Let's Talk Bitcoin Episode 66 Transcription

Let’s Talk Bitcoin Episode 66 – “The Eye of the Beholder”

Participants:
Adam B. Levine (AL) - Host
Andreas M. Antonopoulos (AA) – Co-host
Stephanie Murphy (SM) – Co-host

A Look Into Bitcoin Panel participants:
David Chen (DC) – Lightspeed Venture Partners (http://lsvp.com)
Chris Larsen (CL) – Ripple Labs (http://ripple.com)
J Cabou (JC) – Perkins Coie (http://www.perkinscoie.com)
Vinny Lingham (VL) – Gyft CEO (http://www.gyft.com)
David Johnston (DJ) – BitAngels (http://www.bitangels.co)
Music was provided by Jared Rubens


[Music playing] (0:25)

AL: Hi and welcome to episode 66 of Let’s Talk Bitcoin, a twice-weekly show about the ideas, people and projects building the new digital economy and the future of money. Visit us at http://letstalkbitcoin.com for our daily guest blog, all our past episodes and of course, tipping addresses.

My name is Adam B. Levine. Have you ever lost something carelessly only to discover later it was wildly valuable? As the price of Bitcoin goes up that initial carelessness is now fueling a hunt for treasure and perhaps a darker side too. Andreas, Stephanie and I talk lost, locked, or misplaced Bitcoins as buried treasure. Then on Thursday the 5th of December I found myself at the Plug and Play tech center moderating a panel discussion about Bitcoin. In contrast to our normal deep dive interviews this one plays out like five mini interviews with Lightspeed Ventures’ David Chen, Ripple Labs’ Chris Larsen, Perkins Coie partner J Cabou, Gyft CEO Vinny Lingham, BitAngels.co’s David Johnston.

Finally, where does value come from? Is it the money we use or the system that controls it? Ed Rex submits and performs his piece, “Satoshi and the New Gold” to end today’s episode. Enjoy the show. (1:41)

[Music playing]

AA – With the recent increase in Bitcoin prices or the exchange rate, something very interesting has happened. Old hard drives containing long forgotten wallets are suddenly becoming buried treasure. I’ve seen this phenomenon play out several times with people gleefully reporting that they have found an old wallet while searching one of their old computers. I was reading an article on Reddit where students had discovered and old wallet from 2010 and said I have lots of student loans but it seems I have 917 bitcoin in this wallet. I’m looking at the price and I’m not sure what to think. Can someone confirm? Am I really rich?  (2:32)

[Laughter]

SM – Woohoo! (2:33)

AA – Such a great story… (2:36)

SM – Beer! (2:37)

AA – Yeah, exactly… oh, too much beer… (2:40)

[Laughter]

AA  – Suddenly you have these completely opposite stories and one of the most interesting ones was a person who had discarded a hard drive then realizing that on that hard drive were seven and a half thousand Bitcoins or about $7.5 million or about £5,000,000 (this was in England). They know which dump or which landfill the hard drive went to and now there’s people with metal detectors digging through the landfill. Here we go—[a] new industry: treasure hunters looking for digitally encoded Bitcoin wallets that have appreciated in value. Imagine a hundred years from now a Bitcoin is $10,000,000 in equivalent to today’s money and someone’s looking for a great haul from a rusty hard drive or USB sticks that were lost in the bottom of the Atlantic and they’re sending submersibles like looking for the Titanic. (3:39)

SM – I think there are also people who are starting businesses basically to not only help people recover  their wallets but also to make a profit in the process. They’re seeing a need that’s unfulfilled in the market which is recovery of old Bitcoins that are suddenly valuable. These things are starting up whether it’s people going out with metal detectors to this landfill in the UK wherever it is or people who are disk diving and scouring old hard drives that have been written over in some sectors to see if they can find that wallet.dat file and recover it somehow. I’ve heard a lot of stories about this in my personal life. Somebody who I know once very early on sent 65 Bitcoins to an old Electrum wallet that they had since deleted and they were trying to recover the old Electrum with no luck. They contracted it out to another person who was more computer savvy and said that he could have half if he was able to recover it. (4:37)

SM - Then, I actually have a story that kind of relates to this. I’ve actually talked about this on the show before so this is going to be a nice follow up. I want to say it was within our first ten or twenty shows that I revealed that I had an old laptop where I had gotten some Bitcoins back in 2011 or early 2012. At the time they were like five bucks or less. I had about twelve Bitcoins in there. I had encrypted the wallet because at the time everyone was saying you got to encrypt your wallet, choose a strong passphrase—so I did. I didn’t write it down and I kind of forgot it. [Laughter].  I had a vague idea of what it was but not really enough to piece it back together. There were a couple of times once I realized I wasn’t able to unlock the wallet that I tried to break into it. Every time the Bitcoin price went up. When it hit $100 I tried. When it hit $260 I spent a whole day trying to crack into it trying different typos and combinations of what I thought the passphrase was. Didn’t work. Then suddenly Bitcoin went up to about $400 and I was like I got to get this wallet cracked. Then at the same time I actually heard about somebody, one of these entrepreneurs who’s starting a wallet recovery business. It was walletrecoveryservices.com. It’s Dave Bitcoin—not his real name I’m sure. He wrote a brute force program. If you have some idea, like a vague idea of what you think the passphrase is, it can try different variations on that until hopefully the wallet is decrypted. So I thought, alright, `well, these twelve coins are gone to me. I’ve written them off as gone so I might as well try it and send it to him. I sent him my wallet.dat file although you don't have to. He has a way that you can send partial information from the wallet without sending the whole wallet so he couldn’t take the Bitcoins and run, supposedly, but I didn’t do that. I just sent him the wallet.dat file. What the Hell. I have a big microphone if he screwed me over, right, so I sent him the wallet.dat file and I sent him what I thought the passphrase was. Literally within a few hours he was able to decrypt it and he sent me back 85% of the balance which is what we discussed before. Needless to say, I was really happy that. Basically what happened was the passphrase was a sentence and I had the word “and” in there and I wasn’t sure if it was “and” or an ampersand and there were some capital letters that I had gotten wrong. I was really close, but when you’re typing in a password close doesn’t count as we all know. [Laughter]. Yeah, I had a happy ending to my story and maybe that can help some other people, ‘cause I’m sure there are people who are listening to our show who have the same issue. They made a wallet and they encrypted it and now they can’t remember the password. If you have that situation check out walletrecoveryservices.com. Maybe Dave can help you. I really hope people can recover their coins. Whether it’s a hard drive failure or in the trash or sending it to some weird address that maybe the private key got archived or something like that. I really hope that people can get them back and maybe now there’s an incentive to do so. (7:40)

AL – Well, yeah, Stephanie the incentive is that they’re worth so much now. Suddenly, whereas a couple of months ago that twelve Bitcoins might not have been worth his time, now even 15% of that twelve Bitcoins is worth his time. Again, it’s all just so relative. (7:52)

AA – That’s the big lesson here. The first lesson is these businesses have an expanding market as the price goes up. The things that are marginally recoverable become recoverable and then wildly profitable. That expands the market all the time from wallets potentially it will be worth doing for a wallet that only contains a few hundred millibits, because that price will be worth doing and spending the computer power to do. The other thing to of course take from this is don’t delete anything—ever, because you never know how much value it might have in the future. You never know how recoverable it might be in the future and if you think all hope is lost today, well, back that hope up and wait for the price to rise. (8:34)

AL – I actually have a story that’s kind of taking the other end of this passwords thing. During the price spike up above $1,000 when we were near $1,150 or so, I actually received a couple of emails because a couple of my different accounts had been compromised. I set up a localbitcoins account, maybe, I don’t know, it would have been seven or eight months ago, and there hasn’t really been much of a local scene in that so I didn’t really pay that much attention to it. I almost did a deal so I had maybe a Bitcoin and a half sitting in a wallet there from a time obviously when they were much less expensive and I didn’t have two factor on. Even though I had a really long password on this particular account, not having two factor led to my account being compromised. They actually tried to scam somebody else by telling them that they had dropped money into a night deposit and that they’d get conformation for it in the morning and so to send bitcoins to it now trying to use my identity and it wasn’t under my Adam B. Levine name, but it was crazy. It was crazy. I only found out about it because my email address was getting cc’d on these emails from the buyer saying, “I’m not sure if this is right. This seems a little odd.” I was like, “Don’t do it! Don’t do it!” (9:41)

SM – Wow. (9:42)

AL - We got it fixed, but yeah, that was crazy. (9:44)

SM – So you didn’t lose the Bitcoin that was in there? (9:48)

AL – No, no, I did. I did. That account is gone. I had them shut it off. The one and a half bitcoin I had in there was gone. That’s OK. You know, when they’re not worth so much you find yourself with some little ones lying around in various places that you sometimes forget about because they were worth a lot less at the time. (10:02)

SM – Right. (10:03)

AL -  I chalk this one up to that. Also my BTC-E account was almost compromised. It looked like the password had been because there was someone logging in from somewhere else. Again, I didn’t have two factor on but I had a different twelve character password on. Those long passwords really aren’t doing it for me anymore. Maybe we’re high profile enough that I’m being targeted, but more likely I think it’s just Bitcoin is valuable and it’s worth it now to go through and do this stuff. (10:27)

SM – Oh my gosh, yeah, you can get paranoid, but I think you’re right. It’s just the incentive for theft increases as well as the incentive for recovering old wallets. Bitcoins become buried treasure and looters and thieves love buried treasure just as much as everybody else does, right? (10:44)

AA – Speaking of which, I just got a message on Reddit from the bitcointip bot warning me that I had an excessive amount of bitcoin in my tipping account. It wasn’t excessive in the past, but now suddenly I had more than $500 equivalent (about half a bitcoin) in my tipping account. A significant amount to be sticking around tipping. Kudos to the bitcointip bot developer who came up with the idea of notifying the owners that they have excessive amounts that they can start draining those out because it doesn’t have the security as he admitted to handle those kinds of amounts. There’s no two factor. It’s just for tipping, right? You only need a few dollars in there.  This is exactly what is going to be happening. I found that I had some left over in localbitcoins.com sitting around [in] my wallets. Turns out it was several thousand dollars. I had some left over money in bitcoinstarter.com accounts that I had done again worth several thousand dollars now. Go trolling and see what you can dig up. There’s buried treasure out there. (11:52)

[Music transition] (11:59)

[Ad from gyft.com]
When you shop with Bitcoin on Gyft, you can get gift cards from over two hundred retailers. Think of the possibilities. Not only is your holiday shopping taken care of in a snap from your Android device or on the web, but now you have a way to purchase everyday items from stores like Target, CVS, Gap, and GameStop using your bitcoins. That’s not even the best part. When you shop with Bitcoin on Gyft you get 3% back. Ready to shop? Visit gyft.com today. (12:34)

[Music transition]

AL – Happy Holidays from Let’s Talk Bitcoin. If you like the work we’re doing we appreciate bitcoin tips of all sizes at letstalkbitcoin.com. Just as importantly, share the show with your peers and review the show on iTunes. Don’t be kind, be honest. LTB reaches nearly ten thousand listeners, but has less than fifty reviews anywhere I can find. I’d very much appreciate your help in remedying this situation. Thanks for listening. (13:02)

[Music transition]

A Look Into Bitcoin Panel Discussion
AL -  My name is Adam B. Levine. I do a twice-weekly show about the ideas, people, and projects building the new digital economy as I like to call it. The people up here really are some of those folks. David Johnston is with BitAngels.co and has been working on some of the most exciting projects out there in the Bitcoin space right now. I think that as far as VC [Venture Capital] is concerned you are working with some really small projects that have a lot of potential. I think it should be really interesting to hear what you have to say, so thank you for joining us today. (13:31)

DJ- Absolutely. Thank you. (13:32)

AL – Vinny Lingham is the CEO of Gyft [and] has recently become one of the Let’s Talk Bitcoin sponsors. This was scheduled before that happened, so nothing there. He’s been one of the earliest adopters of Bitcoin and I think that it’s been pretty successful for you guys, so thank you. (13:49)

AL – J Cabou is with Perkins Coie, probably doing the leading work as far as in the legal space in the Bitcoin space right now. Just about every new startup I hear about is being represented by you guys. Once again thank you very much for joining us. (14:02)

JC – Happy to be here. (14:03)

AL – Chris Larsen is the CEO of Ripple Labs. We’ve been on a couple of panels together and if Ripple is Bitcoin 2.0 then we’re going to hear about it today. David Chen, Lightspeed Ventures, right? I apologize so much.  Again the VCs that are working in the space right now and that have been in longer than six months really are hooked up with some of the most exciting projects that are out there. This should be a really interesting conversation and I’d like to thank you all one more time for joining us. (14:29)

VL – Thank you. (14:30)

AL – So the first question goes to you Vinny. Break down it for us as a merchant in this space, why is Bitcoin something that’s attractive to you? (14:40)

VL – We’re in the gift card space and one of the biggest problems with gift cards online and online digital mobile gift cards is card not present.  You have people using credit cards and they purchase gift cards and as a merchant you release the code straight away because the bank says cool it’s approved. The card is good and then three months later you get a chargeback. Sorry that card wasn’t good. We’ve lost up to $2,000 on a single customer where they used a fraudulent credit card multiple times. The bank kept approving it. When the message came back they said, “We were notified before the transactions that it was fraudulent.” So why didn’t you block it? They couldn’t care… The banking system is quite prejudicial toward retailers. Think about it. As a retailer when you ship anything whether it’s a gift card or physical goods to somebody, you’re at risk. With Bitcoin it is obvious, we get the money. It’s digital cash. We know that when we’re giving out the gift card that it’s paid for and irreversible. That was the biggest saving for us, going and taking this 3% margin (actually it’s more—about 4% worth of costs) out of the business. Now it make it a lot more scalable and profitable to run an online gift card business and then we’ve built a loyalty program around that by giving back 3% to our customers in points to encourage more purchasing. (15:59)

AL – Based on your experience so far in this space, if you had the opportunity of doing all of your business in Bitcoin would you? (16:05)

VL – That’s a good question. The market we serve is obviously the whole U.S. and the idea of Gyft is that you can get from the East Coast to the West Coast. If we can get mainstream adoption of Bitcoin and credit card adoption going to zero, then yes, but while there are payment options out there that are profitable for us, even marginally, it’s worth adding them for the convenience of our customers. We accept VISA, MasterCard, AMEX, Discover, PayPal, [and] Bitcoin. The more payment options we offer the better for us as a company although we reward our customers with 3% back on Bitcoin purchases and 1% back on credit card purchases. We try to encourage more Bitcoin usage. (16:45)

AL – Do you see that being a trend that continues in the future for you? (16:48)

VL – I think for Bitcoin to be successful you have to give people reason to use Bitcoin. When people ask me why I should use Bitcoin over credit card, the simple answer is because I’m going to give you 3% back versus 1 as part of our rewards program. The penny drops and they [say], “Wow, that’s pretty impressive, so you can put all your expenditure through.” Think about it. When you walk into a retail store and you’re buying clothing or whatever it is, all the prices in that store is[are] marked up 3% because you’re getting points back on your credit card, right? If you’re paying cash, you’re losing that 1% back. Whatever it is. Cash customers are at a disadvantage to credit card customers. That’s the financial system we’ve built. Bitcoin being digital cash, the way we look at it is let’s incentivize people to give us a low risk method of payment and eliminate the friction and cost with credit cards and the rest for the retailers. That’s how we’ve built our business. (17:39)

AL – Thanks very much. David Chen, I’d like to ask you, when you’re looking at new projects in the Bitcoin space are there particular industries that you’re looking at? It seemed like last year it was all about exchanges and it’s a little bit less so this year. What are the trends you’re seeing? (17:52)

DC – To be clear, we’re still in the infrastructure building stage, still. You might have noticed we were earlier investors in BTC China, the major exchange in China. We’re still pretty excited about the exchange space. In terms of applications that we’ve built on top of Bitcoin, an obvious one is Remittance. We’ve seen a lot of purchase around there. The challenge with Remittance in particular is that the local demand in the large urban corridors, Mexico, India, the local demand for Bitcoin isn’t quite there yet so you’ll have trouble with liquidity. We see a lot of promise with Remittance. There are a lot of e-commerce transactions so anyone that is enabling payments that will be interesting. We’re also looking at the applications that are built on top of the core Bitcoin protocol. Things like Ripple, Mastercoin, Colored Coins, Smart Properties, [and] Smart Contracts. These are emerging areas, but once the core infrastructure is built out a lot of these new financial instruments could be built on top of Bitcoin itself. Those are all very exciting. (18:58)

AL – Thank you, David. Chris can you talk to us about Ripple for a second and the ways in which it addresses problems. (19:06)

CL – Sure. The Ripple protocol is really three things. First and foremost, we designed it to be a distributed payments platform. Second, it does have a math-based currency analogous to Bitcoin. Currency without a counterparty. That’s really what Bitcoin, that’s what Ripple are. We look at that really as the enabler of distributed payments platform. Then, third, because Ripple is actually currency agnostic, Ripple is also a distributed currency exchange. Our view on this is that virtual currency is really just the tip of the iceberg of what’s going on here. The big innovation that’s happened in the world is that the world has figured out how to confirm financial transactions without a central clearing house. It’s actually the same exact thing as building a currency without a central bank. So we’ve figured that out. We’ve solved the double-spend problem. That was the thing that was preventing value from being exchanged like information already does on the Internet. We’ve had an information Internet for twenty years. We have not had an Internet for value. We believe that’s the big thing that’s happening. What we’ve done with Ripple is say that’s what we should be building. An Internet for value, not a virtual currency. Now Bitcoin can also be an Internet for value. Now it’s a currency with a payment system for value put in Bitcoin only. At Ripple, turn it around. It’s a currency agnostic value Internet. Put anything you define as value (Dollars, Euro, Yuan, Bitcoin, Ripple, airline miles, merchant loyalty points, Gold) should be able to be an Internet of value. Then you don’t ever have to adopt a virtual currency. We think the world is not going to adopt a single virtual currency. It can’t. There’s too many different needs for different types of currency. Some people will want inflationary currency. Some people want deflationary ones. The analogy would be if we forced everybody to adopt a new language to use the Internet, we wouldn’t have the world we have today. Everyone is not going to speak Esperanto. It’s the same thing with value. Put anything of value you want in it. That’s what we see as the real benefit. Ripple does that. We also tried to clear transactions quicker. We use a different confirmation method than Bitcoin. Bitcoin uses mining. Mining is brilliant but it has some flaws as a payment system. It’s slow (8 minute confirmations). Obviously off blockchain is an option, but then you’re in a central authority again. Ripple is about 5 to 10 seconds. Those are really the two things we’ve tried to solve and we use our virtual currency as the universal joint for the most efficient path to go from one thing of value (say the dollar to put on a gift card for example) to something else of value (YEN, Yuan, or airline miles). That’s how we see the world. (22:02)

AL – Thank you, Chris. J, the challenges surrounding virtual currencies at this point really seem like they’re more legal and regulatory then they are technical. The technical problems all have solutions but the regulatory side has a little bit more finesse involved with it. What are the problems that you’re running into? What are the problems you’re trying to help your customers/clients with? (22:24)

JC – Yeah, it’s always the lawyers that get in the way of good innovation, good technology. I was very heartened to see a lot of the pitches focused on what those companies are doing to ensure their investors and their customers that they are compliant with law. I think that especially in the early days of Bitcoin, because the Bitcoin community grew up largely among anarchists or libertarians, there was certainly that bent to it. Now that it’s becoming more mainstream, the fact of the matter is this is a world of laws and governments and we have to find a way to have this very innovative technology and very innovative system integrate with the established not that innovative, kind of annoying systems for financial compliance. As the more successful companies in Bitcoin are realizing now, these are not insurmountable problems. They are problems that demand a little bit of innovation and a little bit of work. We saw a couple of different models that companies talked about today. One is seeking the licenses that you need individually, partnering with companies that may have those licenses and getting into some kind of contractual relationship with them. There is a lot of action right now in innovating the compliance side of this. I think that’s been pretty interesting to watch. (23:40)

AL – On the Bitcoin side of the business that you do, do you think that in five years you’ll be doing more business or less business? Will this normalize is the question. (23:48)

JC – Yeah. I think that my contribution which is very mundane compared to the things people are doing in this room in terms of helping people navigate the regulatory, compliance and law enforcement landscapes that will decrease in five years. I think that we’re having a lot of action in my space now simply because this isn’t just a technology that interacts with people or with products. Finance is a very highly regulated industry and the speed with which Bitcoin can be transferred, the irreversibility of Bitcoin transactions, and the massive growth in adoption has caused a lot of folks in regulation and in law enforcement and in law-making especially very recently to take notice and to say, “Hey, wait a second, we’ve got to figure this out.” To answer your question simply, five years from now, I doubt that anyone in Bitcoin is going to be inviting me to speak at a Bitcoin conference which will be too bad for me, but for now there’s a lot of action in the regulatory space. My personal belief and one I’ve shared with some people in the room and at other events I’ve spoken at is that the companies that are poised to succeed, not just in Bitcoin, but in other de-centralized virtual currencies and in payments generally in the long-run, are companies who have taken on the compliance challenge head-on and found a way to solve it in a way that is above board and is comfortable even to stodgy old institutions like State banking regulators and banks. We saw a couple people talk about how difficult it is to get banked as a Bitcoin company. Bitcoin companies with solid compliance programs can get banked. It’s not as easy as running a grocery store, but it is certainly out there and doable. Companies that have invested in the compliance side are pretty far ahead. (25:35)

AL – I want to follow up with you one more time. I agree with you. I think that it is possible, but there are other examples out there of companies that really are compliant or well-funded, BitInstant being the most prominent of them, that have apparently been shut down with no recourse for more than four months and the only thing holding them up is that they can’t get a bank account. (25:51)

JC – I’m not in a great position to talk about any one particular company, but I’ll say that getting the meetings and making the contacts with people at the financial institutions to really get banked is challenging. It was just a couple of days ago that we saw B of A [Bank of America] come out with some policy on Bitcoin businesses. We’re going to see more of that. My guess would be that if Plug and Play does an event on Bitcoin a year from now, there will be a number of prominent banks that have established Bitcoin banking programs. If I were a man of unlimited means, I would buy a bank and bank Bitcoin companies. I think there’s a tremendous amount of growth in that area. There are a lot of very smart, very law-abiding, very innovative people who are working in virtual currency and cannot get a banking relationship and that is a huge problem. There are also a lot of those people who have developed really good compliance programs and I’m sure there are people in this room working on technology tools that will allow those compliance programs to far exceed the capacity of compliance programs at more traditional money transmitters. There’s just so much information out there between the ability to harvest information from users [and] between information in the blockchain. People are going to develop those tools and continue to develop compliance programs and analytic tools that will allow banks and others to get very comfortable with the fact that Bitcoin businesses don’t pose a greater risk for money laundering or terrorist finance. (27:21)

AL – It’s just a new thing? (27:22)

JC – It’s new. They’re still building those kinds of things and as someone said earlier today, banking is not known for great innovation. This is just an example of technologists coming together to create an extremely innovative product that is moving very quickly and banks just being slow to keep up. (27:40)

AL – Thank you, J. David, every Bitcoin conference that I go to, I see you there. I see you always sneaking off into the corner with the interesting projects that have absolutely no funding whatsoever and talking to them about creating alt coins. Can you tell me what strategies you’re using when you’re investing into the space? Are there particular characteristics or types of projects that you’re attracted to at this point? (28:04)

DJ – What I’m primarily interested in is people that are doing something more than Airbnb for Bitcoin or eBay for Bitcoin. I’ve been approached by a high number of those companies which is great early on. You can do those things now with Bitcoin, but I would just echo what David said about building infrastructure is really my interest at this point. You need to be building a company that is at a competitive advantage beyond a year from now when Airbnb themselves starts accepting Bitcoin and then your competitive advantage disappears. Most of the interest from the Bit Angels so far has been in these infrastructure level investments. David brought up Mastercoin. I led the due diligence for that particular investment. This is a protocol built on top of Bitcoin that does distributed exchange, distributed commerce. That is the single biggest investment that the group has made—about five million dollars in that particular project. I really believe it because it was a very fundamental thing that everyone wanted: a de-centralized no counterparty risk way to do commerce, way to do exchange [and] way to do financial transactions. People that are building in that infrastructure, those are the deals I want to look at. People building those fundamental protocols. That’s what really gets me excited. In fact, as you know, I recently published an entire white paper on the subject of de-centralized applications and how we can use this new model to build these new types of companies that aren’t traditional but instead are built on open source. They have their own token and they have their own protocol. I think that can be one of the single most disruptive things that comes out of Bitcoin is this entirely new monetization and financial model. (29:53)

AL – So the Bitcoin as we know it now is not the Bitcoin that we’ll know in two years from now? (29:59)

DJ – Exactly. We’ve seen some really, really important developments come out from the core Bitcoin developers recently. Gavin, the chief scientist for the Bitcoin foundation, posted a great update about this debate in the Bitcoin community which has been going on for years about should Bitcoin just be about Bitcoin transactions or should we be able to attach additional metadata information into the blockchain to store other kinds of information and to do all these different types of features? What he said was the core developers have now given a clear way that people can add metadata to the blockchain records. That opens up a huge number of applications. I expect that I’ll spend most of 2014 exploring how to invest in the companies that are building out those core applications. (30:50)

AL – What do you think of the fact that Bitcoin as a protocol continues to expand over time and that it’s not really a static thing? When I ask you that question I was actually talking about Bitcoin will have things like Mastercoin built on top of it but also Bitcoin itself is in flux. How is it to work with something like that? (31:06)

DJ – Well, it’s definitely still evolving. You’ve got very smart developers that are working to build the core infrastructure and it seems that so far they’ve really focused on the core features. Bitcoin for those that don’t know can theoretically enable a huge number of different types of features, but most of those have been turned off, because they’re more difficult and they’re more complex. Scrypts is the usual example. You can do Scrypts in Bitcoin, but that’s a feature that’s been turned off in the reference client, because it brings a lot of complexity, there’s a lot of edge cases we don’t really know what the risks would be. What I’ve seen more and more is they’re focusing more and more on the scalability of the main transactions. There are big questions still left about the block size, about other technical issues and as this becomes a $10,000,000,000 or $100,000,000,000 eco system the core team seems to be really focusing on making sure they nail scaling the existing system. That’s really where I realized there’s a need for these additional protocols on top because you need a different token that is monetizing different features. You can have a different core group of people focusing on that particular feature set without risking the underlying infrastructure. That’s been a big realization for me the last six to twelve months and that’s why I’ve spent so much time on it. (32:28)

AL – Thank you, David. Vinny, I almost skipped you. I have a question for you, hang on a sec… One of the interesting parts about Bitcoin and these blockchain technologies is that you actually have a lot of information about how these transactions process. You are dealing with a lot of Bitcoin transactions and I know we’ve talked about how you don’t share those publically, but I’m wondering internally is that an advantage of doing Bitcoin? Do you gain from that? (32:57)

VL – Yeah. We’re very smart about how we do things and we try to be respectful of people’s privacy. We don’t dig in too deep to that information. We also use Bitpay which operates as a proxy service. We don’t actually know the wallets of the consumer or where the coins are coming from because they pay Bitpay. Bitpay does the exchanging and then pays us in fiat or some bitcoins. We already have too much visibility into that. If that was what you were asking. (33:29)

AL – That was what I was asking. Do you intend to use Bitpay as your payment processor forever or does it make sense at some point to just integrate natively into the app? (33:39)

VL – I think for many use cases out there it probably doesn’t make sense to not use a payment processor. There’s a lot of work that goes behind accepting payments and checking for a lot of things (double-spending, etc…) especially as transactions get bigger. It’s also just easier for us to focus on our core business. We don’t want to setup nodes. We don’t want to do any of that stuff either. If your core business is not actually being in the infrastructure space, use the infrastructure provided. That’s what they’re there for. Bitpay power is 15,000 merchants out there. At no level of scale does it make sense for us financially to go and invest in that. The fees they charge us are so miniscule. It doesn’t make sense as a business to do that. (34:26)

AL – Thank you Vinny. David, you have an investment with Lightspeed into BTC China. It seems like a lot of the action that’s been happening in the Bitcoin market has been driven by extreme demand in China. Do you have any insight into that market? (34:40)

DC – Sure. We recently invested along with Lightspeed China partners in BTC China. This investment happened a bit prior to the recent run up. A bit of luck there. Our interest in Bitcoin is a global phenomenon, right? There are a lot of nations like Argentina, Cyprus, and areas of Europe where there is really high inflation, capital controls where it makes more sense to do transactions in Bitcoin then your local currency. You see this local demand happening in a lot of places. If you just look at a country like China there is a massive number of people in China. We saw that as a very interesting opportunity for something like Bitcoin. Pair that with an outstanding entrepreneur, Bobby Lee, who is a seasoned technology leader. He led technology at Wal-Mart. [He has] Stanford degrees. [He was an] engineering manager at Yahoo. [He] has a technology track record of leading technology teams. Pair that team together with a large market opportunity it seemed like a good bet. Overall the statement is about the global phenomenon that is Bitcoin. A lot of the innovation that’s happening is happening in the U.S. but also looking outside the borders here… If you look at just the exchange space, you got Mt. Gox in Japan. In Slovenia you’ve got Bitstamp.com, BTC-China leading in China. Those are the top three exchanges and none of them are based in the United States. A lot of that may be due to regulatory concerns. It’s hard for companies to get started with the fifty states and needing to comply with the regulatory bodies in all fifty states. Gathering your money transmitter licenses as an exchange is a very lengthy and extensive process. In the meantime we’re looking outside the U.S. Obviously we’re U.S. based investors so we’d love to invest in more companies here as well. (36:33)

AL – The U.S. is often identified as a hostile regulatory environment for things like virtual currencies because people didn’t really know how they were going to react, but I don’t get that same feeling about China and that’s kind of an interesting thing if you think about it because the Yuan has capital controls on it to make it very difficult to convert it into non-Yuan denominated currencies. Is that any sort of concern? Do you have any concern that the party might end in China? (36:59)

DC – I think it’s dangerous for us to speculate how the Chinese government wants to rule its country. There was an announcement actually made in the last 24 hours in China telling banks not to deal with Bitcoin. That statement’s out there. It’s unclear where China is going to go with its citizens, whether or not they’re going to outlaw Bitcoin outright. It seems that they haven’t done that yet. They’ve been signaling that that may not be the direction they’re going, but anything can change with China. (37:30)

AL – I would agree with that. The only reason why I’m pressing you on this is because there’s a parallel here. QQCoin which was a social media currency achieved a very high rate of penetration into China and after a certain amount of penetration, they did ban it. There might not be an answer here, I just figured I’d [ask]. (37:47)

DC – Yeah. Time will tell. Hard to speculate at this point. (37:49)

AL – Thank you. Chris, can you talk to us about why virtual currencies are something that are legitimately important? You are an entrepreneur who is building an entirely different virtual currency network that’s currency agnostic. What are the reasons why this was a problem you wanted to solve? (38:04)

CL – I think it’s just clear that financial services just have not changed in the last 20 years of the Internet. This whole revolution has just bypassed the banking industry [and] the finance industry. What Bitcoin ushered in in ’09 and is now just an unstoppable reality is that you can exchange value like you can information. That same point. That’s a huge game changer, because before this time all payment systems, all financial systems are country by country. They’re actually hugely limited in big parts of the world. China being an example where you have huge Internet penetration, but you have a cash society that doesn’t have a lot of payment options. That’s not lining up. You need to be able to have the citizens of the world be able to see the information, Airbnb or whatever it is, and execute on it through payments. The world is missing that. That’s why this is such a big deal. To date you’ve seen Fintech companies, in my last two companies (e-Loan, Prosper) they were U.S.-centric. You’re sort of trapped in the U.S. So much of Fintech is like that. I think that’s why venture capital has not been that interested in Fintech to date when you compare to other things. Now that’s all over. It is global. In fact, Bitcoin, Ripple, these things are [global]. [For] Ripple, China is our number one region. These things are actually more important in the developing world in places like China which are so wealthy now and huge e-commerce markets. That’s a big game changer. Startups now can go global in Fintech. You can start doing things with dramatically lower costs, dramatically higher numbers of customers that you can serve. These are great things for the world. Regulators, I think, are starting to see that. That’s why the Senate hearings were so positive a couple of weeks ago. They’re starting to see these not as some fringe thing, it’s not, but as a really monumental shift where now finance gets flattened just like information has been flattened. (40:06)

VL – As a retailer, we get people around the world trying to buy gift cards, for example online retailers, there’s a whole bunch that support delivery in 150 countries. When they put their credit card in (and I’m going to pick on an African country like South Africa or Nigeria or one of those—I’m from South Africa)… when you use a credit card in those markets (and it’s happened to me when I’m there), the merchant cancels the order. The email comes back, “Sorry, the order’s cancelled; we don’t trust the credit card,” or “the shipping risks…” whatever it is. You can’t blame them, right? You’re a retailer, you’re an online merchant how do you trust the credit card is good for a foreign bank issuing it and then you have to ship the goods overseas. It’s even worse than the U.S. When we use Bitcoin (we’re planning international expansion in 2014 and we’ve got dozens of online retailers that ship to hundreds of countries around the world) now they’re saying, “If you guys can take the payment and deal with that and issue a gift card and people use gift cards to pay online, it’s fine.” They’re currently doing that. We’re seeing a lot of international traffic. People are signing up on our website, buying gift cards, paying with Bitcoin and having goods shipped to them that previously they just didn’t have access to. For them to go and buy on an online retailer was just not possible because of the credit card system. To Chris’ point, Bitcoin is now opening up new avenues for e-commerce companies to start looking at audiences outside the U.S. without fraud risk. (41:36)

AL – Thank you, Vinny. Chris I have one last follow-up. One of the primary differences between Ripple and Bitcoin is that Ripple is an actual company and Bitcoin is sort of powered by a foundation, but mostly it’s just out there and there isn’t really anybody backing it. Do you think that’s a detriment or a benefit for you? (41:57)

CL – Just to be clear, there’s two things. Ripple the protocol, which is open source, basically a public good, anybody can use it without paying Ripple labs (which is the company I’m CEO of and there’s 35 of us now in San Francisco and we’re growing rapidly). In a sense we’re sort of like a RedHat to Linux in a way. Anybody can take the code that is the Ripple protocol, again they don’t pay us fees. Our business model is that we have created a math-based currency called XRP, or Ripple, and we’re distributing lots of that to incent people to get onto the Ripple protocol. Market makers, Wall Street companies for example, gateways throughout the world, because those are the way you bring other things of value that do have counterparties: Dollars, Euros, Yuan, [or] airline miles for example. We don’t have to charge fees through the protocol. We can just hold on to a portion of the XRP and if the protocol succeeds (it’s a deflationary currency, XRP, just like Bitcoin) you would expect that the currency would succeed therefore our business model would succeed. There is a separation of the two. What we like about this model is that we can hire a ton of great engineering talent to work on the core network and then let other companies build applications for consumers on top of that like you do on Bitcoin. A lot of our engineers are some of the original Bitcoin folks: Stephan Thomas, David Schwartz, [and] Jed McCaleb (who invented the consensus method). We think that’s constructive for the network itself. (43:30)

AL – Thank you. J, can you quickly, we’re almost out of time here, go over some best practices that you think [are] the top 3 most important things that all companies must do to operate legally in the space? (43:42)

JC – Wow.  If I could I would put myself out of a job. [Laughter] I’m hesitant to do that and I’m also hesitant to say what I’ve heard lots of lawyers say which is just call your lawyer—although I’m happy to take your calls. At a thematic level, especially with a very educated audience about some of these issues, there’s a lot of nuance in the regulatory environment. One thing I would say is, especially to people in rooms like this that are committed to operating above board businesses, your relationships in your currency business or whatever that business may be (is it an exchange, is it providing some sort of consumer facing interface, is it payment processing for merchants) you have to be transparent with all the relationships that you have. If you feel good about those relationships, as a rule of thumb, you’re doing pretty well. If you, for instance, are a Bitcoin business and your bank doesn’t know that you’re a Bitcoin business, I would say, “red flag.” Yes, you may not have broken the law. You may have. If you signed a form to open your bank account and it says that everything is true and correct under 18 USC 1001, and I promise I haven’t made any false statements and they asked you if you were an MSB and you checked, “No,” that’s possibly a crime. More broadly, if you go down to your corner bank and you open a small business checking account and you’re moving a huge volume of dollars into that that is going to set off some red flags. The same way with your customers, if you’re a Bitcoin business. Are you making the right disclosures? Are you really out there? You have your secret sauce that you’re going to keep in the back cupboard, but broadly speaking we kind of know what the issues are. Are you a money transmitter? Are you engaged in some other money service business? Those are issues that need to be acknowledged and solved rather than 6 or 8 months ago I saw a lot of people trying to go around the regulations. At this point I think it’s pretty clear that the companies that are going to succeed in crypto currency, in virtual currency, or in online payments (whatever that evolves to be), they’re not trying to go around the regulations. They’re acknowledging what they are and finding a way whether it’s through lobbying (which there are lots of people in the Bitcoin industry that are involved in very persuasive lobbying efforts to make sure that regulators don’t regulate the United States out of the Bitcoin market). The fact that the three largest Bitcoin exchanges are not in the United States says something about what the regulatory climate is. Maybe it’s not what it will always be, but I think it’s certainly an issue. As a general rule, companies, especially companies trying to raise outside capital, if you’re not being honest with yourself and your business partners about what your business is, what disclosures you’re making, you don’t feel good about someone doing diligence, you’ve got some issues. (46:31)

AL – Thank you, J. We’re going to end with you David. David, you released a whitepaper about distributed applications. We have 3 minutes and 13 seconds. Can you do it? Can you give us an overview of what is coming next in Bitcoin? Or in Crypto currency? (46:48)

DJ – Sure. I’m happy to talk on that. What I’m seeing as the future is just like with the Internet, we have different protocol layers, the same thing is going to evolve in Bitcoin. We have at the bottom of the Internet, TCP/IP, that’s the basic messaging mechanism. On top of that we have HTTP. On top of that people have built browsers. On top of browsers, people have built applications. There’s a lot of gain and benefit you get from the network effect and having a layer that already exists that’s massive in size like Bitcoin that provides a lot of security against a 51% or double-spend attack gives you a huge starting advantage if you build a protocol on top of that. What we see with Mastercoin is the first wave of these types of applications. There’s others out there that have been mentioned and this is really exciting because now with Mastercoin it gives me a layer that has different features that Bitcoin doesn’t have. One example is a distributed exchange that lets me trade any digital asset for any digital asset directly on the blockchain without having to have a counterparty. I’m actually making that offer to the blockchain, someone is seeing that offer and they’re matching that offer and the blockchain does that matching. There’s no counterparty. That’s interesting. The other main feature that really interests me is the user-based currencies. Forbes recently covered this in an article about Mastercoin. Basically, Mastercoin allows you to create your own digital tokens for, not necessarily even currency or even payment systems, but any application that you want to record the ownership in tokens you can now issue those through the Mastercoin protocol. It’s recorded in the blockchain transaction so you have a permanent record of that and now when you want to offer those tokens to customers or to developers or to people doing the funding, now you have a mechanism to do that. That’s a pretty incredible stack that’s developing with Bitcoin at the bottom, something like Mastercoin or these other protocols in the middle and then you have people building more user applications, customer-facing applications on this third level. That’s what I describe in my paper. What do we call these entities? This really hasn’t existed before. They’re not companies. They don’t have employees. They don’t have revenue. They don’t have profit. All the monetization is built into the mechanism of the token similar to what we have with Bitcoin. I’ve termed those de-centralized applications, distributed apps for short. You can check out distributedapps.co if you want to read the whitepapers, but I really do think that model of building a company is something we haven’t seen before and is incredibly disruptive, incredibly interesting, because it leverages all these different technologies. (49:38)

AL – David, Thank you very much. (49:40)

DJ – Sure. (49:41)

AL – That wraps up our panel. I’d like to thank all our panelists. David, Chris, J, Vinny, David. [Laughter]. Thank you very much for joining us, this was really enlightening.	 (49:49)

[Clapping] (49:52)

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[Music transition]

Satoshi and the New Gold, a children’s story about Bitcoin, written and read by Ed Rex.
There was once a village at the base of a large mountain. For years, the village elders had been in charge of handing out gold to the villagers. The villagers used this gold to trade food, clothes and everything else they needed.

One day, the whole village was woken up by a loud hammering sound coming from the square. They all rushed to see what it was, and found that a large notice had been nailed to the doors of the village hall.

People of the village, it said.
I have discovered a new metal. It may not look precious, but I promise you it is more valuable than gold. It is found in the rocks of the mountain and needs to be mined. Those who want some, come to the highest lake every morning at dawn and join the miners.
Satoshi

No one knew who Satoshi was, but they all muttered excitedly when they read this — what was this New Gold? Could it really be more valuable than the old gold they all used?

One of the elders stooped down and picked something up from where it was lying under the notice. He held it above the crowd, and they saw that it was a large, rough piece of metal. It certainly didn’t look more valuable than gold. Was this it? Was this what Satoshi had discovered? Disappointed, the crowd dispersed, and everyone went about their daily business.

But there were one or two people who wondered if what Satoshi had written might be true, and they decided to find out. So they left the village and made their way to the highest lake on the mountain.

As they rounded the corner and the lake came into view, they saw hundreds of pickaxes and shovels strewn across the rocky landscape, with no sign of who had put them there. Intrigued, they picked up some tools and started to dig.

When they returned to the village that evening, they passed some of the other villagers, who beckoned to them and asked what they had found. The miners showed them a single, tiny bit of this new metal, which was all they had returned with. The villagers laughed at them and told them they were wasting their time, but, even so, the miners agreed to split it equally between themselves and decided to go back the next day and try again.

The following morning, when they met in the square to return to the mountain, one of the villagers who had laughed at them the previous night was there waiting for them. “Do you mind if I come with you?” the villager asked. They knew they would be able to mine more with more people, so they agreed to let this new volunteer come along. And so a larger group this time traipsed out of the village to search for the New Gold.

In the days that followed, more and more people were waiting in the square every morning to join their group. As they left the village, the curtains of the houses they passed would twitch as the other villagers watched them go and wondered if they, too, should be spending their days mining up on the mountain. The more people who joined the group, the more everyone else thought that perhaps it might not be such a bad idea.

Soon, some villagers who couldn’t go up to the mountain decided they wanted some of the New Gold they kept seeing people returning with. So they started swapping their old gold for the New Gold the miners brought back with them.

The people who ran the market stalls couldn’t get time off to go up and join the miners, but they, too, wanted some of the New Gold. So they started accepting it instead of the old gold at their stalls. Soon, villagers could use their New Gold to buy food, pay for carriages and even have an ale at the local inn.

Even though more people were talking about the New Gold, most of the villagers still didn’t see what all the fuss was about. They could buy everything they needed with their old gold — why would they want to replace it? But all that was about to change.

One morning, the town crier, who roamed the streets every day proclaiming the day’s news, turned his attention to the New Gold. “Do you have any New Gold yet?” he shouted, going from house to house and ringing his bell. “Soon everyone will be trying to get some, so get it while you can!”

When the villagers heard this, they all rushed out into the streets — if everyone else wanted the New Gold, they didn’t want to miss out. They crowded around the stalls in the market that had been set up just for people to trade their old gold for New Gold. So many people wanted New Gold that by the end of the day you had to pay a thousand pieces of old gold for just one piece of New Gold.

As more people became interested in the New Gold, rumors about it began to spread. Someone claimed they had heard from Satoshi himself that the amount of New Gold in the mountain was limited, and it would one day run out. And, sure enough, the miners had to dig deeper and deeper and use bigger and bigger tools to keep finding more of it. But knowing that it would run out only made people want it more.

Even though more and more of the market stalls let people pay with the New Gold, for a while the villagers stopped wanting to use it to buy things. Even a small piece would have bought them enough food to last for a month, but they realized that, if they stored it away instead, they’d soon be able to buy twice as much with it, since it was getting so much more valuable so quickly.

After a while, though, when the initial excitement of the New Gold wore off, its value stopped rising. People started using it to pay at the market again, and the old gold they used to use lay forgotten at home.

Lots of the villagers regularly travelled to the other villages that lay around the base of the mountain. They used to have to swap their old gold at the border for the different money the other villages used, and the elders of each village would make them pay for this and would keep the profits for themselves. But now all the villages used the New Gold, since they all had access to the mountain and sent miners up to the lake, so no one needed to swap their money and pay the tax to the elders any more.

That wasn’t the only reason the elders weren’t happy that everyone was using the New Gold. They had always controlled how much of the old gold was given out to the villagers, which gave them power over the whole village. But the mountain, lying outside the village, didn’t belong to them, so they had no control over the New Gold that was mined there.

One day, the elders held a secret meeting and decided to ban the New Gold. They called the entire village to the square to make their announcement.

“The old gold has real value,” they said. “We use it to make our jewelry, but the New Gold is worthless. We don’t use it for anything — we want it only because everyone else wants it. So, from now on, the New Gold is banned. We will go back to using the old gold.”

The assembled villagers murmured amongst themselves. They didn’t agree — they liked the New Gold, because it took control away from the elders and it meant they could travel to the neighboring villages without paying a tax. But the elders had a point. No one had ever actually used the New Gold for anything. It wasn’t shaped into necklaces or bracelets. Were the elders right? Was it worthless?

Suddenly, a voice spoke up from the crowd. “You’re wrong,” it said, and everyone craned their necks to see who was speaking. A space cleared around an old man in a cloak who had a hood pulled down over his face.

“The New Gold isn’t worthless,” said the old man. “It has value precisely because people want it. It takes power away from you and gives it to us. And as long as we want it more than we want the old gold, you have no choice but to let us use it.”

At these words, the villagers all nodded their heads and started shouting that they wanted to keep using the New Gold. The elders looked at each other, and realized the old man was right — they had no choice.

“Then so be it,” they said. “We will use the New Gold.”

The villagers cheered and celebrated all night and into the next day. Over time, the New Gold completely replaced the old gold. The different villages traded with each other more, because they all used the New Gold, and power shifted from the elders to the villagers, because the villagers were finally in charge of their gold.

No one noticed the old man in the cloak slip away from the celebrations. He walked to the village gates, looked back at the villagers, smiled, and disappeared into the night.

And no one ever heard from Satoshi again. (58:44)

[Music transition]

AL – Thanks for listening to episode 66 of Let’s Talk Bitcoin. Buried Treasure, Seekers and Thieves was produced and edited by Adam B. Levine, and featured Stephanie Murphy, Andreas M. Antonopoulos and Adam B. Levine. A Look Into Bitcoin Panel was sponsored by Plug and Play Tech Center and featured Chris Larsen, David Chen, David Johnston, J Cabou and Vinny Lingham. Satoshi and the New Gold was produced and edited by Adam B. Levine, written and performed by Ed Rex. Music was provided by Jared Rubens. Questions or comments? Email [email protected]. Have a good one (59:23)

[Music] (59:50)

[Silence] (1:00:33]