by Tom Harper, president and CEO, Networld Media Group
After almost 20 years in the payments industry, I've learned to appreciate its history. That's why, with the growing popularity of virtual currency over the past couple years, I decided to do some digging into its past.
What I found changed my thinking on where the cryptocurrency market is going.
A turbulent path
Do you remember Digicash? It started 25 years ago as an anonymous cryptocurrency. It partnered with major European banks and created some of the technology still used for encrypting transactions. The problem was that banks wouldn't allow anonymous accountholders, and Digicash went bankrupt after eight years.
In '94, CyberCash made a splash with a $300 million public offering that jumped 79 percent on its first day. But the company lost millions as it tried to market itself as an anonymous payments alternative to credit cards, and it fell victim to Y2K and other technical problems. It went bankrupt in 2001, and part of it was sold to Verisign, which itself later sold to PayPal.
A company called Beenz sprouted up in '98 and withered in 2001. It was a global online couponing program calling itself "virtual currency" and it raised $100 million from big-name investors. It failed because not enough Beenz (Beenzes?) made it into circulation.
Flooz had an even shorter lifespan — from '99 to '01. This online currency's claim to fame TV advertising that featured Whoopi Goldberg. But it sank when cyberthieves in Russia and the Philippines stole hundreds of thousands of dollars worth of coupons.
Internetcash.com lived and died during the same time, dissolving during the dot-com collapse. The company developed Web-based electronic cash that verified transactions without using credit cards.
E-Bullion launched in '01, backed by real-world gold and silver and complete with its own currency exchange. The service managed to survive for eight years before shutting down without warning when owner James Fayed was arrested for running an illegal money transfer business — and for orchestrating the murder of his wife and business partner, Pamela Fayed. He was found guilty of paying three hit men to stab her to death and is currently sitting on death row. All of E-Bullion's assets were seized by the government, and users wound up empty-pocketed.
And then there was E-gold, which emerged a few years after E-Bullion, and was also backed by gold and silver. When its founder was convicted of money laundering in 2009, the whole thing shut down.
Launched in '03 in Toronto, Dexit was a rechargeable, contactless, stored-value smart key tag used for electronic payments. Although it formed several partnerships with banks, retailers and mobile companies, the currency never caught on, and in 2006, Dexit removed its payment terminals from stores and gave back all funds.
Short memories, big dreams
The consumer media seem to have forgotten this history. Just consider the following quote from The Wall Street Journal on corporate curiosity over bitcoin:
The interest is most evident on Wall Street, where there's a sense that the bank-dominated, centralized pathways through which international finance passes are long overdue for the kind of Internet-driven cost savings that have affected other industries. (MoneyBeat, March 30, 2015)
On the contrary, Internet-driven cost savings in finance, particularly in the payments space, is anything but "long overdue."
Consider Web-enabled ATMs and POS devices, mobile payments, online bill pay, cross-border remittance, dynamic currency conversion and a host of other payment innovations that leverage the Internet.
I could go on about the rampant lack of technical and historical understanding in the tech media, of all places. But let me take you back even further to the mid-1930s.
When cards were the Next Big Thing
This was the era when card-based payments first reached the masses. Department stores, restaurants and other merchants issued their own charge cards, which doubled as loyalty cards. Customers received credit from the store and paid off the balance every month.
In 1946, Flatbush National Bank of Brooklyn issued one of the first bank credit cards in its "Charge-It" program between bank customers and local merchants.
In 1950, Diners Club issued its first credit card in the U.S. Frank McNamara, the card's creator, wanted to help salespeople schmooze their clients at dinner. A customer could eat without cash at any restaurant that accepted the card. Diners Club would pay the restaurant and the cardholder would repay Diners Club.
The company went competition-free for eight years, until American Express issued its first card in 1958, the same year that Bank of America issued BankAmericard (which eventually became Visa).
By the early '60s, more companies offered credit cards, advertising them as a time-saving device rather than a form of credit. American Express and MasterCard became huge successes overnight.
Bitcoin: Toward new lands
I believe bitcoin is just another stop on the way to an exciting destination — and that we will get to this destination because of bitcoin.
No other digital currency history has stirred up so much venture capital and media madness. There seems to be a sort of rebellion among the digerati, a revolutionary fervor reminiscent of other countercultural movements. In online and social media, there's a sense that we're at the start of a new "Big Thing."
Juniper Research finds that the number of active bitcoin users worldwide will reach 4.7 million by the end of 2019, up from just more than 1.3 million last year. I call that a "Big Thing."
The Digital Currency Council reports that in the past 12 months, almost 1,000 new merchants began accepting bitcoin each week. That's huge, too.
Many corporate giants are investing millions in their quest to capture the digital payments flag. Companies such as Facebook, Apple, Microsoft, PayPal, Amazon, Alibaba, Google, MasterCard, Visa and others are vying to be the company to bring virtual and mobile money to the masses.
Five thoughts on the future
Following are five quick virtual currency reality checks that give us a roadmap to perhaps the next five years:
- Regulatory and tax issues are a big concern for merchants. Because laws are just starting to evolve, many changes and updates are coming. Now that California has legalized virtual currency use, we'll likely see more loosening up by other states.
- Bitcoin's price volatility must be solved. The swings in bitcoin value have made merchants and consumers nervous. Some startups have begun mitigating the risk, but volatility is the very nature of bitcoin, and this leaves the door open for more stable virtual currencies.
- Most early-adopter merchants are attracting younger demographics by promoting bitcoin acceptance. This adds to a brand's cachet with millennials, whether they actually use bitcoin or not. If a store accepts virtual currency, the thinking goes, it must be cool.
- Nearly half of bitcoin exchanges have failed since 2010. Can you imagine living in a world where half of the banks had gone under in the past five years? It says something that bitcoin has survived and continues to grow, but it also begs caution. We're in the Wild West of virtual currency, where anything can happen.
- Virtual currency as a category will catch on when consumer comfort with it and desire for it reach critical mass. Isn't that true for any new technology? When consumers "get" a new tech product and see an obvious use case, mass adoption erupts. Just look at the iPod, followed by iTunes and then the iPhone. History is replete with successful new products that at one time seemed unnecessary.
No doubt our financial future includes virtual currency — 25 years of history has established this. But how the newest iteration of digital money will be tracked, acquired and spent are all fair questions.
What could be cooler than new payment rails built on an open-source, immutable ledger? The bitcoin-blockchain combo is an exciting technological breakthrough that promises to transcend current closed-loop payment models — even if bitcoin gives way to other kinds of currency.
Now that a new wave of financial innovation has been born, and a zealous user group has emerged, the next chapter of virtual currency's history is becoming reality.
Tom Harper is CEO of Networld Media Group, the publisher of ATM Marketplace, Mobile Payments Today and Virtual Currency Today. He a founding director and past chairman of the ATM Industry Association and the coauthor of "Cash Box: The Invention and Globalization of the ATM."