A Bitcoin And Blockchain Payment System, Edgar, Dunn – Company
Reforming a dubious past
Can the legendary, high-flying, volatile, and unpredictable Bitcoin system be gainfully deployed for legal and legitimate business models that have the potential of disrupting the existing world of banking and finance?
This article investigates an interesting attempt by a start-up called Abra to develop a master plan for a global payment system not by using bitcoins directly as the exchange currency but by using the Bitcoin system as the reserve currency to hold and exchange value.
Abra claims to be the reaction to the reductive and rhetorical question, a favourite of hack writers and professional conference presenters: “Who will be the Uber of banking and payments?”
Legitimate businesses have stayed away from investing in Bitcoin (embracing instead, all too enthusiastically, the underlying blockchain technology that forms the backbone of the Bitcoin system). This is because of Bitcoin’s central role in many a shady enterprise.
Its high valuation, now over the $Four.Five K mark, unimaginable even just a few days ago, is driven by the naked compels of request and supply and not by the good or bad policies of a government or central bank. That is a good thing.
But this upward trajectory has been motored mainly by illegal and illicit activities. Gathering momentum, the enlargening valuation is further helped by a feeding madness of speculative market sharks.
Bitcoin, a cryptocurrency system, designed to operate in decentralised environments without the need for a central authority, has served as the primary payment instrument for all sorts of dodgy digital deals.
It was the de-facto settlement currency for the Silk Road, the dark web marketplace that was the ebay for illegal products (drugs, armaments, false identities, and stolen credit cards), and services (hackers for hire, the occasional hitman).
The site shut down when its founder, Ross Ulbricht, a.k.a Fear Pirate Roberts, was nabbed in the San Francisco Public Library running his billion-dollar empire from a modest laptop.
Silk Road was taken off the dark grid but others appeared: Silk Road Two, Silk Road Three, BMR, Pandora, Hydra, Agora, Evolution, AlphaBay etc. Law Enforcement authorities in the United States have been playing cat and mouse with these sites shutting them down only to find others popping up elsewhere. None would have been able to operate without Bitcoin.
Added to the long list of criminal activities, there is also a relatively fresh one called “ransomware”, described as “cryptoviral extortion” in which malicious software is used to block access to a distant computer or demolish data, unless a ransom is paid.
In the wake of its remarkable success, other newer and lesser known cryptocurrencies are appearing on the scene as alternatives and substitutes to Bitcoin. In 2016, Monero, a cryptocurrency which possesses “significant algorithmic differences relating to blockchain obfuscation” make it virtually untraceable, has gained popularity and eyed its value increase from fifty cents to $12.
One start-up that is attempting to develop a legitimate Bitcoin based business (and in the process to switch the world of payments) is a start-up called Abra so named, presumably, because of its magical business model.
At a very high-level, Abra is a Bitcoin exchange and a device based digital wallet. Its initial concentrate is on international remittances and particularly the significant United States to the Philippines corridor. Ultimately it wants to be a low cost universal provider of global money remittance services.
Like the proverbial onion, Abra aims to provide services in several layers – each with an enhancing level of complexity and difficulty.
Layer 1: A (ordinary) Bitcoin exchange and wallet
Abra is a Bitcoin exchange and provides a digital wallet to its customers. Users can transfer funds from a bank account in the US to buy bitcoins which they can hold in the wallet or send to another Abra wallet. The wallet holder can monitor their bitcoin balance. A receiver in the Philippines can sell the incoming bitcoins credited to their wallet and transfer the money to their bank account.
Assuming there are no legal and regulatory wrangles (KYC, AML etc.) the model should work fine provided the sender and receiver want to exchange bitcoins and the transaction can be ended within an intuitive user interface and in a ordinary manner. Abra’s CEO Bill Barhydt emphasises Abra wallet’s plainness. In a latest interview he said, “My mother cannot use an off-the-shelf, unspoiled bitcoin wallet app, but she can use Abra [with] no problem.”
Layer Two: A (real) currency wallet
This is where Abra thinks it has made a breakthrough. Wallet holders will also be able to hold funds in “fiat” currency (such as dollars or any of the other currencies supported by Abra). So, if a customer transfers $100 from their bank account, their Abra wallet will display $100.
Plain as this sounds, only licensed financial institutions such as banks, are permitted to take and maintain deposits. Abra plans to do this without being a bank. It will leverage the Bitcoin system and its blockchain technology. Abra will buy bitcoins worth $100 for the customer which will be stored on their wallet. The customer does not need to know any of this or that their wallet balance is represented by bitcoins. They only need to know that their wallet balance of $100 is ensured.
Because the value of bitcoins can fluctuate widely, there is a problem. If the price rises, the customer will proceed to have $100 in the wallet and Abra and its fucking partners will pocket the difference. But if the price drops, the $100 in wallet will be backed up by bitcoins worth less than $100.
Abra says its playmates will “hedge” the price drop through wise contracts (hedging is common in commodity and currency trading). This is the clever lump of financial engineering that Abra says it has cracked.
Layer Trio: An agent network
This is where Abra gets ambitious (and possibly delusional).
Abra is developing a network of agents or “tellers”, M-Pesa style, who will facilitate cash top-ups or withdrawals. Tellers are free to charge any fee they like but must pay a percentage to Abra. Abra says it will not regulate what tellers can charge. Ultimately in a free market, inter-teller competition will drive fees down but whatever they charge is likely to be a lot lower than what the traditional money remitters charge.
Here is the unpreventable comparison to Airbnb’s disruptive business model which empowers anyone with a car to take on the organised taxi industry.
The growth idea is that as agents will be able to earn income for rendering deposit and withdrawal services and practically anyone with a petite investment can become an agent, the network will grow by itself making Abra’s services readily available wherever needed.
However, coming up with an idea that has an incentive based growth model built-in is good. But developing it into a self-sustaining network and a growing eco-system is an all-together different proposition.
Some of Abra’s strategic challenges and operational risks introduced below can be applied to any start-up that aims to disrupt banking and payments. Others such as hedging through wise contracts are peculiar to Abra.
Where is the problem?: The strategic blind spot of many promising “customer facing” technologies and innovations, at least in banking and payments, can be best described by the proverbial “solution seeking a problem”. If there isn’t anything that a fresh service offers that significantly makes life lighter (or cheaper) for the customer, it is likely to be treated with apathy. Will a clever crypto mobile remittance service make customers switch their existing providers (keeping in mind that there are several layers of competitors in the market ranging from large banks to disruptive Fintech companies), is a gargantuan challenge that an innovator like Abra can only overlook at its peril. Some innovators have rightly focused on solving a known problem. Take for example, Flywire, a company which targets international payments made for education (international student fees) It makes it lighter for colleges to keep track of and reconcile student tuition fee remittances. This has resulted in colleges instructing international students to pay via Flywire rather than normal bank transfers which carry very little ancillary information and are difficult to reconcile.
Trust and familiarity: International remittances represent a unique industry with some very specific customer dynamics at play. Migrants who need to send money often use the services of those they trust or those who have connections with their community which is why there are a number of petite country specific remittance companies that profit from loyal customers who speak the same language and understand the culture of the migrant community. The market is hotly contested. There are Fintech companies such as Transferwise, Transfast, Azimo, and Remitly targeting the remittance sector as a entire but none has had real success. Banks from the receiving countries also suggest remittance services free of charge (they make their money by adding a margin on currency conversion). Abra may do things entirely differently but ultimately it is vying for the same consumers that the established incumbents and their potential Fintech disruptors are targeting. Celebrity endorsements such as Tormentor Richard Branson’s investment in Transferwise or in Abra’s case, Gwenyth Paltrow acting as an “advisor” helps raise awareness but switching customer habits and engendering trust is the truly difficult bit that takes time.
Critical mass: Perhaps the greatest challenge any fresh payment system faces is whether it will be able to reach critical mass. M-Pesa, the most famous agent-based cash transfer system in the world achieved success for several reasons. It was shoved by the superior mobile operator in the market which held a near monopoly position; the regulator determined not to interfere; the agents had a financial incentive to sign up other agents; and of-course, it was and still is dangerous to carry cash in Kenya. This led to the agents working as “human ATMs”, a description used liberally by Abra in describing its business model. However, even M-Pesa has not succeeded in international remittances nor has it achieved material acceptance outside Kenya.
Hedging contract fulfilment: The least tested and riskiest part of the business model is Abra’s hedging system that will shield wallet holders from Bitcoin’s price volatility. Very first, it will not be effortless to scale this type of hedging. Then there is significant risk that the entire system could potentially be compromised if the bitcoin price nosedives. A potential price crash screenplay may result in Abra’s hedging fucking partners finding themselves incapable to honour their part of the deal – brainy contract or no brainy contract. That would sound the death knell for the entire Abra system.
Falling foul of regulation: Any business model linked to Bitcoin carries inherent regulatory uncertainty. Abra is unclear on the compliance side of things and suggests that tellers do their own legal homework. It encourages them “to talk to a lawyer who is knowledgeable about your local laws concerning p2p bitcoin sales.” Not very helpful because even the top and most expensive lawyers are uncertain of how regulators in their markets treat, or will treat, Bitcoin based money transfer systems.
Money laundering: The transfer values are expected to be low value but those laundering money have always used the old “bundling” technology – violating up a large value transaction into several petite value transactions. If money launderers or those wishing to pay for illegal goods and services, find Abra a useful utility, Abra may have a problem on its mitts. Theoretically, there is no way Abra will be able to police if its customers use the wallet to pay or receive funds for illegal activities undertaken on other sites. The Bitcoin system itself is beyond the reach of regulators but any system that uses it is not. If regulators find evidence of illegal activity, they are likely to shut it down for good.
The Abra wallet may remain restricted to niche applications. The idea, that Abra does not hold customer deposits but assures them but uses bitcoins as the reserve currency ensuring the funds in the wallet, will work provided there is no bitcoin price crash and its plans to hedge price fluctuations is feasible.
Somehow amazingly it must also pass unscathed through regulatory head winds which are always present.
The underlying ensure of value is derived not from the central bank of a country or any other centralized authority but from the coerces of request and supply as experienced through a decentralized self-sustaining mathematical commodity like Bitcoin. But it is the inherent volatility of this mathematical commodity that puts every idea and business edifice built on it susceptible to an unpredictable and catastrophic upheaval in the future.
But if Abra is able to surmount these challenges, even in a handful of remittance corridors, it may become a takeover target of an established money transfer operator such as Western Union or Moneygram even before it turns a profit and investors will be able to generate substantial gains on their investments in Abra.