Unchained - Bitfury on the Ways It Collaborates With Governments and Why It's Partnered With a Public Company

Episode Date: April 10, 2018

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-dao Crystal: 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 Thank you to our sponsors! Bitwise: https://www.bitwiseinvestments.com/unchained Preciate, at https://preciate.org/. To recognize someone for a future ad spot, go to https://preciate.org/recognize/ Keepkey: https://www.keepkey.com/   Learn more about your ad choices. Visit megaphone.fm/adchoices

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 reading or review that helps other listeners find the show. And be sure to follow me on Twitter at Laura Shin. Unchained is sponsored by Precce. Founded by Ed Stevens, Precceed is building the most valuable relationships on Earth. In each episode of Unchained, Prechete's Spursors. 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. 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. www.bitwiseinvestments.com slash unchained.

Today's episode is brought to you by KeepKee, the easy, safe, and simple way to protect your Bitcoin, ether, light coin, and many other digital assets. There's no time like the present to protect yourself from hackers, malware, and viruses. Rest easy knowing that your digital assets are protected. Visit KeepKee.com to order your secure hardware wallet today. Today's guests are Valeri Vevi Love, the co-founder and CEO of BitFure. and George Kikwadze, Vice Chairman of the Board.

Welcome, Val, and George. Hi, Laura. Hi, Laura. Let's start with Val. How did you get into Bitcoin and what were you doing before? It was in 2010 when I was introduced to the Bitcoin first time. And I learned the technology and understood this is not just another 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 live in a digital world, and we can send the information all across the world. And from one hand, everything is digitized, but from another 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 piece of plastic. It's your identity card or your passport. So why it's happened? Because internet was not designed for secure transactions. And blockchain

and the cryptocurrency and all this technology is by default designed for secure transactions. So that's why 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 project and went in only to do this thing. And so 2010 is super, super early. Obviously, Bitcoin, the software only started running in 2009. How did you get introduced to it so early? And what had you been doing before? So before, I spent many years to create different kind of registry systems for Latvian. and municipalities and did some consulting and startups. Okay.

And George, what about you? How did you discover Bitcoin and what had you been doing before? Well, Val and I have a common friend who now runs Bitfiry Capital, Marat Kitschiko. And Marat kept telling me and bugging me about Bitcoin as early as when price was $10,20. And, you know, obviously it was early 2012, 2013, that time period. And he kept coming back and coming back, is that, you know, there's this Latvian entrepreneur. I'd like you to meet to discuss this cryptocurrency. And we finally met, and, you know, I really liked the idea and the concept.

And 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 Zappo. And after a brief conversation was in. Yeah, exactly. And after talking to Wences, you know, I realized we had very similar backgrounds and experiences. And, you know, I got a lot of comfort. And obviously then there was a lot of deep diving into, you know, 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. 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 was something truly unique and novel and that you were able to do that because you didn't have the sort of background in conventional chip design that someone like him would have had. And I just, I never found out later whether or not that story is true or whether he had, you know, because obviously he wasn't like in the middle of it. And so I just always wanted to find out from you guys how Bifuri got founded. Yeah, you know, this story about 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's 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 it's impossible. And you know when you don't know what it's impossible, you think it's possible. And you just do it. And we did it and it's worked. And yeah, but it was very interesting journey. And now we created already, I think, six generation of chips. But this first chip was, yeah, it was very interesting story. And we collected money from friends and family. So the first investments was very hard to get because I reached to some of the investors,

created the business plan, told about. Bitcoin, about cryptocurrency, about blockchain, but nobody believed, nobody believed in back in 2012 and 2011. So we just collected money from friends and families who believed in our story and, yeah, went all in. And here we are. Now we're a company, global company, with the people from 16 countries and more than 500 people. Oh, wow. Yeah, that was actually going to be my next question. and how many employees you have. And so you have more than 500, and you have 16 offices?

Not really 16 offices, but people from 16 countries, offices in Amsterdam, San Francisco, D.C., London, Tokyo, Belisi, Canada, Norway, and so on. Yeah, and also, where are your mining operations? So our main mining operations are, in Republic of Georgia, in Iceland, in Canada, and in Norway.

And how do you choose where to locate a mining center? So first of all is 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. And that's why we're choosing locations with the cheap energy, but green energy. And how do you define green energy? Green energy is the renewable energy, for example, hydro, thermal, and everything renewable. Okay. Well, yeah, 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're 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 publicly 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 looked like in those areas they used a lot of natural gas and I wondered how green that was. In Canada, they are using a lot of natural gas. Yes. So I don't know the carbon footprint of natural gas, but I presume it's not zero.

Carpet footprint on natural gas, I think, is not zero, but it's plus minus okay. And it's much better than the dirty coal that is being burnt in, you know, in many locations around the world, unfortunately. Right. Like China, which is, I think, so I've not looked into this. But obviously one of your biggest competitors is Bitmain and they have a lot of operations in China. I actually, so I don't want to make any claims as to what types of energy they're using. But let's just talk about kind of the moves that you are making. in general in the wider context of what's going on in the mining world, you now have a 49% stake

in HUD-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 HUD-8 and how does this move fit into your overall strategy? That's a very good question. So, you know, I think, you know, if you go, back four or five years ago when there were a lot of chip companies, key to success were two factors, Laura. It was execution on the chip and keeping the promise. It was very important, 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 the 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, and they've costed us a lot of resources in order to accelerate the deployment and, you know, global expansion. As a result of that, if you look back for the last four years, we have really funded ourselves through angel investors such as Bill Tai and friends as well as.

as bootstrapping. In other words, taking the bitcoins that we'd mind, selling them on exchanges and then reinvesting in a 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, you know, we would have spent roughly 350 million US dollars on chip designs, on wafer,

on electricity costs on the CAPEX of rolling out, but we would be sitting right now on 860,000 Bitcoins. Wow. So that is the equation. And to all the VCs that didn't believe or didn't take that bet, you know, I understand it was early in the game. But at the end of a day, you know, that is an outcome. 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 20, 30 miles per hour. So I think one of the success stories of our Chinese competitors has been not only executing, but also ability to access the 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've been able to do that, and that's the difference between ordering 10,000 wafers or 50,000 wafers. So what Hadeh does for us is for the first time allows us to partner up with credible institutions. And in this round, we had some 57, you know, large institutions, including, you know,

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, you know, build out the world's largest crypto mining facilities in Bitcoin, in Ethereum, in, you know, Zicosh, Monero, and other sort of major protocols that we believe will, you know, will be of interest to institutions. So hot aid is in essence is creating an institutional structure, whereas, you know, long-term capital can come in and fund the acceleration and development of Bitfury and locating the crypto mining 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 some corrupt bureaucrats, and in places where you will be able to build around the 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. That's interesting. So everything that you said makes sense to me and sounds 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 you know, 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 mine 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. That's a very good question. So, from, 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 G-Hashio.

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 through hot aid, a super dominant, you know, crypto mining facility that will command some 40, 30 or even 20%. 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 hash rate that's attributable to Bitfure, it's actually

a magnitude less than all the equipment that has been sold to the third parties, primarily to the family offices and, you know, family offices and, you know, more of the institutions and those that have been allocated to throughout the network via other pools. So we actually are super conscious of the decentralization and we're super conscious of spreading around the mining capacity, you know, across the border. 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. 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. So we are focusing mostly on a B2B business. And, you know, the minimum entry point is a million plus. So from that angle, we have several wealthy individuals that have bought and located these block boxes around the globe. As well as we have, you know, teamed up with some corporate players, you know, that have bought 5, 10, 20, 40 in some cases. We've built, you know, large data centers for sort of corporate players. So we are not selling, you know, our equipment to, you know, mom and pop, so to speak.

We're not on a B2C side. I think there are, you know, 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. With Amex Platinum, $400 in annual credits for travel and dining means you not only satisfy your travel bug, but your taste buds too.

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Appreciate sponsors the recognition of an individual or group in crypto for an achievement. Today, Preachate 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. 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 appreciate.org slash recognize. That's appreciate.org slash recognize.

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To learn more about the Bitwise Cryptocurrency Index Fund or download research, visit www.com. com slash unchained. I'm speaking with Valeri, Vavilov, and George Kikwazi 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 cryptocurrencies to mine and have you decided which other

ones to mine yet? Yeah, we are working on solutions for other cryptocurrencies. So we will update on this once it's ready. But we are thinking about this and we're working to deploy these solutions for other cryptocurrencies. 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. Because we see there is a need for equipment for other cryptocurrencies, and we see that in the space of public blockchains, there will be not only one public blockchain, there will be several public blockchains. So that's why we decided to move to this direction as well.

And are you going to do the same as you did with Bitcoin, where you develop specialized chips for each blockchain? either specialized chips or specialized custom equipment that efficiently mine and process transactions of different altcoins, yeah. And you plan to do the same where you open your own data centers and maybe you tap the B&B market a little bit or B&B. The business model will be the same as now. We will sell to high networks, individuals, to institutions, and most likely we'll mine some small part to ourselves as well.

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 like the 2014 and 2015 years, there have been periods where Bitcoin has sort of dwindles down after a big run-up. What's the lowest price you can mine at and still be profitable? So it depends, of course, the location, because the price is dependent on energy price. But just preliminary calculations shows, but it's something like $2,500 per bit, $2,500 per bitcoins,

$2,500, maybe $3,000 per bitcoins. Depends on the location. Oh, wow. Okay, so it looks like you guys still have quite a bit of runway. Well, I was curious, do you normally sell your bit of Bitcoin's immediately after the 100 blocks? I know, 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 100 blocks. So do you normally sell them immediately?

or do you keep them as long as you can? Or what's the strategy there? No, we don't have a particular, let's say, strategy. We are not, we're definitely not selling immediately, but we are selling from time to time to keep the cash balance. 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? You know, because when we started to talk to regulators and decision makers, we understood what they will be, there will be, 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. The institutions and governments didn't switch to Internet immediately. Yes, they told the technology is okay, the technology is perfect, but we don't know who is using this technology.

We don't know who owned this technology. We will use this technology and will create our own. intranets, yeah. And after a lot of intranets was created, they interconnected it using internet when they become more comfortable with the technology. The same is happening in the blockchain space. There is a public blockchains, but to move to public blockchain institution need to become more comfortable. And to become more comfortable, they need intermediary step. An intermediary step is the private blockchain. So that's why, in two, 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 Exxonom. And now using Exxonom platform, you can use it to blockchonize any government, services, institutions can use it, different kind of organizations can use it. It's some kind of operating systems that you can use to easily deploy blockchain, private blockchain solutions to your organization. But still, you know, every private blockchain is just a software. That's why we're using Bitcoin blockchain as a security layer to secure the private blockchain with so-called anchoring.

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 Exxonum, you know, was a step in that direction. But I know Exxonum 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? You know, because government, you could put it this way, you can put the government as one of the biggest service providers for the citizens. Because every government provides thousands of difference of 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 be. go to different third parties, you need to get different type of checks and balances, papers, and so on and so forth. And from country to country, this process could take from a few days to a few months, just to do one operation. Why it's happening?

Because you don't trust the systems. 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 on the blockchain and this is not only for land title buff but for any other service what you're getting from the government And we believe 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. 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 is it's always the case. And can you tell listeners your personal story with government not working for its citizens? Yeah, you know, I was born in Latvia.

Latvia is a small country with population roughly two million people. It was part of Soviet Union. Now it's part of European Union. and when the Soviet Union collapsed, I think I was 12 by this time, my parents and parents of a lot of my friends just literally lost everything. Money become paper and 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 okay no more toys no more toys so but but as a technologist and i'm in computer science since i'm i was eight i always thought okay how can i use the technology to to make the systems

to work for the people because many many years after the this this happened with me with my family and with a lot of families in our countries, I understood, okay, why it's happened because of the systems that were not designed to work for the people. 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, 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 U.S., in Europe,

all the systems working plus minus fine, yeah, and you can trust land title registration and so on. You can move money quite 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 land titles just because somebody changing records in a database. And this is a really huge issue. Because if you are, for example, some sysadmin, you are making small salary and the country is corrupt and the system is corrupt, and the system is corrupt. Somebody can go and negotiate with you and you are just changing records.

And the owner of the, I don't know, 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 this global issue. So this is the perfect segue for us to talk about the NECR 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 as I've definitely, 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, you know, was wonderful, but, you know, 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 Vinnie Lingham and Sandra Rowe 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? First of all, we want to create the mix of the

people, part of the people who clearly 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 technology, 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 this technology really can make systems work for the people and change this world to be a better place. And the Naccar Island is perfect location because, first of all, of Richard Branson 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 island 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 when all these people from, let's say, two different words,

from world of technology and different world, they come together and discuss different cases. Some good ideas happening, yeah. 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 mean, I could list. a whole bunch. It's like the blockchain trust accelerator, so I'm just going to list all these and please

define them for the listeners. There's the global blockchain business counselor. 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? Yeah, so Blockchain Alliance is the perfect

example. The Blockchain Alliance is the organization that literally was born on Naker Island. And why this organization was created? Because when such a disruptive technology is happening, the worst thing what could happen is the not smart regulation. Regulation is good, but regulation for such a disruptive technology should be very smart.

It's like, you know, you have rails, you have an old train, what is using these rails to move around something. And you created completely new train, hyperloop with magnetic fields, 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 regulators. So that when law enforcement and 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 some arena of things that not need to be done. Yeah, actually, 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 Neckar Island were hanging out in a hot tub. I almost said bathtub.

Definitely not a bathtub. But anyway, so yeah, 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? We analyzing a lot of public data on different forums, on social networks, and we created some sophisticated algorithms to analyze the transactions, to untouching. angle mixed transactions. So with this kind of algorithm, you significantly increase probability of understanding where

these bitcoins are coming from. But this tool, also 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? and we understood, okay, Bitcoin is, from 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 MSDOS comparing to Windows or MacOS, yeah. And that's why with the help of this tool, you're just creating very easy to use an instrument.

to give a comfort, to give a 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 the institutions. Yeah, I mean, I think one important thing here is that the gene is out of bottle. You know, 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 cryptocurrencies, to trade cryptocurrencies. And obviously post-2008, the financial institutions have been laden with, you know, 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, you know, works that is. you know, that adds value. We see a humongous opportunity to go in and address, you know, to basically solve a choke point with financial institutions, with, you know, insurance companies. There's some health care applications, you know, data analytics, you know, and obviously law enforcement. And what we're seeing is one of the myths of Bitcoins has always been, you know, Bitcoin for criminal money. But actually, if you dig deeper, the Bitcoin 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 illicit activities of the cryptos have moved to other protocols, which are much more anonymous than Bitcoin. But Crystal is really a solution for, you know, for a huge, you know, financial industry opportunity.

you know, alongside the lie enforcement, which we believe is, there is a need for that, and there will be, you know, there's a lot of synergies in that work. 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, you know, saying they won't let their customers trade in it and stuff like that. So who of them are interested in using this? Yeah, you know, they're disavowinging that they come back and apologize for that.

But at the end of the day, you see Uberization of the industry, right? I mean, you can have a head of a post office saying that, you know, I don't like email, but if the constituents are coming and saying, hey, can you install, you know, PCs in your post office so I can be sending email, you know, in democratic countries, It's a bottoms up. It's the grassroots movement. And that's what we're saying. So when you have, you know, massive amount of folks coming in and bugging their bank officers from the standpoint of buying cryptos and such, you know, there is obviously a demand from the population. And I think, you know, it's a matter of coming in with a solution to the compliance officers and to the banks that addresses those needs that, you know, allows them to satisfy their demand. because if that is not satisfied in one jurisdiction, you're going to have regulatory arbitrage. And I think everybody is aware of that. So we believe there is a huge opportunity to be pioneers, to entrench ourselves and to, you know, build out this industry.

Yeah. I guess we are seeing that already, at least in the ICU space. We're all, not all, but a bunch of ICOs are moving to Switzerland. But I actually wanted to go back because Val said something about looking at me. mixed transactions. And I wasn't sure what he meant by that. How do you define mixed transactions? I mean, there are different mixers where people send transactions from different wallets to one wallet and mix it from this one wallet started to send it to different other wallets. And trying to mix the transactions. So I don't know if I explained correctly.

A sort of like money laundering or something. Not really, but just to... To off-sacete the trail. Yeah, exactly, exactly. But I heard that they were improving, that the mixers were improving, and it was at least, I mean, this was a while back, but Catherine 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? So it's not 100%, but with this technology, you can increase probability of entangling the transaction. And so I know the product is fairly new, but do you have customers yet? And if so, who are they for Crystal? We are not disclosing our customers right now, but we have several customers who are using the tool

as a better version, yeah. Okay, 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? Depends what kind of privacy reason. 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. But 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. Okay. Yeah, 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. You know, the best days for law enforcement will be when all the criminals of this world will start using Bitcoin. It will be the best days for law enforcement because starting from this moment, all of the bad guys will be traceable. Yes, and actually for anybody who didn't listen to that episode, you should go back and check it out because Katie did track down a few very, very interesting crimes with the blockchain. And she described how she actually realized that the crime 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 Exxonum, which you had talked about earlier. is your enterprise blockchain product. Who is using that? So right now we have dozens of pilot projects going on. It's still early stage. We launched a land title registration in the Republic of Georgia. We launched a few projects in Ukraine. And we have dozens of commercial projects what are happening in pilot stage right now. 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? Yeah, so how it's working.

From time to time, we're doing snapshot of this private blockchain, let's say every 10 minutes or every hour. And we're putting the hash code of the full snapshot of the private blockchain as a Bitcoin blockchain transaction to the Bitcoin blockchain. And by this, Bitcoin blockchain becomes a 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 Bitcoin blockchain. And you will see immediately what something happened wrong in private blockchain. Yeah. Not in five years.

Yeah. years when it's too late, but in 10 minutes. 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 pace 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, you know, obviously with a Bitcoin, or it's not a Bitcoin, but the public blockchain space, just things take off at lightning speed often.

So do you think enterprise clients are moving at a pace quickly enough to keep themselves from being disrupted? Yeah, a lot of enterprise 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 companies that are concerned about the technology that thinks it's some kind of hype, but it's always like this with new technologies.

There will be always fast movers and there will be always followers. But the companies who will be first in the line, they will get competitive advantage. Okay. Yeah, 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, you know, maybe, I mean, 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 this, you know, obviously these are big names, Coca-Cola and State Department. How do you convince large institutions like these to test out something this is experimental?

Well, I mean, I think this goes back to one of the projects that was born out of NECR and blockchain trust accelerator. And I think one of the important aspects of blockchain is really social good. You know, we truly believe that this technology will transform the world. We'll make it more transparent, open and accountant. As such, one of the key projects that emerged out of this was BTA, together in partnerships with National Democrat 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 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 these issues to take on and spread it like a wildfire. Great. 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-Holan State Department project.

And it's called Emmercoin, what is Emmercoin and why are you guys so interested in it? Sure. So basically, Amercoin is a technology where 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 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 Amercoin can be complementary to Exxonum. And what we also see is that Amercoin as a platform, as the one that's being merged mine to Bitcoin blockchain is something that is very interesting and from the security standpoint. I just want to point out also we are big supporters of Rootstock project, which also, you know, enabler, of the smart contracts, but it's also merged mine to 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 Amercoigne stood out from the standpoint of what it can accomplish, and we took on this project some three months ago. 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 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 a 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 here where you see the future of crypto-headed. What do you think the next one to two years in the space will look like? You know, next few years, I think we will see exponential growth of implementation of different blockchain systems and use of cryptocurrency. And yeah, we're traveling a lot.

We're a meeting with a lot of decision makers in different parts of this world, different countries. And you know what is interesting? I never see any person who understood who, after understanding what cryptocurrency is and what blockchain is, say it's some kind of, I don't know, hype or something. Every single person who understood the technology said, yes, this is great. This really can change our world and the same. systems in the most efficient way. Yeah, I think Bitcoin has sort of passed a point of no return.

You know, now it's about a speed of adoption. And what is so powerful about this technology that it's really not driven by Silicon Valley. If you look about it, it's really a global phenomenon. And it's driven by, you know, coders from, you know, China and Japan and, you know, Europe and, you know, obviously America and, you know, Middle East and many other parts of the world, South America. So, you know, it's a global phenomenon. It's open source. And it's really amazing to see, you know, we have some 100 coders and programmers that are working day and night on, you know, various applications of blockchain. And you're just seeing, you know, these young,

brilliant kids, you know, PhDs in mathematics, winners of international chess Olympias that are coming and coding and creating. So, you know, 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 lightning 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, you know, media advertising to IoT sector. And the promise of lightning is gathering a lot of speed.

You know, we are huge supporters and contributors, you know, to this. And I believe year 2018 will be the year of the lightning. And year 2018-19 will be an influence. reflection 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 transparency 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 best, benefits of this technology will start being enjoyed by the peoples in India and Indonesia and in, you know, Argentina and Brazil and, you know, Russia and, you know, Nigeria and, you know, in, huge, huge numbers. Well, actually, before we go, one other thing I wanted to ask about is I believe we're seeing kind of a wide range of reactions from governments to cryptocurrency. And I noted that, obviously, you just opened this mining center in Norway. And it appears the minister of trade or something was even at the ceremony.

And I looked up where the mining center is located. And it's not like near Oslo or anything. It looks like it was kind of a trek. But it's in a remote area. And I feel like the fact that he went there 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. 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? So we've been super selective in terms of identifying which countries to go and, you know, which partners to partner up. And, you know, in many cases, it's like, you know, 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, you know, welcoming with open arms and seeing that this is the technology of the future. And, you know, the investments are creating jobs. Investments are creating transfer of, you know, knowledge and technology. And in

our cases, we have had very, very warm reception. And you haven't had any. I mean, I guess you're choosing the governments that you think will already be open to working with you. That's correct. Okay. 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. Thank you.

Thank you for time, Laura. Thanks, Laura. And before we go, actually, where can people get in touch with you or see your work? Which kind of? What kind of work? Yeah, what kind of work? Or just learn more about the theory. I mean, obviously on our website and, you know, we're quite accessible.

So doors are always open for interested parties. Great. Well, thanks to both of you again for coming on the show. Thank you, Laura. Thank you. Thanks, Laura. Take care. 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 Unchanged come out every. Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it 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.