WBD559 Audio Transcription
Running a Business on Bitcoin with Tibor Ballai
Release date: Monday 26th September
Note: the following is a transcription of my interview with Tibor Ballai. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Tibor Ballai is the co-founder and CTO of Fortris. In this interview, we discuss the challenges of running a business on Bitcoin, how Fortis enables businesses to use Bitcoin as an operational currency, and why this will be the next step in the adoption cycle.
“One interesting thing about Bitcoin is Bitcoin doesn’t care about what the regulators do. If they end up drafting regulation that stifles the adoption it will just flourish in other jurisdictions, and eventually, they realise their mistake.”
— Tibor Ballai
Interview Transcription
Peter McCormack: A very important conversation we're about to have now with Tibor from Fortris. There was a computer game I used to play as a kid called Fortris.
Tibor Ballai: Fortris, with the same spelling?
Peter McCormack: I can't remember. Danny, can you look up "Fortris BBC game" and go to Google Images?
Danny Knowles: It was not spelt the same; it was spelt like an actual fortress.
Peter McCormack: That was the one, see that. So, you had this little spaceship and it was one of the first kind of 3D games because, I don't know, how old are you, Tibor?
Tibor Ballai: I'm 37.
Peter McCormack: You're a bit younger than me. Did you ever have a BBC or a Spectrum?
Tibor Ballai: No.
Peter McCormack: All right.
Danny Knowles: So, this isn't like BBC, like BBC News?
Peter McCormack: I don't know if it was same company.
Danny Knowles: I've never heard of it.
Peter McCormack: Yeah, well, so that was the first computer. Search on the computer itself, you can leave it open, "BBC computer". Yeah, bottom left. So, I used to play that chess game, top right. So, my dad came home one day when I was about 5 years old and he said, "We've got a computer", and it was a BBC, and it was one of these, and the first game I ever played was a game called Manic Miner; can you search for Manic Miner, Danny?
So, this is what games looked -- there you go. You can emulators and still play this, right; I'll do it afterwards and I'll show you. I'm a legend at this game! But it was just simple 2D stuff like this; Chuckie Egg was another one, etc. I don't know what that Manic Miner is on that Wikipedia; that's like an updated new graphics version. Yeah, that's Chuckie Egg.
Danny Knowles: They all look exactly the same.
Peter McCormack: Yeah, well, you know, there weren't that powerful. I used to sit there just playing it but I used to always scratch my nose like this and I ended up with a big scab on my nose; my dad will tell you about it. So, if you go back to Fortress, spelt differently, like an actual fortress, although I believe you've probably got the same intention; it does sounds like a fortress.
Tibor Ballai: It is, yeah, and that was part of the idea behind the branding.
Peter McCormack: So, either you couldn't get the domain name or someone can't spell!
Tibor Ballai: I'm not going to point any fingers!
Peter McCormack: What is "fortress" in Spanish?
Tibor Ballai: It's a good question.
Peter McCormack: Get Fortress back, Danny, bring Fortress back. So, this game, Fortress, was one of the first 3D games that you would get and, yeah, there's a little spaceship and you just had to keep navigating around the obstacles that would get in the way. See the red and white kind of line, bottom right?
Danny Knowles: Oh, yeah.
Peter McCormack: So, you would have to refuel; there's an oil drum there, you can see it, you'd have to get one of those and then you'd have to go up and down. Suddenly a wall would appear and you'd have to go up to get through the wall and things would try and shoot you. It was a pretty fucking cool game back then. Look at the front cover; that's so cool. Yeah, that's Fortress. Anyway, welcome to Bedford, Tibor.
Tibor Ballai: Thank you, nice to be here.
Peter McCormack: Got the scarf up for you, thank you, sponsor of Real Bedford.
Tibor Ballai: Well, thank you for giving us the opportunity; it's a really, really cool experiment and we're happy to be able to be part of it.
Peter McCormack: Well, that means more than an experiment for me; this is like a childhood dream. I don't know how much you know about football, but the UK football pyramid is like four professional leagues, Premier League, Championship, League 1, League 2, and we've never had a team in Bedford in the football league. We're quite a big town to not have that, and so a childhood dream, I wanted to do it, but I'm only able to do it because of people like you sponsoring it. You've given us the capital to be able to invest in the ground and the team and, you know, do everything right in terms of merchandise and shirts and our programme, which I showed you. I guess it was an experiment in some ways, but two games in, it's going all right.
Tibor Ballai: That's an amazing start to the season, congratulations.
Peter McCormack: Have you watched any of their goals?
Tibor Ballai: I have to admit I haven't.
Peter McCormack: You've seen them?
Danny Knowles: Yeah.
Peter McCormack: You've got to, well, I'll show you after this; I'll show you the first goal, our striker Kevin Owusu, two minutes into the first game, he hits at 30 yards. Do you actually like football?
Tibor Ballai: I wouldn't say I'm a big fan; I enjoy watching it, but I'm not a big football fan.
Peter McCormack: Where are you from; what city are you from?
Tibor Ballai: So, I'm based in Malaga, Spain; originally, I'm Hungarian.
Peter McCormack: Hungarian? Yeah, I can't think of any Hungarian teams. Good historical international team; didn't they win a World Cup once?
Tibor Ballai: Did they?
Peter McCormack: I think Hungary won the World Cup once.
Tibor Ballai: Would that have been the 1970s?
Peter McCormack: Yeah.
Tibor Ballai: It was a long time ago.
Peter McCormack: A long time ago.
Tibor Ballai: Yeah.
Peter McCormack: Yeah, I'm pretty such Hungary won the World Cup. Well, anyway, thank you so much; but not only is it a childhood dream to run this football team, and I've got this dream to get them in the football league, I'm also trying to run it as best like a Bitcoin company.
Tibor Ballai: Yeah.
Peter McCormack: We were joined by your colleague, Alex Cannon; I owe him a reply to an email from a while back, because there are lots of things we're still trying to do. But we are trying to operate it not entirely on a Bitcoin standard, because we can't because we have bills to pay and players to pay, but we're trying to operate like a Bitcoin company. So, working with a company like yourself is going to enable us to do things. We should probably lay it up; tell people about Fortris and what it is you guys do.
Tibor Ballai: So, Fortris is a platform that allows, primarily enterprises to run on the Bitcoin Standard, so effectively you run your business on the Bitcoin Standard. This obviously can mean many different things. So, if we boil it down what our vision is of a company running on a Bitcoin Standard, we mean using Bitcoin as an operational currency.
So, if you look at the typical use cases you see in the corporate world today for Bitcoin, like the MicroStrategy model, the buy-and-hold, you hold it as a treasury asset and it depreciates. Or you see a lot of companies introducing Bitcoin as a payment, as an alternative to credit cards or other payment methods, but they do so in a hands-off manner where they use a third-party payment processor that settles to them, they don't actually touch Bitcoin.
So, when we talk about using Bitcoin as an operational currency, it can be the base unit of account for your business; you can now pay your staff in Bitcoin; you can pay your contractors; you can use it for large multinationals; you can use it for cross-border settlements. Obviously, you're holding it on the balance sheet as well, but you're using it to run your day-to-day operations for your business.
Peter McCormack: Right, I'm going to run through with you shortly how we're using Bitcoin within the football club, and then you can talk to me about how Fortris would actually help us improve things, because we've run into a few blocks here. But, to benefit from Fortris, you don't need to be on 100% Bitcoin Standard, right; it's just certain companies who maybe partially use Bitcoin can benefit?
Tibor Ballai: Correct. The reality is that we live in a fiat world.
Peter McCormack: Yeah.
Tibor Ballai: Whichever jurisdiction you're operating in, your accounting is going to be bound by that jurisdiction, and you will have to do your accounting in fiat and you have to interact with the fiat world. So typically, what we see among our customers is they have their existing fiat infrastructure, financial infrastructure, be that service providers, tooling, and then when they start introducing Bitcoin, they need to have a solution that works nicely with their existing infrastructure; that's where Fortris helps.
First of all, from an accounting point of view, we have what we call a fiat reference model, so we track basis down to the UTXO level for every single transaction that moves through the ecosystem, and then from that, different types of reporting can be derived. We can feed the data into the accounting system, so --
Peter McCormack: We use Xero.
Tibor Ballai: It's not something that we work with today, but we can look at it and typically, the way we interact with accounting systems is pretty standardised, right. So, we do the journal entries and, if that's configured properly, then it should just work.
Peter McCormack: Are you seeing a growing number of enterprises starting to have this requirement? I know, like you said, a lot hold it on the treasury and hope it goes up, but are you seeing more starting to accept Bitcoin and need a system to help managers?
Tibor Ballai: Yes. The primary use case that we see driving this operational adoption is actually payroll, or you could put it in a broader category, you can look at it as payroll and rewards programmes, right, and also the creator economy; that's another area where we see adoption for Bitcoin for paying out the royalty holders, the artists, and I suspect that's just the beginning.
Obviously, we have, among our customer base, some early adopters, but we're seeing a pattern emerging there and we're seeing larger, more traditional multinational corporations starting to do some tests for using Bitcoin as a cross-border settlement tool as well, which is very encouraging.
Peter McCormack: Interesting, tell me more about that.
Tibor Ballai: Well effectively, if you look at the challenges, especially for multinationals, that move significant volume of liquidity across international jurisdictions, the banking system can be quite so at times and quite challenging and expensive as well. So, obviously, Bitcoin, when you effect a Bitcoin transaction, that's final settlement; it can be very cheap if done properly. But also there's another significant benefit which is, typically when you're sending money in the fiat world, the money and the message arrive at different times.
What we mean by that is what we're looking at, use cases with large corporations where they're doing thousands upon thousands of transactions a day, and ultimately funds might hit an account but there's no metadata coming with that transaction, and then there's the challenge of reconciliation and matching all of those. Well, with Bitcoin, that’s different; you get a transaction, final settlement and the message arriving at the same time.
This is where Fortris helps those use cases, because we integrate with treasury management systems, ERPs, and then we can feed that data in real time. So effectively, you take reconciliation from being a challenging process to fully automating it for Bitcoin transactions.
Peter McCormack: So, using Bitcoin to settle across borders, is that jurisdiction-specific where people are finding the use case? I know, for example, I trade with the US because of the podcast; I've got sponsors there. Whenever they want to pay me, it's not too difficult; I give them my Swift or my IBAN numbers and usually the settlement's pretty quick. But I have had it where I worked with a guy in Japan and we couldn't find a way to connect our bank accounts.
Also, when I was in El Salvador, I was with somebody who was trying to send money into El Salvador from the US and it became close to a nightmare; there were limits, IDs, it was so painful. In the end, they actually did do a Bitcoin transaction. So, it is jurisdiction-specific?
Tibor Ballai: It is definitely jurisdiction-specific, but what's interesting about Bitcoin is, once you’ve set up your system, it's jurisdiction-agnostic.
Peter McCormack: Yes.
Tibor Ballai: So, you have a system that now works worldwide. In certain jurisdictions, maybe a fiat transfer makes more sense, but in most, and if you're looking at it from a global perspective, Bitcoin is definitely going to be superior for many use cases.
Danny Knowles: Are those companies just using Bitcoin to send the payment across borders; are they then just converting it straight back to fiat?
Tibor Ballai: They're holding a position, right, they're holding Bitcoin on a balance sheet as well, but they're separating the two use cases. So, that’s where we look at that and, basically, you're classifying the use of Bitcoin depending on its intended purpose, and this is important not just from a use case perspective, but also from a legal compliance and tax compliance perspective as well. The reporting requirements are going to be different for holding it when you're holding it as a treasury asset versus when you're using it as a payment asset.
Peter McCormack: Right, but could you have companies who come to you and say, "Listen, we've got to sell globally in a number of countries; we're having difficulty with the banking system. We want to use Bitcoin to do this, but we don't want to hold Bitcoin", is that a possibility?
Tibor Ballai: It is common, yeah. What we see is almost like an educational element to this where, typically, that's what we call hands-off approach, right. Typically, that’s where, when you have a company that wants to look at utilising Bitcoin, they will take this approach first just because they don't want to be too exposed to the price fluctuations. That is something that we can facilitate; we have partnerships with liquidity partners that can do quick on- and off-ramping to be able to facilitate this; you could even call it using Bitcoin as a network and not necessarily holding it as an asset, and try to minimise the exposure to price fluctuation. But what we typically see is that's just a gateway. Once they start using it, once they start learning what the benefits are, they want to hold it.
Peter McCormack: Yeah, always the way.
Tibor Ballai: That doesn't mean that, as you said, even your company, you live in a fiat world, you have bills to pay, that doesn't mean that they hold all the Bitcoin. But they can establish the level of comfort that they have for exposure to price fluctuation on the treasury side and then, anything above that, they can offer them into fiat, and they can define their operational controls.
Peter McCormack: But you only support Bitcoin, right?
Tibor Ballai: At the moment.
Peter McCormack: What's coming, Solana, Ethereum; what are you bringing?
Tibor Ballai: We built this on Bitcoin. Obviously, we believe that Bitcoin is really the only truly decentralised network that can offer this kind of innovation, and that's where the volumes were and where the volumes still are. But what we're seeing is, with these traditional corporates moving into the space, they want to test the waters and they want to be able to work with primarily stablecoins and some ERC-20 tokens as well. So, we have a choice, right, we can either just ignore that, but I would draw an analogy, going back to Real Bedford, you live in a fiat world.
Peter McCormack: Yes.
Tibor Ballai: You couldn't run that on Bitcoin only.
Peter McCormack: No.
Tibor Ballai: Now, we have two choices here; we either just say, "No, we're going to work with Bitcoin only and ignore everything else", and the reality is we will have to say no to potential customers who do want to educate themselves, they want to run a few tests or proof of concepts and see how it works. So, the approach we've taken is we view these stablecoins and ERC-20 tokens in the same lens as we view fiat, from an interoperability point of view.
Peter McCormack: Right.
Tibor Ballai: So, yes, you can run your business on the Bitcoin Standard, but you will have to interoperate with fiat and, potentially, other tokens.
Peter McCormack: Right. I was heading towards it because I was thinking of stablecoins, because when I started talking to you about my football club, one of the challenges I have at the moment is I'm essentially operating two disparate financial systems. One is a Bitcoin one and one is a fiat one, which have their own different software and challenges. But if I could use stablecoins instead of fiat, well not instead, but use fiat stablecoins rather than fiat systems, you could do it all from one system. Then, that balancing sometimes between your Bitcoin and your fiat would be a lot easier.
Tibor Ballai: It would help, because the financial tooling that exists, it's easier to repurpose it if you're just using stablecoins. But obviously, I don't need to explain the challenges and the risks associated with that, but I think that's one of the key problems or the key challenges in enterprise adoption of Bitcoin that Fortris solves. So, if you take an ERP installation, the best-case scenario, you're looking at a 6- to 12-months project to get an ERP set up in an enterprise; worst-case scenario, depending on the level of customisation, you're looking at something more.
Peter McCormack: So, tell people what an ERP is.
Tibor Ballai: ERPs are Enterprise Resource Planning systems, so effectively it's enterprise software that covers, at its base layer, accounting and then financial tooling, and then it gives you governance, financial reporting, etc. Then, depending on the industry, there are certain modules that you can layer in, like booking systems and purchasing, etc.
Peter McCormack: Would SAP be considered one of those?
Tibor Ballai: SAP would be considered one of those; Oracle NetSuite would be another one. So effectively, it's a very involved operation to get that set up. Now, if that enterprise is now looking at integrating Bitcoin into their operations, they will have a similar challenge to what you describe. If you look at the tooling that exists on the market today, they will have to run the two in a silo, and obviously that's less than optimal. If you look at the reporting side, just something as basic as getting a consolidated view of your financial positions is going to be very difficult; you'll have to do that manually.
So with Fortris, the approach we took is we tried to design a system that works with existing financial infrastructure. So, we integrate with the likes of an SAP or an Oracle NetSuite, with treasury management systems, to integrate all of your Bitcoin flows into your existing financial infrastructure. So, let's say you're using Kyriba as a treasury management system and you have your cash forecasting set up and all of your global reporting, well, we can feed the Bitcoin data into that. So, yes, it works differently than a stablecoin --
Peter McCormack: Maybe better.
Tibor Ballai: -- you have to track basis, obviously it brings unique advantages, but ultimately we can still feed that data into your accounting and financial infrastructure, so you get consolidative reporting and you don't have to deal with running two systems in parallel.
Peter McCormack: It sounds a bit more ideal. Okay, so let me talk you through what my usage is because it's been a real good case study for me to live understand the challenges of operating with both fiat and Bitcoin. So obviously, we're a football club, we have different revenue streams. So, one is tickets which we sell in advance and we sell on the day; we have merchandise, again, we sell online, but you can also buy them at the ground; we sell programmes, which you can buy online and at the ground, including subscriptions online; and then, on match day, we have the ability to buy food and drink, beer, a burger, whatever, and in every scenario, we want to be able to accept fiat and Bitcoin.
We also have the need to pay people; so, we have staff and we have running costs and bills, things like gas and electric, so there's a range of things, and we have sponsors. So, any sponsor that's paid me in Bitcoin, I'm holding in Bitcoin in our treasury. Anyone who buys merchandise or buys anything in the ground and pays in Bitcoin, it's like 1 in 15, 1 in 20 transactions, all runs through OpenNode, and we keep that 100% in Bitcoin. Because of the volume, we know we never need that for operational costs, but we keep it there in what we call our float, it's like our Bitcoin float. And then what happens is, when we have any Bitcoin payments that need to be made, we pay that from that float.
We're not paying anyone yet in Bitcoin, but I assume it's going to come; at least one player, I think, is going to turn around and say it at some point. In terms of how we manage this, it's all over place, but the thing that's all over the place is the Bitcoin side; it's not the fiat side, because as you are well aware, the tooling already exists, the accounting system already exists.
Tibor Ballai: Correct.
Peter McCormack: So, we've got a Zettle reader and the Zettle reader has all our stock on there and, when we pay something, the stock gets deducted, the payment reference goes into our system, the money goes to our bank, and that's all reported on our accounting system; perfect, works great. With Bitcoin, what tends to happen is everything just goes into one big pot.
Tibor Ballai: Yeah.
Peter McCormack: One big pile; I don't know if it's separate UTXOs, or records and spreadsheets. So if you said to me, "Pete, how many tickets have you sold?" I can say, "We've sold this many tickets". "How much Bitcoin did you get for those tickets?" I'd be like, "Huh, I don't know".
Tibor Ballai: Yeah.
Peter McCormack: "What's the value of that Bitcoin?" "Oh, I don't know"; that bit is a mess.
Tibor Ballai: And that is the exact challenge that we saw and set out to solve.
Peter McCormack: Right.
Tibor Ballai: We started Fortris back in 2017 and at the time, we were looking at all the tooling that was coming out for Bitcoin as an individual user that allowed you to be self-sovereign, to take advantage of all the benefits that Bitcoin brings. But there was nearly zero tooling for corporate usage, unless you went the third-party processor route where someone else is holding your keys and then they're managing it for you, right.
So, the use cases you described, effectively what we do is for every single payment, be it retail or B2B, there's an order set up and, in Fortris we track the basis. There's a reference number, and Fortris pushes the journal entries into your accounting system so it's all reconciled, and then all of the challenges you were describing, you can track.
But there's another challenge that a lot of people don't realise; because you're coming from a background of having used Bitcoin personally, so obviously security, you understand how important security is, but security for individual use is very, very different than the other considerations you need to have for corporate use. So, that's where governance comes in, right. For personal use, I can get a hardware wallet, I can shop around; there are many options. I can set up my wallet, I can secure my backup and I can be confident that my Bitcoin is secure.
For corporate use cases, we've seen horror stories among potential customers where we rolled out Fortris where they were trying to replicate that in a corporate world. So, they had hardware wallets that the CFO controlled, and they were locked away in the safe --
Peter McCormack: That's essentially what I have.
`Tibor Ballai: Exactly, and as long as you're a small operation and you trust yourself, that's fine, but there's another challenge. Even if you trust that person, there's a challenge of that person potentially becoming a target for attackers.
Peter McCormack: So, just compare it to our fiat thing. So, in terms of running the podcast, Emma does all the bookings and the arranging of travel for me, guests, whatever. She has a card and she can make bookings and she sends me an approval and I approve it and it all works great, etc. On the Bitcoin side, we actually had a need for some Bitcoin; we ran a meet-up before the first game and we were going to give donations, so we had to get the Bitcoin. But I was away at the time, so there was no way of anyone getting that done.
Tibor Ballai: Exactly, so give it the considerations; you have business continuity and scalability, or you're a single point of failure for all Bitcoin payments at the moment, right. So, those are the kind of challenges that we solve by introducing governance. So, what we mean by "governance" is defining operational and security protocols for how you use Bitcoin. So, you can define different types of accounts; you might have a treasury account that you're comfortable that you have to have final sign-off before funds can leave treasury, but you can have operational accounts.
If you're introducing Bitcoin into your payroll, you can have a payroll account where you can set up, let's say, a dual sign-off workflow, where someone in the operations team who sets up the recurring payments can set up the order, they can provide one of the required sign-offs and you provide the final sign-off; very similar to how you're using the fiat system today, and it goes beyond that. We can also allow you to control who has access to what accounts, what visibility they have, what kind of operations they can carry out. I'm assuming you have an accountant; you could give your accountant auditor rights where they can go and pull all the reports, see all the transactions without necessarily having the ability to set up payments.
This is really the main difference between personal use and corporate use. For personal use, as long as you have the hardware wallet, you can control your own keys; that's perfect, that works.
Peter McCormack: But we don't have that for our fiat account, because it wouldn’t work.
Tibor Ballai: No.
Peter McCormack: I mean, Danny needs to organise things, I do, Emma does, and we all just kind of know where to go to do this, and it is just very smooth. At the football club, I have me, Emma, Tom all accessing payments and doing things; I'm the only one with access to the Bitcoin. So, I guess what you're saying is you've created the infrastructure that allows people to use Bitcoin like they use fiat. I mean, I'm not saying exactly the same, but you're giving the same tooling we have elsewhere.
Tibor Ballai: It's interesting you would say that, and very early on, when we started designing user experience for this, we had to choose a persona for who's the typical user, and the persona we chose is someone who's familiar with financial software but they're not a Bitcoin expert. I like to think that we've done a decent enough job that it turned out to be quite intuitive; the learning curve is not too steep when we rolled this out to customers.
Interestingly, with the COVID lockdowns, we received some very interesting positive feedback from customers that we've already rolled this out to where they were saying, "Well, look, now that all of our staff is remote, this is brilliant for us, because now we can still continue operating without having to overhaul our procedures, we can still have multi sign-off where we have people in different parts of the world and they can set up transactions and authorise them; whereas before, everyone had to be in the same physical location to do that".
Peter McCormack: Do you have the facility to manage between hot and cold wallets?
Tibor Ballai: Yes.
Peter McCormack: That's one of the things that the next challenge is that I have to think about is that, as that Bitcoin stack grows, I do want that float that's available for making quick payments, but I do also want a cold wallet; will we be able to mix between the two?
Tibor Ballai: So effectively, what we allow Fortris users is the ability to set up multiple accounts, and every account in Fortris is a wallet, but how that wallet is set up, that is flexible. So, that’s where the security model comes in, that's where the governance comes in. You can have complete cold storage, that's Air Gap; you can have hot operational wallets. It's not really the typical hot wallet where you have a key stored somewhere, and that comes with its own risks. It's a bit more complex than that, because you have distributed signing built into this, some business rules, validation, etc, but ultimately we can make that distinction, and you can choose how you want to allocate the funds among your accounts.
Peter McCormack: At Fortris, are you guys on a Bitcoin Standard?
Tibor Ballai: We're in the same situation as you guys would be.
Peter McCormack: It's a mixed bag?
Tibor Ballai: It's a mixed bag; we're living in a fiat world. We do have staff that are 100% paid in Bitcoin.
Peter McCormack: 100%?
Tibor Ballai: Yes, we do.
Peter McCormack: Bold. What do you think, Danny; do you want to do it?
Danny Knowles: I'll get paid in Bitcoin.
Peter McCormack: 100%?
Danny Knowles: Is it possible to have this interact with like a wallet that you have custody of, or is it all custodied with you?
Tibor Ballai: No actually, so we do not custody funds; we don't hold anyone's keys. We built this to a self-custody use case, so you have a vault that gets deployed on premise or in the cloud; there are a couple of options. If you want to run this on top of HSM, you can do that; if you want to do Air Gap cold storage, you can do that as well. Then Fortris, basically, is a SAS-type software that runs on top of this and it hooks into your key management, your vault, for the actual sign off of the transactions.
That was the initial use case we've built it to. As you can imagine, not everyone wants to self-custody and not everyone has the capability to self-custody, so we've, since then, introduced the option. So, we have flexibility where Fortris customers can choose if they want to self-custody or use a third-party qualified custodian.
Peter McCormack: So, if I was holding my Bitcoin in a Ledger, for example, that integrates with Fortris?
Tibor Ballai: Not today, but I don't see any barriers why we could not set up that bridge.
Peter McCormack: So, you said you don't hold the keys, but do you have specific services you integrate with them?
Tibor Ballai: So, we offer the vault software, which we license to our customers, they can deploy it or we can help them deploy it themselves, and then that, effectively, is their key management solution.
Peter McCormack: Oh okay, there is a product you have to use to do that?
Tibor Ballai: There is, yes.
Peter McCormack: Is that a company you own?
Tibor Ballai: So, we build that; that's part of Fortris as well.
Peter McCormack: So, you built it?
Tibor Ballai: Yes.
Peter McCormack: Then you are holding the private keys?
Tibor Ballai: It's our customers who hold the private keys; we license them the software. So, it's the same way that, when you buy a Ledger, the Ledger's not holding your private keys.
Peter McCormack: Yeah, I see what you're saying.
Tibor Ballai: It's running on your own hardware; you set it up, you control it, so it would be similar to that.
Peter McCormack: So, in terms of building this, were you your own test customer to begin with?
Tibor Ballai: No, we were fortunate enough that, when we started this, we had a couple of large customers who were already using Bitcoin in an operational capacity that we could use as our initial use case and customers. They were happy to because, to be frank, they were in the reality of locking away Ledgers and Trezors in a safe and their finance team doing most of the reconciliation and accounting in Excel, and dealing with all the challenges that you just described at a massive scale.
Peter McCormack: So, you just built it collaboratively with them?
Tibor Ballai: Yeah, pretty much.
Peter McCormack: That's pretty awesome.
Tibor Ballai: So, we built it to a real-world use case from the beginning.
Peter McCormack: What if those two companies had conflicting wishes for the product? Do you do customisation or is it complete?
Tibor Ballai: We tried our best to build this to be agnostic, and our approach was, if they ever come to us with the use cases that we don't truly believe in, then we will put a feature flag in place. We would try to do it in such a way that it doesn't affect the core product, and I'd like to think that we've succeeded in that.
Today, we have customers across many different industries and it seems to be working quite well. But I think we're very fortunate that we had the chance to build real-world use cases as opposed to trying to figure out in a vacuum, "Okay, what exactly would be the challenges of Bitcoin in an enterprise setting?"
Peter McCormack: It's interesting because the trend for our business is only one direction, right; we will only see an increasing market share being taken by Bitcoin in terms of the number of transactions we do. I've got no idea if we get to the point where it's much higher than, I don't know, we're probably like 5% at the moment; I've got no idea, if it gets to like 20%, 30%, 40%, but the trajectory is only one way. So, I guess for you as a company, you're spotting that trend because we're going to the point where almost every company has to be able to do this.
Tibor Ballai: That is our vision and mission, to allow more and more companies to want to adopt Bitcoin as an operational asset, because we see that as a next natural step in the adoption cycle for Bitcoin, right, and then to give them a tooling to be able to ramp that up. So, even within those existing customers who we used as our initial use cases, when we started I think Bitcoin was somewhere around 20%, 30% of their retail payments, and now it's closer to 70%.
Peter McCormack: Wow!
Tibor Ballai: And it's really driven by the end users; they want to use it. Obviously, also from an internal point of view, so these customers use it heavily to pay their staff, so they would fall into the category of, well I would say they offer a digital experience, right. So, they use Bitcoin in many different ways; they use it to accept payment from their customers; they use it to pay their suppliers, vendors; they use it also for cross-border, they have operations in different jurisdictions. Initially, they started with the hands-off approach, they started with introducing Bitcoin as an alternative payment method and, bit by bit, they realised the advantages and they got to a point where it's predominately a Bitcoin business.
Peter McCormack: One of the challenges I guess that traditional accounting software has is that every country's quite different, different accounting rules, different accounting practices. But when you're building software for people who are using Bitcoin, I'm guessing you still have to do certain customisation for certain reporting requirements in countries; or, is Bitcoin building a standard way of working so it doesn't matter whether you're in El Salvador, Bedford or Malaga, the software essentially works exactly the same?
Tibor Ballai: So, one thing that seems to be common across most jurisdictions today is the way Bitcoin is classified; so, Bitcoin is classified as a non-depreciating and tangible asset, right. If you look at the two primary jurisdictions, you have the GAAP accounting standards in the US and, for some reason, the name of the standard escapes me, which is the global equivalent of that, the approach is very, very similar. So, you need to track basis at the time that --
Peter McCormack: Explain to people what you mean by track basis.
Tibor Ballai: So effectively, when you receive a Bitcoin, in your use case, you told sold a ticket or you sold something on the day of the match, you receive a Bitcoin. There's a price point that will be associated or you have to associate with that Bitcoin at the time that you've acquired it. From an accounting point of view, if you're sitting on that Bitcoin for two years, and since then the price of Bitcoin has gone up, from an accounting point of view the value is still the original value.
Peter McCormack: Right.
Tibor Ballai: The new value is not locked in until you use or dispose, so until you use it somehow or you sell it. And, when you've done that, then you have a realised gain or loss, and then at that point, depending on the jurisdiction where you're in, you have to file some form of tax report for that transaction. And that last mile, that is what is jurisdictionally specific.
So, what we would do there is we try to partner up with companies that do that last mile, or we can give them all the data, we track the basis and we give them all the data, and then they can help craft the tax reporting. Or depending on the customer, some customers have the tax specialist in house and they can build those reports themselves to be compliant with the local jurisdiction.
Peter McCormack: That price volatility is one of the biggest challenges to all of this; it is to us.
Tibor Ballai: It is, and we've invested quite a bit of effort in building tooling to be able to visualise that and to be able to give effectively decisionmakers the ability to decide how much they want to be exposed to and when they should on- and off-ramp. So, we build the capability to track on realised gains or losses.
Obviously, the use case I describe is very simple because we're looking at one transaction, but even in your use case, if that number goes up, let's say it goes up to 10%, that's still a large number of transactions. Every single time you have a different basis, you have a different fiat reference that you need to keep track of, what we can do is, by building this data model, you can look and see, "Okay, right now, with the price of Bitcoin as it is, I have X amount in unrealised gains; maybe it's a good time to lock some of that in".
Peter McCormack: Lock some of it in.
Tibor Ballai: Yeah, or maybe not, maybe I want to wait a bit more.
Peter McCormack: How much consideration do you have to give to the Lightning Network?
Tibor Ballai: Well, it would have to be significant obviously, because layer 2 is going to be critical, especially within the context that we're working in in operational use, and especially for microtransactions, it will be critical. So, we have a significant amount, I'd guess almost the majority of our R&D capacity is on the Lightning Network right now, and we're looking to pilot Lightning payments with one of our larger customers before the end of the year.
Peter McCormack: Yeah, so how would that work with us? So, all of our transactions at the ground are all on the Lightning Network; it's the only way we can do it, it's the only way we can settle instantly. How would that work if we were to integrate into the software?
Tibor Ballai: I guess you're using OpenNode for that?
Peter McCormack: Yes.
Tibor Ballai: So, we'd have to look at an integration with OpenNode and just leverage that.
Peter McCormack: But that's possible to do that?
Tibor Ballai: Yes, absolutely.
Peter McCormack: Interesting. Yeah, I guess your current clients then are mainly taking transactions on basechain or dealing with basechain transactions?
Tibor Ballai: Correct.
Peter McCormack: I think that we can convert them with OpenNode to basechain Bitcoin.
Tibor Ballai: You can settle out basechain Bitcoin effectively, yes, so you could do that.
Danny Knowles: Whereabouts are most of your customers; are they in the EU?
Tibor Ballai: We have a pretty distributed customer base. We have customers in the EU, North America, Latin America; we have a significant presence among Latin America as well as Asia.
Danny Knowles: Within the EU, it looks like they're going to try and regulate Bitcoin pretty hard; do you worry about them limiting self-custody?
Tibor Ballai: It is a concern; I think we'll have to see how things will evolve on the regulatory front. It is a concern, but ultimately one or two things will happen: one, they might put the regulation in place with limitations and then, once they realise the impact, that might be changed; or two, we'll have no choice but to comply, and unfortunately the EU is going to fall behind on other jurisdictions because of these restrictions.
Danny Knowles: And I suppose then, people using your service will have to move to working with like a regulated custodian?
Tibor Ballai: It depends on what the final form of that regulation will be. If the final form is simply you have to identify self-custody wallets, then maybe there is a possibility of still being able to do so in a self-custody manner; I think it's too premature to tell what will happen there.
Peter McCormack: The EU's, and I'm going to include the UK in this as well, the UK and EU's treatment on understanding of Bitcoin is so, I'm going to swear, fucking frustrating. I travel to the US a lot and I see people building companies and I see regulators thinking about Bitcoin and thinking how to regulate it. You tend to see more pro ideas coming out of the US, which feels like we really lack champions in Europe who are going in to bat for people like yourself, companies who are building a fucking awesome business using Bitcoin.
Tibor Ballai: I think the challenge is the people that are drafting the regulation don't have access to good information on how Bitcoin works and what it can do.
Peter McCormack: I think you're being kind; I think you're being generous. I think these people are a mixture of malicious and ignorant, and the information's out there if you want to find it. I guess though, when you go to the US, you've got Coin Center, you've got the Bitcoin Policy Institute, you've got actual people working towards this. Me and Danny were talking about it beforehand, perhaps some of us need to come together and try and build some, I don't know, non-profit institution that can work on policy or work with policymakers.
Tibor Ballai: That’s a very good idea; I would be very happy to contribute to that.
Peter McCormack: Yeah, we should definitely look into that.
Danny Knowles: The Bedford Bitcoin Institute!
Peter McCormack: The Bedford Bitcoin Policy Institute; the Real Policy Institute! Well, do you know what I would do, I would speak to like a Coin Center or the Bitcoin Policy Institute and say, "Look, we can't do this; we don't understand this. You've got the entire infrastructure already; you know how it works. Why don't we raise the funding to fund someone to be based in Europe to do this but they operate under you, they work under you?"
It's not a good thing for America or Latin America Bitcoin adoption if the EU or the UK put in place particularly onerous regulations. We want this free and open around the world; we want everyone to be able to access this.
Tibor Ballai: Absolutely. One interesting thing about Bitcoin though, and maybe I'm being too optimistic in this, but one interesting thing about Bitcoin is Bitcoin doesn't care about what the regulators do. If they end up drafting regulation that stifles the adoption, it will just flourish in other jurisdictions and eventually they will realise that mistake. Obviously, the optimal path here is that they don't put those restrictions in place that are going to limit the adoption and the evolution of this. But, the worst-case scenario, other jurisdictions will flourish and then the EU will realise that they're being left behind, and hopefully they'll take the appropriate action at that point.
Danny Knowles: I wonder if we even have to go through a country or jurisdiction, like a western country jurisdiction, regulating Bitcoin too much, it breaking and not working, for people to realise that it's actually not a good idea.
Peter McCormack: Everything is good for Bitcoin, like Harry Sudock says; do you know Harry Sudock?
Tibor Ballai: No.
Peter McCormack: He's a mining guy; he's been on our podcast, what, four or five times now? He's got this saying that, "Everything's good for Bitcoin", even the bad stuff eventually ends up being good for Bitcoin. But I think you could be right about that. I mean, it's just like what's happened with China and the mining.
Danny Knowles: Exactly.
Peter McCormack: China bans the mining; the mining just moves to somewhere else in the world.
Tibor Ballai: Exactly.
Peter McCormack: Mining doesn't stop, and they've essentially taken out all that capital accumulation out of China.
Danny Knowles: Yeah.
Peter McCormack: But, at the same time, I think we should give Zell a call, or maybe Peter Van Valkenburgh a call.
Danny Knowles: Totally; we need an English cell.
Peter McCormack: We need an English cell, yeah. Just going back to the software, there is one thing I wanted to ask you about with regard to it; how does UTXO management work? If you're considering your accounting practices and the base price that comes in, etc, do you create sets of rules so people can automatically spend certain Bitcoin first, get certain UTXOs first; how do you manage that?
Tibor Ballai: So, from the UTXO management point of view, typically the rules are designed to optimise fees, so you would be spending UTXOs that are the optimal choice for the transaction you're spending. But there have been use cases where customers wanted to spend certain UTXOs, and I'll describe why someone might want to do that, and let's use MicroStrategy as an example, right. MicroStrategy has been buying Bitcoin in several tranches.
Peter McCormack: Very big tranches.
Tibor Ballai: Very big tranches, and they will have a basis associated with each of those tranches. Now, if they want to sell, they have two choices; well, they're going to be limited by the tax law on which basis they can use, but the default is first in/first out. But let's say they don't want to use first in/first out, because the first time they bought it was at a low price, and maybe they actually want to lock in a loss right now instead of a gain.
The only way they can do that is if they sell by specific ID, and right now the challenge with specific ID is proving that you're really spending coins that were bought at a basis where you're locking in a loss. So, the way they are doing it is they're effectively segregating each of the tranches into separate accounts, so, "Okay, if we want to sell, we're going to sell from this account", which works at scale; they're doing it at large scale in terms of value, but low scale in terms of frequency of transactions.
But if you look at a retail use case where you're doing thousands of transactions, you're not going to have the luxury of separating them by basis in individual accounts. So, what we can do is we track the basis at the UTXO level and then we can say, "Okay, you want to sell this particular UTXO at that price? Well, you can now submit your tax filing, but you can also audit it on the blockchain. That UTXO that you just sold was purchased at this time where the basis was X".
Peter McCormack: We've had nothing but sunshine the whole ten days we've been doing it; the two guys from Spain come in and bring the rain with them!
Tibor Ballai: It's pouring, yeah.
Peter McCormack: You mentioned earlier you're from Hungary.
Tibor Ballai: Yeah.
Peter McCormack: Did you grow up in Hungary?
Tibor Ballai: No, I grew up in Transylvania, so I'm I think Hungarian from Transylvania.
Peter McCormack: Oh, okay, because I didn't know if you grew up -- because Hungary was communist at one point, right?
Tibor Ballai: Hungary was, and then Romania was under a dictatorship until pretty recently; it was the last dictatorship in Europe. So, I managed to get a few years of that and then the interesting environment afterwards.
Peter McCormack: Has any of that had an influence over you as a bitcoiner?
Tibor Ballai: Not consciously, but I would have to say that subconsciously, absolutely.
Peter McCormack: So, before we finish up, tell me your Bitcoin story and how that led you to creating this company.
Tibor Ballai: So, it's an interesting one. So, my background is in enterprise software, and at the time, this would have been early 2012, I was working in payment technology in Asia. So, retail payments in Asia are very fragmented, a lot of the jurisdictions have their own card schemes and different programmes; it's not as unified as Europe or North America might be. So, I first came across Bitcoin back then, and unfortunately I was dismissive.
Peter McCormack: What year was it?
Tibor Ballai: This was 2012, so it would have been a good year.
Peter McCormack: Fuck it!
Tibor Ballai: Yeah.
Peter McCormack: God damn it! Well, we all have that though, we all have that.
Tibor Ballai: I'm actually surprised that my co-founder is still not angry, because at the time, I sort of convinced not to take up a position in Bitcoin because of my dismissive approach. I was looking at E-gold and everything else that came before and then promising the same thing, and I didn't really scratch below the surface to really understand it; obviously, I've learned my lesson on that! Then, a few years later, I just kept coming back, and once I looked at it, I realised how this was different, and I realised the potential, and ever since then I've been hooked.
So, we started using Bitcoin, even at that point, for retail payments; we had a couple of different use cases that we were trying to incorporate it into and then, just before 2017 was when we realised this lack of tooling for the enterprise use cases; as an individual, you had options. You had options on what to use; you had the PowerWallets already available; you had self-custody options, etc. But for corporate use case, you had a handful of payment processors, or you could just use an exchange and then keep your funds on an exchange. So, that’s where our idea and story started.
Peter McCormack: Oh wow. Well, you might have missed out in 2012 because you dismissed it, but if we're right about this, in a few years SAP are going to come knocking on your doors and say, "Hey, listen, we might need to acquire you".
Tibor Ballai: Well, it might be an interesting outcome. So, we spoke about your challenges, and I gave some examples of how customers today are using Bitcoin operationally. But we have one customer in particular, while they're not among the largest ones in terms of volume, I think they're a good indication of what running on the Bitcoin Standard can do for a business.
So, they're a programmatic marketing start-up I would say, and what they effectively do is they have a set of customers that are geographically distributed, that assign a specific budget to them, and then they programmatically buy traffic and then they track the efficiency of how the marketing is deployed. They also do influencer management, and effectively that all gets fed back into analytics. And, what's interesting there is they have a distributed customer base around the world, they have staff that's distributed around the world, and they have outflows for buying the traffic as well as the payments to the influencers, and they're using Bitcoin for all of this.
Peter McCormack: All of it?
Tibor Ballai: All of it, yes. Now, I'm not saying purely; they're doing a mix of fiat, but Bitcoin is relevant in all of these flows, and especially on the payroll side. They're using contractors in jurisdictions; some of them are even unbanked where they're in jurisdictions where they will have no other option. But what's interesting is this is an example of a business that would find themselves to be very challenged to replicate all of this in the fiat world.
Peter McCormack: Interesting. Eventually, it would make my life a lot easier if everything was just Bitcoin, but that's what we want, that's what we're working towards, right?
Tibor Ballai: We are. I don't think that's achievable any time soon where we're in a world where you just have only Bitcoin.
Peter McCormack: No, I know.
Tibor Ballai: There will always be an element of interoperability that you need to keep in mind, but that's our vision as well; it's trying to further the adoption.
Peter McCormack: Well, listen, thank you for coming in and explaining Fortris, and thank you again for sponsoring the football team. We're joined here by Alex Cannon; I'm going to have to sit down with him now and actually get this all installed and set up for us, because we need it because we do have issues with keeping track of everything.
Wish you the best. Tell everyone where to find out more about what you're doing.
Peter McCormack: fortris.com? Do you have a Twitter account; do you want them to follow you?
Tibor Ballai: We have a Twitter account, @fortrishq if I'm not mistaken, right, Alex?
Peter McCormack: What about you; do they want to follow you; is your Twitter game weak?
Tibor Ballai: My Twitter game is non-existent. I'm not really big on social media, so I don't have it.
Peter McCormack: What?! Has he got no idea of the crazy shit that goes down every day on Bitcoin Twitter?!
Tibor Ballai: I get a condensed version from Alex and my co-founder, but I try to stay away.
Peter McCormack: It's fucking crazy out there. All right, man, well, listen, thank you for everything. Keep crushing it.
Tibor Ballai: Thank you.
Peter McCormack: I will get myself set up; next time I speak, I'll be telling you how I'm using it.
Tibor Ballai: Perfect, thank you very much.
Peter McCormack: Thank you.
