Bitcoin's promise: A financial revolution the web's been waiting for

Bitcoin's promise: A financial revolution the web's been waiting for

Bitcoin may not be the messiah of a new currency its hardcore 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," says Manu Sporny, CEO of web payments 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, Sporny and others say, will be a meeting in Paris next week hosted by the World Wide Web Consortium, or 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, as well as the US 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 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 timestamping, public key cryptography and a proof of work system - that promise to revolutionize transactions.

Says Peter Vessenes, CEO of bitcoin start-up CoinLab and chairman of the Bitcoin Foundation, an advocacy group promoting its adoption: "Those three could be turned into money, but they could also do a lot of other things."

Cheaper deals

What interests some, and worries others, among those due to attend the Paris meeting is the promise bitcoin offers in cutting the cost of moving money around.

"If they can have it cheaper, they will make it cheaper," said Marcus Swanepoel of Switchless, a Singapore-based company offering to integrate bitcoin processes into traditional banks and telecom companies.

Bitcoin poses a challenge for those used to handling consumer transactions: PricewaterhouseCoopers estimates that credit card companies charge around 3 per cent in transaction fees. PayPal's cut can go as high as 4 per cent. 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 were things to be learned about bitcoin, "I don't see those as the things that are going to tip the apple cart anytime soon."

MasterCard and Visa will not be at the Paris meeting, noted Sporny.

"Getting whacked"

Indeed, there's 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's little more than a Ponzi scheme.

Some of bitcoin's doubters come from within. Mike Hearn, a key contributor to the code underpinning bitcoin, dismisses talk of Ponzi schemes, but worries about complacency. "A lot of people seem to believe it's a done deal, a dead cert. And I don't see it that way at all."

Hearn says 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 then, it needs to reach out to overcome the banking world's anxiety about regulators and its perceived links to crime.

"The banking blockage, where all banks are afraid of touching bitcoin because they're afraid of getting whacked by governments, is still the biggest challenge that bitcoin faces," he said.

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