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Musings on Bitcoin vs iCoins

March 7th, 2014

I have been interested in the movement of money for most of my professional life, and initiated a number of businesses to ease payments in the digital world from Earthport – LSE:EPO (CTO/Founder) through to iCoins more recently.  The quest is always the same – how to move money between interested parties – whether from individual to individual or from customer to merchant – quickly, seamlessly and robustly.  By the latter I mean that transactions must settle and risk to all parties should be minimised.

This against a background of credit cards being “ruling the roost” with all their inherent flaws, unsuitability for online transactions and high propensity for fraud.  Clearly there has to be a better way.

The currency of the internetiCoins took the approach that the interfaces to the physical world could be independent of one another, and that stored value should always be underpinned by value in the same currency in any one of many treasuries (financial institutions). To a large degree this mimics the real world.  We further saw that transactions should/could be anonymous at the time of transacting, but that sufficient audit trail should be provided to satisfy authorities concerns over money laundering and the use of the system to perpetuate crime.

The system was well engineered.  It mimiced to a large degree the real world in that it left the responsibility for looking after value and dealing with end users in the hands of the existing players, but it extended the field to include not just financial institutions, but any party who acts as a source or destination for customer funds. So it was possible to send funds instantly from (say) your Skrill wallet to (say) your wallet on Neteller. Or from Pokerstars directly to Ladbrokes to facilitate that urgent bet. Contractual arrangements were put in place between all parties in a way that could evolve and grow without the system becoming unmanaged. In a way this “feature” was an achilles heel as well.

Unfortunately we ran out of funds to commercialise iCoins.  So while the systems are all completed and were deployed in a number of scenarios, the company has had to be mothballed.

BitcoinThen along came Bitcoin.  On the face of it it offers all that iCoins offers.  But it seems tidier.  End points can hook on without any contractual obligations and “money” just flows. Money is worth what it trades for – a tidy model and with the inherently limited supply of BTC a very stable model in the long term, albeit with massive volatility in the short term.  Money is stored in client side wallets – in other words wallets that are on your device be it a computer, phone or whatever.  Client side wallets in my view provide a double edged sword – while they are more secure against theft (ala Mt Gox) they are also susceptible to failure – hardware/software failure or simply lost private keys.  So with the client side wallet the currency is inherently deflationary in that coins can be lost.

Some of its features also lead to concerns.  While there is a transaction trail (good thing), there is no standard or legal identification of end points along the trail, making it tricky to satisfy regulatory AML concerns.  And the latter is a bigger problem in that there is no control over the probity of the end points, or contractual relationships with end points. Now, with the failure of Mt Gox, we see what can happen in this scenario. In many respects they behaved as an unregulated poorly managed wild west bank – placing few controls on treasury funds and allowing the bandits to make off with the money.  Arguably they would not have reached the level of insolvency that they did had they been properly regulated (although recent events in the banking world question this assessment). In any case we now see the result – the largest “bank” in the Bitcoin world is no more and gone with it are the customer funds.

Having said all that – this is no dissimilar to the US monetary system in the 19th century.  There were bank failures, insolvency and theft there too. There was volatility. The list goes on.

So – in the end – where are we?  BTC has gone through a test  phase now – has seen a significant acceptance, and is now going through the failure of an end-point.  Unfortunately that was the largest end-point which doesn’t help!  End result – end-points will be regulated entities such as wallets and the like and eventually perhaps banks.

Is iCoins a better model?  In a lot of ways yes, in that it complies with AML and provides the exact same feature that everyone likes about BTC without the drawbacks.  It provides anonymous but traceable, instant, simple, secure cross wallet/treasury/currency transactions without trying to be a currency in its own right with all the downsides of volatility and market acceptance.  iCoins can be based on any currency with an exchange rate, so we could have independent coins, indeed we could integrate BTC, but we also offer all the advantages of BTC without forcing a new currency on the world.

Too bad we ran out of steam.  Perhaps it’s time for a rethink!

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