EC Why Marc Andreessen Is All Wrong About Bitcoin...

"Every day, hundreds of millions of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries—over $400 billion in total annually, according to the World Bank. Every day, banks and payment companies extract mind-boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly."

And, of course, lest a few of the more domestically focused politicians want in on the fuzzy love, he points out that Americans can join in the fun:

"And even here in the United States, a long-recognized problem is the extremely high fees that the 'unbanked'—people without conventional bank accounts—pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system."

For the "unbanked" globally, the reason their services cost so much has nothing to do with lack of sufficient technology. It's about the cost of customer service. These folks would require computers, smartphones, or other complicated devices to store their bitcoins, or still be reliant on the same intermediaries that charge these hefty fees today. Maybe cellphone companies or app providers would step in to offer competition, but they'd still be in a messy and expensive business.

Take Western Union, for instance, one of the major providers of transfer services for these migrant workers. Western Union has no problem at all dealing with security between various Western Union franchises. They accept cash on one end, transmit bits to another, and that end dispenses cash. They charge 10% to do so, because that's necessary to cover the risks they take and still profit—risks like running storefronts with rent, workers, and drawers full of cash to be potentially stolen. The high cost of their services is not changed in any way by putting Bitcoin between their branches.

Andreessen of course means to remove those intermediaries. That's fine for those who already have such devices on both ends—like the many Indian and Chinese colleagues I had at Microsoft who sent their money home via electronic funds transfer for free with ease. But doing so would be immensely complex for most of the unbanked—those without the means for basic security and privacy.

If you store your life savings on a cellphone, for instance, how do you divide it and keep portions safe from thieves? Or do you need to carry it with you all the time, risking your savings every time you leave the house? The argument is not to break it up and store it like cash, but to use a cloud provider. However, that cloud provider will inevitably charge fees. And so will the provider who allows that cash to be turned into bits to begin with… and the vendor who allows it to come back out the other side. That a few companies provide all of these services end to end and charge commensurately for the convenience seems to me a triumph, not a failure, of capitalism.

The rosy picture that Andreessen paints is one where the entire world has a means to store and transmit these digital coins. But if all these migrant workers had an online wallet, are they really all that better off than if they simply had a bank account? Those customers will still be expensive to provide service to, with telephone operators, brick-and-mortar locations, and other infrastructure required to collect, store, and transmit their coins. In other words, bitcoins work fine when they're exchanged between the technologically savvy, wealthy folks who trade them today. Put in the infrastructure to support the mass population, however, and the costs of that support will rise dramatically. And companies who rise to serve those populations will demand, as they should, to be compensated for the risk to their invested capital in the form of profits.

Which is where we get fees for all the services card providers charge.

Add in the cost of compliance to criminal investigation and currency controls and you can begin to understand why those fees sometimes seem much higher than they should be for shuffling bits around the Web. It's the fraud analytics software, telephone operators, compliance attorneys, and all the rest—plus the critical role in insuring customers from fraud and mistakes—that make for the universe of fees we currently occupy. Some competition from Bitcoin could do a great deal to challenge the current Visa-centric hegemony in the payments world and lower fees for all, but only if it does so on a level playing field.

The world Andreessen would like to see is apparently one where his payment system is held to a lower standard of consumer protection, combating of criminal activity, and support of monetary policy—providing an unfair cost advantage over the status quo. I'd happily lobby for the same edge if I thought I could find it for my business. But realistically, if Bitcoin is to survive, let alone thrive, it must not just please consumers and businesses: it must appease the government—and that will cost a lot of coins.

Even if given that cost advantage, most of the warm and fuzzy scenarios Andreessen paints as a result will fail to materialize. The current banking system has every incentive in the world to bring the billions of people still outside the system into it finally, and has been trying hard to do so given the tight regulatory bounds it must work within. Should those handcuffs be loosened a bit, let it be done across the board, not just in the name of one technology. That would truly move the world's digital and offline economies forward, even if it would make it harder for Andreessen to make a profit from all his bitcoin investments.

Bitcoin is a monumental technical achievement in its simplicity and effectiveness. But just as the dot-com era overestimated the impact of the Web in the short term by several orders of magnitude (a hype-filled time during which Mr. Andreessen made his initial fortune selling a piece of free software to AOL, only to see it fall from grace and never monetize) so too do investors risk once again pouring billions into the currency equivalents of Web Van and, failing to analyze all the dynamics of the market in which it competes. Pet food is heavy and expensive to ship, and most stores sell it at break-even to get you in the door for more expensive items. And dealing in currency requires protection of government and consumer interests—neither of which Bitcoin is well suited to.


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Lennie 4 years ago Member's comment

There is one thing you did not understand about Bitcoin and cryptocurrencies, which is that they are protocols which can be used to build other things on and much more flexible than the current systems. Bitcoin is like the Internet without the Web, still in it's infancy. It will take at least a couple of years for it to reach that next step.