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Moving beyond traditional banks

Is bitcoin start of a financial revolution?

Reuters

Bitcoin may not be the messiah of a new currency its hard-core fans yearn for, but it may herald the deeper financial revolution the Internet has been waiting for.

While computers and smartphones have brought the Web to more than a third of the world’s population, online commerce still largely depends on a banking system that has changed little over recent decades, some of it relying on computer code written before the Web was born.

The growing interest in bitcoin, a digital currency that requires no centralized body to handle transactions, is beginning to change all that.

“The rise of bitcoin has changed everyone’s idea of what a good payment system should be,” said Manu Sporny, CEO of Web payment company Digital Bazaar, who is spearheading an effort to get the industry together to agree on standards for handling online transactions. “Bitcoin raised the bar, so everyone’s got to come in and match that in some way.”

A key moment will be a meeting in Paris next week hosted by the World Wide Web Consortium (W3C), one of the key bodies for setting Internet standards. Gathering for the first time to discuss Web payment standards will be telecom operators such as Deutsche Telekom, Telefonica and AT&T, payment companies including SWIFT, PayPal and Gemalto, and the U.S. Federal Reserve.

Bitcoin can claim some credit for this buzz of activity.

Much of the focus on bitcoin has been on its meteoric rise in value — soaring from $30 a year ago to above $1,000 late in the year — which has been only slightly dented by the collapse last month of Tokyo-based Mt. Gox, a leading bitcoin exchange, with half a billion dollars’ worth of bitcoins missing.

But bitcoin as a currency might be a distraction. Underpinning the digital currency is a combination of key computing principles — decentralized time-stamping, public key cryptography and a proof-of-work system — that promise to revolutionize transactions.

Peter Vessenes, CEO of bitcoin startup CoinLab and chairman of the Bitcoin Foundation, said, “Those three could be turned into money, but they could also do a lot of other things.”

What interests some, and worries others, is the promise bitcoin offers in cutting the cost of moving money around.

Bitcoin poses a challenge for those used to handling consumer transactions. PricewaterhouseCoopers estimates that credit card companies charge around 3 percent in transaction fees. PayPal’s cut can go as high as 4 percent. Those same transactions via bitcoin firms such as Coinbase and BitPay, which bypass central financial institutions, are as likely to be free.

However, Visa Inc.’s head of innovation, Jim McCarthy, told an investors’ conference this month that while there are things to be learned about bitcoin, “I don’t see those as the things that are going to tip the apple cart anytime soon.”

Indeed, there is plenty of skepticism that bitcoin will amount to anything, with critics pointing to recent setbacks such as Mt. Gox and the libertarian bent of some of its supporters, as indicators it is little more than a Ponzi scheme.

Some of bitcoin’s doubters come from within. Mike Hearn, a key contributor to the code underpinning bitcoin, said that if bitcoin is going to challenge or win over the banking mainstream, it needs to adopt better security while making it easier to use. And it needs to reach out to overcome the banking world’s anxiety about regulators and its perceived links to crime.

If bitcoin does make it into the mainstream, it is likely to accompany existing technologies.

Bitcoin’s biggest potential market may be among the millions of people with limited access to proper banking services.

Bitcoin naturally lends itself to the idea of a mobile wallet, and of small payments that have so far been too expensive for mass adoption. Users of dogecoin, a variant of bitcoin, for example, raised funds for the Jamaican bobsled team and three Indian athletes to go to last month’s Winter Olympics, and this week raised more than $30,000 to build wells in Kenya.

Bitcoin and its offshoots also offer a way around government currency controls — either by converting fiat currency to a virtual currency that can be sent overseas, or by bypassing the local currency entirely.

Forget bitcoin as merely a currency, said Vessenes, and think of it as a decentralized way to confer and agree ownership.

The smallest unit of bitcoin, the satoshi, could be a token that represents ownership of a share — with details of who should be paid a dividend, or who can vote at shareholder meetings — all built directly into the token.

“Money . . . is just a form of disintermediated trust,” said Pindar Wong, a Hong Kong-based consultant who has been working on Internet-based payment technologies. “There’s a whole scope of innovation here, and we’re just touching the tip of a very big iceberg.”