Bitcoins: currency 2.0

London is the fastest-growing hub in Europe for bitcoin users. The much-hyped virtual currency is changing hands in pubs, cafés and e-boutiques across the capital. Does it herald a cashless future or is it a no-cash flash in the pan, asks John Arlidge

The Old Shoreditch Station café and its bitcoin atm

John Arlidge

21 August 2014

There is nothing old about The Old Shoreditch Station café, a £1 coin’s throw away from Silicon Round-about, the home of East London’s Tech City. It’s about as cutting edge as a café can get. It’s not the menu — although the cappuccinos are religion-changingly good — it’s the price. They don’t charge for caffeine in silly old cash or credit cards. They take something new: bitcoins.

Don’t have any? Don’t worry. The café has installed one of London’s first bitcoin ATMs. Download the bitcoin app on your phone, put a fiver into the ATM, hold your phone up to the QR code that appears on the screen and your account is credited with £5-worth of bitcoins. Next, hold your phone near the cashier’s tablet or smartphone and the bitcoins are transferred to the café’s account. The whole thing takes about two minutes, less time than it takes the barista, Nick, to make the coffee. ‘We get more and more people paying in BTC,’ he tells me, using the currency’s nickname.

It’s all very currency 2.0, provided you know what bitcoins are. Here’s a quick recap. Bitcoin is a misnomer. Bitcoins are not coins. They do not exist in physical form. They are a digital currency that exists only as a series of com-puter files. They are not issued by or backed by a government, like paper money. No central bank ‘promises to pay the bearer on demand’. Retailers are not obliged to accept them. In fact, they have no intrinsic value. But people are willing to buy them or trade them for goods and services. Retailers like them because the transactions are cheaper than using credit cards and consumers like them because it means they don’t have to deal with banks.

Thanks to all the new hi-tech startup businesses near Silicon Roundabout, London is now the fastest-growing hub in Europe for bitcoin users. There are thousands of places where you can spend the world’s newest currency. Hungry? Nincomsoup café in the Old Street underpass lets you pay with bitcoins. Thirsty? Take your e-wallet to the hipster Pembury Tavern in Hackney for a bitcoin beer. Going out for the night? Bag a new outfit at Girl Meets Dress, a website that rents dresses by the night, then go online and order a Wheely minicab whose driver will accept bitcoins.

Fancy a trip abroad? You can drive to France in a Tesla electric car bought with bitcoins from Tesla in Westfield Shepherd’s Bush. Not snazzy enough? How about a private jet from PrivateFly? Moving house? East London-based Man With a Van takes bitcoins. You can even buy your new home with bitcoins. Richard Mathieson, managing director of Cai-Capital, has helped two buyers to secure homes for £1m and £750,000.

And then there’s the final frontier. If you have £150,000-worth of bitcoins to spare, you can book a trip to space with Richard Branson’s Virgin Galactic. Branson became one of the first entrepreneurs to start using bitcoins. Space travellers are the ultimate early adopters of new technology, he says, which makes bitcoin ‘a natural fit’.

Bitcoin was invented in January 2009 when a shadowy hacker, or team of hackers, working under the name Satoshi Nakamoto, released computer code that enabled people to transfer credits direct to one another online, outside government control. In an essay that accompanied the release, Nakamoto said he invented bitcoin because he was angry at the big banks’ role in the financial crisis. Newsweek recently identified one Dorian Satoshi Nakamoto, a 64-year-old engineer living in Southern California, as Satoshi Nakamoto. Dorian Nakamoto denies it.

Since 2009, bitcoins have been created, or ‘mined’, every day by geeks who compete to solve fiendishly complex mathematical problems set by Nakamoto, whoever he is. The person who comes up with the right answer wins a block of 25 new bitcoins from the virtual currency’s decentralised network.

Bitcoins are stored in digital wallets, which operate much like an online bank account, or in online ‘vaults’ — the world’s first insured bitcoin vault opened in Holborn earlier this year. They are bought and sold, and converted into gold, sterling, euros or dollars, on bitcoin exchanges.

The value of one bitcoin, which began at just pennies, has fluctuated over the past few years like any other currency. It topped £660 in late 2013 but is now around £325, and can shift significantly throughout the day. You don’t have to spend whole bitcoins: each one can be split into 100 million pieces, each known as a satoshi, and spent separately. My cappuccino in The Old Shoreditch Station café cost 0.0076 BTC (£2.65 in old money).

Unlike paper currencies controlled by governments, which can be issued endlessly, Nakamoto’s software dictates that only 21 million bitcoins can ever be ‘mined’, making it — and this is the really neat bit — immune to inflation. Around 13 million have been issued so far. No one knows exactly how many Nakamoto has kept for himself or how much ‘cash’ he has made so far.

When bitcoin launched, it was described by the European Central Bank as ‘a high-risk system’. But in the past two years the currency has been jingling in some distinguished pockets. Germany has recognised bitcoins as a ‘unit of account’. US financial institutions and government agencies, including the Chicago Federal Reserve, have praised it as ‘a remarkable conceptual and technical achievement, which may well be used by existing financial institutions or even by governments themselves’.

Investors are backing bitcoin-related startups. Peter Thiel, who helped to create Facebook and PayPal, has raised £1.2m for BitPay, an exchange that helps companies accept bitcoin payments. Small wonder Wall Street and the City are taking note. Bank of America Merrill Lynch analysts say that bitcoin ‘may emerge as a serious competitor to traditional money transfer providers’. The bank estimates it might eventually account for ten per cent of global online transactions per year — £3bn worth of commerce in today’s money.

Bitcoin believers have no doubt it will one day become a serious currency. Foremost among them are Tyler Winklevoss and his brother Cameron. The twins, famous for suing the Facebook founder Mark Zuckerberg for allegedly stealing the idea for the social network, have invested heavily. By some estimates, they own one per cent of all bitcoins. ‘People say it’s a Ponzi scheme, it’s a bubble,’ says Cameron Winklevoss. ‘But that narrative will shift to “virtual currencies are here to stay”. We’re in the early days.’

However, critics dismiss bitcoin as shady and dangerous. They point out that the currency is unregulated now and argue it will soon be so tightly regulated it will lose its appeal. Criminals, they say, are among bitcoin’s most enthusiastic users because it’s possible to make transactions anonymously. It’s true that bitcoins are the currency of choice for ‘dark’ websites such as Silk Road and Black Market Reloaded, through which users can buy drugs anonymously. Police have begun to crack down on such sites, reducing their and bitcoin’s appeal.

At present, bitcoin transactions are hard to spot and, therefore, hard to tax. To many users, that’s a key advantage. But governments are likely to take action to limit tax evasion, making the currency even less attractive. Some governments, notably China, are so concerned about bitcoin use — and abuse — that they have banned it altogether.

Critics also point out that bitcoins are hackable. The largest bitcoin payment processor in Europe, BIPS, based in Copenhagen, recently ‘lost’ £600,000-worth of bitcoins, including some in the personal online wallets of customers. With no central bitcoin bank or regulator, the victims had no one to complain to.

Traditional payment providers are quick to exploit bitcoin’s woes to defend their lucrative turf. ‘There have been a number of alternative currencies talked about over time,’ says Chris Monteiro of MasterCard. ‘The bottom line is, consumers want a payment solution that is safe, simple to use and universally accepted.’

Despite its problems, could bitcoin take off? The answer probably lies with retailers. If they like it, it’s got a fighting chance. Many seem to. Existing payment systems, such as PayPal and credit cards, take a cut, sometimes as much as 2.5 per cent, of every transaction. Bitcoin exchanges only charge around 0.2 per cent. To retailers, that looks pretty good.

Xavier de Lecaros-Aquise, co-founder of Girl Meets Dress, says his company started to accept bitcoins because the processing cost is ‘a fraction’ of that of credit cards. Akin Fernandez, the entrepreneur behind Azteco, Europe’s first bricks and mortar bitcoin-only store in Shoreditch that sells everything from £80 leather backpacks to £34 geometric terrariums, adds: ‘With bitcoin, it’s possible to send a fraction of a euro or pound anywhere in the world instantly. Bitcoin is going to change e-commerce forever.’

It’s not just the low cost that excites early adopters. It’s the simplicity and privacy. Simon Hamblin of Netagio, one of the first online exchanges for storing, trading and selling bitcoins, says: ‘When you go online to buy something or register for a bank account, you have to fill out a form with lots of sensitive personal details. With bitcoin, you don’t. It’s faster, cheaper, more discreet and safer.’ Indeed, some rich divorcees are said to be converting assets into bitcoins to try to protect their money from former spouses.

Many, such as Hamblin, liken bitcoin to Napster, the first music file-sharing service that allowed users to call up almost any song. It demonstrated that there was huge demand for digital music, prompting many other services to spring up in its wake, notably iTunes and Spotify. Bitcoin believers, retailers and investors are waking up and smelling the coffee about digital money. The new currency’s evangelists hope you and I will soon do the same, one 0.0076 BTC cappuccino at a time.

Bitcoins: currency 2.0

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