Patrick Murck is a founding member and Executive Director of the Bitcoin Foundation. His expertise as an executive in a number of digital currency companies extends across the legal and regulatory issues governing the use of bitcoin, decentralized financial systems, virtual economies, alternative payment systems, and social loyalty and reward programs. He has appeared before numerous agencies, testified on Bitcoin’s social and economic benefits before the U. S. Senate and has received the distinction of being named among “America’s Outstanding General Counsel” by ALM in The National Law Journal.
The Politic: In some ways, I like to compare Bitcoin to the Crimean War in the sense that almost everyone has heard of it while few people know exactly what it is. Could you briefly summarize what Bitcoin is and where it has come from its origins to today?
The best answer to that can be found in the original white paper by Satoshi Nakamoto. It’s about nine pages, it’s not super technical, and it’s something that anybody can read and understand. The premise was to create a frictionless, electronic payment system where one doesn’t have to rely on third party intermediaries or endure counter-party risk. There are two things that come up when you make a payment online. You have to rely on a central gatekeeper, and if you do that, you are required to get their permission to allow the payment to go forward. This can create an economic problem because for certain payment types there is no effective fee mechanism to allow a third party intermediary to reap any economic gain. For example, credit cards are terrible with micro-transactions. Credit cards in the western world are great for transactions that range in cost between five and one thousand dollars, but with micro-transactions, there is no economic benefit for either the merchant or the processor to accept those payments. For macro-transactions, the cost of credit cards becomes too great because it is simply a flat fee. It is about 160 or 200 basis points on a transaction. When you are selling a car, 160 basis points going to a payment processor is not tolerable as your margin will disappear. By creating a system where you no longer have financial intermediaries or counterparties anymore you can create a different set of economics around payment processing. That is essentially what Bitcoin has done.
The other issue with counterparty risk is when you have to rely on central processors to clear and settle – not just electronic payments but any asset transfer – you are relying on the fact that those third parties either actually have the asset or won’t over-leverage the asset and essentially blow up the whole system. I don’t think it’s a coincidence that Bitcoin took off in the wake of a financial crisis sparked by overleveraged counterparty risk.
The Politic: What road led you to become the Bitcoin Foundation’s General Counsel?
Make up your own job; that always helps. I was a telecom, media and technology attorney in D.C. and I moved to Seattle, and I joined a startup essentially as employee number one. We did a lot of things at the startup, but our last pivot, one that became our business was in digital currency. That happened around the time that Satoshi released the white paper. I became aware of Bitcoin in 2010, and I was following it for a number of different reasons, one of which was that I was already looking at digital currency business models and the regulatory impact of issuing and administering digital currency. When I finally got the white paper, it clicked in my head that these people had solved many of the regulatory problems by not having a central issuer or administrator. Later, after I transitioned out of that company and started representing some of the early players in the Bitcoin industry from a legal perspective, a small group of the early pioneers, led by our chief-scientist Gavin Andresen, got together and decided to create a Bitcoin Foundation that could support the core development of the Bitcoin infrastructure and interface with the legal world where you need to have a central point to do that.
The Politic: As the world just starts to wrap its head around Bitcoin, few people recognize that there is a proverbial arms race of proliferating cryptocurrencies with over 1,000 different forms out there today. What differentiates Bitcoin from all the other forms of cryptocurrency?
At the end of the day Bitcoin is a protocol; it is a set of rules for people to follow. There is software that implements those rules. Bitcoin Core, which used to be led by Gavin Andresen and now Wladimir Van der Laan, is an implementation of the Bitcoin Protocol. The software can be copied for free. I don’t just mean that practically – legally as well. It is licensed under the MIT open-source license. Anyone can make a copy of the reference implementation software. If you look at Bitcoin and think, “I like Bitcoin, but I don’t like proof of work system. It should transact faster,” you can copy the code and tweak the things that you want to tweak to create a better Bitcoin. That is essentially what a lot of the legitimate alt-coins have been trying to do – different experiments of tweaking different sets of rules around Bitcoin. That is not a bad thing, and in a lot of ways is like research and development around the core Bitcoin project. Bitcoin itself has to move slowly; it’s a conservative project, because there is so much invested, so you can’t make massive, sudden changes. It also requires consensus from a very wide-ranging group of people for changes to happen in the Bitcoin project. It’s good that there are these experiments. It does, however, create some fractionalization. Where you will see the next big wave of innovations will be in side-chains. This idea of side-chains is where you are essentially pegging your alternative currency to the value of Bitcoin and the mining power of Bitcoin, which allows you to experiment with these new systems and make Bitcoin more extensible but also make all of those new experiments interoperable with the original core Bitcoin system.
The Politic: I want to get back to the other forms of cryptocurrency in a second, but first, sticking with the core Bitcoin project, where do you see Bitcoin twenty years from now?
That’s a great question, and if I had the ability to predict things like that, I’d have yacht in the Bahamas.
The Politic: Fair enough – where would you like to see Bitcoin twenty years from now?
Twenty years is such a long time horizon, but as we move forward to beyond the near future, what I am hopeful for is that you are going to see a system that is apolitical that allows to people to access a new global economy without having to ask permission. A lot of what we are seeing around the world is stalled-out wealth creation and under-banked populations and people pushed into informal cash-based marketplaces. There is an opportunity here to say that maybe the issue isn’t that we aren’t throwing enough aid money or development money at the problem, but rather the issue is that everybody in the system has to ask for permission to be granted the privilege of engaging in global finance. Maybe if we remove this barrier and allow everyone to rise and fall on his or her own merit, we will give everyone in the world equal opportunity to participate. That will create a huge and lasting difference in the world. That vision is what gets me up in the morning and eager to go to work.
The Politic: One impediment to Bitcoin as a conventional form of currency is its volatility. How do you see the volatility changing in the future?
There are two parts to this. One, there is a higher-level question: how volatile is Bitcoin? It is volatile, but it is all relative. In the Western world, and in the U.S. in particular, Bitcoin looks very volatile as a currency. One day you can have a three or five percent swing. If you were in Argentina and the government is devaluing the Argentinian peso by fifty percent and not allowing you to move your wealth out of the Argentinian peso at the same time, I don’t think you’d think that Bitcoin is that volatile, at least not by comparison. We have to take a relative look at volatility; that means that Bitcoin may be a more useful innovation in other places in the world first before it comes to the Western world, which is also a phenomenon that we are seeing with mobile money more generally such as with M-Pesa. The other piece is that to the extent that Bitcoin is volatile, and it does have some volatility for sure, it is going to be a function of adoption. It’s not like volatility is going to go away tomorrow. There’s no silver bullet to cure volatility; however, as more people come onto the platform and into the network you are going to see the volatility level out. That’s pretty clear. You are also seeing people innovate around this and build products to help solve these problems whether it is merchant processors like Bitpay, who will accept all the volatility risks per merchant accepting Bitcoin, or you are seeing products like Bitcoin to USD swaps that allow people to literally create a market to hedge the volatility risk of Bitcoin. That type of innovation is happening pretty quickly now, and it will not only help draw down the overall volatility of the asset, of Bitcoin, but also help people reduce their risk exposure to that volatility.
The Politic: You mentioned Kenya’s M-Pesa. This has offered many Africans the opportunity for e-banking and virtual currency exchange that has been reliable today. What differentiates Bitcoin from M-Pesa, and why should Bitcoin be the path moving forward when M-Pesa has proved reliable for millions today?
M-Pesa is a pretty interesting phenomenon. The biggest difference, and the most obvious, is that with M-Pesa you have a very centralized system. Here is a system where Safaricom essentially is the bank in the equation. With Bitcoin, you have not just a decentralized system, but also a distributed system. Everybody is a bank unto themselves. Both systems have advantages and disadvantages. With Bitcoin, that means that a lot of the security risk is pushed down to the end user whereas in a centralized system it is easier to contain that risk to one place. The difference is that you have to trust that Safaricom is going to continue to operate in a safe way. If all you are doing is replacing the Kenyan Central Bank with the Safaricom Central Bank, you kind of have the same system. Again, you are going to have to ask for permission to use the network and there will be restrictions and fees. Generally, when you have closed protocols and open protocols, especially in an Internet landscape, the open protocols win over time. The reason why open protocols tend to win is that when you have an open protocol like Bitcoin, you have what’s called a billion IQ points working on it. The whole world, the best and the brightest minds in the world, come and work on Bitcoin. They don’t work for anybody; they do it because they love it. With Safaricom, you actually have to hire people. You will never hire enough IQ points to compete in a closed eco-system with the IQ points that are gravitating towards a broad-based open-protocol that people have embraced like Bitcoin. Central ones can move faster earlier and clearly M-Pesa is a much more polished, developed product end-to-end today than Bitcoin.
The Politic: Building on that note, one of the advantages that you mentioned earlier about Bitcoin is its reduced transaction fees compared to the formal banking system. Another thing that distinguished Bitcoin is its anonymity. What are your thoughts on the emerging cryptocurrencies like Darkcoin and Zerocoin that offer almost perfect levels of anonymity?
I am always a little hesitant when people start throwing around the “A-word:” anonymity. It’s not because I’m opposed to anonymity online. I’m not. It’s because, generally speaking, those systems are not actually anonymous. It’s very dangerous to tell people that they can be anonymous in their dealings online whether its communication or in their financial transactions if that’s not actually true. What you are doing is setting people up to do stupid things that they are going to later regret because they believed falsely that what they were doing was going to be anonymous. Whether something like Darkcoin or Zerocoin can truly provide an anonymous service to people is up for debate. I don’t think that’s a given. I would caution people. People used to say that Bitcoin is anonymous too. It’s not. Usually what I tell people is that Bitcoin is as anonymous as surfing the Internet. The same subset of people who claim some level of anonymity surfing the Internet are probably the same ones who can claim some sort of anonymity using Bitcoin. It is generally the same skillset. It is a very, very small group of people who can do that effectively, and it is always questionable how effective they can be at it. Anytime that you leave a digital paper trail, it’s hard to see how at some point down the road, people won’t figure out a way to connect those dots back together. You are just leaving too much information out there. What I like to think about with Bitcoin is not anonymity, which I just think is dangerous to sell that to people when it’s not that true, is this idea of user-defined privacy – the idea that, as a consumer, I can decide how private I want my information to be on the network. I can choose to use mixers and tumblers, or I can choose not to. I can choose to use Coinjoin, or I can choose not to. That is similar to how the Internet operates as well. You, as a user, can forgo some of your privacy to gain convenience, or you can spend a lot of time hardening your identity. I think that’s an entirely appropriate thing when you’re discussing the Bitcoin protocol.
The Politic: A recent report from a Treasury Department representative mentioned that with the advent of Darkcoin and Zerocoin, as well as mixers and tumblers, there is going to be somewhat of a bifurcation of cryptocurrency users with inherently illicit actors gravitating towards the options that offer greater levels of privacy. What are your thoughts on this bifurcation of licit and illicit actors who use cryptocurrencies?
People who transact to do illicit activity always take advantage of new technology. It would be naïve to think that those people won’t use any of those privacy-enhancing technologies to further their activity. At the same time, that doesn’t mean that everyone who values privacy is a criminal. There may be very good, legitimate reasons why I don’t want people to track my transactions or my financial history, including the government. If I wanted to seek out psychiatric help, and God knows I probably need it, and I maybe someday wanted to work for the Treasury Department, I may not want to put that out there whether on my credit card or my checking account. I might want to make that payment very discrete and very private because that would put me into a stigmatized class if it were discovered. Just because you want transactions private and shielded, not just from your family but the government as well, does not necessarily make you a criminal. At the same time, it would be naïve to think that criminals won’t use these systems, and I think the people that are building these services have the obligation to build responsible systems. It is pretty critical people for people to understand how to build responsible systems that are hardened against misuse by illicit actors so that we can move away from this discussion that Bitcoin is just for criminals, which I think is oversold to be honest. It would take a some stupid criminals to use Bitcoin right now, seeing how effective lawmakers have been in catching up to people.
The Politic: How have you seen Congress and the U.S. Government receiving cryptocurrencies over the past two or three years, and what are your thoughts on the regulatory landscape of virtual and cryptocurrencies?
When I first went to D.C., it was pretty hostile. It was all about Silk Road. The worst of the worst stuff was being peddled by certain interest groups in DC at the time. After we hit the ground in DC, and it was me and Gavin [Andresen], Jim Harper, Jerry Brito and some others. We very effectively changed that narrative pretty quickly. It might have been as simple as a bunch of Bitcoin people who looked like responsible adults showing up in suits and ties. We did, and it made a big difference. The capstone on that were the Senate hearings that happened in November. There were people in the community who said, “Be careful, they might walk you out of the hearings in handcuffs.” Fortunately, the hearings went a little differently, and they were very positive. That changed everything, and shifted the tone completely. We took some hits after that, but it has recovered, and the general climate is positive.
There are a few reasons for that. The biggest reason is that people in the regulatory community understand the inevitability of these technologies, and they want to preserve a place in them. Also, what you are seeing is a recognition of the benefits of these technologies. As I elaborated on earlier, there is a huge public good with Bitcoin, and people really get that. Government in regulatory circles is not all gloom and doom. They would love to be a part of the story that says we helped bring Bitcoin to the world, and it helped improve everybody’s lives. The government and a lot of the regulatory community want to be a part of that positive narrative too.
The Politic: Are you focused on addressing solely Congress and the U.S. government’s opinions on Bitcoin, or are you also focused on an international level? I know the international community is remarkably divided with Ecuador developing its own national cryptocurrency whereas Bolivia has declared that all forms of cryptocurrency are illegal in the country.
The Bitcoin Foundation is an international organization. Jim Harper’s title today is Global Policy Counsel. We are active in the EU, and we are active elsewhere. It is important to understand that this is a global phenomenon. You are going to have very diverse views on how Bitcoin should be treated on a country-by-country basis. If you had to map out where the friction points are going to be, it’s probably safe to say that any Bretton Woods style centrally planned monetary policy that relies on controlling capital flight is going to have a difficult time adjusting to a cryptocurrency world because Bitcoin is the hottest of hot money, and it can’t be controlled. You cannot keep that capital within your borders. If you are in Argentina, and you are trying to re-peg the Peso, you are going to have a very difficult time when all of your citizens can move their wealth into Bitcoin and hedge it against the risk of the Peso. It does have some pretty broad geopolitical implications that people are only just starting to understand. At the same time, the market cap is only $5 billion, which is still a small number.
The Politic: On a final note of Bitcoin-related misuse, what do you see as your threat or risk assessment of hardened illicit actors, such as violent extremist organizations, gravitating towards Bitcoin and cryptocurrency to conduct illicit transactions?
Organizations like that will gravitate towards anything that allows them to fund their activities. Anything. There is nothing special about Bitcoin in that context. If they feel like that helps them fund their activities, then they will use it. If they feel like stealing credit card numbers and selling them on the black market will help them, then they will do that too, which they do. If they want to use pre-paid access cards, they will use them. Of course, they will use cash. Cash is king because that is a truly anonymous currency. It doesn’t do anybody any favors to say that we need to stop terrorist financing, so let’s look at Bitcoin. It’s always going to be that we need to look holistically at the global financial system; let’s see how people are channeling their money and figure out how to follow it and how to conduct investigations. Do we, as a law enforcement community, need to adjust our methodologies to fit some of the new emerging technologies?
The Politic: Do you see any similarities or differences between pre-paid access cards or also hawala networks and Bitcoin in terms of money transactions or in terms of how governments and regulators have responded to them?
There is another alt-coin called Ripple, which is literally a digital hawala network. Bitcoin is less like that because its not based on trust, there’s actually a hard asset being traded around. There is a lot of concern around hawala networks in counterterrorism finance circles for obvious reasons. At the same time, people understand that at times, hawala is the only way to move lifeline payment from one country to another, from Western developed countries where people are making their money to support families back home. There is an ongoing balancing of how to deal with hawala networks. I suspect that people would love to replace hawala networks with something that is more secure, more stable, and more transparent. Pre-paid access cards have had to fight a lot of the same fights in the regulatory circles that Bitcoin is fighting right now. When pre-paid access came to market, there was a great cry from the law enforcement community about the potential for misuse and abuse by illicit actors for criminal activity. Any time that you introduce a new technology into the financial system, there is going to be a struggle to understand it, a struggle to understand where the problems are if there are any, where the benefits are, and how to capture the benefits and mitigate the risks.
The Politic: What would it take for you to receive your next paycheck in Bitcoin?
I already get paid in Bitcoin, so it doesn’t take much. Everybody at the Bitcoin Foundation, the entire staff, gets paid in Bitcoin 100 percent. I have never bought a Bitcoin. I have only earned them, and spent them. For a long time, I would only earn and spend; however, once I got my salary entirely in Bitcoin, I had to start selling them because my son’s school doesn’t take Bitcoin, and you can’t pay your mortgage yet with Bitcoin, but I have never bought a Bitcoin in all my years. A lot of people are speculators and traders, but I am not. I know if I tried, I would just lose my shirt. I love to focus on the idea of being a part of the Bitcoin economy through earning and spending Bitcoin.
The Politic: Okay, fine. What would it take for Yale to pay me, as one of its student employees, in Bitcoin for my next paycheck?
Maybe I should fly in to speak with the dean. There are companies out there that are building solutions to do that; Bitwage is one of them. There are going to be some software solutions that come out that allow employees to choose the currency that they would like to be paid in. There might even be some people working on some projects where they will collect your paycheck and give you Bitcoin or perhaps where you can opt in through your employer. I like the way you are thinking, and I am happy to help and support you in making this happen.