Skip to content
Swan logo
Log InGet Started

Erik Townsend and Yan Pritzker: Swan Signal Live E27

Posted 9/11/20 by Brady Swenson

Erik Townsend, host of the vener­able MacroVoices Podcast, and Yan Pritzker, author of Inventing Bitcoin and cofounder of Swan Bitcoin, held a lively discus­sion about central bank digital curren­cies and govern­ment responses to Bitcoin. Erik argued that Silicon Valley will create a new currency that govern­ments will co-opt and foist on their citizens, whereas Yan argued that Bitcoin would outcom­pete any other currency, including any digital currency the govern­ment tries to mandate.

Subscribe to the Swan Signal YouTube channel and Swan Signal podcast.


0:00 Introduction

1:51 Summary of Erik’s book about digital currencies 

10:12 Why Bitcoin is the likely winner 

17:25 Bitcoin as a bearer asset 

21:41 Silicon Valley coin 

26:23 Why people will choose Bitcoin 

31:15 Central Bankers knowl­edge and goals 

38:18 Capital controls by governments 

44:27 Geopo­lit­ical control of currency 

56:21 Govern­ments will force their citizens onto “The Orwell” currency. 

1:03:55 Black market currencies 

1:06:57 Bitcoin’s proof of work and diffi­culty adjustment 

1:13:22 Bitcoin’s layers and distrib­uted architecture 

1:19:52 Building a decen­tral­ized finan­cial system 

1:33:03 Ethereum doesn’t scale 

1:40:13 Why Erik doesn’t talk about Bitcoin on his podcast

1:52:34 Wrap up


Brady Swenson:

Hello everyone and welcome back to Swan Signal Live. This is a produc­tion of Swan Bitcoin at The safest way to accumu­late Bitcoin with automatic recur­ring buys. Swan Signal’s a weekly show that pairs up great guests for compelling discus­sions about Bitcoin and economics. I’m your host, Brady Swenson, head of educa­tion at Swan. Before we dive in, a quick word about the service we provide here. We’ve built the best way to accumu­late Bitcoin. You can set up a plan for recur­ring buys at Couldn’t be easier. One, you just connect your bank account and auto fund USD. We automat­i­cally buy the Bitcoin for you and you can option­ally set up automatic withdrawals of your Bitcoin to your own wallet. We do all of this with very low fees in the industry, up to 80% lower than Coinbase. Get off Coinbase, get on Swan and up to 57% lower than Cash App for automatic recur­ring purchases.

And just in case you’ve missed it. We are launching daily buys very soon. We’ve had massive demand for the daily frequency. Since the day we launched, you can sign up for the beta group at Okay. I’m really excited to get into this one today. We have Eric Townsend on the show. Eric began his career as a distrib­uted systems archi­tect and software entre­pre­neur. He went on to run a macro strategy hedge fund for five years, and now hosts the popular MacroVoices Podcast. Eric also published a book about the matters at hand today, The Depth of the Dollar in the Rise of Digital Currency. Eric, I’m person­ally a big fan of yours. So it’s a thrill to have you on the show today.

Erik Townsend:

Thanks so much. It’s a pleasure to be here. I’m really looking forward to this one.

Brady Swenson:

All right. And Yan Pritzker. Yan has spent time working as a software engineer, leading engineering teams and tech startups. He is co founder and CTO of Swan and author of Inventing Bitcoin, A Quick Guide to Why Bitcoin was Invented and How it Works. Yan, great to have you on the show today, man.

Yan Pritzker:

Thank you. Thanks so much, Eric, for being here. Every­body knows this probably, but Eric is… I’m a huge fan of Eric’s. I listened to actually more MacroVoices right now than I do to Bitcoin pods. So sorry to all of you, Stefan Lavera fans. I’m a huge fan of those as well, but honestly, when it comes down to it, I don’t have time. I’m actually listening to MacroVoices because for me, the gap in my knowl­edge is more on the economic side than it is on the technical side. And so I feel like I’ve learned a ton from Eric’s show. So thank you Eric, for being here. The other thing I wanted to comment on is that prior to us getting the show together, which is again, really cool, Eric and I had a bit of a Twitter spat, which I initi­ated and I simply said, “Eric, can I send you a copy of my book?”

And I greatly upset him and why did I do that? Well, it turns out that Eric had written a book researching digital curren­cies, had done a ton of research on Bitcoin, under­stands it thoroughly. And here I was saying like, “Why don’t you read about Bitcoin?” Right? So I had a total misfeed on the situa­tion and that was made worse by a bunch of Bitcoiners mobbing Eric’s Twitter accounts. And that’s not cool. So I want to tell you guys, I’m saying this from my own heart, I’m not being coerced into this apology. I’m saying this because you guys are a bunch of assholes on Twitter and you shouldn’t do that. Eric’s a smart guy. He owns a great show. Let’s have a discus­sion and not fight. So if you guys are tuned in for drama, it’s not going to happen here. Sorry.

Erik Townsend:

Well, thanks for trying, but even folks that know that I wrote the book still give me a hard time on Twitter for not being fully on board their religion. So I don’t think you can stop it, but.

Yan Pritzker:

So actually I wanted to comment on the book because I did read the book. Eric sent me his book. It’s not what I thought it would be. I kind of imagined that there would be this kind of blockchain, not Bitcoin. Bitcoin is like irrel­e­vance kind of thing. It’s not really what it is. I would say that what I found is more like a sympathy to what Sitoshi did. In fact, several times Eric says out loud like, “I sympa­thize with this specific notion of what Satoshi was trying to accom­plish.” And he even really goes through very deeply about how the monetary system works, how the bond system works, how sover­eign debt works. It’s actually a very good educa­tion on money in general. It does cover some of the same ground. The safe does with the Bitcoin standard, goes a lot into history, is very educa­tional on that side.

I think what… and this is my inter­pre­ta­tion of the book, Eric. So I’d love to hear your commen­tary, but my under­standing is it’s not that you’re against Bitcoin. You actually like the ideas in there. You just think that it’s going to be taken by govern­ments and flipped on its head, poten­tially, as a sort of Orwellian system of control if we don’t want to actually guide them to do the right thing here. And it’s not that Bitcoin is not working for say, it’s more like Bitcoin is just very narrow in scope and what you’re really looking at as a much broader idea of govern­ments and even super­na­tional digital curren­cies driving the next say 10 to 20 years. Can you expand on that? Is my under­standing of your thesis correct? And how has any of that change the last couple of years?

Erik Townsend:

I think it’s basically correct, but I would frame it a little bit differ­ently. The single most impor­tant lesson that I’ve learned in my investing career is not to make the mistake I made in the begin­ning, which is figure out what the right thing is, what should happen, what the right outcome for the planet is, and then expect govern­ments to actually do that because that’s not the way history teaches us the world works. So a place where I think a lot of the Bitcoin commu­nity doesn’t get where I’m coming from is if you want to know what I believe in, what I feel in my heart, Satoshi for grand ruler of the universe, man, I am so on board with what Bitcoin stands for. Take the power away from govern­ments, give it back to the people and get rid of govern­ment money, allow sound, money princi­ples to be effec­tu­ated through this incred­ible inven­tion of the secure digital bearer asset and make the world a better place.

I also believe in campaign reform, individual liber­ties, people having the right to choose their own health­care and not be forced by the govern­ment to buy what the govern­ment tells you, you have to buy. There’s a lot of things that I believe in that are simply not going to come true on the planet that we actually live on. And unfor­tu­nately, I don’t think it’s realistic. It would be… and if I’m proven wrong about Bitcoin, if Bitcoin takes over the entire finan­cial system and becomes the center of every­thing, I want to be the first guy at the celebra­tion party to make fun of myself for having been so wrong, because that is a major celebra­tion. I don’t think it’s going to happen, just like we’re not going to see campaign finance reform or a lot of other things. I think that corrupt govern­ments who want to stay in power will use their power to continue to stay in power.

When you consider the propo­si­tion of what Bitcoin really is meant to be, it’s designed to take power away from the most powerful people on the planet. Central bankers take away their ability to monkey with money by using monetary policy tools to control the money supply and so forth and allow free markets to govern. Those are values I believe in. Those are not values that I think are really going to happen. So as a profes­sional investor, my job is not to be in the what should happen business. It’s to be in the what’s likely to really happen business. And unfor­tu­nately… I don’t think Bitcoin is going away. But when you consider the scope of it, what’s really at risk here, it’s a whole lot bigger than what we see right now. If you look at what this whole cryptocur­rency world, not just Bitcoin, but other cryptocur­ren­cies is all about.

If I look at that in the grand scheme of the world, and I’m going to use wars, cause every­body’s familiar with wars, just to sort of think about a compar­ison of scale. The whole Bitcoin story to date is about as big as the Yom Kippur War or the Bay of Pigs Invasion in terms of its impor­tance to world history. Bay of Pigs Invasion was a really impor­tant event. It set the prece­dent for how a lot of other stuff was going to go later in the Cold War. So it was not an insignif­i­cant thing, but unto itself, it’s not that big of a point in history. What is bigger than the American Revolu­tion and World War II combined?. It’s when the U S dollar is replaced as the center of the global monetary system by a digital currency system. That’s the big shebang. That’s what we really need to think about.

And I think the place we disagree is not whether a money system designed by the people for the people like Bitcoin should win that race. It’s a question of, who’s likely to really win that race when corrupt govern­ments who have guns and power are in charge? And I don’t think it’s Bitcoin, unfor­tu­nately. So where we disagree is not on what should happen. It’s what’s likely to really happen, but I really want to focus the conver­sa­tion today on not just… cryptocur­ren­cies are great and a bunch of leading edge forward-thinking people who were ahead of most of society. I’ve gotten fasci­nated with them. That’s great. But what changes the course of human history is when the U.S dollar is replaced as global reserve currency by a digital currency. That’s the primary predic­tion of my book. I know that we agree on that as an outcome.

You guys think it’s Bitcoin. I don’t think it’s Bitcoin, but it’s not because it shouldn’t be, it’s because I don’t think it’s realistic to expect govern­ments to allow that to happen, even though it should happen for the better­ment of the world. So that’s kind of the where I stand. Do you want to explain, Yan, why you think it… I mean, first of all, do we agree that the big apple here is replacing the U. S dollar as the global reserve currency at the center of the global finan­cial system? Would you agree with me that a digital currency is going to take that title away from the dollar? And if so, why do you think Bitcoin is the likely winner?

Yan Pritzker:

I think we… the agree­ment is almost there. I do agree that in the short term, and this is… I think obviously anybody’s been paying atten­tion that pretty much all money is going digital in one form or another, right? If you even look back at the last 20 years, we’ve already got digital money in some fashion. We have PayPal, we have Venmo, we have Square, we have credit cards, even, right? Money has been digital for a long time. I think the revolu­tion that you’re talking about is also happening, and that is the idea poten­tially of a central bank, digital curren­cies, or other bearer type of tokens, like Bitcoin, where the thing itself, you can put it into your wallet and can carry with you and you can transact. Versus something like PayPal, which is going through a corpo­rate inter­me­diary. So whether we use Fedcoins or some other type of coin, I think that is probably happening to some degree.

I mean, obviously it’s underway in lots of countries that have pilots for this kind of stuff. I think that my view on Bitcoin is probably not the same as every­body else’s. Even in the Bitcoin commu­nity, you will find a lot of different nuanced views on what Bitcoin could be. I think in the short term, and let’s just say short term, let’s call it a gener­a­tion. Let’s say the next 25 years, I don’t think Bitcoin is going to take over the world the next 25 years. There are those in Bitcoin that will disagree with me. I think of Bitcoin more like gold. So gold there’s $8 trillion market of gold or 10 trillion. What are we at now? I don’t know. It’s certainly a lot smaller than the market for national curren­cies, but it exists side by side with them. And whenever national curren­cies are abused… And I think you’ll probably agree with me, Eric, because you’re a gold bull.

Whenever people are seeing deval­u­a­tion of currency, whenever they’re thinking that the govern­ments might default on debt, whenever they’re worried about infla­tion, they use gold as this kind of hedge thing because it’s outside of the control of govern­ments and they buy the gold so they can sell it during a rainy day. And govern­ments do this too. Govern­ments buy gold, central banks buy gold, people buy gold. Every­body buys gold for a rainy day, right? To me, Bitcoin is more that. It’s more of that, I call it a stash of freedom cash, right? It’s something that you can have that is outside of the purview of govern­ments. And what do we define as success for Bitcoin? It could vary a lot for different people. Some people won’t be happy until the dollar collapses in hyper­in­fla­tion and Bitcoin takes over and they call that hyper Bitcoinization.

I actually am not a believer in that, at least not in any short scenario, 25 years, 50 years, I think it’s a long way away. Then you get a lot of flack from Bitcoiners for saying that. If at all, I think Bitcoin could very well be a digital goal that is used exactly like gold is used, which is infla­tion, hedge, uncer­tainty hedge, uncor­re­lated asset, something that you can put in your pocket and run away from your failing country from. Although with gold, it’s very hard because you’ll get stopped at the border, Bitcoin’s easier.

But that’s how I view Bitcoin. So we may have a hard time dissecting that because I don’t… I’m not saying Bitcoin is going to be the next world reserve currency. I think we should really dive into what the quote unquote visual currency revolu­tion that you talk about. What does that actually mean? What is changing from what we have now to what you’re suggesting is happening? And then we can kind of go from there to dissect how that might happen. Because I found a lot of… I have a lot of inter­esting quotes I saved off from your book that I’d love to discuss where you talk about how we might transi­tion. I’d love to hear you give an overview of that.

Erik Townsend:

First of all, the thing that really surprised me in what you just said is, I guess we disagree on this money is already digital thing. I think that’s one of the biggest fallacies and miscon­cep­tions. And it sounds like you believe that. We have never had secure digital bearer instru­ments where it’s not an electronic or digital accounting system that keeps track of your money. It’s not an electronic online checking account type of system, which is what PayPal and those types of things are. It’s actual money. The actual value, the bearer instru­ment, the equiv­a­lent of cash exists digitally in a completely decen­tral­ized permis­sion­less network that is-

Yan Pritzker:

Small points of contention. We did have a Chaumian E‑cash in the eighties, which was bearer… it wasn’t just not govern­ment run, but it was bearer cash, digital cash, right?

Erik Townsend:

Okay. It never… I mean, we had Myspace too, but it never got traction. So okay, I’m not arguing with you about the chronology of inven­tion, but in terms of the chronology of adoption, where you have a major network that is actually trans­acting value every day on the Bitcoin network, where it is actually digital secure, digital bearer instru­ments that operate in a permis­sion­less globally distrib­uted network, that is a break­through in computer science that most people just totally don’t get. And all the talking heads that say, “Oh, money’s already digital. It’s been digital for 20 years.” No, no, no, we’ve had digital accounting systems keeping track of a conven­tional currency. True digital bearer instru­ments, and this is something I want to come back to later, have so many appli­ca­tions in finance beyond just currency systems. But the currency system is the most obvious place to employ that.

And as far as I’m concerned, Bitcoin is first because from a stand­point of widespread adoption, clearly Bitcoin really actually became the Facebook, not the MySpace of this kind of capabil­i­ties. So as far as the digital currency revolu­tion, what I see it is, is it’s all about the inven­tion of the secure digital bearer instru­ment. The idea that you can actually have something with the proper­ties of cash. Copying it doesn’t allow you to double spend it. Solving that double spending problem was a huge break­through in computer science. Now that enables a whole bunch of things, including a vastly superior monetary system. The big debate that I think we have to have… and I want to be on your side of it, I just I’m in the business of what’s going to happen, not what should happen.

The question is, do you see Bitcoin, which was the first successful large scale imple­menter of secure digital bearer assets, take off to the point where it just takes over the finan­cial system, according to the Bitcoin Maximalist crowd? Or do corrupt govern­ments steal all of the best technical inven­tions from the Bitcoin guys and use it against them in order to create the exact opposite? A digital currency system, which is designed with the exact opposite goals of Bitcoin to make every trans­ac­tion trace­able and track­able, and maybe even voidable by the govern­ment. So if they don’t like the fact that I paid you $500 five years ago, they can undo that trans­ac­tion and claw it back. I’m going to keep talking guys because I know we’re live. You’ve gone frozen on my screen.

Yan Pritzker:

Oh. No, we’re here. We hear you.

Erik Townsend:

Okay, great. Sorry to the audience. You guys froze, and I wasn’t sure if you lost me. So where was I? Talking about the digital currency and where it’s all headed? It’s the adoption of bare assets as the founda­tion of a new digital monetary system, which could change the world. And you’ve got to under­stand the polit­ical backdrop, which is why is the US dollar the center of the global finan­cial system, as the global reserve currency? Because there is no viable alter­na­tive. And there’s no other reason. Because a whole bunch of govern­ments around the world have been seriously pissed off that the US has this unfair advan­tage of being the reserve currency issuer. They’ve been pissed off about it for decades. They’re looking for a way to elimi­nate the US hegemony over the global finan­cial system and make it more fair. So if somebody comes along… okay, I’m going to keep talking because I don’t know what’s happening. My screen’s gone totally black.

Yan Pritzker:

Your screen’s frozen, but we can hear you, so keep going.

Erik Townsend:

Okay. Hopefully I’ll come back. Boy, my Zoom’s going crazy on us here.

Brady Swenson:

On the broad­cast, every­thing’s fine. So I think maybe between the two of us or three of us, there might be some inter­mit­tent freezing, but we can get on the broad­cast so far, so.

Erik Townsend:

Well, I can’t see you guys anymore, but I’ll just look into the camera and hopefully our audience will be okay.

Brady Swenson:

This will turn into an audio podcast. There we we go. You seem back. I think you’re back.

Erik Townsend:

Okay. Yeah. I got reorga­nized on my side. So I think that there almost has to be this digital currency revolu­tion where the inven­tion of digital bearer assets enables a completely new monetary system. And it’s not just the monetary system. It’s also many other aspects of finance. I want to come back and talk about that a little bit later on, but just starting with the finan­cial system. Okay. That means we have to ask ourselves a question. Without a doubt, Bitcoin has the leap. Bitcoin has been doing secure digital bearer assets in a fully decen­tral­ized permis­sion­less network for more than a decade now. So does it win because it’s got huge first mover advantage?

Or does it get stepped on by govern­ments who use their power and authority to say, “Wait a minute. We’re not going to allow a bunch of guys who didn’t believe that we, the central bankers should be in charge of every­thing to design the system, which basically was designed to take our power away from us. We’re going to get some other smart technical guys to steal all of their best engineering ideas and design us a digital currency system that does the exact opposite.” That doesn’t disable monetary policy, but that dramat­i­cally expands the power of monetary policy because frankly, the oppor­tu­nity to engineer new monetary policy tools, which go way beyond the way that central bankers do things today is staring them in the face. Now they’re still so ignorant. They haven’t really figured out what Bitcoin is yet. So it’ll be awhile, but eventu­ally they’re going to figure it out.

And they’re going to say, “Wait a minute. The monetary policy tools that we have, which is adjusting policy rates, it’s kind of like setting this interest rate. That’s not really what you’re trying to control, hoping that it’s going to kind of bleed over and be conta­gious to the interest rate that you are trying to influ­ence. And you’re doing that by setting this something else. Well, what if we had a really elabo­rate digital bearer asset based monetary system with a whole bunch of monetary policy controls designed into it to give central bankers much more power than they ever had before, as opposed to Bitcoin’s design center, which is to take the power that central bankers have away from them.”

Which one of those do you think the central bankers want? Well, they haven’t even figured out the possi­bil­i­ties yet. Once they figured out the possi­bil­i­ties, that’s when they’re going to want to do every­thing they can to try to elimi­nate Bitcoin, to outlaw Bitcoin and to develop their own contender. Now, I used to think the answer was CBDC, central bank distrib­uted curren­cies. What I realized is really the engineering talent is in Silicon Valley. And if you look at what went wrong with Facebook’s Libra, first of all, all the crypto guys are like, “Oh, it’s a joke. It’s not fully decen­tral­ized. Bitcoin is much better.” You got to under­stand, they weren’t trying to address the same design objec­tives that Bitcoin was trying to address. They weren’t trying to-

Yan Pritzker:

I think we all under­stand that Eric, you’re putting words in the mouths of people who are maybe not thinking clearly about it, but I think every­body under­stood the Libra was an attempt to have a central­ized Silicon Valley run digital currency. And that’s precisely what the govern­ment recog­nized. When Mark Zucker­berg went up there to testify, they recog­nize that. And they said, “Why would we trust you with money when we can trust you with data?” Isn’t that what we heard on the floor of Congress?

Erik Townsend:

Well, I’m a little bit more cynical than you are. what I saw in that is who do you think you are? You pasty faced, little weasel to think that you can change the money system of the entire planet without buying off all the politi­cians first? You idiot. You didn’t bribe us, dummy. You’re out of business. Get lost.

Yan Pritzker:

That’s fair.

Erik Townsend:

I think that other people will learn from that. And what I fear, and this is… my original reaction to Bitcoin, going back to, I think I first learned about it in like 2009 or 10. As I thought, “Oh shit, they’ve solved the double spending problem.” What that means is eventu­ally govern­ments will recog­nize the oppor­tu­nity to build something that has the exact opposite goals of Bitcoin. And there was no doubt in my mind it was a matter of time. I’m surprised it’s taken this long and they’re only starting to figure out that opportunity.

But what they’re going to see is you could design a much, much better monetary system, that’s still based on secure digital bearer assets. But it’s designed to track every­thing, to give our govern­ments much more power than they have now. And then you go and you sell that system to govern­ments. Facebook was trying to own it themselves. They weren’t trying to sell it to govern­ments. My contention is you’ve got to either sell it to govern­ments or you’ve got to bribe govern­ments in order to get them to let you adopt it. Zucker­berg didn’t do either of those things. And he got promptly put out of business. I’m afraid the next guy might be smarter than that. And the worst outcome I think we could possibly see for the planet is, let’s say that, I don’t know if it’s Google or Apple or somebody else, but a major Silicon Valley interest takes over the entire planet money system by designing a better system. And the way they managed to get it past govern­ments is to give them a bunch of monetary policy tools that work much better than the stuff they’ve got now.

If they can sell it to govern­ments, they can accom­plish global adoption. And it’s scary as shit that, that’s a possi­bility, but I think it is. Now you guys, I think, are of the mindset that the people will be smart enough to under­stand that something like Bitcoin that’s designed to take power away from govern­ments is better. And the thing is, I believe that myself, but we’re unusual. Most people… if you look at the trends in society right now, it’s not about a celebra­tion of individual liber­ties and libertarianism.

We’re moving to more and more collec­tivism in society. A lot of people favor socialism over capitalism. And it’s easy to under­stand where capitalism has gone awry. And I don’t think there’s anything wrong with capitalism, but the corrupt system we have now, that’s masquerading as capitalism is very broken. So we have a lot of people that want to give govern­ments much more power, not less power. And to think that all the people are going to be smart enough to reject anything that central­ized and in favor of Bitcoin instead, I don’t think most people are as smart as you guys are. I don’t think that’s going to happen.

Yan Pritzker:

So I agree with you with a lot of what you said here. I would disagree that govern­ments haven’t wised up to this. I mean, if you look at every major central bank has a project, that’s either in progress or they’re thinking about it. The IMF has put out a paper a year ago, two years ago saying how they could use digital currency to imple­ment negative interest rates, which I know you’ve talked about in the book. I’d love to hear you expand on that in a second. But they all know that this… and I agree with you. We haven’t had barer digital cash, although Chummy and Ecash… technology was there. It was starting at them in their face, they just didn’t use it. But yeah, they didn’t have barer digital assets. That is a new inven­tion. It is possible that when we have… whether we call it a Fedcoin or a Silicon Valley coin, that coin would have… each individual coin would be tracked, right?

It could come with smart contracts. We talk about all that stuff. None of that is actually is new technology. We’ve had the idea of digitally signed things for many decades. As you pointed out, govern­ments don’t need to have a permis­sion­less ledger. They need to have a permis­sions ledger. Distrib­uted database has been around for a long time. That’s not new either. So the Bitcoin’s innova­tion was not their digital, their assets. That was around for a long time. The innova­tion was actually the idea of making it truly permis­sion­less. So, okay. So maybe Bitcoin made the govern­ments wake up and realize, “Oh, this is a thing that we should be worried about and we should work on it.” Okay, fine. But the technol­o­gy’s been there, in my opinion, for a long time. That aside, I think you’re saying, “Yeah, people will just get the shoved down their throat. They’re not smart enough to under­stand Bitcoin.”

I would contend that neces­sity is the mother of all inven­tion, right? Here in America for us, Bitcoin is more or less a luxury good, a specu­la­tive good, something you buy to see if it will go up or not. That’s not the case in a lot of parts of the world, especially the ones that have author­i­tarian govern­ments, Capital controls, and all of that. If you watch those places, right? Like watch what happens in Venezuela and watch every country around Venezuela buy Bitcoin while Venezuela is going through hyper infla­tion. What does that mean? I mean, they’re looking at Venezuela. They’re seeing their neigh­bors suffering and they’re recog­nizing the oppor­tu­nity in Bitcoin as the only thing that their govern­ments can’t screw up. So I don’t think it’s that people are stupid. I think people have to be driven to that point by neces­sity. And you’re right, that Ameri­cans will not be driven to that point by necessity.

They will either think of Bitcoin as a number go up. Let’s buy this and get rich, or they’ll just, kind of like you, maybe dismiss it and say, “Ah, this would never work anyway. We’ll just use whatever the govern­ment gives us.” If it’s… my dollars in my bank account, they’re not digital in the same sense you’re talking about. They’re not barer assets, but they are digital in the sense that tomorrow the bank could swapped them for CBCs or a Libra on the backend. And I wouldn’t know any different, right? It would still be a number in my account. So I think there is definitely a big danger where the existing infra­struc­ture, being already digitized, if not digital, right? It is already checking or IOU accounts, digital IOU accounts turns into something that’s a digital bearer asset on the back end and starts to enable central banks. Like you’re saying to have a tighter controls over monetary policy. Things like negative interest rates would be very easy to imple­ment. They would just click a button and your accounts would draw down, right? We could have the happening.

And your account to draw down. We could have that happening, and the question is… It’s not either or to me. It’s like okay, that’s going to happen, but people out of neces­sity in places where their currency is constrained, they go and get Bitcoin, and we have a very, very rich history of currency black markets. I’m from the former Soviet Union. In the Soviet Union, it was illegal to own US dollars, 100% illegal. You could go to jail, worse, who knows? Beaten. I don’t know, and yet, the Soviet ruble was a nonfunc­tional currency and every­body knew it. And in the ’80s, I did this research and I posted this yesterday on my Twitter feed, a company called Winton, which is appar­ently a multi­bil­lion dollar asset manager, never heard of, did research on black market currencies.

They found that 40% to 80% of trans­ac­tions in Soviet Union, for things like apart­ments and goods that you can get on the streets. Those were all done in US dollars, even though they were completely illegal. So I think what happens is not either or. I think both. I think the digital currency changeover to bearer assets that enable central bankers to give them control does happen for sure. A hundred percent happens for the next 10, 20 years. But at the same time you have this other thing growing next to it, just like gold, is next to the tradi­tional finan­cial system. I would kind of say maybe gold lost its way because it got swallowed by that system and became digitized and is mostly traded as IOUs. But you could still have a bar of gold and you’re safe. Just like you could still have a Bitcoin in your wallet, or you could have it on a custo­dial exchange where it could might be taken from you. So I see it kind of as a simul­ta­neous evolu­tion of these things, I’m not an either or system.

Erik Townsend:

Okay. I think that the place we agree a lot is I’ve never said, Bitcoin is bad. Bitcoin has no future. What I’ve said is I don’t think it’s going to replace the dollar at the center of the global finan­cial system. I don’t think it’s realistic to expect a currency system designed for the express purpose of taking power away from the most powerful people in the world is going to be allowed to succeed in doing that. I hope that that’s wrong and that it is successful. A place where we do disagree is yeah, central bankers sort of kind of get it. They can see that CBDCs are on the horizon. They didn’t even know that when I wrote my book just two years ago.

Now, I had an email exchange with the authors of that IMF report. And there’s a passage in the execu­tive summary, it says with respect to monetary policy trans­mis­sion, digital currency should have no effect. And I wrote to them and I said, look, you guys got it completely backwards. What you should’ve said is with respect to monetary policy trans­mis­sion, the single most impor­tant value of digital currency technology to central banks is the oppor­tu­nity to engineer an entirely new gener­a­tion of monetary policy tools, which are orders of magni­tude more effec­tive than the conven­tional ones. Which frankly are not a whole lot more sophis­ti­cated than divining rods and voodoo dolls, which is the way the current system works.

So they have a huge oppor­tu­nity that’s staring them in the face that they’re completely obliv­ious to. They’re looking at the existing cryptocur­ren­cies like Bitcoin, which don’t offer any monetary policy tools. They’re just fixed money system. The idea that they could use digital controls to imple­ment variable money systems with monetary policy controls that are much more effec­tive than the ones they know about and are used to, it hasn’t even hit their conscious­ness yet. And even after I tried in email to get them to see it, they still didn’t get it.

Yan Pritzker:

I mean, Erik, I am sorry, but I have to correct you on that. Because in that IMF paper, they liter­ally say here’s a quote. “The proposal is for a central bank to divide the monetary base into two separate local curren­cies, cash and E‑money. EMoney would be only issued electron­i­cally, pay the policy rate of interest, cash would have an exchange rate against EMoney.” And then they talk about how they would exactly control the exchange rate to force people into negative interest rates. I mean, they under­stand this. They have under­stood this.

Erik Townsend:

They under­stand negative interest rates, but I don’t think they under­stand the oppor­tu­nity to engineer new monetary policy tools to control the growth of the money supply to incen­tivize lending through mecha­nisms other than policy rates, to modernize monetary policy, and make a huge leap forward into the 21st century with how monetary policy itself works. If we’re talking about the same IMF paper in my email exchange would be,

Yan Pritzker:


Erik Townsend:

Yeah, I think it’s the same one. I wrote the authors. They expressed some curiosity. I sent them a copy of my book. I explained, guys, what you’re missing is you’re looking at the way digital currency systems that were designed by people who don’t like you, you’re looking at how they work. What they do is they defeat monetary policy. You want to think about how you could design monetary policy systems in a digital money system and a digital bearer asset based monetary system that go far beyond anything that you’ve ever imagined before.

With respect to conven­tional tools, they haven’t processed that yet. At least when I inter­acted with them, they didn’t get it yet. Now, they’ll get there eventu­ally. And that’s what scares me. Frankly, I shouldn’t be saying this on the air. Never­mind all of that, guys. It’s impos­sible. Read what the paper says. It can’t be used for that. I don’t want to help them. Cause I don’t think it’s good for the world to get to the point where somebody delivers that capability. It’s going to give the central bankers more power to monkey with the money system more than they ought to.

Yan Pritzker:

Yeah. I think that in your book, you have an awesome anecdote about how you think about central bankers that you’re paraphrasing. I think Eric Jansen, right? Can I read this? It’s about the bookshelf and the rubber band analogy.

Erik Townsend:

Oh yeah. That is an Eric Jansen quote.

Yan Pritzker:

Yeah. So, this is just from Eric’s book, which is an inter­esting take because I want to under­stand after I read this, how you think about this. So here’s how Eric describes central banking, a paraphrase from Eric Jansen. Imagine you’re standing in front of a bookshelf, a very heavy concrete, cinder block rests on the shelf above your head. This repre­sents the economy running a little hotter than you think it should. So you wrap an elastic bungee around the cinder block, and then you put the ends between your teeth and then you very slowly step back from the shelf, just a quarter inch at a time.

And at first nothing happens. You wait six weeks, you take another step back, still nothing. And then eventu­ally the cinder block, boom, plops in your head. You wake up with a concus­sion in the hospital, you schedule a press confer­ence and you say, oh, there was absolutely no way to see the reces­sion coming. So, that’s a paraphrase of Eric’s paraphrase. But I thought what was really inter­esting about that is it’s two things. One is it doesn’t seem to me like you trust central banks to under­stand what they’re doing and with respect to the complexity of their effects on the overall economy.

And two, that you think that their effects are actually very muted because they don’t have direct control. Because they’re doing something that’s got a lot of give in it that they’ll do this one thing. They’ll roll over the interest rate or they’ll do QE, whatever they’re doing. It doesn’t transmit very well through the economy. So are you suggesting that by giving them better trans­mis­sion tools, maybe more direct and like liter­ally Paul hits a button and tomorrow, all interest rates across the world go negative with a hit of a button, is that what you’re suggesting that this new type of system would allow? And is that something you would want, or are you just predicting that it’ll happen regardless?

Erik Townsend:

No, I’m predicting it’ll happen. I don’t want it. I mean, what we’re talking about is taking oppres­sive govern­ments, which for polit­i­cally influ­enced reasons, manip­u­late, debase the value of every­one’s money for the sake of being able to try to control the economy in ways they shouldn’t be trying to control it. Who are armed only with batons and we’re going to give them assault rifles. That’s what, unfor­tu­nately, the digital currency revolu­tion is going to mean in terms of, I thought, central bank digital curren­cies. But what I realized now is it’s going to be Silicon Valley digital curren­cies. People in the valley are going to engineer the system that they can sell to the central bankers as saying, look, if you use this system, it gives you far more power and far more robust monetary policy tools than you ever could’ve imagined in a conven­tional money system. And it also solves your problem of ditching the U.S. dollar at the center of the global economy at the same time and leveling the playing field.

Now, the U.S. govern­ment has every reason to oppose that strongly enough to start a war over it, but every­body else who doesn’t like the dollar being at the center of the global economy has an incen­tive to allow that to happen. So there’s a huge geopo­lit­ical conflict that poten­tially arises out of this at the same time. I am not at all advocating these outcomes. I think it would be better if we went back to sound money systems. And I think that the designers of Bitcoin had exactly the right idea for what’s right for the world. But again, the biggest lesson I’ve ever learned in investing is not to confuse what you think should happen with what’s likely to happen on this planet.

And unfor­tu­nately, I think eventu­ally govern­ments are going to figure out how to use the technology that the Bitcoin guys invented more than a decade ago, to do the exact opposite of what Bitcoin set out to do. And I’m pleas­antly surprised that it’s taking them longer than I expect it to figure it out. And I feel kind of bad about saying this so bluntly in a podcast because they’re watching. We don’t want to help them figure that out. It doesn’t make the world a better place.

Yan Pritzker:

Well, you’re right in that the technology is out there. You’re right in that we have already lots of Silicon Valley and bank local teams trying to imple­ment this kind of stuff. And I would agree that this is going to happen at some degree or another. Knowl­edge is out there. Whether you say it explic­itly on this podcast or not, believe me, I’ve read enough of these CBDC papers to know that the knowl­edge is for sure out there. I have been tracking this for the last couple of years. And I think it is very inter­esting to me specif­i­cally because I come, again, from the Soviet union and, in the Soviet union, they didn’t have this perfect system of control. So what they tried to do was they would try to lock down infor­ma­tion flows, so no infor­ma­tion about America in and out.

It was just a TV. They tried to lock out, sensor your letters coming in and out of the country and they would censor your money. So like when my family left, for example, we were only able to exchange a certain amount of ruble to U.S. dollars, which is $100 per person. That’s capital controls. So in that environ­ment, in the Soviet union, and I’m going to talk about that because I think it’s close to home for me, and this environ­ment exists today in places like Iran and Turkey and Lebanon, Venezuela, Argentina, you name it.

Half the countries in the world have some type of capital controlled environ­ment. When these govern­ments get this technology with direct trans­mis­sion and all that, it will make life worse for people if they abuse it. There are govern­ments also that, for example, I’ve seen the bank of Canada put out something saying they want to look at how to achieve some degree of privacy in a central bank, digital currency, where AML will be enforced, but general small payments between people aren’t going to be looked at. There are different design decisions that govern­ments could make, depending on how author­i­tarian they are. We would hope America doesn’t go down that route.

Erik Townsend:

And the NSA is not reading your emails either. They’re just making a copy in case they might need to in the future, that’s all.

Yan Pritzker:

Right. Okay, we have strong encryp­tion and all that kind of stuff. The NSA might be reading it. We don’t know. Long story short, I agree with you in the sense that the technology is out there. There are smart people out there. At some point, regard­less of who and how it happens, it’s going to get combined. Money will become much more tightly controlled. The question for me is what happens then? Well, two questions, I guess. One question is I’d love to hear you talk about how we get to that system, okay. Because one option is the dollar is no good anymore, nobody wants it, which, I would agree that that’s happening across the world. We already see China reducing its USD reserves. We know that China and Russia aren’t happy using dollars to trade. We know all of that.

Yan Pritzker:

But we also know, and you point out in the book, that the reason for this is kind of histor­ical, it’s because of the gold standard and Bretton Woods and all that. It came before that. And kind of because the U.S. has the deepest and biggest liquid market for treasuries and has the most confi­dence in its military might, if you will, as to not losing control over that currency, that’s part of the reason why people use U.S. dollars. But how do we get from there to this other system where people issue their own currency? Because to me, it seems like we’re always back to the same problem you outlined in your book. Let me just read this real quick. It’s about how our reserve currency is chosen. And it’s something to the effect of, you look for the most credit worthy country. Let me find this. I’m sorry that my notes are a little scattered here. Maybe you can outline it while I’m thinking, how do we, yeah.

Erik Townsend:

Sure, I know where you’re headed, which is how has the global reserve currency been chosen before. Really history teaches us that it’s mostly about military might. And the reason is that back in those histor­ical times, what global trade was all about was liter­ally ships on the high seas, with chest full of gold and other goods that in trade and so forth. Whoev­er’s got the strongest navy has the strongest ability to win a war. And there­fore, why would I invest in one country’s currency when the other country, maybe their currency is not quite as good, but they’re the ones who are going to win the war. Well, the guys that are going to win the war, the ones who are still going to have their currency standing, I want to be in that one. So histor­i­cally it’s been about military hegemony, and I just inter­viewed Mike Green today for this week’s Macro Voices that airs tomorrow night.

I don’t want to steal his thunder since that hasn’t aired yet, but he talks about some of the factors that drive reserve currency selec­tion. And, is there a reason to think, okay, the world has changed. If you can deliver a completely decen­tral­ized permis­sion­less network, that uses digital bearer instru­ments to deliver new function­ality, and that would include a digital sover­eign bond market, which I also talk about in the book, which dramat­i­cally changes the financing options for entire countries. If you can deliver profound benefits that just make a digital reserve currency so much better than a conven­tional currency, is that enough to outweigh the United States still has all the aircraft carriers and can blow up every­body else’s shit if they piss them off? I don’t know. That’s a really impor­tant question. I think there’s definitely an argument to be made that the advan­tages of a digital bearer asset based monetary system are so tremen­dous that it could change everything.

Just like the internet has changed every­thing. The end of the day, the U.S. is still the hegemonic military power on the planet. Until that changes, is it possible for the U.S. Dollar to be usurped as the global reserve currency? I don’t know. That’s a really good question. And do you ask a monetary histo­rian that question, or is it really a question of, is this current techno­log­i­cally centric economy that we live in different from the days of high ships on the tall seas, carrying chests of gold back and forth across oceans? I don’t know. So,

Yan Pritzker:

It’s both different and not different because we still go to war all the time, over our currency, essen­tially, by invading countries that are oil rich or imposing sanctions on countries like Iran and saying, you can’t use the dollar. And then they try to go around it. I know you cover this in your book. They try to make a system with the EU that would allow them to sell trades. And then America said to the EU countries, hey, we don’t like this. We’re going to sanction you if you do this. We are throwing around essen­tially what a sanction means. It is a sort of violence, it is eventu­ally at the end of the day probably would be enforced with violence. I don’t think we’re past the point where the world is done with fighting wars.

Clearly just look around, it still happens. But to me, I think what’s inter­esting is let’s take that out of the equation for now. Let’s just assume we didn’t have to deal with military issues. And let’s assume that we’re looking at creating a better system, and you outline in your book, a system that is essen­tially… You imagine a world where China and Russia, which I agree is probably geopo­lit­i­cally the most likely kind of people to try to put something like this together, they go and create their own thing that is outside of the U.S. It’s outside of Swift. It’s outside of the Fed, it’s their own settle­ment system. They try to get together, create their own supple­ment system. But here’s the problem that I get to, and I’d love to hear you talk about this. China and Russia don’t trust each other.

They have a history of not trusting each other and the other countries that might be in on this as well. They tend to be what we in America would probably call axis of evil countries like Iran and Venezuela and people that they’re really bad guys. We don’t trust them. They don’t trust each other. How are they going to come together to imple­ment this kind of system? And you talk about them creating some kind of jointly chartered bank that has got some digital currency aspects, some gold back aspects. I’d love to hear you talk through that, just for the people looking at podcasts. But also then I wanted to pick that apart a bit and under­stand how we might, see that emerging.

Erik Townsend:

Okay. Well, first of all, I don’t have a clear vision of, okay, here’s exactly what’s going to happen. These are all open questions in my mind, but the way I see this is there’s no way that China or Russia or Venezuela or any combi­na­tion of those AK-47 countries could possibly assert its own digital currency and say, we did a CBDC. It’s really cool. China’s working on their CBDC, I’m sure that will have some signif­i­cance for trade with China, but they’re not going to take over the global economy and have every­body trading digital yuan and every­thing just shifts to that. It ain’t going to happen. What I spend,

Yan Pritzker:

Why won’t it happen? I’d love to clear that up.

Erik Townsend:

Because nobody is willing to trust China as a single controller of that. And if the backing of that currency is somehow tied to Chinese currency or to the Chinese economy, that’s a depen­dency that people don’t want. What I have specu­lated is that eventu­ally those guys will have the realiza­tion of, okay, we can’t control this. Nobody’s going to trust us with this, but it is in our strong advan­tage to get it taken away from the Ameri­cans. So let’s try to foment an outcome that results in the creation of some consor­tium. I think it’s probably Geneva based. And I predicted it was Geneva based before Facebook made their Libra plans to base it in Switzer­land. And I said, what if somebody did a gold backed… I origi­nally said CBDC, but I think it’s more likely to be SBDC Silicon Valley digital currency. What if you had a Switzer­land based neutral consor­tium, a central bank of the world that is not part of any government.

Erik Townsend:

It doesn’t answer to any govern­ment, but it’s more of like a commer­cial banking organi­za­tion that creates a digital currency system that is backed by vaulted gold in a vault in Switzer­land someplace and provides the entire world with an indepen­dent currency system. Now, I don’t think that if all of the govern­ments of the world were opposed to it, that a private venture and Facebook’s Libra is a perfect example. If the govern­ments are against you, you can’t just pull something like that off. Even if it’s gold based in Switzer­land, based on whatever, it ain’t going to fly. If you’ve got a bunch of the bricks countries saying, well, we wish we could control this, but we know we can’t. And it’s better to let some consor­tium control it than to let the Ameri­cans keep being in charge. If you get Russia and China and Brazil and Venezuela and Iran and whoever else, all backing this, maybe Silicon Valley initi­ated Swiss domiciled, digital currency system.

All of a sudden it starts to get traction. And even though all those countries wish they could be in charge, they’re willing to seed that control if it gets taken away from the Ameri­cans. Now, even the U.S. CIA isn’t completely stupid. They will eventu­ally figure this out. And those guys play rough. They’re not going to let this happen and they’re not going to play nice in order to stop it from happening. So how could something like that play out. I have no idea. I’m at a point where I’m saying, okay, look at the people, look at the motiva­tions of the various different actors. A lot of sover­eign nations around the world want the reserve currency to stop being the U.S. dollar so the U.S. doesn’t have the unfair advan­tage. They perceive as an unfair advan­tage that it has now.

None of them could pull it off on their own, even a consor­tium like the Euro can’t really pull it off. Now, one of the things that is inter­esting about this, and it’s another aspect that I don’t think the central bankers have figured out yet. One of the biggest criti­cisms of the Euro currency is this idea that you’ve got a single monetary policy union, but you don’t have a single fiscal union behind it. So each of those European countries has its own tax policy and its own economy. The whole argument for having separate curren­cies is that each country’s central bank can manage its economy through its currency system, using monetary policy.

If you have a monetary policy union where the entire monetary policy for all of Europe is set by the ECB, but each of those countries still has its own tax policy and its own economic condi­tions that it’s trying to manage. You run into a real problem because in a conven­tional currency system, the monetary policy controls are not sophis­ti­cated enough to have one currency have separate monetary policy control zones. What if you had a really sophis­ti­cated digital currency system where each different geographic central bank could apply a certain set of digital monetary policy tools to the currency that exists within that national zone. Now, you can’t control things like interest rates because that would affect the other zone. So you have to figure out what things you can control that are just,

Yan Pritzker:

You couldn’t really control supply either because aren’t you really just talking about going back to multiple curren­cies if there is some,

Erik Townsend:

Well, but you could have a single fungible currency where you use digital monetary policy controls to affect the supply of private bank money creation. So the incen­tives for private banks to create money through the fractional reserve system is tweaked, if you will, by monetary policy tools that work on the digital currency in that country. But the unit of exchange is still fungible across a much broader union. Now there’s a lot of design issues in figuring out how to make something like that work. I believe it’s possible.

Once people start to figure stuff like that out, if you could get to a single global currency system that really allows us to not need to have a global settle­ment currency, because every­body’s on the same currency. Why can’t we just have that global currency? Because all these countries’ central banks feel that they need to maintain indepen­dent control of their own economies. What if there was a global currency system, just one for the entire planet that still afforded each individual country’s central bank some degree of monetary policy control over their monetary policy zone within that currency system? It’s a big, huge design challenge to figure out how to make that work. But if you can figure it out, you can sell that to the central bankers of the world, liter­ally take over the global economy. It’s that big of a deal.

Yan Pritzker:

I’m wondering though, how is that different from each individual country having its own totally separate currency and having one universal settle­ment currency between them. Because that would allow all of those design challenges to happen without the additional complexity of this is one currency, but then yet, somehow… because you’re talking about replacing each country’s local currency with this thing too. So we need to also not just talk about the design of the system. We talk about the design of the migra­tion path to that system. That’s the biggest thing that I’m not seeing here. And a couple of ways that I could see it as… most of these things tend to happen. Look how the dollar evolved today. It came from, it was gold. Then it was a certifi­cate that refer­enced the gold, then was a certifi­cate that refer­ences certifi­cate. And it was a digital certifi­cate that refer­ences certifi­cate that… You know what I mean? It was a chain of changes that happened over many, many decades over gener­a­tions, even, that allowed the dollar to become what it is today.

You’re suggesting somehow that not only did we replace every­thing with this one, super­nat­ural currency, that also somehow America doesn’t get in the way militarily, that also this currency replaces all the existing curren­cies in circu­la­tion. How do we get there on a migra­tion basis? That’s,

Erik Townsend:

I just really have to disagree on one point. I’m not suggesting those things. I’m fearing those things,

Yan Pritzker:

Fearing. Whatever. Yeah. So you’re predicting that they might come to pass,

Erik Townsend:

I’m afraid they may come to pass. Yes, exactly. And the reason that I’m so concerned about it is I think that what you could do is design a system that gives govern­ment a whole lot more power than govern­ment ever even imagined having before over the monetary system. And I don’t think that’s good for humanity. So I’m very concerned about where this is headed. How it plays out is really hard to tell, because if you look at what’s going on right now… CBDCs are the big thing for central bankers to go to confer­ences and talk about. Talk. Governments,

Yan Pritzker:

And for consulting compa­nies to sell to them as well.

Erik Townsend:

It’s govern­ments operate at a pace, which is a very small fraction of how private enter­prise operates and at a much smaller fraction of how the technology and software industry operates. What I think the big risk is somebody really, really smart in the software business engineers and it just brilliantly archi­tected global digital currency system, which is the… I call it the Orwell. It’s the ultimate author­i­tarian control system that gives govern­ments unlim­ited power over every­body’s money. The ability to clawback trans­ac­tions five years after the fact. If the police decide that you did a drug deal five years ago, they’re going to take the money back away from the drug dealer’s heirs because they are unwinding that trans­ac­tion, retroac­tively. That kind of control over every­one’s lives. The big brother kind of environ­ment. If somebody invents that crap and sells it to govern­ment, govern­ment’s buying, they want that. They want to control every­thing. And it was never possible before. Unfor­tu­nately I have faith in Silicon Valley to engineer that kind of sophis­ti­cated monetary system that I don’t want to see the world adopt.

Yan Pritzker:

I don’t think the problem is with the technology. Set aside all this fancy distrib­uted ledger stuff you could have and set aside even a global world order that we might be fearing here. You have author­i­tarian govern­ments like China or Venezuela. They have the complete power to do this. They are doing this. We already have the digital RMB in China being proto­typed. We have the Petro in Venezuela, which is, an attempt to create some kind of digital currency. I actually talked to someone in Venezuela who was on the ground there and I asked them whatever happened to the Petro because here we heard news.

I was on the ground there and I asked him, “Whatever happened to the Petro?” Right? Because here we heard news that they basically tried to raise money, like in an ICO with this Petro. They claimed to have raised some, I don’t know, $700 million. Appar­ently, they didn’t. Whatever happened to the Petro? So I asked this guy, he says what they’re doing is they’re handing it out to people as UBI. Basically it’s a bonus, they call it, “A bonus”, but it’s basically UBI. They’re giving people income in Petros. Then, what people are doing is they exchange those Petros for Bolivares, which are the actual currency that people will accept because Petros are not accepted anywhere, right? Why would you want this thing? And this is an author­i­tarian govern­ment with the might of the military… Willing to shoot people over this stuff.

They’re unable to get it down people’s throats. I’m wondering how… And to be clear that their inten­tions are quite bad in this case, they’re trying to trace what people are doing with the Petros. They’re trying to monitor all activity after they hand it out, but how do you get to the point of imple­menting this? It’s not a technology problem. It’s why do people use a certain currency, right? And you could say people buy gold because they like store value aspects, or they use their national currency because the govern­ment forces them to pay taxes in it. But how do you make this migra­tion happen? You have to outlaw the existing currency. You have to do that whole Execu­tive Order 6102 thing again, right?

Erik Townsend:

How does the NSA get everyone to volun­tarily disclose almost every­thing about their personal lives that they have no reason to share with the govern­ment? You invent Facebook. And they do it willingly because it’s easy, conve­nient, and fun. I think that what happens is Silicon Valley invents a… Libra was just a flash in the pan, but something that’s 10 times more sophis­ti­cated and advanced than Libra set out to be, which makes it incred­ibly easy and simple for everyone to manage all of their finan­cial affairs on their phone, pay for anything, using your smart­phone, be able to see all your trans­ac­tions and every­thing in real time. It’s super easy and super conve­nient to buy things online. It’s just as secure as a credit card, it has the same kind of dispute and clawback capabil­i­ties of credit card trans­ac­tions. It’s all digital, simple, automated, and it’s on your smartphone.

That simplicity will cause people to flock to it just because they want the conve­nience appeal. And if they’re giving up all of their rights and moving all of their money into a currency system that gives the govern­ment the ability to monitor and control every aspect of their life. Hey, if it’s cool and it works like Facebook, they’ll do it anyway. It’s that simple.

Yan Pritzker:

I would agree with you there. I think it is that simple. I agree with you there. And I actually wanted to talk about that because we opted into credit cards and nobody forced us to use credit cards. And yet now credit cards, track all of our purchase data, right? We opted into all of our digital payments systems we have now. I’ve never been to China, but my under­standing is that a huge majority of payments happen digitally through things like WeChat and Ali pay, which with China being what it is, you’re sure that the govern­ment’s got a piece of all those trans­ac­tions and knows what’s going on.

I think we’re already there, to some extent, we already have digital payments that are completely monitored either by a corpo­ra­tion or a govern­ment, or eventu­ally we’ll be nation­al­ized or the govern­ment just has oversight into that corpo­ra­tion’s affairs. Like, what would happen in an author­i­tarian regime? I think all of that does happen. At the same time, and to be clear, I think the stuff that you described in the book, I think is an evolu­tion and maybe our evolu­tion to this in the sense that the technology will change, you will get finer grained controls over things like monetary policy, I think that’s all very inter­esting in the kind of, may you live in inter­esting times since. I wouldn’t want to live in that kind of society, but it’s already happening in a big way.

And I think it’s inter­esting to look at what happens in those countries that do have those systems, right? As those systems get tighter and tighter, you also see people going to assets like gold when they can, or Bitcoin. Now that that’s easy to acquire and China’s tried to ban Bitcoin a number of times and there’s been countries, India tried to ban Bitcoin and they got struck down by the Supreme Court. I feel like this is the kind of thing I want to talk about. What is that path to… How do you prevent… I agree every­body will opt in… 90% of people will opt into the system just because it is what it is. It’s our daily conve­nience. But how do you prevent value from leaking out of that system when you have Bitcoin and it exists, right? How do you prevent people from-

Erik Townsend:

Oh, I don’t think that you can ever prevent, as long as Bitcoin exists, Bitcoin is going to be used. There will always be a use case for Bitcoin. No doubt about it. Now, if govern­ments outlaw it, even though they cannot force the Bitcoin network to cease to exist, just outlying it and making it illegal is enough to cause all the insti­tu­tional holders to have to exit whether they want to or not. And the people that continue to hold it illegally are breaking the law. That’s a smaller demographic that’s willing to do that. Then the current asset base. If they take it the next-

Yan Pritzker:

Is that true, though?

Erik Townsend:

Well, it opens up a new market.

Yan Pritzker:

A new market, a big black market.

Erik Townsend:

It opens up new markets to the black market. But at the same time, the things that they can do, a lot of Bitcoin guys think, “Oh, there’s nothing they can do. It’s designed to be foolproof.” Well, look, all the govern­ment has to do is to outlaw the conver­sion of fiat currency to Bitcoin. If the exchanges go away and all you can do is get your Bitcoin from a guy who’s willing to transfer it to your account if you give him cash or drugs or cigarettes or whatever it is that you’re trading and barter, that’s a very different market than what we have today with exchanges.

Yan Pritzker:

I’m sure you’ve probably, I know you’ve traveled the world quite a bit. Have you been down to Argentina and they’re completely open black market currency trading? On Florida street where every­body says, “Cambio, Cambio, Cambio” You come up to somebody and you liter­ally physi­cally exchange US dollars at a black market rate, right? This is wide open with Bitcoin, we’re talking about a digital system, so you can do peer-to-peer exchange without anybody ever even knowing about it. And it’s happening now, right? It’s happening in Venezuela and Nigeria, people are sending gift cards from the US, pictures of gift cards to Nigeria that are being changed for Bitcoin.

It’s just that they have no way to control that market and I think as history shows us, every time any kind of currency has been banned, any hard currency has been banned, people flock to it in massive ways. And over time that actually what it does is it arose the govern­ment, the ability to artifi­cially control their own currency rate. Happened in Argentina, happened in Soviet Union, happened in Venezuela. The govern­ments end up devaluing their currency because they can’t actually sustain­ably be so discon­nected from the actual market and the black market grows and grows and grows until it becomes the white market. That’s what we’ve seen so far. So why is it different this time?

Erik Townsend:

Well, I think that what you’re describing is in juris­dic­tions where govern­ments are unable to control their black markets through force and other usual techniques of govern­ment overbear­ance. You get this free black market that works exactly as you describe it.

Yan Pritzker:

No, not in juris­dic­tions where they can’t use force. Are you kidding me? The Soviet Union used a lot of force. They jailed a lot of people. Ghana, any of these places, they were more than willing… Maybe Argentina didn’t use so much force, I don’t know, but most of these countries used plenty of force and jailed people for lots and lots of time for currency viola­tions. And yet it was a huge black market because the market always wins.

Erik Townsend:

And I think that there always will be a market for Bitcoin, not just a black market, but when we talk about, is it going to replace the dollar at the center of the global finan­cial system? That’s where I don’t think Bitcoin will live to the aspira­tions that some people hold for it. Will it always be the favorite currency of people who are looking for an alter­na­tive to govern­ment controlled money for whatever reason? Probably. Although I do think there’s a risk to Bitcoin, which is, for now, nobody has figured out how to make a cryptocur­rency system work in a truly permis­sion­less and truly a decen­tral­ized network without binding.

Erik Townsend:

The Hedera Hashgraph guys claim to have figured it out and I don’t think they quite have, yet, but somebody will eventu­ally we’ll get a DLT system which allows a truly permis­sion­less, decen­tral­ized, digital bearer asset to exist without requiring mining. I think you have a cultural problem in Bitcoin at point, which is the logical thing to do is for Bitcoin, as a currency system, to ditch blockchain and adopt the new ledger, which doesn’t require mining because that’s a better idea, except the thing is-

Yan Pritzker:

Wait, is it a better idea? Let’s just dive into that.

Erik Townsend:

Let me just finish. Before we get to whether it’s a better idea. If it were a better idea, which I think it is, do you really think that when you consider the control archi­tec­ture of Bitcoin, where the miners have more influ­ence than anybody else, do you really think the miners are going to put themselves out of business by saying, “Hey, let’s ditch mining. There’s a better way now”? I don’t think that the culture of the Bitcoin commu­nity, which is so centered around miners and the oppor­tu­nity that miners have is ever going to say, “Let’s throw away mining.” I can’t see that as happening. I think the threat to Bitcoin in that market, in the… I don’t want to call it, “Black market” because I think it’s bigger than just a black market, but the alter­na­tive to govern­ment money.

I think the risk is somebody develops a truly decen­tral­ized, truly permis­sion­less system that doesn’t require mining. Doesn’t have the perfor­mance overhead of proof of work and still works just as well. Now, that doesn’t exist, yet. The Hederan guys think they’re close, we’ll see. Someday, it’ll exist, when it does, is it going to be enough better that it overcomes the fact that Bitcoin already has a huge entrenched user base and a very strong following behind it? I don’t know. It could go either way, but that would be the risk to Bitcoin in that market space, if there is one.

Yan Pritzker:

I think there’s a funda­mental disagree­ment here in what the word, “Better” means for a cryptocur­rency. I know that you’re a big gold bull, right? And let’s say tomorrow we discover a new metal and it’s way more efficient to mine it, right? It costs you a ton of resources to mine gold. Tomorrow, I can extract just an insane abundance of this. So I can just extract it with… Just snap my fingers it’s anywhere in my backyard, it’s a little bit shinier than gold and I can extract a lot easier. Would people flock to that asset? I think probably any basic monetary or economic person would say, “No”, because scarcity is what gives it value, right? That’s the reason people buy it is because they know that it can’t be produced from thin air. So what is something like that worth?

Erik Townsend:

Well, and I think that the real question then is… The reason it may be as apples to apples. And maybe isn’t, if you take your analogy and you said you have a new inven­tion, which is you can snap your fingers and no diesel fuel gets consumed and you’re mining gold, real gold, and you get gold for it. Would you continue to mine the old way if you could do it that way? Well, obviously not. You’re going to use the new way. Is the-

Yan Pritzker:

But what would happen to the value of gold in this new mining system?

Erik Townsend:

I think it depends if the scarcity of gold is still the same, but the extrac­tion cost is lower. It changes the value of gold because if the extrac­tion cost is lower, you can more aggres­sively exploit the resources that have been discovered.

Yan Pritzker:

Which means you increase the supply of gold at a faster rate.

Erik Townsend:

Which means you increase the supply of gold.

Yan Pritzker:

What does that do to the price of gold? It lowers it, right? Supply and demand.

Erik Townsend:

Well, I think it would depend on… We’re talking about a hypothet­ical magic tool that doesn’t exist.

Yan Pritzker:

Well, you’re talking about hypothet­ical magic blockchain that doesn’t exist also. I think it’s impor­tant to think about it.

Erik Townsend:

But there’s lots of good reason to expect the inven­tion of a distrib­uted ledger technology, which is able to deliver secured digital bearer assets without requiring mining. That’s an inven­tion that has to be coming someday. I think it changes every­thing when it does.

Yan Pritzker:

I guess, again, I think it depends… Here’s where I think the disagree­ment is. And it’s more about how you view what Bitcoin is, right? If you think about it as it’s an accounting system, it’s a database. This partic­ular database requires a security of… You have to buy a bunch of hardware, to invest millions of dollars building out a data center, you have to have really cheap power. You have all these different, crazy constraints on just securing this digital database. Then, you might say, “Well, aren’t there other databases that are faster and still permis­sion­less and trust­less?” Which obviously the answer is no. There’s 6,000 other attempts at it, actually 7,000 now. You mentioned Hedera but it’s liter­ally one of 7,000 coins.

The question is, has it been discov­ered yet? No, it hasn’t. Will it be discov­ered one day? Maybe somebody can discover something that somehow makes it possible to have a trust­less permis­sion-less thing. I think no, the reason is very simple. If you and I are distrib­uted systems people, right? We know that the latency between the US and China is 200 millisec­onds. We know that there’s no such thing as a free lunch. When it comes to distrib­uted systems. You need to be able to pass infor­ma­tion back and forth at some speed. It’s not the speed of light. You need to be able to have that system resilience, to complete outages and all of that.

But even if we overcome all of those things, right? Somehow we magically overcome those things in a way that Bitcoin hasn’t. The thing is that people value Bitcoin, and we have to come back to that under­standing, is they’re not valuing it as a database. They’re valuing the actual thing, the bearer asset itself. And the reason they value it is because they know that nothing in the world short of breaking the first law of thermo­dy­namics can affect that value, because we know that there’s no way to create that Bitcoin at any faster way. If there was a way to create it faster, I think that just means you’re inflating the supply.

Erik Townsend:

And I think that the future challenge for the Bitcoin commu­nity is what happens when the technology has been invented that can be layered in. So it’s possible for Bitcoin to continue to exist with the same people, holding all of the Bitcoins, because you’ve reached the cap on the money supply. All of the Bitcoins have been issued. You want to continue to perpet­uate that with the current holders holding it. And technology has been invented that allows you to completely elimi­nate the whole idea of mining by simply replacing blockchain with a newer, better, faster distrib­uted ledger. Do you do it because that perpet­u­ates forever the value of those Bitcoins to their holders? Or do you not do it because you just took trans­ac­tion fees away from miners?

Yan Pritzker:

I think that already happens, right? We already have a bunch of databases that have Bitcoin in them. Ethereum’s got some Wrapped Bitcoin in five different or seven different flavors. We have Bitcoins that exist in central­ized databases at custo­dians. We have Bitcoins that exist on multiple blockchains and their own little wrappers and all of those come with their own individual risks. And they’re basically turned into Bitcoin IOUs. Would Bitcoin ever migrate to some other system? I don’t think that’s the correct question. The correct question is, will Bitcoin exist in other databases? The answer is obviously yes, it already does. Just like US dollars exists in lots and lost of databases. I think we have to make the separa­tion between the… If you and I are trans­acting US dollars, you would probably be okay with me sending you a PayPal trans­ac­tion of 50 bucks.

But if you ask me for a billion dollars, you’d probably want to see cold, hard cash. You probably want to see a suitcase of cash. You probably want to have some settle­ment assur­ance on it. And I think that’s what it comes down to. When we talk about digital currency systems is what is the settle­ment assur­ance is because the money that’s in my bank, it’s not actually there, it’s an IOU. In the future land of these CBDCs or SBDCs. We will also have IOUs and we will have bare instru­ments, but it will probably be some type of fractional reserve system, no matter what, like you’re pointing out, it might be a gold, backed one or whatever. But long story short, there’s always layers and layers and layers of IOUs that exist. And you may want to have the under­lying asset, or you may want to have the IOU.

I think that’s the distinc­tion. And you can always transact IOUs faster than the base money. That’s always the case. And I think if you… You and I, again, we know we’ve built distrib­uted systems. We know that systems are built in layers, right? You in your book point out that in order to provide the world with a system that’s good enough for cash settle­ments that it needs, it needs to do like hundreds of thousands of trans­ac­tions a second, right? Well, that kind of trans­ac­tion capacity is possible, really in extremely central­ized servers. It’s not possible if you need to pass every trans­ac­tion between the US and China, because there’s a 200 millisecond latency. So you’re going to have to batch it in some way, right? Which we agree on that. So you have to build layers. It has to be done. There’s no magic bullet here short of speed of light connec­tion between all the countries somehow overcoming physics, right?

Erik Townsend:

Well, as I described it in the book, it requires a lot of sophis­ti­ca­tion. What you need is in order to build a scalable distrib­uted system that supports hundreds of thousands of trans­ac­tions per second globally, you can’t be settling every­thing through a central­ized server because of latency issues, nor can you be settling it on a global blockchain that has to be updated instantly. You’ve got to have the ability to stripe that network and there has to be a local server so that all of your trans­ac­tions with other actors in your local geography happen in sub millisecond response times.

And the only time that the actual trans­ac­tion latency for making a payment takes two or three seconds to clear is when you’re sending it to the opposite side of the planet. And you physi­cally have to go over undersea cables in order to get there. And it shouldn’t be several seconds. It should be several hundred millisec­onds at that point, as opposed to a few milliseconds.

But the point is you’ve got to have a very, very sophis­ti­cated, scalable trans­ac­tion processing archi­tec­ture. That’s very different from the way Bitcoin works today. Now that doesn’t mean that Bitcoin couldn’t evolve to become that, but it would be completely overhauling and replacing the engine in a car would be the analogy. You’re not tuning it up or adding a fancier carbu­retor. You’re ripping the engine out completely and replacing it with a whole new set of technolo­gies. There’s no reason that they can’t do that, but it’s totally different thing.

Yan Pritzker:

I think we would agree that if Bitcoin was to somehow replace this mining engine, it wouldn’t really be Bitcoin anymore. That defines Bitcoin in a big way, but even the system you described with its central­ized regional databases still is a central­ized system in a big way.

Erik Townsend:

No, it doesn’t have to be, you can design a completely decen­tral­ized network where near trans­ac­tions are resolved locally and eventu­ally skulked out to the rest of the networks. So that eventu­ally the final analysis of the ledger, it takes several minutes before that’s visible around the world, but you can still actually effec­tuate a trans­ac­tion between you and I in the same country in a matter of a few millisec­onds. It’s a very, very sophis­ti­cated, layered archi­tec­ture that makes that possible. It goes way beyond the way these systems work today. There’s no reason that Bitcoin couldn’t evolve over the next 20 years to become something like that. I think it’s more likely that what will define what system becomes that global thing is not going to be who ought to win. It’s going to be, who’s in charge of govern­ments and authority and guns and power. And unfor­tu­nately that guaran­tees they’ll make bad choices that won’t be good for the world, but we’ll have to live with what they come up with. I think you made-

Yan Pritzker:

I agree in that… Sorry, go ahead.

Erik Townsend:

I wasn’t waving at you. I was actually trying to catch a fly that was flying past-

Yan Pritzker:

I would agree… In order for the system that you described to exist, every­thing has to be controlled. Submilisec­onds, or even millisecond settle­ment times require computers to be connected by fiber optic cables. You need to have 5G or beyond network speeds, you need to have infra­struc­ture. In other words, hardware in the country to support that. You’re not going to have random people or even random entities connected to this network. You’re going to have a network that’s completely controlled for perfor­mance. Other­wise, the perfor­mance could not be achieved.

Again, perfor­mance, resilience, downtime, these trilemmas that exist in distrib­uted systems. You need to be an archi­tect of the system and control every aspect of the system for it to work. I don’t see how you say that this is a decen­tral­ized or permis­sion­less in any way. It has to be permis­sion. Other­wise, can I connect my home computer to the system and via node? Of course not. I would slow down the system. So how would that work? This is a govern­ment-run entity. It has to be.

Erik Townsend:

I think it has to be a govern­ment-run entity for different reasons than you do. I think techno­log­i­cally it’s possible to design a distrib­uted system, which is truly decen­tral­ized, which still organizes its trans­ac­tions so that physi­cally proximal trans­ac­tions get cleared faster than trans­ac­tions that require inter­ac­tions with ledgers that are on the other side of the planet. I think it is possible, but I don’t think it’s going to happen. I think that govern­ments are going to centralize it for a completely different set of reasons having to do with power and authority and control. We agree on the outcome is… But I think you touched on something that’s really impor­tant to expand on, which is, I think we’re finally getting to the point where we’re going to see digital bearer instru­ments play a much bigger role than just in currency systems. And if you think about what happened in the early days of Bitcoin, there was a whole bunch of people in finance that made this blockchain, not Bitcoin, prediction.

And what they were thinking was, wait a minute, the inven­tion of a secure owner­less database that can’t be hacked is so profound and enables so many incred­ible things. That’s the big innova­tion here. Well, what they really forgot to consider is the whole reason that Bitcoin works is because you have the incen­tive of miners to want to mine in order to get more Bitcoin.

If you’re trying to use secure bearer assets in a blockchain-based system, there has to be a motiva­tion for somebody to mine it in order to make it work. I think that what was wrong with all those blockchain, not Bitcoin, predic­tions is people thought that a generic capability to have an owner­less permis­sion­less system where you can have a secure database that has no owner was just a new thing that was suddenly avail­able. And it really wasn’t yet. But I think in a lot of ways, it is now.

I know that what a lot of people are doing is they’re layering on top of… I’m sure this is happening with Bitcoin, too. And I don’t pretend to be an expert on all of the intri­ca­cies of what’s going on in the Bitcoin and Ethereum world. But I know that what some people are doing is they’re layering on top of Ethereum tokens. Not because they want to use the Ethereum as a currency, but because the cost of getting a secure, digital bearer asset to use for some other purposes, if you layer it on top of an Ether, what does it cost you to buy one Ether in order to have that token and use it for some other purpose?

Yan Pritzker:

Well, nowadays it’s like 20 bucks cause the network is congested, but-

Erik Townsend:

I know that there are people that are doing sub penny tokeniza­tion. That’s layered on top of Ethereum. And I don’t know, the intri­ca­cies of-

Yan Pritzker:

The token can be worth a penny, but the trans­ac­tion costs do go up like in any finan­cial system as a demand goes up.

Erik Townsend:

But I think that… The way I see this is we’re going through this evolu­tion, think about how the internet devel­oped. You went through this late 90s phase where basically the message that we were getting in the computer business at the time was, we’ve got this business, which is leading the way to deliver enter­prise- scale method­olo­gies to deliver the blah, blah, blah, across the global enter­prise. Trans­la­tion: we have no freaking clue what any of this shit means, but we know that if it in its name, we can sell it because we’re sleazy Wall Street guys. It’s just mania where they’re selling compa­nies that have no business plan and it doesn’t make sense. And I think we went through that in the digital… In the secure, digital bearer asset world with ICOs. Every­body’s got to have their little ICO if you want it to be successful, you have to get the self-appointed King of ICOs. What’s his name? The liber­tarian presi­den­tial candi­date guy, McAfee, to endorse it for you-

Yan Pritzker:


Erik Townsend:

… And hold up his guns or whatever it is that he does.

We went through the retarded phase of digital bearer assets because it’s got blockchain technology in its name. There­fore, it must be cool so let’s invest in it. It’s the same thing as bubble. What we’re coming to now is the intel­li­gent phase of this, where people are doing incred­ibly cool things with digital bearer assets. One of them I just learned about recently is, I think, and just a really fasci­nating story, I’ll use an analogy here.

Do you know who Tony Fadell is? The father of the iPod and one of the biggest inven­tors of the iPhone? Around 2009, Tony announces he’s leaving Apple and he’s going to do a startup for the next device and every­body in Silicon Valley is talking about it. What is Tony going to do? What’s this next thing? You go from iPod to iPhone. What’s the next inven­tion? Finally, they have the big unveiling thing. And what is it? Ta-dah. A thermo­stat and every­body’s, “A what?” And every­body in the Valley is, “Tony has lost his freaking mind.” This is Honey­well makes these setback thermostats for your house. Tony is going to build thermostats now? The guy’s on LSD.

Well, of course, what was really going on is Tony didn’t care about thermostats any more than Jeff Bezos cared about selling books. He was smart enough to know that the internet of things was going to be a major trend and he wanted to be on the ground floor of that trend. He created Nest not to sell thermostats, but because the thermo­stat was something that every­body needs in their house and it was a way to really show off the concept of IOT innova­tion in a way that every­body would get it and say, “Oh, that’s really cool. This company builds stuff that talks to it. Every­thing talks to you. My blender talks to my thermo­stat. It knows what I’m driving home. And it turns the heat up for me. This is so cool.”

He went from the laugh­ing­stock of, I‑can’t-believe-Tony-is-deliv­ering-thermostats. What the hell got into Tony? To selling that company like three or four years later, for 3.2 billion with a, “B” dollars. Why? Because he’s a visionary guy. Fast forward to 2018, Josh Crumb, a FinTech entre­pre­neur that you probably know, guy who did BitGold and then GoldMoney. He’s got to do his next big thing. Every­body’s saying, “What’s Josh going to do next?” It must be something having to do with blockchain, whatever. And he announces a commodity exchange based in Singa­pore. And it’s, “That was the thermo­stat moment, a commodity exchange based in Singa­pore”, it’s going to have a natural gas contract that’s physi­cally deliv­er­able, which doesn’t really exist in the market…

…tracked that’s physi­cally deliv­er­able, which doesn’t really exist in the market­place. Who cares? Well, when you look under the covers, what they’re doing is every­thing that they’re doing is based on Ethereum based smart contracts and digital bearer instruments.

So let’s say today you go and buy 100 ounce bar of gold on the COMEX and you take physical delivery. To stand for physical delivery, you have to pay up your futures contract and then you get a warehouse certifi­cate, a warehouse receipt.

That warehouse receipt is a paper document that could easily be forged and they have to FedEx it to you. And if you lose it, you lose the gold. You’re screwed. It is an incred­ibly, just arcane paper system. What they’re doing is they’re replacing that all with digital assets.

So when you settle a futures contract, it’ll be settled for a digital token. First of all, the whole chain of command or the chain of custody of signing who’s got owner­ship of it and taking the physical gold and turning in the warehouse certificate.

All of that stuff becomes digital and it’s trace­able through a secure Ethereum smart contract based system, but it also gives you fungi­bility. So now, that secure token doesn’t have to be just deliv­er­able against COMEX gold warehouse in New York.

Maybe there’s some other warehouse someplace else that says, well, we’ll give you a premium or a discount to the New York price if you exchange it with us. Because the token itself is a fungible asset that has value that can forever be exchanged for 100 ounces of gold in New York.

So they’re using digital bearer assets in an intel­li­gent way to change the way that commerce is done. And I started thinking about this. I thought, wait a minute. Look at the shift that happened in the finance industry. The way we used to accom­plish leverage in insti­tu­tional finance was by margin borrowing.

You have to borrow money on margin in order to use leverage. Well, that margin borrowing these days it doesn’t cost very much because interest rates are so low. But back in the day when the brokers call rate was 8%, cost of margin borrowing was off the charts.

And there was a funda­mental paradigm shift when somebody said, wait a minute, the commodity futures market, the way those guys in Chicago trade their pork bellies and their lean hog futures and so forth, that provides a leverage mecha­nism that’s just totally superior to borrowing on margin.And we could just say, stock indices are a commodity and okay, we’ll c reate the E‑mini stock index future. So they created stock index futures and interest futures. And now what we’re doing is we’re using commodity exchanges to get a much more efficient form of leverage.

Well, what’s the next step function in that progres­sion where you get the next paradigm shift that changes the whole industry the way that did? Imagine, and your audience is one of very few that actually gets this, but imagine that somebody who really under­stood what digital bearer assets mean, and how they work and what they’re capable of was in charge of designing, not a futures contract that just uses a digital token as a replace­ment for a warehouse certificate.

But what if the whole margin and perfor­mance bond mecha­nism was replaced by digital bearer assets? And what if you just re-archi­tected the whole system around digital bearer assets? Who could be in a place… Or who is in a position to intro­duce a total game changing paradigm shift thing like that?You’ve got to be an exchange to do that because it’s the exchanges who write the contract speci­fi­ca­tions that get traded. All of a sudden, Josh Crumb doesn’t look so stupid for wanting to be in the exchange business, does he?

It’s not because he wants to trade natural gas. It’s because he wants to revolu­tionize the way commodity trading works and completely embrace digital bearer instru­ment technology with this new exchange called Abaxx that they’re going to launch it in Singapore.It’s just, all they’re telling the world is it’s just a better way to trade natural gas. The fact that the whole thing is based on Ethereum smart contracts, they’re not even adver­tising because they’re not ready to go that next step yet.

So, that’s just one guy that I happen to know the story because I’ve inter­viewed Josh on Macro Voices. I believe there’s a lot of other smart entre­pre­neurs in the FinTech world who are saying, wait a minute. We’re way past that ICO bullshit. It’s time to really embrace secure digital bearer assets and figure out how to change the world with them. And that is really starting to happen now. So, I think that that vision that led people to the blockchain, not bitcoin slogan, it was completely misplaced when they made it.

But some aspect of it is being realized now as we see things like Abaxx getting ready to change the world in a very quiet way. And I think just as when Bezos intro­duced Amazon. At first, every­body thought it was just an online bookstore. They didn’t under­stand that he had a plan.

And I think it’s going to be probably five or 10 years before people figure out that Josh had a plan for what he was doing with his commodity exchange. There’s got to be hundreds of other stories like that.

And eventu­ally digital bearer instru­ments are going to take over not just currency systems, but the entire finan­cial system. It’s going to change every­thing, and most people don’t even get what it is yet. So-

Yan Pritzker:

Yeah, I think you’re not wrong there. I think there’s definitely an element there that’s inter­esting. I made a… I have this slide deck that I like to pass around. It’s called bitcoin not blockchain. And it talks about what the word blockchain has come to mean for the industry. And to me, it’s really a combi­na­tion of factors. One is you pointed this out, there used to be paper cut. Liter­ally, paper used to be FedEx around. Now that they’re digitizing. So the first word… First thing it means is digitization.

Second thing it means is standard­iza­tion because now you’re talking about, for example, the Ethereum, you have all these exchanges and they all operate on the same standard, which is a ERC-20 token thing, right?

So if you want to make an exchange that can deal in these tokens, it’s very easy because you already have a standard in front of you that you can use. I think all of that is true, right? There’s digiti­za­tion, there’s standard­iza­tion, there’s some aspect of trans­parency which was taken from Bitcoin, right?

You can see the blockchain, you can see things moving around. I think that’s inter­esting. All of these things have been wrapped together in this word blockchain, which means a lot of things to a lot of people. But I do want to point out that the process you described isn’t specific to blockchains. It’s really specific around digiti­za­tion and standard­iza­tion, right? This ledger, I mean, any exchange could publish their database on the website. That will be a trans­parent ledger. Any group of exchanges come together and create a standard. Just so happened that the Ethereum crowd invented a standard that’s working pretty well in this space.

And I think that’s great. And if exchanges want to take that center and move with it, that’s great. I think I have a harder time under­standing… Or I have a harder time believing that the Ethereum public blockchain will be the thing that settles these trades. And I think that’s part of the reason why you will see compa­nies not commit to it in any public fashion. Or even those who have, have come out and said, well, if this doesn’t scale, we’re just going to move it to blockchain A, B, C, D, or F.

I’ve made this comment before. I do think all blockchains have a scala­bility bottle­neck because you’re talking about a distrib­uted system where there’s some degree of permis­sion­less, some degree of trustlesness. We can talk about where they are on the scale from zero to bitcoin, but they’re somewhere on there and they give up something to do that. So in my mind, I think what every­body’s doing is actually building proto­types on a system that is free.

Ethereum is free to build on in a sense because you don’t pay for the storage and stuff, but you kind of do because when you’re executing these contracts, now you’re competing against every­body else who’s on the Ethereum system. And recent times we’ve seen those prices go up to tons of dollars. Now, bitcoin has been criti­cized for the same thing. Tens of dollars to settle a bitcoin trade doesn’t sound great. Tens of dollars to settle an Ethereum trade doesn’t sound great. Here’s where I think the distinc­tion is.

I think when people build on this Ethereum standard, it’s very easy for them to then swap it out with something else like a private imple­men­ta­tion of Ethereum. So let’s say, your friends exchange and five other exchanges, or 100 other exchanges want to connect together and settle fades on a permis­sioned feder­ated network where they all sign off on them, that’s really great.

And they now don’t compete with any other Ethereum use cases. Like last year we had CryptoKit­ties, which took over the entire network. Or this year we have DeFi where people are trading tokens called sushi and pasta and getting totally wrecked on them. We have… It was funny that you mentioned ICO’s are over, but they’re really not. They just evolved into this DeFi craze. But in either case, the Ethereum system is a system based on smart contracts and the more complex the contract, the more the execu­tion cost.

So I think what’s really inter­esting is it is inter­esting that this is happening. I agree, there’s a very inter­esting movement towards standard­izing the trading of things that were previ­ously not traded. Perhaps, a lot of people talk about tokeniza­tion, like fractional owner­ship of things. Well, there’s fractional owner­ship of art already, right? You even had an inter­view with a guy from Master­works, which is all about that, but it’s centralized.

So is it inter­esting if it becomes somewhat trans­parent, somewhat inter­change­able and liquid between exchanges? I think it is inter­esting. But does it happen on Ethereum? I think no, because now it’s competing with every­thing else that’s going on there. And basically the issue you have in any blockchain is as you get more usage, the fees have to go up because it’s a constrained resource, right? If it actually is permis­sion­less and I can connect my computer at home to it, then it is and it can’t ever be 100,000 trans­ac­tions a second.

It has to be, like you said, that has to happen locally, but it has to be settled eventu­ally on these systems. So the settle­ment costs go up a lot. Now, if your whole use case is bitcoin is money, then I don’t care what the settle­ment costs are. Because I can settle a billion dollars and I’m happy to pay 100 bucks for it or even 1000, right? The bigger… The only settle­ment constraint on bitcoin and the only constraint on the scala­bility is the depth of market. Because today I can easily buy a million bucks of bitcoin. Tomorrow, I can buy 10 million. Five years from now, I can easily buy a billion.

As long as I can buy it and transact with it, it’s fine. It’s scales, right? It doesn’t have to scale in the way that you’re talking about where it has to be instan­ta­neous settle­ments of every piece of trans­ac­tion. It has to scale in some sort of batch settle­ment fashion, because there are other layers like Light­ening Network. Whereas a system like Ethereum based on smart contracts, the system… What you’re talking about is very inter­esting, but it creates this scala­bility problem.

Because the more complex the contract the more you pay for settle­ment, the more of a problem that becomes if the thing you’re trading isn’t worth that much, right? You can trade $1000 gas contract for 20 bucks, but I don’t know if you’d want to do that for something that costs a dollar. I’m just making an example. I have no idea how much gas contracts cost.

Erik Townsend:

Well, the gas contract cost a lot, but I think the most impor­tant part of what you just said, to my ear at least, is the fact that anybody with a brain is going to use what we in software engineering call an abstrac­tion layer to abstract the ledger system or the DLT, whatever it is that you’re using to create these tokens.

The point is you can start to make business plans to change the world with things like a completely new technology commodity exchange, which is what Josh is doing. And the way they’re approaching it, and I know this for a fact, because I’ve talked to Josh about it, is he’s saying, look, we know for sure there’s going to be avail­able tokeniza­tion technology.

And there’ll be different options that have different costs associ­ated with them, and we’ll pick the best one at the time. What we’re doing is we’re devel­oping software with an abstrac­tion layer that allows us to change it after the fact, very easily.

Plug it in, replace it. And it’s going to get better over time. Eventu­ally, they’ll be able to do both by the token and transact the trans­ac­tion for sub-penny trans­ac­tion costs. That probably doesn’t exist today.

Now, natural gas contracts depending on the price of natural gas at the time, most futures contracts are worth about 100,000 bucks. So, it’s not a big deal. If it costs two or $3 to close a trans­ac­tion, you know there’s going to be sub penny trans­ac­tion comple­tion costs within the next five years.

And there’ll probably be a robust set of smart contract and other function­ality avail­able in addition to the tokens. So people are going to do real stuff to change the world in real ways using this technology, that’s happening now. Whereas the ICO stuff, the Kitties or whatever they’re called, that’s just-

Yan Pritzker:

We’re over time. Brady wants to chime in here because we are probably-

Brady Swenson:

Yeah, I want to bring this back to bitcoin and wrap it up. There’s a piece of the conver­sa­tion that I really wanted to come back to just like one part, because I think-

Erik Townsend:

We got through the first third of our agenda.

Brady Swenson:

I know, oh my God.

Yan Pritzker:

We’re doing a second episode, right?

Brady Swenson:

You are right Eric. You’re right.

Yan Pritzker:

Sorry, we went off the rails there. It was just so fun.

Brady Swenson:

It’s okay. I want to bring this back because I think this is a really impor­tant point and the discus­sion, YouTube, definitely wanted to make sure that we got to this before we closed out.

So let me pose this question. Let’s discuss it then let’s close up with closing thoughts. So as we discussed today, money is about trust, right? And to paraphrase Satoshi, the US and all of the histo­ry’s basically reserve curren­cies have been filled with breaches of that trust. So why would there be trust? And even in some version of an Orwellian coin, whether it be the Switzer­land domiciled, CBDC or backed by gold or whatever, why would sover­eigns, businesses, and individ­uals trust that money more than bitcoin? Which is provably neutral, open border­less, and would not…

In fact, it would be in their gain theoret­ical interest in fact, to choose to trust bitcoin instead of a central­ized alter­na­tive. Yan, I’ll let you take the lead with this one.

Yan Pritzker:

I think this probably should be answered by Eric because I mean, I will say briefly, I think there is a problem of trust. I think what Eric lays out in his book is an idea around some set of countries started getting together, that don’t neces­sarily trust each other, but somehow yet still forming an alliance enough to create a Swiss domiciled thing.

Again, assuming America doesn’t stop them, assuming Switzer­land is still neutral for the next 500 years, assuming those countries can get over their own trust issues and create this joint venture, still now we have this problem of how does that system sustain itself?

How does it maintain itself? What happens when… If it’s gold back, how do they decide to issue more currency or not issue more currency? Is it a conglom… Is it a vote? Is it democ­ratic? Is it depen­dent on who’s got the bigger aircraft carriers? How does that play out? I see it very diffi­cult for a conglom­erate of countries to agree on anything. I mean, look at the climate accords, you can’t get the whole world to agree on anything. Maybe five countries can agree on something, but when it comes down to money, this is the thing that people fight over the most.

It’s liter­ally the cause of all wars, right? It’s about resources. If you have the money, you can buy the resources. So how do we get countries to agree on this? It seems to me unlikely. And instead, what I think will be tried and is being tried, we see countries doing this now, they’re creating their own trial projects with their various central­ized digital curren­cies. We’re going to see how that plays out. Maybe they’ll get them adopted locally.

I mean, reach out works in China. It’s a central­ized currency. They’ll replace it with digital RMB, fine. Maybe the US does that too. But I have a real hard time under­standing how countries will ever trust each other enough with any one of them or even a group of them control­ling that money and what it has to come down to. What it will come down to is if bitcoin is contin­u­ously growing, which we have no reason to believe it won’t be, but let’s just hypoth­e­size it continues to grow and tomorrow it’s a trillion dollars poten­tially in dollars. Now you have plenty of depth of market.

You have plenty of liquidity to settle large inter­na­tional trades in a currency like you said, is provably neutral and not under anybody’s influ­ence. Why wouldn’t you, if you were a country that didn’t trust another country, want to settle a trade in bitcoin? That’s where I would pause it. Not today, let’s call it 20 years from now. It’s too early.

Erik Townsend:

I’m going to counter to say, I agree with a lot of that, but I would counter to say that I think that trust gets usurped and impor­tanced by conve­nience for the consumer use case. It’s the fact that it’s on your smart­phone and it’s super easy to use without thinking about it.

It’s the WeChat, the reason people would put so much trust in WeChat without having any idea how it works, because it’s on your phone and you can pay for every­thing with incred­ible conve­nience. It’s the same argument of how do you get Ameri­cans to volun­tarily give up all their personal data? Make it hip and cool to do it on Facebook and then sell the connec­tion to the NSA, to the govern­ment so that they can keep copies of everything.

You can get people to do things that maybe they ought to think through a little more carefully just by making it either conve­nient or easy and fun and cool. And I think that that’s how you hit the consumer use case. In terms of the large insti­tu­tional billions of dollars at a time, I think that deliv­ering security that is better than what’s possible… And the way the current system works is not very sophisticated.

The way that the SWIFT payment network actually facil­i­tates inter­na­tional wire trans­fers, a lot of people think SWIFT trans­mits money. It really doesn’t. It’s just a secure messaging system and they essen­tially use a manual process to clear all of those trans­ac­tions through recip­rocal accounts with clearing banks.

So it’s a very, very low tech system that could be much better. And I think that you can deliver security value that makes people want to trust it better than conven­tional systems. And I think that you also have govern­ment mandate.

If it’s something that govern­ments are pushing, they tell you, you have to use it. That pretty much seals the deal.

Yan Pritzker:

I think that does address the retail side, but less so like if you’re Venezuela wanting to trade with Iran, how do you get that done with a trusted currency, right? I think that’s going to be the issue. Did we cover your question Brady?

Brady Swenson:

Yap, that sounds good. I appre­ciate it guys. This was a-

Yan Pritzker:

Wait, I have one question.

Brady Swenson:

Please, can I close up? I was just going to invite closing state­ments and questions. Let’s keep it going, it’s all good.

Yan Pritzker:

We said this is very long. We were sure this is… There’s a lot to talk about here, and we didn’t even talk about a lot of things that I had loved about Eric’s book that were really inter­esting conver­sa­tions starters. So maybe we’ll do this another time.

But my question to Eric is this. So in your last Macro Voices podcast, at the end of the episode, you were adver­tising this show. Thank you, by the way. But you also said that bitcoin is not in scope for Macro Voices because it’s not a scope for macro economics discus­sion. My question is a little bit broad in that. What does make something worth discussing on that level? You talked about the fine art market with one of your guests, and that’s a smaller market than bitcoin.

We have a lot of, let’s just call them changes going on in bitcoin. We have a multi billion dollar company, MicroS­trategy, a public company buying Bitcoin for its cash reserves. We have a multi­na­tional oil company saying they’re going to mine bitcoin on their flared gas. So it is really becoming this kind of thing that is reacting to world events. We have CNBC putting up a chart of bitcoin next to Paul’s face. CNBC sure, whatever, but Raoul Paul and other macro investors are taking it seriously. At what point is it a topic worth of discus­sion for a Macro podcast? That’s my question to Eric, and what would change your mind about that?

Erik Townsend:

Well, I think that we’re talking past each other a little bit because… And I probably misspoke at the end of that podcast. What I should have said is bitcoin is already discussed on Macro Voices.

We do discuss it on Macro Voices. A lot of our guests bring it up. I ask a lot of our guests about it, but when I talk on Macro Voices about gold, which we discuss a lot, we don’t talk about how core samples work in junior mining and what you have to do in order to make a discovery.

And the intri­ca­cies of how junior mining compa­nies eventu­ally sell their assets and get acquired into producing compa­nies, because that’s an area of investing that is special­ized, and there’s a lot of people that are doing that. So from a macro stand­point, bitcoin is definitely relevant as are a number of other things.

And we do talk about it. What I don’t want to do in Macro Voices is go down the level of detail that we’re talking about here. Because, a lot of our listeners are not inter­ested in technology intri­ca­cies. We’re talking…

And frankly, we’re making assump­tions that most listeners to your channel already know about distrib­uted ledger technology and they get the basics of what a secure digital bearer asset is. We never defined that in this conver­sa­tion because I’m assuming most of your audience gets it.

We can’t make that assump­tion. And just as I don’t talk about the intri­ca­cies of how gold is mined, I just talk about why gold is an impor­tant asset to the macro economy. We talk about the impor­tance of bitcoin, because it’s a scarcity asset and macro investors who want to diver­sify beyond just gold are really flocking to it in droves.

Although, I don’t think a lot of them under­stand some of the concerns that I have about it. So it’s not that I’m against it. It’s what I’m against doing on Macro Voices is having the level of detailed discus­sion that we’re having today, because a lot of the Macro Voices audience just doesn’t care about how this stuff works.

You’ve got to be kind of into distrib­uted systems and currency systems and distrib­uted ledgers and so forth. I do want to, before we wrap this up though, I just want to make the point to the audience that the topic we didn’t unfor­tu­nately have time to cover, which I think is really impor­tant for people to think about even though we don’t have time to talk about it, is bitcoin re-engineers money. And that’s really cool, but re-engineering the finan­cial system is much, much broader than that. And you’ve got to start with the currency. I’m not criti­cizing where they’re starting, but my point is a lot of people in the bitcoin commu­nity, they just write off fractional reserve banking and say evil, that’s the bad stuff. We’re against it.

Look, fractional reserve banking is what has made lending and borrowing possible for thousands of years. You’ve got to have lending and borrowing in an economy in order to make the economy work.

Now there’s better ways than fractional reserve banking to make lending and borrowing work. But what hasn’t, I mean, I’m sure that people are working on this, but what hasn’t happened yet is for someone to really recog­nize bitcoin and digital currency, currency is just the tip of the iceberg.

When you’re talking about a digital revolu­tion, and I call it a digital currency revolu­tion, I should probably call it a digital token revolu­tion, what we’re really looking at is revolu­tion­izing the entire finan­cial landscape.

There’s a few innova­tors like Josh Crumb that are already trying to do a token based commodity exchange, but we’ve got to get to just, how does lending and borrowing work if it’s not the old fractional system way?

There’s so many better ways, and you can take a lot of the way securi­tized lending works and you can tokenize that, you can make much more efficient markets for it. So many cool things you can do way beyond the currency to modernize the global finan­cial system.

And I think a lot of guys in the bitcoin world are not really realizing the finan­cial system is much bigger than just the money system. There’s a lot to it, and there’s a lot of oppor­tu­nity to digitize and modernize it.

And I think that’s going to be the big trend over the next 30 years, probably. Anyway, next time we’ll talk about how that works.

Yan Pritzker:

Yeah, I think that’s fair. We really should do another one. I think in bitcoin, there’s this saying fix the money, fix the world. I don’t know if you came up with that Brady, you say that a lot.

But I think the reason we’re focusing on money is because we do think there’s such a big problem with author­i­tarian regimes and capital controls all over the world that that is the first place to start before. What you’re talking about is absolutely correct.

There’s this massive amount of innova­tion that could be done in Fintech and could be changing the way we trade things, but these are first world problems. People in Venezuela aren’t trading fraction­al­ized artwork, they’re trying to survive.

I think this is why we really do focus on the money, but I get your point and I also under­stand how you think about bitcoin. It is relevant on the Ethereum stage, but it’s not neces­sarily something that we want to do a deep dive on because of the level of technical complexity.

I think that’s a fair way to look at it. I hope that we can, over time, make it palat­able to people and make it more easy to under­stand because the stuff you went into in your book about monetary history is absolutely crucial.

I think a lot of people don’t under­stand that. I don’t know how many high net worth people who listen to your show actually know monetary history. It was news to me. So I think it’s absolutely worth covering at some point. I hope you do more on that.

Erik Townsend:

Okay. Well, thanks for having me guys. This has been fun, get to talk about tech stuff for a change.

Brady Swenson:

Well, absolutely. Thank you so much for taking the time Eric. We really do appre­ciate it. It was fantastic discus­sion. Go to and subscribe to the podcast if you’re not listening yet.

It is one of the very best macro investing podcasts out there and avail­able, and I’ve learned a ton from listening to it person­ally. Yan, thanks for the time man. And you guys can go to to buy some bitcoin. We have the safest way to buy bitcoin. It’s easy automatic recur­ring buys, dollar cost average into bitcoin. Set and forget it. Don’t worry about timing this crazy market. You’re not a profes­sional trader, most likely. All right, we’re out. Thank you so much.

Past Episodes

Episode 8 –Andy Edstrom and Ansel Linder

Episode 9 –Rockstar Devel­oper and Jeremy Rubin

Episode 10 – Bitcoin TINA and CK Snarks

Episode 11– Gigi and Knut Svanholm

Episode 12 –Adam Back and Preston Pysh

Episode 13 –Alex Gladstein and Matt Odell

Episode 14 –Robert Breedlove and Tuur Demeester

Episode 15 –Isaiah Jackson and Max Keiser

Episode 16 –Gigi and Udi Wertheimer

Episode 17 –Aleks Svetski and Jimmy Song

Episode 18 –Stephan Livera and Marty Bent

Episode 19 –Mark Moss and Ben Prentice

Episode 20 –Samson Mow and Parker Lewis

Episode 21–Lyn Alden and Jeff Booth

Episode 22– Robert Breedlove and Cory Klippsten

Episode 23 — Saifedean Ammous and George Gammon

Episode 24 –Jameson Lopp and Eric Martindale

Episode 25 –Preston Pysh and Andy Edstrom

Episode 26 –Lyn Alden and Nic Carter


Swan Bitcoin

Swan Bitcoin — the best place to buy and invest in Bitcoin

Swan Bitcoin on Twitter

Swan Signal on YouTube

Swan Signal on Facebook

Swan Signal on Twitch

Swan Signal Podcast

Swan Signal Telegram Chat Room

Erik Townsend

Erik Townsend’s Personal Website

Erik Townsend on Twitter

Macro voices podcast –Erik’s Podcast

Yan Pritzker

Yan Pritzker on LinkedIn

Yan Pritker on Twitter

Inventing Bitcoin –Yan Pritzk­er’s book

What is Bitcoin–Yan’s Intro­duc­tion to Bitcoin

This blog offers thoughts and opinions on Bitcoin from the Swan Bitcoin team and friends. Swan Bitcoin is the easiest way to buy Bitcoin using your bank account automatically every week or month, starting with as little as $10. Sign up or learn more here.

Brady Swenson

Brady Swenson

Brady is the Head of Education at Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Brady also hosts Citizen Bitcoin, a podcast focused on documenting his journey learning Bitcoin, featuring some of the biggest names in the Bitcoin world.

More from Swan Signal

Thoughts on Bitcoin from the Swan team and friends.
The Bullish Case for Stratum v2

The Bullish Case for Stratum v2

By Pavlenex

Stratum v2 is the missing piece of the decentralization puzzle for Bitcoin.

Read More
A New Age Dawns for Financial Advisors

A Blockbuster Moment

Read More
Dollar Cost Averaging vs. Lump-sum Investing

The best strategy is the one that allows an investor to hold through Bitcoin’s volatility and sleep well at night, whether it's DCA or lump-sum.

Read More

Join our mailing list to receive new articles from the Swan Signal

Swan Bitcoin
© 2023 Swan Bitcoin

Electric Solidus, Inc.
26565 Agoura Rd Ste 200
Calabasas, CA USA
© 2023 Swan Bitcoin

Electric Solidus, Inc.
26565 Agoura Rd Ste 200
Calabasas, CA USA

Swan Bitcoin does not provide any investment, financial, tax, legal or other professional advice. We recommend that you consult with financial and tax advisors to understand the risks and consequences of buying, selling and holding Bitcoin.