Nextury Ventures Venture Fund Director Ilya Laurs
How Crypto-currencies Will Change Electronic Commerce
throne commerce, the market in them desperately needs and instantly swallows them when the right time comes. Because bank payments and credit cards as well as physical money are incompatible with the virtual economy, none of these tools meet its requirements. This is nonsense, when in the twenty-first century, to buy a button, it is necessary to fill out the form more complicated than to obtain the rights. In it you need to specify your address, phone number, credit card number, to whom it is registered, etc.
Moreover, the level of fraud, risks and mistakes is also inadequate. In e-commerce, the amount of fraud – that is, the use of someone else’s credit cards – is oversized. Uncomfortable, cumbersome, unreliable, and most importantly – a heap of theft. This is in a segment where it would seem that banks could do better.
Therefore, Internet commerce and virtual payments are simply begging: “Give us a convenient, reliable, simple tool for using.” I’m not talking about the fact that the latest achievements in the field of virtual commerce do not even require micropayments, but nanoplatges. When you buy not just a button, but a detail for the digital tailcoat of your avatar in some second universe. The cost of payment in physical money can be a third of a cent, and it’s cumbersome to run the entire credit card mechanism for it.
After talking with the guys from the gaming industry, you realize that due to the heaviness of payment instruments, up to 90% of the profit is lost. That is, they could earn ten times more money if the system was classy and convenient. This is a whole class of financial transactions: micro, nanoplatezhi, normal payments, reliable for all Internet commerce. This is a giant market.
Now they talk a lot about the Internet of things, when things themselves communicate with each other. Naturally, trade relations will arise between them: a light bulb, relatively speaking, declares itself how much energy it has spent. Perhaps it has some kind of digital balance, and wherever it is included, it pays for its own energy and burns itself off as it burns itself.
Or are you a designer, your computer requires a three-week render. He immediately gets access to the virtual machine – even at the same time he compares the workload of the main supercomputers and selects at the auction what is the second less loaded and can offer the best price. For the use of resources, he is instantly calculated by the bitcoins – all without the participation of a man.
These self-financing on the Internet of things beg for themselves. Because people in principle, it is more convenient to wave a phone or something else, so that they can write off the normal amount of money from their account, without losses when converting currencies – this is also adequately expected in the twenty-first century. Because now credit card conversion is predatory.
In the US, restaurants and shops pay a bank up to five percent for a credit card service. The user loses up to three percent when converting. In our digital age, this does not make any sense at all, it is beneficial only for banks, not for the market.
Bitcoin and the state: beguiling the leviathan
While the development of the crypto currency depends on how the state will look at the bitcoins. Now this issue is in the “gray zone”. The traditional reaction of all regulators to the gray zone: “We can punish and close, and we will not understand what and how.” And still, money is a sphere in which the presumption of innocence is not applied: either you act as permitted, or step aside is taken for an escape.
That is why one of the main parts of our work now is a kind of evangelism, work together with the State of Lithuania – the Central Bank, the Ministry of Finance, at the level of both the City Hall and the Ministry of Economy. We tell you what is the crypto currency, how it works, what potential risks or, conversely, the benefits it brings.
We are now, probably, spend more than half the time clearing, regulating and dealing with such projects with the state. It is necessary to imagine what laws in this sphere are applicable, what actions we need to take to make the business legal and transparent.
And then you can go back to specific businesses. Here is an illustration for an example: America adopted a law according to which bitcoins belong to the class of physical goods. That is, like, say, oil, they are subject to regulation as exchange commodities. Europe so far formally adheres to the point of view that this is just a foreign currency. That is, the accounting, the change in the balance should be subject to the same rules as when foreign currency is on the balance sheet. According to the laws of China, bitcoin is a digital commodity.
That is, you can buy, store, invest, and so on the crypto currency. But then the options begin: do I need a monetary license, do I need permission from the Central Bank, do I have a liquidity law, etc.
Crypto-currencies to replace banks
I hope that the crypto-currencies will simply replace the current financial system at some point. There is already nothing to reform, we need a quantum leap: the same as the transformation of gold-guaranteed currencies into economically viable ones, and physical paper into digital money. That is, such fundamental changes in the history of mankind occurred.
Now we walk with our pieces of gold and still hold on to the quantity of grams in gold, while we just have to take a deep breath, turn the cold water, feel the first turbulence, hurt get on the head because the first experiments always hurt painfully, but then get used to and live in a normal world.
But the only possible way to this is to go from the bottom. I would give, maybe five percent, that there will be one or two upstart states like Estonia who will see this as an opportunity to step into the technological future and instantly move from the pawn to the king. But with a 95% probability at some point, the use of the crypto currency will become so massive that it can not be ignored, and states and banks will submit to pressure from below.
International transactions based on bitcoin
One of the companies in which we invest and declare this, is engaged in the transfer of payments abroad. Now payment to America takes place in two days. It costs fifty dollars, and on conversion of currencies it is eaten up to five percent. This is absolutely inadequate because technologically it is a transfer of a ridiculous number of bytes, which is less than in an e-mail.
We do not live in the Stone Age, nor send messengers with a bag of gold to justify two days for transferring money. Carrying cash on a scheduled flight is now twice as fast as making an international bank payment.
The conversion of euro from Lithuania to dollars in America using bitcoins takes thirty minutes and costs one dollar for the end user. The cost of such an operation is about two cents, and the conversion of currencies is virtually non-existent.
A possible bitcoin-based business will use crypto currency as an intermediate protocol. That is, the user sends the euro to an account that determines the recipient and the essence of the payment and instantly converts the transfer into bitcoin. Then he transfers bitcoin to the US, where he changes the crypto currency to dollars, and already sends it to the end point according to the American system.
In Europe, this year the sepa-scheme – interbank European payments began to operate. Thanks to this system, the whole of Europe can be serviced from one account.
That is, from the users’ point of view it is the same local payment as any others, but in the interim this acts on the bitcoin protocol used to transport money. In this case, the crypto currency is used only for information transfer. In such services it is easy to use in parallel bitcoins, altcoins and any other virtual currency.
Because in the intermediate transport layer – is hidden. The system does not matter what is inside it, it is not at risk of fluctuations, because in half a second the rate of bitcoin will not change radically. Even if it changes, the risk, expressed in probability and multiplied by the losses, is still justified if it saves up to twenty percent of its own payment. We expect that a critical mass of businesses will immediately be recruited, which will use this mechanism, because it is economically viable, meaningful and reasonable.
There are other players in the market of international payments: TransferWise, Lithuanian TransferGo. These services are built on different models. The system that occurs most often is a mutual credit, that is, a classical clearing. The amount of payments in America, the amount of payments in Europe, the amount of payments in Europe, the difference between the amounts is usually quite small, and only it “clears”, it is aggregated in the process.
That is, one hundred debtors in America and one hundred debtors in Europe through one transfer that is ten percent of the total mass, physically sent, and through the aggregation and clearing, efficiency is achieved. This is a classical scheme of international payments.
While companies that perform transfers based on bitcoins, did not announce themselves. Most likely, I predict there will be a couple of dozen startups, and each will have a non-zero probability of becoming the dominant player.
The most difficult part is not technological, but regulatory. Therefore, for example, we do not consider the Russian market. I’ll just say at random that we most likely would have stumbled upon tough rules and restrictions if we wanted to start such a service now in Russia. That is, we spend ninety percent of efforts on legal clearing, and we open business in a new country only when we do not exactly interfere with regulatory restrictions.