Copyright 2015 by John T. Reed

Okay, so I finally attended a talk where grown-ups talked about digital currencies. This was a Digital Currency Panel held at the offices of Ripple in San Francisco. The panelists were Wallace Young, a credit risk coordinator from the Federal Reserve Bank of San Francisco; Dan Morehead, the CEO of Pantera Investment Fund; and Wellington Sculley, a Ripple business developer.

This was a joint program sponsored by the Financial Women of San Francisco and the Harvard Club of San Francisco. Sculley is president of the Harvard Club. My wife is the treasurer of that club. She is also a long-time member of the Financial Women. And she works for the Federal Reserve Bank of San Francisco. Pantera is focused totally on bitcoin.

I wrote a book titled How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition.

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It says to minimize the amount of your net worth that is in dollar-denominated assets. Consequently, a bunch of people started writing to me that I should be advocating bitcoins. I looked into it. It’s first advocates seemed to be tin-foil hat, anti-government kooks. They claimed the FBI hated it, as if that alone meant it must be a great thing. Actually, the FBI is required by law to investigate legal violations like money laundering, drug trafficking, forged documents trafficking, violations of sanctions and so on, all of which have used bitcoins, and resulted in some convictions.

For transferring money only

I ultimately concluded that bitcoin and other digital currencies might be faster, cheaper ways to transmit money internationally than the current SWIFT network. That costs about $47.50 a pop. And it can take days—maybe a week.

I also thought it might be a way for persons in countries with capital controls to get their local money out of the country where it can be converted to foreign currencies. By definition, that is illegal in such countries, but capital controls are immoral laws. They prohibit citizens from possessing foreign currency inside the capital-control country. Often they also prohibit possession of bullion gold.

And they typically limit persons leaving the country on a foreign trip from taking very much local currency with them. Chinese citizens traveling abroad from Communist China often sew Chinese yuan cash into the lining of their clothes to hide it and thereby take more out of the country to exchange for dollars or other respected currencies.


The panel started by defining digital currencies. Sculley said they are a way to transfer value using the Internet for free. Morehead said it was MOIP. VOIP is Voice Over Internet Protocol, a standard term referring to your ability use wireless to talk on the phone via the Internet for free—like Skype. MOIP is not a standard term, just Morehead’s invention. He says it means Money Over Internet Protocol.

In other words, they are saying what I figured out: interesting approach to transferring money instantly and for free. Better than SWIFT.

But wait, there’s more.

Replace MasterCard and Visa?

This could replace MasterCard and Visa. They, like SWIFT, are too slow and cost too much. They charge 2 or 3%. Merchants, like me, get paid at the end of the day. The card companies get paid monthly. Don’t feel bad about that. They make the merchant and card holder pay for the 30 days. If you could pay me by Internet, I would get paid instantly and there would be no 2% or 3% rake off.

Trust would be an issue. When you buy my stuff via MasterCard or Visa, you are trusting them mostly. When you pay direct through the Internet, you have to trust the merchant only. As a practical matter, digital currency, when it’s perfected, will probably force MC and Visa to lower their rates. Or, perhaps they cannot handle such a radical change and still be profitable, in which case some other financial institution—maybe Wells Fargo or Walt-Mart, will take over the MC/V role for a lower price.


The big advantage of bitcoin when the kooks are talking is anonymity. The panel basically said the bitcoin transactions are all thoroughly documented. The only anonymity is that you are known by your IP address in the bitcoin transaction. But the IP address is very much on the Internet for all to see. If law enforcement or anyone else wants to know the actual person behind the IP address in question, they can use detective and electronic surveillance methods to do so. They can trace like tracing phone calls.

Handles are supposed to give anonymity. Some guy attacked me once on the net. He was hiding behind a handle. But I was able to do a little detective work on the Net and figured out his actual name, phone number, and address. On some web sites, he was the self-righteous Christian condemning other posters for profanity. On others, we was cursing and bragging about using prostitutes and having an illegal gun with illegal bullets. On one, he used the same handle, and gave his home town.


Silk Road

The head of the Silk Road web site, Ross William Ulbricht, which was selling illegal drugs and forged documents for bitcoin, is now in jail. How could that be if he was anonymous? Basically, the FBI traced the Internet calls that used his IP address or Bitcoin identity. He had a pattern of times he went on line. They worked their way toward him and finally figured out he was using a laptop in a San Francisco public library. They arrested him in mid post. Did they know his actual identity? When they surrounded him in the library and took his drivers license out of his wallet they learned his real identity.

Silk Road 2.0 promptly came up on line after Silk Road was shut down. Then the FBI promptly shut down Silk Road 2.0 and arrested the guy running it. I wonder if their prison uniforms have name tags that say “anonymous.”

Bitcoin and other digital currencies give you a “handle” made up of miscellaneous alphanumeric characters instead of some cutesy nickname like Dread Pirate Roberts (The Silk Road guy’s handle). If you want, you can see the headers on an email, which is sort of the route it took to travel from the anonymous guy to the other end of the transaction. I once got a death threat by email. I told the browser to show me the headers and I put them on the net. My Net-savvy readers told me where the email came from including sending me a photo of the house where the server was located in Florida.

The whole world knows what computer is doing each bitcoin transaction. Figuring out that it’s your computer, is a fairly mundane, old-time detective exercise. Also, there is typically a physical aspect to the transaction: bitcoin going one direction and goods or services going in the other. That requires the bitcoin guy’s address.
Eventually, you will probably want to turn the bitcoin into dollars. The people who do that—banks—want lots of information who exactly who you are and exactly why you are doing this transaction this way because of bitcoin’s reputation as a criminal tool.

Morehead said bitcoin was mainly for banks to transfer money between each other at present—although convincing the banks of that was not easy. Later it will move down to consumer transactions.

I asked if losing a computer or cell phone with bit coins in it loses the coins. Yes, but you can and must back it up. If you back it up, the coins are not lost. Morehead pointed out you can also lose cash, and that cash cannot be backed up.

More resilient than government banking systems

An audience member asked about outages in bitcoin. To whom would you complain? Who is responsible for getting it back up? Government-run payment systems have gone down in U.K. and other countries, sometimes for days.

Actually, it would appear that bitcoin is the most resilient of all electronic payment systems. It has no hub. It uses the Internet and all the servers on the Net. The Net was first created by DARPA as a way to have communications survive a nuclear attack. The D in DARPA stands for defense as in Defense Department. It creates redundant paths for messages to take—millions of them. In contrast, the electronic payment systems run by banks and governments tend to have central hubs.

Bitcoin is email. Asking about it going down is like asking about email going down. Your computer may crash. Your Internet Service provider may go down. But email has never gone down because it sort of requires that all the servers and wires and fiber-optic lines and satellite links on earth go down simultaneously.

I don’t want to say that can never happen. Computer systems are notorious for bugs and hackers and viruses and all that. But the redundancy is mind-boggling and the amount of additional redundancy being added every minute is also mind-boggling.

The panel discussion was often in very big picture terms. My section (85 people who sit is the same room all day every day) at Harvard Business School quickly got into the habit of asking “What business are we really in?” in every case discussion. Example answer, HP is in the toner business, not the printer business.

Bitcoin is using the Internet to move money from A to B instantly and for free. Bitcoin also has a sort of “Wiki central bank” algorithm that purportedly limits the total number of bitcoins created each year.

No store of value

Many bitcoin pushers say it’s money. No way. Money performs three functions:

1. medium of exchange

2. unit of account

3. store of value

Bitcoin can work as #1, but not #2 or #3. Bitcoin is to money what Western Union is to money—a way to send it to a distant location. Bitcoin is not money any more than the 1s and 0s Western Union shoots out electronically are Western Union coins. If you use it to transfer, you should keep it in dollars until the last second then convert to bitcoin for the transmission. And the recipient should convert it into dollars or whatever currency he wants immediately upon receipt.

People do hold bitcoin as a store of value. But since the value has fluctuated wildly—up to $1,000 in 2013; $235 currently—putting your savings into bitcoin is like putting your savings into soybean futures—or worse. At least soybeans have a use and value-influencing factors like weather and acreage planted are known.

Do not put savings into bitcoin and hold them there.


Bitcoin is also to money transfers what email is to snail mail via the U.S.P.S. Email is faster, but less secure, if not encrypted. It can only contain digital bits, no physical things like a lock of your hair or a left-behind teddy bear. Because the stakes are higher for money transfers than for most mail, it is taking longer for bitcoin transfers to become popular than it did for email to become popular. Security measures need to be tested. Hacks need to be detected then secured against and so on.

Ultimately, bitcoin transfers are like military communications—also very high stakes and visible to the enemy as they fly through the air. They must be encrypted in a code the enemy cannot break. Military codes have been used since 1900 BC. And they’ve been getting broken since 1900 BC. When you use credit cards or debit cards or send a SWIFT wire, you are relying on encryption. Ditto if you have a contract smart phone. Ditto when you enter your password on line or in your smart phone.

There are encryption best practices—change frequently, safeguard the physical versions of the code in guarded safes. The operators of any encrypted traffic system must monitor and look for breaches, etc.

So forget store of value. Forget anonymity. This is a way to send money by email. They need to perfect the encryption, continue the shakedown cruise, but the basic idea of sending money this way for free and instantly will happen. I expect trusted companies like Western Union will for a small fee guarantee that your transaction goes through as you want. At that point, you’ll jut see it as Western Union and you won’t care what mechanism they use as long as it’s fast and cheap.

John T. Reed