>>Fred Ehrsam: I'm Fred Ehrsam, one of the two founders of Coinbase.
We're the largest bitcoin company in the world.
So I'm going to try to explain a little bit about what bitcoin is, why we think it's important,
and why we think it's going to grow drastically in the next ten years.
So what is bitcoin?
Bitcoin is the first-ever global transaction network.
What does that mean?
It means that it's open, quite literally, it's open source, so anybody can go and download
the code, review it, build on top of it.
It's also open in the sense that since anybody can download it, that means that anybody can
go and download this code and have a wallet for free just because they have a connection
to the Internet.
It means that it's distributed.
So there are computers all around the world, kind of like the Internet, that work to maintain
this global network and maintain this global ledger with the history of all transactions
over time in this unified network.
It's also secure.
So how is all of this made possible?
Bitcoin solved for the first time this very famous computer science problem called the
Byzantine Generals Problem.
In short, what that means for bitcoin is that any two people in this room can transact in
a peer-to-peer nature.
And if you think about all of the transactions you've done in your life to this point, that's
never been true.
Think about transferring, let's say, $100 from your Bank of America account to somebody
else.
You need Bank of America in the middle as a trusted intermediary to help you perform
that transaction.
That's what bitcoin removes.
It removes the need for this trusted third party.
So in that example, you need Bank of America to go in and say, yes, debit $100 from account
A and credit $100 to account B. And what are they doing?
They're going in the background to their closed, proprietary ledger of transactions and making
a journal entry.
So what does that mean for transactions as we go forward in the world?
As a result, you can kind of think about bitcoin like email for payments in a sense.
It, by nature, is fast.
It just takes a couple seconds for a transaction to confirm.
It's cheap.
Since you're just moving data around, it costs almost nothing to perform a transaction.
And, by nature, it's international, again, much like the Internet.
It's borderless by nature, because you're simply altering data.
So I'm guessing that most people in this room have heard about bitcoin sometime maybe in
the last two years, at least in passing.
It's grown quite substantially in the last two years.
Depending on who you ask, there are between 5 and 10 million bitcoin wallets worldwide,
about 80,000 businesses that leverage bitcoin in one way or another, and transaction volume
on the network is growing rather rapidly.
It's used in about 96 different countries, and, quote, unquote, using it in a new country
is pretty easy, because you're just downloading some software.
And there's anywhere between 50 and $500 million of value processed on the network each day,
depending on the day.
So let's put all of this into a bit of a global macro context for a second.
It costs about half a trillion dollars a year to process payments, which given the current
state of technology seems rather exorbitant.
You think about what the Internet did for the cost of distributing data.
It kind of took it, made it open, and brought that cost down by roughly an order of magnitude,
and we think that the same thing can happen here with value transfer, on top of the fact
that you also enable all sorts of new innovation.
And you think about why that is, and it's due to the proprietary and kind of construction
of these networks.
So think about making a credit card transaction online, as a simple example.
By nature in a credit card transaction, there are four people in the middle of that transaction.
You have an issuing bank, merchant bank, you have a network; i.e., a Visa or a MasterCard.
Not only that, but you have this massive fraud cost; right?
And we've all seen the identity-theft piece of that, but the system is pretty fundamentally
broken when you think about as an online retailer, you're forced to be left holding the bag if
somebody comes to you with a stolen credit card, despite the fact that you have no way
of controlling the root of the problem.
So 3% interchange.
Another 3% to fraud.
You have all sorts of false declines because merchants don't want to be left holding the
bag, and the all-in cost of the payment becomes very high.
You think about rethinking this and having a system that was actually made for the Internet,
and the costs go dramatically down.
It's free to accept Bitcoin, and to convert it to your local currency, it's probably less
than 1%.
I think one interesting trend in our lifetime has been the rise and fall of land lines,
or maybe more appropriately, the plateau.
So in our lifetimes, we've seen land lines plateau in about a billion in the world and
it's slowly in a decline now.
Meanwhile, we've had mobile phones and now smartphones rocket past to about five or six
billion around the world.
So what does that mean?
You hear people oftentimes talk about the underbanked or unbanked.
What does it mean in that context?
I think what you could very possibly see here is you now have two and a half billion people
who don't have a bank account in any way but they rapidly are getting access to smartphones,
to the Internet.
Is it plausible that their first bank account, their first store of value is one that is
free and electronic in nature?
It actually seems -- It seems quite plausible, and I think Bitcoin is a system that can enable
that.
In the scheme of things, Bitcoin is still relatively small in terms of transaction volume
when you rank it against the major credit card networks, but it's getting close to some
of the larger traditional remittance networks.
And I bring up remittance because that is a classic example, in my opinion, of these
closed networks where a company like Western Union, for example, can happen to move money
across borders more easily than anybody in this room can as an individual because they
happen to just own a lot of global infrastructure; right?
They can do it more efficiently than you can as an individual, solely because of that fact.
But again, these are closed networks.
So what happens when we make these networks open, accessible to anybody, we allow anybody
to go and build a business on top of it.
As with any kind of efficient market, when you open things up, costs usually go dramatically
down.
Just anecdotally, we started by paying a developer back in eastern Europe using one of these
traditional networks, it cost us about 6% to do so, and that seemed exorbitant and so
we started doing it in Bitcoin instead.
And given that we have the luxury of Bitcoin being fairly liquid in both the United States,
so to the dollar, and in Europe to the euro.
But that, now that we do it in Bitcoin, costs less than 2%.
And I think these network effects will only be increased as more liquidity kind of pops
up around the world over time.
So I've spent a lot of time talking about the transactional in a dollar or in a fiat
currency sense, a Bitcoin.
Another one -- actually, quick show of hands.
How many people here have spent in a single transaction less than 99 cents on the Internet?
You've done a purchase for less than a dollar.
Okay.
So a couple but not a whole lot.
And you have to ask yourself, well, why is that?
And the answer is that the current payment rails, the networks, really don't support
that in an economically efficient way.
So for a credit card, there's usually a 15 or 20 cent base fee.
That's 15 or 20% of your revenue just right out the door.
In our opinion, Bitcoin will make small payments on the Internet now viable.
And if you look at where apps and mobile games are going, this will enable entirely new business
models on the Internet as a result.
Going maybe more into the less transactional but more what does it mean now that we have
a shared and distributed ledger of ownership in general, think about securities clearing
for a minute.
So stocks and bonds.
This is something that banks employ tens of thousands of people to do, and it takes two
to three days, often, to settle a trade, and that seems crazy.
Well, what happens when you put that on a network where everybody can see?
It's very clear that ownership is transferred and it's taken care of by a unified network.
Again, you can see how the costs go down dramatically, and you don't even necessarily need centralized
places of exchange because you yourself can transfer ownership directly on the network.
I'll try to keep this part brief.
So we just simply make it easy to use Bitcoin.
So -- And easy to use consumer wallet built on top of the Bitcoin network.
Much in the way that you have Gmail sitting on top of the email network, SMTP is the underlying
protocol, we as a company sit on top of Bitcoin as the underlying network and kind of create
this easy-to-use abstraction.
We've got about 1.6 million consumers using that.
We have a set of merchant tools that make it easy for businesses to use Bitcoin and
then a set of developer APIs so that all sorts of great ideas can flourish on top of Bitcoin.
These are some of the people we started working with in 2014 to do that.
Some of them I think are in the room today.
The thing I want to leave you with, though, is think about this in many ways as the second
coming of the Internet, where the Internet came along and brought the cost of distributing
data down by an order of magnitude, and it made it open.
It made data distribution free and accessible.
The same thing is happening here, except it's not for data.
It's for transferring value.
Thanks for your time.
I'm happy to -- This tends to be a bit of a rabbit hole subject, so I'm happy to talk
with anybody afterwards, but thanks very much for your time today.
[ Applause ]