Bloomberg News

Bitcoin Raises Washington Profile, to Silicon Valley’s Dismay

July 31, 2014

Bitcoin Foundation Executive Director Jon Matonis

The Bitcoin Foundation’s executive director, Jon Matonis, said yesterday running the foundation is like “going downhill in a go-cart trying to keep the wheels on. There are different constituencies going in different directions.” Photographer: Chris Ratcliffe/Bloomberg

The Bitcoin Foundation’s executive director, Jon Matonis, travels the world to promote the virtual currency as a replacement for traditional money. Some of his members want him to focus on a less lofty goal: helping them make lots of old-fashioned cash.

Matonis, a longtime advocate of what he calls “non-political money,” has built the group into a kind of a bitcoin governing body. Early this month he hired a Washington lobby firm, and yesterday he unveiled a website aimed at raising the virtual currency’s public profile.

Some foundation members are dismayed by Matonis’ leadership and grander plans. Investors from Silicon Valley in particular would like the group to focus on more technical matters, particularly fortifying the underlying bitcoin software so it can grow into a viable, large-scale payment network.

Running the foundation is like “going downhill in a go-cart trying to keep the wheels on,” Matonis said in an interview yesterday. “There are different constituencies going in different directions.”

Venture capitalists and entrepreneurs, lured by the technology’s promise, have plowed time and money into bitcoin businesses -- and they’re demanding software upgrades to develop the digital currency’s commercial potential.

“The impact of the bitcoin protocol is economic,” Jeremy Allaire, chief executive of Circle Internet Financial, a Boston-based bitcoin startup, said in an interview. “These are higher stakes than with other open-source software.”

Linux Model

The organization, established in 2012 and modeled on the Linux Foundation, the open-source operating system created in the early 1990s, has tried to mix stewardship of the code with political advocacy. Unlike Linux, bitcoin rapidly became a channel for billions of dollars in transactions, making security and capacity bottom-line issues for entrepreneurs.

Matonis said that pressure to invest more in bitcoin’s computer code reflects a “fight over who controls the policy dialogue,” and whether the group will continue to fund lobbying. “Tech investors want to make sure that all the resources in the world are there on the tech side,” he said.

Bitcoins are part of a software system that transfers digital assets from owner to owner without using a third party. Startups are seeking to use the innovation to disrupt the existing payment system dominated by firms such as JPMorgan Chase & Co. (JPM:US), Visa Inc. (V:US) and Western Union Co. (WU:US)

Informal Upgrades

The core software managed by the foundation contains instructions that let computers communicate with one another to verify transactions on bitcoin’s public ledger, called the blockchain. Another program enables users to conduct those transactions.

Software upgrades are made through an informal system of mostly part-time developers who communicate in Internet chat rooms. Gavin Andresen, the foundation’s chief scientist, was until May the only paid coder working on bitcoin. Online discussions sometimes devolve into virtual shouting matches, according to Andresen.

This year, the bitcoin network processed between $20 million and $580 million per day in transactions, according to the data aggregated on blockchain.info.

“This is not sustainable,” said Mike Hearn, one of bitcoin’s core developers. “You can’t have an infrastructure held together by chewing gum and sticky tape and people who work evenings and weekends.”

Software upgrades have helped ward off hacking and increased commercial utility. A change in March, for example, improved the security of transactions conducted through online merchants by adapting bitcoin software to the Internet’s existing system for authenticating websites.

‘Non-Trivial Problem’

That tweak pales in comparison to the “non-trivial problem” of raising the number of transactions the bitcoin network can process, Allaire said. The system can handle about nine transactions per second, far off the roughly 2,400 on Visa’s network.

Investors have raised the idea of earmarking donations to the foundation for work on the software.

“A lot of people would give a million dollars if it would go solely to development,” said Brock Pierce, a venture capitalist who was recently elected to the foundation’s board.

Another board member, Micky Malka, the managing partner at Ribbit Capital, said developers won’t help improve the protocol without good pay, something that’s hard to structure through a foundation.

Developers’ ‘Upside’

“We have to find ways that allow more upside for the people who are working on the protocol,” Malka said.

Under pressure from the entrepreneur side, the foundation has commissioned a “feasibility study” to determine whether the software development could happen as part of a partnership with a major university, Matonis said. Or, it could be spun out into a separate body that the foundation organizes.

Matonis has frequently argued that bitcoin is a political project that will displace money issued by governments, and has at times disavowed close work with regulators.

“The Foundation is not pro-regulation as some have claimed, but it is pro-education,” he wrote when he became its director in 2012.

‘Drive-Thru Donut’

He has dismissed money laundering as an overly broad category of crime, “like buying a drive-thru donut in a stolen vehicle.” He once wrote that being a customer of bitcoin companies that work with regulators to stop crime “feels like buying weed from the Drug Enforcement Administration.”

Under Matonis, the foundation has hired a new Washington-based global policy counsel, Jim Harper of the libertarian Cato Institution. And this month, it retained Thorsen French Advocacy, a Washington lobbying firm.

Many entrepreneurs are keen to dodge the politics that Matonis courts. Nic Cary, the chief executive officer of Blockchain, the largest website for creating digital wallets to hold bitcoins, said the group should improve software and promote consumer adoption of the virtual currency.

“What we’ve seen is a lot of mission creep,” Cary said. “We need to fund the people who are working on development.”

Venture Capital

Allaire’s Circle Internet Financial has shareholders including Accel Partners, a venture-capital firm based in Palo Alto, California, and Pantera Capital Management LP, a San Francisco hedge fund backed by Fortress Investment Group. (FIG:US) Venture capital firms Andreessen Horowitz and Index Ventures also put money into bitcoin companies.

Matonis and the other founders of the group have rules on their side. They set up a system in which individual members elect the same number of board members -- three -- as do all the corporate members. That has raised the possibility, mentioned by Matonis at a meeting in Amsterdam in May, that the foundation could split.

The Electronic Frontier Foundation, an early Internet advocacy group, spun out the Washington-based Center for Democracy and Technology in 1994 after similar conflicts. Matonis told his members that he won’t go quietly if the Bitcoin Foundation cracks.

“If we’re going to fracture,” Matonis said in May, “I want to make sure I’m running the one we remember.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo


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