WASHINGTON – Entrepreneurs from Silicon Valley to Wall Street say they don’t care much for Bitcoin as a currency to supplant the U.S. dollar. As a payment technology they could use to undercut Visa, Western Union or Citigroup, they say they like it a lot more.
As Bitcoin’s value gyrates, these investors have said that the headlines about its price and chatter about which retailers accept it obscure the real merit of what Satoshi Nakamoto, the name given to the anonymous person or people who created Bitcoin, delivered five years ago.
At some point, I had an aha! moment and realized that Bitcoin was best understood as a new software protocol through which you could rebuild the payments industry in ways that are better and cheaper, Chris Dixon, a partner at Menlo Park, Calif.-based venture capital firm Andreessen Horowitz, wrote in a blog post.
Bitcoin enthusiasts say they are building a system to move money across the Internet securely and at a lower cost than existing wire transfers, bank debits or remittances.
If they can eliminate the friction created by middlemen and create easy-to-use consumer tools, Bitcoin businesses may claim a piece of the revenue and still deliver lower costs.
Already, some retailers are paying 1 percent to process transactions in Bitcoin, improving profit margins.
Taking debit or credit cards, they may pay more than 3 percent to issuing banks. Bitcoin transactions log immediately, and are confirmed in as little as five minutes.
Skeptics counter that the volatility of Bitcoin, whose price swings resemble those of a thinly traded currency, could wipe out cost savings in what is still a small business. They also say the startups, in addition to facing entrenched incumbents, will layer their own costs onto Bitcoin transactions, undermining the goal of a cheaper system.
A lower-cost virtual currency-driven payment system could take business from companies like Western Union that specialize in foreign remittances, as well as Visa and MasterCard. Banks such as JPMorgan Chase & Co., Citigroup and Bank of America reap billions in fees from the use of credit and debit cards, and are the main players in the direct-debit system.
Perhaps the rise of Bitcoin will put pressure on big banks to get us a more modern payment system, said Jennifer Tescher, president of the Center for Financial Services Innovation, a Chicago-based research group.
Bill Carcache, a Nomura Holdings analyst in New York, said any disruption is bound to move slowly. Visa and MasterCard have 35 million locations globally that accept their cards, and as many as 2 billion account holders.
I’d never dismiss the risk posed by a new technology, but I think the network effect that Visa and MasterCard have achieved creates a high hurdle for new competitors seeking to disintermediate them, said Carcache, who reiterated buy recommendations on Visa and MasterCard in a client note last month.
Bitcoin’s potential as a payments system is an exotic topic within an exotic topic, said Arjan Schutte, founder of Los Angeles-based Core Innovation Capital, which invests in financial-services startups.
It’s also the driver behind the most important venture capital investments in virtual currencies, according to Schutte, far more important than the price of Bitcoins.
I have no interest in owning Bitcoin, he said. What I am entirely interested in is frictionless money transfer.
The global integration of financial markets obscures a central and costly problem: Moving the most basic asset, cash, can be expensive, slow and at times fraud-ridden.
When a consumer swipes a debit card at a store, the amount is immediately subtracted from the customer’s available cash. The merchant is paid only when the next collection of transactions clears, usually in a day, but sometimes at the cost of higher fraud levels, according to Shirley Inscoe of the Boston-based consultancy Aite Group. When an immigrant gives cash to a Western Union agent, such as a convenience store, the money may be available quickly to a family member in another country only if the customer pays a premium.
Businesses paying suppliers through the automated clearing system to which all U.S. banks belong have no guarantee that payments will clear the same day, and the process uses a 40- year-old software protocol. International wire transfers can take four or five days, and are costly enough to make small payments uneconomic, Inscoe said.
The chief innovation of Bitcoin involves a solution to what is known as the double-spending problem. Any payment that is not cash handed over in person, such as entries in a bank account, could be duplicated, allowing people to spend the same money twice. A trusted third party, such as a payment system run by Visa or MasterCard that confirms identities and ownership, adds costs while preventing double-spending.
Bitcoin transactions could mitigate the risks of breaches of the type reported by Target, said Jerry Brito, director of the technology program at George Mason University’s Mercatus Center.