Originally posted October 1st 2014 on FollowTheCoin.com

In order to better understand how traditional banks function compared to Digital Currency Centric Services or “DCCS’s” (eg. Coinbase, Paypal, Circle, Bitpay, GoCoin, Huobi, BTCChina, etc), it’s best to do so with a mental exercise. The purpose of this exercise is to understand the underlying structure of what these DCCS’s will hopefully all do for you. As well as how they are more efficient in certain key areas when compared to centralized banks. Also, most importantly; who will be the ones to truly bring DCCSs into the mainstream, changing the way we bank forever? Hint: it’s not going to be the older generations.

THE STORY

Let’s begin with a little bit of imagery. Imagine a black seed and a white seed. The white seed represents the DCCS’s, and the black seed represents traditional banks. We’re going to plant each of these in two separate containers. We want our seeds to grow and prosper, how do we best water them?

For the DCCS to grow, all we need are people who will to use their services, and for people to see the underlying long-term/short-term value in the digital currencies they support. As these digital currencies grow in acceptance, so does their overall perceived value — therefore making the DCCS’s that use them more valuable as well. Our white seed is now watered; the DCCS’s already have people using them, buying/selling Bitcoin and other digital currencies for goods and services. The digital currencies these DCCS’s will ultimately support are backed by either miners and/or individual communities building the infrastructure and services necessary to make them grow more in their perceived value.

As people continue to adopt and use the digital currencies on these platforms, the DCCS’s potential user base continues to grow exponentially, bringing more and more promoters for their specific DCCS brand of choice. We continue to water our white seed with new users and promoters for their brand and the digital currency movement. A sprout forms and, from the moist and fertile plow of innovation, a tree begins to emerge. Our tree has now outgrown its container, so we’ll replant it atop a nice grassy knoll. Sprouting from that tree planted adopt the sunny, grassy knoll, are value added services that grow from this booming economy. The ability to crowd-fund P2P, use smart contracts, automated trading, specialized storage options, expanded merchant services — every new service is a branch on the tree that is the people economy. All of these services run on centralized platforms, but they are built atop decentralized services and digital currencies. Centralized entities like DCCS’s in digital currency will rein apparent for awhile, but as long as their core underlying systems are decentralized, and dependent on blockchains, we can rest assured that they are slowly giving power back to people. This tree from the white seed is powerful, and its roots run deep into the hearts of the people that use them, creating one of the most powerful economies possible — one that runs on human initiative and innovation in the technological space. Our white seed tree stands alone, and no other trees need grow next to it, for it provides all we need to support ourselves financially.

Now, our black seed. This seed is special. It was locally sourced from a bank in the local governing body in a country near you! We plant it in our container. We want our black seed to have just as much of a fighting chance as our white seed. So we must water it. But, with what? We look around our garden hurriedly looking for a solution. The watering can with the nourishing water that is the people economy is not an option, as the people do not give power to the banks. We search more and more. There, beneath the overturned wheel-barrow, fertilizer. Just what we need! We picked up the bag and read it is marked: “Contains: Fees, Big Government, and Corruption”. We don’t want our black seed to die. So we nourish the black seed in the fertilizer, and wait for rain (regulation). The rain of regulation comes, and we rejoice! Our black seed is finally starting to grow.

Now the local government has given us a version of their own currency, backed by an entity they cannot name specifically. But they assure us it will help our seed grow faster. Our black seed grows faster. With the help of the local government and all the fees that the people are paying, the black seed tree is stronger than ever. We decide to plant the black seed at the base of the grassy knoll where the white seed tree stands strong. But, something is happening. Our black seed tree begins to wilt…but we don’t know why. We pace and pace thinking what could be causing this? We look back at the fertilizer bag and remember the last ingredient; ‘Corruption’! Oh! How could we have been such a fools? Our black seed never stood a chance, the local governments have failed us, and the currency they promised us had value — turned out to be nil. The black seed tree topples under its own weight (corruption) — at the base of the grassy knoll where the white seed stands, decomposing back into the earth. The people who were harmed during the death of the black seed tree ascend to the top of the hill, to stand next to the white seed tree. The people (the world) soon realize that the white tree is their best chance at survival now the black seed has shown how weak it can be. The people then care for the white tree more than ever, as it grows stronger from the nourishment of the decomposing black seed tree at the base of the hill…

THE DCCS TAKEOVER BEGINS…

Who will be the majority at the top of the hill standing together when the local governing financial bodies we depend on everyday begin to fail us? Will it be the baby boomers? The twenty-somethings with a chip on their back for being forced to play clean up? It will be a small combination of the two. However, the majority will be a whole other group — the millennials. The millennials will grow up using strictly e-banking services and ATMs. They won’t be writing checks, and they definitely won’t keep a check book, ever. They’ll more than likely never have to fill out a deposit slip, or get to see those awesome vacuum tubes shoot people pens in drive-thru banks. But what the millennials will be doing without a doubt is using their smartphones.

Millennials use their smartphones more than anyone; there is no reason to cite a source here. We all know this for a fact now. The future of these digital currency-based companies depend on persuading the younger generation into getting use to using apps to quickly spend digital currency. Take for example, Casheer App and Pheeva+Gyft. They deserve an honorable mention here, because they have been working to quickly turn your digital currency into a spendable form; whether it be gift cards or actual cash. The key difference between Pheeva+Gyft and Casheer is that Casheer will have the capability to spend over 33+ digital currencies (Source), and Pheeva only allows you to use Bitcoin (with Litecoin support reportedly coming soon according to their site). Millennials are adept to using their electronic devices for almost everything now, so innovating personal finance for them is as simple as making it a really inviting utility for mobile. There are some traditional banks who began to understand this awhile back, and started focusing on more mobile centric services.

Simple is an excellent example of what traditional banking plus a focus on mobility and ease can do. Simple does a great job of giving you a beautiful set of tools to make handling your finances easy, convenient, and with as little fees as possible. Simple is doing what many banks have stumbled in executing — and that’s leaning out the banking model to focus on the essentials and do them well; make the customer experience their focus and commitment. Now if you could combine that with the power and mobility of digital currency, you’d have the capability to create a bank — but not a bank in the traditional fiat-based sense. The barriers of nations would not be an issue, allowing the potential for many new customers.

I reached out to Simple on Twitter about the possibilities of incorporating digital currencies/Bitcoin into their services. This was their response:

@Steven_McKie We’ll definitely keep pondering the possibility, but we don’t have any firm plans in that direction yet. ^CH

— Simple (@simple) September 11, 2014

When I dug a bit deeper, they concluded with this:

@Steven_McKie @Moneyandtech Yeah, totally! It’s Chelsea. However, our official stance on Bitcoin is extremely neutral. We’re Switzerland ^CH

— Simple (@simple) September 11, 2014

The barriers to entry currently into the realm digital currency for banks are obviously still very high due to mountains of regulation and all the overhead with deciding how to best implement digital currency/Bitcoin; all without cannibalizing their core business model. I reached out to PNC, Chase, Bank of America, Wells Fargo and Capital One via Twitter as well to get their stance as well. There was no response. This is where DCCS’s come back into play. With their ability to be mobile, and no major hinderance to their ability to expand — beyond that of mobile and internet adoption — their window of opportunity is now, as the banks continue to scramble. Mobility is another key factor for best accelerating their growth to harness more market share and continue disruption.

THE IMPORTANCE OF MOBILITY

If any of these DCCS’s can take their online web services and make them all 100% mobile (with a nice UI/UX to boot), they would exponentially speed up the inevitable displacement of current banks. The fear that keeps most banks from venturing to certain overseas domains has to do with financial institutions that are deeply rooted into some form of localized currency. However, due to the nature of blockchain-backed digital currencies, there are now no walls or restrictions for a “bank” that purely exists on your mobile device. Payments, banking and handling your financial assets can be done safely and more securely from your mobile device, as opposed to handling cash and physical assets in areas of civil unrest and tyranny. This allows developing countries more power to participate in online e-commerce, or quickly receive humanitarian aid that would be plagued with transfer fees. I wonder how much of that $50 million dollars from The Gates Foundation (Source) will actually remain by the time the money gets to those who need it? A smart contract and a few hundred micro-trades made across it could ensure aid gets to where it needs to be, and ensures additional funds aren’t sent until certain milestones are met and progress is made toward reducing the outbreak. But continuing on, this all opens billions of new potential customers to these newfound “bank-like” entities, without all the overhead of regulations around dealing with local currency in these new markets. The performance of DCCS’s could increase the potential for profits in e-commerce 10-fold in the next fews years as mobile buying/selling and digital currency continue to grow in adoption. Many banks are too big to simply start an initiative such as this quick enough to compete; or they just haven’t decided how to approach things yet, opting to stay neutral (like Simple). Some however are getting creative by taking a different approach to mobile payments that brings the ease of digital currency, minus all the benefits of decentralization from central authorities and government backed fiat.

THE OPPOSITION

What’s the easiest to way to be innovative as a bank as digital payments explode? You let someone else do all the innovating for you. Many banks and payment processors recently hopped on board the newly announced “Apple Pay”. Apple Pay would effectively give the ease of use of mobile payments to millions and millions of Apple iPhone users in the short term. And, unlike most other electronic wallets (eg. Google Wallet, etc), Apple’s version will undoubtedly get far more use and acceptance quicker due to its iconic following of fanboys and girls all over the globe — especially if Apple begins to offer incentives for using Apple Pay in their Apple Store locations all over the world, where most every Apple user ventures into at some point. The addition of the TouchID gives everyone instant access to a reliable 2FA, allowing Apple to negotiate paying smaller fees with banks and reap big profits on transactions done using its service. Apple will reportedly receive small fees for each transaction made with Apply Pay through banks, not payment processors — talk about a massive new revenue stream — all while getting to keep their hands clean from the bulk of financial regulatory overhead. One you believe digital currencies are an avenue Apple is already looking down, I’m sure others are researching the topic and seeing if it can be used to benefit them some how. Only time will tell. Apple only just recently put NFC in their new smartphones, and that still is only available for use with Apple Pay, for now.

If DCCS’s can continue to ensure little to no fees, Apple will eventually do them a big favor by teaching millions how easy it is to make transactions from their smartphones. And, luckily for Apple, they have an army of Apple employees ready and willing to educate millions of their consumers in their stores. Then overtime, those that began with Apple Pay will slowly migrate towards more competitive mobile payment alternatives (eg. Coinbase, PayPal, BitPay, Circle, GoCoin, Huobi, BTC China) that don’t rely on currency from a centralized authority. These all-in-one financial services have far fewer fees and far more innovative services such as: P2P lending like Huobi, built-in support for multi-signatures on accounts like Bitpay’s recently released Copay, and embedded support for creating smart contracts. Coinbase and Circle already boast insurance for some of your balances, and Coinbase has even released ‘Vault’ to more securely store your coins long-term in ‘cold-storage’. Though there are improvements to be made, these DCCS’s can offer similar services as traditional banks, and even more with the potential for equity crowd-funding businesses such as Swarm. Perhaps hopefully soon, we’ll have one click utility payments (similar to Bylls) to a recurring address with a push of a button right from a mobile app — that is if they decide to partner with major utility providers to provide such a service. The possibilities are endless for these platforms, because the fear of fees and regulation swallowing the cost of implementing such features is far less than for a traditional bank.

THE HARDWARE

Now how do you tie this all up once you can store, transfer, buy, sell, and make investments and payments all from one very simple service? After bringing the power of all this to mobile, we’re going to want a secure place for our private keys and financial information that isn’t always on the go with us. The eventual arrival of application hardware is on the rise. The ability to have our finances on our mobile devices is great. But like storing your coins in a safe and secure place, devices built specifically for the storage of digital assets at home are surely to be on the rise soon, after all these DCCS’s get their software and web services perfected — a storage device that has built-in software to seamlessly and easily back your private keys to cloud services or USB devices, with a built-in portal to all the essential services for that particular hardwares DCCS. “Banking” from home is now secure, decentralized, and really simple. Moving to a new town? You no longer have to change bank branches or notify your credit card companies. Simply bring your DCCS-specific hardware with you wherever you need it. You can track your spending, all your receipts and transactions securely from there, forever. No more shuffling financial documents and receipts or worrying about major hacks into your bank’s system stealing all your personal and financial information. Being able to remotely connect to your device from your smartphone would be just like accessing your online bank account. Devices such as this may or may not already be in development. But an application-specific device would help spur adoption even faster when people know they can rely on a device to make the transition for them, dead simple.

In Closing

Banks should either be afraid right now, or scrambling for the appropriate merger or acquisition. Only time will tell. But we can be rest assured that as long as we stand together at the top of that grassy knoll, with the seed of the white tree that represents the people economy, we can continue to move this space forward for the betterment of all of our financial futures. DCCS’s will continue to make the transition to a blockchain-backed world easier than ever. Centralized banks will have to innovate to stay competitive. But the odds that innovation will stem from blockchain-based technologies are looking pretty good right about now.