So many people miss the point about Bitcoin

Some of what is reported about Bitcoin, even in reputable journals of record is, frankly, mad. The media is missing the most interesting aspect, which is the technology.

Here’s a typical example of media comment on Bitcoin that makes little sense to me. The article was labelled “Mastercard Hates Bitcoins” which, I think, is at minimum an exaggeration.

The new boss in charge of giving out a MasterCard licenses has no intention of allowing the brand or any bank that does private label cards to use Bitcoins. In fact, he nearly bragged to me about killing the BitInstant deal with a U.S. bank for the first planned $BTC card this year.

[From Mastercard Hates Bitcoins]

The Bitinstant deal that is referred to here is something mentioned in a couple of presentations earlier in the year.

Exchange service BitInstant is reportedly planning to bridge the gap between the digital world of Bitcoin virtual currency and the real world of debit/credit card payments. An unconfirmed source from the company has revealed that BitInstant is in the final stages of creating a Bitcoin card that will also function as a standard international MasterCard.

[From BitInstant to Bridge Virtual, Real Currencies with Bitcoin Credit Card]

I have to say that it is not obvious why, or how, MasterCard could stop a bank from accepting Bitcoins if it wanted to. In fact I there is one MasterCard-issuing bank that already does, which is Fidor. The idea that is behind the old BitInstant deal that is being referred to here is that a bank might want to issue a US$ MasterCard that is connected to a Bitcoin Wallet. Conceptually this is no different to the way my Simpleaccount works. My Simple account is a prepaid Visa card connected to a share of a bank account somewhere. So my BTCard (or whatever it might be called) would be a prepaid US$ MasterCard connected to a share of a Bitcoin wallet somewhere. The only difference is that where my Simple card spend converts at par to debits on the bank account, my BTCard spend would convert at the prevailing exchange rate to debits on the Bitcoin wallet. And it would still obtain interchange on the transaction. The volatility might be a problem, in terms of working out which price to use and when to apply it, but it’s not a conceptual problem.

Bitcoin’s backers admit that there is some inherent risk to the electronic currency. After all, there is no FDIC for Bitcoin. It’s also volatile: In the last 30 days, the value of a Bitcoin in U.S. dollars has ranged between $7.58 and $15.40.

[From Get ready for BitInstant’s Bitcoin debit card – Aug. 22, 2012]

I don’t understand why MasterCard would care about this. I mean, I know why they don’t care about it in practice (because the retail spend on Bitcoins is so tiny – most Bitcoins are hoarded) but I wonder if they care about it at a conceptual, policy and strategy level? I’m not saying that they shouldn’t care about it, by the way. They should. But not as the (n+1)th currency in the world. They might, for example, want to look at using something Bitcoin-like as a backbone for the new remittance business that they have just acquired from our friends at eServGlobal, HomeSend. I remember Consult Hyperion doing a study some years ago on using digital money as an international backbone for internal use for a large foreign exchange business that wanted to minimise cross-border bank transfers to settle between currencies and it looked pretty good. The newspapers look at Bitcoin for retail payments, especially for drugs and such like, but it may be far more disruptive on the wholesale side.

Gumroad’s Sahil Lavingia also chipped in with his two cents – suggesting Bitcoin’s biggest impact could be how it inspires others to build products… “A lot of the ideas that it contains are really interesting and will affect the way other people think about building stuff”.

[From Bitcoin’s Biggest Impact Could Be Changing How Others Build Products, Say Digital Money Firms | TechCrunch]

I agree with that wholeheartedly. As I said when first asked about Bitcoin a couple of years ago and consistently since a few times via various media channels (see for example, Wall Street Journal TVthis week), Bitcoin is more interesting to people like me for the technology than for the currency and I’m pretty sure that’s true for our clients as well even if they don’t realise it yet. Someone much smarter than me, Google’s Chief Economist Hal Varian, puts it like this:

I think something like this technology will take hold in the future but I am not particularly optimistic about bitcoin because it suffers from being the first in the area<

[From Not particularly optimistic on Bitcoin future: Google official – The Economic Times]

Hal and Sahil are surely correct to focus on the underlying technology. The family of technologies for distributed public ledgers that Bitcoin has founded are set to disrupt by realising the dreams of the early “digital bearer instrument” pioneers in a very different way by finding an alternative route to fixing the well-known problem of double-spending. This is exciting and interesting and important, and it’s much more of a story than some guy tossing his Bitcoins in the garbage by accident, which is the sort of thing media focus on.

The impact of Bitcoin will not be a digital gold standard. It might not even be payments. In his much-linked talk at Le Web, the well-known venture capitalist Fred Wilson said that “we have allowed Google and Facebook to become our de facto identity services” and he predicted that a “Bitcoin-like” identity protocol will arise in the future. Interesting. In other words, for Bitcoin as for everything else, identity is the new money.