Editor at Large

Those who want to understand exactly how bitcoin is being adopted in the U.S. would do well to take a look at the tech startup Snapcard.

The company has existed less than three years, but it's already reinvented itself twice, changing its business model to adjust to bitcoin's evolution. A look at what the company has attempted and the market forces it's faced provides insight into digital currencies' acceptance in the U.S., the technology's disruption of traditional banking, and what the future might hold for bitcoin-based commerce.

The upshot: Providing bitcoin wallets — which let people buy things with an app using bitcoin — is a tough road for multiple reasons. But the use of bitcoin for international payments holds promise and is already helping startups edge out traditional banks.

Snapcard's founders have been "very smart, very agile in the way they envision the markets," said Pascal Levy-Garboua, head of business at Checkr, an angel investor at Weave Capital and an early investor in Snapcard.

"When you're in the very beginning of a market, like bitcoin is, where it's not clear it will work for anybody, I like that," he said. "And I like the fact that they have this plan of partnering with other companies to help them transition bitcoin initially for the wallet, now today remittances. They were very active in pursuing these possibilities; they weren't shy about it."

Evolution of a Bitcoin Startup

In its first incarnation, Snapcard created technology to help merchants handle bitcoin payments.

"That's where you go to a business and say, Hey, bitcoin is the new currency; we think you should start accepting it," said Michael Dunworth, Snapcard's CEO.

The San Francisco company's founders soon realized that commercial adoption of bitcoin was slim to nonexistent in the U.S. and other developed countries.

"It's a very hard sell trying to get people to convert their stable currencies into bitcoin, which is somewhat volatile compared to the U.S. dollar," Dunworth said. "So the value proposition is pretty thin."

Dunworth noted that in 2013, when the company began navigating the bitcoin space, there were no role models to follow.

"This is a whole new industry, so blockchain and bitcoin are brand new, we're writing it as we go," he said. "As a company, we've always said we want to stay nimble in understanding what the market wants."

Pivot No. 1: Becoming a Bitcoin Wallet Company

Once it became clear that merchant processing wasn't the right approach, Dunworth and his team decided to create a bitcoin wallet that would let people buy, send and receive bitcoin through a mobile app.

Snapcard became the second-largest bitcoin wallet provider in North America. But once again, market realities quickly set in.

"The total addressable market of people who want to buy bitcoin is very, very thin," Dunworth said. "If we're trying to build a business, we can't build it on 100,000 American users that are looking to get into bitcoin."

Another challenge is that it's hard to charge much for a bitcoin wallet — people expect the service to be free.

 "Essentially you're selling $1 for $1 and trying to work out a way to make money off that," Dunworth said. "It's a really tough break."

Snapcard is not the only company phasing out of bitcoin wallets. Coinkite recently shut down its wallet. In a blog, the company cited problems with daily DDoS attacks and government interference.

"Being a centralized bitcoin service does attract attention from state actors and other well-funded pains in the butt, and as a matter of fact, we've been under DDoS since the first month we launched—over three years–yay," the blog stated. "Plus we have put real fiat dollars into our lawyers' pockets, to defend our customers from their own governments. This is not what we love to do, which is coding and delivering awesome services."

The company said it plans to create a physical device for storing bitcoin, basically a read-only USB flash drive. It also plans to build a standalone bitcoin terminal with a printer and quick response code scanner, hardware products for authentication and security, and hardened servers for hosting bitcoin wallets. (Coinkite did not respond to a request for an interview by deadline.)

"You'll see a lot more of this over the next six to 12 months; you'll see a lot of shutdowns or acquisitions or acqui-hires in the blockchain space," Dunworth said.

Even the market share leader in bitcoin wallets, Coinbase, is regrouping. In a blog, CEO Brian Armstrong said that 80% of all activity on the Coinbase app is people buying, selling, and storing bitcoin as an investment, and only 20% of the time is it used as a wallet for day-to-day spending. "We set out to build a bitcoin wallet, but it turns out we were building a retail exchange," he wrote. (Coinbase declined a request for an interview.)

Having an exchange and a wallet in one app is too confusing, he said, because people want different things in the two products.

In bitcoin wallets, people expect low-friction sign-up, fast transactions and privacy. In a retail exchange, on the other hand, converting government-backed currency into and out of bitcoin "requires building relationships with banks and regulators in many countries, and is a highly regulated business," Armstrong wrote. "All third-party apps must pass a stringent review process. Customers are more tolerant of high-friction on-boarding (since it is the norm with financial services) and less privacy."

That's why within a year or so, Coinbase will become a retail and institutional exchange.

Levy-Garboua still sees a market for bitcoin wallets in the U.S. "But it seems this market is not as big as people thought it would be, so in the U.S. it makes sense to look around to see if there are better opportunities than just that."

Pivot No. 2: Taking on International Payments

Snapcard's second reinvention was a much larger leap — to a service that helps companies send payments overseas.

"We thought we could use our technology to transfer local currency internationally much cheaper," Dunworth said. Wiring U.S. dollars to China through a bank might take 24 to 48 hours and fees range from 5% to 10% of the payment, he said. Typically the payment goes through several correspondent banks, which takes time and adds cost. Snapcard's MassPay service charges less than 1% and the payment is completed in a few hours, Dunworth said.

Snapcard uses bitcoin behind the scenes to help with the currency exchange, but customers generally don't know this. "These customers don't use bitcoin or hear about bitcoin, they just know that the technology is faster and cheaper," Dunworth said.

The company accepts a payment in local currency, such as U.S. dollars, converts it to bitcoin tokens, transfers it to the destination country, and converts the tokens back to the local currency on the other end. Snapcard uses hedging models to alleviate the risk that the value of the bitcoin will fluctuate during the course of the transaction.

The company targets very large businesses with subsidiaries in multiple countries, remittance companies, foreign exchange companies and money transfer companies that might have some outdated technology. Banks could use Snapcard's service; the company has had conversations with some. It provides an API suite for the integration.

Two clients are RationalFX, an international payments service for high-net-worth individuals that charges only a margin of the exchange rate; and XendPay, a company that helps migrant workers send money back home for an optional fee (the company recommends 0.4% of the payment amount, 76% pay the recommended amount, a small percent pay nothing, the rest pay a little more than the suggested fee).

Both companies were founded and are led by Paresh Davdra and use Snapcard to send payments to China and Brazil, where it has established relationships with local banks.

"Banks in those countries are backward when it comes to technology," Davdra said.

And Brazilian currency cannot be purchased on the open market. "I'm in the U.K., I can't go into the Barclays platform and buy the Brazilian real, it's just not available," Davdra said. "If one of my customers wants to send money in euros or dollars, that currency is converted locally at the other end. I can't tell them what they'll receive at the other end."

Davdra doesn't care about Snapcard's use of bitcoin and blockchain protocols.

"For us, it has to be safe, it has to be secure, it has to be licensed, and they tick all those boxes," he said.

Snapcard seems to have settled into a business model that works — 95% of its transactions now come through its MassPay product. "That's where we commit most of our resources and effort," Dunworth said.

The evolution of bitcoin continues, and other use cases may open up that today seem obscure.

Levy-Garboua, for instance, sees an application in the Internet of Things, letting machines pass micro-payments to each other. And there are many potential uses for the technology underlying bitcoin, the blockchain distributed ledger, from securities settlement to transfers of mortgage ownership to the tracking of shipping containers.

Smart companies experiment, take chances and find the working formula.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.