Bitcoin: Cutting Its Own Path to Adoption

Transitioning away from fiat currencies — the worthless money issued by central banks — to money that retains its value, is transparent and reliable in its governance, and cleanly circumvents the labyrinthine regulatory framework of the world’s 195 countries is, for the first time in human history, possible with the invention of bitcoin. Its inventor describes it thus:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution — Satoshi Nakamoto

However, though bitcoin frees us from unjust and discriminatory constraints that foster poverty and economic disparity, its path to widespread adoption has not proven without obstacles. In great part its use has been hampered by the uni-directionality of the system’s capacity id est though one can send bitcoin to another party without touching the banking system, there’s a second leg to most transactions: the receipt of value in exchange for the bitcoin sent (fiat), which need largely be made through the banks.

Of course, one can earn bitcoin through labour, receive it as a gift, or sell a product for it but though these scenarios may one day come to pass en masse, before the system gains the ubiquity required, the world’s populations will need to exchange their fiat for it.

And this goes to the crux of the problem: a banking system that rightfully feels threatened by a monetary supply they have no control over will prove hostile to this second leg.

The inevitability of adoption

In light of the massive expansion of quantitative easing (QE) programmes around the world, which even to the most dense amongst us equates to the loss of purchasing power in our pockets, the conclusion that capital flight-to-safety has become an imperative is as clear, as is that the only safe haven left for money is bitcoin.

Not only is it then any surprise that the smart institutional money is re-evaluating its views on this new asset class, as evidenced by the recent Tudor Investment Corp. disclosure, but that interest at the retail level is rising as well.

Whilst retail adoption of bitcoin is difficult to quantify (see the Buy Bitcoin Worldwide site for analysis), certain metrics are telling — for example, since the start of the Covid-19 shutdown, the number of intermediate verifications experienced by the popular Kraken exchange have tripled.

Similar, have referred and helped people buy > $1mil BTC last 2weeks. Good investors too, long term view, cold stored. New buyers mostly, who never dove in before but become interested due to price window and asset class as an uncorrelated hedge, due uncertain economic backdrop.

— Adam Back (@adam3us) April 3, 2020

Anecdotally the consensus is that a large portion of the surging retail interest stems from new users, as reflected in the tweet above by British cryptographer and inventor of Hashcash Adam Back, which cites the increasing uncertainty of our economic condition as a factor.

What is easy for the hedge-fund manager, however, is difficult for the man on the street. Consider that purchasing $20 of bitcoin requires a $30 wire fee from your local bank. Any sensible person can calculate that to pay a more acceptable 3% for wire, a $1,000 investment must be made… but this leaves the guy with $20 in his pocket out in the cold, unable to participate.

Lets now consider that the number of $20 guys is substantially larger than that of $1,000 or $1M guys, likely by a ratio of 10:1, which according to Statista places 77% of American wealth in the hands of the top 10% . Where adoption is concerned, this matters.

The problem of access to bitcoin can then be solved in one of two ways:

1. purchasing bitcoin with physical cash, or
2. charging the purchase on a credit card

The use of cash would seem like a natural first choice for buying crypto, but due to our governments’ ongoing efforts to make war on cash, this approach has largely been precluded. In the US, for instance, most cash trading for bitcoin has been obliterated by the oppressive diktat of FinCEN, the Financial Crimes Enforcement Network, which prosecutes traders under the alleged charges of money laundering and the operation of unlicensed money transmitting businesses.

Is it illegal for Americans to sell their bitcoin? Clearly not, since it can be sold on any exchange, but sell it for cash and you’ll end up behind bars.

Which leaves credit cards as the sole means of participation in the crypto world. But… credit cards too are highly regulated and not only are they forced to comply with the regulatory animus towards crypto, but also face issues of risk management.

Consequently, despite a great many attempts to sell crypto with credit cards, nary a solution is to be found today.

Credit card processors and risk management

In a typical credit card transaction there are 5 parties: 1) the customer, 2) the bank that issued his credit card, 3) the merchant, and 4) its receiving bank, and 5) the payments network (e.g. Visa/MC).

The network essentially verifies the availability of funds and authorises the transaction but takes no legal liability for the outcome. Because it’s reasonable that a transaction may need to be reversed, it is possible that a chargeback may occur, exposing the merchant’s bank to risk.

The three primary reasons for a chargeback follow from a customer complaint that may allege:

1. that the product was never delivered,
2. that the vendor falsely advertised the product, or
3. that the customer never authorised the charge

When a complaint happens, the bank that issued the credit card immediately refunds the customer, initiating a chargeback against the merchant bank. In most cases the situation leads not only to a loss for the merchant, but to fees charged by the merchant bank.

Merchant banks manage the chargeback rates of their customers very closely, where a 1% rate is considered “high risk” and 2% leads to discontinuation of service to the customer and blacklisting.

To alleviate this problem and facilitate high-risk businesses (such as gambling, pornography, cannabis, etc.) that banks would not otherwise service, one type of payment network participant called an Independent Service Operator (a.k.a. credit card “processor”) may step in and guarantee the transaction. This requires the processor to risk its own capital, hence charging clients for the services with fees upwards of 15%. Such firms which include the likes of Elavon (owned by Bank of America), Square and Stripe today comprise an entire industry.

Breaking the ice

Traditionally, credit card sales of cryptocurrencies have been deemed to be of such high risk that no processor will touch them. The risk, however, is primarily regulatory, owing to the opacity of the government’s position on crypto. Ask the IRS and they’ll tell you cryptocurrencies are commodities. Ask the SEC and they’re securities. Still FinCEN and the Treasury will insist they’re currencies.

With such uncertainty as to treatment, it is understandable that no firm would risk being on the short end of a stick. However, recent rulings on the status of bitcoin and ethereum clarify that these assets are not securities, effectively removing the bane of SEC regulation …which leaves the door wide open for enterprising processors that understand the nature of bitcoin.

Specifically, that any risk of chargebacks may be wholly eliminated as follows:

1. claims that the product was never delivered are easily disproven by simply inspecting the blockchain, which records the amount of bitcoin delivered, the time of delivery, and the destination address, as provided by the customer
2. claims of false advertising regarding the product are impossible as bitcoin is bitcoin. No merchant need make any claim as to the nature of the product beyond properly specifying its ticker symbol
3. finally, claims where customers deny having authorised the transaction are easily refuted by having customers perform a light version of the traditional KYC process e.g. associating the receiving address with photo ID submitted before the purchase

Conclusion

As our economic system continues to deteriorate — driving more of us to poverty — awareness of and appetite for bitcoin is snowballing. And whilst the channels for participation in this safe-haven asset have been clogged by bureaucracy, it turns out that bitcoin is its own solution: as the first product that guarantees zero risk to the credit card processor, it is like an ice-breaker cutting its own path to adoption.