LETS TALK BITCOIN

Episode 66 The Eye of the Beholder

Participants: Adam B. Levine (AL) Host Stephanie Murphy (SM) Co-host Andreas M. Antonopoulos (AA) Co-host David Chen (DC) Lightspeed Venture Chris Larsen (CL) Ripple Lab J Cabou (JC) Perkins Coie Partner Vinnie Lingham (VL) Gyft CEO David Johnston (DJ) Executive Director of BitAngels Ed Rex (ER) Writer of Satoshi and the New Gold

AL: Hi and welcome to Episode 66 of Lets Talk Bitcoin, a twice weekly show about the ideas, people and projects building the digital economy and the future of money. Visit us at www.letstalkbitcoin.com for our daily guest blog, all our past episodes and, of course, tipping addresses. My name is Adam B. Levine. Have you ever lost something carelessly, only to discover later, it was widely valuable? As the price of Bitcoin goes up, that initial carelessness is now fuelling a hunt for treasure and, perhaps, a darker side too. Andreas, Stephanie and I talk lost, locked or misplaced bitcoins as buried treasure. Then, on Thursday 5th December, I found myself at the Plug and Play Tech Center moderating a panel discussion about Bitcoin. In contrast to our normal deep dive interviews, this one plays out like five mini-interviews with Lightspeed Ventures David Chen, Ripple Labs Chris Larsen, Perkins Coie Partner J Cabou, Gyft CEO Vinnie Lingham and BitAngels.Cos David Johnston. Finally, where does value come from? Is it the money we use, or the system that controls it? Ed Rex submits and performs his piece Satoshi and the New Gold to end todays episode. Enjoy theshow! [1:41] AA: With the recent increase in Bitcoin prices or the exchange rate, something very interesting has happened. Old hard drives containing long forgotten wallets are suddenly becoming buried treasure. Ive seen this phenomenon play out several times, with people gleefully reporting that they have found an old wallet while searching one of their old computers. I was reading an article on Reddit, where a student had discovered an old wallet from 2010 and said I have lots of student loans but it seems I have 917 bitcoin in this wallet and Im looking at the price and Im not sure what to think. Can someone confirm? Am I really rich? [2:32] SM: (Laughing) Woohoo! [2:34] AA: Its such a great story and then, at the same time, youve got... [2:37]

SM: Beer! [2:37] AA: ...exactly! Too much beer. Suddenly, youve got these completely opposite stories. One of the most interesting ones was a person who had discarded a hard drive, then realizing that on that hard drive were 7,500 bitcoins, or about $7.5M, or about 5M. This was in England. They know which dump, or which landfill the hard drive went to and now theres people with metal detectors digging through the landfill. Here we go, a new industry - treasure hunters looking for digitally encoded Bitcoin wallets that have appreciated in value. Imagine a hundred years from now, Bitcoin is $10M in equivalent todays money and someones looking for a great haul from a rusty hard drive, or USB sticks that was lost in the bottom of the Atlantic and theyre sending submersibles... like looking for the Titanic. [3:39] SM: I think there are also people who are starting businesses, basically, to not only help people recover their wallets, but also to make a profit in the process. They are seeing a need thats unfilled in the market, which is recovery of old bitcoins that are suddenly valuable. These things are starting up, whether its people going out with metal detectors to this landfill in the UK, wherever it is, or people who are kind of disk diving and scouring old hard drives maybe that have been written over in some sectors, to see if they can find that wallet.dat file and recover it somehow. Ive heard a lot of stories about this in my personal life. Somebody who I know, once very early on, sent 65 bitcoins to an old Electrum wallet that they had since deleted and they were trying to recover the old Electrum wallet with no luck, so they contracted it out to another person, who was more computer savvy so that he could have half if he was able to recover it. Actually, I have a story that kind of relates to this. Ive, actually, talked about this on the show before, so this is going to be a nice follow-up. I want to say it was within our first 10 or 20 shows that I revealed that I had an old laptop, where I had gotten some bitcoins back in 2011, early 2012. At the time, they were $5 or less. I had about 12 bitcoins in there. I had encrypted the wallet because, at the time, everybody was saying youve got to encrypt your wallet, choose a strong passphrase so I did. I didnt write it down and I kind of forgot it. (Laughter) I had a vague idea of what it was but not really enough to piece it back together. There were a couple of times, once I realized I wasnt able to unlock the wallet that I tried to break in to it. Every time the Bitcoin price went up, when it hit $100, I tried. When it hit $260, I spent a whole day trying to crack into it, trying different typos and combinations of what I thought the passphrase was. It didnt work. Suddenly, Bitcoin went up to about $400 and I was like I got to get this wallet cracked. At the same time, I actually heard about somebody, one of these entrepreneurs, whos starting a wallet recovery business. It was www.walletrecoveryservices.com, its Dave Bitcoin not his real name Im sure. He wrote a brute force program and if you have some idea, like a vague idea, of what you think the passphrase is, it can try different variations on that until, hopefully, the wallet is decrypted. I thought, alright, these 12 coins are gone to me. Ive written them off as gone, so I might as well try it and send it to him. I sent him my wallet.dat file, although, you dont have to. With him, he has way to actually... you can sen d partial information from the wallet without sending the whole wallet, so he couldnt take the bitcoins and run, supposedly, but I didnt do that. I sent him the wallet.dat file. What the hell, I have a big microphone if he screwed me over, right? I sent him the wallet.dat file and I sent him what I thought the passphrase was and literally, within a few hours, he was able to decrypt it and he sent me back 85% of the balance, which is what we had discussed before. Needless to say, I was really happy about that. Basically, what it was the

passphrase was a sentence and I had the word and in there and I wasnt sure if it was and or an &. There were some capital letters that I had gotten wrong. I was really close but when youre typing in a password, close doesnt count as we all know. (Laughter) Yeah, I had a happy ending to my story and maybe that can help some other people. Im sure there are people who are listening to our show who have the same issue that they made a wallet and they encrypted it and now they cant remember the password. If you have that situation, check out www.walletrecoveryservices.com and maybe Dave can help you. I really hope people can recover their coins whether its a hard drive failure, or in the trash, or sending it to some weird address that maybe the private key got archived, or something like that. I really hope the people can get them back and maybe now theres an incentive to do so. [7:40] AL: Well, yeah Stephanie. The incentive is that theyre worth so much now. Suddenly, whereas a couple of months ago that 12 bitcoins might not have been worth his time, now, even 15% of that 12 bitcoins is worth his time. Again, its all so relative. *7:52+ AA: Thats the big lesson here. The first lesson is that these businesses have an expanding market. As the price goes up, the things that are marginally recoverable become recoverable and then wildly profitable. That expands the market all the time from wallets potentially it will be worth doing for a wallet that only contains a few hundred mBits because that price will be worth doing and spending the computing power to do. The other thing to, of course, take from this is dont delete anything, ever because you never know how much value it might have in the future. You never know how recoverable it might be in the future and if you think all hope is lost today, well, back that hope up and wait for the price to rise. [8:35] AL: I actually have a story thats kind of taking the other end of this passwords thing. During the price spike up above $1000 when we were near, I think, it was $1150 or so, I actually received a couple of emails because a couple of my different accounts had been compromised. I set up a LocalBitcoins account, maybe, I dont know, it would have been seven or eight months ago, and there hasnt really been much of a local scene in Napa, so I didnt really pay that much attention to it. I almost did a deal so I had, maybe, a bitcoin and a half sitting in a wallet there, from a time obviously when they were much less expensive and I didnt have two factor on. Even though I had a really long password on this particular account, not having two factor led to my account being compromised. They actually tried to scam somebody else by telling them that they had dropped money into a night deposit and that theyd get confirmation for it in the morning, so to send bitcoins to it now trying to use my identity. It wasnt under my Adam B. Levine name, but it was crazy. It was crazy. I only found out about it because my email address was getting ccd on these emails from the buyer, who was saying Im not sure if this is right. This seems a little odd. So I was like Dont do it! Dont do it! [9:41] SM: Wow. [9:43] AL: We got it fixed. Yeah, it was crazy... [9:45] SM: So you didnt lose that Bitcoin that was in there? [9:48]

AL: No, no, I did. That account is gone. I had them shut it off. The one and a half bitcoin I had in there was gone. Thats ok. Like I said, when theyre not worth so much, you find yourself with just some little ones lying around in various places that you sometimes forget about because they were worth a lot less at the time. [10:03] SM: Right. [10:04] AL: So I kind of chalk this one up to that one. Also my BTC-E account was almost compromised. It looked like the password had been because there was somebody logging in from somewhere else. Again, I didnt have two factor on but I had a different 12 character password on. Those long passwords really arent doing it for me anymore. Maybe were high profile enough that Im being targeted but more likely, I think its just Bitcoin is valuable and its worth it now to go through and do this stuff. *10:27 ] SM: Gosh, yeah. You can get paranoid. I think youre right. Its just the incentive for theft increases as well as the incentive for recovering old wallets. Bitcoins become buried treasure and looters and thieves love buried treasure just as much as everybody else does, right? [10:45] AA: Speaking of which, I just got a message on Reddit, from the Bitcointip bot, warning me that I had an excessive amount of Bitcoin in my tipping account. Of course, it wasnt excessive in the past but now suddenly, I had more than $500 equivalent in my... about half a bitcoin in my tipping account. A significant amount to be sticking around tipping so kudos to the Bitcointip bot developer who came up with the idea of notifying the owners that they have excessive amounts they can start draining those out because it doesnt have the security, as he admitted, to handle those kinds of amounts. Theres no two factor its just for tipping, right? You only need a few dollars in there. This is exactly what is going to be happening. I found that I had some leftover in www.localbitcoins.com, some sitting around my wallet it turns out, several thousand dollars. I had some leftover money in www.bitcoinstarter.com account that I had again, worth several thousand dollars now. Go trawling and see what you can dig up. Theres buried treasure out there. *11:52+

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Happy holidays from Lets Talk Bitcoin. If you like the work were doing, we appreciate bitcoin tips of all sizes at www.letstalkbitcoin.com. Just as importantly, share the show with your peers and review the show on iTunes. Dont be kind, be honest. LTB reaches nearly 10,000 listeners but has less than 50 reviews anywhere I can find. Id very much appreciate your help in remedying this situation. Thanks for listening. [13:02] ______________________________

AL: My name is Adam B. Levine and I do a twice weekly show about the ideas, people and projects building the new digital economy, as I like to call it. The people up here really are some of those folks. David Johnston is with www.bitangels.co and has been working on some of the most exciting projects out there, in the Bitcoin space right now. I think that as far as VC is concerned, you guys are working with some really small projects that have a lot of potential. I think that should be really interesting to hear what you have to say, so thank you for joining us today. [13:31] DJ: Absolutely, thank you. [13:32] AL: Vinny Lingham is the CEO of Gyft and has recently become one of the Lets Talk Bitcoins sponsors. This was scheduled before that happened, so nothing there. Again, hes been one of the earliest adopters of Bitcoin and I think that its been pretty successful for you guys. [13:48] VL: Yeah. Thank you. [13:50] AL: J Cabou is with Perkins Coie, probably doing the leading work as far as in the legal space, in the Bitcoin space, right now. Just about every new startup I hear about is being represented by you guys. Once again, thank you very much for joining us. [14:03] JC: Happy to be here. [14:03] AL: Chris Larsen is the CEO of Ripple Labs. Weve been on a couple of panels together and if Ripple is Bitcoin 2.0, then were going to hear about it today. David Chen Lightspeed Ventures, right? I apologise so much. Again, the VCs that are working in this space right now and that have been in for longer than six months, really are hooked up with some of the most exciting projects that are out there. Again, this should be a really interesting conversation. Id like to thank you all one more time for joining us. [14:29] PANEL: Thank you. AL: The first question goes to you, Vinny. Break it down for us as a merchant in this space, why is Bitcoin something thats attractive to you? *14:39+ VL: Yeah. So, were in the gift card space and one of the biggest problems with gift cards online and online digital mobile gift cards is, card not present, right? You have people using

credit cards to make purchases of gift cards and you, as a merchant, you release the code straight away because the bank says - Cool, its approved. The card is good. Three months later you get a chargeback Sorry that card wasnt good. Weve lost up to $2,000 on a single customer, where they used a fraudulent credit card multiple times. The bank kept approving it and when the message came back, they said We were notified before the transactions that it was fraudulent, so why didnt you block it? They couldnt care. The banking system is actually, quite prejudicial towards retailers. Think about it. As a retailer, when you ship anything whether its a gift card or its physical goods to somebody, youre at risk. With Bitcoin, which is obvious, right? We get the money; its digital cash; we know when were giving out the gift card that its paid for and irreversible. That was the biggest saving for us, actually going and taking this 3% margin (its actually more, its about 4% worth of costs) out of the business. Now it makes it a lot more scalable and profitable to run an online gift card business. We built a loyalty program around that by giving back 3% to our customers in points to encourage more purchasing. [15:59] AL: Based on your experience so far in this space, if you had the opportunity of doing all of your business in Bitcoin, would you? [16:05] VL: You know, its a good question. I think the market we serve is, obviously, the whole US and the idea of Gyft is that you can give from the East Coast to the West Coast. If we could get the mainstream adoption of Bitcoin and credit card adoption going to zero, then yes, but while there are payment options out there that are profitable for us, even marginally, its worth adding them for the convenience of our customers. We accept VISA, MasterCard, AMEX, Discover, PayPal, Bitcoin. The more payment options we offer, I think, the better for us as a company, although we reward our customers with 3% back on Bitcoin purchases and 1% back on credit card purchases. We try and encourage more Bitcoin usage. [16:45] AL: Do you see that as being a trend that continues in the future for you? [16:48] VL: I think for Bitcoin to be successful, you have got to give reasons for people to use Bitcoin. When people ask me why should I use Bitcoin over credit card, the simple answer is because Im going to give you 3% back versus 1% as part of our rewards program. The penny drops and they are like Wow, thats pretty impressive. So you can put all your expenditure through. Think about it, when youre walking through a retail store and youre buying clothing, or whatever it is, all the prices in that store are marked up 3% because youre getting points back on your credit card, right? If youre paying cash, youre losing that 1% back, whatever it is. Cash customers are at a disadvantage to credit card customers. Thats the sort of financial system weve built. With Bitcoin being digital cash, the way we look at it is lets incentivize people to give us a low risk method of payment and eliminate the friction and cost with credit card and the rest of the retailers. Thats how weve built our business. [17:39] AL: Thank you very much. David Chen, Id like to ask you when youre looking at new projects in the Bitcoin space, are there particular industries that youre looking at? It seems like last year, it was kind of all about exchanges and its a little bit less so this year. What are the trends youre seeing? *17:52+

DC: I think to be clear, were still in the infrastructure building stage. *17:57+ AL: Absolutely. [17:58] DC: I think, you might have noticed that we were early investors in BTC China, the major exchange in China. Were still pretty excited about exchange space. In terms of applications that weve built on top of Bitcoin, I think an obvious one is remittance. Weve seen a lot of features around there. I think the challenge with the remittance, in particular, is that the local demand in, say, India or the large remittance corridors (Mexico, India), local demand for Bitcoin isnt quite there yet, so youll have trouble with liqu idity. We see a lot of promise with remittance. Obviously, e-commerce transactions, anybody whos enabling payments, I think that will be pretty interesting. Were also looking at... the applications that are built on top of the core Bitcoin protocol... so things like Ripple, MasterCoin, ColoredCoins, I think smart properties, smart contracts. These are emerging areas that once the core infrastructure is built that a lot of these new financial instruments could be built on top of Bitcoin itself. These are all very exciting. [18:59] AL: Thank you, David. Chris, can you talk to us about Ripple, for a second, and the ways in which it addresses problems? [19:06] CL: Sure. The Ripple protocol is really three things. First and foremost, we designed it to be a distributed payments platform. Second, it does have a math-based currency analogous to Bitcoin. Currency without a counter party thats what Bitcoin, thats what Ripple are. We look at that, really, as the enabler of a distributed payments platform. Third, because Ripple is actually currency agnostic, Ripple is also a distributed currency exchange. Our view on this is that virtual currency is tip of the iceberg of whats going on here. The big innovation thats happened in the world is that the world has figured out how to confirm financial transactions without a central clearing house which is actually, the exact same thing as building a currency without a central bank. Weve figured that out, weve solved the double spend problem. That was the thing that was preventing value from being exchanged like information already does on the internet, right? Weve had an information internet for 20 years; we have not had an internet for value. We believe thats the big thing thats happening. What weve done with Ripple is say that thats what we should be building an internet for value, not a virtual currency. Bitcoin, I think, also can be an internet for value, right? Now its a currency with a payment system for value put in Bitcoin only. At Ripple, turn it around its a currency agnostic value internet. Put anything you define as value (Dollars, Euro, Yuan, Bitcoin, Ripple, airline miles, merchant loyalty points, gold, anything you define as value) should be able to be internet of value. You dont really ever have to adopt a virtual currency, we think the world is not going to adopt a single virtual currency. It cant. Theres too many different needs for different types of currency. Some people will want inflationary currency, some people want deflationary ones. The analogy would be if we forced everybody to adopt a new language to use the internet, we wouldnt have the world we have today. Everybody is not going to speak Esperanto. Its the same thing with value. Put anything of value you want in it. Thats what we see as the real benefit. Ripple does that. We also have tried to clear transactions quicker. We use a different confirmation method than Bitcoin. Bitcoin uses mining. Mining is brilliant, but it has some flaws as a payment system its slow, 8 minute confirmation. Obviously, off blockchain is an option

but then youre in a central authority again. Ripple is about 5-10 seconds. Those are really the two things that weve tried to solve. We use our virtual currency really as just the universal join for the most efficient path to go from one thing of value (lets say dollar to maybe put on a gift card, for example) to something else of value (a yen, or yuan, or airline miles, for example.) Thats kind of how we see the world. [22:02] AL: Thank you, Chris. J, so the challenges surrounding virtual currencies, at this point, really seem like theyre more legal and regulatory than they are technical. The technical problems all have solutions but the regulatory side has a little bit more finesse involved with it. What are the problems that youre running into? What are the problems that youre trying to help your customers with, clients with? [22:24] JC: Yeah, its always the lawyers that get in the way of a good innovation, good technology. I was very heartened to see a lot of the pitches focused on what those companies are doing to ensure their investors and their customers that they are compliant with law. I think that, especially in the early days of Bitcoin, because the Bitcoin community grew up largely in a... whether you want to call it anarchist or libertarian... there was certainly that bent to it. Now that its becoming more mainstream, the fact of the matter is, this is a world of laws and governments and we have to find a way to have this very innovative technology and very innovative system integrate with the established, not that innovative, kind of annoying, systems for financial compliance. As I think the more successful companies in Bitcoin are realizing now, these are not insurmountable problems, they are problems that demand a little bit of innovation and a little bit of work. We saw a couple of different models that companies talked about today. One is, seeking the licences that you need individually, partnering with companies that may have those licences and getting into some kind of relationship, contractual relationship with them. Theres a lot of action right now in, kind of, innovating the compliance side of this. I think thats been pretty interesting to watch. [23:39] AL: On the Bitcoin side of the business that you do, do you think that in five years, youll be doing more business or less business? Will this normalize, is the question? [23:48] JC: I think that my contribution which is very mundane compared to the things that people are doing in this room but in terms of helping people navigate the regulatory compliance and law enforcement landscapes, that will decrease in five years. I think that were having a lot of action in my space now, simply because this isnt just a technology that interacts with people, or with products. Finance is a very highly regulated industry and the speed with which Bitcoin can be transferred, the irreversibility of Bitcoin transactions and just the massive growth in adoption has caused a lot of folks, in regulation, law enforcement and in law making, especially very recently, to take notice and to say Wait a second. Weve got to figure this out. I think, to answer your question simply, five years from now I doubt that anyone in Bitcoin is going to be inviting me to speak at a Bitcoin conference which will be too bad for me, but for now theres a lot of action in the regulatory space. My personal belief, and one that Ive shared with some people in the room at other events Ive spoken at, is that the companies that are poised to succeed, not just in Bitcoin but in other decentralized virtual currencies and in payments generally, in the long run are companies who have taken on the compliance challenge head on and found a way to solve it in a way

thats above board and thats comfortable even to stodgy old institutions, like State banking regulators and banks. I saw a couple of people talk about how difficult it is to get banked as a Bitcoin company. Bitcoin companies with solid compliance programs can get banked. Its not as easy as running a grocery store, but it is certainly out there and doable. I think that thats companies that have invested in the compliance side, theyre pretty far ahead. [25:35] AL: I want to follow up with you one more time. I agree with you. I think that it is possible but there are other examples out there of companies that really are compliant or well funded, BitInstant being the most prominent of them that have apparently been shut down with no recourse for more than four months. The only thing holding them up has been that they cant get a bank account. *25:51+ JC: Im not in a great position to talk about any one particular company but Ill say that getting the meetings, making the contacts with people at the financial institutions to really get banked, is challenging. I think that, it was just a couple of days ago that we saw Bank of America come out with some policy on Bitcoin business. Were going to see more of that. My guess would be that if Plug and Play does an event on Bitcoin a year from now, there will be a number of prominent banks that have established Bitcoin banking programs. If I were a man of unlimited means, I would buy a bank and bank Bitcoin companies. I think theres a tremendous amount of growth in that area. There are a lot of very smart, very law abiding, very innovative people who are working in virtual currency and cannot get a banking relationship. That is a huge problem. There are also a lot of those people that have developed really good compliance programs and Im sure there are people in this room working on technology tools that will allow those compliance programs to far exceed the capacity of compliance programs than more traditional money transmitters. There is just so much information out there between the ability to harvest information from users, between information in the blockchain. People are going to develop those tools and continue to develop compliance programs and analytical tools that will allow banks, and others, to get very comfortable with the fact that Bitcoin businesses are not... they dont pose a greater risk for money laundering, or terrorist finance, or anything... [27:21] AL: So its just a new thing? *27:22+ JC: Its new. Theyre still building those kinds of things and as someone said earlier today that banking is not known for great innovation. I think this is just an example of technologists coming together to create an extremely innovative product that is moving very quickly and banks being just slow to keep up. [27:39] AL: Thank you, J. David, every Bitcoin conference that I go to, I see you there and I see you always sneaking off into the corner with interesting projects that have absolutely no funding whatsoever and talking to them about creating altcoins. Can you tell me about what strategies youre using when youre investing into this space? Are there particular characteristics, or types of projects that you are attracted to at this point? [28:04] DJ: What Im primarily interested in is people that are doing something more than Airbnb for Bitcoin, or Ebay for Bitcoin. Ive been approached by a high number of those companies,

which is great early on. You can do those things now with Bitcoin but I would just echo what David said about building infrastructure is really my interest at this point. You need to be building a company that has a competitive, be it, advantage beyond a year from now where Airbnb themselves, start accepting Bitcoin and then your competitive advantage disappears. Most of the interest from the BitAngels, so far, has been in these infrastructure level investments. David brought up MasterCoin. I led the due diligence for that particular investment. This is a protocol built on top of Bitcoin that does distributed exchange, distributed commerce. That is the single biggest investment that the group has made, about $5M in that particular project. I really believe it because it was a very fundamental thing that everybody wanted was a decentralized, no counter party risk way to do commerce, the way they do exchange, the way they do financial transactions. People that are building in that infrastructure, those are the deals that I want to look at. People building those fundamental protocols thats what really gets me excited. In fact, as you know I recently published an entire Whitepaper on the subject of decentralized applications and how we can use this new model to build these new types of companies that arent traditional, but instead built on open source; they have their own token; they have their own protocol. I think that could be one of the single most disruptive things that comes out of Bitcoin is this entirely new monetization and financial model. [29:53] AL: Bitcoin, as we know it now, is not the Bitcoin that well know in two years from now? [29:59] DJ: Exactly. I mean, weve seen some really, really important developments come out from the core Bitcoin developers. Recently, Gavin, the chief scientist for the Bitcoin Foundation, posted a great update about this debate in the Bitcoin community which has been going on for years about Should Bitcoin just be about Bitcoin transactions, or should we be able to attach additional meta data information into the blockchain to store other kinds of information and to do all these different types of features? What he said was the core devs have now given a clear way that people can add meta data to the blockchain records. That opens up a huge number of applications, so I expect Ill spend most of 2014 exploring how to invest in the companies that are building out those core applications. [30:50] AL: What do you think of the fact that Bitcoin, as a protocol, continues to expand over time and that its not really a static thing? When I ask you that question, I actually was talking about Bitcoin will have things like MasterCoin built on top of it, but also Bitcoin itself is in flux. How is it to work with something like that? [31:06] DJ: Its definitely still evolving. Youve got very smart developers that are working to build the core infrastructure. It seems like so far, theyve really focused on the core features. Bitcoin, for those that dont know, can theoretically enable a huge number of different type of features but most of those have been turned off because they are more difficult and theyre more complex. Scrypts is the usual example, right? You can do scrypts in Bitcoin but thats a feature thats been turned off in the reference client because it brings a lot complexity, theres a lot of edge cases. We dont really know what the risks would be. What Ive seen more and more is theyre focusing on the scalability of the main transactions. There are big questions still left about the block size, about other technical issues and as this becomes a $10bn, $100bn ecosystem, the core team seems to be really

focusing on making sure they nail, basically, scaling the existing system. Thats really where I realized theres really a need for these additional protocols on top because you need a different token that is monetizing different features and so you can have a different core group of people focusing on that particular feature set without, sort of, risking the underlying infrastructure. Thats been a big realization for me, the last six to twelve months and thats why Ive spent so much time on it. *32:28+ AL: Thank you, David. Were going to return to... Im sorry, Vinny, I almost skipped you. I have a question for you. Hang on a sec. One of the interesting parts about Bitcoin and these blockchain technologies is that you have a lot of information about how these transactions process. You were dealing with a lot of Bitcoin transactions and I know weve talked about how you dont share those publicly but Im wondering, internally is that an advantage doing Bitcoin? Do you gain from that? [32:57] VL: Obviously, were very smart about how we do things and we try to be respectful of peoples privacy so we dont dig in too deep into that information. We also use Bitchain, sorry, BitPay which acts as a proxy service so we dont actually know the wallets of the consumers, where the codes are coming from because they pay BitPay. BitPay does the exchanging and then pays us on our side, in fiat or some bitcoins. We dont really have too much visibility into that, if thats what youre asking. *33:29+ AL: That was what I was asking. Do you intend to use BitPay as your payment processor forever, or is it, at some point, it makes sense to just integrate natively into the app? [33:39] VL: I think for many customers, many users out there, it probably doesnt make sense to not use a payment processor. Theres a lot of work that goes behind accepting payments, checking for a lot of things, double spending etc., especially as transactions get bigger. I think its also just easier for us to focus on core business. We dont want to set up n odes, we dont want to do any of that stuff either. I think if your core business is not actually being in the infrastructure space, use the infrastructure providers as thats what theyre there for. BitPay powers 15,000 merchants out there. At no level of scale does it makes sense for us to financially to go and invest in that. The fees they charge us are so miniscule so it doesnt make sense as a business to do that. *34:26+ VL: Thank you, Vinny. David, you have an investment with Lightspeed into BTC China. It seems like a lot of the action thats been happening in the Bitcoin markets has been driven by extreme demand in China. Do you have any insight into that market? [34:41] DC: Sure. We recently invested along with Lightspeed China partners in BTC China. This investment happened a bit prior to the recent run-up so, a bit of luck there. I think our interest in Bitcoin is is a global phenomenon, right? There are a lot of nations like Argentina, like Cyprus and areas of Europe where theres really high inflation, capital controls where transactions are actually... it makes more sense to do those in Bitcoin than your local currency. You kind of see this local demand happening in a lot of places and I think if you just look at a country like China; theres just a massive number of people in China. We kind of saw that as a very interesting opportunity for something like Bitcoin. Pair

that with an outstanding entrepreneur, Bobby Lee, who is just a seasoned technology leader. He led technology at Walmart, Stanford degrees, engineering manager at Yahoo so has a track record of leading technology teams. Pair that team together with a large market opportunity, it seemed like a good bet. I think, overall, the statement here is really about the global phenomenon that is Bitcoin. A lot of the innovation thats happening, its happening in the US but also looking outside the borders here. If you look at just the exchange space, youve got MtGox in Japan, in Slovenia youve got BitStamp, BTC China leading in China. Those are the top 3 exchanges and none of them are based in the United States. A lot of that may be due to regulatory concerns. Its hard for companies to get started with the 50 States and needing to comply with regulatory bodies in all 50 States, gathering your money transmitter licences as an exchange is a very lengthy and extensive process. In the meantime, were looking outside of the US. Obviously, were a US-based investor so we would love to invest in more companies here, as well. [36:33] AL: The US is often identified as a hostile regulatory environment for things like virtual currencies because people didnt really know how they were going to react but I dont get that same feeling about China. Thats kind of an interest ing thing if you think about it because the Yuan has capital controls on it to make it very difficult to deal with, to convert into non Yuan denominated currencies. Is that any sort of concern? Do you have any sort of concern that the party might end in China? [36:58] DC: I think its dangerous for us to speculate about how the Chinese government wants to rule its country. There was an announcement, actually, made in the last 24 hours in China around encouraging, or basically telling banks not to deal with Bitcoin. That statement is out there. Its unclear where China is going to go with its citizens whether or not they are going to outlaw Bitcoin outright. It seems like they havent done that yet and theyve been signalling that that may not be the direction theyre going but anything can change with China. [37:30] AL: I would agree with that. The only reason why Im pressing you on this is because there actually is a parallel here. QQCoin, which was a social media currency, achieved a very high rate of penetration into China and, after a certain amount of penetration, they did ban it. Again, there might not be an answer here, I just figured Id... *37:47+ DC: Yeah. Time will tell. Its hard to speculate at this point. *37:50+ AL: Thank you. Chris, can you talk to us about why virtual currencies are something that are legitimately important. Youre an entrepreneur who is building an entirely different virtual currency network. Its currency agnostic, so I mean, what are the reasons wh y this is a problem you wanted to solve? [38:04] CL: I think this is clear that financial services just have not changed in the last 20 years of the Internet. Its sort of this whole revolution has just by-passed the banking industry and the finance industry. I think, really, what Bitcoin kind of ushered in in 09 and now, I think, is just an unstoppable reality, is that you can exchange value like you can information at that same point. Thats a huge game changer because before this time, all payment systems, all financial systems are country by country. They are, actually, hugely limited in big parts of

the world, China being an example, where you have huge internet penetration but you have a cash society that doesnt have a lot of payment options. Thats not lining up. You need to have the citizens of the world be able to see the information, Airbnb or whatever it is, and execute on it through payments. The world is missing that. Thats why this is such a big deal. To date, youve seen FinTech companies and my last two companies, e-Loan, Prosper, they were US-centric. Youre sort of trapped in the US. So much FinTech is like that. I think thats why venture capital has not been that interested in FinTech, to date really when you compare to other things. Now, thats all over. It is global and, in fact, Bitcoin, Ripple, these things are... Ripple is also number 1... China is our number 1 region. These things are, actually, more important in the developing world in places like China which are just so wealthy now and such e-commerce markets. Thats a big game changer. Start-ups now, can really go global in FinTech. You can start doing things with dramatically lower costs, dramatically higher numbers of customers that you can serve. These are great things for the world. I think regulators, I think, are starting to see that. Thats why the Senate hearings were so positive a couple of weeks ago. Theyre starting to see these not as some fringe thing, its not but as a really monumental shift. Finance gets flattened just like information has been flattened. [40:06] VL: As a retailer, we get people around the world trying to buy gift cards, for example online retailers and a whole bunch that support delivery in, I think, 150 countries and when they put their credit card in (and Im going to pick on an African country like South Africa, or Nigeria, or one of those, Im from South Africa), when you use a credit card in those markets (its happened to me when Im there) the merchant cancels th e order, the email comes back Sorry, your order is cancelled. We dont trust the credit card or the shipping address is... whatever it is. You cant blame them, right? Youre a retailer, youre an online merchant: how do you trust the credit card is good for a foreign bank issuing it and then you have to ship the goods overseas. Its even worse in the US. When we use Bitcoin, I mean, now were planning our international expansion in 2014 and weve got dozens of online retailers that ship to hundreds of countries around the world. Now, they are saying OK, well if you guys can take the payment and deal with that and issue a gift card and people use gift cards and pay online, its fine. Theyre currently doing that. Were seeing a lot of internation al traffic. People are signing up to our website, buying gift cards, paying with Bitcoin and having goods shipped to them that they previously did just not have access to. For them to go and buy on an online retailer was just not possible because of the credit card system. To Chris point, I think, Bitcoin is now opening up new avenues for e -commerce companies to start looking at audiences outside the US and not have to worry about fraud risk. [41:36] AL: Thank you, Vinnie. Chris, I have one last follow up. One of the primary differences between Ripple and Bitcoin is that Ripple is an actual company and Bitcoin is, sort of, powered by a foundation but mostly its just out there and there isnt really anybody backing it. Do you think that thats a detriment or a benefit for you? [41:58] CL: Just to be clear. Theres two things: Ripple, the protocol which is open source, basically, a public good and anybody can use it without paying Ripple Labs (which is the company Im CEO of and theres 35 of us now, in San Francisco and were growing rapi dly). In a sense, were sort of like a Red Hat to a Linux in a way. Anybody can take the code that is the Ripple protocol. Again, they dont pay us fees. Our business model is that we have created a

math-based currency called XRP, or Ripple, and we are distributing lots of that to incent people to get onto the Ripple protocol. Market makers from Wall Street companies, for example, gateways throughout the world because those are the way you see bring other things of value that do have counter parties; Dollars, Euro, Yuan, airline miles, for example. We dont have to charge fees through the protocol, we can just hold on to a portion of the XRP. If the protocol succeeds (its a deflationary currency - XRP, just like Bitcoin), you would expect that the currency would succeed, therefore our business model would succeed. Theres a separation of the two but what we like about this model is that we can hire a ton of great engineering talent to really work on the core network and then let other companies build applications for consumers on top of that, like you do on Bitcoin. A lot of our engineers are some of the original Bitcoin folks, Stephan Thomas, David Schwartz and Jed McCaleb (who invented the consensus method) and we think thats constructive for the network itself. [43:29] AL: Thank you. J, can you quickly (were almost out of time here), can you quickly go over some best practices that you think the top three most important things that all companies must do to operate legally in the space? [43:42] JC: Wow. I guess, if I could, I would put myself out of a job. (Laughter). Im hesitant to do that and Im also hesitant to say what Ive heard lots of lawyers say which is Oh, just call your lawyer, although Im happy to take your calls. I would say that, I think just at a thematic level, people... (especially as a very educated audience about some of these issues), theres a lot of nuance in the regulatory environment. One thing I would say is, especially to people in rooms like this that are committed to operating above board businesses, your relationships in your cryptocurrency business, or whatever that business may be, is it an exchange, is it providing some kind of consumer facing interface, is it payment processing for merchants, you have to be transparent with all the relationships that you have. If you feel good about those relationships, I think the rule of thumb is youre doing pretty well. If you, for instance, are a Bitcoin business and your bank doesnt know that youre a Bitcoin business, I would say, red flag. Yes, you may not have broken the law. You may have if youve signed a form to open your bank account and it says everything is true and correct under 18 USC 1001, and I promise I havent made any false statements and if they asked you were an MSB and you checked no, thats possibly a crime. More broadly, if you go down to your corner bank and you open up a small checking account and youre moving a huge volume of dollars to that, I think that is going to set off some red flags. The same way with your customers, if youre a Bitcoin business: are you making the right disclosures? Are you really, kind of, out there? Obviously, youve got your secret sauce that youre going to keep in the back cupboard but, broadly speakin g, we know what the issues are. Are you a money transmitter? Are you engaged in some other money service business? Those are issues that need to be acknowledged and solved, rather than, I think, six or eight months ago you saw a lot of people try and go around the regulations. At this point, I think its pretty clear that companies that are going to succeed in cryptocurrency, in virtual currency, in online payments, whatever that evolves to be, they are not trying to go around the regulations. They are acknowledging what they are and finding a way whether its through lobbying. There are lots of people in the Bitcoin industry that are involved in very, very persuasive lobbying efforts to make sure that regulators dont regulate the United States out of the Bitcoin market. I think, the fact that the three largest Bitcoin exchanges

are not in the United States says something about what the regulatory climate is. Maybe its not what it will always be but I think, thats certainly an issue. As a general rule, companies who are... especially companies trying to raise outside capital, if youre not being honest with yourself and with your business partners about what your business is, about what disclosures youre making, you dont feel good about someone doing diligence, youve got some issues. [46:31] AL: Thank you, J. Were going to end with you David. David, you released a Whitepaper about distributed applications. We have 3 minutes and 13 seconds. Can you do it? Can you give us an overview of whats coming next in Bitcoin, in cryptocurrency? *46:49+ DJ: Sure. Im happy to talk on that. What Im seeing as the future is, just like with the internet, we have different protocol layers. The same thing is going to evolve in Bitcoin. We have, at the bottom of the internet, TCP IP, that is the basic messaging mechanism. On top of that we have HTTP, on top of that people have built browsers, on top of browsers people have built applications. Theres a lot of gain and benefit you get from the netwo rk effect and having a layer that already exists that is massive in size, like Bitcoin, that provides a lot of security against a 51% or double spend attack, it gives you a huge starting advantage if you build a protocol on top of that. What we see with MasterCoin is the first wave of these type of applications. Theres others out there that have been mentioned and this is really exciting because now, with MasterCoin, it gives me a layer that has different features that Bitcoin doesnt have. One example is a distributed exchange that lets me trade any digital asset for any digital asset directly on the blockchain, without having to have a counter party. Im, actually, making an offer to the blockchain, somebody has seen that offer and they are matching that offer, the blockchain does that matching and theres no counter party. Thats interesting. The other main feature that really interests me is the user-based currencies. Forbes recently covered this in an article about MasterCoin. Basically, MasterCoin allows you to create your own digital tokens for, not necessarily, currency or even payment systems but any application that you want to record the ownership in tokens, you can now issue those through the MasterCoin protocol. Its recorded in the bloc kchain transaction so you have a permanent record of that. Now, when you want to offer those tokens to customers, or to developers, or to people doing the funding now you have a mechanism to do that. Thats a pretty incredible stack thats developing, wi th Bitcoin at the bottom, something like MasterCoin, or these other protocols in the middle and then you have people building more user applications, sort of customer facing applications on this third level. Thats what I describe in my Paper is what do we call these entities? This really hasnt existed before. Theyre not companies, they dont have employees, they dont have revenue, they dont have profit. All the monetization is built into the mechanism of the token, similar to what we have with Bitcoin. Ive turned those decentralized applications, distributed apps for short. You can check out www.distributedapps.co if you want to read the Whitepapers, but I really do think that model of building a company is something we havent seen before and is incredibly disruptive, incredibly interesting because it leverages all these different technologies. [49:39] AL: David, thank you very much. [49:40] DJ: Sure. [49:41]

AL: That wraps up our panel. Id like to thank all the panelists; David, Chris, J, Vinnie, David. Thank you very much for joining us. This was really enlightening. (Clapping). [49:52] ______________________________

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ER: Satoshi and the New Gold, a childrens story about Bitcoin, written and read by Ed Rex. There was once a village at the base of a large mountain. For years, the village elders had been in charge of handing out gold to the villagers. The villagers used this gold to trade food, clothes and everything else they needed. One day, the whole village was woken up by a loud hammering sound coming from the square. They all rushed to see what it was and found that a large notice had been nailed to the doors of the village hall. People of the village, it said, Ive discovered a new metal. It may not look precious but I promise you, its more valuable than gold. It is found in the rocks of the mountain and needs to be mined. Those who want some, come to the highest lake every morning at dawn and join the miners. Satoshi. No one knew who Satoshi was, but they all muttered excitedly when they read this. What was this new gold? Could it really be more valuable than the old gold they all used? One of the elders stooped down and picked something up from where it was lying under the notice. He held it above the crowd and they saw that it was a large, rough piece of metal. It certainly didnt look more valuable than gold. Was this it? Was this what Satoshi had discovered? Disappointed, the crowd dispersed and everyone went about their daily business. But there were one or two people who wondered if what Satoshi had written might be true and they decided to find out. So they left the village and made their way to the highest lake on the mountain. As they rounded the corner and the lake came into view,

they saw hundreds of pickaxes and shovels strewn across the rocky landscape, with no sign of who had put them there. Intrigued, they picked up some tools and started to dig. When they returned to the village that evening, they passed some of the other villagers, who beckoned to them and asked what they had found. The miners showed them a single, tiny bit of this new metal, which was all they had returned with. The villagers laughed at them and told them they were wasting their time but, even so, the miners agreed to split it equally between themselves and decided to go back the next day and try again. The following morning, when they met in the square to return to the mountain, one of the villagers, who had laughed at them the previous night, was there waiting for them. Do you mind if I come with you? the villager asked. They knew theyd be able to mine more with more people, so they agreed to let this new volunteer come along and so a larger group, this time, traipsed out of the village to search for the new gold. In the days that followed, more and more people were waiting in the square every morning to join their group. As they left the village, the curtains of the houses they passed would twitch, as the other villagers watched them go and wondered if they, too, should be spending their days mining up on the mountain. The more people who joined the group, the more everyone else thought that, perhaps, it might not be such a bad idea. Soon, some villagers who couldnt go up the mountain, decided they wanted some of the new gold they kept seeing people returning with, so they started swapping their old gold for the new gold the miners brought back with them. The people who ran the market stalls couldnt get time off to go up and join the miners but they, too, wanted some of the new gold. So, they started accepting it instead of the old gold at their stalls. Soon, villagers could use their new gold to buy food, pay for carriages and even have an ale at the local inn. Even though more people were talking about the new gold, most of the villagers still didnt see what all the fuss was about. They could buy everything they needed with their old gold. Why would they want to replace it? But all that was about to change. One morning, the town crier, who roamed the streets every day proclaiming the days news, turned his attention to the new gold. Do you have any new gold yet? he shouted, going from house to house and ringing his bell. Soon, everyone will be trying to get some, so get it while you can. When the villagers heard this, they all rushed out into the streets. If everyone else wanted the new gold, they didnt want to miss out. They crowded around the stalls in the market that had been set up just for people to trade their old gold for new gold. So many people wanted new gold that by the end of the day, you had to pay a thousand pieces of old gold for just one piece of new gold. As more people became interested in the new gold, rumors about it began to spread. Someone claimed they had heard from Satoshi himself that the amount of new gold in the mountain was limited and it would one day run out and sure enough, the miners had to dig deeper and deeper, and use bigger and bigger tools to keep finding more of it. Knowing that it would run out, only made people want it more. Even though more and more of the market stalls let people pay with the new gold, for a while, the villagers stopped wanting to use it to buy things. Even a small piece would have bought them enough food to last for a month but they realized that if they stored it away instead, theyd soon be able to buy twice as much with it, since it was getting so much more valuable so quickly. After a while though, when the initial excitement of the new gold wore off, its value stopped rising. People

started using it to pay at the market again and the old gold, they used to use, lay forgotten at home. Lots of the villagers regularly travelled to the other villages that lay around the base of the mountain. They used to have to swap their old gold at the border, for the different money the other villages used and the elders of each village would make them pay for this and would keep the profits for themselves. But now, all the villages used the new gold since they all had access to the mountain and sent miners up to the lake, so no one needed to swap their money and pay the tax to the elders any more. That wasnt the only reason the elders werent happy that everyone was using the new gold. They had always controlled how much of the old gold was given out to the villagers, which gave them power over the whole village but the mountain, lying outside the village, didnt belong to them, so they had no control over the new gold that was mined there. One day, the elders held a secret meeting and decided to ban the new gold. They called the entire village to the square to make their announcement. The old gold has real value, they said. We use it to make our jewellery, but the new gold is worthless. We dont use it for anything. We want it only because everyone else wants it, so from now on, the new gold is banned. Well go back to using the old gold. The assembled villagers murmured amongst themselves. They didnt agree. They liked the new gold because it took control away from the elders and it meant they could travel to the neighboring villages without paying a tax. But the elders had a point. No one had ever, actually, used the new gold for anything. It wasnt shaped into necklaces or bracelets. Were the elders right? Was it worthless? Suddenly, a voice spoke up from the crowd. Youre wrong, it said and everyone craned their necks to see who was speaking. A space cleared around an old man in a cloak, who had a hood pulled down over his face. The new gold isnt worthless, said the old man. It has value precisely because people want it. It takes power away from you and gives it to us and as long as we want it more than we want the old gold, you have no choice but to let us use it. At these words, the villagers all nodded their heads and started shouting that they wanted to keep using the new gold. The elders looked at each other and realized the old man was right. They had no choice. Then, so be it, they said. Well use the new gold. The villagers cheered and celebrated all night and into the next day. Over time, the new gold completely replaced the old gold. The different villages traded with each other more because they all used the new gold and power shifted from the elders to the villagers because the villagers were finally in charge of their gold. No one noticed the old man in the cloak slip away from the celebrations. He walked to the village gates, looked back at the villagers, smiled and disappeared into the night and no one ever heard from Satoshi again. [58:44] ______________________________ CREDITS: AL: Thanks for listening to Episode 66 of Lets Talk Bitcoin.

Buried Treasure, Seekers and Thieves was produced and edited by Adam B. Levine and featured Stephanie Murphy, Andreas M. Antonopoulos and Adam B. Levine A Look Into Bitcoin Panel was sponsored by Plug and Play Tech Center and featured Chris Larsen, David Chen, David Johnston, J Cabou and Vinnie Lingham Satoshi and the New Gold was produced and edited by Adam B. Levine, written and performed by Ed Rex Music was provided by Jared Rubens

Questions or comments? Email adam@letstalkbitcoin.com Have a good one! [59:24]