The Federal Reserve Bank of Boston became one of the first members of the US central banking system to issue an in-depth paper on bitcoin last September that suggested the digital currency was emerging as a cost-effective online shopping tool.
Fast forward to today, however, and the number of large merchants entering the bitcoin ecosystem seems to be stagnating. Though major e-commerce players such as Dell and Overstock are expanding the payment option overseas, there has yet to be a billion-dollar merchant of their stature to begin accepting bitcoin in 2015.
In a new interview, Boston Fed researchers Stephanie Lo and J Christina Wang indicate that they remain interested in developments in the bitcoin space, and that they have noted a number of reasons why bitcoin’s use case in online commerce may have become less compelling since the publication of their original report, 'Bitcoin as Money?'
Lo and Wang told CoinDesk:
“One likely explanation is that saving on transaction costs is only one factor in a merchant's decision whether to adopt bitcoin. We can easily imagine that bitcoin represents a technology that is still considered too risky and that may well deter some merchants from adopting it.”
In their report, Lo and Wang found that merchants were offering discounts to bitcoin users, in part, because of the lower processing costs the payment method offered, a factor they asserted made online payments perhaps the most attractive use case for bitcoin.
Still, Lo and Wang suggest that recent trends signal that bitcoin suffers from a perception problem and that the majority of merchants do not yet see how it could be a beneficial payment tool.
“Some established large-scale retailers can already negotiate very low rates with mainstream processors, so the potential savings if they were to adopt bitcoin would not be that great for them, more easily offset by the greater risk,” Lo and Wang theorized.
The comments come at a time when some in the bitcoin industry are casting doubt on the idea that bitcoin can compete against credit cards, and that the technology might be best suited toward use cases such as micropayments and remittances.
The Boston Fed is one of 12 district banks that comprise the US Federal Reserve System, responsible for US states including Massachusetts, Maine, New Hampshire, Rhode Island, Vermont and parts of Connecticut.
Lo and Wang went on to suggest that, while advantageous when compared to credit cards, the bitcoin network has yet to hit the scale where its benefits can be as easily realized.
The researchers painted bitcoin as less costly for users, but said that such a benefit is outweighed by the fact that credit cards are more widely accepted.
“One major advantage of bitcoin is its low transaction cost to the user once he or she has set up wallet accounts, but it is useful to the recipient only if bitcoin is accepted in most of the places he or she shops, and assuming merchants don't charge much of a premium for using bitcoin,” Lo and Wang stated.
Also a factor, the researchers said, is the added hassle bitcoin consumers must incur when exchanging local currency for bitcoin. However, they still indicated that mass acceptance is likely the most pressing roadblock today.
“We can deduce that if bitcoin doesn't make further inroads in terms of acceptance in multiple countries, especially those relying more heavily on remittance, then it will be hard for bitcoin to compete,” the researchers added.
However, in this industry too, Lo and Wang suggested that bitcoin may be no more competitive than other FinTech solutions.
“We’ve heard stories of how bitcoin can help users avoid fees when sending funds to family abroad, or how bitcoin makes it easier to pay a friend back without using cash, although, with services like Venmo, the advantage of bitcoin in this space is limited,” the researchers said.
Bullish on technology
Though critical of bitcoin in many respects, the Boston Fed researchers added the caveat that they remain “bullish on bitcoin as a technology”, though not as a currency.
“A currency would ideally have a stable value and be accepted as payment nearly universally, yet bitcoin has a ways to go in this sense,” they said.
Still, the researchers say they believe bitcoin is “useful for payments” as it can help merchants avoid transaction costs. Further, they suggested that the technology has been effective at least at waking up the financial world to new ideas on how payments can work.
“Bitcoin's presence has demonstrated that a separate system outside the existing established payment system is a very real possibility, and it has emboldened potential entrants as well as galvanized at least some incumbents,” the researchers said.
They went on to suggest that bitcoin, even if unlikely to succeed, will prove "valuable in stimulating innovations".
While Lo and Wang regard bitcoin to be a valuable experiment, they echoed many of their original findings, suggesting they still believe bitcoin's distributed mining network to be inefficient and, as a result, a factor that likely holds bitcoin back in the long term.
“Distributed transaction processing would be counted as a conceptual shortcoming to the extent we want efficiency in our payment systems. It expends far more energy and (possibly other resources as well) than necessary for processing a given number of transactions,” Lo and Wang said.
The researchers went on to reiterate their scepticism that bitcoin's mining network is likely to succeed at staying decentralised, adding that they believe transaction processing will become increasingly consolidated.
"The potential risk of such concentration of processing power is that the system is vulnerable to possible collusion and manipulation," the researchers continued.
Still, they acknowledged that bitcoin today could be seen as beneficial, regardless of its merits, to those with particular tastes.
“We know people can have objectives other than mere efficiency. Say if participants really don't like having a central processing agent, such as financial institutions, then there would be reason to have a processing technology configured like in the current bitcoin setup,” the researchers said.
Payments protocols here to stay
Most problematic, they argue, is that bitcoin as a currency has no backing, meaning its value could be caught in a “downward spiral” should users begin doubting the ability of the network to prosper in the long run.
In their original writings, Lo and Wang were more effusive in their praise for distributed payment networks such as Ripple, those that are agnostic to any one currency and therefore less subject to the rise and fall in value of any currency on the network.
Lo and Wang indicated that bitcoin has at least made obvious that a transaction network in which different components of the system can communicate would be beneficial, adding that “the existing mainstream payment system fails along this dimension”.
However, the future they see is still one where a number of protocols comprise the payment system, and that the "lasting legacy" of bitcoin is in how payments can use protocols to better facilitate payments and transfers.
“The way forward is to have one or at most a few protocols that govern all transmission of payment data,” the researchers concluded.
Boston Fed image via Wikipedia