Consumer Adoption of Bitcoin: Prospects and Barriers

August 2014

Note: This transcript uses lower-cased "bitcoin" to refer to the network, technology, concept, and unit of account.

Nancy Condon: I'm here with Doug King, payments risk expert with the Atlanta Fed's Retail Payments Risk Forum, to talk about digital currencies, and bitcoin in particular. We'll talk about prospects for consumer adoption and the barriers that must be surmounted before that can happen.

Thanks for joining us today, Doug.

Doug King: My pleasure, Nancy. Glad to be here.

Condon: So why don't you tell us a little bit about what's out there for consumers—what attraction there is, and what has to happen before consumers will adopt bitcoin.

King: Sure. Let's talk about the adoption aspect and what makes bitcoin attractive to consumers. One of the attractive aspects that's really received a lot of attention around bitcoin is this whole aspect of anonymity. Unfortunately, we've seen some bad characters using bitcoin for the sole purpose of that anonymity—for instance, with what we saw go on with the Silk Road, which has been well-documented by the media.

But on the flipside of that, there are some good things about anonymity that the good guys are attracted to. I know some people who make very legitimate purchases that don't want their information out there to be found. We've seen by using card-based instruments that we're open to theft of that card information. A large retailer was breached back in December, which resulted in many consumers having their card information stolen. With bitcoin and the way this payment works, consumers really don't have that fear by using bitcoin or a virtual currency.

Condon: So Doug, maybe you can talk a little bit about why consumers might want to adopt it and what's in it for them.

King: I think there are really four key aspects or key words that you could focus on when thinking why would consumers want to adopt bitcoin. First is the overall speed of the transaction and how quickly you can move money across these networks. This is really important, especially when you start thinking payments from an international remittance standpoint. We're talking about moving funds as fast perhaps as two-and-a-half minutes to ten minutes where, depending on traditional payment methods, it could be three to four days once the payment is transacted before the end user actually receives that payment.

Another aspect is cost. When talking about bitcoin and other virtual currencies, there's traditionally fewer parties involved in the transaction, and they have a completely different cost structure than what we see with traditional payment methods.

Then you have the security aspect. Not only are the transactions extremely secure but the fact that your payment credentials—you're not providing payment credentials in the open like you are with other traditional payment instruments.

Condon: I know that makes a lot of people very nervous to have their credit card information out there on file with however many number of merchants they have worked with.

King: Absolutely. Credit card information or banking account information and routing number. And I think that fear has been heightened in the last few months as we have seen some massive data breaches of that type of data.

And then I think the last aspect—and this is, again, very important from an international remittance standpoint—is these currencies are borderless. So there's no multiple currency conversions along the path, which also increase the cost to those traditional payments.

Condon: Good. That's very interesting. How many consumers have adopted it, would you say? Is it some huge phenomenon?

King: As much as you read about in the media you would think it is a huge phenomenon.

Condon: Yeah, there's information out there everywhere.

King: But it is really just a blip in terms of total payments volume. And I don't have the data in front of me, but when I say “blip,” I mean it is a teeny, teeny speck on the amount of payments volume compared to overall volume. And there are barriers to this adoption.

Condon: What are some of those barriers?

King: I would say, one, it's difficult to obtain some of these virtual currencies and bitcoin in particular.

Condon: I can't go to the bank and say, "Here, I have $600 (isn't that the latest market value—$600?); I need a bitcoin"?

King: Unfortunately, it's not that easy. There are bitcoin ATMs out there in certain locations.

Condon: I had no idea!

King: Which, actually, I haven't had the fortune to use one of those yet, so I don't know how easy that is. But again, that is, I think, innovation in this space. People, entrepreneurs see that this is a barrier—it is difficult to obtain, so [they're] trying to make it easier for consumers to obtain.

Another barrier out there is just a lack of benefits compared to what other payments offer. So for example, when I use my credit card at a merchant, I might receive rewards for using that card, and I might have certain protections, where if I go and purchase a television and it breaks within 60 days, I can return that television and I can have my money refunded through a benefit that the card issuer's providing me. Obviously, with a virtual currency such as a bitcoin, those benefits aren't there.

Further, when you talk about credit cards and debit cards, some of those networks offer a zero-liability policy. So, say I order a television from an online merchant and they never deliver that television, then I am not liable for that purchase. Whereas, had I paid with a virtual currency such as bitcoin and sent that payment off, I don't have that protection that the card networks offer me. That's a—looking at the barriers—another big barrier is this lack of consumer protections.

Condon: So are there regulations in place yet to watch out for the consumer?

King: There are regulations in place, but not for virtual currencies. So consumers are covered through Regulation E, or Reg E as it's known, on other electronic transactions, but virtual currencies do not currently fall under Reg E. Also, many people have heard or seen what happened with Mt. Gox. Mt. Gox was a bitcoin exchange that—I guess it has yet to be seen whether it was fraud that took down Mt. Gox—but it was an exchange that failed, and a lot of people lost not only fiat currency, but bitcoin as well. Well, there are certain consumer protections in place where if a bank fails, there is FDIC, which is the Federal Deposit Insurance Corp coverage. That's protected—at one time it was $100,000, $125,000, but since the financial crisis that actually was increased to $250,000 worth of protection should a financial institution fail. Looking at it a step further from an exchange perspective—on stock exchanges, if you have an account with a brokerage firm, you are also protected. It's not through FDIC, but it's through SIPC, the Securities Investors Protection Corp. And I think the consumer protection aspect is going to be critical to ultimate consumer adoption of bitcoin and other virtual currencies.

Condon: Doug, this has been really interesting. Thank you so much for coming. It will be fascinating to see how bitcoin unfolds, and see what happens down the road with digital currencies, in general, and the technology behind it.

King: I fully agree with that, Nancy. And it is something that I am going to be monitoring, as well as the entire Retail Payments Risk Forum. It's an exciting time in payments just to see where all of this will fall out.

Condon: This concludes our EconSouth Now podcast on bitcoin and the prospects and barriers for consumer adoption. For more information, please see the May–August 2014 issue of ourEconSouth magazine, where you will find our article on this topic.

Thanks for listening and please return for more podcasts. If you have comments, please e-mail us at podcast@frbatlanta.org.