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The Incremental Adoption of Electronic Currencies

September 29, 2014 in Economics

By Peter G. Klein


Electronic currencies are typically viewed as “disruptive” innovations that will upset the existing structure of the banking industry (and even the economy and society at large), rather than “sustaining” innovations that generate incremental changes within the existing structure (here I’m borrowing Clayton Christensen’s famous terms). But people sometimes forget that technologies such as Bitcoin are both currencies and payments systems, and in the latter capacity they are integrated into the existing network of payment providers. As Charlotte Bowyer puts it, “the ‘Bitcoin revolution’ (if it is to happen at all) could be less explosive, more incremental, and far more reliant on existing processes than many might believe.” Bowyer argues that existing financial institutions and payments systems and Bitcoin are at least partly complements, not substitutes.

It . . . looks like Bitcoin’s success will be increasingly related to its integration with established payment, merchant and finance companies such as PayPal, Amazon, Apple and Visa. Bitcoin is a disruptive technology with the capacity to bring about huge changes, even within the confines of today’s regulated industries. However, these changes look likely to come with the help and blessing of today’s commercial giants, rather than by a process of immediate disintermediation.

For instance, Bitcoin is much more than the new PayPal, for it’s simultaneously both a currency and a payment processor. Despite this, Bitcoin’s price rallied significantly after a long period  of decline following the PayPal announcement. Whilst the Bitcoin protocol has absolutely no need for an Apple Pay or a debit card to transmit it (in fact Bitcoin was developed to render such third parties obsolete), there’s no denying that it would also work wonders for user adoption. As the Bitcoin ecosystem grows and seeks increasing legitimacy, integration with established companies is a very realistic route to long-term success. In addition these companies have much to gain from embracing Bitcoin early, rather than risk competing with it later.

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