Bitcoin infrastructure evolving to enable greater use for payments

By:
Solomon Teague
Published on:

Escrow services crop up but lack of mainstream financial intermediaries might be an obstacle to bitcoin’s evolution into a mainstream currency.

For all the media coverage associating bitcoin with porn and drug trafficking, many bitcoin users are making legitimate purchases from foreign merchants. One advantage they will enjoy is the inability of over-zealous banks to cancel their payments.

On the face of it, payments have their own dangers. Being unregulated and irreversible, the use of bitcoin to make payments for goods requiring physical delivery, from internet sites managed on the other side of the world, might not seem to be playing to the system's strengths. To help facilitate this business a number of bitcoin escrow sites have already emerged, providing a third party to take custody of a payment, pending delivery of goods, in order to make bitcoin payments safer.



“Bitcoin is a great idea that works well in the tech community, but to work on a massive scale it needs more consumer protection services around it, for example escrow,” says Grzegorz Luczywo, co-founder of online security firm SecurityKiss. “We need reputable companies to get involved – big, recognizable brands. Even if this reputation is not deserved this is where people put trust in.”

If the challenge was difficult at the beginning of the year, it’s even more difficult now. Many bitcoin-related businesses prefer to stay away from the US, fearing the attentions of its legal and regulatory enforcement agencies, and the recent court ruling defining bitcoin as a legitimate currency further complicates matters. An escrow doing business with a US counterparty, or facilitating a trade with a dollar component, might run into compliance issues with US regulators. "As bitcoin transactions go beyond boundaries, I might have to block my site from US residents until the legal area is clearer," says Colbert Low, a bitcoin trader who runs BTC-Asia, a bitcoin escrow service.

Luczywo does not believe banks are best placed to evolve in the bitcoin space. “They are too big to be efficient, there is too much clutter around what they do and too many compliance issues.” he says. “Bitcoin is a free-market vehicle while contemporary banks don't operate in the free market.”

A number of bitcoin escrow services already exist, including Low’s BTC-Asia in Malaysia, Australia-based BTCrow and ABEscrow in Hong Kong.

BTC-Asia does five to 10 deals a week, typically involving trades of between one and 50 bitcoins. It offers dispute-resolution services where necessary, although to date this service has not been called upon, says Low. Deals are conducted on behalf of fellow traders, principally for local traders in Malaysia or Singapore, principally in cross-cryptocurrency transactions, where traders are exchanging bitcoins for litecoins, for example.

Different escrow services offer different procedures. In some instances no dispute resolution is offered and the money in escrow is returned to the buyer if goods are not delivered within a pre-agreed time. Critics say this incentivizes fraudsters, who could claim to have not received goods that have been delivered, and not pay.

One service, MyBitSafe, tackles this problem by pledging never to return funds to a buyer: if the goods are not delivered the bitcoins will be donated to charity. This policy, a form of mutually assured destruction, means neither the buyer nor the merchant can profit from a fraudulent transaction. However, the buyer does take a risk of loss that the merchant does not, meaning the service might not appeal to more risk-averse shoppers.

In fact, basic escrow functionality is embedded in the bitcoin protocol, meaning trust is not a big issue when it comes to selecting an escrow provider. Person A can make a payment to persons B and C, as well as to himself, with the money only released when two people have consented to the finalization of the trade, involving the third party only in the case of a dispute.

“The third party never holds the money at all,” says Nicolas Genko, a Zurich-based strategy and innovation consultant specializing in bitcoin. “I would only pay for escrow [for bitcoin trades] if I trusted the resolution services.”

However, without established, conventional financial institutions coming into the market, these services might not be enough to soothe the concerns of more skittish retail traders. Concerns like this provide an obstacle to bitcoin evolving into a mainstream currency, widely accepted as a form of payment.

“I’m not convinced bitcoin will become a mainstream currency; every state has a currency already and for most people there is little incentive to change,” says Genko. While it will remain useful for moving money across international borders, he says, “the real revolution of bitcoin is an internet of trust.” Digital contracts can be embedded in the bitcoin ledger, or bitcoins can be used as a form of deposit to protect websites from spammers or for users to register more than a casual interest in their services.