Fintech Payments

Why I let bitcoin seduce me

Why I let bitcoin seduce me. Main image: Bakhtiar Zein/MoonRock, Shutterstock.com
Written by Sudhir Kesavan

This is only the beginning for cryptocurrencies, says Sudhir Kesavan, who reveals why bitcoin seduced him in the first place.

Let me start this post by admitting that I can’t claim to be a bitcoin aficionado. However, I admit I am among those who were seduced by it. It’s easy to dismiss a non-fiat currency purely for being non-fiat, or then go deeper and take the economist’s perspective that any inherently deflationary currency will fail to attain sufficient circulation, because the tendency will be to hold on to it versus spend it (in the hope that its value will increase), thereby never causing it to be used as an alternate to most fiat currencies.

I, on the other hand, believe that, failing a black swan event on the bitcoin core, there will be an equilibrium and its value will be more a reflection of its supply, usage incentives, volatility of the fiat currencies and bitcoin’s perceived value as an asset class.

Don’t kill the solution without understanding the problem it solves

In my humble opinion, it’s important to understand the problem that any innovation attempts to solve before forming an opinion on the solution. The myriad use cases that have been created around bitcoin can be very distracting. The reality is that bitcoin was created for the purpose of being a peer to peer value transfer mechanism without a centralised clearing house. In a sense, it’s anti-statist by design. Some would argue that this really is its core purpose, which is the reason why one of its biggest support groups is the global libertarianism movement.

For those who want to be off-grid, this is the single biggest innovation yet. While its use in criminal activities is well known, its exponentially increasing adoption isn’t. Of course, it still runs the risk of infant mortality (market cap being really small ~ $10bn). On a less serious note, I imagine that not just libertarians, but global spy agencies have already started using it, and Hollywood will have bitcoin wallets in its scripts by the dozen.

At its core, bitcoin was about creating a functioning internet scale economy that’s off-grid. The fact is, it succeeded. A lot has been written on the genius of combining trust-less consensus, proof of genealogy of transactions, trustable cryptographic immutability and the clever use of private key – public key pairs for authentication purposes. It is this genius innovation at the intersection of perhaps four innovations in their own right that one has to doff one’s hat for. This innovation does solve a genuine problem: you may not identify with the problem, but for those who do (its customer segment, if you will), this is a solution that has been decades in the making.

Bitcoin beyond being off-grid

Bitcoin, of course, is making a mark outside of the off-grid movement, and is now positioned as a very useful cross-border money movement tool. However, it is its use case as the digital fuel for the internet age that has got folks like me excited.

You have to repatriate your earnings home to an underdeveloped nation to realise the pain of losing 7-10% (typical exchange rate) of $1,000. In most developing nations, that’s a month’s tuition in a private school or a year in a public school. No kidding. I must admit that my initial reasons were less existential. It started with trying to get my hands on the book that Amazon says is not available in my home country, and then shows me a fee (exchange + +) of ~ $7 on a $22 purchase.

In case you think that remittances aren’t going to make bitcoin real, cross-border money movement is actually a much wider scenario. Globally, independent contractors are getting paid in bitcoin, and this isn’t just in Europe, Canada, and the US, but in Latin America and China too. The biggest use case by its sheer size is of course if government regulations allow exports and imports in exchange for bitcoins. While this may come as a surprise, it is speculated that there are manufacturers in China who are quite comfortable with this model. Admittedly, economies where the fiat currency is in doldrums are most open to exchanging value using bitcoins (eg Greece and Venezuela).

Very frequent, very small payments

While cross-border money movement (and buying books on Amazon) is a big use case of bitcoin, my favourite use cases for bitcoin are in the space of small-value payments. To illustrate, I can very well imagine that in the near future Twitter will have an option of associating a bitcoin wallet that can be charged if I decide read an article whose preview (not the click bait!) gets me interested. This for me extends to other pay-per-micro use scenarios (and APIs). If you think about it, the reality of the associated wallet is all a third party really cares about.

Non-criminals (I guess 99.95% of the populace) don’t need to worry about trusting each other. In a value exchange, what’s more important is trusting the value of the goods that are exchanged, because that’s what most transactions are really about. There are transactions where trusting the person is as important as trusting the value of the goods the person is selling or buying. Bitcoin needs to be looked at as an option for the other set. Do note that in the physical cash world, this happens all the time without a second thought.

This isn’t about avoiding the pain of revealing my credit card details at every site; that problem was solved by PayPal 20 years ago. There are enough (and more) options today.

The small-value transaction model is set to grow exponentially. The centralised clearing house model is too cumbersome and inefficient in this scenario. If one combines Internet of Things into this scenario and then looks into the near future, it will be difficult to argue that the current infrastructure is what’s needed to support it. Adding supporting infrastructure on top of existing simply makes it more expensive even if it is more “convenient”.

I understand that, currently, the bitcoin blockchain doesn’t scale, but it will be difficult to argue that the talent working on fixing this wouldn’t be able to. In fact, my point isn’t even about bitcoin alone but about the fact that the above scenarios are emerging and will increase exponentially, and that the bitcoin architecture will fuel greater innovations, including in fiat. The smaller economies of Continental Europe are embracing bitcoin-inspired architectures in surprising ways, and it’s remarkable to learn about Estonia and the bitcoin-inspired revolution there.

Extending the freemium-premium business model

I’m going out on a limb here, but coming back to small payments I believe that the freemium-premium business model is about to get extended on the back of satoshis. In the world of freemium and premium business models, I would hazard that we are entering into a world that includes ‘onetimemium’ – the convenience of paying a few satoshis for a limited one-time micro use. I guess there are other models and options, but in my head ‘onetimemium’ resonates.

As a seller, what you need is an anchor that has an associated wallet that can transfer money to you. As a provider, you will most likely end up with four customer groups and associated business model:

  • Free users – freemium (the user is the product one way or the other).
  • One-time users – Onetimemium (could very well become the long tail).
  • Customers – The ones who register and pay.
  • Clients – Those for whom you have moved towards customised services and associated fees in the business model.

Bitcoin and its impact on digital identity architecture

The other element that bitcoin has thrown open is that it has brought the concept of digital identity front and centre; my real identity, my digital identities (government ID) and all my online avatars. If you look at it, your real identity or your government-(or government license)-backed digital identity is needed to access your money. At its heart, bitcoin has challenged that. Your pseudo identity is enough for you to participate in the network.

There are gurus of this space, and I humbly learn from them, but I would hazard that while the obvious interpretation of separating real identity from payments is in its use for being off-grid, its more nuanced interpretation is in actually simplifying the payments value chain while keeping security and privacy paramount. This is something that is a must-have in the digital age we’re entering into. Very few really need to know my digital identity and fewer still need to know my real identity. Mostly, we just want to exchange value.

Bitcoin-inspired architectures enable this. Yes, interoperability and customer experience need to be cracked, but with efforts including the likes of interledger under way, I believe this has more than a reasonable chance of being solved. Remember that we’re talking about something that’s still very much in its infancy. I try not to look at bitcoin based on today, but rather as a long-term vector. There is a real problem here that needs solving, and the vector set by bitcoin has gained more than critical momentum globally.

Central bank insight

This post was really about putting down why I believe it’s only the beginning for cryptocurrencies, and not the end. The use cases for crypto continue to gain momentum. Sooner rather than later, you will have major central banks get into cryptocurrencies themselves. It’s possible that what isn’t so visible today will become a lot clearer with central bank insight. Much of the conversation today is about blockchain, which is because a new monetary system is really a central bank play, and blockchain is something that banks can grapple with. Crypto … they would rather wait for regulators and fintechs.

READ NEXT: Joi Ito is concerned about the future of bitcoin and blockchain, and we should be too

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main image: Bakhtiar Zein/MoonRock, Shutterstock.com

About the author

Sudhir Kesavan

Sudhir Kesavan heads the fintech team of vLendRight, a customer journey platform that enables banks to gain market share in auto finance. For the last 19 years, Sudhir has worked as a technology provider with banks and FIs in the US and Europe. He and his core team have worked in digital transformation for several years, focusing on innovation in banking using a methodology they call 'digital imagineering'.

Leave a Comment