by Kiran Kalmadi and Sukhna
Infosys Strategic Vision
March 06, 2015
Senior Client Solution Manager, Financial Services,
Sukhna Dang, Client Solution Manager,
Do you know what is common to,
This list is a sample of companies that
have started accepting
Yes, you read it right, the Amazons,
Apples and Microsofts of the world are accepting Bitcoins.
Bitcoins and other virtual currencies
are the cynosure of all eyes - of industry experts, bankers,
hackers, consumers, merchants and regulators. Experts believe that
the world of virtual currency is at a crossroads.
Now, what is virtual currency?
Virtual currency is a form of electronic money, not issued by any
monetary authority, but which has an equivalent value in real money.
When someone buys virtual currency, they don't get an actual note or
coin. Instead, they receive electronic units that people agree to
accept and treat like real money. Virtual currencies can be
classified as Centralized and Decentralized.
Centralized virtual currencies like
Facebook Credits, Amazon Coins etc. have an administrator and a
central repository, whereas decentralized virtual currencies do not
have either, and every transaction is registered in a public ledger
known as a block chain.
The most popular virtual currency today
Bitcoins are managed by peer-to-peer
(p2p) technology without any central authority governing them.
Virtual currency is not only about Bitcoin; there are the likes of,
...and many more.
In the past few years, virtual
currencies have mushroomed widely and are making presence felt for
the right or wrong reasons.
Why the spurt
The concept of crypto-currency is not entirely new, being first
described way back in 1998, and the first proof-of-concept Bitcoin
being published in 2009.
Initially, virtual currencies were
mostly used in lotteries and online gaming. However, in the past few
years, there has been an increase in interest in the usage of
virtual currencies and a rising acceptance among merchants.
According to CoinDesk, by end-2015, the
number of merchants accepting Bitcoin is expected to cross 140,000.
Bitcoin has found high-profile
supporters in the form of Marc Andreessen, Al Gore, the Winklevoss
twins, Richard Branson, and Ashton Kutcher, to name a few. The spurt
in interest in virtual currencies is a result of their perceived
benefits versus traditional payment methods.
The pro-virtual currency group hails it
as a disruptor of the financial service industry and a challenger to
the current financial system.
The Appeal of
"It is vital for banks
and financial services firms
to study this space and see how
it can impact
the payment industry, look at
engaging with interested parties,
and launch new products and
Senior Client Solution Manager,
Financial Services, Infosys
The cost of processing is far lower
for virtual currency than any other payment mechanism.
One of the main reasons for this is
that virtual currencies eliminate the need for intermediaries.
As virtual currencies are a form of P2P payment, they bypass
banks and other intermediaries and evade the additional
For instance, in the traditional
banking service model, if someone buys a watch using a credit
card, the merchant needs to pay the issuer an interchange fee of
1% - 3% plus a flat fee, which is eventually passed on to the
consumer as a cost.
However, if the same payment were
made using virtual currency, the transaction cost would have
been <1% of the transaction amount, as there are no
Payments made using virtual
currencies are much faster than payments made using other
It is believed that the processing
time for the Bitcoin is in the range of 10-60 minutes and
transfers can happen instantly, which is much faster than
traditional payment modes.
For instance, in traditional
banking, international bank transfers can take up to a week.
In addition, virtual currency
payments can happen round the clock, unlike traditional
Virtual currencies can promote
They can become an appropriate form
of payment, especially in those countries where individuals do
not have access to bank accounts. For instance, in several parts
of Latin America and Africa, many people do not have access to
traditional banking services or even to any safe, cheap and
convenient credit functioning system.
All this can change with virtual
currency, as it provides an alternative option for the unbanked.
Virtual currencies are expected to
play a big role in the global remittances market.
In Q4 2014, the global average cost
of remitting about USD 200 was about 7.99%. Post offices are the
least expensive, at 5.06%, while banks are the most expensive at
11.75% (Source: The World Bank: Remittance Prices Worldwide).
However, using virtual currency,
users can remit money directly to their families at a lower cost
and faster too. For instance, BitPesa uses a virtual currency
like Bitcoin to cut transaction costs.
It charges about 3% on cross-border
transfers and the money reaches the same day.
Players charging lower fees using
virtual currencies will eventually put pressure on the existing
money transfer operators and banks to reduce their remittance
Virtual currencies can facilitate
rapid expansion of micropayments online.
In the traditional banking service
model, there is no proper system available to transfer $1 or
less online using a credit card or other traditional form of
Virtual currencies like Bitcoin can
be used to make micropayments as small as 25 or 50 cents. This
is particularly useful for businesses, such as content or news
providers, that would like to charge say, 10 cents per article.
Virtual currency potentially opens a
new revenue model to sell things digitally at a much lower
Virtual currencies pose fewer risks
to merchants due to transaction certainty, protecting them even
against non-delivery claims and fraudulent chargebacks.
The transactions are irreversible,
i.e. once a transfer is completed, it cannot be reversed, which
is not the case with a credit card transaction.
Concerns of card fraud are also
making online merchants skeptical about traditional forms of
payment and driving them to consider virtual currencies as an
Lower Identity Risk
Virtual currency transactions do not
contain a customer's personal information, whereas traditional
payment mechanisms, such as credit cards, require card
information and other user credentials to be shared, posing a
higher risk of identity theft.
For all its advantages, virtual currency can be labeled as a
double-edged sword. Being a comparatively new phenomenon, the
market for virtual currencies is still developing and many users
are unaware of such currencies and their workings.
Virtual currencies have their own
legion of critics, with the likes of Warren Buffet,
Alan Greenspan, Nouriel Roubini and many others
having criticized Bitcoin.
“Virtual currencies can promote
They can become an appropriate
form of payment,
especially in those countries
do not have access to bank
Client Solution Manager,
Financial services, Infosys
currencies a mirage?
The very advantages touted as benefits by virtual currency
supporters, are seen as disadvantages by its critics.
The disadvantages attributed to virtual
Virtual currencies are subject to
The total value of virtual
currencies in circulation and the number of merchants or
businesses using them are still small. Hence even a small
activity or trade can affect the price movement, which makes
virtual currencies highly volatile.
There have been instances of the
Bitcoin exchange rate falling alarmingly - by more than 50% - in
Critics of virtual currency pinpoint
that since the identities of parties involved in a transaction
are not recognizable and transactions are not traceable, they
can be misused for unlawful or criminal activities like:
Money laundering or terror
Virtual currency transactions are
vulnerable to money laundering/terror financing risks, thanks to
payer and payee anonymity compounded by the lack of an
authorized monitoring authority.
This increases the possibility of
virtual currencies being used for suspicious activities. For
instance, Liberty Reserve‘s CTO was operating an unlicensed
money transmitting business which processed more than $16
billion through the firm's digital currency system.
He leveraged his technical expertise
and created a virtual currency business which was used
extensively by criminals across the world:
Hacking or fraud/theft.
Virtual currencies definitely run
the risk of being targeted by hackers using various methods to
steal Bitcoins and other virtual currencies from user accounts.
Over the past few years, there have
been quite a few cases of hacking of virtual currency accounts.
For instance, in March 2014, 650,000
Bitcoins were looted from Mt. Gox, and as recently as January
2015, hackers looted around 19,000 Bitcoins worth about $5
million from the Bitstamp exchange.
Risk of Rejection
Virtual currencies face the risk of
rejection as they are yet to be recognized globally by users,
merchants, regulators or governments.
Many governments and regulators have
issued sufficient risk warnings - including on liquidity risk -
on virtual currency usage, or like the Government of China,
banned them from trading.
Absence of regulation entails risk
Virtual currencies are largely
Currently, there is no pertinent
regulation or central supervising authority for virtual
currencies, nor government/central bank protection for virtual
currency accounts, leaving users with no recourse in case of
In spite of all these drawbacks, all is not lost since many
regulators and governments are looking into virtual currencies
and it is widely believed that regulations will develop soon.
Virtual currency has raised unique challenges, and policymakers
globally are focusing on developing an appropriate regulatory regime
for the same.
To start with:
The New York Department of
Financial Services (DFS) has proposed BitLicense, an
extensive regulatory framework that mandates a license for
companies that deal with digital currencies.
The Monetary Authority of
Singapore (MAS) will regulate virtual currency
intermediaries in a move to combat risks from
terrorism-related financing and money-laundering.
Canada has also moved on the
path to Bitcoin regulation, with a virtual currency
provision reported in the 2014 Budget Implementation Bill.
The UK Government has been a bit
slow to respond, but is looking into how virtual currencies
could or should be regulated and their associated risks,
while at the same time analyzing the virtual currencies
which might bring innovation in the UK's financial services
Considering the upsurge in the usage of
virtual currencies, regulators and policymakers across the globe are
looking to develop a comprehensive, consistent and appropriate
virtual currency regulatory model.
January 2015 will be marked in history
as the time when the first licensed Bitcoin exchange opened in the
services industry keeps a close watch on virtual currency
As virtual currencies gain both popularity and controversy, banks
and financial services firms are monitoring the steps taken by the
issuers of virtual currency as well as the guidelines of various
governments and policymakers to see what opportunity it holds for
Global banks like Bank of America, JPMC, Citi, Wells Fargo, etc.
have published reports on how Bitcoin could impact the global
Banks are also keen to understand
whether virtual currency can become an investment opportunity like
Commodities, Exchange Traded Funds, or Derivatives. Although banks
did open accounts for firms accepting Bitcoins or any other virtual
currency, but they were forced by regulators to close Bitcoin-related
For instance, U.S. officials ordered a
Wells Fargo account used by Mt. Gox to be shut down.
Banks and financial services firms are still in observer mode on
virtual currencies, but analysts do predict that virtual currencies,
specifically Bitcoin could emerge as a serious competitor to banks.
Adoption of virtual currencies by merchants will rise as they
realize good savings, and consumers will pick virtual currencies
once they see their myriad benefits.
Banks, regulators and governments are
also waking up and paying attention to the virtual currency concept.
Regulators and governments need to
further step-up their efforts to create new regulatory regimes for
virtual currencies. It is equally vital for banks and financial
services firms to study this space and see how it can impact the
payment industry, look at engaging with interested parties, and
launch new products and services.
Given the benefits and challenges of
virtual currencies, it's too early to write them off or say how
quickly they will attract mainstream adoption.
The ideal scenario is one of harmonious
co-existence virtual and other currencies, where the limitations of
one become the strength of the other. For instance, if there is no
anonymity in virtual currency transactions, the chances of money
laundering, terror financing and volatility reduce.
The current banking system can support
this payment method by servicing the businesses dealing in virtual
currencies. Virtual currencies are definitely at a crossroads and
the road ahead is going to be a fascinating one.
Only time will tell whether virtual
currencies are gold 2.0 or just a mirage.