Cryptocurrencies like bitcoin may have gotten a shady reputation for being the underground economy’s currency of choice, but as more people are exposed to the blockchain technology, the conversation is changing
To the uninitiated, a conversation about Bitcoin—the cryptocurrency created by one mysterious Satoshi Nakamoto in 2009 that’s causing waves of disruption in the world of finance—can be somewhat of a mind trip.
For one, it’s quite difficult to wrap your head around the concept of paying—or being paid—with currency that, technically, physically doesn’t exist. Instead, every bitcoin transaction is represented by a random string of letters and numbers. These transactions are then collected into a “block” that is then verified by “miners”, before being finally written into a public ledger called the “blockchain”.
It reads like something straight out of an Asimov novel, but if there is anything such Bitcoin-related scandals like the now-defunct black market Silk Road (which used bitcoin as its mode of payment) and the bitcoin trade exchange platform Mt Gox prove, it’s that the bitcoin’s value is every bit as real—and present—as the dollar, peso, and every other currency in the world.
Unlike government-issued currencies, however, the bitcoin is an idea born out of a libertarian ideology. No central authority or government exists to regulate it.
“One aspect of bitcoin is that it is decentralized. It’s just like the Internet—there is not one server, one government that can shut the Internet down. It works like a peer-to-peer file sharing application, but instead of transferring files, its underlying algorithm, the blockchain, facilitates and verifies the transfer of value between two peers,” states Jay Villarante, the CEO of Paylance, an app that allows overseas Filipino workers (OFWs) to send money to the Philippines using bitcoins.
DIGITAL CURRENCY AND THE PHILIPPINE SETTING
Much of the appeal of bitcoin is that it does away with the middleman. The very fact that it is traded peer-to-peer makes it the digital version of a cash exchange where you send or receive your money directly, bypassing payment processors.
For developed nations where much of the market are banked and using credit cards, dabbling into the bitcoin trade could be nothing more than a novelty. It is in emerging markets like the ASEAN, however, that bitcoins can truly deal a huge impact.
For Ron Hose, the CEO of Coins.ph, a Philippine financial tech startup that grants the unbanked access to financial services like overseas remittance, bills payment, and bank transfer, it’s in a country like the Philippines—where only two out of 10 households have access to savings accounts, much less credit cards—that bitcoin can really leapfrog.
“The statistic that always sticks in my mind for the Philippines is that more Filipinos have Facebook accounts than bank accounts. This is very telling,” Hose says. “It tells you that the market is reachable, and that the problem is addressable—you can provide services to people who are unbanked. It’s just that traditional banks and financial institutions haven’t figured out yet how to do it while keeping costs to a minimum.”
Bitcoin’s technology, the blockchain, is what gives bitcoin much of its appeal as a digital currency.
“In the digital world where any information is very easy to replicate, the blockchain solved the problem of verifying transactions in a decentralized ecosystem or network. It’s very complex in the back end, but basically it ensures that transactions are transparent and unchangeable—meaning, when I give you a bitcoin, I can no longer spend or give the same bitcoin anymore. The algorithm ensures that there is no ‘double spending’,” Villarante explains, adding that such complex process takes place in a matter of 10 minutes.
As transactions are dealt directly from one person to another—unlike traditional financial transactions where money is first passed on to payment processors before reaching the recipient—costs are significantly reduced. It’s exactly why blockchain-powered financial platforms like Coins.ph and Paylance have seen double-digit growth in the last year.
“We see ourselves as a microfinance institution of sorts,” clarifies Hose. “We’re not providing the financial services ourselves, nor are we trying to replace existing banks and remittance companies,” he says, “but we help connect the customers with financial institutions offering these services. All we’re doing is giving a platform for these two parties—the financial institution and the customer—to transact at minimal cost.”
Quite like how the Internet helps facilitate the transfer of information via the HTTP protocol, funds are transferred from sender to recipient using the blockchain protocol. But because for some consumers the concept of bitcoin trading can be quite hard to grasp, a number of financial tech startups powered by the blockchain implement go-to-market strategies that do away with even the mention of bitcoin.
“Right now, how we do it is we act as an ‘abstraction layer’ between the consumer and bitcoin, which means the buyer and seller do not really need to know what bitcoin is because the money that goes from point A to B is already converted to the currency of the recipient,” Villarante explains, adding that it’s similar to how international bank transfers are being done, except that transactions over the blockchain are direct and take away the exorbitant costs associated with using the SWIFT network.
BEYOND DIGITAL CURRENCY
Bitcoin may still be at its nascent stage, but globally, there has been a huge spike in investment money pouring into the technology. Villarante reports that in 2014 alone, bitcoin had $349 million worth of investments. The figure for 2015 currently stands at $916 million. “That’s almost a billion dollars—a huge jump from 2014. The growth is tremendous, opportunities are huge, and we’re probably just looking at the pre-bubble days of bitcoin,” he avers.
Hose, who was recently invited to speak at the Asian Bankers Summit about financial tech disruption, adds that even U.S. companies like NASDAQ are experimenting with blockchain technology. In the Philippine setting, he shares that the country is one of the best environments for innovation in financial technology.
“I’m seeing people exerting a lot of effort—we have a forward-thinking BSP that is really motivated about financial inclusion; there are tech companies like Lenddo that are building new solutions; Globe and Smart are both doing things with GCash and Smart Money; and the big banks are experimenting. I see it almost every day—ADB, USAID, microfinance institutions—all these great minds focused on digital currency,” Hose shares.
“What’s good about bitcoin,” Villarante adds, “is that, first, the ledger is public, so there’s transparency when it comes to all the transactions in the bitcoin economy. Second, it has intrinsic fraud-prevention features. Unlike credit cards where you have to give out your information, you don’t have to do so in bitcoin.”
But more than bitcoin’s potential as a digital currency, Villarante avers that the revolutionary aspect about bitcoin really lies in its underlying technology, the blockchain. Because the blockchain ensures that a permanent, public record of every single Bitcoin transaction is created, its potential as a decentralized way of conducting business and organizing data across industries is huge.
It can even topple government institutions, says Villarante, only half-jesting. “Think of bitcoin as a ‘domain name’ that you can add value to. When you buy a domain, it doesn’t offer any initial value, but if you use it and turn it into a site that generates a lot of traffic, there’s value added that you can trade in exchange for something. Similarly, you can use bitcoin to represent a geo-location of a piece of land or a company stock that you can directly sell or trade with another person in 10 minutes. And you do away without all the paperwork, all the bureaucracy. It’s fascinating, really, because if this grows, the technology has the potential to disrupt, even replace, all government institutions—except the military,” he says.
“Digital currency,” Villarante simply states, “is just the first of many potential applications of bitcoin’s technology.”
Manila Bulletin, 22 June 2015