international payments possibilities in bitcoin

Banking and Bitcoin: Understanding the Ecosystem

Claire IngramStockholm School of

Economics

I’ve used Swedish companies as examples, where possible, although can’t claim to have represented all possible companies.

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Bitcoin Protocol released in 2008 by “Satoshi Nakamoto” in a paper on The Cryptography Mailing list

Underlying technology called “the Blockchain”

Released the first version of the bitcoin software client in 2009

Disappeared in 2010

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The Problem: Centralisation

Weakness of the trust based model: Non-reversible transactions are not really

possible, The cost of mediation increases transaction costs, Small, casual transactions consequently

expensive, With the possibility of reversal, the need for trust

spreads.

Fraud is accepted as unavoidable.

These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments using IT without a trusted party.

https://bitcoin.org/bitcoin.pdf

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The Solution: P2P & Distributed An electronic payment system based on

cryptographic proof instead of trust,

Allowing any two willing parties to transact directly with each other without the need for a trusted third party,

Transactions that are computationally impractical to reverse would protect sellers from fraud,

Routine escrow mechanisms could easily be implemented to protect buyers,

Peer-to-peer distributed timestamp server to generate computational proof of the order of transactions,

Secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

https://bitcoin.org/bitcoin.pdf

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Blockchain and Mining

Screenclip : How Bitcoin Works under the hood, by “Curious Inventor”

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Buying Bitcoins

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What’s it being used for?

Anecdotally, people on ”the dark ’net”, including Silk Road

Increasingly for mainstream transactions

As well as investment/speculation

And for fun, of course

“Cash on the internet”

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Who’s using it?

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Speculation and Volatility

Price volatility

Insert graph here

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Rejection of Centralisation

Developed Open Source

Distrust of Laws and authorities

Libertarian, so opposed to various Taxes, intermediaries

Consensus-driven

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Libertarian roots, going commercial Definite underlying

libertarian tendencies

Price spikes when money seized in Cyprus in 2013 (said to be demand spikes)

Emphasis on decentralisation as a trust mechanism

Extra-legal

Many entrepreneurs are more commercially pragmatic though

Emphasis on decentralisation for efficiency

Compliance with regulations (as far as possible)

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Regulations

US:

Bitlicence in NY State (closed for comments in Oct 2014)

IRS treats it as ”property” (so Capital Gains Tax)

Some states consider Bitcoin a good (so VAT/Moms)

Europe:

Sweden referred question of VAT (Moms) to European Court of Justice in Summer 2014

Banned for Transactions:

China, Russia, Vietnam….

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Where are they stored?

In a ”Wallet”

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Important Wallet Security Features Two-Factor Authentication

Shared Validation vs Distributed Validation

Hot vs Cold Wallet

Type of Device

Access from Tor network?

Disclosure to Third Parties?

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But also Vendor Transparency AML and KYC Features...

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Possible problems

“Liability of newness”

Volatility

Libertarian vs commercial interests□ Transparency requirements?

□ Anonymity?

Trust in general

Security

Consumer protection?

Cross-border transactions?

Dispute resolution mechanisms

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Involvement of Banks so far

Mostly limited (sometimes even sceptical)

Fidor bank in Germany working together with at least two exchanges

Handles fiat currencies while exchanges hold Bitcoins

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Sweden ahead of the Curve

Swedes as ”early adopters”

Strong IT (entrepreneur and industry) community

Skatteverket actively engaging with community

Sweden (Skatteverket) referred question of VAT (Moms) to European Court of Justice in Summer 2014

First in EU to have formal experience dealing with stolen Bitcoins, according to Ekobrottsmyndigheten

Subsequently auctioned them off

ALSO have a person specifically responsible for Bitcoin at Ekobrottsmyndigheten

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Still trust in Swedish banks...

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Unique context in Sweden

(For better or worse) banking system not as expensive for consumers here

Consumers less distrustful of banks here

Consumers already used to necessary security features

Possibility to leverage this ”trusted position”

Also possibility to interface with existing services – few ”unbanked” in Sweden

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Possibilities for Banks

Clearing House for Bitcoin/cryptocurrency transactions

Speculation / Investment

Holding Partner for Fiat Currencies

Develop own wallets – interface with existing services

Currency sales / Exchange

Using underlying technology to improve internal efficiency

Customer service(s)

TRUST

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Wave of other currencies based on similar principles

□ Dogecoin

□ Litecoin

□ Stellar

□ Ripple

Use of protocol for a number of other purposes

□ Storj.io

□ Coloured Coins

□ Ethereum

ProtocolCurrency

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Claire IngramStockholm School of Economicsclaire.ingram@hhs.se@Claire_EBI