The Internet Of Value
By Richard Svinkin and John Biggs
“The medium is the message.”
The Freeport Network is an open-source system designed to connect financial players like banks, cash points, and digital wallets seamlessly using proof-of-stake methods operating on the proof-of-work Bitcoin blockchain. By allowing all of these players and their customers to communicate in a trusted way we are able to streamline the movement of money within and across borders. It is the first step towards a true, borderless Internet of Value.
The turn of the last century brought us a vast network of connected machines. This Internet of Data enabled the sending of general information — photos, text, and audio/video files — from person to person at lightning speeds triggering a revolution unseen since the creation of the telegraph. But, just as telegraph operators like Western Union adapted their medium to enable payments, modern financial players attempted to graft their payment tools to the Internet with mixed results.
Money doesn’t move like a photo. You don’t just take a dollar from your bank folder and attach it to an email or share it with your friend on Bankstagram. Getting money in and out of closed networks like Venmo or Paypal is not trivial. To speed things up you can to use a card, which adds a fee. Adding cross-border payments into the mix increases costs, time, and complexity. Any payment app that purports to be free domestically or cross border is simply accepting and hiding the costs of using 1970’s rails in order to acquire users.
Why (Not) Bitcoin?
Now we have Bitcoin and the blockchain. These tools are ushering in not a financially-augmented Internet of Data but a new and separate Internet of Value — a network that allows users, web pages, and even smart devices to pass small amounts of value between themselves quickly, securely and openly in the form of Bitcoin or other cryptocurrencies.
But Bitcoin will not be adopted by the masses as a payments solution. Bitcoin and cryptocurrencies at large, in their current form, may absolutely be the best stores of value the world has ever seen but the world is not yet ready to adopt crypto as a replacement for governement-backed currency.
A Third Way
So the question that all payments and cryptocurrency thinkers are asking now is how do we bring about this Internet of Value? How do we create a money system and perform money transfer on the Internet in a way that is fast, secure, fair, stable, and compliant with regulations? In other words how do we bring the world’s money fully online?
Do we upgrade legacy technology following Bitcoin’s example or do we ignite the Bitcoin revolution to try to replace all fiat currencies?
The answer is neither.
Value is an asset, digital or even physical, that can be represented on a network. What is needed is a new value messaging system for banks, risk holders, money transfer applications, ATMs and all entities in the fintech ecosystem to transfer and exchange value quickly and easily as secure messages just as web servers and browsers can communicate based on a common protocol.
We are proposing the Freeport Network where today’s money can be brought online properly. This network will ensure that “value,” in whatever form the user desires (be it fiat or crypto or some other digital asset), moves from point A to point B anywhere in the world and can do so without degrading, slowing down, or stopping all the while maintaining its agreed upon meaning to each party.
If it is free and trivial to send email or instant messages between servers, why isn’t it free and trivial for money to travel between people? Why is there no sane way for a user in the US to send $5 to a friend in India and have that friend send back mobile minutes? Why is there no friction-free or sane fee-based approach to using an ATM abroad?
When I use my money abroad in any form — swiping a card, sending money at Western Union, or performing an ATM transaction — I am getting screwed. In the current version of the global financial model, players in the financial space use many legacy money transfer applications and rails. What we have is incremental adaptations of information technology in the service of competition between closed systems of trust. In such a world it’s nearly impossible for money to pass like simple messages, freely and in compliance with all governmental regulatory bodies.
There are ways to move money seamlessly between banks. In the US we have ACH and in the EU we have SEPA and between them and other regions we have systems like SWIFT. China is building a global network of their own. But these systems are themselves vulnerable. These systems aren’t designed for the fintech application explosion we’re beginning to witness. Further, banks don’t want to let the money flow seamlessly. They hold our money for as long as they can in order to make more money even as they argue that security and technology are the rate limiting factors.
N Closed Networks for P2P Money Transfer
It is upon a vulnerable and fearful layer of financial plumbing that banks and financial apps like digital wallets are creating N closed networks where each user must invite another user to adopt the same app. From a market perspective this is results in a world that is massively inefficient. How many Venmos are being built around the world — each locked within a domestic regulatory box? How many remittance platforms that move money between countries but are really one-off channels between banks? Certainly there is always PayPal and its increasing global reach, but as that company’s earnings continue to rise, PayPal is just as vulnerable as any legacy system to hacking.
The future is multi-modal and global. Connectivity, like nature, seeks diversity.
How The World Works Now
Imagine a US user who has some money in a digital wallet called MoreMoney. Right now if they have $250 in MoreMoney account and they want to send that money to a friend in India, first they have to “download” the money from MM because the app isn’t available in India.
Step 1 — “Download” the Cash
When the user requests her cash, this kicks off an ACH withdrawal from MM’s bank to the user’s bank. The “download” process takes 1–3 business days so each bank can hold the money to make money for themselves. Once the user “receives” the money there are a number of ways to move it from their bank to India. Some would consider this choice to be a benefit but, thanks to the tribal and insular nature of money sending services there is no transparency and no way to find the best rate.
Step 2 — Initiate a Wire Transfer from the US Bank to an IND Bank
Instead of going down the money transfer rabbit hole the user’s US bank offers a wire transfer service that can be initiated as soon as the MM funds are received. It costs $35 to do the transfer and offers what appears to be a competitive exchange rate. If they want to try a cheaper option like Transferwise or PayPal they have to wait even more days to get the money from their bank to one of the cheaper options. All the while the banks are earning interest, holding the funds, and taking time.
Step 3 — “Compliance”
The US bank receives the order, iniating a wire transfer and charging the $35 transfer fee. The transfer and transferring user goes through the AML/KYC process required by the bank. So does the receiving user. The Indian user’s bank details need to be entered as well as well as some identity information to comply with both US and Indian regulations and to know where to “send” the money. So the transfer is initiated, minus the transfer fee and the currency exchange tolls. This entire process can take a day or a week depending on the initiating bank.
Step 4 — IND Bank receives the Money
Finally the Indian bank “receives” the funds. They may take some currency exchange fees as well and notify the Indian receiving user that the funds are available. At this point only about $200 in Rupees is left and it’s taken many days to send this cash, much diminished, over the ocean.
Step 5 — Load up the IND Digital Wallet
But that’s not all. That Indian user has a digital wallet themselves. To access their cash they initiate a deposit to that wallet which kicks off another process similar to the first.
Both users are using Digital Wallets and even though all operations can be initiated digitally as well the costs, fees and efforts are still there. Closed networks simply don’t talk to each other.
We propose the Freeport Network — an open source messaging and reporting system to connect independent fiat and crypto currency money transfer and payment applications, using a proof-of-stake tokenization method that’s integrated with the Bitcoin blockchain. By connecting apps, wallets, banks, and cash access points we are able to create a trusted and trustable network of players that each pass tokens to each other securely. These tokens contain the contractual, transactional and identity information of users in a manner that is adherent to global regulations in a decentralized fashion. Settlement will follow agreements between application owners and their underlying bank and risk-holder partners.
The future we want is one where money is interoperable, borderless, fast and serves the needs of users while complying with necessary regulations. Say you’re a user of a digital wallet in the US. You want to send money to a user in India who is using a different digital wallet there. When you open and log into a your wallet and you want to connect to your friend in India, if both wallets are participating in the Freeport Network then the user is available as a money transfer contact. In this model the user in India is not required to create an account in a US bank or download the US app.
Just as email@example.com can send email to firstname.lastname@example.org without each having to get permission from the respective email providers, we ensure that Bob can address Alice internationally and send a transfer between them. There is no intrinsic degradation of value. The $5 that the US user wants to send to India can recieve the equivalent amount of Rupee at the time of transaction initiation based on FX markets if the parties agree to such terms. The transaction is instantaneous.
Users can interact with each other using one or more money transfer applications. When participating application owners join the Freeport Network their users various money addresses become visible throughout the network and through a secure messaging channel money can be passed between those addresses regardless of the User Interface application people use to access them. The end vision for this network is that every end user has one or more “money addresses” by virtue of subscribing to one or more financial applications — just as a user may have a Gmail email address and a Yahoo! email address. In the proposed system a user can have separate but connected and trusted money addresses at Bank A, Payment Provider B, and/or Digital Wallet C.
The end vision for this network is that every end user has one or more “money addresses” by virtue of subscribing to one or more financial applications
The value proposition for users is simple — as long as I have any network connected app that holds money — I can send money to any other network connected app, or “withdraw” that money from a wallet onto an ATM so long as that ATM is also on the network. The same logic may apply to Point-Of-Sale systems, Bill Payees and many other money app providers. This is a blueprint for a real Internet of Value.
In order to provide an interoperable and simple end-user experience the complexity must be hidden from the user and passed to the underlying architecture. Further, application owners and underlying risk holders must have their own requirements met in order to transfer contractual relationships online and remove complexity from end users.
The properties of the system necessary to deliver the end user experience we seek are almost obvious:
- Immutable records of transactions and identity — POW
- Immediate transaction execution — POS
- Integrity of value in money sent and received, across currencies — Contracts
- Integrity of ownership and value sharing — Contracts
- Security of “actual” funds — Licensed Currency Reserves
- Ability to display and process value in user-preferred currencies — Apps
What follows is a proposal for a three tier system that contains these properties and provides the necessary foundation for the UX we seek.
Freeport Network Architecture
A User of a US digital wallet that’s on the Freeport Network wishes to send money to a friend in India. That friend is unable to use the US digital wallet. However that friend is a user of a Freeport Network participating IND digital wallet. The network allows for connecting contacts across apps. When the US user adds the IND user as a contact both parties are alerted that they can send and receive money from one and other via their respective apps.
Now that they’re connected the US user wishes to send $5 to their new contact in India. Both users have been verified as valid money transfer users by their respective apps who comply with domestic regulations. Based on a previously determined or even default contract between the US and IND apps, an exchange rate is pulled from a third party source and an exchange value is established for the USD to INR transaction.
All required identity information and verification, fiat transaction and exchange value and participating financial parties (wallets) are encoded into Freeport Tokens and shared between the apps and app owners via a Blockchain-based messaging system.
The information is encoded into Proof-of-Stake Tokens using the open source colored coins protocol that are immediately sent from one side of the transaction to the other. And according to the contract between the underlying application owners, funds are immediately debited from the sending user’s account in USD, and credited to the receiving user’s account in INR.
Hypothetically if you are using our Freemit app, and transfers are free, then we’re not taking any currency exchange fees. So the Freeport Network token that’s sent out to a partner application provider will contain the value of the original fiat in the senders preferred currency and the exchange value of the destination fiat currency based on the “market” interbank exchange rate at the time of transaction initiation.
If participating application providers charge a fee on larger money transfers or provide a value-added service, that fee can be included in the token and resolved when interparty settlement happens on or off the Freeport Network. In this way existing financial applications can use traditional settlement methods between themselves without causing their users the inconvenience of wait times.
There are several data types that must be tokenized: User Identity Tokens, Application Owner Tokens, and Transaction Tokens.
The User Identity Token holds cryptographically secure data on a particular customer as it relates to a particular app. These tokens identify the customer as an AML/KYC complaint user of a particular service. There may also be an overaching token that is usable in many services — imagine OAuth or single sign-in for financial activity.
Next there is an Application Owner Token. These are signed by finanical endpoints that identify the financial player in question (ATM machine, wallet, bank) and the types of transactions in which this player is able to participate. An ATM ID, for example, would allow for the withdrawal of money only, while a wallet app offer a number of allowable transactions.
The Transfer Token is a proof-of-stake value contract containing the amount to be transferred between two cryptographically signed parties. It contains n levels of data from the names and compliance information for the participating consumers to secure data on the banks that will eventually have to settle the associated transaction. Finally, they also contain the real-time currency exchange rates pegged to existing markets.
A bank or financial application provider can hold an identifier that confirms their status for business, regulatory status, and available products. An end-user/customer is connected to subscribed financial application providers and has a store of information regarding their identity, country-of-residence, and other important regulatory information.
If one of these tokens is missing the transaction is refused. These tokens also confirm to other players on the network that everyone involved is fully-regulated, fully-identified, and unique on the network.
Ledgers on the Network
Each Participating Application Provider would hold their own ledger on the blockchain with the ability to send/receive Freeport Network tokens to multiple parties who themselves are participating application providers, be they banks, payment systems, wallets or cash points.
Proof of Work on the BTC Blockchain
Each time a token is generated and sent the system utilizes an integration with the Bitcoin blockchain to gain proof-of-work recording of every transaction. Application owners use the immutable records on the Bitcoin blockchain to monitor and initiate settlement.
When application owners join the Freemit Network, real stores of either fiat or cryptocurrency must also be connected. For the first phase of the network applications can join if they are or are partnered with domestic banks that hold fiat. Those banks provide store the money that’s represented by the tokens, monitored by the ledgers and recorded on the blockchain. By definition anytime an application joins the network money will flow into and out of the application via real money debit and credit from a reserve of funds stored at the partner bank. There is no need to linearly move funds to match transactions on 1:1 basis.
Applications that enter into partnerships with each other, say Indian Digital Wallet A and US Digital Wallet B can create a smart contract that automatically initiates a settlement process when one-sided debits between them exceed a previously agreed upon threshold. Interbank settlment in such a proposed network can take one of 3 major forms:
- Banks and application providers can use the proposed system to track settlement needs but use traditional methods to perform settlement.
- Parties can settle with a cryptocurrency like BTC or Ethereum and exchange for fiat using local cryptocurrency exchanges
- The actual tokens in use to generate settlement events can grow to assume value that can be passed back and forth to support settlement.
If a bank or application provider were to “go under,” that is, if their assets are seized by government authorities, those assets would include all that parties tokens and all its liabilities including tokens owed. Since all parties on the network would be participants on a common interbank, interparty token system, bad actors or failed participants would carry records of tokens carried and tokens owed, thereby allowing for some recourse.
Alternative Solutions (And Their Discontents)
There are a few alternative solutions that could be used to create a network like Freeport. In parallel to the development of our MVP we will be testing Stellar and other protocols as alternatives. No one protocol, including Bitcoin has emerged as a dominant solution for interoperable money transfer, crytpocurrency or fiat.
We are building the first nodes of the Freeport Network with a number of partners who are eager to test this system as an alternative to legacy rails. We will update you as we have more to report on the progress of the network and our first app on the Freeport Network — Freemit.
The bitcoin blockchain has ushered in the future. We are attempting to add another approach to ensure its growth and use and eventual evolution into a true Internet of Value. It is a bold claim but it is one that will lead us past the mire of the present and into a fascinating future.
For more information, please contact email@example.com.