September 1, 2015
BayPay’s September event was hosted by PWC at their offices at Embarcarder 3 building, and featured David Ripley the co-founder and CEO of Glidera, a bitcoin integration company, and Sarah Hody, an Associate Counsel at Coinbase, a bitcoin exchange company. Paul Puey, CEO and Founder of AirBitz, who was on another BayPay Bitcoin panel discussion back in June, facilitated the evening’s discussion. Unfortunately Scott Bambacigno of AlphaPoint was unable to make the panel event due to a family emergency.
Coinbase (https://www.coinbase.com/) has three main services - an instant wallet that allows you to track and manage bit coins which is available in more than 180 countries, a Developer API kit to foster new uses of the blockchain network that more than seven thousand developers have used, and they have an exchange that converts dollars to bitcoin, and back. The exchange represents the largest portion of their revenue. The exchange allows traditional format buying and selling of bitcoin, but they also offer retail conversion for retail businesses that want to allow their customers to pay in bitcoin. The retail business will work with them to immediately convert the bitcoin into US Dollars.
Glidera (https://www.glidera.io/) is a newer, smaller company that believes the key benefit of the bitcoin technology is that the user holds the (crypto)keys to their own money. The storage of keys and protection of funds is important, and they put this power in the users hands.
Paul started with questions, but the audience quickly jumped in:
What does a successful business model look like?
Coinbase: Coinbase has been in business since 2012. As you can imagine, you have the chicken & egg phenomena. Merchants aren’t jumping to accept bitcoin because there hasn’t been much customer demand. Customers aren’t eager to spend their bitcoins, if there aren’t desirable merchants that accept the coin. The “bread & butter” for Coinbase has been working with merchants who do accept bitcoin for payments to quickly convert those bitcoins to US dollars, and as part of that exchange, they take a 1% fee for buying/selling bitcoin.
Glidera: They have a similar service with a similar price structure.
What are the regulatory hurdles the industry has to face?
There are a couple of basic hurdles relating to regulation – for example licensing, reporting, know your customer, and the cost to acquire a license in each state (which can easily run to the six digits).
Coinbase: By law, any business entity that provides money transfer services or payment instruments needs a money transmitter license. Existing legislation wasn’t developed with bitcoin in mind, and so states struggle to re-interpret these laws to determine how to apply it to bitcoin, and experience that can be frustrating both for the state, and for the bitcoin companies looking to do business in the state. For Money Transaction Services, bitcoin frequently falls in the “stored value” bucket.
Coinbase has been pushing to get their Money Exchange Platform in all 50 states. Money Transmission Licenses are required by most states in order to handle money, as a measure to protect customers and prevent fraud.
So when talking to regulators about licensing, they offer provide whatever reporting is required (Number of customers, number of transactions, value of transactions, etc). But it can be tricky reporting on bitcoin, because the value isn’t in dollars. So when they negotiate reporting with regulators, they have to determine when to document the value of the bitcoin – is it at month end? At time of transaction? Etc.
Some states require them to hold surety bond in reserve, the equivalent amount of US Dollars for the bitcoins being transacted. So for example, the company takes in $5 of bitcoin, they must hold $5 in reserve – but what happens then if the value of bitcoin goes up? Do you then need to put aside additional US dollars for the increased value? To deal with this situation, many states will have a foreign exchange currency license. These will have a designated list of “permissible investments” where funds sit in a separate custodial account.
Glidera: Another challenge is the government “KYC” (Know Your Customer) regulation. It is important to be able to identify the source of funds. Anyone can create a digital wallet, and people can send and receive money to these digital wallets. You can’t necessarily identify the source of funds.
Which states have the most receptive attitude towards bitcoin?
Glidera: Texas acted early, and gave clear guidance on what companies need to do from a compliance perspective. Many bitcoin businesses don’t even require a license in Texas. For example, for a number of business models where they are converting money back and forth between currencies (like an ATM), that aren’t storing dollars, don’t need a license. In Texas, Bitcoin is not considered a “stored value” product.
Coinbase: South Carolina is another state where money transfer licensing is not required (even Western Union doesn’t need a license there).
How would financial institutions behave in a world where bitcoin is prevalent?
Glidera: Banks provide consumers with secure storage as well as easy access to funds. Banks also have the ability to do “capital allocation” – to use the money they have for different things – whether investing in processes, people, and projects to generate additional revenue. If you take away this capital, their business model is going to look different. Capital allocation is also an area of opportunity for bitcoin companies.
Coinbase: Large “B” bitcoin = bitcoin network, small “b” bitcoin is the technology (aka blockchain). It is widely believed that the blockchain portion of the bitcoin will be the most likely to be adopted. Banks are already exploring it’s use. The blockchain can make the rails between banks faster, and they processing of ACH transactions faster. Another option is that maybe financial institutions will play a smaller role, and that 3rd world countries will have access to funds that they didn’t have before.
Glidera: It would take too much to overhaul the global financial system, something would have to be developed to help navigate between the two monetary systems, and provide some convergent services.
Coinbase: Various digital currencies want to leverage the blockchain technologies. Central banks need to get behind them especially with APIs becoming more popular.
Glidera: Central banks could leverage the technology to regulate currency and technology behind it. There are two different approaches to leveraging the blockchain technology – “permission” vs. “permissionless” . Our current monetary system relies on people granting permission, but Blockchain is basically a “permissionless” solution. If we take some of the most popular aspects of bitcoin – the cryptography, and the transparency, and apply these to the architecture in our existing monetary system.
What can you tell us about Bitcoin XT?
Glidera: Bitcoin XT is open source code that made some modifications to the blockchain code base. The original premise of the blockchain is that a the transaction bandwidth for a block cannot exceed 1MB. While this isn’t an issue now, some fans of bitcoin forsee a day when bitcoin is used regularly, and the 1MB will not be able to support the full transactional volume. So in anticipation of this, Bitcoin XT was created with an increased bandwidth capacity of 8MB.
However, one of the benefits of bitcoin is the fact that the system is de-centralized. It is relatively easy to support the blockchain history on individual computers when the size is 1MB. But the larger the blockchain gets, the harder it is to store on an individual computer. Right now the whole blockchain can be contained on one computer, but if the size is increased to 8MB, it may have to be moved to a more powerful server. That one servicer would be controlled by an individual, and then the whole concept of decentralization disappears and it reverts to a system very much like the traditional system in place today.
The dialogue kept everyone’s attention, and the event concluded with some more networking before folks went home. From the conversation, it still seems like we have a long way to go before bitcoin and blockchain will be mainstream. But these pioneers are carving the way and working on what the next generation of payments could look like. I look forward to the next Bay Pay event where we are sure to gain another perspective on this emerging payment.