Desperate for a payments market, cryptocurrency turns pro-regulation

Given the scant use of cryptocurrencies for payments relative to their use for investment, some companies are rooting for the kind of government oversight and monetary policy that used to be considered an assault on the alternative currency movement.

Such regulation — even self-imposed — is increasingly necessary, given cryptocurrency's volatility makes its use as actual money nearly impossible.

"You can't use cryptocurrency as currency," said Nader al-Naji, founder of Basis, a Hoboken-based startup that's building a cryptocurrency that forces "stability" so it's more attractive for payments. "Imagine if you're paid a salary of 1 bitcoin per month. If the price of bitcoin drops, you might miss your next bill; and if it rises, you might get fired because your boss thinks you're overpaid."

SeongJoon Cho/Bloomberg

Basis is part of an industry subculture that's trying different ways to make bitcoin and other alternative currencies palatable to mainstream users. Despite bitcoin's traditional base of libertarian enthusiasts attracted anonymous transactions that are free from centralized authority and institutional oversight, most of these efforts to lure lay people and merchants do so by making the alternative money behave similar to traditional payment methods.

A startup called MoxyOne, for example, is building its own debit network to convert cryptocurrency in real time at the point of sale. In this case, no change is required from the merchant, which still accepts only government-managed fiat currency. Crypterium also takes this approach to remove cryptocurrency risk from merchants.

Cryptocurrency giant Coinbase is taking another approach, ceding more control to merchants in an effort to diversify the cryptocurrencies used for e-commerce to manage volatility.

These efforts face hurricane-force headwinds.

Cryptocurrency acceptance and usage at mainstream retailers is almost non-existent, even after myriad attempts to reverse that trend. It's arguable the problem is getting worse, given the departure of e-commerce payments enabler Stripe from cryptocurrency payments earlier this year. Even seemingly friendly venues for cryptocurrency, such as gaming, are pulling away.

Beyond exceptions such as Overstock, politically complicated markets such as guns and high-end purchases like condos and art, how can cryptocurrency become a mainstream asset?

For Basis, the answer is selling stability. Basis is using what could be compared to a Federal Reserve-style cycle of controlling the currency that's in circulation.

The startup uses a mix of tokens to ensure that its coin will always be worth a dollar. It's attempting to do this through its Basecoin, which will be pegged to the U.S. dollar and will be usable for payments. Basis will auction base bonds, or tokens, when necessary to contract the supply of Basecoins to keep the value at $1. These bonds will generally be sold at less than one Basecoin, resulting in a yield for the investor when the number of Basecoins is expanded at a later time.

"We believe the price volatility of cryptocurrencies is one of the biggest barriers to widespread adoption," al-Naji said. "Unlike the currencies we use today, most cryptocurrencies do not have a central bank to keep purchasing power stable. This means that changes in demand cause massive fluctuations in price."

Basecoin attempts to retain the original appeal of cryptocurrency by being usable in multiple jurisdictions and by supporting easy processing for local and cross-border digital transactions—it's the same as a dollar, but it doesn't have to converted to be usable in another country, and e-commerce merchants don’t have to worry about "pay in local currency" concerns.

It's not an unprecedented concept; Facebook once tried to introduce its own currency, Facebook Credits, to allow merchants to price in-app purchases more easily without worrying about currency conversions. Facebook began to phase out Credits in mid-2012, finding that merchants actually preferred setting different prices by region.

Basis has other use cases in mind. Beyond retail payments, Basis sees additional demand in emerging economies where the "stablecoin" model can surpass immature central banks.

"Small, local currencies often suffer from high inflation or sudden large devaluations," al Naji said. "As people learn about cryptocurrencies, they may easily prefer a global, stable currency over their unstable unreliable local currencies."

Basis is part of an emerging trend toward stablecoins, which peg their value in some way to fiat currencies to corral price volatility. Basis has drawn attention from Silicon Valley, where it has raised $133 million.

Another stabilizing force can be regulation. While cryptocurrency can be hurt by severe restrictions such as those in China, laws provide transparency and a guide for usage that can mitigate volatility and encourage legitimacy, according to Charlene Cieslik, the chief anti-money laundering officer at the Toronto-based Coinsquare.

"Digital currencies may have some volatility inherent to them, but lack of regulatory clarity only contributes to that volatility," Cieslik said. "Lack of regulatory clarity also contributes to lower trust in digital currencies by the general public. Combine these two things together — high volatility and low trust — and many vendors would not feel comfortable accepting digital currencies as a means of payment tender."

While Canada has taken an adversarial tack toward cryptocurrency, it is working on regulations, which Cieslik sees as an opportunity for Coinsquare to demonstrate the stabilizing impact of its risk strategy. Among its measures is storage of the majority of its coins in "cold" offline status to keep them secure.

"My hope is that regulatory bodies and regulatory frameworks recognize that effort and recognize the job of risk management is not to eliminate risk and make it perfectly safe, but to ensure risk mitigation is a key focus of any organization in the digital currency space," Cieslik said

If the volatility problems can be solved, there is a potential market of users—a high percentage of Square's merchants said they are interested in accepting cryptocurrency payments, for example.

"Cryptocurrency usage will grow as economics become more digital and global," al-Naji said. "As more business is done online, products and services can be paid, earned, saved and borrowed using cryptocurrencies, helping avoid the overhead of operating with banks and payment monopolies in the offline world."