Wasington, D.C. -- (ReleaseWire) -- 06/10/2015 --BENNETT: Nathaniel Popper is a business reporter at the New York Times and the author of Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money. Popper is here today to talk about the secrets and eccentric characters that of the Bitcoin world, which is probably one of the most talked about but least understood technological innovations of the past few years. Nathaniel, welcome to Financial Myth Busting.
POPPER: Thanks for having me.
BENNETT: This week, the founder of the so-called darknet marketplace, Silk Road, was sentenced to life in prison. Ross Ulbricht appears like many other young tech CEOs, except instead of an app, he created a digital marketplace where people can buy and sell all manner of contraband. Are you surprised about this tough sentence, and is the US government trying to send a warning to others considering setting up marketplaces like Silk Road?
POPPER: I think the government was indeed trying to send a signal with this sentencing. The prosecutor said as much, the judge said as much. I think they realized that Silk Road really was something quite new. It was a new kind of illegal market that had grown enormous. Ross Ulbricht, by the time he was arrested, was making millions a month on the commissions from this site. And I think the government wanted to stop that. I think what's interesting is that it's probably already too late for that. The government arrested Ulbricht and shut down Silk Road but within about a month or two, Silk Road 2.0 was up and running, along with several other competitors, and within a year there were more drugs for sale on similar sites than had been on Silk Road. So the deterrent effect, I don't know if that's going to work.
BENNETT: During the case, it was revealed that two FBI agents leading the investigation had themselves stolen Bitcoins, which they kept to enrich themselves personally. Did that affect the case against Ulbricht?
POPPER: It didn't affect the case in court, because it wasn't revealed until the trial was over. So you had a situation where it went essentially unmentioned during the trial. What's interesting is that the government, of course, did know that this case was coming down the pipe, and in fact Ulbricht's lawyer knew it was coming down the pipe, and had asked for it to be talked about during Ulbricht's trial, and the government said no. I do think the way it influenced the trial was that the government didn't talk about certain things, because it would have forced them to go into this issue of the corruption of the federal agents. And so, for instance, Ross Ulbricht was not charged with murder for hire, which was in some of the original complaints. And the government didn't want to bring that up, because these two agents who were about to be arrested had been involved in that.
BENNETT: The biggest Bitcoin proponents hail that the currency is a way to circumvent governmental management of the economy. How realistic would you consider this kind of possibility? I mean, obviously the government isn't going to happily agree to letting a vast percentage of commerce be conducted in non-taxable exchanges, right?
POPPER: Right. I mean, I think that that was a big part of the original motivation for Bitcoin. When it was launched in late 2008, early 2009, originally it was put out there by this shadow creator named Satoshi Nakamoto. A lot of the talk around it was about central banks and Wall Street and that was what got people interested in this. This was right after the Lehman Brothers had gone under, right after government bail outs of banks, so that was a big part of the rise of this. I think over time what you've seen is that actually the Bitcoin technology makes a lot of different things possible. There are a lot of debates about what exactly is Bitcoin? Is it a currency, is it a commodity? Is it more like a financial network, and the currency is just kind of one use of that network? And I think right now the currency, the Bitcoin digital token, has fallen somewhat out of favor. I don't think you can easily call it a currency right now. You might be able to call it a tradable commodity; something like that, perhaps digital gold. But it's a long way from being a threat as a currency. But a lot of people are thinking about the networks, that this new kind of financial network that Bitcoin makes possible, and that's why you're seeing Goldman Sachs making its first investment in the Bitcoin space, the New York Stock Exchange, NASDAQ, these sorts of companies. And so, we call it a virtual currency, but that's a somewhat misleading term, because it's a lot of other things, and it actually may not be most of all a currency right now.
BENNETT: So Goldman Sachs, New York Stock Exchange, they're making investments into Bitcoin; are they doing that because Bitcoin's given the world's unbanked—those marginalized billions who've never had a bank account—unprecedented access to the global economy?
POPPER: I think that that's sort of the promise that they're looking at, that element of it is: this is the kind of financial network that can be accessed by anyone. It's not sort of walled off in the way that all of our current financial institutions are. And as a result of that, you can have these sort of direct exchanges between people on the Bitcoin network, and I think that is what Goldman Sachs is looking at, that. I don't think that they are looking at perhaps reaching the unbanked in Africa, but the same thing that might make getting people in Africa tapped into the financial system is related to what Goldman Sachs is looking at. They made an investment in a start-up that is focused on peer to peer payments and cross-border payments, so the types of remittances that immigrants sending money home, without having to go through Western Union; things like that.
BENNETT: I think cyber-currencies promote financial equality. They're removing the middle man from financial systems, giving more power to the people, and maybe even potentially safeguarding us from the devastation of the October 2008 type of crash. Do you see it in that perspective?
POPPER: I think that that's a big part of why Bitcoin has risen to popularity. I mean, what it represents is somebody being able to control their own money. You have your password and you have your money. You don't need an institution to hold it for you. Now, I think one of the things that's been interesting to watch with Bitcoin is that it's been subject to a lot of volatility, ups and downs, and people have lost a lot of money in Bitcoin. I always venture to guess that probably more people have lost money in Bitcoin than made money in Bitcoin, just because of the unknowns in the system. And it turns out that people aren't always great at being the custodian of their own money. Oftentimes when it's something as simple as a password, people just lose the password. So you have people who you hear about who have 10 million dollars' worth of Bitcoin in a wallet, but they can't access it because they lost the password at some point back, and there's-- in Bitcoin, because it's your account, because you're the person, the sole person in charge of it, there's nobody else you can ask to recover your password, so I think it's kind of been a test of some of these ideas, but that is certainly a sort of big ambition, a big dream of it, is that it's kind of distributing that power, so that there isn't as much concentrated in the central institutions.
BENNETT: So these wild fluctuations in the price of Bitcoin, again, this has been one of the biggest knocks against the cyber-currency, but explain to me; how can goods and services be priced in a currency that seemingly goes through these high crashes and boons every single day? Is that being addressed at all?
POPPER: Yes. I mean, the simple answer to your question is that goods can't be priced in this currency. Goods are priced in other currencies; they're priced in dollars and converted into Bitcoin on a sort of rolling basis. And so as the price of Bitcoin changes, the price of goods in Bitcoin changes. So if you try to buy something on, say, Overstock, which sells goods for Bitcoin, if you'd look at it one day, the price in Bitcoin can change by the next day, because the thing is priced in dollars. And yes, that volatility is very much something that people are trying to address. And it's why people are starting to talk about it less as a currency, at least for now, and more as a network. The company that Goldman Sachs invested in, one of the things they do is that you keep your money with that company in dollars, but when you want to buy something, it quickly converts into Bitcoin, sends the Bitcoin over to the company, and then if the company wants to, can convert it easily back into dollars. And so what Bitcoin is doing there is serving as a sort of Visa or PayPal, this network. And it's a much cheaper network, much faster, more efficient, and it serves that purpose, while it isn't serving the purpose of a currency.
BENNETT: There's no shortage of digital currencies out there. Is there any standard by which you can measure their value? I mean, since Bitcoin is open source, couldn't someone simply duplicate currency and call it Bitcoin 2.0 or 3.0. Doesn't that impact the value of Bitcoin itself?
POPPER: Yeah, well, and people essentially have done just that. I mean, there are hundreds of so-called Altcoins, with funny names like BBQcoin and Zerocoin and Litecoin, and a lot of them are just somebody who took the Bitcoin software and made some tweak to change it in some way that that person thought was a necessary. And for a while, it looked like some of those currencies were taking off, some of them were becoming significant in the amount, and numbers of transactions were happening, but over time most of that activity has died off, and so Bitcoin has actually become more dominant over time. And I think that's because you have to remember the social nature of money. Money is a social technology. Money is as useful as the number of people who are using it and who are willing to accept it. The reason that the dollar is accepted around the world is because there is this belief that other people will accept it as well. And gold has obviously served that same purpose. And Bitcoin, it has this social network effect, which is that each new person that uses it makes it a little bit more valuable, because you have the sense that somebody will take it. If I buy this and I want to get rid of it, somebody else will take it. And so that network effect is very strong with Bitcoin, and it's something that any other alternative cyber-currency is going to have trouble catching up with. And that's what you've seen, is that a lot of these alternative currencies have sort of withered away.
BENNETT: What do we know about the mysterious geek, Satoshi Nakamoto?
POPPER: Satoshi Nakamoto is, I think it's generally agreed now, was a pseudonym used by the creator of Bitcoin. For the first two years, Satoshi was in the community, emailing with people, and always from behind a veil of anonymizing software that obscured his location, all of that. And nobody ever spoke with Satoshi on the phone, and then Satoshi disappeared in 2011, and since then there's been a lot of efforts to search for the wizard behind the curtain. Most of them have gotten nowhere. I think right now there's a sense within the Bitcoin community, as I did my research for my book, that the best evidence pointed to a guy in the Bay area, a guy named Nick Szabo who has been involved in similar efforts for years. But it's still very much an open question. If it was Nick, then it may have been Nick in partnership with some other people who had been working on this project for many years.
BENNETT: Nathaniel, thanks for being on Financial Myth Busting.
All data sourced through Bloomberg
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