Bitcoin and The Future Of Money

The scene is a restaurant in 2020. A waitress has just left the check on the table for a group of friends dining together. Mobile phones are pulled out, and the diners take turns scanning a code on the bill. One person slips something that looks like a credit card out of her wallet. Her fingers tap on several dark squares on the card which light up when her personal code is activated. The card — an intelligent check — is waved over the bill and debited. Below the charges for food is a space for tips. Their waitress prefers to be compensated in Facebook Credits, although some of her co-workers ask for tips in an alternative digital currency or transferable frequent flyer miles, any of which can be automatically placed into their linked accounts with the tap of a diner’s finger or the wave of a mobile device.

Such a scenario was painted in 2011 at Sibos, an annual financial services industry gathering that attracts over 8,000 banks from around the world. In many ways that future is already here.

Mobile payments and alternative currencies such as Bitcoin, Ripple and Ven are already gaining traction, shaping the future of money and widening the way value is determined and traded around the world and even beyond.

For the moment Bitcoin appears to be winning. Recent headlines say it all: Facebook starts using bitcoin payments for its advertising platform; Zynga links up with BitPay For Bitcoin Payment Test in Farmville; The world’s second Bitcoin ATM to be installed in Hong Kong; British entrepreneur Richard Branson, founder of Virgin Group, which owns the Virgin Atlantic airline and telecommunications provider Virgin Media, accepts pre-payment for his commercial space flight venture Virgin Galactic in bitcoins.

Virtual currencies represent an opportunity to shape the future of the Internet and global commerce. Fans include early ticket holders for the Virgin Galactic suborbital space flights, such as Silicon Valley venture capitalist Shervin Pishevar, a scheduled speaker at DLD14, as well as Cameron and Tyler Winklevoss, the twins best known for their part in the history of Facebook. The twins have invested millions of dollars of their money into bitcoins and in July announced that they filed a proposal with securities regulators in the U.S. to set up an exchange-traded fund that would allow any investor to trade bitcoins as if they were stocks.

But the first to launch a Bitcoin fund in the U.S. was DLD14 speaker Barry Silbert, CEO of SecondMarket. The fund is called the Bitcoin Investment Trust or BIT; it has more than $50 million in management and around 90 investors, including hedge fund traders and private family investment firms. The BIT is structured like an electronically-traded fund and modeled, according to Silbert, after one of the most prominent gold ETFs, but it is not publicly traded.

The fund is raised by Alternative Currency Asset Management, a wholly-owned unit of SecondMarket, which is acting as the broker-dealer for the fund. SecondMarket, which offers a variety of services to buy into illiquid private assets, has invested into the fund alongside institutions and accredited individual investors.

This is just the beginning. Silbert predicts that during the coming year a country somewhere in the world will start accepting payment of taxes in Bitcoin; a U.S. bank will launch a Bitcoin trading desk and a Central Bank somewhere in the world will start accumulating Bitcoin in the same way it accumulates gold.

That’s not all. “Digital currency really has the potential to disrupt the way payment processing works,” says Silbert. “The systems we use to send money are built on old rails and don’t talk to each other. Bitcoin is like a blank slate that lets you send currency without a middleman practically instantaneously and practically free.”

Brightcove founder Jeremy Allaire, a serial entrepreneur and Internet pioneer, believes Bitcoins will prove to be an attractive form of payment for online merchants because it is frictionless and cheaper. He most recently founded Circle Internet Financial, a payment processing system for Bitcoin with $9 million in financial backing from Accel Partners and General Catalyst. Board members include Michele Burns, a finance industry veteran who sits on the board of Goldman Sachs. Jim Breyer, a partner at Accel and an early backer of Facebook, is also on Circle’s board, as is Raj Date, who recently left a top post at the Consumer Financial Protection Bureau.

Circle’s mission is similar to that of BitPay, a company backed by Shakil Khan, head of special projects at popular music-streaming service Spotify. (Khan is also the founder of CoinDesk, a media site that specializes in news about Bitcoin that aspires to become the Reuters of digital currency.)

BitPay makes it easy for thousands of businesses across the world to accept bitcoins, “so it shares that common goal with Circle,” says Khan.

BitPay has so far helped over 10,000 merchants across the world to start accepting payments in bitcoins. According to CoinDesk, 50% of the merchants that use BitPay are located in North America and 25% are in Europe. Over 90% of the merchants using the payment service provider are e-commerce businesses; BitPay also counts blogging platform WordPress among its clients.

Allaire says that along with some Silicon Valley players like Facebook he sees digital gaming companies accepting Bitcoin payments in 2014. “In terms of a Target, Walmart or a J.Crew, I think their cycles for point-of-sales technologies are a lot longer.”.

Virtual currencies can enable nearly instant payments and money transfers globally at almost no cost and — their proponents argue — with greater security and privacy than existing electronic payment methods.

Ripple Labs, which has invented its own virtual currency, has also developed a system in which any currency, including bitcoins, can be moved around or traded without hefty fees.

Over 20 million units of the Ven, a digital currency traded on Thomson Reuters terminals which is tied to a weighted basket of currencies, commodities and carbon futures, have circulated, and it can be used to purchase anything from cars to coffee.

Unlike the Ven or traditional money, bitcoins are not centrally controlled. Instead, the coins are created by a network of users who solve complex mathematical problems — a method known as “mining” — to generate bitcoins. Only a finite number of bitcoins can be created.

At U.S. Senate hearings in Washington in November, government agencies such as the U.S. Secret Service acknowledged that Bitcoin, which is designed to be difficult to trace, has potential benefits, as well as risks, helping establish the currency’s credibility.

Still, some question whether any asset that fluctuates so erratically can plausibly work as a medium of exchange. In early December the price of a single bitcoin spiked to over $1,200, then fell to less than half that.

“For Bitcoin to become a mainstream success it has to increase many more times in value,” says Khan. “Of course it will be volatile on the way up, but in five to ten years it should be more stable.”

Right now, there is no telling what might happen. “The price of a bitcoin either goes to zero or it goes to many, many zeros,” says Khan. “Should people buy it? Yes. Should they go and put every penny in? No. They should only risk an amount they are comfortable with and can afford to lose. That said, when it comes to risk/reward potential I see no better investment.”

Comments

comments

Related posts

Top