A Publication of WTVP

Say goodbye to leather and plastic (eventually)… as new technologies transform the face of legal tender.

For millennia, man has required a way to facilitate the exchange of goods and services and payment of debts. From metal and paper to bits and bytes, money has long been a ubiquitous feature of society. But in an increasingly virtual world in which convenience is everything, are paper and plastic still viable forms of payment? The rise of a new digital currency is only the latest step in the virtualization of money, and whether or not it gains traction, it’s clear the future of your wallet lies in the cloud.

Road to the Digital Wallet
The 1990s saw the emergence of the Internet as a pervasive element of everyday life. As the likes of eBay and Amazon transformed it into a platform for commerce, the need for an online payment system arose. In 1998, PayPal was invented by Peter Thiel and Max Levchin, whose concept of a “digital wallet” was about a decade ahead of its time.

“The need PayPal answers is monumental,” said Thiel in 1999, according to Eric Jackson’s The PayPal Wars. “Everyone in the world needs money—to get paid, to trade, to live. Paper money is an ancient technology and an inconvenient means of payment. You can run out of it. It wears out. It can get lost or stolen. In the 21st century, people need a form of money that’s more convenient and secure, something that can be accessed from anywhere with… an Internet connection.”

Today, while the concept of a digital wallet slowly comes to fruition, no online payment system comes close to the widespread adoption of PayPal, which now boasts 143 million users worldwide. In fact, a recent comScore report entitled Digital Wallet Road Map 2013 found just 12 percent of U.S. consumers had used a digital wallet other than PayPal, while only half were even aware of alternatives, such as Google Wallet. But the increased use of mobile technologies has consumers beginning to see their value—and brought competition to PayPal. From Stripe to Amazon Payments to Braintree—recently acquired by PayPal’s parent company, eBay—a range of options have arisen to ease the online payment process, while rumors of mobile payment services from the likes of Facebook and Apple abound.

Among PayPal’s greatest competitors is Square, which grew popular with a small credit card reader that plugs into smartphones, allowing virtually anyone to accept credit card payments. Since its 2009 founding, Square’s suite of software has grown to include advanced checkout functionality and management tools, allowing it to completely replace point-of-sale devices for some businesses. In 2012, Starbucks began using Square in its stores, and this February, Whole Foods became the second major retailer to do so. Such partnerships have positioned Square as a major player, competing with traditional point-of-sale systems, mobile apps, and of course, PayPal itself.

Even as PayPal counters with PayPal Here—a piece of hardware which, like Square’s reader, plugs into smartphones—Square’s launch of Square Cash, which allows debit card users to send money via email, is challenging PayPal on its home turf. And it’s crowded territory—with additional competition from the likes of Ribbon, Popmoney, Venmo and Google Wallet.

The next step in the march toward greater convenience is “hands-free” mobile payments. With Square Wallet, all you do is “check in” at a local business, state your name at checkout, and upon confirming your identity, your account is charged automatically. Some Whole Foods locations have already announced support for Square Wallet, meaning its customers can avoid checkout lines entirely. Naturally, PayPal is fighting back with Beacon, a Bluetooth device for merchants that pings all compatible devices within its range and allows for the same hands-free, line-free shopping experience. Apple’s recent launch of iBeacon brings yet another player to this space—all of which point to the virtual future of payments in the retail environment.

New Frontiers in Currency
But even as this future is being written, the likes of PayPal Beacon and Square Wallet have been eclipsed by the far greater media attention paid to the world’s first all-digital cryptocurrency. Having entered the world on January 3, 2009, Bitcoin hints at a time when tangible money as we know it may cease to exist.

Bitcoin is both an online payment network like PayPal—Capital-“B” Bitcoin—and a unit of currency like the dollar—lowercase-“b” bitcoin—but at its most basic, it’s simply a way to verify you’ve sent something to someone else. Launched by an unknown person (or persons) known as Satoshi Nakamoto, it employs sophisticated mathematics to implement a distributed, decentralized method of exchange. Operating outside the control of any central authority, no individual or group can manipulate the network; behind the scenes, it shares a public ledger of every Bitcoin transaction ever processed, allowing for confirmation of the authenticity of each transaction.

New bitcoins are not printed or minted, but created through a process called “mining,” in which computing power is used to solve complex math problems in exchange for a block of bitcoins. Whenever a block is released, all computers in the network begin solving the next problem, which becomes increasingly difficult over time. The rate of bitcoin creation is controlled by a formula fixed in the initial design of the network—only 21 million can ever be created. Theoretically, anyone can become a bitcoin miner, but the difficulty of mining has increased such that specialized hardware is now required to do it cost-effectively.

Spencer Cree, a developer for Peoria’s OneFire, Inc., began mining bitcoins out of curiosity and soon experienced this very problem. “I tried mining for a while, but it wasn’t very lucrative.” He was only able to mine about one bitcoin a week, and at that point, “you’re spending more on electricity than you are making in bitcoins.” Instead of mining, Cree and many others prefer to buy and sell bitcoins through Coinbase, a San Francisco-based company that serves as an intermediary between individuals for exchanging bitcoins and processes payments for business transactions using bitcoins.

Embracing Bitcoin
The advantages of Bitcoin are many, according to its proponents. It offers users full control over their transactions; anyone can send and receive any amount of money anywhere in the world at any time, without limitation. Bitcoins are impossible to counterfeit; feature little to no processing fees; and all transactions are secure and free of sensitive personal information, protecting merchants from fraud and individuals from identity theft. All information about Bitcoin transactions is public and readily available, and no person or group can control or manipulate the network. In short, Bitcoin is neutral, transparent, flexible, secure, cost-effective and predictable.

These features have not gone unnoticed by political libertarians, who view the revolutionary currency as a way to free the money supply from regulation by governments and central banks. “I really think digital currency is about freedom,” says Rep. Steve Stockman in a YouTube video. “Freedom to choose what you do with your money, and freedom to keep your money, without people influencing it through printing money or regulation.”

If Bitcoin achieves mass acceptance, it could “go down in history as the destroyer of the dollar,” adds former Congressman Ron Paul, another prominent figure in the libertarian community. Indeed, libertarians show a great amount of zeal for Bitcoin, so much does its design suit their philosophy. One group has gone as far as founding a utopian community in Chile known as Galt’s Gulch, hoping to build its own self-sustaining economy run entirely on Bitcoin.

But while the Bitcoin marketplace is growing, there remains a long road to mainstream acceptance. Despite the hype, few businesses today accept the currency, and those that do are an odd hodgepodge of companies. OKCupid, WordPress, Virgin Galactic and are among the most well-known early adopters, while Coinbase reports 21,000 merchants—mostly very small ones—are using its services to accept the currency. In central Illinois, the business closest to Peoria that accepts bitcoins, according to a map at, is Homecare Plus, a Normal-based home improvement company. “I thought I’d put it out there and see what I could drum up,” explains owner Francisco Vill, who adds he has yet to have a customer actually pay in bitcoins.

On January 9th, the fledging currency received a boost from, which, in partnership with Coinbase, became the first large retailer to accept bitcoins. Overstock CEO Patrick Byrne is an outspoken Bitcoin supporter who thinks the public, math-driven software can eliminate the conflicts of interest and regulatory failures that helped create the 2008 financial crisis. As Byrne’s company embraces Bitcoin, he believes other large retailers, like Amazon, will soon follow its lead—and according to Coinbase cofounder Fred Ehrsam, “There are others of similar stature in the pipeline.” Certainly, that will have to be the case for Bitcoin to take hold as a viable currency.

» A Brief History of Money
Bartering is mankind’s oldest method of exchange, involving goods or services exchanged directly for other goods or services. Though useful, it has obvious limitations, including the lack of a common measure of value; the need for “coincidence of wants” (both parties must have what the other wants); the indivisibility of goods (goods must be of equal value or able to be divided); and the difficulty of storing wealth, all of which led to the creation of tangible currency.

Cattle are generally considered the oldest form of money, followed by the shells of cowries, a type of snail, which were widely used throughout China, Africa and India. Bronze and copper imitations of cowries—the forerunners of modern coins—first appeared in China, and by 700 BC, round coins composed of precious metals were being used in present-day Turkey, stamped with the images of gods and emperors. Coinmaking techniques were later adopted and refined by the Greeks, Persians, Macedonians and Romans.

With the invention of block printing and the need for a lightweight alternative to coins, paper money entered circulation. By the ninth century, paper was used as currency throughout China, though it was several centuries before it spread to Europe. In the United States, paper money was issued by a handful of colonial governments, then by the Continental Congress to finance the American Revolution. While a patchwork of private and state-chartered banks issued paper money in the early 1800s, it wasn’t until the Civil War that the U.S. Treasury issued paper money in the form of Treasury notes.

Checks became popular in the 20th century, though primitive forms had been used for centuries. In recent years, check usage has dwindled, replaced by more convenient forms of electronic payments. Credit and debit cards have roots in the charge card, which dates to the 1920s, when it was first used to sell fuel to automobile owners, while the modern-day credit card can trace its roots to the “BankAmericard” launched by Bank of America in 1958.

A Vulnerable Position
But the widespread adoption of Bitcoin is constrained for many reasons, including its public perception as an enabler of criminal activities. In recent months, numerous members of the Bitcoin community have been arrested in connection with the Silk Road, a black-market website used primarily to buy and sell illegal drugs. Because it is purely digital and difficult to trace—though not entirely anonymous, as many believe—Bitcoin was the only currency accepted on the site. Its defenders point out that all forms of money are used for purposes both legal and illegal, and that cash and credit cards far surpass Bitcoin in the financing of crime.

A larger problem is the currency’s volatility. Having increased from $13 last January to more than $1,000 in November, the value of a bitcoin has more recently fluctuated between $600 and $900. Because the total number of bitcoins in circulation remains small, relatively minor events can have a significant impact on their value. In theory, this volatility will decrease as the market matures, but there’s no guarantee of that. It’s a chicken-and-egg scenario: for the value of bitcoins to stabilize, more businesses and consumers must begin using them, but many people will not use them until they are stable.

When China barred its financial institutions from handling Bitcoin transactions in December, their value promptly plummeted. A similar thing happened in India, where traders were investing in bitcoins to hedge against the declining rupee, while just a few weeks ago, Russia prohibited its citizens from using bitcoins. Such cases illustrate perhaps the greatest challenge to widespread adoption: the tremendous uncertainty of the legal and regulatory environment.

Though few jurisdictions have banned Bitcoin outright, U.S. regulators are holding hearings to see what rules are needed to integrate digital currencies into the formal financial system. Companies like Coinbase would prefer to see some sort of regulatory framework in place, as the legitimacy of their businesses depends on it. Yet many Bitcoin supporters are concerned that regulators don’t understand the technology well enough to regulate it, fearing that innovation—and legitimate businesses—will be crippled by regulatory overreach.

In addition, a recent spate of hacker attacks and technical problems have thrown the currency into even greater turmoil—and called into question the security that is supposedly at its very core. In February, two of the three largest bitcoin exchanges halted bitcoin transactions after discovering a significant technical glitch in the system. While developers worked to fix the problem, the news came as another blow to Bitcoin, its exchange value dropping yet again.

Meanwhile, Apple recently caused an uproar when it removed a popular bitcoin wallet from its App Store. With 120,000 users, Blockchain had been the only bitcoin wallet available to Apple users. While Apple did not provide a reason for the move, Blockchain CEO Nicolas Cary told Wired magazine he believes the company sees Bitcoin as a potential competitor. “I think Apple is positioning itself to take on mobile payments in a way they haven’t described to the public.” Whether by government ban, regulatory overreach or high-stakes competition, it’s clear that Bitcoin’s position is quite vulnerable.

Taking It Mainstream
While the future of Bitcoin is uncertain, its supporters are working hard to take it mainstream. Cameron and Tyler Winklevoss, famous for their early involvement in Facebook, filed a proposal with the Securities and Exchange Commission last July that would allow investors to trade bitcoins as one would trade stocks. If it is approved by regulators, the Winklevoss Bitcoin ETF (exchange-traded fund) would make Bitcoin investing available to anyone with a brokerage account. And if Wall Street dollars begin moving into Bitcoin, mainstream acceptance could come quickly.

Early backers of Paypal, Skype, Twitter and Instagram are also jumping on the Bitcoin train, including venture capital firm Andreessen Horowitz, which recently invested $25 million in Coinbase—the largest bitcoin-related investment to date. In addition, a chorus of respected financial voices has lent its credibility to the notion that digital currencies like Bitcoin are here to stay. Last fall, in a letter to the Senate Committee on Homeland Security and Governmental Affairs, then-Federal Reserve Chairman Ben Bernanke wrote that digital currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”

“We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers,” wrote Bank of America currency strategist David Woo in December. On the other hand, a February report released by JP Morgan offered a sharply different view, stating that bitcoin’s volatility “make[s] it impossible to seriously consider [it] as a unit of account or store of value for a material amount of corporate or investor exposure.”

“Bitcoin is not a stable product yet,” adds Dr. Amit Sinha, chair of the Finance and Quantitative Methods Department at Bradley University. “In my opinion, this volatility will exist for a while.” While Dr. Sinha believes bitcoin usage will continue to increase in the short term, he does not foresee it becoming a mainstream currency.

Electro-Cash: Building the Future
In the wake of Bitcoin, dozens of cryptocurrencies have emerged, with names like Peercoin, Namecoin, Mastercoin and Litecoin, the most notable alternative. “I think other cryptocurrencies will probably take [Bitcoin’s] place,” says Cree, who notes that mining Litecoin has already become difficult. “And it will just become more difficult over time,” he adds. “It’s probably going to go the same way as Bitcoin.”

Taking a very different approach to digital currency is MintChip. Conceived by the Royal Canadian Mint in 2012, it’s a smartcard chip containing a private key that enables digital transactions, backed by the Canadian government. Elsewhere, millions of Africans are using a service called M-PESA to send and receive money through their mobile devices. Clearly, there is tremendous, worldwide demand for an electronic alternative to cash.

As the digital currency situation is sorted out, some suggest the peer-to-peer network that underlies Bitcoin offers great potential for many things beyond currency. “It so happens that the first application… is payments and money, but it doesn’t have to be,” Coinbase cofounder Fred Ehrsam told Wired in February. Ehrsam suggests a similar system could be built for the stock market that would quickly and reliably transfer securities, complete with a public ledger that could eliminate “naked short selling and other schemes like it.”

Twenty-year-old hacker Vitalik Buterin agrees, telling Wired he sees Bitcoin as a way to build just about any decentralized Internet application. Envisioning “a future in which users are in control, not governments or big companies,” Buterin recently unveiled Ethereum, a platform for doing just that. But it will be an uphill climb, pitting mathematics, cryptography and technology against entrenched powers in government and finance that are unlikely to give up their monopolies easily.

Yet it’s not out of the question. “As with all currency, bitcoin’s value comes… from people willing to accept them as payment,” notes the FAQ on Bitcoin offers all the intrinsic characteristics of money—durability, portability, fungibility, scarcity, divisibility and recognizability—but is “based on the properties of mathematics rather than relying on physical properties (like gold and silver) or trust in central authorities… With these attributes, all that is required for a form of money to hold value is trust and adoption.”

Can this fascinating, new digital currency weather the storms surrounding it to build that trust and adoption, or will it be revealed as a technological fad? Each day seems to bring more news throwing Bitcoin’s viability into question. But given humanity’s inexorable march toward convenience, it appears some form of digital currency is inevitable. In the meantime, most people can count on hanging onto their physical wallets for a while longer. “I think we still have a few years [before we] find a long-lasting digital currency,” Cree predicts. iBi