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 anonymity.
- Use a range of financial instruments, such as cheques, vouchers, and untraceable 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.”
- 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.