Question Do you see a danger of bitcoin becoming fractionalized by, for example, PayPal in a way
that the total available balance from all accounts will inflate the actual supply? No but I do see
a danger of PayPal becoming fractionalized while trying to chase the price of bitcoin to the point
where that renders them bankrupt. You see the problem here is that for institutions like this,
that attempt to offer a non-bitcoin settled proxy to bitcoin wallet that you can't withdraw from,
is that they need to keep going back at market prices and buying bitcoin to top up their
reserves. And they need to do that as quickly as possible in markets that may be less liquid
than the demand they have on the front end of PayPal. This means that there is
a window of risk between the moment that someone says, "I want to buy some bitcoin on PayPal"
and the moment that PayPal then buys bitcoin to fill up their reserves. So one of two things
happens either they have to have over a hundred percent reserve to be safe. They have to not
sell a bitcoin that they don't yet own because otherwise they run the risk of a massive run on
the bank if there's panic selling or even profit taking and the market turns upside down on them.
This risk of arbitrage between their platform and the open markets is a very very real risk.
Now either they have to keep greater reserves than a hundred percent or they have to keep
trying to catch up to a hundred percent. But in that period of time when they have less than a
hundred percent, their risk to being exposed to wild swings in prices is very very very high. So
yes, if you buy your bitcoin on PayPal you didn't buy bitcoin. What you bought is exposure to the
price of bitcoin, mediated by a custodian, who you hope is doing good risk management practices
but who you cannot audit for their actual existence of reserves. This is great for
price speculation. It's great for driving up the price as more and more people line up to become
second-class citizens of the bitcoin system. But it's not very good for those second-class
citizens. They do not get the full exposure to all of the capabilities of the bitcoin system;
they only get a fraction of the full rights and privileges that accrue to someone who has control
over their own keys. I don't think this is a risk to bitcoin but I do think it's a risk to
these intermediaries who find themselves exposed to wild swings in prices and the possibility of
extreme arbitrage. Now the the real risk, however, to bitcoin (and this is where things get tricky)
is that if more and more bitcoin is owned by intermediaries like this, held in the
treasuries of companies like Microstrategy or Square or PayPal or JP Morgan Chase,
these companies now control keys that control bitcoin on the chain. And that means they are
now participants in consensus. Whether we like it or not. Consensus emerges from economic activity.
People who have keys that control money, have power in consensus. Why is that?
Let me give you a simple example. Let's say that I come up with a new invention that is broadly
popular within the bitcoin developer community called confidential transactions. That is not
an arbitrary example, it's a real technology that was invented by Greg Maxwell and others,
and [confidential transactions] provides very high level of privacy by encrypting the amounts
of bitcoin transactions. Now I want to introduce that to all of bitcoin, and in order to introduce
that we have to introduce a soft fork maybe a hard fork. In order to get that change implemented,
we need to get all of the constituencies of consensus aligned. Well here's the thing -- as
far as exchanges and Microstrategy and Square and PayPal are concerned privacy is not a big
priority. Not only is it not a big priority but it makes it much more difficult for them to continue
operating their business in the face of regulatory demands. So they will push back hard and they may
end up pushing back hard enough that that change is not implemented in bitcoin. So
this is the risk. The risk is that by having more and more intermediaries whose interests
are the interests of regulated corporations and not aligned with the fundamental principles
of open decentralized financial sovereignty, that creates some very big risks for bitcoin's future
which is why I'm against financial intermediaries like this. I'm against the introduction of
exchange traded funds. Yes, number go up -- yes, to the moon -- yes, hodl hodl and all of that
bullshit. But at the end of the day what you're doing is sacrificing principles in order to get
price appreciation and that story does not have a good ending. Now I'm hoping that the
risks that these intermediaries face: regulatory risk, arbitrage risk, etc are greater than the
risks that bitcoin faces from the concentration of power of these intermediaries gradually making it
less palatable for them to operate in our industry and that we have fewer of these
intermediaries really surviving the competition that is imposed by open decentralized systems. But
you know that's an optimistic perspective and sometimes things don't work out so well.
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