Bitcoin for charities

A few days ago we talked about Barclays’ confirmation that they were working with some of their charity clients to look at how Bitcoin* could help them collect and disburse funds. But we didn’t really go into how Bitcoin can help. If you’re familiar with Bitcoin, the advantages are obvious. But if you (like most people) are not, then talking about these advantages will give you a good idea of how Bitcoin can make payments and money transfers easier, faster and cheaper. Which, when it comes to the use of charity funds, we can all agree is a good thing.

by Neslihan Gunaydin for Unsplash
by Neslihan Gunaydin for Unsplash

Bitcoin is a digital currency that cannot be counterfeited or duplicated. It is not controlled by a bank or an organisation, so no one has control over how many there should be, nor what value it should have. No one can decide tomorrow that it doesn’t exist anymore, or that we’re suddenly going to issue lots more and dilute the market. While the original idea was thought up and initially programmed by a pseudonymous person or group called Satoshi Nakamoto, bitcoins are not created by anyone. They create themselves, according to a pre-programmed steady-release algorithm. A certain number of bitcoins are created as a reward every time a node (a powerful computer or group of computers) verifies a transaction, specifically that I have the bitcoin that I want to send to you, and that I haven’t already sent it to someone else. The process of verification is complicated, very mathematical and requires significant computing power, but is what gives Bitcoin its innovative qualities of being unhackable. Bitcoins have been “hacked” before, but only through incorrect application of the program, or through the theft of account keys.

The beauty of Bitcoin is that it can be sent anywhere in the world with almost no delay (10 minutes) and almost no cost (minimal transaction fees). It would be a huge advantage for most global charities to be able to receive funds from anywhere, and be sure that the funds are actually reaching you without the subtraction of hefty transfer fees, commissions, etc. If someone wants to donate $100, say, it would be nice to know that you’re getting $99 instead of $79. Those figures are approximate, of course: bitcoin transaction fees are not fixed, and at the moment are very low or even non-existent. The nodes that maintain the system get their reward for verification through additional bitcoin, but the amount awarded is programmed to decline over time to 0. Transaction fees will become more important, but they will remain much lower than with traditional methods (lower overheads, fewer people involved, and if they don’t, bitcoin users will switch to another system that is).

The low transaction fees broaden the potential pool of donors to those who can only spare a few dollars. Up until now, transfer fees would have made it uneconomic to donate small amounts. With Bitcoin, the collective weight of micro-donations could well equal or even surpass that of more substantial amounts.

Another huge advantage for charities, especially those working in parts of the world with unstable or corrupt governments, is that the funds go directly to you. They do not pass through any middleman. No-one can take an arbitrary cut. The charities have much more control over the donations. They will probably need to use an exchange to convert the bitcoin into the local currency, and these will take their commission, but the dent in the funds received is more transparent and more reasonable.

Personally, I think that one of the biggest impacts will come from ease of use. Sending bitcoin can be as easy as three taps on your smartphone. Or you can donate directly in the comments section of any webpage or via email using ChangeTip. Bitcoin is not limited by physical or political boundaries. It is true that it can be difficult to convert Bitcoin into local currency in certain places. But exchanges will become more efficient, and work-arounds will help overcome regulatory obstacles. The end result will be a more efficient funding for good causes. And if something is easier to do, more people tend to do it.

*You’ll notice how sometimes Bitcoin is written with a capital B and sometimes lower case. The convention is that when you’re talking about the system of Bitcoin, the protocol and the concept, you capitalize it, because it’s a name. But if you’re referring to the currency, as in “I’m sending you two bitcoin”, then it is lower case because it’s a thing. In another post we’ll go into the craziness of this naming system. Because, as you will see, even I get confused sometimes often.

Bitcoin and banks: a perplexing relationship

One of the most difficult aspects of setting up a Bitcoin-related company is finding a bank that will work with you. Simple things like collecting revenues and investment, and paying suppliers and employees, become insurmountable barriers. Because setting up a tech startup isn’t hard enough, right? And it’s not like the Bitcoin technology is easy or anything…

So it was with delight that I read earlier this week that Barclays would start accepting bitcoins into bank accounts. This was potentially huge, because actually accepting bitcoins is a huge leap forward compared to other banks, who won’t even accept dollars that have just been converted from bitcoins. I could almost hear the ripples of excitement going through the rapidly growing Bitcoin startup sector.

photo by Davide Ragusa for Unsplash
photo by Davide Ragusa for Unsplash

But the excitement was premature. CryptoCoinsNews and others announced soon after that Barclays has denied this. If this denial is true (and it most likely is), it is a huge blow to many who were expecting startup operations to get easier. And it is confusing to those of us following banks’ interest in Bitcoin, because Barclays is one of the leaders in the banking sector in Bitcoin investigation and experimentation.

How can an institution invest in a technology, yet at the same time turn away business because it feels that the technology is too risky?

The technology that Barclays is investing in is the blockchain behind Bitcoin. More and more banks, governments and exchanges are looking into how the blockchain can revolutionize payments, asset transfers, trade settlements, etc. Bitcoin works because transactions are grouped into transparent blocks that are then processed by a decentralized community of powerful computers. These blocks, once verified, get added on to an ever-increasing chain of previous blocks. The chain makes it impossible to alter previous blocks without altering every block that comes after, which would be prohibitively difficult. And the verification process makes it prohibitively difficult to duplicate coins or to spend coins more than once. I will talk about this more in future posts, but perhaps you can already see why banks are interested in the blockchain potential for faster asset transfer and settlement.

Investment aside, the business that Barclays (and other banks) are turning away is that of a volatile currency. Bitcoin went from $13 to almost $1,000 over the course of 2013, and is now trading at around $230. That’s volatile. Businesses that earn bitcoins are therefore categorized as “high risk”. Combine that with the public perception that Bitcoin is mainly used for criminal activity, and with banks fearful of public criticism and regulatory investigation, and the institutional reluctance to hold accounts for Bitcoin companies starts to become a bit more understandable. Banks are not known for their risk-taking intrepidity.

Yet, nor do they want to be innovated out of existence. Banks in general seem to be aware that blockchain technology has potential, and they have no doubt been following the headlines of valiant startups intent on shaking up the staid financial industry. So, cautious investment in the equivalent of “Research & Development” keeps them involved and gives them a reputation for being forward-thinking, without leaving their core business vulnerable to public or regulatory criticism.

So why the precipitate announcement? The press’ eagerness to announce good news for the sector probably led to the hasty interpretation of “we are looking into” as “we will” (my daughter does this all the time). Barclays has clarified that it is investigating a Proof of Concept (which means “let’s test it”) together with some of its charity clients, to see how Bitcoin could help them with fund raising and disbursement. It’s easy to interpret from that they will soon start allowing select clients to accept bitcoins for altruistic causes if, indeed, it does turn out to be an efficient transfer mechanism. But, Barclays has not committed either way.

Barclays has the advantage of being a UK-based bank. The UK government has repeatedly expressed an interest in Bitcoin, going as far to set up a £10m research initiative. So, if it’s regulatory approval that Barclays is waiting for, it probably won’t have to wait for much longer.

In the denial, Barclays stressed that “no Bitcoin is travelling through Barclay’s systems”. That emphasis is revealing, and underlines the understandable reluctance on the part of any publicly-traded bank to let the market think that it was holding such a volatile asset, either on behalf of clients or for its own book.

The reluctance is still perplexing. Most banks now have entire teams dedicated to Bitcoin research. In most cases they are looking into applications rather than the digital currency itself, but even so, they must be aware that Bitcoin is no more about criminal activity than cash is. Obviously, working with a Bitcoin-related business does not mean the bank account holds bitcoins – the bitcoin wallets can do that. These companies need currency accounts to accept payments with which to pay suppliers and employees, not to mention taxes. With KYC/AML (Know-Your-Client/Anti-Money-Laundering) regulations in force in most developed countries, the banks should feel relatively protected against illicit activity.

It will be interesting to see in what way Barclays lets its charity clients accept the digital currency. Will it act as a bitcoin wallet? Or merely a bitcoin exchange, transferring the bitcoins into pounds?

In June, Barclays announced that it has teamed up with Safello, a graduate from its fintech accelerator, to test blockchain applications for banking. Ironically, Safello, a Stockholm-based bitcoin exchange, had its account shut down by its UK bank (name withheld) earlier this year.

Perhaps Safello will play a role in Barclays’ careful Bitcoin acceptance, or perhaps the bank will end up incorporating other Bitcoin players into its stable. Either way, it looks like Barclays is in the lead when it comes to offering Bitcoin-related services to its clients.

Elsewhere, young Bitcoin startups are still struggling to get the basic level of service any business needs from its bank. Perhaps more startups will start to look at this as an opportunity. The lack of banking services for the Bitcoin community could lead to the development of a new subset of startups: the Bitcoin banks. Decentralized, hack-proof and unregulated. Appealing, or scary?