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.
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
Hello everyone and welcome back to Swan Signal Live. This is a production of Swan Bitcoin at swanbitcoin.com. 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 swanbitcoin.com. 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 swanbitcoinv.com/dailybuys. 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.
Thanks so much. It’s a pleasure to be here. I’m really looking forward to this one.
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.
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.
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.
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?
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?
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.
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-
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?
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.
Oh. No, we’re here. We hear you.
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.
Your screen’s frozen, but we can hear you, so keep going.
Okay. Hopefully I’ll come back. Boy, my Zoom’s going crazy on us here.
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.
Well, I can’t see you guys anymore, but I’ll just look into the camera and hopefully our audience will be okay.
This will turn into an audio podcast. There we we go. You seem back. I think you’re back.
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-
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?
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.
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.
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.
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.
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.
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,
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.
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.
Oh yeah. That is an Eric Jansen quote.
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?
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.
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.
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.
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.
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.
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,
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.
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,
Why won’t it happen? I’d love to clear that up.
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.
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,
You couldn’t really control supply either because aren’t you really just talking about going back to multiple currencies if there is some,
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.
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,
I just really have to disagree on one point. I’m not suggesting those things. I’m fearing those things,
Fearing. Whatever. Yeah. So you’re predicting that they might come to pass,
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,
And for consulting companies to sell to them as well.
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.
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?
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.
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-
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-
Is that true, though?
Well, it opens up a new market.
A new market, a big black market.
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.
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?
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.
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.
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.
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-
Wait, is it a better idea? Let’s just dive into that.
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.
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?
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-
But what would happen to the value of gold in this new mining system?
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.
Which means you increase the supply of gold at a faster rate.
Which means you increase the supply of gold.
What does that do to the price of gold? It lowers it, right? Supply and demand.
Well, I think it would depend on… We’re talking about a hypothetical magic tool that doesn’t exist.
Well, you’re talking about hypothetical magic blockchain that doesn’t exist also. I think it’s important to think about it.
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.
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.
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?
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?
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.
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.
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-
I agree in that… Sorry, go ahead.
I wasn’t waving at you. I was actually trying to catch a fly that was flying past-
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.
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?
Well, nowadays it’s like 20 bucks cause the network is congested, but-
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-
The token can be worth a penny, but the transaction costs do go up like in any financial system as a demand goes up.
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 whatever.com 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 has.com in its name, we can sell it because we’re sleazy Wall Street guys. It’s just this.com 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-
… 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 the.com 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-
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.
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-
We’re over time. Brady wants to chime in here because we are probably-
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-
We got through the first third of our agenda.
I know, oh my God.
We’re doing a second episode, right?
You are right Eric. You’re right.
Sorry, we went off the rails there. It was just so fun.
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.
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.
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.
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?
Yap, that sounds good. I appreciate it guys. This was a-
Wait, I have one question.
Please, can I close up? I was just going to invite closing statements and questions. Let’s keep it going, it’s all good.
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?
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.
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.
Okay. Well, thanks for having me guys. This has been fun, get to talk about tech stuff for a change.
Well, absolutely. Thank you so much for taking the time Eric. We really do appreciate it. It was fantastic discussion. Go to macrovoices.com 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 swanbitcoin.com 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.
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
Inventing Bitcoin –Yan Pritzker’s book
What is Bitcoin–Yan’s Introduction to Bitcoin
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