How Money Became Digital
--
Humanity used shells, salt, rocks, metal, and paper as money for thousands of years. With Bitcoin, money is finally digital.
“Wait, wasn’t money already digital?”
Let’s go back and examine how money became digitized. In the early 1920’s, retailers came up with a breakthrough idea. Instead of accepting cash for payment, they issued charge cards. When presented, cashiers verified signatures on cardboard and recorded transactions on a pieces of paper.
However, this original charge card design had scalability issues. Given the complexity of reconciling transactions on pieces of paper, it was difficult if not impossible to add retailers. It took nearly 40 years for a mainstream solution to this problem when Bank of America introduced the first major credit card in 1958. While the actual card was the same — still made of cardboard — it was no longer retailer-specific, moving from a closed-loop to open-loop system. This advancement was enabled by database technology, and by the end of the 1960s, over 30,000 retailers and 1.8 million consumers were onboard. [1]
Credit cards quickly became ubiquitous in the U.S. In 1994, one brave individual transmitted his credit card number online to Papa John’s marking the first digital payment. PayPal launched five years later enabling people to send money over email. Just 1.5 years after launch, PayPal transacted over $2 billion. [2]
Commoditization of Online Payment
Since PayPal, online payments expanded. Alibaba, Apple, Facebook, Google, Samsung, and Square rushed to develop competing proprietary payment networks.
But take a look at the new entrants — what do they do that PayPal couldn’t do in 1999? Underneath the hood, these systems rely on the same payment rails to move money: ACH and card networks. Stuck on antiquated rails, the industry produces faster trains.
Bitcoin, a better payment rail
ACH (Automated Clearing House) is the largest electronic payment network in the world. It clears and settles over $38 trillion annually including card payments, payroll, insurance, bills, and remittances. Managed by the Federal Reserve Bank, ACH evolved from clearing physical checks, and it still utilizes mainframes from the 80's. Transactions are batch processed daily and take 3–5 days to settle. Electronic money is not real-time in 2015.
The privilege to use ACH services requires a combination of licenses, bonds, and commercial banking relationships. Only 10,000 financial institutions (banks and payment processors) have permission to participate on the network.
Compared to ACH, Bitcoin is a superior payment system. Instead of trusting institutions, participants trust the network. Instead of a 500 page operating manual, Bitcoin is open source. And instead of taking holidays, Bitcoin never sleeps.
Credit cards are not much better. If you’ve ever been on the receiving end of a card transaction, you know that payment processing is neither real-time nor frictionless.
“Security by obscurity of a 16 digit # that also acts as your ID # is completely broken and nothing short of lunacy for a global payment network.” — Andrew Parker
Bitcoin is better, but…
There is a way of taking every unique advantage and squashing it in implementation. Bitcoin payment processors mimic credit card processors, and funds flow through multiple intermediaries. As a result, Bitcoin merchants are burdened with the same stringent requirements as merchants who accept credit cards. Bitcoin can’t win if it’s harder to accept bitcoins than it is to accept credit cards.
At Purse, we believe people should be able to buy and sell goods and services online without the hassle of dealing with banks. We pioneered multi-signature escrows to avoid custody of funds, improve consumer protection, and maintain accessibility. Today, our marketplace delivers the best deals online, and we operate the largest consumer marketplace for Bitcoin. We’re focused on identifying other use cases that leverage Bitcoin’s unique advantages to connect the world through commerce in ways that were previously impossible.
The Original PayPal Vision
“A blank canvas upon which to write new rules on the delivery of financial services” — Elon Musk
When founding X.com, Elon Musk had more in mind than a payment mechanism for eBay. And Peter Thiel described a future where citizens have direct control over their currencies making it impossible for corrupt governments to steal wealth from their people. PayPal stopped short of their mission to liberate the world before selling to eBay, and whether they realize it or not, they were a decade early. [4]
Our mission is to continue where PayPal left off.
Notes
[1] http://about.bankofamerica.com/en-us/our-story/birth-of-modern-credit-card.html
[2] http://www.argoglobal.com/media/pdf/041801_Paypal.pdf
[3] Buy PayPal Wars for $12.82
[4] Buy Zero to One for $14.48
Thanks to Justin Lee, Fred Wilson, Josh Elman, Thomas Hunt, Kyle Russell, Paul Veradittakit, and Ryan X Charles for reading drafts of this.
