Bitcoin sounds like something from the future — an online currency developed using computer code, regulated by an anonymous web-based community. It has worth because "as long as someone is willing to accept it, it essentially has value."
It also sounds like it’s a scam — but it’s not. Online retail stores have begun accepting Bitcoin. Last year, Canadian e-commerce platform Shopify enabled its more than 80,000 online stores to accept Bitcoin as an online payment option. This could lead to an uptake in Bitcoin because, in 2013, those merchants using Shopify’s platform generated $1.86 billion in sales.
Now, a Canadian payroll software provider has integrated it into its product, allowing employers to give employees the option to convert and deposit a portion of their net pay directly into Bitcoins.
"We think that the way that the world works is changing and so is compensation," says Shrad Rao, CEO of Toronto-based Wagepoint Payment Services. "Our job is to basically keep up with the trend."
Wagepoint wanted to integrate the currency because it recognized Bitcoin has fundamentally the same function as any other currency, Rao says.
"It’s a substitute from what exists today," he says. "It functions like a regular currency, the only difference is it was built in a lab."
Bitcoin is a cryptocurrency, which is a virtual currency maintained by computer-based algorithms, rather than the government or a bank.
They are created through a process termed "mining," which is when individuals use their computer to perform calculations with the objective of solving a puzzle. Because the puzzle is often very difficult, people form "mining pools" and collectively contribute computing power in exchange for a share of the virtual reward — Bitcoins.
Unlike a federally-regulated currency, there are no physical Bitcoins. Instead, when coins are exchanged, it is done over a publicly accessible peer-to-peer network. Through that network, it is possible to track the exchange of Bitcoins, but the parties remain anonymous. And because each exchange is recorded, theoretically every transaction should be accounted for.
"Bitcoin transactions offer as much privacy as one desires," says Ian Molendyk, director of sales at Canadian Virtual Exchange (VirtEx), a Bitcoin exchange.
A Bitcoin exchange is an online trading outlet that allows individuals to buy and sell Bitcoins with Canadian funds.
Wagepoint has partnered with VirtEx. When an employee decides to convert a portion of his pay into Bitcoins, VirtEx automatically exchanges the specified amount at the current market rate.
At the end of January, a Bitcoin was estimated to be worth around $900. But its value fluctuates. In November 2013, the price of a single Bitcoin went from around $250 per coin to more than $1,000 per coin in a matter of weeks. The value decreased to $900 because the Bank of China ordered third-party payment providers to stop using it in December.
Canada’s six largest banks — RBC, TD, BMO, CIBC, Scotiabank and National Bank — have frozen or shut down accounts owned by Canadian companies who trade Bitcoins and convert it to cash for customers.
Those exchanges, like VirtEx, must now accept responsibility in ensuring all Canadian financial laws and regulations are obeyed in the exchange.
Canada’s Department of Finance also doesn’t recognize Bitcoin as a legal currency.
"Only Canadian bank notes and coins are recognized as legal tender in Canada. Bitcoin digital currency is not legal tender in Canada," an official from the finance department told the Wall Street Journal.
But Rao says this doesn’t really matter because "as long as someone is willing to accept it, it essentially has value. "
And if an employee is looking to use the online currency, Rao says it makes sense to offer direct deposit.
"Getting paid in Bitcoin is probably the easiest and fastest way to get one’s hands on this emerging digital currency," Molendyk says. "As the Bitcoin economy continues to grow, more people are likely to want to avoid extra steps by being paid in Bitcoin directly."
Using Bitcoins to make online purchases can save consumers money, Molendyk says.
"Bitcoin is a faster, cheaper, and more secure alternative to traditional currencies," he says. "There are no charge backs, so merchants from around the world can sell you their products for Bitcoin without fear of loss through fraud."
When consumers use credit cards or another online payment option, such as PayPal, they are often charged a fee. Bitcoin transaction fees are often non-existent or very low.
The range of products you can buy with Bitcoins are one reason people might be interested in the new currency. Molendyk says the options range from computer hardware to web hosting, and from clothing to movies.
Another reason people may be interested in this new currency is because the supply of Bitcoins is limited. There will only ever be 21 million Bitcoins created. As a result, Bitcoin could possibly undergo deflation — or experience an increase in its relative price.
Moreover, the puzzles that need to be solved to create Bitcoins become increasingly difficult, which gradually reduces the number of Bitcoins added to circulation over time.
"The money supply actually comes into the (Bitcoin) system over a long period of time and it slows down as the years keep going," says Rao.
The earlier consumers invest in Bitcoins, the greater the possibility their worth will increase, Molendyk says.
Rao admits most of the employees who want to receive payment in Bitcoins come from tech-savvy professions, but that doesn’t bother him.
"I don’t know if we’ll see… in the future any non-techies converting Bitcoin," he says. "But the main intention was to basically provide a service that actually makes it easy. The decision to buy Bitcoin… is completely in the hands of the employee."
Wagepoint will be expanding to the United States in early 2014 and plans to offer Bitcoin integration there, as well.