Will the Bitcoin off-ramp regulatory problem limit it to transactions within national borders?
This is part of my effort to understand how Bitcoin and the Blockchain could change the financial services business. I will later pull all these posts together into a series.
Technically, converting Fiat to Bitcoin (on-ramp) and converting Bitcoin to Fiat (off-ramp) is easy. This is an Exchange function and the Internet is perfect for setting up Exchanges.
So, the problem is almost entirely a regulatory problem.
I don’t think there is an on-ramp problem. Regulators want to protect consumers against scams and frauds; they want to make sure that your grandmother does not buy fake Bitcoins. However it is hard to argue that one should prohibit the purchase of any commodity. The American tax authority, IRS, has declared that Bitcoin should be treated like a commodity. You can buy gold or wheat or tulips, so you can buy Bitcoin.
Bitcoin is of course different from all other commodities, because Bitcoin is a digital commodity that can be transferred as easily as an email or any other digital file.
Which leads us to the off-ramp, converting Bitcoin to Fiat.
There are legitimate reasons for regulators to control the off-ramp. This is far too easy for money launderers and other bad actors to abuse. Libertarians can rant against this, but entrepreneurs and investors are wise to treat it as a fact of life. Betting against regulatory control of the off-ramp is a huge speculative risk.
Regulators tend to be happy with a digital currency that only works within the borders of the nation state that they control. There are many of these already such as M-Pesa and and Dwolla. Google has their own currency which you can send as an email attachment – within the US only.
So, regulators will be comfortable with the idea that you can buy Bitcoins in US$ for example and then convert those Bitcoins back to US$. This will be a way for traders/investors to buy Bitcoins in the hope that the price will go up and then sell them for a profit – just like any other commodity.
Regulators are more keen to stop cross border transactions. That is hard for regulators because digital bits don’t stop at borders and present their passport. That is why regulators seek to control the off ramp.
It is possible to imagine a fully regulated global money transfer business that allows you, for example:
1. Buy Bitcoins with US$
2. Send those Bitcoins to the UK.
3. Convert the Bitcoins into UK £
This hypothetical fully regulated global money transfer business would have to go through all the usual KYC (Know Your Customer) checks that regulators have put in place to prevent money laundering and other illegal activity. In that case it cannot offer free exchange and existing money transfer businesses will be able to do exactly the same thing. Consumers who want to change currency only care about a) price and b) speed/convenience. If adding Bitcoins as an intermediate step makes it cheaper and quicker to change currency then this will happen. However, given a regulator/KYC level playing field, it is unclear how adding Bitcoin as an intermediate step makes the transaction cheaper/easier.
If Bitcoin is not primarily a cross border money transfer service, then it has to serve some useful function to buy and sell goods/services domestically either online or in physical stores. I will be exploring what could make that happen in another post.