…in a much less painful way than ever before!
In 2017 Justin Thomas was overwhelmed by the number of Americans that lived paycheck-to-paycheck, and this was driven home during the most recent government shutdown.
As a software engineer by trade, Justin saw an opportunity to build a tool to help people share and distribute their savings — a “revocable trust”, as he calls it. And so Friendowment, a service that enables you to create controlled shared accounts, was born.
The Long Road of Finding the Right Partner
Justin began by implementing a pilot application that transferred money to his company bank account with a popular ACH processor, but soon came to realize that, no, you can’t take the money from one bank account and put it into another bank with that provider. Then he tried another one, and they wanted a lot of money up front. Too much for a pilot and the simple testing of the product.
This particular difficulty isn’t the only one that besets startups with vision and desire to build just like Justin. In fact, the U.S. is widely known to have some of the tightest financial regulation in the world. If Justin had been able to afford the provider that would let him use their services to move money from one to another account, on day one he would then have had, to with the help of legal counsel:
- Compile Know Your Customer (KYC) / Anti-Money Laundering (AML) documentation (you must know who your customer is before providing services of any kind to them — it’s the law!)
- Create funds-flow diagrams and specifications
- Write a software as a service (SAAS) agreement
- Enter into an agency agreement, independently file for money transmission licenses or legal exemption letters
- Apply and obtain cyber insurance, general liability insurance, and umbrella insurance in certain minimum amounts
- Undergo FINCEN registration as a Money Services Business (MSB)
- Do all of the other paperwork all financially related businesses have to do (that Justin didn’t even know is out there)
He would later, quite possibly, be required to undergo an audit or three, not to mention the requisite legal and compliance interviews and code reviews with that provider’s team. Additionally, if Justin ever decided he wanted to change anything about the funds flow in his product, he would have to go through all of the reviews all over again. Often, figuring out where the product fits and how it is regulated alone can take at least a year to iron out. And once it’s ironed out no one dares change it, regardless if the product is ideal or not.
As for the cost an ACH provider charges? It can range between $5–10K per month, not counting per-transaction fees and a reserve account that should hold at least $5K when you start your business, but with a minimum that rises as you scale. Who’s wealthy enough to start a traditional FinTech company? Not many people.
Enter the Blockchain
Distributed ledger technology has disrupted the traditional financial rails for transferring value. Mirian is another startup that is launching Social Wallets for friends to save, spend, or invest together. Their vision is to transcend borders and let anyone with a computer have access to financial services.
However, as noble as their vision is, the sticking point is being able to translate tokens to and from the U.S. dollar, or any other form of fiat currency. It’s still uncommon to be able to buy your groceries with Ethereum or Bitcoin. Even if it were more common, the value of these currencies can be wildly variable. In July 2010, the price of 1 bitcoin was $0.08, and on December 17, 2017, 1 BTC was worth more than $19,000. On January 24, 2019, 1 BTC was worth $3,576.
Sila to the Rescue
Sila, an innovative technology platform that provides a much needed link between the current financial system and the new blockchain rails, is soon to release an application-program interface (API) over HTTP to effectively facilitate the development of applications that have similar needs as Justin, and Mirian’s founder, Murat Akdeniz. It promises instant access to a development sandbox, and sensible pricing that scales with the developer’s application. As Sila gains trust in developers, they allow developers to make more, and higher-value, requests.
New users in Sila’s system are registered with KYC information, a blockchain address, and an identifying handle. Ownership of the address is confirmed with a zero-knowledge proof — the signature of a message with the private key of the address, which should be known to no one other than the holder of the address. This signature continues to be used to validate the identity of the caller of Sila’s API, and it changes for every call, deterring replay attacks.
Users with validated KYC information can then link their bank accounts (which are required to have a fuzzy match to their KYC’d name) and request to be issued SILA — a token with a fixed value of $0.01. A request for 1000 SILA will debit $10.00 from the user’s linked bank account of their choosing, and, upon settlement of the funds after about 2 days, they will be issued SILA at their blockchain address. The debited funds are to be held in a short-term government money market fund that invests in U.S. treasuries, so there are always highly liquid U.S. treasuries backing 100 percent of SILA tokens issued, guaranteeing their stability versus the U.S. dollar.
As the user transfers their SILA, their interest in the money market fund also transfers, but only to other KYC’d users. If the holder of SILA is not an address associated with a known user, the ownership of the interest in the money market fund goes to Sila, the company. More interestingly, developers can write smart contracts, hosted on the Ethereum network, to determine how SILA tokens are distributed
When a user requests redemption of SILA, the requested number of tokens at their address is burned, and the money market fund interest is deposited via ACH to their linked bank account that was identified and provided during the KYC process.
The Headache Ends Here
Innovative possibilities, such as Friendowment, open up when low-capital startups can not only reduce their go-to-market time, but also their up-front costs. Over the next few months, Sila will become ready for general use, and Justin and Murat will be there to use it when it is.
Let’s say you wanted to start a FinTech business. Before Sila, it would take at least a year from start to initial launch, no matter how good you are at programming. After Sila? That’s all up to you.
So let’s stop postulating. Let’s build the financial future together.
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