BitGold co-founder Roy Sebag explains the company's philosophy

BitGold, which offers a platform for savings and payments in gold, listed on the TSXV on May 13 at 90¢ per share and since then the company's shares have traded as high as $8.00 apiece. The startup shook up the markets again on May 20, with the announcement that it is acquiring GoldMoney Network Ltd. (GoldMoney) for $51 million.

Roy Sebag, BitGold's co-founder, recently spoke with The Northern Miner's Trish Saywell about the company's origins and philosophy.

The 29-year-old started his career as a distressed equity investor and developed a strategy of contrarian investing in "very sticky situations" such as bankruptcies, spin-offs, and reorganizations, when he thought there was a discrepancy between market value and fundamentals. He was the classic value investor, he says, "trying to buy a dollar for 10¢" and "trying to buy equities that trade like options in terms of risk/reward—where you lose one dollar if you're wrong, but you make $20 if you're right."

Sebag started investing when he was fifteen years old and launched his first fund at the age of eighteen. "I've been working for a long time," he jokes in an interview. "That's why I have a lot of grey hair."

Sebag and co-founder Josh Crumb, set up BitGold on Aug. 14, 2014. The men have created a financial services internet-based platform that allows users to buy gold, store gold, and pay for goods and services using gold as the currency.

Prior to launching BitGold, Sebag founded Braavos Capital, an international private investment organization engaged in value-oriented investments across a variety of asset classes and industry. One of its investments, Natural Resource Holdings, has acquired six historically delineated deposits in North America, which together host a mixture of compliant and historic resources of about 1.59 million oz. gold, 34.5 million oz. silver and 280 million tonnes of iron ore. Another investment, in April 2012, was in Argentine energy company YPF, after President Christina Fernandez de Kirchner seized a 51% stake in the company, which at the time was owned by Spain's Repsol.

In 2004, Sebag founded Essentia Equity Ltd. Among its investments was providing seed financing to PPDai, China's first peer-lending network. PPDai went on to become a market leader by creating a credit database of borrowers and setting monthly records for loans matched. China's Alibaba Group invested $35 million in PPDai in November 2013.

The Northern Miner: How has your view of gold changed over the course of your career?

Sebag: I was trained to dislike gold and to look at it as something that can't be modeled. But what ultimately got me to appreciate gold was understanding that markets aren't efficient over the short term, and at times there can be very wide discrepancies between the fundamentals of an economy or a business, and the markets' speculative fervor, if you will. It happens on the upside with hype, and it happens on the downside, and both are a result of human psychology. We move from elation to despondency because we respond to fear and greed. That's what is so great about markets. And as central banks have become more involved in markets our economy has become more a reflection of the human fear and greed element. Right now we're seeing a lot of greed. But as we saw in 2008, greed can quickly turn into fear. What all of this creates is a situation in which there is very little predictability. Real economic growth should be driven by gains in productivity, by demographics, and what our physical world can sustain. Growth and prosperity have been achieved because those with capital could deploy it with some predictability—cooperating to achieve a goal. In today's markets—where the central actors are a group of academics in a room in New York—it’s now only about forward bets on policy. Savings and productivity have been minimized in the new “capital” return equation, and hence both metrics have been in decline since money went purely experimental. It’s gone so far now, that at this stage of the cycle, you're betting that there will be another buyer for that negative yielding bond—because you're not buying it on the fundamental math that it will destroy capital into maturity. Savers and those looking for long-term growth, through sustainable and cooperative gains in productivity, need a benchmark like gold, where the math has been unequivocal that it protects and measures capital and purchasing power over time.  

The Northern Miner: When did your view of gold really start to shift?

Sebag: In 2008 I started thinking that if you look at the physics of gold and the cost of mining gold, there is virtually no profit once you take into account exploration, energy, and capex costs. Therefore gold's marginal cost is reflected over time, a global function of labor and energy. That is incredibly useful. And with gold you only need to produce it once and you can keep using it over and over again with very little cost to maintain, it’s the original “scalable” technology. It's predictable in a world that is not predictable. By contrast, you can't model out a security like that, with unpredictable interest rates originating from new academic theory. Most companies or currencies that were around 100 years ago are not still around today. Gold is different, commodities are different.    

With this framework, I realized that gold wasn't an investment, it was a currency for savings and a global economic measurement. For those not born in the West, it probably has always been superior to the currency in their native countries, just very difficult to obtain. If you were born anywhere other than in North America, in other words, it is clear that gold has been a superior currency, and that people are punished simply for being born elsewhere. Factory workers born in Mississauga and factory workers born in Russia, for example, both work hard, they both contribute to society, but one is measuring his surplus in Canadian dollars and the other is doing the same in Russian rubles. Thirty years later, the person earning rubles is wiped out—for no fault of his own—and the person in Canada is fine. So the real value in gold is not holding it as an investment, it is using it as money, as a benchmark, and for savings.

The Northern Miner: You met your co-founder, Josh Crumb, in 2011. Tell me how your thinking evolved further as a team?

Sebag: We were both young guys pondering existential questions and we decided to explore whether there was a legal challenge preventing us from building something like BitGold. We believed that the legal challenge would be the main impediment. I knew the math was clear from my background in finance, Josh developed the marginal cost model and knew the math was clear from his background in physics and mineral economics, so why can't a modern bank be backed by gold? And post-2008 I thought that it would be a massive selling point. So we hired a top law firm and went to work. We discovered that there was a legal framework through which we could operate as a Canadian company and it revolved around bailment law. Given that gold is a commodity, you could have a customer relationship in which you temporarily possess the commodity, but act on behalf of the customer.  Think of it like a valet service. You give a valet your car, the valet gives you a ticket, and that's the legal framework. It's your property right. So in BitGold's case, users with an account can show up at the vault where their gold is stored and reclaim it. 

The Northern Miner: What was the biggest challenge?

Sebag: It turns out that it wasn’t the legal but the technology. No one has tried to do this before without a shortcut, using IOUs, fractional reserves, or some other way to cheat the challenges of a high-velocity physical settlement. When you look at fiat and gold, the two were equal in 1971. When gold was demonetized, however, you had this exponential increase in technology with advancements in the movement and digitization of fiat with things like E-payments and credit cards. But gold remained in this London fix, over the counter trading. Transactions were cumbersome and time-consuming. You filed a request, the money was wired, and then the gold was shipped. The whole process could take from one to three weeks. BitGold has shortened the settlement cycle for gold. In order to do it, we had to adapt the existing system. When you swipe your debit card, or write a check, for example, the settlement cycle is generally one to two days. Often it's as little as a few hours. So when we wanted to store a customer's physical gold in a vault, we had to have the system integrated with credit cards, for example. We needed to be able to liquefy that gold into cash within a few hours or a day.   

The Northern Miner: What does it cost to open an account with BitGold?   

Sebag: We provide gold to our users at the spot price, plus 1%, which is our fee.

The Northern Miner: Is there any risk to BitGold in this system?

Sebag: We try to minimize the risk for everyone. We have very little working capital requirements. We just collect a fee in gold weight between purchases, sales, and connections to existing payment networks. We had to connect our technology (AURUM) to existing rails, card networks, Interac, UnionPay, SWIFT. We're now connected to all of them. Users can open accounts, make deposits, and within ten to fifteen minutes get gold at the best possible price. They can then go and use that gold. They can send it to anyone in the world for free through an email or text message. Merchants can send invoices and be paid in gold.

The Northern Miner: This will be incredibly useful for people who live in countries where banking and payment systems are not well developed.

Sebag: It is empowering for people who may not have a way to make deposits where they reside. The gold sits in vaults outside their jurisdiction. They can have their savings in gold, accumulate it in London, for instance, and yet access it and spend it locally from a smart phone. And the next time their country's currency is devalued, their labor won't be devalued. It also helps their local community and maintains aggregate demand. It counters this brain drain problem, where people constantly have to move closer to the money centers to succeed.

The Northern Miner: How did the emergence of Bitcoin shape your thinking?

Sebag: Bitcoin showed us what was possible. We liked some of the underlying technology of bitcoin, and how bitcoin was designed to mimic gold as commodity money with a low marginal transaction cost. What we didn't like was its token value, because it is not a store of value inextricably linked to natural systems, it is just a really good medium of exchange for certain transactions. It was a powerful experiment and it showed us that we could come up with a better solution, using commodity money rather than the centrally planned debt people are forced to use. 

The Northern Miner: BitGold launched on May 4, listed on the Toronto Venture Exchange on May 13, and at last count has signed up over 25,000 users. 

Sebag: We're seeing a lot of demand—far more than I ever imagined. We now have users from almost every country.

The Northern Miner: I know BitGold is not available to people living in countries where there are sanctions, but why does it disallow users from the United States?

Sebag: There's no law that precludes us from doing this in the U.S. We just want to see more federal clarity around a business like this. We don't like the state-by-state approach. So long as we manage our Know Your Client and Anti-Money Laundering policies within guidelines approved by FINTRAC (the Financial Transactions and Reports Analysis Centre of Canada), and as long as we promote tax compliance, there's no reason why banks, processors, and regulators, wouldn't accept this. We just want to grow into the U.S. over time.

The Northern Miner: How is BitGold monitored or regulated?

Sebag: We are registered with FINTRAC. We are fully regulated and have a bank-grade anti-money laundering policy. Users have to open an account with government-issued ID. It's a very onerous process compared to a lot of internet companies, or even PayPal for that matter. We're expecting a lot from our users and we try to provide a lot in return.

The Northern Miner: What sort of costs are you carrying?

Sebag: We have very low fixed costs. We employee 20 people and most of them are software engineers. We also have a lot of capital. 

The Northern Miner: You've launched a program called Golden Heart that rewards current users who attract new accounts. Can you explain it?

Sebag: We really wanted this to go viral so we started the Golden Heart program. It gives account holders a unique link that they can then text message or email to other people. If someone signs up because of it, the account holder who sent the link receives 0.25 gram gold into his or her account. This has changed everything. When we first launched the program we had a few users, but now people all over the world are signing up. For us it's a very low customer acquisition cost. We don't have a problem paying to acquire users at that price because users are going to be gaining trust in us. One of the reasons we went public is to demonstrate that we are transparent and have best practices. We're audited by PriceWaterhouse Coopers. 

The Northern Miner: The BitGold philosophy is very different from that of goldbugs. How would you differentiate the two?

Sebag: We don't like the fear ideology or narrative that the Goldbugs have linked to gold. We think there is a compellingly different and more empowering narrative simply focusing on the math, physics, and personal choices people can make with technology at a grass roots level. We don't believe there's a grand conspiracy, for example, or some kind of a plan, to systematically devalue the currency or confiscate wealth. We don't believe the Central Bank is the Knights Templar. We wouldn’t want a centralized gold standard, so we need to invent a market solution with technology, and do so legally and safely. We believe there is a misunderstanding of gold and money and it has to do with the lack of a multi-disciplinarian narrative by economists. The debates in macroeconomics have never been solved, we’re always experimenting and adjusting, as is the market. There's now this common consensus in academia that if things go badly governments can run deficits and print money, and it will encourage people to spend money that is worth less on things they don’t need, thus keeping the economy growing. In our opinion they don't properly look at the ramifications of that in a capitalist system with natural resource limits where productivity and prosperity are not easily achieved without long-term investment, literally feeding a division of labour with commodities you can’t cheat. So look at some of the data points related to the explosion of fiat money. Consider wealth inequality. When you measure the wealth of the 1% since 1971, you can see that it has gained by a factor of ten.  But no one understands why. It's very clear to us that this trend is linked to the proliferation of un-anchored fiat money. When fiat money is created, it's created through asset inflation.

The Northern Miner: Can you elaborate on the relationship between printing money, the devaluation of currencies, the increasing wealth of the 1%, and why BitGold is so important as a result?

Sebag: Central banks don't just distribute fiat money to everyone. They buy assets. But they don't buy real assets such as mines, factories, and property. They buy securities such as treasury bills or government-issued bonds. They buy these securities indirectly from financial services dealers and this drives up financial asset prices. This has been happening since the end of the Volker era. Who owns the securities? Not those who are just starting out on their journey in life and launching their careers. They are not the ones buying securities. They are trying to save their first $5,000 or $10,000 in a chequing account. Who is buying the securities? It's the 1%—which includes me. Here's the chronology of who benefits first in the fiat system. The 1% buys the equities and pushes up the asset prices. They then sell the securities and go out and buy assets. They buy real estate, cars, art. They start companies. The money then starts to trickle down. But because the 1% got the money first, there is what I call purchasing-power decay. The 1% buys the best houses on the best street, and whomever wants to compete with them, has to convince them to sell their house to them. So when more money is printed, you have purchasing power decay that can be as much as 50% within a year. So the 1% is benefiting. I'm part of that 1%. We work hard, of course. But we own key parts of the economy and large parts of the controlled wealth, because we get the first pass on new money.

On a gold system that would be impossible. Everyone would have to be paid in gold or its value equivalent. Gold can only be extracted from a mine and mining requires energy and labor. Using gold as a currency would be a far more equitable system because you can’t cheat it, you can only seek productivity gains that everyone benefits from. It would be a system in which a worker that is productive and generates surplus can climb up the economic ladder. Under a gold system, a family could move from poverty to the upper middle class without being cut off by these shortcuts. In our current system we minimize the value of real commodities and real labour, always seeking a scalable way to extract or redistribute current wealth, not create more through productivity. 

The Northern Miner: The purchasing-power decay you speak of is illustrated in the problems facing today's millennial generation.

Sebag: You're seeing millennials today who can't even achieve what their parents achieved. They have to share cars and housing. They have to use Uber because they can't afford to own a car. This has happened because there has been an accumulation of paper wealth that wasn't earned through surplus or productivity. In fact, productivity has collapsed as asset prices have increased. This has become a huge problem. Millennials are willing to work hard. But because there has been no discipline, governments have been generating trade and budget deficits for years with fiat money. The simple solution is: If you let people operate on a gold system, they can peg their surplus to themselves and aren't exposed to factors that devalue currencies.

Gold is not going to make people rich. It just reflects the cost of production that can't be devalued. Gold has been a good peg for food and energy prices for hundreds of year in markets that are not predictable. That's very valuable.

The idea that gold is going to $10,000 an oz. and make Goldbugs rich, is bullshit. We have to open the debate about money. Can there be a gold system that is equitable? Let's solve the technology and let the market decide. Perhaps we are wrong, but we need challenges to a system that clearly isn’t working for 99% of the world. We feel we have a lot of solid math and history on our side.  

The Northern Miner: What kind of feedback have you been getting beyond the acceleration in your share price?

Sebag: Everyone we've spoken to—on the left, on the right, in Canada, in Europe, politicians—they are intrigued by the idea. People from all spectrums get it as long as it’s done correctly. They have no problem with it as long as BitGold promotes tax compliance and anti-money laundering regulations. We don't have a problem with the state. There has just been a misunderstanding of the economics. We decided to build this thing for people as we thought it was needed, and people from all over the world are embracing it. Recently there was a day when we had over $200,000 come in. We're democratizing accessibility to a stable form of savings.

The Northern Miner: The level playing field aspect of it will appeal to many people...

Sebag: We felt we needed to do this. We understood the math. The problem with gold is that it's linked to the U.S. dollar as an investment. We have unlinked it. We're creating a live price system in 106 different currencies. When you look at the charts going back ten or fifteen years you can see that gold is up against every currency. The biggest bull market in gold didn't occur from 2002-2011, it occurred from 2011 until now. It occurred in Brazilian Real, in Japanese Yen, in Russian Rubles. But nobody noticed. There is an opportunity here. Why do people in India buy gold? They do it because they're pricing it in their local currency, not dollars, and their currency loses value compared to the food prices that make up 50% or more of their spending. They are not trying to get rich through asset speculation or investment, they understand that it is a savings, it's a dowry, and it's the only thing they can pass on forever when they build a surplus.