October 15th, 2013
Is this Bitcoin’s moment to shine?
There’s been a lot of talk about Bitcoin this year. Once a fringe idea espoused by hardcore cyberpunks, there has been a large increase in demand and interest from tech startups, incubators, and investors that are working to legitimize the space. But why is Bitcoin becoming so popular, and how does it help us solve some of the biggest problems facing startups today?
Legitimizing Bitcoin has not been easy. The debates are mostly positive, occasionally uncomfortable (money is.. a touchy subject), usually confusing, but always fascinating. It was difficult to have a serious discussion about Bitcoin with sordid publicity from (now extinct) Silk Road, which some claimed was almost all of Bitcoin’s traffic (a claim we now know is completely false). But despite these difficulties, and numerous attempts to break the protocol by the world’s top experts, Bitcoin is still going strong, and is showing no signs of slowing down.
Value exchange is an enormous and difficult topic that affects all of our lives, so there are a lot of angles for describing Bitcoin. Rickard Falkvinge (founder of the Pirate Party) called Bitcoin the “Napster of Banking” due to its potential to change brick-and-mortar banks the same way P2P music changed the top-heavy record industry. Tom Robinson thinks Bitcoin is a startup: “A wonderfully fascinating, exciting, crowdsourced, decentralized, risky startup”. I had some early fun describing it as a Cyberpunk Cryptocurrency, which might be reinforced by the fact that cyberpunk author Neal Stephenson has recently started using it.
Why all of the interest in Bitcoin?
I think the debate of “what Bitcoin really is” will continue for a long time. But I want to focus on why startups are so interested in Bitcoin, why it is great for both startups and consumers, how Portland businesses and startups are already taking advantage of it, and how you can start using it right now.
When you buy things online, you typically use Credit/Debit Cards. You give the merchant your credit card information, they withdraw money from your account via a third-party intermediary (Visa, MasterCard, your bank), and then you (hopefully) receive whatever good/service you purchased. That’s a terrible way to do exchange, because it means that the merchant is allowed to reach into your bank account and pull out as much money as they want (even if they make a mistake). That also means any hacker that breaks into your merchant’s servers can do exactly the same thing. We don’t let businesses take money out of drawers in our homes – why are we comfortable with letting them do this with our bank accounts?
The result of this broken trust model is a massive amount of fraud. It’s been estimated that 1 in every 50 credit card transactions is fraudulent – some studies have suggested that credit card fraud could constitute more than 1% of GDP every year, which in the United States alone is 157 billion dollars. Ask anyone, and you’ll hear a story about how their money was taken by fraudsters via their credit card information.
The problem is so massive that credit cards would not be used without protections. So the way credit card companies deal with this is to issue a refund of the fraudulent transfer (after you spend time fighting with them over the phone to fix it). The problem is, the merchant is then forced to pay for the fraudulent goods/services, which means that in order to do online purchases with a startup, the startup has to incur a massive amount of loss. Fraud hurts startups and small businesses the most, because they lack the tools necessary to fight it. Many great startups have failed because of this, and many more will experience similar difficulties in the future. There just isn’t any good way to solve the problem using our broken, antiquated credit card system that was not made for the digital economy.
In addition to fraud, credit card companies use their intermediary monopoly to charge arbitrary and exorbitant fees on Portland businesses that we cherish. Those fees amounted to $48 billion in 2008 alone nation-wide, amounting to $427 per household, a number that has probably gone up as more commerce has gone digital. None of this money goes towards merchants who have lost money, it is pocketed by the credit card companies. They also charge different fees to merchants based on the type of card. “Rewards cards” work by charging your merchant even more, as high as 2.95% + $0.20 per transaction. That means when you use a credit card at your favorite Portland restaurant or web site, you are costing them money that leaves our local economy, hurts our businesses and forces them to raise prices, while also putting your bank account at risk. And to make things worse, as a merchant you can only accept credit cards from a few countries (want to sell your awesome handmade Fox Scarves to someone in the Czech Republic? You might be able to use PayPal, which also charges high fees and is slow). We can do better!
Credit cards also don’t fit in very well with the emerging maker culture. It’s easy to purchase things from companies, but it’s much harder to send money to individuals. The obsolete credit card model fits very well with the consumer-culture that predominated the 1950s when it was invented, but with the emergence of the social web and the ability for everyone to be a creator, they present a barrier to entry that stifles creativity and entrepreneurship. Credit cards were not made for our changing culture, and they were not made for the internet!
Bitcoin offers room for improvement and Portland recognizes that
So how can we improve one of the most important ways for us to support the businesses we love?
Bitcoin solves the fraud and fees problem by allowing you to send money easily without needing a third-party intermediary, and without giving merchants access to your bank account. In Bitcoin, merchants don’t “pull” from your Bitcoin wallet, you “push” to theirs. Instead of having to worry about theft from the dozens or hundreds of sites you purchase things from, you only have to worry about the security of your Bitcoin wallet (or wallet provider). And there’s usually no fees (at most, a few cents per transaction).
This makes Bitcoin the most fraud-proof, tamper-proof, secure way to send and receive money that has ever existed. And Portland companies are already starting to use this technology to help us send payments.
Portland startup Gliph has recently adopted Bitcoin, using it as a way to quickly send payments to anyone using their app. There are also some Portland businesses starting to experiment with Bitcoin for in-person transactions. Whiffie’s Pies now accepts Bitcoins as payment, and so does it’s neighboring Madison Grill (which is also home to the Portland Bitcoin Meetup). The Figure Ground accepts Bitcoin for their landscaping and architecture work, Pacific Solutions for their computer sales, and Siempre Beauty for their homemade cosmetics and beauty products.
Even more Bitcoin options
There are also a lot of projects and startups emerging to make it easier to work with Bitcoin. There are many Bitcoin wallet clients you can choose from, and many startups are working to finish the difficult compliance rules to allow you to easily purchase Bitcoins from exchanges. There’s even a Bitcoin ATM!
If you’re a merchant that just wants to accept Bitcoin in addition to credit cards, BitPay gives you an easy and safe way to accept Bitcoins (with a 0% transaction fee!) and have them automatically converted to US Dollars for you and transferred to your bank account. And I’ve been working on Coinpunk, which will allow developers to run an open source web-based Bitcoin wallet service, currently backed by a grant from the Bitcoin Foundation (a non-profit based in Seattle dedicated to improving the Bitcoin ecosystem).
Bitcoin is an early technology, and as a result we’re still ironing things out to streamline and improve the process of using them for day-to-day transactions. But the technology is sound, there’s a lot of great investment and development going on, and the goal is clear: the internet needs a better payment system, and someday soon, you’ll be able to make a purchase with Bitcoins even more easily than with credit cards. Keep a close eye on Bitcoin, and if you’re a business accepting credit cards, start looking today into how you can use Bitcoin to accept payments internationally, reduce fraud, and save money.
(Image courtesy Zach Copley. Used under Creative Commons.)