“We're not going to go backward. When people start doing things a better way, it kind of doesn't matter what the old way was. You can find people who will say that this is all just an arbitrage on the current trouble in the financial system, and I'm sure the big traditional banks will fight back and try to get things outlawed.

''But think about the scenario of a loan officer talking to a prospective client. To software people, that looks like voodoo. The idea that you can sit across the table from somebody and get a read on their character is just nonsense.

''Lots of industries are changing in a similar way. There's been a qualitative approach, and now there's a quantitative approach. Everybody who grew up in the qualitative approach hates the quantitative approach and considers it a giant threat.”

Big Data

“There is a growing idea in Silicon Valley that there are sources of data on consumer behavior we can use to predict creditworthiness. These will be completely different than the traditional approach to credit ratings, which are tremendously imprecise and 'laggy.' PayPal can do a real-time credit score in milliseconds, based on your EBay purchase history—and it turns out that's a better source of information than the stuff used to generate your FICO score.

''The hypothesis is that there are many other similar sources of consumer data: credit card bills, social-network behavior, potentially even search history. Lots of people, both in the big Internet companies and at startups, are trying to get at these large pools of data and figure out new ways to do scoring. What they all have in common is that they are all being done outside of banks.

''The minute any of these new credit vehicles can show any level of repeatability and reliability, the hedge funds come in and provide the funding. Hedge funds are very comfortable with analytic models. If you have sufficient stability, you can get leverage.''

Cryptocurrencies

''The startups chasing disruptive technology aren't working within the existing system. This is the cryptocurrency phenomenon. If it works, we can re-implement the entire financial system as a distributed system, as opposed to a centralized system. We can reinvent the entire thing.

''Bitcoin is clearly in this category. With bitcoin, there are advantages to decentralizing the financial system in order to do commerce. For instance, you can make payments in all but four countries. So, on day one, you can use it all over the world. Forget about all the different currencies and banking systems; it's a truly universal way to transfer value.

''That also means we have the chance to radically lower fees. Most consumer transactions are weighted with a 3 percent fee; remittances run up to 10 percent, which I think is a moral crime. There's a big opportunity to take those fees out.

''Bitcoin is like technology that's arrived from Mars, and so regulators don't know what to do with it. That's a good thing. What a lot of financial technology entrepreneurs will tell you is that if you're going to innovate in financial services, you want to do something so new and so different that the existing regulatory system doesn't know how to react to you. That is your window of opportunity.

''The problem with building a new product or service in the existing financial industry is that tens of thousands of pages of legislation and thousands of lobbyists are going to come down on you very quickly.

''We needed a new technology to have the wedge to be able to enter the market, to be able to justify all the work to rebuild the system. With bitcoin, we now think we have that wedge.

''Bitcoin is a classic venture capital endeavor: It will either work or it won't. And if it doesn't work, we will lose all our money. But if it does work, it will work in a spectacular way. Our investments will pay off 1,000-to-1 or 10,000-to-1 or some other crazy extreme, because these markets are so big.'

''There are serious conversations going on at every single large financial institution. They're all trying to figure it out. The technology folks who work for the banks are very smart, and the trading floors have split between 'This is for real' and 'This is a joke.' Yet people are leaving those institutions to start bitcoin companies. We're seeing hundreds of bitcoin entrepreneurs. Some of them are brand new to financial services. They don't know what they're in for, but they're excited.”

Volatility Will Vanish

“Bitcoin had a chicken-and-egg problem. Speculation was the way to get the thing established. The speculators are doing us all a favor by valuing it at $500 or $600 or $800 because otherwise it would be valued at zero. Now you can actually do things with it. With scale and time, the volatility will vanish. The designer of the system, I think, would say that the system is working perfectly.

''If you're used to living in a world where you trust people and institutions, then it probably does seem weird and bizarre that you would trust something where you don't know who created it. But if you're in a world where you trust numbers and math and code, it doesn't matter. There is no appeal to authority. You evaluate it on the basis of the math. It's just math; it's completely open. None of us thinks we need to know who created it.

''As for security concerns, bitcoin is designed to work properly in an untrusted, networked environment. Take Target. As a consumer, there is nothing you could do about Target. Target blew it; their systems stunk.

''In a bitcoin world, things like the Target hack are not possible. The way a digital currency works is that it lines up the incentives to protect yourself with the consequences of failing to protect yourself. Bitcoin is a digital-bearer instrument: If you have the numbers on the coins, you own the coins. You can make payments without having to give any information about yourself, and everyone can double-check their transactions. If someone hacked into Target, they would be able to steal all of Target's money—but they wouldn't be able to steal your money.

''For five years, many of the world's best mathematicians and computer scientists have been studying bitcoin and trying to figure out what's wrong with it. They haven't found anything yet. Every critique people have of bitcoin, so far, can either be answered with 'the designer anticipated it and has a solution built into the system' or 'there's a service that can be built on top to address the problem.' That's the magic of why everyone out here is so excited about it.”

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