Friday, November 1, 2013

Bitcoin Pursues the Mainstream

But some entrepreneurs, investors and even merchants are eyeing a far more mainstream use for it. They are convinced that bitcoin, though not widely understood, offers a path to lower payment processing and more secure transactions. Instead of using bitcoin to buy illegal guns in the recesses of the web, they say, ordinary consumers will use it to buy legal goods from legal retailers — and as easily as they now swipe their credit cards or exchange paper bills.

“I’m confident you will see major worldwide retailers adopting systems built on bitcoin,” said Jim Breyer, the Silicon Valley venture capitalist and early Facebook investor who also served on the board of Walmart Stores for more than a decade.

Mr. Breyer is an investor in Circle Internet Financial, one of the host of start-ups trying to find a way to make bitcoin a widely adopted currency for retail payments. The company was started by Jeremy Allaire, a serial entrepreneur, and it aims to be a payment processing system for online and physical merchants, similar to the service PayPal offers online. Along with his venture firm, Accel Partners, and another called General Catalyst Partners, Mr. Breyer has invested $9 million in the company.

One potential obstacle to mainstream acceptance of bitcoin is the sometimes wild fluctuations in its value, which makes it alluring to currency speculators but could scare off ordinary consumers. One bitcoin was worth just over $200 Wednesday afternoon. Someone who bought a bitcoin in early April paid as much as $266 for it.

Only a small and motley assortment of merchants now accept bitcoin as payment, and in many cases they do it largely as a marketing strategy. The list includes a winery in British Columbia, the popular online dating site OkCupid and a Seattle lunch truck that specializes in grilled cheese sandwiches. A start-up called Gyft lets people buy electronic gift cards for major retailers with bitcoin, and this week an A.T.M. in Vancouver, Canada, began issuing bitcoin to people in exchange for cash.

“We pride ourselves on being the nerdiest online dating site,” said Sam Yagan, co-founder of OkCupid, which is owned by IAC/InterActiveCorp, a media and Internet company. “We were like, ‘This is cool and we should do it.’ ”

Since bitcoin emerged in 2009, many of those who flocked to the currency celebrated it for being beyond the clutches of governments and other institutions. Until recently, the currency lubricated transactions on Silk Road, one of the Web’s biggest bazaars for drugs, forged documents and other contraband. The site was shut down in early October by federal authorities.

New bitcoin is created on computers connected through a peer-to-peer network. An algorithm controls the production of new bitcoin, which is meant to mitigate the risk of inflation.

Already, though, businesses transferring and exchanging bitcoin find themselves in regulators’ cross hairs.

In March, the Financial Crimes Enforcement Network, part of the Treasury Department, issued guidelines telling businesses involved in the exchange of digital currencies that they needed to register as money services businesses and comply with a variety of rules to prevent money laundering. New York’s Department of Financial services began an inquiry in August to determine guidelines for digital currency businesses, issuing nearly two dozen subpoenas to start-ups, investors and others involved in the emerging field.

Patrick M. Byrne, chief executive of the online retailer, said his company was talking about accepting bitcoin, but it decided to pause its plans until legal matters around the currency were clarified.

Fred Ehrsam, co-founder of Coinbase, a start-up that helps merchants accept bitcoin and helps consumers obtain it by exchanging traditional currencies, said he thought the demise of Silk Road gave entrepreneurs and investors more confidence in bitcoin.

“The bad guys basically lost,” said Mr. Ehrsam, whose start-up has raised over $6 million from Union Square Ventures and others. “It took the single most illegitimate player in the space and wiped them off the map.”

Bitcoin advocates, and especially merchants, say one of the currency’s most enticing promises is that it could significantly lower payment processing costs.

Retailers typically pay 2 to 3 percent of the value of a customer sale when a credit card is used. Retailers have long complained about these fees and have sought other options, but without much luck. PayPal, the online payment system, typically charges merchants a fee between 2.2 percent and 2.9 percent, as well as a per-transaction fee of 30 cents.

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