(SOUNDBITE OF TV SHOW, "FACE THE NATION")
TIM GEITHNER: The risk we face starts to happen in July. But then on August 2, we're left running on fumes. We have no capacity to borrow. I have to write 80...
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SPOON: (Singing) Japanese John, his slight face fur - still just as confused, still just as sure.
JACOB GOLDSTEIN, HOST:
Hello, and welcome to PLANET MONEY. I'm Jacob Goldstein.
DAVID KESTENBAUM, HOST:
And I'm David Kestenbaum. It's Tuesday, July 12. And that was Treasury Secretary Tim Geithner you heard at the top on CBS' "Face The Nation." Today on the show, what happens when you try to invent a whole new currency from scratch, no government behind it at all, a currency by the people, for the people.
GOLDSTEIN: You can't hold it. You can't touch it. It exists only on computers. It's Bitcoin. And today, David, is the much-requested Bitcoin podcast. But first, I'm going to give you the indicator.
KESTENBAUM: Please.
GOLDSTEIN: Today's PLANET MONEY indicator - 600 billion. Italy needs to borrow about 600 billion euros - that's more than $800 billion - over the next three years. That's according to a report from Reuters. And it's suddenly an indicator-worthy number because just over the past few days, everybody has started to get very worried about Italy's finances. And we know this very clearly because the interest rate on Italian government bonds has really been shooting up.
KESTENBAUM: Italy? Wasn't Spain the one - you kept telling me I'm supposed to be worrying and watching Spain. I was already plenty worried about Spain. Now you're telling me I got to worry about Italy, a country whose economy is much larger than Spain's?
GOLDSTEIN: Yes. In short, yes. You know, until now, Italy has seemed pretty stable. Its annual deficits are pretty small. Its banks are in decent shape. It didn't really have a crazy housing bubble. So it was sort of a back-burner worry. But when you look at it, I mean, Italy's national debt relative to the size of its overall economy - it's really high. Italy's debt-to-GDP ratio, it's actually the second highest in the eurozone after Greece's.
And then the particular thing that happened - late last week, there were reports of some tension between Silvio Berlusconi and the country's finance minister, who's been pushing for austerity. And, you know, that may not sound like a big deal - right? - just some little political spat. But in the context of how nervous everybody already is about Europe, it seemed to be enough to set this off.
KESTENBAUM: It's really interesting 'cause, you know, if you're the United States - like, we've been spending weeks and weeks with political wrangling over the debt ceiling. And yet the markets don't really react because they don't have a choice. You know, Treasury bonds are the thing you buy when you're freaked out about everything else. It's unclear where else they would put their money. But if you're Italy and you get a little political turbulence, the markets can really freak out and make life hard for you.
GOLDSTEIN: It can happen very fast.
KESTENBAUM: OK. On to Bitcoin.
GOLDSTEIN: So, David, you and I, we like to do the podcast and talk about money - not so much how to get money, but really, what is money? You know, we bought gold, and we talked about the origin of money. And now we discover that there is this group of people out there who are actually trying to invent a new kind of money.
KESTENBAUM: The new, experimental money goes by the name of Bitcoin. You can think of Bitcoin as a currency, just like the U.S. has the dollar. In the U.K., they have the pound. If you go to Japan, they use the yen. And if you go to Bitcoin land, they have bitcoins.
GOLDSTEIN: Right, except there is no Bitcoin land. Bitcoin was actually invented to be a kind of universal online currency. So if you use bitcoins, you have a sort of digital wallet. And you buy something by sending bitcoins from your digital wallet to someone else's digital wallet.
And Bitcoin has had some success. Every day, hundreds of thousands of dollars' worth of bitcoins are trading in online currency exchanges. And you can buy stuff online with bitcoins. One place sells alpaca socks. Another place sells coffee beans.
KESTENBAUM: And we had this kind of crazy adventure trying to get some bitcoins and buy lunch with them, which you will hear. But first, let's answer a basic question. Why? Why are people inventing this currency when the U.S. dollar seems perfectly fine for most purposes?
Well, there are two things about bitcoins that are really appealing for some people. First, it's basically an online version of cash, which I hadn't thought about before we did this story, but it doesn't really exist. I mean, you can buy things online with dollars, but you have to set up accounts with your bank or use a credit card, and sometimes there are big transaction fees. The money we have was not designed with the internet in mind and digital commerce in mind. Bitcoin is. And like cash, it's totally private. You can buy and sell stuff online without it going through a bank or credit card company or anybody else.
GOLDSTEIN: Another big selling point for some people is bitcoin is independent of any government, of any political system. Up until now in the modern world, if you wanted to use money, you basically had to trust some government. If you want to use dollars, you've got to trust the U.S. government. If you want to use yen, you've got to trust Japan.
KESTENBAUM: People who like bitcoin say, why do governments have to control money at all? Let's have government over here, money over there - totally separate.
GOLDSTEIN: For these people, Bitcoin could be a sort of techno-libertarian dream come true, a sort of universal, easy-to-use, private money.
KESTENBAUM: So to find out how this dream came about we talked to a guy named Gavin Andresen. He's a programmer who's done a lot of work on Bitcoin. But he did not create it. In fact, he said it's a very strange story about that.
GAVIN ANDRESEN: The idea started with a guy named Satoshi Nakamoto. He's a bit of a mysterious figure. We're not sure if Satoshi Nakamoto is his real name. He doesn't give interviews, and I've only ever interacted with him via email and electronically on the bitcoin forums.
GOLDSTEIN: Are you Satoshi Nakamoto?
ANDRESEN: I am not Satoshi Nakamoto.
KESTENBAUM: Do you have any sense for Satoshi? Has he ever made a joke in an email or anything?
ANDRESEN: He never has.
KESTENBAUM: Or she.
ANDRESEN: It's always been - or them.
GOLDSTEIN: Oh, them.
KESTENBAUM: Them. I like them.
ANDRESEN: Always is strictly business, just about kind of the bitcoin project and the code.
ANDRESEN: Creating a new currency is really complicated. How do you prevent people from making counterfeit bitcoins? How do you make sure that someone can't spend the same bitcoin twice? You know, I send it to you. I send it to Caitlin (ph).
GOLDSTEIN: Well, whoever is Satoshi Nakamoto is, he or she or they came up with really a pretty clever system. There's no center to the whole thing. It's not like one computer somewhere is storing all the information. Bitcoin isn't run by a corporation. It's not run by any nonprofit group. It's what computer geeks call a peer-to-peer system. It's run by everybody who uses Bitcoin. And Gavin says because of that, you don't even have to trust Satoshi Nakamoto, whoever that may be.
ANDRESEN: If you have the technical know-how, you can look at every line of code in it and see what it does. And it cannot be changed unless a majority of the people who are running the software decide that it ought to be changed. So you're trusting the collective wisdom of all of the people who are using Bitcoin not to screw it up. For me, that's more comforting than thinking that politicians or central bankers won't screw it up. I actually trust the wisdom of the crowds more. It seems like they have better incentives to make sure the system works.
GOLDSTEIN: Now, David, there is no way either of us is going to look at this code and understand it. But even assuming that Gavin and the other programmers who've looked at it are right, you know, when they say that it sets up this beautiful, self-sustaining system and it doesn't require any central authority, there's still this other really weird problem. When you're creating a new currency, one that just didn't exist at all before, how do you get the money out there in the world in a fair way? You don't want to just give it to your friends. You want to make people work for it.
KESTENBAUM: So here's how Satoshi did it. He decided he would make bitcoins like a computerized version of gold. Just like gold, there would be a finite amount of bitcoins out there in the world, and the coins would first enter the economy through mining. People would mine for bitcoins with their computers.
GOLDSTEIN: And what this means - what mining means in the case of Bitcoin is you download a computer program, and then you run it. And your computer grinds away at this very computationally intense puzzle. If your computer solves it, you get some bitcoins.
KESTENBAUM: We thought it would be fun to try to mine some coins, so we had Gavin walk us through it.
ANDRESEN: So it should start up, and you should see a traditional, very geeky-looking application.
KESTENBAUM: Yeah. There aren't any pictures or anything.
ANDRESEN: Yeah. The Bitcoin application is kind of designed by geeks for geeks a little bit.
GOLDSTEIN: It turns out, David, we are late to this bitcoin prospecting game. The bitcoin gold rush - it's basically already happened. And the more people who are looking for bitcoins, the harder it is for any one person to find some. So if we'd been doing this, you know, last year, when Bitcoin was just getting off the ground, we would have had a good shot, but now - not so much.
KESTENBAUM: Down at the bottom of the screen, there is some number that says hashes per second, probably.
GOLDSTEIN: I feel like we're just sort of, like, walking out to the banks of the Hudson River or something and sticking our hands in the mud, and there's essentially no chance that we're going to come up with a bitcoin here.
KESTENBAUM: That's pretty much true. Your typical office computer would take five or 10 years of running non-stop all day long to find any bitcoins, and you would end up spending more on electricity than you do on the value of the bitcoins that you got.
GOLDSTEIN: There are still people out there getting bitcoins this way - by mining them. But those people have these very powerful computers that can essentially run circles around our little laptop.
KESTENBAUM: Jacob, it struck me at this point that whoever got in early on bitcoins and dug up the first coins when they're easy to find - they are in a position to get really, really, really rich if this thing takes off.
GOLDSTEIN: Yeah. Last year 1 bitcoin was worth just a few cents. As of today, 1 bitcoin is worth more than 14 dollars.
KESTENBAUM: Have you made money on bitcoins?
ANDRESEN: I have made some money on bitcoins. I bought some bitcoins when they were cheap, and I have sold some bitcoins for a profit as they've gotten more popular.
KESTENBAUM: How much profit?
ANDRESEN: I've made about, I think, $5,000.
GOLDSTEIN: How many bitcoins do you have?
ANDRESEN: I would rather not say. I don't have hundreds of thousands, but I have a few thousand bitcoins.
GOLDSTEIN: So mining is not going to work for us, but there is another way for us to get bitcoins. Just like you can go to a currency exchange to trade your dollars for British pounds or euros or yen, there are places online where you can go to trade your dollars for Bitcoins.
KESTENBAUM: The biggest exchange online is this website called Mt. Gox. But, Jacob, when you and I went there a few weeks ago, something crazy had happened. The exchange rate had gone through the roof.
GOLDSTEIN: OK, buy bitcoins at market rates. Now it says 23.8.
KESTENBAUM: No.
GOLDSTEIN: So - what? - two weeks ago it was 7.
KESTENBAUM: What?
GOLDSTEIN: So it's about $24.
KESTENBAUM: Wait. Is that right? Or is it flipped or something?
GOLDSTEIN: Well, price per coin in dollars.
KESTENBAUM: So we really - so, really, they could double their money in this last week.
ANDRESEN: Yes, yes - tripled.
GOLDSTEIN: So, David, right here you actually ran out into the other room to find Jess Jiang, our producer who'd been working with us on this story.
KESTENBAUM: Hey, Jess. How much was a bitcoin when you were looking at it the other week?
JESS JIANG, BYLINE: Nine dollars.
KESTENBAUM: It's 23.8 right now.
JIANG: Yes, I just saw that.
KESTENBAUM: What the hell?
JIANG: (Laughter) Yeah. And it was $1 when I looked at it, like, three months ago.
KESTENBAUM: Jacob, this was part of a wild month for bitcoin. The website Gawker ran a story about an online market where you could use bitcoins to buy heroin, LSD and other illegal drugs. After that story ran, the exchange rate for bitcoin started rocketing up.
GOLDSTEIN: But then Chuck Schumer, the New York senator, he wrote a public letter about this drug website, saying it should be shut down. And he specifically cited bitcoin in the letter. After that, the bitcoin exchange rate started falling back down.
KESTENBAUM: Then someone posted online that they'd had a half-million dollars' worth of bitcoin stolen. And an internet security company discovered this computer virus that stole bitcoins. And the main bitcoin exchange website got hacked and had to shut down for a while. So we couldn't trade our dollars for bitcoins there.
GOLDSTEIN: We called Gavin Andresen back to ask him what was going on.
ANDRESEN: Sigh.
GOLDSTEIN: I didn't know sigh was a word...
(LAUGHTER)
KESTENBAUM: ...How you said like that...
GOLDSTEIN: Someone who thinks of writing on forums, right? You're typing on the forum - sigh.
(LAUGHTER)
ANDRESEN: I do tend to express myself when speaking as if I'm writing a blog entry or something. You know, short of some fundamental flaw found in the, you know, core bitcoin system, it's hard to think of another kind of combination of events that would shake trust in the currency anymore, and yet still, you know, people are still buying and selling bitcoins. It appears that it hasn't killed bitcoin.
GOLDSTEIN: Gavin told us he saw these problems as growing pains. Yes, for instance, bitcoins can be stolen. Cash can be stolen, too. We just have to find good ways to protect it.
KESTENBAUM: When we talked with Gavin, the Mt. Gox exchange - it still wasn't working. So we told him, you know, we're running out of time for this story, and we asked him if there was some other way we could get bitcoins.
ANDRESEN: Well, you guys are in New York City?
GOLDSTEIN: Yes.
ANDRESEN: I mean, if you're physically in New York City, the fastest way to get bitcoins is to find somebody else in New York City who's willing to sell you bitcoins for cash, and then you meet them in person, and you give them some cash, and then they transfer bitcoins to you. And I know there are a couple people in New York City who are willing to do that. So it's primitive (laughter). I mean, it's really kind of going back in time sort of, you know, where you actually have to physically meet somebody. But that's the best you can do right now if you want to get bitcoins quickly.
GOLDSTEIN: Gavin give us the name of this guy here in New York, Bruce Wagner, who it turns out does this online TV show about bitcoins and is just a few blocks away from our office. And we called Bruce, and he said, sure, come on over.
KESTENBAUM: Hi.
BRUCE WAGNER: Hey.
KESTENBAUM: We're looking for Bruce Wagner.
WAGNER: I'm Bruce Wagner.
KESTENBAUM: Hey. How are you?
WAGNER: How you doing?
GOLDSTEIN: Nice to meet you.
WAGNER: Nice to meet you. I'm just going to change. You got here too fast (laughter).
KESTENBAUM: David.
GOLDSTEIN: I'm Jacob.
WAGNER: Nice to meet you.
GOLDSTEIN: Nice to meet you.
Bruce's office has a few different rooms. One room has the setup for his internet talk show. It's basically a barebones studio with a white, shaggy rug and black chairs, a fake plant in the corner and a couple digital cameras.
WAGNER: We have the bitcoin show, which is every weekday, 2 p.m. Eastern. Every day we talk about bitcoin for an hour. There's so much to talk about. And then that's the bitcoin show. And then we have in Spanish language, "El Show The Bitcoin," on Wednesdays. That's weekly.
KESTENBAUM: We go into Bruce's office where he has two computers back to back. He sits at one; Jacob sits at the other.
GOLDSTEIN: Bruce tells me to go to this website called MyBitcoin so that I can set up, basically, a digital wallet. So I go to MyBitcoin, and it turns out the person who was sitting at this computer before me, they forgot to log out. So I see their account, and it's huge. They have a lot of money.
WAGNER: Someone else was using that computer.
GOLDSTEIN: So whoever this person is has a lot of bitcoins.
WAGNER: Yeah, a lot of people coming and going through here.
GOLDSTEIN: Twenty-five thousand bitcoins worth $426,000.
WAGNER: Yeah.
KESTENBAUM: Bruce Wagner told us that $426,000 was not his. He doesn't have that much money in bitcoins. He said, though, he would not tell us how much he did have. He said that was personal.
GOLDSTEIN: Anyway, I do create my account at MyBitcoin, which in fact is really easy and totally anonymous. I just put in a username and password. I don't have to provide any personal information at all.
OK, so I just signed in. My account balance is zero bitcoins.
So then I actually take two $20 bills out of my wallet, and I hand them across the desk to Bruce. And he looks up how many bitcoins my $40 is worth at that moment.
WAGNER: So that comes out in my calculator to 2.352941176. You might wonder why we go that many decimal places, and the reason is because we expect that bitcoin one day could be worth $100,000 a bitcoin. So those decimal places will matter in the future. So I'm going to just type a little note - congrats on your first purchase. And - whoops. And then - now watch this. I hit send payment. Now hit view balance and see if you see it there.
GOLDSTEIN: Oh, there it is. My account balance is 2.35294117 bitcoins.
David, I have to say, this part of the whole Bitcoin thing for us, it actually did seem really easy, easier than using a credit card or wiring a friend some money.
KESTENBAUM: And finally now, we have our bitcoins. Bruce goes to dress up put on a suit jacket to start his show.
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WAGNER: Hello, and welcome to "The Bitcoin Show."
KESTENBAUM: Before we went out to try to spend our bitcoins, we called up an economist and a law professor to see what they thought of this whole thing - a law professor because we had this question in the back of our minds this whole time. Is this legal? Can someone just invent a new currency? So we called Ronald Mann, professor at Columbia Law School. And he said it is legal for now, though there is this really, really old act called the Stamp Payments Act over a hundred years old that says it is illegal to create a private money that's a threat to the dollar. But he says the act is really, really old, and he can't see the government really doing that.
GOLDSTEIN: What's more likely, according to Ronald Mann, is the government could decide that bitcoin is basically being used to buy illegal stuff like drugs or child pornography. And in that case, the government could try and shut down bitcoin on those grounds.
RONALD MANN: If you put something out on the internet as a payment system and you make it available to people, what you have to observe as a regulator is, what are the things that it's useful for? OK. And if its main attraction is that it's wholly anonymous, that's not something that ordinary consumers care about. The main people that are really excited about a wholly anonymous payment system as were people that are violating the law.
KESTENBAUM: But Mann told us, before you even get to the legal issues, bitcoin faces a much more basic obstacle. For it to take off, a critical mass of people have to prefer using bitcoin to the dollar.
MANN: That's why I see its future as a real currency as being very limited.
GOLDSTEIN: What do you think bitcoin will be like in, I don't know, five years or 10 years?
MANN: Oh, I think it won't exist.
KESTENBAUM: Won't exist - in which case, early adopters like Bruce Wagner could find their bitcoins one day worth not a hundred thousand dollars, as he said, but worth nothing.
GOLDSTEIN: We also called up Benjamin Friedman. He's an economist at Harvard. And he was also skeptical. He said there is a reason we use the dollar, and it's written right there on the dollar bill itself.
BENJAMIN FRIEDMAN: If you take out a dollar bill and you look at the front of it...
KESTENBAUM: Hang on. Jacob is taking his wallet out.
GOLDSTEIN: I actually have a dollar. Here, let me see. It says - well, at the top, of course, it says the United States of America. And then below it in a smaller type, it says, this note is legal tender for all debts public and private.
FRIEDMAN: What it means is that it's not legal for someone to refuse to take dollars in payment for something you buy or to refuse to pay you in dollars.
KESTENBAUM: Jacob, I hadn't really thought about this. You know, we talk about what makes money money a lot on the podcast, but I hadn't really thought this part of it through. He's saying one of the reasons everyone uses the dollar is because everyone here is required by law to take it. It is the only currency you can pay your taxes in. You want to do business in the United States, you're going to need dollars.
GOLDSTEIN: With bitcoins, nobody has to take them if they don't want to. And Friedman said there have been other attempts at private money before, but they've never really gone anywhere.
KESTENBAUM: Friedman wanted to make sure that we conveyed this. We said, look, don't worry. We'll explain that you're skeptical. He said - he was polite about this - but he said, no, please make clear I am more than skeptical.
FRIEDMAN: I think on the basis of prior experience that this is highly likely to come unstuck at some stage and that many people who will have put their dollars into bitcoins will find that they've lost a substantial amount, if not all, of what they put in. And do I know that for certain? No, I don't. But I think it's highly likely.
GOLDSTEIN: For now, bitcoins are worth something. You can use them, say, to buy lunch at Mezeh grill in midtown Manhattan. As far as we know, that's the only restaurant in the city that accepts bitcoins.
KESTENBAUM: Maybe the only restaurant anywhere. When we got there, we found a sign in the window.
GOLDSTEIN: Bitcoin accepted here.
KESTENBAUM: It's a Mediterranean place that also sells smoothies. We got a couple smoothies. Jacob, you got the falafel platter. I got the chicken.
UNIDENTIFIED PERSON: Rice pilaf or bulgur wheat, sir?
KESTENBAUM: Bulgur wheat, please.
UNIDENTIFIED PERSON: Bulgur wheat, sure.
GOLDSTEIN: The food came pretty fast, but it did take me a couple minutes to pay. I had to monkey around with my iPhone. It did work eventually, though. And the owner told us that they get a handful of people paying with bitcoins every day.
KESTENBAUM: And actually, while we were there, this guy came in and used bitcoins to pay. He'd clearly done it before it, and it seemed to go pretty smoothly for him - still took him a minute. We were psyched to find someone actually using bitcoins to eat. We tried to interview him.
GOLDSTEIN: But he was not interested in talking to us. You know, we asked him, what do you do for a living? And he said, things.
KESTENBAUM: Yeah, he did not want to talk on tape. He said bitcoins are about privacy. I said, dude, you're just buying a falafel sandwich. But he did not want to talk to us.
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GOLDSTEIN: As always, we'd love to hear from you. If you use bitcoins, tell us what you use them for. If you don't use bitcoins, we want to hear from you, too. You can email us at planetmoney@npr.org.
KESTENBAUM: Or leave us a comment on the blog - npr.org/money. I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
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