Speaking at the Senate Inquiry
Today I spoke as a witness in the public hearing on digital currencies. Was a very exciting and interesting day. I must thank Ron Tucker from the ADCCA for inviting me to the event. For the official transcript click here.
CULLEN, Mr Lucas, Chief Executive Officer, Bitcoin Brisbane
CHAIR: Welcome. Mr Cullen, I am very conscious of the fact that we are actually quite tight for time, so I might ask you if you have a brief opening statement and in your opening statement you can just outline where your area fits so that we make sure we are asking the right questions.
Mr Cullen : Sure. Thank you for inviting me to this committee, Mr Chair. Bitcoin Brisbane is a consultancy firm that develops bitcoin related software and advises industry on the exciting opportunities and potential pitfalls of digital currencies. I am also studying a Bachelor of Mathematics at QUT, and I have previously worked developing software in the banking industry—so I think that should answer where you should target your questions. I was also mining bitcoin in 2011, so I am happy to talk about bitcoin mining and why you should not, and, as they say, it is better to sell the shovels to the miners than to mine itself.
As Mark said, the biggest expense of mining is power. In Australia, we have an abundance of free power in the form of solar, and a decreasing feed-in tariff. A potential industry could emerge by converting the solar power generated during the day into bitcoin when the demand for electricity is low and then using that revenue to buy power back from the grid in the evening, thus forming an economical battery.
While my experience in digital currency is broad, today I would like to confine my opening remarks to the technical characteristics of digital currencies. The blockchain is a technology that underpins bitcoin. Just as TCP/IP is the network protocol that allows services such as email, websites and Skype to run, the blockchain allows peer-to-peer digital currencies to exist. The blockchain is a distributed public ledger that all actors agree to be the truth by a decentralised validation process called ‘mining’, and actors participating in validating a transaction are known as ‘miners’. The ledger may be thought of in traditional accounting terms as double-entry accounting. However, in the bitcoin network, each and every transaction is known by everyone, making fraudulent transactions impossible. Bitcoin transactions are organised and synchronised without central authority into 10-minute chunks called ‘blocks’. I will skip this next section because of Mark’s comments on it, and I will take questions.
CHAIR: Okay, Mr Cullen; let us just talk about the business opportunities and industry opportunities. So you are saying that in your business you effectively develop product and consultants advise businesses on how to get into this space?
Mr Cullen : That is correct.
CHAIR: Do you want to just outline to us what you see as the growth potential of the business opportunities for Australian businesses, firstly, and then, secondly, could you touch on the impact the taxation issue has had on those opportunities?
Mr Cullen : In regard to business opportunities, what bitcoin and block chain technology allows is this inversion of trust. As we are seeing, a distributed public ledger that can be audited by anyone has massive ramifications. For example, party donations could be audited by the public and could also be audited to see where those funds are allocated throughout the system.
We mentioned earlier a topic called proof of solvency, where we are talking about fractional lending. Because a block chain and every transaction is known, you can actually see mathematically and provably the amount of funds a company has, so you can actually see whether the company has the capacity to pay your invoices. Again, it is a proof of solvency. Those are just a few use cases.
CHAIR: What about the potential for the Australian businesses you are consulting with?
Mr Cullen : I think we have an extremely good talent pool here in Australia from the software developers. We have a good climate—albeit solar power—to actually encourage miners to participate here and to reduce the cost of electricity. We have decent broadband penetration, which will allow these services to exist. We are traditionally English-speaking citizens. Most of the bitcoin code is written in English, so we have a competitive advantage over other markets, such as India, in developing software products in this space.
Senator CANAVAN: Is there any mining happening in Australia any more?
Mr Cullen : Yes, there is an ASX listed company called DigitalBTC, who have a mining operation in WA.
Senator CANAVAN: Where did you do your mining? On your MacBook?
Mr Cullen : We started mining in 2011. A friend of mine has 10 kilowatt solar power, so we are using the advantage of free electricity to earn bitcoin.
CHAIR: Was it profitable?
Mr Cullen : To put it into perspective, I bought about $3,000 worth of bitcoin mining when bitcoin was $5. It would have been more profitable just to buy bitcoin and be up $750,000.
Senator CANAVAN: With the increase in the price?
Mr Cullen : Yes.
Senator CANAVAN: What is Bitcoin Brisbane’s business at the moment? What services do you offer people?
Mr Cullen : It is primarily developing software for bitcoin. Either accepting payments, as a traditional e-commerce marketplace, or building software for up-and-coming industries like bitcoin ATMs.
Senator CANAVAN: Do you have ATM clients at the moment?
Mr Cullen : Yes, we do. We have just finished a development cycle for an ATM client.
Senator CANAVAN: Do you know how many ATMs there are in Australia?
Mr Cullen : It would be fewer than 10.
Senator CANAVAN: Fewer than 10 in the whole country. Where are they?
Mr Cullen : Off the top of my head, there are three in Melbourne, one in Brisbane and I think a couple in Sydney.
Senator CANAVAN: Presumably you are fairly connected in with the bitcoin community. Is it growing in Australia? Are people using it? Is there data at the moment on the use of bitcoins in Australia, not just globally?
Mr Cullen : You could work it out. There is growth. My user group has 200 members. The Sydney meet up last night well exceeded that. It is growing as people are becoming aware. But one of the biggest benefits for accepting or using bitcoin is consumer protection. I might quickly talk about that.
In a traditional system, when you pay via credit card you are literally handing your wallet to someone and saying, ‘Take out as much funds as you see fit and hand the wallet back to me.’ We have legal frameworks to stop people doing that but as history shows that process is flawed. There are a lot of actors along the way who can maliciously or unintentionally lose that data. Whereas, a bitcoin system is a push system. I will never reveal my information to you. You will send me an invoice and I will sign a transaction on my computer using my private keys and then push that transaction, unencrypted, to the network for every actor to witness. From a merchant point, because transactions are for all intents and purposes irreversible, that allows trades to markets or in areas that typically would not be acceptable to trade in. I have one client who has done over half a million of consumer electrical sales and has zero fraud.
Senator CANAVAN: Who is he selling to?
Mr Cullen : It is anyone in the world.
Senator CANAVAN: He is based in Australia?
Mr Cullen : Yes, he is based in Brisbane. He has sold to over 50 countries worldwide and with zero fraud.
Senator CANAVAN: He only accepts bitcoins?
Mr Cullen : He only accepts bitcoin.
Senator CANAVAN: Just on the consumer safety: you are saying that the consumer safety is a selling point for bitcoin, I suppose. What are the risks though? We heard earlier about the potential for stealing bitcoins and those things. Are they evident in the community now? Do people lose bitcoins?
Mr Cullen : Yes, that is a good point. With bitcoin, the consumer or the user is entrusted with their own private keys. Effectively, everyone is their own bank. That is a scary and an exciting opportunity. But I would argue that a central repository with everyone’s data in it that is susceptible to an attack is probably worse than a distributed system where everyone’s private keys are distributed by themselves.
The bitcoin protocol has a few things built in to stop loss of data. Mark did not touch on this. They are called multisignature accounts. We can think of these in a traditional model as a joint account, so we could have an account that requires, say, two of three signatures. You and your partner could be custodians of the account and keep the third signature in a vault et cetera.
Senator CANAVAN: What do you mean by signatures—an electronic type?
Mr Cullen : Sorry, I should say ‘as private keys’—as the keys to sign the transaction.
Senator CANAVAN: Like a wi-fi password or something like that?
Mr Cullen : You could think of it that way, yes.
Senator CANAVAN: I think we will hear from the Australian Digital Currency Commerce Association their proposal for a sort of self-regulatory environment. What do you think of that idea? Obviously we want to protect against people doing the wrong thing in this industry. Do you think that kind of model can work, or would you prefer other types of regulatory models or just a complete open slather arrangement?
Mr Cullen : To be honest, regulatory is not really my expertise. But what I would like to see, and what I am doing, is educating people on how to stop theft and loss of bitcoin. I think there should be, maybe from a government point, more education into this space. We talked briefly—I forget who asked the question—about what this private key is, and Mark touched on it briefly: it is just an arbitrary string of characters. That is correct and it also is incorrect. It is just a number. It is literally just a number, albeit a number that is so large that the number of combinations to try and guess that number is just not feasible. So I think a broader understanding of what the private key is and why that information is sensitive is one of the ways to bring adoption into this space. I think that is done through education and through forums like this.
Senator CANAVAN: I am going to the issue that, if storing that number then becomes an issue—and I suppose, if I have a lot of bitcoins, I probably do not want to carry them around on a USB stick—
Mr Cullen : That is right.
Senator CANAVAN: or even on Dropbox or something like that. I would probably want to have them secure with some kind of exchange or wallet, as we were speaking about before. Of course, there was a high-profile failure earlier in the year with MtGox.
Mr Cullen : Yes.
Senator CANAVAN: To what extent do you see the risk to your industry of cowboys, if you like, in the industry doing the wrong thing and therefore hurting the reputation of everybody in the industry? Is that a great risk?
Mr Cullen : Again, it is about education. There are ways, as I said, to provably know that that company is solvent. With MtGox, if they had used a proof of solvency, we could have seen that they did not have the funds that they said they did, so people could have had that be transparent. I think exchanges et cetera will take on these features and have a competitive edge over their competitors, so you will only do business with an exchange, and it will have proof of solvency. By the same token, using a multisignature account, I could jointly sign my coins on MtGox and myself, requiring both parties to sign that transaction in the event of an exchange, so no one actor can ever spend those coins. So we can avoid scenarios like MtGox through education and through best practices.
CHAIR: Can I just follow up on that. I will just go back to what Mr Pesce said earlier, just to get the order right. There is the ledger, which is the block chain. That has proven to be incredibly secure and strong—impenetrable is probably the wrong word, but it has been demonstrated to be a kind of Swiss banking system. It is a kind of vault. That has been fine; there has been no issues there and there is faith in that. Separate to that you have got the exchanges which stem off that. My interaction with the block chain is through the exchanges, and that is where they maintain my wallet and do those kinds of things.
I am just going to note here that ASIC said that the weak link has been the kind of exchanges. And your point, Mr Cullen, is that as we go through this process the competitive nature of the exchanges and market forces will mean that the trusted, successful exchanges are the ones that are going to succeed. Of the others, some will fall over, some will get bought out and some will get unprofitable.
But you are effectively saying that what we are going through now is the market forces making a determination on which of the exchanges are going to come to fruition and which of the exchanges are going to disappear—vanish.
Mr Cullen : I get asked this a lot of times, and it was touched on here today: where do we buy coins from? I would advise that we buy from Australian exchanges like CoinJar or CoinTree. They have ABN numbers and they are based in Melbourne so they abide by our laws and regulations. There are other, offshore exchanges but, like any purchase on the internet, you have to be diligent. You have to work out who you are dealing with and if these companies are reputable. Perhaps you should start small and only risk the amount of money you can afford to lose—just like any transaction on the internet.
CHAIR: But the point I want to make is that what happened with MtGox was not a reflection on the ledger—the block chain.
Mr Cullen : No.
CHAIR: That was a reflection on the exchange itself.
Mr Cullen : That is right.
CHAIR: I just want to make that distinction, and get my understanding right on that.
Mr Cullen : It was run by criminals.
Senator CANAVAN: What exactly went wrong with MtGox? How were they able to defraud people?
Mr Cullen : It was basically a Ponzi scheme: I can sell two people one bitcoin each, but I only have one bitcoin on my balance sheet. I can make a website that shows them whatever I like, but if they both withdraw that one bitcoin, therein lies the problem.
Senator CANAVAN: So it was a bank effectively? That is exactly what the Commonwealth Bank does. It does not have all the money in its vaults to pay everyone out if we all went there today.
Mr Cullen : I will decline to comment on that.
CHAIR: I think we will leave bank bashing to another time!
Senator CANAVAN: That is a different inquiry.
Mr Cullen : Exactly right. And using a proof of solvency, we can show that they are 100 per cent solvent for the amount of money. So, like you said, using bitcoin actually solves problems that we are seeing today in the banking and financial sector.
Senator CANAVAN: And I suppose that is where some would argue that regulation can help in the sense that it is fine for MtGox or some other entity to say, ‘Yep, I’m solvent; please trust me.’ But obviously, when the confirmation is coming from the interested party it will carry less weight, whereas if there was a third party and a regulator and a creditor, that could provide some kind of certification stamp and perhaps help the industry. What do you think of that potential?
Mr Cullen : Sure. Anyone that audits these companies can also make mistakes.
Senator CANAVAN: Sure.
Mr Cullen : And all of these audits come at a cost. With a proof-of-solvency scenario these costs are literally zero, and anyone has the potential to do this. So again, these systems should be embraced.
CHAIR: There are a few more questions that I would like to ask, and in particular about the recent decision by the NAB in April 2014, but I might bring that back to the panel because there might be other views on that as well. Thank you, Mr Cullen, for making yourself available.
Here is Ron Tuckers post hearing interview: