Only a week into life in my new state of California, I was looking to get immersed in the culture of innovation and entrepreneurship in San Francisco, and the BayPayForum event on Bitcoin, the Blockchain and the Future of the World seemed like a great introduction to life on the West Coast.
 
I just moved to the San Francisco Bay Area a hub of innovation, from Charlotte, North Carolina one of the top 3 hubs of financial services and also a growing payments hub.  Charlotte  is a beautiful, charming, affordable southern city experiencing a lot of growth. San Francisco is a lot larger city with a lot of charm, but has a very different feel from Charlotte. I experienced a bit of a culture shock moving from one coast to the other, but am determined to dive in and experience what the region has to offer.
 
Back to the event held on June 10th at the offices of Bryan Cave on Mission Street in San Francisco. There was a great turnout for the event with more than 80 people registered. The format was a panel discussion with Bay Pay Forum’s founder, Daniel Chatelain, serving as moderator, and representation from 4 San Francisco Bay Area companies representing different services in the Bitcoin/Blockchain value chain:
Bitnet: Payment processer that enables merchants to accept digital currencies including bitcoin using a service layer that insulates merchants from bitcoin price volatility, the need to manage the payment security or the encrypted bit coin keys. They function under the premise that traditional payments are using outdated (50’s & 60’s) technology to process payments, where blockchain enables us to use the internet as a payments network.
Xapo: They manage the security of bitcoins providing both software and hardware infrastructure solutions including storage sites that re highly secure. Jeremey showed us a picture of one of their vaults, located in Switzerland, that had military level security with biometrics, and is said to be able to withstand even a nuclear hit!
Gem: They provide a universal open-source wallet platform that supports any type of bit coin or blockchain app. Their focus is around access and authentication.  Any developer working on bitcoin or blockchain solutions has to make sure the money is secure and protected from hackers  “access and authentication” is key.  Developers can leverage Gem’s multi-signature solution that requires up to 3 encrypted keys for each transaction – making it almost impossible for fraudsters to hack the system. One key resides with the owner of the system, one key resides with Gem to “co-sign” transactions before the money would move, and a 3rd key would reside in a secure cold storage vault.
AirBitz: Provides consumers with the ability to secure digital assets themselves on their own device. Those at the event were able to download the wallet and receive some bitcoin currency to “play” with.
Before I dive into the topics covered, I want to give you a chance to look up some of our key terminology: Bitcoin, blockchain, hot storage, cold storage.
The dialog flowed very quickly, and I wasn’t able to capture all the speakers with the answers, so below are the key messages I captured.
 
What is the difference between bitcoin and blockchain?
Blockchain is the infrastructure that allows you to build distributed applications. It is a tool to prove that an event happened at a point in time. It is a powerful tool because this is the first time we’ve had a network that allows us to exchange value without having to “trust” our trading partners.
Bitcoin is the fuel that allows you to use the blockchain infrastructure. It allows people to send money anywhere in the world for free.
The two can never be entirely separated, although there are numerous experiments in process to come up with a bitcoinless blockchain.
In order to exchange money, banks have built up a networking of trust with customers and with other financial institutions. But trust is not only about ensuring the money is there and will be transmitted, it’s also about trusting the security systems that partnering banks have in place. Can they be trusted to be secure enough. If their partners are vulnerable, then they are vulnerable.
 
What lessons did we learn from the Mt. Gox $460MM bitcoin hack?
Mt Gox was a bit coin trading exchange that got shut down – a hacker had put in a trading bot that had been skimming off bitcoins for years, about 850,000 coins which were worth about $460MM. Regular reconciliation of the books would have caught this, but the exchange wasn’t using accepted business practices.  They just didn’t have the infrastructure support the popularity of bitcoin.
The first wave of bitcoin technologists weren’t very capable – the industry was driven by geeks with little knowledge of the financial world. A lot of those initial bitcoin companies lost a lot of money.
Bit coin funds are held in cold storage (vault) and hot (wallet) storage, with the wallets being the most vulnerable part of the bitcoin exchange process as it is known that people forget their passwords or don’t use very strong passwords and so are easily hacked. Wallets are where funds ready to spend are held by the consumer and typically have a smaller amount of funds that can be stolen.  Business storing funds for other people need to have more security in place and typically store funds in a vault.  Multi-signature management was devised as way to manage the funds securely without having to take possession of them.  The wallet in a multi-signature model has 3 keys, only 2 required at any time to spend money. One for the user, one for the co-signer, one for cold storage (as back-up) that way nobody is in total control of the funds, and hackers would have to break through 3 entities – a social hack for the users key, and then hacks on the system and cold storage.  This process is considered potentially more secure than existing banking systems.
 
Can the damage be repaired?  How do we bring it back as a valid currency?
There has been a general “professionalization” of the industry. There have been a lot more entrants with more relevant skills. Security has gotten better with more seasoned security personnel getting in the space, as well as people with financial services experience.  Xapo brought people in from Visa, Citi, and US Treasury for their board.
Banks are exploring the space. It’s a good sign when you see companies like Goldman Sachs investment of $50MM in bitcoin startup Circle Internet Financial Ltd., and BBVA invested in Coinbase, a bitcoin trading exchange.  The validity of the industry has grown. When bitcoin first came out, at conference events you’d see guys wearing bitcoin shirts and pink tutus, but now these events are filled with people in business suits.
Perception is influenced by the media, initial hype played up the bad events like Mt. Gox, this needs to be turned around to help build up popularity.
 
How hard is it to deal with governmental regulations?
The type of company you are will dictate whether a bank will work with you or not. It also will dictate whether you need a banking license or not. AirBitz is a custodial account, and as such starts running into regulatory and legal burdens – they are required to have a Money Transaction License (MTL) for every state they do business in, these can costs millions of dollars, and they need to give the government API access to show that they are complying with state regulations. Once this infrastructure has been invested in, it becomes a competitive advantage.  Exchange companies that only buy and sell, like the brokerage model don’t need to have an MTL.  There are two types of licenses – the MTL and the MSB (federal service license) – each license has different requirements, with various thresholds and reporting requirements.
Customers need to have payment exchanges with a way of getting their currency in and out of the system.  Different states have been trying to regulate bit coin. Texas has passed some very favorable bitcoin regulations. However, New York passed some regulations hoping to attract bitcoin business to their state, but it was done in such a way that it is actually generating the opposite effect where companies are actually having to block New York IP addresses from transactions.
 
What are some best practices?
The key to elevation of the industry is standardization, specialization, and elevation of awareness around security.  When bitcoin first started, everyone was building their solutions from the ground up. Everyone taking their own approach, and there were no standards.  Now there are a lot of layers to each solution, and a lot of specialists that have joined the industry and contributed their particular expertise.
The Bit Coin Consortium is in the process of developing open source standards on what is good security and what is not. There are many different security aspects to look at – it’s not linear, it’s more like a fan – you can expose one area of security by putting emphasis in a different place. Companies that do audits for PCI compliance are very interested in the BitCoin standards. As bitcoin matures as an industry, the first thing people ask about is the security. This should be taken as a given. However, today, many companies say they have “military grade encryption”, but that means different things to different people because they are not compared to the standards. What do these different security levels mean?  It would give customers a greater sense of confidence if these different security levels were defined, and that security/compliance “grades” could be given to products and solutions.
 
Who owns bitcoins today?
While there is much more awareness today around what bitcoins are, they still haven’t quite hit the mainstream. When the question was posed to the audience who here owns bitcoin, less than 10% of attendees raised their hands, and when asked who has purchased something with their bitcoins, even less of the attendees raised their hands.
Anonymity is one of the elements that make bitcoin so popular. There is some speculation that the designer still owns a good percentage of the active bitcoin. Even though every transaction is captured in the ledger, because bitcoins are anonymous, it is difficult to track down each IP and figure out who has all the bitcoins. Coinalytics has recently released Jarvis Beta, a tool that allows customers to visually explore the Bitcoin blockchain and unveil hidden relationships. This tool may help us understand who owns bitcoins.
There are 193 counties around the world where bitcoin could be a valid currency.  In Africa they skipped over phone technology to mobile technology. A similar thing happened with MPesa – it’s a virtual currency consisting of mobile minutes. In Africa most people don’t have bank accounts and they are used to trading in virtual currency.
The best use cases for bitcoins today are those scenarios where ex-pat consumers are sending remittances back to family members in their home countries.  Messaging apps are taking the place of traditional financial services like Western Union – like WeChat.
 
How do you get people to adopt bitcoin as a currency? – the chicken and the egg syndrome
Merchants can derive benefit from bitcoin – it’s digital cash, there are no chargebacks, and no PCI compliance.
However they are resource constrained, and they have to deal with many different types of wallets – Apple Pay, Google Wallet, different bank wallets, etc. They have limited resources, and they are going to allocate those resources to the channels their customers are using.  They know it’s just a matter of time before they have to start accepting bitcoins. It’s not a matter of if, it’s a matter of when.  They have seen a growth of merchant adoption, and the size of the companies accepting bitcoin has gotten larger.   A Japanese company, Rakuten, is the 5th biggest eCommerce company in the world with $30B in gross sales, started accepting bit coin in March.
One of the challenges for merchants is on getting their staff to use it. They need to keep it simple for the staff, they have to train them on it, and if it isn’t used multiple times in a day, it isn’t going to be well adopted. The capabilities need to be seamlessly integrated into the POS systems like the wallets. You don’t want merchants having to manage bitcoins separately.  Ecommerce will start driving use of bitcoins, and then brick and mortar stores will follow.  Note that ApplePay can only work with an Apple device, where a bitcoin can be used with any device.
From a consumer perspective, the challenge with bitcoin is that they are used to a pull system. When a customer writes a check or pays with a credit card, the merchant pulls the customers information.  With bitcoins it’s a push system where the customer has to send the information.
There are a number of merchants giving special incentives to customers to pay with bitcoins (Starbucks, Amazon, etc).  Also there are countries already using bitcoins like in Manilla, they have 500 ATMs that deal with bitcoins.
Some solutions use bitcoins in a way that are transparent to the customer, like Abra (an Uberlike app with ratings and starts) that allows consumers to send money anywhere in the world with the app, and they don’t even know that bitcoins are being used for the process.  Programmers need to know how bitcoin works, but consumers don’t need to know how it works, they just need to know how to use the tools.
 
Where are there business opportunities?
Decentralizing currency.
Digital security, especially on a personal level. People aren’t used to backing up and protecting their data, but with bitcoin, they need to have secure data.  Finding ways to protect consumers without passwords.  People have to remember a lot of passwords now, and that makes them more vulnerable, because it’s a challenge to create and remember numerous passwords.
If you can solve the problem of handling private keys, then more things can be represented in digital form.
Exploring different product solutions that can leverage bitcoin and blockchain – smart contracting maybe a mortgage can be done entirely on the blockchain and eliminate the need for lawyers. With smart contracts, you can build autonomous legal entities that can transact. Businesses that can run themselves – real estate titles, government services, voting.
 
My Conclusion
Based on the great dialog before, during, and after this informative event on bitcoin and blockchain, I think some of the key nuggest I had were:
·        Blockchain is a really great tool/ledger for record keeping, and this can be really helpful for preventing fraud
·        If coins/information resides on a consumer device it is vulnerable/susceptible to attack, and you need to minimize the exposure
·        Adding a 3rd party validation to transaction processing can make transaction processing more secure
·        Microtransactions can be quickly processed through bitcoin technology, but must be managed off-books and then reintroduced to the ledger
·        Bitcoin/Blockchain can be particularly beneficial for international remittances, because it can provide transparency for the  to end transmission of funds, the process is quicker and less costly

The payment space is evolving ways we never could have envisioned even 10 years ago. I look forward to seeing how these technology advancements and creative minds will transform the way we use money.