As mentioned in the previous two blog entries:
- Why governments will fail to block the emergence of cryptocurrencies such as Bitcoin
- What can you buy with a bitcoin?
Jon Matonis, Executive Director with the Bitcoin Foundation, spoke at our Polish Financial Services Club meeting last week.
It was challenging timing, as the issues with MTGox and other exchanges had just come to light. What issue was this? It’s best described in this week’s Economist:
The problems began with the discovery of a flaw in Bitcoin’s code at the start of February. Bitcoin is, in effect, a giant shared transaction ledger, recording who owns each individual unit of the currency at any one time. Everyone must use the same copy of the ledger—known as the “blockchain”—to prevent the same coins from being spent twice. The flaw, known as “transaction malleability”, muddles up the ledger so that successful Bitcoin payments do not appear to have been made. This could make it possible for hackers to trick badly-coded software—such as the proprietary Bitcoin wallets used by some exchanges—into sending money repeatedly.
To avoid any losses, most exchanges ceased all withdrawals while they checked that their software was secure. That sparked a panic as rumours spread that Bitcoin was fundamentally broken or that hackers had made off with customers’ money … fixing it is technically simple but harder in practice, as it means getting a large majority of those running Bitcoin to accept new rules at about the same time. In the meantime, vigilance—and safer wallets—can prevent hackers.
This occurred right on the back of Jon’s colleague Charlie Shrem, Vice Chairman of the Bitcoin Foundation, being arrested on money laundering charges in the USA.
Not a great time to be advocating the Bitcoin network and its future.
But Jon more than stepped up to the task.
The flow of our conversation began with a discussion about the background to Bitcoin and Jon’s involvement in it – he is ex-Visa and intimately understands payment networks having set up Visa’s foreign exchange desk.
Jon describes bitcoin as money without government which gives you one insight. This is because bitcoin does not need a central bank authority to bless something with value. (Another definition is cloud-based money, which I also like).
Jon reinforces the fact that Bitcoin is also an experiment. That’s an important underline as no-one should bet the farm on Bitcoin, but feel free to play with it. This is a fledgling economy, not a robust one, and so you should expect the trials and tribulations we’ve seen with Bitcoin to date.
We then discussed a little about the different views of governments towards Bitcoin, and I asked Jon whether this was a currency with value or a financial instrument or something illicit and illegal. Intriguingly Jon responded that bitcoin is a little bit like gold and silver, with XBT as its denomination for trading. This is because other units of value are traded with government relationships – USD, GBP, JPY etc. Because Bitcoin is non-government related, it should be given an X-rating which is the only rating that is non-government related. For example, the other X’s are XAU for gold and XAG for silver.
Only 2% of trading in bitcoin is in the USA, even though the US has the most Bitcoin nodes. This means that most US users are trading their coins overseas in Japan, Slovenia, Bulgaria and Cyprus, which are the largest exchanges.
The result is a form of regulatory arbitrage, with different countries taking the opportunity to gain business as other countries deny such business.
Jon likened it to the way in which online gambling has developed. When George W. Bush’s administration outlawed online gambling in 2006, that should have protected Atlantic City and Las Vegas and seen the end of online gambling shouldn’t it?
Not at all.
In fact, the main countries that offer online casinos today are Gibraltar, Costa Rica, Antigua and Barbuda, Curacao, Malta, the Isle of Man and a small Indian reservation in Canada called Kahnawake. These online services are fully regulated, authorised and taxed.
Taking Gibraltar as a good example, Jon noted that the bans in other countries such as the USA fuelled this small island’s trade such that today, online casinos employ 12% of the island’s workforce!
The bottom-line therefore is that as country’s try to squeeze the life out of cryptocurrencies such as bitcoin, other country’s will breathe life into it, such as Slovenia and Cyprus.
We talked about a lot more stuff and you can hear the whole 30-minute conversation with Jon on this podcast.
I promise you it’s well worth the time.
If you still haven't had enough of Bitcoin, read Simon Taylor's blog today: Why Bitcoin scares the crap out of governments.