Three hours into a lengthy debate with Tarik Kaddoumi, a self-proclaimed liberal and cofounder of Umbrellab – a payment gateway that enables businesses to accept Bitcoins – Communicate felt that it had stepped into an all-too familiar movie storyboard.
Three hours into a lengthy debate with Tarik Kaddoumi, a self-proclaimed liberal and cofounder of Umbrellab – a payment gateway that enables businesses to accept Bitcoins – Communicate felt that it had stepped into an all-too familiar movie storyboard: a too-good-to-be-true revolutionary seed of an idea against the status quo that turns real, is fought against tooth and nail by those in power, is consequently fought for by those against them, takes on a life of its own and, just as fast, sees a crash of epic proportions.
Except that Bitcoin, a crypto-currency that seemingly operates independently of any financial system or government, and dependently of a worldwide consensus of supercomputers and networks – one of its many definitions – has already set the date for its own end; by 2140, there will be 21 million Bitcoins worldwide, approximately half of which have already been created. Every four years, the number of Bitcoins per block (currently, a block stands for 25 Bitcoins created every ten minutes) is cut in half, until it is close to nil. And then? “And then that’s it. It’s like saying you have mined all of the gold in the world. It doesn’t make gold worthless,” says Kaddoumi.
Cryptic history. Armed with a background in software engineering, Kaddoumi started preaching about the crypto-currency more than a year ago, right around the time he bought some Bitcoins “as an investment” and started selling them. Along with David El Achkar and Ola Doudin, co-founders of Yellow – another gateway for merchants in Lebanon, the UAE and Jordan allowing Bitcoin transactions – and The Pizza Guys, a UAE-based pizzeria that was the first merchant to accept the virtual currency in the MENA region in early 2014, he was among the first to start the Bitcoin movement here. And he’s got the twitter handle (@BitcoinMENA), a Bitcoin ATM that made a quick appearance in Dubai Media City – before it was removed on the basis of regulatory ambiguity – and Piiko.com, a service that allows users to top up their mobile phones in more than 100 countries using Bitcoin, to show for it. But that’s as far as credit to Kaddoumi goes.
Whether to play a cruel joke against financial centralization, engage the world in the longest-running virtual pyramid scheme or, in all good intention, revolutionize the future of value exchange, a person or people under the pseudonym Satoshi Nakamoto wrote the Bitcoin protocol and reference software in 2008. Kaddoumi’s partner at Umbrellab, Sergey Yusopov, was among the first to start programming the open-source Bitcoin platform.
Supply (and block) chain. “Bitcoin has two main components: there’s the currency that you can spend and buy things with, and there’s the protocol, the way of storing value. This is really a revolutionary idea. Every time someone sends money from point A to point B, a series of numbers gets generated. Those series of numbers keep adding on top of each other and, at some point, they become a Bitcoin,” explains Rami Badawi, co-founder of The Pizza Guys, in layman’s terms.
In this sense, Kaddoumi’s gold analogy might not be so overreaching. Each Bitcoin is created through a mining process, where miners or pools of them – machines with gigantic processing powers – present their “proof of work” algorithm (numbers, equations and cryptography) to the worldwide network. “The platform then rewards with Bitcoins the miner with an encryption that is the most difficult to hack and least vulnerable possible. Pools consist of people that donate their mining powers to create one theoretical supercomputer; one that has the same power as those used by NASA,” explains Kaddoumi, who adds that Bitcoin’s grown too big and competitive for his computing power.
Alongside Yusopov, he now mines other crypto-currencies that have recently emerged, such as Litecoin, Feathercoin, Dogecoin and Ripple – but that’s another story for another time. Badawi says that, simply put: “The conventional system has, instead of cryptography, an entire bank”; and a less secure one at that. “Supercomputers totally beat what Visa is doing. What is Visa doing? A four-digit pin number? Are you comparing that with sophisticated super cryptography?” asks Kaddoumi.
His statement might be exaggerated, but not unfounded. “Bitcoin was designed for online transactions. With regards to security, safety and anti-fraud, it would pass with flying colors,” says Omar Soudodi, managing director at payment gateway, PayFort. Bitcoin gathers the world’s biggest experts in mathematics and hacking “that are putting their powers into making sure it stays,” adds Kaddoumi.
The open platform’s power lies in the fact that each miner has a copy of the Bitcoin platform and the block chain software – a public ledger of sorts that displays all Bitcoin transactions in history – on their own computing devices. Effectively, each transaction that’s ever been made with Bitcoin gets re-confirmed and approved by the majority of networks every ten minutes. “If you manage to make yourself the majority, then that’s a different case. It will be a 51 percent attack and, even then, you’d be only able to fake one Bitcoin. Everybody’s going to switch on their miners to protect the network. There aren’t any supercomputers in existence that could do that,” explains Kaddoumi.
Dangerous bedfellows. Still, the Bitcoin platform and block chain miss some crucial KYC (know-your-customer) processes and requirements, asking very little of information of those that use them. The transactions might be there for the world to see, but those that perform them can, much like Nakamoto, do so under pseudonyms. In fact, the currency has been plagued with many scandals and controversies since October 2013, when online black market Silk Road, which allowed users to purchase illicit goods from around the world, was found to transact and trade in large volumes of Bitcoins.
In February 2014, Mount Gox, an exchange company that allowed users to trade Bitcoins, went bankrupt and lost all of its customers’ funds. “Bitcoin is being blamed for facilitating illegal transactions and [commodity] trades. I have one question for anyone who says that: what is the number one currency for money laundering and [illegitimate trading] in the world? The US dollar. You really want to crack them down? Ban the dollar,” asserts Kaddoumi.
While worldwide governments remain hesitant on their stance toward Bitcoin’s increasing adoption, the US Consumer Financial Protection Bureau (CFPB) recently issued a warning around virtual currencies, stating that they “offer the potential for innovation” and are associated with several risks, such as hackers, limited investor protection, cost and fraud. But, Kaddoumi is clearly willing to dispute these claims. The warning goes on to say that “virtual currencies aren’t regular money”, as “they are not issued or backed by the US or any other government or central bank”. “Most money in banks’ financial statements is just numbers in a ledger somewhere. There’s no cash behind it. Currently, you need a bank to keep track of the pluses and the minuses. And on top of that, you need a system that sends a message to another system to debit and credit. There are a lot of layers. It’s highly inefficient and costly,” says Badawi.
Pick their brains. In the region, Jordan addressed consumers with a warning around the risk on trading with Bitcoins and banned financial institutions from dealing with the currency. “We’ve approached the central bank in Jordan. But, so far, there haven’t been [serious] talks. The activity now is still nascent. Central banks are really watching the progress, but there’s nothing negative for them to act on,” says Doudin. El Achkar adds that, while Lebanon’s central bank has also raised flags around transacting with Bitcoins, it’s maintained its support of free market trade. Aside from their joint venture, Doudin and El Achkar are leading meet-up groups advocating and raising awareness around Bitcoin in Jordan and Lebanon, respectively.
In April, the duo organized the “Cointalks” meet-up at the DIFC’s (Dubai International Financial Center) Capital Club, the first day of which gathered financial professionals and lawyers. “The reception from the audience was more inquisitive and curious, rather than apprehensive,” says Doudin, while El Achkar adds: “We were at, such an early stage in Bitcoin awareness that people hadn’t reached the point of judging whether it was good or bad. They were still wrapping their heads around it. They weren’t raving about it either.”
50 shades of grey. Indeed, “there needs to be a level playing field for how the digital currency is approached, regulated and monitored. There is a central role that governments and regulators must play to define the rules around topics such as consumer protection, value stability and anonymous transactions, among other things,” says Raghu Malhotra, president Middle East and North Africa – international markets at MasterCard. “As you might expect, we have R&D [research and development] work going on in this area and we’ve recently filed for patents in the space,” he adds.
Kaddoumi’s Bitcoin ATM’s official launch is on hold “until we figure out the government’s stance on [the currency]. We didn’t really reach any agreement with the government. The Department of Economic Development can’t license it. It has no category for it.” “As a business, you always get the regulatory hurdles. There are several ways you can work around them [through which] you can be operating legally,” adds Doudin; which, perhaps, explains why both Umbrellab and Yellow were set up in the UAE as payment gateways, the latter falling under technology, rather than financial services, and, therefore, easily licensed under the free zone.
The fact that those that want to introduce Bitcoin to the region must maneuver their way around regulations begs many questions on the legitimacy of the crypto-currency, to which Kaddoumi answers: “This is where the grey areas are. It’s not illegal. If it’s not illegal, then it is legal, technically. It’s not like people are trading Iranium or explosives. People are trading in something that is a commodity.” At least, Kaddoumi would like it to be treated as such. While Bitcoin is perceived by the banking system as a currency, he says it should be considered a commodity – gold, to be exact – “where your taxes would be calculated as capital gains by the end of the year”. In fact, in June, Sweden asked the European Court of Justice to determine a Bitcoin taxation system on the crypto-currency’s exchanges.
Pegging please. As a currency, Bitcoin operates independently from any financial or governmental entities or authorities. Kaddoumi likes to believe that it regulates itself. But, on the flipside, this means that governments can’t control its inflationary or deflationary direction with policies such as quantitative easing – money injection into the money market.
Governments also can’t break their way into the Bitcoin network: their supercomputers can’t take over the mining share of Bitcoin, as “they would have to shut down their existing networks temporarily to do so,” says Kaddoumi, and their efforts would be countered by a worldwide network of geeks and hackers. They also can’t buy enough Bitcoins to control its price. “If someone wants to buy ten percent of Bitcoins now, the price is going to shoot up so much that they won’t be able to buy the next ten percent. We’re talking about supply and demand,” he explains.
Brochures that were recently handed out by reps at a Bitcoin stand in Jebel Ali’s Ibn Battuta Mall suggest that the crypto-currency’s exchange rate against the dollar can only go up – whereby one Bitcoin was worth $0.01 in 2010, $1 in 2011, $13 in 2012, $130 in 2013 and $630 in 2014. “What are you waiting for?” the brochures ask. Laurent Wakim, regional director at payment gateway PayPal MENA, is waiting for the Bitcoin’s volatility to “go down” and the introduction of a regulatory framework for the currency. However, Badawi says the currency’s stabilized over the past few months, as big companies in the US started accepting it. “Honestly, the conventional financial system is more complicated than Bitcoin. But nobody thinks about it,” he adds, admitting, though, that businesses still can’t price something in Bitcoin like they would with other currencies.
The good side. Still, The Pizza Guys, for which 30 percent of transactions is made through credit cards, sees a lot of promise in accepting Bitcoins – only if customers were to adopt the currency. Through their Bitcoin wallet, Badawi and his wife and business partner, Amber Haque, are able to receive payments instantly from nearly 50 customers.
With credit card transactions, “you’re never clear on how much money you have and when you’ll get it to pay bills. For any business, managing your liquidity is very important. Say we’ve accumulated AED1,800 in credit card transactions. After two days, we’d get a notification that AED1,400have been credited to our account and, three days later, AED375,” explains Badawi. Doudin and El Achkar have already begun testing Yellow with two merchants, one of which is Liwwa, a crowdlending platform, and the other, an e-commerce shop. When asked why, in a region that is yet to swallow the concept of Bitcoin, they have not unified their gateway ventures, El Achkar, Doudin and Kaddoumi agree that their businesses now largely rely on referrals and, as such, have to be very localized until further notice. “It’s two different startups. So technically, we would be competing. We promote each other. We’re not enemies,” says Kaddoumi, while El Achkar adds: “Realistically, we’re starting operations in Lebanon, Jordan and Dubai, because we have to limit our scope initially to serve our customers adequately.”
Risky business. Kaddoumi now plans to promote Bitcoin by speaking to trendsetters, rather than paying door-to-door visits to local merchants. “It makes sense for e-commerce players to adopt this first, but that’s not happening.” That is because merchants want to safeguard their businesses against Bitcoin’s fluctuating exchange rates, according to Omar Kassim, founder of e-commerce platform, JadoPado. Elias Ghanem, CEO and co-founder of Telr – a payment gateway targeting SMEs (small- to- medium-sized enterprises) – and former managing director at Paypal MENA, says that, while he is frequently approached by Bitcoin providers to add a payment option with the crypto-currency, merchants are yet to ask for the same. “They are more concerned with multi-channel payments, anti-fraud [provisions] and the availability of local currencies,” he asserts.
Both Umbrellab and Yellow allow merchants to accept Bitcoins and immediately have them converted to their local currency, taking on the risk – or the profits, depending on the day – on their behalf. This risk hedge also happens to be the value proposition of both businesses, because merchants can just easily open a Bitcoin wallet with no need for a payment gateway – which is exactly what The Pizza Guys has done. From research and worldwide trends, Doudin has picked up that merchants care very much about the volatility risk and that not all of them would know how to “store their Bitcoins securely and exchange them to the same amount they sold their products for”.
What’s the use? “As a business, accepting Bitcoin doesn’t cost anything; it opens your business to customers around the world and decreases your costs of transactions significantly,” says El Achkar, adding that it is the acceptance of Bitcoin by businesses that would allow for more awareness around it. But, some may argue it’s the other way around. The Pizza Guys has been hoarding and sitting on their Bitcoins for a while now, because Badawi says: “Unfortunately, not much can be done with them at the moment. It’s kind of my personal savings plan.” Even outside of the region, Bitcoin still has a super niche aura to it and is yet to appeal to the mainstream money market. “Even a lot of tech-savvy people don’t understand the mechanics of how it is mined, its value, why it fluctuates so much and the transaction ledger. And a lot of customers don’t want to understand it,” says Badawi. On the prospect of Bitcoin in the region, Kassim adds: “I think it needs to get critical mass in other markets. Payments, as a sector, here is heavily regulated by the central bank. If you want to get a license to be a money exchanger, it’s a long waiting time. I know businesses that have been waiting for seven years for a license. But then you have the interpretation that Bitcoin is a commodity.”
Doudin likes to compare Bitcoin to the Internet, revolutionizing value transfer, online payments and remittances around the world with no cost, much like the latter did to communication. In a region where he says payment options available to customers are “really bad”, cash-on-delivery (COD) transactions are high – with most research reports putting COD at 80 percent of online transactions – and credit card acceptance rates are low, El Achkar believes Bitcoin is a promising payment solution that is facing “an education hurdle”. What’s more, he sees no threat in the likes of PayPal possibly introducing Bitcoin as a payment option, but rather potential in legitimizing the crypto-currency.
“Bitcoin is the future of payments and value and money transfer. It’s not money, currency, commodity. It’s all of these things together,” says Kaddoumi. As a liberal, he is naturally fascinated by how the block chain technology can keep a record of wrongdoings and foul play when need be. “You can apply this to government elections that get rigged in a lot of countries. Every time someone votes, it can be shown in real time. You can do complex finance with it. You can put your will on the block chain. My personal belief is that cryptocurrency and the block chain type model will be adopted worldwide.”