Bitcoin offers much potential for innovation

If you’ve heard of Bitcoin but don’t know how it works, you now have an easy way to find out. A bitcoin ATM opened Wednesday in Montreal, which will make it easier for anyone wanting to own and try the so-called crypto-currency.

Bitcoin ATMs have also recently opened in Ottawa and Toronto. Last fall, Vancouver got the world’s bitcoin ATM and it exceeded $1 million in transaction volume in its first month alone. If this is an indication, the new Montreal ATM on St. Laurent Blvd. north of Sherbrooke St. could quickly become a popular attraction.

The media are increasingly talking about Bitcoin, and the virtual currency continues to gain popularity worldwide. However, the focus of attention is often on the price fluctuations of Bitcoin, and less on the innovative network that supports this currency and allows its dissemination and exchange.

In fact, Bitcoin isn’t just a new currency, it is also a decentralized payment system — where the transactions are confirmed by a large number of users without the need for a financial intermediary. This aspect of Bitcoin deserves more attention, because it holds a lot of potential for innovation.

Since its introduction in 2009, a bitcoin has seen its value fluctuate significantly, peaking at more than $1,000 U.S. last fall. Since then it has attracted the attention of a growing number of Internet users, researchers, central bankers and speculators. At the same time, a growing number of businesses and organizations of all kinds now accept bitcoins as payment. And a host of startups are currently working on innovations to facilitate and improve the use of bitcoins for both merchants and consumers.

One of the main reasons for the growing use of Bitcoin by businesses and consumers is that it reduces transaction costs. Banks, credit-card companies and online-payment services charge fees to merchants who allow their customers to pay by credit or debit card, or with their PayPal account. Some of these expenses are generally passed on to customers through higher prices for goods and services. The use of Bitcoin may therefore help some companies that are most affected by such costs.

Bitcoin thus holds some potential for improving current financial products and services. For example, a number of financial analysts believe that international money transfers (e.g., payments made by foreign workers to their families still living in their country of origin), where transaction costs are relatively high, is a promising avenue for Bitcoin.

As The Economist noted last November, in many respects Bitcoin is similar to the music-file-sharing service Napster, which disrupted the music industry in 1999 and opened the way for iTunes. In its turn, Bitcoin has already triggered a wave of innovation, this time in the realm of digital money. This is how we should appreciate Bitcoin: as a technology platform that offers great innovative potential for today’s entrepreneurs.

However, to further its development, Bitcoin will have to overcome some challenges. Among them, the volatility of the price of bitcoins, which can incur costs and risks for users. But above all, the fact that Bitcoin still operates in a regulatory grey area, and that many central banks have expressed concerns about it, undermines its widespread adoption. That is why, although it is a fascinating innovation, an appropriate legal and regulatory framework will be needed to strengthen the trust of users and to mitigate the risks and concerns associated with the use of Bitcoin.

David Descôteaux est chercheur associé à l'Institut économique de Montréal. Il signe ce texte à titre personnel.