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Virtual Currency Still Potentially Disruptive Force, Despite Slow Acceptance

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Disagreement concerning how to operate the cryptocurrency known as bitcoin led to a split known as a “hard fork” in August, resulting in the introduction of Bitcoin Cash, a new strand of the virtual currency.

It will take time for users to ultimately judge the wisdom of that decision. Meanwhile, it’s another drop of uncertainty in waters already muddied by an increasing number of competing cryptocurrencies in a world that still doesn’t quite know how to harness them for commerce, how to prevent their abuse for criminal gain and just how much privacy they should afford.

Looking specifically at bitcoin for the sake of simplicity, the number of local retailers and service providers who accept it has not budged since 2013. Online transactions aside, acceptance has been slower than many local advocates once anticipated; the reasons are up for debate.

From the perspective of Gloria Phillips-Wren, professor of information systems and operation management at Loyola University Maryland, the fact that anonymous cryptocurrencies are not backed by any recognized authority is both a strength and a weakness.

“Virtual and digital currencies are more secure in the sense that [their use] is more transparent,” she said. “Fraud should be harder, because all users have a copy of the transactions.”

But that level of transparency is exactly what bothers some users who place more value on the concept of complete anonymity.

Fallout

The slower-than-anticipated acceptance has contributed to fallout for some local businesses oriented around bitcoin.

Alan Reiner, CEO of Fulton-based Armory Technologies, which pioneered one of the world’s most secure online bitcoin storage systems, announced in February 2016 that he was returning to private employment and abandoning his involvement with the company.

“In the immediate future, Farhod [Fathpour, an Armory developer] has indicated that he will take over the reins of the public side of the Armory project,” Reiner wrote in a message to the bitcoin community that uses Armory’s wallet and other tools.

So far, Armory appears to have survived. On July 28, Fathpour announced the release of a new update for Armory users and acknowledged that future updates were expected.

Baltimore-based Bitsie, a business focused on promoting bitcoin’s adoption by more retailers, was not as lucky and folded. “After the 2013 boom, the market introduction on the retail side stagnated and didn’t pan out,” said the company’s former CEO Joshua Riddle.

In the aftermath, Riddle and the other partners who ran Bitsie took a new direction, partnering to establish the digital marketing firm Black Label Agency.

Cautious Approach

Part of the uncertainty surrounding virtual currency lies in its taxonomy.

Earlier this year, the Securities Exchange Commission declined the proposal of entrepreneurs Cameron and Tyler Winklevoss to develop a bitcoin investment vehicle accessible through common investment accounts.

Moreover, the Internal Revenue Service classifies cryptocurrencies as property, not currency, and taxes them as such for purposes of federal income reporting.

“We have seen wild swings in the price of bitcoin, and it’s not uncommon to see hundreds of dollars of swing in a single day,” Phillips-Wren said. “The volatility makes it unstable.”

But like a wildly fluctuating stock, there are people who are drawn to it as a speculative investment.

“It’s actually a good way to help diversify a portfolio, but investors do have to have a good stomach for it,” Riddle said. “The volatility is ridiculous, but the potential return is also ridiculous. In my own experience, bitcoin has outperformed any of the assets I’ve ever owned and outperformed all of the expectations that I’ve had.”

Adapting

It remains to be seen whether the banking industry will get behind the notion of virtual currency that is absent of regulatory controls.
“As the technology progresses, we may see more official backing and more financial institutions willing to get involved,” Phillips-Wren said.

According to Steve Kenneally, vice president in charge of payments and cybersecurity for the American Bankers Association, most banks view virtual currency as an immature product, but they are paying attention to what’s going on in that sphere.

“User experience is a real challenge with virtual currencies,” Kenneally said, compared to existing payment systems that are simple to use and have rules in place that everybody understands. “Once virtual currency is spent, it’s gone. There’s no way to stop payment or question a transaction. With the introduction of second- or third- generation products, we’re hoping there will be some type of governance framework in place to reassure [users].”

On the disruptive side of the technology, there have been predictions that virtual currencies could remove banks from the process of intermediation — matching lenders with borrowers — or spell the end of charging currency exchange fees for global transactions.
“What we see there is similar to what happened with the smartphone revolution,” Kenneally said. “We would likely see banks develop more payment products [enabling the use of virtual currencies] that are user-friendly.

“What typically happens with technology,” he said, “is that banks get involved when they see it coming. They understand that they have to adapt and figure out how to leverage it, if they want to stay in business.”

Zcash

One of the newest virtual currencies, Zerocash (also referred to as Zcash), was developed just up the road at Baltimore’s Johns Hopkins University.

“We brought it into existence in October 2016 because we saw a privacy problem with bitcoin,” said Matthew Green, an assistant professor in the Department of Computer Science. “The problem is that bitcoin transactions are traceable, meaning they can be seen by others, including people who want to hack bitcoin users and do bad stuff to them.”

Working with Zcash Founder Zooko Wilcox, Green and a team of developers from Hopkins, the Massachusetts Institute of Technology and Israel developed a virtual currency that allows transactions to be confirmed without recording the addresses in a ledger, like bitcoin.
“The way the blockchain works is dangerous,” Green said. “It’s a public record that’s available to everybody.”

Zcash functions much like bitcoin in every other respect, down to the number of coins — 21 million — that will eventually be circulated.
While it may prove more difficult for Zcash to gain acceptance from regulators and the financial industry because of its untraceable nature, Wilcox and the developers are doing what they can to reassure regulators that it’s not a tool for criminal activity.

“As it stands now, virtual currency is early technology, much like the Internet was in 1985,” Green said. “Back then, we didn’t see many people using the Internet, because it was hard to use; but today, it’s universal and it has become second nature for people to use it every day.”