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Introducing the Future of Money, Powered by Blockchain Technology


The Halving Has Come, Is It Boom or Bust for Bitcoin?


Companies Clamor to Build Blockchain Applications

10 2 What Is Bitcoin? 1



Why Bitcoin Has Value Bitcoin: Why It Now Belongs in Every Portfolio


6 The Halving: Then & Now 1 A Guide to Buying Bitcoins

Merchant Adoption: Full Speed Ahead!



The Dollars and Sense of Bitcoin

Growing The Market – A Bitcoin Shopping Guide



Bitcoin’s Innovation at Enterprise Scale



How to Ensure Bitcoin Security


What is Bitcoin Mining?

Problem: International Payroll Delays and Fees


Bitcoin Security – A Best Practices Primer

Bitcoin Regulation Remains Murky — Careful Research Pays


2 What Is the Blockchain 5 Blockchains vs. the Real World

Bringing the Heat –

43 How One Farmer Used Bitcoin



to Grow His Crops and Increase His Profits

2016: The Year of Blockchain Integration



How to Build Tamper-Proof Titles with Blockchain Technology


How to Launch Organizational Training & Development for Blockchain Related Initiatives

ON THE COVER Cover art by Josh Dykgraaf, global artist based in Amsterdam, Netherlands, specializing in 3D and photo/illustrations.

FEATURED INSIDE!! Removable Fold-Out Brochure/Poster Illustrating the Bitcoin-Blockchain 2016 Ecosystem

T H E I N N O VAT O R S 65

Matthew Roszak – Cofounder and Chairman, Bloq


Marco Streng – Genesis Mining Bobby Lee –

68 BTCC Is Shaping the Future of Money


DJ Qian – VeChain Transforms Manufacturing and Retailing


Fenbushi Capital and Wanxiang Blockchain Labs


The Blockchain Momentum Builds We’ve known all along that Bitcoin was a game-changer, but now it is clear that blockchain, the distributed ledger technology invented to record Bitcoin transactions, will know no limits in its ability to impact every business on the planet. With enterprise investment topping $1 billion and industries as diverse as healthcare and global transportation in a race to apply blockchain use cases, there couldn’t be a better time to be standing in the eye of this perfect technological storm. The mission of yBitcoin magazine is to share with you our front-row perspective on the cutting edge of Bitcoin and blockchains in the real world. Our focus is to introduce you to the innovators behind the technology and preview some of the applications and opportunities that may apply to your business. Toward that end, we are pleased to include with this issue a removable 16-page educational brochure that opens into a poster showcasing the vibrant state of the Bitcoin/blockchain ecosystem. To keep you informed on the fast-paced revolution brought on by blockchain technology, we at BTC Media are also proud to announce our new Distributed brand, which includes a weekly newsletter, 24-hour news portal, print magazine and conference series, all making their debuts in 2016. Our first conference, Distributed: Trade, held in June at Washington University in St. Louis, was an overwhelming success and our second, Distributed: Health, will take place in Nashville on October 3. We plan to continue these groundbreaking forums of the best and brightest leaders in blockchain innovation, driving the dialog forward each time to new ideas and inspiration. (For more information on past or future events, please visit: Bringing inspired people together is always the first step in innovation. I don’t have to look far to see how quickly Bitcoin and its blockchain are changing the world. I am experiencing it first hand, as our own business integrates Bitcoin into our everyday practices. I published my first magazine in 1986, and until Bitcoin hit the world stage in 2013, the way we used financial services changed little if at all. We were still snail mailing checks, and taking credit card payments that dinged us up to 3.9 percent. Now, only three years later, we work with a global network of freelancers whom we seamlessly pay in digital currency—with no payment delays and no extra fees. We invoice our global base of customers in Bitcoin. My payment processor guarantees the invoiced amount in U.S. dollars regardless of the valuation of bitcoin. And those guaranteed, risk-proof payments are automatically deposited into our bank account with no transaction fees or costly currency conversions. We are on the threshold of a golden age, just as we were when the internet was young. In the pages of yBitcoin, you’ll get a glimpse of what it can all mean to you. The print edition of this magazine may have reached you on a one-time basis through one of our strategically targeted distributions. If you'd like to receive subsequent issues, please sign up at, and we will mail you a complimentary copy of our next edition as soon as it rolls off the press. I know you are going to enjoy exploring the new world of Bitcoin and blockchain.

Volume 3

Issue 2

Founder/Editor-in-Chief David F. Bailey Publisher Calli S. Bailey Managing Editor Ellen Sullivan Design Pat Riley Jennifer M. Taylor Sales Bryce Wells International Operations John Riggins Product Development Tyler Evans Circulation/Logistics Vanessa Krohn Contributing Writers Andreas Antonopolous Jonathan Chester Tuur Demeester Anthony Di Iorio Tony Gallippi Peter Kirby Alex Lawn Sterling Ledet Trace Mayer – Bitcoin Law Team Stephen Pair David Perry Kirk Phillips Alan Silbert Emily Vaughn Erik Voorhees Downloadable Digital Edition: Advertising Sales Office 256.539.6100

Warm regards,

Calli S. Bailey, Publisher


yBitcoin is published bi-annually by BTC Media, LLC, P.O. Box 1411, Fayetteville, TN 37334. Reproduction without the express written consent of the publisher is prohibited. yBitcoin is not responsible for unsolicited manuscripts, photography or art. yBitcoin does not endorse any advertiser or business listed in its directories, and is not responsible for errors and omissions in advertisements, sponsored content or editorial content. The information contained herein should not be construed as an endorsement of any company or individual, nor reflect in any way upon the products/services they provide. yBitcoin does not knowingly accept false or misleading advertisements, sponsored content or editorial content, nor does the publication or its staff assume responsibility if such advertisements, sponsored content or editorial content appears in the publication. yBitcoin makes no warranties or representations and assumes no liability for any claims regarding services, products or claims made by advertisers. yBitcoin is not a broker, seller or buyer of Bitcoin, nor shall it be considered to be promoting or encouraging the purchase of or investment in bitcoin. ©2016, all rights reserved. *All sponsored content is paid advertorial and marked sponsored in the footer. 9

What Is The Most Secure Way to Store Large Amounts of Bitcoins?

What is Bitcoin?

Bitcoin is both a digital currency and a payment system. It is used to send funds around the world in seconds, at almost no cost.

What Makes Bitcoin Valuable?

Bitcoin has value because of all the good things you can do with it. Whether you need to quickly transfer money internationally, shop online without a bank account, accept payment from a compromised land with no risk of fraud, or have a store of value you can easily convert into local currency, Bitcoin is your answer. This base level of demand gives Bitcoin a monetary value that can be used in the exchange of goods and services.

Is Bitcoin a Good Investment?

Bitcoin is the best-performing financial asset of all time. While still nascent, and with some risks, the opportunity for Bitcoin to appreciate in value is remarkable.

How Do I Buy Bitcoins?

Bitcoins can be bought, mined or exchanged for goods and services. Buying bitcoins is the simplest way to acquire them. You can buy bitcoins in person, direct from another Bitcoin holder, purchase them online through an exchange or buy them through a growing number of Bitcoin ATMs.

How Do I Store My Bitcoins?

Bitcoins are stored in a digital wallet. Wallets can exist on your smartphone, a computer, on the internet or printed out on a piece of paper and locked away in a safe deposit box. 10

There are a number of things you can do to completely secure large Bitcoin funds, but they can be complex to achieve. For now, it is best to consult with one of the well-known security companies in the Bitcoin space. Meanwhile, those same companies and others are busy innovating, and greater ease and efficiency are on the way!

Is Bitcoin Safe to Use?

Similar to online banking information, logins and passwords to Bitcoin services must be kept 100 percent private. Best practices include using a password manager to store unique, long passwords for each site and enabling two-factor authentication using a smartphone whenever possible.

How Are Bitcoins Created?

A process called Bitcoin mining ensures that bitcoins are created at a predetermined rate until reaching the total number that will ever exist: 21 million. Miners also confirm transactions, ensuring that bitcoins are not “double spent.”

Where Can I Spend My Bitcoins?

More than 100,000 merchants accept Bitcoin—and more are doing so every day. You can use your smartphone to spend bitcoins at a local brick and mortar store, or you can spend them online direct from your digital wallet.

Do Any Well-known Merchants Accept Bitcoin?

Many multi-billion dollar companies are accepting Bitcoin, including, TigerDirect, Dish Network, Dell Computer, Expedia, Microsoft, Newegg, Anheuser-Busch, Virgin Galactic, the Sacramento Kings NBA basketball team, OkCupid and WordPress.

What Is Blockchain?

A blockchain is a record, or ledger, of digital events — one that’s “distributed,” or shared among many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The Bitcoin blockchain contains a certain and verifiable record of every Bitcoin transaction ever made.

Why Is Wall Street So Excited?

Wall Street is interested in the many capital markets applications of the blockchain—a shared ledger of records or transactions. For example, a blockchain could be used to share equity trading information among many different parties or to track settlement of various financial instruments.

Why Do Merchants Want to Accept Bitcoin?

Bitcoin offers numerous advantages for businesses. Merchants are able to save the fees that are generally charged by credit card companies, never have to deal with chargebacks, and can accept payment without requiring personal information from their customers. And with payment processors, merchants don’t have to worry about Bitcoin’s volatility.

How Can I Implement Bitcoin in My Business?

Beyond accepting Bitcoin as a form of payment, there are a multitude of different ways to engage and use digital currency and blockchain technology in your business— from paying overseas employees to cutting-edge accounting and reporting practices. Most important, however, is to build a long-term strategy for your organization and team, which means in-depth research and active education.

Who Runs Bitcoin?

No one! This is one of its greatest advantages! Bitcoin is open source software that anyone can use and build on. Thousands of pioneers are actively building out the applications and services used every day by millions of users. Daily, established entrepreneurs from respected fields are entering the ecosystem and improving the protocols.

Can Blockchains Be Used Outside of Finance?

A blockchain can be used to store any type of data. For example, medical records could be stored on a blockchain, which would provide an immutable set of data that could be shared between different doctors or hospitals. Data encrypted on a blockchain could also be used to track everything from authentic luxury goods to insurance policyholders to votes in public elections.

How Is Bitcoin Changing International Business?

With the advent of the internet, companies today, both big and small, are building teams distributed across the globe. Powering ordinary payroll processes with digital currency allows even the smallest of companies to pay international staff cheaply and quickly. For example, an international newspaper could pay thousands of freelance writers from around the world every month without having to worry about fees, minimum transfers, foreign currencies or week-long delays.

What Is Bitcoin’s Legal Status?

Bitcoin has been treated as a currency and a commodity by the United States government, meaning most Bitcoin companies fall under existing laws and regulations. In the U.S., it is legal for individuals to buy, transact and sell bitcoins for personal use as long as capital gains taxes are paid to the IRS.

Are There Other Types of Digital Currency?

There are currently more than 1,000 different digital currencies, but Bitcoin is magnitudes larger than its closest peer. Bitcoin pioneered the space and is without doubt the most trusted digital currency. 11

WHAT IS BITCOIN? Welcome to Digital Currency by ERIK VOORHEES


When most people hear about Bitcoin, whether for the first or the tenth time, they ask one simple question: “What is it?” Like an automobile, Bitcoin is technically advanced, and it can appear complicated, depending on how much you want to know about it. But also like an automobile, it doesn’t require you to be a technical expert in order to use it—and for it to change the way you interact with the world. Here’s what you need to know. Generally speaking, Bitcoin is two things: 1) A payment network (“Bitcoin”); 2) The currency unit used on that network (“bitcoins”). Thus, as both a payment network and the specific currency used on that network, you use “Bitcoin” to receive and send “bitcoins” from and to other people. To clarify, take a look at the relationship between PayPal and U.S. dollars. PayPal is a payment network, but not a currency. In contrast, the U.S. dollar is a currency, but not a payment network. You use the PayPal payment network to make transactions in U.S. dollar currency. The PayPal payment network is operated and centrally controlled by one company (PayPal Inc.), and the U.S. dollar is created and centrally controlled by one organization (the U.S. federal government).

“The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.” 12

“Bitcoin is two things: (1) A payment network (“Bitcoin”); (2) The currency unit used on that network (“bitcoins”).” Here’s where things get important, revolutionary—and a little weird. The Bitcoin payment network, unlike anything else before it, is decentralized. It is not controlled by any company or organization. That fact alone is its core “value-add.” Bitcoin's decentralization is why it's unique and revolutionary. The Bitcoin network is like file-sharing: it’s a network of computers that talk to each other, but nobody controls the network itself (there is no central server). The bitcoin currency unit itself is similarly not created or controlled by any central party. Bitcoins are created by the network itself over time, in a process that distributes the new coins to those computers that are supporting and operating the network. The number of coins created in this way is limited according to a clear mathematical schedule. As of this writing, there are 15.8 million bitcoins in existence, and this will continually increase over time to a maximum of 21 million bitcoins many years in the future. Unless you care about how Bitcoin accomplishes this, the above is really all you need to answer the question, “What is Bitcoin?” It’s a payment network, and a currency used on that network, which are controlled by no central party. People control their own bitcoins. The number of bitcoins in existence is limited by the rules of the protocol.

Perhaps the more important question is, “Why should I care?” While computer engineers and mathematicians might find Bitcoin’s technical details fascinating, most people don’t really have the time for those complexities—just as most people don’t spend time worrying about exactly how the internet works. We trust that it does, we enjoy its benefits, and we know enough about it to use it.

“Bitcoin means that for the first time in human history, every person has financial sovereignty. Private property can now truly be controlled by the owner, and nobody else.” And while it’s true that Bitcoin permits financial transactions that have essentially zero cost, that can occur instantly anywhere in the world, these consumer benefits are not really what’s important, either. The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence. The fact that Bitcoin is decentralized, with no controlling entity, has fundamental implications. Because there is no central

control, the power of the currency and its payment network belong entirely to the people who use it. And this power is tremendous indeed. Bitcoin enables any two people, anywhere on earth, to transact with each other freely. They cannot be censored. The only rules of their exchange are those they set between themselves. With Bitcoin, there is no third party presiding over the economic activity of the users. With Bitcoin, you don’t need anyone’s permission when you make a financial decision. This means people can contribute to causes they believe are important, with no government agency or financial company able to cut off the payment flow. It means an entrepreneurial child can start an internet business before he or she is 18. It means a rural African farmer can receive payment for crops from a neighboring city, even with no bank account. It means a citizen of a tyrannical nation can hide his financial assets from seizure. It means the wealthiest and the

poorest of the world now have the same authority over their money – beholden neither to banks nor bureaucrats. It democratizes finance just as the internet democratized speech.

“Bitcoin enables any two people, anywhere on earth, to transact with each other freely.” With Bitcoin, economic relationships are set and regulated by markets instead of politicians. By the individual, not the collective. The value of one’s savings now cannot be reduced through monetary debasement (i.e. inflation). Trade between individuals is now the business of only those individuals. Certainly, some of these implications are controversial. Indeed, they will have a profound impact on human society, just as all great technological achievements do.

A good way to think of it is that Bitcoin represents the separation of money and state—the ability to “practice one’s own economic behavior” without the permission of anyone else. It offers privacy in an age of surveillance, and honesty in an age of manipulation. So what is Bitcoin? It is a payment technology, sure. But more than that, it is a social and economic experiment. It is a project that, if successful, will change the relationships between humans on a fundamental level. Its implications have just barely been explored. Like any experiment, it can fail, but the genie is now out of the bottle. While this genie goes about its business, many things you take for granted will likely change. The changes will be beneficial, especially if you know something about them in advance. Remember the dawning of the internet. And educate yourself now on the phenomenon that is Bitcoin.

Erik Voorhees

Erik Voorhees, CEO of, is recognized as one of the world’s leading Bitcoin entrepreneurs. Voorhees passionately advocates for Bitcoin, which he considers among the most important inventions in history. As a featured guest on Bloomberg, Fox Business, CNBC, BBC Radio, The Peter Schiff Show and at numerous Bitcoin and industry conferences, he has asserted that “there is no such thing as a ‘free market’ when the institution of money itself is centrally planned and controlled.” His writings address “the human struggle for the separation of money and state,” with Bitcoin as the instrument by which the future will happen. 13

Why Bitcoin Has Value Notes on the “Network Effect” by DAVID PERRY

This is where money saves the day. By agreeing on one intermediate We all have what feels like an intrinsic understanding of value, though it is actually learned as we come to know our world. commodity, say, silver coins, two is the maximum number of A gold bar has value, an empty soda can, not so much. When we exchanges anyone has to make. And there’s only one exchange rate encounter new things it’s usually fairly easy to assess what kind of for every other commodity that matters: its cost in silver coins. In truth there is more complexity involved—some things, value they might hold, but Bitcoin is a different beast. Bitcoin is harder to define and understand, and for many beginning like your fish, would make very poor money indeed. Fish don’t Bitcoiners the question of value is one of the most puzzling. stay good for very long, they’re not particularly divisible, and depending on the exchange rate, you might have So why does Bitcoin have value? “Bitcoin is instead a to carry a truly absurd amount of them to make To begin, we really need to understand why your day’s purchases. anything has value. Fans of post-apocalyptic fiction simple, elegant and On the other hand, silver coins have their will often point out that in the end, the only things modern replacement inherent problems too, when traded on extremely of real value are those that sustain and defend life. for the entire large or extremely small scales. This is what is Perhaps they’re right on one level, but with the rise truly valuable about Bitcoin: It’s better money. of civilized societies things got a bit more complex, concept of money.” because the things that sustain and defend those societies also gain a certain degree of value. It is in this context that all monies, Bitcoin The Evolution to Bitcoin included, gain their value. Since our societies rely heavily on trade and commerce, anything that facilitates the exchange of goods and It’s been a long time since those first “hard” monies were developed, and today we transact primarily with digital representations of paper services has some degree of value. currency. We imagine bank vaults filled with stacks of cash, but that’s almost never the case these days—most money exists merely as numbers From Barter to Money in a database. There’s nothing wrong with this type of system, either; Imagine, for example, a pre-money marketplace where the barter system it works fantastically well in an age where physical presence during is king. Perhaps you’re a fisherman coming to market with the day’s a transaction is not a given. The problem is that the system is aging catch and you’re looking to go home with some eggs. Unfortunately and far too often plagued by incompetence or greed. Every IT guy knows that from time to time you have to take a for you, the chicken farmer has no use for fish at the moment, so you need to arrange a complex series of exchanges to end up with something drastic step: throw the old system in the trash and build a new one the egg seller actually wants. You’ll probably lose a percentage of your from scratch. Old systems, such as our current monetary system, fish’s value with each trade, and you also must know the exchange rate have been patched so many times they are no longer functioning as efficiently as they should. of everything with respect to everything else. What a mess.



We previously patched our problems with gold and silver by introducing paper banknotes. We patched further problems by removing the precious metal backing those banknotes, then patched them again and again to allow wire transfers, credit cards, debit cards, direct deposit and online billpay. All the cornerstones of modern life are just patches on this ancient system. But what would you do if you had the chance to start over? What if you could make purely digital money based on modern technologies to solve modern needs? What if we didn’t need those dusty old systems or the people making absurd profits maintaining them? This is Bitcoin.

Replacement, Not Repair Bitcoin isn’t another patch, another layer of abstraction added on top of an aging and over-complex system. Bitcoin isn’t another bank or payment processor coming up with new ways to move old dollars. Bitcoin is instead a simple, elegant and modern replacement for the entire concept of money. It has value for exactly the same reason as the paper money in your wallet: It simplifies the exchange of goods and services, not in the antique setting of a barter system bazaar, but in the current setting of modern internet-enabled life. “But that’s only why it’s useful,” I hear some of you saying. “Why does it actually have value?” The two-word answer is one most economists are familiar with: network effect. The network effect is a lovely piece of jargon that refers to the quite commonsense statement that networked products and services tend to have more value when more people use them. The most common example is the telephone. During its early days when few people had access to telephones their utility, and therefore their value, were minimal. Today practically everyone has a phone, so its utility and value is so high as to be unquestionable. In this way the value of Bitcoin is directly tied to the number of its users and the frequency of their use. Of course Bitcoin’s value stemming from the network effect is not without its own unique difficulties. When the network is still relatively small, each new group’s entry or egress can create massive price fluctuations, resulting in huge profits for early adopters. Unfortunately, this makes Bitcoin look, on the surface, too good to be true—a bit like a Ponzi or pyramid scheme.

“Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use their primitive multi-user computer system to pass messages.” Ponzis and pyramids are distinct and different forms of fraud, but they share one thing in common: The first ones in make a lot of money while the last ones in foot the bill. Both feature initial “investors” being paid out directly from new investors’ money. The return is always too good to be true and the gains (for those who actually get gains) are exponential. Because Bitcoin’s value has risen so dramatically since its 2009 debut, it seems to fit this sort of a profile at first glance, but then so does every new technology. It’s just not normally the case that we get to invest in this sort of technology and profit as it’s adopted. Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use primitive multi-user computer systems to pass messages. It might have seemed like a silly waste then, but owning even a tiny percentage of the rights to email today would make one wealthy beyond imagining. Technologies follow a known adoption curve, which tends to include a period of exponential rise. Bitcoin is no exception. Ponzis and pyramids both create value for their oldest investors by stealing from the new. There’s no economics involved—just theft. Bitcoin creates value for the old investors and the new by splitting a finite currency supply more ways. That’s not trickery or theft, just good old-fashioned supply and demand at work— a basic and ancient economic principle applied to the world’s newest currency system.

David Perry

David Perry is the chief architect for BitcoinStore and author of the popular Bitcoin blog, Coding In My Sleep. When he's not breaking (or making) Bitcoin news, he can often be found moderating the Bitcoin StackExchange Q&A site, attending Bitcoin meetups and conventions, or tending to his Bitcoin mining operation. 15

he Halving. It sounds like a scary Stephen King movie or maybe the process involved in the birth of a two-headed monster. And given the build-up to this planned Bitcoin event in July, which included predictions ranging from exponential increases in Bitcoin’s price to the end of Bitcoin amid a collapse of the mining network, maybe the ominous interpretations were understandable. But in the end, “the halving,” which refers simply to a reduction in the amount of bitcoins awarded to miners who complete a block of transactions, turned out to be pretty close to a nonevent. And that news is a great outcome in the Bitcoin world. While the halving’s anticipated advent was undoubtedly one of many factors affecting a rise in the Bitcoin price, especially during the first half of 2016, it ultimately left barely a blip on the radar of Bitcoin price trends (price as of this writing still hovers around $620). What that means in everyday terms is that the aftermath of the halving, if it can even be called that, constitutes further evidence that Bitcoin is maturing, its volatility decreasing while its adoption grows. “Halving shows us...that Bitcoin’s volatility has come down,” said Bobby Lee, CEO of BTCC, one of the world’s largest Bitcoin exchanges. “It is much more stable than it ever was and with more trades and more liquidity, its volatility will keep coming down.” 16

Bitcoin’s price has attracted the attention value compared to reserve and fiat currencies of bitcoin owners and the wider community like the U.S. dollar, which lose some of their alike, perhaps never more so than earlier this purchasing power every year. Because of its year when it spiked to $700 over June 11 and deflationary nature, the digital currency is 12, during a period many interpreted as a often compared to precious metals such as speculative runup to the digital currency’s gold, which also undergo a resource-intensive second halving, which took place on creation or mining process. This process of mathematically securing July 9, 2016. (The first Bitcoin halving took place in November 2012.) The reason Bitcoin transactions in a chain of cryptobehind halvings has to do with controlling graphically sealed blocks, called mining, requires a tremendous the supply of bitcoins, which supply of computing power relates directly to the ability of Although the the digital currency to maintain miners’ reward for and electricity. In exchange its value. The concept is basically completing a block for securing the Bitcoin network and processing that if miners, the people who log has now halved, the transactions, the pre-halving Bitcoin transactions, experience a 50 percent cut in their transaction value of one bitcoin protocol rewarded miners with 25 bitcoins for every “rewards,” the generation of has increased block of transactions found. new bitcoins slows. This is an dramatically, Since the halving, however, intentional effect of the halving balancing things out. this reward for miners was event, designed to counteract the sort of hyperinflationary spiralling created when cut in half, from 25 bitcoins to 12.5 bitcoins. One concern, leading up to the second traditional fiat, or paper, currencies rampantly print new money and the fiat currency in halving, was that some miners would stop mining once their pay, so to speak, was cut some cases can become virtually worthless. Bitcoin, a deflationary store of value as in half. Just imagine how you might feel if opposed to reserve and fiat currencies, has you went to work in a coal mine every day, had its total supply limited to 21 million only to wake up one day to half the paycheck bitcoins since the original code released by you have been used to. But it isn’t quite that Satoshi Nakamoto in 2008. Unlike fiat simple. The opposing argument is that the currencies that can be printed at will by halving event has been preprogrammed into central banks, the total supply of bitcoins is the code from Day One, and that miners fixed by the consensus rules of the system. have been preparing for it for a long time. This makes Bitcoin a deflationary store of Also, unlike the hypothetical coal miner, the

Bitcoin miner has known exactly when the second halving would take place and when. Although the miners’ reward for completing a block has now halved, the value of one bitcoin has increased dramatically, balancing things out. So it appears that, like pretty much everything else Satoshi Nakamoto thought up, the Bitcoin halving worked. Such halvings, per Satoshi’s plan, are scheduled to occur once in about every four years, and they ensure that no more than 21 million bitcoins will ever be in circulation.

PRICE: UP, DOWN OR OTHERWISE Perhaps the most debated issue leading up to the halving concerned Bitcoin’s exchange rate. As Bitcoin's price is based on supply and demand, some thought a cut in supply would naturally lead to an increase in price. But since the halving did not come as a surprise, others expected the market to have anticipated the supply cut, and would have already priced it in. Others believed that an anticipation of a price increase could actually have resulted in a bit of a bubble, and therefore expected a fall in price. Now, it's clear the price has not moved substantially—at least not by such an extent that it is obvious the halving is the cause of it. Hovering around $675 a week after the event, compared to about $650 at the time of halving, the exchange rate did increase by a couple percentage points. But that’s not unusual for Bitcoin. It can, however, be argued that the price increase as a result of the halving did occur in anticipation of the event—that the halving was indeed anticipated and calculated in. Bitcoin's exchange rate rose about 50 percent (from $430) in the three months ahead of the halving, and even more than doubled (from $300) compared to a year ago. And, of course, how the halving will affect Bitcoin's price in the near future remains to be seen. As an interesting detail, the moments leading up to the halving itself did see some increased volatility. In the hour before the

first “12.5 Bitcoin block” was mined, Bitcoin's exchange rate dropped more than $30, almost 5 percent, from about $660 to $630. It stabilized to around $650 at the time of the halving itself.

HASH RATE DROP? Since the block reward is the main source of income for Bitcoin miners (and Bitcoin mining itself comes at a significant cost), many expected to see a drop in hash rate, which is a measure of how many people are mining at a given time, after the halving. Some predicted the hash rate could drop by up to 50 percent, proportional to the drop in block reward. But even more conservative estimates—by some of the most prominent mining pool operators, for example— predicted a slight drop of 5 to 10 percent, or perhaps no drop at all. As it turns out, hash rate hardly dropped at all. Current estimates suggest that total hash rate has decreased only by about one percent—or less. And since Bitcoin mining is inherently a game of chance, this slight loss may even be due to variance (“luck”). (This, of course, also means the drop could in reality be slightly more than a single percent.) Neither does the halving seem to have resulted in significant changes in the Bitcoin mining landscape. While there have been slight shifts in the size of different mining pools, none of these are out of bounds with expected variance.

STABILITY ISSUES: REAL OR IMAGINED The most worrying predictions concerned the stability of the Bitcoin network itself. Several prominent Bitcoiners worried that a sudden drop in income could lead to many miners shutting down their hardware. The resulting drop in hash rate, and subsequent slowdown of block creation, could cause the network to become congested, they warned. In a worst-case scenario, they worried, this could even lead to downward spiral of decreased usability, a falling exchange rate, and, therefore, even more miners shutting down.

A milestone in Bitcoin’s history, the block reward was halved on July 9, 2016. Where the first “halving” cut the mining reward from 50 bitcoins to 25, for the next four years miners will only earn 12.5 bitcoins for each block they find— not counting mining fees. This means that the sensational “25 bitcoins” era has come to an end. Since the last halving, almost four years ago, Bitcoin experienced spectacular growth in every conceivable way.

Bottom line: Bitcoin is maturing as a currency. And that, previous and future halvings included, is something we should all take comfort from, especially during times when other genuinely worrisome world events are going bump in the night. Another described threat concerned an increased risk of a 51 percent attack. In this scenario, the reduction in mining reward could knock miners off the network, resulting in an even more centralized mining landscape. This would open up the possibility of miners blocking or even reversing transactions. Of course, since neither hash rate (nor price) dropped much at all, the downward spiral scenario did not play out. The Bitcoin network is chugging along at a regular pace, with miners mining blocks and confirming transactions as if nothing happened. And while it seems the share of hash power controlled by major mining pools concentrated in China did increase by a couple of percentages since the halving, there is—again—no reason to think this actually had anything to do with the halving; it could very well be variance. Additionally, there is little reason to think risks of a 51 percent attack have increased along with it. The three biggest mining pools were already responsible for more than half of all hash power on the network; that has not changed after the halving. Historically, halving of miner’s reward has had no substantial effect on the price of Bitcoin. On November 28, 2012, the first time the miners’ reward was halved, there was no visible impact on the value of Bitcoin, which was worth around USD $13.40 per bitcoin. As Bitcoin security expert and author of Mastering Bitcoin Andreas Antonopoulos explains, the impact of halving on the price of Bitcoin depends on a wide range of factors, including the difficulty and transaction volume of Bitcoin. “I can't predict price. No one can. Anyone who does, even for 10 minutes, is lying,” said Antonopoulos. “The reward halving will


change the inflation rate in Bitcoin. How that affects the overall economy depends on the conditions of all the other parameters in the economy: price, adoption, transaction volume, hashrate, difficulty, investments, other currencies, world market conditions, etc.” It appears that as with all other predicted apocalyptic events including the departure of the gold standard, Y2K, and even Brexit, the digital currency economy did not end on halving day, July 9, 2016, nor did it erupt in a volcanic shower of gold. The reality is that the complex, interconnected market factors that affect every other segment of world finance come into play in regard to the value of Bitcoin, and that as the currency matures it will increase or decrease in value based not on any one single event, but on all of the forces that drive international markets. The halving event was but one factor, and in hindsight it appears to have been a kind of positive demo of the resilience of Bitcoin. “The most important thing is that even if the hash rate declines, it will not compromise the security of the Bitcoin network,” said BitFury CEO Valery Vavilov. “As to the Bitcoin price, it surged close to 20 percent over the weekend spanning June 11th and June 12th, and [that was] a very robust appreciation. This is an indication that the halving event is regarded as a good thing for the Bitcoin industry [because] it positively impacted the market even before it [took] place.” Bottom line: Bitcoin is maturing as a currency. And that, previous and future halvings included, is something we should all take comfort from, especially during times when other genuinely worrisome world events are going bump in the night.

A “

Why It Now Belongs in Every Portfolio

A technology is called “disruptive” if it creates a new market that first disturbs and then displaces an earlier technology. Bitcoin is potentially such a technology and much more. The fact that it can disrupt the largest and most interconnected marketplace in the world—money, banking and finance—makes it perhaps the most promising investment opportunity of our age. Unlike our current increasingly unstable and unpredictable financial system, Bitcoin has 21st century technologies at its very core. The digital currency and clearing network is open source, mobile, peer-to-peer, cryptographically protected, privacy oriented and native to the internet. The fusion of these technologies allows for a level of security and efficiency unprecedented in the world of finance.

From the inception of Bitcoin in 2009 until January 2011, its market cap grew to $1.5m. From there, it rocketed to $145m in January 2013, spiking to over $10 billion in January 2014, and after a two-year consolidation period, it recently regained that $10 billion market cap. These are some of the areas in which Bitcoin-based technologies can directly compete: • $2 trillion annual market for electronic payments. • $1 trillion annual e-commerce market. • $514 billion annual remittance market. • $2.3 trillion hedge fund market. • $7 trillion gold market. • $4.5 trillion cash market. • $16.7 trillion offshore deposit market. Bitcoin’s potential is not going unnoticed. After it had been praised by tech moguls such as Bill Gates (“a technological tour de force”) and Gmail founder Paul Buchheit (“Bitcoin may be the TCP/IP of money”), the money started speaking. We saw investments in Bitcoin 20

by top venture capital brass such as Marc Andreessen, Reid Hoffman, Fred Wilson and PayPal cofounder Peter Thiel; by billionaires such as Jeffrey Skoll (eBay cofounder) and Li Ka-shing (by all reports the richest person in Asia); by iconic executives such as Vikram Pandit (Citigroup), Blythe Masters (JPMorgan Chase) and Tom Glocer (Reuters); and most recently by large cap companies such as Google, Qualcomm, NYSE, Nasdaq, USAA (American bank and insurer) and NTT Docomo ($75b Japanese phone operator). Finally, several academic and government heavyweights have also affiliated themselves with Bitcoin companies: Larry Summers (ex-Treasury Secretary, World Bank Chief Economist), James Newsome (CFTC and NYMEX), and Arthur Levitt (SEC). The core value proposition of this network is the fact that, in the words of IBM executive architect Richard Brown, “Bitcoin is a very sophisticated, globally distributed asset ledger.” What Brown and others hint at is that Bitcoin will in the future be able to serve not only as a decentralized currency and payment platform, but also as the backbone for an “internet of property.” This entails a decentralized global platform, smartphone-accessible, on which companies and individuals can issue, buy and sell stocks, bonds, commodities and a myriad of other financial assets. The effect will be to remove much of the current bureaucracy and barriers to entry, presenting a huge opportunity for the world’s 2.5 billion unbanked people. Which raises the question: why Bitcoin, and not some other digital currency? The answer may lie in the network effect: of all the digital currencies, Bitcoin is the one with the highest adoption rate and the strongest security. The combined computing power of the Bitcoin mining industry serves as a protective firewall around the payment network. To give an idea of its size, as 21 Inc. CEO Balaji Srinivasan has pointed out, “All of Google today would represent less than one percent of mining.” In short: no other digital currency is as secure as Bitcoin. This attribute in itself attracts more capital, which in turn makes the network even more secure and performant.

Because of its robustness, the Bitcoin network is now the reference protocol for the new paradigm in finance. And just like TCP/IP became the mainstay for the internet of information, the Bitcoin network will likely become the value anchor for the internet of money and finance. Speed may be provided by offchain, lightning network, or sidechain transactions, but for the high-value transactions of tomorrow, Bitcoin could very well become the security-providing reference currency. So, how much of all this potential is already realized? Well, from the inception of Bitcoin in 2009 until January 2011, its market cap grew to $1.5m. From there, it rocketed to $145m in January 2013, spiking to over $10 billion in January 2014, and after a two-year consolidation period, it recently regained that $10 billion market cap. Despite significant price fluctuations, year-on-year adoption trends markedly point upward: as of Q1 2016, there were more than 13 million Bitcoin wallets (+60 percent), and the hashrate of the network was 1,028 pth/s (+300 percent). Enticed by its great potential, investments in the Bitcoin ecosystem are taking off rapidly. In 2013, little over 40 VC deals were made that raised a total of $96 million. That number nearly quadrupled over 2014, with $335 million invested. For 2015, despite a softening VC climate, Bitcoin and blockchain startups raised a total of $490 million, an increase of 46 percent. The value of bitcoins in circulation has been rising steadily. This can be explained mostly by the fact that it is a scarce commodity (maximum supply is 21 million) with rapidly growing utility. Here are a few possible scenarios for the future value of one bitcoin:

POTENTIAL VALUE OF BITCOIN $ 1,230 $ 2,480 $ 3,500 $ 6,860 $ 11,500 $ 44,000 $ 500,000 $ 800,000

Hedge Funds allocate 1% to Bitcoin1 Argentines sell USD cash for Bitcoin2 Gold holders divest 1% into Bitcoin3 Bitcoin replaces remittance market4 Becomes global e-commerce currency5 25% of black market transactions in Bitcoin6 Bitcoin replaces reserve currency7 Bitcoin replaces offshore deposits8

The scenarios projected above are, of course, not cast in stone. Bitcoin faces several risks going forward. These include: • The emergence of a much better digital currency that steals its market lead. • An undetected bug in the system. • A hard fork (what happens when some nodes in the network start running a Bitcoin software upgrade that is incompatible with previous versions) causing the Bitcoin payment network to split in two. • A sustained attack by an organization with substantial financial resources, such as a government.

Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold.

How serious a risk do these challenges pose? Let us examine them. A better currency is possible, but experience shows that disruptive protocols—such as SMTP for email and TCP/IP for internet—have proven to be very resilient once adopted by a critical mass of the population. As with any software application, the discovery of bugs may destabilize the system, but the open-source nature of Bitcoin allows for many eyeballs to help track problems, and many brains to help figure out a solution. A hard fork creates competition between two versions of Bitcoin, and after a period of fear and doubt, eventually the value will flow to the version deemed most useful by its users—not a long term threat in other words. An organized attack on the network is possible but expensive, and there are many potential defense mechanisms: miners can refuse suspicious transactions or raise fees, vulnerabilities in the code can be fixed, and so forth. From the perspective of the government, approaching the robust, decentralized Bitcoin network with an outright ban is nigh impossible. Therefore taxation, regulation and acceptance seems the more likely outcome. In any case, it seems exceedingly clear that the technology of the digital currencies is here to stay. Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold. With a risk-reward proposition this attractive, holding a small percentage of bitcoins in one’s portfolio as a speculation on increased adoption may be one of the wisest investment decisions of our age.

1) 2) 3) 4) 5) 6) 7) 8)

Source: Source: Source: Source: Source: Sources: and Source: Source:

Tuur Demeester

Tuur Demeester is founder of cryptocurrency-focused economic research firm Adamant Research and editor-in-chief of The Adamant Newsletter. He first discovered Bitcoin on a research trip to Argentina, and started recommending it as an investment at $5 in January 2012. 21

Ready to own your first bitcoins? Fortunately, it’s much easier today than it was even a year ago, and thanks to innovative companies entering the market, it’s getting easier all the time. There are multiple ways to get started: you can mine them yourself, trade goods for them, or apply for a loan in Bitcoin. Some employers—especially those in the Bitcoin space—will even pay a portion of your salary in bitcoins. However, the simplest way to break into the world of Bitcoin is simply to purchase some. There are a variety of ways to do so, and this guide will walk through some of the most popular options. Buy Directly Online The simplest way to buy bitcoins online is by using a consumer site like Coinbase, companies will walk you through the process of setting up a wallet and linking your credit card or bank account to complete your purchase. However, the companies must verify your identity to comply with U.S. “Know Your Customer” (KYC) regulations. The availability of these services varies worldwide due to regulatory restrictions, although Coinbase and Circle maintain a presence in multiple countries. In order to control fraud, these sites typically impose limits on the number of bitcoins you can buy, and they charge transaction fees. The bitcoins you purchase through these companies are held in an online wallet linked to your account. From there, you can send bitcoins to another user, make an online purchase of items that sell in bitcoins, or transfer them to a different wallet. Many of these companies offer insurance for your bitcoins stored with their wallets, and they implement security features like two-factor authentication and multisignature wallets to keep your account safe. If this is your first journey into the world of Bitcoin, consider these companies for a relatively quick and convenient way to get started.


Use a Traditional Bitcoin Exchange Traditional exchanges such as Bitstamp or Bitfinex are the most common sources for traders or large investors. These sites allow you to create an account and fund it with a deposit of fiat currency such as U.S. dollars. (“Fiat” refers to a currency that is issued or considered legal tender by a government e.g., euros, pounds or dollars.) You can deposit your local currency into an exchange trading account using either a wire transfer or an ACH withdrawal directly from your bank account. The deposit options vary by exchange, and this process can take several days depending on the method you use. Once you’ve moved money to your exchange account, you can buy and sell bitcoins with other traders using the exchange. The exchange doesn’t actually sell you bitcoins directly, instead it matches you with someone else who’s willing to trade at that price using an order book. Yes, that means it works essentially like a stock exchange that matches buyers with sellers at an agreed-upon price. The order book is a list of all the prices and amounts of bitcoins that other traders are willing to buy or sell. For example, if you want to buy bitcoins, you can either place an offer at the current market price (“market order”) or you can set the price you are willing to pay and wait to see if anyone else will sell at that price. Once someone decides to sell at your asking price, the exchange executes the trade, transfers the fiat currency to the seller, and credits your account with bitcoins. Since exchanges are designed for professional trading, they offer advanced features like limit orders and margin trading. However, you must be careful to choose a reputable exchange since they maintain control of any bitcoins or currency held in your exchange account. Many exchanges are also required to comply with KYC and other anti-money laundering rules. These rules can require additional identity verification from users before they’re allowed to transact.

Modern technology and savvy entrepreneurs have made buying bitcoins easier and much more convenient than opening a bank account. If you own a cell phone, there are hundreds of ways you can start buying and spending bitcoins today.

Find an Over-The-Counter Seller Another way to buy bitcoins is through an over-the-counter (OTC) trade, which is a direct transaction with another party instead of using an exchange. There are a number of websites and apps that facilitate these transactions by helping you find other people interested in trading. You can often contact these people and negotiate a transaction directly, paying with PayPal, cash, gift cards or even gold depending on what the seller is willing to accept. There are also brokers who will connect you directly with a seller if you’re looking to buy a large amount of bitcoins at once. These brokers, such as Binary Financial, itBit, SecondMarket and Cumberland Mining, specialize in transactions over $100,000. In addition to matching you with other sellers, some of these brokers offer financial products that function similarly to buying bitcoins directly. For example, you can purchase shares of the Bitcoin Investment Trust, which trades with the ticker symbol GBTC on the OTCQX public exchange. These shares can be purchased with a brokerage account and held in some IRA and retirement accounts. The shares represent the underlying Bitcoin asset which is purchased and held on your behalf by the Bitcoin Investment Trust.

Buy In-Person There are a growing number of locations worldwide where you can purchase bitcoins directly from a convenience store or ATM. A Bitcoin ATM will let you exchange local currency for bitcoins directly— often the fastest and most convenient option. A map of all Bitcoin ATM locations can be found online at In addition to using an ATM, you can also trade directly with other people. For example, you can use the Facebook app Get Bits ( to find friends on Facebook who are willing to sell you bitcoins. This allows you to contact friends directly and negotiate a transaction without a middleman. One of the most popular ways to find other people to trade with is the site, which allows you to search for people in your city who are willing to sell you bitcoins for cash. However, if you choose to meet someone for a transaction in person, be sure to take basic safety precautions like meeting in a public place. Companies such as Ripio in Argentina allow you to purchase bitcoins through local convenience stores. This process is as simple as buying a gift card or telephone minutes; you receive a card that allows you to redeem it for bitcoins online. These services usually include substantial transaction fees, but are a convenient way to get started.

Conclusion While this guide covers some of the most popular ways to buy bitcoins, it is not exhaustive: new options and marketplaces are springing up rapidly as the Bitcoin economy grows. Startups worldwide are building easier and more convenient ways to transfer value and increase investment opportunities with bitcoins, including the ability to buy bitcoins with your 401k or retirement account. In addition, exchanges and services are expanding worldwide as the global regulatory environment adapts to this relatively new player on the world financial scene. Art by Mariano Rodriguez 23

• Transactions are instantly verifiable and irreversibly settled within a day (usually an hour). • There can be no fraud by way of chargebacks. • Counter-party risk is nonexistent in contrast to a bank operating with fractional reserves, foreign currency settlement risk or credit card processing problems. • Identity protection is built in to keep users safe from identity thieves. • Fees are extremely low or non-existent. A prominent example: On July 18, 2014 Michael Dell tweeted, “Received PowerEdge order @ for more than 85 #bitcoin (~$50K USD).” One can assume Dell did so in order to announce his ability to receive payment from anyone anywhere in the world, thus expanding his market from a mere 50-60 countries where credit cards or PayPal currently function. If Dell used a feeless Bitcoin processor, this would result in a savings of about $1,000 when compared to credit cards. The merchant processor does its part by processing Bitcoin transactions, converting them into the fiat currency of choice, and making a direct deposit to a merchant's bank account the same day. Another advantage: Everyone has heard of the massive data breach of customers’ personal information at Target stores.

Bitcoin users now range from individuals to large publicly traded companies. With Bitcoin transactions there is no personal customer information. There is even a YouTube video of someone making a Zynga Bitcoin payment in two clicks. No more hassle using obsolete technology for which you have to input your name, address, zip code and all the other information an identity thief would need to go on a shopping spree under your name. Bitcoin has identity protection built in. In December 2014, Microsoft began accepting Bitcoin so it is reasonable to suppose that eventually Target, Amazon, Walmart, etc. will all be forced to accept Bitcoin. Why? Because publicly traded Overstock along with major electronic retailers TigerDirect and Newegg began accepting Bitcoin in 2014. At Overstock, Bitcoin transactions accounted for 4.7 percent of gross revenues for the month, and the average order amount was about 30 percent higher than transactions using other payment methods. The most popular item ordered? Sheets! Which leads us to the next major point. Target, Amazon et al. will want to know they are on solid legal ground when being innovative and accepting Bitcoin. Lawmakers in the Trace Mayer, J.D.

The author hosts the podcast Bitcoin Knowledge (; is an early Bitcoin thought leader, entrepreneur and investor with companies such as Armory, BitPay, Kraken and Netagio; and has worked as a journalist, monetary scientist and ardent defender of the freedom of speech. He holds accounting and law degrees, and has studied Austrian economics.


Art by Mariano Rodriguez


Almost every Introduction to Computer Networking course once taught that the “Byzantine Generals’ Problem” was impossible to solve. In simplified terms, the “problem” is how multiple generals are able to arrive at consensus on when to attack when they are able to communicate only through messengers, with the possibility that some of the generals are malicious or the messengers are compromised. Then Satoshi Nakamoto released Bitcoin. Thus was born the innovative solution to a previously impossible computing problem, one that created the world’s first practical implementation of triple-entry bookkeeping. Assuming the same gross revenue percentages for Bitcoin transactions, a $3,000 per month merchant processor fee on $5 million or more of volume with 2 percent average credit card processing costs, handled via Bitcoin, would result in annual savings for Target of about $75 million, Walmart of about $150 million and Amazon of $60 million with no downside risks. When any business can now implement Bitcoin and save proportionately, why cede cost advantages and profitable market demographics to competitors without a fight? Bitcoin users now range from individuals to large publicly traded companies. Here is why increasing numbers of people and businesses are adopting its advantages:

by Trace Mayer, J.D.

Companies need a Bitcoin strategy just as in the mid-1990s they needed an internet strategy.

U.K. and U.S., have all started to weigh in. On April 1, 2015, the Proceeds of Crime Act took effect in the Isle of Man which specifically legalizes Bitcoin use by financial institutions. The highest profile digital currency lawmaking event was the United States Senate hearings in November 2013, which included testimony from major Bitcoin service providers, venture capitalists, investors and law enforcement on how regulation of this nascent industry should move forward. Edward Lowery of the U.S. Secret Service said: “Digital currencies provide an efficient means for moving large sums of money globally for both legitimate and criminal purposes.” It appears that lawmakers and regulators are cognizant of the tremendous benefits to be gained from digital currencies such as Bitcoin but are also aware that like any technology, it can be used for nefarious purposes. Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network at the United States Department of the Treasury, told the Senate: “The meetings are designed to hear feedback on the implications of recent regulator responsibilities imposed on this industry, and to receive industry’s input on where additional guidance would be helpful to facilitate compliance. … We are very encouraged by the progress we have made thus far. We are dedicated to continuing to build on these accomplishments by remaining focused on future trends in the virtual currency industry and how they may inform potential changes to our regulatory framework for the future.” So: where does Bitcoin go in 2016 and 2017? Well, my cautious prediction is we will at least see more merchant acceptance. Companies need a Bitcoin strategy just as in the mid-1990s they needed an internet strategy. Meanwhile, lawmakers and regulators seem to recognize the possibilities and, at least in word, appear willing to encourage this new flower to grow and bloom. Consequently, while the financial world at large continues to experience commotion, the Bitcoin industry appears to be in forward motion like never before! 25


Dollars & Sense of Bitcoin Payments by TONY GALLIPPI


itcoin is a digital currency and a global payment network that is growing in popularity every day, offering unique advantages to businesses in a wide range of industries. But does it make sense for your business to accept Bitcoin? Let’s explore why it may.

Credit Cards: Designed for an Offline World Credit cards were never designed for the internet. These lovely pieces of plastic with a magnetic stripe were popularized in the 1950s. Actually the magnetic stripe was added in the 1970s, but that’s still a long time ago, when commerce operated very differently from the way it does today. These cards still work well 60 years later when you are paying in person, but they don’t work well when you are trying to pay or accept payments online. Customers expect a seamless payment experience – they don't want to fill out credit card information forms for every purchase. Merchants are still being hit by multiple-percentage-point processing fees for the cost of securely settling customer payments through the multiple antiquated layers of the card network. The costs of the security failures of this system have the most impact on online businesses. Online payment fraud continues to hit record highs year after year, and it shows no signs of slowing down. “Friendly fraud” is also increasing as consumers learn how to abuse the chargeback system. When an online merchant ships merchandise to a shopper, that merchant assumes a risk for up to 90 days whether that payment is final or not. If the payment is disputed by the cardholder at any point during that time, the merchant is usually forced to reverse the payment and pay a penalty fee. Merchants bear the cost of this fraud, and ultimately this cost is passed back to honest consumers in the form of higher prices. As businesses use the internet to meet demand from consumers around the world, this weakness is sapping time and money from the online economy – one that should have a payment method of its own.

Bitcoin: The Solution for Online Payments Bitcoin was invented in 2009 using everything we know about the internet and online security. It’s a payment system designed for internet purchases from the ground up. While credit card companies spend tremendous resources trying to make the online payment card experience better, they'll never match the simplicity and security of Bitcoin. Bitcoin works like cash for the internet. It’s sent from person to person in a push transaction, not drawn from accounts by third parties.


It uses cryptography to provide proof-of-ownership – bypassing the traditional multi-party routing and authorization processes that transmit sensitive customer information. With this native solution for payment security, Bitcoin functions without a chargeback mechanism like the one today's card system is built on. Customers and merchants alike are protected from fraud and its costs. If your business accepts a large number of payments over the internet, accepting Bitcoin might make sense for you. Here are four areas of online payments where accepting Bitcoin can have the most impact.

Micropayments: Payments Under $10.00 Payments under $10 are becoming popular among Bitcoin adopters, especially for businesses selling entertainment, games and fast food. The gross margins on these micropayments, when managed traditionally, are getting squeezed due to the ever-increasing cost of acceptance by credit card. Because Bitcoin payments can be sent without the traditional minimum interchange fees of card transactions, they are highly efficient and cost-effective for amounts under $10. Macropayments: Payments Between $1,000 & $10,000 Credit cards also make payments between $1,000 and $10,000 more difficult. At this scale, interchange fees of up to 3 percent on card transactions can quickly add up to larger amounts. These macropayments are also at a higher risk of fraud. When criminals obtain stolen credit card information, they try to buy the most expensive things they can find before the cards get deactivated. Merchants selling items in this price range are at the forefront of the battle against payment fraud. For merchants from precious metals giant to online car seller, Bitcoin already provides a much-needed solution.

International B2B Payments Businesses that need to receive payments from international clients are often hit with elevated interchange rates, which vary country-by-country, and can easily be over 10 percent per transaction. In many of the world's fastest-growing economies, businesses may not have access to card networks at all. Wire transfers can be received from more countries, but they are inefficient solutions. Bank wires rely on a large network of corresponding relationships, leading to unpredictable costs and transfer times to simply get money from point A to point B. Payees end up with

little or no information as to the delays and fees incurred along the way. Bitcoin changes that. There is tremendous potential for companies to offer Bitcoin as a payment option for their international receivables. It’s faster, lower risk and costs less than any other payment method. We've already seen traction—Bitcoin billing already makes up more than 10 percent of transactions run through one Bitcoin payment processor, and those B2B payments are 25 times the size of average consumer Bitcoin payments. If your business has international clients, then accepting Bitcoin also might be worthwhile for you. SWEET SPOT FOR CARDS BITCOIN ZONE Micropayments<$10 Cross-border payments ioT payments




Domestic consumer spend $10-$1,000 Recurring payments Customer loyalty



BITCOIN ZONE Macropayments>$1,000 Cross-border payments Multi-user payments



Payment Disbursements Businesses don’t just need a new way to accept payments. Many times they need to issue payouts as well. Some businesses have large fleets of affiliates, consignment sellers, or vendors that need to get paid their revshare on a regular basis. Traditional bank transfers work well if you need to pay a batch of payments in the same country (for example, a domestic payroll). However these traditional transfers break down when businesses need to send batches of small payments internationally. Those small international payments are very costly to send via bank transfer. Plus, the banks and their routes can be different in every country, and making a mistake in a transfer instruction can lead to delays. Bitcoin payments operate on the same network worldwide, with a direct point-to-point access to any internet-connected device on earth. Marketplaces, affiliate networks and app stores can pay their users directly, frequently and cost-effectively with Bitcoin. Imagine a rideshare driver getting paid after every ride, or an app store developer getting paid after every download.

$100,000 $1,000,000

Bitcoin works especially well for payments under $10 and over $1,000.

Getting Started With

Bitcoin Payments


ntegrating Bitcoin payments into your business is a fairly simple process. If you have a small business or online store, you can start accepting Bitcoin in just a couple of hours. Billion-dollar enterprises take a little longer, but even TigerDirect, the huge tech retailer, was able to integrate Bitcoin payments in as little as four days. Most Bitcoin payment gateways allow you to set your prices in your local currency. More important, they can settle incoming Bitcoin funds in your local currency and local bank account. This way, the rise or fall in the price of Bitcoin doesn’t affect the price of your product or service.

A partnership with a payment processor can essentially eliminate any risk with Bitcoin. In fact, due to the lower cost of accepting Bitcoin payments and the publicity it can bring as a byproduct, your business has more to gain than to lose. And you'll be joining the more than 100,000 merchants worldwide who already accept Bitcoin. Even as Bitcoin matures in its growth as a technology, the opportunities for merchant adoption remain wide open. It is expanding the possibilities for online commerce well beyond the limits of traditional payments. Is your business ready?

Tony Gallippi

Tony Gallippi is the cofounder and Executive Chairman of BitPay, a global leader in Bitcoin payments. The company was founded in 2011 and handles millions of dollars worth of Bitcoin transactions per month. He has 15 years of experience in sales and marketing working in the robotics industry, was a district sales manager for Aerotech, and worked as regional sales manager for Industrial Devices Corporation. He holds a bachelor’s degree in mechanical engineering from the Georgia Institute of Technology. 27


If years ago someone were to guess what products would kick off Bitcoin adoption, alpaca socks might not make the top of the list. Fuzzy socks to launch a disruptive technology and global currency? Yet thatâ&#x20AC;&#x2122;s exactly what occurred when alpaca socks were among the very first consumer items to be purchased with bitcoins. Similar feelings were no doubt engendered when early enthusiasts were directed to make their initial Bitcoin purchases using an ominous red phone at a grocery store, speaking to an operator to route U.S. dollars through an intermediary to a Bitcoin exchange. This was the future of currency? But just as the red phone led the way to many international exchanges, alpaca socks helped launch a burgeoning Bitcoin consumer ecosystem. With over 200,000 transactions per day and that number growing, it is evident that bitcoins are making headway in the world of consumer purchasing.



In the evolving Bitcoin market, consumers can now buy electronics, clothing, food, precious metals, internet services, creative services and even luxury cars and homes. Consumer Market As of the beginning of August 2016, there were around $10 billion worth of bitcoins in circulation that are ripe for spending. In the evolving Bitcoin market, consumers can now buy electronics, clothing, food, precious metals, internet services, creative services and even luxury cars and homes.

Lower Prices and International Barriers The frictionless, low-cost nature of Bitcoin allows for lower prices to be passed on to consumers. (The Bitcoin network is fee-free, albeit for a voluntary nominal fee that benefits the miners who support the Bitcoin network.) These economics mean that Bitcoin merchant processors offer lower fees than the VISAs and PayPals of the world, enabling merchants to deliver lower prices to consumers. Similarly, due to the borderless and peer-to-peer characteristics of Bitcoin, consumers can bypass costly middlemen altogether and go directly to the source. An American family renting a home in France can send bitcoins to the property owner without concern for intermediary or currency exchange fees, and without waiting for PayPal to release their funds. A foreign worker can send bitcoins back home to his or her family abroad, and avoid the

With over 200,000 transactions per day and that number growing, it is evident that bitcoins are making headway in the world of consumer purchasing. 8-9+ percent fees traditionally charged, thus providing the family with more bitcoins to spend in their local economy. Additionally, Bitcoin can reach many countries where traditional credit cards and PayPal aren’t accepted, giving more reach to consumers, especially those who are “unbankable” by traditional banking. East Africa is a perfect example of where this is taking hold.

More Safety Consumer security is another benefit of Bitcoin. Giving out a credit card number and associated information involves divulging an uncomfortable amount of personal detail while opening consumers up to future charges, possibly illegitimate, as long as the credit card is valid. In contrast, each Bitcoin transaction is a one-time, irreversible event that uses only your pseudonymous Bitcoin address. Escrow services, such as the one offered on BitPremier, mitigate the risks of large-ticket transactions. Bitcoins can be held in escrow by a trusted third party until both parties to the transaction consider it final and binding.

Maintenance of Purchasing Power Inflation protection is another benefit to the Bitcoin consumer. The purchasing power of the U.S. dollar has been almost halved in the last 25 years due to inflation, with a $100 basket of goods and services in 1990 costing nearly $180 today. The limitation on the number of bitcoins ultimately placed into circulation provides protection to consumer purchasing power.

The Growing Market • PayPal, Stripe and Braintree are starting to integrate Bitcoin into their payment networks. • and the Bitcoin wiki show growing lists of merchants. • and bitify are constantly broadening their inventory of electronics, clothing, gifts and other items, as they vie to be the “Amazon of Bitcoin.” • Food take-out and delivery service Foodler accepts Bitcoin for its 14,000 restaurants. • Microsoft is the largest merchant to accept Bitcoin to date. • Bitcoin ATMs are appearing in several countries worldwide. • Gyft offers gift cards from more than 200 different retailers. • OpenBazaar has launched a peer-to-peer marketplace for buyers and sellers to transact directly with each other using bitcoins. • Dell, Overstock, Expedia, DISH Network, 1-800-Flowers, Newegg and Wikipedia’s acceptance of Bitcoin shows that more mainstream businesses are starting to adopt it.

Dangers for the Consumer While Bitcoin may be almost perfect, it does have its challenges. As the ecosystem evolves and develops, it will naturally attract nefarious characters. Consumers should deal with trusted merchants, perform their due diligence, and use escrow services for large transactions. And while the irreversible nature of Bitcoin has its positives, it leaves little margin for error. Bitcoins should be treated like cash in that once you walk away from a transaction you and your cash have parted ways. Buying from a business that uses a trusted merchant processor like BitPay or Coinbase is a good start toward secure shopping. So is shopping at e-commerce sites run by reputable names in the Bitcoin community, or using local brick-and-mortar merchants. As always, transactions that seem too good to be true should be viewed cautiously.

To the Future While the choices for the Bitcoin consumer are growing, the Bitcoin economy is still in its infancy. With some help from the Bitcoin community, and as the benefits of Bitcoin become more well-known around the globe, the consumer market for Bitcoin should grow into a thriving global merchant economy.

• Entire communities, such as Berlin’s Kreuzberg neighborhood, are embracing Bitcoin and accept it in many of their local businesses. Bars and restaurants and even luxury goods purveyors are now accepting Bitcoin worldwide.

Alan M. Silbert

Alan Silbert is founder and CEO of BitPremier, the leading Bitcoin luxury marketplace, and a senior vice president at Capital One. He has more than 18 years experience in commercial finance. Previously, he was a vice president at GE Capital and held various positions at Merrill Lynch Capital, Heller Financial and HealthCare Financial Partners. He holds a B.S. degree in finance from Towson University, and currently resides in Maryland with his wife and two children. 29



When most people think of innovation, they think of Oculus Rift's virtual reality devices or Google’s self-driving cars. With a technology like Bitcoin, it’s easy to see why consumer applications also get the most attention from new adopters. At least on the surface, advances that closely touch daily life have the most to offer people who are discovering a technology for the first time. What this causes most new observers to miss is that many of Bitcoin's significant innovations will happen—and are happening— within firms that aren't featured in TechCrunch or based in Silicon Valley. While these uses of Bitcoin technology may not be public, they're also the ones that can transform how the world’s most important companies work.

A Payment Network Built for Growth Since its creation in 2009, Bitcoin has had more success as a payment method than any other digital currency. Today more than 100,000 merchants worldwide accept Bitcoin. As with any new technology, adoption has begun at the edges. Now many large-scale enterprises are embracing Bitcoin payments—and for good reason. The internet has made obsolete what used to be acceptable for companies using traditional payment networks: high fraud rates, interchange fees and country-to-country settlement limitations. Now these companies have a currency and a payment network that meet the realities of online commerce. With Bitcoin, it’s possible to receive payments in any size and amount for low settlement costs, all with the global scale that enterprises need.

Globalized Business Payouts Globalization has made international hiring and remote work common features of enterprise workforces. It has also extended supply chains and business relationships around the world. On the other hand, there has been little globalization of traditional payment networks, which are still limited to the developed world. Even within the reach of these networks, international transfers are often expensive and unreliable due to the cost of maintaining and securing a multi-step settlement process.

With Bitcoin’s peer-to-peer network, money can be moved directly to payees via the internet. It's not limited by borders, and its costs remain flat whether a company is paying a supplier in Thailand or a developer in Argentina. This is the fastest fund settlement network in history, and enterprises can already begin to use it to effectively cut wait times, red tape and costs in payouts.

Asset Management on the Blockchain The same problem that plagues the payments industry affects how companies manage their assets. Many financial institutions and other businesses still rely on analog processes to maintain digital ledgers and databases across borders and across branches. The costs of the human oversight, human error and fraud in these systems add up. Now even traditional players in finance and banking are coming to appreciate Bitcoin's underlying technology—a distributed digital ledger called the blockchain—as the solution. Using the same worldwide network of computers that verifies Bitcoin transactions, this ledger can allow firms to make and record transfers of any digital asset, title or token across systems in a matter of minutes. Spanish banking group Santander has already estimated that blockchain technology could save banks up to $20 billion per year. Whether through direct adoption or a more modern financial infrastructure, the blockchain is set to have the same impact for the broader business world.

Bitcoin as an Enterprise Platform In the past decade, cloud-based solutions have allowed small companies to grow their operations faster than ever before. Until now, financial technology has lagged behind. Businesses have had to use systems made for a pre-digital world, from bank transfers to credit cards. Now Bitcoin promises to beat the cloud in providing scalable financial tools for any company with access to the internet. The enterprises that are adopting Bitcoin’s payment and asset management technology are beginning to find solutions to the toughest problems with doing business in an online world. That’s something more newcomers to Bitcoin should note. While this innovation may be happening at enterprise scale, it’s certain to affect the way we all live and work.

Stephen Pair

Stephen Pair is the cofounder and CEO of BitPay, the global leader in Bitcoin payments. He has over 20 years of experience building software systems in the financial and telecommunications industries.

30 31



International Payroll Delays and Fees


If your business is required to make even a small number of international payments to contractors or employees, you are all too aware of the delays and fees involved. One of the greatest benefits Bitcoin brings to the table for businesses like yours is the elimination of these issues. Using Bitcoin for international payments, your payroll process and business disbursements become streamlined to a degree that will make you wonder how you ever did it any other way. The delays, bank transfer fees and miscellaneous charges you’ve experienced using traditional payment transmission methods will disappear forever. Uber, the internet rideshare company, offers a prime example of how Bitcoin can simplify the payroll process. Uber has two choices to pay their contractors. They can either incorporate and build banking relationships in every country, working with non-userfriendly interfaces and old, low quality APIs, or they can go through several slow and costly integrations of multiple platforms. Either way, the contractors are left with no choice but to accept high FOREX costs and slow, unreliable transfer times. According to the World Bank, the average of cost of sending funds across borders is 8 percent, and the average time for transfer completion is three to five days, with workers shouldering the bulk of these costs.


But why does it take so long for wages to be transferred and exactly how much is lost to intermediaries? Here’s a step-by-step breakdown of a simplified international contractor transaction: 1. Client initiates the international bank transfer from their bank account and pays a $45 flat fee. 2. Their bank forwards the funds next business day to a large correspondent bank with the resources to maintain international correspondent banking relationships. 3. The large correspondent bank removes $25 from the total amount. 4. The large correspondent bank sends back $7.50 to the client’s bank for initiating the transfer. 5. The large correspondent bank forwards the funds next business day to their large multinational correspondent bank with a presence in Brazil and the capital to facilitate a foreign exchange. 6. The large multinational correspondent bank exchanges the USD to BRL and takes 7.5 percent in the spread between the interbank rate and the retail exchange rate. 7. The large multinational correspondent bank forwards the funds next business day to the contractor’s local bank account. 8. The contractor receives the international bank transfer into their bank account three business days later and pays a $15 fee.

These costs and delays are a result of the current financial system’s reliance on sending funds through a system called the correspondent banking infrastructure. Banks do not actually have direct relationships with the banks receiving the funds on the other side. Instead, funds flow through a series of correspondent banks, where one bank somewhere in the middle will make the conversion from one currency to the next. While many people tend to focus on the flat fees levied on both sender and receiver, the main cost burden is accrued through the currency conversion, where the spread is often over 8 percent. Unlike the simplified version of the correspondent banking system provided above, the real process is actually very opaque. The sender and receiver typically do not know how many banks are within the chain of correspondent banks, and there are currently no good mechanisms for tracking funds. So banks cannot provide an exact date for when funds will arrive at their destination. In fact, many wires end up getting lost in the process, often delaying international payments by one or two weeks. For the receivers, this creates the stress of not only not knowing when the funds will hit their accounts, but also not knowing where the funds are or even whether the funds will ever reach their destinations. For the sender, this typically results in increased customer support costs and less time to hold onto the working capital used to pay employees and contractors. This is clearly not an ideal situation for any of the participants other than the intermediary banking institutions who are generating additional revenues. So what would an international payroll solution look like if it used Bitcoin and the blockchain?

Sender $0 Initiation fee Sender bank or payment platform

Receiver $0 Receiver fee

Blockchain Transactions

Receiver Bank

Uber, the internet rideshare company, offers a prime example of how Bitcoin can simplify the payroll process. This means that Bitcoin payroll and payments companies now have full control over the entire payments process. Fees and transfer times can be dramatically reduced by removing intermediaries and directly accessing all the players involved. In many circumstances, employers receive better rates than the interbank rates, saving them money, and the employees and contractors have access to their local funds next day. And unlike the current financial system, both the employers and their workers can actually track the funds, providing insight into when the funds will arrive and assurance that the funds will actually reach their destinations. It is obvious why both individuals and corporations are looking to Bitcoin for a better payroll solution. Some people are using pure “Bitcoin payroll” systems, while others are working with systems that leverage Bitcoin as an intermediary step. There is even a service that allows employees and contractors to receive their wages through Bitcoin without requiring their employer to sign up. Market research carried out by Bitwage, one international payroll services provider, suggests that even among the Bitcoin community, many people don’t know that they can receive Bitcoin-powered payments even when their employers or clients have not signed up for a Bitcoin-powered payroll service. It is surely only a matter of time before more employers and employees transition away from antiquated traditional payment systems to the vastly superior solution that Bitcoin provides. In the near future, the everyday pain of international payroll payments will be a thing of the past.

Here is the step-by-step breakdown of the new blockchain-based international contractor transaction above: 1. Client initiates domestic bank transfer for a vastly reduced or zero flat fee. 2. Domestic bank forwards funds to Bitcoin Payroll & Payments company’s domestic bank next business day. 3. Bitcoin Payroll & Payments company facilitates near instant international blockchain transaction. 4. Bitcoin Payroll & Payments company takes a nominal fee depending on the service. 5. Contractor receives domestic bank transfer from Bitcoin Payroll & Payments company’s domestic bank in the receiving country, forwarded one business day later, and pays vastly reduced or zero flat fee.

Jonathan Chester

Jonathan Chester is founder and president of Bitwage, a blockchain-powered international wage payment and payment processing company named among the top 7 blockchain companies in the U.S. and top 21 in the world. He is also contributor to Forbes for all things Bitcoin and blockchain-related. Jonathan has been featured in Entrepreneur magazine and spoken in front of members of the European Parliament regarding regulation of the blockchain industry as well as for the Amsterdam Institute of Finance and conferences such as SCAPayments, Transact15 and Inside Bitcoins. 33



Bitcoin allows anyone to be his or her own bank. If that sounds to you like a potential scenario for chaos, it’s only because you haven’t yet heard of the great lengths to which Bitcoin users can go to ensure the security of their “one-person banks.” By following a handful of basic security guidelines, they can achieve a level of security for their money that is actually unavailable in the banking world as we know it. The truth is that banks are barely able to keep accounts secure. Although banks promise to have your deposited funds available for you, none of them could withstand a “run” in which all depositors simultaneously decide to withdraw their funds. In that respect, bank funds are just an abstract reference to value, because your money isn’t really there. It’s just a number in a ledger, but the actual money is out on loan to the bank’s borrowers. Bitcoin is different. Instead, it functions very much like digital cash or gold. Once sent to your Bitcoin address, you control it entirely; you maintain it, and when you want to use it for a purchase, it is there for you— yours and yours alone. With Bitcoin, possession gives 100 percent control. With this great power comes great responsibility. Having the keys to unlock a bitcoin is entirely equivalent to possessing a chunk of precious metal. Which means if you misplace it, have it stolen or accidentally send the wrong amount to someone, you would have as much recourse as if you dropped cash on the sidewalk and didn’t notice until you got home.


Bitcoin is different enough from anything that has come before that we need to think about its security in a novel way, too. However, Bitcoin has capabilities that cash, gold and bank accounts do not. A Bitcoin wallet, containing your keys, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hard-copy backup. A backup of Bitcoin keys is as good as possession of the original keys. You can’t “back up” cash or precious metals. Banks can recover funds for you, but only at their discretion. And they can also confiscate funds, adding a risk that doesn’t exist in Bitcoin. Bitcoin is different enough from anything that has come before that we need to think about its security in a novel way, too.

What should end users do to secure their Bitcoin wallets? Here are six guidelines: 1. Back Up Your Keys Today, most Bitcoin wallets will prompt new users to create a backup of their keys. Sadly, many people skip this step, which can lead to loss if a device is lost or stolen. Backing up can be as simple as using a sheet of paper to write down 12, 18 or 24 backup words (mnemonic words) displayed by your wallet and storing them in a secure, fire-proof and tamper-evident location such as a home

safe or bank vault. Some wallets don’t use mnemonic words but still provide a backup feature; check their websites for details. Regardless, before you back up be sure you’re in a secure environment, away from prying eyes and cameras. Your backups are your keys.

2. Balance the Risk of Loss and Theft While most users are rightly concerned about theft, loss is an even bigger risk. Data files get lost all the time, but if they contain bitcoins the loss is much more painful. Some users further protect their backups with encryption, passphrases and pins, but more is not always better. In the effort to secure their Bitcoin wallets, users must be very careful not to go too far and end up losing the bitcoins instead. In the summer of 2010, a well-known Bitcoin awareness and education project lost almost 7,000 bitcoins. In an effort to prevent theft, the owners had implemented a complex series of encrypted backups. In the end they accidentally lost the encryption keys, making the backups worthless and losing a fortune. Like hiding money by burying it in the desert, if you hide it too well you might not be able to find it again. Balance the risk.

Bitcoin has capabilities that cash, gold and bank accounts do not. A Bitcoin wallet, containing your keys, can be backed up like any file.

3. Use Two-Factor Authentication Many first-time users will use a web-based wallet or online service as their Bitcoin bank. Unfortunately, this has led to a rash of thefts from Bitcoin users, almost all due to compromised desktop computers. Hackers will install trojans and keyloggers looking for access to well-known Bitcoin sites. As soon as users log on, their own computer will compromise the account and surreptitiously transfer all their money to another Bitcoin address. Once stolen, there is no recovery, as Bitcoin transactions are not reversible. The most effective defense against this attack is using what is known as a “two-factor authentication scheme” (2FA) or using a smartphone application to generate one-time codes. (See “Google Authenticator” at; See “Authy” at Many wallets now incorporate 2FA as a standard feature, be sure to use it!

4. Spread the Risk Would you carry your entire net worth in cash in your wallet? Most people would consider that reckless, yet Bitcoin users often keep all their bitcoins in a single wallet. Instead, users should spread the risk among multiple and diverse Bitcoin wallets. The prudent user will keep only a small fraction—perhaps less than 5 percent— of their bitcoins in an online or mobile wallet as "pocket change." The rest should be split between a few different storage mechanisms, such as multisignature and hardware wallets as described below in 6.

Currently the most popular multisignature configuration is 2-or-3, where you hold two keys and a wallet provider or some third party holds the third.

5. Use Physical Storage or Hardware Wallets Bitcoin keys are nothing more than long numbers, sometimes displayed as a series of words. This means that they can be stored in a physical form, such as printed on paper or etched on a metal coin. Securing the keys then becomes as simple as physically securing the physical copy of the Bitcoin keys. A set of Bitcoin keys that are printed on paper is called a “paper wallet,” and there are many free tools that can be used to create them. Paper wallets are not backups of your online keys, they are new keys, generated securely, offline, and used specifically to store bitcoins offline. This type of storage is sometimes referred to as “cold storage.” Another way to store bitcoins securely are hardware wallets: devices designed to securely store bitcoins. These hardware wallets allow non-expert users to attain an almost foolproof level of security. Unlike a smartphone or desktop computer, a purpose-built Bitcoin hardware wallet has only one purpose and function—to hold bitcoins securely. The devices don’t run general purpose software and have simple interfaces which work to limit opportunities for compromise. These devices range in cost from $25.00 to $220.00 USD and are available for purchase online. (See,

6. Use Multisignature Wallets Multisignature, or multisig, is a powerful feature which was added to the Bitcoin core protocol in 2012. Like a bank safe deposit box, where two keys are simultaneously used to unlock a single box, Bitcoin’s multisig feature allow users to secure their bitcoin using multiple keys. Unlike a bank safe deposit box, which offers limited configurations (typically two of two keys), Bitcoin can currently support up to fifteen total keys with any configuration of required signers. Currently the most popular multisignature configuration is 2-of-3, where you hold two keys and a wallet provider or some third party holds the third. The most popular configuration for businesses is 3-of-6, where three executives in a company each hold one key, two keys are stored at different off-site cold storage locations, and the last is held by a third party for recovery purposes only. In summary, Bitcoin is a new and complex technology. The industry has grown considerably over the past seven years, demonstrating an incredible rate and breadth of innovation. Over time we will develop better security tools and practices that are easier to use by non-experts. For now, Bitcoin users can employ many of the tips above to enjoy a secure and trouble-free Bitcoin experience.

Andreas M. Antonopoulos

Andreas M. Antonopoulos is the author of “Mastering Bitcoin” (published by O’Reilly Media), considered by many the definitive technical guide on Bitcoin. He is an expert in security and distributed systems, an entrepreneur and a coder. He has founded six companies and advised hundreds more in a career spanning two continents and more than two decades. He can be contacted on twitter as @aantonop or at 35



Bitcoin Exploration The Bitcoin ecosystem has many different types of platforms such as exchanges, payment service providers, reporting platforms and an array of other supporting services. Every time you create a new account your online profile expands, increasing the risk of breach with one or all of your accounts. Private keys and passphrases should be managed as securely as possible, and the same for login credentials. The following tales are filled with valuable lessons for stepping up your game with digital identity management regardless of whether you're an individual, microbusiness or a Fortune 1000 company. Gone Phishing Paul Boyer, creator of the “Mad Money Machine” podcast on the “Let's Talk Bitcoin” network, learned a tough lesson recently. Paul happily received donations totaling 3.3875 bitcoins, about $2,000, from loyal listeners until he discovered a zero balance in his wallet at the end of June 2014. He collected donations using a payment service provider normally paying out bitcoins in U.S. dollars on a daily basis, but he never submitted a Bitcoin payout address, so the coins just accumulated, awaiting the attention of hackers. That was his first mistake. It turned out that a creative BitPay lookalike phishing scheme had cleverly disguised an email with a “View Invoice” link requesting the refund of a customer payment. Unfortunately, Paul took the bait by clicking the link and unknowingly handed his password to the hacker who changed the payout address and received 3.3875 bitcoins the following day. One last mistake: Paul hadn’t activated a security feature for his account known as “2-factor authentication,” which would have prevented hackers from cashing in his bitcoins, even if they had hacked into his computer. Fortunately, 2-factor authentication is becoming more widely used on Bitcoin platforms. After a standard username and password login, a 2-factor box pops up asking for a code generated by a smartphone app such as Authy or Google Authenticator. If hackers obtained your login credentials, they couldn’t log in without your smartphone and the code. The lesson here is to activate every 2-factor authentication available upon setting up a new account— and beware of downloading overhyped free software.


Seven Steps to Digital Security Best practices for digital identity management are encompassed in the following seven steps. Let's put some golden security nuggets to use before we end up as another cautionary tale. Best practices for digital identity management are encompassed in the following seven steps.

Step 1: CHOOSE PLATFORM Select a password management system such a LastPass or Secret Server, create an account, activate two-factor authentication and start adding website and login credentials. Browser-based password managers should not be used, so just do a Google search for reviews on the best password managers. Businesses should create an enterprise-level account with an admin console for managing users. You are 100 percent responsible for managing your bitcoins, so reducing the risk of compromising your entire online profile starts by managing one account at a time.

Identity Ransom Longtime Bitcoin evangelist Roger Ver was attending a conference when friends started messaging their suspicions of a Facebook imposter. Someone hacked into his old Hotmail account using it like a master key to retrieve logins for other accounts. The hacker demanded a 37.6-bitcoin identity ransom worth $20,000 at the time. Roger offered up a 37.6 bitcoin table-turning reward via Facebook and Twitter for info leading to the hacker's arrest. The viral bounty was too much for the hacker to bear, so he or she quickly bowed down, handed over login credentials and disappeared. No bitcoins were stolen, but this tale shows how a single email account can be an attack vector or weak point for exposing an entire online digital identity. When the same email is used for all accounts it effectively weaves your entire digital identity together with a single thread. In addition, the more well-known and the more perceived wealth someone has, the greater the risk for getting attacked.

When the same email is used for all accounts it effectively weaves your entire digital identity together with a single thread. A Tale of Social Engineering Bitcoins Reserve CEO Sam Lee and his company were victims of a creative social engineering attack starting with the U.S. Marshals’ public email leak of the Silk Road Bitcoin auction list. Hackers were licking their chops over a juicy list of high rollers handed to them with a white glove. Sam then got an email from a hacker asking for a media interview while proceeding to open a Google docs link supposedly containing interview questions. The link unleashed malware that sucked out all the usernames and passwords from his Chrome browser, leading to control of all the company’s email addresses. The hacker then sent an email from Lee's account to the CTO requesting a client withdrawal of 100 bitcoins—worth about $65,000. In this case the “client” was actually the hacker and the bitcoins evaporated. Browser-based password managers are convenient but non-secure ways to store passwords. The hackers took over Lee's entire digital identity but still couldn't penetrate the company’s securely stored bitcoins. However, it’s hard to defend against a hacker falsely posing as a trusted party, one of the slickest tools in a hacker’s toolbox. “This is a weakness in our internal processes and procedures; it has nothing to do with weaknesses in Bitcoin because frankly Bitcoin so far has none,” says Lee. Keys to the Kingdom Androklis Polymenis, a.k.a klee, is an early Bitcoin adopter and NXT stakeholder who recently discovered his $1 million stash of bitcoins and NXT, another digital currency, had vanished. The breakdown likely came from a hacker who found klee's unencrypted plain text password file sitting in Dropbox, where klee had left it exposed. He responded by putting out a 500-bitcoin bounty, worth nearly $300,000, for return of the stolen crypto and identification of the hacker, who eventually returned 462 of 1,170 bitcoins while keeping the rest as the bounty in exchange for klee calling off the hunt. In the meantime, the NXT community was able to rally together and retrieve some of the stolen NXT tokens.

Step 2: ADD SITES Once the password manager is set up, you can easily add sites by logging into an account as you normally would. Most systems will prompt you to save the site with a simple click. You can also add sites manually with the URL, site nickname, username and password. If you previously saved all your usernames and passwords in a spreadsheet, adjust the columns to the import format and upload. Easy tutorials are usually available for mastering the setup.

Step 3: TEST SITES Always go back and test-click the site after saving it whether you save sites one by one or import a list. Sometimes little nuances like the login URL or username need to be adjusted. When you create new accounts the URL automatically picked up by the system is often not the login URL, so testing and correcting helps to avoid frustration.

Step 4: DELETE THE OLD LIST After you've successfully transitioned from a password list it's time to delete the file. If you set up a password manager and keep your old file then you have not reduced any risk. If you’re among those who have a difficult time parting with the old for fear of losing access to something or wanting to keep it just in case, you can get over the hump by copying your old password list and pasting it into a secure note available in most password managers.

Step 5: CREATE A UNIQUE EMAIL Email is the golden thread that weaves your entire digital identity together, and unfortunately, most folks use the same email and the same or similar passwords for all their accounts, including social media, financial accounts and everything in-between. The critical distinction is understanding how email is used for both communication and account creation. Securing your online identity means that these two roles must be separated by using two different email addresses. In other words, the email you use for communication should be different from the one you use for new account setup. Create a new second email account without using your own name or a word that could be associated with you. For example, set up an email like (any word) or use the random password generator to create an email “prefix” such as rather than Then swap the email on each site with the new email the next time you log in. It will be easier to change accounts one by one instead of turning it into a major all-at-once project. 37

Although about two-thirds of the digital currency wasn't recovered, it could easily have been a total loss. The keys to the kingdom were practically sitting on a park bench waiting to be picked up. It's a painful lesson highlighting the importance of safeguarding bitcoins and other digital currencies. Armory founder Alan Reiner, a self-proclaimed ultra-paranoid crypto-nerd says, “Holding your own bitcoins is like harnessing fire,” and then adds: “Sometimes the biggest threat to users is themselves.” Dancing Barcode Clef is a+ 2-factor mobile app that eliminates database storage of usernames and passwords by generating a unique digital signature every few seconds using RSA public key cryptography with essentially nothing for hackers to steal. Users are blown away by the ease of use when they hold a mobile phone up to a computer screen while the app syncs with a dancing barcode called the wave. Clef increases registration conversion by 30 percent while eliminating forgotten passwords. In addition, only 15 percent of users set up traditional 2-factor, leaving the other 85 percent exposed to a greater hacking risk. Clef solves the website login problem; however, Bitcoin private keys, passphrases etc. still have to be secured. Websites set up Clef and conversely, end users set up password managers, so Clef can only be used when implemented by the website itself.

Step 6: CHANGE PASSWORDS Hackers can simply use brute force to break an easy-to-remember password. Change all of your passwords to the maximum password length allowed using the random generator provided within the password management software. Password resets should be done in conjunction with the new email resets described above. If you can't remember the password then it's harder to break. If you use a password manager you no longer have to remember passwords.

Step 7: SECURE BITCOIN WALLETS Bitcoin-related sites may require special attention beyond standard login credentials. Sometimes a passphrase, a group of random words, is required to access your bitcoins. If you lose the passphrase you lose your bitcoins, period, so it must be handled very carefully. Some sites don't have standard login credentials and only require a passphrase. In either case, the passphrase should be saved in the password field of the password manager. In some cases, risk management dictates keeping passphrase and private keys in a safe rather than a password manager. There are many other advanced techniques that are beyond the scope of this article, but these strategies are meant to significantly reduce risk for people who would otherwise keep login credentials in a text file, spreadsheet, on post-it notes or in draft emails.

Conclusion Every hack starts with a breakdown by one or more responsible individuals working as part of a large company or just managing their personal affairs. Every size organization should follow the golden thread rule of emails, which states that companies should issue one email for communications and at least one email for account login credentials per employee. This separation exponentially reduces the surface area for attacks with the highest return on security than any other measure. The cost of an additional email is close to zero while the benefit of being out of the public domain—as would happen with a single-use email address—is priceless. There are many great password managers. LastPass has multiple 2-factor authentication options, with a free version available for individual users and an enterprise-paid version for businesses, with access controls scalable from a microbusiness of one to hundreds of users. Eventually these types of defense measures used to better secure session-based authentication will be replaced by message-based authentication thanks to the gift of Bitcoin's blockchain. For example, is transforming identity management by offering banks a KYC network on blockchain to reduce the amount of KYC due diligence checks, while giving bank customers co-ownership of their verified identities, which can be adapted for accessing websites. In the old model, companies stored all their customer usernames and passwords in a centralized database. This one giant attack vector required significant resources in the futility of constant defense. The new model eliminates the database silo and the millions of dollars used to maintain it. In the meantime, start securing your digital identity and your bitcoins with these seven easy steps and go on more vacations with all the time you save. The average person has 25 logins per day, so one minute of fumbling per login multiplied by 250 working days equals 2.6 wasted weeks per year logging into websites. Enjoy peace of mind on your newfound vacation instead!

Kirk Phillips

Kirk Phillips is an entrepreneur, certified public accountant (CPA) and a certified Bitcoin professional (CBP) who is passionate about technology and the possibilities for Bitcoin to disrupt, decentralize and bring transparency into the business world. Author of The Ultimate Bitcoin Business Guide, an inspirational reference for entrepreneurs and SMBs, he weaves risk management into business process outsourcing, crypto-business consulting and education. He can be reached at 38

What Is Bitcoin Mining? by ALEXANDER LAWN


Bitcoin mining is the process by which the transaction information distributed within the Bitcoin network is validated and stored on the blockchain. It is a term used to describe the processing and confirmation of payments on the Bitcoin network. What makes the validation process for Bitcoin different from traditional electronic payment networks is that there is no need for an issuing bank, an acquiring bank, merchant accounts or mandatory centralized clearing houses, such as Visa and MasterCard, holding onto funds until they process transactions at the end of each day. Bitcoin mining is a process that anyone can participate in by running a computer program. In addition to running on traditional computers, some companies have designed specialized Bitcoin mining hardware that can process transactions and build blocks much more quickly and efficiently than regular computers. The process of validating transactions and committing them to the blockchain involves solving a series of specialized math problems.


In exchange for validating the transactions and solving these problems, Bitcoin miners are rewarded for all of the transactions they process. Each Bitcoin miner is competing with all the other miners on the network to be the first one to correctly assemble the outstanding transactions into a block by solving those specialized math problems. In exchange for validating the transactions and solving these problems, Bitcoin miners are rewarded for all of the transactions they process. They receive fees attached to all of the transactions that they successfully validate and include in a block. In addition to transaction fees, miners also receive an additional award for each block they mine. This block reward is also the process by which new bitcoins are created, as specified by the Bitcoin protocol. Currently, that reward is 12.5 new bitcoins (worth over $7,000 at time of publication) for each block mined.

That reward decreased from 25 bitcoins on June 9, 2016. Because the reward for mining blocks is so high, the competition to win that reward is also high. At any moment, hundreds of thousands of supercomputers all around the world are competing to mine the next block and win that reward. In fact, the total power of all the computers mining Bitcoin is over 1000 times more powerful than the worldâ&#x20AC;&#x2122;s top 500 supercomputers combined. And the competition doesnâ&#x20AC;&#x2122;t stopâ&#x20AC;&#x201D;the Bitcoin network has gotten stronger and stronger over the past several years, growing by as much as 10 percent per month. The strength of the Bitcoin network is very important for security because in order to attack the network, an attacker would need to have over half of the total computational power of the network. The more miners that are mining Bitcoin, the more difficult and expensive it becomes to perform this attack. In order to have an edge in this global competition, the hardware used for Bitcoin mining has undergone various iterations, starting with using the humble brain of your

computer, the CPU. The CPU can perform many different types of calculations including Bitcoin mining, but is designed to be general purpose. Early miners soon discovered that the calculations could be run faster and more efficiently using a graphics card (GPU), which is the computer chip that handles complex 3D imaging algorithms. Aside from being able to process Bitcoin's transactions faster and more efficiently, the graphics card setup in many desktop PCs meant more than one graphics card could be used per computer. This was already a feature of high-end gaming and 3D design computers. As such, Bitcoin’s popularity grew among those associated within such fraternities, as they could dedicate their machines to mine bitcoins, and thus cover the cost of their hardware. But this still wasn’t the most power-efficient option, as both CPUs and GPUs were very efficient at completing many tasks simultaneously, and consumed significant power to do so, whereas Bitcoin in essence just needed a processor that performed its cryptographic hash function ultra-efficiently. Enter the Field Programmable Gate Array (FPGA), which was capable of doing just that with vastly less demand for power. There was one issue: due to the reprogrammable nature of the chip, it had a significantly high cost for a chip that solved blocks at the same rate as a GPU. Its real virtue was the fact that the reduced power consumption meant many more of the chips, once turned into mining devices, could be used alongside each other on a standard household power circuit.

ASICs are super-efficient chips whose hashing power is multiple orders of magnitude greater than the GPUs and FPGAs that came before them. Succinctly, it’s a custom Bitcoin engine capable of securing the network far more effectively than before. As Bitcoin’s adoption and value grew, the justification to produce more powerful, power-efficient and economical per-chip devices warranted the significant engineering investments in order to develop the final and current iteration of Bitcoin mining semiconductors: the Application Specific Integrated Circuit, or ASIC. ASICs are super-efficient chips whose hashing power is multiple orders of magnitude greater than the GPUs and FPGAs that came before them. Succinctly, it’s a custom Bitcoin engine capable of securing the network far more effectively than before.

Because of the high energy costs for running a powerful Bitcoin miner, many operators have elected to build data centers known as mining farms in locations with cheap electricity, such as near a hydroelectric dam in Washington State or even in foreign countries like Iceland and Venezuela.

The year 2013 was very much a land grab for Bitcoin ASIC technology as the first ASICs became available and many different companies raced to create the most power chips using cutting edge semiconductor manufacturing processes. In the years since, several Bitcoin mining chip manufacturers have focused on optimizing for efficiency, rather than total power, since mining is a very energy-intensive process. Because of the high energy costs for running a powerful Bitcoin miner, many operators have elected to build data centers known as mining farms in locations with cheap electricity, such as near a hydroelectric dam in Washington State or even in foreign countries like Iceland and Venezuela. Another advancement in mining technology was the creation of the mining pool, which is a way for individual miners to work together to solve blocks even faster. As a result of mining in a pool with others, the group solves many more blocks than each miner would on his own. However, the miners must split the rewards with the entire group. Today, the majority of mining on the Bitcoin network is done by large pools, several of which are based in China. So far, 2016 has seen the Bitcoin mining continue to grow stronger and more secure, even as the mining reward has decreased at the halving.

Alexander Lawn, MSc.

Hailing from London, Alex Lawn is a well-known character on the cryptocurrency scene. He is responsible for not only the fundraising and building of some of the most successful branding in Bitcoin, specifically in hardware, but for bringing journalists working in the world’s financial and tech press up to speed on the subject of cryptocurrencies. Lawn works within disruptive finance alongside the principals of Bourne Capital. 41


How One Farmer Used Bitcoin to Grow His Crops and Increase His Profits You’ve heard of Bitcoin miners, but Chris Ryan might be the first Bitcoin farmer. Ryan, cofounder of Chris and Kristina’s Market Garden in Rhode Island, found a way to nurture both seedlings and currency. In the growing process, the right amount of heat is critical to maximizing seed germination. Many growers use space heaters or, depending on the size of the operation, much larger industrial heating units. But with any size traditional heater, the farmer has one input—electricity—and one output—heat. Chris spotted an opportunity to subsidize the cost of his growing by using a Bitmain Antminer C1. Using the miner to create heat, Chris suddenly had two outputs, bitcoins and heat, for the cost of only one input. “We have electric heat at home, and I picked up the miner last year to heat the apartment,” explained Chris. “The miner was still kicking around in the spring, so I figured I’d put it on the rack for the seedlings, rather than using the space heater.” What Chris found was that the miner provided a sufficient amount of heat for his seedlings to germinate. However, it was the secondary output—bitcoins—that made it even more worthwhile. “I would have been spending the money on the heat anyway. I would say that the amount I was spending on electricity was being paid back by the bitcoins the Antminer was generating,” he said.

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“When I first started, our cost for electricity was approximately 16 cents per kW. I was getting about .015 BTC per day.” But what he was also getting was 2,729 BTUs of heat based on the wattage of the C1. The potential is there for other farmers (or any industrial heat user) to increase their heat generation while also increasing their Bitcoin rewards. Although Chris was only running a solitary heating unit, it would have been easy for him to scale up his heat—and bitcoin—production. One newer Bitmain model is the Antminer S5. Each machine requires only 590 watts of power and hashes at 1,155 GH/s. Based on that wattage, the S5 could generate 2,013 BTUs of heat. While it produces slightly less heat than Chris’s C1, it results in an increase in hashing power; therefore, more bitcoins can be generated for much less electricity. As a theoretical implementation of using S5s for power generation, a farmer might look to acquire an electric unit heater that costs $729 and gives off 17,000 BTUs based on the 5kW of required electricity. His proposed implementation would use ten S5s, which would require 5.9 kW and mine bitcoins at a total rate of

11,550 GH/s. The farmer would generate 20,131 BTUs of heat and approximately 0.4 bitcoins per month, based on the current network difficulty. Even if the machines did not generate enough bitcoins to cover the cost of electricity, they could still be useful. As Chris explained, he would have been spending the money anyway on the heat. “If you have electric heat, I don’t see why you wouldn’t use a Bitcoin miner,” he said. And along the way, his heat paid for itself. Bitmain’s newest Antminers, the S9 and R4, mine more efficiently; and the energy they give off as heat can still be used in eco-friendly ways. The rise of organic farming in cities, especially hydroponic farming, a method that replaces soil with mineralnutrient-rich water in compact growing spaces such as shipping containers, offers a great use case for the more efficient R4. The S9, which hashes at 14,000 GH/s using 1,400 watts of power, is ideal for use as a small space heater. With companies cutting costs by keeping their buildings cooler in the fall and winter months, the S9 can provide needed supplementary heat to an office while producing a return in bitcoins.


Bitcoin Regulation Remains Murky — Careful Research Pays By Bitcoin Law Team

Martin Mushkin, Joseph Sahid and Rony Guldmann

FinCEN, the Federal Regulator For instance, FinCEN, the federal Financial Industry Crime Enforcement Network, has published a guide to which Bitcoiners need to register as MSBs, or Money Service Businesses. A Bitcoiner can sift through the FinCEN guidelines and the underlying regulations to find out what kind of MSB she is, if any. Registering with FinCEN is easy, but once registered – there’s the rub. The MSB regulations have to be complied with, which requires, among other things, that the Bitcoiner abide by Know-Your-Customer rules and install anti-money laundering programs – also known as KYC/AML. That can be cumbersome and time-consuming. Fortunately, there are companies who will set up those programs for you and companies who will automatically run data through their programs to make sure you are not dealing with listed bad guys. Then there are the 50 states. The problem with state regulation is that the Bitcoiner has to examine the rules state by state. Some states, such as New York and North Carolina, have set up regulations (NY) or passed statutes


(NC) strictly regulating who can buy and sell bitcoin. Their particular rules are aimed at Bitcoiners who buy, sell, transmit or hold bitcoins belonging to other people—like a bank or brokerage house. In other words, they regulate Bitcoiners who handle “other people’s money or property.” The national Conference of State Bank Supervisors (CSBS) has proposed a law for each state to adopt, based on the New York bitlicensing regulation. But so far there are no takers unless one considers the North Carolina law, which is modelled on New York’s regulation. The Uniform Laws Commission (ULC), a private not-for-profit organization, has added reciprocal recognition of licenses granted by other states in its proposal similar to that of the CSBC. That would be a very forward-looking provision. The Nature of Regulation Regulation may be by specific digital currency statute or regulation, under existing money transmitter law and by court cases. In addition to the Federal and different state rules in this area, we also have to consider two main levels of regulatory approach: statutes/regulations and court interpretation. In that context the recent debate has been over how to regulate Bitcoin and just what Bitcoin is, as well as when it is being sold or exchanged for fiat money. Is digital currency the equivalent of money? Is it property? Is it some commodity? Is it a security such as stock in an enterprise run for profit? Let’s talk about jurisdiction first. Generally, FinCEN and the state financial institution regulators, want to protect their

“residents.” But jurisdiction is a highly elastic concept, and the truth is neither FinCEN nor the states really care where the Bitcoiner subject to regulation actually resides. Take as a general rule that the regulations reach a Bitcoiner wherever he/she is located so long as the Bitcoiner deals with a resident of the regulating jurisdiction. In the banking world, New York’s highest court ruled that its courts had jurisdiction over Lebanese Canadian Bank, which was sued by U.S., Canadian and Israeli citizens resident in Israel who were victims of Hezbollah rocket attacks. The claim was that the bank assisted Hezbollah by “facilitating international money transactions” using its New York correspondent bank to transfer money to Hezbollah agents and therefore was subjected to NY jurisdiction. If that kind of jurisdictional thinking is applied to Bitcoiners, a Bitcoiner located anywhere in the world who cheats a New York resident might find himself subject to the judgment of a New York court because its money passed through a bank account located in New York. To protect itself the popular Bitcoin site,, requires a user to check a box assuring that he/she/it is not a resident of New York. protects itself this way even though its worldwide service is only to put prospective buyers and sellers together and provide an escrow service to exchange fiat money for bitcoins. And is located in Finland! Fortunately or unfortunately, at least one other court has ruled that jurisdiction under the applicable statute in the case before it

Bitcoin regulations are constantly evolving. This map reflects information available at the time of publication.

Any lawyer familiar with Bitcoin regulation will tell any inquiring Bitcoiner that whether his or her activity is regulated, and by whom, is “something that has to be examined.” Some regulators have applied existing law, and simply published guidelines as to whether certain Bitcoiners need register. Other regulators have established, or are in the process of establishing, special rules applicable to some (but not all) Bitcoiners.

Bitcoin Friendly Bitcoin Neutral Bitcoin Conflicted Bitcoin Hostile

only allowed jurisdiction where the offense took place, a “locus delicti” approach, rather than a “locus of effects” approach, eliminating jurisdiction where people were injured. How It Works New York’s regulation is not for the faint of heart. It costs $5,000 just to apply. Applicants must submit fingerprints and pictures of employees having access to customer funds, extensive personnel background information, certification of an outside investigator, a detailed business plan and audited financials—much like a bank. Once in business, a licensee must have a written compliance plan, maintain compliance personnel, be audited and report frequently to the regulators. Among other things, if for instance, $10,000 in Bitcoin or money is transmitted in “one day by one person,” ... “involving New York or any resident of New York,” the licensees will have to report the transaction to the New York regulators as well as FinCEN within 24 hours. Importantly, the regulators can grant conditional licenses under limited circumstances. There are exemptions for dealing with some “residents,” such as merchants who accept Bitcoin in payment for goods or services, and for other mere “users,” a defined term. Banks and certain licensed bank-like trusts are deemed covered and need not get an additional license. It appears that people who only buy and sell Bitcoin in arbitrage transactions for their own accounts may be investors or users and exempt. The New York regulation also requires all advertisements by Bitlicensees to include their names and a statement that they are licensed to engage in “Virtual Currency Business” by New York. The Bitlicense will serve as an advertised badge of integrity, like a bank saying it is a member of the FDIC. Even so, 26 applications have been filed for Bitlicenses and only 4 have been granted to date. At least one applicant, backed by the Winklevoss Brothers, changed its application to be licensed as a trust, a much broader license.

North Carolina has passed a law similar to the New York law but somewhat less stringent. A bill remains before the California legislature that would regulate Bitcoiners similarly to New York. Many states seem to be relying on their existing Money Service Business laws to regulate—or not regulate— Bitcoiners. For instance, while Texas says Bitcoin is not money, it will look closely at Bitcoin wallets and Bitcoin exchanges since they are dealing in an escrow-like manner with other people’s money or property. Georgia has issued a memo that operators of Bitcoin ATMs which merely sell bitcoins need not register under its Money Service Business statute if the Bitcoin ATMs do not hold money or bitcoins (i.e. as in a wallet) for the customers but only send purchased bitcoins to the buyer’s designated location (wallet). It may be another story if the Bitcoin ATM exchanges digital currency for fiat currency beyond mere sale and instant delivery. In December 2015, the Tennessee Department of Financial Institutions issued a two-page memo under the Tennessee Money Transmitter Act which opined for the purposes of that statute that digital currencies, including bitcoins, were not currency. Therefore, the mere sale or purchase of digital currency for fiat money or the exchange of digital currency for other digital currency or other goods or property (as in a retail sale) was not subject to that law. However, it went on to say that if digital currency belonging to another was being held in a wallet by the Bitcoiner, or the Bitcoiner facilitated the exchange by Mr. A with Ms. B of the bitcoins, it was subject to registration under the cited Tennessee law. That kind of exchange service and wallet availability is akin to what does with its matching customers and its escrow service. How do U.S. courts deal with this? We have dealt with court interpretation of jurisdictional statutes above. The dilemma of the licensing and substantive regulation interpretation is illustrated by two cases in Florida. In January 2014, officers of the U.S.

Secret Service Miami Electronic Crimes Task Force contacted Michael Abner Espinoza through, and arranged to meet him and his cohort, Pascal Reid, at a local coffeehouse to purchase bitcoins. A small transaction took place in which bitcoins were purchased by the undercover police for cash. A second meeting was later arranged at an ice cream parlor. This time the undercover agent told the prospective defendants that they were in the business of buying stolen credit cards and selling them, and asked the defendants if they would accept the stolen cards. The defendants said they “would think about it.” A third transaction took place via the internet— no indication of illegal activity in that third transaction. The detectives then arranged a fourth meeting at a hotel to buy bitcoins for a roll of cash purporting to contain $30,000. They said they were going to use the bitcoins to buy stolen credit cards. The defendants talked about how to get the cash to their banks and they were arrested. They were charged with (a) violation of two Florida money transmitter laws, and (b) a Florida anti-money laundering law. (Note: no federal law violations were charged.) Mr. Espinoza pleaded not guilty. In a decision rendered on July 22, 2016, the Court analyzed the statutes involved and concluded that Mr. Espinosa was not a “money transmitter” under the statutes since he was not “transmitting currency.” It explained that to transmit means “to send or transfer (a thing) from one person or place to another.” The Court said this is not like Western Union which acts as a middleman to transmit money from one person to another. That is a money transmitting operation. Mr. Espinoza was selling for his own account. More interesting, the Court said Mr. Espinoza was not a “payment instrument seller.” The Court ruled that under the Florida statute, Bitcoin did not fit into the definition of a “payment instrument” and gave as an example the fact that the IRS had decided to treat virtual currency as property for federal tax purposes, and that 45

“Bitcoin [did not] fit into one of the defined categories listed” as a “payment instrument.” Noting that bitcoins were not taken in trade by many merchants, fluctuated wildly in value, and are not backed by or issued by a central agency, the Court held: “This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money.” So the Court held that Bitcoin is not currency which was being “transmitted” under the cited statutes. As to the money laundering count, the court added an analysis of the technical statutory meaning of “intent” and held that the actions of Mr. Espinoza simply did not fit the definition. Case dismissed. This court decision seems to be quite technical and must be read as an analysis of the specific Florida statutes. Poor Mr. Reid. He had pled guilty in 2015. We shall see how this conflict of justice plays out. In the meantime, the moral of the story is never deal with anybody who gives you the slightest indication he/she/it is involved in an illegal operation anywhere in the world. You may think the particular transaction is legal where you live, but you may get stung—and it won’t be by a little bee. It will be a punch. Where Does This Leave You? Suppose somebody trades bitcoins over the web. She buys bitcoins on one site and sells them on another, hoping to make a profit. Is she a mere user, or an investor? Suppose she does this, not only for herself but also

for her husband, mother, father or best friend. She is successful and soon she and her friends meet regularly to decide how they will individually trade. They then pool their money (digital or fiat) and authorize one person to trade for the group and distribute profits, while requiring the members to contribute funds to cover losses. Putting aside securities laws issues, is the organization just a user or investor or has it become a money service business? The answers will vary with the details of the organization, activity and location. It pays to research your own situation carefully. Bitcoin ATMs are here. Bitcoin ATMs are being sold and set up in the U.S. and other countries. Their purpose will be to permit people to deposit fiat currency into the machines which will credit them with bitcoins. They can then direct the bitcoins to be instantly sent to their own Bitcoin wallets located anywhere. That is, they are transmitting the value represented by the bitcoins. The transaction can also go the other way— depositing bitcoins and getting cash. The system can be used to transmit money (value) anywhere in the world in short order without passing through the normal banking system encumbered with all its controls, third parties, regulators and high fees. The ATM will have sold bitcoins, exchanged it for fiat currency and transmitted it who-knows-where. Or vice versa. Is the owner/operator of the ATM in some kind of money service business and if so, what kind? In what jurisdictions must he register—if at all? We have dealt only with U.S. law.

Martin Mushkin was an SEC Senior Trial Attorney, has published extensively, and has been listed in Who’s Who in American Law. Joseph Sahid is a litigator handling commercial and financial disputes, was a partner in Cravath, Swaine & Moore, and is listed in Who’s Who in America. Rony Guldmann works in a variety of litigation and transactional matters. The authors are the Virtual Currency Law Team at located in New York, Connecticut and California and concentrating on corporate finance, business regulation and litigation.


Martin Mushkin

But what will Greece (or some other country) have to say about this? Suppose the seller of the ATM has nothing more to do with the machine once it is sold. Is he subject to regulation? This seems the same as selling a car. But the answer will not always be obvious. For we are dealing in the financial world where the transmittal of value is highly regulated and constantly scrutinized. Now suppose the manufacturer remains the owner of the ATM and sells it with a contract to maintain it for a flat fee— no share in any profit or loss. Or suppose the fee is a percentage of the gross value of any transaction. Or suppose he fully owns, operates and controls the ATM to the point of maintaining its Bitcoin and/or fiat money inventory. Now suppose he buys the machine and carries out one or more of these activities from and in the U.S. At what point does he have to comply with U.S. federal and/or state laws? Add to that the possibility that he is outside the U.S. but the machines are in the U.S. How is this activity any different from standard fiat currency transactions for the deposit of checks via your mobile phone, the withdrawal of currency from an ATM at a corner store or paying for a cup of coffee by holding your mobile phone up to a handheld scanner at Starbucks? Suppose the ATM (or mobile phone) sells insurance for digital currency or alternatively for fiat currency. Who must comply with the KYC/AML laws and/or register with the authorities? Think about it. Where are you, Bitcoiner, in this sphere? It’s in your interest to know.

Joseph Sahid

Rony Guldmann


Just as the internet once did, blockchain tech in just the past year has gone from abstract to practical reality as a powerful new way to record and manage data. Blockchain is going to affect everything you and your business do. But just as with the internet, you don't have to know how it works. You only need to be aware of its benefits, and be poised to take advantage of its opportunities. Originated as the basis for recording digital currency transactions, blockchain tech is exploding into applications for financial services, healthcare, insurance, real and intellectual property, transportation, manufacturing, warehousing and distribution… and every industry that uses data. Which is to say--every industry. As widely reported by major media, enterprises including Barclays, Merck, Goldman Sachs, IBM, MIT, Humana, State Farm and Nasdaq, to name a few, have invested more than $1 billion to date in piloting and introducing blockchain resources globally, in one of the most massive shifts in information technology, software and, ultimately, intelligence in many years.



including many of the investors named above, are creating their own private blockchains for specific, enterprise-related purposes. To understand the fundamental nature of the blockchain, let’s go back to the origins of its use in transmitting digital currency. The concept of digital currencies has been around for decades, but early on, they faced an apparently insurmountable roadblock: the “double-spending problem.”


But what IS blockchain exactly? A blockchain can be thought of as a digital chain of encrypted, time-stamped blocks of transactions, linked in chronological order. This transaction log is also known as a distributed ledger. Bitcoin uses the public blockchain, an open source system anyone can access, to transmit and record digital currency transactions. Private industry,


Suppose user Alice sends a line of code with a monetary value to user Bob. Bob receives the code and can now spend it like money. But what is to prevent Alice from making a copy of the code before sending it to Bob, and sending it again to someone else? Why can’t Alice make infinite copies of that valuable code just as she can make duplicates of a digital photograph or file? This is the double-spending problem that blockchains resolve.

You may have realized that we are calling the two users Alice and Bob because the solution to proving digital asset ownership has something to do with cryptography. In fact, the characters Alice and Bob are often used to explain how cryptography works. Public-key cryptography is the science of easily exchanging securely encrypted messages with “public” decryption keys available in the open and “private” keys given to specific stakeholders. It has been considered a potential foundation for digital currencies since the launch of the PGP (Pretty Good Privacy) public-key encryption system in 1991. But leveraging public-key cryptography to solve the double-spending problem eluded researchers and programmers alike—until 2008. In October 2008, a cryptographer called Satoshi Nakamoto—the name is probably a pseudonym and the person behind the Nakamoto identity has never been found— solved the double-spending problem. In a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” first announced in a popular cryptography mailing list, Nakamoto showed how a decentralized, distributed network of end-user computers, each running a piece of software built upon the public-key cryptography algorithms and communication protocols described in the paper, can keep track of all digital currency transactions between the users of the network in a shared public ledger called the blockchain, while avoiding double-spending. In the previous example, Alice would not be able to twice spend the digital currency code that she had previously sent to Bob, because a record of her first transaction would be on the blockchain, and the network would reject her second transaction. The first implementation of Nakamoto’s discovery was developed by Nakamoto himself, but he was soon joined by a team of brilliant programmers. The team created the first working blockchain and the first working digital currency secured by

public-key cryptography. The blockchain and its currency are called Bitcoin. Bitcoin is often described by the sensationalist press as an anonymous, highly volatile form of internet money used for nefarious purposes. But that description entirely misses the solution that Nakamoto built. Bitcoin provides the first demonstration, complete with a working implementation, that blockchain technology can be used to create a system to transfer value and store information among many different parties, even parties that don’t trust each other. One potential application of the blockchain is to replace obsolescent legacy financial infrastructures with lean, mean and much more efficient ones. Furthermore, every Bitcoin transaction is permanently recorded in the tamper-proof public blockchain, which permits much easier record keeping. The users do not necessarily have to use Bitcoin to benefit from the blockchain. For example, Alice can send U.S. dollars to Bob using the Bitcoin blockchain as a transparent intermediate step through a payment service provider. The payment service receives U.S. dollars from Alice, converts them to Bitcoin by buying bitcoins on an exchange, and sends bitcoins to the payment service used by Bob. The payment is then converted again and sent to Bob. If Bob is in another country, he can choose to receive the payment in his local currency. The important thing is that, even allowing for reasonable fees charged by the payment services and Bitcoin exchanges involved, the transaction is faster and cheaper than traditional transactions. The difference is especially evident for cross-border transactions. The potential benefits of Bitcoin—faster, cheaper, immutable transactions—are so dramatic that, over the last couple of years, top banks, stock exchanges and financial service providers have started pilot projects to find out how to integrate blockchain technology into their operations, and venture

capital firms are funding blockchain technology startups, with more than $1 billion total invested in 2015. The human and capital resources right now pouring into developing blockchain technology for application to real-world problems hasn’t been seen since the early days of the internet. Some pilot projects in the financial sector use the original Bitcoin blockchain as part of the settlement infrastructure, while others are developing new private blockchains unrelated to Bitcoin. Both approaches have their advantages and disadvantages, based on the design and intended purpose of the blockchain.

ALTERNATIVE BLOCKCHAINS These are entirely independent chains, such as Ethereum, and also include private, permissioned or federated blockchains. While these blockchains do not benefit from some of Bitcoin’s advantages such as the highest security and open access, there could be use cases where an alternative blockchain is sufficient. COLORED COINS These utilize the Bitcoin blockchain, but represent assets that are not currency. These are fractions of bitcoin (satoshis) that can represent other value, such as shares of stock or property title, but remain limited to the functionality of the Bitcoin blockchain. SIDECHAINS A sidechain is a two-way communication connection with the Bitcoin blockchain that utilizes the network effect and security of Bitcoin, but different scripting languages. It has the capabilities of an alternative blockchain. 53

n 2015 the blockchain entered a new phase of public awareness. Bitcoin, which once generated all public comment on digital currencies, took a backseat to the larger subject of blockchain technology. Major magazines like The Economist featured stories describing the amazing potential of the blockchain. Their comments have followed a similar narrative: while Bitcoin is an innovation, it is a product and application of the blockchain. It is the blockchain itself, however, that offers a genuinely new innovation with huge implications for financial institution infrastructures.


Recently, Nasdaq declared that it would incorporate the technology into its operations All the comment and activity surrounding the blockchain has been more than just speculative or academic: major financial institutions, banks and stock exchanges have been investing time and money to understand and adopt blockchain technology.


In September 2015, Barclays announced that it is currently home to more than 45 Bitcoin and blockchain-related experiments. Similarly, Deloitte has a digital currency group that numbers around 100 people across 12 countries in which the company operates. Recently, Nasdaq declared that it would incorporate the technology into its operations. At the time of the announcement, Nasdaq CEO Bob Greifeld stated that the blockchainâ&#x20AC;&#x2122;s benefits to the industry are immense and cannot be ignored. As of January 2016, 42 major banking institutionsâ&#x20AC;&#x201D;including Barclays, RBS and Goldman Sachsâ&#x20AC;&#x201D;have joined an initiative led by financial innovation firm R3 to standardize the use of distributed ledger technologies. The goal of this partnership is to establish industry-wide protocol consistency, marking the first significant commitment by the banks to collaboratively evaluate and apply this emerging technology to the global financial system. In September 2015, Barclays announced it currently is home to more than 45 Bitcoin

and blockchain-related experiments. Similarly, Deloitte has a digital currency group that numbers around 100 people across 12 countries in which the company operates. Other entrants into the space from the traditional banking system include UBS, Citi and USAA. These projects can be grouped under the heading of 2nd generation or Blockchain 2.0 initiatives. These developments underline that the blockchain has now entered an intermediate, corporate test phase. There are many use cases being explored by both startups and large financial institutions. This is a process that is expected to be ongoing well into 2017, with viable products in the space becoming operational within the year. While none of these are currently deployable, we expect that to change over the coming months.

Company acceptance of blockchain integration will require vision from the top…


While it’s never easy to predict the future, and while this is by no means a complete list, what follows are some developments we are currently seeing: Security Settlement - Many financial institutions and startups are currently working to improve the securities settlement process using blockchain technology. The most significant gains would be a system in which the security is embedded directly onto a blockchain (most likely, a private “contractual” blockchain managed by known participants). This would allow for near-instantaneous settlement, and eliminate much of the friction and risk associated with post-trade operations. Syndicated Loans - It can take up to 20 days to settle syndicated loan trades, making this a prime market for disruption using fast and efficient blockchain settlement. There are companies currently developing offerings in this space. KYC (Know Your Customer) - Cryptographic ID could reduce KYC friction by enabling a more efficient verification process. However, existing regulatory constraints and the fact that most ID must be government-issued could stifle development in this area. Derivative Trading - Blockchain 2.0 projects with advanced scripting capabilities could enable financial institutions to flexibly create derivatives matching their immediate needs and risks, with all the standard advantages of blockchain-based assets, specifically automatic execution and cryptographic security.

With all the talk of disruption in the financial sector, many companies looking to leverage blockchain technology are faced with dizzying numbers of competing claims and pie-in-the-sky predictions. The chance to pull the rug out from a competitor has dazzled many a chief innovation officer. While it is important that businesses embrace the opportunity the blockchain presents, they must proceed with caution. This is more than just boilerplate advice. Blockchain technology has gained significant attention in a relatively short period of time, leaving many financial institutions without the expertise needed to sift through competing claims. Business should approach change in the following way: Seek out people who have the expertise but are not trying to push any particular product or platform; thoroughly vet your options before deciding who to work with, and then again when selecting products; take an agnostic attitude when considering different platforms; and look for advice from a professional who has sufficient background in the space to cut through the hype. As a general rule, while waiting to see which movers in the space are proven winners, businesses should start the process of inhouse adoption with test products— remembering also that entrenched aspects of a company’s culture will have to be nurtured toward change before adoption can happen. Company acceptance of blockchain integration will require vision from the top, and this will need to be clearly communicated to staff throughout the workplace.

Anthony Di Iorio

Anthony has been building the Canadian Bitcoin, digital currency and decentralized technology community since 2012. Based in Toronto, he works with the city’s major innovation hub, MaRS, organizing events and advising startups. As CEO of Decentral Consulting Services, he and his team help small business and major banks, as well as other financial enterprise clients, navigate these disruptive times. 55



Emerging technologies have a long history of initial aversion, of being feared and despised by the beneficiaries of threatened business models. Examples of humanity’s resistance to innovation include the Luddites of the Industrial Revolution, 19th century Romanticism, and more recently the media-fueled technophobia that dared to challenge the internet. Fear has failed in the face of new technologies, as time and again, humans discover convenience, utility and a better quality of life. Blockchain technology is no exception, a fact made evident by the resilience of Bitcoin and substantial institutional buy-in from the world’s largest banks and financial

Bitcoin introduced the concept of a blockchain, a type of cryptographic data structure that uses logic, which can be summarized as being simply “logs with rules.”


Blockchains not only deliver irrefutable logs, but they allow you to share that history with other parties so that you are all acting on the same information at the same time. exchanges. Today’s experts tout the inevitable capitulation of centralized networks to decentralized ones, and the proof is in the pudding. The most powerful computing network in the world is more powerful than all of the world’s Top500 supercomputers combined. That’s the Bitcoin blockchain. Bitcoin introduced the concept of a blockchain, a type of cryptographic data structure that uses logic, which can be summarized as being simply “logs with rules.” The log itself is cryptographically secure, immutable and trusted by its users. Because every party trusts the log, they can also run secure applications on top of it, like asset issuance, peer-to-peer trading, smart contracts (aka programs), and automation. This gives businesses the ability to act on the same data as a third party and know that the other party can see the same information… all without compromising the integrity of the data. Identifying the right blockchain solution for your business can be tricky.

Blockchain technology is new and a little unrefined, whereas database technology— to which it is often compared, though not accurately so—has been tested, trusted and proven over the past 50 years. An important difference between the two is that blockchains aren’t designed to store vast amounts of data. In fact, currently, they are better outfitted to be transactional logs that reference databases. Why is a log so important? One word: chronology. When it comes to reconciling transactions, for example in a double-spend scenario, order matters. Chronology is important not only to financial transactions, but also in making business decisions. When it comes to acting on the information you have, you want to know that the information is irrefutably sound. Blockchains not only deliver irrefutable logs, but they allow you to share that history with other parties so that you are all acting on the same information at the same time.

Let’s explore how that might work in the real world through three use cases. Health Insurance – A blockchain

Luxury Goods – Proof of origin and

Debt Sales – Blockchains enable multiple

could be used to manage the lifecycle of a medical claim as it moves across the value chain. The provider, their bank, the payer and their bank are all participants in the network with different user types, access controls and capabilities. The claim file itself is registered on the blockchain, and access to that file can be shared between permissioned users. Rather than the hospital, insurance company, and banks keeping local copies of a file that they must continuously reconcile against everyone else’s, they can collectively manage one claim file with full data provenance and transactional integrity— while still maintaining custody of their proprietary data. The blockchain connects these entities to a network they can trust, and now they can reduce resource expenditures such as paperwork and gatekeeper fees, to achieve real-time claims management.

legitimacy is the principal instrument of value in the trade of luxury goods. A blockchain could help track the purchase and distribution of fine jewelry. Today, the purchase of a Rolex comes with a certificate of authenticity. But once I sell that Rolex on the internet, that piece of paper becomes suspect, and the origin of the watch becomes unclear. On a blockchain, that paper is replaced with a digital certificate and its record of ownership is recorded as it changes hands over the years. Now there is a log that represents every Rolex out there, and every time ownership is transferred, there’s a record of it. When the watch becomes separated from its digital token, through theft or simply being lost, there is a record of its last legitimate owner. Proof of ownership and immutable record keeping are central concepts to blockchain technology, which makes it an interesting application for provenance and supply chain management.

entities to view and write to the same data store. This could potentially reduce reconciliation processes, redundancies and other costly operational inefficiencies. If insurance companies, banks, hospitals and debt collectors used a blockchain to manage the lifecycle of a patient’s medical bill, instances of debt collectors calling on bills that have already been paid would be reduced. Many patients will pay an overdue bill directly to the hospital, rather than giving out their payment information to debt collectors. But when that happens, the databases of debt collectors are not automatically updated. The debt collector in this instance has not collected the debt, and when the bank “buys back” that account, they sell it to another collection agency. The cycle continues, creating a regulatory nightmare and frustration for the patient and the hospital. Using a blockchain to relay the status of a bill, where each party can submit updates, would allow these businesses to make decisions based on the correct information and would reduce costly redundancies.

This gives businesses the ability to act on the same data as a third party and know that the other party can see the same information… all without compromising the integrity of the data. …so why is a log so important? One word: chronology.

These examples assume the technical complexity and stakeholder buy-in is present to make these blockchain applications work. Getting to that point is going to be very challenging for blockchain service providers, but the interest is there. Innovative industry leaders from finance, healthcare, supply chain and IT are already experimenting with this technology. The current problems this technology can solve may represent a narrow window of possibilities, but they will impact the way we share and secure value.

Emily Vaughn

Emily Vaughn, Director of Client Services at Gem, has been involved with Bitcoin and blockchain technology since 2012; she previously worked in marketing at BitPay before joining Gem in 2015. A marketing veteran in blockchain technology, Vaughn believes education is the most important factor in early adoption. Vaughn has initiated a variety of educational projects in blockchain technology in collaboration with BTC Media, notably The Distributed Ledger. Gem provides data integrity for enterprises powered by blockchain technology and is based in Venice, Calif. 57


home mortgage in Honduras charges 18 percent interest on a 10-year note. That’s like having a credit card on your house. Why so costly? Because the banking system in Honduras doesn’t trust that you will continue to own your house. Imagine if someone could steal your home by making a few changes to a database. Imagine that your family could lose everything because a few bureaucrats with high-level access to the land registry could kick you out. Or if one day you woke up and didn’t actually own the things you had paid for. This is reality for most of the world. National land registries in developing countries are notoriously corrupt, and rife with fraud and negligence. The World Bank and other international organizations have spent billions trying to correct the problem, but the flaw at its core remains the same: Absolute centralization corrupts absolutely.

ADDRESSING THE TITLE CORRUPTION PROBLEM The blockchain offers a promising opportunity for new solutions. The blockchain is essentially a shared database, distributed across the globe

on thousands of computers, with no central authority. Anyone can write data to the blockchain—but once written, the data can never be unwritten. The mathematical proof can’t be fooled. Trust the math, not the people. So in theory, we can attach all of the land titles of the world to blockchain entries and they become permanently tamper-proof and immutable. Just like a Bitcoin transaction, there’d be no way to “double spend” a home. Except that it’s not quite that straightforward. First, we have the major limitation of Bitcoin: the network doesn’t have enough capacity. Seven transactions per second means the blocks in the blockchain aren’t big enough to hold all the title data in the world. If we increase the block size, the volume of the network grows to become unwieldy, and could overwhelm the applications that depend on it. Second, we have the “double-spend-askyscraper problem.” What happens when the value of a single asset on a network becomes more valuable than the whole network? Now we’ve created both a reason to attack the network and an even more compelling reason to attack the single transaction that contains the skyscraper.

Third, we have a core privacy issue. If every property record becomes public, transparent and easy to move without recourse, we've created a very good incentive to kidnap and hold people hostage for their property. Especially when transfer of your home is as easy as a few clicks on a wallet.

CAPACITY, SECURITY AND PRIVACY The challenges of a blockchain title-recording solution are far from insurmountable. Fundamentally, title issues are a recordkeeping problem. The goal isn’t to tokenize houses. The goal is to create permanent, immutable audit trails for all land title records. This can be done in three simple ways. One: Title and record management should be handled using document management software run by a central property institute. The software should have multi-signature access control and cold-storage backups. It would track every change, and store a log file in the blockchain. Unauthorized changes could be safely reversed. Two: All title chains should have an immutable blockchain audit trail. So every easement, every lien, every change in

Peter Kirby

Peter Kirby is the Chief Executive Officer of Factom. A seasoned entrepreneur, Kirby has spent the past 15 years involved in numerous successful early-stage tech companies. As a leader in the blockchain space, Peter has led multi-million dollar operations and was the driving force behind delivering major products to market. Peter earned his degree in biochemistry from Lehigh University in Bethlehem, Penn and an MBA in Entrepreneurship from the Acton School of Business in Austin, Texas, where he graduated summa cum laude.


Imagine if someone could steal your home by making a few changes to a database. Imagine that your family could lose everything because a few bureaucrats with high-level access to the land registry could kick you out. ownership is hashed, timestamped and stored in a unique chain. If a property is incorrectly changed, the audit trail helps revert to the previous state of the database. But, because it’s a hash, it’s impossible to use the entry to go backward and recreate the documents. The private data stays private. The data layer would vastly extend the capacity of the blockchain, making it possible to create millions of entries and large numbers of unique property chains. Three: All process steps should also be tracked and given a blockchain audit trail. The digital signature of the attorney who

submits the file would be captured and recorded. The ID of the user who types in the legal description would be logged and recorded. The final results are recorded. This way, you use the power of the blockchain to prevent the “garbage in equals garbage out” problem of all recordkeeping systems. Errors can be identified and corrected in real time and bad actors have a permanent record of fraudulent behavior. Sunlight is the best disinfectant. The key insight is this: Unique instruments like loans, real estate and fixed income products don’t fit simply into a coin-shaped solution.

They’re audit and recordkeeping problems, not movement of digital asset problems. Though the blockchain is a powerful tool for auditing and recordkeeping, the core limitations require additional tools to be built on top of the blockchain to solve recordkeeping problems. The good news is: Innovative solutions that combine the capacity and flexibility of document management software with the encrypted security of the blockchain will allow us to build more accountable and transparent instrument-recording systems, and keep them honest. In math we trust. 59



Blockchain and digital currency technology is being adopted by organizations in government, healthcare, finance and manufacturing. This increased utilization brings with it a need for businesses to train their employees on the use, management and security of Blockchain-based processes and workflows. Employers and managers can’t afford to assume basic literacy among their staff when it comes to understanding the basics of this new technology because value stores and other digital assets and ledgers sometimes worth millions are at stake. Just as previous disruptive technologies such as email, social media and the internet itself have brought new training needs to organizations, blockchain-based value and transaction stores also require that we train staff on how to maximize the advantages of the technology while minimizing the risks that attend a poorly implemented blockchain or digital currency strategy. Beyond Knowledge Transfer

When considering organizational training as it relates to implementing a blockchain integration strategy, the first thing many leaders might focus on are Bitcoin’s technical aspects. While technical details and factual


background are certainly of high value and need to be carefully considered, often the most substantial result obtained from formal training initiatives is not technical but cultural and psychological. That’s because effective training programs do more than just transfer knowledge. Strategic training initiatives can also instill confidence, enhance buy-in and develop enthusiastic champions in an organization, turning skepticism or resistance into support and cooperation. The result can be a long-term competitive advantage in an environment of rapid change. As the pace of massive change increases, organizations that are more effective at learning are better able to adapt and thrive. Achieving this goal requires looking at the training objective from more than a content-delivery perspective. The Charismatic/Structured Divide

Let’s compare two hypothetical organizations as they prepare to introduce blockchain literacy training into their workplaces. Both organizations’ leaders are enthusiastic about blockchain, are personally invested and have confidence the technology will provide substantial benefit to both their organizations and the larger community.

The first leader approaches accomplishing this objective in an unstructured way, primarily relying on his natural leadership talents, his organizational role and the power and respect that comes with that position. He uses his personal charisma and reputation in the industry to promote and encourage employees and colleagues to learn more about Bitcoin and blockchain. He is enthusiastic and frequently talks about Bitcoin in company meetings. If anyone asks him questions about Bitcoin, he is quick to explain how confident he is that it will bring value, and why he is a proponent. He encourages his associates and employees to explore the technology on their own, and he even makes a practice of helping his team members open wallets by giving them a small number of bitcoins to play with. The second leader takes a more structured approach. She thinks through what she is trying to accomplish and comes up with a written executive summary statement that clearly encapsulates her mission. In her case, she defines her objective as: “Develop both technical fluency and cultural enthusiasm in our organization around blockchain technology so the team is capable of both implementing blockchain-related pilot projects and capitalizing on opportunities for gaining strategic competitive advantage in our industry as they arise.” Rather than overtly promoting the technology using her personal charisma, she decides to work closely with a subordinate who is respected in the organization as a conservative, careful planner who is relatively risk-averse. She meets with that subordinate one-on-one and appoints that person as project leader rather than spearheading it herself. She asks the person to help her plan a structured training initiative to accomplish her written objective. The two of them work together to both develop the list of tasks that need to be accomplished, and then schedule these items on the calendar with specific milestones

and deadlines. Because she selected someone who tends to keep her grounded and has the managerial courage to ask tough questions, the interaction between the two of them sharpens the leader’s ability to predict areas of skepticism and resistance in the organization, and to prepare potential responses to objections or roadblocks that may arise. Shaping the Pace of Change

Over time, both organizations make progress on their blockchain initiatives, but each organization evolves a bit differently. The first organization starts off with a lot of excitement. The leader is effective at getting a high level of buy-in, especially among his closest circle. Several team members open wallets, and a few even invest some of their own money into Bitcoin. Besides the intellectual fun of team members simply learning about this inherently interesting new protocol, they get an additional boost when they see a rapid 20 percent rise in value in the first couple of weeks after they invest. Alas, disappointment

follows when the dollar value of their bitcoins eventually drops 25 percent. This has the effect of momentarily dampening their enthusiasm, but may actually serve the purpose of simply adding to their learning about the reality of Bitcoin price variations as they tackle the multiple initiatives and projects they are responsible for implementing in their jobs. Under an unstructured charismatic leader, though, emotional energy can ebb and flow, and a potentially transformational blockchain initiative can become just another project on a worker’s to-do list. The initial burst of enthusiasm and excitement fades—along with a small amount of the trust and confidence workers had in their leader. While they still respect and admire him, they may come to feel that blockchain is hardly as transformative as the leader led them to believe. The second organization starts off slower. From the beginning, everyone involved knows this is a long-term initiative that is unlikely to achieve instant results. Team members view the blockchain training initiative as preparing for the future, as opposed to hopping on a

fast-moving train today. The plan has a year-long timetable with specific events such as attendance at a conference, scheduled participation in webinars and a series of formal classroom training initiatives. As time elapses and the plan is executed, the build-up of enthusiasm is much more gradual than in the first organization. Every once in a while a lower-level team member catches a bit of Bitcoin fever and it becomes a good-natured positive joke around the water-cooler, but organizationally the team has its mind set on a longer-term goal. After a year of structured training, the leader is able to look back at a substantial increase in both the general support of blockchain technology and the deep level of understanding that begins to percolate through the organization as concepts such as “immutability,” “distributed open ledgers,” “smart contracts” and the "internet protocol for money, trust and value” become part of the organization’s internal dialogue and lexicon. Most would agree that the second leader took the wiser approach.

A Four-Step Plan

I see four basic steps in the organizational training process for blockchain fluency:

Create a shared vision.

Develop a structured plan and schedule. Execute your plan. Consider your options and set a budget.

The shared vision may be the most important step. Long-term success in an organization requires more than just leadership carrying the torch. While that’s critically important, it’s only a first step. The fire needs to spread from that torch— and that means organizational buy-in. It’s not just the leader’s vision that sustains and enhances successful teams. It’s what the individual team members and performers think and believe that shapes the innumerable

little interactions that ultimately lead to success or failure. That’s true whether it’s a minor project or a major organizational change initiative such as developing your organization’s blockchain fluency, skill base and data infrastructure. It’s important to keep in mind that the shared vision should not be fixed, but must evolve and develop its own momentum as the plan unfolds. It’s critical to start with the shared vision as a primary objective, though,

because any training program’s effectiveness is closely tied to the level of motivation and enthusiasm among the participants. People rarely learn much in a training class they don’t want in the first place, and purchasing self-study training resources that remain unused is a sad waste of time and money. There are plenty of options for various components of the training plan. It helps to have some basic categories, though. 61

Self-Study or Formal Class?

One useful approach is to consider options on the scale of self-study vs. formal structured study programs. These exist on a continuum rather than separate poles, because good self-study programs have formal structure and good formal study programs have self-study components as well, e.g. in preparatory work or self-directed exercises. The best trainers adopt the perspective of a coach who is focused on supporting your people’s efforts at taking charge of their own learning as opposed to viewing themselves as experts downloading their knowledge for the benefit of your team members. Therefore, a great plan typically includes both self-study and formal training elements. Some options to consider when it comes to blockchain training: • Free self-study resources such as those available at and various webinars. • Paid self-study courses such as those offered by • Assembly of a corporate book and resource library. • Conferences and trade shows. • Formal training classes, either publicly scheduled or custom-delivered for your organization.

There are pros and cons to these alternatives, and selection should be made based upon the circumstances and priorities in your organization. The chart below addresses an appropriate budget for several options, as well as how each one tends to rate in several categories as compared to the other alternatives. “Certainty” refers to the level of certainty that the resource will actually be utilized. How confident can management be that the investment will not be wasted and that the purchase will result in measurable change? “Motivational value” refers to how much that training alternative moves the needle when it comes to cultural buy-in and enthusiasm, in addition to the technical skills transfer objective that workplaces sometimes overemphasize. “Adaptability” refers to the ease with which that resource can be customized and directed toward incorporating organizationspecific content and strategic objectives. Once the specific alternatives are chosen and budgeted, the difference between success and failure can often come down to the diligence applied to the scheduling of the resource on a calendar. This is of particular importance when organizations attempt to accomplish their objectives internally using less formal methods.

Things that get scheduled onto a calendar tend to get done. Things that don’t get scheduled, don’t get done. It’s as simple as that. While it’s very rare that someone won’t attend a scheduled formal class, the utilization of self-study resources is typically abysmal. That means it is critical—if you want to make sure your organization gets its money’s worth from an investment in self-study resources—that you take the step of assigning a scheduled date and time for the people in your class to spend going through that resource. Ultimately, the return on any project or initiative is about how well the people in the organization execute on the plan. Training projects are no different than any other project when it comes to this truth. Good project management means execution is observed and measured. Formal or informal evaluations on the effectiveness of the training initiative on accomplishing the original objectives are an important part of the management process. With the thoughtful application of the principles and tactics discussed in this article, your organization should be able to make substantial progress on its blockchain-related organizational development objectives.



Motivational Value

Technical Value

Ease of Scheduling





Low to Medium






Low to Medium









$2,000/each + travel



Medium to High



$895/each + travel






$5,000 to $10,000






Sterling Ledet

Sterling Ledet is the founder of Ledet Training, a chain of Adobe, Apple and Autodesk authorized training centers with locations in Atlanta, Chicago, Denver, Houston, San Diego and Washington, D.C. He is a Certified Bitcoin Professional and Certified Technical Trainer in addition to holding multiple training certifications from various software vendors. He's been a leader in the software training field since 1996. His organization offers technical training classes in his training centers, onsite at client locations and online at


Venture Capitalist & Technology Entrepreneur

Matthew Roszak Cofounder and Chairman, Bloq

Serial entrepreneur and VC Matthew Roszak has paved an impressive path on his way to becoming one of the top figures in the burgeoning blockchain industry. With over a decade of venture investing in technology, and founding a half-dozen enterprise software companies along the way, Roszak formed Tally Capital to build and manage his investments in the blockchain ecosystem. Over the past four years, he has invested in more than 20 blockchain-based companies, including wallets, exchanges, payment processors, miners and beyond. Roszak is now one of the most deeply rooted players in the industry. “Early on it was important to invest in and build out the onramps, bridges, roads and tunnels of this industry, and help foster innovation and adoption,” explains Roszak. “There’s still a ton of work to do in order to get Main Street and Wall Street to jump on this train, however the momentum is clearly building.” Roszak’s most recent endeavor is launching Bloq, an enterprise blockchain software company that he cofounded with Bitcoin core developer and industry visionary, Jeff Garzik— which has caught the attention of some of the most prominent technology and financial services companies around the world. Roszak’s other investments are comprised of industry headliners including BitFury, Blockstream, Factom and MaidSafe. He also brought on longtime business partner and tech mogul Flip Filipowski to serve as chairman of Tally.

Outside of his direct investments, Roszak’s passion for the industry is further underlined by making such moves as founding the Chicago Blockchain Center, a fintech incubator, and serving on the boards of the Chamber of Digital Commerce and BitGive. In addition, Roszak was a producer of the documentary, The Rise and Rise of Bitcoin. This comprehensive approach provided some key elements in determining where next to invest his time and energy. Roszak had developed a keen network of industry CEOs, technologists and entrepreneurs to help him think through a particular start-up, technology or trend. “These discussions helped frame a ‘heat map of the blockchain ecosystem,’ in terms of what was working, not working, and where the white spaces were forming.” Bloq was created within a month of a breakthrough conversation between Roszak and Garzik, when the two sat down last year to compare notes on future opportunities in blockchain. Garzik is one of the premier thought leaders in the industry going back to the early days of Satoshi, and was the key technologist at BitPay, backed by Richard Branson, Peter Thiel’s Founders Fund and Li Kai Shing’s Horizon Ventures. Pre-Bitcoin, Garzik spent a decade at Red Hat developing open source software for some of the largest companies in the world. For companies looking to adopt blockchain technology, Bloq is building out the much-needed scaffolding and infrastructure

between the protocol and application layers. “Bloq’s mission is to lower the entry barriers and operational costs for companies innovating with blockchain technology, and help this industry scale.” Roszak and Garzik say their goal with Bloq is to create the “Red Hat of Blockchain.” Red Hat, currently valued at $12 billion, is the poster child of developing mission-critical software and support for enterprise customers that leverage Linux’s open source operating system. Bloq, its cofounders say, is in many ways emulating and applying that much-needed playbook to this new technology frontier. So on what day will the blockchain revolution happen? “Think of blockchain technology adoption as a freight train,” Roszak suggests. “The train may look like it’s moving slowly right now, however there’s an incredible amount of momentum building given the financial and intellectual capital jumping on board—that momentum and innovation will continue to unfold at a significant pace.” “This technology will have incredibly positive and profound implications for industry, government and humanity—and I envision Bloq playing a key role in realizing that future.”

@MatthewRoszak 65

It’s a very fast-moving field, very exciting. Many companies have already come and gone, but we’re just getting bigger, launching new mining technologies and really pushing the innovation envelope.


MARCO STRENG Built to Last: Genesis Mining CEO

trange as it may seem to many people who have still barely heard of Bitcoin, the cryptocurrency has been busy maturing in the fashion of all new technologies. That means a steady shakeout of early players and the consolidation of companies whose assets and brands have stood the test of the sector’s early, tumultuous months and years. That’s where Genesis Mining Co-Founder and CEO Marco Streng finds himself, four years after he dropped the pursuit of an academic/scientific career in his native Germany to heed the siren call of Bitcoin, which he had stumbled upon while conducting networking research online. Like many people in the Bitcoin world, Streng has an outsized math-and-physics oriented intellect that helped him both gravitate to and quickly grasp the complexity, symmetry and opportunity that Bitcoin’s blockchain technology offers the world. He dove directly into mining on his home computers, first for Bitcoin and then Litecoin. The venture proved to be both lucrative and a dazzling intellectual challenge. He was all of 21 years old. “Bitcoin was just too attractive to resist,” Streng says. “It’s a very fast-moving field, very exciting. Many companies have already come and gone, but we’re just getting bigger, launching new mining technologies and really pushing the innovation envelope.” Streng launched Genesis late in 2013 with partners Dr. Marco Krohn and Jakov Dolic. The trio has built the company into the largest cloud-based Bitcoin miner in the world. It built and operates mining facilities in Eastern Europe, China and Iceland. (The latter’s renowned cold weather is particularly conducive to providing cheap cooling for hot-running mining computers.) Recently, Genesis launched a cloud mining protocol named X11, based on a fundamentally new algorithm that makes it more efficient and lucrative for miners, who can mine all other “alt currencies” and then cash them into Bitcoin for optimal returns. “Our service is not technically difficult either, which makes it a major innovation given how technical cryptocurrency mining has been in the past,” Streng says.

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“I love what I do, and when you love what you do, you can’t get enough of it.”

Another innovation with which Genesis hopes to reduce mystery, further transparency and shake up the Bitcoin world in a fun way: a live streaming website of life inside that shows a Genesis mine in full operative mode. While it won’t make viewers forget their favorite Academy Award winners, the site does help demystify the whole notion of “mining” as it might be popularly (mis)understood. Streng marvels at his luck in finding a way of life so in sync with his passions and interests. “It’s quite funny that when we’re dealing with businesses not involved at all with Bitcoin, all our contacts turn off their mobile phones at 6 p.m. and never do business on weekends,” he muses. “In the Bitcoin world, we work almost all the time, every day, because every day counts! It’s not a problem at all, though. I love what I do, and when you love what you do, you can’t get enough of it.” Still, he concedes, there is such a thing as life outside Bitcoin, though it is spare. What there is of it he spends with his girlfriend, who happily is as flexible as he is regarding the demands of work. “I’m always telling her we’ll be going on holiday soon, and though we do manage to get away sometimes, it’s not as often as we’d like. Things move so fast that planning much ahead is just not possible. Meanwhile, we get a few hours in the evening or an occasional day off. But almost never two in a row.” 67

Bitcoin is shaping the future of money, and China’s BTCC under the leadership of CEO Bobby Lee is shaping the future of Bitcoin. Under a visionary global expansion strategy, the company expects to play an instrumental role in the way people everywhere understand, use and benefit from the empowering value of digital currency.


rom being the first Bitcoin exchange founded in China in 2011, to now playing a leading role in every segment of the Bitcoin ecosystem, BTCC’s development is a mirror reflection of the momentum of Bitcoin. “Our mission is to bring the most compelling, convenient and trustworthy service in the Bitcoin ecosystem to everyone in the world,” says BTCC CEO Bobby Lee, who cofounded the company (then BTCChina) in 2011. The company’s ambitious expansion program has to date included not only what is now one of the largest exchanges by volume, but also the third-largest mining pool, along with consumer wallets, payment processing, a professional exchange for leveraged trading, physical bitcoins and blockchain engraving. And that is just the beginning of what BTCC envisions as a 10-year growth plan that will carry its strong reputation along with expanded services to people and markets worldwide. The company’s recent rebranding as BTCC was effected as a part of its strategy to expand internationally. Lee points out that BTCC is ideally situated for global leadership from its headquarters location in Shanghai, China. China has seen entrepreneurial investors


embracing Bitcoin with unbridled fervor, so much so that the majority of Bitcoin mining power originates from within the country’s borders. (BTCC’s own mining pool now represents 12 to 15 percent of total global hashing power.) “I just happened to be here with my previous job,” says Lee, an American citizen who moved to China from California. “But if I would have consciously chosen China as the place to be, I could not have chosen better.” When he came to Bitcoin in 2011, Lee saw immediately that it had potential as a multibillion-dollar endeavor. “My personal reference here is to gold, which has a $7 trillion circulation value in today’s money. If you look at gold, I think Bitcoin will meet or exceed that, going to a hundred or even a thousand times today’s value. We will be measuring Bitcion prices in bits in the future.” Perhaps the greatest potential for Bitcoin in the future, Lee explains, is as a global reserve currency. “USD is the current global reserve currency against which all other currencies are traded,” he points out. “That’s because of the dominance of the dollar after World War II. But the point of Bitcoin is, we now have an incredible digital currency type that is freely traded against almost every other

currency, so it can become its own global currency.” Once Bitcoin reaches that stage, Lee says, it will enable an explosion in personal financial freedom worldwide. BTCC will be leading the charge with its growing list of services and products. The company will be aggressively expanding into U.S. dollar trading for Bitcoin in the immediate future. Also coming soon is a new BTCC product that uses Bitcoin as the underlying asset class to provide instant person-to-person payments in multiple currencies. More than a potential killer application for Bitcoin, this service will be revolutionary in the financial services industry as it reimagines how money can be moved around the world. Lee said: “There is currently no global, instant, and easy-to-use payment system. This is because the most common mediums of exchange and stores of value—physical currencies like dollars— are government issued; therefore, by definition, restricted to a specific region. Dealing with different financial regulations is resource and time-intensive, so most payment businesses end up only setting up operations where they are headquartered or in the few countries where it is profitable for them to do so.

Bobby Lee

Samson Mow

Bitcoin can change that. Bitcoin is already traded in many currencies, and it allows frictionless cross-border payments.” Also charting phenomenal growth is the company’s foray into physical Bitcoins via BTCC Mint collectibles, which combines the world’s most popular digital currency with titanium, one of the strongest and lightest naturally occurring metals, to produce high quality, durable physical bitcoins. BTCC has vastly outsold all other providers of physical, collectible bitcoins, and the company now plans to launch the coins in smaller denominations to make them accessible to everyone who wants them. The coins can be used as a cold wallet to securely store bitcoin investments; or because of their unique, limited edition design, they make a shrewd choice for discerning numismatists. BTCC’s N Series Bitcoin Block is the world’s first physical Bitcoin product to contain the full uncirculated block reward. BTCC’s multicultural team with its revolutionary products and services represents a formula for industry disruption. Bobby Lee’s ascension as chief executive has shaped him with the qualities one would expect from the leader of one of the world’s most active Bitcoin exchanges.

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Mikael Wang

A computer science graduate from Stanford University, Lee was born in Ivory Coast where his parents ran a factory that produced flip-flops. The experience of working for global firms, honing his craft in the IT space, and his family ties to digital currency enticed Lee to approach the original developers of BTCC and transition it from a website created as a hobby to one of the most actively traded Bitcoin exchanges worldwide.

There is one thing I’d like to remind people. Bitcoin has gotten a lot of headwind in recent years: regulation, scrutiny, resistance from banking; and the reason is that Bitcoin is real. It’s gaining momentum—fast. BTCC chief operating officer Samson Mow is no stranger when it comes to transitioning fantasy into reality. He began his career as a video game developer, where he experienced the international success many gaming entrepreneurs only dream of. He then established a reputation for transformative

startup leadership and a history of successful exits. Mow has now become an authoritative voice in the Bitcoin industry— one that resonates worldwide when he voices his opinion on relevant issues. Mikael Wang represents the heart of BTCC’s platform. As chief technology officer, his contributions are reflected in the users’ experience with the BTCC platform. Wang joined BTCC from Sweden, where he earned a Masters degree and gained experience in developing cloud computing solutions and service delivery platforms for Ericsson. After transitioning to China in 2013, Wang’s passion for digital currency led him to develop his own Bitcoin mining operation in Shanghai. Bobby, Mikael and Samson bring their global perspectives and understandings of both worlds to the boardroom to bridge the East-West divide, which is crucial to the company as they seek to evolve BTCC from a Chinese startup into a global leader. The winds of Bitcoin change are blowing for the good, Lee emphasizes. “There is one thing I’d like to remind people. Bitcoin has gotten a lot of headwind in recent years: regulation, scrutiny, resistance from banking; and the reason is that Bitcoin is real. It is gaining momentum—fast. Bitcoin is at $10 billion now and it was only at $1 billion a few years ago. Central banks may not fully understand it, but they know enough to know that this is not some airline-miles credit-card reward program. Bitcoin is a real digital disruptor to the world of fiat currency, here to provide an alternative for people to hold their value without loss, and still have the purchasing power of fiat currency. Regulation will come, and questions will come, and there will be debate and change….but this is all happening because Bitcoin is here to stay.” 69


Amidst the high-rises that dominate Shanghaiâ&#x20AC;&#x2122;s skyline, a team of veteran executives from their respective industries walk past the gates into a historic stone house. Every day these great minds enter this home, and what leaves this domain is world changing.


Transforms Manufacturing and Retailing

with Unique Blockchain Product IDs

From left to right: Patrick Dai, Sunny Lu, Richard Fu, DJ Qian, Jay Zhang


The team, held in high regard in China, is building one of the most applicable blockchain projects in the world: VeChain, which combines NFC chips and blockchain technology so that any tangible item can be tracked, identified, managed and verified. VeChain gives a unique ID to each product, puts it on the blockchain and brings it to life. The team building this product call themselves BitSE, because they are Bitcoin and Blockchain Service Experts.

BitSE was founded in 2013 and started off in the digital assets business. But, when IBM’s youngest executive ever, DJ Qian; Louis Vuitton’s former CIO of China, Sunny Lu; ten-year sales veteran at Louis Vuitton, Richard Fu; past PwC Senior Manager, Jay Zhang; a product manager from Alibaba, Patrick Dai and a talented team put their heads together, they realized the problems they could solve with blockchain technology. Combining Existing Technologies The power of being able to track products at the individual level with embedded chips is crucial in the era of mass customization. Think about how many parts go into a car, and how different every car is at the dealership. In addition, immutable distributed ledgers open up a new dimension of dialogue between businesses. Together, these capabilities will unleash new efficiencies to a vast array of potential clients. “Imagine if every manufacturer knew how far along in the production process their supplier was, it would bring new meaning to just-in-time manufacturing,” said Sunny Lu, COO of BitSE. The world will see many existing industries combine with blockchains much akin to the way old industries took advantage of the internet. There is nothing revolutionary or modern about commerce, banking or communicating but when the internet came of age and these old ways of life became accessible through a digital connection, the world changed.

These modules tackle different areas in which VeChain’s blockchain-integrated NFC chips can be useful. This application of blockchain technology reaches beyond the financial services industry and has the potential to affect almost everyone’s life. We have already seen companies trying to tackle the diamond trade with blockchain technology because this gives consumers peace of mind, knowing where their diamonds originated. “As an industry agnostic platform, VeChain can broaden the scope of what we can put on a blockchain, and what value we gain from having that shared, immutable information,” hinted DJ Qian, CEO of BitSE.

Blockchain is going to change the world, and we are taking one small step with VeChain

VeChain in the Luxury Goods Market VeChain has seen some particular interest come from the luxury goods market. China is one of the largest markets for the unauthorized sale of products and counterfeit goods. Many luxury brands do not allow the sale of their products on third-party websites, but despite this, almost every luxury brand can be purchased through China’s largest e-commerce retailers. With VeChain Asset Management, manufacturers can track where their product was logged in the blockchain and see how their product got diverted to a third-party retailer, thus curtailing VeChain the unauthorized sale of their products. VeChain is one product, although it is VeChain enables luxury goods comprised of four modules: manufacturers and other industries to • VeChain Asset Management (VAM) track the inputs in their supply chains, • VeChain Anti-counterfeiting (VAC) check the country sources, and see • VeChain Supply Chain (VSC) how far in the manufacturing process • VeChain Client Experience (VCE) their products are.

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VeChain, in particular the VAC module, also helps consumers quickly and easily verify the authenticity of a product by using their smartphones to communicate with an embedded NFC chip and integrated blockchain software. VeChain developed these special, inimitable blockchain NFC chips, that allow mobile phones to confirm the authenticity of products through non-contact scanning, that accesses relevant product information all the way back to the products’ birth after the test has passed. This scanning feature facilitates the rapid identification of consumer goods and helps enterprises enhance their brand reputations. After a product is bought, brands can stay in touch with their customers through VCE while their customers stay pseudonymous. This product provides a standardized blockchain API, and can be integrated with a client's after-sales service system, customer relationship management systems and electrical systems, and even create a new type of enterprise commodity digital marketing. Other Applications of VeChain The four modules of VeChain can be used in whole or in part across different industries. The ability to trace a product's origin, track its location, know whether it is authentic, and reach a customer in case of a product recall or simply to offer more services, is imperative in almost every major industry whether automobile manufacturing, pharmaceuticals, finance or food. “Data has given us a new understanding of the world and has enriched our lives. We would be unwise to go without utilizing blockchain technologies to share data and enhance such crucial industries that are so vital to our modern-day life. Blockchain is going to change the world, and we are taking one small step with VeChain,” Sunny added. 71


Above from left to right: Remington Ong, Vitalik Buterin, Dr. Feng Xiao, Ada Xiao and Bo Shen


ou’ve built your own company. You enjoy trailblazing work that takes you around the world. Your business contributes to both the economy and the social good, and you recognize how the two are intertwined. You are an entrepreneur. And a quintessentially successful one at that. No one can say you haven’t stretched yourself. But you’re still a bit restless. (Because all entrepreneurs are restless— it’s a defining quality.) And you think: What more might I do? How else can I do something useful for this world?

Your name is Dr. Feng Xiao. Your name is Bo Shen. Your name is Vitalik Buterin. And you think you might want to work together. Those were just a few things on the minds of the three entrepreneurs last year when they gathered in Shanghai, China, each with an intense interest in blockchain technology. The idea was to put their heads together, throw some ideas around, and see what might suggest itself about this increasingly intriguing new protocol that was turning heads in the financial world.

So the Russian-born, Canadian-reared, Switzerland-residing Buterin, a blockchain technical guru and founder of decentralized contract platform Ethereum, flew to Shanghai to meet with Shen and Xiao. Shen is cofounder of Invictus Innovations (the team behind the financial contracts platform BitShares), and Xiao is the founder of Chinese mutual fund giant Bosera Asset Management. He also serves as vice chair of China Wanxiang Holdings, which is the financial arm of Wanxiang Group, one of China’s largest auto parts manufacturers. Think of it as a kind of consummate summit meeting of the digital era, with the collective brainpower and business acumen in the room surging off the charts, final landing place unknown. A few days later, the threesome had sketched the broad outlines of what was to become Fenbushi Capital, a $50 million for-profit venture capital fund dedicated to supporting startups across the blockchain world. (Fenbushi translates as “distributed” in Mandarin.) Appended to that was its nonprofit affiliate, Wanxiang Blockchain Labs, a fund designed to provide a steady stream of grants ($300,000 annually) to support research and education projects in the blockchain domain. The nonprofit arm, unlike the startups seeking VC funding from Fenbushi, aren’t about bringing financial return to their developers, but are instead intended to contribute to the collective knowledge of the blockchain and its potential applications across a broad swath of human activity. “None of the three partners had the time to start new companies directly in the blockchain space either together or by themselves,” says Remington Ong, who also has a partnership interest in Fenbushi and serves as a spokesperson

for the company. “But they also agreed the industry is in the very early, nascent stages, and just creating one company within a specific niche of the blockchain wouldn’t have enough impact on the ecosystem as a whole. So they decided the best use of their resources was to pool them and invest in others who could advance the industry.” Besides which, Ong adds, “What they didn’t want to do is create just another Bitcoin wallet or mining tool; there are plenty of good ones and lots of competition out there already. They were looking for innovation, for ideas that will help grow the industry at large.”

No industry limitations. Just as long as it helps build the blockchain. We tell applicants to give us a good working demo, present it well, and sell the story. That means moving beyond the internal Bitcoin industry—producers selling to insiders and enthusiasts—to the wider blockchain world and its many vertical applications, such as financial and legal services, supply chain logistics, and auditing. Both Fenbushi Capital and Wanxiang Blockchain Labs, Ong adds, are designed to support those efforts, the former by funding worthy product and service development, the latter by funding the best research and code that grant money can buy. “A lot of work needs to go into building infrastructure, and though the blockchain world is open source, that doesn’t mean it’s free. Developers still need to be fed, but where does that money come from? Wanxiang Blockchain Labs wants to help answer that question.”

The grant program awards up to $50,000 every two months, entertaining proposals literally from around the world, some for just a few thousand dollars, up to the entire $50,000 if one project proves worthy. Most, however, tend toward smaller sums, which suits Wanxiang Blockchain Labs just fine. The first awards in December 2015 generated such intense response from multiple qualified applicants that the award was doubled to $100,000, which was dispersed among nine projects. In addition to its grant program and research and development work, Wanxiang Blockchain Labs is launching a blockchain accelerator, ChainBase Accelerator, the first of its kind in China. It will use its unique positioning to focus on integrating blockchain technology across industries in the largest market in the world. In alignment with China’s One Belt, One Road initiative, a development framework meant to optimize trade and commerce between China and Eurasia, ChainBase Accelerator will incubate blockchain solutions for trade, manufacturing, supply chain management, logistics and financial services and serve as a bridge connecting the most innovative blockchain companies in the world with China’s massive markets. Based in Shanghai, the accelerator will be ideal for companies looking to utilize blockchain across the world’s largest growth markets in China and Eurasia. “We place very few limits on the projects we want to support,” notes Ong about both Fenbushi Capital and Wanxiang Blockchain Labs. “No industry limitations. Just as long as it helps build the blockchain. We tell applicants to give us a good working demo, present it well, and sell the story.”

The core value of Fenbushi Capital, adapted from the Analects of Confucius: “Keep always a curious heart, an acute mind, and resolve to learn new things every day.” 73



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