Silicon Prairie News

Guest Post: The virtual currency debate, exchange and hysteria

Des Moines June 21, 2011 by Guest Contributor

Editor's Note: This is the first 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 as Mt. Gox and Tradehill.

In the following guest post submitted Monday, Dwolla founder and CEO Ben Milne directly responds to questions that have arisen and expresses both Dwolla's take and his personal opinion on Bitcoin. (Photo courtesy of Milne, by Anna Jones | Art of Photography.) In order to best maintain the tone of the post Milne submitted to us, we have not altered any of the grammar, style or punctuation of this piece.

To learn more about Bitcoin and read our interview with Milne about the use of Dwolla within the Bitcoin marketplace, see our second post: "Bitcoin: What is it and how is Dwolla involved in its marketplace?"

- Danny Schreiber, Managing Editor


        

The virtual currency debate, exchange, and hysteria: The meteoric rise of misinformation, misguided assumptions, and rumors.

Our PR guy asked me if the second sentence is necessary. I personally believe it is. Why? Because if you think about it… It's more likely your going to buy a banana than a bitcoin and yet… Even reading this you’re probably spending time trying to wrap your head around what the heck cryptocurrency is and the extension of what it means to our economy, banking system, and trade… Is that is kind of… Mind blowing… And when minds are blown… You get hype…

"OMG what is happening. Is virtual money going to replace real money? #OMGBBQSHOULDISTOCKUPONGOLDORBANANAS !?"

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.

A few years ago I started this company called Dwolla. For a long time no one cared what it was. Then it started growing, fast, about 4 months ago we started to disrupt web payments, interchange fees (25 cents per transaction), social payments, the FI space, and even retail payments… We’ve even received recognition for these developments and achievements.

Alas. Enter an unforeseen innovation, one we didn’t build.

It’s called Bitcoin. Bitcoins are bought and traded on exchanges (like MtGox or Tradehill) or earned through a software process, called mining. The people behind it are obviously very intelligent and it’s not an anomaly created by kids in their basement just because they wanted to buy more purple turtles in a Facebook game. Very few people actually get how this whole thing ties together. I’ve talked to a lot of very intelligent financial minds, engineers, economists, and people whom otherwise still have a lot of questions, but no real answers. Which means it’s evolving and anyone’s opinion is probably as invalid as the next guy’s assumption. Why do I care? Two of the leading trading platforms (MtGox and Tradehill) allow legitimate US users to buy Bitcoins using Dwolla to make the payment.

30 days ago I didn’t care. After people started mentioning Dwolla in regards to something I hadn’t seen before, I started to.

I’ve been working very hard to keep my mouth shut in the meantime. Why? Because that meteoric rise of misinformation coincides with an unbelievable amount misunderstanding and, in some cases, a total lack of knowledge in how financial transactions work.

Now that our name popped up in a Fortune article referencing BitCoins, the time to be silent is probably over.

Why is taking a stance frustrating?

Because if we correct erroneous claims we see posted online we’re violating privacy. At the same time, not answering any statements, no matter how outlandish, can be misconstrued as being wrong or dishonest. Well, that’s silly. Why? Because doing something "wrong," "illegal," or "dishonest" in the financial system isn’t a slap on the wrist. People go to jail. Aside from that fact, it's the wrong way to create a business built on trust.

Keep in mind we have over 100 years of financial and regulatory experience powering Dwolla’s backend through our investors. Dealing with abuse (or potential abuse) is a part of scaling any financial service. While I’m no expert on the virtual currency, I can however speak intelligently on the subject at hand as it pertains to Dwolla and how our relationships simultaneously affects people, businesses, regulators, financial institutions, and good judgment.

Our take on bitcoin

It’s not a company or a person. It’s more of a concept. It’s a name tied to a piece of data people buy or earn. If consumers buy it they purchase it through sites like MtGox. If they want to mine it, they can download software.

Anytime you buy something, you’re investing in the concept that it will provide you with value. I can only assume that this goes for trading a currency, buying a stock, or otherwise. Bitcoins can be purchased or earned and the value of them shifts with market pricing.

Here is where it gets finicky / sticky / concerning

Someone obviously figured out how to game it.

That poses a lot of questions I don’t have answers for. If someone steals the bananas you buy at the store. What do you do?

Especially with fraud, exchanges have problems. Virtual or not.

1. In our highly regulated economy, moving money legally and operating anonymously don’t go hand in hand. Converting anything to real cash means at some point you have to prove who you are. It’s part of modern regulation and is there for good reasons. Naturally, it also becomes a point for potential fraud. Eventually, the numbers hit someone’s balance sheet and they will be reported, taxed, or penalized.

2. Any platform will be abused to the fullest extent possible, if not well controlled.

  • This is prevalent in Paypal’s history and a chapter in any payment network’s history.
  • Everyone at one point has had a fraud problem and has been targeted by the mafia, drug runners, and an assortment of people who traditionally no one wants to do business with.

3. If allowed, fraud will run free and someone will be held responsible for it…

Our role (or the confused one)

Well, it’s not that much different than Paypal, honestly. We offer software that gives people the ability to buy what they want. If they want to buy something from MtGox or one of thousands other merchants that take Dwolla, it’s their choice.

What everyone probably doesn’t want me to say.

Have we found suspicious and fraudulent activity? Yes.

Do we deal with it accordingly? Yes.

There will always be endless amounts of attempted fraud. If it goes unchecked and ignored, the hellishly brutal onslaught of soul (and time) devouring problems that will stem from it will forever alienate any platform and its users.

The way Dwolla looks at it

If you are:

  • A legitimate US user
  • Accessing your own money
  • Engaging in a legal transaction

Then you should probably be able to use Dwolla how you’d like. If your intention is to buy a truckload of bananas and let them rot in the sun for a week so you can make a killing on banana bread, we won’t interfere. Doesn’t seem like a sound idea, but we won’t stop you.

We care about people legally accessing their own money and engaging in a legal transaction. If they are doing that then it’s not really our right to wag our finger and say, "that’s not ok."

My personal opinion

I’m not buying Bitcoins and I didn’t install the application. I also don’t buy stocks, and the only investments that I’ve ever seen return on, are my own companies.

This is not an argument for, or against the platform at all. One way or the other the virtual currency doesn’t change our core values, goals, or future and is a small story in what we hope to accomplish as a new type of payment network. What it does do is give us insight into something we hadn’t initially thought about.

Abusers of virtual currency do not do the owners (the community) of it any good and while there might be some hilarity to the uncontrolled nature of it (for some) all, the argument could be had that it will make it stronger, weaker, or more/less likely to implode because of it.

Once you start dealing in some virtual money, which by its very nature is existing in the internet alone, you’re in the new virtual equivalent of the Wild West.

If you use any platform to move real money, that platform abides by the laws and regulations in the territories it operates.

At least Dwolla does.

Some questions I keep getting asked.

Will Dwolla allow virtual currencies to be bought? Yes. Just like Mastercard or Visa. We will.

Will Dwolla suspend accounts, which are fraudulent? Absolutely.

Will Dwolla assist law enforcement in the event someone is engaging in illegal activities? Yes.

Does Dwolla see this is an opportunity? Bitcoin is an aspect of something great we too are also doing. We are building something that never existed before, on top of a payment network that never existed before, utilizing systems that never existed before.

The opportunities to learn, adapt, and grow… have never been so great. Is there opportunity in that? Yes. Does any of this change the mission Dwolla has had since day 1? No.

My advice?

Spend your money wisely. Money doesn’t grow on trees and earning it takes time, effort, and hard work. Just like building a company.

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COMMENTS

ARCHIVED COMMENTS

datguy

All in all, I'd have to say that you seem to have a very reasonable stance, both as a CEO and towards Bitcoin.

I have enjoyed the use of your service so far, and I will continue to use it as long as I find it suits my needs.

Jun 21, 2011 at 07:38 PM

Brilliant post, thank you for spelling this out.

Jun 22, 2011 at 01:02 AM

You could probably also add to the above questions:

"Will Dwolla prohibit any and all transactions to bitcoin exchanges if requested to do so by their regulators? Absolutely, we operate in the US jurisdiction and we would also comply with requests to turn over user data since we collect that under KYC guidelines."

Herein lies the problem, an intermediary that exists at the pleasure of the government currently acting as a key intermediary to the bitcoin exchange ecosystem.

Jun 22, 2011 at 01:04 AM
Phil

You are talking about the virtual equivalent of the Wild West as if that was a bad thing (perhaps I misunderstood you). I see it as a good thing. To me the Wild West is a place of great opportunity, fierce competition, and unencumbered innovation. Of course, the flip side is that in Wild West you face risks and dangers that are absent in the old economy. You are responsible for your own protection against those dangers. Fail to protect yourself, and you will probably get pwned. There will be no nannies you can run crying to, and nobody will bail you out. But as long as you take the necessary precautions to minimize those risks, the Wild West can be a hugely rewarding place to be.

In the old economy, the agents of social cohesion are institutions of authority, such as states, courts, police, regulators, etc. In the bitcoin economy, there is no authority, and the agent of social cohesion is reputation and trust. A bit like in the old Wild West. Bitcoin cannot work without an effective trust system. The two go hand in hand. There has been a recent influx of newbies who failed to understand this.

The web of trust concept on bitcoin-otc has already demonstrated beautifully that such systems are much better at preventing fraud than any central authority.

Jun 22, 2011 at 04:28 AM
Hans-Georg Michna

One point is conspicuously absent: Will we protect the privacy of our customers and will we therefore keep their data secret, particularly from governments and their institutions?

Surely Dwolla will have to yield to a judge's order, but the article sounds to me as if Dwolla will yield all information instantly if anybody merely hints at illegal activity.

Jun 22, 2011 at 06:46 AM
Scotty P

Thank you for being intellectual enough to think instead of merely react.

Jun 22, 2011 at 08:26 AM

Love your transparency Ben - great post!

Jun 22, 2011 at 09:04 AM
donald

"Because if we correct erroneous claims we see posted online we’re violating privacy. At the same time, not answering any statements, no matter how outlandish, can be misconstrued as being wrong or dishonest. Well, that’s silly. Why? Because doing something "wrong," "illegal," or "dishonest" in the financial system isn’t a slap on the wrist. People go to jail. Aside from that fact, it's the wrong way to create a business built on trust."

Not if you are Goldman Sachs, JP Morgan, Citibank or other large financial institutions. What you say is a joke actually Ben.

"Everyone at one point has had a fraud problem and has been targeted by the mafia, drug runners, and an assortment of people who traditionally no one wants to do business with."

This again is a joke for a couple of reasons Ben Milne. 1.Banks are awash in money from the sale of illegal recreational and medicinal drugs. 2. people who sell recreational drugs provide a service and overwhelmingly provide an honest much desired service. The people of the USA want recreational drugs, you know like alcohol and nicotine/tobacco and caffeine.

Jun 22, 2011 at 07:31 PM
GarciaDavid

There's always money in the banana stand.

Jun 27, 2011 at 11:57 AM
Danny Schreiber SPN

Colinosterman - Your comment has been removed as it violated our Comment Policy, found here: http://www.siliconprairienews.com/faq#does-spn-have-a-com...

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Jul 29, 2011 at 04:05 AM

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