Niall Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University, and the author of numerous books including The Ascent of Money: A Financial History of the World and most recently, the Square and the Tower: Networks and Power from the Freemasons to Facebook, and Michael Casey, chief content officer at CoinDesk and coauthor of two books on crypto, The Age of Cryptocurrency and The Truth Machine, discuss the history of money and the macro environment for Bitcoin. We cover:
- how they became involved in crypto
- historically, what has made things money, or how people have decided that something is money
- the difficulty of managing fiat currency
- modern monetary theory and the role of the state in the financial system
- Satoshi’s message in BTC’s genesis block and what that indicates about Satoshi’s intentions with Bitcoin
- whether a more transparent, blockchain-based financial system could eventually lead to a new financial order
- how Bitcoin behaves like an option on digital gold, and when it will behave like digital gold
- whether Bitcoin is simply a reversion to previous forms of money that weren’t controlled by the state
- how crypto/blockchain and fintech innovation from startups and the Chinese government will affect the USD
- how a hypothetical war between the US and China would affect the dollar’s dominance
- how China’s DCEP could disintermediate banks
- how Bitcoin fits into all of the different macro conditions facing the global economy
- whether Libra is going to be the initial gateway getting people into our digital currency world
- how well the recovery from coronavirus will go, and how it will affect the development of the crypto space in the near-term
Thank you to our sponsors!
Niall Ferguson: http://www.niallferguson.com
Michael Casey: https://www.michaeljcasey.com
Money Reimagined: https://www.coindesk.com/tag/money-reimagined
The Age of Cryptocurrency: https://us.macmillan.com/books/9781250081551
The first episode in the Why Bitcoin Now series: Mike Novogratz and Raoul Pal on ‘the Single Greatest Brand’ ofo the Last 10 Years: https://unchainedpodcast.com/why-bitcoin-now-mike-novogratz-and-raoul-pal-on-the-single-greatest-brand-of-the-last-10-years/
How Niall got into Bitcoin:
Niall and Michael at Consensus: https://www.coindesk.com/disruption-money-and-a-world-of-change-feat-niall-ferguson
Unchained interview with Chamath Palihapitiya, who believes Bitcoin is a hedge on everything blowing up: https://unchainedpodcast.com/chamath-palihapitiya-why-bitcoin-will-be-the-category-winner/
Carlota Perez at CoinDesk’s Consensus: https://www.coindesk.com/video/carlota-perez-on-blockchains-and-technological-revolutions
Unchained interview about the DCEP: https://unchainedpodcast.com/why-china-aims-to-replace-cash-with-the-digital-yuan/
Unchained interview with Christopher Giancarlo about a digital dollar: https://unchainedpodcast.com/christopher-giancarlo-why-the-us-needs-to-have-a-digital-dollar/
Unconfirmed episode with Michael about Libra: https://unchainedpodcast.com/why-it-would-be-good-if-libra-rivaled-the-us-dollar/
Unchained episode with a co-creator of Libra: https://unchainedpodcast.com/a-libra-co-creator-on-how-facebook-will-make-money-from-calibra/
Hi everyone, Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin.
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Today’s show is the second in my series Why Bitcoin Now, that looks at Bitcoin in this macroeconomic environment. The topic we’ll dive into today is the history of money. Here to discuss are Niall Ferguson, Milbank Family Senior Fellow at the Hoover Institution at Stanford University, and the author of numerous books including The Ascent of Money: A Financial History of the World and most recently, the Square and the Tower: Networks and Power from the Freemasons to Facebook, and Michael Casey, chief content officer at CoinDesk and coauthor of two books on crypto, The Age of Cryptocurrency and The Truth Machine.
Welcome, Niall and Michael.
Hi, Laura. Good to be with you.
Thanks for having us.
Both of your paths to the world of cryptocurrency have been quite different. Why don’t you each describe how it is that you came to both have a background in the history of money and then also get involved in crypto. And Neil, do you want to start?
Sure. Well. I’m a historian, as you said, and I spent my career working on financial history, which is really my core competence. Many years ago, too many to count, I wrote a doctoral dissertation on the German hyperinflation of 1923 and subsequently wrote histories of a couple of banking dynasties, the Rothschild’s and the Warburg’s so that was really my path into being an academic historian, and in 2008 I tried to knit together a lot of my earlier work in a book called The Ascent of Money, which you already mentioned, and that book started, I guess, as a Harvard course in international financial history and by 2006, ’07 I’d come to the conclusion that it should become a book and that there was going to be an almighty financial crisis and it would be rather good timing if I could bring it out around about the time of the crisis, and sure enough by the time I’d finished…I also did a tv series called The Ascent of Money, the crisis was well underway. The book came out a few weeks before Lehman Brothers, but if you were paying attention it was really not the Lehman bankruptcy that signaled the beginning of the crisis, you’d actually seen the beginnings of the crisis in late 2006, so of course, The Ascent of Money came out in the same year as Satoshi’s paper on bitcoin. That meant it couldn’t be included in the book, but of course, I was intrigued when I heard about bitcoin.
A brief anecdote, my then-teenage son, who’s now 21, said to me one day, hey dad, I really think you should get into this bitcoin thing and I gave a very pompous response along the lines of my dear boy, if you had read The Ascent of Money you would know that is impossible for money to exist without the backing of a state, so do not waste my time with this obviously doomed innovation. Well. By 2016, ’17 he was having a laugh at me and I was admitting that I was wrong. I’m one of the academics who’s capable of saying I was wrong, so round about 2016, ’17 he and I together began really seriously thinking about crypto and he helped me to really up my level of knowledge, along with one of my former students, who’s become a co-author, so over the last three years I’ve really been self-educating and I came to the conclusion, on the tenth anniversary of The Ascent of Money, that I’d been very, very wrong and that this is part of a really extraordinary financial revolution, so I updated the book, added a chapter on crypto, and the new edition is available at all good bookstores. So, that’s my story.
Wow. Great. I guess we owe a credit to your son, especially you.
Yeah, name check, Lachlan Douglas Ferguson, who called it and if he’d only been empowered by his father to some investment would probably have retired by now.
So, Michael, I know you… Yeah, you have a similar story.
Well. It’s not quite similar but I do also have to thank Niall’s son, because if you remember, Niall, I badgered you. In fact, you called me a first-rate nagger, and you eventually caved and wrote a blurb for The Age of Cryptocurrency, and it was a fabulous blurb. I was actually trying to call it up, but I don’t have my book here. I can’t remember exactly what it was, but you refereed to if you think that Satoshi’s is a type of fish or a Japanese form of sushi, and it was brilliant, and so I thank you for that, but I mentioned that your son was helpful to me in that regard.
As for my journey in this area, it really comes down to having lived in Argentina. Someone once explained to me that Michel Foucault, who covers…who wrote about madness and how really the study of madness was actually the study of what we call normality, and I tend to think about Argentina a little bit like that when I comes to what money and the functioning of society is. Don’t get me wrong, I absolutely love Argentina, and I love Argentines deeply but there is a disfunction about Argentina that is extremely illustrative about what it is that kind of makes the intersection between government and money function in places where it is supposed to function. The dysfunction illuminates things, and so I just became fascinated with this breakdown of the social covenant that was evident in the 10-year cycles that Argentina has. Every 10 years or so their entire system breaks down and it doesn’t matter whether it’s hyperinflation, as they had in the ‘80s or deflation as they had once they tried to peg the currency and control that at the end of the ‘90s going into the 2000’s, and there was a massive breakdown then. It’s part of the same problem and you start to…I started to think about trust.
I had no idea how to frame this but that’s what I was doing. I wrote a book called The Unfair Trade that sort of drew a little bit on some of that, but sort of looked more broadly at the financial crisis. When this was emerging is after I came back from Argentina. I was the bureau chief there from 2003 to 2009. I came back to the US, the crisis was in full swing and that was my beat, basically. I was at the Wall Street Journal and I was writing about currencies and about this incredible moment in our financial history, reading books by Niall and really digging into these things, and then at some point…and it wasn’t that early in the process. I wish I could’ve seen bitcoin for what it was earlier, but it was around mid-2013. I think it was the time of the…was it in Crete? There was a blowup in Cyprus.
That was in Cyprus, and there was a banking crisis there and bitcoin sort of suddenly…I saw it and I wondered what the hell this thing was and wrote a pretty ordinary column saying this is crazy. You’re sort of minting money from your computer? How on earth would that work, and it wasn’t…I was interested, and clearly, I knew there was something sort of profound about this concept but I just didn’t really get it, and then I was taken out of dinner with a bunch of other journalists by a few people who were really quite…they came from a normal background, it seemed to me.
One of them now actually is the owner of the company that owns CoinDesk, Barry Silbert. There was also Jeremy Allaire there from Circle, but interesting to me was Raj Date was there, and Raj Date, at that time, had just completed a role as the interim head of the CFPB, the Consumer Financial Protection Board, that Elizabeth Warren had championed, and I was like hang on a second. What’s a guy like that hanging out with all of these crazy libertarians, and then around the course of the conversation, I think it was Barry, but somebody just pointed out to me how valuable this concept could be to emerging markets, to places that don’t have…where the institutional management of money is a bigger challenge, and I just wanted to use that because it’s not necessarily their fault. I see these problems as systemic and it’s a global problem as much as anything else, but in these places, the capacity to control their money has been a challenge and therefore it’s this problem for individuals and the bitcoin and come of the ideas around it could be really valuable and I just…so at that point it clicked and I saw it all through the lens of my Argentine experience, and then I was in.
That’s when I went down the rabbit hole and started…I was very interested in property rights. I’d had a lot to do…quite a bit to do with Hernando de Soto, and met him, and have written about things with him, and I was very interested in this idea that we…that records needed to have an environment in which they would not be corruptible by some central party and it just all started to come together. Went down the rabbit hole, wrote The Age of Cryptocurrency with Paul Vigna eventually, figured that this was too big a thing to just have as a little sideline dalliance and dived into a stint at MIT, at the digital currency initiative, and now here I am finding my way back into media, but yeah.
It was very much a developing world framing that made me realize that this was a big deal.
Yeah. As I mentioned at the beginning, the series that this show is going to be a part of is looking at bitcoin in this macro moment, and I think a lot of the threads that you guys pulled out are things that we will discuss in a moment. I actually just want to lay a little bit more groundwork so people understand better how the pandemic might change the environment for cryptocurrency but in order to even understand that let’s talk a little bit about what led us to the financial system we have today, so even just going all the way back to the basics what would you say…what is money, or historically, what has made something money or have people decided that something’s money?
Well. I once tried to explain that to Stephen Colbert on the Colbert Report, and if memory serves what I said was…well, Stephen, money is just the realization in some usually tangible form but not necessary of the relationship between a creditor and debtor, and the first money was clay tablets in ancient Mesopotamia thousands of years ago. Today we can represent the relationship between a debtor and a creditor digitally. It’s something that appears on a screen, but Stephen, anything can be money. You could use an enormous shell or a piece of stone, and Colbert replied, can I be money, and I said yes, Stephen, you can be money if you want, so I think that’s the first building block.
One has to realize that we’ve represented, over the ages, the relationship between a creditor and a debtor in all kinds of different ways, and it hasn’t always been coins and it certainly hasn’t always been banknotes. Most people still, even in 2020, have in their minds’ eye a banknote, a dollar bill when you say money and it’s quite hard to persuade people that actually a really small fraction of the dollar…US dollar money supply takes the form of banknotes, and as for coins it’s a rounding error. Most money today is, in fact, created by banks. The Central Bank plays a regulatory role but ultimately, it’s actually the banking system that generates the bank accounts that are money in our system, and I think the key point I would make is that the system we have today is of relatively recent origin. It could really be traced back to around 1971 when Richard Nixon, then president, ended the link between the dollar and gold. You could go all the way back to the late seventeenth century if you wanted to find the origins of the gold standard, of the link between money and gold, and even further back if you just wanted to find the link between gold and silver and money, but we ended that in the early 1970s with the collapse of the system known as Bretton Woods, which had been created at the end of World War II, and this ushers in the era of fiat currency, an era in which money is essentially what a government determines, and to be precise a particular government authority of Central Bank.
So, the era of fiat money is actually shorter than my lifetime, as I was born in 1964, and I think to understand why cryptocurrency has become the object of so much fascination you have to recognize two things about the era of fiat money. The first is that, as has already been pointed out by Michael, for many countries, and Argentina is just one of many cases, managing a fiat currency has proved extraordinarily difficult. There are powerful political economy temptations to debase the currency, and those existed even when we used coins. It’s easy to debase the currency if you have a central bank with what we usually refer to as a printing press. It isn’t that anymore. It’s just the ability to create money out of the ether. That temptation has led many countries down the path of very high, if not hyperinflation, and so the obvious argument for something like bitcoin is that you are creating at least of store of value, maybe not a particularly efficient means of payment but a store of value that you’ll be able to rely on even if the Argentine government or the Zimbabwe government, or the Venezuelan government decides to create currency with extremely reckless time and consistent monetary policies.
The second point to notice, which is generally missed by the people I know in the crypto community is that the argument you’re solving the problem of inflation works much less well in the developed world, because, in truth countries like the United States, most European countries, and Japan ceased to have a problem with inflation some time ago. The inflation spike was in the first decade of fiat money in most of those countries. Since the beginning of this century the problem has in fact been deflation, not inflation, and the recurrent headache of central banks, first in Japan and then in the United States and Europe, was that they couldn’t in fact keep the inflation rate in positive territory. That became acutely scary after the 2008 failure of Lehman Brothers because it seemed as if the world was going to be plunged into a second rate depression with deflation driving us into a dire tailspin, as in the 1930s, and the central banks had to work extremely hard to avoid that by using all kinds of unconventional monetary policies of which quantitative easing is the best known, but there were others. Two zero interest rates, forward guidance, a whole toolkit of new techniques, which have not been inflationary.
In fact, they’ve underperformed in terms of inflation targets, so I think when one’s thinking about the need of monetary innovation it’s really important to recognize that what Michael described in Argentina is a problem for only those parts of the world that we call emerging or developing. For the big economies of the northern hemisphere, this is not the problem that you’re really trying to solve.
I’d like to key off of that actually, because…and I know that there’s a lot of people in, I would call the mentalist, hard money kind of crowd that are drawn to bitcoin who would think that this new…it’s not new, but modern monetary theory that is out there is sort of heretical. So, this is a confession. I’m reading Stephanie Kelton’s book at the moment, The Deficit Myth, and I don’t know that I buy into, in any way, the prescriptions that the modern monetary theory folks come up with about just forget about deficits. Just spend because you can, from a government’s perspective, but I do think that the way that they frame what money is, is very interesting, and it relates to how I came into bitcoin. It took me, the way I saw the world, but partly because I came out of this Argentina experience, to recognize what Niall started out talking about, which was the relationship between debtor and creditor. The idea that the real function of money was this ledger-keeping role, and that allowed me to understand that bitcoin could be money, that it really was…it was the blockchain that mattered.
It was the record-keeping function, but I think a lot of people who are drawn to bitcoin are obsessed with the scarcity function, which is a key component of it. Really, you have to have to some form of monetary policy embedded into the algorithm, but I don’t think it is fundamentally just scarcity that matters. Because of the many things that Niall’s referring to here, is it deflation or inflation? What is your problem? To me it is about can you trust the governance of the monetary system, whatever that system is? Can we trust that is being operated in the form that we want, so I…what I do accept from the MMT crowd is that I recognize the reason why I’m going to accept a dollar rather than a shell as currency, even though as Niall pointed out it could be either one, is because this particular form of money comes with this imperative that the government imposes upon us to pay your taxes, and so the MMT crowd tell us that that’s what makes the dollar the dollar and that’s why taxes matter, not because it is a way to actually extract resources to then make payments but rather to impose a compulsion to actually use this particular currency, and if you think about it from that perspective then okay, so if you were to create…just imagine if you could create a modern monetary theory model, which is to say you just don’t worry about deficit per se?
You don’t have to balance the books as the government because you’re an eternal being, but you do worry about inflation, and if that is the case then the key…most important feature of the monetary system is trust in that government, because now we’re handing it over to them, and that’s where I don’t think their theory is particularly practical because there is an enormous amount of mistrust in these entities, but it does bring us, interestingly, to questions about the role that blockchain solutions can have here, and not necessarily on sort of a national or even international scale but around communities because it’s about the governance of the type of money that my particular community, and I can live in multiple communities in a digital era, right, is being managed, and so I see these two pieces coming together.
That is the role of the ledger to keep track of our debits and credits, the debtor and creditor relationship. That is a fundamental part of money, and in fact, the transfer of notes, as I see them, is kind of a physical representation of the ledger, if you like, and now, of course, the digital version of that it has to be kept as a ledger, but the fact that that ledger cannot be tampered with is a critical point, but then it is what is the actual governance model of the monetary system underneath that, and is it something that cannot be corrupted? That is where I think we see this really interesting interception between the solutions that the bitcoin blockchain world has come up with and the challenges that both those governments fighting deflation and those fighting inflation in a developing world have had to grapple with, which is at its core a fundamental trust challenge between the users and the actual…the government…those who are governing the monetary system themselves.
Yeah, and actually something that I find really fascinating about this part of the conversation is, as Niall pointed out, it’s pretty obvious in emerging markets what the appeal of bitcoin’s monetary policy would be and it may be less obvious in developed markets, but what’s so fascinating to me is that obviously, we know that in the genesis block of the bitcoin blockchain Satoshi put the message, the Times. The third of January 2009. Chancellor on brink of second bailout for banks. So, it appeared that in that instance…well. Why don’t you say…so what message do you think Satoshi was sending in that moment and how does it reflect on your point about what the benefits are to different economies?
Well. I think the key issue is the timing, but bitcoin was created in a relatively early stage of a massive banking crisis that extended right across the Atlantic, and in fact was as serious, if not more serious, in the UK and European Union, as it was in the United States. Now, I think one way of coming at this is just to try to get the sequencing right, which I don’t think the proponents of modern monetary theory do. There’s something wrong with that whole theory, from a historians point of view. You have to remember that for most of history the state does not play a particularly big role in the economy. It’s really quite a small thing, and the terms of the monetary system in, say Renaissance Italy aren’t set by governments, they’re set by merchants. There are multiple competing currencies in the early modern world, and as the world becomes more globally integrated, and it was already remarkably globally integrated as early as the sixteenth and seventeenth centuries, there are flows.
Cross board of flows on really large scales that determine where money is most readily available, and this carries on being true right into the nineteenth century with the role of the state actually shrinking so that it reaches a really low level, in most places, in the nineteenth century, whether you’re looking at Europe or China, so the monetary system for that period is essentially a function of the needs of merchants and ordinary people, and Tom Sargent has written a really interesting book on this, the big problem of small change, which is well worth the read. Then second phase, which really doesn’t sort of get going until the eighteenth century is the discovery by governments that they can finance largescale warfare through the issuance of bonds. Bonds had a prehistory in the Italian city-states but they don’t really take off as a form of security until the seventeenth and eighteenth century, and it’s, in fact, Britain that pioneers the idea of a bond market as a major source of financing for government, with the advent of the perpetual security known as the council.
Meanwhile, equity finance is still at the relatively early stage of development. There had been an experiment with it in the early eighteenth century principally as a means of, again, financing government warfare, and it had gone rather horribly wrong in the South Sea Mississippi bubbles, and for at least a century after that equity finance has kind of frozen and it doesn’t really take off again until the nineteenth-century railroad era. This is the right sequence of events to think about. A series of financial innovations, only some of which are propelled by the government. It’s not until the twentieth century with the World Wars, which were on an unprecedented scale that the government really becomes the dominant player in the financial system, and it becomes apparent that central banks, which had originated as private entities are in fact agencies of government debt management, and the system revolves increasingly around the problem of government debt. That was the central problem of the period from really 1914 right through until the period of the 1950s.
Managing the huge stocks of debt that people accumulated when they fought wars. If you lost the war, ask any German, it ended in disaster. The government didn’t just default on its bonds, the money in which they were denominated became worthless. That happened twice in German history at the end of the two world wars, so I think what is missing from much of the modern monetary theory is a recognition that the financial system is evolutionary, and the state has not always been the driving force. We now arrive at a time, the early twenty-first century when the relationship between the government, the Central Bank, and the banking system more broadly becomes highly unstable, and that’s really the story of 2008. It’s not really fully resolved in Europe. To this day the fundamental problem was that the banks in, say, Italy had on their balance sheets great quantities of Italian government debt. If there was uncertainty about Italy’s ability, A, to service the debt, and B, to remain part of the monetary union in whose currency the debt was denominated then the banks themselves were in mortal peril, and that’s why it proved and still has proved so difficult to solve the problem of the relationship between the sovereign and the banks in southern Europe because they lost their monetary autonomy when they joined the euro when they became part of that monetary union. Now that problem doesn’t exist in the US and let me make one final point.
Because the United States issues the fiat currency, the dollar, that most transactions around the world are conducted in because a huge proportion of international trade is in dollars, and because the dollar also happens to be the most popular currency in Central Bank reserves there is almost no visible limit to how many dollars the United States can print or how many bonds it can issue, and as long as the demand for those…the currency and those bonds remains as great as the supply then, in fact, we exist in a strange and very unusual era in which there is no difference between money and bonds, because the interest rate on the bonds is zero or close to zero. That is the strange world we currently inhabit. To believe in modern monetary theory I think you have to believe that that world is a permanent state of affairs, or if that’s not the case then implicitly you are basing future policy on fiscal, not monetary method, in that you will use taxation to avoid inflation.
Now, I personally don’t regard the present era as likely to continue for very long. I’m happy to go into why that is in a minute, and therefore I think we need to recognize the MMT is only credible for two reasons. A, people know virtually no financial history, B, they take the erroneous view that the present state of affairs of zero or near-zero nominal rates will continue for the indefinite future.
I’ll just jump in if it’s okay, Laura because I think…
Yeah, it sounds like you want to respond, and after that, we’ll take a commercial break, so go ahead.
Well. I’m absolutely not here to defend MMT and I think that is…the core issue is this idea of the permanent state of the state as if the state itself is always operating in this world. I think that the notion of a country has this kind of permanent state but what its governance model is, is something that is constantly changing and fragmenting, and I think Niall’s point about the fact that money has always been through this evolutionary state and it’s only so recently that government played this central role in it is critical. I do want to pick up on the…your original question about that situation, these comments and the banks, but before I do that I think…and I think this will lead us into a different conversation about this potential post-COVID era as we’re talking about, but that…there is almost this ebb and flow between the power and the centralizing power of the state, and how it then wanes of a time when the system can’t sustain it, and I feel like that’s what we…it may be that we’re moving to a fragmented role, a fragmented situation, and therefore what type of money we have is going to have to basically comply with hat, which means the state’s role in it would certainly be diminished, and therefore any kind of MMT theory about how this is all going to be managed with this sort of taxation as an inflation tool and everything, just spinning it, it just seems impossible because things are getting fragmented.
But in terms of Satoshi’s commentary in that moment when the release of bitcoin in early 2009 it is about the centrality of the banking system to the money, as far as I see it. None of us can dare to say what was going in his head but is the problem fiat money or is the problem the fact that we’ve…we are completely dependent upon this fractional reserve banking system and that interconnection between those banks and the state. The too big to fail problem that became the defining feature of the crisis. When I was writing about it then, I just saw this as the banks holding the citizenry hostage. That they were given this, moral hazard allowed them to take as much risk as they could and then there would always be a bailout of those banks because if not there would be a systemic breakdown, and why do we care about systemic breakdowns, why didn’t we just let the whole system collapse? Because our monetary system was dependent upon that, so the idea that we could disintermediate the banks and create a model that was…whoever the issuer was, whether it was the government, an algorithm, or gold, the earth. Whoever the issuer was didn’t have these powerful gatekeepers in the middle who could essentially dictate the terms, that we would now have a more direct relationship between the users, we the citizens, and the issuer of the money. That’s, to me, one of the most powerful things that bitcoin has brought, this disintermediation, and it’s the essence of decentralization, right, so that’s where I see it.
I mean, I think in many respects bitcoin attacks banks. It doesn’t necessarily attack governments and that’s, I think, one of the most important readings on this.
Yeah, I don’t know if a lot of bitcoiners would agree with…I mean they would agree with maybe both but certainly, there’s that libertarian sentiment there. So, in a moment we’re going to actually just continue this line of thinking around maybe the transparency of blockchains and trust, but also a shift to something more decentralized and basically user-owned, but first a quick word from the sponsors who make this show possible.
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Back to my conversation with Niall Ferguson and Michael Casey. So, there are actually a couple of different strands from what we were discussing that I want to pull out, and one was just throughout financial history there have just been so many bubbles. You referenced when it happened in the very early stock markets, obviously, and we’ve been talking about the housing bubble, and I just wondered…so as Michael mentioned, when you have this ledger it’s more transparent. Do you think if we were to switch to some kind of future of blockchain-based money or financial assets then that will mean the end of bubbles, or where do you think that could lead us, in terms of a new financial order?
Well. Laura, I think the idea of a world without bubbles is only plausible if you replace the human race with some other species that isn’t susceptible to our many cognitive biases. One of the arguments I tried to make in The Ascent of Money was that this evolutionary financial system ultimately is subject, more than anything else, to the human psyche and I’m not talking here just about your gradient fear story. It’s a more profound point than that. Ultimately, the price of any financial instrument, whether it calls itself money, or a bond, or a stock is the reflection of expectations more than anything else. The expectations of the future price level in particular, and historically expectations of inflation have in fact fluctuated quite widely right now. In the principle developed economies, they seem remarkably stable and low, but that’s an odd state of affairs and quite unusual. For most of history, there have been big fluctuations in the price level and periods of high inflation, which have often taken people by surprise because wars are not predictable and wars have been historically the principal driver of unexpected moves in the price level, so history is really a kind of learning process.
People periodically suffer from amnesia, we’re going through one of those phases now, and they forget that time and consistent policies by governments regularly produce bursts of inflation or even defaults. As Michael Rightly said, the idea of an infinitely lived state is entirely at odds with historical reality, because in fact states come and go. Most of the states that currently exist in the world, a clear majority didn’t exist 100 years ago. Just to make one very obvious point, Germany, which we think of as this sort of pillar of fiscal and monetary stability, has been through multiple currencies and two hyperinflation episodes and default episodes. The thing is that revolutions happen as well as wars. Again, we can’t predict when they happen. They nearly always take people by surprise. There were American bankers wandering around Petrograd and Moscow in 1917, ’18 thinking that probably it was quite a good thing there had been a Russian revolution. They didn’t see it coming that Leon Trotsky was going to default on the entire czar’s Russian debt, one of the biggest defaults in all of history, so I think the key here is that expectations are based not on some kind of supercomputer that we carry around in our heads that constantly maximizes utility, expectations are based on what we remember of history, and we keep on being surprised because of this unexpected incidence of warfare and revolution.
Now that brings us to the question of whether you can kind of create an instrument that is somehow immune to these fluctuations and sentiment, and the answer is you can’t. Gold isn’t a solution because remember, gold has fluctuated tremendously in its dollar price over the past century, and you can never be entirely sure that gold would continue to be available to you as a store of value. One of the things that Franklin Roosevelt did in the 1930s was to make it illegal for Americans to hold gold as private citizens. The idea that bitcoin can somehow solve a problem that gold couldn’t solve, that nothing has been able to solve was never, to me, plausible and the volatility of bitcoin as a financial security, which is how it sometimes appears to behave is the proof of that. What you’re seeing when bitcoin’s price fluctuates widely, as it’s done in the last five years, is not variations in the supply of US dollars. These are fluctuations in expectations of investors about the future of bitcoin, and as we all know, as everybody listening to this podcast knows, those fluctuations have been enormous because there’s great uncertainty about the future of bitcoin.
It only seems like the other day that an influential economist, Nouriel Roubini, was calling bitcoin Shitcoin and predicting that it would go to zero. It’s not that long ago at the Nobel Prize-winning economist, a New York Times columnist, Paul Krugman was dismissing bitcoin in much the same way that he once dismissed the internet as a kind of nothing burger, and so there’s all kinds of confusion, uncertainty, and downright error about the future of this particular instrument. That’s why we will have another bitcoin bubble at some point. I can guarantee that, and during that whole cycle, which will be, what the fifth? I’ve lost count of the big bitcoin bubbles there have been. There’ll be the same debate that we had back in 2017 between the people who say it’s going to the moon and the people who say it’s Shitcoin, it’s going to zero, and both of these views will be wrong.
Over time I think bitcoin will seize to behave like an option. I think it behaves like an option on digital gold right now. A term that I owe to my friend Matthew McLennan at First Eagle, gradually over time the longer it survives and the more useful it appears to be bitcoin will behave less like an option on digital gold and more like digital gold. I take the view, and I’m probably going to annoy a majority of listeners now, that bitcoin isn’t going to become money in the sense of the means of payment. I think bitcoin is a peculiar kind of digital gold that people will want to hold in their portfolios because it has behavior different from other asset classes and it’s not closely correlated with them, and I think the more people who take the view that bitcoin will live, that Roubini is wrong, the more people will hold it in their portfolios, and that’s a preference for bitcoin as an asset with a diversification quality that will push up its price. Its price will not go up gradually it will go up in steps and each step will look like a bubble, and each time the bubble bursts Nouriel Roubini will say, you see? You see? And each time he’ll be wrong.
Yeah. Nick Tomaino, of 1confirmation, he’s one of the venture capitalists in this space, or…no. Sorry. I think it’s Adam Draper, another VC in this space. He says that bitcoin breathes, so it takes in an inhale and there’s a bubble, and then it exhales and then inhales. So, Michael, there was so much in there. You can feel free to respond, but actually, one other question I just wanted to throw in was…because it just fascinated me the way Niall was going it started to sound like he didn’t think it was going to be digital gold but I guess ultimately he thinks it actually could take up that mantel, but one other aspect that I wanted to draw out, in relation to my question about the bubbles, is also I feel like maybe this is a shift back to…if you think of bitcoin as a user-owned system or any of these blockchain networks as user-owned systems then this is maybe a reversion to previous kinds of money that were not government-run, so I just was curious, also, to maybe throw that in the mix, because we’re far into the episode and yet we still have so much material to cover.
Okay. Yeah, as always, whenever I talk to Niall I…or I hear from Niall, my brain starts going because he inspires so many just interesting trains of thought. Look, in the bubbles especially I just think…also, I love this idea that price labels are always a reflection of these kinds of, I suppose, waves of expectations and we go through these cycles where expectations are very bullish, and then expectations are very bearish in that sense, the price level, so it’s interesting to think we are in this place where…this period where we’re not seeing any inflation in money but we are certainly, I think, seeing relative to what would imagine the underlying return on stocks right now. There has been significant asset inflation, certainly since the bottom of the post-COVID moment, if you like, in March because there is this expectation that somehow this return on assets is going to be higher, at least denominated in the money that’s being issued against it, but the thing about bubbles that I find, also, important is we had Carlota Perez, who’s a very interesting thinker around innovation cycles and bubbles, as a speaker at Consensus.
Niall was also a speaker at Consensus back in May, and she I think takes this big step back view of what a bubble is, and it’s this perspective whereby you unlock innovation by bringing this speculative moment actually then…it gets invested into these moments of, almost like, technological paradigms, and there are different moments when a particular type of technology becomes the driver of this innovation wave, and therefore the driver of what was speculation around it. We say it in the dot com bubble, we’ve certainly seen it in blockchain, we’ve certainly seen it, and we’ve seen it in lots of other times, so bubbles almost are necessary evils. This idea that you unlock all of this value, you actually create a framework in which the underlying technology can be developed with a cheap currency, which is the high level of the equity attached to that particular thing, so I don’t know. That’s a bit of a tangent but I think it’s just an interesting way to think about things like expectations.
With regards to bitcoin and digital gold I actually just generally agree with what Niall said. I’ve never really thought that bitcoin could be money. I’m not a mentalist. I really don’t think that…for one, just this sort of hard bait scarcity function. Again, this is going to annoy a lot of listeners, but I don’t think it is the most interesting innovation here. The most interesting innovation to me is the governance of a ledger system, of a monetary system for how we manage debits and credits, so the idea that bitcoin could become the global median of payments strikes me as very challenging, in terms of its limits. I very strongly believe that it is almost ideal to become a reserve asset for the digital age, that it becomes, essentially yes, digital gold because we are living in a decentralized…we have two worlds. We have a centralized real-world and a decentralized online world and we just have to look at how Twitter and Facebook grapple with who is actually governing this conversation right now to understand that that is the biggest challenge we have, is this decentralized architecture for our online existence, and bringing order to that just means censorship and control in a way that the internet doesn’t want, right.
We, as the citizens of the internet, do not want censorship and control so what is our money going to be in that system, right? What is the underlying reserve asset for that system, which would then build other payment vehicles? Lauren, I think the bitcoin sits there as something…as the anchor, potentially, for that. So, digital gold, at least if you go back to gold and it’s role, in some respect, is an underlying base layer for money is one aspect of this. I also think though that it’s just…gold has persisted throughout the millennia as…if bitcoin is a digital option on gold, gold I see as an option on chaos, on the breakdown of whatever other monetary system exists, so I see bitcoin as transferring into that world, but it’s always there as a backstop to a breakdown in the otherwise previously functional monetary system. And I…
Yeah. Actually, why don’t we maybe just use this as a jumping-off point to kind of talk about the current, I guess, global landscape when it comes to the financial world, because I think there are just so many interesting forces at play. Obviously, we’re in a situation where the US dollar is the dominant global reserve currency, China would like that to not really be the case, probably, and they’re kind of maybe perhaps gaining a first-mover advantage with various different types of digital currency, whether you’re looking at the DCEP, or even what they’re doing with their different payment apps, which are becoming used even outside of China in some of these emerging economies, and then meanwhile, I do agree with you. Our digital world is just moving faster than our analog world and so at the same time we’ve got things like Facebook’s…well. It’s not Facebook’s Libra, but Libra, which is coming out and will be accessible to Facebook’s platform which is…has a bigger user base than the population of China, and yet at the same time then here we are talking about bitcoin is an option on perhaps chaos erupting in some fashion, which it really does feel in these times like it’s a distinct possibility and I don’t know if you have heard, but Chamath Palihapitiya, who became a billionaire form working at Facebook and now is chairman of Virgin Galactic and does social capital, he…basically, that’s why he believes in bitcoin, it’s pretty much only for that reason.
So, I just wondered how you thought all of these factors were going to play out, like what would happen to the US dollar and the various Central Bank, digital currency efforts amidst all these other movements that we’re seeing with other kinds of digital currencies, not from governments?
When I was writing the new version of The Ascent of Money, which is two years ago now, I tried to give as much space to the various Chinese innovations as I gave to bitcoin, Ethereum, and the crypto world, because in terms of scale actually the Chinese payment platforms, Alipay and WeChatPay, are more important. They are gaining market share more rapidly and that is very simply because they are very easy ways to pay for things, and in fact when it comes to means of payment China has in fact moved ahead of the United States, largely because a great many Chinese citizens were ready to make the leap from conventional means of payment to using their telephones, their smartphones for more and more transactions, and this is an enormously important development because it runs counter to the trend toward decentralization and libertarianism that we’ve been talking about so far.
The key to finding feature of the payment platforms that have emerged from China is that they are highly centralized and they exploit the fact that you can deploy artificial intelligence on vast databases of transactions and use the insights that you gained from that to create, essentially, a financial services platform in a two-sided market that brings together consumers and people offering financial services. That’s the essence of the financial business model.
Eric Jing, who runs Ant, is one of the most interesting players in the world of this financial revolution because in his minds’ eye you’re creating an optimal payment platform, very appealing to small business, through emerging markets and as you rightly say, Laura, the interesting thing about the alley and 10 cent platforms is the speed with which they’re expanding in the rest of the world. It’s also fascinating to watch those companies invest in a variety of different fintech platforms, in South America, in South Asia. This is really the frontier of the financial revolution and it’s a completely different business model from the one implied by bitcoin and the conversations that happen in Palo Alto are so different from the conversations in Hangzhou, and Changsheng that they are essentially being conducted in two different financial worlds, so the argument I would make here is it’s quite difficult for bitcoin or Ethereum, or any other crypto model to gain global market share against Chinese competition because China is offering a payment solution that is just much, much easier and much more readily adopted.
This is important. If China is successful it does pose a threat to the dollars dominance, because ultimately all of these different platforms do link back to the Chinese financial system, and therefore the Chinese currency. It’s not a convertible currency. The Renminbi is a deeply unattractive alternative to the dollar, which is why it’s not about to displace it, because the Chinese daren’t have a convertible currency. There would be such an outflow of capital from China to the rest of the world that it would destabilize everything, but particularly China, so the only way that the Chinese can challenge the dollar is just by making their payment platforms super convenient and super attractive, and that’s what they’re doing. If the volume of transactions on those payment platforms grows large enough then I think the dollars dominance over a five to 10-year timeframe will be threatened. It particularly troubles me that in Washington, whether you are at the fed or at the treasury, the mindset is so small seed conservative they really don’t want to do anything new. They’re very suspicious of Libra. They’re pretty suspicious of bitcoin.
When you ask them, but what about digital currency, they say well, we already have that. The dollar’s already digital and so this is, I think, a sign of a very profound pathology that the United States is no longer at the cutting edge of financial and monetary innovation, and so at the end of Ascents of Money, the second edition, I say two things. Number one, the US is losing its leadership in terms of financial innovation, and that means it ultimately will lose its predominance because there’s such a close correlation between being the financial innovator and being the dominant power. Two, and I got this right, I said the next big crisis will not come from the west it will come from China. Granted, I didn’t say it would take the form of a novel coronavirus that spread a highly contagious and dangerous disease, but I certainly got right that the next crisis would emanate from China, and I’ll add one final point.
In the final analysis what we can’t predict, as I said before, is where the next revolution will happen, where the next and when the next war will happen, but it will be the dislocations following from the pandemic that determine which money is the dominant money 10 or 20 years from now and which asset is regarded as the safe asset. If, let me just give you one hypothetical, the United States and China went to war over Twain in September when the next US sanctions directed against Huawei kick in. These are the measures by the Justice department that would cut Huawei off from TSMC semiconductors. If there’s a war over that, which I don’t think one can completely rule out, and the US does not win it, if aircraft carriers are sunk in the Twain Straight that will be one of those moments in history, the turning points in history, which determine a steep depreciation of the dollar just in the same way that major reverses, military reverse is suffered by the United Kingdom, ultimately doomed the pound to lose its dominant status, because remember the pound was the international currency for reserves and for transactions really right up until the outbreak of World War II, so that’s the way we need to think about this.
The present situation is not a steady-state. You’re not going to have a dollar-dominated world, 10 or 20 years out and you’re not going to have zero, or very low inflation, 10 or 20 years out because history will happen, and history always happens, and it happens with the biggest impact when people are most complacent and least expect it.
Well. Actually, I want to ask you, now, two follow-up questions. So, in that scenario let’s say that there is something like this kind of war between us and China and we lose. Well. Then what do you think would happen, because you already said that people would not trust that Renminbi, they wouldn’t want to put their money there, and yet right now the main alternative is the US dollar, but as we were discussing we also have these new digital alternatives that don’t require us to place our trust in government, but they are so small it seems weird to imagine that they would become dominant out of this, so I’m curious to know what you think would happen.
Well. I think it’s likely that in the scenario I’m describing you would get quite a steep depreciation of the dollar, but that would be probably principally reflected in the appreciation of the euro, which is a much more alternate currency to the renminbi, or any other currency that you might want to hold, but I think the key thing is that people would want to rebalance their portfolios and reduce their dollar exposure in that scenario because they would reasonably expect there to be inflationary consequences. Imagine a Biden administration struggling with the aftermath of a strategical diabolical or imagine…let me give you another scenario.
That the result of the US election, in the early hours of November 4, is unclear. In fact, it looks like a tie, they can’t call it, five or six states results are challenged, and we’re plunged into weeks or months of constitutional crisis. That’s a perfectly plausible scenario. It didn’t happen in 2000 when the result was really close because Al Gore conceded without really much of a fight, but I think this time around you could end up in an absolutely hideous domestic political crisis in the US, and once again I think this would be a very negative signal to investors in the US and outside the US, and what would you want to do in that situation, and I think the conversation would go roughly like this, well, there isn’t a kind of perfect alternative because you still have to worry about the euros long-term stability and you definitely don’t want to have a large holding of RMB that you can’t exit from when you want to. That’s when bitcoin, I think, will be a very attractive asset to hold, and gold too. Those things will be bound to…I think to rally under those circumstances.
So, I think what I’m envisioning is a period in which expectations about the future, dominance, and stability of the United States undergo a step change. We radically reassess our expectations of domestic stability and global predominance, and when that moment comes there will be a kind of rush to diversify portfolios and it will be quite heterogeneous because there won’t be this obvious alternative. When Britain declined and fell there was this obvious alternative called the dollar. English-speaking empire, better hardware, bigger domestic market. It was a no-brainer actually, but there is no no-brainer if the US enters a period of domestic, and or foreign crisis, and that I think is a pretty upside scenario for bitcoin holders, because that will suddenly look like a very, very smart thing to own in a world where there isn’t any longer a dominant superpower with a rule of law system. The dominant superpower of the People’s Republic of China, which is run by the Chinese communist party, which doesn’t believe in the rule of law, in that world you really would want to have in your portfolio more than just a 0.2% or 0.3% in the form of bitcoin.
Yeah, so one thing before Michael responds. We’re at one hour and so I just want to make sure can you guys over a little bit because we’re still in the middle of this discussion, and we’ll try to maybe wrap it up right now. But Michael, do you want to respond and just kind of looking at, what we were saying, these different macro conditions and where bitcoin might fit in, or how it might fit in.
Yeah, and I think where bitcoin fits in I just, again, tend to agree with Niall. What I would like to do though is paint a different scenario around which the dollar gets challenged as a result of Chinese activity. Hopefully, it’s a more peaceful setting for change. It will nonetheless be a massive challenge to US power, because of course the dollar is…and its role as this gatekeeping instrument within global finance gives the US enormous power to impose sanctions, to basically set the terms by which it wants the international order to function. That, under a diminished dollar role, would go away. Now, how would we get there though in a way that would be less violent? I think it comes down to the fact that China is creating programmable money. Bitcoin is, I would call, programmable money. Other forms of digital bearer instruments are programmable money, but the money that is currently being used by WePay and Alipay is not programmable money. It is money that still sits within the banking system at the middle of it.
So, you have banks as intermediaries that are, therefore, basically, almost like a blocker in the capacity to have two computers transact with each other, right. The notion of programmability that I can just literally transfer to you a digital unit of value that then triggers a corresponding response of some sort by the other computer is dependent upon that digital unit being truly a digital bearer instrument, one that is…
What about DCEP because I feel like…
Well, that’s where I was going to go.
Okay, go ahead.
That’s exactly where I’m going, right?
DCEP is really important. It’s not just that we have the WePay and Alipay infrastructure for the payments, that’s a very important piece of this, but now China is going to create a programmable form of the money itself that essentially disintermediates the banks. The banks may play some role, in terms of the distribution, but that is not a fractional reserve system. Ultimately, if I’m receiving the DCEP I know that it is…and that’s what the unit’s going to be called, it is something that is like a claim on the People’s Bank of China just as a dollar is a claim on the fed, so I treat it as a bearer instrument.
Now I’ve got something very powerful. It can be used in supply chains to turn on or off pallet movers, and so forth, and you can start to…so I think one of the biggest challenges to the US, by the way, is that this programmable form of money is going to create phenomenal efficiency in the Chinese economy, particularly around things like smart cities and all these other innovative industry 4.0 solutions that they are building for the infrastructure of their economy and that will just be literally a competitive challenge to the dominance of the US economy, but the thing that I’m really fascinated by is the prospect that other digital bearer instruments…let’s say there is a digital ruble and now you have these tow currencies able to essentially talk to each to other. There is this programmability function that is now…if you bring in things like atomic swaps, and here we start to dive into the nerdy worlds of the cosmos of this world that are created in cosmos, by the way, in participating in China’s blockchain…what’s it called.
The BSN, that’s the right. The Blockchain Services Network. So, atomic swaps essentially allow you to lock-in…these two assets can now be locked in a certain way to create a space in which over time those smart contracts can distribute at a later date, according to whatever the terms are, the outcome of that smart contract, so imagine, to me, the most…the fundamental role of the reserve currency, the dollar, other than just to be a place to have a store of value is to sit there as an intermediary in trade, so one country is importing, another one is exporting. The time-lapse, the 30-day, 6-day, 90-day, whatever period for that payment leaves both sides vulnerable to a change in those exchange rates, and so there is a gravitation toward some centrally understood unit of account, the dollar, as the denomination for that risky period, but if I can create a programmable structure, and escrow environment, that locks in the value of the import and export contract at the very beginning and then in 30…90 days, whatever the terms are, the value is…as was set at that time is distributed to me in the currency of the exporter at that value, or it isn’t.
It reverts back because I’ve locked this through a decentralized structure. To me, that is a very, very powerful way to start chipping away at the dominance of the dollar. That yes you still have these concerns about where do I hold my assets and so the capital flows of the dollar exist, but the underlying purpose if you like, the functionality of the dollar as this intermedium of trade starts to go away, so I think there’s a…there’s programmable money and the emergence of it, and this is why when Niall was talking about US lawmakers, and we’ve already got digital dollars. You don’t have digital dollars. They have to have this programmable bearer capacity that makes it…that’s what makes it really powerful and that’s why I agree that the US is far behind in terms of this innovation because China is building that functionality.
Now how does bitcoin fit into this? It still gets back to everything we’ve been talking about. If China or Russia are now creating this programmable space between themselves to engage in global trade, I’m still having to trust in either of those environments, either as a citizen of one or the other, the terms as set by those non-rules of law trusting entities. Bitcoin still becomes this very important store of value that protects me against…the risk of that money itself gets debased, or destroyed, or used against me in some way, so yeah.
Right. Actually, I want to maybe then look at maybe the, I don’t know, short to medium-term then because if we’re…so, Niall already said he thought…I think you said within five or ten years you didn’t think the US would be…dollar would be as dominant, but…so in the interim, and Niall, I had a specific question for you about stable coins because apparently, you are pretty skeptical of them, but I don’t actually see that we would just shift from where we are now to bitcoin even if all of these things were to happen, and that’s why I do feel like there is going to be some kind of intermediary step, like stable coins, or perhaps could it be Libra? I mean, is Libra going to be that convenient user-friendly answer that gets people into this digital currency world, gets them used to using it, and understanding how to use it and then that ends up being the gateway, and so what are your thoughts on that?
Well. There are two issues that we haven’t touched on, which are extremely important. Ultimately, a world in which Chinese forms of electronic payment or Central Bank digital currency predominate is a world without any privacy. It is a world in which all transactions are directly observable by the communist party of China, and it’s a world in which there is no possibility of recourse to real rule of law courts in the event of dispute between a creditor and a debtor. In fact, the last real vestiges of rule of law in the Chinese system, namely Hong Kong’s common law-based system suffered an almost fatal blow that in the last days with the passage of the new Chinese national security law for Hong Kong, which essentially ends the semi-autonomy of Hong Kong, and indeed has a territorial dimension to it in that it will apply to non-Hong Kong residents to visitors from abroad who happen to be in Hong Kong they should fall out of the Chinese authority, so we need to be very clear that this is not a world that we want to end up in.
What is the alternative? Well. The US alternative currently suffers from a defect, whichever form it takes. If it takes the form of Libra ultimately it is, as you said, Laura, not Facebook’s currency but it wasn’t exactly dreamt up by anybody else. It’s a Facebook devised enterprise, and part of the problem with Facebook’s business model is that it also centralized. It’s not Xi Jinping who would have access to your transactions in that world but Mark Zuckerberg, or at least there would be that suspicion no matter what institutional architecture was developed. The fundamental problem that…
Yeah, they’re saying the subsidiary would keep access to the date and Facebook wouldn’t have it, but point taken.
Right, but if you ask yourself how credible a Facebook’s commitments over a four-year time horizon the answer is not very and that’s why ultimately it was unfortunate that of all the big tech companies it was Facebook that took this initiative. Shout to Wences Casares here because it was at his birthday party, before Libra was announced, that I gave a talk at which I said, the obvious solution to the Chinese challenge is for one of the big tech companies to come up with a new form of digital payment but please don’t let it be Facebook, and everybody in the room laughed because they all knew what I didn’t know, namely that it was going to be Facebook, so here’s the way I would try to think about this.
Ultimately, blockchain does offer us a way in which we can meaningfully decentralize not just payments but all the associated data and moreover would create an environment in which ideally there would not need to be recourse to law courts because the transactions would come with their in-builds, the contractual terms. It needs to be a decentralized alternative world to the world that China is building or there’s no point to it. I think it was Peter Teal who said that in the end, AI is communist, or totalitarian, and crypto is libertarian, and I think that’s the key insight here. What we’re failing to do in the west, and I think this is as much a problem for Europe as it is for North America, is to build an authentically decentralized architecture that will protect individual privacy and that will also have some kind of rule of law credibility, so I think…my sense is that we haven’t yet solved this problem and that Libra will probably turn out not to be the answer because it isn’t meaningfully, or at least sufficiently credibly, decentralized.
Okay, interesting. I’m actually maybe…well. I don’t know. I’m not going to express an opinion actually. We are well over time but I do want to just maybe wrap it up by bringing it maybe to the near short-term just to say how do you think the recovery from coronavirus will go, and how do you think that will affect the development of the crypto space in the near-term?
Niall or myself?
Oh, it doesn’t matter. Either one of you.
Either one. Okay. I think one of the things that most compelling about the coronavirus situation is how it has…A, it is global, right, so there is this…every single country is suffering in some way from this. Every single country is not immune from the either health or economic fallout from this, and therefore in terms of how there is a response to this it requires some sort of global coordination, but we do not have any system for doing so. The solutions are only decentralized. They are only working at local levels and that is a critical component of this. How do we actually coordinate that in a global way because of the need for that is the core tension I see in terms of that aspect of it.
Now, how does money come into this? Again, because the dollar is the reserve asset it is also a medium of exchange in countless developing countries, and where there is a great fear that the shutdown of the global economy is going to expose the massive amounts of debt that is sitting on the books of banks and other in Europe and elsewhere, and so much of it in dollars, then you have this sort of crisis around the demand for dollars, right, so one of the reasons why the dollar is far from being knocked off its perch right now is because everybody wants it. It’s like a margin call, if you like, on the risk that I would face as a debtor. I need dollars to pay back my debts, and so there’s a huge demand for dollars and the fed is obviously trying to meet that with an incredible amount of unprecedented quantitative easing, but what does this mean for, say, Nigeria or Zimbabwe, or so many places around the world in which the dollar is their now means of payment, and you’re seeing it like never before.
If you look at Paxful, right, which is this peer to peer bitcoin exchange, if you look at Local Bitcoins, which has long functioned as a means of people to actually exchange bitcoin you’re seeing rises in demand for bitcoin across the developing world because the instrument that they were using, the dollar, is globally in a shortage despite all the feds efforts. Plenty of it’s sloshing around US financial markets but there’s not much of it sitting in the hands of merchants in places like Nigeria. Nigeria has always been dollarized because of its oil trade, so you’re seeing this kind of meltdown in the economic fortunes of the world. That’s exposing a debt problem, which is creating a demand for dollars, which is creating, therefore, all of these dysfunctional problems for those who’ve relied on it to actually run their economies, and crypto suddenly works its way in there as an interesting alternative. Take a look at what’s happening in Zimbabwe right now where the Zimbabwean government has just banned digital payments, which was covering 85% of all transactions in Zimbabwe, and you are definitely seeing an increase in demand for crypto as a result of that, so I see it as this shock, if you like, to this global system, and therefore all of these localized solutions starting to emerge because of that global shock.
I know we’re nearly out of time, Laura, so I’ll be very brief in just adding a couple of points. Pandemics are at least two-year affairs and we have had, I think, the delusion that there was just one curve that we had to flatten. In practice, there are nearly always several waves when a new pathogen spreads around the world. We’ve seen that in multiple cases through history, so this ant over, and even if there’s a big breakthrough in vaccines…by the way, I hope you’re enjoying the vaccine bubble that we’ve been witnessing. Even if there’s a breakthrough there isn’t going to be a generally available vaccine until well into next year. That means that governments are playing various games of whack-a-mole. There are two variants, you can play it with a blindfold or without. Without means, you do testing and contact tracing. You exploit the data that you can garner from apps and smartphones as they do in Twain. If you decide not to do that, and the United States has decided not to that, I think, for rather spurious reasons, then you play whack-a-mole with the blindfold on.
There’s going to be a good deal of disruption as we play this blindfold whack-a-mole. The economies of the United States and its peers are actually recovering faster than people expected but that’s partly because we decided to have a second wave this summer, and it’s not clear to me how far yet that’s going to derail recovery, but somewhat. In this context, I think it’s important to notice that the dollar’s preeminence was successfully reasserted by the federal reserve from the very earliest phase in March, and the fed did not only, as you’ve mentioned, the massive balance sheet expansion, Michael, more importantly, I think, it used its international swap lines and a new repot facility available to nearly all central banks to satisfy the demand for dollars in that dollar squeeze that we saw back in March.
If you look at, say, M3 growth rates the dollar is growing in its supply at an extraordinary rapid rate far faster than any other major currency, and that’s why ultimately one can see trouble ahead, but right now in the first phase, the first quarter, of the pandemic you’d have to give it to Jay Powell and the fed. They successfully played the part of the world’s central bank. But you’re right, Michael, that what you see happening in unstable countries, Argentina was where this conversation began, maybe it’s appropriate to end there, is one of the places where demand for bitcoin has leaped upwards, because in countries, especially in South America, where citizens have reason to be fearful not only of the competence of the public health system but fearful of the banking system, fearful of the domestic currency. There’s no doubt that Argentina is headed for another period of crisis. It was already in default negotiations before the pandemic struck.
My involvement with Wala, one of the Neobanks in South America, has given me an insight to this and we can see the demand for bitcoin. We can see the way it’s jumped up during this lockdown period. So, I’ll conclude by saying that as we’re at a relatively early stage of the pandemic, and this is going to be with us into 2021 with considerable divergence in economic performance, I think the onus is on the alternatives to the US dollar to show what they’ve got, and it will be, I think, an enormously important time for every innovator in financial technology. We’ve been given a great chance to show that Neobanks work better than traditional banks. The lockdowns forced people away from traditional branched banking and forced them to adopt the new technology, so that’s phase one. I think phase two will be how well the Chinese experiments go and how far the Chinese platforms are able to gain market share in rest of world, and then finally I think let’s see what happens with Libra 2.0. It’s been radically modeled, and in some ways reduced in its scope in the new variance. The opportunity is there for financial innovation to accelerate in this time of crisis. As I said in The Ascent of Money, it’s an evolutionary system. We see periods of great divergence, of variance, of speciation, new entities come along, and we see great dyeing’s of older institutions and I am not capable of predicting who the winners and loser will be in this great evolutionary period of disruption but that’s why it’s a financial revolution.
We’re in it now and I think there are huge possibilities, enormous opportunities for financial and monetary innovators precisely because the world has been plunged into this crisis.
Great. This has been such a fascinating conversation. I just feel like we could go on forever because there really is just so much change happening right now and so much to discuss, and I think the only last point I’ll make is I think in the way that I framed that question earlier about Libra I was thinking of a comparison to the internet, like AOL, where at that time you did need something to get people used to the internet, but frankly, I guess now people already think of money digitally anyway, and so if on the back-end its blockchain-based…I mean, granted there are certain things they will have to learn about security and behaviors around that, but still, I do think you’re right that the stepping stone for it isn’t as great, and so in that regard perhaps we could see people going directly to cryptocurrencies as you say is happening in some of these emerging markets, so who knows what will happen. Maybe we’ll have to regroup in a year or two and see what panned out.
Okay, so in the meantime where can people learn more about each of you and your work?
Well, I have a website. Niallferguson.com. I’m not the epidemiologist from Imperial College London, by the way, and you can find on Niallferguson.com all of my journalism, my interviews, there’s a YouTube channel if you haven’t already had enough of me. Personally, my preference is not for you to read my tweets or even my journalism but to read my books, and my books are available in all good bookstores as well as inevitably on Amazon.
Right. I have a website as well, MichaelJCasey.com although I think it’s a little out of date. It needs an updating. Obviously, CoinDesk is the place to find much of what I do. Money Reimagined is the weekly newsletter I’m putting out that is grappling with a lot of these themes, and you can find that at coindesk.com. Do subscribe to that newsletter because it arrives in your email…inbox every Friday. In fact, it’s just about to hit right now. I can’t say that. That Money Reimagined you can find details there. There’s also various other aspects of what CoinDesk does on Coindesk.com so please check it out.
Perfect. Well. Thank you both, so much, for coming on Unchained.
Thanks so much for joining us today. To learn more about Neal and Michael, check out the show notes for this episode.
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Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Josh Durham, and the Team at CLK Transcription, Inc. Thanks for listening!