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November 08, 2013, 05:10:51 PM |
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[I assume this goes here rather than "Alternative Cryptocurrencies" as coloured coins was originally suggested as an extension to Bitcoin rather than a currency in its own right. Move it if I'm wrong though.]
Fiat-coloured coins (or equivalent) are not a way to trade fiat on the blockchain. They are tokens representing fiat, and just like any other digital token one requires a gateway step to convert from "fiat" (in a bank account) to fiat-coloured coins. Unless being specifically used for reasons of anonymity or distrust of central authorities, fiat-coloured coins will not be viable if people are expected to pay exchange costs to buy/redeem the coins (negating the advantage of micro transaction fees) every time they buy or sell something online. They will only be viable if there is an incentive to hold onto the coloured coins and re-use them on other services. This will occur only if there are enough services accepting the coins to make holding onto them rather than paying a fee to translate them back into universally accepted fiat-proper a good idea.
Comparison of different payment gateways:
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Fiat-coloured coins:
-(Negligibly) low fees for buyers (fixed ~10p atm for btc)
-No fees for merchants
-Pseudonymous
-No chargebacks (certainty of fate)
-Decentralised (trustless)
-No account requied
-Exchange costs (likely) in and out of currency
PayPal:
-PayPal has no fees for buyers or one-off transactions
-PayPal has fees for merchants
-Chargebacks
-Buyer-protection & seller-protection (essentially "free" insurance)
-Money can be spent directly from your bank account or payment card
-Legal protection as this is legally a "purchase"
-Non-anonymous (proof of ID required)
-Gateway can refuse transactions for political/biased reasons (e.g. WikiLeaks)
Visa/MasterCard debit cards:
-No fees for buyers
-Fees for merchants/receivers
-Can involve third-party payment processors for merchants
-Money can be spent directly from your bank account
-Legal protection as this is legally a "purchase"
-Fraud protection etc. (free insurance)
-Non-anonymous (proof of ID required)
-Gateway can refuse transactions for political/biased reasons (e.g. WikiLeaks)
Western Union/Moneygram:
-Fees for buyers
-No fees for sellers
-No chargebacks
-Can be more anonymous than PayPal/Visa/MasterCard
Centralised digital currencies like Ukash, Pecunix, Liberty Reserve (deceased):
-Often exchange fees in and out of currency
-Sometimes transaction fees for sender
-Sometime transaction fees for receiver
-Centralised (can go down and take everyone's money with them)
-Can be more anonymous than PayPal/Visa/MasterCard
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Sellers should be keen to accept payments in fiat-coloured coins because they offer advantages over the other four: they don't cost the seller anything like PayPal or Visa/MasterCard, they don't allow for chargebacks, they are less hassle (to send and to receive) and can then be used again by the seller incredibly cheaply and easily, so I would expect a quick adoption by service providers as bitcoin fever spreads.
Buyers who want greater anonymity (and large, respected merchants WOULD require proof of ID/account verification anyway) or else distrust central authorities (even though it's likely such coloured coins would need to be issued and backed by one) would be willing to pay a premium to use such a gateway so wouldn't mind paying the exchange fees to get their hands on them in the first place.
But "normal" buyers by and large would have no reason for choosing coloured coins over PayPal or debit cards. Though the transaction fees themselves are negligible, unless buyers had some source of income directly in coloured coins then they would have to buy some in advance of/at the point of sale, meaning exchange costs. Also, they throw away options like chargebacks, fraud protection, buyer protection whilst receiving no discount (they could pay more for these options from third-parties, but what's the point when they could get them free?). And because of the uncertain legal status of cryptocurrencies, they might have a much harder time invoking their statutory consumer rights if the seller was unscrupulous. Coloured coins present a distinct advantage for buyers over WU/MG and centralised digital currencies, but don't present a major advantage over PayPal and debit cards.
So while there is plenty incentive for merchants to adopt the payment system, there will be no major demand from most buyers yet, for whom using fiat-coloured coins for "normal" transactions will be no more than a gimmick. The only way this would happen would be if a bank (or some other institution) that allows you to withdraw/spend money by Visa/MasterCard (essentially acting as a gateway for the Visa/MasterCard payment network) would also act as a gateway/issuer on a decentralised payment network (coloured coins/mastercoin/ripple/open transactions) for no or negligible fees, allowing you to spend your account balance directly onto the blockchain. Such an institution would be almost impossible to set up in any country due to AML and needing Visa/MasterCard onboard (although if bitcoin REALLY takes off over the next few decades there could possibly be a reconsideration).
Coloured-coins will certainly have plenty of niche use cases, but in order to really challenge the status quo they need negligible exchange costs (if the demand for fiat-proper was equal to the demand for fiat-coloured, then in a fee-less P2P exchange the exchange costs would be negligible), a way to instantly transfer bank account funds into coloured coins and vice versa, legal status (so buyers are protected) and perhaps insurance against fraud/mis-selling offered as part of a bank account.
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