Redeemable Codes Bypass International Banking System
A financial instrument that has become quite visible in the Bitcoin world is the redeemable codes system issued by several Bitcoin exchanges. These codes essentially work like a e-gift card that can only be redeemed at the exchange that issued the code. The payment intermediary BitInstant is now linking the exchanges so that the codes allow funds to be moved from one exchange to another.
Why Use Redeemable Codes?
These codes help with solving the problem of customers wishing to move funds into and between the exchanges. A code is created by the customer of an exchange using the customer’s funds from their own account. When redeemed, the exchange instantly transfers the funds associated with that code into the account of the party that redeems the code.
These codes are thus a bearer negotiable instrument that is transferable electronically making them ideal for providing the ability to transfer funds from one account with the exchange to a different account at the same exchange.
To date, none of the Bitcoin exchanges which offer redeemable code charge any transaction fee for using the code and redeem for the full 100% value of the funds associated with the code.
A code is simple to use. The code itself is simply a set of letters and numbers, about 30 or so characters in length. The code can be easily transferred to or from a mobile using a QR code.
Which Exchanges Issue Redeemable Codes?
Mt. Gox was the first exchange to introduce this redeemable code system in the middle of 2011. Currently the list of exchanges that now do issue codes includes Crypto X Change, Bitcoinica, and BitStamp.net.
Some exchanges offer codes denominated in either USD or BTC. Both methods are offered to serve various use cases. A BTC-denominated redeemable code allows a transaction involving bitcoin-backed funds to be completed instantly. This contrasts with a withdraw of bitcoins using the bitcoin network because bitcoin transactions need to first confirm — a process that can typically take an hour or so. This might explain why some merchants have started to accept redeemable codes from various exchanges as an alternative payment method as well.
Inter-exchange Transfer
BitInstant accepts USD codes from some of these exchanges, at a discount, for its service which is used by many to move USD funds between exchanges. For instance, a trader that wishes to move USD funds from Crypto X Change to Bitcoinica might use BitInstant for making that transfer. For most smaller transactions (e.g., under $1,000) the fee charged by BitInstant will likely be significantly less than if the transfer occurred using a bank wire.
In many instances the use of redeemable codes enables a Bitcoiner to use BitInstant to bypass the international banking network as the end result is then just domestic banking system transactions occurring with BitInstant and the exchanges simply operating as intermediaries.
BitInstant even serves as a method for acquiring these redeemable codes quickly. Cash may be deposited at nearly a dozen of the largest banks in the U.S. for purchase of a redeemable code from any of the exchanges BitInstant works with. BitInstant will soon be introducing additional cash deposit and online instant transfer methods as well through banks in both Europe and the U.S.
Risks
There are risks to using these redeemable codes though. The term “bearer instrument” means just that — the funds can be spent by any party that knows the code.
Individual traders have become accustomed to using e-mail as the method of forwarding a redeemable code as payment to trading partners, for instance. At some point, cyber-criminals will be sniffing network traffic to snag these redeemable codes sent through e-mail and other insecure channels as once the code is known it can be redeemed at the exchange and withdrawn — all anonymously, in many instances.
Additional risks exist as well. None of the exchanges offering these codes are registered to operate as money service businesses in the U.S. BitInstant claims to be exempt from the requirement to register as a money service business as they do not issue nor store the value from the codes themselves.
There is also the risk that the exchange which issued the code might not truly hold the funds to back the amount of value supposedly available on demand to the bearer of the code. At present, these codes are not generally used as a store of value by customers so the total amount of value tied to these codes is likely just those transfers in progress at any point in time — presumably just a relatively small amount of funds to an exchange.
Are Bearer Instruments Legal?
Another bearer instrument known as a bearer bond has not been issued the U.S. since the Tax Equity and Fiscal Responsibility Act of 1982 passed.
There are other forms of bearer instruments that are still widely used however. Lottery tickets are redeemeed by the bearer in most U.S. states and jurisdictions globally, for instance. Another example — stored value prepaid cards might employ a scratch-off that reveals the code underneath — for redemption by the bearer.
Green Dot’s MoneyPak and WalMart’s Money Card are two financial instruments that would seem to be similar to these redeemable codes however those products are for sale with the intention that the buyer loads the funds into another account controlled by the same buyer, and not for use as a cash transfer method.
Looking Ahead
Unlike how the Bitcoin digital currency employs a decentralized architecture, the Bitcoin exchanges are entities that can be shut down with a single phone call. As a result, the exchanges appear to attempt to comply with regulations — such as the anti-money laundering restrictions imposed, for instance. Similar to how in the U.S. stored value instruments that could be used internatioally, such as prepaid debit/ATM cards, were sold for more than a decade and a half without significant restrictions, redeemable codes may have some runway yet before becoming a target by regulators in the various jurisdictions where they operate.
In the meantime, Bitcoiners have achieved near parity with the fastest global money transfer systems available anywhere yet thanks to financial innovation are not having to foot hardly any of the large bill that those systems traditionally incur.
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