J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
I don’t know about you, but the thing that got me interested in bitcoin (BTC) was its potential to become a popular way to make payments and remittances. Over the years we’ve been constantly disappointed on this front. Bitcoin payments just never caught on with the masses. Meanwhile, usage of fiat-based person-to-person payment tools like Venmo, Square Cash, Zelle and the U.K.’s Faster Payments has exploded.
Bitcoin’s new lightning layer has rekindled the dream of bitcoin-as-generally-accepted medium of exchange. But lightning is prickly to use. Which is why Zap’s recent announcement of Strike, a new lightning application, caught my interest. Strike aims to popularize bitcoin payments by making lightning more user-friendly.
The idea behind Strike is to create a fiat-based payments app, say like Venmo, except under the hood the payment is conducted in bitcoin. A hybrid fiat-bitcoin payments app is a neat idea. But marrying fiat with bitcoin will involve challenges, too.
A bitcoin payment is special. The bitcoin network is open to everyone, or censorship resistant. It allows for pseudonymous usage. And it provides what Satoshi Nakamoto described as non-reversible digital transfers; like cash, once the stuff is spent, the economic relationship between payer and payee is severed.
Without even knowing it, you’ve paid your neighbor with bitcoin.
Pseudonymity, non-reversibility and openness will cause hassles that regular payments platforms like Square Cash or Venmo needn’t worry about. It remains to be seen whether hybrid fiat-bitcoin platforms like Strike will be able to marry the two systems in a form that still attracts a mainstream user base.
Let’s back up a bit. How does lightning resuscitate the dream of mainstream bitcoin payments? Writing a transaction to bitcoin’s core blockchain takes time. It has to be broadcast to the network and confirmed by miners. On top of that, a processing fee must be paid. This fee can get particularly costly when everyone wants to use the bitcoin network at the same time.
These delays and fees put off mainstream users. By routing around the blockchain, lightning can help regular people be more comfortable making bitcoin payments.
Unfortunately, lightning doesn’t solve bitcoin’s roller-coaster problem. After experiencing bitcoin’s crazy price rises and dips, a new user will never want to hold bitcoin again. Or they will be so excited by the ride that they treat it as a betting game. Either way, they won’t use it for payments.
Strike, founded by a smart and affable Jack Mallers, tries to solve the roller-coaster problem by letting people load funds onto an app, much like they do with Venmo. But when they make a payment, unbeknown to them, Strike (which is still in beta) will route the payment to the recipient via lightning.
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.
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. That’s neat.
But unless your neighbor has the technical chops, setting up lightning won’t be easy, certainly not as easy as accepting fiat-based payments via Zelle or Venmo. Which means that hybrid fiat-bitcoin payments systems will probably have to reach nooks and crannies that are as-yet unserved by the Zelles and Venmos of the world.
While marijuana is legal in many U.S. states, it is illegal on the federal level. And so banks often disconnect companies that process marijuana payments for fear of losing access to Federal Deposit Insurance, or the Federal Reserve’s settlement system. As a result, many marijuana businesses are forced to turn card-paying customers away.
In a recent blog post, Mallers described how his family’s marijuana store set up a lightning channel, then encouraged debit card-carrying customers to download Strike. Now the store could reconnect to its clients with cards. That’s pretty useful.
Many parts of the world, including Nigeria, are locked out of the U.S. person-to-person payments economy. Venmo and Zelle don’t allow non-U.S. citizens to sign up. As a matter of policy, PayPal doesn’t allow Nigerians to receive money (although they can open an account). If a Nigerian were to advertise a lightning payments channel, however, a hybrid fiat-to-bitcoin system like Strike could connect that person to Americans who want to do fiat-based person-to-person payments. The sender needn’t know anything about bitcoin or lightning.
Now for some of the complications of marrying fiat to bitcoin.
Operators of hybrid systems will have to fund buyer identity fraud out of their own pocket.
One of the problems that person-to-person payments apps like Venmo must deal with is buyer identity fraud. Scammers will often hack Venmo accounts or fund them with stolen credit cards. Then they use the funds to buy expensive goods. Sellers never realize they’ve accepted stolen money until Venmo reverses the payment.
Since a hybrid system like Strike connects to lightning addresses, recouping stolen funds from recipients won’t be possible. Once a lightning payment is made, it’s irreversible. Which means operators of hybrid systems will have to fund buyer identity fraud out of their own pocket. That could get quite expensive.
Another type of fraud is authorized push fraud. This sort of fraud occurs when a scammer tricks victims into sending money for, say, concert tickets, but never actually provides the tickets and makes off with the money.
Payments options like the U.K.’s Faster Payments, Venmo and Square Cash are rife with push fraud. But they do have tools for combating it, including quickly canceling offending accounts and tightening up the rules for opening accounts. Faster Payments is introducing a new account name checking service to cut down on fraud.
But a hybrid fiat-to-bitcoin system that connects to pseudonymous lightning addresses can’t use tools like identity checking or account cancellation to combat authorized push fraud. The whole idea behind bitcoin is to prevent this very sort of censorship.
And so hybrid systems could become popular with fraudsters. A popular scam these days is to ask Granny to get out of her rocking chair, go to Walmart and buy four $500 Google Play cards. With a hybrid fiat-bitcoin system, scammers can extort her by having her send $5,000 via her debit card, all from the comfort of her chair. The lightning side of the transaction allows the bad guys to stay anonymous and untouchable.
The problem with fraud is that if it gets out of control, it stigmatizes a payments system. This, in turn, harms the brand, impedes broader usage and may even attract political pushback. Douglas Jackson, the founder of the pseudonymous e-Gold payment system, serves as a good example. According to Jackson, e-gold’s failure to ever become more than a marginal player can be blamed on “self-reinforcing negative reputation” created by criminal abuse. (Indeed, it eventually led to e-gold being shut down.)
To cut down on buyer identity fraud and authorized push fraud, a hybrid fiat-to-bitcoin system might decide to throw in the towel and do what Venmo and the others do: vet all users. But then it would no longer be doing censorship-resistant money. Gone would be non-reversible transactions. After all, the operator of the payment system could pressure lightning address owners to reverse payments on pain of being taken off of it the operator’s white list.
Strike highlights many of the contradictions involved in developing bitcoin solutions. Lightning is complicated. This prevents regular folks from using it. But simplifying a lightning payment by marrying it to the fiat system introduces a new set of complications. Bringing censorship resistance and non-reversibility to a mainstream audience may be impossible.
Or maybe not. There’s a lot of creativity being brought to bear on this problem. Maybe folks like Mallers will find the sweet spot.