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E-print | Pay Magazine | Vol. 6 Issue 2 | Fall 2013 | www.paybefore.com

Bitcoin Brouhaha

B

itcoin has catapulted onto the payments scene. At one point this year,
the virtual currency was trading at more than $200. While some
applaud its decentralized nature, others, including regulators, have
become wary of its potential effects.

In Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry.
Paybefore endeavors to present many points of view to offer readers new insights and information.
The opinions expressed in Viewpoints are not necessarily those of Paybefore.

©2013 Paybefore. All rights reserved. Forwarding or reproduction of any kind is strictly forbidden without the prior consent of Paybefore.

Bitcoin symbols: Nick Kinney/Shutterstock.com; thought bubbles: Danijela T/Shutterstock.com

Insights on the


prepaid. mobile. emerging payments.

Why Bitcoin Is Going Gangbusters
and Why It Matters
Viewpoint

By Samee Zafar,
Edgar, Dunn & Company

T

he Bitcoin system offers
a virtual “crypto-currency”
based on an open source
computer program developed
in 2009. The currency is decentralized
and anonymous. So anonymous that
its creator used a pseudonym to hide
his identity and has now completely
disappeared from the face of virtual
Earth.
Many have exhausted the available
management vocabulary to describe it
as a “killer app,” a “major disruptive
technology” and a “powerhouse” that
“lowers barriers to entry.” Already
analysts trained in the field of quantitative finance are propounding theories on how to measure the “intrinsic
value” of Bitcoin. They point to its
soaring value and a little bit of incomprehensible magic that needs to be
explained with incomprehensible
equations. The price of a bitcoin went
erratically upward earlier this year,
then down in apparent free fall, before
steadying itself and then zigzagging,
like a high performance aerobatic
plane experiencing engine trouble.
Surely, there must be the natural
economic forces of supply and demand acting on its unpredictable
trajectory. Where is the demand
coming from?

Who Wants It?
The demand for bitcoins arises from a
number of very different sources.
These overlap, of course, but to make

sense of Bitcoin’s rocketing popularity, let’s look at who uses it and why.
1. Monetary Freedom Fighters:
In the forefront of those who support Bitcoin are the true believers. For
them a virtual currency that
is anonymous and not backed by
a central authority is at the heart
of an ancient good, the teachings of
the founding fathers, an inalienable
right and all that good stuff. These
enemies of monetary tyranny are the
digital libertarians—who believe in
the powers of cryptography to win in
this battle for individual liberties.
Contrary to any misleading images of
libertarians you may be entertaining,
of long haired, rebellious, tattooed
anarchists, these guys are smart and
successful idealists who are motivated by a particular political philosophy and a world view that not
everyone finds comprehensible or
pragmatic.
2. Disillusioned and Desperate: The
second group is made up of those
who have something to lose. These
are the people whose savings are
under threat from recent bank failures
and economic crises in markets, such
as Cyprus. People in other markets
anticipating a Cyprus-like future also
are interested in the Bitcoin system as
a means of preserving their distressed deposits. Decentralized
currency on a server somewhere in
Siberia is better than money in an




The Bitcoin Brouhaha

con
by someone called Jeff Berwick,
whose other ambition was to create a
libertarian expat haven in Chile, until
he realized that an ATM is “hardware”
and therefore, “any government,
anywhere, can just come and take it
away.”

account which could be accessed by a
bankrupt government as and when
needed.
3. The Undesirables: One of the
places bitcoin is said to be used often
is the famously secret Website Silk
Road where, allegedly, contraband
items are bought and sold, money is
laundered and a whole host of illegal
stuff is available for sale except,
allegedly, items that could “harm
others” (although apparently drugs are
available). People who participate in
these activities have a special interest
in Bitcoin, which is their currency of
choice.
4. Gamers and Gamblers: This is
a very big deal. The multibillion-dollar
market for online gaming and gambling is important. People who play

perfectly harmless entertaining games
online or gamble, pay with their credit
cards, bank accounts or prepaid
vouchers. But the great thing about
online gambling with bitcoins and
pocketing your winnings is that no one
needs to know about anything at all.
5. Speculators and Entrepreneurs:
The market price of bitcoins is highly
volatile, fertile ground for those who
want to get in to make a fast buck.
Bitcoins also offer opportunities to
entrepreneurs. Businesses have
appeared overnight offering to store
bitcoins for their customers or process transactions for them. There
also are those who operate large
computers to generate new bitcoins.
Other creative business concepts are
being developed every day, including
the Bitcoin ATM project championed

So Where’s the Problem?
Besides the fact that the Bitcoin
system is currently in service of some,
shall we say “niche” uses, there are
problems on the supply side, too. The
open source program that generates
bitcoins rewards the use of computing
processing power (solving “complex”
mathematical problems and confirming Bitcoin transactions). Transactions
are added to a decentralized transaction log, called the block chain, every
10 minutes or so. The system is based
on distributed computing involving
thousands of “nodes” and needs no
central authority to back it up. The
lack of a central authority is a plus in
the eyes of those who inherently
distrust the role of such entities in
monetary systems.
But what about the role of the guarantor of last resort in times of acute
crises? There is no one who would
bear the ultimate responsibility for
system failure or provide some form
of guarantee in times of unexpected
economic crises.
The threat of regulation is always
a real one. Regulators tend to be
conservative, more interested in public
protection rather than monetary
freedom and are likely to take an
adverse view of any anarchic, self-regulated system where there are multiple
points of failure but no central control.




Why Bitcoin Is Going Gangbusters and Why It Matters

Bitcoin enthusiasts will tell you it’s an
elegant system—an open source
computer program spewing out value
at a managed predetermined rate
limiting the supply, unlike the debasing of real money through quantitative
easing practiced by tyrannical central
banks. There is an obvious analogy to
the mining of gold and other precious
metals. The details and the underlying
algorithms of mining bitcoins are
so arcane and so fiendishly complex
that they are not properly understood
even by Bitcoin developers and
die-hard enthusiasts.
So what if the system screws up like
any other system? What if there is a
massive fraudulent attack by sophisticated hackers using algorithms of an
even higher order than the so-called
“unbreakable and impregnable”
self-sustaining loops of the Bitcoindistributed servers? And even if all
goes smoothly and the Bitcoin
system succeeds to represent a
stable digital currency, what would
prevent a clutch of clones from
entering the market and diluting the
demand? The only way to avoid such
a fate is to achieve widespread
acceptance and usage, but that’s
highly unlikely until we all start
dumping our cards and bank accounts en masse and retailers start
accepting bitcoins globally.

With Us or against Us
The possibility of something going
wrong in the process of electronic
monetary genesis or somehow
someone getting through to compromise the integrity of the system
leads Bitcoin enthusiasts to start

hammering into our heads the
extreme improbability of such an
event. If you continue this line
of questioning, you run the risk
of being labeled one of those
who “just doesn’t get it.” The
world seems to be divided into
two zones: The developed world—
those who get it—and the developing world, those who don’t.
Only a few avenues are open for
debate with enthusiasts. You are
allowed to discuss certain weaknesses, such as loss of value if bitcoins are lost or stolen, the
threat of regulation, problems of
system scalability and lack of merchant acceptance. But at the
risk of exposing your ignorance,
you may not question the complexities
of Bitcoin supply and demand or the
underlying crypto-technology.

Conclusion
You don’t need to be a rocket scientist to understand that the current
rate of conversion offered for bitcoins
has appreciated because of factors
that have no bearing to its underlying
value as a payment mechanism. It
may yet grow to be an alternative
cyber-commodity or a standard safe
haven for distressed deposits—provided it survives serious hacker
attacks in the future—but, at this
stage, it’s difficult to see Bitcoin
as an alternative currency for the
connected world that will provide
value to a majority of people.

The lack of a
central authority
is a plus in the
eyes of those who
inherently distrust
the role of such
entities in monetary
systems. But what
about the role of
the guarantor of
last resort in times
of acute crises?
—Samee Zafar, Edgar,
Dunn & Company

wildly successful, it’s likely that several
similar currencies will appear alongside it. The focus of hackers all across
the globe will then surely turn to
these anonymous stores of virtual
value rather than to traditional
account-based payments.
Samee Zafar is a director in Edgar, Dunn &
Company’s London office. He has advised some
of the largest financial services organizations in
Europe and North America on competitive strategy, operations and technology. His expertise
covers retail banking, card issuing and acquiring,

Yes, people still buy gold as an
investment and they’ll buy bitcoins,
too. If Bitcoin manages to become

as well as online and mobile payments. He can
be reached at samee.zafar@edgardunn.com.

©2013 Paybefore, P.O. Box 486, Natick, MA 01760 USA. Email: info@paybefore.com. All rights reserved. Copyrighted material. All material contained in Paybefore publications is the property of Paybefore. Forwarding or reproduction of any kind is strictly forbidden without the
express prior written consent of Paybefore. Paybefore™, Paybefore.com™, Pay Update™, Pay Gov™, Pay News™, Pay World™, Pay Mobile™, Pay Magazine™, Pay Connect™, Paybefore Awards ® and Paybefore Awards Europe™ are the property of Paybefore. All other product
and service names may be trademarks of their respective companies.



Bitcoin Challenges Us All
to Keep Innovating
Viewpoint

By Pervees Faisal Islam,
Centra Payments Solutions

B

itcoin (and the tsunami
that has ensued) has been
characterized as the next
stage in the revolution
of payments—more precisely, of
money. Many have called Bitcoin
a revolution, largely because of its
focus on decentralization; the
separation from a government and
the freedom from monetary control
(cue the cheering and Hacky Sacks).
While that freedom might have been
touted by the early adopters, the
focus for many has shifted. Various
venture capitalists, investment
bankers and other “suits” (yours truly
included), are plunging into Bitcoin
discovery from other points of view
and interests. Why? One reason: No
one is expecting another bubble so
soon after the last one.
Before we get into Bitcoin’s positive
attributes, let’s focus on why there
is opposition, move on to challenges and finally look at the
possible reasons this revolution is
occurring. Bitcoin represents more
than its monetary value, and something more important. Yes, there is
such a thing.

The Haters
Any new player in the payment space
always faces opposition as it gains
traction. Critics usually have a vested
interest in overemphasizing the
negatives as they might have direct
clients, ventures or partnerships with

mainstream or traditional payments
companies. This would be an
attempt to ensure that the market
share of established players doesn’t
erode. Receiving negative criticism
and regulatory pressure is a positive
for Bitcoin. Criticism from any
direction makes the system stronger
and presents in itself a self-defeating
action by that actor (read Antifragile:
Things That Gain from Disorder by
Nassim Nicholas Taleb). Bitcoin and
bitcoins represent, at least for now,
the hope for the movement of money
to be less disjointed, less possessive
and finally as low-cost as possible.
So let’s discuss the most common
talking points of the haters, although
there are many more.

Bitcoin is decentralized
and that is dangerous.
It represents a threat to
the fiat currency.
Weakness is exploited only when it’s
present. The threat to any currency
starts as soon as the currency is
used. If the bitcoin does topple the
fiat, then the fiat let itself be weak,
or at least its elected or appointed
custodians handled it miserably. As
for governments, they are not in the
least bit worried. As long as capitalism and democracy remain, the
taxation system that comes with it
will give the government as much of
a handle on its country and currency as it deserves. In that aspect,
taxation is elegantly agnostic.




The Bitcoin Brouhaha

Bitcoin is anonymous and
attractive to criminals.
Bitcoin is not anonymous. It is
actually, and sometimes unfortunately, with respect to merchants and
their privacy, the least anonymous
form of value transfer mechanism.
Every transaction is verifiable, posted
and immutable for as long as the
Internet is powered. What some tend
to confuse anonymity with is the lack
of identification. We compliance folks
refer to that as KYC (know your
customer) or CIP (customer identification program). Bitcoin gateways or
administrators might have that
burden in the context of regulation
and may not be exercising these
duties fully. In that situation, it’s a
case of assigning responsibility and
accounting for it, not a case of
anonymity for its own sake.
How much happier and more effective
would law enforcement be if someone
handed them a system where every
note of every paper dollar or euro

PRO

could be tracked throughout its entire
journey? Starting from print to circulation, law enforcement would be able
to identify all the points where the
money changed hands. The Bitcoin
network has that record, identifying
points where bitcoins changed
ownership. Aside from the fact that
receiving proceeds of crime in cash is
the most frictionless experience
compared to using Bitcoin, the fact
remains that every Bitcoin transaction
is forever documented and traceable
and public. Therefore, Bitcoin transactions are anything but anonymous.

Bitcoin prices are very
volatile and unstable.
Bitcoin is going through a phase of
discovery and experimentation. The
only thing larger than Bitcoin is its
own hype. It’s rigorously being tested
as a form of currency, commodity,
message transfer solution, information
storage, third-party signature verification and market uptake on new value.
Like any product during experimentation, it’s subject to all the various
components of its market—the media,
world events, large players in the
industry and even insider trading.

Bitcoin operators have
been shut down or seized,
due to …
There is no accounting for stupidity or
a shortage of those willfully ignorant
of the law. Also, let’s not forget
though the seizure, arrests, orders,
fines, penalties, deferred prosecutions
of operators of fiat currency in legacy
institutions that persist. Similarly, not
everyone deserves to handle Bitcoin.

Bitcoin has a commodity/currency
problem. Which one is it?
Most likely, both.
Where does it get its value
compared to a commodity
like gold?
Let’s put aside the aesthetic values of
gold that are sought after. Gold is an
essential component in electronics
and various other industrial applications. Its elemental properties are
responsible for that. Likewise, Bitcoin
is the foundation on which extremely
sophisticated communication models
can be built. After all, it is cryptography at its core. With the rage nowadays of government-spying, various
applications are being built on the
Bitcoin premise and offer a cryptographic form for everyday communication. What needs polishing is the
product branding and user experience. Bitcoin payment systems, wallets
or other applications typically aren’t
easy or intuitive to use.




Bitcoin Challenges Us All to Keep Innovating

My grandmother won’t understand and can’t use it; therefore,
it’s highly unlikely to take off.
A lot of grandmothers prefer waiting in
line and using a bank teller to pay
their bills. It’s the most adorable thing
and should continue.
The Bitcoin operators don’t
have principles of best practices
to abide by; therefore, security
is an issue.
True. There is no PCI-DSS comparative
to Bitcoin. Currently, operators are left
to their own methods of security but
aren’t shy of sharing their practices
and providing open-source applications. This is a constant work in
progress. Some would argue PCI
compliance is a constant work in
progress as well. That being said,
certain primary notions need to be
further discussed in the field of data
and hardware risk.
How is Bitcoin better?
For one, there are no groups or
associations in between, and no
middlemen between users and,
therefore, no interchange fees,
card association dues, acquirer fees,
ISO dues, etc. The whole hierarchy of
bank, acquirer, processor, third-party
processor is flattened to two players:
sender and recipient. In some cases,
there may be a middle party, but its
primary goal is traction and exposure.
The most common way to send bitcoins is to copy someone’s bitcoin
address into an email, paste it and hit
send. There are other ways using QR
codes, but that method is unlikely to

The most important thing about Bitcoin
is not that it’s creating a new payments
model, but rather shaming the current
payments models and disclosing their
flaws. Bitcoin demands that the current
leaders in payments constantly innovate.
—Pervees Faisal Islam, Centra Payments Solutions

become an optimal form of payment.
This opens the door for innovators.
The most important thing about
Bitcoin is not that it’s creating a new
payments model, but rather shaming
the current payments models and
disclosing their flaws. Bitcoin demands
that the current leaders in payments
constantly innovate. Bitcoin also has
accelerated the impetus of regulators
to be more vigilant about the shift in
the payments landscape. Overall, it has
turned the discussion of how we move
money upside down.

ensure that the complacency to
innovation is constantly averted. If
some unknown guy can develop
something that in five years gains the
largest market share in the news and
worldwide discussion of payments,
somewhere out there, some product
and marketing managers need to be
shown the door.
Pervees Faisal Islam serves as director of
compliance advisory services for Centra Payments
Solutions, a compliance consultancy based in
Washington, D.C. An AML, compliance and
fraud-prevention practitioner at heart, Islam
frequently advises companies with a variety of

Whether it’s Bitcoin or another cryptocurrency, or some other form factor
that becomes the next craze in payments, one thing is certain: Traditional
payment companies have to exert the
most amount of pressure on their
product and marketing managers and

payment platform and nontraditional money
transfer systems. He has held several executive
positions at payment processors, money transmitters and online payment firms. Islam is a critical
tactician for Centra’s social commerce, e-commerce and payments systems clients. He can be
reached at p.faisal.islam@centrapayments.com.

©2013 Paybefore, P.O. Box 486, Natick, MA 01760 USA. Email: info@paybefore.com. All rights reserved. Copyrighted material. All material contained in Paybefore publications is the property of Paybefore. Forwarding or reproduction of any kind is strictly forbidden without the
express prior written consent of Paybefore. Paybefore™, Paybefore.com™, Pay Update™, Pay Gov™, Pay News™, Pay World™, Pay Mobile™, Pay Magazine™, Pay Connect™, Paybefore Awards ® and Paybefore Awards Europe™ are the property of Paybefore. All other product
and service names may be trademarks of their respective companies.

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