LET’S TALK BITCOINEpisode 96 – Don’t Stomp the Gecko

Participants:

Adam B. Levine (ABL) - HostAndreas M. Antonopoulos (AA) – Co-hostStephanie Murphy (SM) – Co-hostPatrick Murck (PM) – General Counsel of Bitcoin Foundation, Board member of DATA

CoinSummit Participants:

Nathaniel Popper (NP) Moderator – New York TimesAndreas Antonopoulos (AA) – Blockchain.info and Co-host of Let’s Talk Bitcoin Professor Susan Athey (SA) - Stanford Graduate School of Business Jonathan Levin (JL) – Founder of Coinometrics

ABL: Today is March 29th 2014 and this is Episode 96. This program is intended for informational and educational purposes only. Cryptocurrency is a new field of study. Consult your local futurist, lawyer and investment advisor before making any decisions whatsoever for yourself.

Welcome to Let’s Talk Bitcoin, a twice-weekly show about the ideas, people and projects building the digital economy and the future of money. My name is Adam B. Levine and man, are my legs tired. Krystal and I spent the week in San Francisco for the CoinSummit conference. It was a really interesting event.

Following up on Episode 95’s questions about the Bitcoin Foundation and in the immediate aftermath of the IRS clarification, I grabbed a talk with Patrick Murck on the Foundation, the DATA organization, transparency, insurance and more. ‘You’ve got to create trust in different ways and we have this opportunity right now to create different types of exchanges, non-custodial accounts, multi-sig accounts, things like that, decentralized exchanges, where you’re not always relying on trust to facilitate the transaction’.

Then, for the rest of today’s episode, we’re pleased to feature one of my favorite panels from the event – Andreas Antonopoulos of Blockchain.info and, of course, one of the hosts of Let’s Talk Bitcoin, Professor Susan Athey of Stanford and Jonathan Levin of Coinometrics to discuss whether Bitcoin is a flash in the pan. ‘If they try to stomp on Bitcoin, they’re going to discover that Bitcoin was the little gecko technology and when you stomp on the gecko, you cause it to evolve until it becomes a komodo dragon and it bites off your foot’. Moderated by Nathaniel Popper of the New York Times, this is not to be missed.

In other news, the LTBCoin project is progressing nicely with our third live Q&A held earlier today. If you’d like to learn more, or watch any of these, visit www.LTBCoin.com.

It’s another good one! So we’ll get right into it. Enjoy the show! [1:53]

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Adam B. Levine interview with Patrick Murk at CoinSummit – 25-26th March

ABL: Interview 7 with Patrick Murk, Bitcoin Foundation/DATA. This is day two at CoinSummit. Patrick, thanks for joining us on Let’s Talk Bitcoin today. [2:02]

PM: Thanks Adam. [2:03]

ABL: Yesterday, during the panel... when I travel I don’t look at the internet or do anything, I’m a total Luddite, so I didn’t know about the IRS guidance that came out but it actually is sort of weird and sort of contradictory and I wanted to get your thoughts on it. Can you give us a summary of what they’ve said? [2:19]

PM: Yeah. Essentially, you’re going to treat Bitcoin as property, as an asset, which in some context makes a lot of sense. If you’re a speculator or you’re an investor and you buy Bitcoin, you buy it at one price and you sell it at another, you book a capital loss or capital gain, that all makes perfect sense. That’s what you would expect. What’s interesting and potentially problematic is that you’re applying that same framework even when people are using Bitcoin as a currency, for transacting – merchant transactions. If I acquire a bitcoin for providing services to somebody and I spend a bitcent on a cup of coffee, even if that transaction occurred within say, half an hour of each other, now I’m having to book and realize either a gain or loss on that transaction and that’s untenable the way that’s actually going to play out in the real world. We need to go back and rethink some of how they did this. [3:12]

ABL: This is IRS guidance that came out two or three weeks before we actually have to turn in our income tax. You made a comment about how everybody gets to extend. Certainly, we’re in this situation. I guess we thought we had our taxes pretty well taken care of because we were following the FinCEN guidance that basically said that any money we take out of Bitcoin and into dollars, that’s something we have to deal with from a taxable standpoint but that’s aggressively different than this new guidance. Do we need to go back through and redo all of our taxes? [3:42]

PM: In fact, you might have to go back and redo all your taxes and rethink all your taxes. Obviously, the timing was interesting to say the least. You pointed at a deeper conflict within the two treatments. There’s the obvious kind of at the surface layer, while FinCEN calls it money and the IRS calls it property, which may or may not really be a big conflict. Maybe you’re just talking about an asset as a substitute for money on the FinCEN side, you could make that argument. The really deeper conflict that’s happening within one agency, which is slightly disappointing, is that in the FinCEN guidance, there was encouragement to use Bitcoin as a currency – to use it to pay for things, for goods and services. In the IRS guidance, essentially they’re doing the opposite. They’re discouraging its use as a currency and for paying for goods and services and encouraging investment and speculation in Bitcoin as an asset. [4:40]

ABL: The guidance from the first time actually, is completely contrary to the guidance that’s been give now and, since this new IRS guidance is retroactive indefinitely, I guess. There didn’t seem like there was the time frame associated with it, so I’m assuming that all transactions aren’t grandfathered in. [4:55]

PM: Correct because guidance isn’t rule making. They’re saying we didn’t create new rules here. (Yeah, right) We didn’t create new rules here but we’re just interpreting our old rules as a public service. [5:06]

ABL: You should have figured this out. It was all there in the rules. We’re just clarifying because, obviously, you didn’t get it. [5:11]

PM: Yeah, sure. No, they did put in a provision in a little sentence in there that says – Listen, if you can reasonably show that you didn’t understand it, or you don’t have the records anymore, or something, then we’ll consider forgiveness in those cases. [5:23]

ABL: You’re saying that my lack of organization is actually, potentially a saving grace in this situation. (Laughter) [5:28]

PM: They won’t get into inside our structures in the real world. [5:32]

ABL: Fair enough. One of the other organizations that you’re involved in besides the Bitcoin Foundation is a relatively new group called DATA and again, you’re involved as a board member? [5:43]

PM: That’s correct. I’m on the board of directors. [5:45]

ABL: We had a conversation yesterday with Edan Yago about what DATA is trying to do and something like, again from your perspective, how does this fit in compared to the Bitcoin Foundation, relative to the Bitcoin Foundation, where are the overlaps, where is DATA doing something fundamentally different? [5:59]

PM: When you think about the Bitcoin Foundation, you have a member-driven organization which is meant to be a community resource. We’re still, obviously, working through some growing pains to get to this point but that’s the goal. The Bitcoin Foundation is supposed to represent members in support of the Bitcoin protocol; keeping the Bitcoin protocol open, accessible, participatory so that anybody can use it freely. While we’re doing that, there are certain problems. How do you grow the ecosystem, particularly at the exchange level, which has been now considered a critical control point in the intersection between the digital economy and the traditional financial economy? How do you manage that? We can make some movement on that and we have been working on those issues but, at its heart, the Foundation is focused on the protocol. We talk about protocol, neutrality, user-defined privacy, things that really support kind of how you can use the protocol as an individual. The exchanges are... it’s natural that it’s going to evolve... that the exchanges are going to want to have their own voice and they should because they have very, very different issues that they have to deal with, in particular, around any money laundering, counter-terrorist financing, data security, privacy issues. They’re going to have distinct issues and, frankly, it’s a resource strain on the Foundation to support that all the time. [7:21]

ABL: This is where DATA comes in? [7:23]

PM: Sorry, to wrap that up, that’s where DATA should come in, right? The first thing that you can do to help move the needle on those issues right now is to create best practices, security guidelines, standards for operating a Bitcoin exchange, a digital currency exchange in general. [7:40]

ABL: One of the things that I’ve been kind of waiting and expecting and now I think it’s starting to happen is – there are two things. One is on the transparency side... again, this is all so much more relevant in the aftermath of the Gox incident. On the one hand, you have transparency where, if there are issues, there are ways... if MtGox had been a transparent institution, we would have been able to see that these were issues way before it got to the point where now it’s this horrible thing and nobody... it’s going to take years or months to unwrap it just because it all happened privately and non-transparently. That’s one side of it. I’m curious about what you think, for exchanges, if that... if we have now passed a tipping point there. On the other side of it is around insurance and the idea that exchanges... I mean, exchanges in the conventional world are insured. There just hasn’t been the willingness, or the ability to do it yet, but when insurance comes in, aren’t standards that make it so that insurance can be affordable for good players versus bad players. Isn’t that, kind of, an inevitability? [8:33]

PM: Yes. As people gain insurance, the insurance companies will put pressure to increase standards and best practices, and all that. It’s a nice, healthy, virtuous cycle there. As far as the transparency, I agree absolutely 100% and I think we’re seeing this interesting shift from... I have a friend, Ryan Straus and he... after the Gox thing, he said – The whole point of Bitcoin wasn’t to replace trusted third parties with trustless third parties. You’ve got to create trust in different ways and we have this opportunity right now to create different types of exchanges, non-custodial accounts, multi-sig accounts, things like that, decentralized exchanges, where you’re not always relying on trust to facilitate the transaction. There will probably always be exchanges that work that way and that’s fine. They are going to face the highest requirements, the highest burns on the regulatory side and the consumer protection field. They’re the ones that are going to need to go get the insurance and they are the ones who are going to be held to standards by the insurance companies. In the interim, I think there’s an opportunity to set minimum standards; set best practices; lay them out; let people understand how to build a safe exchange and, as a consumer, what a safe exchange looks like. [9:41]

ABL: Same question applied to the DATA organization and the Bitcoin Foundation organization. These organizations that, so far, aren’t really very transparent and yet, they are going to be holding funds of members. Is there any intention, expectation; either on your part or institutionally that transparency should be something that’s for things beyond exchanges? [10:03]

PM: Yeah. I absolutely think that would be a good thing. I can’t speak for DATA yet because it’s very fledgling. For the Foundation, we file Form 990 and we publish it. We publish it fast. Other non-profits, it takes... they usually wait it out until the IRS publishes it. When we did our first one, we published it very quickly. We intend to do the exact same thing this year. That’s one level of transparency. I think that there are other opportunities to create even further transparency and we talked about this earlier. How do we do that? How do we create transparencies in blockchain without revealing people’s private information?

It’s a difficult problem to solve. I know people are working on it but I think if there is a good solution, I’m sure we would embrace it. [10:43]

ABL: There have been some questions about... since MtGox was a pivotal part of the Foundation for a long period of time, whether or not any Foundation funds were stored in MtGox. There hasn’t been a statement on this yet. Again, if you don’t want to answer, you don’t have to but it’s a question I think people would like to know the answer to. [10:59]

PM: Sure thing. When it comes to MtGox, I simply can’t comment because there is an ongoing criminal investigation. We’re certainly not a target or anything like that, but we are talking to law enforcement about certain things that may or may not have happened. No one should have any concerns about the general financial welfare of the Bitcoin Foundation in general. [11:18]

ABL: Final thoughts – what is next for the Foundation, or for DATA? What are the exciting things on your horizon that you think that people should really be paying attention to? [11:27]

PM: We have a number of really interesting projects coming up. For DATA, we have the annual meeting coming up. I think, again, there’s a big opportunity for the community to get involved in shaping what the best practices should look like and not just from the point of view of a lawyer writing down rules. That’s not fun for anybody. Even the lawyers, I promise. There can be some technical advancement there, as well. I know that Greg Maxwell is working on some interesting things about provably solvent exchanges and things like that. That’s a really interesting way of attacking standards and best practices. That’s interesting on the DATA side. On the Bitcoin Foundation side, we have a lot of things in the hopper. We’re working on solving some of the... in the US, some of the state regulatory issues by creating a kind of model rule that some of the state regulators and the task force can look at and draw from. We, hopefully, soon will open source that so that people can add their comments in. I would love to put it on GitHub, if I can, right alongside our by-laws. I would love to see more people participate in shaping our by-laws through GitHub. We put them out there for people to make... even our by-laws, our governing document, a community project. We haven’t had a lot of action there, just a little bit. There’s been some good dialogue in some of the areas where there’s been pull requests there, then, with Jim Harper coming on board as our Global Policy Counsel, which is very exciting to me. He’s going to have a study that he’s going to release on the threat matrix, the risk factors, how we can respond to those things from regulators, from banks, things like that. That will serve as our platform for our public policy goals going forward. Again, opening that up to community involvement. [13:13]

ABL: When are you planning on paying your taxes? Are you filing for an extension? (Laughter) [13:18]

PM: I’m filing for an extension. (Laughter) [13:20]

ABL: Fair enough. Patrick Murk, thank you very much for your time. [13:22]

PM: Thanks, Adam. I appreciate it. [13:24]

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ADVERT:

This is Kris Joseph bringing you news on Nxt, the first true second generation cryptocurrency for March 29th 2014. Now that development of Nxt is becoming more formalized, the community has begun creating Nxt Improvement Proposals, or NIPs to suggest extensions, modifications and improvements for the platform. As you might suspect, these are modelled after the mechanisms used by Python and Bitcoin. Improvement proposals in progress are being discussed on the new forums at www.Nxtforum.org. Proposals being crafted right now are related to two-factor authentication for our Nxt client, arbitrary asset pairings on the decentralized asset exchange and a mechanism for allowing transaction fees to be automatically regulated by the network. In other news, Brian Snyder represented Nxt at CoinSummit in San Francisco and his presentation can be found on the CoinSummit channel on YouTube. For more general information on Nxt, head to www.Nxtcrypto.org or www.myNxt.org and stayed tuned for more news on Nxt on the next Let’s Talk Bitcoin broadcast.

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CoinSummit – March 25-26th 2014-05-08

We have, I think, a fun panel to start the day today, so I’d like to welcome Nathaniel from the New York Times, Susan from Stanford University, Andreas from Blockchain.info and Jonathan from Coinometrics. A big round of applause. (Applause) [15:01]

NP: Good morning. I guess we’ve been set up here to answer the question – Is Bitcoin a flash in the pan? I would venture to say that I could answer that question for all of you. If it’s not no, let me know right now. (Laughter) These are three incredibly smart people with, I think, rather different opinions about where Bitcoin might be going, so I’m going to try to draw that out a little bit. I thought a good place to start might be looking at Bitcoin from each of your perspectives. What is the part of the current ecosystem that is most likely to survive and what is the part that you think is least likely to survive, at this point, then maybe that will get us going from there. Maybe start with you Susan. [15:52]

SA: Sure. I think that the sort of amazing, organic growth of Bitcoin by aficionados, people who were early adopters and are just really excited about the technology, I think that energy will stay and that’s going to support the peer to peer community of Bitcoin. I think that something that’s sort of been an open question for me is some of the specific vertical challenges that a lot of the people here are starting start-ups to solve. There’s a question of how those are going to get solved best. If you think of some of the different kinds of money movement solutions, remittance solutions, your services for businesses – some of those, I think, will continue to be based on Bitcoin, but I also think it’s possible that some of those specific applications, maybe they need a lighter touch. Maybe they need more privacy, maybe they need less privacy, maybe they need a tweak to satisfy regulators. At that point, it

will be a race between something that’s built on top of Bitcoin to adapt to the specific circumstances, or maybe something that’s forked, or done independently. [17:10]

JL: I think there are some technical challenges that probably need to be overcome as well, and not just the vertical ones. I think there is also the centralization of mining is a potential problem down the line with lower block rewards and power of miners to determine transaction fees. I think there’s the technology of distributed value exchange is definitely going to stay but I have questions on whether proof of work and the current architecture is able to sustain that over the long term. [17:45]

AA: Blockchain. The blockchain technology is the enduring gift of Satoshi Nakamoto and that will radically transform our world for decades to come. I think there’s no doubt in my mind that currencies based on blockchain technology, as well as a myriad of other applications based on the ability to do decentralized trust at scale will transform many aspects of the internet, many aspects of social interactions, finance, law, accounting and society in general, in ways that we can’t even imagine yet. [18:24]

NP: Spoken like a true employee of Blockchain.info. (Laughter) [18:27]

AA: Well it’s not about Blockchain.info, although I think that company really captured, at least in its name, the essence of Bitcoin but really, for the first time in history, we have the ability to do decentralized trust at scale across distances between individuals who have never met before. That is radical and it has implications we can’t even imagine. Out of that, many currencies will evolve. I think Bitcoin is probably going to stick around for a very long time and I think that’s because the early network effect has generated enough momentum that any of the problems will be fixed. All of the arguments I hear, about why Bitcoin will fail, seem eerily reminiscent of 1992 on the Internet and how it couldn’t do voice, it couldn’t do video, it couldn’t scale, it wouldn’t work, it couldn’t deliver quality, and it did, did and it did. [19:25]

SA: I just want to underscore, I think that was really well put, that there is just this fundamental technology of the ledger and the security around the ledger and the decentralized trust. While I agree that Bitcoin is very likely to stick around for a very long time, there is also all sorts of things that we haven’t even thought of that you can do with that technology. Some of the current uses of the store of value and the payment mechanism are very subject to regulation, so you can see things needing to evolve in certain ways to meet the regulatory environment. At a fundamental level, a ledger is a powerful concept and I don’t see how you regulate away the fundamental technological innovation and all the things that you can do with it. That’s one reason that I’m a believer in the movement and all of the technology and development that’s going on around it is going to be multi-purpose. It’s not just for what we see today, but a lot of that investment and innovation is also going to get purpose to expand the range of applications. Again, we can’t necessarily imagine or predict what all of those will be but this fundamental technological innovation is... it’s happened. It can’t unhappen and so we’ve entered a new era of being able to do things on the internet. [20:54]

NP: I’d like to go back to the scepticism, dig out the scepticism in each of you a little bit. Let’s say if you were Satoshi, (and maybe one of your are, I don’t know) but if you were and you were looking back and redesigning it, what would you change and I know, Jonathan, I had an interesting conversation with you about this yesterday, so let’s start with you and maybe you can get the argument going. [21:22]

JL: I think Bitcoin solved and did create this technology, this ledger that allows for decentralized trust but it does so through proof of work, which is expensive in terms of electricity and might not be the long term way of securing these blockchains. I think that I would spend a lot longer thinking about that problem and making a more cost efficient solution that was eventually more decentralized than proof of work is going to be. The other thing that I would definitely change is the currency design. I think that the distribution of coins came out far too quickly for something that should scale over a very long period of time and disproportionately rewarding early adopters over people who are going to adopt the currency down the line. [22:10]

NP: Just let me refine your answer. Do you think it was a good thing that early adopters were rewarded or just not as much as they were? [22:18]

JL: I think it’s problematic that we had a very... we’ve got a finite money supply and a lot of coins came out; we’re more than half way through the money supply and we’ve had a lot of failures of companies, a lot of people being defrauded, 10% of the money supply is in the hands of criminals and we need to then advocate a Bitcoin price going through the roof and giving material value to those people rather than a more distributed money supply that goes to the people who need it. [22:47]

AA: I’m actually quite... [22:50]

NP: Wait. Can we... I want to hear your response to that but first, can we hear from you what you would change. Maybe that’s where you were going but if you were going back and redesigning it, would you change anything, or... ? [23:01]

AA: I would say the distribution of early adopters, at the moment, if 10% of them are in the hands of criminals, that’s a vast improvement over the rest of our economy where 80% of the money is in the hands of criminals and they own the banks. (Applause) The rest of the money is in the hands of brilliant people who saw the early potential of technology and took a huge leap of faith with enormous personal risk in order to achieve that. I’m not one of those early holders, trust me. I’m not a Bitcoin millionaire. What things would change? I think it’s very difficult to go back and apply hindsight in this because I don’t think we even know the answers yet. A lot of these things are going to get hashed out. I think Bitcoin doesn’t have to be perfect as both a store of value and a means of exchange in order to be successful. If it turns out to be less successful as a means of exchange, then it can provide a proof of stake reserve currency for many other coins that are much more nimble, if that is the need in the market. So far, I don’t think we have indications that that’s a problem. We talk about centralization of mining but people often forget that if you have CPU friendly mining, the easiest way to mine is to compromise 15 million bots and create a botnet and then, all of the mining is in the hands of criminals. There is that trade off. ASICs actually provide protection against botnet mining. The proof of work can actually change so, I think, we shouldn’t underestimate the ability of Bitcoin to change. It’s already changed quite dramatically from the early design in 2009 and it can change again. This is a work in progress. Now, it’s not going to be elegant change, necessarily. The one thing I would have done different would have been a much stronger layer of fungible anonymity and privacy in the transaction layer – much stronger fungibility, encryption of the amounts as well as the sender/recipient addresses so that you can’t track anything on the blockchain. [25:05]

NP: Susan? [25:06]

SA: I think it’s also... I agree with the things that you’ve said. It’s hard to second guess because if you think about what it takes to develop interest and trust in something really new like this. The fact that the way it was designed, managed to accomplish that is kind of amazing. I mean, not only was this group brilliant at security but they also really thought through the incentives. The thing they created really captured the imagination as well as the investment of a large group of people, so the mining kind of provided a reason to be involved in the whole system, a financial reason which then helped to grow the ecosystem. That’s a pretty amazing thing that this same concept, this mining concept provided incentives, helped sort of bootstrap the system and also provided its security. It’s an amazing insight. That said, I wish it didn’t take so much electricity as well. [26:06]

AA: I wonder if anybody has done a study comparing the cost of electricity for mining on a per transaction basis with the cost of guards, vaults, trucks, pallets of money being moved around the country, the data centers doing fraud protection on the Visa network, and all of the other ancillary functions that are completely replaced by blockchain technology. I would assume from what I’ve seen and working in the financial service industry, in fraud prevention and security, that the cost of those things is massive and on a per transaction basis, mining might be a much more elegant, much cheaper solution and therefore, this might be the greenest currency we’ve ever had. [26:47]

NP: But... hold on... [26:48]

SA: It could be greener, I mean... [26:49]

AA: It could be greener and we’re seeing new proof of work algorithms and it’s going to be very difficult to change the proof of work algorithm though because you’ve got to go and get consensus from the miners to blow up their own business. That’s going to be a bit difficult to do. If necessary, the proof of work algorithm can be changed because the nice thing is that it’s always just for the next block. You could say, 100 blocks from now, new algorithm. [27:11]

JL: Yeah, but you would have a big problem convincing all the people investing millions of dollars into ASIC miners that are specialized in doing just this. [27:19]

AA: Right. [27:19]

JL: Also, the kind of cost of electricity has a two-sided thing because if it’s not that expensive; if it is really efficient, then a 51% attack is more economical... [27:30]

AA: Right. [27:30]

JL: ...so there’s a bit of a trade off there as well. [27:32]

AA: Exactly and again, just as with botnets, it’s really fascinating how mining actually provides such good equilibrium that you can figure out the price of electricity on average just by reverse engineering the difficulty. It’s such a beautifully engineered market that it efficiently calculates the price equilibrium. [27:50]

NP: I bet we are now moving to a world where we also have... where Bitcoin also has vaults, and guards, and high security. I mean, obviously, to a lesser degree than gold does and dollar bills do but... [28:04]

AA: I think those are fairly temporary measures because what we’re seeing, at the same time, is the development of hardware wallets and other primary security mechanisms based on trusted computing that are much better solutions than vaults and buried treasure. [28:19]

NP: It’s interesting Susan, I think you’re the first person I’ve heard who starts by referring to Satoshi as they, rather than an individual. I guess we shouldn’t probably go down that rabbit hole but let’s talk about alternatives that are out there because obviously, there are a lot of challengers, and altcoins and I’m curious which of those alternatives you see as having the greatest chance of success, at this point, or which of the models, at least, do you see as having the greatest chance of success, given what we’ve said about mining, electricity, this sort of thing. [28:58]

SA: Sure. I think one of the functionalities (and you’ve already brought this up) is the privacy and anonymity, so for fitting into... there’s a couple of reasons why this is really important... for fitting into a regulatory framework, it can be very important that if you trade a dollar for a bitcoin, that you know where your bitcoin is landing. That you know the identity of the wallet; that you know that that wallet address is not say, in North Korea, that it’s not subject to sanctions. The inability today to really verify the holder of an address is an issue. On the other hand, if you thought about a company doing a lot of its internal business over the blockchain, then even... they would worry, they would have to take a lot of effort to make sure that they weren’t revealing company secrets that way and, of course, there’s people out here who get paid in bitcoin and I could probably figure out your salary if I worked at it. I think the current system is kind of the worst of both worlds in some ways. It’s not fully anonymous because, with some effort, I can track people, but it’s not fully private so I still worry that even if I take steps to hide myself, that someone might still figure me out in some way that I hadn’t anticipated. Of course, very sophisticated people can get around that but for, sort of, most people. What do you do with that? Well, I think there’s a couple of directions. One is that we build things on top of the current system; better anonymity tools as well as better identity tools, so that you can have identity when you need it and not have it when you don’t want it. You might also imagine that this could be a feature of alternative coins, or systems that might have this baked in a little more naturally. I don’t have a perfect solution to that today but it’s just a direction where I think innovation could happen and it’s a little hard to predict which of these paths will work out. There’s other kinds of applications you could imagine where you could actually provide a company with its own private ledger using... basically, forking the technology but just... it’s not that I’m being anonymous on the public ledger but you’d just have a private ledger. That type of technology, I think, is very interesting. Ripple Labs, where I’m an adviser has a different architecture that makes it easier and more natural to choose who you trust and who you interact with so, in their system, it’s easier to choose that I’m only going to trust people say, who bank at my bank. That type of architecture can be more friendly to regulators in certain situations but we don’t know yet the what the regulators are really going to ask for and until we know, with certainly, what they want and what they say is OK, it’s hard to know which technology is going to fit into it best. [31:52]

AA: We don’t what the regulators are going to ask for but I think I know what my answer will be. No. (Laughter) Listen, right now, we have a situation where we have a massive

imbalance in the centers of power and democracy, both in this country and across the world. Organizations like Wachovia and HSBC commit 20-30,000 anti-money laundering violations knowingly, every single year and don’t get punished. At the same time, we have a situation where we want to create the ultimate, trackable money, so that even cash has become suspicious. Government get to have secrecy while they strip us of privacy. Secrecy is just the word they use for their privacy while they strip us of ours. That’s not the way it should be. Government should be fully transparent and we, as individuals, should have the right to privacy – a right that’s been encoded since the Magna Carta. Blockchain technologies actually give us the ability to do that because they allow radical transparency that is easier than radical anonymity. If you do traditional law enforcement, which involves unravelling conspiracies and turning people... states evidence against other people in the conspiracy, you can actually track things quite effectively in the blockchain. What you can’t do is ubiquitous surveillance and that’s the right balance. We can achieve individual privacy while causing governments to gravitate towards radical transparency in their ledger, as it should be, so that they can gain the consent of the governed. We’re in an unbalanced situation and the regulators have this idea that they have power over the use of Bitcoin, but Bitcoin is the first trans-national global currency and the blockchain technology isn’t going anywhere and it can create these trans-national currencies. If they try to stomp on Bitcoin, they’re going to discover that Bitcoin was the little gecko technology, like Napster was the benign file sharing technology and when you stomp on the gecko, you cause it to evolve until it becomes a komodo dragon and it bites off your foot next time you try to stomp on it. (Applause) If the regulators try to stop Bitcoin, they’re going to end up with much stealthier technologies because the evolution of currencies will create venomous versions to resist regulation and in a trans-national currency, the currency will flow to the places where it can go most easily. I think it’s important to understand that the regulators both have limited power and should have limited power because while we’re trying to appease regulators in the US, and give them identity tracking, and give them full transparency of individuals’ transactions, regulators in Egypt are using that to drag people out of their homes and torture them, as they are doing in dozens of other countries around the world. We need to be more aware that this is the global environment we live in. Individual privacy means freedom of association and expression. It’s a cherished right. It’s one we have to absolutely defend. We have to do it for the places where owning currency and using it, as an empowerment tool as an individual, gets you killed. When the regulators come and they say – Let’s fix Bitcoin to make it more palatable, so that we can regulate Bitcoin like we haven’t regulated HSBC, I say go away. Bitcoin’s fine. (Applause) [35:21]

NP: Do you want to jump in there? [35:28]

JL: Yeah. I mean, I think I take a slightly different tack but I think that the question is definitely a subversive technology and something that can subvert good regimes and bad regimes and we need to obviously, protect the privacy of everyone who uses the blockchain today. Like Susan said, when I look at the blockchain, I can go through and see who is transacting with who and we can identify public addresses and we can see what shops people go to, and things like that. That’s not acceptable. You end up in a system that doesn’t work and finding some way of creating privacy for all the transactions that need to be private and transparency for the transactions that need to be transparent is something that everyone needs to work towards as a goal. The thing for me about the alternatives that could come out is exactly that kind of implementation. Something that is palatable to the masses rather than a system that we have today, which is essentially public knowledge about everyone’s transactions. It’s not palatable to the general public. [36:35]

AA: Yeah. It’s not tenable for corporations either. That’s a big thing that Susan mentioned. I get paid my entire income in Bitcoin. Our company, Blockchain doesn’t have a bank account. We operate entirely in Bitcoin. We can’t do payroll if the treasury account just pays individuals because then you can track the treasury account and the individuals and then we become a completely transparent organization and that’s a competitive disadvantage. [37:01]

NP: It sounds like there’s sort of an agreement that actually there’s... rather than being too much anonymity, there’s too little anonymity. On that front, at least, where do you see the most likely next move? [37:17]

SA: I still think that taking into account everything you said about the risks of losing privacy that it’s not totally unreasonable that a financial institution should know who they’re transacting with at the first hop; at the time you trade dollars to bitcoins, knowing who’s receiving those bitcoins. At that point, there are many applications where people in the hop from there, would like to have their privacy and so, my academic research... I do research with internet browsing data as well as now, mining the blockchain and trying to understand transactions. As a researcher, it’s fabulous that the blockchain is so open and that not many people are using anonymity tools right now, but I’m a little more sceptical of the idea that mass surveillance isn’t possible. I think today, mass surveillance is possible, especially if you combined a couple of data sources. If you had a lot of resources at your disposal and you really wanted to go after a particular person, and you looked at their internet and their phone usage, and things like that, I think you would be able to probably triangulate them unless they were pretty sophisticated. It is what it is and I think if we’d had more identity from the beginning, it never would have grown and so, I don’t want to criticize the way that it’s evolved but as it goes out to prime time, you want to be able to avoid mass surveillance, avoid individuals poking you out but allow the financial institutions, which at the moment, are the on ramps and off ramps to have some control over who they’re transacting with at the entrance and exit of the system. [39:05]

AA: We have a couple of technologies that are beginning to address this issue. CoinJoin is getting more broadly deployed. That’s a technology that is used probably by corporations in order to protect their privacy on the Bitcoin blockchain. You need to do payroll; you can’t really do it otherwise. We see CoinSwap, which is even more powerful technology in that respect for anonymity. These are really built as layers on top of the core transaction layer. They can provide privacy on demand. Personally, I would like to see those implemented in every wallet, with reusable addresses going away and having unique addresses for every transaction and every transaction goes through CoinJoin, whether you know it or not. Just like, if you use a browser on the internet today, you use SSL. You do not have a choice to not use SSL for the sites that enforce it. It’s end to end; it’s solid and the user doesn’t know it’s on. I think that should be the goal for anonymity is that every wallet does basic privacy management built in; not reusing addresses; using CoinJoin for every transaction and when you’re not doing transactions, remixing your own addresses with CoinJoin. [40:14]

NP: Jonathan, you want to add to that? [40:16]

JL: Yeah. I mean, when it gets to the point of regulation, the regulator’s not going to agree to that. [40:22]

AA: The regulators can provide identity tracking as an optional feature on top of those technologies where you can do the appropriate disclosure when you want to. The point is, the regulators are not going to agree to that. Great! They can go build their own blockchain which does have that feature but they don’t have consensus on the Bitcoin network and they do not control the entire globe. This is a transnational global currency, so if the regulators in one place say no, all that does is it stops some people in that place (mostly the legitimate users from using it in that locality), while the criminals continue to use it; the regulators themselves continue to use it and the jobs, and the growth, and the innovation, and the votes go elsewhere. That’s going to be a big problem for regulators because you can’t do this on a locality by locality basis. [41:14]

SA: I think that you made a very important point about the way that this evolves and I think that point has resonated with a number of regulators but it should be really underscored that if we make it too hard for this to happen in the United States, the development will go elsewhere and it won’t necessarily have the support of the venture capital community, which does have extensive experience in financial markets and regulation, and also in just how to run a very complex financial business. [41:46]

AA: It exposes legitimate users to risk... [41:49]

SA: Exactly. [41:50]

AA: ...because when you don’t have a US exchange, at all, still five years on, because they’ve been squeezed out, what happens is you have poorly managed setups like MtGox being used by most Americans in Japan and then that collapses and most Americans have no recourse under US law to go after it. It creates these really bizarre situations because of lack of clarity of regulators, or knee-jerk reactions by regulators just leads to more poorly managed, less regulated solutions elsewhere. [42:20]

NP: You’ve raised the question as to whether... or you’ve indicated that it will survive if regulators in various localities decide to stamp down on it and it’s always an interesting question for me. Right now, for all the people that are using Bitcoin, it’s still a relatively small community in the scope of the world. I mean, Jonathan, you were talking about some of your data on this. It does strike me that when we’ve seen regulators clamp down on this, it has essentially stopped and the network from being used in any widespread way in those countries. I’d be interested... I think you might have different opinions on this on whether, at this point, Bitcoin is strong enough to survive if (there are different ways of looking at this) maybe Bitcoins could survive but some parts of that technology, as you were indicating, would survive but what would happen if regulators in Europe, the US, these big economies did decide to take a harsher stance? [43:26]

SA: I’ll start with saying, obviously that would be bad and it would be a hit and probably it would impact prices and transaction volume over the shorter run. I think that some of the countries where Bitcoin provides the biggest value add above the next best alternative, are countries where the rule of law is already weak. You have countries with hyper-inflation and there’s tons of people running around with suitcases full of dollar bills, risking their life, risking jail to go to Miami to get those suitcases full of dollar bills and, despite the fact that they are not supposed to have them, that’s sort of a thriving sub-economy. When I think about the ability of the government to clamp down on that, now maybe they would clamp down on it more if it was Bitcoin and not suitcases full of dollar bills. I sort of think they’re

already working hard to clamp down on it and I think that the technology of Bitcoin is nice if the guys walking round with two suitcases (one with pesos and one with dollar bills) and you can eliminate the suitcase full of dollar bills, then he’s going to be much harder to detect, you can have easier entry into this business of trading assets for your local currency and it’s going to be almost impossible to clamp down on. One of the really interesting scenarios I could see is that in some of these developing countries, maybe poorer people still shouldn’t be holding Bitcoin today because it’s too volatile but they could hold dollars. Through Bitcoin, they can get onto an exchange; they can exchange their bitcoins for dollars and so you could have access to, basically, a US dollar bank account for the unbanked developing countries that have hyper-inflation. I don’t really see how those countries are going to stop that if it gets started. Maybe Jonathan can weigh in with some empirical evidence. I think he has the latest. [45:16]

JL: Because the blockchain’s a public ledger, you can see that there’s been about 26 million public addresses that have been used over the past, since the beginning of the blockchain. You can also look at what value is in each of those addresses. In my analysis, there’s only 250,000 addresses out there with more than a bitcoin in it. Just have a think about that for a second. 250,000 addresses with more than one bitcoin inside and most of that wealth is contained... 60% of the wealth is contained within addresses with over 1,000 bitcoins in each address. We’ve got a huge concentration of wealth. We’ve got some walled gardens so it doesn’t give you the exact user distribution but those are all security risks, as we’ve seen with MtGox. This is still a very nascent piece of technology that if want to go mainstream and wants to get a huge user base, probably does need to comply with regulators. I agree that there’s huge value add in protecting the unbanked and extending services to them, but one of the problems with the idea of them holding bitcoins and then converting into dollars is that what currency sits on the other side of the Bitcoin transaction? Who’s going to trade Bitcoin for Zimbabwean dollars? [46:39]

SA: Local dealers. [46:41]

AA: Yeah. [46:42]

SA: The guys that today have the suitcases of the dollars and the suitcases of the Zimbabwean currency. Now they lose a suitcase but they stay in business. [46:50]

AA: As Susan said, I think very astutely, the places that have the highest regulatory burden because they have the highest need through hyper-inflation or collapsing local currencies... and by the way, the number of those places is increasing dramatically as we’re seeing a worldwide currency crisis going on at the same time as Bitcoin is emerging... a few interesting things happen. First of all, you have capital flight from the rich at the same time as you have remittances flowing into the countries, which is rather interesting as it provides a balanced flow. The reason you can actually have pesos in Argentina moving out is because the rich people are trying to get their money out of the peso. Secondly, if you have a regulated environment that tries to crack down on the cryptocurrencies, the people who ended up holding cryptocurrencies are the regulators, the cops, the soldiers, the generals, the politicians. When hard dollars were banned in Russia, the Politburo was stuffing hard dollars into suitcases. The people above the law are the first to adopt it as their own currency diminishes in value. I think that’s really a funny situation because it ends up fuelling a black market for the currency and makes it more appealing and, in places where the rule of law is weak, if your government says don’t do Bitcoin, people go – Oh really? Maybe we should do

Bitcoin. (Laughter) You have the exact opposite effect of what you’re trying to achieve. Also, we need to realize that in many of these countries, the level of desperation and the level of demand is so high. If you just see your life’s savings disappear in front of your eyes, you’re going to go to great extents to bypass that law and you’re going to bribe someone in order to do it, in Bitcoin by the way. The idea of moving people in the developing world out of their own currencies into dollars is appealing, I think, but overall, the volatility is an issue that’s going away as the liquidity increases. I don’t think the Bitcoin volatility is an issue, plus Bitcoin volatility has been, on the whole over five years, up. If you ask an Argentinian about Bitcoin volatility, they’d say – My currency has being doing volatility like this, Bitcoin’s been doing volatility like that. I’d rather have upwards volatility. As far as converting to dollars, I think that’s a really difficult proposition because, quite honestly, dollars are not backed by anything and they don’t have intrinsic value. Putting your money in a currency that is backed by a Ponzi scheme fuelled by the Fed; that’s really risky. I think I’d put my money in Bitcoin instead. (Laughter) [49:20]

SA: I might take a little bit of issue with the last part... (laughter) the dollar... it often makes sense to think about if something that’s correlative, and what you’re getting paid in, and what you’re going to pay your bills in. For countries that are doing a lot of trade with other countries that are, more or less, tied to the dollar in some way, the dollar makes sense. If you’re in the Eurozone, then it makes sense to have euros. There are some advantages to having fewer frictions and to having your assets be related to some of your liabilities. That said, I do understand... on the way up, it’s nice to hold it but, I mean, when you’re talking about people living pay check to pay check, a weekly fluctuation could be a big deal. As it stabilizes, that stability will come also as the growth flows down and so then it becomes less interesting to hold just because it’s going up. I agree that in a steady state, it should have... it won’t be as great an investment vehicle but it will be easier to hold it without risking not being able to pay your rent or buy your food. [50:30]

AA: More seriously, in the meantime until Bitcoin achieves a broad adoption and higher levels of liquidity, the really killer application is remittances and, in that application, you don’t want to use Bitcoin as the end-point. You want to hide Bitcoin in between and the end-point of the local currency, so if you’re doing a transfer from Dubai to India, for example, then Bitcoin can blend into the background and just simply facilitate a system where $74 billion are extracted by Western Union in exorbitant profits right now from the poorest people in the world. That’s a problem we can solve now and it will affect a billion people and deliver money into their pockets that will have an immediate effect in their communities. That’s a valid problem that a lot of companies in this space are working on and it’s really admirable that you’re seeing that focus in much of the Bitcoin space. [51:22]

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NP: You guys all are doing really interesting research, digging down to levels that most of us never see and I wanted to just go through and hear from each of you, what the most recent discovery you’ve made in this space in your own researches that might surprise people, that surprised you; whether it’s the data you found or patterns. Tell me what you’ve been working on that’s been interesting. [53:16]

SA: One thing that I’ve found that’s actually very high level and can be replicated by anybody at home who wants to download some things from blockchain.info is to understand how the price movements actually relate to fundamentals that it’s possible to reason about. You have the wackier commentators saying things like – Well, the price could be anything. There’s no underlying value so how do I know that $1,000 is a good price, or $500 is a good price? There are economists out there who say things like – Well, what kind of asset goes from $50 to $1,000? There must be something wrong. It must be a Ponzi scheme of some sort. You can sort of refute that with just a little bit of plotting of charts. It can be hard to reason directly about the Bitcoin price but you can reason about fundamentals like transaction volume and velocity. Velocity is how frequently things should be used. How do I know what the velocity of Bitcoin should be? I don’t and, in fact, I think the velocity will change as different segments of the market change. As you get more regular transactions, as you get different wallet apps, as you get changes from speculation, and so on. It’s not a fundamental constant but it’s something you can reason about and possibly predict in model. The transaction volume – of course, the transaction volume is impacted by newspaper articles, and by price movements, and so on and so again, it’s all sort of wrapped up but at a fundamental level, if you have a certain transaction volume that’s occurring on your system... so, if you want to support say $100 billion worth of transaction volume... we’ve been going up like this about $40 billion roughly would be an annualized amount now, so it’s not crazy that it could go up to $100 billion fairly soon. If you’re going to support that level of transaction volume and if each bitcoin can be used say, like 5 times a year roughly on average, then that’s going to tell you what the exchange rate of dollars to bitcoins has to be. If you look out... the thing that surprised me... so this is a rough theory but none of the underlying things... relationships should necessarily be stable but if you go out and look at the data, you can actually, more or less, see that the Bitcoin prices have roughly tracked transaction volume in the proportions you would expect with a roughly constant velocity. It’s kind of surprising because the market is so nascent and there are so many things left out of

that simple analysis. What I take from that is just that this market is not crazy. It’s not completely divorced from fundamentals and that the price movements have tracked the use of the system, in a broad sense. [56:11]

NP: It’s an efficient market. [56:13]

SA: The price fluctuations aren’t just coming out of nowhere. [56:18]

NP: It’s a rational market. [56:19]

AA: Yeah. [56:19]

SA: It looks like you can understand the rough outlines of the market through fundamentals. [56:25]

JL: I haven’t seen exactly that. If you look at the number of transactions on the blockchain, it has absolutely no relation to the price, which is something that I think is telling in a market that doesn’t behave like a currency like we would like to see it. I agree that the velocity of money, if you could measure inter-user trades would be a perfect model of the fair Bitcoin price but, at the moment, the number of transactions is invariant to the price and the transaction volumes don’t have an impact when the volume changes and the exchange trades also don’t map onto the transactions on the blockchain. I’m finding it difficult to see all the solid relationships at the moment. [57:15]

SA: I would agree that as you dig deeper, it gets more complex but if you download the data from blockchain.info and draw a few pictures and do a few divisions, you can get a nice pretty picture, so I can show that to you. [57:29]

JL: Yeah, right. (Audience laughter) [57:30]

NP: Are there any pieces of... relationships you have seen that have been interesting in the data you’re looking at? [57:36]

JL: I was actually going to say that, contrary to that, that the fact that the number of transactions doesn’t relate at all to the number of users coming on to the system, or anything like that. It’s something that I’ve found quite surprising. The other thing that I thought was pretty surprising is that there’s a bunch of transaction fees that are just sitting in the memory pool that aren’t being picked up by miners. The mining market is not picking up all those transaction fees. That’s a little bit of irrational mining behavior that still needs to be worked on. [58:08]

NP: Andreas. [58:09]

AA: I would say that’s not irrational behaviour. The speed at which you can propagate a block depends on its size and, therefore, given that the reward is disproportionately biased towards reward instead of transaction fees, at the moment, getting out a smaller block at high speeds in order to collect the reward. Keep in mind, you don’t probabilistically decrease your reward collection; you either get it or you don’t, and it’s a race. I think that’s a rational response – leaving transactions out in order to make a smaller block. [58:41]

JL: That’s a really bad thing for the network. [58:43]

AA: It’s a bad thing for the network now, but over time I think it balances out and we’re going to see that gradually change but, we’ll see. To me, the most interesting thing is the change in the relationship between the authority of issuance of a currency and its monetary value. Up to 2008, sovereignty created currency. The fact that a scarce sovereign entity could create a currency is what gave it value. Now, I foresee a world where we’re going to have hundreds of thousands of currencies because currency, at its very basic level, is a language, it’s a form of expression, a language that is used to communicate the transfer of value between individuals. If you look at a primary school and you look at little hominids in their native environment, what they do is they invent currency. It spontaneously emerges from the social interaction. They trade bubblegum, they trade rubber bands, they trade Pokemon and they trade Tamagotchi. Trading is an exchange of values and emerging property of social behaviour. When anyone can create a currency, when Joey can launch JoeyCoin in his school with two clicks of a web interface in order to compete against MariaCoin in a popularity contest, we will have millions of currencies. Asking how many currencies we will have is equivalent to asking how many bloggers will there be on the internet. The answer is, all of us. Once you understand currency as a conversation, the next question is what gives it monetary value. Sovereignty isn’t the source of authority; use is the source of monetary value. User adoption is what gives a currency value and that creates a very interesting situation because you can imagine ten years from now, in a small tribal region in a remote place of the world and people are using DogeCoin as their primary currency and they have no idea what a Shiba Inu is, and they have no idea what this dog is doing on their currency but, guess what... they had no idea what the old, white lady that said Queen Elizabeth was on their currency either, in colonial times, and they used it anyway. It has monetary value for them. We’re going to be surprised by what creates monetary value and so, my last prediction is this. Up to 2008, sovereignty created currency. We now live in a world where currency creates sovereignty and Bitcoin is the currency that will give Internet sovereignty in the form of financial and purchasing power and that is a very powerful idea. (Applause) [1:01:12]

NP: We have thirty seconds. You guys have all... allowed you all to sound very smart. Now, I’m going to ask you the stupid question that you don’t get to give any explanation for - the price of Bitcoin in a year, the price of Bitcoin in five years? We were supposed to ask this question, so I’m going to make it the last one that you can leave all these wonderful people with. [1:01:33]

SA: We should start on that end then. [1:01:35]

NP: Yeah, Andreas. [1:01:36]

AA: I don’t really know. [1:01:38]

NP: I know you don’t. We can’t get a... any number, for at any point in the future where you would imagine this? [1:01:47]

AA: I think the price of Bitcoin will stabilize in the several thousands of dollars, at some point in the near future, certainly way above it’s going to be here. [1:01:55]

NP: Good answer. [1:01:55]

SA: In the couple of thousand in a year or so. [1:02:00]

JL: I’m going to go $500 in a year. [1:02:03]

NP: OK. That’s all, we’re done. (Laughter and applause) [1:02:10]

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CREDITS:

Thanks for listening to Episode 96 of Let’s Talk Bitcoin.

Content for today’s episode was provided by Adam B. Levine, Patrick Murck, Susan Athey, Jonathan Levin, Andreas M. Antonopoulos and Nathaniel Popper. Special thanks to CoinSummit for the great event and panel.

This episode was produced and edited by Adam B. Levine, with live field engineering provided by Krystal Levine.

Music for this episode was provided by Jared Rubens and General Fuzz

Any questions or comments? Email adam@letstalkbitcoin.com

Have a good one! [1:02:43]]