With Bitcoin all the rage and startups popping up left and right, it's hard to know who's an expert in the virtual currency and who just has an opinion. Most people would put Jeff Garzik in the former camp.
A Bitcoin core developer for three years, he left his job at Red Hat on Friday to start work at Bitpay, the biggest Bitcoin payment processing service. IDG News Service caught up with him at the Bitcoin 2013 conference in Silicon Valley, where he talked about the state of Bitcoin today, the parallels with open source, and Bitcoin's pseudonymous creator, the elusive Satoshi Nakamoto. Following is an edited transcript of the conversation.
What's on people's minds at Bitcoin 2013? It feels like the Wild West right now -- the exchange rate's up and down, the government's starting to regulate, there are startups cropping up everywhere, where are we at? Bitcoin's growing up. It's been a hobbyist-grown organic piece of software, an organic community. I was one of the hobbyists. It grew up slowly, slowly, slowly over time, and now VCs are all over the place trying to write checks. As a developer, I've told several people, I don't want your check. I just started work for a startup called Bitpay, my first day is today.
For a long time the Bitcoin developers were working at Fortune 500 companies like Red Hat and Google. You didn't know if Bitcoin would be a success, we have families and have to support ourselves, so we all had non-Bitcoin jobs. This is sort of the watershed where developers are starting to be employed by Bitcoin companies, Bitcoin companies are starting to see outside investors, and the number of users is going through the roof. This is its coming out period.
I've talked to people here who trade bitcoins on exchanges, they say the exchanges need to become more professional and more stable. There's a race on. In order to legally service customers in the U.S., you have to register with the federal government, with FinCEN [the treasury department's Financial Crimes Enforcement Network], and you have to obtain licensing with 48 out of 50 U.S. states. That's what the Mt. Gox thing was all about, it wasn't an attack on Bitcoin, it was a specific compliance issue.
Because Mt. Gox isn't properly licensed to trade? That's what that seizure was all about, it was specifically saying that they were violating the money transmission regulations, and money-transmission licensing is what the exchanges all need. So you have four or five exchanges that are racing to get all the licenses, because the prize at the end is going to be U.S. customers.
But they're trading in the meantime anyway? Some of the exchanges are going after only accredited investors, which is a legal slot you can fit into. [Accredited investors include registered investment companies and individuals whose net worth exceeds $1 million]. Other exchanges go for one or two states, they say we'll register with the feds, which is easy, and then get licenses in, say, California and New York and serve those customers.
Some people are put off Bitcoin by the price fluctuations, how do you see that playing out? It's definitely an issue, but to make a plug for my new employer, Bitpay lets people pay with bitcoins and then merchants receive U.S. dollars, so that removes the volatility for merchants. For individuals, I think it's going to be volatile for another year or two, simply because, mathematically, it's a thinly traded market.
Meaning there aren't enough bitcoins relative to the number of people wanting to trade them? Correct. If a hedge fund trader has a million dollars and wants to make a big Bitcoin buy, Bitcoin's going to go through the roof. If he sells the coins the next day, it goes through the floor. It behaves the same way as a Nasdaq penny stock, because there's a limited number of liquid tradeable bitcoins on the market.
Wasn't that avoidable? Why do we have this system where new bitcoins are released gradually over time? That's essentially modelled after natural resource extraction, gold mining and coal mining. Initially there's a whole lot, but every year you mine, there's less and less new gold introduced and the market slowly adjusts. If you released all 21 million bitcoins at once it would be even more volatile. It's an important part of the predictability of Bitcoin and where a lot of its value comes from.
The government has started to act, will it try to will regulate Bitcoin out of existence, at least in the U.S.? I don't think so. There are a lot of Bitcoin businesses springing up, as you can see around here, also the FinCEN guidance from a few months ago indicated they're treating it, as we predicted, as a private currency. Long before computers existed, private currencies existed and the laws around that are pretty well known.
As opposed to a national currency? Yes, it falls into the category of private currency, just as my bank could create its own currency if it wanted to, that's legal.
So it's illegal to destroy U.S. currency but it's not illegal to create your own? Exactly. There was a case with the Liberty Dollar, where a gentleman tried to make coins that actually looked like U.S. currency. The FBI and the federal government shut him down. But we're not pretending this is U.S. dollars, there's no confusion.
What's your background, how did you get into Bitcoin in the first place? I'm an engineer through and through. I saw it on Slashdot about a year after Satoshi [Satoshi Nakamoto, the pseudonymous creator of Bitcoin and has never made his identity public] mined the first block in January 2009.
So you've been into it for about three years. Yeah, that makes me an old man.
What were you doing before? I was a kernel engineer with Red Hat. What I was doing there is remarkably analogous to what I'm doing now. Red Hat paid me but they didn't tell me what to work on, they paid me to be an OS engineer and contribute to Linux, so I would send my changes to Linus Torvalds. Same thing here, Bitpay isn't paying me to work on Bitpay, they're paying me to work on open source.
So they're paying you to strengthen the Bitcoin platform overall. Exactly, because if I make Bitcoin better, that benefits Bitpay.
There are a lot of parallels between Bitcoin and open source, politically and philosophically. A lot of people are into the whole libertarian aspect, I think of it more as an interesting engineering project. When I first heard about Bitcoin, I thought it was impossible. How can you have a purely digital currency? Can't I just copy your hard drive and have your bitcoins? I didn't understand how that could be done, and then I looked into it and it was brilliant.
There's a lot of powerful hardware coming onto the market for mining bitcoins [mining is how new bitcoins enter the system]. What is there to stop, say, Google from loading the Bitcoin software into one of its data centers and mining all the remaining bitcoins? Technically nothing, but in practice CPUs are powerless against ASICs [custom chips designed specifically for bitcoin mining]. Google would have to manufacture its own ASICs for that to have an impact, and that's never really been a worry. The worry now is who controls the foundries that produce the chips, so you have to think a couple of levels up.
Like TSMC? Yeah, you have companies designing the ASICs and then the chip foundries make them. Who's to say the foundry won't simply produce a million chips on top of your thousand-chip order?
Are you afraid that will happen? There are enough people who are pursuing ASICs that it isn't likely, but that's the current battle over decentralization of mining, that and mining pools.
What are the big obstacles to Bitcoin achieving world domination? I would never recommend Bitcoin as a nation state currency that you're forced to use, but I think it's great as a private currency that you're free to choose if you want to. It's just very frictionless, you can trade it with free software.
The biggest hurdle may be the volatility, as you suggested. For regular users, I agree that's off-putting to a certain extent. I think it's something that will diminish over time, but it's a free market so there's no guarantee. Just introducing new people to Bitcoin is hard as well. It's technologically complex, how do I explain it to my aunt? But then, to a certain extent you don't have to understand it, you can download a Bitcoin wallet in the Android market, scan a QR code and you have bitcoins.
Is Satoshi still involved in Bitcoin's development? My personal opinion of him as a project leader is that he's not a good project leader. My opinion of him as an engineer is that he's a mediocre engineer. My opinion of him as an architect-slash-economist is that he's brilliant. He released Bitcoin and there were a bunch of obvious bugs and attacks that got fixed in the first six months, then there were less serious bugs that got fixed. He designed the system, fundamentally it works and it hasn't been hacked, but the software is sort of a crap program.
Do you know his real identity? No one I know has done any more than converse with him over email or Internet forums.
Do people still ask for his input? He hasn't answered anything since December 2010.
Do you think he'll pop up one day and say, hey I invented this? In the early days, when we had Wikileaks wanting to use bitcoins for donations, Satoshi came up on the forum and said, Please don't do that, it's a system in its infancy, we don't need all this conflict and controversy right now.
Can Bitcoin transactions be completely anonymous? The stock answer is no, it's pseudo-anonymous, sort of like a Swiss bank account, it's a number. But if you go through a lot of effort it can be anonymous.
Like using Tor? You'd have to use Tor, and if you send me bitcoins and another person sends me bitcoins, I have to sort of keep those in two separate pools. If I spend them both together, a network analysis can tie you, the other person and me together, so you might not even know who that other person is but suddenly we three are linked through network analysis.
Isn't the anonymity and inability to trace transactions one of the things that worries the federal government? That's the big thing with licensing the bitcoin exchanges, if you can regulate that gateway then you have a good chance of attacking the problem directly.