Valery Vavilov and George Kikvadze of Bitcoin mining and blockchain software company Bitfury discuss why the firm has partnered with the publicly traded Hut 8, how it plans to branch out into mining other crypto assets, and how it chooses where to open mining operations. They also explain how low the bitcoin price can go before mining will be unprofitable for them, what their new blockchain analytics tools Crystal can do, and why they often choose people outside the blockchain/crypto industry to attend the Blockchain Summit they co-host on Richard Branson’s Necker Island. Vavilov also tells the story of a childhood experience that has influenced Bitfury’s decision to work so much with governments and regulators, and he and Kikvadze describe the company’s new blockchain analytics tool, Crystal, plus its hand in launching other blockchain-and-government-focused organizations such as the Blockchain Alliance and the Blockchain Trust Accelerator.
Bitfury: http://bitfury.com/
Bitfury’s origin story as told by Bill Tai: http://unchainedpodcast.co/maitai-globals-bill-tai-on-why-blockchain-is-the-6th-wave-of-technology
Hut 8: https://www.hut8mining.com/
Exonum: https://exonum.com/
Necker Blockchain Summit: http://www.neckerblockchainsummit.com/
Blockchain Alliance: http://blockchainalliance.org/
Blockchain Alliance on Unchained:
http://unchainedpodcast.co/how-the-blockchain-alliance-helps-law-enforcement-with-bitcoin-crime-and-developments-like-the-daoCrystal: https://crystalblockchain.com/
Blockchain Trust Accelerator: https://trustaccelerator.org/
Pilot with Coca-Cola and State Department: https://www.reuters.com/article/us-blockchain-coca-cola-labor/coca-cola-u-s-state-dept-to-use-blockchain-to-combat-forced-labor-idUSKCN1GS2PY
Emercoin: https://emercoin.com/en
Transcript:
Laura Shin:
Hi everyone, welcome to Unchained, the podcast where we hear from innovators, pioneers and thought leaders in the world of blockchain and cryptocurrency. I’m your host, Laura Shin. If you’ve been enjoying Unchained pop into Itunes to give us a top rating or review. That helps other listeners find the show and be sure to follow me on Twitter @Laurashin. Unchained is sponsored by Preciate. Founded by Ed Stevens, Preciate is building the most valuable relationships on earth. In each episode of Unchained, Preciate sponsors the recognition of an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out.
Bitwise: 00:00:41
This episode of Unchained is brought to you by Bitwise Asset Management. Last year, Bitwise created the world’s first cryptocurrency index fund. The Bitwise HOLD 10, which holds the top 10 cryptocurrencies and rebalances monthly. The fund has several hundred LPs and is currently accepting accredited investors. To learn more and invest in the Bitwise cryptocurrency index fund, visit www.bitwiseinvestments.com/unchained.
Keepkey: 00:01:07
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Laura Shin: 00:01:33
Today’s guests are Valery Vavilov the co-founder and CEO of Bitfury and George Kikvadze, vice chairman of the board. Welcome Val and George. Let’s start with Val. How did you get into Bitcoin and what were you doing before?Valery Vavilov: 00:01:54
It was in 2010, when I was introduced to Bitcoin for the first time. I learned about this technology and understood that this was not just a cryptocurrency, but this technology can really change this world. Can really digitize everything, what is not digitized yet, because if you look at this world right now, we’re living in the digital world. We can send the information all across the world and on one hand everything is digitized but on the other hand, anything of value and all our assets are still on paper. Your house is a paper. Your car is a paper. Your company shares is a piece of paper. Even all of us, it’s a piece of paper or a piece of plastic. It’s your identity card or your passport. So why it’s happened? Because Internet was not designed to secure transactions. And, blockchain and cryptocurrency and all this technology is by default designed for secure transactions. So that’s where this technology will be able to digitize the most important part, the assets and anything of value. Once I understood it, I put aside all my projects and went in on how to do this thing.
Laura Shin: 00:03:12
So 2010 is super, super early. Obviously Bitcoin, the software only started running in 2009. How did you get introduced to it so early in? What had you been doing before?
Valery Vavilov: 00:03:22
So before I spent many years to create different kinds of registry systems for Latvian [Inaudible] and did some consulting and start ups.
Laura Shin: 00:03:35
OK. And George, what about you? How did you discover Bitcoin and what had you been doing before?
George Kikvadze: 00:03:48
Well, Val and I have a common friend who now runs Bitfury Capital, Marat Kichikov. And, Marat kept telling me and bugging me about Bitcoin as early as when price was $10, $20. Obviously, it was early 2012, 2013, that time period. And, he kept coming back and coming back because there’s this Latvian entrepreneur I’d like you to meet to discuss this cryptocurrency. And, we finally met and I really liked the idea and the concept. I did spend a little bit of time diving into it and called a couple of my friends that were in Silicon Valley and actually the first person that I got connected was Wences of Xapo. And, after talking to Wences, I realized we had very similar backgrounds and experiences and I got a lot of comfort and obviously then, there was a lot of deep diving into online resources. And, I realized that this could be something really huge and, decided to join up Val in his journey to embark on this project.
Laura Shin: 00:05:04
So I have a somewhat burning question for you guys and it’s surprising to me that I’ve never asked you before because I know you both pretty well. And also, because people may remember, listeners may remember that one of my first podcast guests was Bill Tai. And, near the beginning of his career he was a chip designer and during that episode he told me that the way he came to invest in Bitfury was that he saw Val and I guess the other Bitfury co-founders on this message board and he noticed that none of them had a background in chip design, but they wanted to design an ASIC, which is a chip built for a special purpose and they wanted to build one for bitcoin mining. And he saw that what you guys built with something truly unique and novel and that you were able to do that because you didn’t have this sort of background in conventional chip design that someone like him would have had. And I never found out later whether or not that story is true or whether he had, cause obviously he wasn’t like in the middle of it. And so I just always wanted to find out from you guys how Bitfury got founded?
Valery Vavilov: 00:06:18
This story about the chip design is really interesting because it was our first chip and we went all in to create this full custom chip. And, full custom chip, it is very hard to do because you literally need to create your own transistors. And, because we didn’t have experience before, we just didn’t know what is impossible. And when you don’t know what impossible, you think is possible and you just do it. And we did it and it worked. But, it was very interesting journey. And, now we’ve created six generation of chips, but this first chip, it was very interesting story. We collected money from friends and family. So the first investments, was very hard to get because I reached out to some of the investors, created the business plan, talked about Bitcoin, about cryptocurrency, about blockchain. But nobody believed back in 2011, 2012. So we just collected the money from friends and families who belived in our story. And went all in and here we are, now we’re a global company with people from 16 countries and more than 500 people.
Laura Shin: 00:07:46
Oh Wow. Yeah. That was actually gonna be my next question. How many employees do you have? So you have more than 500 and how many, and you have 16 offices or…
Valery Vavilov: 00:07:58
Not really 16 offices, but people from 16 countries. Offices in Amsterdam, San Francisco, D.C., London, Tokyo, Tbilisi, Canada, Norway and so on.
Laura Shin: 00:08:13
And also where are your mining operations?
Valery Vavilov: 00:08:13
So our main mining operations are in the Republic of Georgia, in Iceland, in Canada and in Norway.
Laura Shin: 00:08:25
And how do you choose where to locate a mining center?
Valery Vavilov: 00:08:33
So first is the energy price, business climate, cold weather. But the most important parameter is the energy price and green energy because we as a company are committed to lower the carbon footprint. That’s why we’re choosing locations was the cheap energy but green energy.
Laura Shin: 00:08:52
And how do you define green energy?
Valery Vavilov: 00:08:57
Green Energy is renewable energy, for example, hydro thermal and everything renewable.
Laura Shin: 00:09:04
I was going to ask you about that. So I noticed that you have these new mining centers that you’re opening in Canada and by the way, they are in what I think are some of the most interestingly named towns I’ve ever seen. Like the city of Medicine Hat and the other one that caught my eye is Drumheller, which is actually nicknamed, “The dinosaur capital of the world.” And I was so excited by this and I wanted to ask you guys to invite me to do some sort of story that involves me going to the dinosaur capital of the world. That would be amazing. But, I actually was curious about that because I think in that area, what kind of energy is it? I looked it up and it looks like in those areas they use a lot of natural gas. And I wondered how green that was
Valery Vavilov: 00:09:57
In Canada, they are using coal or natural gas.
Laura Shin: 00:10:01
So I don’t know the carbon footprint of natural gas, but I presume it’s not zero?
Valery Vavilov: 00:10:09
Carbon footprint on natural gas, I think is not zero but is plus/minus okay.
George Kikvadze: 00:10:13
And it’s much better than the dirty coal that is being burnt in many locations around the world, unfortunately.
Laura Shin: 00:10:24
Like China, I have not looked into this, but obviously one of your biggest competitors is Bitmain and they have a lot of operations in China. So I don’t wanna make any claims as to what types of energy they’re using, but let’s just talk about kind of the moves that you’re making in general in the wider context of what’s going on in the mining world. You now have a 49% stake in Hut 8, which is a Canadian company that now controls or will eventually control 35 Bitcoin mining centers in North America and it’s also now publicly traded on the Toronto Stock Exchange. Why did you decide to partner with Hut 8 and how does this move fit into your overall strategy?
George Kikvadze: 00:11:08
That’s a very good question. So I think if you go back four or five years ago when there were a lot of chip companies. A key to success were two factors, Laura, it was execution on the chip and keeping the promise. But also, nor less important was the access to capital and I think it was very tough for us to go and convince investors in Silicon Valley and other institutional investors to invest because they would see other companies coming in claiming they had better technology. We now know that all of these companies are extinct or have pivoted away, but they have costed us a lot of traction or that costed us a lot of resources in order to accelerate the deployment and global expansion. As a result of that, if you look back for the last four years, we have really funded ourselves through angel investor such as Bill Tai and friends as well as bootstrapping. In other words, taking the Bitcoins that we mined, selling them on exchanges and they’re reinvesting in the business. We calculated actually that had we found someone with deep pockets that believed in our story and bet on our technology in the same way that Bill Tai has done so, but with large stash of capital, we would have a roughly $350 million on chip designs on wafers, on electricity cost, on the Cap X rolling out, but we would be sitting right now on 860,000 bitcoins. So that is the equation. And to all the VCs that didn’t believe or didn’t take that bet, I understand it was early in the game, but at the end of the day, that is an outcome.
George Kikvadze: 00:13:03
So in this case, where you keep executing but you don’t have an access to capital, it’s as good as moving down the highway at a 20-30 miles per hour. So I think one of the success stories of our Chinese competitors has been not only executing, but also the ability to access capital from local, much more risk tolerant sources. Whether it’s government, non-government, it’s a different story, but at the end of the day, they’d been able to do that. And that’s the difference between ordering a 10,000 wafers or 50,000 wafers. So what Hut 8 does for us, is for the first time, allows us to partner up with credible institutions. And in this round we had some 57 large institutions, including some extremely well known and regarded international players. It allows us to go and raise capital from institutions and for us then to take that capital and to deploy that to build out the world’s largest crypto mining facilities in Bitcoin, in Ethereum, in Zcash, Monero, and other major protocols that we believe will be of interest to institutions. So Hut 8 is an essence is creating an institutional structure, whereas long-term capital can come in and fund the acceleration and development of Bitfury, and locating the cryptomining in places where there is rule of law. In places where your assets will not be nationalized. In places where your assets will not be brought down by some corrupt bureaucrats and in places where you will be able to build around a know how centers. The excellent centers and develop really long-term relationships with local academia and governments to embark on this amazing story of blockchain.
Laura Shin: 00:14:52
So everything that you said make sense to me and sound smart in terms of strategy against your competitors. But one thing that caught my attention was you said you want to build the largest mining operation. So how do you do that at the same time that you don’t add to the centralization of these cryptocurrencies? Because one thing that’s a little bit different from you guys as a mining operation compared to your competitors is that you don’t operate what’s known as a mining pool in the sense that you don’t have individual investors or other institutions that rent or I don’t know if rent is the word, but kind of own a slice of what you’re mining and then get a payout from that. Everything as far as I understand all the block rewards that you mind go to you. So that is even more centralized than one of these pool operators where the components of their pool are individuals who can easily move to another pool if they feel like it and therefore reduce the power of that mining operation.
George Kikvadze: 00:15:59
That’s a very good question. So from the standpoint of centralization. Obviously we are super cautious about this. We learned through our mistakes. If you remember four years ago there was a debacle with GHash.IO. And that was a learning experience and you’re absolutely right, the philosophy of the Bitcoin protocol is decentralization. So obviously we’re not talking about developing Hut 8 as a super dominant, crypto mining facility that will commence some, a 40%, 30%, or even 20%. You know, I think the target would be to shoot for something at 10-15% and in regards to the pools, we will be announcing our public pools. And actually if you look at the hashrate that’s attributable to Bitfury, it’s actually, it’s a magnitude less than all the equipment that has been sold to the third parties. Primarily to the family offices and more of the institutions and those that have been allocated throughout the network via other pool. So we actually are super-conscious of the decentralization and we’re super conscious of spreading around the mining capacity across the board.
Laura Shin: 00:17:13
Tell me more about that, about I guess institutions that are buying. Are you talking about your block box? Is that what they’re buying? If so, explain what that is. Because I don’t know if I fully understand it. I believe individuals cannot buy mining equipment from you, but at the same time, I believe you do sell these block boxes, but I’m not sure what the situation is.
George Kikvadze: 00:17:34
So we’re focusing mostly on a B2B business. And, the minimum entry point is a million/million+. So from that angle, we have several wealthy individuals that have bought and located this black boxes around the globe. As well as, we have teamed up with some corporate players that have bought 5, 10, 20 and 40 in some cases. We’ve built large data centers for sort of a corporate players. So we are not selling our equipment to mom and pop so to speak We’re not on a B2C side. I think there are players that are addressing that market, but we are building the capacity and expanding on capacity, working on a B2B and addressing a corporate and increasingly looking to address the government sector given our reputation, corporate governance and the relationship that we have. I think there’s a place for everybody.
Laura Shin: 00:18:38
We’re going to discuss your summits on Necker Island and your new product Crystal and more. But first I’d like to take a quick break to tell you about our fabulous sponsors. Founded by Ed Stevens, Preciate is building the most valuable relationships on earth. In each episode of Unchained, Preciate sponsors the recognition of an individual or group in crypto for an achievement. Today, Preciate is recognizing Caitlin Long, a blockchain leader who helped drive recent legislative advances in the Wyoming legislature. On her website, Caitlin mentions many others who contributed to the project as well. For that, Caitlin gets Kudos for sharing Kudos and thanks to Caitlin and to everyone who helped her get a big win in Wyoming. Listeners, if you know someone in Crypto who should be recognized in a future episode of unchained, take action and go to preciate.org/recognize.
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Bitwise: 00:20:26
Bitwise Asset Management is the creator of the world’s first cryptocurrency index fund, the Bitwise HOLD 10. The fund holds the top 10 cryptocurrencies by five year diluted market cap, rebalances monthly, and takes care of secure storage and taxes. It’s an easy, secure way for long-term investors to get diversified exposure. Bitwise is backed by Khosla Ventures, General Catalysts, Blockchain Capital, Naval Ravikant, and several others. They’re a trusted partner to individual investors, wealth managers, family offices, and large institutions who are navigating the cryptospace. The fund has several hundred LPs and is currently accepting accredited investors. To learn more about the Bitwise cryptocurrency index fund or download research, visit www.bitwiseinvestments.com/unchained.
Laura Shin: 00:21:14
I’m speaking with Valery Vavilov and George Kikvadze of Bitfury. So let’s talk about your expansion to other cryptocurrencies. As you mentioned before, you will be mining other crypto assets from bitcoin, although I do believe, at least up until now it’s been mostly bitcoin or maybe even only bitcoin that you’ve mined. How will you decide which other cryptocurrency to mine and have you decided which other ones to mine yet?
Valery Vavilov: 00:21:41
Yeah, we’re working on solutions for other cryptocurrencies. So we will have an update on this once its ready, but a way of thinking about this is we are working to deploy these solutions for other cryptocurrencies.
Laura Shin: 00:21:58
And why have you decided to expand now? I mean, you were very much focused as a company on Bitcoin for quite a long time.
Valery Vavilov: 00:22:08
Because we see there is a need for equipment for other cryptocurrencies and we see in the space of public blockchains there will be not only one public blockchain. There will be a several public blockchains. So that’s why we decided to move to this direction as well.
Laura Shin: 00:22:29
And are you going to do the same as you did with Bitcoin where you develop specialized chips for each blockchain?
Valery Vavilov: 00:22:36
Either specialized chips or specialized custom equipment that efficiently mines and process transactions of different altcoins
Laura Shin: 00:22:47
And you plan to do the same where you open your own data centers and maybe you tap the B2B market a little?
Valery Vavilov: 00:23:01
The business model will be the same as now. We will sell it to high net-worth individuals, institutions, and most likely we’ll find some small part to ourselves as well.
Laura Shin: 00:23:14
The price of Bitcoin, at least right now, at least at the time of this recording, has fallen from the highs it saw in late 2017 of nearly $20,000 to around $8,000. And, as we know from the 2014 and 2015 years, there have been periods where bitcoin has sort of dwindled down after a big run-up. What’s the lowest price you can mine at and still be profitable?
Valery Vavilov: 00:23:43
So it depends, of course the location, because the price is dependent on energy price. But preliminary calculations shows that it’s something like $2,500 per bitcoin. $2,500 – $3,000 per bitcoin. Depends on the location.
Laura Shin: 00:24:05
Oh Wow. OK. So it looks like you guys still have quite a bit of runway. Well, I was curious, do you normally sell your bitcoins immediately after the 100 blocks? I guess if you mine then you can’t sell the block reward the bitcoins that you win from mining a block, you can’t sell them for at least a hundred blocks. So do you normally sell them immediately or do you keep them as long as you can or what’s the strategy there?
Valery Vavilov: 00:24:33
No, we don’t have a particular, let’s say strategy. We’re definitely not selling immediately, but we’re selling from time to time to keep the cash balance.
Laura Shin: 00:24:49
As far as I understand, after starting in hardware, you expanded your services to software services and I believe you were selling them mostly to governments. For instance, you have been working with the government in Georgia to put the land titling system, there on the Bitcoin blockchain or to develop a system that can at least put a hash of the records on the Bitcoin blockchain. Why did you decide to go in that direction of offering blockchain services for governments?
Valery Vavilov: 00:25:21
When we started to talk to regulators and decision makers, there will be no fast move of institutions and governments to public blockchain. Just like the same happened 20 years ago when Internet was created, These institutions and governments didn’t switch to Internet immediately. Yeah they thought the technology as OK, the technology is perfect, but we don’t know who is using this technology. We don’t know who own this technology. We will use this technology and we’ll create our own intranets. After a lot of Intranets were created, they interconnected it using Internet when they become more comfortable with this. Same is happening in the blockchain space. There is public blockchains. But to move the public blockchain institution need to become more comfortable and to become more comfortable, they need intermediary step. That intermediary step is the private blockchain.
Valery Vavilov: 00:26:25
So that’s why in 2015 we decided, “Okay, there is a need for such a solution. And, this solution also will help to expand the awareness of public blockchain.” We decided to put some money and create the framework for private blockchain. And, that’s how we created the platform called Exonum. And now using Exonum platform, you can use it to blockchain-ize any government services. Institutions can use it or different kinds of organizations can use it. It’s some kind of operating systems, that you can use to easily deploy private blockchain solutions for your organization. But, every private blockchain is just software. That’s why we’re using Bitcoin blockchain as a security layer to secure the private blockchain. With so called, “anchoring.”
Laura Shin: 00:27:26
Earlier you were talking about how for your mining business, you’ve decided to focus on the B2B business and you could have done the same here and it sounds like Exonum was a step in that direction, but I know Exonum was announced, I believe last year and your work with governments started quite a bit before then. So why did you focus on governments initially?
Valery Vavilov: 00:27:54
Because the government, you could put it this way, you can put the government as the one of the biggest service providers for the citizens because every government provides thousands of different services to its citizens. Most of the services are very inefficient. For example, land title registration to do the land title registration, you need to go to different third parties. You need to get different types of checks and balances, papers and so on and so forth. From country to country., this process could take from few days to a few months just to do one operation. Why it’s happening? Because you don’t trust the system. You don’t trust the data in the systems and every time you do this transaction you need to do these checks again and again and again. What blockchain and how blockchain can help? Blockchain can add this trust because once you place data on a blockchain, it cannot be deleted and it cannot be altered by these. You don’t need to check the same operation again and again, once the data is on the blockchain. This is not only for land title, but for any other service, what you’re getting from the government and we believe, that with the help of the blockchain, any government could reduce first of all the cost of each service and could reduce the time of each service that will make the government much, much more efficient.
Laura Shin: 00:29:42
And Val, I believe you have personal experience with government not working for the citizens. And I’ve heard you talk before about how you believe that at least in some governments or in some countries that isn’t always the case. And can you tell listeners your personal story with government not working for its citizens?
Valery Vavilov: 00:30:11
I was born in Latvia. Lativa is a small country, with a population of roughly 2 million people. It was part of the Soviet Union. Now, it’s part of the European Union. And, when the Soviet Union collapsed, I think I was 12, by this time, my parents and parents for a lot of my friends just literally lost everything. Money become paper, they lost the pensions and so on and so forth. And, I was very small, but I felt it. Yeah, because one day my mother told me, “OK, no more toys.” But as a technologists, and I’m in computer science since, I was eight. I always thought, “OK, how can I use the technology to make the systems to work for the people?” Because many, many years after this happened with me, with my family, with a lot of families, now countries. I understood, “OK, why it’s happened?” Because of the systems that were not designed to work for the people.
Valery Vavilov: 00:31:25
And you know, when in 2010 I learned about cryptocurrency and in 2011, I understood what this technology could be used not only to move money but to digitize the assets and to add trust into untrusted networks. I understood this is the perfect technology to make any institutions to make any system work for the people and to make any system to be trusted because what is happening right now, for example, in a lot of countries, I know in US, in Europe, all the systems working plus/minus fine. And you can trust land title, registration and so on. You can move money quite fast from bank to bank. But, in majority of the countries in this world and from the part of the world where I am from, people can lose properties and a land titles just because somebody’s changing credit cards in a database. And This is a really huge issue because if you, for example, some Sys Admin, your are making a small salary and the country is corrupt and the system is corrupt, somebody can go and negotiate with you and you’re just changing records and the owner of the company. The owner of the property is the different owner and there are a lot of such cases all around the world. So with the help of the blockchain. It becomes impossible. So it is solving these global issue.
Laura Shin: 00:33:06
So this is the perfect segue for us to talk about the Necker Island blockchain summit that you co-host with Bill Tai and which I’ve had the honor of attending now twice. Thank you for those invitations. So for me, obviously I’ve been to a ton of different crypto and blockchain conferences, but I don’t remember if I’ve told you directly, but I’ve told at least some of the other organizers that this conference for me sticks out because you guys don’t invite all the same people that attend all the other crypto conferences. You get pretty creative and strategic. I think with your choices, for instance, at the most recent summit, there was the president of conservation international who was wonderful, but she fully admitted, “Oh, I don’t know a ton about blockchain technology.” There was an officer from the Rockefeller Foundation and these people were mixed in along with crypto insiders, like Vinny Lingham and Sandra Ro and Michael Casey. But how do you select who you’re going to bring in? What’s your goal in bringing together a group that’s that eclectic?
Valery Vavilov: 00:34:23
We want to create the mix of the people, part of the people who could literally understand the technology from different angles. And the second part of the people who are the global decision makers or regulators or just a very important person who can make an impact. And the education is a key. So the biggest issue in our industry and in any new technologies, such a disruptive technology as a blockchain is the lack of education. So you need to educate people. You need to explain them why this technology is so important, how this technology can change our lives better, how the technology really can work for the people then change this world to be a better place. And the Necker Island is perfect location because first of all, of Richard Branson’s energy itself creates this island so that you start thinking completely differently. Your mind on this island just opening and when you’re living in this islands for the four days with all the people. A lot of interesting ideas came into action and one of the most important component of course, the education, exchange of ideas. And then when all these people from let’s say, two different worlds. From the world of technology and the different world they come together and discuss different cases, some good ideas happen.
Laura Shin: 00:36:13
Well, let’s talk about some of the things that have come out of the summit because there have been so many. And it’s kind of interesting to look back because, you know, at the time it’s just kind of like, “Oh, we have this idea. We’re going to try to bring this group together for…” I could list a whole bunch. It’s like the blockchain trust accelerator… so I’m just going to list all these then please define them for listeners. There’s the global blockchain business counsel. There’s the blockchain alliance. I feel like there are others I probably miss. But why don’t you, for the listeners kind of list what they all are and what these organizations are doing?
Valery Vavilov: 00:36:50
So blockchain alliance is the perfect example. The blockchain alliance is the organization that literally was born on Necker Island. Why this organization was created because when social disruptive technologies happening, the worst thing that could happen is not smart regulation. Regulation is good. But regulation for such a disruptive technologies should be very smart. It’s like, you have rails, you have an old train. You are using these rails to move around something and you’ll create a completely new train, hyper loop with magnetic fields, a very high speed and so on. So for the new train, you cannot use the old rails. Otherwise, this new train will be as efficient as the old one. So for the new train you need to create completely new rails. And this organization was very important to join together industry experts and law enforcement and the regulators so that when law enforcement and the regulators have some questions or have some issues, they always have industry experts who are ready to help. Who are ready to answer the questions, who are ready to find the solution together and who are ready to help how to solve it without doing things that not need to be done.
Laura Shin: 00:38:42
So listeners should go back and listen to that episode I did with Jason Weinstein and Alan Cohn, of the blockchain alliance because it was a very interesting episode. And they talk a little bit more about the origin story of it. And apparently I think the idea literally came about while some people on Necker Island were hanging out in a hot tub. I almost said bathtub, definitely not a bathtub. But anyway, it’s a very interesting story. And actually this also now is a good segue to talk about your new product that you announced, Crystal, which is a blockchain analytics tool for law enforcement. And, as you described it in Medium it quote, “Uses advanced analytics and data scraping to map suspicious transactions and related entities.” So how do you know if a transaction is suspicious and then what data are you scraping there?
Valery Vavilov: 00:39:40
We’re analyzing a lot of public data on different forums, on social networks and we created some sophisticated algorithms to analyze the transactions to untangle mixed transactions. So with this kind of algorithm you significantly increase the probability of understanding where these bitcoins are coming from. But this tool, we spent almost two years to create this tool and the idea of creation of this tool was after discussing with banks, institutions and different companies. After discussing what is Bitcoin. We understood, “OK, bitcoin is on one hand is very transparent system, all transactions are fixed on the blockchain. But it’s so hard for institutions to use this.” It’s like using MS-DOS comparing to Windows. And that’s why with the help of this tool, you’re just creating a very easy to use instrument to give comfort to law enforcement, to banks, to hedge funds, to insurance companies and other organizations who just want to see where those bitcoins are coming from. And, I think this tool will help to get this comfort to institutions.
George Kikvadze: 00:41:16
Yeah. I mean, I think one important thing here is that the genie is out of the bottle. We are in hundreds of billions of value for the crypto assets and increasingly, more and more individuals are sort of asking their financial institutions to allow them to buy currencies, to trade crypto-currencies. And obviously post 2008, the financial institutions have been laden with a lot of compliance and they do have a lot of headaches in terms of dealing. So if you come up with a product that works, that adds value, we see a humongous opportunity to go in and to basically solve a choke point was financial institutions, with insurance companies, there are some healthcare applications, data analytics, and obviously, law enforcement. And, what we’re seeing is one of the myths of bitcoins has always been in a bitcoin for criminal money. But actually if you dig deeper, the usage of bitcoin by criminals, as Jason Weinstein, our board advisor has said, “You know, if you’re a criminal, you should not just walk away. You should run away from bitcoin.” And surely the elicit activities of the crypto have moved to other protocols which are much more anonymous than Bitcoin. But crystal is really a solution for a huge financial industry opportunity. Alongside the law enforcement, which we believe there is a need for that. And there’s a lot of synergies in that work.
Laura Shin: 00:42:55
And what are the financial institutions wanting to do with the Bitcoin blockchain? Because, as far as I understand, at least from the headlines that we see on CNBC and other sites like that, a lot of the heads of these companies are sort of disavowing Bitcoin and saying they won’t let their customers trade in it and stuff like that. So who of them are interested in using this?
George Kikvadze: 00:43:20
You know, they come back and apologize for that. So, at the end of the day, you see the Uber-ization of the industry, right? I mean, you can have head of a post office, saying that, “I don’t like email.” But if the constituents are coming and saying, “Hey, can you install PCs in your post office so I can be sending email?” In democratic countries, it’s a bottoms up, it’s the grass roots movement. And that’s what we’re seing. So when you have massive amount of folks coming in and bugging their bank officers from the standpoint of buying cryptos and such. There is obviously a demand from the population and I think it’s a matter of coming in with a solution through the compliance officers and to the banks that addresses those needs that allows them to satisfy that demand. Because if that is not satisfied in one jurisdiction that you are going to have regulatory arbitrage. I think everybody is aware of that. So we believe there’s a huge opportunity to be pioneers to entrench ourselves and to build out this industry.
Laura Shin: 00:44:28
Yeah, I guess we are seeing that already at least in the ICO space. Where a bunch of ICOs are moving to Switzerland. But, I actually wanted to go back because Val said something about looking at mixed transactions and I wasn’t sure what he meant by that. How do you define mixed transactions?
Valery Vavilov: 00:44:52
There are different mixers where people send transactions from different wallets. Mix this one wallet by sending it different other wallets. So in trying to mix the transaction. So I don’t know if I explained that correctly…
Laura Shin: 00:44:52
Sort of like money laundering or something?
Valery Vavilov: 00:44:52
No, not really, just to…
Laura Shin: 00:44:52
Just to obfiscate the trail….
Valery Vavilov: 00:45:16
Yeah, exactly.
Laura Shin: 00:45:18
But I heard that they were improving? That the mixers were improving and I mean this was a while back, but Kathryn Hahn on my podcast who you guys also know. She said that they were improving to the point where law enforcement was not able to untangle them. But, obviously that was a year and a half ago. And so now is your technology good enough to untangle those?
Valery Vavilov: 00:45:48
So its not 100%, but with this technology you can increase the probability of untangling the transaction.
Laura Shin: 00:45:52
And so I know the product is fairly new, but do you have customers yet? And if so, who are they for Crystal?
Valery Vavilov: 00:46:05
We are not disclosing our customers right now. But, we have several customers who are using the tool.
Laura Shin: 00:46:11
OK. So I did see online there were some critics of the tool for privacy reasons. What do you say to people who criticize this product for that?
Valery Vavilov: 00:46:11
Depends on what kind of privacy reason.
Laura Shin: 00:46:25
Well, I didn’t pull any quotes, but obviously if you are tracking the transactions and scraping data and stuff like that, I think maybe that’s what they’re referring to.
Valery Vavilov: 00:46:45
The Bitcoin blockchain, this tool doesn’t do anything new. Because Bitcoin blockchain is transparent by default. So, you can do it without this tool, but it’s much more complicated. This tool just provide you user friendly interface to do so. So that you spend for example for tracking not hours but seconds.
Laura Shin: 00:47:03
I guess that does make sense. This reminds me of how in that episode with Katie, she basically said, “Yeah, it’s better if the criminals use bitcoin.”
Valery Vavilov: 00:47:25
It will be the best days for law enforcement will be when all the criminals will start using Bitcoin. It will be the best days for law enforcement because starting from this moment, all of the of the bad guys will be traceable.
Laura Shin: 00:47:34
Yes. And actually for anybody who didn’t listen to that episode, you go back and check it out. Because Katie did track down a few very interesting crimes with the blockchain that she described how she actually realized that the crimes she was seeing were being perpetrated by two people, not one, because she could see a difference in their behavior using the blockchain. So it was very interesting. But, let’s actually circle back to Exonum, which you had talked about earlier. This is your enterprise blockchain product. Who is using that?
Valery Vavilov: 00:48:07
So right now we have dozens of pilot project going on. It’s still early stage. We launched the land title registration in the Republic of Georgia. We launched a few projects in Ukraine. We have dozens of commercial projects happening in pilot stage right now.
Laura Shin: 00:48:32
And the way you described it earlier, it’s a private blockchain where they secure it by maybe putting hashes of the transactions on the Bitcoin blockchain?
Valery Vavilov: 00:48:41
Yeah. So how it’s working, from time to time were doing snapshot of this private blockchain, let’s say every 10 minutes or every hour. And we’re putting the hashcode of the full snapshot of the private blockchain, as a Bitcoin blockchain transaction to the Bitcoin blockchain. And by this Bitcoin blockchain becomes so called independent auditor of the private blockchain. And if something happened inside private blockchain, for example, all the nodes negotiate between each other to change the records. They cannot negotiate with the Bitcoin blockchain. And you will see immediately something happened wrong in private blockchain. Not In five years, not in three years when it’s delayed, but in 10 minutes.
Laura Shin: 00:49:34
Yes. So one thing that I was curious about is, is it difficult to persuade companies to use this blockchain software or to adopt blockchain technology or even use something that touches the Bitcoin blockchain? Because if I look at the piece of innovation in the public and private blockchain spaces, it’s like no contest. The enterprise stuff is moving at a snail’s pace. Generally there isn’t a ton to show for it yet. And then obviously the public blockchain space just things take off at lightening speed often. So do you think enterprise clients are moving at a pace quickly enough to keep themselves from being disrupted?
Valery Vavilov: 00:50:25
Yeah, a lot of enterprise are moving to use blockchain because a lot of them understand the value of blockchain. Blockchain can significantly improve all business processes because you will not need to spend time on papers. You will not need to spend time on third party checks. And so on, of course there are a company that are concerned about the technology. That thinks it’s some kinds of hype, but it’s always like this was new technologies. There will be always first movers and there will be always followers. But the companies who will be first in the line, they will get a competitive advantage.
Laura Shin: 00:51:11
I mean it makes sense. They’re in it for the efficiency gains. So one other thing I wanted to ask you about in this department was you’re helping with the pilot that the State Department and coca-cola are doing to use a blockchain for labor rights. And as far as I understand, I think what the problem they’re trying to solve is that migrant workers sometimes sign contracts that promise one set of working conditions in their home country let’s say. And then when they move to the other country where they’re supposed to work, they can be subject to worse working conditions, but then they have no recourse or proof that the employer isn’t holding up their end of the agreement. And, they’re just not in their home country. Maybe they don’t know what resources they have or they don’t speak the language. So obviously these are big names, Coca Cola and State Department. How do you convince large institutions like these to test out something this experimental?
George Kikvadze: 00:52:07
Well, I mean, I think this goes back to one of the projects that was born out of Necker and Blockchain Trust Accelerator. And I think one of the important aspects of blockchain is really, social good. We truly believe that this technology will transform the world. Will make it more transparent, open and accountable. As such, one of the key projects that immersed out of this was BTA together in partnerships with National Democratic Institute as well as the New America Foundation. And the team has been very successful bringing in additional players. And one of the projects that are a part of the BTA is exactly the one you just described. Laura. I think this is a very important project. It will be impactful to thousands of migrant workers and we believe that it will act as a template for many other companies that are responsible and are looking to address this issue, to take on and spread it like wildfire.
Laura Shin: 00:53:13
So let’s now switch to talking about this new blockchain that you guys have been talking about a lot, which I believe is also involved in the Coca Cola and State Department projects and it’s called Emercoin. What is Emercoin and why are you guys so interested in it?
George Kikvadze: 00:53:29
Sure. So basically Emercoin is a technology that allows you to provide services on blockchain very efficiently. And our chief security officer, Alex Petrov is really the guy that got to know the technologies behind this project some two years ago and got fascinated by what they were doing and brought this to our attention. I think from the standpoint of Bitfury’s investment. It’s a strategic investment for us. We see that Emercoin can be complimentary to Exonum. And what we also see is that Emercoin’s platform is the one that’s being merged mined to Bitcoin blockchain is something that is very interesting. And from the security standpoint, I just want to point out also that we are big supporters of the Rootstock project, which also enabler of the smart contracts, but it’s also merge mined with the Bitcoin blockchain. So as we are expanding and we’re looking at various protocols and applications, we really look at the teams. We really look at the value they can add and Emercoin stood out from the standpoint of what it can accomplish. And we took on this project some three months ago.
Laura Shin: 00:54:41
So I know you guys travel the world quite a bit. Obviously you have offices all over the world and listeners didn’t hear, but before the show started we were joking about how they were the international men of mining, I think. I think I was saying. But then we were joking about how they like to call themselves a transaction processing company, but decided international men of transaction processing does not sound anywhere near as sexy. But, because I know you guys have this big global view of what’s happening in a lot of different areas in crypto right now. I was curious to hear where you see the future of crypto headed? What do you think the next one to two years in this space will look like?
Valery Vavilov: 00:55:25
You know, in the next few years, I think we will see exponential growth or implementation of different blockchain systems and use of cryptocurrency. We’re traveling a lot. We are meeting with a lot of decision makers in different parts of the world, different countries. And you know, what is interesting, I never see any person who after understanding what cryptocurrency is and what blockchain is. Say it’s some kind of hype or something. Every single person who understood the technology say, “Yes, this is great. This can change our world and the systems in the most efficient way.”
George Kikvadze: 00:56:19
Yeah, I think Bitcoin has sort of past the point of no return. Now it’s about the speed of adoption and what is so powerful about this technology that it’s really not driven by Silicon Valley. If you look at it, it’s really a global phenomenon and is driven by coders from China and Japan and Europe and obviously America and Middle East and many other parts of the world, South America. It’s a global phenomena. Its open source and it’s amazing to see, we have some 100 coders and programmers that are working day and night on various applications of blockchain. And you just see, these young brilliant kids, PHDs in mathematics, winners of international chess olympiads that are coming and coding and creating. This is the technology, I believe that is going to have much more powerful impact than Internet and I believe it is a technology that will transform the world in a significant way. The most important innovations to answer your question, I think the implications of lightening network we haven’t even fathomed. What will be the significance of this innovation. We think that it will have paramount influence on numerous industries from payment rails to media, advertising, to IoT sector. The promise of lightning is gathering a lot of speed. We’re huge supporters and contributors to this. And I believe year 2018 will be the year of the lightning and year 2018-19 will be an inflection point where Bitcoin starts going from OECD countries really to the billions in emerging markets because we truly believe this technology is meant for the emerging markets where the friction of payments and assets is the highest. Where the friction of corruption and lack of transparencies is the highest. And, we really believe that this is a technology for the billions and next two years you will start seeing that shift occurring where the benefits of this technology will start being enjoyed by the peoples in India and Indonesia and Argentina and Brazil and Russia and Nigeria in huge, huge numbers.
Laura Shin: 00:58:58
Actually, before we go, one other thing I wanted to ask you about is I believe we’re seeing kind of a wide range of reactions from governments to crypto cryptocurrency. And I noted that obviously you just opened this mining center in Norway and it appears as though the minister of trade or something was even at the ceremony and I looked up where the mining center is located and it not near Oslo or anything. It looks like it was kind of a trek, but it’s in a remote area. And you know, I feel like the fact that he went there, it was pretty significant. So that sort of shows an openness on the part of the Norwegian government. And then at the same time, I know that recently there was this small town in New York, Plattsburgh that banned Bitcoin mining because I guess a number of miners descended upon the small town and some of the people, the residents were contending that the mining operations were raising everyone’s electric bills. So what is the range of reactions that you’re seeing when it comes to governments?
George Kikvadze: 01:00:00
So we’ve been super selective in terms of identifying which countries to go and which partners to partner up and in many cases like in Norway for example, we will be bringing jobs. We will be bringing know how. Same thing in Canada. Same thing in Georgia. So we have seen governments super receptive, welcoming with open arms and seeing that this is the technology of the future. And the investments are creating jobs. The investments are creating transfer of knowledge and technology. And in our cases, we have had very, very warm reception.
Laura Shin: 01:00:43
I guess you’re choosing the governments that you think will already be open to working with you?
George Kikvadze: 01:00:48
That’s correct.
Laura Shin: 01:00:50
Well, we will see how the government reaction unfolds over the next few years. Well, thanks so much to both of you for coming on the show.
Valery Vavilov: 01:01:01
Thank you for your time, Laura.
George Kikvadze: 01:01:01
Thanks. Laura.
Laura Shin: 01:01:04 Before we go actually, where can people get in touch with you or see your work?
George Kikvadze: 01:01:18
Obviously on our website and we’re quite accessible, so doors are always open for interested parties.
Laura Shin: 01:01:26
Great. Well thanks to both of you again for coming on the show. Thanks so much for joining us today. To learn more about Val and George, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple podcasts. If you liked this episode, share with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me Laura Shin with help from Elaine Zelby, Daniel Nuss, and Fractal Recording. Thanks for listening.
