Brian Patrick Eha on Bitcoin

Bitcoin was first released in 2009, and though critics have been predicting its doom for years, the cryptocurrency continues to grow and thrive.

In this week's episode of Industry Focus: Financials, host Gaby Lapera interviews special guest Brian Patrick Eha, finance journalist and author of How Money Got Free: Bitcoin and the Fight for the Future of Finance. They discuss how bitcoin began and how it took off, some of the biggest potential draws and drawbacks for adoption, how regulators are responding to bitcoin, how bitcoins are made, and much more.

Gaby Lapera: Hello, everyone! Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. You're listening to the Financials edition, taped today on Monday, May 15, 2017. My name is Gaby Lapera, and joining me on the phone is Brian Patrick Eha, a journalist whose work has been published by Fortune, The New Yorker, and CNNMoney, and a variety of other publications. Hey, Brian! How's it going?

Brian Patrick Eha: Hey, it's going well. How are you?

Lapera: I'm doing pretty good. I'm excited to have you on the show. Brian is here to talk about his book, How Money Got Free: Bitcoin and the Fight for the Future of Finance. Listeners, this is super exciting for me. I knew very, very little about bitcoin before reading this book. This book got me sufficiently up to speed that I could talk about bitcoin on a different show and actually sound mostly coherent. I didn't even get any emails saying, "You have no idea what you're talking about," so I know I must have been right. [laughs] But, yeah, let's start with some of the basics, for people who have never heard of bitcoin, which, I don't think there are that many people left, but it's still a pretty confusing topic. So, what is bitcoin? What's blockchain technology? Why are those two things always going together?

Eha: Sure. In the simplest terms, bitcoin is a form of commodity money. When it was released in January 2009, originally, its promise was to be a truly universal currency, a form of electronic cash that could be sent around the globe in minutes, that would work as well in New York as it does in New Delhi. Transactions were supposed to be anonymous. It all happened on a network that existed independently of any government or bank. So, bitcoin can serve as a unit of exchange, something with which you buy a plane ticket or a pair of shoes, or as a store of value, like gold. That's the double meaning in commodity money. It's also a revolutionary payment system that can send money, in the form of bitcoins, directly from person to person in minutes anywhere in the world. Now, the blockchain is the technological breakthrough that makes bitcoin possible. It's basically a decentralized, tamper-proof ledger for recording transactions, which I know sounds like the least sexy thing in the world. But the revolutionary thing about it is that it allows for transactions to be verified and recorded without the need for a central authority, which normally would be a payments company like PayPal (PYPL -1.14%) or Venmo, or it would be a government or a bank. So, the blockchain businesses and services of businesses can be decentralized. It simultaneously cuts out middlemen that add costs to the system, and it removes any single points of failure in the system, all in one fell swoop. So, a lot of financial institutions remain wary of bitcoin itself, but they have seized eagerly on blockchain technology, because it could cut their back-office costs, it could help them do a lot of things more quickly, more transparently, more cheaply. Large tech firms like Microsoft have done the same. So, they're all setting up blockchain labs and working groups to study it, and coming out with proof of concept, and so on.

Lapera: Yeah, that's really cool. I was reading that IBM was doing the same thing. It's crazy, because most people think IBM and they think "stodgy," but this is pretty cutting-edge stuff. Actually, I want to get into something you said about cutting out the middleman. In your book, you talk about the history of bitcoin. What I hadn't realized, but what makes total sense in retrospect, is that bitcoin has a really strong libertarian streak. It's like a bunch of libertarian nerds who got together and were like, "Everyone should be their own bank. There shouldn't be government interfering with people's financial matters." Can you talk a little bit about the founding of bitcoin, and what that looked like?

Eha: Sure. By the time bitcoin came along cryptoanarchists and some digital libertarians had been talking for years about the need for digital cash that could just be peer-to-peer. Cryptoanarchists are essentially people who want to use encryption technology and peer-to-peer network culture to increase personal liberty, as they see it, and undermine state control. As a philosophical movement, cryptoanarchy emerged in the early 1990s in California among a group of people who called themselves cypherpunks.

Lapera: I love that name, by the way, so much. And it totally makes sense that it came out of California.

Eha: It was great branding, right?

Lapera: Yeah. Listeners, you might not know this, I love punk music, and I especially love punk music that has come out of California. So, if you ever want to chat about it with me, shoot me an email. But, go ahead, cypherpunks. 

Eha: So, they were actually organized around this electronic mailing list not unlike the one on which Satoshi Nakamoto, bitcoin's creator, would later announce his invention to the world. So, these earlier guys, they made some attempts of their own to create digital cash, but there were a couple of problems they couldn't figure out how to solve. One was, if my money exists in electronic form, how do I keep it from being counterfeited and spent over and over again, the same way you can send infinite copies of a Word document or a digital photo? Satoshi solved that, and the first chapter of my book is all about these origins of bitcoin, its precursors, and what makes it a breakthrough that really rivals the invention of the telephone, or maybe even the internet. But, you're right, once bitcoin was invented, the libertarians and the cryptoanarchists were among the first to see its potential and start using it. You weren't aware of it because the later bitcoin users don't necessarily subscribe to those same ideals, they may even clash with those ideals of those radical early adopters. But, ordinary people today probably would never have heard of bitcoin if not for those crypto anarchists.

Lapera: From reading your book, it's really interesting because, it looks like the roots of bitcoin, the reason it really got started, was because these people with this libertarian bent who were using it to purchase things that are, perhaps, not legal in the wider world. I'm talking specifically about Silk Road. That's also an outgrowth of "the government shouldn't be able to tell me what to do." Backing up, can you tell listeners what Silk Road is, and why it was so important to bitcoin?

Eha: Sure. Silk Road was the world's first so-called crypto-market, it was a new kind of secretive, online black market that did a booming trade in illegal drugs. It was run by this 20-something Texan named Ross Ulbricht, who call himself Dread Pirate Roberts, after The Princess Bride character. He was kind of a libertarian philosopher drug lord, and he did a lot to associate radical free-market principles with bitcoin in the popular imagination. But, beyond that, the importance of Silk Road pragmatically really can't be overestimated.The illicit commerce on Ulbricht's market, which opened in January of 2011, drove a lot of early demand for bitcoin, because bitcoin was the only form of payment allowed on Silk Road. For the first two years of bitcoin's existence -- I mentioned it launched in January 2009 -- it really had almost no monetary value at all. But soon after Silk Road launched, the price of bitcoin went above $1 U.S. for the first time ever, and has never dropped below it since. But, by the time Ross Ulbricht was arrested in October 2013, there were still these black markets, people were still using bitcoin to buy illegal drugs online and so on, but the bitcoin economy was much larger at that point, and the shutdown of Silk Road by the Feds didn't do anything to shut down bitcoin. In fact, the price of bitcoin went on a huge run after that point, and there was a lot of excitement from that point on.

Lapera: Yeah, it's really interesting. Bitcoin really hasn't been around for that long, when you think about it, in the grand scheme of things. But, I believe one of the first legitimate uses of bitcoin to pay for something was pizza.

Eha: Right, and that actually happened on May 22nd, 2010. May 22nd is my birthday, as it happens.

Lapera: Happy birthday soon!

Eha: [laughs] Thank you. But, yes, someone got the bright idea to ask if someone else would order him a couple of Papa John's pizzas over the internet, and in exchange he would send some huge amount, like 25,000, bitcoins, I forget the exact number, which, of course, now would be worth millions upon millions of dollars. They did it, but it was just a proof of concept that, yes, this works, you can send digital money across the world and interact on a peer-to-peer basis without anybody else being involved in that transaction. That was, as ridiculous as it was, that was the first time anyone had exchanged bitcoin for any other form of value, so it is a bit of a milestone, and people like to mark the occasion every year.

Lapera: Yeah, it's really wild. Listeners, bitcoin's price today is $1,733.99. That's a lot of money for a pizza, now. [laughs] But, so, one of the things with Silk Road, there are some potential downsides to bitcoin, which is that it kind of works outside of this regulatory sphere. This weekend, we actually saw the malware attack called WannaCry, where people's files on their computers were held ransom, and people had to pay these hackers with bitcoin in order to get their files back. And that has temporarily gone offline, but it's going to come back online soon, probably, once the hackers fix the thing that took it offline. What are some of the downsides of bitcoin?

Eha: I think you said it, the downsides of bitcoin, one of them is that, because it's a form of money that's harder to trace than normal transactions, it can be sent directly from person to person, it doesn't have to go through the same kind of channels that are easy for law enforcement to monitor, so it does allow cybercriminals on the other side of the world to reach out and harm people. To be honest, they can reach out and harm people even without bitcoin, of course. Computer viruses and worms have been around for a long time. It's just that this adds a monetary element, that, before, maybe they were just doing it for the hell of it, they were just doing it to mess with people and show off their skills, but now they can actually do it as a business and make a lot of money from it. In fact, this is something I've looked into. Cybercriminals are raking in hundreds of millions of dollars a year from ransomware, and this was even before the WannaCry outbreak. I haven't looked into exactly how much money that might have yielded for the people behind it. 

The good news is, bitcoin can also provide things like cheaper remittances. This is one of the big pain points for people around the world. There are 2 billion adults in the world that have no bank account, and when immigrants send money back home to their families, they have to go through Western Union or MoneyGram, and they're charged really high fees, and it's often the poorest people who are charged the highest ones. So, migrants from sub-Saharan Africa, for instance, pay an average of almost 10% when they send money back to their loved ones, and the global average is 7.5%, which is still pretty enormous. Remittances were ignored by economists for a long time, but they recently realized it's a $600 billion market, this amount of money that's flowing around the world. For countries like Mexico and India, it's one of the largest chunks of their GDP. So, bitcoin, because the transaction fees are so low compared to traditional methods, it has a chance to grab a piece of that market while putting millions of dollars back in people's pockets. In fact, there's a venture-backed company called Abra that is using bitcoin today to provide cheaper remittances, I think, it's over 100 countries, I'm not sure exactly how many, but they claim to be able to reduce these remittance fees by as much as 90%. So, those are two sides of the same coin --

Lapera: Ha, two sides of the bitcoin, you might say. [laughs] Sorry, I couldn't help myself.

Eha: [laughs] That's OK. But, I guess the point I'm trying to make is that, the downsides of bitcoin are inextricably intertwined with the upsides of bitcoin. This thing that allows it to be sent peer-to-peer around the world for very low transaction costs in minutes without necessarily getting anybody else involved, it's the same, it has very positive and some negative consequences.

Lapera: Definitely. That's actually something I was talking about with Simon Erickson, who's one of the investors here at The Motley Fool, which is, the future of finance is probably going to end up being decided in the developing world, because they're completely skipping over banks with physical footprints. They're going straight to mobile technology to transfer money, and a lot of them are keeping these bitcoin-esque wallet things to transfer this money. It's really interesting, they're using blockchain technology to make sure that government documents are well-recorded, something that you couldn't really do before that. It's really interesting, and something we'll probably dive into on a future episode.

Eha: Right. In addition to the lack of bank accounts, a lot of people in the developing world don't have photo IDs, they don't have official identification. So, people are working on methods that you can use blockchain technology to securely store proof of people's identities that can be used for all kinds of things. So, that's true, a lot of people from the early days, critics were saying, "Why use bitcoin if I can use a credit card, or this or that?" But a lot of the most forward-looking advocates of bitcoin were saying, really, the use case is for the developing world. There are uses for it in the developed world, but where it's really going to become huge, and then maybe surge and come back into the developed world, will be with people who have cellphones, like you mentioned, where they can have mobile money and digital wallets to hold their balances, but they don't have bank accounts, so something like bitcoin is perfect for that.

Lapera: Yeah. It's definitely super exciting. But, next question for you, talking about the developed world, especially the U.S., what do you think about the legal/regulatory future for bitcoin? We know that the Winklevoss' ETF got rejected by the SEC recently, they said it was moving money around in a way that might be harmful. And I think you said right before we started the show that the SEC has decided to reconsider their decision, but who knows what they're going to say, it could be yes or no.

Eha: Yeah, Jamie Dimon, the chairman and CEO of JPMorgan Chase, has said that governments will flatten bitcoin before it can become a true competitor to the dollar, the pound or the euro. But I think there are good reasons to believe he's wrong. The monthly transaction volume of bitcoin has continued to climb. The price is close to its all-time high, which it reached in the last week or so. The user base keeps growing. A report out of Cambridge University last month found that the number of cryptocurrency users worldwide now rivals the population of small countries. So, at a certain point, it gets difficult, I think, to ban bitcoin outright, or to come down on it too hard. To be honest, if the U.S. government were going to do that, I think it would have done it already. Instead, what we've seen is that the IRS has said, "OK you can use bitcoins, but you have to pay taxes on them," and FinCEN and other regulators have said to bitcoin start-ups, "You can work with this digital currency, but you still have to register as a money-transmitting business, or something like that." So, they're trying to enfold it into the existing regulatory scheme. Now, the more radical bitcoiners would say it's going to be disruptive to the existing regulatory regime, just like the internet was. But, if the government had known from the get-go what the internet would turn into, they probably would have come down a lot harder on it in its early days, they would have tried to get their arms around it much sooner and much more stringently. But there are a lot of people who think bitcoin is going to be the same way, that they won't realize just how disruptive it's going to be until it's a little too late for them to do anything about it. 

What I will say is there are still challenges to overcome if bitcoin is going to succeed, and some of them are not regulatory, some of them are inherent in the very rules of the bitcoin software. It's still unclear whether or not bitcoin can scale up sufficiently to serve the needs of the global user base while staying true to its origins as digital cash, or if it's going to stay a niche technology and maybe eventually die out. So, the future of bitcoin is not yet written, but I would say we're well past the point where we know the technology is good for something, and there are people in Washington who realize that.

Lapera: Yeah. It's an interesting thing. Listeners, part of the reason that the government is so invested in trying to figure out regulations around bitcoin is because of anti-money laundering laws and "know your customer" laws, just to make sure that money is getting funneled into legal operations. That's where a lot of the restrictions on bitcoin from the federal government come from, is they're saying they're not meeting the standards. But of course, bitcoin was designed so that you wouldn't have to know anyone, you wouldn't have to disclose anything, so it's kind of this fundamental mismatch between what regulators want and what the original bitcoin people want.

Eha: It's also important to understand just how much regulations have changed in the last 15 years or so. Peter Thiel, I saw him at a public debate in New York a couple of years ago, and he was very open about saying that a company like PayPal could never have been founded in a post-9/11 world, we would have been accused of money laundering. So, that is something to understand, too, that the things that bitcoin pioneers have run afoul of are things that earlier pioneers would also have run afoul of, they just have to deal with a much more stringent regulatory regime than what existed before.

Lapera: Yeah, definitely. It's an interesting thing, and it's definitely a space to watch. I want to switch gears really quick and talk about the book itself. The book was really great for a few different reasons besides that it actually explained bitcoin to me in a way that I understood. It's incredibly well-written, and it's a super bold and interesting approach to writing about bitcoin. Most people would write a textbook or focus on the technicalities, but you actually created this set of narratives and interwove them. You humanized the main players in bitcoin while simultaneously teaching the reader about bitcoin along away. It actually kind of reminds me of those recipes that are like, "Secretly feed your child vegetables by hiding them in mac and cheese!" That's what your book felt like to me, it was like, "Oh, I learned something, and I was entertained along the way." This is a really accessible book for the average person, and I have a few questions about your writing style. Listeners know that we really enjoy good writing here at The Motley Fool. First question, why did you write this book?

Eha: It was partly that, when I first heard about bitcoin, it struck me as an idea whose time has come. I mentioned Peter Thiel just a minute ago. Early internet pioneers had always envisioned that a payments protocol would be woven into the fabric of the web. And when Peter Thiel was building PayPal, his original ambition was for it to be an internet currency that would replace the U.S. dollar for online transactions. But, it was the post-9/11 regulations that forced him to pivot away from that. The brilliant thing that Satoshi Nakamoto, bitcoin's creator, did was, rather than found a new company like PayPal, he built a decentralized system that no one would own but anyone could participate in. That really interested me. And then, the first time I wrote about bitcoin was in the summer of 2012, I'll never forget. I was a staff writer at CNNMoney briefly, and when I pitched this Bitcoin story to my editor, she told me, "Go ahead and do it, but don't make too much of it, bitcoin is just a digital curiosity, it's a play thing for crypto anarchists." Well, I didn't see it that way, exactly, but I also didn't know a lot about bitcoin at the time. So I went and did the story. And as I talked to the employees of this one bitcoin start up in Manhattan, I was just overwhelmed with the realization that bitcoin had real potential. These guys were young, hungry, passionate, willing to do the Mark Zuckerberg thing, moving fast, and I was just fascinated by how they were risking everything to build the early foundations of a new economy, and the CEO of that start-up actually became one of the main characters in my book. At that point, I just knew I wanted to keep following this story. And as it got bigger and bigger, and more and more headlines came out, I saw how rich a book-length narrative could be.

Back, by the way, when I did that first story for CNNMoney, the price of a single bitcoin was less than $10, and all the bitcoins in existence put together were worth less than $100 million. Now, as you mentioned, bitcoin is above $1,700, its market cap is somewhere close to $30 billion. So, I think I made the right choice to take it seriously.

Lapera: Yeah, definitely. A side note to listeners, it's really interesting, because you get bitcoins by mining, which is basically that you have computers solve these problems, and the problems get increasingly hard as you go along. Right now, there's about 16.8 million Bitcoins in circulation, but there is a known cap of the total amount of Bitcoins that could ever possibly exist, which I believe is around 21 million, right?

Eha: Right.

Lapera: It's, really interesting, it does act a little bit more like a commodity like gold, where there is a finite amount of gold in the world, just like there's a finite amount of bitcoin in the world. It's definitely a really interesting thing. But, back to the book. My next question is, what was your favorite story to tell? You told a lot of different people's stories. Which one was your favorite?

Eha: I think, of the main characters, probably this guy Charlie Shrem's story resonates with me the most, because he was just a young middle-class guy living with his parents in Brooklyn before he discovered bitcoin. And he ended up co-founding one of the major early start-ups, that was actually the first to receive serious venture capital funding. Of all the major players in those days, he was, perhaps, the one most gratified by the attention, and most eager for the publicity, the fame, the respect that came from his leadership role in the community. And he also ended up suffering more than most, he had to spend more than a year in federal prison as a result of some things he did in the bitcoin space. So, there's a pathos there, the story of this middle-class kid made good, and his fall from grace, and now, actually, he's out of prison and he's working on making a comeback. So, that's all compelling to me.

Lapera: Yeah. And it's a really interesting and great story, and it so perfectly illustrates the rise and fall and rise again of bitcoin, that is the whole overarching story. Brian, I don't know if you know this, but we are kind of obsessed with reading here at the Fool. We do an annual reading list, we love interviewing authors like you, we have a bunch of book clubs. So, I'm going to ask you a few different questions about books and reading. What are you reading right now?

Eha: I've always got a number of books going at any one time. Right now, a few of the ones I'm reading are Virginia Woolf's To The Lighthouse, which, honestly, I should have read years ago, it's brilliant. I'm reading the collected poems of Philip Larkin. And, I'm reading this other book that's a huge doorstop called The Creators: A History of Heroes of the Imagination by Daniel J. Boorstin. It was a national best-seller when it came out in the '90s, and it essentially traces thousands of years of human history from the point of view of creativity and the creators who pushed the boundaries of the imagination forward, all the way from Stonehenge and ancient Egypt through James Joyce and Picasso and on into the future.

Lapera: That sounds really interesting. I will probably pick that up at some point and read it piecemeal over the course of a couple years.

Eha: Oh, it's definitely a book that you can read piecemeal and still get a lot out of it, yeah.

Lapera: Excellent. What's one thing that you think everyone should read? It doesn't have to be bitcoin-related.

Eha: I'm going to do this as a two-part answer. I think the one thing about bitcoin that everyone should read is Satoshi Nakamoto's original white paper. Bitcoin itself was released in January 2009, but the white paper came out a few months before that, and it was essentially a technical paper explaining, "This is the system I build, this is what I'd like to do, this is how it will work." It's only a few pages long, it's really accessible to pretty much anyone, and I think it's just an important founding document for anyone who wants to understand this really revolutionary technology. I think the one thing non-bitcoin-related that everyone should read in these days is the essays of Ralph Waldo Emerson, which I return to again and again. I find them a useful corrective to the current trends of our time and society and politics. There's a lot of groupthink going on, a lot of people, especially in my industry, talk about filter bubbles, which is basically, on social media, we only follow people who think like we do and say the things we want to hear. Ralph Waldo Emerson is all about being a non-conformist and about charting your own path and thinking for yourself. So, it's really valuable in this day and age.

Lapera: Those are two really wonderful answers. I really love Emerson. Also, I really love that you suggested a primary source document for bitcoin. I think it's really important that people go back and look at how things were originally written, and that kind of combats what you were talking about, those filter bubbles, because you can see what the original data, what the original evidence, said. Super interesting. Is there anything else you want to say as we wrap up this interview?

Eha: No, I wish I had something prepared. Well, I guess the one thing I would say is, I think, in the history of money and in the digital economy, bitcoin does not mark an endpoint, as far as I can tell. But, I do think it marks a point, like the invention of the telephone, from which there can be no turning back.

Lapera: Awesome. Thank you so much. I really, really enjoyed having you on the show. If you ever write another book, definitely let us know.

Eha: Sure, let's stay in touch.

Lapera: Yeah, I would love that. As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocks based solely on what you hear. Contact us at [email protected], or by tweeting us @MFIndustryFocus, and let us know what you thought about the show, or if you have any other questions about bitcoin. I can see this becoming a pretty reliable topic for us. Thank you to Austin Morgan, today's producer. Austin, would you buy bitcoin?

Austin Morgan: It's a little pricey.

Lapera: Fair enough. Thank you to everyone for joining us, and have a great week!