Digital Currency: This Dough Isn’t Quite Ready to Bake

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David Silva Smith, 34, who is a Web designer, recently sent a contract to a business contact in Japan. His colleague signed and submitted the electronic payment instantly—no fees were paid to banks and no days of waiting took place for a check or wire to clear. Smith likes that, in contrast with a check, the payment can’t be reversed, and he had no worries about a fake check or other scam, because the transaction was completed by the use of a digital currency that’s known as bitcoin.

Bitcoin is the poster child for digital currency, also called cryptocurrency. Digital currency is a money alternative that enables users to make electronic transactions on websites, their personal computers or through mobile apps without banks to process the payment, thus avoiding most transaction fees. This form of money operates outside of the realm of physical money and beyond the control of government-run central banks, such as Federal Reserve. That means that digital currency has no backing and, thus, no assurances that you can spend it, says James Angel, who is a finance professor at McDonough School of Business at Georgetown University.

Bitcoin and other digital currencies work similarly: Consumers have to establish a digital-currency wallet (an account, not to be confused with mobile wallets that make point-of-sale transactions) that’s available for smartphones, on computer desktops or via websites. You have to provide your driver’s license number, bank account numbers, your Social Security number and address to comply with state and federal laws, such as anti-money-laundering regulations.

Digital-currency wallets are assigned by identifying keys or numbers that are used in transactions. Everyone can see a transaction that’s posted online, but they don’t know who sent or received it, Smith says. That’s known only by the sender and recipient. A recipient “doesn’t need to wonder if the check is in the mail,” he says. “He knows it’s been sent, and he has access to the funds.”

Proponents and critics agree that bitcoin in its current state is too complicated for most U.S. consumers to adopt because of a lack of convenience and a limited number of places to use it. Angel found bitcoin clunky to use. He says it takes an average of at least 8 minutes for transactions to be completed. “In consumer terms, that’s forever,” he says.

Smith says bitcoin owners avoid bank transaction fees and instead pay at most a penny to a nickel to middlemen that verify a transaction—some don’t charge a transaction fee. The charge fluctuates with the bitcoin’s dollar value.

Online middlemen serve as bitcoin marketplaces that can be used to exchange bitcoins for dollars in the form of gift cards to buy items from online retailers at discounts of up to about 10 percent. Online retailer Overstock began to accept bitcoins in 2014, followed by Microsoft, Dell, Time and online travel company Expedia.

However, you’re lucky to find a brick-and-mortar store that will accept bitcoin: We were able to find only a passing reference that estimated a mere 4,000 stores in the United States will accept bitcoin. (Christina Yee of Kraken, which is a global bitcoin exchange, says 100,000 merchants worldwide accept bitcoin, which is up from 60,000 in 2014.)

Furthermore, the volatility of bitcoins poses a major hurdle to consumer acceptance, because their lack of stability means that they might lose their value rapidly. For example, bitcoins started June 2013 valued at $100, rose to $1,250 in November 2013 and crashed the next month to $600. The value of one bitcoin hovered at about $400 as of press time.

Gene Kavner, who is a bitcoin supporter and a former executive with e-commerce giant Amazon, says bitcoin is at a similar stage as the Internet was in the early ’90s: “[It’s the] equivalent to back then of us getting on the Internet and saying: ‘Now what?’ … We want to find avenues to make bitcoin useful and simple.”

To that end, in May 2016, Kavner plans to launch a bitcoin wallet that’s called iPayYou. He says it will simplify the process by showing consumers where they can exchange bitcoins for gift cards. Other bitcoin wallets leave that to the consumer to figure out, he says.

Kavner says acceptance will come when consumers receive similar value for using bitcoin as they receive for using credit cards now, such as loyalty points and discounted gift cards to mainstream retailers.