Who are you? Why are you writing about Bitcoin?

Do you ever feel like there is that person who is un-naturally enthusiastic about a new currency even though they have no idea how/why it will be used?

That’s me! For years I have been into virtual/crypto/digital currencies of different kinds. Including, but not limited to: letting people transfer cellphone minutes peer-to-peer and use them as micro currency, PM-ing Facebook Credits and Facebook global payments, buying World of Warcraft Gold online, and of course Bitcoin. Additionally, I have lived much of my life overseas in China, India and the Philippines and have struggled to accept payments in those countries for my businesses, which fuels my enthusiasm.

With all the excitement around Bitcoin, I have had friends and acquaintances ask me questions on payments, stored value, etc. I’ll share my opinion here.

I own BTC, am a BTC supporter and enthusiast, and so am biased. Bitcoin has very real problems and risks, which I discuss below, and is highly speculative. In these FAQ, I refer to the currency itself as BTC and the protocol as Bitcoin. These are the most frequently asked questions I have received.

What would it take for BTC to gain adoption?

What’s your best Bitcoin startup idea?

Why is regulatory buy-in so crucial to a payment system?

What’s the difference between the different crypto currencies? Why does Dogecoin appear to be taking off?

What would it really take for BTC to become a global remittance network, like good enough to replace Western Union?

What would it take for BTC to gain adoption?

There are many technology enthusiasts (myself included) really want Bitcoin to succeed and usher in a world of cheaper, frictionless, futuristic commerce.

One thing that is worth thinking about is the role of the underserved merchant in the adoption of a new payment system. Specifically, I mean merchants who today cannot easily collect payments from customers (i.e. it requires high up-front or ongoing cost), but with a new payment system they can collect easily and have enough margin to run a business.

Some examples of underserved merchants and their enablers are:

• eBay merchants enabled by PayPal

• Farmers’ Market merchants enabled by Square

• Developers who want to collect payments online enabled by Stripe

• Drug dealers enabled by Bitcoin

Underserved merchants have something people want, but customers can’t pay. The underserved audience is the engine that fuel the growth of new payment systems and helps the system move upmarket and be accepted by bigger, more established merchants.

With this lens, let’s think about a few specific examples where there are merchants who have something people want, but it is hard/expensive/capital-intensive/need-a-middle-man to accept payments today. I have chosen these examples specifically because each one illustrates tactical obstacles which will need to be conquered in order to bring the BTC ecosystem to life.

• Underserved Merchant: Sellers of apparel and professional services in Philippines, Bangladesh, Turkey, maybe Eastern Europe. Today, if you run call center from the Philippines or a garment factory in Bangladesh it is really hard to sell your products directly to a global market. Getting a merchant gateway to process credit cards as a (for example) a Filipino company is hard and requires up-front capital in the thousands of dollars and sometimes a trip to Hong Kong. PayPal kinda works, but they are pretty strict and they kick merchants off based on their policy (which has the perception of sometimes being arbitrary, especially for service businesses). Other payment mechanisms have restrictions on transaction size, and can hold your funds based on their policy. All of these factors don’t make it impossible to do the cross border business, but it certainly increases the barriers to entry. You need to raise a good amount of capital or have a multi-national partner (who will take a cut of the action) to use the current systems.

People overseas want apparel from Bangladesh and call center services from the Philippines, they get them today, but an alternative commerce system that didn’t require as much up front capital or connections would dramatically increase the number and variety of operators that could sell directly. They would also open up corridors which are really hard now, like Nigeria to Bangladesh, where both sides are underserved with regards to payment, but people still need and want apparel!

Why do I mention specifically Philippines, Bangladesh, Turkey (PBT) versus the more prominent China and India? The governments of PBT have not yet flexed their muscle with regard to restricting BTC transactions. If foreign exports were to pick up steam and benefit locals, PBT governments would be unlikely to do so. China has already started to regulate BTC, and the Central Bank of India has shown its willingness to crack down on cross-border transactions with its PayPal remittance restrictions a few years ago. If BTC were to catch on in India at the rate of millions, I suspect its use would quickly become restricted.

• Underserved merchant: US-based SaaS vendors. For US-based SaaS vendors accepting the long tail of global currencies is really hard and often not worth the investment for the incremental sales. Imagine you are a startup, e.g. Verbling, selling language tutorial lessons online and you want to sell lessons to people in Turkey. It’s easy for you to sign up for credit card payments and get a merchant account, but your payment gateway doesn’t support charges in Turkish Lira, so you need to charge the customer in USD. It’s hard enough to find one of a customer with a credit card, and when you do there is a very high decline rate for cross-currency transactions. Accepting a local payment method, like Mikro Odeme is expensive and time consuming to set up and may not be worth it. Even if the transaction goes through, there is a whole host of extremely irritating things for customers: they often have a Forex fee on their credit card, they don’t get a competitive Forex rate at time of transaction, and if you are doing recurring billing charges are different amount each cycle. Customers have to be pretty motivated to deal with these issues, and often merchants don’t have that luxury.

Assume for a second we were going to try and solve Verbling’s problem with BTC. Here is what would need to happen: Verbling (a US Company) would need to accept BTC on their website, easy, this can be done today. Second (and this is the harder part), there would need to be a way for local Turkish people to cash in through a local payment method to BTC. Payment methods are extremely local, and the ability to cash into BTC in the local market at competitive rates with high availability is crucial to being able to accept payments from there.

• Drug trafficking and BTC: this example is tongue in cheek, but it should be mentioned that illegal activity is also an example of the underserved merchant theory. Drug dealers can’t get credit card merchant accounts, and drug transactions through credit cards could be traced and the funds clawed back. An anonymous transaction system with no intermediary to claw back or freeze funds that Bitcoin provides served this purpose. I am concerned that people will latch onto the negative applications of this technology, and think that nefarious scenarios are all that it can enable. We need a legitimate scenario more enticing than drugs to bootstrap this ecosystem.

Growing by helping the underserved is not the only way to grow an alternative payment system. Payment systems and currencies can also grow, for example, by mandate, like QQ Coins or iTunes payments. Due to the decentralized nature of Bitcoin, I doubt this will be an option for BTC in the near future.

Another way to think about this issue is why did cool new payment methods like NFC or mobile cash like they have in Kenya (M-Pesa) struggle in the US? Because the merchants in those scenarios are not underserved. People rich enough to buy smartphones in the US almost certainly have credit cards and re-habituating them just won’t be easy. BTC scenarios that address merchants that are well served by credit cards or commercial banking won’t make a material difference in fostering adoption.