Opportunities and risks for digital currencies in retail

Like many within the payments industry UK Cards Association has been tracking the development of digital currencies, including Bitcoin, with interest for some time. This is in respect of both its potential to offer consumers and businesses new low-cost payments, and as being a payment type that can be applied across a full range of digital channels. 

The tantalising question is whether Bitcoin becomes a viable alternative which could displace the traditional use of established payment products, including cards.

A clear and fundamental advantage is that the digital currency has been designed to exploit and reflect the underlying protocols and workings of the internet. This stands in contrast to the incremental costs of having to integrate an established payment process, such as cards, to fit with the digital age, particularly with its requirements for external authentication, authorisation and 'clunky' user experience.

As part of their evolution, digital currencies, such as Bitcoin have also found a way to address the security concerns people have with internet payments. The developers of these currencies, through creation of an internet distributed ledger, have found a way to transfer digital property from one user to another, where the transfer is guaranteed to be safe and secure and everyone knows that the transfer has taken place. In doing so, there is no need to enter sensitive personal or account data, with the legitimacy of the transaction instead being validated and proven through cryptography and mathematical law (i.e. 'the block-chain').

There are significant advantages to be gained if consumers and businesses are prepared to embrace Bitcoins, not least as a commercial 'hedge' against the future 'value' of  fiat currency and their equivalent paper-based abstractions (e.g. shares, bonds, options, ETFs etc).

Some of these benefits might include:

Many of these attributes will be attractive to retailers and businesses. It is no surprise to see nimble and forward-looking retailers and payment service providers alike (e.g. Stripe) already accepting and processing Bitcoins as one of a broad range of payment methods, and user interfaces, on offer to the consumer.

One of the key features of Bitcoin as a currency is its value of 'infinite divisibility'. I can foresee the re-emergence and widespread use of 'micropayments', whereby tiny individual sums can be charged on a 'per-article' or 'per-video-play' basis. This would provide a genuine alternative to the traditional '‘pay-wall' structure that most mainstream publishers have adopted when monetising and delivering their digital content offerings.

Similarly, it might offer a useful billing alternative to subscription fees; providing a happy medium to the pervading 'freemium model' as is currently used for most digital goods/ services and which has become the de-facto choice for most in-app billing purchases.

Forecasting its future potential use, there have been some well-publicised risks and significant security breaches reported recently. Examples include users failing to protect their own digital assets, or, problems through the theft of those assets as held by a 'trusted' third party (Bitfloor 2012), or, indeed, where denial of service attacks have targeted key suppliers (Mt. Gox 2013).

Similarly, the pseudonymous nature of digital currencies could attract criminal activity. It would be remiss not to acknowledge that Bitcoin's reputation has been tarnished by the well-publicised use of the currency to trade illegal goods on the deep-web black-market site Silk Road, which has heightened suspicion of it in being a credible 'store-of-value'. Further scepticism is raised because of the currency's extreme fluctuations and volatility in price.

However, perhaps the danger is in looking solely at the currency and not the platform. This negates its potential as a low cost payment system and a medium of exchange seamlessly designed for the 21st century and the interconnected age in which we live.

Concerns around fraud and security are understandable but these are no more significant to digital currencies then they are for other more traditional payment types. The primary difference is that, in a digital world, there exist greater opportunities and more flexibility afforded to solve such problems because of amendments that can be made to the underlying coding of the protocols themselves.

There is no doubt that concerns about fraud and security, coupled with the uncertainty that exists around future government and/or regulatory intervention, is holding back more widespread adoption by consumers and retailers.

To counter this, developers and trusted service providers (e.g. Armoury/Coin Jar) are building products and services to address the security of wallets, as well as putting in place greater protections to build the supporting and outward facing infrastructure. Forward-looking investors are supporting this drive but the risk of heavy handed regulatory interference would be an unnecessary and cumbersome impediment.

In our recent response to the HM Treasury's Digital Currencies 'Call for Information', UK Cards discussed all of these points and urged restraint in imposing strict regulation at this stage. Instead, we believe that any intervention has to be proportionate and follow a broad principle of being 'light' and/or 'right-touch' in approach.  

A heavy-handed government approach will only serve to undermine, rather than enhance, the conditions that will be needed to help explore the value and concept of mass digital currency usage.

Digital currencies should be allowed to run in parallel and tandem with other payment mechanisms while their full potential is realised. This will allow time for consumers, merchants, miners and developers/entrepreneurs alike to refine their proposition and build a platform that can be used as a viable alternative.

As the internet was allowed to flourish, and as specific applications and use cases were developed, so too should these protocols be free from the economic censorship that is prevalent in the current global financial system.

Central controls, leading to exaggerated distortions in the market, from central bank intervention, will likely hamper the development of alternative currencies and remove many of the inherent features that make the use of a distributed ledger so attractive and ideally suited for the digital age.

Perhaps what is at stake is as much a philosophical debate addressing the future role of money and whether this marks a return back to its original and intended state, as a neutral (rather than political) tool, which serves and encourages the free-flow of commerce.

David Baker is head of the payment innovations unit for The UK Cards Association. He will be writing a regular column for Essential Retail on the evolving payments landscape and its impact on the retail industry.

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