What’s happened to the ‘Bitcoin Revolution?’

Last Tuesday PayPal announced partnerships with the three biggest Bitcoin payment processors, BitPay, Coinbase and GoCoin. Merchants can now accept Bitcoin through PayPal’s Payment Hub platform, although the company hasn’t integrated the currency into its system directly.

With over 143m registered users and $125bn worth of transactions last year this is a boon for the digital currency-cum-payments processor, which currently sees up to 80,000 transactions a day.

It’s also a suggestion that the ‘Bitcoin revolution’ (if it is to happen at all) could be less explosive, more incremental, and far more reliant on existing processes than many might believe.

In many ways the last 12 months have been incredible for Bitcoin. It’s gone from an underground obsession to a mainstream curiosity and the darling of the FinTech world. Huge companies such as Overstock and IBM now accept payment in it, and the currency is on track to attract more VC funding in 2014 than the Internet did in 1995.

Yet for some Bitcoin’s performance has been a disappointment. Despite all the investment and media attention, Neither Bitcoin’s price nor its use have seen anything like the exponential rise anticipated by its biggest proponents.

Enthusiasts are prone to making eye-watering predictions of Bitcoin’s value, yet its price has been falling in recent months and is down from a peak of $1,000+ in December to around $400 in recent days. Bitcoin transaction volume has also stagnated around 100,000btc/day, a decline from around 250,000 last November & December.

There’s also been little vindication for the more ideological Bitcoin supporters, who view the protocol as a tool with which to challenge power structures and state legitimacy. Wall Street and the banking sector are more interested in harnessing the power of cryptocurrency and distributed ledgers for themselves than in lobbying to protect themselves from the technology. There’s also little indication that central banks (even privately) consider cryptocurrencies a threat to fiat currency. And whilst Bitcoin fans are quick to proclaim its resistance to state censorship, places like China and Russia have done a good job of suppressing its use within their borders.

Yet none of this renders Bitcoin a failure. Whilst crazy price rises no longer dominate the news and public interest may have waned, the past year has seen significant professionalization within the Bitcoin community and the development of a staggering amount of infrastructure.

Actors like the Bitcoin Foundation have worked hard to safeguard the Bitcoin protocol and to provide the currency with a ‘legitimate’ face. Bitcoin conferences now cater to serious investors and carry hefty pricetags to match. Self-styled crypto-consultants and established law forms vie to provide specialized advice, whilst groups like Google Ventures and Barclays Accelerator have their eyes on crypto-entrepreneurs. Whilst basic problems like securing an UK bank account for Bitcoin businesses persist, financial innovation in areas like Bitcoin derivatives which compensate for the currency’s volatility race ahead.

Lawmakers are also starting to take Bitcoin seriously. The UK Treasury has already offered really very reasonable tax guidance on Bitcoin and has a detailed report on it due out this Autumn. The Bank of England’s most recent Quarterly Bulletin labeled Bitcoin a ‘significant innovation’ and remarked that its underlying protocol has the potential to ‘transform’ the financial system as a whole.

This doesn’t guarantee that governments will make the right decisions or regulatory steps. Indeed, proposed legislation like NYC’s ‘BitLicenses‘ threaten to affect Bitcoin companies across the globe. However, in the UK and the USA at least policymakers are seem interested in understanding Bitcoin technology and how it can contribute to society, rather than in controlling the network completely.

This ‘professionalization’ of Bitcoin invokes the ire of some members of the coin community, who regard it as selling out and the establishment of a new, powerful Bitcoin elite. Certainly, companies which pre-emptively comply anti-money laundering and know-your-customer laws applied to other financial services cannot utilize the full potential of Bitcoin technology. However, it is inevitably these boring, corporatized activities-  not transactions fueled by price speculation or clickbait about the Dark Web- that create the chance of a sustainable future for Bitcoin.

It also looks like Bitcoin’s success will be increasingly related to its integration with established payment, merchant and finance companies such as PayPal, Amazon, Apple and Visa. Bitcoin is a disruptive technology with the capacity to bring about huge changes, even within the confines of today’s regulated industries. However, these changes look likely to come with the help and blessing of today’s commercial giants, rather than by a process of immediate disintermediation.

For instance, Bitcoin is much more than the new PayPal, for it’s simultaneously both a currency and a payment processor. Despite this, Bitcoin’s price rallied significantly after a long period  of decline following the PayPal announcement. Whilst the Bitcoin protocol has absolutely no need for an Apple Pay or a debit card to transmit it (in fact Bitcoin was developed to render such third parties obsolete), there’s no denying that it would also work wonders for user adoption. As the Bitcoin ecosystem grows and seeks increasing legitimacy, integration with established companies is a very realistic route to long-term success. In addition these companies have much to gain from embracing Bitcoin early, rather than risk competing with it later.

Understandably, this doesn’t make the ‘Bitcoin revolution’ seem much like a revolution. But for libertarians and free marketeers there’s still much to celebrate. The fact that Bitcoin can reduce payment transactions fees by a couple of percent isn’t all that sexy, but the fact that it could slash the fees associated with remittances to developing countries certainly is. And if established companies like Western Union or M-Pesa can work with a Bitcoin company to speed up this process, so much the better.

There are also innumerable areas (many of which are still in their infancy) where Bitcoin and blockchain technology can work to make the world richer and freer, such as in providing finance for the unbanked , establishing a decentralized internet, or enabling Decentralized, Autonomous Corporations.

Bitcoin is still an alternative to fiat currency, which is great for those anticipating global monetary collapse as well as those experiencing extreme inflation in countries like Argentina. Bitcoin can still be used to circumvent capital controls, give funds to politically outlawed organizations, and to achieve increased levels of financial privacy.

As Bitcoin ‘legitimizes’ and enters the mainstream it is inevitable that the companies and services interacting with it will become regulated. There’s even demand for the legislation, since businesses tend to prefer regulatory clarification rather than to be stalled by uncertainty. However, the beauty of the blockchain is that whilst companies and specific actions can be restrained by law, the underlying Bitcoin protocol cannot be controlled or regulated. This allows for disobedience and experimentation in the shadows. No matter how Bitcoin is taxed, treated or regulated in the open economy, the possibility of a parallel realm where no interaction with the current political and financial system is required- however small- remains as an enduring idea.

 

Should fans be concerned by Bitcoin’s fall in value?

The last few months has seen a breathtaking rise in the price of Bitcoin. Starting around $15 at the beginning of the year, Bitcoin’s price went from round $200 to a peak of over $1,200 just during November. Then from early December BTC’s price began to falter, with a sudden drop and a low of $550 on the 18th: less than half its price just weeks before.

Commentary has been just as volatile, with some seeing BTC’s rising price as its explosion onto the scene and proof of its revolutionary potential. Others have scoffed, calling the whole thing a bubble inflated by overoptimistic geeks and people looking for a quick profit. Now that BTC’s price has come tumbling, should proponents of the crypto-currency be humbled and/or worried?

Recent rises and falls in Bitcoin’s price have reflected developments in China.  In November Bitcoin exchange BTC China secured $5m investment from Lightspeed Venture Partners, and surpassed Mt Gox as the largest exchange in terms of trading volume. However, on the 5th December the People’s Bank of China announced that it does not consider Bitcoin a currency, barring banks & other financial institutions from dealing with it. Around this time Bitcoin’s price took a sharp downwards turn. Then, on Monday, the central bank banned 3rd-party payment companies from working with Bitcoin exchanges. This left Chinese exchanges unable to take deposits, and the price cfurther tumbled.

This is potentially bad news for entrepreneurs who want to see Bitcoin widely adopted, as well as for more ideological fans who consider Bitcoin’s strength its decentralised and stateless nature. Governments will never be able to stamp out Bitcoin completely, but making it as difficult as possible to use will hamper the objectives of both groups. The Mercatus Centre’s Bitcoin Primer explicitly urges policy makers to consider the technology morally neutral, warning against restricting its development and its use by non-criminal users. Whilst China cracks down on BTC its uptake in developing countries -particularly amongst the unbanked-is strong, and Denmark has just announced that it will not regulate Bitcoin or its exchange. China may well realise that it is missing a trick and relax its hostility.

Nevertheless, innovation around this problem will occur if it continues. Bitcoin is a global start-up project, with swathes of  passionate and seriously techie fans.

Some take Bitcoin’s crash as proof that that it is an unstable and unsustainable folly- nothing more than a risky virtual commodity bet.

Certainly, Bitcoin’s volatility is an established fact, with its last big crash in April wiping out 80% of Bitcoin’s value over 6 days. Nevertheless, BTC has always recovered and increased in value. Indeed, since the 18th Bitcoin’s price has been creeping up yet again.

Calling bubbles is a funny thing, because both falls in price and continued rises offer ‘proof’ of the hypothesis. It is perhaps more accurate to say that Bitcoin is undergoing a long period of ‘price discovery’. A lot of purchases have been speculative or made out of curiosity, but as more users and ways to spend the currency emerge, so will a clearer and more stable idea of its price. Bitcoin’s shifting price isn’t even that much of an issue for those using it for purchases: vendors adjust their Bitcoin prices regularly to reflect the changing exchange rate. It is short-term investors and those calling Bitcoin the ‘new gold’ who should perhaps be more wary.

Others say that Bitcoin’s falling price reflects underlying concerns with the currency – such as issues with security and fraud, and exchanges’ ability to cope with demand. Some suggest these issues mean that Bitcoin will never be much more than a digital curiosity. But at the early stages of the computer and the internet few thought they would be so transformative, or could imagine how they would evolve. Bitcoin is certainty not ready for mainstream adoption or about to cause a central banking crisis, but that is zero reason to write it off.  So much of how Bitcoin can and should operate is yet to be discovered, let alone decided. Despite all the recent attention it is still in its infancy, and growing pains and price shifts are an inevitable path of its development.

Even if Bitcoin’s price were to come crashing devastatingly down, the world’s first digital, decentralised ledger-based currency has created a new paradigm: a new way of thinking about money, transactions, anonymity and even our relationship with the state. Even some of Bitcoin’s biggest fans say it could one of the alternative, retweaked and ‘improved’ cyrpto-currencies which will really take off.

On which note- why care about the price of Bitcoin when you can be an early adopting millionaire of everyone’s favourite meme-cum-cryptocurrency, the shibe-tastic, very money Dogecoin! (wow)

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The growing digital challenge to government money

The folks at the Real Asset Company have put together a very useful graphic outlining the rise of digital currencies like Bitcoin. It’s big, but you can see the whole thing by clicking through the preview below.

Tor, Bitcoin and the Silk Road: three forces for good

Since the arrest of Ross Ulbricht aka ‘Dread Pirate Roberts’ — the alleged mastermind behind the Silk Road — media attention has in part focused on the role of legal technologies Tor and Bitcoin in its operation. Silk Road was an online black market where all kinds of restricted and illicit goods (from illegal drugs to forged passports) were sold in an eBay-style setting. Because of the nature of its wares it made up part of the ‘deep web’ – accessible only by using software such as Tor, which enables user anonymity by obscuring their location and usage, making surveillance incredibly difficult. Its illegality also prevented customers from paying via card companies or PayPal, so business was done using the crypto-currency Bitcoin.

Whilst talk of Bitcoin and Tor is old hat amongst technophiles, reporting of Silk Road’s takedown is probably one of the first times that many people would have heard about such technologies. And, understandably, when their raised profile comes in association with a giant underground marketplace in drugs and a man charged with charged with ordering an assassination, people may be swift to discount them as ‘hacker tools’, or look upon them unkindly. (The Guardian’s leak of GCHQ’s presentation ‘Tor Stinks’, which depicts an apparently typical terrorist Tor user masked and toting an assault rifle (and sat in front of a giant onion) is in this respect both amusing and depressing.)

However, Tor and Bitcoin aren’t used just for shady dealings. Both can be used to great benefit — Tor in providing freedom and safety online, and Bitcoin in encouraging financial and monetary innovation.

There are huge numbers of people who aren’t terrorists, sex offenders or drug barons who benefit from anonymising software such as Tor, and those whose lives may depend on it. Tor allows people across the globe to communicate freely when doing so is risk and the internet is monitored or subject to blocks. It circumvents national firewalls, empowering and educating citizens who would otherwise be restricted. It allows whistleblowers to divulge their information anonymously, journalists to share news, and activists and citizens to criticise, dissent and organise in protest. Millions around the world benefit from Tor.

And it isn’t just citizens in oppressive regimes who benefit — Tor is used by the military in operations to protect their location whilst communicating securely. It could also be argued that concerned parents can help protect their child online by using Tor to mask their location. Whatever else Tor may be used for, its capacity to liberate and protect is great.

Similarly, the development of crypto-currencies such as Bitcoin carry with them great potential. Bitcoin is an open-source, peer-to-peer electronic currency. It has no central issuing authority; the money supply is increased as users’s computing power crunches numbers to verify pervious transactions. This has made crypto-currencies very interesting to those who wish to abolish central banks and establish new forms of currency. But Bitcoin also has a growing number of practical uses.

Increasing numbers of vendors are accepting payment in Bitcoins and it can be used to pay for things from WordPress services to pizza. It doesn’t require any third-party intermediary such as credit card companies or PayPal to process payments, making transactions cheaper and easier. This can lower transaction costs for businesses, which, were Bitcoin to become widely adopted could also be passed onto the consumer. The Mercatus Center’s primer on the currency suggests that this aspect of Bitcoin could also revolutionise the global redistribution of wealth. In 2012 immigrants to developed countries sent $401 billion back home to developing countries. The average fee doing so at places like Western Union is close to 10%, whilst fees for similar services using Bitcoin are less than 1% of the transaction. Wiring companies are looking at integrating Bitcoin services into their own, and if they were to do so this would be a tremendous boon for the poorer people of the world.

Transferring traditional currency into Bitcoins can also allow people to overcome domestic economic problems and the consequences of corruption. With tight capital controls and an inflation rate of 25%, it is no surprise that Argentinians are some of the most enthusiastic users of Bitcoin. Other great uses of Bitcoin, such as in conjunction with SMS banking in developing countries, are developing all of the time. Bitcoin definitely has the potential to be more than a plaything for nerds and a way of buying hash.

Cathy Reisenwitz is right: the world is less safe now that Silk Road is gone. The violence associated with drug dealing is not a consequence of the products, but of their illegality. As a stable, trusted and effective platform Silk Road removed that need for violence. Drug laws need a serious overhaul, and the user rating and delayed payment system of Silk Road offer a great model for a legal marketplace for drugs. I therefore think that it is great that technologies such as Tor and Bitcoin are being put to such use.

However, many will disagree. This is why it is important to point out the great potential and liberating capabilities of these technologies before people discount them, or worse turn against them. No technology in itself is ‘good’ or bad’ – what matters is how it is put to use, and while we worry about the potential dangers of new technology, we should remember its use in positive ways too.

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