Episode 40 Back to New York!

Participants: Adam B. Levine (AL) Host Stephany Murphy (SM) Co-host Peter John Manglaviti (PM) Special Guest CIO Feathercoin Marc Hochstein(MH) Special Guest American Banker

AL Hi and welcome to LetsTalkBitcoin, a twice weekly show about the ideas, people and projects building the new digital economy and the future of money. My name is Adam B. Levine and today we're back in New York. Marc Hochstein is a journalist and the editor of American Banker. The day after the Inside Bitcoins conference he and I sat down for a wide ranging interview on themes in crypto currency, bitcoin, altcoins, how it's all perceived within the legacy banking space and much more. But first Stephanie sat down with Peter John Manglaviti, the CIO of feathercoin to discuss lessons learned, alliances formed and finding your place with an altcoin. Visit us at LetsTalkBitcoin.com for our daily guest blog, show archive, and of course tipping options. Enjoy the show!

SM Okay hello and welcome to LetsTalkBitcoin I'm here talking with Peter John Manglaviti and you are from Feathercoin, right? You're the CIO from Feathercoin.

PM Yeah, I assume responsibility. I do more of the strategic planning. I'm a developer as well, but not as good as the other guy so I handle the other side of things. I've been recently working with both Feather, Phoenix and World to kind of coordinate all three of those coins now.

SM Oh, yes, I heard about this. I saw a press release about this. Okay, and until I had seen that press release I had never heard of Phoenix Coin or World Coin. Just

Feather Coin. But first let's start with that. So for our listeners who have never heard of Feathercoin what is it?

PM Sure. Feathercoin is a de-centralized currency. So if you're a bitcoin fan you'd probably also be a Feathercoin fan. Some of the differences that we have is in terms of some of the geeky things - re-targeting trying to control difficult it can be. But more importantly trying to focus on Feathercoin is grassroots. I come from not only an IT background but a political background. I was one of the guys behind the meetups with the Ron Paul campaigns. So we had an idea that, could this translate to digital currency? Can you take a bunch of volunteers, and we have quite a few now, and just get them motivated to just do something. To just, do good. And that's how we developed our community.

SM Oh interesting, so is there actually a libertarian ideology behind Feathercoin?

PM Absolutely.

SM Explicitly? Oh wow.

PM Yeah, absolutely.

SM See, I didn't know about that. And I can consider myself a liberty lover. Maybe not so much into the political system more outside of the system you could say, but I certainly have been following Ron Paul since before 2008.

PM Yeah, I was the guy with the Free State project and all those guys. I went to New Hampshire, I was waving signs.

SM Well, actually I live in New Hampshire. So...

PM Oh do ya?

SM Yeah. I moved there because of the Free State project in 2006, so.

PM Well yeah. But the idea was - so, with Ron Paul. I'd spend my weekends making signs with a bunch of guys. And at first, the idea of volunteering, I'm like, how much fun could this be? I had a blast. I had so much fun doing work so when I met Peter Buschnell, the Lead Developer Feathercoin, I thought huh! Could this work? You know, can you make it fun? Can you make it something where people want to contribute and then everybody celebrates in success? And that's really the direction of Feathercoin.

SM Wow, that's cool. So how, I mean how do you accomplish that with a crypto currency?

PM Yeah, um, that's a good question. I started off very small. When I got on board there was maybe 20 or 30 of us. And we have over 10,000 members right now. Yeah, it was just a matter of - I asked people what they liked to do. I said hey, what do you enjoy doing? I'm an artist, hey, we have sculptors, we have musicians, we have people that aren't necessarily your typical crypto-techie guys. And I just figured out,

I thought, hmm! Is there a way kind of to make this work? So for example if we have a project we have artists that will do the graphics for us. We have a sculptor that does stuff on the side for us. We have business people that like doing press releases like you've seen. It's the idea of Stone Soup. I was a big fan of that in elementary school that you start with this idea of this is the best soup ever if everyone just adds a little bit to it it'll be awesome. And people have fun, you know, it's a place - our community is very much against trolling as the kids say and we don't accept it. We just say that's not us. I want it to be a place that my parents would enjoy going to. Because if you go to some forums it can get nasty at times. And people... I don't believe that. I believe that you should say what you want, express your feeling, but attack the points and not the people. And we have a community that I don't handle that, they step in and go - appreciate what you're saying but at Feathercoin we do this. So I'm really proud of what developed. I don't take credit for that. We just had some really bright people come aboard and I happened to be the mouthpiece at the time.

SM So um, Yeah, it sounds pretty decentralized just like the nature of all crypto currency. It's supposed to be decentralized, right? Is there a Feathercoin forum? I'm not familiar...

PM Yeah, forum.Feathercoin.com, we have a pretty large forum there.

SM So go there, no trolling.

PM Yeah, no trolling allowed. But you know we're not gonna sit around and try to landbass you. You know, you're a horrible person. We'll say look - attack the issues. Because believe me, we attack. Just recently these things I've done that not everyone agrees with. But you attack the issue and not the person and we can respect each other that way. And that keeps developing moving forward.

SM

Well I'm kind of curious about some of the conflicts that come up and get resolved.

PM So one of the major things is I guess the partnership between the three coins because up until recently this has not been done. And I work also in the proprietary IT sector in schools. And I've helped merge schools together in terms of sharing resources. So I've seen this work before but it hasn't been proven here yet. So there are some skeptics. And I don't blame them. I want them to be skeptical. The whole idea behind this movement is to do your own thing, challenge each other. If you want my role I say by all means please take it, it's volunteer based. But we hash things out. It's a respectful kind of conversation.

SM Yeah, that's really interesting to hear about, because honestly I see some parallels to the Free State Project trying to organize or occupy New Hampshire or whatever, those kinds of activism.

PM Yeah, sure, I got interested - when I first got involved in crypto I went on - I'm not gonna say the website but I went on one of the forums and I was like, okay. I have this great idea for meetups, I've done this before with Ron Paul, and like twenty comments 19 of them you suck! That'll never work. And I went, that's not the community I want to be in. So I can either complain about it or help build something that I... want to be involved in. So I took the other approach. I met a couple guys from Feather. And they said you know what? We want to build something cool. Want to come aboard? And we started off just throwing ideas out there and building a very friendly environment. And we also have a lot of technical things we're working on with Feather as well but I'm most proud of the Libertarian ideal. In the end I think that's what's gonna make us successful more than the retargeting or how the difficulties adjusted. That's important and I believe in the security but I think ultimately what matters is people want to get involved. Does my Mom understand Feathercoin? Can you purchase products at a bar with Feathercoin? Yes you can.

SM Now you can, right? There's one bar.

PM You can, right, right. Little plug there.

SM Right, right. I saw that too. Okay, so. I am actually curious about some of the geeky stuff, like I. It's cool to hear about the community and everything. But I also want to hear about like, so I know that Feathercoin is based on the script algorithm like Litecoin was the pioneer in that area, right? With the script algorithm. Um, and so what else is different about Feathercoin than other crypto coins?

PM Yeah, right now the major difference is with us, and this is about to change again, is 504 blocks. So it's about 4x quicker what Litecoin is. And the reason why is because we were left in what I call difficulty hell. Before we did our hard fork we had a bunch of miners really excited about Feathercoin and they jacked the difficulty up really high. And then when they left us we were floating in space for 3-4 weeks.

SM Oh, and you couldn't find a block. Oh, so that's something we talked about on LetsTalkBitcoin before, where the difficulty of the network goes way up because a lot of people are mining, and then suddenly they drop out or it could be one party that's one very powerful miner. And then suddenly the difficulty is high and they can't find a block and they can't adjust back down.

PM And with products like Coin Choose and some of the switchers between the most profitable coin these are problems that we didn't see back in 2011 with Litecoin for example. So for better for worse Feather was challenged with a couple interesting issues. The second thing is is not only the...

SM Wait, hold on, how did you solve that? Was that the 51% attack?

PM That's a different one.

SM That's a different one, okay. So, okay, with the difficulty problem when the difficulty got really high and then the miners dropped out, how did that get resolved?

PM Sure, so we had to hard fork it at block 33,000 which was - it's a major deal. That's something you never take lightly, but we did two things. One is we reduced the retargeting to 504 blocks. So we couldn't be left in limbo that long. And the important thing was that now you could only adjust up or down by 41.4%. So in other words if difficulty starts skyrocketing it won't skyrocket like it did. It can only go up in increments. Since the hard fork we've stayed within probably about a difficulty of about within 50. About a 50 difficulty. It's put us right where we need to be so. And that was all Bush. He figured it out and it kept us right where we need to be now.

SM So it kind of put the breaks on the difficulty changing?

PM It did. It kept it consistent. Next to Litecoin we are the largest cash network for script.

SM Okay. Are there any other script based coins? Besides Litecoin and Feathercoin?

PM Oh yeah, there's... it seems endless at times. I'd say there's at least 40 I can name off the top of my head.

SM Wow, oh my.

PM Maybe my new listeners aren't familiar with some of the smaller ones but there are script coins for Final Fantasy. There are script coins for gas. I mean there are very specific coins. Where they'll end up I don't know, but there's a lot of forks out there. A lot of people experimenting. Which is not a bad thing. I enjoy that I think it's important for people to try new things. To make mistakes like we did in the past and then be willing to admit. Say hey, this is an issue we didn't foresee, how are we gonna fix it? Because in the end that's what matters. How do we move the currency forward?

SM Sure, yeah. Okay, so a hard fork. That means that you make a different blockchain essentially.

PM Yeah, exactly. Everyone has to- you know, it's not an optional download, you have to grab the new wallets. So you had challenges involved with that as well. We worked with some of the forforums and helped coordinate that so they were really good about getting the news out there and allowing us to kind of ramp up to it.

SM Okay, in that case could you just upgrade to a different client or would you have to like send your coins from the old client to a new client or something like that?

PM You can upgrade, you can use an existing wallet. But again you have to get the upgrade finished. So it's not something you ever want to take lightly.

SM Do you think that shook the trust in Feathercoin in the community? Or the bitcoin community?

PM Sure, it's hard to say. There's always going to be those that don't like us. And look, I'm okay with that. But often times when I dig around the ones that don't like us the most they have coins somewhere else. And I respect that. You know, push your coin that's fine. What we did do though for the miners is we offered 10ptc. What we did at each point we offered a bonus, whoever found that block went ahead and got 1ptc. And I contributed an additional 5 on top of that for the last one. So the person that hit the last one got 10 PVC for hitting the 33,000 block.

SM I see.

PM You know, we're not trying to bribe the community, what we want to do is say look, we know this is an inconvenience. What can we do to help get people motivated. We turn it into something more that's a positive. We could have left it alone and said, you know what, forget it. It'll sort itself out but that doesn't do anything for the community;. That would lose trust. I think quicker than to say look, it's not working out, we have a solution in place, we talked about it with the community - we executed.

SM Yeah, I mean that's - I really like your attitude about that because this is just - it's an unknown frontier. We're trying new things, stuff's gonna happen and...

PM ...and it does!

SM

And it does. (laughs)

PM You see that over and over.

SM So you're rolling with it, so... cool.

PM And you mention the 51% of tax.

SM Yeah I was gonna ask about that next, tell me more about that.

PM In truth I'm not gonna hide that, we've been attacked a couple times now. We've been tapped with massive hash. We're talkin', 7 or 8 gig. I mean which is unheard of on all coins.

SM How do you think. Do you think it's one person or do you think it's like a botnet, or.

PM Um, I'd rather not say. I have a pretty good idea. What I'll say about it is this. There are some bigger coins that definitely need to protect, that want to protect their investments and if you can make Feathercoin look unstable if you can send massive amounts of miners at us it can make people move away from us. But that's not the case because if you look at our price over the last couple of weeks we went from about 7.9 cents to 12 cents. So it hasn't shaken the community but we take it serious. Something new needs to be solved. Litecoin doesn't have this issue because they have the network to support them. But if something happened with

them and I'm not saying I hope that happens, but let's say for example they don't end up on Dox. And let's say for example that they lose some of their miners. Their script base, they'd be in the same boat that we are. So what we feel like it's our responsibility to solve this. And one thing we're implementing is something called an advanced check pointing system. I'd rather have Bush Star talk about that. I'm the PHP guy he's the main guru coin guy. But we're working with Sonny over at PVC coin that we hope that proliferates to all coins in the script community. You know what, we got beat up a bit but I feel like it's our responsibility as one of the leaders in all coins for script to come up with solutions. We don't hide that fact.

SM That is really interesting that the 51% attacks didn't seem to effect the price negatively. Or did it go down after?

PM Very little.

SM It's hard to have - when you don't have far to fall it's hard to have a price crash, right?

PM It is, but even if it goes from 7.9-7.7, that's pretty significant for us. So you know for us we're almost double the last couple of weeks now. And I think it's just because we're doing the right things in the community. I feel like people support the idea of Feathercoin. And they trust we're gonna do the right things and try to fix this. We're not hiding anything, we have a section or form that says a tax. And here's what's happening, we want input from the community. We're open on how we want to solve it, and I think ultimately that's what people care about. And then our great PR people are out there getting Feathercoin in bars. We have different merchants coming aboard. We have a batman system being developed, specifically for merchants that we're about to release. People are excited, and I'm just happy to be a part of this. I feel like I was invited to the party.

SM

Yeah. So okay, tell me more about this partnership with Phoenix Coin and World Coin. First of all, what are they? I have not heard of them.

PM Absolutely. So Phoenix Coin, these guys come from the casino world and adult world, actually. That was their Marcet. And they decided..

SM So it's like porn coins. That's cool.

PM Yeah, they've had quite a bit of success in that Marcet and they wanted to kind of ease into... they liked the idea of crypto currency. Of course the customers being casino and adult, anonymous and somewhat anonymous transactions, so they came with a coin. What we felt like we could bring to the party is a bit of guidance in terms of we have a big communty - a lot of developers. So we've kind of transitioned from that world into crypto currency. And then World Coin is very focused on middle sized business. They have a lot of background with banks and accountants and areas that Feather has no experience. So what I talked to Peter about is, Peter Buschnell our lead developer is - we can't be everything to everyone. We're very good at some things. We're very good on the development side, community development, experimenting. But we certainly don't have the experience with the business side. We definitely don't have the adult world and the casino world. So I met with John Carr, who is the leader of Phoenix Coin I just said here's what I'm thinking. It'd be nice if we can compete against one another, why don't we figure out a way to pool resources. I mapped out a strategic plan because I'm a geek that way, that's like my porn, right? Here's how we can make it work, and here's how we can like, you know, go ahead and move forward as a group. And that's how it came about.

SM Cool, so okay. What is involved in the partnership, what is it doing?

PM

Sure. So for example right now we're about to release the UNIX Bridge. And that's gonna allow us to do instant transactions between exchanges, merchants, and customers. So think about it almost as a bank account. If you deposit at Bank of America, they have systems where you can - I've seen commercials for this. If you have your bank account with Bank of America, your babysitter does as well, you can instant transfer, right? Well that's the same idea here. That's what Phoenix Coin is good at, they worked on back end systems. They worked on credit card processing, banking type systems. Feather did not. We had no experience. So they're bringing that to the group and then all three of us are able to use it. And we'll be talking more about that real shortly. Coindesk has an exclusive on it, they already have the article written. Walked them through it, I just gotta wait till we get through penetration testing.

SM Okay, cool, so it's some kind of system where potentially you could pay for something with Feathercoin that you might've only previously been able to pay with Phoenix Coin.

PM Sure, so for example let's say you want to sell something. Let's say, do you sell anything?

SM I'm a freelance voice over artist. So I sell my voice.

PM Okay. So you sell your voice. Ok, so let's say you have an mp3, a sample, and you want to sell it for like a couple dollars. And you and I want to exchange Feathercoin for it. How would we go about that?

SM I guess I would send you a Feathercoin address and you'd pay me, right?

PM Right, so you'd have a wallet, right? And then I would go ahead and send it to you and you'd wait for a couple confirms to verify that it's legit and you have these coins now, right?

SM Yup.

PM Okay. Now what if my coins were on an exchange. I want to go ahead and pay you. So now I have to go ahead and go to the exchange, withdraw, wait for confirmation, go to your wallet, wait for a confirmation. What this will do is allow me if the exchange, you, myself are all in this same network, within a second or so we can move money around or coin around.

SM Oh, okay.

PM And the fact that it's already been on the network, it's already been confirmed. So that we can verify if the transaction's been legit. And for you you don't have to keep a wallet. We have code already for you, you can click a button and pop on your website and you have an instant in on the bridge. So we try to solve, what we do is we try to solve problems.

SM Is that from Ripple? Have you taken any inspiration from Ripple on that?

PM I'm talking to Ripple. There's... I don't want to say anything about Ripple right now. I'm still looking into it. There's some things I really like as far as the multiple currencies. Some of the centralization and the way to handle the coins I don't

necessarily agree with. But the idea is how do we make it easy for people that aren't crypto nerds. And my Dad has a small business, how does my Dad accept Feathercoin without having to deal with wallets and resyncs and all those issues? He clicks a button, he pastes it on his website or has one of his guys paste it on the website, and they will just instantly work.

SM Yeah, but isn't that kind of centralized?

PM It is. So there is some centralization with that of course. But that doesn't stop others from opening their own bridges. The idea is that this is our bridge to demonstrate the concept, but we encourage other people. If you like that, great. I would love our coin to be on your bridge in (inaudible 20:00) transactions. And that's the challenge we face is some coins focus on just working on the coin itself and then they say the guys that developed services for it to go in the wrong direction. The other guys would say well you're just working the coin, you're going the wrong direction. I think it's a compromise. I want to be able to show what could be done with the coins and by all means if you want help developing, implementing, our teams would be happy to help you. But right now our customers want an easy way to do it. Our bars want an easy point of service, right. People who are selling products want an easy way to offer these coins. Because I talk to them and I say, you know we really want you to deal with Feathercoin,. They're like, oh we like the idea but we're not techs. We don't understand this whole wallet. I want to make it so, hey do you have an online banking? Yeah we do! Great, do the same thing.

SM Is that pretty much like the future where you see Feathercoin going? Do you have other ideas?

PM We do. Gosh, there's so many things we're working on right now. Okay, sure. One of the biggest challenges right now... my Mom. I was thinking my parents. Because they are not computer tech at all, let alone crypto. How does my Mom buy Feathercoin? I mean think about that process, how do you buy Litecoin?

SM Oh, you gotta go on BTC-E.

PM You go through that process and you have to do it with an exchange and, oh my goodness. To get your user to buy anything besides bitcoins is a challenge, isn't it? There's a lot of things involved.

SM Even to buy bitcoin is a challenge.

PM That's even a challenge. Good point. I mean, and then smaller ones good luck on that. With this bridge we're working on the bonding and we're working on the regulations where you'll be able to buy through fiat. Fiat currency you'll be able to buy our coins directly with cash.

SM That's really useful. Cool.

PM The challenge of course is regulation. There's a lot of things we have to get in place, but for the Feather side this is all new to us. We haven't had to work with accountants and lawyers and those things. Phoenix has that experience, so they're pulling those resources and we're guiding that thing. So eventually you'll be able to sell it for cash, deposit with cash - basically anyone who wants to get a hold of a coin will have easy access to it. It's not around next week, next month, but it's close. I refuse to give a date again because we missed our big release for the bridge. Because I've heard about that. So I learned something when it comes to crypto development - when it's done. I'm gonna say when it's done.

SM

Ok fair enough. Peter, thank you so much for talking to me today.

PM Really appreciate sitting down with you kind of Indian style.

SM Yeah! We had a pow wow, this was fun. And where can people find-? Is it Feathercoin.org?

PM Yeah you can find us at Feathercoin.com, yeah, or the partnership at unocs.com.

SM Cool, thank you so much, this was fun.

PM I appreciate that, thank you.

Break

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(Music) 24:40

AL I'm joined this morning by Marc Hochstein, editor of the American Banker Magazine. That was an interesting conference that we just attended. It was a little bit of a different crowd than I think I was expecting. There was a lot of miners there. There was a lot of venture capital there that we saw. There was a lot of regulatory institutions there. You know it seems like there are some changes that are kind of coming to bitcoin just because these people are taking an interest and these particular types of groups are getting involved. I'm kind of curious for your take, what did you think of the conference?

MH I got a lot out of it. I was sort of impressed at the eclectic mix of the crowd. You had your exchange operators, you had your entrepreneurs, your had your VC's, but you had a few people that I know going back from American Banker. You know, banking lawyers, compliance people, you know, people who have been in the payment industry - in the mainstream payment industry for a while. And considering the price of the conference I don't think that it was purely curiosity that they were there. I think that people who have expertise in compliance and who have been doing compliance for money services businesses and money transmitters probably see an opportunity to sell their expertise and their advice. Particularly given that there's a lot of concern now among bitcoin related companies about compliance and a lot of uncertainty about what exactly the rules are depending on what your business model is. And of course the most interesting thing I noticed as I was leaving the cocktail hour. There was someone from the FBI there and he had a big name tag, I didn't catch his name, but it said FBI special agent. I guess he wasn't a secret agent otherwise he wouldn't have been advertising on his name tag. Oh, and Booze Allen Hamilton had a couple people there.

AL I didn't see that.

MH Yeah and I've talked to those guys. Actually funny enough it was like a couple weeks before the Snowden thing broke. I had talked to them. They are paying attention to the virtual currency space, you know government contractor obviously but I think they do some consulting for banks and they've hired people who have worked at like treasury, worked at OFAC, worked in A&L compliance. You had that element, and you had the serious business element. But you know you still had sort of the ideal- there's a little bit of the idealistic bitcoiner crowd in there too which is nice because that's a very endearing group of people.

AL So you've been watching this space now kind of from an I don't want to say outsider perspective because you do sort of integrate into the community to a certain extent do you have like a timeline or any sort of guess where we'll find ourselves six months from now? Because again it seems like this compliance stuff we're starting to come to a head on it and right now we have some guidance but there aren't really any rules and the guidance could change. Is there, was there a vibe you thought? That this is going one way or the other?

MH There was some nervousness I sensed. Tony Gilleppe from BitPay said that every bitcoin business has been dropped by at least one bank. And he mentioned that there was an actual merchant. Not an MSB or money transmitter or a bitcoin exchanger but just a merchant that accepted bitcoin and got dropped from their bank just because they accepted bitcoin as a form of payment as opposed to whatever other forms of payment they take. So I mean I think that there's like an... and even bitcoin friendly banks are at the very least full up on the amount of business they'd be willing to take on. I'd be lying if I said I had a crystal ball and I knew how it was gonna pay out. But I do think that there has to be some kind of a confrontation. I use that word a little bit loosely but there could be congressional hearings. I wouldn't be surprised to see that before the end of the year. The best outcome would be if it prompted a candid discussion about all these rules, these legacy rules in these legacy systems and these legacy regulations that are kind of being shoehorned to apply to these new business models. I think that there should be, and I sort of have gotten at this at some of the things that I've written and John

Matones would put it in even stronger words in the columns that he's written. People need to take a hard look at the whole AML regime in policy circles. You know, how much are we getting out of it? How is it really benefiting us? And what's the collateral damage? If we are going to a cashless society, which I believe we are doing slowly - and that's mostly a good thing if you consider cash inefficient. But if we are gonna go in that direction where it's gonna be a world of mostly electronic payments shouldn't we have to carve out a space for payments that are anonymous. And I'm even framing it too narrowly already because if we can get rid of physical cash that's all well and good, but there should be some form of digital cash. And bitcoin happens to be the most successful digital cash that there has been. There have been other attempts at it that have just sort of flopped. Bitcoin has gained the most traction. I've talked about anonymity before and I stand by the position that we have to live with that and that there has to be a space for that. That there are perfectly legitimate reasons for people to want to make payments anonymously whether it's in person or whether it's on the internet. Another aspect of cash - and this came up at the conference, it was great. You had Tony, and you had some other merchant processing types presenting, is that for certain types of merchants, one of the virtues of cashes, the irrevocability of transactions.. I fear that the next wave of trash talking about bitcoin is going to be focusing on that. Is going to be focusing on, oh it's all a rip off. And you know, the virtue is that supposedly there's no charge backs and the consumers are gonna pay for stuff online, they're gonna get ripped off. Even as we get rid of cash, some merchants should be able to have ways to get paid that are irreversible. Or at least irreversible or not unilaterally reversible. One of the great things about credit cards, and this is a valuable thing that a credit card company provides. There is consumer protection, there is fraud protection. That is valuable, no question. But it shouldn't be mandatory. There has to be lots of different flavors in the world that we go to.

AL But is that the way that society is moving. Because it seems like we're moving towards a place where risk is being socialized to a certain extent and we're looking towards America specifically you look at something like healthace and it seems like we're moving away from an opt in system to one where you almost opt out at a cost. Let me back up a second. We're talking about anonymity and money, and I think it's important to define really what that means. Anonymity and money as I understand it, basically separating the concept of value from the concept of identity, because in a world of credit cards, it's not that you necessarily possess the money as a person. It's that your financial identity has the rights to spend the money. Whereas with something like cash, or like gold or like bitcoin, possession is the entirety of ownership.

MH

Right, and that's what makes it cash like. And once you spend it it's gone. That has its benefits and its draw backs for both parties.

AL So it's not one size fits all basically when it comes to money.

MH Yeah, exactly. And I could see a world where a merchant will accept payment from credit cards or debit cards or Paypal or maybe we won't cal them credit cards in the future we'll call them credit accounts because they won't actually be physical - you know they'll all be on a phone or whatever. And then they'll accept digital cash which could be bitcoin or it could be one of the alt coins or it could be Bitcoin 5.0 or whatever. That the Marcet would find kind of a balance where if you don't trust the merchant or it's a big ticket item you might choose to say I'm going to put that on my credit card. I mean you know, if I was gonna buy an electric guitar or a computer I'd probably want to put it on my credit card today unless I really really trusted the merchant and thought they had a good reputation. And the merchant can say okay, you can pay us that way but there's a discount if you pay us with cash, bitcoin, or some future alt coin. You know one of the nice things now is that after all the legal settlements and anti-trust settlements with the credit card companies is that merchants now can do a little bit more steering towards preferred payment types which that previously the Visa MasterCard rules barred them from doing.

AL It's more of a monopoly system.

MH It was. Now it would be nice if instead of having to work that out in the courts and having to pay lawyers and have congressional hearings and all this stuff. It would be nice if the Marcet could force that to happen as opposed to bludgeoning it. But that's happened so merchants, you know. Merchants now, what they're allowed to do now is surcharge for credit cards which is almost the same thing as saying a discount for cash. It's almost symantec. Why couldn't you have a world where a merchant has a surcharge for the protected payment or the identity based payment - better way of thinking about it - and then a discount for the possession based payment, the cash like payment. Different strokes for different folks.

AL You moderated the panel on essentially crypto currencies and free speech. It was bitcoin and free speech. Really broadly was talking about the tools for free speech. That was one of the most interesting panels I think. A lot of really interesting things said there. I was wondering moving forward, what role do you really feel like crypto currencies or identity list money forms can play in our society? I mean like in a practical sense.

MH You know, one of my favorite stories that we've looked at lately on Bank Think which is American Bankers' Blog is the issue with the Somali communities. This has come up in Minnesota, it's coming up in the UK where this Somali immigrants send money home and in Somalia that's a big part of GEP. It's a completely ravaged country. It's getting harder and harder, there's fewer and fewer choices. Here in Minnesota they would use the Hoala brokers. You know, Hoala is an ancient system it goes back thousands of years and it's totally trust based. You know, I want to send money to my Aunt back home so I hand the US cash to the Hoala broker and he calls up the $100 or whatever, and that guy calls up his friend Hoala broker in Somalia and says give the equivalent of $100 to this guy's Auntie. And at the end of the month they settle up and you know, they take a fee out of that or whatever. There's no records.

AL So it's like a relationship based money transfer system.

MH And Western Union does not serve Somalia. So that's the way you get it over there. Last year in Minnesota the last community bank that was banking the local Hoala broker had to cut off that relationship because of ANL money laundering regulation concerns. And there was a big uproar and then there was like, people were pressuring US Bank Corp., Wells Fargo which are the two biggest banks in that Marcet. The individuals were saying we as consumers are gonna pull our deposit accounts unless you start servicing money transfers to Somalia. And that put them in a bind. Because from the bank's perspective it's a big risk for them to be in any way involved with facilitating money transfers to a country like that. Because if it turns out that somewhere along the food chain someone sent money and it ended up in some terrorist or suspected terrorist' account, they're gonna get a big fine.

And they don't want to touch it, they amount of money involved is probably not worth the risk to them. I'm not gonna get all moral and high and mighty towards the banks because they're in a tough spot. So you know it was a big PR headache for them. US Bank Corp. to their credit did eventually announce a pilot program with Tahab Shahil which was the biggest money transmitter serving Somalia. And I don't know what the status of that is, that was about six months ago. In fact I called a couple weeks ago and I haven't heard back so I'm going to stay on their case to find out how that's going. Over in the UK recently Barclay's had a very similar situation. Barclay's started dropping relationships with money transmitters. About 80 of them and about a dozen of those were serving Somalia. And they got raked over the coals in the press in the UK, like, you're gonna cause a humanitarian crisis Barclay's. And it might cause a humanitarian crisis if you really cut off remittances. And again, you know, Barclay's looked at what happened to HSBC you know, I mean, HSBC guys didn't go to jail but I mean, they did have to pay a big fine and they got a lot of bad press and they had to go to congressional hearings and have these pompous...

AL It was very inconvenient

MH It was inconvenient. For them life is too short. You know, so they made a business decision to drop those. Now, bitcoin, I don't know what internet connectivity is like in Somalia, but if you have an internet connection, that's pretty much all you need to get a bitcoin from point A to point B. So the only other thing that you would need is someone to pay for bitcoin in whatever the local currency is. So it just cuts out all this nonsense. I just spent 9 10 minutes explaining this Rude Goldberg chain of events that in the end hurts poor people all in the name of stopping terrorism. Bitcoin is neutral. Bitcoin doesn't care who you are. Bitcoin doesn't care if you are a hard working immigrant sending money home to Mom or if you're an evil terrorist. It just does what you tell it to do. And it does it very well and very fast. I think that if we try to make money not neutral there's a lot of collateral damage. And is that the only way to address the issue of terrorism.

AL I think I'd like to dig a little bit into this one size fits all kind of world that we're starting to live in. It's sort of strange because you know on the one hand you have all sorts of technologies that enable people to get exactly what they want, the exact specifications. You've got things like 3d printing that are continuing to expand that further play on that mean. And yet you look at the way the rules are made and the

way that people's lives essentially are governed, and you see that increasingly we're moving towards one-size-fits-all solutions that wind up not really fitting many people at all. So I mean in a global world this is a problem that bitcoin runs into because a micro-transaction in the Western World is a large transaction in many parts of the underdeveloped world - in the 3rd world. I don't know a nicer way to say that is...

MH The emerging Marcets.

AL Emerging Marcets, there you go.

MH Some of them are quite emerging.

AL But they will eventually. So many things are changing to make it so that it doesn't need to be that way but I don't understand why it seems like more and more with regulation we're finding ourselves in that situation.

MH I think a lot of it is just that the regulations are outdated and they're trying to be applied to new things that don't quite map to the old categories. And you see this outside of bitcoin too. I mean money transmitter licenses... it's not just bitcoin that this is a problem for. I mentioned last time the sad story of Eric Greenspan and Face Cash. I read a law professor article that came up very recently talking about these transmitter- state money transmitter laws. And some of them defined money transmission so broadly that they could apply to bike messengers or app stores. And these were laws that were meant to regulate- and I'm not talking about AML here I'm talking about state transmitter laws that are originally designed to regulate businesses like Western Union from a consumer protection standpoint. So you can give the money transmitter your money making sure that it actually gets to the place it's supposed to get to - that you don't get ripped off. But they are being applied to businesses where there really isn't that much risk to the consumer. Like businesses

that basically act like an agent for the payee are happy to get this licensing and this guy argues quite persuasively I think that you gotta take a hard look at those laws and look at is there really risk of harm to the consumer? Because if there isn't, if the businesses accepting payment on behalf of a merchant and even if that intermediary doesn't pay the merchant there's no risk to the consumer. Why do you have to pay these fees and add all these compliance costs because it's discouraging startups, it's disturbing innovation - it's creating higher barriers to entry. Protects incumbents which is nice if you're an incumbent but...

AL It's good work if you can get it.

MH But you know it's not necessarily good for innovation and competition and all these things that we supposedly believe in as a free Marcet liberal society. Bitcoin might help force the issue. In some ways a cause for optimism would be that now that there's a big debate about surveillance broadly and all these big revelations keep coming about what the NSA is up to. People are questioning the third-party doctrine, if you have records stored with the third-party you have no expectation of privacy. Which has been around forever in banking I mean the Bank Secrecy Act which is what, I think 1980 or earlier. The Supreme Court ruled long ago in a banking case that if you have no expectation of privacy for records stored with the third-party for the bank. So that's where it all got started. It seems like a long shot to say that we'll re-evaluate this in light of the Snowden revelations or whatever. But you know I mean the Nash amendment was only narrowly defeated which I think surprised everyone. Surprised the people who are for it, surprised the people who are against it. The administration has to scramble the jets to defeat that. It looks like there's very strong intredged interest that would want to straight jacket the new technologies but optimism would probably be the only way to look at things because if you're pessimistic it's almost close to giving up. I mean you can be realistic and you can be careful and you can- I wouldn't advise someone to blatantly break laws because that's very risky. I think if people speak up and they are honest and candid about these issues then I think it might make a difference.

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(music)

AL So let's talk about alternative crypto currencies for a second. Marc have you looked at any crypto currencies besides bitcoin?

MH No not really. I've listened to you guys talking about Litecoin and what not. I had an interesting conversation with one of the speakers at the conference who was working on an alt coin. I think it was like a local alt coin. This was at Charlie Shroom's bar, and this was after a couple drinks, so I don't remember the details but. I think it's great that there was all these different mutations coming out. You know, the more the merrier. First of all because even though bitcoin is very hard to shut down because it's very decentralized, you know there is that whole... I was actually pretty shocked when I heard on your program when this came out at the San Jose conference that something like 48% of dividing power is in one pool. And I think that they're very consciously trying to keep it below that threshold because they understand that the value goes away once you get to 50, 51%. It is conceivable that someone could do the 51% attack thing. And of course if you destroyed bitcoin someone could always start it over again. I think the more the merrier. As you said one size fits all doesn't work and a lot of them might just fail or go nowhere but you

can't knock anyone for trying. That's the nice thing about bitcoin and that whole community is that they're experimenting and they're doing things and they're building things. Everyone's talking about projects. They're talking about starting a company, and starting a startup, and starting an alt chain. You know, they're creators. They're not just bullshit artists like me or. You know a lot of people in the media kind of like sneer at bitcoin and either say oh it's a waste of time or you're off in your own little world. It's a retreat - it's not a retreat. It's very social. Both in terms of the aspect that it's peer-to-peer and that just in terms of like the meetups and events like SatoshiSquare. It's very social and interactive. They're building something. And who knows how long it will last but when people scoff at that, "Well what have you done?" You know, they're trying. Frycoin is interesting, I actually want to try it. You know it's a very different philosophy behind it than the Austrian Economic perspective. But you know, it's kind of interesting.

AL So Frycoin is an altcoin that introduces a demorrhage feature. Which basically means that the currency over time disappears actually. It's not that it devalues it's that literally some amounts of it go away. Is my understanding. I also have not used it but that's my understanding of it.

MH It addresses the hoarding issue. If you believe that's an issue. As an aside, hoarding is a judgmental synonym for what our grandparents called saving. But admittedly yes I mean in a weak economy like this where inflation has not been that great even though despite monetary policy. I could see why people say well why do you care about inflation. Crypto currencies don't have to be Austrian. You could have a (inaudble 49:00) crypto currency I suppose, you could have a modern monetary theory crypto currency. You know one idea that keeps coming up is the government (inaudible 49:15) crypto currency. And I wouldn't mind that as long as it really was like physical cash in the sense that it had the irreversibility and the sudominity. I don't think that's gonna happen but it's nice to imagine.

AL But you know I think the more the merrier. So this guy I was talking to who was talking about one of his altcoins. He had a great analogy. He said like in a forest you need lots of different types of foliage.

MH

Monoculture doesn't quite work as well.

AL Right. Exactly. So maybe it should be that way with money. Even Dave Birch who is not very popular in the bitcoin community because he's always the person quoted in bitcoin articles sort of damning at his fake praise. But even he, he takes that position that you should have lots of different stores of value. So in the future there will be government currencies and private currencies and people will keep some of their value in bitcoin or crypto currency, some of it in dollars and some of it in kilowatt hours. The experimentation, I see very little downside from it. But like we were saying earlier with the merchants the more alternatives the merrier. One of the things I wanted to mention about neutrality that I didn't get a chance to say on the panel but it's just a great example. If you go to a site called coinDL.com, they sell content, they sell eBooks, they sell music. There's a musician in Iran Muhammed Rafiq. I'm not sure if I'm pronouncing his last name. He's in Iran. he sells mp3's of his music through this site. It is not illegal under the sanctions to buy music from someone in Iran. I have confirmed that. I called the US Treasury and I specifically asked them that. They said there is an exception for information. As a practical matter though it would be very difficult were it not for bitcoin for this guy to sell his music anywhere outside the country he's in. But I in the United States can go online and for a miniscle price I can download his mp3's. And by the way people do still pay for music and musicians are trying to make some bread in a country under crippling sanctions as our president put it. You know, if it helps them a little bit that's good for humanity. The album is...

MH Is it to your taste? It was more about the support.

AL It was more about the support... I mean it's okay. It's the type of music you hear in the spa when you're getting a micro-derma facial or something but. It's good to listen to when you're in a room burning aroma therapy candles. It's not an album I would want to go to jail for. You occasionally write about bitcoin but American Banker it seems like has been running quite a few stories about bitcoin between you and John Matones. You speak to financial professionals and people who are specifically in the industry, what type of reception have you gotten from your audience? Are you getting people saying why are you covering this or is it more curiosity? Or what's the?

MH There's a lot of curiosity. it's all over the map. For most bankers right now, I wouldn't say bitcoin is top of the line for them. They've got a lot of issues. They've got the Dodd Frank legislation which is thousands of pages long. And a lot of it hasn't really been put into practice yet because the legislators haven't put in all the rules. They've got the Basel three capital regulations which are still being ironed out. interest rates, low interest rates have made it very hard to make money in their traditional business of taking deposits and making loans. Loan return rates are starting to tick up but that's been a mixed blessing for them because the mortgage refit' boom that they've been enjoying, they've been getting a lot of earns out of for a while just came to an abrupt halt and now they've got to lay off all their mortgage people that theyve been hiring. So bankers are very conservative by nature. They're risk averse at least when it comes to certain kinds of risks. They've got a lot of things on their plate right now. There's some skepticism. Obviously you can tell from behavior that they're wary of dealing with bitcoin related businesses probably just out of a compliance risk concern. But there's also curiosity about it and I think there is some recognition that there needs to be innovation. We did a series on bank think called the future model of banking which John contributed to and John thinks that there's an opportunity for the banks to serve these businesses to help them on the compliance front because the banks if nothing else know compliance very well. He said it's kind of like their last mulligan payments before they get truly disrupted. I'm very glad that John writes a column for us. I really like having a voice like that in the mix. I mean it's not core quite yet bitcoin but it's part of a core theme for financial services now and for the years to come is disruption and bitcoin is one of the most disruptive technologies there is. It's funny because in banking we ooh and aah over things like mobile remote casher of checks. That's really just sort of

AL It's an update to an antiquated technology.

MH It's a patch. And at some point that Shaq did on that panel we did.

AL That's Shaquille Kahn.

MH Right, that's Shaquille Kahn. Jus the absurdity that in 2013 I can send you an email and you'll get it in seconds. You know, you can download an mp3 in seconds or I can send you any kind of data file in seconds. But to transfer money to someone even like $10 through the banking system is such a hassle. It can take days. And it can cost more than the amount of money that you're sending.

AL That one size fits all thing again.

MH Exactly, exactly. And I think that an important example is in the automated clearing house there's a payment system that is collectively owned by the banks. Sometimes if you look on your banking statement you see the ACH, that's what that means that means that this money was sent through the Automated Clearing House. It is one of the lower cost payment systems in the traditional banking world. About a year ago there was a vote among the banking members over whether to basically make it mandatory that everybody be ready to do same day settlement of funds on ACH. A majority of members voted for it but they did not get the 75% that they needed to pass it. So instead what NACHA, that's the association that oversees ACH is doing is a voluntary same day settlement. What that means is that if both the sender's bank and the receiver's bank are participating.

AL I mean it seems like it's inconvenient for customers and if it's inconvenient for customers then it should be a problem as far as the bank is concerned. So what is the incentive for the banks not to do this?

MH There were objections over the cost of updating systems. There were concerns about fraud.

AL Fraud, but isn't this a bank to bank system?

MH It's a bank to bank system but you know that someone has stolen account information or something.

AL They want time to be able to find that out and reverse it.

MH Yeah, exactly, exactly. And of course no one will admit this, but of course some of the suspicion was the big banks didn't want to cannibalize wire transfer revenues. This has been reported that it was the big banks that killed it. Some of the little banks objected but the little banks were either for it or indifferent. It was the big banks that torpedoed it in the end. Because I think they get a disproportionate share of the votes. Because they get more volume on the system. You know bitcoin has shown, not that bitcoin is necessarily the only way but it is showing that it is possible to transfer a digital monetary asset almost instantly and have it be done. Right?

AL Is there a space for alternatives? I mean like this is a question that I've really been thinking about a lot. With systems like this. You know with the ACH. The reason why they can get away with that, and not have to, not have to update to more modern standards really. Because that's what we were talking about - like Shaq was saying, you can't send small amounts of money or even large amounts of money fast but you can with these alternatives. You know to a certain extent you can apply that same sort of standard to the current monetary regimes that we live in. Where we have money and everyone is inflating their currency around the world and so long as everyone inflates at the same time basically, and when I say inflate I say add to the monetary supply so long as everybody plays along with that game and keeps in tandem with each other then nothing really changes. But when you introduce alternatives to the situation that seems like it's dangerous to the equilibrium of the system. I've been wondering if there is a place in a system like we have now for any kind of alternative that fixes these problems to the detriment to the existing system.

MH

I hope so. I mean I really hope so. The reaction to bitcoin so far. You can read it either way. I mean the (Finsend 58:30 ) director did say we welcome the innovation of virtual currencies and we just want them to follow the law and follow the rules. we'll see if that's lip service or how sincere that is. I think in the long term it's - and we talked last time about the anti-fragile book. In the long term it's better for stability to have lots of centers than have one center if you buy Nassim Talib's argument one center, one point of failure it's more dangerous. And if you have lots and lots of different heads and lots of different nodes... I think it's in everyone's interest to be a little more flexible and say let a thousand flowers bloom. To use a phrase by a coin by a guy who didn't mean it but it's a great phrase and that's the way I think about this. Even if it threatens your. Because I don't think bitcoin tomorrow is gonna take away a whole lot of revenue from Western Union or paypal. You know and it might over the long term but supposedly we live in a society that competition is healthy and that competition will... bitcoin could be good for banks in the long term sense in that if it forces them to become more responsible customers and it forces them to streamline and to not have this confusing like: your available balance is, your present balance... I can't believe they still do that in 2013. And you know as a consumer I never got that. And I know it's because they've got these old systems and it's complicated. Maybe it's comparing apples to oranges to compare the two. It's just funny, bitcoiners get frustrated when they have to wait 20 minutes for the confirmation. But that's gonna be what the standard is and that's gonna be what people demand. I think it's in everyone's interest to let the alternatives bloom.

AL Marc Hochstein, American Banker. Thank you very much for your time.

MH My pleasure, always.

AL Thanks for listening to episode 40 of LetsTalkBitcoin. Content for today's show is provided by Stephanie Murphy, Peter John Maclaviti, and Marc Hochstein. Music was Provided by Jared Rubins. And if you can't get enough original thought and discussion, read our daily blog at LetsTalkBitcoin.com, sign up for the weekly newsletter at theweeklybitcoin.com and participate in our listener interactionary at LetsTalkBitcoin.com/talk. See ya next time!

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