If not bitcoin, what?
October 16, 2013

Although there are many types of arguments favoring unregulated currency, such as the desire for a free market, in many instances this form of payment serves one key purpose: privacy. In light of programs such as PRISM and the belief that businesses and governments are monitoring people's every action, some individuals want a little anonymity in their lives. 

Because of this, bitcoin has grown into one of the better known alternate forms of payment. The currency can be exchanged without revealing the identity of its holder. It's not backed by banks, it's unregulated by the government and it works on free market principles. 

However, bitcoin's lack of regulation also made it an attractive payment option for illegal activities. As strongly as it is associated with certain ideologies, it also bears a hard-to-deny association with criminality. Anyone doubting merely need look to the shutdown of the online black market, Silk Road – what had been a popular place to buy drugs on the Internet. Just one day after the site's closure, bitcoin value dropped from $140 to $129, according to Reuters. Although bitcoin's known as a volatile currency, there are additional associations between it and lawless enterprises. 

While Reuters stated that there are currently 11.8 million bitcoins in circulation, 9.5 million bitcoins were used to complete transactions on Silk Road. Although many of these were reasonably passed back-and-forth, this is still a considerable volume of the currency and 3.6 million bitcoins were in the possession of Silk Road's founder, Ross William Ulbricht, when he was arrested. 

That said, the popularity of bitcoin conveys the desire many people have for some anonymity. Alternate payment methods likely will need some level of regulation to avoid bitcoin's value fluctuation and its association with crime, but they should also strive to address privacy issues. The market exists for currency that enables people to avoid being scrutinized, but it has yet to be realized. Cash performed this function for centuries, but online versions have yet to gain widespread acceptance. 

Furthermore, ZDNet claimed that it's only a matter of time before the government regulates bitcoins. The currency is already banned in some countries, and should the bitcoin remain a viable payment method in some markets, it will attract the attention of policy makers. Whether it will remain valuable after that point is debatable – since it wasn't designed for with regulation in mind, its appeal may decline. A more robust alternative, created with regulation in mind, may be necessary. 

Fraud another consideration
Reuters also noted that bitcoin supporters also claim that the currency reduces fraud risk, which is another advantage that alternate payment methods will need to achieve widespread usage. The current methods for protecting someone's identity, such as passwords, are often an easily cracked form of authentication. According to a recent study from Kount Volumatic, fraud results in $54 billion in losses to the retail industry every year. For brick-and-mortar locations, much of this resulted from employees, but credit cards were involved in 83 percent of all online incidents. Addressing issues such as this will be a key component to implementing new transaction methods. 

Balancing identity protection with a more socially acceptable form of payment may be difficult, but retailers, the government and other institutions could benefit from both just as much as their customers and citizens due to the decreased chance of fraud and their willingness to provide anonymity. The support of legitimate organizations will also likely be key to the success of any alternate payment method.