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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Tuesday, August 30, 2016 | Manila, Philippines

2nd Quarter Banking Report (2016) (Q&A with bitcoin startup Satoshi Citadel Industries, Inc.'s CEO)

'We're going to kill the banks — that was the initial idea'

The idea of a currency that is (1) created via the Internet, (2) not governed by any central monetary authority and (3) determined by lines of code is something that seemed to come straight out of a science fiction novel. Bitcoins, however, have attracted the attention of bankers, merchants, economists, and government authorities since the virtual currency entered the public lexicon in 2008. Created by an anonymous programmer bearing the pseudonym Satoshi Nakamoto, Bitcoins can be used as a medium for paying some goods sold through the Internet as well as for investment. But the stability of the virtual currency has been tested time and again through hacking of exchanges, the biggest of which was the security breach at Tokyo-based Mt. Gox that resulted in its collapse. Early this month, another breach happened at Hong Kong-based BitFinex, with close to $65 million worth of Bitcoins stolen. In the Philippines, one start-up that has managed to stay afloat despite these challenges is Makati-based Satoshi Citadel Industries, Inc. (SCI), which came into being two years ago with the aim of “building the ecosystem for Bitcoin in the Philippines.” Claiming no relation to the Bitcoin founder, SCI has since developed several products: Rebit.ph (a remittance channel that uses Bitcoins), Bitmarket.ph (a payment processor service), PrepaidBitcoin.ph (a prepaid Bitcoin stored value card provider), BuyBitcoin.ph (a Bitcoin exchange) and Bitbit.ph (an upcoming Web mobile e-wallet). Recently, it received venture funding from KVG, the investment arm of South Korea’s Kakao Corp. BusinessWorld sat down with John T. Bailon, the Philippine start-up’s co-founder and chief executive officer, to discuss his Bitcoins-worth (pun very much intended) of insights on the prospects of the virtual currency.

What’s the story behind the company’s founding? What led you to form a company dealing in Bitcoins?
I first got into Bitcoin in 2013, my interest started out with its speculative aspects. Eventually, I realized how much of a breakthrough the technology behind it was. That’s when I started pursuing opportunities to build a business out of it. That’s when I met my co-founders who shared the same vision for the technology. We had a very broad goal back then: we wanted to use Bitcoin to build a company that will service the Filipino people.

What opportunities and challenges do you see in entering the virtual money market? From both a consumer and business perspective, why should one consider using Bitcoins?
The landscape needs a lot of help. Our country is comprised of 10% of OFWs -- that’s 10% of Filipinos doing regular cross-border transactions in the form of remittances. Eight percent in global average fees comes out to about $2.4 billion in expenses just to send their hard-earned money back home. This can be helped by digital payment rails. Only 30% are banked, and most of them use banking services merely as a dispenser of their salaries. But in the last couple of years, there has been a surge in smartphone ownership. Filipinos are becoming more and more connected and Internet-literate. Around 52.6% Filipinos are on Facebook.

Who are typical users of Bitcoins and your services?
Users are usually aged 18-30, very young and very technical. They’re mostly males and into computer-gaming because they’d need a powerful computer to mine Bitcoins. As for income level, it varies really. I would hear someone who is a top executive deals with Bitcoin in the bank. On the other hand, you have a student.

What is your company’s business model? How do you guys earn from the Bitcoin business?

We’ve been using Bitcoin as payment rails. In the core of all our products is basically a trading desk. We’ve built products that convert traditional money services into more efficient digital forms.

A lot of the excitement surrounding Bitcoin is driven by news reports. How do you break that? It’s not a problem for a new bank because everyone knows what a bank is, what it does. But with things like Bitcoins and blockchains, how do you generate the trust in using this kind of technology?

It’s very hard. First of all, before you could even convince someone to use Bitcoin, you’re going to have to explain it to them. It’s a tall task and it’s a paradigm shift because how can something exist without someone owning it? So really, what we’ve been doing is that we minimize the effort of having to educate people (of course, we’ll still educate those who are willing to know about it). But the consumer, in general, doesn’t have to really understand what it is, the same way that we don’t understand how SMTP (simple mail transfer protocol) works, but we know how to send an e-mail.

How are the company’s financials? Can you translate that into peso/dollar terms? And how’s growth so far? How soon do you expect to earn a profit and sustain it?
It’s not a lot to be honest but so far, we’ve been processing a pretty significant amount of volume. I can’t say exactly, but I can tell you we’re doing more than $3 million at least every month, on average. We’re always in double-digit growth month to month, so we average at around 12-20%. It varies. Since last year, we’ve been in the black. I think we owe this to the fact that compared to companies like Western Union or Moneygram, we do not require huge amounts of capital and operating expenditures to run our services owing to the fact that we use digital solutions.

What do you think is a nice model that could earn and be attractive to consumers at the same time?
It’s basically just putting all the financial services that you can in a (mobile) app. Let’s look at millennials -- most of the time, they’re probably on their phones. When they start earning money, they’d probably get it in a bank account and they’ll probably download an app that accesses their bank account. So I think, it’s a generational thing more than convincing my lola or my mom to use these products...

With your company on its second year -- and the industry on its seventh -- what is its biggest achievement so far? Its biggest setback?
Growth. We’ve seen user and volume growth as a very good indicator of where things will go. I think a huge setback so far are these other malicious entities that are using “Bitcoin” as a means to scam people. It hurts the image of this technology, but I believe our regulators are ready to foil these actors and allow legitimate innovators to flourish.

Describe your company’s (if not the industry’s) growing pains. And how did you overcome them?
The complexity of Bitcoin and how it works really is a big roadblock for us. We try to eliminate the need to understand that, and instead we’re building user-facing interfaces that make using our services easy and putting the Bitcoin complexity under the hood. Some of the OFWs that got sent through us, they don’t even know that it’s Bitcoin… They hand their money (denominated in foreign currency) to the company that they’re working for, and that’s it. It’s a work in progress that we constantly monitor and learn from, and to say that we’ve actually already overcome them is irresponsible at this point. There are tons more of improvement to be made.

What did your company do to promote Bitcoins in the Philippines?
We’ve been touching base with universities to teach students about the technology. Grassroots movements are the best in planting such a complicated but powerful seed such as Bitcoin in the young minds of our future innovators.

Recently, your company acquired local exchange BuyBitcoin.ph as well as received funds from KVG. How will these benefit SCI?
BuyBitcoin is a very good first-touch product that stands to become a core component for providing liquidity in the Philippines. We’re happy to have the product, as well as Sam Kaddoura, their CEO as part of our team. KVG’s investment helps us grow our team and scale all our development efforts at a higher speed. With the investment, we’ll be able to bring all our services to more and more Filipinos.

Considering that a huge part of the Philippine population remains unbanked, how will your products help promote financial inclusion?
There are two general types of Filipinos, those who are set in their ways and those who are open to new things. (And they aren’t necessarily separated by age groups.) Our approach is two-pronged: We have Rebit that sort of “upgrades” the traditional methods of sending remittances and we have Bitbit to bring financial services to the more technology-savvy Filipinos.

One of the sales pitches behind Bitcoin is to do away with middlemen and thus bring down transaction costs. However, providers such as your company have partnered with banks to expand access to your services. What is the arrangement between the two parties? How do the two benefit from each other?
This is a more traditional partnership, in that these banks earn fees for their services. Bitcoin can eventually eliminate the middleman, but until our government accesses Bitcoins to pay for taxes, a middleman is not necessarily a bad thing if it will solve a lot of financial inclusion problems.

How do you respond to traditional financial institutions getting into the game?
It’s a welcome thing. To be honest, they should be coming into the technology. The fact is that when we started out, we thought that we’re going to kill the banks. That was the initial idea. Now looking at it moving forward, we realized that it’s not really that way. What we have is a technology that can co-exist with existing banks because not everyone can be their own bank, which is what essentially Bitcoin is doing.

Do you see a future when there’s still a role for banks?
Yes, for sure. If banks fail, it would be because of other reasons, not because Bitcoin is here. I’d imagine Bitcoin becoming a reserve currency, sort of like the US dollar is a reserve currency here. It remains to be seen.

So far, you have seven products under your belt, which according to your website, would serve “to create a sustained and dynamic Bitcoin ecosystem for the Filipino market.” Can you explain what this means and how this would benefit everyone in the long run?
Our goal is to make use of digital currencies and other innovative technologies to improve the lives of Filipinos, especially in the financial aspects of it. That is a huge undertaking and that’s why we believe that an ecosystem play is what is needed to become successful. For example, you can’t only be a Bitcoin payment processor, you also have to have a wallet.

Considering that Bitcoins are relatively new and their use here in the early stages, what are the gaps that your company can fill?
Consumer facing products are definitely a huge gap in our offering. We have Bitbit for that, but as with all consumer products, a lot more time and effort is required to get things right.

Incidents such as the Great Bubble of 2011 and the Mt. Gox incident have led people to become wary of Bitcoins. How do you develop among people the trust in this alternative mode of transactions?
All of those incidents are caused by poorly managed companies and their security measures. In fact, if you think about it, Bitcoin’s power was put to the test in those two incidents. The fact that the theft of the Bitcoins happened at Mt. Gox and no one was able to “manipulate” the blockchain to right what is wrong proves that the technology does not discern from what is legal or not. It only knows to behave the way it was designed: securely and in a decentralized fashion. That’s a fundamental requirement in building such systems. The internet is a great analogy for this. People can keep publishing malicious or illegal content over the internet, but it’s up to the authorities to regulate or stop them. It’s sort of like an even playing field, as an analogy: in basketball, the ball, hoops and court are equal for both teams, and the rules are set by the officials. Bitcoin and the internet are the courts, let the officials and its players do what they want with them. To answer the trust necessity: we need our customers to trust our company. Bitcoin is only the technology so trusting it is not the point. It’s the company and the people who are behind it that is to gain their customers’ trust.

The Bangko Sentral ng Pilipinas (BSP) is preparing new rules to cover the use of digital money as well as crowdfunding and peer-to-peer lending. What kind of regulations do you foresee? How will you and similar FinTech companies respond to the challenge of regulation?
We welcome regulation, in fact we want regulation. It helps prove to our customers our willingness to protect them and to serve them within the security of the law. I believe the BSP is set to create a very good precedent for FinTech companies, they understand that killing innovative technologies while in the cradle is irresponsible and overall, as long as it helps improve the lives of the Filipinos, then they are all for it. They’re the referees. If you think about it, we’re sort of becoming a “crypto-bank” because we process payments and people sort of tend to trust us with their funds, and that is a responsibility that needs to be regulated…

Right now, what’s the regulatory landscape for companies like yours?
Right now, the BSP doesn’t require us to report anything, but we follow the rules anyway. We collect KYC (know your customer) information and we’re in the process of registering for our remittance license, so we’re complying even if they don’t need us to comply. And we’ve been advising the BSP for a while now... It felt like it was a good starting point for a framework to regulate Bitcoin, or more importantly, regulate Bitcoin companies. The thing is, we can’t regulate Bitcoin. It’s like regulating the internet. It can be done, but you’ll need billions of dollars for that. Bottomline is that as long as they don’t make it illegal, I’m okay with it.

What were the key areas of concern that BSP raised, or you raised to them?
Mostly areas on consumer protection, which is good... They were worried about how funds get stolen. They also wanted to understand how Bitcoins are created. I guess they just want to make sure that it’s not us that’s creating Bitcoin. Once they got that, they realized that it’s a payment rail, not a currency per se because nobody really uses Bitcoin as a currency. Like in Bitbit, eventually we would store your funds in pesos, but it gets converted to Bitcoin when you send out.

With exchanges having different exchange rates, how would a Bitcoin user know if she is not overpaying (if you’re buyer) or underselling?
Like in all securities, it really is up to the customer and the circumstances of their transaction. Bitcoins may seem cheaper in other territories because of liquidity in those markets, sure, but will it be convenient and actually cheaper for them to set up an account, wire the funds and wait a few days to get the Bitcoins. Another misconception: because Bitcoins are divisible up to eight decimal places, you can actually buy P1 worth of Bitcoins if you wanted to. Prices are quoted per Bitcoin, so let’s say Bitcoin is at P30,000/btc here and in Hong Kong it’s at P29,000. The P1,000 spread may seem huge but if you only wanted to buy 0.05 btc, the cost here is P1,500 while in Hong Kong it would be P1,450. Considering forex spreads on Philippine peso to US dollar to Hong Kong dollar, and fees paid in sending the funds, buying here actually makes more sense. Take note too that prices can sometimes be even cheaper here, so really, circumstances of each transactions vary and it’s not generally good to compare rates across other markets.

In the context of remittances, wouldn’t the volatility of Bitcoins be a concern?
Yes, but we protect our users from volatility. This is the gist of our product Rebit’s service lies.

So you have products that deal with remittances and payments. Which is more difficult to penetrate?
It’s definitely the payments, because you’re trying to change consumer behavior. With remittances, we haven’t done that because they still talk to the same people, it’s just that the Bitcoin (transaction) is being done in the middle. Whereas with consumer (payments), imagine a jeepney driver using Paypal, that’s a huge shift. But here’s how we look at it: so there’s like 30% only of Filipinos having bank accounts, but there’s 60% Philippine penetration of Facebook... and 40-50% of Filipinos are smartphone users. That’s growing. So eventually the generation that really doesn’t know how the internet works will die out, and the people that understand technology will eventually ease into the working society. And I think this is a perfect timing for the Philippines because we never got to the point that the Philippines is penetrated by credit cards. So maybe there’s a way for us to leapfrog over the credit card system and go directly to digital currencies.

Care to share with us your future plans and strategies going forward?
We intend to get into the consumer market with Bitbit and other products in the pipeline. Up to this point, we’ve been focusing mainly on our B2B business in Rebit, with ancillary products supporting. Bitbit will soon be officially launched, and with the help of Kakao Venture Group’s help, we will enter the consumer market with never before seen innovations.

*For inquiries, send e-mail to research@bworldonline.com

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