I had a birthday this month and two of my children – both in their 20’s -- gave me a joint gift. This left my daughter in London owing money to my son in Boston. She paid him in Bitcoin.
Granted we’re not typical since (full disclosure) my son works for Circle, a startup aiming to bring digital currency to the mass market. While digital money is nowhere near being practical and safe for mainstream consumers, it has huge potential to get there and to bring us all enormous benefits. It’s a mistake to dismiss it as either unserious or as intrinsically more risky than worthwhile.
For most people, the first hurdle in understanding digital currency is to get past the weirdness factor, which is huge. We hear about how Bitcoin was created anonymously, was arguably not legal, and sprang from conspiracy theories on the illegitimacy of the Fed. We hear the odd words – the “block-chain,” “crypto-currency,” the “keys” stored in secure cold vaults, the “mining” that creates Bitcoin as big computers solve complex mathematical problems. We are asked to trust that the supply will be permanently limited by some shadowy non-governmental entity. We read of exotic-sounding scandals – Silk Road, Mt. Gox, mentions of murder for hire. I’ve been in numerous sessions with very sophisticated financial people who just cannot wrap their heads around any of it.
However, using Circle, and presumably its competitors, is simple as pie. You sign up online, link your bank account or credit card, and voila, you have a Bitcoin account to spend as you want. I just bought a shirt on Overstock.com and sent $50 to my London-based daughter. It was in her account a minute later.
Digital currency is confusing because it doesn’t fit into any pre-existing categories. Government agencies are variously trying to regulate it as a currency, a payment system, and an investment asset. It has attributes of all these, but it isn’t fully any of them. That said, its main disruptive power, and potential consumer benefit, is as a new and better payments system.
Why better? Because this innovation can make moving money essentially instant and free. It can do this because the money moves on the internet. Remember how people originally found it hard to believe the internet is free, or later that Skype’s internet phone calls are free? Digital currency is like that. It simply bypasses the old infrastructure. And its disruptive potential is huge because that old payments infrastructure is the opposite of instant and free – it is expensive and slow, domestically and more so in international payments.
Here are a few recent examples from my own life. I got a $15 late fee on a monthly payment I make automatically from my online bank account, which inexplicably took ten days to reach a huge national company. Sending funds “online” to my Boston son always takes over a week, because my bank generates a paper check and puts it in the mail. For my daughter, things are worse. Before she and her husband moved from Washington, DC to London they visited their local branch of a huge bank to arrange to wire money into a new account at a UK bank. When they got to London, they learned the branch’s instructions were wrong and spent hours trying to get their money, including 40 minutes of hold time during a call with their U.S. bank. We ultimately solved it through my personal banker, who also waived the wire fee and helped in other ways because I have more money than my kids do. I appreciated it of course, but financial systems should work for everyone. I recently met a man who spent over $300 wiring a fairly small sum to his mother in eastern Europe. It’s a situation ripe for disruption.
Think of all the consumer problems caused by slowness. If payments were instant, a huge share of overdrafts -- and overdraft fees – would disappear as people stopped misjudging when deposits and debits would hit their accounts. Instant payments could also enable underserved consumers to drop costly check-cashing services, because they could pay pressing bills electronically as soon as they received the money to cover them. Real-time accurate balances might even foster better habits as people regain financial clarity and control, especially if they adopt phone-based mobile tools like ApplePay (See my prior blog post on Disruption). Imagine also transferring money internationally with no currency exchange rate risk, or without even touching sovereign currencies at all.
Those benefits all flow from speed. Now consider costs. If money can move nearly for free, banks’ costs for low-balance checking accounts would plummet, widening access to mainstream banking. International remittance charges would plunge too. Furthermore, near-zero costs enable tiny payments. Whole industries’ online business models could shift as high-priced bundled content, like newspaper subscriptions, could profitably be divided and sold in small units, such as single articles for a few cents. In the developing world, people could access a new formal, regulated, transparent, cost-effective system far more fair than old markets, and far safer than cash. My son at Circle likes to say someone in Kenya will be able to send 17 cents to someone in India, at no cost.
These potential benefits clearly bring enormous consumer risks. For one, digital currency vehicles like my Circle account fluctuate in value with Bitcoin. A mainstream system will have to protect people’s money or be limited to those who can afford to lose it. Business models will emerge with hidden pricing that will raise concerns. Global activities will strain our regulatory structures. We now have “ransomware,” in which computers are encrypted and held hostage until the attackers are paid off in Bitcoin. Threatened legacy industries will adopt both business and political tactics that could cause harm. Massive challenges lie ahead in consumer education, disclosure, privacy, data security, taxation, anti-money laundering, and fraud, although some of these cut both ways. Digital currency is much more traceable than cash, partly because the whole system’s activities are open and visible on the internet. On the negative side, instant money movement can obviously abet laundering and fraud, which is one reason the current system contains delays.
Smart observers also warn, rightly, that nothing that’s highly regulated -- as this ultimately will be -- can stay “free” forever.
Unlike many other payments innovators of recent years, Bitcoin is an open platform upon anyone with a good idea can build. Like the internet itself, it will undergo cycles of rapid innovation – it’s currently in the equivalent of the pre-Netscape era. Since it’s an evolving protocol rather than a static technology, no one knows what it will bring (including whether Bitcoin itself will be the dominant digital medium). Still, some version of digital currency will likely become a major force, because its intrinsic advantage is so great. Already central banks and payment system leaders are exploring how these innovations could strip time and costs out of today’s antiquated payments flow, and also how both traditional and new systems might harmoniously coexist in a new framework allowing digital-age progress while preventing most harm. People interested in consumer access and protection should join in this dialogue.
Let me know what you think. And for one further note, see below.
My daughter’s anecdote
In case you’re interested, here is my daughter’s account of the London transfer fiasco. Gotta love that last sentence….
To make a long story short - Nick went in to a (bank’s name) branch, told them we were moving to the UK, and asked how we could transfer our money to a UK bank once we opened an account. They told him it would be no problem - that we'd just need to call once we had the new account and pay a $40 transfer fee- and gave him a sheet with our account information before sending him on his way.
Once we had moved and opened our account in the UK we called (bank name) to try to initiate the transfer. We were on the phone, mostly on hold, for nearly an hour before we hung up on them out of frustration. We were transferred between four different people who all gave us different information. The second person tried repeatedly to sell us a product for bill paying exclusively in the USA. It was completely irrelevant to our current situation (which he, the bank employee, admitted) but still tried to make us answer the question "do you think you might ever use this product in the future" repeatedly.
The next two transfers went up the management chain but ultimately we were told that we had been given the wrong information in the branch, and that we had to do the wire transfer in person, which we were at that point clearly unable to do as we had already moved. Effectively (bank name) told us we could not have our own money.
Other solutions suggested by the highest-level person we spoke to were to increase the amount of money we could withdraw from the ATM (which would have incurred a fee each time we made a withdrawal). Useless. We were also told to deposit a check with the British bank but were informed that it would take a while to clear and no one could estimate how long that could take.