Proposal for a Bitcoin Banking system

[ploum]

Hello,

I'm not an economist. I'm not a politician. I'm an usability engineer. What I care about is to make technology easy to use by everybody.

In that aspect, Bitcoin fails in nearly every possible way.
- It is impossible to grasp without spending hours on it.
- It is very hard to use to pay or receive payments.
- It is very hard to make it secure to avoid having your bitcoins stolen.
- It is hard to understand how to buy bitcoin and even harder to ensure you buy at a good rate
- It is also risky to accept it as a payment as you don't know what value it will have in the future.
- Bitcoin transaction requires complex escrow mechanisms (which are handled by VISA or Paypal transparently, most people don't even know what an escrow is)
- It is currently almost impossible to accept Bitcoins in a physical shop (to much hassle)

I had ideas for all of those concerns and there was nothing impossible to solve.

Then, I sat down, and decided to write my ideas, to imagine a solution for those problems. Then I realized that all the ideas were merging perfectly in only one concept: Bitcoin Banks. Then, I imagined this Bitcoin bank and realized that it would be a completely ground breaking technology. It would really put the whole banking/e-payment system in danger.

Well, I believe that ideas are free so I want to share this Beta version of the paper with you:
http://ploum.net/public/bitcoin/bitcoin_banking.pdf
Please accept apologies for the bad English. I'm willing to improve my writing. send me corrections and criticisms.

I'm now looking for investors to build that Bitcoin bank of the future. Unfortunately, this is not a 10,000$ investment. It needs to be big and a lot of work is needed. But I really believe that this is an unavoidable breakthrough we will see in the next 15 years.

And if you find that interesting, a few millies for the work are appreciated:
15SCCTDK9xcZyKFWXsPRXYS9s1m3Mikcxs


UPDATE: if you want to share the link, please use this one : http://ploum.net/post/bitcoin-banking

[wujh]

A venture capitalist will ask you two questions:

Who are you?
What's YOUR commitment?

[ploum]

A venture capitalist will ask you two questions:

Who are you?
What's YOUR commitment?

And I will answer him before asking him exactly the same question 

Unlike many people out there, I'm not doing secret plans, promising a lot. All the ideas are public, in this paper. And I'm willing to take my part in making this idea happen. If someone find the idea interesting enough to consider an investment, he might approach me.  I'm not saying "give me one million, I will make a startup, you will receive two in 2 years". I'm looking for real partnership, real trust and concommitment.

If I don't get it, well, at least the ideas is public and someone might jump in.

[dennis_sweden]

The Bitcoin bank you are proposing would has valid and useable functions. Setting aside technical problems and trust issues, the main problem is legality. Business owners would not accept payment in Bitcoins if it were outside the law. This is also the biggest problem for Bitcoin to become more widely used in society. Only a very limited amount of people would be interested in switching their VISA/Mastercard etc. for Bitcoin payment if it was not 100% above water. Until your proposal works within the remits of the law, I do not think it will be a viable business. However, if it can comply with the law, I have no doubt that investors would be interested, as the market potential is large.

[ploum]

You are right. I purposedly ignored any legal implication.

But I believe that, for a merchant, accepting payment from a Bitcoin bank would not be different than accepting Paypal. You have an trusted intermediary that tell you "ok, I've received the money, you can deliver". For the merchant, the Bitcoin Bank would not be different at all.

Also, don't forget that this is distributed. If there's at least one country where such a bitcoin bank could exist, it is sufficient.

[tomcollins]

I only skimmed through, but two BIG things missing:

1)  How will you make money?
2)  How will you follow regulations of wherever you set up shop and whoever you do business with?

[markm]

Even just calling it a bank can be a problem.

It sounds to me though like a payment processor, basically the type of payment processor I have been asking for all along: one that gives the merchant the type of currency the merchant wants, in the quantity the merchant wants, for a good or service without complicating the merchant's life/business with details about what deal the payment processor made with the customer (other than not making such horrible deals with the merchant's customers that customers are driven away, so hopefully no "if you want to pay using body parts that will cost you an arm and a leg" or even "if you want to pay using your local fiat currency that will cost you a heck of a lot higher exchange fee than you would get almost anywhere else you might turn to to change your local fiat into whatever weird stuff the merchant is actually asking for").

-MarkM-

[ploum]

I only skimmed through, but two BIG things missing:

1)  How will you make money?

There are plenty of space where money could be done. The easiest one is a fee on any conversion. Let's imagine that the merchant wants 10€, you are able to provide that for 0,76btc but you ask 0,77 or 0,78btc.

This would be transparently included in the ticker sent by the bank to the merchant.

There is also opportunities to make paying services, like guarantee on escrow.

2)  How will you follow regulations of wherever you set up shop and whoever you do business with?

That's a question for a lawyer.  But I don't see any major difference with Paypal. Basically, it's a decentralized Paypal system, nothing more. How are merchants using Paypal handling that? I believe (I may be wrong) that they only have to care about that when the withdraw money from Paypal to their bank account.

If it is indeed the case, it would be exactly the same here.

Anyway, I don't really care about that at this stage because it is currently still a legal problem. Asking about laws at this stage is just like asking Bittorrent creator's about how they would fight piracy at a stage when nothing of their protocol is implemented.

[ploum]

Even just calling it a bank can be a problem.

That's just a name. I don't really care if it called a Zooblabla sytem.

[mouse]

I've been reading through your paper, and I think you should have a close look at this project:
https://github.com/FellowTraveler/Open-Transactions/wiki

and listen to these 2 podcasts
http://agoristradio.com/?p=234
http://agoristradio.com/?p=246

btw, I agree usability and security are No.1 & 2 issues atm.

[tomcollins]

I only skimmed through, but two BIG things missing:

1)  How will you make money?

There are plenty of space where money could be done. The easiest one is a fee on any conversion. Let's imagine that the merchant wants 10€, you are able to provide that for 0,76btc but you ask 0,77 or 0,78btc.

This would be transparently included in the ticker sent by the bank to the merchant.

There is also opportunities to make paying services, like guarantee on escrow.

This sounds a lot less like a bank and more like a payment processing site.

2)  How will you follow regulations of wherever you set up shop and whoever you do business with?

That's a question for a lawyer.  But I don't see any major difference with Paypal. Basically, it's a decentralized Paypal system, nothing more. How are merchants using Paypal handling that? I believe (I may be wrong) that they only have to care about that when the withdraw money from Paypal to their bank account.

If it is indeed the case, it would be exactly the same here.

Anyway, I don't really care about that at this stage because it is currently still a legal problem. Asking about laws at this stage is just like asking Bittorrent creator's about how they would fight piracy at a stage when nothing of their protocol is implemented.

It's a big question.  PayPal has to follow a ton of regulations.  It's expensive to do this.

I looked into almost the exact type of business and it turned out to be not even close to profitable compared to the work needed to get up and running.  The model is flawed because it's only appealing to people who won't accept many Bitcoins as payment (meaning you make very little commissions), and that if someone wants to actually accept Bitcoins it's quite easy for them to do this.  There is such a limited market of people buying things with Bitcoins by choice over fiat currency (only when it's essential to use Bitcoins), it's a losing business proposition.  But it's a cool idea, and maybe 5-10 years from now it could be profitable, but it's so early now it's like trying to design a spaceship when no one has ever sailed the Atlantic.

[ploum]

btw, I agree usability and security are No.1 & 2 issues atm.

And security is itself a problem of usability. How to build secure system that people can use and where they cannot break the security themselves?

[dennis_sweden]

I only skimmed through, but two BIG things missing:

2)  How will you follow regulations of wherever you set up shop and whoever you do business with?

That's a question for a lawyer.  But I don't see any major difference with Paypal. Basically, it's a decentralized Paypal system, nothing more. How are merchants using Paypal handling that? I believe (I may be wrong) that they only have to care about that when the withdraw money from Paypal to their bank account.

If it is indeed the case, it would be exactly the same here.

Anyway, I don't really care about that at this stage because it is currently still a legal problem. Asking about laws at this stage is just like asking Bittorrent creator's about how they would fight piracy at a stage when nothing of their protocol is implemented.

Actually, I sent an e-mail today to the Swedish "Financial Institute" (rough translation) asking which licenses are required to open an exchange within the remits of the law. Any answer that I recieve will very likely be of help when applying it to other services. The problem with a "paypal" service (or any service as I see it) is that it does not fit under any clear definition. I am absolutely positive it will be viewed as an electronic money, and that US regulations have provisions that describe and/or relate to the functions and mechanisms of Bitcoin. The largest hurlde is likely to be the fact that no-one at all "issues" Bitcoins, or that all "miners" issue Bitcoins. The issuer is subject to the most stringent regulations, so of course it is not possible to comply with such regulations if every "miner" must comply. However, there may be some way to define an "issuance" that could be in accordance with the law. Maybe if the "paypal" service (having it perform services that subject it to bank regualtions would be very unnecessary - capital requirements/all kinds of regulations) receives "bitcoins" but actually exchanges it into some other "money" which it issues and transfers that to businesses - just some wild speculation without aforethought as to a possible way around the "issuer" issue.

[abednego]

I can tell you have put a great deal of thought into this.  You ask questions of the market, provide answers, and have technical solutions to some challenges you have identified.  What you lack when it comes to seeking investors and recruiting talent, is an actual business plan detailing operations and most importantly revenue stream. 

From your detailed technical description of an actual protocol for solving this problem I can tell you might be onto something.  However, you need a few more pieces even now to bring it to fruition.  I'll PM you.

-Wes

[dennis_sweden]

I can tell you have put a great deal of thought into this.  You ask questions of the market, provide answers, and have technical solutions to some challenges you have identified.  What you lack when it comes to seeking investors and recruiting talent, is an actual business plan detailing operations and most importantly revenue stream. 

From your detailed technical description of an actual protocol for solving this problem I can tell you might be onto something.  However, you need a few more pieces even now to bring it to fruition.  I'll PM you.

-Wes

Well, actually there are a number of other things I am lacking: I have no programming experience whatsoever, my comprehension of security is updating AVG and not opening any funny mail files. However, the op of this thread has opened my mind to an alternative to an exchange, and some kind of paypal service may be simpler to manage in compliance with the law. Anyway, I am looking forward to receiving information from you.

Cheers!

[ploum]

Posted it on my blog, if you are willing to share the link: http://ploum.net/post/bitcoin-banking

[phillipsjk]

I have not looked into it too deeply, but I think it would be useful to convince local credit unions to hold and exchange Bitcoin. With a Credit Union, you buy shares of the organization and get to participate in board meetings. I don't think it would be possible to lend out bitcoins though.

Keep in mind that most existing banks will hold a Bitcoin savings wallet for you. All you do is tell them you want a small (1.5x5x24 inch) safety-deposit box. You can then deposit bitbills, encrypted wallets, whatever non-hazardous things you can fit in the box.
 

[dennis_sweden]

Having looked at the Directive again, I do not know what qualifies as "funds"; could Btc be funds which the issuer receives and serves as the basis of the stored monetary value? I seriously doubt that Btc can qualify as "funds", however I sent an e-mail to the legal department of EU asking for the definition/scope of "funds".

2. "electronic money" means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer;

If it does qualify, there would be no unsurmountable legal hinderance because the funds could always be redeemable.

Services PLC (the name of the money issuer):

Issues 1000 EuroBit (Eurobit being the name of the electronic money)
A customer purchases 1000 EuroBit for 1000 Btc

At any point of time a customer can redeem Btc for EuroBit, and since the money is issued/redeemed at par value, the risk/opportunity of devaluation/appreciation rests with the customer - the same as if actual Btc were held.

A "slight" problem is that the Directive stipulates that any electronic money issuer must have 350.000 Euro of initial capital, about half a million USD.

[Nick]

I can't contribute anything to this topic, but I like the idea and the paper. Tip sent.