News, Education and Events Decoding Digital Payments & Fraud

News, Education and Events Decoding Digital Payments & Fraud

Bitcoin: Bubble to Bedrock? – Part II

Bitcoin: Bubble to Bedrock? – Part II

A case could be made that Bitcoin—its rise and fall and rise again—was the payments story of 2013. But in the early stages of 2014, the debate has shifted. While attention still is being paid to its volatility as an investment, increasingly, the focus is on merchant acceptance and navigating what could be a thorny regulatory environment. presents a three-part series on Bitcoin and its spasmodic progress toward legitimacy. In Part II, we look at efforts to change the perception of Bitcoin from outlaw currency to trusted medium of online exchange. Some companies are betting big on Bitcoin, what are they doing to allay the fears of consumers and regulators?

Part II – Putting a Shady Past in the Rearview Mirror

By Carl Brown

Bitcoin: Bubble to Bedrock? - Part II Despite some recent slippage in traction related to illicit activity and concerns that it has little or no regulation, Bitcoin appears to be making slow progress toward becoming a legitimate digital currency. Several businesses are convinced that this is the universal currency of the future that happens to be experiencing growing pains right now.

One of those businesses is BitPay, an Atlanta-based startup founded in May 2011 that’s providing infrastructure for the virtual money. The company announced in December it had processed more than $100 million in transactions in 2013. BitPay handles transactions for approximately 14,000 companies across 200 countries, with about half of those firms located in the United States.

Bringing legitimacy to the Bitcoin world is going to take time, concedes Stephanie Wargo, BitPay’s vice president of marketing.

“Bitcoin is a new technology and is still in its very early stages,” Wargo says. “As with anything new, we recommend that users educate themselves on the benefits as well as the risks of using Bitcoins. To gain mainstream use and acceptance, the technology needs to continue to mature and develop with companies like BitPay building services to make it easier for merchants and consumers to use Bitcoin.”

Echoing similar sentiments is Jose Caldera, vice president of platform management at IdentityMind, a Palo Alto-based antifraud and risk-management technology provider. Caldera sees education and the availability of applications that solve real problems as two hurdles that need to be overcome to legitimize Bitcoin.

“Legitimacy will be given by market adoption,” he says. “The volatility of Bitcoin needs to settle down. It also needs to continue its trend of becoming more accessible to a larger audience with more and more places to spend.

“Another large area for improvement will be around simplifying the ability to acquire coins. Consumers will push for easier access as it becomes more accessible, and there are more applications with tangible benefits.”

‘Forward Thinkers’ Driving Adoption

Right now, Wargo says, forward-thinking businesses and individuals are the driving force behind the adoption of Bitcoin. The currency will gain wider acceptance as the result of additional innovations and streamlined retail processes, she notes.

“We will see an increase in customer-facing technology that focuses on providing even faster and easier transactions for both consumers and businesses, while outlining the benefits and security of Bitcoin,” Wargo says. “We also will see Bitcoin’s role growing in the U.S. economy. Bitcoins allow small- to medium-sized companies to reach more customers by opening new markets around the world that were previously unreachable.”

That global reach and impact hasn’t escaped the eye of such financiers as Li Ka-shing, Asia’s richest man. Late last year, the Hong-Kong based billionaire became an investor in BitPay through his venture capital company, Horizons Ventures, an early investor in companies such as Facebook and Skype, according to news reports.

But it’s going to take more than backers with deep pockets to secure Bitcoin’s place in the global marketplace. Retailers need to be convinced that Bitcoin is going to give them an economic advantage. Wargo sees that happening.

She says her company is attracting online merchants who are selling low-priced goods and want to avoid expensive credit card fees. And the currency benefits high ticket items—like jewelry, electronics, gold and silver—where chargebacks that are common and costly.

“The ability for merchants to accept Bitcoins makes these transactions irreversible, and for the buyer the risk of fraud and identity theft are eliminated,” Wargo says.

Keeping fraud at bay is something that Caldera’s company is quite familiar with. IdentityMind recently announced that it has released a new version of its flagship platform aimed specifically at Bitcoin exchanges.

Bitcoin exchanges, like all other Money Services Businesses (MSBs), must comply with the anti-money laundering (AML) and know your customer (KYC) requirements of the Financial Crimes Enforcement Network (FinCEN), an agency within the U.S. Department of Justice. IdentityMind’s platform includes a strong AML and KYC component that banks and other types of MSBs have been using to comply with the Bank Secrecy Act.

When integrated into a Bitcoin exchange’s system, the IdentityMind platform alerts a company when it detects suspicious activity related to funding Bitcoin wallets, transferring money between Bitcoin wallets, withdrawals from bank accounts or Bitcoin wallets and wiring money between bank accounts.

Current regulations surrounding Bitcoin mostly involve anti-money laundering (AML), but they have been reasonably clear, Caldera says.

“We haven’t seen, so far, something that looks too much out of the ordinary either from FinCEN or from our clients’ banks,” he says. “It seems the reason there aren’t more banks supporting the industry is really fear of the unknown rather than lack of practical regulations.”

Caldera advises entrepreneurs to educate themselves as far as the regulations are concerned, noting that tax regulations are likely to become clearer in the coming months.

The Effect of Law Enforcement

It’s already crystal clear, however, that law enforcement is going to have little tolerance for those companies seeking to use Bitcoin for illegitimate purposes. An obvious example involved an alleged online drug bazaar called Silk Road. Last fall, the FBI shut down the operation and arrested Ross William Ulbricht, the man they say created it. Ulbricht was charged with narcotics trafficking, computer hacking and money laundering.

According to investigators, Silk Road was the go-to black market for all sorts of illegal products and services since its inception in 2011. The FBI said the site had more than 957,000 users.

Silk Road operated on an anonymous network known as Tor, making activity on the site virtually untraceable, investigators say. The only money accepted on Silk Road were Bitcoins. Since Bitcoins allow buyers and sellers to conduct transactions anonymously, this provided even more secrecy, the FBI contends.

As a result, the digital currency helped Silk Road become a huge money laundering operation, according to the FBI. The site generated revenue worth more than 9.5 million Bitcoins, which, at the time of the site’s shutdown, was valued at $1.3 billion.

After the FBI swooped in, the value of Bitcoins dropped from a high at the time of $141 to below $120, according to news reports (since that time, speculation in Bitcoin led to a massive run-up in the currency’s value along with massive volatility— see Part I of this series ).

Authorities in Florida, meanwhile, conducted a separate Bitcoin-related investigation that earlier this month led to criminal charges being filed against three men who allegedly ran illegal businesses moving large amounts of cash in and out of the virtual currency. Reportedly this was the first case in which Bitcoin vendors had been prosecuted under state anti-money laundering laws, and experts predicted that similar investigations in other states would follow.

According to investigators, undercover officers and agents from the U.S. Secret Service’s Miami Electronic Crimes Task Force contacted several individuals who were enabling high-dollar transactions via, a site that helped match buyers and sellers of the virtual currency so that transactions could be completed face-to-face. The probe, which also involved Miami authorities, revealed illegal transactions exceeding tens of thousands of dollars.

Wargo and Caldera agreed that such crackdowns will benefit Bitcoin in the long run.

“We do think it will help the cause because it’s showing that if you use Bitcoin to break the law, you will be caught,” Wargo says. “While it’s related specifically to (another situation), we admire this quote in the New York Times from Edward W. Felten, a professor at Princeton University who has studied Bitcoin, who said, ‘We’re seeing a shakeout where the companies that are weaker in terms of management and technical execution are being weeded out.’”

Caldera said: “My belief is that if you are doing something illegal you should be held accountable to the law. It doesn’t matter what it is. The same money laundering happening through Bitcoin happens with traditional banking. I do not believe it is easier to hide because of Bitcoins; there is certainly less visibility, which a few took advantage of while it wasn’t properly regulated. As it becomes mainstream it will have the same accountability as other trading systems have.”

Caldera concedes that negative media coverage surrounding Bitcoin can lead many people to believe that the currency is mainly tied to criminal activities such as drug deals and money laundering.

“We need to educate the market,” he says. “Right now most of the coverage is associated with people that have extreme opinions; we need to give space to the more moderate and pragmatic views.”

But Wargo believes that, despite the negative publicity, Bitcoin is here to stay.

“Bitcoin has the potential to change how we send and receive money, especially internationally,” Wargo says. “With many companies sourcing parts and services outside their country, making payments along the supply chain would be very easy. It would also be easy for international travelers, as you would never have to convert dollars to euros or any other currency at an exchange before traveling.”

Please check back for the third and final installment of “Bitcoin: Bubble to Bedrock?,” which will take a look at merchants that have actually made the decision to accept Bitcoin at this early stage. What dr ove their decisions and when do they expect to reap benefits?

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Daniel Leibovitch