Illustration by Jon Krause
Sitting in a coffee shop near the Virginia Commonwealth University campus, Allison Patel hardly looks the part of a counterculture revolutionary. But the Richmond professional photographer is among an ardent corps of believers in bitcoin, a type of digital currency that is slowly gaining acceptance by businesses as a way to purchase goods and services. Bitcoin is a global "crypto-currency" that — at least, so far — exists beyond the control of a central governing authority. In the United States, its growing popularity stems in part from concerns about the Federal Reserve Bank's monetary policy, which critics contend has weakened the power of the dollar.
Patel, 31, isn't a macroeconomist, but says she is worried about the Fed's propensity for pumping new dollars into circulation. Allison Patel Photography specializes in wedding photography and family portraits, and last year it became one of the earliest Richmond-area merchants to adopt bitcoin as a form of payment.
Patel offers bitcoin users a 25 percent discount on all purchases — although as yet, not a single customer has taken her up on it. But she thinks that consumers gradually will embrace virtual currency, which acts as an Internet-based substitute for cash. "Accepting bitcoins gives my customers another option besides credit cards and cash," she says.
How quickly shoppers will warm up to this Ray Bradbury-type currency is not entirely clear — particularly in a fiscally conservative and conventional town like Richmond. We're used to banks and brokerage houses here. But currency whose value exists intangibly in computer code?
Bitcoin isn't currency in the traditional sense. The technology is complex: People store their intangible bitcoins online in "digital wallets." A peer-to-peer computer network facilitates all bitcoin transactions, using cryptography to verify each anonymous user's identity. For transparency, all transactions are visible to every user on the bitcoin network.
Patel and other bitcoin adherents can convert their digital currency into U.S. dollars by using one of several digital currency exchanges, which operate in a manner similar to online trading platforms. Patel uses Coinbase to convert her bitcoins into U.S. greenbacks. "The computer network is basically a public ledger that keeps track of all transactions," says Steven Worley, a one-time Richmond resident and formerly the CEO of Bitcopia Inc., a bitcoin brokerage.
Virtual currencies like bitcoin are decentralized and unregulated, meaning they don't carry the imprimatur of any government or central authority. They are not backed by gold, silver or other commodities. Whereas the Federal Reserve regulates the flow of paper money in circulation, the supply of bitcoins is capped at 21 million. Proponents like Worley say the cap ensures that the value of bitcoin remains stable.
Bitcoin generates the most media buzz, but there are at least 208 similar types of digital currency in circulation, suggesting it may be only a matter of time before they become as common as credit cards.
But the lack of regulatory oversight creates a different set of obstacles to full-fledged adoption. Bitcoin is making headlines nearly every day, often for the wrong reasons. Japan's Mt. Gox, one of the largest Internet-based bitcoin exchanges, imploded in January, forced into bankruptcy after hackers siphoned off more than 850,000 bitcoins. That's roughly equivalent to $480 million, based on current exchange rates for bitcoin. Immediately following the Mt. Gox debacle, the price of a single bitcoin plummeted to $420, well off its high of $1,242 last November.
Digital currency also has been tarnished, though perhaps unfairly, through its association with Silk Road, a shuttered online black market that enabled people to use bitcoins to anonymously buy guns and illicit drugs. The FBI shut down Silk Road last year and charged its founder, Ross William Ulbricht, with drug trafficking, money laundering and racketeering.
Until recently, the emergence of virtual currency has flummoxed federal tax regulators, too. The Internal Revenue Service in March issued its first direct guidance on the issue, ruling that virtual currency is to be "treated as property" rather than currency.
Worley's experience underscores the challenge of virtual-currency entrepreneurs. He launched Bitcopia in Richmond in late 2012, but suspended operations the following April after the federal Financial Crimes Enforcement Network recommended that virtual exchanges subject themselves to financial regulations. It was only a recommendation, but to Worley, the writing was on the wall. He says regulatory compliance would have proved too costly. "It was a shame, because we had a small band of loyal customers and we were starting to generate profit of about $7,500 a week," says Worley, who now lives in Poquoson.
Patel acknowledges the negative news is frustrating, but points out how bitcoin has recovered much of its value since the collapse of Mt. Gox. Coinbase and other exchanges also continue to process an increasing number of transactions. "I hope bitcoin takes off, because I think it has tremendous potential," Patel says.
And perhaps such hope isn't a mere pipe dream. Earlier this year, Overstock.com became the first major retailer to accept payment for purchases in bitcoin. Even amid the Silk Road-Mt. Gox fallout, the online retailer said in March that its bitcoin transactions had already topped $1 million. Former Federal Reserve Chairman Ben Bernanke even testified before Congress last year that digital currency appears to hold long-term promise.
Locally, Patel Photography isn't the only small merchant to embrace bitcoin. Triple Crossing Brewery will accept it when its South Foushee Street brewery debuts this year. Co-owner Scott Jones says one customer has already purchased its microbrews using bitcoin. Jones' motivation is that he wants to stay ahead of the curve.
However, Jones says, the brewery won't store bitcoin payments long-term in a digital wallet: "We'll convert it to cash as soon as the transaction clears. We want to offer customers the flexibility, but we want to minimize our risks."