![nsmblog50 (2).jpg]
(
tl;dr: a short journey into the existing world of financial asset management and a realization of how much stands to improve.
I recently initiated a transfer of funds from one online brokerage to another.
The process is one with which many of us are familiar.
Fill out some forms, click accept (at least we don’t have to print, sign, and mail them), and then….wait.
The Cost of Account Transfers
I was reviewing the process to understand when I would have access to the funds.
Given my crypto-centric (pun intended) life these days, my expectations is minutes, certainly not days or weeks.
I got a harsh reminder of the friction associated with moving money between institutions though. It can take up 10 15 business days to complete.
But, what choice did I have?
This process, which at one point was miraculous, is now outdated.
I can send a video of my kids halfway around the world in 2 seconds, but to send funds from one account I control (sort of) to another account I control (sort of) can take 15 days?
When I talk about the fact that the speed of value transfer hasn’t kept up with the speed of information transfer, this is exactly what I mean.
And the costs of these delays are real.
Whenever you can’t immediately deploy your assets in exactly the way that you want (from buying a coffee to buying a house), that’s friction in the system.
The friction wastes time and it costs money.
Somewhere, you are paying.
There are systems of trust behind these brokerages that say “take Jeremy’s money from here and put it there.”
Fine, great. But those people and those machines cost money.
And the customer is paying one way or another.
There’s always going to be some amount of friction, speed of light and all, but in a digital speed world such as ours, 15 days says “opportunity for disruption.”
How I Double Spent
One of the key innovations of Bitcoin was a novel solution to the “double spend” problem. This refers to the unique challenges of digital money, namely that copies are perfect replicas of originals. In the offline world, we call it “forgery’ or ‘counterfeiting.”
Without a way to prevent that from happening, a digital-native currency would be impossible.
Proof-of-Work and the other parts of the Bitcoin system solve this.
The ironic part of my account transfer story is that the process opened itself up to allow me to double spend.
Here’s how.
Soon after I initiated the transfer from the broker, I had to make a payment via PayPal.
When I was asked by PayPal for “Funding Source,” I chose what I thought was another account at the same broker.
The PayPal payment went through and I was able to send the money to the intended recipient.
Three days later, however, I get a note from PayPal saying that I have a “Negative Balance” in my PayPal.
Apparently, I made a mistake in my selection and actually told PayPal to take the money from the account that was in transit.
When PayPal went to collect, they were told by my old broker that “the money has left this account and is making its way to another account, so we can’t give it to you.”
At that point, PayPal asked me to settle up, which I did, but for a while there, I had left PayPal holding the bag.
There was no way for them to realize that the account I had selected was no longer a valid account, since it was moving.
Transparency and Trust Removes Friction
If I didn’t know any better, I would just throw up my hands and say “oh well, this is the system. This is how it works. What else am I supposed to do?”
Today, however, I know there’s a better, faster way to ensure that money moves around where it needs to be and when.
I know that double spending can’t be done. And I know that 15 day transfers are a thing of the past…eventually.
Ultimately, public blockchains will give all of us a lot more choice about where we want our assets deployed.
They will give us more choice about what system of trust works best for us. They will make us less reliant upon back office systems that are slow and inefficient.
It’s going to take a while for value to migrate because the alternatives are rife with their own problems, which are growing pains. There will be different problems, but trust and (one day) speed will come standard.
When that happens, it will come down to which system of trust can deliver its output faster and cheaper.
One that uses computers, but is managed by people. Or one that uses computers, but is managed by software?