Bitcoin and Beyond Understanding The Opportunity in Digital Currency Services and Infrastructure

Bitcoin and beyond: understanding
the opportunity in digital currency

services and infrastructure
Kristina Yee
a mobile report
Bitcoin and beyond: understanding the

opportunity in digital currency services and
infrastructure
03/28/2014
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. THE STATE OF ALTERNATIVE CURRENCIES WORLDWIDE
a. What is digital currency?
b. Categories of digital currency technology
3. DIGITAL CURRENCY PROSPECTS WORLDWIDE
4. THE IMPLICATIONS OF DIGITAL CURRENCIES
5. BARRIERS TO DIGITAL CURRENCIES
6. DRIVERS FOR DIGITAL CURRENCY ADOPTION
7. THE OPPORTUNITY IN DIGITAL CURRENCIES
8. THE EVOLUTION OF ALTERNATIVE CURRENCIES
9. KEY TAKEAWAYS
10. ABOUT KRISTINA J. YEE
11. ABOUT GIGAOM RESEARCH
12. COPYRIGHT
Bitcoin and beyond: understanding the opportunity in digital currency services and infrastructure
This PDF prepared for: cwoodrow (cwoodrow@cisco.com)
At current valuation, the bitcoin system surpasses the average market cap of $4.5 billion
of the worlds three largest wire-transfer services: Western Union, MoneyGram, and
Euronet. Clearly the momentum and support for bitcoin and the digital currency
movement that it represents should be considered a serious influencer and driver in the
evolution of financial systems and services.
Even the greatest proponents of digital currencies have expressed doubt that bitcoin or
any other cryptocurrrency will ever become the currency of an entire nation, but there is a
collective desire and a role for digital currencies. There is also a need to improve the way
financial transactions operate.
This paper provides an overview of the current digital currency landscape and educates
the reader about the opportunities around the adoption of bitcoin and other alternative
currencies.
It is not the digital currency itself but instead the bitcoin protocol and its variations
and extensions that represent a new phase of internet use and development the
internet of value.
While the web provides the interface for digital transactions representing the
exchange of goods and services, the internet of value is a mechanism for the entirely
digital exchange of money and other instruments of value.
The potential of alternative currencies and payment protocols lies in not only the
promise of faster, cheaper money exchange and financial transactions but also the
creation of a new paradigm for the digitization and transfer of all things of value. That
means not only replacing slow proprietary money-transfer systems and procedures
such as automated clearing houses (ACHs) but also revolutionizing onerous
procedures such as real estate title transfers, loan origination, and contract signings.
Thumbnail image courtesy of arinhabich/Thinkstock
The state of alternative currencies worldwide

According to a WorldPay research study, there are more than 300 alternative payment
systems operating globally for ecommerce transactions. The study defined alternative
as all methods other than debit and credit card transactions. These numerous systems
result primarily from:
Lack of access to traditional electronic payment methods such as credit cards
Other unique environmental or social circumstances, such as chronic high inflation in
unstable economies
A willingness of users and merchants to try new payment models.
Alternative payment methods are expected to account for 59 percent of all online
transactions by 2017, with digital currencies representing 5 percent, or $209 billion, of ecommerce volume, up from $164 billion in 2012.
What is digital currency?

Digital currency is an alternative, electronically delivered method for the exchange of
value and the social and technical infrastructure that enables it. The generally understood
value of digital currency lies in it providing an alternative, relatively frictionless
financial-transaction system that can both work in parallel to or even replace traditional
payment systems.
At best, digital currency systems provide a powerful, agile, reasonably secure, and
relatively economical technological solution for the facilitation of financial transactions.
This emerging payments universe is particularly suited to micropayments, cross-border
transactions, and highly volatile currency inflation and deflation scenarios, in which there
are clear and compelling reasons to adopt digital currency systems. And despite highprofile scandals, as in the cases of Liberty Reserve and Silk Road 2 as well as the wellpublicized meltdown of the MtGox exchange, digital currencies can be as traceable and
transparent as credit cards and more traceable and practical than cash. Digital currencies
also streamline peer-to-peer (P2P) transactions; reduced operational layers result in lower
fees, faster settlements, and a built-in trust mechanism for enabling transactions between
two not-necessarily known parties over an insecure network without the fees and
requirements instituted by the banks and credit card companies.
This report discusses digital currencies, under which cryptocurrencies fall. Virtual
currencies that have no intrinsic monetary value and are not cash equivalents are not
digital currencies; examples include Ven, travel reward miles, My Coke Rewards points,
Amazon Coins, and Second Lifes Linden Dollars.
Categories of digital currency technology

A breakdown of the market capitalizations of each of the recognized digital currencies
lists more than 80 different coins, with new instruments being rapidly introduced as the
developer community focuses on creating the most efficient and practical system for
digital currency exchange. This effort is borne from both the development of bitcoinprotocol-based alternative currencies and the creation of other unique protocols and
currencies.
It is necessary to understand the differences between the technology protocol underlying
digital currency transactions and the unit of digital currency itself to fully comprehend
the breadth of opportunity in this space. In other words, were not concerned with any
one coin but instead the idea that the technical and social infrastructure on which these
digital currencies are exchanged forms the basis for a new way of moving money.
These technologies may be grouped into three categories:

Transaction protocols by which the systems for enabling digital transactions are
built
Cryptocurrencies and other digital-money instruments that are the medium of value
exchange on these systems
Expansionist technologies that seek to improve on existing protocols and add
supporting functionality and infrastructure for the enablement of a widespread and
efficient distribution and exchange of digital currency and other digitizable value
assets
Transaction protocols
Today there exists two major cryptocurrency protocols, or sets of digital procedures for
governing the transmittal of data between electronic devices proof-of-work protocols
and trust-based protocols. Each provides unique advantages. The common benefits of
both include:
The ability to send money to anyone, anytime, and anywhere with less friction
Low transfer fees for buyers, merchants, and individual payees
Near-real-time clearing and settlement (seconds to minutes) versus ACH transfer (two
to three days)
Proof-of-work protocol
Bitcoin is a general-ledger P2P protocol that is currently the leading system for the
enablement of digital currency transactions. Described as a proof-of-work protocol, this
cryptographic technique or system has built-in checks and balances to prevent doublecounting and other erroneous transactions without requiring a trust relationship between
the transaction parties. This proof-of-work protocol establishes consensus by checking an
algorithm that proves a certain amount of work was invested in a given ledger, or
blockchain. The bitcoin monetary unit, or BTC, is one of the digital currencies
implemented by the protocol, and it is currently the leading digital currency in terms of
volume of transactions and market capitalization.
The decentralized nature of the system allows for the separation of personal data from the
transaction, allowing for a strong level of anonymity. While it is technically feasible to
track transactions to an individual or group, the effort in doing so for all but the largest of
transactions is resource-prohibitive, and arguably a holder of small amounts of bitcoin

with a strong understanding of the system could remain anonymous indefinitely.
Decentralized trust-based protocols
The Ripple protocol enables and ledger-records transactions between trusted parties, as
opposed to bitcoins proof-of-work system. Trusted market-makers match buyers and
sellers to maintain liquidity, and assets are stored as debts, with exchanges made via the
exchange of XRP coins for the debt at each end of a transaction. Ripple acts like a
currency-exchange system, supporting all fiat as well as digital currencies. It potentially
could be used to trade digital assets (stocks and bonds) as well as physical goods and
services.
One major advantage of Ripple over bitcoin is that it uses a single-ledger system that
results in transactions clearing within seconds while bitcoin system-transactions
reportedly take as long as 12 minutes. Thats an eternity when dealing with highfluctuation currencies like bitcoin. Ripples closed-loop network is also significantly
more energy-efficient and more secure against attacks than the bitcoin protocol.
However, all currencies are first converted to XRP during the exchange before
conversion to the payment recipients requested currency. Notably, XRPs are proprietary
to the Ripple system, and the majority of the existing 100-billion XRPs are held by
Ripple Labs as opposed to being owned by the participants in the greater ecosystem, as
with bitcoin. This brings into question whether XPR is a true, sustainable currency. That
said, the built-in transparency and speed of the system, as well as the financial technology
industry experience and celebrity of the Ripple Labs management team, make the Ripple
system more attractive to governments and institutions. This upside for institutions,
however, could be considered a downside for individuals who lose their ability to
separate the transfer of personal information from the transaction.
Bitcoin-based cryptocurrency
When cryptographic methods are used to create digital instruments that act as a medium
for holding and exchanging value, the result is a cryptocurrency. Litecoin, Dogecoin,
Zerocoin, Primecoin, Namecoin, Peercoin, Coinye, WorldCoin, Feathercoin, Megacoin,
QuarkCoin, bitcoin itself, and other emerging alternative coins are based on the bitcoin
protocol and may be thought of as currencies that validate the bitcoin proof-of-work
concept. While bitcoin itself is an open source technique that is continually evolving and
improving, the creators of these offshoot cryptocurrencies felt the need to create separate
currencies based on their unique needs or to fulfill a perceived market need. For example,
Zerocoin seeks to provide true anonymity for bitcoin transactions, which are transparent
via the public ledger. These coins do not necessarily compete with bitcoin on a direct
basis but serve their own niche in the user community from both a brand perspective as
well as one of enhanced functionality (i.e., improvements to the bitcoin standard).
Tethered coins
Tethered coins are instruments of value based on an underlying commodity, such as
digital gold currency (DGC). The most widespread instance is the Kenyan M-pesa, a
mobile-payment system and money unit that is essentially based on the value of cell
phone minutes, though easily convertible to local cash.
Support platforms
Supporting the exchange and storage of bitcoins (and potentially other alternative
currencies) are bitcoin exchanges such as BTC-e, Bitstamp, and the soon-to-launch
BitCM. The mission of the new exchange Kraken is to build the first step in making BTC
mainstream a full-featured professional trading platform. Digital wallets, such as
Coinbase, allow individuals to buy, sell, and accept bitcoin. And for businesses, BitPay
allows merchants to accept bitcoins for payment, claiming 20,000 customers, including
WordPress.com (see disclosure).
(Disclosure: Automattic, the maker of WordPress.com, is backed by True Ventures, a
venture capital firm that is an investor in the parent company of Gigaom.)
Expansionist technologies (bitcoin 2.0)
Enabling technologies are emerging to improve upon the digital currency infrastructure
by offering services that work with existing cryptocurrencies. Two such examples are
colored coin and Mastercoin, which build off of existing bitcoin-protocol
cryptocurrencies to enable increased utility through advanced features. Colored coin,
which despite the name is not a currency itself, is a self-described bitcoin minting and
exchange protocol that works on top of an existing bitcoin-blockchain infrastructure.
Colored coin is a method for annotating the general ledger (i.e., time-stamping) to
increase the number of ways that digital coins can be used and how the value of the coins
themselves becomes irrelevant. A primary advantage of this system is that certain digital
coins can be set aside and marked such that they can be used as digital tokens to signify
virtually any type of asset, including commodities, stocks, bonds, loans, titles, and
contracts. Should this method gain widespread traction, the implications to the status quo
are significant; for example, the bitcoin system could be used to create virtual stock
exchange systems, and the currently onerous real-estate document-signing and transfer
system could be streamlined and truly digitized.
Similar to colored coin, Mastercoin seeks to further decentralize the bitcoin ecosystem by
assigning certain characteristics to micro-units of bitcoin to create digital tokens that can
be used for titles, deeds, user-backed currencies, and even shares in a company.
Property can be bought, sold, transferred, and even used for betting. Three significant
goals for Mastercoin include the creation of a decentralized exchange that will enable the
trading of digital currencies without a third party (i.e., wallet), a toolkit that would allow
anyone to create their own currency without developer skills, a decentralized betting
exchange, and a security feature that would allow certain coins to be marked in such a
way as to enable the reversal of the payment if a transaction is made without the users
permission.
Digital currency prospects worldwide

Bitcoin
The most ubiquitous and technologically robust digital currency, the bitcoin is an open
source, cryptographic P2P protocol that uses the concept of a transparent general ledger
of transactions in order to achieve consensus about the validity of a transaction. The
concept of a public master ledger is key to the value of bitcoin as a standard practical
system for the international management of digital currency. The ledger prevents doublecounting or double-spending and also solves the problem of trust; like cash, you do not
need to trust the person you are transacting with because the system will check for you.
While the transaction volume per bitcoin block peaked in December 2013 at 102,010
transactions per day worldwide a tiny amount compared to the number of transactions
run over credit cards, the overall rate of growth has risen by multiples from 7,000
transactions per day in March 2012 to a current median volume between 60,000 and
80,000 transactions per day. Transaction volume should continue to rise as the costs
associated with mining (the computing process for creating the bitcoin currency)
continue to increase, as more bitcoins are put into circulation out of necessity (i.e., to
recoup the high computer equipment and energy costs associated with mining), and as
early speculators and investors begin to take gains.
An increased supply of bitcoin in circulation in turn fuels accelerated transactions and a
growing support infrastructure. Lately high-profile retailers such as Overstock.com and
leading financial institutions such as Wells Fargo are examining how to legally offer
bitcoin-related services. This momentum is expected to grow as financial industry
disruptors and respected business figures such as Chris Larsen support development of
the alternative currency infrastructure or what Larsen calls the internet of value as
opposed to the hypertext transfer protocol (HTTP)-based web (the internet of
information)
Payment system or currency?

Bitcoins traction is largely a result of the fact that it is not just a currency but a carefully
thought-out, complete system for the trusted exchange of digital currency between two
unknown parties. That is, just like cash, you trust that no matter who you receive the
money from that there is inherent value in the dollar bill itself and everyone accepts it.
Moreover, there is a system in place that allows you to store and again exchange the cash
in return for something of value. This makes it more attractive than current payment
systems that do not support cryptocurrencies.
Structural advantage: the general ledger system
The bitcoin protocol is based on the premise of a general ledger available to the public
and thus transparent. The digital currency bitcoin is one instrument that can be used for
transactions over this system.
Open-source advantage: power of the development network
As a result of its open source system, the bitcoin protocol is being continuously improved
based on the feedback of users worldwide. These users may have a financial stake
because they own bitcoin, but they are also passionate about bitcoin as a symbol of
eschewing traditional institutions in favor of a borderless financial world. While not quite
crowdsourcing, the bitcoin model allows the worlds best cryptographic and business
minds to improve the system. This global brain trust gives it a significant advantage over
other alternative payment systems, digital and otherwise.
Financial market acceptance
Financial industry trade and standards organizations are well on their way to validating
bitcoin as a legitimate currency, independent from any nations agenda.
In a September 2013 survey of payment industry professionals conducted by payments
industry consultancy Glenbrook Partners, a surprisingly high 31 percent of payment
professionals believed that bitcoin will change how money is moved in the next 10 years.
Furthermore, 61 percent expressed belief that PayPal would add bitcoin to its digital
wallet, and 66 percent expected bitcoin to impact money transmitters such as Western
Union and MoneyGram.
Bitcoin has made significant inroads in the trade community, with the currencys ISO
4217 code being debated. It is key to note that the current debate is not whether it should
have one but rather what the code should be.
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The implications of digital currencies

The emergence of digital currencies is the first wave in the trend to decentralize the
monolithic financial institution. This does not imply that the big banks will go away but
rather that consumers and businesses large and small will begin to hedge their financial
bets by further diversifying their methods of transaction and the ways and locations in
which they store their money. Arguably more stable than fiat currency with a lower cost
of transaction and ownership than commodities or stocks, digital currency is at the least a
logical hedge for holding ones wealth and for the seamless exchange of value between
individuals.
Edelmans April 2013 global Trust Barometer Report illustrated the toll that the banking
crisis has had on the worlds psyche, with the financial services and bank industries
coming in last (again) in a ranking of more than 11 industries by 31,000 online
respondents. Conversely, technology is the most trusted industry. The collective desire
exists for widespread financial system change, particularly for technologically driven
solutions.
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Barriers to digital currencies

Despite a prevailing belief that bitcoin is a tool for laundering money, usage among
technology early adopters continues to grow, with more than 51 percent of engineers
surveyed saying they would use bitcoin. And the consumer financial service Mint has just
teamed up with digital currency wallet Coinbase to add bitcoin to its account aggregation
service. Still, there are significant barriers to adoption.
Regulatory uncertainty
In 2013, the North American Securities Administration listed digital currency amongst
the top 10 financial products and practices that threatened to trap unwary investors and
small businesses. Despite this viewpoint, the U.S. federal government in November
2013 decided not to create special regulation specific to bitcoin rather than stifle
innovation in this new area. To date no agency has been given jurisdiction over digital
currencies, but it is notable that representatives of the Financial Crimes Enforcement
Network, which enforces U.S. laws against money laundering, support a measured
approach to potential bitcoin regulation, taking the viewpoint that innovation is a very
important part of our economy.
Significantly, on Tuesday, March 25, the Internal Revenue Service acknowledged the
validity of bitcoin by issuing guidance on all virtual currencies, stating that they would
be taxed as property, like stocks, rather than currency. While this could be considered
good news for bitcoin and other alt-coin investors and spectulators, whose long-term
earnings are now subject to lower capital gains tax rates, it is at least a short-term setback
for those backing bitcoin as a currency (as opposed to a farther reaching protocol). It also
presents a dilemma for individuals who mine, transact in, and/or are paid in bitcoin, as
well as those businesses that facilitate alt-currency exchange. The higher administrative
requirements associated with the reporting of property sales could drive smaller and less
efficient and/or sophisticated operators out of business. Regulation thus further exposes
the weaknesses and relative naivet of the majority of the industrys first generation of
players clearly evident in the recent collapses of the Mt. Gox, Flexcoin, Vicure and
Poloniex,exchanges while presenting new opportunity for more seasoned financial
services and fin tech professionals in companies like Ripple.
Moroever, institutions and other investors that have adopted a wait and see attitude
toward bitcoin are now sanctioned to jump into the alt-currency market, creating new
financial products and fueling accelerated innovation in the refinement of bitcoin as an
exchange protocol. Notably, the day before the IRS guidelines were issued, the new
startup Tera Group announced the creation of a legal framework to help investors hedge
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against bitcoin losses. In the meantime the U.S. Commodity Futures Trading Commission
is considering the extent of its jurisdiction over alternative currencies.
At the state level, New Yorks regulators held a public hearing on January 28, 2014
regarding virtual currency featuring testimony by venture capitalists, lawyers and
others with vested interests in bitcoin. During the hearing, New York regulators
announced that they were considering the development of BitLicenses specifically
designed for governing digital currencies. The IRS decision will likely steer state efforts
toward a similar standard.
Perception
The idea of bitcoin as a system for underground uses by criminals is a real threat to its
acceptance by governments and at a larger scale within the enterprise. According to the
Financial Crimes Enforcement Network, Virtual currencies have yet to overtake more
traditional methods to move funds internationally for criminal purposes, with the bitcoin
network processing only about $8 billion worth of transactions in 2013, compared to an
estimated $1.6 trillion in global criminal proceeds in 2009. There is a growing belief
amongst Western nations that there are compelling legitimate uses of digital currency and
that the currency itself is not inherently immoral or illegal.
Loss of consumer protections
At least in the developed world, likely the greatest barrier to bitcoin adoption is in the
loss of consumer protections such as credit card-mandated buybacks for faulty or
misdelivered goods and loss limits if ones card is lost or stolen. And whereas ones bank
deposits are protected by such entities as the U.S. government-backed Federal Deposit
Insurance Corporation (FDIC), there are currently no institutionalized guarantees in the
event of the loss of access to ones bitcoin wallet or computer hard-drive storing your
cryptocoins. That said, the digital currency community is already taking steps to mitigate
bitcoin risk, including creative workarounds such as bitcoin storage service Elliptic
Vaults partnership with Lloyds of London to protect against loss of stored bitcoins.
Furthermore, in card transactions, fees are charged to the seller. In contrast, bitcoin
transaction fees are paid by the buyer, and transactions are irreversible. As such, adoption
in the U.S. and other countries with high card-usage levels may only be limited to smallticket purchases or in models where the sender pays the fee, such as international money
transfers.
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Loss of net neutrality

The greatest threat to digital currency is the fall of net neutrality, which is when equal
access to the internet at equal prices for all internet users is revoked. In this scenario,
internet service providers (ISPs) have the power to slow currency trading over the
internet of value by targeting cryptocurrency protocols, potentially favoring Ripple or
other non-bitcoin protocols that may be willing to pay a premium for more bandwidth or
creating a scenario in which higher bitcoin exchange fees will be necessary to cover the
cost of operating an exchange or wallet. While bitcoin mining will not necessarily be
affected in such a scenario, transacting via bitcoin will move from multiple exchanges to
perhaps one large regional exchange per region.
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Drivers for digital currency adoption

The fast rise of bitcoin has as much to do with social psychology as it does system value.
Any alternative financial system is perceived to be better than the current one, whether
you are in the most financially stable countries or in a high-inflation region. Moreover,
with investors such as Andreessen Horowitz, Lightspeed Venture Partners, Ribbit Capital,
Clearstone Venture Partners, the Winklevoss twins, and Hong Kongs richest man Li Kashing putting hundreds of millions into bitcoin-related businesses, there is business
community buzz and growing validation.
International payment solutions
Expensify allows users to be reimbursed with bitcoin primarily to provide international
contractors with an alternative for potentially faster reimbursement and an alternative to
relatively high-fee services such as PayPal. This will also enable companies using
Expensify the ability to provide turnkey payments to contractors in those countries not
supporting traditional payment systems. BitPay offers a similar service for paying remote
workers and international suppliers and for receiving international payments.
Hip factor
To stay in tune with its progressive clientele, small businesses in intellectual and tech
centers, such as the Cambridge, Mass.-based Thelonius Monkfish sushi restaurant and
Seattles Cheese Wizards gourmet food truck, are now accepting bitcoin. CoinMap now
lists more than 3,000 businessess worldwide primarily in retail accepting BTC.
Adding to the populist enthusiasm and passion for cryptocurrencies, the founders of
Coinye, a parody coin of Kanye Wests image, recently responded to the musicians
cease-and-desist order by changing its coin face illustration to South Park-styled fish,
referring to the shows episode that pokes fun of the rap singers lack of humor.
Online consumer-focused companies are also using bitcoin to enhance brand image and
better serve their tech-savvy customer bases, with the price of bitcoin jumping past
$1,000 when online game developer Zynga began accepting the cryptocurrency. Online
retailers Overstock.com and TigerDirect.com as well as travel company CheapOair.com
are accepting bitcoin. And Google Ventures-backed company Gyft allows users to buy
mobile-based digital gift cards for most major retailers; it currently takes only three forms
of payment bitcoin (listed first), PayPal, and credit card.
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Bitcoin cache is also being harnessed in politics, with former U.S. VP and Nobel Peace
Prize and Grammy winner Al Gore stating in December 2013, Im a big fan of
bitcoin. Regulation of money supply needs to be depoliticizedespecially as it applies
to virtual currencies. This [bitcoin] is a good development for the poor of the world.
Those who do not have access to banking services, who do not have access to financial
services of various kinds, are now gaining access through mobile payments.
In line with this idea that bitcoin is good for the underprivileged, Oakland, Calif.,
mayoral candidate Bryan Parker is actively courting bitcoin campaign contributions.
Parker views bitcoin as a tool we can use to dissolve inequality, be it social or
economic, and in courting the bitcoin community, he is seeking to tap into a selfempowered, problem-solving-minded constituency.
Institutional support
Bitcoin companies are also being showcased at high-profile technology innovation
conferences such as the 2014 Consumer Electronics Show (CES) and Austins South by
Southwest. And financial tech-innovation conferences such as the Future of Money and
Technology Summit, Finovate, and Money2020 accept bitcoin as payment. Only in its
third year, the latter show, whose attendees include many high-profile bitcoin-related
companies and investors, has become the premier showcase for the international
payments industry, selling out at 4,200 attendees in 2013. With 6,000 attendees expected
in November 2014, the conference organizers have taken it up a notch by introducing
(Bit)coinWorld, a platform for strengthening ties within the cryptocurrency business
community.
The financial industry establishment is also preparing for the introduction of digital
currency services, from Bank of America predicting that bitcoin will become a major
currency to Wells Fargo initiating a bitcoin public forum and exploring bitcoin services as
a way to enhance revenue. Interestingly, while JPMorgan Chase Chairman and CEO
Jamie Dimon publicly questioned the efficacy of bitcoin at the 2014 World Economic
Forum, Chase filed for a U.S. patent application in December 2013 for an electronic
payment system that would allow people to make anonymous payments over the internet
without having to reveal their name or account numbers, indicating the creation of their
own alternative to bitcoin. Whether hedging its bets or buying itself time to introduce its
own service, Chase is clearly cognizant of the digital currency opportunity, if not publicly
supporting it.
Particularly by 2040, when the maximum of about 21 million bitcoins will be mined and
the adoption of non-bitcoin currencies raises the overall supply of cryptocurrencies
(resulting in more people selling their bitcoins instead of holding them), any perceived
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difference between using a cryptocurrency and a bank account or card-based transaction,

or mobile wallet, will be minimal.
International adoption
Bitcoin acceptance is sporadic but worldwide and growing. Sites such as CoinMap and
useBitcoins.info track worldwide adoption of bitcoin based on merchant-reported and
crowdsourced data. According to the latter site, bitcoin acceptance has nearly doubled
over the past 2.5 months, from 1,142 at the end of November 2013 to more than 2,100 in
mid-February 2014. From the small British University of Cumbria becoming the first
public university in the world to accept bitcoin for course fees to a Moscow Subway shop
offering a 10-percent discount if you buy in bitcoin, the currency is gaining acceptance.
At current low volumes of use, there is relatively little risk for a business in adopting
bitcoin, and for the time being, being associated with bitcoin has become a sign of
progressiveness and innovation.
Significantly, the general use of digital and mobile-based currencies has precedence in
several economies, including Kenya, India, and South Africa. Knowledge and acceptance
of bitcoin is also taking hold in Latin America.
A barometer: China
Significantly, Chinese authorities have stated that bitcoin is a virtual commodity that
does not share the same legal status of a currency. The fact that the government has both
acknowledged the importance of bitcoin in commenting on it as well as not legislating
against it is of note; individuals may continue to use digital currencies but at their own
financial risk. And to capitalize on this potential opportunity, Ripple recently announced
that it is building a presence in China.
Europe: the emerging region for digital currencies?
While net neutrality takes a blow in the U.S., Europe has adopted a more pro-internet
stance and is in the process of legislating protections for net neutrality that limit the
power of ISPs to strike deals with one another. In addition to maintaining the free and
equal use of the information web, Europe will be better positioned to become the
financial center of the digital currency world for a number of reasons.
1. European citizens are proven early adopters of mobile technology, outpacing the U.S.
in the use of texting and mobile payments. They were nearly a decade ahead of the
U.S. in terms of alternative payment models such as chip cards.
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2. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has

publicly, though not officially, endorsed bitcoins and is a European-centric
organization, with two of its three databases in the Netherlands and Switzerland.
3. Europe accounts for 34 percent of the worlds e-commerce transactions, with 41
percent utilizing alternative payment methods, in contrast to the U.S, which accounts
for 36 percent of global online commerce but utilizes cards in 71 percent of those
transactions, according to WorldPay.
4. Europeans have already gone through a major currency shift with the mandated
adoption of the Euro.
5. The generally understood failure of the Euro and the long bureaucratic road to
approval and reversion back to individual national currencies could take a decade,
opening the door for individuals to take matters into their own hands and begin to
diversify and protect their monies through alternative instruments.
6. Digital banking services are replacing traditional physical bank visits, and European
banks will be investing more in digital channels, setting the stage for support of
digital currencies.
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The opportunity in digital currencies

Precedents for mass adoption of digital currencies
Globally, the use of alternative payments is common. They are used for:
Remittance: International money transfers are currently high-cost and slow to
implement.
Inflationary hedge: Residents of African and Latin and South American countries
need a stable currency to trade.
In places that are politically unstable: In countries such as Afghanistan and Pakistan,
the lack of a financial infrastructure and unstable currency results in the government
needing to pay policemans wages in M-pesa in order to maintain vital services.
Person-to-person micropayments: The U.S. and Japan are more likely to use mobile
and other alternative payment forms for smaller transactions for which people may
not be permitted to use credit cards (resulting from high fees for merchants on a lowpriced item).
Peer-to-peer 2.0 technologies
Peer-to-peer financial technologies are gaining ground fast and are the greatest
opportunity. For example, Google acquired a minority stake in P2P lender LendingTree
in May 2013, and Prosper raised a new $25 million round in September 2013 with new
blue-chip investor BlackRock. These developments further the acceptance and growth of
an alternative financial universe for individuals and businesses.
Significantly, BitTorrents new file format BitTorrent Bundles, which provides musicians
and other artists with the opportunity to receive a payment for sharing their intellectual
property (a song file, an ebook), has demonstrated significant acceptance, with more than
60-million downloads in the three months between the services alpha launch on
September 24, 2013, through the end of 2013. In this model, the currency paid for the
song is determined by the artist and is essentially any unit of value a Facebook like, a
donation to a cause, or an actual cash (or other currency) payment. Notable are Ripples
similarities to the BitTorrent P2P platform.
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The evolution of alternative currencies

As a proxy for all alternative currencies, the evolution of bitcoin can be viewed as:
Phase I: Development Creation and working validation of the protocol
Phase II: Momentum Growth of the developer community (miners, others), largescale investment, and user acceptance
Phase III: Mass adoption Critical mass of population begins transacting in bitcoin
Phase IV: Normalization Bitcoin currencies become commonplace, and the
infrastructure is stable enough and used enough to warrant specific legislation
Currently the world as a whole is in Phase II. But with new applications developing to
facilitate easy-to-use individual adoption (BitPay, Coinbase), continued consumer
education via the media and word-of-mouth, and the development and circulation of
digital currency-ready devices, we expect the U.S. and certain other alternative currencyreceptive countries such as Brazil and Russia to enter Phase III within the next five years.
Whether Bitcoins ledger system or another emerges, the public believes that the current
financial system is a necessary evil, working at the expense of the mass consumer and
small business. Just as 3D printing takes manufacturing out of the hands of the factories
for some products and crowdsourcing empowers individuals to make highly specific
investment decisions, economic power is shifting away from the individual country and
enterprise and toward the individual by way of the collective network.
21
Key takeaways
Digital currency technology has gained significant traction in the past two years and
represents the first-wave time in the development of the second stage of internet
functionality the internet of value.
While talk of bitcoin and multiple other digital currencies has dominated the public
discussion, it is the efficacy of the bitcoin technology platform and other transaction
protocols like Ripple that will result in large-scale change in the way transactions are
conducted.
The support for bitcoin from the social, political, and financial community is strong
and growing, driven as much by disillusionment with the current financial system as
it is with the promise of a new and better (faster, more personalized) financial world.
Peer-to-peer technologies will become the backbone of the internet of value, with
public acceptance and use of this model already established for both content
distribution as well as financial transaction execution.
22
About Kristina J. Yee

Kristina J. Yee has more than 18 years of post-MBA business strategy and marketing
experience, primarily in the technology and online security sectors. Her focus is on all
aspects of cloud-delivered technology, from consumer to enterprise to business-tobusiness-to-consumer (B2B2C). She has worked with successfully acquired startups and
mid-size companies looking to cross the chasm as well as Fortune 1,000 companies in
the midst of reinventing themselves. Her background includes working with companies in
the following areas: online banking, electronic bill payment and presentment, online
brokerage, consumer account aggregation, two-factor software authentication, and most
recently private cloud loan production. She has held senior-level positions for cloudcomputing solution companies providing active server pages (ASP), Software as a
Service (SaaS), and Platform as a Service (PaaS) to organizations worldwide.
While she has cross-industry marketing strategy, research, and communications expertise,
Yee is particularly interested in developments in the financial services technology area.
She has been interviewed by such publications as Inc. and American Banker, and her
articles have appeared in such publications as Mortgage Banking and New York Finance.
Yee holds a BA in English and film studies from Yale and earned her MBA from
Columbia Business School.
23
About Gigaom Research

Gigaom Research gives you insider access to expert industry insights on emerging
markets. Focused on delivering highly relevant and timely research to the people who
need it most, our analysis, reports, and original research come from the most respected
voices in the industry. Whether youre beginning to learn about a new market or are an
industry insider, Gigaom Research addresses the need for relevant, illuminating insights
into the industrys most dynamic markets.
Visit us at: research.gigaom.com.
Giga Omni Media 2014. "Bitcoin and beyond: understanding the opportunity in digital
currency services and infrastructure" is a trademark of Giga Omni Media. For permission
to reproduce this report, please contact pro-sales@gigaom.com.
24

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Bitcoin and beyond: understanding

the opportunity in digital currency

Bitcoin and beyond: understanding the

The state of alternative currencies worldwide

What is digital currency?

Categories of digital currency technology

These technologies may be grouped into three categories:

transactions is resource-prohibitive, and arguably a holder of small amounts of bitcoin

Digital currency prospects worldwide

Payment system or currency?

The implications of digital currencies

Barriers to digital currencies

Loss of net neutrality

Drivers for digital currency adoption

difference between using a cryptocurrency and a bank account or card-based transaction,

2. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has

The opportunity in digital currencies

The evolution of alternative currencies

About Kristina J. Yee

About Gigaom Research

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