Bitcoin Hits the Road: Who’s Riding Shotgun
for the Mobile Payment Ecosystem?

April 1, 2014

Cha-ching!

Once, and for a very long time, there was a lone fiat currency until an unknown visionary devised something unprecedented; a man (or so we think), concocted an elaborate and revolutionary system for the purpose of generating a digital currency. Computer processors running a software program would accomplish this by solving increasingly complex mathematical problems. The newly minted cryptocurrency could be managed - sold, traded, invested and spent on goods and services - by utilizing a peer-to-peer system of verification, without the hindrance of government involvement. Thus in 2009, a baby baptized as Bitcoin came to be.

At the perimeters of an economically conservative world, in the thick of the U.S. recession, risk-takers peered over the edge and jumped into the intoxicating perfume of a decentralized monetary system. Wild stirrings that touched on the psychological roots of the human condition and the desire to transcend it drove the movement forward. Without the shackles of big banks and government interference the path to great fortune was attainable and better still, unfettered. Or was it?

Red Rover, Red Rover, Send Bitcoin Right Over

Depending on who you talk to, Bitcoin and the math-based system of exchange that started it all, is being groomed to play a substantial role in the growing mobile payment trend. Expected to reach $617 billion worth of “mined” coins by 2016 with a trajectory indicating tremendous gains in the next five years, it’s no wonder that big-time merchants are cultivating mobile payment initiatives. The same companies that have made robust profits from an online consumer base are currently looking to bring digital payments on the road. So, what does digital e-commerce in the virtual world have to do with mobile payments in the physical world? In a word… Bitcoin.

The Flirtation

When Bitcoin strode into the cryptographic world in a come-hither manner, people took notice. The fact that the anomalous virtual coin spawned a generation of cryptocurrency copycats soon thereafter speaks volumes to its influence. Now, a zealous race for controlling interests in the developing landscape of mobile ecosystems is underway. In spite of several upheavals in the crypto-tender community, companies are vying to corner the mobile payment market, especially transactions made with bitcoin. The quest to rule the payment space has accelerated efforts to exploit new growth opportunities. Key players such as PayPal, Apple, MasterCard, Google and Square are in hot pursuit to conquer the spoils. But who will coax the best out of Bitcoin and will it be worth the growing pains along the way? Conflicting opinions abound.

Chomping at the Bitcoin

Using one of the typical routes for money transactions via Western Union, credit card companies or PayPal run from 2-4% whereas a bitcoin transaction clocks in at a trim 1%. Check cashing fees can cost 2% or more, but with Bitcoin’s “unbanked” transactions, expenses are reduced on that front, too.

According to Ripple, a payment information network that asserts it “does for money what the Internet did for information,” 500 billion financial transactions are conducted worldwide on an annual basis and take 36 trillion hours to process through a maze of disjointed networks that are outmoded by modern consumer behaviors, largely spurred on by a global economy. Using Ripple validates payments in seconds and costs next to nothing - 1/1000th of one cent - giving consumers more control over their money and helping companies to accrue revenue.

For the Google, PayPal and Square Wallet programs, the draw to Bitcoin has not been marred by a fresh bramble of infamy, most notably the downfall of both the Mt. Gox and Flexcoin exchanges to the tune of nearly $410 million combined.

Undaunted, Google Wallet has teamed up with MasterCard to tap the mobile payment ecosystem in order to gain entree to millions of retailers internationally. Even though they still appear to be competing for the same space individually… maybe they’re hedging their bets. PayPal purchased Zong, a frictionless mobile payment platform developed by David Marcus for social gaming micropayments in 2008, three years before he became the Vice President and General Manager of PayPal’s mobile division. This may give the company a foothold in its mission to dominate mobile payments, but don’t count the others out just yet. The ‘little engine that could’ in this scenario is Square, a startup from the mindspring of Jack Dorsey of Twitter fame, a long shot though still a viable contender.

Each one possesses some unique, distinguishing features. It will come down to which one curries favor with the consumer. Google Wallet uses a tap-to-pay system as compared to the PayPal and Square Wallet protocols that require you to give your name to the cashier in order to correlate your identity with the photo you uploaded upon account set up. While it may feel cumbersome to spell out your full name to the barista when ordering your morning latte, reviewers have reported that the experience of Square’s mobile transaction is seamless, with an activity report logged onto your device in record time. Apple may have an edge with its fingerprint recognition software, a factor that could motivate those who are seduced by no-muss, no-fuss shopping ease at online and brick-and-mortar retailers. Interestingly, a post on coincharts.com reported that Apple vanquished the last Bitcoin wallet app from the iTunes app store in February of this year. The reason is the subject of much speculation ranging from Apple’s discomfort with the legal ambiguity in which Bitcoin hovers, to the company’s intention to quash the apps that threaten their future profits in the mobile ecosystem space.

Drawbacks and Speed Bumps

Clearly, there are kinks to be leveled before success can prevail. Apple’s fingerprint recognition technology can be inconsistent -- if the designated finger isn’t clean the fingerprint reader might fail to work. The Google Wallet rollout had more than one security issue. Reportedly resolved since, the Google Wallet app could be reset by a hacker very simply and start fresh with a new account and password as if it was the first-time setup.

Despite the collective chatter to gain footing in this market, it was libertarian and CEO of Overstock.com, Patrick Byrne who piloted a new model in the digital payment space as the first major online retailer to accept Bitcoin for merchandise purchases as of January this year -- a noteworthy move. Due to the unpredictability of the bitcoin unit, Byrne mitigates the risk by promptly exchanging Bitcoin payments to U.S. dollars.

Mood Swings

Proponents of the Bitcoin mystique point to a promising trend, as it has rallied considerably, especially in the wake of the exchanges debacles. A retrospective glance at the volatility of Bitcoin provides every caveat that businesses need to consider before getting involved with the temperamental medium of payment. Here’s a brief snapshot of some highs and lows in the short life of the cryptocurrency where gambling the price of admission is fundamental to playing the game.  

July 17, 2010:
At $0.05 BTC, its value jumped almost 10 times higher than it was five days prior to that.

June 8, 2011:
Bitcoin reached $31.90 BTC.

June 19, 2011:
A hacking incident at Mt. Gox trampled the unit value from $17.51 BTC to $0.01 BTC.

February 28, 2013:
The Mt. Gox exchange rate slogs out of a 601-day slump after the last spike in June 2011.

April 1, 2013:
Mt. Gox and other major exchanges report the unit value exceeds $100.00 BTC.

November 16, 2013:
A value increase to $445.32 BTC gains cache.

November 30, 2013:
Peaking at $1,126.82 BTC, Bitcoin investors get a serious buzz.

February 24, 2014:
$543.73 BTC marked the beginning of the Mt. Gox tumble into oblivion.

March 20, 2014:
At a respectable $591.36 BTC, the collective exhale is audible.

Smoke and Mirrors

In a display of vitriolic criticism, Jonathan M. Trugman wrote in an article for the Daily News, “Bitcoin is not a currency, crypto or otherwise. A legitimate currency is a store of an economic value based upon a nation’s level of economic strength.” He cites the catastrophic loss that flattened Mt. Gox to a pile of rubble following the recent hacking. “Anybody referring to Bitcoin as a currency is either slimy or just plain stupid," he concludes.

The bile for alternative currency aside, I asked Stephen Brecher, Senior Advisor at WeiserMazars in New York City if Bitcoin could be defined as a unit of money. “Looking at all the analytics historically, currencies are associated with a government’s Central Bank. Bitcoin and other digital currencies are more analogous to a commodity or an asset class with which one can barter,” he ventured.

Following the cataclysmic event that snuffed out Mt. Gox, the most popular Bitcoin exchange, several others banded together to spin the credibility of Bitcoin. BTC China, Coinbase, Bitstamp, Blockchain, Circle and Kraken stood united, insisting that it was an aberration. Fast-forward five days later when, in a cruel twist of fate another exchange in Alberta, Canada fell victim to the same destiny. A hacker vaporized Flexcoin’s $600,000 hot wallet.

In a conversation about the Bitcoin community’s response to losses of this magnitude Erin Fonte, Payments and Cybercurrency Attorney and Shareholder at Cox Smith in Austin, Texas told me, “They’re putting on a good game face, but when $409 million goes missing... that’s a big blow to both consumer and merchant trust. I think you’re going to see the investors and users demand more accountability. The exchanges recognize that improving security and auditing standards and interfacing with the regulators are essential. Some want to work with the regulators to educate them and others don’t want to have that dialogue.”

According to Fonte the problem is not with the cryptography, it’s the exchange and related services. “The bitcoin transaction itself and the algorithm for the currency is secure and traceable; the currency itself works. But, think about the fact that when dealing with cash, we also use armored car companies to transport our money,” she notes. “The question becomes how reputable is the company that you’re dealing with to be that trusted party?”

Will the Real Satoshi Nakamoto Please Stand Up?

Perhaps, because the singular -- or plural -- entity known as Satoshi Nakamoto, creator of the digital currency and its algorithmic method of mining, has chosen to remain anonymous, it lends itself to a sense of disrepute. And the decision to cloak the network system and its gains in anonymity, though transactions are logged on a public ledger, has created a fascinating dynamic, almost on purpose it would seem. Maybe it’s the greatest marketing tool ever. Although, it does beg the question; will the likes of Google, Apple, Square, MasterCard and PayPal want to associate their good name with a monetary format of dubious distinction?

Regardless of the March 6, 2014 Newsweek article claiming to identify the real Nakamoto as a 64-year-old Southern California man, whose name actually is Satoshi Nakamoto, remains unconvincing in its preponderant simplicity. After all, a man with the brilliance to devise a code-based monetary system could certainly create an alias meant to elude. Of the ten or more individuals conjectured to be Nakamoto, every one has staunchly denied it; apparently no one wants to claim ownership of an identity rife with controversy and value judgments.

It’s hard to imagine Steve Jobs and Steve Wozniak not taking due credit in founding the Apple brand or Larry Page and Sergey Brin disavowing original ownership of the Google brand. This is a time of reckoning for Bitcoin and these ubiquitous companies know it. Presumably they have ideas of redefining the digital ecosystem for the mainstream with transparent transactions that build consumer confidence.

In Bitcoin We Trust… Maybe

Extreme spikes and dips in value speak to the susceptible nature of an unregulated currency, giving way to theft, money laundering and scandal. The virtual payment phenomenon has attracted a counter culture and more recently, mainstream marketers. Retailers purveying comprehensive digital wallet services may experience a gap in commercial implementation as federal government regulation and taxation on the neo-currency takes shape.

Senator Joe Manchin (D-W.Va) launched a campaign on February 26, calling on federal regulators to ban or at least limit Bitcoin activity. He cites the potential for rampant fraud due to Bitcoin’s cloaked and ultra-fast transactions as detrimental to the U.S. economy.

In contrast, others feel that regulating the nascent currency, in essence an innovative means of communications, flies in the face of First Amendment rights, equating this new “money” and the pending regulatory repression of its growth as a rail against free speech.

What will it mean for mobile wallet trailblazers if Bitcoin profits are deemed a capital asset and not a currency? The distinction has the potential to shape and direct future business models and impact on a socio-economic scale. Classified as a currency, profits would be taxed as income, but categorized as an investment, as something that remains within the exchange upwards of a year, they would be more likely to be taxed at a preferential rate, as are capital gains.

Bitcoin in the Crosshairs

The companies competing in the digital wallet arena, the ones that generate user-friendly apps, seamless information integration for a range of devices and the market buzz that supports a huge fan base, factor heavily in gaining coveted mobile payment terrain. For the one that crosses the finish line first, millions in transactional fees and the scepter that wields over a marketing kingdom are within reach. In a win-place-show scenario, I’d put my wager on Apple, Square and PayPal. Time will reveal their innovative plans to manage the influx of a Bitcoin wallet stash.

There are as many champions of the Bitcoin as there are detractors, and ironically for most of the same reasons. The cryptocurrency represents a high-grade polarity, a defining crux that spins off into a new chapter of consumer marketing and behaviors, tipping the scales one way or the other. In any case there’s a profound fascination for e-money and no stopping Bitcoin from striking chords of harmony and discord everywhere.