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The Rising Price of Bitcoin, ICO's, and the Economics of Cryptocurrencies | Gil Luria
00:41:36
In this Crypto Forces segment of Hidden Forces, Demetri Kofinas speaks with Gil Luria. Gil is the director of institutional equity research at D.A. Davidson and one of the earliest sell-side analysts to cover Bitcoin. Gil Luria provides us with the Wal...
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- [00:00]
A
What's up, everybody? Welcome to this Market Forces segment of the Hidden Forces podcast. My guest for this segment is Gil Luria, the director of Institutional Equity research at DA Davidson and one of the earliest sell side analysts to cover the bitcoin and blockchain space. The reason I wanted to have Gil on the show is because I wanted to cover bitcoin and blockchain from the standpoint of Wall street, looking at it as a commodity, as an asset, taking a Mac view of the sector. And this is part of a long series of segments that I plan to do on bitcoin and blockchain. We had a few technology problems. It's not unusual, but this was unusually difficult to work through. You will notice that in the interview. I don't think it takes away from the substance of the discussion, but it prevented me from being able to sort of jump in in certain areas and maybe clarify and ask certain questions. And it also is the reason why this is a shorter segment than I would have liked. I intended it to go the full hour and we had to sort of end at 40 minutes because we had to start late. But I think it's definitely worth your time listening to. I think it's a great complement to the conversation that I had with Andrew Keys, and I think it'll be an integral part of the future discussions that we have on blockchain. So without further ado, here is that conversation. So, Gil, thanks so much for coming on the program.
- [01:28]
B
My pleasure.
- [01:29]
A
So why don't we start off a little bit with kind of your background, how you first catch wind of this space of blockchain and bitcoin. Sure.
- [01:37]
B
In 2013, the topic of bitcoin piqued my interest, and I've been following it closely ever since. I am a stock analyst by trade, have been since 2001, and my specialty for the last 10, 15 years was financial technology and payments. And so in 2013, when somebody alerted me to bitcoin, I entered it with the same level of skepticism most people enter bitcoin. But then I did the right thing, which is to read the original Satoshi Nakamoto white paper and light bulb went on over my head. It is a very eloquent and clever and brilliant representation of how to solve a problem that exists in many parts of the economy and specifically in payments of how to transfer value between two people that don't know each other and don't necessarily trust each other without using a third party. I found that fascinating because at the time I was covering stocks and companies like Visa MasterCard, PayPal, that were extracting very good fees for doing specifically that, for helping people transfer money from one another. And it was great for those stocks, but the overall functioning of the market, of the transfer of payments and funds and money. I found the Bitcoin solution to be very elegant and have been involved in following it ever since.
- [03:05]
A
Well, we've talked a little bit about the technology on this program. What we haven't talked about much about it, and I'd be curious if you have a perspective on it, given your time in this area, is the evolution of digital payment technology and digital cash. Prior to Bitcoin. In other words, what was the evolution that led to Natoshi's paper in 2008?
- [03:26]
B
Sure. The banking system, if we were to back up a little bit. Banking systems existed for a long time. This notion that you can leave money with the bank and they'll safeguard it for you, you can save it there, you can keep it there, and then take money out when you need in order to transact. And initially that was a physical representation of the money. And increasingly over the last 30, 40 years, there's also been the possibility of electronically moving the money that you left at the bank in a demand deposit account, you know, what we refer to as a checking account. The methods of moving that money from in and out of that account have become increasingly electronic. The same notion that's existed for centuries about having the money at the bank and using it per the relationship with the bank has continued, but the method of actually transacting has become increasingly digital. The first level of evolution was 40 years ago, the introduction of a credit card which allowed to move funds and then settle with a banking entity at some period of time and end of the month or after that. And then More recently, about 20 years ago, the introduction of the debit card, which allowed you to transact directly or almost directly on that deposit that you have in the bank account, with some framework around the roles and responsibilities of the bank, the payment provider, the consumer. The further evolution is still happening now, which is transferring that ability into a computerized form and most recently into a mobile form to a point where we can transact with that, those funds that we keep in a bank, as we have in centuries, but we do it digitally, electronically. And it's shifted the conversation from physical means of, for processing transactions into the more virtual means. And these days, you can live a fulfilling life without ever having to touch cash or any other physical representation of the money that you are depositing at a bank. So that system works fairly well, but per our conversation earlier, there is a big economic toll that the network provider and the member banks that are part of that network provider extract both domestically and especially for cross border payments.
- [05:55]
A
Right. At least 20% GDP from what I've seen by some numbers, and that's seen by some as a conservative estimate. We're going to get into that. That gives a basic overview of how we got to 2008. Post 2008 there was one, I think very significant, the first real peak in bitcoin. That happened in the spring of 2013 and it kind of topped out towards the end of that year. Then after there was this long winter, it was only three years, maybe not even three years between 2014 and the beginning of 2017. But it felt in this industry like a lifetime because it's such a small sort of. The market's only been around for so many years. We said it started in 2008, but really didn't pick up steam until maybe 2010 or any attention really. For me, that period was very significant for the public. It's not something that people really talk about or think much about. But I wonder from your perspective, what was the significance of those three years between 2014 and the past year, let's say, do you have any thoughts about that? I guess where I'm going with that is the significance in the innovation of the blockchain.
- [07:05]
B
There is much significance to that period. What I would say is that bitcoin has, specifically bitcoin. The conversation expands as we get into the last couple of years. But specifically for bitcoin, there have been several hype, boom and bust cycles already. It's a feature of the way bitcoin gets adopted. The supply of bitcoin is fixed and visible. The change in the supply is fairly visible and at this point pretty slow moving. The change of the demand is dynamic and momentum driven. It's a friend brings a friend. You buy bitcoin, thus increasing the demand. You see it go up because of the increased demand. You enjoy the fruits of that. You tell your friends about it. They buy bitcoin, the demand grows, that increases the price and that cycle causes the spikes in price. At some point, the friend tells a friend, momentum runs out. There's no new demand fueling this process. And this is the natural supply of people that have made money and want to realize some of those gains creates the downward pressure and. And we see a bust cycle and rinse and repeat. We've done this three or four times now since bitcoin was introduced all the way From a penny to $4,000 during the period of upward momentum in price. It draws a lot of attention, developer attention, entrepreneurial attention, venture fund attention. And a lot of businesses have tried to get off the ground based on that attention. And we had some of that in that period between 2000, let's call it the 2014-2016. There was some development of business and actual solutions that entrepreneurs were trying to build based on venture funding. Not much has come of that, to be fair. I would say the inflection point came when Ethereum started going through that same hype cycle. Added functionality and capabilities that new developers were interested in building on, then added the capability to do initial coin offerings, which brought more demand to both Ethereum and Bitcoin indirectly, but also brought another wave of developers and interest and entrepreneurs and investors. And that's fueled a lot of the most recent run up. In the background. You also have large financial institutions that are investing in the technology and legitimizing it. While the Bitcoin brand is a complex brand that some entities, especially financial ones, are hesitant to engage in, the concept of blockchain technology is now, in its notion, almost mainstream. Everybody's got a blockchain initiative. A team working on blockchain is thinking of blockchain part of the development path. And so that's been a nice tailwind for the entrepreneurial activity that's led to more demand for new coins and through that for Ethers, and through that to Bitcoin to a certain extent as well.
- [10:15]
A
A few things. I definitely want to get more into Ethereum and I want to get into the ICOs. A quick clarification, then I want to hit a little bit more on this notion of price and the significance of price and the demand and supply dynamic. When was that development cycle for Ethereum? Did that begin prior to 2013?
- [10:33]
B
No. Ethereum was born in Vitalik Buterin's mind around 2013. It was the initial coin offering for Ethereum and Ethers was done in 2015. And as that platform came to be around 2016, a lot of developers were attracted to the new capabilities that Ethereum offered and started developing businesses, projects, ideas, networks around that, leading to the wave that's happened over the last few months.
- [11:05]
A
So I guess my point, I don't want to belabor it, but it was really from the outside looking in and thinking that the mania that was developing in Bitcoin, once that subsided with the major decrease in price from the peak in 2013, I felt from my standpoint, it at least gave some breathing Room for the developer community to come up with alternative projects around blockchain and not focus just on this speculative drive that was happening in Bitcoin. But that's very much a qualitative analysis on my part. It may not hold any water whatsoever as far as the price is concerned. I've heard you talk about the market for Bitcoin compared to commodity markets, but you're also talking here about how it's really demand driven, not supply constrained. Or it is supply constrained, but it's not the supply dynamics that are causing the price changes in Bitcoin. I wonder how all that works, because in a commodity market, of course, if you have a period of low prices, that can make the mining of that material, let's say it's gold, unprofitable, that causes a decrease in the capital stock, and then the market is vulnerable to price shocks because there isn't enough supply to meet the demand. How do those dynamics work within Bitcoin?
- [12:16]
B
I think there are some analogies. The processing with the transaction processing equipment, the mining equipment, as the price is going up, get better return on investment, which fuels investment in new mining equipment, new transaction processing equipment, and higher hash rate, et cetera. And when the price came down, the cycle for introducing new equipment also slowed down. But that also meant that the previous equipment with the older hash rates was able to last longer in the market and therefore still achieve returns. So to me, this is one of the very clever aspects of Bitcoin. And, well, I don't know if we'll ever know if it was part of the original intent. But the market dynamics around the transaction processing in Bitcoin, again I'll use that term as opposed to mining, are actually extraordinarily clever because the calculation is the higher the price goes, the more equipment comes online, the more stable the platform. If the price goes down, then the existing equipment can still work and there doesn't need to be another investment and therefore the existing equipment can still get a good return. And this is part of how the bitcoin network works without there being a central entity, by creating the economic incentive for entities to provide compute power to provide transaction processing. So I'd say the mechanism actually works quite well and worked quite well through the price shocks of the really since Bitcoin started in bringing in processing capacity as the price goes up, and then as the price went down, that processing capacity was still able to be profitable because it was depreciating over longer periods of time because there was less investment in the next generation of hash rate.
- [14:02]
A
Help Me understand that distinction, because I don't see a distinction right there. And I'm trying to see what I'm missing between Bitcoin and, let's say, some other commodity markets, whether we're talking about oil drilling or refinery or gold mining. In those cases, the equipment you have is still useful at any price. But the question is the financing for it and the economics for it can make it unsustainable. You're basically operating in the red. Are you saying that those same economics don't work in Bitcoin? That the miners, the way that they finance their equipment, they don't need to actually have X amount of profits per month in order to be operable, or that some marginal capacity is not affected and so the market is much more stable, Is that you're saying because of the fact that computer equipment is more affordable and more replete?
- [14:47]
B
I think yes to a lot of what you just said. The basic rules of economics are the same. It's just that the life cycle of the transaction processing equipment is measured in weeks and months as opposed to in generating other commodities could be depreciated over 10, 20 years. And so there's a layer of the microeconomics that's mostly unique to Bitcoin because of the very, very short life cycle of the transaction processing equipment. That's not only parallel to the world of microchips, but had often, at times, been going even faster than Moore's Law. There was a period of time when, especially in that 201314 timeframe, where we were even beyond Moore's Law for the transaction processing industry.
- [15:36]
A
I see what you're saying. You're saying that the investment in the equipment for something like gold mining or oil or other commodities, aluminum, whatever it is, that is a much longer cycle. Whereas the computer, you need to upgrade those every year or every 18 months or whatever else it is in order to remain competitive. You have to be constantly making those investments. So you're not really making forward investments that then are going to bankrupt you with as much certainty as other commodities. That's very interesting, because I wasn't really entirely sure about that. And so you kind of enlightened me within the moment, and we're going to shift with that in that respect. I guess two questions. One is, we've had that hard fork that happened in the bitcoin market with bitcoin cash. We have this talk about proof of work versus proof of state. That's something that I spoke to Andrew Keys about in our previous discussion on Blockchain. I'm Still a little fuzzy on the distinction between POW and pos. And also, given what you just said, the fork and why that came about, given the economics and everything else, can you contextualize that within the economics of the industry?
- [16:42]
B
For me, sure, let me at least try. But let me start by saying I'm an outsider. I am neither computer scientist nor mathematician and I'm a stock analyst. And so I analyze this problem exactly the way I analyze other technology companies, be it PayPal or Square or Apple or Microsoft. I look at what's been proven, what's established, what has a track record, what's been tested versus good ideas that may hold, may be valid theoretical level, and maybe smarter people than I have believe in and created the mathematical proof. I put those in two different categories. Again, the analogy would PayPal say our Venmo product works great, but oh, just wait until we put a new product that integrates into social. So what I would do in that situation is say, well, Venmo I know is great, I know what the cash flow is. I can assign a certain credibility and value to that. The new product that they're going to introduce, smart people, I'll take their word for it, but I'm not going to really factor for it. I feel the same way about proof of work versus proof of stake. Proof of work has been proven to me one of the most revolutionary changes in both computer sciences, mathematics and economics. The success of Bitcoin, to me is remarkable. The fact that there has been this network that's been up and running and helping everybody move money from everywhere in the world to everywhere else world, the, in. In the world in a highly efficient way because of this mechanism of proof of work, to me is astounding. And it's held up. And for as much as there have been controversies about Bitcoin, you can quietly say that the Bitcoin itself has not been hacked or broken, which is remarkable considering how many people have taken aim at it.
- [18:38]
A
The peer to peer aspect is what astounds you, is what you're saying. The fact that this is a distributed ledger, that very notion, the notion that.
- [18:44]
B
I can transfer money to you without a third party, without knowing, without trusting you, and that it works anywhere in the world for a terrifically small fee in a very, very short period of time. Again, in the context of where we started, of where electronic payments are today, it's remarkable. We're not even in, really in version 1.0 of Bitcoin. If you look at, I think we're up to 0.15. So I think that it's remarkable and a huge achievement. And most importantly, it works. Proof of stake is a very interesting concept. And again, greater minds than mine, which include Vitalik, Buterin and many others, have concluded that it will work and it'll work even better than proof of work. I'm going to have to suspend judgment. I believe them. They're extraordinarily talented, intelligent individuals. The mathematics are there for them. But until I see it working, until they've gone through years of being attacked under a proof of stake regime and it survives and works and is shown to be as bulletproof as Bitcoin has been, honey badger like characteristics as Bitcoin has, I'll give it the same credit, but we're not there yet. We're still at the point of it mathematically makes sense and very intelligent people say it'll work. In my mind, I don't know that the proof and the credibility is quite there yet.
- [20:06]
A
Okay, well, I guess this notion of the price in this market interests me. It fascinates me from many perspectives, from the ones we just spoke about. It also fascinates me from the perspective of, and I think you've touched on this as well. We cannot think of this. The majority of people out there, the public, views Bitcoin in a binary way. It's either up or down. Up is good, down is bad in terms of price. But as we understand it, Bitcoin is ether for Ethereum, which is a development platform, essentially is a type of fuel. If you've got low gas prices, that's not great for the oil drilling industry or for shippers, but it's great for companies producing SUVs. There are flip sides to this. I think that's really interesting as well because there's a whole stimulative effect that a low price would have to this market. Of course, again, I'm not talking about Bitcoin in this case. I'm just talking about more generally for blockchain technologies that use tokens. I don't know if you have any thoughts on that, but we could also just go ahead.
- [21:07]
B
First of all, I really like that analogy. To me, bitcoin to the Bitcoin network is as oil to the gasoline engine network of vehicles. It's a good analogy and it ties to the fact that I think the right way to value a crypto asset such as Bitcoin is with the framework we would use for a commodity, whether it's oil or copper, copper or bandwidth that the government auctions off. There's a Certain supply, there's supply denies, there's demand dynamics, and where they meet is where the price meets. That analogy is a good one. And it's important because bitcoin is such a unique animal, it's such an unprecedented type of asset that analogies help, but they only get you so far because while oil and the price of oil impacts the demand directly to your point, the higher the oil price, the smaller the car and the more fuel efficient car in bitcoin, that doesn't necessarily work the same way. Because if you think of it as a technology and utilizing it as a payment network just to move funds around, the spot price is the only thing that matters. If I want to move $100 to you, it doesn't matter what fraction of bitcoin it is. I want to move $100 to you, I want to put $100 into Bitcoin and you get $100. Bitcoin is a far more efficient way to do that than Western Union. And that's why I want to do because instead of 10%, I'll pay a fraction of a percent. And I don't really care what the price of bitcoin is at that particular point in time. And so that analogy can only extend so far. To me, the price of bitcoin is interesting because it's part of this extraordinarily clever mechanism of how to build a network. To a user of the bitcoin network, I think eventually it'll become transparent. I believe that government currencies will survive bitcoin. I know that's a leap for many people, but if they do, then at some point bitcoin is going to go to the background. When I transfer money to you, when I do micropayments, when I do cross border, when I use it for storing short term value, it'll become transparent. It won't matter what the price is, it won't matter that it's bitcoin. I'll be able to do a lot of these functions. Regardless of what the price of bitcoin is. The price of Bitcoin will be important to investors and speculators, which up until now has been. Almost everybody involved in Bitcoin is either an investor or a speculator. There's very little usage for bitcoin for the economic purposes for which it was intended to. The vast majority of activity in Bitcoin has to do with either investment or speculation.
- [23:38]
A
When you're saying in the background, are you also describing the broader uses of blockchain technology, technology for alternative types of Payment systems that adopt it. For example, hypothetically speaking, if a sovereign government wanted to adopt that currency as part of its own monetary system, are you saying something analogous or are you seeing specifically Bitcoin, the actual original currency?
- [24:02]
B
Let me draw a framework here. I keep referring to Bitcoin as a crypto asset, not a cryptocurrency, because I think it's confusing to people. When you start talking about it as a currency, people immediately leap to that logical conclusion that it can be a government currency that can replace a government currency. I don't necessarily think that's the case. I think the framework is government currencies have their role in an economy. It's how governments control certain aspects of their policy. I don't think that needs to change for payment transactions, for moving money, paying vendors, paying friends, moving money across borders, making microtransactions in order to surf the web, having small deposit accounts. Those are all very good uses, not for any blockchain technology, but specifically for Bitcoin. But then there's a whole area you mentioned earlier, something that I agree to that about 20% of the economy of GDP goes to trust creating entities. So that's the overall name I would call banks. Banks, lawyers, accountants, real estate professionals. All those entities are there to create trust for transactions in any other type of asset. And those entities I believe will all be either served by or replaced with a form of blockchain technology that may or may not be Bitcoin. So that's the distinction I make. There's government currencies, those are great. Bitcoin will work for payments. I think that's a pretty good idea. All the rest of the trust based industries, law, accounting, finance, I believe will be built on a blockchain. Which one? I don't know. There's some good guesses. But it could be any blockchain. Private, public, Ethereum, possibly Bitcoin. But those are to be the three different entities in this framework. We have pretty good visibility into the government side. We've been doing that for a long time. Bitcoin again has now eight solid years of track record for being the best technology for doing payments once it's adopted to a certain level. But then all the rest, which is by the way considerably bigger than the world of payments, I believe will be built on some type of blockchain to be determined.
- [26:20]
A
Right, and that kind of gets to a question of consolidation too, which I think you implicitly answered, which is way too early to tell how this industry would consolidate. Let's put aside how it will Consolidate what the currency could be, because it may not even be out there right now. Do you see the same network effect on the blockchain that we've seen on the Internet with respect to certain companies, for example, Google in search or Facebook in social? Do you expect something similar to occur with blockchain technology?
- [26:51]
B
I think to a certain extent it's happened with Bitcoin in payments. It's going to be hard, not impossible, but hard to displace the robustness of the Bitcoin network for these particular applications. I think we have seen a network effect for that.
- [27:06]
A
Help me understand why that is. Is it because the ecosystem, the supporting ecosystem of applications for Bitcoin that have grown up around it are so significant that no one, for example, would look to make remittance payments through some other cryptocurrency, and that they've got such a lead on that that that's not going.
- [27:26]
B
To change an aspect of what you said, which is the transaction processing equipment. There's been so much money poured into this transaction processing equipment that the computer science aspect of it, the calculative aspect of it, is now so robust that it would require a very large investment to overtake that. In terms of the robustness of the transaction processors, the miners, that investment, there's a big installed base of investment there.
- [27:55]
A
Do you have any idea what that is, out of curiosity? Like, do you have any numbers on that? Like the amount of money that's been spent? The amount of money that's at least.
- [28:02]
B
Hundreds of millions, right? At least hundreds of millions of dollars, possibly into the billions at this point. So that's 1, 2 is the Bitcoin software itself has proven itself to be robust. And you can't underestimate that. That's where the network effects come in. PayPal does something very well. It allows you to pay online without entering your credit card at some point. They had such a long track record with consumers that it didn't matter who tried to compete with them. It was too late because they had the track record. So even though companies like Visa and Google and Apple tried to replicate what PayPal did, it's too late, because PayPal's worked for almost 20 years now. And that track record and experience and installed base mean that you don't need to solve the problem again, if you can't solve it better than PayPal, then you can't beat PayPal. And that Bitcoin has that right now. It has eight years where it's proven itself to work so well for moving value around, for moving money around in a payment context that you have to do something a lot better and a lot more efficiently than Bitcoin and I'm not sure that's going to happen again. Other applications you can build a lot efficiently. Ethereum solved a lot of big problems, for instance, and there could be even better technologies, but specifically for moving money. It's going to be very hard to do it more efficiently and develop a track record the way Bitcoin has over the last.
- [29:28]
A
That's very interesting that you say that again. I wasn't sure where you would come down this and obviously you know much more about this industry than I do. You've been also in the payments industry for what, 30 years. It's very impressive and I take your opinion on this very seriously. It's an interesting thing for me from my perspective. I look at let's say Ethereum and I think, well, the potential for software and applications to grow up around that protocol could potentially displace Bitcoin as a significant transaction mechanism. But in any case that's very interesting.
- [29:59]
B
What I would say on that is that Ethereum can do all these things and can do things that Bitcoin can do, but it's a lot more expensive. Part of what makes Bitcoin interesting as a payments network is how inexpensive it is, how low the fees are, how streamlined and purpose built the softwares for moving money. Ethereum can do it, but it's like bathing in spring water. It wouldn't be a good use of the Ethereum compute power to move a penny to pay for a video online.
- [30:33]
A
I see what you're saying. That's very interesting. Because we have limited time, there are a few topics that I want to touch on. I'm trying to think what would be most advantageous given the amount of time we have. I guess given your background, I certainly do want to get into China and Alibaba if we can. But before we do that, let's talk a little bit about regulation. I'm really thinking larger about the challenges to the adoption of blockchain technology. You've touched on positive outlook for its adoption over time. But I think you've also been very clear about your expectation that it's going to take longer than many people might otherwise think. Certainly people within the community. I guess large question is maybe we can run through some of those challenges. The first of which I think is regulation. What do you see in terms of the headwinds for regulation? I think we've overcome one, maybe the first major speed bump. Insofar as that's concerned because early on in bitcoin's life, before really we had Ethereum, before we had this notion of blockchain for the broader public. We had Mount Gox, we had Silk Road, we had Charlie Schremm. There was this notion of bitcoin as being this kind of illicit medium of exchange. That perception has changed significantly and it seems that the United States government, and certainly other governments as well, have started to embrace the notion of regulating this industry and making it legitimate. Can you talk to us a little bit about what the challenges on the regulatory front are for bitcoin and blockchain based cryptocurrencies?
- [32:09]
B
Sure. What I would say is, again, I'm an outsider. I talk to people that are developers and entrepreneurs and regulators and law enforcement. And I can tell you that I don't think the government was ever out to get either bitcoin or blockchain. I don't think we even went through that kind of a stage. There was always a curiosity. A lot of people didn't understand it, just like a lot of people at any other field didn't understand it and tried to learn about it. And there was an honest, genuine effort. And in fact, I would say that it was accommodating for a very long time and it continues to be accommodating.
- [32:43]
A
Sorry, Gil, I just wanted to interrupt, just to ask a question here. Could it be an implicit bias towards official sort of legacy institutions? For example, the way that we conducted, I mean, one of the common criticisms of course, is the way in which non prosecutions, so to speak, I mean, the lack of prosecutions for widely perceived crimes within the financial services industry after 2008, comparing that to the sort of heavy hand of the government. With respect to. I mentioned Charlie Shrimp, because he's a great example. Do you think it's just simply the fact that a brand new industry is something that professionals within the regulatory community and legal community look at askance and it's just the implicit bias of trusting legacy infrastructure.
- [33:21]
B
Let me give you a little bit of a different narrative. I know that what you described is the common narrative of, oh, you know, the big bankers stole a lot of money and got away with it. And Charlie Schremm, who's actually probably a pretty good guy, went to jail for something that looks to be pretty small. I would offer an alternative narrative. The big banks had tens of billions of dollars to pay ransom to the treasury and the treasury could make a decision between putting a few people in jail or taking in tens of billions of dollars in fines, and they chose to go that way. And that's, that's completely separate than the fact that when you move money in a way that is against the law on a small scale, you're very often going to get in trouble. And has nothing to do with Bitcoin. If you tried to do it with any other mechanism, if you tried to move money without registering, if you tried to move money that could be used for illicit purposes, you will go to jail. And it has nothing to do with bitcoin, cryptocurrency or a perceived threat to the US Dollar. Again, that's my perspective as an outsider.
- [34:21]
A
That's very fair.
- [34:21]
B
The perspective on regulation was, hey, we already have a regulatory framework for moving in. We have a regulatory framework for what a bank looks like and how a bank gets regulated, for how money transfer company looks like, how they get regulated at a federal and a state level. And the approach, by and large by most governments in the west, you know, other countries may be a little bit of a different matter, but most governments in the west was, let's just apply the same framework. We already have a framework, and unless there's something unique about this, which in many cases there is not, we just apply the same framework that we apply to PayPal and Western Union, to Coinbase and any other company that traffics in crypto assets and bitcoin. And that's largely been the case. There have been some exceptions to that. The legislation in New York probably said, okay, the, the existing framework and then added a few requirements just for whatever reason. And that may have been a little bit out of the norm, but in most other places there's just been an application of the existing rules and regulations. Now it's still an impediment to the development of blockchain and bitcoin, because these existing rules and regulations are, to begin with, quite difficult to deal with. Western Union and PayPal and Visa and banks spend ungodly amounts of money complying with these regulations. And the problem is that as a startup, you have to then comply with the same regulation that those big guys are spending hundreds of millions of dollars on with your startup resources. And that's very hard. And in that sense, regulation has held back blockchain and bitcoin, but not because they're picking on that particular sector. There really is a genuine, genuine notion of trying to protect consumers from losing money. And consumers have lost a lot of money. There is a lot to protect. And that really has been the spirit of regulation and enforcement so far, has been to try to protect consumers wealth while allowing a technology to find its way and to develop and add value. So it is an impediment. But I don't subscribe to the notion that that somebody's out to get Bitcoin, blockchain, the community, crypto assets in general. From talking to many people in the field, I never got a sense that there was a feeling of a threat that needs to be reacted.
- [36:40]
A
I agree, you kind of touched on it when you talk about ransom. I've simply had a sense that granted there is the legitimate role of regulation in order to safeguard investors. That has been built up over time in reaction to events and circumstances. But I think also you're talking about barriers to entry to the financial sector, which is insulated, some of these regulations and institutions. And I think those two things work together. I certainly don't see it as some sort of big brother saying we need to protect our capacity to credit member banks so that we can expand the money supply. I don't see it in that sort of centralized way. So I think there are two sort of interesting things that I want to make sure we touch on with respect to regulation. One is the issue of tax. I think that's a very difficult one. That's a challenging one. And I'm curious kind of what your view is on that the challenge is to the IRS and monitoring transactions and making sure that tax dollars are collected accurately, especially in respect to capital gains. Then the one I'm really interested in, that's obviously very news relevant. We touched on it very early on in our conversation. That is the ICOs, the initial coin offerings, which I'm curious to ask you, how do you think about the value proposition of ICOs? A to the investor and B to the app developer. So take those two as you like. I'm curious what your views are on that.
- [38:03]
B
So first on tax, if you're a government, if you're a taxation authority such as the Internal Revenue Service, it's binary. Is it a currency or is it an asset? If it's a currency, I have one methodology to deal with it. If it's an asset, it's another methodology. They ruled very early on in 2013 that it is an asset. Once. Once a crypto asset, Bitcoin or any other crypto asset is defined as such. The rules to ownership of that asset are very consistent. If I buy copper and sell it for more, I have to pay taxes on the game. If I buy bandwidth from the government and sell it for more, I have to pay taxes on those games. It is Very unambiguous. And it will eventually, as we mature in this industry, become clear to everybody that if you made money investing in a crypto asset, you have to pay taxes. Now, the point you pay, the mechanism, we'll have to figure out, because it is an unusual and new type of asset, but we're not going to be able to get away from that. The IRS does not have a sense of humor, and it is very binary.
- [39:03]
A
They definitely don't have a sense of humor. I agree with you on that.
- [39:07]
B
And then on the initial coin offerings. This is fascinating. It's one of the things that gets me excited about this industry. This new way of crowdfunding technology is absolutely fascinating. The enthusiasm and entrepreneurial spirit that's come with it and invigorated a lot of people to try to build something is absolutely fantastic. Having said that, when you're dealing with people's money, you need to work within a regulatory and legal framework. Again, unambiguous and very important for people to understand this. There's very good legal resources around that. If you look at the story of Ethereum, they spent a lot of resources on the front end figuring out where they're going to be, what the regulated entity is, what the structure of the offering is going to be. I don't know if it'll hold up, but they spent a lot of work on the front end making sure that as they issue those ethers and get capital, that they are within a framework that will keep them safe. I'm hoping for the sake of all these great entrepreneurs, that they're doing the same right now. If you're doing an initial coin offering, if you're raising capital, even if it's in a crowdfunding notion that may be exempt from certain rules and regulation, that has to be cemented and buttoned down and nailed down before entrepreneurs proceed on the one hand and before consumers and investors proceed on the other side, because otherwise a lot of people are putting themselves at risk at a very young point in the their lives, and that's unnecessary. This is a great technology for accomplishing the raising of capital, the involvement of people in a building of a new network and a new enterprise, and I think it'll be truly revolutionary. But we have to be very respectful of the guidelines that have been issued by the securities and Exchange Commission and irs, et cetera, et cetera, in order to make sure that everybody stays safe while they're engaging in this revolution.
- [41:02]
A
Gil, I know you have to go. I appreciate you taking the time. There were so many other things I wanted to get into. And I'm really fascinated by the financial side of this equation and the economics of this market. It's not something that I've had a chance to really discuss with anyone. What we talked about with Andrew Keys on our last Market Forces was really a micro business oriented look. Most of what I've been interested in has been on the technology side. I appreciate you taking the time to educate us on some of these things. I hope we can stay in touch. Maybe we can have you again on the show at some future date. We can delve into this a little bit further.
- [41:35]
B
Absolutely. My pleasure.