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2017 was the year the terms “Bitcoin”, “Blockchain” and “Cybercurrency” appeared in the news and entered our vocabulary. What are they? What does this mean for paper money? What is the impact, if any, on international finance? Here we discuss these new virtual means to purchase goods and other services and speculate about the future of Cryptocurrency.

Since electronic funds transfer was introduced in the 1980s, the technology of money transfer has evolved considerably. Today digital money is the currency that exists only in electronic form, not as coin or paper money. Unlike traditional forms of currency, digital money can be restricted to use by members of a social network, or online gamers for a particular game. Unlike money issued by a governing body, virtual money is unregulated and may be issued and controlled by whoever develops it. It may also be distributed for exclusive use by members of a closed community and not the general public.

As an overview, let’s define the major terms before launching into our assessment. Virtual currency is not to be confused with digital money. A digital money supply is bank money and is ‘stored’ on computers. Virtual money users rely on a system of trust on the part of its developers. It is solely traded electronically. Both FinCEN, a branch of the U.S. Treasury and the European Banking Authority define this currency as “not necessarily attached to a fiat currency, but is accepted by…persons as a means of payment and can be transferred, stored, or traded electronically.”

Now let’s define Bitcoin. Developed in 2009, bitcoin is virtual money, however, it can be used to purchase anything from hotel bookings to kitchen appliances. Bitcoin’s origins are murky, as its inventor, using an alias, is completely unknown. Bitcoin transactions bypass financial institutions altogether. The term joined the popular lexicon in 2017 because of social media hype that it is possible to become wealthy by trading it. It has gained popularity because Bitcoin is open-source, its design is completely public. That means that no one actually owns or controls Bitcoin and participation is open to everyone. The currency enables peer-to-peer transactions, borderless payments, and offers fraud protection. Its unique properties facilitate uses that traditional, regulated payment systems cannot match. Both businesses and individuals can utilize Bitcoin as follows:

Individuals:

  • Easier Mobile Payments: Lets users pay with a simple Two-Step scan and pay. All that is required to receive payments by Bitcoin is to display the QR code in your Bitcoin wallet app and have your mobile scanned by another mobile, or using radio technology, touch the two phones together.
  • Financial Security and Control: Bitcoin transactions are secured by military grade cryptography. Only you can make charges or payments. There are security steps to take, however, these provide the necessary safeguards and financial protection against most types of fraud.
  • Universal Compatibility: As long as everyone uses the same open technology, there are no limits to using Bitcoin within a member network.
  • No Bank Fees, No Wait Time, No Borders: International funds transfers are immediate, no waiting periods as with banks. Nor are their limits on the amount of Bitcoin that can be transferred. While we’re at it, you can choose your own fees to pay when spending. There is no fee to receive Bitcoin.
  • Identity Protection: There are no credit card numbers to hack, and payments can be sent without revealing your identity. There are privacy protections that must be set up prior, however.

Ecommerce

  • Secure and Inexpensive Payments: As for individuals, there is no fee to receive Bitcoin, and merchants can set their own fee schedule so it costs the same to send one bitcoin or several hundred thousand.
  • Advanced Fraud Protection: Since Bitcoin payments are irreversible and secure, their usage eliminates chargeback fraud. This also means the cost of fraud is not charged to merchants.
  • Fast International Payments: As for individuals, international funds transfers are immediate, with no bank-imposed waiting periods. As for individuals, there are no limits on the amount of Bitcoin that can be transferred.
  • No Processing Compliance: Accepting credit card transactions usually means being scrutinized to obtain compliance. While payment requests must be secured, merchants do not carry the cost of processing sensitive credit card information.
  • Extend Your Brand’s Reach: Since Bitcoin’s acceptance is relatively new, there are many users in search of ways to spend their Bitcoins. Accepting this form of virtual currency will give businesses new visibility and attract new prospects and customers. This is great for smaller to mid-sized businesses as they can more easily compete with big box stores for market share, whether they sell services like data storage, video conferencing or online games.
  • Requires Multi-Signatures: Transactions must be authorized by a group of persons, such as board members. This also allows the distributors to track which members allowed certain payments.
  • Transparent Accounting: Balances and transactions afford complete transparency. This is ideal for Non-Profits and groups seeking grants, for example, as the public/investors can easily see the number of donations received.

On a personal note, back in the 1980s when electronic funds transfer within proprietary and later shared networks was introduced, the public was slow to respond. After all, for centuries, people had held on to their money in tangible form. And when they deposited it in banks, they could ‘visit’ it whenever the institution was open, also to withdraw funds as necessary. It took some convincing, but chiefly, once concerns over security (encryption) were addressed, the process gained acceptance. Convenience triumphed over fear. Today, just about all transactions are performed electronically. In future, we predict, through cryptocurrency, that is virtual money, and high levels of online security, that virtually all financial transactions, will be virtual.

Next time, we’ll discuss how some Bitcoin investors have leveraged financial gains through this new technology.