Guan’s blog


What’s the point of easy Bitcoin?

12 Mar 2015

(This is cross posted from Ello.)

It’s easy to see the appeal of Bitcoin to drug dealers and nerds like me. I can buy some Bitcoin, or mine it myself, and use it to make instant (well, 10-minute) payments without using the antiquated US dollar payment infrastructure.

Most consumers, however, don’t want to hold Bitcoin, because they might lose all their hard earned savings, and merchants don’t want to bother with that either. That’s why there is a slew of startups that make the Bitcoin payment process much easier. When I buy things from Adafruit, Bitcoin payments are processed by BitPay, who takes care of instantly converting my Bitcoin to US dollars. BitPay will then automatically transfer the converted dollar amount to the merchant using ACH or other national payment systems.

What if, like most consumers, I don’t own any Bitcoin and don’t want to be exposed to the risks of holding any? A company like Coinbase lets me instantly buy Bitcoin and send it to BitPay to pay for an online purchase. How do I pay for that? Coinbase prefers to withdraw the US dollar amount from my bank account using ACH.

Startups like BitPay and Coinbase have made it reasonably convenient for me to pay a merchant using Bitcoin, but it already looks like there are a few redundant steps here. If I pay using ACH, and Adafruit is paid using ACH, why can’t there just be a single ACH transaction? That way we could save half of the ACH fees (on one of the two ACH transactions) as well as the Bitcoin transaction fee.

So what’s the point of using Bitcoin here? Why not just use ACH payments? BitPay and Coinbase both comply with all the relevant laws and are registered with the regulators, so there’s not even any regulatory arbitrage to be had. In some ways, the easier you make Bitcoin as a payment system for regular folks, the less you actually need Bitcoin as part of that system.

Bitcoin has also been touted as revolutionizing small cross-border payments, such as remittances. But to make it easy to use, remittance solutions for Bitcoin have to interface with a “normal” payment system, whether it is dispensing cash at a retail store or domestic payment systems like ACH or the European SEPA. Companies like TransferWise and XE Trade have already disrupted the market for international payments the old-fashioned way, by maintaining bank accounts in each country and making domestic payments in and out of those.

The main advantage I can think of, for this type of consumer, is that Bitcoin can decentralize the centralized component of the payment flow. This allows each consumer and each merchant to use different providers at the endpoint. If I pay with a credit card, the endpoint providers are my card issuer and the bank that provides the merchant account. There is a lot of competition in the market for card issuance and merchant accounts, but a centralized network connects all the card issuers and merchant accounts. (Indeed, operating such a network is very profitable.) I don’t have to use Coinbase, or any particular card issuer in the case of debit and credit cards: I can use some other company. And I can still make easy payments to Adafruit.

For domestic payments, we can cut out Visa or MasterCard as a middleman, but we cannot cut out ACH. At each end, we could, however, replace ACH with something else.

For international payments, TransferWise is easy and cheap enough. But what if I want to make a payment to a country that TransferWise doesn’t support? I can use a provider in my country to convert dollars to Bitcoin, and the recipient can use a provider in a different country to convert Bitcoin to local currency that is transferred to his or her bank account. I think this is a minor improvement: if we both live in countries supported by either TransferWise or XE Trade, it would be easier and faster to just use a single provider for the whole transaction.