You might know Trace from his work on Run To Gold. Or, you might know Trace from his work with How To Vanish. More recently, he has made waves by investing pre-Peter Thiel in BitPay, and now in Armory. We sit down now with Trace and discuss his recent investments, the Bitcoin ecosystem, MintChip and the general information age specifics with which bitcoiners concern themselves.
[heading]Bitcoin Big Boy Pants[/heading]
J: Thanks for joining us, Trace.
T: Thanks Justin, glad to be here.
T: Well, I’ve been following Armory since it started. ive been around Bitcoin a long time and so i understand what the Bitcoin ecosystem needs, i understand how all the pieces play together, at least as well as anyone else i suppose. As you’ve said I’ve led some of the larger names in finance. For instance, I participated in the seed round of BitPay before Peter Thiel. Everyone knows Peter Thiel from Paypal.
The reason I am so interested in Armory is because Alan is really the best at what he does and what he does is extremely complex and extremely specialized. Bitcoin is very complicated from a mathematical point of view and then Bitcoin programming particulary – I don’t know if you or the listeners here have much experience programming- but programming can be a very tedious and specialized thing.
And particularly Bitcoin programming is just this very tiny niche there aren’t a lot of people with much expertise in it. And those who have attempted it dont have much expertise necessarily in cryptography.
Alan has a masters in cryptography, he has advanced degrees in cryptographies and mathematics and statitistics and he has built Armory, which is far and away the best Bitcoin wallet in the space, it’s best of breed, there is no doubt about that, and in Bitcoin Land, if you’re going to invest in critical pieces of the infrastructure, then I’d want to invest in the best at what they do, and Alan is among the best at what he does.
In fact, I’d say there are few people outside of three letter agencies who can do what he can do in terms of shamir secret sharing (in which a secret is divided into parts), in terms of getting down into the encoding for keeping the wallet safe and secure when it comes to entropy or keyspace. Overall being able to see how all the pieces fit together [he’s great].
He’s been able to reduce into fifty lines of python code what some people have told me is going to take tens of thousands of dollars and several months to get the expertise from big accounting firms to do, and so those are some reasons I have made this investment in Armory.
J: Should a Bitcoin user go straight to Armory?
You can go another step higher: you can use the Bitcoin-QT client or the satoshi client and that client will actually go out and connect to peers and you will be able to broadcast transactions. It is what the bitcoin community has been using.
Finally, if you really wanna put your Bitcoin big boy pants on, there is armory and armory runs on top of QT. You need QT, but then you run Armory on top of it.
Where Armory has pioneered is cold storage or offline transactions, and so you’re able to run an instance of Armory on top of your QT client and you can have different addresses or whatever and you can draft a transaction then you can take that transaction on a USB drive and connect to a computer that is never connected to the internet, it is running only an instance of Armory which has the private keys to the wallets and you can sign the transactions on the USB stick, then you can take it to a internet-connected computer and broadcast a transaction. What this means is your bitcoins can be extremely safe and secure in an offline Armory instance like that. In fact, there’d be pretty much no real ways to compromise it.
You can have full disk encryption on that computer and you can feel secure storing hundreds of thousands or millions of dollars of bitcoins, if you using something like blockchain.info, this isn’t true. I had a friend who lost $180,000 on blockchain. One day they were gone, just poof. He has no idea how they were compromised but they were.
J: Trace, you have made two big public investments into BitPay and Armory. With BitPay it seems perhaps you’re catering to the people just entering into the space, like merhants, who are concered with bitcoins stability or convervatilibty, as BitPay mostly takes care of. And then you’ve invested in Armory, which is geared towards high net worth bitcoin users or at least veteran bitcoin users. Am I misled here?
T: No. BitPay is a company that is growing leaps and bounds, they just went from 1,000 merchants to 10,000 merchants and their merchants are small businesses and big businesses.
Some process hundreds of thousands of dollars per month, some millions a month. So BitPay is going for the more enterprise level or corporate bitcoin user, but Armory is an example of the product chain rule it is extremely complicated.
It is the best. Nothing is close to it in terms of security. It is not the most userfriendly but it’s the best for security. The way I see it is it is a lot easier to simplify or reduce the math problem into something easier than it is to understand or take something that is insecure, made by somebody who doesn’t have the speciality, and try to take it up to the level of a differential equation or an integral or a derivative or a product chain rule or a la plais model or something.
So that is what i am seeing with Armory – a wonderful foundation – and we can make it really simple and easy for people to use or we can also continue innovating and taking it to the next level and go aofter enterprise level solutions should that arise in the bitcoin community.
J: And by looking forward you’re calling on the bitcoin users to learn more about computers themelves. As we are seeing a macbook is much more than a laptop, today laptops are offices and wallets for many.
T: Yes and the Armory, in their press release, mention we didn’t have any revenue streams right off the bat and, of course, that is what I’d tell any of the VCs loolking into funding our competitors.
We have a lot of plans for Armory and people who want to put on their bitcoin bigboy pants, who want to do something in this space or put capital into it, you’re going to have to learn to use Armory.
We have a tremendous headstart. we are going to build Armory out so that it is a useful suite of tools to take control of their financial life and rights. It is realeased under aglp3 open -source. This doesn’t mean that people can use the code without paying a license, especially if they are using it for commercial reasons.
For sure, we are going to be seeing a lot more bitcoin adoption in my opinion and if people want to get serious about Bitcoin they need to learn how to use Armory because we have the funding in place to continue developing it and make sure our users are safe.
J: Should we show family and friends Bitcoin QT first, if we can, or just jump into Armory?
T: I think it’s more of a natural progression. Use Coinbase, use Blockchain.info, then QT then armory where you’re really putting on your big boy pants. It is not necessarily the easiest thing to use, hopefully we will make it easier.
Bitcoin is a whole new technology, people don’t just learn how to use technology the first time they point their mouse at something and click, you really have to take your time.
People have to learn to copy and paste, then edit a spreadsheet. These are skills we take for granted but baby boomers don’t have this intellectual or technical foundation and yet they think I’m gonna put $100,000 into Bitcoin.’
Good luck with that. There is more to bitcoin than just economic capital, there is a lot of human capital and part of that is in the users being able to learn how to use bitcoin.
J: I see you haven’t made investment into exchanges, what is the future of exchanges? A LocalBitcoins model or Coinbase model? Coinbase has really jumped out ahead in that space in the US, I believe.
T: I think Coinbase might be somewhat of an unique example. They have funding, their bank works with them, they have strong VCs going to bat for them behind the scenes. Otherwise I think we might see the exchange model move to something more like the big players settling bitcoins behind the scenes and then not having the retail investor interfacing with the exchange, but instead interfacing with a BitcoinATM or larger players and the other players behind will be settling with an ETF or hedge fund trying to acquire bitcoins for their fund. I think this idea of MtGox having 400,000 retail customers upset because their Gox doesn’t get it out immediately is ridiculous.
The antiquated banking ystem is not inefficient for interfacing with Bitcoin.
Coinbase is doing a good job, but I wonder what their fraud rate is, their fees are, their compliance costs, the bank’s complicance costs; all that raises the costs, whereas the BitcoinATM slices through all that particulary when you look at these ATM operators sticking up an ATM and not caring about an MSB FinCen license or Money Transmitter. What does it matter? It will be months for the legal provess to seize the ATM and an operator can make a profit in that time.
People trade on LocalBitcoins, making a full-time living and they aren’t licensed with an MSB or MT. Good luck going after each of them. It is the war on file sharing like with BitTorrent all over again. FinCEN has what, 300 employees total? And there are 20,000 people on LocalBitcoins. I think we’re gonna see Bitcoin continue to infiltrate as the free market dictates its kinda like an old Chinese proverb: “flow around and not through obstacles,” and all this MSB/MT license and regulation stuff is many obstacles, and if you’re gonna run a business at scale like CoinBase, and be in the US, one should be compliant with relevant rules and regulations.
But Bitcoin is very p2p. There are a lot of meetup groups forming all over, and a lot of transactions are cross border anyway, which can in some ways be settled advantageously in certain contexts, such as in an importer-exporter relationship in China or Argentina. So how people are gonna use Nitcoin as far as a transaction currency and a settlement currency, I think, is gonna be so-varied and so widely different and we’re already starting to see that whether it is in Singapore or China, the Ukraine, Brazil, the EU, the US or Mexico. I am constantly amazed at all the innovative things I see people doing with Bitcoin.
It is really fascinating to watch it. I think we so often see just a small piece of the bitcoin eco-system that we don’t comprehend how it is being used in so many different ways.
For example, the 11 Chinese exchanges had more volume than Gox recently and most people dont know how it Bitcoin is being used among the Chinese populations becase there Chinese news is in Chinese, and its not comprehenable (for us)..because it is in Chinese.
We are seeing Bitcoin being used in so many ways, and the language barrier is an impediment because for example the Spanish people don’t have access to English, but Bitcoin is a protocol.
It is computers talking in computerspeak to each other. The overlying languages are in some ways irrelevant, because the free market, this invisible hand, is leading bitcoin to be adopted no matter what those underlying languages or what those underlying jurisdiction and regulations are.
J: I believe the day after Bitcoin’s bubble bursted from $266 on down, state television ran a special on bitcoin. And so, we get that after the price bubbles and we get record amounts of client downloads in China, which were irrelevant beforehand, to 5 times the amount of US downloads.
So this diversifcation of hands led to a stabilizing effect it seems. Ithink we’ve only started seeing the effects of those downloads in China on the price as we’ve seen Bitcoin test $130 a couple times in the last few weeks.
J: Trace, the bitcoin foundation: What should its mission be?
T: I think it should be about devloping the most robust, censorship resistant protocol as possible. I dont think it should be a lobbying organization for particular jurisdictions. I think it should be doing some education, but that should be a profit center if anything.
I don’t think we need to spin funds to teach people Bitcoin if they don’t wanna hear about it. If regulators want to learn about Bitcoin they should be willing to pay for it so we don’t need to run over and teach them something they don’t want to learn about. The best way to learn if someone wants to learn is if they pay to have you teach them.
J: So, we’ve talked a little bit about regulations. Now if you transact for value under $1,000 per day/per individual then technically you are not a MT, and I’ve been read these regulations from numerous bank employees from US banks. They always tell me, “no you’re not an MSB cause you don’t cash checks.” But, for sure, there is this MT clause if you wire value from one location to another, you’re an MSB/MT. But below $1,000 these laws do not apply to you.
Many companies have viewed FinCEN guidelines as reason enough not to do bitcoin business. But, they are nothing more than guidelines and cannot be used in a court of law, I believe. Further, if you keep your transactions under $1,000 per day per individuals i dont think you have to register as an MSB.
J: What do you think, Trace, is reasonable regulation of Bitcoin?
T: I think Bitcoin is speech and if it is any particular type of speech it should be granted political speech since the bitcoin protocol already contains the WikiLeaks cables and that is a form of political speech and anonymous speech is extremely important. Bitcoin is just a form of free speech and just because people have found or use it as a type of currency, that is a very subjective theory or proposition.
The underyling tech nature of Bitcoin is just speech and i think the Constitution is clear here: “Congress shall make no law abridging the freedom of speech or press,” and so like any of these regulations or guidelines, it will be interesting to see if FinCEN actually tries to apply and what types of creative defense attorneys can come up with.
J: What is an off block-chain transaction?
T: There are several different ways that can be interpreted. You can use the micro payments channel that was recently released or you can use something like a Casacius Coins, wherein there is a private key under a hologram and the public key you can read and you can trade that physical coin. That would be a Bitcoin off-chain transaction.
People have also come up with BitBills, where the private key is under a laminent or something or there is also controlling Bitcoin via SMS, controlling the wallet via SMS. That is fun also you can send bitcoins to different cell phones by using different number like Coinapult. There are different ways Bitcoin can be overlayed on different tech and you don’t have to interact with the blok chain itself.
J: I’ve heard a lot on BitcoinTalk and Reddit, that what we’re seeing is a centralization of the miners. I’ve read a lot of theories about how mining will naturally move into a cloud type deal like Amazon Web Servers. What is the future of mining?
T: I think we’re gonna see all types of innovations, whether it is integrating mining chips into darknet things like Hyperboria which I think would be pretty cool. You could have little raspberry pie implementations, where people can pay WiFi bills with it or our own meshnet.
We could have it running on all our devices like refrigerators.
Another application of bitcoin mining people under-appreciate is that it is doing sha-256 calculations, and so these advancements in these ASICS are very similar to what is used for type-1 classified info. I think we could see some interesting applications of Bitcoin mining or at least how it is mining in cycles and those types of things. There are other reasons they might want this processing power, other than solely bitcoin.
Bitcoin could link with bio-informatics or other types of math problems. I think the free market is gonna show us all types of different avenues opening up and justifying different financial invstments in this type of hardware.
J: I am going to ask everyone on this series this following question: What is Bitcoin, in its simplest terms?
T: Bitcoin is like a gold coin that you can e-mail.
J: We both started in the precious metals space and one thing I’ve been thinking to myself that Bitcoin is quite bearish for silver namely. Is Bitcoin bearish for silver?
T: Well, Chris Duane is silver shield dude and he has been very negative on Bitcoin for a long time, and it is really funny because one of my friends wanted to setup a debate between the two of us and at the time it took five bitcoins to get one ounce of silver.
Now it takes more than five ounces of silver to get 1 bitcoin. so whose got egg on their face, who has to eat crow? And at the end of the day you’ve got to look at the value that something adds to society and each individual determines that value based on what they’re willing to pay for something and the financial scoreboard is showing that bitcoin is adding a lot of value, whereas silver is not. But overall, I think that remains to be played out.
We might see where it takes an ounce of gold to buy 1 bitcoin. I think that is in the realm of possible. Within a year because Bitcoin solves so many provlems and as a result of that people are going to bid the price up, we have to be open and willing to adopt new ways of seeing things and that is what I’ve been doing for a long time. A lot of different people in the Bitcoin space like yourself, Jeff Berwick, James Turk, Jeffrey Tucker, etc. are now in bitcoin mainly beause of the work i’ve done to help them understand bitcoins role in monetary science and in the information age. I think we’re just at the very beginning.
J: Your effects on the precious metals industry are so deep, Trace, that the Royal Canadian Mint is going to be testing their own digital currency.
T: Oh, what – their little mint chip? What a joke. It will be fun to watch it but i don’t think we will see anything substantive from it. Anything MintChip can do, Bitcoin can do, and we can do it securer because we have the processing power to do so.
J: I agree Trace, and disagree with the Mint’s head of the project, who said “where we are going is a road that has not been travelled.”
It is a road that we’ve travelled, me for a year for you longer, so thanks for all you’ve done for Bitcoin and we look forward to watching this play out.
T: Ok, thanks Justin. Keep up the good work.