Video - Bitcoin - The Future of Digital Currency Financial Systems
The system is peer-to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the US Treasury to categorize it as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency, although prior proposals existed. Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value.
MR. PAVEL: Well, good morning everyone and welcome to the Atlantic Council. I'm Barry Pavel, I'm the vice president and director of the Brent Scowcroft Center here at the Council. Thanks for joining us to discuss this, what I would call disruptive technology application, but I may have different words when we're finished with this event. On Bitcoin and the implications of virtual currencies, but also other block chain based applications for the future broadly and I'll get into what I mean in a little bit.
The Atlantic Council is a non-parties in organization that promotes constructive U.S. and European leadership in the world to meet today's challenges working with our allies, but we also serve a public education function. And I really can't tell you how many people from what I would call our traditional constituency here at the Atlantic Council which is a longstanding institution here in Washington. How many people have come to me and said what is this thing called Bitcoin, and what do I need to know about it, how important is it. What are the parameters, is it going to fail tomorrow or will it be here in 2050. And that was part of the reason I decided we should really have an event that sort of performs these functions that I try to bring together a nontraditional panel of a lot of distinct experts from different disciplines. And I'm really thrilled and honored that they're here today to explain what Bitcoin is? What it means for the future of currency and finance and what it might portend for the future of our society and for our security as well.
And so our focus today on virtual currencies is just one area of a body of research that we've done on disruptive technologies, particularly those that empower individuals relatively more than nation states at the Brent Scowcroft Center's strategic foresight initiative here at the Council. In the last year, we've published analyses on such issues as the impact of robotics on the future of manufacturing, how big data will influence decision-making by corporations, individuals and companies and governments. Major report last December on how the United States can harness the technological revolutions that are ongoing, including biotechnology, three dimensional and four dimensional printing and other technologies that are really changing our operating environment and our world.
And pretty soon we're going to publish a new concept on how the United States' conceives its role in this dynamic world and a new concept for national security strategy. There will be a major conference right here May 14th, on foreign policy and defense policy aspects of these issues, the discussion on that day will be kicked off by the chairman of the Joint Chiefs of Staff, General Michael Dempsey, General Martin Dempsey whom I've been discussing some of these issues with and it'll be a very interesting presentation by him as well as the director of DARPA which is the Pentagon's advanced research projects agency and a number of other very important and interesting speakers, I would really commend May 14th, that will be an interesting conference.
And last December we hosted also in this room what we called the Strategic Foresight Forum which gathered top thinkers to engage in very deep conversations on again how to harness these technological disruptions, to be better prepared for trends that are really looking to move us toward a very different world, where resources -- natural resources are much more scarce, where individuals and small groups have a lot more power to do things, to do things that are very good in that advanced society and strengthen our security but also each of these technologies has darker potential applications that can cause significant new security and military threats and a number of other sources of instability so there's always sort of a positive and negative I've found of all of these technologies.
Now, Bitcoin itself is to me, it's a clear marker of yet another innovation that empowers individuals and really democratize as a task that traditionally has been reserved for governments and here I'm talking about the regulation of currency, it's something I think we couldn't even really fathom just a few years ago and now it's upon us and we'll talk about how it's upon us today. So, significant set of questions we'll try to address with this panel. If peer to peer engagement is displacing government in such tasks what other government functions that were used to them performing might also soon be disrupted. What does this mean for the security of our finances? How might international affairs be affected, how might national security be affected by the digitization of services like this and a number of other questions so I would like to now introduce our experts. It's a really excellent panel. I'm really thrilled.
First, to my immediate left, is Mr. Ronald Marks, he's a senior fellow at the George Washington University, Homeland Security Policy Institute. He has held a number of increasingly senior positions with the CIA so yes, he could kill you. As an Intelligence Council to former Senator Bob Dole, during his CIA career the things that I can't talk about he was special assistant to the associate director of Central Intelligence for military support. He was at the State Department, as a program director for law enforcement issues in Russia and Eastern Europe and a senior budget director at the National Reconnaissance Office. Since leaving government, he has been a senior defense contractor and software executive. He testifies before Congress, he comments extensively on a range of defense and intelligence issues on television and radio. So I'm thrilled to have Ron here with us today.
To his immediate left is Mr. Kevin Haugh, who is currently a freshman in the Honors Program at Penn State University. He's already an established Bitcoin miner, that's miner within e, not an o. At Penn State, he studies security and risk analysis and cyber security. He will be working for block chain.info, this coming summer in the company's London office. He serves as captain of the Air Force Association's cyberpatriot competition team, which he led through a nationwide competition with 1600 teams competing. To test how well one can secure computers from virus's backdoors, Trojans, et cetera. His team came in second place among those 1600 teams so, not bad for the work that he did. In 2012, he in turn with the Northrop Grumman Corporation, conducting penetration testing and cloud research which I won't even ask about.
We also have Mr. Jason Healey, who is here the director of the Cyber Statecraft Initiative in the Brent Scowcroft Center. As director for cyber infrastructure protection at the White House from 2003 to 2005, Jay helped advise the president and coordinated U.S. efforts to secure cyberspace and critical infrastructure immediately after the 9/11 attacks, his efforts as vice chairman of the financial services information sharing and analysis center created bonds between a finance sector and government that remain strong today. And I think most recently he edited a book called "A fierce domain conflict in cyberspace 1986 to 2012", which really is the first history of cyber conflict. It's a really interesting book with a lot of anecdotes in addition to analysis. I'd strongly commended and it was reviewed very favorably by the economist when it came out.
And then certainly last but not least we have Dr. Chris Brummer, who is the C. Boyden Gray Fellow here at the Atlantic Council's Global Business and Economics Center. He is also the project director of the Council's transatlantic finance initiative, he leads the Council's work on regulatory and trade policies and provides bipartisan analysis on Transatlantic Economic Cooperation issues. He frequently serves on the NASDAQ delisting's panel and has been appointed to a three year term at FINRA's National Adjudicatory Council beginning in 2013. He received his J.D. with honors from Columbia Law School and his PhD in dramatic studies from the University of Chicago.
I'm going to turn to Ron now please also join us on Twitter using the hashtag that we use for events like this hashtag ac disrupt and with that, I will turn to Mr. Ron Marks, Ron.
MR. MARKS: All right, let me be disruptive. I was trying to think of what I was going to say here today that would still allow me to be friends with Barry, maintained my membership in the Atlantic Council and tell you something that I think is the truth. So, let me relate to a little family history and a little context. Now, I'm spy that's what I was trained to do, but I also come from a long line of people who had -- well, let's put it this way slightly questionable reputations. They ran --
MALE: You do too.
MR. MARKS: They -- thank you very much. They ran booze during the prohibition. My grandfather was someone who was from Boston and was originally part of something called the Ponzi scheme. And he made a lot of money at it and he got out early. My father -- and I was born 1956, my dad was born in 1906. In the first 25 years of my father's life, he lived through three depressions. Three depressions. You think the last one was a bad, 1907, after World War I and again in 1929, where you had more than double digit of unemployment. Banks failed. People did not necessarily trust a government which frankly wasn't all that involved with them. So, growing up with my father and listening to him talk about banks and the depression. And by the way, he was a lobbyist here in Washington so his opinion of this town is you can probably imagine was not high to begin with, it didn't rise, it was an interesting experience.
Now, I grew up in a different time and we grew up in a different time for the most part. My memories are of post World War II, 1944, July, I believe somewhere up in beautiful New Hampshire, a place called Bretton Woods, New Hampshire, the Mount Washington hotel, people from the United Kingdom, the U.S. and a few other countries gathered together to figure out how the world we're going to survive after World War II, because we've just gone through 10 years of depression, 10 years of tariff raising et cetera, et cetera 1930s, which pretty much stapled the world economy.
Now, two things happened at that conference. One of which, (inaudible 00:11:13) John Maynard Keynes was about ready to die. He was ready representing the British and try to hang on to whatever shred of dignity the British had in the marketplace, they were bankrupt. By the way, the British went bankrupt almost twice beforehand just after World War I, by the way, they just paid off those loans about a couple of years ago to us. They almost went bankrupt in 1930s and by 1944, they were broke again. And they were living essentially on our monies. The largest empire in the world was essentially living on the U.S. dollar borrowing on the U.S. dollar. So that conference in 1944 was essentially about how the United States and others were going to rule after World War II. So some of these delightful buildings that you see around town World Bank, I.M.F, all those are little places was all came out of that.
The British Pound going into World War II was about $4.60 were down to about $4.5 at the end of the war it was $2.60, $2.80, excuse me. The dollar was going to reign supreme, we had roughly half of the world's G.D.P. and we pretty much call the shots. By the way, the decision was made at that point to have a dollar, which would not only hold value and was valued around the world but was actually exchangeable for something, $35 per ounce of gold, believe it or not, that was the number. $35, it was amazing. Some countries slightly higher than others.
Now again, if you're an ancient guy like me and you're little spy you believe in sort of syp porn called James Bond. Guys, do you remember a Goldfinger, the movie Goldfinger. The movie Goldfinger was about gold arbitrage, which was being done during that period of time because you can move gold out of England at 35 bucks an ounce if you had the right to have it and move it to Europe or it might be $42 an ounce or into the Middle East like India for instance or Pakistan where it would be $300 an ounce. So there are ways of working around that system. And I add that my father and my uncle during World War II or shortly afterwards were living in Paris and I wouldn't be surprised on the weekends really stories related to me how they used to take suitcases worth of dollars and go to Switzerland and exchange in there for other things.
So we grew up in sort of a stable time. The last 70 years of our existence has been based on Bretton Woods. The U.S. dollar has been dominant during that period of time. I've been to 50 some odd countries in this world and nobody turns out to block. Even the Russians in the battle days when that currency was in "exchangeable" wouldn't turn down a dollar because it was considered a value. Now, by 1971, we went off to gold standard. Why? Because there was a tremendous desire to have U.S. dollar overseas and those people in turn wanted to convert that, the French in the mid 1960s, for instance, came in and demanded a whole lot of gold. There was an attempt again in the early 1970s to demand a whole lot of our gold out of Fort Knox, now, you don't physically ship it by the way, you just sort of literally put the sticker from one side to another, but it was going to be a drain on our gold reserve. President Richard Nixon made the decision at the time, that there would be no more drains on our gold reserve.
So the United States dollar, since 1971, has been based on the full faith and credit of the United States. So it is not an exchangeable thing in terms of silver or gold. And for those which are old, to get these old silver certificates on the wall there were dollar bills et cetera, et cetera. That system lasted pretty much through the 1990s. We won the Cold War or as I like to think of it as I won the Cold War. And then between 1991 and 2001, we drifted along fairly well. Since 2001 and certainly since the last and we'll call it a depression starting in 2008, the recession and a depression by the way differs as follows if you have a job it's a recession if you don't it's a depression.
We have seen other parts of the world begin to move forward, China in particular. We've also seen a world that has been increasingly, allowing itself more than allowing itself, connecting itself, 2.5 billion people on the internet right now, we're probably had to five shortly. They belong to some 200 countries, not all of whom have stable currencies. I can sit here right now and recite for you which new peso and new whatever else, this would promulgated by different countries over the years or who slashed a couple of zeros off the end of their currency. Now, ask me what that does to people. When they start thinking about stability. Some of you guys are probably too young to remember but even the United States in the late 1970s, I remember parking money in a CD at about 19.5%. Why? Because mortgages were being charged at 16.5% percent because our inflation rate was running 12 to 14%. That was unusual in our circumstance. It's not unusual around the world.
So when you started asking other people to have full faith and credit in their money they look at you, smile a little bit, nod their heads and go on their merry way thinking I'm going to do what I have to do to survive. I was just recently spent three weeks in the U.A.E. I go to the gold souks in the U.A.E. There are enormous amount of bracelets and necklaces and whatever else made out of gold, why? Because nine out of ten of that population in the U.A.E are expats and the vast majority of them come from either Pakistan, Bangladesh or Burma. And they want to get money out of the country and they don't trust the local currency.
So what I'm asking you to do essentially is to get yourself out of the mind frame of a 20th Century American and get yourself into the 21st Century, where the power of the United States is not as great as it used to be, the power of the dollar is not as great as it used to be. And we have to start thinking about a way of dealing and communicating with each other in which borders and boundaries don't matter all that much anymore. So when I look at Bitcoin, and I've purchased one by the way just because I like to put, if you'll pardon, the expression of my money where my mouth is. I've taken a look at this and I think to myself okay, is it the BO and end all of this, I don't know. Is it a Ponzi scheme, I don't think so but we'll see. Does it represent value and ability to exchange across borders, like a money, then the answer is yes. Does it represent a threat to Nation States, well take a look at China. They're doing their level best right now to make sure that Bitcoin doesn't exist if at all possible.
However, and I will probably conclude it which sides you want to go on for a little bit, I can conclude on this one note. One of the things that I spent a career doing is getting around the rules and getting around borders and getting around different places in the world where somebody told me I couldn't do something. If you don't trust the currency, if you think there's a better way of exchanging value, to your family and your friends you will use money orders like Hawala, you will use a Bitcoin, if possible. Can it be forged, can it be copied, is it all that's cracked up to be et cetera. I ask you simply to take a look at what happens to the regular currency. Is it more subject to something decide that regular currency? I don't know. This guy does. So on that happy note one and I sit back and let him talk.
MR. PAVEL: Thanks, Ron. Yeah, Kevin can you sort of give us some education on the basic aspects of what Bitcoin is, you know.
MR. HOUK: Sure. So basically, it might get a little bit complicated. And I'll definitely do my best to come up with, you know, bridges for you to help understand the process. But basically, you know, through all this just keep in mind it's dollars, computers can exchange to one another. And this dollar, you know, Bitcoin can be written on physical paper if you want to but in one way or another it has to talk to another computer if you want to exchange the funds. So the way Bitcoin is revolutionary is that it, you know, encryption, decryption has been around for a while but Bitcoin was the first to use encryptions specifically asymmetric encryption to have a value of money, have a value of Bitcoin. And the value of Bitcoin is basically, how much people perceive the value to be. This works on a principle of when somebody wants in a dress or think of it like a PayPal email what they do is they click a button whether it be on a program on their computer or using BotChing.Com.
And basically it will creat two keys for you. One key is called your public key. And this is your PayPal email address. This key you give to anybody who you want them to send you Bitcoins. And so they'll have this key and then they'll send funds to this public key, but when you're creating this, and it's two sides of the same coin so when you create this public key, you also create a private key and this private key you use to unlock all the funds that are sent to this public key. You don't want us to give -- if you give anybody that your private key they could very well steal all your money. And so, you can look at a miner over there. That's one of the rigs that I built and miners are the things that keep the network going. There is no essential company Bitcoin, it's not like you know essential authority like PayPal, everything is distributed, everything is peer to peer, it's something that gives more power to the people.
And this works on a basically the miner will take 10 minutes worth of transactions. So in 10 minutes people will be making transactions, I'll send a Bitcoin to my mom, you know, whoever I will be sending Bitcoins. Then all these transactions are kind of floating in the Bitcoin namespace. And then in the meantime, there's people running programs on their computer that basically check the disk transactions across the network. So the way that they do this is something called the block chain which he mentioned in his opening speech and the block chain is the thing that Bitcoin gives to the world. That's -- this way that you don't need a central authority and the block chain is basically a very large ledger. It tracks all the transactions since day zero of Bitcoin's creation. So if I were to say I have one Bitcoin, it'll say okay, you got your Bitcoin from Fred, Fred gets Bitcoin from Bob, Bob got his Bitcoin from where the Bitcoin was minted so it's like okay. You do have a Bitcoin to send your private key is valid, I'll go ahead and send that for you.
And so the way that the miners do that is they -- it's a race to find out which one is going to solve the puzzle and so imagine a very large Sudoku puzzle and the only way to solve it is for a miner to throw random numbers or computer to throw random numbers in this Sudoku puzzle, check to see if it's right and then if, you know, they're doing this a million times a second and then so they'll try another one. So they'll just be throwing numbers across the world and so finally one very lucky miner will throw a right combination of numbers into the Sudoku puzzle, say I got it. And then the broadcast that answer to the world to the Bitcoin world and so when you have a solution to a Sudoku puzzle, it's relatively easy to check, it's hard to find the answer but it's easy to check the answer. So when the network confirms that, yes, you indeed have found the answer that miner the one that founded is awarded Bitcoins for its work.
The Bitcoin reward is decreasing, so a couple of years ago, every miner was given 50 Bitcoins for solving this puzzle. Today, the reward is 25 Bitcoins, next time it'll be 12.5 and so on, until the cap of 21 million Bitcoins is hit. Once that 21 million Bitcoin is reached, there will be no more reward for finding the answer to this Sudoku puzzle. So once the miner finds the answer of this Sudoku puzzle, it does one last check with these 10 minutes of transactions that are in limbo to make sure, you know, nobody just arbitrarily saying I'm going to transmit a 100 billion Bitcoins because they'll in fact checked you and decide that you are wrong.
And so basically, they'll go through all these transactions, they'll use a little answer they've gotten from the Sudoku puzzle and they'll compress all these into a block and added to the block chain. And then once that -- once those confirmations hit and they add it to the block chain, they work all over again, they start the next puzzle and the puzzle will change every single block and in order to keep the program itself is designed to be every 10 minutes that compression will hit and the new Bitcoins really minted. It can be, you know that, it really can be every two-and-a-half minutes, every 20 minutes but the way Bitcoin was designed, it wanted to be 10. So if a block takes, you know, more and more people are mining, if a block takes five minutes to mine then what the program will do is it'll make the Sudoku puzzle harder. It will make it bigger so, you know, you have to spend a little bit more time throwing random numbers in order to find the answer.
So once this is confirmed then you've successfully made the transfer of Bitcoins and then as more and more blocks are added to this block chain your transaction becomes more and more final, more and more edge into stone because the further back in the block chain in this transaction is the more that this transaction basically is, you know, as good as gold. So I think that's --
MR. PAVEL: A couple questions. Why, I'm a former math major but tell me why 21 million is the magic number?
MR. HOUK: Like I said, with the block time being 10 minutes, that's just the way the program was designed. There's -- I don't want to blow your mind too much but there's a bunch of old coins, you know, this is all, Bitcoin introduced cryptocurrencies and so there's a bunch of different other cryptocurrencies like Litecoin. Litecoins current value I think is $11 a coin, its cap is four times as bigger as Bitcoins and it's every block time is two-and-a-half minutes. So it basically was created by an MIT grad called Charlie Lee. He works for coin base where you can get that, where he got his Bitcoins, so excited about it. And so that -- and then there's Litecoin, there's dogecoin, there's Ripple there's so many.
MR. PAVEL: Let me just ask two more sort of informational questions and then I'll move on to my other panelists. So when we hit this $21 million, is there anybody who's thought about will that be a discontinuous sort of milestone or will things keep going the same or --
MR. HOUK: That's an excellent question so --
MR. PAVEL: Have anyone thought about that?
MR. HOUK: Yes, the program is very clever in that every single transaction. It's recommended that you tip the miner, you know, as you tip a waiter. So basically, it doesn't matter if you're making a $20 transaction or a $1 million transaction, you can tip the miner a penny or less than a penny and that's plenty, that's more than enough because, you know, all the tips between 10 minutes of transaction that adds up to be a lot. So that's the way that Bitcoin can, as opposed to PayPal which will take a percentage of what you're transacting, Bitcoin doesn't care. You could be transferred -- you can also be transferring a $100 million or $1. The transaction fee will be less than a penny and then after 21 million Bitcoins is hit that's the incentive for miners. But the reward decreasing, it's designed in a way to be finished rewarding of a miner in about a 110 years, so we got time.
MR. HEALEY: And my understanding is that Bitcoins are divisible, I think, like the eight decimal places --
MR. HOUK: Oh, yeah, yeah.
MR. HEALEY: Something like that so it's not like we're run out of money, we can just say all right, you know, we can keep using smaller and smaller -- you know kind of like, you know, pieces of egg -- you know, you can keep chopping up the piece of gold and a fewer pieces to use them as a currency.
MR. HOUK: Yeah a lot of people were offered to Bitcoins now as micro Bitcoins, so you just move in a decimal over three places because that's a little bit more enticing the people. If I put a $100 into -- you know, into buy a Bitcoin, I don't want to be getting 0.1 Bitcoin that's kind of, you know, demeaning I want to have a 100 micro Bitcoins.
MR. PAVEL: Last question before we move to Jay Healey. What is this mythology about the inventor, where does he live, does he exist?
MR. HOUK: So the creator, basically the person who wrote the code and the white paper explaining what the code does, what he feels like it should accomplish, his name is Satoshi -- you know, his name is Satoshi Nakamoto. And this person actually doesn't exist. There was a story a month or two ago about, you know, a reporter saying that they found him, he was using the hidden name Dorian Nakamoto in California but this guy, I mean, they -- you know they really just report through his life and put it all up on the internet and then he was just a guy and in the model trains.
So -- but the thing is in my opinion, I don't think this Satoshi figure could of have revealed himself. I don't think it would be viable for something like this because you know if I had a guy or you know it could be in organization, if we knew who did it then their first response to Bitcoin will be well it's going to profit them like they created it for themselves so no matter where Bitcoin goes they're just basically doing it as a Ponzi scheme. So I think the way the reason that he did it anonymously was to try to just really assure people, yes, this is a new technology, I'm not trying to game you guys I don't want any recognition just do with it what you will.
MR. PAVEL: Very interesting. Thank you very much. It's really, really, I think you quadrupled my knowledge in just a couple sentences there. Now, Jay Healey (00:29:52 audio cut) on this.
MR. HEALEY: Well, you, you know, Barry your central question was, is this going to be here 2050, what are the implications between now and 2050. I'm going to pick up two aspects of that. One, is confusion and security and the second, how this fits into the larger geek versus government battle of the last, I would even go back as far as 30 years maybe and a little bit farther. Because, you know, Kevin's part of answered that 21 million, it was, you know, sort of arbitrary. You know, 10 minutes was kind of pacts, 21 million was kind of pacts and maybe it's not completely arbitrary but there's a lot of arbitrariness to it, and that bothers a lot of people. But dollars are incredibly arbitrary, I mean most things that you know big gap wheels that were used as currency. I mean a lot of financial instruments have arbitrariness built around them, the true financial professionals would tell you that even gold is completely arbitrary. I don't quite go that far. And every time we introduce a new financial instrument of any kind whether it's is a currency, whether it's a commodity there's often a lot of confusion about it, confusion by governments, confusion among the public and even confusion among the professionals.
This is no different than when we were introducing paper money. I mean when the United States was going to paper money I mean folks could be rolling out all sorts of different dollars. I mean the greenback was just the federal government trying to come in. I mean that's why we have the secret service was we had just rolled out the greenback in the 1860s, and the secret service was there to make sure that this was the one currency that we had that the different banks couldn't be printing their own U.S. dollars. And we've had lots of other confusions when we've rolled out new instruments. You know, the very arbitrary stock certificate. I mean that tried to be rooted in, this piece of paper entitles you to a portion of this company and just like we've had security issues for Bitcoins and confusion on Bitcoins. I mean stocks certificates are all sorts of South Sea Bubble was one of the classic incidents -- you know, if you, well, you know I watch a lot of Turner Classic Movies when you see movies from the 20s and 30s it seems like every other movie is about someone perpetuating some stock fraud.
I worked in Hong Kong for a while and you'd see the way that a modern Chinese are dealing with the new stocks that are coming out has a lot to -- you know, seems very familiar to those movies from the 1930s. This new financial instrument a lot of confusion and about it, a lot of seeming arbitrariness and a lot of angst, insecurity and fraud that tends to be around these new pieces. Now, the security issues there with Bitcoin, I think might prevent Bitcoin from being around 2015. Sorry, the issue of cryptocurrencies though. These are all completely solvable, if there's a point to it. I mean the amount of security that you have to put in to make sure that your Bitcoins can be secure are outside of what even I would be willing to deal with as a guy with a master's in computer security, right. I mean you've got to really protect yourself, it's best to have a laptop -- you know a separate computer that you keep offline on that you're only using to keep your wallet. There's some other ways to do it but as Mt. Gox showed there is -- there's a lot of issues in the exchanges. We're still new into this, we're still trying to figure it out entirely solvable but again it has to be usable for people, there has to be a demand for there that were not getting through PayPal, that were not getting through credit cards, that were not getting through other things, that is going to make it easy, viable medium of exchange for you and me.
As far as the broader change of geeks versus government, I want to read and this might be familiar to some of you. This was written in 1996. A declaration of the independence of cyberspace. Governments of the industrial world, you weary giants of flesh and steel, I come from cyberspace, the new home of mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us, you have no sovereignty where we gather. Cyberspace does not live within your borders. You have not engaged in our great and gathering conversation nor did you create the wealth of our marketplaces. You claimed there are problems among us that you need to solve, many of these problems don't exists where there are real conflicts which our where there are wrongs, we will identify them and address them by our means. Your legal concepts of property, expression, identity, movement and context do not apply to us. They are all based on matter and there is no matter here. We must declare our virtual selves immune to your sovereignty even as we continue to consent to your rule over our bodies. And that was John Perry Barlow, he was a lyricist for the Grateful Dead. And that was from 1996, which was representing a trend. You could see that trend from the top floors writings of the Third Wave and others in the 70s and 80s of saying we're going in for out of this industrial age into this information age and in the information age governments are going to have less power, we're going to see more power from the bottom up.
Where we talk about that a lot here at the Atlantic Council, it's one of the mega trends that we talk about in the conference Berry talked about is that we tweet at for AC disrupt. That government used to have the monopoly on a lot of areas, a monopoly on force, monopoly in other areas, monopoly on currency. This is particularly strong now in frankly the post Snowden era and we're pretty sure Snowden is not behind Bitcoin. Where you're starting to see people in especially geeks, Silicon Valley, other places the younger generations say man the stuff that the government is doing enough already we can have our own things that are separate. We have our own rules that apply, your bureaucracies, your rules, we have our own social contract for whether that's sharing media, whether that's communicating and having strong cryptography to make sure that happens separate from government, remove the things that were in Paris Barlow if there are problems, we'll solve them.
This cyber space occurs across these borders. So to me Bitcoin and cryptocurrencies in general are part of this larger trend of the geeks and I -- I'd mean geeks as a term of endearment but this technological change, this diffusion of power away from governments to say there are problems we can solve them on our own without governments being there to have to solve them themselves. This is a really strong trend. You're going to see it here in currencies, you're going to see it as people say can we invent a new internet that's not so subject to mass surveillance and hack attacks. Or is N.S.A going to continue to be getting involved or other governments that can be containing to get involved. I think the strong money is on governments. It has been in the past every time we've tried -- you know, when we've had other disruptive innovations. Sovereignty still matters a lot.
So if Bitcoin and other cryptocurrencies remain something that's kind of difficult to use and kind of arcane and really seems too confusing for normal people to use. Then probably the governments are going to stay on one side, are going to stay mostly dominant and Bitcoin, like other things that start with crypto like strong cryptography and other things, will remain somewhat niche for just for those people that are willing to try and figure out how to use it. If it does turn out to be stronger, if privacy turns out to be stronger if we say we want a more secure and private internet, Bitcoin and cryptocurrencies could certainly fit in with that, we can imagine not the way to 2050 but by 2020, that these could be very much stronger.
So I'm the big fan of Bitcoin capital B, the system of the ledger, the system of the block chain that says here's a smart way that this could get done. I'm a huge believer in that. I think it can really solve some interesting problems, whether small be Bitcoin the actual, what gets mind is going to be that solution I think it's early to tell. I certainly hope it is.
MR. PAVEL: Jay, let me follow-up on one issue that you've pointed towards and then we'll go to Chris and then I don't even mind a conversation among the panel and we'll take questions from the audience, but what about this -- the last point you just made and I think is really interesting which is this. For want of a better term, this business model, the -- what I called at the beginning, block chain based applications is already being experimented with for -- as I read in a recent article Twitter style, social networks called Twister encrypted email, alternatives bit message, unseizeable domain name system called name coin, sort of this. The use of these processes seems to be proliferating services peer to peer encrypted services. Where do you see this going even in the near term? Most people heard of Bitcoin but don't know much about it. No one's heard of any of these other things and so where is the next application of this type of technological process?
MR. HEALEY: And I really am figuring what's the need -- you know, what's the mass need that this is going to handle. you know, mobile money and paisa in Kenya has made a huge difference because people don't need a wallet they can use their phone. Here you had this technology that came in that has absolutely changed of that society because now it was an under bank society now they can use their mobile phones not just to get information but to make payments. It's completely changed the society in incredible ways. I'm not quite sure what that need is, that we're going to be using Bitcoins for. Yes, it can be anonymous or pseudo anonymous, I mean, right, you don't necessarily know that it's going to Bob and Rob and Jackie and Phil, you know, it's going to this address and this address and this address and this address, but cash already fills that need.
So I mean, yes, it'll allow you to do that more easily over the network but how many of us need to have pseudonymity when we're working over the internet. You can't get credit in Bitcoins, there aren't any derivatives for a Bitcoins, you know, you can't say what's the 90-day Bitcoin selling for today in ways that allows you to hedge. Maybe the we can get there in 10 years but we still have to find what's the -- it's a cool thing, it's certainly a cool story of value, hugely volatile right now, far more volatiles and got gold or currency. I hope I'm not getting in your area.
MR. BRUMMER: Go for it.
MR. HEALEY; So we'll see. I don't want to get in --
MR. PAVEL: I don't want to keep Chris waiting any longer. He knows the most about anything having to do with currency of all of us, certainly combined up here so Chris we would love to hear your view on these questions.
MR. BRUMMER: No, this has been a fascinating discussion and thank you, Barry, for allowing me to get on stage. I'm over in the global and business and economics program but your leadership and Scowcroft leadership on this issue is obviously very important one. I'm here at the Atlanta Council and I'm also tenured Georgetown law professor so I'm going to take a bit of a regulatory stab, but I think it's important to think about in very basic terms. What does Bitcoin do? How is it different? What are its advantages? Because I think that when you think about it in simple terms it helps for you to put your mind around just how difficult it is for regulators to deal with this very new phenomenon.
You know, at its essence when you have any kind of transaction between two parties in a Bitcoin system the information relating to the transfer of Bitcoin is not a process in the way that one would normally anticipate, particularly when you deal with a transaction involving currency that is quite simply, in our modern financial markets there is an infrastructure for certain kinds of transactions that in essence, we have certain clearing and payment and settlement systems that allow parties that are based in far-flung parts of the world to transact with one another and that clearing system effectively validates and confirms that a party has what it says that it has and that will deliver that currency to the counter party in that transaction.
Now, what we have in the Bitcoin system is very, very different. Instead of having a central clearing mechanism, we have this democratized process whereby all of the participants in the Bitcoin system and particularly the miners who receive various levels of incentives go out and validate not like your term fab check, in essence. The transaction to make sure on the one hand that Party A, who was giving Bitcoin to party B, actually has the Bitcoin that Party A says it has. And then also and closely related to it, there is a recording process, a process by which the transaction is recorded and that the transaction is then transmitted to the world, right. So it creates this kind of public good once the block chain is created, right.
So it's a democratized system, a system in which lots of different parties can participate in the information gathering and the information sharing and it's, to a certain degree a kind of market-based information system, okay. And that is what's really very fascinating, what's different from a payment perspective and then they obviously really interesting part is that the Bitcoin itself is data, right, it's a string of numbers, okay. It's not just a piece of paper but it's a string of data created and generated by software, that is given value and it is undergirded by faith in the same extent that perhaps faith in a normal currency is backed by faith, but the faith in that currency is generated by certain or digital communities as opposed to national communities, right. The participants in that community of faith ultimately give that data the value that the other participants in that system agree exist, okay.
Now, that's really a 21st Century phenomenon. It's a 21st Century phenomenon because on the one hand you have these new platforms and data and young geniuses at Penn State who are sitting around and attempting to create the computational models by which you can continually process that data, right. And at the same time, it is responding to a world that just generally a space with a variety or growing skepticism about finance, about money, about counter parties in finance, right. And then you have the regulators. Now, as I said I'm a law professor at Georgetown as well. And one of the main reasons one goes to law school is because they can't do high powered computational models that would allow them to be hedge fund advisors and private equity individuals, okay.
My students grow up to come fancy lawyers and regulators and it's useful to sort of think a bit about like what then is the place of a regulator in this world in which, you know, we generally have to open up our dictionary, to remember exactly what an algorithm is after all again that's why I went to law school but then you have to figure out particularly what is the infrastructure behind that system and what are the relative weaknesses and what are the relative strengths of that infrastructure and then how does it relate to your own specific mandate, right, as a regulatory agency.
Now, the fact that we have this 21st Century currency, if one will, in and of itself creates lots of problems because no one really knows if it's currency or not. I just released a book myself this last week called mini-lateralism basically this idea that the multilateral system of the Bretton Woods' era is under stress, that some of the core foundations of international economic diplomacy are under revision. Certain aspects of characteristics of mini-lateralism is you don't try to aspire to a universalist regime in which everybody is involved, sometimes you have certain communities of faith. Secondly, you don't necessarily rely any more in international economic affairs with treaties, formal legal obligations but increasingly informal obligations perhaps datas of currency are data instead of a fiat piece of paper.
And then finally the last is the fact that we're losing this dollar hegemony and the book focuses on different kinds of blocks but clearly we're here, we're dealing with a different kind of block, a block chain in a increasingly truly multi-currency system. Now, regulators have to ask themselves, what does all this mean, okay. What could a Bitcoins be regulated or considered to be, right, because you can't regulate anything if you don't know what it is. So what are some of the contenders for what Bitcoin is, all right. So you could view it as a commodity not just a currency, if it's a commodity however it's kind of weird because commodities, we think about commodities great as lawyers we actually have an entire list as to what specific things cost you to commodity; wheat, oil and the like. But here, you have a thing that has an exchange value but it doesn't necessarily have a use value from the perspective of consumption, you know, you don't consume a Bitcoin the same way that you eat wheat or wheates, right. And so this creates this kind of question as to what, is it really a commodity. Well, a currency was discussed and we've sort of use this term in a larger rhetorical sense from my book, both economic and legal sense there are questions to really whether or not it's a currency.
A currency is an instrument of payment. On the other hand here, we have an instrument of payment that's actually not universally accepted and it's not backed by any government. It's considered to be a store of value for many of us here in the room, you know, that Bitcoin has fluctuated. Well, it's fluctuates everyday way beyond sort of the means of fluctuation that one would normally associate with other kinds of investment insurance, so it a store of value, it's that doesn't really meet the traditional conception. And a unit of account. Well, I don't go to a store in which my baseball bat is denominated in Bitcoin or micro-Bitcoin. If I go online it's rare that I see any object necessarily denominated in Bitcoin. I can use Bitcoin to pay for it but usually the unit of count is some kind of other currency, you know, so it's hard to think of Bitcoin as a typical currency. Well, is it an investment? Maybe it's a security. I see in the background, someone who has been in my securities lock could cost. Well, we, security lawyers actually have a definition as to what constitutes a security and when you bring in the feds and Securities and Exchange Commission and there are certain key elements of what a security is, you know, for those lawyers and the law geeks, you know, no commonality, you don't have lots of folks participating in the same way in which one participates in the Bitcoin chain.
Well then, maybe we'll just call it an asset and that's where obviously the I.R.S. has come in, to say, well, you know, well this is property but it's a very weird because property is not always given this anonymity much less pseudonymity and then so how do you assess property rights in a world in which you not only have wild fluctuations but you don't necessarily have identities that are created in a typical property based system. And then finally is it then we'll just give up and we'll say it's not really a currency but it's a payment system, right, you know, we've already seen, you have different participants, you have these brilliant young miners who create a ledger that's then broadcast to the world and therefore fulfils this clearing and settlement system. Well, you know, that's hard because it's not centralized and the different nodes in different parts in that clearing and settlement system can't -- don't operate in anything that we've seen before. For this reason, federal regulators have tried to call it something called a money service business like a cash checking of firms.
And to make them more compliant with no like customer and money laundering systems but even here there's a certain question as to what is the integrity of that payment system? Where you have not only the exchanges themselves that can be hacked or you have these folks who can create Ponzi schemes not in the Bitcoin but around the Bitcoin system, right. And what happens as to well, once you keep your Bitcoin, what is the integrity of the saving and storage system, these digital wallets, right. It doesn't look like, it doesn't seem to pass the same kind of institutional master, if one will, that one associates with more established regulatory systems. So as a result -- but each of those questions, is it a commodity, is it a security, is it a payment system, is it a currency? How you answer each of those questions leads you to a different answer as to who's in-charge first, right. And then once you get to the question as to who's in-charge sometimes various regulators can look at any particular aspect and say well, that's me and then you have possibilities of overlap confusion and the like, but it's at the top it all off you have this very dynamic system, that's always evolving and it's deeply international, right, where Mt. Gox was run out of which was a major exchange, for Bitcoin was run out of Tokyo by two French guys, right, you know, that creates new kinds of stresses and challenges for the international regulatory system. And so, you know, from a regulators perspective, you know,, things are just now getting started and Washington folks are going to obviously be employing the young geniuses to help them figure it out but it's very hard to formulate response when you don't know what it is and when you don't know who's in-charge.
MR. PAVEL: But someone texted me who brooks in my program that leads me a little bit confused.
MR. BRUMMER: Then I've done my job.
MR. PAVEL: Thank you. But I think the key -- your key principle, I think, is an important one. You know, how you define it, determines who if anyone will be in-charge of regulation either nationally, internationally or globally.
MR. BRUMMER: That's right.
MR. PAVEL: So I would say, want to give the other panelists a chance to respond to each other's point somewhere writing vigorous things down before I open it up to questions from the audience. So can you start?
MR. MARKS: As someone who employs a lawyer I want to hire you. As someone who lives in the 21st Century I want to look at you straight in the eye and I know you don't believe this in total because we've talked. That was the greatest set of late 20th Century jargon from a government that I've heard. And it's not wrong, within the confines of that system, but it is a nation state based system and it is asking nation state based rules and I think a little bit of what Jay is referencing and then obviously our young friend here is referencing, is that there are people now who wish to work outside of that and the question is in terms of international law, whether or not in fact we have those kinds of controls over these people. I mean again, what you said is perfectly sensible and (inaudible 00:55:35) knows running down that list. I can hear exactly what you're saying but those are nice dollar based Bretton Woods systems kinds of rules and the thing I would say to you is do we need to think more carefully about how those rules are designed. I think you've talked about that. Perhaps approaching this a little differently now.
MR. BRUMMER: So let me, I was describing what the regulatory response is current --
MR. MARKS: Oh, yeah, no, no, that's all right.
MR. BRUMMER: Currently, under as it's being developed but let me me actually confirm your point to show just how difficult it is to think and I was simply trying to explain to people what the process is unfolding, but to your point, do you then look at a Bitcoin as an asset, as a property, right. Sounds interesting enough. Well, then that means you would have to figure out a way to tax any appreciation of a Bitcoin at any given point in time where there is a very wide fluctuation, right. So, when, for example, the I.R.S. makes its release of saying could we need to go in tax Bitcoin everyone saying well in a system where there is a large degree of pseudonymity not to mention there are wide fluctuations when a daily basis as to the value of the Bitcoin not to mention you'll be able to write it off or you can't write off any losses but you'd be only tax with gains but doesn't seem like the a very viable approach to always --
MR. MARKS: There are looking at it like you would look at a commodity like weeds or soyabean or something like that.
MR. BRUMMER: Precisely --
MR. MARKS: Right.
MR. BRUMMER: Precisely and so there's this question as to how viable or how exactly would the IRIS do this.
MR. MARKS: Okay.
MR. BRUMMER: When you talk about the international aspects, for example, you know, Germany, will I believe and I'm talking later today with the head of the German (inaudible 00:57:24) but, you know, I called this stuff -- you know, a digital commodity, whatever that is. On the other hand, some countries have decided to call it a currency which obviously gets your banking regulators involved. The SEC is worried about fraud to the extent to which every nation state and is again to your point, you know, tries to come up with an approach, that is where the market and technology has outpaced the regulatory infrastructure, you're not going to always end up with the optimal results. And one of the challenges and what I argue in my book about mini-lateralism is this need to sort of update both how financial markets participants and authorities talk to one another even across national boundaries. I will say one last thing though, depending on the size of the Bitcoin market, right, that's where you have certain kinds of issues. As I always tell my students always remember this. You too, young man. I love the fact I can say young man, it's been a while, answer me, you know.
MR. HOUK: I'll write -- I'll write it down.
MR. BRUMMER: Yes, yes. Cheese.
MR. HOUK: How do you spell that?
MR. BRUMMER: Young people, Twitter. Cheese attracts rats, okay, cheese attracts rats. Now, the question is once you start to create value, once you start to create value how you will get lots of shenanigans and we've seen lots shenanigans I could go on with all the examples everyone's already known, right, you know, Silk Road I go down to the Ponzi schemes I'd say. That now that doesn't mean that anything is inherently good or bad but it does mean that where you have certain kinds of opportunities, you know, folks get involved and maybe not always the best of all people with the best of all motives. And sometimes our regulatory mechanisms aren't nearly enough so the question is how do you leverage the power of the crowd because we're dealing with crowd sourced information, right and how do you model the market and get the market involved in a way, you know, and I am -- you know, I've work and do some things with the self-regulatory agency of it, right. You know, how do you get market participants involved in a way to speak to 21st Century problems where the problem outpaces, you know, the human capacity, intellectual capacity and regulatory capacity of these national sovereign states. And that is precisely why we're all gathered here today. And yeah, to your point.
MR. HEALEY: And to make it, and to bring it even in more practical perhaps our -- will governments allow a system that allows money to be moved around that there's no "know your customer requirements" I mean you've got an address, you've got a mobile phone, you can essentially sign up. Governments especially since 9/11 have been particularly strong in saying you've got to know who's working with you, you've got to know who's signing up for bank account. That allows the money to move across borders with absolutely no visibility by the government and what that's going to happen.
One of the reasons I suspect why Russia and China are particularly not liking this, not just because it can be used for illicit purposes because it completely evades capital controls. And if I were Russia or China, I would be paranoid about this because of capital flight. People want to get their monies out of those countries and to get into safer currencies and those governments have controls on what monies can be allowed to leave the borders. There are no such controls on this. So do you imagine there are a lot of government interests involved in trying to stop something like Bitcoin right now.
Now can Bitcoin really be able, if it really starts becoming important stand up not just against the U.S. government and the I.R.S. trying to figure this out but very dedicated bureaucrats that want to stamp out anything that they can't, that they can't control.
MR. BRUMMER: And were they want to control the transmission of monetary policy? You know as you said that's --
MR. HEALEY: So it's got it, there's a lot stacked up against it.
MR. PAVEL: But not all necessarily, not all of that control is necessarily good and the way I would put it reflective of the values that the Atlanta Council stands to promote. I'm giving Kevin a little protection here in defense but he can do it himself, so Kevin.
MR. HOUK: So a couple of points that were touched on that I want to give my point 0000187 Bitcoins on 0.2 cents. As was mentioned --
MR. HEALEY: It was a lot better than Bitcoin fuse in batteries, I mean.
MR. HOUK; Bitcoin does have an identity crisis, nobody knows is it a currency, is it a stock, I don't know a lot of other terms that he was talking about. I haven't taken economics yet but it -- nobody knows what to classify it and the easy thing to do is to say to fight tooth and nail, is it a currency, is it a stock? Well, in reality, it's kind of both as Ron and I were talking about earlier, some people are just want to treat it like a currency and some people view it as a stock. So it is the best of both worlds where, you know, if somebody just wants to have a little bit of Bitcoin and make transactions they shouldn't be penalized as if they were bartering stocks.
And another name that was thrown out there is Mt. Gox. Mt. Gox was the online exchange for Bitcoins, they were the people to go to if you wanted to exchange Bitcoins to dollars, to Yen, to Pesos, whatever. And the funny thing is Mt. Gox -- and how many people know where it originated is, Mt. Gox, stands for Magic to Gathering Online exchange. It was basically in a platform for a trading card game and when it first came out in 2011, it sent your password plain text over to, you could see your password on the url, any script kiddie and his mother could find your password and so.
MR. HEALEY; Not my mom. I love your mom.
MR. HOUK: And so basically this was built on a platform that was expecting -- you know Bitcoin was worth, you couldn't give away Bitcoin if you wanted to. It was worth less than a penny a coin. So they built it on a platform that was doomed to fail. And then as Bitcoin started gaining more and more popularity they just kind of add, added more servers tacked up duct tape code. And so it reached to a point where there were so many holes and gaps but they were just too big to stop everything and rework the entire system so they just let it roll. And, of course, eventually, they were hacked into and the Bitcoins were transferred out or so they say a lot of people are like they just high tailed and ran. So that was something that was favoring early investors and the day that that Mt. Gox went down I got so many text saying, oh so the head of Bitcoin failed. I was like no, it's just an exchange, Bitcoin is fine. And so this system really does favor early investors like -- you know, if you were to invest in Apple or Microsoft early on, you would get rewarded for that.
And another thing I wanted to talk about was it would be nice if the I.R.S. were to talk to a Bitcoin expert on where to -- you know, what points they should keep in the regulatory matter but now that they have something on paper, something sort of grasping it, I really do believe that the Bitcoin community will be able to work with them in educating them on -- you know, what they should do, what will work because of something that Bitcoin people believe is stupid or, you know, just outlandish, they don't -- they're not going to follow it. They just won't pay taxes on it which is a lose lose because one's being illegal and one's not getting taxes. So they need to work together in order to come up with a policy that works for everybody and it would be, you know, worst case scenario, the wonderful thing about Bitcoin is that governments don't need to approve it. Bitcoin can function completely normally without government intervention so government can ban. China has been in the news lately because they banned going from Yen, is it Yen?
MR. MARK: Yeah.
MR. HOUK: Their currency to Bitcoin and Bitcoin to their currency, but the transacting only in the Bitcoin world, that's completely fine. And even if they were to say don't even touch Bitcoin at all, people would still be able to do it. So I think it's just a moot point for a government to ban anything with Bitcoin, because that's not where the direction is moving, the directions moving back towards the power to the people and the governments kind of -- are having a hard time with this but it's going to happen anyway so you might as well just not fight it.
MR. PAVEL; You tell that to the I.R.S. So now we're going to open it up for questions. We have a number, the gentleman here in the middle with his hand up and will grab everyone while we're over here.
MR. APPLE: My name is Martin Apple and I'm sorry I can't be (inaudible 01:06:54) but I'll do what I can. I want to look at this as a different phenomenon. To me this is an experiment in the alternatives to currencies as we've known them. And whether it fails or not is irrelevant. It is going to be probably succeeded by yet another experiment. And until people get to the notion that everything that we have always embodied as something physical in the digital world doesn't have to be. Secondly, everything that is in the digital world is so universally distributable, that it's out of federal controls of any particular country and that always will be kind -- some kind of a threat. So the question is how do we want to learn to live with this new evolution because I think trying to stamp it out will not be the successful story, I think it will continue to evolve and create until the successful -- a successor does occur.
MR. PAVEL: Whoever on the panel wants to --
MR. HOUK: So you made an excellent point that I wanted to bring up is, when the internet was first coming about and surfacing, you know, a congress had no idea what to do with it. There was a lot of discussion on just completely stamping it out making sure that -- didn't, you know, cause any harm or do drug related activity and then today you can do anything on the internet, you can get anything, you can get drugs, hitmen, whatever.
MALE: What have you been doing on the internet? I'm sorry, I disagreed with you to your points earlier. But everything you said is right. (inaudible 01:08:31) except Bitcoin.
MR. HOUK: Don't mess with me. But basically when the internet first came out it was text based, it was completely unappealing to the average person who just wanted it for email or just to look at funny pictures of cats. You couldn't do it without knowing you know whatever coding language it used at the time. And then, you know, innovators like Google came up, Apple, just basically was able to have it away so if people wanted to get really technical they could and if people just wanted it for, you know, email, that's fine too. So I think Bitcoin is similar in the way that right now it is a good point that, you know, it's not natural to people to have something need to be so secure because if you have a $100,000 in Bitcoin and then just one day you leave your computer on or you go to the wrong website and you download the wrong thing, it's gone. So that's something that in the next coming years I'm sure that developers will able to help people make it easier for them to make this a viable method of exchange.
MR. MARKS: Yeah, I think one of the real problems here is that is, this is a 20th Century town with 20th Century ideas and 20th Century institution. And I keep saying that not dismissively but that's what we grew up in. And this is a 21st Century so this is about the cutting edge of technology, but it's also about jumping generations here to. I'm less concerned about, well, not less concerned but it interests me that many third world countries or other underdeveloped countries at this point have basically dismissed say hardware telephone systems, and it's gone right to sell. I mean, I could see in unstable countries in Africa and stable currencies in Africa we take a look at this kind of thing so are you kidding me this is great. So well, it's interesting that we are of course the status quo and we're status quo power and we're protecting ourselves here that in fact this things are going to go on, you know, I quite agree with you. I think this is going to go on quite you know quite well in terms of the 21st Century whether it's this or something else and the challenge of course is going to be for these guys down here which is how do you regulate this in a nation state and I don't know how you do that frankly.
MR. BRUMMER: And I think, you know, one of the first things to do is don't regulate something that you don't understand or at least be very careful at least when you regulate something that you don't understand because you do want to make sure that you have the opportunity for technological innovation to develop. I did want to make a couple of basic points though. You know, it's not just that the Chinese just wanted to -- there are some really basic power politics obviously interest about controlling their national monetary supply and the like. But there were also questions about should a bank be able to lend money to a broker dealing in Bitcoin right. You know, and obviously in the post 2008 financial crisis world that becomes not a 21st Century problem this becomes a problem of the last couple years, right. You know, what should be the relationship of this new payment system, what should be the relationship between the 21st Century payment system with the 20th Century payment system, right. That is a real question like that is something that you cannot just overlook and so you know and then how does the 21st Century, actually in all these things. How does the 21st Century exchange deal with a 20th Century exchange, right.
I mean, we're using words like a Ponzi scheme very, very and I -- you know loosely but how a -- you know, that is an old school problem that works itself out in very interesting ways when you have a potential Bitcoin exchange. The only reason why I'm saying this is because it's, you know, Bitcoin offer some amazingly interesting opportunities, right. On the one hand, one of the drivers behind Bitcoin was in an age of what appeared to be, you know, western profligacy, you had this opportunity for individuals to create value amongst themselves or you're not entirely dependent on a sensibly purely politically driven government decisions right. And so, you know, you get this opportunity for people to create their own hedge, to protect themselves. It creates a sensibly or in some ways when done right. By cutting out certain kinds of middlemen and by employing miners it at least offers the potential prospect of being able to make payment transactions in a way that is more efficient and less costly to people in the marketplace, right.
So I mean it's not like it's just all coming out of nowhere but at the same time wherever you have the internet and you have the opportunity for human trafficking or hitmen, please don't hurt me. You know, obviously you know both of those problems are age old problems that get a new life, if one will, when you have this 21st Century technology. And so even at the nation state level there are questions and particularly when the nation state looks at its domestic infrastructure they were going to ask themselves, how can we regulate in our times the question is you know they'll never be able to be entirely successful. But we just want to make sure that, you know that regulators and market participants are as prudent as possible and they keep a certain dialogue open because they're not going to be able to cure all of the downside with just one for sure.
MR. PAVEL: Thanks. I want to click a couple questions, with that gentleman and then we'll get one more before we answer.
MR. WOLOFSKY: Okay. I share some of your skepticism --
MR. PAVEL: Can you just identify yourself, please?
MR. WOLOFSKY: I'm sorry?
MR. PAVEL: Can you say your name and where you're from?
MR. WOLOFSKY: Oh, Charles Wolofsky. I'm from New York.
MR. PAVEL: Can you put your microphone towards the mouth, please, can you --
MR. WOLOFSKY: I'm recent graduate from -- I'm sorry?
MR. PAVEL: Like can you speak into this mic?
MR. WOLOFSKY: Oh, sure. Yes, I'm a recent graduate from Fordham Law and I'm actually writing an article right now on Bitcoin and I would like to create either a niche market in law and this and potentially a business in Bitcoin. My share, your skepticism regarding a regulation, any new regulation, you're always wondering about the policy behind it. I'm directing my question though to Dr. Brummer. Brummer, right?
MR. BRUMMER: Sure.
MR. WOLOFSKY: You expressed the problem of basically regulators trying to basically fit a square peg into a round hole. And that's, it's not a unique issues surrounding Bitcoin, it's generally anytime that something new there's, you're trying and dealing with the traditional system. I'm wondering whether perhaps the best way for regulators who are facing serious issues, real issues and where you need regulation and good regulation is whether they should look at Bitcoin and define it by its function instead of trying to look at is this a commodity, well, doesn't fit into the traditional norms of what a commodity is. And when it looks like a currency regulate as a currency and obviously not just a regulation for regulation's sake but for serious real issues.
MR. BRUMMER: Great. And I was actually at your alma mater two weeks and then we can talk, but I think what -- I think that's -- it's a great point. In the 21st Century you have to have a much more objectives based process, where you want to ask yourself, what am I trying to do before I get involved, but understanding what you want to do again, you have to answer basic questions of what it is, what is the nature of the problem that I'm trying to deal with. And in a new technology and -- you know, this is not -- Bitcoin is a great interesting question but there are other important ways in which technology is impacting finance, right. I mean you can look at everything from high speed through to frequency training to crowd funding to all kinds of related issue areas, right. Where you get crowd source information and new technology and new platforms that are impacting the way in which people do business and each of those different domains you have to take a step back, you know, in Bitcoin, I think it's particularly difficult because of the math. Because of the fact that you are dealing with pure data and, you know, it stretches the human capacity and intellectual capacity of lots of the folks over at the agencies including myself. And started to which you know when I'm trying to figure out well what I do and people are always, you know, will call me as well say so Brummer, what would you do, what would you do and the like. Well, you know, well, I can't tell you exactly what -- how I would come out, I can only give you some basic idea of the process that I would undertake to begin to figure out what I would do. And I think that that's the best and the wisest course for most of our regulatory agencies because we're -- everyone is trying to figure out and pretty good when the market participants themselves, you know, I mean granted you know the rest of the world is a little dumber but nonetheless, I think even for the market participants themselves that there is a challenge for them to fully articulate what it is that they are doing and in that kind of world you have to move to create a smarter dialogue and a smarter process and I have the ideas of how you would get that up in running but I can't tell you precisely about it.
MR. PAVEL: Great. We're going to take quicker questions because we're -- our time is running out, if you can keep your questions short.
MR. ALBERT: Thank you. My name is Sean Albert, I'm the treasurer of the Inter-American Develop Bank in Washington and I suddenly very much involved in transactions on the daily basis. And going back to the questions about our KYC rules and so on, wouldn't it be in the Bitcoin, say communities own interest, if you mainstream Bitcoin. Wouldn't you be just yourself waiting for government to try and figure out what it is and regulate? Would it be better if you said please help us move Bitcoin into the mainstream because then you could become a dominant exchange of value. Thank you.
MR. PAVEL: Interesting.
MALE: (Inaudible 01:18:49) United States Army National (inaudible 01:18:50) University. My question along your lines is that it's inherently beneficial for the government to get tax revenue and not make its citizens a criminal when win situation so how does the government help proof, help provide better security and have access to that big paper trail that ledger that you call it, so that way the I.R.S. can track and then maybe when you file your taxes you have to give your public account domain user names, that way they can help check for tax purposes. And then for you sir, Doctor, can you explain the money service manager versus user versus exchanger and how that will affect your tax filing purposes and how do you maintain being a user and not become a money exchange manager?
MR. PAVEL: Let me take those two questions for Kevin and Chris and then we'll take a couple more.
MR. HOUK: So your question is basically how would a government be able to track your funds and then therefore tax them?
MALE: Well, how do you further help the security, so that way you don't people are like there are set files, or how do (inaudible 01:19:52) with U.S. say yes we're going to encourage you to do this, because we're in the backstream parts of security in that way can you file, say, can you file with your user name with us, we will help you track down some of the company (inaudible 01:20:02).
MR. PAVEL: I think it's similar to the first question which is, is it a useful approach for the Bitcoin community to help figure out a regulatory approach that works for all parties.
MR. HOUK: No, I do completely agree that there is a need for the, you know, bridging of the two worlds. As for how they would do this. They could theoretically give the government your public key address and then therefore because, you know, Bitcoin is based on a public ledger called the block chain they could see exactly who you're paying it to, well not like who, but they can see the addresses that it's going to and then where you're getting the money from. So it could adapt maybe to like if you're using it as a currency maybe from -- because I know TigerDirect in overstock. com they're accepting Bitcoin as payment so maybe if you're doing a transaction like that maybe the tax purposes will be a little different than if you're using an address for something a little bit more substantial more, you know, like a car or a boat or something that would be in need a little different tax implications.
MALE: Yeah. (Inaudible 01:21:18).
MR. PAVEL: Hold on a second. And Chris --
MR. BRUMMER: No, this is just to say, you know, the money service issue has to do with whether or not you look at as a payment system and then I.R.S. is asking more much more basic questions as to what you know is it a property or asset that needs to be taxed. I just want to jump up on once, you know, the I.R.S. has actually said that even using the public key and I don't -- you know, that they can in certain instances backtrack and look at the patterns right of certain kinds of payments even using the pseudo name to be able to identify the real person, the wizard behind the curtain for each transaction but the computational power and the time required for each of the stuff is so extensive that it would be very hard under currents and in today's world for them to be able to regulate every single Bitcoin transaction instead, however, like the I.R.S. sort of proclamation and the idea of looking as a money services industry the idea is how can we better make sure that this that this, that Bitcoins are being used for illicit purposes in particular money laundering, terrorism, financing, drugs and the like narco-trafficking.
MR. MARKS: Which puts you in a position, by the way, of having to think about which part of the government has that capability and I'll give you three letters that do. After all it's set and done, there's only one that has that kind of computer capability and do you want them there.
MR. HEALEY: And I think it's going to -- I think it's been a very difficult place to get the Bitcoin community to stand up to that there. You can get there a couple of ways, either they're threatened by extinction by regulation, you know what I mean, and governments just cracked down so hard that it's an item of last resort. So many folks in that community see anonymity has one of the reasons for the system and if you don't have anonymity in the system, what's the point, why don't you just use dollars?
So I think there would have to be some value, I mean, if you come forward, if you say, if it's K.Y.C then it's easier for an exchange, the exchange will be recognized by the authorities, it's easier you've got more safety and security if you come out publicly to be associated with your private key and associated with an exchange and there are real benefits that come from that. You could imagine other ways that we have done this that you come out but there is no -- it's not like sort of bankers, I'm sorry. I mean, it's not we can go to U.B.S. and say tell us everyone who everyone is because there's no real there or there. As you do in going after other corporates, I mean, other sovereigns that have corporate banking secrecy laws.
MR. PAVEL: Unfortunately we're out of time for questions but any last comments from any of our panelists before we formally end this event.
MR. MARKS: Thanks again. I must tell you this as a member of the intelligence community. I think I would have an enormous problem dealing with this and I think from both from the counterterrorism standpoint we're talking before but also from the standpoint of what this does to nations currencies, especially if you're dealing in countries where you do have unstable currencies. Are you going to get a class of people that are using this in the elites for instance and how is that going to affect their behavior toward the government.
MR. HOUK: So two things one after this if you want to see my mining rig I work so hard on it and I'm happy to show you. And the second is, you know, we're talking about Bitcoin here, but like I said before the greatest gift Bitcoin has given us is that block chain, is the way that we can do something like this without needing a central authority. So is this -- in the next five years, is it going to be Bitcoin maybe, who knows, but I do know that there's more and more people getting interested. More and more ingenious developers even smarter than me, who will create something that will just be able to make cryptocurrencies something that everybody would want and everybody could use.
MR. HEALEY: Yeah, I remain skeptical in the broader term, I mean look at the -- what we've been going through this last week with Heartbleed. S.S.L. it's one, you know, it's open source, we've had people that have been looking at the standard for years and years and years. The internet is fundamentally insecure at almost every level even those places that have had a lot of scrutiny so if cryptocurrencies are going across they've got a lot stacked against them, dollars at the end of the day you can have counterfeiting that happens, you can have inflation, it tends being an issue that we can get past because it's fiat currency backed by the full faith of the United States government, or whatever or whatever government. When you have these security problems in one of these cryptocurrencies it's more difficult to get passed if 51% of miners agree on something you can make changes to the standards in ways that allows power in areas you just don't really have in fiat currencies or only result, only left with the sovereigns. So I think there's a lot of things that we're going to have to get through, there's been a lot of things that sound like a good idea in the internet and then don't work out. We don't know what are our groceries that much just because something makes sense just because it's technically possible doesn't mean it's going to happen or else we would all get in here on jet packs.
MR. BRUMMER: And I guess I will actually, speaking to jet packs, I need to say something. I think that the core question of what happens when you digitalized information and what are the new kinds of opportunities it allows market participants of all shapes and sizes to connect with one another and to transact with one another across borders that's here to stay and if not in the Bitcoin iteration then in a subsequent iteration and you know one of the challenges will be exactly how do you engage this phenomenon that's fundamentally reshaping our society.
MR. PAVEL: Well, unfortunately, we're out of time. I could go on another two hours. I've really been educated and also entertained here, but please join me in thanking our fantastic panelists.