Weekender



By Raymund Luther B. Aquino, Reporter


Bitcoin: The future of payments?




Posted on October 10, 2014


IT WAS an overcast morning this October, and I was in line for an early lunch at a Manang’s Chicken branch along Katipunan Avenue. I instinctively reached for my wallet when I got to the counter -- then I remembered the purpose of my visit. As I made my order, I brought out my phone and opened an app I just downloaded that morning.

  
  PHOTO
ERIC MARTINDALE and John Dreyzehner from BitPay, the world leader in Bitcoin business solutions, demonstrate a transaction using an iPad to charge a customer who is using his phone to transfer Bitcoins for the purchase at the North American Bitcoin Conference in the Miami Beach Convention Centre, Florida on Jan. 25. -- AFP
“You accept Bitcoin?” I asked the waitress in Filipino.

“Bitcoin?” she said, then turned around to consult with her manager.

“Yes! Just a second,” the manager said.

It was quite new to all three of us, it seemed. The waitress told me I could just proceed to my seat with my order and that the manager would come over for the payment.

This gave me some time to remember how the whole payment process worked, after an already educational morning that saw me opening a Bitcoin wallet on my Android phone and buying an initial 0.01 Bitcoin for around P150, based on the prevailing exchange rate.

There were a good number of banks to choose from when I made the Bitcoin purchase in the online exchange -- there was Bank of the Philippine Islands (BPI) and BDO Unibank, Inc., for example. I decided to try using my cellular service provider’s own mobile wallet system to make the purchase, though. No hitch.

Back at the restaurant, the waitress came to me after a few moments.

“Just a few minutes, sir,” she said. “There’s a slight problem with the Internet connection.”

When the manager returned not long after, she was all smiles and presented me with a tablet flashing a QR code. I snapped a picture of the black-and-white square using my own Bitcoin wallet app, and then, in a second or two, I realized the whole process was completed. The payment was made -- my Bitcoin wallet was a few millibitcoins poorer.

If this is the future of payments, it’s not so bad, I thought. The future’s in the here and now -- though still only in small shops here and there.

CRYPTOCURRENCY
More than five years after Bitcoin first began circulating globally, local entrepreneurs are only now growing more positive over the cryptocurrency’s prospects in the country.

But new partnerships are set to bring Bitcoin to more shops, and prominent internet shopping sites -- from discount site MetroDeal to the Bench online store -- already accept it as a payment method.

Manang’s Chicken, which made it to the limelight a few years ago as a crowd favorite in nighttime weekend markets, has good ol’ entrepreneurship to thank for its current success, shown by a growing network of branches. But Manang’s probably had it easier; it did not need a business model that requires customers to embrace some great new unknown -- exactly the task local Bitcoin start-ups now have in front of them.

It’s the one question constantly pounding on these newly established firms, and it will pretty much decide their survival: are Filipinos ready to put away their leather wallets and paper -- or even plastic -- money for a night out in town, in favor of smartphones and some complex lines of code?

Ron Hose, co-founder and chief executive officer of local Bitcoin exchange Coins.ph, thinks so. He gave a presentation on Bitcoin during the Asian Banker’s Philippine International Banking Convention on Aug. 29, and said in an interview after his talk that his start-up is seeing some promising signs.

“We launched the exchange in February, and it’s been very good,” said Mr. Hose, a Cornell-educated tech entrepreneur who’s shifted bases from Silicon Valley to Ortigas. “We’ve been growing very fast.” He declined to share exact figures, citing the need to keep the data confidential given the burgeoning local competition. But Bitcoin in the Philippines “is now actually farther ahead than what people think,” he said, as he cited some online stores and electronic payment systems: “Cash Cash Pinoy, Bench online, E-pass, and DragonPay all accept Bitcoin through our gateway.”

“We don’t charge [partner merchants] anything. We make money on the exchange rate,” Mr. Hose said. “Right now, our goal on all transactions is to make about 1% per transaction. As we scale up, obviously, we’re gonna be able to reduce that.”

Mr. Hose’s bullishness over his 15-person start-up -- which was initially self-funded but is now backed by foreign angel investors he declined to identify -- is shared by others in the growing Bitcoin community in the Philippines.

“We’re very optimistic on the [Bitcoin] adoption rate here in the Philippines,” John T. Bailon said in an e-mail last month. Mr. Bailon is co-founder and chief technology officer of Satoshi Citadel Industries, a local company with various Bitcoin-related businesses.

“Bitmarket.ph, our payment processing service which enables merchants to accept Bitcoin, is doing very well with regard to merchant adoption,” Mr. Bailon shared. “Rebit.ph, our solution for sending money to the Philippines by allowing ‘rebittances,’ has been hitting our aggressive monthly targets.”

Manang’s Chicken is one of the companies partnered with Bitmarket.ph. According to its web site, Bitmarket.ph facilitates Bitcoin acceptance for at least 120 partner companies, mostly small start-ups and Metro Manila-based small- and medium-sized enterprises.

Mr. Bailon likewise declined to share exact figures on the volume of Bitcoin transactions seen by his company.

“As we are still in the early phase of Bitcoin adoption in the Philippines, we are aware that transactions are not large in volume,” Mr. Bailon shared. “However, Bitmarket.ph has been seeing month-to-month growth with a rate of 0.5%. We are very optimistic that this will continue to grow and Bitcoin will become a currency that Filipinos will use daily.”

ADVISORY
Mr. Hose’s and Mr. Bailon’s optimism perhaps belies the significant concerns that still surround the cryptocurrency.

The Bangko Sentral ng Pilipinas (BSP), for example, in an advisory dated March 6, raised alarm over the emergence of Bitcoin exchange platforms. The advisory -- perhaps only expected for a form of digital money neither issued nor guaranteed by central banks around the world -- warned that there are no existing regulations to protect consumers from financial losses if an organization that exchanges or holds virtual currencies were to fail or go out of business.

The BSP’s warning was released as regulators, particularly in Japan, have moved to outline rules on Bitcoin trading, including barring banks and brokerages from handling the digital currency, after some Bitcoin exchanges like Tokyo-based Mt. Gox collapsed.

Some investors also use the cryptocurrency as an investment, which can provide high returns given the high risks involved. But the losses for those with significant Bitcoin holdings can also be phenomenal.

One Bitcoin traded for about P20,000 last September, for example, is now worth less than P15,000. In late January this year, one Bitcoin was worth about P45,000, but by mid-February, it fell to around P12,000, before recovering again in the following days. 

In dollar terms, the virtual currency’s volatility is just as apparent. One Bitcoin was worth more than $1,200 in early December last year, but it is now trading for around $320.

The volatility of Bitcoin -- created in 2008  by a programmer known as Satoshi Nakamoto, the apparent namesake of Mr. Bailon’s company -- underscores the fact that the virtual money is “merely valued subjectively according to one’s ability to exchange them for goods,” according to the BSP.

“There is no assurance that the value Bitcoin or any virtual currency would be stable,” the BSP said in its advisory.

Due to its unregulated nature, it is difficult to ascertain the amount of Bitcoin in circulation in the Philippines -- or if traditional, national boundaries even have much relevance to the global Bitcoin trade. At the moment, however, more than 13 million Bitcoins are in global circulation, according to data from leading global Bitcoin service provider Blockchain.

The central bank’s March advisory additionally flagged concerns on Bitcoin’s “possible use for money laundering and other illegal purposes.”

Use of Bitcoin is, after all, anonymous.

“This innovation could possibly offer a low cost remittance solution, but we would need to have some level of confidence that the weaknesses could be addressed,” BSP Governor Amando M. Tetangco, Jr. told reporters, adding that the BSP would be “studying the appropriate regulatory approach to this innovation.”

Mr. Hose nevertheless welcomed the points raised in BSP’s advisory.

“So far, the Bangko Sentral has only issued one statement, and it actually was a very good statement. They outlined the risks of dealing with Bitcoin,” Mr. Hose said. “I think they did a really good job as far as educating consumers to make sure that people who are dealing with Bitcoin are aware of the risks.”

Mr. Hose acknowledged that local Bitcoin exchanges, such as Coins.ph, are not regulated.

“There are no regulations, so we’re not a covered financial institution.

However, we are very aware of regulations and we do our best to comply with anti-money laundering laws and KYCs [know-your-customer requirements],” Mr. Hose explained. “We basically self-regulate.”

As for taking investment positions on Bitcoin with the aim of profiting, Mr. Hose said he doesn’t “recommend for anyone to speculate” on the currency, noting that customers should instead just use it like normal money -- for purchases, for service payments, the like.

MINING
That’s one thing Carlos Vincent Chua, a freshman law student at the University of the Philippines, never got to do.

“I haven’t used Bitcoin to make any purchases so far. I don’t have enough,” Mr. Chua said in an e-mail. “My Bitcoin count is somewhere around 0.0000021 to 0.0000030, probably even less.” That would be worth around four centavos.

Rather than buying Bitcoin with cash, Mr. Chua said he found an opportunity to earn some of the digital currency through Bitcoin mining.

Mining entails the use of top-of-the-line computers for solving complex math problems that would unlock codes in exchange for Bitcoin -- the process that adds to the global supply of the cryptocurrency.

“I stumbled upon Bitcoin doing my usual rounds of internet browsing... It intrigued me and after researching about it more, I found out you could mine them with your computer,” Mr. Chua said. “I decided to give it a shot. I mean, come on, it was practically free money, but [that] was far from the reality.”

“The hardware needed to mine Bitcoin is expensive. If you don’t have the right equipment your computer can easily overheat and eventually break,” Mr. Chua said. “I decided it wasn’t worth it.”

Of course, Mr. Chua could just have easily exchanged his pesos for some Bitcoin -- that would have gotten his hands on the cryptocurrency much faster than mining ever could.

But he said: “Personally, I would still use peso for online transactions.”

Apart from citing that the lack of regulation “makes it risky to use,” Mr. Chua said he thinks individuals in more developed economies should first lead the way in using the currency.

“Once we see that it is feasible and safe, then we may follow suit,” he said, explaining that the country’s infrastructure woes can easily make the use of any technology a headache. “Unless we can develop the proper infrastructure to increase internet use and make it fast enough for it to be comfortable, then the growth of virtual currency is greatly limited in this country.”

Like Mr. Chua, though, Mr. Hose is pinning his dreams for his company on hopes of technological improvements in the country -- both in terms of quality and in terms of reach.

“Smartphone penetration is still low but [we expect it to] grow three times next year. Within two or three years, you can expect that probably 60-70% of people in this country are going to have smartphones,” Mr. Hose said, adding that Coins.ph will bank on this opportunity to promote mobile Bitcoin use.

“So many more people are going to have smartphones than there are going to have bank accounts.” Mr. Hose points out that about less than a quarter of the population have a bank account. “Anyone who doesn’t have a bank account but has a smartphone is our customer.”

Notably, though, even traditional banks said they would be willing to join the fray, if Bitcoin pioneers -- whether local or global -- show they are on to something good.

Bitcoin is “not affecting us at this time,” Bank of the Philippine Islands senior vice-president and Electronic Channels Group head Manuel C. Tagaza said in an interview last month. “We always keep watch on these happenings, but it’s too early to tell with the Philippines.

“We’re looking at how it grows outside of the Philippines, and then we’ll see,” Mr. Tagaza said. “What we can say is that we’re looking at different payment mechanisms, not necessarily just Bitcoin in particular... We’re watching the developing trends in alternative modes of payments.”

Rizal Commercial Banking Corp. vice-president and head of Deposits, Investments, and Cross-Selling Roel Lustado, in a separate interview last month, identified Bitcoin as a possible “disruptor.”

“But we can work hand-in-hand,” he said about local Bitcoin firms. “You sometimes come across people who have things like this -- like Bitcoin -- that really stir up interest.

“That’s why we may continue to look at these things, because eventually, we might find the right partner,” Mr. Lustado said.

Mr. Hose would perhaps be a fan of Mr. Lustado’s choice of words.

“We’re building tools that improve financial inclusion using the underlying Bitcoin network as protocol,” Mr. Hose said. He cited as an example Coins.ph’s minimal P2 charge for money transfers, which “is really going to drive financial inclusion.”

Bitcoin is “a big disruption,” Mr. Hose professed, as he demonstrated basic Bitcoin transactions on his phone and laptop. “If you think about it, it’s really a rewiring of the financial system.”