29 July 2014

Beyond TEDIPAY

Alexander Peschkoff - TEDIPAY

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Bitcoin vs real life

29 January 2014  |  3156 views  |  6

Heated polar debates over Bitcoin are in full swing. Even the banking community, let alone non-fin companies, are divided in their opinion. With over 80 (!) competitors and wannabes, Bitcoin is not the only cryptocurrency out there. More schemes are in the making. Only a couple will survive long-term (and Bitcoin may not be one of the winners). 

So, what exactly excites all those companies that invest time and money into digital currencies? More importantly, are they excited for the right reasons?

2P or not 2P
In real life, Bitcoin, as well as most of the other digital currencies, is not based on P2P mechanism. Just like email requires ISPs and SMS needs MNOs and SMS centres, Bitcoin et al rely on several parties for its existence and operation: "miners", exchanges and distributed nodes (the "ledger"). It's not at all similar to such true P2P actions as me handing over a fiver in cash, or beaming some data over direct wireless link. That leads us to the following problem.

It's your problem!
When I send you an email and it doesn't get through, I don't care much - I will resend it again. If my emails start persistently disappear in the ether, I can talk to my ISP if needed. Since Bitcoin relies on some distributed "ledger", whom do you call when your Bitcoin payment gets lost?! When a system is "decentralized", nobody is in control/in charge - i.e. nobody is responsible.

Pseudonymous nature
Most of us know by now that any online transaction can be tracked, one way or another. In case of Bitcoin, you do need to go through some KYC when cashing in or out. Hence, there is no anonymity. And why would you need one - in the digital world, knowing the identity of the party you are dealing with increases confidence and trust. After all, when parting with your money whom would you rather pay: "Alexander Peschkoff" (knowing that my identity was verified to at least some degree) or "cn5467"?..

Low transaction cost
Shifting data costs next to nothing indeed. However, in real life, you need to cash in or out at some point - e.g. most of the remittance markets cannot use even banks cards, let alone Bitcoins, to buy food and other things they need most. That means more participants in the food chain, and - hence - increased cost, including the cost of fraud as well as the cost of volatility. From that perspective Visa or MasterCard charges look rather reasonable (not that they cannot be improved though).

Can digital currencies be a viable payment option? Absolutely. Are they here to stay? Sure.

Are digital currency ready to enter the mainstream market? Not yet. What is missing? Ubiquity, trust, Apple-style user experience.

To gain ubiquity, digital currencies must be extended to physical retail (where both consumers and merchants can benefit from an alternative payment method). Trust comes from transparency, big name credibility and certainty of value. User experience needs apps that make paying with digital currencies easier than sending a text message. From that perspective, MintChip seems to be heading in the right direction...

TagsVirtual currencyPayments

Comments: (6)

Bo Harald - ZEF and Real Time Economy Program - Esbo | 30 January, 2014, 10:53

Well written. I think Bitcoins will fade away when it is realised that they do not offer any real benefits over already invested in solutions. No real anonymity, no proper supervision, no sustainable cost benefits - having an additional payment system only adds to cost.

 

Henry Young - TS-Associates plc - London | 01 February, 2014, 08:41

Many current comentators fall into the trap of fitting Bitcoin at al to established thinking revolving around fiat, retrofitting current regulation, etc.  I doubt Alexander has personal experinece of actually using Bitcoin. The reality is that Bitcoin broadens the repertoire of possibilities today, and in the longer term facilitates change that will have profound impact on all of our futures.

In terms of real world usage today, to find out about the benefits, try asking the online retailers whose margins increase for not having to pay 2% transaction fees to Visa/Mastercard, try asking the OFWs (overseas foreign workers) being ripped off by Western Union et al when remitting money to their families back home, try asking those running fund raising or disaster relief campaigns who only need to flash a QR code in a YouTube video to be sent money by all who chose to contribute anonymously with no middle man taking a cut.  Broaden your thinking, and there are so many applications of crypto currencies that are genuinely safer, cheaper than and more practical than currently available payment and ownership certification methods.  Second generation use of the Bitcoin "block chain" will support distributed ownership certification and exchange of any digitally identified asset (shares, land, even multi-leg multi-party derivatives contracts)

Couple Bitcoin and Kickstarter, and you end investment banking fees for book running IPOs.  Couple Bitcoin and P2P lending (Zopa, FundingCircle, etc) and you disenfranchise large aspects of the retail banking industry.  Indeed, given that bank deposits earn no interest and are in effect loans to risky, highly leveraged and corrupt institutions, and we'll see banks disenfranchised of any activity that does not require significant human input.  The vested interests will spend vast sums on trying to avert this cleansing of the temple but the conclusion will be unavoidable.

The longer term impact of this new payment paradigm is actually far reaching.  Income taxation is based on voluntary reporting with plausible verifiability.  Payment in Bitcoin at al removes the verifyability so there is no incentive to report income.  That in turn means that taxation will have to shift from taxation of citizens' income, to taxation of sale of or use of goods by whomever happens to be within a tax juristiction at the time.  This then erodes the whole concept of citizenship with us ultimately becoming global citizens.  Governments whose ability to issue debt is based on their ability to tax citizens will no longer be able to issue arbitrary amounts of debt, putting an end to expansionist policies, illegal wars, the whole "guns and butter" regime we got into when the USD changed from being backed by gold to being backed by "men with guns" [per Paul Krugman, Economics Reoirter on NY Times].

I firmly believe crypto currencies represent the next major revolution.  The internet revolution has enabled is to share our ourtage at the corruption of our institutions - illegal spying, LIBOR rigging, drug running, etc.  The crypto revolution now gives us the enablers to do something about it.

Idealistic, simplistic, naive ?  Watch and learn ... you'll grow old in a world that is very different from the one we live in today.  But we already knew that didn't we ?

Matt Scott - Wincor Nixdorf International GmbH - Wokingham | 04 February, 2014, 10:02

I think you hit the nail on the head.  I had a lengthy discussion/argument with a close friend of mine regarding Bitcoin - I put it to him that I (as a consumer) am relatively happy using my existing plastic based payment instruments as bundled as part of the service is the concept of Chargebacks and Disputes.  If I pay for something and I don't receive the goods or service I paid for I raise a dispute (non-delivery) with my Issuer – something you cannot do with Bitcoin.

If someone is siphoning off Bitcoins from my device – nobody from Bitcoin is going to phone me and tell me.  However if someone attempts to fraudulently use my plastic based payment instrument (and assuming it is detected by my Issuer) I’ll get a friendly call from their Fraud team to rectify the situation (oh and any transactions identified as fraudulent will be refunded – providing I wasn’t stupid enough to legitimately share my PIN).

It’s the value-added elements of existing services which gives them the edge over Bitcoins – at the moment Bitcoins are too similar to Doubloons.

 

Henry Young - TS-Associates plc - London | 04 February, 2014, 18:45

The Bitcoin protocol is a push based payment system, whereas the protection referred to (@Matt) is required for pull based systems.  The block chain is a completely open, transparent distributed public ledger.  It's a pretty fundamental paradigm shift.  If you need non-delivery protection, process the payment through a Bitcoin escrow service or give your 2% insurance premium to VISA/Mastercard.  It's high time we had the unbundling of insurance from the associated transaction.  We don't need that service in all cases, so we shouldn't be forced always to pay for it.

Matt Scott - Wincor Nixdorf International GmbH - Wokingham | 04 February, 2014, 19:16 Push or Pull: Do you think the consumer cares? They just want to pay and know that a transaction will go through and that they'll receive the goods or services they've paid for. At the moment Bitcoin is a tech pet project - it is far from mainstream - for it to go mainstream it needs governance, regulation and control. At the moment its too much like Doubloons...
Henry Young - TS-Associates plc - London | 11 February, 2014, 10:19

Actually there is a very key difference between push and pull.  With the traditional card based pull transactions you have to divulge all kinds of personal information - number, expiry, name, CCV, billing address.  This is (a) precisely what causes the security problems with card data theft/abuse and (b) is a huge inconvenience which creates unnecessary friction.  With a push transaction the seller passes you their payment address - a single character string that can conveniently be encoded as a QR code.

Almost by definition, those on Fixextra have huge vested interests in the traditional payment processing paradigms, so I guess this level of hostility is to be expected.  Turkeys never voted for Christmas / Thanksgiving !

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Alexander Peschkoff

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TEDIPAY

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