EB87 - John McDonnell: How Bitcoin Will Win Online Payments

Transcript

this episode of epicenter bitcoin is brought you by ledger makers of the ledger nano hardware wallet half piece of mind and knowing your private keys are protected by industry standard physical security go to ledger wallet calm to learn more and use the offer code EB 09 and check out to get ten percent off your first order and by coin cap do with over 500 all coin exchange rates updated in real time coin cap is the authority for crypto currency market information hi welcome to episode of Bitcoin the show which talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is Sebastian co2 and my name is Brian fog and crane we're here today with john mcdonald he's the CEO of big net and he

has a long history of working in the payments industry with mesa and he was also the head of business development at cybersource which we'll talk about it later so he sort of a deep from the payment space and they're sort they run a pic on payment processor so thanks so much for coming on today John yeah my pleasure Brian thanks Sebastian so it's actually it's kind of funny that we've been doing this podcast for a long time and payments is always one of the first things that come to mind when people talk about Bitcoin but this is the first time we actually have a sort of a pure payments episode and someone on who's really focusing on that we have had I guess people talking mittens as it changes all kinds of things but so can

you tell us a bit maybe about online payments in general because I think a lot of people in the Bitcoin space actually don't know that much about how payments really work okay sure yeah and it's it's a something that you know are the founding team of a bit net comes from the online payments industry so we know a great deal about that you know how broken frankly online payments has become as the Internet has enabled merchants to market and sell their goods and services globally payments is not kept pace okay the infrastructure for transmitting funds and accepting payments his is continues to be based on

you know 1950s era card swipe technology so we see Bitcoin as a thing probably the biggest innovation in FinTech since the introduction of electronic payments okay going back to the magnetic stripe card and visa so I guess probably a little bit of background about where we came from my co-founder Steven McNamara or CTO and myself were at cybersource which is a company founded in the mid-90s at the advent of the commercial internet which was created to help merchants accept payments at the time primarily credit cards online and

something that the cybersource founder fellow named Bill McKiernan who is actually an investor in bit net and he was the chairman of our Board found a cybersource out of frustration try with his efforts to sell at the time software so you know bill looked at the internet and said this is awesome okay what can we sell over this over this global network and software came to mind ok it was a digital product that could be downloaded so there was no need to ship a physical good and so I created a company called software net but what they quickly ran into was collecting on that almost the license payments for software was a disaster people quickly caught on to the ability to defraud merchants by filling out fake fake credit card numbers that would appear to

be legitimate but otherwise when they were processed would turn out to be false or stolen and so it'll bill looked at this and and solved it by creating a payment gateway with some real-time fraud control systems I something that's important to note that in the in the credit card world okay first off it's a pole payment you're presenting a credential to a merchant or more specifically to the merchants processor that merchants processor then uses those credentials to pull payment from the card issuing bank the card issuing bank maintains the account the relationship with the consumer I so there are multiple steps including a cartoon network in the middle that connects the

processing bank for the merchant with the issuing bank on behalf of the consumer the card network establishes the rules including the collection of interchange which is the fees paid from the merchant acquiring processor to the card issuing bank on behalf of the card issuer and under the network rules under the so-called operating regulations established by Visa and MasterCard the merchant in a online transaction and a so-called card-not-present transaction is liable for the fraud so it's the reverse of a physical retail brick-and-mortar transaction where you hand your card it's you know in most places it's not Chip and PIN insert your card you put your PIN in to authenticate

yourself as the cardholder in some places like the US it's still room eames a signature based where you swipe the card and you sign but if in under the card regulations if that card is not physically captured in other words if the chip is not interrogated by a point-of-sale terminal or the magnetic stripe card is not swiped in the track to data interrogated to compare with the signature and the other authentication then the merchant is held liable for fraud so which applies to any use of a credit card through a mobile phone or through a PC over the Internet so there is a tremendous cost associated with accepting cards online above the interchange which is for card-not-present hire 50 to 100 basis points so a full one percent higher for

cardinal present transactions as compared to physical retail location transactions so merchants a are paying higher rates to accept credit cards online be there exposed to the fraud so that if the card transaction is later found to be fraudulent or even just disputed the merchant is at risk of losing the entire value of that transaction so it goes from the added sort of half a percent one percent additional cost accepting the card suddenly it's a hundred percent of the cost of transaction okay and those examples where a merchant is is found to have accepted a bad card for transaction they have lost the entire value of the goods or the services that they sold in exchange for that bad that that fraudulent card even if they're

successful in defending a dispute the so-called charge back that's initiated by the cardholder it's still an expense it still requires overhead requires resources and we've done some math okay to try to come up with the total cost of acceptance which starts with the interchange and then other fees are layered on the card network thieves the acquiring processor fees sometimes there's an ISO I'm so-called independent service organization there are PCI costs associated with accepting cards the costs that are needed to pay outside consultants to audit retail systems for security okay to make sure that there aren't any unintended back doors for breaches where card

numbers can be stolen which unfortunately happens it with increasing frequency and that's that's the other thing you know the criminal rings are becoming very very sophisticated than becoming incredibly organized and professional I and so it's an escalating problem so when we add up the total cost of acceptance it's it's not the sort of 200 to 400 basis points two to four percent it's really eight to ten to twelve percent depending on the industry so if you're a retailer and you're accepting cards that's really what you're paying the fully-loaded cost of accepting cards online is in the neighborhood of ten percent which is an incredibly corrosive cost okay to the margins especially in some some thin margin businesses and in some industries

such as Airlines you're specifically or i should say particularly and disproportionately hampered by the cost of acceptance because of the nature of the high value of the ticket and the delay in providing the service so if your if your card acquiring bank you're a bank that is basically accepting cards on behalf of airlines I you to mitigate your risk at any point in time we're holding on to 10 20 sometimes thirty percent of the airline's cash flow as a protection against this whole chargeback process that I just described and against the fraud people unfortunately airlines are our particular targets for these subpoenas crime rings to resell stolen credit cards that have been

obtained through breaches of retailer and processor systems and we're talking millions millions and millions of cards and in particular time are for sale on the black market on the internet and and again you know these these criminal rings are becoming incredibly professional and sophisticated at marketing these cards and gaming the fraud control systems that issuers have put in place they know that if they could sell cards by zip code in the US then the buyers the other criminals the buyers of these one's card can actually create counterfeit cards and go shopping within a certain radius of that zip code and go undetected for a certain period of time and again as a way to circumvent some of the fraud control systems that issuers

have put in place as a result of this increasing amount of fraud there there's been a hair trigger okay put on these fraud control systems and as in that result otherwise legitimate card transactions are being declined so in other words if your card holder and you're presenting your card it's your card you've authenticating yourself but because it's an online transaction and because say you're in Europe and you're buying an airline ticket on a carrier in Asia or your cross borders and you go outside your particular buying zone issuers increasingly are declining those transactions and we call those false positives so here again is another cost to merchants of accepting cards online

it's it's this dead weight loss of otherwise legitimate sales that get declined by the card networks by the issuing banks through no fault of the retailer and there's a firm called experience that has done some some data analysis on on the magnitude of that cost it is 40 billion dollars annually 40 billion that's that's that's crazy I mean it it is such a complex system and one that is like you say it is extremely expensive and on the Merse so I guess one exception to what you mentioned where the merchant is liable for fraud and online transactions is using three secure but that's another cost that the merchant has to has to interior eight through through through the the

subscription to three days secure so I know but I mean so but why is it that when these regulations that you mentioned imposed by Visa and MasterCard why are the why our online transactions different from physical transactions in the sense that merchants have to be held liable for fraud I think you touched on it in the case of three to secure its it's the authentication okay it's the ability to physically interrogate the piece of plastic that other has a chip embedded in it or that has a magnetic stripe on the back of it which can be you know read and swiped it's it's the added risk of of just what we described that there could be you know so-called pans the

primary account number you know and Visa Mastercard it's just a 16-digit number which can be sold and then used in a you know in a pull credential fashion okay to to defraud a retailer it just introduces a higher degree of risk because of the lack of the ability to physically interrogate the payment credential in the form of a piece of plastic and there have been a lot of efforts okay 3d secure is a good example although again it's an added cost you need to be implemented there's a certain amount of IT overhead um and again you know we're keenly we had bitnet or keenly familiar with this system okay a lot of these costs that we were just describing our sources of revenue for

cybersource okay that was a you know a service layer on top of the credit card networks that was designed to help merchants handle these risks you know manage these costs improve the likelihood that they would collect on a card transaction but at the end of the day their costs right there just additional costs layered on top of the you know the existing payment system to help merchants who are trying to sell their goods online of from getting ripped off so if we is we sort of sum up the the what that whole payment system currently looks like for consumers sorry for merchants it seems extremely frustrating because they have to bury bear the weight and the responsibility of potential charge backs because of fraud and for consumers they're faced

with the reality that they're not able to use their credit card in certain situations where it might be considered a fraudulent transaction that certainly happened to me I'm sure it's up to you Brian as well and and who's benefiting from this is a broken system or a system that doesn't really serve merchants and consumers well the banks are and because they're taking those fees for providing that service but that doesn't really is i mean it's it's not a very good situation when you look at it from from a high level no no it's and it's broken and i think that that was the point that went that was a conclusion that my co-founder and i came to well at cybersource was you know as we gave you another kind of background on that visa and 2010

acquired cybersource for a couple billion dollars cybersource was by than a publicly traded company and it had been for some time and part of the new strategy for visas acquisition was to extend the reach of cybersource globally okay so at the time we were active in western europe we had a joint venture in Japan but visa strategy was you know go to Asia go to Singapore go to Brazil take this technology and as e-commerce was proliferating globally help merchants and other regions accept cards more safely online something that we found was that a lot of other regions were not as card centric as Western Europe or as the United States in terms of they were using other payment types as so-called alternative payments bank transfers ideal in the Netherlands is a

good example boleto bancario and Brazil is another good example some places like South Korea we're using mobile payments and that was great but did the point being that for a retailer now to extend your reach globally which was the opportunity with the global internet was to reach consumers anywhere and I'm a planet with access to the Internet you had to you were faced with these with the prospect of integrating not just to the card systems but now to a proliferation of other regional alternative payment types that were tied to regional bank networks or regional mobile network operators okay so they worked great in a particular country or maybe even a particular region but didn't travel and so suddenly we're looking at this as a patchwork quilt of

siloed payment systems that were stuck okay within regions and their atty to proprietary bank networks etc and so what we saw with Bitcoin and this is going back to sort of the 2012-2013 era was an incredible leap forward okay just an incredible development that was a single connection into a service provider like bitnet a merchant could now accept a global payment type from anywhere on the planet anyone connected to the global public internet could spend Bitcoin and that Bitcoin can be accepted by any other merchant okay independent of any bank Network any mobile at work network operator no cross-border restrictions no cross-border fees and that's another

cost that I should have mentioned earlier with the card networks a so-called aissa an international service assessment is charged by the card networks anytime that there's a transaction that crosses a border okay again where the merchant is is in a different location of the issuing bank so with Bitcoin right with you know the Bitcoin protocol the global public internet became a secure payment network and that caught our attention and here we were at visa tried to figure out okay how are we going to continue to serve merchants globally or of you know to help them extend their reach to consumers anywhere the internet you know can be accessed which with the proliferation of mobile phones was everywhere right and so that we saw a

couple of developments from in the expansion of of the Internet okay through mobile broadband the proliferation of smartphones and and then the fact that now there are billions you know 56 billion people now with access to the internet but no bank account okay and thus likely no you know no access to a credit card so we saw the opportunity of you know there were a couple of different important developments sort of converging okay and Bitcoin came out at a time when you know the global financial system was brought to its knees frankly okay going back to the metadata included in the Genesis block right about the Bank England bailing out RBS or whatever

that was and you know I think that we all started to question right you know what what are we doing here with the financial systems why are we relying on central banks why are we still relying on card networks and other proprietary Bank systems to transfer money with all these added costs and risks and exposures you know the Internet is freed up information we cannot trade you know information you know providers like skype and they enabled us to complete voice calls over the internet we had voice over IP which is a great technological innovation suddenly we were freed from you know the landlines and the mobile roaming charges we could use the internet to speak well now with Bitcoin we have money over IP we have the ability to send money securely as

securely as we can send or as freely as we can send an email we can now securely send money and that was an incredible in our estimation innovation and probably the single most important development and financial technology ever okay and so we felt that it justified our leaving cybersource our live in visa to develop and launch a platform specifically tailored to enable merchants to accept Bitcoin to obtain all the benefits of accepting Bitcoin but without a lot of the risks and without a lot of the costs of having to handle the private keys you know convert the Bitcoin back into Fiat which merchants still need okay to pay rent to make payroll to pay vendors um and and guarantee the payout right at

the transaction at the cost of the transaction to the merchants so we saw an opportunity and effects to create a services layer on top of the Bitcoin network to to enable merchants to accept payments from anyone with a smartphone and access to the Internet yeah I think this is such a such a compelling compelling thing I think like that's been one explained speak going to someone I think it's always those cases or remittances is another one that just kind of makes sense to everyone and it's really easy to for people to then see that it's such a compelling thing I think when we look at the realities of it and I'm curious about your opinion on that because for a consumer that may be in security of the credit card network can actually be almost a feature right

because it allows one to sort of claim back the payment in case something goes wrong or if you dissatisfied with the merchant right with this pool payment and that's not the case with with something that Bitcoin so how do you think about the aspect of of consumer protection and and the aspect of how it appears to the consumer in this context well so and we're now using the case where a consumer has access to a credit card right so right and and and and I agree that that's a that's a frequent analysis that we perform is that you know if you have a credit card and it despite a lot of the frustrations that we just mentioned the fact that you know your card might not work in fact I

rented that twice just in the last week trying to buy airline tickets okay trying to get from Europe to united states one and one I won't name the airline but one particular case I had to try three or four different ways to get to divide ticket on that carrier I and I finally had to go through a travel agency that would recognize my credit card and authorize me that's incredibly frustrating I know those travel sites where you can buy with Bitcoin right well I tell you that unfortunately did that travels I do know those travel sites well and in this particular airline work was not that hooked up to that travel site but um but again I mean no you know all kidding aside that is the solution right i mean if if i were able to spend bitcoin on that airline i

could have gotten 30 minutes of my life back right so but we'll put that aside it first time because I know brown what you're trying to get to is a consumer protection element of you know I've now pushing cash to that airline okay if that airline doesn't fly you know how do I get my cash back and that you know the technology exists for that today I know that that's an increasing area of focus and inquiry for some regulators I know in the in the US the Federal Trade Commission is just begun providing some guidance some kind of consumer risk warnings I know central banks the world over have likewise issued you know even if they're not regulating Bitcoin they're they're issuing guidance to say you know consumer you know caveat emptor you know consumer beware and guard your private keys don't deal with unscrupulous

merchants you know etc but the fact is that the technology exists today to enable consumer protection on any Bitcoin transaction you know and I think it was an important enough consideration that it was addressed right in the initial white paper and did the whole notion of you know having an intermediary function accomplished through a smart contract right through you know multi signature transaction where the bitcoin is subject to some additional conditions okay before it can be further transferred and that's that's a service that we can provide today yeah I think that's that's really interesting way of looking at it right because one one way of looking at consumer

protection in the current card network you could say oh the card networks are secure so it's always possible the car was stolen so as a consumer if you call them and say like hey this was a fraud this was a legitimate payments up you get your money back because they can be sure whereas with Bitcoin it's like cash but then it does have all this programming capabilities and multi sick and things like that so you can sort of layer consumer protection on top of that in whatever way you want right maybe sometimes you don't want it sometimes you want to have a third party sometimes maybe you want to pull data from api's to determine whether the payments made or how and so I think that's interesting of course it's a considerable engineering effort it's hard it's going

to be hard to coordinate and standardize and and also I think it will be hard for consumers to know what to expect right because if you have different types of consumer protections in all kinds of areas one of the advantages of credit card is this like one number the call and you know you can deal with it if if you have a credit card if you have a credit card yeah I just don't yeah well I'll just say this you know that's an important consideration right we're talking about the billions of people now right you know it can get online and but that doesn't that doesn't eliminate the fact that okay those billions of people can now shop with Bitcoin but they're still subject to write the you know unscrupulous merchants who don't deliver on the services or the goods and we do think that you know there are near term use cases and we have a best best

practices kind of you know turnkey solution that we can offer to retailers today basically say okay this is how you handle you no refunds disputes and consumer protection could the extent that you want to offer the ability into a good example would be a marketplace right where you know it's one thing if it's a high street name brand retailer with whom you know the consumer may have a prior relationship or you know to whom the consumers want to place a great degree of trust and just the refund policy if it's say you know you're buying your on etsy you know or even ebay or some marketplace and you're going to purchase a hypothetical Muse Rolex watch right from from another

seller you have no connection to this seller probably will never deal with the seller again yet you're going to push that sell a digital cash ok what is your recourse um and in that particular scenario we would say well you know we can set up a multi-state transaction where you know in an automated fashion and by the way you know these solutions exist today you know their providers like gem you know bit go right there I mean this is not something that nest needs to be built it exists right we're all using this technology for you know corporate Treasury and financial controls purposes but this could be a consumer-facing service where the consumer can say okay I'm going to spend my bitcoin and by this user all X and I know that

no if that doesn't show up within five days something happens right and there's a condition that's tied to a timeline that the condition expires if the consumer receives the Rolex inspects the Rolex sees it's a valid Rolex it works etc the condition expires right it's in some period of days and then the bitcoin is capable of being transferred off the block chain sold on exchange etc um that you know that but that dead technology that solutions exist today I think Brian to your point you know that's our best practice that we've kind of put piece together it's not a standard okay it's not like an operating regulation necessarily being dictated by you know a duopoly stick card network of room for instance um but at the same time it's it's something that for a consumer who's

concerned about their exposure I should be sufficient okay if that consumer has decided they want to play with Bitcoin and that could be because that consumer is in you know Malaysia right or South Korea or someplace where they don't have a credit card or the card is not going to work you know for some reason that consumer has decided we pay with Bitcoin um and in there are a lot of use cases where we can you know explain and describe with that that would be the case where they would want to use a Bitcoin transaction instead of a card we can protect that transaction we can we have the technology today tell protect that consumer but it's a space we have to keep an eye on because I think that your point if each country regulator jumps up and requires you know a different standard or a different solution that could get complicated you

know it could cause consumer confusion any sort of kind of siloed regulatory approach we have found you know it has carries with it the risk of disrupting the global appeal of Bitcoin right I mean if it's going to work differently in one country versus another because of these kinds of regulations that's something that we need to nip in the bud and and I think you know the only way really of doing that is coming up with some sort of you know yourself you know best practices right that you know the industry itself comes up with let's take a short break so I can take you to Paris I dropped into lab Mazzone g bitcoin the house of bitcoin in the heart of silicon sanjay home to many startups including ledger and I spoke with Nicola Becca a ledger CTO about the

recent membership in the phyto Alliance so the final Alliance is a group of in this video is dedicated to remove the use of password from the web so we decide to join them because we think that bitcoin r is a very close protocol technically speaking to fido and enhancing Bitcoin products with that kind of feature is very useful for everybody so this will enable you to log on easily into websites in different ways for example are with our NFC product will be able to look at into a service by tapping the device on your phone or by tapping the device on an NFC reader you will have a way to authenticate without passwords in a stone that way and the standard way is really important because there have been a lot of initiatives trying to remove

passwords from the web but this will only work if they are interoperable you don't want to lock users into single solutions given the traction that Fido has today you have supporters like Google like eBay like paypal it to it we believe that it is a must are the best under to do that so definitely look forward to future larger products being fight or certified in the meantime you can always count on the ledger nano to keep your bitcoins safe so don't delay in getting a secure set up today go to ledger wallet calm and use the offer code EB 09 to get ten percent off your first order that offer code is valid until September 30th of 2015 we'd like to thank ledger for their continued support of a percent of Bitcoin when we talk about adoption you mentioned I was making the comparison to credit cards and you certainly write that may not be

the best comparison because for consumers credit cards work reasonably well at least they seem to work reasonably well because they the costs are sort of hidden right there just put on top of the price but you don't you don't notice it as a consumer does that mean that you guys a bit net will focus on maybe some of those niches and markets where that's not the case in payments don't work well like maybe gambling some online things that card networks and work way for remittances micro payments maybe Internet of Things although that's probably and stuff like far away until that's really going to become a big application know exactly

right we're looking at all those use cases and I think you're onto something that you know some of the areas of early adoption could well be tied to places where credit cards just are not working well today for whatever reason the you know our every hour focus is that look if it's if it's legal okay and the jurisdiction where the business is being conducted ok if it's regulated is the merchant capable of complying with those regulations um you know it because we analyze this a lot and frankly you know with some of our banks the the notion of being a high risk merchant and a credit card and a card acquiring scenario oftentimes has nothing to do with the appeal of that merchant as as a big point acceptance solution so in other words again going back to Airlines and

started picking on airlines but there are high risk merchant there are high risk their so-called MCC the merchant category could is high risk because they're accepting high value tickets they order they're selling high value tickets well in advance of providing the service so that leads to a lot of disputes and a lot of headaches and under the network rules the card acquiring banks are the ones responsible for making whole the card issuing banks okay on these charge backs and these disputes and frauds so those are that's a great merchant category for Bitcoin right and yeah the airline's get their cash up front they don't have to wait for the billing cycle they don't have hold back reserves you know the banks don't crimp their cash flow the whole thing um you know gambling shirt okay potentially I think you have gambling in

Europe and other places where it's it's legal the United States it's it's still an issue um that should be a great market for Bitcoin acceptance right it solves a lot of issues that card acquires deal with and chargebacks but in the additional consideration for Bitcoin are the rig patience and concerns pertaining to money laundering okay and so online gaming unfortunately is is prone to high volume you know kind of potentially anonymous transactions okay so a Bitcoin in to gambling chips the gambler chips are bet traded you win some you lose some but then they're cashed out and I think that some of the concerns about you know gambling specifically as a

vertical pertain not to the credit risk right that typically is a hindrance for card acceptance but to the money laundering considerations but again that's manageable right and our approach is you know we have built a platform from the ground up with a lot of these considerations in mind about collecting the data both on the payer and on the merchant so we can comply with a whole panoply of regulatory frameworks starting with the beef BSA the bank secrecy act okay you know know your customer anti-money laundering you know so far so called the you know sdn specifically designated nationals in the u.s. Cisneros OFAC the Office of Foreign Assets Control and there are a lot of

considerations that exist with the existing financial services existing financial systems i should say we're typically financial institutions are on the hook for screening out money laundering and monitoring transaction activity to try to spot indications for potential money laundering situations activity that spike source out of the ordinary unusual that requires further investigation you know we're we're registered money services business and the US Treasury under their FinCEN guidelines we're obligated to file suspicious activity reports and all the jurisdictions networ do business so these regulations don't change just because we have a global digital currency and we knew that we know that coming from BSF cybersource we

understand that there are a whole host of regulations that we're going to have to be complied with and so we built we heart wired in from the ground up and our platform the ability to collect the necessary data and to comply with these regulations and you know we shall it that's table stakes right for getting access to the bank systems and for the time being while bitcoin is still really a payment type as opposed to a currency all right in the sense that retailers really can't use Bitcoin to pay vendors and to make payroll that they're going to want fiat currency so a big part of our service for the foreseeable future will be accepting the Bitcoin from a retailer whether it's in you know high street retailer or you know gambling or you know travel or Airlines or whatever converting that Bitcoin back into fiat

currency and paying that out from the existing bank systems to have access to this existing bank systems we have to comply with a lot of these regulations that were frankly created for financial institutions to screen out bad actors at the account level well on the Bitcoin network there are no financial institutions right so guess who has to do that bit net so you you touch them perhaps it's a good segue into my next question what I mean Bitcoin as you mentioned is it I mean so it's an international payment system right now but it's not used as a currency per se and that is sort of the main role the payment processors are playing now is converting that back into fiat currency and that has been one I guess a thing that has helped back adoption is that

you always have to hold this currency for one reason it's a fiat currency one of the reasons is volatility do you see in the future Bitcoin as a currency or simply as a payment rail and I guess the second part of my question is can we assume that if we assume that Bitcoin may become a payment rail for only high valley transactions as has been discussed what would that mean for payments yeah sure I do think it would become a currency and if we look at the sort of the last six months the volatility really has decreased dramatically right and the price has been trading within sort of a 200 to 300 275 band for several months and I think that that's important right for establishing the confidence by consumers to hold

Bitcoin for some period of time right and in some cases it's you know they don't trust their own sovereign currency so it's a stored value rightly volatility of Bitcoin might be more attractive than their their their central bank issued sovereign currency but I do think the given time and frankly given you know the chicken and egg issue of providing a place for consumers to spend Bitcoin and that's something that bit netis is hyper focused on is the acceptance side of that equation right if you know one of the recurring questions is well gosh how is Bitcoin ever going to act like a currency if consumers don't have a place suspended and that's that's where we come in we're trying to make it as simple and risk free as possible for for

retailers to start accepting Bitcoin which we think will be a big step forward and you know enabling consumers to to treat Bitcoin as a currency as opposed to perhaps you know it's stored value or a speculative trading opportunity right um and I do believe that you know given given situations like we have in a couple countries in South America for instance you know Venezuela or Argentina you know now we're pointing at Greece you know as always you know there could very well be a situation where it's central bank I don't know you know at a particular example that way this might happen but a populist government takes over through some some vote on the country um and just basically bins the central bank just says you know what we're on our

third currency in 20 years this is not working okay we can't you can't trust ourselves or you know finance ministers anymore to to issue you know a sovereign currency you know by default a lot of these countries use the dollar okay as a primary reserve currency but I I don't think it's out of the realm of possibilities that one of these countries is going to turn the Bitcoin okay and I think that that would be a very interesting phenomenon in the sense that the rest of the world then have to accept it as a sovereign currency right because it would be at that point would be the official currency of a country who knows what scenario might lead to that and I'm not saying that that's is going to be a necessary step I think the Bitcoin just

through you know dynamic market forces could start to operate as a currency and I do see that happening you know in the not-too-distant future that's really interesting scenario I mean I I have my doubts about whether that would happen in the next you know 10 20 years but I mean what what I'm curious though is if if transaction volumes increase and you know in a couple of years we have so I next year actually will have the minor the minor or Ward go to half and then Trent we can assume the transaction fees will start going up perhaps in four years after that you know as the minor rewards keep going down if you have only these high-value transactions with high martyr fees that going to the Bitcoin

blockchain and the block chain is the Bitcoin block chain is only used as a clearing mechanism then where is the place for payments there where I mean how would you pay for how would you assume that Bitcoin can be used to pay for your newspaper or coffee well yeah again I think that there's you know a tremendous amount of you know activity ok around this analyzing these potential future problems and i like to make reference to you know adam smith's you know invisible hand analogy right where um if the tech technology exists if there's a need for a solution someone is someone very intelligent it's working on

it at this moment right either you know at MIT or you know some private company and we and we can see evidence of that today already you know we can point to for instance a lightning network okay you know a side chain which is going to use under its current kind of iteration smart contracts right word you know the nodes that operate on the lightning network and it's basically it's designed to try to process a high volume of microtransactions to take the strain off of the block chain itself but it's using the block chain okay too important for smart contracts for all the modes operating on the light moon network and there's teeth you know the nodes are going to have pledged the Bitcoin will be used as a common denominator and in practice is a kind of

capital to enforce good behavior on the lightning network so um and it's it's more than just kind of a drawing board idea I mean it's something that is developed enough and there's enough you know kind of activity behind it that know there are solutions that you can see are coming out of the ground which I think will will be effective in addressing something with longer-term issues but we are cognizant of of you know the having other reward as you say then we need to you know kind of from miners destructive to rely on transaction fees at some point in the distant future but if this all operates as designed you know the Bitcoin the value is going to continue to go up right as people use it more utility will increase and is the only unit of value

to be transacted on the Bitcoin network the price of Bitcoin will go up yeah we did an episode of like network guys a few weeks ago so I think our listeners role or well familiar pattern and I think I agree you know there are a lot of different ways that one can use either become directly or between SS or the clearing settlement thing and I the one should work and I guess we will see which direction it goes i think it's not quite clearly but i want to bring a sort of critical point up here that Tim swanson and some other people have analyzed for example some of the big pay data and because they reuse addresses so it's possible to estimate how much does action volume did you and also coined as

for example they in their last set of pecan report they showed like that the number of new merchants that have started accepting Bitcoin and that has been decreasing dramatically what's your point of view there because it seems even though bitcoin is becoming better known and more companies are building things that that sort of bitcoins usage as a payment system people actually spending bitcoins and new merchants as a consequence starting to accept Bitcoin that's not happening at the moment why is that and what can what needs to happen for that to change well I I can just say from from our perspective I've seen some of the some of the data you have and some of the

blogs um you know we're in early days right and I think that there is a saying I can't attributed to leave to the author but that you know we human beings tend to you know overestimate the value of innovation in the short term but underestimated for the long term right and and I think that there was a big flurry of activity in the early days you know bitpay has been in business now what since 2011 I think something like that I've coinbase be created a merchant processing service in January of 2014 right when they kind of sign up overstock and they had exposed some api's prior to that right to enable

merchants to kind of create wallets and accept Bitcoin um but I think that with you know with the introduction of a service like bitnet right where we really have approached it in a different way where we've built a platform from the ground up with a lot of considerations in place to address you know some of the regulatory complexities but but frankly a lot of the technological hurdles that you know PSP will want to see specific kind of services or a large enterprise level you know international retailer are going to want to see the ability to integrate into existing commerce platforms existing ERP systems that run their inventory and do reconciliation

reporting um before I mean not to blow our own horn but before bitnet a lot of these solutions didn't exist so right if we're seeing you know a reluctance by some of the bigger retailers to accept coin it could very well be that the state of the art to date was not sufficient and and we have gotten that feedback directly from a number of retailers who have said yes they want to take Bitcoin but prior to meeting with bitnet and getting familiar with our systems they weren't comfortable accepting Bitcoin right and so you know we'll see it's you know I think that the idea is that we are continuing to focus on the acceptance side of the equation we work very closely with a lot of the wallet companies and to try to keep dialogues with the exchanges and try to

figure out what solutions from from wallet and other kind of consumer facing enhancements may be necessary okay to motivate consumers spend a Bitcoin as a payment type whether it's a you know something the merchant can control like a discount or a reward right the issuance of loyalty points for spending with Bitcoin and instead of using a card or some other kind of payment perhaps that will help be helpful for motivating consumers to go out and get bitcoins specifically right to make a payment we're we're continuing to analyze these that the spending patterns to the extent that we can try to extrapolate you know where is the Bitcoin going we think that remittances are a big part of that the remittances corridors are I think leading indicators of who is holding

Bitcoin as a potential consumer and you know who will then be in a position to spend Bitcoin as payment right as opposed to again you know speculative trading or a story value so a lot of those signs point towards emerging markets ok South America Asia where expats emigrants are sending Bitcoin back to their friends and family we can see proliferation of ATMs I think that's another good indicator of where Bitcoin activity is starting to happen where recipients in these countries are getting bitcoin sent back from their family and then they have the ability to go to an ATM and withdraw a fiat currency to spend locally and then leave the balance on the block chain right as

their bank um and frankly you know as we continue to retailers and see where the spending comes from and tracking you know incoming IP addresses or shipped to addresses that's we are trying to correlate those trends and form a pattern it does look like probably a lot of admission use case is enabling read excuse me enabling consumers and a lot of these developing emerging markets to spend on existing established retail sites okay and so but again Brian I mean it's let's face it it's it's still early days right in the sense of if we look at the number of merchants that are accepting Bitcoin you know as a percentage of the number of retailers

globally it's a tiny rounding your type of fraction right so we have a lot of work to do to solve the acceptance side to give people a place to spend Bitcoin and there's a lot of hand-wringing about Oh people you know their consumers aren't spending well where do they have to spend it you know look I mean I spent a lot of time talking about Airlines there are very few airlines right now I think probably count them on one hand where you can actually go to their site and buy a ticket with Bitcoin we're solving that you know we're integrating with the you ATP a universal air travel program which is owned by the airlines okay 260 airlines are now on the UI TP network which you know we will now be able to seamlessly enable airlines to accept Bitcoin and settle those

transactions through to existing systems I think that's an important notion to kind of drive home bitcoin is a silver bullet as a front end payment type it is a miracle okay money over IP anywhere in the world to anywhere else in the world but it doesn't change the existing payment infrastructure it doesn't exist a change the back office systems okay that retailers have spent a lot of money putting in place so I think that what bit net is now solving for is the ability to use the miracle of a Bitcoin as money over IP but at the same time interface was all the existing payment infrastructure the plumbing as we like to call it which is a labyrinth of complicated commerce platforms and check out systems and modules and so the point being that that system is not

going to change overnight just because would they now have the ability to accept payments from anywhere in the world and and that's that's not something that a company is going to jump into this industry without having been at cybersource for instance for the last 15 years and figured all this stuff out and provide provide the solutions that the big global retailers and airlines are going to want to see as a as a precursor to accepting Bitcoin yeah I think if he if you think of the sort of you know you mentioned Adam safe and and if on things up where should it end up in terms of an efficient market an efficient system then it's pretty clear to me I completely agree that in the long run something like big conscious makes a lot of sense one of my biggest

worries in my biggest concerns is actually the security of the Bitcoin network with my name mining centralization and incentives for minors what are you thoughts on that is that something you worry about as well well certainly we've got some people out staff that one guy particularly to terrorize me with conspiracy theories right about you know big mining pools going offline periodically and who the hell knows what they're up to and you know and I do think that it's a legitimate risk that we all need to remain you know watchful and cognizant about um you know at the same time it seems like there's enough self-governance kind of in play and you

know when the mining power gets too too concentrated there seems to be some concessions to make everyone comfortable again and I think ultimately that you know it's the doomsday scenario if someone's going to try to take over and corrupt them though you know the Bitcoin network what do they what are they going to gain you know they're going to destroy the value right of what they're trying to obtain well if you can short Bitcoin which presumably and a world where bitcoins integrated you will be able to those ETFs and all those things well then there's potentially a lotta game right right yeah well I guess you're right I mean did this probably with with derivatives and other kinds of financial instruments there's always a way to to benefit from

destroying something you know the so-called bear raid right from the stock trading strategy where you short summer and make up a bunch of bad rumors about it and you know but but you know I you know I gotta say that the while the mining business is important clearly because that's they maintain the nodes that that comprise the Bitcoin network and that's the vital importance to a company like like bid net or anybody else using using Bitcoin um the economics I gotta say I mean we talked to a lot of private equity firms and other types of investors who always like to ask us questions about what we think about this mining company where that mining furman i gotta say i mean that's that's just high-stakes gambling right it's it's it's an arms race where you

know it's you know it's tied to a lot of you know electricity and other other costs where I'm sure somebody can figure that out and illegitimate businesses or based on on mining and that's great but um I can't profess frankly to be you know an expert I mean that is a big Bitcoin ecosystem I'll just admit that is the one place where I've got a big blind spot like I just you know this is nothing we have not spent any time actually looking at mining as a business except except from just you know third hand what you can read in the papers okay American again I can talk to some people of mining firms and I know some some mining firms that have pivoted you know and gotten out of mining all together and just cut over to Big Data right because of some of the costs and

because they have the reward did not keep pace you know with with the initial business plan right or you even look at a big kind of you know example like 21 right that has continued to sort of pivot right from mining strategy to now consumer-facing strategy so far as we can see from again written in the papers um so I but anyway going back to your initial question you know the the risk right of of you know the the miners are some nefarious activity from the mining side you know corrupting and destroying the value of the network it's something to be mindful of it's certainly and we've got some folks on staff that again are you know hyper hyper focused on tracking kind of

concentration of mighty power and and periodically terrorizing me with some of the stats but it's not something to keep me awake at night at this point today's magic where it is pristine pris ti & E head over let's talk bitcoin calm to sign in enter the magic word and claim your part of a listener reward let's talk about bitnet I'm curious can tell us about the the infrastructure that you're building some of the services provide I believe you have an API as well talk to us about the products you're building yeah sure so I mean the idea was that we have a suite of services that are accessible through a

single API connection a restful I've made it api that is easy to integrate we've got an implementation guide available on our website that anymore can download we've got a test center which is important and we basically except the bitcoin on behalf of the retailer so the retailer does not have to manage the handling of the bitcoin we maintain the trading accounts at exchanges so that we can aggregate and periodically sweep the bitcoin over a period of say 10 15 minutes into a trading account and liquidated we have some hedging strategies that at this point aren't too complicated but you know we have the ability through some as probably just mentioned there are some

some outfits in new york coming up with derivative products and ford contracts and other kinds of hedging services but at this point it's really it's straightforward from our standpoint we just try to trade as quickly as possible we have bitcoin on reserve you know ad exchanges so we can lock in the trade but the net result is that we guarantee the payout in fiat currency to the retailer at the action value net net of our processing fee and the you know it's a pretty simple it's pretty straightforward value prop especially as compared to the cost of other cards and other kind of payment types as we discussed earlier so from a retailer perspective they integrate to our platform either directly or through their PSP or commerce platform or other

sort of intermediary um we take it from there right we handle the Bitcoin the conversion and the payout to their account and their currency of choice at a guaranteed rate i will say that there's there's one enhancement probably worthy of noting that we we started to discuss publicly just recently and it's a it's a a risk a proprietary risk mitigation tool I believe we're calling it instant authorization okay where despite the lag time as we are all aware of the confirmation system um anywhere from you know five to ten plus minutes to confirm a transaction we're able to monitor the Bitcoin network and come up

with in a few hundred milliseconds a risk score that it is reliable enough to us that we can you know we're capable of making a determination you know and that's few second time frame to underwrite a transaction okay and so and that that's a big part of our guarantee to the merchant of the payout in the sense of it if it's a digital good or an immediate download something that has to be approved instantaneously from from the retailer perspective we can do that okay so that's again just kind of a proprietary value added component of the service of the suite of services that retailers are able to access through

your API integration or platform and so the customers are targeting your you mention your retargeting psps uh are you also providing services just for merchants like just like the mom and pop store that has an e-commerce boutique or are you mostly targeting larger merchants with really integrated Bitcoin payments like on their website etc yeah well well both ok so I think that the the larger merchants we can integrate directly for the for the smaller as you say mom and pop you know sm being small medium business sized businesses we typically will work through aggregators ok so that would be say a shopping cart provider or a payment service provider or commerce

platform ok and examples of those would be sort of Club well the bigger ones SI p Oracle IBM but also Hybris NetSuite magento a lot of these companies that provide a software or SAS based you know commerce platforms to enable merchants so in other words retailers will outsource a lot of their payment infrastructure to a variety of these types of partners and depending on the vertical and frankly the size of the merchant okay and the complexity of what the merchant is selling you know inventory control you know tax collections all this kind of stuff they typically turn you know to a partner for that I mean retailers you know there dude they're not they don't want to be

the IT business they want to outsource that and so what we do and what we have done is good to design and launch a platform that can integrate through a series of what we call Micro services so we have discrete api's from a platform to platform integration that can interconnect with these specific functional areas of these commerce platforms onions PS PS to pass through the data that the merchants are going to need to complete these transactions and that makes sense and I mean I I guess that's a way for you to with one partnership with you know like a good Magette to go or a PSP to potentially reach a really large number of merchants and customers rather than trying to

target like individual merchants that are setting up prestashop or magento on their own servers and in you know how modules and having to deal with customer service with them having that higher level strategy where you're going after large payment processors and large ecommerce SAS solutions does sort of broaden your reach ya know exactly that did Sebastian I mean that's as precisely the strategy is to be this a trusted solution partner to to to provide Bitcoin acceptance through these existing what we would call you know Alliance partnerships okay but bit frankly their distribution channels right for us to to leverage the installed base of merchants that have

been aggregated by this payment solution providers so before we wrap up one last topic that we've also been coming back to again and again which is a regulation side so the license now finally came out and the I think the aspect that may be most interesting there is the sort of kyc requirements as I take them where at least at some point it said that you know if you doing a big hun transaction you have to know you know both parties what does that mean for you are you guys going to get a bit license do you need to and will you at some point need to do kyc you and on each payment you receive a process well yeah I mean our our

approach frankly to regular regulatory discussions has been you know we to the extent that we can technologically comply with the regulation and general we're in favor of regulation right we're in favor of the comfort level that banks get from dealing with regulated entities okay and that's a you know as we all know that's the biggest you know hurdle the biggest stumbling block this industry is is getting Bank relationships if if you need it if you need more right and there there are certain types of businesses that aren't going to have to deal with banks so they can continue to you know ignore that consideration but for us that's a critical dependency right is the inter

connection to banks to settle merchant funds through to their accounts and so that being said in New York is it's a key jurisdiction right it's an important market a lot of retailers basis of New York a lot of consumers based in Newark so I know that there's a lot of discussion about you know ring-fencing New York right and you know using IP addresses to just block New York and I know some some companies have already come out and so they're going to do exactly that you know we filed a comment letter to bid license we asked for the same exemption okay as a merchant processor that that applies for there there my transmission statute in New York where there's a so-called processor exemption that if you're an agent on behalf of emergent that you are

exempt from having to obtain my transmission licensed in the state of New York because in effect all you're doing is collecting on an invoice on behalf of merchant um so bit license unfortunately does not contain that same exemption as we had requested so we are going to be required as a condition to doing business in New York to obtain a bit license it's just it it's become final we're analyzing it we're trying to figure out exactly how to comply with it fortunately we have the tools to do so okay we have the ability to collect pair information through through an API on our platform so technologically we can comply with bit license okay but we're only going to be able to do it to the

extent that the merchant we don't have the relationship with the consumer we are an agent on behalf of the merchant so the merchant is going to have to collect the pair information or sufficient information that you know can be passed through to us as their processor to comply to comply with a bit license and that's our current understanding but that's a that's a super crucial point to being up here right because one FD appeals and then I've talked about this in talks about Bitcoin as well you know why speaking so much better than like credit cards and stuff well if you pay online you don't have to fill out you know your address and you name in etc etc I mean of course sometimes you need to do that anyway if you get a product shipped or something like that but often and especially if you think of like one off small payments

and stuff you just want to get rid of that and with Bitcoin because it's sort of like cash you can but what you're saying is that well if any in any way you are sort of touched by this middle license thing so for example you guys wouldn't be able to offer that service well this right I mean and again we're you know we're analyzing it it didn't come out of huge surprise right the previous iterations have been available for public comment so we're pretty familiar was finally signed into law but you know you raise a good point for you know something that we're physical good has to be shipped clearly a lot of information is being collected by the merchant anyway so and again it's going to be up to the merchant from our point of view if the

merchants says you know what I'm just trying to sell you know an mp3 file and and part of the appeal of bitcoin is that someone can scan a QR code and go on their way I'm not going to collect pair information then our response to that merchants going to be well then you can't accept Bitcoin from consumers in New York and we're going to figure out how to make sure that you don't write and as a processor right we're going to be the ones responsible for enforcing a bit license it's not optimal I'm not going to sugarcoat it right I mean I think that I you know I think it's the sort of outcry from some of the other constituents and the Bitcoin ecosystem to let's ring fence New York and shut them off you know that's not going to change the law now it may draw attention

to the fact that and other jurisdictions that are contemplating you know similar licenses as California now is as New Jersey now is um you know the reaction for the Bitcoin ecosystem two-bit license may have some influence over you know their their design okay they're drafting the regulation which does not contain the same level of you know information or you know does not introduce the same level of friction right we're using Bitcoin but it is what it is right and I think that at this point our position is we're going to do our best to comply with it right because you know we want our merchants to accept Bitcoin wherever our merchants want to accept Bitcoin if that includes New York

we'll figure it out okay but it could very well get to a place where technologically and that's that's our our fallback position you know our mantra is if we can technologically comply with this regulation we fully intend to but if we can't then we won't and unfortunately then wolf by defaults fall into the category of some of these other companies that are already out front saying we're not going to do business in New York and neither should you cool well John thanks so much for coming on it was really interesting talking with you if it was really interesting diming a little bit deeper into sort of one of the primary use cases of Bitcoin yeah I appreciate that bribe yeah I really do look forward to seeing you next week in Berlin yeah absolutely yeah so john is coming over because their tech open air

is coming up here actually to anyone who is in bruin so tech open is coming up there will be a few events it's a panel that i'm moderating with john and my career and it's going to come over and we'll also be showing screaming off the documentary a Bitcoin the end of money as we know it right as some of you have probably seen the trailer and if you could send me quite excellent there's a good chance there's probably Aires after after that all that's right um well as yeah so thanks so much for joining us to our listeners so we put out new episodes of eps and a pic on every monday you can subscribe the show and itunes soundcloud favorite podcast app and you can also get the video on youtube at epicenter youtube.com slash episode of BTC and your if you like to show you has it been

listening to it for a while you can do us a favor and leave us in itunes review that would be appreciated and it helps other people find the show and of course you can send us a tip if you want to through our address so thanks so much and until next time