The controversy surrounding virtual currency Bitcoin reached fever pitch earlier this month. Following the FBI’s move to take down the notorious crime site Silk Road, the anonymous ‘eBay for crime’ website, the real world dollar value of bitcoins plunged. This is unsurprising given the currency’s unfortunate links with illicit online trading, in particular its status as the primary payment mechanism for transactions on Silk Road.
Although the value of Bitcoin has recovered for now, with all the salacious stories, hype and government furore, it is unlikely that Bitcoin will become the go-to online currency – and it will certainly never replace the dollar as the default currency in the real world. Yet the rise of Bitcoin can give us valuable insight into the future of virtual currency and the implications for businesses.
There are three areas where Bitcoin can clarify our thinking about the future of doing business digitally: micro transactions, trust and anonymity.
1. Micro Transactions
Most of the transactions we make online rely on credit cards, which typically mean the merchant has to pay a percentage and a minimum charge of 10 to 20 pence per transaction. While this works well for more expensive items, it’s a real obstacle to purchasing items costing mere pennies.
Just think of the possibilities if it were possible to manage digital transactions on a zero-cost basis for items costing less than a pound: you could purchase a single newspaper article for a few pence, rather than having the hassle of setting up an account or committing to a subscription (par for the course when purchasing many online services).
While Google and Apple App stores come closer to delivering a customer-friendly payment service, they still rely on credit card transaction fees which inhibit micro-payments, unlike bitcoin, which has no one central owner and in practice is not costly to undertake transactions with.
Although their identities remain a mystery, the creators of Bitcoin are clearly world authorities on encryption and they took great care to ensure that Bitcoins could not be faked. Because Bitcoin uses the individual’s ‘private key’ to complete transactions, you know whether subsequent transactions come from a trusted party.
In the internet of things (where everyday objects are connected by microchips) a similar principle could be used, whereby specific devices (e.g. a smartphone and the lock on a hotel door) could exchange micro value Bitcoins to demonstrate that they ‘trust’ each other for defined numbers of transactions – without the need for the two parties to physically pair up in advance.
The third area where Bitcoin provokes thought is around the value of anonymity in the modern world. Big data, analytics and cloud computing make it is increasingly hard to remain anonymous when we buy and sell in the digital realm – yet the desire for anonymity over the internet isn’t necessarily sinister.
In the physical world I can walk into a shop and pay cash for a book about dealing with cancer, or put money in a collection box for a tsunami relief fund. Equally I may want to buy a digital book to understand more about a health issue, or donate money to a charitable cause on a one-off basis. Doing this without wanting to reveal my identity and being forever linked with the health issue or the charity doesn’t make me a criminal.
Bitcoin may always be too volatile in value and tainted with shady dealings to prevent it becoming truly mainstream. Yet if a reputable group comes up with a Bitcoin equivalent that allows trusted, free and demonstrably anonymous micro transactions – while at the same time avoiding any association with Silk Road – it could allow digital businesses to flourish where they have never flourished before.