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Leaving no coin, metal, or commodity unturned, retiring Rep. Ron Paul made a final push on one of his signature issues on Thursday, seeking stronger ground for the U.S. to implement a parallel currency in lieu of the U.S. dollar.
August 2 -
When the alternative payments provider Dwolla changed its terms of service earlier this month, it made it harder for users of the digital currency Bitcoin to use Dwolla as a funding source — and easier for banks to step in and benefit from the Bitcoin economy.
May 18 -
The digital currency Bitcoin was conceived as a rebellion against the financial establishment. But it may also present business opportunities for banks that can get comfortable with the risks.
January 13
It took 11 minutes, tops, after I pushed the button for the equivalent of $5 to travel across the Atlantic. For this service I paid less than a penny.
There were no banks involved. If there had been, it would have cost me at least twice the amount I was sending.
Whoa.
I sent the money using Bitcoin, the decentralized peer-to-peer network that's received a great deal of buzz over the past year or so. People usually think of Bitcoin as an alternative currency challenging the hegemony of government-controlled fiat money, which it is (and technically, the currency is bitcoins, with a small "b"). But Bitcoin is more than that. In addition to being a store of value, it's also a means of exchange, a payment system that can perform many of the same functions as banks and as financial services companies like Western Union, PayPal and Visa. And its efficiency as such is arguably a more important reason for bankers to pay attention to it.
The technology, powered by tens of thousands of users' computers across the globe, lets you move as much of your money as you want, to whomever on the Bitcoin network you want, whenever you want. It sends funds nearly instantaneously, and for almost nothing. Users are identified only by their Bitcoin addresses, a cryptographic string of characters (my receiving address, for example, is "1PFgAJWLJZGSaVDg2rX3XDfTcyd6CpXXXX"), and so can transact anonymously if they wish.
But there are catches. First, anyone you want to send money to or receive it from needs to be on the Bitcoin network also. Then, getting money in and out of Bitcoin is difficult, maddeningly so. Unless you're a "miner" with
"I tried once to install the software. It took forever and didn't do anything," says Robert Hughes, a senior vice president with the consulting firm Speer & Associates who's been studying Bitcoin.
Getting money to an exchange generally entails funding an account at a third-party service like Dwolla, which can then send your dollars or other government currency on to the exchange. You can cash out your bitcoins for fiat money on the exchanges, too, but sometimes the
Another disadvantage of Bitcoin is that there are few merchants that accept the digital money. Sure, you can use bitcoins to buy
And Bitcoin is a risky place to store large sums of money. Fanatics will argue it's a better long-term investment than the U.S. dollar, because of the predictable and fixed supply – the algorithm that creates bitcoins is programmed to stop once there are 21 million of them – and who knows how many greenbacks the Federal Reserve will unleash upon the world if the economy keeps limping along. (There are currently about 9.8 million bitcoins in circulation, trading at $9.99 apiece. The last bitcoin is expected to be generated years from now.) But even if the devotees are right, the Bitcoin "wallets" that store the currency aren't FDIC-insured. You can keep your wallet on your computer, where security is up to you, or in the cloud – and like in the pre-FDIC banking days, you choose your cloud wallet provider based on
"There is no authority or regulation that says what they must provide, how they must provide it, what to do if something goes wrong," Hughes says.
Wallets have been
It took me months of futzing around in my spare time to acquire my first $60 or so worth of bitcoins on Monday. Yet once I had the coins, I was able to send some to a Twitter acquaintance in London, quick snap and dirt cheap. If entry and exit from the system were easier, this technology could become a more viable alternative to established financial players.
Easing Bitcoin's choke points is the business of BitInstant, a New York startup. The company's flagship service expedites the transfer of funds to and from the exchanges, for which it charges a commission. Charlie Shrem, the founder and CEO, says that in two to three months it will come out with a reloadable general-purpose prepaid
Erik Voorhees, BitInstant's chief marketing officer, says Bitcoin skeptics often ask, "What can I spend them on?" The card, he says, will provide "the ultimate answer…Everything."
Of course, the banking system will have to be involved here, since
Bradley Leimer, the vice president for online and mobile strategy at Mechanics Bank in Richmond, Calif., has been keeping an eye on Bitcoin. Linking it to a prepaid card, he says, is "a little bit of a game-changer," since it's "a much more mainstream way to move the value within your bitcoin collection."
However, using a MasterCard debit card as the exit means someone will still be "incurring a transaction cost at some point," Leimer says. "It doesn't necessarily lower the transaction cost to near-zero." (Shrem says BitInstant will try to minimize cardholder fees by dispensing with the middlemen usually involved with prepaid cards, i.e. "program managers" like Green Dot.)
BitInstant's existing service is the easiest way I know of to acquire bitcoins, which is to say it's the only way that's worked for me. First I placed an order for $60 worth on BitInstant's website and printed out a sheet of paper instructing me to take my cash to a Bank of America branch in the ZIP code I'd provided. The teller looked mighty confused when I read her the script ("I am making a deposit into the account detailed on the invoice"). But after a few minutes she figured out I needed to fill out a deposit slip with an account number for TrustCash, an Atlanta outfit that serves as BitInstant's go-between with the bank. I didn't have to give my name, much less show ID, throughout the whole process. TrustCash knew which order to fill because it sets a unique deposit amount for each order at each branch. Mine was $61.20 including fees.
All of that extra 2% went to TrustCash, by the way – the price of anonymity, perhaps. BitInstant would take another $3.99 plus 1% off my $60. Sounds steep, but the service speeded the process of acquiring bitcoins, which could take a week when dealing directly with one of the exchanges.
Normally, bitcoins would have shown up in my online wallet within 30 minutes of the bank deposit, except I'd goofed. When I placed the order, I'd pasted the wrong character string in the field where my Bitcoin receiving address was supposed to go. (There's a lot of copying and pasting involved in Bitcoin, unless you want to memorize phrases like "1PFgAJWLJZGSaVDg2rX3XDfTcyd6CpXXXX.")
It took me another business day to sort things out with BitInstant. It may have helped that the three guys in the company's New York office knew me. (And they are all guys. According to research by Heather Schlegel of Swift's innovation team, 95% of Bitcoin users are male, which sounds about right given the makeup of the earnest crowds at two Bitcoin-themed Meetups I attended this month, including
Dave Birch, the director of Consult Hyperion in Surrey, England, says Bitcoin "is really interesting because it informs other debates, not necessarily because of what it is itself." It's likely that Bitcoin's "technology and techniques will be part of some future means of exchange," particularly the use of cryptography to protect user privacy, Birch says.
Part of? Bitcoin's most rabid fans would beg to differ. "Bitcoin is the virtual currency of the future
It's a tantalizing thought. But I think Bitcoin can coexist with the established forms of money and payment. Competition doesn't have to mean winner-take-all.
I can envision a future where people will sometimes charge purchases to Visa to rack up rewards points and earn special offers tailored to their spending history, enjoying the fraud protection of chargebacks, and sometimes use Bitcoin (or something like it or something that evolves from it) for transactions they don't want tracked, incurring the same risks as they do with physical cash today.
Transacting off the grid should remain an option even after we phase out paper bills and metal coins. Just because the world's going digital doesn't mean we have to fulfill Orwell's prophecy of the
The problem with Bitcoin right now is that if it were a car, it would come only in stick shift. When the automatic version arrives, though, watch out.
Marc Hochstein is the executive editor of American Banker. The views expressed are his own.