Shamir Karkal a co-founder of Simple and then head of open APIs at BBVA, is now launching a tool to help fintech developers with one of their greatest challenges — getting access to the payments system.
“Despite extensive efforts to innovate, the current financial system is controlled by a long chain of middlemen engaged in moving money between a buyer and a seller, Karkal said in a blog announcing Sila.
“Bureaucracy, legacy software, and complex regulatory environments have held back innovation and disruption in banking, and fixing this has motivated much of my career over the past 10 years.”
The existing payment systems — ACH, Visa and SWIFT — are accessible only to a handful of large incumbents, Karkal said. “The system should not require you to have a money transfer license.”
In a blog post, Faisal Khan, a banking and payments consultant, wrote:
“In the US, one of the biggest challenges faced by startups in the fintech space, is that of money transmitter licensing. Obtaining money transmitter licenses is no easy feat. It involves a large amount of paperwork, money and time. It can take up to two years to amass all 50 state licenses…for those who do touch money as part of their business model, getting money transmitter licenses from the states in which their clients are based is important.”
Jim McKelvey, a co-founder of Square, said it took three weeks to build the hardware and software for Square and 18 months to get all the necessary licenses. Karkal said Sila will provide that payments connectivity so fintech developers can use its API to launch a product in weeks. The system should not require each fintech firm to have a money transfer license.
He explains the mechanics in detail in a blog on Medium.
The basics are simple — ID verification and account linking. Sila uses a crypto currency token pegged to the U.S. dollar and 100% backed by USD securities to exchange value through the user’s Ethereum address. Sila will transfer value by moving tokens from the user’s Ethereum address to the target user’s Ethereum address, using Ethereum’s smart contract functions.
The details are not so simple.
In an email response to a request for clarification, Sila executives wrote:
“Sila is not a crypto currency in the traditional sense (if there is actually a traditional sense when it comes to cryptocurrencies. Specifically, the way we have designed and think of Sila as a de-materialized representation of an underlying financial instrument in a token form that has the ability to be used on distributed ledger networks. The regulation with respect to the transmission of crypto currencies in the United States and in majority of other jurisdictions is not settled yet, however there are clear indications from the US Federal level, e.g. FinCen, and the state level, e.g. NY few other states, that take the position that the transmission of cryptocurrencies is subject to current money transmission laws all the way to the other end of the spectrum with Wyoming which specifically excludes tokens from money transmission.”
How many states regulate crypto currencies?
“There are two levels of potential regulation on the state level – one is whether the state money transmission laws are sufficiently broad to include the use of crypto-currency and other similar stored value under the money transmission regulation, and the other is whether the issuance of a crypto-currency/token can potentially trigger the money transmission. With respect to the issuance of crypto-currency/tokens, our view is that the issuance of a token requires BitLicense in NY and state money transmission license in Alabama, Connecticut, Hawaii, New Mexico, North Carolina, Vermont and Washington.”
The outcome is “an API platform and suite of developer tools supported by a new regulatory-compliant, fiat-backed tokenized means of exchange — the Sila Token — that allows developers to rapidly build fintech applications and bring them to market,” he wrote on his blog.
“The benefit for developers is raw speed to market,” Karkal said. “You could create a savings pool for an individual that others could contribute to. Today you need to quit your job, raise at least half a million dollars and get a deal with Wells or Bancorp for access to ACH, work through money transmitter licenses and 12-18 months from now you will actually have a functioning app. The biggest problem in fintech is getting access to the markets. With Sila, you can build your app and ship it.”
The issue of regulation is still a bit in flux, the company said in an email:
“The regulatory approach for Sila is in the process of being vetted by both our third party providers internal as well as external counsel prior to seeking the official views of the regulators. As you can appreciate there is still a lot of regulatory uncertainty. However, we are encouraged with how the regulators are thinking and developing their positions. Specifically, the positive signals sent by the banking regulators in their approval of the Gemini and Paxos tokens as representations of deposit in a FDIC insured institution and its ability to be used on the distributed ledger networks.”
Fintech apps solve real-world problems, Karkal said.
“There’s a huge potential for improvement in finance, so many problems everywhere. If you can unleash the creativity of the developer community you will see a lot more fintechs and a lot more successful fintechs.”
The two most promising new platforms are robot savings, like Acorns, which builds on the idea that people need help saving, something Simple pioneered in a banking app years ago. That requires signing up users, linking their bank accounts, taking their money, saving it and then returning it when they need it.
Sila will charge 20 basis points for all transactions — redeem Sila, purchase Sila and transfer Sila.
“Initially, we will likely transfer some cost of transactions (including ACH costs for pulling or pushing funds, KYC requirements costs, and verification costs for blockchain) to the end customers until we have substantial revenue. Eventually, transaction costs will be pushed as close to zero as possible, and the additional fee will cancelled,” the company explained in an email.
A second area where he expects growth is in smart contracts that are simple enough for people who aren’t bitcoin experts to use in areas like payments for smart contracts.
“So much is going on in the crypto world around smart contracts. Ethereum is the biggest platform for that type of development, but the user experience sucks. Ninety-nine percent of people want a simple way to use money. Now there is no easy way to get dollars in and dollar out of crypto currencies. They are highly volatile. I think those will be our early markets.”