Despite its detractors, the digital currency Bitcoin has continued to grow in popularity. To get some inside perspective on Bitcoin, Radical Social Entrepreneurs spoke with ‘Bitcoin Millionaire’ Jered Kenna, CEO of the Tradehill Bitcoin exchange located in San Francisco.
RSE: Can you give tell us a little about your personal background and how you became involved with Bitcoin in the first place?
Kenna: I joined the marines at 17. I was in the marines for 6 years and I went over to Afghanistan for a couple years and then I moved to Chile. When I was living in Chile in 2008, I was importing electronics and was really into finance, economics… that kind of thing. I’d always been interested in economics and then I’d been there for a year and a half or so — it would have been late 2009 — a friend of mine introduced me to the Bitcoin white paper.
I read up on it and I thought it was probably the most interesting thing I’d ever seen. It seemed like one of those things that if everybody used it, it would work great and it could change the world, but I was worried about the network effect. I was worried that until it got critical mass it would be worthless. I wasn’t very optimistic that it would get enough critical mass that it would even have a decent value to where it could actually be used.
In 2010, Bitcoin was starting to take off a little bit more and I was more active in it, so I decided to launch Tradehill. I contacted a friend of mine who was a coder at SpaceX and pitched him on it and he started coding. He worked on it for a while and then we launched on June 8th of 2011.
It was still kind of an experiment at that point. The first Bitcoin bubble was just starting to take off and the price ramped up to about $31. I expected to get a couple thousand dollars in … and then we had a quarter million come in during the first twenty-four hours, then give or take a million by the end of the week. It just went nuts after that. We were doing a couple million a month in transactions.
So, I ran that for a while and then ran into some problems with Dwolla. They promised to be charge-back free, non-reversible. And what happened was they were getting hit with ACH reverses and they weren’t sure about how to deal with it so they pushed it on us. They deleted transactions in previous statements and took six figures out of our account without even saying anything. I tried to pull the rest of the money and they just deleted it. So we took a major hit and decided it was best to shut the company down and take a look at the regulatory picture, evaluate, get legal help, get more tech guys, raise some money, and do it again.
Fast forward to March 18th, 2013 and we’ve relaunched. For legal reasons, we only allow professional traders, accredited investors, and institutions on the exchange. The current Tradehill is a B2B [business-to-business] exchange for larger transactions.
RSE: As an Exchange, how does Tradehill stack up against the other folks out there? I think Mt. Gox is the big one, right?
Kenna: The big difference is if you have an account with us and you send an email, we have a representative that’s linked to your account and he’ll get back to you. It’s not sending an email and waiting two weeks. We’ll call you on the phone. If someone accesses your account and tries to do a large transaction, we’ll confirm it with you. We might call you on your cell phone and say “hey, I see you’re trying to pull out 300k, is this really you?”. We have free, two-factor authentication built in from the start.
We brought our CTO from Google and he was a senior privacy guy there, so he has more than twenty years software experience and left Google to work full-time for us. He’s also a contributor to Bitcoinj, so he’s definitely one of the best guys we could hope to get. So we built a more serious, professional product from the beginning. Everything from how customers interact to the software. Our batching engine processes hundreds of time a second, sometimes you see seconds or even minutes to do a transaction on Mt. Gox. We’re also based in San Francisco at one Market Street in the Financial District. So we’re…we’re a more legitimate, professional exchange.
Kenna: Yeah…yeah, exactly
RSE: It seems like most of the other exchanges have had problems with accounts being hacked or technical glitches. How are you making sure there are no technical or security failures… other than just having better people?
Kenna: One thing is I’ve already done this before and I saw it. I represented twenty percent of the market or something like that. I definitely saw it all… fraud, bugs and everything. We thoroughly test everything before we release it. Also, on the legal front, we have more lawyers than engineers. We make sure everything is legit before we push any new products as well. And we’re definitely proactive on all that.
RSE: Has it been hard to convince investors to get on board with this?
Kenna: No, not at all. The first time around it was difficult, but this time investors are looking at it and they’re saying, “what Bitcoin investment should I make?”, as far as VCs [venture capitalists] go. As far as currency trading investors, they see me talking on Bloomberg and they feel a lot more confident in that than some guy in Japan.
RSE: What’s your take on the recent guidance from FinCEN?
Kenna: It’s great that they’re attempting to clarify exactly what virtual currency is, exactly what Bitcoin is, and how it should be treated. I think it’s difficult to interpret exactly what they’re saying. Hopefully we’ll get something more concrete and clear later, but I think it’s great that they’re taking steps towards it.
RSE: Price volatility seems to be a major criticism. What kind of time line do you think we’re looking at before it settles down into something comparable to a major currency?
Keena: You’re going to see things like derivatives, futures … stuff like that will take away some of that. For example, Bitpay already cuts it down to fifteen minutes so when you send it, you get a price and you send it. So as far as the asset goes, it’s probably always going to be volatile. But as far as using it as a means of money transfer, I think we’re going see it starting to calm down.
You can already use it. If you take dollars, buy Bitcoins, and you convert it into Euros you’re not going to take much risk for volatility in the time it takes to send it. Volatility is not a problem for using Bitcoin as intended. Using Bitcoin as a speculative asset, I think it’s going to be, at the very least years, maybe even a decade.
RSE: And what about as an actual medium of exchange. If I want to go out and buy a pizza with Bitcoins…?
Keena: I think it depends. If you buy Bitcoins on your cellphone, if you already have dollars escrowed somewhere and then you pay for that pizza with Bitpay right then, you’re not looking at any volatility at all. If you’re buying Bitcoins to pay for something next week, then you’re definitely, completely exposed to volatility. I think it’s going to be a long time before that volatility is gone.
RSE: Bigger picture, what do you see as the social, political, and economic impacts of Bitcoin? What does a world where Bitcoin achieves really wide acceptance look like?
Kenna: I think virtual currencies, digital currencies, distributed currencies, whatever you want to call them, I think that’s the future of money. I think it’s inevitable. The government in my opinion has a much easier time tracking Bitcoin than they do cash. In some ways Bitcoin is more anonymous than cash and in other ways it’s more transparent and more trackable.
If you have somebody that deals with large amounts of cash, there’s no way to track it. With Bitcoin there’s breadcrumbs. If you had all those serial numbers, you could track it down. You might not know who’s behind each number, but there’s breadcrumbs to follow. At least there’s something to start with at the minimum and there’s additional ways as well. I see it as less of an issue for money laundering than actual cash.
RSE: Do you see Bitcoin ever becoming a constraint on central bank policy by providing a way for ordinary citizens to flee a currency? Maybe in cases where policy has been overly inflationary or like Cyprus where funds were just being seized?
Kenna: I’m not a lawyer and it’s difficult for me to interpret the effects of Bitcoin on specific policy, but in general, companies like ours make it much easier for governments to understand and regulate the virtual currency system.
RSE: What do you see as the biggest hurdle to actually getting wider acceptance?
Keena: I think seeing more merchants accepting it. If the average person is on the street corner buying coffee with it, then people will see it. They won’t think “so what” when they hear it, they’ll think Starbucks. So just from word of mouth when somebody says, “oh yeah, you can’t do anything with Bitcoin” and someone responds “well, I went to Cups and Cakes in SOMA and bought some cupcakes with it” … that’s one. You can pay for your blog on WordPress with it. That’s huge. That was a milestone.
RSE: So you think it’s just a matter of publicity and then all of a sudden it hits a tipping point and then it really takes off?
Kenna: Yeah, I think it’s a tipping point. It’s a network effect, it’s like Facebook. It started off with just a few people at colleges and then all of a sudden it just exploded. Or Paypal, only a few people were using Paypal and it just continued to grow. Once it hits that critical mass, which I think it has, it’s gonna just snowball.
Kenna: Yeah, I think so for sure.
RSE: And if you already have Bitcoin, what’s the attractiveness of, say, Litecoin? I get that the transactions are processed a little faster and there’s going to be more units, but they’re almost interchangeable, aren’t they?
Kenna: Right… I don’t see things like alternative chains on Bitcoin being hugely successful. Things like Litecoin. What I see are things like Ripple. Ripple is completely different from Bitcoin. It allows you to create your own assets. It allows you denominate things in dollars so people are comfortable sending dollars. I see Bitcoin being great for settlement and continuing to gain acceptance and be used for settlement whereas other currencies like Ripple being used for debt transfer, if that makes sense.
RSE: And what’s next? What’s the next milestone you’re looking forward to, either for Tradehill or Bitcoin in general?
Kenna: We’re looking forward to deeper integration between the innovative virtual currency space and the traditional banking sector. It’s not really a milestone, but it’s a process we’re looking to encourage. That’s the future for us.
An article by Jeff Fong, reporting for RSE. Jeff is a Silicon Valley-based journalist who writes about technology and politics.