Armory and the Monetization of Bitcoin Wallets

By Jon Matonis
CoinDesk
Wednesday, September 25, 2013 

http://www.coindesk.com/armory-monetization-bitcoin-wallets/

A group of prominent investors recently made a play in the bitcoin wallet space by backing startup Armory Technologies, Inc. The $600,000 seed round investment will go mostly towards funding and expanding development.

Interestingly, this placement brings into focus a much larger issue: the monetization of bitcoin wallets.

It’s no mistake that Armory founder and CEO Alan Reiner told CoinDesk: “This first 12 months is more about developing a quality product than it is figuring out how to monetize it.” An effective wallet monetization strategy doesn’t exist yet.

Even lead investor Trace Mayer agrees. Wallets being in dire need of improvement is “actually very problematic and a tragedy of the commons problem which I fear will likely only get worse because it is so difficult to monetize wallets,” he wrote. Mayer also said: “There is no immediate plan for how to monetize Armory.”

Indeed, wallet development may get funded, but revenue and profitability are different issues. Here is how I see this market playing out.

It may be comforting to wallet investors that open source Mozilla Firefox has 18.29% worldwide market share of the free browser market, but receives $300 million per year from a Google search deal. Similarly, eyeballs from bitcoin wallets could steer exchange choices but that’s in the long term.

Armory is an open source bitcoin wallet with a strong reputation for security and it is considered a ‘thick client’, meaning that downloading the entire block chain is required to verify transactions.

For low overhead and faster mobile applications, future releases will support a spectrum of block chain access options and the desktop-to-mobile interaction will be important.

Just as with web browsers, the client front-end (or wallet) is part of a grander play in the space. With the online wallets of traditional payment methods, the grander play for transactional and value-add revenue is currently being executed by the technology giants, telecoms, and banks.

But what’s the main driver for bitcoin wallets and payments, especially given that tech brands like Apple may actively be blocking certain bitcoin features for their own strategic benefit?

The answer lies with the bitcoin service providers. Today’s hosted wallet services, merchant processors, and integrated exchanges offer the best near-term choice for wallet monetization, but it will most likely involve a third party and a mobile app.

Bitcoin exchanges already experience a good portion of their customer base using the exchange as an online wallet of sorts. As the bitcoin economy matures, service providers will be searching for unique differentiators to gain a competitive advantage.

Either the service providers evolve into turbo-charged, sophisticated wallets or the bitcoin wallets themselves emerge as premier service providers as seen with the Send Shared mixing service from Blockchain’s My Wallet.

Since it’s a convergence either way, the future of wallets probably includes a combination of both approaches. Armory’s management team has a tabula rasa business model in front of them now and they will no doubt be presented with several promising opportunities to build or partner. So let’s focus instead on the evolution of the third-party service providers becoming sophisticated wallets.

For corporate security reasons, there’s probably a place for desktop wallets in the future, but the majority of innovation will be in the web-based and mobile wallets.

Hybrid wallets, where the user maintains the private keys, and hierarchical deterministic (HD) wallets offer two of the most promising areas for development.

To see where all of this is headed, just look at the feature set of the Blockchain Android App for My Wallet and that doesn’t even include P2SH and split key support.

Take Coinbase for example. The company operates a hosted bitcoin wallet with two-way exchange capabilities and it smartly realizes that consumers are also merchants, and vice versa.

A Coinbase-Armory mobile wallet app could broaden out the Coinbase offering by allowing customers more direct control over their coins using different hosted wallet scenarios. Their primary downside right now is that they only provide a domestic exchange service for the US.

LocalBitcoins is a decentralized approach to trading bitcoin because it matches buyers and sellers in various local regions for trade clearing and settlement.

Sellers maintaining bitcoin balances on the LocalBitcoins wallet is the preferred way to operate. With greater functionality, the site could easily evolve into a primary hosted wallet service in its own right. The company is already offering support for multi-currency and has a global following.

Not wanting to get left behind, exchanges like Mt. Gox and Bitstamp could see themselves adding robust and mobile wallet features that are quite separate from the exchange business.

In addition to exchanges expanding into the wallet space, the merchant processing operators like BitPay and BIPS both benefit from increased functionality at the wallet level.

As more bitcoin balances are kept by the merchants rather than exchanged out to national currencies, the merchant processors start to resemble a hosted wallet because the exchange services become less important. The online secure access and management reporting capabilities of the wallet become the wedge for competitive differentiation.

Going outside of the bitcoin ecosystem, it’s easy to imagine commercial banks and portfolio managers offering specialized bitcoin custodial services to their client base, including branded hardware wallets. When the online casino world goes full bitcoin, the wallet integration issues will be front and center. All present excellent revenue opportunities for leading wallet vendors, not excluding transaction-based revenue.

As new companies and new business initiatives enter the bitcoin market, they will look to the well-known wallets.

Established wallet leaders with reputable brands and diverse offerings will be able to leverage that into a service-oriented model. With integration, maintenance, and even hosting potential, the superior bitcoin wallets like Armory have a bright future.

Bitcoin Gaining Market-Based Legitimacy as XBT

By Jon Matonis
CoinDesk
Tuesday, September 17, 2013

http://www.coindesk.com/bitcoin-gaining-market-based-legitimacy-xbt/

Punctual trams run quietly along the street out front. It looks like any other office building in Zürich. But inside the nondescript building of SIX Interbank Clearing, a small unit of professionals maintains the list of the world’s currency codes.

Last week in that very same building, I had the honor of presenting the bitcoin cryptocurrency to a gathered audience of various bank officials at an e-commerce conference. And I mentioned that the individual, or committee, that endorses and finalizes XBT as the ISO currency code for bitcoin will earn their spot in history next to Satoshi Nakamoto.

Of course, a new code for a brand new asset class is not comparable to an achievement in financial cryptography and distributed consensus, but it is significant nonetheless because of its impact on the evolution of math-based currencies.

The ISO 4217 standard for currency codes is published by a voluntary, non-governmental organization independent of any national agenda. It operates more or less as a body that approves the three-character currency codes of new countries or regions. In some cases, the code reflects a non-governmental unit such as gold (XAU) and silver (XAG).

Beyond the regulations and government approval that so frequently underpin discussions about the legitimacy of bitcoin, a different type of legitimacy is emerging and it has the ability to out-survive the elected administrations of legal jurisdictions.

This market-based legitimacy holds the key to bitcoin’s success – not the sanctions and official blessings for what’s an appropriate monetary unit. Governments and regulators may come and go, but customs and convention persevere.

Currency code XBT is a sign of this growing market-based influence, at least among the organizations currently depending on such codes. Governments generally follow rather than lead market adoption because it is too difficult to alter the course of momentum.

Uniquely, bitcoin operates as both a value transfer network and a separate unit of account. Therefore, it doesn’t require the services of a third-party intermediary to approve and route transactions. However, as a monetary unit, bitcoin offers great opportunities for those who desire to trade or price in bitcoin and perhaps layering services on top of the protocol.

At the top of the pyramid is SWIFT, a member-owned cooperative that provides the communication platform to connect more than 10,000 banking organizations in 210 countries (16 more countries than the United Nations).
SWIFT’s influence is so pervasive that its ecosystem is a daily barometer of global economic performance such as GDP growth rates, capital flows, and foreign exchange trade volatility.

Once again, bitcoin is a major topic of conversation at Sibos, the annual SWIFT conference being held in Dubai this year.

In prepared remarks yesterday, SWIFT CEO Gottfried Leibbrandt said, “I would not see why we at Swift could not send transactions in bitcoin as a currency.” If they do, they will undoubtedly look to the ISO for the currency code. The Bitcoin Foundation had two scheduled appearances at the SWIFT conference.

Also, the payment networks like VISA, MasterCard, and American Express all rely on the ISO 4217 codes for international transactions and currency conversion. Once the member banks start requesting settlement in bitcoin for certain transactions, the payment networks will look to the ISO for the corresponding currency code.

XE.com, one of the world’s leading providers of Internet foreign exchange tools and services, recently began displaying bitcoin prices in XBT across their data feed. Founded in 1993, the company licenses over 35,000 XE Currency Converters, provides commercial currency data to over 1,000 clients, and serves 18 million unique users per month.

Service provider OANDA also displays bitcoin prices using the currency code XBT. OANDA is a market maker and a trusted source for currency data, serving both individuals and financial institutions. Founded in 1995, it provides access to one of the world’s largest historical, high frequency, filtered currency databases serving over 30 million requests per month.

Not to be outdone, Bloomberg in August announced that they were testing XBT price quotes internally lending more ammunition to the push for formal code adoption.

In the bitcoin trading world, exchange operator Kraken became the first to make the formal switch to XBT this week and other bitcoin exchanges are expected to follow suit.

In the retail foreign exchange trading world, platform market leaders like MetaTrader 4 are witnessing client firms undertaking the bitcoin modifications on their own. Although not expressing trades in XBT yet, the gradual adoption of bitcoin into existing forex platforms signals a huge shift in market trading. So far, only three companies are known to have incorporated bitcoin into the MT4 environment, including AvaTrade, BTC-E, and Bit4X.

XBT may represent the beginning for bitcoin standards and market-based legitimacy, but it is certainly not the end. Next up on the standards agenda is the Unicode symbol for bitcoin with B⃦ or ฿ as the two leading contenders.

Bitcoin Foundation Files Comments with Federal Election Commission

The Bitcoin Foundation has filed comments with the Federal Election Commission (FEC) on the Conservative Action Fund PAC’s Advisory Opinion Request advocating for the Commission to allow bitcoin for contributions and to permit recipients to categorize contributions as monetary or in-kind at their discretion.

CoinDesk Launches Proprietary Bitcoin Price Index

By Jon Matonis
CoinDesk
Wednesday, September 11, 2013

http://www.coindesk.com/coindesk-launches-proprietary-bitcoin-price-index/

Mr. Charles Dow and Mr. Edward Jones probably felt this way at the launch of their now-famous average. A benchmark price index established by a reputable publisher is a significant milestone for any industry. Its importance becomes amplified with the benefit of hindsight.

This week, CoinDesk launches its proprietary Bitcoin Price Index (BPI) aiming to establish the standard retail price reference for industry participants and accounting professionals. Wholesale exchanges and dark pools may trade around other price points, but those are usually private trades and not available to retail businesses and individuals.

The new CoinDesk index represents an average of leading global bitcoin exchanges but the formula is flexible enough to maintain only those exchange rates that conform to certain minimum criteria for price discovery and validity. Initially, those specific criteria are defined as:

(a) exchange must serve an international customer base;

(b) minimum trade size must be less than 1,500 USD or equivalent;

(c) banking transfers in or out of the exchange must be completed within seven days without special fees.

It is believed that this is preferable to simply discarding the outlier price because in some instances the outlier price may be the most accurate.

According to CoinDesk developers, the criteria are subject to modification based on changing market and regulatory conditions and they intend to keep any revisions to the formula on a predictable monthly schedule. This will increase the credibility of the index because users will have some advance notice with respect to the formula updates and associated rationale for those updates.

Starting a new index can be a tricky endeavor because it must appeal to the lowest common denominator to be broadly applicable yet it must be selective enough to maximize market-based price discovery.

The Mt. Gox exchange price had been the early leader in terms of adopted usage of their API, but increasingly that has caused problems for companies attempting to benchmark average price while not having adequate access to the Gox platform. Due to Mt. Gox banking delays in transferring US dollars out, a spread of approximately 10% has existed between Mt. Gox and other bitcoin exchanges for several months now causing distortion in real-time conversions that depended on the API. This spread has been as high as 20% at times. As a result, businesses such as BitPay and LocalBitcoins.com have already moved away from using the Gox pricing API.

Initially, the CoinDesk Bitcoin Price Index will be based on XBT/USD price data from Bitstamp, BTC-e, and CampBX using each exchange’s bid/ask midpoint and without volume-weighting. The decision not to weight the component exchange prices based on trading volume was made because the bitcoin market is currently not deep enough. It tends to be more dispersed by region and a volume-weighted index would not act as a proper global indicator. This is expected to change over time as more bitcoin exchanges gain trading volume in different countries thereby weakening the impact of regional variances. At that point, it is anticipated that the bitcoin market would be mature enough to apply a volume-weighted approach.

In addition to a real-time API updated every 60 seconds (contact us to request access), CoinDesk will provide a GMT (Greenwich Mean Time) end-of-day closing index price including a high price and a low price for the daily trading period. The historical index data will commence on July 1st, 2013 and any data prior to that date will be based on the Mt. Gox price data previously recorded by CoinDesk. Therefore, users will see a drop in the historical index from June 30th, 2013 to July 1st, 2013 but the transition and formula details will be cited in the explanatory notes.

The representation of the Bitcoin Price Index in other national currency units will be provided by applying exchange rates from openexchangerates.org until those other bitcoin trading pairs reach sufficient trading volume. That level will most likely be reached earliest by the XBT/EUR trading pair.

The XBT designation as bitcoin’s ISO 4217 currency code is accepted by both XE.com and OANDA for their current data feed. As Bloomberg terminal and other trading platforms adopt XBT, the CoinDesk Bitcoin Price Index could increasingly become the de facto metric for recording historical and current exchange rates for bitcoin.

Check out the Bitcoin Price Index page to find out more.

Talk of Ticker Symbols Shows How Far Bitcoin Has Come

By Jon Matonis
PaymentsSource
Monday, August 19, 2013

http://www.paymentssource.com/news/talk-of-ticker-symbols-shows-how-far-bitcoin-has-come-3015160-1.html

Does bitcoin need a standardized three-character symbol? Only if it has a future as a tradeable instrument with a physical spot market and a robust derivatives market. I argue that bitcoin does indeed have such a future.

The news that Bloomberg was testing a bitcoin price ticker with code XBT on its worldwide platform gave a boost to the effort for including bitcoin in the ISO 4217 list of currency codes.

The Geneva-based International Standards Organization is an international standard-setting body composed of representatives from various national standards organizations. ISO 4217 is the standard list of currency codes used in banking and business globally. SIX Interbank Clearing in Zurich maintains the ongoing discussion and management of these currency codes.

Although not necessary for market adoption, as the Bloomberg testing demonstrates, recognition of a bitcoin code by a market-based standards organization such as ISO would set the stage for increasing market depth and liquidity of bitcoin trading. That in turn would tend to reduce volatility and lead to some basic risk management and hedging strategies for merchants that accept bitcoin and maintain some balances in bitcoin (rather than immediately converting to a national fiat currency). Additionally, the enhanced trading liquidity provides more reliable outlets for exchanging bitcoin thereby facilitating overall consumer and merchant adoption.

Only four non-national units that do not require the backing of any third-party institution have ever made the list – gold (XAU), silver (XAG), platinum (XPT), and palladium (XPD). Bitcoin as XBT would be the fifth. This would be an important milestone for the cryptographic money and for the Bitcoin Foundation, whose mission it is to standardize the protocol. (I am the foundation’s executive director)

A lower court ruling in Texas recently declared that bitcoin is a "currency or form of money." This ruling is interesting because it highlights the fact that bitcoin is gradually becoming recognized as commodity money in the same way that gold and silver are. A commodity money classification is appropriate for bitcoin because ISO already recognizes the precious metals.

Early indications are that bitcoin will soon be included in this 4217 standard under code symbol XBT. It is unlikely bitcoin would be listed under the abbreviation popular among its users, BTC. That’s because in the ISO standard, the first two alpha characters represent the country code whereas the "X" prefix is reserved for special, non-country-specific currencies.

Interestingly, XBT would be the first code to have more than 3 digits to the right of the decimal separator (most have only two). The Bitcoin protocol was intentionally launched with 8 digits to the right of the decimal separator, because rather than inflate the supply to create more units, the decentralized Bitcoin protocol subdivides to obtain more units. And, even the convention of eight spaces could be expanded through a majority consensus of the bitcoin mining operators, who secure the transactions on the decentralized Bitcoin payments network.

The global network of retail and wholesale foreign exchange dealers relies on the ISO 4217 code system. A robust spot market for bitcoin requires broad integration of bitcoin as a unit within existing electronic trading platforms. Platform market leaders like MetaTrader 4 would be driven to incorporate XBT into their standard product offering paving the way for a multitude of currency pairs involving bitcoin (XBT/USD for the dollar, XBT/EUR for the euro, and so on).

The market depth and liquidity of this robust spot market is what would eventually underpin a derivatives market for bitcoin futures contracts and options. Without a deep spot market, there is no credible and reliable method to offset risk in derivative positions, which otherwise place too much emphasis on pure counterparty risk. Free market derivatives exchanges with sufficient and verifiable inventories evolve to manage the trade clearing and settlement process.

At that point, the jurisdictional race would be on for becoming the domicile with the world's deepest bitcoin futures exchange.

While not apparent at first, the significance of this XBT milestone would have a lasting impact on Bitcoin and its role in the global monetary system. No other non-State digital currency has ever achieved bitcoin's level of market penetration and overall market capitalization ($1.2 billion as of Aug. 19), which is even more remarkable considering that bitcoin is barely four-and-a-half years old.

Don't Let Bitcoin Morph into Govcoin

By Jon Matonis
American Banker
Tuesday, July 30, 2013

http://www.americanbanker.com/bankthink/do-not-let-bitcoin-morph-into-govcoin-1060955-1.html

Almost since Bitcoin arrived on the financial scene in 2009, traders and exchange operators began contemplating the prospects for a self-regulatory organization that would be organized by bitcoin participants for the purposes of outlining and recommending best practices.

Now, more than four years on, an SRO in the spirit of the National Futures Association and National Association of Realtors could be emerging for the disruptive Bitcoin cryptocurrency and other digital assets. The Committee for the Establishment of the Digital Asset Transfer Authority is set to announce its launch Tuesday in conjunction with several leading industry participants and the well-connected Promontory Group as an advisor.

As a longtime cryptocurrency advocate and the recently appointed executive director of the Bitcoin Foundation, I welcome the emergence of SROs. (Unlike the foundation, the D.A.T.A. will cover a broad range of virtual currencies, including Ven and Ripple). A non-governmental body formed to promote good industry behavior has a distinctly free market heritage. Groups born out of mutually-beneficial community trade can also define a set of common principles that they want to abide by referred to as lex mercatoria. This is Latin for "merchant law," the body of commercial law used by merchants throughout Europe during the medieval period emphasizing contractual freedom and alienability of property. Merchants relied on this legal system they developed and administered while shunning legal technicalities and deciding cases ex aequo et bono – "from equity and conscience."

Although SROs can be extremely beneficial in advancing an industry, clear political lines must be drawn to mitigate the risk that an SRO would be co-opted by government and this is where it gets tricky. To avoid more direct and onerous regulations, the government may ask the SRO for certain guidelines or rules to be incorporated among its membership. If such modifications are objectionable to the majority of industry participants, the SRO faces the dilemma of challenging the authorities and risking its relevance or being complicit in harmful and over-reaching backdoor legislation.

The path of complicity ultimately leads to an SRO that has strayed from its core constituency and could be absorbed by the government as a direct regulatory body. The SRO should periodically conduct a reality check by remembering Voltaire's words: "To learn who rules over you, simply find out who you are not allowed to criticize."
From a purist perspective, challenging the authorities on points of principle may not necessarily result in irrelevance but it would shift the group's mandate to one of advocacy and most likely even criminal defense. This does not have to be viewed as a negative outcome, but it does have to be anticipated.

As self-regulatory organizations are excellent non-governmental solutions for industry best practices, they need to be vigilant about maintaining the integrity of the original mission. In the case of bitcoin as a negotiable digital asset class, the protection of core fundamental attributes includes perfect fungibility, payment irreversibility, and user-defined privacy. Also considered sacrosanct for the Satoshi Nakamoto Bitcoin protocol would be the 21 million limitation on coin supply and the roughly 10-minute interval for new "blocks" of transactions added to the public ledger known as the block chain. That interval is a function of the self-adjusting difficulty for bitcoin mining. (The more distributed computing power dedicated to securing and verifying transactions on the network, the harder it becomes for any miner to solve a mathematical problem in order to "find" the next block for the public ledger and earn newly-created bitcoins.)

Anything different simply wouldn't be Bitcoin – it would be an alt-coin. A toaster does one thing and it does it amazingly well. It makes toast. If you modify it and ask it to do something else, then it's no longer a toaster.

Recently, Govcoin has become a metaphor for alterations to the core bitcoin protocol that reduce its fungibility, irreversibility or privacy to conform to certain government specifications for an "appropriate" digital currency.

In the Juan Llanos' article with the sensationalist title, "The Hidden Rule that Could Kill Bitcoin's Irrevocability," the author makes the point that bitcoin's privacy and irreversibility could be under attack via ignorant legislation that cannot comprehend what it is attempting to regulate. Llanos states, "It is no surprise that regulation and compliance often set the boundaries of product design. In the case of crypto-currencies, however, don't these rules cut through the fundamental features of digital [peer-to-peer] payments that make them so disruptive?"

The Consumer Financial Protection Bureau has not yet confirmed to what extent the implementation of Regulation E by money transmitters will be applicable to licensed virtual currency providers. Also known as the Remittance Transfer Rule, this amendment to Regulation E mostly overlaps with measures in place at the state level and compliance will be required by Oct. 28. It requires, among other items, prepayment disclosure, transaction receipts, and transaction cancellation within prescribed time limits.

Although it is technically possible to delay a bitcoin transaction, a full reversal of a transaction would require unacceptable developer complicity at the core protocol level and probably the introduction of an intermediary of some sort. This would undermine Nakamoto's vision of a financial system that did not require trusted third parties.

Examples of what would be considered acceptable variables to modify within the core Bitcoin protocol are the block size limit and the proof-of-work algorithm. A block size change would be anticipating transaction throughput and increases in storage and network bandwidth. Changes to the SHA-256 algorithm for proof-of-work would be considered technically feasible and prudent given certain advances in cryptography. However, each of these modifications would require majority consensus of the bitcoin miners to prevent a critical "fork" of the bitcoin block chain.

Think about physical paper cash which everyone has the right to use today. The supreme features of physical paper cash, other than security and divisibility, are fungibility, irreversibility, and privacy.

Digital cryptocurrency assets such as bitcoin do not add anything new to that primary feature set. An SRO in the digital asset industry should not remove any.

Fungibility refers to a commodity possessing the trait of mutual substitution among its individual units. A crumpled $20 bill found between the sofa cushions is as good as a crisp one handed out by a bank teller. In the context of digital currency, this means the blocking or banning of "tainted coins" is not permitted. Just because someone once used a bitcoin to buy drugs, it shouldn't prevent a subsequent owner to use it to buy socks or baklava or MP3s.

Irreversibility means that payments in the unit are final and irrevocable – no chargebacks. User-defined privacy refers to a sliding scale, based on individual preference, as to how many details of a particular transaction are associated with the user.

"Privacy on the network begets transparency," writes my colleague Patrick Murck, general counsel at the Bitcoin Foundation, in an article on the Cato Institute's Cato Unbound blog. "You can't expect participants to allow full financial transparency at the institutional level if the participants can't choose to guarantee the privacy of their individual transactions."

Rather than a failed patchwork of individual state money transmitter rules, Murck says, "the preferred outcome would be home-rule and reciprocity amongst the states allowing states to compete for industry by creating efficiency and clarity in the regulatory process." Furthermore, multi-state regulation has failed because each state is not required to respect the judgment of another where a company is domiciled.

Over-regulation tends to drive innovation to more lightly-regulated jurisdictions or underground where it thrives. And, this is even truer with the cryptographic bitcoin. Although not government's intention, a throttled and neutered bitcoin in the "official" economy would ultimately enhance its overall effectiveness via increased anonymizing measures and more robust decentralization.

Life-Saving Remittances Smothered by Anti-Money-Laundering Laws

By Jon Matonis
American Banker
Wednesday, July 24, 2013

http://www.americanbanker.com/bankthink/life-saving-remittances-smothered-by-anti-money-laundering-laws-1060845-1.html

The law of unintended consequences strikes again. This time NGOs and political leaders are declaring a "humanitarian" crisis.

It is both sad and amusing to watch members of the U.K. Parliament proclaim disgust with Barclays' (BARC) decision to sever relationships with money transfer agents that facilitate remittances to Somalia. The legislators are the ones who blindly supported the imposition of restrictive anti-money laundering guidelines in the first place, even if they are simply following the U.S. lead.

Now these same British MPs, some with large African migrant population constituencies, have pressured Barclays to agree to a 30-day stay for some agent accounts that will be ending in mid-August.

Barclays is scheduled to close the accounts of about 80 money-transfer businesses because the bank fears that proper checks are not in place to spot criminal activity and that the funds could go towards terrorist financing. Among the banks, there is justified concern that the U.S government's forced $1.9 billion settlement against British bank HSBC for weak money laundering controls could also affect the business of overseas remittances. So, Barclays is merely exercising caution. "This is solely about the company's controls, not where they send money to," a Barclays spokesman told American Banker.

Apparently the money transfer agents operating in the U.K. do not have a problem with law enforcement or regulators because the funds transfers that they make are serving humanitarian purposes such as feeding children and purchasing medicines. The agents make the point that "cash going to extremists in Somalia is sent in sacks by plane, not from a London suburb a few hundred dollars at a time," according to The Economist magazine.

Dahabshiil, the largest Somali money-transfer agency in the UK, estimates that $500 million per year is sent from Britain to Somalia. About one-third of Somalia's $2 billion gross domestic product enters through money transfer businesses.

Without a formal banking sector, millions of Somalis rely on money sent from abroad. Underground agents could potentially fill the void. Alternatively, migrant workers could simply transfer new cryptographic commodities like bitcoin, which are not against the law.

Also included in the countries put on notice by Barclays are Nigeria, Ghana, India, and Bangladesh with the resulting impact certain to be felt by Somalia's neighbors, Kenya and Ethiopia.

The wholesale closure of accounts with U.K. money-transfer businesses parallels the situation in Minnesota last year when a local bank, citing the risk of strict penalties, ceased transfers to Somalia for migrants wanting to send money home. Wells Fargo (WFC) and U.S. Bancorp (USB) were dragged into the fight as customers threatened to close bank accounts at the two leading banks in the market unless they offered remittances to Somalia. Banks face a no-win choice over remittances.

A chilling effect in the provision of certain banking services has been created and we are witnessing its global expansion. If banks sufficiently fear punitive action from the authorities, it matters not whether an actual law is being violated. The fear of prosecution is enough to warrant an abundance of caution.

"We are regulated by the U.K. government. We are a licensed institution as is any other legal company," Abdirashid Duale, CEO of Dahabshiil, told the news service IRIN. "Dahabshiil's anti-financial crime controls are fully compliant with all applicable legal requirements and industry best practice and have been regularly audited by HMRC, the UK's customs and tax department, for a number of years on behalf of the Financial Services Authority, without any adverse findings."

Omar Abdinur, managing director of Tawakal U.K., another remittance firm affected by Barclays' decision, told IRIN, "There is no other bank willing to open an account for us in the U.K….. We have approached many banks but they are not willing. They say that money transfer is a risky business, but there is no single case in the U.K. where it has been proved that our firms are under-regulated or that we have transferred money to people under sanctions."

The chilling effect running through the banking industry goes well beyond hawala agents and money transfers to the horn of Africa. Last week in the United States, Amagi Metals, a broker of gold, silver and copper, had its account at Bank of the West closed with little warning simply because the firm accepted some payments in the digital currency bitcoin. These types of incidents are on the rise.

Financial journalist Christopher Alkan calculates that the U.S. approach of extending the scope of its laws beyond its territory will eventually backfire.

Recognizing that the Barclays action on Somali transfers is a private commercial decision based on calculated risk-reward parameters, the bank should be applauded for staying in the game as long as it has, remaining one of the last few financial institutions operating with the money transfer agents.

According to The Economist, "Some observers are calling for the creation of new institutions that could replace private banks. One suggestion is a 'remittance bank' hosted by the UN or a multilateral agency. Another is a code of conduct worked out by remitters, banks and regulators."

Adding to that sentiment and despite the fact that government has gotten us to this crisis point, Leon Isaacs of the International Association of Money Transfer Networks says, "This needs to be driven by government or the banks won't get the comfort they want." Worldwide financial inclusion is at stake.

Increasingly, it's looking like the solution may reside in not going through the banks or government at all.