Colored Coins: How Banks Could Exploit Bitcoin Technology


NEW YORK (InsideBitcoins) — Many people in the Bitcoin community have been talking about Bitcoin’s promise in the realm of international remittances and money transfers for quite some time. This new digital currency and payment system is supposed to be the migrant worker’s saving grace when it comes to sending money to their families back home.

While we’ve seen a few new Bitcoin remittance companies pop up in places like Kenya and the Philippines, these solutions have proven to be more costly than originally predicted.

As people are beginning to doubt Bitcoin’s ability to shake up the international remittances market, it’s important to remember that the Colored Coins project could offer the perfect solution when it’s all said and done.

Bitcoin still has its costs

The main issue with using Bitcoin for international remittances right now is that there are still added costs on both ends of the money transfer. For example, a person living in the United States who wants to send money back home to Kenya must first convert a portion of their paycheck into bitcoins before they can take advantage of this cheaper alternative.

Once the bitcoins arrive in Kenya, they must then be exchanged for the local fiat currency. These exchanges between bitcoins and fiat currencies come with added costs, so the real price of sending an international remittance with Bitcoin is much more than the $0.05 fee sent to the miners.

What are colored coins?

Colored coins could be the solution for removing these added costs found from exchanging between dollars and bitcoins or Kenyan shillings and bitcoins.

This project is basically a way to take advantage of the Bitcoin distributed ledger rather than the bitcoin currency. When you “color” an individual bitcoin, it can be used to represent any kind of tangible property in the real world.

A bank could take some of their U.S. dollar reserves and claim that some bitcoins that they own are now redeemable for dollars at all of their branches across the country. Although they still have the issue of counterparty risk, the dollars represented by those colored bitcoins can now be moved around in a frictionless manner.

The solution for international remittances

Although the protocol is not widely used at this point in time, the idea of using colored coins could become quite popular once the technology is matched up with the right financial institutions. If there were banks or other money services businesses issuing colored coins for a wide variety of currencies, the act of moving money from one country to another would become quite trivial.

The individual working in the United States could now withdraw “U.S. dollar coins” from their bank account and exchange them for “Kenyan shilling coins” on an exchange.

Merchants are much more likely to accept these colored coins rather than bitcoins due to the cryptocurrency’s volatility, so it’s likely that the family in Kenya would be able to purchase goods with the colored coins directly rather than having to exchange them for physical cash.

Then again, there are some countries where inflation has caused bitcoin to look rather attractive when compared to the local fiat currency.

Written by Kyle Torpey
Photo credit: Gates Foundation via photopin cc

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