Repeat after me: Bitcoin Bad, Blockchain Good

I wrote a while ago about the contrast between the innovators (jeans and beers) and regulators (suits and canapés) and was struck by this again as I attended EBADay in Amsterdam.  Like SIBOS, EBADay is attended by the best people in transaction banking and payments, and they all wear suits and ties.

The focus of these meetings is often on a regulatory dialogue, and EBADay didn’t let us down with panel sessions on BASEL III, Beyond SEPA, The Regulatory Hurdle, PSD2, ISO20022 XML, Financial Crime and Security and so on and so forth.  There was a bit on the blockchain too, and here is really struck me that things were awry.

I’ve been tweeting a while that bankers are all repeating the mantra Bitcoin Bad, Blockchain Good.  This rallying cry is now so strong that if you challenge it – is bitcoin really that bad? – everyone quashes the discussion.  I’m now of a mind that the majority quash such discussion because they really don’t know what bitcoin is about.

Reid Hoffman – the co-founder of LinkedIn and early investor in PayPal and Facebook – talks about this in Wired this month.  Interestingly, Reid only got interested in bitcoin two years ago after meeting Wences Cesares, who interview featured on the blog in March.  Reid says a few interesting things in this space.

“There are three aspects to Bitcoin that are interwoven … One, it’s an asset, like digital gold 2.0. Two, it’s a currency in as much as currency is like the digital app that allows you to begin to transact and trade. And, three, it’s also a platform where you can build financial and other products on top of it. These attributes all bound together are what convinced me that there’s a certainty that there will be at least one global cryptocurrency and that there’s a good argument that it’s Bitcoin, or that Bitcoin is one of them, if not THE one.”

He goes on to talk about how other VCs and protagonists are dissing bitcoin and says that this pleases him, as he’s investing for the long-term and the long-term says that bitcoin, or a relation, will win.

Now, back to the banking audience, and they’re talking Ripple – Chris Larsen was the opening keynote here – and, since I arrived, I’ve heard this mantra about Bitcoin Bad, Blockchain Good. 

So why would someone as intelligent and informed as Reid Hoffman – and Marc Andreessen, Richard Branson, Wence Cesares, Jon Matonis, et al – be so pro-bitcoin when the banks are not.  My answer is that most of the people dissing bitcoin haven’t looked under the hood.

So here are two test questions for all of you reading this and thinking Bitcoin Bad, Blockchain Good. 

One, have you actually read Satoshi Nakamoto’s white paper?

Two, can you explain to me exactly why the blockchain is good?

I don’t do this, as I don’t want to embarrass anyone, but I’m guessing that 99% of the Bitcoin Bad, Blockchain Good people would answer no to both questions.

So, to help you along the way, here is Satoshi’s white paper and the abstract pretty much summarises what you need to know (but read the rest anyway as I’m going to test you on it):

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.

Here’s a quick explanation of the blockchain that works well for me from the

The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.

And here’s why bitcoin is integral to the blockchain: because the blockchain does not work without a native cryptocurrency, and why would you create an alternative to bitcoin when over 90% of all cryptocurrency transactions are based upon bitcoins?

Maybe that’s why Nasdaq is using bitcoin as the blockchain currency to record securities settlements:

Nasdaq will leverage the Open Assets Protocol, a colored coin innovation built upon the blockchain. In its first application expected later this year, Nasdaq will launch blockchain-enabled digital ledger technology that will be used to expand and enhance the equity management capabilities offered by its Nasdaq Private Market platform. Nasdaq’s blockchain technology will offer efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities.

And no, they may not mention it in the press release, but yes, Nasdaq is using bitcoin as the native currency for their blockchain developments.

So please stop being parrots and squawking Bitcoin Bad, Blockchain Good as some parrots are Norwegian and may find themselves in a Monty Python sketch if they don’t watch out,.



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Why the blockchain will radically alter our futures

There’s an interesting debate about blockchains, sidechains and identity taking place that is emergent right now but, soon, will be mainstream.  For those who are unclear about these things, blockchain is the technology protocol invented by Satoshi Nakamoto with bitcoin, although it doesn’t have to be based upon bitcoin.  The blockchain allows you to create a public ledger system that is accessible for all and secure.  This is achieved by having public recording of transactions whilst they are secured by private keys.  As a result, any exchange on the blockchain is secured until the private key is passed along.  At that point, the ledger records the exchange of the key and the movement of a digital asset, and that asset can be anything from a currency transaction to a securities settlement to a mortgage deed to a marriage contract. 

In fact, in order to allow different markets to create different blockchains to record these different styles of transaction, there is now this thing called sidechains.  Sideschains are just spin-offs of a blockchain used to record a specific market transaction, such as house deed sales, and sit alongside the main blockchain.

It is this is the technology that all the banks are excited about, as it allows the exchange of digital assets to be recorded digitally for near free and, for those who read them, the recent case studies with Ripple, Jon Matonis and Jeffrey Robinson illustrate the great debate around this technology well.  The core of this debate is whether this blockchain technology needs to reside on the bitcoin currency.  For some, such as Jon Matonis, this is a given.  Why would you create another currency?   For others, such as Jeffrey Robinson, as soon as blockchains are endorsed and operated using dollar, euro or yen, then why the hell would you need bitcoin?  You can make your own mind up, as this is a sideshow to the emergent discussion about the internet of things and how the blockchain may make it work effectively.

So here’s the scenario in the very near future.

You buy a fridge, a car, a house, a smartphone, a wearable, a whatever.  All the things you buy have clear serial number identifications as well as chips inside to enable them to transact wirelessly over the web.  Upon purchase, your device is recorded as being yours using your digital identity token (probably a biometric or something similar).  That recording of that transaction takes place on the blockchain. 

Now, you have multiple devices transacting upon your behalf.  Your fridge is ordering groceries from the supermarket; your car auto refuels as it self-drives the highways; your house reorders all the things needed for the robot vacuum and other cleansing devices it uses; and so on.

Each transaction is a micro-purchase around your wallet, but involving no authentication of you.  The authentication is of your devices.  Should a large transaction occur, or maybe just to check-in as contactless payments do with every twenty or more transactions, you are request to agree that this is your device ordering on your behalf by providing a TouchID or similar.

And all of this is being transacted and recorded on the open blockchain ledger of your bank cheaply, easily and in real-time.

What this provides is the scenario I keep talking about. The scenario invented years ago by Gene Rodenberry, when he came up with the idea for Star Trek.  Now Star Trek has lots of things that were forecasts of the future that came true from communicators that were the predecessors of Motorola flip phones to body scanners that could be hand held.  One of the other predictions was that we wouldn’t need money.

Did you ever see anyone ever pay for anything on Star Trek?

The reason you don’t need money in the future is that all the transactions you make take place wirelessly around you, through your internet of things.  You walk into a store or mall, and all of your devices and identity are communicating your location and intention.  As a result, you never pay for anything.  You just authorise with the blink of an eye or the wave of a watch.

The future is so bright, I gotta wear shades, and it’s coming within the next decade.  By 2025, the only humans who will be using cheques, cards or cash, will be the ones who are happy to pay the penalty fees charged by the merchants and banks for these transactions.  The rest of us will be using chip-based identities for ourselves and our devices to wirelessly order everything without having to think.


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The Finanser Interviews: Jeffrey Robinson, Author of "Bitcon, the naked truth about bitcoin"

Following our regular weekly interview, the Finanser talks this week with best-sellng author Jeffrey Robinson.

Jeffrey Robinson

Jeffrey Robinson is a native New Yorker and an international bestselling author of 26 books.  He is a recognised expert on organised crime, fraud and money laundering, and has been labelled by the British Bankers’ Association as “the world’s most important financial crime journalist”.  After my recent coverage of bitcoin, the blockchain and cryptocurrencies, he got in touch to provide the other view of this world.  As his most recent book is a year long investigation into the other side of bitcoin – “Bitcon, the naked truth about bitcoin” – the conversation proved fascinating. 

What is your background with bitcoin and how did you find some of the activities with bitcoin rather suspicious?

A few years ago, someone told me that bitcoins were good for money laundering. And after books like The Laundrymen, The Merger, The Sink and The Takedown, serious books about the serious business of dirty money, I was interested. So, I looked into it and eventually came to the conclusion, as I say in BitCon – The Naked Truth About Bitcoin, that it is, in fact, not good for money laundering. The system moves it but doesn’t inherently disguise the origins of illegal funds or helps them reappear as legally obtained funds. However, bitcoin is great for capital flight, terror finance, tax evasion, extortion and criminal finance. But, for money laundering, it basically sucks.

Still, I wanted to know more so I went to one of these Bitcoin meetings.  One of these big convention type things that they hold all the time. I was awestruck at the general level of naïve stupidity. These were pre-pubescent kids. It felt like a bad high school reunion. Everyone was keenly intent on convincing me that the dollar is dead; that Bitcoin was about to take over the world; that all the central bankers should be thrown in jail.

I said to myself: “If this is what the Bitcoin movement is all about, it has no chance whatsoever.” But, over lunch at that meeting, I spoke with one of the few grown-ups in the room about the technology. It dawned on me that maybe there is something here when it comes to the transferring of assets. 

The way I see it, and the way he saw it, too, was that with greater development of asset transfer there will be greater emphasis on valuing those assets in dollars and pounds and euros. That means the pretend currency will become increasingly useless and eventually disappear.

By the way, I call it a pretend currency because it doesn’t satisfy any of the three main criteria for modern currency. Furthermore, it is traded like a pretend commodity on what I have come to believe is a pump and a dump market; where very few people control the market and the gullible lose money.  Only the few people who control the market make money.

The more I got into this the more evident it became to me that, if you could separate out the lunatics, the delusionals, the pump and dump schemes, the pretend currency and all of that, and get to the core blockchain, you might actually have something interesting. It was with that in mind that I went and spent a year running around Planet Bitcoin, talking to a lot of people and asking the kinds of questions that I didn’t see anybody else asking.

I find it intriguing, in your book ‘BitCon’ that you quite clearly lay out the idea that the currency has no future. And yet, when you talk to the fundamentalists in the community of the Bitcoin world, they believe you can’t have a blockchain without bitcoin.  The two are integrally tied together. Do you agree with that view?

No, not at all. This is the old argument of: “The Catholic Church is the only church, and everything else is heresy.” It simply isn’t true. Preston Byrne in Eris is working on a blockchain that has nothing at all to do with bitcoin. Ripple has nothing to do with bitcoin. People don’t want to know about bitcoin because it is surrounded by so much hype, spin, misinformation and outright fantasy, and it’s too clumsy.  On the other hand, if you have a bank or a group of banks that could operate a centralized or closed blockchain just among themselves, for the transfer of assets back and forth, that could work.  This bank or group of banks could, say, send money from the US to London and back and forth, and if it was just these banks working on these settlements, you wouldn’t need bitcoin. You wouldn’t need the miners as you don’t need any mining. It’s a closed ledger that the banks control, and the banks essentially are inventing their own blockchain.

Of course, that’s seen as heresy by the bitcoin faithful. But look at the concept of decentralization. It’s a political ideology. “I don’t want the government involved”.  That makes it non-commercial. How about if the banks don’t want to turn over their money for the ten minutes that it takes the miners to verify each transaction, which means they  temporarily lose control of the money. A couple of months ago, transactions were taking an hour and a half or almost two hours. No bank is going to give up control of $100 million for two hours, especially when you consider that much of it will be verified by miners in China. It’s not going to happen. The decentralisation political ideology does not conform with what the banks want. They want a commercial solution.  What they’re looking for is a centralized, or closed, blockchain.

Now, the faithful will say, “You can’t have a centralised blockchain, it’s just a database”. Well, decentralized blockchains are just a database. There are efficiencies and inefficiencies in that database, so you take the great efficiency of the decentralised blockchain, you centralize it, close it, and you can say bye-bye bitcoin because no one needs it.

I can see both sides of the argument in some ways and right now we are seeing a lot of the banks on Wall Street starting to play. For example, UBS recently announced that they’re incorporating laboratories to develop blockchain technologies to reduce cost.

That’s right, but they don’t say they’re getting into bitcoin, the pretend currency.


You see this is part of a hype and spin and why we need to separate  the pretend currency from the blockchain”.  Every time someone speaks of the technological advancements, the bitcoin faithful immediately equate it to a success for the pretend currency. But it’s not. As a matter of fact, there are no bitcoin pretend-currency successes. I can’t find even one of them. You talk about the VCs in Silicon Valley and London and Canada, especially the big ones who have invested upwards of a half a billion dollars. The investment is not in bitcoin the pretend currency; it’s in the concept of blockchain technology.

I think Marc Andreessen gave the game away when I contacted him for BitCon. He said, “My only interest is in finding practical solutions to real problems”. When you think about that, he’s developing businesses that will ride off the back of the blockchain. What he needs to do is sell it to somebody. So, if it’s a financial thing, he’s going to have to sell it to a bank or a finance house. If that bank or finance house says, “We have no interest in this pretend currency, we want it in dollars and pounds”, he’ll abandon bitcoin in a heartbeat. He has no loyalty to the pretend currency, none whatsoever. No one does. Except speculators and the guys trying to flog it to greater fools. In fact, Andreessen told me how he hardly has any of it. He doesn’t own a lot of it.

Yes. If you look at Marc Andreessen, in particular, you can see his VC fund Andreessen Horowitz investing heavily in the technology developments, such as Ripple, rather than the currency.

That’s right. That is their onlynterest. You’ve got $500 million approximately invested in this technology. None of them have seen real returns yet. How sustainable is that if it goes on for another two or three years? It’s not. These guys are only interested in seeing two, three, five or ten times their return on money and, if they’re not making it, they’re going to pull out and put their money into someplace else. That’s how venture capitalists stay alive.

I really blame the media for a lot of this. I don’t blame the bitcoin media, because there is no bitcoin media.  They are simply regurgitating public relations and PR releases. CoinDesk is not journalism. I’m sorry, but it isn’t. However, the mainstream media – CNN, BBC, the Wall Street Journal, the New York Times, Forbes and the like – aren’t asking the right questions. They are blinded and enamored by the idea of bitcoin. They keep rehashing this “bitcoin is the currency of the future” crap and never look beyond it to say: “Hold on a minute, this stuff can’t stand a close scrute”.

For example, Dish Network, Dell, Expedia and others supposed “accept” bitcoin, at least according to the press reports. The truth is that they don’t “accept” it. They simply allow you to pay in bitcoin. And those payments go through Coinbase or BitPay.  This is because Dish and Dell and Expedia and the others don’t want anything to do with bitcoin. Allowing a customer to pay with bitcoins is not an endorsement of bitcoin, it’s a marketing ploy.

Microsoft is not endorsing bitcoin. Bill Gates said recently something about how crypto-currency maybe the future of finance. Right. So, immediately the media screams, Bill Gates endorses bitcoin. No, he doesn’t. Apparently Bill Gates doesn’t even have any bitcoins. That’s the kind of hype and spin misinformation that really drives me nuts. It’s a failure of journalism to do its job.  As an old school journalist, I find that really extremely worrying.

In your book you’ve dug through a lot of the headlines, in terms of where claims are being made about bitcoin that actually aren’t true.

They’re categorically untrue. I’ll give you a really good example. Take my pal Patrick Byrne, the CEO and Chairman of Overstock.  About a year ago, he was saying he has no interest in cryptocurrencies or in bitcoin. Well, somebody convinced him that there were pockets of bitcoin all over the place that couldn’t be spent anywhere. So he said, let’s go after those pockets of bitcoin and sell them garden furniture. This was a marketing ploy.  He announced, “Overstock will accept bitcoins.” The press loved it. But Overstock wasn’t “accepting” bitcoins because every sale had to through Coinbase. What’s more, Patrick was smart enough to have negotiated with Coinbase that he wouldn’t have to pay a commission on the currency conversion. So “accepting” bitcoin didn’t cost him anything. The very first day he racked up $133,000 worth of bitcoin driven sales. It looked like he was supporting the bitcoin community, so the bitcoin community supported him. Within three months, however, his bitcoin-driven sales was down to $7,000 a day. Why? Because the people who had these pockets of bitcoin and no place to spend them, had spent them. And they didn’t buy back in. They saw no reason to buy any more bitcoins simply to use them to buy for pillow cases and garden furniture priced in dollars at Overstock. That’s significant. Think about it. How is there any logical reason for anybody to take dollars to buy bitcoins to pay for things priced in dollars? It adds no value and, in fact, creates extra expense. So, his sales dropped down to $7,000 a day. He then announced that he would accept bitcoin worldwide and his sales went up to $8,000 a day. But they have since fallen again. He has even said publicly, there is no international interest in bitcoin.  None.

Shortly after admitting world wide disinterest, he filed a report with the SEC which received no media reporting whatsoever.  He’d decided to hold on to 10% of all his bitcoin sales.  That means that Coinbase now converts 90% and sends him the remaining 10%. So he’s holding onto $700 a day worth of bitcoin business which he says he is giving to his staff as bonuses. By the way, the staff apparently insisted they put a bitcoin ATM in the lobby of the building in Utah so they could cash out right away. Now, on $7000 a day of bitcoin driven sales, he’s saving his 3% Visa and Mastercard fees.  That’s $210. Okay, $210 a day times 365 adds up.  Except, he told the SEC that, in order to integrate the 10% he holds,  he must integrate $700 a day into his bookkeeping for tax purposes. That’s not so easy because bitcoin is considered property by the tax people, which means there are both capital gains and capital loss calculations on each bitcoin. So far for the privilege of keeping a few bitcoins on his books, he told the SEC, it has cost him $400,000.  Next, Patrick said in that SEC filing, he would probably have to spend another $400,000 to make his bookkeeping fully compatible. So, he’s spending $800,000 to save $210 a day. It will take him almost ten years to get his money back. Explain to me how this is a good idea, how this is sustainable, how this makes any sense at all.

The Bitcoin community claim they have created money without government if they live within the Bitcoin system. What’s your reaction to this claim?

But you cannot live within the Bitcoin system. It’s impossible. Sure, you can buy bitcoins with your dollars and fool some people into thinking you’re living on bitcoins. But you’re not. To manage it, you need a circular flow of income, and with bitcoins, there is none. Every time you purchase something with bitcoins, as soon as the sellers of the goods and services turn it over to Coinbase or Bitpay to convert it back to dollars or pounds, each purchase becomes a sale of bitcoins. That way, no one’s holding this stuff.

Equally, when you look at the real statistics, you find that a lot of the numbers the Bitcion faithful claim as usage, are outright phony.  The faithful say there are 110,000 transactions a day, but only about a thousand of those transactions are for the buying and selling of goods and services. The rest are miners moving bitcoins between different wallets and address, and gambling. On top of that, there is what’s called “the change factor” which means each transaction gets counted twice. Next, the faithful say, there are eight million wallets. What they don’t tell you is that almost all of them are either empty or near-empty. In truth, Coinometrics at Cambridge says that fewer than 250,000 wallets hold one bitcoin or more. That’s not 250,000 people, that wallets, and most people have multiple wallets. Based on that, I am correct when I say, there are more people who are members of the Kuwait Airways frequent flier club that there are people on the planet holding bitcoins.

The faithful also say there are 80,000 to 100,000 businesses around the world that “accept” Bitcoin. But they don’t “accept” it.  Most of them never see any bitcoins and the few that do, mostly, don’t hold any. I called some of these businesses and I said, “Since you put a bitcoin button on your site, what’s  happened?” They said, “It’s a pain in the ass.  We’d much rather have somebody just give us cash, because what we have to do as soon as we get the bitcoins is sell them.  We don’t want them.”

Of the very few businesses I found that actually keep bitcoins, the one I liked the best is a guy who sells rodeo tickets in Texas. He said to me, “I put the bitcoin button on my site hoping that I’d get one or two, which I would save so that when I hit a million dollars of coins, I could retire. But I also play the lottery and that never comes in.” I asked, “How many purchases have you actually had with bitcoins?” He said, “None”.

The facts are the facts. No one is using this stuff. To that I add this undeniable fact: As a global economic phenomenon, bitcoin is a non-event.

The pretend currency is not working. Where people are saying bitcoin has a future, ask them to point to a bitcoin success. Nobody is saying, “Look at this, here is a huge success,” because there aren’t any. Instead, they point to the future. They say: “Just wait and see how bitcoin will end poverty by becoming a bank for the great unbanked.”

Huh? You and I both live in countries where there are unbanked, but they’re unbanked for various reasons. In some cases it’s cultural. There are ethnic communities that don’t want banks, that operate only in cash. There are also people who cannot afford banking and have to use payday lenders and cheque cashiers or things like that. But I cannot find a single case where bitcoin has actually saved any of those people, and this is in the developed world.  Not a one. In the United States, where there are 70 or 80 million unbanked, there is now a move by Bank of America and Walmart to go after these people and to get them credit, to bring them into the banking system. How do you expect three delusionals teenagers on bicycles, wearing t-shirts that say, “In thin air we trust”, to compete with Bank of America and Walmart? It’s not going to happen.  

Also, in the States and in Britain and throughout the developed world, WiFi is cheap and readily available, and smartphones are readily available and cheap.  But the unbanked are still unbanked. Now look at the developing world where WiFi is expensive, where smartphones are not plentiful and where people have traditional, cultural, religious and political distrust of all sorts of things coming from the West. How are you going to sell these people on an invisible currency they can’t possibly use?. They’re simply not going to buy into this.

On the other hand, a bank in Kenya and Vodafone, whom they know, are saying to them: “Look at M-PESA.  You can put that on your phone and move money.” They have sales and marketing forces. They understand the traditional, culture, religious and political mindset. Those three guys on their bicycle with the t-shirts are never ever going to compete with with.

I still haven’t worked out your view between the idea that there’s a good technology here, which is going to play something useful for banks such as Ripple, which has centralized capabilities.

Or Eris. It’s the blockchain that is useful, and the blockchain needn’t have anything to do with bitcoin.

Versus the Bitcoin guys who keep coming back at me and saying, “But it’s out there, it’s in the wild. We’ve got it, we don’t care about you.”

Except no one’s using it. Preston Byrne in Eris had a great quote the other day that I re-tweeted, because I think it’s the best quote ever about bitcoin: “A paradigm shift is not a paradigm shift if no one is using it.” That sums it up. The faithful always talk about bitcoin being disruptive. What they ignore, at their peril, is the fact that the disrupted will always be heard from.

So you see this as a pretend currency, but it actually has a real technology, and your outlook for the future would be: this is a really useful thing?

No, no, no. Bitcoin is a pretend currency traded like a pretend commodity and pushed and pumped by a snake oil salesmen who have a self-interest in finding greater fools to buy it from them. Look at the Winklevoss twins and their Bitcoin ETF. These guts are grasping at straws to find greater fools to buy their bitcoins from them.  And they’re  not alone. The problem with bitcoin the technology is that it is surrounded by the need to recruit the gullible in order to keep the game alive.

What about the way in which bitcoin is used as a community currency, for crowdfunding for example?

Like the Elmer Gantrys of the old south, some of these evangelists are preaching: “Look at crowdsourcing and crowdfunding, and this will save you all. “ Andreas Antonopoulos testified before a Canadian Senate last fall, telling the committee on banking how wonderful Bitcoin was. I testified in January and spent most of my time debunking everything he said, explaining to the senators: “This guy is pulling the wool over your eyes.”  One of his misleading contentions was how bitcoin crowdsourcing was changing things for small businesses. The idea that you could have people from around the world collectively giving you two bitcoins so that you could do whatever business you needed to do with two borrowed bitcoins.  Again, the media just accepts this stuff, and they accepted his explanation. So I spoke to people who are borrowing crowd-sourced bitcoins, and spoke to people who are lending this stuff, and asked: “How does it work?” One guy in South America said to me: “It works great. I borrowed 1.1 bitcoin and I only paid 2% interest.” I said: “Gee, that isn’t bad. What was the term of the loan?” He said: “15 days.” I said: “Hold on a minute. You paid 2% interest for 15 days? Tony Soprano charges 2% for 15 days. That’s 48% a year. If you put it on your credit card, you can get it for 19% a year. You’re paying extortionate usury.” I then looked closely at the leading bitcoin crowdsourcing site, and they’re listing loans at 204% interest, and 305% interest and I even found one at 2,037% interest.

Short and simple, this is loan sharking. And there are laws against this. It is even possibly criminal for sites to aide and abet these loans. And it is definitely bad for business. What’s more, if you’re sitting in Britain and you crowdsource a guy in South America and he doesn’t pay you back, how do you collect on your loan? But, Antonopoulos sat in front of those Canadian senators and, with a straight face, told them: “It’s a wonderful thing.” It took me to say: “Look at the numbers, they don’t lie. He’s full of crap”. That’s what gets me about this. All of the spin and the misinformation and the hype, and the mainstream media is not doing its job debunking this.  They should be saying: “Let’s look closely”, because bitcoin cannot stand a close scrute. Because, frankly, when it comes to bitcoin, what you see is never what you get.

In BitCon, you write about Mt.Gox and the guy who ran it, Mark Kerpeles, being such a geek that he wasn’t actually sustainable in his own world, let alone running billions of dollars of other people’s money.

Karpeles was a train wreck waiting to happen. And he was in Japan, which meant if you wanted to get your money back, you had to go there. Now, here’s Coinbase in the United States, run by a bunch of Americans. If something goes wrong, they’re easier to get to get. But how will you know until it happens because they don’t publish their books. They’ve just gotten a $75 million fill-up. Why? Because, I would suggest, they were in trouble and needed more money. There is a processor in Slovenia, run by two geeks. Are you telling me that you’re going to trust your money to anyone in Slovenia? This is crazy. There are no consumer protections.  There’s absolutely no guarantees in any of this.  And people say it’s wonderful. But it isn’t wonderful. It’s a minefield that’s fraught with problems, and it will come unglued because it simply cannot continue.

It’s not helped by the criminality that surrounds bitcoin. Not just Mt. Gox, but Ross Ulbricht – aka Dread Pirate Roberts – and his Silk Road conviction. Or Charlie Shrem, one of the original bitcoin stars, now doing time in federal prison for illegal activities with bitcoin. Or any of the other so-called “stars” who have previous criminal convictions. Or the fact that the champion of bitcoin, the Bitcoin Foundation, was near-bankrupt through alleged mismanagement and sheer stupidity.

As soon as the guys at Eris or Etherium or Ripple or any of the many other labs working on bitcoin-less blockchains get it right – by which I mean that they create a blockchain that deals in dollars and pounds and other currencies – that’s the end of bitcoin. It’s dead. That is when all the bitcoin processors in the United States or Slovenia will find themselves in an economic death-spiral because there won’t be enough action to sustain them. I’m not even convinced there’s enough action to sustain them for much longer, now. As soon as one of the VCs announces: “I just figured out a way we don’t need bitcoin”, it’s over. We’ve seen it before. Fads always disappear. Pet Rocks. Goo-Goo Dolls. The guy who invented pogs died the other day. His legacy is pogs. Satoshi’s legacy will be the concept of the blockchain, but the legacy of the pretend currency will be pogs.

But what about the whole idea that it will become a centralised technology.  In fact, I don’t know if you saw it, but the Fed and IBM announced the other day that they’re working together on creating a dollar-based cryptocurrency that will be authorised and regulated and centralized.  Is that the way it’s going to go?

That’s right. That’s the future. Centralized. Closed. As soon as they work out payment systems in dollars, sterling and euros, bitcoin goes down in history like 8-track, semi-automatic transmissions and Pet.Com.  The idea that everyone is going to use this pretend currency because it’s an alternative way of beating the central banks, is ludicrous.  The faithful say: “Why would you believe in a central banker when you can believe in mathematics?” The answer is because mathematics alone and the algorithm alone, can’t run an economy. You need the central banker to run the economy. But, they say, central bankers inflate everything so that the value of your money is miniscule. They argue, if you’d put $100 under your mattress in 1913, today it would be worth $3. So what? I don’t know anybody who’s got 1913 dollars under their mattress.  And anybody who puts money under their mattress is a fool, because money invested can keep up, and often, beats inflation.

Inflation is built into the system specifically to avoid deflation. If you have a closed commodity economy, like bitcoin or like gold, the deflation you end up with is ten times worse than inflation. The bitcoin faithful want all the benefits of the gold standard without any of the problems attached to the gold standard.  Look around. There isn’t a single country left on Earth that’s on the gold standard. And for good reason. The bitcoin faithful simply don’t understand the world economy. They don’t understand money. All they understand is their own self-interest. As one kid said to me: “When bitcoins hit $1 million dollars a coin, I’m going to be a multi-millionaire. I’m going to get rich.” Yeah, good luck.

You seem rather anti-bitcoin.

I’m passionate about this stuff because it’s easy to see through, and because nobody is asking the right questions. I see people come on CNBC and Fox Business, talking about the joys of bitcoin, and none of the journalists are doing their jobs by saying: “You’re full of crap”. They’re buying into this stuff and, when it all goes wrong, trust me, they will be the first to say: “We knew. We told you so.” There was a guy on CNBC that I openly challenged, who has a bitcoin credit card. He said: “You put bitcoins on your credit card and you can pay for anything with bitcoins. You go to Selfridges, John Lewis, a petrol station, and you pay in bitcoin. Isn’t that terrific?” No. It’s a con. It requires you to buy bitcoins with pounds or euros or dollars first, which is not only completely illogical but a really stupid thing to do. Why bother? Where’s the benefit? Just pay in pounds, euros or dollars. Why put bitcoins in the middle? Why add the cost when you’re getting no added value? Same thing with the bitcoin ATMs which, by the way, are mostly going broke. Bitcoin ATMs are proving to be non-profitable because (a) nobody’s using them, (b) the rent is too high and (c) the charges are too high.  They set their own exchange rate and they add a fee on top of it. There’s no reason to use them. The whole concept of bitcoin the pretend currency, is illogical. Yes, you can fool some of the people some of the time but you can’t fool all of the people all the time. Bitcoin the pretend currency will die on that.

So it’s like The Emperor’s New Clothes? Eventually you see there’s nothing there?

That’s right. It’s become a cult. It’s become a religion. And I’m the heretic because I stand up and say: “This is crazy.” So they come after me. There are whole Reddit forums talking about the fact that I don’t understand anything. Vehemence, vengeance and juvenile temper tantrums show you the kind of people who are involved in this, and you quickly understand that they can’t possibly sustain this because they truly are delusional. The rational ones are the VCs who are putting real money onto the blockchain to find practical business solutions to real problems. And none of those practical business solutions will involve bitcoin the currency.  None of them.  Because bitcoin is a solution to a problem that doesn’t exist.

And if I’m talking to you in about ten years, it’s hard to forecast these things, but do you think we’ll be looking back and saying, “Look at all these bitcoin fraudsters who have now disappeared, but didn’t they give us a great technology?”

But they’re not giving us a great technology. They’re pumping bitcoin, the pretend currency, which has nothing to do with the technology. Again, they’re self-interested. One of these clowns went on the record as saying: “Bitcoin has gone so viral, it is viral cubed.” The man needs to keep taking his meds because he’s just not in touch with the reality. More recently, he’s claimed that bitcoin’s future is assured because the average life of a fiat currency is 27 years. In the next breath he recalled that Sterling has been around since the 17th century. Only the people who want to believe the earth is flat buy into his absurdities. But then, without those flat-earthers, the pretend currency would become worthless. The point is that the blockchain will revolutionise things, but it won’t be the bitcoin blockchain. And it won’t take ten years. Five years from now, you and I will talk about bitcoin the way we talk about Edsel.


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As the Bitcoin Foundation fails, banks wake up

I’ve blogged before about how bitcoin will become institutionalised, that you cannot have money without government, why it needs a Foundation and how a Wild West structure for value exchange will fail.  It’s certainly moving in that direction after the latest revelations about the Bitcoin Foundation, alongside the equally revealing announcements that banks are incorporating the blockchain.  Here’s the latest.

There were lots of news and media sites covering the revealing post made by new Bitcoin Foundation Board Member Olivier Janssens over the weekend.  Janssens was elected to the Foundation just over a month ago and, on Saturday, posted an update on Reddit: The Truth About The Bitcoin Foundation .

It’s pretty revealing.

First of all, the Bitcoin Foundation is effectively bankrupt and The lesson for all of us in Bitcoin is to never put any trust in a centralized org again that wanted to represent Bitcoin.

Urm.  I’m not sure that’s the lesson Olivier.  I think the lesson is don’t give your money away to something that has no regulation, no guarantees and no transparency.  Anyways, the fallout has been pretty interesting.  A few comments on the Reddit post include:

I think it is going to keep coming back to: who manages the funds? [coinaday]

Shh guys – don’t you all realise “blockchain technology” is just the terminology we are using so that we can get bitcoin into banks and big businesses through the back door? [bitcoind3]


The truth is that money turns everything into shit. Centralization and money even more so. [lightrider44]

In fact, most of the community believe that decentralised control of everything solves everything.  It’s an interesting idea.  Today, the 1% control everything and the 99% revolt.  Tomorrow, if the 99% control everything, then what happens to the 1%?  Most likely they find a way to create a new control mechanism and retain their 1% privilege.   It’s an interesting battle.

But the real issue with the Bitcoin Foundation turns out to be the centralisation of focus and then the use of that focus.  As I mentioned in my blog last year:

Why is the Bitcoin Foundation smeared with controversy?  There has been extensive critique of the Bitcoin Foundation and its leadership, such as the discussion yesterday, of their involvement in the Mt.Gox failure.  Former vice-chairman of the Bitcoin Foundation, Charlie Shrem, faces federal money laundering charges for his role in assisting agents of the infamous online drug marketplace Silk Road.  Executive chairman Peter Vessenes’ relationship to former board member Mark Karpeles, the disgraced CEO of bitcoin exchange Mt. Gox, has been highlighted as inappropriate. In fact, the Bitcoin community in general is divided over the role of the Bitcoin Foundation as a community or industry representative. 

Certainly the Bitcoin Foundation were close to Mt.Gox, and it really doesn’t help when the organisation created to promote and support Bitcoin’s developments is accused of being corrupt.  In fact, between the multiple failures of exchanges in bitcoin and now their organisation created to promote their cause, it begs us to ask: what will happen to bitcoin now?

The answer: not much,  as you have to bear in mind that the Bitcoin Foundation and Mt.Gox are not bitcoin, but operators around the markets of bitcoin.  It would be like saying that because the US tourism agency and Washington Mutual fail, that the US dollar would disappear.  They are not the same things, and bitcoin will continue to develop regardless of these headlines.

Meanwhile, some have pointed out that the failure of the Foundation may be more to do with being unlucky or stupid, than anything else.  After all, the Bitcoin Foundation had $4.7 million of net assets at the end of 2013, but these were mainly in the form of bitcoins valued at $900 each.  A year later, the value of bitcoin had tanked to $250 each, wiping out almost 75% of the value of their asset base.  Meanwhile, expenses were around $1.47 million whilst revenues were less than one million.  In other words, the Bitcoin Foundation was created during a rapid growth in the value of bitcoins and did not know how to handle the rapid loss of bitcoin value, whilst trying to sustain their operation.  That created a challenge as to how to keep going and is the reason why many people have stepped down or been let go (including our friend Jon Matonis).

Anyway, before I move on my favourite comment about all of this came from John Barrett on Cryptocoin News:

Bitcoin foundation

This is why you need a regulatory structure folks.  

The 99% will claim that with democratised transparency they can manage everything but, without structure and control, you have anarchy and abuse.  Imagine Alibaba or eBay without a central exchange to manage disputes and that’s what the 99% are lobbying to achieve.  They believe the multisig structure to arbitrate disputes will provide the appropriate controls, but I am not so sure.  In fact, these developments – Mt.Gox and the Bitcoin Foundation – demonstrate more about why you need independent governance to make monetary systems work as, without it, you have a complete mess.

Talking of which, banks have become far more vocal and articulate about bitcoin or, rather, the blockchain of recent days.  In January, USAA, NYSE and BBVA invested in these technologies ($75m in Coinbase), with two quotes catching my eye:

“At its core, Bitcoin is a decentralized protocol that enables exchange of value among parties around the world, giving it the potential to alter the financial services landscape,” Jay Reinemann, BBVA Ventures executive director; and

The Bitcoin blockchain “is an opportunity for Wall Street to streamline some operations that are pretty antiquated”, Duncan Niederauer, former CEO of NYSE Euronext 

It’s not surprising that these statements are being made when even the regulator gets it:

“The price of handling bits [of data] has come down by a factor of 10,000 fold over the last generation; it’s high time that the costs of payments processing fall by a factor of even two.  Bitcoin offers the prospect of necessary and important disruption in finance for the benefit of buyers and sellers rather than financiers and middlemen.”  Lawrence H. Summers, former U.S. Treasury Secretary

Maybe the latter quote is the reason why the US Fed is creating their own cryptocurrency with IBM.

All in all, we are seeing the natural development of order in the cryptocurrency community where the unregulated markets of exchange (Mt.Gox) go through a trough of disillusionment as even their leadership cannot function effectively (the Bitcoin Foundation), whilst the traditional order things (governments) wake up to see how they can make this work effectively (via the banking system).

Watch our weekly interviews closely as we’ll have more on this coming up soon.

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Why bitcoin will be bigger than the internet

Nicholas Carson of  Business Insider interviews Silicon Valley entrepreneur Wences Casares.

Here’s why bitcoin will be bigger than the internet

“In Spanish, we have a saying that when a genius points at the moon, a fool looks at the finger. I find that happens a lot with bitcoin.” —Wences Casares

Bitcion _ Wences Casares

Serial entrepreneur Wences Casares created Argentina’s first internet provider and later sold his online brokerage firm to Banco Santander for $750 million in 2000. He was 25 years old.

Now 40, Casares is a star of the Silicon Valley bitcoin scene, but his Argentinian roots inform much about him. The son of a cattle rancher, he sees the world in literary and philosophical terms, speaking of the arc of human existence over thousands of years.

Bitcoin has had a rough time lately, with its slumping value and high-profile flameouts, but Casares has no doubt that the digital currency will prevail. First, it promises efficiency and equality of access unlike anything the world has known. Also, he argues, technology has already created a leapfrog effect in the developing world. As cellphone usage shows, billions of people worldwide have cash but exist outside of the traditional banking and credit systems. Bitcoin unleashes that power.

Casares believes the revolution will take time, and bitcoin will not fully replace other forms of money. His newest company, Xapo, is said to be the largest custodian of bitcoin in the world, catering to people seeking to hold on to the currency in a secure way. As such, he says, Xapo is the “Swiss bank of bitcoin.”

Nicholas Carson of Business Insider spoke with Casares at the World Economic Forum in Davos, Switzerland, in January. In the beginning, he offered a soliloquy on the history of commerce and the future of bitcoin. The following has been edited for clarity and length.

Wences Casares: I think bitcoin may very well be the best form of money we’ve ever seen in the history of civilization.

That’s a super-bold statement, I understand. We were all taught that early civilizations first bartered and later invented money because bartering was too hard. Well, that’s not true.

The way we did commerce before there was money was that everybody in our tribe would know that you killed a big buffalo and I would come and say, “Hey, can I have a little bit of your buffalo?” And you would say, “Sure, here’s a bit of buffalo.” And that was the end of the transaction. I had to remember I owed you. You had to remember everybody you gave buffalo to.

You had to carry a ledger in your brain for each counter party. It was unreliable. But it worked for 25,000 years. And then, someone intelligent came up with an idea, a new technology. This person came to you and said, “Can I have a bit of buffalo?” And you said, “Sure, here’s your buffalo meat.” And this person said, “You know what? Here are some beets.” You said, “I don’t want or need beets.” 


He said, “No, no. It’s not about that. We’re going to use beets as the objective ledger in our tribe.”

Instead of your having to remember, just let the beet keep track for you, right? It was brilliant. It was such a good technology that it took off. In some tribes it was beets; in others, salt. In other places, different things.

That worked from 25,000 years ago to 5,000 years ago. It just spread like fire. Really successful technology. And then, 5,000 years ago, when tribes began to trade with each other, they needed to use the same ledger.

Gold emerged as the universal ledger. Anthropologists say that they can predict what’s going to emerge as money in any tribe because it always has six characteristics. Most of all, it has to be scarce. If it’s not scarce, you cannot trust it. People will create a fake. It also has to be divisible, transportable, durable, recognizable and fungible.

Those are the six things that make money, money. So gold emerged as the universal ledger and it was the best form of money we’ve seen for 5,000 years. Nothing has kept value the way gold has. Not the British pound, not the US dollar, not land, nothing. Not even close. Simply because of its scarcity. And some people believe — wrongly — that gold has some form of intrinsic value. And the truth is, the only value is that it’s scarce and it makes a good ledger. Bitcoin, like gold, doesn’t have intrinsic value. But in all but one of those six qualities, it is much, much better than gold.

In terms of scarcity, gold is scarce, but we still mine areas. Let’s say you buy 0.01% of the gold that there is today. Next year, it will be a smaller percentage, because we’ve mined some more. Right?

‘We have never seen something so perfect’

Same thing if you have some cash. With bitcoin, you buy something today, and it will be the exact same percentage of the 21 million coins that there can ever be. It’s perfect. We have never seen something so perfect from that point of view. 

In terms of the divisibility, each bitcoin is made up of a hundred million Satoshis. It’s incredibly easy to divide. And in terms of the transportability, it’s also something that we never seen before. Whereas with gold, it’s a stupid transaction; you’re dealing with coins and exact change. And we have to trust a third party. In the past, we’d go to the Medicis or the Rothschilds and they would write letters of credit and you would trust that I had gold there.

Since then, every time we do a payment when we’re not physically together, we have to trust a third party — whether it’s a bank, Visa, MasterCard, PayPal, there’s always a third party, I have to trust them.

Bitcoin. It’s remarkable in that it allows me to send money to you anywhere in the world, in real time, free, without any third party. So in terms of the transferability, it’s revolutionary. But it’s better than gold in every way except in terms of fungibility. If someone offers you two identical gold coins, you truly shouldn’t care which one they give you. It’s exactly the same. Truly fungible. In the case of bitcoin, each bitcoin contains in it its entire history within, right?

So if someone offers you one of two bitcoin, you should choose the one that has never been attached to Silk Road or that has some dubious history. It could be that is eventually worth less. But in every other aspect, bitcoin is superior.

So, you know, we live in a world in which there are 5 billion people who have a phone but do not have a bank account or a credit card. So these banks that do so well have managed to barely bank 1 billion people. There are 5 billion people who get abused for not having a bank account or a credit card. They cannot participate in this global economy that we’re talking about all day. This is the one time that we see a true, realistic hope this could change.

Bitcoin History

Bigger than the internet

That’s why I think bitcoin is important: It’s relevant, and I think it will take time, just like the internet took time. But it may have more impact than the internet. If you go to Africa or Latin America, parts of Asia, and you sit down with not even a poor person, just an average person, and you ask, “Look, what would you prefer — free access to information [which they’re getting now with their phones] or a secure place to store the fruits of your labor and to receive and make payment?”

If they didn’t have either, which was true until recently, they would choose the second because it is more relevant to them. Right? So for 5 billion people, I think that bitcoin will be more relevant than the internet.

Nicholas Carlson: That’s amazing. How long until that happens?

WC: A long time. I am maybe the most bullish person you can find on bitcoin. Ironically, I think it will be much more powerful than people think, but it will also take more time.

NC: Decades?

WC: Yes. If it takes one decade, it will be incredibly fast. More likely, I think it will be two decades.

NC: What are the big applications that need to be invented between now and then?

WC: I think the applications will emerge organically once you have consensus around the legitimacy of bitcoin. I don’t think bitcoin will or should ever replace money. I think the pound should be the pound, the euro the euro, the dollar the dollar, and so on.

But I do think we need a global type of currency, like a meta currency. If Argentina is buying oil from Iran today, for example, there’s no point in their using the dollar, right? I think it will make a lot of sense for all individuals to have a little bit of bitcoin.

NC: Right.

WC: So more than the applications, I think what has to happen is for people to just take bitcoin for granted the way they take the internet for granted.

Let me tell you a story. When I was a teenager, my mom was worried that I was spending too much time on the internet. And back then, you know, there was no browser — it was just a UNIX screen. So I remember sitting down to try to show her how this thing, the internet, would change the world. I showed her the CPU board, I explained the whole stack, the protocol, why it was free. You know, it was a total failure. She limited my computer hours anyway. And the funny thing is, if today I ask her, “What do you think of the internet?,” she says, “Oh, my god. It’s great! It changed my life!”

She just takes it for granted. It works. Same thing with credit cards. It’s quite complicated how they work. Most people trust them, but don’t have a clue how they work. To get to this point with bitcoin will take a long time more than it took with the internet, because the internet was not challenging any existing assumptions. Whereas, bitcoin challenges a lot of assumptions we have about money. Once you change that, all the rest will come.

NC: Basically the analogy is you need the World Wide Web to be developed on top of the internet.

WC: It’s exactly like that. And look, if bitcoin continues to grow at the same rate as it has for the last five years, we can expect to finish 2015 with 50 million users. That’s a fivefold increase in one year. And we’ll probably have more bitcoin users and owners than PayPal accounts sometime next year. Then you can start doing something different, right?  

NC: Does the massive spike and plummet that bitcoin experienced over the last year limit the possibilities?

WC: That’s basically because of the volatility. The volatility is a constant reminder: Don’t use money you cannot afford to lose. That’s why I hope the whole ride from here to where I see bitcoin going is as volatile as possible to keep this honest and to keep it safe.

NC: Is there a comparison to be made between bitcoin and Esperanto, the language some people say would be a better universal language?

WC: Look, we live in the 21st century, and the fact that it’s easier for me to call Jakarta, see someone on the screen, and talk to them for free — given all of what has to happen for that to be true, and yet I can’t send them 1 cent? That’s incredible.

It’s like this train departed, and there are a few wheels that are behind. It’s like they’re not part of the rest of our world. That’s just to prove a point: Bitcoin isn’t like Esperanto.

NC: What will be the first common application of bitcoin?

WC: You know, I think it’s dangerous to think that you are genius enough to do so. But if I had to brainstorm, I would say I see two very different use cases. One for the developed world and one for the developing world. In the developed world, to me, there is a clear need for internet money. The internet is super powerful, but it doesn’t have its form of money. So whenever you’re going to transact on the internet, you have to use dollars, euros, pounds, and it’s messy. It interrupts you for at least 35 seconds. It costs a lot of money. It’s just a mess. Right?

What if you could really move money the way you would move an icon? Put it there. Put it here. Send it. Especially micro transactions. Imagine how it could work for some of the columns you’re writing. Readers like me could see a summary. But if I want to read more, I have to pay few cents. And some of your stories get enough thousands of readers that that could be meaningful, right?

Or, when YouTube is telling me that I have to wait 5 seconds to skip that ad, let me just pay a few cents. And that would be a lot more relevant to the producer of that content. Right?

Bitcion Economy

NC: Let’s just dig into this. So I have an iPhone that has Apple Pay rigged into it. Why is it better than me just hitting Apple Pay, just hitting this button? And it clears through my credit card.

WC: Because this is a closed ecosystem. In a closed ecosystem, it only processes them when they have enough to make the transaction fees justified. They will still take a few days to receive it, and you still pay 3.5% to Visa. It creates that sense that it’s paying immediately, but it takes three days to clear. It costs a fortune.

NC: It’s not as efficient as it could be. 

WC: It’s not as efficient, and it’s a fiction. But it’s not really that things are happening in in real time. It’s like saying, “Why do I need the internet?” I can go to CompuServe. Or Delphi or AOL, and I have all of that here, but it’s a closed system. The beauty of the internet is that anybody can do anything.

I imagine a totally different case for the developing world, where I think it’s more interesting. You know what’s the maximum number of fixed telephone lines we ever sold? It’s a little over a billion now.

And you know how many cellphones there are today? A little over 6 billion. And you know what made us go from 1 billion fixed lines to 6 billion cellphones? The real leap has nothing to do with form factor or technology. The real leap was financial. Every time you issued a fixed telephone line it was like writing a blank check. I install your phone. Use it, and I’ll charge you at the end of the month. So I’ve got to trust your credit. So the billion people who have credit, good credit, got it. And no one else.

And with the cellphone, we got to a billion cellphones, postpaid. The other 5 billion are prepaid. It is a financial fact that people come with cash and pay you in advance and then they go use it. That’s what allows the 5 billion extra. They can’t participate in conferences like these. They’re not part of this economy. But, man, they have a phone just like yours. They have money.  They can’t participate in conferences like these. They’re not part of this economy. But, man, they have a phone just like yours. They have money.  They have cash. And they just cannot be part of the global economy, because cash doesn’t travel here.

NC: Yes.

WC: There are a number of problems with today’s currency system. It’s expensive. It’s unsafe. It carries huge transaction costs. And I think that bitcoin can be the way in which these people can participate. They love their phones and can use them to do things that you and I take for granted.

NC:  It’s cash that’s digital.

WC: It’s digital cash for them.

NC: Yes.

WC: You and I don’t need it.

NC: Right.

WC: They do.

The article was originally published by Business Insider, February 2015.  Reproduced in full with permissions.


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The Finanser Interviews: Jon Matonis, Crypocurrency Economist

Bitcoin still stirs up a huge debate about where it will go in the future; will it become institutionalised; what is the blockchain going to do to banking; and more.  In order to clarify the debate, we interviewed Jon Matonis, a renowned expert on bitcoin and cryptocurrencies, to find out what is the truth.

Jon Matonis

Tell me about yourself and your background Jon. 

I was involved with the Bitcoin Foundation since its inception, starting in 2012, as one of the founding board directors. At the end of last year I decided to retire from the Foundation board and give other people the opportunity to step forward and work on the board.

It was never meant to be a lifetime gig for any person.  Prior I was working in the payment space at Visa and VeriSign, working on the public key cryptography for online banking, and prior to that I was an FX and Derivatives trader for commercial banks. I have been blending all these skills into this new brand amazing field of financial cryptography.  

What’s the future of the Bitcoin Foundation?

In terms of the Bitcoin Foundation going forward, it still is an excellent institution. People should be encouraged to join it, as it does pay for some of the core developers’ compensation. It doesn’t pay for all the compensation, as no one entity controls Bitcoin development.  It is an open source project so it’s not a centralized power struggle, but does provide some compensation. The main focus of the Foundation today, which is slightly different from when it first founded, is to develop a standards body for Bitcoin Core, along the same type of protocol standards as the IETF. It is premature to just automatically throw that over the fence with the IETF standards process, as it would be lost. It has to mature, has to have more participation, more advocates to allow it to thrive in an IEFT structure. That is what the Foundation is preparing the protocol for, so that eventually it will go into a larger more rigorous standards body process.

You mentioned you’ve been a trader and involved with the payments industry so why did you get interested in bitcoin?

I had always been studying and focusing a lot of my research work on digital currencies and alternative monies. Even prior to Bitcoin going back to Digitcash and E-Gold days. In late 2009, I got introduced to Bitcoin by a random email from Satoshi Nakamoto.  I didn’t give it much thought at the time and then 3-4 months later I started to focus upon it. It seemed to solve a lot of problems encountered by the first generation digital currencies, primarily around the centralization issue for preventing double spends. That’s the real breakthrough and is what got me excited both as a trader and as a digital currency monetary theorist. Bitcoin came up with the way to solve the double spend problem, without having to go back to a centralized mint for reissuance or confirmation that the units weren’t double spent. The cryptographic principles for Bitcoin have been around prior to the launch of Bitcoin. There was nothing uniquely new about any of the individual components but it was unique in how it was assembled as a peer-to-peer distributed environment. That was the real breakthrough.

You say it’s decentralized, which often raises the question: is this money without government.

Well the decentralized and peer to peer computing capabilities are the wave of the future. So that is definitely going to last. I see that growing in fact rather than going in the other direction.

In respect to the ‘money without government’ phrase, we actually have always had money without government going back to the evolution of money, even gold and pre- gold barter days. Gold was the form of money without government before the kings and monarchs started stamping their image on them. So I don’t see concept of money without government as being something impossible to achieve.  Instead, we are regaining something that was lost. 

But regulators and government officials, when it comes to a value exchange that is unregulated, worry about drug runners and terrorists. Do you see that as a threat? 

I don’t see it as threat. It’s not specific to Bitcoin and other crypto currencies.  Any type of value exchange medium for small or medium transactions are subject to abuse.  The tradeoffs are that you have to severely clamp down on the benefits of having digital money in an absolute way, to prevent something happening on the negative side in an absolute way.  What I mean by that is that the so called drug and criminal communities that you’re labeling, dwarfs what’s happening in Bitcoin. You don’t blame the monetary unit for the actions of the criminals.

I agree with, although another problem of an unregulated value exchange system is that you get lots of hacking and issues like MtGox and Bitstamp failures.  These things give Bitcoin a bad name. Do you see a structure to give consumers more assurance that it is safe to use?

Let’s talk about MtGox and the episode of Bitstamp. Regulation cannot be a panacea for ‘caveat emptor’ (buyer beware). Regulation cannot be a panacea for everything. It rarely works in a way that a government intends it to anyway. Look at episodes in the United States where Lehman Brothers and MF Global were both regulated entities and meant to be safe.  They weren’t. So in terms of protecting consumers, that is just what the government regulators put forward for the justification of massive regulation in the Bitcoin arena. We are now seeing major areas of Bitcoin being involved with best practice though.  If you look at the recent BitStamp episode, that actually resulted in adoption of new multisig technologies for Bitcoin and cryptocurrency exchanges. So the solution with BitStamp generated a more robust and stronger exchange system, which happened outside the action of any government regulation.

Alongside that you are seeing firms like BitGo, which was the multisig company, and companies like Xapo, CoinBase and more adopting their own private insurance to provide customer security and peace of mind for any funds that they choose to leave there. So the market is stepping up, through best practices and through providing these solutions. The main take away from MtGox, which happened over a year ago, is that it demonstrated the exact opposite of too big to fail capitalism. It’s always curious to me that some the critics of MtGox would prefer a world where the tax payers always steps in and bail everybody out. That’s not the world we need to be moving towards, so that MtGox was allowed to fail on its own accord should be taken as a positive sign that the system is working.

It’s interesting that traditional value stores have started to pick up on Bitcoin since failed. A lot of institutions that have got licenses and government regulation are starting to try to incorporate cryptocurrency and blockchain technology in what they do.  That feels like a movement towards the institutionalisation of cryptocurrency. Do you think that will happen or would that be the opposite of the wishes of the community that created this capability? 

Well the wishes of the community don’t really matter here and the institutionalisation of Bitcoin will be jurisdiction by jurisdiction.  Going back to your other point though, the exchange environment has matured significantly over the 12 months since MtGox and that’s a beneficial sign.  Not only are they aware of this, but the service providers are a lot more robust.  Some of them are taking steps on their own in anticipation of future regulation but to present a more mature offering. Users of these services have also worked out that it’s not right to use firms like MtGox as a bank vault, which they should have never been using as such in the first place.  So Bitcoin gives you a way to control your own assets and not required to leave everything on balance.  It’s down to your own guidelines and comes back to what I said, caveat emptor, whether its regulated or unregulated. 

On the institutionalisation of Bitcoin, you will start to see that happen. I don’t think this is a negative and, as mentioned it will be jurisdiction by jurisdiction. Trading liquidity, increasing volume and depth of the market will lead to institutionalisation.  It is unavoidable that we will get to a phase where we see Bitcoin derivatives type instruments, which we are already starting to see evolve in certain markets.  It will be just like any other commodity that goes through stages and develops.  We are just seeing that on a faster time horizon with Bitcoin, which seems like it is moving a lot more quickly. We will get there. 

I can see it happening. That’s why you see innovators like Fidor Bank and Circle creating cryptocurrency consumer guarantees and assurances, similar to traditional regulated banking licenses, but in the new model world rather than the old model world.  Is this the correct view?

It is a correct view. We are also starting to see it on an international level. You will have the small local regional players, but you will start to see the ones that are large have a global footprint, which will end up only being beneficial because a global footprint for a cryptocurrency type operation really sets the stage for entry into the remittance market. When you have a global player that covers multiple countries you’ve pretty much displaced the functionality of someone like Western Union.

That’s where things get very interesting. For example, Ripple is working with Wells Fargo and other banks to have their technology capabilities incorporated but using other cryptocurrencies than bitcoin.  Will we see a different cryptocurrency arrive?  Is bitcoin the one?

Well there are already over 300 crypto currencies that come and go. Bitcoin has the majority share at almost 99% share. Bitcoin is the dominant player. Ripple is making a lot of progress with financial institutions, as they are making this area their main focus of attention. I don’t see systems like Ripple as being truly decentralized however. They have distributed deployment, but the currency unit itself is entirely pre-mined by the founders of the currency.  That means it is not decentralised, as there are people who work out where to deploy that initial currency unit. The Ripple currency XRP is what they use as a glue to hold everything together and the test as to whether something is truly decentralised is: who will be the financial winner with Ripple’s success? Ripple has lots of venture capitalists participating in it, and investors in XRP. Those people will be the winners. Because of that Ripple doesn’t take them away from a single point of failure. Their implementation with lots of financial institutions, and what they are trying to do with various asset webs and connections, is very appealing to banks as it makes it subject to oversight and regulation.  At some point, when you traverse everything in that world however, there is still a single point of failure. Regulators like to have that single point at the end of the day, because then they can regulate it. Bitcoin doesn’t give them any type of single point to focus on.  That’s why it’s democratized value.

So if Ripple is not the solution, how will banks manage cryptocurrencies into their operations?

This is actually a very interesting area.  I am starting to focus on it a lot more in my work as, in some ways, it’s the flip side of Ripple and alternative cryptocurrencies that want to do their own independent blockchains. What we are starting to see evolve are banks beginning to leverage the existing Bitcoin blockchains.  The blockchain that already exists, rather than trying to recreate something that will be a second or third tier chain. The reason this is interesting is that it’s already there to be exploited.  The fact is that banks just have to figure out a way to connect to the Bitcoin network, which gives them the same type of liquidity and ability to do the large amount transactions they currently have on SWIFT.

An interesting company that illustrates this development well, came out of the SWIFT innotribe challenge last year coincidentally.  This is a company called epiphyte based in London, and with offices in New York.  They created an interface for commercial banks on both sides to be able to leverage and utilise the Bitcoin network, in lieu of using Fedwire or CHAPS or SWIFT, who are liquidity providers.  The banks never end up touching the cryptocurrency. This solves the challenges of correspondent banking for large global banks, who have to tie up a lot of capital in counterparty cover.  Equally, there are other parts of the world where banks do not want to leave a lot of money with their correspondent banks, due to the counterparty risk.  If they can leverage something like the Bitcoin blockchain then this will have significant impact on the future of correspondent banking worldwide.

That’s one of the reasons I believe bitcoin as a cryptocurrency has more relevancy at the wholesale level, replacing both Hawala and correspondent banking structures at the same time.

So if I summarise what we have covered so far, you believe we will have a jurisdiction-based system that regulates usage at a national level but, because it’s incorporated by banks into wholesale bank structures, it massively reduces costs. Is that how this plays out?

Yes.   It’s important to look at jurisdictions, as jurisdictions do have the ability to regulate the in-and-out functionality of their own currencies into cryptocurrencies.  When you talk about a country having Bitcoin regulation, what they are really regulating is their own currencies exchanged into and out of another cryptocurrency. That’s what you’re seeing at bitcoin exchanges and banks, and will be one primary level of regulation.

Beyond that, you will have a whole parallel world which will exist person-to-person.  In some ways that world is more interesting than person-to-business use of cryptocurrencies as in a person-to-person environment, similar to using Skype or using encrypted email, you find new ways of doing things.  In this case, you have an independent financial messaging system which has allowed us to create a large global value exchange network. That secondary level of exchanges, person-to-person or otherwise, with a cryptocurrency like bitcoin is outside the control of regulators. That’s not even an area where the regulators have a remit, and is why they will have to focus upon when cryptocurrencies are converted into and out of their own national currency.

So that person-to-person exchange, what will be the protection mechanism that will take place in that the system? Will free agents manage the system?

Well ultimately this will rely on the Bitcoin blockchain, which is secured by the power of the overall mining participants. This represents the largest distributed and secure computing project in the world. In aggregate it exceeds the top 500 or 600 super computers combined. 

And here, I want to make a point about the price of bitcoin, as this comes up a lot. I don’t think watching the price is that important. It’s more important to look at the number of projects and developers working on building user friendly solutions. It is more important to focus upon the installed base of bitcoin wallets.

At the end of the day, the bitcoin price should reflect a price level that is sufficient to protect the aggregate value of transactions that are arriving over the blockchain. If you extrapolate that forward and say that a lot more economic activity is occurring on Bitcoin blockchain, then the security reaches a level that is consummate with the value riding across that decentralized value transfer network. As a result of this, that will tend to slowly increase the natural price of Bitcoin. That’s the only way to guarantee that the transactions riding across the network will be secure.  Then people will be willing to pay for that additional security in increased transaction fees.

It’s a feedback loop, as you won’t have those transactions occurring if the miners aren’t rewarded through a higher price of bitcoin. You won’t have the higher price of bitcoin if the transactions aren’t occurring in the first place. So it’s very much a feedback loop in a two-way structure.  That’s why I don’t put a lot of effort or thinking into the alternative cryptocurrencies, as they tend to be distraction for building the strongest leading network that we need for migrating economic activity and commerce.

Final question Jon.  If you were a betting man and you were betting on what will happen in the future, where would you put your money… or don’t you use money anymore?

I do have to still use money in some cases and also credit cards but, if I look at it from a Bitcoin investment point of view, I would bet on investing in the actually currency and using that as a proxy for the sector, rather than choosing individual companies. I think it’s unique and rare that we have an opportunity in the investment world to choose a currency as a way to invest into an entire sector. It is a proxy for the sector.  If there was a way to invest into healthcare through a healthcare currency, you have that now for investing in bitcoin as a cryptocurrency for the digital value exchange sector.

In terms of your portfolio, I look at this in the same way as gold.  If people are comfortable in having 10-15% of their overall net worth in something like gold and precious metals, then equally they should be comfortable in having 10-15% in bitcoin. It’s investing in assets and commodities on a portfolio percentage basis.  I think this whole transition that you describe as the ValueWeb  will be complete when we start calling gold an analogue version of bitcoin.


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Crime-as-a-Service: pay-as-you-blow with #bitcoin

So I’ve talked about Banking-as-a-Service for some time, but what about Crime-as-a-Service?  It does exist on a pay-as-you-blow basis.

Europol were one of the first to note this trend, in a report published late last year (from ITPro):

According to the organisation’s 2014 Internet Organised Crime Threat Assessment (iOCTA), the model allows cybercriminals to develop sophisticated malicious products and services before selling them on to the less experienced to use via the “digital underground” world.

As a result, it’s getting easier for less technically-minded criminals to engage with cybercrime, putting companies at even bigger risk.

“In a simplified business model, a cybercriminal’s toolkit may include malicious software, supporting infrastructure, stolen personal and financial data and the means to monetise their criminal gains,” the report states.

“With every aspect of this toolkit available to purchase or hire as a service, it is relatively easy for cybercrime initiates – lacking experience and technical skills – to launch cyber attacks not only of a scale highly disproportionate to their ability but for a price similarly disproportionate to the potential damage.”

Many of these transactions take place on the “Dark Net”, which the report states has fuelled evolution of cybercrime in recent years.

They followed this up on Tuesday with an assessment that cryptocurrencies are becoming the value exchange of choice for Crime-as-a-Service (from Coindesk):

Digital currencies are increasingly serving as a money laundering platform for “freelance criminal entrepreneurs operating on a crime-as-a-service business model”, according to a new Europol report.

The EU’s law enforcement agency said that the decline of traditional hierarchical criminal networks will be accompanied by the emergence of individual criminal entrepreneurs, who come together on a project basis.

The report, which identified the key driving factors affecting the EU’s criminal landscape, predicted that the role of freelance crime organisers is expected to “become more prominent”.

It added that individuals with computer expertise are very valuable to criminal organisations and that people with such skills are expected to advertise their services in exchange for payment in cryptocurrencies.

The report continued:

“Virtual currencies are an ideal instrument for money laundering. In addition to traditional layering methods, cryptocurrencies use specialised laundering services to obfuscate transactions to the point where it is very resource-intensive to trace them.”

This gets interesting as I attended a policy forum last week where the UK’s National Crime Unit were saying that they’ve spent “an inordinate amount of time investigating cryptocurrencies”.  I asked what they meant by that, and they clarified that it was time spent understanding them.  When I then asked if they saw much criminal activity in cryptocurrencies, they said not yet.  The National Crime Unit see most money laundering crime in cash (€500 notes being the launderers note of choice).  They only use cryptocurrencies if the payee demands payment that way.

However, this is because cryptocurrencies are still minor league compared to cash markets, and they are being studied as some of the action in cryptocurrency exchange is for illicit activities on the dark net.  Note cryptocurrency guys that I say some, not all.

For example, in a further Europol study produced in February, they find that bitcoin is the preferred currency of paedophiles (from Coindesk):

Bitcoin is increasingly being used to pay for livestreams of child sex broadcasted over illicit Internet sites, according to a new Europol report.

Produced by Europol’s EC3 cybercrime centre, the report sheds new light on the commercial sexual exploitation of children online, while providing evidence that individuals with a sexual interest in children are becoming more entrepreneurial.

“Live streaming of abuse for payment is no longer an emerging trend but an established reality”, the report said.

It continued:

“There is a clear shift from traditional credit card payments to the ones providing the most anonymity, namely alternatively payment options, including virtual currency.”

In line with the International Centre for Missing and Exploited Children’s (ICMEC) findings, the report said that “there is apparent migration of commercial child sexual exploitation, along with other criminal enterprises, from the traditional payments system to a new, largely regulated digital economy made up of hosting services, anonymising Internet tools and pseudonymous payment systems”.

Add to the above the use of bitcoins for terrorism.  According to Bitcoin News, the United States Central Commands have been studying the alternative payment methods terrorist organisations raise and transfer money around the globe to support their activities. Digital currencies proved to be of the most efficient mechanisms for the transfer of funds due to their decentralized nature that facilitates anonymous donations as opposed to traditional banking transactions with the use fiat currency. Recently, an Israeli analyst has come up with concrete evidence that the ISIS is raising funds in Bitcoins, most likely in the United States, to fund their operations.

This is not even to mention the use of cryptocurrencies for drug dealers.

What is intriguing in all of this is that the cryptocurrency community believe they are unassailable in all of this.  Money is decentralised by bitcoin and they believe (or hope) it is therefore immune to governmental and regulatory control.  Anyone who disagrees is a statist.

Conversely, for the reasons given above – terrorism, drug running, extortion and sex trafficking – this idea of a decentralised market that governments are excluded from controlling may be wrong.  To be clear however, bitcoin and cryptocurrencies are not the problem here.  You have massive use of cash for terrorism, money laundering, drug running and paedophilia.  It is the reason why the US dollar has more physical stores outside the USA than inside, and is the reason why it’s the currency of choice for people like Saddam Hussein.  Equally, it should be born in mind that cryptocurrencies are not anonymous, are traceable and are available in a form that can be identified, so governments do have ways to deal with them.

The most likely start will be on the cash-in and cash-out moments of cryptocurrency usage.  You may be able to use cryptocurrencies in a revolving credit and debit scheme bilaterally but, as soon as you try to cash out or put cash into the scheme, the national jurisdictions will make the transaction subject to national laws.

Over time they will then get other regulatory structures put in place.  A whole raft of papers have already been issued on these themes, with the latest iteration of the New York Department of Financial Services (NYDFS) cryptocurrency regulation – or the BitLicence if you prefer – providing clear requirements for cryptocurrency usage.  Issued last month, the NYDFS BitLicence requires any trading firm to adhere to a collection of rigid rules.  There’s a raft of requirements for capital provision, record-keeping, and even oversight of new or planned features, such as:

  • The BitLicence application itself costs $5,000
  • Firms must keep detailed records of customer names, addresses, dates, and transaction amounts for at least seven years
  • Audits will be made every two years by the NYDFS
  • Firms must get written approval before changing products or services, or creating new ones
  • Mandatory internal anti-money laundering programs must be implemented, including enhanced oversight of foreign customers and those who transact in amounts greater than $10,000
  • Firms must have an internal cybersecurity program to protect personal and financial information from hackers
  • Firms must show a clear disaster recovery plan in the event of attempted or successful theft

These BitLicence rules make cryptocurrency trading firms, for all intensive purposes, banks.

Equally, it means that for every step the cryptocurrency markets innovate ahead of the curve, the lawmakers review, analyse and try to keep up.  Whether they can keep up or not is a different question.


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