Earlier this week, it seemed the roller coaster ride for bitcoin enthusiasts would continue as usual: There was good news from U.K. regulators, who have taken a relatively progressive stance on virtual currencies, and bad news with the latest heist of 896 bitcoin (roughly $600,000) and the resulting demise of Flexcoin (a bitcoin storage service).
There’s no doubt that additional revelations are on the horizon when it comes to the first cryptocurrency, and with that, the debate about the longevity and usefulness of bitcoin will continue.
Here’s the bottom line: Bitcoin is deeply flawed as an alternative currency or payment method for mainstream consumers. It will, however, be a catalyst for a more efficient global payments system because it demonstrates one way to tackle the many embedded inefficiencies.
Bitcoin is not a viable payment alternative for mainstream consumers
According to a Bizrate Insights survey of more than 7,000 online buyers, less than one percent of online buyers have used bitcoin. Yet bitcoin enjoys very high awareness for a new technology: 34 percent have heard of bitcoin, and 25 percent are curious enough to plan to give it a try.
However, mainstream consumer adoption of bitcoin will be stymied by bitcoin’s questionable value proposition. It is risky, it is complex, and the bitcoin market is illiquid — all leading to little consumer upside. Highly motivated mainstream consumers who take the time to understand how and where to use bitcoin must be willing to absorb the currency volatility risk, the security risks of losing their funds altogether, and the lack of standard commerce protections if they don’t receive the product or service they expect. But in its current state, bitcoin offers little beyond novelty to compel a mainstream consumer in a developed market to choose it over the many other options available for offline and online purchases.
Cryptocurrencies hold disruptive potential for global payments systems
Despite a shaky consumer-value proposition, bitcoin will be a catalyst for improved efficiency of today’s payment and commerce ecosystem. Why? Because current payments systems don’t fully meet the needs of consumers engaging in cross-border commerce and remittances, or the needs of the unbanked and underbanked. These consumers must cope with payment options that can be inflexible, inconvenient, costly, slow or wholly inaccessible. Businesses have many pain points, as well: The cost of payments can be hefty (some businesses spend more on payment processing than on personnel), slow settlement can lead to cash flow constraints, and fraud management and resolution can be costly, as can ensuring payments’ security.
As a protocol, cryptocurrencies could also enable new business models for digital commerce that don’t yet exist today. In the same way the early days of PCs, software and the Internet inspired computing innovation, a plethora of failed startups, and many very successful ones — like Amazon.com, eBay and Google — the emerging cryptocurrency ecosystem will inspire innovation and disruption for payments and commerce globally.
So, while bitcoin as a brand may never reach mainstream consumer adoption, incumbents in the global payments ecosystem should consider the emergence of bitcoin and cryptocurrencies (the protocol and burgeoning ecosystem) as an early warning siren of more innovation to come. The winds of disruptive change will be felt by players across the traditional payments ecosystem that are responsible for the speed, cost and risk involved in digital commerce, both for B2B and B2C payments.
For instance, firms like Azimo, CurrencyFair, TransferWise and Xoom are already working to offer less expensive, more convenient international remittance services. And a large tech company with a large installed user base, such as Apple, Google, Amazon or Facebook, could create a solution to transfer funds inexpensively, quickly, securely and conveniently — bringing transformation to the existing payments ecosystem with an overnight disruption. So, just as Uber and Square empowered consumers looking for transport or small merchants looking to accept credit cards, cryptocurrencies promise to provide an attractive alternative for portions of and players in the existing payments ecosystem.
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