The Second Coming, Cross-Border Payments Update :: Blockchain Letter, May 2016
Bitcoin’s volume-weighted price on the Bitstamp exchange has declined 3% since April 26th. However, price has risen 4% to $469 from yesterday to the time of publication. Year-to-date, bitcoin is up by 4%.
CROSS-BORDER PAYMENTS UPDATE
Cross-border payments have become one the most proven applications of blockchain. The increasing real use of the Bitcoin network, which has corresponded to a steady increase in bitcoin price, stems, in part, from institutions, businesses, and individual consumers using Bitcoin as a global payment rail that transcends the expenses and challenges posed by legacy systems.
Since 2014, we’ve been strong believers in the cross-border use case. Customers don’t need to know anything about bitcoin nor need to know that it is being used. Outside of Latin America and BitPagos where there are pain points specifically for bitcoin as a store of value and payment processing, all of our other cross-border portfolio companies are allowing customers to interact with what they are used to, their national currency, and the companies are providing faster, cheaper payments through bitcoin as a transfer rail in the background.
To illustrate the growth of cross-border payments as a use-case, many of our portfolio companies represent some component of the blockchain-based cross-border payments ecosystem and, as a vertical, they are seeing some of the most growth indicative of long-term health and success.
The transactional volume handled by our blockchain-based cross-border payments companies has been growing 20% month-over-month:
Blockchain-based cross-border payments are up nearly 8x since last April.
SWIFT is a 40–50 year old technology; perhaps the last major “fintech” innovation before Bitcoin. It is a one way messaging layer and we live in a 2-way communication world. SWIFT stands for “Society for Worldwide Interbank Financial Telecommunications”. How 1960’s is that? “Worldwide financial communication” is synonymous with Bitcoin. What’s the difference?
For one, as per recent news, SWIFT is hackable. Public distributed ledgers secured to the extent that the Bitcoin network is are virtually invulnerable to breaches like this — by design. Perfect timing… as Bitcoin and blockchain are ramping up, the vulnerabilities and inherent risks of centralized services such as SWIFT are coming to light. In related news, JPMorgan has become more receptive of blockchain technology as can be seen from its quiet testing of it, while trying to minimize further risk of SWIFT hacking.
Bitcoin is being used as a technology rail to move money while the users can enter and use products through familiar channels such as cash, credit/debit cards, and ACH. Companies will exchange fiat to bitcoin, move bitcoin, then transfer fiat back to users. The pain points where Bitcoin can be used as a technology rail is moving money across borders where existing friction is present, whether it relates to micropayments, remittances, or international business wires. Even though Bitcoin enables faster and cheaper payments, if the technology is going to be used by the mainstream, it needs to provide not only economic and transparency benefits but it also it needs to have a much better user experience than the products it’s disrupting. Two companies have done a great job of quietly using bitcoin as a rail to make innovative products for the mainstream — Align Commerce and ABRA.
Recently, Kleiner Perkins made its first Bitcoin-related deal by leading the Series A round in Align Commerce. Pantera lead Align’s seed round.
Align Commerce is a payments company that is replacing international business wires through the use of the blockchain as a technology rail. Align Commerce has been called the “business Venmo” or “Skype for money movement”. Currently international wires through local banks and correspondent banks can cost anywhere from 5–10%, take up to 2 weeks, and both sender and receiver have no transparency on the fees nor the process. Align Commerce has relationships with local banks and uses blockchain technology to reduce fees by more than half (company charges 1.9%), make payments within a few days, and both sides of the transaction have full transparency in terms of the entire process and fees.
Like how VoIP (Voice over Internet Protocol) disrupted cross-border telephony, Bitcoin will bring huge savings and improved service in cross-border payments.
Bitcoin will do to payments what VoIP did to telephony. We coined the phrase “MoIP” — “Money over Internet Protocol”. Bitcoin has revolutionized how consumers move money to each other and is just beginning to have an impact on business-to-business payments. Just as VoIP became popular with SMBs through cost savings and simplicity, Bitcoin will do the same through cost savings, speed, and transparency.
ABRA has recently raised $12 million in Series A funding for its bitcoin-based money transfer and remittance service, most notably including American Express as an investor. Pantera Capital participated in the company’s Series A round with Arbor Ventures, First Round Capital, and RRE Ventures.
ABRA is a company that is providing a digital wallet and a way for consumers to move money across borders with an innovative peer-to-peer model. ABRA has been called the “Uber for remittances” or an “international Venmo”. What’s innovative about their model is that users deposit and withdraw the local currency through tellers — designated individuals and small businesses acting as “ATMs” — so that the company does not hold funds. The flow starts when a user decides to add funds to his digital wallet through ACH or depositing cash at a nearby teller. The teller would accept the cash and transfer digital dollars (or whatever is their local currency) onto the consumer’s phone.
The local currency is stabilized and hedged using Bitcoin. The consumer can then send Philippine pesos to someone in the Philippines, and the receiver can move the money to his bank account or withdraw cash through the nearest teller. Bitcoin is the technology used in the backend and users don’t need to know that Bitcoin is being used or anything about it. The company launched their mobile app for the Philippine market and, currently, it is only available for consumers in the Philippines. The picture on the top right demonstrates the company’s teller coverage, reminiscent of a distribution of bank branches.
The timing is right for replicating the Kenyan M-PESA model at a global scale and in a decentralized way. ABRA’s mission is to replace bank-driven ﬁnancial inclusion with user-driven ﬁnancial inclusion by making cash mobile and through utilization of the Blockchain.
Just yesterday, Ripple announced that Santander has become the first major U.K. bank to use Ripple for cross-border payments.
Global payment infrastructure isn’t just stressed by today’s volumes, it flat out won’t meet the demands of tomorrow. Already, we’re seeing increasing need for international, low-value, high volume and high velocity payments from new types of corporates like Amazon, Google, and Alibaba.
Ripple affords banks the opportunity to serve growing global commerce needs with modern global payments infrastructure. Banks around the world are joining Ripple’s growing network of financial institutions to process cross-border payments instantly, inexpensively, securely and with end-to-end visibility. In the distributed financial tech or blockchain industry, only Ripple has shipped complete enterprise solutions, battle-tested by banks who have used them to process real money transactions. Ten of the world’s top 50 global banks are using Ripple. Several banks expect to deploy Ripple commercially this year.
In order to facilitate services like ABRA and Align Commerce, there needs to be regional exchanges with liquidity through the buying and selling of bitcoin from customers. These local exchanges can also provide cross-border transfer services themselves. Five Pantera portfolio companies (BitPagos, Korbit, Coins.ph, Unocoin, and BitPesa) have demonstrated the growth of using bitcoin as a payment rail by each transacting monthly volumes in the 7-figure range.
South East Asia — Coins.ph
The South East Asian region has some of the highest demand for money transfer and remittance globally.
Worldwide, a quarter of a billion people migrate annually, many migrating to send money back home from countries with better working conditions and pay. The World Bank estimates that $543 billion was remitted in 2014 alone. Remittance is now bigger than all foreign aid combined.
In 2013, one of every six working-age Mexican citizens lived in the United States.
In 2012, the Commission on Filipinos Overseas estimated that approximately 10.5 million Filipinos worked abroad. This is one out of every ten working-age citizen. On average, Filipino migrants remitted about 82,000 pesos in 2011, 80% of the average income of the Philippines (102,240 pesos, according to the International Labor Organization in 2012), representing roughly 10% of the Philippine GDP.
Coins.ph makes money transfer frictionless and accessible to everyone through the use of mobile devices and Blockchain technology. Their mobile wallet holds user funds in local currency and brings access to financial services such as lending, bill payments, and peer-to-peer payments.
Coins.ph stands out from many of the other South East Asia region money transfer plays because of its high traction, leading penetration into multiple countries across the region, and most importantly its abundance of “cash-in, cash-out” partnerships with local businesses. Coins.ph is already the dominant Bitcoin company in both Philippines and Thailand.
Latin American — BitPagos
Bitcoin has proven popular in Argentina and other parts of Latin America where local currencies are subject to wild depreciation or capital controls — to the point that bitcoin provides a more stable and viable option for storing value, making payments, and purchasing goods online. BitPagos was the first mover in this region and continues its market reign.
BitPagos started out by offering a bitcoin wallet which enabled consumers to turn local currency into bitcoin and vice versa, while also enabling online payment for goods using bitcoin. E-commerce transactions typically incur 15–20% fees and take 30–60 days to clear, which — if you can put yourself in their shoes — causes immense pain.
Recently, BitPagos has launched the ability to receive instant credit to buy goods online without the need for a credit card or credit check, using their proprietary credit-scoring algorithms. That’s hugely important in emerging markets because credit cards — the most obvious way to buy online — are not universally owned and alternatives like paying cash-on-delivery are inefficient and subject to high cancellation rates. In Latin America, for example, credit card ownership is below 20 percent, while many millions are unbanked altogether — do not even possess a bank account. Offering credit in this way is not only innovative, but is paving a real path to the financial inclusion dream — something that’s often talked about but hardly ever pursued this effectively in practice.
Africa — BitPesa
BitPesa allows individuals and businesses to send payments to and from Kenya, Nigeria, Uganda, and Tanzania. The intra-payments market in Africa is equally a large opportunity. They accept Bitcoin from nearly anywhere in the world and exchange it for local African currencies, which is then sent to the customer’s mobile money wallet (e.g,. M-PESA) or bank accounts.
BitPesa is now focusing on business payments in areas like import/export and tourism. Customers and receivers don’t need to know anything about Bitcoin and again, it is used as a transport rail for money.
India — Unocoin
Unocoin is the leading Bitcoin company in India. Similar to Coinbase in the U.S., the company provides a brokerage and payment processing service. They expect to release their exchange and remittance API soon.
The Bitcoin opportunity in India is immense and unique:
- India is the largest remittance market, transacting over $70 billion a year.
- The country has fast growing Internet adoption.
- The population is largely unbanked, but technology-savvy and noteworthily accustomed to storing value in gold.
Bitcoin adoption in India is still very much in the early, innovative adopter phase. Much like the Internet, which was slowly adopted in India but later resulted in India becoming the 3rd largest Internet user base in the world, Bitcoin too is expected to pick up exponentially in the coming few years. We believe the impact that Bitcoin technology will have on the country’s future is expected to be much larger than the impact of Internet.
THE SECOND COMING, SATOSHI AND THE GRAND INQUISITOR
Tons have asked about Craig Wright and whether he truly is Satoshi Nakamoto.
“And behold, He deigned to appear for a moment to the people, to the tortured, suffering people, sunk in iniquity, but loving Him like children.”
“Man is tormented by no greater anxiety than to find someone quickly to whom he can hand over that gift of freedom.”
A parable from Dostoyevsky’s The Brothers Karamazov is in our Medium post.
Chief Scientist of White Ops Dan Kaminsky — a renowned security researcher who keynoted one of our first Bitcoin Pacifica conferences — conducted a thorough analysis of the “proof” provided by Wright and concluded that Craig Wright is not Satoshi. In short, Craig Wright used misdirection techniques in conjunction with publicly accessible identifiers attributed to Satoshi to create convincing illusions that he was Satoshi. You can read more of Dan Kaminsky’s analysis on his blog.
Despite the mainstream fanfare these hoaxes generate, Satoshi’s true identity doesn’t matter:
“…the identity of Satoshi Nakamoto…serves to distract from the fact that bitcoin is not controlled by anyone and is not a system of Appeal-to-Authority. Identifying the creator only serves to feed the appeal-to-authority crowd, as if [Satoshi Nakamoto] is some kind of infallible prophet, or has any say over bitcoin’s future.
“Identity and authority are distractions from a system of mathematical proof that does not require trust. This is not a telenovela. Bitcoin is a neutral framework of trust that can bring financial empowerment to billions of people. It works because it doesn’t depend on any authority. Not even Satoshi’s.
“Back to work.”
MAJOR BLOCKCHAIN INDUSTRY DEVELOPMENTS
Japan Officially Recognizes Bitcoin and Digital Currencies as Money
Excerpts: “…According to the Japan Times, the Japanese Cabinet has officially approved a set of bills that will help the integration of digital currency into the legacy banking system through regulation. As we at BitConnect.co have previously reported, this legislation has been in the works for several weeks. The recent announcement formally makes what was already considered a forgone conclusion official.
“New Japanese regulations will require Bitcoin exchanges to adopt established KYC/AML standards used in other nations. Banks will be able to enter the burgeoning “Fintech” industry for future gains and asset management. Preventing new forms of money laundering through Bitcoin and maintaining consumer protection will also be goals in 2016….” [BitConnect]
Opinion: Why I’m Buying Bitcoins
Excerpts: “If I were to tell you that gold miners or oil producers were about to cut their production in half, would that make you more or less bullish on gold and oil? More bullish of course. That’s exactly what’s about to happen to bitcoin, the digital currency.
“Currently, 25 bitcoins are created every ten minutes. On 11 July, this number will drop to 12.5. Then, four years after that, it will half again. Why is this happening? There are roughly 15.5 million bitcoins in existence and the halving process means that the total can never exceed 21 million, expected to occur roughly a century from now. That’s all locked down in the code.
“Limited supply is a powerful force, and making bitcoins scarce was a key feature of its design — and a key difference between bitcoin and normal, “fiat” currency, which can be printed in unlimited amounts.
“Many people buy bitcoin purely for speculation — betting on the price going up. But they’ll only be proved right if others buy it for its utility. You can almost think of bitcoin as a social media stock. The more people who use it, the more valuable it becomes. But what, for the uninitiated, exactly is bitcoin? Quite simply, it is a digital asset that can be freely transferred across the internet. It doesn’t exist in physical form, there’s just a reference to your holding stored on a public ledger known as the blockchain.
“…So as far as I’m concerned, you should treat this as a cheap growth stock. At $450, the “network value” of bitcoin is around $7bn. If it goes mainstream, it’ll give the FANGs (Facebook, Amazon, Netflix and Google) a run for their money….” [Moneyweek]
Delaware Considers Using Blockchain Technology
Excerpts: “Delaware, the state that incorporates the most public companies, is exploring the use of blockchain technology to move more of its paperwork to cheaper systems.
“The effort, while still in its early stages, could change some of the most basic back-office functions for private and public companies alike.
“Delaware Gov. Jack Markell is scheduled to discuss details of the Delaware Blockchain Initiative at an industry conference in New York on Monday.
“’This is something we’re very interested in,’ Gov. Markell said in an interview. ‘We think the benefits could really be tremendous….’” [WSJ]
CFTC Commissioner J. Christopher Giancarlo: “With Blockchain, Do No Harm.”
Excerpts from his speech: “Two decades ago, as the Internet was entering a phase of rapid growth and expansion, a Republican Congress and the Clinton administration established a set of foundational principles: the Internet was to progress through human social interaction, voluntary contractual relations and free markets. Governments and regulators were not to harm the Internet’s continuing evolution. Because of this ‘do no harm’ approach, the Internet created millions of jobs, transformed our economy forever and improved standards of living across the globe.
“Today, as you know, a new technology is at hand that may offer a similarly profound tool to share networks of information. Yet, its development is at risk of being stymied by disparate and uncertain regulation.
“It is time again to remind regulators to ‘do no harm.’ That is what I want to speak to you about this afternoon.
“The emergence of distributed ledger technology, which all of you know is sometimes referred to simply as ‘DLT’ or ‘blockchain,’ may revolutionize the world of finance. In fact, the Bank of England has called DLT the “first attempt at an ‘Internet of finance.’ DLT has the potential to link networks of legal recordkeeping the same way the Internet connects networks of data and information. It will have profound implications for global financial markets by increasing settlement efficiency and speed, linking recordkeeping networks, reducing transaction costs and increasing market access. It will broadly impact financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis….” [CFTC]
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