Bitcoin nabob: Yes, there’s life after Mt. Gox (Q&A)
Bitcoin suffered a PR black eye with Mt. Gox's bankruptcy filing, but Coinbase co-founder Fred Ehrsam says bad news for the few will translate into good news for the many.
Bitcoin's been very much in the news of late for all the wrong reasons.
In February the Bitcoin exchange Mt. Gox declared bankruptcy after some $400 million in bitcoins got stolen. Bitcoin bank Flexcoin shut down earlier this month after robbers made off with $600,000 in stolen bitcoins, while a smaller exchange called Poloniex lost more than 12 percent of its assets after a hack. Adding to the general uncertainty, another exchange, Blockchain, suffered an hours-long outage.
But for Coinbase co-founder Fred Ehrsam, this is part of an all-too familiar narrative, one in which a new disruptive technology arrives on the scene -- Internet, anybody? -- attracting any number of entrepreneurs, some who fail, others who succeed. If he's right and Coinbase passes through a temporary squall, the company, which Ersham co-founded in 2012 with Brian Armstrong, would seem to be in a strong position.
Some big-name tech financiers apparently agree. Late last year, Andreessen Horowitz led a $25 million Series B investment in Coinbase, the biggest chunk of change ponied up by a venture capital company in a Bitcoin-related startup. (Bitcoin's earlier backers included Union Square Ventures and Ribbit Capital.) Coinbase, which provides users with a digital wallet, now has about 27,000 businesses that accept Bitcoin for customer payment. If you do the exponential math, they will reach 270,000 in about a year and a half.
Of course, that's assuming that there are no more Mt. Gox-like landmines about to explode and derail a nascent industry before it can establish itself.
For Ehrsam, a self-described nerd and former Goldman Sachs foreign exchange trader -- traits that perfectly fit someone trying to win over the skeptics -- the obsession with bitcoins started long before he headed west to Silicon Valley.
"I would go to the bathroom and trade bitcoin on my smartphone and then return to my real desk to do my real job trading real currency," he said.
At the time, he said the landscape was wide open. "There was nobody in the space who was doing something that was consumer-friendly or who wasn't an amateur," he said. "The key to making it work was to find a way to make consumer feel secure and provided with a good experience, but it would by necessity also require us to interact with the real financial world, whether that was regulators or banks."
But let's be clear: this remains the present-at-the-creation stage. Ehrsam and Armstrong still haven't swayed mainstream opinion. Warren Buffett recently labeled Bitcoin "a mirage" and dismissed the idea that it has "some huge intrinsic value" as a "joke." Ehrsam and sundry other notables from the Bitcoin ecosystem will have an opportunity to explain why the legendary investor and other skeptics have it wrong when a three-day conference about all things Bitcoin gets under way Tuesday in San Francisco.
I spoke with Ehrsam recently at the company's temporary headquarters, a cramped two-story loft apartment with a don't-you-wish-you-could-see view of downtown. The day I visited there also was Thai takeout for the asking and a fridge full of beer -- after all, we're talking startups. The following is an edited transcript of the conversation.
Has the press helped or hindered the public's understanding of Bitcoin?
Ehrsam: Honestly, it's a double-edged sword. All of it might be helpful because it's constantly in the news, it's constantly in people's minds and it's not dying. So people know now that this is real, it's not going away and hey, maybe they should know about it. The problem is that stories largely focus around sensationalist things that as a percentage of what's going on are actually very small and not very important ... what's important is the technology.
What does the next era look like for Bitcoin exchanges, post- Mt. Gox?
Ehrsam: We're fortunate that the Internet came before us. Because it's not the first time that lawmakers and regulators have seen a brand-new, very powerful network emerge that kind of breaks existing boxes. We've had an example play out in the past with the Internet. It can be a little scary at first ... all of a sudden there's this free information dissemination and what about X, Y, Z potential negative consequences? But the reality is it's the same thing but applied to what is payments -- and it could be other things going forward.
So there's life after Mt. Gox?
Ehrsam: There is very much life after Mt. Gox. It's a funny thing. As a company operating in the industry, I can say that very little has changed. Almost nothing's changed but the outside perception is that it's huge.
Coinbase recently passed more than 1 million consumer Bitcoin wallets -- up from 13,000 at the start of 2013. Is that growth sustainable?
Ehrsam: Bitcoin has this pattern where there'll be booms and what one might consider a bust. But the reality is that you reach a plateau that's higher than the one it was before it all started. And this has repeated itself three or four times and on and on and on -- so you're constantly reaching higher plateaus. In the first plateau we were signing 60 people a day. In the second plateau we were signing 400 a day. The next one was 2,000 and now we're at 5,000 a day, or whatever it might be.
So far, it's been a battle between competing headlines. In terms of bringing Bitcoin into the mainstream, you have to deal with reports about big thefts or calls by people in Congress for bans and such. How do bust through all that?
Ehrsam: The first is that you knock down more retailers where people point to that and say, "Hey I know that business. They're credible to me. They're accepting Bitcoin and I can spend it there." You close the loop as much as you can with well-known names. The biggest one for us recently was Overstock. They did a million bucks in sales, roughly the first month and most common item was sheets. Their average demographic was middle-aged women and it doesn't get more mainstream than that. And that was a good proof-of-concept for us.
But you also need to deal with the fallout of negative PR impacting a young industry.
Ehrsam: I think, frankly speaking, you're right that it's a nascent industry with players at various stages. Things like Gox can cause trust issues and bit of a negative PR storm. I feel we're at a point now where the vast majority of what I would term "Generation 1" Bitcoin companies have been rooted out in one way or another. Mt. Gox was really the last one of those to fall.
Part of a changing of the guard?
Ehrsam: While it created a bit of a short-term fiasco, I think the industry is better off now without that being some piece of the infrastructure. I think those sort of incidents will become less and less frequent as players with more credible management teams and more credible backers operating under some remote set of regulatory framework -- those sort of things -- become more common.
[US Senator] Joe Manchin has called for a ban. If he gets his way, what happens then?
Ehrsam: I think that one, honestly, was an outlier. At the federal level, FinCen (the Financial Crimes Enforcement Network) laid out pretty clear guidance. It said if you are doing business in bitcoin, then you have to abide by the same standards you would be if you were operating in dollars. That's mostly focused around money laundering. You have to have a compliance officer. You have to have employee training...
Can you understand why this makes people like Warren Buffet uneasy? What doesn't he get about all this?
Ehrsam: This is a common problem with Bitcoin where people think financial first, and not technology first. And that's very backwards. The reason I'm convinced and other people around the Valley and elsewhere are convinced [about Bitcoin] is they see the fundamental technological properties and they look at what this does -- it cuts out the middleman and thus it's more efficient because of the way the network is set up and its properties.
I think where people kind of misstep is that they go, "Oh, is this a viable global currency and what about deflation?" To me, that's the second level. You need to convince yourself first that this network is valuable because it cuts out middlemen and can do things in a more efficient manner. I think he's approaching it the wrong way around.
How does Bitcoin win over Main Street?
I like to think about it in pure economic terms. Think about the use cases. When you think about how PayPal emerged, they emerged because their solution was significantly better than the next best alternative. Now roll that forward to Bitcoin, and the question is, in Bitcoin, what about it makes it significantly better than the next best alternative such that people will really use it? I think it will start creeping in at the edges in two big ways: the first is just any kind of overseas payment.
Right now, the economic cost to an overseas payment is just very, very high. For a number of reasons -- foreign exchange fees, false declines because of fraud risk because it happens to be international and then from there it gets payment-level specific. But if you're doing credit cards, there's interchange, often times higher internationally, or if you're using a Western Union or Moneygram, they'll probably charge you 10 percent. You can do the equivalent with Bitcoin and it'll be 2 percent .
The underlying transaction technology is something that still has a lot of value. Could it morph into another use?
It will evolve into other uses, irrespective whether the payments part ends up being the hugest part or not. I obviously believe it will be.
I read somewhere that you test the service on family members for usability.
We test it on Brian's mom, occasionally.
How's that going?
Pretty good. It's funny the things that she reacts to. Like small things in wording, where like we wouldn't even read it but she's, "This doesn't make sense to me." One of big ones on that was when we implemented "Send to an email address" it would list your public addresses just for easy copy-paste if you wanted to give it to somebody on the Internet on the main screen, and she said, "What is that? It looks like one long password." Within a week we put that another layer deep and people barely need to use it now.
Will we ever know the identity of the creator or creators behind Bitcoin?
Maybe it's better left without knowing.
You're not him, are you?