Saturday July 2, 2016
Autumn of last year I wrote an article about consumers beginning to revolt. Interestingly, the prediction the article was constructed around is slowly playing out. Companies like Shapeshift and Poloniex sound exactly like this prediction:
…one of them is that consumers revolt, entrepreneurs intervene, before the end of 2015 there’s about a thousand to a million different Bitcoin forks, each with its ten million-ish monetary base worth about a dollar, on global average. The size of the inter-Bitcoins market, the complexity and confusion ensuing makes pretty much everything unmanageable for the “ordinary person”. Hedge funds and banks (the ones a little ahead of using Excel) that trade in this murky complexity make a killing and become the principal driver of economic growth worldwide
Although the hard fork missile crisis has yet to be fully resolved with a treaty, the block size ceiling remains at 1 megabyte, which has begun to price lower value transaction out of the network with increasing fees. These lower value transactions found their demand being filled by Ethereum, a system in which users huff toxic gas from a paper bag. Hype generated around Ethereum inflated the market cap to nominal highs of $1.5 billion – Ethereum was fueled by the consumerist mentality the mass adoption crowd believes Bitcoin needs to succeed. The war profiteers charging fees for facilitating the exchange of BTC and ETH, were poised to make significant revenue from consumers revolting.
When The DAO was properly executed, Poloniex reported a 24 hour volume of over 100,000 BTC of ETH/BTC trades. The lowest fee tier for Poloniex is 0.1%, thus Poloniex made at minimum 1,000 BTC in revenue generated by fees on ETH/BTC trades alone – approximately $900,000 worth of bitcoins using today’s prices. Shapeshift uses a different monetization strategy. Instead of charging a fee per transaction, they exchange for a 0.3% markup on what one would pay at an exchange – charging for what the consumer has come to expect.
Inciting consumers to revolt creates demand for using these exchanges. Among the many lessons learned from The DAO, it’s clear there is a lot of money to be made from popping a bubble with a heist. Of course, this bubble has been inflated with mostly consumer hype and idealism.
The dark pool of liquidity that exists in the Bitcoin world, has been growing significantly as regulation has tightened its grip on fiat-bitcoin interfaces. While consumers cause a storm on the surface, underground entrepreneurs who intervene will find their infrastructure creates much needed utility. The war on Bitcoin and cash through overzealous and misguided laws will create incredible demand for unregulated markets.
The prepaid card market exploded over the past decade. In 2014 the prepaid market hit approximately $200 billion in merchant sales, and is expected to grow into the $1 trillion range worldwide by 2022. The underbanked have flocked to prepaid cards as a banking solution. Mass adoption of this technology predictably drew the attention of fraudsters, for example Russell Simmons’ Rush Card was accused of charging excessive undocumented fees. Whenever scammers make headlines, regulation soon follows.
During the initial boom of prepaid cards in the 2010’s, two categories of products arose: the anonymous prepaid card, and the registered prepaid card. In 2011, the US began enforcing new laws that required all prepaid cards containing value of more than $1,000 to require some form of KYC (know your customer) registration. The anonymous prepaid card market unintentionally created a money laundering market, where placement was fulfilled through the purchase of anonymous prepaid cards.
Preloaded, one time use, prepaid cards are essentially seen as cash. In fact, card issuers tend to lock these cards in vaults before distributing them. Even in an attempt to abolish cash, regulators have merely created a new set of money laundering concerns.
Green Dot’s MoneyPak was a good friend to Bitcoin in the early days of OTC exchange. In fact some of my first Bitcoin trades were done by exchanging MoneyPak numbers. Before the onslaught of regulation on prepaid cards, a MoneyPak could essentially be liquidated for cash without presenting any identification. It allowed anyone to purchase or “load” an anonymous prepaid card, as MoneyPak didn’t require any identification to use their services. In the US, the postal service has these neat money orders endorsed by the Federal Reserve, which can be purchased via cash or VISA/Mastercard, which includes anonymous prepaid cards. These money orders can be made out to “Cash”, just like personal checks, allowing any check cashing bodega to turn the money order into cash, without the need of an ID from the payee.
This launders the Bitcoin into clean cash – it is placed into MoneyPak cards, layered in multiple postal money orders, and finally integrated as either clean cash or alternatively can be deposited into a bank account, and subsequently filed as income for taxes without much issue.
In 2012, Green Dot had to terminate its agreement with TSYS, and began building its own processing platform. Although this bought Green Dot some extra time allowing them to continue to offer anonymous products, the money laundering potential was too great. Today, the use of a MoneyPak requires the user to disclose their social security number.
Hopefully these challenges do not prevent the anonymous entrepreneur from being industrious. Consumers rioting against an obfuscated enemy creates a large shadow under which peers can productively operate without interruption. Open Bazaar and BitSquare provide a strong case for WoT-enabled transactions becoming more easily adopted. Enterprising entrepreneurs will find an ever increasing incentive to act as producers, as investment capital is more responsibly allocated. The MoneyPak of the past may be dead, but the spirit of the anonymous prepaid card lives on. Anonymous prepaid cards can still be purchased with cash from various stores without ID, and the technology to program a magnetic stripe with specific card information has become mainstream.
The incentives in the Bitcoin market to create and produce useful goods and services seems to be increasing. Undiscovered trade routes resulting from this new market have the potential to bypass misplaced and misinformed consumer demand, so it can find its way to fulfill productive demand from educated consumers. Regulators will likely be too busy calming down surface-level consumer riots to chase down a decentralized network of invisible entrepreneurs and consumers. While the vocal and unacceptably demanding consumers inflate bubbles, the growing decentralized markets will present unprecedented opportunity that can be exercised without much interference.