Via TheRealAsset.co.uk

On April 12^th 3.4 million ounces (100 tonnes) of gold was sold in the US futures markets. This was just for starters, the main, side and dessert appeared over the following hours and the next session on the Chicago Mercantile Exchange (COMEX).

As those in the West holding paper gold stood frozen watching the price tick further downwards, those in the East and others looking to buy physical gold, went on a shopping spree. Premiums on physical gold in China, India, Vietnam and across Asia hit highs associated with economic and geopolitical crises. Dealers struggled to keep up with demand.

In the four weeks to April 24^th reported inventories of ETFs, funds, and futures market depositories collapsed by over 5.5 million ounces ($7 billion).

The largest physical removals were reported by the COMEX of 1.4 million ounces and the SPDR Gold Trust (GLD), which reported total inventory removal of nearly 4 million ounces.

In their Q1 report, the World Gold Council referred to the ‘dichotomous nature’ of the gold market – this is clear as the paper gold market continues to tell a different story to the physical market.

Today we continue to see ETF outflows and COMEX gold futures have fallen once again this week. Meanwhile, premiums on physical gold in Hong Kong have climbed to $5 per ounce, having been $3 last week, whilst traders in Japan are pushing premiums up in response to Chinese gold demand.

…

But, what do people really mean when they talk about the ‘paper gold’ and ‘physical’ gold markets?

Gold futures, gold exchange traded products (ETPs) and physical gold are each different ways of gaining exposure to gold. Each form of gold exposure has its relevant gold market segment catering for investors, yet all are priced according to an international gold price.

…

The Futures Market

Futures contracts allow investors to efficiently trade gold, for delivery at a future date – they are one of the most efficient ways to buy gold.

The global gold futures market is worth around $75 billion, with liquidity, in the form of open interest spread, around the world’s major financial exchanges.

The 100 ounce gold futures contract on the COMEX dominates this activity and accounts for 85% of gold futures trading. COMEX has mild competition from 1kg gold futures contracts traded on the SHFE (Shanghai) and TOCOM (Tokyo) which account for 7% each of the futures market.

There is little doubt over which gold futures market enjoys the liquidity monopoly of these exchanges and thus has the biggest impact on setting the gold price.

This was no better seen than back in April when several large sell orders of the June futures COMEX futures contract appeared on the market, over 120% of annual gold production was traded in one day and the gold price plummeted to levels 30% below the all-time high of $1,920.

Exchange Traded Products

Exchange traded products, or exchange traded funds, allow investors to easily invest in a given asset class by buying shares in a security that tracks the price of the underlying asset. The gold ETP market has grown over the last 12 years to rival other gold market sectors.

Made up predominantly of gold-backed exchange traded funds, the gold ETP market is worth $81.2 billion. State Street’s SPDR Gold Trust, known by the ticker GLD, accounts for nearly 60% of this market, representing the main liquidity hub within the gold ETP space.

Together, the top physically gold-backed ETF products are worth over $59 billion, of which $48 billion is held by GLD.

…

Refineries and Supply to Physical Gold Market

After the two gold market parts above, we arrive at the physical gold market which is supplied by a range of refineries around the world.

The top refineries in the world have a collective refining capacity of 8000 tonnes, the equivalent to $354 billion. This is assuming that they are able to operate at full capacity and are constantly processing given mine and scrap gold supply.

However, supply of gold bullion to the market is on average 4,400 tonnes per year. This physical gold supply is made up of approximately one third recycled gold, with the rest coming from active gold mines. Supply of gold has remained relatively flat since the start of the gold bull market, twelve years ago, meaning that the world’s growing gold demand has to be serviced by this steady supply.

…

It is important to note the lack of mining and refining information in areas such as South America and China – hence why we don’t mention refineries from these areas.

At first glance the gold production capacity from refineries appears to more than match the value of assets traded in the futures and ETPs markets. The nature of trading in these markets is more difficult to compare though, and the paper markets are where the greatest daily volumes occur.

After looking at the size of the relative gold market constituent parts, we need to look deeper to establish where the gold price really gets set and how this happens.

The physical market, although larger, with its lower turnover and churn is less relevant at this time, with gold prices being set in the paper markets of COMEX, GLD et al.

We are thus focused upon COMEX and GLD, the largest liquidity hubs in their respective markets. How do their trading volumes compare?

In the last week, the value of the ‘gold’ traded on the COMEX, far exceeded that on the GLD – by over 20 times in fact.

To put this paper trading into perspective, the annual capacity of refineries is $374 billion. Therefore the last week’s gold trading volumes on COMEX were equivalent to 50% of total annual refinery capacity. Half the physical gold that could possibly be refined in a year was traded in paper form this week.

So, whilst the notional value of open interest on the world’s major futures markets is comparable to the market cap of the gold ETP industry, the volumes traded at the major two liquidity hubs within these different market segments is noticeably different.

The dollar value of trading volume at COMEX is far greater than its largest ETF competitor, GLD, meaning that COMEX continues to hold its place as the largest and most sophisticated meeting place for buyers and sellers to express their gold price opinions, in the form of bids and offers, on what the price should be.

COMEX remains the beating heart of gold price discovery.

Questions Being Raised About COMEX

Gold futures contracts are referred to as ‘paper-gold’ because the size of this market is said to be over 100 times larger than physical gold available. As we said previously, open interest on the COMEX, at the time of writing, accounted for over 85% of demand on the gold futures market, so COMEX receives the most examination here.

In theory investors are able to take delivery of the futures contract on expiry, although few do, instead choosing to roll the contract.

…

There has been some attention paid to the scale and pace of draw-downs of COMEX inventories. JP Morgan and Scotia Mocatta have seen the largest outflows of bullion in their repositories. Compared to withdrawals at JP Morgan’s storage facilities of 1.2 million in the first 3 months of 2013, Scotia Mocatta’s drainage of 650,000 ounces seems less remarkable in comparison. Until these recent drawdowns eligible gold stocks at COMEX had been increasing.

The speed and acuteness of recent drawdowns in COMEX inventories – over 2 million ounces since the beginning of the year – suggests that traders are increasingly standing for delivery of their futures position. It is argued that these investors are not exiting the gold market, but simply converting their efficiently entered paper position into physical form.

 Read the report in its entirety here.

Fabrice Drouin Ristori:How long can the manipulation of the precious metal markets last ?

Chris Powell: It can last as long as gold investors buy “paper” gold rather than real metal. The primary article of faith about gold is that it can’t be printed, but it CAN, insofar as “paper” gold can be printed to infinity. Gold investors who buy “paper” gold with the hope of price appreciation would do better to flush their money down the toilet. At least that way they’ll avoid commissions.

FDR: What will put an end to it –

CP: Probably only the discrediting of “paper” gold, or a futures market default.

FDR: What will be the signs proving that the manipulation is ending ?

CP: I doubt that we’ll get any signs, though maybe the decline in price of “paper” gold relative to the price of real metal is a sign of trouble for the manipulation. More likely the gold price suddenly will be reset to a much higher level that is more sustainable for manipulation by central banks with less drain on their gold reserves, at which point manipulation will resume at the higher level. I doubt that the manipulation will ever end, since, to preserve their power, governments probably always will try to rig the currency markets, and they’ll probably get away with it until investors around the world are far more informed than they are now.

FDR: Do you anticipate an overnight ending of the manipulation or a progressive process ?

CP: I think an overnight revaluation is more likely now. Of course currency revaluations are always done suddenly, aiming for surprise. No central banks are going to call us a few days in advance so we can arrange our portfolios for the greatest benefit. Only the investment banks that function as agents for central banks will get such calls.

FDR: Is the gold/silver paper spot price still relevant to value physical gold and silver ?

CP: It is if people really can find metal for purchase at the paper spot price. But the paper spot price may be losing some relevance as more shortages have been reported and there is rationing of gold and silver coins from government mints. Shortages and rationing are forms of higher pricing that don’t get included in nominal prices. Nominal prices are little use if the product isn’t available. But indeed, most gold-related assets are still taking their cues from the paper spot price and futures prices.

FDR: What direct consequences would a free gold/silver market have on people worldwide — not investors, people in general ?

CP: Free markets in the monetary metals would liberate markets and peoples generally, and reduce the power of governments and central banks, especially their power to control in secret the prices of all capital, labor, goods, and services in the world. Such liberation is really the objective of those who would expose the Western central bank gold price suppression scheme. We don’t really care what people use as money. We just want them to have options of valuation that are beyond the control of government. Here’s how von Mises put it: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

]]> http://www.dgcmagazine.com/goldbroker-interviews-gatas-chris-powell/feed/ 0 http://www.dgcmagazine.com/bitcoin-selling-out/ http://www.dgcmagazine.com/bitcoin-selling-out/#comments Tue, 21 May 2013 23:15:47 +0000 Julia Dixon http://www.dgcmagazine.com/?p=1454 Continue reading →]]> The 2013 San Jose Bitcoin Conference has proven to be rather controversial. While it is considered to have been a success, being well attended and attracting high profile speakers, it has brought up a very divisive topic in the Bitcoin community…regulation.

In his presentation at the conference Peter Vessenes, the executive director of the Bitcoin Foundation, announced that the Foundation will be hiring a lobbyist saying “It’s time to engage with regulators and have a good, productive conversation.”

High profile investors Cameron and Tyler Winklevoss declared that “Cooperation [with regulators] is really the way forward.” And expressed that recent moves towards Bitcoin regulation are a good thing saying “FinCEN acknowledges virtual currencies. They’ve given guidance, which is a big step.”

There are many in the Bitcoin community who worry that close co-operation with regulators will destroy what Bitcoin is meant to be, free from political control and anonymous. Lifetime Member of the Foundation, Mike Gogulski, has even called for the disbandment of the Foundation.

Late last year Jon Matonis, also on the board of the Bitcoin Foundation, published an article entitled Bitcoins Greatness not Realized by Succumbing to Regulation.  In the piece he express concern that compliance with AML & KYC rules will link names to transactions and has the possibility of “cumulatively degrading the privacy of all bitcoin transactions.” Adding that …

Bitcoin’s great promise lies in its potential ability for both income and consumption anonymity. It is this feature alone that allows users to maintain the same financial privacy as physical cash today and it is this feature that will also lead to liberating advancements such as a thriving and interconnected System D, unhampered and undiluted freedom of speech, and superior asset management that can truly be said to be off-the-grid.

I tend to agree with Matonis. The idea that embracing regulation will actually work out for the Bitcoin community is a bit of a fairly tail. As he reminds us…

Those who support the antithetical overlay of  bitcoin on the current financial system ensure us that it will only be temporary and that we must build bridges. That would be nice but it’s a fairy tale. It reminds me of the Marxist theory of historical materialism and the Marx-Engels ideology that if we only tolerate the bourgeois state during the transitional advancement to a higher phase, we will see the complete “withering away of the state.”

I don’t see this as a political debate, or smart business management, or selling out, I see this through the lenses of power. Those who have it don’t like to lose it. Bitcoin and commercial banking/monetary policy are incompatible. Crypto-currencies threaten the government/banking cozzie power sharing deal and if you think they will give up power voluntarily you’ve got to stop dreaming about sailing the Caribbean in your new yacht and wake up.

As c-net reminds us co-operating with regulator didn’t work for e-gold.

that didn’t stop the E-Gold online payment system from being shut down after a federal indictment on charges of money laundering. Not only did E-Gold chairman Douglas Jackson interact with regulators, he even testified before the U.S. Congress a year before the indictment took place.

I can’t imagine that US regulators will stand by and let Bitcoin succeed. This isn’t crazy conspiracy stuff; this is basic theory on incentives and human behaviour.  All those regulators have mortgages to pay and friends to impress…they don’t want to be rendered irrelevant.

An increasing number of people have complained about governments and central banks in recent years, even using the word “tyranny” to describe them. They are, of course, called names in the establishment press: conspiracy theorists, mainly.

Calling someone a name, however, does not erase their argument (at least not among rational people) and both the governments and the big banks stand accused.

Up till now, however, these accusations were never accepted by the general public. The average guy really didn’t want to hear about the evils of government money. After all, that was the only thing he had ever used to buy food, clothes, gasoline, cars, and so on. He didn’t want to acknowledge the accusations because he feared what might happen to him without his usual money.

Now, however, we have a brand new currency (called Bitcoin) available to us: something radically different. This gives us a new way to directly address the subject of monetary tyranny, providing a clear test for the governments and money masters of the world:

If they are truly NOT tyrannical, they will leave this new currency alone.

If they ARE tyrannical, they will attack the new currency because it eats into their scam.

In other words, Bitcoin is a test for “the powers that be.” The way they deal with this new method of exchange will reveal their true nature.

If they ignore Bitcoin, they refute the charges of tyranny. If they attack it, they verify those charges.

After all, what honest reason could there be to attack an inherently peaceful tool for transferring value?

Prospective Reasons

Reasons to attack Bitcoin have recently appeared in the “public square.” Here are the three most popular ones, each followed with some analysis:

1. It can be used for money laundering.

Of course it can be used for money laundering — ANY currency can be used for money laundering. Currencies are neutral — that is their purpose! Currencies are valuable precisely because they can be exchanged for anything else — that’s why we use them!

Moreover, dollars and Euros and Pounds are used for money laundering every day. Consider the recent money laundering crimes of HSBC and Wachovia/Wells Fargo. These banks laundered hundreds of billions of dollars for violent drug cartels. And consider that this amount of laundered money is several hundred times the value of every Bitcoin in existence.

No one from either bank went to jail. Neither bank was shut down. Neither bank suffered more than a minor fine. So, how much of a concern can money laundering really be to governments and banks? Clearly not much.

But, since they accuse Bitcoin of being used for bad things, let’s be clear about the situation:

– Every mafioso uses government money.

– Every drug smuggler uses government money.

– Every terrorist uses government money.

– Every pornographer uses government money.

– Every criminal of every type uses government money.

They also use the telephone system and the mail and banks and a wide variety of government services. But government money is good and Bitcoin is bad?

The argument fails.

2. It could destabilize the current system.

A tiny, new currency is a threat to the long-established king of the hill? Comparing Bitcoin to dollars, Euros and Yen is like comparing an ant to a dinosaur. This is a threat?

Please understand also that no one is forcing anyone to use Bitcoin. If you don’t think it’s a great idea, you don’t have to use it. If its price movements (relative to dollars) bother you, you don’t have to use it. How is that destabilizing to the current system? It is entirely separate.

And what of the current system? It was falling apart on its own before the Bitcoin program was ever written. And I could go on at length on the insane levels of government debt, hundreds of trillions in derivatives, rehypothecation, and innocent people being forced to bail-out failed banks.

The current system has massive problems, but none of them can be blamed on Bitcoin.

This argument fails also.

3. Bitcoin provides no customer protection.

Well, no, it doesn’t. Bitcoin is a currency, not a legal system.

What is implied by this argument is that the government banking system does protect customers. That is an outright lie. People are ripped-off via the banking system every day. And more than that, consider what happened just a month ago in Cyprus: Thousands of innocent people were ripped-off BY the banking system — purposely — all at once and without recourse. This argument is, really, an insult to one’s intelligence.

And I should add something else: If Bitcoin is used properly, the crime of identity theft (a big problem with government money) vanishes — there is no identity available to be stolen.

So, again, the argument fails. Only those people who believe anything a government says will buy it.

In the End

In the end, it is said, we judge ourselves. Bitcoin has now put governments and banks in the position of judging themselves. They will write their own verdicts.

It should be interesting to watch.

Via the EFF website

Today, we’re happy to announce that we will be accepting Bitcoin donations through our website. You can use them to make one-time donations, set up monthly donations or get an EFF membership (which includes awesome membership swag like EFF hats and digital freedom t-shirts).

While we are accepting Bitcoin donations, EFF is not endorsing Bitcoin.  EFF does not typically endorse products or services, and we certainly do not endorse any of the electronic payment methods that we currently accept (credit cards, PayPal, and now BitPay).

The EFF stopped accepting Bitcoin donations two years ago. They give the reasons for the reversal of this decision as…

• “Censorship by payment intermediaries is an ongoing problem for free speech online – so it makes sense to start diversifying the available options.”
• “You can now give Bitcoins to EFF in the same way that you can give stock.”
• “Our research and FinCEN’s guidance removed a key risk to EFF.”
• “Our members keep politely asking for it.”

WebMoney has its own exchange to allow users to convert between the supported currencies. This change means that users will be able transfer Bitcoin(WMX) to any of WebMoney’s other denominations.

More details here.

With their recent guidance, FinCEN decided that virtual currency exchangers are money transmitters.

“An administrator or exchanger that (1)accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations.”

Mt. Gox is not a US company; however, it does a lot of business in the States and is not registered with FinCEN.

An informant working with a Homeland Security agent signed up for both Mt. Gox and Dwolla accounts. After making a few transactions, he was able to determine that his funds had gone through a Wells Fargo bank account owned by Mt. Gox and opened by the exchanges’ CEO Mark Karpeles. The account was opened by Mark in May 2011 who at the time signed a Wells Fargo form declaring that his business was not a Money Services business or a Money Transmitter.  Of course this was almost 2 years prior to FinCEN’s guidance on the issue.

The Warrant states that Mt. Gox is in violation of 18 U.S.C. section 1960. The punishment for this can include fines and up to 5 years in prison.

Ars Technica obtained a copy of the warrant which can be read here.

The Department of Homeland Security appears to have shut down the ability to use Dwolla, a mobile payment service, to withdraw and deposit money into Mt. Gox, a Bitcoin trading platform. A Dwolla representative confirmed the move to Betabeat.

A representative for Dwolla told Betabeat that the company is “not party” to this matter and encourages those with questions to reach out to Mt. Gox or the DHS.

“The Department of Homeland Security and U.S. District Court for the District of Maryland issued a ‘Seizure Warrant’ for the funds associated with Mutum Sigillium’s Dwolla account (a.k.a. Mt. Gox),” he said. “In light of the court order, procured by the Department of Homeland Security, Dwolla has ceased all account activities associated with Dwolla services for Mutum Sigillum while Dwolla’s holding partner transferred Mutum Sigillium’s balance, per the warrant.”

Mt. Gox has posting the below statement to their Facebook page.

Like many who have contacted us, MtGox has read on the Internet that the United States Department of Homeland Security had a court order and/or warrant issued from the United States District Court in Maryland which it served upon the Dwolla mobile payment service with respect to accounts used for trading with MtGox. We take this information seriously. However, as of this time we have not been provided with a copy of the court order and/or warrant, and do not know its scope and/or the reasons for its issuance. MtGox is investigating and will provide further reports when additional information becomes known.

Below is a screen shot of the email being received by Dwolla users who have recently made trasnfers to Mt. Gox.

The online world SecondLife comes with its own currency, Linden Dollars. A number of virtual currency exchanges make a significant portion of their income buying and selling Linden Dollars. Third party exchanging of Linden Dollars has been happening for years and is an important service particularly to SecondLife players outside the States who otherwise do not have a means of purchasing Linden Dollars.

Last week Linden Lab, the SecondLife operator, changed their terms of service to prohibit third-party trading of Linden Dollars.

Via the SecondLife Website

“to better protect Second Life users against fraud, the updated Terms of Service make it clear that trading of Linden dollars (L$) on exchanges other than the LindeX, Second Life’s official L$ exchange, is not authorized or allowed. “

There is some reason to believe that Linden Lab’s change of policy is due to FinCEN’s guidance on virtual currencies.  FinCEN made it clear that their guidance applied to “convertible” virtual currencies and the existence of Linden Dollar exchanges would seem qualify the virtual currency as “convertible”.

HypergridBusiness.com, a website dedicated to users of virtual worlds, is reporting that several exchange owners have received emails from Linden Lab requesting that they immediately cease facilitating Linden Dollar trades.

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.