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Why 'Britcoins' may soon pay for your latte

Bitcoin logos Image copyright Getty Images
Image caption Cryptocurrencies could revolutionise how banks handle payments, say their proponents

Two years ago, perhaps 4,000 or 5,000 merchants in the world accepted Bitcoin, says Nicolas Cary, co-founder of Blockchain, now there are more than 100,000.

"It's a very efficient way for a company to accept payment, since they receive 100% of the value of a transaction," he says. "Very different from dealing with credit cards, which take at least 2% to 3%."

His company, which offers a popular electronic wallet for storing Bitcoins, now has three million users - plus a London headquarters.

Britain's first Bitcoin cash machine has been installed in a Shoreditch coffee shop in London, where you can pay for your coffee from your digital wallet.

And argue some, with other successful UK start-ups including Coinfloor, a Bitcoin trading platform, and Elliptic, which aims to offer unhackable ways to store them in offline vaults- Bitcoin is becoming increasingly 'Britcoin'.

Britain's tech empire normally shrivels beside that of the United States. Last year London's 'Silicon roundabout' district received $1.4bn (£930m) in investments, compared to Silicon Valley's $22bn (£14.6bn).

But the financial crisis forced an outflow of talent from banking to start-ups.

And more global financial institutions make their home in wet Britain than sunny California.

So London became the world's new financial technology centre, employing more people (over 44,000) in the sector than either Silicon Valley or New York.

Image copyright Getty Images
Image caption Cryptocurrencies are increasingly important for financial technology hubs like London's 'Silicon roundabout'

Payment looms large in financial technology, and start-ups working with cryptocurrencies such as Bitcoin and Ripple, which are the two largest cryptocurrencies by market capitalisation, are prominent.

Collectively, they're luring big bits of investment.

When Elliptic raised £1.2m ($1.8m) in seed funding last summer, it was regarded as an important coming of age for cryptocurrencies.

Liquidity savings

Cryptocurrencies offer an advantage in countries where official currency exchange is tightly controlled, like China.

Cryptocurrencies could revolutionise how banks handle payments, too.

Large retail banks currently use central clearing - everything goes to one place, and then back out.

But with Bitcoin, this exchange happens in different places and instantaneously.

At the moment, the small amount of liquidity in any particular cryptocurrency limits broader use of this system.

However, this would grow exponentially if several banks began to convert cryptocurrencies to a traditional currency, and back again.

This has happened in Germany, where Fidor Bank adopted the Ripple cryptocurrency for payments.

Two American banks have done so as well.

Image copyright Getty Images
Image caption Bitcoin cash machines may still be relatively rare - but their numbers are growing

The Ripple protocol offers advantages over Swift, the 40-year old system which most banks now use to send payment orders.

"Banks don't have to hold liquidity in all far flung corners of the world," says Conny Dorrestijn, one of the judges of the 2015 FinTech50, which looks to promote new types of financial services technology.

"At the moment, if you're a bank in Germany and have two clients who do payments with Chile, you have to hold liquidity in a corresponding bank in Chile.

"With the new protocols, you don't."

Risk versus reward

Elliptic calls itself a 'Bitcoin custodian', storing the private keys which they compare to digital gold, in an encrypted form and a secure location.

Says its co-founder, Dr Tom Robinson, "If you're storing it in an internet-connected device, there's always the possibility of web-based hacking. So we store it in a bank vault."

He is unsure we ever will be using Bitcoins as we do physical cash on the High Street, but says block chains - the data structures that record Bitcoin transactions - can be used with tokens representing any financial asset, including shares or bonds.

If a company represented its shares in this way, then the platform could transfer ownership of the shares in a highly transparent manner.

And dividend payments would be more efficient, since you would simply send Bitcoins to whichever wallet holds the token.

Image copyright Getty Images
Image caption Some shops and retail outlets are now accepting Bitcoins, alongside more traditional payment methods

A Scottish company called MaidSafe issued 'cryptoequity' last year, with a crowd-sale of what it called MaidSafeCoins.

Worries by banks about the money laundering risk from cryptocurrencies has stunted use of block chain technology in the UK banking sector till now. But the money laundering risk from cryptocurrencies can be overstated, believes Dr Robinson.

"The risk is there, but there is a publicly available database, and everyone can look at it, and see every block chain transaction that's ever been made."

Regulating cryptocurrencies

The absence of regulation also has been a problem.

Britain's tax authorities released a guidance brief on Bitcoin a year ago (and decided not to charge VAT on cryptocurrency mining or trading). Last month, the Bank of England publicly explored the idea of issuing a 'digital pound'.

But in general, the UK government has adopted a wait-and-see attitude.

In America, New York state has been one of the first governments at any level to propose regulations for the virtual currency industry. Initially, its reporting and capital requirements were viewed as quite onerous on smaller cryptocurrency start-ups, but they have been relaxed.

Dr Robinson says it could be time for some light-touch regulation in Britain, to lend cryptocurrencies credibility, and give banks confidence in dealing with them.

Image copyright Getty Images
Image caption The Bank of England has explored the idea of a 'digital pound' but questions remain about how this would work

And the Bank of England concluded if it were ever to create a digital pound, research would be necessary to ensure the technology would not constrict the central bank's ability to control its currency and secure the banking system against attack.

Miss Dorrestijn cautions that too much investment may have gone into the front end of payment, and neglecting banks' ageing infrastructure, where the bulk of payments are still handled.

"'98% of the world still works with banks as we know them today," she says. "I see a very new interest in investing in new core technology, new protocols, and new formats."

"I think the world is oversaturated with wallets, and mobile channels, if they only are a shiny face on an old fashioned mechanism."

More than small change

Michel Akkermans, founder of Clear2Pay, says retail banks are mostly hindered in payments by batch-based systems.

Transactions get processed once a day, instead of in real time.

And legacy payments software is "written in arcane programming languages no one knows any more".

He says after the 2008 banking crisis, banks have focussed again on their core business of enabling transactions rather than esoteric financial instruments and derivatives.

Image copyright ALAMY
Image caption Traditional payment processing methods hinder banking, says Michel Akkermans

But they are at very different stages in modernising their existing payments infrastructure, he says.

One new body, the Emerging Payments Association, represents newer entrants in the payments space.

It pushes for non-bank payment firms to have more equal access to retail clearing banks, for such things as faster payments and dealing with consumers through the Post Office, says board advisor Richard Wagner, chief executive of Advanced Payment Solutions.

Bitcoins may not yet have met their killer app. But how we pay is undergoing more than small change.

And Bitcoin, Ripple, and other new alternative forms of payment are steadily gaining currency, bit by bit.