HANNA ZIADY: We are discussing virtual currencies – Bitcoin, the Blockchain – what all of these things mean. We are joined in the studio by Lorien Gamaroff. He is the CEO of Bankymoon, which is a company that helps other companies to figure out how they can use Blockchain.
Lorien, firstly, welcome to the show.
LORIEN GAMAROFF: Thank you for having me.
HANNA ZIADY: Let’s start right at the very, very beginning. What is a Bitcoin, where do Bitcoins come from, and who is invested them?
LORIEN GAMAROFF: Bitcoin and the technology that underpins it, the Blockchain, is actually the missing piece of the internet. For 20 years we’ve had this wonderful resource that’s enabled instant communication around the world, and we’ve been able to freely publish and consume content.
But ever since that time we’ve had a fundamental flaw on the internet, and that is an issue of trust, where we haven’t been able to trust the people whom we transact with, primarily. So for the first time now we have the ability to make payments online without having to trust the person we are paying.
Let me give you an example. How we’ve [made] payments [previously] has always been with a credit card. What you have to do is hand your credit-card information over to a retailer, and you have to trust that the retailer is going to take only that amount of money from your card, and also you have to trust that it is not going to lose that information.
Also, the retailer has to trust that you are who you say you are, because then it is at risk of perhaps a charge-back. So there is a whole industry that’s now come out of this, and there are a lot of fees that we pay to protect people against payment fraud.
Now Bitcoin has, for the first time, given us the ability to make payments where we can be free from that doubt.
HANNA ZIADY: How does that work?
LORIEN GAMAROFF: The way a typical payment works is there is a whole number of intermediaries that sit between a person and the actual person being paid. If you give your credit-card information to retailers, what they do is they send an instruction to your bank and the bank then sends an instruction to the retailer’s bank, and payment is made.
But now Bitcoin allows you to send money directly from the person to the retailer, without having to go through that intermediary.
HANNA ZIADY: So you’re disintermediating banks – is that what you are telling me? And credit card companies, for that matter?
LORIEN GAMAROFF: That’s correct. The amazing thing about the Blockchain, which is the technology that makes Bitcoin possible, is that it doesn’t just have to be currencies. It can also be any asset that you can imagine. If you think about securities, like shares in a company, even real-world assets, like a car or a house, you now have the ability to transfer ownership of that asset directly to somebody without having to depend on a trusted third party to mediate that transaction.
HANNA ZIADY: So that transaction is essentially stored in the Blockchain?
LORIEN GAMAROFF: Right. The Blockchain is like a big database, and what it stores is a record of who owns what. It also allows one then to directly transfer that asset to somebody. And it’s all stored on the Blockchain.
HANNA ZIADY: Forever and ever?
LORIEN GAMAROFF: Forever and ever. It’s a database that is what is called an “immutable ledger”. So any record that is made on the Blockchain database can never be changed.
HANNA ZIADY: Now, Bitcoin and other virtual currencies – I’m assuming Bitcoin is not the only one – are not regulated. Is that correct?
LORIEN GAMAROFF: That’s right. Governments around the world are right now trying to figure out what this thing even is. Is it a currency? Is it a commodity? Is it a property? Is it technology? And there is no consensus at this stage between countries on what it is. Some countries are trying to come out with licence models. Some other countries, like in the Eurozone, have decided to tax it like it’s a property.
So it’s still new, it’s early and I’m happy to say our own Reserve Bank has opted for the wait-and-see approach to see how this technology develops.
Just like with the internet back in the early days, it seemed very scary to have this thing where people could communicate freely. And what happened was we allowed it to evolve and we could see the enormous benefit it has had on the world. And this is a technology that looks as though it could also have an enormous benefit.
HANNA ZIADY: Just on that, it’s not regulated and you make a good argument for why it’s not regulated – regulators are still trying to figure it out before they decide what rules to impose on it. But that effectively means that people who use virtual currencies have no protection, no outside protection, no recourse should something go wrong.
LORIEN GAMAROFF: That’s right. At this stage, because it’s so new, people are getting involved at their own risk. It’s very often said that it is a big experiment, after all, which shows potential. But the internet once was also an unregulated place and it didn’t work properly. It was clunky and difficult to use. And I think that what we’ll see over the longer term are companies coming and trying to solve those issues of how people hold this, and how they can interact with other people in a way where there is a recourse if some sort of problem arises.
HANNA ZIADY: How do I get Bitcoins?
LORIEN GAMAROFF: Well, you can earn them. So you can ask your boss to pay you your salary in Bitcoins.
HANNA ZIADY: [Laughing] Assuming he says no?
LORIEN GAMAROFF: Well, the next thing is you can by them. If you think about Bitcoins, really, the closest analogy to it is gold. If you wanted to go and buy gold, you’d go to a coin shop and buy it. If you wanted to buy Bitcoin, you could go and find somebody who is willing to sell it, and in South Africa we’ve got a very good exchange where people can freely trade Bitcoins. It’s called BitX.
HANNA ZIADY: Okay, so there is an exchange in South Africa. I’ve heard the term “Bitcoin mining” – what does that refer to?
LORIEN GAMAROFF: Essentially that just means transaction processing. The way that the Blockchain works is volunteers can contribute their computers’ resources and processing power to the network, and what they do is they then process transactions and make sure that they are valid and legitimate. And, in doing so, if your computer happens to process a transaction, then you are rewarded with new Bitcoins.
That process will happen up to a limit of about 21 million, and that could happen in the next hundred years or so.
HANNA ZIADY: So there are only 21 million Bitcoins out there to be mined?
LORIEN GAMAROFF: That’s correct. But, just like the rand, can be divided down into a hundredth of a rand, into a cent, Bitcoins can be divided down to a hundred-millionth of a unit. So even though there are only going to 21 million Bitcoins, there will be 21 million-plus, another eight zeroes of a unit.
And also what’s important is that it is software, after all, and it is very easy to go and add more decimals and further sub-divide the Bitcoin down. But, in doing so, we’re never going to inflate the supply of Bitcoins. So Bitcoin is actually a deflationary currency, it’s not an inflationary currency because there can never be more Bitcoins in the world.
HANNA ZIADY: But do we need inflation for growth? That’s what we are told, that you need some inflation in an economy to generate growth. How would Bitcoin fuel economic growth?
LORIEN GAMAROFF: I often hear that, and you hear everyone on TV always talking about inflation, how we need inflation. But do we really? Who does that serve? I want to live in a world where things get cheaper. So is it true that the only type of economy that can be sustainable is an inflationary one? I have my doubts.
HANNA ZIADY: I’ll have to get an economist to answer that question.
We have a question on our SMS line: somebody is asking whether you can cash in your Bitcoin or can you only transact online?
LORIEN GAMAROFF: Yes, you can go and sell it on the exchange, or you can go and find somebody who is willing to buy it from you.
HANNA ZIADY: And get hard currency?
LORIEN GAMAROFF: And get hard currency.
HANNA ZIADY: And how much is one Bitcoin worth? I did look that number up – it’s obviously changing, because this is a traded currency – $415 dollars was the price this afternoon. So that is about R6 370 for one Bitcoin.
LORIEN GAMAROFF: That’s right. The price is determined in a free market and it has supply-and-demand dynamics, just like gold does. So it could vary from day to day. It is very volatile, though, because very few people own it. And it is quite easy for the market price to fluctuate quite a lot. But over the long term, as more people adopt the currency, it will become a lot more stable currency.
HANNA ZIADY: We were talking about the fact that virtual currencies are not regulated, so people are using them at their own risk. My question is what are the users using them for? Are companies actually accepting this as payment for goods and services?
LORIEN GAMAROFF: In South Africa one of the largest payment providers is a company called PayFast, and they allow their merchants – and I think there are around 30 000 of them around the country – to accept Bitcoin. So if you use Lancet Labs you can go and pay with Bitcoin.
So there are a lot of merchants that accept it, that sort of payment gateway. But at this stage it is a speculative vehicle. People expect the price to go up. There are a limited amount and over the history of Bitcoin the price has gone wildly up and down. But over the long term it’s been rising, and that’s how a deflationary currency works.
So I think people who have them are probably holding on to them more than spending them.
HANNA ZIADY: Are you one of those who has them?
LORIEN GAMAROFF: Yes, I do. I believe in the technology and I believe that this is going to fundamentally change the world and I certainly believe in the long-term prospects of it as a currency and a money.
HANNA ZIADY: The “internet of the next generation” is how you described it to me the other day. Are there international companies that are using it, well-known companies?
LORIEN GAMAROFF: Very many well-known companies – Microsoft, for example – and they all see the value in it. Obviously they are a little bit cautious because I guess it’s a regulatory grey zone. They don’t want to go full on. But very many companies do and it’s becoming more and more an accepted form of payment, especially since the fees are so low and it’s a very sure way of receiving your money. If you are a merchant you are not at risk of charge-backs.
HANNA ZIADY: There we go. Lorien Gamaroff is the chief executive of Bankymoon. More on this story on our website next week. I even spoke to the JSE – about what it thinks about virtual currencies and the Blockchain. Some feedback can be read in that article.