Bitcoin drives the financial revolution of the Internet

Bitcoin may not become the savior of new currencies as its believers hope, but it may drive the financial revolution that the Internet industry has long awaited.

Although computers and smartphones have brought the internet to more than a third of the world’s population, e-commerce remains almost entirely dependent on a banking system that has been slow to adapt, with some companies using computer code that was written before the internet was invented.

However, since Bitcoin is a means of payment that does not require the involvement of a central authority, the rise of this currency will gradually change the status quo.

"The rise of Bitcoin has changed people's understanding of what a good payment method is," said Manu Sporny, CEO of the online payment company Digital Bazaar, who is working to get the entire industry to work together on a set of standards for processing online transactions. "Bitcoin has raised the bar, so everyone is trying to match it in various ways."

Spone and other industry insiders say a meeting next week in Paris of the World Wide Web Consortium (W3C), the main body that sets Internet standards, will be critical to the field.

Telecom operators such as Deutsche Telekom, Telefonica, AT&T, payment companies such as SWFT, PayPal and Gemalto, and the Federal Reserve will all come together for the first time to discuss online payment standards.

This industry trend is partly attributed to the rise of Bitcoin.

The reason why many people pay attention to Bitcoin is mainly because of its skyrocketing value - from US$30 a year ago to more than US$1,000 at the end of last year - and the bankruptcy of Japanese Bitcoin exchange Mt.Gox last year did not bring much impact to it.

But these people may be missing the point. The digital currency is based on a set of important computer algorithms that combine distributed timestamping, public keys and proof of work systems, which is extremely important for reforming the current way of e-commerce transactions.

“All three of these technologies can be turned into money, but they can also do a lot of other things,” said Peter Vessenes, CEO of bitcoin startup CoinLab and chairman of the Bitcoin Foundation.

Reduce transaction costs

A mixed blessing for Paris conference participants was the potential for Bitcoin to reduce the cost of transferring money.

“If they can reduce the fees, they will reduce the fees,” said Marcus Swanepoel, whose company Switchless hopes to integrate Bitcoin processes with traditional banks and telecom companies.

But bitcoin poses a challenge to businesses that specialize in processing consumer transactions: PwC estimates that credit card companies charge about 3% of transactions, while PayPal charges as much as 4%. Because bitcoin companies like Coinbase and BitPay don't need to go through a central financial institution, their fees could be zero.

However, Jim McCarthy, Visa's head of innovation, said at an investor conference this month that while Bitcoin has its merits, it will not have a major impact on the financial industry in the short term.

MasterCard and Visa will not attend the Paris meeting, Spone said.

Suffered a heavy blow

Indeed, many have questioned the significance of Bitcoin, with critics pointing to the collapse of Mt. Gox and the libertarian tendencies of Bitcoin’s supporters as evidence that it is nothing more than a Ponzi scheme.

Some doubters even come from within the Bitcoin community. Mike Hearn, a major contributor to Bitcoin's underlying code, denied the Ponzi scheme, but he was also concerned about the complacency of some Bitcoin supporters. "A lot of people seem to believe it's a sure win, but I don't think so," he said.

If Bitcoin is to challenge or convince mainstream banks, it will have to adopt better security measures and be easier to use, Hearn said. It will also need to overcome banks' concerns about regulation and shed its image as being closely associated with criminal activity.

"The biggest challenge facing Bitcoin remains that all banks are afraid to touch it because they are afraid of being punished by the government," he said.

Active cooperation

Switchless’s Swanipal believes such concerns have been addressed: South Africa’s Standard Bank, for example, recently launched a pilot using Switchless’ technology to integrate bitcoin transactions into the bank’s own currency system.

He found that telecom operators and postal companies are also very interested in this, they hope to find a cheap way to develop a system for processing currency transactions. But if Bitcoin really works with these giants, it may need to develop alongside existing technologies. "Bitcoin is unlikely to change existing business models at present," Swanipal said. "They will develop side by side."

For example, startup Ripple offers a way for users to buy and sell currencies using some of the bitcoin technology, but without the bitcoin mining mechanism. End users don’t need to know they are using a bitcoin-based system.

“In the future, users won’t even know they’re using Bitcoin, they’ll be using brands they trust, and those brands will be using these protocols,” said Chris Larsen, CEO of Ripple. “All they’ll know is that suddenly they can send money to India for free.”

Mobile Wallets

Perhaps the biggest potential market for bitcoin is the hundreds of millions of people who have difficulty accessing conventional banking services.

Bitcoin is a natural fit for the concept of mobile wallets and for making small payments that have so far been difficult to implement due to high costs. For example, Dogecoin, a variant of Bitcoin, successfully raised funds for the Jamaican bobsleigh team and three Indian athletes at the Sochi Winter Olympics last month, and this week raised $30,000 for Kenya.

Bitcoin and its offshoots also provide a way to circumvent government currency controls—either by converting fiat money into virtual currency and remitting it overseas or by bypassing the national currency altogether.

Next week, an Icelander calling himself Baldur Friggjar Óðinsson will launch a cryptocurrency called Auroracoin for all Icelanders. He said in an email interview that the move is to help Icelanders get rid of the control of fiat currency and allow them to use a currency that can be used to trade or buy products and services online.

Icelanders, who have been subject to strict currency controls since the 2008 financial crisis, have difficulty converting funds into foreign currencies. Each Icelander can download an allotment of Auroracoin worth about $500.

"Hopefully this will spark a lasting revolution that shifts control of money from the elite to the masses," said Baldur Friggjar Óðinsson.

Other Uses

Bitcoin can decentralize any kind of transaction. Bitcoin transaction records are stored in the blockchain, which is a log used to record the change of bitcoins.

Bitcoin Foundation president Vasanas said Bitcoin should not be seen simply as a currency, but as a distributed way to grant or agree on ownership.

As the smallest unit of Bitcoin, satoshi can be used as a token to represent a piece of ownership. Whether it is the details of stock dividends or voting rights at shareholder meetings, they can be directly integrated into such a token. The ownership of a car can also be adopted in this way, so that the car will only start when someone can show the ownership token.

“Money, or something that is treated as money, is just a disintermediated form of trust,” said Pindar Wong, a Hong Kong-based online payment technology consultant. “There is still a lot of room for innovation. We have just seen the tip of the iceberg.”