Carl Mullan is DGC’s founder, former editor and publisher of DGCMagazine with more than 50 past issues online. His new book, The Digital Currency Challenge – Shaping Online Payment Systems through US Financial Regulations, is now available on Amazon.
You’ve been involved with ‘non-bank’ payments since the late 90’s. What drew you to the industry?
I got started because Internet payment systems provided me with an easy to use alternative to bank products such as cards. Back then, not everyone had plastic cards, there were not a lot of prepaid cards on the market so if you didn’t have a bank account or credit card, your online payment options were very limited. Also, online processing for high risk or offshore products was expensive and very hard to get.
Who was this book written for?
The book is a monograph written for use with college level finance and economics courses.
This book is about the interaction between digital currencies and US regulations…A very hot topic at the moment! You list a history of regulators being hesitant to recognize some payment systems, it would seem to avoid granting them legitimacy, and yet still prosecuting for failure to comply with regulation. There is a dance going on between official recognition and applying the regulation. How do you see this playing out with Bitcoin in the US?
This is a very good question and I don’t have a rock solid answer. What I can say based on previous US action is that the government (Treasury Dept/FinCEN) could introduce more restrictive regulations forcing Bitcoin companies which provide services to US consumers to avoid the entire US market. Mt. Gox is a good example. At least this type of regulatory action has occurred in past years. The regulations make it so expensive to get set up combined with the US bank’s reluctance to work with MSB’s or any Bitcoin company. This would seem like the most obvious answer. However, many factors in today’s digital world are VERY different from years past. Today, we see very large, well-financed start-up companies developing such as Circle Internet Financial. These companies are taking the time and spending the money to set up by-the-book here in the US, this makes me very hopeful that crypto-currency will not only survive the compliance actions but thrive in the years ahead. Just take a quick look at who is on the team at Circle:
Jeremy Allaire (Brightcove, Coldfusion etc.)
James Breyer (Acell Partners VC)
M. Michele Burns (Goldman Sachs, Wal-Mart Stores, Cisco Systems and Orbitz, Delta Air Lines)
Michael Barrett (Former PayPal CISO)
Mike Hearn (Bitcoin Pioneer and Google Engineer)
These folks play for real money and they are not setting up to be regulated out. I’d have to say that this paints a very positive picture for Bitcoin in the US. Gone are the days a US customer would exchange their digital currency through an anonymously registered web site hosted in Singapore or Latvia with customer service being handled in broken English through a web contact form! Things are much different today, digital currency is much more mainstream.
Do you have any predictions as to if/how Bitcoin will be recognized and classified?
Again, I can only guess. Based on the recent very favorable ruling by FinCEN for Bitcoin miners, I believe that things will go pretty smoothly for the future regulation of Bitcoin in the US. At least I’m hopeful. I’m building a mining rig this week if that is any indication! However, I also see mainstream Bitcoin transactions going from a “currency” to more of a “method of payment” or “payment platform” more like credit cards. My book describes a BMS or a Bitcoin Merchant Service much like credit card merchant services. The US market could develop much like past credit card merchant services did in America. It’s also even money that today’s marketplace for money transmitters in America will mirror future Bitcoin exchange’s development. In other words, of the 200,000 or 220,000 operating money transmitters in the US barely 35,000 have properly registered. Large companies like Circle will dominate, but thousands of small Meetup groups, bodegas and local people will exchange dollars for Bitcoin everywhere without any real issues or licenses. I was at a Bitcoin Meetup last night here in Portland and there was a working BTC ATM machine everyone was using (no registration, no licensing, no problems). The government can’t really stamp out the little guys. They will try, but prosecutions are expensive and it has to be worth their while. I also do not feel that any crypto-currency will be recognized as a commodity, however, any derivative products branching off will likely fall under the SEC or CFTC’s watchful evil eye!
Things are very different from a decade ago and while the government regulators and agencies did everything they could at that time to kill US digital currency, I don’t see that occurring with these new monster big players now entering the Bitcoin exchange and service market.
A BMS could offer huge advantages for merchants which could entice them to move away from directly accepting BTC, and signing up to accept it through the merchant service. In a sense, this moves Bitcoin away from the “currency” role and into the “method of payment” role. This would also include, the BMS clearing all transactions instantly for POS sales. In this case, the BMS would be extending a small/short line of credit while the Bitcoin platform verifies the transaction. You can’t walk into a store, pay for a physical item and stand there waiting on 6 verifications and this is a big issue for everyday merchants. The BMS could easily clear the transaction in advance, sidestep this problem and streamline the payment.
Another issue is TAX and the IRS. Barter networks have long shown that the IRS wants to be paid on any gain generated by trade activity. If the merchant is accepting a million dollars in BTC each week and one week the BTC price skyrockets up $200, that generates a taxable profit. The merchant is then responsible for the tax on that gain. Now, whether that will be considered a short term gain or capital gain and what rate at which the profit will be taxed is still unclear. Another item is the accounting rules to be used for all of the accumulated sales/profit/loss. Are BTC transactions calculated by FIFO, LIFO or some kind of cost average? We had the exact same issue with digital gold currency in the 90’s. Would an exchange agent be required to 1099 each user at the end of the year? No one knows because the last IRS info on virtual currency came out in 2007 before Bitcoin. A lot of questions? Here is where the BMS steps in and pays merchants in USD, thus avoiding all these questions and issues. If the merchant never actually handles the coins, but accepts payment in dollars from the service, there are no worries. Last year, when the founder of Overstock starting talking about accepting Bitcoin, he was planning to do so later this year  and hoping to solve some issues with hedging against price moves. Coinbase removed all those issues and he moved ahead almost overnight. I also think the BMS will be a powerful force in the development of the derivatives market. If services like Coinbase or BitPay are processing $10 or $100 million a day in BTC transactions, they will not want to get stuck on the wrong end of a price swing and lose that hard earned profit. These companies are going to want a hedge to ensure their profits. It’s just like VISA has that super-sized foreign currency trading department to hedge their transactions, as will these new BMS entities. The “trading pits” will also be much larger than https://icbit.se/ but that’s a reasonable example for today.
Non commodity backed, decentralized crypto-currencies are new and very different from the DGC model. What did you think of Bitcoin when you first heard of it?
I’m a gold bug, so at that time in 2008-2009 I failed to see the importance of the distributed system. A friend gave me 5000 BTCs back in 2009 and said “spread the word”. I gave out 2000 and never backed up my wallet because I never thought it could get this big! I’d like to have those 3000 coins now! On a global scale, BTC is awesome, however, I think the US market will take some time to develop and have a much different personality than other jurisdictions.
“Bitcoin has done something that no other online digital currency product has ever done. It has created a global discussion about the origins of government money and the possibility of using private digital currency.” This is one of my favorite things about Bitcoin! Why has Bitcoin been more popular than previous digital currency options?
This is probably the most important point in my book. Years back, digital currency users were looked at as looney tunes when we suggested to use something other than the dollar. This is not the case with Bitcoin, it now appears on news stations, blogs, papers etc. You can’t swing a dead cat without someone asking about Bitcoin. Here is a great example, like most people in Portland, I ride the bus and light rail. While standing at the bus stop last summer I looked down to find a really nice looking postcard sized art flyer for Bitcoin. I saw some again last night at the restaurant Meetup. It did not have a company ad, or business promotion, it just listed many of the popular Bitcoin educational sites like the .org and Bitcointalk etc. Now, being that there is no formal company behind the currency, these flyers, stickers and cards have been created by enthusiastic users. They designed, printed and pay for these items just because they want to see more people adopt the currency. That’s amazing! I think the overall reason BTC is more popular than previous decade old digital currencies is simple:
(1) 2008’s recession revealed that banks ARE the real enemies and sent people looking for alternatives
(2) Today, the young people of the world are so much more skilled and experienced with digital products and payments. Everyone has a cell phone, tablet, laptop or PC and the environment is much more receptive today for this type of product than ever before.
In the book you say, “there exist two possible situations for Bitcoin in the US market. Either Bitcoin will gain popularity with larger US merchants or it will not.” You also note the importance of liquidity and the ability for merchants to convert digital currencies to US dollars. You seem to believe that Bitcoin’s success in the US hinges in large part on merchant adoption and merchant services, is that correct?
Yes, this is absolutely correct, if the big merchant services don’t develop to remove the issues and roadblocks, then I believe that regulations are likely to prevent wider merchant acceptance. Just look at Overstock and Tigerdirect. Overstock accepts BTC through Coinbase and Tigerdirect though BitPay. No large merchant is going to accept it directly. The big merchants will all use this kind of BMS. After a few more regulations from the gov. come down, even the smaller merchants will go through the BMS. It’s just that simple.
Imagine if you are TigerDirect and you sell $500,000 worth of graphics cards in one week and you accept Bitcoins and the following week a company comes out with a faster cheaper card. Overnight $100,000 worth of orders are returned for refunds….however, now, the price of BTC has risen substantially….do you refund the customers in BTC and lose money or do you refund them in USD and make them all angry? The BMS company get rid of all these headaches and I’m sure they will charge for these shiny new services.
Do you predict any coming regulatory or banking issues for US payment processors such as BitPay or CoinBase?
There is just no way to tell. If there a large issue with the Bitcoin platform develops, which could indicate large scale fraud, banks could pull away overnight leaving the big companies with nowhere to process payments. Will something like that occur? Users, will tell you that can’t happen, the skeptics will say it doomed to occur. No one knows. Without such an event, I see things developing smoothly for banks and the large BMS companies. There are very smart folks running those companies and kudos to them for sticking their necks out, I don’t see any issues ahead they can’t conquer.
“The average US consumer will not adopt any new financial product without a specific need to use the product along with a guarantee of security for their funds. This need and guarantee are not yet present in the US Bitcoin marketplace.” Agreed! Do you envision digital currencies catching on in other jurisdiction, which are perhaps experiencing a greater need, prior to gaining mainstream popularity in the States?
Yes, absolutely as I say in the book, outside of the US, that BTC market is much more mature. It’s very hard for anyone in the US to put down their plastic.
“At present, there are no legally operating commercial centralized digital currency systems in the United States. Of the several dozen popular systems which have operated in the United States during the past 10-12 years, none have survived the increases in US financial regulations.” There are some who see digital currencies as pulling the rug out from under the current banking/political power structure and therefore believe that ‘the powers that be’ in the US simply cannot allow these systems to gain any real traction. What do you think of this theory?
No I don’t agree with that reasoning or even coming close to that kind of reality. The comments by FinCEN Director. Jennifer Shasky Calvery make it plain to me that they control the US payments market for the most part through regulating a business as a financial institution and that is all they are doing. There’s no great conspiracy here. People said the same thing about e-gold, that the government was scared of gold. I don’t see it.
You encourage digital currency businesses to work with regulators and law makers and to develop in a way that complies with regulations. Do you envision a future where digital currencies will be a popular and legal option in the US?
YES, absolutely. But I think you mean popular and regulated. Most of the transactions in Bitcoin are legal now. Anyone can use any currency to engage in a private transaction or private trade. Americans are only required to use the USD for taxes, some government payments and debts. If two parties in a private transaction voluntarily agree to accept Bitcoin as a method of payment that transaction is perfectly legal. By that reasoning, crypto-currencies are already a legal method of payment. It’s important to note the change in opinion after the 2008 collapse, whoops I mean recession. The banks lost a lot of customers who then went looking for alternatives. Demand for faster and cheaper payment solution is now driving this digital currency expansion.
You give a number of predictions on the development of digital currencies. Which digital currency projects/developments are you most excited about?
Good question. I’ll be excited to find out if after decentralized currency has developed in the US, if it still possesses any of its original benefits and features. This won’t be true for the rest of the world, it’s developing very nicely outside our borders. However, digital currency history shows us that as these new systems develop around US regulations they lose all of their original and exciting features. Crypto-currency was designed as a non-bank version of electronic cash. Bitcoin was never meant to be integrated with banks, that’s like saying Napster was created so that it could easily work with record companies. No one would believe that, so I’m curious if after the next few years of BTC development in the US if any of those original features are still operational for US residents.
I like to think of currency as filling cracks in the wall that are left behind by scarce government issued money. Once the US regulates the Bitcoin market will the currency just flow along top of the wall like dollars or will it still fill the cracks?