Line by Line Response to WaPo “R.I.P. Bitcoin” Article

Vivek Wadhwa published a piece at the Washington Post today about Bitcoin. Here’s the takeaway, in his own words:

Bitcoin did have great potential, but it is damaged beyond repair. A replacement is badly needed.

Vivek is wrong. His article shows he has little knowledge of Bitcoin himself but relies on the word of others to form his opinion. This post will respond line by line to counter his claims.


Not long ago, venture capitalists were talking about how Bitcoin was going to transform the global currency system and render governments powerless to police monetary transactions.

Some venture capitalists may have said this. I’m guessing most VCs didn’t actually publicly endorse the idea that Bitcoin would “render governments powerless” since that’s not the type of things investors like hearing. Regardless, his point is that VCs used to be excited about Bitcoin – implying that they are no longer excited. Is there evidence that the same VCs that were excited about Bitcoin previously are no longer excited? He provides no evidence of this.

Now the cryptocurrency is fighting for survival.

Fighting for survival means that Bitcoin is nearing collapse. It may not survive if people don’t keep fighting for it. This is a strong claim; let’s see if he follows this up with any evidence.

The reality came to light on Jan. 14, when its influential developer, Mike Hearn, declared Bitcoin a failure and disclosed that he had sold all of his Bitcoins. The price of Bitcoin fell 10 percent in a single day on the news, a sad result for those who are losing money on it.

It is true that a prominent member of the Bitcoin community quit, leading to a 10% drop in Bitcoin price. Of course, anyone that has followed Bitcoin for any length of time knows that a 10% change in price is not unusual at all. Lamenting about this “sad result” is ridiculous; Bitcoin’s value increased 35% in 2015, but lost 52% of it’s value in 2014 – only after gaining an incredible 5,429% in value in 2013! Bitcoin has always been volatile.

[As an aside, has the author not been watching the US stock market? The S&P 500 is 10% off it’s all time high set less than a year ago.]

Bitcoin did have great potential, but it is damaged beyond repair. A replacement is badly needed.

This is the core argument of the piece, so the author needs to establish that Bitcoin is “damaged beyond repair.” We’ll be looking at all his claims to see if they are truly irreparable, or if they are even true.

Our current system is flawed

Most currency and transaction systems today are opaque, inefficient, and expensive. Take the North American Stock Exchange, the NASDAQ, as an example. It is amongst the most technologically advanced in the world. Yet if I buy or sell a share of Facebook on the NASDAQ, I have to wait several days for the trade to finalize and clear. This is unacceptable; it should take milliseconds.

Bitcoin does take milliseconds to transfer value.

In Venezuela, citizens wishing to buy anything of value on supermarket shelves wait all day in lines to do so, because hyperinflation causes the paper currencies in their pockets to lose significant value every day.

He’s right that central banking fails many people, and Bitcoin isn’t controlled by any central banks.

When migrant workers there send money back to their families in places such as Mexico, India, and Africa, they are gouged by money-transfer companies—paying as much as 5–12 percent in fees.

Bitcoin is much cheaper to send.

And even in the United States, payment processors and credit-card companies collect merchant fees of 1–2.5 percent of the value of every transaction. This is a burden on the economy.

The author is making a clear case for Bitcoin. Not only is it cheaper but it eliminates the ever-present threat of hackers getting into the databases full of credit card numbers which are the keys into the bank accounts of millions of people around the world.

Instead of explaining why Bitcoin isn’t compelling given all the flaws with the current system he’s just listed, he shifts over to the problems with Bitcoin.


Bitcoin was born with serious flaws.

It was unregulated and provided anonymity, so it rapidly became a haven for drug dealers and anarchists.

This is one of many lines that reveals the author’s ignorance of Bitcoin. Bitcoin is not anonymous, but pseudonymous. This means that a user has an identity, but it isn’t necessarily attached to their real world identity. But Bitcoin also makes all transactions public to everyone. This makes using Bitcoin for illegal activity difficult since there’s a permanent record out there of your transaction.

Yes, drug dealers did use Bitcoin. Of course this isn’t a compelling reason to say that it has serious flaws: drug dealers primarily use cash, and the author isn’t calling cash “seriously flawed.” It is worth noting that the most prominent place that used Bitcoin for drugs (the Silk Road) was actually shut down by law enforcement years ago.

Lastly, pointing out that “anarchists” use Bitcoin is just a hand-wavy scare tactic. Who are these anarchists and what are they doing? Not all anarchists are violent bomb throwers. Maybe these anarchists just want to use their own money between themselves, peacefully? How does that reveal a flaw?

Its price fluctuated wildly, allowing for crazy speculation. And, with the majority of Bitcoin being owned by the small group that started promoting it, it has been compared to a Ponzi scheme.

Bitcoin isn’t a ponzi scheme by any stretch of the imagination. Ponzi schemes are fraud; there is no real investment taking place. Bitcoin is a real thing, used around the world constantly. Check out this chart of daily transactions if you don’t believe me.

Exchanges built on top of it also had severe security vulnerabilities.

This has nothing to do with the security of Bitcoin itself, but with the security of some companies and websites that dealt with Bitcoin. I typically don’t rely on these third-party services to hold my coins for me (I think that mostly defeats the purpose of Bitcoin) and I’ve never lost any of my Bitcoin as a result.

And then there were the venture capitalists who got carried away. Several of them purchased considerable coinage and then began to hype it as a powerful disruption that could underpin all manner of financial innovation, from mobile banking to borderless, instant money transfers. They also poured millions of dollars into Bitcoin start-ups hoping to reap even greater fortunes.

Saying that VCs got carried away is an opinion. Some believe that the entire tech sector has VCs going too far; I have no idea. So far the author hasn’t shown any reason to explain why these VCs shouldn’t be doing what VCs do, which is pouring money into new technology and hoping to reap greater fortunes.

I co-founded a company with VC money. It takes a long time to build new software. Many companies are still building their products with VC funds. Claiming that all these VCs will see no return is premature. No one knows yet.

Nightmarish reality

But Bitcoin was not ready for primetime. Hearn’s criticism has laid bare the nightmarish reality—a list of negatives that is both long and frightening.

Finally we’re going to get into the meat of the argument.

Chinese Bitcoin miners control more than 50 percent of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China. This slows down the entire system because, as Hearn explained, it is the equivalent of a bad hotel WiFi connection. It also gives the People’s Army a strategic vantage point over a global currency.

Only two claims in this part matter: 1) Chinese miners slow down the system, and 2) The People’s Army can control Bitcoin (gasp!).

It’s true that a large part of Bitcoin mining happens in China, but it’s unclear why that’s a bad thing apart from the scaremongering reference to the People’s Army. The Bitcoin system is functioning fine right now; Chinese Bitcoin miners are doing the same things as miners across the world. The network isn’t noticeably slower due to Chinese miners. And there’s zero evidence that the People’s Army is controlling these miners or doing anything nefarious at all.

Also, it’s important the remember that the author claimed at the beginning that the problems with Bitcoin are irreparable. Let’s assume for the sake of argument that China having the majority of Bitcoin miners is a problem: Is this irreparable?

Not at all. For one thing, the Bitcoin network isn’t static. If these Chinese miners did attempt to do something malicious then it would be noticed immediately and the rest of the network would take whatever action needed to prevent the attack. From that point on those miners would likely have a much smaller role in the network, or be banned outright. Also, there’s no reason to think that China will always have more miners then everyone else. Anyone can join the network anywhere in the world.

The Bitcoin distributed network can process only a handful of transactions per second. That causes unpredictable transaction-resolution times and other behaviors that one really does not want as part of a monetary system.

Transaction resolution times aren’t unpredictable unless you opt to pay no transaction fees. They are typically instant for transactions with fees included; only in rare cases do they take longer. Yes, the capacity of the network is fairly low at this point, but this is an artificial constraint which can be lifted (and is a heavy subject of debate). This is not irreparable. There are various different methods which people have proposed to increase transaction capacity on the network. Since we haven’t quite hit the upper limit at the moment, none of them have needed to be adopted yet, but they will be soon.

Bitcoin fees can, at peak times, exceed credit-card fees, for example.

I would really love to see his evidence for this claim. I’ve used Bitcoin for more than 3 years now, and I’ve never paid more than a few cents for a Bitcoin fee. Ever. This claim is likely a complete fabrication or cherry picking of the worst kind.

As if all this weren’t bad enough, the Bitcoin community appears to be engaged in open civil war. Its members have been censoring debates and attacking each other’s servers.

Again, we need to ask if this is irreparable. This isn’t a failing with the technology at all. It’s a human failing. Pointing out that people in the technology community aren’t playing nice together doesn’t mean the technology is a failure. I do hate the censorship of debates and DDoS attacks we’ve seen, but this is a result of people being so committed to Bitcoin that they want their own vision of it to win the day. In the long run technology projects don’t die because they have strong, vocal communities. That’s a positive sign.

A tiny committee of five core developers that controls the Bitcoin codebase has become the Star Chamber that guides the future of Bitcoin.

There’s a lot wrong with this statement.

I have a political science education so the Star Chamber reference intrigued me. I suppose he means that the core development team can act arbitrarily and in secret. So is it true that only five people can make arbitrary and secret decisions which guide the future of Bitcoin?

No, and this statement again proves that the author doesn’t understand what’s going on. Bitcoin is open source. This means that all the code is public and can be reviewed by anyone. All proposed changed are public and can be reviewed. There are no secrets.

And it’s not only five people who propose changes. There are hundreds of people who have contributed to Bitcoin core. Also, Bitcoin core isn’t the only game in town. Right now there’s an alternative Bitcoin client being developed called Bitcoin Classic which wouldn’t be maintained by the current core development team.

Again we need to ask is Bitcoin has been “damaged beyond repair.” The very fact that Bitcoin is open source means it is malleable enough to change when the community wants that to happen, and the Bitcoin Classic client shows that the community is willing to exercise this right.

This has been a severe blow to the reputation—and wallets—of VCs. Yet some of them are still staunchly defending Bitcoin.

There’s no evidence here that VCs have had their reputation or wallets harmed by this. This is simply an assertion by the author. Some still “staunchly defend” Bitcoin because – unlike the author – they understand that nothing about the fundamentals has changed.

It’s time to admit that the current Bitcoin needs to be scrapped and to take advantage of the innovations behind the technology that underlies Bitcoin, the blockchain. The blockchain is a transparent ledger of transactions—concurrently hosted on numerous computers around the world—allowing the creation of digital currencies and virtual banks. Implemented correctly, it will, I believe, prove to be a better transactional and verification model that we presently use for the global financial system and for many other types of activities such as voting, public registries, provenance of works of art, and real-estate transfers.

Here the author stops trying to be subtle about his technical ignorance around cryptocurrency and decides to display it proudly. This “blockchain without Bitcoin” idea is hardly new, but it only appeals to those who don’t understand how either works. You need Bitcoin – or an equivalent – for a blockchain to work. Since the Bitcoin blockchain is by far the most widely adopted and secure blockchain in existence, there’s a huge disadvantage to creating a new blockchain which uses NotBitcoins instead of using Bitcoin itself. If you like the blockchain then you like Bitcoin.

From Bitcoin’s failures, we have learnt how digital communities shouldn’t operate.

How? Don’t argue with each other? That’s hardly a useful admonition. Maybe in a hierarchical system where there is centralized control over a product this is possible, but we’re talking about an open source project with no barriers to entry other than an internet connection. You’re going to have discord and disagreement; it’s the wild wild west of the internet out there. That’s the price to pay for not having central control over your money. Completely worth it in my opinion.

We have seen how ledger systems can be hijacked.

Have we? When did this happen exactly? Who hijacked it? Is Bitcoin not working right now?

Nope, I just checked and the system is working fine. Exactly the same as a few days ago, before Mike Hearn left. Hijacked is a strong word to use without explaining what happened.

And we have seen the wastage in a mining system that consumed gigawatt–hours of electricity and spawned giant server farms in China solely to crunch numbers to “mine” Bitcoins.

This sounds like an old man lamenting the growth of social media online. “Those giant server farms up in Washington State using all that electricity just to let people share pictures of their lunch with each other.”

Bitcoin miners are validating transactions on the network and securing it against attack. I believe that having permissionless money that is nearly free to use and not controlled by any company or government is incredibly valuable and worth the energy expenditure.

We need to learn from successful open-source technology projects such as the Linux Foundation, which is thriving largely because it has proven its worth as a neutral body to govern all manner of open-source projects that grew too big for small groups to manage in a casual manner.

Again, this implies that Bitcoin cannot move to this model, but the author gives no reason to think it cannot.

We also need to rethink aspects of the blockchain, along the lines that Hearn and Bitcoin loyalists have suggested.

“Rethink aspects of the blockchain” is code for “I’m pretending I know how the blockchain works and how it can be improved” because he gives zero specifics here. What suggestions is he referring to?

Let’s also bear in mind what it is that makes some venture capitalists Bitcoin zealots: pure greed. That is the reason clearest to me for Bitcoin’s failure.

I hope I’ve established here that the author has made no case at all for Bitcoin’s failure. The defection of a single member in a huge global community is practically a non-event. The technical aspects of Bitcoin – which the author (thankfully) only touches on briefly in the entire article – are completely unchanged. More people are using Bitcoin now than they were last year, and more than the year before, etc. These growing pains are where the divisions in the community are coming from. It’s hardly compelling to be claiming that “Bitcoin is a failure because it’s grown large enough that decisions aren’t made easily anymore.”

It’s also wrong to claim that most people in Bitcoin are in it for the money. I’ve been involved in this community for more than three years now. Most people I know that are most passionate about Bitcoin are excited because it is a technology that empowers individuals to take control of their own money. We don’t have to be reliant on central banks or traditional banks anymore; that’s something worth fighting for.

Intended as a level playing field and a more efficient transaction system, the Bitcoin system has deteriorated into a fight between interested parties over a pool of money.

Over what pool of money? Bitcoin itself? Everyone in the space knows that fighting isn’t the way to make Bitcoin more valuable. They fight because they believe in different core visions of what Bitcoin should be, not because they are fighting over how to make it more valuable.

In the beginning, Bitcoin was a noble experiment. Now, it is a distraction. It’s time to build more rational, transparent, robust, accountable systems of governance to pave the way to a more prosperous future for everyone.

Since the author hasn’t proposed any alternative to Bitcoin other than an impressive string of adjectives, it’s not clear what Bitcoin is distracting us from. This is practically the definition of the Nirvana Fallacy; A better digital money could be built therefore Bitcoin is bad.

That’s not how this works. Building new technologies is hard to do under the best of circumstances, but building them in a transparent way with a global community is much harder. It doesn’t mean it’s not worth doing.

You know what isn’t hard? Writing an article which dismisses a technology you know very little about. Anyone can do that. It doesn’t mean it is worth doing.

CISA Passage Proves Need for Combination of Encryption and Peer to Peer Networks

The US federal government passed a massive $1.15 Trillion piece of legislation today. Inside was the controversial Cybersecurity Information Sharing Act (CISA), which has failed to pass on its own merits previously. For those who care about privacy or their constitutional rights, it was a major defeat.

After CISA passage, Bitcoin advocate Andreas Antonopoulos took to Twitter to give his advice:

Andreas is right; the political process cannot be trusted and we should focus on how to protect ourselves with technology. But he doesn’t go quite far enough in his recommendations. The response to CISA – and the entire surveillance apparatus – should be two-fold. Encrypting our personal, financial, and commercial communications and moving them onto peer to peer platforms.

The benefits of encryption are obvious. If done properly, then anyone viewing the traffic over the network will be unable to decrypt it and read the contents. This should be default for all traffic online, and is slowly becoming so.

But encryption doesn’t hide metadata, which gives those watching nearly as much information as the plain text of the communication would anyway. It also does little to prevent companies from sharing your data with government agencies. If the information over the wire is encrypted, but then freely given to a company who gives it to the government, then encryption has done you no good at all.

One of CISA’s worst aspects was how they give immunity to companies who hand over their data to the government. As Ars Technica reports:

The CISA part of the spending package gives corporate America legal immunity when sharing consumers’ private data about hacks and digital breaches with the Department of Homeland Security. The DHS can then funnel that information to other agencies, including the NSA and FBI, which can use that information for surveillance purposes.

This poses such a threat to privacy because companies have a huge amount of personal information in their databases that intelligence agencies would love them to share. Now those companies can share it without fear of any legal repercussions.

Encrypting traffic doesn’t solve this problem. However, there is something we can do: Encrypt our personal, financial, and commercial communications and move them onto peer to peer platforms.

Moving our activities onto peer to peer platforms means there is no central organization collecting data about users, and there is no central organization to hand any data over to government agencies. It means that metadata is often more difficult to ascertain. Most peer to peer networks allow for pseudonymity, making connecting activity to identity more time and resource consuming.

I don’t mean to suggest that peer to peer platforms are a panacea. They can still be monitored. More importantly, they are still young and in development. It would be difficult for the average person to move the majority of their activity onto such platforms. But for those among us who value privacy and understand technology, using them – and hopefully helping to build them – is a valuable investment of time. Let me give two examples.


Bitcoin is a peer to peer network for exchanging value. It’s not perfectly private; all transactions are visible on a public ledger. However, it gives users much more privacy and control over their own money than using the traditional banking system. The information around a credit card purchase is directly tied to your identity, to the identity of the place you made the purchase, the item you bought, etc. The information around a Bitcoin transaction doesn’t include either users’ identity or location, or details around the transaction itself. While it’s sometimes possible to discover those details out by analyzing the public ledger of past transactions, it’s not a simple process if the user is careful about their privacy.


OpenBazaar is a peer to peer network for trade, using Bitcoin. I’ve been working on the project with an international community of supporters since mid-2014, and it’s nearing release now.

OpenBazaar isn’t a darknet market, so its main appeal for privacy isn’t based on using IP obfuscation techniques. Instead, it eliminates the middlemen from trade online, along with their massive databases of personal information. Because trade is peer to peer, you only share your information with people you engage in trade with, and only the information you want. No central organization is collecting the data of all users on the platform. The transactions between users is done directly between them, and it’s encrypted. Chat messaging is peer to peer and end to end encrypted as well. Users wanting more privacy can access the network behind a VPN.

There are other examples; Bitmessage or Tox for communications, Bittorrent for data sharing, various other cryptocurrencies and a handful of peer to peer marketplaces.


CISA’s legal immunity for businesses has no power over Bitcoin, OpenBazaar, or other peer to peer platforms; there’s no one to give them data. The more we encrypt our data and move our activities onto peer to peer platforms, the less information is centralized and collected by the surveillance state. Encryption and decentralization go hand in hand.

Breakdown of Hardware Costs for New 21 Inc Bitcoin Computer

21 Inc announced today their new Bitcoin Computer, which was met with some skepticism by the Bitcoin community. The computer is essentially a Raspberry Pi 2 with a miniature Bitcoin miner, and comes with the blockchain and their own custom operating system. The current price is $399.

In this post I’m breaking down the hardware costs of what is included in 21’s Bitcoin computer.

According to the Amazon listing the Bitcoin Computer comes with everything needed to use it right out of the box. I’ll list each component, and then list a similar component I found along with it’s price. Please note that I didn’t search extensively for the lowest price, nor did I take quality of components into account. The Bitcoin Computer may have better or worse components than what I’ve included.

Here is a photo of what comes with the Bitcoin computer.

1. Raspberry Pi 2: $35
2. 128 GB memory card: $75.95
3. Raspberry Pi B+ Power Supply: $6.99
4. Raspberry Pi WIFI Adapter: $8.56
5. Raspberry Pi Cooling Fan: $7.99
6. USB to TTL Serial Cable: $9.95
7. Heat sink: $10
8. 125 gh/s USB miner: $93

Also note that according to the 21 Inc technical specs, the miner can process between 50-125Gh/s so I took the higher end. (I also did little shopping around for the best deal on comparative cost of mining equipment so if anyone knows better deals let me know and I’ll update.)

The total cost of these components is $247.44, meaning you could save $151.56 if you built the Bitcoin Computer yourself (again, your own build might be a substantially inferior product).

However, this ignores the value of the OS, which comes with tools that are supposed to make using Bitcoin easier, including tools that allow developers to sell digital content directly for Bitcoin. It’s yet to be seen if developers will find those tools valuable enough to pay for them.

Line by Line Response to MasterCard’s Matthew Driver

Mr. Driver,

In only a few hours you’ve seen an overwhelmingly negative response to your December 3rd video entitled Perspectives: Matthew Driver “Trust Is A Critical Component” on YouTube.

I trust that as President, South East Asia, for MasterCard Worldwide, you’re curious to know why this video has been so poorly received. It would be simple to dismiss the response to this video as a reaction from a passionate – often called rabid – group of Bitcoin defenders, who will loudly object to anyone who opposes their precious digital currency. To do so would be a mistake. The negative reaction is due, in large part, to you making inaccurate statements about Bitcoin, and also for making claims that are remarkably out of tune with the younger generation of internet users that you presumably want as customers.

I’m going to explain this line by line, on the off-chance that you genuinely are interested in hearing feedback from someone who is knowledgeable about Bitcoin and its community of users.

Video transcript and comments

Today we are seeing a huge change in payment technology, whether it’s digital convergence or cryptocurrencies.


There’s a huge opportunity in Asia, so it’s very important for us to look and understand what are the real benefits that are being put into the system by these new technologies.

Your interest is understandably in Asia. I would note here that cryptocurrencies are not restricted to any geographic area.

If you are a consumer or a merchant, a government, even a financial services provider, what’s really critical is that what you’re putting into the marketplace is solving a need for a customer and is trusted.

Here is where your first fundamental misunderstanding of Bitcoin is revealed. Your criteria for a successful product are something that solves the needs of customers (no disagreement there) and something that is trusted. The financial system prior to Bitcoin did indeed run primarily on trust, but this was a bug, not a feature. In fact, the entire reason that Bitcoin was created was in order to use a trustless system. As Satoshi Nakamoto, the creator of Bitcoin, said in the first sentence of the introduction to his original paper:

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.

In case this isn’t clear enough, the first sentence of the conclusion states, “We have proposed a system for electronic transactions without relying on trust.” Bitcoin is entirely about having an alternative to the model of trusting third parties, such as MasterCard, and instead trusting in cryptography.

You continue:

Trust and security, a stable form of value are incredibly critical if you’re going to be able to get acceptance for the services that you’re looking to provide.

Trust we’ve already discussed. Security is another thing entirely. As you’re well aware, services such as MasterCard are “pull transactions,” meaning that consumers give access to vendors to pull funds from their account. This system is inherently insecure; it leads to massive databases of credit card numbers which incentivizes criminals to break into those systems and steal that information. Home Depot and Target alone were many tens of millions of cards stolen. I’m sure several million were MasterCard.

There’s a far more secure system available. It uses “push transactions” meaning that the consumer does not give access to the vendor to pull funds from their account, but instead they push the amount to the vendor. This means there are no massive databases of numbers to steal, and no one has access to the funds except the user themselves. Bitcoin isn’t an insecure pull transaction system like MasterCard, it is a secure push transaction system.

The challenge with cryptocurrencies like bitcoin is that they’re unstable in terms of their intrinsic value, they don’t offer perhaps the recourse that consumers are naturally expecting that comes from using cash in the day-to-day, and they’re also there to serve a purpose that’s not necessarily completely clear.

You lay out three challenges with cryptocurrencies:


  • They’re unstable in terms of their intrinsic value.
  • They don’t offer the recourse that consumers are naturally expecting from using cash.
  • They serve a purpose that’s not completely clear.



1. This is disappointing coming from a man who was educated at Columbia and the London Business School. Intrinsic value doesn’t exist. A piece of paper, plastic, or even gold only have value due to the belief that other people will agree they have value. Entries in a digital ledger are no different. It is true that bitcoins have a volatile price, but it is set by market forces, meaning that regardless of your dislike of Bitcoin, others find it valuable and give it a price.

2. Strange argument; what recourse does a user have when they spend cash? Unlike Bitcoin, cash has no permanent record of a transaction having taken place, nor is there any way to prove ownership over cash in the past. Bitcoin has far more recourse than using cash, and the same systems that people use for settling disputes with cash (receipts, courts) are also available to Bitcoin users.

3. Bitcoin’s purpose is entirely clear. I’ll quote Satoshi Nakamoto a second time, filling in some details to make it easier to understand:

“We have proposed a system for electronic transactions without relying on [trusted third parties such as MasterCard, PayPal, Bank of America, JP Morgan or the Federal Reserve].”

Is that a clear enough purpose?

Let me give you an example: bitcoin and a lot of concerns related to bitcoin are because they are looking to guarantee anonymity, essentially electronic cash if you will.

Bitcoin doesn’t guarantee anonymity. Every Bitcoin transaction is recorded permanently in the public ledger called the blockchain. It’s simple to think about Bitcoin as electronic cash, but it’s not as anonymous as cash, or pre-paid MasterCards purchased with cash.

And what Mastercard is critically looking at is: how can we move to this world beyond cash, how do we actually use electronic payments to combat the inefficiencies of cash and really create a more transparent and inclusive financial system.

Bitcoin isn’t cash. Bitcoin is an electronic payment system. Simply calling Bitcoin electronic cash doesn’t mean you can then disregard is as sharing the same inefficiencies as cash. What’s more similar to cash: an electronic payment system that relies on a cryptographically secured public ledger that isn’t controlled by any organization and has no physical representation, or an electronic payment system that is reliant on a monetary system controlled by a single organization and is used by accessing a piece of plastic in your wallet (instead of a piece of paper)?

You mentioned transparency. The blockchain is perhaps the most transparent financial instrument in history. An organization that uses Bitcoin could literally have every single aspect of their finances transparent. Are you willing to submit MasterCard to that level of transparency?

Lastly, you mention an “inclusive financial system,” which is interesting coming from a credit card company. MasterCard’s rules for merchants are right here – please be warned Matthew, that’s a 274 page pdf, you might not want to download it. I was going to post the table of contents for illustrative purposes, but they were 13 pages long, so here’s a single chapter:

Chapter 3 Customer Obligations
This chapter contains Rules relating to Customer obligations.
3.1 Obligation to Issue MasterCard Cards Transactions
3.3 Transaction Requirements
3.4 Authorization Service
3.5 Non-discrimination—POS Transactions
3.6 Non-discrimination—ATM and PIN-based In-Branch Terminal Transactions
3.7 Integrity of Brand and Network
3.8 Fees, Assessments, and Other Payment Obligations
3.8.1 Taxes and Other Charges
3.8.2 Maestro and Cirrus Card Fees and Reporting Procedures
3.9 Obligation of Customer to Provide Information
3.10 Confidential Information of Customers
3.11 Use of Corporation Information by a Customer
3.12 Confidential Information of the Corporation and the Corporation’s Affiliates
3.13 Data Protection—Europe Region Only
3.14 Quarterly MasterCard Report (QMR)
3.14.1 Report Not Received
3.14.2 Erroneous or Incomplete Report
3.14.3 Overpayment Claim
3.15 Cooperation

I’m not sure that merchants in developing countries will consider this an inclusive system. Bitcoin only needs an internet connection. It’s free.

If you really want to do that, it’s quite hard to understand what the appeal is of a cryptocurrency, when that currency is really essentially electronifying cash.

It’s not about “electronifying” cash. It’s about having an electronic payment system that isn’t controlled by any organization.

It seems to be pretty inefficient.

It’s not. This is an inefficient system.

Innovation in payments and frankly any industry is critically important to maintaining a healthy competitive environment and driving improvements and experiences for consumers and businesses.

Bitcoin is a fundamental innovation in both the computer science field and in the monetary space. Does MasterCard claim to be innovative? You’ve been using the same “priceless” ad campaign since 1997. Perhaps your innovation is in suing people for making parodies?

Innovation is something critically important to what MasterCard does and MasterCard is particularly focused on ensuring that we’re delivering safe, simple, smart solutions to consumers.

I’ll have to take your word for it, I’m a Bitcoin and Visa user myself.

When we look at the markets across the world, 85% of the world’s retail transaction are cash, so what we’re trying to ensure is that we are building compelling, interesting, secure and convenient payment solutions that encourage merchants, consumers, governments and other participants in the financial system to move to adopt electronic payments.

Let’s ask Vib Prasad, head of MasterPass Global, for his opinion on electronic payments:

I’m going to kid myself and think I’m going to have millions of people download a MasterPass app,” Vib Prasad, head of MasterPass Global, told Mobile Payments Today in a recent interview. “Fundamentally what MasterCard has really been successful at is enabling partners to help embed the MasterCard brand into their own experiences, and we’re doing the same thing with digital.

“If it’s a mobile banking app, we want to be integrated into it. If it’s a merchant’s shopping app, we want to be integrated into it. It’s less about creating something new.”

Well, that doesn’t sound innovative at all.

Vib and Matthew, you know what electronic payment system has millions of users downloading apps and programs on their smartphones and laptops? Bitcoin.

With a big increase in Internet traffic, convergence with mobile and everything digital, there’s huge interest in cryptocurrencies and what perhaps they can create in the marketplace.

Yes, the numbers above highlight just how huge this interest is. Interestingly, even though you admit there is a huge interest in cryptocurrencies, you never give an answer to why this is. Since you are so quick to point out the faults, do you believe you are uniquely capable to see its faults and millions of people are all being hoodwinked?

Now we at Mastercard are not completely comfortable with the idea of cryptocurrencies, largely because they go against the whole principle that we’ve established our business on which is really moving to a world beyond cash and ensuring greater transparency and security and simplicity in the way people live their lives.

Your entire anti-bitcoin argument rests on the fact that Bitcoin is cash, and therefore MasterCard is better. As I’ve explained already, Bitcoin isn’t cash. Surely you can see how a digital currency is necessarily an electronic payment system?

Greater transparency is a ridiculous claim, as I’ve mentioned. Same with security.

If you think about it, cash is a problem for a number of countries.

Many people have thought about it, which is why they propose an electronic payment system. You can use centralized electronic payment systems that censor your transactions, charge fees, and need a 274 page manual to understand. Or you can use an electronic payment system that is censorship-resistant, nearly free to use, and requires no applications to file or manuals to read.

Cash really facilitates anonymity, it facilitates illegal activity, it facilitates tax avoidance and a range of other things that aren’t going to drive an efficiency in an economy.

We get it, you don’t like cash. Also, I’m not sure what you mean by “efficiency in an economy,” but having people use their medium of exchange however they see fit is more likely to lead to an efficient economy than locking them out of actions they want to take.

Trust is a critical component of any payment system, so if you think about the idea that all of a sudden you’re having cryptocurrencies being manufactured if you like on an anonymous computer, in an anonymous location, it’s completely legitimate to have some concerns about how that might be working.

Actually, these concerns are completely illegitimate, and here’s why: it doesn’t matter where the bitcoins are being “manufactured,” they end up in the system all the same. Just like printed cash or gold, the end-user doesn’t care where it came from. Also, you seem to believe that simply asserting that bitcoins are being mined anonymously is enough to “have some concerns.” Why would an anonymously created bitcoin be any different from a bitcoin created by an identifiable person? The system is regulated by math, and those bitcoins are identical to an algorithm.

What a regulator wants to do is ensure that there is a fully compliant root to the transaction.

I’m sure that you place a strong emphasis on making regulators happy. I don’t personally care if regulators are happy, and if they have a “fully compliant root” or not. Guess what? Neither do your customers, except when they face fines or punishment from you or the government.

That they understand who is making a transaction, who that payment is being made to and that they have a suitable record, so that they can ensure that there’s prudential control over the system.

The fact that you actually used the line “prudential control over the system” as something positive to strive towards is exactly why Bitcoin exists and is growing in popularity. People don’t want you and government bureaucrats to have this level of control over their own finances and trade. Prudential control be damned.

If it’s an anonymous transaction, that sounds like a suspicious transaction. Why does somebody need to be anonymous?

There are many ways to respond to this, but I’ll just quote a headline:

Mastercard under fire for tracking customer credit card purchases to sell to advertisers

I prefer anonymous transactions so that companies don’t track my purchases and sell my information to advertisers. Given your company’s track record, I’m not surprised you don’t understand this.

I certainly don’t want anybody mining technology or mining financial services away from my control, particularly if they’re gonna represent something for me.

We understand. You like control. Enjoy it while it lasts.


Sam Patterson

Three Reasons the BitLicense Regulations Wouldn’t Have Prevented the Mt. Gox Collapse

Ben Lawsky, Superintendent of Financial Services at the New York State Department of Financial Services, recently took to Reddit to reveal his new BitLicense regulatory scheme. He explains his justification below:

We recognize that not everyone in the virtual currency community will be pleased about the prospect of a new regulatory framework. Ultimately, though, we believe that setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets. (We think the situation at Mt. Gox, for example, made that very clear.)

The failure of Mt. Gox is the primary example that regulators, and proponents of regulation, point to in order to show why we need state restrictions on Bitcoin businesses.

This claim is misleading. The proposed BitLicense regulatory scheme wouldn’t have prevented the Mt. Gox collapse, for three reasons.

1. Mt. Gox isn’t in New York State, or the United States.

The intended goal of proposing regulations on Bitcoin businesses in New York State is to force companies who have customers in New York to comply with these regulations, and to put pressure on other legal jurisdictions to create their own regulations. However, there are many reasons why Mt. Gox (or other foreign Bitcoin companies) may have simply ignored the new regulations. New York State certainly does have a lot of sway in the finance and banking industries, but their word is not binding in all legal jurisdictions and they cannot claim that their regulations will protect consumers in foreign countries.

2. Regulated companies also fail.

Bernard L. Madoff Investment Securities LLC was a Wall Street firm. They defrauded customers of more than ten billion dollars, which is more than the entire market cap of Bitcoin at the moment. Maddoff’s firm was regulated, and even investigated by the regulatory agencies, and it still got away with massive fraud. There’s no guarantee that regulation inherently protects consumers. It can have the opposite effect, causing customers to not to their due diligence because they instead trust the regulatory agencies (the 2008 financial crisis shows this trust is often misplaced).

3. Mt. Gox wouldn’t have existed under a strict regulatory scheme.

If Mt. Gox did feel compelled to adhere to a BitLicense scheme from the beginning, it almost certainly wouldn’t have existed at all. The compliance costs for a startup are simply too great, particularly in an infant industry like Bitcoin.

In this sense, Lawsky might be technically correct in saying that the BitLicense might protect customers in some cases. In a similar fashion, I could eliminate credit card fraud overnight by shutting down all the credit card companies.

Yes, the Mt. Gox collapse was terrible, but we shouldn’t overlook the years that Mt. Gox provided a valuable service to the Bitcoin community. All of that early trading wouldn’t have occurred, and the path to wider Bitcoin acceptance is uncertain.

The BitLicense could completely strangle Bitcoin startups in the US, meaning customers won’t see new services at all. This will undoubtedly prevent some future failures, but only by assuring there are no future successes.