by Judith Dinowitz
On Thursday, June 11th, I was fortunate to be invited to a General Assembly event showcasing Cameron and Tyler Winklevoss, and their upcoming project, Gemini, which will be New York's first licensed bitcoin exchange. The Winklevoss twins, two of Bitcoin's earliest investors and proponents, were interviewed by Nathaniel Popper, author of Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to reinvent Money. In the hour-long talk, the brothers touched upon their passion for bitcoins -- why they believe in the digital currency and why they are so sure that Gemini will succeed where other exchanges have failed.
That the brothers enjoy working together was obvious from their interview, interspersed with teasing. Tyler said that Cameron's good at doing the grunt work, while he's good at strategy. Cameron joked that he's slightly more creative. They were passionate and articulate, and the sense of two people who had been partners for a long time permeated their talk.
What is Bitcoin?
Before we get into the meat of the interview, let's start with some basic definitions. Bitcoin, the network and cryptographic standard, spelled with a capital B, is different than bitcoin, the currency. In 2009, Satoshi Nakamoto, whose true identity is still a mystery, published the first Bitcoin specification and proof of concept on a cryptography mailing list. The specification he started is used by the Bitcoin network to verify and encode bitcoin transactions as they occur in the "block chain", a public ledger. All transactions in the block chain can be authenticated; anyone can send and receive bitcoins using a Bitcoin application that provides a personal Bitcoin wallet, without a bank or credit card company. Bitcoins can be bought or sold, gifted, or used as payment for product or services. The Bitcoin specification can only be changed by a consensus of the Bitcoin network.
How are bitcoins created?
Bitcoins are created by bitcoin miners, who run machines that compete to verify transactions and add them to the block chain. All transactions are protected by the digital signatures of the people sending and receiving them, and are not considered valid until they're in the block chain. Miners are gifted with new bitcoins that are created with each transaction they process, an incentive for people to take part in the network and create more bitcoins.
One major difference between dollars and bitcoins is that the supply of bitcoins is finite, with the upper limit set at 21 million. However, transactions can happen in smaller subunits, called bits, and there are 1,000,000 bits in a bitcoin.
In the Bitcoin network, faster machines mean more transactions verified, which means more bitcoins earned. When the network was young, it was easier to earn money; now the network is much more mature, and competition is fierce. Imagine my surprise when a friend from General Assembly told me he had been a bitcoin miner for several years, and only stopped recently, as it became much more difficult to turn a profit. He paid for part of his General Assembly tuition with money he had earned through bitcoins. This made the idea of using bitcoins so much more concrete!
Their Plans
The Winklevoss twins are moving full-speed ahead on Gemini, while at the same time still maintaining Winklevoss Capital, their angel investment company. They have ten or twelve people on board, and they're waiting for approval by the SEC (Securities and Exchange Commission) for their new ETF (Exchange-Traded Fund) for bitcoins. They've also put in for a bitlicense from the New York Department of Financial Services. (A bitlicense is New York State's attempt to regulate Bitcoin, and you'll learn more about it below.)
Building a bitcoin startup has challenges that you won't find in a regular startup. The work can be siloed into four parts: Security, compliance and regulation, product, and the banking relationship. All four of these aspects are essential, and making mistakes on any of them, especially security, can spell catastrophe to a bitcoin business.
"The short of it is, there's a huge barrier to entry for a money service business that is different than most startups," said Tyler.
"The moral is, don't start a money service business," joked Cameron.
Angel Investors
Yet the twins have decided that despite the challenges, they can create a safe, secure bitcoin exchange in New York. Betting on companies is not new for them. They began Winklevoss Capital three years ago and they now fund 50 companies. Angel investment is a numbers game, where you need a certain threshold of investments. "Finding good companies," Tyler Winklevoss said, "is a matter of instinct. Within five seconds, you know if you'll invest in someone -- whether you would want to bet on this person, and whether you'd want him or her as a teammate."
Bitcoin: More Efficient
They first heard about bitcoins from David Azar, back in 2009, and decided it was the next big wave. They started buying up bitcoins and now own 1% of all of the bitcoins in the world. They haven't looked back.
At its core, they say, Bitcoin is internet money -- much better than the traditional banking system, which is slow and inefficient. Tyler compared the evolution of Bitcoin to the evolution of long distance digital communication. Before the creation of the Internet, long distance calls were very expensive. Then they created a protocol, and kids growing up today skype for free on a regular basis for free. Bitcoin, he said, is like email for money. "I can send people fractions of a penny the way I send an email."
Putting Their Names to It
They were also the first to publicly endorse Bitcoin, and despite some of the news items of the last three years -- the revelation that the currency had been used in the drug trade and the dissolution of several Bitcoin exchanges- they remain positive about the future of the technology. They don't even regret their investment in Bitinstant, whose co-founder, Charlie Shrem, is now in jail in Pennsylvania for dealings with the Silk Road drug trade.
"As an investor, you're informed by your failures as much as your successes," said Cameron. "The irony and the sad aspect of the Bitinstant story is that it was a very viable business, thriving and growing at a really fast clip. There were poor decisions made by the operator. But it was very much a learning process for us."
"Bitcoin definitely got a bad rap," he admitted, "even though the vast majority of participants were not involved in illegal or illicit behavior…That was what was selling papers." Because Winklevoss Capital is a family firm, the brothers had more leeway than other venture capitalists, who were restricted to investing in c-corporations. "We had the structural agility to make that bet. We didn't have to wait for the right kind of company to come around," noted Tyler.
Still, they waited for the right exchange to come along, and they're still waiting. That's why they decided to start Gemini and invest in themselves.
Regulation: The Road to Acceptance
Currently, Bitcoin is in a no-man's land when it comes to regulation. The SEC won't regulate it because it's not a security. The CFTC (U.S. Commodities Future Trading Commission) won't touch it because it's not a future derivative; they only regulate commodities. The Federal Reserve classifies it as a digital asset rather than a currency, and will not regulate it because it's not centrally issued. The only federal body that regulates bitcoin right now is FINCEN (Financial Crimes Enforcement Network), which is an arm of the treasury.
The first state-level effort to regulate Bitcoin, New York's bitlicense, has engendered much debate in the Bitcoin community. Eric Voorhies, a well-known bitcoiner, said that he would not be serving customers from New York and that no one should have to abide by these rules.
The Winklevoss brother see regulation as the path to a much broader acceptance of bitcoin as currency, and don't find these rules to be unattainable. "Our goal is to bring institutional people into bitcoin and make it look like a much more mature market," said Cameron.
Tyler agrees. "We're in favor of healthy regulation. We're confident that they ([the regulators]) want this to happen as much as us or anyone else."
Playing the Waiting Game
Now the twins are waiting for approval of their ETF and for their bitlicense to come through. Their goal is to create a NASDAQ-like place for bitcoin trading -- a secure exchange. Tyler points out that 80% of bitcoin transactions take place overseas, and that there is a long way to go. "We're not going to gain the trust of Midtown or Wall street or the average consumer unless they don't have to wire their money off to a bank in Estonia or off to Japan…We have to look familiar." It won't be an easy road, but they see it as a necessity.
On The Bleeding Edge of Innovation
Bitcoin's an exciting journey, and the twins are happy to be part of it. They have expressed their belief that ultimately, the technology will rise above the pitfalls of Silk Road and failed exchanges. They talk about use cases like remittance, or using bitcoin to pay for services across borders. Gemini is their bid to bring that future closer and make a positive social impact with Bitcoin.
More power to them.
You can watch the interview I reviewed on YouTube.
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