Scott Millar, CEO of blockchain startup BlockSettle, spent some time with Coinscrum’s Meet the Founders series to discuss the evolution of his company and his future plans. Millar is the common denominator among the three co-founders of BlockSettle, which is an alternative to a centralised cryptocurrency exchange.
Millar previously worked as a derivatives trader in London, where he came to know one of the other co-founders. He later moved back to Sweden and took derivatives trading with him, which he continued to do for another six or seven years. As a derivatives trader, he was basically in front of monitors for 12-14 hours a day. He likes to read about how the monetary system works, and while doing so in 2011, he stumbled upon Bitcoin.
(2:40) “I saw this article in a banner when I was reading an article about how the Supreme Court should have heard the Pirate Bay case. And so I read into it. And it was an article about Bitcoin. And down the rabbit hole I went.”
Considering that Millar is interested in finance and how the monetary system works, he was intrigued to actually find an asset where the account holder controls the asset and suddenly it’s not the ledger keeping institutions that control the asset on your behalf — it’s the asset holder. He explained how the hierarchy completely changes and there are a lot of new settlement models that come about because of it. It becomes possible to have actual delivery vs. payments and other very interesting settlement models.
(3:53)“Back then the space was very nascent and quite undeveloped,” Millar said.
He was behind another startup that he raised capital for, as a result of which he had expanded his network of people who had pivoted to the blockchain space, so Millar and his co-founders decided to start BlockSettle.
He described how back then, all the models that were built up had the premise of having to surrender control to a centralised exchange where they control both the cash component as well as the bitcoin component. Otherwise they can’t guarantee the fulfillment of settlement obligations. So what they did was to set out to build a model where that was turned upside down, where the bitcoin or blockchain leg was transferred directly between the participants in a trade, and the cash leg would be settled on account like any other exchange. The key difference is the exchange wouldn’t custody any BTC — it would only custody cash. So the user prefunds the account in cash and the BTC settlements are peer-to-peer.
He compared BlockSettle’s model to that of Kraken and Bitstamp, for example, where everyone pre-deposits cash first. BlockSettle has that on account and then users can trade and settle in real-time with each other.
(8:02) “So you have all the efficiencies of a centralised exchange but all the benefits of the self-custody of the P2P models,” he said.
The trading, Millar added, becomes very much an OTC model and is the way that BlockSettle “match-makes.” It’s an open model that anyone can quote. So the user sends an RFQ to the system, which everyone receives. Anyone can respond, and the user is matched with the most competitive response.
Regulatory Model & Tainted Bitcoins
Millar described how Sweden has a “fantastic regulatory climate,” one that works so well it should be harmonised across the EU. Blocksettle is allowed to custody cash on the users’ behalf, who have deposit insurance. BlockSettle works with a bank in Estonia into which the customers pre-deposit funds. All the cash is segregated, and AML and KYC requirements are placed on all exchanges, a model that is no different to anywhere else.
BlockSettle also addressed tainted bitcoins on a recent blog post. Millar explained how when users sell BTC, they send it to a centralised exchange. The coins are then sent to a company like Chainalysis that will attach a score to the coins. If the coins score low, there will be many follow-up questions because you don’t want to receive coins that are the result of a hack or that are blacklisted.
In the BlockSettle model, whoever is settling the bitcoins needs to show the UTXO, or the actual coins they’re selling prior to them being sold. BlockSettle does the screening, and if the score domes in too low, they prohibit the trade.
More on BlockSettle
Millar went on to explain that the customers using BlockSettle are not first-time users. They are slightly more savvy and understand the need for holding your own coins as well as why they shouldn’t trust centralised exchanges.
(16:56) “We want to pursue a model that basically resonates with what bitcoin was built to do, basically, where you custody your own coins and trade P2P,” he said.
When Millar first dove into the Bitcoin space, there was a lot of negative media coverage around blockchains, which he said you don’t have to the same extent today. Back then it was more of a concern surrounding AML and KYC vs today. Now it’s more of a concern around price as bitcoin has developed into an asset class in and of itself.
The developments on the institutional investor front in the cryptocurrency world have been two pronged, the first of which is custody solutions. Many banks and financial institutions aren’t comfortable holding their own keys. So with a big organisation, there are a host of questions. How do you distribute the keys? Who is controlling things? Who is authorised to do transactions? How do they back things up?
(19:35) “So there’s I think a lot of questions still left to figure out in these areas. But that’s one area where lots of work has been done and the work that’s been done there has to a large extent allowed for many more institutions to come in,” said Millar.
The second area involves having bitcoin being viewed much more as an asset class in itself for institutions to even consider dipping their toe in, he added. Another big area that has been addressed is the ability to hedge, so you have proper futures contracts or CFD contracts, which in an asset this volatile is always helpful, he explained. Millar believes that second-layer additions on top of the base layer need to be worked on much more and need to be developed.
He explains how in addition to the first layer, you need a payments layer to get bitcoin to interact with the financial system, trade shares, issue shares and have them trade in real time against each other. These are issues being worked on right now through everything from sidechains to different models of issuing assets on-chain regardless of whether it’s bitcoin or Ethereum, for instance.
Millar finds the decentralised finance (DeFi) space “super exciting.” There’s still a lot to figure out as it relates to institutions, however, considering they are the de facto ledger-keeping institutions that rely on other people to have accounts with them. He asks what happens in a world where the account holders hold their own keys? What does the institutional role look like in this model? It’s too soon to say, he added.
Millar would like to see more of a focus on building secondary layers, the actual wallet software, maintaining keys and that type of work, which has been difficult to monetise. He says there aren’t enough standards across wallets in terms of backups, etc., as well as for payment layers. So if you want to open up a web shop and receive payments, there’s no standard way that’s easy to roll out.
BlockSettle is working on Auth eID, which is a clone of the bank ID system in Sweden. They came about it by asking how to upload documents like other exchanges. They said why not make a bank ID clone where it’s a copy and paste of everything, the main difference being that instead of doing the KYC process with a Swedish bank, they would make an app where the onboarding is done remotely like other exchanges.
So basically users enter an email address, mobile phone number, scan a passport and do a face ID scan. Next they upload proof of residence documents. So it works like other onboarding processes but you have everything in an app. So if other services start using the technology, you can be onboarded there with ease.
The crypto world is ideal for this, Millar said, considering it’s such a global marketplace and everyone basically uses the same services.
For BlockSettle, longevity is the key. They’ve only just released their platform, which they are gently rolling out. Next the team will deliver the APIs so anyone can connect programmatically so they don’t need the actual wallet that the company has developed but any service or wallet will do. Step two is to develop a one-day futures market where they have cash settlement at the end of the day and they do BTC settlement on delivery obligations. This is to establish a hedging market and not to have to do delivery trade by trade in real time. It’s more of a high-frequency market. These are the company’s next near-term steps, in addition to an Armory release that is coming out shortly.
For more information check out their website: blocksettle.com