Satoshi, I have the hugest respect for your genius and insight. To come up with such a complex yet fundamentally simple solution that is both utopian and practical must have taken years of deep thought and flashes of brilliance. Plus, you write very well. But, seriously… why “bitcoin”? There are no coins involved. And while us geeks understand the “bit”, to the rest of the world it implies “small”. As in “a little bit”, or “a bit of luck”.
It’s catchy, though, and does roll off the tongue in a clumsily elegant mix of consonants that is not hard to pronounce. That is useful. My main complaint concerns the fundamental question that those of us who write about bitcoin have been grappling with and arguing about: to capitalize, or not to capitalize? Is it bitcoin, or Bitcoin?
So far I have been careful to use Bitcoin when talking about the system or the concept. Bitcoin as a name for an idea. Bitcoin as a title. But I switch to lower case when talking about the currency, the piece of code, the “thing”. Bitcoin the system, vs. a bitcoin, the unit.
And it’s very confusing. Some writers I follow seem to have similar struggles, and others don’t even bother. I remember that we all went through similar confusion when we started writing about the internet. Or was it the Internet? Is the internet a thing, or a concept?
Like bitcoin, it turned out to be both. Now you hardly ever see the capitalized version, which means that we have paid it the highest compliment of incorporating it into daily vocabulary without the elitism of the capital letter. You know that something is mainstream when it drops its capital letter.
So I have decided to pay the same compliment to bitcoin. I’m perhaps ahead of the reasonable timeline here, but I’m dropping the capital B. From now on, I will write bitcoin the concept and bitcoin the thing the same way. I hope that everyone will not only understand, but also join me in doing the same. Maybe, just maybe, this can be our little tiny contribution to bringing forward the day that bitcoin is part of the daily conversation, worthy of its lowercase status. When that day comes, I imagine that we’ll all laugh at how formal we once were.
And as for the name, I totally understand. Like Terry Pratchett once said in an interview as his books started flying off the shelves: “If I knew I was going to attract this much attention, I’d have written better books.” I imagine that if you knew bitcoin was going to get this big, you would have spent more time on the name.
The bitcoin graveyard is littered with ideas that were going to revolutionize the field of remittances, spread income more evenly and lift developing economies. Structural barriers, higher-than-expected costs and limited markets are the usual culprits. But even when those obstacles have been overcome, success is no sure thing. On Monday, the best-funded business in the sector was dealt a blow by a fellow fintech, in a move that shows that even innovators can become establishment, and that unclear regulation is perhaps the biggest hurdle of all.
Remittances – money sent home by relatives working abroad – are the economic lifeblood of not only hundreds of thousands of families but also of entire countries. By not requiring a bank account, remittances are crucial for wealth distribution and financial inclusion – the sent money can be received at participating agents, which could be stores, supermarkets, pawn shops or mobile money handlers. One of the largest and fastest-growing markets is sub-Saharan Africa, which received $33 billion in 2014. In some countries, remittances account for 20% of GDP. Yet these inflows comes with a high price: the fees and commissions. The global average cost of sending money is about 8%. In sub-Saharan Africa it rises to 12%, reaching as much as 20% in some countries. In 2011, Bill Gates urged G20 leaders to commit to bringing the costs down to a more reasonable 5%, which would generate global savings of $15bn. Yes, billion. More money in the hands of low-income, unbanked families in developing countries would be a significant step towards reducing poverty.
BitPesa was founded in November 2013 to improve the UK-Kenya remittance corridor using bitcoin transfers. It soon moved into other originating markets, and now handles remittances from just about anywhere to Kenya, Tanzania, Nigeria and Uganda. Users deposit bitcoins which are converted into the destination local currency and sent via the blockchain, for a 3% fee. BitPesa doesn’t handle the cash-out side of the equation, but instead deposits the funds in a mobile money wallet, which the receiver can then cash out in his or her usual way.
Yet businesses almost never develop as originally planned. The startup soon found that their service was being used by an increasing number of businesses to pay suppliers and employees, rather than for personal transfers. Their website shows a partial pivot away from remittances, towards a business payment platform. It has also diversified into trading, and offers one of the largest bitcoin exchanges on the continent.
In February of this year, BitPesa secured a $1.1m funding round led by Pantera Capital, one of the prime VC investors in the bitcoin space. Yet, as is usually the case, securing the round does not mean that their troubles are over. In November, M-Pesa stopped payment gateway company Lipisha from processing M-Pesa transactions, freezing Lipisha funds held in M-Pesa accounts. They offered to reinstate the service if Lipisha stopped working with BitPesa, claiming that BitPesa does not have the necessary license and does not comply with anti-money laundering (AML) regulations. According to BitPesa, they do comply with all AML and know-your-client (KYC) regulations, and that the Central Bank of Kenya has told them that a license is inapplicable to its business. Both Lipisha and BitPesa have taken M-Pesa to court. A preliminary ruling on Monday declared that more time is needed to make a definitive ruling. Meanwhile, BitPesa’s access to M-Pesa’s clients remains cut off.
Losing the Kenyan remittance market would be a blow, but not necessarily game over. M-Pesa is not the only platform that BitPesa can use: its gateway Lipisha also works with Airtel Money, Visa and Mastercard. BitPesa has managed to diversify its markets over the past few months, recently moving into Tanzanía, Uganda and Nigeria, the continent’s largest remittance market ($21bn in 2014, vs Kenya’s $1.5bn), and 5th largest in the world. It has also managed to develop a liquid bitcoin exchange in Kenya, Nigeria and Uganda, and will no doubt keep on innovating in payment mechanisms and services.
M-Pesa’s blocking manoeuvre can be seen as the recognition of the potential threat that innovative platforms pose, at a time when M-Pesa’s high fees and restrictive business practices are being increasingly called into question. Which is ironic, since M-Pesa is itself a classic example of successful financial innovation. What’s more, a large part of its success is due to relatively relaxed regulation, the same concept that it is now arguing against. It is surprising to see it attempt to block a new player such as BitPesa instead of working with them – unless their plan is to move into bitcoin remittances as well. Perhaps their intention is to provoke explicit bitcoin regulation, which in the long run will help the sector. Yet there are less destructive ways to do it. In the end, BitPesa will hopefully come out stronger, more diversified, and having benefitted from the public support of the underdog. As the saying goes: “When they start shooting at you, you know you’re doing something right.”
“Bitcoin will not be a significant player in the remittance industry.”
At the Money 20/20 conference last month, the Executive VP of Business Development at MoneyGram dismissed bitcoin as a possible remittance solution, alleging that “you can send money to a phone, but these people need cash”. It is somewhat perplexing that someone so involved in moving money has not realized that mobile money can be converted to cash relatively easily, using any existing extensive network of mobile money agents. And that it is precisely the spread of convenient mobile money services that is relaxing the dependence on cash, as more merchants and suppliers are happy to accept the digital equivalent. It is even more perplexing that MoneyGram does not seem to have realized that the move towards mobile is one of the main factors behind the fall in MoneyGram’s market value to almost half its value of three years ago, and the net loss of $72 million in the first quarter of this year. Someone should give them a Kodak camera.
Market statistics aside, though, the Executive VP may have a point, at least in the short-term. Bitcoin has been hailed as the revolution of cross-border payments, whose cost savings will lift entire regions out of poverty. Unfortunately, it doesn’t work like that. For now.
Remittances – money sent home by foreign workers – is a complicated issue. Too many middlemen eat away at the sometimes already meagre amounts sent. Currency controls delay delivery. But most difficult is the “last mile”, the physical problems of actually receiving the money. In the most common remittance destinations (India, China and the Phillipines), a significant portion of adults do not have a bank account, so they depend on exchange offices. In rural areas, exchange offices are not plentiful, competition is scarce, the fees are high and the security is low.
Enter bitcoin. Finally, money can be sent to anywhere in the world, to anyone with a computer or a mobile phone, almost instantaneously and with almost no fees. All the sender needs to do is to convert some of his or her wages into bitcoins, and with a couple of swipes and taps send it to another bitcoin address, which could be anywhere. Within a few minutes, the receiver has the bitcoins in his or her wallet. And here we come up against the problem.
Well, actually, two problems. The first is that to set up a wallet, you usually have to confirm your identity to comply with the local anti-money laundering laws, and to do this you need to upload a photograph of yourself next to your ID. Easy if you have access to a computer or a smartphone. Not everyone does.
The other, bigger, problem is that most money exchangers in typical remittance destinations do not accept bitcoin. It isn’t hard to switch your bitcoins into a more “acceptable” currency on an exchange, but relatively few exchanges operate beyond the trinity of dollars, euros and yuan. Even if the local money exchanger does accept a non-local fiat currency, there may be barriers to accepting it from an entity they are not familiar with.
Liquidity could be an issue. For an exchange to work efficiently, both sides of the trade need to be fairly liquid. There needs to be enough holders of Ghanaian cedis who want bitcoins, for example, and enough bitcoin holders who want Ghanaian cedis for the trade to go through at the recent market price. Trading bitcoins in and out of the major currencies is not a problem. Beyond that, bitcoin is just not that liquid.
But let’s say that everything has gone smoothly and the receiver has the bitcoin-converted-into-fiat mobile money in his or her digital wallet. What then? Finding an agent to convert that into cash is usually possible although with varying degrees of convenience. In Kenya, for example, M-Pesa agents are ubiquitous, as even rural areas depend on the mobile money system. Other countries don’t have that kind of opportunity or infrastructure. And the scarcity of agents allows them to charge whatever fees they wish. Often the most convenient option is to use the expensive MoneyGram or Western Union facility. Western Union and Money Gram have a combined 50% or more of the remittance market of almost 80% of sub-Saharan countries, and in some, their market share goes up to 90%.
And bitcoin-based remittances have significant competition from other innovators. Payment startups have brought remittance costs down for those willing to seek them out, to a level that in many cases competes with the bitcoin solution. In Kenya, for example, bitcoin remittance startup BitPesa charges a 3% transaction fee. Equity Direct, a payment platform that does not run on the blockchain, operated by Kenya’s Equity Bank and money changer VFX, charges 3.4%.
In some cases, the structural barriers to converting your bitcoins into a local currency are prohibitive. Bitcoin is banned in several remittance-heavy countries, such as Bangladesh, Russia, Ecuador, Bolivia and Thailand.
In others, regulation is clamping down amidst increasing concern about terrorist financing and money laundering. Money transfer businesses have to tighten their account requirements, report any suspicious movement and install a more rigorous screening process, the costs of which will obviously be borne by the users. The off-ramping gets more complicated as well: to avoid red-tape and possible fines, some banks are refusing to handle remittances of any type.
The biggest barrier of all, though, is habit. Even with all the remittance innovation and the more efficient and economic choices that senders have at their disposal, only 2% of remittances are sent via mobile. In part this is due to poor interoperability of mobile providers, and the cumbersome identity proof regulations. Innovators have their work cut out for them to overcome these barriers, and to convince long-term users that the cost saving is worth the effort of overcoming the innate resistance to change.
The potential for bitcoin to make a big impact in the developing world is still there. In theory bitcoin is ideal for the “unbanked” in that it gives users control over their financial transactions with minimal cost. An estimated 80% of rural people receiving remittances do not have access to traditional banking services. In sub-Saharan Africa, more than 70% of adults do not have access to a bank account. In the developing world, the average is 46%. In five sub-Saharan African countries – Cote d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe – more adults have only a mobile money account than have an account at a financial institution.
In countries with political unrest and volatile currencies, bitcoin makes even more sense. While the value of local currencies depends on relative growth prospects, the financial health of the government and faith in ruling stability, the value of bitcoin is above all those things. The value of bitcoin fluctuates, true, but its worth is determined almost exclusively by market forces. No-one can unilaterally devalue bitcoin, no-one can ban it outright, no-one can dictate what it’s used for. Bitcoin is a self-determined alternative store of value, whose worth is protected by cryptography.
As with all innovation, the idea is “essential but not sufficient”. The secret to success is in the implementation. Bitcoin’s use is growing and spreading, and its benefits are still being explored. The potential it holds to put economic power in the hands of the hitherto disenfranchised is real, and exciting. But making that happen is something else altogether. The shift required in regulation, infrastructure and habit is profound, but it is starting. And as bitcoin use spreads, the change will gather speed and the economic benefits will become apparent. That should be enough motivation for the current startups to keep on trying, and for others to fill the service and technology gaps that impede the progress. Bitcoin may not be ideal for remittances now. But in one form or another, it will be.
The most interesting thing going on in the Bitcoin world this week hasn’t been the alleged unmasking of Satoshi Nakamoto (and I stress “alleged” because, no, I don’t think so). It’s the gathering of the Bitcoin influencers at the Scaling Bitcoin conference in Hong Kong. As the second part to the Scaling Bitcoin conference in Montreal earlier this year, the objective was to get miners and developers together to discuss a possible solution to the block size debate.
Up until now, everyone has been assuming that the choice is between leave things as they are, or launch a hard fork that will increase the block size and give Bitcoin more scalability. There are pros and cons for each version, and firm, uncompromising beliefs on both sides. Yet some interesting ideas have emerged.
To appreciate what’s at stake here, it is important to understand what a “hard fork” is. A hard fork is a change to the current Bitcoin Core protocol that renders older versions invalid. The Bitcoin Core protocol defines how Bitcoin works. It is the core program that nodes use to validate blocks, and dictates such parameters as the block size, the difficulty of the cryptographic puzzle that needs to be solved, limits to additional information that can be added, etc. A change to any of these rules that would cause blocks to be accepted by the new protocol but rejected by older versions, would lead to serious problems on the blockchain.
Let’s say that the protocol is changed in a relatively fundamental way that relaxes the rules or broadens the code’s scope. If this happens, mining nodes running new versions would produce validated blocks that will not be accepted by nodes running an older version. For instance, if the block size limit is increased from 1MB to 4MB, a 2MB block will be accepted by nodes running the new version, but rejected by nodes running the older version. Let’s say that this 2MB block is validated by an updated node, and added on to the blockchain. But what if the next block is validated by a node running an older version of the protocol? It will try to add its block to the blockchain, but it will detect that the latest block is not valid. So, it will ignore that block and attach its new validation to the previous one. Suddenly you have two blockchains, one with both older and newer version blocks, and another with only older version blocks. Which chain grows faster will depend on which nodes get the next blocks validated, and there could end up being additional splits. It is feasible that the two (or more) chains could grow in parallel indefinitely.
This is a hard fork, and it’s messy. It’s also risky, as it’s possible that bitcoins spent in a new block could then be spent again on an old block (since merchants, wallets and users running the previous code would not detect the spending on the new code, which they deem invalid). The only solution is for one branch to be abandoned in favour of the other, which involves some miners losing out (the transactions themselves would not be lost, they’d just be re-allocated). Or, all nodes switch to the newer version at the same time, which unfortunately is almost impossible to achieve in a decentralized, widely spread system. Or, Bitcoin splits, which would damage its usefulness and scalability. With a hard fork, since new version blocks are only accepted by upgraded nodes, it is essential that all nodes upgrade as soon as possible. This is very hard to achieve.
In March 2013, an accidental hard fork – brought on by an update which led to a database glitch – split the blockchain. The chain mined by updated nodes was longer than the chain containing only older nodes, so it would have been more efficient for the shorter chain transactions to pass to the longer chain. But that would have required a massive forced upgrade, which would have been logistically complicated, so the community decided to abandon the update and go back to the previous version.
If, however, the protocol is changed in a way that tightens the rules, that implements a cosmetic change or that adds a function that does not affect the structure in any way, then new version blocks will be accepted by old version nodes. Not the other way around, though: the newer, “tighter” version would reject old version blocks. Old-version miners would realize that their blocks were being pushed off (“orphaned”), and would upgrade. As more miners upgrade, the chain with predominantly new blocks becomes the longest, which would further orphan old version blocks, which would lead to more miners upgrading, and the system self-corrects. Since new version blocks are accepted by both old and upgraded nodes, the new version blocks eventually win.
For instance, say the community decided to reduce the block size to 0.5MB from the current limit of 1MB. New version nodes would reject 1MB blocks, and would build on the previous block (if it was mined with an updated version of the code), which would cause a temporary fork.
This is a soft fork, and it’s already happened several times. Initially, Bitcoin didn’t have a block size limit. Introducing the limit of 1MB was done through a soft fork, since the new rule was “stricter” than the old one. The pay-to-script-hash function, which enhances the code without changing the structure (more on this later), was successfully added through a soft fork. This type of amendment requires only the majority of miners to upgrade, which makes it more feasible and less disruptive.
Soft forks do not carry the double-spend risk that plagues hard forks, since merchants and users running old nodes will read both new and old version blocks.
One interesting development to come out of the Hong Kong talks is Pieter Wiulle’s “segregated witness” proposal, which would enable Bitcoin to increase the number of possible transactions in a block without a hard fork (more details later). This has the Bitcoin community quite excited, as it would enable a greater level of growth, while avoiding the risks and the controversy. The drama is far from over, though. And the next time you find yourself setting the dinner table, think about using spoons instead.
Smart contracts enable us to use the blockchain to lock in instructions contingent on something happening. If a certain price is reached, sell. If the package arrives, pay. If someone uploads a document that contains a specific sequence of words, send that person an image. I’ve written about smart contracts before, so I won’t go into much more detail at this stage. Today I want to talk about smart property.
Smart property is an extension of smart contracts. An interesting extension that could change our relationship with objects, and push the Internet of Things into practical, interactive uses.
The idea that physical things have technology embedded in them is no longer new. We have all heard of smart lightbulbs, smart clothing and smart trashcans that gather data, transmit and occasionally talk amongst themselves. So far, most of the uses for the Internet of Things (in which objects have sensors and link to other objects) have been about collecting information and transmitting data. Smart bus stops gather statistics about public transport use in specific areas, and can keep users informed about times and routes. Smart mattresses can record sleep patterns and help to diagnose any problems. Smart cups record how much liquid you consume, and advise you how on you’re doing compared to the ideal.
Smart property contracts, however, embed decentralized blockchain technology into objects, and make the relationship more interactive. Instead of giving the objects a data-collecting life of their own, they increase our control over their use. Smart property contracts can dictate the extent of our ownership and control over networked objects. And they do so in a decentralized, efficient and automatic way.
Perhaps you have had the experience of renting a car with RFID (radio frequency identification) technology, which gives you access to a vehicle without even passing through the rental office. Efficient and very clever, it saves the user and the rental company time, and makes it easier to track the cars and their use.
The smart property concept is even more efficient, in that it unifies the rental contract and the access in one tiny piece of code. If this amount is paid, open the car door for the bearer of this sequence of characters.
It is also more revolutionary, in that it opens up the rental field to just about anybody. With the current RFID system, the business structure does not change. You still pay one of the established car rental businesses, and they decide if you get access to the car, and to which one. It’s still a centralized system in which they own the asset and they decide who gets to rent it. And it’s limited to the big players, since the investment needed to kit out fleets of cars with the necessary technology is substantial. Smart property opens up the field to individuals or small businesses. Investment in technology will be necessary, but will be limited to the lock automation and the readers. Since smart property contracts run on open-source blockchain technology, no expensive proprietary software should be needed.
The concept enables the blockchain to become a tool for managing property rights. As with cars, it could make apartment or house rental agreements more secure. Computer rentals. Bicycles. Power drills. The “sharing economy” could get a boost as the hassle of renting out items when we’re not using them is significantly reduced.
Established sectors could also benefit from the potential efficiencies. Hotels, for example: imagine not needing to pass through the check-in desk. Your public Bitcoin address becomes your room key, and payment is automatic. Access automatically expires when your departure date rolls around.
And smart property can extend the use of credit, by removing trust from the equation. Smart objects can be used as collateral. The lender can program the restriction of access to a car or a property if payments are missed. While that sounds harsh and slightly dystopian – consequences with no human intervention and no room for appeal – it would make it easier to get loans and concessions, with less risk for the loaner. Access to car loans, loans for residential or commercial rent, etc., gets opened up to a much wider potential base, with all the social and economic benefits that that implies. In theory, anyway. Obviously, legal challenges would need to be ironed out, but the business potential is sound.
Even more potentially interesting is the impact that smart property can have on business structures. By “democratising” use of property and programming conditional access, the concept could give rise to new types of group governance, decision making and rule enforcement. New types of ownership structure could develop as a result, which would lead to new types of markets. The impact of Bitcoin and the blockchain could well be even deeper than most Bitcoin enthusiasts realise.