Doing Business With Bitcoin?
By Gamble, Richard H | |
Proquest LLC |
E-cash experiments are the lawless Wild West on today's payments continent. The risks for CUs may be great, but so may be the eventual promise.
Want to put your credit union in a payments network of obscure origin, favored by Internet black markets like
Bitcoin is the best-known brand name for a group of e-currencies that includes Litecoin (https://litecoin.org). This is digital or virtual currency that uses peer-to-peer technology to facilitate instant payments. For efficiency, this article will refer to the group of e-currencies as "bitcoin."
Don't dismiss the prospects of virtual currencies like bitcoin, cautions
"People who really know what they're doing-names with prestige and track records like venture capitalists
The top banks are not rushing to open bitcoin accounts or accept bitcoin loan payments, but they are seriously studying it and producing white papers, Maule reports.
"There's an emerging consensus that the underlying protocols, algorithms and block-chain technology (a transaction database shared by all nodes participating in a system based on the Bitcoin protocol) point to a viable foundation for blue-sky banking with clear potential for person-to-person and cross-border payments," he says. "
But they haven't fully opened the door for regulated financial institutions to do business with bitcoin companies nor transactions in "bitcoin." The obstacles are the lack of any effective regulation or transparency and the risks that clearly exist.
"We saw
At this point, the infrastructure for moving the currency is more promising than the currency itself, he says. Eventually virtual currency will not disintermediate financial institutions or displace established currencies, but it will "provide valuable tools for the digital movement of cash and data." The right strategy now for any bank or CU is to watch closely from the sidelines.
That didn't stop one financial institution-a credit union, actually-from trying.
The
But the regulators quickly weighed in, and the CU's CEO announced in an
That doesn't mean CU members are waiting. To see where CUs and bitcoins actually intersect today, look no further than
He has one foot in tradition (he writes credit union histories) and one in the future. His
"Bitcoin definitely has a future," Cropp insists. "It has succeeded where past e-cash experiments failed."
When
Internet Archive FCU's mistake was not in betting on the viability of bitcoin, but getting too far in front of its regulators, Cropp says. "They discovered the regulatory drag of engaging in bitcoin before the regulators figured out what to do about it. As regulatory clarity emerges, such experiments are likely to move forward." If some countries impose tight restrictions on bitcoin, others will become bitcoin havens, somewhat like
Bitcoin still has a Wild West aura of lawlessness, Cropp says, but the regulators are starting to catch up. He predicts regulators won't ban bitcoin, but will build a regulatory framework around it so the traditional money system and the emerging virtual money system will work in parallel. The
But by classifying bitcoin as an asset, the
Where It Works
Notably, Internet merchants, such as
"It looks like quite a bit of money, but it's a tiny sliver of their transaction value."
Now intermediaries like Zinc Save (www. zincsave.com) accept bitcoin for purchases from major retailers like
Merchants are drawn to accepting bitcoin payments, Cropp points out, as long as they can convert them quickly to dollars, because they can avoid paying the credit card and debit card fees. "Services like BitPay (https:// bitpay.com) are available that let merchants get paid in bitcoin and convert it seamlessly" to their preferred currency, he explains.
How the e-cash system works is pretty technical, but essentially bitcoins are created through a digital "mining" process, and the value is determined by the market, explains
Similar to sending cash digitally, individuals can send bitcoins to each other using mobile apps or their computers. Additionally, as the consumer does business with Internet merchants, he or she has the option to settle in bitcoin if the merchant accepts it. The bitcoin is debited from the consumer's virtual account and credited to the merchant's, or it flows through an intermediary for conversion, Goldwasser explains. Because the purchases are completely anonymous, bitcoin has been favored for illegal commerce, which has contributed to its tainted reputation, he observes.
Bitcoins are essentially ghost cash, Goldwasser says. They exist only as data. If they are lost through hacking or accidental deletion, they can't be recovered. They just vanish. Transactions are also bankless. "To move money through bitcoins," he points out, "you don't need banks or CUs."
CUs and banks will necessarily be slower to board the bandwagon. CU executives have "tons of interest in digital currencies," Best reports. "They want to understand it, but they don't want to touch it yet. I don't know of a CU that offers a bitcoin savings account," he reports. "That whole market needs to mature."
But CUs must be ready to deal with a member who holds a lot of bitcoin or earns a living primarily by selling in bitcoin when that member applies for a loan. How to calculate that member's bitcoin creditworthiness could be difficult-but still manageable, Best suggests.
"It would be a risk-based asset, much like any other risk-based asset, such as gold or stocks," he says. The loan committee would have to consider its historic volatility and its susceptibility to hacking, which would be different from other riskbased assets, but the principle would be the same, he explains.
If a member is an Internet entrepreneur with income largely composed of bitcoins, calculating a prudent loan-to-income ratio could be a challenge. And whether such a loan would be welcome on the secondary market is still unknown, Best concedes. CUs almost certainly would denominate the loan in dollars and require bitcoins to be converted to dollars for payments, he adds.
Bitcoin will create payment mechanisms that are faster, cheaper and more directly peer-to-peer than CUs can offer through their traditional payment mechanisms, Cropp notes. But he expects the bitcoin community to favor CUs over banks where it needs to connect to regulated, insured financial institutions.
The bitcoin world is a bit counterculture, which sees banks as bureaucratic, rigid and tied to an establishment that is corrupt and unfriendly to innovation. CUs seem more loveable, more cooperative and possibly more naïve if the bitcoin entrepreneurs are trying to pull a fast one. In all, the virtual cash future will be built on technological protocols rather than institutions, and protocols will prove more efficient and less corruptible, he envisions.
At some point, a consortium of credit unions, perhaps operating through a CUSO, could acquire the hardware and software to create its own bitcoin mining operation and run an exchange, Best speculates, but that would come after regulators have established rules and found a level of comfort with the technology.
The gulf between bitcoin and CUs is huge at this point. CUs are safe, slow, highly regulated, trusted and somewhat fee-based. Bitcoin and its ilk are risky, fast, unregulated, hardly trustworthy and free. But it would be a mistake to dismiss Bitcoin as a digital fad, Goldwasser says. The younger, tech-savvy members want to transact digitally in real time, and even the Federal Reserve is encouraging the industry to develop solutions that can move money faster, he reports. With this in mind, CUs need to plan for ways to expedite payments over the digital channel and should continue to monitor the impact of bitcoin as it develops.
"Bitcoin definitely has a future. It has succeeded where past e-cash experiments have failed."
Resources
Also read "What's in Your Wallet Strategy" at cues.org/0414waiiet.
Learn more about the <org>CUES School of Product and
Internet payments guru
Copyright: | (c) 2014 Credit Union Executives Society |
Wordcount: | 1985 |
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