Unfortunately these bridges which make up the exchange market are concentrated and often broken.  This leads to concerns over reliability and security, which can cause market panic and extreme volatility. As Bitcoin enters the mainstream a wave of new businesses, services and software developers have recently dedicated their efforts to solving this problem. Their task will not be easy, and the while the exchange rate has seen some recent stability, there is a long way to go before obtaining bitcoins can be called user friendly and reliable.

This is an especially big problem for the expansion of Bitcoin. Attempting to purchase bitcoins is a frustratingly slow, nervous and difficult process for a consumer who is used to the convenience of internet shopping.  The usual reversible and/or disputable payment methods of credit cards, PayPal, etc. are rarely available in the purchase of non-reversible bitcoins. Generally consumers are required to use slow and expensive bank wires. This situation is an example of the difficult task facing exchanges as they attempt to integrate two very different systems.

Bitcoin was not designed for compatibility with traditional banking.  There is no Bitcoin protocol for ID verification. There are no accounts to freeze or confiscate.  As such exchanges have the unenviable task of attempting to shove Bitcoin transactions into the current banking regulatory mould.  While Bitcoin’s recent gains in popularity have brought about new entrants to the exchange market, it has also brought the scrutiny of regulators. Compliance with financial regulation, particularly in the states, is costly, time consuming and no small barrier to entry.

The Bitcoin exchange market is in the midst of a rapid evolution which will be critical for Bitcoin’s continued adoption. Here we will attempt to provide an overview of the current market and developments on the horizon. This is a tricky task as it is an attempt to take a snap shot of a rapidly moving target.

What are the current options in the Bitcoin exchange market?

While there are a number of different ways to obtain bitcoin, however, the large online exchanges are currently the dominant players in the exchange world.

Online Exchange Markets

By far the most popular option is a large online exchange such as the market leader Mt.Gox. Exchanges such as these operate entirely online. Customers must first open an account which now usually requires sending in copies of ID and waiting for verification in accordance with anti-money laundering polices. Once an account is set up a money wire or another form of irreversible payment is sent in to fund the account. After those steps, which are likely to take days if not weeks, bitcoins can be purchased. While this method requires some patience, the advantage is that it can be done entirely online.

At some exchanges there are faster funding options such as Dwolla or cash deposits, however, these options are often suspended or shut down due to banking and regulatory issues.

Over the Counter Alternatives

For those looking to avoid common delays from online exchanges, or perhaps looking for greater privacy, a common option is a local Bitcoin exchanger.  Services such as LocalBitcoins.com match local Bitcoin traders with those looking to buy or sell. Exchanges can be arranged entirely online using options such as bank wires and the site offers an escrow service. However, many transactions that originate via the site happen in person and with cash. Another OTC option is services such as Bitcoin-OTC.com which helps to match buyers and sellers via an IRC channel.

New Software Options

On the horizon are projects that aim to provide peer-to-peer exchange solutions. MetaLair is an open-source project designed to create a decentralized exchange network. The network created would allow for both crypto-currency to crypto-currency via an automated escrow service with plans for fiat to crypto capabilities. While still very much in development, a solution such as this technology would provide a quick, peer-to-peer exchange solution.

The Expanding Market

Earlier this year Bitcoin’s USD exchange rate hit all-time highs at near $260. This happened as Europe was experiencing a new round of financial trouble in Cyprus and Bitcoin hit the mainstream press.

What was once considered to be only the play thing of computer nerds or conspiracy theorists was now seen by the mainstream press as a possible opportunity. Perhaps still a very risky and out-there opportunity, but Bitcoin got quite of lot of attention.  And it sparked a rush to invest in the new currency and related businesses.

Many Bitcoin start-ups went from being small operations run by one programmer in his/her spare time, to potential big businesses being courted by major venture capitalists. This is especially true for the exchange market as many realize that Mt.Gox’s huge market share can be chipped away at, and the race to do so is on. As Bitcoin exchange support service Bex.io’s co-founder Yurii Rashkovskii put it, the current situation “is a land grab.”

The many new exchanges entering the market is exciting news for the Bitcoin economy which has suffered from extreme market concentration.  The oldest and by far the largest Bitcoin exchange is the Japan based Mt.Gox. While its market share is starting to slip, for years the exchange enjoyed an over 80% market share for USD/BTC exchange.

This extreme concentration has been an ironic problem for the brilliantly decentralized Bitcoin as it leaves one very large point of failure in the exchange market. The trouble this can cause was shown earlier this year during Bitcoin’s run up in price. Mt.Gox is such a dominant force in the market that it’s posted BTC/USD exchange rate is the defacto ‘Bitcoin price’.

In April, as Bitcoin’s price was soaring over $200, Mt.Gox was hit by a series of DDoS attacks that delayed and briefly blocked access to the site. Market speculators panicked and the price plummeted to near $60.

This exchange volatility makes accepting Bitcoin payments a risky business for merchants, often undermines the currencies legitimacy and holds back those considering investing in the Bitcoin world.

However, as the Bitcoin economy continues to expand, new entrants in the exchange market not only stand a chance of making quite a lot of money, but also will wind up solving some of the currencies biggest problems in the process; exchange market concentration and price volatility.

The Race is on

The new businesses entering the market are numerous and varied and any list or figure given here would likely be out-dated by the time it reached the reader. However, some idea of the activity in the area can be gained by looking at new investments in Bitcoin exchanges and exchange related businesses.

Many investors go about their business quietly and solid numbers are unavailable, however, there have been a number of well publicized investments in the Bitcoin exchange space in the past few months.

In April Coinsetter, a Bitcoin trading platform offering margin trading, raised $500k from a number of investors including the Bitcoin Opportunity Fund run by SecondMarket founder Barry Silbert.

Coinbase, a Bitcoin wallet service that can be used to purchase BTC, announced in May this year that they had raised $6 million from a number of big investors including Fred Wilson, Ribbit Capital, SV Angel, and Fundersclub.

Also in May BitInstant, a Bitcoin exchange funding service, raised $1.5 million in a seed funding round led by Winklevoss Capital.

There has also been a number of venture capital funds created for investing in startup Bitcoin businesses. These include Liberty City Venture’s Digital Currency Fund and BitAngels.

The race for market share is such that new businesses providing support to exchanges are springing up; specifically BTCGlobal and Bex.io.  These new businesses provide technical support for new exchanges. “We do the tech. You do the rest” reads the Bex.io website. Or as co-founder Yurii puts it they are “Mt.Gox in a box”.

“Looking at the eco system as a whole there is definitely a need for more access points into and out of the Bitcoin economy and it makes no sense for everyone to be reinventing the same wheel” explains Bex co-founder Jessie Heaslip. ”We are inventing one wheel that we are going to license out.”

The start-up has the goal of making opening an exchange a less capital intensive and technically challenging endeavour.  Bex will focus on developing “the most repeatable parts of this business” and then link together the exchanges using their platform in a “global liquidity pool.” This liquidity pool would allow small exchanges in various locations to operate reliably without a large amount of start-up capital. Instead they would be able to access liquidity from other Bex based exchanges.

Support businesses such as Bex could dramatically lower technical and capital barriers to entry for new exchanges. But Bex is not aiming to capture any of the very large US market share, that would be too resource intensive and risky.

Also looking to create an exchange network is the new Ripple system. Operated by OpenCoin Inc., which received a round of venture capital funding in April, Ripple is looking to create a network of small and large exchanges which are ‘Gateways’ to the Ripple network. With Gateways in many locations Ripple users will be able to exchange a wide variety of currencies. Leading Bitcoin exchange BitStamp is already setup as a Ripple Gateway.

What is the online exchange market doing?

For years Mt. Gox has been the undisputed market leader with a USD exchange market share of 80%+. Mt. Gox came to be in this position largely by getting in first and managing to be the last man standing as the Bitcoin economy grew and became the subject of many theft attempts.  Mt. Gox simply survived the growing pains that killed many others.

Since April, Mt. Gox has slowly been losing its market dominance.  And now sits at just below 50% of the USD exchange market.

*Via BitcoinCharts.com

 *Compiled from data obtained via BitcoinCharts.com. Shows total BTC volume including trades in USD and other currencies, using 7day averages.

Mt. Gox’s decline in market share, as can be seen from the above chart, is due largely to a loss in its own volume rather than being over taken by a competitor.

With all of the issues Mt. Gox has expirenced this year, law suites, bank account closures and issues with USD withdrawals,  it’s not terribly surprising that it has lost volume. But where has the volume gone? Perhaps there has been a reduction in speculator trading. Perhaps Bitcoin users are moving to exchange alternatives.

Unfortunately there are not easily available numbers on the use of exchange alternatives, but as all Bitcoin transactions are public, we can have a look at the Bitcoin transaction numbers in general.

*Chart taken from BlockChain.info 180 day USD major exchange volume using 7 day averages.

The above chart shows USD volume on the major exchanges. It is clear that USD exchange volume in general has been on the decline, particularly in the last month.

However, USD transaction volume on the Bitcoin network has seen a rise in the last few months. This shows that while exchanges have been losing some volume, the Bitcoin network has not.

*Chart taken from BlockChain.info 180 day USD transaction volume using 7 day averages.

It would be very interesting to look at a comparison of trade volume of various exchanges vs. total transactions on the Bitcoin, however, due to a number of technical factors this is quite difficult. However, BlockChain.info provides an estimate of Bitcoin transaction volume and produces a Trade vs. Transaction ratio chart.

The chart was created to examine speculation in the Bitcoin economy. It compares Bitcoin ‘Trade’ volume, volume of exchange between BTC and fiat, to Bitcoin ‘Transaction’ volume, number of transactions which likely represent transactions between users or for purchases of goods and services.  The charts tracks the ratio of transactions to trades; transactions/trades. A higher ratio means less speculation. 

*Via BitcoinCharts.com

The US Dollar remains the dominant national currency in the Bitcoin economy.

Regulation

While Bitcoin’s recent explosion in value and mainstream attention has brought many new entrants to the exchange business, it also brought about the attention of regulators and the scrutiny of banking partners.  Just as the Bitcoin economy is moving into the mainstream regulators and bankers are applying the brakes.

Serious regulation entered the Bitcoin economy earlier this year with US financial regulator, FinCEN, releasing a guidance paper on ‘virtual currencies’.  The guidance made it clear that any entity which buys and sells virtual currencies, such as an exchange, is considered to be a money transmitter.  This is a heavy burden to bear. Not only does it require strict adherence to anti-money laundering policies but also lengthy and costly licensing hurdles. To legally operate as a money transmitter in the States, a business needs to obtain money transmitter licenses from 48 different states. Estimates vary on the time and cost of this compliance but it is certainly a significant hurdle for a start-up business to clear.

One US based exchange start-up, Vaurum, has experienced interest from investors and has raised a seed round, but also faces an uphill battle with compliance. Avish Bhama, Vaurum founder, sees compliance as being a barrier to entry and one which has been very costly for his business. “Complying will cost us ~100k+ / year.  It is expensive and time consuming and is a big barrier to entry. … It’s hard to put a number on it, but lately more than half of my time has been spent on regulatory stuff.”

CampBX, an established US based exchange, also puts a significant amount of resources into staying compliant. “Bitcoin regulation is evolving at a fast clip, and we actively revise our compliance program every quarter to remain fully compliant.”

One could assume that friction with US regulators would simply move Bitcoin businesses off shore. However, this did not save Japanese based Mt. Gox from a run-in with US authorities. Shortly after the release of their guidance regulators seized the Dwolla account of Mt.Gox’s  US subsidiary, Mutum Sigillum LLC. The subsidiary also had its Wells Fargo bank account closed as regulators accused the business of operating in the US as an unlicensed money transmitter. Nearly two years prior while opening the Well Fargo account the businesses CEO, Mark Karpeles, signed a form declaring that the business was not a money transmitter.

While they have now registered with FinCEN, Mt.Gox had failed to register immediately after FinCEN’s guidance which categorized exchanges as money transmitters.

US regulators willingness to enforce their rules on any digital currency based service with US customers was demonstrated in their dealing with Mt. Gox and in the recent shut down of Costa Rican based digital currency provider Liberty Reserve. Statements after the May shutdown of the business make it clear that US regulators intend to enforce their anti-money laundering standards on foreign companies. Under Secretary for Terrorism and Financial Intelligence, David S. Cohen, clarified that the US would pursue illicit financial actors wherever they may be, in the US or overseas.

“We are prepared to target and disrupt illicit financial activity wherever it occurs – domestically, at the far reaches of the globe or across the internet.” 

Any exchange which hopes to share in the very large US market will have to keep US financial regulators in mind. However, the ever resilient Bitcoin economy is developing services designed to ease compliance issues for exchanges.  BTCGlobal, a Uruguayan based support service for Bitcoin businesses, has launched a “Massive Parallel Licensing” program which aims to create a network which will allow members to leverage each other’s regulatory infrastructure and resources.

Via the BTCGlobal Site: “The highest hurdle for entrepreneurs interested in launching a Bitcoin exchange business is the significant international and local regulatory requirements. It is estimated that an investment of over $10 million would be required to reach total legal compliance in all the U.S. 50 states alone. The BTC Global Massive Parallel Licensing program addresses this hurdle with a package that includes comprehensive regulatory support and a full suite of Bitcoin products and services.”

However, increasingly Bitcoin businesses are simply choosing to block US customers as they see entering the US market as too risky and/or costly and focus on other jurisdictions which have been comparably much friendlier.

Regulation outside the US

Many countries have not directly addressed digital currency regulatory issues, however, some countries have stated that they are not requiring any regulatory compliance at this time. Both British and Canadian regulators have issued letters to exchanges stating that they are not required to register with financial authorities.

In Canada a letter from regulator FINTRAC was sent to a number of exchanges confirming that the exchanges were not money service businesses and were therefore exempt from laws governing those businesses.

The UK’s financial regulator HM Revenue & Customs (HMRC) sent a letter to at least one exchange start up making it clear that the business was not required to register with HMRC under money laundering regulations.

In Europe ‘e-money’ is regulated, however, for the moment the European central bank does not view Bitcoin as money or e-money and does not require compliance for Bitcoin businesses.

While regulators may change their policies, it’s clear that some locations are far more lenient than others. However, lenient regulation does not necessarily translate to co-operative banking partners.

Nervous Banks

Recent moves by regulators, particularly in the States, have scared many banks out of the Bitcoin arena and their caution is understandable. Commercial banks cannot exist in their current form without accounting rules and national currencies that are created and supported by national legal structures. They cannot afford to be on the wrong side of these legalities.  Bitcoin should be a concern for them; it was not built to fit the regulatory mould and it seems that banks are frightened of inadvertently enabling violations of financial regulations via the Bitcoin network.

There have been numerous examples of banks, often abruptly, ending their relationships with Bitcoin exchange businesses. Earlier this year US based exchange BitFloor ceased trading after CapitalOne closed their bank account, and this is just one of many examples from the US.

In Germany Bitcoin exchange Bitcoin-24 had its bank account closed by authorities in April who were concerned that the site was being used for fraudulent transactions. More recently, LibertyBit, a Canadian based exchange, halted operations as a result of bank account closures and alleged fraudulent account activity.

While start-up Vaurum has managed to build banking relationships, it took some convincing. “The hard part is that banks won’t even talk to Bitcoin exchanges because their compliance teams are scared of the regulatory issues that come along with banking a Bitcoin exchange. …  The mechanics of the partnership are pretty straight forward – it’s just that banks don’t want to get in trouble with regulators and are quite conservative by nature. … It took some time to educate banks on our business.”

The Other Options

While some are putting their effort into making the Bitcoin/banking partnership work, others are busy finding ways around it. For the moment it would seem that there is only a small percentage of Bitcoin trade happening outside the large exchanges and most exchanges do not view these options as competitors. However, the alternative exchange market is experiencing rapid growth of its own.

As Fiat currencies in their digital form exist only on the servers of banking institutions, Bitcoin to fiat exchange cannot take place without the co-operation of a banking institution.  Many who are looking to bypass the regulatory and banking relationship hurdles are attempting to fly under bank’s radar with small transactions.  This means peer-to-peer transactions rather than a large intermediary such as an exchange.

There are a number of options that aim to connect individual Bitcoin users for trades. Two examples are LocalBitcoins.com and MetaLair.

MetaLair is an open source software project that aims to create a decentralised exchange mechanism which would facilitate peer-to-peer exchanges between crypto-currencies and in the future fiat to crypto exchanges.

The project will begin by building a network to enable peer-to-peer, crypto-currency to crypto-currency exchanges. In this scenario the MetaLair software acts as an automated escrow agent which makes for a very low trust system; but of course fiat to crypto exchanges would be more complicated.

Due to the nature of the banking system, the project’s crypto to fiat exchange plans would necessarily involve fiat funds being held by a third party escrow service. MetaLair plans to provide an open protocol to allow anyone to set up as an escrow service and to build a reputation via a rating system. As lead architect Johnathan Turrall explains, “what we are creating is an open system. The details of how the fiat to fiat transactions occur between the entities are effectively between them, we are just providing an interface by which they can do that.”

While MetaLair aims to create online exchange, LocalBitcoins.com has been in operation for years offering primarily in person exchanges.  The service matches local Bitcoin traders with those looking to buy or sell. The site is known for finding exchange agents for in-person trades, however, exchanges can be arranged entirely online. These trades use options such as bank wires and the site offers an escrow service for added user security. Via a local trader it is possible to purchase bitcoins quickly, privately, in person, and with cash in over 2,200 cities worldwide.

Earlier this month the sites founder Jeremias Kangas said his site has been gaining roughly 300 new users each day and has over 50k users overall. The site currently employs 4 people and is looking to hire more as they continue to improve their service.

New local Bitcoin markets calling themselves Buttonwood have sprung up in a number of US cities. The name is a reference to the 1792 Buttonwood agreement that created the New York Stock Exchange and which took place at 68 Wall Street under a buttonwood tree.

Conclusion

While the exchange market is changing, things are still largely the same. Mt. Gox is currently the largest exchange and USD/BTC exchange is the largest market.

Venture capital backed start-ups are determined to capture the US market and they seem likely to succeed. Only those start-ups who can attract large investment funds will be able to calm nervous banks and clear the regulatory hurdles.  As such the exchange options in the States will become much more serious and will require verification from all clients, likely above the current law. Privacy will not survive in the US online exchange market.

As compliance in the States is a large and expensive hurdle to clear, many innovators who’s projects do not fit the regulatory mould will avoid the US and likely actively block US users. Bitcoin innovation may be driven out of the States.

The large online exchanges are the dominant exchange options and it is difficult to guess the percentage of the market for exchange alternatives such as local markets or OTC trades. These options would seem to be much more appealing to Bitcoin veterans, however there is no doubt that alternative exchange options are experiencing a boom of their own.

As the world of traditional banking collides with the new world of crypto-currencies there will continue to be friction. New exchanges will appear, bank accounts will be closed, regulators will take action, businesses will be shut, some will get rich, some will face prosecution and how the exchange rate reacts is anyone’s guess. But this weak point in the evolving Bitcoin economy is where the action will be. Watch this space!

A network of small, peer-to-peer transactions would likely bypass many of these issues and would be a fitting solution for the brilliantly decentralized Bitcoin network. But is such a thing possible? The guys behind MetaLair, a UK based start-up, think so and are working hard to develop the software and find the investors to make it a reality.

Their vision is a decentralised exchange mechanism which will facilitate peer-to-peer exchanges between crypto-currencies and in the future fiat to crypto exchanges.  The MetaLair network would be similar in structure to the Bitcoin network featuring…

• No central servers
• Open-source software
• Incentives for all network operators
• A proof-of-work based system

If they are successful in achieving funding, MetaLair will develop both a free open-source version and a pay version with added features. The business intends to make money by charging for the client software with additional features that will include added security, trading and analysis tools. They hope that this could become the defacto standard wallet and trading platform for Bitcoin and other crypto-currencies.

MetaLair’s developers believe that the project will benefit the crypto-currency community as it is open-source and fully decentralized; this ensures that should MetaLair not be around the decentralised exchange will simply carry on.

“For me personally I’m only ever interested in a business if it has a primary social benefit” explains lead architect Johnathan Turrall who just returned from a trip to Cuba and South America. “The reason I went to Cuba was to look at communism and the impact that it had on financial systems, processes, business and industry. … I think potentially this system could be of great benefit to people in those areas so that is one of the motivations behind it.”

Johnathan and his business partner, Kerry Fraser-Robinson, will release their design papers whether or not the business obtains funding with the hopes that the project will eventually be developed even if they are unable to finish it themselves.

MetaLair will create and distribute the exchange software, but will not handle any funds or transfers. All transfers happen between users of the network.  The system uses an escrow service in all exchanges; however, all escrow actions are either automated, or are carried out by the human users of the system.

The projects development will be in two phases with initial development focusing on crypto-to-crypto exchange. Theoretically MetaLair can work with any crypto-currency that uses a blockchain and has M of N transaction capability. This allows the exchange software to act as the escrow agent for the transfer of both crypto-currencies in the exchange.

Explanation of M of N Transactions

An M of N transaction is essentially an escrow system built into the Bitcoin protocol that removes most of the need for trust that a traditional escrow would require. This capability allows a party to the transaction to act as an escrow without actually having access to the funds held.

The most common form of an m-of-n transaction is a 2 of 3 transaction. In this case there are three parties and three private keys, any two of which are needed to sign the transaction for it to be valid.

• All parties involved in the transaction can verify that the address belongs to the transaction they are participating in.
• All parties can view the funds in the destination address.
• Escrow requests must be signed first or second by the escrow in the chain of events.
• The escrow is able to grant access to the funds to sender or receiver.
• Escrow is unable to access the funds themselves.
• Sender and receiver can still cooperate so that one party receives the funds without the need to rely on the escrow.

Any crypto-currency using the Bitcoin source code will support this feature and can therefore be used on the decentralised MetaLair exchange.

For example a Bitcoin/Litecoin exchange would begin with two parties entering buy and sell orders via the MetaLair network. The system correlates the matching bid/ask and, using a 2 of 3 transaction, will act as an automated escrow agent for both the Bitcoin and the Litecoin transfer.

Bitcoins are transferred between the parties via the Bitcoin network and litecoins are transferred between the parites via the Litecoin network with MetaLair acting as the escrow agent for both transfers. If MetaLair’s decentralised exchange mechanism notices that double spending has occurred before the maximum specified number of transactions has been reached it reverses the transaction and refunds each party.

In the crypto-to-crypto scenario the MetaLair software is acting as the automated escrow agent, which makes for a very low trust system; but of course fiat to crypto exchanges would be more complicated.

Fiat currencies in their digital form exist only on the servers of banking institutions. As such, fiat to crypto exchanges require the services of those who have access to the banking system.  MetaLair sees a number of options for fiat exchange escrow agents. These options include very large and well respected businesses that may use their name and existing banking relationships to bring in a large volume of trades.  Of course this scenario might look at lot like existing Bitcoin exchanges that have to take many steps to comply with regulation to appease their banking partners as they cannot offer exchange services with access to traditional banking.

On the other end of the spectrum, there is the possibility of individuals offering escrow services in their spare time. For example you may have an exchange in India that would only involve a small amount of Rupees moving between local accounts and would likely not draw any attention from regulators.

Essentially what MetaLiar is providing is an open protocol to allow anyone to set up as an escrow to facilitate fiat to crypto transactions, complimented with an underlying trust based system.  The fiat exchange may simply be a small transaction between individuals or small businesses. “That’s an added benefit of this approach.”

As Johnathan explains, “what we are creating is an open system. The details of how the fiat to fiat transactions occur between the entities are effectively between them, we are just providing an interface by which they can do that.”

Fiat to crypto exchange also require an escrow service, however, due to the nature of the banking system, this escrow cannot be automated via the MetaLair software. Funds will have to be held by an intermediary individual or business acting as an escrow service. “The key innovation with our system is, because it’s fully decentralized, that it lets a lot of different escrows sign up from anywhere in the world and offer their services via an API.” There are many ways in which a fiat to crypto exchange could take place, but below is how possibility might work…

• Bob is looking to sell his bitcoins for Euros and enters a sell order (ask) via the MetaLair network.
• Alice is looking to buy bitcoins in exchange for her Euros and enters a buy order (bid).
• The MetaLair system connects Bob and Alice who both agree to use Ivan as the escrow agent.
• Ivan is a small time Europe based escrow agent who has a good trust rating via the MetaLair network.
• Ivan acts as the escrow agent for the fiat funds and holds Alice’s Euros in his bank account.
• Ivan therefore also acts as the escrow agent for the Bitcoin transfer which is done via the Bitcoin network using a 2 of 3 transaction. (or this may be automated)
• The Bitcoin transaction completes successfully.
• Ivan transfers the Euros to Bob’s bank account.
• Ivan receives a fee for his services.

MetaLair will leave regulatory compliance as a decision for the users of the network and they do not expect to deal with any financial regulation themselves as the business is not an exchange. “In the same way that Satoshi has provided Bitcoin we’re providing the decentralized exchange mechanism. You don’t pay Satoshi for any of the transactions you do on the network. It’s distributed; you pay the people who are working on the network.  It’s the same process with our decentralized exchange mechanism.”

This is an attempt at setting up a network in which anyone is free to join and offer their services or exchange currencies between themselves.  Should it succeed it could offer a wide variety of options in what is currently a concentrated and under pressure market.

As the big exchanges face regulatory scrutiny and continue to impose more and more conditions on their users, the network that MetaLair is attempting to create could offer much needed options for consumers.

A new mobile payment system, Dinero MPS, aims to offer a wide variety of mobile payment services starting with the unserved markets in Africa, South America and Asia. Founded by financial cryptographer Ian Grigg and entrepreneur Ken Griffith, Dinero’s Ricardian-Contract based system is set to launch later this year with the release of an Android phone app.

Dinero’s co-founder Ken Griffith shared with DGC insight on the businesses’ plans and motivations.

Julia: As Dinero is a Ricardian-Contract based system, can you give me an overview of the origins of the Ricardo Transaction Engine?

Ken: It started with Systemics, a business founded by Ian Grigg & Gary Howland in 1995. Gary was at DigiCash before he left in Fall 1995 to join Ian.  Their initial goal was to create a platform that could trade multiple instruments from many issuers. Their target was corporate bond trading, but as they developed the model to do bond trading they invented the Ricardian contract and Gary created the Secure Open Transactions Protocol which we call SOX. They soon realised that the model was so flexible that it could be used for currency; it could be used for stocks, for bonds or just about anything that you could write a Ricardian contract for.  So the Ricardian Contract is the heart of the system.

(A Ricardian Contract is simply a contract that defines a set of conditions for the instrument that can be read by both humans and computers and is signed with the Issuer’s public key.)

The Ricardian Contract is important because it allows several things, but the primary benefit is the triple entry accounting.  Most people don’t understand what’s so secure about it but when you start using the system you understand how powerful it is.  It makes it very difficult for an insider to forge a transaction because you’ve got a digitally signed transaction history in every transaction receipt so if someone tries to forge a transaction it’s very easy to prove which one is fake.   In a multi-Issuer ecosystem it allows trading, and trading is where the real power of the system is.

Julia: Can you tell me a bit about the origins of Dinero? When/why did you and Ian decide to launch the business?

Ken:  In the early 2000’s I realized that once the phones became powerful enough to process encryption, that the union of phone and wallet would be a beautiful child that every woman would love.  Ian had also realized this and written about it in 1998, and I’m sure others anticipated this as well.  So you could say that both of us have been waiting for the development of smart phone operating systems with enough power to process strong crypto.  As you know the media has been chattering about mobile wallets for the past two years, so the time has come and there are about 150 companies trying to figure out how to do this and be the first one to capture this market.

I was invited to Kenya by a friend in 2010.  At first I was not interested. But then I heard about M-PESA, a digital money system that Safaricom had put on their phones.  This caused my ears to perk up because this was an example of a telco breaking the glass ceiling where the banks have managed to keep non-banks from becoming serious players in digital money transactions. M-PESA was the first instant clearing transaction system to gain more than 5% market share in any country of the world.  It was the first mass adoption of digital currency by the average Joe.  Today they have about 90% penetration of the market and process 30% of Kenya’s GDP.

So I moved to Kenya in 2011 and spent a year studying the economy and the opportunities in the digital money space.  M-PESA had become such a dominant player in Kenya that the other telcos had copied their system, but completely failed to take more than 1-2% market share.  30% of Kenya’s GDP allegedly went through M-PESA in 2011, which means that the first company into the space had become so dominant that it would be virtually impossible to compete with them on their own turf.

But M-PESA also has several glaring flaws, most notably the fact they are limited to the Safaricom network, they have reversible transactions (which are now resulting in a growing fraud rate), inability to be certain you paid the right person until after the money was sent, and there is no API to allow other applications and web sites to use M-PESA.

While we think we have a superior transaction engine to M-PESA, trying to compete directly with the biggest player is a non-starter.  Airtel, Orange and Yu-Pay have all tried with far greater resources than we have, and failed.

So I had been looking for a niche that M-PESA cannot effectively serve.

I learned that Kenya has a savings culture of these groups called “chamas” that are little clubs where the members pool their savings together for investment.  There are 300,000 chamas in Kenya managing about USD $4 billion per year in savings.  By offering a variety of savings instruments to these chamas, we can take advantage of the strengths of the Ricardo system in a niche that neither M-PESA nor the banks are currently serving.  This lets us establish ourselves as the first entrant into a new market at the base of the pyramid.

The reason that this chama culture exists is that the banks of Kenya have high fees and low returns, making them inaccessible and unaffordable to the majority of Kenyans who have an average income of $140 per month in a country with 11% average inflation.

Having seen the opportunity to field Ricardo in Africa, I contacted Ian Grigg in July of 2012 to see if he would be interested.  After several months of discussion and test marketing, Ian moved to Kenya and we formally founded the Dinero MPS venture in December 2012.

Julia: Dinero’s initial market will be the under-banked population of Kenya?

Ken: Yes. Kenya is our test platform or testing country largely because the idea of storing value on the phone has become accepted by the mainstream here.

Kenya has the one of the worst environments in the world in terms of trust. Kenya ranked #1 in the world for financial corruption. There are a lot of issues with trust which are compounded when dealing with people at a distance.  If we can build a system that can work in this adverse environment we believe it will work well anywhere.

But I think Kenya has a lot of positives.   Kenyans have an excellent work ethic and a very high savings rate (12%).  This means that there is a very large potential profit to be made by solving the problem of savings for the Kenyans at the base of the pyramid – and thereby capturing the entire pyramid, like M-PESA did with payments.

In the longer-term we are going to an unserved market – the poor in Africa, South America and Asia, countries with large unbanked populations.  We are providing them with a system that has such low transaction and operations costs that it can work for them on their phones and enable them to diversify their savings into apolitical investments like bullion, unit trusts for real estate, stocks, etc.

Additionally, we are building a bridge to allow someone with a dumb phone to control a Ricardo account which will be hosted on a server.  The penetration of Android phones is still too low in Africa to support a business by itself.  However, several studies have projected that Android phones will be the majority in Africa in five years as prices come down.

Julia: What currencies will the Dinero system will be set up to trade?

Ken: It depends a lot on who the customer base is, but currently we have groups that are using the national currency and gold. This is being done through a co-operative society, like a members-only club.

There are also other groups that are interested in doing community currencies. And they want to create community currencies for lots of little towns and cities in Kenya and since our system is designed to have multiple issuers and allow trading it is quite well suited for that kind of project.   The first one of these was launched on May 11^th in Bangalore Slum in Mombasa, and they call it Bangla-Pesa. We hope we can help them with those projects, and by doing so expand our user base.

In the long run Dinero could be expanded to do other things. It could do coupons for businesses it could move into bonds and move into a stock exchange and trading system.

Julia: Can you tell me more about these members-only investment clubs?

Ken: There is a “Co-operative Societies Act” in most countries, which allows people to form clubs for various purposes, including self-help savings groups. They use these groups to pool their money and invest in things and some of them get bigger and turn into a credit union which in Kenya they call a SACCO (Savings and Credit Corporation).

In Kenya the informal savings groups are called “chamas” and they are quite popular and have spread to other African countries. There are roughly 300,000 Chamas managing about 4 billion dollars in savings per year which comes out to about 11,000 per group. Under the co-operative societies act these savings clubs are allowed to do some of the things that if you did for the public you would be regulated as a bank, a securities issuer or a forex agent. But as a members-only club they are allowed under the law to do these things. So we are catering to that market to give them a platform to do it with good governance.

Our system also has a social networking component that we are using to meet the know-your-customer requirements. So, the Issuers on the system will know with very good accuracy who their account holders are, and who their social network is. So if there is a problem, such as criminal activity, the Issuer will be able to pinpoint who, what and where, freeze the account and then hand that info to the relevant authorities.

Julia: When will the Android app be released?

Ken: The end of this year. The app is right now in Alpha. We are doing invites and transactions on the Android. We are testing but we have got 3-6 months more user interface work to do before it is ready for the end users. We are thinking that it will be Autumn before you will see an app on Google Play that you can download and install on your Android phone.

Julia: So 6 months from now I download the Dinero app to my Android phone and what can I do with it?

Ken: Well initially it has a chat app and chat credits so when you do the default install all you will have is a chat contract. In order to install another contract you have to be invited by someone on that contract. Keep in mind that we are working with investment clubs that are members-only so you have to be invited to a club in order to get a contract installed and then you will be able to trade.

By this Fall the currencies that will be available in these investment clubs in Kenya will probably be the Kenya shilling, gold and the US dollar and possibly Euros.

Julia: Dinero is an account based system?

Ken: Yes.  The system has a master nym – that is your id and then you create sub-accounts under that nym, on various contracts. So your nym might be “Julia Dixon” And you install a contract for a gold issuer, and a contract for Euros. Then you can create one or more holdings on each of those contracts. So for your Euro contract, you might create one account called, “DGC Magazine” and a second account called “Julia’s Personal”. On your gold, you might just called it “JD Gold Savings”.

Now under your top level nym you have these three accounts. In order to pay someone, you first need to invite them to be able to transact with you on a particular contract/account.  You just send them an invite code and they can add you to their address book and transact or chat with you.

Julia:  How does Dinero compare to the current mobile payments giant M-Pesa?

Ken:  A huge problem in the past decade has been phishing. And with M-PESA the problem is that the phone number is the acct number.  And it doesn’t tell you the name of the person you pay until after the payment went through.  So the big problem with M-PESA is people getting a digit wrong on the phone number and paying the wrong account.

Since anyone who has used M-PESA for a number of transactions has probably paid a wrong number, a phishing scam has arisen based on this.  The scammer sends a fake payment notification message purporting to be from M-PESA for several thousand shillings.  Then they SMS the victim and say, “Pole (sorry), I accidentally paid the wrong account, please refund my payment. Asante (thanks).”  If the victim did not realize the payment receipt message was a fake, they might send a real payment back to the perpetrator.

So the weaknesses in M-PESA’s transaction model have given rise to a criminal enterprise of professional fraud.

The way we have solved that problem is through relationship and what we call a zero payment. I can send you an invite code via email or SMS. When you enter the invite code, your app then checks to see if you have this contract installed.  If not, you are given a chance to install it. Once you have installed it, you create a holding. And then this “zero payment” is deposited into your holding. Now both of us can look in our transaction history and see a payment of zero from me to you. We now know we have the right person. Henceforth, I can make payments to you via the address book without worrying about having the right account number because you have already been verified.

Compared to M-PESA we have a much more flexible and sophisticated system because we can do multiple currencies and instruments.  M-PESA can only do one currency on one telco network.  So it works very well in a larger country like Kenya where Safaricom has majority market share.  But in other countries like Nigeria with no dominant telco, the M-PESA technology results in a highly fragmented mobile payments market where each system is incompatible with the others.  It is like only being able to SMS someone who uses the same telco as you.

Also in the small countries of West Africa, several currencies are often used in one country.  The Ricardo system can handle that very well.

So our major strength is having one system that works for many currencies, on any telco in any country.

Julia:  How does Dinero compare to other digital currency systems such as Voucher-Safe?

Ken:  In one way it is similar. Voucher-Safe is also a multi-issuer system with some very impressive software engineering. The major difference is that Voucher-Safe uses blinded digital coins and is designed for maximum privacy.

For a long-term transaction system for businesses, you need account histories, auditing and accounting. Ricardo is better suited for businesses because it has the audit trails that are needed for governance. By governance, I mean an organization (company, non-profit, etc) keeping track of their own funds and how they spent them.

Voucher-Safe, as I understand it, is deliberately designed to serve as a digital cash system.  In the real world you need both cash systems and book-entry systems, because they serve different purposes and roles.   So I am happy to see the development of Voucher-Safe and wish the founders of that system the best of success.

The second major difference is that Voucher-Safe is designed for maximum user privacy, but the users know very little about each other.  This may be considered to be a benefit in certain sectors, but we all know that organized cyber crime has proved to be the bane of digital currency systems.

In order to avoid a repeat of “the e-gold problem”, where the system became permeated with criminal activity to the detriment of legitimate users, we are taking the opposite approach to privacy.

The Dinero system combines social networking with transactions so that Users and Issuers can have a high degree of confidence in the people they transact with.  We hope to build a community of integrity so that users can feel safe using the Dinero MPS System, knowing that if there is a problem with a transaction, they know who the other party really is, and there is a fast, reliable and inexpensive dispute resolution system.

In order to get there we are starting with members-only clubs, which we realize will slow down our rate of growth in some ways.  But we believe the long-term benefit of building a system that is able to identify and self-eradicate the bad actors will pay off for the community and for us in the long run.

Part II  examines the Voucher-Safe economy, trust, security and software.

This final part looks at Voucher-Safe’s interaction with Bitcoin, Issuers and OnionPay.

Bitcoin

The idea behind voucher-safe is that money can be anything that people value and want to exchange.  Money can be national fiat currencies, silver or gold and increasingly, Bitcoin. Bitcoins can be exchanged via the Voucher-Safe system with the creation of Bitcoin backed Vouchers.

One of the benefits that Bitcoin backed Vouchers have is increased anonymity.  Voucher-Safe’s principal developer Kevin doesn’t see Bitcoin as anonymous.  “You actually see people offering to sell bitcoins that are free of taint now. Because taint means there are certain payment hashes that have been used for criminal activity or looted bitcoins … And because everything is recorded on this massive block chain, it’s like a chain of titles… And so if you end up with a house or car that has been owned by a criminal it casts a taint on your property. And that’s a horrible problem for the Bitcoin block chain.”

Kevin sees a solution to the block chains problems in Vouchers. “If you bailed bitcoins into a Voucher-Safe Issuer that issued Vouchers against bitcoins, they could circulate in the wild without having any foot print in the block chain whatsoever, except in what was created when the bitcoins actually moved in or out of the Issuer. I really think that would be a huge improvement and would solve one of Bitcoin’s biggest problems.“

Kevin sees further benefits adding, “Circulating bitcoins in voucher form would also eliminate problems with clearing times and transaction dependencies, which arise from the fact that bitcoins actually exist in blocks of 20 whole coins. This means that when some of the coins in a block are involved in uncleared transactions, it prevents any other coins in the same block from clearing until the earlier transactions are closed. Bitcoins carry the full transaction history of every coin. Vouchers are always destroyed and replaced any time they are used in a transaction, so they can carry no history.”

A Voucher Issuer for Bitcoin is being discussed.

Issuers

At the heart of Voucher-Safe are the Issuers who put the currency into the system.

One of the first Voucher-Safe Issuers will be PXGold. The business is run by the creators of Pecunix and they hope that Pecunix’s good reputation is also applied to the new business. However, PXGold is a separate entity and will have no direct connection to Pecunix.

As an Issuer PXGold will issue gold backed Vouchers and maintain 100% backing for all their Vouchers.  However, they will not make the location of their gold vaults public. The reasons behind this move is explained in part II.

When demand becomes sufficient to justify it, PXGold plans to do a run of PXGold Medallions, which customers will be able to take delivery of in exchange for their PXGold Vouchers. The business will work with Vouchi.com, the current Voucher-Safe publisher.

There is currently one active Voucher-Safe Issuer, voucher-issuer.com. The site issues Vouchers backed by USD and EUD. The decision to have the first Issuer back their Vouchers with national fiat currencies is explained by Sidd. “People need to come to terms with the fact that these Vouchers can be used as a payment system to pay each other and used as real money. Not just as vouchers to claim back whatever is backing that system. “

“When I’ve spoken to people, often the reaction is that we’ve created this voucher system where the vouchers are for gold. And they say ‘that’s great, so if I want to give my aunty some gold I can give her a voucher.’ And I say yes but you can also buy her a pair of shoes with that Voucher by paying for it with a Voucher. And you could be paid in Vouchers. And that seems to be a difficult problem for some people. And that’s why we are considering an issue with USD and Euro’s, so that they can see that well one Voucher is equivalent to one Euro, that makes sense to me. “

Plans are also in the works for two more Issuers, one for silver and another for Bitcoin.

Issuers and KYC

Any Voucher-Safe Issuer who intends to interface with the fiat banking system will need to be KYC compliant and require ID from their customers. Not doing so would be a violation of AML laws and would risk a shutdown of the business.  However, there are options for obtaining Vouchers anonymously. An obvious choice would be to receive one in trade with an existing Voucher Issuer customer. There is also the possibility of an Issuer which does not interface with the banking system and is not subject to KYC rules.

It is possible to have an Issuer which only trades its assets in exchange for other types of Vouchers or anonymous digital cash.  For example, suppose an Issuer existed for a metal-backed Voucher currency which only bought or sold the metal using Bitcoin. That Issuer could likely get away with not requiring ID from its customers.

OnionPay

OnionPay (The name is a “humorous tip of the hat” to Tor) is add on software for the Voucher-Safe system.  It is essentially a Voucher-Safe based PayPal alternative for e-commerce websites. OnionPay is intended to provide a more traditional merchant checkout experience for websites that accept Voucher-Safe.

The Voucher-Safe payment process involves a few steps; the sender has to send and then the receiver has to pick up. “Well how is that going to work if the receiver, the payee, is actually a website?” OnionPay solves this problem.

As Kevin explains, “the way it works is that it borrows a concept from public key cryptography where you have a public key that you give to everybody and you have a private key. Only here you have a public Voucher-Safe and a private Voucher-Safe.”

To use OnionPay, an e-commerce website would set up what amounts to a merchant account with OnionPay. The service creates a public safe to which both OnionPay and the merchant have joint access. This provides the merchant with a payment gateway that allows customers to check out. The customer can make a Voucher payment that goes to the public safe. OnionPay then logs into the public Voucher-Safe, picks up the payment, confirms that it is the correct amount and then takes the customer to the success page back on the merchant’s website.

After sending a message notifying the merchant of the payment, OnionPay sweeps the money from the public safe to the merchant’s private safe. “This keeps the merchant from actually having to trust OnionPay with any of their money unlike PayPal where it sits there in your account until you withdraw to a debit card or take an ACH payment.”

Auto Exchanger

A planned additional feature of the Voucher-Safe system is an auto exchanger or escrow system.  As Kevin explains, “We used to have this kind of functionality with something called Open to Exchange. And this was back in the day when people wanted to exchange between e-gold and Pecunix, etc. It was mostly exchangers who used it when they had too much of one and not enough of another. But in theory, this is something that can be done by anyone. I think there is room for a lot of synergy there in terms of people using different kinds of Vouchers and being able to exchange with each other.”

“So one of the easy things that we would be able to do is to create an auto exchanger that would act as the escrow system, it would probably be an Onion Pay merchant, that would let people exchange all these different things as anonymous digital cash without ever having to go through an exchange. So for example, you have a Bitcoin Voucher and you want a Dollar Voucher, you just post that on this site for someone who wants the reverse of that trade. Then each of them pays their Voucher to the middle man and he reverses it.”

While the Voucher-Safe system is designed to allow anything to be money, the system offers one of the best options for those who want to transact in gold, silver, etc. Voucher-Safe is about as de-centralized as you can get while still being able to transact with real assets. The system is a versatile, more decentralized, Anti-Money Laundering compliant way to anonymously exchange value. It is a smarter, more resilient generation of digital currency.

In this part we examine the Voucher-Safe economy, trust, security and software.

The Voucher-Safe Economy

“One of the things that occurred to us as being necessary in order to have a robust economy, is that the people who are operating the servers need to get paid for doing that.”

All of the players in the Voucher-Safe economy, the Publisher, DHT (Distributed Hash Table) server, OFS gateway, SDS (permanent database) server, etc. are in the business of earning tokens. As Kevin explains it, “you can think of tokens kind of like micro Vouchers, which are backed by Vouchers which are in a special Voucher safe.”

Tokens are created by the Publisher, from backing Vouchers, and are sold to Voucher-Safe users. “What is silently going on here in the middle of all these payments, pickups, storing receipts and so on, is that all these charge some number of tokens. For example, it costs a token to store a receipt, and it also costs tokens to make payments or to pick them up.”

Once the players in this system, for example the OFS gateway, accumulate a certain amount of tokens they can redeem them for Vouchers. The OFS gateway operators would initiate an exchange with the Voucher Publisher and say ‘ok, I’d like to cash in my tokens.’ Those tokens are then taken out of circulation and the Publishers Voucher safe, where the users who have been buying the tokens have been placing Vouchers, is debited to create a new Voucher. This new Voucher is then paid to a special safe which is owned by the operator of the OFS server.

This method encourages the OFS gateway, and other server operators, to be very careful about which Issuers and Publishers they do business with. Kevin explains that this is an intentional incentive. “Basically what this boils down to is that the publisher and all of the other servers are getting paid in the same issuer’s currency. You wouldn’t want to accept any Issuer that you didn’t have confidence in because this is how you are making your money as well.”

It is also important to note that “the number of tokens is fixed by the publisher but the value of a token is fixed by the Issuer.” For example, an Issuer may set the of value of a token at .005 grams of gold, about 2 ½ cents.

“And that means that although it gets divvied up in different ways, the total cost of a payment is about 47 & ½ cents. About 2/3 of that is paid by the payer and the other by the receiver. 50 cents or less to make a payment and that’s regardless of the amount of the payment. As the same amount of work has to be done and the same operations have to take place whether your payment is for 5 clams or 5 million clams.”

How does a user obtain, exchange and ‘redeem’ Vouchers?

There are many ways to obtain Vouchers, an obvious method is to purchase some from a Voucher Issuer.

Voucher-Safe was designed to be an AML compliant, and yet anonymous, digital cash system. The Issuers are charged with maintaining AML compliance.  To purchase a Voucher from an Issuer a user would (dependent upon the policies of the Issuer) likely have to provide ID in accordance with Know-Your-Customer rules. Similarly, if a user wanted to redeem their Vouchers, they would likely have to have an account with the Issuer and provide ID and bank account information.
While most Issuers will likely require ID as they will have to interface with the fiat banking system, Voucher-Safe’s creators do envision Issuers that may not require ID. “It is conceivable that one could have an Issuer which only traded its asset base in exchange for other types of vouchers or anonymous digital cash.  For example, suppose an Issuer existed for a metal-backed voucher currency which only bought or sold the metal using Bitcoin. That Issuer could likely get away with not requiring ID from its customers.”

“But the idea here is that many users wouldn’t need to be ID’d, just as many people can have physical cash in their wallets and purses without needing a bank account. One could imagine ‘Voucher-cashing’ services just like there are check-cashing services.  Also decentralized exchanging operations, along these lines:”

Purchasing a Voucher from an exchange would be like purchasing Bitcoins on an exchange, and it would come with many of the same issues. Kevin notes that “the exchanger issue is a problem for any digital currency. There’s just no way to fix it that I can see other than going to this decentralized model … about dealing in cash and dealing with other people who use the currency. … And it gets around single points of failure such as large exchangers that are doing millions of dollars a day in through put. And I think that kind of thing is ultimately where we are going not just with Bitcoin but with Voucher-Safe and pretty much everything else.”

Plans for the voucher-Safe system include an ‘auto exchanger’ or escrow service.  This service would allow people to exchange between different Voucher-Safe currencies or Vouchers from different Issuers “as anonymous digital cash without ever having to go through an exchanger.”

Another interesting feature of Vouchers that is important to note, is that they expire.

“We didn’t want this to be a money storage facility. We want this to be a transactional system. … The idea is that it is very, very important to make sure that you don’t end up with value that is permanently in limbo. If Vouchers are somehow lost, you can’t just leave that value out there forever. You have to have some way to take it out of circulation.”

What happens to the backing of an expired Voucher will be determined by the Issuers policy. But there are safe guards in place to prevent Vouchers expiring. “Whenever you’re doing a voucher transaction, your client will automatically use the oldest vouchers possible first.”

It is also possible to simply log into your Voucher-Safe every few months and revalidate any expiring Vouchers. This will however cost you a few tokens.

Trust

When dealing with the digital exchange of physical assets, trust is an unavoidable factor. Users of Voucher-Safe, or any currency with a physical backing, have to trust the Issuer.

Voucher-Safe is designed to be as decentralized and require as little trust as possible. But there is no escaping it, you must trust the Issuer.

Issuers will be discussed in detail in Part III, but one of the first Voucher-Safe Issuers will be PXGold.

Reputation is a huge factor in Issuer trust. Sidd, the creator of PXGold and monetary architect of the Voucher-Safe system, is also a co-founder of Pecunix, a well-respected gold custodian. “Pecunix has a good reputation. But at the same time the bottom line is when you bring me the Voucher, can I give you the gold? So far, we’ve been going for 12 years and there’s never been a problem.“

An important difference between Pecunix and PXGold is that PXGold will not make the location of it’s gold vaults public. While this may cause some trust concerns, it is done to protect customers gold from confiscation. “PXGold is based on an entirely different premise.”

Sidd explains the reasoning behind this decision. “With Pecunix, we held audits, we said ‘this is how much gold we’ve got, this is where we keep it, these are the checks and balances, this is how much gold is in the account, etc.’ But we have now got evidence of the danger of that because of what happened with e-gold. Because all of e-gold’s information was out in the open, the government came along and confiscated the gold. They literally took that gold even though it didn’t belong to e-gold, it belonged to the customers.”

“So, when it comes to PXGold, that information won’t be made public. There will be people who know and people who can verify, but it won’t be public.”

Trust in the Issuer is necessary, but very little trust in the Publisher, and other Voucher-Safe players, is needed.

Kevin explains that it “would be very hard for the Publisher to run off with much of anything. The Publisher has zero ability to do anything with Vouchers outside of those presented by a user for a specific transaction.  It cannot determine anyone’s ‘balance.’  It cannot tamper with the values of vouchers, despite being the party who signs them, because Vouchers with incorrect amounts would be rejected at the Issuer.”

“The same can be said about the DHT and SDS operators.  Yes they maintain ‘databases’ but all the records are encrypted using keys to which the server operators have no access.  The worst thing they could do would be malicious deletion, which profits them in no way.  And there are mirrors and backups in place to allow for this possibility.”

Security

PXGold’s security systems are impressive and are an improvement upon Pecunix’s well-known security. “Everything in Pecunix is encrypted, a lot of it is double encrypted. The entire database is encrypted. If our server got stolen by the authorities they wouldn’t be able to make a dent in it.”

Sidd is very seriouse about the security of PXGold “What we’ve done with PXGold, is that every single account is encrypted to its own key and the key for that account is actually that persons login details.” If authorities were looking for information on an individual from PXGold’s database, “they would actually have to come to us with the persons account details before we would even be able to find them in the database otherwise they’re not even searchable.“

“Nobody builds systems like that; I think I’m the only one. I’m a bit pedantic about that.”

Software

The software that makes up the Voucher-Safe system will be published. “Voucher-Safe has published source clients (3 of them). This is not quite the same thing as ‘open source’ because open source technically means that anyone can check in changes.  For obvious security reasons, we wouldn’t want that.  However by publishing the client source, we invite others to create competing client versions white labelled for particular Issuers or even ground up rewrites.  It would be great if someone made one for Android phones, for example.”

“The network source code (for the server side) is not published at this time.  However, every line of code which runs on a user’s computer has source code available, either from us or from the authors of the particular library component.”

The decision to delay the publishing of this code was done for several reasons. Sidd believes it is important to ‘vet’ Issuers and Publishers for the first few years to prevent any shady server operators from destroying trust in the system.  “As it stands now, we will run the only Publisher (vouchi.com) and we will vet every Issuer to make sure that that Issuer is trust worthy. And that way we can, to a certain extent, protect our investment in the software.”

Kevin adds that “ultimately the software for the VP/OFS/SDS/DHT/PKS should be published also, or at least licensed and franchised out to others who will make wise and profitable use of it.”

“In the end it’s about enabling free market money, which is not the purview of a single Publisher, Issuer, or network, any more than it should be the purview of a central bank.”

The final part of the Voucher-Safe special will discuss Voucher-Safe’s interaction with Bitcoin, Issuers and Onion Pay, a Voucher-Safe merchant checkout.

The business’ founders, Chris Odom (Fellow Traveler) and Johann Gevers aim to make this ‘financial system 2.0’ possible by developing commercial versions of the Open Transactions digital finance library. This software will allow digital finance entrepreneurs to startup micropayment services, financial markets, community currencies, escrow services, and many others all without depending on the traditional banking or legal system.

Johann, Monetas’ CEO, recently shared with me his thoughts on finance, his belief in decentralized systems and his plans for Monetas.

“Monetas is a transaction system not just for financial transactions but for transactions in general. Financial transactions are a special case, a subset, of legal transactions. So Monetas is actually a legal transaction system which includes both legal and financial transactions.“

A transaction system like Monetas is designed to operate as an alternative to the current banking system. It works brilliantly with Bitcoin, however, the software is “agnostic” and allows you to use any asset type. “You can use fiat currencies, digital gold currencies, Bitcoin, basket currencies, or the most sophisticated derivatives. Our system works with any asset type, but it works particularly well with Bitcoin and solves very important problems in the Bitcoin economy, so it will help strengthen the Bitcoin ecosystem. But Bitcoin also allows our system to do things that it cannot do with other types of currency.”

The Monetas system is built using the open-source Open Transactions digital finance suite created by Monetas’ CTO, Chris Odom. To understand how Open Transactions works, it is helpful to compare it to the functioning of traditional transaction systems.

Traditional transaction systems use databases. A database is a centralized repository of information. A user’s transactions and account balances are recorded as numbers in the database. When a user conducts a transaction, the accounting software simply edits the numbers in the database. What’s important to note, is that the bank has the ability to edit the numbers in the database to whatever it wants to. So the user has to trust that the bank will not abuse this power, and that hackers will not break into the database.

The Monetas/ Open Transactions software doesn’t use a database. It uses digitally signed receipts, which operate in a decentralized way without any databases. The receipts have to be signed by all parties to be valid. This makes it literally impossible for the parties to cheat. The software uses advanced cryptographic protocols that create unforgeable transactions and balances.

A ‘bank’ using the Monetas/ Open Transactions software can provide all the normal banking services, accounts, checks, transaction receipts, etc. but without needing a centralized database. Instead of editing numbers in a database, The Monetas/ Open Transactions software works by digitally signing and transferring cryptographic data (such as receipts) and digital assets (such as Bitcoins). A Monetas/ Open Transactions ‘bank’, or server, cannot forge transactions or alter balances.

The brilliance of the system is that even if servers fail, or are hacked, the user’s assets are safe. Because there are no assets stored on any servers. The receipt is the asset. All the user needs to prove his asset balances is a copy of their last transaction receipt, which cannot be forged.

This means that users do not need to rely on trusted third parties. The technology itself guarantees the integrity of transactions. For details on how this works, go to the Open Transactions website.

Open Transactions can be used for a wide variety of transactions, such as to:

• Issue and manipulate digital assets.
• Create pseudonyms, issue currencies, and create asset accounts.
• Transfer digital assets securely between accounts.
• Operate “cash-only” (without accounts) for maximum privacy.
• Use a range of financial instruments, such as cheques, vouchers, and digital cash.
• Use higher-level, contract-based transactions such as payment plans and markets with trades.
• Create online markets that support market orders, limit orders, fill-or-kill orders, day orders, stop orders, and stop limits, just like trading on a real market.
• Use basket currencies.
• Provide proof of which transactions have cleared and which instruments are authorized, without having to store their entire transaction history, but instead by merely keeping the last signed receipt.
• Execute smart contracts.

Monetas’ commercial-grade version “will have a lot of additional features that are especially important to enterprises and big corporations. For example, it has to be scalable so that you can have millions of simultaneous users, and it has to be highly secure.” These of course are “not easy problems to solve,” and the current projection is that it will take another year before the commercial platform is ready.

Offering financial services on a global level is a legal nightmare and developing a good business model that addresses these concerns took months of legal research and brainstorming.  “What is really important to us is that everything we do is 100% legally compliant. At the same time we need to be profitable, plus we need to achieve our mission of providing access to next-generation financial and legal services to everyone worldwide.”

The solution was to not be a financial services operator. “We will never handle anyone’s assets. That is how Monetas is designed. It never, ever touches or has access to anyone’s assets or information. We are purely a software publisher. This puts us in the same category as book publishers, who are protected under international free speech conventions and laws.”

Monetas’ business model is to license its commercial software to consumers as a mobile app (available Q3 / 2013), and to businesses as an enterprise platform (available Q3 / 2014).

The mobile app will enable users, including the world’s 2.5 billion “unbanked”, to:

• Securely and privately store digital assets
• Buy and sell goods and services worldwide with no bank or credit card required
• Instantly send and receive money
• Execute legal contracts with any party anywhere in the world, without a lawyer.
• It will also have “convenience” features such as automating recurring transactions, storing transaction history, operating with multiple currencies, etc.

The Monetas enterprise platform will be licensed to businesses, including the millions of merchants who currently have no access to a merchant account, “who will use it to create amazing new products and services that weren’t possible before, as well as make existing transactions far cheaper, faster, more secure, more private.”

Imagine…

• Jose’s Easy Contracts “Powered by Monetas”
• Julia’s Bitcoin Bank “Powered by Monetas”
• Ragish’s Derivatives Exchange “Powered by Monetas”

Monetas’ aim is not to just add polish to existing systems, but to create a fundamentally different, less centralized, system. “The interesting thing is, if you look at the offerings out there, even the new startups, they are all centralized systems. And centralized systems are inherently fragile. They concentrate information, money, power, and technology in a single place—creating a single point of control, attack, and failure. Not surprisingly, centralized systems are failing all around us.”

Johann is passionate about decentralized systems, and decentralization is the theme not just in the Monetas software architecture, but also in Monetas’ organizational structure and processes. “The problem if you look at the world right now, the financial crisis and economic and political crises, it is precisely because of centralization that we have these issues.”

“Existing financial transaction systems—even those that use the ‘peer-to-peer’ buzzword—are centralized. For example, in the case of PayPal, it appears on the surface to be a ‘peer-to-peer’ payment system, because when one customer sends money to another customer, it seems that the money is transferred directly between them via email. But what actually happens behind-the-scenes is that customer A sends a message to PayPal, then PayPal transfers the money from customer A’s PayPal account to customer B’s PayPal account. So PayPal is the intermediary, the middleman, the third party that controls both customers’ assets and information. And as we know, PayPal often abuses this privilege. It freezes customer’s assets. It charges high fees. It takes days, even weeks, to complete transactions such as bank withdrawals. It refuses to open merchant accounts for merchants that do not meet its criteria. And so on.”

“These kinds of problems and abuses are predictable when you have to deal with a centralized entity that has, in effect, a monopoly position. And if a hacker breaks into PayPal, your information is at risk. This happens all the time, we see it in the newspapers every day. Another database hacked, another million credit cards stolen. And of course centralized systems are also vulnerable to government control which is exactly what has happened with PayPal and all other large, centralized entities, including ‘the Big Four’ data companies—Facebook, Amazon, Apple, and Google—the large telcos such as AT&T and Verizon, and financial institutions worldwide.”

“So that’s the problem when users’ assets and information are controlled by a centralized provider—the old provider-centric paradigm. Monetas is a complete system for financial and legal transactions that operates as a decentralized, self-organizing, peer-to-peer network. No person or entity controls the system—it presents no single point of control, attack, or failure—like the internet. The user—and only the user—controls their assets and information. Users enjoy autonomy and provider independence—the new user-centric paradigm. This design is inherently more reliable, secure, and private.”

“If two parties want to transact using our system they do not need a middle man such as a bank or lawyer or other agent to ensure the integrity of the transaction. The software itself prevents cheating and guarantees the integrity of the transaction. So the parties can transact directly with each other. They don’t need to entrust their assets or information to a third party. This is what true ‘peer-to-peer’ means.”

In keeping with their belief in decentralization, Monetas is working to integrate their system with Ripple.  “Ripple is a system for exchanging value in your friends network, so this allows decentralized exchanges instead of the centralized exchanges we have to rely on today, that are being targeted by governments.“

Monetas works particularly well with Bitcoin, but at the moment, transacting in Bitcoin usually requires using a centralized exchange. The exchanges are the most vulnerable point in the Bitcoin economy as they have to interface with the traditional banking system. “And so that is where governments are applying pressure. They are requiring exchangers to be licensed as money services businesses, and they are requiring them to collect information on the people that use their services.” The Ripple integration is intended to reduce customers’ need to interact with the traditional banking system and centralized exchanges.

The world’s “unbanked” population is estimated to be around 2.5 billion in Africa, Asia, and South America. The services Monetas offers are aimed in large part at the unbanked as Monetas provides global access via mobile phones, at prices that are affordable even to the poorest people, without needing a bank account or a lawyer. “As we know from economics, transaction costs are a critical factor that limits entrepreneurship and wealth creation.”  And transaction costs aren’t only measured in terms of money, but also in the time, effort, licenses, and other obstacles put up by bureaucracies. “So by radically reducing transaction costs and eliminating middlemen, we can dramatically expand entrepreneurship and wealth creation.”

“What we are going to have is contracts that are dramatically simplified, so someone who just has a mobile phone, who is in Africa who does not have an education but can understand their local language or English, will just have a few check boxes. It will say I want this clause, check, etc. click and done. So by eliminating the middleman, you do not need a bank account, you do not need a lawyer, and it dramatically reduces transaction costs.”

Monetas’ aim is simple, to make it possible for those who cannot afford, do not have access to, or are not well served by the current banking and legal system to have the ability to freely transact with one another and participate in the world economy.

You can visit Monetas’ site for more information on their upcoming products.

But as DGC’s were starting to take off and be recognized for their many benefits, the rug was pulled out from under the industry with the prosecution of e-gold. The old DGC business model is centralized and vulnerable to seizure, censorship and prohibitive regulation.

The Voucher-Safe system allows for a more decentralized, Anti-Money Laundering compliant way to anonymously exchange value. It’s DGC 2.0, a more flexible and resilient system where anything can be money. “The idea behind voucher-safe is that it isn’t about making just one thing money. Money  can be gold, it can be existing national fiat currencies, it can be bitcoins, it can be silver, it can be anything of value that people want to exchange.”

I recently had some very in-depth discussions with Sidd, Voucher-Safe’s founder (also co-founder of Pecuinx) and Kevin, the principal developer. Voucher-Safe is software and a network that allows for the anonymous and very affordable exchange of the encrypted representation of value. DGC readers will be familiar with Voucher-Safe from the 2011 Industry Overview Issue.

Sidd and Kevin began designing the system when they ‘saw the writing on the wall’ soon after the demise of e-gold.  As Kevin put it, they began discussing how it would be possible to “operate one of these businesses without getting an ankle bracelet like Doug Jackson’s.”

The problem with the old DGC model is that they are account based and centralized.  Kevin recalls “seeing footage of Doug Jackson testifying before congress and actually boasting about how he was able, because it was all in one database, to track every little flake of gold from the first time it was put in the system to every account it had ever been in and so on.“ With an account based system the operator has a record of all transactions and can be held liable for their clients’ illicit transactions. E-gold’s ability to track all transaction through the system was used against them. Having records of all transactions is “absolutely a sucker’s game, particularly if you’re talking about an alternative currency that’s not going to be in good standing to start with simply because it is alternative. You have to separate the payment system from the store of value”

The Voucher-Safe system is designed to do exactly that. The Issuer, who hold the assets, is separated from the rest of the system and has no knowledge of the transactions taking place with the ‘cash’ that it has issued.

The system is modelled after gold backed “claim checks” or receipts. A good analogy would be a gold backed paper currency where you have gold sitting in a vault somewhere and the “claim checks” on this gold then circulate as cash. In this situation, those looking after the gold in the vault have no idea whose wallet that claim check is sitting in. Their only concern is the safe keeping of and accounting for the assets that back those claim checks.  “And that situation has been recreated technologically with Voucher-Safe where the vouchers are a circulating bill and you have digital wallets where different kinds of vouchers representing different assets can circulate.”

It is a complicated process to replicate this situation in the digital world. To understand how Voucher-Safe works you need to understand who the players are. There are three primary players in this system, the Issuer, the Publisher and of course, the users.

The Issuers are the entities holding, maintaining and accounting for the assets that back a particular issue of vouchers. The Issuer is AML compliant. Anyone wishing to purchase assets from the Issuer will need to provide identification and information in accordance with Know-Your-Customer rules. The Issuer is responsible for maintaining those assets and assuring that the amount of vouchers issued is always less than or equal to the assets that they hold. However, the issuer has no knowledge of what their customers may or may not do with those vouchers once they have been issued to them.

The Publisher works with one or more Issuers, facilitating transactions and is an essential part in the payment system. Publishers join the Voucher-Safe network to earn tokens which are in essence mini-vouchers. (This arrangement will be discussed in the next part of the series.)

The users are anyone who is using the Voucher-Safe software to exchange value with other users.

The Publishers and the exchange process are the heart of the Voucher-Safe network. To achieve the goals for the system, it was necessary to find a way for transactions to take place without centralized receipt signing, accounts or transaction records, all while maintaining anonymity. Not an easy task.

Because this process is so important to the functioning of the system, I’ll list the steps in the process. But, for those who don’t want to get bogged down in the technical details, here is an analogy that will hopefully be helpful in understanding the process.

Issuer A is a respected bullion vault and you would like to own an ounce of gold stored in their vaults. You go to Publisher A, who works with Issuer A, you give them $1,700 and you receive a receipt for one ounce of gold. (You can think of the Issuer and Publisher as a private Mint and Treasury.)

You owe Joe some money for some services he has provided and the two of you decide to settle your bill by passing the receipt for one ounce of gold stored in Issuers A’s vault on to Joe.

Joe gives you a lock for which only he has the key.

You then take this lock to Publisher A’s office and ask them to please place your receipt for one ounce of gold in a safety deposit box and give them Joe’s lock to put on the box.

Joe then stops by Publisher A’s office and notices his lock on one of the boxes.

Joe is able to open the box with his key and retrieves the receipt.

You and Joe then give each other receipts for the transaction.

Note: Neither one of you have an ‘account’ with the Publisher. The Publisher never asks you for ID and has no idea who you are. The only thing Issuer A knows is that you purchased one ounce of gold stored in their vault and that they issued you a receipt for the gold. They have no idea that you exchanged this receipt with Joe

In the digital world, this process is much faster, but involves a few more steps.

It is very important to note that the single most important feature of the Voucher-Safe system is the limited information that each player in the process has. This is particularly true of the Issuer who has no knowledge of anything besides vouchers. It knows which vouchers are on the circulation list and it knows about voucher serial numbers and nothing else. It is a “need to know” system.

This limiting of information is done through encryption, so that each player only has access to the information they need, and through anonymous communication via the OFS Gateway. You can think of the OFS as a proxy that hides IP addresses. All user login and payment-related communications happen via the OFS and, of course, the OFS cannot read the contents of any of the messages traveling through its system.

Below is a step by step of the transaction process in the Voucher-Safe system.

• The Payer logs in and all the vouchers in his safe are decrypted
• When the Payer initiates the transaction the client software automatically selects a voucher for payment, starting with the oldest first
• To send a payment, the Payer will need to have the Voucher-Safe ID of the Payee. (This  looks like an email address, but is similar to a Bitcoin payment address)
• The Payer enters the Payee Voucher-Safe ID of the safe that they want payment to go to
• The software creates a message that includes the voucher(s) to be transferred and Payee safe ID and any payment details (a memo field, or baggage fields)
• If there are any payment details associated with the payment, (information in the message that is only for the Payee) then these are encrypted using the Payee’s public key.
• The whole payment message is encrypted with the Publisher’s  public key and signed with the Payer’s private key
• The message is securely transmitted to the Publisher via the OFS
• The Publisher decrypts the payment message and checks the signature from the Payer
• The Publisher looks up the Payee’s safe ID and retrieves his public key
• The Publisher verifies its own signature on the vouchers to be certain that they are unaltered and valid
• The Publisher sends a message detailing the amounts, serial number, and amounts required (if splitting or combining vouchers) to the Issuer via an encrypted communication.
• The Issuer checks that the vouchers are still on the active circulation list (this prevents double spending)
• If there are no problems, the Issuer assigns new serial numbers for the output amounts and sends this information to the Publisher
• The Publisher acknowledges the Issuer and makes the new signed vouchers using the new serial number, while the Issuer retires the old serial numbers and adds the new serial number and amount to its active circulation list
• The Publisher includes the new voucher and the original payment details in a new message which it signs and encrypts to the payee
• Publisher places the encrypted voucher & message on the DHT (Distributed Hash Table) which acts like a safe deposit box in the cloud
• The Publisher places the change voucher (should there be one) back in the Payer’s safe and returns a successful status reply to the Payer
• The message is stored on the DHT with a unique encrypted address that the Payee can find
• When the Payee logs in to his Voucher-Safe (or clicks “refresh”)the software automatically checks the Distributed Hash Table and finds the encrypted message
• The Payment message is collected and decrypted
• Payee now has the voucher, but he needs it to be stored permanently in his safe by having it revalidated and replaced with a new voucher of identical value
• The Payee creates a message that includes the voucher and the Payer’s ID
• The Payee then signs this message  with its private key
• The whole message is encrypted with the  Publisher’s public key
• The message is securely transmitted to the Publisher via the OFS
• Once again the Publisher facilitates the issuance of a new voucher and destruction of the one sent by the Payee.
• The Publisher signs this voucher with its private key and then encrypts it with the Payee’s public key
• The Publisher stores the new encrypted voucher in the Payee’s safe and sends a successful status reply
• After the successful pickup by the Payee, the transaction becomes irrevocable
• If the Payee fails to pick up the payment within the time set by the Payer, then the Payer becomes able to pick up the payment voucher himself (i.e. retrieve it)
• The Payee’s Voucher-Safe software generates a receipt for the Payer, signs the receipt with its private key and places the receipt on the Distributed Hash Table for the Payer to find
• If there were any private payment details, those are included in the receipt data signed by the Payee, along with any optional return memo text

Even this is simply an overview of the process. There is quite a lot happening under the hood, but thankfully the Voucher-Safe software makes the user experience much simpler. You can watch demo videos, or try it out for yourself at Voucher-Safe.com.

For those who are interested in the technical specifics of the Voucher-Safe system, they can be found by creating an account at Voucher-Safe.org. The client source code and API documentation for all components can be downloaded from the site as well.

Voucher-Safe is a secure cloud based system.  Unlike Bitcoin, “there is nothing actually on your phone or on your computer. If your phone should get lost or stolen or arrested by authorities, there is nothing for them to find.” All of the information in the system is encrypted, sometimes twice. “What that means is that no one, including the voucher Publisher, can see what value somebody has. They might see that there are so many rows in the table at this hash for that particular safe, but there is no way to know what those rows represent, or whether they are simply payment receipts.”

Voucher-Safe’s carefully thought out design and payment system make it vastly more flexible and resilient than previous digital currency business models. “We’ve been through generation one of digital currencies now and it’s time for generation two.“

The next parts of the Voucher-Safe special will cover Issuers and assets, the economic incentives of the system, trust in the system, the extensive security procedures, supporting apps and payment software and more.

Part II examines the Voucher-Safe economy, trust, security and software.

Part III looks at Voucher-Safe’s interaction with Bitcoin, Issuers and OnionPay.

Julia: What was it that got you interested in gold and Bitcoin?
Jay: I was comparing the two markets side by side, and realized there was a distinct similarity between precious metals and Bitcoin. Both have no central issuer, both have natural scarcity and supply control, both markets are highly volatile, and both are highly liquid. The main difference is that Bitcoin is easily transferred online, whereas gold is easily transferred offline. I also saw the potential for trading the Bitcoin markets day to day just like you have been able to with gold for decades, and the interesting indexes that emerged as a result of an exchange capable of supporting an appropriate conversion.
Jon: I became interested in Bitcoin by reading about poker weirdly enough. What got me interested were the few Bitcoin poker sites that popped up after the black Friday incident. Where a bunch of US based online poker sites went down because of financial restrictions. The US government was regulating how they could transfer money for players that wanted to deposit US dollars and play with real money. And what the banks and poker sites did, which was terrible, was they initiated money laundering tactics to try to get around the regulations. But these new Bitcoin poker sites didn’t even have to go through the banks. I thought it was a pretty novel solution to the problem.
After reading about it, I started really getting into the Bitcoin community and I saw gold as another extension of that initial opportunity I viewed. I’ve always liked saving, and gold is a very safe investment which is appealing to me.

Julia: Why sell people gold for bitcoins?
Jay: My motivation behind Coinabul was the obvious market demand for a secure way to store your accrued Bitcoin market gains or mining profits in a way that provides an inflation proof, Bitcoin-volatility-proof offline medium. Precious metals have proven to be a fantastic investment medium over many years, providing a safe way to store wealth without worrying about issues with long-term inflation. Bitcoin is a great way to transfer value, but can experience drastic volatility as evidenced by the crash from $32->$2 over the latter half of 2011. The need for a safe store for Bitcoin profits that has nothing to do with fiat money was obvious, and we made it our goal to provide the best possible value for long term profit storage for the Bitcoin community.
Jon: The gold industry is plagued by fraudulent transactions and chargebacks; Bitcoin eliminates any ability to counterfeit, double spend or chargeback. So there is in essence no transaction fraud that occurs on the Bitcoin network. So what this allows us to do in the gold industry is eliminate all chargeback risk which eliminates chargeback insurances, which means we’re able to cut down on our premium prices by a couple percentage points.
We’re a fairly small gold dealer and we’re able to compete with some of the largest gold retailers in the world after only a year of operation.

Julia: You and Jay Shore started Coinabul together?
Jon: Jay is the founder; I hopped on a few weeks after he started building the company. I do marketing, customer support, and some aspects of business development. Jay handles everything else, including tech!

Julia: Jay is the tech guy that has set up all the software behind your website and ordering system?
Jon: Kind of: Jay is the “everything” guy. He has upwards of a decade of web application development experience, he’s done a lot of e-commerce work, he’s done private consulting for many years and now he’s set up Coinabul. Jay has been around the Bitcoin community for a very long time. He’s trusted by just about everyone.

Julia: Who do you purchase your gold from?
Jon: We have a number of suppliers that we’ve created relationships with. It can be a bit of a hard industry to break into; you have to have a lot of personal contacts. Jay has created these contacts for us. We have relationships with specialized brokers who store large amounts of gold that they order directly from manufacturers, as well as the manufacturers themselves; both have stringent minimum quantity requirements that we must adhere to. Our products come with documentation; it depends on the manufacturer, but most of our products come with serial numbers. We only purchase our inventory from the most direct to-manufacturer route as opposed to the majority of dealers who rely on the general public to be their supply chain, exposing their customer base to the risk of counterfeit products.

Julia: What personal information do you collect from your customers? If I purchase some silver coins from you guys, what information are you going to ask me for?
Jon: We collect shipping information and we require an email if you want to open up an account. We ask for only what we need to ship gold to our customers in accordance with our AML policies, and for most customers this tends to be very little. Sometimes shipping companies will require an ID on location, for your safety and ours. With Bitcoin we can accept international payments easily. This means transferring funds from somewhere like the European Union to the US costs less than a penny with Bitcoin. We have a lot of international customers which means we are dealing with customs pretty much every day, and have the export process down to an art.

Julia: So Bitcoin allows you to operate globally largely because it significantly reduces the cost of international payments?
Jon: Yup! That’s part of what makes Bitcoin so exciting.

Julia: Bitcoin exists in a legal grey area at the moment. What has it been like trying to comply with applicable legislation?
Jon: I’m not the legal expert, but we have a very good lawyer and Jay oversees the legal issues. We are compliant and we make an effort to follow all applicable regulations, and have internal KYC/AML policies that help keep everyone protected. In essence, we’ve structured all of our policies such that we are in compliance with stringent regulations that technically are not even applicable in order to maintain the highest level of safety for us and our clients.

Julia: Do you worry that at some point Bitcoin may become illegal or regulation may become so burdensome that you might have to close shop? Do you have plans for such events?
Jon: Bitcoin has helped to create a really strong foundation for us, but we’re not solely a Bitcoin business. We’re currently working on plans to integrate US dollar payment options. We are looking at other payment options that similarly to Bitcoin are hard to charge back so that we can keep our costs down.
If Bitcoin does become illegal we will discontinue it as a payment option. But the Bitcoin protocol is adaptable and if there is a new version of Bitcoin was developed that is legal under this hypothetical ruling, we will adapt and use that.
With the launch of the Bitcoin foundation, I think Bitcoin is in a better place that it’s ever been.

Julia: I would think that any payment option in USD would go through the traditional banking system and be subject to chargeback fraud. What payment services or options are you considering?
Jon: That’s the initial problem with USD, pretty much every payment method has some sort of chargeback process. So, we’re trying to find the methods that are the most difficult to reverse.

Julia: Bitcoin can be very volatile. How do you guys manage that risk?
Jon: Once we receive Bitcoins they enter our special market risk mitigation system to ensure as little volatility risk as possible, despite the sometimes inordinate volatility we can experience day-to-day. But the name of the game is really to eliminate as much currency risk as possible on both sides of the equation. On our website, our prices update both with the gold spot and with the Bitcoin spot. We have two spots running all the time. This means that if Bitcoin and gold move in opposite directions of one another there are huge opportunities for gains or losses for our customers.
We have an API that allows you to order from our site without having to interact with our site at all. Some of our customers use our API to create bots that wait for a market opportunities.

Julia: What is Coinabul’s sales volume?
Jon: We just released our first year statistics. We sold roughly 140,000 BTC worth of product in our first year. That’s about $1.7mil US, which solidly places us as one of the largest Bitcoin businesses.

Julia: Where are most of your customers based? Where do you ship to most often?
Jon: We get a lot of customer in the States, but I’d say it’s about 50/50 US and international. We get a lot of customers from the UK, and the Netherlands, occasionally we ship to Asia.  We’re seeing a fair bit of growth in the South American market as well as the rest of  Europe, Eastern and Western.

Julia: What plans do you have for Coinabul in the next year or two?
Jon: We would like to begin competing with the bigger players in the industry. Our first year has been spent creating an initial foundation of customers and gaining the confidence of the Bitcoin community. Our first few months were just about earning the market’s trust as everyone is initially dubious of the first player in a high-value market like gold. But now we have hundreds of customers, community trust and we’re one of the only merchants verified by Mt. Gox, the largest Bitcoin exchange.
Our long terms goal include taking our processing time, which is currently 1-2 weeks, to about 24-84 hours. Once we have that turn around we will be a lot more appealing to a lot more consumers as customers will then be able to order and have their gold within three or four days.

Julia: How big of a company is Coinabul? How many employees do you have?
Jon: We currently have 8 employees, but will likely have to expand our workforce substantially within the coming year.

Julia: Do you own precious metals and Bitcoin yourself?
Jon: I prefer silver and I’m very, very long on Bitcoin. Jay is a big metal-bug and has also been into Bitcoin for a really long time so has a fair few himself. Everyone at Coinabul is enthusiastic about Bitcoin. A lot of Bitcoin companies encourage accepting your pay check in Bitcoin. It supports the Bitcoin economy. But I don’t think anyone should be putting their kids college fund in Bitcoin right now.

Julia: Do you see Bitcoin and gold as money? Do you think in ten years you’ll be using Bitcoin or gold to pay your mortgage?
Jon: I personally do not see Bitcoin as money. I think it is a way to transfer funds securely and rapidly. It is quite frankly a better bank wire. So, a Bank Wire 2.0, only without the banks. Gold, at this point in time, is very similar. However, since it cannot be moved quite as rapidly, locally or internationally, I think of gold as more of a reserve or an investment choice. I doubt Bitcoin will ever be something I buy my groceries with, but I could see it being used as a tool to make large payments, such as mortgages or cars. Gold’s future is unclear, I think in the current economic turmoil that anything could happen.

Now, there is a huge opportunity for something Bitcoin-esque to make an appearance in the future that is more user-friendly focused on micro-payments and consumer payment processing. I think that the idea that Bitcoin has sparked will put a lot of credit cards in the shredder.

.