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

Coinffeine brings Bitcoin to the Mobile World Congress

4YFN-WMC
Photo: 4YFN

Coinfeine is in Barcelona these days. The Catalan capital is host to the Mobile World Congress (MWC) and the startup event 4 Years From Now (4YFN), and we have been invited to be part of the ICEX stand in the event.

Without a doubt it is a great opportunity to attract new attention for our distributed Bitcoin exchange in front of a national and international audience that visits the capital of mobile phones these days. Coinffiene is proud to be one of the few Spanish Bitcoin companies that participates, and we have got attention for the possible union between banks and Bitcoin that our protocol makes possible. When it was made public that the large Spanish bank Bankinter is our partner, nobody will be surprised that we are working for other Spanish banks to do similar agreements.

We started off the fair last Monday with a workshop about Bitcoin in the 4YFN program. Together with Jorge Ordovás, from Foro de Economía Digital and José Ramón Morales, from Garrigues, our CEO Alberto carried out a workshop called “Bitcoin, the next (r)evolution”. The workshop wanted to transmit a simple message: Bitcoin exists because we need a something similar to cash on the Internet. The interest for the workshop exceeded our expectations and it was one of the 9 that was fully booked before the fair started. After a small game with paper wallets and a talk about new payment systems like the VISA card rechargeable with bitcoins from Xapo, we used the occasion to explain and show how Coinffeine works. And once again, we could confirm it did not disappoint.

4YFN WorkshopDuring the rest of the first day our stand was full of activity. Being a reference for Bitcoin startups in Spain, we received visits from all kind of people that kept us busy practically all the time. Most of our visitors wanted to meet the team behind one of the most talked startups these days. And the second day we had the same experience.

We are enthusiastic about this event. Being invited to other international events like the Silicon Valley Forum in San Francisco or CoinSummit in London, the Mobile World Congress is the first Spanish-based large event we have attended. It will not be the last.

So if you happen to be in Barcelona come and visit our stand! Get to know how Coinffeine works and how our business plan includes banks in the Bitcoin ecosystem. We are thrilled to share our experiences.

 

Coinffeine brings Bitcoin to the Mobile World Congress

Coinffeine visits Congress to talk about Bitcoin regulation in Spain

Congreso de los Diputados
Photo: Wikipedia, CC BY 3.0, (Not changes made)

Spain is proving to be one of the most attractive places for Bitcoin companies to set up.
Unlike what happens in other countries, Bitcoin fits in the Spanish legal framework as a digital commodity. The proof of that is that our startup could be created with bitcoins as social capital just eight months ago, something we did consciously to start a dialogue with regulators and the Central Bank of Spain.

Despite the fact that Bitcoin can be considered a digital commodity, as explained by Coinffeine’s law advisors Abanlex, there are small details that are still unclear and some potential uses that might concern regulators.

Because of these concerns, the political party UPyD has on several occasions urged the government to start a process in which these details are studied. On Monday February 16th, I accepted UPyD’s invitation to attend a meeting at the Congress of Deputies in Madrid, where we presented our vision as experts on the regulatory process.

We attended this meeting with other experts in the field. Most notably Pablo Fernández Burgeño, expert in technology law and co-founder of Abanlex (a firm that recently won the case of “right to oblivion” against Google) and Jorge Ordovás, Director of the Department of Innovation of Means of Payment in the Digital Economy Forum.

In the meeting, Deputy Carlos Martínez Gorriagán and UPyD parliamentary technicians agreed with Coinffeine that the main use of Bitcoin is currently as a speculative vector.
To this end, and because one of the most common ways to acquire bitcoins is through traditional Bitcoin exchanges bearing cryptocurrency deposits, UPyD members were concerned about the limited guarantees that exists for users who make this kind of deposits. This is a very different scenario to the deposits of FIAT money, where a license that provides guarantees and counterparties are required.

Coinffeine explained that Bitcoin fortunately fits in the Spanish regulations as a digital commodity without being required a specific regulation. We explained that the two issues that are still unclear are how Bitcoin should be taxed and if it should be compulsory to identify the customers in companies that support cryptocurrency deposits.

The current regulation for digital commodities only brings uncertainty on these two points. These can be solved with simple questions to the Tax Agency and the SEPBLAC -Spain’s Financial Intelligence Unit (FIU) and AML/CFT Supervisory Authority-. On the other hand, a specific regulation on all legal aspects of Bitcoin could add friction to the entire industry, raise the level of complexity and requirements for the creation of new startups and jeopardize complex legal inconsistencies with other countries.

We also discussed concerns about delays and responses that do not contribute clear solutions, as in the responses obtained by Coinffeine from SEPBLAC, or the possibility that the answers are inconsistent, as the response from the Tax Agency to the question formulated by Abanlex last September 2014. The lack of answers from the administrations, have made many Spanish companies explore the possibility to set up in the United Kingdom.

The United Kingdom has been able to identify problems of inconsistency between administrations and the need to expedite responses to the Fintech industry. In October 2014, the UK finance minister announced the creation of Innovate Finance. UPyD has shown interest in the experience and decisions made in the UK to tackle the same problem that Spain is facing, and they have the intention of collaborating to replicate these success stories in Spain.

Although Bitcoin is a digital commodity in Spain, the fact is that under the current rules it is taxed with VAT. This means that companies that sell bitcoins in Spain, such as Bitcoin exchanges or ATMs, must sell at price at least 21% higher than their American counterparts. This makes this business unviable in Spain.

Coinffeine is at the moment the only legal solution that allows to buy bitcoins without paying the 21% VAT. It is all due to the magic of contracts between individuals.

Coinffeine visits Congress to talk about Bitcoin regulation in Spain

Contracts between individuals

Lego pair
Photo: Brian Neudorff, CC BY 2.0 (Not changes made)

A decentralized system is one in which the control or the essential parts of the system are transferred to the peripheral cores. In this way, the whole system does not depend on single points of failure to operate.

This concept is not new. Already in 2002 the paper of Petar Maymounkov and David Mazières, which would create the protocol for P2P file sharing Kademlia, explained what technical problems were solved and why it makes sense on the Internet. However, it was not until 2009 that they began to explore the mechanisms of consensus and incentives applied to decentralized systems to replace the trusted authorities. This work resulted, among other things, in the technology we know as Blockchain.

Decentralization is a concept that has become fashionable and has solved many technical problems, but few understand the business problems it also solves. Some of the Bitcoin ecosystem startups have created admirable technologies, but that do not solve problems that anyone are willing to pay for. Others are aimed at too small markets where it is difficult to create solid business models, specially if they are based on volume. Being aware of this Coinffeine, with its technology and business model, has chosen a different path.

Coinffeine has created a protocol for exchanging currencies and bitcoins between people in a secure way, using payment processors to manage payments. In the future we also intend to allow exchanges between other digital assets: next generation financial products. We understand that this is the most natural way to exchange digital assets for money, an opinion shared by regulators and experts that we have been in contact with. In this way, instead of creating a new scenario that needs to be regulated, we reuse the existing infrastructure, creating synergies with financial players on the road.

By using Coinffeine, one of the benefits is that the assets traded are always under your control. You do not need to grant us their custody at any point in the process. This means that you never have to worry about news that an Exchange has been hacked or robbed. By doing an exchange with Coinffeine, you will simply never run that risk.

Another big benefit of our technology is that it is not necessary to provide personal information. Think in Coinffeine as a tool such as BitTorrent. You download it, install it and use it. Everything keeps between you and your partner. In this regard, it is noteworthy that the payment processor you use cannot relate payments between users with operations made outside the platform.

Finally, the P2P model allows reducing operating costs of the company: since it does not withstand deposits, it is presumably not considered an MSB.

Coinffeine manages to combine the resolution of various business problems through their protocol. These problems have been solved as a consequence of what the Coinffeine protocol offers: to convert the services traditionally offered by a service provider into contracts between individuals.

In following articles I will explain the tax advantages, the operational advantages and the reduction of costs by involving contracts between individuals and also the problems that Coinffeine solves in traditional banking.

Contracts between individuals

Coinffeine attracts interest in Wall Street

Wall Street
Photo: Mike Czumak, CC BY-SA 2.0 (Image crop)

We are now back from New York, and our journey has been full of interesting encounters in which we could re-confirm the great interest Coinffeine awakes in the USA. During these days we were also pleased to see the interest from NY venture capital to know more about our protocol.

In a way it is not a surprise. Even if Coinffeine was born as a market to buy and sell bitcoins in a distributed way, its potential to become the first decentralized market for financial products has also attracted interest on Wall Street.

During the first days of our stay, Alberto attended the market accelerator program organized by VentureOutNY. There we had the opportunity to participate in an attractive Investor Round Robin with the leading venture capital funds of the city. In addition, we attempted to get the most out of the inspiring work sessions and workshops we were attending. We got to learn a lot about the reality of this enchanting city, essential stepping-stone in the world of Fintech.

After these first intense days, we made our own schedule. The up front work to organize meetings that we did not want to miss was very useful, but once there we had to rearrange our schedule to accommodate many more.

As we like to do whenever we travel to a new city, we prioritized meetings with the local Bitcoin community. We were able to meet almost the entire Bitcoin industry based in New York, which is something that serves as inspiration, learning and always motivates new synergies.

Being in the Big Apple as a Bitcoin start-up, the BitLicense is an inevitable and recurring theme. Coinffeine were interested in getting first-hand knowledge of the entire process and therefore we organized meetings with the regulators. We hope that by properly understanding the vision of the regulators in NY, it will allow us to move forward with political parties and experts on the regulation of Bitcoin in Spain.

Back in Madrid, we bring all this learning, stimulating encounters and valuable contacts. Most importantly, however, we are more eager than ever that Coinffeine continues this path. A path that we are building step by step.

Definitely, it has been a new breath of inspiration that will motivate us to continue programming.

Coinffeine attracts interest in Wall Street

Understanding Coinffeine’s protocol (II)

Chicken
Photo: W_Minshull , CC BY 2.0 (Not changes made)

In our first post we saw how useful game theory is for analyzing strategic situations, and in this second post of our series Understanding Coinffeine’s protocol we will return to game theory.

Mutual assured destruction

The next concept that interests us is mutual assured destruction, a concept closely related to the years of the Cold War. To get some atmosphere going, we can think of the cult film classic: Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb where Peter Sellers plays a scientist who is actually a parody of our friend Von Neumann (or if you prefer film in color, watch WarGames).

Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb

In this game, which is the Cold War, we have two rational players, USA and the USSR, both with a high regard for their own survival. At that time nuclear power was already developed, and had sadly been used as a closing ceremony of the Second World War. Both powers had entered into an arms race which, if continued, could have ended with humanity on several occasions.

For years it seemed that nuclear war was about to happen anytime, but it never did. The answer to this is the fact that both players had the ability to respond to a nuclear attack, even if it was a last resort and losses would be dramatic on both sides. The advantage of being the first to attack was insignificant compared to the losses it would cause. And it justified the cost of always having intercontinental missiles ready, and nuclear submarines or planes circling the Arctic to be able to respond to an attack.

Table mutually assured destruction

Nash Equilibrium

If we take stock of the possible outcomes in a table, we can see that the best answer to not attack is not attack, and in the event that the other player attacks it is indifferent what we do. Unlike the prisoner’s dilemma it is not enough to find the dominant solutions. In this case, we need the next best thing, a Nash equilibrium (and yes, there is a film about it).

These equilibrium situations occur when each player can not improve his situation by changing his strategy if the other player persists. In the game we have presented as an example, we find two equilibriums: (Not attack, Not attack) and (Attack, Attack).

A Nash equilibrium is a stable situation by definition and, therefore, in real life are often end up giving or aspire to these kind of results. However, not all equilibriums does necessarily happen. Given the consequences in this game, we get a happy ending (Not attack, Not attack), as happened for example during the Cuban Missile Crisis.

The only winning move is not to play

The lesson we can draw from this game is that you do not need a trusted third party if we have a mechanism that makes you lose more than you could win when the path of collaboration is left behind. This principle is very important to design a decentralized exchange protocol as Coinffeine, and to avoid aberrations such as “preventive wars”.

The game of “chicken”

The next ingredient we need to get familiar with is the concept of strategic moves. We will illustrate it with the game of “chicken” (Yes, you are right! Rebel Without a Cause is a representation of this game).

Rebel Without a Cause

The term “chicken” is a metaphor in which two sides are locked in an escalating situation, where none have nothing to gain and where only pride prevents them from pulling out. It is represented as a race in which two vehicles deliberately are driving on a collision course. The first to swerve is a coward ( or a “chicken”) he loses pride and the other wins. If both swerve no one loses anything, whereas if both continue they will crash and die.

Table game of the chicken

A quick glance at the table makes us realize that it does not exist a dominant strategy. If one of the drivers swerves, the best strategy for the other driver is to continue. However, if one of the drivers does not swerve, the best strategy for the other driver would be to swerve. As in the prisoner’s dilemma, this type of situations are common in the real world.

A strategic move is to modify the game to change the outcome and to change the balance. This would happen if driver 1 rips off the steering wheel, and throws it out of the window so the other driver realizes that his choices have been reduced dramatically.

Table strategic move - game of the chicken

As a result we have a new game where there is a dominant strategy for driver 2: Swerve is the only option, as death (-∞) awaits him if he continues.

We can say that by restricting the options, “rip off the steering wheel”, we make the threat of staying on the collision course even more credible, and it changes the rules of the game. The strategic moves are terribly useful, because we can use it to design games where collaboration is the dominant path. However, I do not recommend you to do this at home… you could see the steering wheel of the other driver go out of the window as well…

In the next post we will present the Coinffeine protocol as a game, applying all these concepts.

 

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Understanding Coinffeine’s protocol (II)