The Bitcoin system is said to be reaching its capacity limits – spelling a possible disaster for thousands of those who decided to invest in the world’s top cryptocurrency. One of the leading programists from the company quits it, selling all of his Bitcoins and calling it a “failed experiment”. On the other hand, with the growing number of Bitcoin users, even politicians and bankers can’t anymore deny its importance in the financial and digital world. Can the Bitcoin solve its problems, or it is the end of the road for the virtual money giant? We ask executive director of the Bitcoin Foundation – Bruce Fenton is on SophieCo.
Sophie Shevarnadze: Bruce Fenton, executive director of the Bitcoin Foundation, welcome to the show, it’s great to have you with us. Now, one of the developers of the Bitcoin software, Mike Hearn, has called Bitcoin “a failed experiment.” He quit and sold his Bitcoins, there’s been a lot of rumors about problems in the Bitcoin establishment. Is this the end? Is Bitcoin doomed?
Bruce Fenton: I don’t think so. I think the news from Mike Hearn, one of the developers, was widely covered, but I don’t think it’s really that significant to Bitcoin overall. I mean, certainly, a developer that made great contributions to Bitcoin programing and ecosystem over the years, but Bitcoin doesn’t rely on anyone person or even several people to succeed and continue.
SS: So, Hearn is saying it’s become a system controlled by a handful of people – how come a decentralized form of currency is so tightly controlled? Isn’t that contradictory?
BF: I don’t necessarily agree with what Mike Hearn, said on that. Bitcoin is not really controlled by anyone. There’s probably more centralization of control that we would like, developers don’t really have any power to make anyone to use the code that they write, and anyone in the world can take the Bitcoin code, copy it and release it – what’s called a “fork” and the people of Bitcoin may choose to move over to that. There’s also no central CEO or organisation of any kind that has any authority over Bitcoin – it’s really an entirely voluntary type of system totally distributed. So, it would be nice to spread that, you know, on people who are working on it, and spread that even further, and have even more people involved, but I don’t think that it’s controlled by any small group of people.
SS: As of now, who can propose any changes to Bitcoin?
BF: It’s an interesting thing: because it’s an open-sourced project, anyone can be a developer, so anyone watching this program anywhere in the world, whether they have developer skill or not, could make a proposal. Certainly, that is going to be based on how useful it is – it’s very complex to put these proposal into the Bitcoin system, but anybody, absolutely anybody can propose some kind of change, and there’s been a lot of changes that have been made over the years by different proposals. It’s called BIP – Bitcoin Improvement Protocol.
SS: But what about implementation? From what I gather, there’s only five people that can actually implement any software changes to Bitcoin and they are all kind of split about how to deal with Bitcoin’s problems – so gives them authority and why do they decide?
BF: Well, those five people control what is now known as Bitcoin Core – which is the main core code that Bitcoin runs on. But, anyone could make a proposal, and, first of all, those people could basically have it accepted after a lot of discussion and a technical review process, or someone could just create an entirely different version of Bitcoin, called a “Fork” where they could make any changes and if the majority of users, particularly represented by Miners, the people who are validating transactions, agreed -then that would be the new sort of main Bitcoin. So, it’s not really as centralized as it may seem, because anybody can make those changes or requests anytime.
SS: But what happens if the users are split on how to go on about it?
BF: Yeah, we have a really fascinating thing that’s happening right now, and in an effort to try and be as fair as I can to both sides, of the issue – and it’s really not even two sides, there’s more than two sides to it, but, in very simple terms: basically, you have the majority of the technical people who have done by far most of the work on Bitcoin, the core programming, over the last couple of years who want to take one path, and then there are a couple of very well known developers, specifically Gavin Andresen and Jeff Garzik are two very respected and very well known developers who did a lot of work early on in Bitcoin, have another path that they want to take. So, the majority of the current technical opinion wants to go one way, and these couple other developers want to go another way. The interesting thing is that most of the CEOs and many of the major Miners are with the kind of minority technical opinion, and basically what that is in simple terms – it’s about the way that Bitcoin is scaled in order to accommodate more transactions, and everyone agrees that it needs to be scaled, some people have different opinions on whether Bitcoin should try and compete with something like Visa or not, and then the big disagreement is on how exactly to do that scaling. So, we do have that now, and there’s a fork that’s been proposed by someone else that both Jeff and Gavin have agreed to contribute too. So, it’s a very interesting thing, it’s really very much a human issue rather than a technical issue to try and figure out how do you govern something that can’t really be governed, that has no CEO.
SS: IMF published a report that says Bitcoin’s volume is growing so rapidly, that politicians and bankers simply can’t continue ignoring it anymore. However, if you look at the number – I mean there’s only 250,000 digital wallets that hold more than one Bitcoin in the world. Why should politicians care? I mean, there are six billion people on Earth.
BF: Yeah, well, the number of wallets is not always the best measure of how widely it is being used, because there are large companies that may have a couple of Bitcoin addresses that have huge amounts of coins, but it represents a lot of their customers. So, there’s certainly more than 250,000 overall Bitcoin users in the world, and I think the reason that the governments and large banks and others have to pay attention to this because it is a superior form of technology, just like the Internet was superior and television was superior in many ways to the newspaper. So, since that is here and it’s going to be here to stay, this technology is real, it’s here and it’s very-very much superior to what was here before. So, I think that’s the reason, and also, there are a number of banks and venture capitalists and others that are moving into this space. So, it’s not just users but really what the technology can do, I think, is the main thing.
SS: Right, but, we’ve touched upon the fact that Bitcoin network is getting crowded, greatly slowing down transaction times. This is threatening to cripple the system. Why is Bitcoin community afraid of increasing capacity?
BF: I don’t think the community is afraid of increasing capacity. One of the common misconceptions about this sort of debate that we’re having within the Bitcoin system….
SS: Wasn’t it the main reason why Mike Hearn actually left?
BF: Yes, it wasn’t a matter of one group wanting to scale transactions and the other didn’t want to. That’s a common way that it’s painted that probably isn’t super-fair to the current core developers. They both agree that the network needs to scale, needs to accept a lot more transactions. What the disagreement is on how to do that, whether that should be done with what’s called a “hard fork”, where basically the code goes a different way and everybody has to jump over to the new system, or whether it should be done, basically, for simplicity sake, with what’s called a “soft fork”, where that change is made overtime. There’s also, without getting too technical, other ways that sort of both sides agree on to other than increasing what’s called a “block-size” to allow more transactions to be done. So, really, both sides agree that we need more capacity, it’s just a disagreement of how to do that.
SS: But if the disagreement continues for a while, the system stay decentralized – won’t that congestion become so serious, it won’t be convenient to use Bitcoins any more? Wouldn’t this kill the network?
BF: Yeah, it is certainly something that has to be fixed. It will be fixed. There isn’t any disagreement about that. Both of the major sides definitely agree that it has to be scaled, it has to be fixed. We do already have delays…
SS: Yeah, that’s what I’m saying, some Bitcoin deals freeze and never go through, I mean – are there cases when people just lose their Bitcoin money because the network is clogged?
BF: No, people wouldn’t lose their Bitcoin because the network is clogged. The place where we are at now, one of the worse drawbacks is that – and just as a backup for people that may not know how this works: every ten minutes, a batch of transactions are processed on the Bitcoin network, and that is also the mechanism by which new coins are released. Whoever processes those transactions – a Miner – is rewarded some new coins. What is happening now is that there’s so many transactions, sometimes, in these blocks of ten minutes, that transactions have to carry over. So, the worse thing that’s happening now is that people are being delayed more than 10 minutes, sometimes as much as an hour on having these transactions done.They don’t risk losing their Bitcoin, but they do risk a delay and that’s not acceptable, that’s something that needs to be changed and both of the major proposals… that’s the main focus of them.
SS: So we’re talking about all these problems that Bitcoin is facing, and I’m thinking, Bitcoin is a great idea, right, this attempt to create a new kind of money, unregulated, free from surveillance and supervision – but now it’s obvious that it has run into all these problems because it’s unregulated. Does this mean an unregulated community-based currency just can’t really work and it’s a utopian idea more than anything else?
BF: No, I don’t think so. For one thing, I don’t think that these problems are due to lack of regulation. Adding more politicians into the mix wouldn’t solve this kind of situation. Politicians cause gridlock all the time, and especially, in the technical matters, they really wouldn’t add any efficiency into this. I could only imagine how much worse this would be, actually, if it was a decision that instead of being, for simplicity sake, a debate between a large number of technical experts versus a smaller number of technical experts and most of the CEOs, if we throw politicians into that mix as well, I could only imagine it would be a lot worse. So, I think that having an unregulated currency is a great and most people if they were to start from scratch and say what would be the ideal government – very few would think we want government to control money, we kind of just take it as a give, because that’s the way it has done for so long in all the countries of the world. I think that being an unregulated currency is one of the best benefits of Bitcoin.
SS: Bitcoins used for financial transactions involved in illicit activities like drug dealings and terrorism has always raised a lot of questions in the past. Isn’t this kind of publicity casting a shadow on everyone using bitcoin? I mean, the use of the cryptocurrency by criminals – aren’t you afraid governments will try to shut down the whole thing altogether?
BF: Yeah, it is certainly a risk. We have to remember, back in the early days of Internet, people were terrified that the Internet would be used as a means of communication for criminals and I remember people talking about how someone would be able to go online and be able to find out how to build a bomb or things like that – but what we have to do with any technology is look at its overall benefits, just like cellphones make it much easier for criminals to commit bad acts, the overall benefit is much greater, and I think that’s the healthy way to look at any new technology like Bitcoin. Certianly, it will make life easier for some bad actors – because it will make life easier for everyone.
SS: Especially in the aftermath of the Paris terrorist attacks, Bitcoin was under fire with some suggesting terrorists used it, actually. Europol is saying there’s no evidence to suggest that, but even a possibility of it – does it bother you that something like that could be done with the help of Bitcoin? And you won’t even have a way of knowing or tracking the thing down and trace the perpetrators.
BF: Yeah, but by a huge margin…
SS: You were talking about the Internet, right – Internet isn’t anonymous, it’s really easy to track someone down by Internet, and that’s what Americans have been doing and Brits have been doing and the whole world has been doing. But, Bitcoin is really untraceable as of now, from what we understand…
BF: Bitcoin is traceable, because every transaction is listed publically. It’s encrypted, so you don’t know who owns it, but I would say that it’s comparable to the Internet. I mean, the Internet was thought of as of entirely anonymous not long ago – and in some ways it still is. There are anonymous ways to publish some things on the Internet anonymously and certainly act on the Internet and communicate… So, yeah, I think the similarity is there and as far as being worried about the use of Bitcoin for terrorist acts – I mean, certainly that would be a horrible thing and none of us hope for that to happen, but we have to remember that by far the biggest mechanism of funding terrorism is cash, specifically the U.S. dollar which is used in much more crime, probably on the daily basis, than all of the Bitcoin that exists in the whole world.
SS: Now, the European Commission wants to end anonymous trading and virtual currencies in order to help track terror groups funding – so what would that mean for Bitcoin? Is it going to be banned in Europe?
BF: It doesn’t seem that it will be banned at this stage, time will tell exactly how this is interpreted. I think people should look at this with some scepticism – in general, when governments talk about cracking down on Bitcoin, they use terrorism as more of an excuse, I think, than the real reason. Really, with virtual money, the victim is much more often the state or people who are evading taxes or something like that, which doesn’t have the public support that going out and saying that the goal is stop terrorism would have. You know, I’m a bit sceptical about the real motivations, both in the EU and the U.S., when you hear politicians talk about terrorism, I don’t think that… even the mechanism of how terrorists fund things is not as significant as the questions like why there are terrorists in the first place and what is going on in the world – there’s a lot of other factors, in the U.S. case, our own foreign policy that is much more contributing to causing terrorism than something like a digital currency.
SS: We started with Mike Hearn and his actions caused a bitcoin price to drop. How much does Bitcoin depend on major holders? If you people do what Mike Hearn did, will that crash Bitcoin?
BF: As far as I understand, Mike Hearn didn’t own significant amount of coins. I’m not positive about that, because it was his personal business. I don’t think the drop was due to him unloading a large amount of Bitcoins, as far as I know he didn’t own that many Bitcoin. But, overall, there are not many Bitcoin holders that would have a huge impact on the market if they were to dump those bitcoins. It is a small and thinly-traded market compared to the overall global financial instruments, but there are a lot of other factors that contribute to the volatility a lot more than certain large holders.
SS: So, for whatever reason, Bitcoin’s price is very volatile, and it’s hard to keep track – can you keep money in Bitcoins and be sure that you won’t lose it the next day? And then, what’s the point of you can’t?
BF: You definitely can’t keep money in Bitcoins and be sure you don’t lose it. I always recommend that people recognize that this is an experiment, it is very volatile and I tell people never to put anything into Bitcoin that they cannot afford to lose. Having said that, if you also look at the other side of it, you have some of the best and brightest minds, people who backed companies like PayPal and Facebook and some of the smartest venture capitalists and business people in the world, and technologists in the world, who believe that this technology is as big or bigger than the Internet itself. So, there certainly is some upside, but yeah, definitely very volatile and I don’t recommend it for anyone as a major piece of their holdings unless they can afford to lose whatever they invest.
SS: What’s your explanation, why is it so volatile? I mean, it’s been around for 7 years.
BF: Yeah, it’s volatile because it’s still a very small market. Bitcoin is worth 1/100 of some of the major companies like Facebook or Apple are worth. It is still experimental, there are a lot of things that are unknown. It’s been around for several years, but it has taken a long time before it’s been… it’s only the last year or so that it’s been public eye in the way that it is now. It was unthinkable that a bank would investigate Bitcoin or take it seriously in any way just a couple of years ago. I remember very first conference that I went to as a venture capitalist , it was kind of a buzz and a lot of people couldn’t believe that a venture capitalist was showing up at a Bitcoin meeting, and prior to that it was even more of a kind of a wild jungle, so… Yeah, just like any new technology, the Internet or other things, it takes some time to mature and get to a stage where it will be more stable.
SS: Now, the security of Bitcoin has always been a concern as well. Cases like a massive heist at the Mt. Gox Bitcoin Exchange, where hundreds of thousands of Bitcoins were stolen by hackers – remember that, right? They are not exactly instilling confidence in the safety of your money. Can you see Bitcoin abandoning some of its libertarian flavor, adding insurance, at least?
BF: It would certainly be great if a company were to offer some sort of insurance, and I believe there are companies that do that. As far as Bitcoin itself, the core code doing that – I don’t think there’s really a way to do that and I don’t think it would make sense. It’s also important to note that some of the highly publicized failures like Mt. Gox were not failures of Bitcoin, they were failures of companies. The Bitcoin code has never been hacked and has never been broken, and the reason for that, by the way, is it’s a distributed ledger that is open in public – so the only way that someone could change it, is that if they could change it on every single computer that it’s on, going back in time. That is basically impossible – theoretically, for hundreds of millions of dollars it could be done for 10 minutes or so, but to have a real impact would be very-very difficult, basically impossible. So it’s very secure. These failures have been companies’, which certianly is very unfortunate, and I wish they never happened, but it is a very new industry, and especially, with a company like Mt. Gox, which was so early in this space, they had a lot of issues that contributed to their collapse.
SS: Computer scientist Nick Szabo, a rumored creator of Bitcoin, he’s saying “Bitcoin could be more secure than gold, since the information is easier to protect than a physical asset” – now, in the digital age when hackers’ capabilities are unmatched, is that really the case? I mean, something that can be programmed by one group of people – what’s the guarantee it can’t be hacked by another group?
BF: Well, that’s the really interesting thing about Bitcoin. It’s hard for people to wrap their head around that, because the first thing they think of is exactly what you’ve said – “Well, it’s a computer program, it can be hacked”. There has been a lot of high-profile people that have said things along those lines. But what this really is at its core, Bitcoin is a ledger, it’s a ledger that lists every single transaction that has ever been done. Picture it like a giant book, like when you sign in at a building and you put your name in the ledger. The only difference is, that ledger is copied thousands and thousands of times, so if you signed your name in a logbook, when you entered a building, and then that book was copied thousands of time and spread across thousands of computers and verified every single ten minutes to say “Yes, it’s real, it’s real”, then it will be pretty much impossible to change that, unless you went back and hacked all of those computers and changed the entry. The older it gets, the harder it is, so… so that’s important to know. The code can’t be hacked, because it’s really a ledger that published. So, that’s a different kind of concept, and in some cases it is even printed on paper and different things like that, so, yeah, I do certainly agree with Nick that it is more secure than gold, because of the distributive nature of how it’s tracked.
SS: John Cryan, the co-head of Deutsche Bank said in Davos this year that cash should be “dematerialized” and will die out in the next decade. Do you think cash should die? Is Bitcoin going to speed up the process?
BF: Yeah, there’s a lot of benefits of that and I would like if the cash died, provided that something that takes its place is better, and I think Bitcoin would be a great alternative to fill that role. Yeah, I hope it happens as long as something better takes its place. Bitcoin certianly is better in my opinion, so that would be great.
SS: Alright, Bruce, thank you very much for this insight. We were talking to Bruce Fenton, executive director of the Bitcoin Foundation, discussing the current problems of the digital currency and its future potential. That’s it for this edition of SophieCo, I will see you next time.