Viewpoint: Bitcoin: Take Charge of Your Destiny

By James Hutchison, FIS

Like it or not, the bitcoin craze is here to stay. Over time, bitcoin will be a major disruptor in payments—with broad implications for governments, businesses and consumers. Ignoring it (or any next-generation virtual or cryptocurrency that may supersede it) will only compromise your company’s ability to adapt once bitcoin is truly a viable payment option.

Preparation for this future is key. Take charge of your destiny and begin planning your strategic incorporation of bitcoin now. Dragging your heels practically guarantees your business will be counted among the detritus of disruption.

How It Works

Bitcoin enables users to purchase goods and services in exchange for credits, which are stored and validated simultaneously across the entire network of bitcoin transaction processors globally. Those transactions are tracked and authenticated by bitcoin “miners,” individuals who earn bitcoins by tracking lists of transactions in a general ledger technology, called a blockchain. Miners then digitally create the bitcoins.

In essence, what this means is that, while bitcoins have begun to be traded on exchanges, including the first regulated U.S. exchange, there is no central bank to issue them. Bitcoin transactions also are irreversible, so if someone accidentally receives a bitcoin payment, there is no way to reverse that transaction without the recipient’s participation.

In addition, bitcoins have a limited supply. Currently, only 13.5 million of the 21 million bitcoins are in circulation, with the full amount not expected to be issued until 2045. The purpose for this limited supply is to eliminate the significant price fluctuations the currency experienced over its first few years.

The Need for Cost-Effective, Real-Time Payments

Bitcoin proponents cite a number of benefits, including anonymity, lack of transaction costs and security. While those benefits are important, even greater may be the creation of a path to cost-effective, real-time payments.

Examples of Benefits in Specific Sectors

Let’s look at examples of the benefits of bitcoin in three specific sectors: developing economies, and consumers and businesses that transact cross-border.

• Developing Economies

Bitcoin offers unique benefits to consumers in developing countries where banking infrastructure—regulation, availability, credentialing, etc.—may be lacking, but where cell phones are a necessity for communication and have made digital transactions feasible. Bitcoins now provide people in developing countries an easy to use, free (for now) digital currency exchange market that’s globally accepted. In the near term, the greatest opportunity for consumers in emerging markets to use bitcoin would be for e-commerce, where it’s more widely accepted.

• Consumer Remittance

Today, consumers who transact across borders face substantial costs, typically incurring charges of 3-4 percent—plus additional hard costs, depending on their transaction frequency and risk associated with the initiator of a transaction. A typical consumer sending $1,000 electronically from an account in the U.S. to an account in Latin America will pay up to $40 in fees, with the transaction taking several days to settle, depriving the recipient of the funds and subjecting the transaction to negative currency fluctuations. The same consumer using bitcoin would currently pay nothing and the transaction would settle in real time.

How important are cross-border transactions for consumers? Globally, sending remittances costs an average of 7.68 percent of the amount sent, according to the World Bank. Reducing costs by five percentage points could save immigrants up to $16 billion a year. Reducing the cost of cross-border remittances could have positive economic benefits for the people sending and receiving the funds. Speeding up the process is another key benefit for those who rely on remittances to support their families in other countries.

• Businesses

For businesses, bitcoin is a money saver. There are currently 400,000 merchants accepting bitcoin. That’s twice as many as Apple Pay had at launch. There’s no need for an expensive POS system because most bitcoin merchants use simple smart device applications such as CoinDesk, Coin of Sale and BitPay, to process payments. However, return and refund policies must be made clear to consumers. To avoid the volatility of bitcoin’s changing values, it would be more beneficial to base refunds on the original dollar price, rather than the bitcoin price.

Looking Ahead

While bitcoin continues to develop, questions and new ideas about traditional currencies and exchanges are surfacing. Is there a way to achieve real-time payments and settlements, while avoiding clunky batch systems? Can traditional payments ever be as seamless as those made with bitcoin? Will traditional currencies, like the dollar or euro, ever develop to become real-time capable? Can traditional currencies be digitized? How aggressive will regulators be in trying to control or even shut down cryptocurrencies like bitcoin?

Market reaction, adaptation of service providers and, ultimately, the organic adoption of consumers to technology advancements, as well as payments and currency innovations over time will answer these questions.

Taking small steps to incorporate new technological systems should be the ideal thought process of the regulated world.

For now, it’s up to consumers to keep this system alive. Having options is generally what people want, and bitcoin is a truly unique option when buying and selling goods and services.

James Hutchison is SVP of Emerging Commerce Products at FIS. He can be reached at [email protected].

In Blogs & Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.