Is bitcoin ready for primetime? Presenters at a recent Western Union conference didn’t think so. At its 2013 Consumer Protection & Compliance Conference last month, executives gave a presentation that said it wasn’t yet suitable for international money transfer. Are they right?
“My audience and the discussion for this slide was about retail consumer money transfer – remittances,” said Jay Postma, president of MSB Compliance Inc, a company that consults on compliance issues for money service businesses.
Bitcoin holds great promise for payments and settlement transactions, but it’ll take longer for it to catch on in the remittance market, he maintains.
One of the big sticking points is liquidity, he argues, adding that family support payments can currently only be useful once converted to local fiat currencies.
“We're a long, long way from sending momma in Mexico $240 each month or a Somali family in a refugee camp $200 each month in bitcoin that is held in a wallet for conversion to local fiat currency and spending as needed,” he suggests.
Market movements can hinder transactions between bitcoin and fiat currencies by changing exchange rates too rapidly. And while bitcoin can slide around the world without friction, more people need to support its use natively, say advocates.
It’s true, payment processor BitPay has 10,000 merchants under their belt, but more is needed.
“Liquidity is important because currently, most merchants who provide life-sustaining goods such as groceries, gas and utilities have yet to adapt to this new technology,” Englund says.
The other issue that Postma identifies is regulatory. For bitcoins to be converted to wire payments, money transmitters need the ability to convert cash deposits while continuing to meet compliance obligations. They have to do that without endangering relationships with banks.
“The infrastructure and market for money transmitter operators (MTOs) to use BTC as transfer and settlement option is just not here yet. “
For bitcoin to overcome these regulatory challenges, there are several “areas of improvement,” he says.
These include customer identification and due diligence, verifying ownership and control of wallet addresses, and transaction monitoring for fraud.
Bitcoin institutions must prevent transfers that would violate OFAC (Office of Foreign Asset Control) sanctions or the UIGEA (Unlawful Internet Gambling Enforcement Act).
Some of this is already happening. Many exchanges are aggressively pursuing KYC and AML measures, in some cases beyond what they think regulators will expect.
But in many cases, they’re doing this in part because they don’t want problems when regulators finally wake up to bitcoin and start pursuing them. Coinfloor’s recent launch is a good example.
And firms still face the challenge of building good banking relationships he adds. Many have fallen afoul of banks that cancel accounts after getting spooked by any association with bitcoin.
Finally, there are issues with the consumer interfaces for bitcoin wallets and other services, Postma warns. He would like to see the ability to send bitcoins via email, and to an IP address, along with the ability to send provisional payments subject to acceptance, and return of funds if not accepted.
He wants security features such as multi-factor authentication, transaction limit setting, and confirmation entry settings.
But again, some of this is already either happening, or in progress. Coinbase already enables bitcoin to be sent via email, and BIPS 70 will introduce some enhancements to payment processes, such as refund addresses, and the ability to send payment requests and certified payments without having to touch a bitcoin address.
Would Western Union ever use bitcoin as the basis for its money transfer services, if it decided that it was ready for primetime? Fred Ehrsam, co-founder of Coinbase, says that the company may simply be too entrenched.
“They have innovator’s dilemma. It’s hard for them to move on bitcoin because they have all this massive infrastructure invested, with physical locations and agents everywhere,” he argues. He thinks that operating a closed system that they control is a key part of their business model.
That, of course, is where bitcoin and other payment systems that claim to be decentralized differ.
“The fundamental innovation of these protocols is the ability to process transactions across a distributed architecture,” says Daniel Aranda, director of business development, Ripple. “There's never been a more exciting time to innovate in core areas of our financial infrastructure and improve access and service to millions of people.”
But when? When will bitcoin (or payment systems such as Ripple, for that matter) deserve to be recognized as mainstream?
Eventually, says Roger Ver, an investor in Blockchain.info, bitcoin will be able to do everything better than Western Union's current services, but it will take time for the infrastructure to develop.
“I think we will know when bitcoin has reached prime time when it is transferring more value each day than Western Union or Money Gram," he says. “I think we may see that happen within another two years.”
Others have different yardsticks for when bitcoin hits primetime. “Acceptance by major, reputable companies like WordPress and Baidu are beginning indicators of an idea whose time has come,” says Englund.
Baidu’s acceptance of bitcoin may be close to tripping one of Ehrsam’s triggers for a mainstream bitcoin.
He says that a major household name accepting bitcoin (think Amazon, eBay, or perhaps a major phone carrier) would be a good indicator.
Another might be a country undergoing major economic upheaval that becomes unable to trust its currency, and which turns to the cryptocurrency instead.
Bitcoin still faces its challenges, but some of the things that Postma highlighted in his presentation are in progress.
There’s no doubt that bitcoin is a ‘frothy’ business at present, with startups popping up on a weekly basis trying to push the cryptocurrency forward with more merchant options, better tools, and more sophisticated interfaces.
When will you consider it to be a currency ready for primetime? Let us know in the comments below.
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