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Bitcoin and Mobile Payments pp 27–51Cite as

Palgrave Macmillan

Economic Issues on M-Payments and Bitcoin

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Part of the book series: Palgrave Studies in Financial Services Technology ((FST))

Abstract

Technology innovation and new consumers’ habits are fostering two interesting experiences in the payments’ landscape: the increasing use of mobile payment instruments and the emergence of alternative payment schemes without fiat or banking money, like Bitcoin. This contribution considers both cases as useful drivers for innovation, but at present their positive outcomes are unclear. A synthetic economic analysis highlights costs and benefits for consumers and third-party operators, arguing that mobile payments could improve competition and force banks to rethink their strategies. More controversial issues concern bitcoin: on this topic enthusiastic expectations of financial operators are jointly considered with cautious positions expressed by regulatory and monetary authorities. Recent tendencies in Bitcoin’s informal infrastructure are confirming that an effective decentralized and peer-to-peer payments system is rather hard to build.

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Notes

  1. 1.

    European Commission, Towards an integrated European market for cards, internet and mobile payments, Green Paper, Brussels, 11 January 2012.

  2. 2.

    According to European Commission, Towards an integrated European market for cards, internet and mobile payments, Green Paper, Brussels, 11 January 2012, e-payments are payments made over the internet via remote payment card transaction, or online banking procedures, or trough e-payment providers.

  3. 3.

    The European Central Bank, Recommendations for the security of mobile payments, Frankfurt, November 2013 adds to these a third category of m-payments, when executed via MNO services, without using a specific application installed on mobile device.

  4. 4.

    For a detailed analysis European Payment Council, White paper Mobile wallet payments, January 2014.

  5. 5.

    Mobile payments applications are different from online banking services accessed by remote devices. See European Payment Council, White Paper Mobile Wallet Payments, January 2014.

  6. 6.

    Funds transfers can be executed using ordinary SEPA instruments: SEPA Credit transfer, SEPA direct debit, SEPA card framework.

  7. 7.

    Fundamental principles of this approach can be found in Oz Shy, The economics of network industries, (Cambridge: Cambridge University Press, 2005).

  8. 8.

    Other switching costs are learning costs and it requires a standardization process of applications to enter a mobile scheme, to minimize costs of changing mobile phone operator.

  9. 9.

    Payment by e-money, prepaid cards, does not require bank accounts.

  10. 10.

    As evidence of this joint contribution, see European Payment Council and GSM Association, Mobile contactless payments service management roles requirements and specifications, October 2010.

  11. 11.

    See the revised directive on payment services (PSD2), adopted by European Parliament on October 2015.

  12. 12.

    As clearly stated by European Commission, Towards an integrated European market for cards, internet and mobile payments, Green Paper, Brussels, 11 January 2012, p. 5.

  13. 13.

    Satoshi Nakamoto, A peer-to-peer electronic cash system, (2008).

  14. 14.

    Bitcoin market capitalization on February 2015 was 2.6 billion euro, while M1 aggregate of the Euro area was about 6000 billion euro.

  15. 15.

    We think of M-Pesa, for instance.

  16. 16.

    On this topic see European Central Bank, Virtual currency schemes, Frankfurt, October 2012; European Central Bank, Virtual currency schemes – a further analysis, Frankfurt, February 2015; Mona Naqvi and James Southgate “Banknotes, local currencies and Central bank objectives”, Bank of England Quarterly Bulletin, 2013, 4th Quarter; Gerhard Rösl, “Regional currencies in Germany: local competition for Euro?”, Deutsche Bundesbank, Discussion paper series 1: Economic Studies n. 43, (2006); Rolf Schroeder, The financing of complementary currencies: risks and chances on the path toward sustainable regional economics, The 2nd international conference on complementary currency systems, The Hague, 19–23 June 2013.

  17. 17.

    Goldman Sachs. “All About Bitcoin”, Top of Mind, Issue 21, 11 March 2014 is an example.

  18. 18.

    A synthetic analysis has been developed by Reuben Grinberg, “Bitcoin: An Innovative Alternative Digital Currency”, Hastings Science & Technology Law Journal, Vol. 4, December 2011 and by Financial Action Task Force – FATF, Virtual currencies key definitions and potential AML/CFT risks, Paris, June 2014.

  19. 19.

    See for example European Central Bank. Virtual currency schemes, Frankfurt, October 2012.

  20. 20.

    Quoted from European Central Bank, Virtual currency schemes – a further analysis, Frankfurt, February 2015, p. 25; the same definition has been expressed in European Banking Authority, EBA Opinion on virtual currencies, 4 July 2014.

  21. 21.

    Bitcoins can be received as payment for business transaction in goods, services or financial instruments, or by charity contribution. Bitcoins are also exchanged with other foreign currencies on specialized electronic platforms. There exist also a very few number of ATMs accepting cash like euros or US dollars in exchange for bitcoins.

  22. 22.

    Examples are the websites Coinbase.com and Paymium.com: the latter is incorporated under the French law.

  23. 23.

    Using a new address for every transaction is a suggested behaviour by bitcoin.org.

  24. 24.

    When the software generates a new address, the user has an additional pair of private and public keys. The public key represents the code to store or receive bitcoins.

  25. 25.

    A simplified description can be found in Anton Badev and Matthew Chen, “Bitcoin: Technical background and data analysis”, Federal Reserve Board Finance and Economics discussion series, 2014-104, October 2014.

  26. 26.

    The complex algorithm used in the scheme makes impossible a recalculation of the whole sequence, so a transaction cannot be denied by the sender.

  27. 27.

    Useful information on daily transactions are reported in the website blockchain.info where in real time one can see progression of the new blocks verified and added to the blockchain.

  28. 28.

    This democratic feature is more apparent than real, due to growing difficulty of validation proof and to the consequent requirements of expensive processing machines and energy.

  29. 29.

    Every day about 144 new blocks are added to the blockchain.

  30. 30.

    Usually 1 % of the value transferred is charged on sender: variable fees can be applied according to the type of transaction, as explained in the website bitcoin.org. Transactions can be labelled as high-priority, depending on fee and on creation date of bitcoins used, to stimulate spending of idle amounts stored in wallet.

  31. 31.

    Quoted from Financial Action Task Force – FATF, Guidance for a risk-based approach to virtual currencies, Paris, June 2015, p. 43.

  32. 32.

    There are only a few manufacturers of bitcoin ATM: at the end of 2014 there were about 300 machines operating in the world, provided by merchants accepting bitcoin payments in their shop.

  33. 33.

    At the end of 2014 the whole of daily gross revenues from mining activity has been estimated about 1 million US dollars.

  34. 34.

    See Anton Badev and Matthew Chen, “Bitcoin: Technical background and data analysis”, Federal Reserve Board Finance and Economics discussion series, 2014-104, October 2014.

  35. 35.

    According to Anton Badev and Matthew Chen, “Bitcoin: Technical background and data analysis”, Federal Reserve Board Finance and Economics discussion series, 2014-104, October 2014, p. 19, a large volume of small value bitcoin transactions originate from the online gambling service Satoshi Dice.

  36. 36.

    Remittances are globally growing, so this will be an attractive business in the future.

  37. 37.

    On this topic see European Central Bank, Recommendations for the security of mobile payments, Frankfurt, November 2013.

  38. 38.

    See European Banking Authority, EBA Opinion on virtual currencies, 4 July 2014.

  39. 39.

    See European Banking Authority, EBA Opinion on virtual currencies, 4 July, 2014, p. 35. Issues in the following text are reported from a Bank of Italy warning. See Banca d’Italia “Avvertenza sull’utilizzo delle cosiddette valute virtuali”, Rome, 30 January 2015.

  40. 40.

    The main reason is the high volatility on bitcoin exchange rate: its value in terms of US Dollar was about USD 0.001 at the launch of the scheme on 2009; USD 0.10 on October 2010. On December 2013, 1 bitcoin was exchanged with over USD 1,200.

  41. 41.

    European Banking Authority, EBA Opinion on virtual currencies, 4 July 2014, recognizes that in the European case benefits will probably be less than risks; central banks consider it an innovation, with potential risks depending on its use by consumers, as stated in European Central Bank. Virtual currency schemes – a further analysis, Frankfurt, February 2015.

  42. 42.

    For suggestions in this sense see The Economist. “Blockchains: The great chain of being sure about things”, 31 October 2015.

  43. 43.

    For example a British Government’s document states this intention to “... set out plans for making Britain the global centre of financial innovation...” announcing “....pro-innovation regulatory measures to unlock the potential of new technology, and allow new innovators to compete on a more level footing with established players” enabling “... the government to examine the potential benefits that digital currencies could bring to consumers, businesses and the wider economy”. Quoted from H.M. Treasury. Digital currencies: call for information, 18 March 2015, para. 1.

  44. 44.

    François Velde, “Bitcoin: a primer”, Chicago FED letters, Federal Reserve Bank of Chicago, December 2013, p. 4, suggests that financial institutions “...could issue their own bitcoins, using bitcoin technology as public ledger and cryptography”.

  45. 45.

    This definition has been used by Pak Nian, Lam and David Lee Kuo Chuen. “Introduction to Bitcoin”, in David Lee Kuo Chuen, (editor). Handbook of digital currencies. (Amsterdam: Academic Press, 2015)

  46. 46.

    According to George Selgin, Synthetic commodity money, 10 April 2013. Available at SSRN: http://ssrn.com/abstract=2000118, there are four different monies: bitcoin is a synthetic commodity money. Other analysis can be found in David Yermack, “Is Bitcoin a real currency? An economic appraisal”, in David Lee Kuo Chuen (editor). Handbook of digital currencies. (Amsterdam: Academic Press, 2015) and in Stephanie Lo and Christina Wang. “Bitcoin as money?”, Current perspectives, Federal Reserve Bank of Boston, n. 14-4, September 2014.

  47. 47.

    Security and privacy considerations are crucial in this sense. See in this book the contribution of Safari Kasiyanto.

  48. 48.

    In Financial Action Task Force – FATF. Guidance for a risk-based approach to virtual currencies, Paris, June 2015, p. 4 attention is concentrated on exchangers, where “convertible virtual currencies activities intersect with regulated fiat currency financial system”. Same issues are expressed in European Banking Authority, EBA Opinion on virtual currencies, 4 July 2014 and in European Central Bank, Virtual currency schemes – a further analysis, Frankfurt, February 2015.

  49. 49.

    An example was the Japanese Mt. Gox platform, closed down on February 2014.

  50. 50.

    Considering e-money as a “prepaid valued fixed on hardware device” according to ECB definition.

  51. 51.

    A further aspect is that many key actors of the virtual currencies environment were not present before: many of them are start-up firms, their managers are strongly motivated and their marketing strategies are highly dynamic

  52. 52.

    As reported from Blockchain.info in 1 November 2015.

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  1. University of Siena, Siena, Italy

    Gianni Bonaiuti (Assistant Professor)

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  1. University of Siena , Siena, Italy

    Gabriella Gimigliano

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Bonaiuti, G. (2016). Economic Issues on M-Payments and Bitcoin. In: Gimigliano, G. (eds) Bitcoin and Mobile Payments . Palgrave Studies in Financial Services Technology. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-57512-8_2

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  • DOI: https://doi.org/10.1057/978-1-137-57512-8_2

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