Dwolla is Back, But Focused on Blockchain, Not Bitcoin
After a series of mishaps working with bitcoin startups – including the infamous, now-defunct bitcoin exchange Mt Gox, Dwolla is once again hoping to work as the connector between the emerging technology and traditional financial worlds.
The alternative payment network has been quiet about its foray in the blockchain space, but Ben Milne, Dwolla's founder and CEO, says the company is working closely with startups building solutions for tracking assets on the blockchain.
As assets are sent from one blockchain to another or from one business to another, there will have to be a real-world payment in fiat currency to settle that exchange so people can pay their mortgages and purchase other things that can't be bought with a cryptocurrency or digital assets, Milne contends.
He told CoinDesk:
"Cash assets between banks have to move so people get paid real cash for the things being exchanged."
Milne believes as more cryptocurrencies are deployed and blockchain technology advances, whole new asset types will be created.
One of the more interesting ideas for blockchain-based asset exchange is logging the extension of credit.
When certain types of credit are extended, "it’s good for everyone to know who owns what debt and what debt is where," Milne said, adding:
"Hypothetically, it would have been good to know who held the parts of the collateralized debt obligations during the 2008 crisis."
Preventing another collapse
Leading up to the financial crisis, banks made poor loans because they could pool various loan types and sell that bundle to third party investors as mortgage-backed securities, passing off the risk.
The complexity of this process can limit investors ability to monitor risk themselves and competitive securitization markets are prone to declining underwriting standards.
But instead of the opaque securitization process in place today, if registered on a blockchain, these exchanges could be transparent helping people manage risk.
The process would not be so much about changing the core ledger systems banks already use for storing assets, but making part of that process public so financial institutions, regulators and experts can have a better picture of what’s happening, Milne says.
Milne wouldn’t divulge the companies Dwolla is currently negotiating with but mentioned the interesting work R3 and Chain are doing. For instance, Chain's partnership with NASDAQ signals that the market is finding ways to leverage blockchain technology to solve organizational problems while also communicating with the status quo, he says.
But Dwolla isn’t in the business of determining which assets are moving, just ensuring that the cash equivalent for those assets passes between existing financial institutions.
"Dwolla has a very interesting asset in [its] alternative payment network which they’ve had before bitcoin and Ripple," says Gil Luria, an analyst focusing on bitcoin at Wedbush Securities.
Dwolla launched in 2010 and from its meager start in Des Moines, Iowa, with just a few small bank and retailer clients and two employees, it has grown to 50 employees and 500,000 customers processing more than $1bn annually.
Over the past few years, the company has built relationships with government entities in Iowa, speeding up the payment of cigarette stamp tax, vehicle registration and fuel tax. In October 2014, BBVA Compass partnered with Dwolla for its FiSync real-time payments platform.
"They’re leveraging a trend right now in financial institution investment to bridge the gap between the blockchain and traditional financial institutions," Luria says.
Ripple, R3, Digital Asset Holdings, Eris, Overstock’s tØ and many other bitcoin startups that have pivoted recently, including Chain and Gem, are working in this area.
Blythe Masters of Digital Asset Holdings has spoken specifically about how blockchain technology could change the way bankers and investors trade bonds and loans.
But it’s still early days, says Luria, and Dwolla might be at a slight disadvantage because Milne has been vocal in the past about his skepticism with bitcoin. Although Luria doesn’t suspect this will be too much of an impediment since many of the initial bitcoin companies and entrepreneurs have been overtaken by a new group that sees bitcoin as just one specific implementation of a blockchain network.
Influence of Mt Gox
Of course, this group may also view Dwolla as uniquely experienced given its firsthand issues with bitcoin firms, including Mt Gox, the insolvent bitcoin exchange that would later lose hundreds of millions in customer funds.
The incident may have arguably marked the high water mark for bitcoin as a currency, coinciding with its loss in value over 2014, and with this loss, a decline in investor interest.
Months before, however, the US Department of Homeland Security seized more than $2.9m from Dwolla’s Mt. Gox account under suspicion that the bitcoin exchange was operating as an unlicensed money transmitter.
Milne isn't worried about the past, though, suggesting blockchain offers the company a chance to begin anew in using bitcoin-inspired technology to solve pressing business problems.
"In our eyes, blockchain and bitcoin are totally different. Blockchain isn’t about currency exchange; it’s about recording, managing and moving assets."
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This article has been updated with additional information.
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