A proposed method to facilitate p2p trading between fiat and cryptocurrencies

[nii236]

EDIT: Crossposted Reddit thread located here: http://www.reddit.com/r/Bitcoin/comments/1ex7er/a_proposed_method_to_facilitate_p2p_trading/

Hi all,

I've been thinking for awhile for a good method to enable P2P exchanges. The recent thread regarding Bitmessage (BM) and OpenTransactions (OT) left me swimming in my thoughts for the past couple of days.

One of the main issues with getting Bitcoins is moving fiat money in and out of the system. Wiring money around or doing a bank deposit has been the best method so far with large quantities to MtGox or similar. Smaller quantities are taken are of with the Localbitcoins OTC system. My proposal will allow a global P2P exchange by all participants by first converting their fiat to digital fiat. The issues of this will be covered and a solution proposed afterwards.

After reading about OT I think I understand the general gist of it. My proposal is an extension of the coloured coin system I first read about here (http://www.reddit.com/r/Bitcoin/comments/1clrk3/whats_coming_colored_coins_could_allow_p2p/). The coloured coins will be used to convert fiat to the digital equivalent of that fiat, pegged to that fiat's value. The difference with my concept is having there being only one type of digital fiat for each country's currency, such as dUSD or dAUD, as opposed to per company as described in that post (Mt Gox Dollars, Silk Road Pounds).

The problem with issuing from USD to, say, dUSD is that the issuer of the currency can flood the market with a supply of dUSD if supply is not controlled. So the issuer can just generate his own dUSD and go spend it in the global OT economy. This is not desirable and removes the value of dUSD. To counter this, I propose the value of the fiat be stored in Bitcoin and locked away until the dUSD is returned to the system. The OT servers will operate as a sort of 'bank' but without the crazy fractional spending that banks do today. People can deposit Bitcoin and receive the equivalent dUSD in return, either for trading, exchange or whatever. If desired, the dUSD can be redeemed at the OT servers for the equivalent Bitcoin.

I will attempt to explain this from points of view of different parties in a world where my concept has taken hold and is available globally.

System

The following currencies are available in the OT global economy:

    - Cryptocurrencies (Bitcoin, Litecoin, Altcoins)
    - Digital Fiat (dUSD, dAUD, dEUR, etc) - There is a digital version of the fiat of every single currency in the world. These are pegged to the value to their real life counterparts, and are minted then supplied to the global OT economy only when the equivalent amount of bitcoins is deposited in.

Summary:

    - dUSD is pegged to the USD 1:1
    - Fresh dUSD is issued by depositing Bitcoins into the OT system
    - These Bitcoins can be released proportional to whomever returns the dUSD to the OT 'bank'
    - The dUSD can be used to trade with other cryptocurrencies or digital fiats

Assumptions:

    - 1BTC = 100USD
    - 1USD = 1dUSD
    - All of the digital fiat is cryptographically controlled in a similar manner to Bitcoin (I don't know if this is possible, I hope so!)

Local exchanger

Alice wants to become a local exchanger of cryptocurrency. She has offered Bitcoins for quite some time but the demand is not high as face to face meetups aren't suitable for geeks, or the value of Bitcoin is too unstable. She owns 10BTC. Instead of sitting around waiting for someone to trade BTC with she decides to send 10BTC into the OT system and as a result the OT system issues 1000dUSD back. She can not receive any more dUSD than this until she puts in more BTC. Alice now advertises that she sells dUSD! Alice finds she gets a lot more interested parties because the value of the dUSD is obvious and not subject to speculation.

Interested trader

Bob wants BTC, but is not comfortable with the crazy rise and fall of Bitcoin. He does, however, know that 1 dUSD is always equal to 1USD so is happy to transfer a large amount of cash for that. He finds Alice through the crazy magical OT system and then he wires Alice 1001USD for 1000dUSD. He has now suddenly given his fiat money access to the entire global OT economy! He can use this to convert money to Bitcoins when the price is more ideal, trade with other altcoins or perhaps he can hang on to it until he goes on a holiday to Australia where he can use the OT system to convert to dAUD before he departs America, or perhaps the OT system will find someone willing to convert dUSD for real AUD.

In a foreign land far far away

Chen is travelling to America soon and needs USD. He only has dRMB. Using the OT system a triangular transaction is setup (Bob goes to China and needs dRMB, Chen is going America and needs dUSD, Bob is going to Australia and needs dAUD). This will allow everyone to exchange local currencies quickly and easily without any fees.

Meanwhile since Alice is working in Bitcoin she can just deposit the Bitcoin into the OT system and convert to the digital fiat equivalent of any country she wants to visit.

Why is this system good?

Because the amount of value of the issued dUSD is equal to the amount of Bitcoins deposited into the OT servers and locked away, there is no value being created out of thin air. This controls the supply of dUSD which is important. The OT servers become a bank which won't play with your money and lose it. Nor will it demand exorbitant fees from you. This also means that dUSD holds true value as opposed to just representing an IOU. With IOUs, the issuer can refuse to accept your dUSD to USD. If this happens, the holder of dUSD can just send it into the OT servers and convert the dUSD back to the original Bitcoin that was used to mint the dUSD! Or they can do any of the options I outlined above.

Also having a 1:1 value of dUSD to USD is clear, simple and leaves no room for speculation or concern. Just buy it, bam, you hold the same value in your hands and it won't become valueless tomorrow.

Also while the world slowly plays catchup and adopts Bitcoin, this system will allow you to go to any country and convert your digital fiat into that country's fiat. Enjoy your holiday! While the world still uses fiat, using a digital version of that exact same fiat just makes things easier.

The proposed system prevents a central point of failure. OT servers can be everywhere, linked with other locales with Bitmessage, and all currencies are supported, which can all be traded together. It becomes a true P2P trading/exchange system.

Expanding this system also provides a great method of remittance, which is something I'm interested in. For instance I might be in Australia and want to send money to friends in Ghana. If the proposed system is up and running then I can put BTC into the OT system and receive freshly minted dGHS. I can send these to Ghana easily to my friends wallets. Hopefully the local economy there is happily accepting dGHS in my vision.

Wouldn't people just buy BTC directly?

Yes and no. I know I don't want to put so much money into a wildly fluctuating commodity just yet. Bitcoin, however, works well as a reserve currency which is why its used to allow issuance of a specific amount of equivalent digital fiat to whoever deposits in.

This proposed system is more of a intermediate measure between today's economy and a full global bitcoin-only economy. Its important because people like to think in their own respective currencies. This system has digital fiat types pegged to the value of every single fiat in the world. This system allows people to transform their existing money into a digital form to be used globally easily.

What happens if the issuer no longer wants to redeem the dUSD? What if too many people want to redeem their dUSD into USD and there isn't enough money between all of the exchangers?

By having a large number of exchangers in the country, hopefully this will be prevented. Alternatively I've thought of a couple of other solutions.

The people with the dUSD can convert their dUSD to Bitcoin in the OT system. This can be done by standard trading, or perhaps the Bitcoin that was locked away when it was deposited and dUSD can be released by returning dUSD to the system. For instance, Bob comes to Alice demanding to convert 500dUSD to 500USD, but Alice is now homeless and is dirt poor. Bob can either:

- Find another exchanger in his area
- Since it is a global economy, he will be able to trade his dUSD for Bitcoin or Litecoin or perhaps another digital fiat.
- Bob can become an exchanger on his own. He needs to find one of his friends willing to convert their USD to dUSD and then they can trade.
- The Bitcoin that was locked away in the beginning to allow issuance of the dUSD can be released by returning the dUSD to the OT servers. So Bob returns 500dUSD to the system, and in return he receives 5BTC.

Point 4 is cool because its like having the OT servers act like a bank, issuing currency. But the cooler thing is that fractional reserve banking is not possible here, and the value that was deposited into the OT 'bank' always remains there waiting to be redeemed.

Anyway I'm still thinking about this concept, I was wondering what were your thoughts? Am I onto something here or is there no point creating digital fiat currencies with controlled supply? I feel that this idea has value because as soon as the fiat is converted to digital fiat (that has provable equivalent value to the real fiat through use of Bitcoin deposits) the entire global economy is available instantly and without fees.

Ideally everyone would just work in Bitcoin but we know that is not the case. Fluctuating prices and price discovery is still working. Bitcoin can be the 'gold' and the value of the dUSD and other digital fiats can be based on this 'gold'. While Bitcoin is busy fluctuating, pegging digital fiat values to real fiat will really get the global economy ball rolling.

Thoughts?

TL;DR - Make fiat currency become digital, whose value is backed by Bitcoin

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[stretchwynand]

I like it a lot. 

[epetroel]

How would this work with a changing bitcoin price?

For example, lets say that on day one bitcoin is worth $100.  People deposit a total of 100 BTC causing the issuance of $10,000 dUSD.  So at this point the OT system has:

100 BTC in reserves
10,000 dUSD outstanding

Now on day two, the market price of bitcoin drops to $90.  We still have 100 BTC on deposit and 10,000 dUSD outstanding, but there is no longer a 1:1 relationship between dUSD and USD. 

If all the users decided that they now wanted to "cash out" and send their dUSD back to the OT in exchange for BTC, the OT would not have enough BTC to cover (10,000 dUSD should buy 111.11 BTC, but we only have 100 BTC available)

[nii236]

That's a good point. This same question was posted in the crossposted thread over at Reddit located here (http://www.reddit.com/r/Bitcoin/comments/1ex7er/a_proposed_method_to_facilitate_p2p_trading/).

Now I don't claim to have all the answers, but this is what I wrote in response.

Well the owner of the dUSD has two options:

    Trade the dUSD on the market with BTC owners at the going rate.
    Redeem the dUSD with the original BTC deposit. The amount returned will be proportional to the number of dUSD owned independent of the current exchange rate.

This gives two options, and the owner of the dUSD can choose what benefits him most.

I suppose the contract of converting the currencies should be clear that it will be proportional. So if the market price of BTC was $90, people can redeem their dUSD for 9/100 BTC instead of 10/100 BTC.

However the dUSD people would be silly to do that. If I was in that position (cheap BTC in the P2P exchange) I wouldn't be redeeming my USD anyway. I would be buying BTC on the global marketplace.

Another idea would be to have all of the currency exchangers in that particular currency to pool their deposits automatically. So with 1000 exchangers in America, all depositing 10BTC each there would be 10 000BTC in the pool and 1 000 000dUSD circulating around. There should be plenty of BTC in the pool or globally to cater to a high volume of people trying to redeem their dUSD.

If they're well and truly stuck (shouldn't happen). The dUSD could alternatively be sold for 1USD each to anyone else, or converted to another currency.

And besides, we all know the price of BTC will be going up anyway right

[neurobox]

Fascinating, big, scary, dangerous idea. It just might work.

[Kazimir]

I still can't get my head around one particular thing. Maybe it's a weak spot, or maybe (hopefully) I'm just not seeing it. Can you please explain:

He finds Alice through the crazy magical OT system and then he wires Alice 1001USD for 1000dUSD. He has now suddenly given his fiat money access to the entire global OT economy!

Except he needs to trust that Alice will acknowledge receiving his 1001 USD. Or Alice has to trust that Bob will actually wire the 1001 USD that he promises to send.

What prevents Alice from running away with Bob's 1001 USD, or claiming she never received it? (thus refusing to send him the 1000 dUSD)

Or vice versa, what prevents Bob from saying he wired his 1001 USD to Alice (thus claiming she should send him the 1000 dUSD), whereas he actually never did?

"The system" has no way of verifying whether a wire transaction between bank accounts actually took place or not.

[townf]

I still can't get my head around one particular thing. Maybe it's a weak spot, or maybe (hopefully) I'm just not seeing it. Can you please explain:

He finds Alice through the crazy magical OT system and then he wires Alice 1001USD for 1000dUSD. He has now suddenly given his fiat money access to the entire global OT economy!

Except he needs to trust that Alice will acknowledge receiving his 1001 USD. Or Alice has to trust that Bob will actually wire the 1001 USD that he promises to send.

What prevents Alice from running away with Bob's 1001 USD, or claiming she never received it? (thus refusing to send him the 1000 dUSD)

Or vice versa, what prevents Bob from saying he wired his 1001 USD to Alice (thus claiming she should send him the 1000 dUSD), whereas he actually never did?

"The system" has no way of verifying whether a wire transaction between bank accounts actually took place or not.

Escrow(?) I'm half asking

[nii236]

Yeah maybe some sort of 2 party escrow like BIP38? Or adding the third party in for more traditional escrow? As soon as you have electronic forms of funds transfer you have problems verifying because of how everything is setup. The system I've proposed here makes OTC trading a lot easier because its more about converting to digital fiat 1:1 as opposed to bartering goods, services and currencies at a BTC market price which chops and changes all the time. So here we're converting to digital fiat as opposed to exchanging money. Since that's simplified its easier to do the OTC work, and that will be left up to the discretion of the local exchanger. Perhaps Alice can advertise that she only accepts irreversible wire, SEPA, ACH, BPAY, or cash in person.

[franky1]

escrow is exactly what bitstamp/mtgox/etc are.

if some bank account is going to receive more then $1000 a day from a multitude of people, without a wire transfer licence. then the banks will investigate it. if the story of "its personal use" is given. the taxman will nibble at each transaction.. plus by having an escrow/third party used as a trusted bank. you have now just demolished the whole idea of p2p transactions.

the only way it would work is having a bank that has API tools to inform of payment transactions. and communications with bank managers that it will only deal with small amounts under $1000 thus avoiding the identification requirements. but even then the OP's project may end up requiring users to register their ID when signing up to the project.

after all FIAT is involved so you cant make up your own rules or pretend the government rules dont apply.

[traderman]

This system will work if you use services like webmoney/paypal/liberty reserve etc... Then it will work very well!!
And if people are worried about being scammed, just brake the transaction into several pieces and do 1:1 ratio of sending to receiving.
So if Bob wants to to exchange 10usd with Alice, once the transaction is initiated the first portion say 3 is sent, then Alice has to send 3 dollars back to Bob for the next sum to be sent and unless all the amounts are sent back and forth then Alice can't get anything (so Alice can't have access to any money until all the transfers are made and confirmed by both parties). Otherwise if Alice does not reply in timely manner the whole transaction is blocked and refunded to the sender. So the receiving party can not just take part of the sum and run.

So a protocol where the party that send money first can cancel the whole transaction if there is a part missing.

[luv2drnkbr]

dUSD already exists, it's called Liberty Reserve.  it's centralized, but for the most part it works, and it is a good test example of your system.  certainly, it works, but you still have the problem of converting USD into dUSD.  if you can find a way to turn cash into dUSD, that's the first hurdle.  the next is paypal and credit cards, since you run into the inevitable "one is reversible, one is not" problem.  IMO the only way to solve that is with centralization, i.e. trust in a specific entity, or a distributed web of trust like #bitcoin-otc's WOT.  but if you can solve the paypal or credit card/reversible  --> digital dUSD/irreversable problem, no matter the form, you'll be a bitcoin hero.

[luv2drnkbr]

dUSD already exists, it's called Liberty Reserve

Apparently I spoke about 5 minutes too soon.

[waxwing]

Yes, this is a major problem. As soon as you create dUSD, you are directly violating the law. Regulators are still not sure what to do about bitcoin, as it lives in a grey area. But creating digital dollars is in direct contravention of the laws about minting currency.

By far the most important is how to transfer fiat into the P2P system. Everything else will fall into place once this is solved.


I have been discussing it here:
http://www.reddit.com/r/Bitcoin/comments/1doeih/idea_for_solving_the_exchange_problem_just_add/

here:
https://bitcointalk.org/index.php?topic=210903.msg2210078#msg2210078

and with dansmith, the use of SSL to verify fiat payment here:
https://bitcointalk.org/index.php?topic=173220.msg2266271#msg2266271

Wire transfer, I think, is key, because it has been designed to be irreversible (after a certain time) because it involves deposit into current/checking accounts, which are good-as-cash by design.

[neurobox]

As interesting as all these ideas are, the dUSD "counterfeit" issue is pretty unavoidable.

Really all you need is a big-name, trusted vendor to distribute and sell bitcoin cards in stores, much the same way as you would buy Vanilla MasterCard or any gift card or calling card. Scratch off to see private key and/or qrcode, and you can claim it with almost any old wallet. Adding an intermediate step would allow said company to perform the exchange at the time of redemption, selling the cards based on USD value alone. There are really a hundred ways to do this. EDIT: As an added bonus, gov gets their sales taxes, makes them happier.

[usscfounder]

I could be wrong, but isn't mintchip pegged to the Canadian dollar?

If you can convert mintchip back to usd without having to register as a "money transmitter" then that would solve your liquidity problems on a p2p exchange (or any exchange for that matter)

[foggyb]

I could be wrong, but isn't mintchip pegged to the Canadian dollar?

If you can convert mintchip back to usd without having to register as a "money transmitter" then that would solve your liquidity problems on a p2p exchange (or any exchange for that matter)

Of course it is.

[usscfounder]

So is there a way to use mintchip as an avenue to solve some of these problems?  Don't get me wrong; I do not like mintchip and was against it from the start but if it can be used as a loophole to do fiat conversions then I am all for it.

[usscfounder]

http://blogs.wsj.com/canadarealtime/2013/04/19/bitcoin-outshines-canadas-stalled-mintchip/

I guess not.

[CasinoBit]

Any form of trading based on existing non physical fiat (e.g. computer debt) is unstable. The only solution seems to be to create an efficient person-to-person transfer device and then guerrilla warfare that fiat system.

[waxwing]

Any form of trading based on existing non physical fiat (e.g. computer debt) is unstable. The only solution seems to be to create an efficient person-to-person transfer device and then guerrilla warfare that fiat system.

Your assertion that the "guerrilla warfare" must be based on physical fiat is based on what?

If you read my post a few posts up and follow the links, I hope you can see that leveraging the power of P2P software and using it *specifically* to create a fiat to crypto transfer using wire transfer is likely to be much more powerful than in person exchanges.

What is constantly happening on this forum is people saying "I've solved it!" then describing a purely crypto currency solution for real time decentralized exchange. Great (if they can actually do it), it's a fascinating and worthwhile project. But what happens next is always "this does not address the fiat transfer problem". Because most of us understand that it's not only a matter of convenience, we need decentralised transfer of fiat into crypto to stop the banks shutting Bitcoin down.

By the way I don't deny that in person physical exchanges addresses this; I just think it's worth finding a better way. The average man on the street is never going to feel very comfortable with it, for obvious reasons.