'This is how money should be': Digital asset pioneer Erik Voorhees

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One of the objections often raised to bitcoin is that it is not—cannot be—secure, existing as it does online where cyberthieves and hackers can pilfer it. The best way to keep one's digital gold safe is to store it in a "cold wallet" on a device not connected to the internet. But that typically leaves users unable to spend or sell it on short notice.

Erik Voorhees, the founder and CEO of the Switzerland-based digital asset exchange ShapeShift, is only too aware of the challenges. He is determined to give cryptocurrency users the best of both worlds.

On Wednesday, ShapeShift announced that it had acquired KeepKey, a Seattle company that makes a hardware wallet for bitcoin, ether and other digital assets. Unlike other cold wallets, KeepKey's can turn "hot" at any time; thanks to an integration with ShapeShift, users can swap their digital assets from within the wallet's own interface, turning bitcoin into ether, ether into Zcash and so on. The experience, says Voorhees, is "magical," and will only improve with time.

While the basic ability isn't new—KeepKey integrated ShapeShift's APIs more than a year ago—demand for such services has exploded in recent months. The total market for cryptocurrencies and blockchain tokens is now $137 billion. In July, ShapeShift processed $250 million of customer orders, an increase of 1,500% since December 2016. Voorhees' exchange is now responsible for about 2% of all bitcoin transactions.

But ShapeShift's size doesn't tell the whole story. Voorhees was part of the first wave of bitcoin adopters, and he'd be the first to tell you that cryptocurrency is more than a great business opportunity or savvy investment to him. It is the Archimedean lever by which he hopes to move the world.

American Banker recently caught up with Voorhees to learn more about KeepKey and ShapeShift's investment product, Prism, pick his brain about the future of the industry and find out what he thinks of Bitcoin Cash, the new digital currency created in a recent "fork" of the original. What follows is our interview, which has been edited for length and clarity.

So tell me about this acquisition of KeepKey. Why does this move make sense for ShapeShift?

ShapeShift's entire model has been around providing a safer and more convenient way for people to exchange digital assets. The issue is that those assets still need to be stored somewhere, so while we can help people during the exchange part itself, if they are then holding all their assets somewhere that is insecure, which most people do, that's not good. We were really interested in acquiring KeepKey because then we can provide a round-trip user experience: Someone can hold their assets on a KeepKey device and exchange them, and that exchange happens through ShapeShift, and that person can be much safer—not holding their funds at some exchange or online wallet. It also is a much faster and easier experience for them. It made a lot of sense for that reason.

How does the integration work? How can a piece of hardware make trades without visiting a website?

KeepKey can use different software interfaces. Someone could make a Google Chrome app that would interface with KeepKey, for instance, plus KeepKey ships with its own software wallet. So you interact with it using your computer just like a normal app.

When you want to exchange, if you have bitcoin and you want ether, you just tell it, "I want to convert this one bitcoin into 200 ether," or whatever the exchange rate might be, and then the software will authenticate to the ShapeShift API over a secure encrypted connection, and then the bitcoin will be transferred after you have approved the transaction on your device. So the device screen will pop up with a little message saying, "Are you sure you want to do this exchange?" And then you click a physical button on the physical device; that's what signs the transaction to be permitted. Then the bitcoin goes to ShapeShift, ShapeShift sends back the Ethereum—so it's just going directly from a hardware wallet to ShapeShift and then from ShapeShift to a hardware wallet, without any intermediary.

Ultimately, software bugs can afflict anything; nothing is perfectly secure. But at least with a hardware wallet, the keys are never exposed online, and that's the big benefit of it.

With this acquisition, are you retaining all of the people from KeepKey and letting them run it semiautonomously? What's the plan?

We kept a couple of key staff, and brought in a CEO named Bob Goodman, who has real manufacturing experience for hardware devices. Unrelated to crypto, but he has manufacturing experience. So it's a small team now, just a couple of people from the prior company plus Bob, but it will grow to be five or 10 people within a year. The brand will remain the same. It will be its own company running under the KeepKey brand—same product and everything—just that ShapeShift is the owner.

In ShapeShift's first month, you fulfilled only $25,000 of customer orders. In July 2017, it was $250 million—1,000,000% growth in only three years. To what do you attribute this growth?

The digital asset market has been on fire for the last six months. It has grown an order of magnitude in just half a year, so that has really propelled many businesses that are in this industry. But then ShapeShift itself has demonstrated an important niche, which is the ability to trade any digital asset easily, without friction, without signing up for an account, without waiting for deposit confirmations and putting up bid orders and all the normal things that a traditional exchange has that are confusing to some people and just unnecessary for many orders. ShapeShift has demonstrated itself as a unique model. And lots of other companies are plugging into the ShapeShift APIs, so all of their users become our own. That's something KeepKey did. A year ago, they plugged into our APIs so that users could convert between assets on the device.

"New York is the crypto backwater," thanks to the state's BitLicense regulations, Voorhees says.

Now that we own and control KeepKey, the interface will be a lot more streamlined. KeepKey will end up supporting all of the same assets that ShapeShift does, and there will be a much smoother user experience between the two companies.

Do you consider yourself a "bitcoin maximalist"? Or do you think the brave new multi-coin world is here to stay?

I used to be a maximalist, very much, but my opinion changed in early 2014. If my opinion hadn't changed, I wouldn't have started ShapeShift. It would have been a silly company to build if I thought there would be only one digital asset in existence. Basically, I just realized that this technology was going to allow many different tokens to be created, some of which would be cryptocurrencies but [also] others which wouldn't really be used as currencies at all. And many things that we can't even figure out today that will become obvious in the future.

With each passing year, we see many more tokens than existed prior, and the entire market cap of all the assets goes up. So it's not just that these other assets are competing with bitcoin and taking its market share; the entire market is getting much bigger and more diverse at the same time.

How do you distinguish between all of these different assets?

I always use the term "digital asset" now and never "cryptocurrency." Because even a single asset is not going to be used the same way by different people. Even bitcoin itself, there are people who use bitcoin as money, but there are a lot of people who don't. They might use the bitcoin blockchain as a record-keeping timestamp, or they might use bitcoin just as a store of wealth and not be paying people with it at all. "Cryptocurrency," I think, is a term that was premature, and now should probably be avoided. It confuses people, and you can imagine that if all of these things were cryptocurrencies, they're all just competing with each other for the same user. But in reality, they're all different assets.

That's an important point from a regulatory perspective: This technology is changing so quickly that even the people who are very much at the center of it don't really know how to categorize this stuff, and are often wrong when they do. So what luck is a regulator going to have narrowly defining things and figuring out how to treat it from a regulatory perspective before the market has matured? This is exactly what New York State did when they categorized all bitcoin companies as money transmitters and tried to treat them all as banks. And now New York is the crypto backwater. So it's an important point.

What do you think of Bitcoin Cash?

The issue is the dispute that the bitcoin community has been dealing with for two years over how to scale. I think it's at the point where the different factions are not going to agree. They're not convincing each other of anything, and the debate is not getting anywhere. So the only way for that to be reconciled is for the communities to split off from each other, and Bitcoin Cash was the first example of that. But there's another example happening in November, when most of the industry will move to the SegWit2x fork, and there's a big contingent of the crypto community that doesn't want that to happen.

Which side of the November fork are you on?

I'm very much in support of the SegWit2x plan, which is what most bitcoin companies and most miners are preparing for. Ultimately, the forks are stressful and difficult, and they can cause some short-term discomfort in the market, but in the long term I think they're good, because you get these warring factions that no longer have to argue with each other on the internet, and they can take their fork and try to outcompete the others in the market. The market is the ultimate way to settle these disputes. While I don't support Bitcoin Cash as a project, I'm fine with it existing, and I think it's good that it happened. It's the fifth-biggest digital asset at this point, so at ShapeShift we just treat it like any other.

Do you think now that there are so many of these digital assets, several of which are above $1 billion in market cap, and now that Ethereum and bitcoin have both forked to create alternate versions, are we in the world theorized by [the Nobel Prize-winning economist] Friedrich Hayek in "The Denationalisation of Money," in which you've got these different privately issued currencies competing against each other?

Yeah, that's exactly what is happening. Money was never able to be a product on the open market that private parties could create and try to build, because any company that tried to issue a private currency would get shut down by the government if it got too big. E-gold probably being the best example of that. Crypto finally broke that stranglehold, because crypto blockchains are decentralized, so there's no party that can get shut down. What that means is that people all over the world are creating all types of different monies based on blockchains, and they're going to compete in the open marketplace. And that's how it should be. Money should be no different than food or shoes or cars; it should be a product of the marketplace and people should be able to buy and sell whatever is most attractive to them. And the monopoly of fiat currency now is no longer the only form of money for people to use.

Apart from bitcoin, are there any other cryptocurrencies you find particularly valuable or interesting?

I'm very much supportive of Ethereum, Zcash and SALT, which is a token that has not been released yet. Those are some of my favorites. But bitcoin and Ethereum are really the two winners in my book. A lot of these tokens are going to fail, and that's OK, just like most startups fail. Even though I run ShapeShift, I don't personally hold 40 different cryptocurrencies. Although maybe I would if I didn't own ShapeShift; maybe ShapeShift is my index fund on crypto generally.

Let's talk about ShapeShift's new partnership with Overstock.com, which allows the retailer—one of the earliest to accept bitcoin payments—to accept several newer cryptocurrencies as well. In announcing it, [Overstock CEO] Patrick Byrne said his company was "pro-freedom," including "the freedom of individuals to communicate information about value and scarcity without relying on a medium created through the fiat of unaccountable government mandarins." Is that still what gets you most excited about cryptocurrencies?

Yeah! That's the whole point. There are people in the crypto world who are doing it just because there's money to made and it's a good business opportunity, but there are a number of us who are in this primarily for ideological reasons, and that statement from Patrick captured it really well. When I first read that in the press release, I had to do a double take, because I was like, "Wait, did I write that, or was that actually Patrick?" I applaud him for being one of the few CEOs of a large public company in the world who will actually take a stand on ideological issues like that. So yeah, Overstock is fantastic. They've been at the very forefront of bitcoin adoption since the early days, and Patrick is one of my personal heroes.

Another interesting thing ShapeShift is doing is Prism, a smart contract-powered investment product, which opened its beta in May. What is this service exactly?

The idea is to give people a way to create a basket of crypto assets without having to trust a third party. Normally, when people get interested in this stuff, and they want to buy three or five or 20 cryptos, the easiest way to do that is to just leave all the cryptos you buy on the exchange where you bought them. Which is convenient but really bad from a security perspective. But the alternative is downloading a bunch of wallet clients, and syncing all the blockchains, and every time you change your portfolio changing your entire infrastructure of all these blockchains that you're managing. That can be a lot safer if you do it right, but it's a huge pain in the ass.

Prism is meant to be the best of both worlds, where it's easier than either of those options and it's safer, because you're not having to trust a third party. You just create a portfolio with whatever allocation—10% litecoin, 20% Dash, whatever you want—and then you choose how much ether you're going to put in [to fund the portfolio]. And the portfolio tracks the value of the underlying assets over time.

How is the beta going?

The beta is going great; we're just trickling people in. We have a wait list of over 10,000 people. We're just trying to ease into it; it's really cutting-edge technology and we don't want to screw up. So we're just taking it slow and steady. There are probably about 1,100 who have been invited in [so far], and about three-quarters of them have made a Prism.

What's the business model? What kind of fees do you charge?

When a portfolio is closed, we take 2.4%. There's a half-a-percent fee on the portion that's reallocated [if you change your portfolio]. By acquiring KeepKey, we can ensure that KeepKey is the device that interacts best with Prism. The one thing you do have to have with Prism is you have to send in the collateral from an Ethereum account, and then when it closes out it goes back to that same account. So KeepKey can be the best way to interact with Prism as well as the ShapeShift exchange. For all of our current projects and future ones, users being able to store their key really opens up a lot of great opportunities.

So this is kind of a way for individuals to be their own hedge fund, their own Polychain Capital?

Yeah. And for people who have a Prism portfolio, there's a leaderboard, so you can see the portfolios that other people have and you can follow theirs. Someone who's good at this stuff can have a portfolio that other people are following, and that person can earn some of the revenue from all of the followers. So it really does decentralize fund management. Some 18-year-old kid in Zimbabwe, if he knew how to manage crypto assets and knew the good ones, he could have 1,000 people following his portfolio and he could be a hedge fund manager earning millions of dollars from it. The whole concept of borders and jurisdiction and all that kind of thing just falls apart with this stuff.

So there's this social component, basically. Is that already part of the beta?

Yeah, it's already in the beta. The fees from a follower to a leader are not integrated yet, so right now when you follow it's free. But when the fees are implemented, the follower won't pay any more; it's just that a portion of what the follower would be paying [to ShapeShift] will go to the leader. Fees are much more reasonable [than those of traditional hedge funds].

Do you think bitcoin, and cryptocurrency in general, is coming into its own this year? What does the future hold?

It's definitely not the year that this stuff is coming into its own. I would define that as where these technologies start seeing wide, mass adoption, and that has not happened at all yet. There's five to 20 million users of this stuff. Probably three-fourths of them almost never use it, but just have it or have made an account. So there's probably one to five million people in the world who are using it commonly. Which is great; that's tons more than there were four years ago. But that's not at all anywhere close to mass adoption.

When this stuff is seeing mass adoption, there's no way that bitcoin can be sub-$100,000. Just do the math on any number of people actually using it. This is obviously a great year for crypto—it's going to go through a number of these bubbles, these big speculative cycles—but it's not at all at a mainstream stage yet. But it kind of has to play out like this. As someone who has been in this industry since 2011, I've seen this same pattern three or four times.

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