Bitcoin 2013: the future of payments

anewdomain.net—The first-annual Bitcoin 2013 conference kicks off this weekend, May 17–19 in San Jose, Calif.  This will be the first major U.S. summit entirely focused on Bitcoin and its growing impact on the payments landscape.

Image credit: Madison Andrews for aNewDomain.net

“We are excited to be hosting industry leading Venture Capitalists, key technologists in and outside of Bitcoin, and top-tier regulatory thinkers at Bitcoin 2013,” said Peter Vessenes, Chairman and Executive Director of the Bitcoin Foundation, in a press release.

The conference is a reflection of heightened interest in the digital currency. Bitcoin exchange rates skyrocketed this year, prompting a surge of public interest. But Bitcoin is still in its infancy. Conference attendees will address key issues and best practices for driving widespread user adoption by both businesses and consumers.

“Bitcoin has a long way to go before it will be a truly mainstream currency, if by mainstream we mean comparable to the US Dollar in terms of ease and breadth of use,” said Garrick Hileman, a PhD candidate and economic historian at the London School of Economics, who will be speaking at the event.

Hileman has been invited to present his research on parallel and alternative currencies (e.g., Bitcoin), black markets, sovereign debt, and financial repression at a number of international conferences. In the current market, he said, Bitcoin appeals primarily to people who want to engage in relatively anonymous, decentralized digital transactions. Silk Road—the online marketplace for drugs and other illegal goods—is one Bitcoin community that appeals to people who want to stay off the grid.

Still, says Hileman, “anonymous online transactions aren’t enough to propel Bitcoin into becoming a mainstream currency, given how comfortable consumers are with paying for most things with credit and debit cards, which offer relatively limited privacy. In short, convenience trumps privacy.”

Familiarity also plays a key role in consumer spending habits. Most people are creatures of habit, especially in terms of personal finance. There would have to be a highly compelling reason for the average consumer to choose Bitcoin over traditional forms of payment.

“If a better price can be had by using Bitcoins on a highly desirable good or service,” said Hileman, “especially if it can only be acquired with Bitcoins, then this could help drive adoption.”

So how would a thriving alternative currency impact the global financial system? According to Hileman, a currency like Bitcoin would introduce sorely needed competition. He cited two examples to illustrate his point—banks and credit card companies. Both industries, he said, get away with charging outrageously high fees on merchant transactions.

“Two to three percent may not seem like a lot, but a small number multiplied against a big number (trillions of dollars in purchases) equals a big number. If you’re a banker this is a great thing, but if you’re a consumer or business these fees are costly and also reduce commerce.”

The UK’s five-day waiting period on check clearing further illustrates the downside of a market insufficiently regulated by competition. This waiting period made sense prior to online banking, when physical checks had to be sent from one bank to another. The system remains in place today mainly so that banks can earn interest on what is known as float—the waiting period during which money changes hands.

“There are no good regulatory or technological reasons for keeping the 5-day check clearing rule,” said Hileman. “Perhaps competition from relatively instant Bitcoin transactions will drive increased financial efficiency and lower costs.”

The whole concept of Bitcoin sounds like something straight out of science fiction. But Hileman pointed out that alternative currencies are nothing new. Though Bitcoin is often compared to Napster and BitTorrent, similar kinds of trade existed long before then.

“London merchant tokens were quite popular in the 17th and 18th centuries. They addressed what Nobel Prize winning economist Thomas Sargent and Francois Velde describe as the ‘Big Problem of Small Change’, meaning a lack of coins to conduct small value transactions,” said Hileman. 

Merchant tokens ultimately disappeared when policymakers figured out how to prevent small coin shortages by introducing fiat money. Here, the advent of a new technology (fiat money) ultimately proved lethal to merchant tokens.” Shown below, a Freigeld note, the alternative currency created in Austria, which was shut down by the government in 1933.

Image credit: Wikimedia Commons

Historically, alternative currencies have relatively short life spans. Several previous attempts to circumvent traditional payment systems have ended in failure, and are often stamped out by the regulating powers that be. During the Great Depression, for example, an Austrian town created a currency called Freigeld, which is the inspiration behind the Bitcoin competitor Freicoin. In 1933, Freigeld was shut down by the Austrian Central Bank.

It will be interesting to see how Bitcoin fares in the current global marketplace. Given the historical precedents for non-standard currency, it seems unlikely that it will survive the decade. Then again, there’s no shortage of enthusiasm for Bitcoin. The very existence of a conference like Bitcoin 2013 may indicate that this particular trend will last longer than its historical antecedents.

Visit the Bitcoin 2013 site to learn more about Garrick Hileman and the impressive list of panelists who will be joining him at the event.

Madison Andrews is a writer, editor, and designer living in Austin, Texas. She is founder and editor of madskillsvocabulary.com. Email her at [email protected], find her on tumblr, or follow her @madskillsvocab.

Madison Andrews
Madison Andrews is a writer, editor, and designer living in Austin, Texas. She is founder and editor of madskillsvocabulary.com.
Madison Andrews
Madison Andrews
Tags: Tech Culture,Technology