Alexander Shulgin: Cryptocurrencies Are Pioneers That Will Perish For the Future Generations
Cryptoindustry is on the march, which is hardly a secret for anyone now. Still, many officials as well as community members can’t imagine what will it be like in a couple of years, not to mention in a decade or two. For that reason ForkLog contacted renowned composer, well-known visionary and venture investor Alexander Shulgin to find out what he thinks about the future of blockchain and cryptocurrency.
Remarkably, Alexander has made lots of predictions regarding geopolitics, society and industry. Most of them have in fact already fulfilled. So, what’s down the road for cryptocurrencies and blockchain?
ForkLog: First, we’d like to ask you about regulation. As you know, Japan has recently recognized bitcoin as a legal means of payment, so the interest to cryptocurrencies and blockchain is booming there with new exchanges opening and retailers accepting bitcoin. Why do you think Japan has become one of the first countries where it is possible?
Alexander Shulgin: It’s good you asked about Japan as the country is a great example of what I’d like to talk about, namely about models and prospects. Japan is very conservative when it comes to finance and beyond. If someone of your readers has lived in Japan for a long while, or run a business there, they know how Japan’s banking system works. It’s closed and has a great monetary mass, yet it is a sort of a thing for itself. This system is somewhat unique. Still, when the Japanese economy peaked in the eighties, deflation, stagnation and correction came about when the financial bubble burst. It has secluded itself and works differently as compared to American or European economies. Japanese is considered a conservative nation, which goes for the society and business approaches as well.
And, all of a sudden, such a conservative nation is the first to make such a big step. Amazing it may seem, but for me it’s evident that it’s a spring effect or even a bifurcation. When water is heated to a certain temperature, it becomes steam, or a solid metal becomes melted and liquid. In other words, it’s a metamorphosis.
It’s not that metamorphosis is abundant in Japan these days, yet some of their steps are quite surprising. Such an advanced solution that brings their monetary system to a metamorphosis could have been expected from some other nation. Japan, however, is advanced as well if we take a look at the history of their unexpected decisions that had effect on the financial system. Regulation is regulation, but if we look at the most recent well-known formats the mass market knows about, like VHS/Betamax, MAT/Minidisk, or BlueRay/HD-DVD, we’d remember that battles of all those formats always involved Japan or even were initiated by Japanese keiretsu and zaibatsu. Sparring partners of those battles were first released in Japan as some trial options, and then the winners were accepted elsewhere in the world. For that reason, it’s very important that it is the Japanese who made that step forward to decentralized technologies. They’re experienced in testing formats and standards. Prior to actually regulating those technologies, they have to undergo a large-scale test flight.
FL: What about blockchain development? How do you see its development over the next few years?
A. S.: I think that currently it is at a certain development phase. For instance, if we compare it to development of the internet, we may say that it was initiated back in 1957 when the USSR has launched the first artificial satellite. The next landmark is 1966-1968 when Darpa or Arpa were created. Their names changed, but eventually the project became Arpanet. Interestingly enough, the first decentralization happened back at that time. A computer was a standalone device, and it wasn’t too powerful compared to its peers of today, but it was huge. It got hot, it required cooling, and it was difficult to work with such a machine. The first thing they did is connected a computer to a remote working place, and then created decentralized working time when several work stations could communicate in time. It was the first decentralization.
Thus, a centralized system originated the first decentralization. Still, when Arpanet was being developed, they also worked on somewhat similar technological projects like Telnet or Ethernet. Decades have gone by. The first exchange of text messages and the first spam came about back in the seventies. They were testing it all, and all of a sudden they got FC/IP, WWW in 1989-1992, and some other formats that became standard in early nineties. When the standardization was over, regulation came. From late 1980’s to late 1990’s there was a fundamental standardization of the new sector of economy that brought initial regulation along with it. Some competing technologies like FidoNet were emerging at the same time as there was no understanding which model would be the best, and which one should be considered standard.
Then there were DNS, URL, hypertexts, http and html, and they became standard at the time. Before them, however, there were other attempts and proposals, there were other technologies.
One should understand that the standard was formed in early nineties, while the internet itself first emerged in 1957, so it’s been almost 35 years. Of course, the time has accelerated since then, but we have to admit that the internet today and the internet as it was at the beginning are very different. Only one tested technology in each segment survived the ordeal, and none of them was the first to emerge.
Once the standardization was over, the first products emerged, like first browser Mosaic and some search engines. Google wasn’t the first search engine, iTunes wasn’t the first digital store. Some of the pioneers of those days are now history. This is what makes them pioneers: they build the roads that the next generations successfully walk. We can see it from the most recent stories. Most giants of today were created in 2000 or so, and only a few mid-nineties giants survived. Today, it’s only eBay and Amazon.
Russia also has nothing that was created before 1998. The most important companies created in 1998 were Mail, Ozon, and Rambler. RBC also came about in 1998, even though they state that it began forming in 1994. Still, it started working in 1998, when the crisis was everywhere. That’s when everyone was panicking about currency exchange rates. And where could one know the rate at once? On the internet, of course. The traffic was so huge that RBC’s growth was explosive. Everything else was made well after the bubble of 2000 dotcoms, i.e. after such pioneers as Demos, Glasnet, SoVam, Krovatka etc.
see something that will catapult the humankind to a new level in this new trend, new technology, new step of expanding digital space. It’s all very needed and useful. Still, all we see in 2017 is the era of pioneers that will give their lives for the happiness of future generations.
FL: Do you consider bitcoin a pioneer as well?
A. S.: If we speak of a system for mutual settlements, I deliberately avoid the notion of cryptocurrency as it is not a currency, it is records. I have told before, and told you as well, that it was either a mistake or a deliberate move to call this process coins. If they called it paper or, even better, records, a ledger, it wouldn’t have irritated central banks and banks that much. Here are records, here is a ledger, it’s like an IOU.
The term “cryptocurrency” that logically succeeded the term “coin” irritates centralized axes of today’s monetarism: the foundations of capitalism and governance. But it’s not money in terms of their conception and intention. Money is two things: memory and energy. It’s energomemory. It’s memory because we remember: I did something for you, so you owe me something for that, but you can’t pay me right away so you write an IOU backed by a brick of gold or some other guaranteed value. It is energy because clearing, paying, delivering and taking require a lot of energy, indirect, direct, human and inhuman. That’s why money is energomemory.
So, what is cryptocurrency? It is records and related actions like accounting such records. If we take altcoins and bitcoin (Ethereum is an altcoin as well), I predict that no altcoin will survive. Bitcoin is a more stable system and it’s a bit less than 50% chance that it fails to survive. It’s more than 50% chance that bitcoin makes it to the future.
FL: In your previous interview you were talking about digital states, i.e. geopolitical structures that act as economic states. Let’s get back to this issue.
A. S.: Alright, I’ll develop my previous answer concerning the surviving coins, and link it to this issue. It’s only natural, I believe, that geopolitical decentralization will result in state landscape changes. I still believe we’ll see those 6 or 7 digital states before entering the era of three global axes. Some of them are visible even now: it’s China with its great firewall; America and the British Commonwealth; and Eurasia also starts consolidating in such a structure. That’s what ASEAN is working on right now. It’s nearly a billion people, and last year they’ve created a common economic market. India, the Islamic world and maybe Hispanidad will become such states. It’s nearly equal markets of 1 to 2 billion people, digital citizens. They will be able to survive in the new economic and social paradigm.
It is likely that each of those markets will feature its own decentralized record-keeping system, will have its own standards for ledgers and all related issues. If we look at those possible future markets, i.e. hyperplatforms of digital states, we’ll have some deja-vu: 30 years ago, media communications system was well developed (money is a form of communication as well), and it featured systems that some might recall even now: PAL, SECAM, SECAM II, NTSC, and NTSC II. There was a number of zones accounting for the zones of digital economy I’m talking about. Those zones were big and decentralized. If you come to NTSC zone your tapes or tape-recorder won’t work there, and if you bring a tape from the U.S. to Europe, it won’t work there either. You brought Japanese NTSC TV’s to Russia and they couldn’t work with SECAM. Those were decentralized systems, and only the central television in Moscow had an official decrypting device. If someone had friends there, they could transfer films from NTSC to SECAM. So, we’ve seen it all already. And if we go through the era of 6-7 digital states, we’ll have three digital economies. Two digital states make the model unstable, but three is stable. It will be the British Commonwealth, the Chinese system incorporating 40 more nations outlined in the Belt and Road Initiative (it is an influence system similar to the Soviet state of 15 republics, which probably was a test flight), and the Big Eurasia from Portugal to Japan with some additional zones like Israel.
FL: So, you don’t consider Japan a potential digital state?
A. S.: Japan has a market of 120-130 million people, it won’t survive it. The market is too small to compete with such leviathans. It won’t stick with America as the Japanese are fed up with those postwar ties and remember Nagasaki, and of course they’ll never side with China, that’s for sure. So, in a manner of speaking, connecting to Germany via Russia seems more logical.
We’ll have a Eurasian digital state market, the Chinese digital state market, and the British Commonwealth. But, again, I concede there can be six to seven major digital states. Each of them will have its recording format and its regulation for this format just like PAL, SECAM and NTSC. In this case, bitcoin’s blockchain, being a well-developed structure, could underlie one of such platforms. Ethereum isn’t likely to do it. All those pioneers can hardly become a foundation for something serious, even though their patents and know-how could be very useful for their successors.
FL: Could Ethereum become a common foundation for e-governments, like a warranty platform for state decisions? It’s Blockchain 2.0 after all, and smart contracts are perfect for that.
A. S.: But what for? When it’s all settled, and I believe it will happen well before 2030, there will be a big platform, and the new economy will be able to build something itself. There will be lots of people aware of the technology’s features, there will be many experiments conducted, many errors corrected, and lessons learnt.
It’s important in this regard that we’re expecting 5G to be deployed everywhere around 2022, and it will let us consider a decentralized system very seriously. It will be mobile in any case. We won’t be tied to any cable, and therefore, we’ll be able to reconsider all solutions in terms of technology and regulation. In 2025, 6G is likely to launch. I think when it comes to government decisions, some of existing companies might comply with their requirements. They could make it from the scratch just as Yandex did in 2000 in Russia, even though there were search engines that were considered leaders, like AltaVista or Aport. It’s not a problem to build a new search engine now, but nobody needs it as the technologies have gone farther, and there are virtual assistants like Siri or Alexa that can find anything following your query that earlier you had to type in. So we have now a different understanding and a different approach to the problem.
Similarly, we’ll have a different understanding of a decentralized system, and we’ll abandon making records in a financial ledger for smart contracts and, most importantly, the driving economy of the IoT. It’s also at the pioneering stage right now, and it cannot work without 5G and decentralization linked to every item that could work with 5G. And following the Internet of Things will be the Industrial Internet, the Energy of Things, and the Economy of Things.
Therefore, they cannot rely on blockchain’s decentralized system as local servers and local internet can’t transfer such a traffic through narrow 4G systems. But with 5G, they could. There will be new systems like LTE-U and LTE-I that will work under different standards, and, therefore, the technology that could empower a decentralized system will be different as well. Technology of decentralized systems, programming language and some other standards might be different as well.
With the next generation of communication in place, everything will change dramatically. Just like there was some programming language back in the nineties, but now we have new ones. We can’t live all our life with html, right? Most things we live with now have been devised 30 to 40 years ago. We want a new iPhone, but we also want a new language and new solutions.
FL: Speaking of pioneers, do you believe cryptocurrencies might develop? When will they start declining?
A. S.: Back in early 2009 I predicted that we’ll use e-money. I had no idea of bitcoins back then, and only a year after that I heard about them. I said that it will be e-money and they will be regionally united somehow. The premonition of a single currency for every big region of the world that would be electronic is what I outlined. But also I noted that it will be a period preceding money-less relationship. Why do we need money if we can make records? Imagine an old desolate village where people lived 500 or 1000 years ago. They had no money, but they knew everything very good: this man took a jar of milk but promised to bring some potatoes in return, a blacksmith has made nails for you, and you have to make a shirt for him. People lived with natural exchange. And they had everything they needed. Money came along when families divided, or there were new territories and nations which you had to deal with economically. In the unifying the world, money becomes obsolete. The system of records we know as blockchain technology has the best solution for it all. Money, whatever it is, paper, gold or crypto, will not be needed.
FL: So, you’re speaking about economy of values, no money. It is records that have some value.
A. S.: Yes, it is socialization. We could use the more familiar notion of barter economy here. Of course, it won’t be barter as it is understood at exchanges. It will be economy of knowledge, sharing economy. And if you ask yourself why do you need money, you’d probably say that you have to eat something, etc. But if those issues are settled, then why do you need money? The consumerist generation is passing: soon nobody will need the eighth Louis Vuitton purse or 15 pairs of Louboutin shoes.
FL: Do you believe the economy of consumerism is passing away?
A. S.: Of course, just take a look at our young people and their leaders. Zuckerberg wears T-shirts. He came to the Russian prime minister in his wedding suit because he had no other jacket. But he was told to wear a suit to meet the prime minister. Well, he went to the closet, found the jacket and put it on.
My prediction is that capital will be redistributed. And it seems to have begun. Look at the American elite: Gates, Zuckerberg, or Buffet. They gave everything away. And some of Russian oligarchs tend to do the same. It’s not accidental. As Marshall McLuhan said, the world is becoming a big village. If you live in a friendly village, why do you need money if you’ve got everything you need? You’ll be happier if your basic problems are solved and fears are dissolved. That’s when you have more time of happiness. Technologies lead in that direction: they set you free.
FL: Can we say that cryptocurrencies and digital values make the world a single financial space?
A. S.: Do you remember beepers before cell phones? It was a passing phase. Mobile gadgets are also a transition option as we’ll get to communication, and many things will be just in the air, and you won’t have to hold anything in your hands. Those transition pieces, including cryptocurrency, will remain records because it’s not a currency in the traditional sense of word. Gold isn’t needed that much now. Only 14% of the annual gold mining amount is needed for production. It has no other value but being the equivalent of money. Back in 1971, they created the Bretton Woods system that untied the global economy from the gold standard, and now it is becoming a simulacre as the new generation doesn’t want to wear thousands gold and silver rings. There is too much gold, we have no idea what to do with it, and soon it will have hard time.
FL: Speaking of regulation, is it normal to regulate cryptocurrency as money? And will such regulation be necessary in the future?
A. S.: I think Japan set bitcoin and decentralization free because it saw it was not really dangerous. Japan started testing those formats because all of them have to undergo trial at high power prior to going strategic.
Nowadays, a company in this sector may cost $100 million, or fifty, or five hundred, which is all too little for a nation state. It’s a sandbox where children play, though they swagger all right. On the other hand, it’s still a laboratory that has to be expanded. Japan expanded it a bit so that they could play more.
However, big players will enter the industry once 5G is deployed. That’s why I put my investments in distributed ledger technologies to a halt, yet I watch its development very closely. I don’t invest in anything related to decentralized models but I watch everything to start investing in this sector of decentralized technologies and services again when the time comes.
FL: What should we expect a little ways down the road? Recently Head of Sberbank Mr. Gref stated that cryptocurrencies have to be regulated in Russia asap. Do you believe Russia will follow in Japan’s steps or come up with something of its own?
A. S.: Generally, we never followed in Japan’s steps. We always looked at the Germans, the French, the City, Uncle Sam, i.e. to the west. We never looked at Asia.
FL: The thing is that the authorities want to make money because it’s big money. They have to make this wish legal.
A. S.: That’s a different question. I said they had to let it go, I didn’t say whether they succeed. Of course, they should let it go. The thing is that Japan has closed economy, very strong internal policies and business ethics, so it’s easier for them.
FL: Speaking of more urgent matters, everyone’s interested what’s going to happen to bitcoin in case of this much-talked-about hardfork.
A. S.: It will certainly split because we have to try both solutions. If there are any variations, the market has to test them. Or, not even the market but the big guys watching the sandbox. It must be tested. The split will occur in some form, but it definitely will.
FL: Everyone’s afraid that bitcoin will get dumped and then come to nothing. How would you describe the situation after the hardfork?
A. S.: Well, it gets dumped, and so what? If someone falls, someone other becomes the leader. The law of conservation of balance still works.
FL: If we take a look at Ethereum’s hard fork, everything turned out just fine: Ethereum Classic became a tradable coin that has nothing to do with smart contracts, while Ethereum evolved into a big technology that improves itself and keeps on expanding.
A. S.: Back then Ethereum was just a baby, and it’s still one, but back then it was just tiny. And when it experienced the hardfork, some other cryptocurrencies had an instant win. People left Ethereum for something other similar in size to what Ethereum was before. If dollar cheapens, Euro gets more expensive. Imagine bitcoin fails. Then someone else takes its place. But which altcoin is capable of taking bitcoin’s place? That’s the answer: nothing will happen. It’s possible when you have a shelter, a plan B, and Exit and Save buttons.
FL: What about ICO? Do you believe this phenomenon has any potential? What should this market expect?
A. S.: There is a platform Lending Club, and it’s successfully developing. People loan each other money, and there are successfully developing crowdfunding campaigns. Lending Club, crowdfunding and ICO have something in common, and it is crowd: people raise funds on their own, without any regulators. Of course, the system gets irate and says: no, you can’t do a thing without us! But who needs rules? Distributed system will soon be capable of protecting investor and customer rights on its own, and it all will be transparent so that there won’t be any swindling. The system is fairly able to do it all without regulators. Certainly, nation states are defending themselves. Cab drivers protest against Uber and puncture their tires. Similarly, nation states try to protect itself against self-disruption. The progress can’t be stopped, but sure there will be some attempts of prohibition.
FL: So, you believe it’s a promising phenomenon and it will keep developing further as the time goes by?
A. S.: Of course. Whether it will be ICO, or, looking ahead, Lending Club, crowdfunding and ICO all rolled into one. Most certainly, people will regulate and chip in for something, record everything. This area is very promising, it’s leading us to the economy of records and knowledge. It will turn us into a big village I talked about before. It will bring about the Economy of Everything.
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