Bitcoin: What is it and how is Dwolla involved in its marketplace?
Editor's Note: This is the second of two posts that address the recent attention Dwolla has received about its popularity amongst Bitcoin users, primarily as a platform to add and withdraw funds from Bitcoin exchange sites, such a Mt. Gox and Tradehill.
In the following post, I provide a brief explanation of Bitcoin and how and when Dwolla entered its marketplace, plus a short interview with Dwolla founder and CEO Ben Milne about those topics.
To read the first post, a guest post from Milne in which he directly responds to questions that have arisen and expresses both Dwolla's take and his personal stance on Bitcoin, see: "Guest Post: The virtual currency debate, exchange and hysteria".
- Danny Schreiber, Managing Editor
"Now that our name popped up in a Fortune article referencing Bitcoins, the time to be silent is probably over."
- Ben Milne, Dwolla founder
In a guest post on this site addressing the recent attention given to Dwolla because of Bitcoin, Dwolla founder and CEO Ben Milne wrote: "I can’t go a day without talking about it or being asked about it. Whether it's the CEO of a billion-dollar company, a friend in passing, a reporter or someone in the financial institution space … apparently, I’m the guy to ask."
Up until today, Milne hasn't publicly commented on Bitcoin. In fact, he's done the complete opposite. "I’ve been working very hard to keep my mouth shut in the meantime," Milne wrote in his guest post, in which he explains how Dwolla is used in the Bitcoin market, provides Dwolla's take on Bitcoin, shares his own opinion on Bitcoin and more.
As a follow up to Milne's guest post, it's my aim in this post to give our readers the complete picture of how Dwolla, a Des Moines-based startup that launched just a year and a half ago is playing a role in the Bitcoin story, and how Bitcoin, a digital currency that isn't the easiest for the everyday consumer to understand, is playing a role in the Dwolla story. In addition, I've reached out to Milne regarding the volume of Dwolla's usage in the Bitcoin marketplace.
What is Bitcoin?
Created in January 2009 by Satoshi Nakamoto, an individual whose identity and nationality are unknown, Bitcoin is a peer-to-peer currency that's touted as the world's "first decentralized digital currency." Unlike the U.S. dollar, which is backed by the Federal Reserve, or Second Life's digital Linden dollar, which is backed by Linden Lab, Bitcoin is not backed by any centralized authority. Anyone in the world can buy a Bitcoin. Users that lend out some of their computer processing power can become a part of Bitcoin mining, the pre-calculated release of the currency over the next 19 years, and earn Bitcoins by doing it. Though Bitcoins are rarely accepted in brick and mortar stores, the Bitcoin wiki lists hundreds of online merchants and service providers that accept Bitcoins. (To learn more about Bitcoins, I recommend the June 13 Economist article: "Bits and bob".)
Here's a short animated video explaining Bitcoins, from the informational site weusebitcoins.com:
On June 1, a Gawker post ("The Underground Website Where You Can Buy Any Drug Imaginable") about Silk Road, one of the online merchants accepting Bitcoins, brought the digital currency into an unfavorable light and led to scrutiny from politicians. In addition, online Bitcoin exchanges have seen the price of the Bitcoin fluctuate dramatically – once, according to DailyTech, losing nearly 31 percent of its worth in one day – and have been susceptible to attacks, such as one on Sunday that shut down the most popular exchange, Mt. Gox.
In the past 36 hours, some journalists have further questioned the viability of Bitcoin. Forbes' Tim Worstall wrote a piece titled "So, That’s the End of Bitcoin Then." With the Electronic Frontier Foundation announcing yesterday that it was no longer accepting Bitcoins, The Atlantic's Adam Clark Estes wrote about "Bitcoin's speedy fall."
And, as referenced in the opening quote of this story, Fortune (via CNN Money) recently shed light on Bitcoin, as well, in an article which made mention of Dwolla: "The clock is ticking on Bitcoin."
Bitcoin exchange Tradehill began accepting Dwolla on June 8. According to the blog Bitcoin Money, Mt. Gox began accepting Dwolla in early May as a way for users to add and withdraw U.S. dollars intro their accounts in order to purchase Bitcoins or cash out after selling Bitcoins on their exchange (left, image from bitcoinmoney.com). Also, the Bitcoin wiki indicates Dwolla has been accepted as payment on Bitcoin-OTC (over-the-counter) since January.
According to our records prior to the guest post published today, Dwolla hasn't issued a press release, published a blog post or reached out to Silicon Prairie News about the use of Dwolla in the Bitcoin market. Then again, it's never been Dwolla's M.O. to do so when other services sign up for the platform.
However, there has been communication about Bitcoin from Dwolla's customer support department made public. In a phone conversation today, Milne said that was not meant to reflect the company's position on Bitcoin or the use of Dwolla within the Bitcoin market. Instead, Milne said, these customer support representatives were doing their job to assist the customer, specifically someone who was excited about the platform, in a timely manner. The first public customer service occurrence came in an April 29 Dwolla Twitter retweet of @BitcoinNews that began, "We're #bitcoin friendly". The second came in a June 9 Raw Story article on Bitcoin, which stated: "Contacted by Raw Story, a Dwolla customer support agent said they had seen tremendous growth in recent weeks thanks to Bitcoin users. Conversely, their marketing director was hesitant to offer any official endorsement or even speak about Bitcoins on the record."
Interview with Milne
Answered by email yesterday, here are Milne's responses to questions regarding usage of Dwolla in the Bitcoin marketplace. (Photo courtesy of Milne, by Anna Jones | Art of Photography.)
SPN: According to a June 1 tweet by Mt. Gox, the site processed 4,401 Dwolla transactions – can you confirm this number?
Milne: I can't confirm or deny it. No one would want us posting how many bananas they bought last month online would they? Would they be OK with Visa doing that? Of course not.
Keep in mind that daily Dwolla transaction volume (depending on the day) can range from 3k-10k transactions.
SPN: Prior to the Gawker June 1 article about Silk Road and the government action taken in response to the article, was there any reason to be concerned about connection to Bitcoin?
Milne: A decentralized virtual currency which can be traded internationally has a bit of a grey area to it without the Gawker article. While my personal feeling is that there is likely a group of people who are going to abuse it.
Our primary concern is making sure people aren't abusing Dwolla.
If we find someone is utilizing Dwolla to try and partake in illegal activities, there are obvious consequences. Dwolla isn't detached from the U.S. financial system, regulations or reporting requirements. If anyone is making that assumption they would be incorrect.
Dwolla is just a really low cost way to move funds. Ironically, the rules to using the system are really no different than a credit/debit card.
SPN: As a follow up the previous question, is the traffic from Mt. Gox due credit for Dwolla's recent uptick in traffic and usage, including the hitting of a $1 million a week mark?
Milne: Although we've seen a lot of new traffic, there are 3-10 people visiting Dwolla from these sites normally. While that is a lot, there are also 200-300 people online at all times.
I think you can attribute that to the continuous growth we've seen since going national. Bear in mind, everyone knows usage is up tremendously, but we haven't released any numbers for months.
The massive uptick in mobile use might also be due to the new API changes which support a lot more continuous users. That and spots social integrations being added to the mobile apps. We've got a lot more coming in that pipeline which will continue to accelerate that in my opinion.
The timing is tough but that's life. I'm sure the growth rate could possibly increase, and maybe it will. Give us another 30-60 days :) After all … Dwolla is getting a lot more attention now outside of our core markets. We didn't really account for that growth in our initial projections, which are proving to be quite sound on their own.
We are just hitting the market at a very, very good time. Google is doing a lot of education for us, and almost immediately following the Google announcement we saw a flood of new users come in.
(With) the GRID release, a lot opens up for Dwolla way beyond this with large commercial platforms. I still see financial institutions as the largest source of initial scale as far as growth is concerned.
$1M a week is just the beginning for Dwolla.