Bitcoin On The PayPal Network

By Jon Matonis
Forbes
Saturday, May 4, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/04/bitcoin-on-the-paypal-network/

PayPal has recently entertained the notion of accepting and clearing the bitcoin unit on its pervasive platform. It’s a bit like the prince joining the revolution. Is this a good thing?

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 fundamentally unnecessary.

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 suspension.

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.

PayPal Assault On File-Sharing Sites Makes Business Case For Bitcoin

By Jon Matonis
Forbes
Wednesday, January 9, 2013

http://www.forbes.com/sites/jonmatonis/2013/01/09/paypal-assault-on-file-sharing-sites-makes-business-case-for-bitcoin/

BitTorrent and Bitcoin were made for each other. An article on TorrentFreak reports that PayPal is requiring private BitTorrent tracking sites to provide them free access for purposes of monitoring user content for possible copyright infringement.

On the very same day, another TorrentFreak article claimed that researchers at Boston's Northeastern University show domain seizure of file-sharing sites to be ineffective and that blocking the money streams to these sites would be a more 'fruitful' solution. And, it is already happening in a major way. The money stream targeting even extends to ISPs that happen to be BitTorrent friendly.

Just as with the payment-oriented attacks against the online pharmacy industry, censorship-resistant bitcoin appears to solve the problem by providing a decidedly nonpolitical currency. Used properly, bitcoin can have the privacy attributes of paper cash and bitcoin doesn’t make morality judgements about what you choose to do with your money. It is purely a value transfer protocol and it functions generally in accordance with the same distributed peer-to-peer principles as BitTorrent.

Of course, many commenters to the articles have already made the connection to a bitcoin solution but with varying degrees of endorsement. Private BitTorrent trackers traditionally rely on donations for the operation of their service and PayPal is so widely used that donations would drop if forced to rely on lesser-known payment methods.

Indeed PayPal is a private corporation and using their payment service is voluntary. But the problem is that, through fear of liability or outright pressure from authorities, PayPal enforces a blanket global policy across legal jurisdictions as a substitute for due process. File-sharing sites comprise both file-hosting and BitTorrent tracking sites each of which may have different legal status in different jurisdictions depending on interpretation and enforcement of various copyright laws.



PayPal is actually setting the stage for its payment successor. "Bitcoin as a viable currency keeps growing in appeal with every incident like this. These companies are undermining their own viability," said a veteran redditor.

According to TorrentFreak, PayPal has started freezing the accounts of private BitTorrent trackers until they provide PayPal unfettered access to the site in question. File-hosting services MediaFire, DepositFiles, and Putlocker have had their PayPal accounts disabled too. Additionally, file-hoster PutLocker had their PayPal funds frozen for six months because they objected to the backend monitoring of their customer's files.

This action wouldn't seem so difficult if PayPal were barely used, but for those unable to prepare for alternatives it can have a significant impact on revenue. "This has a paralyzing effect on the file-hosting industry where 90% of the users of some sites pay using PayPal," declared an owner of a major file-hosting service.

Established private tracker TorrentBytes announced that they may have to shut down unless they can find a way to process payments:

Problem is not lack of donations, but entirely on handling them. As of current every service provider the site has to pay for only accepts PayPal, Credit/Debit cards or direct bank wiring. Only one provider allows bitcoin. Unless we can figure out some realistic and possible way to do site finances completely PayPal free, it seems like the story of TorrentBytes will end very soon after January 2013.

Bitcoin can be accepted fine without any third-party involvement. Spending them remains the bigger hurdle. While services like BitPay and Coinbase exist that will accept bitcoin payments on your behalf and convert out to national currencies, operators like TorrentBytes may not have a bank account or a credit card to use for their own procurement. If businesses don't want to exchange bitcoin for cash physically or load bitcoin onto a surrogate offshore debit card for purchases, bank accounts are still required with most online bitcoin exchanges. Life can be tough in the early days of a stateless currency.

If PayPal free is the goal, several VPS providers already accept bitcoin for payment of hosting services. In turn, file-hosting sites and private torrent sites that have successfully adopted the bitcoin payment method from their users include Lumfile, filecloud.io, and TorrentLeech.

Maybe the researchers have a point about targeting the money stream. It has been speculated that blocking the money stream to governments would solve the regulation of the economy and unbridled spending problems too.

Payments Startup Balanced Innovates In Wrong Direction

By Jon Matonis
Forbes
Monday, November 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/11/26/payments-startup-balanced-innovates-in-wrong-direction/

Under the maxim that there's no such thing as bad publicity, only publicity, the Balanced startup team will not mind this analysis of their uninspired approach to payments innovation. The explosion in collaborative consumption is indeed transformative, but Y Combinator-backed Balanced is a step in the wrong direction precisely because it extends and supports the legacy infrastructure rather than offering a true peer-to-peer payment solution.

Receiving an investment of $1.4 million from celebrity Ashton Kutcher, SV Angel, Airbnb CEO Brian Chesky, Reddit CEO Yishan Wong, and others, Balanced aims to empower the P2P marketplace movement by providing a two-sided payment platform for online marketplaces.

Balanced and Stripe both rely on the credit card giants for source of buyer funds; however, the target customer for Balanced is the marketplace whereas the target customer for Stripe is the merchant. Primarily, all other differences stem from that difference. Their main innovation appears to be the notion of offering disparate existing functionality on a locked-in platform.

In managing the funds collection and funds transfer, Balanced will maintain funds in an escrow account for the marketplace to settle with merchants and the marketplace will be responsible for any chargebacks and collecting information from merchants. To facilitate large-value transactions and to assist in returns and merchant chargebacks, Balanced intends to add an option for bank ACH credits and debits as a payment choice in the near future.

Available only to US-based marketplaces and sellers, Balanced charges 2.9% plus $.30 per transaction. They also charge $.25 per next-day ACH deposit to the seller.

Just imagine if this extraordinary flood of software development talent could be deployed in the decentralized digital currency space where it would lead to reduced transactional friction, shorter clearing times, massively lower processing fees, optional buyer anonymity, and finality of merchant payment.

Yann Rachere, the Finance Director of Anthemis Group in Geneva, Switzerland, thinks that the "current frenzy is temporary" because ultimately "P2P marketplaces need scale to succeed." He also emphasizes that controlling payments is a key component of the strategic plan for achieving scale as eBay and Etsy demonstrate. Control of the payment infrastructure and individual payment choices allows for competitive differentiation among online marketplaces. This is valuable.

On the positive side, I like that Balanced considers themselves an escrow agent in an agora setting. This is the lynchpin area for peer-to-peer marketplaces because it deals with trust -- either your real identity trust or your avatar identity trust. If one can learn anything from futuristic and successful peer-to-peer marketplaces like Fancy, Silk Road and bitcoin-OTC, the lesson is that reputations matter and exploiting the reputational component opens up breathtaking advancements in payments and P2P exchange.

On a reddit post, Stephen Gornick hints at the possible redundancy of the Balanced offering and the potential for bitcoin solution integrators:

"Each of Balanced's customers is a potential Bitcoin merchant. Zaarly is using Balanced to provide payments handling for its peer-to-peer task market. Instead of Zaarly having to build its own, it can used Balanced's API. With Bitcoin there is a little different flow. You can't pull funds from a Bitcoin user. Bitcoin is push only. But Balanced also handles the payout component. And that is a push transaction. Balanced could just as easily offer Bitcoin payments as it could ACH.

But Balanced shows what is needed by the marketplace -- a path that a Bitcoin variant could follow. Balanced is offered in the U.S. only. A bitcoin-variant could operate globally."

Bitcoin, without an intermediary, already solves P2P marketplace payment issues with a decentralized P2P digital currency that is both fair to buyers with optional anonymity and fair to sellers with finality of payment. What a global online marketplace operator needs more is reputation management APIs and bitcoin payment modules for a broad range of e-commerce shopping cart platforms. Certainly, that is functionality that a payments handling platform could provide. Reputation is how you decide who to business with -- Bitcoin is how you pay and get paid.

For example, leading marketplace and shopping cart software that is open source includes Magento, OpenCart, osCommerce, Spree, and Zen Cart. Extensions for multi-vendor support are usually available so building a proprietary marketplace platform for both buyers and sellers is not always necessary. Companies that are advancing the integration of the bitcoin payment choice into these popular e-commerce platforms are WalletBit, Paysius, and BitPay. Also, newcomer BitWasp is an open source anonymous marketplace built to leverage the features of bitcoin and lower the barrier to entry for launching an agorism-based marketplace on Tor or I2P. All could easily incorporate the escrow and reputation functionality.

Sadly, even though Balanced see themselves in an escrow role for buyers and sellers, that is where it ends because they still depend on transactions and chargebacks flowing through the monopolistic credit card networks. Balanced is merely a pass-through for the money. They do not leverage their potential as a reputation aggregator for buyers or sellers in an online marketplace and unlike Wordpress they ignore a vast swath of the world where banks and credit cards are simply unavailable.

I would like to conclude by saying that I wish Balanced much luck in their success, but I can't. I really hope that I never see any of these types of startups again. Overall they are detrimental to global payments innovation and they reinforce the paradigm of declining transaction anonymity coupled with increasing bank fees and restricted merchant segments. At best, they point out the ridiculous pricing and chargeback structure of the quasi-government credit card systems. At worst, they suck investment capital away from more promising projects and distract mind share from where it is most needed.

Update: Balanced has opened a github discussion on the topic "Support Bitcoin as a Payment Method."

What’s Your Bitcoin Strategy? WordPress Now Accepts Bitcoin Across The Planet

By Jon Matonis
Forbes
Friday, November 16, 2012

http://www.forbes.com/sites/jonmatonis/2012/11/16/whats-your-bitcoin-strategy-wordpress-now-accepts-bitcoin-across-the-planet/

Best CEO Toni Schneider in 2007

I awoke to incredible news this morning. Leading web publishing service Wordpress.com announced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.

Then I remembered that WordPress.org powers our online publishing platform. It also powers the blog platform for The New York Times, CNN, Reuters, Mashable, NBC Sports, GigaOm, TechCrunch, ELLE Girl, RealClearPolitics, TED, National Football League, General Motors, UPS, eBay, Sony, and Volkswagen.

Not only does this strategic move bring new unserved customers into the WordPress fold, it paves the way for the online publishing platform run by parent company Automattic not to be restricted by the choices of its payment partners. Companies doing business and accepting payments globally are subject to increasing fees and sometimes arbitrary chargebacks which no doubt impact their bottom line. WordPress would probably not even mind if a large chunk of their mainstream payment processing migrated to bitcoin.

Over 57.8 million WordPress sites are written in 120 different languages creating nearly 32 million new user posts each month.

Criticizing the centralized bankcard associations and citing payment method deficiencies, WordPress spokesperson Andy Skelton said, "Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone." And thus the planet becomes immediately open to their products and services.

"PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions," continued Skelton. "Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control." [Note: WordPress.com updated their original blog post which mentioned Cuba and Iraq.]

Vitalik Buterin of Bitcoin Magazine brings up an equally significant reason for accepting payment in Bitcoin, "Another argument which WordPress did not mention is anonymity. Many bloggers that operate in restrictive regimes do so using pseudonyms for their own protection, and traditional payment methods like credit cards and PayPal are unusable for those bloggers because they expose the payer’s physical identity." With user-defined anonymity and identity privacy, bitcoin offers unparalleled safety to dissident bloggers and free speech advocates.

Initially, processing will be managed by payment service provider BitPay, Inc. of Orlando, Florida. BitPay shields WordPress from having to handle actual payments by immediately converting and transferring sales proceeds into a WordPress merchant bank account. This minimizes the currency risk for the accepting merchant. An important configurable option also allows the merchant to retain Bitcoin balances for their own account and subsequent usage.

Although WordPress states that they are not waiting for a sufficient number of confirmations from the bitcoin block chain, it is largely irrelevant for e-services since upgrades can simply be deactivated or reversed due to a failed payment.

WordPress may not stand as the lone giant for very long since Reddit CEO Yishan Wong hinted last week at the social news site's willingness to begin transacting in Bitcoin for Reddit Gold subscriptions. Reddit is a subsidiary of Condé Nast's parent company, Advance Publications.

As the bitcoin juggernaut continues to roll forward absorbing merchants and customers globally it leaves archaic and unsuspecting payment methods in its wake. As one bitcoin forum member articulated, merchants will increasingly be asked: "What's your Bitcoin strategy?"

WikiLeaks Bypasses Financial Blockade With Bitcoin

By Jon Matonis
Forbes
Monday, August 20, 2012

http://www.forbes.com/sites/jonmatonis/2012/08/20/wikileaks-bypasses-financial-blockade-with-bitcoin/

People shouldn't fear their government; government should fear its people. Publishers and journalists will not be intimidated nor silenced. Now entering day 626 of the financial blockade against WikiLeaks, Julian Assange sits in the Ecuadorian Embassy in London awaiting safe passage.

Following a massive release of secret U.S. diplomatic cables in November 2010, donations to WikiLeaks were blocked by Bank of America, VISA, MasterCard, PayPal and Western Union on December 7th, 2010. Although private companies certainly have a right to select which transactions to process or not, the political environment produced less than a fair and objective decision. It was coordinated pressure exerted in a politicized climate by the U.S. government and it won't be the last time that we see this type of pressure.

Fortunately, there is way around this and other financial blockades with a global payment method immune to political pressure and monetary censorship.

On its public bitcoin address, Wikileaks has taken in over $32,000 equivalent in more than 1,100 separate bitcoin donations throughout the blockade (1BTC = $10.00). But these amounts may be significantly higher, because it does not even include the individually-generated bitcoin addresses that WikiLeaks provides for donors upon request.

Also announced last month, WikiLeaks appears to have found another way around the VISA and Mastercard blockade by using the French national credit card system, Carte Bleue, to process these payments (at least temporarily).

According to WikiLeaks, VISA and MasterCard are contractually barred from directly cutting off merchants through the Carte Bleue system and the French non-profit FDNN (Fund for the Defense of Net Neutrality- Fonds de Défense de la Net Neutralité) has set up a Carte Bleue fund for WikiLeaks.

Time Magazine declares that WikiLeaks "could be as important a journalistic tool as the Freedom of Information Act."

It used to be that people had secrets and the government was transparent; now it's the people that lack privacy and the government has secrets. Freedom of payments is an extension of financial privacy and digital cash-like transactions without financial intermediaries become a critical piece of that foundation. Money was never intended to act as a form of identity tracking or payments restriction and this is why the option for anonymous and untraceable transactions is so vital as society moves to a world of digital currency.

"It is the privatization of censorship, because this is being done because of extreme pressure by the U.S. Government," says Kristinn Hrafnsson, spokesman for WikiLeaks. "It’s extremely important to fight back and stop this process right here and now so that we won’t see in the future, ....where we have the financial giants deciding who lives and who dies in this field."

To those that don't support freedom of payments, consider this financial blockade invoked in the name of political correctness before you dismiss the inherent value of a nonpolitical unit of account and of a decentralized medium of exchange. It should be offensive to most free-minded people that you are not the final arbiter of how and where you spend your money. Bitcoin restores the balance.

Why Apple Is Afraid Of Bitcoin

By Jon Matonis
Forbes
Wednesday, June 13, 2012

http://www.forbes.com/sites/jonmatonis/2012/06/13/why-apple-is-afraid-of-bitcoin/

When you finally grasp the magnitude of Apple’s play in the payments business, it becomes clear that potential competitors will be shunned from the platform. As Daniel Terdiman suggests in CNET, "New Apple features may leave fresh app roadkill in their wake as Apple is likely to undercut several existing third-party applications." With the introduction of Passbook, Apple has launched mobile payments on iOS and competing virtual payment systems, including bitcoin, must be terminated.

Roadkill in payment apps has already occurred and they were never given the chance to be made irrelevant. The decentralized digital currency bitcoin has had two functioning payment applications on the Apple App Store -- Blockchain Wallet and BitPak, both of which have since been unceremoniously evicted. Several other bitcoin-related apps currently appear in the store but they don't seem to be restricted by Apple since they don't enable send/receive transaction capability as the wallets do.

In April, I covered the extraordinary Blockchain Wallet product in Forbes only to see the app abruptly removed from the store in less than two weeks. The explanation given by Apple was that "apps must comply with all legal requirements in any location where they are made available to users." Apple further stated, "it is the developer's obligation to understand and conform to all local laws" and the developer was referred to the legal department for an exact explanation of which law it violates. Clearly, they will not be able to cite a law as no laws prohibiting bitcoin currently exist in any jurisdiction. Fortunately, the wallet app is still available here at the Cydia Repository for jailbroken iPhones.

At about the same time, BitPak received an electronic notification that the first bitcoin wallet for iOS had also been removed from the Apple App Store again citing similar legal reasons. Sadly, BitPak's developer says that he would have continued BitPak development had the app stayed in the store and that he had been working on a revision which would have put the blockchain in the cloud for greater efficiency.

Basically, it boils down to this. Apple realizes that, with their current installed base of 400 million active credit card details, the mobile payments war at the point of sale is largely theirs to lose. Why complicate the strategy by offering competing currencies and competing systems on the iPhone platform? If Apple can facilitate proprietary mobile payments successfully, it can undoubtedly spur demand for more Apple products.

Even though bitcoin payment apps could boost sales of Apple mobile hardware, bitcoin poses a more specific threat because, as its own independent, nonpolitical currency, the third-party legacy players (i.e., VISA, Mastercard, banks) can be bypassed which would disrupt Apple’s partnerships with dongle players like Square and iZettle. Bitcoin payment apps have already demonstrated the effectiveness of QR codes and scanning at the point of sale which is obviously Apple’s bridge strategy prior to full Near Field Communication (NFC) deployment.

According to Caribou Honig, a partner with QED Investors:

"The pending battle for these revenue streams will be the stuff of legends. Never have so many corporate giants been lined up for their piece of the pie. Let’s start with Apple. My thesis is that they are the only company capable of catalyzing adoption of tap-to-pay on smartphones. But which prize do they seek?

I predict they will take no interchange revenue and no fees. They will avoid such barriers to adoption. Advertising revenue will be negligible. Apple’s prize is simply to boost sales of high margin iPhones. The mobile wallet will be a key selling feature and create yet another means to lock people into the iOS platform."

Bitcoin is not the only virtual currency target. The founders of micro-payment service Flattr say that they are the victims of an 'app dictatorship' after Apple rejected the podcatcher Instacast based on its integration with Flattr. Apple cited App Store Review Guidelines 21.2 which states that "the collection of donations must be done via a web site in Safari or an SMS." A Bitcoin Forum member then surmised: "Have the app create the script and route that out through using SMS. I wonder what the difference is though between an app that uses Flattr and an app that uses PayPal, as far as being used to transfer funds from one person to another."

PayPal is a unique and interesting exception. Having been in the App Store since the very beginning, PayPal has the volume and clout to the point of where rejecting it would harm Apple more than PayPal. Also, PayPal holds consumer accounts and processes only national currencies so they are more like a bank and card company combined. However, Apple still hugely regulates what can be done via PayPal. While consumers can send payments to each other and link PayPal to fund their iTunes account, developers selling in the App Store are forbidden in accepting PayPal directly due to Apple’s 30% cut.

Bitcoin might be stymied by Apple for now, but I predict that even the well known PayPal app will join the growing list of roadkill if Apple decides to enter person-to-person payments.

For further reading:
"Does Apple’s Passbook App Make Cents?", Tricia Duryee, June 16, 2012
"Passbook Is the Beginning of Mobile Payments On iOS", Brent Rose, Gizmodo, June 11, 2012
"Understanding Bitcoin", Nicolas Mendoza, Al Jazeera, June 9, 2012
"Apple’s mobile payment plans and its vision for retail", The MultiChannel Retailer, June 2012
"A wealth of wallets", The Economist, May 19, 2012

Why Facebook Never Built P2P Credits Payments

I have always maintained that a 'true' virtual currency will have at least three attributes: two-way convertibility, floating exchange rate, and privacy (or anonymity). Any currency without those attributes is merely an extension of the existing payment structure or a surrogate currency like a glorified coupon. There are some strong legal reasons for companies electing not to support those attributes, including regulation as a US-based licensed money service business and strict AML (anti-money laundering) guidelines. In writing for TechCrunch, Josh Constine explains why Facebook doesn't allow its Facebook Credits virtual currency to be used for person-to-person payments:

"But why hasn’t Facebook built its own way for friends to send money to each other using its virtual currency Credits? Because of significant fraud risks and its focus on making Credits work better for virtual goods purchases where it earns 30%."

"The primary reason Credits can only be spent in games and apps, not sent to other users, is fraud. There are several ways for users to earn Credits instead of paying for them, such as completing on-site offers, or making off-site purchases that are incentivized with Credits rewards through companies like ifeelgoods. If users could transfer Credits to someone else, the occupation of 'Credits Miner' would emerge. These people would earn Credits any way they could and sell them to others for more than they cost to earn but less than Facebook sells them for. This would essentially create a secondary market for Credits and undermine Facebook’s ability to make money on them."

Mining for 'credits' is not necessarily a bad thing and it can tend to increase the overall demand for the nonpolitical currency unit. The so-called fraud (or unfair profit) can always be addressed by floating, rather than fixing, the exchange rate for Credits in the way that Linden Labs has done for the economy of Second Life. Constine correctly hints that the close partnership between PayPal and Facebook is what prevents Facebook from entering the payments business directly:

"To be competitive, Facebook would only be able to take a few percent on transactions, and still it wouldn’t have the base of merchants PayPal cultivated through eBay. Instead, Facebook is focusing on Credits as its platform’s mandatory virtual goods payment processor for developers, where it earns its juicy 30% cut. That business is growing thanks to gaming giants like Zynga, so there’s no need to move into a risky sector such as P2P payments that’s outside its core competencies and dominated by incumbents."

While I believe that to be true for the moment, if Facebook were to address the fraud issue and the legal and regulatory issues of two-way convertibility, it would have an enormous opportunity that PayPal would not -- the ability to create currency at will and earn seigniorage.

For further reading:
"Virtual Currencies, Real Potential", Keith Button, Bank Technology News, November 1, 2011

Bitcoin: Dangerous to Surveillance State

By Hack This Zine, V.13
Fall 2011

https://hackbloc.org/svn/htz/HTZ13_DRAFT_READ.pdf

BitCoin is an online crypto-currency, computer program, and peer-to-peer network that has been called “the most dangerous open-source project ever created”. Politicians, bankers, and police alike have become terrified that people may be able to untraceably send money to each other through the internet. For those in control of the financial and political systems, this is scary and not without reason: the system they depend on to keep them at the top of the pyramid may very well be replaced by one written by some rebel programmers. So what is this crypto-currency and why should anybody care? Let’s take a look. This article is targeted towards an audience that isn’t technically savvy so please keep reading even if you have no idea what cryptography, peer-to-peer networking, or distributed hash tables are.

Bitcoin, unlike traditional payment methods such as cash, debit cards, or Paypal is decentralized, censorship-proof, provides strong anonymity, and can easily traverse large geographical areas without incurring significant transfer fees. You have hopefully heard about the banking blockade that is currently taking place against Wikileaks. Currently PayPal, Visa, MasterCard, and Bank of America are all refusing to allow their customers to send money to the organization[blockade]. Paypal in particular has a long history of suspending accounts and stealing hundreds of thousands of dollars for no reason from organizations such as Cryptome, Tortoise SVN, a Katrina relief fund, Courage to Resist/Bradley Manning Support Network, and Minecraft just to name a few [paypalfreeze]. BitCoin is one example of a technology that can prevent this type of situation from happening in the future.

So, how is Bitcoin different than current online payment systems? Let’s take a quick look at some of the things that make it so unique and useful for activists.

About Bitcoin Anonymity

In the past couple of years, we’ve seen a number of organizations such as local copwatch programs, groups that support political prisoners, and online news sites for activists start to accept donations through Paypal (and consequently debit/credit cards). This nice as it allows groups and causes to quickly and easily receive money from all over the world. Unfortunately, we’re also taking quite a hit in terms of security.

In the same ways that email communication and Facebook give the state an incredible tool for mapping and supressing social movements, so do our current methods of sending money to each other. If your area is lucky enough to have a fundraiser for your favourite political prisoner, then you can just donate cash but chances are this may not be the case and the organizers of this event are probably sending the money via bank wire or paypal anyways. The FBI, Department of Homeland Security, and other organizations in charge of repressing dissent know the biggest threat to U.S. power comes from decentralized, leaderless, geographically dispersed groups of people who we call activists, dissidents and revolutionaries. These types of threats are most easily countered by finding important nodes in the network, and removing them. To do this requires a detailed map of the social network. When you see the police coming down on a comrade or an organization in your movement, this is because their social network intelligence has lead them to believe that they are the ‘key players’ whose removal will deal a below to the movement’s effectiveness. Often times their analysis of who/what is important and difficult to replace is true and the data they use to reach that conclusion is given to them by our poor security culture, the methods through which we communicate, and how we send money.

Bitcoin transactions provide you with payment anonymity. There is no central site or organization with whom you must register or send the transaction through. Instead, you simply run the BitCoin software which creates a pseudononymous address for you on the network which is randomly generated and looks something like this: (1QFnuvD5jK6JMVG4PtDv4GUmDrCnpBRShq). Your address is like your bank account, anybody can send and receive money to it. You can create as many addresses as you like which can each have their own BitCoin balances. This identity is not associated with your real name unless you post it on your Facebook or somewhere else that would be. This is comprable to the name you would use on a web forum or a chat room.

Each BitCoin spent is uniquely tracked through the network, so if you receive a bitcoin or send a BitCoin, anybody can see that transaction. This has to be part of the network to insure that any individual bitcoin isn’t spent twice. Since your real identity is not tied to your BitCoin address, this shouldn’t theoretically be a problem.

So let’s take an example: At a large demonstration, a bunch of people are arrested and a group which we’ll call the Defense Committee quickly forms to raise some legal fees. They set up a website with some information on how to donate. Some people live close enough to the events such as parties, fundraisers, and skate nights they are putting on to simply go there and donate cash. Since there is so much repression going on, the group needs to solicit money from outside their local area so they set up a Paypal account. Over 800 people donate a little under $10,000 which covers most if not all of the legal fees (yay!). A couple days after the legal fees have been paid, Agent Smith comes along and decides to see just who donated all this money. He asks Paypal who happily hands the information with no or barely any legal justification and he now has a list of everybody who donated. He has just been given a powerful tool for mapping the social networks of these dedicated activists which he can use to launch campaigns of repression against them. He also has the justification he needs to perform additional surveillance on these individuals who otherwise may not have even appeared on the radar. These are the same reasons that informants attempt to become administrators on mailing lists, get people’s cell phone records, take video cameras to protests, and become treasurers for fundraising groups: so that they can map out who are the ‘key players’ and neutralize them.

Let’s say that instead of PayPal, the defense committee prefers BitCoin and posts their BitCoin address online. Luckily for them, a number of people and groups in their movement are already familiar with BitCoin and send them a bunch of BitCoins (which they exchange for real cash from a BitCoin exchanger which we’ll get to in a bit). Agent Smith now has a problem on his hands: He has no idea how BitCoin works because it’s a new technology, which means his agency has probably never heard of it. He has to send a frantic email to somebody in another branch of the agency asking what the hell BitCoin is. After some investigation, he is able to see all the BitCoin addresses which sent BitCoin to the Defense Committee’s BitCoin address. Like many organizations, the Defense Committee encourages people to contact them for a “private” BitCoin address. Agent Smith has no idea what those addresses are or who sent BitCoins to them. He spends a couple days researching all these addresses and finds that only a couple of them have ever been posted online before and most of those happen to belong to other legal defense groups so he’s at a dead end there. In the end, Agent Smith is left pretty much empty-handed after exhaustive investigative work which he now decides he probably won’t even be doing in the future.

Lack of Intermediaries

When you wire money through a bank, use a credit card, or use an online payment system like Paypal, you usually pay a transaction fee in exchange for the service they provide you. Depending on which method you use to transfer money, the fees may be small or large and the general rule is that if your money has to cross national borders then the fees go up exponentially. You also end up paying an exchange rate so you can convert your money to some other currency.

With BitCoin, you transfer your money through the BitCoin network (which is run by volunteers and anybody who runs the BitCoin program) and there’s no mandatory fee for transfers. Transfers only take a few seconds but take longer for the network to “confirm” in the same way that you might have pending charges on your bank account/debit card. The lack of intermediaries also makes BitCoin extremely resistant to censorship and the ups and downs of many national economies. The latter feature is particularly useful if your country is financially unstable or in the middle of a political crisis. A BitCoin is a BitCoin and it will be worth the same amount no matter who you send it to or where you send it from. This also means you don’t have to trust your bank or its investment decisions.

BitCoin also can’t freeze your account, has no minimum balance or monthly fees, etc.

Actually Using Bitcoin

1. Download BitCoin

This step is pretty easy. Whether you’re on Windows, Linux, or Mac you can get BitCoin running in less than five minutes (think of how long it takes you to open a checking or paypal account if this seems like a long time). Download BitCoin from bitcoin.org.

2. Get Some BitCoins

Now that you have BitCoin set up and a BitCoin address, we need to get you some BitCoins. You can either buy BitCoins or have somebody give them to you. If you’re setting up BitCoin for an organization that is accepting donations, simply copy your “receiving address” onto your website, blog, or wherever you solicit donations from people. If you have no friends who use BitCoin yet but want to see what a transfer looks like, you can get some free BitCoins at the BitCoin Faucet https://freebitcoins.appspot.com/. You do not need to have the BitCoin program open to receive BitCoins. The network will remember the transaction and it will appear in your program when you start it next. If you don’t see a transaction you expect, keep waiting until the number of blocks at the bottom of the program stops going up. If you’re looking to buy things using BitCoin such as web hosting, pre-paid debit cards, or clothing then you’ll need to buy some BitCoins first. There are a number of places online (and in real life) that will sell you BitCoins which are called “exchangers”. They all offer a certain rate which is pretty close to the actual value of a BitCoin and cheaper in bulk. Depending on which exchanger you go with, you can buy BitCoins with cash, money orders, paypal, credit cards, or checks.

There’s a frequently updated list of currency exchangers at: https://en.bitcoin.it/wiki/Trade#Currency_exchanges. The big exchanges at the moment are Mt. Gox and BitCoin7 but there’s plenty of smaller ones, some of which may be physically near you such as the London BitCoin Exchange.

Since BitCoin is fairly new, the price of BitCoins isn’t incredibly stable at the moment so unless you’re trying to invest in them, just buy enough for whatever transaction you’ll be doing. Keep in mind that your BitCoin exchanger may record your IP address and your BitCoin address, removing much of the anonymity BitCoin
provides.

3. Convert Your BitCoins to Cash!

If you have BitCoins left over or just got a bunch of ‘em and want to turn them into your currency of choice, you’ll need to sell them. You can do this through the same exchangers that you bought them through.

Common Questions

Below are a couple common questions about BitCoin. There are a whole slew of myths out there, so please research them before dismissing this online payment system. For a list of a bunch more (or more technical explanations of the ones below), see https://en.bitcoin.it/wiki/Myths.

How Anonymous is BitCoin?

When used properly, BitCoin can provide you a very high degree of anonymity. The way it is configured by default, it provides you with more anonymity than any major payment system but you probably shouldn’t publicly do anything with it that would get you in hot water. There’s a good explanation of what anonymity it
provides and how it can be improved at https://en.bitcoin.it/wiki/Anonymity. There’s an article about an interesting study into the level of anonymity most BitCoin users have at http://www.newscientist.com/blogs/onepercent/2011/07/bitcoin-is-not-inherently-anon.html. If you want to maintain a high degree of
anonymity, you should use a “mixing service” and proxy your BitCoin connection but that’s beyond the scope of this article.

Can’t Anybody Just Make Fake BitCoins and Spend Them?

This simply isn’t true. BitCoins are made by doing very intensive computations (which become more and more difficult as the network grows). In the same way that counterfeiting money is extremely difficult, counterfeiting BitCoins is because of the cryptography used in it. The “minting” of BitCoins is done by part of the network who donate their spare CPU cycles in order to support it (called mining). In exchange, they get a small amount of BitCoins which often times is less than they spend on electricity and hardware. In other words, you can’t just make a bunch of BitCoins and spend them because you’d have to do the cryptography first which you can’t fake as it’s verified by the rest of the BitCoin network. The more computation that is done, the stronger the network will be.

BitCoin is a Giant Ponzi Scheme/Early Adopters are Unfairly Rewarded

A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value while risking time and money. Late adopters profit from the usefulness of a stable and widely accepted p2p currency. The vast majority of the 21 million possible Bitcoins still have not been distributed. By starting to mine or acquire bitcoins today, you too can become an early adopter.

Isn’t BitCoin Illegal? Don’t People use BitCoin to do Illegal Things?

HELP! THE WORLD IS SCARY! If the in-game currency in World of Warcraft, Gold, and coupons become illegal then BitCoin will be as well. BitCoin is simply a commodity you can buy and sell just like precious metals, jewelry, or cardboard. Their value is determined by what others are willing to pay for them. People use BitCoin to do all sorts of things, the majority of which are legal. Of course people will do illegal things with BitCoin just like they do with cash, cell phones, or knives. Cash is actually more anonymous than BitCoin in many ways and less likely to get you caught. BitCoin also can’t be shut down as long as the internet still exists and is decentralized so the government trying to do so isn’t a huge issue.

Where can I spend BitCoin?

You can spend it at all sorts of places to buy things from web hosting to design services to music and books. Here’s a quick list of places that accept it: https://en.bitcoin.it/wiki/Trade

What happens if my computer crashes?

If you lose or have your “wallet” stolen, which is a file on your computer that BitCoin stores your information in, then you will indeed lose access to all of your BitCoins. This is why if you’re going to have a lot of them or use it frequently then you might want to consider making backups and securing your computer. You can also use an eWallet service, which is a site that runs BitCoin for you and holds your wallet. If you do this, make sure the service has a good reputation and is worthy of your trust.

Links and additional resources:

[paypalfreeze] Paypal Freezes Bradley Manning Support Network/Courage to Resist:
http://www.techdirt.com/articles/20110224/05013913241/
paypal-cuts-off-account-bradley-manning-support.shtml http://
tinyurl.com/5wl2kpr

Paypal freezes Katrina aid:
http://www.wired.com/science/discoveries/
news/2005/09/68788 http://tinyurl.com/5rysdn

Paypal freezes Cryptome:
http://www.theregister.co.uk/2010/03/10/cryptome_paypal/
http://tinyurl.com/3l9km97

Paypal freezes Minecraft:
http://notch.tumblr.com/post/1096322756/working-on-a-fridayupdate-
crying-over-paypal http://tinyurl.com/33zao5f

Paypal Freezes TortoiseSVN:
http://tortoisesvn.net/howpaypalscrewsopensourceprojects.html
http://tinyurl.com/2ckqdx2

[blockade] http://wikileaks.org/Banking-Blockade.html

Getting started with BitCoin:
https://en.bitcoin.it/wiki/Getting_started

Some BitCoin FAQs:
https://en.bitcoin.it/wiki/FAQ
http://bitcoinfaq.com/

A good discussion on the Anonymity of BitCoin:
https://bitcointalk.org/?topic=241.0

Reprinted with permission.

For further reading:
"Cryptocurrency", James Surowiecki, MIT Technology Review, October 2011
"The World's First Bitcoin Conference", Morgen E. Peck, IEEE Spectrum, October 2011
"An Analysis of Anonymity in the Bitcoin System", Fergal Reid and Martin Harrigan, September 30, 2011
"Easily Anonymous Bitcoins", Michael Hendricks, September 30, 2011
"Anonymizing Bitcoin", Andrew Badr, September 10, 2011
"Why Bitcoin is not as anonymous as most users think", Jacob Aron, July 26, 2011
"Bitcoin: A Technical Introduction" (video), Brian Warner, July 21, 2011
"Bitcoin: More Covert than it Looks", Thomas Lowenthal, July 14, 2011
"Bitcoin, gold and the demise of fiat money", Detlev Schlichter, June 30, 2011

I'm Done Helping PayPal

Since I believe that the advent of bitcoin has now made PayPal irrelevant, this will be my last interview for a PayPal study. In April 2011, I was interviewed by Dann Anthony Maurno of Blueshift Research for a strategy piece that he was compiling on PayPal. Below is my excerpt from that study, "PayPal a Mobile Payment Leader But Competition is Fierce". I discussed bitcoin as a mobile digital currency as well as the recent BitcoinJ, a java bitcoin client from Google.

Background:

Blueshift Research's Sept. 22, 2010, report on PayPal found the company still dominating the alternative payment market with 84 million active users. (PayPal now claims 94 million active accounts and 9 million merchants in more than 190 countries.) Mobile payments are in their infancy, but consumer interest and potential PayPal competitors are fueling mobile payment pilot projects. PayPal is in a position to capitalize on the adoption and growth of the smartphone/mobile payment segment and has identified mobile payments and non-U.S. markets as its future growth areas.

Current Research:

In this next study, Blueshift assessed whether PayPal can navigate the numerous competitors emerging in the mobile payment market to remain a leader in the alternative payment industry. Blueshift employed its pattern mining approach to establish and interview sources in seven independent silos:

1) Application developers (3)
2) PayPal competitors (3)
3) NFC manufacturers (3)
4) Industry experts (6)
5) Merchants (3)
6) Consumers (2)
7) Secondary sources focused on the mobile payments industry (4)

PayPal a Mobile Payment Leader But Competition is Fierce

View more documents from Jon Matonis

For further reading:
"Google Android Market the Only Source of Bitcoin Mobile Apps", Todd Ogasawara, SocialTimes, May 19, 2011
"Google releases open source Bitcoin client", Rodney Gedda, TechWorld, March 21, 2011

PayPal Freezes Accounts of Two Bitcoin Exchangers

By Jon Matonis

Over the weekend PayPal froze the accounts of both Morpheus and CoinPal, two online exchangers that sold bitcoin. In taking this step, PayPal is making it clear that they intend to view bitcoin as a full-fledged e-currency and not just a reusable proof-of-work "math puzzle". Ultimately, the enforcement relies upon PayPal's Acceptable Use Policy, which prohibits transactions that are associated with money service business activities, including currency exchanges. So, the real surprise here is that, at least according to PayPal, bitcoin is now a currency. Undoubtedly, this decision will have implications in future legal cases against bitcoin.

PayPal has continually strayed further and further from their original mission of providing an global extra-governmental system of digital currency based around privacy, strong encryption, and e-mail addresses. Most recently, it was decided by PayPal that Wikileaks was not worthy enough to receive donations that utilized its payments platform. Apparently, these unfortunate incidents are part of a long history of PayPal deciding who should and who should not get paid. In 2004, the Daily Pundit blog and the civil liberties TalkLeft blog received letters from PayPal informing them that their accounts would be frozen unless the blogs removed controversial and "offensive material". From Reason's book review by Rodney Balko:

"Both letters came a month after PayPal announced an abrupt shift in its terms of use. The company would no longer permit customers to use the service for purchases associated with "mature audiences," gambling, hate paraphernalia, or prescription drugs, along with a long list of other prohibitions. It would also fine its customers up to $500 for attempting such transactions. Those terms apparently applied to donations to blogs with content PayPal found objectionable.
That's a far cry from the libertarian vision founders Peter Thiel and Max Levchin originally had for PayPal, an online payment service that enables account holders to send money to anyone in the world with an e-mail address. Thiel and Levchin had hoped PayPal would grow to become an extra-governmental system of currency, something reminiscent of the world described in Neal Stephenson's novel Cryptonomicon, in which programmers use encryption to create an offshore data haven free from government control."

PayPal has become the antithesis of a free market monetary system and now they operate as an extension of the establishment. What I find most difficult to believe is how so many people continue to support a system that has repeatedly demonstrated that it knows better than you do when it comes to how to spend your own money. It is certainly PayPal's choice to restrict any transactions that it chooses, but it also proves why a decentralized P2P digital currency like bitcoin is desperately needed in this world.

The Morpheus closure announcement can be found here and the CoinPal closure announcement can be found here.

Interview with Blueshift Research on PayPal, Again

In July 2010, I was interviewed by Dann Anthony Maurno of Blueshift Research for a strategy piece that he was compiling on PayPal. Below is my excerpt from that study, "PayPal Still Dominates Online Payment Industry":

Excerpt

Alternative Payment Experts - All five alternative payment experts said PayPal is the U.S. market leader and will continue to dominate the space. Mobile payments and non-­U.S. opportunities represent areas of growth. One source said PayPal will enjoy significant growth opportunities, especially from its Facebook agreement. Source reported high levels of competition. MasterCard’s API could be a game changer while Visa’s CyberSource purchase could open up a large merchant network to its services.

Jon Matonis, a digital currency consultant and author of The Monetary Future blog, said MasterCard and Visa are not yet significant challenges to PayPal. Still, they could eliminate the need for PayPal if they can match it in offering easy online transactions. Significant opportunities await PayPal, such as moving into direct deposits and, outside of the United States, virtual currency in online gaming and serving the unbanked in developing countries.

1. “With PayPal, you really have to talk about domestic and international, where there are far more challenges. They can maintain their market share domestically, but on the international side, PayPal is not the de facto standard. If you look in the UK, there are companies like Neteller, Moneybookers and Ukash.”

2. “These [developments for Visa and MasterCard] will only have the effect of extending the establishment leaders. They don’t much change anything.”

3. “The credit cards feed in and fund PayPal. But I do think PayPal is threatened by that. They’ve made their market by filling the void left by [Visa and MasterCard]. If they fill the void themselves, that eliminates PayPal’s raison d’être.”

4. “The arrangement Facebook made with PayPal was far better for PayPal than Facebook; it opened up the entire Facebook user base to PayPal, which Facebook didn’t need to do. It’s probably going to double PayPal’s user base.”

5. “What PayPal has to do to increase its market share is to look into its own unit of accounts rather than push through other ones. If PayPal adopted something like paychecks or direct deposits into PayPal, they’d address a major problem of getting cash into the system, which is not coming through a bank or Visa or MasterCard.”

6. “Canada’s doing direct deposits for workers’ paychecks into PayPal. If you got paid that way, how much more would you use PayPal?”

7. “I don’t think you can talk about PayPal’s future without mentioning the virtual currency platform people. gWallet [Inc.] and [Jambool Inc.’s] Social Gold are the two big ones, and SponsorPay [GmbH] in Germany. They allow you to make a spontaneous purchase during a game so you can continue playing. Facebook Credits are coming out as a step toward obliterating that business platform for providers.”

8. “Internationally, Moneybookers and Neteller gained market share in the last two years, not necessarily at the expense of PayPal. One of the reasons they’re gaining is they get into merchant transactions that Visa and MasterCard and PayPal won’t even touch [including online gambling and adult entertainment].”

9. “There’s a split between the developed and undeveloped world [in terms of mobile payments]. Kenya is probably five or 10 years ahead of the U.S. because the need in that country is to serve the unbanked. Mobile payment is preferred in parts of Africa. It’s happening in the U.S., just not as quickly as in other parts of the world.”

Also, see the April 2010 Blueshift Research interview excerpt here.

Interview with Blueshift Research on PayPal

In April 2010, I was interviewed by Seth Agulnick of Blueshift Research for a strategy piece that he was compiling on PayPal. Below is my excerpt from that study, "PayPal's Recent Efforts Secure Its Leadership Role":

Excerpt

Three payment industry experts consider PayPal an industry leader in the alternative payment industry. One source pointed to PayPal’s 130 million membership base and Facebook’s recent decision to partner with PayPal for its online payments. PayPal’s growth could come from transactions outside the United States as well as in-game, in-store and mobile payments. PayPal’s challenges include 15 to 20 foreign PayPal imitators, its decision not to accept online “sin payments,” customer service issues and merchant frustration, and the United States’ slow adoption of mobile payments.

A digital currency consultant, blog author and a former bank and software executive said PayPal’s growth will be somewhat limited by international competition, especially in payment categories where it has chosen not to participate, such as gambling and adult sites. However, its recent deal with Facebook is a huge coup as Facebook could have provided serious competition in the United States with its own payment system. PayPal could break into the brick-and-mortar store market as mobile payments increase. However, its ability to change consumer behavior the way credit cards did likely is limited to certain online games.

1. “They’re going to be limited internationally and by the choices they’re making in restricting some of their categories. If you look outside the U.S., there are probably 15 or 20 PayPal imitators that have sprung up because they’re addressing markets PayPal is either intentionally or unintentionally ignoring.”

2. “There are a lot of categories they restrict. They restrict online gambling, which is very big in Europe. They restrict the adult sites. They are now restricting the prescription drug companies. Those are the things that have given their competitors an opening, so I don’t think they’re going to just grow and grow unchallenged. I think they’ll actually be facing a lot more competition in the future.”

3. “In the online gambling world, the two notable competitors are Moneybookers and [Neovia Financial PLC’s/LON:NEO] Neteller. Both are in the UK. There’s also a company often considered a serious competitor of PayPal called [Smart Voucher Ltd.’s] Ukash. They started in Germany, I believe, and their volume is extraordinary.”

4. “Facebook decided recently not to challenge PayPal but to allow PayPal transactions to go through Facebook. I think Facebook has more of the branding trust than PayPal, but they made the decision that they didn’t want to deal with the customer service issues or fraud issues that would come up. That’s an enormous win for PayPal because Facebook is probably the only [competitor] they were afraid of.”

5. “I know there’s a lot of merchant frustration around transactions being reversed without warning, and it’s difficult for them to dispute it because it’s time-consuming and PayPal is so big. It’s really the same thing you see with Visa and MasterCard. There’s no finality of the transaction. It’s always subject to a charge-back if the customer disputes it. That’s why they don’t want to be in online gambling, because a guy will say, ‘I didn’t mean to make that bet. I need to reverse it.’”

6. “PayPal does not have finality of payment the way you’re seeing some of their competitors do. If PayPal does get challenged, it’s probably going to be driven more by the merchants than by consumers.”

7. “Talk to 10 people who use PayPal from the merchant side, and you’ll have three, four, five of them who’ll say they’ve had problems with payments. That’s the same issue with Visa and MasterCard. PayPal started out with the mission of improving what Visa and MasterCard do in the online world, but they’re really just turning into those guys.”

8. “A PayPal account used at a walk-in location? PayPal could do that, absolutely. They’ve already opened up their API [Application programming interface] to developers. If they get more into the mobile payment world, I don’t see why it couldn’t function there just as well as it does in the online world. You flash your mobile phone at the merchant. Definitely, that’s possible.”

9. “I definitely think that’s a good way for PayPal to go. It doesn’t attack the cash market, but it eats into checks and Visa and MasterCard and Amex [American Express Co./AXP].”

10. “[Mobile payments] already are common in Africa and South America and other parts of the world. That’s kind of the big joke: Why do mobile banking and mobile payments work for undeveloped countries, but we can’t seem to get a foothold in the U.S.?”

11. “In the undeveloped countries in Africa, there were so many people who were unbanked. They didn’t have traditional banking relationships, but many of them had mobile phones. They were able to send money to Grandma or to each other, and it started getting accepted at the merchant level.”

12. “The challenge in the U.S. is that you already have the infrastructure here of the banks and the payment networks and the payment processors. What’s slowing it down is that you have to do all the negotiating with all the interested parties. Everybody wants a slice of the pie and wants to protect its turf.”

13. “Especially when you look at in-game payments, like the spontaneous purchases for Farmville and things like that, it definitely can change consumer behavior if you can make a payment without having to leave the game. A lot of the mobile payment companies are recognizing that already and they’re ahead of PayPal in that area. One is Zong and another is Boku [Inc.].”

14. “PayPal has the possibility to change consumer behavior, but I think it will be focused on the in-game payments. I don’t see it changing people’s spending habits just because they’re on eBay and somebody takes PayPal. I don’t think it changes behavior there.”

15. “They do have a good brand, and they do have trust with that brand. But it’s only the same kind of trust you’d have with your bank. They would turn over your banking records if required by subpoena. So how far does that trust go?”

The Digital Currency Doppelganger

Peter C. Tucker, J.D., Business Editor for Cardozo Journal of International and Comparative Law at Benjamin N. Cardozo School of Law, has published an engaging chronicle and modern analysis of the digital currency environment. It's entitled "The Digital Currency Doppelganger: Regulatory Challenge or Harbinger of the New Economy?" in Volume 17, Number 3 (2009) and the full article is available via a one-click download here. In addition to profiling certain digital currency issuers and exchangers, The Monetary Future has covered legal and physical jurisdiction concerns. Those articles can be found in the blog archives.

Unfortunately, the author here comes down on the side of regulation, both domestic and international. Financial privacy and monetary freedom are fundamental human rights that have been continually eroded, especially when it comes to the innovation and evolution of digital currencies. It is always amazing to me that the same people respecting the anonymity of a paper $100 bill do not seem to respect that same privacy when it is extended into a 'digital cash' equivalent. A digital bearer certificate, privately issued, would emulate the anonymity and untraceability features of a paper bill just like the ones in use today. The cryptographic technology exists now. Privacy should not be sacrificed simply for the sake of going digital.

Tucker correctly states that digital currencies ultimately are born of market demand. This market demand may be driven by microtransactions, wealth preservation against fiat currencies, confidentiality from merchants, general financial privacy, etc. Also, the commodity backing a private currency must be determined by the market, in accordance with Mises' regression theorem. Exchange agents provide a much-needed function in terms of localizing the service, facilitating rapid growth, and providing a vibrant two-way exchange for multiple digital currency issuers. The exchange agents also provide an additional layer of protection from over-zealous governments that seek to restrict the financial privacy of their citizens. Therefore, I come down firmly on the side of 'harbinger of the new economy' and I hope to play a part in its realization.

From the Introduction:

"You are a doctor, a board-certified oncologist and a founding partner of a lucrative group oncology practice. You enjoy the wealth and prestige that comes with practicing medicine until one day you read a book, Friedrich A. Hayek’s The Road to Serfdom. Long interested in credit theory, you familiarize yourself with the bad boys of economic theory, the Austrian School. You become convinced that the phenomenon of cyclical economics, the peaks and troughs of economic progress that have been observed for centuries, could be almost entirely attributed to the manipulation of money supplies by the federal governments of the world. Steeped in economic theory, you begin to hypothesize that wars and recessions the world over have been fertilized by the noxious manure of monetary manipulation. Although you continue to see patients your hobby, your interest becomes an obsession, a plan. You teach yourself a programming language and begin writing code day and night, often forgetting to eat. You lose weight, stop attending your local church, and finally, you sell your medical practice and liquidate your life’s savings. You launch a private currency on the Internet. You are Dr. Douglas Jackson, the founder of E-Gold Ltd."

"Nine years later, Dr. Douglas Jackson had a bad day. On the evening of December 19, 2005, Secret Service and U.S. Federal Bureau of Investigation (FBI) agents raided Dr. Jackson’s home and the offices of Gold & Silver Reserve Inc., the parent company of E-gold Inc. The agents copied data from Dr. Jackson’s servers, but did not immediately file charges. However, on April 24, 2007, a federal grand jury indicted both companies, Dr. Jackson, and his business partner on 'one count of conspiracy to launder monetary instruments, one count of conspiracy to operate an unlicensed money transmitting business, one count of operating an unlicensed money transmitting business under federal law and one count of money transmission without a license under D.C. law.' According to the indictment, Dr. Jackson and his business partner conducted fund transfers on behalf of customers whom they knew to have funded their accounts with moneys gained from unlawful activity, 'namely child exploitation, credit card fraud, and wire (investment) fraud; and thereby violated federal money laundering statutes.' The conspiracy to commit money laundering charge alone carries a maximum sentence of twenty years."

Virtual Money Presents Real Legal Problems

By Thomas Claburn
InformationWeek
Monday, March 1, 2010

http://www.informationweek.com/news/software/showArticle.jhtml?articleID=223101009

Introducing a virtual currency in an online game or social Web site isn't simply a way to print money without paper.

Virtual money has real value and companies that operate online games, having recognized that selling nothing for something can create a profitable revenue stream, are rushing to cash-in on the imaginary economy.

The signs are everywhere. On February 25, social monetization company gWallet introduced the gWallet Brand Bar, an interactive banner ad that appears at the top of browser-based game screens to make interactions involving virtual currency easier. Gurbaksh Chahal, CEO and founder of gWallet, called virtual currency "a thriving industry."

On February 18, Facebook and PayPal said that PayPal had become a payment option for Facebook Credits, the virtual currency used in a rising number of Facebook games.

"Today more than 500,000 applications exist on Facebook, and the virtual goods within those applications (particularly games) have become an increasingly valuable part of the user experience," explained Deborah Liu, a product marketer on the Facebook Developer Network team, in a blog post last week week. "By providing a single, cross-application currency, our goal is to making transactions simpler for users, leading to a higher conversion rate for developers."

Facebook has been testing Facebook Credits with a select number of large developers, including Crowdstar, Playdom, Playfish, RockYou, 6waves, and Zynga. It plans to invite additional developers into its program in the months ahead.

On February 9, Offerpal Media, a virtual currency distributor, introduced "Offerpal Tasks," a way for consumers to collect virtual currency for online games and social networks in exchange for the completion of Amazon Mechanical Turk jobs.

Dax Hansen, a partner in law firm Perkins Coie's Electronic Financial Services practice, observes that "points," "coins," "bucks," and other forms of virtual currency are becoming commonplace at online gaming sites, social media sites, and among retailers and other businesses.

Read the rest of the article.

For further reading:
"Seed Money", Douglas Quenqua, OMMA, March 1, 2010
"Virtual Currencies: Real Legal Issues for Retailers", J. Dax Hansen, RetailingToday.com, February 26, 2010