Bitcoin is one of the sexiest topics in payments and at the same time, one of the least understood.
Optimists say that it has the potential to revolutionise the payments space, while sceptics say it’s no more than a Ponzi scheme.
Bitcoin is a digital currency that people talk about as an asset, a currency, and a payments network.
It’s already drawn the interest of governments, institutional and private investors, banks, and large online retailers.
To get a better feel for what Bitcoin is and its implications for the payments space, in particular, we sat down with SecondMarket Founder and CEO Barry Silbert, at his New York office. SecondMarket is an online marketplace that helps qualified investors to invest in illiquid assets. The company runs The Bitcoin Investment Trust (BIT) which allows qualified investors to gain exposure to Bitcoin. Silbert is a Bitcoin true believer and he offered his insights into what he sees as the future of the digital currency.
This Q&A has been edited for clarity and brevity.
BI Intelligence: So, what is Bitcoin?
Barry Silbert: Bitcoin is two things. It is a digital currency and a global transaction network. As a currency it has attributes of gold and fiat money. As a global transaction network, it has attributes of Western Union, Moneygram, and PayPal.
If you look at the conversation around Bitcoin, I think that everybody universally sees the real potential of Bitcoin as a global transaction network — something that enables you to move value around the world without friction and practically free.
BI Intelligence: What does Bitcoin mean for legacy players in the payments industry?
The problem that these companies have is that they were built on legacy financial service rails — essentially they are using a system that has been around for decades and has tons of players involved. Bitcoin is circumventing that by sending money directly without anyone having to step in the middle.
About $US500 billion is sent in the remittance market annually from a local country to a home country. And on average the remittance fee is 7-9%. The problem for that whole business is that the people who are paying those fees tend to be the people who can’t afford to pay. If you have the alternative of sending $US100 to your family and paying a dollar vs. $US20, you’re always going to choose the cheaper option.
BI Intelligence: Is Bitcoin a threat to these legacy companies in the near-term?
Silbert: Bitcoin is going to be a competitive threat, but not in the near future because Bitcoin is still nascent, complicated, and confusing — it takes a fair level of technical knowledge to use. People who want to send money to their family do not necessarily want to figure out how this technology works.
More importantly, there is not enough liquidity in the Bitcoin market to eliminate the risk of taking a 5% hit in the value of Bitcoin on either end. If you wanted to send money to Kenya, you have to be able to convert dollars to Bitcoin and then Bitcoin into the local currency fairly inexpensively and that is just not possible right now. But it is going to become possible because Bitcoin exchanges are opening up in every country. You will be able to send money to Kenya — it’s going to take 3 seconds and it’s going to be basically free.
BI Intelligence: Why Bitcoin and not other digital currencies like Litecoin?
Silbert: I believe Bitcoin is the ultimate winner for two reasons.
Number one, there is only one group worldwide of early adopters — entrepreneurs, hackers, angel investors, and venture capitalists — that will embrace the cryptographic alternative currency concept. And we’ve already gone all-in on Bitcoin.
There isn’t an incentive for these people to move to another alternative currency unless it’s solving a major problem. There are certainly some problems with Bitcoin, but it is a really elegant system and nothing is perfect.
Number two, Bitcoin is software. It is a living breathing piece of software. Every few months the core development team for Bitcoin releases a new version that fixes bugs and adds functionality. So, Bitcoin itself is not static. It is going to continue to evolve.
BI Intelligence: Tell me more about the core development team.
Silbert: Bitcoin is open source software and anybody can review code or submit code for it to be incorporated. But there is a core development team who does all of the testing.
On top of that there is a head scientist, Gavin Andresen, who makes the ultimate decision as to what code gets incorporated into the protocol. So, you have a big group of developers that all have to agree, and then you have Gavin who has to agree. But that’s just one level of protection.
In order for any changes to actually be incorporated into the network, 51% of the miners have to download the new software onto their computers. So you have a bit of a democratic process for alterations to the code.
BI Intelligence: What happens when all the bitcoins get mined? How does the protocol get changed? You wouldn’t have miners anymore would you?
Silbert: Well, you would because what mining is actually doing is processing transactions. When all the new bitcoins are mined, the reward will come in the form of very small transaction fees. Whoever confirms a particular block of transactions will get all the transaction fees for that block.
[Editor's note: We'll explain how the Bitcoin confirmation process works in detail in an upcoming report.]
BI Intelligence: If Bitcoin took off it could conceivably become a threat to other currencies like the U.S. dollar. Are you worried about the government trying to shut down Bitcoin?
Silbert: The entire value of the Bitcoin network is $US12 billion, so in the grand scheme of things Bitcoin is a rounding error in comparison to other global currencies.
Right now, the Fed is not going to worry about it. In fact, a few weeks ago in the Senate hearings, in a letter Bernanke wrote to the Senators — I’m paraphrasing — he sees potential in Bitcoin and is not sure that the Fed even has the jurisdiction to manage Bitcoin.
If you project out 10 years — let’s just say that Bitcoin becomes a global currency and is competing with the U.S. dollar — the Fed will absolutely be incredibly concerned about their loss of control of money and their ability to influence the economy, but at that point it’s too late.
Once Bitcoin is already distributed around the world, they can’t ban it. They can’t confiscate it. There is this practical reality that Bitcoin is either going to go away or it is going to thrive and become this global currency and the Fed can’t do anything about it at that point.