One non-obvious but very strong potential driver for Bitcoin is international trade. Today, that area suffers from monopolization and stagnation in the financial sector, despite huge turnovers.
The annual turnover from international trade is about 12 trillion US dollars. It is hard to translate this to a specific portion of the world’s money supply, but a lot of money is being kept in USD for the purpose of international trade, particularly intercontinental trade.
This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the second article, on international trade. The others are unlawful trade, merchant trade, and investment (coming July 5).
To understand why Bitcoin is a major potential driver here, one needs to understand how international trade works today.
Businesspeople in different countries don’t generally trust each other, at least not to the tune of millions of euros that aren’t theirs but their employer’s. Therefore, they used a trusted and well-established intermediary to buy a so-called Letter of Credit. Essentially, it’s a check on steroids that needs an additional call from the issuer to clear it.
This check costs from $100k and upwards in normal container-level trade. Businesspeople at all levels are frustrated at how badly they are treated by the banks who take their business for granted, so it’s personal, too.
So the order of events is roughly like this:
- An order is placed
- A Letter of Credit is bought and presented
- The goods are manufactured and shipped
- On unloading at docks, the Letter of Credit is cleared
- The manufacturer is paid
The people in the factories in Asia are angry more or less every single day over how long it takes to get paid. Eight weeks for a payment to clear is not uncommon, so they need to deal with all sorts of currency fluctuation insurances as part of daily business. Additionally, the transaction is usually in USD, which is neither the buyer’s nor the seller’s native currency.
Do you see what would happen with Bitcoin as a drop-in replacement for USD here?
These traders are already used to dealing with the volatility of a non-native currency. Their frustration comes from the long waits (months!), from the cost of the Letter of Credit, and from the way they are treated by the banks that issue the LoCs.
Bitcoin has the potential to just do away with all of this, with the high reason for switching being the business advantage of fast payment and much lower escrow costs, and the low reason being the bad treatment by LoC issuers and frustration from payment delays. With both high and low reasons being perfect-storm-grade, it’s just a matter of clearing the obstacles for conversion.
A “high reason” is the officially presented reason for something, a rational reason, whereas a “low reason” is what causes us to actually energize and pursue the objective given in the high reason — an emotional reason, if you will, which is what really matters but needs an external justification. This pattern is frequently seen in politics.
The obstacle that must be cleared for this growth to materialize is the large-trade escrow scenario. Also, since we’re dealing with something as wishywashy as trust, it takes time to transition in large scale, but some pilots could be expected as soon as people inside international trading get to understand this advantage.
Potential growth
Again, it is hard to estimate the growth potential from this uptake driver. International trade is 12 terabucks annually. But how much of this would lie constantly in the transactional money supply? It is very hard to guess. Let us assume 5%, which is very cautious and conservative given the months-long payment escrows today. That gives a figure of 600 gigabucks that would have compelling high and low reasons to convert into Bitcoin.
Observers note that this number is tenfold that of unlawful trade which I covered the day before yesterday. Thus, unlawful trade may be a driver, but it is an insignificantly small one compared to international trade and the potential efficiency gains in the worldwide merchandise economy.
Today’s bitcoin economy is worth about 100 megabucks. Thus, once the escrow hurdle is cleared, international trade is very likely to increase the value of the Bitcoin ecosystem by a factor of about 6,000 over the course of a decade or so. Again, this doesn’t mean that the value of one bitcoin will rise by a corresponding 6,000x, as the market is more complex than that — but it does show the potential of the bitcoin ecosystem and the market direction.
This series continues in two days with merchant trade.
Hey Rick,
Just curious. Why isn’t this a business opportunity for current USD based escrow services? Why can’t the money just be wired to a trusted escrow service for a small bank fee? Then the escrow service handles the clearing and wiring to the recipients account and charges you a fee (smaller than $100k).
Or are you saying banks won’t even let you do international wires that big without paying them a ton of money?
To be honest, I don’t know the details enough. I do know that there are requirements on the escrow service that go way beyond what I have detailed here.
Discretion is usually one, and banks outside of Switzerland have given up that.
It looks like, in your four drivers, your forgot something that I feel significant: micro-trade. Being able to pay a very small fee for a very small service. Such as paying 10 cents to read an article. This is currently very expensive (as most of the cost is taken by the transaction fee) and could be a significant push for bitcoin.
I talked about it here : http://thebitcoinsun.com/post/2011/06/18/The-Virtual-Cent-War
You are absolutely correct that this is a new field that opens up.
However, in my drivers series, I choose to focus on what already exists and will benefit from moving to Bitcoin, more like a profitable drop-in replacement. There will be a follow-up post on opportunities about some of the interesting new possibilities that appear.
I actually disagree that micro trade will be a driver for bitcoin; the reason being that it takes FOREVER for fractional bitcoin transactions to occur without paying a fee. You don’t want to wait 10-20 hours to read an article; you want it now. Even in the best-case scenario, it takes a lot of time for bitcoin transactions to clear. It’s not the best currency for fast-and-easy transactions.
Right now, even a nominal transaction fee will push transactions through. However, in a world where we’re competing to get in on the 40k (I believe) blocks that occur every 6 minutes, it’s easy to see that if micro transactions gained significant market traction, there just wouldn’t be enough room for them in the blockchain — most would end up being orphaned simply by the limitations of the current rules of the blockchain.
Now, if someone were to start an alternative blockchain with more blocks/hour and larger block sizes, then we’d have a case for microtransactions. Otherwise, I just don’t see it happening.
Letters of credit are used because they allow international companies who don’t trust each other to do business through trusted intermediaries (banks in the home countries of the parties). There is plenty of competition among banks to process letters of credit quickly and efficiently while ensuring that both parties are holding up their end of the bargain (on paper). None of BTC’s properties do anything to eliminate the problems of the lack of trust involved in international trade, and it’s the lack of trust that is responsible for the delays, not the medium of exchange.
Letters of credit cost money because the banks are doing important work. They are making sure that if you’re ordering X amount of goods, that the shipper has a Bill of Lading stating that they put X amount of goods on the ship. They are making sure that the goods are described in the documents exactly as they were described in the LoC. Using BTC is not going to somehow make these services free of charge. You need to pay people to do these things, whether its a bank or another service.
I also don’t understand how contracting in BTC helps solve the problem of volatile currency changes. The value of BTC will rise and fall against other currencies just as the USD does against other currencies, and the prices of goods/commodities will also rise and fall against currencies. So how does BTC solve the problem of contracting for goods and currencies that take months to be received when prices and exchange rates can be volatile? That’s not a problem BTC can solve. (And why even mention “native currencies”? The parties can use any currency or basket of currencies that they want to use. BTC aren’t going to be the native currency of any place, nor are they guaranteed to be any less volatile than any native/non-native currency or basket of currencies.)
The need to insure against a volatile currency is lower if the transaction is quicker. If Bitcoins can do this quicker (assuming it can – I have no idea, this is not my area of expertise), then such insurance me be less costly.
It’s not the transaction itself that causes the weeks of delay. The delay is there because the parties don’t trust each other. The bank keeps the buyer’s money until the bank is satisfied that complying, non-forged documents have been presented, as agreed upon by the parties. If you are a buyer or a seller, you want this delay. It helps to make sure that you get paid, or to help make sure that your goods are shipped before you pay. If the value of currencies and commodities fluctuate during this period, that’s not a problem BTC can fix. The fact that BTC can be sent quickly does not at all solve this fundamental problem of a lack of trust between buyer and seller, and it does not do away with the delays involved in dealing with intermediaries.
It’s not the transaction itself that causes the weeks of delay. The delay is there because the parties don’t trust each other. The bank keeps the buyer’s money until the bank is satisfied that complying, non-forged documents have been presented, as agreed upon by the parties. If you are a buyer or a seller, you want this delay. It helps to make sure that you get paid, or to help make sure that your goods are shipped before you pay. If the value of currencies and commodities fluctuate during this period, that’s not a problem BTC can fix. The fact that BTC can be sent quickly does not at all solve this fundamental problem of a lack of trust between buyer and seller, and it does not do away with the delays involved in dealing with intermediaries.
Escrow was anticipated by Satoshi — it’s just not enabled yet:
https://en.bitcoin.it/wiki/Contracts
Put up a bounty.
I’ve not seen it put so simply an easily, I applaud this article. One of my friends did ask me after reading this, how workers without a computer would be able to be paid in Bitcoins without converting it straight over to fiat money. It’s pretty simple really, the employer holds the employees Bitcoins on their computers and hands out company scrip to the employees. Employees will benefit from Bitcoins without needing to buy a computer, and employers can use Bitcoins to decrease the cost of business, which will allow them to give out more company scrip. It’s a win situation for everybody.
How do those workers receive payments now? Most money is digital already, cash is a small minority of actual money purchases. Further, you will see Bitcoin banks emerge (like MyBitcoin.com), wherein BTC is simply stored by the bank, and owners of that money will have debit cards that draw against it. No computer needed in such cases.
The problem is there are many areas without electricity, making a debit card useless. The only way to fix this, and the best way is to offer company scrip to employees. It helps the profits of the company and encourages loyalty to the company that is graciously allowing them to be paid money.
[…] Falkvinge.net – Bitcoin’s Four Drivers: Part Two – International Trade: […]
The electricity issue can be solved with a reliable mobile app. Many areas in africa with electricity issues do fine with mobiles because then only need charging once in a while and you don’t even need power at home to do this.
Who is monopolizing international trade? I believe you are referring to the US dollars as the defacto international currency for trade settlement. This means that US Bankers have a major monopoly on the financial services business of trade financing. As you suggested, if Bitcoin can be a replacement, then all national banks will have the same level of playing field which will drive transaction costs down. This will, of course benefits traders. BUT is outcome is only an assumption that BITCOIN is a superior alternative to the current electronic commerce conducted in international trade. As pointed out by Ari Pole (earlier post) this may not hold true. I tend to agree.
A LoC is a payment insurance for the seller where the terms & conditions for the payment are clearly stated in the LoC (not related to the contract between seller and buyer). I.e it is a payment security for the seller where the bank (not the buyer!) guarantees payment for a service done (as stated in LoC)! (simplified description of course)
That means that the buyer of course need to make sure that the payment terms & conditions in the LoC needs to fit it purpose (can be tricky!).
Currency used is irrelevant, can be chosen whatever the buyer and seller agrees. If any currency exchange risks exists for either buyer or seller then hedging (currency exchange rate insurance can be bought from any financial institution) can be bought.
Summary:
1) Bitcoin can not replace LoC (trivial)
2) If buyer and seller pays salary, taxes, rent, utilities etc in Bitcoin then no hedging is necessary
Dying to read your take on “merchant trade (coming June 20)” and “investment (coming June 22)”
Where is the next installment on bitcoin drivers? Due 22nd!
How is the Bitcoin economy different from tulip mania?…
Exactly correct — there are differing reasons why people and businesses will use bitcoins, but they all draw from the same pool of supply. Simply the float needed for use as a payments system even if nobody is hoarding bitcoins would cause the demand …
The next installments in this series are coming, don’t worry. I just didn’t want them to drown in the current chaos with MtGox.
I’m currently inflight, presenting day after tomorrow, so maybe Sunday.
Cheers,
Rick
This can indeed be a might driver for bitcoins. But it would only drive anything if businessmen around the world hurry up and get ready to use bitcoins *before* governments start banning them all over. A few politicians are already waking up to the danger bitcoins represent to them. I’m quite pessimistic there, I think only a few governments will not ban bitcoins, particularly those who don’t depend on their central banks so much, like Switzerland, Norway, Singapore etc. Most others will ban it more fiercely than cocaine.
[…] as Bitcoin’s four drivers. This is the first article, on unlawful trade. The others are international trade, merchant trade, and investment (coming July […]
[…] four drivers. This is the fourth article, on investment. The others are unlawful trade, international trade, and merchant […]
[…] Forrás: Falkvinge.net […]
[…] four drivers. This is the third article, on merchant trade. The others are unlawful trade, international trade, and investment (coming July […]
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[…] a reasonable enough number to be in the right ballpark. Based on my four earlier estimates (one, two, three, four), I think it is reasonable that bitcoin captures a 1% to 10% market share of this […]
[…] http://falkvinge.net/2011/06/18/bitcoins-four-drivers-part-two-international-trade/ […]
[…] http://falkvinge.net/2011/06/18/bitcoins-four-drivers-part-two-international-trade/ […]
[…] pour ensuite échanger ces dollars contre le gadget. Mais nous l’avons observé, le Bitcoin dépasse de loin le dollar sous tous ses aspects en tant que gage de valeur pour le commerce international. […]
[…] many cases where servers have been hacked and keys stolen. As Bitcoin grows so that, for example, high value international trade with suitable escrow becomes a reality then the possibility for intimidation arises (force the […]
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