What Should Etailers do with Blockchain, Bitcoin?

Martijn Hoogeveen
By
September 19, 2016
Bitcoin blockchain

Bitcoin’s hype in 2014, leading to its all-time-high of close to 1200 USD or 900 EUR, has marked the breakthrough of cryptocurrencies to the wider community. I also bought some bitcoins in 2013. I thought they would be safe with the then largest gateway, Mtgox in Japan. That was a fatal mistake. Mtgox filed for bankruptcy in February 2014. Allegedly because of embezzlements by its French ceo Mark Karpelès, who was sent to jail in Japan. According to IBT, he had spent large sums on prostitutes and luxury goods.

Boom and Bust Innovation

Since then, gateway bankruptcies, hacks and crime busting, like closing down the crypto-driven marketplace Silk Road, have cooled down the bitcoin hype significantly. Bitcoin went down from its peak of around 900 EUR per Bitcoin to around 200 EUR during 2015, but has bounced back to around 500 EUR in August 2016, reflecting the trust in its technology in a broader sense. Even recent failures like the Bitfinex gateway in Hong-Kong, due to a hack, didn’t stop bitcoin from bouncing back.bitcoin-euro-rate-historical

source: bitcoinweb

But, at the same time, both the ups and the downs have spurred innovation. Blockchain protocols evolved, and a whole range of startups start to improve on the security of wallets and gateways, the usability of blockchain in an ever wider range of applications, and the improvement of the processing speed of transactions. It caught the imagination of the fintech industry.

New Kids on the Blockchain

The breakthrough of Bitcoin has inspired also a host of alternative cryptocurrencies. Coinmarket lists the first 100 in order of market capitalization. Ethereum, Ripple and Litecoin are the nearest to Bitcoin, but all experience their own challenges and subsequent boom and bust cycles.

Cryptocurrencies like Bitcoin are just one application of blockchain protocols, which form basically a distributed public ledger consisting of secure records of any type of database transaction. Secure in the sense that it’s protected from tampering or revision.

The underlying blockchain technologies, especially those of Ethereum and Bitcoin, have inspired a whole range of startups, making use of these open source standards, for a variety of applications like the distributed notarization of documents, exchange of medical patient files, interbancary payment processing, E-ordering, etc etc. The applications of blockchain fall roughly in a number of categories:

  1. Cryptocurrencies
  2. Payment infrastructures to validate online payments not being cryptocurrencies
  3. Digital assets, such as stocks, bonds, loyalty points, etc.
  4. Authentication as used in digital signing
  5. Smart contracts
  6. Notarization of documents or data records filed or exchanged

The hacking of blockchain applications, especially related to crypto-currencies because of their value, spurs the innovation of blockchain protocols. Vulnerabilities are resolved. Architectural design flaws in blockchain apps are corrected. Business processes and procedures in companies applying blockchain services are improved. This type of trial and error, and survival of the fittest protocol, is what has made the internet great in the past, and will continue to do so. Blockchain is just another set of open (source) protocols, which are set to solve fundamental trust problems that are at the heart of our economical infrastructures. They are here to stay. It’s therefore a great time to experiment with them, and that’s just what all major banks are doing.

Why are Cryptocurrencies Hardly Used by Etailers?

When Bitcoin had its rally towards the 850 EUR mark, taking the world by surprise, the ecommerce industry seemed to lean towards accepting this payment method. The absence of capital controls, its cryptographic strength (security!), very low transactions costs, and relative anonymity, seemed to position it as the digital money of the future. Afterall, it’s strange that in the digital world we still hardly use digital coin. But, the breakthrough in mainstream ecommerce didn’t happen yet. There are a few concerns that caused this:

  • Lack of trust in Bitcoin as a stable currency as its value fluctuates wildly against major currencies like the USD and EUR.
  • Uncertainty about how governments would look at Bitcoin, although that is mostly clarified now in Western countries, as Bitcoin is treated as just another commodity.
  • Lack of trust in the safety of Bitcoin wallets to store values, as hackers exploit the vulnerabilities.
  • Lack of trust in Bitcoin exchanges as a number of high-profile hacks or embezzlements brought some of these down.
  • Lack of support by mainstream payment service providers like Paypal.
  • Lack of trust in the legitimacy of the sources of bitcoins offered, in the light of anti-money-laundering, anti-terrorism or facilitating crime.

Paypal, one of the most successful payment service providers, at one point announced that it was going to accept Bitcoins. But Paypal backed off, without any further notice, probably because of the above-mentioned trust issues. The other digital currencies suffered from the same trust deficit as Bitcoin, and have the additional drawback of a much smaller market capitalization.

Still, there are high-profile ecommerce sites accepting bitcoin. One is DELL. A major advantage for DELL is the lower transaction cost and reaching out to customers in countries, like China and Greece, where bitcoin is relatively well accepted because of low trust in government or banks. For this purpose, DELL is working with the bitcoin gateway Coinbase. Also TigerDirect and NewEgg, mainstream US etailers, are accepting bitcoin. Here and there some examples in travel or hospitality can be found. It’s not widespread.

What should the ecommerce industry do with blockchain?

Although cryptocurrency and blockchain are still in a kind of experimental stage, it’s important to realize that these technologies are here to stay. They will continue to evolve and mature. Even if cryptocurrencies form a very small percentage of transactions, it’s good to experiment with accepting them, while keeping risks low. A way to do that is to work with bitcoin payment providers that immediately convert accepted bitcoins in mainstream currencies like EUR or USD and wire the amounts directly into your company’s bank accounts. BitPay is at the moment the most successful payment provider doing this. This eliminates most of the risks regarding keeping bitcoins on a wallet. In this case, the risk is reduced to BitPay getting broke and thus losing your last transactions.

Experiment with accepting bitcoin and blockchain tech

In case of regular payment service providers, it’s smart for them to similarly start experimenting with adding support for accepting bitcoins, so that more etailers can easily make use of it.

The underlying blockchain technologies are even more promising. For lowering transactions costs between manufacturers, distributors and etailers. For example, by replacing traditional EDI (Electronic Data Interchange) services. Or for industry-wide marketing applications like loyalty points and membership cards. It’s good to start experimenting with the use of blockchain technologies, to assess its potential for improving customer service, and optimize the ecommerce value chain.

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