Bitcoin In Commerce: The Bumpy And Unapologetic Road To Merchant Adoption



Throughout the course of history, commerce has been shaped by the use of several different means of payment.


From primitive money like shells, cattle or tobacco to the gold standard of the 20th century, we've seen the adoption of metal coins as early as 1200 BCE, paper banknotes and finally Bitcoin. The role of Bitcoin is ever-evolving. In addition to being both a sound money and an investment asset, there is some clear intention to create a base for a cash equivalent that can be used in e-commerce. This dual nature has proved crucial to its success so far and provides a clear advantage to other monetary assets like gold.


The controversial ‘fractional reserve banking system’ paved the way to modern fiat money. This allowed for the creation of bank notes that were only fractionally backed by metal deposits, and subsequent to 1971, not backed by anything.


Bitcoin was created to replace that very economic system which continuously debases the savings of citizens, and led to behaviours that eventually spurred the 2008 global financial crisis. The prevailing concepts of economics and commerce accepted prior 2008 are now being questioned, making room for a sound monetary system that does not have to rely on trusted 3rd parties. However, the very nature of Bitcoin and its security model does indeed necessitate certain tradeoffs, leading some to assume that certain drawbacks have encumbered its full adoption so far.


Initial interest in bitcoin was minimal and circumscribed to a few cryptographers in a niche mailing list. This changed as the free market took hold and Bitcoin (the world's first provably scarce digital asset) began to grow in value. Although many new users held primarily speculative interests, some of course experimented with Bitcoin payments. This in turn contributed to the development of the network, its growth in value and an increasing interest from vendors.


These network externalities created a network effect: a phenomenon whereby an increased number of participants raise the value of a good or service. The Internet is an example of the network effect in action. Looking more granularly, we find the same patterns in social media platforms like Facebook and Twitter, and other peer-to-peer networks like eBay, Wikipedia and Bitcoin.


How Has Bitcoin Been Used in Commerce?


The infamous silk road was where many heard about Bitcoin for the first time - allowing people to u to purchase illicit goods on the internet. Wikileaks was another early adopter of bitcoin as a donation method in 2011. While some detractors point to those use cases as negatives, they also point out the immutable and censorship resistant nature of the protocol.


As new users came, so too did new use cases. By​ ​2012,​​​ ​BitPay​ had ​reported that​ over ​1000​ ​merchants​ ​were​ ​accepting​ ​Bitcoin​ ​through them and in​ ​2013, Coinbase announced​ ​that​ ​it​ ​had​ ​sold​ ​$1​ ​million​ worth​ ​of bitcoins​ ​in​ ​one​ ​month.


By 2013 new​ ​businesses​ started accepting bitcoin payments ​such​ ​as dating​ ​site​ ​​OkCupid while Robocoin​ ​​launched​ ​the world's​ ​first​ ​bitcoin​ ​Automated​ ​Teller​ ​Machine​ ​(ATM)​ ​​in​ ​Vancouver,​ ​Canada,​ ​which​ ​allowed​ ​clients​ ​to​ ​sell​ ​or​ ​purchase​ ​bitcoin​ ​currency​ ​at​ ​a​ ​downtown​ ​coffee​ ​shop. Contrast this with the nearly 8000 Bitcoin ATMs around the globe today.


An​ ​even​ ​larger​ selection ​of​ ​businesses​ ​began​ ​to​ ​accept​ ​bitcoin​ ​in​ ​2014,​ ​including​ ​Overstock.com,​ ​Dell​ ​and Microsoft.​ In​ ​2016,​ ​the largest​ ​South​ ​African​ ​online​ ​marketplace,​ ​Bidorbuy​ ​launched​ ​bitcoin​ ​payments​ ​for​ ​both​ ​buyers​ ​and sellers.​ ​In​ ​Argentina,​ ​Uber​ ​switched​ ​to​ ​bitcoin​ ​after​ ​the​ ​government​ stopped​ ​credit​ ​card companies​ ​from​ ​transacting​ ​with​ ​Uber.​


Fast-forward to more recent times and we have records of countless merchants that accept bitcoin worldwide and the number of transactions made since bitcoin was created has skyrocketed.


This year technology specialist surveyor HSB, recently released a survey reporting that at least one-third of U.S. small and medium-sized businesses accept cryptocurrency as payment for goods and services. Many of these are start-ups and by nature more inclined to innovate, therefore attracted by a new niche market.


For a long time BitPay and Coinbase were the main bitcoin payment providers, until the free, open source and non-custodial BTCPayServer payment processor was created in 2017. It was soon welcomed by the bitcoin community, due in part to it lining up perfectly with the philosophical views that spurred the creation of Bitcoin in the first place. This was most clearly communicated by lead developer Nicolas Dorier in his infamous tweet declaring he intended to make BitPay obsolete. In 2019 BTCPay developers were granted $100K by Jack Dorsey’s Square, and development doesn't seem to be slowing.


What Has Contributed to Bitcoin's Evolution over Time?


Speedy Transactions: Bitcoin certainly fits our tendency towards instant gratification, so much sought after in our fast-paced society. Indeed, Bitcoin payments are cleared quickly and merchants can ship products out with near certainty of payment because bitcoin transactions are typically confirmed within 10 minutes, and practically irreversible inside of an hour. Contrast this against traditional payment systems: Paypal transactions, for example, can be reverted up to 6 months after completion. In cases of fraud this leaves the merchant on the hook for the lost merchandise.


No Middlemen or Rent-Seekers: Bitcoin's network structure is based on peer-to-peer trust that requires no third party or middleman. Barring miner fees (paid by the sender to those that secure the network itself), there’s no cost the merchant incurs in order to receive the currency. To further reduce transaction fees, merchants and consumers can utilize the Lightning Network to reduce wait time and fees to near zero.


High Security: Bitcoin is an extremely secure payment gateway. Users can back-up and encrypt digital wallet keys to effectively store bitcoin offline. Mobile apps allow users to securely access their wallet online (referred to as a hot wallet) and while shopping in store too. Furthermore, since every transaction is recorded on a public ledger, double-spending becomes near-impossible as time passes, while fraud and misappropriation of fund risks are minimized.


Bitcoin Boosts Commerce in Developing Countries: Bitcoin often represents the only payment option in developing countries where other financial institutions or services are almost non-existent. A censorship-resistant tool like Bitcoin is often one of the few financial tools available to face dictatorial control.


The share of Bitcoin payments appears significantly higher in countries with lower GDP per capita because they tend to mainly use cash as a means of payment. Since the unbanked are not able to utilize credit card and bank transfer payments, or merchants are unable to process them due to fraud risk, e-commerce and online transactions are rare activities. Bitcoin can potentially address this niche market.


Bitcoin could replace or even be integrated into the M-Pesa system that is currently being widely used in many Sub-Saharan African countries like Kenya, Tanzania, Nigeria and Uganda.

Additionally, many developing countries impose restrictions on foreign exchange or erect other barriers to international payments, which Bitcoin can overcome.


The Challenges to the Expansion of Bitcoin as a Payment


Trust: Customers facing a choice between Bitcoin and payment options like PayPal or credit cards, will choose the familiar and established service. Moreover, insurance protection with loss-coverage schemes reassures the customer while the lack of a bitcoin ‘customer service’ represents skepticism and fear among most. Once people become more aware of bitcoin and how it provides financial freedom and sovereignty while also understanding its bearer-asset qualities, they will be better prepared to embrace it.


Bitcoin network infrastructure, for instance, sounds complicated and obscure while in reality it is extremely safe. It has been functional 99.98% of the time. This makes Bitcoin the most consistently robust of all networks in existence, considerably more than Google or Amazon's servers. Hacking still represents the major threat to most of the online world but, although a 51% attack scenario on bitcoin is possible, it is extremely difficult to perform and less and less viable from an economic perspective. It would require enormous computational power and at the time of writing it would cost over US $19Billion on hardware only.


Volatility is identified by many as the main barrier to bitcoin adoption as a payment. While it represents a great advantage to crypto traders, merchants might view it as a concern that can have serious financial implications for their business.


There are, however, ways to overcome the issue. Companies that allow bitcoin payments normally support the ecosystem, accept its drawbacks including volatility, and consider it as an opportunity to hold it as a store of value. In the case of returned items, a store credit can be issued in fiat money based on the original purchase price.


Regulatory hurdles: Despite most payment providers are obliged to meet anti-money laundering and counter-terrorism financing legislation pretty much everywhere, bitcoin regulation might well differ from one country to another creating confusion and questioning among users.


The Taxman: The payment use case for bitcoin has made a huge comeback since the inception of the Lightning Network and its renewed interest has raised the eyebrows of regulators who look at ways to make bitcoin purchase transactions a taxable event. In simple terms, buying something with bitcoin, whether it is a house or a coffee, is akin to selling bitcoin holdings. Each expenditure then could incur capital gains tax on the value accrued since they bought the asset.


This regulatory issue, other than being complicated to comply with, has been perceived by the bitcoin community as a way for authorities to interfere with Bitcoin adoption. A potential workaround could be to apply the same capital gain taxes that are enforced to foreign countries: Exemption of Bitcoin payments of up to $600 from capital gains taxes.


Stigmas Surrounding Early Uses


It’s no secret that early bitcoin commercial transactions were mostly associated with illicit activities. Without a thorough investigation, payments can be settled online with anonymity, thus attracting those whose transactions are deemed illegal in various locales. Large bitcoin transactions across international borders are both cheap and easy to execute, hence why the cryptocurrency became linked to drug dealers and money laundering in early days.


In October 2010: Financial Action Task Force (FATF) published Money Laundering Using New Payment Methods to warn about the use of virtual currencies to finance terrorist groups. In 2015 there were false claims that Bitcoin had been used to fund 2015 terrorist attacks. Specific evidence that terrorist groups use bitcoin is scarce and largely anecdotal. Yet, crowd-sourcing and fundraising activities continue to be investigated among those sympathetic to terrorist ideologies.


In October 2013, authorities closed the infamous dark web site Silk Road and arrested its founder Ross Ulbricht who was later sentenced to life in prison with no possibility of parole. Many view this as an extremely harsh sentence for creating a website that was illegal but still had a strict code of conduct by not allowing violence related goods, services, or even pornographic activities.


Ross's imprisonment did little to impede other digital black markets from arising, as iterations of the silk road and alternatives continue to proliferate today. However, in 2015 even dark-web users found themselves questioning the reputation of bitcoin, when the two founders of marketplace Evolution exit scammed with $12M worth of cryptocurrency at the time.


All fraudulent and criminal activities linked to bitcoin exasperated those who wanted to use the cryptocurrency legitimately while looking forward to its development and full-scale adoption. The tide seems to be gradually turning though, as in July 2016, researchers published a paper analysing patterns in Bitcoin transactions from 2009 to 2015. This paper found that by November 2013 bitcoin commerce was no longer driven primarily by "sin" activities but by legitimate enterprises instead.


Base Layer Limitations and Secondary Layers for Payment


There’s no end to the debate over bitcoin scalability. While it led to BCH hard fork in 2017, the BTC community is still grappling with mechanisms through which greater transaction throughput can be achieved. The general consensus seems to be that only large settlement transactions will eventually be recorded on-chain while in time all others need to move off-chain to secondary and tertiary layers.


This structure is what sorted the scalability issue for the Internet and allowed layers of protocols to spread from the base infrastructure. There’s no doubt that Bitcoin is the monetary layer that was missing from the internet. Bitcoin and its Lightning Network (BTC/LN) are increasingly perceived as the internet protocol TCP/IP (Transmission Control Protocol/Internet Protocol) equivalents, and very similarly the Lightning Network (LN) acts as a second layer built on top of BTC, enabling nearly instant, friction-free, and anonymous exchange of smaller units of BTC.


As the payment use case for bitcoin is brought back to life, development and innovation are only ramping up. Start-ups like Fold, OpenNode, Bitrefill and Lolli, have started to apply the LN to their payment processors. Although the protocol still has some issues to resolve, it seems to be accelerating full adoption of the currency as a payment method at a speed that appeared unlikely only a couple of years ago.



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