Thursday, March 29, 2012

Bitcoin Doesn't Need a Dongle

By Jon Matonis
Saturday, March 24, 2012

There's a lot of talk about dongles recently. Square has always relied on a dongle and now PayPal is sporting a fancy triangle-shaped dongle, nicknamed the 'Blue Dorito'. Both of these dongles equip your mobile phone to accept and process credit cards securely by inserting the device into the smartphone's 3.5mm audio input jack. Apparently, this passes for financial innovation in mobile payments but I file it under the 'not-disruptive-enough' category. Truly-disruptive financial innovation is already here with decentralized bitcoin. And, bitcoin doesn't need a dongle!

Bitcoin bypasses the need for an external dongle because it bypasses the existing railroad tracks of the entrenched legacy players like VISA and Mastercard. Just as the newly-funded VC favorites of Boku, Jumio, and CardSpring layer on top of the legacy network, Square and PayPal repeat the strategy of keeping the banks and credit card processors in the transaction loop, and the lion's share of the revenue loop as well. This might be a good short-term bridge but the real action is taking place with solutions that route around the legacy networks by replacing the unit of account, or numéraire. The easiest way to circumvent the high-fee transaction networks is to utilize a different currency unit since it does not come with the same handicaps and legacy restrictions of a political currency unit. Erik Voorhees states that we need to advocate "the separation of money and state."

"The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010," according to research and advisory firm Aite Group. With massive new opportunity like this coming into the mobile payments arena, why not harness it into meaningful paradigm shifts rather than expand and enrich the existing processors and centralized networks?

The mobile payment landscape for lightweight bitcoin android apps includes Bitcoin Wallet, Bitcoin Android, and BitcoinSpinner, with Paytunia on the horizon. With the more difficult to obtain approval from Apple, the App Store offers BitPak as the first bitcoin wallet for the iPhone -- that is if you're willing to wait for the entire block chain to download. Amazingly, these functioning wallets allow you to send and receive bitcoin from your smartphone today. For instance with Bitcoin Wallet, you can send bitcoin between phones just by scanning the QR code that is displayed, by invoking the application, or via NFC (Near Field Communication).

So, what is a typical bitcoin transaction flow without involving banks or credit card networks at the point of sale? As a merchant solution provider, U.S.-based Bit-Pay bills itself as the world leader in bitcoin payment processing and they have produced a simple mobile checkout demonstration video. Merchants enjoy no risk of chargebacks, no costly PCI compliance, global acceptance from any country, and low .99% pricing compared to 2.75% and 2.7%, for Square and PayPal respectively. Of course, the .99% pricing applies only if merchant maintains the balance in bitcoin rather than instantly converting out to US Dollars. Bitcoin 24/7 is an alternative merchant services provider based in Ireland.

A bitcoin processor can be beneficial for a number of reasons including overall risk mitigation and managing the process for adequate block chain confirmations. Some third-party innovators are even making advancements in "green address" techniques that enable secure, zero-confirmation transactions. However, without a third-party processor, which is entirely possible because no special hardware is required other than a smartphone or merchant deposit card, transaction fees can be at or near zero.

Mobile wallet security in general is constantly improving and it is already more secure than a physical wallet due to the nature of passwords and remote back-ups. Bitcoin certainly has a slot in the digital mobile wallet of the future. Frictionless mobile phone remittances to a worker's home country, such as Africa, may just be the killer app for bitcoin. I'm sorry but fancier buggy whips and dongles are not disruptive.

1 comment:

  1. I've played around with the Android Apps Bitcoin Spinner and Block Chain, which you don't mention but it is a derivative of Bitcoin Wallet. What amazes me is how immature they are. I managed to stuff up both and if I hadn't exported the private keys first would have lost the coins. It is hard to export and import private keys and a lot more trouble than the average person would bother with. Accounting is confusing too. You can easily end up with lots of Bitcoin addresses and a confusing transaction history. I'm sure they will get better but they are not consumer friendly yet.

    However, once you master the app, payments are surprisingly fast and easy. Payments between apps, to a desktop client with the full block chain and a merchant were notified in seconds. With a voluntary transaction fee of about 0.25 US cents, transactions are confirmed in an average 5 minutes. If you don't offer a transaction fee it can take a day or so and Bitcoin Spinner doesn't allow you to opt out which is wise. The risk of double spend is low so I'd have thought when a fee is offered most transactions will not require confirmation and are effectively instant. Bitcoin transactions are very practical, much easier than Visa, Paypal etc and you only risk the payment unlike credit card payments where merchants, particularly hotels and hire car companies, often add unexpected charges. A wallet with a small balance doesn't need much care as losing it matters little.

    What I can't see is how a payment processor could charge a 0.99% transaction fee. Merchant software and support would cost but payment as a percentage of turnover seems odd as payments would be direct rather than through a third party. Even if the third party is processing the transaction it would make sense for the payment to be direct and then there is no way to take the cut. The bitpay video is confusing. The scenario they show requires only two bitcoin wallets and no role for a third party at all.

    One expense everyone pays is the cost of supporting the network. With 50 new bit coins every 10 minutes this is currently running at US$1,500 an hour which seems a large sum for such an immature technology to support. Of course the cost, as represented by the exchange rate would drop if it wasn't supported so even though Bitcoin apps are immature and Bitcoin is hardly used, people are paying it.