Video - Coinbase - Bringing Digital Currency into the Mainstream

Fred Ehrsam talks about Bitcoin, the first ever global digital currency network and how it is fast, cheap, borderless, and can support small payment transactions. He talks how Bitcoin maintain the security over the network.


I'm Fred Ehrsam. I'm one of the two founders of Coinbase. We're the largest Bitcoin company in the world. So I want to try to explain a little bit about what Bitcoin is, why it's important and why we think it's going to grow drastically in the next ten years.

So what is Bitcoin? Bitcoin is the first ever global transaction network. What does that mean? It means that it's open, quite literally it's open source so anybody can go and download the code, review it, build on top of it. It's also open in the sense that since anybody can download it, that means that anybody can go and download this code and have a wallet for free just because they have a connection to the Internet. It means that it's distributed. So there are computers all around the world kind of like the Internet that work to maintain this global network and maintain this global ledger with the history of all transactions over time in this unified network. It's all secure.

So how is all of this made possible? Bitcoin solved for the first time this very famous computer science problem called the Byzantine General's Problem. In short and what that means for Bitcoin, it means that any two people in this room can transact in a peer to peer nature. And if you think about all of the transactions you've done in your life to this point that's never been true. Think about transferring, let's say, $100 from your Bank of America account to somebody else. You need Bank of America in the middle as a trusted intermediary to help you perform that transaction. That's what Bitcoin removes. It removes the need for this trusted third party. So in that example, you need Bank of America to go in and say yes, debit $100 from account A and credit $100 to account B. And what are they doing? There going in the background to their closed proprietary ledger of transactions and making a journal entry.

So what does that mean for transactions as we go forward in the world? As a result, you kind of think about Bitcoin like email for payments in a sense. It by nature is fast. It just takes a couple seconds for a transaction to confirm. It's cheap. Since you're just moving data around it costs almost nothing to perform a transaction. And by nature it's international. Again, much like the Internet, it's borderless by nature because you are simply altering data.

So I'm guessing that most people in this room have heard about Bitcoin sometime maybe in the last two years at least in passing. It's grown quite substantially in the last two years. Depending on who you ask there are between five and ten million Bitcoin wallets worldwide or about 80,000 businesses that leverage Bitcoin in one way or another and transaction volume on the network is growing rather rapidly. It's used in about 96 different countries and "using it a new country is pretty easy because you're just downloading some software" and there's anywhere between 50 and $500 million worth of value processed on the network each day depending on the day.

So let's put all of this into a bit of a global macro context for a second. So it costs about half a trillion dollars a year to process payments which given the current state of technology seem rather exorbitant. You think about what the Internet did for the cost of distributing data it kind of took it, made it open and brought that cost down by roughly in order of magnitude and we think that the same thing can happen here with value transfer on top of the fact that you enable all sorts of new innovation. And you think about why that is and it's due to the proprietary and kind of construction of these networks. So think about making a credit card transaction online as a simple example. By nature in a credit card transaction, there are four people in the middle of that transaction. You have an issuing bank, a merchant bank, you have a network ie, Visa or MasterCard. Not only that but you have this massive fraud cost right. And we've all seen the identity theft piece of that but the system is pretty fundamentally broken when you think about as an online retailer you are forced to be left holding the bag if somebody comes to you with a stolen credit card despite the fact that you have no way of controlling the root of the problem. So 3% in interchange, another 3% to fraud. You have all sorts of false declines because merchants don't want to be left holding the bag and the all cost of the payment becomes very high. You think about rethinking this and having a system that was actually made for the Internet and the cost go dramatically down. It's free to accept Bitcoin and to convert it to your local currency it's probably less than 1%.

I think one interesting trend in our lifetime has been the rise and fall of landlines or maybe more appropriately the plateau. So in our lifetime we've seen landlines plateau at about a billion in the world and it's slowly on the decline now. Meanwhile, we've had mobile phones and now smartphones rocket past that to about five or six billion I believe around the world. What does that mean? You hear people oftentimes talk about the under banked or the unbanked. What does it mean in that context? I think what you could very possibly see here is you now have two and a half billion people that don't have a bank account in any way, but they rapidly are getting access to smartphones, to the Internet. Is it plausible that their first bank account, their first store of value, is one that is free and electronic in nature? It actually seems quite plausible and I think Bitcoin is a system that that can enable that.

In the scheme of things Bitcoin is still relatively small in terms of transaction volume when you rank it against the major credit card networks. But it's getting close to some of the larger traditional remittance networks and I bring up remittance because that is a classic example, in my opinion, of these close networks where a company like Western Union, for example, can happen to move money across borders more easily than anybody in this room can as an individual because they happen to just own a lot of global infrastructure, right. They can do it more efficiently than you can as an individual solely because of that fact.

But again, these are closed networks so what happens when we make these networks open, accessible to anybody, we allow anybody to go and build a business on top of it. As with any kind of efficient market when you open things up costs usually go dramatically down. Just anecdotally, we started by paying a developer back in Eastern Europe using one of these traditional networks. It costs about six percent to do so and that seemed exorbitant. So we started doing in Bitcoin instead and given we have the luxury of Bitcoin being fairly liquid in both the United States to the dollar and in Europe the Euro. But now that we do it in Bitcoin, costs less than 2% and I think these network effects will only be increased as more liquidity kind of pops up around the world over time.

So I've spent a lot of time talking about the transactional in a dollar or in a fiat currency sense of Bitcoin. Another one, actually quick show of hands. How many people here have spent in a single transaction less than 99 cents on the Internet? You've done a purchase for less than a dollar? Okay. So a couple but not a whole lot. And you have to ask yourself why is that and the answer is that the current payment rails, the networks, really don't support that in an economically efficient way so for a credit card it's usually a 15 or 20 cent base fee. That's 15 or 20% of your revenue just right out the door.

In our opinion, Bitcoin will make small payments on the Internet now viable and if you look at where apps and mobile games are going, this will enable entirely new business models on the Internet as a result. Going maybe more into the less transactional but more what does it mean now that we have a shared and distributed ledger of ownership in general. Think about securities clearing for a minute of stocks and bonds. This is something that banks employ tens of thousands of people to do and it takes two to three days often to settle a trade and that seems crazy. Well, what happens when you put that on a network where everybody can see? It's very clear that ownership is transferred and it's all taken care of by a unified network. Again, you can see how the costs go down dramatically and you don't even necessarily need centralized places of exchange because you yourself can transfer ownership directly on the network. I'll try to keep this part brief.

So we just simply make it easy to use Bitcoin so and easy to use consumer wallet built on top of the Bitcoin network much in the way that you have Gmail sitting on top of the email network, SMTP is the underlying protocol. We as a company sit on top of Bitcoin as the underlying network and kind of create this easy to use abstraction. We've got about 1.6 million consumers using that. We have a set of merchant tools that make it easy for businesses to use Bitcoin and then a set of developer API so that all sorts of great ideas can flourish on top of Bitcoin. These are some of the people that we've started working with in 2014 to do that. Some of them, I think, are in the room today.

The thing I want to I want to leave you with though is think about this in many ways like the second coming of the Internet where the Internet came along and brought the cost of distributing data down by an order of magnitude and it made it open. It made data distribution free and accessible. The same thing is happening here except it's not for data, it's for transferring value. Thanks for your time. This tends to be a bit of a rabbit hole subject so happy to talk with anybody afterwards, but thanks very much for your time today.

Written by Fred Ehrsam on September 16, 2014.