Jean Lievens: PayPal Integrates BitCoin — This Is HUGE!

03 Economy, Civil Society, Commerce, Ethics
Jean Lievens
Jean Lievens

Why Paypal integrating with Bitcoin is a big deal: reader opinion

By Malavika Nair

Alabama.com, 2 October 2014

Paypal, the online payment processing giant, recently announced it would start letting its merchants accept Bitcoin by taking first steps toward integrating with three of the largest existing Bitcoin payment processing companies: Bitpay, Coinbase and GoCoin.

This seemingly small step actually represents a major moment for the current and future legitimacy of Bitcoin. Not only does it exponentially increase the number of merchants who could start accepting Bitcoin as payment, more importantly it seriously challenges conventional notions of what we typically think of currency and payment systems.

Bitcoin has faced its share of naysayers and detractors and even today many people aren’t aware of what it is or the benefits it can offer.

Bitcoin is a digital currency and peer-to-peer payment system that allows you to transfer value over the Internet without the use of an intermediary like a bank or even Paypal.

No one government, company or individual controls the production or regulation of Bitcoin. Rather, Bitcoin software runs on a worldwide network of computers that plays the role of an online accounting system called the “blockchain.” In return for running the software, computers are rewarded with newly mined bitcoins. In order for bitcoins to have value, all people have to do is trust the code, which is publicly available for anyone to verify. Since the total supply of bitcoins is capped at 21 million, this creates scarcity and hence increases the value even more in the eyes of bitcoin holders.

Technologically, Bitcoin represents an advance in current electronic payment and currency systems. For example, currently merchants who accept payments electronically via credit cards or Paypal have to pay a minimum 3% processing fee on every sale. By accepting Bitcoin payments instead, merchants are able to reduce this fee to 1 % or even lower (Bitpay recently launched a 0% transaction fee package for merchants). That’s a minimum of $20,000 saved for every $1 million in sales. Merchants can even have the Bitcoins automatically converted to dollars if they don’t wish to hold on to Bitcoins themselves, thanks to companies like Bitpay and Coinbase that bear the exchange rate risk.

With benefits so large, Bitcoin represents some serious competition to credit card companies and, well, Paypal. Thus a global giant the size of Paypal making a step toward integrating with Bitcoin exemplifies an important property of any well-functioning competitive industry: “adapt or die.” It also tells us that entrepreneurs and the market may actually be able to provide us with viable alternatives to government controlled fiat currencies in the not so distant future.

In many ways, money is what money does. A governmental agency has no more power to mandate or “create” money any more than a large company or a private individual. Money is something that is used as a medium of exchange, its role is to facilitate and smooth buying and selling. All that is really needed for a medium of exchange to come into existence, of which Bitcoin is but one example, is that people value it and are willing to trade goods in exchange for it. Though Bitcoin currently still has limited acceptability, it has come a long way in terms of how many merchants who accept it. With Paypal possibly opening up Bitcoin integration to its more than 150 million registered merchants worldwide (the option to accept Bitcoin through Paypal is limited to the United States currently), these numbers are only going to grow.

Bitcoin represents a major innovation in payment systems and currency in our times. It is inevitable that it faces its share of stumbles and road blocks. In a sense, the Bitcoin industry today is not dissimilar to the early days of the Internet. There is a lot of innovation and entrepreneurship and there is going to be failure, bankruptcy, price fluctuation and regulatory uncertainty. Yet, it has come a long way from being of interest only to computer geeks and an initiated few in 2010 to having a shot at becoming a purely market created and widely used currency and payment system.

The most recent endorsement of Paypal integrating with Bitcoin could well be a major defining step in that direction.

Malavika Nair is an assistant professor of economics at the Johnson Center of Political Economy at Troy University.