Can DeFi Be The Better Financial System? (S1E12) Transcript

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Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies, and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast. 

Who’s in Charge of the Money?

Samantha [00:42]: Felix Martin’s book, ‘Money: The Unauthorised Biography’, is a brilliantly written overview of the economic, historical, cultural, social, and anthropological aspects of money. In this book, Felix Martin challenges whether economists really know what money is, our philosophical views on money and the notion that thinking about money as a thing is not quite the way to think about it. The way it’s written is original, easy to read, and incredible just how he’s been able to cover so much of the origins and journey of money in sixteen chapters. 

In his last chapter of the version of his book published in 2013, he recounts a conversation with his entrepreneur friend who sums up the ‘moral’ of the story of money. To fix problems in a system, naturally you write to the person in charge. But Felix arrives at the point where he says ‘the state is not society, so the state’s control over a monetary standard is never complete.’ So his friend asks, “Are you trying to tell me that there’s no point in my writing to the new governor of the Bank of England after all because he doesn’t actually control inflation and he’s not actually in charge of our money?” Felix responds by saying, “If he agrees that money is a social technology, then the conventional way of thinking about money as a thing is wrong. So, it’s no use writing to the experts.” So who should we write to? Well, Felix concludes that you are in charge of money. Yes, you and me. It will all come down to ourselves. So what does that really mean? 

Samantha [2:21]: Well, while Felix ended his book on that note, I’m thrilled to invite him back on the show to see what he thinks about cryptocurrencies and Decentralised Finance – and perhaps to even prompt a sequel to his book. I also figured this is an excellent way to end this season about the story of money on YAP Cast. Felix began his career as an economist at the World Bank in Washington DC in 1998 working mostly on sovereign lending programmes and debt restructuring in eastern Europe. He holds degrees in classics, international relations, and economics including a Doctor of Philosophy in Economics from Oxford University. 

Samantha [3:01]: Hi Felix, really excited to have you on YAP Cast today. Thanks so much for joining us.

Felix [3:06]: Thank you very much indeed for having me.

The Burden is on People Disrupting the System

Samantha [3:07]: You published your book in 2013. So maybe this is when it was all more unfolding. And, we’re talking at a time where Bitcoin adoption has really grown. And crypto adoption has grown as well to more mainstream users. And you’ve got PayPal and other mainstream payments platforms really adopting it. You end your book by saying that ‘if anyone wants to reform the way money is working, we need to do it ourselves’, or, everyday people need to kind of play a part in it. What is your perception of where it’s heading now with this technology?

Felix [3:38]: So what I mean by that is, that was just a sort of exhortation at a very general level, which is all I could do at the time – I can’t do much better now. But it all comes back to that conflict we were describing earlier, which is a very, very ancient conflict between the sovereign and independent people, and wanting both to have control of this crucial technology. It’s so germane to our societies and how they work. That’s the very reason why on the one hand you can’t have it captured by one group, and it’s also the reason why everyone wants to have a say in it. 

And when I said, ‘it’s up to us, and you’ve got to get involved’, it’s been really thrown into sharp relief by these technological developments in the wave of cryptocurrency and DeFi taking off. That really shows why people must get involved, because it’s possible that 90% of these developments are complete flops and turned out to be nonsense. But it’s also possible that the other 10% turn out to be genuinely very revolutionary and very disruptive of the current financial sector, and therefore the whole monetary system. And if that’s the case, you must no more allow that to happen without the involvement of the people who are going to use it, than you should have allowed the financial system before 2008, just to be run by bankers for their own purposes. 

Felix [4:55]: So it’s really important. The technologists will remake the monetary system simply as they see fit. And unless there is participation of the people who are going to use this monetary system, in setting these rules for how much money is issued, and what technologies you use, and how accessible they are for different people, and so on, it will end in tears – of that I’m certain. Of course, that’s a very general statement. The question is how to do it. 

Now again, I’m going to be the boring old conservative now and stand up for the current monetary system and say, ‘look, it may have many flaws and failings, but in a country like Britain, at least in principle, it is subject to democratic governance, right?’ We have a parliament, and the parliament appoints the Chancellor of the Exchequer, and Chancellor of the Exchequer sets the high level rules, which the Bank of England is responsible for implementing when it comes to the monetary standard – how much money is issued, which banks get licences, and so on, so forth. So, it may be very very roundabout. It certainly has not worked perfectly, that’s pretty obvious over the last 10-20 years, but you can trace the way whereby people get to set the monetary standard, get to set the rules of the game in the monetary system. 

Felix [6:05]: I’m always advocating that they should be more active, and that it should be done better, but it does exist, you can see how it’s meant to work. So the burden is on people who are trying to disrupt this system to show how that same thing would work. Of course, there are answers to that question. You, yourself mentioned earlier on, one of the main philosophical premises of the cryptocurrency movement is precisely that has to do with this. It basically says, ‘look, what you were just describing, Felix, is all so corrupt, that it’s useless. Therefore, we’ve come up with another way of doing things, whereby it’s all essentially hardcoded in Bitcoin.’ Now unfortunately, on further examination, that begs the question, what have you hardcoded? Why did you hardcode this thing and not something else? How do you know that what you’ve hardcoded will suit the majority of people? 

There’s another school of thought, which we haven’t talked about yet, which essentially has to do with a sort of utopian idea that you could replace the people on the monetary policy committee, who after all are sitting there, reading the incoming data on what’s going on in the economy, churning it through their minds and chatting it through all the theories they learned or didn’t learn in their economics courses at university and coming out with a decision on monetary policy on interest rates on how much money should be issued. There’s another utopian school of thought which says, ‘well, that’s all very old fashioned and silly, we can replace this strange committee with an algorithm. We can programme this. We can automate it. So that all the information is fed in much more efficiently using some sort of neural network machine learning process. 

Felix [7:35]: We have an artificial intelligence, which absorbs all the same kind of data and more, and it comes out with rules for the creation of money in the setting of interest rates and so on, which of course, will be much more accurate and sensible than the ones which the monetary policy committee came out with.’ This is the idea of not having a set rule. It’s the idea of having an automated algorithmic monetary policy. Again, it sounds good, but let me tell you, there are many questions that are begged by this picture as to whether it would work. The idea of a self regulating market mechanism, again, is something very, very old in monetary theory. Throughout monetary history, there have been people who have thought you don’t need to apply any kind of control or authority from above to a monetary system, you can simply allow it to run itself. And these hopes have always been disappointed in the past. 

Samantha [8:20]: That’s a good way of looking at it. I think something that we’ve seen over the last year is that the decentralised finance industry has grown quite rapidly. Before crypto was like a pool of people, and it’s still very well is. It’s a community of people, but it’s decentralised. There’s a global community that is now seeing more value in crypto. Is it as big as the banking system yet? No. However, the decentralised finance industry has grown from a market size of 500 million dollars in January 2020. And now with the Ethereum price and Bitcoin price going up, the total value locked is now at 170 billion dollars the last I checked, and so the space has grown quite rapidly. You’re seeing a move of traditional financial leaders going to DeFi like a movement. They call it ‘TradFi to DeFi’. Do you see another war happening or the same battle you just described, but in a different form?

Felix [9:12]: I think that, ultimately, the battle, which I was describing, is drawing a distinction earlier between new technologies for recording monetary balances, for recording value, for transferring value between people, and so on. That’s the new technologies aspect if we want to summarise it. That’s distributed ledgers, that’s blockchain – that’s that kind of thing. Which by the way in principle, does nothing to stop those technologies being used with national sovereign monies. There’s nothing to prevent a world coming into being in which blockchains and distributed ledgers are widely used, but just with national currencies. So, there’s a distinction between that, the technology part of it which facilitates DeFi, crypto, and so on, and private monetary units which is what most people really think of when they think about crypto. They’re thinking about Bitcoin, Dogecoin and Litecoin, and so on, so forth. Now, those are all private monetary units. Private in the sense, I stress, that they are not state monies. 

The history, the great conflict, and the great compromise is really to do with that second aspect. It’s to do with the difference between nationally determined monetary units and privately determined monetary units and how they get managed. The reason why that’s such a contentious question throughout monetary history, and will remain so until the end of time, is that in a system which operates with credit and debt, the changing value of those units has enormous distributional consequences. If I run up an enormous debt of three million pounds to you, but in a year’s time, the unit, the pound, is worth nothing, that’s great for me and it’s terrible for you. That is the root of it, what that is all about. And so, you go back through history, and it was always in the interest of sovereigns to inflate away the value of the currency because they’d run up huge debts buying luxuries or waging wars or whatever. And that’s why private merchants got sick of it and fed up with it, because they were the creditors at the end of that. 

Felix [11:04]: So that’s where all the contentious part of it lies. And it will continue to be contentious. I noticed Ray Dalio only yesterday was saying, ‘You know, crypto’s great, I love Bitcoin. But on the other hand, when it gets big, it’s going to get squashed by the regulators.’ It’s become a commonplace thing to say but of course it’s true, because that contention is not going to go away. There is a further issue about how easy it will be for regulation to be applied in these cases. That’s of course one of the crucial arguments and in true innovations because it’s tied to cryptography. The advocates of these new private monies would say that it will be very difficult to regulate them and that’s different from previous incarnations of private money, but that part of it is not going to go away and the overall dimensions of what’s going to happen. I don’t think it will come as a great surprise to you, you know the regulators will try and squash these things.

Samantha [11:54]: Yeah, and you touched on a good point though, because Uniswap is one of the largest decentralised exchanges. And there is the SEC, they’ve got a case against Uniswap Labs, the central entity that’s running the interface. But they say they can probably shut that down, maybe deal with them, but it wouldn’t shut the whole system down, which right now has at least $5 billion total value locked in. No government or regulator can shut down that exchange.

Felix [12:18]: Exactly. And this is going to be an interesting experiment because, like I said, this is the first time we’ve lived in this era where this can all be completely international. It’s the republic of the internet, it’s not the republic of any particular country. But when you think about the denouement of this conflict, typically throughout history, let’s take the most recent example, in 2008, these banks went mad and created all this shadow money in the shadow banking system outside the regulated banking system. And then there was this gigantic moral hazard. That’s what actually caused the crisis. It was that governments could not allow this thing to collapse on its own because they were so worried that it would blow back into the real economy. So, the question one should be asking is – how is that going to play out? Let’s imagine that the cryptocurrency space becomes not a couple of 100 billion, but a couple of trillion. Is that kind of blowback possible? That’s one thing. I think you’d have a hard time making the case at present, that the connections between crypto transactions and the real economy are all that significant. They may be significant in some small sectors, but difficult to say there. And in fact, many of the advocates of cryptocurrency correctly say at the moment, this is a good aspect of it. They say, ‘Look, Bitcoin collapsed. It was $60,000 down to $40,000. And you see, there wasn’t a crisis, and that’s great. That shows you there’s no moral hazard here.’ 

But, one question is, what kind of blowback could there be? At the moment, probably not very much, but who knows if it gets to 2 trillion. But for moral hazard to operate, there has to be an incentive for the government to step in. And the reason why in a traditional banking crisis that happens is that you’re dealing with your own jurisdiction. You’re dealing with the creation of a lot of ‘funny money’, and then its collapse, within your own jurisdiction. You’re dealing with the economic consequences. Therefore you, the government, will suffer the political consequences of this happening. Now, those distinctions one assumes will be somewhat erased given the international nature of cryptocurrencies. So, the moral hazard may not be there to convince governments to step in and bail their people out.

Should DeFi Embrace Regulation?

Samantha [14:10]: So, my question to you is, should the world of DeFi, an alternative finance with this new technology, embrace regulation, reject it, or preempt it? What should they do? These are run on decentralised, autonomous organisations and that’s what these decentralised finance protocols are – they are DAOs.

Felix [14:29]: That’s right. Well, I don’t know the answer, so this is all just supposition on my part. I wouldn’t dare to try and tell the very innovative technologists who are actually going about creating this new system. One should not do any of this down, it is quite incredible what’s going on. These people are actually doing this stuff and creating. It’s not my place to tell them what’s going to happen, but what I would say is that I would be surprised if you didn’t see the same kinds of disagreements or the same kinds of parties emerge amongst those people, exist in the conventional financial system. That is to say, there will be people who are the real ideologues who believe in what I was describing earlier, this utopian idea that markets are self-regulating. Indeed, they would say political systems perhaps are self-regulating. These people are genuine anarchists or libertarians, however you want to call it. ‘You do not need any government to run a political system. You do not need any regulation to run a financial system. Markets operate very well, they are the ultimate sort of algorithm which will produce an efficient and equitable result and so on.’ 

There will be people like that, they exist, and they believe that if you can, if you have the technology which can set up the rules in a way which cannot be tampered with, this will result in a satisfactory equilibrium outcome. But I predict that there will also be people who don’t agree. And this disagreement, I hasten to add, is not about technology, it’s about political philosophy. That’s the crucial thing. And they will say, ‘No, you do have to have some sort of authority in place, whether it’s despotic authority, or democratic or whatever it is, but you have to have some authority in place to govern politics. You have to have some authority in place to govern markets, otherwise you don’t end up with good results.’ And then there will be a great debate amongst these people. Well, how do you implement such an authority? Do you mean a discretionary authority and how’s it going to work? So this is what I would expect to happen, but I can’t really be much more precise than that.

Samantha [16:17]: Yeah, it’s still very early days as you said. Even the price of a Bitcoin is very volatile. And even in DeFi, for example, I’m sure you’ve noticed there’s this 640 million theft of Poly Network that happened not long ago, and that led to a manhunt by proponents of investors or participants of the system, which in turn led to the return of most of the assets. I guess because the community right now is still small, they all kind of know one another. So this also suggests that there are some shared values that help bind the stakeholders together and almost deter or reverse fraud. But that might just be either a strength of a system, or it might just be the people or a rare occasion. What do you make of that?

Payment Risks: Credit Risk and Settlement Risk

Felix [17:00]: That’s an important point because, again, traditionally the way that private money used to work. Like I said, private money is as old as money itself. It’s not that sovereign money has already always been dominant, private money is as old as money itself but traditionally, the way the private monies have operated is precisely amongst groups of like-minded people. Those groups have tended to be fairly small throughout history, simply because the technologies which enabled all of this were not conducive to very large networks of people like they are today. Today, they are conducive to large, certainly geographically spaced networks of people. There’s a question of how large they can get in terms of numbers without losing cohesiveness, but where are these limits being tested? Well, they’re being tested on discord. That’s where such limits are being tested these days because those are the technologies which are allowing large groups of people to gather around some kind of ideal. So that’s always been a crucial feature of them. 

Again, this comes to the question of whether these new technologies represent some sort of qualitative change in the ability of very large groups of people to come together. And it all comes back to what you mentioned at the beginning – trust. I’m a little bit skeptical about that because I think often there’s a big confusion between these various different kinds of trusts, which are needed in running a financial system. And remember that although we’ve been talking about DeFi, all this kind of stuff started from payments. Now payments come with various risks, and the main risk in payments is what’s called settlement risk. Now, this is not about me lending you lots of money, and then you going off and doing something with it and me trusting you that your project is going to work and you’ll be able to pay me back. That’s what we call proper credit risk. 

Felix [18:35]: The risk inherent in payments is much, much shorter term. And it’s really just I’m going to pay you, but the money is in transit for one day, and during that day, it’s going to be sitting with JP Morgan, and there is a very tiny risk that JP Morgan might go bust on that day and then you won’t receive your money. It’s not even about whether I’m going to be good for my promise to send you the money. It’s that something might go wrong in the plumbing between me and you. The first example I gave you is about credit risk. That’s about you having to trust some entrepreneur who’s going off to do a project. That’s the fundamentals of a capitalist economy. I do not believe that, as far as I’m aware, DeFi, distributed ledgers, blockchain, and everything else mitigate that risk. That is a fundamental risk in capitalism which you cannot defray by any kind of clever cryptography. And now the second kind of risk, which is settlement risk, that’s really what has been attacked and addressed through these new technologies. And the jury is out perhaps on how effective it is. But it looks reasonably effective.

Lender of Last Resort in DeFi 

Samantha [19:34]: And on the credit question because you’re saying, yes, that’s something that maybe DeFi and cryptocurrency can’t mitigate. But what if there are pools of money that can be the lender of last resort as you said? Because there’s 170 billion now, could be a trillion. And that’s just a pool of decentralised money. That’s like the money in the world can be that lender of last resort whenever anyone needs it.

Felix [19:55]: One would have to go into the details of exactly what you’re getting at there. But in finance, all the things which are really good are also the things which are really bad. So the thing that’s really bad about central banks, according to the advocates of crypto, is that they can print as much money as they like whenever they like. That’s obviously bad because they’ll just go crazy and start printing for their own purposes. Of course, that’s also what’s good about the system because what it means is you don’t have to run the system with tremendous redundancy. You don’t have to somehow accumulate hundreds of billions of dollars of savings to serve as a buffer in case things go wrong and you need a lender of last resort. This is not required. I can assure you in the Bank of England, there is not a huge store of money sitting there waiting to be used by the lender of last resort. That’s not how it works. The fact is when we get into a crisis, because people trust those institutions, they can conjure it up out of thin air. 

That’s all it is – being a lender of last resort, injecting liquidity into the system is simply putting a lot of numbers in a digital ledger on the authority and legitimacy of these institutions. That’s what it is, it’s a metric. It’s a barometer for the legitimacy of the state in those circumstances. So it’s both what’s great about the system if you believe that the state is legitimate and deserves to be trusted, and it’s what’s awful about the system if you think that the state is just a bunch of carpetbaggers and so on. And you can say that all the way down through the system, it’s the same with the banking system itself. ‘Isn’t it awful? Can you believe that we live in a system where these executives, at JPMorgan in Manhattan can just invent money. I mean, they can literally just make loans out of thin air to whoever they like, isn’t that outrageous?’ 

Felix [21:34]: Well, yes, maybe. But on the other hand, that’s exactly why the system is so flexible and can licence entrepreneurs to go and do whatever they like without having to accumulate lots of savings. We don’t live in a sort of primitive pre-financial economy before we rediscovered banking, first discovered by the Romans. It doesn’t work like that anymore, that’s the miracle of banking. So it’s both what’s great about it, and what’s disastrous about it. And the disagreements between people, draw it in primary colours – crypto enthusiasts on the one hand and conventional bankers on the other- they all come down to differences of essentially political philosophy or certainly philosophical differences about whether these things are really good or bad and which of these things dominate.

Where is DeFi Heading?

Samantha [22:14]: Cool, and just one final question just to wrap up. What’s your view? Yes, there’s the conventional bankers and there’s the crypto enthusiasts. Where do you see this heading? Where do you see decentralised finance heading? It seems like you want to learn more and there are people who do see the promise of it. Right now, the market’s not really reflecting the maturity of it yet. 

Felix [22:30]: Don’t get me wrong. I think these technological developments are extremely exciting. I have a great deal of sympathy, just by personality and philosophically with the people who are behind these developments. But what I would say is that, and I say this, as someone who is obsessed with money and finance, that I’m grateful that the place where these technologies are first being applied, where they have come to fruition initially is in money and finance, because I understand a bit about that. But I don’t believe that that’s actually going to be the ultimate place where they have their real impact, I think the impact will be much broader. And the impact is much more broadly political in particular. 

I’ll say this in closing – To me, it’s no accident that these technologies came along at a time when first of all, people were thoroughly fed up with the financial system after 2008. This was a way out of it, but that’s just one part of it because they’ve also come along at a time when people believe that their political systems, at least in the West, are very sick. And they’ve lost a lot of trust in conventional political institutions, not just financial institutions. And the potential for some of these technologies to contribute to the solutions to that problem, I think are in the end going to be much larger than just contributing to the problems in the financial sector. So that’s why I think it’s really very, very exciting. All of these developments in cryptography and decentralised ways of doing things.

Samantha [23:49]: And that is a really great way to end this podcast. Thank you so much, Felix Martin, for your time. Really looking forward to continuing this conversation with you over time. Thanks, Felix.

Felix [24:00]: Thank you.

Samantha [24:01]: And there you have it from Felix Martin, an expert on money and finance who has spent years studying the history of it saying that it’s no accident that these technologies have come along when people were fed up with the current financial system. As we wrap up this season of The Story of Money, I am left with more questions about where we are heading with money. Will the so-called trustless nature of decentralised finance really work because we need to trust code which we don’t understand. And it’s not like we understand the current banking system either right? – But we still trust it. How likely is Felix’s idea that the disagreements that will emerge in the DeFi landscape might undermine or damage the process or make it stronger? And then there’s the question of regulation – how much of DeFi can be regulated without destroying the promise of DeFi itself, or should it be regulated at all? 

This journey of the Story of Money will continue, but for now, I hope your perspective on money has shifted thanks to the wide range of experts I spoke to on YAP Cast. Mine certainly has, I started this season with little idea about money itself and where it came from, and now see money as a concept and a social construct. I have come to the realisation that  we really need to look at and learn about the way society thinks about money, to understand where it’s heading. 

If you’d like to watch my full-length conversation with Felix Martin, head to the YAP Cast YouTube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

Why Do Financial Crises Happen? (S1E11) Transcript

Listen on:

• Apple
• YouTube
• Spotify

Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies, and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

A Pandemic Crisis?

Samantha [00:42]: What is a crisis – financially and economically speaking? How do we know when one is coming, and when we’re in one, and when we’re out of one? In fact, how come no one seems to see them coming until it happens? And who is responsible for the crisis, and for fixing it? Who do we blame, hold to account, put in jail, or make pay for the mess? It turns out, these are hard questions to answer. When we do realise we’re in one, we even give them names. The Asian Financial Crisis, for example. Some of them end up as Broadway shows, like the Lehman Trilogy featuring the 2008 global financial crisis. And back in the 1920s, we all know what people are talking about when they mention the Wall Street Crash and the Great Depression.

But what about the COVID-19 pandemic for example? Is the pandemic a financial, economic, or market crisis? Carmen Reinhardt, author of “This Time Is Different” and chief economist of the World Bank, has called this ‘the quiet financial crisis’, pointing out that some aren’t as dramatic as the media headlines make it out to be. There’s plenty of politics, death and chaos, but the bankers are still wearing their suits (at least the top half) for their Zoom calls. Carmen’s conclusion: “In addition to these trends, a quieter crisis is gaining momentum in the financial sector. Even without a ‘Lehman’ moment, it could jeopardize prospects for economic recovery for years to come.” This doesn’t sound too good. When the World Bank’s chief economist is scared about getting out of bed in the morning, we know something is not right.

Samantha [2:30]: Which begs the question, what is a financial crisis, and why does it happen? What actually causes them? Is it just ‘boom and bust’? Does it take a war or a plague? For centuries, economists and monetarists have offered theories for how financial crises develop and how they can be prevented. But yet, they keep happening from time to time. So can we stop them from happening? Carmen’s work, interestingly, suggests that financial fallouts occur in clusters, and the real problem is our short memories, making it all too easy to get into the same rut all over again. So can crypto and DeFi reduce this sequence of crises? Advocates of crypto and DeFi claim this time is different, but are we just replacing one vicious circle for another?

To satisfy my curiosity, I’m very excited to invite Felix Martin, the author of ‘Money: The Unauthorised Biography’. Felix began his career as an economist at the World Bank in Washington DC in 1998, working mostly on sovereign lending programmes and debt restructuring in eastern Europe. He holds degrees in classics, international relations, and economics including a Doctor of Philosophy in Economics from Oxford University.

Samantha [03:52]: I’m really excited to have Felix Martin with us, and I have his book here, ‘Money: The Unauthorised Biography’. Hi Felix, Thank you so much for joining us.

Felix [04:01]: Hi, Sam. Very nice to be here.

Excising Money in Economics

Samantha [04:03]: So Felix, could you tell me a little bit about your background? And about the book and the process of you putting this book together?

Felix [04:11]: Yes, sure. Well, I became fascinated whilst I was an undergraduate many years ago now studying classics. And so, I decided later to convert to becoming an economist and I went and did many more degrees culminating in the end in a doctorate in economics. And one of the things that mainly fascinated me about economics and indeed what I thought economics was about when I started studying it, like I think many people, the man or woman in the street, if you ask them, you know, “what is economics or subject about?” One of the first things they’d say would be “Well, I think it’s about money. It’s about money and business, and people making money and all that kind of thing.” 

I was quite surprised when I started to study economics, that there was very little about money, banking, and finance. And in fact, that whole field had been hived off many decades earlier, and was sort of studied in business schools, and the whole banking industry and finance industry and so on. The whole concept of money had, in some sense, been excised from economics. And so this was something which sort of fascinated me, but troubled me about that particular intellectual discipline. And then later, I began to work in the financial markets. That’s what I do these days, I’m a fund manager. And I began to see what I thought was a big problem with that – the fact that economics, which is meant to be the discipline in which, for example, central bankers are trained, does not anymore have a focus on money and banking, and people don’t learn about it. 

Felix [5:38]: When I was doing my doctoral coursework at Oxford, and this was in the early 2000s, I was in the last year of the course that was offered in money and banking to graduate students going on to do their doctorate. And the year after I did that course, it was abolished. But the irony of this was that this, of course, was just before the biggest financial crisis in history, basically. And the fact that you had been producing generation after generation of economists, who were meant to go off and staff central banks, the World Bank, financial institutions, the IMF, and so on. But to not have any more an opportunity even to learn formally about money and banking, this seems, to me, to be pretty odd. So it’s what got me interested in going further than just being sort of interested in money. What is it? Where does it come from? What is the history of it? Into wondering also, why is it that we don’t learn about it as economists? Why is it in its intellectual blind spot? And then, is there some link between that and what happened in 2008?

Samantha [06:37]: Wow, that’s so interesting. Because for someone who’s not an economist (my background is in journalism), you would think that economists know about money. I read in your book that in business schools it seems like there’s two different worlds forming. Would you agree?

Felix [06:52]: It’s something you see in many disciplines, you see the academic side of it, the sort of thought leading side of it diverging from practice. And that’s really what happened in economics and caused problems. What’s most interesting is the practice itself. I mean, what’s really interesting is, what is money? Where does it come from? How does it work? What are all these people doing in these skyscrapers? For example, in the city of London, and in Manhattan, and in Shanghai and so on. What exactly is going on in these places? I think these are questions which, if they’re not of interest to people, they should be because it’s clearly so important to the functioning of our economies and society and so on.

What is a Financial Crisis?

Samantha [07:29]: Yeah, you’re on the right track there. I run a PR firm, which specialises in helping crypto and decentralised finance projects and protocols, you’d call it, and they’re basically saying the same things – “What are all these banks and all these skyscrapers doing? Why can’t we just trust a code and a system?” And there’s so much to it. So, you touched on something at the end about the reasons for financial crises. And so that’s what I really want to unpack in this conversation with you. In your own words, could you explain, what is a financial crisis?

Felix [08:02]: Perhaps put it very simply, one can have an economic crisis, which is not intrinsically connected to something that’s happened in the financial sector. And one can have a crisis which is connected and is driven by what happens in the financial sector. So, the former kind of crisis would be in the modern era, let’s say, a big war, like the Second World War, for example, or the First World War. These were not financial crises in the sense that they were started by something that happened in the banking sector. Clearly, these were caused by ulterior political and military events. Military events are only one kind of non-financial cause. Another one which was very common, for example, in the 19th century would be fluctuations in the weather, which led to big fluctuations in the agricultural economy. That was a very common cause of economic crises in the 19th century, for example. Of course, that’s much less important today, because so much of the economy is non-agricultural. But there are economic crashes, recessions, and so on, which are caused from within the financial sector. And once all those developed, as the economy began to get more financialized, that process started a long time ago – centuries ago in Europe, but it really began to take off in the 19th century. 

And that’s when you began to see the first banking crises in particular, which fed back into the real economy. And there is a tempting way to think about finance, which is that it’s all just a sort of reflection of what economists call the real economy. And that’s a very traditional way of thinking about finance. You think there are people out there, there are entrepreneurs, and there are companies, and there are households, and they’re all doing this stuff, making things, demanding things, consuming things, and so on. They’re all doing that, quite independently of anything going on in the banking sector. And as a result of what they’re doing, they demand a certain amount of finance, they need a certain number of mortgages and a certain number of loans, and so on and so forth. And so the real economy is the dog, and the finance sector is the tail of the dog. So the real economy wags the financial sector. 

Felix [10:07]: But what is obvious when you look at history, is that it doesn’t always work like that and at certain points for some reasons. It’s the financial sector dog which is wagging the tail of the real economy and the things which happen autonomously within the financial sector, within the banking sector, feed back into the real economy. Why does this happen? Again, there are various different kinds of financial crises, there’s not only one kind of financial crisis, which can cause problems in the real economy. But a very typical one is a banking crisis. And there is something intrinsic about banking in particular, banking is key to the modern monetary system. That’s how our modern monetary system works. We can go into that in a bit if you’d like. But there’s a key feature of it, which really drives this, and this is the fact that in a modern banking system, banks undertake what’s called liquidity transformation. So the liabilities of modern banks tend to be very short term. What do we mean by that? We mean that your or my deposits at the bank, a lot of our deposits will be on demand, we can take them out, we can withdraw them whenever we like.

Whereas a lot of the assets of those banks, so the loans they make, primarily, are long-term, certainly longer term than the liabilities. And that difference goes to the heart of what banks do, they try to mediate by cleverly mixing up lots of different short-term liabilities, but from lots of different institutions with lots of long-term assets. And in doing so never get caught short. That’s the idea. They never get in a situation whereby more people want to withdraw money, than they can liquidate assets to meet those withdrawals. But when that happens, when you get into a situation where people do want to withdraw more money than the bank can realise through liquidating its assets, where that synchronisation breaks down, then all of a sudden, you have a potential for a big problem, because people lose faith in the idea that this is going to be possible. And that’s when you get a bank run. And of course, at the very beginning of the last big financial crisis in 2008 if we’re thinking about, for example, the United Kingdom, that was the absolutely canonical picture that sparked the whole thing off. It was people queuing up outside a particular bank, Northern Rock, we hadn’t seen a bank run of that sort for 150 years in the UK. And what that was, was exactly too many people turning up all at the same time to try to liquidate the bank’s liabilities to them. And the bank was unable to liquidate its assets, which were very long-term mortgage lending in order to meet that.

Trusting Banks

Samantha [12:34]: And do you think that that’s an issue of trust, when that happens, that people want to just hold cash?

Felix [12:40]: So there are lots of different kinds of trust involved in a modern financial system. And there is one important kind of trust, which is involved in that process, which I was just describing. Because the kind of trust which is involved there is the trust from customers. That the bank will be able to manage its assets and liabilities and in particular, manage the timing of cash flows, which come in from its loans, with the cash flows that they have to pay out to its depositors that this will all hang together, that there won’t be some mismatch between these things. And that’s a matter of trust, you’re trusting the ability of the bank, it’s systems. 

In the olden days, it was just people making judgments. These days, you’re trusting various kinds of digitised systems and algorithmic solutions, and they’ve got to try and predict all this, but you’re trusting that it all works. That’s one level of trust. Now, it’s crucial to say that because the problem I was describing is a habitual one. There hasn’t just been only one banking crisis in history, there are banking crises all the time in history. Because it has a potential to fall to bits. Almost since the beginning of the modern banking system, there’s had to be a backstop. A backstop if it turns out that there are too many people lining up outside this bank wanting to cut out the deposits and you can’t liquidate your assets in time. 

Felix [13:52]: That backstop is the one that we saw in action in 2008. And that is that if you are a bank, deemed by the authorities to be sensible and well run enough to have a bank charter, in other words, to be a regulated institution, you have access in time of emergencies to the central bank, ‘the banks bank’. And the role of the central bank in that kind of circumstance is for them to step in and say, ‘all right, we understand that you cannot liquidate your long-term mortgage holdings at this point in time to meet your depositors demands. So instead, we will step in, and we will take off your hands, those loans, and we will give you cash in order to pay up to your depositives’, that’s called ending being the lender of last resort. 

So another aspect of trust would be that people trust that that is going to happen, for example, they trust that the central bank will step in. And then of course, this all cascades backwards, if you trust that the central bank is going to step in, then you don’t get so worried that the commercial bank is not going to be able to meet your deposits in the first place. So if you trust the central bank, then of course, you have trust in the commercial bank, then all the problems go away. So it all cascades backwards. Ultimately, you have to trust the top of the system, in order for there to be trust at the bottom of the system.

Shadow Banking in 2008

Samantha [15:04]: That’s really interesting because I think that there are a lot of people in the crypto world that don’t trust this system, that the central bank is going to end up being the lender of last resort. And people are a bit concerned with the banks just printing money at the moment, even with us talking right now after the pandemic. But just back to what you talked about, in chapter 12 of your book, you do share an account of the queen, asking the British Academy why no one saw the 2008 and 2009 crisis coming? What does this situation tell us about the financial crisis? Is it a problem of collective imagination, about foreseeing events, or is there a problem with the system itself?

Felix [15:43]: There have been many accounts and many analyses written of why the crisis of 2008 came about, the most mainstream perspective on why that crisis happened has to do with the institutions and the regulation of the sector. If I was to summarise the history of money, which I tell in my book, very simply, it would be as follows: what you have is a battle that has lasted for millennia, literally millennia, between two kinds of models for issuing and managing money. And one model is that the sovereign and the sovereign can be of course, in the Middle Ages, that can be a king or a queen, or in the modern era, that can be a democratic government, it doesn’t matter. The sovereign is responsible for issuing the money used in a particular jurisdiction. So in other words, deciding basically how much money is issued and to whom it’s issued, and so on, so forth. So that’s one model, the sovereign should be in control.

But there’s another model, which will ring a bell for all of your listeners who are interested in crypto and DeFi and so on, which, again, is it has existed throughout all of monetary history, and this is that if you allow the sovereign to do that, the sovereign will, of course, manage the money supply purely in its own interests. And those interests might converge with those of the money using population or they might not converge with those of the money using population, but there’s certainly no guarantee that they will. Certainly not in a non-democratic system. And so for that reason, money users, merchants or just everyday people these days should go and create their own money. How do you do this? Well, you get together with other like-minded people, and you just agree that you’re going to issue your own money. And you set up some kind of system for managing the money supply, your own monetary standard, and you operate like that. 

Felix [17:27]: It’s something I call in my book, ‘The Monetary Maquis’. The Maquis was the slang term for the resistance during the Second World War in France, the anti-state way of doing things. But this tension between these two options for operating money has existed, as I said, absolutely throughout all of monetary history. And very frequently, it’s very oppositional because the more successful is the monetary maquis, our private sector people creating their own private monies and operating them under their own kinds of standards, the less successful by definition is the sovereign money. And the less influence, therefore, the sovereign has via money over governing its jurisdiction. But this story arrived at a crucial moment in the late 17th century. And this was really the creation of modern finance, modern money, modern banking systems, it happened for the first time by chance here in the UK, with the creation of the Bank of England, because what happened there was a compromise between the mercantile classes and their demands for how money should be operated. And their demands, for example, to be able to run private banks, which issued their own liabilities, their own money. A compromise between that, and a sovereign institution, the Bank of England, which was there to manage the sovereign money. 

And essentially, there was an agreement to create a hybrid system, in which both of these two sides have some say in how money is operated. And that hybrid system, which continues to work today, means that almost all money in circulation in a country like Britain is actually issued by private institutions, banks. 97-98% of the money in circulation in a country like the UK, is liabilities of commercial banks. But at the same time, it’s the sovereign via the Bank of England, which sets monetary policy. Now, that compromise is always fragile. It’s always fragile, because that compromise itself can come to be seen, as the sovereign used to be in centuries past, as a special interest as alien to a lot of people or a lot of businesses within the country. And once that happens, the monetary Maquis will again rear its head, people will think, “Well, it’s no better than it was before. Now, we’ve just got the Bank of England and a bunch of bankers who are running money for their own interests. And therefore, let’s again, try to improvise private monies and private finance outside of the control of those two groups.” And that is essentially in a kind of way, what happened in the lead up to 2008.

Felix [19:56]: But if you recall that time, there was a phenomenon called shadow banking, which became revealed in the course of the crisis. And all shadow banking was, was the creation on a massive scale of new financial credit instruments, primarily, these famous CDOs and CDO-squared and all kinds of acronyms that came along at the time with the creation and proliferation of credit instruments on a massive scale, which effectively functioned like money, but all outside of the regulated financial sector. Effectively what was happening is, in addition to all the money that was licenced, to be created by commercial banks, there was an enormous amount of wholesale pseudo-money being created, outside of that arrangement, outside of the regulation of the official financial sector. 

And then what happened was when you got to that point where people are lining up outside the bank where there’s a bank run, where people are worried about this liquidity mismatch, the authorities suddenly had a terrible choice. The size of the shadow monetary supply was so large, that to have simply said, “Well, I’m terribly sorry. But this is shadow money, it’s not real money within the system, and you’ve broken your promise, you’ve created money outside of the regulated sector, and therefore, it’s nothing to do with us”, would have had tremendous repercussions in the real-world economy, it couldn’t be allowed to happen. And therefore, it had to be brought in, in an emergency inside the regulated sector, effectively, it had to be bailed out. That was the story of 2008, a massive bailout, which went way beyond what had previously been agreed. And that’s how it relates to what’s happening at the moment with crypto and DeFi.

Bitcoin’s Place After 2008

Samantha [21:31]: So on that point, 2008/2009, that was when Bitcoin was created. And now it’s known as digital gold. And it’s kind of a move to hard currency, as you call it, and you were talking about the two different worlds in the battle. Where do you think Bitcoin and crypto sit in those two worlds? Where do you think Bitcoin sits moving on from the 2008 and 2009 crisis?

Felix [21:55]: It’s a totally fascinating technology, obviously. Of course, people have raised questions. “Well, is it all a flash in the pan?” but you can say that something that’s stuck around for a long time now, as you just pointed out since 2008, there’s clearly something to it. The question is, what is there to it? Because it has different aspects, not just Bitcoin, but cryptocurrency generally. To refer back to what I just said, in one sense, it’s clearly a manifestation of this very old trend of people saying, “I’m not happy with how this absolutely core institution, the core tool that we all use in our daily lives, is managed by our government. And instead of trying to convince my government to run it differently, we’re just going to take the exit and create something new”. And it’s the technology which allows that to happen easily. I mean, as I said, it has been the case throughout history, that this has been done using all kinds of different technologies, which are developed over time. But what is quite obvious is that modern digital technology, information technology, and the internet, enable this to be done on a scale, which is very different from before. 

Once you have a world in which billions of people are connected, and in which, for example, the ledgers on which you store information, which is necessary for financial system, are no longer on paper, they’re no longer on a centralised computer in a building somewhere in London, but can in principle be distributed all throughout the world, that’s a very, very different situation. Something which previously might have been a very small phenomenon can become a very large phenomena in absolute terms, even if there’s still a very tiny proportion of money users who are interested in running their own money. Whereas previously, you have been talking about a tiny proportion of 100,000 people who live in Oxford and want to create an Oxford pound. Now, you’re talking about a tiny proportion of several billion people and that’s a lot of people.

Felix [23:43]: One fundamental distinction which is really important to have in mind when one’s talking about cryptocurrency, and Bitcoin is an excellent example, is the difference between the underlying technology – blockchain and distributed ledgers generally, and so on – and Bitcoin, the private money itself. These things are separate, they’re not separate within the Bitcoin protocol, but they are in principle separate and have developed separately. You can see there’s a lot of excitement about blockchain and distributed ledger technology, which isn’t to do necessarily, even with particular private monetary units. So one question is, how revolutionary is this new distributed ledger technology and what kind of effects will that have within the monetary sector? And more broadly a separate question is, how revolutionary is Bitcoin, the private monetary unit and the rules governing how many bitcoins get issued? That second part is a very, very traditional monetary question. It’s no different from asking, throughout history: “What are the current rules which govern how many dollars get printed?” or “What were the rules in the 19th century, which governed how many pounds sterling got issued?” 

Samantha [24:51]: I think it’s very interesting how you phrase the question about Bitcoin and the private aspect of it, because the community that I speak to and talk to everyday, they would argue that Bitcoin is not private, it’s actually the most public currency in the world.

Felix [25:05]: When I call Bitcoin a private money, that’s not in contradiction with what the advocates of crypto are talking about. The private I’m talking about is to draw a distinction between who makes the rules which govern how much money, or Bitcoin in this case, gets issued. And so it’s a distinction between whether that’s a sovereign responsibility. It’s the monetary policy committee of the Bank of England, yet it’s a sovereign institution or whether it is something which has been agreed on by the private users of the money. It’s not the sovereign, it’s distinctly in opposition.

Most people, of course, don’t understand it very well. Most of the users of it aren’t able to actually go and scrutinise the code, but they trust the idea that this is hard coded and cannot be changed. Of course, in the abstract, the technologists will tell you that there is no trust involved in that second system, but that’s not in practice true. It will never be true that the people that use these things, actually fully understand them or the code, for example, they won’t. So there’s a huge element of trust involved.

Samantha [25:59]: And again we come back to the question of trust. I like how Felix summarises that what we’ve seen through the ages is a battle between two kinds of models for issuing and managing money. But what I’ve learnt the most from speaking with Felix is what really happens during a financial crisis. In summary – a lot of factors come to play. So can the technological innovation behind decentralised finance actually prevent financial crises? 

Stay tuned for the second half of my conversation with Felix Martin on our final episode of season one of The Story of Money on YAP Cast. Felix’s book, which was published in 2013, didn’t actually touch on Bitcoin or cryptocurrencies so I’m quite excited for you to listen to a potential extension of his account of the biography of money. 

If you’d like to watch my full-length conversation with Felix Martin, head to the YAP Cast YouTube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

Why is it So Hard to Move Money? (S1E10) Transcript

Samantha [0:03]: Hi I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on a journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha [0:31]: We are only now beginning to understand the nuances of what money is, and some of the lessons we’re learning can be drawn from outside the shiny towers of Wall Street and the city in London. Take for example, Hawala. Hawala is the commonly used term for the informal transfer of funds, usually across countries and mostly, but not always, among the unbanked. If you’ve ever tried to move money by your bank, you’ll know the hassle and the expense, it’s likely to take a couple of days on your pay through the nose for it often several times, both for the movement of money between places and the movement of money between currencies. You’ll also be temporarily out of pocket while the money will be in the bank’s hands for possibly several days. 

Hawala is, therefore, popular among people wanting to send money to family overseas. It beats the banks hands down, because it’s faster and cheaper. It’s also less painful. A Hawaladar, the person arranging the transfer will take your money, give you a code, you pass that code on to the recipient, and they go to their local Hawaladar, hand over the code and boom, the money appears, as if by magic. So how does the system work? And why does it work so well? And why aren’t we all doing it? 

Samantha [2:00]: Well, the Hawala system is an informal network of individuals usually running shops doing other things as well, who essentially move IOU’s around people they trust and which they settle in whatever way suits them the best. What’s key here is trust. The two trust each other. Hawaladars only deal with Hawaladars they trust, so they may be family members, or friends or friends of friends. Honour is also important. Hawaladars have none of the image of money lenders or loan sharks or cheats. The system only works if everyone involved trusts the other. Everything depends on the respectability of the Hawaladar. 

Hawala has become the term to use for systems and networks going back centuries, predating paper money to China’s Tang Dynasty to the Arab world and South Asia, and even to Europe, where it gave rise to the bill of exchange, a cornerstone of the rise of banking. In fact, the bill of exchange is very similar to the Hawala in the sense that it’s an obligation addressed to a person. When they receive that bill of exchange, they must do whatever demands pay to the recipient or pay on to some other person. South Asia beat the Italians to the punch on this with their Hundi, a bill of exchange that dates back to the times of the Hindu religious scriptures and was used by the British colonialists until they outlawed the system in the 19th century in preference of their own banking system. Hawala – it is believed to emerge from the ashes of that crackdown as an informal means of transferring money. Despite its longevity, and effectiveness, the Hawala has had a bad rep. 

Samantha [3:43]: George W. Bush blamed it for financing terrorism after 911 calling it a foreign scourge. Even in India, in some ways, its homeland, it’s not a popular word, and it’s associated with sleazy politicians using it to transfer their ill-gotten gains. This is still going on, according to some, but it’s still going strong, and despite the accusations and sleaze, it’s still a very popular way to move money between countries. And that tells us something to learn from this. But Transferwise, now Wise, admired enough to model its system on it, money transfer without money movement, and some have said that Bitcoin owes its roots to Hawala. There are certainly some similarities, both bypassing the traditional banking system middlemen and capital restrictions, both aimed to remove or reduce commissions and currency exchange fees. Neither needs a trusted central authority, and they have both faced down the steely glare of regulators. So what does a wallet tell us about what money is and isn’t a natural partner or precursor to cryptocurrencies? Maybe the question is whether the notion of financial inclusion and banking the unbanked misses the point? That people don’t need banks because they have Hawala? If so, do they need crypto? Let’s bring in George, our esteemed expert on such matters, who knows more about Hawala than he’d care to admit. George is the co-founder of Step Finance and head of decentralised finance at Yap Global. He is a returning guest on The Story of Money and is a well-known builder of the world’s first crypto remittance startup. 

Samantha [5:08]: George, welcome back to YAP Cast. We’re so glad to have you again.

George [5:11]:  Thanks for having me. So what’s on the menu today?

Samantha [5:13]:  So we’re going to  be talking about why it is so hard to move money around the world. I’m going to be asking you why people move money, the problems with it, and looking ahead into the future, and what’s the best way of moving money globally. 

George [5:27]: Sounds great. Let’s get started. 

Samantha [5:28]: So I’ve lived in many different countries. I used to live in Australia, Malaysia, Singapore, and now the UK. And every time I move to a different country, I have to transfer my money over and exchange it for the local currency. I’ve been doing that for pretty much my whole life. So why do people need to move money around the world?

George [5:51]: Well, there’s some countries where a majority of the population is living outside the country. Places in Southeast Asia, South Asia are pretty predominant for this kind of thing where you might have millions of people living overseas for work, maybe they’re working there for like 10 years, or even more in some cases, and they need to move money back home. So ultimately, a lot of these money flows are driven by migration. I’m here in the UAE at the moment, and I think 80% of the population is not from the UAE, they’re actually migrants. So, here is a good example of a place where there’s a lot of people that are sending money back to their home country, wherever that might be.

Samantha [6:30]: Right. So I think an important part of this is the fact that every country right now has their own local currency. And so, with these migration flows, everyone still needs to exchange their money for the local currency. What are your thoughts on this system?

George [6:49]: Often, it might vary between countries. So you’ll often see some of the big companies that you might have heard of, say, Western Union or Moneygram. These are some of the key transfer mechanisms that people use when they’re sending money around the world and these companies have been in business over a 100 years doing this whole money transfer thing. It might vary from country to country, but there’s often similarities. Often, it’s cash. When people get paid in cash in most of these places, they want to send it back to their home country. And in many cases, that’s a developing country, and often, there’s not a developed financial system there. So you know, people have to go cash-to-cash. 

So it means that you need to go and visit some sort of local shop You give your money there in cash, you tell them where you want to send it in the world, they’ll charge you some fee, and then your family will be able to pick the money up at the other end, usually in cash. We’re seeing that changing, I guess. Over the last few years, with more digital payments, maybe apps coming into it. But really, the whole system is very fragmented. I was at a conference a few years ago, and they said that there’s 2,000 money transfer mechanisms in the world. So that’s including banking as one mechanism, and only 3% are connected together. So that gives you a reference point where there might be lots of these little local forms of payments, or however it might work there. But often, they’re not really connected together, and that’s one of the problems. So it’s very hit and miss.

Samantha [8:16]: Yeah, it’s a good point you raised about how most money transfers happened with cash. In the UK and EU region, everyone’s quite used to being cashless, everything is on mobile banking and online. And it’s an interesting reminder that for most countries, I’d say that it’s mainly cash.

George [8:36]: Yeah, you’d be surprised. The last time I looked at the World Bank studies, they usually put out every year, I think it’s maybe twice a year, they put out how money moves and global remittances. And they’re the only source of data on these kinds of things. Generally, the vast majority of about $700 billion around the world annually, is moved via cash mechanisms. Now often that might be digitised at various stages along the way, but predominantly, it’s cash. And that’s because in many countries around the world, not everyone has a bank account. In Indonesia, only 10 to 20% of the population have a bank account. So, what are the other 80% doing? Well, they have to use these local payment mechanisms. But ultimately, it’s usually cash. And you might think, during this pandemic times that cash would become less useful. Well, actually, if you look at the numbers, there’s more cash in circulation now than there was in five years and the graph just keeps going up. So that’s an interesting thing. 

Samantha  [9:33]: Why do you think it’s increased over the last five years? 

George [9:37]: Often, it can just be hard to deal with other payment mechanisms. So for example, many of the online systems you might need identification. And in many countries around the world, people just don’t have identification. They don’t have a passport, they don’t have a driver’s licence. They don’t have any digital form of identification, so they can’t just go and sign up to Transferwise, or Wise, now, because they don’t have any of that. So you just have to use the mechanisms which you have. And often that’s cash, I guess. 

One, there’s a barrier to entry for people to use these digital mechanisms. And maybe number two, in many cases, kind of governments aren’t really set up to go digital yet, and there’s still a lot of like, remember, there’s 200 countries around the world. And a lot of them don’t have adequate financial systems at all. So, all they can really do is manage the supply of cash, and that’s something which a lot of people are familiar with. If you have the cash, you have the cash. If you don’t, you don’t, it’s very simple.

Samantha [10:33]: Yeah, you made a good point there on how some people just don’t have either identification, or passport, or perhaps even a Visa to set up a bank account. I’m here in the UK, and when I first moved here, to sort out my bank account, I needed proof of address, and then obviously, my identification. But I was still looking for a place to stay, so I wasn’t able to open a bank account. But also, I wasn’t able to also prove that I have a bank account to even rent. So yeah, opening a bank account in the UK has its challenges, which I imagine is the same for multiple banks around the world.

George [11:13]: Yeah, absolutely, and it can get a lot worse than that. I’ve been to some countries where you can get a bank account in 15 minutes, and then some where it’s like, “Look, forget it, you know, come back in a month’s time, and then maybe you’ll have a bank account”. So definitely mileage may vary. 

Samantha [11:28]: And in the interim, then that’s why you need cash.

George [11:31]: Absolutely. Like how you’re going to live, what are you going to do? Or how are you going to get paid? So cash works, right? It’s like you have it or you don’t.

Samantha [11:38]: So we spoke about the Hawala system earlier, and I’d love to hear what you know about the history of money moving around the world before banks were even created.

George [11:47]: So Hawala is a word to describe a process, which has been around for 1,000s of years now, actually. It’s pretty much the first form of money transfers that ever existed. I think the roots go back to ancient Mesopotamia, one of the first societies in the world. But Hawala is basically when you pay someone, and then they pay someone else, and then maybe they pay your end recipient. Because the problem often is that I’m in location A, and I need to pay someone in location B, but I can’t actually go and send the money. Imagine we’re back 4,000 years ago. How am I going to send the money? I need to get on a horse and go and take some gold coins 1,000 kilometres away. So often, the best way to do it is, “Look, well, I know someone who’s heading that way, or know somebody, I’ll pay them”. And then they’ll go and pay my intermediary at the other end. 

So it’s a trust-based system, and you often can’t really track these flows as well. So I mentioned the World Bank before and the $700 billion annual that’s usually transacted in remittances, that’s an official channel. There have been studies that said  the unofficial channels are maybe double that number, which is huge when you think about it. Because, often, if you need to send money to a country, which is either expensive to get money to, maybe there’s no banks or maybe there’s sanctions or something like that, how are you going to do it? It’s all through Hawala. 

Samantha [13:13]: How would you know if Person A is going to  give it to Person B?

George [13:16]: It’s all a reputation system – do you know a guy who’s a good guy who can get their money there? Pretty much, right? So, you see these reputation systems started up online over the last couple of decades: eBay rating, your Uber rating, these are all reputation systems. So reputation is an effective means of doing things. Because certainly, if your business is sending money for people on behalf of somebody else, you certainly want to keep your good reputation. Otherwise, you’ll be out of business. There is an incentive there to be a trustworthy person to deal with. But obviously, there can be gaps, in any sort of trust-based system. But on the whole, given that it stood the test of time, it seems that people are willing to engage with the system, often much more than they would through banking systems.

Samantha [14:03]: That’s interesting. Have you seen a Hawala system carried out?

George [14:08]: Oh, yeah, many times, I’d spent some time in Tajikistan with the UN and part of the job there was to look at the money transfer systems there. And in many cases, it’s people that have bags of cash, and they need to send them to somebody else in another town or village. And the only way to get there really is via taxi drivers. So often, they would like to give the cash to the taxi driver, the taxi driver would physically drive to the other town, and they would go and deliver the cash. And that was better than the banking system, because people just didn’t have bank accounts or they weren’t connected, or some of the banks collapsed there. So just giving your money to the trustworthy taxi driver is literally a better system, and people are much more comfortable doing that. You can think of it as crazy inefficient, but, hey, this is the system which works. So yeah, that’s a good example.

Samantha [14:53]: Yeah, it’s a good thing that taxi drivers are not driving away. But then at the end of the day, as well, if you call up B, and you’re like, “Did you get the money?” and they say “No”, then most likely that taxi driver has gone off with your money, and you can’t do anything about it then.

George [15:08]: So there’s the social pressure as well as the reputation system. People in the village, they all know each other, right? And you don’t want to be the one in the village that screws over somebody else, because you’re probably going to get screwed over by the entire village. In that case, in many of these sorts of rural societies, you might see it where the taxi driver is going to be way more trustworthy than the local bank that’s maybe 1,000 kilometres away in the capital city somewhere. Because you know that if that taxi driver drives away with your money, well, he’s never going to be seen again in the village, they’re going to have social exclusion applied to them and obviously, that leads into their reputation.

Samantha [15:43]: Well, let’s switch gears and talk more about the problems with moving money across the world. You were speaking earlier about migration flows – what are the problems with that? Because what if there’s not enough people going one way or the other or not enough money flows between?

George [16:00]: When you’re dealing with these countries, let’s say Indonesia, Indonesia has a currency, which is not globally a floated currency, the Rupiah, it can only be traded in Indonesia. You can’t get a Rupiah account in London. So you have to have these intermediaries, not only on the sender side, but also on the recipient side. Often, many of them might have a pile of money at one end, and a pile of money at the other end and, essentially, balance it off between each other. And they have to do a trade with someone, maybe some intermediary company, and that’s the gist of where a lot of the friction can be when you’re sending money around the world.

Samantha [16:37]: Right. So that’s why it’s so expensive to move money around the world, and banks take this big percentage cut.

George [16:45]: One of the reasons markets are 24/7 in this traditional exchange world is the bank holiday example: national holiday weekends, these kinds of things. If you’re a money transfer company, you get an exchange rate on a Friday. So you have to take a bet on a Friday, hoping you’re not going to lose money by the time it’s Monday. Again, if we’re talking about cash, cash itself is difficult to move. I met a guy who once ran a large money transfer company for the Pacific Islands. He runs speed boats between islands. And that’s like the official way to move money for the central banks. Their banking system is not connected really to the outside world. So, speedboats – that’s the way to do it.

Samantha [17:27]: What if it sinks? 

George [17:28]: Yeah, exactly. Yeah.

Samantha [17:29]: It sounds like a big logistical challenge moving cash around the world. But there’s platforms like Wise/Transferwise that have made money transfers cheaper, that solves the problem, doesn’t it?

George [17:41]: Not at all. So remember, I said before that a very small percentage of the country might have a bank account. So in some countries that can be 10 to 20%. And what happens about the other 80%? Well, Wise is bank transfer to bank transfer. So literally, you cannot send money with Wise to many people of the world. So fundamentally, yeah, the problem is not solved. So then the thing is maybe we use some sort of online transfer service, which connects to the local cash providers. But often people kind of pick and choose the avenues which they want to use. That’s one stage, there’s all of these different forms of payment. In other stages, not everyone has a bank account.

Samantha [18:19]: I guess I’m in a privileged position to say I trust maybe a platform like Wise or say, PayPal, and I think that’s the safest way for me to move money, because at least there’s a record of this. Using the Hawala system for moving cash around the world or moving cash by speedboats – I mean, I find it really hard to trust that that’s going to get to the other end.

George [18:42]: I guess it depends on what country you’re in. 

Samantha [18:45]: A lot of the developing world, everyone has mobile phones before they even have bank accounts. So what are the opportunities there for moving money around the world?

George [18:53]: Yeah, so ultimately, having a mobile phone opens you up to a whole bunch of new potential avenues. So you can imagine in the Hawala example knowing someone who knows someone, a lot of that could be automated. If you had everyone signed up to the same mobile app or something like that, right? But then of course crypto is something which can live on a smartphone and makes things a lot easier in many cases to move money and value around the world.

Samantha [19:18]: Right. Tell us a little bit about how Bitcoin can be a borderless form of payment.

George [19:23]: Yeah, if I need to send you some Bitcoin right now, I don’t have to visit a bank. I can do it 24/7. 

Samantha  [19:30]: I don’t need a speedboat.

George [19:31]: Yeah, no speed boats required. So just sending one Bitcoin, it can be very easy. But converting it at other ends for something which people need for every day, that’s where you need some sort of intermediary to really solve that problem for you. There’s no way around it. And then the problem is really what they call the ‘last mile problem’, is just distribution. But ultimately, this system still is much more efficient and much better than the traditional ways of doing things via banks, which are only open nine to five and they have all sorts of various restrictions and problems. Maybe one day we’ll live in a world where everyone just uses Bitcoin values, everything in Bitcoin takes their salary only in Bitcoin. Many people do live like that. Maybe that number will grow over time.

Samantha [20:13]: But let’s talk about say, you and me. If you send me Bitcoin, how can I take cash out from it? Because I can’t go and pay for my lunch in Bitcoin today.

George [20:25]: Well, first thing you could. There’s a number of places around the world, hundreds of 1,000s of companies that are accepting crypto as a form of payment for their goods and services. So you just need to find one. Another option could be that maybe you have a crypto debit card. There’s a couple of companies where you can send that Bitcoin to a debit card, and that debit card behind the scenes will convert a little bit of Bitcoin when you go to Sainsbury’s or whatever, and pay for your groceries. So that’s another way that perhaps you could make it useful for people in the world. 

But also, if you want to get cash in your bank account, let’s say that’s your priority, you’d have to have an account with an exchange or some sort of company, which essentially, you’re going to send that Bitcoin to, they’re going to convert it for you, and then they’re going to go and pay you and they can be formal institutions that have licences and pieces of paper. Or it can be peer-to-peer platforms where you just meet somebody else, you pay them. The money is maybe held in escrow until they go and pay you, like I said before, a reputation system, kind of like Hawala. Because often not every country has a local Bitcoin exchange, right? But in many cases, a peer-to-peer system is much more scalable. So there’s a couple of different ways you could get that Bitcoin, if you want to pay for stuff in your life.

Samantha [21:39]: So talk us through how you paid for your hotel with crypto, what did you need to use?

George [21:45]: There’s a lot of websites, in many cases, they will use hotels from, say hotels.com or booking.com, or something. And they will just be like this layer on top. So they will give you access to like every hotel in the world, but they’re just sort of this intermediary which is converting the crypto and then booking it for you, essentially.

What are Stablecoins? 

Samantha [22:03]: Can I ask what crypto? Was it Bitcoin? Was it another crypto?

George [22:06]: I paid and stablecoins. 

Samantha [22:08]: Okay, so what are stablecoins?

George [22:10]: The hint is in the name, right? It is a coin, which is stable to the local currency. So there’s quite a few different stable coins mainly for the US dollar. One USD tether is one coin. It’s the largest stablecoin, that’s equivalent to one USD, you have one thing called a USDC, that’s equivalent to one USD. So you have a lot of these coins, which essentially are the same price forever as one US dollar. So they don’t fluctuate against the local currency. If your currency is US dollars. There’s some other stablecoins for Euros, for Australian dollars, and New Zealand dollars. 

There’s a lot of these coins where the question is, well, how come they are valued at exactly the same as one US dollar? Well, there’s two types of stablecoins, I would say trusted and trustless. In the case of say, USDC, we would call that a trusted stablecoin, where, essentially, there is a bank account somewhere. And let’s say there’s a billion dollars in that bank account. Well, that means that there’s also a billion coins in circulation. So if I have a USDC coin, then I can go and redeem it at USDC, and they’ll give me one US dollar from their bank account. So, essentially, it’s always backed by that. 

George [23:40]: The question is, well, how do we verify that trust? In the case of USDC, there is a licenced institution, they actually show you the amount of money that they have in their bank account, I think every quarter, and it’s signed off by some firm or something like that. So it’s still trusted. However, they try and do their best to assure you that they really do have the money that they say they do, which to be honest, is much better than some banks do. Because, where can I see the balance sheet of some banks in real time? You can’t. A trustless stablecoin is instead of backed by money in a bank account, it’s backed by crypto. So a good example of that is one called Dai, D-A-I, it’s backed by Ethereum. 

Samantha [24:03]: Wait, what is Ethereum?

George [24:05]: Ethereum is another cryptocurrency, currently the number two cryptocurrency after Bitcoin. But in the case of Dai, all the information is there on the blockchain in real time. So fundamentally, I think that the trustless stablecoins are probably the better way to go. But the trusted stablecoins do serve a good purpose of having that connection to the Fiat world, and real bank accounts. There’s room for both in the scenario.

Samantha [24:27]: Yeah, would you say that stablecoins are the way we’re going to continue to move money around the world now?

George [24:33]: I would say that actually stablecoins are the best way to move money around the world, and if I want to trade USDC for Rupiah, there’s literally a website I can go on to and do that right now. So that’s pretty amazing, and that doesn’t really exist in the traditional way to do it directly like that, which is pretty interesting.

Samantha [24:51]: Yeah, I can speak from experience. I have clients around the world. We’ve been taking payments in USDC. And it’s been more convenient because we’ve got paid instantly. Because if they just did a bank transfer, I will probably not see that money until perhaps 30 days later, and I have to pay my team. So actually stablecoins are quite efficient in a way as well.

George [25:14]: Absolutely. Way more efficient, they don’t have all of the encumbrances of the traditional banking system. They’re traded 24 seven, they’re some of the largest markets in the crypto world. Ultimately, my goal has always been for many years that we’ll see 200 different stablecoins for 200 different countries. I think we’ll probably get there one day.

Samantha [25:32]: George, we’ve touched on a lot today from why people move money around the world, the problems with it, and also where we’re heading with cryptocurrencies and stablecoins, making it easier to move money globally. It’s been an interesting time speaking to you. Thank you so much for joining me on YAP Cast. 

George [25:50]: Thanks so much. It’s been a pleasure.

Samantha [25:52]: If you’d like to watch my full-length conversation with George Harrap, head to the YAP Cast YouTube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

Where is Debt Heading? (S1E9) Transcript

Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast. 

Samantha [00:43]: We naturally tend to borrow from, and lend to, only people we know well, and for the most part we merely expect the return of what we lent. But lending money to friends and family has always been an awkward situation. That’s because since ancient times there have been formal channels for borrowing and lending money, and those formal channels themselves have always been fraught in nature. Charles R. Geisst, an academic & writer, who authored a book about finance called ‘Beggar Thy Neighbor’, wrote: “Charging interest on loans is the oldest financial practice. It has also been decried almost from the beginning as predatory, with the lender seeking to take advantage of the borrower. Whether loans were made in cash or in kind, unscrupulous lenders were said to be practicing a ‘beggar-thy-neighbor’ policy by ensuring that the borrowers were disadvantaged to the point of losing their collateral, or in extreme sense, even losing their freedom or families. Charging simple interest was barely condoned, but charging compound interest was unscrupulous, immoral and rapacious. It was also practiced with near impunity.” In other words, what we now consider a relatively normal business function has always sat on the fringe edges of moral law. Perhaps it’s worth looking at the state of the capital markets and particularly debt capital markets today to understand what’s working and what’s not. Debt crises happen from time to time, such as the multi-year European Union debt crisis which began at the end of 2009. Several member states of the EU including Greece, Portugal, Ireland, Spain and Cyprus were unable to repay their government debt or bail out in debt financial institutions. The causes were high-risk lending and borrowing practices, real estate bubbles bursting, and hefty deficit spending. As a result these countries had to be bailed out by the European Central Bank and International Monetary Fund. So could crypto or decentralised finance have aided this? To expand on this I’d like to welcome back Sidney Powell, an expert on debt and the Co-Founder of Maple Finance, a decentralised institutional marketplace, which enables trusted institutions to borrow and lend money. 

Samantha [3:19]: Hi Sid, Thank you so much for joining us on YAP Cast. Really excited to have you here today.

Sid [3:14]: Hey Sam, thanks for having me onboard. Really looking forward to it.

Samantha [3:17]: What is the state of debt in the economy? Debt plays an important role behind economic growth and economic activity. Could you please expand on this?

Sid [3:27]: Yeah. So, one really important phenomena in modern economies is capital markets. So capital markets are how we get resources to companies that can deploy those resources productively in creating new jobs and creating new business opportunities. The capital markets are comprised of equity, which would be venture capital or purchasing shares in a company, or you funding a company initially with a partner if you’re a founder. It’s also comprised of debt, which is the other major piece. Now, this could be loans from a bank, there could be bonds issued by a public company, or it could be many other alternatives, like convertible bonds, but what’s really important is that it is this flow of capital, which to a much greater extent, comes from debt. So the debt markets globally are much larger than the equity markets. And so the part debt plays in the economy is funding investments. So, if you ever see an airline purchase a new aircraft, that would be largely funded by debt, and that promotes global trade. For example also, shipping, if you see, Amazon might issue bonds to go and build a new headquarters somewhere, which they can then add 5000 new staff to. So, these investments are often financed by debt. But what we’ve seen over the last 10 years is that increasingly, debt has been used as a tool to prop up vanity metrics, and things like, say, stock prices. So, over the last 12 months, or 18 months, I would say since COVID. We’ve seen debt used by the Federal Reserve Bank, other central banks around the world and governments to effectively stimulate their economies. Now, I would say where debt  can be used unproductively, at an economic scale, is propping up ‘zombie companies’. So I use the example before of airlines. Now, airlines were the beneficiaries of a large amount of bailouts in the US, and this was largely kind of preserving a competitive dynamic, where you have companies that otherwise weren’t profitable, that were allowed to stay in business by being given debt. Instead, what would ordinarily happen is that these companies might go out of business or be acquired. And then resources would get allocated to areas of the economy, where there is more opportunity for say, jobs creation, or more demand for the services they’re providing. And I think that’s how we’ve seen distortions over the last 18 months. And so that’s in the real economy, where poorly performing zombie companies are getting propped up, instead of that money going to creating jobs in sectors where there is a lot of demand, or there is a lot of actual opportunity, the second element where debt can add distortions in the financial economy. So these are financial assets like prices of stocks, crypto assets like Bitcoin and Etherium or other financial assets. Sometimes esoteric collectibles might go up when it’s an environment of really stimulative monetary policy. So anyway, what that is to say is that the creation of debt in the economy over the last 12 to 18 months pushed up the prices of stocks and financial markets, because what was happening was money was getting pushed into the economy that didn’t have anywhere else to go. So instead of going to creating new businesses and new jobs, it was instead going to stock buybacks and bonuses, which I think angered a lot of people.

Samantha [6:45]: So there’s this distortion of debt. By the way, ‘zombie companies’, is that a term that you use or do people often use that?

Sid [6:53]: No, other people use that – I didn’t just make it up. But it refers to companies that are not ordinarily profitable, but receive debt and the debt allows them to pay the interest on their existing debt, and just keeps them in business. But they’re not generating the money that they need to pay off the debt or to remain in business. It’s simply by borrowing more money over time that they stay in business. That’s not what should happen.

Samantha [7:17]: So there’s obviously good and bad debt everywhere, whether it be personal and in the global economy. Actually, I want to take it a step back, just to explain to our listeners who may not really understand this whole ‘capital markets’ that you’re explaining. So, you said capital markets have equity? Is that the two types of capital in the market? And then you mentioned the word ‘bonds’. Could you just explain to those who don’t know much about finance?

Sid [7:44]: First of all, to take a step back. Yes, debt and equity are what the capital markets are comprised of. And then every instrument is typically just a variation of that. So you could have listed equity, which could be shares on the NASDAQ, you could have unlisted equity, which is, you know, it’s private ownership in a company. You could have a convertible bond, which is actually a hybrid of both debt and equity because instead of repaying the bond, it can be converted into equity. And then you have loans, which is obviously debt. But to get to what you just asked about bonds are also a type of debt. And you can think of those as being a loan, except the loan is written on a piece of paper. And a piece of paper is a tradable security. So if, say Coca-Cola issued a bond, they are effectively borrowing money from people who purchase that bond. Now, if you purchase the bond, you are effectively lending money to Coca-Cola, but you can sell the bond to me because it’s a tradable security, and then I’m effectively lending money to Coca-Cola. And so when Coca-Cola repays that loan, instead of paying you back, they paid me to repurchase that bond. And that’s effectively the repayment of the loan. So that’s just one of the instruments, but it’s a very common instrument used by large companies and institutions and governments.

Samantha [9:01]: Thanks for that whole overview. Could you explain what smart contracts are? What does that enable, and maybe in that, also explain what decentralised finance is?

Sid [9:12]: A smart contract is code. It’s effectively an ‘if then statement’. So it is saying that if condition A is met, then for example, pay Samantha $100 of Ethereum, or some other money. So what that allows is this system to have developed this ecosystem, which is decentralised finance, which I’ll go into in a moment, because when you have smart contracts, so that ‘if then statement’, we can then start to build a whole lot of really exciting products off of this. Because if you think about it previously, what happened in international commerce was, for you and I to do business, particularly if we’re in a different country, we would need to have a trusted intermediary between us. But now we can put money into effectively this box of code. And then we can each specify conditions that we want to happen. And then we know that that money will go to its intended purpose. Like if I want to purchase something from you, or swap it with you, I know that if I pay money into this contract, you will put the item that I want to purchase into another contract, and we will each receive what we want. Whereas before, what might need to happen is that I would need to send you that money and then rely on you sending me the goods that I was purchasing. This just allows that to happen, what we call trustlessly. And so what decentralised finance is, it’s a collective term referring to an ecosystem of financial products built on top of the blockchain. So some really well known examples of this would be decentralised exchanges like Uniswap, money markets like Compound, lending protocols like Maple, which is the protocol that I helped co-found. And the ‘finance’ part of decentralised finance is really self explanatory. These are financially related products, like exchanges, but it’s the decentralised aspect which refers to the fact that the protocols can run trustlessly. So without any central figure running or administering them. So in the example I gave before, let’s say that you have Bitcoin, and I have some other cryptocurrency. Well, we can each go to UniSwap, and interact with it, and I can put in my Ethereum, and I can get something else back. And I don’t have to rely on anyone making sure that that happens. There’s no central team making sure that I get the thing that I was swapping for. And that’s what we mean by decentralised is it can operate without the interference of people. And that’s the core underpinning ethos of decentralised finance.

Samantha [11:38]: That is a really great explanation, Sid. Sorry, continue.

Sid [11:41]: I was gonna say what decentralised finance offers has several other advantages. So the first of these is that it’s a single layer of infrastructure. So probably a good way to think about the financial system up until blockchain was it’s kind of like a railway network across the US. And across every state. The railways are different gauges. So the tracks are different thicknesses. And what that means is that if you are trying to get a train from LA across to New York, in every state, you would need to change the wheels and pay someone to do that. Now, by the time you get from LA to New York, that’s starting to be a really costly train journey and it’s taking a really long time. What blockchain and decentralised finance does is it’s a single train track size, all the way from LA to New York. So you can make the whole journey without stopping without paying additional fees and without taking that additional time to do that. So from a network perspective, this means you’re going to get greater economic value being transacted. And you can have more people participating, because it just takes less time to conduct business. And so, the key innovations here is the reduction of disagreements. So with those examples I gave before, you have a reduced likelihood of disagreement. Because with UniSwap, I know that if I use it, I can see how the smart contract is written. So I can see how the code works. And I know what the outcome is going to be. And it prevents somebody from deceiving me. So that reduces the likelihood of disagreement. And then decentralised finance reduces the cost of resolving a disagreement, because it has dispute resolution built into it. So for example, if I use Compound or MakerDAO and I take out a loan from them, I would have to put in $150, to borrow $100, if my collateral drops below $120 in value, the protocol automatically sells it and then pays back my loan. So that dispute is already resolved by software code. It doesn’t rely on somebody coming and chasing me up for that money, it simply repays it automatically. So in that instance, we’ve then reduced the cost of resolving a disagreement.

Samantha [13:45]: Sid, that’s some really great analogies right there. So just to explain to our listeners, what is Compound and what is MakerDAO? So you’re saying UniSwap is a decentralised exchange?

Sid [13:55]: Compound and MakerDAO are decentralised lending protocols. What that means is that they set up, let’s call them boxes, referred to as contracts, what I can do is I can put in crypto currency into that and then use that to borrow a digital version of the US dollar, which I can then spend. So the way that they work is that there is no central company administering these, it is code that just operates trustlessly, that word I use before, on the Internet. So if I have a cryptocurrency wallet, I can go and freely interact with that protocol, and I can borrow money through it. And what we’ve seen is that over the course of the last 12 months, billions of dollars of loans have been created on both MakerDAO and Compound.

Samantha [14:39]: Let’s also touch on Maple Finance. What you explained about MakerDAO and Compound that is over collateralized. Because you said you put in $150 and you can borrow $100? Or you can borrow within that? Could you explain the difference between under collateralized and over collateralized and how Maple finance is different?

Sid [14:55]: Yeah, absolutely. So an over collateralized loan is, as I mentioned it, would be you putting in $150 of some cryptocurrency like Ethereum or Bitcoin, and then you borrow $100. And then you can use that either to purchase more Bitcoin or for some other use. These forms of loans, over collateralized lending, have really dominated the space because they were very easy to implement, because they were trustless. You did not have to worry about defaults. So you could originate loans at a much faster rate. But this type of lending is not really useful for job creation or business expansion. If you can think about it, there aren’t a lot of businesses who are willing to put down $1.5 million dollars worth of stuff to borrow a million dollars. It’s not really conducive to growing your business. But what we’ve found is that over the last 18 months to two years, companies have now emerged who have found product market fit, they have really strong balance sheets that generate profits, these companies in the ordinary economy would be excellent borrowers. These are not zombie companies. And what we found, though, is that because they’re in the crypto space, they’re not able to access borrowing from traditional lenders. So these companies, there are market makers, which would be firms that trade on exchanges that might be arbitrage funds. They could also be crypto miners, or they could be other exchanges, or myriad other crypto native companies. But what they have in common is that they have a great growth runway ahead of them. And they need capital to reach that growth potential. So what we try to do with Maple Finance, which is an institutional capital marketplace which provides under collateralized loans to crypto native companies, is that we provide credit creation. So lenders on the protocol can extend loans to these crypto native companies and those crypto native companies can then use those loans to expand their business. So it’s proper credit creation, they would be putting down, let’s say, they might put down $500,000, to borrow a million dollars, or if they’re really strong enough, they might not put down any collateral at all to borrow the million dollars to put in their business. How Maple Finance works is, given what I’ve said, risk management is really important. So what Maple Finance does is we have pools on the protocol. This is where capital is aggregated, and that capital can then be lent out. Each pool has a kind of manager. And we call this role, which would be a fund, usually we call them a pool delegate, and they would perform the credit assessment. So they make sure that that borrower is going to be able to repay the loan. And then they also negotiate and agree the terms of the loan with them, and then approve it. So what happens then is you get a borrower who’s able to come to Maple Finance, take out a loan, expand their business, you get the pool delegate who performs your credit assessment on them, and is able to share in the revenues generated through the protocol. And then you get lenders who are able to earn a yield from participating in the growth of the crypto native ecosystem or digital economy. One of the other really important innovations or the way that we actually manage risk here is through a concept of staking. And this means that the pool delegate and other people put capital into a reserve, which is available in case there are default within a pool. And so this just offers a little extra protection to the lenders, which makes it a more suitable product or source of yield for say institutions or more risk averse participants.

Samantha [18:15]: So just to go back to what you said. Thanks for explaining all of what Maple Finance is and also how decentralised finance is enabling financial markets to bypass a lot of the bottlenecks, as you said, and you mentioned that ‘this is the real FinTech’. So let’s talk about FinTech today, right? FinTech and DeFi see debt differently. Basically clarify that for people.

Sid [18:37]: So, DeFi is different from FinTech and it’s operating on an entirely different layer of infrastructure. So it has several advantages. If you were to look at FinTech today, you could probably divide it largely between payments processing. Now, this could be something like Stripe, which is quite innovative, or it would be, say, consumer or commercial lending. This is largely just a fancy front end on top of existing core banking infrastructure with some fancy machine learning, deciding who is able to take out a loan or not. And then the other element is in wealth management, which is products like Wealthfront who are doing effectively kind of like Robo investing products just making decisions about whether to buy or sell various investments. So these are all things that are built on existing infrastructure, whereas DeFi is built on a whole new layer of infrastructure. As I said, it’s really the equivalent of a single railway system or train track spanning the entire breadth of the United States. So it just makes it that much easier to conduct business globally. And it significantly lowers the cost of running a financial system. So in DeFi, what we are seeing is, it’s far more advantageous for two reasons. So first and foremost, it’s globally aggregated. So it’s kind of the difference between, say, you going to your local bookstore, and using Amazon. With DeFi, you have access to, in Maple Finance sense, a capital market that truly spans the globe versus just the network, as I said before of the Rolodex and email inbox of somebody at a local investment bank, so it’s quite different there. So it’s that aggregation aspect, and then it is the coordination of large groups of people, which is kind of tied to aggregation. But because we can rely on smart contracts to execute decisions, it means that more people are willing to participate, because you don’t have that same requirement for some trusted single controlling party, who needs to manage everything. And that just means that what we’ve seen is all these super exciting products, when you’ve got small teams of like 10 people who can code up some product, like UniSwap that can do billions of dollars of economic value and transfers over the course of a single 24 hour period. So I think this is really the exciting element of DeFi. It’s kind of like the Internet of finance, or the Internet of money, the same way that the Internet of the late 1990s was occurring, where you just had all this innovation – that’s what’s happening now and has been happening over the last 18 months to two years. And people are building new products every day. You see there’s teams raising money all the time, and launching new products and I think that’s super exciting. The pace of innovation is like nothing we’ve seen before in the FinTech space. So, yeah. FinTech is very underwhelming, DeFi, way better.

Samantha [21:21]: Yeah, that’s so exciting. And as you said, we’re seeing, like what you’re building, I guess, traditional financial tools and products just being built on DeFi and money flowing in.

Sid [21:31]: And I was just gonna say, and the other element is the inclusiveness of DeFi. So because it can be accessed globally. And because it lowers the technology hurdle for accessing this stuff. Anyone with a browser and has cryptocurrency is able to participate in DeFi effectively. It has become a far more powerful product. And it’s lowered the cost of, say, remittances in third world countries where somebody who is working in one location might want to send money back to their family, well previously they would pay a huge commission in transferring that money and it would take days. Now, it can happen in 15 seconds or less, and at a fraction of the cost. So I think that financial inclusion, creating new opportunities, and just creating new and exciting products and experimenting is something we haven’t seen in a long time.

Samantha [22:16]: Well, so you’re very, very passionate about this. And it sounds like you said, innovation is happening at a speed that we’ve never seen before. Closing points, Sid, where are we heading? And what needs to happen for more people to see the potential and the value of DeFi?

Sid [22:32]: So, I think of a couple of elements. So, where are we heading, we’re seeing more interest in participating in DeFi from institutions. Maple Finance is a more institutionally focused product. And so what we’ve seen is that there was the initial wave of participation in cryptocurrency. DeFi was wanting to hold assets, like Bitcoin and other cryptocurrencies. Now, we’re seeing more interest in its ability to generate yield. And this was really something that was seen over the last 12 months with the DeFi summit. So I would say increasing institutional participation, and also more accessibility. So the number of apps and teams I meet who are building apps and things that people can access on their mobile is huge. And I think this on ramping is one of the key elements to increasing adoption. So I’d say, adoption takes time. And we’re now benefiting from the Lindy effect, the longer that these protocols are around, the more people are likely to trust them. We’re getting new security standards. So teams take security very seriously, and would be getting their code audited. And they’re increasingly working with trusted institutions. For example, Circle is one that has built a fantastic reputation in bringing more traditional financial markets players into the space. And I think this bodes really well for this technology no longer becoming something that is separated, but something that is just built into the financial system. 

Samantha [23:48]: Awesome. So just to sum up, DeFi is growing. The longer it’s here to stay, the more people will trust it. It’s inclusive. Sid, thank you so much for joining us on YAP Cast and for giving us an overview on debt and decentralised finance and where we’re heading today.

Sid [24:03]: You’re very welcome Sam, thanks for having me. Had a great time.

Samantha [24:06]: We learn from Sid that Decentralised Finance is inclusive, accessible and anyone with a web browser and cryptocurrency is able to participate in it. This also means anyone can also borrow and lend on DeFi. But does this new technology solve the problems of debt in our day? For me, until I see people borrowing money on DeFi lending platforms to buy a physical property or physical assets, I think the technology, while very promising, is still very early in its development.

If you’d like to watch my full length conversation with Sidney Powell, head to the YAP Cast youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

The Need For Debt (S1E8) Transcript

Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast. 

Samantha [00:43]: Debt often has negative connotations associated with it. It’s not ideal to owe someone money, and paying off debts is a freeing act – this is generally understood, right? Well after this episode, your perspective on debt might change. Let’s first look to the people of Trobriand Islands, an archipelago off the east coast of Papua New Guinea. Not too far from our friends on Yap island. We can learn a thing or two about debt from their ocean-based exchange system called Kula in which island chiefs circulate possessions in the form of precious shell necklaces called (soulava) and shell bracelets called (mwali) from island to island. The shell necklaces travel clockwise around the geographic ring of islands while the bracelets travel anti-clockwise continuously stopping only when they meet a real, present need. The Kula exchange binds the tightly knit community together through debts of obligation because objects are always on the move. So what does this tell us about ‘debt’? Well, in the case of the Trobriand Islanders, there’s no such thing because all items, both practical and ceremonial, are in a permanent state of circulation. Like a step ladder or drill in a village which might constantly ‘be borrowed.’ This creates a bond between a community — It may not be in the form of a gift, but it does assume we now have a [non-financial] relationship with one another. This is quite unlike most financial transactions, which are ‘settled’ on the spot — because we assume some reciprocity. Borrowing and lending within the world of finance is, most times, a quite different transaction to the ones we make as related individuals, or within a community. Transactions that involve debt, similarly puts the borrower in a relationship with the lender – in the financial markets those relationships are often between unrelated individuals or parties who are not in the same community. And that might explain some of the discomfort we have with debt. But how does debt fit into the broader financial markets? What is debt and why would someone want to get into it? To answer these questions, I speak with Sidney Powell Co-Founder of Maple Finance, a decentralised institutional marketplace which enables trusted institutions to borrow and lend money. 

Samantha [03:16]: Hey Sid, thank you so much for joining us on YAP Cast. Really excited to have you here.

Sid [03:20]: Thanks for having me, Sam. Really excited to be here.

Samantha [03:23]: You seem to be an expert on debt, you know, being the co-founder of Maple Finance, a decentralised institutional marketplace. Let’s just touch on the basics of debt. What is debt to you?

Sid [03:36]: So to begin with, debt is, at its core,  when you receive something now, which you have an obligation to repay later. So it’s neither good nor bad. Debt in and of itself is just a tool, it can be used well, or it can be used poorly. So that’s what debt is to me. A tool.

Samantha [03:49]: Right. And what do you know of the history of debt? Has it always been there? What do you know of that?

Sid [03:55]: So, the story of debt is as old as the Bible. If you look, one of the original sins was usury, which was money lending. So historically, debt was always viewed quite poorly. And this was because there was a fixed mindset that you have, if you will, the economy is a pie, and the pie was neither growing or shrinking. So if you had debt, which usually carried the obligation to pay interest, then that meant interest was in effect, the loss of the borrower and the gain of the lender. This all changed around the time of the Renaissance, when people for the first time started to have a positive view of the future. So in their minds, you could now have a bigger pie in the future, and therefore debt could be a good thing, because it could allow the baker to invest in expanding their business, and then they would be able to afford to pay the interest and repay the debt at a later point. So it’s this shift in mindset towards a growth mindset, and away from a fixed mindset, which really catalysed a different view of debt as something which could enable opportunity and development and growth.

Samantha [04:58]: It’s interesting that you draw it back to how debt was in the Bible, because debt to some people is kind of regarded as a sin when you live above your means, and you can’t pay back what you owe. So, it’s really interesting that you view it that way. How do people kind of shift that perspective on it?

Sid [05:15]: Well, I think it all depends. So whether debt is good or bad, ultimately depends on what it’s used for. And when I say useful, I mean what it’s spent on. So, for example, if you have a person who has difficulty with impulse buying, then debt is not going to be a great tool for them, because it’s going to be used for consumptive purposes. So you know, buying a new sweater, or let’s say you want to spend it on gambling at the horse races, these would all be poor uses of debt, because they’re going to unproductive purposes. But if you want to use debt to, say, purchase a new house, or buy tuition for a university degree, or to expand in a new shop front for your business, these would all be productive purposes, because they’re going towards an investment in something in which you expect a greater return in the future. So, it ultimately comes down to the choice of what you spend that debt on as to whether it’s good or bad.

Samantha [06:05]: Cool, that’s really helpful that you’ve given us examples of good and bad debt in personal finances. Are there any other examples of good and bad debt when it comes to our personal spending?

Sid [06:16]: Yeah, so I think when it comes to personal spending, let’s say that if you want to purchase a car, for example, because you want to buy a really expensive top of the line car. Well, that’s probably a poor use of debt. But if you’re somebody who needs to travel for work, and you’re purchasing that car so that you can serve more customers, let’s say you were a delivery driver, and you can now double the number of customers you can serve by getting a better car. That would be a positive use of debt in a personal sense.

Samantha [06:45]: Yeah, that’s a good point. Maybe we’ll go into paying the debt off.

Sid [06:48]: Yeah, that is a good point to draw. So where you use the debt to buy something which would generate cash flows that can pay that debt off over time, Well, that’s actually quite a positive use of debt, provided you don’t take out too much. So, let’s say somebody uses the debt to purchase, you know, for their business, it’s a baker and they purchase a new oven, well, the oven is revenue generating revenue for them, which they can use to pay off that debt over time. So you can see that it’s actually a very productive use of debt, because at the end of the loan, they will have an oven that can produce more loaves of bread to expand their business, and they will have paid off that debt. Whereas if they used it to simply purchase a brand new Ferrari, in five years time, they still have the debt because the Ferrari is not paying it off. And the Ferrari is now worth less than when they purchased it, they’ve never effectively got nothing out of it.

Samantha [07:33]: Actually back to the baker example or businesses, I think it’s about the balance of not borrowing too much. So making sure that you’re borrowing enough to know that the revenue that you might be making can pay off that loan. How does one strike that balance? I mean, similar to a home loan, you need to have enough income to make sure you pay that off, how do we all strike the right balance?

Sid [07:57]: So, generally finding the right balance, there’s a few rules of thumb. So if you’re using debt for your business, you might look to cap the amount of debt that you take on at most, maybe three to five times what you would call operating income of your business. So in the case of a baker, they would limit the amount of debt to three to five times what they sell the loaves of bread for, less the cost of the flour that goes into making that bread. And therefore they know that it wouldn’t take them too long to pay off that debt. So three to five times, they would expect they might be able to pay it off in three to five years then, versus, something that’s going to be a debt that they’re going to be saddled with for 10 to 20 years. Similarly, when people are taking on debt to buy a mortgage or a house. That’s a longer term loan that is typically 20 to 30 years long. And so what they would look for is, they’re taking on debt, that they can still make their regular household expenditures, and have a little bit left to save, and still pay the interest on that home loan. So that would be a reasonable amount of debt, if they find that they’ve taken out so much, they can no longer meet the interest payments of the debt, that would be a pretty good indicator that they’ve extended themselves beyond their means. And that’s really what it’s about, taking on only so much that you can improve either the quality of your business or the quality of your lifestyle through having a home. But not so much that you can no longer actually afford to service that debt.

Samantha [09:17]: I think that there’s a principle coming from the Bible as well, where you’ve got to pay off your debts, and to be free, you got to be debt free. However, today there are millennials, even Gen Z today, they’re going to graduate with student debt. And then they’re going to spend a few years working in their first jobs, and then they’re going to save enough to put a deposit down for their home loan. So it seems like they’re going to be in this perpetual debt. Is this a part of life? Are we always going to be in debt? Should we strive to pay off all our debts but is that even possible? Could you explain a little bit about that?

Sid [09:52]: Yeah, so there’s this binary idea that you’re either saddled with a lot of debt or you need to get to the point where you have no debt. Having no debt is certainly having less obligations and it means that you’re in a state of lower risk. But let’s be clear, having debt does not mean you’re insolvent. For example, Elon Musk famously took out several margin loans, which were backed by his equity holdings in Tesla and SpaceX to purchase houses. Now he had debt, but he was far from trouble financially. And this was because he made the decision that his equity in Tesla and SpaceX was going to be worth more in future or growing at a faster rate than the interest cost of his debt. Therefore, it made a lot of sense to take out debt now, rather than selling his productive assets, you know, the equity in Tesla and SpaceX. So what I would say to someone is that you don’t need to necessarily be debt free, because having some debt does not mean you’re insolvent provided that you still have an income that allows you to service that debt, and you have assets which are going to be worth more in the future. So I would say you don’t need to completely eradicate debt. Now, that said, the problems facing a lot of Gen Z’s and Millennials are that the cost of education has expanded precipitously. This means that, arguably, we’re not actually getting value for money anymore when we pay for a degree. And we’re needing to finance that degree with student loans. So this is the problem where we’re now taking out debt to pay for something that’s actually perhaps not necessarily increasing our human capital and our earning potential that much. The other thing is that because of zoning laws in a lot of areas, the single biggest purchase in most people’s lives is the family home, right? And so, now, house prices have appreciated because zoning laws have been managed poorly, such that house prices have skyrocketed, and the supply of new housing has not kept up with the increase in demand. So, arguably now, two of the biggest expenditures that Gen Z and millennials will pay for in their lifetime, their degree, and their house are now costing more and delivering less value, and are increasingly needing to be financed with larger amounts of debt. So I would say that is a problem to be aware of.

Samantha [12:01]: That is a problem. So you said that they’re in debt, and that debt is not generating enough human capital for them to grow from there. So would you say that’s bad debt?

Syd [12:11]: I would say it’s bad debt, I would say, on average, the average person who goes and gets a college degree and then enters the workforce, and then tries to purchase a house is probably getting a raw deal. They’re probably over leveraging themselves. And the increasing human capital from the degree is not commensurate with the additional cost of paying for it, and how much it’s gone up over the last 10 years. And a lot of them are paying a very large price for a house on the expectation that that is going to appreciate in value. So a house is viewed as both a really important lifestyle purchase, but also an investment to a lot of people. And I would say the fact that house prices have appreciated so much now means they’re not likely to appreciate that much in the future. And so what people are doing in our generation, Sam, is that they are choosing to exit on both fronts. So they’re choosing alternatives, like more entrepreneurialism, or alternatives to a university degree, like say, Lambda School, which teaches you how to code, and then you don’t get saddled with upfront debt. Instead, you have a revenue share agreement, which only kicks in once you receive, you know, a job that pays over X dollars. The other thing is that people are choosing not to purchase a house. Increasingly, people of our generation are choosing to purchase Bitcoin or Ethereum or some other cryptocurrency, because in their perspective, it’s likely to appreciate and deliver a better return than a house and it’s liquid. So it’s probably a better use of that capital.

Samantha [13:34]: Wow. So you just basically outlined the problem today. But again, what is the solution and the way out? Not everyone is entrepreneurial, I mean, sure, people can do a course and learn how to code but it’s kind of also a chicken and egg thing, right? Because you need to get an education to be qualified to get a job to have that income to pay for your home. But yet, at the same time, I think something to add here is obviously the income hasn’t increased. I mean, the salaries of graduates, for example, hasn’t increased parallel to the increase in housing prices, for example.

Sid [14:08]: So the answer is what is the solution. So I would say, what happens is that pressure builds up within a system, and then it hits a release point. And so, an example would have been, as I mentioned, you have Lambda school, an alternative to a more formal education. And this is something that Peter Thiel famously tries to encourage with the Thiel Fellowship, where he gives people, Vitalik Buterin was a great example, a grant to instead of going to university, try and found something. Now, appreciating not everyone has that entrepreneurial streak. But there are increasingly accepted alternatives to the kind of credentialism of going to an Ivy League college and getting a degree. So for a lot of employers, an Ivy League education is a signalling effect, it shows that somebody has a moderate amount of intelligence, that they can motivate themselves to complete tasks. Now, if we are able to find alternative ways of signalling that or certifying that, then people will have access to lower cost alternatives, in terms of getting a job in the workforce, and not being saddled with monumental amounts of debt. Necessity is the mother of invention when it comes to other significant costs. People from your and my generation are likely to incur in our lifetimes like a house. You know, we are seeing other inventive solutions. I don’t think anyone is there yet, but you’re seeing alternatives like 3D printed houses and communal living options. So, I would say none of these solutions happens quickly. They’re all things that evolve over time in response to pressures and needs.

Samantha [15:32]: I’m really enjoying this discussion, because I think it’s really shifting perspectives. And also just like you were mentioning, the binary view of debt and how it is bad, we must pay it off. I mean, for example, I come from an Asian upbringing. And my father is always saying ‘clear your debts!’. But then you can also see it work for good. Thanks for explaining that Sid, that was a really good explanation. Actually, It would be really great to actually learn about your background and how you are so informed about this, because maybe you want to also talk about your experience. You said that you had to update Excel spreadsheets and deal with debt in the actual system right now. If you want to expand on your background, please do.

Sid [16:10]: Yeah. So, prior to being in crypto, I came from a background in banking and finance. So I used to work in institutional banking in a very specialised area, which is called securitization. So, this is something that fuels home loan lending, car loan lending in the wider economy. And what it involved was effectively, we would help lending companies to raise debt through issuing bonds. And they would use that debt to give out home loans to mums and dads or car loans to mums and dads. The part that is called securitization, just refers to the fact that the loans would be used as collateral for those bonds, which meant that mums and dads would repay their home loans, that money would then go to repay the investors who had purchased those bonds. And those investors would be pension funds, superannuation funds, which is something very common in Australia, and other banks and asset managers. So, these were funds and asset managers who are investing retirement savings, for example, or parts of banks balance sheets, so when you deposit at a bank, part of that could have been used to fund the purchase of these bonds, which in turn funded home loans, so that’s a sort of more simple explanation of what I was doing in banking. And then following that, I went to work at a commercial lending FinTech and I needed to set up a programme so that it could raise money through debt, to provide commercial equipment and finance to customers. So in my time in both companies, I observed that you have a lot of bottlenecks in financial markets, and that a lot of processes were being done in very manual ways mostly as you alluded to in spreadsheets, traded around in email inboxes. And then you would have third parties who collect fees for largely trading PDFs around. And so the cost ultimately gets passed on to the people who take out the home loan or the car loan. And it’s a system in which it felt like time was moving a little bit slowly. So it hasn’t changed a lot probably in 20 years, and it really hasn’t evolved towards a kind of a global system. So you say global capital markets, but the idea of a global capital market was somebody calling up a colleague in another country and offering to sell them bonds or debt over the phone and confirming via emails. So it’s not really 21st century technology when you think about it. And I think what this meant was that capital was really getting bottlenecked between countries, and also in these large institutions that moved very slowly. And the debt basically wasn’t going to promote innovation in new industries and new areas. So as I started to learn more about the blockchain, I got to thinking, we have this global layer of infrastructure where we can programme financial contracts to shift and transfer money. Why couldn’t we build a capital market on top of this brand new layer of infrastructure, and why couldn’t that be global first? Why couldn’t it promote economic opportunity in new cutting edge industries? So in my mind, really, blockchain is kind of the first proper FinTech. All FinTech prior to this was really just a fancy front end on systems that were built in the 80s and hasn’t improved since then. Blockchain is really the first time that we’ve actually said “let’s build a new system”.

Samantha [19:24]: Thanks for that whole overview. It seems like there’s different forms of debt, you’re just saying there’s loans, there’s bonds. But in the real world sense, with your experience at a bank and at a FinTech is literally PDFs and spreadsheets being shared around, and people bringing up the phone and talking to each other and trading them, which is not what people think when they think capital markets, they think money in a physical sense is moving around the world. But really, it’s just spreadsheets. Sid, thank you so much for joining us on YAP Cast and giving us an overview on debt. I really hope that for those listening, that we’ve shifted your perspective on debt today. So, thank you Sid again for joining us on YAP Cast.

Sid [20:03]: You’re very welcome, Sam. Thanks for having me on. It was great.

Samantha [20:06]: This new system built on blockchain technology that Sid talks about certainly seems to be the way the future of debt is heading. My perspective on debt has certainly changed after speaking with him. I like the reminder Sid makes that having debt doesn’t mean we’re insolvent. The debt we have just determines what level of risk we’re taking with our finances and what value we are really getting out of it. What I particularly look forward to delving into next with Sid is whether blockchain technology and decentralised finance really can fix the problem we have with debt today. 

If you’d like to watch my full length conversation with Sidney Powell, head to the YAP Cast youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

The Art of Borrowing and Lending Money (S1E7) Transcript

Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast. 

Samantha [00:42]: So today we’re going to talk about borrowing and lending. It’s an uncomfortable topic. When we talk about not talking about money, it’s usually because of this. We’re told never to borrow stuff and not lend stuff. And yet we do it all the time, usually with strangers – a bank, for example. Our language shows just how uncomfortable we are with it. A lot of cultures make no distinction between the act of borrowing and lending. In languages both ancient and modern, there is often no distinction between borrow and lend. Chinese, German, Danish, Norwegian, Dutch, Estonian, Bulgarian, Serbian, Japanese, and many others each have but a single term for borrowing and lending. Even in vernacular English, borrow is sometimes used instead of lend. Can you borrow me a fiver, for example. There are lots of reasons why this might be the case but it’s probably down to the way we can’t really place a value on the act of lending. Is it okay to borrow a book? Yes, if it’s already been read, but maybe we really liked the book, and like to have it around. And how do we ask for it back if the person forgets to return it? So should the person not just give the book back but pay something for its absence? And what about the risk of never seeing it again? Here we enter the world of interest, which is interesting, including why we use the same word for something so pleasant, and something so risky that it has added to the financial burdens of many. Charging interest is the oldest financial practice. But why would you charge someone interest – more money – when the only reason they’re borrowing from you is that they have none to start with? Well, a loan can enable someone the opportunity to own a car, get on the property ladder, or grow a business, and that should come at a cost. The tricky part is to borrow from the right lenders and to stay away from the unauthorised lenders known as loan sharks, or engage in usury, those who lend money at unreasonably high interest rates. Wisdom literature is aware of the dangers of overreliance on debt. Proverbs 22:7 of the Bible says ‘the borrower is slave to the lender’… That is, until debts are repaid. So should banks lend to people knowing they might have trouble repaying it? Should you even charge interest to those who need it? And who is morally and legally responsible for that? What about the subprime loans that led to the financial crisis of 2007? And what about lending to whole countries knowing that the next generation will have to pay it off? We hear a lot of talk about financial inclusion, of giving access to credit and other services to those denied them because of location, class or lack of financial infrastructure. But is that not just another way of building up more indebtedness? What I really want to find out here is how can technology help make borrowing and lending fairer, and, well, less fraught? To help answer this question, I’m excited to welcome Leo Cheng, Project Lead of CREAM Finance, a decentralised lending protocol. 

Samantha [04:08]: So Leo, thank you so much for joining us on YAP Cast.

Leo  [04:10]: Thanks for having me.

Samantha  [04:12]: Really excited to have you on today to talk about borrowing and lending. Now, I’ve been raised with a very frugal and Asian mindset where my dad taught us to hoard money, you know, to have a bunch of cash is security and safety in a sense, and he always taught us not to be in debt, only maybe with student or housing debt. But he always said not to owe anyone money, even to the government. He was like, ‘just pay off your loans as soon as you can’. So in essence, I was brought up with trying not to borrow so much money. So could you share a little bit about your take on borrowing and lending money? Is it good or bad to borrow money?

Leo  [04:49]: I think it depends on how you’re using it. But generally, if you’re borrowing money in a responsible way, it can be good. And I think for the most part, if you aren’t sure, then you probably would be better off not doing it. I think a good example of that would be when I think about back in college, some of my friends for the first time had a credit card and they were just saying, Yeah, I’ll buy rounds for everybody, I’ll go buy this expensive stereo system because it’s there. And then you forget that your payments accrue and then the cost of the borrowing is super expensive. So I do think that people should be very much educated before they make these decisions. I think generally more acceptable scenarios of borrowing would include something like school loans where you’re improving yourself or house debt or house loans, that you’re responsibly leveraging your existing amount of money to finally get that dream house or the actually the first house, whatever the house or property may be.

Samantha  [05:33]: Right. So, school loans and housing. Some people say getting a loan to buy a car is also not that good because once you get a car that depreciates, right?

Leo  [05:42]: Yeah, I think that’s true too. And also the cost of capital for borrowing against a car for that very reason that it’s a depreciating asset, and tends to be worth less, I think back to some of the social media humblebrag of like, “Oh, I worked all my life”, and, “Over the last 10 years, I’ve been saving all my pennies. So I bought this really nice, beautiful Mercedes!”. It’s like congratulations, but that’s really not how you should be investing. And what would be worse is that you finally spent all that time in life working and eating ramen or whatever, just so that you can put the downpayment and borrow against a depreciating asset. So I think in terms of being smart, money managing for yourself, it would be super useful to think about what it is you’re borrowing to leverage on. And you should be, from a smart financial standpoint, leveraging on something that is going to end up giving you more assets and more value later than something that’s going down.

Samantha  [06:26]: My dad taught us to save for a house first, then go on to maybe buy your fancy car later, right? We were always taught as well to live within our means. But living within our means is also kind of living with what we have. But right now, these days, a lot of people can’t even put up a bunch of cash to buy a house. So they must borrow. So yeah, it’s interesting when you think about that way, borrowing enables people to get that house or study, for example, because you need to study to qualify for certain jobs.

Leo  [06:54]: Or start a business, right? So if you have a really good idea and you just need some startup capital, that might be an okay place to borrow. That, of course, would be a higher risk activity for something like a bank, because then we get into something that is collateralized or not collateralized. And that’s why you hear these stories of entrepreneurs that may say, “Well, I put my house on the line and took out a loan to build my business”. But I think that’s another place where if you believe in it, you have a good plan, I think borrowing might be okay. But of course, there are risks involved.

Samantha  [07:21]: Right. So we’ve spoken a little bit about borrowing. Now, what’s the benefit for people to lend their money? Usually, you might lend money to a friend if you trust them, you trust that they’re gonna pay you back for a meal or for a night out, for example. But why do people lend money?

Leo  [07:37]: I think it’s a very basic idea of savings. So you can get for every $100 you put in, maybe hopefully get some money back in the future. In the lending scenario, I think it’s just to get yield. The more you can get back in that yield, the more money you have in the future. If you just stick your money into the regular bank savings account, you know, you might get very low rates, less than 0.1% or something like that. And then if you lock it up on a CD (certificate of deposits) for a certain amount of time, but maybe the trade off is if you have certain amount of money, and you lock it up for six months, for a year, or for five years, you might be getting these rates, like 1% or 1.2%, etc. But that’s generally retail to banks. There’s also peer-to-peer, lending trees, etc. services, where you can then get in these higher-risk activities, they tend not to be bank insured, etc, but you end up with more yield because you’re taking on higher risk.

Samantha  [08:25]: So yeah, so like a certificate of deposit, I think that’s what they call it in the States, is like a fixed-term default posit in certain parts of the world. So my bank gives me that option where I can kind of lock it away, I might get a little bit more yield. Is interest kind of a similar thing?

Leo  [08:38]: Yeah, yield sounds more complicated. Yeah. If you put money in a savings account, you earn some interest. It’s the same thing.

Samantha  [08:43]: Okay. So there is a benefit to lending money because you could earn more because that money could be used by someone else to pay for the student loan or buy a house, right? So we’ve talked a little bit about good and bad debt, why people borrow and lend money. Could you just talk through an experience where you’ve had to borrow money in the past, for example, and this is more real-world experience, like buying a house?

Leo  [09:05]: Yeah, I’ve done the home loan. When I was in Los Angeles, I bought a small condo. it was quite painful actually, as a first time home buyer, you’re trying to understand all the laws and say, you know, in California, you can do these things. And you can get these benefits. But then you have to read all these pages of disclosures and things and you have to go into the office, you have to show a bunch of ID, there are so many people involved. And because there are so many people involved, you gotta pay for so many different parties. Then there’s also all kinds of hidden fees. And it’s really hard to do and just took a long time on the home buying experience.

Samantha  [09:34]: You were saying, yeah, you have to apply to get approval for a loan. That’s not often easy, right? Because not everyone’s loans get approved. When I bought my home, I had to put up 10%, which is actually quite generous. So I have to have that amount of cash, then I was able to borrow 90% of the home value. So this is what we call ‘collateralized lending’. And the collateral is 10% that I put up and the home essentially, because if I can’t pay back my loan, the bank will basically take ownership of the home. Could you explain what under collateralized lending is?

Leo  [10:10]: Yeah, under collateralized lending or not collateralized at all would be something like your credit card, right? So you have this credit card, you have a credit limit, the bank looks at whatever reasons that they do and they say you have X amount you can spend a month. And then once you’ve spent that much then you can’t spend any more, but you’re allowed to carry balances from one month to the next one period to the next. But that’s why the rates you’re seeing for credit cards (if you get a good deal), you’re looking at maybe 12%. If you get a normal average deal it’s like 16% or so. If your credit’s bad (in the U.S. anyway) it looks like 25% per annum in terms of your costs, which is very high compared to home loans – I think recently, probably depending on where we are in the world, 4% to 6%. If you’re anything like Japan, where my brother lives, it’s like 0.5%, which is generally a lot lower than the uncollateralized, unsecured loans on the credit card.

Samantha  [10:56]: And let’s talk about that a little bit. My dad also told me credit cards are not good, you know, because you don’t want to be buying drinks for friends and then figuring out a month later that you can’t pay that back. So what’s your take on under-collateralization? Like, who is that for?

Leo  [11:10]: I think that it’s for the financial services that make money, that’s what it’s for. If you think of it from the standpoint where the best customer for a credit card company is actually one that carries a large debt load, doesn’t ever default, but uses a large part of that credit limit in order to finance things they need or they don’t need (that’s not for us to decide) – but if they make good on that loan and they’re paying back that 16%, then they’re the best customers. Which is why I think if we’re looking at current day credit score services, it’s interesting to see that (at least in the U.S. anyway, with the FICO scores) you should have a good number of credit cards, and you should actually ideally, never close them so you have a longer credit history with more credit cards. It actually helps your credit if you have a larger borrow amount, but you always pay back and that establishes your profile as a good candidate for borrowing money. I don’t think it’s actually super intuitive though. I feel like that’s kind of in the interest of measuring credit worthiness for the bank, but not actually showing how good you are at managing your finances. So the incentives are a bit skewed here.

Samantha  [12:06]: You raise a good point. But then at the same time with credit cards, again, I’ve been taught to make sure you pay it off before the due date, because why pay interest? Or why pay additional fees when you should just live within your means, right? What happens to people who don’t have a good job or salary and even just the cash to buy a home? I guess that’s a situation for a lot of people where they can’t borrow money, that there are people who are kind of locked out of borrowing money because they don’t have this track record or this-

Leo  [12:33]: Yeah, the system is definitely broken in some ways like that. As well as sometimes you hear about people who have money in a bank, but because they don’t have a steady day job and they don’t have steady income, they can’t qualify for loans because they don’t have a steady paycheck right? So that means that they’re not credit worthy from the standpoint of, these folks don’t have, by average normal definition, ‘what a standard paycheck and a standard job looks like’. But when in fact they have very good credit worthiness but it’s just not being used here and it actually creates an inefficiency as well, where you have these people who have the assets to pay things but just don’t fit exactly into that mould. I think if you expand that out more some people may say societally, there’s problems where certain groups of people or certain behaviours they may be discriminated against based on who they are, what they do, or those kinds of things which are inherent in our system and not ideal.

Samantha  [13:19]: Let’s talk about Bitcoin and cryptocurrencies and programmable money. Now Bitcoin was established as a peer to peer cash system that’s decentralised, and global. So Leo, in an easy to understand way, could you explain what programmable money is?

Leo  [13:36]: Sure. So programmable money is pioneered by the invention of smart contracts, which was popularised by Vitalik Buterin’s Ethereum. And Ethereum is currently the second largest cryptocurrency by market cap behind Bitcoin. So this notion of programmable money simply means that you can have behaviour like if you go into a bank, and you say that some amount of money put in equals some amount of money that we’re gonna get as interest, you can guarantee that if this behaviour is programmed into the smart contract, that it’s going to happen in that way. So there’s no humans involved, you can imagine a bunch of robots running this thing. And so the benefit here then, is transparency and automation, which means that you don’t have to say, “Hey, you know, did this thing that not paid out?”, you got to call your bank, and you can see exactly when something happened, if it’s happening, as opposed to the current system which is somewhat opaque.

Samantha  [14:24]: So it’s essentially like trusting the code like you and I, if we didn’t know each other, we can essentially programme a contract, a deal, where if I offer you a service, and then once I complete it, that money will get released to me. Is that a better way of looking at it?

Leo  [14:39]: Yeah. So basically, it’s an If-Then Statement – if this happens, and then this other thing happens. So in your example, you would probably need some sort of data feed into the system to say, “Oh, did Sam complete this job? And if so, then this money gets sent”. So in that example, yeah, there’s no middle person in there to complete the transaction because the smart contract is simply waiting – “I was told to do this one thing. And once that second condition is met, then the result is released”. So it’s faster, it’s cheaper, and it’s more transparent.

Samantha  [15:05]: So you’re saying there’s no one to also check your credit score? I mean, is there that system? Do they need to check whether you’ve got a good salary and credit score history? Does that apply in this world of programmable money?

Leo  [15:18]: Yeah, so far, not quite yet. It doesn’t really know or care who you are, how much you make on a monthly basis, or where you live or what language you speak. It just treats you and everybody else the same. So the benefit here largely is that it doesn’t quite matter if you’re lending out or borrowing $100 and that’s all you have. That’s all you own to your name, or if you have a bazillion dollars, the treatments are the same. You get the same payment terms, you get the same treatment, the same efficiency.

Samantha  [15:43]: Right. As we speak right now, Leo is the Project Lead of CREAM Finance, which is a decentralised lending protocol. Now Leo, in a really easy to understand way, what is a decentralised lending protocol?

Leo  [15:58]: Right. So, decentralised lending protocol in that there’s no real central party. It’s software that runs, so no bank, you don’t need any bank approvals, no nation state really has the exact claim to come in and say, “Okay, we’re doing this thing” – the whole thing runs autonomously. So I think about them as robots – they take your money. If you give them the money, and then they tell you “Okay, well, this is what you’re gonna get”. The robot very smartly within the system then calculates the interest that you would receive. On the other side, if you’re borrowing the robot says, “Okay, here’s how much you can borrow based on how much you deposited”. And then when you do come back and return it, then everything gets squared off. But this is also where robot automation comes in. So the collateralization, I think, is important. In this case, much like a home loan, it’s over collateralized. So it may be that for every $150 you deposited, you might get $100 of a credit line. And that’s somewhat counterintuitive to a lot of people, like well, “Why would you put $150 in to borrow $100?”. But really, it’s $150 worth of value to borrow $100 worth of something else. So you could think of this as – if we stick to the default world of currencies, you can say, “Well, if I put in $150, I might be able to borrow $100 worth of Japanese yen”, or something like that. And in which case, there are different types of currencies, but for us in the cryptocurrency world this is more applicable to Bitcoin and Ethereum and other variants of crypto assets.

Samantha  [17:14]: Earlier we were talking about interest and yield, and how banks right now give us like 0.01%. Maybe if I locked my funds up for like 6 to 12 months, I might get 1% or 2%. We are talking right now in 2021, and the yields and the interest with this decentralised finance world, they’re quite high, right? I mean, could you talk us through what the benefits are with putting your savings in this ‘machine’ you talk about?

Leo  [17:45]: Right, I think that there are a few things going on here that’s causing the interest rate to be higher. Certainly some of this is automation and other parts of it is fairly advanced usage. So the opportunity costs are different. So I think that people borrowing money have other things that they could do to make more money, therefore they can pay the supplier more money. But in terms of actual numbers this morning, when I took a look at our site, we’re looking at roughly 5% – 8% annualised rate on the U.S. dollar basis. So comparing that to something like 0.1% or 0.05%, on an interest bearing account that you can move money out of any time versus like a savings account, or like a CD that may lock you up for a month or so at 0.1% or 0.2%, maybe if you’re lucky. And that’s a very, very big difference. And in this world of decentralised finance, not only can you access these interest rates that are higher, you could also enter and exit as you wish. So there are some transaction costs involved here with gas fees, etc. but if you have a large enough chunk of money, where you do want to pick up 5% or 6% for a week or so, you could put it in there for a week, you could take it out. You could put it in there for an hour, you could take it out. It’s gonna do the math correctly. There is zero scenario of human error. There’s no clerical error in the back end – somebody hits a button and then all sudden, it’s gone. All of it is automated.

Samantha  [18:53]: But that’s pretty revolutionary. And I think to a lot of people it’s a bit scary putting their money into a system where there’s no number to call. So, Leo, with programmable money and with this decentralised lending protocol, can people lose their money? Because I know that with the bank, or fixed deposit, I guess I trust that, you know, HSBC is going to still have my money. But can I trust that my money in CREAM Finance will still be there?

Leo  [19:18]: Yeah, I think it’s a very good question for most people coming into the space to learn about. I think there are a few elements of risks that we should cover: One is just the self custody risk. If you’re really coming in from decentralised finance, using something like MetaMask to log in, people often don’t understand exactly how it works. It’s not exactly intuitive in today’s setup. It is possible for people to end up making mistakes, but I think that’s a general knowledge gap for anybody who’s new to the space. So that’s something to look after is how you manage your money, are you sending it to the right places, etc. And secondly would be the smart contracts potentially having an error or an exploit – so if an exploitation happens, and money can leave those bank accounts, at that point, that is a risk potentially. But to combat these risks, though, the industry does have insurance. Probably worth pointing out the fact that to date, no supplier that put money into decentralised finance lending protocols have ever experienced a situation where they couldn’t get their money out. So there’s never been a run on banks, there’s never been bank insolvency to this date. And I think with insurance coverage with good security practices, with a good understanding how you operate your wallet, these risks can be managed. I tell my friends sometimes, like, think about my mother, she’s gonna want to call someone to reset her password, she’s gonna want to call someone to ask questions. So she’s probably not the best candidate to use decentralised finance directly. But I do think that there are other services that are more centralised versions of the crypto lending space that have these – BlockFi. Nexo, Celsius, etc, you can actually go to those services and you can have customer service calls.

Samantha  [20:43]: So what Leo’s mentioned there is the centralised crypto lending platforms, Nexo, Celsius, etc. So if you could give any advice for anyone who is not in the crypto space, just some practical steps, what should they do if they want to lend or earn some of that maybe 5% – 6% yield?

Leo  [21:02]: Yeah, if you’re adventurous enough to figure this out yourself, I think it’s actually getting easier and easier to onboard into crypto globally. So I would say whatever amount of money you have in your savings account that you put into a locked deposit type of setting, you take some of that budget, and maybe just start off with 1% or 5% of that money. You take that out, you experiment with it. And the reason I say 1% – 5% is so that if you mess something up, it’s not your life savings, it’s not gonna hurt you tremendously. But if you do it successfully, the yield you’re gonna get from that 5% of your money could potentially be equivalent to the other 95% of your money, depending on what vehicle you put it into. So at that point, it is what some people would like to say, an asymmetric bet, right – the amount of gains you’re gonna get is potentially a lot greater than the losses you could potentially experience. But I think it’s always good to read up on it, put the work into it, and not any more than you can lose, because this is a highly experimental realm. There are a lot less guardrails in place for this space so it’s very important to make sure that you know what you’re doing before you put any kind of significant investment in. But certainly, it’s worth exploring, and I don’t see how this is not the way of the future. So it would actually behoove you to jump in, learn about it and participate, not just for financial gains.

Samantha  [22:11]: That is some really great advice. I think it really starts with learning. And for those who are willing to learn, I think it’ll be an exciting journey. And as Leo says, we’re still in an experimental phase with this. So we’ve talked about the current system of borrowing and lending today. And we’ve also talked about decentralised financial lending. Now how does decentralised financial lending solve the problems that the current systems have today? Where some people are actually shut out from borrowing money because they just don’t qualify for a loan. 

Leo  [22:40]: I think the benefit of decentralised finance and what we’re working on with CREAM Finance as a lending protocol is that we’re very much blind to the people are coming in from the standpoint of who they are. Because I know, around the world, folks are being in some ways, unfortunately, discriminated. Whether it is because they don’t have money, or they belong and they affiliate to groups that some circles don’t like. And that causes a problem for them and impacts their ability to borrow, quite frankly. By decentralised finance being just permissionless by nature, anybody can come and interact with our smart contracts and get the exact same terms. It doesn’t quite matter who they are, or how much assets or what school they went to, etc. None of that stuff matters. Whether it’s a really really wealthy person with a small amount of money in or a poorer person with all their assets in, both parties would get the exact same terms, the exact same service and not be required to physically show up, present a bunch of documentation, etc. And it’s a very drastic departure from how it’s done today in the lending market. So I think in that sense, it levels the playing field, and in a little bit, allows for more opportunities for everybody.

Samantha  [23:37]: Levelling the playing field, that’s a really great point to end on. Leo, we’ve been on an awesome journey today, talking about borrowing and lending money, the systems today, to where it’s heading in the future with this experimental programmable money. Thank you so much for joining us on YAP Cast.

Leo  [23:51]: Thanks for having me.

Samantha  [23:52]: Leo offers a glimpse of what borrowing and lending may look like in the future. In some ways, it seems logical that it becomes more decentralised and even more impersonal than our present system as a way to solve the problems of inequity. Why should the lending and borrowing of money be this fraught after all? If you can program money to do these things, not only does it become more efficient, but it also removes the discrimination inherent in our present systems. But decentralised finance is still daunting to use, and we’re some ways off from making it easy and secure enough for even my grandma to do. But stay tuned and we’ll be exploring how some of those gaps might be filled, bringing money back to the people. 

If you’d like to watch my full length conversation with Leo Chang, head to the YAP Cast YouTube channel. I’m Samantha Yap, and you’ve been listening to the story of money by YAP Cast.

Money as a Social Construct (S1E6) Transcript

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Samantha [00:06]: Hi I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha [00:43]: Perhaps the key to thinking about money is that it’s an extraordinarily powerful idea. An ideal even, that everything is exchangable. In the words of Jorge Borges, a key figure in Spanish language and international literature, money symbolizes man’s free will because it can be transformed into anything, even if that means throwing it all away to find happiness. But as the famous saying goes, “Money can’t buy happiness, but it can make you awfully comfortable while you’re being miserable”, says Clare Boothe Luce, an American author and politician. The Philosophy of Money is a book on economic sociology by German sociologist and philosopher Georg Simmel, written in 1907. He was fascinated by the notion that money is a perfect means of exchange, able to convert qualitative differences between things into quantitative differences that enable them to be exchanged. If money didn’t exist, we’d have to invent it. But he also believed that our social relations are increasingly mediated by money, and they become more abstract and featureless as a result, while our inner lives are rendered more devoid of meaning and value. Does money enrich our lives as well as our bank accounts, or are the two mutually exclusive? Maybe the answer lies in what meaning we ascribe to money, whether we value it highly or see it as a means to an end. The Bible says in Matthew 6:24, “You cannot serve both God and Money”. “Money”, as Nigel Dodd writes in The Social Life of Money, “can be anything or everything, and derives its power from that fact”. When the euro was first introduced, there was hope both among policymakers and critics, that somehow, this unified currency might also play a social role, which was to unify member states by building social cohesion among its citizens. That’s not how it panned out, of course. And in fact, the European central bank is far removed from both EU society and governments, basing its decision-making entirely on technical questions like price stability. Its one-size-fits-all is in keeping what Dodd calls, a “sanitized view of money as a cultural-neutral landscape”. So, is money an abstract thing or something functional we prefer not to talk about, like our salary or how much rent we pay? And how does that square with the sense that in societies, money defines us: how much we have, what we spend on, or don’t spend on, or what we do with it? To help me unravel what money as a social construct actually means, I welcome back Professor Cathy Mulligan, Co-Director of the Imperial College Centre for Cryptocurrency Research and Director of DCentral Lab from the University of Lisbon.

Samantha [03:41]: Welcome back to the YAP Cast, Cathy.

Cathy M [03:43]: Thanks for having me, Samantha.

Samantha [03:45]: So when the euro was first introduced, it was seen among policymakers as a way to unify the other countries and play a social role. Could you give us an idea of money as a social construct?

Cathy M [03:57]: So, money for me is nothing more than a social construct, but I like your analogy to the euro, because the idea was to create this common “European feeling”. You would feel European in whatever country you went into, trying to create a social identity for Europe. Which I think is probably an important thing for Europe to try and do. However, what we’ve seen as well is, because of the way the euro got set up, we’ve also seen that it nearly has torn Europe apart. Before we had Brexit, we almost had Grexit because of the financial situation of Greece. And we saw very passionate discussions from the Finance Minister of Greece at the time, basically saying we need to exit the European Union so we can actually retain control over our own economy and run it the way we want. So that’s why in particular for CBDCs, we need to really deeply think through how we’re setting them up. The euro started with a great vision, but it’s also almost torn the European Union apart because of design that was not necessarily well thought through, if you will. And the monetary policy of the euro is very, very complicated.

Samantha [05:07]: How well does the system of where money comes from work today?

Cathy M [05:10]: That really depends on who you ask. Sorry to give you such a blithe answer but that phrase, “It takes money to make money” is not an incorrect one, really. So in order to get a $100 or a 100 pound loan, you actually have to have enough wealth for the bank to say “Yes, I will loan you that money” in the first place. So, the circulation of money really works extremely well for those who already have wealth. So I would say, if you went to ask some really rich people or people in the middle class and above, “Does the money system work today?”, they would say it probably functions quite well or relatively well. The issue, however, is that it doesn’t really function particularly well for those who don’t have pre-existing wealth, or those who can’t put up lots of collateral to get those loans to create money. So for example, you might have small businesses that are unable to access credit markets because they don’t have enough collateral to put up to secure that loan. Whereas other companies, which shall remain nameless, have so much money that they can just get more and more money in order to continue the domination of the global economy. For me, the current financial system is extremely exclusionary, and in the same way we have a social contract about what money is, we also seem to have a social contract about who can actually have it. There are lots of people impacted by (and lots has been written about this) the level of financial exclusion currently experienced in today’s world. So I would say it’s not particularly just. I would say, yes, it’s functioning but it’s not just, shall we say. And a large part of the research that myself and the guys at the [DCentral] lab are doing together with me, is looking at what is the social good that we can create out of these technologies – is there a way to be more inclusive financially or be more inclusive for smaller companies in order to help them access these credit markets.

Samantha [07:05]: You make a good point. Even getting on the property ladder, as people say, people need that 10% or 5% deposit. But not everyone has that cash lying around so they’re not able to borrow, and therefore not able to own a home. And I’m sure there’s more that people are shut out from.

Cathy M [07:21]: Exactly, and that compounds: the more you rent, the harder it is to save that deposit. But meanwhile, the people who are able to afford to buy the property to rent to you are able to make more and more money, and then go out and buy more property to rent. It’s not a dissimilar situation with money.

Samantha [07:38]: So going into the meaning of money, it seems to take a variety of meanings to people. What does money mean to you?

Cathy M [07:46]: That’s a very philosophical question. For me, honestly, money means freedom, and that’s why I think social justice around access to money and finance is so important to me. Money is freedom in the sense that, if I don’t like a job I’m working, I’ve got enough money to walk out the door and be able to, for example, still have my home. So for me personally, money is freedom. The whole point is that it has a very different meaning for most other people. Well, actually other people say money is freedom as well, but I think everyone has a different interpretation of what it means. But for me it’s freedom to have the agency to do what I think is important and useful for the world.

Samantha [08:28]: That’s interesting because for me, I see it as a very practical thing- it provides security, like we talk about financial security, you just need to have enough to pay for rent, to pay for food, to live, to get by – so it enables me to do things. I never really saw it as a social thing, but am I missing something here? 

Cathy M [08:48]: I think money is massively social, if you think about just some of the ways that money is implicitly used in your day to day life. So, the way that people display logos or talk about what restaurant they went to, inherently, what some people are saying is that “This is what I can afford.” I think it’s a very subtle thing, and I think you’re right, it’s such a practical everyday thing that potentially we don’t think about it from a social construct perspective, but it definitely is, right? And if you think about some of the ways parts of our world and our society are set up, the amount of money you have is the calling card to allow you into certain places.

Samantha [09:30]: Yeah, that actually brings me to my next question: how much does money play a role in impacting our social lives today? 

Cathy M [09:37]: I think it probably is one of the defining factors in many countries, actually. We might like to think that it’s not something that drives our life so much, but I would say try living without money. I will leave you with a challenge Samantha: try not to spend any money for five days.

Samantha [09:55]: That’s a really tough challenge. That is a really interesting point because money is like you say, freedom. People say money is power, and yes, money does matter. And you talk about social good, and even for me, I used to be a very naive journalist, I would say. I would want to write about social causes, but really, charities need money to do the work. So, yeah, money is power.

Cathy M [10:22]: I actually would like a world where we don’t need charities. Now we’re getting into a really exciting topic. So, I think that the need for charities and the need for philanthropy in the world today is an exact and very clear example of how badly our financial system actually functions. And I’d love to understand how we could make financial systems work such that we didn’t need charity because everybody was able to have enough financial resources to do the things they wanted to do and also take those loans that we’re talking about, to access money and engage the financial system in a way that is really empowering, rather than having to wait for a charity. Can we create an agency for people? I’d love to see a world where we don’t need charity.

Samantha [11:10]: Well that is a very powerful point: a world where we don’t need charities. How does cryptocurrency change the game with this?

Cathy M [11:18]: So this is where I think it gets interesting, when we talk about things like private money. Imagine you and I run companies. Let’s say I’m really good at baking and you grow some of the best tomatoes in the area, and they’re always super fresh and tasty. We would be unable to go and access finance to create a joint venture between us that allows us to go and sell fantastic sandwiches to the world because of the way that the current financial system is set up. But what if we could create our own ‘Cathy and Samantha coin’ and say to the world, “Hey guys, you’ve seen how good these tomatoes are, and you’ve seen how good her bread is. Why don’t you invest in us? And we will give you a promissory note, basically a cryptocurrency coin, and you will earn money off that when we are successful.” So there could be lots of different ways to cut this, but I think we’re at the start of cryptocurrencies, Bitcoin is really a thought experiment, to me. I know a lot of people have massive investments in it, but I think it’s the start of a thought process that is going to take us for the next 20 to 30 years. But if you think about what you’re actually saying, you’re saying that what cryptocurrencies, for me, do in particular is give access to small companies and individuals who might be financially excluded. You can give them new ways to engage in the financial system that are truly empowering. Rather than, I don’t know if you’ve ever been to a bank and tried to get a loan and they’ve turned you down.

Samantha [12:50]: I have. It took me like, two months to get a bank account when I moved here.

Cathy M [12:55]: Exactly, so, it allows us to completely rethink the way we’ve set up our economic system. A new type of economic system is emerging that is completely based on digital technologies. So I think new types of money are going to emerge, that we won’t necessarily understand in the same way as we understand what money is today, but will enable new types of transactions around value using those kinds of digital currencies. For me really, let’s put it this way: the price in U.S. dollars of Bitcoin or Ethereum in US dollars is probably the least interesting thing, and I can’t understand why everybody’s going on about it all the time. You’ve basically invented a new monetary system, and all you’re trying to do now is compare it to the old monetary system. It doesn’t make sense to me. And that’s what I really think is fantastic and extraordinarily useful around cryptocurrencies. I think it’s where we’re going to start to see a lot of changes because it demands us to rethink things that we’ve taken for granted for generations. We’re now asking each other, “What is money?” Actually, it’s what you and I decide it is. Sorry I’m very excited. I’m going to shut up. 

Samantha [14:05]: No Cathy, I think we’ve done some really philosophical and really impactful topics today. Thank you so much for joining me on YAP Cast.

Cathy M [14:15]: Absolute pleasure. Thanks so much, Samantha.

Samantha [14:18]: That was Professor Cathy Mulligan, the Director of DCentral Labs from the University of Lisbon. It was really interesting to hear how she sees money, and how it means different things to different people. For her, as with many, I suppose it’s freedom: freedom to quit a job, to take a holiday, or to buy a house. But with that comes a glimpse at just how badly broken our system is, and that the amount of money you have is the calling card that allows you into certain places, and bars you from others. She also talked about how charity is the thing that has come to fill the gap for those who don’t have money, and how she’d love to see changes that would make the system work where we wouldn’t need charity. So might cryptocurrency fill that gap? I loved the way she described Bitcoin as a thought experiment. I guess those deep believers wouldn’t agree with that, but she believes this could still take us another 20 to 30 years, and so perhaps it still is that. But it also shows just how radical the change may be – it’s helped to frame a discussion where even the mainstream world, even finance ministers and central banks are ready to completely rethink the way we’ve set up our economic system. Which makes it some thought experiment. 

If you’d like to watch my full length conversation with Cathy Mulligan, head to the YAP Cast Youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.

Why Does Money Lose Value Over Time? (S1E5) Transcript 

Listen on:

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Samantha [00:06]: Hi I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha [00:43]: We’ve talked about how value is denominated in a currency, and how that is useful in the sense that how else are we going to trade things if we can’t agree what to price them in? But we’ve also touched on how it’s misleading to people. We tend to assume that because money is our unit of account and our unit of measure, it’s also a good thing to have. It is, but we’ve also learned that the value of the currency is designed by central banks to be based on what it can buy: a basket of goods, which, in the US, is the Consumer Price Index. So $1 is supposed to be able to buy you the same things over time. But as Sam Kazemian of Frax Finance has pointed out in an earlier episode, that value changes. And this is where we come to the scariest of money issues, inflation. What is it, and what can be done about it? Well, let’s go back to the good people of Yap. Remember them? They thought they had it made, basing value on huge, round stones that they mined on an island hundreds of miles across the ocean. That meant that the stones retained their value, because they were hard to mine, carve and carry. But when David O’Keefe, the Irish adventurer known as the ‘King of Hard Currency’ arrived, he figured out how their economy worked and set up an industry of mining the stones. This undermined the system because the stones started to lose their value, requiring even bigger stones and creating a preference for the older stones. The result was, as economists from the University of Oregon described it, “a psychological loss of faith in expectations of future value have impaired numerous currencies through history, and the Rai stone is an ancient example”. So, is inflation a bad thing? Does it eventually undermine all currencies, stone or otherwise? And is it bad if it raises our salaries, or helps to increase the value of our investments? And what, if anything, can technology in the form of crypto do about it? To answer these questions, I welcome back Sam Kazemian, the founder of Frax Finance, a decentralised stablecoin protocol. 

Samantha [03:00]: Welcome Sam. 

Sam K [03:02]: Hey, good to be here Samantha, thanks for inviting me.

Samantha [03:04]: Let’s start with who decides what money is worth today. 

Sam K [03:08]: Well, that’s a very open ended and philosophical question. If you look at statistics, 80% of the world’s trade is denominated in dollars, and one of the first things people either don’t know about or don’t realise is that the U.S. dollar is a floating currency. It’s not actually hard pegged to something like gold, silver, or any commodity. The question is, who decides how much dollars are worth? Well, we know that the US Government tries, at least it’s intent or what it says, is that the dollar loosely tracks this CPI.

Samantha [03:40]: What’s CPI? What the CPI stands for and what is it? 

Sam K [03:43]: So that’s the Consumer Price Index, which is essentially a basket of goods that the US government upkeeps in calculating which is defined as people’s standard of living. The things in the CPI are things like the average price of automobiles in the US, food items such as bread, milk, and eggs, and the average price of rent. There are a few other things like electronics, I forget off the top of my head. But there’s obviously debate about what should go into this basket and what shouldn’t. And one of the main things I feel like people gloss over is that the U.S. dollar does loosely track something, particularly this basket of goods. And the reason it’s some basket of goods versus another, and it’s not gold or something, is because the idea behind it is that the dollar should always be able to buy that basket of goods. Because that’s the definition of what it is to have some kind of standard of living, some base needs. And that’s by the definition of the government. The main thing that you have to keep in mind is that every single quarter and every single year, the Federal Reserve releases their CPI target which means how well the dollar is following the basket of goods that the Federal Government is trying to loosely peg the currency to. So it’s interesting that people just miss or gloss over it, but that’s one of the most important things of the U.S. dollar – it’s supposed to provide a somewhat stable and consistent standard of living for the average American citizen in their consumer life. That’s actually the point.

Samantha [05:26]: When my dad goes, “Oh, back in the day, this chicken rice bowl cost only $2. Now, because of inflation, it’s worth more”. But then, with Bitcoin it’s the opposite. 

Sam K [05:37]: Yeah, in the 1950s, a hamburger was like 50 cents or $1. Now, a Big Mac is $6. There’s two ways to look at it. One thing is that you could say there shouldn’t be any inflation or there should be some, but this is too much. But first of all, the reason why the Federal Reserve even targets any amount of inflation is that the government doesn’t want people to just hoard and hold cash, because that would slow down economic growth. They actually want cash to go somewhere that has productive use – either consume something with it, or invest it. Now, that idea alone isn’t wrong, I actually agree with that to a certain extent. Then there’s an argument about how much – is 2.5% percent inflation per year (which is the target), is that too much? Because if you take $1 and then you add 2.5% inflation to it for over 50 years, you actually get way more than $6. But recall that you actually track the Consumer Price Index. So then, even though it’s going to be inflated by way more than 5X or 6X over 50 years, the price of meat processing and creating bread and all this stuff is getting cheaper over time as well because of technological improvements. 

Sam K [06:59]: So, if you compound 2.5% over 50 years, then hamburgers should really be $80. However it’s only 6X as expensive because the price of making a hamburger is actually also getting cheaper over time because of technology. Same thing with electronics – we all know that a computer that had one megabyte of RAM in 1995 was $1,000, it was the bleeding edge model of the day. But now, you have a $1,000 laptop that has 64 gigabytes of RAM or 32 gigabytes, and that’s 10,000 times as powerful overall with a better CPU, graphics card, RAM, and everything, and it’s the same price. That’s what $1,000 will buy you – something that’s 1000 times or more powerful than 20 years ago. People forget about that. The whole point is that the U.S dollar is supposed to be pegged to those things. It’s interesting because, let’s say you’re a person that eats five hamburgers a week in 1950 and you make minimum wage so to speak, whatever it happens to be back then. If you also make minimum wage today in 2020, you should, in theory, be able to also eat five hamburgers per week without actually going into debt, or without cutting into savings. That’s the goal. That’s the point. They might not be doing a good job, they might be doing a great job, I don’t know. But that’s the actual intent. The intent isn’t to make the U.S. dollar an investment asset. If you hold it across 1950 to 2020 you should be rich. For example, if you held Apple stock in the early 70s when Steve Jobs and Wozniack founded Apple, you would be insanely rich. But if you held U.S. dollars, your standard of living shouldn’t change minus 2.5% inflation per year. 

Samantha [08:53]: That is a really good illustration. Coming back to the point about stability, you’re right- you hope that a person who works minimum wage could still afford their food and rent, and that’s the whole point of it. I’m not so sure Bitcoin solves that part. 

Sam K [09:08]: So, on the other side of the Bitcoiners’ defence, the hard money people, like gold and all these things, their view is that the way that the dollar is being inflated is not actually to keep someone’s standard of living the same. Obviously, this is a debate. People say that the Consumer Price Index is deliberately manipulated. For example, real estate and home prices are not in the Consumer Price Index, but rental prices are. There’s a reasoning behind this: the Federal Government says that the consumptive asset of a home is to live in it (i.e. paying rent), and then they see real estate as an investment. But again, it’s a political discussion. The counter argument is that the Consumer Price Index doesn’t do a good job, it’s outdated, it’s politically manipulated, for example if the price of homes is going too high they’ll exclude it just to make sure that it doesn’t show the weakening of the U.S. dollar. There’s some truth to that, but there’s also some debate. Personally, for example, the thing that I find the most lacking in the CPI which I think there’s no good reason for, and I would agree with Bitcoiners and the hard money people, is that the cost of college education in the United States is not in the CPI. But in order for you to even be able to get any kind of middle class job or income, a college education is essentially required, and the cost of college education is far outpacing the CPI. For example, people have to go into crushing debt these days just to get a college degree so that they can qualify for the average wage, and that’s not accounted for. So the argument is that college degrees are not a consumptive good. Okay, sure, technically that’s true. But then you completely miss a common fact of life in the United States, which is that you need a post-secondary education to actually be able to even earn enough dollars to do any of this stuff. That’s something that I think there’s a real debate. It’s not very obvious that the CPI and how the dollar’s monetary policy is being conducted is incredibly good and perfect. 

Samantha [11:15]: So we’ve talked about Bitcoin and how there are people who have the view that we should head into a world where our items are denominated in Bitcoin. Then we’ve talked about how currency is meant to be stable. And before we touch on cryptocurrency, what is ‘currency’? 

Sam K [11:32]: Oh, now it’s even more open ended. The reason I always start with the CPI and what the U.S. dollar tracks is that we use U.S. dollars as a currency. So no one debates that the U.S. dollar is a currency. And what’s actually interesting is, I always like to say that cryptocurrency as a complete umbrella term for all of these tokens and coins is the biggest misnomer that’s confused a lot of people for a long time, because my definition of ‘currency’ that its meant to keep your standard of living stable. That’s my personal definition, because that’s what the U.S. dollar’s intent is. We can debate about how good of a job it’s doing or not, that’s up for debate, and whether it’s inflating too much or not or whatever. But the U.S. dollar is the most predominant currency in the world. It’s intent, whether it’s accomplishing or not, is to keep your standard of living the same, which follows the Consumer Price Index. One thing that’s interesting is, notice how that’s the exact opposite definition of an investment. If you make a good investment, the whole point is that your standard of living is supposed to go up. “You invest in something and you make a lot of money”, that’s what is usually said, right? So the point is you allocate your currency to something that will hopefully change your standard of living. Then you exit that investment for money, currency, and that currency is the thing that is supposed to keep your standard of living constant. It’s essentially the reference point for how we basically calculate and do our accounting into the future. For example, you can know that the average family vehicle in the US is this price and plus or minus 2.5% inflation (which is the target of the Federal Reserve). And so, one of the first things I always say when I’m talking about cryptocurrencies is that it shouldn’t have been called ‘currency’, because it’s a misnomer, and they’re really good investments. Obviously not financial advice, I’m not saying go out and buy all the Dogecoin or anything. But the fact of the matter is that whenever someone tells you to go and buy some cryptocurrency, it’s not to keep your standard of living the same, it’s because they’re saying, “Do this and you’re gonna hopefully get rich.” 

Samantha [13:44]: I really like the point you make about currency, that it’s meant to be stable. How do we know how much money there is? It seems like no number, and no end, or cap to how much money there is in the world. 

Sam K [13:58]: It’s a really difficult concept because there’s a lot of views about this. It’s like when you go and deposit $1,000 in a bank, and the bank tells you have $1000 and I can wire it to you. But you know that the bank is going and lending your $1,000 to someone else in a loan to buy a house or something else. Was there $1,000 created out of thin air? Is that money creation? And so those are important topics in economics that there’s a lot of views about, where one of the views is that this is how the majority of money is created. The money supplied in this situation did, though. And then, the other view is that essentially there’s only a hard supply of money and one stock that the sovereign government can print. Then they lend this out, and the actual amount of money is just the total circulating supply of dollars. It gets into it with cryptocurrency because these days, there’s a lot of applications in crypto that allow you to lend and borrow, and it actually expands the actual credit supply of something. So, it’s a really interesting topic to explore. 

Samantha [15:06]: So to wrap up, what do you think it’s going to take for the world, the average person on the street, or moms and dads to adopt stablecoins? 

Sam K [15:16]: In a certain sense, you could probably say that people adopt and already use stablecoins as currency more than Bitcoin, because most of them are pegged to the U.S. dollar. Stablecoin usage has actually expanded year over year. So one topic that’s really interesting that we’re also doing research on at Frax, is the newest types of stablecoins (including what we’re doing at Frax), that we’re going further than just pegging to the U.S. dollar and asking, “Well, if we peg Frax to the U.S. dollar, and the U.S. dollar is pegged to the CPI or some basket of consumptive goods, aren’t we basically transitively pegging Frax to the CPI?” What if we actually create our own or better version of a CPI? One thing we are doing research on, which is part of our long term goal, is to release this thing called the Frax Price Index, so the FPI. And the point of that is to eventually peg Frax directly to that. It’s not happening soon, Frax will be still pegged to the dollar, but I think that it’s really important research and it’s where decentralised stablecoins are going. Because the goal is to create stability on the blockchain in a decentralised manner without having to rely on the US government or pay into the U.S. dollar. And so, other than the fact that everyone already uses it, what makes the dollar even more useful than gold or anything else is that it keeps your standard of living relatively equal, plus minus the 2.5% inflation rate. So I think that problem can be solved in a decentralised manner with stablecoins going forward, but we’re still a few years out from that. But that is also one of the big, ultimate challenges that Frax and other leading stablecoin projects are looking to solve. 

Samantha [17:04]: I think that’s a great way to end the show for now. For those who are interested in Sam’s work, do follow him on Twitter. We look forward to seeing what Frax is going to achieve in the coming months and years. 

Sam K [17:17]: Thank you so much for having me on, Samantha. It’s been a pleasure. 

Samantha [17:20]: Thanks for joining us on YAP Cast. 

Samantha [17:22]: Some interesting gems from Sam there, who’s shown us that if we think differently about currency, we might think differently about inflation. And that stablecoins, though an excellent idea, don’t really solve a problem, at least not the whole of the problem. Let’s take a step back: We understand now that inflation is a normal process, an inbuilt mechanism, almost to prevent people from hoarding money. If everyone just hoarded their money, there would be no economic activity and therefore no growth. No one would produce anything because no one would invest anything. If I didn’t buy a cow, I wouldn’t be able to sell you milk and beef. So to make cash go somewhere productive, you have to make it attractive to spend, and unattractive to just stick in a hole in the ground. So the value of money is pegged in some way to the cost of things. But Sam has another argument. With cryptocurrencies we’re trying to get away from the traditional way of doing money, which is great, but we’re busy building bridges between the two to make things work better. Like stablecoins, but stable, how? Well, the most popular obvious version is to peg them to something – the U.S. dollar, in a lot of cases. But what is the U.S. dollar pegged to? Well, the CPI, the Consumer Price Index, the basket of goods. So why don’t we just cut out the middleman and build our own CPI, perhaps one that is better? Well, Sam and his team are working to build one for the crypto industry. The point we’ve regularly reached during this series is that we’re in this process of redefining money, and in this instance, this means trying to wean ourselves off this idea that the value of everything crypto should be counted in U.S. dollars. 

If you’d like to watch my full length conversation with Sam Kazemian, head to the YAP Cast Youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast. 

Ep 4 How Do We Measure Money? Transcript

Listen on:

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• YouTube

Samantha [00:06]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha [00:43]: We’ve touched on credibility and trust in money, now let’s look into the denomination of money. In other words, how we measure money. Denomination is the monetary unit in which something is priced or measured. I see a shoe I like, and I ask the price. I will be told the price in some kind of unit: the national currency, or national unit of account, or the US dollar, most commonly. But it could be anything. It is what the seller feels is the most valuable and liquid currency, or equivalent. In short, it enables the seller to assign a value to the shoes in a mutually accessible and understandable format. Denomination is important then, for someone wanting to acquire something, and for someone wanting to sell something, or for agreeing on who owes who what. Now if we didn’t have that agreed denomination, we’d be bartering. One cow for 10 chickens, say; or half a horse for one husband? So, who agrees what that common currency is? Well, anyone, really. We’re actually already used to value being denominated in different ways. Nowadays, most online games or apps we use, it seems, have some form of coin that we earn and trade for things, possibly, even real money. It’s the same with credit card points or frequent flyer miles.
 

Samantha [02:09]: The calculation for us is whether what our money is being converted into is worth it. Is it worth trading my credit card points to buy a new TV or discounted flight tickets for a holiday to Italy? So what do we learn from this? First off, you care what the currency is denominated in. Second, even if it’s something you recognise and like, you still need to trust the person who is controlling it, be it the gaming app or credit card company. Which is why in most cases it’s a government that denominates a currency. After all, we trust them right? Sort of. Governments really want to be in charge of denominating the measure of value. Indeed, an independent currency is one where all the payment instruments (a fancy way of including not just money in circulation, but the other bits of money we don’t see) are denominated in the same currency. This means overnight deposits of commercial banks at the central bank, the central bank’s reserves and all that, need to be denominated in the same currency for that currency to be considered independent. 

Samantha [03:16]: Currently, the USD is the de facto global currency, accepted more or less everywhere. From street touts to central banks, the USD is welcome. Governments, however much they think their own currency rocks, will keep a tidy sum of USD stashed in a vault somewhere. According to the International Monetary Fund, the U.S. dollar makes up over 60% of all known central bank foreign exchange reserves. The history of that is something we’ll explore in my conversation with today’s guest. It’s fine for a currency not to be independent, like those countries which have adopted the Euro, for example. But the point about being independent is that whoever runs that currency is free to dictate the convertibility of it. In other words, make it easier or difficult for people to swap it for another currency, and this is where things get tricky. For example, when Argentina’s economy was in recession around 2001, its USD-pegged Peso eventually collapsed once the peg was removed. After the government had limited the amount of cash that could be withdrawn from banks, Argentinians had a problem. What could they use to buy stuff? Ever inventive, they replaced the Peso in daily transactions with IOUs, initially Peso-pegged, but eventually using their own denomination. What happened here is that the government effectively had to choose between preventing the flight of local currency into a foreign one (as everyone preferred dollars) by rationing the supply of cash, or risk the danger of losing control of the monetary system. 

So, governments use denomination to maintain control of their monetary system. It is an act of sovereignty. If you can control how your citizens denominate what they produce, and sell et cetera, then you can, in theory, control the country if you control the currency of denomination. But this might change with the cryptocurrency revolution. Bitcoin and Ethereum as decentralised cryptocurrencies pose a threat to national currencies and to governments. But stablecoins present an in-between solution before Bitcoin or Ethereum get widely adopted. Stablecoins are in the name – a stable form of currency that offers price stability, that is backed by an asset. The most widely adopted stablecoins are backed by, and pegged to fiat currencies like the USD. To talk more about the promise of stablecoins, I’m excited to have Sam Kazemian, the founder of Frax Finance, a decentralised stablecoin. In more detail, Frax is the world’s first hybrid fractional algorithmic stablecoin protocol. We’ll get into that later in the conversation.

Samantha [06:08]: Sam, welcome to the show. 

Sam K [06:10]: Hey, good to be here, Samantha. Thanks for inviting me.

Samantha [06:12]: No worries. So tell us a little bit about yourself Sam, what’s your background?

Sam K  [6:16]: So basically, I got into cryptocurrency a long time ago now, around 2013. I heard about it while I was in college at UCLA. It’s funny now, as one of the first cryptocurrencies I started mining was DogeCoin in early 2014. It’s pretty crazy how far DogeCoin has come since then. After college I started my first company called Everipedia, which is like a decentralised Wikipedia. My interests in crypto really are about the aspect of cryptocurrency as money and what money actually means, and where the evolution of crypto as money is going to go. So in 2019 I started Frax, which is an algorithmic stablecoin. It’s the first fractional stablecoin, that’s basically what we call it. I’m currently working on that full time, and it’s been really fun.

Samantha [07:07]: Awesome. Do you still have a lot of Dogecoin?

Sam K  [07:10]: I have more than enough, thankfully. But realistically, at this point I accidentally sold a lot of it in the first bull market, just trading and doing other stuff. So I am like the Bitcoin pizza guy, the guy that everyone makes fun of every year. I’m like the Doge pizza guy. I didn’t buy any pizzas, but I would have probably done better if I just never touched it. So now, a lot of the cryptocurrencies that I have I just don’t bother touching, because I don’t want to pull a Doge on this one.

Samantha [07:42]: Yeah, just for our listeners, the first Bitcoin transaction was a guy buying pizzas with Bitcoin. How much Bitcoin was it back then?

Sam K [07:50]: It was 10,000 Bitcoins.

Samantha [07:54]: So every year there’s a Bitcoin Pizza Day, and people calculate what the price of Bitcoin is that day, and then remind this guy who bought the pizzas.

Sam K [08:04]: It’s a really good way to start this just as an aside, but think about how weird that is. It always gets me thinking, you call these things cryptocurrencies, there’s the word ‘currencies’ in it, and everyone always says everything is gonna be denominated in Bitcoin, yet, we have a Bitcoin national holiday, so to speak, every year where we’re like, “Wow that was the most expensive pizza in the world”. I just find it funny because his name is Laszlo, and you’re thinking, “Laszlo will never forgive himself”, it’s just weird, right.

Samantha [08:42]: A lot of the world’s transactions and trade today is denominated in US dollars, even when you travel. I was born in Malaysia, I’ve lived and travelled a bit throughout Southeast Asia and every time you measure how well the currency, for example, the Indonesian Rupiah or the Malaysian Ringgit is doing, it is denominated in US dollars. That’s how it is reported on and measured. I wonder how the world has decided that the US dollar is how things are measured?

Sam K [09:15]: Not getting into the history of it or anything because a lot of people have opinions like “Oh, well the US military forces the entire world to use it”, or something like that. The thing I think is important from an economic perspective is that whatever the world currency or the predominant currency that’s being used in trade happens to be – it’s currently the dollar, it didn’t always used to be the dollar, it used to be gold at some other point – but the point is that it’s like the SI unit of value. So if you think of SI units, meters are for distance and joules are for energy, and so son, obviously there’s no SI unit for money. But if you think about it, we all need one. Most people need one to be able to coherently communicate value between each other. Imagine if I quoted you every price in toasters, and I said, “My laptop is worth about 42 toasters”, and then you said “Well, my laptop is worth two dryers”, that would be impossible for people to actually understand each other. You wouldn’t be speaking the same economic language. Thing about currency or the predominant world currency is that everything is denominated in it, because it’s a coordination mechanism for us to talk about value, the same way that metres are a coordination mechanism for people to talk about distance. And the question becomes what’s a good unit? Is it something that’s going to significantly change your standard of living across time? Or is it actually something that is completely neutral to the average person’s standard of living? That idea is a very powerful idea, and I think most people just gloss over that. Most people just think that a dollar is just worth whatever it is. No, there’s actually some thought put into the exact purchasing power of this unit that we all use as a SI unit of account.

Samantha [11:12]: So the US dollar is definitely a unit of account that we all still need today. I’ve been in the crypto community for three years now and  I feel like people make comments about the US dollar, but it is a system that still underpins a lot of the way the global economy works today. In a previous episode, we touched on Bitcoin and how that might be a future form of money. People call it ‘digital gold’ or ‘the gold standard’. I’m not so sure about this, but where do you stand on Bitcoin?

Sam K [11:47]: First of all, I have Bitcoin. I think it’s a good investment, I think it’s very revolutionary. But one of the first things that I said, which we’ve talked about here, is that I think ‘good investment’ and ‘good currency’ are mutually exclusive. I think they’re in conflict with each other in terms of what I think a currency is supposed to be, and what currency currently is in the world in terms of the dollar. So, the important thing to get at here is that most proponents or most people who are saying that Bitcoin is not only a revolutionary new technology but everything will be denominated in it, it’ll be the currency of everything. In fact, the other day, admittedly, El Salvador passed a full law, and that basically made Bitcoin the national currency, like the US dollar, which is also accepted in El Salvador. So that’s interesting, that’s a counter argument to something that I think, which is that Bitcoin is not a good currency, it’s a good investment. So my personal view is that Bitcoin as a stable unit of account is not possible. One of the main things that people say is that as the market cap gets bigger, it’s going to be less unstable, it’s going to be more and more stable and predictable. I think that the data actually shows that this is not correct. Last month in May, Bitcoin had its most volatile month in its entire history. It went down by about 50% from its highs of around 60 thousand into the 30 thousands, and it’s currently in the high 30 thousands range. And that was Bitcoin at over a trillion dollars of market cap. So I’ve been in this space since Bitcoin had a couple billion, and it’s basically 500X to 1,000X since I got into this space, and it’s just had its negative 50% month.

Samantha [13:39]: And we’re speaking in May 2021.

Sam K [13:43]: Yes, and that doesn’t mean it’s bad or it’s a scam or anything. I not only hold Bitcoin, but I also think it’s something that will go up in value over the long term compared to the dollar. But the fact that we compare it to the dollar, again, is evidence that it’s not a good currency. So there’s evidence for and against, and it’s difficult to say what’s objectively right or wrong: that Bitcoin is a good investment, but bad currency; or that stablecoins are good currencies, but bad investments. But it’ll be interesting, and I’m very bullish on Bitcoin as something to make a lot of money on. But I’m not bullish about the fact that poor Laszlo is ever going to not get made fun of for spending 10,000 Bitcoins on two Domino’s pizzas. Just imagine people making fun of you for spending dollars on pizza – that doesn’t even make coherent sense.

Samantha [14:37]: So, we’ve talked about Bitcoin and how there are people who are of the view that we should head into a world where items are denominated in Bitcoin, and then we’ve talked about how currency is meant to be stable. And so, one of the solutions to this is stablecoins as an in-between. You’re the founder of Frax, a stablecoin. Before we get into that, could you explain in an easy to understand way, what is a stablecoin?

Sam K [15:06]: Yeah, so the cool thing is that it’s in the name: A stablecoin is an on-chain cryptocurrency token that’s meant to be price stable. So it’s meant to either follow some peg, and recently they don’t follow outside pegs, but we can get into that. So for example, most stablecoins are pegged to the dollar, one token is just one dollar. Those are the predominant stablecoins. There are some that are euros or other things, but just like how everyone uses the dollar, most cryptocurrency exchanges and people also use US dollar-denominated stablecoins. The most famous ones are Tether and USDC. Frax is one that we started and it is pegged to the US dollar. It’s exactly the opposite of the other cryptocurrencies, in that it’s not an investment. You don’t actually hold Frax if you want to get rich. So typically, before Frax launched, the idea behind stablecoins on the blockchain was that there’d have to be more cryptocurrency backing it. But the unique value proposition of Frax is that Frax is actually the first fractional reserve stablecoin – that’s where it gets its name from Frax – fractional currency. It’s like a classical bank, but completely decentralised and on the blockchain. Frax isn’t fully backed. So for example, for 120 million Frax there’s only $100 million worth of cryptocurrency in the reserve. Everyone can still come and redeem their Frax for dollar value, but there isn’t one-to-one backing. And so usually, the next question becomes, “Okay, what happens if there’s a bank run?” What happens if all 120 million people want to come, redeem their Frax and there’s only 100 million? You’ve just created the classical fractional reserve bank. The cool thing about Frax’s design is that it uses on-chain smart contracts and algorithms, so that as soon as people are trying to redeem a lot of Frax stablecoins, it actually mints the second token – the thing we talked that’s the investment asset, the Frax share – and it uses that to immediately buy cryptocurrency on the blockchain and fill the reserve to keep it from running out. There’s no way the last people would be holding a useless unbacked token. The fact that it can robustly do that programmatically instils confidence. You actually just don’t need a full backing.

Samantha [17:32]: Right, thank you so much for explaining that. It sounds like there’s a lot of math behind it all. When you talk about how you can print money, I’d say, some people will be concerned about that because they’d go, “Well then, couldn’t you guys just print more money if you wanted to take out 5 million? You just print it and then you take it out?” Is there a mechanism that stops that?

Sam K [17:54]: So, the whole point with Frax currently is that it’s pegged to the dollar. What’s interesting is, all of the smart contracts and on-chain and algorithms only do things if the price is $1. We can’t just mint a bunch of Frax, print money and basically do a bunch of stuff that would break the entire system. And that’s actually why blockchain tech is really important because people can see the code, they can see that this is actually decentralised because the peg is exactly $1. And whatever the peg needs to be to stay at a dollar is the actual amount of Frax that’s circulating and no one else can change it. I can’t go and increase the supply of Frax to make the price go down and I can’t decrease the supply of Frax to make the price go up to 2, 3, 4, or 5 dollars or something. So we can only actually just see the protocol function according to the smart contracts, basically.

Samantha [18:48]: And I think that is a great way to end the show for now. For those who are interested in Sam’s work, do follow him on Twitter. We look forward to seeing what Frax is going to achieve in the coming months and years. 

Sam K [19:01]: Thank you so much for having me on, it’s been a pleasure.

Samantha [19:04]: Thanks for joining us on YAP Cast.

Samantha [19:07]: So we heard Sam Kazemian of Frax talk about denomination. It comes back to what we’ve mentioned before – that money, currency, or anything else of value plays several different roles, and we need to understand those roles to get the most out of it. Bitcoin has gone up and down like a yo-yo and its defenders say, “Yes, it’s gone up and down but it’s mostly up”, and they say it will get less volatile. But as Sam points out, that hasn’t happened. It’s actually more volatile now in percentage terms than ever before. So you can be a fan of Bitcoin as an investor, believing that on balance it will go up, but that’s not what you want out of money that you’re using to buy things with on a daily basis. Hence, stablecoins. Sam argued his Stablecoin is more stable than other stablecoins, but we’re probably much too early in the game to make that call. His most important point is a good one: we need to denominate values in a way that we can agree on. Using the same currency means we’re both speaking the same financial language. That language, at least across borders, is the USD. But why is that? And why can’t it be something else? We have a standard unit to measure everything else in our lives: height, area, volume, how much we should eat of different kinds of food. Why do we default to a currency run by one country as the internationally recognised measure of value? It’s a good question and one we’ll be looking at in more detail in the episodes ahead. 

If you’d like to watch my full length conversation with Sam Kazemian, head to the YAP Cast Youtube channel. I’m Samantha Yap, thanks for listening to The Story Of Money, by YAP Cast.

Where Does Money Come From? (S1E3) Transcript

Samantha [0:07]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on a journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha [00:44]: So we agree that there’s no one clear definition of money and there is a movement to reinvent money today with Bitcoin, but before we get to that I want to first look at who gets to decide what money is today and how much of it there is. After all, governments might not be too happy about cryptocurrencies, because essentially, governments still decide what money is today. However, the picture isn’t quite that simple. Let’s go back to the Yapese. Who decided what money was? As far as we know, they had a central bank of sorts. The tribal leader, who would authorise trips to mine more stones and keep the larger ones, was effectively in charge of controlling the amount in circulation. In theory, the tribal leader could therefore manage the value of stones by limiting how many there were. But in practice, he seemingly lacked the authority or respect to be able to decree what money was. He could only authorise trips which enabled the creation of money, but his authority over the actual stone was limited, and that authority was eventually undermined. When David O’Keefe, the Irish adventurer, built a more sophisticated and efficient supply chain with bigger boats and more miners, he ended up flooding the market with stones. He therefore did two things: He usurped from the tribal leaders the control on who issued currency, and he also caused inflation by making stones more plentiful. 

He also, possibly indirectly, caused something else. Eventually, the mining stopped, forever freezing the number of ‘Stones’ in circulation. That would, at least in theory, have prevented any further inflation, but it probably also led to the demise of the stones’ role as a currency. So what could we learn from this? Governments consider money to be their sole prerogative, although sometimes this is farmed out to a supposedly independent agency. Ultimately though, the government is considered to be the sole arbiter of a currency’s value, because theoretically, it is they that would honour the value written on the dollar bill or coin, but there are limits. Like the tribal leaders of Yap, governments have authority, but that authority is based on the credibility of the underlying token – the stone. The stone is a limited resource. Similarly, governments need to ensure the credibility of their role of ‘seigniorage’, which means the authority to print money or mint coins. This is one reason why governments create central banks, ostensibly at arms length. So how has this worked over the years, and what might crypto change, or be changing? To help me answer this question, I’ve had the privilege of speaking with Professor Cathy Mulligan, Co-Director of the Imperial College Centre for Cryptocurrency Research and Director of DCentral Lab from the University of Lisbon. DCentral Lab looks at all things crypto and blockchain.

Samantha  [03:45]: Welcome to the show, Cathy.

Cathy  [03:47]: Thanks for having me Samantha, lovely to be here.

Samantha  [03:48]: Earlier in the show, we touch on the Yap islands and stone money, and back in the day the tribes determined the supply of access to the stone money, whether it’s maintaining the flow of people mining these stones, and also providing access to travel to it. In a sense it’s evolved: Today governments and central banks manage where money comes from. Cathy, if you can help us paint a picture or take us back, who decides what money is?

Cathy [04:32]: That’s a really interesting question, Samantha, and really pertinent for our world today. So for me, the best way to think about money is actually as a form of social contract. We have agreed that there are these institutions in the world that will define for us what money actually is. So we have a way across the world today to agree that a US dollar or a bill that says ‘Great British Pound’ has value and is money because a set of institutions will tell us that it does. And what that implies, of course, is the other side of that equation is we’ve all agreed to trust them, that it is the US dollar and that it is the Great British Pound. So it’s a social contract between citizenry and their government for me.

Samantha  [04:58]: So we basically trust what the governments say, which is interesting when you put it that way. So how do they decide how much money there needs to be in the world, or in the country? 

Cathy  [05:09]: Okay, that’s a really, really, tough question and actually it really depends which country you are in. So one of the most interesting things I found out when I started studying cryptocurrencies is that there’s no universal definition of money across the world. Our contextual understanding of money in Britain, or in Portugal or in the United States may have subtle nuances, and that’s why there’s a lot of discussion around how cryptocurrencies, in fact, should be regulated because there is no uniform definition of money. But when we think about money, and I tend to take this from a simplistic perspective because I think that is easier for people to grasp, there are very complex groups of people: So there’s something called the MPC, The Monetary Policy Council in the United Kingdom that assists the Bank of England to understand how the monetary supply is working and how much money should be in the economy, or what the interest rate should be – should they raise them? Should they lower them? They were also, for example, deeply involved in the financial decisions around how the Bank of England should respond to COVID and all of those kinds of examples. But let’s take a step back from that and think about something, because I think most people don’t necessarily understand that most of the money we have in the economy is not actually created by printing presses. We have this image in our head of printing presses spewing out dollar bills or whatever it is from the movies, but actually banks create money by providing loans. Now I know that sounds a bit weird, but think about it this way – your bank account is often considered money even though it’s not actually cash. That’s because you can buy things with your bank account using your debit card. So if you think about it this way, how does new money get created? Well, if you borrow a 100 dollars let’s say, or 100 pounds, the bank is going to credit you 100 pounds, and that is new money being created in the economy. And as you pay that off, the electronic money is deleted and therefore it no longer exists. So in that instance, banks are really creating the majority of the money in an economy through loans. I know that seems really counterintuitive, but that’s really how it works. The other thing to remember is, of course, that there are lots of different types of money in an economy. So for example, in the British economy, you have notes and coins which now make up a very small part of that. I think about 3% of the money in Britain is now notes and coins, then you have Federal Reserves or the reserves, and also bank deposits, which actually make up about 75% of money in Britain.

Samantha  [07:40]: Wow, thanks for breaking that down, because I think you make a good point. People have this image where how much money we have in this country is all representative of coins and notes but really, it’s all just digits on a bank account for us.

Cathy  [07:52]: So what is interesting, however, is the fact that the flows of money are actually maintained by the central bank. So there’s a difference between the commercial banking system in which you and I engage with, and the central banking system, which is the system of banking for the government. So there’s really two different types of banking systems in a country. And I think that’s the critical piece to understand, in particular when it comes to thinking through cryptocurrencies and those kinds of things.

Samantha  [08:19]: You’re saying that in terms of the supply, the central bank or the governments decide what the supply of money is based on the MPC? What are the other factors at play?

Cathy [08:28]: Most, or at least most economies that I’m aware of, tend to not be too totalitarian about the way that they control money in the economy. They will look at inflation and decide what to do. So we’ve seen the outgoing head of the Bank of England warning about inflation, but other people are saying don’t worry about inflation. There’s always different ways to interpret it. But I would say that they are relatively hands-off, whereas other nations who have different types of monetary systems or different political systems may have a much more hands-on control over their monetary policy and actually control over money in the economy. What I will say though, is that a central bank and the people who control the flow of money in an economy, what they do is they’re ‘the lender of last resort’, and you’ve probably heard this phrase used for the banking system. So their job is to ensure the stability of the financial system in a particular country, to ensure that we all continue to trust the commercial banking system which sits around it. So if you were looking at the financial industry back in 2008 at the beginning of the global financial crisis, what you could see was the central banks were acting as the lender of last resort trying to prevent the commercial banking system and indeed some of the institutional banks from completely collapsing, because of the systemic financial risk that that would have caused across the entire economy. The central bank functions towards the commercial banking system – it basically controls the banks.

Samantha  [10:01]: Interesting on the ‘lender of last resort’. So you’re saying that the government, to maintain stability, they lend more money?

Cathy  [10:08]: Yeah. So in 2008 there was a run on lots of banks. We saw something most of us thought we would never see in our life. I remember it was a long time ago now, I was finishing my PhD, I think, I was walking down the street and there were queues outside the bank, and literally queues for about nearly half a kilometre outside of the bank. There was a run on the accounts from Northern Rock, so the citizens got very worried that they weren’t going to have their money, and they were trying to take it out of the bank. And what happens in those situations is, behind the scenes, the Bank of England will be attempting to ensure that as many banks as possible don’t go bankrupt because that obviously has a massive impact on the overall economy and can cause a crisis of trust in money.

Samantha  [10:50]: That’s interesting because you’re saying that they were lining up to take money out of the bank, and they’re essentially lining up to take cash out, physical cash?

Cathy  [10:58]: Physical cash because the ones and zeros can vanish very quickly.

Samantha  [11:00]: Right. We touched a bit on stone money and then along the way it was barter and then there were precious metals like gold, and then we ended up today, where we use paper money. So you’re saying back in 2008, people were lining up to take cash out again, and now we’re going into this cashless society and a world with digital currency. How does that change the game?

Cathy  [11:22]: Well, that’s a very, very good question and it’s a very difficult question for a lot of the Central Banks, in particular when they’re thinking about Central Bank Digital Currencies or any of those kinds of situations, because what happens if you suddenly get a run on the banks in a digitally enabled world? So, what you could do with a CBDC is, consumers could say “Actually, it seems a lot more sensible to me to take all of my money out of the bank and just buy CBDCs”.

Samantha  [11:50]: Just to take a step back a little bit, you mentioned CBDCs – what are CBDCs, if you could explain it?

Cathy  [11:52] Yeah, very simply, a CBDC is what we would call a fiat currency, so a British Pound, lets say, is a fiat currency of a nation, put onto a digital technology such as cryptocurrencies. It could be other types of digital technology that it could be built on, and instead of issuing notes as the country does today, they could instead just issue electric coins and electric notes using the digital technologies.

Samantha  [12:20]: Central Bank-Backed Digital Currencies. Actually, back to the analogy of people lining up to take cash, if a similar situation happened today, would it look like us taking digital versions of money?

Cathy  [12:25]: Exactly. That’s exactly what it would look like. I think the other thing to really think about as well is, the Global Financial Crisis is when Bitcoin got released and if you look at the original papers and the original discussions at the time, it was very much in response to the fact that there was this Global Financial Crisis and people felt they couldn’t trust the banks. If we have a digital world today, and we all have digital CBDCs or we are able to purchase them, then it basically looks like a digital run on the bank. The issue in that instance is far worse because digitally we can do things a lot quicker. So we can have incredible efficiency improvement in that queue, whereas physically we had to queue up before for half a kilometre – you don’t have to do that anymore, you just digitally remove the money. Digital technologies give you great efficiency, most people talk about efficiency as a very good thing, but if you end up in a negative feedback loop, and a very efficient negative feedback loop, you can cause massive problems very, very quickly. So these are some of the issues that need to be thought through.

Samantha  [13:36]: You touched on how Bitcoin was created during the 2008 Global Financial Crisis and Bitcoin is not run by any central authority, it’s purely decentralised, but Central Bank-Backed Digital Currencies are still, in a sense, managed by governments, right?

Cathy  [13:53]: So if we talk just briefly about cryptocurrencies and about the history of money, there’s one period of history in the history of money that I think everyone forgets to think through. And I think it’s also very relevant to some of the digital currencies we’re talking about today. There was, actually, in American history, an era called the “Private Money Era”, and that was the era when people themselves would issue their own banknotes, or towns or companies would issue their own banknotes. So that’s called private money. And one of the biggest changes in the monetary system in America, about 100 odd years ago now, is that they created one national currency because there were a lot of issues around private money. What you’re actually doing with the cryptocurrency is creating a form of private money because it is decentralised, it is not controlled by anybody, and it is outside of the control of a central bank. What CBDC’s are doing is taking the technology of something like a cryptocurrency and saying, “We will now ensure that this is backed up by the reserves of the country in question”. So the CBDC is a liability of the central bank, and the government has to maintain reserves and the deposits to back that coin up, rather than private money. On the cryptocurrency markets we see wild fluctuations (of course we do), and what the people who are proponents of CBDCs are saying is that we can stop the fluctuations if we align it to the government, and the government maintains reserves. So it’s really combining our existing financial system with the central bank, creating trust, together with the technology base of a cryptocurrency.

Samantha  [15:42]: That’s a good distinction and that is a really great explanation. So there’s a separation between the cryptocurrencies that are decentralized like Bitcoin or Ethereum compared to CBDCs. Are governments not so happy with Bitcoin and Ethereum and the other cryptocurrencies? What do you think?

Cathy  [16:00]: Depending on who you ask, again. We’ve just seen El Salvador has accepted it as legal tender, and it could be relatively good for their economy. I would say what we see is cautious interest from other countries. So for example, the FCA, the Bank of England, they’ve done lots of studies on this stuff and they’re starting to do some trials around it. The FCA for example, in the United Kingdom, warns that these are quite unstable investment vehicles. I think anyone who watches the market can agree with that. The thing to remember, of course, is that the difference between the private money, and the government-backed money is that in your bank account, in the United Kingdom, at least, the Bank of England guarantees up to 80,000 pounds of my deposits. Whereas in that private money system there’s no guarantee at all. So there’s lots of subtle differences. And so governments, I think, are cautiously interested, because the other thing that’s happening separate from cryptocurrencies, separate from all the digital currency discussions, is that we’re seeing lots of geopolitical interactions around money. The United States dollar has acted as the reserve currency of the world for many, many years. And the power of that is starting to slip, and many people are becoming quite worried about that. We can see that there are geopolitical interactions with China trying to make the Renminbi the replacement for the reserve currency, the US dollar. Other actors in that space, for example, the Bank of International Settlements and some other people from the Bank of England have been looking at how you could use cryptocurrencies to help mitigate that. So, for example: Could you use a digital currency that enables you to create a basket of currencies as the global reserve currency, rather than having one single reserve currency? There’s lots of different discussions in this space, but what we’re seeing is a complex interaction of geopolitics, technology and economics, all coming together. And that’s why it’s so exciting to research in this space, it changes literally every day.

Samantha  [18:07]: Yeah, thanks for that overview. I was actually gonna ask about the different countries and you rightly touched on China and the US, because they’re all thinking of also launching their own digital dollar. What are the concerns that can come out of this? I think some people are concerned about mass surveillance. If CBDCs become a thing, and China and the US can track where everyone’s money is being spent and used, is it a concern? What other concerns are there?

Cathy [18:33]: Yeah, there’s lots of concern about these kinds of technologies and combining them with our financial system in this way. There could obviously be privacy implications, there could also be cyber security implications, and there could also be obvious implications around the use of these kinds of CBDCs, as we’ve discussed before, creating a run on the commercial banking system. So, the relationship between a central bank and the commercial banking system still needs to be resolved if we’re all using CBDCs. And there’s lots of different ways you can cut that, and lots of different ways you could think about implementing it. So I think there’s quite a lot of reasons to think carefully through how you would implement it. But on the other side there’s just as many reasons to think about doing it. For example, CBDC’s could actually reduce the transaction costs of managing and transferring money in the economy. Currently they’re extremely high. So, let’s say if you’re a government and you want to pay your unemployment benefits to your citizens. Currently that money has to go through the commercial banking system, and the commercial banking system will charge you a lot of money to make those transactions. If you have CBDCs, suddenly, for the government to pay unemployment benefits becomes a lot cheaper. So removing transaction costs is really interesting. But the other reason that many countries are thinking about it is what we’re seeing as the evolution of money. You were talking about the Yap islands and we’ve seen an evolution through gold, private money, fiat currencies, through to all of the things we’re seeing today – we’re moving towards what you’ve already referred to as a cashless society. If we move into a cashless society, the central banks really need to think very carefully about how they can actually control monetary flow, and this is one of those technologies that could enable them to continue to control the flow of money within the economy in a digital form. It is, however, massively complicated so it needs careful thought.

Samantha  [20:28]: And that’s a great point to wrap up on. Thank you so much, Cathy, for joining YAP Cast.

Cathy  [20:32]: Pleasure. Thank you for having me.

Samantha [20:34]: What I learned from Cathy is that there is no clear universal definition of what money is. Something that surprises me, but explains why our response to cryptocurrencies has been so varied. How do you have control over something if it is not clear what it is you already have? Part of that lack of definition, Cathy told us, comes from us not really understanding what money is and who creates it. She explained it beautifully: It’s banks, in essence, which create money. But there are two systems, one for banks and governments, and one for us ordinary people. And that second one really works for people who already have money. The rest, those of us without much money or any money at all are out of luck when it comes to loans. In short, money works great for those who have it, and for those who don’t – well, it doesn’t. That leaves a problem big enough to demand a solution – can social good come out of the technologies like cryptocurrencies to make money less unfair? We are in a world where money is evolving, so expect lots more experimentation as we try to figure out what kind of system we’d like to see, perhaps one that doesn’t look anything like what we understand as money today.

Samantha [21:46]: If you’d like to watch my full length conversation with Professor Cathy Mulligan, head to the YAP Cast Youtube channel. I’m Samantha Yap, thanks for listening to The Story Of Money, by YAP Cast.

Reinventing Money (S1E2) Transcript

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In our second YAP Cast podcast, we continue our What is Money? discussion with George Harrap, the Co-founder of Step Finance, and Head of decentralised finance at YAP Global.

Here are the key takeaways:

[0:28] Where Money Originated and the Meaning of ‘Pay’

[5:31] Reinventing Money with Bitcoin

[7:53] What is Bitcoin Mining?

[10:52] You’re the Custodian

[13:07] Finding More Value in Crypto

[15:27] Paying for Things in Bitcoin

Samantha  [0:03]: Hi, I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on this journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Where Money Originated and the Meaning of ‘Pay’

Samantha  [0:28]: In the last episode, we talked about trust and accountability with our money, differences in the perceived value of money, and the difficulties that can arise from trying to get your hands on money when you need it. These challenges have given rise to a desire to improve the systems of money as we know it – to reinvent money, so to speak. 

Before we get into that, let’s go back to the Yapese. As I mentioned before, we don’t really know how this system works, and it has become an illustration of more or less any interpretation of money over the years. The truth is, as with the Yapese, we don’t really know how early civilizations developed a system of money. 

Here’s our best guess: money didn’t arise from the marketplace, but from the quarrels, tensions, and hardships of life. The first institutions were tribal ones, and their main purpose, then and now, was to solve disputes either within the tribe or between tribes. These could be over rights, obligations, sexual misconduct, or boundary disputes. 

The word ‘pay’ itself is derived from the Latin word Pācāre, which came to mean ‘pacify a piece’ or ‘make peace with’. To keep the peace, tribal society demanded a means of compensation and an end to the matter. Money, therefore, came in different forms, and that form was associated with intrinsic value. It could be as an ornament, as with the Rai stone or shell, or it could be useful, like a tool, food, or cigarettes. Out of this arose the functions that serve to define money as a medium of exchange, a currency, a unit of account, a way to value something, a store of value, or a standard for future payments.

This is an area where students of Yap disagree, some don’t believe the stones themselves contained any value other than as a store of value, which means that some people don’t see them as money at all. A house is a store of value, but you can’t perform any of the other supposed functions of money with it. For example, you can’t buy a loaf of bread with a house.

Samantha [2:36]: That just sounds strange. But not everyone sees it that way. For one thing, we know that the items don’t need to move physically to change possessions. An unwritten ledger of who owns what, whether it be livestock or land, is stored in the minds of villagers instead.

In fact, this is how most of our transactions take place. These days, no physical money actually changes hands when we buy something online via a credit card or an app, the transaction merely exists because of the communication. In this way, a stone is a memory of contribution. 

In the words of Michael Bryan, then-vice president and economist at the Federal Reserve Bank of Cleveland, “This is a halfway point between our idea of barter, my eggs for your iPhone, or my necklace for your TV, the difficulty of barter has always been finding a perfect match the double coincidence of wants, and that’s where money has come in, and why maybe there has never been a clear cut case of a barter economy”. 

But what if there was a midpoint, something we can use as a marker to postpone the need for the coincidence to happen simultaneously. This is where money is seen more as a communication device. In this definition, money is just a rather crude technology that allows us to keep track of the balance of our gifts to society, relative to others, as Brian, writing in 2004, put it: “In fact, from this perspective, we might foresee a future in which all transactions are costlessly and instantaneously recorded for all to see making the idea of money, at least as a physical construct obsolete”. 

Whether this interpretation of early money is right or not, we still end up in the same place today, where money plays two important functions, first as a medium of exchange, and second as a unit of account. So that all works pretty well, right? Nothing to fix or change here, or is there? 

Well, the process of reinventing money has a long history, and the cryptocurrency revolution, which started with Bitcoin in 2009, should be seen as just the next chapter in the story of money. Bitcoin was created to be a peer-to-peer electronic cash system and is a cryptocurrency that is not owned by a central authority. 

Samantha [4:53]: But before we delve in, there are some important questions that need to be answered. What exactly are cryptocurrencies and how did they come about? Do cryptocurrencies like Bitcoin actually solve the issues that exist with traditional money? And is this really money that we can truly trust if no one owns it? 

To answer these questions, we have George Harrap back with us. George is the co-founder of Step Finance and head of decentralised finance at YAP Global. George is a crypto entrepreneur and one of the earliest Bitcoin pioneers. He actually began mining Bitcoin in 2011. 

Reinventing Money with Bitcoin

Samantha  [5:31]: George, thanks so much for coming back onto YAP Cast. So we’ve touched on how trust is dependent on where you are in the world. And value isn’t always agreed upon. And it’s not always possible to get cash in hand when you need it. Is that why there seems to be a movement of people right now trying to reinvent money, and it seems to start with Bitcoin?

George  [5:50]: I think that’s a lot of where Bitcoin came from, surely there’s a better system to solve some of these problems that you mentioned. I’ve been in Bitcoin for almost 10 years now, actually, over 10 years and it’s sort of been part of my life every single day. I started as somebody not knowing anything about finance, and how the financial world works. To be honest, I wasn’t too interested in that. But I’ve sort of educated myself over the years. And in Bitcoin, there’s this concept called mining, and that’s the creation of these Bitcoins, it’s how transactions get verified and you need computers to do that. 

My hobby was to go and build computers. I would buy parts off eBay, I would put them in my room, they would go and make some Bitcoins, and they would also be a heater at the same time. So it was a heater, which made money, which is the best kind of heater. That’s how I got started, and then from there, I continued to do the mining thing. I started to learn about trading and what all of that is about, and why Bitcoin exists in the first place. What are the sort of philosophies behind it? You can get that from the white paper as well – the Bitcoin white paper by Satoshi Nakamoto. 

George [7:01]: But, in 2014 I decided to leave my job in Australia, and go and co-found a company in Hong Kong that was focused on the use of Bitcoin for sending money around the world. And back then that was kind of a novel concept, using this digital currency to exchange value across these different borders, there wasn’t anyone doing that. We were actually the first in the world to do it. Through my learnings with Bitcoin from there, it’s evolved into various other forms, whether it’s stable coins or DeFi or these other new concepts, but everything starts with Bitcoin, and that’s where a lot of people came into it. 

Samantha  [7:38]: And you still have some of that Bitcoin today? 

George  [7:40]: No, I don’t. Obviously, everyone says they wish they did. My first Bitcoin, I bought it at $1.72. It’s now whatever it is 40 something $1,000 or something. So, yeah.

What is Bitcoin Mining?

Samantha  [7:53]: Okay, George. So you’re talking about mining. What is Bitcoin mining? Talk us through it.

George  [7:59]: It is how Bitcoin transactions get verified. Well, how do we know that I had that one Bitcoin to send you? In order for me to say that I have that one Bitcoin, you can’t just trust that I’m a good guy, and I’m not going to defraud someone. Whenever a Bitcoin transaction happens, that transaction essentially goes out to the rest of the world on the internet, and all of these different mining computers, and they do some complicated maths in order to determine that I actually did have that one Bitcoin, it was in my account. Bitcoin mining is just verifying these transactions. The question is: why would anyone do that? Well, you would if you’re going to get paid for it, right? When people verify these transactions, they are rewarded in new Bitcoins. And that’s how Bitcoin comes into circulation. It’s not thought up by some bank.

Samantha  [8:45]: Right. Do we know the creator? Who created it?

George  [8:48]: We don’t. All we know is that their name was Satoshi Nakamoto. And that was maybe a pseudonym. It’s an online username. Who knows? But this entity called Satoshi Nakamoto, was the one who first started Bitcoin. And they disappeared, I think it was 2012. I could be wrong on that, but they disappeared at some time around then, maybe a bit earlier. Satoshi basically said things are running well and I’m going to leave it for now.

Samantha  [9:13]: But can anyone turn it off? Does anyone control it and can they shut it down?

George  [9:18]: Here we’re talking about centralisation versus decentralisation, so, maybe take a step back. When I do that bank transfer to you, the person who can approve or deny that transaction is the bank, right? They can, quote, “turn it off”, or they can do whatever essentially. They are the ones who verify their transactions; it’s up to them. 

In the case of Bitcoin, there isn’t one entity which is able to turn it off or to stop people verifying. In the case of these miners, there’s no one miner who has a majority share of things who can just make decisions unilaterally and just go, “Yes, everything is the way that I see it”, and I’m going to turn off this transaction, and I’m going to stop this one. Nobody can do that. It’s impossible to do that because anybody can start mining Bitcoin. That means that anyone can start verifying these transactions. What it comes down to is in the Bitcoin world, there is no central entity which can exercise control over the whole system like a bank can; there’s nobody that can turn off the taps or turn off the transactions. 

George [10:20]: One of the key values is that this system is not censorable. It works 24/7, and it doesn’t require the input of one individual entity, whatever they call themselves. It’s just a bunch of people on the internet, who are incentivised to verify these transactions because they’re going to make some Bitcoin. And, because there’s a lot of them who are doing this, even if one person says, “Hey, I don’t want to do it anymore”, or “I don’t want to mine anymore”, there’s still a lot more people that can verify it in their place. So that’s what we call a decentralised system that doesn’t rely on this one entity.

You’re the Custodian

Samantha  [10:52]: That’s interesting, because this goes back to trust as well. I’m so used to if something happens with my bank account, I can call up a number and I might have to wait a little while, but I will be able to speak to someone over the other end of line, and they’ll be able to solve the problem for me. What if something goes wrong with Bitcoin? Who do you call?

George  [11:15]: Well, A: there’s no one to call. But also think of it like if you lose your wallet on a park bench. Well, who do you call? There’s nobody to call, you just lost your wallet. If you lose some cash out of your pocket, who do you call? Well, there’s no one to call. Once it’s gone, it’s gone. Essentially, you have custody of your money, and you are the one in control of it. And that’s the same as Bitcoin, there’s nobody to call, you are in complete control of your money at all times. And you’ve got to be careful about it. That’s why security is a big area of concern. There’s various ways in which you can back it up and make sure that you don’t lose your wallet, let’s say just like your wallet on a park bench. But ultimately, you’re the custodian, it’s all on you.

Samantha  [11:58]: But that’s, I think, scary for a lot of people, even for myself, I can’t trust myself to keep 1,000s of dollars. And I like that I can go and say to my bank that I forgot my PIN, because I can’t even remember my own passwords to half the things I signed up for. I think that’s scary for a lot of people.

George  [12:17]: Yeah, it might be and people, I guess, have to make the decision if they want to take custody of the money or do they want to abdicate that to someone else? There are services available, like Blockfolio, where you can have your Bitcoin that’s managed by somebody else. People that are experts and they’re the ones who keep it safe. And then, if you have a problem or something, they have a support line, you can call them up. 

There are options out there, but it comes down to, you have the choice now. With the Bitcoin world, you have the choice of ‘custodying’ your own money, or giving that custody to somebody else. In the traditional world, you don’t have that choice. I guess you have cash, but if you’re wanting to hold a lot of money, you probably don’t want to store a lot of cash in your house. So you have to use banks. There’s not really the same level of options there in the traditional world.

Finding Value in Crypto

Samantha  [13:07]: Okay, so we’ve touched on what Bitcoin is and how no one person controls it. And right now, the Bitcoin price is quite volatile. So George, how can we trust Bitcoin as a means of payment? If it’s worth something today, will it be worth something different tomorrow?

George  [13:26]: Well, I guess to answer that question, it really depends on what your references are. If your references are your local currency, let’s say pounds, then  something that is not in pounds is always going to have a different price in pounds, because there’s no pounds. That’s what we say when it’s all relative to what you’re valuing things in. I would say that there’s always going to be volatility because your reference is not Bitcoin; there’s always going to be some other currency involved. And that means that it’s always going to be different. 

I guess, where we’re going, though, is there a world where we don’t use the British pound as a reference? And we use some other currency, perhaps Bitcoin? And people might go, “Well, I don’t think that that will happen”. Well, it already happens in many countries of the world. Many countries, say Venezuela, for example. They don’t want their local currency, they want some other currency. It’s quite reasonable to say that another currency might become more useful for people who might want to value what they have in that local currency. They don’t care what the exchange rate is. They don’t care what the local Bolivar currency in Venezuela is. They just want one thing and one Bitcoin is one Bitcoin. 

George [14:37]: I guess the answer to your question, is it going to be volatile? Yes, it will. But you might reach a point in society where you don’t actually care about that because you’re not using your local currency anymore, because maybe something provides you more value. Maybe it’s going to be worth more over time rather than less. That’s what we see with fiat currencies, historically, they’re always worth less. You know why? You could buy a house in London for £20,000 50 years ago, but now, forget about it. What? Do you pay a million pounds to buy a new house? It’s often the same house, it hasn’t become 50 times better. It’s literally deteriorated, the brickwork is older, all of these kinds of things. The value of these currencies is what’s going to push people to use a different mechanism and value things in Bitcoin one day. We’ll see, the question is still out.

Paying for Things in Bitcoin

Samantha  [15:27]: So [we] touched on the history of money, where it comes from, and what it is, and we fast forward into the future of what money could look like. But let’s go back to today because I still can’t pay for my mortgage in Bitcoin. But George, you seem to be able to pay for things in Bitcoin. How do you do it?

George  [15:44]: Yeah, well, last year, I paid for most of my rent via cryptocurrencies. Not Bitcoin, particularly, but some of the other ones. I got a loan for that, in the DeFi world, the decentralised finance world. There’s lots of mechanisms out there today of which people can use to make Bitcoin or these cryptocurrencies more relevant for your everyday transactions. Whether it’s paying your rent or buying your groceries or paying for a hotel room, like I’m doing, or flights or whatever it might be, there are options out there. And what you’re seeing over time is that the usage of these services are increasing. We started where there were only a couple of people on the internet who knew this thing. And now, hundreds of millions of people around the world are using this system. 

The question is, where do we go from hundreds of millions of people around the world to billions of people around the world? And once you reach that kind of level of utility and people using this new payment mechanism, there will be groceries, which you’ll be able to buy in these cryptocurrencies. I think when we talk about the future, it’s not really this lofty ideal, which is sometimes when we’re all in flying cars and spaceships. It’s more “Look, this is the reality right now, there are options”. There are people using this system to pay for their everyday lives. And I think that’s only going to increase.

Samantha  [17:04]: Well, why don’t you just have some money in your bank account and just pay in fiat? Why do you have to pay in crypto? 

George [17:10]: Well, the money in my bank goes down in value where the money in crypto goes up in value. I’d much rather have my crypto money than then my money in my bank.

Samantha [17:18]: So you store all your wealth in crypto?

George  [17:21]: 100%. Yeah. 

Samantha [17:22]: Wow, that is bold, because I still like to have a number to call. But I think that we’re going to have to agree to disagree on this point about money and see where we go from here. I think it’s been a great discussion, learning about where money came from, how things are changing, and also where we’re heading today with it as well. Well, George, thank you so much for being on the show today. And I’d love to have you back to talk more. 

George  [17:50]: Thanks so much for having me.  

Samantha  [17:51]: If you’d like to watch my full-length conversation with George Harrap, head to the YAP Cast Youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money by YAP Cast.

What Is Money? (S1E1) Transcript

Listen on:

Samantha  0:03  

Hi I’m Samantha Yap, and I help blockchain and cryptocurrency companies tell their stories. I’m really passionate about demystifying emerging technologies and making it easy to understand for everyone. 

I’m embarking on a journey to discover the history of money, in order to better understand where money is heading today. In this series we’ll explore why Bitcoin, digital currencies and decentralised finance may play an important role in our future. 

Come join me on The Story of Money, by YAP Cast.

Samantha  0:31  

So where better to start the journey of money than on the Yap islands, nine degrees north of the equator in tropical Micronesia, a region in the western Pacific Ocean. The nearest significant landfall from Yap is New Guinea 1400 kilometres to the south. That’s about from London to Rome.

Samantha  0:53  

Burt Lancaster, an American actor and producer, made a movie there about the very thing I want to talk about the monetary system of Yap. Now my family name isn’t connected to the islands. And we didn’t name this podcast after it either, but I figured it’s a great starting point for understanding the past and perhaps the future of money. The Yapese use dollars these days, but they’re most famous for using donut shaped stones as a form of currency. However, it was not the only form of money at the time. Traditional money on Yap included coconut fibre rope turmeric, banana fibre mats, mortars and pestles and pearl shells – you get the gist, but it’s the stone discs known as Rai or Fe, which have captured the imagination of sociologists and monetarists. The disks range in diameter from a foot to 12 feet, and they were made of a crystalline form of limestone called argonite. They were valuable because they didn’t come from the Yap islands but had to be mined on the Palau islands 450 kilometres away. This made them hard to get and many fell off bamboo rafts while trying to carry the stones to Yap Island upon return. Such factors affected their value, along with size, colour shape, an age, and the number of lives expended to obtain it. In 1871, when an Irish adventurer called David O’Keefe, known as the ‘King of hard currency’ started mining and shipping Rai on an industrial scale, inflation kicked in, the Yapese developed a preference for the older stones and much larger ones until gradually, the tradition of mining stones was abandoned. Scholars are divided on exactly how the stones were used and what they actually signified. Their lack of agreement illustrates not just how historians can never agree on anything, but also that money itself remains much of a mystery, something I hope to unravel in this series. So what does it mean to possess our own money? We would usually demand that money is transferred to us either by digits on screen by our bank accounts, or the physical transfer of coins and notes. The Yapese didn’t bother with this, though, at least with their stones because they were too large and heavy to transport easily. Most stones just stayed put in someone’s backyard, but the community would be told about the exchange, and everyone would know who owned the stone, or what fraction of it. We do the same thing with gold, a certificate of ownership is usually enough to demonstrate that we own some of the bullion in a vault. Now this brings in the element of trust and accountability with money. Money has come a long way since the Yap, but it still relies on trust. We trust that the bank will look after our deposits. We trust that the customer who pays with cash isn’t giving us counterfeit bills. We trust that the waiter who goes away with our credit card isn’t going to clone it. So while we don’t leave our money in the street or someone else’s yard like the Yapese, we still rely heavily on trust to make our monetary system work. The system has refined itself over the centuries, but the basics have remained the same. So does this trust system work well? Or could it be better? Here to answer this question is George Harrap, the co-founder of Step Finance and head of decentralised finance at YAP Global. George is a crypto entrepreneur and one of the earliest Bitcoin pioneers. He has been in the crypto space for almost a decade now. First as an early miner, then a builder of the world’s first crypto remittance startup. George now focuses exclusively on the decentralised finance space, which he believes is the next giant leap for crypto assets in blockchain technology.

Samantha  4:37  

Hey, George, really excited to have you on YAP Cast. We have known each other for about two years. We worked together while you were running a crypto remittance company. It’s been a while.

George  4:51  

It’s been a while but it’s been a fun time. I think it’s closer to like three years as well. So, yeah. Something along those lines. 

Samantha  4:57  

Yeah, like time flies. Because the thing about the industry that we’re in is we travelled a lot before COVID to many conferences, and it was nice to see you around the world. 

George  5:07  

Yeah, hopefully that time will return again soon. 

Samantha  5:09  

Yeah, I’m really excited to go back to the basics because money as we know it is changing. So let’s just start with: George, what is money to you? 

George  5:20

Well, I think money is something central to everyone’s life. And I think, for me, it is the ability to transact and ultimately, money is freedom, it is a representation of our time that we put into things, our labour, essentially. And yeah, I would say that money is this mechanism for us to transact our labour, you know, if I’m really good at building shoes, and, and you’re really good at doing YAP Cast, we can trade our time and labour by this medium in between called money. 

Samantha  5:49  

But let’s go to the basics. Money to many people is a piece of paper. I’m in London, and in the UK, if I want to go buy groceries, I will need either pieces of paper, or it would be a balance on my bank account. And I will go to the store, tap my card to the card machine and I’ll be able to get my food. So, is that how you see money?

George  6:12  

All over the world, people use a thing called money. And generally it’s pieces of paper. And generally, these pieces of paper are issued by various governments around the world. There’s like 200 of them. But I think we’d all agree that some monies are better than others, right? So you know, you probably wouldn’t want to have a $1 trillion Zimbabwe dollar note to go and do your your groceries, as opposed to like, you know, a one Pound coin or something, it’d become kind of unmanageable, if you have to take a wheelbarrow with you every time you get to the supermarket. So given that, we know that some monies are better than others. So I guess for me, I’m trying to look for the best form of money. And I’m trying to use that best form of money. And I’m trying to incorporate that into my life. This hotel that I’m in, I paid for in crypto as a form of money, and in different parts of the world, you know, sometimes people have cards or mobile apps, or the physical cash, the pieces of paper.

Samantha  7:04  

Did you say you paid for your hotel room in crypto? Because surely the hotel did not accept your Bitcoin or Ethereum? 

George  7:12  

Yes, there was a middleman involved who took my Bitcoin and then was able to pay the hotel in the form of money which they want, you know, which in this case, I’m in Dubai. That’s Dirhams. Right? 

Samantha  7:24  

Right. But isn’t that kind of inconvenient? Because like, why don’t you just have Dirhams to pay for your hotel room? Why did you need to pay via crypto? That sounds inefficient. 

George  7:34  

Well, I literally couldn’t. So like, one of the problems was that my bank card doesn’t work. My billing address is not in the same country as the thing which I’m booking. And the website that I’m booking on, also doesn’t accept cards issued in the country of which my card is from. So basically, like I couldn’t actually pay for this hotel if I was to use the traditional banking system. 

Samantha  7:56  

Yeah but surely, these days, people have credit cards that are linked to Visa and MasterCard. You know, when I travel, yes, it’s expensive exchange fees. But if I’m really stuck and lost somewhere in another country, I can trust that the more reputable hotels and restaurants will take my Visa or my MasterCard. Don’t you have any of that?

George  8:18  

Yeah, but it comes down to billing addresses and this like concept of, for some reason, when we book something online, we need to tell people where we live, I don’t see why that even matters. If I have the money, and I want to give it to you, can’t I just give it to you? And sometimes like they only do certain countries or certain cards, you know, there’s lots of different things in between “Oh, is it a Visa or MasterCard?” and that can interfere with this transaction? If I give my money to the hotel via a Visa card, well, that includes a bank and includes a credit card issuer includes a merchant provider, like there’s a lot of people involved in that transaction is like eight in total or something. 

Samantha  8:55  

And you still have to use a middleman though, if you want to pay in crypto. So that’s another person involved, right? That’s still middlemen? 

George  9:02  

Sure. But there’s also places in the world that take crypto directly, where there’s no middleman and I can just pay somewhere and I paid for that in Hong Kong. There’s been places that I’ve stayed at and you can pay rent and stuff like direct and crypto. 

Samantha  9:15  

I can imagine that’s rare. It’s rare today to find a hotel that will take crypto, maybe you just are very good at finding the right places to go to?

George  9:26  

I guess here’s the thing, right? Like, I as a person who wants to use the services of a hotel, I have crypto and they as a hotel, need to pay rent and employees salaries and the local currency and government taxes or whatever it might be. So fundamentally, there’s always going to be a need for Fiat. If everything we’re valuing in society is using this money called Fiat and basically that the government is saying that you have to use it. So fundamentally, you’re like, yes, people can accept Bitcoin, but at some stage, they’re going to probably convert some of that to pay the bill.

George  10:00  

So the question is like, Are there places where I can pay with crypto? And then it’s somebody else’s problem to do that? And the answer is yes, there’s hundreds of 1000s, if not millions of places worldwide, where there’s like these middlemen who essentially take your crypto and convert it into the local currency and then pay people. So yeah, I’m taking a plane flight soon as well. And, again, I’ve paid via crypto for that one, too. So there are some middlemen involved there that pay the airline who needs to buy fuel and pay for people’s salaries and so on. 

Samantha  10:29  

So the Yapese store their money on a ledger. And that’s how people back in the day knew how much money they had. For me, I know how much money I have based on the bank balance. And I know that at the end of the day, my bank will be able to give me that sum of money if I want to spend it for whatever I please. 

George  10:47  

Well, let me ask you this, why didn’t you calculate the amount of wealth that you have denominated in Yapese rocks?

Samantha  10:54  

Because today, Sainsbury’s will only take my British pounds whenever I want to shop for groceries.

George  11:00  

Right? So it’s kind of geographically limited as well, right? So, you know, you might think of your wealth one way and somebody else might think of their wealth in an entirely different paradigm, it seems like you are trusting, you know, what the bank tells you as the numbers, you know, in in your bank balance, and you use those numbers to go and spend on stuff. And you’re trusting that somebody else will give you something in return for these numbers, right? So it kind of has to have both people in this transaction trusting you have to have Sainsbury’s at the grocery store, and you have to have yourself and you both kind of mutually agree that this thing is worth transacting, right? 

Samantha  11:34  

It works, they trust that my HSBC card has this bank balance, and then they’ll take it. And I mean, the system works.

George  11:43  

I guess, trust is only sort of relative to where you are, like they don’t trust some other country or some other currency. So I think trust is kind of this relationship that comes back to governments and what they have jurisdiction over, you know, the government of the UK doesn’t have jurisdiction over the government of France or the land of France or anything. So, you know, they can’t take their money. So they have to have their own money. And they have to take that. So I would say that when we’re talking about trust, keep it in context, that it’s usually something that’s very specific and regional to individual people. It’s not global, it’s not International – I can’t spend my Pounds where I live at the moment. So I think we have to be aware that this is the best form of money that is kind of limited on sort of where we happen to be standing at the current present time? Are there better forms of money? And I would say that there are better forms of money. There are systems where we don’t have to trust our local government or bank or something like that.

Samantha  12:41  

Right. We have touched on currencies like Fiat currencies. And actually, could you give us an explainer like what is Fiat? 

George  12:49  

So Fiat means by decree, so its value is determined by decree, which means the government says it has value, so therefore it has value. Whereas we would say something like gold, gold has value not by decree, but by voluntary people transacting. So like, you can take one ounce of gold all over the world, and you can trade it for goods and services, you can trade it for stuff, people will value it. And it’s not because they’ve been told to value it, or somebody saying, hey, you need to use this thing. It’s just because it’s one ounce of gold. And everyone realizes that that’s a valuable thing. Whereas, you know, pounds euros, these things are not like that, like we just discussed, right? I can’t take my pounds to Dubai and spend them. It doesn’t work like that because people don’t recognise it. So by decree versus a currency, which is voluntary, like gold. 

Samantha  13:38  

Right. So you touched before on gold? And it makes me think, do we even know where money came from? Because money seems to be a concept that we’re all still inventing, we’re kind of making it up as we go. Right? 

George  13:53  

Yeah, I think if you look through history, and history is a great example of, you know, the rise and fall of empires and tied to a lot of that is the money. Like, I think the first form of money was probably back in ancient Sumeria. I think that 5000 BC or something like that. And they used various tally sticks in order to see how much you owe somebody. So like a farmer might owe somebody, some some quote money, but they would register it as sort of notches on a stick, and the two people would take a copy of these sticks, or they would break the stick in two. And then if at a later date, you needed to make sure that that was a person I owed money, we could put the two sticks back together and it would work. So that’s one example of how, you know, the ancient Sumerians used it. But ultimately, it kind of went from using sticks as money or with the Yapese case, you know, rocks, and a lot of civilizations around the world converged on gold and silver being money. 

George  14:53  

What we’ve seen throughout certainly the last 5000 years of history, is that the common theme for humans being able to transact with each other is that gold and silver seems to have been the predominant form of money. And often when somebody else tries to insert themselves in the middle of that, like a central bank, or some local ruler or something like that throughout history, and they’ve interfered with the the supply of the gold and silver coins or reduced the content of golden silver in these coins, is genuinely led to ruin and inflation. So you can look at the Roman Empire, you can see how the gold content in their coins, you know, when they first had the Roman Republic was very pure, but at the end of it, it was maybe 100th of that. 

George  15:37  

And, things were a lot more expensive back then, you know, because of this, I guess debasement of the real value of money. But what we can take from this is, money has to have value in order for it to be useful. If money doesn’t have value, then why would you use it? Why would you, you spend all of your time working and doing all of these tasks, if you’re earning something which is not useful at all, and has no value? So I think value is another core concept of money, we’ve got trust, we’ve also got value. And these are some of the tenets that you have to have in order to have a useful monetary system in your local country. 

Samantha  16:14  

Right. So you’re basically saying gold and silver are more valuable than Fiat currencies that we have today?

George  16:22  

Yeah, well, I mean, you know, you can take a one pound gold coin is currently selling for I think, at the Royal Mint, something like 17 hundred worth, I don’t know what that is in pounds, it’s probably 1500 Pounds or something that’s versus like one Pound in a coin that you would probably have in your wallet right? So clearly, one is more valuable than the other. I guess the measurement here is like what do you measure it in? Do you measure it in Pounds? Do you measure it in dollars? Do you measure it in Bitcoin? Or what do you measure it in? So with gold, you always have this one measurement, which works everywhere in the world? 

Samantha  16:57  

Right, I get it. But practically, today, if I have a gold bar, and I go walk into my local restaurant, they won’t take, I mean, maybe they would, but like, they won’t take the gold bar, maybe like chip at it to go, “alright, this is how much your pizza costs”. I mean, no one’s using gold today to transact and it seems very clunky. I mean, right now, it seems like people have just gold bars in the vault?

George  17:23  

Right, well, I mean, this is going back to history. Again, this is the same problem that many civilizations have faced over the years in that you had all of these physical metals, which were worth something, but carrying them around all day was really hard. So I think it was in China, paper money was invented there first. So you would have representations of money that’s held somewhere else. So this kind of gets into the trust that we spoke about earlier, whereby, well, if we have 100 ounces of gold, and we make some pieces of paper that says, Well, you know, we have 100 pieces of paper, to certify that there is 100 ounces of gold backing these these pieces of paper at one ounce each, we have to trust someone for that right. Who are we going to trust? 

George  18:09  

And that’s the question you could you could trust, maybe you know, the local merchant. And in ancient societies, that local merchant maybe became a bank, whereby they would have a vault, they would have all this gold there. And it would be much more practical to put it there because it was more secure, you couldn’t get robbed. And they will just give you these pieces of paper. But of course, what happens if they issue more pieces of paper than the gold, which they already had. And that’s where currency debasement happened, and where essentially, you could have these lots of these pieces of paper, they’re easy to manufacture, they have really not much value at all. But the currency that’s actually backing those things, you know, you’ve got to make sure that you have an equivalent amount, otherwise, your pieces of paper are useless. And you’ll need more pieces of paper to buy the same thing. So that’s sort of what we’ve seen throughout time. 

Samantha  18:58  

Okay, so in a sense, money is a medium of exchange that everyone kind of agrees and trusts today, we kind of all agree and trust that one British Pound is one British pound, one US dollar is one US dollar, we don’t kind of agree that we should be transacting gold bars to buy houses today. But you’re saying that that’s kind of what works. Why are we using paper money today? What happened along the way?

George  19:29  

Things have developed over the last, say, 500 600 years where you’ve seen the proliferation of a lot of these banks that have popped up, that started as places where people could store their gold, and these banks would issue promissory notes, essentially saying, “Hey, we’re good for this amount of gold”, and here’s this piece of paper for you, you can redeem it at any time. That’s how sort of the origins of modern banking started but right now you can’t go and take your pounds and go to your local bank and say “Hi I’d please like the gold equivalent of this please and, and the money which is backing, you know my pounds”, because no currency is backed by gold anymore. They’re all based on basically the faith of the local government. So when we’re talking about Fiat currency, currency by decree, we’re talking about trust, we’re talking about value.

George  20:19  

Currently, we have no actual value that’s backing the currency, we have the trust of the local government, and we have the decree of the local government saying that it’s valuable. So this kind of means that you know, a lot of your day to day, you know, transactions depend on if you have a good government or not. And, you know, there’s a lot of places where the local governments, let’s say, are not ideal, so a lot of people in the world are transacting, without having this, this implicit trust in what they’re doing. You know, if the bank is there, maybe the bank doesn’t even give them an account. Maybe often, you know, currently, or I’ve worked with the UN in the past, I went to Tajikistan. And when we were there, we were told that two banks in the last few years collapsed, and everyone lost their money. So if you had money in the bank, this is a place where you’re meant to trust, and you’re meant to trust the value of it, because the government says it’s valuable. Well, everyone just lost their money. And it’s worth nothing, right? And now you’re poor, because all your money’s gone. 

George  21:16  

So I think, yeah, when we’re talking about, yeah, value, we’ve got to really focus on these currencies, which are not dependent on these middlemen, and these intermediaries, which essentially have no value, and if they disappeared tomorrow, then then our wealth and value will also disappear. And that’s a bad thing to have. 

Samantha  21:35  

So George, for you and me, we don’t exactly face these problems that you just spoke about. The bank does give me money when I need to spend it, and I trust it today. And the system works quite well where I am, at least.

George  21:49  

Not all the time. I remember one time when I was travelling in Malaysia, I had my card and the ATM ate my card. And now I have no access to money, and I have no ability to buy food for the next day, or pay for the rest of my hotel room. So I had to find some other sorts of money without a bank card and I went to the local bank, they didn’t want to give me back my card. And all these sorts of things. So eventually, it ended up where I had some Bitcoin. I had a laptop. My friend was also in Malaysia at the time and I said, Hey, can we do a cash deal? And I sold him some bitcoins . He gave me the cash, and now I have money. So I guess yeah, the moral of the story here perhaps is, it can happen in many places around the world. You know, my example earlier of me paying, having problems paying for my hotel as well, because they didn’t want to accept my debit card, or whatever reason, it was a card that wasn’t issued in the right country. It probably works for us in this narrow band of circumstances. But that’s not everyone in the world. 

Samantha  22:50  

Unfortunately, that’s all the time we have today. George, thanks so much for sharing your insights with us. 

George  22:55  

Thanks for having me. 

Samantha  22:56  

We’ve had a great conversation about trust and accountability with our money, differences in the perceived value of money and the difficulties that can arise from trying to get our hands on our money when we need it. In the next episode, George and I are going to discuss if there’s a solution to these challenges. If you’d like to watch my full length conversation with George Harrap, head to the YAP Cast Youtube channel. I’m Samantha Yap, and you’ve been listening to The Story Of Money, by YAP Cast.