The Internet of Trust

Author:Andreas Adriano and Hunter Monroe

The Internet of Trust Finance & Development, June 2016, Vol. 53, No. 2

Andreas Adriano and Hunter Monroe

Created to avoid banks, bitcoin’s blockchain technology may end up helping them

The greatest thing about cash is the simplicity of transactions. You just hand it over and receive something. Nobody asks your name, address, phone number, date of birth, social security number, salary, how long you’ve been in your current job … Cash produces instant trust between buyer and seller.­

Because it’s impractical to move large amounts of hard cash around, paper-based and later electronic payment systems were created. However, establishing this trust without cash is complex and expensive. Acquiring a credit or debit card requires the applicant to answer numerous questions—and the issuing bank to verify the answers and the applicant’s credit. Using the card demands a complex infrastructure to ensure that transactions are fast, reliable, and safe—and costs the merchant a percentage of each sale.­

Domestic transfers between banks depend on payment systems operated by central banks, while international transfers may involve other commercial banks between the sender’s and the receiver’s banks. Furthermore, these transactions can take several days. As another example, although we associate modern stock markets with nearly instantaneous electronic trades, settling transactions can take two to three days and requires additional players, including custodians, notaries, clearinghouses, and central securities depositories. Until the transactions have settled, financial institutions must set aside significant amounts of cash or other liquid assets to cover their positions if someone along the line does not pay.­

Simpler and cheaperCould technology make things simpler and cheaper again? Enter bitcoin, the digital currency that some claim will spell the end of banks but others view as a Ponzi scheme and a financial vehicle for criminals. Bitcoin—or more precisely, the underlying technology that allows it to function, called distributed ledgers, or blockchain—could allow what many see as radical rewiring of the financial sector (see Box 1).­

Box 1. You got moneySeveral start-ups are already delivering small payments and remittance services at low cost using bitcoin as a payment system, not a currency. Rather than charging 8 percent to send remittances, the start-up Circle Internet Financial, for example, performs the service free. Its sleek mobile app incorporates social media features like sending pictures and emojis together with a payment notification—appealing to a younger demographic accustomed to expressing itself in smileys.­

Users link their profile to a bank account or card on each end of the transaction and simply “text” money to each other anywhere in the world. Transactions are conducted via bitcoin, but the user doesn’t need to know how it happens. If the receiver is not in the bitcoin system, the money can still be retrieved with other “digital wallets” (apps that allow the storage of bitcoin or other currency on a smartphone) or at the counters of remittance companies for a small fee, provided they also deal in bitcoin.­

“It’s like with sending an email,” says the Circle CEO, Jeremy Allaire. “You don’t care about how the message is routed through the Web.” He explains how his Filipino nanny in California used to spend about $50 for each remittance home and now pays $0.75, and that much only because her family at the other end of the transaction doesn’t use Circle. Because transactions happen very quickly, bitcoin’s well-known volatility is not really an issue.­

Circle combines the digital appeal with some good old “real” features. It is registered as a money service business, which allows it to provide many banking services, except lending and investing clients’ money, and enjoys deposit protection from the U.S. government. It recently became licensed in the United Kingdom and formed a partnership with Barclays...

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