This third article in this series will cover the testimony of industry witnesses at the joint hearing on alternative currencies held on Nov. 19 by the Senate Banking Committee's Subcommittee on National Security and International Trade and Finance, chaired by Mark Warner, D-Va., and the Subcommittee on Economic Policy, chaired by the Sen. Jeff Merkley, D-Ore.
Anthony Gallippi, CEO of Bitcoin payment processor BitPay, is an engineer from Georgia Tech who runs a startup company established in 2011, headquartered in Atlanta, with 16 full-time employees. He made the startling point that while most payments for Internet transactions are made with bank cards, that technology dates back to the 1950s and was not designed for the Internet. (Al Gore did not turn 10 years old until 1958.) He estimated the cost of payments fraud at $20 billion per year.
Gallippi stressed that the chief vulnerability of bankcards is that once an account is used for a single transaction, it can be used for further transactions by anyone who obtains account information. BitPay acts as a merchant acquirer to service transactions on behalf of the merchant payees.
With Bitcoin, customers are able to put the exact amount of the payment through the system without revealing information that might compromise their identities. Gallippi acknowledged that Bitcoin has limitations that prevent it from achieving large-scale adoption, because it can only process seven transactions per second, whereas the bank card network can handle 50,000 times that number, and the worldwide money supply of Bitcoin is only $5 billion, a negligible amount compared with the $70 trillion of global M2 money.
Bitcoin holds out the possibility of instantaneous settlement of transactions in all sorts of assets, so that closing costs for housing transactions could be reduced to mere pennies, but this would require a manageable compliance framework. Gallippi predicted that Bitcoin technology would ultimately disrupt the annoying fee structures of banks.
Mercedes Kelley Tunstall, a partner and practice leader of the Privacy and Data Security Group at Ball Spahr LLP, identified weaknesses that need to be addressed in the next generation of virtual currency, such as the need to reconcile the anonymity Bitcoin affords with Know Your Customer Rules, which are intended to prevent fraud.
Sarah Jane Hughes, a university scholar and fellow in Commercial Law at the University of Indiana Law School, called for specific measures to establish a federal licensing system for virtual currencies and a framework for applying all of the existing payment regulations to virtual currencies, as well as a study of virtual currencies by the Federal Reserve.
Paul Smocer, president of BITS, the technology policy division of the Financial Services Roundtable, representing a hundred mainstream financial institutions, discussed the potential benefits and drawbacks of virtual currencies from the point of view of the incumbent payment providers. He stated that whereas earlier attempts to launch digital currencies proved unsuccessful, technology has evolved to a point that allows, "though still on a limited basis, digital currency and the development of some infrastructures to support the exchange of digital currency."
Ironically, Smocer warned that digital currencies pose market risk because they might not receive government support funding or support (as banks do). Pending whatever disruption digital currency has in store for them, the banking industry seeks solace in a Fed study of the future of the payments system.
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