CoinSummit London – Panel Discussion: The Challenges of Operating a Bitcoin Business in Europe

Transcript

[Music] welcome to epicenter Bitcoin the show which talks about the Technologies projects and startups driving decentralization and the global cryptocurrency Revolution my name is Sebastian Cur and I'm Brian faan crane on July 10th and 11th we were in London for the coin Summit conference this two-day event gathered approximately 250 investors entrepreneurs and developers to discuss some of the most important issues facing the Bitcoin and cryptocurrency ecosystem this episode features a panel discussion called the challenges of operating a Bitcoin business in Europe

Peter Smith Chief Operating Officer of blockchain.info Mark Lamb CEO of coin floor and Frank shill CEO of saell provide their insights on some of the challenges of operating a Bitcoin business on the old continent these challenges include Regulatory Compliance establishing Bank Bing relationships and establishing trust with consumers the panel is moderated by Adam vizeri of diagle I'm Adam Bazi I'm moderating I'm a I'm a lawyer for digital currency businesses and uh I mean part of part of what my experience is is assisting businesses in Europe with the challenges that they face so today I mean I

apologize this is the last session of the day so I'm trying to keep you wake as as much as we can um so bear with us um so we're going to look at get some insight from from businesses operating within Europe what are those challenges like um what in the foreseeable future the challenges will look like um to give you an insight and share that Insight with you so we can start we can start with Peter from from blockchain maybe you want to introduce yourself and say just give it a bit of an insight as to the kind of ch challenges the key challenges that you faced as a business and we go across sure well uh my name is Peter I work at blockchain.info we're the most popular provider of Bitcoin

wallets to Consumers we also provide a uh block Explorer as well as Enterprise apis pretty well known in the space um Nick KY our CEO is supposed to do this event but he's sick so he sent me so you're going to have to bear with me I don't really do these events it's kind of Nick's thing so uh so I might struggle um our key operational challenges are mostly along the hiring front um it's quite hard to hire well in the Bitcoin space particularly because most developers that have a very strong background in cryptography and security y as well as building Financial technology as well as having knowledge of how the Bitcoin protocol works it's a very small group of people and most

those people are already doing their own projects so there's probably an extremely shallow pool of actual true development talent in the space which means that you have to hire very very far in advance yep so you have to hire maybe two out of three of those attributes and then you have to wait for them to come along so one of the key things that we're focused on is building out a pipeline there as well as encouraging more knowledge of these kind of skill sets within the overall development Community which is a positive thing in a way because that shows that you're scaling up but the resources aren't there to address you it's not a in a sense uh it's a is positive challenge yeah there's there's worse challenges to have for sure yeah um but I think one of the things is

moving the industry from kind of a short-term time frame where it's like a quarter at a time to thinking about how you're scaling and building as an industry and as a company over a year time frame a twoyear time frame to a three-year time frame and so it's exciting to be at a place where we're maturing in that respect great Frank yourself and maybe a little bit about yourself and yeah yeah maybe key piece of news a key piece of news yeah uh so we're a Stockholm based exchange started locally in the Swedish Market uh and then over the course of the year we started actually one year ago exactly when we were uh at coin Summit and decided to start the company there so that's a good that's one Milestone so maybe there's a startup here it's about to start exactly that's how we started

we we actually came here last year to find okay we're going to do it and we did uh and now a year later we we expanded more into Europe with 11 countries 87 banks for direct payments so we're not a peer-to-peer Exchange but more a broker where we execute to the market when we get an order in um and we've got investment from from Nicholas Cary and Roger ver behind blockchain.info as well as Eric Vorhees and iron Miller who's also here in the audience from coinapult uh and today we can announce that we got another heavyweight on board with Barry silbert who invested $250,000 congratulations so we're quite happy with that so we got all the check marks uh in place uh and we're just getting ready for the next

phase for SE okay so what would you say is your has been your principal challenge operating a broker brokerage for Bitcoin unlike most companies in Europe I think we've had more luck on the regulatory side we have a registration with fanisa the Swedish uh regulatory Bud there uh harder time on the banking although we have one of the top four banks in Sweden on board um but that's definitely the biggest challenge to get the banks on board uh and it's it's a back and forth and some are more receptive than others uh we've been lucky to through get the PSPs on board and get the direct payments in that way but the direct Bank relationships are are the hardest to obtain I mean it's interesting because you know uh Premier was just mentioning that there was a

Swedish exchange that had all of their Banks shut but yet you're still surviving in this climate I mean a piece of news like that must cause ripples well we had we had some calls from the bank director that calls up when something happens in Sweden it's like uh hello there um but overall we've been able to be a trustworthy I mean we we started as a counter movement with the company hence the name we're your safe fellow um really to be a compliant company and ultimately that wears off to the banks you're working with uh so it's a trust relationship and and they uh luckily trust us and we we uh we are really really happy with working with them so brilliant brilliant Mark tell us all about coin FL and yeah the

challenges that you have faced yep so uh I got into Bitcoin in 2012 and basically uh we formed the we formed the team in uh April of last year and the first thing we did after kind of pulling pulling the founders funds was to uh go after the regulator and see what they thought about Bitcoin and and apply for a PSP license um to to set up shop um they they kind of said well we we believe Bitcoin isn't money we don't want to regulate you and and they sent us a letter explaining their position and and we took that and and started setting things up uh We've launched three months ago roughly and we've just integrated faster payments so that's

been kind of a big hurdle we had to had to get over and we've we've just gotten that and also we just announced um today a funding round and bringing on of Adam Knight who is formerly managing director of credit s and golden Sachs and s's coming on board but uh it's been good it's just been basically challenge of getting UK customers to kind of shift their trading from other exchanges to the only pound sterling exchange so you're talking more of a business challenge as opposed to a systemic challenge well the systemic challenges have been uh for for us the the FCA hasn't been as much of a challenge other

than their decision not to regulate us which had the the main challenges have been banking um so it's been very difficult to find a bank account uh we're now working with a a financial institution the aisle of man they've been amazing um and and and they're they're very bullish on bitcoin um but the regulatory side other than this decision not to regulate us they haven't been interfering too much we're we're a bureau to change registered with hmrc so we're we're compliant with all AML law AML regulations and and we're we're very focused on being as compliant as possible and being as Trust worthy as possible and what most of what we've been doing or a lot of what we' doing is

focused around trust so on the on the financial side but also on the Bitcoin side um we believe that we're we're essentially regulated by we should be treating the blockchain and the Bitcoin aspects as regulated by the blockchain and regulated by cryptography so we're the first exchange to do provable solvency we're the first exchange to hold 100% of client funds in cold storage and multi- signature uh separate vaults um so we've never held all the keys in kind of one place and we don't ever have to hold customers keys in in one place or in one person um but yeah maybe just just to give a bit of an Insight because obviously you set up

your business been a year now um and Mark how long has it been um approximately since you set up since so we incorporated in April last year and we've launched about three and a half months ago okay okay so talking about a year-ish yeah give us an Insight of how long it took you in particular Mark to obtain a bank account and what that experience was like well um it's it was you basically roughly four to six months depending on how you count things uh to to get our first our our initial banking relationships obvious we had

operational accounts much quicker than that that we could operate under but to get accounts to actually hold client funds that took um six months we've approached every major kind of UK High Street Bank um Turned Down by all of them okay let's just pause for a moment you approached every major UK bank and you turned down by all of them probably a number a high number of other Banks as well the the the interesting thing about the UK bank banking sector is that you can you can talk to a very Innovative bank and they might really like Bitcoin you can get to the CEO you can get as high as you want they might really like Bitcoin their compliance officer might

say I we're actually okay with this and we're totally willing to do it but when that bank agrees to bank you they clear through one of the top 10 Banks and so one of those top even you can talk to well I won't I won't name any names but there are a lot of banks that are very interested in banking Bitcoin companies in the UK and they clear through Barclays or Lloyds or HSBC or RBS and because they clear through those Banks if they start accepting Bitcoin companies those banks will shut down their accounts and so this this is actually a problem that goes beyond Bitcoin and goes into PSPs at payment services companies and um financial

institution remittance companies and Financial institutions in general in the UK where they there was a consolidation process after the fines from barlay so that sidetracking a little bit but other than Bitcoin the UK banking sector has had some some problems with dealing with financial services those those problems are looking like they're going to get solved soon by some other players or by some existing players but it's it's been it's been quite a challenge yeah and I mean I can relay my own experience with Rising businesses they're good to go they've got startup Capital they're ready operationally everything's in order but they're just waiting for that bank account and that is you know the

gatekeeping uh the gatekeeper for operating a Bitcoin business even regulated firms are getting their accounts shut down and not being able to go anywhere and some are are just shutting down operations that aren't dealing with Bitcoin at all so this is a big issue for the UK and uh so it's a challenge that I I think everyone needs to be aware of if you're especially if you're setting up a business within this um within Europe I mean Frank your experience has been let's say quite Exceptional from a European perspective um to give an example of that in the Netherlands where I was at the national Bitcoin conference there um I know there are like 17 different Bitcoin companies and they are coming together doing their

own regulatory part just to because all the Regulators shut them down uh and the bank shut them down as well so it's it's a very very complex situation there but also in the Sweden uh we know of several startup companies that are trying to obtain bank accounts uh but haven't been able to do so so because there's a capacity let's say of risk that the bank can accommodate you know to a certain degree I mean they going to take on 50 exchanges no so they're very picky which is a smart thing to do but like what Mark says they they are very conscious about the The Wider ecosystem for them like what if we take a b Coin Company in uh and what does it uh tell to our our our network of banks that they work with

uh and that is a big concern and and one yeah logically yeah that exists and I don't know really how they're going to C through that let's drill down a little bit deeper sorry yeah like for me I've been going to these conferences for several years now and we we kind of talk about this at every conference how hard it is for Bitcoin businesses to get a bank account but the overall trend is quite positive um you know years ago no one had a bank account and if they did it was because the bank didn't know they were a Bitcoin company um now you have banks that are specifically seeking Bitcoin clients like you know we heard from Fedor Bank earlier um there's Banks uh throughout the world that are very accepting uh we deal with a variety of exchanges that have extremely strong banking relationships um you know

multiple bank accounts multiple jurisdictions so I think like we can spend a lot of time sort of talking about this issue yeah but the overall trend line in the industry is a a steady steady improve and so I think that's important to observe true and I think so I think sort of we're waiting for the institutional money to come in and that that will trigger the banks to to make the final switch just just to note that uh for anyone who didn't read it the European banking Authority in their report they said explicitly um although financial institutions can't hold Bitcoin per se they said explicitly that they could still as credit institution open bank bank accounts for Bitcoin businesses so

you know we've got it from the ebaa on paper that there's no reason for a bank not to open an account for Bitcoin business so that is a positive trend and I'd just like to pick up you mentioned this point about regulatory uncertainty you know in the Netherlands I you could register with the financial Authority but they couldn't so therefore they could not legitimize their business and that puts them on the back foot if they are approaching strategic Partners yeah so they know it's going to happen sort of European uh legislation or regulatory uh environment will be in place at some time so they're now trying to to prepare themselves as well um but the companies like us that were able to do that from the get-go they're already in a better shape so now they're getting sort of

catching up and and shaping themselves up to be ready for when that regulation comes uh but it also affects again the bank accounts especially in the UK I would say uh where you go to the regulatory uh uh body to to get a registration that say no and then the bank said yeah but you need to have a registration in order to get bank accounts so it's like a chicken a catch 2020 situation let's talk a little bit about that regulatory uncertainty you said that you know the FCA weren't prepared to offer a license or the opportunity for you to acquire authorization what do you perceive that as a challenge in its own right not being regulated or would you say in in to a certain degree that's an advantage forgetting about the banking situation but just inherently in that well actually uh it's it's hard to forget

about the banking situation I think the main advantage of being regulated is a a bank account will will come much much much more easily uh on the other hand from a regulatory perspective there are a number of institutional funds and and institutional clients that would be much more comfortable dealing with us if we were regulated um so on on one hand there is that on the other hand um I I guess there are some advantages of being unregulated although for the most part I don't I don't think that's a big factor we are preemptively regulatory compliant we basically when we when we applied the to the FCA we had

to become compliant to do that and build a build a policy in a kind of internal control structure to that was compliant and so for the most part we're operating in a compliant fashion so it's it's not EXT it's not really going to be extra overhead in ter terms of the way we see it um okay regulation would basically be more of a a certification that we are doing the things that we're claiming we're doing okay and so to the extent that that would benefit customers whether they're institutional clients or retail customers that would be well appreciated and we we are we would wish that they would have changed their answer okay so there's maybe a a business opportunity in having a license

or authorization you could scale up your business with institutional clients but L's let explore a little bit about the retail clients we mentioned earlier about this idea of consumer protection um you know and you know the mount go Fiasco um creates let's say you know consumers are scared with just depositing their money with exchanges and the unregulated environment to to a certain extent is not sufficient to address those concerns I mean can we talk a little bit more about consumer protection and what you as as a challenge essenti I think one of the important things to remember here is that we are in a stage in the industry where the end points to the world we're

trying to build are tricky that it's improving over time as I said but it's important to remember because we get lost in the Weeds on this a lot we're I'm here certainly and I hope most people are here because we're building a new Financial World we're reimagining the way we all transact yes and we're making things much better and I think that if you stay committed to that you have to stay committed to the long-term Vision part of that is well once consumers are in this system is completely unregulated at this point and what happens to them you know to date is an industry we haven't done so well in consumer protection you know there's been a laundry list of meltdowns of thefts internal and external

mismanagement um you know and I've been caught in several personally I know most people I know that have been in Bitcoin for some time have been caught in several and so I think that we have to do better on that front and one of the reasons that we haven't done so well on that front is that when people design these in points and exit points a lot of times you know there's been a centralization of funds you know there one of the interesting things I was talking to the guy a guy who's um who's formerly the COO of City group and he told me you know the history of finances has told us anytime you create a Target anytime you pull value people will go through all manner of effort to try to steal it now for City group that wasn't such a problem because people would hack

into City Group transfer the money out they'd recall the wire in Bitcoin there is no recall the Bitcoins function you know that hasn't been built into the protocol and I doubt it ever would be and so once someone gets into breaches you either from a hardware level software level or a purely operational level if you've centralized or pulled consumer funds you're going to lose them and there's all kind kind of ways to be breached it's basically Limitless and we've seen that play out again and again and again um and that's deeply troubling as an industry that's very young that we've already lost so much in consumer funds so how how would you go about let's say addressing so this this challenge of centralization maybe we

could so at blockchain we're extremely committed to not centralizing funds we never have we have no control over users funds no way to access your funds and if we're breach on any of those levels either at a hardware level operational level or software level our own accounts may be breached but your account will not be and that's one of the key things that we're committed to because what it does is it controls our risk profile so instead of our risk scaling over time with growth of customers our risk stays pretty flat what we'd like to see the industry do is things similar to what saell is doing so saell is running this ability to get Bitcoins but they're never storing your Bitcoins in a centralized pool um they're actually building their own wallet right now that

doesn't centralize and you know I think that's positive development so it might be interesting to hear Frank talk about that because we don't actually sell Bitcoins yeah yeah okay let's let's hear about that um well yeah I obviously fundamentally agree with that approach is like as as soon as you centralize you become a Target and there are enough examples in the industry that that has happened uh so we made a conscious decision to not store any Bitcoins and work with liquidity providers to execute the tradeit straight on without any holding it and a similar approach we're taking to the wallet although I'm not inclined to say too much about what we're doing there but uh um yeah we we we certainly SE an advantage in in making it not accessible directly by us um and also not holding it one common

wallet so and Mark do you perceive this to be a problem and how how have you addressed it yeah so as an exchange we have to have full control over a customer's Bitcoin when at the point that they are placing a limit order or Market order on the exchange um now what we're doing in terms of protecting the client funds is essentially even though we control the Bitcoin we're not centralizing it we're not holding any Bitcoin on one one private key or there's there's noing to be fair even Mount gox didn't hold all their Bitcoins on one private key they held it spread you you're uh misunderstanding what I was saying no none of our Bitcoins are hold held on single signature addresses

so like bit stamp uh Kraken and every other exchange holds funds in s single signature private Keys um or signal signal signature addresses we hold 100% of client funds once they're deposited we hold 100% of client funds in multi- signature pay to script addresses where the keys are held in different bank vaults actually not Banks but different vaults um and can just two quick questions there one how does that prevent you from being breached on like a hardware or operational level and two how can I independently verify that you're adhering to this security protocol so you can tell anytime you've deposited the funds and and once you can see that that they're they're moving to

a uh P to script hash address and then when you see a transaction going into or out of that P to script hash address um on the into you see it's a pay to script hash and on the output transaction you see that it's been signed by bu three signatures how do I know who controls the signatures though well that's there's no there's no we don't have any way of of you knowing who controls signatures so one person could in fact control all three signatures yes but you can it it is a definite Step Up Above what other exchanges are doing where they're holding funds to be clear I need to trust that you don't control all three signatures yeah any any exchange will require trust so the challenge is how you can use technology

to address the lack of trust in third parties which is an irony of Bitcoin being a trustless remittance system but I think we can solve this from a software level as things come along you know you work on solutions for multic custody wallets I think some of that work is extremely fascinating um and there's companies uh including ourselves who are working on this kind of technology that would allow people to have joint custody of accounts um and obviously it's possible to do like you don't have access to a full order book but saell never hold never hold your Bitcoin no um and I think we've got to get there and we've got to keep committing to solving these problems from a software level or we're going to continue to see these meltdowns and losses of consumer funds okay great so I

agree with that we've looked at looked at some of those challenges and now I'd like to come to the audience and see you know whether there's you know any challenge that you've had that you want to relay or any questions that you have um about the you know description where you've experienced something similar in obain a bank trying to get a bank account open does anyone want to make any comments not really no yes at the back um Dennis and Bertram a tum cryptographic uh number oh sorry a number of years ago I ran one of the first Bitcoin exchanges in the Czech Republic which allowed for you to instantly deposit um check crowns into our exchange and then trade them for uh

bit coins we ran into the problem relatively quickly of fraud where they have a a secure system of online banking but it isn't so secure as to prevent old ladies from being socially engineered by whomever so really quickly early on we ran into people who were sending money to The Exchange to us when they didn't actually intend to send the money to us and the bank initially told us that they didn't really care because the the transactions had been confirmed from their end in terms of their um two-factor authentication so it was fine of course a few months later the the story changed and we eventually closed

because the the Ministry of Finance had big issue with how they were going to handle Bitcoin and the bank of course was just not happy with us in general so one of the things that in the smaller countries and working with other individuals who work in Bitcoin companies in smaller countries is is that the banks have been very leery they almost are waiting to see what the larger countries do with regards regulation in Bitcoin before they make any clear rules so except some places like Slovenia I feel that a lot of these smaller countries are in this just holding pattern where even though you could develop something really unique in for example the Czech Republic you don't

have the legal framework where the government won't give you any promises in terms of what the future is going to be okay and so okay interesting I I think that you picked up a very key issue here which is fraud you know um you know an exchange whereby you're accepting card payments with the possibility of charge back is a massive challenge I mean the online gaming industry had loads of Fraud and they spent years trying to deal with it have you ever considered you know beyond Bank transfers wherever you're going to accept payments via card well we have direct payments right from 87 banks in 11 countries and um I mean this is the biggest challenge to make sure that you

know who the customer is and do the kyc and yeah it's it's quite extensive if you really want to make sure that you don't that you're not getting fraud in your system um and uh there are different layers that you have to implement to make sure that the person is who they say they are and then uh you you will actually minimize I mean sure we've seen fraud cases as well but it's really minimize to to the amount of cases that take place um and it depends which method you use as well some are more prone to to fraud than others um uh so it's it's and you we don't use credit cards uh there you have more charge back risk than for instance with the direct payment methods that we use uh and we partnered with yumo a company that that does the the verification with the the

recognition of the different IDs so these are the type of U things that we so kyc for you know your client is not only important so you like stay out of jail but secondly it's important from a Ford perspective to reduce your Ford risk absolutely and then whatever technology part you can do on the back end that's where we spend most most of the time up in the first phase of sael to make sure that we have that that basically locked down what's your view Mark um it's it's a lot of the same kyc Pro procedures we uh we check everyone's documents and do any electronic check of all of our clients whenever funds come in from their uh that that are referencing their reference code we have to check that that it's coming in from their bank account and not a third party

account not someone else trying to you know wire funds to The Exchange to launder money or commit fraud so it it's it's a number of kind of IND financial industry standard policies around around fraud and just procedures to to kind of mitigate that and make sure none of it happens and of course making sure that the only payment meth mechanisms you use are ones that don't have any chargebacks because you can have the best kyc procedures in case and someone can do a a charge back and you're out money so that's basically I mean for wallets what kind of fraud risk uh do you we don't really have a lot of fraud risk but I will jump to the

regulatory question you know it's kind of a two-part question yeah you know I think that we've seen the regulatory environment change a lot over time it has a tendency to spike up and down so a lot of regulatory interest and not a lot the the most important thing in my view is that you decide who you are as a business what you are committed to achieving and what you are committed to building and then be open both with consumers about who you are what you're doing and what you care about and be open to Regulators as well I I'm not saying that you should um should accept every regulatory suggestion but I'm saying that you should figure out who you are stay committed to that and you should also tell them what you're trying to do and you know hopefully hopefully you can reach some sort of understanding

um and some sort of business model that lets you operate but it's a really long game and it's important not to get kind of caught in the weeds of every specific announcement that crosses your Google news alert all right you guys can have cocktails now after premiere's finished but thank you very much thanks guys thanks guys that was great thank you thanks thank you thanks so much for listening to our coverage of coin Summit if you enjoy this episode please support us with your donation it really helps us traveling to conferences and produce high quality content for you you can donate at eper bitcoin.com tips where we have our tipping addresses and also an option for donation subscriptions your support is

much appreciated and special thanks to those generous Souls we have already donated to the [Music] podcast h