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UCLA's John Villasenor takes you inside the world of cryptocurrencies (think bitcoin)

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Questions about bitcoin? UCLA's John Villasenor has some answers

You can donate to a PAC, buy a Tesla or order a Domino's pizza using bitcoin. California just repealed a ban on such cryptocurrencies, so the question is not only "Now what?" but "What?," period. Any currency that's not tied to something like gold is essentially faith-based, but faith may be harder to come by for something like bitcoin, which took a PR hit in the Mt. Gox failure in February and has no physical existence anyway. You may want to try it out just because it's neat, says John Villasenor, a UCLA professor of electrical engineering and public policy and a Brookings Institution fellow, but it's the "decentralized trust" that underpins bitcoin transactions that is the real innovation.

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FOR THE RECORD:
Bitcoin: In the "Patt Morrison Asks" column on Wednesday, the name of a Treasury Department bureau was incorrect. It is the Financial Crimes Enforcement Network, not the Financial Crime Enforcement Network. John Villasenor's transcribed reference to "stock charges" should have been "stock charts." —

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Bitcoin is the biggest of the cryptocurrencies. What makes cryptocurrency different?

I'm not one of those who believes bitcoin is going to replace the U.S. dollar. But think about some strange things we take for granted that, if you take a step back, don't make sense.

When you buy something with a credit card, you provide all the information to defraud you. That doesn't make a lot of sense. If I hand you $10 cash, unless you're going to whack me over the head, you can't get me to give you any more. With a credit card, I authorize you to charge $10 and you could charge $50 and, in the immediate term, there's no way for me to stop it. Every few weeks we find out millions of credit cards have been compromised. What we have is not really fine.

Enter bitcoin. On the security side, in a bitcoin transaction, you are never providing any other party with information that could be used to defraud you. When you send bitcoin to somebody, even if they're not trustworthy, they cannot use the information you provided to extract more money than you want to give.

Second, efficiency. In a bitcoin-like system, money can move essentially instantaneously, and the fees can be much smaller than with traditional transactions.

What is so hard for most people to grasp about it?

The hardest thing — not unreasonably — is that bitcoin is completely decentralized currency. There's nobody in charge, no company, no government, no consortium — collectively everybody acts to run it. Most of us grew up in a world where government has oversight over currency like the dollar.

Is there an actual bitcoin coin?

Strictly speaking, no. People have made little things with a capital B on them. But you can send a half-bitcoin, or .003 bitcoin. I can't send you less than a cent, but I can send you the equivalent of less than a cent in bitcoin.

How is the value of bitcoin determined?

By the market. You might say, how do we know the value of Tesla stock? There's no government body that says Tesla stock is worth X. The value is whatever willing buyers and willing sellers are willing to exchange Tesla shares for. How many dollars it costs to buy one bitcoin flows up and down, a lot like stock charges or foreign exchange charts.

What's the impact of California repealing the old law that banned alternate currencies?

I don't think it fundamentally changes the larger regulatory landscape, but it is important because it represents a more open-minded approach to bitcoin from the government of California. One big complication is that [bitcoin's] issues are both federal and state.

And that could mean regulation.

The government has money reporting laws. If you go to a traditional bank for a wire transfer for $60,000 as a down payment on a condo, that gets reported [because of] "anti-money laundering/combating the financing of terrorism" [rules]. If you send $70,000 in the bitcoin network, there's no reporting at all. The Financial Crime Enforcement Network, part of the Treasury Department, can't mail a letter and say you need to keep us in the loop. They have oversight more easily over people who change dollars into bitcoin and vice versa, but [otherwise] there's no reporting. The parties transacting in bitcoin aren't readily identifiable. They're identifiable simply by strings of numbers and letters. That does raise some regulatory questions.

Is the virtual community going to resist regulation?

The bitcoin community isn't monolithic. There's an industry organization that advocates for the ecosystem but no one person speaks for bitcoin. There's a subset of people who want to roll up their sleeves and work with regulators and bring bitcoin into the fold with appropriate legislation. Those people are presumably of the belief that that's the way to make the ecosystem grow. Others feel the whole point of bitcoin is that it's unregulated, untethered to any government mechanism for moving money, and they don't want to in effect sell out by having it become highly regulated.

What's the bitcoin-owner demographic?

In the earlier days of bitcoin, which has been around since 2009, you had to have quite a bit of technical knowledge. [It's now] far easier to use, but it's still a very tech-savvy crowd. You find people who are trying it out because it's neat. You find people who have a basic distrust of anything run by the government. And you find people attracted to it because [it is untraceable]. Not all financial systems are used for above-board [activities]. Sometimes I get a bit defensive when people say, "Gosh, bitcoin can be used for criminal purposes." So [can] cash and credit cards and checks.

How can regular people get bitcoins?

There are various providers where you can link your bank account to convert money to bitcoin. You can't just turn dollars into bitcoins in your own living room; you have to go to exchange services, with the obvious caveat that you want to be very careful to use a reputable service. Bitcoin is stored [online] in your own bitcoin "wallet" and you are free to spend it with anybody who [offers] bitcoin options.

Bitcoin isn't backed by insurance, as bank deposits are. When it's gone, it's gone. Evidence the losses when the bitcoin exchange Mt. Gox folded, and the British man who threw out his hard drive with millions in bitcoin value on it.

You're right, there isn't consumer protection at the same level there is for traditional deposits in banks. There may emerge a market for insurance for cryptocurrency, but right now there's no FDIC for bitcoin. Right after Mt. Gox went down, CNN ran a headline along the lines of "Mt. Gox Site Disappears, Future of Bitcoin in Doubt." That makes as much sense as a headline saying, "Bridge Washes Out in Storm, Automobile's Future in Doubt." I would distinguish between Mt. Gox itself and the bitcoin ecosystem.

I've read concerns about its potential for destabilizing "fiat" currencies like the dollar, not just complementing them.

Eight billion dollars [the current estimated value of all the bitcoin in existence] in the context of the global financial system is the tiniest drop in the bucket. I don't see bitcoin shaking the fundamental foundations of the global system.

That's not meant to be a criticism of bitcoin. If I'm going to the grocery store, I can pay cash, I can use a debit or credit card — there's not really a pain point that bitcoin will help to resolve. Now, if I'm going to move $2,000 to London, there is actually a pain point where I might look at bitcoin.

Are there unintended consequences to bitcoin?

If you buy coffee and a muffin with bitcoin, most merchants immediately convert it to dollars. If you have thousands of merchants doing that, you put downward pressure on the [value of] bitcoin because you are selling bitcoin.

Do you know anything about bitcoin's supposed creator, Satoshi Nakamoto?

I know nothing more than what I've read in the press. It seems clear the person fingered in the Los Angeles area doesn't seem to be the right Satoshi Nakamoto. I have no idea who the real Satoshi Nakamoto was, and even if I did, I wouldn't go talking about it because whoever that is wanted to remain anonymous and that anonymity should be respected.

Copyright © 2014, Los Angeles Times
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