Can bitcoin enthusiasts put down the anti-Paypal pitchforks? PayPal has dominated the bitcoin news headlines over the last week with striking discussions from both PayPal and Ebay senior executives – they are openly discussing bitcoin, and in a positive light. However, no one has addressed why these headlines are important. PayPal most likely sees a business case in solving at least one of the four significant barriers to bitcoin seeing wider adoption: easy to use wallets, escrow for large transactions, quick acceptance by merchants, and reliable exchanges. PayPal can use its brand and infrastructure as a significant competitive advantage for solving the first two almost immediately, and could eventually be a game changer for the later two.
“And I think here, for us at PayPapl, it’s just a question of whether Bitcoin will make its way to PayPal’s funding instrument or not, and we’re kind of thinking about it right now.” – David Marcus President, Paypal
“It’s the perfect currency by design… I think it’s a fascinating phenomenon and we are definitely watching it.” – Hill Ferguson VP Global Product, PayPal
“It’s a new disruptive technology, so, yeah, we’re looking at Bitcoin closely. There may be ways to enable it inside PayPal.” – John Donahue CEO, Ebay
PayPal deserves credit for being forward-thinking enough to consider adopting this disruptive technology instead of trying to immediately crush it. Having worked on the Corporate Strategy team for a $10B+ company I can tell you that these statements are not made by accident. Executives are coached by their teams on what to discuss, and it is highly unlikely that three execs would slip on the same topic. They were certainly briefed on this emerging technology, and most likely have tests in the pipeline to determine the feasibility of implementation. I have no doubt the recent FinCEN guidance has reduced a lot of the legal ambiguity that would have previously been a concern. They now know that there is no additional regulation for facilitating transactions, and that Money Service Business (MSB) registration is required to convert bitcoin to other currencies. PayPal entering the bitcoin market will usher in the next tier of bitcoin adopters.
One of the first things a new bitcoin user has to decide is where to store their newly acquired coins. Blockchain.info has developed a fairly reliable system, but it appears that there are some lingering vulnerability concerns with their security that still need to be addressed. Online bitcoin banks which hold your coins in their own wallets (not personal wallets like blockchain) have been unstable at best, and outright frauds at worst. PayPal is in the position to add an established security system and reliable brand to online wallets. Newcomers to the bitcoin ecosystem would feel comfortable storing funds in PayPal, making it a great avenue for keeping a small amount of money available for day to day transactions.
Bitcoin is inherently a great method for international purchases; however, the one-way nature of bitcoin transactions requires a minimum amount of trust. This creates a significant barrier to using bitcoin for large transactions like buying a house, or international transfers like buying bulk merchandise from a Chinese distributor. PayPal has an established conflict resolution network and would be in a perfect position to provide an escrow service for these transactions. This would significantly reduce the initial barriers to wider adoption that bitcoin currently faces, and act as an important stepping stone until bitcoin transaction systems become more mature.
The first question any merchant ask is “how can I accept bitcoin on my website?” Adding a BTC option to PayPal’s established payment network would significantly improve ease of adoption. Theoretically a merchant could add a “pay with PayPay” button, enable the bitcoin option, and accept BTC for payments. The main question here would be whether PayPal would offer the option of converting to USD immediately to reduce exchange volatility. This feature would require them setting up automatic conversion through Mt. Gox – and opening themselves up to Mt. Gox’s vulnerabilities – or acting as directly as an exchanger, which would require leveraging their status as an MSB.
The most significant question if PayPal joins the bitcoin scene is whether they will go all-in and become a bitcoin exchange. Anyone trying to buy bitcoin with USD recently has no doubt experienced the tribulations associated with getting verified and moving currency into Mt. Gox or one of the smaller exchanges. If PayPal were to leverage their MSB certification, they would revolutionize the dynamic of the BTC/USD exchange market. They would have the resources and technical expertise to operate a proper exchange. They have an established reputation with international banks. They know how to build a proper back end that can handle thousands of trades in a short period of time, and have the resiliency to last through the DDoS’s that have been targeting every banking institution. This last business model is probably the least likely in the short term, but don’t be surprised to see them move into this arena if their other three services see mass adoption.
Will PayPal turn from bitcoin’s pariah to it’s newest innovator? We will find out soon if PayPal is agile enough to beat the stealth bitcoin startups that recently received VC injections.