Viewpoint: Bitcoin Challenges Us All to Keep Innovating

By Pervees Faisal Islam, Centra Payments Solutions

Bitcoin (and the tsunami that has ensued) has been characterized as the next stage in the revolution of payments—more precisely, of money. Many have called Bitcoin a revolution, largely because of its focus on decentralization; the separation from a government and the freedom from monetary control (cue the cheering and Hacky Sacks). While that freedom might have been touted by the early adopters, the focus for many has shifted. Various venture capitalists, investment bankers and other “suits” (yours truly included), are plunging into Bitcoin discovery from other points of view and interests. Why? One reason: No one is expecting another bubble so soon after the last one.*

Before we get into Bitcoin’s positive attributes, let’s focus on why there is opposition, move on to challenges and finally look at the possible reasons this revolution is occurring. Bitcoin represents more than its monetary value, and something more important. Yes, there is such a thing.

The Haters

Any new player in the payment space always faces opposition as it gains traction. Critics usually have a vested interest in overemphasizing the negatives as they might have direct clients, ventures or partnerships with mainstream or traditional payments companies. This would be an attempt to ensure that the market share of established players doesn’t erode. Receiving negative criticism and regulatory pressure is a positive for Bitcoin. Criticism from any direction makes the system stronger and presents in itself a self-defeating action by that actor (read Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb). Bitcoin and bitcoins represent, at least for now, the hope for the movement of money to be less disjointed, less possessive and finally as low-cost as possible. So let’s discuss the most common talking points of the haters, although there are many more.

Bitcoin is decentralized and that is dangerous. It represents a threat to the fiat currency.

Weakness is exploited only when it’s present. The threat to any currency starts as soon as the currency is used. If the bitcoin does topple the fiat, then the fiat let itself be weak, or at least its elected or appointed custodians handled it miserably. As for governments, they are not in the least bit worried. As long as capitalism and democracy remain, the taxation system that comes with it will give the government as much of a handle on its country and currency as it deserves. In that aspect, taxation is elegantly agnostic.

Bitcoin is anonymous and attractive to criminals.

Bitcoin is not anonymous. It is actually, and sometimes unfortunately, with respect to merchants and their privacy, the least anonymous form of value transfer mechanism. Every transaction is verifiable, posted and immutable for as long as the Internet is powered. What some tend to confuse anonymity with is the lack of identification. We compliance folks refer to that as KYC (know your customer) or CIP (customer identification program). Bitcoin gateways or administrators might have that burden in the context of regulation and may not be exercising these duties fully. In that situation, it’s a case of assigning responsibility and accounting for it, not a case of anonymity for its own sake.

How much happier and more effective would law enforcement be if someone handed them a system where every note of every paper dollar or euro could be tracked throughout its entire journey? Starting from print to circulation, law enforcement would be able to identify all the points where the money changed hands. The Bitcoin network has that record, identifying points where bitcoins changed ownership. Aside from the fact that receiving proceeds of crime in cash is the most frictionless experience compared to using Bitcoin, the fact remains that every Bitcoin transaction is forever documented and traceable and public. Therefore, Bitcoin transactions are anything but anonymous.

Bitcoin operators have been shut down or seized, due to …

There is no accounting for stupidity or a shortage of those willfully ignorant of the law. Also, let’s not forget though the seizure, arrests, orders, fines, penalties, deferred prosecutions of operators of fiat currency in legacy institutions that persist. Similarly, not everyone deserves to handle Bitcoin.

Bitcoin prices are very volatile and unstable.

Bitcoin is going through a phase of discovery and experimentation. The only thing larger than Bitcoin is its own hype. It’s rigorously being tested as a form of currency, commodity, message transfer solution, information storage, third-party signature verification and market uptake on new value. Like any product during experimentation, it’s subject to all the various components of its market—the media, world events, large players in the industry and even insider trading.

Bitcoin has a commodity/currency problem. Which one is it?

Most likely, both.

Where does it get its value compared with a commodity like gold?

Let’s put aside the aesthetic values of gold that are sought after. Gold is an essential component in electronics and various other industrial applications. Its elemental properties are responsible for that. Likewise, Bitcoin is the foundation on which extremely sophisticated communication models can be built. After all, it is cryptography at its core. With the rage nowadays of government-spying, various applications are being built on the Bitcoin premise and offer a cryptographic form for everyday communication. What needs polishing is the product branding and user experience. Bitcoin payment systems, wallets or other applications typically aren’t easy or intuitive to use.

My grandmother won’t understand and can’t use it; therefore, it’s highly unlikely to take off.

A lot of grandmothers prefer waiting in line and using a bank teller to pay their bills. It’s the most adorable thing and should continue.

The Bitcoin operators don’t have principles of best practices to abide by; therefore, security is an issue.

True. There is no PCI-DSS comparative to Bitcoin. Currently, operators are left to their own methods of security but aren’t shy of sharing their practices and providing open-source applications. This is a constant work in progress. Some would argue PCI compliance is a constant work in progress as well. That being said, certain primary notions need to be further discussed in the field of data and hardware risk.

How is Bitcoin better?

For one, there are no groups or associations in between, and no middlemen between users and, therefore, no interchange fees, card association dues, acquirer fees, ISO dues, etc. The whole hierarchy of bank, acquirer, processor, third-party processor is flattened to two players: sender and recipient. In some cases, there may be a middle party, but its primary goal is traction and exposure.

The most common way to send bitcoins is to copy someone’s bitcoin address into an email, paste it and hit send. There are other ways using QR codes, but that method is unlikely to become an optimal form of payment. This opens the door for innovators. The most important thing about Bitcoin is not that it’s creating a new payments model, but rather shaming the current payments models and disclosing their flaws. Bitcoin demands that the current leaders in payments constantly innovate. Bitcoin also has accelerated the impetus of regulators to be more vigilant about the shift in the payments landscape. Overall, it has turned the discussion of how we move money upside down.

Whether it’s Bitcoin or another crypto-currency, or some other form factor that becomes the next craze in payments, one thing is certain: Traditional payment companies have to exert the most amount of pressure on their product and marketing managers and ensure that the complacency to innovation is constantly averted. If some unknown guy can develop something that in five years gains the largest market share in the news and worldwide discussion of payments, somewhere out there, some product and marketing managers need to be shown the door.

Pervees Faisal Islam serves as director of compliance advisory services for Centra Payments Solutions, a compliance consultancy based in Washington, D.C. An AML, compliance and fraud-prevention practitioner at heart, Islam frequently advises companies with a variety of payment platform and nontraditional money transfer systems. He has held several executive positions at payment processors, money transmitters and online payment firms. Islam is a critical tactician for Centra’s social commerce, e-commerce and payments systems clients. He can be reached at [email protected].

Click here for an opposing view on Bitcoin.

*This article was written for the Fall issue of Pay Magazine before bitcoin value shot up to $1,000.