If Bitcoin is to grow in popularity as a world currency, it has many obstacles to face. While many of these, such as popular mistrust or governmental regulation, are well-recognised and frequently debated, one challenge is less frequently discussed. Conversation of how Bitcoin improves payments over large distances is abundant, but less attention is paid to the flipside of that comparison: the numerous smallscale, local payments that constitute the bulk of the world’s transactions, and are still conducted overwhelmingly using hard cash — with physical coins and banknotes.
Physical currency has a long history. Standardised disks of metal were first developed for payments in the 8th century BC, and banknotes have been in use in China since the 11th century AD. Even today in an age of widespread card payments, on the likely advent of a wave of smartphone-based payment systems, coins and notes are practically ubiquitous in most developing countries, and still abundant even in many wealthy countries, especially for smaller payment amounts. Only a handful of countries in the world have switched to primarily electronic payment systems, and in none of those countries has cash yet disappeared or been abolished.
Cash is not only widespread and history-rich, it is in some use-cases arguably superior to Bitcoin. It requires absolutely no special equipment to accept cash payments, and the act of giving a coin or banknote as payment is very easy, as long as the sum is simple. Compared to authenticating a payment with a fingerprint or password on a smartphone, reaching into one’s pocket or wallet and retrieving a coin is fast and simple.
From one perspective, the challenge Bitcoin faces against cash seems strong. Recently I was able to visit several developing countries whose economies run heavily on cash money. Everywhere one looks, cash is flowing in all directions, in amounts big and small. Cultural knowledge of its appearance, how it is held, stored, counted and given is second-nature, and acceptance that these physical tokens are valuable and desirable is a fact of life.
But those who are familiar with their histories understand that these currencies often have extremely poor track-records for serving their users. The Indonesian Rupiah, for instance, has suffered a staggering 137 million percent inflation since its creation in 1949 — initially valued at 3.8 IDR per USD, one USD now buys 13,439 IDR — and that is after a thousandfold downgrade of the Rupiah. Adoption of a stable, growing Bitcoin for this reason alone should be viewed as a huge opportunity to protect ordinary people in such environments from corrupt and incompetent centralised monetary management.
But how can Bitcoin gain popularity and thrive in these cash-heavy environments? Bitcoin’s intangibility, the same great technological advantage enabling its fast, location-independent global payments, also happens to challenge thousands of years of human culture. How can people be convinced to trade their age-old relationship with physical cash for intangible internet money? How might Bitcoin respond to the appeal and utilities of physical currency?
Receiving payments
In my home country of New Zealand, card payments using a system called EFTPOS are extremely widespread, often available for even the smallest transactions. This system works because New Zealand is (still) a relatively prosperous country, and enjoys low levels of fraud and crime, and thus these expensive networks are cost-effective for banks, and retailers can afford extremely expensive payment terminals — often costing thousands of dollars a piece, plus ongoing transaction charges and support costs.
In developing nations however, these costs and requirements become untenable. The cost of maintaining a payment network becomes much higher relative to average incomes, and payment terminals are prohibitively expensive and impractical for the countless small businesses present in these countries. Nevertheless, smartphone adoption in developing nations is widespread and ever-growing. In a Bitcoin world any smartphone becomes a potential payments terminal for small merchants, with no need for any special equipment. Any small streetfood vendor could for instance use their personal smartphone for receiving payments, and even individual employees could use custom applications on their own smartphones to take payments. One can imagine too cheap purpose-built devices sold as Bitcoin payment terminals, with a specific loadout of software features catering to this use-case.
The potential advantages for such small businesses (outside of the inherent benefits of switching to an inflation-proof open-source currency) are numerous, including improved precision in pricing, simplified and reduced cash handling, much improved cash security, and much higher control and functionality for the resulting money. These benefits, coupled with the natural entrepreneurship of small businesses and the low costs of transitioning to Bitcoin, should make this issue relatively unproblematic.
Making payments
The problem of receiving payments for merchants is a relatively simple one, primarily due to low authentication needs — merchants receive many more payments than they make. But what about everyday users — how can they make numerous small payments throughout their daily lives, retain a high level of security over their money, and avoid onerous authentication burdens?
In this area technological progress and innovation will certainly ease many functional concerns. Increasingly portable computers with more capable intelligence and sensor systems will be integrated more and more into daily life, opening up exciting possibilities for flexible mobile payment authentication. Apple Pay on the Apple Watch offers a glimpse of this— users authenticate with TouchID when they make their first payment of the day, and afterwards the device remains authenticated until its sensors detect that it has been removed.
While smartwatches are currently an emerging product category, in ten years they will likely have seen the same level of improvement and a similar level of adoption as smartphones over the last ten years. And we can expect increasingly sophisticated Bitcoin wallets to appear to take advantage of these devices. For instance, wallets might offer multiple tiers of funds with corresponding authentication requirements, from an initial low-risk tier for daily expenses, to a final primary savings tier requiring potentially a time-lock or extraordinary authentication measures to access. Combined with behavioural pattern recognition and biometric monitoring, small value transactions at a relatively low rate could be automatically approved, stepping up through higher levels of authentication as payment patterns deviate upwards.
Challenges are still real in this area, but as technology becomes an ever larger part of people’s lives, the ease of making electronic payments and people’s comfort with and desire to manage and spend their money using electronic payment systems can be expected to grow. Over time people may come more and more to view a wallet full of dirty bills and messy coins as a fundamentally inconvenient and inefficient form of making payments. The need to price goods to match common hard currency amounts and the irritation of giving and receiving awkward amounts of change do not compare favourably with the ease of making arbitrarily precise payments with a modern electronic payments tool.
A hard cash for Bitcoin
Even if all this comes to pass, perhaps the demand for “hard cash” may never completely disappear. And perhaps too a hard cash alternative based off of Bitcoin could help wean the world off of fiat currencies. Could Bitcoin develop a response? Yes it could, and it is an interesting (though potentially entirely impractical and unnecessary) example of some of the new possibilities afforded by post-state currencies.
Those involved in Bitcoin are probably familiar with efforts to represent Bitcoin as physical coins, often realised by some method of attaching a private key to a coin, for example as a QR code on one side. Such coins are usually created for their novelty or presentation value. They are unlikely to have any use as actual day to day currency tokens, among other reasons because the associated private keys must be electronically verified, negating the usefulness of a hard cash payment in the first place. So we shouldn’t expect a physical currency based off of Bitcoin to be some form of direct private key storage.
We might instead imagine a much more practical attempt to fuse Bitcoin with hard cash. Namely, an enterprising company, effectively acting as a bank, would acquire a store of Bitcoin, then create their own currency product for their reserves: private tokens representing various quantities of Bitcoin, which they would sell to consumers. These tokens, coins or notes, initially sold with a premium above their stated value, would then be redeemable with the firm for the given quantity of Bitcoin.
Insofar as such a firm could make their protect their tokens from inflation and thus remain profitable, and that the firm was highly regarded as stable and trustworthy, and the tokens widely recognised, they would be a perfectly practical stand-in for our current fiat-based hard cash, instead simply valued on the underlying token of Bitcoin.
Conclusion
It is an open question if such a market of physical Bitcoin tokens is realistic or even necessary, and it seems almost certain that, in the long term, any such system would be rendered redundant as electronic payment systems become more and more streamlined and widely-adopted. But perhaps one stage in the adoption of Bitcoin might be competition against fiat via tokenised Bitcoin, especially in countries in which hard cash still dominates — a sort of gateway drug to “real” Bitcoin.
Regardless of the merits of this business model, its very possibility touches on one of the most exciting aspects of the new era of post-state currencies: the radical liberation of the monetary ecosystem from the monopolist control of nation states. For the first time in centuries, free-market currencies such as Bitcoin are more than just small regional curiosities perpetually at the mercy of their local governments. There even exists a (much-maligned and primarily implemented as a scam) new business model for a private currency: the release of a pre-mined altcoin.
On top of all that, juggernauts such as Bitcoin now offer a safe harbour where private companies can move into areas previously totally dominated by governments, such as the minting of physical currency. If there is indeed a market to be made in this area, then private companies will find it and make it work. And instead of the inefficiency and low rate of innovation seen under monopolist government management, free-market competition can be expected to produce the most efficient, innovative physical currency products possible.
