Why you can’t have an Internet age without cryptocurrency
Originally posted @ finder.com.au
Cryptocurrency lets you safely move monetary value over Internet infrastructure. And that's a big deal.
Alexander Vasylchenko first touched bitcoin in 2011. "I remember, the price was €7.50 per bitcoin," he said.
He went on to join Mycelium as chief technical officer, and in the coming years Mycelium would release some of the most popular products in bitcoin. At its peak the Mycelium wallet was handling about 10 to 15% of all bitcoin transactions, and was one of the most popular crypto apps in China, which was already a bitcoin mining leader back then.
And with Vasylchenko's deep engineering experience, including a stint at the Swiss Center for Electronics and Microtechnology, the core development team at Mycelium would grow from 4 to 13 engineers, while Vasylchenko's total team was a group of 35 people, at the cutting edge of digital currency technology.
And then Vasylchenko ran into a problem...
The problem was that Vasylchenko needed to make a bank transfer.
"I had to transfer, quite urgently, several thousand euros to my mother," he explained. "I'm originally from Ukraine, and my mother still lives there. I asked my banker two questions: how much time it will take, and how much will it cost? The banker, who was serving me for several years, he cannot answer this question."
"It might take 3 days, it might take a week. I don't know the exchange rate," Vasylchenko recalls the banker saying. Vasylchenko offered to Google the current exchange rates if it would help, before the banker elaborated and said he didn't know which rates the bank would actually end up using.
On his phone, Vasylchenko could check any exchange rates at any time, but he wasn't allowed to know which rates would be used for the transfer right in front of him. He could immediately contact his mother and talk in real-time in a dozen different ways, but had no way of knowing when the money would get there, and no way of expediting its arrival.
All this while Vasylchenko was the technical lead for one of the most prominent bitcoin companies in the world, able to flick pure, unadulterated digital monetary value anywhere in the world at will.
"We created this nice stuff, had this very extensive reputation worldwide... Now I'm facing a problem transferring 4,000 euros to Ukraine."
He briefly considered the possibility of sending his mother some bitcoin, but quickly abandoned the idea. Because even once you get past the hurdle of walking someone through the set-up and transfer, there's still the entirely new problem of converting that bitcoin to a spendable form.
"I would say "here mother, install Mycelium wallet, send public key, backup private key," and then she'd have bitcoin... [but] the only thing she wants is to get money and then buy something... I realised my mother cannot benefit from the technology of crypto."
For all the technology and expertise at his disposal, Vasylchenko would still have to throw money into the mysterious black hole of the bank, and hope that enough of it would eventually make it to his mother on the other side.
Clearly something was still missing.
That special something
"I came to the idea that, okay, there is a huge threshold between the digital currency space – [both] back then and now – and ordinary people," Vasylchenko says.
Cryptocurrency can allow near instant and nearly free transactions to and from anywhere in the world. It can theoretically send monetary value itself across the Internet, and it would have been perfect for Vasylchenko to make that urgent transfer to his mother.
But all that technological potential was still just potential, rather than something useable.
Cryptocurrency still needed a special something. It would need real, meaningful accessibility of the kind that even the best UX, simplest wallet, clearest block explorer, and so on, can only partly deliver.
Using cryptocurrency today is analogous to trying to put a photo online 15 years ago, Vasylchenko says.
"If it would be like 15 years back, without Facebook, I would need to be a geek in order to even post [a] photo on the web."
You would need to digitise your photo, sort out your file storage and hosting and then have the actual know-how to upload that photo and present it in a functional, visible form. And even then, only a tiny fraction of the world's population would be able to access it. For perspective, 15 years ago in 2003, only about 50% of Australian homes had Internet access, while less than a third of people over the age of 60 had used a computer at all in the previous year. Many had never even touched one.
"The barrier to publish everything online was very high," Vasylchenko notes. "Facebook reduced these barriers."
With the right infrastructure, suddenly everyone could put a photo online without necessarily having anything resembling technical expertise, and everyone could go look at it. The rest, as they say, is history. Facebook didn't get billions of users simply by being easier to use than the alternatives. It got billions of users by being so easy that absolutely anyone could use it without any kind of experience except the most basic computer literacy.
The most pressing question for cryptocurrency isn't necessarily how to make it easier for more people to use, or how to explain things better. It's how to make it so easy that absolutely anyone can use it and you don't have to explain anything. That's the only way to make the leap from millions of users to billions of users.
"When I buy a T-shirt at the department store, I don't care who is the payment processor, the acquirer, or how the settlement goes," Vasylchenko says. "What I care is that I get my T-shirt. What we want is this immediate satisfaction, to satisfy these needs. We don't need to go into details about euro, AUD or cryptocurrency."
This mission would require taking a step back, and fundamentally rethinking the best way to actually use cryptocurrency.
To this end Vasylchenko left Mycelium in 2014, started working on this new problem in 2015, co-founded Sofittoin 2016, and is now rolling out a key part of its envisioned solution. It's called Sugi, and it looks like this:
Look familiar? It probably should, because on the outside it's a fairly ordinary card. "A blockchain wallet inside an ordinary banking card," Vasylchenko explained. Incidentally, that tasteful tree trunk design on the card is from a Sugi tree, formally known as Cryptomeria, which literally means "hidden parts". It's quite apt.
Just like Facebook means anyone who's remotely familiar with a computer or phone can upload photos, Sugi means anyone who's remotely familiar with the concept of a credit or debit card can use cryptocurrency.
That simplicity on the outside, and all the "hidden parts" on the inside and behind the scenes, mean it might be the only type of cryptocurrency wallet ever made which could meet Vasylchenko's key specification – that he could have used it to send money to his mother.
"I would say, okay mother, just get your card and pass me your card number. And if she would do it, I'd just type the card number into my wallet, just indicate amount I want to send and the next second she can go to the nearest ATM and withdraw money in local currency in Ukraine," Vasylchenko says.
"I will have my mission fulfilled when I know that a person like my mother can execute blockchain transactions flawlessly. And she gets this magic, she gets her money, she can pay money, and she doesn't know or have to know what rails there are there."
HOW IT WORKS
As you can probably see, Sugi is a near field communication (NFC) card, of the kind that lets you make payments just by tapping the card to an NFC reader. This means it's compatible with existing payment infrastructure, including most ATMs, payment terminals and everything else. In this way it can slot cryptocurrency much more directly into the existing financial system, and allow it to be used in a way that's familiar.
To a certain extent, in this way the Sugi wallet might make bitcoin ATMs quite obsolete.
It's a PIN card, so no need to worry about someone swiping your BTC by robbing you with a card reader, and it works in tandem with the Sugi app, which is used to indicate transaction values, destinations and so on. The joined app lets you check your card balance, transfer funds, check previous transactions and generally offers the functionality you'd expect from a comprehensive crypto wallet – or a fiat bank account, if you're feeling traditional.
So, in the physical world you can use the Sugi card on point of sale terminals and then "sign off" on transactions through the app, and in the digital world you can make online payments by QR code or via a link, and then "sign off" on these transactions with the card.
So either way, it still has that hardware wallet security, and requires you to physically verify transactions with the card's presence, the PIN and access to the app. In short, it makes cryptocurrency compatible with existing payment systems, and for the first time makes crypto simple enough for absolutely anyone to use.
The private keys themselves are held in a secure element on the card and are always offline. So far, Sugi can hold bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), XRP and ERC20 tokens.
Designing for the inevitability of card loss and forgotten PINs is one of the trickier elements to overcome without completely twisting back to centralised banking, but Sofitto offers its own new take on this, with "quite an elaborate secret sharing scheme. So basically a private key sharing and reconstruction scheme" in Vasylchenko's words.
The goal is to ensure funds can still be recovered where needed, without needing to entrust everything to a central entity that demands payment for their efforts. Secret sharing schemes might provide a suitable balance.
Ingredients: Stupid piece of plastic (x 1), magic (x infinity)
Outside a handful of use cases, you still need to be a certain kind of crazy to actually want to use cryptocurrency.
"Imagine you want to invest in a cryptocurrency," Vasylchenko says. "You want to buy some Ripple or Ethereumor whatever token you fancy. Now the question is how do you do it? What do I install? Is it safe? How do I use it?"
"But the cards, the stupid piece of plastic... you will know exactly what to do when I give you a piece of plastic."
A lot of design magic has gone into turning that stupid piece of plastic into a functional and secure hardware wallet.
And perhaps just as much effort has gone into building the kinds of ties that will make it useful and its contents spendable, which means making deals with existing financial services and finding ways to actually integrate this card into existing financial infrastructure.
Sugi doesn't come to the table empty-handed though. As Vasylchenko notes, Sugi offers a way of extending the lifespan of existing financial infrastructure, and that's a very tempting offer.
"We're not only piggy-back on this known usability scenarios for pretty much everyone, we also have potential with these cards, and we've proven this with integrating the POS terminals. Recycle all the banking terminal infrastructure which is already out there. Banks which have ATM machines installed, they want to increase the lifespan of the machines, so they bring in revenue. We are bringing new use cases, new services to deployed infrastructure, so we actually can have this smooth transition from the world of today into digital currency benefits."
Being able to provide these benefits can help ease cryptocurrency into mainstream adoption, and also bring some of the benefits of existing systems to crypto, all in keeping with the goal of making it as familiar an experience as possible.
The best of both worlds
Vasylchenko doesn't see people using Sugi entirely like a cryptocurrency hardware wallet, even though that's essentially what it is. He sees people using it as a bank card, because that's also essentially what it is.
The goal is to get the best of both worlds in a package that no one has to think twice about. It's pursing a bank card-like user experience by design because it's one of the only ways to meet the accessibility goals underpinning everything.
The "best" of the traditional banking side includes overall familiarity and ease of use, as well as recovery procedures.
"You already know that when you have a banking card, you know that losing your card or forgetting your PIN means your funds aren't stolen," Vasylchenko says. "Whatever happens to your banking card doesn't necessarily translate that something can happen to your funds."
"We as the card producers or card issuers, we actually have no access to the funds of our users... [but] we enable the procedure to retrieve the funds if something happens."
However, on the crypto side, there are also benefits to be kept.
"The value is actually stored on the card," Vasylchenko emphasises. "We have some security measures and identification measures, but ourselves if we decide to block accounts we are not in the capacity to do that... If Visa wants to cut off the payments of their particular user, they can do it."
Beyond the reassurance of knowing your funds are beyond the reach of anyone except you, decentralised funds storage is also a security boon by spreading around the actual location of funds. Without a central custodian there's no one place a thief can hit to steal a lot of different people's funds all at once. In this way, there are some definite security benefits to the crypto "be your own bank" way of thinking.
Certain kinds of attacks can theoretically hit every single crypto hot wallet of a certain kind all at once, draining incalculable amounts of money all at once. But actually extracting the funds from a Sugi wallet means physically getting one's hands on the card itself, and then finding a way of getting the PIN from the owner. There's no way of pulling off a grand heist on a decentralised bank.
The biggest benefits of crypto might all come back to the experience that put Vasylchenko on the road to Sugi's creation. Traditional money simply hasn't kept up next to all the other marvels of the Internet age.
When the quickest way to move value internationally is with crypto, and the second quickest is to read off gift card serial numbers over the phone, you know there's room for improvement.
The Internet of value
Money, as we mostly know it today, is hard to move by the standards of what is possible in the digital age.
A mess of exchange fees and currency spreads, a tangled web of banking intermediaries and other frictions are putting a huge burden on commerce, essentially siphoning off money from useful, productive and value-creating enterprises to the frankly much less useful and much less important intermediaries.
"If it's 1,000 euros it's probably not a big deal. But if it's a business transfer of 5 million euros it's a big difference," Vasylchenko says. "A couple of points more or less is a big difference. About 10% of all the money that's flown around, all the wealth, is basically spent on friction... We have to have insurances, we have to encounter financial services... in fact 7 to 10% of money is lost to overcome this financial resistance."
These costs land on everyone, but aren't applied evenly. When you pay a well-above-cost fee for an international transfer, that's subsidising a low or no fee service a bank extends somewhere else, and shoring up bank operations elsewhere. That the business of moving money has become a revenue stream in its own right, tied up with a much wider world of financial services, might be one of the elements contributing to all the resistance in financial services.
What exactly makes cryptocurrency so much cheaper?
In simplest terms, cryptocurrency is such a cheap way of moving money because it can be sent across the Internet, exactly like VOIP (voice over Internet protocol) is so much cheaper than making a long distance call. All the blockchain principles, the cryptography behind it and so on, are primarily for the purposes of securing the value of this digital currency in the hostile, open environment of the Internet.
So, instead of asking why VOIP calls are so cheap, you might ask why long distance phone calls are so expensive. And the answer is because the phone companies need to maintain a huge mess of decaying copper wires and physical infrastructure all over the world, which doesn't come cheap. It's an entire physical network that needs to be maintained at its users' expense.
It's the same with money. It's not that Internet money transfers are cheap, so much as that non-Internet money transfers are expensive. The SWIFT and global banking network is a behemoth that needs to be secured and maintained at great expense. These costs are passed down the line until they land on bank customers (ie, you).
The Internet infrastructure can carry all the information we need, and that now includes monetary value. By avoiding that expensive legacy network, and just letting it decay, one can cut costs dramatically. Cryptocurrency is to the SWIFT network what VOIP is to phone lines. And yet, the world is still pouring a huge amount of money into the maintenance of this outdated network infrastructure, to no one's benefit.
You can't have an Internet age without crypto
"SWIFT is the parallel internet. In my view it's a telco company which allows banks into their system which enables secure messaging systems," Vasylchenko explains.
It has the advantage of (theoretically) being secure and free of bad actors, but it's still an entire private network which has to be maintained and kept secure at great expense. And in a way, it was on track to obsolescence with new developments of cryptography technology even before they were applied in cryptocurrency. These made it possible to communicate data securely, even over the "infected" and dangerous environment of the Internet. With that, it's not really necessary to maintain an entirely separate vanity network at the expense of bank customers.
This principle, of Internet-communicable digital currencies replacing existing systems, is as inevitable as VOIP replacing long distance copper phone lines, Vasylchenko suggests.
"Before to talk we would have essentially literally had to have a wire connected from Brussels to Sydney," he said (over VOIP). "We would pay €4.10 per minute for very bad quality. Now I can have full connectivity virtually for free. We get other services through this channel as well. These rails are very safe to communicate, using video, ensuring only you and I are connected. The same as basically from these copper wires, connected from the telecom companies."
"The same with SWIFT, which is basically the same reality as the copper wires, and independent from the internet. We can do all the same activities using the same internet connections already out there, reconciliating not only the messages, but making the messaging system synchronised using the blockchain protocol."
"So that's where we can save money. That's where we can save costs. It's unbelievable what you can do with that money. We are in this mission to empower my mother, and when people like my mother can do it, then we can release these resources into something much more productive than just maintaining this outdated infrastructure. They're trying hard to maintain the status quo, but the business is out there."
Where Sugi and Sofitto fit
Sugi is one of the first steps towards greater adoption, Vasylchenko says, in that it makes "Internet money" and its exceptionally tangible cost-cutting benefits accessible to all, in a familiar way. Only by mass adoption can the world eventually cut the cord on legacy financial networks, and move away from the incredible wastage of maintaining those entirely separate money networks, for money rather than just using the Internet.
The goal in the medium term might essentially be to use fiat as the "last mile" payment method, where currency is actually exchanged for goods where needed. To bring this full currency conversion functionality to the card, Sofitto naturally needs to become a bank of sorts. It has found a reasonable amount of support among the more forward thinking banks in Europe, and is well underway.
The technology itself is all there and ready to go, and most of the obstacles remaining are regulatory in nature, as Sofitto aims to become a purely digital neobank.
"That's phase 2," Vasylchenko says. "For that, of course a lot of homework on legal compliance needs to be done. But the technology is out there. We are ready to launch it. That's basically the Sugi card we are selling today."
And Sugi is just about ready to go, with shipping set to begin any day now. It would have been sooner but for a minor hiccup in the manufacturing, Vasylchenko says.
It's somewhat appropriate that the hiccup was so physical in nature next to the digital world.
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