PayPal has recently entertained the notion of
accepting and clearing the bitcoin unit on its
pervasive platform. It’s a bit like the prince joining the revolution. Is
this a good thing?
Naturally, some bitcoin businesses will see this as
PayPal moving in to usurp bitcoin’s popularity and momentum in the
marketplace. But, depending on your outlook, it may not be all negative and
it raises the identical issues that a bank would face if embracing bitcoin, especially since PayPal is now viewed as part of
the legacy apparatus.
Speaking as if PayPal represented some sort of global payments umbrella, CEO
John Donahoe told the Wall Street Journal, “It’s a new disruptive technology,
so, yeah, we’re looking at Bitcoin closely. There
may be ways to enable it inside PayPal.” I find this statement funny, particularly
in light of the fact that WordPress’ reason for accepting bitcoin was that PayPal disabled
certain parts of the globe for them.
Let’s examine what it could mean when something like Bitcoin,
that is both platform and unit, is absorbed into something
like PayPal that is just platform. Phil Archer writing at The
Genesis Block categorized the four areas of
likely impact — online wallets, escrow services, merchant processing, and
exchange services. PayPal account funding alone is not exactly bitcoin sitting on the PayPal payments network, so that
use case is not included in the analysis. Archer concludes that PayPal’s
immediate advantage would be in the first two areas with eventual
game-changing impact probable in the latter two.
While I tend to agree with the category choices, the analysis overlooks what
the PayPal-Bitcoin world would not be getting (or,
what it would be losing).
Firstly for the consumers, the new PayPal paradigm would look like a Coinbase on steroids with massive
connectivity into your bank accounts and even more intrusive data collection.
As a fully-regulated money services business (MSB) and licensed money
transmitter, PayPal would be the undisputed gorilla in the U.S. marketplace
with online wallets and fast exchange services. Of course, escrow services
would be welcomed because this model is almost always needed in a free market
and banks could look to provide this functionality as well.
However, what would consumers not be getting in this bitcoin nirvana? Not a huge fan of transactional privacy,
PayPal would have to link your identity to your account and eliminate the
user-defined privacy aspects of bitcoin. This has
the effect of reducing bitcoin’s important
cash-like qualities. While it may be convenient for exchange services to be
an integrated part of your personal online wallet, it is fundamentally
unnecessary.
Furthermore, it’s unlikely that PayPal would reach into many new countries
that it doesn’t serve today because it would need the banking infrastructure
to do so. By the way, that is the same situation for Coinbase
too. So consumers would not gain anything in terms of worldwide access. Also,
consumers would not get unimpeded access to their funds because it’s doubtful
that PayPal will modify any of their current policies on account suspension.
Secondly for the merchants, the new PayPal paradigm would offer merchant
processing services similar to BitPay with exchange
rate guarantees for conversion into national currencies. As BitPay is more nimble with first-mover advantage and
low-cost pricing, they are considered a likely acquisition target. PayPal’s
distinct advantage in this area comes from leveraging its installed merchant
base, however it is unclear how fee savings with bitcoin
could be passed on to merchants due to the potential cannibalization of
PayPal’s other revenue streams.
Larger merchants maintaining their balances in bitcoin
and managing currency risk internally seems like the most efficient practice,
but it’s unlikely that PayPal would offer that option for free. As part of
the PayPal network, merchants would not enjoy the attractive bitcoin benefit of “no account freezing,” because without
segregated bitcoin balances, a merchant’s overall
funds could be ensnared in an account suspension.
Also, when it comes to specific merchant categories being restricted like online casinos or prescription drug sites, a PayPal-Bitcoin world is unlikely to remove the blocks on those
merchants. It is a symptom of having one foot in the old banking and credit
card world and one foot in the new decentralized and nonpolitical currency
world. Perhaps, the PayPal executives view bitcoin
as creative destruction but somehow I don’t think so.
My advice to PayPal and other conglomerates “looking into” Bitcoin with a shoehorn approach is to understand how
authorization, clearing, and settlement occur nearly simultaneously within
the Bitcoin distributed transaction network.
Enhancing, rather than diminishing, that feature is the key to success. Bitcoin doesn’t need PayPal to be mobile, but PayPal probably needs Bitcoin to become seamlessly mobile.
About the best that could be said of any potential arrangement between PayPal
and bitcoin is that it would bestow public
credibility on bitcoin as a “unit of account” or
new currency code. However, squeezing only the monetary unit portion into a
legacy payments platform inserts an intermediary into a decentralized system
and dilutes the value of the whole. Not to mention that Bitcoin
will simply outlast PayPal.
By
Jon Matonis
Forbes
Saturday, May 4, 2013
http://www.forbes.com/sites/jonmatonis/2013/05/04/bitcoin-on-the-paypal-network/
