Secure your wealth in gold, move it around in Bitcoin
If people are messing about with your money, just exit the system. That is what Josh Scigala, founder of the Vaultoro Bitcoin-gold exchange, envisions. To him Bitcoin is a great alternative to our current finance system. But using the cryptocurrency is still too problematic for it to serve as a good way out. With Vaultoro, Josh found a way to tackle the main problems of Bitcoin. Read More
Remember the year 2011: Rain, cold temperatures. Tents and signs on the streets – “We are the 99%” – camp orders, assemblies. In New York, London, Frankfurt and Tel Aviv people were angry. They felt abandoned with no hope for the future. And they knew who to blame: the banks. The burst of the housing bubble, asset-backed securities, the credit default swaps, bank bailouts, European states unable to pay their debts, and so on. You know the story.
The first snowstorms swept the pavements free of the camps, corporate glass façades were swept free of the color bombs, and the large banks’ accounts were swept free of their dirty assets. So people went back to chasing numbers, back to paying with credit cards, back to the old system they hated so much. You might say the Occupy Movement was just a short phenomenon and nothing came out of it. But that is not true. There is Bitcoin – and people like Josh Scigala, who are helping to turn this decentralized digital currency into a real alternative to the current financial system.
Josh, you worked as a 3D designer in Australia. You left your job and started a global Bitcoin-gold exchange with the objective of making the cryptocurrency more reliable. Why did you decide to work with Bitcoin?
I have always been interested in economic topics. After 9/11, I started looking further into global money policy and its geopolitical implications. I began using Bitcoin in late 2010, as I was fascinated by the fact that it is decentralized. Nobody has control over it. The 2008 financial crisis showed again how screwed up our current system is; we create money out of debt.
We have a separation of church and state, we should also have a separation of money and state.
Money created out of debt. What exactly do you mean by that?
Our global monetary system looks complex, but it is actually quite simple: Banks dole out money – with interest! If you have 50 euros in your pocket, then somebody owes 50 euros to the bank – with interest! Now imagine that there are only two people on an island. Both have to pay back 50 euros plus 10 euros interest. Where do the 10 euros come from? You have to sell the second person something and get the extra 10. So you pay back 60 euros, but the other person now needs to pay back 20 euros that don’t exist. If you zoom out, that second person is what Greece is up to right now. It is holding everyone’s debt.
How can we understand Bitcoin as possible salvation from this system?
We have a separation of church and state, we should also have a separation of money and state. We need a system where the central bank cannot just print unlimited money with true value attached to it whenever it is needed for political purposes. Bitcoin is a way out. It allows you to exit your local currency for a while if you are not happy with the money policy of your country. And this gives those in charge an incentive to not to screw up your economy.
Bitcoin: Transferring money without a bank
In 2009, an unknown person (or persons) using the pseudonym Satoshi Nakamoto released an open-source-software called Bitcoin. The software allows users to carry out money transactions directly without a central administrator or repository such as a bank. Every transaction is transparent; it is recorded in a publicly accessible ledger called a block chain. Payments are verified and processed through a decentralized network of users running the Bitcoin software on their computers. Numbers from early 2016 estimated the existence of over 10 million Bitcoin wallets, and about 200,000 transactions are carried out per day. (For more information on how Bitcoins and mining work, visit: https://Bitcoin.org/en )
People trust gold, because it is a real asset you can hold in your hands.
But can Bitcoin be trusted? Since Bitcoin began, there have been various hacker attacks on companies that accept bitcoin. The most famous case was the Tokyo-based Bitcoin exchange called Mt.Gox which filed for bankruptcy in 2014. At that time, Mt.Gox was handling 70% of all Bitcoin trading. The company claimed that around 750,000 of its customers’ Bitcoins (around 480 million US dollars/352 million euros) went missing. To this day it is not clear whether they were lost to a hacker attack or mismanagement.
There are people who claim Bitcoins don’t work. What happened with Mt.Gox is nothing new. The proof of reserve, meaning a guarantee that most or all the money a bank holds is actually held in its reserve, has been a big problem in banking for a long time. Look what happened to Lehman brothers; so many people lost their life's savings. When I heard about Mt.Gox’s bankruptcy, I knew that there was a better way to exchange Bitcoins. I wanted to build an exchange where you have full proof of reserve.
And this gave you the idea for the Vaultoro Bitcoin-gold exchange…
Yes. My brother and I launched Vaultoro in February 2015. Through Vaultoro, users can instantly trade Bitcoins into gold and back. The gold purchased by Vaultoro’s clients is stored in a high security vault in Zürich. Currently we have 23 kilos of gold in the vault, and each kilo is worth around 32,000 euros. We have a public audit page, the Glass Books Protocol, where anyone can check up on all the holdings at any time. The Glass Books Protocol displays the encrypted client IDs of our members and their Bitcoin and gold holdings. Every user can compare this amount to the vault operator’s statements and the blockchain. This gives users the ability to see proof of above 100% reserve of both Bitcoins and gold while protecting users' privacy.
Why did you choose gold as the basis for your exchange?
Gold does not rust, it does not disappear. Gold is the same down to an atomic level. Let's look at one example to illustrate this idea: Six years ago there was hyperinflation in Zimbabwe. What did people do? The young went digging for gold. A guy stood behind people as they dug for gold, and he would offer them a loaf of bread in exchange for their gold. It is a really sad story. The old people who could not dig themselves and had no children to support them starved. But what we see from this example is that people immediately understood that the moment money loses its value, gold is the fallback. Don’t forget we lived on a gold standard for a very long time. People trust gold, because it is a real asset you can hold in your hands.
Which brings us to another problem with Bitcoins: Bitcoin prices are very unstable, which makes them difficult to use for money transactions. Many people fear the risk of losing money due to the currency’s volatility.
Bitcoin is in its price-discovery phase. Nobody knows what it is worth because it is such a brand-new thing and there are only a few people involved in the market. So a really big heavyweight can jump in and shift prices. Bitcoin is unstable but very handy, since you can use it to pay anywhere in the world at any time. Gold is a really beautiful way of storing value with three thousand years of history, but it is very heavy and hard to move around. We combined the two. So for the first time ever, you can have gold in a Swiss vault and instantly spend it in Bitcoin. Users can trade as much as they want and down to 4 cent increments.
What do you do to prevent money laundering and tax fraud?
Money laundering is a circle where money from illegal activities comes in, gets transformed into something else, is taxed a little, and paid out in clean, legal money. Our service does not allow goods to be exchanged in a circle. A member comes in with Bitcoin, buys gold, and then sells the gold back for his Bitcoin to get his value out again. The only way we see a possibility for laundering through Vaultoro is if a member chooses to have their gold physically delivered to them. And for this, we require our members to verify the funds with the appropriate complimentary documents. When it comes to tax fraud, taxes are always an honesty thing, really. Right now, there are no laws that regulate Bitcoin-gold investments. We’ll see some more intelligent legislation over the next 5-10 years.
What if you get hacked as allegedly happened to Mt.Gox?
First, our clients’ gold is totally independent of Vaultoro. They own it and they can have it delivered directly to themselves if something bad happens to us, because the gold is allocated. It is not on books, and not even a liquidator could get access to a clients’ property. Second, a third-party law firm gets the encrypted backup of all users’ holdings in real-time with a fourth-party law firm that has the key to unlock the backup. So the information about the users’ holdings is safe.
Who uses your services?
We definitely have speculators who try to change between Bitcoins and gold to profit from the volatility. But usually people just want to secure their Bitcoins with gold. Some clients are tipping people with Bitcoin – which means sending micropayments in order to rewards them for their work –, some are using the gold to safeguard their money. After the Greece collapse, we saw a lot more customers from Greece. They didn’t trust their own currency anymore. Currently we have 2,500 members from 91 countries, including people in developing countries. Another thing that I wanted to accomplish is to give Bitcoin to the 2.5 million people who are unbanked.
How is your Bitcoin-gold exchange helping the unbanked?
Many people don’t have a bank they can go to. But they have a mobile phone. Some of them have a small business, maybe they have created a T-shirt design that goes viral on the Internet. But the designer can’t sell it because he has no bank account. Through Bitcoin they just download a wallet and then they have instant access to a global market. Bitcoin is a real solution to a lack of accessible banking, except that it is too volatile. And that is where we come in. Plus, if those unbanked people have some savings at home, it is dangerous if word gets out that they have money or gold under their mattress. Through us they can store it and always have immediate access to their savings.
After the Greece collapse, we saw a lot more customers from Greece.
It sounds like you have a lot of thoughts and ideas on how to improve Bitcoin. Do you believe we will all be using Bitcoin in future?
A lot of people say that Bitcoin can never be the only currency. I never want Bitcoin to be the only currency. But if I am in a country where people are screwing with my money, if the government starts printing bills like crazy, I want to offer people a way to peacefully exit the monetary system. There is another aspect to it too: Many big banks now understand the importance of cryptocurrency. If digital money is made by banks, the next generation will be big brother on steroids. The banks will monitor every single transaction, log it, reverse charges, and sell data to insurance companies. This is not a free society anymore. The main takeaway is how important it is that we as a society embrace decentralized, open-source money such as Bitcoin.