Alan Safahi is CEO of ZipZap, and can be found on Twitter @alansafahi.
Digital currencies like Bitcoin are getting their moment in the spotlight. Over the past few months, the value of the decentralized currency (i.e. currency that is not governed by the central or national banks) has been increasing while national economies are taking a dive.
Recently, Bitcoin market cap (i.e. total value of all Bitcoins issued) reached the $2 billion mark, surpassing small countries like Liberia and Guinea.
With this new threshold, Venture Capitalists and other investors are now paying attention and funding companies in the crypto currency segment where Bitcoin is the largest player. We have seen recent investments in companies like BitInstant, BitPay, Coinbase, Coinlab, with many other deals in the pipeline, paving the way for Bitcoin to reach new highs in market cap and value.
Even with the current hype, though, Bitcoin is merely a small blip in the overall FX market, which is moving at an estimated $4 trillion a day. However, it is only a matter of time before Bitcoin, or another alternative digital currency, will reach mainstream adoption status.
But, there are several challenges to be overcome before any “alternative” currency can reach global, mainstream adoption:
Ease of Use: Widespread adoption will depend on how quickly and easily consumers can adapt. Bitcoin is far from easy to use and although there are some wallets available for free download online; buying, sending, receiving and selling Bitcoin has not reached a level of intuitiveness consumers need to be for everyday use.
The concept of mining for Bitcoins is puzzling and complex for the average person. Companies like BitInstant have been created to help consumers rapidly pay funds into Bitcoin exchanges like MtGox, simplifying the process to go from dollar to Bitcoin and back.
There are also companies like TradeHill and Exante who are targeting savvy investors with their sophisticated tools that would enable easy entry into the Bitcoin market and bulk trading.
While these companies have done a great job of simplifying the Bitcoin buying and selling, much more needs to be done to streamline this process.
Consumer Awareness: Not quite reaching the level of general conversation topics, Bitcoin will only be considered “mainstream” when 95% of consumers are aware of what it is. It took gift cards about a decade to reach this level of consumer awareness. Given its current growth trends, Bitcoin may be able to reach this level of popularity in less than five years. Recent media attention has put the spotlight on Bitcoin, driving consumer awareness (and Bitcoin prices) to new highs.
Government Oversight/Protection : Many Bitcoin supporters, including early adopters tout its anonymity as its best feature. However, I feel nothing could be farther from the truth.
To start, the anonymity of Bitcoin is not 100% certain in today’s connected world, especially with close partnerships between law enforcement and Internet Service Providers, financial institutions and exchanges. This is actually a good thing. This will ensure that new innovations like Bitcoin are not undermined with negative reputations for enabling prostitution, child pornography, terrorism, illegal drugs and human trafficking.
Recent Financial Crimes Enforcement Network (FinCEN) ruling has required exchanges to be registered. Some industry observers see this ruling as a positive sign that Bitcoin is moving towards mainstream acceptance as a currency while others view this as the first step in a series of anti-competitive measures that will drive smaller exchanges out of business
Like it or not, government oversight is a necessary evil when it comes to protecting the public and will ultimately benefit Bitcoin users who will be served by much stronger and better managed exchanges.
A good example of the proper amount of government oversight can be seen France, where an e-Money license was granted to Bitcoin-Central, a Bitcoin exchange which suffered a series of DDOS attacks and losses in recent days but was able to provide full refunds to all its customer due to the fact that it was fully capitalized.
Merchant Acceptance: There are thousands of merchants accepting Bitcoin but for it to be considered mainstream big box retailers (like WalMart, Home Depot, etc) will need to jump on board as Bitcoin Merchants.
With market caps hovering around $2 billion and millions of consumers using Bitcoin, major retailers will be likely to watch Bitcoin closely and may start considering Bitcoin as method of payment. Meanwhile, many retailers will tip toe around Bitcoin acceptance by initially allowing their partners to resell the retail e-gift cards to consumers online and accepting Bitcoin as a method of payment.
Mobile wallets based on Bitcoins will soon be enabling consumers to shop offline as well as online and pay for food and other goods and services at brick and mortar retailers worldwide. Many retailers are already equipped with QR code readers that helps them accept Bitcoin as a method of payment at the cash registers.
For these retailers, avoiding credit card fees and reducing fraud and chargeback costs may be incentive enough to speed up retail adoption of Bitcoins offline almost as fast as online.
Mass distribution by Financial Service Providers: Retailers are not the only ones looking closely at Bitcoin. Digital currencies in general disrupt financial services with extremely low cost and easy transaction processes. The enhanced consumer experience will challenge large and powerful entrenched players such as traditional retail banks, card networks and money transfer companies.
Some of these entities will try to legislate Bitcoin out of existence while the progressive minded ones will find a way to use the Bitcoin phenomenon to their advantage and adapt this technology to reduce costs, enhance delivery times and better service their customers.
For the past year, my company, ZipZap, has been working with many regulated and licensed global money transfer companies and banks to enable cash-payment for online transactions with much success.
Western Union recently announced that they too would start looking closely at working with crypto currency providers and exchanges.
I believe banks will start offering Bitcoin as a currency in the same way they now sell fiat currencies, travelers checks, money orders and prepaid cards.
This mass distribution through retail bank branches will be the final act signaling the arrival of Bitcoin to the mainstream.
Alan Safahi is the CEO of ZipZap, Inc. a digital cash payment network and an Advisor to OpenCoin, Inc., the creator of the Ripple crypto currency