How to Win in Today’s Battle for Deposits
December 1, 2023 | 1 min read
Alex Waters is a developer in New York who has been working on Bitcoin for five years. He’s currently the CEO of Coin.co, a company that gives entrepreneurs the ability to reach global markets through the use of Bitcoin.
In this interview we talk to Alex about Bitcoin basics and then dive into how Bitcoin is set to change the banking industry.
Primarily, it’s a significant event in computer science. For a long time, computer scientists and cryptographers have reached for a digital currency or a “digital gold.” It’s been written about in science fiction, and there’s been a large body of work on how to create it.
In 2009 Satoshi Nakamoto, the anonymous creator of Bitcoin, published a white paper about his research, pulling together existing concepts that could facilitate an online currency in a fair way.
The currency is profound in the way it behaves as a decentralized public ledger, which allows people to provably and fairly track assets around the globe. Nobody can manipulate the transactional ledger without everybody else realizing it, which means it’s a fair way for people to exchange things. Additionally, the rules are all consensus based, so the system is held accountable by all of the users. This feature ensures the integrity of the system and allows it to be improved upon if the improvements are in the interest of the general public. We’ve seen a number of those improvements so far, and developers continue to fasten on interesting new features to Bitcoin every couple of weeks. It’s a living code base.
By use of the public ledger people can exchange units, or credits, called Bitcoins. They’re representative of value because the ruleset dictates that they’re scarce, and there’s a fixed supply of them. This allows for international remittance — a global currency, where somebody in Australia can convert their local currency into Bitcoin, send it to their relatives in London (or in the U.S., or in China, or wherever), and then that relative can convert it back into the local fiat currency. The conversion rates are much lower than what we have traditionally seen, and there’s no counter party — no intermediary that can restrict the flow of funds or impose unreasonable costs to moving those funds. That’s remarkable from a remittance standpoint, and that’s one of the more disruptive features of the currency at this time.
Another facet that’s interesting about Bitcoin is how all transactions that occur in the network are logged in this thing called the blockchain, which is effectively a control system that allows us to see a history of all the transactions in real time. We can see them moving across the world, which is useful for auditing. But it can also be used to track the history of a certain token or a certain asset. For example, if we were to tokenize cotton, we could see how certain units of cotton could move through a local supply chain into a final product. That’s advantageous for many reasons to many different interest groups; it’s something that’s long been sought after.
So there are all these interesting facets of Bitcoin that have huge implications, but primarily it’s used as a global currency.
Various banking institutions are placing their bets and starting to take Bitcoin seriously. They want to have a stake in its growth. The blockchain, ledger technology, and digital currencies are going to be a big part of these institutional banks. Investing in some of these early Bitcoin companies gives them insight into how the industry is developing as well as access to the technology being developed. I’m sure they’re going to integrate that technology into their current infrastructure.
Banks could use the blockchain or a public or even semi-public ledger to enhance the current range of interbank settlement networks such as Swift or ACH. By implementing the blockchain banks would reduce costs and compliance risks. Also, there’s much less likelihood of human error because it’s a rule-based, protocolized technology.
There are also some new ways banks could use Bitcoin. They could tokenize a loan and then freely sell that loan on the market in a traceable way. Or say they want to provide products and services to markets that currently aren’t present. For example, say a local bank in New York wants to provide services to a community in southeast Asia. That would probably be difficult to do today, but with a digital currency the bank could potentially reach that new market without having to change that local community’s fiat currency into the bank’s local currency.
Additionally, there’s security. Bitcoin is at the cutting edge of cryptographic technology. By integrating with these new concepts, banks would be incorporating advanced security features like public-key encryption and private-key message signing. So it would improve consumer protections.
I would — especially large banks. Across the board, many of them have Bitcoin working groups, and they’re very active in investigating the potential of the technology. What I would say to banks is to take it very, very seriously. We saw what happened to the recording industry and the publishing industry, and that disruption can’t be far from the banking industry. The wise thing would be for banks to incorporate some of these new technologies into their business model. I think that’s why we have successes like iTunes, Pandora, The New York Times, and Bloomberg — because they embraced new technology rather than fighting it.
I hope that smart banks will take the same approach rather than putting their head in the sand. What I’m seeing currently is that there’s a lot of innovation and interest coming out of Europe — specifically London — but not as much here stateside. I hope that banks here will take it more seriously and allocate more funding for it.
Yeah. With Bitcoin, organizations could use an internal blockchain to track the budgets that are allocated to each department, and each department would have a certain ruleset that had to be followed in order to drawdown funds. Additionally, banks could have a set address for their accounts receivable. That means they could follow all the money that comes in, tag it from the source, and see how that money flows through their organization — all based on rulesets rather than relying on human entry (which is subject to error).
I’m talking about triple-entry accounting, where an organization could have really tight precision on how all money is coming in and how it’s being dispersed. Because of this, organizations could have better analytics on their fund flows. They could also reduce accounting costs.
There’s definitely the possibility of human error in the implementation of the rulesets, but once the rules are set, everything’s automated. I contrast this with the compliance setup of some large banks that I’ve looked at, where a lot of it is prone to human error: manual entry, optional fields, etc. There’s room for improvement, and with a technology that’s protocolized like Bitcoin, banks can enforce a ruleset and remove the human error element.
There are reasons to be optimistic: Bitcoin has reached critical mass, it has a lot of developers working on it, and a lot of investment behind. Powerful, influential people have placed their bets on Bitcoin. It’s a living, adapting codebase. Anything that’s interesting in the field is capable of being adapted and implemented into Bitcoin — and we see this currently. Bitcoin improves itself frequently.
Other digital currencies can be built upon the platform as well, which is something we will soon see happening more and more. And since people place value in a currency backed by a nation-state, I don’t see Bitcoin as a complete replacement. It’s more likely to be used as an interchanged between different fiat currencies. Additionally, I think nation-states will begin to issue their own digital currencies because of the cost savings and transparency. Within the next few years we’re going to see people from the Treasury or from the Fed push for the US dollar to have a digital equivalency. In the next 10-15 years we’ll probably see most people using digital currency in their daily life.
Not necessarily. Think of it like the Internet. A lot of interesting things were built on top of the Internet — email, SMTP protocol, websites, HTTP protocol. They were built on this idea of interconnecting computers. And I think what we’re going to see something similar in that a lot of fascinating technologies will be built on top of the Bitcoin platform. There will be a protocol for tokenizing assets, a protocol for creating fiat digital currency, and so on.
That’s a bigger vision than most people probably have of when they hear about Bitcoin.
Huge technological advancements take a while for people to buy into. Look at the loom and how factory workers rebelled against it, or the invention of the car and how people thought it was going to be used to escape the prohibition by facilitating rum running, or electricity and how Edison argued against using alternating currency. So it’s going to take a while for the public to grab on to this thing.
People are skeptical, and that’s a good thing. It keeps us from having bubbles and too much enthusiasm. But in a couple of years the narrative will change greatly — people won’t say, “oh, that just facilitates black markets.” A lot of that is just silly when you look at the statistics. I think the public will come around in the near future.
If Venmo were to leverage Bitcoin, I don’t think that their product would substantially change, but their reconciliation timeline as well as the cost of doing business would go way down. Venmo currently requires buy-in from banks in some capacity, and so they can be locked out of a jurisdiction in certain instances. Bitcoin could give them another tool in their toolkit to move money without being beholden to the potentially high demands of banking infrastructures in different regions.
I don’t think it would substantially change their user experience, but it would substantially change their infrastructure as well as their cost. It would also potentially get them into new markets.
We focus on payment processing — largely because it’s the lowest risk as far as money laundering is concerned, and money laundering is currently the biggest complaint about Bitcoin. Our primary focus right now is on helping merchants (mostly e-commerce merchants) accept Bitcoin so they can get access to the Bitcoin ecosystem without taking the exchange risks or any other risks. We convert the Bitcoin for them, and we reconcile with them in US dollars so they don’t have to deal with Bitcoin.
We’re shifting a little bit of our model to focus on consumer payments as well. We have about five products we’ve been announcing, and we will release them in the next couple of months. They focus more on peer-to-peer payments.
Yeah — Bitcoin empowers the entrepreneur by lowering the barrier of entry to global markets. Let’s say there’s an entrepreneur in Michigan who makes a really cool neon jacket, which for whatever reason no one in Michigan cares about, but it’s a hit in Japan. With Bitcoin the entrepreneur wouldn’t have to pay interchange fees. They could access the global market directly, and this access could make the difference between the business being successful and dying out.
And that’s what Coin.co does currently — we give entrepreneurs access to global markets by converting Bitcoin to US dollars. And we’ll soon do something more along the lines of Venmo, where my grandma can send me $40 over Facebook — that sort of thing.
Yeah, with Bitcoin it’s very easy to send ten cents to the creator of a YouTube video that you really like. Potentially it could be that by me click “Like” on Facebook or on a YouTube video that the content producer could receive even just one cent from me. I think people want to do that. If you gave people that option, I think people would be on board with that. It’s a way for people to give directly to content producers.
We’ll be announcing a product that does this in the coming weeks.
That’s really exciting.
Thanks. We’re excited to see it move forward.
I’ll just add that we’re looking for a strong banking partner. We want to build new and compelling products, and which we’ll be better equipped to do if we work in conjunction with a bank. We have a lot to offer — such as a large volume of ACH transactions and wires (resulting in fee income) and firsthand knowledge of the advances of Bitcoin as it develops.
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