Dwolla returns, working on blockchain instead of bitcoin

After a string of mishaps for bitcoin startups, including the infamous now-defunct bitcoin exchange Mt Gox , Dwolla is once again looking to become a connector between emerging technology and the traditional financial world.

Alternative payment networks have been quiet about their forays into the blockchain space, but Dwolla’s founder and CEO said the company is working closely with startups to build asset tracking solutions on the blockchain.

When assets are sent from one blockchain to another, or from one business to another, there has to be a real-world payment solution in fiat currency to make the transaction happen, allowing people to pay their mortgages and buy things that can’t be purchased with cryptocurrencies or digital assets.

“ Cash assets have to flow between banks so that people can get paid in actual cash when they trade. ”

Milne believes that as more cryptocurrencies are utilized and blockchain technology advances, entirely new types of assets will be created.

A more interesting idea for blockchain-based asset trading is recording the extension of credit.

When certain types of credit are extended, " it's a good way to let everyone know who has what debt and where it's located, " Milne said.

Preventing another crash

Bank lending has been scarce since the financial crisis, as they can pool various loan types and bundle them and sell them to third-party investors as mortgage-backed securities, reducing risk.

The complexity of this process can limit investors' ability to self-monitor risk, while competitive securities markets can easily lead to a decline in risk standards.

But today, in the opaque asset securitization process, if these transactions are registered on the blockchain, they can be transparent and help people manage risks.

The process won’t be so much about changing the core ledger system that banks already use to store assets, but making parts of it public will give financial institutions, regulators and experts a better understanding of what’s happening, Milne said.

Milne wouldn’t reveal the companies Dwolla is currently negotiating with, but he mentioned interesting work that R3 and Chain are doing. Chain’s partnership with Nasdaq, for example, is a sign that the market is finding ways to use blockchain technology to solve organizational problems while also being relevant to the status quo, he said.

But Dwolla doesn’t determine which assets are transferred, only the cash equivalent of assets passing between existing financial institutions.

“Dwolla has a very interesting asset in its alternative payment network that came before Bitcoin and Ripple , ” said Gil Luria, an analyst focused on Bitcoin at Wedbush Securities , a private financial services and investment firm .

Dwolla launched in 2010 with a few small bank and retail clients and two employees, and has since grown to 15 employees, 500,000 customers and more than $ 1 billion in transactions per year .

Over the past few years, the company has established relationships with Iowa state agencies to expedite payments for cigarette stamps, vehicle registrations, and fuel taxes. In October 2014 , BBVA Compass partnered with Dwolla to enhance its FiSync instant payments platform.

“ They’re leveraging the trend of financial institutions investing in bridging the gap between blockchain and traditional financial institutions, ” Luria said.

Ripple , R3 , blockchain startup Digital Asset Holdings , Eris , Overstock ’s equity trading platform tØ and many other bitcoin startups have recently shifted focus, including Chain and Gem , which are working in the field.

Blythe Masters of Digital Asset Holdings looks at how blockchain could change the way bankers and investors trade bonds and loans.

Luria said it’s still early days and Dwolla may be at a disadvantage because Milne has been skeptical of bitcoin in the past. But Luria doesn’t think that will be a hindrance because many of the original bitcoin companies and entrepreneurs have been replaced by new groups that see bitcoin as just one specific implementation of the blockchain network.

The impact of Mt Gox

Of course, the group also argues that Dwolla has uniquely rich experience, as it has firsthand knowledge of bitcoin companies, including the insolvent bitcoin exchange Mt Gox , which subsequently lost hundreds of millions of dollars in customer funds.

The event undoubtedly marks a high-water mark in terms for Bitcoin as a currency, consistent with the loss in value in 2014 , with investor interest declining as the losses were incurred.

However, a few months ago, the U.S. Department of Homeland Security seized $ 2.9 million from Dwolla 's Mt. Gox account , and the Bitcoin exchange was operating as an illegal money transmitter.

Milne isn’t worried about the past, and he believes blockchain offers companies an opportunity to start over using bitcoin technology to solve pressing business problems.

Milne concluded:

“ In our view, blockchain and Bitcoin are completely different. Blockchain is not about currency transactions, it is about recording, managing and moving assets. ”