Enthusiasm about Blockchain-based innovation is among the fastest-growing new developments in technology. How could this radical new technology change the systems of modern society, from banking to art to personal communications? Where is Blockchain innovation headed next? What industries could be affected? What are the risks and opportunities of this “decentralized distributed ledger”?
Vigna: My name is Paul Vigna. I am a reporter at “The Wall Street Journal.” I cover the market. I also write a lot about bitcoin and cryptocurrencies, and with my colleague, Mike Casey, published a book in January on the subject. So that’s why I’m here today. For me, this is very much—it’s all about storytelling, really. I mean, I’m a writer. I’m not a techie. I’m not an investor. I’m not a policy guy. For me, it’s what makes a very interesting story and what kind of illustrates important things happening in this world and change in this world. So this has been something that has fascinated me for going on two years now. And I think that this probably has another 10 or 20 years to run. So I feel like I picked a pretty good beat for myself.
So I want to introduce the folks on our panel. I need each of you, just give a couple of words about why you’re interested in this and what excites you about it. Keep in mind, I always find this interesting when I do these panels, the people on the panels all always come from different fields. It’s never five techies. It’s never five journalists. It’s always five people from different fields. So I think that really illustrates how wide the appeal of this whole thing is.
So to my right first is Jerry Brito, who directs the Coin Center down here in DC now, right? So what excites you about the blockchain, Jerry Brito?
Brito: What excites me, is that it is an open protocol and we don’t get those very often. When you think about the web and all the innovations and all the changes to society, to the economy that the web brought, I think we’re going to see the same with the blockchain. And what’s also similar is that, just the same way that a lot of the laws that we had on the books didn’t take into account the sort of things that the web made possible and there was like a big gap there, the same exists with bitcoin and the blockchain. And so to me, as someone who has been working in tech privacy for 15 years, when I saw this, this was blue skies. Which could be good, which could be bad, but it’s definitely going to keep us busy.
Vigna: All right. Jinyoung Englund is vice president of strategy at the Digital Currency Council. What interests you about the blockchain?
Englund: To me it’s, you know, as Paul mentioned—you know, my background is actually in development. I started out in Mozambique, working with widows and orphans, and when I think about people who are stuck in abstract poverty, extreme, harsh conditions, when you think about the trillions of dollars that we’ve put into alleviating poverty, why are people still in poverty? And I think the single reason why is because of violence. Because in most third world countries or poor regions, you know, justice or law enforcement is not something you can assume or take for granted. And therefore, I think for bitcoin and the blockchain, when we think about 35 million people stuck in human trafficking, a $32 billion dollar industry, the latest trend in child abuse in human trafficking being on-demand live streaming of the abuse and rape of children, what excites me about bitcoin and the blockchain is that now, law enforcement has the opportunity to better track and produce the evidence necessary to prosecute criminals. So that’s why I’m excited.
Vigna: Brian Forde, good luck following that. [LAUGHTER] Brian Forde is director of digital currency at MIT’s Media Lab, a very key player in this whole thing right now, with the whole thing between bitcoin and policymakers. What excites you about this whole thing?
Forde: Well, first of all, I’d like to say that Jerry is really the key person for policy. The way that we look at it is, and what gets us so excited is, one, there’s an opportunity for MIT to play a role in the foundational research of this technology, from security to scalability to stability, to the privacy, monetary, and economic implications that faculty and students at MIT are well-suited to think about, because this technology has only been around for about six years.
The other opportunity that I really like about this, coming from a policy background, is the social impact of this technology, how it can fulfill famed Peruvian economist Hernando se Soto’s dream of leveraging property title for people who never had it before so that they can borrow against it, how we can address the $24 billion dollars in identity theft, and, you know, the example of how all that information could have been a little less relevant to the Chinese when they stole it a couple of days ago. And so I think there are a lot of opportunities here for us to leverage digital currencies to achieve a lot of our national, state, local policy goals. And I’ll to you a little more about that later.
Vigna: And lastly, Brad Burnham is managing partner at Union Square Ventures, big VC funding the bitcoin industry. Besides the profit motive, what interests you in the whole bitcoin/blockchain world?
Burnham: So I’m going to just pick up on what Jerry was saying, which is sort of the scope of what’s possible with this technology, and I’ll just reference back to our experience with the Internet. The Internet was essentially a shared public communications layer that fundamentally changed the media industry. Prior to the Internet, the media industry was defined by distribution. You had a cable channel, you had a radio station, you had a DVD channel, you had a newspaper and content was controlled by those distribution channels. After we shared the communications medium, all of a sudden that democratized access to anyone and it opened up that market in a huge way. So I think of the blockchain as a shared public data layer, and as a shared public data layer, we have the possibility now of opening up markets and disrupting markets on the scale of the disruption that we’ve seen with the Internet. And that’s what excites me.
Vigna: If you didn’t see Jerry’s presentation before—if you saw it, good. If you missed it, just to give a very quick sort of working definition of what we’re talking about, I think would be helpful and then we’ll move on. What we’re basically talking about here is open protocol software, is open source software. It runs on a decentralized system of servers, so there’s no one point of control. And what the software basically does is it maintains an open ledger called the blockchain. Anything that can be digitized, anything that can be recorded, can be recorded on that blockchain. So without getting into any of the rabbit holes, that is essentially what we’re talking about. The first use case that has really emerged is bitcoin, is a currency, is people exchanging value among themselves. But anything that can be recorded can be recorded in this blockchain, and it can be recorded irrevocably. So with that in mind, I want to go to Brian. And you mentioned the data theft last week, the Chinese stealing all that data. We all know how that shows that vulnerabilities of data security now, but how does blockchain maybe create a situation where that can be less of a problem?
Forde: Yeah. I was personally impacted by it. My information was in the OPM system and it’s now with the Chinese, if they didn’t have it before. [LAUGHTER] And so I think the problem is why is that information valuable in the first place. Right? I mean, there’s a reason why they stole it, but does that information really have value? Or why does it have value? Well, it has value because they can now do more sophisticated phishing attacks on you so then they can get your passwords to other accounts that have access to your banking or other types of transactions, or your email or whatever, anything else that they would like to learn more about, depending on who you are and why that’s important to them.
And so I you think about it, why is your social security number—why is it both your username and your password? How many times have you been on the phone calling your bank or your credit card company and they ask you for those last four digits as the password to, you know, access your account? Or how many times have you cringed writing it on an employee document or writing it on a health record and you don’t know who behind that is going to see it? Because it has so much power over all of those, that someone can actually steal your identity. And if you think about, you know, how powerful your identity is, you know, Americans lose $24 billion dollars a year in identity theft and only $14 billion in physical theft. Right? If you think about how much we invest in protecting our physical assets compared to our identity assets.
And so what could happen in the future is you could authenticate your identity to the blockchain. So the blockchain, the biggest misnomer that Jerry probably dispelled earlier, is that bitcoin is not just about money, just like the Internet is not just about email, right? We also have other protocols like HTTP for web browsing, FTP for file upload/download, and if you think about it, you know, one of Brad’s analysts, Joel, did an excellent post where he talked about the other protocols that are out there for identity. So there’s money, there’s identity, there’s marketplace, and there’s also reputation. And so you know, it’s weird that we have this analog identity and we have this digital identity and they never really cross, so the digital identity being Facebook, LinkedIn, Twitter, etcetera, your analog identity being your driver’s license, your birth certificate, your social security number, etcetera. But if you were to walk into a bank and try to open a bank account and you pulled out a smartphone and showed them your Facebook account, they’d laugh you out the door, right? However, on most websites, you can use that as a form of identity. And if you were to go to a website, you know, to log in and you were to send them a scanned copy of your driver’s license, again, they wouldn’t accept it. And so is there an opportunity for the Social Security Administration to authenticate your identity through your social security number through the blockchain, so that when you log into a bank account, or when you walk into the bank, they actually know that you have been authenticated and that information no longer becomes of value because it’s signed by a private key.
Vigna: And now, any of you can answer this, but I have a very practical follow-up question. Why is this database, the blockchain, better than the databases we have now? Why is the information less prone to theft? What is it about the blockchain?
Englund: So we hear this term a lot in this space, and it’s because it’s decentralized, right? When you think about companies like Visa, MasterCard, you know, they have servers and in most cases their information is centralized and so in order to obtain that information, you need to have one source, right? But if the information is distributed, then it’s much more difficult to obtain that information.
Vigna: What about the cryptography behind it, the encryption behind it? That’s more powerful, right, the encryption behind each transaction. It’s harder to crack into. Anybody? [LAUGHTER] Well, I think it is.
Burnham: Yes. What’s great about the database is not only that it’s distributed, but that it’s open, that it’s public, that anybody can view the data. What they need in order to be able to do anything with that data, or do with private data, is a key which you alone control. So it’s public data that’s managed by a key, as opposed to private data, usually not encrypted, stored in a single centralized place, which is very vulnerable.
Brito: And to me, it’s not about hiding information, which is the way that we’ve developed our infrastructure today is, “We’ve got to keep this hidden.” Because if you have access to this piece of information, well that’s it. Now you’ve got the keys to the kingdom. It’s not about hiding; it’s about verifying. And so when you put this information in a database that’s distributed, you can then go to—let’s say you go to a bar and to show them that you’re 21, you don’t have to show them your address and your name. You don’t have to show them any of that information. You can just verify by signing a transaction, by using your private key. And that you do have to keep secret, so there’s still something personal that you have to keep. By signing, you can just verify that piece of information that you gave. You can sign something that shows what your reputation has been that might allow a lender to trust you more than someone else.
Vigna: Jinyoung, you brought up an extremely powerful thing when you made your introduction, and I want to talk about for a moment. I want you to talk about that. And also, when we talk about identity and what identity represents in this world—just dive into all that.
Englund: I’d be happy to. So another misnomer about bitcoin and the blockchain is that if you operate in that space, you’re completely anonymous. And that’s a misnomer, right? You’re at best, and I don’t know if I’m saying this correctly, pseudonymous? Is that how you say it? Pseudo-anonymous? And with the right training, and with the right software, law enforcement will be able to de-anonymize information. They’ll be able to de-anonymize or decrypt data for the purposes of connecting identities to transactions. Now, is it as simple as what we have today, where we have to know the last four of your social security? You know, it’s actually much more difficult. But that’s why law enforcement, you know, with the right training and the right software, will be able to better track down and prosecute criminals.
In the case of identity—so why was this important, because criminals in the general public think that, you know, bitcoin and the blockchain, you know, they’re anonymous, that for some reason, you know, if they conduct illicit activities in this ecosystem, that they can’t be caught. Since it’s actually the opposite, law enforcement, if they are able to understand the blockchain, and understand that while identities may not be readily available but the transactions are public, what they would have to do is then follow the transaction. And you know, Jerry at Coin Center, he and his team, they’ve written several briefers and several posts on how law enforcement can literally follow the money. So maybe your name will not be tied to the public ledger and the public transaction, but then that public transaction is tied to the original first transaction and they will be able to follow, you know, who conducted that deed.
Brito: The other thing about identity that Jinyoung’s talking about, identity as it relates to monetary transaction. But if you want to use the blockchain as an identifier, there’s a company called OneName, which I know that USB invests in, that is doing this and you should look them up. But it essentially is this: Look, today, if you have a single login to a website, you would use something like Google or Facebook or LinkedIn or Twitter. You know, there’s like a whole string of them and which one do you want to use? And number one, there’s an interoperability problem because, you know, I have a Twitter account but I don’t have a Facebook account. So if I go to a website that doesn’t take Twitter but does take Facebook, do I have to go create a Facebook account? And number two, what if—and this is possible—what if Facebook went away tomorrow? My login wouldn’t work.
We could use the blockchain to basically be the keeper of your identity and then you could log in, pinging not Google, pinging not Facebook, for the thumbs up or thumbs down that you are the one who in fact the one verifying yourself, you can ping blockchain. And that will always be there.
Burnham: Isn’t it true that the other cost that you pay when you ask Facebook to manage your identity is that Facebook is actually tracking what you are doing around the entire web instead of just on Facebook?
Brito: Yeah. They know what websites you’re visiting, etcetera. Which is fine. It’s a fine deal to have, but you can also do it this other way.
Burnham: Right. If you choose to do it in the way that you control, then you’re choosing to share only the data—this actually goes back to the example that you can actually share how old you are without having to share your home address in any kind of identity management system.
Vigna: Brian, we had talked a little bit about what we would talk about beforehand and you had talked about the rubberstamp identification protocol.
Vigna: Why don’t you jump in? Because when I think of identity for me, it means something for me. But I think when you start thinking of it on a governmental level, on a federal level, it starts to mean something else. So why don’t you just go through some of that?
Forde: So for the last three and a half years, I worked in the federal government. And one thing I saw is that—well, actually, for more than 5,000 years, civilizations around the world have depended upon this one thing, which is the rubberstamp authentication protocol. In certain countries, it’s made of wood, in certain countries, it’s made of stone. In other countries, it’s made of rubber. It’s all an ink-based stamp that certifies that you are you, or that this property is yours, or that you gave a paper copy of your identity. And we still depend on it today, and it secures trillions of dollars of assets. In Japan, the stamp is called a hanko and it’s as valuable as your personal signature. From what I understand, even Japanese gangsters will have safes full of these things as a form of collateral for other people. Even if you didn’t sign the document, you physically didn’t sign the document, but someone signed it with your hanko, it’s legally binding.
So for example, a friend of mine went to the DMV because she moved from one side of the town to another, so she needed a new parking permit. And so they said “Okay, well, show us a valid form of ID.” Actually, two valid forms. So she showed her driver’s license. They said, “We gave you that three months before we complied with the Real ID standard, DHS, so the driver’s license that we gave you is no longer valid for proving who you are.” “Okay, so here’s my passport.” “Okay, but we need two forms of ID. Come back.” Okay. “Come back with your pay stub.” So she comes back with a copy of her pay stub. So now the person at the DMV knows how much she earns, knows where she works, knows her address, and they said “Okay, now prove the address that you’re at.” Okay. “Well, we need a copy of the utility bill.” Great. “Well, I haven’t lived there for 30 days yet, so I don’t have that.” Right? And so it got to a point where she started texting me and she said, “Can you Photoshop this?” [LAUGHTER] Because it’s true, I can. And many of you can too. In ten minutes, you can Photoshop any of the documents I just described, hand them over as legitimate copies, and that to them is, “Great, you’ve complied with our regulations.” And so it’s authentication theatre. [LAUGHTER] Right? Based on 5,000 years of culture.
And the one thing I did learn is that technology is never the problem. We have the technology today. We had the technology to prevent healthcare.gov. What you’re missing is culture, right? You need a cultural change. And so I worked in the CTO’s office at the White House, and while we were technologists, our main role was to change the culture of three million people to work more closely with technologists and to ensure that the technologists always sat at the policy table. And so as part of MIT’s digital currency initiative, what we want to do—because it’s scary to work with emerging technologies if you’re a government, right? Because governments are represented by elected officials. Elected officials don’t want to assume risk that emerging technologies present because if it fails, or fails fast, as we like to do in Silicon Valley, then that’s actually a liability for you being elected in the future. And so how do you allow for emerging technologies to succeed and we leverage and we get out of this authentication culture and we break authentication protocol and break that culture. And one way that we want to do it is by working with governments with de-risking it for them, so that we can incubate those technologies, bring in the governments, the nonprofits, the tech companies, and the MIT students to help beta test these in our labs so we have a better understanding of the risks and the opportunities, so that then when they can go into government, they have more of an assurance that it’s been well thought out and tested and they’ve been part of the development process, rather than it just being thrown at them in five years and assuming that they can just ingest it. Because culturally, they can’t.
Brito: Can I note something?
Brito: We’ve been talking for about 15, 20 minutes about bitcoin, and we haven’t yet talked about money. We’ve been talking about identity—
Vigna: No, no, it’s so interesting—
Brito: I want the audience to understand that bitcoin and the blockchain are about so much more than just money.
Vigna: Right, and bitcoin is really the first use case of this technology. It showed that this technology can work. You can exchange value directly between two people, no intermediaries. And because the system works, we’ve gotten this community of people around it that trust it, that use it, that believe in it. And I know trust and belief are words that people don’t like to use in these circles, but they do exist. But you’re right. This is about a lot, lot more. And I want to ask you guys this. In this group especially, we’re all sort of in this little circle of bitcoiners. But to what degree do you have a hard time explaining these concepts to people and how long do you think it’s going to be before you can walk into your barbershop and not have to explain to him what you’re talking about?
Forde: I think it’s contextual. I have a hard time explaining it to my parents or friends here in the US. They think I’ve gone off the deep end, leaving a great job in the White House to go off and work on, you know, digital Monopoly money. But when I was in Iraq six weeks ago, that’s not how they perceived me. Right? Because here, today, it’s easy for us to go a hundred yards and find an ATM, to go into any store and use our credit card. The financial infrastructure, the infrastructure that we have for the most part works. However, when you go to Iraq, it doesn’t. So I was there for something else and with a Facebook engineer friend of mine, a local Iraqi guy, I said, “Let’s just do a bitcoin workshop for the fun of it and see if five people show up.” More than 30 people showed up. Within 10 minutes, they all had wallets installed on their phone. We probably broke some law by doing that. And I immediately started giving them a dollar or two of credit. And automatically, they started thinking of use cases like reverse remittances, because their family member, their older parent lives in Canada and they receive their social welfare check by their family member in Iraq, but it’s a low amount of money, but they still want to send it to their family member abroad, right? That’s something I never would have thought of.
And so it’s actually a lot easier to do this—and Brad and I were talking about this. It’s easier when you have a financial system or a government system in crisis, right? If you think about Detroit for example, you wouldn’t think about that as a twenty-first century government, but within 12 months, they implemented this 8-step plan in less than 12 months, because they had the will to do it because they had no better option. And you know, David and I talked about this when we were in Detroit, you know, six months ago, with the Detroit CIO. And so we’re not in crisis here for these situations. But when you find governments that are in crisis, or cities that are in crisis, that’s where you have a much better opportunity to explain the value of these technologies.
Vigna: Yeah, it’s interesting you mention that, because in the book we talk about—and I think it’s really interesting, the example of M-Pesa in Kenya. And it was a new system that had been introduced on a pilot program and the reason it took off is because they had an election that was horribly contested. The government fell apart. They were on the brink of civil war. Nobody could send money around. And then people realized that there was this little thing that just happened to be turned on and then they started using it, grew to trust it because it worked, and now M-Pesa in Kenya is a huge part of their financial system.
Brad, when you’re looking for companies to invest in, when you’re looking for opportunities in this field, what do you look for? How do you—because there’s a lot of noise. There’s a lot of people with a lot of ideas. How do you discern what is a good investment, what isn’t? What do you think is going to be important in this field?
Burnham: So it’s very early. And so what we’re actually doing is making a number of very early stage investments in companies that are very young, and for the most part, companies that are providing some piece of infrastructure. So OneName was mentioned. That’s an identity management scheme. OpenBazaar is an open marketplace based on the protocol. And then Mine is essentially a little bit like a deed system. It’s an attribution system for digital goods that can basically assign you some sense of ownership over a digital good that’s moving around on the Internet. So those are examples. And we’re also investors in Coinbase, which is one of the—so you know, our experience is that when a market is very young, it’s usually a good to be investing in the picks and shovels because everybody is exploring how to build businesses and everybody is using those tools, and it’s a good idea to be investing in very early stage companies because it’s going to take a while for this market to mature.
Vigna: Before we get to questions, I just want to—I have Jerry Brito here. I have to get his take on the latest with the BitLicense. Because the a policy response, it is going to matter. I mean, bitcoin is not going to be unregulated wild west forever. The BitLicense out of New York State was the first real sort of concerted attempt at bringing some framework to this. They released it last week. It’s going to go to the register in a couple weeks. It will become New York State law. What do you think of it? What would you like to see changed or different?
Brito: So first, I have to put lie to the idea that bitcoin is unregulated.
Vigna: That’s a good point. You’re right.
Brito: The bitcoin industry, as nascent as it is, is one of the most regulated industries in the country. It is subject to all the Bank Secrecy Act regulations that banks are. It is subject to state money transmission licensing, which is what the BitLicense is. It is subject to CFPB scrutiny. It is regulated, guys. There are those who ignore those regulations and use the technology willy-nilly and so they’re not unregulated. They’re just ignoring the regulations. And they will be dealt with. Folks who want to comply have to comply with a bevy of regulations, including the BitLicense. The BitLicense came out last week after a long process.
Look, I’m glad that there’s finally some clarity. The states are beginning to make clear how they’re going to treat this currency and transactions on it and the technology, and that companies are going to be able to go and get licensed.
That said, it includes some provisions that are pretty onerous. And I’m not concerned about the Coinbases of the world, the Circles of the world, who today, it’s going to be costly. It’s going to be burdensome for them to comply. Coinbase and Circle each have said that it’s taken them about $2.5 million dollars in two years to get licensed in just 25 states. Okay? And so this is a lot like Uber or like AirBnB, where in order to operate as a bitcoin company, you have to get a license in every state in which you operate.
So they’re going to be able to comply. It’s going to be burdensome. I’m worried about the startup. I’m worried about the two or three guys that are building OpenBazaar or OneName and they don’t have $2.5 million dollars. They’re building an open source project. And so taking those folks into account. And so a lot of work that we do at Coin Center is making sure—and today our regulatory battleground is in the states. Luckily for us, when we make contact with the states, they’re usually thrilled to hear from us, because they don’t understand the technology. And they want to get it right. They want to be inviting to this innovation. It’s just that they don’t understand it. And it’s things like custody, right? The purpose of these license, like the BitLicense, is to make sure that if you as a business are taking custody of consumer funds, that you have a good reputation, that you’re bonded, etcetera. And that’s perfectly fine and that’s important. With this technology, things like custody are not that simple, right? And I won’t get into the weeds here, but you can have things like multi-signature, where you can have divided custody among different parties. And so folks who are providing those kind of innovative services maybe shouldn’t be licensed, because they can’t lose your money. And to explain that is a lot of what we do.
And so with the BitLicense, bottom line, I’m glad we have clarity. I think it oversteps a lot of the balance, especially with money laundering. BitLicense includes a money laundering provision, a reporting provision, which is unprecedented. Money laundering is something that we do at the federal level, at Treasury. We have FinCEN, who handles money laundering for the United States. States don’t do that. New York is the first to have a money laundering requirement, which, by the way, they don’t apply to banks or to money transmitters. It’s just to bitcoin. So it’s discriminatory as well.
Burnham: So I’d like to be a little bit more aggressive about that. [LAUGHTER] Jerry is being very politic. I think that regulators as a general rule never are rewarded for taking risks. And so they are actually trying to eliminate all possible risk in something that none of us really completely understand. It’s a platform, it’s a protocol. It’s creating a lot of innovation. Nobody knows exactly where it’s going to go, any more than they knew where the Internet was going to go in 1994.
But the real crime here, as Jerry points out, is who is going to get hit. Because what they are trying to do is essentially regulate entry into a market. And so you have to get permission to get into this market and it costs you, as Jerry pointed out, $2.5 million dollars to go into these markets. It’s the startup world, and if we lost the startup world, we’d lose all of the innovation that’s possible on this platform because there’s just a lot of entrenched self-interest in the existing incumbents in perpetuating the models that we use today. And that would be a real loss to our society broadly.
So I think they overstepped. I think it was reactionary. You know, they reacted to a sense of risk. And I think it’s also missing a huge opportunity, because they don’t understand the technology. Regulation with this technology should be so much easier than it has ever been in the past, because what we’re talking about is a shared general ledger, a shared truth. We can put stuff out there where everybody can see it, and the regulators can have access to that data and they can watch what’s happening and they can regulate adaptively, as opposed to prescriptively and up front. And it’s just a missed opportunity not to be more innovative and creative about it.
Vigna: All right. On that aggressive note, let’s open it up to some questions.
Audience 1: Thank you. So my basic premise of understanding what you’re talking about, in many ways, is that you have a monetary system which can become independent of the monetary systems that we have developed since the Second World War, to be the way we regulate currency exchanges and all the other things. Is that possible, or am I misunderstanding this? And second question is, the gentleman on the end has a publication. The publication comes out in paper form. It comes out in digital form. If he wants to keep a copyright on that format, particularly the digital form, how does he do it and still keep the value inside his company?
Brito: Okay, so let’s take the first question first and maybe somebody else can take the second one. I really don’t see bit coin as a monetary phenomenon, even though it is a digital currency. We have had private monies for decades, if not probably centuries in this country. So sure, you have the dollar, which is legal tender. Legal tender means that if there is a court settlement against you, you can satisfy it with a dollar and it means that if you owe it to government taxes or fines, you can satisfy that with dollars. That’s what legal tender means. So the dollar is legal tender. And you have other currencies that are also legal tender, because they are the currencies of particular nation states.
But aside from those, there are dozens of private currencies that have existed. You can think about airline miles. You can think about different kinds of scripts that have existed historically. Bitcoin is really no different. It’s just a new private currency. It’s not legal tender, because you can’t necessarily satisfy your taxes with it. But aside from that, it’s just a currency. It’s private. What’s unique about it is that there is no central issuer. There’s no company, there is no bank that is issuing the script and can add it to circulation or remove it from circulation. It is a decentralized peer-to-peer network that creates this currency. And to explain this, I would have to get a whiteboard out and spend another 20 minutes with you. But that’s what’s unique and innovative about it. But from a monetary perspective, it’s really is just a new private currency.
Burnham: So the question about copyright of an item, digital item particularly, is kind of interesting. Because that’s what Mine does. So if you take a picture, if that picture has a copyright and it ends up on, let’s say Tumblr, a blogging platform, because you post it on Tumblr and it’s your picture. Somebody reposts it and it ends up on Facebook. When it arrives, Facebook strips off all the metadata that has anything that identifies where that picture came from, who took it, when it was taken, all of the identifying information. And so there are a number of sites sort of make the attribution of an object online go away. What Mine actually does is use some machine learning technology to re-identify that, and to re-associate that metadata so as items move around on the Internet, that identity, that attribution of who created them gets re-associated with it.
So I think there are neat solutions. And again, that identity is tied to the blockchain. There are neat solutions that actually make it easier to track items online than it has been in the past.
Vigna: Not to go too deeply into it, but I think that the idea that the copyright system that we have, and that we’ve developed, that it actually works in the digital age is a fiction that we’re all just kind of happy to pretend still matters. Anybody can go and steal stuff from the “Wall Street Journal.” They can cut and paste it, they can get it. They can go through the search engines. We all know how to do these tricks to get behind the paywall. One think Mike and I did as an experiment, just to show the potential of this, was we actually embedded our book into the blockchain. We hashed it in a transaction. So it is there, it is basically timestamped on the blockchain. If anybody wants to contest that I wrote this book, I can go, I can unpack it, I can prove that I did it.
Copyright is a really interesting field for blockchain technology. I think it’s still very, very early trying to figure out how best to make it work. But I think it has a lot of potential and I think you’re going to see at some point, you’re going to see people who create things—artists, musicians—they are going to figure out that this is a tool that they can use and someone is going to put it together in a much better way than the system we have now. I just think that.
Nelson: Mike Nelson with CloudFlare. Brad mentioned the cost of entry for a startup when there’s regulation. In many fields, there’s also a huge cost of entry when startups have to deal with lots of patents. The web was born—Tim Berners-Lee decided not to try to lock it up with patents. But still, there have been a lot of great uses of the web that have been held back by patents, often very obscure ones. Is there already a land rush going on? Are people running across the river to Alexandria, to the Patent and trademark Office, trying to get every single patent that says “blockchain and”—pet food, classroom, whatever?
Forde: Yeah, it’s something that we’ve discussed online, and conversations that we’re going to start hosting is does it make sense to create a patent offense fund or some kind of organization or entity, a patent pool to start to protect all the opportunistic people who may not be doing this for their own company. Or if they just use it as a defense, is there an opportunity to replicate or create a standard similar to what Twitter and Tesla have done as well? So we’re in the beginning conversations of this right now. And if there’s anyone else who would like to join that conversation, I’d invite you to email me as well.
Vigna: Does anyone want to jump in on that? Okay. Sir?
Audience 2: Okay. I’m curious, Jerry, you keep referring to bitcoin as a private medium of exchange. But to me, it almost seems like the ultimate public medium of exchange.
Audience 2: Just maybe not recognized by any particular government entities yet.
Brito: Sure. When I say private, I mean that as in opposition to government issued. It’s privately issued. But you’re right. I don’t mean that word in the sense of privacy. In that sense, you’re right. The blockchain is open and completely visible, which is, as Jinyoung was saying, this is how law enforcement can trace money flows. There are things you can do, however, because of course, if you learn what my bitcoin address is, then you might be able to see on the blockchain all of my transactions and see, you know, what drugstore I’m going to and what bar I’m going to and what time.
So there are things that you can do to protect your privacy. Again, I would need a whiteboard to show you these. But for example, merchants themselves don’t want to use the same bitcoin address because if they did, their competitor might be able to see all their money flows, what days are their good days, and how much revenue they’re making. So one thing that merchants do, for example, is that they don’t use the same bitcoin address twice. They use a different bitcoin address for each transaction. Consumers can do similar things. So there are ways of making it more difficult for it to use. And there are extensions to the technology that are going to be coming that are going to make technology more private.
Audience 2: Okay. Follow-up question. One of you said, “This will never go away.” How are we comfortable about that? Because I don’t know how many bitcoin miners there are out there, how many servers there are out there. Sounds like something that’s going to fluctuate with time. And as it fluctuates, is anybody concerned if it drops, if costs of energy, for example, in terms of producing this and making it available. Who’s absorbing those costs?
Brito: Of course it could go away, the same way the web could go away tomorrow, the way email could, BitTorrent could. I personally, my opinion, don’t think it will. I think the incentives are there to keep the miners who are the folks who verify transactions on the ledger, keep them interested. And I think you’re right. I think electricity is the largest input into mining. Which is why I’m glad to see so many innovations around energy. And again, it’s a market process and I think it’ll fluctuate, but I think the incentives are there.
Vigna: Let’s do two more quick questions.
Audience 3: Thanks very much. Since bitcoin is so new, I hope you’ll indulge me with what I think is maybe a bit of a philosophical question. So to my mind, I look at bitcoin sort of like three things. It’s a store of any thing of value to be digitized. It’s a transfer system for any digitized store of value. But the third piece is one that you don’t hear talked about very much. Although Brad, if I could address you with this, Fred Wilson spoke about it in France last year. And he wrote that trust—so without getting into the weeds, for those of us who know about the Byzantine General’s problem, isn’t the blockchain, the protocol itself, and the public ledger, isn’t it rightly conceived of as essentially a trust infrastructure? Rather than trusting centralized governments to make institutions function in a certain way, with enforcement mechanisms to corral people’s behavior, you have a decentralized system that has enforcement functions, sanctions, that are from the ground up. You know, Balaji Srinivasan, he talked about it in terms of the new leviathan. Is that not a proper way to think about what the blockchain really represents at its base?
Burnham: Sorry, I’ll just start by saying yes. You know, it’s a shared truth. One way I think about it is, imagine two fiercely competitive companies sharing a common dataset and interacting with that data. It’s hard to imagine how they would do that unless it was an open, public database that had a mechanism that guaranteed that the data was correct, right? And that’s what the blockchain does. And so because you can share that truth, you can trust in a way that you couldn’t. If one or the other company, for instance, said just, “It’s in my data store. Trust me, it’s still there,” that’s a completely different world.
Brito: Right. And here’s the thing. I think, you know, we are lucky that we have pretty good institutions that we can trust in this country. But that’s not the case all over the world. And so I would encourage you to read some of the things that Wences Casares, who started a company called Xapo, has written. He’s Argentinian, and so his relationship with institutions and with money is very different from what our experience is. And so trustlessness is not a bad thing. It removes the need to rely those institutions.
Vigna: Did you say you’re new to this, and then name-drop Balaji and the Byzantine Generals? [LAUGHTER]
Audience 3: I’m a quick study.
Vigna: A very quick study. Okay, we have time for one more. The gentleman in the back there.
Audience 4: I’m just interested in your thoughts on does the infrastructure exist to handle a massive increase in the number of transactions or entries in the ledger and to go beyond this seven transactions per second limitation?
Vigna: Lightning network. Look it up.
Audience 4: Sure.
Forde: So what he’s describing is pretty much the biggest debate in the bitcoin space today. And one of the people behind that debate is someone who works at MIT. His name is Gavin Andresen and he’s the lead developer for Bitcoin Core. MIT brought on three of the leading developers who work on Bitcoin Core. And what he’s proposing is increasing the block size from 1 megabyte to 20 megabytes, and why that matters is because it increases the amount of transactions per second significantly because if there was to be significant increases in transaction volume, the system today possibly couldn’t handle it. And so there are fixes that are being built around it, that Jerry alluded to. But what the bigger question here is, rather than, you know, 1 megabyte versus 20 megabytes in transactions, eventually they’ll have to be increased if we want it to realize the potential that many of us have projected on it. But how do you govern a decentralized protocol? And who makes the final decisions? There’s basically five people that have the keys to the castle on Bitcoin Core code. Maybe Jerry disagrees, but you know, we’re at a really interesting point, because this protocol has only been around for six years, on the future governance of something that is inherently decentralized and something that is being debated out today. And the reason why people are so preoccupied about this debate is because it could signal how future debates are settled.
Brito: Your question tickles a lot of the things that make me excited. Couple things. I think it’s absolutely true that there about five people who have the keys to updating the code at GitHub. But the way the decisions are ultimately made to govern the network are that all parties are participating in peer-to-peer network have to accept the code or run whatever code they want. You have to reach that consensus. And so in there, there is a governance model. But you’re right, it can be much more improved. And I would simply say, if you go to lightning.network, and .network is a domain, you will see a proposed solution to this problem.
Vigna: I think in the last two questions here, we probably hit on what could have been another 40-minute conversation. We literally just scratched the surface of the potential that exists here. And I certainly want to thank you guys for coming. I want to thank you for being here. But I just want to say, really, if you’re interested in this, just go online and start reading. I mean, there are nothing but rabbit holes. There’s a lot that you can read about and you can catch up on. And there’s a lot that’s being developed. So I think Jerry’s right. I think this has got a very, very long way to go. So there’s a lot for you guys to educate yourself on and I hope we just at least wet your beak.
Everyone, thanks for coming out today.