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Interviews, Virtual Currencies

“Bitcoiners Are Repeating Forgotten History, and Are Accordingly Doomed”

[Reading Time: 8 minutes]

Interview with Aaron Greenspan, Harvard graduate, original creator of “The Facebook,” payments innovator, and autodidact non-lawyer.  (PART TWO)

Aaron was generous both in his time and in his responses, which led me to split the interview into three parts.  In PART ONE: REGULATION AND INNOVATION IN THE UNITED STATES, Aaron talks about United States money transmission laws and identifies, with uncommon clarity and depth, what he believes to be wrong with them.

Read on for Aaron’s point of view on Bitcoin, preceded by the intro to the first post for the benefit of those who haven’t read it, yet.

Having been a teen tech entrepreneur, during college at Harvard in 2003 Aaron created the predecessor to Facebook, Inc., which also happened to be called “The Facebook.”  In 2009, he entered into a settlement agreement with Facebook, Inc. as well as his classmate Mark Zuckerberg, and then had the opportunity to figure out what he wanted to do next, so he followed a long-standing interest in payment systems and decided to try and tackle mobile payments.  From 2008 through early 2011, he invested essentially every piece of time, energy and capital at his disposal into making his payments initiative, called FaceCash, widely regarded as a success—until he was told that he would be thrown in federal prison by a state bureaucrat.

As you will soon see, to say that Aaron does not mince his words is the understatement of the century, so I am aware of the risks I am taking by presenting his strong point of view here. However, even though I do not necessarily subscribe to Aaron’s views and approaches, I decided to take the plunge and honor the spirit of this blog. I believe the current BitLicense proposal debate, and the nascent crypto-currency industry will be greatly enriched with his life experience and rigorous–and ruthless–analysis of the United States regulatory landscape.

Here goes PART TWO, and please don’t shoot the messenger (me)!

PART  TWO: BITCOIN, COMMUNISM AND THE SURVEILLANCE STATE

“Bitcoin shares its egalitarian appeal with Communism, and like it, could fail colossally for reasons not readily apparent on the original blueprints.”

Juan: You’ve called yourself a Bitcoin “skeptic.”  Why?  Have your thoughts about it changed?

Aaron: My thoughts haven’t really changed since I wrote about it in December, 2013. I called it Fool’s Gold then.  I don’t think I’ve been proven wrong really, though I’ll admit that the valuation has stayed fairly high.  It’s certainly not catching on in the mainstream, though, and most of the media attention has come from establishments that have ties to the venture capitalists most heavily invested in Bitcoin startups, which makes me quite skeptical.  For example, Businessweek is owned by Bloomberg LP, which is an investor in Andreessen Horowitz, which funds Coinbase, Ripple, and Dwolla (which has since departed the Bitcoin sphere due to regulatory scrutiny), among others.  Some of their reporting has been good, but I think it would be a stretch to call it objective. Bitcoin is also an enormous consumer of electricity. Whether that means it’s a “waste” or not will depend on whether it ever really catches on, I suppose. I would personally put the electricity use in the massive waste column. 

“Bitcoin is over-hyped and fundamentally unwieldy.”

Juan: How about Bitcoin with a capital B, i.e., the technology, the underlying software protocol?

Aaron: I think it’s overhyped and fundamentally unwieldy.  Everyone ignores the 51% problem.  It’s a huge problem.  I guarantee that the Chinese and/or Russian governments don’t ignore that problem.   I think they find it quite interesting. I also think that once you get past the interesting conceptual part of Bitcoin, the protocol fails to achieve its goals in a practical sense.

Communism in the early twentieth century had a similar appeal: it was a new, untested, and relatively innovative way to organize a society. It promised equality and progress, free of capitalism’s many drawbacks. It was also a colossal failure for reasons that weren’t readily apparent from merely reading the original blueprints.  Bitcoin shares that egalitarian appeal with communism, and its advocates are also often skeptics of traditional capitalism.  It is worth noting that I, too, am disillusioned with capitalism in a variety of ways, even as the CEO of a corporation, and so one might expect me to be an advocate of Bitcoin.  Yet I see drawbacks in Bitcoin similar to those that many Americans started to notice in Soviet-style communism early on.

For example, everyone in Soviet Russia was a “comrade,” just as everyone using Bitcoin is merely identifiable as a hashed address.  Everyone in Soviet Russia could supposedly operate freely according to their needs, and free of the greed of their capitalist oppressors, while everyone using Bitcoin can send and receive payments or data according to their needs, free of the greed of their capitalist oppressors (e.g. banks adding substantial transaction costs).  Everyone in Soviet Russia could supposedly benefit from the transparency that so naturally comes with equality, while everyone using Bitcoin can view and parse the entire blockchain if they so desire, unlike traditional closed ledgers.

“I guarantee that the Chinese and/or Russian governments don’t ignore Bitcoin’s 51% problem.  I think they find it quite interesting.”

Yet what happened in each case?  Some comrades became more important than others. Some became vastly more important—Politburo members, for example—and wealthier, and more powerful.  The Soviet anti-capitalist government apparatus began to take on an even more sinister role in daily life than many capitalist governments did.  The KGB twisted “transparency” into an unthinkably large spying organization that in some way or another actually employed the majority of Soviet citizens at one time or another.

In the Bitcoin world, we already see some players becoming more important than others.  While the point of the currency is nominally to disintermediate financial institutions, companies like Coinbase and Circle assert their crucial nature as hubs of commerce, also known as financial institutions.  They charge fees accordingly, suggesting that Bitcoin cannot really function as purely as its advocates suggest—just as happened in the Soviet Union.  Bitcoin’s sinister side was highlighted early on with the Silk Road arrests, not to mention Mt. Gox’s failure, Coinlab’s (largely ignored) fraudulent bankruptcy filing, and Charlie Shrem’s drug-related scandal.  Certain early and/or core programmers clearly have disproportionately enormous financial and persuasive influence.  And the blockchain can quite conceivably be used to spy on the financial lives of others with a little bit of detective work, as many academic papers have pointed out, making it useless for most people.

It took the USSR almost a century to fail. Given that Bitcoin moves at a considerably faster pace, I’d expect it to fizzle and die from similar causes within a decade. Meanwhile, Bitcoin advocates would do well to read George Orwell’s Animal Farm.

Our payment network is far from perfect, which is why I’m in the space at all. Bitcoin solves almost none of the problems with it, though, and as they say, those who forget the past are doomed to repeat it.

“I’d expect Bitcoin to fizzle and die from causes similar to those of communism’s demise within a decade.

Juan: If Bitcoin is doomed to fail, what could be a better alternative to what exists today?  What problems do you see in payments, money and finance that need addressing?

Aaron: If you mean a better alternative to Bitcoin, that depends on what you think the point of Bitcoin is.  I personally think that most Bitcoin users believe the point is avoidance of government oversight, for reasons both legitimate and not.  Along those lines, I don’t think there’s an actual need for Bitcoin in the United States—even if you’re not a fan of the modern-day NSA, using Bitcoin won’t help you—though in countries with truly oppressive governments (North Korea, Iran, certain Arab states, etc.) there will always be a need for economic systems that are free of government control.  Typically that means barter, though, or the use of some kind of scrip, and I don’t really see a problem with that.  Digital, anonymized barter is overkill and frankly pointless in a world where the dollar is strong.  My personal view, perhaps informed by my political beliefs, is that the goal of government critics shouldn’t be long-term government avoidance in financial systems, it should be the building of government and financial systems that actually work and respect civil liberties.  Some small, cynical fraction of the population will always insist that such systems are impossible, definitionally or for other reasons.  I disagree.  It is quite possible with appropriate legislation and regulation.

If you mean an alternative to standard currencies and payment systems that exist today, I think there’s a great need for a better payment infrastructure.  I’m working on that myself, so you’ll see the answer to this part of the question in my work, I hope.  FaceCash is part of that.  Still, if someone wants to build a superior kind of virtual currency just for kicks, I’d be all in favor of one that treats the concept of energy conservation as a scarce resource.  The more energy you don’t use according to your utility bill, the more currency you get.

“The goal of government critics shouldn’t be long-term government avoidance in financial systems, it should be the building of government and financial systems that actually work and respect civil liberties.”

Juan: Now that Bitcoin allows for a payment instruction to travel independently of our identity, how will identity systems need to evolve in order to meet regulatory expectations, either for AML or consumer protection?

Aaron: I think it’s almost a misnomer to speak of “identity systems” as if they’re a real thing—our digital identities are essentially coincidentally-placed pieces of information distributed across hundreds of different databases (and occasionally text files) in inconsistent formats.  I’d personally like to see some standardization at the DMV level in the different states at the very least, not to mention Secretaries of State who manage corporate records.  But that’s all independent of Bitcoin and I’m not sure they’ll actually affect each other that much.  It’s easier to just encourage people to use mainstream payment systems, since that’s what people want to do anyway.

Stand by for PART THREE: A YOUNG FINTECH ENTERPRENEUR’S DAY OF RECKONING, probably the most controversial of all, coming up next week.

 

Aaron can be reached at aarong@thinkcomputer.com.

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About Juan Llanos

Innovative compliance, operations and technology executive leveraging emerging technologies, management and leadership best practices (and, above all, common sense!) to empower businesses and compliance professionals for success.

Discussion

2 thoughts on ““Bitcoiners Are Repeating Forgotten History, and Are Accordingly Doomed”

  1. Decentralized systems may the future for everything. The potential implications of the development of distributed consensus technologies is revolutionary.

    Bitcoin is an open source peer to peer decentralized digital currency. There is no possible fraud, since is cryptographically secured by a distributed global mathematical algorithm and public decentralized open source ledger, a revolutionary disruptive technology called ‘Blockchain’.

    This could be the future of money for everything, from donations, micropayments, money transfers, online shopping and bill payments, etc.

    Empowering and welcoming to the game to billions of unbanked people. And the blockchain peer-to-peer open source decentralized secure technology will be used for many more applications, like escrow, contracts, voting, global ledger, etc.

    Please don’t be like the ones that were dismissing the internet not long ago as a “den of pedophiles, drug dealers and terrorists”. The blockchain is the biggest thing since the internet and will benefit also the billions of under and un-banked people.

    Transfer money anywhere, safely, no fees, no middlemen, no charge-backs for merchants and no fraud.
    These are just physical businesses accepting bitcoin, with tens of thousands more online:

    http://cointerest.org/map

    http://coinmap.org/

    If you want to learn more:

    http://www.reddit.com/r/Bitcoin/

    https://www.weusecoins.com/en/

    https://bitcoin.org/en/

    http://www.thebitcoinpage.com/

    “Not having an internet strategy in 1995 is the equivalent of not having a bitcoin strategy now.”
    -Moe Levin

    Note: Bitcoin yearly gains so far since creation:

    2009 +4,867%

    2010 +387%

    2011 +1,320%

    2012 +170%

    2013 +5,317%

    2014 +????%

    Posted by Diana Miller | 2014/09/25, 7:52 pm
  2. Aaron raises a series of points. Bitcoin is over hyped, Bitcoin has goals that are confused, and Bitcoin’s vaulted equality is really a form of financial communism, where some are more equal than others. Bitcoin “suffers” a 51 percent flaw, and is nothing technically special. Oh, and (like Paul Krugman) Bitcoin uses too much electricity.

    Bitcoin may or may not be over hyped. There are believers, and there are big detractors. Pointing out one or two believers doesn’t wash away all the many detractors in the media.

    Bitcoin is an open source program that keeps score between “players” world wide. That is the goal, and it is working. Nobody gets Bitcoin for free… You have to buy it, or mine it, or find someone willing to sacrifice to give it to you. Its design is clear, and working.

    Is Bitcoin the modern day communism? No. Do early investors have more than the rest? Well, yeah. Do companies that provide services for Bitcoin users charge for those services? Well yeah. But all of that is expected and as designed. There is no “Masters” in the system that get to scrape off rewards for simply being on the top calling the shots. Only those working (i.e. providing servcies) get to charge a fee. And if I don’t want to use Coinbase or Circle? Well, I can still accept and send Bitcoin quite fine without them, thank you.

    Lastly the “electricity” argument. Power use of computers is falling via Moore’s Law even still. While power is an issue, have you ever seen a armored truck drive up to an ATM to stock it with paper? Do you think that monster is some kind of green solution for paper distribution? Hogwash. The power costs of driving the current financial and banking system (at 8 percent of GDP) is MASSIVE. Bitcoin has no hope of burning that much fuel, not even in its most successful dreams.

    Posted by paulsnx2 | 2014/09/26, 6:20 am

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