Bitcoin Pursues the Mainstream

ECONOMICS, 25 Nov 2013

Nick Wingfield – International Herald Tribune-NYT

The currency known as bitcoin — a much-hyped and much-doubted type of digital cash that can be bought with traditional money — has mostly attracted attention for its popularity in the black market, and for its wildly gyrating valuation.

But some entrepreneurs, investors and even merchants are eyeing a far more mainstream use for it. They are convinced that bitcoin, though not widely understood, offers a path to lower payment processing and more secure transactions. Instead of using bitcoin to buy illegal guns in the recesses of the web, they say, ordinary consumers will use it to buy legal goods from legal retailers — and as easily as they now swipe their credit cards or exchange paper bills.

“I’m confident you will see major worldwide retailers adopting systems built on bitcoin,” said Jim Breyer, the Silicon Valley venture capitalist and early Facebook investor who also served on the board of Walmart Stores for more than a decade.

Mr. Breyer is an investor in Circle Internet Financial, one of the host of start-ups trying to find a way to make bitcoin a widely adopted currency for retail payments. The company was started by Jeremy Allaire, a serial entrepreneur, and it aims to be a payment processing system for online and physical merchants, similar to the service PayPal offers online. Along with his venture firm, Accel Partners, and another called General Catalyst Partners, Mr. Breyer has invested $9 million in the company.

One potential obstacle to mainstream acceptance of bitcoin is the sometimes wild fluctuations in its value, which makes it alluring to currency speculators but could scare off ordinary consumers. One bitcoin was worth just over $200 Wednesday afternoon. Someone who bought a bitcoin in early April paid as much as $266 for it.

Only a small and motley assortment of merchants now accept bitcoin as payment, and in many cases they do it largely as a marketing strategy. The list includes a winery in British Columbia, the popular online dating site OkCupid and a Seattle lunch truck that specializes in grilled cheese sandwiches. A start-up called Gyft lets people buy electronic gift cards for major retailers with bitcoin, and this week an A.T.M. in Vancouver, Canada, began issuing bitcoin to people in exchange for cash.

“We pride ourselves on being the nerdiest online dating site,” said Sam Yagan, co-founder of OkCupid, which is owned by IAC/InterActiveCorp, a media and Internet company. “We were like, ‘This is cool and we should do it.’ ”

Since bitcoin emerged in 2009, many of those who flocked to the currency celebrated it for being beyond the clutches of governments and other institutions. Until recently, the currency lubricated transactions on Silk Road, one of the Web’s biggest bazaars for drugs, forged documents and other contraband. The site was shut down in early October by federal authorities.

New bitcoin is created on computers connected through a peer-to-peer network. An algorithm controls the production of new bitcoin, which is meant to mitigate the risk of inflation.

Already, though, businesses transferring and exchanging bitcoin find themselves in regulators’ cross hairs.

In March, the Financial Crimes Enforcement Network, part of the Treasury Department, issued guidelines telling businesses involved in the exchange of digital currencies that they needed to register as money services businesses and comply with a variety of rules to prevent money laundering. New York’s Department of Financial services began an inquiry in August to determine guidelines for digital currency businesses, issuing nearly two dozen subpoenas to start-ups, investors and others involved in the emerging field.

Patrick M. Byrne, chief executive of the online retailer, said his company was talking about accepting bitcoin, but it decided to pause its plans until legal matters around the currency were clarified.

Fred Ehrsam, co-founder of Coinbase, a start-up that helps merchants accept bitcoin and helps consumers obtain it by exchanging traditional currencies, said he thought the demise of Silk Road gave entrepreneurs and investors more confidence in bitcoin.

“The bad guys basically lost,” said Mr. Ehrsam, whose start-up has raised over $6 million from Union Square Ventures and others. “It took the single most illegitimate player in the space and wiped them off the map.”

Bitcoin advocates, and especially merchants, say one of the currency’s most enticing promises is that it could significantly lower payment processing costs.

Retailers typically pay 2 to 3 percent of the value of a customer sale when a credit card is used. Retailers have long complained about these fees and have sought other options, but without much luck. PayPal, the online payment system, typically charges merchants a fee between 2.2 percent and 2.9 percent, as well as a per-transaction fee of 30 cents.

“There have been a number of alternative currencies talked about over time,” said Chris Monteiro, a spokesman for MasterCard. “The bottom line is consumers want a payment solution that is safe, simple to use and universally accepted.”

Fees for a merchant accepting bitcoin payments often range from nothing to less than 2 percent because of the open nature of the technology. Coinbase, for example, said it did not charge its merchants for the first $1 million in sales, imposing a 1 percent fee after that on the conversion of bitcoin into local currency. Circle said it had not settled on pricing for merchants, but that it would charge them a fee to use its system that would be well below credit card transaction costs.

Mr. Allaire and others predict that merchants will encourage customers to spend bitcoin by passing some of the savings on to them in the form of lower prices or other rewards.

“Bitcoin definitely addresses a need,” said Simon Johnson, a professor at the M.I.T. Sloan School of Management. “The payments industry is ready to be disrupted.”

The fluctuating value of bitcoin has not stopped some investors. Tyler and Cameron Winklevoss, the twin brothers who tangled with Mark Zuckerberg over the founding of Facebook, have said they are big holders of bitcoin and have filed a proposal with securities regulators that would let investors trade bitcoin as if it were stocks.

Other challenges face Circle and other start-ups building new payment systems. For example, it can take several business days to link someone’s bank account to their bitcoin. Mr. Allaire of Circle said one of his goals was to make that initial setup much faster.

Mr. Allaire also said his company, which is based in Boston, will protect its customers’ bitcoin by creating “offline reserves” — batches of the digital currency on physical storage devices, like a hard drive, not connected to the Internet. The offline bitcoin reserves will be protected by armed guards, he said.

George Peabody, senior director at Glenbrook Partners, a consultancy in the payments industry, said Circle was a sign of the maturation of entrepreneurs entering the bitcoin market.

Mr. Allaire was an early web entrepreneur, founding a web application development company, Allaire Corporation, that went public in 1999 and was sold to Macromedia. An Internet video company he created, Brightcove, went public last year. Mr. Allaire said he was convinced that bitcoin represented another major technological development.

“It’s similar to me in import as the web browser,” he said. “It’s as exciting and significant as that.”

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