In the Pursuit of Transparency

Bank Vault

With the crypto-community still trembling from the aftershocks of the MtGox collapse, the emergent theme has been one of transparency. If the Bitcoin concept cleverly eliminated the need for trust in key areas, that bottleneck has predictably shifted elsewhere, such is the nature of human systems.

Scrambling to address issues of financial integrity and operationally credibility, legitimate businesses—including Coinbase, Bitstamp, and Kraken—have produced internal audits in an effort to convince users that they won’t be next. Thus far, these audits have been managed by prominent community members, like Andreas Antonopoulos, Chief Risk Officer of Blockchain.info, and Stefan Thomas, Chief Technology Officer of Ripple Labs—given that institutional solutions don’t yet exist.

Along with the recent IRS guidance, auditing and accounting infrastructure could likely become the next big growth industry within the burgeoning ecosystem. But as with all things crypto, there are also technological solutions.

One firm proceeding down the latter path is btc2ripple, a service that allows users to send bitcoins to their Ripple wallet, which provides total transparency of operational capital in real-time.

“This is really revolutionary in how you build trust with your customers,” said founder Denis Kiselev. “Anybody at any point in time can check the status of all our accounts as well as how those funds are flowing.”

A snapshot of btc2ripple’s funds are provided on the site, allowing customers to quickly confirm that the liabilities issued on the Ripple network are backed by real assets on the Bitcoin network. Account balances are verifiable through Ripple or Blockchain.info by clicking on the wallet address.

Ripple Network Liabilities

The company calculates its total liabilities by taking the difference between BTC issued (cold wallets) and the balance of operational accounts (warm and hot wallets). Warm wallets serve as transitional storage, used to top off hot wallets, which provide quick disbursement for live customer transactions—while customer transfers are always kept in cold storage.

Total assets is simply the sum of cold, warm, and hot wallets on the Bitcoin network. According to Kiselev, the difference between assets and liabilities consists of pending transactions but will always be a positive value.

Bitcoin Network Assets

“The nice thing is that you don’t have to rely on any kind of third-party verification, like audits or some kind of industry standard,” said Kiselev.

“When I was working at the Central Bank of Russia, we were building a model for the banking system,” he said. “We had to make sure Russian banks were sound and prudent, that they conducted their business in a responsible way—and to do this, we spoke to regulators in France, the UK, and other countries to learn from their experiences.”

“Your goal as a supervisor is to create a system that will protect consumers from risky behavior from the banks,” Kiselev continued. “The problem is that consumers aren’t sophisticated and can’t be expected to fully understand banking operations. Thus, you need to have standards, audits, and reporting facilities. You need official agencies and ratings companies, which can then confirm to the general public that these banks are operating in a sound and secure manner.”

“As we move toward this new world of internet-based payments, this remediation is becoming less necessary,” Kiselev said. “This new world allows customers to see and understand the operations of their financial institution without the need of a third-party, which will often charge high fees.”

Those cost reductions are passed onto customers, says Kiselev, who believes that a model grounded in transparency can increase efficiency and trust while empowering individual users. It’s also the clear path forward.

“With the MtGox crisis, the issue of transparency became very relevant,” Kiselev said. “Since we’re dealing with brand new technology, there are no well established standards as of yet. But there will be more iterations and other approaches; the market is naturally driven in this direction—as we move toward a self-regulatory model. For customers and market participants, this is a very good thing.”

Photo: Brook Ward