Platforms built around the Bitcoin payments infrastructure are growing rapidly and, in some respects evolving similar to payment systems used in the financial system today. This has advantages as well as disadvantages as we will see later.
Bitcoins and Payments Systems: The Basics
Bitcoin is a payments network and wallets are the required payments interface. So what do payment platforms do? In order to understand, a recap of some basic concepts may be helpful.
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Bitcoin was designed as a peer to peer payment network for digital cash. Bitcoin payment platforms provide extended capabilities to support other payment processes as well. |
Across the world, people can make payments in four different ways -
- Recurring payments – Salaries, utility bills and services transferred via scheduled bank debits.
- Cashless Purchases – Using credit/debit/mobile wallets to authorize purchases at point of sale such as online or in-store transactions.
- Cash – Generally for petty, low value expenditures; sometimes the only form of payment depending on where you are in the world.
- Remittances – Sending one time or recurring payments usually cross border transactions via an intermediary such as Western Union.
The world is not equal as far as payment systems are concerned. Developed nations have a well-connected although legacy payments infrastructure. Cashless payments are well integrated into all transactions.
Developing countries on the other hand, may not have well connected systems. Large parts of the population may not have bank accounts and remain outside the financial system (migrant daily wage laborers example). Cash is the lifeblood in such economies more so for daily essentials such as food and clothing.
Developing countries on the other hand, may not have well connected systems. Large parts of the population may not have bank accounts and remain outside the financial system (migrant daily wage laborers example). Cash is the lifeblood in such economies more so for daily essentials such as food and clothing.
Enter Bitcoin. Bitcoin introduced a fifth form of payment which was not possible through any of the four methods – electronic peer to peer cash payments.
Naturally, for transactions or economies where cash prevails, there has been a growth of platforms and institutions for this innovative form of money transfer, and developing cash centric countries remain a key use case for bitcoin payments.
In cashless payment economies, experiencing long transaction times and high fees thanks to a complex, legacy and highly regulated infrastructure, bitcoin payments offer a faster and cheaper alternative. Over the top bitcoin payment platforms have been developed to scale up adoption and compete with other forms of digital payment.
In cashless payment economies, experiencing long transaction times and high fees thanks to a complex, legacy and highly regulated infrastructure, bitcoin payments offer a faster and cheaper alternative. Over the top bitcoin payment platforms have been developed to scale up adoption and compete with other forms of digital payment.
BitPay, Coinbase and BitPesa are examples of payment platforms. These allow users to adopt and treat bitcoin as another form of fiat currency in the form they are used to.
Payment platforms for bitcoin work like existing payment processors and provide the same capabilities, except that they settle transactions against the blockchain.
Solutions for Cashless Payments
Bitcoin payment processors provide applications designed to support bitcoin payments for goods and services sold online or in store. Merchant solutions for Bitcoin include retail point of sale terminals, invoicing, bitcoin acceptance and conversion, settlements and escrows.
Like wallets, some platforms are exclusive to bitcoins while others support different crypto-currencies. Payment processors such as BitPay provide a wide range of capabilities from point-of-sale solutions to working as gateways to match solutions and processes in existing digital payments.
Payment platforms allow merchants to sign-up for hosted merchant accounts. They provide interfaces for in-store solutions such as POS terminals, mobile card readers, NFC interfaces for one touch payments and QR readers. For ecommerce sites, payment systems can integrate with ecommerce platforms such as Shopify or WooCommerce.
Other payment processing facilities for merchant adoption are also provided. Merchants can generate and settle invoices in bitcoin. The payment systems convert and encash bitcoin payments into fiat currency and can provide daily settlements (a much faster transaction time compared traditional plastic or digital payments).
Payment platforms also implement Bitcoin payment protocols such as BIP70 to support a more user friendly and familiar payment experience with features such as refunds. For example, instead of copying addresses in a purchase, a name URI (e.g. payme.com) can be used by merchants.
Some payment processors allow conversion into multiple currencies. Because the exchange rate of bitcoins can fluctuate widely, payment processors also allow invoices to expire within a set time (10-20 minutes).
Payment processing solutions generally provide transaction confirmation in the same time that blockchain is updated i.e. after six confirmations (or approximately an hour). Settlements can be usually made on a daily basis.
Recurring Payments
Salaries, utilities and subscriptions are examples of recurring billing and payments which means they have to be settled on a recurring basis.
Recurring payments are generally equated with automatic scheduled transfers although that may not be true in all cases. Recurring payment solutions can be as simple as scheduled reminders and user making the payment. Bitcoin payments are push type payments which means senders/payors have to unlock bitcoins from their wallet.
Payment processors such as Coinbase and BitPay provide an over the top “pull” layer to make recurring payments from user wallets. BitPay have also developed a payroll API for US employees to make part or full salary payments in bitcoins, a system which their own employees use.
While options are available, challenges abound though to be fair, an digital cash network is not the best place for sign-once, pay automatically type of scenario. Issues such as insufficient funds, changing wallets or handling transaction changes will also require user intervention, diluting advantages of automated debits. There is also the disadvantage of giving control/authorization to a third party to spend from a user wallet which is still a risk as the world learns to adopt bitcoins.
Remittances
Bitcoin remittances (sometime called "rebittances") are services offered for international remittances using Bitcoins. The remittance platform enables bitcoin payments which can be converted at a local bitcoin exchange. The speed of bitcoin transfers is faster than any other cross border fiat transfers and fees are lower. The risks with bitcoin remittances are related more to the volatility in bitcoin rates and dependency on unregulated exchanges to liquidate into fiat.
However rebittances a preferred alternative for many bitcoin users and are a growing threat to the expensive and time consuming model of fiat transfers and start-ups such as Abra and BitPesa continue to attract users.
Bitcoin as Digital Cash
This is Bitcoin’s raison d'être and has been already covered in several times in this series starting from the overview and in wallet platforms. Wallets are the only requirement in the transaction and users can be located anywhere in the world. Physical cash once handed over is difficult to get back, if not impossible and the same applies for bitcoin. Exchanges and ATMs allow bitcoin to cash conversions.
Taxes and Conversions
Tax treatment of bitcoin payment transactions is a new and emerging topic of its own. In general, invoicing systems can calculate tax components. However, tax deductions or withholdings are managed separately outside the payment platforms.
The chief reason for this hinges on continuing debate on financial definition of bitcoins. Various countries and tax jurisdictions are still working on tax treatment for bitcoins. In some places, bitcoins are not recognized as currency and hence transactions on good or services may not attract local taxes. Taxation is applied when bitcoins are converted to fiat and treated as payee income. The bitcoin transaction may still be subject to GST, and create a double potential taxation issue for merchant (as in this example from Australia).
Till the currency argument settles down, current processes for tax deduction at source or withholdings is not a showstopper for bitcoins. For example, BitPay’s payroll API excludes tax withholding (as it is not a direct payroll deduction in any case).
Accounting and taxation platforms such as Libra have been rolled out in the marketplace to help calculate Bitcoin tax liabilities for coin owners. BitPay has tied up with Libra to help merchants with tax and accounting on payments received in bitcoins.
In the next article, we profile popular payment platforms.
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