ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.
How do you, as a company or individual, figure out when it’s time to start paying attention to a new technology? How do you tell whether it’s a flash in the pan or something that will actually go mainstream? How do you learn about it? When do you invest resources? And how do you predict the impact it will have on your business? For many of us there’s a temptation to dismiss the latest thing. It’s too niche or a passing fad. But as anyone who studies business knows, those who ignore innovation tend to get trampled by them. Companies can reach a point of no return, where their unwillingness to adapt spells disaster.
Today’s guest says that cryptocurrency might just be one of those key developments that we all need to embrace and understand, as soon as possible, because it and the block chain technology behind it will fundamentally change the way we do business. Jeff Roberts is the author of the new book, Kings of Crypto, One Startup’s Quest To Take Cryptocurrency Out of Silicon Valley and Onto Wall Street. He’s with me now. Hi, Jeff.
JEFF ROBERTS: Hi Alison. Thanks for having me.
ALISON BEARD: So cryptocurrency, Bitcoin, Altcoin, block chain, these are terms that many businesspeople hear, and their eyes kind of glaze over. You know, they find it too complicated to learn about and understand. Are you able to give me just a simple explanation of what cryptocurrency is and how it works?
JEFF ROBERTS: Sure. Yeah, and I think those executives are totally in their right to have their eyes glaze over, because too often discussions of Bitcoin and block chain are put forth by people who fetishize it or have a financial interest in it. But the reality is, it’s quite simple.
I mean, let’s start with Bitcoin. Bitcoin is simply software. It’s a software that you download to your computer, and it keeps track of who owes which money. And the innovation of Bitcoin is, the underlying technology is block chain, and a block chain simply provides a tamperproof transaction record of where the money has moved around. And it allows any computer to verify that and to post a public record. So that’s what it is in essence. You hear a lot of jargon about, well, it’s in digital wallets and transfers and stuff, but essentially it’s just a software program that shows who owns which assets.
ALISON BEARD: And Bitcoin is the most popular cryptocurrency, but there are many. So explain that fact, the proliferation of numerous types.
JEFF ROBERTS: Yeah, just as once upon a time there was just a handful of apps, but the underlying technology of IOS and App Stores were universal. In this case, Bitcoin was the first major cryptocurrency and also the first widespread use of block chain technology. Since then, however, many other currencies and other applications have borrowed the underlying principles of block chain, which once again is simply the ability to create an instant tamperproof ledger of transactions. And so there’s now hundreds of cryptocurrencies, and then block chain technology is also used for other applications that don’t relate to money. But still to this day, Bitcoin is by far and away the most valuable, the most important one.
ALISON BEARD: That block chain ledger that you’re talking about, who maintains it?
JEFF ROBERTS: I mean, that’s the radical innovation of it, it’s maintained by thousands or tens of thousands of computers around the world. So, that sort of collectively, everyone keeps up the ledger and proves that, yes, this transaction did indeed happen. Alison paid Jeff. There’s a transaction, and the block chain can be viewed by anyone.
If you’re really into this, you can go to sight called Block Chain Explorer, and that’s where every transaction is posted, and you can confirm it. But the people maintaining it is a decentralized network of computers all over the world. But the fact there’s so many computers that have to agree on what the ledger says, that’s what sort of provides the tamperproof permanent reliable technology underlying Bitcoin.
This gets a bit arcane, but the reason Bitcoin works is, if you decide to lend your computer to this mining effort, or keep maintaining the transaction, you’re also doing something else. It’s what the computer geeks call mining. And every ten minutes, the network issues a new bitcoin, which on the day we’re talking is worth $19,000. So, it’s worth it to participate in it.
Once upon a time, this was just people in their home laptops doing this. Now it’s more industrial conglomerates that have major computers to keep up with the network. But that’s why it works, is there’s sort of a selfish interest. If you participate in this network and maintain the ledger, you can get a reward in the form of a bitcoin, which is issued every ten minutes.
But I should add, for private systems, like Facebook’s money or central banks, you’re not going to really need this decentralized network. You’re going to deputize sort of a few dozen trusted people to maintain the ledger with each other.
ALISON BEARD: And the thing that makes Bitcoin so secure is that to get it in or out, you need a personal number. Right? And if you lose it, that’s it.
JEFF ROBERTS: Right. And that’s sort of the more esoteric part of Bitcoin, is to, if you want to sort of be one of the OG people, you have your own key. You’ve got a public key and a private key. These notions are familiar from cryptography, but basically to hack my bitcoin wallet you would need a quantum computer, which doesn’t exist yet.
But what most people do is, they rely on a service like Coin Base or Gemini or one of these other services that provide Bitcoin for you. And for Bitcoin purists who are like, oh my God, not your coins, not your keys — you’re relying on the man. But for practical purposes, this is the easiest way to do it.
ALISON BEARD: And companies do the same?
JEFF ROBERTS: Yeah. I mean, they have a situation where like when Square bought $50 million worth of Bitcoin, they’re not going to simply leave it on a USB stick in a drawer. There’s now a growing number of custodians, in the same way like there’s an industry if you have stock certificates, you have to store them somewhere. If you have gold bullion, someone will store it for you. Now there’s, you know, a growing number of companies, including Coin Base, but some other ones whose whole schtick is just simply to secure it.
But as the industry gets more sophisticated, there’s now ways devised to require five different people to supply the key. I don’t know if you know what like the Horcrux from Harry Potter is, but it’s basically like that. That’s what professional companies do.
ALISON BEARD: And what’s the lay of the land right now? Who are the big players in cryptocurrency, since that’s the primary use of block chain right now? And how is it being used?
JEFF ROBERTS: Well, for the longest time, I mean, Bitcoin’s been around for more than ten years now, and it’s primarily belonged to the true believers and the ideologues, the sort of people who make your eyes glaze over. But increasingly in recently years, you’re seeing mainstream players take an interest in Bitcoin.
In the past year you’ve seen Square, the big payments company, buy $50 million worth of it. PayPal’s now providing it to everyone. And then meanwhile on the financial side, you’ve got hedge funds, big investors, including Harvard and Princeton University, who now own Bitcoin as part of their endowments. So as it’s driven investment, Bitcoin has really kind of become the gold standard in cryptocurrency, and there’s a big movement afoot to have people buy Bitcoin instead of gold as sort of a permanent store of value.
And some people think this is silly. Some don’t. But the reality is, in the top five stocks bought by Millennials last year — Charles Schwab did a survey, and unsurprisingly, you see Apple, and I think Netflix, but also in the top five is a Bitcoin stock. This reflects, I think, a younger generation’s embrace of software-based cryptocurrency as an asset to own, because it’s simply earlier to own than gold is.
Governments and regulators are getting more friendly to it, which means it’s sort of a less existential threat to Bitcoin being wiped out. And meanwhile, even banks like JP Morgan’s CEO Jamie Dimon’s a famous skeptic. But now, JP Morgan is providing banking services to Bitcoin companies. So, we’re really quite a ways out than we were even three years ago when there a bubble last time around.
ALISON BEARD: And so why is right now a moment that business leaders, managers, not just investors, should know more about crypto?
JEFF ROBERTS: Well, I mean, I think you always have to stay up with new technology. I mean, you know, 15 years ago it was apps. Some people wrote those off as a fad. And then maybe seven or eight years ago it was cloud computing and AI. And these, as with those technologies, there’s a ton of buzzwords and hype and BS surrounding them, but the reality is, you know, now AI, cloud computing and apps are part of our business life. And likewise, the same revolution is sort of underway in the financial sector that’s sort of the plumbing that supports it. And block chain is just such a superior technology to what went before that people can’t ignore it anymore. They might not like Bitcoin. They might not like cryptocurrency culture, but the underlying technology is not going to go away, and it’s being embraced by more and more people.
And let me just add one more point, Alison. The reason it’s so superior is because you can verify a transaction nearly instantly. Right now, to move money around between central banks and big banks, or even at home, if you want to wire money, it takes three days. And it’s a cumbersome technology built on something created in think in the 1960s, the Swift system, which is a messaging system between banks. But it’s a very antiquated one.
And right now, block chain technology is sort of poised to displace that. And you can see that in central banks. China is unrolling this, and I think their thing is basically live, the digital version of the yuan. But Bank of England, Bank of Canada are doing it, and even the U.S. Treasury is exploring how this is going to work. And finally I should add that Mastercard has got a giant program to help central banks disseminate currency using block chain. So this isn’t going to go away, and I think business executives need to at least understand the bigger picture of how block chain works and the role of cryptocurrency within that.
ALISON BEARD: And so even outside banks, financial institutions, whose job is the move around money and currency, retailers need to understand this. Manufacturers need to understand it. Sort of every industry?
JEFF ROBERTS: Exactly, yeah. I mean, the reason why a lot of the corporate sector’s jumping in is because there’s a chance for huge savings. Relying on the Swift system and moving money across borders is really painful. Block chain’s going to eliminate a lot of that, and that’s why you’re seeing Facebook, they’re trying to roll out something called Libra, which is a global cryptocurrency. It’s sort of a private form or money.
And I think we can expect Apple, which is really well poised to do that. They’re on the cutting edge of payments. They have a very good reputation for privacy. So if they can simply issue a block chain based money, they haven’t said they will, but I think it’s a pretty safe bet in a couple of years, they’re going to be doing exactly that.
ALISON BEARD: And so, rather than Bitcoin or other decentralized currencies dominating, it could be in the future that the digital yuan or the digital dollar is what’s running through the system?
JEFF ROBERTS: Exactly, because it’s a lot more flexible to push out. Like for instance, if we had this during the recent push for stimulus money, or PPP loans, it would have been a lot easier to administer. There would have been less fraud. It would have distributed a lot more quickly. And so that’s why, you know, central banks around the world are experimenting with it.
In the case of China, there’s a dark side, though, too, because since all these currencies are traceable, China’s a surveillance state, run by a totalitarian government. So, there’s a risk in that, do you really want to have the Chinese government seeing exactly what you spend? The nice thing about cash is, it’s quite anonymous, whereas if we go fully digital, there’s sort of a risk of surveillance. But I think Western democracies and companies are working to build versions of this that will provide some anonymity.
ALISON BEARD: What are some of the other risks and downsides that have made business leaders and many just individual people hesitant to embrace this trend?
JEFF ROBERTS: Well, I think in the case of Bitcoin and cryptocurrency is, its first use was criminals. But that’s not unusual for the Web. I mean, like pornography’s what built a lot of innovations in payments and streaming technology on the Internet. And likewise, Bitcoin was and is instrumental to a lot of illicit transactions. But people who argue in favor of Bitcoin argue, and I would say correctly, that look, $100 bills, Mexican drug cartels love using American cash. Apple gift cards, Amazon gift cards, any of this stuff can be used illicitly.
But in the case of Bitcoin, a lot of the early adopters were criminals. That’s not really the case anymore. It’s gone mainstream. So the reputational risk is declining. Hacking is still a risk, especially if you’re dabbling in one of these newer, more exotic cryptocurrencies. You don’t know, you know, is someone manipulating behind the scenes? Could it be hacked? But in the case of the most established one, Bitcoin, at this point the network’s pretty bulletproof.
ALISON BEARD: What about the crazy volatility that we saw in the first decade from these decentralized digital currencies? You know, I think that’s what made it seem much more suited for speculative investors than legitimate businesses.
JEFF ROBERTS: You know what? I think the same, the volatility is still there, but much less so. The first big Bitcoin bubble, the price went to $30, then plummeted to two dollars. And ever since, there’s been these boom and bust cycles, most recently in 2017, where it hit almost $20,000 and fell to $3,000, and that was sort of a wipeout of about 85%. It’s likely we’re heading into another similar bubble. But one thing that’s been constant is, every time it crashes, the crash has been less dramatic than the previous time in the case of Bitcoin. Some of the other cryptocurrencies are completely worthless. Some are not. Currencies like Ethereum aren’t going to be part of the future. But the volatility’s still there.
So as an investor, in the same way people invest in emerging markets, you can get a higher yield, but a higher risk. The same is with cryptocurrency, and a growing number of people are saying, you know, OK, start dedicating maybe 2% of your portfolio to crypto. It’s going to be volatile, but in the long run, it’s probably a good idea. And in the case of Bitcoin, I mean, I think it’s hard to argue that over the long term, it eventually goes up again.
ALISON BEARD: What about for corporations, though? What percentage of their resources should they be investing in crypto, block chain, right now?
JEFF ROBERTS: Well, I mean, I think that’s only a question of treasury management, which is above my pay grade. I’m mean, companies like Apple and Google have so much money, and they issue bonds, and they put it into money markets. So, I know Square simply decided to invest $50 million into Bitcoin, because they think it’s a good asset to invest in. A handful of other companies are doing the same. And I think we’ll see more of that. But that’s probably, you know, I think a mainstream company, like, you’re not going to see Walmart or Nike doing that. But financial companies I think increasingly will.
But while doing that, they do have to pay attention to how people are paying, the transformation of payments that the pandemic has accelerated. People already were moving away from cash, but now people are actually afraid of cash, because cash is dirty. The adoption of digital wallets is taking off exponentially. And it’s going to continue to do so. And those wallets will be tapping into things like the Visa and Mastercard networks, your bank account, but increasingly into cryptocurrency. Next year, PayPal is going to let any merchant accept, let people pay with Bitcoin, and convert it instantly to cash. So, this is part of the sort of payment plumbing that’s going to be here for good.
ALISON BEARD: And you talk about Bitcoin, cryptocurrency, the block chain, also as a means of financing corporate endeavors. So talk a little bit about that trend and how you see it developing for startups, but maybe also more established companies.
JEFF ROBERTS: I mean, that’s where it’s going to get really interesting. The company I write about, Coin Base, which is in North America, at least the first onramps go to Bitcoin. Get Bitcoin, that’s probably where you’re going to go, because it operates a lot like online banking. And they’re the sort of oldest, more respected and most sort of regulatory sound company. But if you want to push further out, block chain technology is, you know, the people I’ve talked to say that the way companies issue shares is in the future going to be in a block chain, because it’s going to be cheaper and more efficient.
The current IPO mechanism involves a lot of clearing and waiting a day for stocks to change hands and stuff. If you can put this all in a block chain, like companies like Coin Base want to do, that’s going to make stock trading and clearing a lot faster and cheaper. So what’s going to get really interesting is when Coin Base goes public, what they want to do is issue tokens on a block chain as part of their offering, just as, you know, when Airbnb goes public, they issue shares, and there’s a bunch of Wall Street clearing houses that control those and keep track of them. If you can do that on a block chain, it’s a lot more secure and efficient, and that’s, I think, what’s going to happen. But I think the SEC is still getting its head around that.
ALISON BEARD: Yeah, so let’s talk more about regulation. How are regulators around the world approaching both cryptocurrencies and this idea that block chain can be used for so much more?
JEFF ROBERTS: I think that smart people at central banks really understand the technology’s potential. But also, you know, for these central bankers work hand in glove with treasury departments, whose job is to police money laundering and crime, and those enforcement agencies — from the IRS, the FBI to the Treasury — for very good reason are watching how Bitcoin and cryptocurrency is being used to launder money and facilitate criminal payments.
So, we’re going to sort of see this tension play out where they’re going to ramp up the enforcement, which is a legitimate thing to do, while also embracing the technology to have the benefits of it. But you know, as before, like the Internet itself at first was a haven for crime. Companies, and eventually governments, realized this technology is too useful and too important to reject. So, they’ve come around to facilitating its legitimate use, and we’re going to see the same thing, and are seeing the same thing in the case of cryptocurrency and block chain.
ALISON BEARD: And what are the macroeconomic, geopolitical implications of all of this? You mentioned that China is developing its own digital currency. So what does that mean for international business and competition?
JEFF ROBERTS: That’s a very big question, one that’s slightly above my pay grade, too. But the short of it is, it turns around the US dollar, which is the globe’s reserve currency, and which is an immense benefit to the U.S. right now. Along with the military, America’s most powerful asset is the fact that everyone across the globe settles their transactions in U.S. dollars.
China, who’s our geopolitical adversary, is trying to undermine that, in part by deploying digital currency, which is a lot easier and more efficient to use. So, their digital yuan, it’s a safe bet that for their belt and road initiative, where they’re cooperating or coercing other countries in Latin America and Africa, they’re going to start pushing for those countries to start doing settlement in the digital yuan, rather than the U.S. dollar, with the long term goal of undermining the greenback’s status as the world’s reserve currency.
And very smart people at the U.S. Treasury and at the Federal Reserve are aware of this and are trying to figure out how to encourage the innovation of those with block chain without giving up the primacy of the U.S. dollar. I do know people in the top of the Treasury, and even in the military are watching this because the threat to the US dollar is a threat to the U.S. So, and that’s the kind of greater geopolitical game underway.
ALISON BEARD: Everything that you’re talking about, the fact that sort of most companies need to understand this better. Governments around the world need to understand this better. But it remains this very niche field. Is there a worry that there’s not enough talent to make it all happen? Are people fighting for cryptocurrency experts, block chain experts?
JEFF ROBERTS: Yeah, but I mean, I think, again, it helps to see it through the prism of earlier hype cycles. Remember AI, which still is a buzzword, and companies were raiding university departments to hire their professors. Likewise, cloud computing. But you know, when I first started covering Bitcoin in 2013, most government officials didn’t know what it was. People in universities didn’t know what it was. A couple of protagonists in my book, one of them tried to write his master’s thesis on it, and his professor actually at Harvard Business School said, no, don’t do that, because this is a fad. That was in 2014.
Now, universities across the country have block chain courses in different departments, economics and sociology, in business schools, and so the talent pipeline is certainly coming up. And in my covering of Coin Base, they said increasingly, people applying to work there, you, their resumes say JP Morgan and Goldman Sachs. So it’s just, I think, a generational shift as more of these courses go online, more people, more business school students embrace it. There’s now fintech clubs at Penn and at Columbia and everywhere else. So I think this is here to stay. And the talent to build it is coming online every day.
ALISON BEARD: What do you think are the biggest growth areas for cryptocurrency and block chain in the business world going forward?
JEFF ROBERTS: Well, I mean, I think behind the scenes payments, anyone who can make payments more efficient, and there’s a ton of energy and money going into that. I think the way we pull out cards and handing it back and forth is just unsanitary. And it’s interesting, like in Asia, they sort of skipped a generation of payment technology, and it’s all done through phones. And I think that’s coming here quickly. So anyone who can make that simpler is going to be in a good position to win. And I think in terms of making it attractive to customers, too, letting them pay however they want from Bitcoin, from their phone, that’s just going to be a part of business right now, that, I think anyone who wants, that’s sort of going to be table stakes going forward.
It’s going to be challenge for other startups to come in, because, right now, it’s going to be a battle between Coin Base and the banks, and Facebook and Apple and Square and PayPal, so it doesn’t leave a lot of room for tiny startups to come in. The action’s going to be among the big corporates and in the government. But I mean, I think anyone who can sort of innovate and make this more approachable and easy to use is going to probably do well.
ALISON BEARD: So if I’m a manager at a company who’s not investing at all in cryptocurrency or block chain currently, and by investing I mean studying, putting resources behind it, to figure out how it’s going to impact your business, and I’ve bought into your case, how do I make the argument within my own company, and where do I start? What’s my first step in introducing this to management?
JEFF ROBERTS: I mean, yeah, I think you want to sort of start practically, because there’s no shortage of consortiums and sort of consultancies that will come in to explain you block chain for a lot of money and offer you a private block chain thing, and you’re probably, as a manager, going to write out checks for several hundred thousand dollars. But I would start with more first principles. I’d tell people, just get a Coin Base account, or if you don’t want to do Coin Base, there’s a company called Kraken, or Gemini. And simply work on it. Find out how it works.
You can also use Coin Base, which acts like an online bank, or you can get your own hardware wallet. Those things cost about 50 bucks, and you can store your Bitcoin yourself. And I think just let everyone try that, and move it back and forth and see how it works. That’s probably the best way to educate people about it.
I think that’s the first step, because this isn’t going to go away, and to really underscores this. In the last bubble in 2017, Warren Buffett called it rat poison squared. Jamie Dimon said he would fire anyone for trading it for being an idiot and called it a fraud. And you know, those, I think, are probably the two biggest names in American finance. And now, you know, their tune has evolved. Jamie Dimon still doesn’t love it, but JP Morgan’s using it. So you know, this is not going to go away.
It’s like when the Internet came around. There’s a lot of reason to hate the Internet. It’s full of scams. It’s full of porn. It was full of like disreputable stuff. But as a technology, you know, I think it would have been foolish to say, this is a fad. Likewise, you know, block chain, cryptocurrency is here to stay, so you know, whether you like it or not, you have to learn it. And I think the more you play around with it, I think there’s a lot of really cool dimensions. New tech is fun. Just like apps and like cloud computing and like AI, this is another of those technologies that’s here, and rather than disdaining it or being afraid of it, try it, and then you know, make up your own mind.
ALISON BEARD: Jeff, thanks so much for being here.
JEFF ROBERTS: Alison, thanks for having me.
ALISON BEARD: That’s Jeff Roberts. He’s the author of the new book, Kings of Crypto, One Startup’s Quest To Take Cryptocurrency Out of Silicon Valley and Onto Wall Street.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhart. Adam Buckholts is our audio product manager.
Thanks for listening to the HBR IdeaCast. I’m Alison Beard.