MTBIT REMITTANCES AND

Hugo Cuevas-Mohr IMTC – Mohr World Consulting April 2015 IMTC 27 MTBIT Remittances and Blockchains (English version)

Copyright © 2015 by IMTC – Mohr World Consulting, LLC All rights reserved.

The information herein is based on the author’s experience and knowledge of the industry. The internet references were all accessed in March & April 2015

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FIRST EDITION First Printing (April 2015)

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BLOCKCHAINS 2 5 6 A. Who invented and controls the Bitcoin ? 7 B. Because it’s virtual, can it easily be used for money laundering? 8 C. Is bitcoin secure? 9 D. Is bitcoin legal? 10 E. Should I really pay attention to Bitcoin? 11 F. The Bitcoin Ecosystem 12 G. What are bitcoin’s more interesting characteristics from a money transfer point of view? 15 H. Are companies doing remittances with Bitcoin? 16 RIPPLE 17 A. How was Ripple invented? 17 B. In a nutshell, what is Ripple? 17 C. How can Ripple be important for the MT&RI? 17 D. How can institutions be part of the Ripple Network? 20 E. Is Ripple also a ? 20 F. How large is the Ripple Network? 21 PROTOCOLS AND INNOVATIONS TO WATCH 22 STELLAR 22 A. How can Stellar be a solution for MTOs? 22 EPIPHYTEL 23 23 If you have been working with cryptocurrencies, distributed networks, shared and public databases or ledgers, like Bitcoin, Ripple, or Stellar, or if you have been reading about the Blockchain or you are a virtual or digital enthusiast, this document is not for you. You will probably find it to be too basic. This document is meant to be read by my colleagues in the financial services sector, especially Money Transfer, Remittance and Forex colleagues and the regulators involved with such matters, who know little about the subject and want to better understand the blockchain revolution.

BLOCKCHAINS Blockchain-­based protocols are mathematical models and software programs Blockchains must be designed to authenticate, validate, and store understood as a software valuable information in unbroken sequences concept, first and foremost. that are synchronized all over the world. These This software concept protocols have unique sets of validations that “represents a paradigm make the whole system safer by reducing shift in how software fraud, duplicity, and forgery as much as engineers will write software applications in possible. At the same time, these systems the future, and it is one of the key concepts are open source (which promotes innovation), behind the Bitcoin revolution that needs to public or semi­public (so anyone can verify be well understood”1 wrote William Mougayar the information handled), and promote the this past December (2014). This is not science possibility of agreed standards that makes the fiction or utopic, it is real, it is happening, and transfer of digitally stored information reliable it will change the way many industries operate. the world over. Since we are in the financial world, I have no doubts that blockchains will create significant changes in the industry in the years to come. Blockchain­based protocols are The “rails” will change, the business models mathematical models and software will change accordingly, and service providers, programs designed to authenticate, tools, and companies will come forward with their innovations based in these blockchain validate, and store valuable protocols. information in unbroken sequences Let’s get technical for a second. Blockchains2 that are synchronized all over the are sequential transaction databases that are world. These protocols have unique the basic structure that cryptocurrencies rely sets of validations that make the upon. These databases are decentralized, so no central database rules the validity of the whole system safer by reducing information going in or out. For now, let’s call fraud, duplicity, and forgery as much this information transactions, or better yet, as possible. blocks or sets of transactions. These new decentralized schemes, called protocols, These protocols and cryptocurrencies transfer authority and trust to decentralized have differences that most of the time, I have virtual and public networks that enable decided not to understand, because it is hard dozens, hundreds, and thousands of nodes to know whether the differences are based on (independent servers all around the globe) the terminology more than on the procedures, to keep the shared databases synchronized, or if they are based on the effort of individuals validating blocks or sets of transactions and trying to put very technical information into linking every block or set of transactions non­technical words, thus blurring an already with the previous one, continuously complex landscape. and sequentially recording them. These transaction blocks or sets create a unique, Let’s explain the Bitcoin Blockchain (BBlock). distinctive, chain, like a DNA molecule; these The BBlock is a public of all the chains are called blockchains. They are also blocks of transactions that have ever been called trees, global ledgers, etc. executed. The BBlock is constantly growing 2 as ‘confirmed’ blocks are added to it with new videos, and I encourage you to watch “How sets of recordings. The blocks are added to Bitcoin Works Under the Hood” the BBlock in a linear, chronological order. (http://bit.ly/1zIOR8h). Each node gets a synchronized, replicated I also like how Kariappa Bheemaiah4 explains copy of the BBlock. the way internet communication was launched William Mougayar, already quoted, describes and how we all can communicate digitally the BBlock like this: “​Each successive block now through email, texts, etc. using the SMTP contains a “hash” (a unique fingerprint) of protocol. With blockchain­based protocols we the previous code, therefore cryptography can exchange value: I can give you a “piece (via hash codes) is used to secure the of that digital block” (my wagon, a part of authentication of the transaction source and my wagon) that you accept because you removes the need for a central intermediary. recognize its value; you can store that piece The combination of cryptography and of block, group it with other pieces, acquire blockchain technology together ensures there stuff – digital or material, save it, and send is never a duplicate recording of the same it to others. Now, we can exchange trusted, transaction.” validated, digital information. In the BBlock every transaction has the originator’s signature on it, but only you (an “The Internet we use today is the individual, a company, or a program) can unlock the BBlock because only you have Internet of Communication, the the digital key; thus, you are responsible for Blockchain is the Internet of Value”. keeping your key safe. It is like a constantly moving train where wagons (the addresses) are placed at the front and locked forever Brock Pierce5, venture capitalist and serial with the previous ones. Try to take one entrepreneur, Board Member of the Bitcoin wagon out and you derail the whole train. Foundation, in the video entitled “Bitcoin The order of these wagons is crucial because might fail but the blockchain is here to stay”6 the blockchain constantly authenticates the says: “The Internet we use today is the Internet sequence of the blocks of transactions. of Communication, the Blockchain is the The BBlock has complete information about Internet of Value. The one is a communication the addresses and their balances from the protocol while the other is a value exchange original starting block, through the most protocol. What made the internet so successful recently completed blocks. The blockchain was its open protocol where anyone could grows infinitely and this unbroken chain of innovate and build upon; the blockchain is transactions is the backbone of the system the same thing. If you wanted to innovate which ensures its transparent and secure in finance and payments, there were no nature. real open system [...] by having a baseline protocol that allows you to innovate and build A good explanation of the BBlock is found around finance and payments, there were 3 in many websites, like Investopedia and other no real open system [...] by having a baseline websites. protocol that allows you to innovate and build I found perhaps the best explanation of the around finance a lot of interesting things are BBlock in Scott Driscoll’s Curious Inventor happening.” Block 1 Block 2 Block N

3 There are many blockchain solutions and Dan Morehead from Pantera Capital sees as you read this, blockchain developers Bitcoin as the final piece of the protocol puzzle everywhere are working on the next great made by all the internet protocols that exist of products, services, and ideas. Millions of today: the money protocol10. dollars are being poured over this technology­­ close to 500 million dollars in 2014 alone. One company, Blockchain. info, one of the world’s As an example that we will most popular online bitcoin wallets, was used analyze further, the Ripple by 2.3 million individuals and raised 30.5 Network is one of these million dollars of venture capital in 20147. open standard, distributed networks based around a Many different solutions are being shared, public database or implemented. Some of them – the most talked ledger, where the participants in the network about ones – are the cryptocurrency solutions agree to changes in the ledger via a process (Bitcoin, , etc). Developers are creating called consensus. Ripple is being developed other solutions of a similar nature in that they for financial institutions as the system that all are distributed, shared, and public, and will revolutionize banking, foreign exchange that they utilize open source protocols and and the MT&RI. Ripple’s internal is consensus ledgers. However, the similarities named XRP and is listed as a cryptocurrency of these solutions to the Bitcoin Blockchain, for but it acts as a “trusted medium of exchange” example, depends on your distance from the within the network. The Ripple Network accepts solutions and how much stress you put on the payments denominated in other currencies (or various aspects. assets) where the Ripple ledger only records the The TCP/IP8 protocol is to the internet what amounts owed by one user to another. You can a blockchain protocol – Bitcoin or the “next jump to the section on Ripple or proceed in the best” one – will be for the financial industry. order that I have laid out this document. Other next­generation protocols will probably be built on top of the BBlock, like SMTP for email, HTTP for webpages, and XMPP for chat Another more recently developed have been built on top of TCP as a common protocol is the Stellar Network underlying data layer9. that we will also look and briefly comment.

TCP IP There is also great excitement transmission Internet 11 control protocol behind Ethereum , labeled as the next-generation cryptocurrency and decentralized application platform that will be launched in 2015 and that we will also describe briefly at the end of the document. SMTP HTTP UDP email web browser user datagram transmission protocol protocol We will also mention Epiphyte12, a protocol bitcoin-based international transfer technology designed for banks and other financial institutions, “a solution that avoids traditional money DNS TLS/SSL BTC movement avenues and instead converts domain name cryptographic money protocol security protocol currency to , moves the coins, then cashes them out on the other end in the local tender” 13.

4 CRYPTOCURRENCIES There are now companies that trade between one type of coin and the others Cryptocurrencies are also and many people are investing in Bitcoin known as virtual, digital, and altcoins to realize revenue out of the and math­based currencies. fluctuations. As a regular fiat currencies do, The first fully implemented each altcoin has its own value that fluctuates decentralized cryptocurrency is Bitcoin, which with the market. As of 4/7/2015, 1 Bitcoin was is now accepted and traded every day, despite worth $254.71 Dollars or €234.29 Euros, 1 the fact that many skeptics believe it’s just Litecoin was worth US$1.79 or €1.54 and a fad that will fade away. The Market Cap of 0.00658 Bitcoins. Bitcoin is US $ 3,573 million (3.5 Billion USD). Ripple, which follows Bitcoin, is more than ten times smaller. Now there are many developed cryptocurrencies. Some of them compete with Bitcoin and Ripple, some present different qualities, and others project themselves as better substitutes. The alternative cryptocurrencies launched after the success of bitcoin are frequently called altcoins. Examples of altcoins include Litecoin, , BitShares, , Peercoin, Feathercoin, Zetacoin, Novacoin, etc. Litecoin is seen as the closest competitor to Bitcoin due to its speed of transaction approval and security14. Every “coin” starts and uses a different blockchain; The 2015 Innotribe Startup challenge, the this means that every “coin” has a different second annual contest run by the international public ledger. As of 3/10/2015 Gola Yashu of payment network SWIFT, provides fintech NEWSBTC named the best altcoins to trade in startups the opportunity to present their ideas the year 2015, based on their price stability. to bankers, financial technology experts, and He mentions Dogecoin Dark, Unobtanium, investors to win the ultimate prize. Last year Digitalcoin and Darkcoin. one of the winners was Epiphyte, which we There were more than 500 cryptocurrencies will describe at the end of the document as available for trade in online markets at the one promising bitcoinbased­ financial system. start of 2015. Only 13 of them have market Out of the 60 startups chosen as semifinalists capitalizations over $5 million as of April 7th, in 2015’s challenge, about one sixth of them 201515: were companies. We see here how cryptocurrencies are moving into the heart of the financial system and that SWIFT is paying attention. The digital currency companies that were included are Asian bitcoin exchange BitSpark16, cryptocurrency debit card Shift Pay17, bitcoin remittance company Xendit18, and decentralized digital asset ledger Hyper.

Out of the 60 startups chosen to be semi-finalists in 2015’s challenge, about one sixth of them are digital currency companies.

5 BITCOIN around a $300 million dollar run rate for 2014 An interesting article from and that’s the same as the Internet in 1995. It’s Inside Bitcoins on November also interesting to note that 2015 has already exceeded 2013’s and we’re just a month into 2014 compares the internet 22 developments from 1995 to the year”. Pantera has a great Bitcoin Primer bitcoin in 2014. It shows a very funny YouTube that you can read; I recommend it. video of a 1995 episode of “Computer Because it’s the most widely used Chronicles”19 where “electronic mail” and the cryptocurrency, Bitcoins are produced by concept of downloading are explained. I am many servers around the globe. They are here, in 2015 trying to explain blockchains, expensive to produce because the software cryptocurrencies, bitcoins and you are that both produces bitcoins and adds blocks probably as puzzled as those viewers were in to the blockchain needs large servers and 1995 when they were first hearing about the computer hardware that uses great amounts internet. I got my first AOL email account in of energy. The people that produce bitcoins 1999 and my first bitcoin wallet in 2014! are called miners, and they are similar to Ron Glantz and Dan Morehead of Pantera miners digging for gold, because they are Capital20 explained: “Bitcoin venture capital attracted by the profits they gain from creating investments are outpacing the investment bitcoins, despite the high mining costs. When rate of Internet companies in 1995. Just they mine bitcoins, they earn some bitcoins for fun… some of the companies funded in in return for their effort. The higher the price 1995 included Yahoo!, Amazon, and eBay.” of bitcoins, the larger the profit. There is In their 2015 presentation at the North guidance and there are parameters to follow. American Bitcoin Conference in Miami, they Most legislations that are being developed wrote:“Bitcoin: The Final Piece of the Protocol do not require bitcoin miners to be licensed. Puzzle” 21: “The best way to see the future of Bitcoin mining companies also make money Bitcoin is to see where the venture money is by authenticating transactions and maintaining going. In 2014, there was a tripling of venture the blockchain synchronization and replication. capital going into bitcoin companies. It’s up to

BTC-USD

USD 1,200

USD 1,000

USD 800

USD 600

USD 400

USD 200

USD 0 1 1 1 1 0 0 0 0 2013-12-3 2013-10-3 2013-11-3 2014-01-3 2014-10-3 2014-11-3 2013-07-31 2014-07-31 2013-03-31 2014-03-31 2013-08-31 2014-08-31 2013-05-31 2014-05-31 2013-01-3 2012-12-3 2013-04-30 2014-04-30 2014-02-28 2013-06-30 2013-09-30 2014-06-30 2014-09-30

6 TOTAL BTCs

16,000,000 13,603,650 14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0 4 4 4 4 4 4 4 4 4 4 4 4 2011-11-0 2013-11-0 2014-11-0 2012-11-0 2010-11-0 2011-01-0 2011-07-04 2011-03-04 2013-01-0 2014-01-0 2012-01-0 2011-05-04 2019-01-0 2009-11-0 2011-09-04 2010-01-0 2013-07-04 2014-07-04 2012-07-04 2013-03-04 2014-03-04 2010-07-04 2012-03-04 2013-05-04 2013-09-04 2014-05-04 2014-09-04 2010-03-04 2012-05-04 2012-09-04 2010-05-04 2010-09-04 2009-07-04 2009-03-04 2009-05-04 2009-09-04

make use of it24. Andresen, with other bitcoin “Bitcoin venture capital investments investors and enthusiasts the US, founded the — a nonprofit established in are outpacing the investment rate 2012— which is the most prominent overseer of Internet companies in 1995”. institution in the world of Bitcoin. As of December 25th, 2014, there were 13,642,875 Bitcoins in circulation and 155,795 Bitcoin A. Who invented and controls the Bitcoin users (unique addresses). Since Bitcoin’s Blockchain? inception in 2009, there have been almost 55 A paper published in the Cryptography million Bitcoin transactions. Mailing List in November 2008 is the first In summary, nobody knows exactly who public appearance of the bitcoin protocol created the Blockchain and nobody fully idea. In 2009 released controls the Bitcoin Blockchain. Rather, you the first version of blockchain software client might say it’s “collectively” controlled and and he participated with other developers maintained, which is something that may on the project via mailing lists until he faded be difficult to understand in the traditional from the community toward the end of 2010. payments world. Nobody knows for sure who Satoshi is or was, and the search for his identity is very Who determines the value of one bitcoin? intriguing23. Hundreds of developers around Nobody... and everybody. Like gold, the the world continue to collaborate and work price of bitcoin is determined by the buying on developing the open source protocol. The and selling of bitcoins on the market; Fiat’s Bitcoin Blockchain or “protocol” runs in its currency25 exchange rates allow you to network of independent nodes distributed determine how much of one fiat currency all over the world, with the US having 40% of you can exchange for another. As anyone them and Europe having about 25%. in the remittance industry knows, exchange Perhaps one of the best known developers rates change every day as currencies are of the Bitcoin Blockchain is , traded on the foreign exchange market the “core maintainer” or “chief developer” of (forex). A fiat currency’s forex value depends the open source code defining the rules of on a large number of factors, some real and Bitcoin and providing the software needed to some perceived, and it is influenced by the 7 issuing country’s central bank interest rate, production halts completely once 21 million the country’s debt levels, and the strength have been mined. As more miners join the of its economy compared to other countries. , it becomes increasingly Governments buy or sell fiat currency reserves difficult to make a profit, and miners are to manipulate its price in the market, to control seeking efficient methods to be to cut their inflation, and to stimulate imports or exports. operating costs. However, as production goes Bitcoin, as another currency, also sees its down, its price will probably increase. price fluctuate. In December of 2013 its price Each bitcoin has a unique address that shot up to over USD 1,000 and went down to consists of an alphanumerical string with a around USD 400 in April. Since September, length up to 34 characters [it excludes: the it has been fluctuating below USD 400 (see capital “O”, the capital “I”, the lowercase graph). “l” and the number “0”]. This allows for Although there have been numerous articles millions of possible combinations, which about the volatility of Bitcoin, many experts makes a bitcoin address unique and makes believe that as people mine and use more and duplication almost impossible. Some of more bitcoins, the price will be more stable the positions within a bitcoin address are and the price will fluctuate less and less. used for a checksum and error correction. Today, there are investors that speculating This is an example bitcoin address: about the prices of bitcoin, and some suggest 1JBrS7jzE3AJ9Sz5aFij1BmTcpFGgN88hc. that there are correlations between bitcoin Another interesting fact is that every bitcoin and gold26. address has a matching private key, similar to a protective password, which is saved in the Is Bitcoin creation infinite? wallet of the person who owns it. The private The best answer will be no­­no in the sense key is mathematically correlated to the bitcoin that the Bitcoin protocol – the rules that address, and it’s designed so that the bitcoin guide the creation and transfer of bitcoins – address can be constructed from the private has capped a limit of 21 million bitcoins on key. As a matter of fact. bitcoins are never the production of this currency. However, really “in your wallet”, they are merely tagged bitcoins can be divided into very small parts: in the blockchain with your private key. the smallest divisible amount is one hundred One problem with the Bitcoin Blockchain millionth. A one hundred millionth of a bitcoin is that with every transaction, it continues is called a “Satoshi.” About 13.7 million bitcoins to grow up to the point that “Bitcoin may be have been created up to the end of 2014 from a victim of its own success. The blockchain 12.1 million at the start of the year27. The first is now around 28 gigabytes, and as more bitcoins were created in 2009. people jump on the Bitcoin bandwagon, it will only grow faster” 28. But there are solutions being developed and the size problem might “Ecoins offer criminals no secrecy be solved soon. and only a trivial amount of If you want to become an expert on bitcoin, anonymity. Every Ecoin transaction I encourage you to watch “How Bitcoin Works requires a computer or device to in 5 Minutes” (http://bit.ly/1D8fqpS), a video by Scott Driscoll the Curious Inventor, whom I have a unique (anonymous) identity mentioned earlier in this document. This video on the Ecoin peer to peer network”. offers a great technical explanation that is easy to follow.

As you see in the graph, the production of B. Because it’s virtual, can it be used easily new bitcoins is decreasing at a predictable for money laundering? rate. The number of new bitcoins created Actually, it is the other way around, and every year will decrease until bitcoin even the media and some regulators and

8 law enforcement agencies were misinformed C. Is bitcoin secure? early on when the initial money laundering I will take the answer from www.bitcoin.org, cases surrounding bitcoin caught the public’s which I encourage you to visit to know more 29 attention. With the Silk Road case in October about bitcoin: “The Bitcoin technology - the 2013 () and a second Silk Road protocol and the cryptography - has a strong case in November 2014 (Blake Benthall), the security track record, and the Bitcoin network US Marshals Service (USMS) seized 30,000 is probably the biggest distributed computing BTC and 50,000, respectively, then auctioned project in the world. Bitcoin’s most common them off. vulnerability is user error. Bitcoin wallet “If anonymity and secrecy are good for files that store the necessary private keys crime, Ecoins are bad for crime” 30. Because can be accidentally deleted, lost or stolen. every bitcoin has a unique address and Fortunately, users can employ sound security because all transactions create part of the practices to protect their money or use service blockchain, the system is transparent, and providers that offer good levels of security therefore it’s traceable. Regulations all over and insurance against theft or loss. Security the world require bitcoin “sellers” to keep flaws have been found and fixed over time in the ID information of every bitcoin wallet various software implementations. Like any holder, so even if all of the transactions in the other form of software, the security of Bitcoin blockchain are anonymous, law enforcement software depends on the speed with which can, with warrants and with respect of the problems are found and fixed. The more such privacy laws in each country, trace any issues are discovered, the more Bitcoin is transaction that has ever been completed and gaining maturity. find identities of the individuals from company There are often misconceptions about thefts records. “Ecoins offer criminals no secrecy and security breaches that happened on and only a trivial amount of anonymity. Every diverse exchanges and businesses. Although Ecoin transaction requires a computer or these events are unfortunate, none of them device to have a unique (anonymous) identity involve Bitcoin itself being hacked, nor imply on the Ecoin peer to peer network. While inherent flaws in Bitcoin” 32. each individual’s identify on the network is anonymous, it is unique. Almost all web It is important to note that there are risks 33 devices are identifiable by location or owner. associated with bitcoin. Prableen Bajpai , The real anonymity of Ecoins is the anonymity founder of FinFix Advisors & Planners, a the consumer gets, not the type of anonymity financial planning and investment advisory that protects or hides illegal activities. For firm in India, reminds us in his article that the most part, law enforcement seems to be as with any other investment or payment embracing the Ecoin movement, perhaps in mechanism, there are risks in the following part because it may make their jobs easier” 31. areas: technology, volatility, regulation, consumer protection, taxes, fraud, and theft. We experience these the technology­related Bitcoin Venture Capital $Million risks as the system matures and concerned

$350 parties discuss the rules, which is not an easy $315.0 task with the open structure of the Bitcoin $300 Ecosystem. $250.1 $250 Izabella Kaminska, a blogger for the London $200 Financial Times, has a long series of articles

$150 about Bitcoin called the “Bitcoinmania $112.5 34 $99.5 Series” . She is a bitcoin skeptic, and is $100 criticized by the bitcoin community as a

$50 “naysayer.” However, if you have concerns and $2.1 you would like to read a contrarian view, check $0 2012 2013 2014 1995 2015 YTD out her series. In her latest (2/8/15) blog post, Bitcoin Bitcoin Bitcoin Internet Bitcoin

9 she comments on some of those technological Bitcoin as a Money Transfer Service will risks mentioned above35. If you are interested require the same license as other MTOs or in Bitcoin’s scalability problems and i would Foreign Exchange firms. The problem is in like to study this topic further, read the paper the countries where the license for MTOs or “The Bitcoin ”36 by Joseph Forex firms is too costly and difficult to obtain, Poon and Thaddeus Dryja, which discusses or where the capital requirements are too some of Bitcoin’s scale problems and explores high, and because of the very nature of Bitcoin possible solutions. people or firms dealing with cryptocurrencies are going to have major problems adjusting to the regulations. Bitcoin firms will probably Bitcoin is legal, no doubt about it. become more “unregulated” in those markets, “Has it been regulated?” should be and they might engage in undesirable the question that needs to be practices by working in the margins of the asked. financial system. It is important to add that a few countries have declared Bitcoin illegal and here are a D. Is bitcoin legal? few examples: Bitcoin is legal, and there’s no doubt about • Bolivia: On May 2014 the Banco Central it. “Has it been regulated?” should be the de Bolivia officially banned40 any question you’re asking. The response to that currency or coins not issued or regulated is yes, bitcoin is been slowly regulated, and by the government including Bitcoin. It we will see more and more regulations coming also states that citizens are prohibited up in 2015 and beyond. Many regulators in from denominating prices in Bitcoin. different countries have issued statements 41 regarding bitcoin and will continue to do so. • Ecuador: On July 2014 , the National The November 13, 2014 Assembly of Ecuador banned Bitcoin and Advisory37 by Katten Muchin Rosenman LLP at the same time created its own, state- is a good article that might be of interest run, electronic currency (nothing to do to you if you are worried about US bitcoin with blockchains). Signup for accounts regulation. Many countries are waiting to see began in Dec 2014 with only 11,000 what Benjamin Lawsky, the New York State accounts by April, far from the 500,000 42 Superintendent of Financial Services, will users expected by the end of 2015 . publish in 2015, after his office received 3,700 A number of other countries have restricted public comments when the proposed licensing the use of bitcoin. For example, China for bitcoin-related firms was posted publicly. prohibited financial institutions to trade It seems that the so-called BitLicense won’t bitcoins but allows individuals; Russia has a be required for bitcoin software developers, de-facto ban on Bitcoins that might be clarified virtual currency miners, bitcoin denominated soon; Thailand declared Bitcoin illegal at the gift cards, investors holding virtual currencies end of 2013 but in a later date the Bank of for personal investment, and for retailers Thailand stated that Bitcoin can be traded in accepting bitcoins. Plus, start-ups operating the country so long as it’s only converted to/ in the virtual currency space within the US will from . be given two years to become fully compliant Other regulations have been published in with the licensing law38. Other bitcoin uses will several countries concerning the taxing of probably require a state Money Transmitter’s Bitcoin gains or the use of VAT in commercial License, as it is required by any MTO and transactions involving Bitcoin. RSP in the US. If you ask our money transfer colleague Juan Llanos, now a bitcoin expert, More information about legality of bitcoin he will tell you, as he did in a recent panel in can be found in Wikipedia43, Forbes44, a conference in Rio de Janeiro: “Bitcoin was Coindesk45 and this paper published in March born regulated”39. 2015 by Nishith Desai Associates in India: “Bitcoins: A Global Perspective”46 In my general opinion, Companies using 10 E. Should I really pay attention to Bitcoin? of the Bitcoins you hold so you can use them, Anyone in the payments industry should transferring them to other wallets (or receiving analyze and understand bitcoin. John from other wallets). It doesn’t actually keep the Mauldin47, the Chairman of Mauldin Economics, Bitcoins for you, you keep them in your wallet. a financial expert, author, advisor, and the It has also a nice directory of places where host of the Strategic Investment Conference, you can use the Bitcoins. wrote an article published in November 2014, , Circle, and others are licensed in entitled “Is Bitcoin the Future?” This article the US so you can buy and sell Bitcoins from really made me react and helped me decide them by linking your card or bank account. to pay closer attention to bitcoin by getting a They will require a large amount of information wallet and actually buying bitcoin in order to as part of their KYC requirements. Once you study the growth of Money Transfers & The have Bitcoins, and a wallet you can test it with Blockchain. John says: “If you ask me whether us sending us by emailing your wallet address I truly believe that in 2050 the main medium of (a long string of letters and numbers) and we exchange will be paper money, the very quick will send you USD $1.00 dollar. You will be answer is that I don’t. I also think there is a dipping your toes in the Bitcoin world. You can better than reasonable chance that it won’t be also scan the QR Code: a fiat currency. But will it be Bitcoin? My best to read our Wallet Address. guess is that it will not be Bitcoin as currently constructed but rather an evolved version”.

“If you ask me whether I truly believe that in 2050 the main medium of exchange will be paper money, the very quick answer is that I don’t.”. At the last IMTC USA 2015 in Las Vegas, we got about one third of our attendees to I encourage you to read it because it offers download and use a wallet, and gave them the perspectives of two skeptics, John and USD $5.00 to purchase open bar tickets. We his colleague Worth William Wray48, and will do it again in other IMTCs. with the information on bitcoin that you are I leave you with this quote from the same reading here, you will better understand article: “The Bitcoin blockchain technology their ideas and realize why I am urging the allows for the most secure electronic money transfer industry to pay attention. The transactions ever devised. Its adoption and chronological analysis of the key financially- acceptance seem inevitable to me. It will be important bitcoin-related events [Silk Road, Mt. used to validate everything we purchase: Gox, China, Cyprus] gave me a clear light on stocks, homes, investments, airplane tickets, the bitcoin evolution. etc. It will be a far cheaper and much more If you want to “play” with Bitcoin, and by that secure way to validate your ownership of I mean opening a wallet and buying Bitcoin, anything, from your home to your stocks”. I encourage you to do so. First, download a Bitcoin Wallet with your phone. You can use the mobile wallet of the Bitcoin Exchange “The Bitcoin blockchain technology in your country that will probably have local allows for the most secure electronic “channels” for you to buy bitcoins and load them into your wallet and pay with a card or transactions ever devised. Its adoption debit from a checking account. There are and acceptance seem inevitable also chains of stores that accept cash to buy to me”. bitcoins. Airbitz Wllet, available in The App Store or Google Play keeps the information 11 F. The Bitcoin Ecosystem pay for the maintenance of these server and nodes. Both smart phones that run efficient and Insurers Infrastructure Merchant Services user-friendly wallets and ATMs that offer Lenders & Miners Payment Processors Trading Platforms Remittances services in public places are also part of the bitcoin infrastructure. Mining Hardware Financial Miners Payments • Exchangers: Bitcoin Bitcoin Exchanges Services Blockchain Servers ATM Manufacturers (BExs) or digital currency exchangers (DCEs) are the companies where you buy and sell bitcoins, like an online Forex Bitcoin Core business. Here, you can trade bitcoins Protocol for fiat currencies [or different digital Products Exchangers currencies] and they make money from & Services the bid/ask spreads or they charge fees as transaction commissions for their Buyers Merchants services. They can be brick & mortar Sellers Information accepting BTCs Wallet Apps Identity - KYC locations where cash is accepted or & Support ATM Companies they can use ATMs, but most of them Alternative are online businesses that accept wire Sidechains Ecoins VCs & Investors Foundation transfers and debit or credit cards as Clubs & Events forms of payment. The year 2014 may be looked back on as At the end of 2014, the largest full a year when bitcoin began to move toward trading exchanges by volume were 50 51 a mainstream market with a growing and (Hong Kong), (US), 52 53 maturing ecosystem. Some 6.6 million bitcoin BTC-e , (Bulgaria?), (US), 54 55 wallets have been set up so far this year, (China), OKCoin (China), 56 57 according to Coindesk, a fivefold increase Cryptsy . and BTC China . These and over 2013. And 75,000 merchants now accept other exchanges offer different services 58 the digital currency, including giants like Dell, and loading or exchange mechanisms. 59 Expedia and Overstock49 [and now Microsoft US bitcoin exchange Coinbase has too]. From the miners, to the developers, been eagerly seeking Money Transmitter and the wallets to the trading desks, the Licenses in the US. ecosystem has truly diversified.Any form of • Products & Services: We can place the categorization is merely a way to catalogue software developers and firms providing sectors of the ecosystem and the companies software products that, independent of that are making the digital financial revolution the blockchain, connect it to the rest of a reality: the world in this very broad category. Any form of categorization is merely a way Here we can place, for example, 60 to catalogue sectors of the ecosystem and the AlphaPoint , a white-label financial companies that are making the digital financial technology platform that powers global revolution a reality: digital currency exchanges. Identity and KYC software providers, and all of the • Infrastructure & Miners: Hardware is merchants that are accepting bitcoin as extremely important for both the Bitcoin a form of payment fall into this category, ecosystem and for the Bitcoin software as well as all types of other products because the protocol runs on these and services, from food to clothing, servers. The computational speed of hardware, software, tipping, donations, server farms and the intercommunicating gaming, etc. nodes are vital for the system to function. Every Bitcoin transaction Also, the Bitcoin Blockchain is being carries a very small fraction of bitcoins to used to build on top of or to build 12 around, with open source or closed Bitcoin Bill Payment Providers (BBPPs) source solutions for individual needs. is another payment service that was Joel Monegro explains in his article launched in 2014. Bylls67, one of the “The Blockchain Application Stack”61: world’s first, is a Canada-based service “Developers are starting to build that allows users to pay bills in bitcoin networks that work in parallel to the at more than 6,000 organizations, Bitcoin blockchain to perform tasks including the government. In Australia, that the Bitcoin network can’t, but that the Living Room of Satoshi68 (LRoS) pays make use of the Bitcoin blockchain to, anyone on that country’s BPAY network for instance, timestamp or validate their [a universal bill-payment system in work.” Australia that allows people to pay by IMTC has started accepting bitcoins phone or online by entering two numeric 69 to pay for the conferences and we codes]. Singapore-based Quantified , 70 are waiting for the first bitcoin-paying Mexico’s Pademobile , Argentina’s 71 72 attendee. enBitcoins , Indonesia‘s TuKarCash , Thailand’s Bahtcoin73 are other BBPPs making offerings in this space74. Bitcoin Remittance Companies • Financial Services: This emerging (BRCs), also called “Rebittance” sector of the bitcoin ecosystem is Companies are just appearing in attracting entrepreneurs who are the bitcoin ecosystem. These are seeking to emulate the financial services provided by the traditional services, companies that are actively such as banking, lending, and insuring. providing tools and services The BitLendingClub is a peer-to-peer for senders or beneficiaries of Bitcoin lending firm that has more than remittances. 600 active loans and had more than 2,600 loans repaid at the end of 2014. Germany’s Bitbond75 and San Francisco’s 76 • Payments: Bitcoin’s more notorious BTCjam are also matching borrowers applications are Digital Wallets, both and lenders for crowdfunded Bitcoin the original online ones and the newer, loans. mobile ones. Every bitcoin-owner Insured Bitcoin Custody Services are needs a bitcoin wallet to hold its coins. also new services for 2014. UK based Bitcoins can be bought into the wallet Elliptic Vault77 offers an insured storage and spent or transferred from it. There scheme (encryption coupled with are hundreds of wallets, some of the multiple offline vaults and locations) to most popular ones are Blockchain62, insure bitcoins against theft or loss. 63 64 65 Coinbase , Circle and Airbitz . Tens Bitcoin Banking might not be a service of thousands of merchants now accept that will be available anytime soon, bitcoin payments. According to US although, in a way, bitcoin wallet based Bitcoin Payment Service Provider providers are holding bitcoins and letting (BPSP) Coinbase, more than 25,000 you use you bitcoins to buy, sell, and merchants are using their platform to transfer... and providers might even start attract new customers. BitPay, another offering interest on the bitcoins you are US BPSP, has over 20,000 merchants holding. Isn’t this banking? Luxembourg’s currently accepting bitcoins with their Blockchain My Wallet slogan states:“Be 66 payment interface . Two years ago this Your Own bank” and then explains: “My number stood at few hundred; when the Wallet is a free online bitcoin wallet, numbers for 2014 are released, they will which you can use to make worldwide be large. A list of more than 30 BPSPs is payments for free. We make paying found here: http://bit.ly/1Ezl870 with bitcoins easy and secure available 13 anywhere on your phone or desktop. Foundation is coming of age now that We are not a bank; you retain complete its international expansion has been ownership of your Money. We cannot built with local chapters in a number view your balance, see your transactions of countries (Australia, Bangladesh, or make payments on your behalf” 78. Canada, Denmark, France, Germany, Traditional Banking Services for Bitcoin Mexico, The Netherlands, Romania, firms are another matter. If Money Slovenia). Transmitters have problems getting Bank There are more than 600 Bitcoin Accounts, Bitcoin firms are not much Meetups in the World with more than better positioned, although I do feel 90,000 members in more than 70 this is about to change, and this change countries80. Three of the largest ones might help the Money Transfer Industry are in New York (from 2,000 to 3,000 as a whole. members each), followed by London (2,300), San Francisco (2,100), and Tel Aviv-Safo (1,780). Consultants offering all types of Major Bitcoin Events are taking regulatory, legal and compliance place everywhere in the world. Inside consultancy, help companies assess Bitcoins81 is being hosted in more than the risks and opportunities that the 6 cities in the world; Smile Expo82 is bitcoin ecosystem presents. hosting Bitcoin events in Russia, St. Petersburg, Kiev and Prague; the North American Bitcoin Conference (Miami), Bitcoin Remittance Companies (BRCs) the Virtual Currency Summit83 (Boston); also called “Rebittance” Companies are The Texas Bitcoin Conference84; The just appearing in the bitcoin ecosystem. Bitcoinference in Amsterdam; the Bitcoin These are companies that are actively Africa Conference85, (just Launched in S. providing tools and services for senders Africa); the LaBITconf86 (B. Aires, Rio, next or beneficiaries of remittances to use in Mexico) and others we are probably Bitcoin, either as a medium of exchange missing here. Specialized events or better yet, using Bitcoin “in the like IMTC’s MTBIT87 on Remittances middle”. & Bitcoin are now hosted as part The service can be Person-to-Person of the International Money Transfer (P2P), Business-to-Business (B2B) or Conferences. even Person-2-Business (P2B) There are Associations in several • Investment, Information, Training & countries in the world: US, France, The Support: The VCs & Investors have Netherlands, Switzerland, Belgium, been crucial to the state of the bitcoin Hong Kong, Australia, Israel, Ireland and ecosystem. Investment in bitcoin has others, mostly recently formed. outpaced the rate of investment in the Consultants offering all types of internet in 1995. Yes, bitcoin might be regulatory, legal and compliance a bubble [that has already busted?] consultancy, help companies assess the but similarly, few people could foresee risks and opportunities that the bitcoin the fortunes that were to be made ecosystem presents. Money Transmitter with the internet expansion. The US consultants, especially the ones already Bitcoin Foundation79, with its mission to involved with digital payments, are fund development for the Bitcoin Core becoming bitcoin experts too, and their Project and to support common-good years providing services to money bitcoin infrastructure, has been key to transmitters and payment companies the advancement of the industry. With is valuable. They are teaming up with its ups and downs, the recent news Coinsultants, a term used by many (April 2015) of its lack of funding, the bitcoin consultants nowadays. 14 G. What are bitcoin’s more interesting • No use of a Bank: this keeps the costs characteristics from a money transfer point of low and reduces the risk of losing bank view? accounts (if the Banks closes account). In my opinion there are promising If MTO A and MTO B are already money characteristics, whether Bitcoin is used by transfer companies there are other added the consumer or a Rebittance Company uses advantages: Bitcoin “on the back”, as a medium of exchange. A. Fund receipts from sending clients by Used by the consumer (P2P): MTO A don’t need to be modified. A. Like an email, a bitcoin (or a fraction of a B. Fund dispersal by MTO B to remittance bitcoin) can be sent digitally from one person to beneficiaries don’t need to be modified. another, across the world, almost instantly. C. No change in KYC, AML, CTF procedures B. You can hold your Bitcoins in a digital or already in place. virtual wallet and send Bitcoins from one wallet to another wallet. D. A competitive advantage over competitors since the drop in price, even slight, can reap C. The recipient, who can be can be large benefits. anywhere in the world, can buy goods and services in the internet or in a domestic market Consumer to a Business (P2B): where bitcoins are accepted or exchange them MTO B can decide to cater to any Bitcoin for local currency with other people or using holder in the world that wants to send funds specialized businesses (even ATMs). The larger to a beneficiary in the country that they the local ecosystem, the easier is to use. serve. They could have an online or Mobile D. Transaction fees are minimal. Bitcoin application where the sender transfers Bitcoins exchangers can charge fees for distribution to the corporate wallet of MTO B and provides through domestic payment systems or to the information of the intended beneficiary exchange bitcoins into fiat currency. who can be paid instantly with local currency at an agreed exchange rate. Used by a Business (B2B): If you are an MTO you are probably right in To use it as a medium of exchange: thinking on the legality of such a service. This • MTO A in sending country takes the order type of service might be labelled illegal in the from sender and receives local currency in country where the sender is located if MTO B cash or debited from Bank Account, Card is not licensed in that jurisdiction. I agree that or Mobile Wallet. the regulatory challenges ahead are going to be major. But let’s remember that there are • MTO A buys Bitcoin many similar systems being used today where • MTO A sends order and transfers Bitcoin funds (USD, EUROS) are placed in virtual to MTO B in receiving country wallets or virtual cards and moved, cashed in • MTO B pays beneficiary in local currency or cashed out, in other countries. either in cash or using existing remittance It is also important to understand that there distribution channels. are many challenges, most of all the need for The promising characteristics in such a strong and active Bitcoin markets at both ends business model are: of a remittance corridor and that is why not every corridor will likely see the appearance of • Provided the Bitcoin market is active in MTOs using Bitcoins or Rebittance companies both ends, the transaction costs can be challenging established players. I strongly minimal, almost zero, as both MTO A & suggest that any MTO or Foreign Exchange MTO B are each one benefiting from the firm finds potential Bitcoin partners that it exchange rate spread. could work with. As MTOs partner with Foreign • There is no credit risk between MTO A & Exchange Brokers, why not look for Bitcoin MTO B and liquidity is kept at a minimum Exchanges and see if there is a possibility of with no advances as it is customary working together. nowadays. 15 H. Are there companies doing remittances with Bitcoin? Yes, there are. We know a few that are in the early stages as of Q1 2015. We are going to name a few by region (Americas, Europe, Africa, Middle East, Asia & Pacific) that have made the news or have contacted us as part of our MTBIT events. The operation is managed internally without We are going to use REBIT as an example the client on both ends ever receiving Bitcoins to explain a rebittance system. Rebit is or even knowing what Bitcoins are. The HK a company operating in the Hong Kong- agency internally exchanges the HKDs into Philippines Corridor. Rebit is a service of Bitcoins and transfers those Bitcoins from Satoshi Citadel Industries88, a Philippine-based their wallet to Rebit’s Wallet in Manila, who holdings company for Bitcoin-related ventures. in turns exchanges the Bitcoins into PHPs. Rebit is using Bitcoin to connect its partner in Buying and selling Bitcoins at both ends is not Hong Kong with its office in Manila. a problem, and in fact, it is the revenue from these exchanges that allows the sender of the The sender hands down Hong Kong Dollars remittance to pay an extremely low fee. (HKD) to a teller in the World-Wide House arcade in Central, a shopping center popular For more information on Rebit’s Rebittance with Filipinos in HK. In Manila, Rebit delivers Service see Rebit’s co-founder Luis the corresponding Philippine Pesos (PHP) to Buenaventura’s presentation at IMTC USA the recipient in the Philippines, sometimes 2015 in Las Vegas at MTBIT on March 23rd, in cash at their office, but usually by the 201589 . We are inviting Rebittance companies remittance distribution networks already well- to IMTC’s MTBIT days to showcase their established in the country, such as banks, service and to partner with Money Transfer ATMs, Mobile Wallets, and courier services. distribution networks in the countries where they are pioneering these services. The operation is quick and very inexpensive, plus the HKD-PHP exchange rate is very competitive.

16 RIPPLE business community endorses. At this time, Ripple signed its first banks, such as Fidor in While we can draw Europe and Cross River Bank in the US. differences and similarities between Ripple and Bitcoin, B. In a nutshell, what is Ripple? we will not take this approach As explains it in its Ripple Primer because it may complicate our explanation Brief: “Ripple is a universal protocol for money of Ripple as a distinctive use of a “bitcoin-like transfer that allows independent payment technology.” The two protocols do share basic systems to communicate as easily as email ideas and behave in similar fashion: they are systems do. Just as SMTP created a shared both based on “distributed, shared, public, standard for email, Ripple provides a shared open source protocols, consensus ledgers”. standard for payments.” Ripple is competing Understanding the BBlock has undoubtedly to become the backbone for financial helped me to understand the Ripple Network, transactions across the globe. However, as it will help you. Many people arrive at the instead of focusing on peer-to-peer (P2P) Ripple Network by analyzing Bitcoin, which is transaction, it is focusing on institution-to- more widely known because of the media’s institution (I2I). These institutions are financial coverage and because Bitcoin is more of a services companies, from Central Banks to consumer product while Ripple is a business MSBs, who can use Ripple as a common product. ledger to clear and settle transactions in real-time. They offer bilateral settlement - A. How was Ripple invented? eliminating intermediaries, midpoint failure, delays, lifting fees -- and real-time funding by Let’s start with some history. Ryan Fugger, a minimizing exchange spreads, credit risk and web developer in Vancouver, Canada created collateral costs. Villages.cc, a self-contained community in 2005. He then created Rippleplay.com While Ripple was developed by Ripple Labs, as a financial service to provide secure who does continues to develop it, the protocol payment options to members of the online is open-source, so anyone can download it community via a global network. He was and build the applications that you want on inspired by the alternative currency system top of it for your institution to use. It functions developed by Michael Linton, also a as a consultant and advisor, which helps Vancouver resicent, in the 80s. Ryan’s work institutions adapt the system to their internal lead to the development of a new Ripple processes and to become part of the Ripple system in 2011 by Jed McCaleb; he arrived Network (RNxrp). at this idea when bitcoin, especially bitcoin mining, was being questioned: “It will be a “Ripple is a universal protocol bit obscene how much will be spent mining if the network ever gets large. It would be cool for money transfer that allows to come up with a bitcoin that doesn’t need independent payment systems to miners.” McCaleb founded OpenCoin Inc. communicate as easily as email and continued developing the Ripple system. systems do”. In 2013, he changed the name to Ripple Labs and brought in CEO Chris Larsen who had previously founded the lending service C. How can Ripple be important for the companies E-Loan and Prosper. Here, you can MT&RI? find a great company presentation that gives I think the best way to understand Ripple for you an understanding of the compant and its the MT&RI is to remember the origins of the management team: http://bit.ly/1CInBdJ90. In industry when Forex Companies dominated 2014 the company was reorganized (with the industry and served MTOs or became McCaleb’s exit to form Stellar91) and it set the MTOs themselves. Forex firms maintained a company onto a new corporate path that the trust relationship with each other and honored

17 their trades with their reputation. A Forex firm complexity, automation, security, and speed. in Buenos Aires could call a Forex firm in New These networks vary from email and chat to York and trade, promising to pay immediately webservers, VPNs, etc. after a rate was negotiated. That firm in Communication of transaction information, Buenos Aires also had trust relationships which needs to be wuick, goes one way while with other smaller firms within the country’s the funds travel a very different route, mostly borders; this network of trust was the basis using a manual (or semi-automated) pathway, of the business. In many parts of the world jumping through hoops and obstacles, until it was, and it still is, the same case. From it reaches its destination several days later. Hawala to all other informal systems, currency If there is a foreign exchange transaction exchangers built cross border businesses by in the middle, which there is most of the helping merchants pay each other and trade time in the case of cross-border transfers, their currencies from one country to the other. another process is required, to make sure My grandfather, a “cambista” knew that his that no money is lost in the spread (or that the reputation was at stake if he didn’t fulfill his maximum possible amount is made). Because promises. He also knew his liquidity and his the transaction information travels fast while credit limits, and he knew when to take risks the funds take days to move, the system or not. needs liquidity, which is provided by our own The RNxrp is the millennial version of capital in addition to the lines of credit that a Forex network. Instead of having an we issue and receive. If we add to that the informal and very personal network of trust problem with the financial access for MTOs, and reputation, the trust is now placed in we have to use several banks – or not, or a protocol where all of the Forex firms can intermediaries, to help in the process. take part and where limits, rules, terms, and Bear with me. I don’t want to explain to you conditions are set, so trades can flow safely, in how an MTO runs - you know how it works, but real time, and perhaps most importantly, the I am using this simplification to explain how protocol will always find the best exchange Ripple can function in this environment. Let’s rate possible. start with a simple model, when an MTO A in But let’s explore Ripple in the context one country works with an MTO B in another of the MT&RI today. We all know that our country (an MTO in Belgium making payments operational systems, as an industry, relay through an MTO in Congo, or an MTO in Texas on an interconnected domestic and cross- with an MTO in Mexico). border collection of very heterogeneous MTO A collects funds from agents in networks, mostly using the internet protocol Belgium and it keeps a ledger with each one to communicate, but with varying degrees of so it can control its credit limits for all of them.

MTO MTO

18 Liquidity provider A FX cost: $

MTO MTO

Liquidity provider B FX cost: $$$

The collected transaction information is sent three answers are, of course, yes. The RNxrp, to MTO B in Congo that, in turn, sends the with a liquidity provider in the center, makes transaction information to its paying agents all of this possible. to distribute the funds. While the transaction MTO A, now part of the RNxrp and using the information flows, it alerts the treasury , will then post a bit for USD departments that money is needed here and or local currency for MTO B and in a matter of there, and that funds are becoming short or seconds, the system finds a liquidity provider that credit limits are reached. Funds then with the best deal. MTO B is then credited in travel from financial institution to institution, the ledger with the corresponding amount. from cash to bank deposits, to a wire transfer, to a forex transaction, or to a bank deposit. Who is this Liquidity Provider? Any financial institution can be a liquidity provider in Most MTOs basically have to accept the the RNxrp, from a Bank to Forex firms--any Bank’s FX rates in the process, unless the institution that has capital and is willing to buy MTO can shop for the best FX rate in the and sell currencies while making revenue in market and channel its funds through the the process. With Ripple, a liquidity provider institution that offers the best rate. However, has the funds available in different currencies this is only available in certain corridors (and and trusts the members in the network; it also mostly available for the larger Tier 1 and Tier 2 sets limits, in order to process transactions, companies). bid, trade, etc. There is no risk at either end of a Ripple Transaction; only the institution in the MTOs can settle transactions point-to- center carries that risk, and these institutions point as a straight-through process. in the RNxrp are called Market Makers Let’s review some facts about the RNxrp What if, instead of having the funds to go before we proceed: through this complex, slow, and expensive process, there existed a company that • Financial institutions use the Ripple could receive the funds and deliver them protocol to clear transactions via a immediately at the other end? What if MTO common distriubuted ledger and A using the Ripple Network could settle in use ripple to settle obligations via a real time with MTO B at almost no cost and distributed funds-exchange – all in at an exchange rate that is difficult to match realtime (every 5 seconds), 24/7/365 and in the market? It is possible, then, that the at the most competitive exchange rate. transaction information from MTO A (both • This distributed ledger clears communication and settlement information) transactions (providing real-time record can arrive at MTO B at the same time? All of obligations).

19 • Transaction clearing is the result of The “Ripple Gateways Brief” defines a consensus, a process native to the Ripple Gateway as “a business that provides Ripple protocol, that authorizes a onboard and offboard ramps to the Ripple collection of counterparties to validate network”. A Ripple Gateway then provides Ripple transactions all day long, access to trade in the RNxrp, accepting funds providing the trust, authenticity and (fiat, cryptocurrencies) from clients and moving fluidity the system needs. those funds into the RNxrp or providing • MTOs can settle transactions point-to- funds from the RNxrp to clients. Gateway A point, as a straight-through process. For receives funds from Client A sending those currency conversion, the MTOs access funds through the RNxrp to Gateway B that through Ripple a funds-exchange, a releases funds to Client B. A gateway is, in this marketplace of authorized liquidity simplified example, an MTO in one country, providers, which always results in a Gateway A in the country of origination, competitive FX rate. Gateway B in the country of destination. • The larger the Ripple Network, the larger Ripple gateways can choose to have their the Ripple Marketplace, and the more customers’ accounts be independent or pathways will exist to channel payment hosted. Independent accounts will have a orders. Anyone can post bids or offers in unique address on the RNxrp connected to the system and the Ripple Network finds the gateway. Hosted accounts have indirect the most efficient path to match trades access to the RNxrp through their gateway’s There is no network fee, and there is no Ripple account. For example, a client that is an minimum transaction size. individual can have indirect access to RNxrp (meaning that the client’s account is only with Gateway A) while a client that is institutional D. How can institutions be part of the Ripple can receive its own a unique address on the Network? RNxrp. Institutions can be part of the RNxrp in three For those two Gateways to trade, we need different ways: a Market Maker in the center. Any Gateway 1. As customers or clients of a Ripple can post bids and offers to trade currencies on Gateway Ripple’s distributed exchange. Market Makers post both buy and sell orders, providing 2. Becoming a Ripple Gateway liquidity to the market in order to earn bid/ask 3. Becoming a Market Maker spread. Market Makers play the critical role of facilitating payments between Gateways. YEN Market Maker A “advertises” a price to Trades EURO Trades exchange, for example USD/EUR, that maybe higher or lower than Market Maker B’s price. YUAN XRP/JPY Trades The system uses the best bet, but Gateway WON 11% Trades A can trust Market Maker A more and sets its system to use it (within limits). Market Makers can be Banks, but they can also be Forex Firms, or institutions founded on XRP/USD the RNxrp to make money in the spread. 16% E. Is Ripple also a cryptocurrency?

USD The answer will be no, rather, it is a protocol. Trades BTC BTC/XRP Trades However, the Ripple Network does have 23% a cryptocurrency or math-based currency called XRP (sometimes pronounced “ripples”) that is native to the Ripple Network, which

20 we labeled in the beginning RNxrp. In the XRP/USD SnapSwap same way bitcoin exists on the Blockchain, XRP exists natively within the RNxrp as a H: 0.014733 L: 0.014206 -2.72% V: 4,474,848 XRP free currency. Because XRP is an . asset as opposed to a redeemable balance, it 0.0150 does not require that users trust any specific financial institution to trade or exchange 0.0148 it. You can buy and sell XRPs and you can 0.0146 also exchange it globally, and the RNxrp 0.014290 0.0144 will choose the best exchange rates in the 0.0142 network to settle. Users of the Ripple network 0.0140 are not required to use XRP as a medium of exchange or as a store of value. 09PM Feb08 03AM 06AM 09AM 12PM 03PM 06P FLIP It is important to understand that the RNxrp is currency agnostic. Users can use their F. How large is the Ripple Network? preferred currency, whether that’s USD, EUR, M and even Bitcoin. XRP is intended to fulfill two In Ripple’s Executive Summary for primary network functions – network security Financial Institutions93, a must read, the and to act as a currency bridge. XRP can fill company says: “Ripple Labs is engaged in as a neutral currency with no counterparty with dozens of regulators, central banks, risk. An institution can find advantageous to banks, payment networks, and liquidity convert their currency to and from XRP to providers globally (Americas, Europe, Asia- be able to transact with each other. Bitcoin Pacific). Public engagements include: CBW Remittance Companies do it with Bitcoin all Bank (US), Cross River Bank (US) Fidor the time; with Ripple you have the ability to Bank (Germany), and Earthport (global use XRP, BTC or any other currency. interbank payment network operating in 65 countries). Private engagements include: Three factors make XRP an ideal bridge top-20 EU and US banks, EU and US bank currency on the Ripple network: consortiums, multibillion-dollar hedge funds • It can be sent directly to any account and quantitative trading firms, top-10 global with no transfer fees remittance operators, and top-15 global • XRP has no counterparty risk. It is Telcos”. the only currency native to the Ripple You can view at any given moment, 24/7, the network and thus requires no trust trade volume in the RNxrp by clicking here: relationship with any gateway or third https://www.ripplecharts.com/. party. You can see how USD, Bitcoin, and • XRP cannot be debased – a finite transactions were at this amount exists. 100 billion XRP was moment more than 2/3 of the trades that were “minted” with the creation of the being posted at this particular time. protocol, and by definition, no more will In Ripple Charts you can also see a graph ever be created. with the Total Network Value and the 24 hr. Transaction Volume, as well as charts for the time variation of the conversion rates. In 2014 the number of Ripple Accounts duplicated, from around You can also see that in 2014 the number of Ripple Accounts doubled, from around 62,000 accounts to more than 135,000 62,000 accounts to more than 135,000 accounts and growing by about 7 to accounts and growing by about 7 to 8,000 a 8,000 a month. month.

21 PROTOCOLS AND INNOVATIONS and have it arrive as any other currency. TO WATCH You can send bitcoin and have them arrive as dollars. You can pay someone in euros, and he can receive them as litecoin. You can STELLAR transmit yen and turn them into dogecoin Stellar is a newer blockchain- or ”. For anyone in the Money based protocol entering the Transfer industry these sort of statements are market. It can be easily said that it worth listening to. is an offshoot of Ripple, and, as we mentioned earlier, it grew out of Jed McCaleb’s exit. In A. How can Stellar be a solution for MTOs? addition to Jed’s knowledge of blockchains, Stellar99 is based on the same mainframe Stripe’s early founders also had input in Stellar ideas of Bitcoin & Ripple. If you have read the by investing US 3 Million in July 201494. document, you then have a good grasp of Another group of technology and the basic ideas that Stellar shares with other investment personalities has moved to help blockchain-based systems: Stellar grow. Its board has Stripe95 co-founder Patrick Collison, Khosla VC and former Square “Gateways are simply entities that COO Keith Rabois, and its advisors are well- people trust to hold their deposits known in the silicon-valley scene: security expert Dan Kaminsky, Joi Ito, Ronaldo Lemos, and issue credits into the Stellar Linda Stone, and Combinator’s Sam Altman, network for those deposits”. Naval Ravikant, Jackson Palmer, Greg Stein, 96 and WordPress’ Matt Mullenweg . Lately, • Decentralized Network: “the Stellar Professor David Mazieres from Stanford network does not depend on any single University joined Stellar and news were entity. The idea is to have as many 97 published that he had invented (perfected?) independent servers participate in the SCP, the Stellar Consensus Protocol. Stellar network as possible, so that the Stellar’s technology might be similar to network will still run successfully even if Ripple’s, but it differs on the intentions and some servers fail.” goals that it has set for its protocol, and with • A Ledger-based approach: “the Stellar its non-profit aspect. While Ripple is building ledger records a list of all the balances its system to serve bank and large financial and transactions belonging to every institutions (from ebanks to larger traditional single account on the network. A banks, as well as central banks), Stellar wants complete copy of the global Stellar to fill the gap and be a protocol that can be ledger is hosted on each server that runs used not only with virtual currencies but also the Stellar software. Any entity can run a with fiat currencies--Stellar wants to be a Stellar server.” bridge and an enabler to convert all of the currencies between one and the other. • A network consensus: “The Stellar servers communicate and sync with In August of 2014, writers Cade Metz and each other to ensure that transactions Marcus Wohlsen wrote a WIRED article are valid and get applied successfully entitled “New Digital Currency Aims to Unite to the global ledger.” Every 2-5 seconds 98 Every Money System on Earth” , outlining all servers synch themselves and the ideas behind Stellar and raising questions authenticate the transaction and it everyone about its true potential. Let’s take becomes true and final. two quotes from the article: “…this new project aims to bring digital currencies to a much • The need for Gateways and a distributed wider audience and provide a much smoother exchange: “Gateways are simply entities way of moving all sorts of money over the that people trust to hold their deposits internet”. It is “an effort to create a worldwide and issue credits into the Stellar network network that lets anyone send any currency for those deposits. They act as a bridge 22 between different currencies and the ETHEREUM Stellar network.” The success of the Ethereum is another blockchain Stellar network will depend on the protocol that is being develop number and strength of these gateways and its used will broaden the to trade, issue credit, handle deposits use of these distributed public ledgers to a and withdrawals, and interact with the large number of uses that need agreements consumers. of parties to be excuted, like payment of • Multicurrency Transactions: “Stellar dividends, use of joint savings accounts, allows you to send any currency you corporate investments, agreements that are hold to anyone else in a different called “self-enforcing smart contracts”, smart currency through the built-in distributed in the sense that the rules for enforcement are exchange. People can receive any part of the programming and are executed. currency through a gateway they The use of Ethereum’s blockchain protocol in added.” The interconnected gateways financial services or money transfers is hard to all over the world will share exchange predict but we can envision a system where prices and the system will pick and pensions are distributed digitally to hundreds choose the best conversion (and a of recipients in a matter of seconds without number of other considerations) to complex human interactions. Let’s just leave it perform the fast and final settlement. at that. • Gateways are working on ways to make the user’s experience completely “Bridge the gap between established independent of the technology behind the system. The tools being built on top finance and cryptofinance”. of Stellar will be key to the adoption of the protocol. With Stripe, Stellar will But to explain what Ethereum is in a have access to all the merchants already more technical manner to those of you that using Stripe, which might be a plus for want a better introduction to this protocol the system. As we learn more about the I have to quote Primavera De Filippi in an Stellar network, we will be updating this article102 written in April 2014: “Ethereum is document as we analyze the system a contract validating and enforcing system further to see if it can become the based on a distributed public ledger (or protocol of choice for MTOs in the years blockchain) such as the one implemented to come. by the Bitcoin cryptocurrency. Yet, Ethereum also features an internal Turing-complete scripting language that can be used to encode EPIPHYTE advanced transaction types directly into the Epiphyte says in its blockchain. This allows for the deployment of Homepage100 exactly what self-enforcing smart contracts (such as joint it intends to be: “Bridge the savings accounts, financial exchange markets, gap between established finance and or even trust funds) as well as distributed cryptofinance - Enterprise software solutions autonomous organizations (DAOs) that for financial service providers to securely subsist independently of any moral or legal integrate with cryptofinancial networks”. In entity. These algorithmical entities are both a way Epiphyte is going head to head with autonomous and self-sufficient: they charge Ripple but not developing its own blockchain users from the services they provide so as to but building on top of Bitcoin. It is a “bitcoin- pay others for the resources they need”. based international transfer technology To pay, to transact value, to debit charges, designed for banks. Epiphyte’s solution avoids etc. Ethereum uses its own cryptocurrency, the traditional money movement avenues and Ether, which still has no value since it hasn’t instead converts currency to bitcoins, moves started trading. Ether, like all cryptocurrencies the coins, then cashes them out on the other can be exchange into Bitcoin and other 101 end in the local tender” . altcoins. 23 1 http://bit.ly/mtbitblock1 50 https://www.bitfinex.com/ 2 I created the term Blockchains, in plural, as a way to group and 51 https://www.bitstamp.net/ describe sequential, transaction-database protocols. 52 https://btc-e.com/ 3 http://bit.ly/1xXw5eV 53 https://www.kraken.com/ 4 http://bit.ly/mtbitblock2 54 https://www.huobi.com/ 5 https://www.crunchbase.com/person/brock-pierce 55 https://www.okcoin.com/ 6 http://bit.ly/1uoeLim 56 https://www.cryptsy.com/ 7 https://blockchain.info/ 57 https://vip.btcchina.com/ 8 TCP/IP (Transmission Control Protocol/Internet Protocol) is the basic communication language or protocol of the Internet 58 http://bit.ly/1wv5tv5 providing end-to-end connectivity specifying how data should be 59 https://www.coinbase.com/ packetized, addressed, transmitted, routed and received at the destination. 60 https://alphapoint.com/ 9 From a paper by Vitalik Buterin on January 23, 2014 that we will 61 http://bit.ly/1A2r058 mention again later. 62 http://blockchain.info/ 10 http://bit.ly/1NLxjif 63 https://coinbase.com/ 11 http://ethereum.org 64 https://www.circle.com/en 12 http://www.epiphyte.us/ 65 https://airbitz.co/ 13 http://bit.ly/1Glw9aO 66 http://bit.ly/1Ezl870 14 http://www.investopedia.com/terms/a/altcoin.asp 67 https://bylls.com/ 15 https://coinmarketcap.com/ 68 https://www.livingroomofsatoshi.com/ 16 https://bitspark.io/ 69 https://quantified.com.sg/ 17 https://shiftpayments.com/ 70 https://www.pademobile.com/ 18 http://www.xendit.co/ 71 http://enbitcoins.com/ 19 http://bit.ly/1y53buE 72 https://tukarcash.com/ 20 http://bit.ly/1NLwLsz 73 http://bahtcoin.com/ 21 http://bit.ly/1NLxjif 74 http://bit.ly/1rtMUMl 22 http://bit.ly/1NLwLsz 75 https://www.bitbond.com/ 23 http://bit.ly/1AOx9RO 76 https://btcjam.com/ 24 http://bit.ly/1rlHF10 77 https://www.elliptic.co/vault 25 Wikipedia:”Fiat money is currency which derives its value from government regulation or law [US Dollars, Euros, etc.]. It differs 78 https://blockchain.info/wallet from commodity money, which is based on a good, often a pre- 79 http://bitcoinfoundation.org/ cious metal such as gold or silver, which has uses other than as a medium of exchange. The term derives from the Latin fiat (“let it 80 http://bit.ly/1JcHAkh be done”, “it shall be”)” 81 http://insidebitcoins.com/ 26 http://bit.ly/1A0jtlu 82 http://www.smileexpo.ru/en/ 27 http://bit.ly/1CIIMMr 83 http://summit.virtualcurrencytoday.com/ 28 http://bit.ly/1vssqWp 84 http://texasbitcoinconference.com/ 29 http://bit.ly/1zoG4Wc 85 http://bitcoinconference.co.za/ 30 http://bit.ly/16VOnSp 86 http://labitconf.com/ 31 http://bit.ly/16VOnSp 87 http://imtconferences.com/mtbit 32 http://bit.ly/1AbO40F 88 http://sci.ph/ 33 http://bit.ly/1COZ6v6 89 http://bit.ly/1NBmxuN 34 http://ftalphaville.ft.com/tag/bitcoinmania/ 90 http://bit.ly/1CInBdJ 35 http://on.ft.com/1KG3Cvx 91 If you like drama then read the sad coming of age stories of 36 http://bit.ly/1OOCn75 Ripple’s founders: http://bit.ly/1zGsNMM 37 http://bit.ly/1zMyEkC 92 This is Ripple’s Basic Protocol Primer Brief: https://ripple.com/ files/ripple_primer.pdf 38 http://onforb.es/1D1WYgM 93 http://bit.ly/1FnmXAJ 39 http://bit.ly/1zMyFoR 94 http://bit.ly/1zQpFL3 40 http://bit.ly/1JR6Hu1 95 Stripe (https://stripe.com/) is a payment processor that is com- 41 http://bit.ly/1yCX2Gl peting against PayPal with technology and customer service and 42 http://bit.ly/1G2c5ce is the processor of choice for newer ecommerce sites. 43 http://bit.ly/1yD3Fsb 96 http://tcrn.ch/1E7gsnT 44 http://onforb.es/1InzpS9 97 http://bit.ly/1DqpnLF 45 http://bit.ly/1Ebbtn9 98 http://wrd.cm/1CeqpiJ 46 http://bit.ly/1CXtb6u 99 http://bit.ly/1CerYNU 47 http://bit.ly/1H7M5fZ 100 http://www.epiphyte.us/ 48 http://bit.ly/1wUMcIQ 101 http://bit.ly/1Glw9aO 49 http://bit.ly/1AXkjB2 102 http://bit.ly/1CY9jF9 Mohr World Consulting

MWC was created in 2001 to provide a basis for the consultancy work being given by Hugo Cuevas- Mohr to money transfer companies in North, Central and South America, the Caribbean and Europe. Mohr World Consulting advises money transfer entrepreneurs, companies, corporations, financial institutions, multilateral and government agencies on remittances & money transfers. MWC has consulted for a number of companies and institutions and has recently expanded its consultancy work to include strategic, business, marketing, legal, compliance, technology, product development and other areas with partners, associates and colleagues in different fields and regions of the world. You can check the company’s website for information: www.mohr.world

Mohr World Consulting 16135 SW 109 St, Miami, FL 33196 +1 786 2387857 [email protected] Hugo Cuevas-Mohr is President and CEO of Mohr World Consulting, a consultancy based in Miami, Florida. Hugo is a Money Transfer Expert and has been a consultant for a number of companies and financial institutions in the Money Transfer Industry in Latin America, United States and Europe. Since 2001 he began offering his consulting services. He is invited regularly as a Speaker in International Payment Conferences on Remittances, Financial Inclusion, Mobile Money, Regulation, etc. His work as a consultant lead to the development of IMTC, the International Money Transfer Conferences which he directs since 2010.

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