Bitcoin and Beyond: Audience Q&A

Julie Stackhouse moderates the audience question-and-answer session following the presentation with David Andolfatto. They are joined by Chris Waller, senior vice president and director of Research at the St. Louis Fed.

Presentation (PDF)

• Part 1: Introduction and Welcoming Remarks (6:23)
• Part 2: An Overview of Bitcoin (12:19)
• Part 3: How Does Bitcoin Work? (13:10)
• Part 4: How Big Is Bitcoin and Is It Stable? (19:01)
• Part 5: Legal and Illegal Trading of Bitcoin (4:41)
• Part 6: Conclusion (4:03)
• Part 7: Audience Question-and-Answer Session (36:19)

Transcript:

Julie Stackhouse: Okay. So we're going to just reconvene here in a minute and take your questions. And while these guys are doing the work and I'm watching them—isn't that a great deal? Just a reminder, if you did look on your program, we do have another session coming up on May 6. It's called "The 100 Years of Service." It is the centennial of the Federal Reserve System. And so, for those of us that work with the Federal Reserve, it's a very proud moment. It's probably unusual for a central bank to last 100 years.

And I think the history of the Federal Reserve is something that it's not only unique; it's actually worth coming in for an evening to hear about. And I think you'll see some of the checks and balances. You'll learn some of the challenges and some of the successes throughout the history of the Fed. So, hopefully, you can join us for that session.

Nice work, guys. It's always good to have men at my beck and call. (Laughs.) By the way, did you notice we get along very well here in the Federal Reserve System? So let's take some time now and see what questions you have. Please be sure to use your microphones that are in front of you. Just press the button if you do have a question. Yeah?

Q: So, how do you see the Fed and Bitcoin as competitors, because you had that normally for the last thoughts?

David Andolfatto: Well, Bitcoin, of course, is doing two things. It's a platform designed to facilitate payments, and it's also designed to manipulate its own currency supply. So that second part, the currency supply, could potentially compete with Federal Reserve dollars. I think that the question for me is, I mean, do you really think that Bitcoin can win that battle? Because, as I pointed out, one of the properties of the protocol is a relatively fixed supply of bitcoins.

That might be something that you would desire as an investment vehicle, something that you knew over the long term the value might not depreciate, you know, barring entry or something like that. But, as I showed you on the graphs, in the short run, the demand for this object fluctuates quite violently, and I think that goes against kind of the desirable properties of what constitutes a desirable payments instrument. I think the Fed is very well-positioned to compete with and beat these guys at the game of actually providing the currency. And in terms of the processing of payments, that's a different game.

Julie Stackhouse: [Overtalk]

Q: [Overtalk] with your slides.

David Andolfatto: Okay, [unintelligible].

Q: [Overtalk] Bitcoin going like this, going up and down.

David Andolfatto: Yes.

Q: And then the other one where its purchasing power goes down. Obviously, they're probably different things, but I don't understand what the difference is.

David Andolfatto: Okay. So the one slide you're referring to, I think, is the one where I plotted the purchasing power of four different currencies?

Q: Right.

David Andolfatto: The yen, the Zimbabwean dollar, the euro, and the U.S. dollar. Over the last 25 years they've been falling in value over time, over the last 25 years. The second graph that I showed you was a very much shorter time period, just over the last six months. And what I did was I plotted the purchasing power of the U.S. dollar versus the purchasing power of Bitcoin. And there what I was highlighting the difference was the high degree of short-run variability in the Bitcoin vis-á-vis the U.S. dollar. Did I answer your question?

Q: Not really. I guess I didn't understand what the coordinate was.

David Andolfatto: Okay.

Julie Stackhouse: Oh, [unintelligible] to get 100.

Q: It's [overtalk] in Bitcoin, number one.

David Andolfatto: Purchasing power.

Q: Purchasing.

David Andolfatto: So the price of Bitcoin divided by the price level, the real—the real value of the Bitcoin.

Q: Well, I thought that was a pretty general one. Something was pretty general going down. But then there was another one around eight slides earlier that showed an enormous volatility. And I guess I didn't understand what the difference was in the coordinate.

David Andolfatto: Sure. I don't know how to answer that question, except to go back to the slide.

Q: Okay.

David Andolfatto: But all I can say is that the graph I think you're referring to was measuring on the coordinates the purchasing power of the two currencies, the purchasing power of Bitcoin vis-á-vis the purchasing power of the U.S. dollar. That really smooth line that you saw was the purchasing power of the U.S. dollar. It didn't fluctuate very much. But the purchasing power of the Bitcoin was fluctuating like mad. And the price of Bitcoin is like going high. It's falling down. So how much bread you could purchase with your bitcoins fluctuates a lot in very short intervals of time. That's what that graph was trying to show.

Julie Stackhouse: And if we could offer to do this, maybe at the end of our session tonight, we can sit down and actually pull the graph up.

Q: Sure.

Julie Stackhouse: And walk through that. Would that be okay? Good. Thank you. Is there another question up here? Yeah?

Q: Yeah. This question is on the first question. I thought you had said that a couple of the objectives were to create greater price-level consistency and then drive down transaction costs.

David Andolfatto: Correct.

Q: So, as you just pointed out, there has been anything but price-level consistency, number one. Number two, if increased competition and even to some extent legislation is driving down transaction costs in intermediary during transactions, as opposed to the private bilateral transactions, what is the endgame, assuming that will only increase over time?

David Andolfatto: Right.

Q: What is the opportunity for a virtual currency like Bitcoin?

David Andolfatto: Oh, that's a very good question. I actually—I don't know if I can answer that question, because I'd have to be an expert in the system. I mean I suppose advocates of Bitcoin would say they just have a superior technology to the traditional banks, and I don't know to what extent that's true. But, like I said, in one of my slides I pointed out one of the things I thought was very important was the threat of entry. Like I don't believe it costs $10 for Western Union to send my $100 bill to Vancouver.

And just the threat of entry could like lower these transactions costs. Now whether Western Union has the same type of—you know, Western Union still has to hire people. It has to hire tellers. It has to hire accountants. It has to hire—so it has these costs that Bitcoin doesn't have. So I think there is potential for Bitcoin to displace these traditional intermediaries as payments processors.

Julie Stackhouse: Yes sir?

Q: Isn't there a whole regulatory overlay that Western Union has to comply with that drives up the costs? I mean, Bitcoin doesn't give you written transfer disclosures, right?

David Andolfatto: Right. So, Julie, I think you can answer that.

Julie Stackhouse: Yeah. So, beginning in March of 2013, of course, all the exchanges that trade in U.S. dollars did have to register as money transmitters. And so they do have to provide the different reports required under the Bank Secrecy Act. You know, is that what drives up the cost? Or—and I'm not so sure about Western Union, but banks would say it's me, my examination staff that drive up the cost. Whether it's the Dodd-Frank Act or other regulations, there definitely is a cost to regulation. And, clearly, that's not a cost that the virtual currencies are observing.

The flipside of it, of course, is what do you as consumers want? And so we do start to imagine if you make a purchase at Overstock.com and you don't have any consumer protections and you have an unhappy experience, that may give you something that you're not used to. If you deal in U.S. dollars, then maybe that's something you don't want. So, you know, there's some pros and cons.

But, certainly, there are many protections, particularly for consumers, that you get in the traditional banking system that you won't get into the virtual system. And we're used to having stable currency. And we're used to having FDIC insurance in the United States, and whether individuals are ready to give that up is less than clear.

Q: So excellent presentation, Dave.

David Andolfatto: Well, thank you.

Q: Thank you very much for doing that tonight. You started your talk the quote from Winklevoss evidently had an exchange-traded fund investment vehicle that's entirely in Bitcoin. Is that the height of foolishness? What is the—I'm trying to wrap my head around why anybody would want to take their ill-gotten gains from Facebook and—

David Andolfatto: Well, you know, I think the twins are much more wealthy than I am, so I'm not going to pass judgment on them in terms of their investments. I mean, I don't know. I mean, you know, it's inherently very difficult. I'd fear entry. I'd fear competition. But, you know, I mean, it could potentially play a role, you know, as a small part of your portfolio if you want to play around with it.

I'm not sure. I'm not going to pass judgment on how people want to construct their portfolios. If anybody wants to really make money though, please come to me. I mean, I'm very good at predicting the stock market. (Laughter.) What I'll do is I'll construct a portfolio for you. I'll do a lot of research, you know, and I'll develop this portfolio, and I want you to short it. (Laughter.)

Julie Stackhouse: No. That was a joke, by the way. [Unintelligible]

Q: Thank you, David, for a fascinating presentation.

David Andolfatto: Thank you.

Q: I have two questions. The first is, could you lend some clarity as to whether there is a finite number of bitcoins in the universe? And the second part on that, it's my understanding that you can run a program and create bitcoins as if your money [unintelligible].

David Andolfatto: Okay. So, on the first note, yes, finite. Well, yeah. So there's 21 million—the program as it lives right now stipulates a 21 million maximum that will ever be issued. Each Bitcoin is divisible to eight decimal places. That's a finite number. But, whether potentially down the road—you know, there's nothing in principle that would prevent—you know, if the community of Bitcoin users—Bitcoin is what Bitcoin users want it to be. So if the community votes to increase the supply of Bitcoin at some point in the future, that would be technically feasible.

Your second question was the mining. I think that that's not quite the right analogy, but it's correct that in—the miners are really auditors. And the question is, how do we pay their wages? Part of their wages are just paid in transaction fees that customers supply. The other part is paid by actually creating new bitcoins. The difference between mining for gold is that it takes time to mine for gold. It's costly. But bitcoins, it's just—you just press a button. It's just a virtual currency. So it's really not an effort that is expended in that regard.

Julie Stackhouse: Let's see. Way in the back in the blue shirt.

Q: This isn't my question, but are your slides going to be available for download?

David Andolfatto: I believe they will be.

Julie Stackhouse: Yes. The answer is yes.

David Andolfatto: Yes.

Julie Stackhouse: Okay. Blue shirt in the back row.

David Andolfatto: Oh. Oh. He has a question.

Julie Stackhouse: Go ahead.

Q: I have a [unintelligible] in Kansas City that works for Butterfly Labs. (Laughter.) And he's got some kind of device he can attach to his computer and it mines bitcoins.

David Andolfatto: Yes.

Q: And he can produce about $20 per day, according to my sister. But, are these like tokens or something he can carry around in his pocket and exchange with people?

David Andolfatto: The program?

Q: Yeah, yeah. Well, he has a device that he can attach to his personal computer.

David Andolfatto: Yes.

Q: And it's called a miner.

Julie Stackhouse: Right.

Q: It generates bitcoins.

David Andolfatto: Correct.

Q: So my question was, the bitcoins that this device attached to his computer produces, are they like tokens or some kind of physical—

David Andolfatto: Well, well, back up a second. You know, I have a device attached to my family. It's called my son. He has a newspaper route. And he mines dollars. I mean, that device that your son has attached to his computer is something that is aiding in the processing of payments in this community. So the fact that he is being compensated in bitcoins is kind of a side issue. He could be compensated by—with U.S. dollars, in principle. So, yes, he is mining bitcoins, but I'm mining U.S. dollars when I go to work.

Q: But does it produce a tangible object that he can carry in his hand?

David Andolfatto: Oh. No.

Julie Stackhouse: No, although at least I don't know if you have other bankers—

David Andolfatto: No, they're electronic digits.

Julie Stackhouse: They are. But those electronic digits can, through an exchange, be converted into U.S. dollars.

David Andolfatto: Sure.

Julie Stackhouse: And we do have banks that report that they have miners as customers who are actively taking—exchanging bitcoins for U.S. dollars.

Q: Okay, thank you.

Julie Stackhouse: Yes. Way in the back in the blue shirt, we have to get you yet.

Q: Yeah. The example was kind of—of the $1 and $5 bill—was kind of facetiously offered. Actually, in the Soviet Union, one $100 bill was worth approximately 116 $1 bills. In the market there was no government regulating value, other than, if you want to call it Soviet Union regulating it, by banning it. But, because a $100 bill was easier to store than 100 $1 bills—

David Andolfatto: Right. Sure.

Q: —like rum is easier to smuggle than beer, the more concentrated form is worth more. So the market was deciding what the value of the two relatively useless pieces of paper were. Completely useless for this discussion, right?

Julie Stackhouse: But it's very interesting nonetheless. Thank you.

David Andolfatto: Thank you.

Julie Stackhouse: Okay. Do we have a question over on this side? I see. Okay, we'll go right here with the white shirt, and then we'll go over here with the navy shirt.

Q: Do you think that all these virtual currencies are a reaction to just a lack of faith in traditional currencies around the world? You know, the federal deficits are running amok. Same with Europe and other traditional currencies. You know, is that what's causing this to be so popular?

Chris Waller: The issue of wanting to have the power to print money has been around for—I don't know—centuries. So it's not so much a lack of faith. If you had the ability to create this stuff—you have the seigniorage, as David pointed. I know that Citibank and Bank of America would love to be able to print their own currency. They would love to do it. They're kind of prohibited from doing it in many ways. (Laughter.)

So it's not that this is a lack of trust in the current government or the current situation. There was always a sense that if you had the power to create money, and that doesn't cost anything—it's an intrinsically useless object—I'd do it. Everybody would want to do it. So there's nothing about having these things around.

David pointed out, back in Philadelphia in the 1840s, there were 145 different curriencies that circulated in the city of Philadelphia. Everybody printed their own money. Every bank created their own money and circulated it.

So it's not so much that. It's just that over time people didn't want that many currencies. They like having a single—look at Europe. They got rid of their currencies and went to one. Having one consistent currency has its value. Now, if you go to a situation where price stability is a big problem, Zimbabwe, nobody wants that stuff, and they might step into something else. But—

Julie Stackhouse: So, Chris, I mean, really, what you're saying is in countries like Zimbabwe, this may actually look more stable than notes?

Chris Waller: Oh, it's much more stable. (Laughter.)

Julie Stackhouse: So, you know, all perspective of what's used. I think we had one question over here, and then we'll come to you.

Q: Back to the inception in 2009, did the creators then create a fixed number of units per se, [unintelligible] a million units?

David Andolfatto: No.

Q: And then the way they were first handed out were to the miners who were really supportive? Or how, as it started, and then where we are today?

David Andolfatto: For the case of Bitcoin, my understanding is that it's called the Genesis block. The creation was—50 bitcoins were created by Satoshi. And then, subsequently, you know, the supply of Bitcoin expanded over time as the miners were rewarded with newly issued bitcoins. But I think the initial supply was 50. There are now presently something like 12 million bitcoins in circulation. The maximum number under the current program is 21 million.

Julie Stackhouse: Sir?

Q: Kind of to that point about stability, and do you see a credible threat to U.S. dollars as the currency of the world?

David Andolfatto: Like I said, the U.S. dollar has faced intense currency competition. I mean, people around the world, they don't have to use the U.S. dollar. You don't have to use the U.S. dollar. There's lots of competing currencies. But, you know, for 100 years—or I guess maybe a bit less—but, you know, the U.S. dollar is the go-to currency. So I think that, you know, it's passed the market test in that sense.

I mean, I don't know. I think as long as the Fed maintains a responsible monetary policy and people believe that—and I do believe that we do have that responsible policy in place. I believe that the U.S. dollar will still continue to be king dollar. I just—I personally don't see how these things can compete us away, unless something goes wrong.

Julie Stackhouse: Let's see. Let's go way in the back. Yes?

Q: Hi. David, thank you for your presentation. My name is Chris Reeve Bell, and I organize for the St. Louis Bitcoin Youth Group. So if anyone is interested in learning about [overtalk], you can find us on the [unintelligible]. But my question was about, a few times during your speech, you mentioned that Bitcoin has zero intrinsic value.

And I was just curious how you define that, because I—I disagree. I think that Bitcoin has some very unique properties that allow you to do things with it that are even beyond like payment processing that—I don't know if it's not really widely known, so they may not have been able [unintelligible].

David Andolfatto: Sure. You know, that's a good question. I should have been more careful to define what—not what I define it, but in fact—and I'm an economist, so the economists have a notion of what intrinsic value means. So, you know, define it this way. Suppose you were alone on a deserted island. Could you eat it? Would you draw subsistence from it? Could you use it to build a hut? Could you use it to fish?

You know, is it—and that's how I would define intrinsic value—something that has fundamental value that, even if it doesn't circulate, you could at least eat it, like salt. Okay? So, you know, the U.S. paper currency is close to zero intrinsic value by that definition. It's just toilet paper. So I don't know. Did I answer your question? So you probably have a different definition of intrinsic value. But that's a different definition.

Julie Stackhouse: Okay. Let's go over to this side. Well, actually, let's take you in this, and then we'll take you, and then we'll come back there.

David Andolfatto: Wow, efficient.

Q: I have a very simple question. The LIBOR rate and other factors that have been passed on to consumers because of the financial system we have, I noticed your charts did a direct comparison to the U.S. dollar purchasing power as opposed to the volatility of Bitcoin. Has a comparison been done to the loss of money to consumers with the LIBOR manipulation it made to the savings and loan bailout? I guess it's not a direct comparison, but I guess it's a loss of value comparison. I was just wondering, has that been considered or looked at before?

David Andolfatto: I personally do not know of some studies. Do you know, Julie?

Julie Stackhouse: Yeah. You know, it gets into a larger topic of sort of consequences of the financial crisis. In the case you're referring to, LIBOR was underreported. There are always winners and losers if something's underreported. Most people who had variable rate loans were winners.

Most people who were investors on the other side probably were losers. And that's why there's litigation that exists today of what was that winning and losing piece. But if after the session you want to talk a little bit more about what were some of the fallouts of the financial crisis, we can visit on that and see if that addresses your question. Is that okay with you? Okay. Oh, we have one more question on this side. Yes?

Q: Yeah. Under your definition of intrinsic value, you could argue that Bitcoin would actually have negative intrinsic value, because it takes a useful good, you know, electricity to do something with it [unintelligible] negative value?

David Andolfatto: Ah, no. I wouldn't go that far, because, I mean, you know, there is something to what you just said. But on the other hand, you know, think about the time that tellers or bookkeepers spent. I mean, it's just resources that need to be consumed to keep the books. Wouldn't it be nice if we were all honest and we just all kept honest books? We wouldn't need those services.

Julie Stackhouse: Wait a minute. That would put me out of a job. (Laughter.)

David Andolfatto: That would free you to do something else. (Laughter.) So, to answer your question—no, I just—I view it as a necessary cost to maintain the auditing expense in an imperfect world. So it wouldn't.

Julie Stackhouse: We have a very patient person in the red tie back there.

David Andolfatto: Ah, yeah. There he is.

Q: Ah, David, fantastic presentation.

David Andolfatto: Thank you.

Q: I'm one of the fellows who raised his hand when you asked who uses Ripple, Joe and myself. And I just want to say I'm very happy to see that someone at the St. Louis Fed is respects it at the very least. And I'm sure that, from all the good things you've said about it, many people in this room would like to hear more. But you mentioned that you foresee peer-to-peer, currency-agnostic payment clearing systems such as Ripple coexisting with institutions such as central banks in the United States. And my question is, what do we—how are we going to see that happen? What is it going to take?

David Andolfatto: So, thank you very much. And, you know, all the nice things I said about Ripple, everybody now knows to short it. (Laughter.) Well, how do I see it? I mean, you know, like you said, Ripple is this currency-agnostic platform, and it really doesn't care too much about creating and managing its money supply, although it does have its native money supply.

So, you know, it's doing—the way I exposited the idea, Ripple is handling the processing of payments for many of the world's unbanked people. Okay? And the Fed is one institution that's providing a type of currency that people could use as payment using the Ripple protocol. But there may be other currencies. There could be Bitcoin. There could be the yen. So, I mean, I see room for coexistence. I mean, I see it today. I don't see any reason to doubt why it might not continue in the future.

Julie Stackhouse: Yeah. And to add, some of you may have attended a dialog that we had several months ago where there was a discussion of the Fed's study on the future of the payments system. At that point, there was really a request for input. But I think there is a lot of question right now about how payments—not so much currencies, but payments will transform over time and what the role of the central bank is in that payment system, much less other issues like efficiency and security.

So I don't know if that addresses the question either, but there is obviously a lot of work going on right now to better understand how that might transform and, importantly, what role a central bank should or should not play in that transformation. Do we have any questions on this side real quick? None. Okay, we'll go back. All right, way in the back.

Q: Yeah. When you spoke of the volatility of the personal power, I wasn't sure—it sounds like you were suggesting that this was somehow intrinsic to the currency or intrinsic to Bitcoin. So, for example, a year ago there was basically one Bitcoin exchange. It dealt with about 80 or 90% of all Bitcoin trades. And one event there could send and did send the price, you know, tumbling.

David Andolfatto: Right. Right.

Q: So one wonders, as more exchanges come online and as more people start using it, as single events in China or in Japan or wherever tend to affect the price so easily in such a small market, don't you think that perhaps the volatility will subside?

David Andolfatto: I think that's an excellent question. The answer to your question is yes, I think you're correct. Part of that volatility reflects the thinness of the markets. No, I don't think it's intrinsic to Bitcoin per se. I do think it is something that has to do with currencies broadly defined that have a relatively fixed short-run supply. Bitcoin does have that property. But so do many other objects that serve as money—gold, for example. So I think you're right.

I think as the market matures, you could potentially—I mean, subject to my caveat of competing virtual currencies and the exchange rate volatility, I could see the volatility reducing. But, you know, we have a lot of experience with commodity monies in the past—gold standards. So you do see—you know, and these are relatively thickly traded markets. So you don't see that price volatility that I'm talking about go away. We haven't seen that in history. And I do think that that's—that is a property of monetary systems that insist on relatively fixed supplies of money.

Julie Stackhouse: The other thing I think you've referred to, for those that might not be familiar, there's certainly been issues of fraud at the exchanges. There have also been issues with cyber-security attacks. And just simply the security and the resiliency of some of these exchanges isn't as strong in all cases, some better than others. And those that are in the currency are beginning to find out which are stronger and which are not. But, again, pretty reflective of the newness of the currency.

Q: Julie, how do consumers really know which exchanges are strong and which ones are not, if you're dealing with a completely unregulated system? And does that argue for some level of oversight and examination and supervision?

Julie Stackhouse: You want to expand my job now. Yeah. So, you know, Janet Yellen was asked essentially the question of, shouldn't these things be regulated? And the answer was, "There's no legal authority to regulate them." So, for purposes of Bank Secrecy Act, obviously, the money transmitters are what's being used in terms of calling the exchanges money transmitters and therefore subject them to Bank Secrecy Act and anti- money laundering.

But as it relates to the services themselves, there's many nonbank financial services. They're not considered systemically important and therefore brought into the supervision of the Federal Reserve, and so they're unregulated. There's no consumer protection. And as a consumer, that's something you'd want to understand if you went into the currency, that right now there's no consumer protection. And for some people, that would be enough to say, "I want the consumer protection, so it's not for me."

Q: Hi. My name is Vernis Crow [phonetic]. I thought that was a very interesting presentation. And I wanted to bring out one point or at least hear some of your thoughts on it. While Bitcoin exchanges have been cracked into Mt. Gox as an issue, whether that was an outright theft or fraud I don't really know. But one of the things that Bitcoin provides that I'd like for you to talk more about is the security.

So, being able to crack open the Bitcoin wallet or take money out, or paying—so if I were to pay into Overstock.com using Bitcoin, there is an extremely low chance that fraud would occur on the part of my accounts. And I was wondering if you would talk about that in terms of both what you like about it and then what other companies are doing in terms of Visa or Target or all of the other places.

David Andolfatto: All right, I can't speak to what these other companies are doing, and I can't say much more than to reiterate the point that you just made, that I believe that, from everything I've read, I mean, the security is very tight. But, of course, you know, understanding the details of exactly why that's the case, that's kind of a different matter.

But, you know, the hashing—you know, you've got all this computer cryptology, I mean, is secure. But, you know, I mean, if I know that you're carrying a Bitcoin wallet and I point a gun at your head and I tell you to unload that Bitcoin wallet and load it into mine, there's no record. That thief gets away with your wallet. And, you know, you're not protected by any insurance. So, I mean, you know, what do you mean by security? I mean... (Laughs.)

Q: I mean, well, I think that the amount of payments that are going through the Internet system and the amount of credit card fraud that goes around the world—

David Andolfatto: Oh, I see. Oh, sure.

Q: So, I mean, like, of course that could happen, but you [unintelligible] wallet or a credit card, you could do that too.

David Andolfatto: Exactly. Sure. Sure. Yeah.

Julie Stackhouse: Yeah. Fair point. I think we have time maybe for two more questions. Let's go to this side, and then we'll come back to you. Yes?

Q: Sure. Thank you. A clear discussion. Let me ask a more pedestrian question. How would the average Joe go from using U.S. dollars to a more boutique exchange like Bitcoin? How would they jump into that space, as in every day over the next several years? How—I don't know if anybody sees how that might happen where the average American just starts—would have an opportunity to use Bitcoin?

Julie Stackhouse: I think we have some experts in the audience.

David Andolfatto: We do.

Q: Well, in the first place, I would say go talk to Chris. He [unintelligible]. (Laughter.) But you had mentioned Coinbase—

David Andolfatto: Coinbase.

Q: —as being one. I think in the coming months we're actually going to see a number of new companies come online, Circle being one of them, which one of their board members is the head of auditing from Goldman Sachs. Today there was a notification that Square, the payment processing, is going to start accepting Bitcoin along with Stripe, which is integrated into a huge volume of websites right now. So I think we're going to see it come on easier. So, sort of the way that Google smoothed out the edges of the Internet, people will start to see that happening more and more.

Q: Sure. Without totally paying in U.S. dollars, how do I—how does the average Joe evolve into the Bitcoin space, either as I get bitcoins payment or I use bitcoins for payment? I'm not sure I'm understanding how I would evolve into using Bitcoin.

Q: So the very first place, you can start it very happily if you go to a place called Coinbase.com, and you would just link your checking account, your routing number and your checking account number, on there, and they will do... (Laughter.)

Julie Stackhouse: They'll take care of you. (Laughter.) Yeah. So in a simple sense, what you're saying is the exchanges are just that. You can take U.S. dollars and you can exchange them for bitcoins.

Q: [Overtalk] use a credit card to purchase [unintelligible] and they're asking for real [unintelligible].

Q: I understand the mechanics. I'm just trying to understand the psychological event that would make me give up U.S. dollars.

David Andolfatto: You're asking the question of how this currency might take off, how it might proliferate in the community.

Julie Stackhouse: You know, we'll introduce you to some of these guys, because I think some of these guys are Bitcoin users. I think there are others—and I think you'll agree this is fair—who are just satisfied with using U.S. dollars, the insurance and protection behind them. And that's part of the controversy, is it sounds really cool, but is it cool for me? Or is it going to be used for things that maybe are a little bit more boutique-like? And we're probably not far enough along yet to fully appreciate how these things will evolve.

Chris Waller: Well, I mean, let me make just a comment. There's no laws in the U.S. that says you cannot be paid in Mexican pesos.

Julie Stackhouse: Indeed.

Chris Waller: None of you are. So this is back to the point that, in terms of what kind of social norms, in terms of what objects people want to be compensated for for trading their goods and services, it's whatever they're willing to accept. And I'll accept it if I think I can transfer it to the next person and they'll take it.

So you can put all the currencies you want out there, but if people coordinate on one, which tends to happen a lot of times—they coordinate on one, not 150 of them—then that's what will happen. And then once that acceptance of that one happens, it will be very hard for someone to get a broad network. You might have it in niche boutique-type trades, but it's very hard to get it widespread that we—this has happened over and over.

Julie Stackhouse: Yeah. I'll take your question here and your question there.

Q: I read an article on Wall Street not too long ago about the fear of charitable criminal enterprises using bitcoins. Can you comment on that?

David Andolfatto: I have no knowledge of money laundering.

Q: Now you know what it feels like.

Julie Stackhouse: You know, the Financial Crimes Network, which has spread—if you had a bank, for example, and you have a large transaction or an unusual transaction, then there will be a report filed with the Financial Crimes Network, and that's basically how Bank Secrecy Act anti-money laundering is applied in the United States, through the—really looking across these reports and determining trends.

So what has been required since March of this last year is that these exchanges in U.S. dollars are required to file these reports. So the idea is that it's going to be where the U.S. dollars go in and out of the system that there'll be the requirement to file the report. So will that stop money laundering? I think, you know, everybody would say even in banking there's money laundering. So, you know, it can be pretty sophisticated. But that's really where the Financial Crimes Network is focused.

Q: Oh, unfortunately, the IRS is wanting to—how do you report your Bitcoin transactions where it's a [unintelligible] loss? If it has no intrinsic value and they don't recognize [unintelligible], how can they be so hypocritical to audit? And how could they audit it?

David Andolfatto: Well, I mean, it has no intrinsic value, but it does have market value. And you can certainly record capital gains and losses from your Bitcoin transactions.

Q: How could they audit it, if I were to rely on the IRS?

David Andolfatto: Well, for example, suppose you went through Coinbase, an intermediary, Coinbase would be recording all of your transactions. And I think, actually, if you do go to the Coinbase website, if I recall, I thought I did see something down there in the fine print that said, you know, if the IRS comes and asks for access to these records, we're going to give them to them. Other than that—

Q: [Unintelligible] any internal IRS auditors are smart enough to get into that? I am just wondering.

David Andolfatto: I don't know what [overtalk].

Julie Stackhouse: Okay. And I promised—I promised one last question back there.

Q: Okay, thank you. I can understand that your digital wallet exists on your computer or your iPhone or your iPad, whatever. I can also understand how you can use the principles of the public key cryptography to make secure transactions between people. The problem I'm having is, where do all these records exist? The statement was made that these are all public records. They're stored somewhere, some big computer in the sky. And the question is, where are they? And if it's distributed thing, how in the world do you keep them synchronized?

David Andolfatto: Well, that's a good question. There's this, you know, BitTorrent kind of phenomenon, where you have this distributed network of computers, and you draw this information. They share information. It's just the technology that permits you now to share this information and update these records very quickly.

As to where this information lives, it's going to live on your device, on everybody's devices. The technology is advanced so much that—I mean, you know, the people who use it, help me out here. Is this correct, what I'm saying? I think that's right. The technology permits all of our devices to be updated very, very rapidly.

Q: [Unintelligible]

Julie Stackhouse: Well, okay. So I know there were a few remaining questions. I hope that if you have a minute, you can stay and ask those questions on your way out. But for others, thanks for joining us. Please feel free to join us again on May 6 as we talk about the 100th anniversary of the Federal Reserve. And, again, thanks for being with us tonight.

(Applause.)