by Kiran Kalmadi and Sukhna Dang
Infosys Strategic Vision
March 06, 2015

from GFMagazine Website



Kiran Kalmadi, Senior Client Solution Manager, Financial Services, Infosys
Sukhna Dang, Client Solution Manager,

Financial services, Infosys.






Do you know what is common to,


  • Amazon

  • Subway

  • Expedia

  • Zappos


  • Wikipedia

  • iTunes

  • Dell

  • Bing?

This list is a sample of companies that have started accepting Bitcoins.


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 is Bitcoin.


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,

  • Darkcoin

  • Litecoin

  • Peercoin

  • Dogecoin,

...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 in interest?

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 Virtual Currency


"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 services."

Kiran Kalmadi

Senior Client Solution Manager, Financial Services, Infosys


Transaction Cost


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 processing charges.


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 intermediaries.


Transaction Speed


Payments made using virtual currencies are much faster than payments made using other electronic modes.


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 payments.


Financial Inclusion


Virtual currencies can promote financial inclusion.


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.


International Cross-Border Remittance Cost


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 charges too.


Micropayments Potential


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 payment.


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 price.


Merchant Risks


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 alternative.


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 financial inclusion.

They can become an appropriate form of payment,

especially in those countries where individuals

do not have access to bank accounts."

Sukhna Dang

Client Solution Manager, Financial services, Infosys

Are virtual 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 currencies include:

Substantial Volatility


Virtual currencies are subject to significant fluctuation.


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 one day.


Security Risk


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 financing.

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 for consumers


Virtual currencies are largely unregulated.


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 fraud.

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.



Developing Regulations

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 sector.

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 United States.




Financial services industry keeps a close watch on virtual currency development

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 them.

Global banks like Bank of America, JPMC, Citi, Wells Fargo, etc. have published reports on how Bitcoin could impact the global payment industry.


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 accounts.


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.