Can Bitcoin Go Mainstream?

Thursday, February 6, 2014
Gavin Andresen

Chief Scientist, Bitcoin Foundation

Douglas A. Rediker

Visiting Fellow, Peterson Institute for International Economics; Former Member, Executive Board, International Monetary Fund

Despite being criticized by many economists as being inherently deflationary and eyed with suspicion by government financial regulators, Bitcoin continues to grow in popularity. Gavin Andresen from the Bitcoin Foundation and Douglas Rediker of the Petersen Institute of International Economics discuss what Bitcoin is and where it is headed in the future. Andresen argues that Bitcoin allows for greater financial transparency.

This meeting is part of the Council's Voices of the Next Generation series, which seeks to bring CFR members together with fresh, young voices in the nation's foreign policy discourse.

REDIKER: Good morning. I'm Doug Rediker, and I have been told that I don't need to do the usual "turn off your devices, et cetera" thing. So we're going to get right into it this morning, if I could.

The program is going to be that we're going to speak with Gavin for about 10 minutes, and basically let Gavin explain. This is a complicated and brand-new subject for a lot of us here.

So we're going to ask Gavin to sort of go through who he is, how he got here, and what the heck Bitcoin is all about. And then I'm going to try and provoke some interesting responses.

And then hopefully, we'll have provoked enough from the audience, that we'll get the rest of the morning to have everybody ask their questions. And Gavin will, I'm sure, answer every single question, so that we'll have no questions about Bitcoin when we leave. Maybe we'll get there, maybe we won't.

But let's start with Gavin Andresen, who is the chief science officer.

ANDRESEN: Chief scientist.

REDIKER: Chief scientist—no officers in Bitcoin Foundation—for the Bitcoin Foundation. And as I said, Gavin, if you can just sort of go through who you are, how you got here, and what in your view succinctly we need to know about Bitcoin, before we go into some of the "I don't understand it, so please explain," fill in the blank.

ANDRESEN: Sure. I'm a technology guy. So I started my career working in Silicon Valley. I worked for a company called "Silicon Graphics" for eight years, creating 3D graphic software.

After that, I actually did a series of startups, some of which were successful, some of which were miserable failures. So kind of a typical, you know, high-tech, Silicon Valley background.

When my kids were born in the year 2000, I actually started working half-time, just spend more time with the kids, kind of step back from the entrepreneurial, high-tech, start-up life. And then in 2010, I stumbled across this interesting little open-source software project called "Bitcoin."

And I was kind of looking around for something to do. You know, my kids were at an age where I didn't—I felt like I could jump into something more meaty. And Bitcoin caught my interest.

Bitcoin combined kind of an interest I had in economics, in computer cryptography, and in distributed peer-to-peer systems, so systems where there's no central control. I decided to do the simplest possible project I could think of.

I'm a technology guy, so obviously, you know, if I see some new technology, I want to play with it. And I figured a lot of other people would probably want to play with Bitcoin, too. But at that time, it wasn't that easy to get Bitcoin.

And so I decided that the easiest possible project for me to tackle would be a website that just gave Bitcoin away. And so I spent $50 of my own money, and I bought 10,000 bitcoins.

At that time, bitcoins were selling for about half-a-penny apiece. And I started giving bitcoins away at what's called the "Bitcoin Faucet." And so turns out, if you give something away, that's a good way to make people like you.

So a lot of people kind of liked that I was giving these bitcoins away so people could play with them, try them, you know, see that the system worked, see that, you know, their transactions didn't get lost. And I slowly got more and more involved in the project.

I started contributing code to the project, which at that time, was basically a one-person project. I mean, the creator of Bitcoin's this person, Satoshi Nakamoto, who I won't say upfront, I'm not Satoshi. Don't know who Satoshi is. I haven't met him, or her, or them.

Until at the beginning of 2011, Satoshi decided to step back from the project, and kind of push me forward as the lead developer for this open-source project that was still, back then, just getting off the ground. Since then, my life has been kind of endlessly fascinating. So all sorts of interesting adventures through Bitcoin.

And obviously, you know, Bitcoin has been wildly successful, I hope, partly, because, you know, I did give away 10,0000 bitcoins way back then. I like—at least, I like to tell myself that that's part of the reason why Bitcoin became successful. It was a way of bootstrapping.

You know, it's a really interesting question, right. I mean, bitcoins were worthless when they were first created. They had no value, none at all. You know, when I bought those 10,000 bitcoins to fund the Bitcoin Faucet, they were worth under half-a-penny apiece.

I didn't realize that at that time, but it had just been a few weeks earlier that bitcoins actually had a price, that there was actually an exchange where people were starting to trade bitcoins for dollars. And that's how we know the price of Bitcoin is—these exchanges run by whoever wants to start an exchange, all over the world, where people will trade bitcoins for dollars, or euros, or yen, or whatever other thing they want to trade bitcoins for.

Today, bitcoins are trading for about $800 apiece. So those 10,000 bitcoins that I bought back then, if I had kept them, would be worth about $8 million today.

The reason bitcoins are valuable, the reason people want them, are because they're limited in supply. There's a purely fixed number of bitcoins that are being created. Right now I believe there are about 12 million bitcoins in existence.

And the rules of the software, the open-source software that I work on, there will never be more than 21 million bitcoins in existence. So this is different than other kinds of money, where—you know, we don't know what the Federal Reserve is going to do next year, or 10 years from now.

With Bitcoin, there's some certainty, because it's written in the code, that there shall only ever be 21 million bitcoins. We can talk more about how hard and fast is that rule, what other kinds of rules are there.

But that's basically where Bitcoin gets its value, right. We have these digital tokens that people have decided have some value. We started with they're worth half-a-penny apiece. "I might as well buy some. Who knows if this project is going to be successful? If it is, then I'll make a little money, maybe. If not, then maybe I'll have fun trading it with my friends, maybe buying some alpaca socks with my bitcoins."

It's actually alpaca socks were actually one of the very first physical goods that you could buy with bitcoins. And I have a couple pair of alpaca socks that I bought for bitcoins. Because the alpaca socks guy actually lives across the river from me up in Massachusetts.

But that's the way a money works. I mean, we don't usually think about money much. But all moneys are really kind of the shared delusion that they're valuable because we say it's valuable, and because there's a fixed supply, because you can't just—"Money doesn't grow on trees, is the saying.

So that's what Bitcoin is. And that's what Bitcoin has been. What Bitcoin will become in the future, there's lots and lots of speculation, because it turns out, you can use Bitcoin for money, you can use it as a payment network. It's incredibly convenient to use Bitcoin to pay people face-to-face, using your cell phones, or across the world, which is really revolutionary. And there's a lot of value there.

People are more and more talking about Bitcoin as a network that can support all sorts of other interesting things that maybe money's just the first application of this distributed technology, where there's no central control. But there is this shared ledger of transactions, where we all agree that these are the transactions that took place.

So people are, today, experimenting with using it for all sorts of other different things. And so as we go forward, you may start hearing about Bitcoin as, you know, not just currency, not just money, not even just a payment network; but maybe—maybe a way of signing title for houses or cars, or doing other kinds of contracts.

So there's all sorts of innovation that's happening. And really, for me as a technology guy, that's what makes me really excited. It's all of the interesting things that are being created on top of this new technology that—that, you know, keeps me awake at night thinking about the possibilities.

REDIKER: All right. So many questions; those I'd thought about asking, and now some that just came up. But I'm not a tech guy. So as you could see, when I was trying to raise the font on my iPad, I still have some problems with the basics. But if the software is designed in a way that is reliable, dependable, open-source, et cetera, what is it that you do when you say, "I go home, and I write more code for it"?

In other words, are you constantly revising the underlying computer code, and if so, why? Does that mean you're making it better, or did you find flaws in it? And again, this isn't about Bitcoin in particular, but just in general, if something is a currency—we'll get into what it is, or isn't, or should be, or could be. But, you know, when you're the chief scientist, and you're writing code for something, what does that mean?

ANDRESEN: Sure. I mean, I actually get asked that question a lot. "Isn't Bitcoin finished?" You know, "Why do you have to write any code?"

And being a software engineer, software's never finished, right. There's always—you can always optimize it. You can always make it a little bit faster. You can always make it a little bit easier to use.

As Bitcoin grows, you know, a lot of what I do, a lot of the work is scaling up, is—you know, when there were 10,000 people trading Bitcoin back and forth, and there were a few transactions happening every hour, it's not hard to write software that handles a few transactions every hour.

REDIKER: So like the Affordable Care Act had some...

ANDRESEN: Well, they jumped into the deep end, right. I mean, Bitcoin's had the luxury of kind of organically growing at a very—it's been a steep path. And it's been hard to keep up.

But as Bitcoin continues to grow, we just—there's software engineering that has to be done to support thousands of transactions per second, instead of dozens of transactions per day.

REDIKER: So it's not changing the fundamentals. It's simply allowing it to grow organically or otherwise.

ANDRESEN: Pretty much, yes. I mean, yes. Yes. To the lay person, you know, it would look like...


REDIKER: We're all lay people when it comes to the technology underlying Bitcoin.

ANDRESEN: It typically looks like we're doing nothing, which is what we want, right. I mean, we want the system to just work.

REDIKER: All right. So let's—the questions—we spoke last week. And I started with the basic skepticism of, "It's a virtual currency," and we'll get into what a currency should be, could be, why we need one, et cetera.

But you pointed out it is both a virtual currency, a payment system, or a payment network, and it's regulated in some quarters as a commodity. So can you go through the—and let's start with the payment system, because I think that's the least controversial, and the one that I personally am the least skeptical about.

I think it certainly adds value with limited controversy. Can you just go through how it works as a payment system, and what you think the need is that this is trying to address?

ANDRESEN: So if you think about the payment systems we have today, you know, they're typically created back in pencil-and-paper days. So we have, you know, check-clearing payment systems that have kind of evolved, and they kind of work today. Although, if you try to pay somebody, it might take three or four, five days, depending on whether there's a bank holiday in the middle of, you know, when you wrote your check, when it actually gets to the other person's bank account.

And that's kind of crazy, right. I mean, I can send an e-mail across the world, and it arrives in that person's inbox in five seconds, 10 seconds.

When you're talking about money these days, I mean, you're talking about numbers in bank accounts. Why does it take two, three, four, five days to transfer value to somebody across the world?

The reason is, it evolved, right. It was not designed—our payment systems were not designed for the Internet.

Bitcoin was designed for the Internet. It's fundamentally secure at a very low level, using up-to-date cryptography, you know, using kind of best practices for how do you make sure that the person you're paying is the person you're paying, and nobody can get in the middle of that.

And so as a payment system, it's just much more efficient than the payment systems we've had up to this point. And because it's more efficient, it's cheaper, faster, better. It also doesn't care about international boundaries, which I mean, there's lots of regulations set up around national borders, which in the age of the Internet, you really have to ask yourself, does that make sense anymore, right?

We're a globally-connected world. I can send e-mail across the world. I don't have to go to the national post office, and then put a stamp, that then goes to some other national post office. I just send e-mail. It just goes. It's the Internet.

And so Bitcoin's designed for the Internet, designed to be efficient. And so as a payment system, you know, lots of people are seeing opportunities to make things better, cheaper, faster, for consumers.

REDIKER: All right. So let's break that down for a minute. So the existing payment system structure is slow, inefficient, for, I would argue, many reasons; one of which is, as you say, it was written initially for the paper-and-pen crowd. And it has evolved in a slapdash kind of way.

But the other is that there are actual impediments set up for a reason, so regulators would say, "We have the need to know where funds are coming from, where they're going to."

There are banks that play the role of intermediaries, both to make money, and also to abide by a regulatory or a legal framework that is both country by country, and some international norms. Those could be seen as either the—promoting the common good, or as rent-seeking, and those intermediaries are simply trying to make their, you know, 2 percent on somebody else's hard work.

"When you're talking about money these days, I mean, you're talking about numbers in bank accounts. Why does it take two, three, four, five days to transfer value to somebody across the world?"

But there's clearly some element of both involved here. So whereas on the rent-seeking, you can argue that Bitcoin and this kind of technology advance is a good thing. It does run the risk of allowing people to bypass all the regulatory infrastructure that exists out there. And that leaves it prone to challenge that its basically for people who want to avoid regulatory and legal oversight.

We've seen those challenges play out both in terms of the press, terms of skeptical regulators, in terms of recent events we can get into in a moment. But, you know, what's the pushback on, yes, it's great, because it allows us to avoid all of the friction, when a lot of people would say some friction is there for a reason?

ANDRESEN: I may get myself in trouble.

REDIKER: Then I will have done my job this morning.

ANDRESEN: Personally—you know, personally, I think regulation's always about weighing risks, costs, and benefits. And so, you know, I think—I'm not going to tell regulators how to do their job. I would just encourage them to—I think regulators tend to focus on costs and risks, and not to focus so much on benefits.

Although, I must say, I think, actually, the regulators here in the U.S. have actually done a pretty good job of realizing that, you know, there is a balance to be struck. And if there are tremendous benefits, then even if there are additional risks, if the benefits outweigh the risks, then the rational thing to do is to, you know, allow—or not try to impede progress.

And so, yes, I obviously think the benefits of Bitcoin are huge. The potential is huge. And that's why I'm working on it, right. I wouldn't work on it if I thought it was going to make the world a horrible place.

Other people might disagree, although, so far, I mean, it seems like most smart people who've looked at Bitcoin really closely, they see the value proposition. They see that there are these huge benefits. And it will remain to be seen, you know, how well regulators, governments, law enforcement, adapt.

I think on a larger scale, going through this with just the Internet in general, right, of how does government adapt to this kind of new communication mechanism that lets people all over the world maybe talk about things that we wouldn't want them talking about, that let's them interact in ways that they weren't able to interact before.

So like I said, I don't have the answers. I think you just need to carefully look at both the benefits and the costs.

REDIKER: So from your perspective then—and this is not meant to be definitive—but the idea of some regulatory mechanism is not totally off the table. So the idea of a bit license, I think some regulators have talked about, we don't know what that would look like, and maybe you know.

But that's not a total nonstarter. It's not all or nothing in terms of no government having anything to do with it, or total clamp-down, as in the case of, I think China has prohibited Bitcoin. There's some middle ground that you think might be an acceptable future?

ANDRESEN: I mean, for me personally, you know, I think things like consumer protection make sense, you know. You should have some idea of who you're interacting with if you're trusting them with money, or whatever. So things like that I think make a lot of sense.

Trying to control Bitcoin, I think a government like North Korea will probably be very successful in controlling Bitcoin, just in the same way they've been successful in controlling the access to the Internet.

For other, you know, more liberal governments around the world, it's going to be tough to tell your citizens, you know, "Don't buy shoes from somebody in this particular country, because we don't like that country."

That's going to be hard to enforce. So, you know, even though a regulator might want to have that control, I'm not sure it's even possible to...

REDIKER: Well, the buying shoes, there's a physical good that's being transferred. So there are obviously—just to use that example, the alpaca socks.

They're coming across the border, they've got to be physically transferred. There's a means by which the government can deal with that. A transfer of funding, obviously, is the other side of it. And that's harder to control.

So let me move on to the other aspect of this, which is the virtual currency side. I think that's where I'm more skeptical. Anything that goes from half a penny to $1,000 in a very short period of time, and then has a huge amount of volatility in the meantime, gives you pause to question whether the basic economic theory of what a currency is supposed to be, store of value, medium of exchange, and unit of account on the store of value side, that leads people to say, "Well, hold on now." That's not just currency fluctuation. That's a pretty dramatic shift.

Can you walk me through why we need a new virtual currency—not the payment system side—but why we might need a new virtual currency? And then I'll probably push back on some of the basics of what a central bank's role in the world is, or ought to be, and whether in fact something like Bitcoin is consistent with that.

ANDRESEN: Yes, it's interesting. I mean, I'll get myself in trouble again, this time, with a different audience.

If Bitcoin turns out to be a miserable failure, which I should say, it's still possible. It could be a miserable failure for technical reasons, or sociological reasons, or monetary reasons.

But if it's a miserable failure, but it does encourage some government somewhere around the world to realize that our payment systems are really broken and archaic, and some country decides we're going to create a payment system for this century that's—where the currency is, you know, our national currency, I think that would be a huge success.

Just that would add so much value to the world of creating a way of—it really doesn't matter if the currency is dollars or euros, or loonies. I think—actually, the Canadian government's actually been pretty—done some interesting experiments with putting Canadian dollars in digital form.

Or you can look at what's happening with M-Pesa in Africa, very innovative payment system with the Kenyan schilling being the backing currency.

So if that's the only kind of effect that Bitcoin has, as kind of showing the way, then I think, you know, Bitcoin will have been a success. The argument for why Bitcoin, the currency, there's several things that people bring up.

So one is kind of the fixed supply, right. Everybody knows it's completely and utterly predictable how many bitcoins there will be next week. You know, we know that they're being created at a rate of 25 approximately every 10 minutes. That rate is fixed in the code, and it, you know, kind of self-adjusts.

People all over the world are getting those 25 bitcoins. It's not, you know, one person issuing the currency.

And the economic theory is that if you know that there's a fixed supply, and assuming that demand settles down, that, you know, eventually everybody in the world will have heard about Bitcoin, hopefully, and all the people who want to use Bitcoin are using it, then, you know, you have a predictable demand.

And if supply and demand are both reasonably stable, then you get a stable price. Because the price is purely driven by supply and demand.

Whether that's ever going to happen, nobody really knows. Whether that's actually the correct economic theory, you know, economists I think will argue about endlessly, maybe for years and years.

I still say Bitcoin's an experiment. And it's an experiment in progress. And we'll have to see. But, you know, I mean, theoretically, if you think about it, what if a government did decide—what if the Canadian government decided, you know, "Our currency is going to be a virtual currency. We're going to, you know, upgrade our payment system, so anybody anywhere in the world can use it," would other countries trust the Canadian government to do the right thing, to always uphold their end of the bargain?

I think the U.S. government would probably have a big issue with kind of saying to its citizens, "Yes, you guys should start using this cool currency the Canadian government invented."

So a currency like Bitcoin, where there's nobody in charge, there's no country in charge, there's no corporation in charge, it's everybody who's using the currency is supporting the currency, theoretically might be something that everybody could agree, since there's no one person in charge, "Yes, this is something that we could all use."

REDIKER: So I'm going to push back. First of all, the fixed demand is a question I would push back on, because not only is there not fixed demand in any given quarter, month, year, but over time, the population of the earth grows, and economic growth continues to hopefully be a dynamic.

So over time, you do have both volatility in demand, but a steady, upward trend in demand. And if you cap the amount of supply, then by definition, you're going to have an imbalance at some point in the future, which is why there are those who are skeptical for, amongst other reasons, for the inherent deflationary aspects of Bitcoin; meaning that if Bitcoin continues to go up in value, because you've got a fixed supply, and a potentially increasing demand over the long term, then by definition, if the value of the currency goes up, then the value of what it can buy goes down.

And therefore, you have deflation, which, you know, in the generation of those in this room, is somewhat of a new phenomenon that we're talking about in Europe right now, the risks of deflation; the Fed in the U.S. having fought off the risks of deflation in the post-financial-crisis era.

So it's one thing to say this potentially takes care of your inflationary problems. But don't central banks play a valuable role in using all of their economic and discretionary tools to actually adjust both interest rates and the supply of money, precisely because the world is a messy place, and things don't always go as a software program might predict that they should?

And you need this human element in there, precisely as we've seen over the past several years, to adjust the money supply and interest rates, to take account of what's going on in the real world.

ANDRESEN: Yes. I don't know. I mean, if you talk to most Bitcoiners, they would say, no, central banks have done a horrible job.

In my wallet, I actually keep some foreign currency. I keep a $100 trillion Reserve note from Zimbabwe—it was issued in 2009—which is, you know, that's an extreme example of a central bank screwing up, either on purpose or accidentally.

As a technology person, you know, deflation doesn't bother me, right. That iPad that you're holding, you couldn't buy it 10 years ago. If you could buy it, I don't know how many millions of dollars it would cost, right.

We certainly have rapid deflation in the high-tech world, and just in terms of the things we can buy. We seem to do OK with that, you know. I mean, Apple seems to be doing OK, even though you know next year there's going to be a fancier version of that, that you're going to want.

So I'm not an economist. You know, I know that there's all sorts of theories about sticky wages and, how could you write contracts in a currency if it's deflationary? Again, I don't know. Bitcoin's an experiment.

I think these are questions that, if Bitcoin continues to be successful, maybe it will have to worry about in 20, 30, 40 years—I don't know what the world is going to be like in 20, 30, 40 years. But they're certainly fascinating, interesting questions, I think are going to be debated for quite a while.

REDIKER: Speaking of fascinating and interesting questions, it is at the witching hour of 9 o'clock, which means I'm going to open it up to the audience for your fascinating and interesting questions. So I think I've got something I was supposed to say here. Hold on, let me see.

Right. Please wait for the microphone. Speak directly into it. Please stand and say your name and affiliation. Keep your questions and comments concise to allow as many attendees as possible to speak.

So I'm going to start right here. Wait for the mike, please.

QUESTION: Hi, Danny Frifeld (ph). I'm sorry if I missed this, but I'm having a hard time extricating the payment mechanism from the underlying instrument.

I get the attractiveness of the mechanism. But what is the—if the underlying instrument has some attractiveness, and now it's got fixed demand—fixed supply, rather—and so it's a store value, or it provides some predictability, that it's not going to be subject to such rampant inflationary pressures, that it'll lose all value.

But why – again—notwithstanding what the central bank may do wrong in this country, but the dollar is effectively serving that purpose, along with a couple other currencies. So I know you've alluded to, if the one contribution Bitcoin made to humanity was dragging along the improvement of payment mechanisms around the world.

But I still—what I'm sort of missing, is that, you know, there are other systems, again, all rent-seeking, like credit cards and PayPal and the like. But what's really the attractiveness of the instrument behind this as a store of value, beyond something like gold or the dollar?

ANDRESEN: I think the attractiveness is the fixed supply, right. If you know that there will only ever be 21 million bitcoins in the world, and you have one of them, I mean, you have one-twenty-one-millionth of that commodity. And nobody can take it away from you.

And that's another key part of Bitcoin. If you own bitcoins, you actually own them. It's like cash in that way. They exist as these long numbers, essentially, that can't be taken away from you.

Nobody—until you sign a transaction that transfers the value somewhere else, you own them. You can print them out on a piece of paper, and put them in your safe-deposit box.

I actually have a bitcoin in my wallet that I can show you, that, you know, has that number on it. And so if you're looking for some other store of value, something like gold works, right.

If you own gold, you actually do own it. It's, you know, sitting—you can hide it under your mattress. But it's not convenient to trade, right. And so Bitcoin combines a really interesting—it's both a commodity that you really do own when you own bitcoins.

But it's also incredibly convenient to trade, because it's, you know, a creature of the Internet. If I want to send a bitcoin, sit down at my computer, sign a transaction, send it anywhere in the world.

So I think that's, as a store of value, as a, you know, a commodity, as a token, that's why so many people find it valuable.

REDIKER: I just picked up on this. I saw a study last night as I was preparing for this, saying that 64 percent of all bitcoins are hoarded, or are not used. So just as a make-believe economist, let me just throw out that the purpose of currency is to be used, so that they are used to stimulate economic activity, which feeds growth and jobs, and all that good stuff.

"If you know that there will only ever be 21 million bitcoins in the world, and you have one of them, I mean, you have one-twenty-one-millionth of that commodity. And nobody can take it away from you."

So if the limited supply means you know it's going to increase in value over time, you're not getting into deflation versus inflation, but the fact that I know I've got it doesn't actually help the broader, global economy, because I'm not using it to stimulate economic activity, which ought to be a pretty fundamental tenet of why you use a currency.

ANDRESEN: I mean, in theory, that's true. In practice, it doesn't seem to work out that way. So BitPay is a large Bitcoin payment processor. You can think of them as like the PayPal for Bitcoin. They help merchants accept payments for goods and services in Bitcoin.

And they tell me that as the Bitcoin price rises, they see more transactions. So people are doing exactly the opposite. And it might just be a wealth effect, where, "I bought some bitcoins for $100, they're now worth $200 apiece. I have $100 I can spend, right, without—I might as well spend it. It's basically free money."

And I think you might see some of that. And I think that's something that people will want to hold onto bitcoins as kind of—eventually, the idea would be to hold onto bitcoins as a safe store of value, just like you might put, you know, cash under your mattress if you don't trust the banks, if you don't trust anybody else. It's generally a bad idea, cash under the mattress, in case you have a house fire, whatever.

Bitcoins could function as a high-tech, easier to kind of back up cash under the mattress. And I think there will always be some of that. You could call that hoarding. You can call that saving—savings.

But if the price goes high enough, and there's something you want to buy, I think you will—certainly, I paid for my hotel room here, actually, using Bitcoin. And was very happy to do it, and actually saved a little bit of money, because the company that's doing it saves on credit-card fees when they use Bitcoin instead of...

So, you know, we'll see. In practice, it doesn't seem to be an issue.

QUESTION: I was told to stand. My name is Carter Dougherty. I'm with Bloomberg News. I'm a resident bitcoiniac, bitcoin boy, call me what you will.

I think it's safe to say that when you look at these functions of the store of value versus the medium of exchange, the area that's attracted the most attention in the sense of venture capital, and serious investment, has been the medium-of-exchange concept, whether you're looking at Coinbase, or Circle Financial in Boston, that sort of thing.

And that's really what attracts the people who thought about this for a long time, because Bitcoin shows all the signs of being a disruptive payment system that doesn't simply piggyback on the existing system, which, if you think about it, is really what PayPal has done.

Do you think that over time, if the sort of commercial evolution is in that direction, of this focus on the medium of exchange, will the enthusiasts, the ur-enthusiasts, the developers, the engineers, the ideas people, will they maintain their interests and focus on Bitcoin and digital currency?

Because there is—we all heard the sort of disdain in your voice when you mentioned central banks. I mean, this is a widespread kind of libertarian bent of many bitcoiniacs. Would that—is the enthusiasm going to continue if we move in this other direction?

ANDRESEN: I think so. We'll see. There's—I mean, there's so much potential with Bitcoin. I mean, we're really—like I said, I get excited about all the interesting things that can be done with this new technology, right. I'm a technology guy, so I'm always thinking about what's going to be next.

And so people, like venture capitalists, will look at just kind of the meat and potatoes, you know, "What industries that are already incredibly profitable can we disrupt? How can we get a piece of that trillion-dollar industry, and make a bunch of money?"

That's not that interesting to me, personally. I think there's enough kind of meat there. Bitcoin's such an interesting kind of revolutionary disruptive technology, that I think it will keep people's interest, even while we have, you know, lots of money being thrown at kind of how do you optimize the existing infrastructure and payment system, and work in the existing system?

So I think we're going to have both. You know, as chief scientist at the Bitcoin Foundation, kind of my—part of my job is to encourage lots of different experiments in lots of different areas, and to see, you know—well, to make sure that the fundamental technology keeps chugging away, processing transactions reliably, and then to let, you know, all this wonderful innovation and experimentation happen on top. So...

REDIKER: In the back.

QUESTION: Hi, John Stubbs. You touched on a few of these. But I was just wondering what you see as the biggest, or most significant, existential threat to Bitcoin in the next two to three years?

ANDRESEN: I have a deep respect for, you know, threats that are like an asteroid that you didn't know was there, coming, and like wiping out the dinosaurs, you know. So I always have trouble answering this question, because I think the biggest—probably the biggest threat is something that just isn't on my radar. I have no idea.

You know, maybe there's somebody working in his basement that has a system that's 10 times better than Bitcoin, and will come out with it. And you know, just—everybody says, "Oh, that's way better. We'll just use that instead of Bitcoin."

It's possible. You know, that's—I don't think it's likely. But that's possible. It's possible that society in general decides Bitcoin's a bad idea; that, you know, maybe crazy, high-tech people think it's the greatest thing ever. Ordinary people just think it's unpatriotic. They think it's—whatever.

You know, that could happen, and that could, you know, make it basically be a tiny little niche that's only used by maybe unsavory people, and it fails, because nobody wants to be associated with something that's only used for unsavory purposes.

A technical glitch is certainly possible. As we scale up the Bitcoin network, I get kept up at night worrying that we're going to introduce some bug in the code that, you know, maybe we need to deploy some software that everybody uses. And then, unbeknownst to us, there's some bug that brings the network down for a day or two.

That could really shake confidence in this payment system; that, you know, a payment system that goes down for a couple days is not a payment system you want to rely on. Although, I guess there are existing banking payment systems, kind of go down every weekend.

So maybe that's not an existential threat. But, you know, those are the kinds of things that I think about. But again, asteroid killing the dinosaurs might be out there that I just don't know about.

QUESTION: Thank you. Ornstein Mallock (ph) from the State Department. Quick question. For technology to really go mass, you normally need it to be elegant.

So Bitcoin may be mathematically, and from a cryptography perspective, very elegant, from a user perspective. So one bitcoin, for instance, costs $800. So if the average person on the street wants to get a bitcoin, it's very expensive. And so you need to have smaller denominations.

And I know that right now, people buy zero-point-zero-zero-zero—whatever—bitcoin. That's not very elegant. And it has to be like the iPad, something which is, you know, user-friendly. Is there some effort being made to make it more elegant, more user-friendly in that regard?

ANDRESEN: Absolutely. I mean, a part of the excitement in Silicon Valley is, you know, startups that are trying to make really easy ways for people to buy Bitcoin, easy ways for people to trade Bitcoin, easy ways for people to make their Bitcoin secure.

I saw, I think just yesterday, the day before, there's announcement of a little wrist thing that can hold your bitcoins. And it monitors your heart. And apparently, our heartbeats are unique.

And so, you know, somebody steals your wrist thing, they can't steal your bitcoins, because they don't have your same heartbeat, which is wild and crazy. And I don't know if that will succeed or not, but that's an example of kind of one of the experiments of what people are doing to make it really easy for people to use Bitcoin to keep them secure. And we will see that.

I mean, you're right. Buying—there's this idea that you have to buy one bitcoin, which is not true. You can buy one-thousandth of the bitcoin.

I think we'll see kind of, from a bottom-up, emergent process. We might start talking about milli bitcoins, millies, instead of bitcoins. So I'll send you two millies for that cup of coffee, or whatever. That's going to be a bottom-up. I think that'll be a bottom-up process.

I don't know, you could imagine the Bitcoin Foundation taking the lead in saying, "We think that this nomenclature shall be the nomenclature," although, that's really not in the spirit of the bitcoin. The spirit of Bitcoin is more to kind of let that kind of thing emerge.

QUESTION: Marvin Amore (ph), the New America Foundation. There's a lot of excitement in the human-rights community around Bitcoin. And I know that allows bloggers around the world who might be anonymous to pay with Bitcoin.

So I'm wondering if you've seen anything interesting around human rights and Bitcoin. And also, since we're at the Council on Foreign Relations, any thoughts on foreign policy and Bitcoin, sort of foreign aid? Anything you could write in the code to constrain or monitor where American foreign aid might go, if given in Bitcoin, or another altcoin?

ANDRESEN: Yes. I mean, you know, on the benefit side, you know, bringing kind of a stable payment network to people in the world that really haven't had that, you know, a stable, modern payment network, to anybody who has, you know, a smartphone, or even a dumb phone—I think smartphones, you know, in five years, I think pretty much everybody in the world will have a smartphone, right.

That's just the process of technology, right. iPhones are expensive. Fifteen years from now, you'll have an iPhone given away in your Cheerios, as, you know, your little toy. It's the wonderful thing about technology. It just gets cheaper.

And so I think there is huge opportunity there, and that there are people, you know, working hard on making Bitcoin usable in places in the world that don't have a lot of infrastructure. And so there's a lot of—I think there will be a lot of innovation happening there. And that's fantastic.

And it'll be even more fantastic if the people doing that innovation are the people in those countries. I want to see a lot more of that.

For foreign aid, I don't know much about the foreign-aid world. I mean, one of the interesting things about Bitcoin, is it's this distributed ledger, where if you want, you can be incredibly transparent about, you know, "These are the bitcoins that are coming in, and these are the bitcoins going out."

And we have this data structure called the "block chain," where anybody can audit it. So, you know, if you publish, "These are all my bitcoin transactions that I got in, these are all the bitcoin transactions that I got out, that went out," and, you know, "This is my bitcoin balance," you know, anybody can audit that, and you don't need to go visit some corporate offices, and pour through records. It's out there in the public.

So I think that's actually part of Bitcoin that hasn't been explored much at all, is how do you—how can you use it as a very transparent payment system, so that a non-profit can be completely upfront with their finances, and everybody can trust that the money is actually going to what they say it's going to.

I just want to throw one other thing. I was really excited last week to give money to a charity called, "Give Directly," which has the simplest model in the world for a charity. They find poor people, and they give them money. That's it. Incredibly low overhead. I believe they're operating in Kenya—Kenya and Uganda at the moment.

And they just—I asked them if they would accept bitcoin donations, and actually got to beta-test their bitcoin donation process, and gave them some bitcoins, that they will then turn around, and give directly to poor people in Africa, which I think is just a fantastic—and, you know, they're turning it into cash, and they're actually transferring that cash overseas, and turning it into Kenyan schillings, and then it goes, Kenyan schillings to the M-Pesa system, which works on, you know, phones.

If the poor person doesn't actually have a cheap cell phone, they'll actually give them a phone, so that they can receive the money. Then they have it basically on their phone.

And all of that process, there's all sorts of friction there. But we could do a lot better, right. It would be much better if I could donate bitcoins to them, and then they just turn around and send the bitcoins directly to the poor farmers in Africa. And then they'd trade them amongst themselves.

"I mean, one of the interesting things about Bitcoin, is this distributed ledger, where if you want, you can be incredibly transparent about, you know, 'These are the bitcoins that are coming in, and these are the bitcoins going out.'"

That's the vision. And that's where I hope we get. And that's the kind of thing that, you know, makes me excited, makes me want to work on Bitcoin more.

REDIKER: Right here in the middle.

QUESTION: Hi, Sean Goldheart (ph) of Barclays. So on the side, I run a charity. And we get virtual currency, not Bitcoin. Well, at least, not yet. But if you guys are giving more out, we'd love to take it.

It's been great, because we are able to get cash for it, computers for our kids, suits for the children, whatever we need, which, it's always interesting, because when a new vendor comes on the system, we get very excited, because it's somewhere new we can spend our money.

And I think of Bitcoin now as like American Express points. You can use it in New York City cabs. You can trade it for cash. You can trade it for a flight or an iPad.

How much time do you guys spend trying to find new vendors, versus vendors coming to you, because they see this as like a popular item of exchange?

Because the way—I don't—I think if an asteroid's going to come hit the earth, in my opinion, nobody's going to want Bitcoin. You're going to want a military behind your dollar. And a bunch of guys in Silicon Valley are not going to protect me.

So I see Bitcoin having a limited—not a limited—having a use as the ability, like American Express points are to buy certain things. But it only works if a lot of vendors accept it. And it feels like now more and more vendors are beginning to accept Bitcoin.

So what's the effort you guys are making to find more vendors to accept it, to kind of ward off these other virtual currencies?

ANDRESEN: Well, you say, "you guys," which is not correct. There is no "you guys" with Bitcoin. With Bitcoin, it's everybody. It could be you. There's no central—I mean, the Bitcoin Foundation exists as a trade organization to talk to regulators, to give information to people who, like, are trying to get their hands around this weird, decentralized system.

So I know, for example, the folks at BitPay and Coinbase, which are two bitcoin—big bitcoin companies here in the United States, they spend a lot of time talking to merchants, you know. I know—I don't remember if it was BitPay or Coinbase, that did the deal. Coinbase? Coinbase.

So they spent time, you know, talking to CEO, and selling it to him, and getting to accept bitcoin. That's being replicated all over the world. So entrepreneurs are kind of—people will send me e-mails saying, "I would like to do this or that with Bitcoin. May I?"

And my response is, "You don't have to ask anybody's permission or advice."

It's an open system. Anybody can jump in and do whatever they want with it, subject to whatever regulations exist in your jurisdiction. That's, you know, part of what some of the early entrepreneurs are finding, is that there are things that you—just because you're using Bitcoin, doesn't make you immune from regulation, prosecution.

I think, to me, that's like, "Duh." But, you know, I think there was kind of some feeling that it would be this kind of magical fairy dust that would let you sidestep all of the existing legal and regulatory framework. And that's just not true.

REDIKER: How about tax?


REDIKER: I mean, you know, regulation, know your client, that's one thing. But, you know, societies generally exist with at lest some element of tax revenue. Is there a general understanding and acceptance of Bitcoin Foundation and the broad bitcoin universe, that even if it is an anonymous transfer, there is an obligation at the end of the day to pay your fair share of taxes?

ANDRESEN: Yes. I mean, my salary every month, I get paid in bitcoin. So I get bitcoin transferred to one of my Bitcoin addresses. But before that happens, your taxes are taken out, and are paid in dollars, just as if I had any other job.

And while we wish the IRS would be a little more clear about exactly, you know, when taxable events occur, and I think that will happen. But yes. I mean, Bitcoin is really not all that different from other things in the world that are taxed, like foreign currency transactions, or barter transactions, or—usually there's some kind of pigeon hole in the regulatory framework that Bitcoin might not fit in perfectly, but probably fits in well enough. And taxing authorities all over the world are currently scratching their heads and trying to figure out which pigeon hole to put Bitcoin in.

REDIKER: Gentleman in the back.

QUESTION: Hey, Gavin. I'm John Flam (ph) with the Air Force. So you had mentioned earlier the term, "unsavory people." And this—we were talking about non-profits, and how transparent these transactions are, which is great and all.

But with that term, "unsavory people," one thing that comes to mind, in my small brain anyways, is terrorist financing, money laundering, those sorts of things. And so on the court of public opinion, it's probably important that people want to contribute to an organization that, you know, does not condone that, right.

So with that said, like how—and I'm sure you've been asked this question before. How do you deter unsavory people from participating in Bitcoin, and this type of transaction?

ANDRESEN: That's a really good question for law enforcement, and in the Senate hearings, end of last year, we heard from law enforcement that they felt like they already have the tools that they need to deter people.

And I think we've seen that with like the closure of the Silk Road drug marketplace, where—thinking about it purely from a technical point of view, I think once you get to a size that's kind of large enough to be interesting, it gets really hard to pull off whatever criminal enterprise, you know, you're trying to pull off.

And so I think we'll see naturally kind of these little Silk Roads start out as this tiny little place on the hidden Internet. They got big enough that the founder had to start hiring people to help with that customer support.

Once you have more than like one or two people involved, I think it becomes really hard for criminal organization to function, you know, to not get caught; especially with a system like Bitcoin, where all these transactions are being recorded in this global, public ledger. And the more—just the more people you interact with, the more opportunity there is for somebody to actually turn out to be working for law enforcement, which I think is a big part of why Silk Road got taken down.

So I think the standard law enforcement techniques of infiltration, of surveillance, of all the other tools they have at their disposal, will work with Bitcoin, just like they work with people who are smuggling diamonds, or transferring cash across borders, or, you know, doing what other unsavory stuff.

REDIKER: We've got time for one more question. Before I take it, I just want remind everyone this meeting is on the record. So last question. Gentleman back here.

QUESTION: Hi. I'm Garrett Graff. I'm editor of Washingtonian Magazine, and a proud bitcoin owner. But I'm not Satoshi Nakamoto. So I can help you narrow that down a little bit.

I'm curious. We've talked about it in a couple of different contexts. If you would just talk a little bit about, as the—while I understand, there are not "you guys" at Bitcoin. You are, to a certain extent, the public face of sort of Bitcoin, Inc.

And I'm curious if you would talk a little bit about—I assume you have had some level of interaction with various entities of the United States government, and sort of what those interactions have been, and what the reaction you've gotten from—your interactions have been?

ANDRESEN: Well, I gave a talk at the CIA a couple years ago. And they're really good at not talking back. They're well trained. So, you know, on some level, I don't know.

My interactions with regulators have typically been very open. I mean, the fantastic thing about working on Bitcoin is we really don't have any secrets, right. I mean, we're very upfront about—we're an open-source software project. Here's the code. Here's how it works. Here's where the money comes from. Here's where it goes.

So it's pretty—it's actually pretty easy to talk to government, to just kind of put it out there as, you know, here's what the technology does. We're not going to say what it means, or what's going to happen in the future, but, you know, I think the interactions have been generally pretty positive.

I think they've generally been pretty positive because we have been so open. I mean, we're not trying to do anything nefarious here. And I think everybody working on—at least everybody I know working on Bitcoin is doing it for the reason that we think it'll make the world a better place. We think it'll just make our lives better.

And so, you know, whether we can convince every regulator in the world of that or not, I don't think we will. But, you know, so far, at least here in the U.S., it feels like, you know, we've been successful in that message, that we really do think that the benefits of Bitcoin are going to make the world a better place.

REDIKER: Fabulous way to end. I'm still a little bit of a skeptic on the whether central banks play a positive role or not, but we'll leave that for another day. But I think we all learned a lot this morning. I think you put forth a great case. And we all wish you the best. And thank you all for coming.


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