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ShapeShift’s Erik Voorhees on How the Best Regulation for Bitcoin Is Just Math

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Erik Voorhees has been a fan of Bitcoin for nine years, falling down the proverbial crypto rabbit hole when the Bitcoin blockchain was a mere two gigabytes.

After working with Charlie Shrem on BitInstant, he moved on to found and run ShapeShift in 2014, a digital asset exchange that held off on requiring KYC from its customers until October 2018.

In his own words, Voorhees “despises” regulation of any kind coming from any government. That’s a large part of why Bitcoin appealed to him right after living through the 2008 financial crisis — its protocol is regulated by math and available to everyone open source. This, according to Voorhees, is the only regulation that he feels is “appropriate.”

Today, with the corona pandemic wreaking havoc on the traditional economies of the world and even seemingly touching on crypto, Voorhees is still bullish on Bitcoin. In fact, he thinks it’s pretty wild “for this little tiny nascent asset that most people in the world have never heard of or used to be as stable as the S&P 500.”

What initially got you hooked on cryptocurrencies?

Voorhees

I got involved in May of 2011. and I got hooked because I had lived through the financial crisis just a couple of years before. I was very interested in how money worked and how banks works and how central banking worked.

I wanted for the world a way that they could have a money that didn’t require the government or banks behind it, but I had no idea how that could happen. Gold was maybe an alternative, but not highly practical.

I was depressed about that. And then, when I learned about Bitcoin, after an hour of reading about it, I was completely hooked. I was like, “Wow, this actually can do it.” This allows people to send money anywhere in the world without anyone being able to stop them. No government is involved whatsoever. Can’t be shut down. This is great. And I’ve been down the rabbit hole ever since.

There’s not that many of us [that have been in the space for nine years]. Even in 2011, people that were getting involved felt like they had missed the boat. Whenever someone gets involved in Bitcoin, it’s always easy to say, “Ah man, I wish I was involved a year or two earlier.” 

But 2011 was pretty early. This was back when the only Bitcoin wallet really was running a full node on your computer, and the wallet file wasn’t even encrypted, so it was just storing your private key on your computer in plain text. That was a Bitcoin wallet. The blockchain in total was about two gigabytes.  It was a different world, but it is still running just as well as ever and it’s been almost a decade.

Whenever someone gets involved in Bitcoin, it’s always easy to say, “Ah man, I wish I was involved a year or two earlier.” 

Has the way you thought about Bitcoin in 2011, and the way you think about it now, changed significantly?

Voorhees

The main difference is that it’s much more certain now. I was always a very idealistic believer that it would take over the world. Back in 2011, that was a very, very strange and fringy thing to believe. It’s still fringy today, but it’s much more plausible: Bitcoin’s far more likely to actually take over the world today than it was then. 

But also back then, we were really interested in Bitcoin for payments, and thinking that that would be the leading way this would gain traction, people paying merchants online for goods and services as a money. There was a lot of attention in those early days on merchant services and on teaching people about Bitcoin so they could buy things with Bitcoin from the merchant.

That was one thing we got wrong about how its adoption curve would happen. I still think it will be widely used in payments, but that’ll perhaps be the end of the tail, not the beginning.

That has grown a little bit. There is definitely economic activity like that, but it was not the leading theme. Most people that have Bitcoin are not using it to spend day-to-day. And despite that, it has still grown and it’s still become a big thing. That was one thing we got wrong about how its adoption curve would happen. I still think it will be widely used in payments, but that’ll perhaps be the end of the tail, not the beginning.

Has this global pandemic and economic fallout highlighted any ways that Bitcoin is working really well, or perhaps not working out as intended? Some people thought Bitcoin was a safe haven, but others have said that its price falls early on means that’s no longer the case.

Voorhees

First of all, it’s far too early to cast any judgments on how Bitcoin is performing in this crisis. It’s basically been in crisis for just three weeks or so [interview conducted April 3], at least in the U.S.. I’m very curious how Bitcoin will perform over the next twelve months. 

Six or twelve months from now, we can assess whether it was a good safe haven or not. It has amazingly been no less stable than the S&P 500. That’s wild. I mean, for this little tiny nascent asset that most people in the world have never heard of or used to be as stable as the S&P 500. I think that’s very notable. 

Even though it had a huge, horrific crash and everything was falling apart, it’s still up year-over-year by 20 or 30 percent. The S&P is way down year-over-year. It depends on your timeframe here, but Bitcoin has been fairly resilient. All things considered — it’s up. 

It’s a highly speculative asset, so it’s not surprising that a bunch of it got sold off during a panic. But the question is how quickly does it come back, how do people use it, and to what extent do people turn to it as they see increasing problems with the normal financial system? That’s going to be a medium term thing that plays out over the next twelve months.

I’ve heard that the Bitcoin sell-off was mainly due to institutional investors selling, while retail investors, the little guys, were holding and even buying.

Voorhees

I don’t really have much visibility into that. I’ve heard little anecdotal reports there. It’s always a complicated thing, it’s always some portion of every group, and that portion is hard to determine, as often people will be in different buckets. A retail person might have sold on the first day, but bought back on the second. It’s just very nuanced and difficult.

What’s a really common myth or misconception that you often run into about Bitcoin?

Voorhees

I think a popular misconception is that Bitcoin is controlled by any group. Basically, the myth is that people take a person or a group that has influence and they mistake that for control. 

People like to ascribe control because I think it makes them feel a little more like they understand how it works.

One of the main places this manifests itself is in the mining industry. A bunch of miners are currently in China, everyone knows that. People make this myth that Bitcoin mining is controlled by China. The reason that’s a myth is because that’s just where miners currently are — they don’t control mining. If all mining in China shut down tomorrow, the mining would migrate, move to other places in the world. It’s a fluid thing. No one controls that, even though lots of people have influence on it. 

It’s an important thing to understand, because this is one of Bitcoin’s most important properties: that no person or group controls it. That’s a myth I would like to see it go away, but it’s just hard for people to really understand what decentralization means. People like to ascribe control because I think it makes them feel a little more like they understand how it works.

How simply you can explain how Bitcoin works to a newcomer?

Voorhees

I did this a ton back in 2011. Basically, Bitcoin is a ledger that records who owns what.

This ledger is replicated across lots of different computers all over the world, and all of these ledgers stay in sync through the internet. They’re all updating each other whenever a transaction occurs from Bob to Alice. That’s really all it is.

All of it’s just this ledger, and it says Bob has a Bitcoin and then Bob sends it to Alice, Alice has it, and the whole ledger updates itself. No one, no particular points in that ledger is critical. Any any point can drop out or add on and the things stays in sync with itself. No one can turn it off. As long as you follow the rules of the system, you can participate in it. 

Bitcoin is a ledger that records who owns what.

That’s really all you need to understand what Bitcoin is. Anything more technical than that is an interesting detail, but not not necessary for understanding it.

That’s a really solid explanation. I usually tell people Bitcoin is like an Excel document, but everyone has one…I need to work on my explanations.

Voorhees

That’s helpful because it helps people understand this ledger concept. I think it’s very similar to riding a bicycle. The best way for someone to understand it is to just use it. If you tried to explain to someone what a bicycle was or what it did or how it worked, you’d get into some technical complexities pretty quickly. It would sound very weird, how in the world does a thing with just two wheels stay upright? It doesn’t seem possible. You could get into a long debate with someone about what that is and how it works, or you could just show them by riding around on a bicycle.

The best way for someone to understand it is to just use it.

In a similar way, the best way to explain Bitcoin is often to just send them ten dollars of Bitcoin, and they’ll open up [their wallet] the next day and see that it’s worth ten dollars and 20 cents. They’ll suddenly be hooked. Their mind will be open and they’ll learn about it. That usage is really important.

Do you have any advice for people that are looking to enter the crypto industry?

Voorhees

I don’t think anyone should be investing in Bitcoin or cryptocurrency generally without understanding the basics of how it works and why it’s important. If someone just wants to gamble and they’re just seeing it as a gamble, then fine, OK. But what I get nervous about is when someone just hears about it and then buys a bunch of it because they think it might be going up, when they should understand why it’s likely to go up. They should understand how that works. 

They need to understand that, because the security of the coins that they’re buying is important. They need to understand what it means to hold funds on an exchange vs.  their own custody. These things don’t take months to understand, they take a couple days of playing around with it and learning. But buying a large financial position before learning the basics of Bitcoin, I think is a big mistake.

Given how the cryptocurrency industry has evolved over time, do you think it should embrace or reject regulation?

Voorhees

I pretty much despise all governments and all regulation of all forms that comes from government. I don’t think Bitcoin should be regulated. I don’t think normal finance should be regulated. 

I think the proper regulation of Bitcoin comes from its protocol, so the regulation is done by math and it’s done in an open source way that everyone can understand. There is a certain amount of Bitcoins. They are released on a certain schedule. There are rules of the system. Those rules can’t be broken arbitrarily. That is regulation that’s appropriate. 

I think the proper regulation of Bitcoin comes from its protocol.

People can use that as they will. I think governments should stay the hell out of it. I don’t think they add any value whatsoever. If someone wants a highly regulated financial system, they can just look at what they currently have and all the disasters that causes. I’m a very vocal proponent of an open system, one that everyone in the world can use free of coercion from government.

How far do you think crypto is on that path to deregulation and global freedom?

Voorhees

Well, on the point of deregulation, it seems like nothing in the world is being deregulated other than marijuana in some states in the U.S. That’s the one area that is actually getting better.

Politicians generally, as a matter of principle, only regulate more and more every year in any country. The number of rules on the books gets bigger and bigger. The general trend is not good. 

At the same time, in the early days of Bitcoin, we were very worried that governments would harshly crack down on it and try to ban it or try to outlaw or something like that. That has not happened.

There does not seem to be any political will today to try to outright ban it. That’s great. It was something I was worried about. Obviously, Bitcoin can’t be turned off, but if the governments of the world tried to ban it, it would set it back for years. It would be a big problem. 

It’s good in the bad. Generally, Bitcoin falls under many or most of the same financial regulations that other normal money does. That kind of sucks, that’s what leads to crypto companies having to spy on their users and get personal information from them when it’s not needed or are necessary or even ethical to do that.

Obviously, Bitcoin can’t be turned off, but if the governments of the world tried to ban it, it would set it back for years.

It’s slowly gotten worse, but that’s better than rapidly getting worse. One way to frame it is that Bitcoin has grown and expanded faster than the regulations have creeped into it, and this is great.

What will really be interesting is — especially as this current financial crisis plays out — if it gets really bad and if people start using Bitcoin as an alternative, I think the politicians will start really trying to vilify it. That’ll be a big test of the public perception of what Bitcoin is, because it will be used as a as a scapegoat and Bitcoin will be blamed for many of the financial ills of the world. Hopefully, people will be smart enough to realize that it’s the refuge and it’s the safety, not the cause of the problem.

So you think that Bitcoin’s growth is moving faster than the regulators can keep up?

Voorhees

Oh, yeah, absolutely. This drives the regulators crazy. They were just barely starting to understand that this Bitcoin thing was being used as money, and then all of a sudden Ethereum comes out. And now there’s tokens everywhere. Are these securities or not? Which ones are not? They’re trying to get their heads around that, and now all these derivatives are coming out, and borders are totally broken down. Every step that the regulators take toward this stuff, crypto moves ahead by five or 10 steps, which is amazing, but it’s got to be very frustrating for regulators.

This reminds me of the biggest news of last year, Libra, how regulators were floundering to get ahead of it. But now, Libra has pretty much stayed out of the news.

Voorhees

They’ve been very quiet. Everyone’s wondering if they’ll actually launch, and if they do, if it’ll be in the form that they announced as or if it’ll be in some kind of boring, watered down version of it. I have no particular insight into that either. 

I applaud Facebook’s bravery in trying to push that forward. I’m very curious if they will continue being brave.

I think the political backlash against Libra was so strong, it was crazy. The backlash was so strong because Libra decided not to just create a proxy for dollars: if a Libra coin was just a stable coin backed by dollars, most of the most of the outrage wouldn’t have been there. The reason that the governments were so pissed was because Libra was basically making us a supranational currency. They were backing it with a whole basket of different different currencies and securities, and they are big enough that that could actually end up being a larger currency than most nations and potentially even the dollar. That threat was not appreciated by those politicians. 

I applaud Facebook’s bravery in trying to push that forward. I’m very curious if they will continue being brave and actually release that, or if they’ll just water it down and release a normal dollar token that wouldn’t be that interesting.

As a more personal aside, do you have any working from home tips for people during this quarantine?

Voorhees

One tip is to always do calls with people as a video call, if you can. Normally, sometimes you’ll do a normal call and sometimes video call. But when you’re isolated, this is just by default, have every call be a video call.

I think that helps bring back some of that connection that you lose when you’re not able to see people. That’s what we’ve been trying to do at ShapeShift. 

Another one is to just set yourself some clear work hours. When you’re home all the time, things can bleed into each other and that’s bad on both sides. It can make your work time less productive because you’re getting distracted, and it can make your leisure time less relaxing because you’re caught up in work. Set specific windows of hours where you’re doing either work stuff or your own personal stuff and don’t mix them.

This interview has been edited and condensed.

Enjoyed reading our Crypto Titan series? Catch our last interview with Cardano’s Charles Hoskinson! Or check out the full list here.

About Molly CMC

Molly Jane is a content manager at CoinMarketCap. Previously the head of news at Cointelegraph, she has also contributed to Decrypt and Modern Consensus. You can find her on Twitter at @MollyJZuckerman.

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