An Inside Look at Kim Dotcom’s Bitcoin-Based Payments Platform

[Len]

Kim Dotcom may be spending much of his time fighting extradition from New Zealand to the U.S., where he faces copyright infringement and money laundering charges, but he's also busy working on the successor to Megaupload, the online storage service that got him into this trouble.

As Fortune reported on Monday, Dotcom is looking for popular YouTube stars to test his new micropayments system, Bitcache. Now he's giving Fortune a sneak preview of K.im, a new online storage service that lets creators upload their files and make money every time people download them.

The idea behind K.im is to let people upload their songs, movies, or documents once and then propagate them across a plethora of other platforms: cloud storage services such as Dropbox and iCloud, peer-to-peer networks such as Kickass Torrents, and social media services such as WeChat and Weibo.
When a creator uploads a file, they also get the code for a widget that they can embed on their own websites, inviting people to buy the file. Essentially, wherever the file goes, it takes with it the functionality to demand payment for using it.

"We have our own file type," Dotcom explains. "So to open [it] you will need one of our apps or third party apps that will use our [application programming interface]. That way we ensure that no matter where your file is hosted, the content owner gets paid."

People uploading to K.im can set their own price (shown in U.S. dollars) for each file, and choose from several extra features for the file's availability: it can be a "limited giveaway," people can pay more than the price that's shown, and the files can also be set to be streaming-only, obviating any downloads.

The key advance Dotcom is proposing here is the ability to use bitcoin for micropayments—payments that may be so small that people won't think twice about making them, but that will add up to reward creators for their work.

Bitcoin is generally unsuitable for this use case, because congestion in the bitcoin blockchain system means it already takes a long time for transactions to clear, and adding millions of very small payments would make things even slower. However, Dotcom's solution is to break the bitcoins down into what he calls "Bits"—each being worth a millionth of one bitcoin. Payments using Bits take place on the Bitcache platform, not in the main, clogged-up blockchain.

"Services like this will unchain the artists, because they can sell directly to their fan base on any platform of their choosing. No middle men," Dotcom says.

At this point, it's worth rewinding and remembering the main reason why Dotcom is such a controversial figure (apart from his championing of the Seth Rich conspiracy theory). Megaupload was used by many people for illegally sharing copyrighted content, which led to its takedown by the U.S. Federal Bureau of Investigation in 2012, the freezing of Dotcom's bank accounts and the raiding of his mansion, and the ongoing extradition case against him. According to the U.S. government, Dotcom and his colleagues knew full well that the service was being used for illicit purposes, and profited from that fact.

So, what's to stop people using K.im for the same thing—or, worse, uploading files made by other people and then charging people to download them?

According to Dotcom, the proprietors of K.im will have no idea what people are uploading to the platform because the files are encrypted in transit. However, if someone complains, then he promises a swift response. "We have robust notice and takedown features," he says.

One odd feature in the demo Fortune was shown was the ability to distribute files to media organizations such as The New York Times and CNN—and Wikileaks. This functionality, Dotcom explains, is for whistleblowers.

"K.im provides near perfect protection for whistleblowers," he claims. "We expect to have millions of users every day and it will impossible for spy agencies to identify the whistleblowers within that mass traffic. And whistleblowers have strong deniability because they can say they used K.im for a personal backup, file aggregation, etc."

K.im and Bitcache enter a competitive though as-yet-unproven market. As media companies struggle with online competition and falling ad rates, the idea of micropayments keeps cropping up as a possible route out. No micropayments systems have succeeded thus far, but new ones keep popping up—and some promise more friction-free methods for parting media consumers from their cash.

A notable effort is Flattr, an online tipping service that was this year bought by Eyeo, the company behind the ad-blocking service Adblock Plus. As we reported last year, Eyeo is trying to get publishers to adopt Flattr as a way for people to pay for the articles they read. As with Brave, a browser startup from Mozilla co-founder Brendan Eich, the idea here is to get readers to set aside a certain amount of money each month, then monitor their engagement with the articles they consume and automatically reward the publishers based on that engagement.

"We know that many users want to pay for content they like. What we also know is that they don't want to think about a financial transaction after every article they've read," says Laura Dornheim, Eyeo's public affairs manager.

For Dotcom's latest endeavor, the next big step is an initial coin offering (ICO)—a trendy fundraising technique in which investors get virtual coins rather than shares—in the fourth quarter of this year. "We will go live within nine months after the ICO," Dotcom says.

Only then—and, presumably, only if Dotcom has managed to stay out of prison by that point—will we be able to see if his vision of micropayments really does provide a viable way for people to monetize their creations online.