New Payments Networks and Virtual Currencies: Are They the Future of Payments?

October 17, 2013

Panelists: Brian Armstrong,Coinbase; Chris Larsen,Ripple Labs; Erin McCune,Glenbrook Partners

Moderator: Bill Haraf, Managing Director at Promontory Financial

Brian Armstrong

What is BitCoin?

  • BitCoin (BC) is a decentralized digital currency that no country or single entity controls. It’s based on an open protocol, similar to webmail services, which creates efficiency in payments that hasn’t existed before. There’s also a limited number of BC in circulation (scarcity).

What is Coinbase?

  • Personal Background: previously a software engineer at Airbnb working on fraud and similar issues. He became interested in BC after reading the anonymously-authored research paper showing how payments could be sent without a trusted party in the middle of the exchanging parties.
  • Key metric in Coinbase’s growth: In January 2013, CB implemented a feature to convert money into/out of BC. Since then, they’ve experienced significant growth: over $30 million converted per month, meaning at least $1 million per day.

Opinion on regulatory landscape

  • BC and BC systems are polarizing. While they promote efficiency with payments, there’s also concern about fraud, etc. He sees great potential for small businesses.
  • Re: Silk Road – He sees the shutdown ass a point of legitimacy for BC, which is ultimately good for Coinbase

Chris Larsen

What is Ripple Labs?

  • Ripple is part of the “second generation BC movement.” Ripple Labs is a team of developers focused on building an open source protocol (see above).
  • Ripple is different from BC in three ways: 1) It’s an IP payments rail; 2) It’s a new math based currency that doesn’t rely on a trusted third party, and; 3) Its currency agnostic.
  • The concept: confirmation of payment without a clearinghouse. Today we’re all connected via the Internet. But re: payments and value, there’s no “value-web.” The concept of, for example, exchanging the dollar for Yuan is still pre-internet, based on the “old rails.”
  • BC solves this double spend problem by establishing payments without a clearinghouse.  It creates a global payments rail; a new value exchange for payments. Now, with this system, we have a universal value exchange, in which any currency can be exchanged for any currency, anywhere, at any time.

Opinion on regulatory landscape

  • Because this is peer to peer it theoretically cannot be shut down. But scaring away the Wells Fargos of the world is bad for adoption.
  • The system is fundamentally transparent, which means its ultimately helpful in finding bad guys who may be involved in money laundering and the like.

Erin McCune

  • First: consider the characteristics of existing payment networks. Each has its own rules, systems, branding, etc. that consumers understand. The concept of using BC is scary to consumers – they don’t understand what it is. So there’s a long way to go re: adoption.
  • From a processing perspective, however, BC is very elegant, and its truly global.
  • Ultimately – its not mature enough, its still in its nascent phase. Still need to develop rules, work on adoption, etc.
  • Despite those issues, she believes this is the future of the payments industry, and when existing players don’t take it seriously, it just gives more time to these BC systems to become more efficient, work through issues, etc.


Q: There’s an assumption that centralization is not good. How should the Fed be regarding this regarding control and money flow?

  • A (Bill): The fed is allowing it to develop, for the time being. It’s a very small marketplace, and while they will react eventually, it’s hard to predict how. It depends on growth and adoption.

Q: BC systems have a small user base. How do you keep it from being used by those players that Bank of America and others won’t deal with (e.g. money launderers)

  • A (Brian): Whenever there is a better way to do something, it will attract EVERYBODY. Just because it’s a more efficient system doesn’t mean it’s bad. Coinbase still does KYC and similar work. Plus, the system is inherently transparent. This is ultimately good for the underserved, because they won’t incur fees as they do now. Allows small businesses to work around the world.

Q: Are there limits on payments?

  • A (Chris): This is open protocol (currency agnostic); available to anyone to use. Its no different from traditional systems except now using an IP rail.
  • A (Brian): CB provides low limits to start (e.g. 10 bitcoin, or $1500 limit per day). But these limits as raised as they build customer information up. So its up to the companies who develop these systems to determine how they want to approach limits.

Q: Do you have a merchant acquisition strategy?

  • A (Brian): We rely on social media and word of mouth. We make it easy to join. We don’t have to spend money the way the existing players to, to attract merchants/customers.

Q: How can this possibly stay “free”?

  • A (Chris): These systems are designed to help businesses make money. The main difference is that these systems are more available – previously, it was very difficult to start a new financial tech company on the old rails.

Q: What will be the impact on gold?

  • A (Chris): it will become more important. Ripple is currency agnostic. Now it’ll be easier to move gold around. This is a complimentary system, not a replacement one.

Q: If I fall victim to an online scam, how do I know if I’ll be paid back (like I do now with existing players)?

  • A (Brian): The protocol has no Reg E or anything like that built in it. But that doesn’t mean consumer protection protocol can’t be built on it. For example: there could be three levels: strict, medium, and low. At the strict level, all payments are set (no return). Medium would require parties to enter dispute resolution, and low would refund everything. It’s just important to notify the users beforehand. Branding will become more important.

Q: But what about when scams become more complex?

  • A (Erin): this is so new, and it’s so early – it will evolve and these issues will eventually be addressed.
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