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Episode 5:
Lorien Gamaroff

CEO: Centbee
Reinvention of the sound money concept. South Africa’s foremost blockchain expert, Lorien Gamaroff, provides insight to blockchain technologies and their benefits.
7 March 2019

CIARAN RYAN: This is CFO Talks and today we are really excited to be joined by Lorien Gamaroff, CEO of Centbee, a cryptocurrency payment company. He’s also the chief executive of Bankymoon, a consulting company in the blockchain space. Blockchain is the technology that powers bitcoin and a thousand more cryptocurrencies, although this is just one of the applications of this new technology. Blockchain may well represent the next step in our business and technological evolution. It allows two people, who don’t know each other, to transact safely. Whenever one discusses blockchain there are a few mind-bending concepts one has to understand, such as what is a distributed ledger. That basically means that there is no centralised system of record-keeping for the transactions. These transactions are stored in hundreds or even thousands of locations, making it theoretically immune from hacking. But we’re going to explore that in a minute with our guest, Lorien Gamaroff, we are delighted to be joined by Lorien, CEO of Centbee, welcome.

LORIEN GAMAROFF: Thank you very much for having me.

CIARAN RYAN: Can we kick off by talking about your background in business and how you got onto this path of consulting and developing businesses focused around blockchain.

LORIEN GAMAROFF: In the last 20 years I’ve done a lot of work for all sorts of organisations, financial organisations, I was also involved in a media company, a startup, when social media was becoming a thing, and also the energy industry, building payment systems for smart goods and so on. It’s always been something that I have been interested in, payments. I was born in Zimbabwe and when the 2008 financial crisis hit and just prior to that the Zimbabwe dollar collapsed, it set me up to be very open to the idea of a decentralised currency.

CIARAN RYAN: So you are a Zimbabwean, where did you go to school?

LORIEN GAMAROFF: I went to school in South Africa, I moved here when I was very young but still have family and roots there.

CIARAN RYAN: I also grew up there, I went to St George’s College in Harare.

LORIEN GAMAROFF: My father taught there.

CIARAN RYAN: He did? What did he teach?

LORIEN GAMAROFF: I would imagine French.

CIARAN RYAN: Well, our French teacher was Mrs. Hill. Let’s skip onto the next one, talk about blockchain itself, can you describe in simple terms what it is and why are people so excited about it?

LORIEN GAMAROFF: In the simplest terms all it is is just a database, a kind of spreadsheet that is spread across the world that no central organisation controls. That’s it in a nutshell.

CIARAN RYAN: Nobody controls it, okay. So it’s beyond the reach of the central banks, this is why so many libertarians and so many people who are concerned about the highly centralised control that we have over the financial system are excited by blockchain and what it actually means. You are taking control out of the hands of central banks and authorities and basically you are putting it into the hands of whom?

LORIEN GAMAROFF: Yes, that was the idea around the cryptocurrency bitcoin, it was a reinvention of the sound money concept, where we have a limited supply of some sort of commodity and that can be used as money. That certainly is where things originated from but the blockchain itself has a lot more use cases that could be applied. If we think about the internet, I guess the original idea was just to share bits of information, perhaps emails and now what we have is video streaming and social media and so on. So there is an aspect of that, a crucial aspect, of course it doesn’t necessarily take the control away from central banks, it just reintroduces the concept of fixed commodity that central banks may or may not in the future link a currency to.

CIARAN RYAN: Okay, so we have bitcoin, which is a cryptocurrency, do you own some bitcoin?

LORIEN GAMAROFF: Yes I do.

 

Other areas of Blockchain application

CIARAN RYAN: It relies on the blockchain technology and bitcoin and many other cryptocurrencies out there are just one application of blockchain, what are some of the other uses?

LORIEN GAMAROFF: A lot of people are…and for the last ten years this has been the big quest to try and find a use case that come or transform or enable new sorts of activity and a lot of companies out there are trying all sorts of things. One of the things that seems very likely is that we already have securities like shares and bonds and so on, and it would be quite easy to link a share in the same way that we have dematerialised shares at CSD’s…

CIARAN RYAN: What are CSD’s?

LORIEN GAMAROFF: Central securities depository. That is where if you had a share in a company the registration of that share or the certificate would be held at an organisation like a CSD and we have two main ones in South Africa.

CIARAN RYAN: Those are Strate and…?

LORIEN GAMAROFF: Strate and I forget the name of the other one, there’s a newish one that’s come along. So what would happen is if you owned a share in a company you would then have a certificate that was dematerialised, in other words digitised, at that company and they would hold it. If I wanted to sell a share then what I would do is I would go through an exchange, a stock exchange, we’d do a trade and then the securities depository would actually then change the ownership of that share from me to you. That’s quite a long process, it takes a few days and there are costs involved, of course. So the idea around blockchain was that perhaps what we can do is we can create a share that is on a blockchain and it becomes a record on this ledger, and then you and I can exchange it in a peer to peer way, from me to you without having to go through any central intermediaries and avoid all the costs and all the time that comes with that and the settlement and the clearing. That has been a very interesting, exciting avenue in terms of how blockchain has evolved over the last few years. Then there are a lot of other things, the potential for escrow to perhaps be changed and transformed.

CIARAN RYAN: We better just define what escrow means for the people who don’t know that.

LORIEN GAMAROFF: If I wanted to buy something from you but I didn’t trust you and you didn’t trust me to pay if you delivered the goods, then what we would do is get a third party that we mutually trusted and we would make sure that they know the terms of the contract. So they would know that you want to deliver me something and I am going to pay you X for that. If the transaction occurs, if I delivered the goods, then what will happen is instead of giving you the money prior to the exchange, I would give the money to the escrow agent, then the escrow agent is holding it. If you do deliver the goods the escrow agent would then say yes the goods have been delivered and then hand you the money. So what it does is it just introduces a trusted third party to make sure that the terms of the agreement are fulfilled. Now, with bitcoin and blockchain it is possible to create what is called a smart contract and a smart contract would be something that could have the terms of that agreement, maybe this amount of goods needs to be delivered on this date. Then what would happen is I would be able to send the money to the contract itself, so I actually deposit the money into the contract, which sits on the blockchain and then you’d be able to see the money sitting inside the contract. Then if you were to deliver the goods, perhaps there would be somebody or something out there checking that the goods were received in good order and then the payment would come to you directly without anybody having to hold that money and release it to you. So this is another thing that could potentially become a good use case. 

CIARAN RYAN: You can just imagine that lawyers will be fighting that because they love these kinds of things where there are contested contracts.

LORIEN GAMAROFF: Yes, the idea here is to not really to eliminate lawyers but certainly to make the whole process more efficient. There are so many costs involved, so much paperwork, so many delays and so on and if we were to be able to digitise this in a safe, secure environment that couldn’t be corrupted, especially when it comes to contracts, if you want to create a contract you want to ensure that the contract is set in stone. This is one way of doing it, where we can create it on a blockchain, we both have access to it, we both can see it because blockchains by nature are transparent and then we can enter into that agreement. So I think the blockchain won’t necessarily disintermediate, in other words remove these middlemen like lawyers and so on, but certainly is going to make things a lot more efficient.

Blockchain could rescue Zimbabwe from financial ruin

CIARAN RYAN: There are so many aspects of a contract that can be disputed, did you deliver it at 12 o’clock on Tuesday as you promised to do or was it five past and is that something that we can claim a discount for and that kind of thing. I have heard that before the smart contract idea and the way that it would smooth commerce if it runs like that and, frankly, you would have to remove a lot of those areas where there could be a dispute, you would have to remove that from the equation. But I do see that as quite a fascinating development. Can we just change subjects here a little bit, in a recent article in Brainstorm you talk about being invited to Zimbabwe, which is in the midst of the worst financial crisis in years, and it’s been through many of those, people, it seems, want out of the financial system that they are confronted with in Zimbabwe and I quote you here, “You don’t have to spend more than five seconds with them [Zimbabweans] explaining that bitcoin is decentralised, there’s a limited supply and no one controls it. They got so excited, the whole room was buzzing, it was like a religious ceremony.” Alright, you better explain why Zimbabweans are so excited about blockchain and how do you see it rescuing the country from financial ruin, is that possible?

LORIEN GAMAROFF: I think it is possible. That was an event that was held and it was a five-day workshop, it was open to the public and the whole idea there was to explain these concepts. But I have been back subsequently and even presented a workshop with the Reserve Bank there. At first they were quite open to this idea of cryptocurrency but now, of course, they’ve become a little bit more reserved and so they are not so eager, this is the regulators there right now. But, of course, from the point of view of the people we can see what a disaster the currency has been and now we are going through this issue with bond notes and even they are going through inflation. There’s a big issue with people who are trying to buy things, they’re trying to import and they’re trying to export and it’s very difficult to get money in and out of Zimbabwe. So this is now certainly something that can alleviate the strain and the stress that people have there in terms of how do we get money in and out of the country. Not to say that this is about capital flight, this is just about industry, commerce, trade and so on. So that’s from the business perspective but from the general person in the street they’ve had their currency destroyed, they’ve seen it in their lifetime…

CIARAN RYAN: And their lifesavings destroyed.

LORIEN GAMAROFF: Their lifesavings destroyed and pension funds. My grandfather had a pension that was eventually worth nothing and it cost him more to draw it than what it was worth. So they are very open to the idea of money that is not tied to a central bank that can artificially and arbitrarily inflate and so on, they’ve felt it acutely. So I think that given the opportunity cryptocurrency will certainly thrive. Also, if you think about Zimbabweans, they are very used to mobile money, they use a lot of EcoCash. In fact, I think the number is 98% of transactions go through mobile money and so they are very used to the idea of money on a mobile device and being able to transact. In fact, retailers accept it and they can pay their bills and they can pay their school fees. So the idea of bitcoin, which is the same as mobile money to them, but not tied to a central bank and is global, so they can send money to their family.  For example, Zimbabweans living in South Africa it would be very convenient and very cost effective for people working in Zimbabwe to be able to send money home. So the opportunity is great in terms of rescuing Zimbabwe from this situation that they can’t seem to really escape.

CIARAN RYAN: I recently spoke to Eddie Cross, he’s a parliamentarian from south Bulawayo, on this whole point and the problem that you have there and I think you mentioned bond notes, I think we probably just need to explain by way of background, you are able to transact with US dollars, you are able to transact with South African rands but you have this other thing called the bond note and that’s the one that is controlled by the central bank and, therefore, that’s the one that’s open to manipulation. It used to be I think a bond note was equivalent to US$1…

LORIEN GAMAROFF: That’s right, that’s the idea; it’s supposed to be fixed.

CIARAN RYAN: But it’s now at about a third.

LORIEN GAMAROFF: Not officially.

CIARAN RYAN: Not officially on the black market.

LORIEN GAMAROFF: Exactly.

CIARAN RYAN: So you have basically a black market there but if you’ve got cash and you’ve got rands and you’ve got US dollars you’re a king in Zimbabwe. As soon as you enter into the bond note market you are basically dealing on the black market there. So I guess Zimbabweans see an opportunity because who created this mess, clearly it’s the regulators, it’s the central bank because I believe that the Reserve Bank allocation there is controlled by the party loyalists and I think the people on the street there want to see that removed from them. Blockchain and cryptocurrencies could be the way out, right?

LORIEN GAMAROFF: I certainly think so but just to touch on this idea of cryptocurrencies in general, they are not all equal. When it comes to this idea of cryptocurrency there’s a lot of people out there who are still pushing this idea that there will be a multi-currency world. There’s a lot of high profile, prominent pundits who are all pushing their idea of what a cryptocurrency should be. Even what we see today is that bitcoin itself went through multiple splits; the community was actually divided on how a cryptocurrency should work. What we see now is a whole plethora of different currencies all trying to serve some particular ideology, we see that some cryptocurrencies are trying to be anonymous cash systems, which, frankly, will never work and will never be allowed and just will never be accepted when you have a cash transaction, when you make a payment, you want the ability to trace that payment. Privacy is extremely important but anonymity is never going to work, not from a merchant’s perspective, not from a consumer’s perspective. Then we have other cryptocurrencies that are trying to enable the ability to have anonymous marketplaces. A very famous case was the Silk Road case back a couple of years ago and this is really what got everybody interested in these things called cryptocurrencies. So I really do not believe there is going to be a multitude of cryptocurrencies, I think the cryptocurrencies and potentially cryptocurrency, if there is only going to be one, is going to have to fit within a legal and regulatory framework. We’re not talking about Zimbabweans trying to escape the system and escape the legal framework, what we need to do is make sure that the cryptocurrency that serves a country or a community at least toes the line with the existing legal frameworks. What we see now is there are actually a few versions of bitcoin that have deviated from the original design of bitcoin, which was defined in the white paper by the synonymous inventor, Satoshi Nakamoto,  and we see now how that bitcoin itself has changed and transformed. We have now bitcoin BTC…

CIARAN RYAN: Bitcoin cash, right?

LORIEN GAMAROFF: We’ve got bitcoin BTC, we’ve got bitcoin cash, we’ve now got bitcoin SV, although bitcoin SV is the original design. So what we are going to need to also be sure of if we’re going to be excited about these currencies is do they fit within a legal and regulatory framework. In fact, I spend a lot of time, even with the Reserve Bank of South Africa and the Reserve Bank of Zimbabwe, explaining to them that there are certain cryptocurrencies, very few in fact, that actually can be regulatory compliant in terms of KYC and anti-money laundering.

Know your customer and anti-money laundering

CIARAN RYAN: KYC means know your customer.

LORIEN GAMAROFF: Know your customer because that’s a very important thing as a business, it’s a requirement, you need to know your customer, anti-money laundering, you need to be able to know the source of funds, if there are dodgy-looking transactions, if there’s a lot of money moving backwards and forwards. So what we’ve been doing at Centbee is creating these payment systems based on the original design of bitcoin, which is now bitcoin SV, and going to our regulators and saying we can know apply the correct know your customer rules, the correct anti-money laundering and that is how we are going to be able to bring a cryptocurrency into the country. In South Africa we are very lucky with our regulators, they are very educated and also have this idea that this is a technology that can provide a benefit to people and consumers, not necessarily a currency that a consumer can use to escape the central bank because as a regulator the central bank wants oversight into transactions. If we can provide the assurance that the cryptocurrency we use is compliant then we are going to see growth and we’re seeing it in South Africa today. Now, in terms of Zimbabwe that’s a message that still needs to be told, it’s not going to be that every cryptocurrency will exist and every cryptocurrency will be used but there’s a particular one other bitcoin I think that will become something that can be legally compliant, fit within a regulatory framework, that central banks even though they are not issuing that currency and have control over the issuance, they at least have oversight as to how it is moving.

CIARAN RYAN: Can we talk for a minute about your financial background and your training. You are the chief executive of Bankymoon but you are also an entrepreneur and the chief executive of Centbee, so that covers quite a lot of ground professionally. Do you have an accounting background, how did you get on this path?

LORIEN GAMAROFF: I actually don’t have an accounting background and I am not a finance expert, although I have become one, I guess, over the last ten years with being involved with bitcoin because that’s how long it’s been. It was bitcoin really that got me interested in money and what money is. I think that a lot of us don’t really ever think about what money is, where does it come from and where does the value arise. Having built many payment systems, having been involved with financial organisations building systems for them because that’s actually my background is as a software engineer building these systems. It’s been a very important thing, especially as the founder of Bankymoon, trying to push this idea and explain this idea of bitcoin, what makes it money and why it can be used as a financial asset and why it can be used as a payment system. It’s been very important for me to get to the roots of money.

CIARAN RYAN: I think there’s been a big discussion amongst economists, and I also have done some cryptocurrency buying, there’s been a big discussion amongst economists, what actually is money and that is a good question. There are some who would say it has to be backed by some physical commodity like gold or silver, others say no, it’s really just an idea backed by confidence, you have to have confidence in and trust that what you are using has got value. What’s your view on that? 

LORIEN GAMAROFF: That falls short of the big idea that as a storer of value there must be some way to redeem that value. I think somebody who says that money is just a confidence game, well, then you’re just talking about it being a con game and that’s what con is short for, confidence. The idea that this is just this collective delusion that we have and this money has value that I think falls short of the mark. Yes, of course, money throughout history has always been linked to or actually consisted of some kind of commodity that had value. We’ve had all sorts of money in the past, we’ve had gold and silver but we’ve had all sorts of other things. Then even money that we’ve had today, fiat currency once upon a time was linked to some sort of commodity and, of course, in 1971 the world finally went off and delinked it from gold. But that’s really been a big experiment, we have lived in a financial experiment for the last 40-odd years. I think that when you look around the world and you see how governments through their own fault or through the fault of whatever is going on, just tends to not rein themselves in and they give in to the temptation of being able to print money as a source of funds. If you think about governments they are just like people, how do they raise money, either through taxation or through borrowing but governments, of course, now having a currency like a fiat currency, which is a currency that’s not linked by anything, and now go and artificially create money, creating inflation and, therefore, creating a hidden tax.

Inflation is misunderstood

CIARAN RYAN: I think it’s a commonly misunderstood thing that inflation is actually caused by  governments, how do they do that, they do that through borrowing.

LORIEN GAMAROFF: Yes, the prices going up is not inflation. Inflation is the expansion of the money supply.

CIARAN RYAN: The rising prices are a consequence of that.

LORIEN GAMAROFF: Correct. So what we’ve seen now over the last few decades is radical inflation around the world, if you look at money supplies, there’s a great website I always look at called www.tradingeconomics.com and you can actually see how countries around the world have been hyper-inflating their currencies and someone might ask where’s the price inflation? Well, look at the asset market, look at the property market and so on.

CIARAN RYAN: That’s right, they call that the Cantillon effect, the very first sign of inflation is going to be in asset prices and stock prices and property prices. You’re only seeing that on the grocery shelf months later, so it trickles down very, very slowly.

LORIEN GAMAROFF: Yes but it eventually does. So this idea of going back to a commodity-based money and bitcoin is a commodity-based money, it’s not something that has value because of this collective delusion, it actually has value, the value is being able to create records on this general ledger, this distributed ledger that can then be used for verification and authentication. So the commodity aspect of bitcoin comes from this usefulness as a ledger, where we can all pay a miner to insert a record that becomes immutable, something that cannot be changed, and can also create the ability to digitise or tokenise assets and then the ownership of those assets can be transferred. So what we have is we have got a very useful system here and, of course, to use that system we need to pay to use that system, how do we pay to use that system, we need to acquire the token of that system, the cryptocurrency, and that creates a supply and demand dynamic.

CIARAN RYAN: As the CEO of Bankymoon and Centbee and an entrepreneur what are the issues that keep you up at night, if anything at all, is it making payroll, balancing the books or is it something far more fundamental to the business? 

LORIEN GAMAROFF: Well, what keeps me up at night is, is this all going to work. Are we, in fact, just deluded, us as cryptocurrency, blockchain enthusiasts. Is this such a thing that can prevail and can change the world or is it something that is just a pipedream and perhaps will never work if governments don’t allow it. So it’s exciting right now, we are lucky to have foreign investors and they are as enthusiastic as we are but, of course, we haven’t seen this in the world today, I think there’s a lot of speculation and no real uses right now, of course we have potential uses but we’re certainly trying to change that. We’re creating a payment system, Centbee is a bitcoin payment system, we’ve got vouchers, we’ve got cross-border admittance products, we’ve got merchant payment systems and we certainly hope to change the world, we think we can and we think we have something valuable.

CIARAN RYAN: These payment systems, are they currently in use?

LORIEN GAMAROFF: They are not at the moment, there are some payment systems that are in use but not generally, for example, no large retailers. The reason for that is it’s very difficult to introduce a new payment system into a large retailer like Pick n Pay or Woolworths. So what we are trying to do right now is we are doing a lot of research into how to integrate bitcoin payments into existing points of sale. That’s a complex thing because those are really well defined, we’re talking about card payment rails and so on. But what we are finding is that we have got a payment wallet, Centbee is a bitcoin wallet, we now just in South Africa have released a voucher product, where you can go to any retailer, you can go to Pick n Pay, Checkers, Pep and you can actually buy bitcoin over the counter with cash or a credit card or with SnapScan. So if somebody wants to go and buy bitcoin, bitcoin SV, the original version of bitcoin go for it, download Centbee and give it a try. Then we are about to release our cross-border admittance product.

CIARAN RYAN: Do you have to get regulatory buy-in before you can get acceptance of these remittance products?

LORIEN GAMAROFF: Yes, we’ve been working very closely with our regulators, they know everything we are doing, we are very transparent. We’re doing a bit of self-regulation in terms of the know your customer rules, so we do put limits in to how much you can purchase, how much per day and how much per month. We also obviously track the users, we require some user information, so ID number and so on. So we’re looking at bitcoin as a financial product and my partner, Angus Brown, he was one of the founding members of eBucks, he’s very well respected in the community and understands these things very well and so his great insight is also coming to bear, where we are trying to fulfil the same obligations that a typical payment company would have.

 The future of blockchain

 CIARAN RYAN: Right, so let’s talk very briefly about the future, where do you see blockchain in five years?

LORIEN GAMAROFF: I think blockchain is going to consolidate as a concept, I don’t think we are going to have a plethora of blockchains. I think that just like we have one single internet we’re going to have one single blockchain. That blockchain will be the one that doesn’t have anonymity built in, it doesn’t have the ability to create anonymous marketplaces and that really narrows it down to the original version of bitcoin, which is now traded on exchanges as BSV. I think that there will be a single currency on that blockchain as bitcoin and I certainly see a lot more payment companies, a lot more merchants, financial products around bitcoin. But then, of course, this idea of having an internet that is going to be based around this blockchain, so being able to pay people for information, pay companies for streaming and so on, I think it will all be around that blockchain.

CIARAN RYAN: I noticed, by the way, that quite a few South Africans have achieved prominence in the cryptocurrency space, in the blockchain space, why is that?

LORIEN GAMAROFF: Well, I think that we have quite a unique place down here at the bottom of Africa. We have a wonderful environment, we’ve got a very developed country in terms of the financial system itself and the infrastructure but we have countries like Zimbabwe, Mozambique, Malawi, Kenya, we’ve got all these African countries that seem to first of all have a lot of people here in South Africa trying to move money across border. We all saw what happened in 2008 in Zimbabwe. I think it’s just that right mix, we see a continent above us with a lot of problems that can be solved with bitcoin, a lot of entrepreneurs here. South Africa is very interesting in terms of blockchain interest, if you just type www.trends.google.com and you type the word bitcoin you are going to see that South Africa is consistently ranked number one as the country with the most interest around bitcoin. I think South Africa is going to be a key country going forward in the future in terms of this idea.

CIARAN RYAN: Wow, okay. Last thing, two books that you would recommend?

LORIEN GAMAROFF: Around this subject? I could recommend all sorts of things.

CIARAN RYAN: Even if it’s just for leisure.

LORIEN GAMAROFF: A good book is The Death of Money by James Rickards, I think that’s very eye-opening.

CIARAN RYAN: Don’t they call him the currency prophet of apocalypse or something like that?

LORIEN GAMAROFF: Yes, he’s very focused on…

CIARAN RYAN: He’s been in South Africa, he’s come here and he’s given talks.

LORIEN GAMAROFF: Yes and then there’s a Niall Ferguson book called The Ascent of Money and that also just talks about the history of money and how we got to the point that we have today, it’s also a very insightful book

CIARAN RYAN: What influences, what kinds of people do you admire or who has inspired you?

LORIEN GAMAROFF: Certainly over the last ten years having been involved with bitcoin I now find that economics is very interesting to me, especially the Austrian view of economics where we have sound money. Also that kind of libertarian thing, where we don’t have no government, I’m not an anarchist but we have less government, a smaller government, I’ll admit that I’m not a socialist, I’m a capitalist, I think that free market capitalism is very important for growth and for development. So that’s what has happened over the last ten years, all because of bitcoin and having to go to the root of what is money, what is government and so on.

CIARAN RYAN: So in terms of personalities are you talking there about Ludwig von Mises…

LORIEN GAMAROFF: Yes and Murray Rothbard.

CIARAN RYAN: Friedrich von Hayek and people like that. Thank you very much, Lorien, for that. That was Lorien Gamaroff, chief executive officer of Centbee and Bankymoon.

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