March | April 2015 | paymentscardsandmobile.com in this issueCard Notes UK shuns cash as cards dominate payment marketcrypto-currency Bit by Bitcoin: Decrypting crypto-currencym-payments m-commerce skyrocketing

Advanced PaymentsApple turns payment opinion on its head in 2015 and creates long-awaited momentum for digital commerce

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The majority of merchants that accept Bitcoin operate online, often selling digi-tal goods. Increasingly however, big name brands are offering Bitcoin as a means of payment – Microsoft started accepting Bitcoin payments from customers buying apps, games and videos from online stores, while Japanese retail conglomerate Rakuten announced at the MPE event in Berlin this year that it is expecting the company will start accepting Bitcoin from retail customers by the Spring of this year.

There is still some way to go before virtual

ingly being backed up by commercial reality.Speaking to PCM, Tony Gallippi, founder

of BitPay, a merchant acquirer for merchants that want to accept Bitcoin, said that the company already has more than 52,000 legitimate merchants on their books since they launched in 2011 – a little over half the global market of the just over 100,000 mer-chants that currently accept Bitcoin.

“When we started there was a lack of tools for merchants to accept Bitcoin. So we built a payment gateway for merchants, along with full settlement and processing abilities. The business case was proven pretty quickly – within 18 months we had signed up more than 1200 businesses to allow them to take Bitcoin as payment from their customers,” explained Gallippi.

While there are an ever-growing number of other digital currencies in existence (see box), Bitcoin currently accounts for around 95 per cent of all digital currency trans-actions. Transaction volumes across the Bitcoin network doubled in 2014 – a rate of growth is expected to continue in 2015, making virtual currencies an increasingly viable means of payment.

At a payment industry conference in Riga around four years ago a speaker from the Bitcoin Foundation was

extolling the virtues of a new form of cur-rency that allowed users to be totally anony-mous and was increasingly being favoured by individuals at the shadier end of com-merce – from drug dealing to money laun-dering and prostitution. Understandably, given the audience at the event a number of delegates were left a little perplexed as to the relevance of the speaker.

Given the background to the take up of Bitcoin, among other virtual currencies, it would be fair to say that cryptocurrencies have suffered from something of an image problem. An image problem that continues to persist with the seemingly daily news of Bitcoin exchange hacks and subsequent closures and frauds, alongside the continued use of virtual currencies among criminal groups taking advantage of the presumed anonymity they offer.

However, in spite of the continued dis-missal of virtual currencies by mainstream commerce and much of the payment indus-try, the far-reaching implications of a suc-cessful digital currency with the potential to open the doors to genuine cross-border trade at lower cost, and without the risk of foreign exchange fluctuations, are increas-

Such is the fervour around virtual currencies, that barely a day goes by without some form of news or announcement about the growth and threat of digital currencies but what is the reality behind the scaremongering? And how much of a threat or opportunity is the growth of these new forms of digital money?

by Simon Hardie

Bit by Bitcoin: Decrypting crypto-currency

Bitcoin alternativesLitecoin – 2nd largest, launched 2011

Darkcoin – a more secretive version of Bitcoin launched 2014

Peercoin – launched 2012, with no upper limit on coins in circulation

Dogecoin – uncapped supply and geared for smaller transactions

Primecoin – offers greater security and ease of mining

Altcoins – alternatives to Bitcoins

Blockchain – the ledger storing details of Bitcoin transactions

crypto-currency

www.paymentscm.com payments cards and mobile | March | April 2015 19

Bit by Bitcoin: Decrypting crypto-currency

recession, as central banks in the US, UK and Japan have been doing since 2008, a return to a virtual gold standard currency would have far-reaching consequences.

In light of the increasingly global, cross-border nature of business and particularly of online commerce, however, the gradual legitimization of alternative currencies such as Bitcoin marks the beginning of the trans-formation of money that has up to now been defined along strictly national lines.

The Bank of England’s announcement at the end of February that it is reviewing options for launching its own digital cur-rency is perhaps a sign of just how seriously regulators and central banks perceive the challenge to their own currencies. Another commentator even remarked that a virtual currency could be the solution for Greece if it were to leave the Eurozone.

Ultimately it could be emerging markets that become the driving force in take up of virtual currencies, given the right conditions. Currently the majority of Bitcoin activity is centred in the US and Europe, but with Africa’s success in creating a viable mobile payment marketplace as a benchmark, the continent’s lack of legacy payment and bank-ing infrastructure could present a significant opportunity for a regulator with the right approach to currency regulation.

There are significant barriers to overcome, however, before this is likely to be a reality in Africa or elsewhere. While the benefits to merchants are more obvious, changing consumer behaviour sufficiently that digital currencies are viewed as viable replacements for existing forms of payment is more com-plex, and will take much longer, particularly in the wake of high profile scandals involving theft and Bitcoin fraud.

At the same time, as the number of digital currency transactions grows, along with the number of merchants accepting them, cryp-to-currencies such as Bitcoin are becoming less and less virtual and more like traditional currency. A fact that is also being acceler-ated by the introduction of (albeit only a small number) of Bitcoin ATMs in the US. With no accepted form of storage of Bitcoins or any other digital currency yet available, consumers are exposed to the risk of theft of

currencies become a genuine threat to stan-dard forms of electronic payment.

As with other forms of advanced payment, the challenge for virtual

currencies is to drive adoption when, from a consumer point of view, existing forms of (mainly card-based) payments work satisfactorily. A point that, in the case of virtual currencies, is compounded by the percep-

tion of them both as complex and at the margins of main-

stream commerce.

Vaughan Collie, partner at payment industry consultancy

Accourt explains, “There’s no doubt that there are clear advantages to the merchant, but for crypto-currencies to achieve ubiquity is going to require a number of elements to come together, not least of which is much more effective regulatory scrutiny within a yet to be created set of regulatory frameworks.”

More coordinated oversight of digital cur-rencies is a crucial aspect if they are to gain widespread adoption, and not purely because of market perception.”

An outcome that would not only help improve the image of digital currencies but would also ensure greater trust in them as units of real, rather than virtual, value and help to reduce the extreme volatil-ity that the likes of Bitcoin have suffered in recent months. Bitcoin values for example plummeted from over $370 per Bitcoin in November 2014 to around $250 by the beginning of March this year.

The potential for mass take-up of alterna-tive currencies, however, is nothing short of a budding headache for both regulators and consumers. With no one yet sure what will happen once the magic number of 21 million Bitcoins in circulation is reached – the maximum number permitted in the blockchain – and with a currency that is not centrally managed by any one regulator so that the money supply could be eased in a

the Bitcoins they have stored on their PC or other device. A dilemma that will need to be resolved to drive mass take up and ensure consumers of the safety of holding large amounts of digital currency.

Unsurprisingly, given the current climate of fintech fever, there are a number of solu-tions in development already. UK digital currency bank start-up Ripula.co.uk is one of these. The company’s founder, Oliver Mitchell, is currently in talks with investors in Silicon Valley to fund expansion and market-ing of a cloud-based platform that would effectively act as a digital bank, holding accounts for customers to store and trade any digital currency.

There’s a long, long way to go before any virtual currency represents a serious threat to the existence of any of the world’s national currencies, or even a serious alternative to the Visa, MasterCard scheme-dominated consumer payment system. What is more certain, however, is that the continued growth in use and acceptance of crypto-cur-rencies will be one more innovation that will contribute to consumer adoption of forms of electronic money and payment and to another step away from cash. Small wonder then that western regulators are scratching their heads in response. ■

Virtual currency numbers

150+ crypto-currencies in existence

$3.3 billion Bitcoin market capitalisation

43% drop in value of Bitcoins between December 2014 to March 2014

110,000+ number of merchants accepting Bitcoin

13.9 million Bitcoins in circulation (March 2015)

28 million Bitcoin transactions (year to March 2015)