What exactly is Bitcoin? You may have heard a great deal about this in the media. You may know that it is a virtual currency. You may have heard news that the evaluation of Bitcoin once skyrocketed to a record of $900. But you may not have heard an analysis of Bitcoin and other virtual currencies in the legal community.
On April 2, 2014, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a lunchtime talk on the future of money by Thomas Brown, a partner at Paul Hastings in its San Francisco office. He has more than fifteen years of experience practicing law, focusing on competition and legal issues affecting the financial services industry.
In his presentation titled “Regulation and the Future of Money: Mobile Payment and Virtual Currencies,” Mr. Brown spoke about what drives innovation with mobile payments and consumer acceptance of these products, what problems virtual currencies can solve in the payment space, and what role federal regulators can and should play in this field.
As to the first issue, Mr. Brown mentioned that there are many companies offering mobile payment products (such as Square and Payfirma) and about 30 million American consumers holding mobile wallets. However, mobile payments only make up 1.2% of total credit card purchases. Why? Most people may think it is because mobile devices do not yet fit at the point of sale (“POS”) or they do not improve upon existing and widely accepted payment instruments. Also, mobile payment comes with more security concerns.
However, Mr. Brown pointed out that neither of these theories is the true reason hindering the wide-acceptance of mobile payments. On the one hand, recent technical renovation in optimizing POS experience and improving security measures have greatly solved the above-mentioned problems. For example, PayPal mobile wallet allows POS sales while the phone remains in your pocket, and Apple has introduced fingerprint biometrics. On the other hand, mobile payments are not more risky than traditional payments as we initially thought. For instance, plastic credit cards lack a fingerprint safeguard and are more prone to being stolen. However, the total fraud loss for electronic payment is only below 10 basis points.
In his opinion, the real driver behind the future of payment development is the reinvention of consumer experience. Take for example the following: most people prefer to download songs from iTunes rather taking time to purchase music at a record store because the former enables people to enjoy the music instantly and remotely. In this regard, Mr. Brown found that virtual currency, especially Bitcoin, is likely to be part of the future of payment.
He surprised the audience by stating that Bitcoin is not defined as “currency” in the U.S. because “currency” is a medium by which the sovereign is willing to have its debt paid, but individuals cannot pay taxes using Bitcoin! However, it does not mean Bitcoin and other virtual currencies cannot operate like a currency in some environments. To our surprise, virtual currency can even solve certain problems associated with fiat currencies and traditional payment. It aims to provide asset stability where fiat currencies are unstable and/or subject to appropriation by a sovereign. It can also address money movement, especially cross-border transactions such as remittances at substantially greater speeds and lower costs than existing methods.
State and Federal governments also have noted the importance of virtual currency transmission and have started to regulate it. For instance, as of March 11, 2014, The Superintendent of the New York Department of Financial Services, Benjamin Lawsky, issued a public order allowing the New York Department of Financial Services to consider formal proposals for establishing regulated virtual currency exchanges under BitLicenses. At least one exchange, Coinsetter, has signaled its intent to apply for a BitLicense. The IRS has concluded that Bitcoin and other virtual currencies are “property” for federal tax purposes. The U.S. Federal Reserve Board Chair, Janet Yellen, once said that the Federal Reserve does not have the authority to supervise or regulate Bitcoin because such an invention took place entirely outside the banking industry. However, this does not mean that the Federal Reserve cannot include Bitcoin in its scope of authority in the future. Indeed, according to its 2013 payment improvement report, it dreamt of a utopian payments future, including a ubiquitous and non-member-based electronic retail payment system (where the sender is not required to know the recipient bank account information) and improved choices for cross-border payments.
Maybe Bitcoin can help the Federal Reserve to realize its dream. Who knows? Let’s see…