UPDATE (19th September 2014 14:39 BST):
The team behind Tinkercoin has suspended this service and moved on to other bitcoin projects.
A Canadian company is selling bitcoins via credit card - but it'll only sell you $20-worth, and it'll only do it once.
Founded back in February 2012, Ontario-based Tinkercoin has only opened its service today. Initially serving North America, it is focusing on the market for new bitcoin users who don't have any idea how to set themselves up with the new currency.
Co-founder Gareth MacLeod explains that the team kept encountering friends who had heard about the digital currency, but were put off by traditional exchanges with their know-your-client rules. He said:
"It's designed for someone who has heard of bitcoin and it's in their head, but they never took the plunge. Or maybe they did, but then [incumbent Canadian bitcoin exchange] Virtex asked them for a utility bill."
Instead, the developers decided to create a near-zero effort service for users. They provide a credit card number, sign up for an account, and nominate a wallet.
Tinkercoin lets users nominate their own wallet, but also offers to set up a Coinbase one for them. They make a payment, and their coins drop into the wallet. Tinkercoin only sells $20 of bitcoins, and it will only make one sale per customer.
No regulatory worries
"It's my job to keep tabs on [the] regulatory environment. There's almost no future in which selling $20 of bitcoins to someone will label you as any kind of significant money transfer businesses," said MacLeod, explaining how he expects to fly under the regulators' radar in both the US and Canada with his service.
Money transmission licenses simply don't cover firms dealing at his level, he suggests. "In the US, it starts at $1,000 per person per day. We sell $20 to one person, ever." Once a person has bought their $20 of bitcoins, they'll have to go elsewhere.
For this reason, he is equally unflustered by recent comments from Canadian finance minister Jim Flaherty about his plans to regulate bitcoin in Tinkercoin's home country.
This seems to go against most online business models, which focus on customer retention rather than customer acquisition, which is often a high-cost activity. But there is no shortage of willing users, argues MacLeod.
"I have 25 friends off the top of my head who think that bitcoin is interesting but they don't know where to start. We're not worried that there's gonna be any shortage of new bitcoin users in the next five years. Bank of America said that there were 1 million total bitcoin users in North America right now, so there are still 329 million left to go. We're happy with that for now."
The firm's fees are relatively high. Most KYC exchanges will service a customer's bitcoin-buying needs for roughly a 3% cut. Tinkercoin takes a flat $5 fee, so customers hand over $25 to get their $20 of coins.
That's a whopping 25% fee for the service, which prices itself based on Bitstamp's exchange rate. "We view it as a flat fee for the super-easy user experience," he said.
However, MacLeod says that a lot of the firm's resources went on securing a credit card payment processor willing to work with a bitcoin company (more on that here). The costs of dealing with the processor are "extraordinarily expensive", he said, reducing his margin to around 5-6%.
“There are 1 million bitcoin users in North America right now, so there are still 329 million left to go.”
Tinkercoin is working with at least one credit card fraud prevention service provider to help it reduce the risk of credit card fraud, says MacLeod, who spent a short stint as a software engineer specialising in security at Facebook.
Measures include matching the country associated with a user's IP address against the issuing country of the card being used, for example.
This would be a straightforward high-volume, low-value business if all the firm was doing was chewing through new users. However, there's also another facet: customers have to sign up for an account, which means that the firm will have their email address, potentially turning the business into a large bitcoin-focused list-building operation. The service gathers your email address by requiring a connection with your Facebook account.
MacLeod says that options open to Tinkercoin in the future include becoming a more fully-featured brokerage service, like BTCQuick.
That service, which also offers credit or debit card-based sales (but without the single purchase constraint), has 26,000 users. As long ago as October last year, it showed CoinDesk documents indicating that it had hit $2m in sales. BTCQuick follows anti-money laundering practices.
In any case, "a rising tide raises all ships," he says. Another competitor could be QuickBT, another business based north of the border, which sells bitcoin via Interac, Canada's online payments network. The service, built largely on Python and hosted on Heroku, launched today.
Credit card image via Shutterstock