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Startup sees business in bitcoin, seeking to promote local uptake of digital currency

First came the switch off of the gold standard. Then checkbooks and credit cards started the shift away from cash — but to bitcoin advocates, not far enough.

As the anonymous digital currency gains favor with retailers such as Overstock.com and is welcomed by California and other states, some in Baltimore are trying to boost adoption locally. They argue that bitcoin is the next logical step beyond credit cards, offering greater security without transaction costs.

But they also acknowledge a sort of chicken-and-egg problem when it comes to getting consumers to adopt bitcoin and retailers to accept it. In Baltimore, some tech advocates, a few business owners and the entrepreneurs behind the local startup Bitsie aim to encourage acceptance among local shops and to promote broader education about how bitcoin works, and why more people should use it.

That means overcoming challenges, including volatile exchange rates and a lack of any central regulation of bitcoin, factors that make some question whether the currency will ever gain mainstream traction. While state governments have welcomed it, the Internal Revenue Service has been more skeptical, recently classifying it more like a stock or bond than like a dollar bill.

"We grew up with paper currency, and for us it was never backed by gold," said Joshua Riddle, CEO and co-founder of Bitsie. "It's interesting to challenge what you previously believed."

Bitcoin first gained widespread notoriety as the currency of drug dealers and buyers on Silk Road, the "deep web" marketplace shut down by the FBI last year. Since then, it has gained credibility among tech-savvy consumers and retailers, as well as speculators looking for a potentially high-risk, high-reward investment.

"Bitcoin is a great alternative because of the ease of use, ease of storage, security of storage — and it's also the only thing in the world you can send halfway around the world in less time than it takes to snap your fingers, and for free," said John Devor, who organizes regular Baltimore-area meetings and discussions about bitcoin on Meetup.com. "There are a variety of reasons that basically say this technology is not going away."

For businesses like Fells Point bar Bad Decisions, accepting bitcoins means setting up a software "wallet" on a computer or mobile device and printing out a QR code that points customers to it. When customers scan the code with smartphones, it directs them to the wallet so they can leave their bitcoin payments inside.

Bitcoin is based on a public ledger system that individuals or companies around the world process and monitor, sometimes in exchange for small, optional transaction fees that can encourage faster processing of payments. Even without a fee, payments are processed in a matter of seconds or minutes.

You can get bitcoins either by accepting them for a good or service you're selling, or by buying them on an exchange like CoinBase.com or dozens of other websites.

Bad Decisions is a local pioneer when it comes to accepting bitcoins — the digital currency's proponents say they only know of one other business that accepts bitcoin, CapitolMac, an Apple retailer also in Fells Point. John Reusing, the bar's owner, said he has processed about 10 bitcoin transactions a month since first accepting it about six months ago.

Once, a customer paid an $80 tab in bitcoin, he said, but for the most part, the currency remains more of a novelty than anything else, Reusing said. Given that the payments are a tiny share of his overall cash flow, Reusing said he is "squatting" on any bitcoin payments he receives, waiting to see what happens with the digital currency rather than immediately converting his holdings into dollars.

"It's not a ton of people, but a lot of times it's out-of-towners that are excited because nowhere in their hometown takes it," he said.

Bitsie is trying to liken the process of accepting bitcoins to the credit card transactions business owners are used to, though without the credit card fees that eat into their profit margins. Riddle, along with co-founder Brent Hoffmann and his brother Aaron Riddle, built an app they named Bitsie Shop that puts the payment process online, so retailers can have an instant, or nearly instant, confirmation that the payment has been received.

Bitsie is offering the app for free, and with up to 25 free transactions per month, along with the founders' expertise in an effort to get retailers to take on the risk of accepting bitcoin. Eventually, the entrepreneurs plan to charge a flat monthly fee for transactions beyond that. They are seeking out business owners in tech-savvy neighborhoods like Harbor East and Hampden, hoping that getting it into locally owned shops will raise awareness among their Millennial and Gen-X customers. Bitsie also is organizing a bitcoin seminar for business owners and entrepreneurs at the technology incubator Betamore on July 17.

"They're going to figure it out," Riddle said of the younger consumers and bitcoin. "But they need to hear about it."

Riddle points to growing adoption as a sign that the currency's acceptance is inevitable. Overstock began taking payments in bitcoin in January, and expects to receive $10 million to $15 million in bitcoin payments this year. Accounting software provider Intuit said last week it would begin supporting the processing of bitcoin payments using its QuickBooks software, and the Chicago Sun-Times began accepting bitcoin payments for subscriptions this year.

California recently passed a law clearing the way for bitcoin and other alternative currencies, an issue a group of states, not including Maryland, has been exploring. But the federal government has been less progressive on the idea — aside from the IRS's decision to treat bitcoin as an asset, rather than a currency, the Government Accountability Office said this week that federal consumer protection officials should increase oversight of bitcoin.

Some fear bitcoin will become a target of hackers as adoption grows. Many store the codes that verify bitcoin ownership on devices that don't remain connected to the Internet, or aren't connected at all, as protection.

But without any central authority like the Federal Deposit Insurance Corp., there is no protection from volatility in bitcoin value. One bitcoin was worth about $652 as of July 2, more than six times its value from a year ago but about two-thirds of its peak value of $979 per bitcoin in November 2013. Though a single bitcoin unit is valuable, it's possible to make smaller purchases in fractions of a bitcoin — a bitcoin can be divided in pieces down to eight decimal places.

Many businesses use a service known as BitPay, in which bitcoin payments are instantly exchanged for dollars, allowing them to avoid exposing themselves to potential further swings in bitcoin value, said Gloria Phillips-Wren, a professor of information systems and operations management at Loyola University Maryland. But that also can add to the volatility.

"Anybody who is going to take a position in bitcoin is inherently putting some trust in the bitcoin ecosystem in general," said Joseph Bailey, a research associate professor in decision, operations and information technologies with the Robert H. Smith School of Business at the University of Maryland, College Park.

But there are those who find that trust easily placed. Devor said he sees local uptake as "slow but steady." He said he expects to see more local startups focused on bitcoin in the near future.

"The chicken is being formed, or the egg is being formed," he said. "I don't know which one."

sdance@baltsun.com

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Copyright © 2014, The Baltimore Sun
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