Paybefore bitcoin hater lover

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Paybefore bitcoin hater lover

  1. 1. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com Bitcoin Brouhaha B itcoin has catapulted onto the payments scene. At one point this year, the virtual currency was trading at more than $200. While some applaud its decentralized nature, others, including regulators, have become wary of its potential effects. In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore. Bitcoin symbols: Nick Kinney/Shutterstock.com; thought bubbles: Danijela T/Shutterstock.com Insights on the
  2. 2. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. Why Bitcoin Is Going Gangbusters and Why It Matters Viewpoint By Samee Zafar, Edgar, Dunn & Company T he Bitcoin system offers a virtual “crypto-currency” based on an open source computer program developed in 2009. The currency is decentralized and anonymous. So anonymous that its creator used a pseudonym to hide his identity and has now completely disappeared from the face of virtual Earth. Many have exhausted the available management vocabulary to describe it as a “killer app,” a “major disruptive technology” and a “powerhouse” that “lowers barriers to entry.” Already analysts trained in the field of quantitative finance are propounding theories on how to measure the “intrinsic value” of Bitcoin. They point to its soaring value and a little bit of incomprehensible magic that needs to be explained with incomprehensible equations. The price of a bitcoin went erratically upward earlier this year, then down in apparent free fall, before steadying itself and then zigzagging, like a high performance aerobatic plane experiencing engine trouble. Surely, there must be the natural economic forces of supply and demand acting on its unpredictable trajectory. Where is the demand coming from? Who Wants It? The demand for bitcoins arises from a number of very different sources. These overlap, of course, but to make sense of Bitcoin’s rocketing popularity, let’s look at who uses it and why. 1. Monetary Freedom Fighters: In the forefront of those who support Bitcoin are the true believers. For them a virtual currency that is anonymous and not backed by a central authority is at the heart of an ancient good, the teachings of the founding fathers, an inalienable right and all that good stuff. These enemies of monetary tyranny are the digital libertarians—who believe in the powers of cryptography to win in this battle for individual liberties. Contrary to any misleading images of libertarians you may be entertaining, of long haired, rebellious, tattooed anarchists, these guys are smart and successful idealists who are motivated by a particular political philosophy and a world view that not everyone finds comprehensible or pragmatic. 2. Disillusioned and Desperate: The second group is made up of those who have something to lose. These are the people whose savings are under threat from recent bank failures and economic crises in markets, such as Cyprus. People in other markets anticipating a Cyprus-like future also are interested in the Bitcoin system as a means of preserving their distressed deposits. Decentralized currency on a server somewhere in Siberia is better than money in an ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore.
  3. 3. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. The Bitcoin Brouhaha con by someone called Jeff Berwick, whose other ambition was to create a libertarian expat haven in Chile, until he realized that an ATM is “hardware” and therefore, “any government, anywhere, can just come and take it away.” account which could be accessed by a bankrupt government as and when needed. 3. The Undesirables: One of the places bitcoin is said to be used often is the famously secret Website Silk Road where, allegedly, contraband items are bought and sold, money is laundered and a whole host of illegal stuff is available for sale except, allegedly, items that could “harm others” (although apparently drugs are available). People who participate in these activities have a special interest in Bitcoin, which is their currency of choice. 4. Gamers and Gamblers: This is a very big deal. The multibillion-dollar market for online gaming and gambling is important. People who play perfectly harmless entertaining games online or gamble, pay with their credit cards, bank accounts or prepaid vouchers. But the great thing about online gambling with bitcoins and pocketing your winnings is that no one needs to know about anything at all. 5. Speculators and Entrepreneurs: The market price of bitcoins is highly volatile, fertile ground for those who want to get in to make a fast buck. Bitcoins also offer opportunities to entrepreneurs. Businesses have appeared overnight offering to store bitcoins for their customers or process transactions for them. There also are those who operate large computers to generate new bitcoins. Other creative business concepts are being developed every day, including the Bitcoin ATM project championed So Where’s the Problem? Besides the fact that the Bitcoin system is currently in service of some, shall we say “niche” uses, there are problems on the supply side, too. The open source program that generates bitcoins rewards the use of computing processing power (solving “complex” mathematical problems and confirming Bitcoin transactions). Transactions are added to a decentralized transaction log, called the block chain, every 10 minutes or so. The system is based on distributed computing involving thousands of “nodes” and needs no central authority to back it up. The lack of a central authority is a plus in the eyes of those who inherently distrust the role of such entities in monetary systems. But what about the role of the guarantor of last resort in times of acute crises? There is no one who would bear the ultimate responsibility for system failure or provide some form of guarantee in times of unexpected economic crises. The threat of regulation is always a real one. Regulators tend to be conservative, more interested in public protection rather than monetary freedom and are likely to take an adverse view of any anarchic, self-regulated system where there are multiple points of failure but no central control. ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore.
  4. 4. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. Why Bitcoin Is Going Gangbusters and Why It Matters Bitcoin enthusiasts will tell you it’s an elegant system—an open source computer program spewing out value at a managed predetermined rate limiting the supply, unlike the debasing of real money through quantitative easing practiced by tyrannical central banks. There is an obvious analogy to the mining of gold and other precious metals. The details and the underlying algorithms of mining bitcoins are so arcane and so fiendishly complex that they are not properly understood even by Bitcoin developers and die-hard enthusiasts. So what if the system screws up like any other system? What if there is a massive fraudulent attack by sophisticated hackers using algorithms of an even higher order than the so-called “unbreakable and impregnable” self-sustaining loops of the Bitcoindistributed servers? And even if all goes smoothly and the Bitcoin system succeeds to represent a stable digital currency, what would prevent a clutch of clones from entering the market and diluting the demand? The only way to avoid such a fate is to achieve widespread acceptance and usage, but that’s highly unlikely until we all start dumping our cards and bank accounts en masse and retailers start accepting bitcoins globally. With Us or against Us The possibility of something going wrong in the process of electronic monetary genesis or somehow someone getting through to compromise the integrity of the system leads Bitcoin enthusiasts to start hammering into our heads the extreme improbability of such an event. If you continue this line of questioning, you run the risk of being labeled one of those who “just doesn’t get it.” The world seems to be divided into two zones: The developed world— those who get it—and the developing world, those who don’t. Only a few avenues are open for debate with enthusiasts. You are allowed to discuss certain weaknesses, such as loss of value if bitcoins are lost or stolen, the threat of regulation, problems of system scalability and lack of merchant acceptance. But at the risk of exposing your ignorance, you may not question the complexities of Bitcoin supply and demand or the underlying crypto-technology. Conclusion You don’t need to be a rocket scientist to understand that the current rate of conversion offered for bitcoins has appreciated because of factors that have no bearing to its underlying value as a payment mechanism. It may yet grow to be an alternative cyber-commodity or a standard safe haven for distressed deposits—provided it survives serious hacker attacks in the future—but, at this stage, it’s difficult to see Bitcoin as an alternative currency for the connected world that will provide value to a majority of people. The lack of a central authority is a plus in the eyes of those who inherently distrust the role of such entities in monetary systems. But what about the role of the guarantor of last resort in times of acute crises? —Samee Zafar, Edgar, Dunn & Company wildly successful, it’s likely that several similar currencies will appear alongside it. The focus of hackers all across the globe will then surely turn to these anonymous stores of virtual value rather than to traditional account-based payments. Samee Zafar is a director in Edgar, Dunn & Company’s London office. He has advised some of the largest financial services organizations in Europe and North America on competitive strategy, operations and technology. His expertise covers retail banking, card issuing and acquiring, Yes, people still buy gold as an investment and they’ll buy bitcoins, too. If Bitcoin manages to become as well as online and mobile payments. He can be reached at samee.zafar@edgardunn.com. ©2013 Paybefore, P.O. Box 486, Natick, MA 01760 USA. Email: info@paybefore.com. All rights reserved. Copyrighted material. All material contained in Paybefore publications is the property of Paybefore. Forwarding or reproduction of any kind is strictly forbidden without the express prior written consent of Paybefore. Paybefore™, Paybefore.com™, Pay Update™, Pay Gov™, Pay News™, Pay World™, Pay Mobile™, Pay Magazine™, Pay Connect™, Paybefore Awards ® and Paybefore Awards Europe™ are the property of Paybefore. All other product and service names may be trademarks of their respective companies.
  5. 5. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com Bitcoin Brouhaha B itcoin has catapulted onto the payments scene. At one point this year, the virtual currency was trading at more than $200. While some applaud its decentralized nature, others, including regulators, have become wary of its potential effects. In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore. ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore. Bitcoin symbols: Nick Kinney/Shutterstock.com; thought bubbles: Danijela T/Shutterstock.com Insights on the
  6. 6. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. Bitcoin Challenges Us All to Keep Innovating Viewpoint By Pervees Faisal Islam, Centra Payments Solutions B itcoin (and the tsunami that has ensued) has been characterized as the next stage in the revolution of payments—more precisely, of money. Many have called Bitcoin a revolution, largely because of its focus on decentralization; the separation from a government and the freedom from monetary control (cue the cheering and Hacky Sacks). While that freedom might have been touted by the early adopters, the focus for many has shifted. Various venture capitalists, investment bankers and other “suits” (yours truly included), are plunging into Bitcoin discovery from other points of view and interests. Why? One reason: No one is expecting another bubble so soon after the last one. Before we get into Bitcoin’s positive attributes, let’s focus on why there is opposition, move on to challenges and finally look at the possible reasons this revolution is occurring. Bitcoin represents more than its monetary value, and something more important. Yes, there is such a thing. The Haters Any new player in the payment space always faces opposition as it gains traction. Critics usually have a vested interest in overemphasizing the negatives as they might have direct clients, ventures or partnerships with mainstream or traditional payments companies. This would be an attempt to ensure that the market share of established players doesn’t erode. Receiving negative criticism and regulatory pressure is a positive for Bitcoin. Criticism from any direction makes the system stronger and presents in itself a self-defeating action by that actor (read Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb). Bitcoin and bitcoins represent, at least for now, the hope for the movement of money to be less disjointed, less possessive and finally as low-cost as possible. So let’s discuss the most common talking points of the haters, although there are many more. Bitcoin is decentralized and that is dangerous. It represents a threat to the fiat currency. Weakness is exploited only when it’s present. The threat to any currency starts as soon as the currency is used. If the bitcoin does topple the fiat, then the fiat let itself be weak, or at least its elected or appointed custodians handled it miserably. As for governments, they are not in the least bit worried. As long as capitalism and democracy remain, the taxation system that comes with it will give the government as much of a handle on its country and currency as it deserves. In that aspect, taxation is elegantly agnostic.  ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore.
  7. 7. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. The Bitcoin Brouhaha Bitcoin is anonymous and attractive to criminals. Bitcoin is not anonymous. It is actually, and sometimes unfortunately, with respect to merchants and their privacy, the least anonymous form of value transfer mechanism. Every transaction is verifiable, posted and immutable for as long as the Internet is powered. What some tend to confuse anonymity with is the lack of identification. We compliance folks refer to that as KYC (know your customer) or CIP (customer identification program). Bitcoin gateways or administrators might have that burden in the context of regulation and may not be exercising these duties fully. In that situation, it’s a case of assigning responsibility and accounting for it, not a case of anonymity for its own sake. How much happier and more effective would law enforcement be if someone handed them a system where every note of every paper dollar or euro PRO could be tracked throughout its entire journey? Starting from print to circulation, law enforcement would be able to identify all the points where the money changed hands. The Bitcoin network has that record, identifying points where bitcoins changed ownership. Aside from the fact that receiving proceeds of crime in cash is the most frictionless experience compared to using Bitcoin, the fact remains that every Bitcoin transaction is forever documented and traceable and public. Therefore, Bitcoin transactions are anything but anonymous. Bitcoin prices are very volatile and unstable. Bitcoin is going through a phase of discovery and experimentation. The only thing larger than Bitcoin is its own hype. It’s rigorously being tested as a form of currency, commodity, message transfer solution, information storage, third-party signature verification and market uptake on new value. Like any product during experimentation, it’s subject to all the various components of its market—the media, world events, large players in the industry and even insider trading. Bitcoin operators have been shut down or seized, due to … There is no accounting for stupidity or a shortage of those willfully ignorant of the law. Also, let’s not forget though the seizure, arrests, orders, fines, penalties, deferred prosecutions of operators of fiat currency in legacy institutions that persist. Similarly, not everyone deserves to handle Bitcoin. Bitcoin has a commodity/currency problem. Which one is it? Most likely, both. Where does it get its value compared to a commodity like gold? Let’s put aside the aesthetic values of gold that are sought after. Gold is an essential component in electronics and various other industrial applications. Its elemental properties are responsible for that. Likewise, Bitcoin is the foundation on which extremely sophisticated communication models can be built. After all, it is cryptography at its core. With the rage nowadays of government-spying, various applications are being built on the Bitcoin premise and offer a cryptographic form for everyday communication. What needs polishing is the product branding and user experience. Bitcoin payment systems, wallets or other applications typically aren’t easy or intuitive to use. ©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore.
  8. 8. E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com prepaid. mobile. emerging payments. Bitcoin Challenges Us All to Keep Innovating My grandmother won’t understand and can’t use it; therefore, it’s highly unlikely to take off. A lot of grandmothers prefer waiting in line and using a bank teller to pay their bills. It’s the most adorable thing and should continue. The Bitcoin operators don’t have principles of best practices to abide by; therefore, security is an issue. True. There is no PCI-DSS comparative to Bitcoin. Currently, operators are left to their own methods of security but aren’t shy of sharing their practices and providing open-source applications. This is a constant work in progress. Some would argue PCI compliance is a constant work in progress as well. That being said, certain primary notions need to be further discussed in the field of data and hardware risk. How is Bitcoin better? For one, there are no groups or associations in between, and no middlemen between users and, therefore, no interchange fees, card association dues, acquirer fees, ISO dues, etc. The whole hierarchy of bank, acquirer, processor, third-party processor is flattened to two players: sender and recipient. In some cases, there may be a middle party, but its primary goal is traction and exposure. The most common way to send bitcoins is to copy someone’s bitcoin address into an email, paste it and hit send. There are other ways using QR codes, but that method is unlikely to The most important thing about Bitcoin is not that it’s creating a new payments model, but rather shaming the current payments models and disclosing their flaws. Bitcoin demands that the current leaders in payments constantly innovate. —Pervees Faisal Islam, Centra Payments Solutions become an optimal form of payment. This opens the door for innovators. The most important thing about Bitcoin is not that it’s creating a new payments model, but rather shaming the current payments models and disclosing their flaws. Bitcoin demands that the current leaders in payments constantly innovate. Bitcoin also has accelerated the impetus of regulators to be more vigilant about the shift in the payments landscape. Overall, it has turned the discussion of how we move money upside down. ensure that the complacency to innovation is constantly averted. If some unknown guy can develop something that in five years gains the largest market share in the news and worldwide discussion of payments, somewhere out there, some product and marketing managers need to be shown the door. Pervees Faisal Islam serves as director of compliance advisory services for Centra Payments Solutions, a compliance consultancy based in Washington, D.C. An AML, compliance and fraud-prevention practitioner at heart, Islam frequently advises companies with a variety of Whether it’s Bitcoin or another cryptocurrency, or some other form factor that becomes the next craze in payments, one thing is certain: Traditional payment companies have to exert the most amount of pressure on their product and marketing managers and payment platform and nontraditional money transfer systems. He has held several executive positions at payment processors, money transmitters and online payment firms. Islam is a critical tactician for Centra’s social commerce, e-commerce and payments systems clients. He can be reached at p.faisal.islam@centrapayments.com. ©2013 Paybefore, P.O. Box 486, Natick, MA 01760 USA. Email: info@paybefore.com. All rights reserved. Copyrighted material. All material contained in Paybefore publications is the property of Paybefore. Forwarding or reproduction of any kind is strictly forbidden without the express prior written consent of Paybefore. Paybefore™, Paybefore.com™, Pay Update™, Pay Gov™, Pay News™, Pay World™, Pay Mobile™, Pay Magazine™, Pay Connect™, Paybefore Awards ® and Paybefore Awards Europe™ are the property of Paybefore. All other product and service names may be trademarks of their respective companies.

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