Bitcoin might grab headlines, but it isn't about to overtake the financial system anytime soon. Banks process billions of transactions every day, but the average number of Bitcoin transactions per day is hovering around 70,000-80,000. So far there's no sign that Bitcoin has the mass appeal to become a popular payment instrument. But virtual currencies may still prove useful for certain niches in the payment market that banks struggle to serve well, and the technology behind Bitcoin could be best suited for other financial needs beyond payments.
"There are three possible outcomes here" for virtual currencies, Richard Brown, executive architect for industry innovation for the banking and financial markets at IBM UK, said during a panel discussion on virtual currencies at Sibos 2014 yesterday. "Either this market will collapse, which I think is unlikely because of the technology behind it. I also think it is unlikely that it will overturn banks. So it is likely that there will be some kind of co-existence."
Bitcoin's anonymity, which has often been associated with its use by criminals, can be useful for legitimate transactions, Brown said. He used an example of an American charity that paid women in Afghan villages to blog about their experiences. The charity paid the bloggers through a Bitcoin wallet, so that no one could identify the bloggers, protecting them from potential robbery or reprisal for telling their stories.
Cross-border payments could be one area where virtual currencies could also fill very specific consumer needs, according to Brown. One study of Bitcoin purchases on Overstock.com found that the average price of a given item fell if it was bought with Bitcoins rather than a credit card. This was because of the reduced risk of chargebacks for fraudulent transactions to the merchant; the Bitcoin block chain can provide proof that the purchaser owns the Bitcoins. That reduced fraud risk and the ability to prove ownership of funds could help consumers in countries that are cut off from the international payment network make cross-border payments.
[For more on Bitcoin's block chain, check out: How Bitcoin's Underlying Technology Could Disrupt Financial Services.]
The block chain, and its ability to prove ownership, could make it useful for areas beyond the transfer of funds, Brown said. "We need to separate the technology platform [behind Bitcoin] from this currency use case to make progress with it."
Bitcoin's unique block chain ledger could be used to issue and prove ownership of real estate deeds or securities, though that would present different risks if someone finally managed to hack the block chain. "The ledger -- it's proof that I own something. You can take a contract and embody it in that platform, but that also presents new risks. People are still focused on the currency phase of this and haven't thought through the risks in these other areas yet."
Each new use case with virtual currencies seems to bring its own risks and challenges. Anyone looking to leverage Bitcoin's technology for these other use cases would be smart to look at some of the mishaps that have shaped its reputation as a payment instrument, he said. "There are people in jail right now because they dabbled in this space without understanding the risks."
Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio