By Manie Eagar, Co-founder and Chairman, Digital Finance Institute
First one would need to address the issue of bitcoin as a currency, a unit of account or a store of wealth? It is all three, and more. In short, the bitcoin protocol allows one to designate it any way you choose. There is increasingly talk of the ‘internet of money’, converging with the ‘internet of value’ (exchange) and the ‘internet of things’ and greater understanding of the opportunity in digital finance services and infrastructure development.
The digital finance landscape is evolving to fill all the spaces creating huge convergence and integration opportunities and niche plays alike. At the end of the day the users/consumers of all these offerings will decide which variations suites them best based on ease of use, access, stability, store of value, security, friction, exchangeability, transferability etc. – ultimately the best UX for the money.
Delivery platforms from every sector of the industry will vie for a stake in this lucrative and necessary business – from the so-called ‘over to under banked’ parts of the world. There is no question that the world financial system needs an overhaul, or at the very least sound and viable alternatives to the current legacy system driven offerings and the latest innovations emerging through branchless banking and mobile transactions/payments. There is a great chance that bitcoin itself could become dis-intermediated if it does not ‘step up its game’ as cryptocurrency technologies, business processes and alternative currencies and protocols emerge or become adopted by existing players in the financial and mobile payment sectors.
New players, from a bitcoin perspective, will compete with the vast resources of the incumbent players in the financial sector, to win the regulators over (or at least build a common understanding) and to provide room for the evolution of this disruptive innovation, and last but not least, convince the consumers that this can work for them. Ultimately, these are the drivers for the bitcoin business models and ROI’s to make ‘enterprise bitcoin’ sustainable.
Hybrid digital finance
What this implies is a ‘hybridization’ of technologies and meshing of centralized, decentralized and centralized platforms and delivery channels. There are a number of reasons why this dual economy is likely to emerge, including the ease with which bitcoin can unite global consumers and merchants, the low cost of bitcoin payments, the openness of consumers to new innovations and the growing influence of technology companies according to Gareth Murphy, director of markets for the Central Bank of Ireland speaking at the recent BitFin 2014: Digital Money and the Future of Finance Conference in Dublin.
He envisions a hybrid Bitcoin-Fiat future where “The existence of a ‘euro-denominated economy’ and a ‘virtual currency economy’ raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).”
He continues: “Multi-currency economies are not unusual. For example, the US dollar is accepted in many economies alongside the local legal tender. Also, there are a number of regional currencies in existence in parts of France and Switzerland that aim to encourage transactions in local goods and services.
But unlike these examples, rapid advances in information and mobile technology suggest that such a virtual currency could evolve. The factors behind this might include:
- the ease with which transactions can occur between counter-parties located anywhere in the world;
- the relatively low cost of effecting payment and transmitting funds;
- the fact that many large technology companies are household names that are recognisable and trusted; and
- the possibility of engaging a large market with a broad demographic span, particularly in terms of age, which is open to new innovations” (with reference to the success of M-PESA in Kenya that shows the potential for this technology to reach a large market).
Alternative cryptocurrency options – good or bad?
As there are many loyalty schemes, token systems, voucher offerings, etc. there will be many similar and unique altcurrencies. Service providers such as gyft already has relationships with a number of large retailers that participate in consumers ‘gyfting’ each other via a blockchain protocol backed platform as part of their loyalty and reward programs.
Ripple, Ethereum, Open Transactions and Stellar are examples of current and emerging cryptocurency platforms offering hybrid digital value exchange solutions embracing the principles of the decentralization and distribution of credit, debit or assets. Ripple specifically is making significant traction as a bitcoin-inspired payments network allowing institutions to conduct low-cost international money transfers without the intermediation of banks. It has created a network of gateways for the LATAM region and recently signed up two banks in the United States and Fidor in Europe that should allow them to offer significantly cheaper foreign exchange and bank wire services to their customers.
I predict there will be many more ventures in this strategically critical space in the near future including integration with legacy banking offerings. The foot race for consumer adoption and inclusion has just begun with Paypal which has partnered with BitPay, Coinbase, and GoCoin to provide bitcoin support to the millions of PayPal users and Apple Pay positioning itself in the lucrative market for mobile payments and customer loyalty apps indicating fresh approaches to new and existing markets. There are many lessons here for bitcoin and cryptocurrencies specifically and digital finance solution builders in general.
There are already many reports of future potential ‘plays’ by leading financial institutions in Canada and the USA - either to adopt cryptocurrency-like protocols or to re-invent or enhance their current platform offerings. Many advanced partnership discussions are taking place behind the scenes between cryptocurrency ventures and established financial institutions and mobile transaction players to scale offerings into their existing and new markets.
In the end, there could be thousands of currencies/coins (think of enabling colored coin, mastercoin, zerocoin, etc. platforms) that are offered by individuals, groups, countries and retailers - to provide an exchange of value or to provide rewards to an underlying base of users/customers/citizens not to mention denominating coins/tokens to represent other stores of value such as contracts, physical goods, digital services, shares, gold bullion, etc. And then there is also crowdfunding, gifting, brand promotions (remember the old soda bottle top competitions?) etc. promising huge growth opportunities reaching ‘second markets’ globally.
The emerging digital finance investment landscape
The cornerstones for the new digital finance world is emerging – from decentralized applications; to trusted computing; to currency exchanges; and telecom, capital and banking partners.
Venturescanner, in its latest analysis of the bitcoin startup landscape, has identified 541 active companies representing USD330m in capital raised.
A shortlist of current bitcoin ecosystem investment opportunities from Venturescanner.com include:
Bitcoin exchanges: Platforms where consumers can buy or sell bitcoins in currencies of their choice. Some play matchmaker (tracking bid/ask prices and linking up a seller with a buyer with the spreads close) while others are broker/dealers (doing match making with their own inventory of bitcoins). Leading examples include Coinbase, Circle, Bitstamp and OKcoin.
Bitcoin wallets offer consumers a place to securely store their bitcoins through public / private key encryption. Many offer enhanced security features such as cold storage, multi-step/sig authentication, and deposit insurance. Leading examples are Xapo, Coinbase, Circle and BitGo.
Bitcoin payments: Merchants and consumers pay for real-world goods / services using bitcoin as the medium of exchange. Leading examples are Bitpay, Coinbase, Circle and vogogo.
Bitcoin mining: Includes those who either “sell the pickaxe” or “swing the pickaxe”. Typically hardware companies selling the latest ASIC’s specifically designed for bitcoin mining. Mostly conglomerates of rig-operators that have come to dominate so much of the mining activity. Active fund seekers include BitFury, 21E6, Avalon Clones and KnCMiner.
Bitcoin financial services: Players offering typical banking services, but with a focus on bitcoins. Firms offer financial investment advice on how to manage portfolios of crypto-currencies, focusing on providing remittance payments, and providing loans denominated in bitcoin. Lead players include Xapo, Kraken, Vaurum and Elliptic.
Bitcoin infrastructure: Includes those who are “building a backbone” into the bitcoin enterprise. This cluster includes the people responsible for maintaining the bitcoin open-source code itself, offering white-label solutions (such as those for building your own exchange or wallet services), and the physical-world bitcoin Automated Teller Machines (ATM’s). Leading investments include Chain, Vaurum, HKCEx and Buttercoin.
Bitcoin applications: A very broad category attempting to capture all the players that use bitcoins for a specific purpose. Includes online casinos that only gamble in bitcoins, online review sites that rate bitcoin-related services, and aggregated lists of all the places you can spend bitcoin for real-world goods. Some of the active ventures are BitcoinShop.us, UpDown, CrowdCurity and Gem.
Bitcoin trust and verification services: While a lot of bitcoin transactions can be completed pseudonymously, some use cases are governed by regulations where the identity of a person needs to be verified (anti-fraud, anti-terror financing, etc.). If a company offers these regulated services in other currencies, but wants to also accept customers who use bitcoins, they would turn to players in this cluster to provide 3rd party verification of an identity. Ventures include BlockScore, Blacklisted Bitcoins, BitGo and VerifyBTC.
Bitcoin news and data: Organizations that offer up-to-date pricing information, original content, analytics and aggregated sources of bitcoin-related news. Ventures include TradeBlock, BlockTrail BV, BitScan and CoinDesk.
Bitcoin investment funds: Organizations that have built dedicated funds or investment vehicles to move large amounts of money into bitcoins themselves or into the startups building the bitcoin ecosystem. Funds include CoinSeed, Koinify, Bitcoin Embassy and Boost Bitcoin Fund.
Bitcoin services include those companies which offer business operation consulting, but with a bitcoin focus. Includes recruiting, regulatory compliance, and technical implementation. Examples include Moneero, HoneyBadgr, CoinComply and BitRecruiter.
Bitcoin big data: A core feature of Bitcoin is the public ledger (known as the block chain), which maintains a transparent and complete record of all Bitcoin transactions. Companies in this space parse and analyze that block chain to allow their customers to gain useful insights. Lead players: Chain, QuantaBytes, Coinalytics and Bits of Proof.
Venturescanner’s estimate for the larger financial technology industry is 990 active companies with USD12.4bn raised and the Internet of Things sector with 566 companies seeking funding with USD2.72bn raised so far.
Digital Finance 2.0 – emerging business opportunities
This is a quick checklist of upcoming opportunities for startups and investors in the next phase of development and deployment:
- Tax declaration; blockchain ledgers; triple entry accounting; auditing and financial reporting
- Compliance (regulatory, verification and ‘bitlicensing’)
- Governance and risk management
- Merchant and agent solutions at POS
- Customer facing – UX, KYC, CRM, AML, fraud prevention, privacy (identity management)
- Legal and investment advisory services; mergers and acquisitions
- VC and crowdfunding advisory services
- Security (at all levels) – from customer to financial services providers to securitization
- Storage (multi-key versus cold storage versus secured devices)
- Integration (Banking; Mobile transactions; DAZ protocols)
- Build Operate Deploy (BOD) e.g. inter-exchanges; Build Operate Manage (BOM) e.g. Ripple gateways
- Business Process Management e.g. ITIL, ISO4217
Considering the currently addressable market opportunities in ecommerce, digital banking the IT investment into this sector is substantial. In the bigger picture Ovum projects a compound annual growth rate (CAGR) of 6.4 percent from 2014 to 2018. By the end of this period, global IT spending in financial markets is predicted to surpass $100 billion (Increase in financial markets IT spending points to end of credit crunch, Ovum, March 19, 2014).
Interestingly, according to the Ovum report, there is a desire for the established financial institutions to move toward more centralized banking functions which is further driving up IT spending in this sector. By using technology to consolidate functions, firms hope to improve their efficiency. Account holders demand visibility and control, leading to larger investments in client servicing systems. Corporate banks, on the other hand, are putting money into IT as a means of gaining greater insight into lending decisions, which should reduce risk and increase responsibility.
If we consider the 2.5bn unbanked in the next stage of global financial inclusion, these markets cannot be reached economically and feasibility/efficiently by conventional and legacy banking solutions,. This is where the new hybridized delivery models will come into their own converging digital banking, cryptocurrency offerings and mobile transactions via the internet of value exchange. This will involve a meshwork of centralized, decentralized and distributed financial networks and delivery platforms with substantial integration and compliance requirements.
Gareth Murphy, director of markets for the Central Bank of Ireland, summed up the future challenges for service providers and regulators from a Eurocentric perspective as follows:
- who is transacting (to address AML concerns)?
- how safe is the payments infrastructure?
- how much economic activity is denominated in virtual currencies?
- to what extent is the ‘virtual currency economy’ connected with the ‘euro-denominated economy’?
- how do we distinguish between transactional activity and speculative/investment activity?
And from a monetary policy perspective, there is also the fundamental question of understanding the supply of the virtual currency and its impact as a form of money.”
In conclusion, there is a lot of work ahead for many players at many levels to address and deliver the promise of digital finance 2.0.