Bitcoin, once shunned for its outsider status, has gotten too big for its own sake.
At first, banks and merchants were afraid to use bitcoin because it was — fairly or unfairly — linked to crime and uncertainty. Now that bitcoin's market spike has made the alternative currency a household name, it's linked to wild market swings, bubble-level valuations and onerous fees, with the most obvious fixes likely furthering bitcoin's problems rather than solving them.
Neither scenario lends itself to using bitcoin for retail payments, since it's hard to buy something with a currency that may be worth 20% more or less than its current value a day later.
"Bitcoin is an asset, not a currency per se," said Robert Prigge, chief revenue officer at Jumio, which has supplied ID technology for cryptocurrency exchanges. "And it's a highly volatile asset at that. Visa has not accepted bitcoin and Stripe will stop supporting bitcoin because it is far too volatile to use as a payment method. That's not a knock on bitcoin. It's simply a statement of the current state of the cryptocurrency market.”
This hurts bitcoin's cause for mainstream transactions, at least in countries like the U.S. that have stable traditional currency. And it's not good enough for Stripe and Visa, both of which have very publicly shunned bitcoin in recent days. Visa CEO Alfred Kelly appeared on cable news to say bitcoin's not a "payments player," and Stripe will stop supporting the virtual currency in April because bitcoin fees are too expensive and transaction times are too slow. Stripe and Visa did not return requests for comment by deadline.
"The question is, can we make this stable enough to get to where it's a currency? Because right now, it's not functioning as one," said Stephen Bielecki, a lawyer at Kleinberg, Kaplan, Wolff & Cohen (his views don't necessarily reflect those of his firm). "And in getting to that kind of use case for payments, do you lose something in translation that made the cryptocurrency popular?"
Bielecki has written about the role mainstream acceptance can play in "taming" bitcoin's volatility, which would make it potentially more suitable to buy things. But even if regulatory guidance and financial market infrastructure can smooth out bitcoin's jarring valuation swings and make the currency a more approachable method of payment, what long-term impact will the currency's pariah status have?
"It doesn't help in the short term," Bielecki said, adding Visa and Stripe's condemnation feeds the kind of volatile market behavior that led to their rejection of bitcoin in the first place. "Many of the cryptocurrency markets are susceptible to big swings driven by day-to-day news, in part because they are traded across the world at all times."
The current state of bitcoin is far removed from its original intent as a payments instrument within a community of users. Any short-term fix might not sway the opinions of large payment brands such as Stripe and Visa.
"Bitcoin was designed as this P-to-P payment system that did not require intermediaries and central authorities. Yet to work in the financial mainstream, where it needs to be exchanged with regulated currencies issued and managed by regulated financial institutions, there's a conflict," said Collin Canright, a fintech consultant.
Canright has written about bitcoin's potential for payments, but it's a development he views as a future possibility, suggesting most merchants that do accept bitcoin do so for marketing purposes than for business needs.
"Bitcoin has taken on the characteristics of a highly volatile asset class, which further reduces its ability to provide the solid foundations of a payment vehicle," Canright said. "Bitcoin at this point in its evolution isn't really suited to fulfill its original role as a payment vehicle, for all the reasons Stripe, Visa, and others have articulated. The costs are too high, the value is too volatile, the regulatory regime and governance structure are too uncertain."
Bitcoin has always had a problem with traditional financial services and merchants. Bitcoin's early days were marked by security and accessibility issues for the exchanges, which hurt the virtual currency's adoption. Banks have always been reluctant to fully support bitcoin, though regulations such as New York's BitLicense gave cryptocurrency companies a way to demonstrate their legitimacy.
These successes were thwarted by the sharp rise of bitcoin's value over the past year, bringing out strong opinions that have cast fresh doubt on the soundness of bitcoin for payments, with famous figures in finance such as JPMorgan CEO Jamie Dimon and former Federal Reserve Chairman Alan Greenspan voicing their disapproval. Greenspan went as far as to compare cryptocurrency to worthless Revolutionary War-era money.
Other luminaries such as Warren Buffett have taken a sour position on bitcoin, with Buffett saying bitcoin's market ride is likely to end badly.
"The reliable governance structures that provide certainty and reduce risk aren't there yet," Canright said. "It's like there's a clash between a grown-up, stable, kind of boring adult and a wildly exciting and creative adolescent."
Making the problem worse is that any attempts to correct bitcoin's problems work against the cryptocurrency's ethos.
Bitcoin's fees are determined by the miners who participate in the market and compile transactions into "blocks." One option to lower fees would be a "fork," or a new form of bitcoin that would increase block sizes, allowing more volume for each block, which could drive down transaction fees and support smaller-value transactions. Cryptocurrency forks are common, such as the creation of Bitcoin Cash, which is designed more for payments than trading.
"There is a potential downside to that, however, since it will take more processing power to mine the larger blocks, so there will be less smaller players in the bitcoin market," Bielecki said, adding bitcoin's decentralized ecosystem also services as a guard against crime and fraud. "That centralizes power and cuts against the decentralized nature of the blockchain. So you have lower transaction fees but you don't know what the unintended consequences would be."
There are other cyrptocurrencies that could support decentralized payments, though Bielecki said the cryptocurrency market in general is still in an early stage dominated by bitcoin. Thus, any further pushback against bitcoin would have consequences for lesser-known currencies.
But there is some hope. Stripe is not abandoning cryptocurrency entirely, and has taken an investment in Stellar. Some of these cryptocurrencies are designed to support a specific business or activity, such as medical payments, making their use and valuation easier to manage.
"Maybe industry consortiums where cryptocurrencies could represent value exchanged within a decentralized supplier network or a regulated market like legal cannabis that has costs, risks, and inefficiencies from cash will provide effective cryptopayment use cases," Canright said.