Interview with Jamie Burke and Aron van Ammers of Money Circles at DEVCON1 in London

Transcript

hello everyone right now I'm with Aaron funnyman and Jamie Burke who are developing a startup called money circles its credit unions on a blockchain it's a very interesting idea first let's have an introduction from Jamie and Aaron Jimmy oh yes so y'all do okay so the the genesis of the idea was as an entrepreneur who's done lots of dart startups maybe last years people understanding my risk profile getting loans and credit is really tricky so actually only an entrepreneur can understand and entrepreneurs risk profile and actually as an entrepreneur who might end up having a bit of money

socially you might feel an obligation to lend to people like you who need it who might not normally be able to access that credit so the premise of money circles was the ability to create savings and loan circles on a common bond with people like you yeah well bit about my own background right yeah I've stumbled into blockchains about almost three years ago and of 2013 and well from the financial applications quickly into the the the smart contracts capabilities its interested very very much and it was like clear to me that this would be a big thing in a paradigm

shift and well pretty soon I ran into Jamie and we started a partnership doing basically blockchain businesses of which money surpluses is one it's the first proof of concept we've released through a incubator called our l'aventure such a dedicated blockchain incubator okay so first let's go into what exactly is a credit union and well the credit union effectively is a banking cooperative so in the UK they're not that common but in places like States Ireland Germany and of course places like India they are really popular in places like India they almost are the the banking infrastructure but they're based upon a common bond so that could

be Geographic be professional which allows people to save and lend with one another and give better terms both better terms to the saver and borrower so so in essence what what a credit union does is if there's let's say you know ten of us let's say it's it's the Indian community in Europe and there are ten of us here and there are say Indian students in India that need money and the Indians here we have money but then essentially we have a coordination problem that we want to lend money and on interest yes Indian students wanna borrow money and pay it back later that's fine and

there's some degree of trust in these two two sides of the deal that's right and a credit union is basically some an agency that coordinates these humans to achieve certain certain ends right yeah that's right the problem that you've got with credit union so credit leaders globally is a trillion dollar market so it's huge but it's got a number of problems that the first one is it's saving Salone ratios are very local and so I think globally was something like fifty fifty five percent so a lot of the money that could be then isn't being lent and it's not because they don't want to lend it's because often credit unions operate in silos so often you might be a fireman in the States and so you remember the finest credit union and

you also live in New York State so you'll remember the New York State credit union and the two are disconnected so they what happens is is that there's only only really happens to people within within that circle sorry within that credit union so what we're doing is we're taking them out of the silo and bringing them onto a network and so effectively by building on a blockchain you can have circles that overlap that better reflect my my full social self so it could be profession it could be an alumni from University it could be friends and family the the second problem that a traditional centralized credit union has is governance and so because these effectively relatively small financial institutions the money's given by people

and usually have very small amounts of people so it's not uncommon that people run my mother's fraud employee fraud and often they're not very well ran so a lot of time you have problems with solvency so by bringing them onto a blockchain we can obviously solve governance issues really easily because you can see where the money is at any time what loans are out and by bringing them into a network of circles you solve the silo problem so our idea is actually to work initially with the credit union marketplace not to replace them but to provide them with an infrastructure that allows them to improve their savings ratio and improve governance

yeah well the the example that you mentioned is a really good illustration of of how a credit union form of saving lending could work but now cannot because of this dissoluteness because the people the the students in India that you're talking about and people here who might want to lend the money they definitely don't reach each other in the current credit union world because there would because Union India and one over here and it would be disconnected so opening that up and also opening possibilities to start circles on different than the more traditional common bonds that you would usually have have a credit union for will open up

many possibilities to to to better saving and learning classically I think the difference is that credit unions by default have to operate that's a kind of a macro level so they have to have as large a group as possible so whilst initially we're targeting credit unions for scale the end game is to have our own peer to peer lending license or an equivalent money lending license that will enable anybody to create any circle for any purpose as long as it's not for illicit means so we'll still have to do know your customer and all that kind of stuff but effectively you will enable you'll have a marketplace of different circles you'll have some large centralized institutional circles and then you'll have a long tail of more

niche circles bespoke to kind of your your social your social self so so you've mentioned three advantages of this this approach one is circles one is the the transparent and one day just off of the blockchain and the third one was so it's to help the savings and loans ratio so there's a lot of money you kind of got a disconnect in the market you've got millions of people currently locked out of credit markets because of the risk profile that actually carries through to credit unions are known to be able to assess somebody's credit credit profile in a different way because they look at it from a social dimension in where Bank

wouldn't but equally they're still kind of tied to very traditional ways of kind of assessing that that risk so as such they can't lend as much money as I'd like what we're doing is introducing kind of two levels so the administrator for a circle can assess risk and therefore whether somebody can lend based on two parameters some will be external a traditional credit data and then one will be a network-wide trust score which will be based upon individuals interactions with circles within the network so not one circle but multiple circles and it'll be based upon whitelisting so positive relationships

rather necessarily negative relationships as the idea is that we should always have a circle for somebody somewhere no matter what their past history is of course you would expect a circle set up for people specifically that have a low or high risk score they will ask for more interest but you imagine that some people would feel an obligation to learn to those that are effectively in living in a permanent state of indebtedness but the point is that we centrally don't have to solve any of those problems we're providing a tool to allow people to create those niches and those parameters themselves okay so the first advantage is it was essentially the advantage that if I

let's say I was a lender and I wanted to lend money through credit unions then this thing is I might be involved with a couple of different communities so for example if I'm natural for me to learn my doing instruments it might be natural for me to lend money to crypto entrepreneurs I know them right and maybe if there's a third community like the virtual reality community I'm involved in that might be a third circle for man and today with the conventional model it might be the case that I need to open accounts at each of these credit unions separately if they would exist you with definitely yeah go through kyc and oh well that's this is not promised to step back they pull and point is you wouldn't be able to find a credit union

for those down to first place yeah yeah because actually whilst they're a lot easier to set up in a bank they can still take up to a year to get a license you have to be able to prove that you've got up to kind of five years worth of funds based on your growth projections so it's it's very complex and the barriers are way too high for you to be able to serve very niche lending communities with money circles there will be an algorithm that will determine it will effectively give you parameters that you can create a circle in but but the principle is you should be able to create a circle for anything for any niche there'll be a minimum threshold of people and a minimum threshold of a Treasury and that will then dictate how

much money can be lent it only get a particular point but in theory I like the idea that I live in a very small village just outside of London and I like the idea that there could be a lending circle for that village so everybody knows each other everyone can say yes this person can be accepted him I could even say I accept this person in and personally I would recommend the circle only lend 100 pounds when they then make a low loan request I don't see that loan request no individual approves it it's the the circle the smart contract that approves it so it's impersonal by way of borrowing and lending so it doesn't lessen or ruin social real social relationships because they'll be defaults but what it means is the

parameters with which that circle chooses who can join and the parameters in which they can lend are socially driven okay and then because because this whole interaction so so essentially essentially this is the theme and many of the smart contract ideas is essentially that it solves the coordination problem between humans so many people want to lend and many people wanted to borrow and they find difficult to coordinate and essentially add on you as a technical person will build a smart contract a suit of smart contracts that solves a coordination problem between these and the people can look at this mark contracted and have certain assurances that their money will be

handled in a certain predefined standard yeah it's exactly that we currently have our proof of concept out and it it illustrates at least part of that process where all the transactions within the money circles from the creation of circles to members joining from deposits and loans etc they're all recorded and governed by smart contracts so and and that is publicly presented we currently do that on a private ethereum blockchain but we definitely don't rule out deploying it on the public blockchain it's just for our proof-of-concept purpose it was not

necessary yet to do that but indeed everybody can continuously inspect and verify that everything is being handled as advertised and one step further because it's also the smart contracts code that's on this blockchain you can verify that the the behavior of the of the whole system is going to be correct going forward as well because you know that the smart contract is not going to suddenly make money disappear or they can only do certain things and it can't do other things yeah it's very clear in terms it behaves according to rules and you can continuously inspect those rules so what

what does your proof of concept do currently it's it offers the course at the functionality of money circles so can like create an account connected to create a circle or join existing circles and make deposits in the circle an important thing to stress about the finances within circles is that it's really a pool of money within that circle so the benefits are shared in the risk of shared risks are shared so anyone who is a member of a circle they can deposit money and it then becomes part of the pool of money in the circle and anyone taking out a loan is not

never taking out a direct peer-to-peer long to person but you take out a loan from the circle I was just saying about how we've leveraged uphold as well yeah exactly yeah so what we really need to to make this accessible to like all of the marks that we describe is to be able to deal with the currency that these people deal with people get bills and paying the groceries here in the UK in pounds so you need to be able to deal with pounds this is a problem that is going to be solved in in various ways and etherium I believe incur these nuts but uphold formerly called bit reserve they do

solve this problem in an interesting way it's not fully decentralized but it's fully transparent and what they do is they offer you the ability to deposit money be it in Bitcoin or be it in pounds or other currencies keep it in an account and transfer it to other appalled members so what we did with that proof concept is connected to the bit reserve API so anyone who can set up an account with with with reserve does the the KYC etc then they can start using the money shows proof of concept and then they can transfer money from their upholds wallets if you will accounts due to money circles and take

out loans from the money circles and take it out through up hold as well and transfer it from their their UK bank account back and forth so essentially you're looking to solve the volatility of like the problem is ether is too volatile for people to make loans in yeah it would ruin the right the interest potentially both parties in fluctuation in Bitcoin for example would defeat lending something at 2% if it loses 10 percent of its value yeah and also it could compare on the debt to somebody that's borrowing so for us it had to be fair pegged and the great thing about upholding I think they're decent at 33 currencies or it may be even more global currencies so so that was yeah that's critical force so so one

of the questions I had was the one of the one of the unsolved problems that I see with lending on the blockchain is it's hard to do fractional reserve banking while the conventional system can do fractional reserve banking and perhaps would you would you say that because of fractional reserve banking the cost of loans could be cost of borrowing could be cheaper in the conventional system than a Bitcoin based system or well first we don't see the main so we also wants to kind of target banks so we're looking at getting this into an accelerator that's driven by a bank and so for us we see the problem we discussed with credit unions more and

saving solange ratio a lot of banks high street banks would love to be able to lend more money and if they could lend more money they could give better saving returns to their customers but they can't because they're constrained by how their appetite at risk and how they look at risk so what we're looking to do is to bring new parameters that enable them to lend more money and we think about benefits all parties save us because the savers are suffering as much as the people that are borrowing right near the people that are borrowing the locked out of traditional credit markets are having to use unsustainable payday loan companies like you know 1,000 APR at the end of the year and somebody that's got a savings account might be getting 1% on you know the

money that they've put aside for their pension so we think there's a major imbalance actually you got a load of people with money that they'd like to lend and we were load of people that would like to borrow and both of those things we think many circles can solve by introducing social dimensions Linux so even without involving fractional reserve banking you suspect that there's a market for it because there's a huge pool of savings and I use people of people that I absolutely I mean in credit unions credit unions already exists in many locations and they don't do fractional reserve in fact they do about half or less of the reserve because of the savings to Lending's ratio so basically the for every hundred pounds that's deposited only 50 pounds

are borrowed out and the rest is sitting there because they cannot let alone that for every hundred you would lend out a thousand pounds yeah we don't we don't think there needs to be more money we just think there needs to be greater liquidity so you so you're fundamentally about increasing the connections the financial connectedness of people to each other rather than creating creating new money as in the and thereby realizing a more ethical system so any any big idea like credit unions on the corner transparent international blockchain in which can basically so I think like one of the interesting things about your idea is because a blockchain is international sure and and you can

give certain guarantees to people even without having to go to a certain local national jurisdiction you can basically make connections that would never have occurred what because of the National Signing was that we find ourselves in a lot relationships you know if you think about most of your relationships or my relationships that they're fairly international directly or indirectly and so I think you know increasingly people are becoming more globally aware so you know things like Kiva show that people are prepared to lend to somebody in a totally different world you know I think a huge percentage of Kiva goes to Kenya for some reason most of the money comes to the West so so it shows that those

boundaries are less but I actually think there are only so many people that would lend some in Kenya because the social connection for them is that much less so I think if you enabled it to the proximity of that social relationship to be more intimate because there's a huge proportion in the UK anyway people that don't even have a savings account they're not the savings zero so that's that's like a long-term economic problem that needs to be addressed so I think we can help people save more as well which is hopefully gonna stave off some issues down the line when you've got an aging population and no pension yeah so so any big idea needs to start at our various

targeting a very small niche and small group of people because only a small niche is attackable by a small set of founding team but do you think you have us you have discovered a small niche that is the perfect test case for an idea like this yeah so we've got a great team so many circles is actually born out of blockchain incubator that we've got so we're creating startup every three months which we seed and the model is we then put it into an accelerator so a key thing for us not just specific to many circles but generally is to very quickly get a startup into some kind of vertical incumbent enterprise so in the instance of many circles it's finding a

financial services company that has an accelerator that the company can partner with from day one and so to tap into their globe network their knowledge base so that's the first part the second part is whenever we do a startup we always bring in a management team from that industry so they're not blockchain people we're the blockchain people we bring in a management team of people usually with no less than 15 years it's typically about 20 years within that vertical so in the instance of many circles we've got two two members of the team one who's got over 20 years doing technology and financial services organizations like JP Morgan Barclays and Stock Exchange and any other partner which is

critical to this growth piece it is a guy who's one of the foremost credit union experts in the UK an alternative lending experts he's actually helping the government the UK government with the national rollout of the credit unions banshan program so he's got about 20 years dealing with credit unions setting them up for people who's in the middle of setting up the largest credit union you case ever had which is the retail Association which is millions of members so for us by bringing in that management team day one we've got people that have already got those relationships so we can go and win some test customers and hopefully alongside the the kind of vertical accelerator and the management team and them can can

engage key players in the market to get a good test case quickly so for is it's about how can we accelerate something from concept to scale as quickly as possible yeah so the Pacific community you thinking yeah well we have like the connection will surely be through through credit unions in the UK and there's like there's several that we're scanning scoring targeting to see well this this could be a really good cooperation both ways for for them as as platform to to build on and for money circles as a chance to basically shine

so money circles is not itself targeting to be an administrator right like so if if you have a money circle of exactly service is very much targeting itself not to be an administrator and not to have control over funds or anything so so essentially what money circles could allow me to do is if I if I as a person have a network of people I know in Europe that one there for the Phineas let's say yeah known money to people have no students in India that want to borrow money I as a person I have the social network to do this yeah I can go to your platform go to your software is become an administrator and send up a system very quickly that allows me to

connect funds from here to borrowers in India basically receive some kind of administration fee on behalf of all these people right so the the administrator doesn't make a profit for doing it I mean the commercial model is in development but the basic principle is you know the save is an interest and the lens to pay that interest and that circle have a certain default ratio built into so you create a circle because you want to safe not because you want to profit from people saving directly so so the administrator is literally the the facilitator of a

circle and the big part of what we'll be doing is it's a marketplace a circle so the idea is let's say you're somebody that wants to save you can open up the app it'll be mobile first you'll be able to try and find a circle that meets your financial and social parameters could be one near me it could be within my profession it could be with a savings return of this or a default rate of that anyone max you with circles that you can request to join if you don't find a circle that meets your parameters be it social financial or both then you will be able to create your own money circle but of course then

the onus is on you to bring in enough people so you wouldn't be able to create a circle just you you could you could seed a circle but then you'd have to invite in people from your network so what's critical for us is it overlays into things like Facebook where it will actually find people in your linkedin network or your Facebook network with Twitter network and find what circles they're already a member of or easily invite them into to form a circle so the technology will enable people to very quickly I guess overlap their social networks onto it into a circle and so how do you make money building a platform that

perhaps turns on the same block with all of the contracts that can be copied by anybody yeah well the model is still under development but they're of course they're very various angles to it you can consider fees you can consider free circles up to a certain amount and paid circles above I can also consider more highly secured circles and in terms of being fully Credit Union regulation proof what the credit union a large credit union will require or being a more small size as as you suggested an individual that sets up a small circle

for friends so there's there's lots of option out there if you have that yeah yeah you've kind of got three revenue streams so you've got and again this is all in development but in principle a per seat so as Erin said that can be different threshold so you might not charge that for people that want to create a circle for their village of 50 hundred people but at a certain scale you you would charge per seat you've got for institutional circles a circle set up by a bank or by a credit union you'd you charge a set up costs because it would need to greatings the existing systems and the third one is advertising because it's effectively a marketplace the idea is

that you can promote your circle ahead in the search results you know similar to Google advertising because it would be clearly stated that it's a sponsored circle rather than natural so there there are three areas that we're looking at for revenue cool they're nice to have you on the show thanks Jimmy thank you