By Chris Skinner
The Finanser
Wednesday, March 18, 2015
http://thefinanser.co.uk/fsclub/2015/03/the-finanser-interviews-jon-matonis-crypocurrency-economist.html
Bitcoin still stirs up a huge debate about where it will go in the
future; will it become institutionalised; what is the blockchain going
to do to banking; and more. In order to clarify the debate, we
interviewed Jon Matonis, a renowned expert on bitcoin and
cryptocurrencies, to find out what is the truth.
Tell me about yourself and your background Jon.
I was involved with the Bitcoin Foundation since its inception,
starting in 2012, as one of the founding board directors. At the end of
last year I decided to retire from the Foundation board and give other
people the opportunity to step forward and work on the board.
It was never meant to be a lifetime gig for any person. Prior I was
working in the payment space at Visa and VeriSign, working on the public
key cryptography for online banking, and prior to that I was an FX and
Derivatives trader for commercial banks. I have been blending all these
skills into this new brand amazing field of financial cryptography.
What’s the future of the Bitcoin Foundation?
In terms of the Bitcoin Foundation going forward, it still is an
excellent institution. People should be encouraged to join it, as it
does pay for some of the core developers’ compensation. It doesn’t
pay for all the compensation, as no one entity controls Bitcoin
development. It is an open source project so it’s not a centralized
power struggle, but does provide some compensation. The main focus of
the Foundation today, which is slightly different from when it first
founded, is to develop a standards body for Bitcoin Core, along the same
type of protocol standards as the IETF. It is premature to just
automatically throw that over the fence with the IETF standards process,
as it would be lost. It has to mature, has to have more participation,
more advocates to allow it to thrive in an IEFT structure. That is what
the Foundation is preparing the protocol for, so that eventually it will
go into a larger more rigorous standards body process.
You mentioned you’ve been a trader and involved with the payments industry so why did you get interested in bitcoin?
I had always been studying and focusing a lot of my research work on
digital currencies and alternative monies. Even prior to Bitcoin going
back to Digitcash and E-Gold days. In late 2009, I got introduced to
Bitcoin by a random email from Satoshi Nakamoto. I didn’t give it much
thought at the time and then 3-4 months later I started to focus upon
it. It seemed to solve a lot of problems encountered by the first
generation digital currencies, primarily around the centralization issue
for preventing double spends. That’s the real breakthrough and is what
got me excited both as a trader and as a digital currency monetary
theorist. Bitcoin came up with the way to solve the double spend
problem, without having to go back to a centralized mint for reissuance
or confirmation that the units weren’t double spent. The cryptographic
principles for Bitcoin have been around prior to the launch of Bitcoin.
There was nothing uniquely new about any of the individual components
but it was unique in how it was assembled as a peer-to-peer distributed
environment. That was the real breakthrough.
You say it’s decentralized, which often raises the question: is this money without government.
Well the decentralized and peer to peer computing capabilities are
the wave of the future. So that is definitely going to last. I see that
growing in fact rather than going in the other direction.
In respect to the ‘money without government’ phrase, we actually have
always had money without government going back to the evolution of
money, even gold and pre- gold barter days. Gold was the form of money
without government before the kings and monarchs started stamping their
image on them. So I don’t see concept of money without government as
being something impossible to achieve. Instead, we are regaining
something that was lost.
But regulators and government officials, when it comes to
a value exchange that is unregulated, worry about drug runners and
terrorists. Do you see that as a threat?
I don’t see it as threat. It’s not specific
to Bitcoin and other crypto currencies. Any type of value exchange
medium for small or medium transactions are subject to abuse. The
tradeoffs are that you have to severely clamp down on the benefits of
having digital money in an absolute way, to prevent something happening
on the negative side in an absolute way. What I mean by that is that
the so called drug and criminal communities that you’re labeling, dwarfs
what’s happening in Bitcoin. You don’t blame the monetary unit for the
actions of the criminals.
I agree with, although another problem of an unregulated
value exchange system is that you get lots of hacking and issues like
MtGox and Bitstamp failures. These things give Bitcoin a bad name. Do
you see a structure to give consumers more assurance that it is safe to
use?
Let’s talk about MtGox and the episode of Bitstamp. Regulation cannot
be a panacea for ‘caveat emptor’ (buyer beware). Regulation cannot be a
panacea for everything. It rarely works in a way that a government
intends it to anyway. Look at episodes in the United States where Lehman
Brothers and MF Global were both regulated entities and meant to be
safe. They weren’t. So in terms of protecting consumers, that is just
what the government regulators put forward for the justification of
massive regulation in the Bitcoin arena. We are now seeing major areas
of Bitcoin being involved with best practice though. If you look at the
recent BitStamp episode, that actually resulted in adoption of new
multisig technologies for Bitcoin and cryptocurrency exchanges. So the
solution with BitStamp generated a more robust and stronger exchange
system, which happened outside the action of any government regulation.
Alongside that you are seeing firms like BitGo, which was the
multisig company, and companies like Xapo, CoinBase and more adopting
their own private insurance to provide customer security and peace of
mind for any funds that they choose to leave there. So the market is
stepping up, through best practices and through providing these
solutions. The main take away from MtGox, which happened over a year
ago, is that it demonstrated the exact opposite of too big to fail
capitalism. It’s always curious to me that some the critics of MtGox
would prefer a world where the tax payers always steps in and bail
everybody out. That’s not the world we need to be moving towards, so
that MtGox was allowed to fail on its own accord should be taken as a
positive sign that the system is working.
It’s interesting that traditional value stores have
started to pick up on Bitcoin since failed. A lot of institutions that
have got licenses and government regulation are starting to try to
incorporate cryptocurrency and blockchain technology in what they do.
That feels like a movement towards the institutionalisation of
cryptocurrency. Do you think that will happen or would that be the
opposite of the wishes of the community that created this capability?
Well the wishes of the community don’t really matter here and the
institutionalisation of Bitcoin will be jurisdiction by jurisdiction.
Going back to your other point though, the exchange environment has
matured significantly over the 12 months since MtGox and that’s a
beneficial sign. Not only are they aware of this, but the service
providers are a lot more robust. Some of them are taking steps on their
own in anticipation of future regulation but to present a more mature
offering. Users of these services have also worked out that it’s not
right to use firms like MtGox as a bank vault, which they should have
never been using as such in the first place. So Bitcoin gives you a way
to control your own assets and not required to leave everything on
balance. It’s down to your own guidelines and comes back to what I
said, caveat emptor, whether its regulated or unregulated.
On the institutionalisation of Bitcoin, you will start to see that
happen. I don’t think this is a negative and, as mentioned it will be
jurisdiction by jurisdiction. Trading liquidity, increasing volume and
depth of the market will lead to institutionalisation. It is
unavoidable that we will get to a phase where we see Bitcoin derivatives
type instruments, which we are already starting to see evolve in
certain markets. It will be just like any other commodity that goes
through stages and develops. We are just seeing that on a faster time
horizon with Bitcoin, which seems like it is moving a lot more quickly.
We will get there.
I can see it happening. That’s why you see innovators
like Fidor Bank and Circle creating cryptocurrency consumer guarantees
and assurances, similar to traditional regulated banking licenses, but
in the new model world rather than the old model world. Is this the
correct view?
It is a correct view. We are also starting to see it on an
international level. You will have the small local regional players, but
you will start to see the ones that are large have a global footprint,
which will end up only being beneficial because a global footprint for a
cryptocurrency type operation really sets the stage for entry into the
remittance market. When you have a global player that covers multiple
countries you’ve pretty much displaced the functionality of someone like
Western Union.
That’s where things get very interesting. For example,
Ripple is working with Wells Fargo and other banks to have their
technology capabilities incorporated but using other cryptocurrencies
than bitcoin. Will we see a different cryptocurrency arrive? Is
bitcoin the one?
Well there are already over 300 crypto currencies that come and go.
Bitcoin has the majority share at almost 99% share. Bitcoin is the
dominant player. Ripple is making a lot of progress with financial
institutions, as they are making this area their main focus of
attention. I don’t see systems like Ripple as being truly decentralized
however. They have distributed deployment, but the currency unit itself
is entirely pre-mined by the founders of the currency. That means it is
not decentralised, as there are people who work out where to deploy
that initial currency unit. The Ripple currency XRP is what they use as a
glue to hold everything together and the test as to whether something
is truly decentralised is:
who will be the financial winner with Ripple’s success? Ripple
has lots of venture capitalists participating in it, and investors in
XRP. Those people will be the winners. Because of that Ripple doesn’t
take them away from a single point of failure. Their implementation with
lots of financial institutions, and what they are trying to do with
various asset webs and connections, is very appealing to banks as it
makes it subject to oversight and regulation. At some point, when you
traverse everything in that world however, there is still a single point
of failure. Regulators like to have that single point at the end of the
day, because then they can regulate it. Bitcoin doesn’t give them any
type of single point to focus on. That’s why it’s democratized value.
So if Ripple is not the solution, how will banks manage cryptocurrencies into their operations?
This is actually a very interesting area. I am starting to focus on
it a lot more in my work as, in some ways, it’s the flip side of Ripple
and alternative cryptocurrencies that want to do their own independent
blockchains. What we are starting to see evolve are banks beginning to
leverage the existing Bitcoin blockchains. The blockchain that already
exists, rather than trying to recreate something that will be a second
or third tier chain. The reason this is interesting is that it's already
there to be exploited. The fact is that banks just have to figure out a
way to connect to the Bitcoin network, which gives them the same type
of liquidity and ability to do the large amount transactions they
currently have on SWIFT.
An interesting company that illustrates this development well, came
out of the SWIFT innotribe challenge last year coincidentally. This is a
company called
Epiphyte
based in London, and with offices in New York. They created an
interface for commercial banks on both sides to be able to leverage and
utilise the Bitcoin network, in lieu of using Fedwire or CHAPS or SWIFT,
who are liquidity providers. The banks never end up touching the
cryptocurrency. This solves the challenges of correspondent banking for
large global banks, who have to tie up a lot of capital in counterparty
cover. Equally, there are other parts of the world where banks do not
want to leave a lot of money with their correspondent banks, due to the
counterparty risk. If they can leverage something like the Bitcoin
blockchain then this will have significant impact on the future of
correspondent banking worldwide.
That's one of the reasons I believe bitcoin as a cryptocurrency has
more relevancy at the wholesale level, replacing both Hawala and
correspondent banking structures at the same time.
So if I summarise what we have covered so far, you
believe we will have a jurisdiction-based system that regulates usage at
a national level but, because it’s incorporated by banks into wholesale
bank structures, it massively reduces costs. Is that how this plays
out?
Yes. It’s important to look at jurisdictions, as jurisdictions do
have the ability to regulate the in-and-out functionality of their own
currencies into cryptocurrencies. When you talk about a country having
Bitcoin regulation, what they are really regulating is their own
currencies exchanged into and out of another cryptocurrency. That’s what
you’re seeing at bitcoin exchanges and banks, and will be one primary
level of regulation.
Beyond that, you will have a whole parallel world which will exist
person-to-person. In some ways that world is more interesting than
person-to-business use of cryptocurrencies as in a person-to-person
environment, similar to using Skype or using encrypted email, you find
new ways of doing things. In this case, you have an independent
financial messaging system which has allowed us to create a large global
value exchange network. That secondary level of exchanges,
person-to-person or otherwise, with a cryptocurrency like bitcoin is
outside the control of regulators. That’s not even an area where the
regulators have a remit, and is why they will have to focus upon when
cryptocurrencies are converted into and out of their own national
currency.
So that person-to-person exchange, what will be the
protection mechanism that will take place in that the system? Will free
agents manage the system?
Well ultimately this will rely on the Bitcoin blockchain, which is
secured by the power of the overall mining participants. This represents
the largest distributed and secure computing project in the world. In
aggregate it exceeds the top 500 or 600 super computers combined.
And here, I want to make a point about the price of bitcoin, as this
comes up a lot. I don’t think watching the price is that important. It’s
more important to look at the number of projects and developers working
on building user friendly solutions. It is more important to focus upon
the installed base of bitcoin wallets.
At the end of the day, the bitcoin price should reflect a price level
that is sufficient to protect the aggregate value of transactions that
are arriving over the blockchain. If you extrapolate that forward and
say that a lot more economic activity is occurring on Bitcoin
blockchain, then the security reaches a level that is consummate with
the value riding across that decentralized value transfer network. As a
result of this, that will tend to slowly increase the natural price of
Bitcoin. That’s the only way to guarantee that the transactions riding
across the network will be secure. Then people will be willing to pay
for that additional security in increased transaction fees.
It’s a feedback loop, as you won’t have those transactions occurring
if the miners aren’t rewarded through a higher price of bitcoin. You
won’t have the higher price of bitcoin if the transactions aren’t
occurring in the first place. So it’s very much a feedback loop in a
two-way structure. That’s why I don’t put a lot of effort or thinking
into the alternative cryptocurrencies, as they tend to be distraction
for building the strongest leading network that we need for migrating
economic activity and commerce.
Final question Jon. If you were a betting man and you
were betting on what will happen in the future, where would you put your
money… or don’t you use money anymore?
I do have to still use money in some cases and also credit cards but,
if I look at it from a Bitcoin investment point of view, I would bet on
investing in the actually currency and using that as a proxy for the
sector, rather than choosing individual companies. I think it’s unique
and rare that we have an opportunity in the investment world to choose a
currency as a way to invest into an entire sector. It is a proxy for
the sector. If there was a way to invest into healthcare through a
healthcare currency, you have that now for investing in bitcoin as a
cryptocurrency for the digital value exchange sector.
In terms of your portfolio, I look at this in the same way as gold.
If people are comfortable in having 10-15% of their overall net worth in
something like gold and precious metals, then equally they should be
comfortable in having 10-15% in bitcoin. It’s investing in assets and
commodities on a portfolio percentage basis. I think this whole
transition that you describe as the ValueWeb will be complete when we
start calling gold an analogue version of bitcoin.
