Rawdon Adams, chief executive of blockchain startup Bitt, discusses the company’s pilot project with the Eastern Caribbean Central Bank. Rawdon also details the specific challenges of blockchain technology in the Caribbean, as well as the opportunities that the technology brings in a region that is difficult for traditional logistics.
The interview is part of iupana’s May 2018 special series on blockchain.
Our podcasts are designed to be listened to, and we highly recommend you listen to the audio for the full experience – the emphasis and emotion that you can’t see on paper. We provide the transcripts for your convenience, however please be aware that these may contain small errors.
Rawdon Adams, Bitt: When Bitt was founded, I’ve been here for about seven months. When it was founded it was really founded as a digital asset exchange. Since then the focus has changed much more towards being a technological solutions provider. In fact, we describe ourselves as a digital monetary system as a service. What does that mean? That what we’re really looking at is servicing for constituencies, if you like, but they’re to us a perfect vertical. Starting from Central Banks because you mentioned the deal we have with the ECCB.
The Central Banks are really pretty key for us. One of the reasons that should be of interest to Central Banks, although I am simplifying here: Especially in the Caribbean, just something as simple as the cost associated with minting and issuing traditional paper and coin is very expensive. I can give you the numbers for the ECCB for example. They on average annually spend about USD 3.5 million just replenishing their money supply. It doesn’t sound like that much but for a small Central Bank it’s significant.
Some of those costs are tied up in just the geography. They order the stuff from, I think the supplier is De la Rue in London but I could be wrong on that. It’s shipped over, they are a union of eight countries all separated by water, it’s not land borders. 600,000 odd people and so on. Just the logistics behind that as well as the absolute cost is quite formidable and the security issues and so on down the line.
That’s one of the main points of interest for a Central Bank. Also they’re, Central Banks actually make money off of minting and issuance, and it it is done digitally. What’s go on .. is actually, is radically reduced making up more profit for them, so there are specific advantages there. Looking down from that, that … if you like, of what I like to think of it as a pyramid from the Central Banks. Then we start looking now at next part in the vertical and that’s really commercial banks.
This is a really interesting sector for us. In the Caribbean in particular, one of the huge problems and obstacles that the commercial banks face, that they have to deal with on almost on a daily basis, is this risk of de-risking from the correspondent banks. Correspondent banks are typically larger banks that offer smaller regional banks services linked to facilitating trade payments well out of the Caribbean region. Those correspondent banks themselves are grappling with the same issues. How can we make sure that this is a legitimate transaction? How can we make sure our [Know Your Customer (KYC)] and [Anti-Money Laundering (AML)] processes are consistent with what our regulators demand?
The reason that is really of primordial importance to them, is because that is almost a life-threatening potential mistake if they get it wrong. The regulators can, especially in the States, can impose very, very heavy sanctions to the extreme of threatening to withdraw a banking license from a correspondent bank. I think I have seen that, not related specifically to the Caribbean, but I think a few years ago, BNP Paribas I think were being fined or prosecuted by one of the New York regulators and that was a very real possibility. All banks take that KYC/AML compliance issue extremely seriously. They spend a tremendous amount of money making sure they’re compliant.
Depending on which study and analysis you look at, you’re really talking huge sums annually for big tier one banks, global banks. The knock on affect down to the Caribbean is that if you are perceived as a country or a bank that either is non-compliant or potentially, and this is related, unprofitable simply because the cost of ensuring that the KYC/AML is in line with what’s required is tremendous. If you can’t satisfy those two criteria from a correspondent bank, you’re likely to be what’s called de-risked. They won’t deal with you. Some territories in the Caribbean, the most glaring example is Belize, at one point had all their correspondent banks withdraw their services.
Some of those were reinstated, I think with IMF intervention. Commercial banks are very, very vulnerable in this region to being cut off from the global payments systems and trade payments. Almost by definition an island, any island in this region is outward-looking in economic terms. We have to generate more exports than imports just to survive. We’re very heavily dependent on foreign exchange, foreign exchange reserves. Any solution that bolsters that should be welcomed.
For KYC/AML, our point of focus with commercial banks is really to be able to offer a cheaper way of implementing a KYC/AML check process. Such that the banks perhaps in aggregate, through a warehousing solution for example, they can share the cost, make themselves more attractive for correspondent bank relationships, but also for their own internal profitability. Again, the ECCB, that part of the Caribbean is very interesting because they’re about 16 or 17 commercial banks. Most of them are regional but there are some that are international one, there’s one that’s a joint venture.
They are going through a period of consolidation so this idea of driving down the cost base perhaps through shared services like a bigger warehouse for KYC/AML, is a very specific part of the proposal we put to the ECCB. That accounts for a second layer on this vertical.
The next part down from the commercial banks is really merchants. What we see, again this is a very fragmented region in the Caribbean, and what we see here is that it is quite difficult for merchants to get access to cost-effective transaction processing. The most obvious point on this topic is credit card processing, meaning Visa and MasterCard.
There’s no great argument to scale here, so the merchants end up paying quite hefty transaction processing fees. I can say, I can speak pretty confidently for Barbados but what I consider probably the strongest local retailer here it’s actually a food outlet. They probably get the most attractive fees and that’s below 2%. Generally, most retailers are looking at perhaps as high as 5-5.5%. Those are the ones I’ve come across. … stories of higher ones, but I haven’t actually had a face-to-face with anyone paying more than that.
As you can imagine, right off your top line and this is before any kind of cost, overhead, tax, it’s right off your revenue line. If you’re having to pay let’s just say three 3.5% percentage to your processor, it’s fairly substantial and that’s just one cost. Merchants we know are looking for– and these are just payments and we actually plan to go well beyond payments, but merchants generally here, are looking for a far cheaper more cost effective processing alternative. That’s also faster as well as cheaper and potentially more secure.
That’s an important constituency for us and we think also beyond payments and that’s the first part of our solution that’s already in place for merchants. We’ll be able to extend that to other financial services for example a payroll or B2B transactions also. Already we think we have a pretty compelling case as it stands but we believe it can get a lot better and represent quite substantial advantages no matter what you’re competing against, be it cash, check, debit card or credit card. The final part–
Almost as a result of the geographics right it creates so many opportunities for digitalization there right?
Rawdon Adams, Bitt: Exactly. The door’s ajar, and it’s going to be down to us first of all to persuade that we have a good case. Now but having done that then to be able to offer more services to merchants on the one hand and also the final part of this vertical that we’re looking at, to retail users on the other hand. Payments are great but if you can build beyond that and offer other services, the most obvious to us when we’re looking at retail users, who also– of course it’s a double-sided marketing effort.
Were pushing both the merchants and to people to actually use our smartphone app which is effectively a digital wallet that we would like to turn into a full-fledged financial services center right on the phone. Right now someone can use that to pay for services at a network we’ve been steadily building in Barbados, a network of merchants. That might be at supermarkets, fast food, whatever. We have quite a decent array of merchants. Nearly 300 in a small place like Barbados, so it’s a good progress.
Beyond the payments itself, we know that there’s a huge– this may be true across the Caribbean and even beyond that — we know there’s a huge resentment, just on the part of ordinary account holders of banks. The kind of fees that are being levied and the difficulty of getting access to credit and a multitude of other things that when you hear from the banks perspective is, it is understandable, but the way it manifests itself in ordinary people’s daily existence represents ultimately an obstacle to economic growth and entrepreneurship. That’s clear on some of the data we have.
To give you one example: nearly every island in the Caribbean has a very large informal economic sector that’s not captured in the official GDP measures. In Barbados that’s estimated to be about 3 billion Barbados dollars, which is about 1.5 billion US. That’a a Inter-American Development Bank estimate. Those are people, maybe not 100% of them, but by and large, those are people who are outside the official economic stats. They may be people without bank accounts or it may simply be a case of people who are unable to participate in the formal channels of the financial network in terms of getting credit or what have you.
That’s, I think also a symptom of just the way our banking structure is set up in the Caribbean banks. They’ve got to target profiles that will make them money, and a lot of people fall outside that profile. Additionally, it goes back to the cost base argument that I made to KYC/AML. Sometimes, the banks just have a base cost structure that they cannot reduce such that they could pull in new clients. It is not economic to some of these banks to target people who would like to have access to financial services. The banks cannot do that in a financially sensible way. That is a niche for us. That’s a tour of who we see ourselves as a digital monetary system as a service, and the kind of verticals that we’re looking to address.
Tell me a bit more than the Eastern Caribbean Central Bank project that you signed the [Memorandum of Understanding (MOU)] about two months ago, in March. Can you tell me a bit more about what you’re planning to do there, and maybe some of the first steps that you’ve taken since you signed that MOU?
Rawdon Adams, Bitt: Sure. Yes we did sign an MOU in early March, early to mid March. The next step, in broad terms, that MOU opened the way to sign a contract between the two parties, Bitt and the Eastern Caribbean Central Bank, to develop a digital monetary system that will run alongside in complement to what they have there already. It would run the full gamut of what I described earlier. A central bank being able to mint and issue digital currency that can be issued to commercial banks and the commercial banks themselves can either use their own wallets or ours to offer to retail users and their own account holders.
That’s the broad terms of the MOU. We had a workshop run about three days. I went over there myself with a team, to thrash out exactly what the scope of the project would cover. A lot of the discussions there fell into two categories. One was just explaining in close detail what blockchain technology could potentially bring to such a project. The other bucket of discussions was really about what exactly does the Eastern Caribbean Central Bank want to do, documenting their processes, so we could understand what would be an appropriate solution to give to them.
We came away from that, actually it was very educational, a great discussion on both sides. We came way from that and went away and did the scope which we submitted to Governor Antoine and his team. We are really waiting on them to either- I think there are a couple of points where they may want to change the scope slightly – but a lot of the status right now is around making sure that each party to this pilot project has bought in.
To give you an example of why that can take time, the commercial banks have to be a part of that pilot project. It’s very important for us to get to actually put the value proposition to them correctly. A lot of that revolves around KYC/AML. I mentioned this specific context which was by consolidation. They had a few bank failures in the last three or four years and that sector is still consolidating. To get their buy-in, really does involve opening up a separate dialogue and having more or less the same kind of a workshop.
The Eastern Caribbean Central Bank is leading on that, and we are ready and waiting to participate with us. I’d say the ball is in the ECCB’s court. In terms of what we’ve been able to establish so far, it doesn’t stretch well beyond the scope. We are looking at specific technical solutions that might be appropriate on the minting and issuance side and also the steps that we need to take to roll out a merchant network either ourselves or in partnership with the commercial banks or the Eastern Caribbean Central Bank.
Broadly, that’s where we are. Lately, yesterday our last input was to pass along our feedback in terms of other things that are going on that are very relevant to the ECCB. One particular example of that is legislative discussions that are going on in the region, notably in Bermuda. They might have an impact for what the ECCB eventually wants to do post pilot because we do know that sometimes, the legislation may have to change. I don’t have perfect insight into what framework the ECCB is operating in but we know that is one constraint.
Broadly, we are standing by to explain, in a lot of detail, what the value proposition to commercial banks might amount to. They need our help on that. We are very concerned that that sector, they view us both as an opportunity and a threat, just to be perfectly frank. They know what their position is especially on payments. The broad challenge for any commercial bank, but especially one in the Caribbean which is a difficult region for a bank to be profitable, their loan book tends to be tied up either in tourism related products or real estate. The economies there aren’t massively diversified. That means for them to make money, they have to generate fee income. That might be fees associated with accounts and so on.
In very broad terms, I’m not sure how far either side of this number every bank in the Caribbean falls, but typically you’re looking at 30% to 35% of bank revenue is coming from fees and commissions on foreign exchange transactions or overdraft use or what have you, rather than genuine revenue being derived from lending activities. If you are a bank, you look at that and you see a fintech company or a regtech company, as we are doing both, comes along and proposes this essentially a peer to peer payments facilitation that disintermediates a lot of the fees that banks are drawing on. You are right to look at it very, very carefully.
Their challenge is, to my mind, is how do we transition to a cheaper cost base using this technology, without actually cannibalizing our revenue? For them that is a difficult business problem to solve. Ideally, what we’d like is to talk to those banks, partner with them and we do have a couple of discussions going on outside the ECCB to the end. The overall takeaway is that it’s not a gimme for commercial banks to jump right in. Sometimes they don’t have the expertise. The risk looks a lot more obvious than the reward.
It takes some reflection and education and research for them to come to the conclusion that we’ve come to. It’s probably the obvious one that it is coming and it’s how you ride the wave really. Somewhere like the eastern Caribbean with 17 banks sitting down there, I’m pretty sure some of them are going to be convinced because it’s a battle for survival. Others are maybe laggards, but the final apps are in conclusion I think or remain the same. It has to be done.
Tell me a bit about the technological offering that you provide. It’s based on the Bitcoin blockchain. How are you solving for the privacy versus transparency concerns that come with that?
Rawdon Adams, Bitt: Well, on our wallet in Barbados, we do do the issuance and revocation of all money going into that wallet using the colored coins protocol on the BTC blockchain. Our approach is really agnostic. If there’s something that’s going to be better. There are issues around scalability and processing speed transaction volume that can run on that blockchain. There are various developments like Lightning Network and so on that can improve that, and of course there are alternative blockchains. We’re agnostic. If we have to put in improvements, and it’s a different blockchain, we do it. For the ECCB, that really touches on the second part of the question.
Well again, we haven’t decided on a blockchain right now, partly because the input of the commercial banks is very, very important. In general terms, I’d say the privacy issues can be resolved using a permission approach, that makes sense. I’ve yet to have a conversation with either a bank or a central banker that isn’t predicated on that requirement. It would be very, very difficult, I’m not saying impossible, but it would be pretty difficult to find a central banker who wants every transaction of his institution to be visible to all and sundry. I don’t think that’s a viable option. I don’t want to say it’s a prerequisite, but we are looking at permission approaches for those institutions.
So you’re looking at other blockchains. The digital wallet is based on the BTC, but for the ECCB project, you’re looking at potentially other blockchain solutions?
Rawdon Adams, Bitt: Yes, but even for our– The context is so important. That’s why the distinction I’m making even for the wallet, it’s yes, we could continue as we’re doing. My real point is for reasons of pragmatism if we see something better that comes along, especially something better in terms of scaling up, we look to take advantage of it. For the central banks, the central banks depends a great deal on what the final scope that is agreed with us is before we can pick out a solution.
Then finally, just looking forward Rawdon, what’s the timeline for that? When you’re expecting or hoping to launch the pilot and how long is the pilot likely to run for?
Rawdon Adams, Bitt: Well, the timeline is that if we were to start tomorrow, we’d be looking at 9 to 14 months on the plan we submitted to the ECCB for the first stage and a half or two stages of what we’re proposing. We have a three pronged approach for a bunch of different reasons, but primarily for manageability, but also in terms of the budget that we know the ECCB are likely to be working with. Having said all that, when does the starting bell actually ring? That’s a little out of our hands, given what I said earlier about discussions with other partners and interested parties like the commercial banks.
Until we have that kind of agreement, we can’t actually begin on the substantive work as we’ve laid it out in the project. But we have the mandate and the direction from Governor Antoine, that sooner rather than later is when he wants to begin and at least accomplish the first of the three phases we’ve identified in the project, which has a lot to do with minting and issuance, but also ticking off the idea of a KYC/AML warehouse, but that latter part really ties in very closely with what commercial banks are looking at, and it actually reaches beyond the Eastern Caribbean.
There’s another territories, notably in Trinidad, we know that the local banks there, that’s a market really where it’s dominated by eight banks, and I think the top three really dominate the market, but they, even in that position of dominance, are looking for a shared cost solution when it comes to the KYC/AML. Some of these banks do have interest in Eastern Caribbean, so it maybe that the scope is extended for that part of the project, the KYC/AML to cover their interest as well.
On the face of it, it looks relatively straightforward, but the more people you talk to, the more you realize that this is a pilot project that could really have its scope broadened in a small region to try and capture everybody’s potential interest.
What do you think will be the most popular used case for blockchain in the Caribbean?
Rawdon Adams, Bitt: Well, I think in the Caribbean finally in my view right now, is going to be the cross border trade payments solution. This very fragmented region, many, many currencies, and a lot of those currencies are quite illiquid. This just might sound as a friction to increasing inter-regional trades, so any solution that can avoid going in and out of the US dollar because, your listeners may not realize it, but if a Jamaican company wants to make a trade with a Trinidadian company, typically the way settlement will work is the Jamaican company will first buy US dollars, and then sell those to the Trinidadian. They will settle in USD. They have to make any deal through the US dollar.
That has a couple of bad effects, one is that it’s slow and represents a block to inter-regional trade, and it obliges central banks to hold quite large reserves of US dollar reserves, foreign exchange reserves, then it just slows everything down. Any solution that potentially gets around that, for example, digitized regional currencies and specific bilateral trade agreements, is going to be an extremely popular solution. Opens the doors, for example, for things that people in other countries take for granted. E-commerce between two islands, now how do you settle that?
At least on the transaction side, it could be made a lot easier, especially for services. I think where goods are involved, you still have the cost of actually transporting those goods between two territories which can be prohibitive. That, I think is a massive untapped and dormant demand that we see. We kind of have seen, this is not an unknown problem. There have been approaches to try and solve it for a long time. There was one in the late ’70s carried out by CARICOM, the Caribbean community, and they have something called the CARICOM Multilateral Clearing Facility, where they were really specifically looking to ease the way the settlement process between regional countries.
It worked fairly well for a while, but some countries didn’t respect the rules. There were issues with some nations using the whole facility as a balance of payment tool rather than a trade facilitation tool, but the basic idea behind it was sound, so even that we’re looking, actually our chief economist Marla Durkharan is leading the charge to re-involve the architects and economists who were involved in that in helping us understand, “Is there a better way? Is there are way we could revive that and make it better than it was?” and so, on so forth. Overall, that’s a huge payoff for the region that we see.
What do you think would be the most lucrative use case of blockchain in the region?
Rawdon Adams, Bitt: Yes, in aggregate terms, the same answer. Anything that can facilitate this kind of trade for customers and nations and mitigate the costs, and is a catalyst to increase trade volumes.
What do you see is the biggest limitation for blockchain technology today?
Rawdon Adams, Bitt: The limitation we are seeing, that we encounter is the simple education and awareness of what it is. There’s this initial quarter of an hour you spend with a client explaining the difference between the protocol and the technology and some of the applications sitting on it because it is so closely associated with crypto-currencies for example, and yet that is one application of a good many that pragmatically speaking could really benefit the Caribbean.
We see that wherever we go and at every single level, whether we’re talking to Central bankers, of course at that level there’s a lot more for them to consider beyond, “Okay, I understand this isn’t a crypto-currency. I understand blockchain, what’s going to be the micro sector that’s going to promote financial inclusion. Do I have to worry about my money supply?” So on and so forth.
That is the starting point in every conversation right down to the retail user, who many of whom just associate anything, any sentence with blockchain must contain the word Bitcoin or Ethereum or Monero or something. A lot of our thrust is to say that that is one application but there’re a lot more and that can be applied to solve issues and problems we see every single day in the Caribbean related to inclusion or the high cost of transactions or de-risking in correspondence banking and so on and so forth.
Do you think one blockchain or one particular blockchain will come to dominate the market and if so, which would it be?
Rawdon Adams, Bitt: Good question. I think a lot of these depends on what context they’re talking about. Earlier in the interview we were talking about the BTC blockchain and some of the pretty well-known limitations on the number of transactions that can run to that per second and scalability and so on. I’d say depending on what you’re looking at, be it payments or be it the KYC/AML warehousing solution or what have you. The answer will be a little bit different but I think what will remain the same is how versatile and how future-proof, if you like, is the solution that you’re proposing.
I think the space is so dynamic and the changes in any given blockchain are coming so rapidly because of it’s open source based, many of these blockchain platforms. I wouldn’t even want to pick a winner. If someone could tell me I will re-allocate the source of my business to the suite. I don’t think it’s a question we can answer without considering the context or without the taking in to consideration change either.
Finally, to what degree do you see blockchain transforming financial services in the region?
Rawdon Adams, Bitt: Tough question. Ultimately, I think to the degree that regulators and authorities are willing to learn and understand the use cases and the applications and potential solutions that blockchain can bring. I’d answer quite dramatically positively. A lot of this is down to companies like ours explaining exactly what we can do, how the content is important and producing white papers and so on to address specific use cases. I guess around that, a lot of that argument again has to go towards separating the hype from what’s appropriate in any given context.
There’s just so much hype around blockchain and crypto-currencies that I think for potential clients, it can be quite hard to discern someone who is almost saying that blockchain is the one size fits all panacea to every problem you’ve got, from someone who is saying, “No actually, let’s take a good look at your problem and see whether it’s the appropriate solution.” In a way, we’re in a bitter sweet situation with Caribbean that the problems are quite, they do lend themselves to a blockchain solution but that a lot of these problems are tied up in cost. Even KYC/AML is the same thing and they are appropriate solutions.
Then you really get into having patience, enduring a lot of meetings with a regulators and so on and waiting on their reply in the whole educational, pitching, tendering for the kind of solutions that people are asking for. I think if we do get past that educational process and we’re frankly honest with what the technology can bring, well the region, certainly the Caribbean. Latin America is a little more difficult for me to comment on but I suspect probably similar. Certainly, in the Caribbean there’re necessary eight typical problems here that the technology is almost a godsend for.
The vice-president for regulatory policy discusses fintech in Mexico
The risks – or not – of tech innovation in financial services
PODCAST: Launching a fintech startup in a land of high crime, hyperinflation, and brain drain
PODCAST: Sebastián Serrano, CEO of Ripio, on finances of the future
PODCAST: The stock exchange’s CIO on experiences with Hyperledger fabric, and the limitations and opportunities of blockchain
Should tech companies be regulated by financial authorities?
No: Any financial services they offer are minor ancilliary business
Maybe: If they seek a banking license
Yes: Any company offering credit or payments should be monitored by financial regulators
- Atliana Piñón, CityWallet, on micropayments, blockchain, and starting up in Venezuela
- Argentine fintech InvoiNet hunts for Series B capital
- Kai Schmitz, IFC, on fintech investing in Latin America
- Andrés Araya, Santiago Exchange, on blockchain’s challenges and opportunities
- Andrés Vásquez, Bancolombia, on payments, authentication and digital banking in Colombia
- Amparo Nalvarte, Culqi, on payments gateways