In the common discourse, Bitcoin is often treated as a revolutionary new concept in how we handle our funds, substituting irreversible finance with reversible, automatic with prepaid, asymmetrical with symmetrical and debt-based with equity-based. Bitcoin promoters often hail these aspects as a necessary shift in our economic culture while detractors bemoan the loss of the consumer protection that reversibility and bank responsibility for fraud normally bring.
Reversibility has become a point of great focus in the Bitcoin community, with a widespread understanding that reversible payment media like PayPal simply cannot interact with irreversible media like WebMoney, Liberty Reserve, various forms of virtual game currency and Bitcoin and that eventually one or the other must win. However, what the discussion often misses is that outside of the American and Western European world the debate is almost meaningless and the issue has already been resolved: reversible payment media are almost nonexistent.
In Russia, for example, outside of some parts of the very wealthy population in Moscow and St Petersburg, credit cards have barely any market penetration, and the economy runs on cash. If you have an Internet or mobile phone service subscription, there are kiosks in nearly every shopping mall that allow you to deposit money into it so that the plan keeps going on a prepaid basis. You get paid in cash, you pay for your food in cash and you pay your bills in cash. Even digital goods work in this way; Valve, as part of its plan to expand into Russia, had to set up 45,000 kiosks across the country to allow people to deposit money into their Steam accounts. And the system works fine. Unlike the Western economy, where in order to buy any kind of online good you have to effectively give the provider unlimited access to your bank account, protected only by the assurance that you have the option of a chargeback and the bank is ultimately responsible for all your losses due to fraud, in Russia you only have to trust people with as much money as they deserve to be trusted with — a value which is often not very high.
In the Middle East, CashU is a popular online payment method for e-commerce and gaming, but it is once again prepaid and non-reversible. In China, systems like Alipay are dominant with similar rules; as Bitcoinica creator Zhou Tong describes it, “the root of all reversibility is the Visa/MasterCard credit card system used by Americans. Chinese banking system is entirely different. Chinese people don’t use Visa/MasterCard for domestic purchases, online payments require strict authentication, banks are usually not responsible for fund losses, etc. Everything is very Bitcoin-like, and non-reversible.” But the issue remains: how do these systems get around the consumer protection issue? It turns out that they use exactly the same solution as that which has been proposed and sporadically implemented with Bitcoin: escrow.
Escrow works by having the buyer, instead of paying directly to the sender, pay to an escrow agency instead. The escrow agency notifies the seller that the funds were received, and the seller sends the product. The buyer, upon receiving the product, says so to the escrow agent, who then releases the funds to the seller. This works well as a solution to combat fraud, and is generally adopted in some form in any low-trust scenario without reversibility. As Zhou Tong points out, “over half of Alipay transactions are escrows.”
Africa is undergoing a banking revolution of its own with so-called “M-banking,” or sending and receiving money through text messages with mobile phones. Mobile phones are surprisingly accessible even to the poorest of the poor; even in Africa, where the majority of the population is still struggling with poverty, there’s on average about one phone per household. Although the local banking systems did attempt to shut down mobile phone banking providers when they first arose, they are now working with them and everyone is benefitting; having one’s money available digitally is particularly important in a world where theft is rampant and physical safety is a luxury.
While for Western economies it’s easy to think of Bitcoin as a fundamentally new form of consumer finance, in the developing world Bitcoin-style finance is already here. And everywhere it’s being implemented its efficiency is creating more and more wealth throughout the world. And as there’s no distinction between consumers and vendors — anyone can send money or accept it — the potential for a decentralized and bottom-up economy is maximized. And there’s plenty of time and opportunity for Bitcoin itself to get involved. Substituting banking with Kenyan shillings through M-Pesa to banking with Bitcoins through MtGox is a simple matter of changing providers, and from there, once smartphones become as ubiquitous as less sophisticated phones are now it’s just as seamless a step to people storing Bitcoins directly on their phones. It’s predicted that in a few years there will be as many as 1.7 billion people in the world with mobile phones and without bank accounts, so Bitcoin will have many years to take its place in the market as the Internet reaches the average Indian, rural Chinese or African before traditional banking and credit cards do. And, as shown by the example of every society outside of the West, the culture to support non-reversible, symmetrical payment media is already there.
Differences between Bitcoin-style and credit-card style Finance Explained
- Symmetry – with systems like credit cards and PayPal, it’s much more difficult to get a merchant account than a simple consumer account, and they are not designed to be used outside the context of a formal storefront. With Bitcoin-like finance, anyone who can send money can also receive it just as easily, facilitating more informal economy and lowering barriers to entry for business.
- Reversibility – Credit cards and PayPal have mechanisms for customers to “charge back” any fee in case of fraud, and if a merchant wants to dispute the chargeback they have to deal with a formal dispute resolution process, effectively moving the entire problem over to sellers, which some argue is even worse since while customers can choose not to buy from suspicious businesses, businesses cannot practically evaluate and pick and choose their customers. In Bitcoin-like systems, transactions are final, and other mechanisms are used to deal with low-trust scenarios.
- Debt-based vs. Equity-based – A credit card allows you to buy products first and pay for them later, while Bitcoin-style systems do not and require everyone to maintain a positive balance. While other systems like PayPal are in theory not debt-based, in practice they often are if you get a chargeback after spending the money that you received.
- Automatic vs. Prepaid – In a credit card-based financial system services where you regularly pay the same business money, like subscriptions and online gaming, usually keep your credit card number on file and withdraw from it as needed. In a Bitcoin-style system, a prepaid approach is preferred, where you deposit money into an account and money is deducted from there. Here, from a consumer protection perspective the prepaid approach is actually superior as there is a limit to the unexpected fees that you can incur.
