Bitcoin and the Coming of the Cashless Society; Challenges for Regulation and Business

The circulation of monetary value gets progressively integrated with computers and networks while cash is substituted by cards, software-based media transaction and mobile payments. The cause of the ongoing obsolescence of cash is the proliferation of digital payment instruments and the development of electronic networks and interfaces for the circulation of monetary value.

The competition from electronic payments confined the use of cash only to a fraction of the total value of monetary transactions. According to the European Central Bank, the total of non-cash payments increased by 6% only in 2013 reaching to 100 billion (ECB 2014, 1). At the same time, the Central Bank of Denmark has announced plans to stop printing banknotes and minting coins by the end of 2016, a further indication of the phasing-out of cash.

The reconfiguration of the monetary system away from cash and towards electronic media is technologically as well culturally and economically determined. The first set of causes that support the phasing-out of cash are related to the overall efficiency of the payment system; technological developments expand the horizon of what is possibly increasing the scope, the speed, and the safety of monetary transactions and at the same time as they are reducing the costs. The second set of causes are socially and culturally determined; the expansion of a culture of “real virtuality” (Castells 2010, 358).

The pervasiveness of new media and electronic networks dictate that money needs to be informational in order to be compatible with the rest of the institutions of the network society. Finally, the commercial banks have been consistently pursuing the substitution of cash, in order to reduce their operating costs, to increase their floating possibilities along with their ability to create money through lending, to cement their dominance in the payments industry and to an extent their control over the monetary system. Central Banks and intergovernmental authorities, including the Bank of International Settlements (BIS) and the European Central Bank (ECB) that are responsible for the oversight of the payment systems have encouraged the collusion of commercial banks in the effort to build the necessary infrastructure for the substitution of currency in banking and retail payments (Evans 1999).

The main obstacle that prevents the complete abolition of conventional currency, is the inefficiency of electronic payments in small-denomination retail payment where cash remains dominant. Furthermore, the privacy concerns that grew in the aftermath of the NSA affair, have increased the awareness and the demand of consumers for more privacy in their economic transactions.

The technological solution for the substitution of cash also in retail and for the anonymization of electronic payments may come from an unlikely source. The recent innovation of Bitcoin, that combines a digital currency and peer-to-peer payment system, originating from the open source and free software communities has attracted the attention, not only because of the speculative bubble that it created in the end of 2013, but mainly because it represents a completely structure for organizing financial services. Unlike the established model of processing of transactions that is being conducted centrally and by a dedicated network that is hierarchically organized, Bitcoin is using the internet, an open, peer-to-peer, structure and a distributed public ledger for processing transactions. The distributed public ledger is comprised by “blocks” of verified transactions and “is the key distinguishing characteristic and the fundamental innovation” (Evans 2014, p. 1) of Bitcoin.

The “blockchain” allows Bitcoin and other peer-to-peer digital currencies with the same technology, to function anonymously and with much lower transaction fees, giving them a comparative advantage in small denomination payments. Because of these characteristics peer-to-peer payment systems using the blockchain may contribute towards the emergence of a cashless economy, compensating for some of the adverse consequences of the substitution of coins and notes, especially in issues of transparency, anonymity, openness but also cost. Peer-to-peer payment systems can function as a form of digital cash that is cheap, suitable for low-denomination transactions. In many jurisdictions, regulation is non-existent and in other absolutely prohibitive, denying virtual currencies any legal recognition.

The directive issued by the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) in 2003 is setting a legal precedent, spelling out the compliance obligations of virtual currencies under the Federal Bank Secrecy Act (BSA). FinCEN defines them as services of monetary transmission, not different from the traditional business of remittances. The European Union has adopted a similar stance treating digital currencies under the Electronic Money Directive 2009/110/EC. Such a solution may not be the optimal for peer-to-peer payments, but rather seems to force them in the model of the already established payment business, dominated by companies like MasterCard , PayPal or VISA. The regulation of cryptocurrencies in the established legal standard of electronic transfers is a conservative reaction, which serves the interests of the payment industry by imposing their model at the same time as it tries to 0defend the monopoly of the state over the monetary system.

The current situation remains discouraging with peer-to-peer payment systems being trapped between the established but inappropriate regulatory framework for electronic payments and an unregulated existence where uncertainty, fraud and criminality are pervasive. The study of the impact of cryptocurrencies has to face difficult methodological challenges. The research on the intersection of business and media is relatively underdeveloped with no clear methods or assumptions. At the same time the study of peer-to-peer digital currencies is in an early stage, in economics, in finance and in the field of software studies/ interface criticism.

The research should be developed along two lines; the investigation of the appropriate role of the peer-to-peer currencies in the cashless economy and the model, both in business and in law, which can allow them to fulfill this role and realize their full potential.

The research should:

1. Explain how current developments within digital payments following the introduction of bitcoin and the blockchain technology affects the operation of the monetary system and the payments industry with a particular emphasis on the realization of a cashless economy.

2. Consider the appropriate regulation for the integration of peer-to-peer digital payment system in the financial system and explain the requirements for their successful implementation.

3. Evaluate the existing business models and to propose new ones for the companies and the organizations that are involved in the supply of services or products that are connected with peer-to-peer payments. These models are going to be compared with the established business strategies in the payment industry and the efforts to protect itself from the incumbents.

The innovation of peer-to-peer payment systems like Bitcoin should be studied both as an act of criticism again the established architecture of cryptocurrencies and as a genuine attempt to provide a viable system for transferring economic value and facilitating transactions across the web. Innovations that come from the network communities of programmers, hackers and artists, bitcoin and the blockchain “have served to accelerate capitalism, [while] they have also served to strengthen antagonism against it, by generating critical artistic practices and hacktivist interventions based on technologies and methodologies of sharing and networking.” (Bazzichelli 2013, 9) Such an understanding of Bitcoin's disruptive effect on the market for payments calls for a more complex framework for the analysis of the business models of the digital currencies community, that can account for the mutual disruption of the principles of openness and collaboration and the business logic of capturing the economies of scale, both of which characterize social networking.

Investigating the business strategies of building a large network of engaged users to produce revenue, one should consider both the ideological attractiveness of specific network technologies, based on openness and equality, and their ability to successfully resolve actual economic problems.

Consequently, the framework of analysis of the emerging business model or the requirements of regulation needs to combine a business school perspective with the visions that guide technological and even hacker practices. Institutional analysis should supplement business studies and their application in the analysis of the disruptive effect of the innovative peer-to-peer payment systems.

The discipline of institutional economics systematically investigates the interplay between the established regulation and the transformative power of technological innovation (Bush and Tool 2003). The theoretical framework for the analysis of institutional change is developed upon the dichotomy between “instrumental” and “ceremonial” values against which a possible technological adjustment can be appraised (Waller 1982, 757). Ceremonial considerations give rise to a system of “sufficient reason” (Tool 2000, 55) for the acceptance of the institutional rules and are connected with rent-seeking and the dominance of vested interests.

Instrumental values are directed towards the application of knowledge for the solution of specific social problems representing progress and “instrumental efficiency” (Tool 2000, p. 60). In the context of the monetary system, the ceremonial values represent the privileges and the rents of the banks and the state, while the instrumental values express the concerns about the efficient operations of the monetary system. Peer-to-peer payment systems can find a niche as a substitute to cash, but so long as the resilience of their technology, their business model and their regulation remains uncertain, it is difficult to imagine that they would enjoy the necessary acceptance by merchants and consumers in the competitive environment of electronic payments.