I am now writing editorial articles for Coindesk. In my first piece I explored Strike, a new app that intends to bring bitcoin payments to a mainstream audience. Coindesk allows me to repost articles after a delay. Rather than putting up the whole thing, I'm just going to take a few bits from it and try to create something new.
We've been discussing bitcoin-as-money on this blog for almost eight years now. Since then the stuff has always been just one design flaw away from taking off as a way for regular folks to make payments. So when I heard about Strike, my curiosity was piqued. Is it bitcoin's killer app, the one that that covers up enough of bitcoin's nuisances that it brings bitcoin payments to a mainstream audience? Or is bitcoin so intrinsically awkward that it will always be consigned to being a niche payments rail?
The rough idea is that Strike will make bitcoin more friendly by standing as gateway between normies who prefer to pay with fiat and savvy bitcoin users. To better understand what this means, here's an example:
"Say you’d like to buy an antique vase for $100 at your neighbor’s garage sale. You don't have any cash on hand. But you do have your credit card. Needless to say, your neighbor doesn’t have a card terminal set up. But she does have a lightning channel open. Strike allows the two of you to connect. The $100 flows from your bank account to Strike’s bank account, upon which Strike sends 0.01 bitcoins to your neighbor via lightning.This sort of hybrid fiat-to-bitcoin system is a pretty neat idea. Regular folks get to keep buying stuff with their debit cards but without even knowing it are settling in bitcoin. But how popular could Strike get?
That’s it. Without even knowing it, you've paid your neighbor with bitcoin. No volatility. And no need to learn how to use a strange new payments network. The entire experience simply piggybacks off of your existing knowledge of how to use a debit card.
As for your neighbor, with just a lightning address, she can immediately accept non-reversible payments from debit card holders all over the world."
I want to back up a bit and focus on the seller in a hypothetical fiat-to-bitcoin payment. In my set-up above, I envisioned a neighbour who is holding a garage sale. Without a point-of-sale terminal, a card can't be used. This opened the field up to bitcoin. But what I omitted in my example was the option to use popular person-to-person payments app like Venmo, Zelle, or Square Cash. Why would the neighbour bother accepting bitcoin (i.e. Strike) if she can just get dollars instantly delivered via the Zelle app?
Let me formulate this question more generally. If someone says that they can either pay you in bitcoin or fiat money, which of the two would you choose to receive?
Most people will choose to receive fiat, not bitcoin. Bitcoin is a recursive, self-referential guessing game. This results in an incredibly volatile price. Regular folks are simply too scared to play the bitcoin guessing game, even if it's just for a few minutes or hours. Fiat is stable and comfortable.
If we normies are going to gamble (say by playing poker in the evenings or buying lottery tickets on Mondays), we usually don't want to mix those habits with our day-to-day payments activities. There's a time and a place for gambling. And there's a time and a place for receiving salary payments and holding garage sales. But as a rule, we aren't generally comfortable combining our gambling habits with our payments routines, say by accepting lottery tickets (or bitcoins) as salary.
That being said, given the question I posed above, there will always be some folks who choose bitcoin over fiat. What sorts of people might these be?
They have to be the sort of people willing to put up with bitcoin's volatility. Bitcoin hobbyists are one demographic who fall in this category. Those with huge risk appetites are another. But these aren't big markets.
A larger audience can be found among people who sell illegal products. These sorts of transactions can't be processed by fiat payments systems like Visa or MasterCard. Bank-to-bank payments leave a paper trail. Accepting bitcoin (and putting up with its volatility) may be their only safe choice for selling illegal goods & services.
Connecting hundreds of millions of debit card owners to the illicit economy would constitute a massive market. In practice, however, this probably isn't a connection that a regulated payments processor like Strike can facilitate. Say Strike starts to link cocaine-using debit card owners to anonymous bitcoin addresses controlled by cocaine dealers. Politicians, law enforcement, and regulators would be furious.
To cut down on transactions for illegal goods & services, I suspect Strike would have to start verifying the identities of the owners of the bitcoin addresses it connects to. But then underground users would shun the Strike network. Not entirely, of course. Even if Strike were to implement identity checks, small illicit trades would still continue. After all, even though Venmo users must identify themselves, Venmo still attracts plenty of of drug transactions.
There is another group of people that would choose bitcoin over fiat. Consider vendors that sell legal goods but have nevertheless been cut off by mainstream payments networks.
If you look through MasterCard's Business Risk Assessment and Monitoring (BRAM) policy, for instance, you can see a list of impermissible activities:
Most of the activities listed in MasterCard's BRAM are illegal. But some are legal, including the "sale of certain types of drugs or chemicals (such as synthetic drugs, salvia divinorum, psilocybin mushrooms and spores, and nitrite inhalants)."
Take salvia divinorum, a leaf that has hallucinogenic properties but is legal in most U.S. states. Neither MasterCard nor Visa will let their networks to touch it.
If you take a look at three Salvia vendors located in the U.S.—The Best Salvia, Salvia Extracts, and Salvia Hut—none of them accept credit cards. They can't. "Do you accept credit or debit cards?" Nope. We will get fined by Visa or Mastercard if we accept credit or debit cards," says Salvia Hut's page. But all three stores accept bitcoin.
Here's an example of Bitcoin as a niche payments rail. Visa & MasterCard refuse to process salvia divinorum transactions. So stores that sell this hallucinogenic (but legal) herb depend on bitcoin for payments.— John Paul Koning (@jp_koning) March 6, 2020
Check out the payments page for https://t.co/ErGkELYe2x pic.twitter.com/07TlJPWBKV
So here is a market that could certainly use Strike as a bridge to its card-paying customers. Instead of having to go out and buy bitcoins, a Salvia buyer could pay with their card via Strike, the bitcoin leg of the transaction being processed invisibly in the background. That's pretty convenient.
But salvia isn't a very big market. And as a visit to the three salvia stores will show you, bitcoin shares the Salvia payment market with e-checks (a bank-to-bank ACH option). One of the stores (see below) accepts Western Union money orders as well as PayPal and Square Cash. (I suspect that this is probably against the terms & conditions of PayPal and Square Cash). This goes back to my original question. Why would a garage sale transaction (or a salvia transaction) be expedited via bitcoin rails if the counterparties to the deal can use fiat routes like e-checks or Venmo/Square Cash/Zelle?
So let's encapsulate the conundrum. MasterCard's BRAM allows it to process almost every legal transaction under the sun, save a few outliers like salvia. This means that the population of underserved licit users that would need to use a back-up system like Strike's hybrid fiat-to-bitcoin payments app is not very big.
But this is a familiar conclusion to anyone who's been reading my posts over the years. When it comes to bitcoin-as-money, the same old problems keep cropping up. Crippled by its recursive, self-referential nature, volatile bitcoin never plays more than a niche role as a payments network.
That's probably better than nothing. When fringe vendors are temporarily cut off by the likes of Visa and MasterCard, and their Venmo account is frozen, and e-checks are off limits, at least these folks will always have an option for making transactions.