Why the Financial System Should Be Based on Bitcoin

Valentin Schmid

To make outsized returns or avoid some nasty losses in investing, you have to go against the grain.

There are few people who live that principle more than Reggie Middleton, the CEO of fintech company Veritaseum.

On his independent research website BoomBustBlog, he called the demise of Bear Stearns, Lehman Brothers, and Blackberry maker Research in Motion, the subprime market, and a correction in Apple. Now Reggie is betting on bitcoin to become the infrastructure of our future financial system.

In this exclusive interview with Epoch Times, Mr. Middleton spoke about how bitcoin is more than digital money, and how he wants to revolutionize the way we trade stocks with Veritaseum.

Epoch Times: Bitcoin is a different market, independent from central banks. You have been active in the space for some time, can you explain to our readers what the digital currency is all about?

Reggie Middleton: Bitcoin is a protocol-based consensus network. Think of it as a large canvas that you can paint upon. The most famous protocol-based network that I think most are familiar with is the internet protocol (IP). The protocol is just an instruction set of how to do things. The bitcoin protocol is similar to the internet protocol in that you can go to a lot of interesting platforms and add applications on top of it.

With the internet protocol, you have basic things such as email, the file transfer protocol (FTP), or more advanced things such as the worldwide web and then applications on top of that: Facebook, YouTube, Google Voice, the list goes on.

Reggie Middleton at an interview with Epoch Times in New York, Aug. 31, 2016 (Oliver Trey/NTDTV)
Reggie Middleton at an interview with Epoch Times in New York, Aug. 31, 2016 (Oliver Trey/NTDTV)

On top of the bitcoin protocol, analogous to email, the most basic service would be bitcoin’s digital currency, which is an application on top of the protocol. It is a P2P currency that has its own transportation rails that is censor-proof and doesn’t require third parties at all to make free transactions.

Epoch Times: What is your company all about?

Mr. Middleton: Veritaseum uses a bitcoin protocol to allow any two or more parties to transact directly with each other, peer to peer. The application allows you to buy and sell the value of any of 45,000 financial instruments with ticker symbols.  Stocks, commodities, bonds, fixed income, indices, currencies…

You trade this value through a digital swap, peer to peer without using a bank or a broker or exchange, and in doing it, you’re guaranteed to get paid the value of the contract because it’s counterparty [and so] risk-free. Both parties put the value up on the Blockchain, which is the consensus database that ensures everybody can see all transactions, and everybody gets paid.

This value is transferred up front and there’s no way not to get paid in this scenario, because if your counterparty goes down, there is still value in the transaction. The transaction is called a smart contract, basically the same as a legal or social contract, but executed in computer code.

Economic Rent

Epoch Times: How do you avoid third-party fees?

Mr. Middleton: The elimination of third parties is interesting because you don’t need an exchange or a bank or a broker to trade the value of financial instruments.

In a peer-to-peer capital market, which is what Veritaseum is attempting to create, you have the elimination of all friction or all entities who do not add value to any transaction.

Charging money without adding value is called economic rent. Think of a land owner where there’s a movie theater, and then there’s a 10-foot strip of land in front of the movie theater just enough where people can’t jump over it.

And he charges actual rent or tax to go through that 10-foot strip of land to get into a movie theater. Then there’s a fire in the movie theater, and everybody rushes through one exit, and this landlord now charges everybody to get out the exit, and if you don’t have the money or you can’t pay enough, you burn. He is extracting rents or value from a transaction, but they are not adding any economic value.

What Veritaseum is doing, is allowing those who are stuck in the fire to build their bridge over that 10-foot piece of land and go directly to the other side. So now economic rent seekers no longer have power in a transaction because they no longer have proprietary access to bridges for transactions.

Individuals can now make their own transactions, and when there is a rent seeker in any way, they could build a bridge over it.

So, banking, brokering, financing deals, lending, etc. could be done peer-to-peer. The old-school rent seekers, banks, brokers, exchanges, insurers, etc. should be out of business unless they up their game significantly and bring in additional value.

You have a win-win situation. You get rid of an additional expense which goes into the pockets of the end-users. We have new business models, a greater world tomorrow, all thanks to Veritaseum.

It’s the Banks’ Problem

Epoch Times: Where is the price of Bitcoin headed?

Mr. Middleton: I get asked that a lot. To be honest, I have no idea, but if we break this down to a binary option whether it’s buy and sell, I think it will go up. The Bitcoin Blockchain is the most proven. It has grown $9 billion to $10 billion dollars worth of market value since 2009. It hasn’t been hacked as of yet, not once.

Epoch Times: It’s the bitcoin exchanges, the private companies that get hacked, like BitFinex recently, but not Bitcoin itself.

Mr. Middleton: Right, the exchanges have been hacked, it’s the same as saying Citibank being robbed is negative for the U.S. dollar.

Epoch Times: Back in the 19th century, when you had your gold stored at a bank in Texas and half of it was stolen, that’s not the gold’s fault.

Mr. Middleton: Right. Because the value of gold is still the same. The guy who got robbed might be out of a couple of dollars, but gold is

The price of bitcoin in U.S. dollars (Coindesk)
The price of bitcoin in U.S. dollars (Coindesk)

gold. Also interesting: There is no developed nation that doesn’t use digital currencies. A quick example is how much money you have in your pocket.

Epoch Times: Maybe $50.

Mr. Middleton: I doubt $50 is the sum of all your assets and net worth, which means the vast majority of the money you have is somewhere else in digital form. Actual tangible and non-digital money is usually less than 1 percent of what every user has.

It’s on private banks’ balance sheets. And the private bank balance sheet, to put in digital asset words, is a non-consensus database, basically an old-school analog Blockchain. The bank itself is a centralized digital wallet, and that’s exactly what it is. It’s the same as bitcoin regarding concept; it’s just the other side of the equation. Bitcoin is a wide-area network, consensus algorithm.

Epoch Times: Decentralized.

Mr. Middleton: Banks are a localized area network centralized, they have server-based networks, but still hold the digital assets. So Bitcoin has never been hacked. Banks get hacked regularly. There’s a report that J.P. Morgan gets 100,000 hack attempts daily.

And who knows how many are successful because J.P. Morgan doesn’t report that. But if you are a bank robber, like Willie Horton, and you had one entity that had a trillion dollars in assets and then you had another entity with 10 billion. But the second entity is spread around 400 million nodes, so you could go on trying 400 million passwords or you just hit the one big honeypot.

Everybody’s always going to go to the bank. That makes the bitcoin archetype just significantly safer. Like Willie Horton said when he’s asked why he robbed banks, the answer was, “Because that’s where the money is.”

Valentin Schmid is a former business editor for the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.
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