Bitcoin and Stripe: presenting a false dichotomy

An analysis of Stripe’s position on Bitcoin.

Stripe recently posted an article on Stripe’s position on Bitcoin. After reading it I felt I knew less about Bitcoin than I knew before. So I’ve posted my thoughts below, paragraph per paragraph hoping to clear up what I just read.

Many people have remarked that Bitcoin resembles the internet in the early 90s: we haven’t yet built the Googles that will make it accessible or the Facebooks and Netflixes that will make it broadly useful. So it’s an open question: what might a Bitcoin that’s useful for the mainstream look like?

Great! Finally an article that will explain what problems Bitcoin solves. Exciting!

Money has three functions: it’s a store of value (that is, somewhere you can put your life savings), a unit of account (that is, a measure of value), and a medium of exchange (a way to transport value). On the first two fronts, Bitcoin has shown promise in high-inflation economies, but it’s a much tougher sell for mainstream consumers in stable countries. There, consumers mostly want a safe place to hold their savings, and the existing bank account insurances and consumer protections have set a high bar.

Ok, now we know what it’s not good for. That’s a start.

“Bitcoin has huge potential as a way to transport value.”

Finally, the good stuff.

“It’s surprisingly difficult to move money today, and the experience of paying for something online is just about the only part of the internet that hasn’t changed dramatically in the past twenty years.”

Umm.. Did these guys ever try to buy anything online in 1994? The slick purchase experience offered by solutions like.. Wait for it… Stripe, is nothing like it was using your card online in 1994. Paying online with my credit card goes fast and things like CVV, CVC and 3D Secure has made it more secure, lowered fraud rates and thereby also the cost. I still remember trying to pay for Yahoo! Mail in 2005 and being forced to input my full home address exactly the way I had given it to my bank and the transaction still failing because I couldn’t use a Swedish VISA card.
For micro transactions like ebooks, apps and movies I’m already signed up with my credit card in walled gardens (Apple iTunes/App Store, Google Play and Amazon) and have a super slick one-click experience. For other more rare transactions I either input my credit card number, use PayPal or pay by an invoice sent to my email using solutions like Klarna. I can also pay directly through my bank using an app provided to me by my bank (although I prefer not to as I’d rather get the bonus points associated with my cards from VISA and MasterCard).

Compounding the issue, value transport becomes especially challenging as soon as there’s a regional border involved. This is in stark contrast to the transmission of information: if you’re using the internet in Honduras, you don’t need to figure out how to hook up your local ISP to send packets to Kenya. But traditional payment systems look a lot like computer networks before the internet.

Ok that might be so — but how does that affect me? My bank does a great job of masking the underlying complexity. There’s universally accepted standards like IBAN and SWIFT for international money transfer so I’m not really affected by what the backend looks like.
The analogy to the internet is halting — the whole point of having an ISP is that they figure out how to send packets to Kenya, just like my bank does for money. For the unbanked there exist other solutions like Transferwise or Western Union.

Cryptocurrencies have given us a real opportunity to solve these problems.

What problems? I’m curious. They haven’t mentioned it but I’ll assume they’re referring to the speed and cost of international money transfer. How does Bitcoin solve them? If the problem is with the underlying technology, is Bitcoin the best way to solve the issue? Maybe they’ll explain that further down so let’s keep reading.

If we want to make Bitcoin useful but still allow consumers to think in their local currencies, the place to start is likely by building a series of “gateways”. These gateways should allow people to transparently get into and out of the network, while always thinking in terms of their normal currency.

Of course I should be able to see all my payments in my own currency — anything else would be insane! Sounds like a hygiene factor to me.

A consumer could go and sign up for a gateway in their country, link their local bank account, and then specify all their actions in currencies they understand: “send £10 to this destination; send $20 to that destination”.

My home bank offer this exact same service and I don’t have to “link” my bank account to some “gateway”. How is Bitcoin better?

If this became widely adopted, we’d suddenly have proper connectivity between the world’s financial systems.

Sentences like this is just fluff. What’s “proper” connectivity and how is it different from the current “inproper” connectivity?

If every system backends to Bitcoin (or another cryptocurrency), suddenly the world starts to look a lot like this:

So these guys seriously believe the reason that PayPal and Alibaba don’t make it easy to transfer money between the two is because they are waiting for a technological breakthrough? You really think this is an engineering problem? Let me offer an alternate explanation: they hate each other and will do everything they can not to be interoperable.

You could imagine the gateway ecosystem choosing a traditional financial system as their backend in place of Bitcoin. However, doing so would require each to navigate the regulatory and partnership landscape in two countries: their local country, which they likely understand well, and the country in which the backing system is based, which they likely do not

So Bitcoin will help you avoid regulation? If anything, Bitcoin requires you to handle more regulation if we look at places like New York. But there’s more, so let’s read on.

You could imagine the gateway ecosystem choosing a traditional financial system as their backend in place of Bitcoin.

Here’s the core problem of the whole article — we’re presented with a false dichotomy. We’re presented with two options: use an existing financial system or use Bitcoin. There’s several other ways this could be implemented if the banks or other financial players wanted to (and are in some regions forced to — eg SEPA and PSD in Europe). Still no explanation of why Bitcoin (or any cryptocurrency) would become the de-facto backend.

Namely, every entity on the internet could have a payment address that feels like an email address. To pay on a site, you would just provide your payment address. The merchant’s gateway would then request funds from yours, which you could authorize via a push notification to your phone.

Today I usually pay by typing in my PayPal password, or even better, one click payment on Amazon or Google Play. Or Klarna where I get an invoice emailed to me after inputting my email and ZIP code. Again, how is this better for me as a consumer?

And in the end, we’d have a globally-connected network.

More fluff. What does this even mean? Later on Stripe states that there already exists global payment solutions so not sure how this “globally-connected” network is different.

It wouldn’t replace the existing financial systems—consumers would still be able to use all the infrastructure they use today. But it would make the existing system incredibly more valuable, in the same way that connecting everyone’s local networks via the internet multiplied the value of what was already there.

How? I’m lost now. It wouldn’t replace the existing infrastructure so we’re obviously not disrupting anything here. But we’re empowering and banks others — the “existing financial systems” to become “incredibly more valuable”. How exactly?

The fundamental advantage a Bitcoin gateway ecosystem has over PayPal is that it’s open. Any closed network will, by nature, be deprived of structural pressures that force it to improve.

This is fundamentally wrong. It’s not about closed vs. open — it’s about monopoly versus competition. If there’s competition a closed network will improve, you might even argue that a closed system improves faster than an open one (compare iOS vs Android). And it’s not like there’s no innovation in the financial system — just look at companies like…wait for it…Stripe.

Bitcoin does better than Swift by including money movement and transaction fees in the protocol, though it similarly lacks native currency conversion.

Ok finally an advantage over the traditional banking system. But again, how is including money movement and transaction fees in the protocol helping me as a consumer or financial startup wanting to do something with money? If that’s a great innovation won’t Swift include it too?

[long explanation of what VISA is] “[Trust providers] will provide consumer protection services like chargeback mediation (and have a direct relationship with the merchant to actually recoup funds for those chargebacks). They’ll gain acceptance among Bitcoin-accepting merchants if they can boost sales:”

This sounds reasonable — but again, this will only put Bitcoin on par with the services already offered by the existing payment networks. And it seems like these “trust providers” will provide a low value to consumers and merchants — all that they’ll do is put a brand on the site that consumers can trust. Compare this with what VISA, MasterCard or AMEX who issue cards, vet merchants and provide the underlying technical infrastructure to banks.

So what would all of this buy us? There would be three major improvements to the existing financial system.

Ok, none of this has been explained above, but maybe we’ll finally get to know!

First, the resulting ecosystem is technologically open. Open ecosystems have a way of getting better much faster than their closed counterpart. Anyone can enter, connect to the network, and start building good tools and applications on top of it.

Maybe — open is sometimes better than closed, not always, but I’ll accept it. Again, compare iOS vs Android — I’d argue that the key competitive advantage of iOS is that they’re closed and they can do whatever the hell they want. The same goes for Paypal, VISA, MC or Amex. If they wanted to implement the feature listed above (“input my email to pay and get a push notification to my phone to approve the transaction”) they could launch such a service to hundreds of millions of existing users and merchants tomorrow.

Second, this model unbundles the existing financial system into layers run by independent companies.”

What layers are we talking about here?

Again, a wet dream but still no evidence that Bitcoin will be the technology to make this happen.

And third, this would be the first truly global payments network: anyone would be empowered to start a gateway in their country, rather than relying on it eventually making sense for some centralized actor.

Ok, again sounds good, but doesn’t follow from the facts presented above.
My conclusion
Stripe is presenting a false dichotomy with the traditional financial system on one hand and Bitcoin (or another crypto-currency) on the other.

In reality, there’s reasons why the banking system looks like it does — and few of them are technical. “I wish there was a distributed crypto-currency over which I had no control over to handle all my technical problems” said no player in the financial system ever.

There is no doubt that the current banking system is complex and built on legacy infrastructure and we would all be well served by replacing it. But is Bitcoin thepanacea that will disrupt the current infrastructure?

I have no idea, and Stripe doesn’t seem to know either, at least they’re not presenting any evidence in that direction in this post.