By Jon Matonis
Saturday, May 4, 2013
Naturally, some bitcoin businesses will see this as PayPal moving in to usurp
bitcoin’s popularity and momentum in the marketplace. But, depending on
your outlook, it may not be all negative and it raises the identical
issues that a bank would face if embracing bitcoin, especially since
PayPal is now viewed as part of the legacy apparatus.
Speaking as if PayPal represented some sort of global payments umbrella, CEO John Donahoe told the Wall Street Journal,
“It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin
closely. There may be ways to enable it inside PayPal.” I find this
statement funny, particularly in light of the fact that WordPress’ reason for accepting bitcoin was that PayPal disabled certain parts of the globe for them.
Let’s examine what it could mean when something like Bitcoin, that is both platform and unit, is absorbed into something like PayPal that is just platform. Phil Archer writing at The Genesis Block
categorized the four areas of likely impact — online wallets, escrow
services, merchant processing, and exchange services. PayPal account
funding alone is not exactly bitcoin sitting on the PayPal payments
network, so that use case is not included in the analysis. Archer
concludes that PayPal’s immediate advantage would be in the first two
areas with eventual game-changing impact probable in the latter two.
While I tend to agree with the category choices, the
analysis overlooks what the PayPal-Bitcoin world would not be getting
(or, what it would be losing).
Firstly for the consumers, the new PayPal paradigm would look like a Coinbase
on steroids with massive connectivity into your bank accounts and even
more intrusive data collection. As a fully-regulated money services
business (MSB) and licensed money transmitter, PayPal would be the
undisputed gorilla in the U.S. marketplace with online wallets and fast
exchange services. Of course, escrow services would be welcomed because
this model is almost always needed in a free market and banks could look
to provide this functionality as well.
However, what would consumers not be getting in this bitcoin
nirvana? Not a huge fan of transactional privacy, PayPal would have to
link your identity to your account and eliminate the user-defined
privacy aspects of bitcoin. This has the effect of reducing bitcoin’s
important cash-like qualities. While it may be convenient for exchange
services to be an integrated part of your personal online wallet, it is
Furthermore, it’s unlikely that PayPal would reach into many new
countries that it doesn’t serve today because it would need the banking
infrastructure to do so. By the way, that is the same situation for
Coinbase too. So consumers would not gain anything in terms of worldwide
access. Also, consumers would not get unimpeded access to their funds
because it’s doubtful that PayPal will modify any of their current policies on account suspension.
Secondly for the merchants, the new PayPal paradigm would offer
merchant processing services similar to BitPay with exchange rate
guarantees for conversion into national currencies. As BitPay is more
nimble with first-mover advantage and low-cost pricing, they are
considered a likely acquisition target. PayPal’s distinct advantage in
this area comes from leveraging its installed merchant base, however it
is unclear how fee savings with bitcoin could be passed on to merchants
due to the potential cannibalization of PayPal’s other revenue streams.
Larger merchants maintaining their balances in bitcoin and managing
currency risk internally seems like the most efficient practice, but
it’s unlikely that PayPal would offer that option for free. As part of
the PayPal network, merchants would not enjoy the attractive bitcoin
benefit of “no account freezing,” because without segregated bitcoin
balances, a merchant’s overall funds could be ensnared in an account
Also, when it comes to specific merchant categories being restricted
like online casinos or prescription drug sites, a PayPal-Bitcoin world
is unlikely to remove the blocks on those merchants. It is a symptom of
having one foot in the old banking and credit card world and one foot in
the new decentralized and nonpolitical currency world. Perhaps, the
PayPal executives view bitcoin as creative destruction but somehow I don’t think so.
My advice to PayPal and other conglomerates “looking into” Bitcoin
with a shoehorn approach is to understand how authorization, clearing,
and settlement occur nearly simultaneously within the Bitcoin
distributed transaction network. Enhancing, rather than diminishing,
that feature is the key to success. Bitcoin doesn’t need PayPal to be mobile, but PayPal probably needs Bitcoin to become seamlessly mobile.
About the best that could be said of any potential arrangement
between PayPal and bitcoin is that it would bestow public credibility on
bitcoin as a “unit of account” or new currency code. However, squeezing
only the monetary unit portion into a legacy payments platform inserts
an intermediary into a decentralized system and dilutes the value of the
whole. Not to mention that Bitcoin will simply outlast PayPal.