Bitcoin spins into wider currency as banks brace for major change

Nicolas Cary receives 100 per cent of his salary in bitcoin. Then again, he is the chief executive of the world's most popular bitcoin wallet service, Blockchain.info.

His company’s web wallet service has more than 1.7 million users, and has processed almost $20 billion worth of transactions. It’s not too bad for a business that was founded just three years ago.

Cary says 2013 was a tipping point for bitcoin, as more than one million people started using the cryptocurrency, and some of the world's largest platforms including OKCupid started accepting it. More recently, travel site Expedia, gaming giant Zynga and online retailer Overstock. com announced they would accept it too.

“A year ago today there were maybe 4,000 or 5,000 merchants on the entire planet that accepted bitcoin. Now there are about 100,000,” Cary says.

However, it’s still very early days when it comes to digital currencies. “If bitcoin’s entire history was a clock, we would only be in the second or third second on that clock.”

He believes bitcoin has the ability to drastically change financial services in emerging markets, where millions of people have no access to banks, current accounts or credit cards.

“Bitcoin can make a huge difference in places where there is a lack of access to financial services and banking. In emerging markets, they don’t have bank accounts but they all have smartphones.”

Cary, who will address a Bitcoin Finance conference in Dublin today, says it is only a matter of time before money goes digital.

“You used to have to develop photos to see them, but now they are all digital. The same happened with music, movies and books. Everything went digital. Money will be next.”

However, despite all the positives, bitcoin has also been the subject of high-profile heists, global shutdowns, wild price shifts and some shady Silk Road dealings. As a result, its use has drawn the attention of governments globally who are unsure whether, and how, to regulate cybercurrencies.

Cybercurrencies gain traction

Japan decided against regulating bitcoin following the collapse of Tokyo-based bitcoin exchange Mt. Gox. Canada meanwhile has enacted legislation regulating bitcoin and other digital currencies. All bitcoin exchanges in Canada will now have to register with the Financial Transactions and Reports Analysis Centre (FinTrac) and take active steps to thwart money-laundering. Californian governor Jerry Brown has signed a Bill making bitcoin and other cybercurrencies legal in the state. The Isle of Man has also outlined plans for digital currency regulation.

Cary says trying to regulate an idea or invention is very difficult. It can’t be treated like something we’ve seen before.

“Imagine if all the postal companies called for email to be regulated when it was introduced all those years ago, and asked for emails to be delayed by several days so postal companies could compete.”

Lee Penrose of Cayman National Bank says one of the problems the bank has when it comes to dealing with bitcoin is that it is an unregulated entity.

“Our regulators might say we are high-risk if we have a large amount of business that’s unregulated. There’s nothing stopping us taking it on. But we don’t want to be considered high-risk in the future or do anything that could affect our licence.

Security needs

“We want regulation because of security issues surrounding bitcoin. Even if it was just minimum regulation such as anti-money-laundering requirements. Security worries have held us back thus far.”

He says digital currency needs banks as a portal between people.

“There is no need for banks on the transmission side but they’d come in on the investment side or if people wanted to convert digital currency to cash.”

He believes digital currency could reduce costs in transactions for retailers, as merchants don’t have to surrender the 2-3 per cent fees they have to give to Visa, American Express and the likes. It would also help financial institutions with international transfers.

“For it to go mainstream, you need big banking corporations on board. You want to have a situation where any member of the public can access bitcoin.”

Edward Castronova, author of Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy, believes virtual currencies are where social networking was in 2005. A bunch of systems are cropping up, but only one of them will take off.

"The first period often consists of smaller programmes that make everyone aware something is possible technically that wasn't before. There was Friendster, MySpace, Orchid, Bebo etc but then Facebook came along and took over. I think the same thing will happen with cryptocurrencies."

“Unlike social networking, the emergence of a truly powerful non-state currency will ignite a rather large policy and political struggle.” He says virtual and the real economic worlds are intermingling more than ever before, raising the possibility this new money might eventually replace the government-run system of dollars, euro and yen. He says unregulated currencies are extremely unstable, as what makes money tick is faith.

“We accept money from others if and only if we are confident that others will accept it from us. Since 1950, governments have done a very good job of sustaining our faith that the dollars we receive today will be acceptable to others tomorrow.”

Central Bank of Ireland director of markets supervision Gareth Murphy says virtual money poses significant challenges for financial, monetary, economic and fiscal authorities. Some of the main challenges include prevention of money-laundering, collection of taxes, consumer and investor protection, and the calibration of monetary policy.

He says financial authorities have a wide range of issues to consider in relation to the implications of virtual currencies and are considering the most appropriate way to respond to these challenges.

Stephen McNamara agrees with Cary, that bitcoin is very early in the adoption lifecycle: “In the next few years we’ll see a huge number of industries appear from that.”

McNamara is the chief technical officer of Bitnet, a new bitcoin company based in Ireland founded by a team of former Visa employees.

“It’s easy to throw about words like innovation for things that aren’t. Bitcoin protocol is a complete gamechanger not just for payments but for the internet.”

Aged credit card

He says payment methods such as credit cards weren’t designed for the internet. “They have a black magnetic strip on the back. They are a 1960s invention.”

Realex Payments founder Colm Lyon says bitcoin is being a catalyst for change in the industry.

“The model could threaten some traditional payment models. There are some deeply routed issues that still exist in payments. If I give you my account number or credit card number, there is a risk.”

Lyon, who uses bitcoin, says competition in the payment space is not what it should be.

“If large institutions start seeing people adopting bitcoin, that will change everything.”