Writer, reporter, and film producer Jim Epstein talks with EconTalk host Russ Roberts about mining Bitcoins in Venezuela as a way to import food. Venezuela is a tragicomic example of how policy can lead to strange and presumably unexpected outcomes. Epstein also discusses how Bitcoin is being used elsewhere in Latin America and the potential for the blockchain technology to lower the costs of owning and transferring property.
Play
Time: 59:51
How do I listen to a podcast?
Download
Size:27.5 MB
Right-click or Option-click, and select "Save Link/Target As MP3.
Readings and Links related to this podcast episode
Related Readings
HIDE READINGS
This week's guest:
Jim Epstein's Home page
Jim Epstein on Twitter.
This week's focus:
"The Secret, Dangerous World of Venezuelan Bitcoin Mining: How cryptocurrency is turning socialism against itself," by Jim Epstein. Reason. Redirects to January 17, 2017 issue.
Additional ideas and people mentioned in this podcast episode:
Gavin Andresen on BitCoin and Virtual Currency. EconTalk. April 2011.
Life in Venezuela:
"Why Is Venezuela in Crisis?", by Gabriel Hetland. The Nation, August 17, 2016.
"On Price Controls and Populist 'DoubleThink'", by Ibsen Martinez. Library of Economics and Liberty, March 3, 2008. Hugo Chávez, food scarcity, violence as far back as 2008.
"Venezuelan Police Arrest Eight Bitcoin Miners in Two Weeks, and the Country's Leading Bitcoin Exchange Suspends Operations," by Jim Epstein, Reason, February 3, 2017. Published after this episode was recorded.
Surbitcoin and miscellany in that discussion:
Surbitcoin.
BlinkTrade: The Blockchain Financial Network for the Masses.
Fernando Ulrich on Twitter.
"How Bitcoin Is Undermining Socialism in Latin America: Rodrigo Souza on why technology is the clearest path to freedom," by Jim Epstein. Reason, November 30, 2016.
"Bitcoin: A Peer-to-Peer Electronic Cash System," by Satoshi Nakamoto.
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando De Soto at Amazon.
A few more readings and background resources:
Magic Realism. Wikipedia.
Randy Brito.
Factom Blockchain.
Steam Bitcoin Group.
Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics.
Foreign Exchange, by Jeffrey Frankel. Concise Encyclopedia of Economics.
Property Rights, by Armen Alchian. Concise Encyclopedia of Economics.
A few more EconTalk podcast episodes:Gavin Andresen on the Present and Future of Bitcoin. EconTalk. May 5, 2014.
Marc Andreessen on Venture Capital and the Digital Future. EconTalk. May 19, 2014.
Nathaniel Popper on Bitcoin and Digital Gold. EconTalk. June 2015.
Wences Casares on Bitcoin and Xapo. EconTalk. July 2015.
Sam Quinones on Heroin, the Opioid Epidemic, and Dreamland. EconTalk. January 2017.
Highlights
Time
Podcast Episode Highlights
HIDE HIGHLIGHTS
0:33
Intro. [Recording date: January 20, 2017.]
Russ Roberts: I want to thank those who participated in EconTalk's Annual Survey, which is now closed. I'll discuss the results and your favorite episodes of the year, next week. Now for today's guest. Writer, reporter, and film producer Jim Epstein of Reason, whose recent crazy article on what is happening in Venezuela really fascinated me. And that's our topic for today. Jim, welcome to EconTalk.
Jim Epstein: Thanks, Russ. It's a thrill to be on my favorite podcast. And I also want to say right at the outset that I actually first heard about Bitcoin by listening to your 2011 interview with Gavin Andresen.
Russ Roberts: Oh, cool!
Jim Epstein: And I remember standing in my kitchen, listening to that interview, thinking, 'This can't possibly work.' And, you know, over the course of 6 years, I, through a gradual evolution, including through my reporting on Venezuela, I've come around to the idea that's it's going to actually change the world. But I also say one more thing--which is that in 2011, when you interviewed Gavin, the price of a bitcoin was $.90. So, I also wish I'd purchased a few.
Russ Roberts: You're not alone there. I have a friend, a very wise adviser friend who mocks me constantly for my failure to purchase at that point. Hindsight is 20-20, though, and we don't keep track of all the times we didn't buy the things that didn't go up. But it is somewhat unsettling. We don't do investment advice on this program, of course, so consult with your adviser for what the right activity is for yourself, those of you listening out there. So, this is partly about Bitcoin, but it's about lots of things, which is partly what makes it such an extraordinary story. When I tell people I'm interviewing you about this, they go, 'You're kidding. This is so bizarre.' So, the background for the story is the Venezuelan economy, which people may have heard hasn't been doing so well lately. Give us some idea what's gone wrong in Venezuela--not necessarily the causes people argue about, but: What's the state of the economy, generally?
Jim Epstein: The state of the economy is--I think the most important thing to mention is that for a long time, and for many cases now, still, the supermarkets are empty. So you can't really buy food the normal way. And that has to do with price controls. So, an enormous black market has grown up in food. So, it's okay for the middle class. If you are poor, it's particularly difficult. You can wait in line for a long time at a Venezuelan supermarket. But the bottom line is that there's a shortage of food. The hospitals are falling apart. People are fleeing the country en masse. The country's been taken over by violence. The police--the Secret Police, the Federal police--are also pretty dangerous. It's kind of become a living hell.
Russ Roberts: And, there's debate about how bad it is. I just want to--and as well as, what are the nature of the policies exactly--the price controls situation is quite complicated; there's been some relaxation of price controls, evidently, outside of Caracas, in the outside regions, in other parts of the country. But I just want to read a quote from The Nation, a Left-leaning publication, an article by Gabriel Hetland, who just gives some facts as well as his own take as to what's gone wrong. He blames it partly on government mistakes, partly on U.S. policy. But that's, again, not our purview in this conversation. I just wonder about his summary of what's happening there. This was written in August of last year (1916):
The main features are the following: runaway but not (yet) hyper-inflation, which government sources unofficially put at 370 percent for the past 12 months, and which the IMF estimates will top 700 percent for 2016; multiple years of low and negative economic growth (1.3 percent in 2013, -3.9 percent in 2014, -5.7 percent in 2015, and an estimated -10.1 percent in 2016, according to the IMF, with the Economic Commission on Latin America and the Caribbean forecasting -8.0 percent growth in 2016); a 40 percent drop in imports this year, and a 60 percent drop since 2012; chronic scarcities of food, basic goods, and medicines....
And you may have seen videos of people rioting in the streets over possible opportunity to get food, empty shelves, people in lines for hundreds and hundreds of yards hoping to get basic supplies like sugar, rice, flour, water, toilet paper, etc. It's not a good situation. Crime is a huge problem. There is a lot of corruption in the government, as you've mentioned. And so, what's interesting is in this situation people have come up with some pretty creative stuff. And so, talk about what some of those activities are that you write about in your article.
Jim Epstein: Well, I guess I'll first talk--so basically, what's happening in Venezuela is that people are using Bitcoin. And, what is driving this, in part--and we can talk a lot about Bitcoin's unique attributes, what gets around the government's currency controls. But, what's really driving it in Venezuela and causing such a rapid increase in uptake is that electricity in Venezuela is virtually free. It's a token sum that you pay. It's heavily subsidized by the government. And there's an activity, for those who are familiar with Bitcoin, called bitcoin mining, which is: You are participating in the Bitcoin network. Most people who use Bitcoin, the vast majority are not miners. But anyone can become a miner. And when you become a miner, you are helping to kind of maintain and run this decentralized currency network, which is Bitcoin. And you are using a lot of electricity. And in most of the world, it's hard to squeeze out any value in mining. So, when you mine you get paid in newly-minted bitcoins. But, you know, the price of electricity--because you are running your computers at high speeds--you are solving cryptographic puzzles--are going to generate a lot of heat, use a lot of electricity. And that electricity, the cost of it, can sometimes exceed the value of the bitcoins that you receive. So, to Venezuela, where electricity is, you know, virtually free--
Russ Roberts: Artificially cheap--
Jim Epstein: Artificially cheap. If you can set up a Bitcoin Miner--and people are discovering this: it can even be an outdated miner, which is a specially-designed computer, which would be essentially worthless, would get you nothing here in the United States--you can set it up there and you can start making money. And this is in the midst of a country where there's not enough food. Suddenly, you can--it's like having a home mint: There is almost this magical realism aspect to it that, in the midst of this country that's just disintegrating--the economy is disintegrating. You can bitcoin-mine. You can set up a miner in a soundproof room of your house and start making, you know, $70, $80 bucks a month. And that is really changing the lives of middle class Venezuelans all over the country.
8:19
Russ Roberts: So, a little background. Those of you who don't remember or missed our previous Bitcoin episodes, you can go back and listen to them. We'll put a bunch of them up as links to this episode. But the point you are making is that, this solving of cryptographic, extremely complex computing challenges is the way that the creator of Bitcoin set it up so that it would be difficult but not impossible to generate addition bitcoins; and that the amount that would be generated would increase at a decreasing rate till it finally reaches a limit. And so the only thing that keeps people from creating more at any one time is their brain power--their ability to learn how to do this. And, access to computing equipment, with a sufficiently low cost of using that equipment--which is the electricity. So, here we have Bitcoin mining flowing to its cheapest source: which is places where electricity is artificially low. And before we get into--what's especially interesting, what people do with the bitcoin, talk a little bit about the electricity challenge. Because, even though it is artificially low, it often is shut off, for hours at a time, by the government, to conserve the cost, to keep the cost down of providing cheap electricity.
Jim Epstein: Well, I mean, Venezuela has an awful electric grid. So, you know, they are--and they also primarily also rely on hydroelectric power; there have been electricity shortages. It's like everything else in the economy. The infrastructure there, it's falling apart. They've had 3-day government holidays to shut down the office buildings. There's been rolling blackouts in some parts of the country. So, yes, there are electricity shortages. However, in many parts of the country, there haven't been shortages. Miners are also--they are very savvy. They do things like they rent office space in industrial areas of the city where the electricity supply is more constant. There are definitely miners who are dealing with constant outages and it decreases their earnings from their mining activities. But it's not to the--you know, it's still an incredibly profitable venture, if you can learn about it and start doing it.
Russ Roberts: And just as a footnote, I also should have mentioned that when people list the causes of Venezuela's problems, the fall in the price of oil has been very hard on them. And also, of course they are not the only country that has had to face that. And their economic situation I think is really due to really poor economic policy. But people debate that.
11:07
Russ Roberts: So, some creative people have gone out, acquired computing equipment, taken advantage of the cheap electricity price, and produced bitcoin--a currency that is not inflating at 300% or 700% a year. What are they doing with it? What's the thrill? A lot of people would say, 'Well, what can you do with bitcoin? What good is that? You can't use that in the grocery store?' In Venezuela, it's true that the shelves are empty; but there are black market opportunities where you could make, acquire stuff. But those people don't take bitcoins. So, what are they doing that's--um--with the Bitcoin?
Jim Epstein: Well, Bitcoin is the first successful digital currency that runs on the Internet. And that's--if you think about any other digital money--and most of us primarily use digital money at this point--it's routing through the traditional financial system. There is a third party involved. Generally a third party that is involved with the government. That's not true of Bitcoin. There is no third party. You are interfacing with this decentralized--
Russ Roberts: No Federal Reserve--
Jim Epstein: There's no Federal Reserve. There is no bank, actually. And nobody can stop you; nobody can control it. Nobody can set the price. It's a complete free market in currency. And it's sort of an amazing technological feat that this is possible. And it's secure. But, so, in Venezuela, in 2003, Hugo Chavez, I think it was an oil strike that initially prompted this, put in place currency controls, setting up a fixed exchange rate. Currently there are three levels. I believe the most advantageous level is about $1 U.S. dollar for 660 Venezuelan bolivars. On the black market, sort of free market rate, it's more like $1 U.S. dollar for 3700 bolivars. So, nobody wants to participate in this fixed exchange rate. But because the traditional financial system--and, you know, Venezuela has a modern[?] banking system--it is forced to abide by this government exchange rate. And as a result, your money is worthless. You can't buy stuff out of the country with your bolivars. Nobody will take it. There's a little bit--if you cross the Colombian border, you can use cash; and there is to some degree a free market, a free exchange rate. And that's actually how we know the black market rate, through the, on the exchange houses, on the Colombian border, where you can do an exchange with cash. But for most of the country--and if it's digital--you can't do it. So, Bitcoin, what it does, it's a complete borderless technology. It doesn't matter where you are in the country when you pay. Where you are in the world when you pay someone in Bitcoin. It is--it is essentially circumventing these currency controls. And it's allowing Venezuelans to spend their money abroad. And they are very specifically, a lot of them. And, you know, I've talked to many, many miners who are using Bitcoin in this way. They are, um, buying groceries from Amazon.com. There is an industry of courier services in Miami, who are, who pre-date the currency controls and who are very sophisticated in bringing packages into the country. They are routing their Amazon orders to these warehouses, and then having the food--often canned goods, rice, corn meal, non-perishables--delivered straight to their homes. And now--of course, the first thing you might say is, 'Well, Amazon doesn't accept Bitcoin.' It doesn't matter, because they use--there's a couple of services--there's a site called eGifter, where you can buy an Amazon Gift Certificate with bitcoin. There's a great company called Purse-io, which allows you to use bitcoin to buy things on Amazon through an intermediary. This also, actually, makes me thinks me think back to your conversation with Gavin Andresen in 2011, when there was a--you guys were discussing, as I recall, some kind of concern about: 'Nobody takes Bitcoin. What is this worth?' What we found out since then is that it doesn't matter that much. Because if you have a Bitcoin Credit Card, at the point of sale it's converted to fiat dollars. There's so many services that will convert your Bitcoin to traditional money that the fact that any one vendor doesn't take it doesn't matter.
Russ Roberts: Yeah, there's virtually exchanges where you can move back and forth between bitcoin and dollars. At least right now. There's always still a question whether that's going to persist. We've talked about this before; but I'll also mention in passing: There's nothing "behind" Bitcoin. It's just--it has value as long as people think it has value. There are a lot of people out there who want it to have value. That's not quite enough; but it's getting us there. It's important to remember that the U.S. Dollar isn't backed by anything real. It does have the advantage, though, that the U.S. Courts will settle disputes about contracts made in U.S. dollars. And you can pay your taxes in U.S. dollars. That automatically creates a viability for being paid in dollars, that, in many ways, along with some vague level of trust, creates the value of an usefulness of accepting dollars in your paycheck. But, Bitcoin is using a different--but not totally unrelated method--of, well, 'If people think they can be useful somewhere, then they are.' At least for now. So, people are--I mean, this is just a mind-boggling piece of economics. It just is--as a microeconomist it just utterly fascinates me that price controls, in Venezuela, on food, means there's not much food, or none in many cases on the shelves. Price controls on electricity, and subsidies, means that it's really cheap to use electricity. People have enterprisingly gone out and are generating bitcoin with that cheap electricity, to import food from America. It's mind-blowing. Now, the government--
Jim Epstein: And I credit my Reason Editor, Peter Suderman, for helping come up with this formulation, in terms of--what we say is that it's turning Socialism against itself.
Russ Roberts: Right. It's an end around, exploiting a piece of the system--the subsidy of electricity. It just, it's just extraordinary.
17:35
Russ Roberts: So, the government doesn't like this, though. One question would be why? People are literally hungry there, it appears. It's hard to know exactly how bad it is, by the way. You are painting a very negative picture. I think it's pretty negative. I don't know if it's as negative, and--scary, despairing--as you suggest. But it's clearly not good. But, you'd think the government would be happy that people found a way to get some food into the country. Why are they cracking down on it? And talk about how they are cracking down.
Jim Epstein: Um, well, they are not--they are cracking down in part. They could certainly go farther. And, you know, one thing--so this was, early last year the government, the state-owned media issued a report that Bitcoin is terrible; it's used by criminals. The same kind of thing that people in the United States use to speak negatively about Bitcoin. And then, right after that, a handful of Bitcoin miners were arrested, on a number of charges, one of them being electricity theft. Because, on the--you know, one miner in particular who I interviewed ended up spending 3 and a half months in prison, whose name is Joel Padron, was told by his arresting officers that, you know, he was taking advantage of this free resource, the electricity that the government was giving him, to generate currency. To line his own pockets, essentially. So, a number of miners were arrested. It was reported on in the state-owned media. And the effect was to allow the SEBIN (Servicio Bolivariano de Inteligencia Nacional)--which is the Secret Police in Venezuela--to go to other miners and essentially extort them. And I spoke to many bitcoin miners who knew of other miners with direct experience who were paying tribute to the police in order so that they could continue their activities. Because, you know, again, the police officers are also living in this country. They--you know, they are facing the same empty grocery stores. So, really what it's done is created this kind of extortion racket. The government could go farther. There is an exchange in Venezuela called Surbitcoin. It's the largest exchange--it's actually run out of Brooklyn, New York. And they, essentially, it's like any other exchange. You can exchange your bolivars for bitcoins. And they are in partnership with Banesco, with one of the big banks in Venezuela. Which allows you to do this digitally. They actually--they have a very good relationship with the bank. Many of the people at the bank are actually their customers. The government can certainly come in and say, put an end to this and shut down Surbitcoin. That wouldn't actually stop Bitcoin, because Bitcoin at its core, and we can talk about this if you want, is a peer-to-peer technology. So, the exchanges aren't necessary. But the government could do more. And they probably will eventually do more, as this continues to scale. It's still--most Venezuelans aren't mining Bitcoin yet. People hear about Bitcoin. People whisper about Bitcoin--this strange technology where you can kind of create money with computers. A lot of them don't understand it.
Russ Roberts: They are not alone. It's hard to understand.
Jim Epstein: When I was doing the reporting on my piece, Surbitcoin, its volume was increasing at about 20% a week. It's growing so rapidly. If you go to the big peer-to-peer Bitcoin trading site, a wonderful company called Local Bitcoins, they make all of their data available--you'll see the incredible growth in bitcoin use every week in Venezuela. I think that, as it grows, you probably will see more of a government backlash. At this point, it seems mainly as a way, driven by the Police, to sort of set up this extortion racket.
Russ Roberts: As you were talking, it reminded me--we mentioned that bitcoin--it was $0.90 for one bitcoin. Do you know what it is right now? Roughly?
Jim Epstein: Yeah. It reached up to $1000 right around New Year's, and it was dipping down to $800. There's a lot of rumors coming in from China--
Russ Roberts: Right--
Jim Epstein: Which are affecting it a little bit. In the $800 range, I believe.
Russ Roberts: Yeah. But it moves around a lot. But a 90-cent investment would have turned out pretty well. If you sold now. It may turn out to be pretty worthless eventually.
22:14
Russ Roberts: So, the government has cracked down some. You mention a Facebook Group--another example of how the Internet circumvents some government activity. There's a Facebook Group for Venezuelan Bitcoin Miners. Talk about what it has on there and the degree that people that people have to go through to maintain their anonymity.
Jim Epstein: Yeah. Well, it's a secret Facebook group. When, as I mentioned earlier, when the state-owned media started coming out with negative Bitcoin stories and some miners were arrested, some of the moderators of the group--controversially, actually, because it's really slowed growth of the group--it was growing enormously before that--they changed the settings in the Facebook Group to make it Secret. Which means that you not only need an invitation: You won't even know it exists unless you get an invitation into this group. And a source did add me. And I will say, also, many of the people who are in this group fully suspect that there are members, you know, of the Secret Police who are part of this group. So they still often use secondary profiles and so forth. But it is--what the kind of leading person behind setting up this group, a guy named Randy Brito, 21 at the time, and a real Libertarian, also, set up--he lives in Spain; his family fled Venezuela years ago--he set up the group in part to kind of teach people about Libertarian economics and so forth. And it didn't go in that direction, interestingly. Most people don't seem to be particularly interested in talking about ideology or economics.
Russ Roberts: I noticed.
Jim Epstein: They are interested in this group. They are interested in selling stuff. It's kind of an online bazaar. And to me it shows--it makes me very optimistic about Bitcoin, because this is a community that is using Bitcoin, not like many of the users here in the United States, not for ideological reasons, but because it's making their lives better. So, people are--every day you see listings for--I just saw one for tires, cars; I've seen houses; toilet paper. Anything where they are offering it for sale, they'll send it to you and you'll send them bitcoin in return. Seems sort of inefficient, but there's a lot of participants in this group. People are also selling bitcoin to each other in exchange; it also to some degree serves as an exchange. There's a reputational aspect to it: People give each other recommendations--say, 'Have you done business with this person? Who can say that this person is trustworthy?' Etc.
Russ Roberts: Is there also information, clearing, they are going on about how Bitcoin is working or what the government is doing, or that kind of thing?
Jim Epstein: Very little. Very little about that. People don't--and I imagine, it also, getting back to the idea that it's sort of monitored. People don't want to speak freely in this group. They don't know who is reading it. It's really about commerce.
Russ Roberts: Interesting.
25:17
Russ Roberts: Now, you point out--one of the aspects of Bitcoin I think that make some people uneasy, including myself--you can't touch it. It's purely digital. I have a little bit of bitcoin. It's sitting in a digital wallet somewhere. In theory I can get at it when I want. But it feels different from a bank. Even though a bank, my money in a bank, or it's Schwab, Charles Schwab, it's also digital. There's no real pieces of paper there in the account. But it somehow feels different. There's nobody to turn to if I feel I've been mistreated--which there is in the case of Schwab. If Schwab defrauds me, there's some legal recourse I have. With Bitcoin, it's a little bit of the Wild West. So, that's usually--it turns people off. But as you point out, one of the advantages in Venezuela, because of the crime rate, is that it's harder to steal.
Jim Epstein: Well, that's right. I mean, you know, the classic refuge from inflation in Venezuela and in other Latin American countries as well has been the U.S. Dollar. However, unless you are lucky enough to have a U.S. bank account--and there are some Venezuelans who have spent time in the United States and are that lucky--you can't really keep your money, you can't keep your life savings in dollars. There's no way to do it. You can keep cash. There's been a real shortage of U.S. dollars within Venezuela because of the currency controls and so forth. Of course, though, if you keep cash in your house, you could get robbed. And that happens all the time. I mean, this is a country that really has been besieged by crime. Caracas--nobody really goes out after 8 o'clock any more.
Russ Roberts: I want to talk about that in a minute, but I want to stick with this for a second, because I've got to read this quote, because I just love the quote. This is from your article. You say, "Since bitcoin has no physical properties, it's also harder to steal. Venezuela still has a robust black market in U.S. dollars, but storing greenbacks"--that is, U.S. dollars--"is risky in a country besieged by crime. 'Burglars smell the Benjamins as if they were hunting dogs,' says Hector, a physician turned bitcoin miner." That sentence--"'Burglars smell the Benjamins as if they were hunting dogs,' says Hector, a physician turned bitcoin miner." The whole thing is great. The imagery is fantastic; the alliteration of burglars and Benjamins--and then you've got a physician who is bitcoin mining because it is presumably at least as lucrative as being a doctor in Caracas--it's kind of sad.
Jim Epstein: Yeah, a physician who is a 44-year old bitcoin miner who has totally given up practicing medicine because essentially there is no money in it: he can't get paid any more.
Russ Roberts: Now let's turn to the nighttime situation, because that's an incredible story, just the example of the breakdown in civil society is terribly tragic. Talk about what happened to one of the people you talked to, in a kidnapping situation.
Jim Epstein: Yeah. A bitcoin miner, I called him Luis--I used pseudonyms for many of these people. I interviewed them on the condition of anonymity because there's obvious incredible risks in terms of being caught doing this activity in Venezuela. He--I tell him--he's the story of what's called an express kidnapping. He was driving in Caracas with his girlfriend. He was pulled over; guys with guns got out. One of them, I believe, had a grenade. They held him hostage. And his father ended up making a payment, giving them, I think, about $6000 that he gathered up from neighbors frantically in the night, and getting this person, this minor, released. They didn't actually know that he was a bitcoin miner: it doesn't seem that they did; though because of his mining activity he was actually able to reimburse the people that put money forward to help him get out. And this guy is a young guy; he's very tech savvy--the exact kind of person, and I spoke to many people for my piece who are just like this--that you'd think Venezuela's future sort of rests on. They would be an enormous asset to the country. And even though they are getting by thanks to their bitcoin mining activity--some of them are doing quite well--they are getting out of there, because it's just no place where you want to live, raise a family. So, the number of people that--anyone who can, really seems to be making plans to leave at this point.
Russ Roberts: Yeah. I don't really know what's going to happen, policy-wise. To change that--seems like just a really bad situation. But that kind of breakdown--that's not a rare event, evidently--I wouldn't say it's necessarily common. I have no idea. But the fact that it's happened at all is so distressing and must be so distressing to people who are in those circles. It's just terrifying. And just as you say, terribly sad--sad because of the human toll; partly because it means the country is going to lose some of the more talented people who might be part of its future.
30:32
Russ Roberts: Let's think for a minute just about that government crackdown, or the fear of being arrested; the fact that people use pseudonyms in your story. You talked earlier about this. How bad is it? Are they just worried because some bitcoin miners have been arrested? Or is it getting worse? Do we have any idea about that?
Jim Epstein: You know, I'm staying in touch with these people; I've heard some worrying reports recently about a few more crackdowns in miners. It depends a little bit on where you are in the country: in Valencia it's worse than in Caracas. The police--it's sort of regional to some degree, so the attitudes are different. I wouldn't say, the vast majority of miners have not gotten in trouble. It's hard to know how many are being extorted. But also we don't know what's going to happen. I think a lot of people expect that the food and the economic situation could only get worse. These people are going to become--they really become targets. And, you know, spending time in a Venezuelan prison is not something you want to do. It's just a terrifying place, because the rule of law has completely broken down.
Russ Roberts: Again, I just wonder how bad it really is. I'm interested if there are any listeners out there who are in Caracas right now or have visited Caracas lately. A lot of times--I always think about Israel which I visit a couple of times a year. Israel is a beautiful country, and whenever I go, people say, 'Aren't you worried?' And of course there's always the risk of some danger. But Israel is an incredibly safe country. My niece lives there and her kids run around much more freely than my kids ran in the United States, without fear. And there's a certain disproportionate media coverage of violence and tragedy there that people are thinking it must be like a war zone. Well, it's nothing like a war zone at all. For all I know, places that I think of as a war zone, like Beirut--maybe life is normal there, too. So, Caracas, when people talk about how "horrible" it is or how it's falling apart, I suspect most of the time most people are leading somewhat normal lives there. But I've no way of knowing; I'd be curious if anybody out there knows about that. And Jim, if you want to comment on that?
Jim Epstein: Yeah, I mean, possibly before 8 p.m. I've spoken to many people who told me that you cannot go out after night. The city, this enormous city, just dies at night. And I think that's sort of one of the really big changes. Also, Caracas is the murder capital of the world. It had a terrible crime problem before the most recent economic crisis. But it's certainly made things much, much worse.
Russ Roberts: We're going to move on and talk about other applications and activities going on in Latin America. Before I do, I'm just curious: Where did you get the idea for this story? This particular crazy mix of price controls and subsidies and entrepreneurship?
Jim Epstein: Yeah. Well, I actually was in Brazil doing reporting on a couple of different stories, and I ended up meeting with and interviewing members of the Bitcoin community in Brazil. And there's actually, and we can talk about that in a moment--there are actually some parallels to what's happening in Brazil with Bitcoin and what's happening in Venezuela. And it was through a contact there named Fernando Ulrich, who is really a terrific writer about Bitcoin. He's a Brazilian who turned me onto the fact, just in conversation, that Rodrigo Souza, who runs Surbitcoin, the biggest Bitcoin exchange in Venezuela, works about a mile from where I live in Brooklyn--that he's actually in Brooklyn.
Russ Roberts: That's a good story[?], too.
Jim Epstein: Again, it points to the fact that this is a borderless technology; it doesn't matter where you are. And Rodrigo is--he actually runs a company called Blinktrade, a former NY Stock Exchange software developer who has mimicked the kind of exchange, broker-exchange relationship that the NY Stock Exchange has, where he runs, he has a liquidity pool; he runs the software; and then he interfaces with a variety of countries: Vietnam, Brazil--he runs the biggest exchange in Brazil--Surbitcoin in Venezuela; there's an exchange in Chile. And there's sort of--there are local brokers who are essentially hooking up his exchange to a bank. And that's sort of how this technology works. And it's right here in Brooklyn.
Russ Roberts: And allowing people to trade in their own domestic currency from bitcoin, which would otherwise be--when you land in Caracas and you go to the--if there is a foreign exchange window there; I don't know if there is--but there is usually a Bitcoin opportunity there.
Jim Epstein: Well, and I was just going to say, also--when I started to talk to Rodrigo--and he was telling me, again, probably some people who first hear about this: I was having trouble wrapping my head around it--and, you know, how people are mining in Venezuela? I mean, isn't there an electricity shortage there? Anyway, Rodrigo led me to a bunch of other sources and then this story started to unfold.
36:16
Russ Roberts: That's very cool. So, you mentioned Brazil. Talk a little bit about Brazil if you'd like. Or other places. What else is going on in Latin America, and to what extent does it mirror what's going on in Venezuela? Obviously, not every country has price controls and empty shelves and therefore people are importing food from Miami. But there are some situations where public policy in Latin America, and Bitcoin is involved in those. What's going on?
Jim Epstein: Well, okay. So, Brazil--I believe it's the biggest Bitcoin market in Latin America. There's a lot of currency speculators. Foxbit is the big exchange. The practical use, though, is similar to Venezuela. There are not the same currency controls. There is not a fixed exchange rate. However, there is an enormous amount of protectionism. So, if you want to import--if you want to buy an iPhone or an Apple laptop in Brazil and bring it into the country, you are going to pay a tariff equal to--it can run as high as 60%. If you want to bring money into the country--and these are very complex rules for exactly how much you'll pay--but you might end up paying an income tax and bringing that money into the country of about 27.5%. If you are a Brazilian and you want to use your credit card to buy something from the United States, or you come to the United States and you want to use your credit card for your hotel, you are going to pay a 6.38% fee on everything you buy. So, there's an enormous amount of protectionism, sort of. Bitcoin, similar to how Venezuela, it allows you to route around the fixed exchange rate--Bitcoin allows you to route around these punitive taxes. So, for example, if you want to bring an Apple laptop into the country, you get whoever is selling it to you to write you a bill of sale for maybe half the amount, something to show at Customs. You pay the tax on that amount. And then you pay the rest of the bill in bitcoin. And you pay nothing.
Russ Roberts: So, let's try to understand that. That's a little puzzling to me. So, let's say--there are a number of ways I could buy a foreign product in a country. I can go to a store that has imported it for me; and usually a store has trouble avoiding, evading tariffs, because they've got a concrete, brick-and-mortar presence and they've got to pay taxes and they've got receipts; and it's just a little more challenging to smuggle goods in. But, I can also--you know, I can just have somebody ship me--if I have a relative in America, I can ship it. And of course that product shows up at the border--that package--and they inspect them, and things get confiscated or taxed at the border, depending on what's in them. So, I don't understand how Bitcoin is helping me--I mean, I can kind of direct order it. I don't know if Apple sells direct order to Brazil or other companies do. But how is Bitcoin helping me? I don't quite understand that. See if you can help me understand that, again.
Jim Epstein: So, Apple, I don't believe would direct-order to Brazil. But, you know, you'd have a third-party company working with Apple that might do that. And, in terms of, bringing that good into the country, when that laptop or phone or whatever you are buying from that re-seller in the United States--that item has to cross Customs. And you need to produce a Bill of Sale. And the Bill of Sale will show how much you paid. And they are going to make sure that you have paid the tax, the import tax. You have paid the tax, the import tax. Right? So, um, because it's a good, you can't pay for the item through Bitcoin, through this, by circumventing it. So you have to pay for part of it. At the border. But then, with Bitcoin, what you can do is you can pay half of it. You can work out a deal with the reseller--and there are many Brazilians who are doing this sort of thing--work out a deal to make up a Bill of Sale for half the price. And then you are going to--it's tax evasion, essentially.
Russ Roberts: Yeah. Let me see if I can get this. So, I'm the reseller. I'm selling you a--a $2000 computer. So I need $2000 from you, the buyer, in Brazil. I declare it as a $1000 computer. You pay me $1000 in cash. In dollars. But you are saying the other $1000 shows up in Bitcoin as an unobserved transaction by the Customs' people. So, the Customs' people see a computer. They see a bill of sale for $1000. They go, 'Okay, that's reasonable.' And then it goes through. And so you only pay the tariff on the $1000 rather than the $2000. And that's what's going on. Is that what's happening?
Jim Epstein: Yeah, it's correct. And because you are going through a Bitcoin exchange--in the case of Brazil it's likely going to be Foxbit--it's not going through the banking system. So it's unobserved.
Russ Roberts: Untraceable.
Jim Epstein: It's--right. It's not traceable. It's not--same thing with just moving money into Brazil. Where you might be hit depending on the amount, it's fairly complicated. But you might be hit with--if you want to, if you are a company and you want to pay some employees in Brazil, you might pay a 27.5% tax on that. Well, you can actually route all that money through a Bitcoin exchange; and then you are not working through a bank bureucracy, which is a sense is in partnership with the Brazilian government. So therefore you are circumventing that tax. Now, you might say, 'Well, why doesn't the Brazilian--this is happening out in the open? Why doesn't the Brazilian government crack down on this and stop Foxbit from this use?' Well, first of all, it's hard to know why someone is using Foxbit, what they are doing with it. You know, what--are they just making an exchange for other reasons. So that's hard to tell. They could shut down Foxbit entirely. They could do that. But again, Bitcoin--and this is one of the reasons I'm so optimistic about Bitcoin--it is at its core a peer-to-peer technology. And the technology around Bitcoin has been improving so rapidly that in the near future, these peer-to-peer transactions will be as convenient as working through one of these exchanges. And when Bitcoin is truly peer-to-peer, as it was intended, if you go back to Satoshi Nakamoto's original paper, it is very, very difficult, virtually impossible for anyone to interfere with the movement of money. Um, and that is, um--that was--short of shutting down the Internet.
43:16
Russ Roberts: But I'm curious how the--I'm thinking about that reseller. They can't--do they advertize? This computer is $2000. But if you paid it with $1000 in bitcoin, it's only $1000. How does that transaction, how does information about this opportunity happen? Or does the seller, does the buyer call up and say, 'Well, the price is $2000. I'll give you $2200, actually. But only $1200 of it will be in--$1000 of it will be in cash and $1200 will be in Bitcoin. We'll both be better off. Because we won't have to pay the tariff.
Jim Epstein: Well, for example, the company called Bit.One, which is moving money into Brazil to get around the tax--they are, I believe, using the Foxbit exchange. What it is, is that there are some companies to facilitate this process. It's not advertised. It's word of mouth. More people in the know are learning about it. And it's not--at this point, I think that big a phenomenon.
Russ Roberts: Yeah, I guess--
Jim Epstein: Growing. It's really kind of--what interests me so much about it is what it points to. The potential.
Russ Roberts: Right. And of course, like you, given our philosophical preferences, I love the idea that--other people would say that, 'Well, that's horrible. They are smuggling. They are breaking the law. And shame on them. And the government should crack down on it.' What are your thoughts on that?
Jim Epstein: Well, I would also say to those people that, um, that there has been a black market in getting around these punitive tariffs already. Bitcoin is a much safer way of doing it. Makes me think a little bit of Silk Road. You know, the Online Drug Bazaar. Which was ultimately shut down by the Feds. You know, it made selling drugs kind of safe and reliable online. You take that away and you give it back to sort of a less predictable, more violent spear of--economy--you know, actors.
Russ Roberts: Of course, my recent interview with Sam Quinones on Dreamland suggests it was some innovations in the deliveries of drugs that are less violent. It's not that comforting, given what it seems to be leading to. But that's a different topic.
45:29
Russ Roberts: Let's talk about the underlying technology of Bitcoin and some of the applications you've noticed in Latin America. Again, it's a fascinating example of an end-around an ineffective or corrupt government system. So, underlying Bitcoin is the Blockchain technology. Describe that, and talk about how people are using that, outside of Bitcoin.
Jim Epstein: I think the easiest way to understand a blockchain is it's a database that nobody controls but everybody can trust. It is--it is the--right, it so it sort of undergirds Bitcoin. It's basically the ledger. It's similar to the ledger that your bank would hold about when--when Jim Espstein pays Russ Roberts, you know, through a bank transfer, the bank transfer is updated. In the same way, the Bitcoin ledger lives on this database, call it a blockchain. And it has this ingenious architechture, which allows it to be distributed. So, um, there are copies of the blockchain on computers all over the world. They are updated every 10 minutes with the most recent transactions. You can search any transaction. It's completely transparent. It can't--what is in the blockchain can't be changed. It's cryptographically protected. So, this, what, pretty soon after Bitcoin arrived on the scene, a lot of very smart people figured out that you could use this underlying this technology of the blockchain for all sorts of applications separate from exchanging currency. Um, and some of the most exciting applications are in a place like Latin America. You know, what excites me most is actually this idea of putting Land Titles on the Blockchain. I live in New York City. There is a data base we have called ACRIS (Automated City Register Information System) that's run by the City of New York. You can look up who paid what for what plot of land, and you can check out the history. And it's--it's trustworthy. It's not really a problem. Bitcoin doesn't solve any problems here so much. But then you take a country like Honduras, where--and I haven't done my own reporting, but I am told that land records were kept on dusty books in a government office. You could have people come in and cross out a name and put a different name down. Very difficult to figure out who owns what. It's a complicated legal process. And many of your listeners might be aware of, there's a book called, The Mystery of Capital, by Hernando deSoto, where he talks about this problem in Peru, of insecure ownership of land. And how detrimental that is to an economy. [More to come, 48:21]