LET’S TALK BITCOINEpisode 114 – The Scientist and the Scourge

Participants:

Adam B. Levine (AL) – HostPatrick Byrne (PB) – CEO, Overstock.comGavin Andresen (GA) – Chief Scientist, Bitcoin FoundationJon Matonis (JM) – Executive Director, Bitcoin Foundation

Today is May 31st, 2014 and this is Episode 114.

This program is intended for informational and educational purposes only. Cryptocurrency is a new field of study. Consult your local futurist, lawyer, and investment advisor before making any decisions whatsoever for yourself.

AL: Welcome to Let’s Talk Bitcoin, a twice-weekly show about the ideas, people, and projects building the digital economy and the future of money. [0:31]

My name is Adam B. Levine and today, we’ve comped your airfare and saved you a seat right up front at the Amsterdam Bitcoin Conference. [0:36]

Patrick Byrne, CEO of Overstock.com and the Scourge of Wall Street, has become a big name in the bitcoin space. The majority of today’s show is occupied by his keynote, where he relates the experience and opportunity of cryptocurrency and his long battle with the masters of the universe.

PB: I went to NASDAQ, the SEC, the Senate Banking, the House Financial Services, and the New York financial press, trying to alert them and explain to them their systemic risk being created by this. We could explain this, had all this data – we got nowhere. I found it was just “turtles all the way down.” [1:12]

But first, long time core developer Gavin Andresen’s State of Bitcoin talk isn’t quite as long but it’s important. He talks the past, present, future, of the first and largest cryptocurrency — Bitcoin. [1:24]

On an unrelated note, if you’ve been following my work on early user created assets, I’m happy to announce the first to launch will be TatianaCoin, on June 3rd. If you are interested in learning about this project, and user created asset process, don’t miss episode 18 of John Bush’s Sovereign BTC, coming up tomorrow, on the LTB network. [1:42]

Ladies and Gentlemen, Gavin Andresen. [1:46]

_______________________________________________

Gavin Andresen’s State of Bitcoin 2014 presentation:

GA: Hi, everybody, thanks for being here. I’m really excited about being in the Netherlands, being here, in this beautiful place. I’m really excited it’s not raining. [1:57]

I’m going to be talking today about the state of Bitcoin. I think the first thing to say about it is we are still all early adopters. I know, people think about Bitcoin as this thing that’s been around for a while. You know, you think about the really early Bitcoiners who got involved with it, just a couple of years ago, but really, we are at the beginning of something that’s just getting bigger and bigger. [2:24]

There’s a question of, you know, we’re early adopters but what are we adopting? Are we adopting a laser disc? I don’t know if any of you remember those huge laser discs that were supposed to revolutionize the way we use movies. Or watch movies. [2:38]

Or, is this the beginning of the Internet? Right? This is Yahoo, in 1997, I think. Right. This was state of the art internet. I tend to think that we really are at the Internet — beginnings of the Internet. You know, Bitcoin, as a protocol and Bitcoin as a platform, is what it’s all about. [2:59]

I want to get one thing out of the way at the beginning of this talk. I just hope we can forget February ever happened. There are all sorts of bad things that happened with Bitcoin in February— I think are part of growing pains. Any new technology is going to have growing pains. Bitcoin has certainly had growing pains in the past, and I expect it will continue to have growing pains in the future. [3:25]

The one thing, I think, that’s really surprised me about Bitcoin is a just how resilient it has been. I think if you’d have asked me two years ago, if — what used to be the world’s largest bitcoin exchange — suddenly went bankrupt and disappeared — would Bitcoin be able to survive, something like that? I might have said no. It turns out we can survive— we have survived— we’re moving on. I think that just goes to show you— all of us early adopters really want Bitcoin to succeed and we’re all working towards making it succeed. [4:00]

I’ll get into the meat of this stuff, this is what I do in the State of Bitcoin address — is what’s going on with the Bitcoin Core project? When I say Bitcoin Core, I mean — the code that Satoshi left to us — the original code that he wrote that bootstrapped the Bitcoin network. It’s still — most of the core network — is running. [4:22]

I recently stepped back from the lead developer role. Vladimir has taken over as the core maintainer. We’re taking the core maintainer title from the Linux project — where they don’t say someone is the lead — they’re just the lead organizer. [4:44]

I have been asked a lot about why I did that? It’s really part of a progression. I first heard about Bitcoin in May of 2010 and I got a lot of hats put on my head. You know, at one point, I was a bitcointalk forum moderator, I was also one of the people who used my personal PC to back up the bitcointalk forum machine, so if it ever got down, we would have a backup of all the conversations. [5:15]

I used to run the bitcoin press mailing list, so if any press inquiries came in, it would actually hit my inbox. As time goes on and Bitcoin gets bigger, I just start taking off all these hats. If anybody’s worked at a start-up, you know when a start-up has four people, those people are doing all sorts of things. As the project gets bigger, it makes sense to specialize and have different people do different things. [5:39]

I’m going to be spending a lot more time talking to academics. Spending a lot more time thinking about where Bitcoin should be two, three, four, six, eight months, a year from now, and less time worrying about “should we accept this pull request to Bitcoin Core.” [6:01]

Part of that growing up — is more resources. I’m happy to announce Cory Fields is being paid by the Bitcoin Foundation to work on Bitcoin Core full time. Cory Fields has done a lot of great cross-platform work. He’s going to continue to do that. [6:26]

The first thing he is going to do is one thing that takes something off of my plate, which is — to make the math builds deterministic. It’s not actually me compiling the OS X release on this old laptop I have, that happens to be running OS X 10.6, so we have compatible releases. Cory’s cleaning all that up and doing it in a way there’s not one central point of failure for that. [6:48]

The general idea with core is still slow and steady progress. The number one job is still going to be making sure the core Bitcoin network processes transactions as reliably as possible. Don’t expect huge, wild changes to Core just because I’m no longer lead developer and Vladimir’s now taking on that role. [7:14]

There are a couple of core changes that you should probably be aware of. Part of what we’ve been doing over the last year or so, is trying to modularise the code more. Satoshi gave us a little bit of a hairball – this code that was windows only, way back when, that was a wallet, the consensus code, was the peer-to-peer network — it was everything, all bundled up together. Slowly, over time, we’re teasing apart the different pieces of functionality, again, because as you grow, you want to specialize. [7:45]

For example, the most recent implementation of the core daemon, you can compile it without any wallet functionality at all, to save a little bit of memory — if you just want your Bitcoin D to be an edge router. We’ll be continuing stripping out more features, probably the core consensus code is going to turn into a library, and we may even drop some features. If you’re now using the accounts feature of Bitcoin D – beware, it may go away, in the next year or so. [8:23]

I put this slide in here, “Boring is good,” because I think there are some things we’ve done really well that are really important that don’t get talked about a lot. For example, we have a process for improving Bitcoin – the BIP process. That seems to be working really well. I’m really happy to see people, other than the really hard-core, core developers participating in the BIP process. We’ve seen BIPs for wallet implementations, we’re seeing BIPS in other pieces of functionality, and that’s actually working rather well and mostly drama free. [9:06]

The core release process is actually working pretty well. Not a lot of people know we have a pretty innovative way of actually building the binaries you download. The binaries are actually compiled on multiple people’s virtual machines, in such a way, they are bit-for-bit identical. We can be darn sure the source code you see on GitHub actually does correspond to the binaries you’re downloading. There’s a security chain all the way down we’ve got working really well. [9:45]

Download security — we have a lot of belt and suspenders around this. The downloads recently moved from SourceForge, where they weren’t secured by https to bitcoincore.org, which does have an SSL certificate, which protects the downloads. They are protected again, at least on Windows and OS X – they’re code signed. Once you run them, you can be sure you’re actually running the code that was signed off on. That’s another drama free part of the whole process — we could have a lot of drama there but you really don’t hear about people trying to fool people to download imposter versions of the core code. It just doesn’t happen. [10:33]

Finally, the P2P network has been pretty darn stable, which is fantastic! That seems to be working pretty well. Mike would probably quibble with that, about denial of service attacks, but they seem to be under control. [10:47]

I want to talk a little bit about communication, because as we scale up, this is actually a really big problem. What are the places where people can talk about changes to Bitcoin, what are the processes? I said the BIP process works pretty well — it does work pretty well. Larger changes to Bitcoin — there’s not a good forum for having these discussions and I really want somebody solve the internet troll problem. I don’t know, maybe there is no solution. [11:13]

It’s hard to find a constructive place to talk about potential changes without people — for whatever reason — attacking people for talking, attacking people for thinking about ideas. I don’t know, I want somebody to solve this problem for us. [11:33]

Beyond Core, what’s happening in the Bitcoin world – technically, I’ve said before — and it’s absolutely true – this is the year of the multi-signature wallet. We’re going to see some really exciting innovation happening with wallet security, with wallets controlled by multiple people, for corporations. I think there’s a lot of innovation happening here, which is fantastic! [11:58]

Privacy is improving. Projects like Dark Wallet are happening that take existing functionality that’s in Bitcoin already. Increasing people’s privacy by leveraging things like CoinJoin and other ideas we have for making privacy better. Harbor wallets is something that really excites me — there’s another way of getting more secure way for people to hold their bitcoins. [12:27]

I think it remains to be seen whether — will your phone be your wallet, or will you have a separate device, or maybe will you have both? I don’t know, it’s going to be Interesting to see how that plays out, it’ll probably be different in different markets and different people. [12:40]

Other full implementations of the Bitcoin protocol are maturing and I think that’s fantastic – and I want to go into that, a little bit more, in depth. When I think about other implementations, one true implementation is okay, but it’s kind of — sort of — evil. Just one piece of code is not the ideal place you want to be, because whoever is controlling that one true implementation is evil, then bad things happen. Like Middle Earth is destroyed. [13:20]

Two is probably even worse than one because you run into consensus failure. Half the network is running one, and half the network is running the other, and there is some disagreement between them — which happened last year, with 0.7 release — that’s bad! You get a consensus failure and Bitcoin is all about consensus. [13:42]

Ideally, you want three or more, where any one fails, it’s okay. You have two or three or four or eleven others that continue to work, then it’s obvious which is correct – the majority is correct. [13:58]

The question is how do we get from where we are today – which is we have this one piece of code, that is the consensus – to multiple implementations, all of which are implementing the same protocol, and then we can evolve the protocol by having all those implementations move along. That’s a hard problem – I think we’re just going to have to struggle through it but I think we can get there. [14:22]

I’ll talk a little bit about mining – I’ll say overall, I still don’t care about mining. At the very first State of Bitcoin address — I think I got myself into a little bit of trouble — saying I don’t care about mining. [14:36]

It’s still kind of true — mining is a zero sum game. There’s a certain number of bitcoins created over time. I don’t really care who gets those bitcoins. From a kind of a high level, technical point of view, it doesn’t really matter — if one miner is more efficient than another — they’ll get more bitcoins — okie, dokie! That’s fine. [14:56]

I do care about mining in the way that it affects users’ experiences. One thing I’ve been really concerned about is the number of transactions miners put in their blocks. We had a lot of discussion about the one-megabyte block size. I’m worried about even getting up to one megabyte. Right now, I think the average block size is about 250 kilobytes. [15:20]

We recently changed the reference implementation to build bigger blocks by default. We haven’t yet seen block sizes rise. It’s a little bit of a mystery why — why are miners choosing, apparently, to build smaller blocks? [15:35]

I think it’s because larger blocks take longer to propagate around the network and miners are very concerned about orphan blocks, where they lose thousands of dollars if their blocks are not accepted by the network. [15:48]

I think there is technical work that needs to be done to optimize the communication of blocks across the network. I’m thinking a lot about that. [15:57]

Once we get to one megabyte, we’ve got to make blocks bigger. I think we just have to. If we don’t, transaction fees will just rise and rise and rise — to a point where only rich people could afford to transact on the Bitcoin network. I personally don’t want to see that. I think that’s a bad world to be in. [16:17]

How — is going to be tricky bit. It’s going to be hard to get consensus on exactly how far we should raise the block size, if we should have rules for increasing the block size in the future – I’ll be thinking and talking a lot about that. [16:32]

I think multiple solutions are possible, so there are some ideas out there – maybe we won’t increase the block size, maybe we decrease the ten minute per block — make that smaller. We can have more blocks that are all one megabyte and increase transaction volume that way. [16:48]

I think these are all discussions we need to have. I think we should all keep in mind — I like simpler, I think simpler is better. Also, multiple solutions may be possible. If we can do more than one, then — fantastic! We should embrace things, and not fool ourselves into thinking there has to be one true answer. [17:08]

I’ll talk about mining ASICS. A lot of people are worried about ASICS. I really do see the whole mining ASICS hardware thing — is being like the old cell phones only rich people could afford. I think tomorrow it will be more like cell phones today, where even babies can afford to get cell phones. [17:30]

I think the whole “who is mining” is going to go in waves. I think we’re in a centralization period where we’re seeing huge mining farms in places where electricity is cheap. I could definitely see that turning around to where — you get a USB miner and plug it into your computer because you can make a tiny little bit of money, and maybe you’re more efficient because you don’t need to worry about cooling the damn thing. [17:56]

We’ll see — I don’t know, I may be wrong. I get asked a lot about — what about Mastercoin, Counterparty, MaidSafe, ethereum — all these things either built on top of Bitcoin or are being touted as Bitcoin 2.0. [18:09]

I think they’re interesting but writing secure code is really hard. And there is a bit of a chicken and egg problem in that you don’t know if your code is secure until it’s securing something that’s actually valuable. [18:27]

We went through this with Bitcoin — I basically have seen it. Satoshi released Bitcoin in January 2009 and it was completely worthless. Nobody knew if it was secure or not. We didn’t find out it was not secure, it turned out, Bitcoin, the very first version of Bitcoin, was horribly insecure. We didn’t find out it was insecure until Bitcoin started to get a value and it became an interesting to attack. [19:00]

You have this chicken and egg problem, I think, with any new project, in that you are not going to know if it is really is secure until it has some value. You really don’t want to promise things and have people invest money in it, if it is insecure. That is going to be the first hurdle. [19:20]

Some of these systems will bootstrap pass that. If the incentives are correct and there is an incentive everybody using these systems to make them better, I think they could possibly bootstrap themselves like Bitcoin did. [19:37]

The other hard bit I think a lot of these projects are ignoring — is identity and reputation— is really hard. You can talk about things like distributed autonomous corporations and smart contracts and for me, thinking about it from a high level perspective – usually it comes down to — do I have to trust somebody or some piece of code? [20:05]

I’m okay with trusting a piece of code. I trust Bitcoin because I can read the code and understand it. Some of these systems, when I think about — wait, you are going to write this really complicated contract and do I actually have to read the code to know that’s going to be doing what I think it’s going to do — or do I trust the person who issued the contract. If I am trusting the person who issued a contract, well then — why bother with some complicated piece of code. I could just trust them, to begin with. [20:36]

I think cryptography really doesn’t help this problem. You can create a cryptographic identity and maybe build some trust up around that. I think with some of the dark market places, we’ve seen, kind of, how far that can go. In that, nothings stopping somebody from building up something with a lot of reputation, that’s very valuable, and then deciding, okay, there is enough value there, I’m just going to take it and walk away and betray all that trust that I built up. [21:10]

That is a really hard problem. Becoming mainstream is really hard. Certainly, Bitcoin is not there. You can have really cool technology — I think Segways are really cool. I am tempted to go down and rent one at the Segway a place here but they are not mainstream. Right? You don’t see people zipping around on Segways. I don’t think you ever will. I don’t know if you remember when Segway was being hyped in coming out and the vision really was we would all be zipping around on these Segways and they would replace cars and all sorts of other crazy predictions. [21:45]

But it really is hard to become mainstream. It doesn’t mean you are a complete and utter failure. Right? There is a place you can rent Segways, downstairs here, to zip around. I don’t think anybody would have predicted policemen and tourists are the two main markets for the Segway scooter. [22:04]

A lot of these Bitcoin 2.0 projects, I think, we might find the same thing. It is some odd, little, weird niche market that maybe they take off and we don’t expect. That’ll be fun to watch. [22:16]

I’m going to end just talking about where I think Bitcoin will be next year. If I do a State of the Bitcoin address next year — I think Bitcoin will be bigger and better looking. [22:28]

I think the wallets will be nicer. User interfaces will be polished — much more secure. I think multi-signature will go a long way for that. I think it will be more diverse. I am hoping by this time next year, we will actually have other implementations to the core consensus code that people are comfortable running. I think it will be more mainstream. We are going mainstream when I see Bitcoin comic strips show up in my local newspaper and my kids come to me and say, “Hey Dad, did you see Bitcoin in Dilbert?” That’s cool. That is going mainstream. [23:09]

I think we will be more regulated. I don’t think Bitcoin itself will be regulated but all of the infrastructure on top of it. I think we will see more regulation. I think that is inevitable — I think that can happen with any technology. I’m hoping it will be less volatile. I hope the price will calm down. That may be a false hope that I am a least confident of, because I just don’t know what will happen in the next year. [23:37]

Thanks a lot! I think we might have time for one or two questions — thanks! [23:40]

[Applause] [23:51]

Someone from audience: I have a question regarding the mining fee. It’s frustrating to see so much confusion about it. It’s essentially just proportional to the latency in the network and the reward. When the reward goes down, the fee will go down as well. But not a direct function of the block size you hard code into the client. It’s not really related to anything there. We had some discussion [inaudible] about that. I think it’s something to spread the word. [24:24]

GA: OK, I see transaction fees as being pure supply and demand. Right? There is a limited supply of blocks space. Maybe we should talk offline and you can convince me I’m wrong. It is possible to convince me I am wrong. I think anybody who has worked with me knows that’s true. [24:43]

Someone from audience: Thanks for the talk. My question would be — you talked about regulation and it might increase next year to some degree. And also some problem of anonymity within the core, the Bitcoin wallet, as it is right now. My question would be what do you think of these efforts, like Dark Wallet, to increase anonymity, like Darkcoin or whatever is coming out right now? Will the Bitcoin core development team work on these kind of solutions, maybe make regulations difficult, or will you try to be more regulator friendly? [25:25]

GA: I think we will be more regulated, but also, more private. As for the question of core—we are splitting out most of the wallet code, ideally to have a separate project. I would imagine, once that is done, teams will arise to implement CoinJoin, implement some of the privacy enhancing techniques — ideas that are out there. I think that will happen and I think that’s fine — you asked specifically what I thought of dark wallet — it’s fantastic! [26:02]

I think more privacy is better. If you talk to regulators concerned about consumer privacy and consumer protection, there’s another set of regulators concerned about law enforcement, investigation — they’ll different opinions whether technology is good or bad. On a high level, it doesn’t really matter because technology is what it is. Regulations evolve, the software will evolve. [26:36]

Someone from audience: Gavin, increasing the block size is probably a hard fork change, probably. If you ask any Bitcoin core developer what hard fork changes they would like, you’ll get a list a mile long. Do you see a possibility of working on a select, small, subset of people to get consensus on in preparation for future hard fork?[26:58]

GA: I think that will be part of the conversation. There are bugs that we should just clean up, right? Whether we should do that as part of a hard fork or not, we could talk about. I have my own pet peeve bug list of things I would love to change in a hard fork. I think there is a danger doing too many things at once. Obviously, do too many things at once, and you have increased risk — there is some awful bug and one of them causes the whole network to fall down. We will just have to be very careful about it. [27:32]

I think that is all the time we have — thanks a lot. I will be at the conference all day today, all day tomorrow. Thank you. [27:40]

[Applause]

[Music] [28:04]

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AL: Hi listener, here at Let’s Talk Bitcoin, we’re building a global network of correspondents to be able to contribute on the ground perspective when Cryptocurrency related information comes across their filters. If you would like to join our global conversation, send an email with your name and geographic or cultural niche to apply@letstalkbitcoin.com. Just like Bitcoin, the only barrier to entry is your time and good work. Thanks for listening. [29:07]

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Patrick Byrne’s Keynote Bitcoin 2014 presentation:

JM: Our keynote speaker today is a liberal in the classical tradition. He considers himself to be from the Austrian school of economics and a leader in exposing Wall Street corruption. He has triple degrees from Dartmouth, Cambridge University, and Stanford University. The CEO of Overstock.com, he took the company from one million dollars in revenue to over 1.3 billion dollars in revenue. He is a true pioneer and he made history in the Bitcoin world when overstock became the first major online retailer to accept bitcoin. [29:50]

Ladies and Gentlemen, I would like to take this opportunity right now to introduce our keynote speaker — Mr. Patrick Byrne! [29:58]

[Applause] [30:00]

PB: Thank you, Jon, for that overly generous introduction. Members of the Bitcoin Foundation Board, ladies and gentlemen, cryptographers, computer scientists, finance geeks, quants, Austrian economics, theorists, I think there are a couple of gangsters in the room, journalists who are trying to make sense of it all — it is a surreal honour to be invited to speak with you today, both because who you are and because this is taking place in Holland, in Amsterdam, in the Netherlands, I should say. [30:44]

I would be remiss, if I did not take a moment, to acknowledge a debt that historians generally overlooked in my country — the United States — and in other commonwealth countries. A debt owed to the Netherlands. That is — the creation myth — in the United States, we had these founding fathers, the constitution was written, declaration of independence. Those who know something, know the founding fathers read a lot of an English philosopher named john Locke, who was a social contract theorist, who wrote a book called Two Treatises of Government. Maybe we know there were these people, the

pilgrims, who came to our country with some notions of religious toleration and such. We see the intellectual history of our country as coming from these two sources. [31:37]

What is generally overlooked in this story, is the enormous contribution our hosts, the Dutch, made to that process. It’s a story generally overlooked but I’ll be touching on it later. [31:53]

First, I want to thank them for hosting this. For a moment, I’ll spend a moment about, who I am. A few months ago, WIRED did a large story about me and I’ll just point out — they called me the ”Bitcoin Messiah.“ Just to be clear, I’m not the messiah of anything. And as much as I favour Bitcoin – I love Bitcoin – I’m about the crypto revolution. I’m about the cryptocurrency and other missions for this technology. [32:37]

I will also mention, I was called the “Scourge of Wall Street.” I could spend hours telling you about how this came about but I just want to give you one amuse—bouche, out of a decade long story. Just to give you an idea of who you are listening to, maybe you don’t want to listen. [32:57]

In January 2007, a very well known and actually a well regarded hedge fund manager in New York, an elder statesman of the industry — not himself a bad guy, a fellow I had known at a distance for some time years — asked me to come see him. I went to sit with him. There was a witness there and this has all been actually vetted by this journalist – this is all true. This very well known hedge fund guy sat me down and his opening words were, “Patrick, you need to know, you are the most hated man, I have ever known in my entire life.” [31:31]

“You used to be kind of a golden boy, here on Wall Street, but now, you could kill people and you wouldn’t be hated, like we hate you, in this town.” Of course, to me and, I assume to you, that’s high praise. They can carve on my tombstone — on January 2007, I was the most hated man on Wall Street. And how why got that way actually ties, in rather a deep way, to what brings me here today. [33:59]

I should apologize now if this talk isn’t what you were expecting. If you were expecting a guy to talk about blockchains and stuff, I’m not the guy. [34:15]

I want to talk about the historical context in which I see the Bitcoin revolution, the crypto—currency revolution. Alas for you, I can’t really do that without talking a lot about history. If you didn’t expect to come to a lecture this morning that included a lot on history and philosophy, I hope you can get your money back. That’s what I’ve brought. [34:37]

I’m going to start with discussion of two books that invite us to view civilizations as operating systems. One, known to many people here, is — snow crash. Now, snow crash is kind of a cyberpunk bible, came out about ’92, ‘91 and for one thing it’s known for being quite visionary about the direction the Internet would develop. What they call the metaverse. [35:09]

What we came to know as they World Wide Web, even Facebook — the idea of distributed republic, this is kind of the bible for anarcho- capitalist, if there are any of those here. Memes, the concept of the meme, actually comes out of this book — many other things. The real value of this book, is — it invites us to view civilization as operating system. [35:33]

Nobody gets all excited — there is UNIX and DOS and Windows and Mac and Linux — nobody kills each other, which is the right operating system. There are other virtues than truth, when you talk about operating system. [33:50]

He invites us to view history the same way but this is really — Judaism, Christianity, Islam, Hinduism, East Asian Confucianism — these are operating systems. History is an enormous petri dish where these different organisms are in a Darwinian struggle to figure out what the best operating system is. [36:16]

Taking that a step further, a book that came out a couple years later by Francis Fukuyama, Trust. Fukuyama wrote another famous book called The End of History . He is the last Hegelian of the 20th century but his point of trust — you can view different cultures and civilizations as operating systems to solve a one central problem. [36:42]

And that problem is — how far does trust extend in a society. If you are in a low trust society — family based society — China, Taiwan, Italy — his argument is, you don’t trust people outside your family. Which means you don’t get businesses bigger than something a large family can run. And that means you are limited, you give up economies of scale, was his argument. [37:10]

As opposed to high trust institution based societies, where you can trust outside of your family, you can trust institutions, you can trust things like the government, and you can trust shareholder corporations and all this plumbing and mechanism that underlies the modern world. Because you have that trust in a high trust society, you get efficiencies of scale, etc., etc., that’s his argument. I’ll be circling back to that. [37:34]

Now, history. George Orwell said you can imagine the future as a boot stepping on a human face over and over, forever. I don’t think that’s true. I don’t think that’s going to be true because of folks like you. Thinking of that as an operating system, that was in fact — the family of operating systems throughout all of history until about 500 years ago. We’re more or less some variation of that operating system. [38:09]

Then, something really odd happened. 500 years ago, here in Spain. Of course, the Europeans among you, do not need to be reminded. Once, 500 years ago, Europe was a sea of Spain, with an island of France in it. This was Spain. In these northern provinces— all this was part of the Spanish territory, as was England — the co-monarchs Ferdinand II. Whenever I see Game of Thrones, and I see Joffrey, I think of Ferdinand II. This strange idea started developing in the north and it was a collection of ideas. Philosophers called liberalism that basic common DNA of them all was — the consent of the governed mattered. It started off in two places in the Spanish empire — one was here in the Netherlands, where

ideas like tolerance, pluralism, constitutional federation of free states and peace emerged. [39:17]

It is hard to imagine – some scientists somewhere proved somehow that fish don’t know that they swim in water. I don’t know how they prove that — but they don’t know that they swim in water. [39:31]

We live in a modern world it’s hard to remember what the world looked like before these ideas came along but this was not at all intuitive to people. Erasmus — the great catholic theologian, the University at Rotterdam is named after — he introduced these concepts like religious toleration, political toleration, and pacifism. [39:53]

Baruch Spinoza, the great one, from right here. If you have time here, you should visit the national museum and learn a bit about him. Spinoza came up with the idea of the self – the modern idea of the self – as an agent from whom consent mattered – who was capable of consent that mattered in a political system. [40:17]

Maybe, these ideas emerged here, of tolerance, of pluralism and constitutionally protected freedom, emerged here, perhaps, because of the middle class, the merchants. I should also mention, generally historians consider a large factor — the expulsion of Jewish people from Spain and Portugal. They came here, the best ones— the Portuguese ones came here. The synagogue is here in town, which I also suggest you visit. They spoke Portuguese into the 20th century because they had such an influence. [40:51]

If you are a Marxist, you might also say — windmills, the invention of windmills here — gave this society a great deal of cheap, abundant energy, gave it a huge advantage, competitive advantage over everyone else. [41:07]

Everything else I just mentioned is this ideological superstructure that came with this economic development, technological development. [41:14]

These ideas emerged here and interestingly, a group of separatists that would be English Protestants, who didn’t believe they could reconcile with the Church of England — they came here. They came here, the beginning of the 1600s and they lived here for about two decades in Leiden. They finally got fed up. They actually loved it here and they learned these values, learned a society modelled on these kinds of principles could work. [41:48]

They were discouraged, though, quite literally, by the effect on their young that was had by Amsterdam — the licentious and wicked ways of Amsterdam — was corrupting their young. They picked up and they sailed to North America, where we know them as the pilgrims. We think of England as the cradle of liberty but in fact it was all conceived here. [42:18]

Also, John Locke, who I mentioned, who had such an effect on our founding fathers — he came here, sitting out some English civil war— spent three years here, went back, and wrote this famous book Two Treatises of Government that became the founding inspiration for the U.S. revolution and much that came after it, at least for the British commonwealth. [42:42]

These ideas owe such a profound debt to this country — the cause of freedom, U.S. constitution. That’s one side. The other thing that was going on in Spain, about 400 years ago — very interesting — at the University of Salamanca, a group of scholastic Jesuit and Dominican friars became the first economists. They discovered notions kind of lost but Re- discovered after 300 years. [43:17]

Things like the subjectivist theory of value, we now equate with Marshall and the Cambridge school of economics, 1880s. That was actually first developed by Jesuit and by the scholastics at Salamanca. Impossibility of socialist calculation – a main theme of the second half of the 20th century economics — quantity theory of money, the equivalence of cash deposits, demand deposits, why fractional reserve banking isn’t a good idea — the value of entrepreneurship — value of property and contract — again, peace and anti-imperial platform that was quite critical in the days of Spanish imperialism from within Spain. [44:05]

Well, something funny happened to this school. They bounced these thoughts, bounced through Spain, Italy to the eastern edge of the Spanish empire of that time, the eastern edge, the eastern reign, the Oestreich, i.e. Austria. They went into hibernation for about 250 years. About 150 years ago, they came out of hibernation, in the form of the Austrian school of economics. Those who I met here last night and this morning, who think of themselves as Austrian school guys — it actually didn’t start in Austria, it started here, started in Salamanca. I consider this, generally, the heart of liberalism – of liberal, political philosophy, of pro-freedom — I like to call this way of thinking. [45:06]

People always object — sometimes, people object to me, maybe not in this crowd — you can’t hijack the word freedom. You can’t say you’re pro-freedom and other people aren’t, well — there are people among us who call themselves in our society, who call themselves progressives and if they hijack the word progress, I think I can hijack the word freedom. [45:25]

This to be understood in opposition to, the great philosophical mistake and this all circles back in one more slide, I promise, it circles right back into Bitcoin and which you are doing. I need to describe this great philosophical mistake. [45:39]

Basically, a virus was introduced into the operating system of liberalism. Authoritarianism. If the key element of the DNA of liberalism— is consent to the governed — for authoritarianism, its submission. [45:57]

The great enemy of mankind — Jean Jacques Rousseau — introduced it. His version of his social contract, written in answer to Locke, makes this very extraordinary claim. Basically, the control freaks knew that they had lost, the enlightenment comes, and they had lost their grip on history, so they subverted it. [46:25]

With this idea — okay, its consent that matters — it is consent to the governed but not the silly way that John Locke understood it. We, intellectual French, understand it in a much

deeper way. I, Jean Jacques Rousseau, understand there is something — he terms of the volonté générale — the general will of the people and that is important. That is what matters, but is not to be determined by silly voting or something, in fact, there may only be one person among us, in a nation who understands what the real will of our people is. What the real will of the nation is and that person is the sovereign — needs to give no guarantee to subjects, no constraints, there need to be no constraints on it. His will is, or should be, nothing but the law. [47:22]

This Robespierre, when he forces everyone to obey his will, it just looks like tyranny, said Rousseau. But it isn’t tyranny because he is forcing people to be free. True freedom is found in submission, to this force that understands the general will, that understands the real historical mission of our nation — of a nation — and that’s true freedom. [47:51]

Voltaire read this and wrote a famous response to Rousseau, where he said, “I have received, Sir, your new book against the human race, and thank you for it… One longs, in reading your book, to walk on all fours….” [48:08]

I love Voltaire. Bertrand Russell was once asked, did he have a bible, and he said “Yes, I keep it over there, under my Voltaire.” [48:17]

Voltaire was correct but, unfortunately, he did not win. This became a really dominant strain in modern political philosophy, starting with Rousseau, led to Kant. Kant was a pietas, working away in Kronenberg, famously never left the city. In his bare, pietas study, he had that one adornment — a portrait of the Jean Jacques Rousseau. In his Teutonic way, he worked out the implications of this theory, in this grand and Teutonic way, develops the idea of “ain folk.” [48:55]

A mission of a people. Freedom. Freedom is found in subordination to this mission. That’s true freedom. Not the freedom the phenomenal self looks in, which is just what you or I want to do, the pursuit of happiness. Life, liberty, the pursuit of happiness, is how Locke put it— is this superficial form of freedom. True freedom is understanding your historical process you’re part of, and through submission to that, Hegel comes along — I never got anything from Hegel other than late stage Kant and suppression stuff. [49:33]

Marx who takes Hegel and famously says, “I’m going to take Hegel and turn him over and stand him on his feet.” Meaning he is going to take all the dialectic of Hegel but apply it to economics and this is the real historical process that matters. Mankind has a story, has chapters in the final chapter, the ultimate triumph of the proletariat, and such. [49:54]

Freedom, again, is defined as submission to that process or commitment to that process. It is a very different definition of freedom that had emerged in Holland, England and Scotland and in the Americas. [50:09]

Nietzsche, who reads like he’s an individualist, cares about the individual — he doesn’t care about the individual. He is all about the Zarathustra, the individual in a capital “I” kind of way. Nietzsche famously dismissed this whole other tradition saying, only an Englishman

cares about happiness. That’s his answer to John Stewart Mills and Jeremy Bentham, utilitarians, John Locke, life, liberty and the pursuit of happiness. He says only an Englishman cares about happiness. I, Nietzsche, I understand the real historical mission and where freedom is to be located again, some sort of submission to that — Lenin, of course, for him — it’s not the masses. The vanguard, the masses, the party, freedom. [51:01]

I used to live in communist China and I used to debate these things with intellectuals there, who actually maintain these points of view. What you think of bourgeois, western freedom, real freedom is submission to, in our case, the communist party. [51:18]

Of course, the third Reich. Over the gates at Dachau and Auschwitz, the signs read “Arbeit macht frei” — work will make you free. Work for the German state, work for the Reich. Again, this idea of submission, properly chosen submission, real freedom is found. Mao, again, I lived in China in the early ‘80s under Deng Xiaoping and we used to have these conversations. I was in Cambodia in the late ‘80s and speak with French educated intellectuals. It’s amazing, everybody knows their Rousseau, Kant, Hegel, Marxist cannon, of course, but the three western philosophers they always knew, especially Rousseau. [52:03]

So that is, as Voltaire said, mankind walking about on all fours. This idea, this is how you define freedom. The great corruption occurred from Jean Jacques Rousseau. [52:17]

Going back to this issue of trust, where does that leave us? The one vision, the vision that I think is fundamentally authoritarian believes we need central institutions. It argues for centralized institutions in one form or another. It’s uncomfortable with institutions that are not centralized. It all comes out of that authoritarian tradition. [52:47]

The problem, it’s funny this fellow himself who wrote this is considered a conservative — Fukuyama — he’s arguing, you want a high trust society, you want to live in a high trust society, where you can have robust centralized institutions. Taking for granted, of course, we can trust those institutions. What’s neglected in his analysis is the whole problem of regulatory capture. [53:16]

Regulatory capture is an extraordinary field in itself. It was invented in 1972 by Stigler, friend of Milton Friedman. Society sets up regulators to protect us from certain industries and certain forces. Sometimes those regulators have a tendency to get captured, to get owned by the industries it’s supposed to be defending us from. [53:45]

There is a Marxist at Harvard named John Hanson, who argues an even deeper theory, called deep capture. It isn’t just the regulators that capture the bad guys — it’s regulators, congressman, and police, and journalists, and judges, and academics. Capture goes very deep. [54:05]

I started a web site eight years ago called Deep Capture that explores – it has won various awards on the best website on corruption in the United States, best economic investigative journalism in the United States, where I explore the capture and corruption of our centralized institutions. [54:25]

The great problem comes down to — if I’m right and there is more capture occurring then generally recognized? What happens is — what John Kenneth Galbraith called, the bezzle. He spoke of the bezzle. The bezzle is — in a modern society, if you could freeze time and ask every single person: what’s their stake in the financial system, what do you own? You could add it all up, you get this much, but you look and there’s only this much there. [55:00]

And any given time, there is this difference. He calls that difference the bezzle, which is the amount that has been embezzled from society and none of you know it. At any given time, there is the bezzle that is growing at a fast rate or a slow rate. I became convinced about ten years ago, there was an enormous bezzle in the financial system. [55:27]

The two centralized institutions that I think are the sources of it – I think 2008 — lot of different causes for 2008. One of the causes is some of this bezzle bubbling to the surface. The two centralized institutions that are to blame — central banking and central counterparty clearing. The reason I am so committed to Bitcoin and crypto is because crypto can solve the problem both of these organizations are presenting to society. [56:16]

The case of central banking — once you have fractional reserve banking – fractional reserve banking, started, legalized in 1844, Robert Peel in the UK. By the way, there is a wonderful Spanish economist, who writes about the Austrian school and central banking that people here, may be like — his name is Jesús Huerta de Soto and he has written on this subject. [56:40]

Once you have fractional reserve banking, you always have the elites – who own the banks —overleveraging themselves. They overleverage themselves, go kaput — they need a bailout. They need a lender of last resort. Once you have a lender of last resort, you have somebody who thinks – you have a central bank, and they think they can start directing and guiding and fine-tuning the economy – the tinkerers. [57:10]

There is a fellow at the London school of economics who says their vision is, the economy is an enormous engine and they are like a workman with a screwdriver. They think they could just fine tune it, and get it just right. That’s their vision. The problem is, the problem with this way of viewing the world is — we laugh at the Soviet Union, those of us old enough to remember it – for trying to run a country without prices, without real prices. [57:41]

They had 23,000,000 prices being set by apparatchik, in a bureau in Moscow called gazprom or something. They set 23,000,000 prices — how much the screws costs that would go in this bracket that would go into this bookshelf. 23,000,000 prices for everything in society, being set by apparatchik. We say, how ridiculous — what a crazy way to try to run a country. [58:09]

In our society, the most important price we face — is the price at which we discount the future against the present. Which is to say, interest rates. Interest rates are being set, both in Europe and the United States, in central institutions called central banks, with names like the Federal Reserve of the United States. [58:33]

We laugh at the Soviets for it but we’re doing it with the most important and fundamental price in our society. Central counterparty clearing. This sounds so dull but I think, it is an enormous opportunity for you cryptos here, for Bitcoin or some Bitcoin like technology, to emerge — this is what I’m talking about. [58:59]

When you watch a movie, you’re not conscious of the grips and the gaffers and the lighting guys – you watch the movie. When you trade in the stock market, it’s the same thing. You just assume, underneath it all, there’s some plumbing that makes everything work — when you buy 100 shares of IBM, it’s getting your account, so forth. [59:21]

We went public in 02, our company. When you’re a public company CEO, you’re right there, in the mix. I’m out there with hedge fund guys, prime brokers, banks, and all these kind of people. I quickly became aware, there was a bunch of criminality going on. Didn’t take a lot of genius – I was asked to take part in it. By ’04, I had it pretty well mapped out. I know just who was doing it. The network of hedge funds— there was a network of about 15 hedge funds. America centered on a guy named Steven Cohen that were the center of a huge stock manipulation scheme which included insider trading. [1:00:01]

I started talking about them publicly, naming them by name. I promise no one will ever sue me because none of these guys can take discovery. Incidentally, Cohen later – this whole network, came under investigation, became the target of the largest federal investigation on Wall Street in history. Eighty odd people have been sent to jail. Cohen himself paid a billion eight fine. It’s the tip of the iceberg. I think the criminality goes far deeper than anything you yet imagine, even in this audience, on Wall Street. [1:00:33]

The real thing that was going on — that I got arguably a bit obsessed with — is the whole question of clearing. Clearing is settlement. You assume there are those, that plumbing underlying the financial system, making everything work. Let me promise you, I got into this very deeply – it’s way too arcane to go into here, unless I get the right questions. [1:01:01]

There is far more slop in the systems that underlie the transfer of property and title in our society than you would possibly think exist unless you were part of it. Let me repeat that, the systems by which property rights and title gets transferred, have gotten lots and lots of slop. [1:01:34]

There are some academic reasons for it that they thought was okay but basically property rights have gotten digitized, securitized and hypothecated and re-hypothecated and netted and pre-netted, sliced, diced and circumcised and the systems lose track of who owns what. [1:01:57]

I was making some very public criticisms of this — ’05, ’06, ’07 – I was dismissed as a nut — when ‘08 happened. First thing the SEC did, went, and plugged several of the loopholes that I was talking about. There’s much more there. [1:02:14]

For example, the mortgage backed security crisis. The American Banking Association estimated in 2009 of the mortgage backed securities – which is when somebody like Goldman Sachs, takes 1000 mortgages, package them into a bond and sell that. In general,

the American Banking Association said 18 to 30% of the mortgages that were stuffed into the mortgage-backed securities, didn’t exist. [1:02:45]

What was happening was, Lehman Brothers, Morgan or somebody, was getting ready to issue a bond, they had expected to have a 1000 — only the paperwork had been done on 750 of them. They would go ahead and issue the mortgage-backed security anyway and stuff — replaced the missing 250 with IOUs, with the intent of replacing them later. [1:03:11]

Everything got so far behind in the whole mortgage-backed security industry, before the crisis, that when everything Chernobyled, the ABA said 18 to 30% of the stuff was just phantom. That’s how much slop there was, in that system of chains of title. [1:03:33]

People didn’t know who owned what. I think this has gotten — Secretary Geithner, famously, privately made this awful comment about we need to” foam the runway” for the big banks. In other words that’s what the U.S. Treasury’s done. They “ foamed the runway”, they made it so the banks could fill an all these potholes – course, at the expense of the taxpayer. [1:03:56]

You may have heard of MF global scandal. A large company that melted down— two billion dollars was missing. Those two billion dollars in securities had been hypothecated and re-hypothecated to London for some tax arbitrage. And when it melted down — no one could tell who owned what. [1:04:16]

That is going on and that’s the essence of why I got, ten years ago, so super fly TNT about Wall Street. Because Wall Street was doing this openly. You didn’t have to scratch too hard to find out where it was going on, how much of it was going on and they were saying — well, it’s okay, it’s okay. Because of efficient market hypothesis and stuff, everything comes out of the wash — it’s not okay —they’re wrong. They turned out to be wrong. [1:04:42]

That brings me to the answer. The problem is — if crypto is the answer, what’s the question? I will close on this. What system respects the consent of its participants, while undermining of the centralized institutions we have come to distrust. [1:05:06]

To me, it is the technology that is being built, here, by people like you, which I see as the fruition of this 500 year old effort — that started right here, in Amsterdam. [1:05:19]

Thank you for your attendance, hope you have a good conference — I would love to take some questions. [1:05:25]

[Applause]

PB: Thank you.

JM: Thank you for an excellent presentation. I feel like I have an honorary degree in philosophy just by listening and attending. I could listen to philosophy all day long. [1:05:48]

PB: Good.

JM: Bitcoin audiences are famous for asking great questions. We have people with microphones in the back, if you want to ask any questions. I want to start and ask a question of my own, after listing to your presentation. I was wondering if you could explain for us and the audience here, how did your business change at Overstock? When you started accepting Bitcoin? Give us an idea, in a day-to-day way — what were some of the things you experienced through customer support questions? Did you get new media attention, for instance? [1:06:28]

PB: Yes. The story is worth telling. On December 19th, a journalist called me and said, in a long interview on other subjects, do you think you’ll take bitcoin? I had been keeping my eye on bitcoin for a few years. By the way, I did my doctorate in philosophy, but along the way, I studied computation theory at Stanford. Gödel, and the math that underlies crypto. When Bitcoin first came along, it sparked an interest — I recognized it as being based on the stuff I had studied 25 years earlier. [1:07:07]

I had this affection for it. I was waiting to see what the Feds were going to do. They seemed green lighted around November, at least they said they’re not going to red light it. [1:07:16]

On December 19th, a journalist calls me on an interview on some other subjects, says, “Are you going to take bitcoin? “ I said, maybe by the end of 2014. I just said it off the top of my head. That mention started showing up in Korea and Japan — these newspapers all over the world were reporting I said we might take bitcoin. So I called Coinbase, just looked them up. They sent someone out. We had one or two conversations on the phone, they sent someone out. On January 2nd, they sent someone out. On January 9th, we were live. [1:07:52]

We had a fantastic experience with Coinbase — I also happen to know BitPay. I hear the same kind of stories about BitPay. I don’t want to disrespect anybody here. I know those are both excellent organizations with great backers. [1:08:08]

They got us live so quickly and the truth is, after we got it live, there were two phases. One was just getting it live, the second phase… there’s three phases: getting it live, being able to issue returns — when a customer buys a podium and they return it, you want to give them their money back, if they paid in bitcoin and they want it back in bitcoin. That was the second phase. The third phase is having our international checkout process being able to accept Bitcoin. [1:08:38]

Well we got the first phase live in a week. We got the second phase live, a month or two ago. We can now issue refunds in bitcoin. I think we’re still a month or so away from international orders, being able to pay in bitcoin – of course, distresses me.[1:08:52]

Since we got it live, it’s been so seamless — haven’t had to give it a second thought. No problem, I know — I sound like a commercial. It’s required no work for many of us. We’ve

had to retrain some customer service agents on how to issue bitcoin refunds but it’s just a few minor things like that. [1:09:14]

We have so far, I think we’re coming up on two million dollars worth of sales. Which is nice. We’ll do a billion and a half this year. I expect we’ll do tenish in bitcoin. That’s nice, it’s growing steadily each month. [1:09:33]

JM: Did you get any new press from the branding? [1:09:37]

PB: Once we did it, once we went live — it paid for itself – the implementation 1one hundred times over, just by the press. I really want to express my gratitude to the Bitcoin community, what apparently happened was, as I hoped would happen, the early adopters out there, the Bitcoin users, started coming to our site. Just as a show of support, buying a set of pillows or buying a bed. We sold a few hundred thousand, just in the first two days after getting live. People wanted to show their support. [1:10:13]

JM: Excellent. Excellent. Let’s see if we have any questions in the audience. We’ll start here. Do we have the microphone? [1:10: 24]

Someone from audience: if Bitcoin does undermine these centralized institutions you are talking about, what’s the best possible scenario? What does your rosy picture of the future look like? [1:10:38]

PB: Well, my rosy picture of the future would be — the bezzle get squeezed out of society, like the toothpaste out of a tube of toothpaste. Slowly, steadily, with no major dislocations. Everything gets filled in. That would be my rosy picture. My guess is – it’s hard to imagine, this technology is so disruptive — it’s hard to imagine it doesn’t disrupt something deep along the way. But it couldn’t happen to nicer set of people. I know if would be bad if it happens but anything’s better than – the system, at least in the United States – the system of knuckleheads – we basically live in an oligarchy now in the United States. [1:11: 22]

There is a wonderful economist — Simon Johnson, was chief economist at the IMF and now professor at MIT. He has said publically, “Look, what I used to deal with at the IMF, going to Argentina, or Russia, or Indonesia and sitting across from some young, bold leader. And it’s always a new, young, bold leader. These oligarchies always get themselves — the elites leverage themselves up too much, they crack and the government bails them out. The IMF comes in and the government wants more money and they say: we need to figure out — are you in Argentina, going to use this money to fix things or are you going to keep bailing out your elites? “ [1:12: 05]

Well, I, Simon Johnson, says he, I’m telling you that’s all that’s happened in America — and you’ve become an oligarchy. The history of the United States can be told as a war between two factions — Wall Street and Washington. [1:12: 21]

I can personally attest, having been on the front lines of this, and I knew this ten years ago, long before it became common knowledge — Wall Street has Washington under its thumb. To the extent I am actually surprised we didn’t get outlawed a few years ago by Washington.

Obviously, Russia and China and other autocratic states, are going to do it but I’m surprised in Washington, maybe it just got away from them. [1:12: 46]

I think their days are really going to be ruined, if bitcoin or crypto takes off. If we start seeing cryptographic ways of transferring securities — there are people here, like NXT, working on that. There are other organizations working on creating — taking this technology and applying it to capital markets — not just currency. Capital markets. I, because I believe the bezzle, is so enormous and is so much worse a problem than is generally understood, I think this kind of alternative technology is going to have a more dramatic effect, than is generally understood. Cause people don’t recognize how big a problem is there. [1:13: 33]

Someone in the audience: My name is David Orban. I believe what you said is very true, regarding distributed systems that are substituting centralized systems. Cryptos is just one component of this. Energy, produced by solar, is distributed. 3D printing and manufacturing, food production, health, learning — all are part of the same process. And the nation state is being undermined by this. But the nation state is also reacting as any [inaudible] system trying to protect itself. You seem to be an optimistic revolutionary —revolutions are always started by optimists — and then, they become bloody. [1:14:20]

PB: Bolsheviks takeover. [1:14:22]

David Orban: And what comes out of it at the end, is impossible to control. The well being of the billions of people is at stake here. [1:14:33]

JM: What’s the question? [1:14:34]

David Orban: What can we do, concretely, to stop policymakers from making it bloody and taking over the revolution? [1:14:44]

PB: Well, I think you’ve analysed it right. I think you’ve analysed it right and listen I have so many scars from trying — I’ve sat there in the halls — the answer is nothing. I think the answers are not going to do anything to stop. You’re not gonna gain anything to make government make the right choice. Let me tell you, in ‘04 and in ‘05, I had concrete data, proof. I had people involved — I had hoodlums from Staten Island. Another Dutch name, Staten Island. [1:15:20]

Who were going and willing and talk to the SEC with me, to NASDAQ and explain what was going on. To the senate banking committee and the House financial services, and financial journalists in New York. I’m reminded of another Bertrand Russell story. Bertrand Russell was once in India, and he was lecturing on Einstein’s relativity, and a Hindu cosmologist stood at the back of the audience, and said, “Professor Russell, you have it wrong. The universe rides on the back of the turtle.” Russell said to the Hindu professor, “What’s the turtle ride on?” The guy says, “The back of another turtle.” And Russell says, “Okay, what’s that turtle ride on?” The fellow says, “I’m sorry, Mr. Russell, but it’s turtles, all the way down.” [1:16:15]

We had clear proof, there were these flaws in the settlement system, they were brokers wildly misrepresenting – fractional reserve banking without a reserve requirement. We had participants, and we had data, we had economists. We went to NASDAQ. We went to the SEC — I was warned, if you keep pushing this Byrne, you’re going to be the target of a federal investigation. I said, you have got to be kidding me. This isn’t some schmuck country. I pushed it, I became the target of six federal investigations, over ten years, all of which went nowhere. Which cost millions of dollars fought. They gave up, they dropped, they give me a letter saying they were wrong, and three months later, start another investigation. [1:17:03]

We later used Freedom of Information Act request later to find out there were Wall Street — I digress. I went to NASDAQ, the SEC, the Senate Banking, the House Financial Services, and the New York financial press, trying to alert them and explain to them their systemic risk being created by this. There’s deep, latent derivative risk that people don’t understand because when you have unsettled trades it’s kind of a contract, it’s a type of derivative — it’s called a contract for difference but one with this pernicious circular effect. We could explain this, had all this data — we got nowhere. I found, it was just “turtles all the way down.” [1:17:42]

It’s turtles. All the establishment that you think is overseeing the centralized institutions in the US, it’s called the DTCC and expecting them to provide — to be doing their job. They’re not doing this. I’m reporting from the front line, I spent ‘04 to ‘08 in this battle, and millions, it became my hobby. This is how I became the Scourge of Wall Street. Trying to expose this stuff. I could give you some happy talk that says if there’s this disruption, this is what you can do to convince the governments — you can’t. They don’t care. The people you’re up against — you got to remember, the people you’re up — against all have senators on speed dial. [1:18:27]

I face this myself. I used to go in and talk to senators and they would say — I would explain everything, and I would bring economists, explaining stuff and I would finish, the aid to the senator would tell me on the way out — what you say, it makes sense — for every time you’re here, Goldman Sachs is here ten times, telling him not to listen to you. [1:18:46]

I think I can give you some happy talk, saying you’re going to make a difference with the government — you’re not. I think the one thing that happened to our benefit is this got away from them. It’s normally aggravating how slow the U.S. federal government can be to see something and understand something and respond. For once, it helped our side. This came along and really if everybody had been on their game, they would have stopped Bitcoin two years ago. It’s gotten away from them — it’s too late now. [1:19:19]

I don’t think they can but I don’t think that there’s anything you’re going to be able to do, to bring this in for a soft landing. If the system is really at the cores — corrupt — as I believe it is, then as Bitcoin gets adopted, it will cause severe dislocations. [1:19:37]

I think what you’re doing, though, is creating a robust, parallel system to which people can quickly switch. I think that’s really about all you can do. [1:19:46]

[Applause]

JM: Do we have another question? [1:19: 56]

Someone from audience: Thanks for a great speech. I think you expect of Bitcoin use a stable currency. Bitcoin is fluctuating very much for the moment. I’m from China and I’ve seen Chinese government has not been very supportive of this currency and the trading volume is big in China. My question is — how do you see the fluctuations of the currency in the future and how do you think the government policy is going to affect the currency and your business. Thank you very much. [1:20: 33]

PB: [Speaking in Mandarin] First, I thought they outlawed it but then I keep seeing these indications that it’s not really outlawed, I don’t understand. The fluctuation risk — there’s a saying on Wall Street: liquidity begets liquidity. Once you start having liquid enough exchanges, there are network effects. There are network affects that come to play. The problem is you don’t have liquid enough market now and that’s why there is this volatility. It’s hugely ironic that I’m the guy that saying this, but anyway. [1:21: 29]

We ourselves, at Overstock, don’t expose ourselves to much of it. We started out, trading out instantly, from 100% of our bitcoin transactions. Then I felt that was kind of cheating. I wanted to accumulate some bitcoin. So now, we accumulate about 10% of all of the bitcoin spent on our site. We’re accumulating. [1:21: 55]

The fluctuation problem is a real problem for businesses. I was just speaking to someone earlier today — when the price of Bitcoin comes down, fewer people come and a sign up for new wallets. When it goes up, more people come in and sign up for wallets. That maybe — I’m sure that’s true. On balance, all the volatility is probably discouraging people. [1:22: 23]

However, the only way we’re going to get there, is eventually, enough early adopters adopt, and there starts to be enough liquidity, and then the liquidity begets liquidity. Things should start — you shouldn’t have the kind of volatility you have now in bitcoin. I don’t follow it like I probably should but my understanding is the last couple months, the volatility has somewhat smoothed out. [1:22: 46]

I would imagine as more people buy into it, you’ll see that’ll happen. When somebody develops — I don’t know if it’s been developed yet – we would use it if it were a service, a way to hedge your bitcoin risk. You don’t trade out of it so much, as buy — various puts and such. You buy forward contracts. [1:23: 05]

I’m trying to indicate areas that would be good business for entrepreneurs to develop. One would be, and I know there are people working on it — bitcoin version of a stock market. Another is a bitcoin, a derivative market — a good derivative market where businesses could hedge out of, hedge through options, out of their bitcoin risk. [1:23:28]

Third, incidentally, is micropayments. I think— bitcoin could solve the publishing industry has been wrecked in the last 15 years. People want to charge subscriptions, they want to charge for content, and they go to advertising based models. There are very few publications who can really — am I singing your song here or something — there are very few publications that can really charge online subscriptions. [1:23: 56]

What I imagine is a world where you go to a newspaper to read some article — it’s 3 cents to read it and if they did that, it could save the publishing industry. [1:24:10]

Those are the three areas that if I were interested in getting or starting another company, that’s what I’d be doing. The point is, as more participants come in, the volatility should smooth out. [1:24:22]

JM: Okay, we need a microphone up here, please. We have time for one more question. Right up here, I’m sorry. Can you stand up, please? [1:24:38]

Someone from audience: Hi, I’m Brian Crain of Epicenter Bitcoin. You talked a lot about dismantling of centralized organizations. Now, I’m curious, is there a role, in some context, where some centralized organizations are superior to centralized systems? Are you worried that Overstock, being a large, centralized organization as well, will be dismantled or replaced by decentralized applications of the future? [1:25:12]

PB: Fair question. It’s not that I’m against all centralized institutions. I think there are efficiencies that come — every corporation, by its nature, is a top down economy. There are problems when organizations get too big, they are not subject to market pricing internally. No, I’m not an anarchist, like some of you. I think there is a role for government, I think there is a role for centralized institutions. [1:25:39]

Just as the left – when I was in academia – the left tended to be obsessed with the idea of market failure. Paul Krugman, Joseph Stiglitz – good guys, well, Stiglitz is. They love exploring the ways markets can fail. Markets do have natural tendencies to fail. There are certain types of goods that are not best left to the market. You always got to ask the question, “Compared to what?” [1:26:09]

Governments have ways of failing, too. There are certain standard ways, that government choice fails. One of them is through capture. I’m a “small L” liberty guy. I’m not right wing or left. When people on the left talk about the need to have a robust, muscular government, that can stand up to these powerful corporations, like Goldman Sachs, they fail to consider the possibility — what happens when your muscular government becomes a wholly owned subsidiary of Goldman Sachs? Now you got the worst of both worlds. [1:26:52]

I’m not against all centralized institutions, I just think in the design of intuitions we have to take more consideration of the risk of their capture. All else being equal, you want peer-to-peer institutions, where consent plays a role, rather than submission. [1:27:15]

Thank you, Jon. [1:27:16]

JM: Thank you. Can you take one more question? One more question here? [1:27:20]

PB: Sure, absolutely. I’ll stay here all day. I know you got a schedule. [1:27:22]

Someone from audience: Hi, my name is John [inaudible]. I’m really curious, when is Overstock going to move their shares over to the blockchain? [1:27:31]

PB: Funny, you say that. If I say this, it’s going to be reported — then three days from now, I’ll have guys locked in a room eating pizza — making it happen. [Laughing] I said to some journalist, we put 40 people in a room, slid pizza under the door, they got it done in a week. Funny you say that — I want to be the —

[Applause]

PB: I would consider issuing a security, just to get the first bitcoin security, or blockchain security out there. I’m also exploring the possibility — we’re listed on NASDAQ, but can we be dual listed? It’s possible in the states, you can be dual listed on more than one exchange. Listed on NASDAQ, it’s listed in Berlin, it’s listed in the Bahamas exchange — not me, but someone in the Bahamas went to the trouble to get it done. [1:28:40]

I believe we could list on a blockchain kind of exchange. I have some lawyers, in the stages, they are talking to two different parties. If anyone here has the technology, has the solution – call collect. I would love to be, at the very least — take our current NASDAQ traded security and dual list it. I would also be interested — I’m going to get escorted by the lawyers, but in issuing a bond or something that we could list. Be the first to list this kind of security. Call collect. [1:29:20]

[Applause]

I noticed some people in their blogs, when I first came out and did this, some people said, this guy just did this stuff with bitcoin for publicity. I’m hoping, if nothing else, this talk dispelled, you understand, this is a deep part of my life what you folks are doing. [1:29:41]

JM: I think that’s an excellent note to end on – let’s hear it again for Patrick Byrne! [1:29:46]

[Applause]

PB: Thank you, sir, thank you. [1:29:48]

AL: Thanks for listening to Episode 114 of Let’s Talk Bitcoin. Content for this episode was provided by Gavin Andresen, Patrick Byrne, and Jon Matonis. Music for this episode was

provided by Jared Rubens. Any questions or comments, email adam@letstalkbitcoin.com. Have a good one. [1:30:09]

[Music]