Payments Exchange


Currency Craze

So what’s behind the buzz of Bitcoin and other virtual currencies?

By Cary Whaley

Virtual Currency Popularity

The reason for the public’s sudden interest in and growth of virtual currencies has much to do with the inability of the traditional banking and payment system to cleanly fit to online and mobile marketplaces. But virtual currencies have had their share of growing pains that have prevented their growth in legitimate commerce.

Here are four main questions that virtualized currencies need to sufficiently answer before they will be widely accepted in the marketplace and among banks:

1. Centralized versus decentralized? Bitcoin is a decentralized virtual currency, meaning that it has no centralized repository and no single administrator. Bitcoin users may obtain the currency through their own computing or manufacturing effort (referred to as “mining”). However, there are also centrally administered virtual currencies, such as XRP, the native currency of the Ripple Network. Such currencies feature a centralized repository and a single administrator with authority to issue and redeem units of the currency.

2. To what degree of anonymity? Initially, Bitcoin’s anonymity proved attractive to its early adopters. However, this attribute is becoming a barrier to broader deployment and can complicate compliance with Know Your Customer and anti-money laundering requirements.

3. Can virtual currencies smoothly interact with established currencies? Price volatility of virtual currencies also presents a real concern, with Bitcoins weathering at least five significant price adjustments since 2011. (Many Bitcoins are acquired for the purpose of currency speculation. A shake in investor confidence could lead to a monetary devaluing freefall for investors and everyday consumers.)

4. How can decentralized, anonymous currencies comply with anti-money laundering and consumer protection regulations? In 2013, the U.S. Treasury required Bitcoin businesses to register as Money Services Businesses and to impose anti-money laundering requirements on their customers, just like traditional banks would for their Bank Secrecy Act compliance obligations.

Meanwhile, California and New York announced plans to develop regulations for Bitcoin and other virtual currencies. For consumers accustomed to the protections afforded by Regulation E and card-based payments, virtual currency provides a harsh reality. There is no recourse in cases of fraud or theft, or if a merchant does not provide the product or service.

One of the timeworn clichés is that any and all press is good press. By that measure, Bitcoin is having an excellent year.

So far this year Bitcoin and its exchanges have been hit by major system crashes, cyberthefts and cyberattacks. It has also been targeted by federal criminal investigations and mysterious intrigues surrounding its principle founders. It has received an extraordinary amount of negative and—amazingly so—positive media attention.

At the same time, Bitcoin has captured at least some of the public’s imagination for three main reasons: 1) it’s a privately minted, non-government-sanctioned currency; 2) its wild currency fluctuations have produced at least two Bitcoin tycoons (the Winklevoss twins?); and 3) it’s a novel currency and commerce invention.

While the focus on Bitcoin has been primarily been as an investment, has recently become the first major online retailer to accept Bitcoins for payments. Part of the potential appeal for merchants and consumers is to have payments that can enable quick transactions that don’t incur foreign exchange costs.

Some consumers are intrigued by Bitcoin and virtual currencies because of their possibility of greater security and privacy. Bitcoin uses a proprietary form of advanced cryptology. Another security measure allows its users to restrict the people or merchants that receive their individual currency. For privacy-minded consumers the anonymity of Bitcoin holds additional lure.

And regardless of whether Bitcoin succeeds or fails, a host of virtual currencies—like Primecoin, Ethereum and Ripple, all Bitcoin-like systems—are poised to gain market share and volume.

While such currency and payment attributes speak at least in part to the appeal of virtual currencies, and why the U.S. banking system should take notice (as a number of regulatory bodies and large financial entities have started to do), several drawbacks of virtual currencies, including their relatively inflexible supply (roughly 12.5 million of the available 21 million Bitcoins have been mined), have some naysayers ready to sound the death knell for Bitcoin, and by extension other virtual currencies.

Additionally, consumers also have a number of practical payment issues to consider regarding the use of virtual currencies, such as how to get funds to and from an exchange, which can be time-consuming and expensive. For example, time is needed to acquire a Bitcoin wallet and tie it to a bank account, then wait for verification via the micro-deposit process. To complete transactions, more time is needed to load (and unload) the wallet via the automated clearing house.

Right now, virtual currencies do not seem ready for prime time. Banks will continue to be reticent to serve as virtual currency exchanges until the above issues are resolved. In the meantime, community banks need to monitor the development of virtual currencies and be poised to be a potential fast-follower.

Community banks also need to play an active role in industry efforts to review and fine-tune legacy payments systems to be more competitive with online and mobile channels in three ways:

Speeding up payments posting and messaging. Enabling legacy payment systems to facilitate fast and efficient payments is an urgent priority for bank-centric payments. ICBA strongly supports the Federal Reserve Banks’ Payments System Improvement project and has urged the Fed to develop a ubiquitous, near-real-time payment system, which would give consumers the ability to make last-minute payments and provide a near-real-time confirmation of good funds.

Masking customer financial information. Virtual currencies send only value. Legacy payments systems should do the same. Personally identifiable data should be masked during the transaction, thus protecting the customer against identity theft and fraud.

Strengthening transaction security. Recent data breaches have renewed a focus on payments data security. As the industry looks at chip and tokenization technology, banks should emphasize their already superior customer care standards and error-resolution capabilities.

Regardless of whether virtual currencies gain traction among banks, it is vital for community banks to remain relevant to customers that adopt online and mobile channels. Addressing these three key issues will do much to keep community banks relevant in the minds of merchants and consumers.

Cary Whaley ( is ICBA’s vice president, payments and technology policy.