Co-authored by Leonhard Weese. Zeall is the co-founder of CoinPip, a Singapore-based cryptocurrency payment processor for offline merchants. Weese is a Hong Kong-based bitcoin enthusiast and economist. He is working on a mobile e-commerce platform.
This article is a reaction to ‘Why Singapore doesn’t need Bitcoin’ by ZDNet’s Eileen Yu.
As technology progresses and as we streamline our businesses and lives, the buying and selling of goods will become increasingly digital. However, we are starting to encounter a brick wall in paying and charging for them.
While debit card systems like NETS have emerged in Singapore as an easy way to pay in stores, debit card systems are often fragmented geographically and can’t be used internationally, while credit cards are difficult to obtain for many.
The international credit card market is served by an uncontested duopoly of American companies who are able to extract between 3 to 5 percent of a transaction value as their revenue. This very often exceeds the profit margin of the Singaporean entrepreneur that worked hard to put that product onto the market. Credit card payment terminals are even more difficult to obtain for small and young businesses, cutting businesses especially in developing countries off from global trade.
Credit cards are not secure
Credit cards have one fundamental flaw. It is not the customer who initiates the transaction, but the merchant. Anybody who knows a credit card number and a little bit of meta-information (the number on the back of the card as well as the name) can initiate a payment. Everybody who you have made a payment to is able to initiate as many payments as they like as they have all of this information.
With a bit of social engineering, a hacker could easily often credit card information about customers and use it to compromise their other accounts. It is also possible to break into a merchant’s data warehouse, which recently happened to Target (a major US retailer). These grave security breaches show how credit cards are inherently unable to serve payments in a digital age.
Since credit card usage requires a lot of trust between the merchant and the customer and between the merchant and the credit card company, a lot of vetting needs to be done before a merchant can start accepting payments. This system is far from working well, with many legitimate merchants being barred from trading while fraud is still occurring regularly.
In the Bitcoin protocol, however, it is the customer who initiates payments. Making a payment to an account does not expose the payer to unnecessary risk. If you make a $10 payment to a fraudulent website you might never see the money anymore, but they will also not be able to empty your account. Similarly, publishing your account information does not expose you to any risk at all.
The reason why this is so because Bitcoin utilizes a private key system. This means that a user will disclose a public Bitcoin address to a merchant to conduct a transaction, but that transaction will still need to be verified with a private key, which only the bitcoin owner possesses. The public address cannot be used to sign off on transactions.
The reason why credit cards are widely used despite all their flaws is because customers see very little of that risk. They receive chargebacks when a fraudulent charge is made and can carelessly give out their account information with the ease of mind that everything is insured.
Credit cards suck for merchants
It is the merchants who currently pay for these poorly working security patches. It will also be the merchants who will drive initial Bitcoin adoption. It is very frustrating for them to see large numbers of customers having their credit card payments rejected and turning to another store or another solution.
Bitcoin’s fluctuating value should not be a concern. Merchants can partner up with one of the many Bitcoin payment providers who take care of security, IT integration and who conveniently exchange the bitcoins into fiat currency and deposit them into the merchant bank accounts, usually within two to three days. That’s about 40 days faster than credit card companies.
This of course comes at a cost, but so far there are many competing providers offering differing service plans. Some take a 1 percent cut, other charge for a flat monthly subscription. It is not clear what business models will become successful, but we can be assured that unlike with credit card companies it will never be possible for a payment provider to establish themselves unfairly in the market and lock the merchants and their customers into an uncompetitive duopoly. That’s because Bitcoin is a decentralized protocol where no single entity can gain ownership.
While money laundering and illegal actions are always a concern when money is involved, cash will by far stay the most attractive form of money for criminals. Bitcoins are easy to trace as each transaction is forever encoded into the blockchain, the decentralized ledger that records every Bitcoin transaction in history.
Exchanging bitcoins into cash is not an anonymous act at all and one which already is regulated in a similar way as foreign exchanges are. For instance, Bitcoin exchanges in Singapore abide by Know Your Customer practices where users are required to submit identification information.
Last but not least, Hong Kong is fast becoming the capital of cryptocurrencies outside the United States. Singapore has to take the opportunity to grab a portion of the crypto market share otherwise it will be left behind. Already, bitcoin exchanges in Hong Kong are leaving Singapore in the dust, processing 11,000 BTC a day compared to Singapore’s 200.
Singapore is known as one of Asia’s greatest startup and innovation capitals, regardless of whatever industry. We certainly hope Singapore will stay that way for the long term.
(Editing by Terence Lee, photo credit: antanacoins)
Want to learn more? Be sure to check out our Bitcoin debate at Startup Asia Singapore 2014 on May 8.