The determinism of Bitcoin: why it makes sense in remittances

Budget
Photo: Ken Teegardin, CC BY-SA 2.0 (Not changes made)

Bitcoin is a digital good that was designed as a form of money that makes sense on the Internet. It is possible to transfer from person to person easily, without intermediaries and with less commission. That is why it is increasingly popular as a way to pay on the Internet. But there are many other markets where Bitcoin, with its properties, may be the key to revolutionize some services as we know them. Sending money internationally, commonly known as remittances, could be one of these markets.

One of the main problems when money is sent internationally and is subject to a currency exchange, is to know the actual amount that reaches the destination. There are very few services that offer a fixed price. The reason for this is that when an amount of money is sent in the currency of origin, it is not converted to the currency of destination in the moment, but a few hours later or in some cases it might even take days. Because of this, the exchange rate between the currencies of origin and destination fluctuates and it is very difficult to offer a fixed price.

In many cases, the remittance processes require the identification of the recipient before receiving the payment, and it is at this time, and not before, the currency exchange is performed.

Uncertainty regarding a non-deterministic price system is not very serious if we are talking about a private person, but in the case of companies these gaps are unacceptable. Companies prefer to reduce their benefits paying for services that allow them to add certainty, and that is the purpose of many financial products.

Coinffeine’s deterministic matching system

Digital goods like Bitcoin are often praised as examples of solving problems with international money transfers for reasons that seem obvious, but that are not always certain..Cost reduction or reduction of friction to avoid identifying the parties, are two examples of this. After designing the Coinffeine’s matching system we have developed a different view: the really interesting new thing about Bitcoin remittances could be the determinism, or the ability to know precisely the money sent and received even though the system can be more expensive. A few months ago Coinffeine studied this common problem in the markets while designing the price discovery system of our platform.

Imagine a market for digital goods, such as Bitcoin or financial products, with the same user experience as a traditional market, but in which users buy and sell these digital goods between them without intermediaries, using a similar application to BitTorrent that allows them exchanging digital goods automatically and where the payments are made using payment processors such as PayPal. Welcome to Coinffeine!

If a user opens an order for one Bitcoin in a market, it is possible that even though there is sufficient liquidity there is not another user ready to to sell that amount. We can immediately think of a solution in which the user is matched with as many counterparts as necessary in order to satisfy the amount of bitcoins you want to buy or sell, but this operation is not so simple. In each operation small commissions are paid in bitcoins to the Bitcoin network for issuing transactions and in euros to the payment processor for the payment made. Although in most cases these quantities do not exceed a cent of a Euro, both depend on the number of partners required to fulfil the order.

We could be satisfied with this solution, but the truth is that this model has an unacceptable property in any market and also in the remittance market: it is not deterministic.

Since it is impossible to know the number of partners required to satisfy an order in advance, and that each match carries certain small cost, it is impossible to know what will be the exact amount of euros or bitcoins that will be received.

As in the remittance market, we are in a situation where the client needs to get a budget. But it is not possible to provide determinism because the conditions depend on the state of the market.

Coinffeine has created an algorithm to guarantee determinism

Coinffeine has solved this problem by designing an algorithm that adjusts the offer price dynamically to guarantee the user a closed budget and ensure compliance. In other words, we have succeeded in making Coinffeine a deterministic market. But how can we manage the same in a completely different market such as remittances?

Since there are several markets, or companies that allow buying and selling bitcoins in different countries, you can buy bitcoins using one of these companies in one country, send them to the country of destination and change them into local currency using a company with similar service. This makes a money transfer with currency conversion possible.

The advantage of an automatic system to perform these operations on both ends is that it is deterministic and can offer a fixed price.

Far from being a real, usable deterministic solution for remittance, the experimental use of Bitcoin today allows us to reason about using this technology in a comprehensive service based on Bitcoin. It could solve some main problems in international remittances, and help to keep the focus on the real problem: the determinism.

The same way as telephony initially, especially with mobile telephony, lacked a deterministic cost system in its services due to the price difference in calls between operators or midrange calls, remittances are now suffering the same problem. And like the mobile telephony market evolved into a deterministic costs system which created concepts such as tariffs and services with meaning and real value for the customer, it is possible that Bitcoin is the key that allows the same type of revolution in the remittance market.

The determinism of Bitcoin: why it makes sense in remittances

Banks join the cryptocurrencies

Future
Photo: Kristian Bjornard, CC BY-SA 2.0 (not changes made)

Banks join the cryptocurrencies. As with any major change, the steps that are being taken are very cautious, but nevertheless significant.

It is increasingly evident that Bitcoin and the blockchain technology are here to stay. Internet needs to find a payment solution that is similar to cash, and that is exactly what Bitcoin is. Banks are starting to see the potential, and far from turning their backs to it, they are joining this technological transformation.

 Is 2015 the year of the transformation?

During the first months of 2015 we have seen a series of moves in this direction. The European Central Bank published its second report on cryptocurrencies early March, which defines them as “a representation of value (…) that can be used as an alternative to money” and described them as “potentially transformatives” in the field of payments. The Bank of England recently published a paper studying how to adapt the Bitcoin technology for the eurozone, and recognized that cryptocurrencies have shown the possibility of transferring value safely without the need of a third party. Furthermore, IBM ‘s next big project was made public a few days ago:  They are looking at the possibility of adopting the Bitcoin technology for the major currencies in cooperation with the central banks.

In 2015 we have also seen the investment of BBVA Ventures in Coinbase, and the alliance between the German based Fidor Bank and Bitcoin.de to enable sending and receiving bitcoins directly between bank accounts.

We are convinced that this is just the beginning. Not surprisingly, Coinffeine´s technology was born with this philosophy. Our protocol turns the services traditionally offered by a service provider into contracts between individuals, and thereby gives banks a privileged place to explore the new cryptocurrencies and digital goods market.

From last year Coinffeine rely on a big Spanish bank among its partners. Bankinter commited to Bitcoin with Coinffeine, and it was one of the first banks in the world to enter the ecosystem. We are also currently working with other major banks to reach similar agreements, as we believe that the future lies on the alliance between banks and Bitcoin.

Coinffeine to the European Commission

In the same way that banks are showing more interest in learning about the potential of Bitcoin and the blockchain technology, the authorities and the regulators are also moving in this direction. And for that they are considering the opinion of experts. Invited by a political party, Coinffeine has already been in the Spanish Parliament to bring our vision of the regulatory process. Maybe that’s why it did not surprise us that we have received an invitation to participate in a workshop about Bitcoin organized by the European Commission next month. This also demonstrates the increasing interest that exists about the progress made by the Spanish Bitcoin community.

On April 27th, Coinffeine will be in Brussels to participate in the event Blockchain and Digital Currencies Workshop, along with Alex Puig, founder of Digital Currency Summit and the event organizer, other important companies in the ecosystem such as Ethereum and Circle and experts of the European financial sector. Alberto, our CEO, will take part in the panel dedicated to banks “Why Banks should (not) be afraid by cryptocurrencies – experience from an early adopter bank”, which will also be attended by Fidor Bank. The panel will discuss about the early and incipient experiences in the alliance banking – Bitcoin.

The transformation is underway and Coinffeine expects to be among its protagonists.

Banks join the cryptocurrencies

Coinffeine Brings Bitcoin to Mobile Operators

Mobile
Photo: Phil Campbell, CC BY 2.0, (Not changes made)

Mobile payments are experiencing tremendous growth. The use of bitcoins has beeen limited so far, but services like Coinffeine can help make it much easier for users.

 

The mobile phone can be used as a means of payment, and operators have been trying make that happen for over 10 years.

There are countries with a failing economy where having a bank account is too expensive and inefficient, but nevertheless everyone has a mobile phone. In these countries, telephone operators have become part of the financial industry, enabling efficient payment systems that allow the transfer of mobile phone balance, known as Airtime, from person to person.

In Kenya it has become normal to pay for a coffee with Airtime using your mobile phone. This Airtime is later changed to local currency by the owner of the coffee shop. The most popular service that makes this possible is called M-Pesa and is provided by the operator Safaricom. It has over 15 million users and over 80,000 distributors in Kenya.

In developed countries like Spain electronic payments are much more efficient and the use of Airtime for this purpose is meaningless. Nevertheless, there are still some operators that allow you to send phone balance from person to person, like the popular service “Passme balance” from Telefónica Movistar.

Although it makes no sense to use phone balance to pay for a coffee in most developed countries, it can make sense for other unexplored purposes, such as the sale of digital goods.

Photo: Ken Banks,  CC BY 2.0, (Not changes made)
Photo: Ken Banks, CC BY 2.0 (Not changes made)

Movistar Payments is an example of this service, allowing the purchase of digital goods with phone balance.

In Spain, the law does not allow operators to sell physical products such as cinema tickets with phone balance, but they are allowed to sell digital goods such as applications, games or even bitcoins. In fact, one of the first operators understanding the potential of the new market of digital goods is the operator T-Mobile in Poland, already offering their customers to buy bitcoins with phone balance.

But even if the sale of bitcoins in exchange for phone balance can be done in an easy way and potentially reach a large number of customers, there are several problems that would make it very difficult to offer this service.

First, if an operator wants to sell bitcoins charging the bill to the client´s phone balance, it must handle and dispose of bitcoins, and this is a problem. To maintain large deposits of cryptocurrencies is expensive, risky and it looks like it will undergo a regulation process similar to the famous New York Bitlicense, which raises the operating costs of the services with Bitcoin to the extent that it is not profitable in some cases. And to buy them on demand from a third party does not solve this problem neither.

bitcoins-620x465

Secondly, the latest report of the ECB on digital currency defines Bitcoin as a digital asset that can be used as money. In Spain this is exactly how Bitcoin fits into the regulation. When operators were banned to sell physical goods in exchange for phone balance, it was because it exists a need to provide certain guarantees, requesting and fulfilling a financial license. In the case of Spanish operators that decide to sell bitcoins in exchange for phone balance, it is likely that they will meet such restrictions in the future, which again would close the door of opportunity of selling this types of goods with phone balance.

Finally, and despite the fact that it already exists solutions such as Movistar Payments allowing micro purchases of digital goods such as games and apps, regulation is especially hard with operators such as Telefónica and do not allow their customers to spend more than €100 per month in this service.

Despite these problems, it is still very interesting for a telecom operator to become the main gateway to the new market of digital currencies and digital goods. And there are solutions, such as the one created by the Spanish startup Coinffeine: a P2P protocol that can be a way to explore this market.

Using the technology that Coinffeine has created, an operator that offers a similar service to the earlier mentioned “Passme balance” and that has an API, could become the largest gateway to the market of digital currencies and digital assets..

Coinffeine is an application similar to BitTorrent, which is using the money in your bank or payment processor such as PayPal, to make payments to other users automatically in exchange of bitcoins. The bitcoins are transferred from person to person, without the need to go through the banks. In this model, banks are used simply as means of payment.

coinffeine logo

What is really interesting about Coinffeine´s P2P model is that it turns the services offered by a service provider into contracts between individuals, a legal framework with many advantages for the exchange of digital goods and reducing most operative costs.

Instead of competing with banks and payment processors, Coinffeine offers them a privileged position to explore the new market of digital assets. A good proof of the interest banks have in the model that Coinffeine offers, is that a large Spanish bank already is among its partners: namely Bankinter.

The model created by Coinffeine allows banks and payment processors´ customers to buy bitcoins with their account balance, and it could work in the same way with phone operators. In this case they can enable a service that allows paying with Airtime from person to person.

Airtime is certainly a perfect means of electronic payment to purchase digital goods like Bitcoin between people or to make micro purchases, even in countries like Spain. Movistar Payments is a good example of that. But in countries like Kenya, combining Airtime and digital currencies could play an even more important role.

In Kenya, over 15 million M-Pesa clients have an inexpensive electronic means of payment in retails. But they still do not have a cheap means of payment to purchase global digital services via the Internet as an account in Spotify or Skype balance, and this is where digital currencies like Bitcoin play a key role.

Bitcoin is already accepted as payment in companies like Microsoft or Dell, and it is being made accessible to many others like Skype Credit through third party services. Bitcoin is the perfect means of electronic payment to pay and to offer digital services on the Internet in countries where Airtime is successfully used to pay in the streets.

In a country where there are more mobile phones than people, the use of Airtime as means of payment for digital goods makes sense, and it can make the telecom operators to be a key player in the new market of digital currencies.

 

Text originally published in Spanish at Telefónica’s Think Big blog.

Written by Alberto Gómez Toribio, CEO of Coinffeine.

Coinffeine Brings Bitcoin to Mobile Operators