Bitcoin and Payments

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Dec 3, 2013 (3 years and 6 months ago)

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Payments and Bitcoin Survey


Summer 2013




© Glenbrook Partners
, LLC 2013

1





Bitcoin
and
Payments


W
HAT
T
HE
P
AYMENTS
I
NDUSTRY
T
HINKS
OF
B
ITCOIN AND
M
ATH
-
BASED
C
URRENCIES


Glenbrook Partners

September

2013

Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

2

Table of Contents


Foreword

4
 
Part 1


Bitcoin and Payments Survey Results

5
 
Conclusion

21
 
Part 2


Glenbrook’s PaymentsViews Posts on Bitcoin

22
 
Considering Bitcoin’s Role in Value Transfer

22
 
Bitcoin, the Two
-
and
-
a
-
Half Party Model, and New Payment Rails

25
 
Does PayPal Need A Bitcoin Strategy?

27
 
Bitcoin, Merchant Risk, and the Need for Speed

30
 
Bitcoin’s Growth Not Witho
ut Pains

33
 
Appendix A


Bitcoin Resources

36
 
About Glenbrook

39
 
About the Author

40
 

Payments and Bitcoin Survey


Summer 2013




© Glenbrook Partners
, LLC 2013

3

Table of
Figures


Figure 1: R
espondent Roles

................................
................................
................................
.............

5
 
Figure 2
-

Respondent Country

................................
................................
................................
......

6
 
Figure 3
-

Purchased Bitcoin

................................
................................
................................
...........

7
 
Figure 4
-

First Purchase Date

................................
................................
................................
.......

7
 
Figure 5
-

Reason for
Bitcoin Purchase

................................
................................
........................

8
 
Figure 6
-

Where Bitcoin was Purchased

................................
................................
.....................

8
 
Figure 7
-

How Bitcoin was Purchased

................................
................................
.........................

9
 
Figure 8
-

Sold or Traded Bitcoin

................................
................................
................................
..

9
 
F
igure 9
-

Why Sell Bitcoin

................................
................................
................................
...........

10
 
Figure 10
-

Where Sell Bitcoin

................................
................................
................................
.....

10
 
Figure 11
-

Bitcoin Attribute Ranking

................................
................................
........................

11
 
Figure 12
-

Bitcoin Future

................................
................................
................................
.............

12
 
F
igure 13
-

Bitcoin Future Questions A

................................
................................
.....................

13
 
Figure 14
-

Bitcoin Future Questions B

................................
................................
.....................

14
 
Figure 15
-

Bitcoin Use Cases A

................................
................................
................................
...

15
 
Figure 16
-

Bitcoin Use Cases B

................................
................................
................................
...

16
 
Figure 17
-

Bitcoin Use Case Rankings

................................
................................
......................

17
 
Figure 18
-

Bitcoin Regulation

................................
................................
................................
.....

17
 
Figure 19
-

FinCEN Impact A

................................
................................
................................
......

18
 
Figure 20
-

FinCEN Impact B

................................
................................
................................
......

19
 
Figure 21
-

Bitcoin Fitness and MBC Need

................................
................................
..............

20
 




Payments and Bitcoin Survey


Summer 2013




© Glenbrook Partners
, LLC 2013

4

Foreword

O
ur definition of money continues to evolve
,

from stone disks and metal coins through
paper scrip to today’s electronification of government
-
issued c
urrency
. M
ath
-
based
currencies
(MBCs)
like Bitcoin

given their lack of central authority, finite issuance,
pseudo
-
anonymous nature, and programmability

are stretching
that

conception of
money, currency, and commodity
,

all at the same time.

Bitcoin and oth
er math
-
based currencies have generated a lot of attention in 2013. The
Bitcoin Bubble of the Spring of 2013, the Winklevoss twins
’ SEC

filing

of

their
Bitcoin
-
based
exchange
-
traded
-
fund, multiple reports on Bitcoin
’s
potential
in

illegal activity,
and th
e Financial Crimes Enforcement Network’s (FinCEN) classification of Bitcoin
exchanges as money transmitters are among the highlights. The

Bank of Thailand’s
Bitcoin banishment and the German government’s classification of Bitcoin as a “unit of
account” su
itable for exchange and taxation are others.

To gauge the payments industry’s
own
thinking on Bitcoin and the math
-
based
currency phenomenon

and it is a phenomenon

Glenbrook Partners conducted an
online survey during July and August of 2013.
Over 300 paym
ents professionals
responded.
The survey invitation was distributed via Glenbrook’s own extensive email
lists, via the PaymentsNews.com website, and via a SourceMedia’s American Banker
list.
We wish to thank the survey participants and those who helped us

get the word out
for their support.

This report contains the results of that survey.
Part
1

contains the survey results. Part
2
is
taken from
Glenbrook’s
previously
published thinking on Bitcoin
from

our
PaymentsViews.com blog.
An Appendix of Bitcoin reso
urces concludes the report.


Math
-
based currencies could have multiple roles in the payments process and our
industry.
If you’d like to discuss this survey’s findings or Bitcoin
-
related opportunities,
please contact George Peabody,
george@glenbrook.com
. We look forward to working
with you to determine if and how Bitcoin and its successor approaches can address your
business goals.


Payments and Bitcoin Survey


Summer 2013




© Glenbrook Partners
, LLC 2013

5

Part 1


Bitcoin and Payments
Survey Results

1.

Tell us your role. While we eac
h may play many roles, please answer these
questions from the perspective you most identify with.

Survey respondents are payments professionals. They come from the incumbent camp.
Respondents represent many
of the
roles needed in the complex payments ind
ustry.

Figure
1
: Respondent Roles



27%  
16%  
14%  
11%  
12%  
4%  
6%  
5%  
2%  
3%  
Payment  Service  Provider  
Financial  Ins<tu<on  
Entrepreneur  
Consumer  
Consultant  
Government  Regulator  /  NGO  
Merchant  
Venture  Capital  /  Private  Equity  /  Hedge  
Vendor  
Other  
Payments and Bitcoin Survey


Summer 2013




© Glenbrook Partners
, LLC 2013

6

2.

What country do you live in?

Given Glenbrook’s natural constituency, it is no surprise that the bulk o
f respondents
are from the US
,

UK and Australia following
by

Canada and France
.
R
espond
ents came
from
a total of
31 countries.

Figure
2

-

Respondent Country


66%  
4%  
4%  
4%  
2%  
2%  
1%  
1%  
1%  
1%  
1%  
1%  
1%  
11%  
United  States  
United  Kingdom  
Australia  
Canada  
France  
India  
Germany  
Argen<na  
Spain  
Ireland  
Israel  
Netherlands  
Poland  
Other  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

7

3.

Have you ever bought Bitcoin?

The answer to this question is revealing. Only 15% of respondents had purchased
, sold, or
traded

bitcoins
. That may say
som
ething about the difficulty of buying bitcoin.
It may also say
something about the respondent’s reticence to experiment.

The following questions, therefore, were answered by a subset of under 40 respondents.

Figure
3

-

Purchased
Bitcoin


4.

When did you first purchase your Bitcoin?

The majority of respondents (5
6%) made their bitcoin purchase within six months of taking the
survey
, a finding consistent with this year’s spike in interest in Bitcoin and MBCs
.
All
respondents had m
ade their purchases within the last two years.

None were there at the
beginning of the Bitcoin phenomenon.

Figure
4

-

First Purchase Date


15.50%  
84.50%  
Yes  
No  
30.0%  
26.0%  
14.0%  
14.0%  
16.0%  
Less  than  3  months  ago  
Less  than  6  months  ago  
6  months  to  1  year  ago  
Less  than  18  months  ago  
Two  years  ago  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

8

5.

Why did you buy your Bitcoin?

Further e
vidence that respondents are “payments geeks”,
the number one response (
38
%

of
respondents
) for purchasing bitcoin was simply to better understand the Bitcoin ecosystem.
Another
28
% reported their interest in investing in bitcoin. Just
9
% expressed an interest in
using bitcoin to purchase something;
another
8
% wanted to send value via a remittance using
bitcoin.

Figure
5

-

Reason for Bitcoin Purchase


6.

Where did you buy your Bitcoin?

Not surprisingly given its market dominance,
42
% of respondents purchased their btc from
Mt
Gox. A privately arranged purchase accounted for
25
% of purchases. Other online
exchanges made up the bulk of purchase at
4
9
%. Named exchanges included Coinbase,
Bitstamp.net, btcquick.com, and bitcoin.de.

Figure
6

-

Where Bitco
in was Purchased


25.0%  
70.8%  
16.7%  
14.6%  
52.1%  
3.0%  
Novelty  factor  
Wanted  to  beYer  understand  
Bitcoin  
Wanted  to  purchase  something  
with  Bitcoin  
Wanted  to  send  /  remit  value  
Wanted  to  invest  in  Bitcoin  
Other  
41.7%  
45.8%  
25.0%  
MtGox  Exchange  
Other  Exchange  
Privately  arranged  purchase  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

9

7.

How did you buy your Bitcoin?

Purchasing Bitcoin is still hard. Getting fiat currency to a Bitcoin exchange requires effort.
Respondents reported they had provided their banking information
nearly

70% of the time. An
online paymen
t provider was used 2
9
% of the time and an in
-
person cash based service was used
1
4
% of the time. Other methods reported include using a SEPA payment to reach Mt Gox’s
French bank account, Barclays PingIt, PayPal, and a direct wire from the respondent’s b
ank.

Figure
7

-

How Bitcoin was Purchased



8.

Have you ever sold or traded Bitcoin?

Of the 33 respondents, 45
% have sold or traded their bitcoin while 5
5
% have held onto it.

Figure
8

-

Sold or Traded Bitc
oin



69.0%  
14.3%  
28.6%  
Provided  banking  informa<on  
Used  a  walk-­‐in  cash  based  service  
Used  a  third  party  online  payment  
service  
45.1%  
54.9%  
Yes  
No  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

10

9.

Why did you sell Bitcoin?

Of the 31 who responded, the top reasons reflected the respo
nses from Question 5. “Wanted to
better understand Bitcoin” and “Wanted to lock in profits” were the top responses at 6
2
%
and
52% respectively
.

Figure
9

-

Why Sell Bitcoin


10.

Where did you sell or trade your Bitcoin?

Half of the 14 respondents used multiple means to sell or trade their bitcoin. Mt Gox (43%) and
other exchanges (
70
%) were the top avenues of sale. The level of private
ly arranged sales (2
2
%)
indicate
s

the cottage industry nature of Bitcoin today.

Figure
10

-

Where Sell Bitcoin



9.5%  
61.9%  
52.4%  
14.3%  
Novelty  factor  
Wanted  to  beYer  understand  
Wanted  to  lock  in  profits  
Didn't  want  to  own  
43.5%  
69.6%  
21.7%  
Mt  Gox  Exchange  
Other  Exchange  
Privately  arranged  transac<on  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

11

11.

How would you rank the following Bitcoin attributes?

Returning to questions posed to all respondents, the respon
ses
regarding a number of Bitcoin
attributes
were measured on a 1 to 5 scale and all were clustered between 3.8 and 4.5. The top
responses were Security regarding counterfeit and double spending (4.5) and Cross
-
border
usability (4.3), the ability to use B
itcoin to send international remittances.
Privacy / Anonymity
(3.8) and No central issuer (4) were the bottom two responses. In hindsight, and as one
commenter remarked, we should have asked about Bitcoin’s irreversible attribute. Bitcoin
functions lik
e cash. Once it’s sent, it’s gone unless the recipient is willing to give it back.

Figure
11

-

Bitcoin Attribute Ranking



0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
Unimportant  
Very  important  
Privacy  /  Anonymity  
No  central  issuer  /  regulator  
Cross-­‐border  usability  
Security  (counterfeit,  double  spending,  etc.)  
Perishability  (lost  /  stolen  Bitcoin)  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

12

12.

Bitcoin's Future

We asked six questions regarding Bitcoin’s future.

Figure
12

-

Bitcoin Future


23%  
18%  
5%  
9%  
4%  
6%  
46%  
56%  
34%  
50%  
30%  
32%  
26%  
24%  
54%  
33%  
51%  
47%  
5%  
3%  
7%  
9%  
16%  
15%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
Bitcoin  will  
replace  how  
money  is  
moved  in  ten  
years  
Bitcoin  will  be  
forgoYen  in  
three  years  
PayPal  will  
support  Bitcoin  
in  the  PayPal  
digital  wallet  
Bitcoin  will  
impact  the  
card  brands  
Bitcoin  will  
impact  
Western  
Union,  
MoneyGram  
and  other  
interna<onal  
remiYance  
providers  
Bitcoin  will  
force  central  
banks  to  take  
ac<on  to  limit  
or  eliminate  
math-­‐based  
currencies  
No  Way  
Unlikely  
Likely  
Definitely  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

13

The payments industry community strongly agreed on
five of six questions regarding Bitcoin’s
future
. To simplify the presentation, in the following text and charts, we have aggregated the
top two (Likely + Definitely) and bottom two
responses (No Way + Unlikely)
:

1.

Bitcoin will replace how money is moved in ten years
. 69
% answered ‘No Way’ or ‘Unlikely’
suggesting confidence in the incumbent system. One might
be
surprised at the 3
1
%
who answered in the affirmative.

2.

Bitcoin will be for
gotten in three years
. Combining the ‘No Way’ and “Unlikely” responses,
7
3
% answered that Bitcoin will not be quickly forgotten.

Again, even payments industry
professionals see MBCs as very likely staying with us for the foreseeable future.

3.

PayPal will su
pport Bitcoin in the PayPal digital wallet
. Some 61% thought that PayPal is
likely to add Bitcoin to the wallet.

Figure
13

-

Bitcoin Future Questions A

69%  
73%  
39%  
31%  
27%  
61%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
Bitcoin  will  replace  how  
money  is  moved  in  ten  
years  
Bitcoin  will  be  forgoYen  in  
three  years  
PayPal  will  support  Bitcoin  
in  the  PayPal  digital  wallet  
No  Way+  Unlikely  
Likely  +  Definitely  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

14

4.

Bitcoin will impact the card brands
. This response, at 58% no and 42% yes,
was the most
equivocal of the responses. The majority believes that the card networks are secure in
their role and that Bitcoin will remain an experiment only.

5.

Bitcoin will impact Western Union, MoneyGram and other international remittance providers
.
As
we’ll see in Question
s

11 and 13, the international remittance use case is one many
expect to be a Bitcoin sweet spot. Accordingly,
a full two thirds (66%) expected Bitcoin
to impact the major money transmitter businesses.

6.

Bitcoin will force central banks

to take action to limit or eliminate math
-
based currencies
. A
majority of respondents (62%) believe central banks will act directly with respect to
math
-
based currencies. The Bank of Thailand’s recent banning of Bitcoin shows that
the majority, in this
case, was correct.

Figure
14

-

Bitcoin Future Questions B

58%  
34%  
38%  
42%  
66%  
62%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
Bitcoin  will  impact  the  card  
brands  
Bitcoin  will  impact  Western  
Union,  MoneyGram  and  
other  interna<onal  
remiYance  providers  
Bitcoin  will  force  central  
banks  to  take  ac<on  to  limit  
or  eliminate  math-­‐based  
currencies  
No  Way+  Unlikely  
Likely  +  Definitely  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

15

13.

The most important Bitcoin use cases are...


Once again
, we aggregate the top and bottom two responses

for
the

follo
wing questions:

1.

B2B payments.

B2B payments were also not viewed as a strong ca
ndidate for Bitcoin,
with 79% saying it was not important or only somewhat important.

2.

B2C (payroll, incentives, refunds).
This use case had the second lowest score of the nine use
cases tested. Some 84% said Bitcoin was not important or only somewhat impo
rtant.

3.

International remittance
. This is the leading use case for Bitcoin with 62% believing it’s a
very important or critical role for the MBC.

4.

D
omestic person
-
to
-
person payments (cash replacement)
.
Aggregating the top two and
bottom two scores, respond
ents were evenly split on the role of Bitcoin in P2P
payments, 53% doubtful, 47% believing that there’s a role for Bitcoin
.


Figure
15

-

Bitcoin Use Cases A

79%  
85%  
39%  
54%  
21%  
15%  
61%  
46%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
B2B  payments  
B2C  (payroll,  
incen<ves,  
refunds)  
Interna<onal  
remiYance  
Domes<c  person-­‐
to-­‐person  
payments  (cash  
replacement)  
Not  Important  +  Somewhat  
Very  Important  +  Cri<cal  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

16

1.

Bitcoin currency trading
. While Bitcoin as a store of value did not appeal to a strong
majority of respondents, the idea of tradi
ng the currency for fun and p
rofit appealed to
about half, 48
% viewing it as a very important or critical role.


2.

Physical point of sale payments
. With t
he highest negative rating, 86% of respondents said
Bitcoin was not important or only somewhat important in the POS use case.

3.

E
-
commerce payments
. With the second highest
ranking score
, e
-
commerce payments are
viewed as a very important or critical use case for Bitcoin

at 59%
.

4.

Store of value for investment and savings
.

A strong majority (7
3
%) is d
oubtful that Bitcoin
as a store of value has little or no role to play.

5.

Micropayments (digital goods under $1).

Once again, respondents were evenly split on this
use case, 48% doubtful, 52% believing that there’s

a role for Bitcoin.
It

s ranking at 2.43
is the 4
th

highest score (Figure 17).

Figure
16

-

Bitcoin Use Cases B




53%  
86%  
41%  
73%  
48%  
47%  
14%  
59%  
27%  
52%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
Bitcoin  currency  
trading  
Physical  point  
of  sale  
payments  
E-­‐commerce  
payments  
Store  of  value  
for  investment  
and  savings  
Micropayments  
(digital  goods  
under  $1)  
Not  Important  +  Somewhat  
Very  Important  +  Cri<cal  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

17

Figure
17

-

Bitcoin Use Case Rankings


14.

Bitcoin, Bitcoin acceptance, or Bitcoin exchanges will be regulated or banned by your
national govern
ment.

The expectation by
nearly
half of respondents was, yes, within three years, Bitcoin will be
regulated or banned.

Figure
18

-

Bitcoin Regulation

2.50  
1.62  
2.66  
2.02  
2.43  
1.83  
1.73  
2.75  
2.42  
0.00  
0.50  
1.00  
1.50  
2.00  
2.50  
3.00  
Bitcoin  currency  trading  
Physical  point  of  sale  payments  
E-­‐commerce  payments  
Store  of  value  for  investment  and  
Micropayments  (digital  goods  under  
B2B  payments  
B2C  (payroll,  incen<ves,  refunds)  
Interna<onal  remiYance  
Domes<c  person-­‐to-­‐person  payments  
44.9%  
26.1%  
4.6%  
8.3%  
Yes,  within  three  (3)  years  
Yes,  within  five  (5)  years  
Yes,  some<me  ager  2018  
No,  Bitcoin  will  remain  unregulated  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

18

15.

How do you think the US Financial Crimes Enforcement Network (FinCEN) rul
ing on
digital currencies and Money Services Businesses will impact Bitcoin?

To make the distinctions sharper, i
n the next two charts, we have aggregated the top two and
bottom two
scores as Top Box and Bottom Box
,

respectively.

1.

It will make banks more re
luctant to work with Bitcoin
-
based firms
.
Nearly two thirds of
respondents
agreed that FinCEN actions will have a chilling effect on bank particip
ation
in the Bitcoin economy. Indeed, t
hat continues to be the case
.

Figure
19

-

FinCEN I
mpact A


2.

It will force new levels of professionalism on Bitcoin exchanges.

An even higher majority
(77%) felt that regulatory oversight would force Bitcoin exchange operators to focus
more on compliance
.

3.

It will push Bitcoin mining and exchange activity
out of the U.
S
. A majority (62%) did not
agree that FinCEN oversight would force Bitcoin miners and exchange operators to
move offshore.

4.

It won’t make much of a difference
.

The response (88%) demonstrates that respondents
believe that regulatory oversig
ht makes
all
the difference

for

Bitcoin and MBCs
.


5.

It will force the largest exchanges to get MSB licenses
.

On a question that, in hindsight
perhaps, one would have expected a nearly unanimous positive response, some felt that
the MSB license question was still in play.

37%  
23%  
62%  
88%  
63%  
77%  
38%  
12%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
It  will  make  banks  
more  reluctant  to  
work  with  Bitcoin-­‐
based  firms  
It  will  force  new  
levels  of  
professionalism  on  
Bitcoin  exchanges  
It  will  push  Bitcoin  
mining  and  
exchange  ac<vity  
out  of  the  U.S.  
It  won't  make  
much  of  a  
difference  
BoYom  Box  
Top  Box  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

19

6.

It w
ill make Bitcon mining in the U
.S. a lot less attractive
. Sixty two percent felt that the
FinCEN regulation would have little or no effect on mining operations in the U.S.

7.

It will slow online merchant adoption
.

Respondents were nearly evenly split in thei
r
response, indicating merchant acceptance of Bitcoin is perhaps independent of
regulatory concern.

8.

It will slow in
-
store merchant adoption
.
Again, respondents were roughly evenly split,
with some sense that regulation will slow in
-
store adoption more tha
n online commerce.

Figure
20

-

FinCEN Impact B



37%  
62%  
56%  
46%  
63%  
38%  
44%  
54%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
It  will  force  the  
largest  exchanges  to  
get  MSB  licenses  
It  will  make  Bitcoin  
mining  in  the  U.S.  a  
lot  less  aYrac<ve  
It  will  slow  online  
merchant  adop<on  
It  will  slow  in-­‐store  
merchant  adop<on  
BoYom  Box  
Top  Box  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

20

16.

Just a few more questions


We asked a few yes/no questions regarding Bitcoin’s current fitness as well as the need for
math
-
based currencies.


1.

Bitcoin will need to be upgraded

to address its shortcomings
.
The vast majority (85%) agreed
that Bitcoin will need to be upgraded.

2.

There is a need for a mat
h
-
based
,
P2P digital currency
. Nearly two thirds of respondents
believe that there’s a role for math
-
based currencies.

3.

There is r
oom for one or two other math
-
based digital currencies
. A large majority (78%)
believe
s

that Bitcoin does not need to be the only math
-
based currency in use.

Figure
21

-

Bitcoin Fitness and MBC Need




85%  
64%  
78%  
15%  
36%  
22%  
0%  
10%  
20%  
30%  
40%  
50%  
60%  
70%  
80%  
90%  
100%  
Bitcoin  will  need  to  be  
upgraded  to  address  its  
shortcomings  
There  is  a  need  for  a  
math-­‐based,  P2P  digital  
currency  
There  is  room  for  one  or  
two  other  math-­‐based  
digital  currencies  
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

21

Conclusion

In their comment
s, s
ome respondents
remarked

that Bitcoin has garnered
too much attention
while more important matters
,

such as

faster P2P
methods
and payment security
,

deserve our
focus.

It’s true that
Bitcoin has a

new gadget
” quality about it that has captured the attention
o
f “payment geeks


and the technology media.

I
t’s
also
true that the
Bitcoin ecosystem’s
“market
cap” is under $
2

bil
lion. That’s not a lot of value.
In fact it’s small beer when
, for comparison,

even
a

small
payment
gateway provider
can
manage a
transaction volume
of similar size in a
year
.

There are ma
ny

who view the extensibility and programmability of math
-
based currencies as
ground breaking. Unlike the decades old architectures of today’s authorization and settlement
systems for moving money, MBCs enjoy a clean sheet of paper opportunity that ha
s the benefit
of Internet
-
scale communications,
a committed open source
software development

community
,
and system design experience.

The survey results suggest that the payments industry, on the whole, sees
Bitcoin’s potential
and is taking a
“watchful w
aiting”
approach
. The payments industry is expecting increased
regulatio
n over math
-
based currencies
. S
tate regulators are concerned with consumer
protections and federal regulators are concerned with money laundering and terrorist financing.
Given the

regulation the incumbent industry’s seen of late, it’s reasonable to expect
that
the
new kid on the block
will, and should,

get equal, and equally rigorous, treatment.

The

very young Bitcoin business ecosystem has to grow up fast to avoid burdensom
e
regulation. Bitcoin needs well
-
funded start
-
ups, and exchanges in particular, obsessed with state
and federal
regulatory
compliance as well as customer satisfaction.
We understand
more
such
entities have been funded and
are on the way.
With
a sophisticated business in
frastructure
in
place, the business of Bitcoin will have the opportunity to compete with and complement the
incumbent payments industry.

Without it, our assessment is that the future will be far more
challenging for what could be a profoundly useful set o
f technologies.





Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

22

Part
2



Glenbrook’s PaymentsViews Posts on Bitcoin

Considering Bitcoin’s Role in Value Transfer

June 9, 2017

By George Peabody
-

george@glenbrook.com

Now that the recent fever of Bitcoin
speculation that swept up both a worried
globa
l constituency and a hype
-
hungry
media has subsided, it’s time for Glenbrook
to examine the Bitcoin ecosystem in
particular and math
-
based currencies in
general.

While there is still no end of open
questions, certainties have emerged as
well.


This Paymen
ts View post addresses a
few of them.


It is also the first of a series by
Glenbrook on Bitcoin’s role in value
transfer. While the Bitcoin currency has
strong commodity
-
like characteristics

gold does come to mind

it is the potential
of Bitcoin in value tr
ansfer of all kinds and
payments in particular that has caught our
imagination.

We’re not alone. Scores if not hundreds
of Bitcoin start
-
ups are seeking funds from
the smallest of angels as well as the VC
archangels on Sand Hill Road, NYC,
Boston, and almo
st everywhere else.

Now that Bitcoin has survived at least
two major crashes and the accompanying
media hype cycle has subsided (see the
Google Trends chart below), it’s time to get
real on the topic.


Let’s begin with a few
things we know.




In Bitcoin, Some Trust

Bitcoin is a resilient currency because of
the trust a broad set of users have in it and
that’s despite recent history that’s tested
that faith.

Bitcoin’s been th
rough several wild
rides, not the least of which took place in
April. That ride was fueled by a number of
factors, including:

1.

The media hype cycle (see the
previous chart).


While non
-
state,
fiat currencies deserve thoughtful
examination by economists and
regulators, there was a lot of
hype.


But not even close to iPhone
levels. (Just to keep this in
perspective,

check this comparison).




2.

Well founded concerns for currency
value and availability in places like
Cyprus and Argentina
.

3.

The organic spread of interest in
Bitcoin as investment and currency

4.

Manipulat
ion of exchanges.


A look
at the chart of Bitcoin value and
volume (below) is
revealing.


Immediately after btc
peaked at $230 on April 9, a
precipitous drop began, fueled by
DDoS attacks on dominant
exchange Mt. Gox.


Panicked
Bitcoin holders fled, drivin
g the
price down by 70% in a week. And
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Summer 2013



© Glenbrook Partners
, LLC 2013

23

then btc trading volume spiked
once more.



Since the April ride, the dollar value of
btc has fluctuated between $100 and $150,
settling do
wn in this week’s range at just
over $120.


Homeland Security’s
investigation of Mr. Gox as an unlicensed
money transmitter didn’t affect price at
all.


Indeed, it’s risen since then.

It’s this price stability that is
significant. It’s proof that there are

some
(unknown number of) hundreds of
thousands who believe in Bitcoin.

In Dollar Terms, Not a Big Deal
-

Yet

Bitcoin is proof we love shiny new
things, excitement, and a bit of
mystery.


But the numbers tell a modest
little story about an experimental new

currency that’s getting some traction. A
little perspective is in order:

At the current range of value of $125 /
btc and 11.249 million btc mined, the total
dollar value of all that btc is just over$1.4B.
Not bad at all for an experiment but, for
example,

Bitcoin’s “market cap” is less than
half the annual sales of California grocery
chain Raley’s, which occupies the number
100 spot on the NRF’s 2012 Top 100
Retailer list.

In other words, we’re not talking Big
Money here. Yet.

It’s the “yet,” of course,
th
at’s gotten our attention.

It’s Still Amateur Hour

While angels, archangels, some
nefarious types, and just plain miners
evaluate their options, entrepreneurs by the
hundreds have been brainstorming new
ways to make money in Bitcoin.


As a
programmable pla
tform, it has endless
potential (more on that topic later).

But simple development of the
transactional infrastructure around the
Bitcoin core has been a first order of
business because a functional Bitcoin
ecosystem requires currency exchanges,
trading pl
atforms, wallets for individual
uses, and vaults, among others. Exchanges
and wallets, in particular, have been the
focus of early entrepreneurial effort and the
results have been, from a security point of
view, mixed.

Multiple exchanges have been hacked
v
ia the standard toolkit of social
engineering, phishing for malware delivery,
and other tricks. Some of these breaches
were childishly simple. While actually
doing something with stolen btc appears to
be quite difficult, it’s hard to be confident in
such w
eak operations.

Of more concern is the market
concentration of exchange functions in Mt.
Gox.


With some 70% of the overall
volume, over reliance on its services cannot
be healthy.

Given the panic sown by the DDoS
attacks against Mt. Gox, Bitcoin needs
mor
e redundancy at exchange points and
better run exchanges at that. To that, the
FinCEN’s classification of miners selling
bitcoin for profit and exchanges as money
transmitters could be a very healthy
stimulant to professionalizing the
ecosystem.


Acquisiti
on of money
transmittal licenses is a fiscally non
-
trivial
activity, requiring $1 million and more in
legal fees, licenses, and effort to cover the
US. If investment follows talent and has an
ounce of prudence, then stronger operators
should emerge, fuelle
d by smarter money,
to create more reliable, secure services for
the Bitcoin community.

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Summer 2013



© Glenbrook Partners
, LLC 2013

24

Bitcoin Will Be Hard to Kill

Internet history demonstrates that once
a new capability is introduced that gains
user traction it is hard to dislodge.


This is
particular
ly true for services that operate at
multiple levels.


Bitcoin operates as a P2P
network that has its own API. Bitcoins can
be programmed via its transaction scripting
language, a powerful way to define novel,
flexible transactions.


Its JSON
-
RPC APIs
expo
se services valuable to client
-
facing
wallet and other user applications.

Open source, decentralized tools have
legs.


The star
-
stable Internet is growing
another leg.


Whether or not it becomes the
native means for programming money on
the Internet won’t
be decided for
years.


Even if governments regulate it into
the shadows, Bitcoin will be very hard to
kill.

Glenbrook has assembled a practice
around math
-
based currencies for two
constituencies: first, for members of

today’s
payments industry trying to di
scern
opportunity in the Bitcoin ecosystem and
for Bitcoin entrepreneurs confronted by the
incumbent payment industry’s rules and
complexities.


We’re looking forward to
exploring the potential of what looks
certain to become a permanent component
of inter
net infrastructure.


AAAA AAAAAAAAAAAAAAAAAAAA

Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

2
5

Bitcoin, the Two
-
and
-
a
-
Half Party Model, and New
Payment Rails

June 16, 2013

By George Peabody
-

g
eorge@glenbrook.com

One of the immediate applications for
Bitcoin and the math
-
based currencies that
are em
erging in its wake is its potential as a
new set of payment rails. Rather than the
incumbent industry’s reliance on the four
party model and its hierarchy of providers,
authorization messages, and settlement
steps that are necessary to connect the
payer an
d the payee, Bitcoin and other
math
-
based currencies promise a simpler
cash
-
like push payment.

It’s not quite that simple of course but
it’s not far off. Call it the two
-
and
-
a
-
half
party model. There are, of course, the payer
and the payee. The other half
provides
services such as currency exchanges, cash
-
in services to purchase bitcoins, trading
desk, secure storage, and more.

Bitcoin is all about push payments
between two end points. The facilitators of
the Bitcoin ecosystem avoid settlement risk
because
of Bitcoin’s funds push nature.
There’s no authorization message and
settlement lag. Once value is converted into
btc, transactions run over the peer
-
to
-
peer
communication protocol that provides the
payment rails. This works because every
device, from the
Internet Protocol’s point of
view, is more or less equal. Despite our
reliance on huge intermediaries like Google
and Facebook, the Internet is a peer
-
to
-
peer
scheme. Bitcoin and other digital currencies
are simply using that Internet DNA in
value exchange
.

Putting aside the “bitcoin as store of
value” discussion, payments professionals
should consider how these math
-
based
currencies could function as payment rails.
As a
Mashable article

put it, they have the
potential to function as the currency
equivalent of Esperanto, an intermediate
lingua franca in the service of value
exchange.

International Remittance Rails

The potential for this approach in
international remittance is squarely in
the
sights of multiple startups, from
BitInstant

to
OpenCoin
. While merchant uptake is
tiny, use cases are already in the market.
Expensify

has added an interface
supporting bitcoin transfers between its
accountholder and independent contractors
performing project work. Other than
providing the capability, Expensify has no
involvement in the

transaction. Remember,
this is person
-
to
-
person payment. And it is
a no to very low cost transaction within the
Bitcoin ecosystem. What it costs to convert
bitcoin to the local fiat currency is another
matter.

FX Built
-
In

A scheme (surprisingly) omitted f
rom
the Mashable article is OpenCoin, Inc’s
Ripple

currency. Ripple’s designers, as with
other digital currency builders, have taken
more than a few pages from the Bitcoin
book but they are all trying to improve on
Bitco
in’s limitations. While transaction
speed is one (more on that in a later post),
Ripple also includes a trading market
capability for multiple currencies. Ripple
“gateways” or exchanges will need to exist,
of course, to move the value across the
Ripple net
work’s border but the protocol
allows value to be stored in individual
currencies.

Getting Onto the Rails

As a payment vehicle, Bitcoin is largely
useless without practical currency exchange
capability. For first time Bitcoin
participants, performing the c
urrency
exchange function is confusing at best if not
baffling. Most exchanges ask for one’s
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
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26

banking information, an immediate stopper
for most of us.

Using a cash
-
in facility is one way to
begin.
LocalBitcoins.com

is a market maker
that connects buyers and sellers. My
nearest contact operates out of a Starbucks
about 15 miles away.

Another is BitInstant, an outfit that
facilitates transfers among various
exchange accounts including Mt. Gox. The
firm also offers ca
sh loading services at over
700,000 locations through its affiliation
with Zip Zap. You can go to a local CVS
and have your purchased bitcoins sent to
your public Bitcoin wallet address for a
3.99% fee plus a $3.95 fee to the ZipZap
cash loading network. B
itInstant has
coverage in the US, Turks and Caicos,
Puerto Rico, both the U.S. and British
Virgin Islands, Cayman Islands, Bahamas,
and in the slightly cooler Russian Republic,
Kazakhstan, and Ukraine. Not cheap at an
8% FX cost, but it can get you in the
Bitcoin game.

Bitcoin’s impact on the foreign
exchange market is infinitesimal compared
to the nearly $4 trillion in daily spot or cash
foreign exchange markets. From that
perspective, there’s only upside.

Merchant Transaction Privacy

An intriguing issue a
nd potential
downside for using Bitcoin payment rails,
given its publicly available transaction
ledger, is a merchant’s ability to keep its
transaction flow private. If the merchant’s
public Bitcoin address is not thoroughly
obfuscated (at extra cost), it
is possible to
determine the transaction volume going
into and out of that bitcoin wallet, revealing
not only a coffee shop’s customer receipts,
for example, but potentially revealing some
portion of its supply chain partners. Since a
merchant’s supply cha
in is often a closely
held secret that provides no little
competitive differentiation, the block
chain’s lack of privacy could be a real
concern for merchant uptake.

There are ways, of course, to
programmatically obfuscate these
transactions by breaking th
em up into
random sizes and sending them to
programmatically generated wallets
belonging to the merchant. Such services
already exist in the Bitcoin ecosystem.
However, unless the merchant is savvy
enough to understand the privacy
implications of the block

chain, it’s not an
obvious step.

There are other concerns about Bitcoin,
transaction speed within the Bitcoin
ecosystem is among them that we will
address in an upcoming post. In the
meantime, we continue to evaluate the
potential for what some consider t
o be an
open source payment gateway that speaks
Esperanto.

Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

27

Does PayPal Need A Bitcoin Strategy?

June 27, 2013

By Russ Jones
-

russ@glenbrook.com

Because we live in a tweet
-
constrained
world, the short answer is yes. But I think
every player in the finan
cial services
industry needs a Bitcoin strategy


payments enablers especially.

By strategy I mean that every company
involved in payments should evaluate
whether Bitcoin, and digital currencies
(math
-
based, virtual, etc.) more broadly, are
friend or foe,
evaluate what they should do
about them (if anything), and assess
whether


and when


action is required.

The Key Questions

There’s a short list of questions to
consider


and they’re all important
questions:

1.

Are they a good thing for your
long term busin
ess or a threat?

2.

Do they open up new market
opportunities or, rather,
threaten current revenue
streams?

3.

Are they the next land grab
opportunity or can you wait a
couple of years and just see how
things shake out?

For payments incumbents, Bitcoin may
be bot
h a threat but perhaps an opportunity
as well. That may, as an example, be the
case for PayPal.

Is Bitcoin a Threat to PayPal?

Why a threat? At first blush, the
Bitcoin value proposition is somewhat like
the PayPal value proposition. Both PayPal
and Bitcoi
n are used as payment systems to
move value from person to person, buyer to
seller, and business to business. Both
systems support instantaneous transfers
between end parties. Both have a similar
funds flow in that real money moves into
the system, moves a
round among
counterparties within the system, and then
moves back out. Both systems are designed
to support the flow of money across
borders. And, while neither is regulated like
a bank, both fall under other types of
regulatory scrutiny (PayPal, historica
lly so;
Bitcoin, increasingly so).

There are also key differences between
the two payment systems, the most
important of which is that there is no cost
to move Bitcoins between wallets, although
there is usually an ad valorem fee to convert
Bitcoins back a
nd forth between real
currencies. While these conversion fees are
not trivial, at the end of the day a lot of
Bitcoin’s appeal is its low cost to users


especially compared to PayPal’s pricing
schedule. Bitcoin also has its precious metal
“store of value”

aspect. While this digital
commodity aspect is quite real for currency
speculators, I think it’s a shiny
-
ball
distraction from a pure payments
perspective.

Another important difference is
usability. PayPal is easier and simpler to
use. Bitcoin feels like
the early days of the
Internet when nobody had a browser and
Internet Service Providers didn’t exist.
Everybody said it would get easier and it
did, as evidenced by our instant on, always
connected life style. So Bitcoin is cheaper,
but harder to use for n
ow. All that, of
course, can change. It might change fast if
easy
-
to
-
use Bitcoin wallets start to pop up
in app stores.

If Bitcoin were to become a competitive
threat to PayPal, it seems most likely as an
alternative to PayPal for cross
-
border
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

28

payments, wh
ich the company says is
roughly 25% of its transaction mix. Oh, and
these also happen to be the most lucrative
of PayPal’s transactions because of the
cross
-
border fees and the currency
conversion spread.

Or Is Bitcoin an Opportunity for
PayPal?

But long t
erm, Bitcoin might actually
prove to be more of an opportunity than a
threat. Digital currencies might be useful as
a way for PayPal to open up payments to
merchants in markets where the company
doesn’t currently support the local
currency. Bitcoin as the
default currency, so
to speak, when the local currency isn’t yet
supported. If PayPal wants to look at
Bitcoin as a market expansion opportunity,
I see a couple of different options that
might be available.

The easiest thing for PayPal to do
would be to tr
eat Bitcoin as another
payment method and embrace it as a way to
move funds in to and out of PayPal
accounts. In Bitcoin terminology, PayPal
could act as an exchange converting Bitcoin
back and forth between any of the 25
currently supported currencies in
the
PayPal wallet. Essentially, PayPal could let
a user in the U.S. convert Bitcoins held in a
wallet into USD in a PayPal account. Or it
could let the user withdraw USD funds out
of their PayPal account into a Bitcoin
wallet. I use USD as an example, but
it
could just as easily be any of PayPal’s 25
supported currencies.

This approach is conceptually similar to
how PayPal has dealt with alternative
funds
-
in methods like CoinStar cash
vouchers, GreenDot MoneyPaks, and
airline miles. PayPal’s argument has be
en
that money in a PayPal account has more
utility to the consumer because there are
more places to use the funds with PayPal.
The same story might work here.

The other interesting aspect of this
approach is that it permits PayPal to
leverage its existing
“regulated money
transmitter” status while other Bitcoin
exchanges are still stumbling to get into
the market. This could be an important
advantage for establishing itself as a major
player in the Bitcoin ecosystem. PayPal also
has an established know
-
your
-
customer
framework (for non
-
banked users that push
cash into PayPal accounts) that could be
repurposed for Bitcoin users.

Another option would be to support btc
(Bitcoin the currency) as another currency
inside the PayPal wallet. PayPal already
has a mult
i
-
currency wallet that can hold
funds in any of 25 currencies with the
ability for users to toggle currency balances
back and forth as needed. Simply put, btc
could be the 26th currency. In Bitcoin
terminology, PayPal would act as both a
Bitcoin exchange a
nd a Bitcoin vault. The
vault aspect, especially, would draw on the
relatively high degree of trust that PayPal
has earned with most users.

PayPal would have to think through
how Bitcoin is exposed through its various
products, but it seems like products t
hat
push funds between accounts (“Send
Money” and “Mass Payments”) would both
be natural fits. Economically, PayPal could
monetize btc (the currency) the same way it
monetizes all currencies

by earning
currency conversion revenue when the user
toggles thei
r balance between currencies or
when the currency is automatically
converted by one of the transactional
products.

Acting as a Bitcoin exchange would
require PayPal to get comfortable
managing the volatility of btc the currency.
But PayPal already manages
currency
conversion risk between its other 25
currencies. Plus it views risk management
as one of its core competencies. PayPal
could probably figure better than most how
Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

29

to manage the volatility risk in Bitcoin.

Deciding When and How to Act?

There are oth
er approaches to Bitcoin
that PayPal might choose to take, but
ultimately the company will have to decide
whether the Bitcoin threat/opportunity is
real and, if so, how soon it will need to act.
In other words, they need a Bitcoin
strategy. The strategy mi
ght be to ignore it
for now, as the company has plenty of other
opportunities it is pursuing. Or the strategy
may be to wait and see what happens with
Bitcoin over the next 12 months. But the
good news for PayPal is that if it does
decide to take action, t
here appears to be
some credible options for leveraging digital
currencies into something bigger. Not
every company will be so lucky.

Of course, it’s not just PayPal that
needs a Bitcoin strategy. Amazon, Google,
Facebook, and others will as well. Each wil
l
need to figure out how to take advantage or
respond to the rise of digital currencies.

What’s your Bitcoin strategy?

Payments and Bitcoin Survey


Summer 2013



© Glenbrook Partners
, LLC 2013

30

Bitcoin, Merchant Risk, and the Need for Speed

July 17, 2013

By George Peabody
-

george@glenbrook.com

Bitcoin's volatility continues t
o swing
with the mood of investors, speculators, and
the economic travails of countries like
Argentina where Bitcoin usage is up
sharply as concerns over the peso rise. The
btc currency has swung between $70 and
$100 since its astonishing mid
-
April high of

$230.

In other words, if you're a bitcoin
holder, you're on a ride you can't control.
As the wiser Bitcoin proponents put it,
Bitcoin is still an experiment. For a lengthy
description of Bitcoin’s many risks (as well
as the risks of their proposed investm
ent
vehicle) the
Winklevoss Trust SEC filing

is
a great start.

Bitcoin’s Twin Roles

Bitcoin’s twin roles as "medium of
exchange" and "store of
value" will remain
in flux and, among a few aficionados,
continues to stimulate a fervor normally
reserved for politics or religion. I’ll leave
politics and religion for others to
contemplate.

It is in another of Bitcoin’s roles, as a
set of rails for movi
ng value, that Bitcoin’s
design and execution demonstrates it is
past the experimental stage.


Sending a
bitcoin from one peer to another on the
Bitcoin network is a reliable activity. As
we've written before, it's been
amateur hour

if we want to move funds between bitcoin
and fiat currency.


But within the Bitcoin
Network, transaction reliability is high.

But that's only part of what a
competent electronic paym
ent network
must do. It must be secure. That appears to
be the case for what happens within the
Bitcoin P2P network and in the block chain
ledger. Yes, security concerns abound at the
exchanges, in the vaults for bitcoin storage,
and in digital wallets, bu
t the network itself
has a good track record.

Payment Network Transaction Speed

Another performance characteristic of
an electronic payments network is
transaction speed. And that is where the
Bitcoin network and block chain ledger fall
down when compared
to the sub
-
second
performance of the payment card networks’
authorization process.


While there is a real
difference between an authorization and
value transferred between accounts,
merchants care first about payment
certainty and then cost.

Bitcoin transa
ction certainty is, it turns
out, a function of speed.

As a consumer or a merchant accepting
a bitcoin transaction, you have a few choices
to make regarding transaction
confirmation, essentially the time it takes
for a quorum of nodes on the network to
wri
te the transaction to the block each is
currently processing. It all depends on your
needs and risk tolerance.

Fast, Medium, Slow, and Cheapskate

Merchant processor
BitPay

offers its
merchants three speed settings to
choose
from:

1. Slow.


This speed setting waits for
six nodes on the network, an indisputable
quorum, before BitPay reports to the
merchant that the transaction has been
confirmed. This currently takes 10 minutes
on average. The transaction requires a
paym
ent of 0.0005 btc to the first node
processing the transaction, at today's
exchange rate a cost of less than a nickel.
The other nodes don't require
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31

compensation because the first node does
much of the computationally intensive
work, making it easier for t
he others to
solve for and record the transaction in their
respective blocks.

2. Medium. The Medium speed setting
waits for a single node, the one that does
the hard work, to confirm the transaction
by writing it to the block it is currently
processing. Ag
ain, the 0.0005 btc fee
applies.

3. Fast. At the Fast setting, BitPay will
inform the merchant that a customer has
made an unconfirmed payment. The risk is
entirely on the merchant as to whether or
not to deliver the product in advance of
transaction confi
rmation.

Risk, therefore, is inversely
proportional to product or service delivery
speed. The shorter the delivery speed, the
higher the payment risk.

A fourth best effort option exists that
requires no fee but it relies on the
generosity of a miner / proc
essor to pick up
the transaction and write it, for free, to its
current block. If transaction volume is light
on the network, the time required may be
shorter as transaction processing helps
miners complete block processing faster but
the cheapskate mercha
nt should plan on an
hour for receiving a transaction
confirmation.

Where This Works

And Doesn’t

At these speeds, Bitcoin cannot address
the most important use case, point of sale,
with anywhere near the same certainty as
card network rails. While there ar
e
merchants taking bitcoin at the point of
sale
, for the vast majority, accustomed to a
few seconds of waiting for the authorization
re
ceipt to print and a high degree of
payment certainty, a Bitcoin transaction
would be unacceptably slow.

E
-
commerce, on the other hand, is an
obvious sweet spot. Purchase of airline
tickets, hotel and rental car reservations,
mobile minutes, and physical g
oods to be
shipped or picked up later, are all
candidates as each has a built
-
in lag
between order and delivery. There's time
for the payment to complete or for the
order to be placed in a queue for review by
customer service representative, fraud
detectio
n tools, or a fraud analyst.

A potential gap in the e
-
commerce
scenario does exist.


Many digital goods
require near instantaneous payment
approval and product delivery. For
example, customers of music, apps, and
other lower cost digital goods expect
insta
nt delivery via download.


With
Bitcoin's lengthy confirmation time, that's a
concern. Firms like Kount have assembled
complex service sets

to reduce payment risk
for card payments of digital goo
ds,
especially where instant delivery is
required. But as a digital equivalent of cash,
acceptance of Bitcoin for these purchases is
a risk that the merchant must calculate as
the cost of trust.

If the marginal cost of delivering a
digital good is small an
d speed of delivery
expectations are high, then the merchant
may be willing to assume the payment
risk.


Given that the merchant's cost is 1%
for converting a Bitcoin transaction into
USD, it may come out ahead considering its
comparable payment cost may b
e 3% or
more for a typical card not present
transaction. The 2% spread could fund
fraud losses.

Under those conditions, taking the
gamble that the payment is good could be
acceptable provided the merchant also
employs some of the tools it’s used for card
p
ayment risk mitigation such as white lists,
black lists, device fingerprinting, and other
methods. After all, giving away material to
fraudsters presenting bogus Bitcoin values
will get tiresome if not expensive.

An intriguing use case, one that’s been
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32

in
search of a viable solution for years, is
online micropayments. Card
-
backed
micropayments have been too expensive,
even with transaction aggregation, for

many content providers and publishers,
especially those wishing to monetize single
recordings, article
s and back catalog
material in the sub
-
$1 range.

Bitcoin continues to excite, confuse, and
deserve evaluation.


If your payments team
is wondering what the fuss is about, and
where the opportunities may be, ask us
about our private Bitcoin workshop, an
ext
ension of
Glenbrook’s Payments Boot
Camp
.

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33

Bitcoin’s Growth Not Without Pains

August 7, 2013

By George Peabody
-

george@glenbrook.com

At a mostly excellent
Inside Bitcoi
ns

conference last week in NYC, the major
features and flaws of the Bitcoin experiment
were on full display.

Starting with the keynote of
BitInstant

CEO Charlie Shrem to some excellent
panels featuring thoughtful

and experienced
participants, the conference offered ample
evidence of the potential for Bitcoin and
other math
-
based currencies to shine.

The sessions also shined a light on a
Bitcoin industry that has a ways to go in its
journey of maturing into a broad
ly used
means of value exchange.


With a few
exceptions

merchant processor
BitPay

among them

there appear to be few
Bitcoin startups with extensive payments
experience and operational expertise.


The
technical underpinni
ngs of the math
-
based
currency phenomenon are, in some respects,
more mature and tested than the business
models being used to bring them to market.

Innovation on Full Display

Enthusiasm for the potential of math
-
based currencies was fully in evidence.

For

example, Adam Levine, of
Let’s
Talk Bitcoin
, presented new models for
content creator compensation using a
Bitcoin
-
powered micropayment
marketplace. Think of it as “liking” by
micropayment tipping.


His thinking

also
accommodates advertisers and platform
provider needs as it restores the direct
author to audience relationship.


It could be
quite useful for bloggers and other content
creators, especially in international markets
where card payment acceptance is
un
available or too expensive.


For more
mainstream publishers, an approach like
this could provide an alternative payment
path around the paywall.

Another, albeit more challenging,
application of the Bitcoin protocol was
raised in the context of the transfer

of
stocks, bonds, and other non
-
currency
assets.

Interest has also spiked in a variant
called BitMessage, a means of secure email
and instant messaging using a modified
Bitcoin protocol that could be simpler to
use and harder to track than current
encrypt
ing email methods.

While the focus was almost entirely
upon Bitcoin itself, several speakers
including Jaron Lukasiewicz, CEO of forex
exchange trading platform
Coinsetter
,
lauded
OpenCoin’s

robust
Ripple

protocol,
its transaction speed, and its XRD
currency’s built
-
in forex capability. Ripple’s
currency agnostic design may position it as
the more flexible approach in a multi
-
currency world.
(More on Ripple in an
upcoming post).

Building Toward a Payment Role

As we’ve discussed in prior
PaymentsViews
posts
, the Bitcoin
ecosystem developing around its strong
math
-
based core has a long w
ay to go
before it develops mass
-
market
reach.


Those shortcomings were
mentioned frequently during the course of
the
Inside Bitcoins

conference and they are
worth repeating here.

Still Hard to Buy Bitcoin
. If the Bitcoin
ecosystem wants more stability thr
ough
utility, more people need to use Bitcoin as a
medium of exchange, not just as a store of
value.


Liquidity matters to a currency and
usage matters to a payments system.


For
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© Glenbrook Partners
, LLC 2013

34

all but the truly committed, it’s still
awkward and often expensive to purcha
se
Bitcoin.


LocalBitcoins.com

puts buyers and
sellers together to meet at a coffee shop to
transact in cash. But the online
experience

how most of us would prefer
to transact

is still awkward.

Bitcoin Exchanges a
re Critical
Infrastructure
.


For math
-
based techniques
to thrive either as currencies or as stores of
value, the ability to smoothly convert those
currencies into and out of the many global
fiat currencies is an essential function. If
you can’t move value,

then the lack of
liquidity will hurt the Bitcoin ecosystem’s
expansion.

Contributing to the challenge of buying
and selling bitcoin is the ongoing fact that
major exchanges like
Mt. Gox

have had
trouble staying onlin
e for a range of
reasons including too high traffic volumes
(inadequate infrastructure), DDoS attacks,
site hacking, regulatory issues, the need to
perform a site upgrade, or a decision to
pivot the business model.


Even BitInstant
has been offline for ext
ended periods as it
prepared a new platform for release.

Wallets Behind the Design Curve.


For
those unfamiliar with encryption
-
based
security, the notion of public and private
keys can be challenging.


User interface
design can go a long way toward
simpli
fying the acquisition, storage, and use
of bitcoins that are, after all, represented by
a long string of numbers. Elegant bitcoin
wallets simply don’t exist yet.


Apple’s
continuing ban on iPhone versions of
bitcoin wallets in the App Store can’t be
helpin
g.

How Helpful is Anonymity?

The Bitcoin
protocol’s pseudo
-
anonymity has been a
strong draw for many early adopters.

Now,
that degree of anonymity may be turning
into something of a barrier to broader
deployment.


If one proceeds on the
assumption that Bi
tcoin needs to coexist
with incumbent systems

and I do

then
Bitcoin operators must feature their
compliance with government requirements
regarding Know Your Customer (KYC) and
anti
-
money laundering (AML)
reporting.


Transactional anonymity is not
friendly
to AML processes.

Successful coexistence suggests a
different approach.


As Jaron Lukasiewicz
pointed out, there may be a good business
for the provider of audit and forensic
tracking capabilities to banks and, by
extension, law enforcement. Bitcoin may be

a push payment like cash but an insistence
on cash
-
like anonymity risks adverse
regulatory response.

Picking Investment Worthy Start
-
ups.

With other VC firms in evidence at the
conference, BitAngels announced some $50
million in available funding for Bitc
oin
start
-
ups.


There are already scores of
them.

As investors evaluate these
opportunities, careful consideration of
regulatory compliance and operational
experience may extend the value of those
investments. With MSB licenses and fully
transparent banki
ng relationships in
hand

hardly inexpensive assets

Bitcoin
-
based enterprises could have staying power.

It’s Time to be Thorough

The Bitcoin ecosystem does not have
endless time to ground itself in regulatory
coexistence.


Unlike operators of a start
-
up
pho
to
-
sharing service, the “market” for
Bitcoin start
-
ups also includes law
enforcement, state regulators, consumer
protection agencies, the Fed, and the
Department of Justice, each of which is
scrutinizing Bitcoin’s role.


Yes, the Bitcoin
protocol cannot be

killed because it’s now
part of the enormous toolkit that is the
Internet. But Bitcoin can be regulated into
the deep shadows. The
Bank of Thailand

banned Bitcoin

last week.


While the ban
may not be written into Thai law, from a
functional point of view, that’s a distinction
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35

without a difference.

As tools for moving money, these math
-
based mechanisms ha
ve much to offer in
terms of speed, security, and cost.


It will be
a balancing act to maintain those
advantages while complying with current
and potential regulation.


We are anxious to
see the many enterprises working in this
area succeed in that dance b
ecause it would
be a loss to have math
-
based currencies
overly regulated prematurely.


As with
many technologies, the benefits and costs of
Bitcoin will not become clear for some
time.


For that sufficiency of time to remain
available, an operational orien
tation on
compliance and transparency will be
needed.


A special shout out to Marc Hochstein,
Executive Editor at American Banker who
assembled and moderated an excellent panel on
Bitcoin and freedom of speech as well as a
thought provoking fireside chat w
ith Shakil
Khan of Spotify.



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Appendix A



Bitcoin Resources


Bitcoin overview



Bitcoin Foundation

and a Bitcoin

primer



Wikipedia Bitcoin

page



CoinLab basic

primer



Infographic

of how Bitcoin transactions work



Bitcoin.org

primer



The
Genesis Block

is a Bitcoin industry
-
friendly
news and information source. Its mid
-
year 2013
review and outlook

is a detailed view on Bitcoin’s status.



Bitcoin: A Primer for Policymakers
, Mercatus Center
, George Mason University

Introductory Videos



Quick Booster Video



Eric Voorhees on Bitcoin as money
-

speech at Bitcoi
n 2013)



WeUseCoins Intro video



Khan Academy Bitcoin course
, emphasizing cryptography



Udemy Bitcoin course

Exchanges to buy/sell/trade/store bitcoins



Bitfinex



BitStamp



BitInstant



BlockChain



BTCe



Coinbase



Coinsetter

trading platform



CoinLab

(with market depth chart on home page)



Kraken



Mt. Gox



Tradehill

trading platform

Bitcoin Payment Processors for
Merchants



Bips



Bitpay



Coinbase



MtGox



Paysius



WalletBit



And

merchants

accepting Bitcoin

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Bitcoin Wallets




Armory



Blockchain

-

Bitcoin Wallet

(Android)



Mobile Bitcoin Wallet

(Android only)



Electrum



Coinbase



Bips



Multibit



Paytunia Bitcoin Wall
et

(Android)



WalletBit



Google play store

search

for 'bitcoin' (currently Apple does not allow Bitcoin wallets in
the App Store).

Selection
of Bitcoin
-
related articles



The New Yorker: “
The Crypto
-
Currency
, October 10, 2011” and “
The Future of
Bitcoin
, April 2, 2013”



MIT Technology Review: “
What Bitcoin is, and Why it Matters
. May 24, 2011”



Wired: “
The Rise and Fall of Bitcoin
, November 23, 2011” and “
Bitcoin’s Comeback
,
December 21, 2011”



Foreign Policy: “
The Shadow Superpower
, October 28, 2011"



Forbes: “
Could Bitcoin become the curren
cy of System D?"
, March 19, 2012



The Atlantic: "
The Winklevoss Twins Want You to Invest in Bitcoin
-

Don't
"

Jul 2,
2013 an
d the

Winklevoss Bitcoin Trust

Bitcoin criticisms



Paul Krugman: "
Golden Cyberfe
tters
", "
Adam Smith Hates Bitcoin
"



Neil Irwin: “
Bitcoin is ludicrous, but it tells us something important




Bryan Goldberg: “
Great, now engineers think they can
be economists too




Felix Salmon: “
The Bitcoin Bubble and the Future of Currency


Data



Current Mt Gox USD/BTC Price



Visualization of global bitcoin node activity



Blockchain.info Charts

o

List of Chart Types

o

Current Stats

o

Largest recent transactions



BitcoinCharts.com Stats and News



Real
time USD/BTC Exchange Rate



Explanation of ten chart types

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38

Regulatory



FinCEN on Virtual Currencies



Canada FINTRAC on virtual currencies



Texas money transmitter license

required by foreign Bitcoin operators

Other Digital Currencies



Beyond Bitcoin



Ripple

from OpenCoi
n, Inc. (not to be confused with

OpenCoin.org
)



From Ripple's CEO, Chris Larsen, on the

Future of Money and Bitcoin



Art Technica on other

cryptocurrencies
, May 11, 2013

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About Glenbrook

Founded in 2001, Glenbrook f
ocuses exclusively on payments consulting. In addition to acting
as consultants, each of Glenbrook’s principals has long experience as a senior executive in the
payments business, having dealt with both strategy formulation and the day
-
to
-
day realities of
execution under the pressure of budgets and timelines.
Glenbrook helps its

clients to track a
number of related markets to assess trends, surface opportunities, and identify threats
,

and then
develop aggressive responses to these forces.
The company is

ab
le to do this by bringing to bear
a valuable combination of specialized skills in payments, decades of hands
-
on experience, and a
network of high
-
level professional relationships.

Glenbrook works across the payments industry


with banks, merchants, biller
s, processors,
networks, alternative payment providers, and a variety of investors


as well as across all
payment methods (card, ACH, alternative, Check 21/imaging). We have deep expertise in each
payment domain from ecommerce, POS, bill payment, P2P, B2B
, to income.

Glenbrook is the publisher of
Payments News
,
the
"blog of record" for
payments professionals, more than
12
,000 of whom read it each day. In
2009
Glenbrook

launched a companion blog
,

Payments Views

featuring
commentary on
topical issues in
the payments
space
.

Glenbrook's

Payments Boot Camp progra
m offers intensive “deep dives”
into the world of payments. The Boot Camp is offered several times a year for the
public, or as a
private on
-
site workshop. More than 6
,
5
00 industry executives

have attended to date. We
recently launched a series of payments education
w
ebinars on special topics

and published a
book,
Payments Systems in the U.S.

S
ee
www.PaymentsEssentials.com

for more information
course
schedules
, and book purchases
.


Learn more

at
www.Glenbrook.com




Payments and Bitcoin Survey


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, LLC 2013

40

About the Author

George Peabody

George brings 10 years in paym
ents technology and 25 years in IT and
entrepreneurial management to help clients with strategy and market
development. He applies his consulting expertise across a range of business
and technology issues with particular emphasis on competitive positioning
,
technology investment road mapping, and innovation.

Before joining Glenbrook, George directed Mercator Advisory Group's
emerging technologies advisory service. His research there focused on
mobile payments acceptance trends, data security in eCommerce an
d point
of sale transactions, and digital identity. As Vice President of Aberdeen Group's
telecommunications research, he led a team of 20 providing research and consulting services to
large internet infrastructure firms in the networking, mobile, and dat
a center sectors including
Cisco, Ciena, Lucent, and others. His entrepreneurial experience includes co
-
founder roles at
payment identity firm Payment Pathways, internet service provider RapidNet, and business
aviation online training firm DigiFlite.

George is also a Certified Smart Card Industry Professional / Payments (CSCIP/P).