Fred Ehrsam, Co-Founder, Coinbase

Thank you. And yeah, to be clear, I see myself as a good guy because I'm a technologist first. So as the intro said, I'm one of the two guys that runs Coinbase, which is the largest Bitcoin company in the world at the moment. I think we see this as a very important innovation, frankly one that is a little bit challenging to understand if you're not a pure technologist because it's probably most analogous to the Internet. It's a very low-level protocol innovation that has a lot of broad implications, and we probably, just like the Internet, won't see a lot of them for a number of years, which is why frankly I'm out here to try to get your minds kind of spinning around it.

I think so. The simple way to think about Coinbase is it's kind of like PayPal, but Bitcoin is the underlier rather than dollars or euros or a fiat currency. I think more broadly, the way to think about Bitcoin is Bitcoin is kind of doing for transactions what the Internet did for information dissemination and distribution. It's making everything an order of magnitude cheaper, faster, and arguably most importantly, it's making everything open so that everybody can access it. Anybody can go and build on it. That's kind of why we saw this mass wave of innovation with the Internet, this concept of permissionless innovation. We basically see Bitcoin as the fundamental infrastructure that will do that for transactions.

I think they're looking at it in that same way. When the Internet came along, you had a lot of companies that ended up being disrupted or had their businesses drastically changed by what the Internet allowed. A good example would be the New York Times in 1994. Obviously their business looks a lot different now, and they probably would have been served well if they had kind of dipped their toe in the water earlier rather than, like a lot of companies, rambling in the late 90s saying, 'Oh, what's our Internet strategy?' So I think what you're seeing here is more forward-thinking people in financial services taking a look at this, seeing a similar movie having played out before, and really thinking, 'How do we get some institutional knowledge around this? Because we know it's going to change our business somehow. We might not know exactly how right now, but we'd be well served to have a good level of understanding around it.'

Yeah, I think it's really important. For some context here, a lot of the Bitcoin companies or exchanges have been largely operating outside of the United States, a lot of it really for regulatory scrutiny reasons to this point in time. But we did launch the first US exchange with some capital from the New York Stock Exchange on Monday. I think this is really important because it lays groundwork and infrastructure that's necessary for other great companies and ideas to be built on top of Bitcoin. It's not a perfect analogy, but you might view this as something like AOL in the early days, where by allowing a reasonable exchange from dollars to Bitcoin, you're kind of enabling other parts of the technology. Almost like AOL allowed a bunch of people to dial up to the Internet and at least kind of get started, get involved. It's a foundation that needed to be there.

Sure. So part of it is simply a time thing. Again, thinking about the Internet, it took many, many years for us to get from the first web browser in '93, '94 time frame to a place now where we all depend on the Internet for a lot of basic parts of our daily lives, fast forwarding what, 23 years now. So I think there's a similar technological innovation wave happening here, hopefully over a shorter period of time, where we're kind of in Bitcoin where the Internet was in '93, '94. That's a part of it. Another part is trying to figure out how it works for them, what why it's important for them, what use they're going to have of it. That's right. I mean, eBay didn't exist right when the Internet came out, for example, neither did Google Maps. So a lot of this stuff just takes time to create. Part of it too is regulatory understanding and understanding from necessary incumbents. So for example, it's very difficult to get banked as a Bitcoin company right now. So if you're trying to start a business around Bitcoin, that's just one more hurdle that you need to cross. So hopefully as people become better educated over time, those kinds of hurdles just get lowered and lowered such that more and more great ideas can get built.

To be honest, it's pretty varied, and I think it's varied mostly because of education level at this point. I think people who understand it are extremely excited about it and are generally supportive. There are times where people are less educated and that could be a little threatening, or they might read slightly more sensationalist media headlines around it. You might view that as the equivalent to child porn or illegal file sharing in the early days of the Internet, where it seemed very scary because it's a powerful new technology, but again, at the end of the day, it really does much more good than harm, I think.

So I think it's good in the sense that you have some geographies, and specifically states here, where they see the promise of the technology and they're trying to be supportive of it because that keeps others honest and really having to go and understand what they're regulating. There is some bad potentially in this because I think people are thinking about this almost a little bit too much from a financial services first perspective, where you get people trying to fit old laws to Bitcoin where you really get a kind of round peg, square hole problem. For example, money transmission laws, and this is at the state level, this is what a Western Union for example would be regulated as. Those are kind of being applied to Bitcoin right now, and these are laws that were conceived of to regulate literally a physical exchange of cash, not conceived of for the Internet age of how all of this has evolved. Just like the Internet, it's an entirely new paradigm where almost by definition the laws that exist don't fit perfectly. So I think the biggest thing that I'm concerned about is regulators and lawmakers really being thoughtful about why fundamentally this distributed system is different than what's existed before and how that may in some cases mean that existing things don't really fit so well.

Yeah, absolutely. I think a good way to think about this that people could relate to is it's much like the early days of email, where you had law enforcement and regulators very scared because it seemed that all of a sudden anybody in the world, let's say a terrorist, could instantly send a message from one place in the world to another. That's a very scary proposition the first time you hear it, but fast forward to today and we all depend on email for our daily lives, and in fact I believe law enforcement actually likes email more than they dislike it because it creates some kind of trail. The same thing can be said for a cash transfer, right? Bitcoin, I think often times there's this large misnomer where Bitcoin is seen as anonymous, which almost couldn't be further from the truth. Bitcoin is the most transparent transaction network that's ever existed because fundamentally for Bitcoin to work, there's a large shared ledger, this thing you might have heard of called the blockchain, where every single transaction that has ever occurred on the network is publicly recorded. It's admittedly, kind of like IP addresses, it's difficult to resolve exactly who's on one end and who's on the other.

That's exactly right. So it is all traced. I think one area the US actually really led the way on here was FinCEN, the money laundering division of the Treasury, came out very early in March of 2013 and set forth basic guidelines around how you need to run a Bitcoin business. Specifically, you need to run it just like you run a business with dollars. If you're moving money, you need to be responsible about who's putting money in and taking money out. So again, early days of any technology, this stuff might seem a little scary, but there are pretty good guardrails in place already, and I think this is going to be one of these things where over time it actually becomes a more powerful medium than it is scary.

I think the highest thing I would recommend is just try to use it. I think learning by doing is usually the best thing. So if you have a friend who has some, have them send you a fraction of a Bitcoin, try to go spend it. You can go spend it at a bunch of online retailers right now. Some of the major ones that are now taking it: Overstock.com is the first major one to accept it through us, Expedia if you want to go plan a trip, Dell.com accepts it, Microsoft. It's really kind of mounting. The rough timeline on this is in 2013 there were zero really large merchants who were accepting Bitcoin, and fast forward to today and there's somewhere around 15 businesses that are more than a billion dollars in annual revenue who are. So it's spreading quickly. So I'd advise go try it out. And I'm admittedly a little bit biased on this one because he's one of our investors, but Marc Andreessen wrote a great piece in the New York Times called 'Why Bitcoin Matters,' which I think is probably the single best condensed piece on why Bitcoin is going to be an important trend. If we have time for questions, that's where you can start finding out right now.

That's a great question. So I would say a couple of things. One, we're in really early days in Bitcoin where speculation really outweighs a lot of practical use at the moment, and we think that will change as time goes on, so that by definition kind of reduces volatility. The other thing I would say is that if you just look at foreign exchange markets, you have similar problems, admittedly smaller, with volatility, and what's happened over time is as markets have gotten more mature, you've had things like derivatives built on top of the currency which allow you to hedge out risk exposure. So I would say in three to four years we could reasonably get to an end point where businesses offer a solution where Bitcoin is simply a more efficient transactional rail and the actual foreign exchange risk is hedged out for you as a service.

Sure. I mentioned a little bit on the merchant front earlier on. On the customer front, keep in mind we started this business about two and a half years ago. We've got a little over 2 million wallet holders today, and it's a pretty US-centric business at the moment. Estimates for Bitcoin wallets around the world are around 10 to 15 million, but it's growing pretty fast. Anywhere between 50 and 500 million dollars is transacted on the Bitcoin network every day, which is something that's growing at a pretty reasonable clip. Again, I think this is much like the Internet, where when people understand the technology they start to harness it. Classic network effect where this will likely creep up on people faster than they might expect.

Sure. So this is getting into a lot of the other applications of the blockchain, this kind of shared ledger that can prove a lot of different things. For example, a voting system as this gentleman suggested. This is why you hear many technologists talking about Bitcoin as an innovation that goes far beyond financial services. You could, for example, build a voting system on top of Bitcoin where everybody is in control of their singular vote, it's auditable by anybody. You could issue, for example, even tickets to a concert on this, which now become freely transferable. You can even bake in rules as to exactly how these transactions have to occur. So I think the important underlying point here is that this goes far beyond what one might think of in the early days as 'I'm sending you some value' to 'I'm representing that I own a car deed or a house deed or I voted for this candidate' on top of this secure network that can prove who's really done what.

Two major things come to mind on that front. I think one huge victory for the Internet in its really formative years was in 1997, the Clinton Administration put out a very simple kind of guideline document on their view on the Internet and how they wanted it to evolve, how they might view law and regulation around it. Very simple document that outlaid, I believe, five bullet points, each no longer than three sentences, with things like 'We'll try to come up with a uniform state tax policy as to how sales tax is applied, for example,' or 'In general, we'd like to take a light touch as it evolves, and then as we better understand the technology, we'll go in and maybe establish more firm laws.' Something like that, where it takes uncertainty out of the ecosystem for entrepreneurs who are trying to build on top of it, and similarly banks who might want to bank these companies, because frankly that's a huge challenge. If I were to ask for anything else, it would be that people like the OCC, for example, who are ultimately the ones regulating these major banks, do as much as they can to really understand the technology and enable upstanding companies that are trying to build these great ideas in the space to do so, assuming they're following the guardrails set forth by Treasury last year.

That's exactly right. And I think this stuff always gets a little dangerous if you're building a singular company, but when it's an entire protocol where there are many years of innovation that are difficult to predict, I think that only becomes more and more important.

That's right. And I think frankly the question about voting kind of gets to exactly that, where most people haven't even conceived of a lot of these things, and that may very well may not exist if you just apply pure financial regulation to it, for example.

Yeah, this is kind of being realized as we speak. But financial services tend to be closed networks. Not everybody can go and join the ACH network or the Fedwire network. Thus there's a very high barrier to entry and it's difficult for people to innovate. I think it's one of the classic spaces where it's been very difficult to innovate. I think what Bitcoin does that's very interesting is it flips all that on its head by saying if you can develop good software on top of it, then you have a good chance of building a good business. So at the very fundamental level, sending or receiving Bitcoin costs less than a cent, and this is why you might hear people talk about how this could be huge for micropayments, in other words sending very small amounts of money over the Internet, for example, where huge cost efficiencies can be achieved. The other kind of mind-blowing concept, and we've seen this proliferation of the $35 Android phone for example in developing economies, fundamentally Bitcoin is just software, so the cost of opening a bank account is zero. You're downloading software onto, let's say, a mobile phone. Similarly, sending money overseas, it's absolutely absurd to me that there are traditional remittance companies that will charge you $5 to send $50 of value to somebody in another country. In a modern Internet age, there's no reason that kind of value transfer should be so expensive. So those are a couple of different examples. And frankly speaking, again, this is why there are many implications of a protocol-level innovation like this, but you've effectively taken a large closed financial system of transactions, made it open, and reduced the cost to moving some data around, just like the Internet.

Sure. So I do think remittance will be a large one. To your point, you do have some kind of currency conversion costs, but if you look at developed foreign exchange markets, those costs are on the order of basis points, not full percents. I think the second thing, which is a little bit more abstract and difficult to predict, will be that it will make the Internet in general a better experience. One of the very strange things about how the Internet evolved is that there were no economics fundamentally embedded in the Internet, and this is why you have things like banner advertisements all over websites, you have spam email. It's because in the case of banner ads, there's no good way to monetize the millions of people that might hit a news site, or in the case of spam email, economically you can send a bunch of spam email without really being punished for it. So imagine an Internet where you actually can have economics that dictate all these behaviors, and you almost get to a version of a premium Internet, if you will. I'm sure most people in this room would pay, let's say, $35 a month to avoid all that garbage on the Internet and just really get to what you want. That would be another major area that I would look to. The final one is what I mentioned before around the underbanked, especially people in the developing world, where it's very difficult for a lot of these people to open a bank account. We've seen this huge trend of smartphones basically leapfrogging into close to 100% penetration in a lot of these countries, while bank accounts really are lagging behind to far lower than 50% of the country, sometimes 10 to 30%. I think it's actually quite possible that a lot of people will have their first bank account in a purely digital format through something in digital currency.