I've long been a Bitcoin skeptic, not necessarily seeing the point of it. While I've kept passing tabs on its progress, I did not think it was viable, or worth much beyond pure speculative game play, a forum for making bets that today are up quite a lot.

At last night's Washington Technology Industry Association's "Tech in Focus" primer on Bitcoin, I changed my mind.

There are lots of reasons why you would not want to put your money into Bitcoin right now, or switch over entirely to using it. But there's one big reason businesses should be very interested in adopting it: fraud.

Bitcoin has two inherent characteristics that beat fraud over any other online payment method, and two more major advantages for business than credit cards:

  1. Bitcoin currency cannot be spent twice.
  2. A Bitcoin transaction is final -- there can be no chargebacks.
  3. A Bitcoin transaction is immediate, funds are transferred and available instantly.
  4. There is little to no transaction fee for processing a transaction.

The flip side is there are no consumer protections for Bitcoin transactions.

Here's the thing: in the credit card payment module, merchants bear all the cost, and all the risk of fraud. Merchants typically pay at least 2.25% for every online transaction, and often much more. If something goes wrong, such as a purchase with a stolen credit card, Visa or Mastercard will yank funds out of the business's bank account. If it turns out that the business did not follow the Payment Card Industry's security standards (which a huge number of small e-commerce sites ignore) the business will be forced to add monthly audits by certified security professionals, driving their cost way, way up.

When you make a credit card transaction as a consumer, you have lots of protection. You complain to your bank about a charge you didn't make, or even a service you're unhappy about, you can get them to unilaterally "undo" the transaction, even though the merchant provided the service to somebody. Banks charge merchants dearly to provide this service, and go to great lengths to discourage different pricing for credit card transactions.

What I think is going to happen is that we're going to see a rash of hacked smaller e-commerce sites that are not properly secured. If you're Target, you might have deep enough pockets to cover this cost -- if you're a smaller operation, it could put you out of business.

Enter Bitcoin.

We all know Bitcoin is a currency that criminals trust -- not because it's anonymous (it's not) but because its ingenious architecture prevents fraud. You can only spend Bitcoins that are in a wallet you own (or have access to). Every transaction in the Bitcoin world is stored on thousands of computers around the world, each serving as a verification of all of the rest. No transaction can happen without thousands of independent entities recording and approving it.

And this means the only thing you really, really need to keep secure is your wallet. The nice thing about this is you only need to access your wallet to spend money, not to receive it. So you could conceivably accept Bitcoin on your web site with no concern over security -- the main thing an attacker breaking into your web site could do is substitute your wallet with theirs, so new payments would go to them instead of you. That, of course, would suck! But it's not going to drive up your operational costs by thousands of dollars a month to meet higher levels of compliance -- you just put your wallet details back, fix the security hole, and you're back in business.

For an attacker, there's nothing to steal there. They can try to steal your wallet, or try to impersonate you, but that's about it.

Lots of other things change in a Bitcoin model -- merchants won't be able to automate recurring payments for example -- the wallet holder has to initiate all payments. Nobody can dip into somebody else's wallet and pull out money.

So the biggest barrier to Bitcoin adoption might be something nobody's talking about: fraud on the part of merchants. If the biggest benefit of using credit cards is consumer protection against fraud, the biggest benefits of Bitcoin are merchant protection against fraud and consumer control of all transactions, one possible barrier just might be if a bunch of shady but legitimate-looking businesses set up shop, and accept payments without ever delivering a service.

That might just be a topic worth more exploration...


Thanks for the blog. I learned a lot from your writing and the other material you sent. I "think" I understand how bitcoins can be used as currency without the volatility in value I feared. If the volatility of the "currency" value really existed (to the transaction parties), people could not use it because you would not know what you were going to be paying for what you were receiving, but if the currency value existed (only momentarily) to allow the transaction to complete in two (even different?) traditional currencies, then the bitcoin is only a vehicle for accomplishing a purpose and the "value" doesn't matter to the "trading parties." I'm not sure I'm right about this interpretation, but I'm beginning to see the power of bitcoins. It could eliminate the entire ACH system (along with the fees) that banks and networks siphon off. I could think of a ton of applications in our trade finance business that could be handled far more efficiently with this technology.

Hi, Rollo,

Yes, I think you have this right -- it really revolutionizes how transactions can be done securely, without a single entity acting as a mediator. For the time being, you would not want to keep value in Bitcoin for anything more than pure, risky speculation -- but at this point transferring value into BTC, doing a transaction, and converting value back out at the other end seems like a very doable proposition right now.

And if/when the value of BTC stabilizes, at whatever value it reaches, then keeping value in it seems like a completely reasonable thing to do. Given the overall amount of volume in the BTC market compared to its future potential, I would say the value of BTC is only going to go up, and probably very substantially. But there are enough unknown existential risks to BTC that putting any sizeable fraction of your net worth into it would be foolhardy...

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