SLP151 Obi – Coinfloor Going Bitcoin Only & Bitcoin Audits (aka Proof of Reserves)

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Obi Nwosu, CEO and Co-founder of Coinfloor joins me in this episode to talk about his approach to the space. We talk about: 

  • Going Bitcoin Only and when an exchange should delist cryptocurrencies
  • Proof of Reserves & Proof of Solvency
  • Educating users of the exchange about Bitcoin
  • Supporting grass roots bitcoin meet ups, conferences, organisations
  • Advancing Bitcoin

Obi links: 

Sponsor links:

Stephan Livera links:

Podcast transcript:

Stephan Livera:

Obi, welcome to the show.

Obi:

Thank you very much, Stephan.

Stephan Livera:

So Obi, you are the CEO of Coinfloor, longstanding Bitcoin exchange. Just recently this week you were a sponsor of Advancing Bitcoin (@advbitcoin), which we were just at recently. Let’s start with you: what was it about Bitcoin that drew you into it?

Obi:

Prior to Bitcoin, I’d had a dalliance with virtual currencies already. I’m a geek and I was a CTO for 15 years and I was the VP of Engineering for a company called WeeWorld, which you may not remember it, but at the time there were things like Habbo Hotel, Club Penguin, these really popular virtual worlds for teenagers or kids. And WeeWorld was one of those. When I started we had 5 million users, and then we finished up with 30 million. And for 30 million users, you have to create a virtual world, and a necessary part of that was some sort of economy. So we created a virtual currency called—inventively—WeePoints, and people started using it. And within a few months we became shocked because people were working, creating or doing stuff for hours a week, sometimes 30, 40, 50 hours a week, it was a full time job for them to earn these WeePoints which could only be used within WeeWorld to buy Justin Bieber T-shirts and bits for their WeeHouse or their WeeRoom, etc. And we would meet up regularly with the founders of Club Penguin or Habbo Hotel and all the others and all of us had the same experience: we were trying to understand why. And it became clear to us that value wasn’t something that relates to physical things. Value was something that was a mindset and if you valued it and other people valued that it was valuable. And that’s why these virtual currencies, even though they were very, very limited, and they were controlled and centralized, still had some value. So when, a couple of years later, I came across in 2011—Bitcoin—it made perfect sense because this was a virtual currency, but that could be used anywhere by anybody. It wasn’t bounded by one particular website. So it was obvious that this was the currency for the Internet. It was the money for the Internet. And the millennial generation and the generation Z etc would inherently and instinctively understand this.

Stephan Livera:

It’s interesting you say that with this whole virtual currency world because what typically would happen in some of these game worlds and so on is someone finds a way to tie value back out into $USD or £GBP or $AUD or whatever. And so then some in game item has an $AUD equivalent or a £GBP equivalent and then people try and tie back the value even though it’s a game currency. Was that something you experienced?

Obi:

This would happen all the time. These secondary markets would exist. The interplay between gaming and real world was happening all the time. Mt. Gox was originally Magic: The Gathering Online Exchange because there was a card game called Magic: The Gathering, and people wanted a way of having a secondary market for that. So we would see on eBay and Gumtree and various other sites, people trying to sell their articles from the WeeWorld. And you saw it with others, but we would constantly try to limit it because of the law. If it became clear that there was a very large secondary market it would be a challenge for us to say that this was an in-game currency and so on. But it was always an ongoing challenge.

Stephan Livera:

So let’s bring it to Bitcoin and CoinFloor. So can you tell us a little bit about how CoinFloor got started?

Obi:

It was actually back in 2012, 2013 there were various UK exchanges, but they were being hacked. They were having various practices which weren’t in line with what should be reasonably expected for a customer of an exchange. So one exchange famously, the CTO open-sourced the code to the exchange unilaterally but accidentally also open-sourced the private keys. So the cryptocurrency stores, it got hacked, funny enough. These are sort of examples of the practice that were going on. It became clear that in 2013 we should set up our own exchange, but understanding that what we are effectively doing is setting up a crypto bank. As such, it needed to have the rigor of a bank. So we started with three main concepts: trust, reliability and security. And unlike many others before we took those really seriously, it seems obvious. And from day one, kept those philosophies in mind in everything we’ve done.

Stephan Livera:

What are some of the ways that you think exchanges can build that trust with the customers and with the broader ecosystem? For want of a better word.

Obi:

So there are many ways. (1) One, when we started, it’s now less of an issue, but as an exchange you have to first understand the most important is: who serves who? We are service providers. And as such the customer is the actual service patron, and as such, the customer is the one who’s in control. A problem that we have nowadays is a lot of exchanges have forgotten that, and they think because they have a number of customers, they forget the fact that it is actually the customers who are still in control. Unfortunately a lot of the customers misunderstand that as well. I’d like to dwell on that more, but let me go through what that means, when you understand that the customer is actually the person who’s in charge. One really important thing is to be public. At the time, there were a lot of exchanges where the founders weren’t known. We were one of the first exchanges in the UK to be known. People could visit us like you’ve just visited us today. Obviously by appointment. We sometimes, less frequently now, have people walking in with bags of cash saying, can you let us in? And we say, uh, no. Can we take your details? And they say no and disappear generally. But still we allow people to see us, to be comfortable that we really exist and we’re there and we are willing to answer questions. (2) Secondarily, it’s important to be part of the community. We regularly go to events. We sponsored Advancing Bitcoin. And these are grassroots events we sponsor, not the big flashy events. We like to sponsor the grassroots events. I often go to events, not just in London because Bitcoin is for everybody. There are some great events up in Manchester and so on that I’ve tried to go to every year. And the (3) third is to find if there are mechanisms to reduce the amounts that people have to trust you given that you’re a centralized exchange. And I still think that for now centralized exchanges are still an essential part of the journey to Bitcoin, to this Bitcoin future that we’re moving towards. If there are tools that you can employ to reduce the amount of trust that people have to have in you, you should use those tools. And so chief amongst them is something called, and it has many names, but there’s proof of solvency, proof of custody, etc. One of the biggest concerns that people have with an exchange is, has the exchange been hacked or are they misusing my money?

Stephan Livera:

Gotcha. And I guess historical context for listeners who might be a little bit newer, one of the big concerns in the space is if an exchange has been hacked, are they going to try to go fractional to try and basically cover up that they’ve been hacked? Historically with Mt. Gox, those of you who are a little new might not be familiar with the story, but essentially that’s one of the risk factors. And so those of us in Bitcoin we’re very concerned with Bitcoin businesses and exchanges being full reserve. Having all the Bitcoins that they say do. Can you tell us a little bit about your provable solvency report? So tell us a little bit about that.

Obi:

It goes under many names. We are probably going to call it proof of custody. But we’re trying to think of simpler ways to get across the point. Effectively what happens is on a monthly basis, we take all of the crypto, Bitcoin that we’re holding for our customers, create a transaction on the Bitcoin blockchain. So we basically send ourselves the money so people can see the amount of Bitcoin that we are holding. It’s memorialized and stored on the blockchain, but it’s possible with Bitcoin using something called a smart contract because Bitcoin does support smart contracting functionality. To add a piece of extra data.

Stephan Livera:

The OP_RETURN.

Obi:

to that transaction, it’s called the OP_RETURN. This is basically a tag with extra data and that extra data links to a report of the amount of balances that we should be holding for customers. And that report again we store online. And it’s timestamped as well. So you can see the amount we stored, each balance we stored for every person. Each balance is encrypted in such a way whereby only the owner of that balance can decrypt their own balance. And confirm that it is, because we want to maintain their privacy. But what this gives you in combination is two things. (1) One, at a point in time we’re showing how much money we should have and also how much Bitcoin we actually have. Now if you’re solvent, the amount of Bitcoin you actually have should be more than the amount you should have. And so that’s the first thing that you can see that if you add up all the lines that are in this report, it should be less than the amount that we were sending on the Bitcoin blockchain at that time. (2) The second thing you have is that any single customer can separately check their line. So we can be held to account by all of our customers in this decentralized way. Now because we don’t know who is going to check that line and they can check it throughout history. So someone could go back five years, six years and nearly six years now and perform that same check. If anyone finds a line that doesn’t fit what they thought their balance was at that time, they have evidence, they can show it to the world and show that at some point in time we weren’t solvent when we were saying we were and our trust will be gone.

Stephan Livera:

Let’s talk through a little bit of the process, like what that customer would do if they want to verify. So let’s say I’m a customer, I go look on your blog and I say, okay, here’s the CoinFloor provable solvency report. I download some of the information, I download the report itself. Basically, there’s certain things here that I could check. For example, you can check the SHA-256 sum of the overall report. And then I would also check my balance. So let’s say I’m holding a small amount on the exchange, maybe like 0.1 BTC. And then I would get a certain identifier and basically I’m matching my identifier. This is my balance in that report.

Obi:

So high level. First of all, most customers have a good idea of their balance and their balances don’t change too frequently so they’ll have a good gut feel of what their balance should have been at any given time. If they’re traders it might change more frequently. They can go on our site, as is the case for most exchanges and they can see their current balance and they can also download their balances and changes in their balance and deposits, withdrawals, all trades from the beginning of their experience of using CoinFloor to the current time. So they can download that and that can be put into a spreadsheet to see. But even beyond that, they should have their own gut feel of what their balances should be as well to make sure that there isn’t anything weird. So they start with that, then they see the provable solvency or the proof of custody report and they will do two things. They will first download the actual reports and each line will have a balance attached to it and they will also be able to see the timestamp. I.E. it’s a line at the top but it basically says when this report was made, to the second. They will then look at the transaction on the blockchain and see that that transaction was sent linking with the OP_RETURN linking it to the report.

Stephan Livera:

Right. And that will also show the overall balance. So for example, on your blog it says, at this day or this time, CoinFloor holds a total of 3,815 Bitcoins.

Obi:

They will see that balance and then they click on the link to a blockchain Explorer. If they wanted to, because the Bitcoin blockchain is decentralized, they could, if they were they could be running their own version of the blockchain if they didn’t trust an online explorer and check the balance as well. And so they would see that the balance we said matches the balance at that point, matched the balance on the blockchain, which is being verified by thousands of machines around the world, thousands of nodes around the world. So they have confidence that that was our balance at that time. They can then see that it links to this report and the timestamps so they can have confidence there that we are saying that this is what we believe were the balances for customers at that time. And now they now have to verify that we’re not lying there or we’re not telling the truth. And what they can do is there’s series of instructions we give them, but fundamentally it involves taking information that only we and the customer shares that they can get when they log on. And they can see certain private information that is shared between the two of us. And they can use that following these instructions to effectively search through the report, find the line that relates to them and they will be able to be decrypt it and that’ll be the only line that will be able to be decrypted, the line that relates to them. Therefore, we’ll know that that’s the line that, the balance related to that line is the one that should be their balance. They will look at the balance, check the balance that they believe that they should have had and from their report they should have had and they should match. If they don’t match, then there’s a problem and it should match to the Satoshi.

Stephan Livera:

And as you mentioned earlier, one of the important factors is you don’t know who could check you. So it could be any of your thousands and thousands of customers, any one of them could check it.

Obi:

At any time as well, if someone was a customer for five years, today they could decide to check their report from five years ago cause they can download all the balances throughout time. You can see what the balance should have been on that date and they could have not bothered for five years and now they checked and realize actually when you started, you weren’t solvent. And so knowing that this is not just something that we check and never have to forget again they never have to think about again, that forces us forever more, our reputation becomes more and more important over time. We have to think about way up in terms of all the way through for perpetuity. This is an important thing for us and we need to maintain it.

Stephan Livera:

That’s an impressive feature. This relates to the Bitcoins with the exchange. What we’ve seen over the years is occasional flare ups in interest in this idea of proof of solvency, proof of reserves, proof of custody, different terminology. One concept I’ve heard is this idea of, well you can sort of verify the reserves, like the Bitcoins held, but that company or Bitcoin exchange might have other liabilities that are unrelated. And so I guess this is one piece of the puzzle, right? And this is an important part of the puzzle, but I’ve heard of other approaches where maybe an auditor, like a traditional auditor would come in and just spot check or test that okay, the liabilities are what they say they are. So let’s say for example, 3,800 Bitcoins are held by CoinFloor, but also, what are the liabilities? Make sure they haven’t been promised elsewhere as well.

Obi:

Yeah. And there are more things that can be done. However there are various challenges with that. One: auditor’s have historically been uncomfortable with auditing exchanges, cryptocurrency exchanges. That is starting to change now. So for example, we had a subsidiary in Gibraltar and it was after multiple conversations between Gibraltar regulatory authorities and the auditors that they agreed to audit our Gibraltar subsidiary. So, because it was possible to be done. Now we did it there. However that being said, we have to remember the environment that was in place when Bitcoin came into being. This was the credit crash of around 2007-2008. And a big part of the problem there was that people relied on auditors, who are still trusted third parties, to verify the books of some of the banks at the time. And it turned out that because of various incentives, they hadn’t actually done their job properly. So ultimately if you want to be able to verify something fully, you want to have mechanisms to verify it yourself separately. The other bigger point is, something not being perfect is not a reason to do nothing at all. And that’s probably the most important thing. As people’s balances, as exchange balances get bigger and bigger and bigger, it’s more and more important to prove that they haven’t been hacked to prove that they aren’t trading their customers’ money. On other exchanges. So behaving like quasi-traditional banks, effectively, without the necessary regulatory approvals and oversight and there’s less and less an excuse for them not to do this. And the discipline of doing this every month reminds us on a monthly basis why we’re here reminds us that we are serving our customers, we are service providers, the clue’s in the name: we provide the service. And it keeps us humble and that’s also an incredibly important thing. And then finally, because we are doing these transactions on the blockchain and it’s large amounts, it becomes harder and harder, we would imagine, cause we don’t do it, but we would imagine if you were trying to do something like moving capital in and out, for example, it will leave bigger, a bigger and bigger footprint on the blockchain. So if you were trying to do this, you’d be spending most of your month figuring out how to not make that apparent on the blockchain as opposed to running a business. So it would keep you honest as well.

Stephan Livera:

Gotcha. Yeah, and that’s a good point as well because that is another theoretical challenge or some of these things when you read some of these papers. I think one of the well known ones is this one called Provisions. I think it’s from 2015, which I’m sure you’ve probably seen. But even in that paper they list out some potential pitfalls here. So this concept of control versus ownership or collusion between exchanges. If exchanges were to try and say, Oh, Hey, we’ll try and coordinate to try and help each other pass the audit and so on. But I think the fact that each customer has their own individual balance helps there because it would be much harder to try and fake that kind of number.

Obi:

It’s possible, but the incentives, the game theory of it are, you’re talking about colluding with your competitors who could shop you to the authorities and your customers and cause you to, and therefore get rid of a competitor and take the market share. So it’s, and if only one of them is honest, they can basically shop everybody else and take the entire market share. So yes, they are theoretically possible, but we’re very comfortable that this keeps us honest and keeps us focused on our customers, philosophically and mentally and morally, and we’re still sort of surprised that not more exchanges are doing it. At the beginning, this was all in the shadow of the Mt. Gox affair, most exchanges at the time, in fact, I think there was a joint statement made by a number of exchanges, I probably wouldn’t want to name them, but a number of major exchanges and a couple of them tried a few times. I think more recently one of them has started again, I think. But the majority of them did not proceed with that premise. And you have to ask yourself at some point, why?

Stephan Livera:

Yeah. And I think it’s interesting because people have shifted, the appetite for proof of reserves or some form of proof has waxed and waned, right? So there are times where people are like Yeah, we want this, we want this now. And then other times where it seems like people don’t really care. And so it must be a weird thing for you to have been around for a few years and see that desire come and go.

Obi:

And I think that’s because of miseducation really. When new people enter the market they have to go through a process. And that process is the same for everybody. And I’m not sure it can be accelerated and it’s only when you get into the space for a while you realize that, okay. Or you see an exchange being hacked. And that tends to be a point where people start thinking of what can we do about these things? Or for example, we enter a bear market and you see a significant jump up in exchanges being hacked. But the question is, were they hacked or were they trading on other people’s exchanges? Trying to make an extra amount of profit traded badly in a bear market and then claims that they were hacked. You can never know. With proof of solvency that could help. So it’s one of these things, but as the balances that are being stored on exchanges continue to increase in value I believe that you’re going to see calls for this increase and another reason is because organizations like us are going to make more and more of a stink about it because historically we are an exchange focused on institutional and sophisticated investors and traders. But the majority of the market in terms of feet on the ground are consumers. And we were expecting over the last few years to see this become more common in this space and it hasn’t. And basically we’ve come to the view that enough is enough. We have to get into that space and educate people as to why it’s important. I think the sophisticated market understands this and there’s no reason why the consumer market can’t be made to understand why this is an important factor when deciding on an exchange.

Stephan Livera:

Yeah, those are good points. I think from my perspective, I’ve just always been trying to push people towards self custody. I’ve always been saying, as an immortal rule in this space, not your keys, not your coins. That’s always the way.

Obi:

100% agreed. I think sometimes people try to make it over complicated and to use an Americanism “Don’t get it twisted.” We are part of a journey. The journey is a very simple journey and the first thing is you have to educate customers correctly. Beause the majority of customers don’t want volatility, don’t want to speculate don’t want to trade. They just want to have a safe position in the crypto space as safe and as simple a way as possible. So you have to educate them. You have to give them very simple tools to buy in a very safe way. As they get educated, at a certain point they will be comfortable with custodying themselves. And at that point, if they’re comfortable with it, they should custody themselves. But also being realistic, it’s important to understand that you need training wheels before you can go off and start doing wheelies on your bike. No matter how skilled you are in one skill it doesn’t necessarily translate to another. If you’re an experienced surgeon, it doesn’t mean that you’re going to be an expert on Bitcoin and Day 1 the training wheels are: working with an exchange, understanding the basics of Bitcoin and then when you’re comfortable with that, then understanding self custody. But getting someone to understand self custody right at the beginning can be very frightening to someone when they start. But ultimately I understand that the majority of people should at some point be comfortable enough custodying themselves.

Stephan Livera:

The other cool thing that I’ve noticed recently with CoinFloor is the Bitcoin only announcement. So can you tell us a little bit about that?

Obi:

Yeah. So we were obviously we started back in 2013 so we were Bitcoin only from the beginning and we were around and quite significantly involved with the whole Bitcoin Cash (BCH) event a number of years ago when we had the first major fork of Bitcoin. And at that point, because a number of our customers effectively were custodying with us, we decided to list Bitcoin Cash. Around that time Ethereum was starting to become more popular, and we were devising our own criteria for deciding whether to list a currency or not. And it came from this nebulous sort of feeling to get it to be more concrete as to what were the actual aspects of a cryptocurrency. Because again, multiple cryptocurrencies were just starting to boom at that point. We were probably one of the last exchanges to list Ethereum because we weren’t comfortable. It reached our very objective criteria. But in the beginning of 2019, I think it was the 5th of January 2019, we decided to list Ethereum. Because we felt it just crept up to the level where it fits the criteria to be able to be listed and to be clear, Bitcoin was also just above that level of criteria because it’s a very high bar because objectively it should be a high bar. This is a high risk space. So you should have a high bar. And the criteria are simple: (1) one is that a currency should be value-driven. So Ethereum sort of excluded itself for a number of years because there was a big mantra that Ethereum wasn’t about its value. It was actually more about decentralized computing. And then in late 2018, there was this move to Ethereum: “ETH is money” type of move. Okay, fine. We’ve now sort of got it that it needs to be value-driven cause guess what? We’re an exchange. So we were trying to translate from one valuable asset to another. And if you don’t believe it’s valuable, you shouldn’t do that. (2) The second one was community support. Ethereum has strong community support. (3) The third was regulatory clarity because we are a fiat-to-crypto exchange and as such we have to, we knew, and now, regulation has come in. It’s an absolute requirement, we have to pay heed to what regulators are going to be comfortable with. Otherwise we wouldn’t be able to service our customers. And finally (4) it’s technical maturity. And that’s the maturity of the teams working on the system, the maturity of the technology itself and the maturity of the people that are underpinning it, supporting it: miners, stakers, whoever they may be. Now, halfway through last year in 2019 the Ethereum developers or some of the main Ethereum developers basically all came out saying that Ethereum 1.0 wasn’t going to scale. It wasn’t good enough. Some claim that they knew this all along. And the solution was Ethereum 2.0. Now Ethereum 2.0 is not a soft fork or hard fork of Ethereum 1.0. It’s a completely new blockchain. So it is a new currency. Now it could be renamed to Ethereum 1.0 and people could transfer through air drops or whatever mechanisms, value from one to the other. But it’s a different cryptocurrency, a different technology and it isn’t even out yet. And the estimates are that it’s going to take between several months to a few years to fully transition over to it. And then there’s a number of unknown technologies in that. But at this point in time, we cannot list Ethereum 2.0 because it doesn’t exist to list. However, if the core developers of Ethereum say explicitly that Ethereum 1.0 is not good enough and to replace it with Ethereum 2.0, then we as an exchange cannot in all conscience look ourselves in the mirror and say that Ethereum is acceptable to offer to our customers. Because we’ve just been told that it’s not good enough. And so it became clear at that point that we needed to delist Ethereum. Now if Ethereum 2.0 comes out and it launches and all of the new technology and improvements that it has in place make sense and work and it’s been running for a year or two reliably. Because to know it’s working we have to see it running for a while, then we would consider listing it again. But just by their own timelines, that’s a good few years away.

Stephan Livera:

Right. So I guess your stance right now is you’re Bitcoin only, but you won’t necessarily be Bitcoin only in a few years time if the right scenario plays out.

Obi:

Correct. If the right scenario plays out, we wouldn’t be, we’re being very objective in terms of our criteria. However when you take those criteria objectively Bitcoin just about meets those criteria, it has very strong community support. It’s regulatory clarity is clear. Value-driven, it definitely is. But the hardest one, one of the hardest ones to achieve the technical maturity. It’s mature enough, but there’s still, I mean we were at Advancing Bitcoin and a conference for example, just last week. It’s still, there’s still a lot to do to continue to improve. For example, areas around fungibility and so on. I think the solutions in scalability conceptually makes a lot of sense to me as being a technologist working in layers. That’s how you scale almost every other technology system, not just in the digital world, but in the physical world as well. You build infrastructure and then piping and then you build the bricks and then finally you start decorating the walls. You don’t start off with decorating the paint. You work in layers. So conceptually it makes sense, but there’s still a lot of work to be done there. But I think that it’s good enough for now to list and as long as that mindset is maintained, it would still be good enough to list. If it wasn’t good enough to list them we’d have to shut up shop because there would be nothing in all conscience that we could list. Now Ethereum seems to have just met the standard in the beginning of January with the decision of middle of last year. It’s now nowhere near the standard because it’s excluded itself and everything else at this point in time, if we’re being objective, is nowhere near. So although in theory and I think anybody, unless I’m just a religious fanatic, I should always be open to other ideas. In theory, I could list something else. In practice: no, nothing is anywhere near being good enough at this point in time. You just look at those objective criteria, you will know that’s the case and I’m sure all other exchanges, I would like to see a set of objective criteria, which is taken from the viewpoint of their customers, which doesn’t lead to that same conclusion.

Stephan Livera:

I can see that it’s a challenging space because while I am Bitcoin only, I’ve never bothered with any of the shitcoins. I appreciate if you’re running a business in the space you have to have revenue and how do you survive in a bear market. I can understand where there were exchanges that had to go and do this stuff. But for me, I think the dividing line would really have been where there was deceptive behavior. Like I think probably an egregious example is something like Coinbase where they like ninja-launch BCash and then there was all this drama around not being able to sell BCash and to me it was like, okay, fine, I get that for your business, you have to have these shitcoins that people want to go gamble on but don’t sell people false promises and lies about it. Or like shill them to all the retail people who don’t necessarily understand what they’re buying. They just think, Oh, I missed the boat on Bitcoin now I want to buy this shitcoin, right?

Obi:

So I won’t speak about a specific company or other, but I think in general when you look at the level of adoption, support, etc., Bitcoin is ridiculously far ahead of everything else. So one thing I find egregious is when on someone’s homepage you have almost equal billing to Bitcoin to a coin, which is doing a hundredth, a thousandth of the volume, has a tiny fraction of the support and they’re displayed with equal measure. I think that’s very disingenuous and incredibly confusing to customers. One common concern for people in the space is they will explain Bitcoin, why it’s really disruptive. They may have a view of even Ethereum, maybe. Although as I say, I think it doesn’t meet the Bitcoin standard. However, they then go to an exchange, their friend then goes to an exchange and comes back the following day and I said, well, did you, how did it go? It was really great. Thanks for the advice, but I didn’t buy that Bitcoin stuff. I bought this other thing that looks like Bitcoin, maybe a similar name or I bought this other coin because it was only 3p or 10p and so on. And the reason why was because they went to a site and that site, effectively—I was told by a friend of mine a UX expert called Selene Jin who works for Blockstream about “dark patterns” and they employed these “dark patterns,” which are basically ways of misdirecting people towards something else. Than what they should be going towards. So it’s basically underhanded techniques in terms of, for example, visual prioritization or you click on one button, they mention you’re coming in for this reason, maybe Bitcoin for example. So maybe a site set up to say that we all love Bitcoin, but when you actually go into it is actually a site educating people about multiple cryptocurrencies. A name that might come to mind is like nakamoto.com for example. These are dark patterns and we don’t like that. So one of the things that we’re going to be launching is what we’ve called no BS education because we want to basically be very straight-talking. We want to basically be very open to customers and tell them how things work. And if you tell people the truth of how things work, it’s actually incredibly simple. And if it sounds complicated, that’s where you have to start worrying.

Stephan Livera:

One other point I wanted to touch on, and so again, as I mentioned, I’m Bitcoin only. But I have heard an argument like, Oh, you shouldn’t list or delist things based on popularity. It should be done on technical merit. And so from that argument theoretically some exchanges should even list BSV or whatever and that you should let the market decide. One argument in favor, again, I’m steel-manning here because I don’t necessarily agree with this, but the view might be something like, Oh Hey, well look, if a lot of exchanges delist BSV then it might be actually easier for it to get pumped up because now nobody can short it and nobody can easily sell it because there’s less exchanges that you can even do that on. But the caveat would be it’s on very low volume. What’s your view there on that idea of technical reasons for delisting?

Obi:

So I put that into a similar camp. There’s technical reasons and also you should give choice. There’s a choice argument as well. Let’s take the technical reasons. One, it’s actually objective criteria. As I say, we have four objective criteria. If they don’t sound sensible for a fiat-to-crypto exchange—I’d love to have a debate as to why they don’t sound sensible. And they’re very simple. It should be technically mature. It should actually be value-driven, i.e. it should be something where the founders believe its value is important. It should have strong community support because the community underpins the currency and finally it should have regulatory clarity. So there shouldn’t be some question marks. Was this an ICO? Was this an unregistered equity or something like that. These things you don’t want to offer to your customers. If you take those four into account, nothing meets the Bitcoin standard and Bitcoin just about gets there and nothing else is anywhere near close. So by that argument, you shouldn’t list anything else. Then as the, yes, but you know, you’re cheating. You should just give free choice and so on. If you had a child, would you just give them a free choice of there’s your garage and there’s all these chainsaws and so on. Just go play, free choice! Or go wherever you want to, any person, stranger comes up to you and walk off with anybody and it’s just ridiculous on its face, that argument. Now once you’ve had a chance to give them their training wheels, educate them to a certain level so they understand the risks and so on, by all means give them, they can then decide to do what they want to do. Experiment with a new altcoin. For whatever reason they want to experiment. Understanding that it is an experiment and highly likely to fail, like most experiments, that’s completely fine. But just to sort of offer them all this choice with no context when they’re just starting their Bitcoin journey is just plainly irresponsible and you would never do in any other environment. I mean, I couldn’t swim until six months ago and I started to learn to swim for reasons. And now I can, I regularly every weekend swim one mile using the breaststroke and I’m pretty good actually. But just last weekend they tried to switch over to the front crawl and I was still back to being floundering beginner because skills don’t translate and just because people are incredibly experienced, they could be a captain of industry, when it switches to something like cryptocurrencies which are completely new, they’re back to being a child and whether they realize it and whether you realize it or not, that is the reality. And you have to therefore have that mindset and educate them until they’re ready to make these more complex and nuanced decisions.

Stephan Livera:

Great perspective. And I think it flows on nicely into this idea of: what’s needed for mass market? What does the mass market need in terms of Bitcoin services?

Obi:

So I actually tweeted about this the other day, but the first thing we need is patience. I mean, sometimes in the Bitcoin space we call it a low time preference. And that’s the most important thing we need. This story has been played out throughout any new major disruptive technology. Going back to the automobile, but more relevant and more recently, the computer, the micro computer, the Internet and now cryptocurrency. Step one is you have to educate someone about Bitcoin, to the point where they understand its value and therefore they want to own it and they own it. That’s the most important step. Once you’ve figured out that step one, then you go into step two, which is get as many people to get past that point to the point where you hit critical mass. Now what I don’t know is when is critical mass? It could be a 10% of people in a given jurisdiction or country or the world. It could be 20%, it could be 50%, but there’ll be some point. And it will be a point where if you’re a merchant or if you’re someone who’s, if you look at your friends, some significant percentage of them will own Bitcoin and want to own more of it, similar with mobile phones that you’ve got to a point where it wasn’t this weird exception. A number of your friends started having it and that’s when you hit critical mass. And step three at critical mass, you now have a circular economy because if I want to buy something with Bitcoin, I don’t need to transfer my fiat into Bitcoin because I already have Bitcoin and then the merchant doesn’t need to convert their Bitcoin back to fiat because they always want to keep a percentage of their holdings in Bitcoin and increase that percentage. And at that point, if you don’t need to have the friction of converting your fiat to Bitcoin or Bitcoin to fiat, then Bitcoin becomes an incredibly powerful mechanism for transfer. But if you need to have that friction to convert, even if it’s in a simplified way, linking your bank account or so on you’re always going to be saddled by this extra set of inconvenience. So trying to get to the point where it’s used as this global payment system now before critical mass is premature. So therefore, once you understand that, the fundamental technology will handle the being used as a payment system with second layers like Lightning network on top of it, of course. All we need to do is make sure we get people through step one. So we need to get as many people understanding the value proposition of Bitcoin and owning Bitcoin and understanding that this is a form of effectively digital prime real estate.

Stephan Livera:

I love that framing because it’s very difficult in today’s world because people might say, Oh Hey, I own this property, but then really, do you, because you pay property tax on it, the regulations on it, there’s all these other claims, if you will. Whereas we think of Bitcoin as allodial money. It’s a title on which there is no higher claim. You are the true owner as long as you hold the keys.

Obi:

Yeah it’s a techie term, but it’s a digital bearer asset. Some people argue with real estate, you also have the ability for it to actually to provide you security and a roof over your head. But what’s happened over the last X hundred years plus has been that we’ve conflated two purposes in one asset. And normally it’s, especially from an engineering background, engineering discipline, you try to separate concerns. So you have one thing to do one job and you don’t try to overload it by doing two different things. So, property should be a roof over your head, protection from the elements, etc. But ideally you want to use some other asset that’s optimized for being a store of value and does that job perfectly, better than anything else. Historically with gold, our money was our store of assets. But then the movement to fiat has meant that we’ve now moved to, predominantly, the currency of the day is inflationary in nature. It loses value. So you’re incentivized to spend it, not to hold it because it loses its value. So we have to find other, instead of the obvious thing, the money, the most liquid assets in, in any given domain or jurisdiction being your store of value, it has to be something else and it had to be stocks, shares, real estate and that leads to, inevitably those prices being pumped up. So only a tiny fraction of the value of your real estate is actually usage value and the majority is the money value. With Bitcoin we are able to make effectively the best of fiat currency because they are all digital nowadays in nature. But combine that with the digital bearer asset properties that we had with gold and therefore offering a better money: a money for the Internet.

Stephan Livera:

One other topic I was keen to discuss with you is around privacy and regulatory clarity. So I think this is something that we’re starting to see a little bit more of and where we’re starting to see a little bit of a focus on this. We have seen some exchanges who were maybe not comfortable listing, Monero or Zcash or things like that. We are starting to see advancement in technology around CoinJoining in Bitcoin. What’s your view there? Do you see it like current regulators and political authorities around the world? What’s their perception of Bitcoin and privacy?

Obi:

So I think privacy and fungibility and so on, I think they understand the need for fungibility in a currency. No one wants to, on their watch have a scenario where someone goes off and buys this mythical cup of coffee and then gets mugged down the road because the relatives of the merchant can figure out that they have 500 Bitcoin or whatever. That’s not a great outcome. And that’s the risk with a lack of fungibility. So that’s understood at one point. But they also have their concerns around avoiding money laundering and countering terrorist financing. However big those are in reality, that is a stated concern of theirs. And so there is a worry that these things are in conflict with each other. I’m not sure they always are in conflict of each other, but again, like everything else it requires education. But not just education of our customers and the consumers, but education of regulators. So for the last six years, pretty much we’ve had conversations with regulators. With the authorities in terms of police governments, etc. in the UK and abroad to just educate them as to the state of cryptocurrency, the reality of its level of fungibility at this point in time. But as Bitcoin becomes more fungible, because that is the stated objective, it will be interesting to see how that interplays with regulators. At this point in time, Bitcoin is definitely considered a currency which can be traded and it’s got a tick by regulators, at least in the UK, in Europe. I think it’s going to be a very interesting space, but my gut feel is that as an exchange we have a number of mechanisms to not play the ball but play the man, effectively, or the woman. In that we can look at the source of funds, the destination of funds on the fiat side of things. So even without the ability to monitor transactions on the blockchain, if that becomes more and more difficult over time, you will still be able to see patterns or behavior which seem uncomfortable, etc., and be able to analyze more in more detail if you need to.

Stephan Livera:

Gotcha. And just context for the listeners, as much as we all dislike this regulation, if you want to run a legal compliant business, there’s all this AML and money laundering laws and so on. And some these laws will require a business to do things like, screening of a name or do things like checking against money laundering typologies or certain kinds of behaviors and so on. And so that’s where some of that is obviously as much as I as I hate AML and KYC, I accept that it exists and people have to run a business and have to stay out of jail if we want this thing to work. So that’s one thing. I was also keen to discuss, you mentioned earlier around grassroots and meetups, right. So obviously we can talk about Advancing Bitcoin and how this thing grows and develops further. I had a great experience at Advancing Bitcoin. Do you want to just tell us a little bit about your thoughts on that conference and your involvement?

Obi:

Yeah. We need to do more. There are a lot of big flashy events which have a lot of funding from people who have raised money on various ICOs and so on. But if I look at the history of crypto and Bitcoin at least in the UK there are a number of events which have been set up by people who just believe in the technology and its potential who actually are not in it just to make money, but they’re in it to change the world. They see Bitcoin as a fundamental technology that can potentially change or reduce the gap between the privileged and the overlooked as an incredibly transformational technology. And they are using their spare time and their own money to progress matters. And they often find that they get no interest from large organizations to fund because it doesn’t meet their strategic objectives, because their strategic objectives are purely monetary. On our side, examples of these are of course Advancing Bitcoin. Great team, Leon working hard to bring an amazing group of people together. But there are also things like Coinscrum, which is I believe, the longest running crypto meetup in the world. And they’ve had some very seminal meetups including the fateful meetup where Mike Hearn suggested that we need a benevolent dictator that was at a Coinscrum event, and so on. And then CoinFest in Manchester and so on. And many other of these grassroots meetups. I patronize them. I go to those. I know the organizers and I think they are amazing events. I think we, and other exchanges, should do more to support these as well because Bitcoin is a grassroots phenomenon. It’s “Vires in Numeris,” strength in numbers. And numbers means not just a small number of very large whales, which are obviously an important part of it, but also every guy on the streets, every girl on the street, every person who’s just there believing in spreading the message.

Stephan Livera:

Yeah, that’s fantastic. I’m a big believer in trying to build that local community and have local Bitcoin meetups and I hope to see that develop further in the coming years that people can have a place to go and learn about Bitcoin and at different levels as well. Right? One that’s more a general one and perhaps one that’s a little bit more techie, developer focused and I can actually learn more about the actual technicals. So for example, a Michael Folkson runs London Bitcoin Devs here and that’s also a great meetup. So yeah, look, I think that’s about a good spot to end it. Did you want to close out with any closing thoughts and obviously let the listeners know where they can find you and CoinFloor?

Obi:

Yeah. Well, first of all where they can find us, it’s very easy. It’s coinfloor.co.uk. The closing thoughts is that 2020 is going to be an incredibly exciting time. We’re starting a new decade. Bitcoin in this decade is going to go through a lot of transformations. One of the biggest, I think this year is there’s going to be a mindset shift. And that is that although people will still talk about other altcoins and so on, I think mentally, people are going to realize that Bitcoin is way ahead of everybody else. And although the game isn’t over from a time point of view, from a mental point of view, it would be. So it’s like one of those points in the match where you could still be at 2 all and you’ve still got 30 minutes left to play the game of soccer, or football. But everybody knows that this team has the momentum and they’re going to win. And that’s, I think at the end of 2020 where we’re going to be, the momentum is with Bitcoin. The architecture approach they’re taking makes sense. And so at least for the foreseeable future, I’m incredibly excited and CoinFloor and I hope other exchanges will do what it takes to give clear, no nonsense, no BS education to all of the new people entering the market. Yes, we need to make money. And you know, I’m a Nigerian by background, so it’s in my blood to make money. But more importantly, we are blessed with the ability to be part of a transformative phase in terms of technology and mankind’s relationship to money. And so, given that opportunity and given that ability we should take advantage of it and we should not just abuse it. And we should just do everything possible to make it happen in the most efficient manner possible.

Stephan Livera:

Fantastic that was a great way to summarize it. Thanks for joining me, Obi.

Obi:

Thank you, Stephan.

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