let's talk bitcoin, episode 35, "the smart money"

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LET’S TALK BITCOIN Episode 35 The Smart Money Participants: Adam B. Levine (ABL): Host Stephanie Murphy (SM): Co-host Charlie Schrem (CS): CEO of BitInstant Alan Safahi (AS): CEO of ZipZap Shakil Khan (SK): Creator of Coindesk Marc Hochstein (MH): Editor of American Banker ABL: Hi and welcome to Let’s talk Bitcoin, a twice-weekly exploration of 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 going to focus on some of the most influential doers in the Bitcoin space today. Shakil Khan is an investor and serial entrepreneur most often associated with Spotify. He is the creator of Coindesk, one of the top sources of original reporting in the Bitcoin space and he sat down with Marc Hochstein, editor of American Banker for a fireside chat at the end of last month’s Inside bitcoins conference. This is a really fantastic talk, if you want to know what the smart money is talking about Bitcoin and it occupies the last 36 minutes of today’s show. -But backing up for a moment, Stephanie starts things up with a lightning interview, by LTB standards, with Charlie Schrem. Alan Safahi is next with a 19 minute interview conducted by Stephanie discussing the cash transfer business, freedom, regulation and more. If you appreciate the work we are doing, stop by the new letstalkbitcoin.com, send us a tip and check out our new daily guest blog. So far this week, we’ve had John Light introduce us

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LET’S TALK BITCOIN

Episode 35

The Smart Money

Participants:

Adam B. Levine (ABL): Host

Stephanie Murphy (SM): Co-host

Charlie Schrem (CS): CEO of BitInstant

Alan Safahi (AS): CEO of ZipZap

Shakil Khan (SK): Creator of Coindesk

Marc Hochstein (MH): Editor of American Banker

ABL: Hi and welcome to Let’s talk Bitcoin, a twice-weekly exploration of 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 going to focus on some of the most influential doers in the Bitcoin space today. Shakil Khan is an investor and serial entrepreneur most often associated with Spotify. He is the creator of Coindesk, one of the top sources of original reporting in the Bitcoin space and he sat down with Marc Hochstein, editor of American Banker for a fireside chat at the end of last month’s Inside bitcoins conference. This is a really fantastic talk, if you want to know what the smart money is talking about Bitcoin and it occupies the last 36 minutes of today’s show. -But backing up for a moment, Stephanie starts things up with a lightning interview, by LTB standards, with Charlie Schrem. Alan Safahi is next with a 19 minute interview conducted by Stephanie discussing the cash transfer business, freedom, regulation and more. If you appreciate the work we are doing, stop by the new letstalkbitcoin.com, send us a tip and check out our new daily guest blog. So far this week, we’ve had John Light introduce us to the trust framework that will guide our personal cloud future. Mark also looks into an alternative reality where the Internet was created in 2009 rather than cryptocurrencies and what kind of response it would invoke. Mark Matthews makes the argument that crypto keys are free speech and should be protected as such. I’m thrilled we’re able to keep the conversation going with new ideas and analyses from a wide variety of perspectives, all for free, at the new letstalkbitcoin.com. Okay, that’s enough from me, let’s join Stephanie now on the floor of Inside Bitcoins as she talks with Charlie Schrem, CEO of BitInstant.

Stephanie Murphy interview with Charlie Schrem

SM: Alright, I’m here talking with Charlie Schrem. Hi Charlie, I just heard your keynote speech

at the Inside Bitcoins conference.

CS: Was it good?

SM: It was great!

CS: Thank you.

SM: You know, I learned some new things about you, because I started to know that we have some mutual friends and everything, in the Bitcoin community and as well as going to events like the porcupine freedom festival.

CS: Yeah, that was a lot of fun.

SM: But I learned today that you are 23 years old, right?

S: Yup.

SM: And there’s another number that people associate with you, its four -fingered Charlie, right?

CS: Yeah, four-fingered Charlie.

SM: Can you tell me about why you are called that?

CS: I used to wear a ring that had my Bitcoin private key.

SM: Where did it go?

CS: I take it off because everyone knows and I don't want to get my finger chopped off. I have a ring on that has my bitcoin private key on it, and I don't wear it any more. I haven't worn it for awhile because I'm scared.

SM: That's probably a smart move, I see. -So, you told a really interesting story about how BitInstant got started, and of course your the founder and CEO BitInstant. Right?

CS: Mmmhmm, yep.

SM: What is BitInstant in just one sentence for anybody who doesn't know?

CM: It's the fastest, easiest, and cheapest way to buy and sell bitcoin. We make it really easy to buy bitcoins, with partnerships with 7-11, C.V.S., Duane Reade. You can walk in and buy bitcoin there.

SM: So, you can buy bitcoin with cash instantly, by the time you get home, make a cash deposit. It's there.

CM: Yep.

SM: And, right now your doing a little bit of a revamp as you explained.

CM: I'm pretty excited about that, yeah.

SM: Can you tell me what's coming next for BitInstant?

CM: We're changing a lot. You'll see kind of a whole new website. We're changing the way our system works. The way we interact with our customers. And, we're lowering fees and changing the whole fee structure around. And, getting our regulatory stuff in check. We decided to, like I said in the thing.

SM: What does that mean, "changing the fee structure around"?

CM: You'll see.

SM: We'll see?

CM: It will be cheaper to buy bitcoin.

SM: *Laughter* So, what about new features? Are you going to have new features?

CM: Yeah, we're going to have some real locations, we have bank transfers now. You can buy bitcoin instantly with a bank account. Um, and a few other stuff. We have the ability withdraw money back to your bank account instantly. So if you have a debt card, we can actually fund your debt card. That's really exciting.

SM: I know a couple years ago BitInstant had this idea, that they were working on, with bitcoin debit cards. Yeah, is that still in the works or what?

CM: So, we finally got approval for the European version of a card. But, the US version is really, really hard to do because of regulatory reasons and stuff. So, I don't want to launch the card just in Europe. I want to have it global, so we're waiting.

SM: Tell me real quick, the story of how BitInstant came into being. You said you were out of college, and--

CM: I was still in college.

SM: Oh! You were still in college?

CM: Yeah, I was just browsing the Internet forums one day. I saw someone post an interesting idea for a bitcoin company. It was our CTO Gareth Nelson.

SM: How did you find out about Bitcoin first of all, actually?

CM: I just read about it only somewhere. I don't remember. I read about, heard about it. And then he had his idea. I couldn't really raise any money, so my mom had to give me some venture capital.

SM: Your mom is actually sitting behind me, at the top. Very proud, both of your parents were here. But, you tried to get, I guess, venture capital through traditional channels back in...what was it? 2011?

CM: 2011, yeah. Three years ago.

SM: And you got laughed out of some offices.

CM: Everywhere. Everyone laughed at me. They're still laughing. I laugh at them all the way to the bank.

SM: Yeah. *laughter* That's right. Once your done with this big upgrade, where do you see BitInstant going in five years?

CM: Global.

SM: Global?

CM: Global. Big-time global.

SM: Are you thinking about other cryptocurrencies besides Bitcoin?

CM: Yeah, BitInstant is extremely agnostic. We can support any cryptocurrency. We're looking at Ripple, and I really like the idea of Ripple. I love the people behind it, so we'll see where that takes us.

SM: What is your favorite thing about Bitcoin right now?

CM: Just the community.

SM: Community?

CM: You, and everyone. All my friends and family, these guys are my family. They're the only ones who understand what I'm doing every day. Its like my parents, they understand, but they don't understand. So, just being a part of this whole community is the best thing of it.

SM: Alright Charlie Schrem, thank you so much. We can find you online at BitInstant.com, right?

CM: Yep.

SM: Thanks so much for talking to me today.

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ABL: You're listening to Let's Talk Bitcoin, the premiere audiocast providing news and insights into the rapidly evolving world of digital money. Our twice-weekly shows include analysis of late-breaking news. Updates on key technically, business, and regulatory issues. -And, in-depth interviews with the key people driving the new digital economy. Let's Talk Bitcoin offers sponsors an attractive way to reach a targeted and savvy audience. For more information, email [email protected].

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SM: I am here talking with Alan Safahi. He is the CEO and founder of ZipZap, right?

AS: Correct. I also sit on the advisory board with Opencoin, which is the creator of Ripple.

SM: We were just on a bitcoin and freedom of speech panel together. I found out you came to the US from Iran, in the 1970's, to get more freedom basically right?

AS: Yeah. I came here to actually get educated but found out that after I got here that the country had changed while I was out. I wound up staying, and I've been here 34 years now.

SM: You've clearly been really successful, starting some businesses, getting involved with the bitcoin community. Tell me, what is ZipZap? -For somebody that's never heard of it.

AS: ZipZap is a global cash payment network. It basically enables customers to shop online, and pay cash, offline. In the local currency, local retailers, grocery stores, companies, stores, post offices, and so forth.

SM: When you say "global," is it truly global?

AS: Well, we are in US, Brazil, Russia, all the Caribbean countries. About 700,000 locations, we are expanding to over two million locations by next year, the third quarter of next of next year.

SM: Wow.

AS: We're going to be about fifty-plus countries.

SM: What make ZipZap different from, for instance, PayPal or something like that?

AS: Well, first of all, PayPal targets people who have bank accounts and credit cards, so if you take the world population as a pyramid, they target the top of the pyramid.

SM: Sure.

AS: In the countries, the western countries, they already have established banking systems and so forth. But when you peel the onion, and behind that, you will see. That even in those countries there are more people that are cash based, than are credit card based or bank based. Eighty-five percent of all online transactions in Russia, for example, is paid with cash offline.

SM: Hmm...

AS: -And, in Brazil, almost the same numbers. People are used to paying with cash in their own countries. What we do is enable them to do the same thing on a global scale.

SM: I see, yeah, so that's clearly something not really available, especially in the US or anywhere else.

AS: We are the first company. Because of the API for cash, we work with web developers, app developers and think tank companies. To let them integrate with our API's to offer them a cash option to their customers. It could be a merchant selling widgets online or it could be a software company creating an invoicing module, for example. Now, you don't have to just put credit card as the method of payment, or PayPal. You could also add cash as a method of payment.

SM: How would someone do that, logistically? If I wanted to buy some thing from some merchant, I'd have to go take cash somewhere?

AS: There are several processes. Let's say – if you were to buy a bitcoin online, you go to an exchange like BitInstant. You choose to pay with cash. Then, based on your location, we will give you three options near by where you can go to make that payment and once you choose that option, we generate a payment slip which looks like a bill, and you take that with you and make your payment with cash. We follow the bill payment modules of these companies that bill these retailers. The clerks are very used to that model. When you look at countries like Russia, for example, they have kiosks, so the model is a little bit different in Russia. You still start online, going through an exchange. Once you decide to pay, we send you to a kiosk location nearby. You just walk up and put in the account number we give you and put in the cash. In Brazil, we use a valuta system, which has been around for decades. That's a form that's sort of like our payment slip, but you can take it to any bank and deposit it, and make cash payments. The person who makes the payment will receive notification immediately that the payment has been made, and they get their coins, often before they leave the store. -So there are really good payment options around the world. We just kinda put a layer on all of these good payment options and provide a really good, unique customer experience.

SM: Yeah, so it wouldn't just be for buying bitcoins, right? It could be for buying anything.

AS: Yeah. Anything. You can pay your rent, you can buy music, you can buy minutes for your long distance -- anything, yeah.

SM: I am guessing, and you can tell me if I'm correct, that this is probably the hardest to accomplish from a regulatory standpoint in the US is that right?

AS: Yeah. If you can make it here, you can make it anywhere. That's true.

SM: Wow.

AS: It's more difficult to do payments in the US than it is to do in Europe or even in African countries these days.

SM: Wow, that's pretty...I think that's worth noting.

AS: You know what's difficult, is there's no uniformity across the states. Each state has their own rules, so you have to go state by state. If you're an exchange and your selling bitcoins, you have to make sure you're licensed in each state.

SM: Oh.

AS: It takes a long time. Two or three years.

SM: Ones bad enough.

AS: Costs a lot of money, exactly - and you get audited by each state potentially. When you're in Europe, for example, you just need one license from financial authorities - F.C.A., and that's good across Europe. A lot of people think we are five to ten years behind in innovation in the US because we have all this regulation that stifles innovation.

SM: Oh yeah, I imagine not only the cost of compliance with all those regulations has to be passed on to the consumer.

AS: The cost is obviously passed on. Every time you get audited by a state, they send you the bill for that audit. What's really more costly is the time that entrepreneur has to spend looking for licensing and staying compliant.

SM: Yeah.

AS: I'm advocating that there should be regulations, and there should be in a way that is non intrusive and that's not overreaching. -But, right now, all these regulations are taking so much time for entrepreneurs. The people that want to start up companies in the bitcoin business - they are spending a lot of their time dealing with regulations versus innovating, and that's where the danger is. The other danger is investors may shy away from investing in companies because they are unsure about the regulatory environment.

SM: I remember just earlier today, we saw a panel here at the bitcoin conference about investing in bitcoin companies with a bunch of investors. They were saying one of the things that was a red flag for them - that they would avoid - was a start up that would have regulatory liability. It might be complicated to get around the regulations that are kinda hanging over their head and I just thought – wow - it's incredibly unfair to the person who's starting a company. They don't know what it's going to be like, because it's the bitcoin world.

AS: Yeah.

SM: Now, they don't get investors because regulators are threatening to put some law on them.

AS: Exactly. That's precisely why I joined a bunch of other companies in the emerging payments. To help found the Safe Regulation Organization. We call it Digital Asset Transfer Authority, or DATA. This was just announced last night. We are forming a committee to create an organization to help companies in emerging payments and virtual currencies: to self-regulate, in order to avoid government stepping in and telling us what to do. It's a model that's been used in other industries.

SM: Right. Is this sorta like the movie ratings?

AS: The movie industries have been very successful at that; to self-regulate. Using industry and others, we need to create guidelines for these start up companies, help them understand what the regulatory environment looks like, what the compliance issues are, to let them be prepared for that.

SM: Sometimes in those industries where they're attempting to self-regulate, the self-imposed guidelines, because they are afraid of what the regulators might do, often end up being pretty strict or pretty harsh, maybe even harsher than an actual regulation would be. I know that sometimes...

AS: I doubt that. I doubt any of us would ever create anything harsher than what the government has created for financial services. I agree to some extent that financial services industry is not the best industry from a consumers perspective. If you think about it, we're probably the worst industry, even worse than airlines and I consider myself among them. We take peoples' money, we tell where they can spend, how they can spend it, with whom they can spend it, how much. When they don't do that, we penalize them and we charge them fees when they do, so it's not really a consumer-friendly organization. We are very cognizant of that. The group that I joined, all very progressive-minded - people in the payment space; a lot of bitcoin exchanges: Ripple, Opencoin, other people that are at the forefront of this technology. I doubt we are going to be succumbing to those kind of fears that you talked about. We are not doing this out of fear, we're doing this out of a necessity to educate people, educate the government. A lot of times, the people in Washington are in their own little bubble. They don't really understand why there is a need for Bitcoin.

SM: Oh yeah.

AS: We want to help educate them, but the way to do that is not to violate the laws. The way to

do it is to self-regulate and work with the government to ease up on the regulation down the road.

SM: Some of these industries that say, "We're going to self regulate.” They are basically just predicting or the government has said, "Do this voluntarily, or we'll make it a law.” That hasn't happened in your case, has it?

AS: No, no.

SM: Because they don't even understand Bitcoin enough to even say that, do they?

AS: That's not the reason for this organization. Digital Asset Transfer Authority was born of the idea that there was a need for self-regulation before the government overreacts and creates something that makes it more difficult than it is today. As I said, we are already losing the innovation war to Europe and other continents because of all the huge obstacles we've created in the US. -So we're not aiming to add more regulation, we just want to kinda define it better.

SM: Sure, yeah. Tell me more about your involvement with Opencoin. How did you get involved with that in the first place and why?

AS: I'm excited about Opencoin, I think it addresses some of the concerns that people have regarding the mining, and for example, as a process as a payment process. If it takes ten minutes to an hour to get approval on a bitcoin, that doesn't lend itself easily to a payment processing platform. People want instantaneous gratification, so it needs to be a lot faster. With Opencoin, because they have a ledger that they authorize against, you can get it in fractions of seconds. That's one of the reasons I like it, I like the whole network concept of tying in a bunch of different currencies together and make it easier for people to email money to each other for example.

SM: Right. That would get around the whole idea of block size and the confirmation time with Bitcoin. -So the idea is that every ten minutes, a block is generated, and the transaction has to be included in a block to be confirmed. Sometimes, you're waiting ten minutes for that first confirmation to come up. Some other alternative coins have tried to address that by making making smaller blocks that come out every two minutes or for every minute - something like that.

AS: Yeah, Litecoin. There is a market for smaller transactions.

SM: That can create its own problems, right? Because sometimes, I think it was Terracoin, it was once every minute. Then you have the problem of miners that aren't caught up with with the rest of the network, and they have orphaned blocks or something like that.

AS: Now you're going into the woods with the technical stuff like that.

SM: *laughter*

AS: I can tell you that with Ripple, it's a cool concept. It's a concept whose time has come. I think it makes it easier to transfer money around the world, makes it faster to do payment processing. It enables you to go in and out of bitcoin easily, which I think is one of the issues with Bitcoin, the cash-in, cash-out problem. If you have a lot of gateways and points of entry for cash and points of exit for cash, that would add value to bitcoin as a currency.

SM: There's a potential that some people hearing this are not going to know what Ripple is. How you explain Ripple in a few sentences for someone whose never heard of it?

AS: Ripple is another math-based open system, just like Bitcoin. It enables you to do two things. XRP is the currency of Ripple, so there's a currency and there is also a payment-processing platform. The currency is nice, but I'm really excited about the payment processing aspect of Opencoin. It allows you, for example, to transfer your bitcoins to dollars and then dollars to bitcoins on the other side. If you think of it as the early days of email, you could only send emails to people within your own group.

SM: Oh, yeah. Like AOL or something like that.

AS: So you have CompuServe, AOL, and others that could only send emails to each other. Now, the Internet has come in and connected all of these together. With HTTP, you can send emails to anybody around the world, so Opencoin and Ripple is HTTP for currency. You have all these people who have Google wallet, maybe Isis wallet. They have a lot of different money in a lot of different pockets, in different wallets. Now, they can, for the first time ever, connect them and move in and out of their own wallet and currency very easily.

SM: Cool, I like that explanation. I had never heard anything like that before, but it makes sense. Do you think Opencoin or Ripple will be apart of the DATA consortium?

AS: Yes, they already are.

SM: Oh, they already are?

AS: Yes. They are already on this idea.

SM: What kind of things would a member do to self-regulate? What terms do you already have laid out?

AS: Well, we purposely didn't lay out terms, but we laid out some guidelines that we all agreed upon. It's all on the web.

SM: Where can people find that on the web?

AS: I would look up the #data. Or you could go to datauthority.org. There is a website already for that. There is a Facebook page for DATA, which is Digital Asset Transit Authority. There are some VC's that are part of it. There are some consulting groups that are a part of it. We are going to be recruiting lobbyists and other people who can consult us, and can help us educate the

regulators, so I think people should get involved while it's still a new concept - we just formed the committee to form the organization. A lot of bitcoin companies can still join as founding members still. I have a saying, that I couldn't get a chance to say in the conference which is, "I think Bitcoin is the currency of the people, by the people and for the people." We need to look at it as – yes, it's a currency and it's something that is going to be around, whether it's in the form it is today or a different form. We need to embrace it and find innovations to build around it and on top of it. I'm excited to be a part of Bitcoin. I'm excited to be a part of Opencoin, as well with Ripple because that helps facilitate with even more bitcoin in circulation.

SM: Great. Alan Safahi, thank you so much. Where can people find ZipZap, one more time?

AS: ZipZapinc.com, but we don't sell direct to our consumers. You will have to through one of our exchange partners to find us.

SM: Gotcha, Okay, thank you so much.

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*crowd noise dying down*

MH: You know, I was thinking they'd at least have arm chairs for the fire-side chat, but just imagine we're in front of a fire place smoking a pipe and drinking cognac. Shak, you came from Spotify, so you were part of the big disruption in the music industry some years ago. What parallels do you see from that experience to what's going on today with money.

SK: The first one would probably be a personal one that I have. I do know how to pick the industries that are going to give me the biggest headache. There are far easier industries to get involved in, but one way you could look at it - in the early days of Spotify, it used to be we'd go out and talk to be people. People would go "Well, I really need to own my music, I need to be able to feel the CD.” That conversation then went on to, "I need to own my download.” Did they actually own a download? It was a file on a computer. That conversation's now stopped. I'll explain how that comes to the digital currency side of things, but the DVD space is a similar thing. I'm sure you remember people buying DVD's, and having big oak cabinets built for their DVD collection. These days, everyone just streams off of iTunes or from Netflix, so that ownership has gone away. This physical feel and touch of a product or a good, of whatever value, has actually diminished. If you look at the money side of things, a prime example that was just a report this week, that over ten percent of Starbucks transactions are now being done by smart phones. That may be off by one or two percent, but around ten percent of all transactions, somebody walks into Starbucks and is basically pulling their phone out. They are no longer reaching into their pocket or their wallet to take money out. Technology and smart phones have fundamentally shifted what ownership is, whether it's content or it's certain goods. How I always try to explain Bitcoin and the current digital space we're in as: why is it, in 2013, I can send you an email, a text message, a voice message, an audio message, any kind of file - it will take you two seconds - but you say to me, "hey Shak, you owe me ten bucks for that pizza from last week," and I'm like, "well, I'll try and send it to you." The amount is ten dollars, my bank is going to charge me a twenty-seven dollar transaction fee. Hopefully, you may get it next week,

and that isn't guaranteed. If you just look at that divide, we live in a world where "real-time" is not real-time enough. Then you've got this banking system, which is slower than it's ever been. Those similarities start coming into play. The technology isn't it, because the technology is now there, as has been proven by Bitcoin. A prime example is Apple's App store micro-transactions. Friction has been removed and we need to do more things to make it more frictionless.

MH: Do you think that money and banking may be a little bit different in the sense that banking and financial services are protected industries? You and I can't just start a bank - wake up one morning and start a bank in our garage... There's licensing, there's charters, there's lots of regulation. Could that be some thing that slows things down: a disruption in a way that you didn't see?

SK: Absolutely, because there is a lot more zeros in the banking system than most other industries. You take the tobacco industry - it's an eight-hundred-billion dollar-a-year industry. Then you take the global financial industry - I have no idea how many trillions that is. It's not as easy as setting up an Instagram going, "Hey, I'm going to set up a website in my garage." Naturally, there are going to be more barriers. Naturally, there are more people at stake, and there are more people who are grandfathered in, that have had a certain way of doing things and they fight it. -So, there's always a fear. I don't mean that they're petrified that someone is going to come over and take over the banking system, but they're frightened of change. The ones who embrace it seem to be the ones that in the early days tend to be regarded as a fad, and they'll end up making great business out of it. Who knows where it ends up. But, absolutely there is fear there, and you combine that with regulation, regulation and laws and rules are a great way to instill fear in the people. A lot of times, there's valid reasons for having these rules and having this fear factor. You just cannot have every Tom, Dick, and Harry creating a mini-bank out there without an consumer protection.

MH: As a VC who has been spending a lot of time in the Bitcoin space, now, what advice would you give to entrepreneur who are looking for capital in terms of “how do you approach potential investors based on the pitches that you've heard so far”?

SK: I must have spent the best part of a year, met over forty companies in the bitcoin space. There was a presentation from Maria from Direct Paynet about an hour ago. everyone should read that presentation, reread it, reread it, reread it to actually understand what goes on in the business world. What I have seen - again, this is just my opinion - a lot of people wanting to build a business in the bitcoin industry have no experience of running a business. Don't get me wrong, I'm a high school drop out, I didn't even finish my high school. Who am I to talk? -But, over the years I've run enough businesses and had enough failures to understand the fundamentals of running an enterprise. Which is profit and loose cash flow, what a balance sheet looks like. What I'm seeing is a lot of people with great ideas, with zero or minimal execution experience, but also the strategy a lot of the time is hope, and hope is not a strategy. It's great if it's your money, but think about it. For me, I invest my own money, but if you're a VC out there, chances are your money, the millions of pounds, are from limited partners such as Yale or Princeton. On one side you've got billions of dollars, and they are taking many different bets. Some of them are safe, some are high-risk. On the other side, you've got Johnny from Estonia whose got this idea for ran App. The divide there is so big and the two of them aren't necessarily

speaking the same language. What I was trying to say was that I don't want to mistake this with regulation. What I am trying to say is, from what I am seeing, is a certain amount of adult supervision is required before it goes to total chaos.

MH: Adult supervision.

*crowd giggles*

MH: Can you elaborate on that a little bit?

SK: Um, I met an entrepreneur about two months ago. He was in the bitcoin space. I asked him, what he was working on. He said, "I'm working on a wallet for the emerging markets.” Feature phones, not smart phones: feature phones for the emerging markets, especially India and Africa. What a great idea, I'm sure there's a big need for it. I said, "Tell me about your security back up plan" and he looked at me. “Well, what happens when you get run over by a bus?” He said, "Well I'll give my mom the password." That was his whole defensive measure. I tried to be a realist, so I said to him, "I'll tell you what happens in the real world. Somebody in Africa has got a hundred thousand or a million dollars worth of bitcoins, [and] somehow, they decided to use your product, because they thought this was the best product on the market. You get run over by a bus. You think they are going to just accept it? 'Oh, Johnny got run over by a bus, that's it. We lost a hundred thousand dollars.'" It doesn't quite work like that in the real world. Again, we come to that hope: hopefully, I'll never get run over by a bus. -So one, as an investor: hope is not something I can go to sleep at night going, "well, I have this great investment and the entrepreneur hopes he doesn't get run over.” There is a lot of idealism. -But, hey, that's a good thing. Because, Daniel Ek, who is the founder of Spotify, he was an idealist. He was a 22 year-old kid when I met him, and I said, " How are we going to fix this?" -And he was like, "I'll find a way." -But, he'd done businesses before. While there was an amount of naivety and confidence, he understood the fundamentals of what the other party wanted. Living in denial and not understanding how the global ecosystem of business actually works - that's a dangerous thing to be involved in.

I hate to keep going on about it, but I sat there are and was mesmerized by the presentation that Maria did, because she actually explains it in plain English, which is great. There is no friction and merchants aren't being charged as much as the credit card companies are charging. You try and go and buy ten dollars worth of bitcoins out there. I think it would be easier to go on a plane, go to MtGox and camp outside. Knock on the door and go “here is my ten dollars. Could you give me some bitcoins?” Because they aren't going to send them to you, right? So, this is -- you talk about frictionless, I think this is the highest form of friction that we're dealing with. Nobody talks about that because it's not cool to talk about that.

MH: I have definitely learned through experience that the hardest part about Bitcoin is getting them. That's where all the friction is, at the entry points. Once you have them, it's really easy to send. It's almost like if you were to build the financial system from scratch, it would look more like Bitcoin. In fact, that's not the financial system we've inherited. To get your bitcoins, unless someone sent them to you for free, you've got to work with that financial system.

SK: Well, if there was a new financial system built today, I'm guessing fifty percent of the liquidity wouldn't be out of one building in Tokyo, would it? We live in a world, and I don't know how many people there are in Tokyo, but it definitely doesn't have fifty percent of the world's population, so you take all those factors in. Again, we're in an industries that's always growing: change is going to come. We have to embrace change. What I always try to say, it will come back to the adult supervision. It's all very well saying, "We don't need regulations. We probably don't need interference." -But who is going to regulate all this? We come back to the situation of there are investors who want to invest in solid business models. There are entrepreneurs who want to build great companies. The fundamentals there aren't exactly aligned. The entrepreneur says "I want to bring down the central bank." I've met entrepreneurs that are like, " I want to bring down some central bank. Introduce me to some VC's." I was like, "You do realize that the same people you talking about bringing down are the same people your looking to fund you." I don't know any bitcoiners that are running multi-billion dollar funds. -So, just this divides, I think. Some sort of education and accepting... this is the real world; this is not a fairy tale. I spend a lot of time in the “normal webspace,” let's call it. It's always great to look at Kevin Systrom from Instagram. There was a photo app and he sold it for a billion dollars. I know about four thousand other guys who created a photo app who have gone back to their nine-to-five jobs because it didn't work. -So just thinking we can change the world – great, and I hope it happens in some shape or form, but you have to look at the bigger picture. There's a lot more going on in the world than going "Hey, we're going to go on bitcoin forum, and together we're going to bring down the global financial system."

MH: Starting with the fed, of course. I wanted to talk a little bit about compliance. Clearly, professionalism is important, and understanding how business works is important. There is a debate in the start-up world, even outside of Bitcoin. You see this when you read about Uber, the taxi app, Airbnb. Is it better to, when it comes to regulators and particularly when you have a disruptive technology that does not perfectly map to the categories that everyone understands, is it better to ask permission, or beg forgiveness? nd is the answer to that question different in money than it would be in other regulated industries?

SK: That's an interesting question. I lived in China for a few years, and there, asking permission for anything, you get a no. It stems from the communist mindset back in the day. The person who says yes is responsible, so if you go and ask "Can I do this?" and they say to you, "Yes, you can," they are the single point of responsibility. When anything else fails, somebody says, "Who authorized this?" -So it's far easier to say no than you've got asking for forgiveness. You go back to, “well, let's do this and we'll live in hope.” I think it depends in different sectors. The issue we've got right now, especially in the bitcoin space. Whether people admit it or not, is nobody has a clue what's going on. I would like to think Coindesk, which is one of the bigger publications... -Actually, I'm curious, who reads Coindesk here? A lot of people. Now, you'd think I'd be sitting up here going, "I'm an expert I know everything!" And, I'll use a swear word here - I'm fucking clueless. I seriously am.

*MH and crowd laugh*

SK: As are most people in this room. However, we come back to, "I read this article and I read that article which makes me an expert." Nobody has any idea what's going on and everyone is

collectively living in a bit of hope. If we keep on talking about it, hopefully somebody somewhere along the line is going to figure it out. Inside the banks, nobody actually knows whose division it is. I'm sure it started off with the guy who was doing the Twitter account going, "Oh, there's this new start-up thing called Bitcoin and you deal with it." I had email from somebody yesterday going, "I have some friends who that would like to talk to the guy behind Bitcoin, can you introduce him?"

*MH and crowd laugh*

SK: These are serious people, who don't actually know... -So... What was the question again?

MH: Is it better to ask permission or beg forgiveness?

SK: Who do you ask permission from? The Twitter or the social media guy? Do you go up to the guy and go, "Stop tweeting. Can I run this exchange where I'm not going to answer questions from people - and, you know what, I may just pack up, and go away for two weeks? Put a sign up. No offense to Charlie Schrem, just put a holding page up saying 'Hey. We're redoing our platform, redoing our website. We're out of here.'" Is he going to give you permission for that? I don't even know who wants to be asked permission, so you end up going to the wrong people. You end up going to the people who think this is money laundering, [so] let's send it straight over to the money laundering unit. -And they are like, "Well, there is no money here. What have they laundered?" So, you've got lawyers talking about it. I'll give you another prime example. I'm letting it all out today, apparently. I met a lawyer last week who's advising a start-up who wants to raise money. I asked, "What's you regulation situation?" They said they had this amazing lawyer who was this bitcoin expert. I asked, "Can I meet him?" -So I meet him, we start talking and I ask, "How many bitcoin do you have?" He looks at me, and he tells me, "None." I'm like, how can you possibly advise? You're the single person in this meeting room that can send these guys to jail or keep them out of jail and you've never bought a bitcoin, but what I realized is all he does is read Coindesk. If I as the publisher of Coindesk am sitting here going, I don't have a clue, but he's making a great business. Unfortunately, that's where the naivety comes in. Peter and Lucy doing the start-ups outside. In the land of the blind, the one-eyed man is king. Because he's got the title of XYZ, he can now make a great business advising them off stuff which I am busy trying to outsource, to freelance writers who I've never met, who are writing what they've see on /r/bitcoin, Reddit's Bitcoin forum. That's the truth of what's going on in this industry. -But, we can gloss it up as much as we like.

MH: Right.

SK: You did want a fireside chat, right? -So here it is.

*applause*

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*applause*

MH: More like a barside chat. Not to keep harping on this, but part of what I was thinking of when I asked that question was... I mentioned Uber. Uber gets a lot of customers, and then they deal with the local taxi commission. Therefore, it is a little bit trickier politically for the established interest to say, no you have to....

SK: It's city by city, right?

MH: Yes, city by city.

SK: I know that space very very well. It's city by city, and while regulated from somewhere along the line in the government, it's not controlled centrally. There isn't the World Bank, there isn't IMF, there isn't trillions and trillions of dollars at stake. Some, they win, some they lose. They are having an issue in Denver at the moment. They had an issue in Sweden. Every country and every city has certain different restrictions. I'll give you an example. Stockholm said we have no problem with you operating here as long as you put a meter of some kind which shows a user when they're in the car, how much your bill has racked up. Uber decided that's not something which they believed in. They decided not to do it. There are small problems. The financial services? We'll come back to it. I don't even know who to talk to. Do I talk to somebody in Wall Street? Do I talk to somebody in Switzerland? Nobody really knows who to talk to. There're different conversations. We ran a story about the H.M.R.C. which is the UK's revenue-governing body. They gave a great statement saying, "We don't think you need to be licensed under XYZ, blah blah." It looked like a great thing, underneath it said, "by the way, this could change at any moment it becomes legal or illegal, and you will have to make relevant changes." So, you could go build a whole business model, and one email comes from them means you're illegal overnight. I don't even know where or who to start with this at the moment.

MH: PayPal, in their formative years - they had a lot of struggles with regulators. There's a great story. I think it was Louisiana, they were told by the state regulator, “you need a license or you don't have the right licensing, you've got to shut down in Louisiana.” -But, at that point, they had

a lot of customers in Louisiana and those Louisiana customers burned up the phone line. Is there a calculated risk you take, creating facts on the ground?

SK: There is, but then you come back to, “how can an army of people who want to remain anonymous, burn up the phone lines?” What are we going to do, set up anonymous email accounts? This is the challenge. You don't want anyone to know what you're doing, but the invisible man doesn't exist. Five thousand people can't just turn up at the regulator's office going, "We want to use bitcoin, but we don't want you to know we're using bitcoin. Approve it for us.” Not to make a joke, because this is a very serious matter. I think there are a lot of different parallels which can be taken in. We're heading in the right direction, right? Events like this... The right people are starting to take notice of it. There just isn't any magic wand. If there was one single person in an organization who you could sit down and explain the logic to, that'd be great, but there just isn't. There are other consumer issues that come at stake. A prime example is recurring monthly billing. A lot of people come to me. The first thing, they come to me and say, "Hey, would you like to invest in our company? Maybe you can help us get the Spotify account, because Spotify is going to do a million dollars and that would be great for recurring billing." And I'm like, “they should take bitcoin.” I get that, but if we come to this month, the average price or the normal price is $9.99 a month for premium service. If it's $9.99... what is it? 0.1 bitcoin today? And it's fine - the price goes up and down. In three months time, you're maybe paying two hundred and fifty dollars a month for Spotify. Who's going to control this element there? The average consumer doesn't want to be playing the currency market. The traders in Wall Street, they are quite comfortable because there are arbitrage opportunity, but [for] the average consumer, it's unfair on them to put this burden of volatility. At one stage, saying that this is the future, this is safe, etc. And the next stage saying, "Oh, by the way, your Spotify service costs $250.

MH: I would think that there would be a fairly easy solution to that. I mean, if you have a service like Coinbase and you authorize coinbase to deduct the equivalent of $9.99 from your bitcoin account, or Blockchain, or whomever. The math can't be too complicated of an algorithm.

SK: It can't to you and I, but think about who we're dealing with here. How far our journey has to go to get to that stage. We've already accepted that trying to buy coins is a bit of a headache. Have you tried using Blockchain? Most teams, most companies have a UI team which make this product work really well. I know the guys at Blockchain. I'm sure they have an anti-UI team. They are like, "Here's a great product. Make it really really hard to use." It took me many months to work out, that's where my coins were because it seemed like there was this data thing and some charts going on. [PR note: keep in mind that this aired in August '13 – Blockchain's had at least one major GUI overhaul since then] We are probably here, we need to get here, and there are random pockets of information that people are going to get involved in which, hopefully, will get it towards the end solution. Then, is it Bitcoin or some other form of digital currency? I honestly don't know. I am a believer in digital currency, what I call "money over IP." Friction -- I don't really care if its pegged to the bitcoin, because it's obviously friction the people want solving, and Bitcoin is the best out there at the moment.

MH: We've got about ten more minutes, then Shak's got to get on a plane, so I think this would be a good time to take questions from the audience.

CV: Hi, I'm Carol Vancleave with Patton Boggs. I was glad to hear the reference you made to your lawyer, or the lawyer sitting at the table using the pronoun "he" instead of "she." I think it is a very serious issue, that everyone in the room who's trying to make that decision of how they are going to move forward, whether to ask for forgiveness later - that's fine in one kind of setting, but you have to realize there are multiple people at the table on this issue. One of them is the Department of Justice. Things are fine as long as they are going well, but if something goes wrong, it could be the slightest little thing that puts you on the radar of the Department of Justice. The first thing they are going to come after you on is, are you registered with FinCEN appropriately and have you addressed the money transmitter licensing issue? All they need, some of you have heard me say before, is one state to put up a hand and say you needed a licenses in this state. That's the basis of a federal criminal action. It's going on, real-time, right now. The Department of Justice is really taking off after third-party payment processors, and is doing this right now. We're seeing it with some of the probably more innocent, as I would say, players in the marketplace. For whatever reason, they end up on the radar screen. If it happens, it's almost a game over type situation. There are steps you can take to try and show you've been trying to make a good faith effort like sending in letters to the states, maybe putting applications in and so on if you've already begun the activity. But, we're in - especially with Bitcoin, a very, very delicate situation right now. If you talk to some of the state regulators, the feedback from the state regulators - there is a great deal of law enforcement interest around the issue. -So, it's on the radar screen. I know that that was a very entertaining presentation you just made, but I have to come in with a little bit of a dose of reality here, because unfortunately, I end up on the other side here. Having to bail people out of these situations.

SK: Absolutely. One, you were supposed to ask a question, but you made a statement. Which is fine.

CV: It was supposed to be a chat I thought.

SK: I also made a statement that all we can do is give our opinions. For me, do I feel comfortable investing in an industry where there are too many unknowns? Probably not. I'm very, very aware, and that's probably why I'm not investing. There have been cases in the gambling industries where the investors and board members are responsible. Sometimes, you can look at it from a legal aspect, but hang out a minute. You're the board, you were the ones who were supposed to be supervising this. Until there is some clarification - you take the anti money laundering rule. There is so much noise out there, that for me as an investor, it's way too much to even process, to decide. I am all for having lawyers, because it's required in any shape or form. What I'm not for is people thinking, just because they met a lawyer, and he may have been doing real estate the week before... It comes back to what we're saying, that is you haven't run businesses than you don't have the main expertise to go and do the right due diligence on the right lawyer to see, is this the person who's going to keep me out of jail, or not. I think fundamentally, I agree with everything you say.

MH: Another question.

Audience: How do you think an entrepreneur like Mark Zuckerberg would respond to adult supervision?

SK: How do I think an entrepreneur like Mark Zuckerberg..? Mark Zuckerberg has a lot of adult supervision around him. If you look at his board, it consists of Mark Andreessen, the founder of Netscape. It consists of Reed Hastings, who is the founder of Netflix. It consist of Peter Thiel, who's the founder of PayPal. I would like to think that those are three adults who have who have gone through disruptive industry changes over the last ten years, and fought a lot of battles. He surrounds himself with a lot of smart people.

Audience: Would you say surrounding yourself with the right people while retaining control of your board is a good idea for an entrepreneur?

SK: It's similar to what Mark said. The finance industry is slightly different. Mark Zuckerberg didn't create a bank, he created a bank of information which consists of every person in the world having an account. He's got his own challenges ongoing in the company as do all large Internet companies. -But, he didn't fundamentally try and disrupt the global financial system. It probably needs disrupting in some shape or form. I think the parallels are slightly different. If you were to go ask Mark, he would say the most important thing I did was surround myself with people who have run businesses. Let's not forget Mark Zuckerberg was in a dorm in his college university and Sean Parker flew out there with the last bit of money he had. Sean Parker had done Napster. I lived being involved with Spotify, Sean Parker had down Napster and been sued for billions and billions of dollars. Whilst he had gone through it, let's take Napster and Bitcoin in the same space. He lived through the challenges, but came out on the other side. I guess his valuable message to Mark Zuckerberg was let's not upset the people who can send us to jail or sue us for trillions of dollars. -So, adult supervision in any shape or form is very important.

MH: And don't forget Sheryl Sandberg, as far as adult supervision goes.

SY: Hi Shak, my name is Susan Young. My question for you - I'll piggy back off of the other two questions that were previously presented... In [relation] to government activity, how does Spotify and Coindesk anticipate that for the future? To also piggy back off of the social media question regarding facebook. I agree with your statement that he has surrounded himself with some very intelligent individuals. How does Spotify and your take on Coindesk, as far as monetization, in the music industry, specifically - what is your thought process surrounding that, as far as embedded content as well as protecting the rights-holders for artists?

SK: Are we referring to the Spotify business model as such? -Or the link of that with digital currency and Bitcoin? I'm curious.

SY: I am tabling that questions to you, to answer both topics.

SK: So, one: I'm sitting here as a minor investor in Spotify, but our agreements are with the rights holders. We didn't do what a lot of people did in the music space which is, let's ask the permission after we launch, which is why it took Spotify many many years to get the licensing required. That was a four year struggle of going in and knocking on the doors. That conversation changed over the years. What we were able to do was, starting in a small country like Sweden with nine million people, which, on the global level of music sales, is probably country number nineteen. Then show how that worked in that country, and go, “well, now its working in Norway,

and we've tried it here.” Then, for the US market, which is the worlds largest music market, to go, “OK the is some traction for the rights holders to risk everything on one bet,” which would be crazy for them. At the same time while this was going on, we still had this conversation up until last year. Even these days, you'll have a conversation with the rights holder, who's like, "I don't believe in this change, and I'm quite happy selling CDs, and I don't want my music on Spotify or any other digital service. Then you go to him and say, you do realize there are millions of pirate copies of your file, your music, your audio file on the web which you have no control over. A lot of them don't really have an answer for that. I think there is a possible lack of education on both sides that technology is trying to change. It's going to take time, it's going to take a certain amount of time until the digital revenue is equivalent of what the CD sales were. But, at the same time, you still have what was going on which is, whether it's pirated DVD's or pirated CDs, you still have companies out there that are giving away the content. Free of charge. I think it's a much bigger play. Are the labels rights holders? Yes. Are they regulators? Probably no. There are regulators involved, but if you are actually doing what you are supposed to do, there is very minimal regulation required. I think that's that, in terms of Coindesk - it's a self-funded project by me. It started off because I wanted information. I'm in absolutely no rush to monetize this. It was really just for me to learn about the space, to be a better-informed investor. It's actually had the opposite effect. I thought having all this proprietary knowledge about the space would allow me to make more investments. I haven't done a single investment since I launched Coindesk because there is an over-flow of information, there are far too many opportunities, but the risk factor is to high for me, and my appetite for investing. I hope that answers your question.

SY: That does, actually. Thank you. Actually, one more question for you. How is your current existent business models? How do you foresee that in competition relative to the spaces that you are doing business in? Relative to festivals, and IDNT merger? Things that are within that space, again back to the monetization issue.

SK: Could you repeat the last part again?

SY: How are you looking at competitors such as big mergers and acquisitions, especially in the music monetization space, such as IDNT, who has now come to north America. Tabling that with large labels such as Columbia, Sony, and so on, into your existing business model.

SK: You won't like this answer, but luckily I don't have to get involved in any of that stuff.

SY: Actually, I like that answer.

SK: I have no involvement. There are people far smarter than me involved in thinking about the bigger play. For me, it was one part of the journey. I have fifteen investments, but one in the bitcoin industry which I actively made investment, which was a company called Bitpay. I believe Tony is over there somewhere. There he is. For, me the investment in that was one, Tony and the team. To my investment in Bitpay, I don't look at as a bitcoin investment. I look at as a technology investment because digital currency is going to come. I have enough grey hairs to know how this one plays out. The people who are providing the services on the side are the ones who I want to back because it's somebody I can help scale versus investing in something that is

taking a far higher risk. As an example, an exchange. I looked at a number of exchanges and I wasn't comfortable with that.

SY: Thank you very much.

ABL: I think we are out of time. Yep. I want to thank you, first of all, Marc. For doing a great job through out the conference.

MH: My pleasure.

ABL: Shak, thanks a lot. It was a last minute addition, and it was just wonderful having you here. So, lets give these guys a big round of applause.

*applause*

ABL: Thanks for listening to episode 35 of Let's Talk Bitcoin. Content for today's show was provided by Stephanie Murphy, Marc Hochstein, Charlie Schrem, Alan Safahi, and Shakil Khan. Music was provided by Jared Rubins, and also me, because now that's something I do. If you want to help out with music we play on LBT, get in touch. As always, comments about the production can go to [email protected]. You can read our daily blog at LetsTalkBitcoin.com and you can participate in our listener subreddit at LetsTalkBitcoin.com/talk. See ya next time.