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The Story of Money

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YAP Cast, brought to you by YAP Global, presents its first series on The Story of Money with Samantha Yap. YAP Cast is on a mission to bridge the communication gap between emerging technology and the mainstream world.

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Oct 19, 2021

Can DeFi Be The Better Financial System? (S1E12)

The future of money may owe more than we think to its complicated past.

In the season finale, Samatha continues our conversation with Felix Martin. Felix draws the distinction between the underlying technologies underpinning DeFi and the monetary system itself, and makes the case that the principle behind the latter is as old as the history of money itself. This leads them to a discussion on the issues surrounding regulation versus self-regulation of the DeFi space, and how history has shown us that both sides have considerable advantages and disadvantages.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with returning guest, Felix Martin.

Felix Martin is an economist, fund manager, and author. He 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. Since 2008, Felix has worked in the fund management industry in London, first at Thames River Capital – now part of BMO Global Asset Management; then at Liontrust Asset Management; and most recently as one of the founding partners of 1167 Capital.
View transcript
Can DeFi Be The Better Financial System? (S1E12) 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.

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.
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Oct 12, 2021

Why Do Financial Crises Happen? (S1E11)

Do we really understand financial crises? History seems to suggest that we don’t.

Samantha discusses this with Felix Martin, the author of ‘Money: The Unauthorised Biography’. Felix explains the types of financial crises, and the potential reasons they occur. They talk about how the modern financial system is fundamentally built on trust - between the people and financial institutions, and between financial institutions and the government. Finally, they explore what happens when that trust breaks down, and whether cryptocurrencies and DeFi can actually solve that problem.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with this week’s guest, Felix Martin.

Felix Martin is an economist, fund manager, and author. He 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. Since 2008, Felix has worked in the fund management industry in London, first at Thames River Capital – now part of BMO Global Asset Management; then at Liontrust Asset Management; and most recently as one of the founding partners of 1167 Capital.
View transcript
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.
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Oct 4, 2021

Why Is It So Hard to Move Money? (S1E10)

Hawala is one of the oldest, fastest and cheapest international money transfer systems. So how come you’ve never heard of it?

In this episode on “Why Is It So Hard to Move Money?” Samantha Yap is joined by George Harrap, Co-Founder of Step Finance and Head of DeFi at YAP Global. They touch on the common challenges with attempting to send and receive money around the world. George takes us through some fascinating alternatives to bank transfers that have arisen out of necessity to fill the gaps in current financial systems, including Hawala. Finally, they explore how cryptocurrencies may prove to be the borderless money transfer solution of the future.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with returning guest, George Harrap.

George is a veteran crypto entrepreneur. Having started in the crypto world almost a decade ago as an early miner, George brings a wealth of experience. He has built the first crypto remittance startup in the world, built 6 cryptocurrency exchanges both centralised and decentralised, and launched 12 stablecoins. George now focuses exclusively on the DeFi space - which he believes is the next giant leap for crypto assets and blockchain technology.

View transcript

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.

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Sep 27, 2021

Where is Debt Heading? (S1E9)

Debt has the power to wreak havoc on personal lives and entire economies alike. Is it really possible to tame the beast?

Samatha continues our conversation on debt with Sid Powell. They discuss some of the ways debt has been abused within capital markets, and the repercussions that have resulted. They contrast the key differences between the current financial system and the brave new world of decentralised finance, with Sid making a compelling case for why he believes DeFi represents the solution to the problems that have plagued debt in existing financial systems.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with this week’s guest, Sid Powell.

Sid Powell is the CEO & Co-Founder of Maple Finance. Sid comes from a background in debt capital markets and institutional banking. During his career in traditional finance, he participated in $3b+ of corporate bond issuance, established and ran a $200m+ bond funding program, and managed Treasury at a commercial lending fintech company.

View transcript

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.

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Sep 21, 2021

The Need For Debt (S1E8)

Does debt really deserve the negative connotations often associated with it?

To answer this question, Samantha talks to Sidney Powell Co-Founder and CEO of Maple Finance, a decentralised institutional marketplace for borrowing and lending. They explore how the negative perceptions around debt came to be, and the ways those sentiments gradually began to change. Sid breaks down some powerful factors that help to differentiate between good and bad debt, and makes it easy to understand how debt can be harnessed as a tool for our benefit.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with this week’s guest, Sid Powell.

Sidney Powell is the CEO & Co-Founder of Maple Finance. Sid comes from a background in debt capital markets and institutional banking. During his career in traditional finance, he participated in $3b+ of corporate bond issuance, established and ran a $200m+ bond funding program, and managed Treasury at a commercial lending fintech company.

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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.

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Sep 14, 2021

The Art Of Borrowing And Lending Money (S1E7)

Few financial topics stir up as many conflicting opinions as the subject of borrowing and lending.

Samantha discusses this with Leo Cheng, Project Lead of C.R.E.A.M. Finance, a decentralised lending protocol. They explore the different scenarios where debt isn’t necessarily a bad thing, but can in fact be beneficial or profitable. Finally they talk about the inaccessibility of borrowing and lending in the present financial infrastructures, with an eye on how decentralised lending protocols may pave the way towards a more fair and inclusive financial future.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with our guest of the week, Leo Cheng.

Leo Cheng is a co-founder at C.R.E.A.M. Finance, a decentralized lending protocol for individuals, institutions and protocols. Prior to C.R.E.A.M., he summoned the Machi X DAO and founded Blockstate, a San Francisco-based blockchain advisory service. Before Blockstate, Leo served on the founding management team at Solano Labs, a cloud computing startup that was acquired by GE Digital. Prior to entering the blockchain space, Leo held senior positions at top technology firms including Apple, American Express and Belkin.

Leo is also an electronica DJ who performed in San Francisco, Los Angeles, and at Burning Man.

View transcript

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.

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Sep 6, 2021

Money as a Social Construct (S1E6)

n our societies, money has a tendency to define us, but why?

In this episode, Samantha and Professor Cathy Mulligan, the Director of DCentral Lab from the University of Lisbon, talk about how money has come to play a huge role in shaping society as we know it, and has in turn been shaped by an ever-evolving social landscape. They discuss the ways digital currencies may hold the keys to completely rethinking the way we've set up our current economic system.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with a returning guest, Professor Cathy Mulligan.

Cathy Mulligan is Professor of Computer Science and Director of the DCentral Lab that investigates blockchain, cryptocurrencies and associated digital technologies for social good and sustainability at Instituto Superior Técnico, University of Lisbon. Cathy is a cross-disciplinary researcher who has worked at the boundaries of economics, sustainable development and digital since 2006. She has led multiple research projects across the UK, EU, Australia, India and Malaysia. She is a member of the World Economic Forum’s Data Policy Council and has consulted at senior levels for the UN, OECD and various governments across the world. She is a Visiting Lecturer at Imperial College and Honorary Senior Research Associate in the computer science department at UCL. Cathy has over 25 years experience in senior corporate and research roles and has written 7 books on digital technologies.
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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.
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Aug 30, 2021

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

One of the most concerning issues with the stability of money is inflation.

In this episode, Samantha and Sam Kazemian, Founder of Frax Finance talk about the mechanics of inflation and its real-world impact on price stability. Sam delves deep into stablecoins and touches on why the term ‘cryptocurrency’ might be a misnomer, and how that has shaped some of the misconceptions that have arisen around digital currencies.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with our returning guest, Sam Kazemian.

Sam is a software engineer, entrepreneur, and cryptocurrency enthusiast. He is the Founder of Frax Finance, a decentralised stablecoin protocol. Frax is the world’s first hybrid, fractional algorithmic stablecoin protocol that is partially backed by collateral and stabilized algorithmically. Frax is open-source and permissionless, bringing a truly trustless, scalable and stable asset to the future of decentralized finance. Sam is also the co-founder of the blockchain based knowledge base, Everipedia.

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Why Does Money Lose Value Over Time? (S1E5) 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]: 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.
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Aug 23, 2021

How Do We Measure Money? (S1E4)

How do we assign value to something that is mutually accessible, and in an understandable format?

In this episode, Samantha discusses the denomination of money with Sam Kazemian, the Founder of Frax Finance. They touch on why we need a standard unit of measurement to coherently communicate value to each other and why stablecoins may present a more viable alternative to Bitcoin in being the currency of the future.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with our guest of the week, Sam Kazemian.

Sam is a software engineer, entrepreneur, and cryptocurrency enthusiast. He is the Founder of Frax Finance, a decentralised stablecoin protocol. Frax is the world’s first hybrid, fractional algorithmic stablecoin protocol that is partially backed by collateral and stabilized algorithmically. Frax is open-source and permissionless, bringing a truly trustless, scalable and stable asset to the future of decentralized finance. Sam is also the co-founder of the blockchain based knowledge base, Everipedia.
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Ep 4 How Do We Measure Money? 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]: 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.
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Aug 17, 2021

Where Does Money Come From? (S1E3)

Who actually gets to decide where money comes from and how much of it there is?

To answer this question, Samantha asks Professor Cathy Mulligan, the Co-Director of the Imperial College Centre for Cryptocurrency Research and Director of DCentral Lab from the University of Lisbon. They talk about who creates money, explore the mechanics of the central versus commercial banking systems and uncover how digital currencies are transforming the way money works today.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5 minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with this week’s guest, Professor Cathy Mulligan.

Cathy Mulligan is Professor of Computer Science and Director of the DCentral Lab that investigates blockchain, cryptocurrencies and associated digital technologies for social good and sustainability at Instituto Superior Técnico, University of Lisbon. Cathy is a cross-disciplinary researcher who has worked at the boundaries of economics, sustainable development and digital since 2006. She has led multiple research projects across the UK, EU, Australia, India and Malaysia. She is a member of the World Economic Forum’s Data Policy Council and has consulted at senior levels for the UN, OECD and various governments across the world. She is a Visiting Lecturer at Imperial College and Honorary Senior Research Associate in the computer science department at UCL. Cathy has over 25 years experience in senior corporate and research roles and has written 7 books on digital technologies.

View transcript

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.

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Aug 9, 2021

Reinventing Money (S1E2)

Challenges with money often give rise to a desire to reinvent money.

In this episode, Samantha Yap is joined once again by George Harrap, Co-Founder and Head of DeFi at YAP Global. They talk about ‘Reinventing Money’ with Bitcoin, and George takes us through a quick history of Bitcoin and an explanation of how it works with mining, the decentralisation of control of it and how Bitcoin may solve the problem of the debasement of money.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important role in our future. She’ll take you on a 5-minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with our returning guest, George Harrap.

George is a veteran crypto entrepreneur. Having started in the crypto world almost a decade ago as an early miner, George brings a wealth of experience. He has built the first crypto remittance startup in the world, built 6 cryptocurrency exchanges both centralised and decentralised, and launched 12 stablecoins. George now focuses exclusively on the DeFi space - which he believes is the next giant leap for crypto assets and blockchain technology.
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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.
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Aug 3, 2021

What Is Money? (S1E1)

Where better to start the journey of money than on the Yap islands...

In this episode on “What is Money?” Samantha Yap is joined by George Harrap, Co-Founder of Step Finance and Head of DeFi at YAP Global. They touch on different forms of money, issues of 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.

Join Samantha Yap on a quest to discover the history of money, to better understand why Bitcoin, cryptocurrencies and decentralised finance may play an important part in our future. She’ll take you on a 5 minute audio journey that touches on the history behind today’s topic, followed by the best parts of her conversation with our first guest, George Harrap.

George is a veteran crypto entrepreneur. Having started in the crypto world almost a decade ago as an early miner, George brings a wealth of experience, having built the first crypto remittance startup in the world, built 6 cryptocurrency exchanges both centralised and decentralised, and launched 12 stablecoins. George now focuses exclusively on the DeFi space - which he believes is the next giant leap for crypto assets and blockchain technology.

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What Is Money? (S1E1) Transcript

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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.

Listen to this episode on:
Jul 28, 2021

Intro to The Story of Money

Listen to this episode on:

Dec 28, 2022

The foundation of digital money (S2E12)

Is there an understanding gap between TradFi, CeFi and DeFi right now? Why is data important in DeFi? Why can’t we replicate how we manage data in DeFi like in TradFi?

Here to share more on the questions above is Ambre Soubiran. Ambre worked at the highest levels of traditional finance until she caught the DeFi bug. She became the CEO of Kaiko, a crypto data company, and turned it into a key player in the digital asset market.

View transcript

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Ambre Soubiran on this episode of The Story of Money by YAP Cast.

Hi, I’m talking to Ambre Soubiran, CEO of Kaiko, who last episode shared her vision of how data is as central to DeFi as it has been to traditional finance.

We can easily forget that financial markets are underpinned by several giant data companies which feed all market participants with up to the millisecond price information.

DeFi too, though we’re still at the early stages, and the principles of on-chain data transparency, immutability and anonymity mean that the TradFi model cannot be simply ported across.

I’m curious about Kaiko’s mission to be the foundation of the digital finance economy and what that actually looks like, so let’s get back to my conversation with Ambre and see what she has to say.

Gap between TradFi, DeFi, and CeFi

Samantha Yap [01:08]: Moving on to talking about the bridge between TradFi, CeFi and DeFi. What do you make of the gap, the understanding gap between TradFi, CeFi and DeFi right now?

Ambre Soubiran [01:20]: Aabsolutely. So, TradFi, I think everybody knows – TradFi is the existing financial system. And by the way, I think there are lots of incredible things with the existing financial systems. This is finance that has been evolving and kind of being perfected over hundreds of years. And so, we shouldn’t just trash everything and start anew. I think, sometimes in the pure kind of short DeFi, Web 3.0 community, you kind of hear a little bit of a revolutionary dialogue. And I think that it’s important to acknowledge the fact that a lot of great things exist in finance and a lot of good financial products and, you know, there’s many great things. But it is today run by what we call centralized, obviously, institutions that are regulated. So, the regulation makes sure that there are some specific liquidity ratios that are responsive to peak rules that you cannot do anything with customer funds, etc. So, the regulated traditional financial institutions is the traditional world.

Then on the other side of the spectrum, you have DeFi and DeFi is entirely public protocol based, blockchain based financial applications such as decentralized exchanges, lending and borrowing protocols, tokenization platform, you have a lot of different applications that leverage the blockchain technology. And then they build protocols that mimics financial contracts in order to enable participants to interact with each other and an exchange value and then kind of program this exchange of value depending on specific guidelines. This is unregulated, but it is also entirely public, transparent, open source, you can read the code, you can see where funds go, etc.

Then you have in the middle CeFi, and CeFi serves a very important purpose, which is it serves as a bridge to DeFi, in order to interact with DeFi, you need to own crypto assets. And the only way to go from Euros to Eth is to have a place where you can buy Eth.

So, CeFi basically creates financial applications that has very much to do with crypto assets. And that they enable and they onboard and they do this kind of on ramping, off ramping for a lot of users to bridge the TradFi world and the DeFi world. However, I think where it’s been a little bit misused, is it’s not supposed to be this new unregulated bank that you use as a sort of, you know, to store your value. And unfortunately, the problem here is that either you have good unregulated, centralized exchanges and kind of offerings. And I’m not going to give names, that’s not the point, or you have some that are more dodgy and do whatever they want with customer funds. But the problem is because they’re unregulated, but still centralized, well, then you just don’t know what’s going on, you don’t know what happens. And every time in the history of crypto, that something happened, that was dodgy it was because it was opacity plus unregulated companies.

However, centralized exchanges serve a very important purpose, which is making the user experience more seamless. And obviously, crypto is an industry where honestly, interacting with DeFi protocols is still hard. It’s not very intuitive. And so, the centralized exchanges and centralized finance today is making crypto easier, and it’s creating that on ramp. So, you know, it’s really not entirely bad. I think none of those three are bad or right or wrong, I think it’s important for people to realize that the power of crypto and blockchain is a lot into being in control of your funds. So, there’s this old saying, not your keys, not your funds, it’s important, you have the power to hold your crypto, you have the power to not trust an intermediary to manage your funds. So why would you? Right. In some way. And so, this this situation that we’re currently in, really puts the spotlight on the fact that it is extremely important to be self-custody of your funds to understand what blockchain means and and to build on the blockchain narrative rather than recreate the TradFi industry on a emerging volatile asset class.

What is Kaiko building?

Samantha Yap [05:27]: Thanks for that overview and that grounded perspective, because I think there are as you highlighted, you know, good things about all different aspects. It’s just the we haven’t quite seen the best use of it all but where does Kaiko fit in this spectrum? And yeah, what’s some of the work you guys are focusing on or want to see happen being this place where you’re providing market data for different players.

Ambre Soubiran [05:53]: So data, data, data, it’s really about transparency, price, order book volume, we’re connected to all exchanges regardless if they are CeFi or DeFi. We gather all the trading activity on all crypto pairs as they are traded everywhere pretty much. We cover 200,000 instruments. An instrument is a pair of assets. So, it can be Bitcoin-Euro, it can be Eth-Dollar, it can be Bitcoin-Eth, whatever crypto against whatever other base assets and what we provide is transparency and visibility for anyone who is interacting with the crypto markets on the market structure and the price of those assets. And that is extremely important. I mean, that industry, the Financial Data Industry and TradFi is a $40 billion industry every year. It is huge. And it is huge because people need access to information, it is essential the information that we’re providing.

Proof of reserves

Samantha Yap [06:48]: Speaking of data, there’s this conversation about exchanges needing to provide proof of reserves. Now, so as a result of what’s happened at the time of speaking with the FTX collapse? It’s expecting the centralized exchanges to prove that they have reserves. What’s your thoughts on that? Is there a way Kaiko can get that data as well and ensure that it’s trusted data from the different exchanges that you work with?

Ambre Soubiran [07:14]: Absolutely, I think that’s great. And I also, so the great thing is, Kaiko can get that data, but anyone can get the data. That’s the whole point, is that once they publish the list of their wallets, where they hold their reserves, everybody can take a look at it. What you see, however, on-chain is a number of Bitcoins, a number of Eth, a number of whatever token. And so, what we will be able to see on chain publicly is the number of each token as they’re held by exchanges. Where Kaiko comes in is by providing a reliable price rate that can be used in order to calculate what is the dollar counter value of all of these assets, and in a fair, transparent way. So yes, absolutely – I think this is great. I think it goes in the right direction of kind of self-regulation, even though I think regulation will help as long as customer funds are involved. I think it does make sense that there are some obligations in terms of reporting of that nature. And then making that publicly available and publicly observable on chain is great. It’s going to create some operational difficulties for exchanges. As you know, everything is under scrutiny. But still very much a good move for the ecosystem.

Transparency might make it hard for some but it’s good for the industry

Samantha Yap [08:19]: I guess the follow up question to that is, how can customers trust that data? How do we know that the data that exchanges like Binance or Kraken are giving us are, you know, is the accurate data because they are still centralized exchanges?

Ambre Soubiran [08:36]: So yes, but what we cannot verify is how much do they have in Fiat on a bank account unless they actually publish bank statements. However, for anything that is on-chain, I mean, anyone can take the list of the public addresses that Binance gave as being their cold wallets. And anyone can just put that in Etherscan and Ether Scan and kind of check the balances, check with transfers and check everything. That’s why I was saying it’s going to make their operational life a little bit more difficult. Because everything is so public. And so anytime they move something – sometime for just storage purpose, or like, you know, housekeeping, kind of making sure that the assets are segregated here and there, etc., is going to trigger some kind of industry questioning on why are they moving so much money here and there, what are they doing with the funds, but now that they’ve announced once that they’ve tied a blockchain wallet to their identity, which is this is our Binance hot wallet or cold wallet, whatever. Well, it’s there, it’s known and now we can track every single thing that you do, that’s public. So, it’s not because they’re a centralized exchange, that their on-chain activity doesn’t show on chain, the on-chain activity is there and now that they shared their wallets, it’s possible for anyone to access that and to see which were the different inflows outflows of each wallet and which other wallet they interacted with. This is not data that we do at Kaiko. This is the you know, guys like Chainalysis are experts in doing these kinds of things or Elliptic in the UK. But I think, it’s a good move for the industry.

Should DeFi follow TradFi applications

Samantha Yap [09:58]: When you were explaining about DeFi, the benefits of DeFi is that it’s transparent and that people can track everything on-chain, however, it’s still kind of this innovative, unregulated space. Do you think DeFi should mimic the traditional financial applications? And would that be the ideal future financial system or is there more to it?

Ambre Soubiran [10:21]: So, there’s more to it right? Because the only thing you need to participate in DeFi is an internet connection first of all. So, I think that by itself is important to mention, I’m pretty sure that most and some of the flaws and craziness and speculation of the existing financial system will be replicated in some form of shape on chain. But where it actually does serve a very important purpose is in bringing transparency into the things where customers do not have access, right. If I want to enter a super leverage trade, I can do that on traditional finance, I can do that on DeFi, that’s no problem. But if I want access to lending services, if I want access to just a, you know, buy-hold-sell banking system, all of the basic functions of the financial system are going to be enabled in a much more transparent, decentralized way than they are today in the financial system. The amount of fees that banks are taking in every single possible direction today is crazy and this is something that we can change with DeFi.

Now, if people do want to start creating exotic protocols and contract and miss-sell them, unfortunately, you know, that’s also a part of the human nature but basically, I don’t think it can get worse. It can only get better, and it will improve on all of the basic services of what finance should be about.

Samantha Yap [11:37]: Cool. And I guess the ones that are doing things right will eventually grow. But I think right now DeFi doesn’t necessarily have the volumes that traditional financial space has.

Ambre Soubiran [11:46]: There’s now solid amounts of liquidity on-chain, right?.

What does the digital finance economy look like?

Samantha Yap [11:50]: Yes, for sure. Looking ahead, the Kaiko mission on your website says that – Kaiko hopes to be the foundation of the digital finance economy. What are the ingredients to that? And what does that look like?

Ambre Soubiran [12:02]: I think solid, transparent, reliable tech, I think is number one. I mean, our focus is institutions and enterprises, right? So, we have to build systems and networks that are at the level of the existing financial market data feeds. And these are like giant companies out there. So, the first thing is obviously we’re trying to do, and that’s why I say there is amazing things already and TradFi is we are taking leafs and lessons from large traditional financial data company, we are regulated ourselves under a data regulatory framework around what you can and cannot do with the data as you’re going to be able to serve as a source of truth for an industry. So, when we say we want to enable the new digital economy is I believe that blockchain will be the underlying tech to many industrial applications in the future. And for that to happen you need reliable code auditable transparent, solid code, and then you need reliable trusted third-party data provider that is going to feed data to that code. And that is really how we’re approaching the question and Kaiko is here to solve the quality data components of enabling a blockchain economy.

Where is crypto going to be in five years’ time?

Samantha Yap [13:12]: And looking ahead, let’s say five years ahead, where do you see crypto growing and evolving and yeah, addressing kind of what’s happened as we’re speaking in the last week? Where do you see crypto heading?

Ambre Soubiran [13:26]: So, I think it’s going to reinforce the actual blockchain narrative, and the fact that we need to, you know, I think it’s going to empower a lot of DeFi application and it’s going to put more emphasis on on what was the original ethos of blockchain and a bit less about synthetic centralized financial products and applications on top. So, I think that is for the better, I think the next step to start seeing proper blockchain application is asset tokenization. And that will be the next natural key, I think, let’s say that there’s a succession of bottlenecks here. And that asset tokenization is key to enabling proper real-life applications of blockchain tech.

We need to get back to basics

Samantha Yap [14:00]: Anything else you’d like to add? I think we’ve covered a lot of ground.

Ambre Soubiran [14:04]: Thanks for asking all those questions. As you say, it’s our role as an industry to be more clear and more maybe, pedagogic, I guess about, you know, what does blockchain mean? I mean, Blockchain is a revolutionary technology, but it is just a technology. It’s a means it’s a different way of executing contracts. The contracts are not going to change. It’s just how do we run them? How do we create trust? How do we execute them? And I think that’s it’s important really to get back to the basics. And I think that’s a good opportunity for people right now in this kind of trust crisis, because of FTX, to go back to the fact that blockchain is really a ledger that is maintained by a network that is incentivized by a unit of account. And that is the triptych that basically creates a blockchain, you need a network, you need the crypto elements that is used to incentivize the network so that they would maintain the ledger. And I think those elements are very important to just go back to the basics. So, you know, you did the University of Nicosia, I have a few colleagues who did it too and it was great. The Princeton degree is great, read books, you know. People should just get back to like, what is the essence of blockchain and what it means to have a network that basically, processes transactions and contracts?

Samantha Yap [15:14]: Yes. And ultimately, the angle of this kind of podcast is The Story of Money and the future of money. And I think we’re seeing money evolve – the trust system of money. So ultimately, yes, blockchain technology is just the foundation of it. And it’s like what will come up – the applications built on that. So yes, I think that’s interesting. And yes, keep up the work that you do with Kaiko because I think it’s very much needed and I appreciate the grounded perspective that you brought between to TradFi, CeFi and DeFi because I work with a lot of DeFi – yes, DAOs and they’re very quick to discount sometimes with the TradFi world do but as you said, there’s been applications that have been tried and tested for years. There’s a reason why it’s still around, so we need to recognize that too.

Ambre Soubiran [15:54]: Yes. Thank you so much for having me on the podcast.

Samantha Yap [15:56]: Thanks so much Ambre.

That was Ambre Soubiran, CEO of Kaiko, a company that is providing data on 200,000 different financial instruments, making digital asset transactions possible.

A key takeaway for me is this: while she clearly believes that TradFi provides important guides for DeFi, its exorbitant fees and slow innovation make it ripe for disruption; but that disruption is not assured, as recent events have shown us.

There’s plenty more that needs to be done in DeFi to build the credibility and infrastructure necessary for long-term success. And Ambre believes that to get there we need to get back to basics, understanding what makes blockchain such a compelling technology, and building out from that.

While the collapse of FTX has reminded us that centralised finance is not the way forward, it is also a lesson in building tools that reflect the core advantages of blockchain, to build real use-cases.

If this particular story of money is to have a happy ending, then we need to listen to voices like hers.

Thanks for tuning into the second season of The Story of Money by YAP Cast. I’m Samantha Yap. For the new season, follow The Story of Money by YAP Cast.

Listen to this episode on:
Dec 14, 2022

The Data Of Money (S2E11)

In any exchange, the value of the assets being traded needs to be known and agreed upon by both parties, whether it’s two currencies being traded or a second-hand car being sold. We need to know what these things are currently worth so the two sides can reach a deal.

This is why pricing data is an integral part of the story of money. Without it, money will not work. Here to share the evolution of this world is someone better placed than most. Ambre Soubiran.

Ambre worked at the highest levels of traditional finance until she caught the DeFi bug. She became the CEO of Kaiko, a crypto data company, and turned it into a key player in the digital asset market.

View transcript

Episode 11: The Data of Money Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Ambre Soubiran on this episode of The Story of Money by YAP Cast.

This week I’m taking a behind-the-scenes look at the data that makes financial transactions possible.

In any exchange, the value of the assets being traded needs to be known and agreed by both parties, whether it’s two currencies being traded or a second-hand car being sold in exchange for lots of candy

We need to know what these things are currently worth so the two sides can reach a deal, and that means data. Like pricing data, which changes all the time. It’s less glamorous but it’s a vital part of the story of money.

To help me understand the evolution of this world is someone better placed than most — Ambre Soubiran, worked at the highest levels of traditional finance, until she caught the DeFi bug, became the CEO a crypto data company and turned it into a key player in the digital asset market industry.

Ambre, thank you so much for joining me on YAP Cast, very excited to have you on the show today.

Ambre Soubiran [01:17]: Thanks for having me.

Background

Samantha Yap [01:19]: So, tell us a little bit about your background in traditional finance? Because I understand you used to work at HSBC. Could you just share a little bit about your background before delving into this digital asset industry?

Ambre Soubiran [01:30]: Yes, absolutely. So, I’m a mathematician by training. And quite naturally, like most French people who study math, I jumped right into the trading floor environment and I was in equity derivatives structure for about 10 years, first in Paris, and then in London, where I stayed all the way up to 2016. After a few years of being a banker, and a crypto convinced, it took me a few years to manage to actually take the decision and make the move towards full-time Blockchain.

Samantha Yap [02:01]: Cool! Could you expand a little bit on your role in terms of structuring derivatives? And what does that all mean? And what did your like role entail?

Ambre Soubiran [02:10]: So, equity derivatives are a type of financial instrument that basically enables people to have a predetermined exposure to the price of underlying assets. The most common equity derivatives are options such as call or puts, which is purchase options or sell options. And these basically enable you to pay a small premium for the right to purchase or to sell a security at a given price.

So, it serves two purposes:

The original one is that it’s used as a hedging instrument. So, if you have an exposure to a specific equity, you could buy downside protection, you can buy the rights to sell at a specific price, which protects you in the case of a market downturn, if prices fall, you’re still allowed to sell at that predetermined price, which means that you’re essentially hedging the downside.

On the other side, you can purchase call options, which gives you the right to buy. And this is in a context where you would like to have actually upside exposure to the price of a security, then you would buy that option, which enables you to buy at a predetermined price at a moment in time, so that if price goes up, you could still buy at a relatively lower price and then make an instant profit. So, these derivatives are used for a myriad of use cases. But what I was doing at HSBC was focusing on large corporate clients, large blue-chip companies that needed equity derivatives for financing or hedging considerations.

Interest in Bitcoin

Samantha Yap [03:41]: So, I read somewhere that you were known as the Bitcoin or Blockchain person in HSBC, because of your interest in the technology. When did you first learn about Crypto and blockchain technology and what interested you about it?

Ambre Soubiran [03:57]: So, the first time I ran into Bitcoin was I was just reading a random math blog, and I stumbled upon the white paper. And that was in, I think, October 2012, I realized that it was just 10 years ao. And luckily, there was a meetup organized in London a couple of weeks later, so I just decided to show up. And by the time it was probably like, 40 people in a garage in bricklay, it was still very, very underground. People had flown over from Canada to talk about bitcoin and how it would change the world. It was really interesting. And so that was my first foray into Blockchain. And what I thought was really interesting was the fact that for the first time ever, we had this unit of account that was internet native, and that enabled a form of digital scarcity. It was for the first time something that you had that was a digitally native asset that you could transfer to someone else while just relying on the power of the network and internet.

So, I thought that was very interesting. And that’s how I started getting into the Bitcoin rabbit hole. I took a couple of online courses, I’d like to say which one because I thought it was really, really interesting and very well done, and it’s not new, but it was the Bitcoin computer science course on Bitcoin and cryptocurrency technologies. I think it was a great way to learn. And I still encourage people today to do it.

The other book that I love was Digital Gold that I read at this time, and that really explains the beginning of blockchain. Then I got into Ethereum when Ethereum came along and I think Ethereum was a real revolution in terms of what it meant for my own industry, which was Capital Markets.

Equity derivatives, as I mentioned, is very much based on the execution of very standardized financial contracts. And something that can be transformed into code relatively easily because it’s generally relatively basic mathematical formulas. And the way Ethereum presented itself by saying we can now not just send transaction, not just send and receive money, but we can actually send and receive code, we can actually execute contracts directly on chain using the same technology that blockchain is, I thought was game changer and it had the opportunity to transform in the way we process code and contracts. A lot of industry is starting with finance and that’s what we’re seeing today with DeFi – I think, DeFi proves the fact that blockchain is a great technology for enabling financial contracts on chain.

Samantha Yap [06:24]: Just before we move on, who taught the course that you did and who wrote that book? Just so our listeners can reference that.

Ambre Soubiran [06:31]: So, the book is Nathaniel Popper. And the Bitcoin course, is called “Bitcoin and Cryptocurrency Technologies” and it is by Arvind Narayanan. You can put it in the link notes, I can send you the link. It’s online, it’s a free course that is available on Coursera and on the Princeton website directly.

Samantha Yap [06:48]: Yes, awesome. I actually learned through the University of Nicosia, which I also recommend they’re masters of digital currency and there’s that free online course. So that’s really cool that you have a course to reference of what led you into this.

Really interesting that you come from this traditional finance background, yet you’ve seen the potential of blockchain technology, just taking a few steps back in 2012, or when you started sharing this stuff with potentially your colleagues at HSBC. What was the stigma of crypto back then? Were there open minds? Or what was it back then when you’re trying to evangelize for this tech?

Ambre Soubiran [07:29]: Not so open. Clearly, it was a bit early. Back then it was the whole, you know, MtGox, SilkRoad, the narrative in the early years around crypto was not so great. Because Bitcoin was a bit of an alternative means of payment on the internet, it became used by people that couldn’t go through the more traditional banking system. So that I think didn’t put Bitcoin in the best light in its early years. And I think it only took a couple more years for people to understand the power of blockchain as a technology and the fact that disintermediating the way we run contracts is a way to create trust between people who don’t have inherent trust and in systems that increasingly lack trust. And back in the days, it was rare to find people that were extremely excited and convinced that this would change the world one day.

Current crisis – same as before?

Samantha Yap [08:20]: Yes. It is interesting you referenced the MtGox. situation that led to– Yes, just the negative stigma around crypto. We’re speaking at a time right now after FTX, one of the fastest growing exchanges in the last two years, has just filed for bankruptcy? Do you see any parallels here to what you saw back then?

Ambre Soubiran [08:42]: Absolutely, I mean, the in some way, it’s terrible for the crypto ecosystem that we have such a breach of values and trust. And I mean, it’s almost morals and ethics at this point to have somebody lie so much about everything and misuse customer funds, etc. That being said, that proves also the point that blockchain is about transparency, decentralization and it’s not about building centralized giants on top of blockchain. So, everything that has gone wrong with blockchain since the invention of Bitcoin has been whenever we’ve tried to centralize value and power and information in one place. And so, in some way, even though the FTX crisis does not put the general broader crypto ecosystem in a great light, it also shows why blockchain is actually so important, and I think you have some very good by the way reputable exchanges, centralized exchanges, doing a great thing and then having the right attitude toward customer funds, etc. But the truth is when you’re unregulated, you’re unregulated, right? So, you can do a lot of things that are forbidden by regulation, and that is where things fail. And it’s fine to be unregulated if you’re a transparent, decentralized protocol that everybody can observe on the internet, what is not fine is when you are both centralized and unregulated. So, I think FTX proves the points and the importance of transparency and blockchain based systems.

What made you leave TradFi?

Samantha Yap [10:07]: Yes, cool. Thank you. I’m going to get you to expand on the differences between traditional finance, centralized finance in a little bit. But before that, what led you or motivated you to leave your traditional financial role at HSBC and what were some of your convictions at the time when you left?

Ambre Soubiran [10:26]: It’s still the same conviction today. It’s really, I believe that blockchain is an incredible underlying technology for financial services and the general financial industry to base its operations on. I think blockchain is a technology, that technology requires crypto, crypto is the unit of account that incentivizes a network to maintain a ledger to process transactions, to process code. So obviously, crypto network, blockchain, all of these are intrinsically kind of intertwined. However, I think that blockchain is the technology that enables the execution of, in the context of finance, because this is where I come from, that’s my DNA, the execution of financial contracts in a way that is much more streamlined. I think, where I got slightly frustrated is I believe that the capital markets industry has decades of iterating on financial engineering and improving and making processes more smooth. But still, what we’ve done is that we’ve digitized the old finance, rather than reinventing the workflow and the processes.

And so today, even to execute a relatively simple call option agreement between a bank and a client, we have to rely on the whole kind of cycle of front to middle to back office, settlement agencies, clearing date agencies, etc. And that could be executed on chain with the entire value chain kind of being disintermediated, and bringing trust and security and auditability. So, I was really driven by that conviction that blockchain will serve as an underlying technology and underlying IT system on which industries could be able to function and to run code. And by code, obviously, I mean contract and almost everything we do in life is contracting with one another.

The second thing that derives from that to explain why Kaiko is in a blockchain enabled world, in blockchain enabled industries, one where we execute contracts under the phone form of code that is executed on chain, two things become really, really important:

The first one is the quality of the code.

And the second one is the quality of the data that you feed to the code, because the code is blind in some way, it can be a perfectly drafted code that lives on a blockchain, it needs to have external information in order to execute.

Again, I take the example of a call option, which is the right to buy at a certain price. For the call option to basically execute to payout of the call option it needs a price and maturity of a security. So, you need that oracle component to bring data to blockchains in order to trigger the execution of the contracts.

So, I was driven by the one fundamental conviction that blockchain would be a transformative technology.

And second, that two critical pieces for that to happen are going to be quality code and quality data. And that’s how I ended up running Kaiko.

What is Kaiko?

Samantha Yap [13:22]: Thanks for explaining that as much as more about Kaiko. How did you get involved with Kaiko? And yeah, if you could expand more on the data tracking aspect of crypto behind that?

Ambre Soubiran [13:33]: Yep. So, Kaiko, was founded in 2014. I left in 2016. And I took over from its original founder and Kaiko does market data on crypto assets for financial institutions and large corporates in the crypto world. So, what we do is that we’re connected to all of the different trading venues that can allow users to buy and sell crypto, so all of the centralized exchanges – the Coinbase, Binance, Kraken, Bitstamp all of the large crypto exchanges that we know today, including FTX, by the way, was one of those venues from which we collected data. And then we also run our own blockchain infrastructure in order to gather data from the blockchain directly, and to extract decentralized finance protocol data from there. So, we gather a lot of different financial data points, which we then standardize and then from that standardized raw data, we create data products that are either data, analytics or indices. So those are the three pillars of what Kaiko does. And this is actually not a new business. Financial Data is as old as finance, it’s a kind of collateral of the trading activity, there is data that is generated. The large financial data companies in the traditional space are companies like Bloomberg, like Refinitiv, like IHS markets, and we do something very similar for everything that is blockchain related.

What is an oracle?

Samantha Yap [14:55]: Could you expand on what an oracle is? Would you say Kaiko has created an oracle or is an oracle for crypto data.

Ambre Soubiran [15:05]: So, we are a data provider to oracles and we also sometime write data directly to blockchains. But you know, the oracle is really the technology component that provides data on chain and that is a piece of tech. It needs to be funneled data through. So, one of the large known oracles is Chainlink, you have Umbrella Network, Super Oracles, 5th.network, there are a bunch of companies that are building oracles and they then go and feed from data providers and then write it on chain. So, Kaiko serves both of the data provider to oracles and in some cases, we interact directly with blockchains. We’re not an oracle, because we don’t take any kind of external datasets, but sometimes we ourselves go and write Kaiko’s data directly on chain.

Samantha Yap [15:48]: In terms of the people or the institutions that use Kaiko or would be interested in using Kaiko who would they be – who are your target clients?

Ambre Soubiran [16:01]: So, we have three types of clients.

One is financial institutions that are acting in the crypto assets markets, people that are trading, investing, building financial products, etc. So here, it’s people who need real time and historical data on crypto for being able to engage with the industry from a financial standpoint.

Second type of clients are financial terminals and research and media. So, people that are not themselves trading, but they need to embed data into their product, platform, website, research, etc. So here, it’s really people that are then building UIs, and customer facing front end to more on a B2B2C kind of business model.

And then the third type of clients are large crypto native enterprises, and just like corporates that need data for evaluation, reporting, audit tax consideration, any kind of more FPNA accounting, controlling use cases, that’s the third buckets of our clients. And then we also work with academia and researchers, but 90% of our clients fall within one of those three categories, financial institutions, financial terminals, or large crypto corporates.

Evolution of the market for data

Samantha Yap [17:05]: So, over the last two years, what has been the sentiment check of crypto to the traditional financial world, you know, like, what have you seen and how receptive have they been to being interested in this data interested in the digital asset space?

Ambre Soubiran [17:21]: So clearly, the market sentiment from the institutional players have evolved over the past couple of years. I think today there is not a single leading financial institution that does not have a digital asset team. And I think that’s for the better. I think it’s interesting because we started from really far away which was like, we will never touch crypto, crypto is terrorists’ money, etc. This narrative is completely dead. There’s not a single person today that still thinks that crypto is drug money.

But then what is interesting is financial institutions were pushed by their own clients to look at crypto, because crypto was an asset class and that the asset class was growing and, and there was some investment opportunities. And so, they were a little bit pushed by their own investors, their own clients to spend more time looking at the space.

The first forays for institutions into crypto was really crypto was trying to figure out what is this asset class? Let’s buy historical data. Let’s see how this asset class behaves. Let’s take a bit of a quantitative approach to it. And I think we’re also moving away from the pure crypto thesis and more into a blockchain tech thesis. How can that technology serves us as an industry? How can we use blockchain? And now when we interact with banks, we don’t see banks, obviously, especially the regulated institutions, we don’t see them trading crypto, however, we do see them spin up entire digital asset teams in order to understand how can we leverage that new technology? So, it’s less about the crypto asset class and more about how can blockchain serve us. And I think that is really the right path towards starting proof of concept starting building on blockchains. You know, for exchanges, for example, traditional financial exchanges, looking at how DEXs function is extremely interesting.

For a bank, understanding DeFi protocols is extremely interesting. I think everything that touches around tokenization of assets, so that then you can create new ways for SMEs to access private debt markets, there’s so many things that is interesting in the disintermediation and openness of that technology. And the financial applications are the most straightforward because it is already live and you already have proof of concepts. So, what I think is today, the two major areas that benefit from the enablement of blockchain is finance and gaming, right? It’s really two industries where blockchain does add value. And so financial institutions have looked at that, have spent some time unfortunately, what happened last week may cause a little bit of a quake in the space, and maybe it’s going to set us back a couple of years. But I think at least now we’re on the right path, which is understanding the technology and understanding how it can help the industry.

Samantha Yap [19:52]: That was Ambre Soubiran, CEO of Kaiko, explaining the evolution of the market for data, and how its key role in traditional finance must be adapted to crypto, how the importance of good code in crpyto is matched only by the importance of good data.

Both are vital if DeFi is going to succeed in its quest to become truly decentralised, transparent and credible. Next time we’re going to pick up the conversation and hear Ambre talk about how DeFi needs to go back to basics if it is truly going to overthrow TradFi.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Dec 7, 2022

Money Programmed For Good (S2E10)

How can money organise the world through code?

In this episode, Samantha Yap speaks with Kevin Owocki to explore how money can be programmed to make society more resilient and reflect values other than financial wealth.

Kevin is the current CEO of Supermodular, a web3 venture studio, the author of "Greenpilled: How Crypto Can Regenerate The World", and the host of the Green Pill Podcast. He is best known as the founder of Gitcoin, which is at the forefront of sustainable work on open-source software.

View transcript

Episode 10: Money programmed for good

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Kevin Owocki on this episode of The Story of Money by YAP Cast.

Last episode introduced Kevin Owocki and his vision of money as something more than just a financial thing.

We heard how his view of the world has been changed by cryptocurrency, that it’s possible to see the flow of funds between actors in a transaction or series of transactions as having the potential to be something more — where wealth is not the only endgame, where the transaction doesn’t just involve money, flowing in one linear direction.

He said it could be more than that, where parties to a transaction can transfer more than money — the example he used was a right to governance, allowing parties to have some say over the network that they’re using.

Let’s dig more into this; I was particularly interested in Kevin’s focus on the potential of this for charitable works, where no financial gain is sought.

Kevin Owocki, is the CEO of supermodular a web3 venture studio that’s building the foundations of a regenerative financial world. He is also the author of Greenpilled – How Crypto can regenerate the world.

He is best known as the founder of Gitcoin, which is at the forefront of sustainable work on open-source software. Kevin also hosts the Green Pill Podcast.

Gitcoin, charity and open source

Is there a place for charity and doing good in crypto?

Kevin Owocki [01:40]: Yes, this will be my easiest answer. Yes.

Samantha Yap [01:44]: And how? And I guess this is a segue into Gitcoin and what led you to start Gitcoin?

Kevin Owocki [01:52]: Totally. Yes. I’m mostly known for founding Gitcoin which is now a DAO that I’m not CEO of – I’ve disaffiliated from leadership because decentralization and basically what Gitcoin is, it’s a crowdfunding platform. Its mission is to grow and sustain open-source software.

Open source is this really interesting market in that. It powers our digital infrastructure. It’s the digital equivalent of our roads and bridges. It creates $400 billion dollars per year in economic value to society but because open source has the code open source – available for free – no one wants to pay for it.

Basically, there’s this coordination failure, public goods funding failure. Public goods just means things that are available for free and can’t be excluded. There’s this thing where you have something that simultaneously creates a lot of value but it’s really hard to capture value if you’re building it and so Gitcoin’s mission is to solve that problem for open-source software. Gitcoin has delivered $72 million dollars’ worth of funding to open-source software developers leveraging crypto as a more efficient and powerful way of funding that open source. So, I think the Gitcoin’s a living example of how crypto can be used for good and for pro social causes but there is an ecosystem of hundreds of what we call impact DAOs, projects whose bottom line are what impact can they create on the world. And I think that’s going to be an up-and-coming category in the Web3 space in the future.

The challenge of finding the right model

Samantha Yap [03:13]: Pretty impressive that you’ve helped build an ecosystem that’s raised and distributed $72 million to projects. Yes, that’s quite impressive, like how – I guess without getting into the details because I think there’s a lot on how the mechanisms work and encourage listeners to learn about how quadratic funding works but just how did you go about creating such a system in a short summary?

Kevin Owocki [03:42]: Yes. I mean, I wish I had some sort of like divine inspiration where it’s like, I had some fundamental insight and then I just built it and then they came but really, it’s just been a lot of trying stuff and failing. Gitcoin was my 6^th side project that I was trying to turn into a startup. The previous 5, all failed and then when I started Gitcoin, the mission has always been about open-source software.

The Northstar at Gitcoin has always been open source but we iterated through 4 or 5 different mechanisms before we got to the current instantiation which is Gitcoin grants and quadratic funding and even then, once we achieve product market fit with Gitcoin grants, we’re like, oh shit, it should be a DAO and not a company and so we had to dismantle the economic and governance and computation levers of Gitcoin and rebuild them from scratch around being a DAO.

It’s really just been a lot of trying stuff, failing, doubling down on the winners and then learning iteratively over time and having a community that supports you is the most fun thing in the world.

When I first started Gitcoin it’s just me alone in my basement and it was really lonely but finding other people who really care about this stuff has really just made my spirit come alive because there’s nothing better than going to a Gitcoin hackathon and someone coming up to you and saying, hey, Gitcoin changed my life because it allowed me to work on this open-source project instead of go get some job that I hate.

It’s really the community that continues to push my gumption ahead with working on this.

The role of money in public goods

Samantha Yap [05:08]: Yes, that’s amazing. That you’ve been also like, while learning, iterating, trying different things like do good along the way as well and on the achievements of Gitcoin and what it’s been able to do for good; what role has money? What’s your perception on the role money has played in hindering human charity or public goods? Like money as the – back to the concept of value that we’ve been talking about.

Kevin Owocki [05:34]: Yes. I mean, I think that there’s – we could do a whole episode just on that question probably. But I think that some of the trends that I see are basically money that’s more focused on ‘now me’ as opposed to a Bentoist view of capital and so what would it look like for money to be programmed in such a way that it reflects not just instant gratification but what’s good for me in the future? What’s good for us? And then what’s good for future us?

Like a bento box of incentives instead of just now me, you’ve got now us, and you’ve got future me and future us. How can we build monetary systems that are good for groups of people instead of just individuals? And overtime, I maybe went a little bit too far into this at the start of our conversation but the 8 forms of capital, how can we have money that regenerates material capital and spiritual capital? How can we build money that is anti-fragile and monetary systems that don’t collapse? And people are out their savings in this booming bear-bust cycle.

The design space is very vast here. We can now program our values into our money and so it really just depends on what problems do we think there are in money and we can create higher dimensional value systems in the web3 space and that’s the most exciting thing about this space is that there’s lots of talented people working on solving all the problems that they see and I’m just one of the voices in the room.

Samantha Yap [06:53]: I like the way you frame it as the way you can just design money. You’re like designing or programming money to serve different purposes and functions and yes, like bringing it back to where you started, the conversation to the 8 forms of capital. I got the page here with me but you spoke about social, material, financial, living, intellectual, experiential, spiritual, cultural. I’ve actually been very interested in the spiritual one and the cultural one.

The spiritual side of capital

We don’t probably have time to break down one or two but yes, let’s use as an example. So, the spiritual form of capital. Yes. How can crypto help with that? Or what does that look like?

Kevin Owocki [07:36]: Basically, there’s 8 forms of capital. There’s financial capital but there’s also cultural capital, spiritual capital, experiential capital, intellectual capital, this podcast might be a form of intellectual capital, living capital, material and social capital. How can we create more resource capacity on those vectors over time is kind of the design space that I’ve been playing in with regenerative crypto economics.

I’ll pause there to take a breath but I’m curious if you think that’s the target and – because like, it’s not really about what economic system I want. It’s about articulating our shared goals together and building an economic system where a decentralized ecosystem of agents can come together.

This is me planting a flagpole for what I want to see but it’s really about the listener and what kind of world they want to see as much as it is me articulating my goals.

Samantha Yap [08:23]: Right. Let’s go back to the consumption types because for the listeners who don’t have the book and don’t see the charts but we’ll pull it up when they have a chance to but there are 4 charts and you – It talks about extractive, sustainable, resilient and regenerative. That’s what I see. This one.

There’s like 4 – there’s 4 graphs, so the extractive graph if we explained, it’s like an arrow pointing downwards but resources deplete over time. The Sustainable Graph is the one where the resource availability is not depleted over time but it’s steady.

Kevin Owocki [08:59]: Yes. I think it depends on what your goals are for the system but sustainable is definitely better than extractive if you’re trying to build something that has longevity in it.

Samantha Yap [09:08]: OK, and then the Resilient one is – it’s a system that’s able to recover from shock like COVID, and it’s able to recover. That’s OK. Right? It’s like a straight-line chart with a little dip in the middle but it’s like back to steady again. That’s fine.

Kevin Owocki [09:23]: Yes, I mean, I think that what you don’t want is fragility. Basically, a system that hits a shock event and then the resource capacity goes down over time is what you don’t want. You actually do want resiliency in your economic system.

Samantha Yap [09:35]: Right. So then let’s take it to the regenerative chart where it is a graph where the line is like, it’s pointed upwards but it’s still a bit volatile but it’s always moving upwards. Let’s unpack that. How can that happen? How can we create that?

Kevin Owocki [09:54]: Right. I mean, I think that’s the design space that we’re kind of in and not to bunt on your question but I think that we’re still trying to figure that out with crypto economics and I think that we’ve seen what doesn’t work and the example of fragility that I’ll use is Terra Luna, an entire $40 billion stable coin that brought a bunch of retail investors in because it was advertised as stable and went to zero overnight.

That’s fragility to me. So I think that when it comes to reverse engineering, the reverse of that I think that we want anti-fragility, we want things that can respond to shock events and not go to zero and maybe pause there but I think that there’s other kinds of ways that we can think about designing economic systems that are regenerative.

So, I mean I – page 51 of the GreenPilled book which you can get a greenpill.party lists out these eight forms of capital and I just have to give a shout out to Gregory Landau, this is his idea. I’m just helping amplify it here but according to the 8 forms of capital, the currency of spiritual capital is prayer, intention, faith, or Karma and basically, what that’s building towards when you’re trying to accumulate spiritual capital, what you’re trying to create is spiritual attainment and this is a higher dimensional type of currency where depending on what your beliefs are, whether you’re a Christian, Muslim, Hindu, Jewish, or any other type of spiritual attainment, that will look different to you depending on what you are.

But just to give you one tangible example, I know of a project called Interbeing Protocol which is basically working on a social meditation protocol. That is a way of decentralizing power away from head monks in Asanga which is like a Buddhist monastery and basically, having meditation being a decentralized protocol means that you no longer need the master, you no longer have the power structure of Asanga anymore. You’ve got a decentralized protocol which produces spiritual attainment instead of having to study with a master and have that power asymmetry between them.

You definitely asked me a really hard question there with what is spiritual capital and web3? But I think that’s an early glimmer of what it could look like.

Programmed money = a double-edged sword

Samantha Yap [12:02]: No. I mean, you address that pretty articulately. But I guess, maybe back to how crypto can enable that. Are you saying it’s like building protocols or building a token that can help people transfer like that capital? Or that value?

Kevin Owocki [12:19]: Well, I mean, I think that yes, we went to a very advanced example there and also not all of this stuff is good, right? Being able to program your values into your money is a double-edged sword because if your values are financial scams and pump and dump schemes, you can do that with crypto but if you want to build something that regenerates people’s spirits or regenerates the earth, then you can also do that with crypto and I always try to be honest about the space in where it is crypto, how crypto can regenerate the world.

I make no case that it’s actually happening right now but I hope to write the book in 2025, how crypto is regenerating the world and it’s all about stimulating the minds of people who build economic systems to build a lot of this stuff. I just want to make sure that we note the good and the bad that comes along with being able to program our values into our money.

Samantha Yap [13:05]: It’s interesting because also with people who manage money, I know, say, Christians. I’m a Christian myself so you– They tithe right, the 10%. I’m wondering is like – yes, I mean, programming the value like if you’re getting value, whether it’s – and I’m trying to think how we can apply that to the world like different faiths also have their relationship with money and like whether we can program that whether that’s good because usually, in traditional world it’s – if you get people who get to the stage where they need someone managing the money, they go to an asset manager and they go, alright, they’re also being very strategic with where they put their money and their funds whether for investments but also who they give to.

Regenerative finance defined

I mean, if you also think about philanthropists and people who give, they also want to have some strategy for where they align and value certain things and then put money in in different directions of yes, no, I think opening a can of worms but yes, it’s interesting to see it right down into different capitals, and as you said, it’s like designing this space. So yes, I mean, taking it to regenerative finance. In a nutshell, could you explain what regenerative finance is now that we’re there?

Kevin Owocki [14:16]: Yes. I mean, I think that we just want to build financial systems, that get better over time have more resource capacity over and hopefully, you know, the real end goal of this is to create more human thriving, to create more stability for people where they can climb the Maslow’s hierarchy of needs, they can house themselves, they can clothe themselves, they can get food and shelter, and then eventually as they climb up to a community of love and belonging and self-actualization is what regenerative economics can do for the individual people which by the way, money should not be an end in itself. It should be a means to enabling attainment of what you want out of your life and so to me, that’s what regenerative crypto economics is. It’s just building crypto that serves people and does it better over time.

Samantha Yap [15:01]: I think you’re one of the talks that you did this year. You’ve done many but I think I was listening to you at in Paris at EthCC this year and you just talked the way you explained it was how like money organizes the world right now.

How money can organise the world, through code

The economics of the world and money. So then with crypto, how do you see money organizing the world right now? And then the potential you’re talking about earlier with regenerative finance?

Kevin Owocki [15:23]: There’s this concept called a hyper object which is basically something that has a ton of impact on our life but you can’t see or smell it or grasp it, right? You don’t have any sensory perception of it and hyper objects are really hard to talk about because they’re so abstract but they’re also important to talk about because they have an effect on our lives and I think of monetary systems as exactly that.

They’re like hidden beneath all years and years of study and for that reason, I think that it’s really hard to answer your question but if I wanted to take a swing at it, I think that one of the things that really excites me about web3 economics is that the idea that money and scarcity can now be designed by anyone who has a computer science degree which is 10s of millions of people across the world and this is like coming from a world in which you had to be an insider, a Federal Reserve banker, in order to design a monetary system.

We decentralized access to building economies to the edges and by the way, hopefully, in 10 years, you’ll have drag-and-drop coding systems where you don’t even have to have a computer science degree to build these things. And there’s a bunch more people who can explore the design space and can do it for their own community needs as opposed to the needs of someone who works on Wall Street and also, we’re building this repository, this library of open-source money Legos, where we can all try things and we can copy what works from each other.

We’re traversing the design space much faster in web3 than could be done in the old world and that means that there’s going to be bigger successes and unfortunately, it seems so far there’s been bigger failures and I think it’s incumbent upon us to try to push the ecosystem of capital and talent into more regenerative things that are not going to collapse and cause people to lose their money and I also think that Web3 is inevitable and it’s because three people can walk into a hackathon and build something in a weekend that it would take in a bank $20 million and 100 people to do 10 years ago and it’s because of these open source money Legos and the amount of talent that is in the space.

I think that we’re speed running the history of capital and finance right now in web3 and I think web3 is inevitable and we just have to guide it towards a more regenerative future. I don’t know if I totally grasp the hyper objects there but that’s at least my swing answering your question.

Samantha Yap [17:41]: Very well-articulated answer here as well. I mean, I recently had Jacob Goldstein who was the host of Planet Money on this show and the way he puts it is that money is fiction, you can’t see it. You also can’t really touch it either.

Even though we have got paper money but these days no one touches or hold holds notes anymore. Yes, that’s another good way to look at it.

the future has room for everyone

But you were saying that a computer – you’re a computer scientist. You could design this world and you can design protocols through open-source software but what about for the average person like me? I mean, I’ve got soft skills. I’m a communicator, I’m a PR person and then there’s other people who have non-technical skills. What about for them? And most of the listeners of this show?

Kevin Owocki [18:23]: Yes, well, I mean, I think that there’s plenty of room for anyone who’s intellectually curious and persistent to enter this space and I believe that there is a movement that is happening here that has a space for people who can do copywriting, for people who can communicate, for people who can do marketing, for people who can do design, for people who just like to learn. And I’m coming to you today as this software engineer who’s written a book on this stuff but the way I got to where I am is by just learning something new every day and really trying and leaning into understanding the future and so it’s important to be inclusive of as many people as possible in this space and a diverse set of intelligences and geographic background and race and gender and all other vectors of diversity because if we’re going to build open-source financial systems, they need to represent humanity as a whole.

I definitely think it helps to have a computer science degree because we’re building things with computers and that’s just the medium we’re dealing with but I definitely think there’s a place at the table for anyone who’s willing to show up and learn persistently day every day.

The gradual emergence of ‘regen web3′

Samantha Yap [19:32]: And looking ahead, where would you like the ReFi industry or regenerative finance world to be in the next 5 years?

Kevin Owocki [19:40]: I mean, I think that right now, it’s seen as this like, Oh, this is this cute little sideshow in web3, like the regen movement. But I will say that there’s a lot of talent and capital in regen web3 and that is really heartening to me because that wasn’t true a year and a half ago and I would like regen web3 to be a category up there with NFTs and with DeFi as a vanguard movement that is happening within web3 and I want that because I think that web3 is the biggest lever that we have for creating human thriving for humanity because we can now program our values into our money. Just the power of that is it’s a genie coming out of the lamp kind of moment and I would like to see more capital and talent rotate into the regen web3 so that’s what I’m here for and that’s what I hope to see.

Samantha Yap [20:33]: I like that – program our values into our money. Very exciting and you are a great mind and thinker in this space, Kevin. Really excited to see what you can do with supermodular. Thank you so much for your insights on YAP Cast.

Kevin Owocki [20:48]: Yes, thanks for hearing me out and Sam, great to be working with you.

Samantha Yap [20:52]: That was Kevin Owocki, who is the CEO of supermodular.

To me the key takeaway is this: in this series of podcasts, we’ve seen how money means something different to different people, but it’s nearly always come down to money and finance being about the same thing: a sometimes-necessary evil that greases the wheels of commerce, of survival, of growth, of wealth.

But Kevin has asked a different question: he’s asked whether money be programmed to do something different? Whether it can be programmed to make society more resilient, whether it can be programmed to reflect values other than the financial wealth of individuals, companies, governments?

There are dangers, of course; we are still early. Web3 has hardly proven itself to be resilient to internal shocks, greed and mismanagement, so why should we expect it to be resilient to external shocks?

And of course, not all of us share the same values; for some the value of getting rich whatever the cost to others is a glorious, admirable one. To others, there are more spiritual purpose that dictates their relationship to money.

But perhaps amid the rubble of the DeFi upheaval, there are the seeds of a stronger, more noble kind of finance, that focuses on regeneration. I really like to think so.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Nov 30, 2022

Money With Values (S2E9)

Does money only represent financial values? A store of value, a medium of exchange, an indicator of wealth, something to buy things with, and something we want more of?

Or could money be something that represents our personal values? What we want the world to be like?

In this episode, Samantha Yap speaks with Kevin Owocki to understand more about crypto's possibilities and Regenerative Finance, ReFi.

Kevin is the current CEO of Supermodular, a web3 venture studio, the author of "Greenpilled: How Crypto Can Regenerate The World", and the host of the Green Pill Podcast. He is best known as the founder of Gitcoin, which is at the forefront of sustainable work on open-source software.

View transcript

Episode 9: Money with values Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Kevin Owocki on this episode of The Story of Money by YAP Cast.

Is money really only a financial thing — a store of value, a medium of exchange, an indicator of wealth, something to buy things with, and something that we want more of?

Or could money be something that represents not value, but our values — what we want the world to be like?

It might sound odd, contradictory even, but this week I want to introduce you to someone who believes it’s possible to move money away from its narrow functions to something broader, to something that can fuel the growth of a better society.

A future financial system that builds capacity sustainably for the long term.

Meet Kevin Owocki, he’s the current CEO of Supermodular a web3 venture studio that’s building the foundations of a regenerative financial world. He is also the author of Greenpilled – How Crypto can regenerate the world.

He is best known as the founder of Gitcoin, which is at the forefront of sustainable work on open-source software. Gitcoin is also a funding platform for Web3 projects that are building for the public good. With Gitcoin, kevin on a mission to accelerate funding towards the most impactful world-positive projects.

Kevin also hosts the Green Pill Podcast and will talk us through how money can be so much more than just a tool for instant gratification.

What does money mean to you?

Kevin. Thank you so much for joining us on YAP Cast. Really excited to speak to you today.

Kevin Owocki [01:52]: Yeah. Same. Thanks for having me.

Samantha Yap [01:00]: Let’s start with talking about what does money mean to you, Kevin?

Kevin Owocki [01:58]: Yes, well, I mean, I guess I’ll start by saying that I’m a software engineer and I think a lot more in bits and logical structures but I’ve been larping as a economist’s finance person since I joined the Web3 space, just because what we’re moving around in the Web3 space is financial value.

I mean, I think that the – what I’ve learned is that money is a medium of exchange. It’s a way of transferring value between people but there’s different types of moneys that have different attributes. They can be inflationary, deflationary, they can be better at specific things and other things but I’m an American, so to me, money is the US dollar and that’s kind of what I grew up with.

My ideals and money

Samantha Yap [02:35]: Yes, interesting and has money helped or hindered the sort of ideals you’re looking to see manifested in crypto?

Kevin Owocki [02:45]: Yes. Well, I mean, I think to unpack that we’d probably have to get into some of the ideals that I want to see manifested in crypto. So maybe I’ll start there and then, and then we can talk about how money can be used as a means towards that end. How’s that sound?

Samantha Yap [02:56]: Yes, let’s start there. Yes.

Kevin Owocki [02:57]: Cool. I wrote a book in a fit of a furious conception early in the year called, GreenPilled: How Crypto Can Regenerate The World, and basically, if you open up the book and you look in the front section, we talk about how do we create systems which–?

Samantha Yap [03:15]: I have book in here.

Kevin Owocki [03:16]: I am on page 26 right here and for the listener who maybe doesn’t have a copy, you can get one at greenpill.party but basically what we’re looking to do, and you’ll see on page 26, is regenerative crypto economics is all about creating systems that resources– Resource capacity is built over time and is resilient to shocks.

As opposed to extractive economic systems where resource capacities are depleted over time or sustainable, where the resource capacity is constant over time or fragile systems, that if they hit a shock event, like say COVID decreased resource capacity over time, our regenerative system increases resource capacity over time. And so one of the sort of design spaces that we’re in in crypto is how do we create crypto economic systems that increase resource capacity over time and are resistant to shock?

What were you doing before crypto and how has it changed your views of money?

Samantha Yap [04:10]: Yes. I want to go back, again, to the to the beginning. In the back of the book, there’s a summary. It talks about how the internet of information which is from the 1990s to the present has changed. Everything society to one that relies on information and then crypto, well, Bitcoin came along in 2009 and that has grown the internet of value that has changed everything in society that relies on value and money is that thing that relies on value.

How has the introduction of crypto in 2009 changed your view on money? And maybe this is an opportunity for you to go back to – yes, before what you’re doing. You’re a computer scientist, but what you were doing before crypto and how that’s changed your view on money? Could you– Yes. Tell us a bit about that?

Kevin Owocki [05:00]: Yes, absolutely. Well, I think that there’s a real symmetry between the internet of information which changed everything in society that relies on information, news, entertainment media. We didn’t even have social media before the internet of information and it’s completely changed the way we coordinate with each other with because information can now be sent across the computer network without an intermediary and I see a parallel thing happening in crypto since the dawn of Bitcoin and everything that’s been built there.

We can now send financial value and scarcity across the computer network because Satoshi Nakamoto solved the Byzantine generals’ problem – this game theoretic problem where it allows you to have scarcity in a digital environment. And so, the parallel I see is, are we going to rewrite banking, finance, insurance, jobs, how we fund our public goods in the over the next 30 years as the internet of value proliferates as a thing in society? And I think that what that’s going to mean is that we can now have digital property rights that are secured by credibly neutral foundations.

We can now have currencies that can’t be inflated by political actors. We can now have access – equal access to these monetary systems from all across the world instead of inside of nation state borders. I know this is me trying to compose an argument from first principles about how crypto is going to change the world and I think that it’s our responsibility to guide it towards a more regenerative system now that we’ve already accepted that it’s going to change the world. How does that resonate with you?

How crypto has opened me up to things beyond money…

Samantha Yap [06:32]: I think it definitely has changed the world and can change the world because it’d be independent of countries and earlier you talked about how money to you as an American is the US dollar but crypto has come in and kind of changed that view of money just being the US dollar. Right? Have you seen that? And has that changed your perception on money too yourself being also very early in Ethereum, as we can say?

Kevin Owocki [07:01]: Yes. Well, I mean, I think that most of the transactions that I do day to day are on the Ethereum network and our crypto economic tokens and I wouldn’t be eating my own dog food, I wouldn’t be participating fully in this ecosystem if I wasn’t experimenting with the new forms of money that can come out of this system but I think that like working in Blockchain has opened me up to things that are beyond money.

Money is one form of how we can transfer financial value to each other and money – a good money is a medium of exchange, it’s stable, it’s universally recognized via its network effects but we can also have units of account that are not stable or don’t have network effects that are more speculative and can represent different things other than mediums of exchange and I think that that’s the design space that Ethereum really has flourished is that you can create all sorts of financial instruments that don’t need to be a medium of exchange. They can be tokens that unlock utility in a network. They can be things like Bitcoin where the value is derived from their scarcity and their hardness or any other type of economic system and that’s kind of the explosion of the design space. It’s almost like, you know in that scene in Wizard of Oz where they’re in black and white and all of a sudden, it’s in Technicolor and there’s like all this beautiful stuff that’s happening there. Like, to me, that’s what discovering Ethereum and was, like I discovered, oh, there’s a bunch of colors and it’s not just black and white anymore.

Samantha Yap [08:22]: Yes. That’s interesting. That’s also just changed your view on one form of transferring value which is well, money at the time. For listeners who are not deep into crypto, can you share an example of a way you’ve exchanged value that’s not money or currency – not dollar?

Governance and closed loops

Kevin Owocki [08:41]: Yes, I mean, I think an example of exchanging value that’s not money on a Blockchain network is, for example, getting governance in an application that you use. Basically, if you use Airbnb, or if you use Uber, either as a driver or a user or as a host, or as a user, you’re basically paying in US dollars for your stay or your ride and basically there’s kind of like 3 main actors in that system. There’s the shareholders of that company, there’s the management of that company, and there’s the users. The management has a fiduciary duty to maximize value for shareholders and so basically, what they’re going to be doing is transferring money over time US dollars from the users to the Management Corporation and then issuing a dividend to the shareholders because they have a fiduciary obligation to do that. And I think that the difference in Web3 is a lot of applications are meant to be governed by the community that they serve.

Instead of having a linear loop of value transfer from users to management to shareholders, what you could have is if you do an airdrop of governance rights, which is just I’ll use the example of Radicle which is a Blockchain network that I’m a part of. If I use their network, they gave me the Rad token and now I now have governance rights over the network that I use which is more of a closed loop.

And closed loops are one primitive for creating regenerative value. When I use Radicle as a user, I’m being governed by a protocol and if there’s still a management team, if it hasn’t decentralized that is still accountable back to me in that closed loop and I think that’s what’s really exciting to me about Web3 is governance rights is to answer your question. An example of something you can transfer around it isn’t really a hard currency.

Is crypto just get rich quick? No, it’s an elephant

Samantha Yap [10:26]: Very well explained, Kevin. Governance rights. Let’s move on to the perception and potential of crypto. Before we delve even more deeper into ReFi, regenerative finance but the image of crypto and DeFi over the years has mainly been one of getting rich quick. Is that unfair?

Kevin Owocki [10:45]: I think that the way I answer this question that I think is both fair to crypto and fair to crypto skeptics is, I think of it as like, there’s this parable of the blind men and the elephant where you have 5 blind men who are trying to figure out what an elephant is by only feeling it and the person who feels the trunk says, Oh, this is this is a hose. The person who feels the tusks says, Oh, this is a spear. The person who feels the legs as Oh, this is a trunk and the whole point is that none of them are grasping the whole of the elephant as they’re trying to grasp because they’ve limited sensory perception and they can’t grasp the whole elephant.

I think that like saying that crypto has only been for get rich quick schemes is like the person who feels the trunk and says, Oh, that’s a hose. Like, yes, you’re feeling an appendage of the hyper object here but you’re not grasping the whole elephant. There are get rich quick schemes on in Web3 but there’s also things that are fundamentally not get rich quick schemes and so my challenge for that critique is grasp the whole elephant, you’re only grasping part of it.

Samantha Yap [11:46]: I like that. Where’s the parable of the elephant from?

Kevin Owocki [11:50]: It’s just like an ancient – I think Indian parable. If you Google it, you’ll find it.

Samantha Yap [11:55]: Oh, cool. I like that. No, that’s a good defense of that. Has the events in the past year of crypto and when I say past year, we’re speaking at a time where we’ve just come off with the 2021 to 22 bull market, but then there’s been a – Yes, a catastrophic fall with the Terra Luna crash among other hacks and exploits. Has that changed your view on money, per se?

Kevin Owocki [12:27]: I mean, I think that all human systems, crypto included, but also traditional financial markets oscillate between the two base human emotions when money is involved. You have fear, which is holy shit, I need to flight to safety, I need to go back to the most safe asset that I can support my family with and then you have greed, which is I want to make a huge return and I’ve seen financial markets whipsaw between these two emotions growing up in the traditional financial markets but also the crypto markets whipsaw between fear and greed and I think that what you saw with the Terra Luna collapse was a flight to safety that was based off of fear and probably justifiably so because it was a $40 billion collapse of a stable coin and I think that, basically, what you get through this cycle of fear and greed is the financial cycle of how these projects are funded, evolves from that. During a bull market when there’s a lot of greed, it’s much easier to get a project funded as a founder but it means that investors are skipping out on doing due diligence and someone like Do Kwon can create a $40 billion thing that’s going to collapse.

In times of fear, it’s actually harder to get funded, and therefore there’s less innovation and so these market cycles kind of naturally correct themselves and it’s what pushes the innovation cycle forward, this oscillation between fear and greed. But yes, I mean, how has it changed my perception of money? I’m definitely more focused on making sure that my company and my family has enough money in the bank to survive for a couple of years, until there’s a cycle where money is easier to come by.

My history in crypto

Samantha Yap [14:00]: On that point – I mean, you’ve been in the Ethereum community since like – When did you learn about Ethereum? Or were you there since the beginning?

Kevin Owocki [14:08]: I mean, I was – I – My friend Piper, who’s now a developer at the Ethereum Foundation told me about Ethereum in 2015. Back when the crowd sale was happening. I was not smart enough to invest in the crowd sale but I learned about it when I was working in tech in 2014- 2015.

It wasn’t safe then, it’s not safe now, but it could be…

Samantha Yap [14:24]: As this new financial world is actually forming separate to the traditional financial system. There are people who are holding Bitcoin and Ethereum who are now, in dollar terms, very well off because they were there early and held on to the tokens or maybe sold them at the right time. There’s that view world in view of the money. Yes. What’s your perception on that?

Kevin Owocki [14:46]: Yes. Well, I’m going to guess I’ll say that I was smart enough to buy crypto tokens early but I was not smart enough to hold. My relationship with crypto has – early crypto was not really understanding why it’s fundamentally valuable and my tokens would go up 20% and I would sell them all and buy like a mountain bike because I’m a Coloradan and I like to mountain bike. But once I learned more about the fundamentals of these networks, basically the fundamental value of Bitcoin and you can see it in the white paper is a cryptocurrency network that cannot be inflated by politics.

Basically, if you have a central bank that could through their political mechanisms, has a team of bankers, insiders that can inflate their currency, they’re basically devaluing everyone else’s currency when they do that and so the idea behind Bitcoin was that there will only be 21 million Bitcoin and no one can really change that and so in a world in which we have inflationary assets because central banks are debasing their currency, the idea with Bitcoin was that if you believe that it has value and that the scarcity has value, then having only 21 million is a valuable thing and so that’s a very supply side answer to your question but I think that it’s helped me to gain more confidence in the cryptocurrency movement to see the economic policies just being fundamentally better than what fiat currency policies are but everyone’s got their own take and I definitely think that what we should not do is say like, if you got rich quick early from crypto, that’s a good or a bad thing.

You can’t attach moralistic arguments to these things. Like it’s really the luck of the draw and you’re taking a very risky thing if you’re getting involved in crypto in 2012 and probably in 2022, it’s still a very risky environment.

You have to have a lot of privilege and the ability to stomach volatility if you’re going to be involved in crypto but I think it’ll mature over time to the point where it’ll be less risky than then fiat systems would be my prediction.

Samantha Yap [16:29]: That’s Kevin Owocki of supermodular, who sees in DeFi the potential for a better, fairer structuring of economic policies underpinning money, one that goes beyond wealth for wealth’s sake.

I’m intrigued by the idea of something that ‘regenerates value’ and how you can programme values into money with crypto.

But as Kevin points out, for now, being involved in crypto requires a strong stomach — and the deep pockets to be able to ride these tumultuous times.

Next episode we’ll be going deeper into Kevin’s vision, exploring what he’s doing and what he sees needs to happen to get us closer to the idea of a monetary system that emphasizes public good over private gain.

More interestingly we’ll get stuck into talking about Regenerative Finance – also known as ReFi.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Nov 23, 2022

Do We Even Need To Reinvent Money? (S2E8)

Can money be controlled? Who gets to control it? Is the future decentralised?

In the eighth episode of YAP Cast Season 2, Samantha Yap continues her conversation with Jacob Goldstein to understand more about the control of money.

Jacob is a Wall Street Journal journalist, the Author of the book "Money - The True Story of a Made-Up Thing", and the host of the "What’s your Problem?" podcast, which helps listeners understand the problems really smart people are trying to solve.

Enjoy this thought-provoking episode as Samantha Yap goes on a quest to discover crypto’s important place in the future.

View transcript

Episode 8: Do we even need to reinvent money?

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Jacob Goldstein on this episode of the Story of Money by YAP Cast.

Welcome, this is the second of two episodes where I have had the pleasure of interviewing Jacob Goldstein, a journalist with the Wall Street Journal and former host of the popular Planet Money podcast. He is the Author of a Book called Money: The True Story of a Made-Up Thing, which was published in September 2020. We finished up in the last episode talking about money and control — and what that means for privacy. So, I wanted to explore more about this idea of who controls money, and what that control means.

Moving on to talk about who controls money you had a chapter on the European Union, as they created a new kind of money where everyone in this group of countries has a common currency. Is this the natural evolution of money – to have a universal currency?

Jacob Goldstein [01:10]: I don’t think so. I mean, the Euro hasn’t gone that well. Right? I think the Euro has gone worse than people thought. One of the big lessons of the Euro is it’s really hard to have one currency and lots of different countries. It kind of doesn’t work, and Europe, at some point, will have to choose – do they want to be more like one country and have a more integrated fiscal policy and redistribution, like the United States or is the Euro going to work, right? Different countries have different economies and the way basic monetary needs change with how your economy’s doing. Sometimes people need more money, sometimes people need less money. And when you have one currency for lots of really heterogeneous economies and no redistribution, it doesn’t work that well. And I think that’s pretty clearly the lesson of the Euro.

The current authoritarian monetary system works okay

Samantha Yap [01:57]: So, a single currency to cover a bunch of countries doesn’t work. But within one country, who do you think should control the money – Is it the monetary authority do you think that should be some political influence? Who should dictate the money of a country?

Jacob Goldstein [02:13]: That is a complicated question. I mean, we might just start with who does control it, right? This is already a somewhat complicated question. In most developed economies, including the US, fundamentally, it’s the government at the centre of it, although elected officials in the US and other countries have to some extent tied their hands, right? They’ve created central banks that are independent. I think it’s pretty impressive the extent to which central banks are still seen as primarily technocratic rather than political and certainly, they’re political on some big kind of macro level, but think of the fact that Jerome Powell, the head of the FED was given the job by Donald Trump and then reappointed by Joe Biden, right? That wouldn’t happen with the Supreme Court. It wouldn’t happen with the Secretary of the Treasury. It’s wild that those two guys both put the same person in the job. It speaks to how, at least, nonpartisan it is. Sure. It’s political on a very big level, like the system, but it’s very technocratic, very nonpartisan. And so that’s a big piece of it. The other big piece that I think people often overlook is private banks also have a ton of control over money. Fractional Reserve Banks create money and take money out of circulation when they make loans. And when they call in loans, essentially. When they reduce their lending. So, a big part of the monetary regime is the choices that private commercial banks make. So, it is this complicated system where you have the government with a lot of power and also private banks with a lot of power and they’re sort of somewhat in tension, somewhat working together, but that’s the system we have now. I think it is basically functional. Yes, it’s bad that inflation is 8% right now, but if you look at the last whatever, 50 years, 70 years now, if you look at the monetary regime, we have now can date it to the early 70s, you can date it to 1945. But in either of those cases, it has basically worked. The economy has grown tremendously. There hasn’t been a monetary collapse. So, I think it works okay.

The adoption of a new universal currency

Samantha Yap [04:11]: So, you’re saying there are all these functions and people involved to manage this made-up thing and it’s working. Let’s then talk about Bitcoin and Crypto because there is this community and group of people that, like you said it’s working out fine, but off the back of the 2008 financial crisis, Bitcoin was born because there’s this issue of trust with these centralized authorities. What do you think about the movement of people adopting Bitcoin as their universal currency of the world or the world?

Jacob Goldstein [04:44]: Yeah, I think it’s really interesting and I’ve started covering Bitcoin. I did a story about Bitcoin in 2011, and in the middle of reporting that story, my colleague, who was working on the story with me, he and I were shocked that the price of Bitcoin went from $10 a Bitcoin to $20 a Bitcoin.

Samantha Yap [04:59]: Did you buy it then?

Jacob Goldstein [05:01]: We bought. And then, because this is supposed to be the new kind of money, we went and we bought lunch with it. We bought falafels and smoothies for, you know, a Bitcoin.

Samantha Yap [05:10]: Wow! How much did you buy?

Jacob Goldstein [05:12]: I would think it was like two Bitcoins. So, it was the $40,000 lunch, right?

Samantha Yap [05:16]: Yeah. It’s like the pizza story.

Jacob Goldstein [05:18]: It’s like the pizza story. And that speaks to why it’s not money, right? If you’re a fool for spending it, it’s not money. So that to me is a big, important point, right? It is a speculative asset. It might be useful in some way, but if someone’s going to make fun of you for spending it, it’s not money. Right? What you do with money is you buy stuff. So that I think is a big, important point.

Samantha Yap [05:40]: No, but earlier…I just want to challenge that because you’re like it’s not money, but then you’re like money is made up. So then could not people think that Bitcoin is money in their world?

Jacob Goldstein [05:49]: Well, sure. People could think anything is money in their world. People could think whatever…a flower is a money in their world. They’re allowed to think whatever they want. Yeah. I think a reasonable definition of money is it’s a thing you buy stuff with. I mean, we could do the textbook definition. It’s a store of value and a unit of account and a medium of exchange. Medium of exchange means it’s what you buy stuff with. A unit of account means it’s what you say, the value of other things is. So, you know, falafel used to be 2 Bitcoin, and now it’s 1/10,000th of a Bitcoin or something. So, it’s kind of absurd as a unit of account, right? It is the case that when Bitcoin came out, people thought you would use it to buy stuff. And I don’t think that people who are really into Bitcoin itself today say that. They say, it’s digital gold. That’s the most sort of pithy description I’ve heard of Bitcoin.

Samantha Yap [06:35]: What do you think of that?

Jacob Goldstein [06:37]: It seems weird. I mean, it’s weird to go back to gold, which is like the most irrational thing you can think of to have value, but like, it seems plausible. I mean, A Bitcoin is still worth a lot of dollars, right? It seems like the main value of Bitcoin, as far as I can tell to people is that you trade in your dollars for Bitcoin. And then, in the future, you trade in your Bitcoin for more dollars than you started with. Right. That seems like the main use case of Bitcoin itself at this point, as far as I can tell. Which seems a cool move if you can do it. But it’s not exactly money, right? It’s like a speculative asset. Gold isn’t money. You don’t denominate things in gold. You don’t really buy stuff with gold. Yeah. I think there was the Bitcoin civil war. Right? And, and we can move beyond Bitcoin, but there was this big fight in Bitcoin over. Should we make it easier to buy stuff with Bitcoin? Should we change the block size? Right. And that was pretty much settled in favour of…no, we should not make it easier to buy stuff with Bitcoin. We should make it more like digital gold, which is fine. But I mean, that seems non-controversial to me. Right? Yeah. Does that seem controversial to you?

Samantha Yap [07:36]: Not really, but I think the digital gold part comes from the fact that it’s programmed so that there are only 21 million Bitcoins that can never exist, which is similar to how gold is in terms of there’s only a finite amount of gold in the world. What do you think of that comparison?

Jacob Goldstein [07:53]: I think it’s valid. I think it’s valid.

Samantha Yap [07:57]: So, then moving beyond Bitcoin, then there’s, you know, there’s Ethereum and, and, and other cryptocurrencies you know, and I think in the last year and a half, I mean, yeah, I’d love to hear your perspective and especially, maybe from an outsider’s perspective, because I’m like deep in the space, but yeah. What do you make of the growth and the surge and interest of Bitcoin and crypto in the past two years?

Jacob Goldstein [08:18]: Well, I’ll tell you one detail that strikes me. You know, when I started covering it, it was cryptocurrency and everybody talked about money because the word currency is right there. People have stopped saying cryptocurrency and started just saying crypto, which I think is meaningful. Right? I think that’s not just because it’s shorter. I think it’s because the ideas have moved beyond money. Right. It really hasn’t become money in the way people thought it would. People really thought people would use it to buy stuff, which is a reasonable thing to think. And that hasn’t happened in a broad way. I’m sure people can point to this thing or that thing where people are buying stuff. But people thought everybody would use it to buy stuff because it works better. And that clearly hasn’t happened yet. Maybe it’ll happen. But it hasn’t happened yet. The thing that has happened that not that many people were talking about at the beginning is people have thought of other possible use cases that are not money – Smart contracts, payment rails, various things. And so that part seems interesting and promising. Though I will say the one thing that I keep sort of hoping for, to the extent I’m rooting for crypto is like the killer app, the use case that everybody uses, even if they don’t care about crypto, the thing people do not because they want to get rich, but just because it’s a better way to do some boring thing, they do already. And then suddenly everybody does it, even though they probably don’t even know it’s crypto, it’s just crypto on the back end. Like that’s the thing that I keep waiting for. Right. The killer app, the thing that, that breaks out and that everybody just does because it’s better, it’s cheaper. It’s more efficient. That to me is the really exciting sort of thing of technological progress. It’s not like people getting rich, it’s not, you know, whatever. It’s just a useful, boring efficiency gain. I don’t think that…that clearly hasn’t happened yet. There’s nothing that has like conquered the world just because it’s better and cheaper, but it could happen. Yeah. I’m hoping it.

Samantha Yap [10:04]: Yeah, me too. No, it’s interesting coming from your perspective and having written about Bitcoin in 2011 it’s obviously been from 2000. It was created in 2009 and I think we’re what? Do the math – more than 10, 12, and 13 years.

Jacob Goldstein [10:20]: Yeah. More than 10 years.

Samantha Yap [10:21]: More than 10. Yeah. 12, 13 years more from that. And you’re right. Like I’m still buying groceries with fiat currencies, not with crypto, or Bitcoin or Ethereum, but yeah, I guess, like you said that is the killer app. And I think people are working to build something like that. People talk about, like better user experience and adoption. Have you interacted with anything in the park lately to do with crypto? What do you think of the user experience? If at all?

Jacob Goldstein [10:54]: I mean, I haven’t. You know, I’m not like out on the frontier, you know, I have a wallet, and I played around with some NFT stuff, but I haven’t found anything amazing. Have you? Let me ask you this, if you were going to pick – I mean, you don’t have to name one company or another if you have a complicated relationship with your clients. But is there some domain like, I would have thought say remittances, like, remittances seemed like one, you know, workers going to another country, they have to send money home, it’s expensive. That seems like a very natural place for crypto to just be cheaper essentially, be cheaper and more efficient. But is there a domain where you are particularly optimistic? If you’re going to pick one to be like the first breakout use case? What do you think it would be?

Samantha Yap [11:34]: Yeah, well, I think it’s interesting that you said NFTs because I feel like the last year and a half, you started to see celebrities start to buy NFTs and that seems to be the kind of most interesting thing to onboard is what we call it, more users into this space. I can talk about this, but what I quite like is ENS domains. So, it’s basically, you know, having a .Eth, and the username, that you can use to interact with different applications on the Blockchain. I think that is pretty interesting. I know that Jimmy Fallon, for example, created a .Eth and changed his Twitter name to it for a short period of time. It’s also a way you can show off your NFT’s like a gallery. So I think when you talk about that killer app, it’s not really a killer app, but it’s more of like, if you’ve got jacobgoldstein.com why not have jacobgoldstein.eth?

Jacob Goldstein [12:24]: Why is that better? What is the gain there?

Samantha Yap [12:27]: That connects with your wallet. So, if I want to send money to you, instead of me sending, using this, your copy, and pasting a 24-25 character phrase, I can just send it to jacobgoldstein.eth, and that connects to your wallet. And similarly, if I want to receive money, I just need to send you that instead of your number.

Jacob Goldstein [12:46]: So maybe the analogue there, rather than a domain, is more like an email address.

Samantha Yap [12:50]: Yes. So, the term is Web3. But what have you observed with decentralized finance? I think your book ended in 2020, and then in 2020, there was a global pandemic. But there was this world kind of forming an ecosystem called DeFi Summer, where the DeFi industry or market, in crypto terms, it started at the start of the year with $500 million in total value locked, which is how they explained themselves. And then, towards the end of the year, it grew to $14-15 billion in total value locked in cryptocurrency. So, it just exploded and it was these decentralized exchange applications. Some people say it’s like financial treadmills moving around online. I mean, I don’t know if you had any observations about DeFi and how that exploded. I would love to hear about that from you.

Jacob Goldstein [13:42]: Yeah. I mean, It’s similar to my broader thoughts about crypto in general. I believe in finance. Finance is useful when you can lend money to someone who wants to buy a thing and will be able to pay for it in the long run. I need to buy a car to get a job. You give me a loan, I buy the car, I pay you back over time with the money I make at my job. Like that’s what finance is useful for. It seems like DeFi was not primarily that right? It seems like DeFi was largely about yield farming about people getting money, lending money to other people so that they could buy more crypto so that they could lend more money. It seemed as far as I could tell, largely kind of internal to crypto.I will say just old school crypto and NFTs and yield farming, like the vibes that come off of them to the broader world have largely been about getting rich, right? Not about doing something useful or solving a real problem but like “Look! You can get 20% yield on this DeFi.” “Look! this thing that somebody bought for 10 bucks is worth 1000 bucks, like, get in on this and get rich.” Which is like fine. I’m not opposed to getting rich. But it’s not to me the really cool thing. To me, the really cool thing is making something useful. And finance is another case where “Great do better finance”, you know get rid of title insurance when people are buying their houses. Make it easier for people who really need a loan to get a loan at a lower interest rate. Like that, to me is the promise of it. And it didn’t seem like it was mainly about that.

Samantha Yap [15:08]: Yeah. I appreciate how that might come off in terms of the vibes if you’re coming from an outsider perspective. And I like to think so that there are certain founders and people that are trying to experiment with this new technology to see how it can improve the current financial system, especially for example, with lending, and I know, it hasn’t had a good rep with the recent crypto contagion. But there’s this divide between CeFi – Centralized Finance and DeFi, where all transactions are on chain. So, there’s a bit more transparency to what’s going on. And I think that’s something that the space is trying to change with the current banking system that isn’t quite transparent. And we don’t really know what goes on behind the scenes at Goldman Sachs or JP Morgan.

Jacob Goldstein [15:52]: Why is it better to know? Why is transparency better in that setting?

Samantha Yap [15:56]: I guess it’s kind of where the funds are going. If you’re kind of entrusting a centralized organization with maybe lending your money, knowing that it’s being used in the right way and also, you’re going to get it like returned. So, and then having that on chain track record, or just to know where it’s going. Because I think what happened with the whole Celsius situation was that people didn’t really know what they were doing with their money that they were entrusted with. So, that is what I think certain, there are certain organizations, companies, protocols, they don’t like to use word companies, but like protocols are trying to experiment with in the lending space.

There’s this world, like you said, it gives off a certain vibe of a group of people that just want to get rich, and then there are people who are trying to kind of transform or revolutionize the way the financial system is today. Do you see these different worlds forming? And that’s kind of growing in two different worlds? What do you think of it?

Jacob Goldstein [16:52]: I don’t know that it has to be that separate. I mean, I feel the decline in the price of big headline cryptocurrencies and the various troubles in DeFi, might be useful in kind of washing out the people who are just there to get rich quick and keeping the true believers. You know, maybe analogously to what happened in Silicon Valley at the beginning of the 21st century, people who were around then talk about the early aughts in San Francisco and Silicon Valley as being like, just the people who really believed in the Web were left because all the people who came to get rich quick left when the bubble burst.

And so technologically, crypto seems really interesting. And so, it’s taking kind of a while for it to really achieve its promise. And I guess, you know, maybe the surprising thing to me and if I go back to it 2011 when I first started covering it, I guess I thought at the time, like, oh, it’s interesting, maybe it’ll work. And suddenly people will be using Bitcoin as money. Or maybe it won’t work, and it will go away.

The thing I did not think is maybe it won’t work and the price of Bitcoin will go from $20 to $60,000. Like, that, I would not have guessed.

Samantha Yap [17:56]: So, imagine if you did.

Jacob Goldstein [17:58]: If I did, I wouldn’t be here talking to you respectfully. And so, the fact that so much money has flown into it before it has really proved itself, before it has really found its Killer App is interesting and surprising. And it is persisting, and so I remain genuinely curious as to what’s going to happen. And, you know, fundamentally still interested not in people getting rich, but in making useful things that people who don’t care about crypto or technology use, just the way that everybody uses an iPhone, and everybody uses FaceTime. And everybody uses email all these amazing technologies, not because they care about technology, but just because they’re really useful.

Samantha Yap [18:35]: I appreciate your curiosity and the crypto community see that the future is Decentralized. I mean, Decentralized Finance seems to be the direction everyone’s going in. But, you know, earlier, you were saying, you know, the current system, it works fine. Yes, it’s not perfect, but it’s efficient.

Jacob Goldstein [18:52]: You give up a lot of efficiency. You give up a lot of efficiency to get decentralization.

Samantha Yap [18:58]: Yes, I wanted to hear your thoughts. Do you think we could have a decentralized financial system that also kind of works maybe?

Jacob Goldstein [19:05]: Maybe, I mean, it’s not clear to me– I mean, it reminds me a little bit of the privacy debate and this idea, you know, David Chaum being like, “Oh, my God, you’re going to lose your privacy, we better come up with this digital cash that’ll keep your privacy.” And people like, “yes, that’s a great idea.” And then, in fact, they’re like, “oh, whatever, I don’t actually care that much about my privacy, it’s really easy to use my credit card. I’m going to keep doing that.” I mean, the centralization thing might be a little bit like that. The idea of decentralization is compelling. But I don’t think most people even know about it still. Frankly! And a lot of the people who do we’re like, “Oh, that’s interesting. Now I’m going to go about my life.”

One of two things:

One, there might be some really profound financial crisis, like worse than 2008, more like the Great Depression. That is traditionally the way you get monetary regime changes. So, there might be that. There might be some really horrible thing that persuades people that centralization is a bad idea.

The other thing that could happen, is, decentralization might be just an undeniable sort of efficiency improvement in some way. So that’s a little bit hard to imagine. Because you tend to give up efficiency to get decentralization. But there might be some use case where a decentralized system is just obviously works better, not in a theoretical way, but in a practical way, where it’s cheaper, you get more money out of it, it’s more efficient. Something.

So, you either need some terrible financial crisis to get people to be really wary of centralization, or some killer use case, where decentralization is just obviously better. And of course, for the sake of the world, I hope we don’t have a horrible financial crisis. And I hope somebody does come up with a killer use case, right? I like when technology makes people better off. And that’s what I hope happens with crypto.

Samantha Yap [20:41]: So, we’re here now where crypto and DeFi still hasn’t come up with this Killer App yet. You know, money as it stands at the moment is working okay, it’s working fine even though inflation is at 8%. Where do you think the future of money is heading in the next, say, 5 to 10 years?

Jacob Goldstein [20:58]: I don’t know is the most honest answer. And anybody who says they know is…they don’t know. They’re not right. Even if they guess, and it happens what they say it doesn’t mean they knew it just means they guessed right. I mean, 5 to 10 years isn’t that long.

In the very long run, money will definitely change again. Money now doesn’t look like money looked 100 years ago, and it doesn’t look, then it didn’t look like 500 years before that. So certainly, in 100 years, money is going to look really different than it does today. The power dynamics will be different. That’s super interesting to think about. I have no idea what that’ll look like. 5 years, I mean, I feel like it’ll probably look a lot like it looks today unless some really horrible unexpected thing happens. And there’s some kind of giant collapse. You know, governments don’t want to let go of money. They’re not going to rush to stop printing fiat. And you know, it works well enough for most people that I think in 5 years, this sort of monetary regime will look a lot like it looks today.

Samantha Yap [21:51]: I really appreciate this conversation to just get a perspective that’s not pro crypto and pro DeFi, because it’s a bit of a reality check as well for some of the hype.

Jacob Goldstein [22:01]: I am not anti! For the record, I’m not anti. I am pro crypto.

Samantha Yap [22:06]: I know you are not anti but I appreciate that you’re like, in 5 years, because I talked to some people that I hear that like, yes in the next year, and the next… so yeah.

Jacob Goldstein [22:14]: Here is one interesting approach. So, there’s actually a thing I did when I was hosting Planet Money, I had the Venture Capitalist of Ben Horowitz, half of Andreessen Horowitz, the giant VC firm. Yep. He made a bet. He came on the show, and he made a bet. And this was in maybe, 2014, something like that. And the bet was, in five years, some percent I think, like 10% of Americans will use Bitcoin to buy something every month. So, he made that bet. That’s what people thought of Bitcoins, which were used to buy stuff. He lost the bet, obviously. But he came back on the show was like, he didn’t really care that he lost the bet, because he got super rich betting on crypto. But you know, and now he is like a somewhat more cautious now he’s like, “Well, it’s going to take a long time if you think about the internet, it’s maybe it’s the internet in 1980, or something.” The Internet was around for a long time before the web came along. And so, I think you can be pro crypto and not think the world is going to look really different in a year or in 5 years.

Samantha Yap [23:08]: Yeah. More of a personal question to you: will you be writing another book and would you look more deeper into crypto for the next one in your quest to study the history of money?

Jacob Goldstein [23:18]: You know, I feel like, I’m not eager to write another book about Money. I’m focusing more on technology now. Now I have this new podcast called What’s Your Problem where I’m talking to entrepreneurs. And so, you know, technology and money go close together, but the sort of less directly financial side has become more interesting. And maybe you can tell that in my answers, like technology as the source of productivity gains, efficiency gains, as the big picture the way people get better off in the long run. That’s really interesting to me. So maybe I’m just waiting for that Killer App, killer use case to come along and maybe that’ll get me excited.

Samantha Yap [23:50]: And I guess that’s where the technology comes in. Well, thank you so much for your time, Jacob. It’s been an amazing conversation with you. Thanks for joining in.

Jacob Goldstein [23:59]: Yes, it was really fun to talk with you. Thanks for having me on the show!

Samantha Yap [24:02]: That’s Jacob Goldstein, former host of Planet Money and author of Money: The True Story of a Made Up Thing, offering amazing insights into exactly what money is, and what it isn’t.

As Jacob clearly indicated, he’s not against crypto, but he has a nuanced view of its potential — and the fact that we have perhaps been premature about when and how crypto might make more serious inroads into our lives.

But that’s not surprising: depending on who you believe, Bill Gates or Stanford computer scientist Roy Amara declared: “we overestimate the impact of technology in the short-term and underestimate the effect in the long run.” Gates was famously wrong — or late — with many things, from computer memory to the internet.

If we accept Jacob’s main thesis — that money is a made-up thing — then we probably have some way to go before we converge on the new paradigm that DeFi, and crypto offer. Perhaps it’s not about finance, or another iteration of the web, or a currency based on cryptography. Perhaps it’s something entirely different, a brand-new chapter in the Story of Money. Thanks for listening!

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.

Listen to this episode on:
Nov 16, 2022

Is Money a Convenient Fiction? (S2E7)

Will people ever stop believing in money? What gives money power? How has money evolved?

In the seventh episode of YAP Cast Season 2, Samantha Yap is joined by Jacob Goldstein. Jacob is a Wall Street Journal journalist, the Author of the book "Money - The True Story of a Made-Up Thing", and the host of the "What’s your Problem?" podcast, which helps listeners understand the problems really smart people are trying to solve.

Enjoy this thought-provoking & engaging episode as Samantha Yap goes on a quest to discover crypto’s important place in the future.

View transcript

Episode 7: Money is fiction Episode Transcript

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Jacob Goldstein on this episode of the Story of Money by YAP Cast.

What is money? We’ve talked about it a lot on this show, and indeed, that’s kind of the point of the show. But we’ve always worked from the assumption that we’re trying to define something that is real. After all, you can put a coin, a note or whatever in your hand, and you can touch it. Sure, we have credit cards and other mechanisms that abstract out the coin or banknote. But we sort of know that somewhere behind it is some real money. Either it’s ours or we’re borrowing it, and we know that people will accept that credit card as payment, and trust the system enough to know they won’t be cheated.

So, we know what money is, and we know what it can be converted into. But maybe we’re looking at it all wrong. Maybe money is just a figment of the collective imagination. Maybe money is, well, fake news.

This is the jumping off point for my next guest, Jacob Goldstein.

Jacob is a journalist, spent time at the WSJ covering healthcare, shifted to money and then hosted the popular Planet Money podcast by NPR. He is the Author of a Book called Money: The True Story of a Made-Up Thing which was published in September 2020.

Now he is the host of What’s your Problem? which aims to helps listeners understand the problems really smart people are trying to solve right now.

A surprising idea: Money isn’t real

So, Jacob, firstly, I’d love to start with your story. Could you tell me a little bit about your background as a reporter, Host of Planet Money and now the author of Money: A true story of a made-up thing?

Jacob Goldstein [02:00]: Yeah. I came to money somewhat late in life. In college, I studied English. I became a reporter. I was a newspaper reporter. I covered healthcare, and it was when the financial crisis hit in 2008 that I got really interested in money. I was working at the Wall Street Journal, so like finance was sort of all around me, but I was covering healthcare at the time. I remember, there is this sort of key moment that I talk about in the beginning of the book where the financial crisis is happening and it seems like trillions of dollars are just disappearing. Disappearing from the stock market, disappearing from real estate prices. And I went out to dinner with my aunt who was a very successful businesswoman and had an MBA, was like a powerful executive in New York City. And I asked her, all that money that just disappeared, just where did it go? What happened to it? She said money is fiction. It’s not real. It’s not like it was ever really there in the first place. So, it’s not like a real thing. And that was kind of a big, exciting, surprising idea to me. And that sort of set me on this path, and then I wound up hosting this podcast, Planet Money and studying the history of money and, as you said, writing this book about money.

Samantha Yap [03:21]: Okay, that’s what led you to write this book about money. So then let’s touch on your point about how money is fiction or it’s this made-up thing. Yeah? Could you just set the scene here and expand a little bit about that?

Jacob Goldstein [03:34]: I think for most people you just sort of take money as given. Like certainly, in my case, before I started thinking about it, I just assumed that it existed in the world, right? It does kind of. You go about your life and you get money, and you spend money and you worry that you don’t have enough money. But you don’t actually think about the underlying mechanisms and to the extent that you do it just seems like a fact in the world, like water or gravity or something. It seems like something, part of nature. And the big insight for me is that that is not true. Right? Money is a thing that people made up, and not just a thing that people made up once, but that people have been making up in an ongoing way. Reinventing as technology has changed, as society has changed, as power has changed. Money has been kind of reinvented again and again. So not only is it a thing people made up, it’s a thing people are still making up.

Money as an agreed-upon shared system

Samantha Yap [04:26]: What would you say to the part that’s real? I mean, it’s real to me that I can transact something and get groceries, or I can pay for my rent. So that’s a real part of it. Is that something that’s tangible?

Jacob Goldstein [04:43]: Yeah, it’s amazing. Right? I mean the money part is what’s not tangible. Right? You go to the grocery store and you fill your cart with food, with real tangible food. And then you wave your phone in front of the little payment thing and you get to walk out with all the food. Right? The food is definitely real. The payment part is this amazing sort of shared system we’ve all agreed to abide by it, but there’s no thing there, right? There’s no thing there. There’s just basically a ledger, right? I mean, if this is crypto blockchain people listening to this, they’ll know that money is basically a ledger, right? We’re all sort of keeping accounts. And we agree to use each other’s accounts. So, what you can buy with money is definitely real. And it’s definitely important, right? Obviously to say that it’s made up, to say that its fiction is not to say that it doesn’t matter. Obviously, it’s wildly important, but at some level, there’s no there-there.

Samantha Yap [05:37]: I like how you challenge that and yeah, when you put it that way, I can see how it’s something that’s a bit – it’s not there – but it changes the way we live our lives. So, yeah, why is this something that anyone anywhere in the world can understand and compare. Everyone in the world needs money or works for money to survive.

Jacob Goldstein [05:58]: Yes. I mean, money is an incredibly useful technology basically, right? If you go back in history and development, there are societies that are very small societies that don’t have money or don’t have, you know, money like we would think of it, but they tend to be very, very small. Everybody knows each other. They’re basically self-sufficient, there’s not a lot of trade. And so, once you get beyond that size of society, you pretty much need money to function, to engage in the distribution and exchange of material goods and services.

Profound crises leading to dramatic regime changes

Samantha Yap [06:37]: But yeah, if it’s fiction and if it’s kind of not there, could we ever stop believing in it?

Jacob Goldstein [06:44]: Yeah, that’s an interesting question. I mean, one analogy that comes to mind when we’re talking about this side of it is the law, right? There are laws, there’s enforcement of laws. Law doesn’t exist in the natural world. Right? But we create laws, we more or less follow the laws, and the laws are more or less enforced. There are times when there are revolutions, there are regime changes, laws change, and profoundly everybody suddenly stops following the law. And with money, there are somewhat analogous things that happen. Right? So, it seems quite hard to imagine a world where there is not money. That world would be profoundly poor relative to our world. We’d be screwed basically if people suddenly stop using money, that would be a catastrophe. You do see times when the monetary system changes. I would say the most recent big dramatic shift came during the depression, right? In the 1930s one country after another essentially abandoned the gold standard. You can say, well, technically, there was a gold standard until the 1970s, but really the big action came in the 1930s. People really believed in the gold standard. Even more, I think, than today, people are attached to our monetary regime. People in power, really important people just believed in their bones, that the only real way to do money was the gold standard. And then suddenly it wasn’t anymore. Roosevelt, Franklin Roosevelt, the president of the United States, his own advisors were like, “whatever you do, don’t go off the gold standard”. And Roosevelt was like, “you know what, we’re gonna go off the gold standard”. And his advisors when he said it, were like, “okay, that’s it. That’s the end of Western civilization. It’s over. Goodbye. It was a good run.” But Roosevelt was right. His advisors were wrong. The gold standard was a problem in the depression. Going off the gold standard actually helped, and so there was this profound monetary shift. I think a lot of people did realize what a big deal it was. There were Supreme court cases about it, etc., but the depth of the shift was extraordinary and not that long ago, so certainly we can have a big change in the monetary regime.

Samantha Yap [08:54]: Yeah when you put it that way that must have been a crazy time to have a shift in a belief in something, so yeah. What does it say about the psychology of money? You know, one minute we can think that gold is gold and hard money is the way to go, and then kind of going off it.

Jacob Goldstein [09:12]: Yeah, that’s an interesting, complicated question. I mean, on the one hand, you can look at how long people clung to gold and just how profoundly bad the depression was. Right? People don’t want to change monetary regimes basically, right? People aren’t excited to abandon the monetary system. I think, on the contrary, people tend to assume that the monetary system that exists at a given time is the right way to do it. So, it took the depression, right? It took the depression to do it. And, you know, Herbert Hoover, who lost to Roosevelt, would not have abandoned the gold standard. He gave speeches when he was running for election in 1932, like, no, there’s no way we’re gonna go off the gold standard. England only went off the gold standard because the Central Bank ran out of gold and they had to. So, it’s a complicated question. I guess people don’t want to change the monetary regime is one piece of it. But then in like a profound crisis, it happens whether people want to or not.

Cash as an ever-increasing form of money – can we move away?

Samantha Yap [10:11]: Let’s move on to the forms of money. So, let’s talk about cash because you talk about cash a lot in your book and we nowadays, don’t carry about cash anymore. As you said, I wave my phone when I pay for my groceries. So, are we moving away completely from cash?

Jacob Goldstein [05:58]: You know, that’s a really interesting one. It feels like it. Why do you even need cash? Right? Unless you want to pay somebody off the books. And yet the amount of cash in the world keeps increasing, keeps going up. There’s more paper money in the world than ever before. I haven’t checked lately, but when I wrote the book a couple of years ago, it was something like $4,000, just in hundred dollars bills for every man, woman and child in America. Right? Which is wild! One fun question is: where are they all? I don’t have $4,000 in hundreds for every person in my family and there are a couple of answers. One is they’re outside the US, right? We know, in the case of the United States, the US dollar is the global reserve currency. And you see that on an institutional level, with central banks holding, dollar-denominated assets, but you also see them on an individual level, where lots of people in countries where the banks are unreliable, where currencies are unreliable, will hold, paper money, dollar bills under the mattress as their savings. So that’s one part of the answer to what’s going on with paper money. I mean, the other part of the answer is crime, right? Paper money is an amazingly good way to move around purchasing power without anybody knowing about it, to buy stuff without anybody knowing about it. So those are the two use cases for hundreds, as far as I can tell. And they’re really popular use cases, and the government doesn’t seem interested in getting rid of the hundred, despite the fact that it’s this sort of this crime vehicle and something for foreigners to use as savings. I mean, partly because, you know, the government can make a hundred dollars bill for a lot less than a hundred dollars and essentially get a hundred bucks for a piece of paper. So, it’s kind of a good business. I would be in that business if I could be.

David Chaum, Dossier Societies and why we don’t really care about privacy

Samantha Yap [12:18]: Yeah. When you put it that way, we think that money is this finite thing, that we can account for. But then, as you said, there are probably hundred dollars bills somewhere around the world that we might never know where they are, and then people are using them to exchange value. I mean, yeah, when you put it that way, it’s a fresh perspective and a kind of true one. But what do you think of the invention and the dream of digital cash by David Chaum?

Jacob Goldstein [12:43]: Yeah. So, I was thinking about him just as we were talking just now. Right? So, cash, paper money, is an amazing technology for anonymous transactions, right? You walk into a store, you give somebody a piece of paper, they give you some stuff, or maybe it’s not a store. Maybe you meet a guy in an alley and you give him some paper and he gives you some stuff. Nobody has to know. You don’t need a receipt. It’s just done. Right? It’s the most anonymous transaction you can imagine. And so, David Chaum is sort of the kind of intellectual godfather of crypto, right? A generation or two before Satoshi, he was a cryptographer, and in the 1980s, he wrote this incredible paper, incredibly prescient, where he talked about how we were moving into what he called a Dossier Society. And he foresaw that cash was going to be replaced by digital transactions and he foresaw that digital transactions could be tracked in a way that cash could not. So, this idea of the Dossier Society is what some people now call surveillance capitalism, right? This idea is what he was looking out for in the 1980s, saying, “In the future, everything’s going to be digital,” which means, everything can be tracked. And he was a cryptographer, he was like a privacy guy. And so, what he wanted to invent was anonymous, digital cash, right? He wanted to take the anonymity of paper money and bring it to the digital era. And he came up with this very complex, very clever way to do it. And relative to what we think about today with crypto, a big difference was there was a trusted central intermediary. There was basically like a bank and there was sort of a complicated technological idea he had that would let the bank verify to a merchant that a customer had enough money to buy something digitally, but the bank wouldn’t know anything about what the customer was buying. Right? So, it’s not disintermediated, it’s not peer-to-peer. There’s an intermediary, but it is anonymized. This was his big idea. He was an academic. He was a professor at Berkeley, but he actually quit. You know, in kind of a modern fashion quit and started a company. Everybody was excited about his company in the 90s. It was called DigiCash. It got written up in the New York times magazine and Wired, like the kind of hype cycle that we’re all familiar with now. And interestingly, nobody was really that interested in using it. I think, partly because the main selling point was privacy. One of the things we’ve seen since then in the 21st century is people might say, “oh yeah, sure. I care about privacy.” But billions of people use Facebook and Instagram and people clearly don’t care that much about their privacy. What happened was, as the world digitized, nobody used digital cash. Everybody just used their credit cards, which are like totally trackable, and convenient. Everybody’s fine with it. So DigiCash went away and digital cash went away.

CBDCs and getting behind financial privacy

Samantha Yap [15:52]: Interesting. And on that topic, and before I get to Bitcoin and Ethereum, you talked about privacy and you also mentioned briefly a potential surveillance-like tool. So, let’s talk about the Central Bank Backed Digital Currencies. What do you think of that as part of the progression of this move towards digital cash? And you mentioned the e-krona in your book as well, so yeah. What do you think of CBDCs?

Jacob Goldstein [16:20]: Well, they certainly seem trackable. I mean, it depends on how they’re implemented, but it is notable to me that the big country that seems farthest along with the Central Bank Backed Digital Currencies is China, which is maybe the most intense technologically-driven surveillance State in history. Right? And so, the idea that cash – paper money is fundamentally untraceable and China wants to replace it with the Central Bank Digital Currency seems to me to be very surveillance driven. Now, I don’t know the details, but just superficially that seems like the most logical story there.

Samantha Yap [16:57]: Yeah. You mentioned not very many people care about privacy, but yeah, if a country like China and also even, I think, in the UK, there’s like Britcoin and other countries are exploring digital currencies, national currencies. Yeah? Are you concerned about this on a financial privacy level?

Jacob Goldstein [17:16]: I mean, I guess personally, I’m not to tell you the truth. For example, look, I pay all my bills online now. Right? Like, I basically do all of my transactions over the internet with a credit card. So, I’ve already given up that fight, right? It’s not like I’m going to the airport and handing over a wad of a hundred-dollar bills when I buy a plane ticket or anything, you know. So, I’m already in the Dossier Society. I lost. You know what I mean? And like, frankly, I’m kind of okay with it. I guess there’s an interesting question, right? To me, it would be interesting if governments ever tried to get rid of paper money, because clearly there is this option now. Like if you really care, if you really want your privacy, just go get paper money, and pay with paper money.

First-generation crypto and the surprising lack of privacy

Samantha Yap [18:01]: That’s real privacy because I do not know if you’ve been following this Tornado Cash situation on the crypto level. We can expand on that a little bit, but privacy coins have started to emerge as well, which are digital currencies that have mixers in them to conceal privacy. What do you think about that?

Jacob Goldstein [18:20]: I think one of the things that have been surprising at least to the general public is the lack of privacy of first-generation crypto, right? Every time somebody gets tracked down through the blockchain when they say use Bitcoin for a ransom, right? And then the authorities just find them through the blockchain. It’s like, we’ve got an immutable ledger we could use to go figure out who has this money. That to me is an interesting story. It seems like there’s been a long effort almost in a way from before the time Bitcoin was created, way back to David Chaum in the 1980s to create anonymous, truly anonymous, not just pseudonymous digital currency. It certainly seems technologically plausible. There is some complicated set of factors about adoption and regulation that we’ll have to see, but it’ll be interesting to see what happens.

Samantha Yap [19:17]: That’s me talking to Jacob Goldstein, Author of a Book called Money: The True Story of a Made Up Thing.

It’s really interesting to hear Jacob’s view — that essentially money is a convenient fiction, a way for us all to collaborate and co-exist. And that fiction is not just one idea, but one that keeps changing as we change, and our needs change.

And how now, we’re in a world where our transactions are being tracked — either by the government, demanding our banks share our data with them, — or by companies, in so-called surveillance capitalism, where our ‘value’ is to a shadowy ecosystem of advertisers, who obsessively monitor and monetize what we do, what we read, what we’re looking for, what we buy, where we go.

So, can crypto help us in that? Is crypto another ‘made-up thing’ for us to participate on a more even playing field? Or is its transparency going to be the future?

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.

Listen to this episode on:
Nov 9, 2022

The Future of Managing Money (S2E6)

In the sixth episode of YAP Cast Season 2, Samantha Yap continues her discussion with Mona El Isa, the CEO & Founder of Avantgarde Finance, an asset management services tool built on decentralised finance.

They touch on interesting like market scrutiny & transparency, the degree of transfer & enforce-ability, financial activities without the need for financial intermediaries, giving people the tools to minimize mistakes, how unchained asset management is a game-changer, the right tools & interface for increasing transparency & security, and bridging the gap between CeFi and DeFi.

Enjoy this thought-provoking & engaging episode of YAP Cast, and keep tuning in for more interesting conversations about people, money, and the world.

View transcript

Episode 6: The future of managing money Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Mona El Isa on this episode of the Story of Money by YAP Cast.

Last episode we heard from Mona El Isa, once a trader at Goldman Sachs, and now the founder of a DeFi company called Avantgarde Finance, an asset management services tool built on Decentralised Finance. We heard her talk about the importance of us managing our money, but also how hard it has become, and how the mechanics of the investment industry are not always working in our favour. If you haven’t heard that episode yet, I’d recommend you give that one a listen first, as what we’re going to talk about here will make a lot more sense!

We hear a lot about Traditional Finance players moving over to crypto, and there are some great stories. But Mona’s is a little different — she has set out to make the process of managing our money simpler, cheaper, and fairer.

Go from clunky TradFi asset management to a simple custody layer, like Enzyme, on top of the settlement layer

What led you to start Melon, Enzyme, Avantgarde? Yeah, tell me about your thinking behind starting your protocols and company.

Mona El Isa [01:18]: Yeah, so I think when you look at traditional finance or let’s say traditional asset management, it’s actually like it takes a lot of resources and multiple entities all engaged in very manual and expensive and slow non-automated processes in order to make a system that kind of works but is opaque still and very expensive, very high barriers to entry etc. And the reason is the traditional finance or CeFi stack asset management today is such that you know you have custodians who look after your assets. You have the asset layer, you know people who issue assets across different spectrums, different issuers for bonds, different issuers for equities, different issuers for real estate and every single country it’s different. It’s just really complex. Then you have different trading venues for different assets and different asset classes. You know whether it’s in crypto, maybe Coinbase, Binance, and in traditional financing the LLC or, you know, the New York Stock Exchange. You have then fund administrators who are responsible for basically making sure that whatever the investment manager has promised to their investor is being enforced. They’re responsible for the NAV reporting, they’re responsible for, you know, handling investments and redemptions, etc. And then you have to have compliance officers, operational staff, back, office, middle office, accounting, and risk management. All of these are different people, different entities, and then the service layer, compliance lawyers etc. And it’s all just very heavy and disorganized and all over the place. It’s a multi-entity, very very clunky experience. And where I got excited when I started to learn about crypto and blockchains is the fact that we could convert this heavily complex multi-entity experience into a very simple vertically integrated experience because now we have a blockchain that acts as a settlement layer. We have a custody layer for asset management which could be like a protocol, like Enzyme. We have assets which are all issued on chain, on a particular blockchain. So ERC-20s, wrapped coins, NFTs. We have, let’s say the trading and execution layer is what I would call DeFi today. So that says lending, borrowing, derivatives etc. And then you have the fund admin, operational, auditability, and accounting layer which is Enzyme. And all of this stuff just meshes into one vertical stack. And enables people to do things with immediate settlement, so with full transparency, pretty big cost savings whilst in the custody of their own assets if they want to be and you know, in a kind of much more transparent way, and I think this is the future.

A more efficient asset manager

Samantha Yap [04:10]: So, you’ve designed essentially a far more efficient and transparent assets manager. Would you put it that way?

Mona El Isa [04:20]: I think asset management framework or asset management framework infrastructure, yeah, I think that’s what we’ve done with Enzyme over the last few years. I think it’s six years now.

Samantha Yap [04:30]: What led you to start Avantgarde Finance Enzyme and Melon yeah?

Mona El Isa [04:26]: I had just had that terrible year of trying to set up my own fund. And with every failure and with every bad experience, I guess you learn a lot of very valuable lessons and for me the very valuable lesson, which I didn’t know at the time, was learning from the inside out – how the entire engine of asset management works because that was something that when I was at Goldman, when I was working at a large hedge fund, had not been exposed to. I was only exposed on the investment side of things and that was kind of what led me to found Enzyme or Melon at the time. And that was the decentralised asset management protocol. But the more we built that, and after we decentralised that, I sort of realised that, to really make this work, DeFi/Enzyme needs to have worked, so two things you know we talk about decentralizing DeFi protocols a lot in the crypto space, and we were the first people to ever do that. But when we learned quite quickly after decentralizing Enzyme, was that decentralization doesn’t necessarily move things forward without some leadership and everyone was sort of afraid to lead because they were afraid of being perceived as not decentralized. And so, what we decided to do was set up a new company called Avantgarde Finance, actually Avantgarde Core initially we and proposed to the Council that we would become the lead developer and sort of try to pitch the road map and product development and in the priorities for the for the protocol. And then at any point you know they still control the protocol, and they can kick us off as core developers if we’re not doing a good job. So, we maintain that decentralization. But by having the efficiency of a sort of centralized organization and we report to them periodically and the other thing that Avantgarde finance is doing is that you know we talked a little bit in the previous question, I think about the vertical division is to have this vertically integrated stack for asset management. And we also have realized over the last few years that having that vertically integrated stack is going to be difficult with just a protocol alone. It requires coordinating some other bits and pieces, and so I see Avantgarde Finance as the coordinator you know towards getting that stack in place so that really managers can basically have and be enabled to set up a fund and manage a fund simply and then investors can easily get access to those funds.

A necessary framework: transparency, cheap, simple, accessible, possible to assess risk

Samantha Yap [06:57]: Basically, you’ve created, you know, the most efficient asset management framework through Enzyme Finance and then obviously Avantgarde helping coordinate it all? Could you explain and make the case for why you think this is a necessary framework for the future of asset management and where money is heading today?

Mona El Isa [07:16]: Yeah, sure, so I think you know basically, for all the reasons I mentioned. You know, I think it’s incredibly important to be able to bring transparency to the market. So, ensuring that information is transparent to anyone, whether it’s a regulator or a 25-year-old exploring their investment options. Enablement like making it simple, cheap, you know, vertically integrated solution for asset managers to access because the world is just, it’s just not, you know, if you have such high barriers to entry and so much complexity, you’re basically just encouraging large incumbents to stay in the asset management space. It’s large, lazy incumbents and not necessarily anything new and innovative. And last but not least, I think access is really important like creating a future where accessing DeFi, understanding DeFi opportunities, assessing risk is as easy as shopping on Amazon. And I bring it all back to DeFi not because DeFi is the only thing people should invest in, but because I like the qualities that DeFi gives you – the transparency, the real-time reporting, the ability to scrutinize behaviours, yeah, you know, in a way that you can’t do in traditional finance.

The case for DeFi: transfer, transparency, accountability

Samantha Yap [08:22]: Yeah, and if you’re going to make the case for decentralized finance you know what is it that excites you and you’ve shared some points and the transparency, the efficiency. But yeah, if you’re going to make the case for decentralized finance to an audience that might not know much about it how would you like to sell it, or explain its value?

Mona El Isa [08:41]: I think the keyword you know for me or the key thing is transparency. Transparency in itself doesn’t stop bad things from happening, but it does allow market scrutiny. It does allow people to scrutinize and therefore make a more accurate, accurately priced risk enables more efficient markets. So, this is something that doesn’t really exist today in CeFi and so you know we’ve seen very recently CeFi, TradFi players like 3 Arrows Capital or Celsius get away with bad behaviours for long periods until eventually they became insolvent and ripple effects were against all their counterparties, clients, investors, etc. Traditional finance is not that much better when you think about Madoff and Lehman. So, I think transparency is really key in terms of pricing risk accurately or getting people to call out bad behaviour and pressure investment managers, asset managers to change their behaviour accordingly. I think accountability is also very interesting when it comes to DeFi. I talked a little bit about conflict earlier and how it’s hard to hold people accountable if they say they’re going to do something and they do something else because of the lack of transparency, even though financial intermediaries exist to try and enforce that behaviour, complexities and slow information makes it quite hard to do that in real-time. What I like about DeFi is that you can embed certain rules that, certain promises into smart contracts, and then you can rely on those smart contracts to enforce those rules. So, you never have to worry about a manager deviating from a specific promise. So, if they say they’re only going to invest in this 10 universe of tokens, you can actually code that into the vault’s smart contract such that you know this the blockchain and smart contracts will not allow them to trade any other tokens, for example. Or if your leverage ratio is only allowed to be a maximum of 3X, this behaviour can be enforced at a smart contract level. So, I think with this degree of transfer, transparency and enforceability are now possible. It’s hard to see why investors, regulators, and counterparties wouldn’t insist on it going forward, and I fundamentally believe that the future of asset managers is moving towards this DeFi vertically integrated stack versus the old way of doing finance. There are some other aspects to DeFi which are interesting that I haven’t touched on like self-custody and permissionless behaviours but I think transparency and enforceability and accountability are the ones I get most excited about.

What’s on-chain, and how does it change the game?

Samantha Yap [11:06]: Yeah, and with respect to transparency, there’s the term on-chain gets used a lot. Could you explain what on-chain means? And how does on-chain asset management change the game?

Mona El Isa [11:16]: Yeah, when you hear the word on-chain when referring to asset management or just in general, it basically refers to the financial system that uses blockchain to settle its trades, account for transaction, auditability and enforce certain behaviours. So, transacting on-chain is only possible with this new world of digital assets and the view that I took six years ago when I got into this space is that increasingly we’ll see more and more digital assets because of that, even traditional assets moving on-chain, because of the codeability of finance, the enforceability of actions through smart contracts and the transparency you get through blockchains, changes the game massively. So, there is a real big reason to move things on-chain. And I think it’s not the what that’s changing when we go on-chain, it’s how. On-chain asset management is changing things because we’re automating protocols that were, you know protocols that were usually enforced by people and intermediaries. We’re automating processes we’re making professional financial activities possible without the need for financial intermediaries. And we can only do this because assets now exist on-chain and smart contracts that exist today which enable us to program certain behaviours.

Risks of automation? Irreversible transactions?

Samantha Yap [12:26]: One follow-up question on you know the on-chain management and is there a risk to automating like a certain trade or a certain position? Is it detrimental that what’s on-chain is also something irreversible.

Mona El Isa [12:38]: Yeah, you could argue that it is. The thing about centralized finances that trades are reversible for better or worse, and that can be good. I mean we saw like I think three or four weeks ago, the London Metal Exchange just randomly decided to cancel hours’ worth of trades just because they didn’t think that users would have the margin requirements necessary, so they wanted to avoid some, but they just took that decision without consulting anybody, and so there were a lot of really pissed off people who made a lot of money on the trade they did and then had them reversed. So, you could argue who were the LME to make that call, to make that decision. You know they’re not a regulator. They’re not a government. You know, like on the plus side, you know if you make a mistake and you need to reverse that mistake, it is more likely that you will be able to reverse that mistake in traditional finance than you would in DeFi, although not always possible, and then in DeFi until, like you very correctly said, transactions are typically final, you know. Unlikely ever gonna be able to reverse a transaction unless you’re on a centralized blockchain and so yeah, you have to be OK with that risk and that’s up to Avantgarde’s builders to make sure that we’re building tools that check against these things to make sure that they sanity check from a user experience, user interface experience to make sure that people are given tools to minimize the mistake, possible mistake first.

How far away are we? A gradual move

Samantha Yap [14:00]: How early are we or how far away are we from seeing this technology being adopted by Banks and traditional financial institutions.

Mona El Isa [14:09]: don’t think banks and traditional finance people will adopt the DeFi stack overnight. Ultimately, I think we’ll see centralized finance gradually moving over to decentralized finance. I think it’s something that they’re a little bit afraid of, they don’t fully understand. However, I think that we will see more and more people, you know, sort of bridging the gap between CeFi and DeFi and transitioning their businesses over in parts by using the DeFi stack, where it’s also a small problem for them and where they think it’s necessary and then, you know, increasingly uses it, using it as confidence builds and you know and track records in this space become more and more robust.

Samantha Yap [14:48]: And what’s your immediate focus? What are you looking for and hoping to see in the next year or a few months to a year?

Mona El Isa [14:57]: I think that’s a great question. Aside from the development work that we do, I think we’re really there to handhold people through that process. So, anybody building anything in asset management that wants to leverage certain bits of the DeFi stack. You know, I think we’re the perfect place to come to whether it comes to giving strategic advice or looking at the different options or how to transition your business piece by piece if you’re not ready to do a radical overnight change, but I think where we’re focused really is in bridging that gap between CeFi and DeFi, making it more secure to use, making it more transparent with the interface because you know blockchain everyone says it’s really transparent, but you have to have the right tools and interface. For that transparency.

I think the role we want to play is handholding CeFi players that the hand holding on holding the hands of CeFi players in traditional finance. Like I said that doesn’t have to be an overnight move or transition or an all-in-one, it can be partial gradual transitions, but I feel that we are perfectly positioned having been in this space for six years and having a lot of traditional finance experience and a lot of DeFi experience, probably more DeFi experience than 95% of the people out there, maybe 99%. I think that we, you know, we’re perfectly positioned to assist with that transition.

Who are you working with?

Samantha Yap [16:12]: I think that yeah, you are the go-to expert on that. Are you working with anyone right now? Like any kind of traditional financial or centralized finance players?

Mona El Isa [16:23]: We’re working with a lot of centralized finance players. Yeah, I would say I’d like, you know, as a kind of go for next year to also be working with more traditional finance. Theirs as well.

Samantha Yap [16:32]: And that’s why you say your hand holding these guys. So, it’s a very important job that you’re going to do so, or that you’re already doing so. Mona, thank you so much. This has been a really great discussion. You know, I’ve really enjoyed learning more about managing money and then seeing the need for infrastructure and frameworks like Enzyme and Avantgarde. So thank you so much for your time.

Mona El Isa [16:55]: Thanks for having us. It’s been a pleasure to be here, Sam.

Samantha Yap [16:59]: You’ve been listening to me talking to Mona El Isa, founder and CEO of DeFi company, Avantgarde Finance. She calls it DeFi as a service. You can find their website at avantgarde.finance.

Over the two episodes we have heard her talk about the importance of managing your money, but how difficult that is — and why so many of us are afraid of doing so. After putting up with the structured and elitist way that traditional investment management worked, she has spent the past few years trying to build something better on the blockchain. She’s learned some really interesting lessons along the way that are relevant to all of us. Ultimately her message is a positive one: DeFi makes possible some really fundamental elements — it is cheap, transparent, simple, accessible, accountable, enforceable and, most importantly, makes it easy to assess risk. Her prediction, that we’ll see traditional assets moving over, and removing financial intermediaries, is an exciting one, making this part of the story of money perhaps the most exciting and far-reaching of all.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.

Listen to this episode on:
Nov 2, 2022

The Importance Of Managing Money (S2E5)

In the fifth episode of YAP Cast Season 2, Samantha Yap is joined by Mona El Isa, the founder of Avantgarde Finance, an asset management services tool built on decentralised finance.

They deep-dived into the importance and challenges of managing money. What does managing money mean? What roles can DeFi asset management services play? How do DeFi asset management services differ from traditional asset management services? We look at all these questions and more in this episode.

Enjoy this thought-provoking & engaging episode of YAP Cast, and keep tuning in for more interesting conversations about people, money, and the world.

View transcript

Episode 5: The Importance Of Managing Money

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Mona El Isa on this episode of the Story of Money by YAP Cast.

In DeFi we hear a lot of talk about financial inclusion — the idea that there are millions, possibly billions, of people who don’t have access to the kinds of financial services we take for granted like putting our money somewhere safe, having access to credit, being able to send money to someone else far away. But there’s one aspect of money that even those who can take these financial services for granted don’t do, or are scared to do, and that’s managing their money.

Many of us are just not confident about doing it. In fact, 24 million adults in the UK don’t feel confident managing their money. That’s nearly half the country, according to the Money and Pensions Service, a body set up by the government, to try to do something about this. This is extraordinary, in that during the past 20 years or so we’ve seen an explosion in online investment apps and services.

So, I wanted to explore this, to see whether it’s true that even those of us who have access to all these savy tools, don’t actually feel comfortable managing our own money. And if it’s true, why is that? Is it important that we manage our money? Money is money, right? And are there alternatives? Is this a case for DeFi as well?

The obvious person to talk to is Mona El Isa, who entered the Goldman Sachs trading floor straight out of university, but has, for the last six years or so, delved into DeFi, most recently with a company she founded called Avantgarde Finance, an asset management services tool built on decentralised finance.

Why is it important to manage money? How hard is it?

We want to learn more about what led you to start Avantgarde Finance. But before we get into that, I would like to start by asking you why it’s important to manage money?

Mona El Isa [02:13]: Yeah, so I think people don’t appreciate how hard it is to manage money. You know, it’s not something you learn how to do at school. It’s not something that we’re taught to do as most people have…to learn how to drive, and they have to get a driving license to, to drive a car. I’m actually kind of surprised, it’s not a more formal requirement at an early age to learn the basics about managing money, but the reason that I think it’s important for people to understand the options with giving someone else your money to manage is because it does require expertise. It does matter if you want to preserve your capital. Some people might simply just want to preserve their capital against inflation, and other people might wanna 10x their money because they have a higher risk profile, maybe more savings, or maybe some combination of both. Either way, whatever you want to do, it takes skill and time, and most people don’t have that combination of things, so I think it is important to think about the options you have to delegate money management to third parties.

What does managing money mean to ordinary folk?

Samantha Yap [03:13]: I think not many people realise there’s so much you can do with money, and it does take skill. So, what does managing money really mean to everyday people who don’t necessarily have full control of their finances?

Mona El Isa [03:27]: Yeah, so I think when you’re handing money over to someone else to manage some things that you should be aware of is that first and foremost you are giving control of your assets to some third party and you’re trusting that they will be managed in the way that you have been promised. Hopefully, it’s in a written contract or in some terms and conditions, and if it’s not, then you probably shouldn’t do it. But managing money successfully is, like I said, a very highly skilled and focused job, and the first thing you should be looking out for is somebody who has a multi-year track record at doing that. If it’s a regulated fund, you will want to know that there are some nominated third party financial intermediaries such as fund administrators, custodians, and their job is to ensure that the funds you are giving this third party are being managed as promised to you via the offering docs, or via the legal contract that you have. So, for example, if you think you’re investing in a fund that focuses on S&P stocks, you know their job is to prevent the manager from investing in something totally off piece like Nigerian real estate and reminding the manager at all times, maybe even forbidding the manager from touching anything outside of the S&P universe. So, you do lose a level of transparency in traditional finance when you give control of your funds to someone else, you also lose custody of those assets and you will not be able to see, in real time, transparently what is happening to those funds. At best, you might get weekly or monthly reports, and you do run a small risk, but a real risk; and we have seen this happen before, losing your funds due to counterparty risks such as fraud. If you think back to Madoff or counterparty risks that occurred due to systemic risks like the Lehman demise and these can lead to a partial or complete loss of funds, and so you really need to be aware that on the one hand you’re getting somebody to provide their skill set, but you are putting a lot of trust in them and a bunch of other financial intermediaries to enforce certain behaviors, and you also have to trust that the system is safe and secure in terms of counterparty risks. And yeah, those are the sort of trade-offs you need to think about.

Mona’s discovery of crypto

Samantha Yap [05:36]: Yeah, I think yeah, we should expand a little bit more on the severity or the seriousness of handing over control of assets to a third party, and could you maybe share a little bit more about your background as an investment banker, and later on hedge fund manager? Yeah, tell us about your experience and the roles you did.

Mona El Isa [05:56]: Yeah, sure, so it sounds like forever now, but I started my career in 2003 straight out of university at Goldman. I was a market maker and prop trader there for nearly ten years. So, I was market making European equities and prop trading really across the entire asset spectrum. By the time I left everything from CDS to bonds to commodities to derivatives, swaps etc. and also kind of got to see 2008-2009 unravel in real-time from a trader’s perspective. So had a great time, learned a lot there and then in 2000…I forget the year now. I think it was 2012 I left to go and work for one of our clients, one of Goldman’s clients. It was a large European hedge fund and I ran a long, short equity strategy for them for nearly four years. And at that point, I decided to leave there because I was offered an opportunity which was at the time my dream opportunity. It was an opportunity to launch my own hedge fund, so somebody wanted to seed me twenty million dollars to launch a longshore equity fund. I thought that was an awesome opportunity; took it; raised another 10 million, launched a fund, and actually, had one of the worst years of my life professionally. I really hadn’t been prepared for how tough it was for small to medium-sized managers to make it. The barriers to entry were very high. The tooling is just like completely non-existent or comes at a very high price, and the assumption is that you’re able to afford four or five operational staff per investment professional, and so by the end of the year I just realized I was spending my time doing everything except investing and decided to wind down the fund and take some time out, which is also when I discovered crypto and blockchain; and soon after that, decided to found Melon which was what our protocol used to be called before we rebranded to Enzyme. We did one of the first token sales and the vision was to build a decentralized asset management protocol. We’ve been doing that ever since, except that after we decentralized the protocol in 2019, we later founded a private company called Avantgarde Finance, which is on the Council, which is on the Enzyme DAO, and we continue to do a lot of the core development, but I think we’ll talk more about Avangard later

High barriers to entry

Samantha Yap [08:07]: Thanks for sharing that and it sounds like you know you’ve learned a lot of lessons from starting that initial fund that you did and it and you talked about the like small to medium size fund and the size of it. I guess my next question is when do people or organizations start to engage in asset management services? Is there like a threshold where it’s like…OK, we have at least this million we’re ready for some asset management services?

Mona El Isa [08:32]: Yeah, I think, again, the barriers to entry are not just high on the fund management on the like setting up a fund side, but they’re also quite high on the, you know investing in the asset management side as well, because regulations have become so strict in the last couple of decades that a lot of products that you might want access to are restricted to accredited investors or investment professionals and you know different countries have different definitions of that. But assuming that access is easy, I think you want to start thinking about it when you have excess idle savings, which you likely don’t need or don’t want to touch for a while. And keeping that money in cash is inefficient, first of all, because it can lose value in real-time. But furthermore, it can be a tool to earn a nice return for you. So, I think at any point when you have you know savings and excess of what you need, and savings that you don’t need or want to touch or be tempted to touch, I would definitely recommend engaging in some kind of asset management services to the extent that you can get access.

Samantha Yap [09:32]: Is there a minimum amount depending on the size of the funds?

Mona El Isa [09:37]: Yeah. It varies from fund to fund, and that’s actually the problem, and it also tends to be that some of the really better funds have higher thresholds; so it is something that you need to think about carefully and educate yourself on. You don’t need to educate yourself on how to allocate a portfolio, or which positions to buy yourself. But in terms of navigating the asset management universe and the different options available to you, I think that is something that requires some education.

Samantha Yap [10:02]: Let’s expand on that: when an individual or organization engages an asset manager, they are trusting this third party to manage what happens to that money. Is there more of a say, or is it just a passive viewing pain and you’re just maybe moving things from one service to another? Or is there a more hands-on approach to making decisions on what they want to invest in?

Mona El Isa [10:25]: I mean, yes, it should be. If you’ve engaged a good asset manager, it should be a very hands-on process. Like I said, you do have to trust in several third parties to execute what they’ve said that they will do as part of their strategy. I think that the system generally works, although in traditional finance you have this problem of trades not being reconciled, and instantaneously there’s always this T+2 or T+3 settlement time. So, you can never really tell in real-time whether someone is following, not that the end investor would be able to see anyway, but even as a financial intermediary, whose job is to enforce certain behaviours, you would never really be able to see in real-time anyway and check whether you know someone is doing their job properly. So, that’s probably I think a disadvantage of traditional finance. It’s one of the things that got me so excited about blockchains, and the potential to build financial applications on the blockchain, this immediate settlement and what that means for transparency in real-time reporting across the entire financial spectrum.

The complexity of handling money

Samantha Yap [11:23]: Yeah, I’d love to expand on that in a bit, but before that, I just wanted to touch on the complexity of managing money; and you did say that there’s just a lot more the average person does not recognize…like needs to get involved, so could you expand a little bit on that? Do you know how complex is it? And that’s why there are so many firms that offer this service.

Mona El Isa [11:44]: So there, I mean, as a starting point, there are so many different asset classes; and within each asset class, there are so many different assets. So, if you just think about a very small sub-universe within a very big universe – equities and let’s just focus, I mean, every single country has its own equities. Let’s just focus on a sub-universe, like the S&P 500, that’s five hundred companies. And if you really wanna, you know, have an edge in terms of outperforming the S&P, assuming that’s your mandate or that’s your desire, you know that’s what you want to achieve out of your own personal allocation. You know you’re going to need the resources and expertise to analyze data around five hundred different companies with new evolving information coming out all the time on these companies. And so, it’s not something that a single person can do. It’s something that an entire team needs to do. They need access to really high quality, frankly, quite expensive data and research and they need some methodology or some investment framework to narrow down that universe and keep tabs on it so that they’re making sure that they always are making the right investments. That’s the first part of analytics and the resources required.

The second part is having as expertise in portfolio allocation and sizing. So, every time you want to take a position, you have to think about the risk-reward associated with that position and make sure that the position side is worth the risk. This is extremely important and often poor sizing and portfolios are what blow up a lot of money managers. So, knowing when to be large because the risk-reward is worth it and knowing you know when to be small because it’s not worth it is almost as important as analyzing the fundamentals themselves. And lastly, I think it entails some degree of discipline, because you know, in theory, it’s quite easy to come up with like a methodology and a practice, a sizing practice, etc. But in my experience, and from what I’ve seen in my career, it’s harder to keep disciplined around your own investment process. Having people around you that can challenge you and bring you sort of back to reality, reminds you of what you’re supposed to be doing. And they sometimes are a good and healthy thing because you do get the tendency to get emotional or carried away emotionally by certain.

Samantha Yap [13:58]: Thanks for shedding light on that I didn’t recognize what and how much goes into this process. Is there an anecdote or a story that you can share from the past?

Mona El Isa [14:10]: I think you know a lot of hedge funds and banks, you know, when we worked on the trading floor, they have risk managers who all they do full time is risk management. And what they do is they look at the individual risk each individual is taking and the aggregate risk if you aggregate risk across the firm and they run stress tests and scenarios based on you know one standard deviation moving the market 2 standard 3 standard deviation. They make sure that you’re well prepared, well sized, and that we or the firm can take, can take can handle and withstand those kinds of moves. I think that’s great when it works. I would just caveat that there is, in my mind, I’ve always kind of felt that there are some conflicts of interest in terms of having a risk manager that is paid by and reports to the fund manager usually or the CEO of the fund or the bank, or you know. Because ultimately you know if the culture is not one of open discussion and you know mutual respect and you know, etc. You can quickly get into a situation where a risk manager is flagging, you know, maybe you shouldn’t be 6 times leveraged because we’ve promised investors, we only get to maximum leverage of three times. And the investment manager or the head of the firm is just saying, well, yeah, I know but this is a one-off, it doesn’t matter. And what’s the risk manager going to go and do then? So, is he gonna really battle the guy that pays his check at the end of the month etc? So, I think I’ve always felt that having that role is an important role but I think sometimes in my career I have seen basically, the risk manager has been ignored or, you know, kind of treated badly.

What happens when the returns aren’t as expected?

Samantha Yap [15:41]: Interesting. So, I guess these asset management firms, I guess they do well because they help make more money for their clients. What happens when they don’t? Or yeah, what happens when the returns aren’t as expected? Is that just it’s just part and parcel of the relationship, like sometimes the returns are good, and sometimes they’re not. What happens then?

Mona El Isa [16:01]: I mean really, a good manager should be able to, and again, this goes back to what you’re looking for when you originally invest. You know, are you looking for something positive regardless of low volatility and positive in up markets and down markets? That’s hard, you know if not many people have cracked that. But if you’re just looking for something that can outperform the S&P in an upmarket, and can outperform the S&P in a down market by X% or over time.

Samantha Yap [16:29]: What happens when, yeah, the returns aren’t as good? Or yeah, perhaps yeah has been cases where asset managers do lose their clients’ money.

Mona El Isa [16:38]: Yeah, they do. I mean there have been cases where asset managers don’t keep their promise. They don’t stick to their investment mandate. There have been cases where they’re not disciplined and they go rogue, frankly, or they, you know, they get so emotionally torn up that they do things they shouldn’t really be doing. There’s been a lot of cases where financial intermediaries have not stepped in when they should have, maybe because of the opaqueness of traditional finance, you know. Or maybe because, you know, the financial intermediaries weren’t there in the 1st place. So, these are the kinds of things if you’re investing your money, you should be looking at track records. You should be monitoring performance. You should be making sure that everything is consistent with what you have been told, you know, is to be expected and to be reading the reports to make sure that yeah, this is what you expect. If you’re seeing money being made in a way that is different to what you were promised as part of the investment strategy, I would personally be concerned about that. Even if it’s making money as a strategy because it’s not really, you know, it’s kind of a sign. It’s an early sign that they’re deviating from what they themselves said that they do.

Hard to get real-time transparency

Samantha Yap [17:42]: On that like talking about financial transparency here, or rather having visibility because you know when you know with traditional asset managers, clients hand over their funds and like you said, sometimes they might not stick to the way they’re making the money or their strategies. Yeah, for a client, is there a way for them to even know if they’re deploying the money the funds in the right way?

Mona El Isa [18:07]: There is no way to track this in real-time in traditional finance. We are also, as I said, like exposed the conflicts of interest when our managed, you know, when our assets are managed by a bank for example. You know, if you’re asking a bank, a investment banker or a private banker for advice on where to invest your assets, you have to be careful that they’re not just recommending a product to you because they are going to get referral fees on that product. Or that they are, you know, somehow pressured internally to sell you a certain product because the bank, for them, benefits disproportionately. You need to find a way to make sure that you’re being shown all the options and that you’re being given all the information and the transparency so that you can make decisions. But once you’ve invested in a fund or in a product, it’s very hard to get real-time transparency. I think at best you might get like a monthly newsletter and an app with some key stats.

Samantha Yap [18:57]: We’ll leave it there for this episode and return to my interview with Mona next time, where we’ll explore how she has tried to solve some of these problems in DeFi. What jumped out at me listening to Mona were two things: firstly, traditional finance is clearly a highly manual, connections and back-office-driven world, and yet Mona only realised that when she cut loose and tried to run her own fund. Suddenly all her skills and experience in managing money counted for little as she found herself having to build all the connections, physical, social and legal, to get her fund going. No wonder few outsiders have ever successfully challenged the big players on Wall Street or in the City.

But another thing struck me too: we think of TradFi as very buttoned down, logical and by-the-book, with strong legal and ethical constraints, but at the end of the day handling money is just as, possibly even more, emotional a pursuit as any other. Investment choices may be presented very coldly and logically, but there are clearly decisions made, sometimes very expensive decisions, based on emotion, on gut instinct or passion, or internal conflicts of interest.

In short, the handling of money under present conditions is opaque, both in terms of who is actually allowed to be involved, and in the sense that no one can be 100% sure whether their assets, the money they’ve entrusted to the system, are being managed in a transparent way, free of factors like the manager’s mood or emotional state.

Next time we’ll look at how Mona has taken her hard-earned wisdom and applied it to crypto and decentralised finance. And crucially, whether this will solve some of the problems we’ve heard in this episode — and not add too many new ones.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Oct 26, 2022

Financial Privacy vs Transparency (S2E4)

In the fourth episode of YAP Cast Season 2, Samantha Yap is joined by Will Harborne, Co-Founder & CEO of RhinoFi (previously DeversiFi). RhinoFi is a gateway to the whole of DeFi, where people can buy, trade, and invest across all blockchains from a single wallet.

They touch on interesting elements related to Decentralised Finance like—the origins of DeFi, the future of DeFi, and the case for DeFi. They also discuss the importance of default privacy, the balance between privacy & transparency, the privacy preservation in DeFi, RhinoFi’s goals, and Will’s take on CBDCs (Central Bank Backed Digital Currencies).

Enjoy this thought-provoking & engaging episode of YAP Cast, and keep tuning in for more interesting conversations about people, money, and the world.

View transcript

Episode 4: Financial privacy vs transparency Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Hart Lambur on this episode of The Story of Money by YAP Cast.

On our last episode, we spoke with Will Harborne, Co-Founder and CEO of RhinoFi, about financial privacy and why it’s something we should care about even when we don’t quite understand what it is or what its implications are. Traditional finance, he says, is a stop-gap measure, which of course he would say because he’s in DeFi.

But he’s also not sure the existing options in DeFi would work in the long run.

It’s a tricky problem because on some level transparency is good — in crypto what makes the system work is that it’s possible for everyone to see every transaction.

We might not know who is buying and selling what, but we can see the system at work. And for all the crashes and scams, the main and oldest cryptocurrency network Bitcoin has been working 99.9876% of the time — it’s been up for 9.5 years, and down for 14 hours and 47 minutes. This is according to the Bitcoin uptime tracker which you can see online. You can see it all in action.

We don’t have to take anyone’s word for it. But we don’t want people to see that we bought or sold Bitcoin; that information should be private. We would like our bank to know that we’re a good credit risk but we don’t want to share with them every single thing we’ve bought or sold.

Will has a point. There has to be a better way. And he talked about some of the solutions in DeFi land that might work. But now it’s time for him to tell us about what he’s working on, and why. And how it might make all this financial privacy thing easier, and more scalable.

What led you to start RhinoFi?

Samantha Yap [02:06]: Let’s kind of jump into, you know, what led you to like start RhinoFi and what’s your vision for it.

Will Harborne [02:15]: So, for RhinoFi really what we want is that everyone can start to access the opportunities of decentralized finance. So, it is possible now, if you are technologically savvy enough and have done your research to go and access opportunities, which most people don’t have access to through the traditional financial system. So, you can make investments into early-stage projects. You can earn interest on your funds, whether that’s stablecoins, like basically the equivalent to the dollar or Bitcoin or Ethereum, and you can also transfer funds to other people without having to wait for banking hours over the weekend, etc with very low fees or no fees in most cases. And so, these are kind of the early applications that are possible and people are doing in DeFi. But it’s very difficult and we are just trying to make it as easy as possible so that millions of people can onboard.

The big problem that has happened over the last few years is that more and more applications have launched and the whole space has become more and more complicated, more and more fragmented, more expensive to use as well cause of the demand. And so, we started by tackling the issue of cost, and we made a platform that was really cheap and really easy to use. And now we’re trying to expand to cover much more of DeFi because DeFi itself has been growing over the last few years and there are now 50 different blockchains, 50 different DeFi ecosystems, 20 different wallets. And so, navigating through that for someone who’s new to the space especially as we see more and more mainstream users coming into this DeFi is really difficult. And that’s really where we see the challenge and what we are set up to do. We’ve been doing it for kind a subset of DeFi two and a half years, but now actually is the opportunity to sort of use our team’s sort of expertise to do it for a much wider aspect of DeFi and help more people get involved.

What is the case for DeFi?

Samantha Yap [04:06]: We talked last week a bit about DeFi — the fancy term for using the decentralised financial system that has evolved around blockchain, the technology underpinning the likes of Bitcoin and Ethereum. But we’ve heard as many bad things as good things about DeFi, and it still has a wild west feel to it — perhaps too much so for anyone but the geekiest investor. So, let’s not just assume it’s better because it’s trendy.

So, I guess Will, if you can make the case for why people should consider using DeFi. You know, in terms of just adopting it you know yeah. Why, should people consider using DeFi because the current financial system works okay? I can pay my bills. It’s okay, I think.

Will Harborne [04:51]: I think that statement in itself is part of the answer, which is that it does work okay if you’re from the right place. If you’re living in the UK or, you know, France or the U.S probably. Yes. And many other countries too, but if you’re living in Turkey, which is actually where we see the largest number of users have DiversiFy, maybe not, maybe your local currency is continuously devaluing. You don’t have the same access to financial services that we are used to in the UK or with your bank in the UK. And so that’s where at the moment DeFi is becoming most useful.

And we are seeing activity in a lot of countries that maybe, aren’t part of the global financial system in the same way. And you can earn today like much higher interest than you would on a savings account, for example, and start to access more opportunities to escape from inflation and other things. And we’re still early so these opportunities are still, you know, growing and still in some cases quite risky, but they’re getting safer all the time and so that’s where I think people are gonna increasingly want to start, want to access DeFi starting from, you know, not necessarily like the kind of center of Europe, but starting from other places in the world, and eventually as the technology and the opportunities improve, extending to everyone in the world.

How do people preserve their privacy in DeFi?

Samantha Yap [06:09]: So, taking it back to financial privacy again you know, in terms of making the case for this, for using DeFi and also engaging with crypto, you know, cause again, we spoke about how some of the benefits is that transactions are transparent, open, and you can trust that your payment is reaching a wallet address. However, it is accessible from wherever around the world, as long as you have an internet connection, but then there are some places in the world where people don’t want their government or people to know that they’re holding crypto. Like, for example, in China, which has banned crypto, and you don’t wanna be a Chinese trader and have the government find out that you’re holding, you know, Bitcoin and trading Eth so yeah. How do those people make sure that their privacy is protected?

Will Harborne [06:56]: Today there are a few different ways. It is harder and you have to sort of navigate through the waters.

But for example, you can do this, you can use a solution like Tornado Cash, where you essentially use again, another version of Zero-knowledge proofs to hide your, the source of your, so you basically move them from one wallet to another, without anyone seeing what their kind of intermediary movement was and who it is.

You can also use solutions like Aztec that today can already have already launched and keep your transactions private.

Solutions like what we built on RhinoFi are partially private and I think a lot of people still rely on that. So, by partially private, I mean it’s kind of the first part of privacy I mentioned where other people just looking at the blockchain, can’t see what you’ve done, but ultimately if a motivated Chinese government wanted to get access to that data, they would be able to.

And so, it’s probably not, you know, it’s meeting some needs, but not, not all of them but we are seeing more and more, more and more solutions. You can, you often indeed find out move to private blockchains, like Zcash and then move back and that again sort of protects your privacy. So, it’s getting easier and easier every day. And I think within the next few years, probably less than one year actually given that there’s a few new privacy focused blockchains launching, it will be possible for anyone who is motivated to have, have all the privacy they want from, from anyone on blockchains.

UX still poor?

Samantha Yap [08:19]: You raise kind of like a good kind of exercise or kind of method that people use. But for the average user, even for myself, like I, I wouldn’t, you know, it’s not like I’m trading hundreds of millions of dollars, but you know, like you said, if someone’s motivated, then they can find these options. But in most cases, people are not you know, the average user or customers not really going to, you know, make a certain transaction, use a certain blockchain, you know? What would you say to with where it is?

Will Harborne [08:47]: That’s gonna be true, and to be honest, the only solution there is gonna be for us to have all privacy by default. And this has been the continual sort of problem that people who are trying to build these technologies have faced, that is if you make it optional or just like, you know, you know, just some people use privacy. It really doesn’t actually help because there’s even evidence of some of the companies now who look at blockchain data, being able to very easily, eventually deconstruct who every transaction was in these private systems like Zcash or Monero just through the fact that a few users made mistakes and then it becomes possible to kind of narrow down the field and keep searching until you’ve eventually figured out every transaction. And so, the only way to get real privacy, full privacy would be for it to be the default and for it to be for everyone. And for that you need basically all of the stacks, all of the tools to upgrade, to include privacy without the user needing to do any extra steps. But that is what there are million people who are yet to come.

What is Rhino’s goal?

Samantha Yap [09:46]: Is that what RhinoFi is looking to do, or is that kind of how you guys are going to ensure financial privacy or you know, from the beginning kind of build something that’s more private?

Will Harborne [09:58]: Yeah. I mean, our goal is essentially to offer all of the most important tools available in DeFi to our users, without their needing to go and search for them and look for them. So right now, that involves decentralized trading, lending transfers, but it will involve privacy as well because that’s something I believe all of our users will eventually need and want as they grow as the number of them grows. And so, we would be integrating, for example, some of the solutions I talked about, like Aztec other of these, these private chains and therefore kind of ensuring that without needing to go and search for them and use different wallets and applications that everyone gets practice. I don’t think that today is quite feasible yet, but I really don’t think it’s gonna be very long before.

Where is the balance between privacy and transparency?

Samantha Yap [10:40]: So, we have the potential for financial privacy here, if someone really cares to do it. But this sounds still quite complicated, and perhaps a little theoretical. Is this still something far off, I wonder? Or is it doable now?

So, you mentioned that RhinoFi provides your customers with the option to integrate these, you know privacy applications by nature and, you know, it makes it easier for them to find these options.

If we can talk about the balance between having financial transparency and financial privacy for a bit you know, where does it like, kind of like start and end, you know? Cause you’re saying it’s, it’s good to have transparency, but then you have to have some level of privacy. And you mentioned a few kinds of blockchains that have tried to build these solutions. Is there one single best solution or is that dependent on the applications and solutions?

Will Harborne [11:37]: Yeah, there’s not yet like a best solution, cause it’s early. All of these are sort of being tested in different ways, but I think the, that there is a general architecture that’s sort of starting to come to consensus with a lot of the different teams that are sort of independently building, but have kind of come to this same route, which is essentially to have kind of a base layer. You can call it layer zero on Ethereum, that would be Ethereum main chain, which maybe is transparent.

And you can have a lot of the core infrastructure by that I mean, things like Uniswap or Aave, which are sort of massive liquidity pools where people can use in DeFi, which are transparent. And that’s great because you want the building blocks underneath everything to be transparent because of all the benefits we spoke about of transparency, which is that everyone can see it safe; everyone can see that there’s nothing that’s gonna go wrong; it’s not over leveraged; whatever else, but then you want the layer that’s built on top of that, which is where users interact with these systems to be private.

And for those users to have to, make use of this DeFi infrastructure, that’s transparent, but not to have their own transaction data visible. And that is possible in a few different ways. We’re seeing it happen in the Ethereum ecosystem with solutions like Aztec and Rollups, which can be private, but then still interact with Ethereum and we’re seeing it happen in other, other blockchain ecosystems in a, using different technologies, but achieving a similar goal. So that’s how I sort of think it’s gonna end up, end up working where you, where you can get the benefit of both but of course it’s still early, so it’s hard to, hard to be sure.

Where are we with DeFI and what needs to happen?

Samantha Yap [13:19]: On that you said it’s still early I think something for listeners who don’t know much about this space, it’s important to remember that Ethereum only came into existence in 2014. So, we are still early. Where do you see the state of kind of DeFi today? And what would you like to see or what you most excited about?

Will Harborne [13:40]: It’s still a lot. I mean, the number one thing is gonna remain wallets and ease of access because until we can overcome that for most people, it is just too much risk to install something on your laptop, where you could lose all your money if you make a mistake, or your laptop crashes and having to use five different websites. Use a bridge website where your funds disappear for 30 minutes and then get them back on a different blockchain. All of this is just, you know, it’s, you can see that it’s proof of concepts really, rather than things, which millions of people could use. And so that’s kind of the number one focus is really making it so easy that it does feel like using Monzo, Revolut or, you know, consumer bank apps on your phone.

But the second thing is gonna be then making actually the applications and opportunities useful enough that people actually want to use them. So, a lot of this, a lot of what we’ve seen happen in the last few waves of cryptocurrencies are very speculation driven. They’re exciting for that reason, which sort of brings people with things like NFTs. New tokens, which, you know, might go up very fast in price, but those sorts of things aren’t for everyone, they are for people who can afford to take more risks, maybe have a bit more disposable income. And really the world is potentially going into a very difficult time with inflation, cost of living and all sorts of other challenges, which are just starting to kinda loom onto the horizon.

And if we want DeFi to really fulfill its promise. It needs to be playing a much bigger role than just for speculation. It needs to be somewhere which people could use as an alternative to their bank. Because although we often forget it, banks do collapse and have collapsed throughout the history of banks. And so, we want to be able to offer kind of a lifeboat for people who maybe are leaving from their local currencies in whichever country to something safer where actually they can protect their money, they can earn some interest on it and have it hedged against inflation and maybe invest it in safe ways.

Some of that it does exist. And if you really know what you’re looking for in DeFi, you can find that today. There are, for example, like gold-backed tokens and all sorts of other assets, but they’re still small and difficult to find. And so that’s the second thing I think we wanna solve. And if we do that, DeFi will become a lot more than just, sort of a play thing for people who have some spare time and money and really something that could help save millions of people from potential sort of financial ruin, or other issues in the next global recession or even worse. So maximising potential that’s what, you know, we should all be focusing on, but there’s a limited sort of amount of time and energy to do it. And the technology still needs to keep incrementally improving, but we we’re getting there.

Samantha Yap [16:28]: I suppose that’s quite sobering, and good that Will is frank about it.

These things are still some ways off, and that’s important to remember.

DeFi can be a bubble where everyone already knows the lingo and are brimming with confidence that this is the future.

But there’s a problem with bubbles, as we know. But perhaps the greatest compliment paid to DeFi is that it’s got governments talking, not just about regulating crypto and throwing its worst exemplars in jail, but about using some of the technology that makes DeFi tick and applying it to their own banks, their own financial system.

You know you’re in a good place when people start copying what you do. So maybe we’re not so far away from something that people can really use?

What do you make of CBDCs?

So with the introduction of like cryptocurrencies and with this technology governments have increasingly been interested in CBDCs which are Central Bank Backed Digital Currencies which, and we’re seeing kind of, you know countries like China, think of launching a digital Yen, as well as the UK thinking of Britcoin. So, in the move of cash becoming more digital this sounds like a good thing, but it also is kind of a concerning thing because it means that now the governments will know more about who we are through our financial data. Could you share, kind of yeah, your thoughts on CBDCs?

Will Harborne [17:53]: Yeah. I think CBDCs have huge amount of potential. I think they will definitely happen and plenty of governments. Yeah. Including China, UK and the EU have said that they we’ll almost certainly issue CBDCs and there are good reasons for them to want to do it, which aren’t necessarily in our best interest as users, but technologically, they make sense – they add lots of benefits. The problem, which we can imagine when we talk for example, about China issuing a CBDC is, it’s not gonna be a blockchain the way that we imagine it today with decentralization and, you know, open control for the people. It’s gonna be a currency that may be tracked on some version of a blockchain, but where the government has full control to free someone’s assets, delete their assets, stop them from moving their fund if they do something which contravenes the People’s Republic, and so that’s a real sort of escalation of control over the monetary system, which of course, China has always tried to have a very tight control over the monetary system, stop people moving at abroad, etc. but this is to an extreme level where they can go directly to an individual’s wallet and freeze it without needing to go via a bank or whatever else.

And so, for that reason, we should be very scared of CBDCs. And you can imagine what we, in the context of what we’ve spoken, privacy becomes even more important. And clearly here, privacy also from the government issue of these currencies, that if you can at least protect who you are then you can’t be targeted by a malicious government, or government employee even. And so that’s, I think a prerequisite for the success of, well, essentially for freedom entirely for anyone who would live in a country with a CBDC.

If we wanna see really successful CBDCs I think the approach that the UK has indicated is gonna take is an interesting one; which is that it would hopefully be linked with the kind of public DeFi infrastructure, that’s being created. So that it wouldn’t exist as some separate thing, but could make use of all the innovation happening in DeFi. But I don’t think it would even be possible under like consumer protection laws or privacy laws in GDPR, in Europe to have a CBDC that wasn’t private because of course, if they were just issued using the kind of technology of today without any extra privacy, we would be able to literally see all of our friends and, you know, anytime someone said, you send you a money, you could look up their address and see every other person they’ve ever sent money on what they bought at the supermarket last weekend. And this is, you know, really not something which would be, I think, even legal. So, privacy technology will be needed before we get CBCDs, at least in the free world, that might not be the case in certain other countries.

Advice for governments doing CBDCs?

Samantha Yap [20:38]: Thanks for explaining that. So, yeah, so you’re saying that the, the UK government is looking into how to ensure that factions of the CBDCs are gonna issue is private. So, I mean, do you know if other governments are considering the privacy aspect of it? Or is that like remains to be seen. And if you were to speak to them, like, you know, what would you encourage them to look out for?

Will Harborne [21:01]: I think to be honest, you know, the main thing would be, make sure that it’s private and the second thing being, make sure it can interact with public decentralized finance, because if any of these currencies are issued as like some separate standalone system they will miss out on all of the open source, rapid innovation that’s happening in DeFi and so won’t be able to kind of piggyback onto those, those rails and applications. Whereas, if they do get that right, I think a successful CBDC could get used throughout all of the cryptocurrency world kind of, you know, in a way that many centralized, centrally issued stable coins are now and be hugely successful.

Samantha Yap [21:40]: Should we be concerned though, of you know, a CBDC kind of becoming this surveillance currency being issued in other countries? And is there a way around it with DeFi and what you’re building?

Will Harborne [21:51]: That, that will depend on whether they’re allowed to be interoperable. At the moment there’s infinite scope on how it can be built, but we’ll have to wait and see what each government decides to do.

Samantha Yap [22:02]: Seems like you’re putting a lot more thought into how you’re building kind of your exchange and project, that I guess government should learn from too.

That was Will Harborne, Co-Founder and CEO of RhinoFi, which aims to open DeFi to the entire world. Many thanks to Will.

My takeaways from this conversation could be summed up by this: DeFi offers the potential to give us more control over our financial data while gaining access to the sort of tools and services that elude many outside the wealthy Western countries.

The ideal DeFi platform will enable privacy for the individual but transparency for the system.

But we’re not there yet: DeFi has some way to go to make these tools safe, secure and straightforward. And governments, rather than opposing the innovations of DeFi, could, with well-thought through initiatives like Central Bank Digital Currencies, help build a financial infrastructure that balance financial needs with financial privacy.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Oct 19, 2022

Why Should Money Should Be Private? (S2E3)

In this episode, Samantha Yap is joined by Will Harborne, Co-Founder & CEO of RhinoFi, formerly known as DeversiFi. RhinoFi is a gateway to the whole of DeFi where people can buy, trade, and invest across all blockchains from a single wallet.

They touch on elements related to financial privacy like privacy from peers/governments/companies, access to financial services, financial inclusion as a human right, the transparency of bitcoin, issues in the current system, solutions for a better future, strategic privacy in DeFi, and DeFi’s huge potential.

Join Samantha Yap on a quest to discover how some elements from TradFi, and technology-&-principles of DeFi: can blend to optimise financial privacy.

View transcript

Episode 3: Why should money be private? Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Will Harborne on this episode of The Story of Money by YAP Cast.

Let’s explore financial privacy. What is it, and should we welcome it, or hate it? We ordinary people assume that our bank is protecting our privacy as well as it’s protecting our money, but is that always the case?

Every year I need to submit my banking statements to my accountant who then shares that information with the tax authority so they can file it and share it with another country’s tax authority in case I owe taxes there too.

Personally, I think it’s nice that they’re cracking down on tax evaders by sharing information, but it doesn’t necessarily work the other way.

If tens of thousands of dollars of my money went missing somewhere between one bank and another, they’ll suddenly plead confidentiality before trying to coordinate with their counterparts elsewhere to track it down for me. I wouldn’t be sure how I feel about that too

So, privacy is a double-edged sword and we tend to be on the pointy end of it.

Privacy International, a UK based charity, that defends and promotes the right to privacy across the world, says that the pressure is coming from two directions: governments and companies.

Both want the same thing: to collect enough information to build a profile of us as individuals.

In other words, while we don’t often like to tell our parents how much or how little money is in our bank account, other people can find out without us knowing. So, is putting our money in a bank a good way to preserve our privacy?

Well, the answer is tricky. And it requires us first to figure out what is privacy when it comes to money. And where is the balance? Is there a way to keep our privacy but share only what we need to, to get a loan, to essentially prove we’re a good credit risk, while keeping spies and marketing companies from peeping too much into our finances?

Here to help me understand financial privacy is Will Harborne, Co-Founder and CEO of RhinoFi, once called DeversiFi. RhinoFi is a gateway to the whole of DeFi where people can buy, trade and invest across all blockchains from a single wallet.

Let’s start with you and your background in just finance and decentralized finance, could you share a little bit about that?

Will Harborne [02:46]: Yeah, I mean, well, I never thought of myself as in finance. I thought of myself as in technology, but I think now with the Cryptosphere, those areas have merged together. I got into working in finance, decentralized finance in 2017. I first worked at one of the biggest centralized exchanges which is where you can basically deposit and start buying your first cryptocurrencies; usually by making like a bank transfer and then they tend to have like pretty easy experiences to buy with. And then I got really into the whole concept of decentralized finance, which is where you don’t trust someone else to look after your money but hold it yourself. And left and started my own company trying to help people access all of the opportunities in decentralized finance in 2019. I’ve been working on that ever since and it’s a project called RhinoFi.

Privacy in finance

Samantha Yap [03:41]: So, you just mentioned trust and part of that is also privacy. Could you explain, you know, your interest or what interested you about privacy in finance as well?

Will Harborne [03:56]: So, I think the thing that we kinda don’t really think about in our day to day lives using financial products; whether you’re using a bank account or Revolut on your mobile or any other application is that although you have one type of privacy, you actually don’t have privacy in a lot of other ways.

So, there’s, there’s two sort of ways that I break it down the first is privacy from our peers; i.e. from your friends, your family, you don’t really want your crazy ex-girlfriend or your children to necessarily know how much money you’ve got. You would prefer that information is private.

But the second type of privacy is around governments or companies who might know about your purchasing history, everything that you buy, however you spend your money, how much you have. In nice countries like the UK, maybe you’re not too worried about your government, knowing how much money you have but there are other places in the world that are more dangerous where you may not even trust your government very much. And there are examples of you know, where it could be dangerous for even sort of corrupt people within your own government knowing what funds you have.

So, privacy can be both sort of important from the kind of social perspective of just people around you but also for real safety aspects. And I think this is something that really interests me because in Web3 and in crypto, which I’m sure we’ll get into, especially the first few waves of this technology had no privacy at all and that was both a, a good thing, but also came, comes with a lot of negatives which were really interesting and something that we all had to adapt.

Why is privacy important to you?

Samantha Yap [05:33]: Yeah. We’re gonna get into that in a little bit, but most financial institutions today are required by law to take steps to protect the financial privacy of their consumers or customers. So that means, you know, my bank like from HSBC or Barclays that they’re required to ensure that yeah, that our privacy is protected. However, they hold this data about us, our financial data. Personally, like going back to the importance of financial privacy, why is financial privacy important to you?

Will Harborne [06:05]: So, I mean, for me personally, why I think that I really care about financial privacy is because I want everyone in the world to have access to financial services. To have access to all sorts of opportunities and it’s not possible to do that in a fully transparent sort of way that involves everyone knowing and seeing all, everyone, everyone else’s data. Ultimately many people will be cut out of these systems and we see that happening already with traditional banking system. Where if people have certain types of profiles or certain credit histories or transaction histories, they do get blocked out of financial system. And that can be anyone from people who come from certain countries, people who work in certain industries. And I really think that basic sort of financial inclusion is a human right. And to have that really scale to everyone on the planet, we need privacy to be part of that.

The transparency of Bitcoin

Samantha Yap [07:00]: It’s interesting you use the word transparency as well, right? Because you know, in response to the growing power that centralized banks and governments have over people. Bitcoin was created as a payment system that is transparent and that enables everyone to see, you know, all the transactions that happen in the efforts to build more trust in a financial system. However, there’s a dilemma here because that does mean that everyone’s data is open. I mean all the transactions are open for everyone to see, and therefore you can track, you know, if you’re making transactions on the blockchain. Yeah. Could you explain kind how Bitcoin was created, Ethereum came into the picture but then how that has evolved?

Will Harborne [07:45]: Yeah. So, I think, and by the way, like, it’s interesting because I think still today, a lot of people, when they look at Bitcoin, don’t think of it as a transparent currency. They think of it, I mean, and because it’s always been portrayed; especially in the early days in the media as being this anonymous sort of shady currency, where you can’t see what’s happening and that’s because it is pseudonymous. So, you can’t necessarily see someone’s name and address, but you can see a unique identifier that you can trace and track forever and that data is public, anyone can look at it and there are companies today that already help you do that. They can basically take an address and essentially figure out who you were and every transaction you ever did. And I think that’s kind of how Bitcoin started off and Ethereum and most other cryptocurrencies that followed, also had that model where the benefit was that anyone could be part of these systems. It was very easy to monitor transactions to check when you’d receive funds and with Ethereum, not just sort of sending money, but you can build all sorts of applications on top of this, which are completely transparent.

So, if you build a lending system where someone can lend funds and borrow funds, anyone can come and view who the borrowers are. The likelihood that they’ll be able to potentially kinda return their assets, where their liquidation prices might be. And that allows you to build a more robust system, something that’s unlike the traditional banking system, like not opaque leading to all sorts of, like, risks that could proliferate without anyone knowing about them. And so long term, we kind of believe that that that base of transparent infrastructure is really important.

But I think that where we’re going next is thinking more, not just about the infrastructure, but also about users. So yes, we want infrastructure to be transparent because that allowed us to build better infrastructure. So, you know, ideally, we would want the big banks in the world today to be transparent, we want to be able to see how their finances are, know that they’re safe, what they’re doing, but we don’t want their customer’s data to be transparent. We want like individual users all around the world to have privacy. So, we’re kind of trying to get the best of both worlds of the transparent infrastructure, but private customer data and customer usage. And there are ways that we can achieve that technologically in DeFi , but we’re not quite there yet .

What’s wrong with the current system — open banking etc?

Samantha Yap [10:00]: Right, okay. So, you’re saying that organizations, institutions, we should be able to see where they’re spending their money, but then like our individual financial data should be kept private. Kind of taking it to kind of you know, more but before we get into DeFi to what’s kind of happening right now in I’d say the current financial system there’s this thing called, you know, open banking and it talks about how banks can have our can hold our data and also share our data with governments and, and one another, but still protect it, but still use it to, to find information about us like whether we can afford to, you know, borrow money for a house. And you know they collect this data to like assess our credit score. What do you make of that? Right now, is that system working well, what’s wrong with it?

Will Harborne [10:50]: So, I mean, this is kind of the only system that’s existed and it has come up, with just kind of solves this issue that does help institutions and governments know where money’s moving. In this kind of legacy world where we have sort of digital money that kind of is, is tracked through, is sort of transferred through all these, all these sorts of opaque institutions. It’s kind of a stop gap solution and the thing we do see is that holding all this data doesn’t work. So, we, there have been throughout the history of this like constant leaks of companies accidentally if they leak huge amounts of data, often they get sort of fined, but it’s too late by that point. Recently, I mean, very, very recently the largest ever leak potentially has happened from the Chinese government of over a billion people’s financial data, and we can clearly see why we don’t want that to be the case. We’d like there to be other ways of allowing to have the same sorts of goals of maybe keeping, you know, protecting people preventing like terrorist financing, for example, without having to centralize all this data under companies, which fundamentally don’t see that as their main job, their job is to facilitate financial transactions, not to guard all this data. So, I think we can, we can find better solutions.

How does DeFi work, and will it be better?

Samantha Yap [12:08]: Yeah. That’s a good point. Like the risks of it is data leaks and we’ve seen that as you pointed out. So, alright then moving into kind of solutions then could you just give a, in an easy-to-understand way, could you explain how decentralized finance came about, and how it all works?

Will Harborne [12:27]: Yeah. So decentralized finance is kind of the second generation after the original cryptocurrency is like Bitcoin. And with Bitcoin, all you can do is transfer your funds to someone else. If you have a Bitcoin wallet and I have a Bitcoin wallet, I can send you my money. But in decentralized finance you can build more complex financial applications that all run on the blockchain where you can basically have programmable money. So, if I had some money and I wanted to send it to you, I could actually also put some conditions on that; and I could say, “If you send me some other assets within a certain time, then I only if you’ve done that, do I send you my funds.” And that basically is a decentralized exchange. And you could have similar ones around borrowing and lending and using all these building blocks you could essentially build up the entire financial system that we have today, around the world, but in a way that’s completely transparent and which is robust and doesn’t rely on big companies to operate this infrastructure, but all runs on the blockchain. Now we’re obviously very early in that journey, but that system now exists. It was originally built on Ethereum and now exists on other blockchain. And it’s gonna keep growing and getting better and better and better until it can replace the financial system that we have that we’re all used to using with our banks. That’s gonna take some years, cause it’s still very difficult to use. It’s complicated technically, it’s easy to make a mistake and lose your money. You have to have your own wallet, that is where you actually hold your, your funds and if you lose access to that, your funds are stuck. So, all these are problems that need to be overcome. But DeFi has this huge potential of really building a very robust system. And so, it’s worth the energy of trying to overcome these. It’s only been really three or four years since DeFi first started to exist. So, we’re very early, but if we look 10 years ahead, it’s gonna be really transformative finance.

How much visibility will users have into their financial data in DeFi?

Samantha Yap [14:13]: Jumping into financial data on decentralized finance. So, right now for me, I can, you know, maybe go through the history of my transactions via my bank and they know what, where I spend my money. You could essentially do the same on DeFi, right? Like basically how much visibility does DeFi give users on their data?

Will Harborne [14:34]: So, it does vary, but in 95% of cases today, as you said, kind of every transaction that you have is visible and in fact, if I found out what your Ethereum address was, I could go back and look at the history of every payment you’d made, every application you’d used, and every token you’d bought or sold. So, it’s very transparent, which does have its benefits. But I think if we want to see many millions, hundreds of millions of people using this, that’s not gonna, that’s not gonna be sustainable.

How can you ensure privacy in DeFi?

Samantha Yap [15:05]: And why is that? Because I don’t really want you to find out what my wallet address and I don’t think you’d want me to know what your wallet address is. So, how do you see this evolving in terms of ensuring privacy is protected when using DeFi?

Will Harborne [15:20]: So, there are a couple of different approaches but most of them make use of a new technology called zero-knowledge proofs. This is something which actually isn’t so new in terms of theory, but in terms of applications, it’s still very new. So, what zero-knowledge proofs in a very simple sense, allow you to do is to make transactions which you can’t see the details of but which you can verify were valid; i.e. I’ve sent you some money but nobody else can see how much I’ve sent you and they actually can’t see who I am or who you are, they can’t see our addresses, they can’t see any other information about us, but they can verify that some valid transaction happened. Now, the first sort of blockchain actually to use that came before DeFi was called Zcash, and it was a version of Bitcoin that let you transfer funds to other people in a shielded way, which meant that no one could exactly this – no one could see what was being sent, but they knew it was valid. And now that same technology is starting to be applied in DeFi to allow you to do much more complex transactions; kind of how Bitcoin evolves to Ethereum and DeFi. Zcash evolving to like private decentralized finance. And there’s a few different teams and applications now starting to use that, which are in the early stage, but actually do work in practice already.

Samantha Yap [16:35]: Delving into kind of how it works, right? Is it similar, I mean, drawing parallels to kind of how it works in legacy systems today, is it kind of like I’m making a transfer to you via my HSBC bank account but then HSBC’s protecting my data from you and they’re not telling me, they’re not like sharing my private information? Is it kind of like that or is it more detailed than that?

Will Harborne [17:01]: So, there’s, I mean, the fundamental technology could allow you to do exactly that. But it can allow you it’s, it’s very flexible.

So, you could use it to make an entirely private system that nobody including banks, you know, each other can see any data at all. And some people are building that there are applications like Penumbra, which you’re building entirely private, shielded DeFi systems.

There are others where actually you might think that some level of transparency or the ability to prove who you are in certain circumstances is useful. So, that the team called IM3 that are building an identity system where by default your private, but you’re able to prove certain things about yourself to applications you use or to people you interact with. So, maybe you want to prove that you are over 18 and you’re from the UK, but nothing else, and you can do that too. And then there are applications like Aztec, which use the same technology, but to allow you to keep all your funds and activity private, but still interact the transparent infrastructure layer.

So, this is kind of the rest of DeFi. So, actually it’s visible that somebody made a purchase of some token, for example, on a decentralized exchange, but they can’t see who it was. So, it’s kind of partial privacy where the actual user information is private, but the activity itself is visible. So, all we know is that somebody did it, but not who it was. And you can basically apply it in all these different ways to build up the, the perfect mix, depending on the use case of you know, who the users are and what the applications are.

Samantha Yap [18:34]: Let’s leave it here for now.

We’ve learned that financial privacy is not an easy thing to have. We actually need to do some thinking about what we want to keep private and from whom? And let’s face it, not many of us think about this, myself included.

This legacy system of banks that we currently have isn’t really equipped to build any nuance into our data when it comes to privacy as well.

We don’t have any way to control this either.

We can’t say ‘share this with x, but not with y’. But at the same time our data is being shared in ways we don’t imagine — credit scores are being built on the back of that data, Amazon and others have a huge log how much we’ve been spending on stuff. And credit card companies like American Express, know where we like to eat and travel to.

Sometimes we aren’t sure what kind of privacy we want until a bank or company gets creepy by joining up the dots we don’t really want to see joined up.

Is this something we should care about? Or something that doesn’t change much even if we do.

Next time: we’ll find out whether the solutions that Will has been talking about are going to work — and to find out why he thinks the answer is somewhere else.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes follow The Story of Money by YAP Cast.

Listen to this episode on:
Oct 12, 2022

Financial Contracts (S2E2)

In the second episode of YAP Cast season 2, Samantha Yap continues her conversation with Hart Lambur, Co-founder of UMA: an optimistic oracle built to query and verify data for decentralised finance.

They touch on financial contracts, what role oracles play, self-policing, DeFi vs CeFi, and how DeFi can revolutionise law and finance.

Join Samantha Yap on a quest to discover how money's practical relationship with law can evolve to be globally seamless.

Enjoy this engaging and thought-provoking episode of YAP Cast and keep tuning in for more interesting conversations about people, money, and the world.

View transcript

Episode 2: Financial Contracts Episode Transcript (website)

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to The Story of Money by YAP Cast where we talk about where money is heading. Join me and Hart Lambur on this episode of The Story of Money by YAP Cast.

When you think of a contract, you think of signing a document that symbolises an agreement. But contracts haven’t always been the way they are.

Nowadays a contract is written by lawyers, enforced by courts, and only partially related to what we might think of as fairness.

Essentially, contracts are about each party agreeing to do something, and what pain one will inflict on the other to punish them if they break that contract.

In the last episode we talked to Hart Lambur who sees the legal process of contracts as a technology, and one that is ripe for updating. Hart is the founder of UMA, an Optimistic Oracle built to query and verify data for decentralised finance.

He saw up close and personal the 2008 financial crisis, and how complicated and opaque derivatives contracts helped drag the global economy down with it; when he saw Ethereum and smart contracts he saw the opportunity to reinvent contracts with a new technology.

So what does this look like, and how would it work?

Hart Lambur [01:28]: So without getting into like the nitty-gritty of like how a blockchain works, we can say, okay, this blockchain has this consensus mechanism that is no one-person controls. So, it’s trustless, and it can execute transactions. And what Ethereum did is implement effectively computer logic so it could execute logic in these transactions, and it could function as effectively a computer that nobody controlled but that everybody agreed was doing computations correctly. So, now if I can write a contract that has like logic like if-this-then-that style logic, I can program this if-this-then-that logic onto a blockchain. That’s super cool.

Samantha Yap [02:16]: It does sound cool and of course smart contracts are a big thing already. Since 2022 we’ve seen more than a million smart contracts created each quarter. And because they are meant to be Smart – as it’s in the name, do they need any help? Isn’t the technology already good enough?

Hart Lambur [02:37]: If I want my contract to reflect things that are happening in the real world, so let’s use our insurance example. I want to write an insurance contract that if event happens, make payout to Sam, right? Well, I need to know a way to know whether that event actually happened. And then we can keep going like what else do we want to know in our financial contracts. Let’s take a good example of a lot of people can wrap their heads around is just sports betting. My contract here is going to be who won the men’s finals at Wimbledon, right?

Samantha Yap [03:12]: This is relatively simple in the real world, as that kind of information can be looked up, instantly, from anywhere. But how does it work in crypto?

Hart Lambur [03:22]: So in crypto space, this is called like the oracle problem. How do we let a blockchain know about things that are happening outside of the blockchain? So, I’ll make an argument that basically the inventions that have allowed us to create this alternative form of contracting are Ethereum and related smart contract platforms that let us do the if-this-then-that logic, and oracles which allow us get data from what the world, what’s happening in the world onto a blockchain. And those two technologies combined allow us to write financial smart contracts that can make payouts to counterparties based on a set of conditions.

Problem: agreed source of information and solution: the oracle

Samantha Yap [04:03]: That sounds easy enough, right? It’s like an API checking the price of a commodity, or the temperature outside, or who won the Euros? Or is it?

Hart Lambur [04:14]: The whole premise of blockchains is that no one person controls them; that’s why we can trust them. Building an oracle that tells you an answer that nobody controls, no one person controls that is actually decentralized, that’s really tricky to do, and I think that’s actually what makes it interesting. If you just have a trusted source, you’re like, “Okay, cool. I’ll listen to what Hart says, and he’ll give me the answers that I’ll put in my blockchain.” But if I do that, I lose all the advantages of having a blockchain in the first place. So, it doesn’t make any sense…doing the decentralized oracle is super challenging.

The tweak: The optimistic oracle

Samantha Yap [04:51]: Part of this challenge, I guess, is to not allow consulting the oracle, or data source, to slow down the process. DeFi is all about streamlining and efficiency. UMA has come up with a version of the oracle called the ‘optimistic oracle’.

Hart Lambur [05:08]: The optimistic oracle is our design which specifically what we try to do is, we assume an answer to be truthful unless somebody says, ‘I dispute that.’

Why do we want to do that? Why do we want to make this optimistic assumption? You can really think of this as just like an efficiency thing. Let’s pretend that actually proving that something is correct is actually really a costly calculation. It takes a lot of time and energy and effort, right? Well, if that’s true, then if I can design a system where I don’t have to prove that it’s correct most of the time, that seems like an efficiency savings. And that’s what our optimistic oracle is doing. So, it’s saying, “Hey, we are going to assume something to be true provided nobody says I disagree.” If somebody does say, I disagree, we are now in the pessimistic path, and we’ll do all the work to prove what actually happened. So, as an example, the actual the legal system, the traditional legal system, I would argue does function optimistically. Like, Sam, you and I can write a legal contract, and we could write it, let’s say, we write it under the laws of the State of New York, and we assume we are going to follow that contract, and we both hope we do. And if we don’t, in the pessimistic case, we sue each other, right?

Samantha Yap [06:32]: Yeah.

Hart Lambur [06:32]: But vast majority of the time, we’re not suing each other because we follow the terms of the contract. So that would be like optimistic enforcement. So, our optimistic oracle follows the same concepts.

Samantha Yap [06:43]: That is quite a departure, given contracts are usually written to think up every possible thing that could go wrong and the punishment that will be carried out should any of them happen.

Code

It’s like an innocent until proven guilty in simple legal terms. And how do you code this system?

Hart Lambur [07:03]: Like one of the very cool things about blockchains, in general, is like, there you can involve people in them and there kind of are people involved in them where we have this network that’s run by computers doing this work here too. But anyone, any person can see what’s going on this network, and so our optimistic oracle allows people or machines, actually, to request data. Say: “Hey, I want to know who won Wimbledon”, right? And then anyone on the network can actually propose the response, right? They can say who they thought the winner was, and that response optimistically will get taken as truthful if no one disputes it. But also, because this is a global network, everyone can see that answer and say: “Hey, you said like Federer won the Wimbledon finals”, and somebody can say like: “No, he didn’t. He wasn’t even playing in them.” Right? Like you’re wrong, right? But again, because the network is globally visible, you just need one honest person paying attention and watching to keep the whole thing honest, which is like a very cool concept in my opinion.

Self-policing: Incentives for the honest person

Samantha Yap [08:18]: That sounds very cool, but what if no one’s watching, because I hear that a lot in you know, with DeFi everyone says, it’s open it’s transparent, we can see all transactions but I’ve also heard that transactions can go through. And if no one else is voting against it, it goes through; so, what if no one’s watching, how can we trust that it’s still going to do the right thing?

Hart Lambur [08:44]: If no one’s watching, it breaks, Sam. Like I’ll be totally honest, right. You need one honest person watching. But the thing that’s super cool: we do know people respond to economic incentives. For one person to be watching for one honest person to show up and we’ve seen this play out. Like it used to be theory, right? That people would actually show up. But in our own network, we’ve seen this time and time again. It’s really cool; people do show up because there’s an economic incentive to pay attention and that continues to be true. It’s sort of like a truth where if there’s an economic incentive to do a thing, people will do it.

Samantha Yap [09:24]: Here we’re through the looking glass, where things in crypto are done differently to the real world.

Economic incentives of course fuel the real economy too, but these incentives are not usually written into the code: they are the outcomes of broader tweaks by the government.

In DeFi the incentives are built into the protocol — the code that makes a network via a token work.

What’s the economic incentive? I mean like, well, what is it actually in UMA’s protocol?

Hart Lambur [09:57]: In our case, it’s straight up just cash money, right? When somebody does respond to a piece of data, they actually have to post a bond that they will get back if they’re right, or if no one challenges them. But if they’re wrong, and somebody challenges them, they’ll lose, so they have an economic incentive to be truthful in the first place. And then, what we call disputers: people that are watching the network to make sure people are being honest. Disputers have an economic incentive where, if they see someone report incorrect data, they can dispute them and double their money.

A new system, and its implications

Samantha Yap [10:32]: So let’s talk about law as code, and how you’re saying the system works, and people trust it because there’s always someone watching because of the economic incentives behind that. Is this levelling the playing field for anyone to come into this financial system?

Hart Lambur [10:50]: If we think about this new form of contracting, this new, this new way of writing contracts that is global by default. Well, first of all, we have one feature that I think is super cool and compelling, where now anyone in the globe has access to the same set of rules, and that set of rules is very true clear and very true, and very uncorruptible, which I think is like a big advantage. So now all of a sudden, if you are in random country xyz, that really doesn’t have a strong rule of law, there is an alternative now: “Oh wait, I could write contracts using this other system, and I have access to the same rule set, the same enforcement technology as somebody in the US or in the UK does.” That seems like a very big win for our world.

DeFi vs CeFi: smart contracts worked! dumb ones didn’t!

Samantha Yap [11:42]: This makes sense, it pulls together code, incentives and law. But didn’t everything DeFi just fall over? Or was that CeFi – Centralised Finance?

Hart Lambur [11:54]: Yeah, so okay, so DeFi got invented to talk about what decentralized finance is, like those way of writing financial contracts on blockchains. And then, the crypto world decided that: “Hey, we should use this word, CeFi, to compare that to centralized institutions operating in and around blockchains or crypto space,” right? So CeFi includes Binance and includes Coinbase; it also includes these centralized lenders. Celsius and, and BlockFi and the hedge funds and investment managers that are also around the space, like Three Arrows, also known as, 3AC. So CeFi is this term for institutions that are all functioning like traditional organizations in and around crypto.

And what we have seen in the last, I don’t know now, two months, we’ve seen some of these centralized crypto institutions fail in ways that look very much like traditional financial market failures and they are. The thing is like the way these CeFi institutions have failed. They failed just like hedge funds or kind of banks have always traditionally failed. And it goes back to what I was saying about the Lehman moment and me sitting on the Goldman trading desk watching Lehman Brothers collapse. What Three Arrows did is identical; it’s like they ran out of money. Nobody knew they were running out of money until it was too late because there was no transparency. It was completely opaque, and then a bunch of people didn’t have money they thought they had because there was no transparency, and this is all happening in the tools of traditional finance with just unsecured loans and agreements. It had nothing to do with DeFi; it just happened that some of these institutions played around in decentralized finance.

Samantha Yap [13:43]: I think that’s a point that needs to be made clearer, you know, especially even with the media, because things got a little confusing. So, do you think this episode, this collapse makes the case for DeFi even stronger? And what would you say, like how would you kind of make the case for DeFi from lessons from this CeFi collapse?

Hart Lambur [14:06]: Yeah, so this collapse is bad – capital B Bad. It’s one thing for institutions, for like a hedge fund to lose money. But I really am not okay with some of these crypto lenders, like losing the money of the average person. And I don’t know all the details, but this seems like straight fraud, so I’ll just, I’ll point out that again, this has nothing to do with DeFi. You were telling these retail investors one thing, and then you were doing something completely different with their money that was way riskier, and you lost it, and that’s just like very bad. The case, though, for DeFi here is strong where, if this was a decentralized system, you couldn’t do that. It would be an impossibility because everyone would be able to see: “Hey, money came in, here’s what you did with it, here’s where it went.” There’s just total transparency into what’s going on and you’ve seen that like in this whole episode the, the DeFi lending protocols, like Compound and Aave have done great. They’ve done just fine. There was an interesting stat I saw on Twitter today like Celsius, which is unable to pay people back, has actually repaid 500 million of DeFi loans they had, and they paid them back first. It was just what they couldn’t negotiate with it. They couldn’t just say: “Sorry, I’m not going to pay you.” If they did, it was actually going to hurt them economically. So, I think it’s counter-intuitive because everyone’s confusing DeFi and crypto, and these collapses they’re all getting kind of bundled up together. But truly, when you just go like a level deeper, DeFi is like the solution to these types of problems where you wouldn’t even be able to have this happen in the first place. And so, I’m very hopeful that the public and regulators and the media do grapple, do understand this and understand here that: “Wait, this was just bad fraudulent financial things.” I hope it doesn’t taint DeFi because it just wasn’t DeFi.

Is this going to change the world?

Samantha Yap [16:13]: How do you see smart contracts changing the way the whole global financial system operates?

Hart Lambur [16:21]: Our global financial system is very big and very integrated into our lives, into how like nation states work, like how into everything. And the global financial system is based around legal technology, like legal recourse is how the whole thing operates. I think it’s actually useful to use this framing of DeFi and crypto as inventing a new, a whole new contracting technology. If you think about that, like for the global financial system to upgrade or to migrate to this other technology, this is like no small feat; this is a big deal transition that is very tricky and hairy and has all sorts of implications. And so, I am very much a believer that the advantages of DeFi, in many circumstances, are really real, and they will like this idea of software eating the world that will play out in finance too. But this is a long and slow process. I think it just takes a long time.

Things that need to be done: the undo button

Samantha Yap [17:27]: What do you think needs to be addressed for more people to open their eyes to it, adopt it, learn more about it?

Hart Lambur [17:35]: I probably have a laundry list for you, Sam, but I think like it’s a super compelling and interesting technology, and I think people should push hard at the things it’s supposed to really offer. So, truly being decentralized. Is there truly no centralized point of control? Because if there is a centralized point of control, there is then the opportunity for manipulation and fraud if somebody can change things around, so you’ve got to be able to point to that. I also think people should look at DeFi systems and understand like: Hey, what if something does go wrong? Is there some concept of an undo button, of some sort? And for me, like in our optimistic oracle, we’ve actually kind of embedded this. There is a concept of an undo button which is: “Hey, somebody said something to be true, and now I can dispute it.” The dispute function is, as like an undo button, much in the same way in the traditional legal world somebody says: “Hey, my contract’s fulfilled;” and you’re like: “No, I disagree,” and you go and you sue them, right? think some of these concepts need to be much more fully developed in DeFi. And I think that will happen over time. I’m pretty excited about it.

Samantha Yap [18:50]: This is interesting, because the reason why there are lawyers, laws and lots of cases is that the contracts themselves are not water-tight.

The lawyers were able to find enough wiggle-room in there to dispute a contract.

And I guess the optimistic oracle is trying to bake in some of that ‘dispute mechanism’ by allowing someone to challenge the data coming from the oracle?

Hart Lambur [19:14]: One of the things that I think is very difficult/impossible to do is to have truths be perfectly accurate in real-time. There’s so many different edge cases or things that can go wrong that are really hard. It’s, it’s really hard to say this is a hundred % accurate and correct, right now, in real-time. A lot of DeFi actually does kind of function that way. And that’s something that, if I’m gonna offer my personal opinion, does, it’s very cool but it scares me a little bit because I don’t believe that you can say: “Hey, I got this figured out right 100 % of the time, all the time.” And the optimistic oracle concept appeals to me because you do have this out, this escape valve where if somebody says: “Hey, this is what happened,” somebody else can go, “I disagree” and then it goes to this other dispute resolution process where things get slowed down and you can you have more time to understand like what the right outcome should be.

Samantha Yap [20:14]: So, does this help in a case where if you accidentally send a payment of maybe you’re meant to send a thousand, not 10,000, and then you added an extra zero? Does it help in those instances?

Hart Lambur [20:28]: That wouldn’t be what like our oracle would do, but you could design a system like that, I think that’s the type of stuff that if DeFi grows, would be useful where, when I go and I send money, it doesn’t actually go through right away; it says: Okay It goes through, and then you can look at it again and verify, and be like, oh yeah, that’s right or not right, and kind of undo it. A bit like how Gmail has the sort of undo button when you send an email now. It’s kind of useful sometimes to be like, “Shit. I wrote that wrong, let me, let me undo that.” In our oracle sense, the oracle is useful here for now like say, there’s a liquidation and I’m going to get liquidated on a loan that I’ve provided based on some price, but I could be like, that price isn’t right, I disagree with that. And so, I could dispute it, and then you go and you figure out was that a correct liquidation or not?

DeFi: a revolution in law

Samantha Yap [21:20]: Because I heard that you’ve said this, but you’ve said that DeFi is a revolution in law, not finance. But I’d claim it if I were you. Can we talk about that?

Hart Lambur [21:32]: I will claim it. I don’t know when was the last time we invented a new contracting system? I think it’s been hundreds of years. Doesn’t happen very often, and I think that is really cool and really compelling. The financial aspects of DeFi, in some ways, are less interesting to me, because you look at like with some exceptions, right? But what has DeFi done? They’ve recreated lending markets Compound and Aave are just like money market lending. They’ve recreated like trading, right, that already exists, that’s not new. There are aspects of it that are new. Uniswap and the concept of an automated market maker doesn’t exist in traditional markets, and I think that’s pretty compelling. But for the really big innovation in my mind is inventing this new system of writing contracts. The other advantage of this this contracting system, is that it’s very easy to access. So, unlike the traditional financial system, where inventing a new financial product costs like tens of millions of dollars or hundreds of millions of dollars, here anyone in their basement can go and like code up something new.

Samantha Yap [22:36]: Yeah, that’s certainly pretty cool, and it shows that anyone can access it, wherever you are in the world. So, it’s kind of lowering the barriers to entry to the financial system, which the current global financial system, as you said, it’s just gotten so complicated and convoluted, and there’s so many layers to it. But yeah, you’ve also just described that we’re building this new financial system you know, like you said Aave and Maker have or Compound has changed the way lending is done. Instead of it changing the current system, are we seeing this alternate universe forming and just growing?

Hart Lambur [23:16]: I think for now; and I don’t think that’s a bad thing. Sometimes people think that means like what’s the point of this thing, right? Why are we? Just like you’re reinventing this system in parallel, and the example: you go back to the early days of the internet. What the early days of the internet was, was actually a bunch of people on the internet talking about the internet that was it, it was very self-referential and circular. But that process built the tools and built the plumbing and built the infrastructure for all of these other innovations to emerge. Like with the internet plumbing, then you started getting, you know, streaming video, and then you got YouTube, and then you got social media and you got all these things that emerged, that have no parallel in like the traditional world, or the world before it. So, I think the path for DeFi looks quite similar, where you have people using DeFi to trade, DeFi to like talk about DeFi, to just very self-referential, but it builds the plumbing and infrastructure required to allow totally new things to emerge that haven’t even been invented yet.

Samantha Yap [24:30]: To bring it all home – We saw in the 2008 crash a failure of a complex system that relied on obscure, opaque contracts which built an obscure, opaque market where no one really knew how exposed they, and the parties they were dealing with, were to banks and institutions that were collapsing.

So, the financial system came to a roaring halt.

Hart believes that this was a failure of legal technology, but smart contracts, and optimistic oracles, can help fix it, if they take some elements from Traditional Finance (TradFi) and use the technology and principles of DeFi to build something better.

DeFi for sure is still in its early stages, and we’ll have to do a lot more talking and building before it feels in any way permanent.

The trick is going to be how we manage the difficult bits, such as agreeing on the data, and resolving disputes.

Hart has come up with one solution, and there are going to be lots more. He’s also helped us think differently about the most basic question in finance: what is a contract?

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.

Listen to this episode on:
Oct 13, 2022

Law and Money (S2E1)

In the first episode of YAP Cast season 2, Samantha Yap is joined by Hart Lambur, Co-founder of UMA: an optimistic oracle built to query and verify data for decentralised finance.

They touch on the concept of contracts, the international localisation issue for financial products-&-services, centralized finance complications, and the role of digital currencies and DeFi in the future global economy.

Join Samantha Yap on a quest to discover how money's practical relationship with law can evolve to be globally seamless.

View transcript

Episode 1: Law & Money Episode Transcript

Samantha Yap [00:03]: Hi! I’m Samantha Yap. Welcome to of The Story of Money by YAP Cast where we talk about where money is heading. Join me and Hart Lambur on this episode of The Story of Money by YAP Cast.

Let’s start by talking about law and money. How do the two work together? And can we remove parts of the role law plays and replace it with something else?

We’ve had contracts in England since the 12^th century, and breaches of an agreement, or covenant, could be settled in court, with damages granted to the victor.

Modern contract law has its origins in the 19th century, but its roots lay much further back. So, could it be replaced with something better and could we replace contracts and lawyers with code?

Helping me understand this is Hart Lambur, Co-founder of UMA, an Optimistic oracale built to query and verify data for decentralised finance. To understand Hart, and to understand the relationship between finance and law, we need to explore Hart’s own past. Hart started out in banking, although it wasn’t what he wanted to do, and like a lot of his peers, he had to pick things up as he went, he had ringside view of a key moment in financial history: the collapse of Lehman Brothers

Hart’s background, and the realisation from Lehman Brothers that the system was obscure, that no one really knew their exposure.

Samantha Yap [01:37]: I started by asking Hart what he learned during his time at Goldman Sachs.

Hart Lambur [01:43]: So, I was a guy that studied Computer Science in university, and I graduated and randomly, even though I didn’t expect to, ended up working on a trading desk at Goldman Sachs. So, I was an interest rate trader focusing on government bonds for eight years, following my university courses. Yeah. My time there was through the financial credit. It was wild and I’ll agree with you that going in all of the analysts that get their job at Goldman, I would argue that none of them actually know what they’re doing or what their desk does or what their job is. It sort of actually speaks to how big and complicated finance has become, like how many different nuances or niches there are in it. It’s wild but like one example that I think is relevant to some of the stuff that has happened in crypto recently was around the collapse of Lehman Brothers. People have talked a little bit like the Three Arrows and Celsius sort of crypto blow-ups which have happened recently. It was sort of like the Lehman Brothers moment for crypto, and I will tell you I was on the trading desk when Lehman Brothers was blowing up, and it was remarkable to have our swaps desk actually have no idea what their risk was, they had no idea what their exposure was, they had no idea what contracts were good, whether people were going to make margin calls. They just had…they were literally like they didn’t know their risk to the nearest billion dollars, and it was a function of just the opacity and lack of transparency in the market; and I think it’s really interesting because decentralized finance does actually solve this, and yet in some of the crypto issues we’ve had recently, it hasn’t been the decentralized finance bit that’s broken, it’s actually the centralized finance sort of opaque and obscure agreements that actually caused issues.

What is a contract?

Samantha [03:45]: What is a contract? We’ll come back to that later. But for now let’s stay with the old traditional financial way of doing things, and which Hart worked on before.

Swap trades are a form of derivative, which are financial instruments whose value is derived from the value of an underlying asset.

A swap is just one of several types of derivatives, like forwards, futures and options. So, driving all these trades were contracts.

What are financial contracts?

Hart Lambur [04:20]: Yeah, financial contract is an agreement between two or more counterparties to make a payment under some set of conditions. That’s it.

Why do we need them?

Samantha Yap [04:31]: And why do we need them?

Hart Lambur [04:34]: Well, that’s where I think it’s probably best to look at examples. So, insurance. Insurance is a financial contract between the insurer and the, I guess, it’s the insuree policyholder that’s going to entitle them to some payout under a set of conditions, and it’s super useful. So, we know we need to insure ourselves against different risks, and it’s actually a very simple form of financial contract where the policyholder just gets the payout if conditions are met and that’s it.

How is it enforced? (Enforcement technology is law, as pursued in a court)

Samantha Yap [05:05]: So that sounds simple enough. A contract spells out what happens when conditions are met. And so, who decides that, and who enforces that?

Hart Lambur [05:15]: What actually is the enforcement mechanism? Like what’s the technology that powers that contract? And my argument is, well not argument, it’s true – the technology powering that is legal recourse like it’s the legal system. So, we write a financial contract and if I’m in Canada and I write an insurance contract, my enforcement technology are the courts of the Canadian government. For you in the UK, it’s the UK courts. Different systems, same concepts, right? And we are fundamentally writing a legal agreement, and that financial contract is really nothing more than a legal agreement. So, one sort of interesting observation here is that most financial products and services that we all use in our daily lives, most traditional financial products and services, really are just legal contracts when you kind of boil them down and distill them. They are legal contracts and the enforcement, the technology that powers them, is the legal system.

The problem: geographic barriers (no common ground)

Samantha Yap [06:13]: That’s interesting calling the legal system a technology. Okay, so that’s a really great example how, you know, if I engage in, yeah, maybe a financial contract here in the UK, it can be enforced under UK law, you know. But cross borders, I can imagine it gets a little complicated if there’s a contract with someone in Canada. And it’s like, who determines that? So yeah.

Hart Lambur [06:43]: It basically doesn’t happen. Like that’s a great point, right? So, if I’m a UK insurer, if you’re a UK insurer, I can’t buy a policy from you because I’m in Canada, and like I don’t have access. Again, we call it a technology. I don’t actually have access to the UK court system technology, I’m not part of the UK legal jurisdiction, and vice-versa. So, in Canada, I can’t sell you an insurance policy. Of course, everything can kind of get solved if you’re big enough, right? If I’m big multinational corporation, I can figure that out so; but at the individual level, that doesn’t happen because they’re really just different legal jurisdictions, which brings you to kind of like one of the downsides of the financial system, the traditional financial system, today is it’s localized. The financial products and services offered in the US are not offered in Canada or in the UK or in Australia, and those are all like countries that are otherwise fairly similar, you know. The internet services that are offered there are all the same. You get – it’s the same Twitter; it’s the same Facebook. It’s the same all that stuff but the financial products aren’t the same, and the reason for that is that the technology powering all those financial products is actually different in each of those jurisdictions. So, this is one of the real like downsides I would argue for the current traditional financial system.

Hart ponders a solution

Samantha Yap [08:13]: So, if we think in terms of technologies, contracts are a legal agreement, and that is the technology. The enforcement mechanism – the courts – are a technology.

So, Hart, what made you switch from high finance to crypto? What made you think this technology could be different?

Hart Lambur [08:33]: I worked at Goldman through the financial crisis for eight years which was far longer than I expected. I never expected working finance in the first place, but it was super interesting and learned a lot and then I left to start a fintech business that was called Openfolio. I should have probably started a crypto business then that was in 2013 before Ethereum existed, but I didn’t so. This fintech business was really interesting, taught me a lot about that space, and that got acquired by an asset manager in 2017. And then I’m sitting there and I’m looking at smart contract platforms like Ethereum and based off of my background and my finance experience and my CS experience and my own academic interests, I’m thinking this is like a very interesting intersection of things I’m interested in, and it seems obvious to me that we should figure out a way to write financial contracts on a blockchain or on a smart contract system. Maybe a little bit naive at the very beginning because this is actually quite hard to do, but that was you know before DeFi as a term existed or was invented. And I think there were a segment of people that also had a similar thought. It’s like look these smart contract systems would be a really cool way to recreate finance and recreate it in a way that is global by default and is permissionless and has like lower barriers to entry. And I think that is the kind of the origin of where DeFi started.

Samantha Yap [10:10]: So Ethereum, we know. Let’s talk about Ethereum. Ethereum was built by Vitalik Buterin to develop the idea that a cryptocurrency could be more than just a currency. It should be possible to use the underlying blockchain technology for anything, like decentralised applications, or Dapps, connected to the blockchain by slices of code called smart contracts.

Solution: the smart contract

Samantha Yap [10:34]: Right. So, let’s get into smart contracts, and how it changes the game. What, in your own words, are smart contracts?

Hart Lambur [10:42]: So a smart contract is a bit of code written on a blockchain that will execute some logic. Let’s put it that way. And I think now, maybe to make the analogy a bit crisper, let’s talk about like a financial smart contract. So, my earlier definition of a financial contract: some agreement between two or more counterparties to make a payout under some set of conditions. A smart financial contract here would be implementing that logic, that same thing on a blockchain. And to keep just rolling with this for a second, if you do this in the pure sense, which I think is what we should talk about, and what’s most interesting. The enforcement technology now is no longer the legal system. I’m not using a legal system to enforce this technology. I’m actually using blockchains and economic incentives. So, I’m solely using blockchains and economic incentives to compel these counterparties, to follow the terms of contract, and that is very different.

Implication: inventing a new contracting system

Samantha Yap [11:54]: Yeah, right. So, you’re basically saying the technology you’re referring to was is the legal system like the courts, the laws of a country. Now you’re saying that a piece of code can replace that or is already replacing that. Is that right?

Hart Lambur [12:10]: Yeah. I’d take it a step further and say that it’s almost like inventing a new legal system. And it’s not a legal system but it is a method of contracting. If you think like abstractly think like contract theory. So, the contract theory right now is: we write contracts that are or traditionally are legal contracts, and now we’re writing contracts that aren’t legal contracts. They’re enforced in a completely different technology. So, we have, in essence, invented a new system of contracting, and this new system of contracting just has trade-offs straight up its like different, and has a different set of trade-offs towards the way traditional financial contracts work, and it’s also like super cool and super interesting if you kind of think about smart contracts and blockchains in this light. We aren’t just inventing like a new database or something like that; we’ve actually invented an entirely new way for counterparties to enter into contracts, and I think that’s like you don’t invent that very often it like hasn’t. They haven’t invented a new form of contract in the last 200 years, so I think that’s kind of exciting.

Samantha Yap [13:23]: So, there we have it for this episode. Hart’s journey has taken him from the financial apocalypse of 2008 to reimagining how one party seals an agreement with another, and how that agreement, that contract is executed. Next time we’ll explore how this works, or doesn’t, and what this all means.

Thanks for tuning in to another episode of YAP Cast. I’m Samantha Yap. For new episodes, follow The Story of Money by YAP Cast.

Listen to this episode on:

Aug 3, 2023

Money and Innovation with Sheila Warren (S3E9)

How Can Crypto Empower Marginalised Communities and Reshape the Financial Landscape?

In this episode, Samantha Yap and Sheila Warren delve into the transformative power of cryptocurrencies and blockchain technology.
They explore the concept of money as a meme and emphasise the importance of understanding the fundamental technology behind cryptocurrencies. They discuss how fintech and cryptocurrencies have revolutionised money, providing efficient payments and investment opportunities while addressing historical financial exclusion.
Join Samantha Yap on a journey to discover the history of money and gain valuable insight into why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.

Sheila Warren (aka @sheila_warren) is the CEO of the Crypto Council for Innovation (CCI), a global alliance formed to showcase the transformative potential of crypto. Sheila started her career as a Wall Street attorney before transitioning to philanthropy and civic technology. She established the blockchain and digital assets team at the Forum, and her groundbreaking policy efforts have played a significant role in promoting inclusivity, equity, and sustainability in data and technology.
Follow Sheila on Twitter at: https://twitter.com/sheila_warren

View transcript

Introduction [00:00]

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

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Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

It’s easy to forget that money is a form of technology that has evolved for thousands of years.

One of the first recorded uses of money dates back to 7,000 BC in Mesopotamia. The people of Mesopotamia used small, clay tokens to represent different goods and services. These tokens served as an early form of currency and were designed to facilitate trade.

Over time, these clay tokens were replaced by coins made of precious metals like gold and silver marking a significant shift in the concept of money, which steadily moved into what we know today as cash.

Now we’re moving towards a cashless society, with most people in the first world using apps like Apple Pay and Google Pay, and doing most of our banking online.

The innovation of money brought by the introduction of Bitcoin and other cryptocurrencies has led us into the next chapter of the story of money.

Cryptocurrencies have the potential to change money for the good of everyone. It can democratize finance, improve global financial inclusion, and offer cheaper ways for instant cross-border transactions.

While the potentials are endless, The Crypto Council for Innovation has a few guiding factors to ensure the innovation of money is developing in a productive way one that is led with a global world view.

Join me as we hear from Sheila Warren, CEO of The Crypto Council for Innovation share her take on where the future of money is heading with crypto.

Samantha Yap (01:55)

Hey Sheila, welcome to YAP Cast. Very excited to have you here today.

Sheila (02:00)

Oh, thanks so much for having me. I’m glad to be here.

Sheila’s Journey into Crypto

Samantha Yap (02:02)

Cool. So, it’d be great to hear about your background and then, you know, what’s the thing that sparked your initial interest in getting into the blockchain and crypto space?

Sheila (02:11)

Thanks. Yeah, I’ll try to keep it kind of keep it brief. It’s been a pretty wild career with twists and turns. I’m a lawyer by training. I started off on Wall Street at a Wall Street law firm. And then I moved out to Silicon Valley to work with tech philanthropists and work in civic tech. I did that for quite a while. I built a tech product, a SaaS product called NGOsource, focused in civic tech and then I got into the blockchain space primarily through a data lens. I was very interested in thinking about new models of not only data storage and data maintenance, but also new models of actually economics around data. And that was sparked by a particular incident that happened to me when I was general counsel at a nonprofit that involved the potential hacking around sensitive information about activists. And I was very concerned about different ways to have not a honeypot of data. This was before Cambridge Analytica, so of course we’ve seen in recent years, you know, all of the challenges there. And so for me, it really was more of a data story actually than a money story or a fintech story. But I very quickly began to understand as I delved into the technology, a) why Bitcoin was kind of the first sort of use case, if you will, of blockchain technology, but also the differences and the kind of revolution that this technology could spark in financial services and in the money space in general, to the point of your show.

Samantha Yap (03:30)

Yeah, that’s very fascinating that you came through it with a data lens because I would say, I would say most people, you know, had come to it because of Bitcoin and the fascination of the fact that it was like this digital gold. So that’s very interesting. Thanks for sharing that. So what was the first thing you did when you got involved in crypto? Like, what was the first kind of foray into it?

Sheila (03:50)

Yeah, well, I was really reading white papers, frankly. I read the Satoshi white paper, I read the Ethereum white paper, and I started to think, and this was 2015-ish, and so a lot of people were thinking about all the myriad use cases that were relevant in this space, or potentially relevant – don’t forget, 2017 was the year where everything was an ICO, and you just threw blockchain into anything, and you could get massive funding and all this kind of stuff. It was a very hype-y time. A lot of those things have proven to be much more complicated to build than people imagined. So I was one of those people that really had kind of the limits of my imagination. I thought about applications for criminal justice and real estate ownership, the titling, authentication, all these different kinds of things that I think we’ve seen experiments, some successful and some have failed over the course of time since then. But my first foray was really quite intellectual and nerdy. It was reading the white papers and trying to understand how the technology worked and what it could do.

Samantha Yap (04:45)

Yeah, that’s a great starting point. I think yeah starting from the white papers is like how you get that fundamental understanding of crypto. So this series is about the story of money and where it’s heading with crypto. So, what is money to you?

Money as a Meme?

Sheila (04:59)

Well, as I say on my podcast, Money Reimagined, I think our very first episode, we talked about how money is kind of the ultimate meme. So money is something that we certainly drive utility from. We use it to create markers so that we can exchange goods and services in society and have a smoothly functioning society and a functioning economy that to some degree is predicated on the idea that, you know, what a dollar is a dollar is a dollar, right? Just like we say, a Bitcoin is a Bitcoin is a Bitcoin.

But money itself, it has value at this point in time because of faith to some extent, right? Because of whether it’s the backing of the US government or the backing of the Indian government for the rupee or whatever it might be, that’s a critical part of it because of course the paper and the money that money is printed on is not inherently worth the value of what we assign to it. So to me, I think it’s really interesting to think about currency, to think about money in that way. To say there’s a metic component to it. And when we start to unpack that, it’s actually quite fascinating that we have such a complicated system of finance and the economy that runs on what fundamentally comes down to an act of faith.

Evolving Money and Adoption

Samantha Yap (06:06)

That is very fascinating. So money is an act of faith and yeah, I think there’s a lot of opacity in just financial system that yeah, we really are operating on faith a lot of the time. That’s fascinating. So I mean, yeah, since the introduction of Bitcoin, you know, when the white paper was written and Bitcoin was created in 2009, how have you seen money evolve with crypto and the introduction of these other cryptocurrencies?

Sheila (06:28)

Yeah, well, I think there’s been a lot of, I think you have to think about fintech more broadly, right? So it’s not just crypto. We’ve kind of seen an explosion of fintech over the last even five years. And exploring everything from more efficient payments and the payments action around this, of course, has been very, very strong in certain cases. But also thinking about different ways of providing financial services, whether that is credit, even insurance, whether it’s a store of value, all these different kinds of things, and of course the investment side of this as well, an opportunity to create potentially generation-changing wealth. I think all those things have been relevant in the crypto ecosystem. Again, I think that when we think about crypto, we think about money, I have to say, again, that is but one use of blockchain technology. It’s the one that gets the most attention and it’s the one that’s perhaps the most complicated because of course our financial system is highly regulated as one would think it ought to be. But the question of kind of how this new opportunity, this new form of money, you know, this new form of currency in some cases fits into our existing economy is one I think is quite unsettled. What I think has been very interesting to me personally, with my background in civic tech, you know, spent almost 15 years in civic tech, working with communities to see how and whether, technology could actually be empowering, a tool of empowerment, and the ways in which technology was actually the opposite, right, it was a tool of oppression, is something I spend a lot of time thinking about. So to me, seeing the different kinds of communities that have embraced this opportunity is quite fascinating. So in my previous role, I was the head of, I founded the blockchain team at the World Economic Forum, and when I left there, I ran all of tech policy. And I had said as far back as 2017, when I took that position, that I always believed we were going to see more adoption in the global south and in other parts of the world before we saw that kind of adoption in the United States. And that was largely true, but what we have seen here in the United States is that certain communities have actually adopted this technology opportunity much more than others. And those are largely immigrant communities, black and brown communities, communities of colour, of folks in rural areas. We’ve actually seen disproportionate adoption there.

And I think that we can’t have an honest conversation about money in society unless we’re talking about who has historically been embraced and excluded by the financial system, the legacy financial system. Now, I’m not going to go through a whole history lesson, although we certainly could. But if you look in this country, United States, where I currently am, when you look back on the history of who has been allowed to get a loan, for generations, women were not allowed to own property, to get loans, to hold title to anything, to have bank accounts, right? For many, many generations, people of colour did not have this kind of access. And even when it was granted, there were such strict limitations and parameters around it. It was certainly not equitable in any way. It was only very, very recently you’ve actually seen some of that behaviour, redlining, de-risking, be acknowledged and try to be corrected.

But the reality is that the legacy of that financial exclusion and that intergenerational trauma still persists. So when you ask folks now, and particularly ask black folks now, you know, why are you drawn to crypto? Why don’t you just go get a checking account, for example? If you were to phrase that so crassly. They would often say because those systems have not treated people like me in my family well in the past, right? My own personal example, which I do think is relevant, is I’ve been a 20-year-old person with very little money trying to cling to a bank account and always worrying about overdraft, minimum balance, things like that. And a lot of those things don’t exist anymore. Minimum balances have largely gone out the window, right? But I remember that. And then I look out there and a person of more age than that who people are kind of like, please come bank with us. Come bank with us, right? It’s a very different experience in the same system. So who you are, where you are, how you experience that is going to affect how attractive an alternative might be. In the United States, most people, certainly not all, but most people do have access to basic financial services, right? Checking and basic savings, things like that. Some line of credit, you know. So these aren’t acute problems for most of the population in the US. Other parts of the world, that is not true. And there are entire countries that are largely excluded from the ease of a seamless financial system because of correspondent banks that have left their countries, because of the cost and expense and just because of access. And so that’s where you see, I think, some more of the adoption that’s happened in an earlier stage than what we’re seeing kind of continue.

Financial Inclusion with Crypto

Samantha Yap (10:43)

That’s fascinating. So you’re basically saying that crypto has made money more accessible to different groups of people and especially perhaps minority groups that were maybe left out of the system. Can you give me an example just to expand on that? You said you’ve seen more adoption from black or other minority groups, but how have they been using crypto?

Sheila (11:06)

Yeah, well, the classic example, I think, that’s gotten tons of press and there’s lots of data on this is remittances. And so remittance is a very low value payment that is made across a border, generally speaking. And so the classic case of remittance is somebody who leaves their country of origin. They go to a different country to make a bunch of money to send home to their family. And so in the US, there are all kinds of communities that do this from all over the world, like Korea and the Philippines. There’s all kinds of places, parts of Africa, where people migrate across the border and they send money home, okay? Sending money home can be very expensive, depending on where you’re sending money to. So you can go with remittances, you can go from 6% to 2%, which is a significantly huge savings if you use crypto. And in some cases, you can’t even send a remittance, to be clear, there’s not even access to that at all. So in some cases, you’ve got people who are still flying money on a plane, right? Like with a guy that runs this for the community, giving the money to some person who takes it to the community and then distributes it, right? Because it’s so expensive to get the money sent through multiple wires or through whatever services do exist. So crypto makes it faster, first of all, and cheaper to send these small dollar payments abroad. Now, this is a pretty well-known and well-documented use case. And in fact, Moneygram, which is kind of an ATM for people all over the world, if you think about it that way, it also sends money. It’s actually using crypto to basically get money more quickly from one person to the recipient, from the donor to the recipient, the sender to the recipient in another country. And that I think has proven to be quite valuable.

So I think what’s interesting to me is that use case, which I think that use case alone not only justifies the existence of this opportunity, but also I think articulates how compelling the opportunity is, because it’s largely helping people who don’t have means. But it’s not the sexy, multi-trillion dollar kind of business line that I think people think about when they think about high finance. And what has been challenging to me as I’ve spent the past almost six years in this space, largely full-time, around thinking about tech, at least in tech policy, is observing that those kinds of stories and that kind of, even at scale, remittances are now are operating at scale, that kind of thing is not necessarily compelling to everybody because it doesn’t have the giant dollar signs behind it. And for something to be taken seriously, apparently it has to have engagement at the orders of scale and magnitude that are deemed like pertinent and relevant to the entire global economy. Whereas I would say, to some extent, this is a gap-filling opportunity. And if it only creates and closes gaps that have existed and allows more people to access financial opportunity, to me, that is one of the best uses of my time, first of all, also something we should be celebrating as a society. So I personally find a lot of the kind of backlash, if you will, against crypto very surprising and misguided because the people that are actually being helped, there are people who are being hurt very clearly, and sometimes they’re the same communities, but there are so much potential for more people to be served, and to be served in ways that are actually relevant and meaningful to them and their communities, and I would hate to see that vanish. I don’t think it will, but it would be very tragic, I think, if it did.

Mariginalized Narratives Overlooked

Samantha Yap (14:14)

Yeah, you raise a good point because, like you said, the remittance is the biggest and very important use case of crypto. But yet the media and, you know, we work in PR, so the awareness of crypto people are drawn to more of the, yeah, the sexy kind of new financial tools and what crypto can enable and DeFi and all that, and we’ll talk on that later. But yeah, what do you see is the biggest challenge with this awareness of the benefits of what crypto can be in the remittance world as well.

Sheila (14:43)

Yeah, I actually think, yeah, I think these stories are actually extremely powerful, because they are kind of the heartstring stories that tend to get PR folks like you kind of excited. Because you’re like, oh, you can tell that story, and it’s got an emotional pull, and it’s also true. you know, So it’s wild to me that what people want to see for credibility is these giant, big, like high finance. That’s hard to understand, right? Like if you’re talking about swaps and derivatives, and it’s like, the average person doesn’t know what that is, or what it means, or care, because they’re not going to ever use that kind of a financial tool, right? They’re going to use something that’s very simple. It’s like, I’m sending money to somebody in a different country across the board. I mean, like, that’s a very understandable and grokable use case. So I find it mystifying, and I try not to be very cynical, but all I can say is I think that people just don’t really care about marginalized people, right? So to have these stories, there might be an emotional tug of it, but unless you actually are committed and care about these communities, I think you just dismiss the stories. And again, I try not to be cynical about it, but it’s hard not to be, right? Because the stories are persistent. There are so many of them, and they just don’t get the kind of airtime as like, crypto criminals, scams people, which of course happens. That is a horrible thing, right? Criminals who do crime should go to jail. You know, I’m like, yes, terrible. But that’s really not, I think, why so many of us are in this space for sure. And it’s also just not in any way a full picture of what’s actually going on, especially when you take a global frame on this. So I think part of this is myopia. Part of it is people looking only in their own backyard and they want something that’s relevant to them personally. And it’s a lack of kind of empathy and compassion for other folks, I think, is part of this, which is, I think, a societal problem, if I may. But I think that’s the reason why these stories don’t get the same traction, the same attention, the same excitement, you know, as some of the other stories get.

Crypto Council for Innovation

Samantha Yap (16:29)

Moving on to advancing crypto innovation for the future of money, you’re the CEO of the Crypto Council for Innovation. So how did the Crypto Council for Innovation come to be and what inspired its creation?

Sheila (16:40)

Yeah, so the Crypto Council of Innovation, CCI, actually started before I got here. It was pulled together by a number of folks who I think were troubled by what they saw as just a general kind of lack of nuance in the dialogue around crypto, you know, and some of these stories, for example, being brought to light. And they were looking, I think, for, well, I wasn’t there at the time, but they were looking for, I think, just a different kind of message around the value of crypto, the use of crypto, particularly in places like Washington D.C. And so I’m the inaugural CEO. I was brought in by the group that started CCI. I’ve hired everybody on the team. I took the job in February of 22 and I’ve been here ever since, and I left the Forum to come and do this. And I took the job because I felt and feel that over the next, from when I started, that over the next three to five years, the most important issue in crypto is going to be policy, number one. Because you can only build what you are kind of like allowed to build in a way, right? And what you have confidence in building. And there’s so much innovation space here that we’ve yet to explore. It’s such untapped potential. And if we don’t get the regulation, the policy right, you know, that’s not going to happen. Now, the good news is that most parts of the world, I think, are really kind of embracing the technology, or at least embracing the potential, and are putting into place rules that I think are quite open to innovation while being mindful of the fact that you have to protect consumers from scams and from fraudsters and from criminals, frankly, which is, I think, also we can all agree, extremely important. In the US, in Washington, I think there are some voices that seem pretty eager to kind of crush this industry and offshore it, recognizing the industry is not going anywhere, but it’s either going to be in a country or not in a country, right? And that I find disappointing. But our hope is that our work will open minds, and through some of the stories that we try to tell, people will understand there’s a lot more to this than just speculation and investment. And there’s a lot more to this that can come, particularly if the guidelines around how to safely and responsibly build in this space are articulated beyond just what the imagination of a builder might come up with. I think that’s an important time that we’re in. So that’s why I took this job. I think at some point the policy will be relatively well settled. And at that point in time, we’ll have to kind of see where we are and take stock. And it may well be that there are other jurisdictions besides the US that are the places where builders have located and become the locus for where this thrives. We’ll just have to see. My hope is certainly it will remain fully global as an innovation opportunity. And that is what we are striving towards every single day.

Navigating Regulations

Samantha Yap (19:04)

Well, we are speaking in a week where the SEC has just sued Coinbase and Binance and classified a number of cryptocurrency tokens as securities, where people in the industry would argue that they’re more like utilities. So how does the Crypto Council for Innovation engage with policymakers and regulators on something like this and you know, yeah, what’s your perception with everything unfolding this week?

Sheila (19:30)

Yeah, well, I do think that these SEC cases are not surprising. I mean, we knew that Coinbase had a Wells notice, and they’ve been talking for some time about their response to that and what they were going to be saying and all of that. So I don’t think any of this is surprising. If anything, I mean, these are very dramatic things. I think for the industry, these are not like earth shattering. I think this is kind of like what we knew was going to happen. What I think is actually quite complicated here is that yet again, I would say, we are seeing an example of Chair Gensler and the SEC in this case really trying to articulate what is and isn’t a security, kind of like obliquely, without actually going directly at it. And I find that very troubling. I think to assert that it is incredibly obvious that all of these tokens are securities presupposes that very, very brilliant members of the bar. And in fact, most securities lawyers or most firms here at the securities law practice think this is an ambiguous area. And so it asserts that all of them are wrong or they’re committing malpractice or they don’t know what they’re doing or they’re incompetent, which is, I just think, crazy. This is an area that’s complicated. You’ve got members of Congress who have different views. You have the CFTC chair’s different view. So someone has to decide like who has authority? What are these assets? How do you classify them? How do you regulate the exchange and the trading of them? All of that has to be decided. And I think it’s unfortunate that’s playing out in the courts, but those are the choices that the SEC chair has made. And so that is sort of the parameters around this. Now, the other thing that happened recently that I think people are missing in all of this is that we had drafted the Market Structure Legislation Bill. That bill language came down. So this is, of course, a bill that Chair McHenry and Chair Thompson of the Financial Services Committee and the Ag Committee in the House have put forth and collaborated on very closely, which is unusual for those two committees to come together and say, we’re both on board with a bill, because they have authority over two different agencies, the CFTC and the SEC. So it’s quite profound to have that out there. And I think you can’t ignore the interplay of the SEC coming out with these, what really are kind of statements about what their authority is, that they’re just asserting kind of like the gorilla, you’re kind of like, we’re gonna sit on this space, and you’ve got Congress, I mean, at least these two committees and the Republicans on the committees coming out and saying, we don’t agree with that. We think there’s more nuance to it than that. It’s more complicated at the same time. So that is wild, right? Whether that bill is going to pass or not is a separate question. That’s more of a political question. But the reality is you certainly have different points of view being expressed in real time from different branches of government. That is just bananas. I mean, that is just like what, you know, there’s a joke in the crypto industry, digital assets more broadly, I would say, even in banking. If you don’t like what an agency says about crypto on one day, wait a couple days, and some other agency will say a different thing, right? And that actually proves to be the case. So you’re in this environment where it’s like a hot potato, and some people wanna grab it, and some don’t, and you’re like, what is going on? So I think the context is much more than just the SEC sued Binance and Coinbase. I think it’s like, look at all these other things that are coming into play, and how are they all gonna intersect. And the last thing I’ll throw in there into the mix is that just, I think yesterday actually it was, and we’re recording, MCCA, which is the Markets and Crypto Assets Act in Europe, actually went into the official journal, which means that now it’s signed, it’s done, that’s the last step. Now it goes into implementation. So we have Europe implementing a comprehensive digital assets regulatory scheme. At the same time you have the US, it’s just like, you know, so it is, there will be like case studies about policymaking that come out of this period of time, just as a general matter. And like, what do you do in an environment that is so chaotic? You know, it’s a very tough question for builders.

Diverse Research and Perspectives through Education

Samantha Yap (23:07)

And you guys are in the middle of this I mean you are working with your you’re trying to inform them.

Sheila (23:10)

Oh yes, all over the world.

Samantha Yap (23:13)

Wow, and so I mean what would you say is like was one of like a highlight project or initiative you’ve worked on with CCI?

Sheila (24:19)

Oh, there’s so many. I mean, I think that, you know, so much of what we do, right, is education. So it’s really pulling together different kinds of research and different kinds of evidence. It’s weighing in and doing a lot of, you know, a lot of point of view, but also like, why does this matter? Why is it interesting? Who’s using it? Who’s not using it? Where are developers going? And there’s an infinite number of, I think, of projects and things we work on. But a lot of this is just trying to, at this point, I think it’s just trying to get people to understand in the United States, why it’s important because I think there’s a dismissal of it that you don’t see in other, and really in any other jurisdiction in the world. It’s really a very unique American dismissal of the space, which I find fascinating. And so I would say, you know, off the top of my head, I mean, we just, when I was at the Forum, I commissioned some research, ethnographic research on the use by minority communities of crypto and of digital assets.

And because I had said to my team at the time, look, if it turns out that people of colour are really only using this stuff because they were, they’re idiots who were scammed, I mean, then like, let’s just pack up and go home, right? It’s exactly the opposite. And that’s what I was talking about earlier, is this idea of like intergenerational trauma, the fact they feel left out of systems, all of that is very relevant to the reasons why folks actually find this opportunity compelling. And so we can actually document that now. We have qualitative analysis of that using ethnographic methods. That’s been a really rewarding project. We did actually really interesting research deep dive on energy, energy use and Bitcoin mining to see, okay, people are claiming that there’s more complicated nuance because there’s stories like Bitcoin mining is terrible for the environment. We’re like, well, is that true or not? We went in and did this kind of actually quite objective study of like, what are the different cases where that might be true or might not be true? And we actually found several examples of models that if incentivized through policy, would actually be productive or net positive in terms of creating more carbon neutral or carbon negative environments. And so that was pretty, I was very surprised frankly, but I didn’t know anything about that space. It was very interesting to watch that research emerge. And now you’re seeing in parallel states like Texas and other places that are like, yeah, there’s something here. We got to figure out the policy around incentivizing the behaviour that’s going to actually be helpful here, which I find really interesting. So every time you kind of it’s like anything, right? When you start and you have a surf scene, all just something it’s maybe like interesting or compelling because it seems sexy, but as you get more and more familiar and learn more and more, you realize how nuanced everything is. And sure enough, in crypto as well, you know, everything’s there’s pros and cons, there’s trade-offs and reasonable minds, I think can differ on what the right set of trade-offs is. But I don’t think anybody reasonable could say credibly that this entire space is like ridiculous and should be, you know, killed. I mean, that is just like flat out wrong and there’s tons of evidence to document why that is wrong.

Outro [25:56]

Voiceover:

Sheila highlighted well the importance of understanding the nuances of blockchain technology and the potential benefits it has, especially for those who have been marginalised by traditional financial systems in the past.

This technology offers an opportunity for financial inclusion.

Currently, there are many people around the world that don’t have access to traditional banking services due to barriers of entry, limiting their ability to save and transfer money or engage in financial transactions.

Crypto enables people to participate in the global economy, regardless of where they live, their documentation or their financial situation.

it is important that we continue to have open and honest conversations surrounding the intersection of crypto and money, to ensure that it is used for good.

Outro Spotify

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Rate and follow this podcast to join us for another thought-provoking episode of The Story of Money by YAP Cast.

Outro YouTube

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Share this episode and subscribe to this channel to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Jul 12, 2023

Sovereign Identity and the Future of Money with Nick Johnson of ENS (S3E8)

How are Sovereign Identities Shaping the Future of Finance and Challenging the Dominance of Centralised Platforms?
In this episode, Samantha Yap and Nick Johnson delve deeper into the advantages and risks of sovereign identities, highlighting the potential opportunities they bring to DeFi.
The discussion delves into the potential of sovereign identities within DeFi and Nick's vision of a future where ENS becomes a widely adopted standard for identification, serving as a substitute for conventional naming systems.
Join Samantha Yap on a journey to discover the history of money and gain valuable insight into why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.
Nick Johnson (aka @nickdjohnson) is the founder and lead developer of Ethereum Name Service (ENS). ENS allows users to register their domain names, such as "alice.eth" or "bob.eth", which can then be used to access their Ethereum wallets and other resources. Nick is a prominent figure in the Web3 community and is considered one of the leading experts on decentralised naming systems.

Follow Nick on Twitter at: https://twitter.com/nicksdjohnson

View transcript

Introduction

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

In today’s episode, I’m continuing my conversation with Nick Johnson, a prominent figure in the crypto space and the founder and lead developer of Ethereum Name Service or ENS.

Before we get into that, let’s talk about sovereign identity which we discussed in the last episode. Sovereign identity is a way for people to have control over their own digital identities. Think about it this way: with sovereign identity, you’re in charge of your own data. You decide what details you want to share, and more importantly, you choose who gets access to it and when. So, whether you’re signing up for a new service or engaging in online activities, sovereign identity empowers you to be the gatekeeper of your own information. It’s a game-changer that flips the script and puts you in the driver’s seat of your digital life.

Last week, we finished the episode discussing Nick’s perspective on the adoption timeline of sovereign identities. Today, we continue our conversation with Nick and dig deeper into this topic. We’ll talk about the challenges and successes of working with a Decentralised Autonomous Organization (DAO), the impact of controlling our own sovereign identities, and what that means for enabling seamless transitions between platforms. Nick also shares his dreams for the future of ENS.

And we kick off with a big question: Do or should the people even want a Sovereign Identity?

Samantha Yap 00:00

Nick, thank you so much for joining us on YAP Cast. We’re really excited to have you today.

Why Sovereign Identity?

Samantha Yap 22:38

Yes. Do you think people would have been– Naturally you’ve built this but do you think people would want something like this? Or do you think that people should want to be able to have a sovereign identity?

Nick Johnson 22:56

I think it’s, it’s desirable. Partly because of the risk that you do lose access to your identity and plenty of people, you know, we probably all know somebody who’s had some error or some problem with access to their account, and you can be the most inoffensive, kitten loving person on the planet and still get hit by something entirely random because a system, you know, mistakenly tagged you as someone else with a similar name, or because you know, it took your post, that was absolutely fine and, you know, some AI filter somewhere said, Oh, it looks too similar to this forbidden thing.

Or, you know, even because someone took a dislike to you and set out to mass flag everything and the filtering systems decided that where there’s smoke, there must be fire. It’s not difficult to find people who have been disenfranchised by this and so I think on that hand, it’s quite an easy selling point. I also think that even if you never experienced any of that sort of thing, one of the advantages of a self sovereign identity is that you can take it with you, you can take it from one platform to another, and you’re not at the platform’s mercy in terms of whether they’ll let you export your friend lists, and, you know, reuse your handle and all of those things when you move somewhere else.

Samantha Yap 24:22

Yes, no, that’s good point. Yes, you’ve used examples like you know, your passport and driver’s license and you know, just all your details and even your social media profiles. How do you think sovereign identities can help safekeep and store money for people?

Nick Johnson 24:42

I think that the key thing about a sovereign identity is that it- it rests in you having some cryptographic credentials that you provably own and that no one else can access and those are the same credentials you would use to store or transmit cryptocurrencies and so if we can solve one problem, will we’ve effectively solved both.

What are the risks of sovereign identities?

Samantha Yap 25:07

And do you think there are any risks, you know, associated with the growth of sovereign identities in- in terms of that, you know, one– There could be a single point where all a person’s data and life on the web and how much money they have, how much crypto they have, and all their passwords can be found out by cracking into their own– Into their identities. Is there- is a risk with that?

Nick Johnson 25:41

It’s– it’s a definite risk. Yeah, and in some ways, it mirrors the same risks you see with centralized platforms like Google. You know, if someone can gain access to that, or if you lose access to that it can have catastrophic consequences and systems like social recovery, where you nominate some people that you implicitly trust who collectively can help you reconstruct your identity or move to a new one can help with that.

But to be sure, it’s one of the biggest challenges and I don’t think there’s a silver bullet on either side of the debate, really. You know that we have the same problem, whether it’s centralized or not, is how do you prove the person using this identity is actually the one who created it? Who it should represent and how do you prevent these sort of things? And I don’t think we’ll ever have, you know, a silver bullet for that.

Samantha Yap 26:34

Yes. Sorry, I’ve just lost your image but I hope it’s recording where you are. Can you see yourself and can you see me as well?

Nick Johnson 26:44

Your video has been dropping in and out, but it does say 99% uploading so.

Does a sovereign identity help DeFi?

Samantha Yap 26:49

Okay, cool. I guess Riverside’s Fine. Yep. Cool and then moving on? Um, yes. So what- What potentials do you see with sovereign identities and also the decentralized, finance tools, applications, exchanges and activity growing?

Nick Johnson 27:16

Sorry, can you- can you reword?

Samantha Yap 27:19

Yep. So yes, I’ll reword that. What potential do you see sovereign? I tend to– So what role do you see sovereign identities playing in the development and growth of the decentralized finance world?

Nick Johnson 27:36

I think that building a system that is focused only around finance, and- and not around who you are, and who you know, and what you do is barren. And I think you know, because these tools complement each other so well, because they rely on the same basic requirement for some form of identity, it very much makes sense that these things are going to come out together and it does enable, you know, better usability and more integration platforms, like, you know, you go out to dinner, and you want to split the bill with your friends. Well, that’s a lot easier when you all have these identities, you can easily enter or scan than if you’re all using the latest decentralized finance but you’re still dealing with big long account addresses.

Samantha Yap 28:27

And yes, what like- what are lessons that we can draw from DeFi. You’re making DeFi and TradFi so DeFi kind of being more like efficient and seamless than TradFi. Yes, what do you have a opinion on that?

Nick Johnson 28:51

I think some for better or worse, DeFi exposes, with its transparency, how things work behind the scenes, and sometimes that can be for better because it lets you see that these things, you know, how they’re actually built and what your trust assumptions are, and you know, how they could potentially fail.

On the other hand, it impacts financial privacy, it also makes it a lot more difficult for people to put together Byzantine schemes that look legit, but aren’t. So I think on the most part DeFi’s transparency, transparency in DeFi, you know, decentralization benefits that some people may be put off by the distinct nature of it, I guess and I think the solution to that is to get people using it and discovering its advantages.

About ENS DAO

Samantha Yap 29:53

Cool, well, um, then to our final part, you know, moving into, you know, our building in the new digital world. You’re a part of ENS Labs with- which works with the ENS DAO, Decentralized Autonomous organization, and the overall .eth name project. It’s one of the most active DAOs in the space, you know. How is the experience engaging, working with a DAO? How has that been so far? And- and how has that been different to what your– You’ve been used to in the past working with big tech startups?

Nick Johnson 30:33

I was certainly nervous about handing things over to a DAO. You know, we always intended to progressively decentralize, but you always wonder, is this the right time? You know, what will they do with this power? What will they do with this money? And so forth but I’ve been really encouraged by how it has worked out. I expected a lot of circular committees arguing over the colors of bike sheds and sort of told myself that, you know, it was worth it for the decentralization and for the- the independent governance and the ability for people to have a voice.

It’s been a lot less of that than I that I really feared. I’ve been really impressed by how, how healthy and how functional and- and- you know, basically, sort of just how well it’s all works, really and it’s, you know, more or less, as a result of people chipping in where they needed to have people with expertise in other organizations coming in and helping build it and thanks to the effort of some of our own amazing rockstars, like, Alicia, we have, I think built a DAO that is independent of ENS labs, and is able to get serious stuff done and, you know, fund serious efforts and so forth, and has come up with its own initiatives that have been extremely productive. So I was nervous, but I think it’s worked out well.

Samantha Yap 32:08

Yes, I mean, congratulations. I think that’s also part credit to you and your- your- you building this and your influence as well. Yes, I mean, can you talk us through because the ENS DAO, it you know, ENS had an Airdrop it launched. You know, these tokens, and it’s the DAO kind of amassed a lot of wealth. I don’t know what the figure is now but it was hundreds of millions at a point. What did you make of it all when it all happened and grew to this size?

Nick Johnson 32:43

So the DAO is responsible for administering ENS, and it gets all the revenue from ens.eth names. So right from the beginning, all of those registration fees were set aside in the multi-sig but it as the sort of one of the multi-sig keyholders, we didn’t really feel like we had the remit or the legitimacy to spend that money. So it was all sort of sat there waiting for the DAO to come along. So once the DAO came along, it already had a pretty substantial war chest just from previous registration fees and the popularity of the Airdrop and the amount of attention that brought to the ENS and the DAO, you know, help further boost registrations, I think which has brought in even more.

It’s, you know, it’s been interesting to see how it puts it to use. I’ve been glad to see that, you know, the working groups dedicated to expanding the ecosystem and funding public goods haven’t been afraid to do that, you know, they are actually putting the Treasury to use.

But on the other hand, we also have a very long term view of things. So we’ve established a endaoment, whose goal is to become self-sufficient or for the– To allow the DAO and become self-sufficient, so that when it’s grown large enough, it will be able to fund ongoing operations just out of interest and returns meaning that the DAO isn’t always, you know, constantly dependent on- on a certain rate of new registrations coming in and so, you know, it’s been- it’s been quite encouraging seeing just how much the community has trusted us with in terms of resources, but also how well the DAO has put that to use so far.

Samantha Yap 34:31

Yes, it’s fascinating to see because it is one of the top and main examples of a DAO, you know, working really well. DAOs have been known to have difficult voting processes for budget allocation and even you know, management of people and resources in time. So, how has– How have you seen ENS DAO do well in this area? How does it, you know, vote for the right budget and then get things done?

Nick Johnson 35:05

So- So voting is something we put a lot of attention into from the beginning, and also just how proposals should you know what the proposal process should be and how it should work its way through the system and so on. I think we’ve done a reasonable job up front with- with setting levels for quorums, with setting norms around how governance proposals get advanced through the system, and voted on and so forth and so far, it’s worked fairly well. We do have the same challenges that every other DAO has but, you know, keeping participation rates high, you know, keeping, you know, new people entering the system and delegating their- their votes to active delegates.

But it’s been quite gratifying to see a lot of active interest in becoming and remaining a delegate, and in participating in things like the working groups, stewardships and so forth. We’ve actually got elections for that going on at the moment.

Sovereign Identities and Web3

Samantha Yap 36:01

No, that’s great and, yes, so that’s kind of all my questions. Just got one more on making identity, you know, more private and secure. If we can control identity and date– Data associated with that, you know, how will that impact and shape the world around us? And especially if we move into the Web3 space? What would that look like? You know, just big picture thinking here.

Nick Johnson 36:39

I think control over our own identity for a start threatens the monopolies of large platforms like Twitter, and Facebook, because they rely a lot on switching costs, on keeping people there because everybody else is there and when it’s easier to take your identity with you, when you can redirect yourself to a new platform, and people will know where to find you. A lot of that goes away. So they will have to compete a lot more on being the actual best platform rather than just being the one where everyone else is. Excuse me and, you know, I think aside from that, it will just enable new decentralized applications that take over some of this functionality, you know, things that we’re seeing now, ranging from- from Mastodon to Warpcast, that are attempting to- to build such platforms without reliance on a single provider.

Samantha Yap 37:41

Yes, now that—Yes, you make a good point. It will- it will turn a lot of the tech giants on its head if we start owning and controlling our own data and so, yes, and, you know, just two more questions. What do you think is stopping people from- from owning our own data today or from- from pushing and striving to have sovereign identities today?

Nick Johnson 38:09

I think a lot of people aren’t aware of the need and benefits for- for owning their own identity until it sort of hits them in the face. I also think a lot of people don’t really know that there’s an alternative out there and of course, the tech itself is- is quite nascent, and- and needs a lot of development. You know, you can’t practically say to somebody stuck on Facebook, oh just go do this other thing, you know, instead, because they still have that walled garden, they still have that enormous switching costs to keep people there and one of the things that will help is building new platforms, you know, like Blue Sky, for instance, which is, you know, federated in a meaningful way and having people just sort of reach a critical mass to switch and at that point, it becomes easier to switch again, or to use a different provider and so forth and some of that may actually come from- from governments, requiring that providers provide some level of portability. You know, we’ve seen actually good results from data portability laws where Twitter and the like, have to let you download all of your tweets and so forth, you know, any data they hold on you, which is a start, but it doesn’t actually let you take your identity with you.

Future of ENS

Samantha Yap 39:28

And cool. My final question is, what is your dream for the future of ENS?

Nick Johnson 39:36

We’ve always had sort of three increasingly outrageous visions for ENS. The most basic one is that nobody should– Sorry. The most basic one is that every application should accept ENS names anywhere they accepts an address, and we’re not quite there yet, but we’re pretty damn close. You know, it’s got to the point where people are surprised when it doesn’t work rather than just assuming it won’t work. So most applications do and when they don’t people sort of get on their back, you know, why aren’t you supporting ENS addresses here?

The second, slightly more difficult one is that end users shouldn’t have to deal with Ethereum addresses or Bitcoin addresses or IPFS hashes any more than they have to deal with IP addresses. You don’t enter an IP address to go to Google, you shouldn’t have to enter a contract address or an account address ever unless you’re a developer and that’s going to take a while longer, but we are on the right track for it.

And the really pie in the sky keeps us going at night, off on the horizon thing is that everything is named via ENS. Everything that’s named today via DNS, everything that’s named, you know, not named effectively, you know, things in the real world, just everything uses the ENS hierarchy and obviously, that’s a bit more of a stretch goal.

Samantha Yap 41:04

Yes, that’s big dreams and yes, I think you guys are on track and you are– I mean, yes, the adoption of ENS has been just amazing and incredible to watch and, yes, it’d be fascinating to see where ENS goes with where money heads as well, especially with crypto and how that underpins the development of new industries. So, thank you so much for your time, Nick and yes. Is there anything else you wanted to kind of touch on or is that– ?

Nick Johnson 41:38

I- I think that you covered it pretty well.

Samantha Yap 41:41

Awesome. Thanks so much for your time, Nick. This was great.

Nick Johnson 41:46

Thank you. It’s my pleasure.

Outro

Voiceover:

On this episode, we had the pleasure of talking to Nick Johnson, the founder and lead developer of Ethereum Name Service otherwise known as ENS. We discussed the transformative potential of sovereign identities in decentralized finance and the challenges and opportunities that come with it.

Nick shared his insights from working with the ENS DAO, and how they’ve successfully implemented voting processes and resource allocation. We also talked about the impact of owning and controlling our own identity and data, and how this could disrupt the dominance of tech giants like Twitter and Facebook.

Of course, no conversation about sovereign identities would be complete without talking about the barriers to adoption. Nick highlighted the need for awareness and alternative platforms, and we also talked about the exciting future of ENS.

So, what did we learn? Well, we learned that sovereign identities have the potential to revolutionize the way we interact with the internet. They could give us more control over our personal information, and they could help to create a more open and democratic web.

But there are challenges to overcome. We need to raise awareness of sovereign identities, and we need to develop alternative platforms that support them. But if we can overcome these challenges, sovereign identities could have a profound impact on the future of money and crypto.

Outro Spotify

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Outro YouTube

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Share this episode and subscribe to this channel to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Jul 5, 2023

Money, Ownership and Identity with Nick Johnson of ENS (S3E7)

How Can ENS Contribute to the Wider Adoption of Self-Sovereign Identities and Foster Financial Inclusion within the Crypto Ecosystem?
In this episode, Samantha Yap talks to Nick Johnson, founder and lead developer of Ethereum Name Service (ENS), about the significance of ENS in decentralised and sovereign identity systems.

Delve into their in-depth conversation on the future of money in crypto, particularly focusing on programmable money, decentralised consensus systems, ENS, and various other captivating topics.
Join Samantha Yap on a journey to discover the history of money and gain valuable insight into why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.
Nick Johnson (aka @nickdjohnson) is the founder and lead developer of Ethereum Name Service (ENS). ENS allows users to register their domain names, such as "alice.eth" or "bob.eth", which can then be used to access their Ethereum wallets and other resources. Nick is a prominent figure in the Web3 community and is considered one of the leading experts on decentralised naming systems.

Follow Nick on Twitter at: https://twitter.com/nicksdjohnson

View transcript

Introduction

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

Let’s talk about Money, ownership and Identity.

Most of us may store our money in bank accounts.

But have you ever wondered that while the banks assign us account numbers, and a bank card – the funds deposited in the bank become the property of the bank.

So do we really own our money? Or do the banks?

On the other hand we can fully own and be the only ones to have access to our own crypto if we store it in a ‘self custody’ wallet address which are alphanumeric strings that are unique to each user. It’s these mix of numbers and letters that help identify the wallet address we’re sending crypto to and from.

It might seem easy to just plug a wallet address in for a transaction but if you miss just one character your funds could disappear. That’s the risk of being in complete control of your crypto.

But what if there was a better way?

Let’s look at the internet and how we identify addresses online.

Every website has a string of numbers known as an IP address which helps us connect to it but we don’t enter those numbers to visit a website like Google or YouTube. Instead, we use a name that’s easy to remember. Google.com.

So what if we had something similar for our digital wallets? Something that could replace the random string of letters and numbers.

In this episode, we’ll be joined by Nick Johnson, founder and lead developer of ENS – the Ethereum Name Service, who will tell us about the great tool he came up with. One that helps turn a long crypto address into a unique, simple username that lives on the blockchain and is not controlled by any single organisation. He’ll share his insights on the future of digital identity and the potential of ENS to revolutionise the way we interact with money.

Samantha Yap 00:00

Nick, thank you so much for joining us on YAP Cast. We’re really excited to have you today.

Nick Johnson 00:05

I’m really glad to be here.

Programmable Money?

Samantha Yap 00:07

Cool. So Nick, you know, as someone deeply involved in the development of web3 adoption and the Ethereum name service, we believe you have a unique angle and perspective on where money is heading with crypto. So to just begin with, you know, let’s start by learning more about your background. As a software engineer, what initially drew you to this world of programmable money from the more traditional tech world?

Nick Johnson 00:34

I guess, for me, it’s all about the consensus systems and the idea that you can have this distributed ledger that is maintained entirely independently without any trusted central party and when I first heard about Bitcoin, I sort of looked at it a bit and I went, oh that’s cool, but was kind of put off by the fact that it’s not actually that programmable. It’s pretty much fixed just for payment use cases and so when I learned about Ethereum and, you know, the fact that it’s fully programmable, and that you can, you can make it do anything you want and, you know, fulfill that promise of being sort of self-sovereign and no trusted third parties. That seemed really exciting.

Samantha Yap 01:14

Awesome and so this series is about the story of money and just, you know, take a step back, you know, take your software engineer hat back, you know, off, what does, is money to you?

Nick Johnson 01:29

That gets very, very deeply philosophical, very quickly. Doesn’t it? I mean, ultimately, it’s a way of keeping track of who owes who, what? Or you know, what resources you have access to, ultimately? But I think it also just comes down to where you are pretty much anything scarce that somebody else wants. There’s a very fuzzy line between money and collectibles these days.

An Introduction to Ethereum Name Service (ENS)

Samantha Yap 01:53

That’s a interesting way you put it. Yes, money and collectibles. So let’s talk about ENS. ENS has over 2.7 million registered domains held by more than half a million users in 2023. This is grown out of a side project that you started well, you know, at the Ethereum Foundation. Could you explain what ENS is?

Nick Johnson 02:18

Sure. So ENS is a self sovereign naming system for Web3 and for the Internet in general. Lets you register a name that represents you or your company, or your smart contract or whatnot, and resolve it to something that identifies you or that contract, such as your Ethereum address, or host content on decentralized networks, like IPFS, or even act as sort of the seed of your digital identity and key to all of this is that is decentralized and independent as we can make it.

Samantha Yap 02:53

And why is that important that, you know, there’s a decentralized, you know, sovereign identity option for people?

Nick Johnson 03:02

Well, I believe that everybody’s entitled to an identity that is theirs and is persistent, and is not reliant on some other person to approve of their having it and continuing to have it and the same goes for being able to name your projects and so on. I- I look at naming as a basic, public good and a basic piece of internet infrastructure that everyone should have access to.

Samantha Yap 03:30

And how did you come up with this idea?

Nick Johnson 03:34

I’ve always been interested in internet infrastructure and in, you know, things like DNS in particular. You know, I sort of dug into that a fair bit when I was playing around with internet stuff way back in the day and when I came to Ethereum, of course, one of the first things that stood out was the usability around account addresses, and so on. The fact that there wasn’t any sort of native built-in naming service or solution and it struck me as like a really obvious omission. So I started working on a solution to that pretty much as soon as I started working in the community.

Samantha Yap 04:09

Yes, I mean, it’s pretty good. I mean, it’s– It makes it easier for people to send money to one another. What are some creative ways you know, you’ve used your ENS name?

Nick Johnson 04:23

So I’ve- I’ve set up a, you know, random side projects, like Beer Coin and given them ENS names. I’ve, you know, I’ve sort of followed through with all of the various things people put– Built on top of it like eth.xyz for creating a profile page and NIMI for some other things, as well as hosting IPFS content and so forth. I believe we publish the complete set of all the voters on constitutional IPFS for instance, and then, you know, that’s all named with ENS names and so forth as far as snapshot votes and so forth. I think a lot of what I’ve done has actually just been utilizing projects that people have built on top of ENS like Snapshot.

Significance of ENS

Samantha Yap 05:07

Yes, that’s- that’s awesome that, you know, you’ve built something that people are building on top of. You know, the website says that, you know, ENS is building a credibly neutral naming- naming system to address the world’s resources. Now, that’s quite a broad statement and, you know, coming back to the series about the story of money. You know, money is one of those resources that people use, and it’s a big part of our lives. You know, how do you see this, you know, naming system important for money today?

Nick Johnson 05:44

I think that being able to find and connect with people is- is crucial to any system like this and it’s why you see, things like PayPal being massively more popular for online payments than direct bank transfers because with one, you could just go send it to this email address, and with the other you have to go in and you know, log into your banking, you have to find the number and enter it manually, and so forth, and so on and, you know, this, despite the fact it actually costs a lot more to use a service like PayPal really demonstrates that people value that usability and the ability to, you know, to- to identify each other like that and on top of that, you’ve got the whole identity aspect of things, the fact that we really want to be able to build a system where people can identify each other, can have personal profiles that are their own and not beholden to whatever social network they created them on.

Samantha Yap 06:38

Now, that’s a really good point here, because yes, the bank account system these days, you still need to have that number, the account number and the sort code and, you know, whatever you need. So this makes it easier. Yes, I mean, I’m sure you’ve seen the ENS Name be used, especially in the decentralized finance industry, where people are sending lots of money on chain- on the Ehereum chain. Yes, how do you see that? How have you seen that play out? And yes, what do you make of it all because you built this system?

Nick Johnson 07:15

It’s– The adoption, in DeFi and in sort of general, you know, Web3 apps and to the point where it’s pretty much the expectation that apps support ENS now at the very least, for entering addresses, preferably for resolving profiles, has been really gratifying. You know, a lot of apps such as Uniswap host decentralized frontends on IPFS, using ENS. So you can access them in your browser without using a traditional web host. I guess it’s just been really gratifying people see the value of this and the potential of this and have been picking up on it.

How does it work?

Samantha Yap 07:55

Yes, that’s great and just to take it back, you know, for people who may not so– Some of our listeners, they may not have actually experienced creating a crypto wallet and- and I think they have this 42 character hexadecimal address. You know, can you explain kind of how the ENS you know, Domain Name Service, it makes it easier for people to send money? So, if you just take us through that?

Nick Johnson 08:26

Sure. So as you say, by default, if you get a wallet and you create a new account, it’s going to give you this address, which will be 0x and then 40 more, you know, letters and numbers and, you know, especially back in the day, people would manually type this out rather than copy and paste this in many cases that have a photo or something and if you send to the wrong address, even by one character, those funds just become permanently inaccessible. So the usability, the user experience there is really not great and ENS was created to address this. You know, it was pretty much the first use case it- It seriously tackled and the way it does this is that anyone can register a .eth name.

So nick.eth, for instance and you can set it to resolve to your Ethereum address, or any Ethereum address really and from then on, you can give your ENS name nick.eth, which is a lot easier to remember and harder to mistype to anyone you want to be able to send funds to you and this works you know, with Ether, it works with all the tokens and so on and so forth. The address it points to can be your personal wallet, so it can be a paper wallet, so it can be a contract even and, you know, effectively what this does is it makes it easier for people to interact like this and also reduces the chances of mistyped names and addresses and so forth.

Beyond Wallet Names

Samantha Yap 09:47

Thanks for explaining that and when you started ENS, did you only imagine that you’re just building convenient wallet names or was there a bigger picture in mind from the beginning?

Nick Johnson 09:59

We– Right from the start, we had decentralized content in mind as well. So Swarm and IPFS, and so forth and being able to host websites, and we deliberately built in so the extensibility in mind. We didn’t want it to be for just one or two applications that we foresaw at the beginning, we wanted people to be able to permissionlessly add their own applications to it and in that we draw a lot of inspiration from DNS which took the same approach that effectively you want the whole thing to be extensible and you want it to be an extent- extensible in a way that doesn’t require going and applying for permission or asking for change to the protocol or anything like that. So we certainly saw there’ll be a lot of uses for it. Some of them, we definitely didn’t foresee right at the start, like, for instance, Umbra, which is anonymous, sending app that allows you to send funds to somebody untraceably. Uses ENS integrally through the whole thing and that wasn’t what we had in mind, but it’s an example of that permissionless innovation at work.

Transparency Vs. Privacy

Samantha Yap 11:05

Yes and in terms of the transparency side of crypto and- and being able to see money move, now you have nick.eth. Anyone can probably look up your address on Ether Scan, which is the, you know, blockchain explorer that we- we use. What do you think about the transparency of that anyone can kind of see what’s on your account, or on your–?

Nick Johnson 11:35

I think transparency in blockchains can be a blessing and a curse, depending on your application. In some cases, allows you to deliberately audit things that can be particularly valuable for organizations. On the other hand, I don’t need the person I’m buying the coffee of to know, you know, what brand of toilet paper I buy, you know, it, for a trivial example. And so there’s a real challenge there in providing financial privacy, especially given the hostility that many regulators have expressed to any attempts to- to engage in financial privacy. You know, with the Tornado Cash sanctions, the US is effectively saying you must be a criminal to one privacy over your finances which is ridiculous and the other issue is how you actually implement any of this and I think the base layer of systems like Ethereum is transparent and solutions for financial privacy are going to have to be built on top of that, rather than necessarily trying to build them in.

Sovereign Identities and ENS

Samantha Yap 12:39

Yes. Speaking, I mean, moving on from privacy but let’s talk about digital identities, and the future of digital identities. So there’s often talk about digital identities and you mentioned sovereign identities. Are they the same thing? You know, can you explain the importance of- of digital or sovereign identities?

Nick Johnson 13:04

I think a digital identity isn’t necessarily a sovereign one. The idea behind a sovereign identity is that you control it, it’s yours to do with as you see fit, and no central agency can say, no, we’re removing the salience together, you no longer have that and that’s in contrast to many centralized applications like Twitter, for instance, if I have a Twitter account, and Twitter decides to ban it, even if I think that was entirely unjust, my entire Twitter identity just vanishes, it goes away and even worse, if I used Twitter to login to other accounts, those accounts may become inaccessible to me as well and it feels like increasingly, we build our online identities on this towering stack of dependencies on other people and often, it’s not even just other people, it’s an uncaring large company that won’t even notice if their systems automatically ban you and because of the huge volume of spam and- and scam thinking it makes it very difficult to actually correct any of their mistakes.

So in contrast to that a sovereign identity, the idea is that you’re not subject to those sorts of things, because everyone has the right to an identity, has the right to be able to use systems that identify them properly and if, you know, that’s causing trouble, then the- the platforms can act independently on that but your identity as it is remains invalid.

Samantha Yap 14:27

Yes and so in terms of– So that– Yes, that’s really well– Very well explained. In terms of sovereign identities, how can ENS names, you know, help with that storage of- of the data and your information? And yes, ensuring the safety and safeguarding of it, as well as the privacy of it, you know, how do you see this playing out?

Nick Johnson 14:55

So if you have an ens.eth name, the only person who can take that away is you effectively. Your- your account has full control over it. There is an ENS DAO that does governance for the platform but even they don’t have the ability to take an existing name and sort of deregister it or assign it to someone else and that’s what, you know, provides the possibility for a sovereign identity there and so building on top of that, you can have your- your avatar image, you can have your nickname, you can have your email address, and your Twitter handle and so on all linked from that ENS name so that when you provide that name, or when you prove that you own the account that controls that name, you can demonstrate that, you know, this is you and these are all the important attributes about you. So when you log into, say, Uniswap, it pulls that up and uses that in order to identify you, independent of any single company’s systems.

Control and Custody

Samantha Yap 15:53

And how– And bring it back to money. If you’ve- you’ve got your crypto or say all your wealth in- in- in a wallet and in an ENS name, you know, how different is it from having money in a bank?

Nick Johnson 16:14

So in terms of ENS, it doesn’t make a difference because anyone- anyone could point any name at any account. In terms of the wider crypto aspects, if you’ve got money in your- your crypto account, you as the signer are the only one who can spend it or anyone you approve. No external system can- can go and alter that balance without your permission. On the other hand today on ramps and off ramps can be pretty tricky. So you might find it harder to practically spend in some circumstances.

Samantha Yap 16:51

Yes. But then yes, with a bank, then. So the difference is that banks probably can’t touch that money. I mean, so if you’ve got money in a bank, a bank could take that away from you because they would be holding custody of your assets. But if you have your own crypto wallet, only you can access that. So yes. And–

Driving Adoption with ENS

Nick Johnson 17:15

Yes, that’s the real distinction as custodial versus non-custodial. Do you actually have control of your funds? Or are you trusting someone else to look after them?

Samantha Yap 17:24

Yes. You have said it before that decentralized identities are key to driving adoption so that operating in the Web3 space becomes commonplace and easier than operating in Web2. You know, can you expand on what you mean, you know, when you say this and why this is important?

Nick Johnson 17:45

I think one of the biggest challenges with Web3 adoption is the usability hurdle because often, you know, Web2 applications are built in the way that maximizes ease of use, even at the cost of- of other factors such as security and safety and self-sovereignty and so when we’re building Web3 application, we labor under additional constraints. But in order to get widespread adoption, to see it adopted by the whole world, we need to not just reach with two levels of usability but go beyond that and go even further and I think that’s achievable. I see applications that are working in that direction but we have a lot of extra challenges there. Nevertheless, it remains our goal that should be the case, it should be easier to sign up for an ENS name than for a DNS name. It should be easiest to set your ENS account up as an email account.

Samantha Yap 18:46

And we know that blockchain technology and crypto has introduced the possibility of growing better financial inclusion and accessibility. How do you think ENS names and it’s link to digital identities or sovereign identities can contribute to this?

Nick Johnson 19:05

I think that improving inclusiveness in the financial system is a- is a crucial goal for- for effectively onboarding the world and also building systems that are less implicitly discriminatory. One of the ways ENS can help with this is that having an ens.eth name is not the only way to have an ENS name, you can have a subdomain. So you could have, you know, my.wallet.eth. You can also have non-dot-eth names that are associated with DNS.

So for instance, Coinbase issues free ENS identities to all of the users and they issue under cb.id. So I could be net.cb.id and all of those are valid ENS names and none of them pay fees to the ENS DAO or require registration or renewal fees. So enabling that and reducing the cost for guests through layer two solutions and so forth, makes this accessible to everyone and ensures that it’s not a case where only those who can afford it have an online identity.

Samantha Yap 20:10

Yes. Yes, that’s a good point. I mean, yes, remember, I created an ENS, a few ENS names in the height of the bull market and yes, it was a little bit more pricey on the gas fees side but yes, I think over time, it’d be more accessible to- to more people. How long do you think it would take for the world to adopt this notion of having sovereign identity that they can fully own and control?

Nick Johnson 20:43

It’s a really good question. In terms of adoption, is, on the one hand, sort of sovereign identity lines up with our expectations around the fact that, you know, if I show up at the- the local cafe five times in a row, they recognize me, and it’s difficult for anyone else to come in and pretend to be me and there’s no, you know, auditor who says, no- no, you can’t pay attention to that, you know, this person’s lost their identity unless you’re in some Black Mirror scenario.

On the other hand, when it comes to actual formal identification systems, things like driver’s license, and passports and so on. We haven’t really had anything equivalent to a sovereign identity up until now. So it’s really difficult to say. It’s an excellent question as to how easy people will find to adapt to that?

I think the most difficult thing is that, ultimately, if you are holding assets, or your identity or anything else, self-custodially, then you are ultimately responsible for safekeeping that and that’s not an experience a lot of people are familiar with. You know, they’re used to recovery mechanisms, they’re used to sort of social, you know, recovery, they’re used to being able to go into the store and show their passport and assert that, oh, yes, I forgot my password and can I- can you restore access, please and all of those things rely on sort of admin overrides, and the ability to override your ownership of your identity, which can also be abused. So I think, for the most part, the ideas around it aren’t alien but the idea of safeguarding it is going to be trickier and a user ability, user experience challenge and we’re going to have to build ways around that like social recovery, if we want to see it universally adopted.

Outro

Voiceover:

It was interesting to hear Nick’s perspective on how the advancements in digital identity is reshaping the way we interact with money.

We also talked about financial inclusivity and accessibility, and how sovereign identity and control over our own digital identities are essential for these goals. ENS has emerged as a tool to link identities, bolster privacy, and ensure accessibility for all.

One of the biggest hurdles to adoption in Web3 and Decentralised Finance is the usability problem. For people to embrace these transformative technologies and actively engage in the evolving financial landscape, the user experience needs to become simpler and more intuitive.

Something that ENS is playing a big part of.

In the next half of my conversation with Nick Johnson, we’ll continue to uncover what Sovereign Identity will mean for the future of money

Outro Spotify

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Rate and follow this podcast to join us for another thought-provoking episode of The Story of Money by YAP Cast.

Outro YouTube

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Listen to this episode on:
Jun 28, 2023

The future of Universal Basic Income with Anna Stone (S3E6)

Can a Crypto-Based UBI System Foster Economic Growth, and Shape the Future of Finance?
In this episode, Samantha Yap continues exploring the practical use cases of GoodDollar with Anna Stone, and the impact of blockchain in empowering individuals and fostering economic growth. Uncover their vision to onboard one million users onto the Celo Blockchain and become a leading force in utilising crypto and DeFi for positive social impact in the coming years.

Join Samantha Yap on a journey to discover the history of money and to better understand why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.

Anna Stone (@TheRealStone) is an accomplished leader and innovator on Web3, strongly focusing on building inclusive crypto products since 2018. At eToro, she provides strategic guidance on Web3 and spearheads impact initiatives that aim to democratize finance through blockchain technology. As the former Executive Director of the GoodDollar Foundation, Anna led efforts to leverage decentralized finance and the GoodDollar UBI protocol, fostering a more accessible digital economy for everyone.

Follow Anna on Twitter at: https://twitter.com/TheRealStone

View transcript

Introduction

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

Universal Basic Income is not a new concept and there have been several experiments with it around the world, but UBI is yet to be implemented on a widespread scale.

I’m curious to learn more about how blockchain technology and decentralised finance introduces a new way of distributing UBI.

Let’s jump back into my conversation with Anna Stone, Co-Founder of GoodDollar, a crypto-based UBI project, as she delves into its practical implementation and touches on the challenges associated with implementing it at scale.

Anna is an expert in the field of technology and social welfare, with a focus on building a sustainable and effective model for a crypto-based UBI.

Empowering Communities with Use Cases and Value

Samantha Yap 28:36

What does one GoodDollar token mean for someone in Vietnam or in Latin America?

Anna Stone 28:52

Okay. Right. So, I mean, I think it’s important for us to like, one GoodDollar are fractions of cents on the dollar. Okay, so one GoodDollar is like, not very much. What I will tell you is that if, let’s say you started claiming, when we first launched and you’ve claimed every day for the past two years, at this point, you would have around $10, 10 US dollars worth of GoodDollars, right? That might not sound like a lot to someone like you or me who’s used to operating in an advanced economy, it might not seem worth your time, okay? But for people who otherwise have no access or exposure to any other sort of US dollar-based currency, or any other source of passive income, this actually becomes a big enabler for people. And I think what’s important to understand is not just what’s the US dollar amount that each individual gets, it’s actually what are the ways that people can use their GoodDollars in their communities around them that enable them to do more activity, right? Like what is the goal of those funds?

The goal of the funds is to enable people to actually buy more goods and services and improve their own lives, right? Like that is the goal, the money. And so even though like, you know, okay, if you claim every day for two years, you end up with $10. It might not sound like a lot until you understand how other people around you; your community, whether it’s a local community, or a digital community provides the infrastructure where, wherein you can use those GoodDollars to do more economic activity than you could have with just the Dollars or the Naira or the Pesos that are in your bank account, right, or that you have attributed to your name. So, this is where the use cases become really important, right?

Impact on the Brazilian Favela Economy

So, we see really, really interesting applications of people using GoodDollar as I want to, say a global digitally native complementary currency. And I’ll give you a few examples.

One is like in a local setting. So, if, we have an amazing community in Brazil that’s led by a woman named that Christiane and Christiane is, she’s always, she lives in one of the largest Favelas in Brazil and Favelas have really interesting circular economies of their own right? Where people are actually rather than transacting using Reals, in this case, people are like, you know, exchanging goods and services, there’s a big barter economy, there’s a big time share economy, etc. And one of the things that Christiane has done is she’s actually moved a lot of that activity on to GoodDollar. So, she has people now.

First of all, she’s hosting workshops that’s focused off of getting hundreds if not 1000s of women and girls signed up in GoodDollars. She has opened up a secondhand shop that now buys and sells secondhand goods for GoodDollars. She has opened up a, actually, I want to say it’s like a fashion line, she makes bags. She works with women to design these bags, where actually there’s a full circular economy in GoodDollar based around that. So, she pays people to collect plastic and trash from the Favela. And she actually then pays them in GoodDollars for separating out the trash, she pays another set of artisans for assembling the bags. And then she sells the bags in her second-hand shop for GoodDollars, right? So, all of those women that she’s on boarded over the course of the past few years, they actually have the currency within which they can buy the bags in the shop. Right? So here’s an example of like, this is when I said money is a tool, right? At the beginning. GoodDollar is actually a tool that is enabling these women to collaborate with each other and these women to put dollar value that has a liquid price in US dollars for a currency that you can cash out into USDC or in Ethereum or Bitcoin and actually create value, create wealth around these activities that in the past was just like being done without any associated capital formation. Right? So that’s one I think, really important example.

Samantha Yap 33:30

That’s a great example. Yeah.

Anna Stone 33:32

Yeah, we love it. Like it’s like so inspiring to see. I’ve never met, Christiane is one of the most incredible builders and entrepreneurs I’ve come across during the course of my career.

Samantha Yap 33:41

Yeah, that’s so entrepreneurial.

GoodDollar’s Impact in Ghana and Nigeria

Anna Stone 33:44

Ah, no, she is unbelievable. And so, it’s like, when we think of who are we trying to empower, right? What’s the goal of GoodDollar, it’s actually to empower someone who’s like Christiane to use this money as a tool to create what’s useful for her own community, the goods and services that are useful for her own community, using this decentralized money infrastructure that we’ve created, right? Or that GoodDollar provides. Another example, I think, is seeing what’s happened with, we have a really, really, as I mentioned, we have really strong communities in Ghana, in Nigeria, and there again, just so many entrepreneurial individuals who have, you know, in Africa, mobile money is a really popular use case. People are really used to interacting with, you know, as a store of value, right?

Well, mobile minutes has actually been used as a store of value and both as a medium of exchange in those economies. And so, we’ve seen many, many, many, I want to say hundreds now, of individuals throughout Nigeria and Ghana who have actually been their own entrepreneurs and again, opened up good dollar for airtime shops, right?

So, where people can actually where their community members, their friends and their families are able to come to them and say, “Here, I’ve got these 50 GoodGDollars, can I get some MTN minutes”, right? And they’re facilitating GoodDollar to airtime swaps, basically. So, people are able to use their GoodDollar UBI to get into data and mobile minutes. That’s another great example. So, it’s like that is because the individuals on the ground have actually been very creative and very ambitious and very entrepreneurial, in terms of creating value around the GoodDollar and creating value around what goods and services are useful for the people around them to use and to be able to buy.

Empowering Community Finance in Cameroon

One last example, which I think is really, really cool, because it relates to DeFi, right? It relates to like, it relates to what is the role of DeFi here, I think. And another amazing community example is actually what we see happening in Cameroon. And so you know, peer to peer finance is actually nothing new when it comes to unbanked populations. Because when you are underserved by a bank, right, like the only people you have around you, or the people around you are your community, right? So, if you or I want to like go to a bank and say like get a loan, we can do that. Right? If you don’t have a bank, like then the only place where you can look for credit is your community. And so, this is nothing, this is nothing new, this is something that’s been happening for 1000s and 1000s of years, that there are all different sorts of community finance innovations that enable people who don’t have access to traditional financial services to essentially pool their capital, use it in a community setting that enables, you know, individuals to actually have money or have access to capital when it’s needed.

One of the most popular examples of this is something called Saving Circles, right? So, getting 20 people today, together, getting them saving their money, you contribute a certain amount of money every week to the group pool. And then the group has a pool of capital where if someone has an emergency, and they need to take a loan, they have it in the pool, or if, or you know, there are different rules of engagement for different types of community savings circles. But this is a very well-established practice, right? And what we see in Cameroon is actually a group that is now taking these very well-established principles and habits and human behaviors regarding community finance, community savings, it’s called Tontine, Cameroonian French, and they are using it in a digital context.

So, they are now saving together using their GoodDollars. And the way they are pooling and deploying the capital is now instead of keeping it as physical cash under the mattress, right? They actually have this money on chain. And they’re able to use it to say, like deploy liquidity and earn fees, and begin to explore using some of these funds, like in other financial products that typically like you have no access to, if you’re just operating in a cash based, fiat-based economy. Because it’s digitally native, not only is it easier for people to save, and collect as a group, but also you’re able to do more and create more wealth off of that, off of what’s the money saved, because you’re actually connected to a larger ecosystem of finance, right? And so, these are some examples.

Again, this is started by like a community leader in Cameroon who came up with this innovation. And now he’s actually, you know, working with a range of different dApp companies that are trying to build community savings apps, and he’s using his learnings and his best practices to inform their product development, right? And so, it’s just another example of like, how you’re lowering the barriers to entry of what it is to participate and how you’re lowering the barriers to entry for who can be a builder in web3.

Samantha Yap 39:15

Yeah, wow, this is, those use cases are so powerful. I mean, we started this conversation talking about UBI in the US and the UK and in different states. But you’ve just launched this crypto based UBI system, and then you’ve just shared a use case in Brazil and Ghana and Cameroon. How did this all come about? Like how did you get the word out? Or did you just, I mean, yeah, I guess everything in crypto right now. It’s like it’s kind of like an experiment, but you’ve done it, so yeah, how did you find all these stories and get the word out about GoodDollar and then understand what, how to use it?

GoodDollar’s Approach to Global User Acquisition

Anna Stone 40:03

So first of all, I would say is that like, regarding like, getting started, we were really adamant about the fact that like, there was no way of knowing all the things that we would know, that we would need to know upfront. And that the best thing to do would be to, let’s say, try to make smart decisions around how we hope the currency would function and then get started and see how people use it. Right?

So, I think from a builder perspective, we tried really hard to understand like, very responsibly, like, if we’re going to be giving out tokens, how do we want those tokens to behave but then also not being, let’s say overly academic or overly didactic around, there was no such thing as a perfect UBI model, there still is no such perfect thing as a UBI model, right? So not being fazed by that and trying to get started.

Regarding user acquisition, first of all, like I said, it’s there are countless millions and millions and millions of really talented, ambitious, hardworking people who exist all over the world who were just born not necessarily in the right “coordinates” and actually are looking to crypto as the onramp to their greater financial future, because they are paying attention, right? Just like how people in the US are paying attention and see crypto and Decentralized Finance and blockchain as a pathway to creating a new asset class and creating new goods and services. Guess what? People all over the world are paying attention to this and particularly people who have no existing payment rails or no existing savings accounts. Like you don’t have to tell them the value of crypto, they understand the value of crypto, can they, do they have money? Do they have access to it? Is it easy for them to begin to access the asset class? That’s a different question. Right? But like, do people understand that you underbanked people who are unserved by traditional financial services and who have no assets? Do people understand the value of crypto? You bet they do? Right?

So, like, that is not the problem with the sell, if you will. I’d say, how do we know these people? Like how do we know What their needs are? How are we building for them? Um, we’ve, like GoodDollar’s not a new project, right? I think this is where having some longevity in the market and having had the time to build out like a pretty robust community and getting to know that robust community and building that trust really comes into play. We’ve tried really hard to make us, our community as open a place as possible, and to make like the core team, “as accessible as possible” to the community. You know, we host open community calls, it’s always fascinating to see you who joins from all over the world, we have, like, you know, we meet people, they show up, they ask us their questions, they want to share what they’re doing, like, we’ve tried really hard to, you know, to do our best to make ourselves easy to find and trusted figures in terms of people approaching us. Having said that, like, you know, there are a lot of challenges, right? Like, we’re a really small team, we’re serving a ton of different users. The journey and financial empowerment journey is completely and totally different whether you’re talking about Brazil, or whether you’re talking about Ghana, or whether you’re talking about Indonesia, right? Like, across every level, right? The income levels are different. The bank, the existing infrastructure and banking system is different, the currency is different. The levels of inflation are different. What fiat off-ramping means is different, right?

So, there’s like, a lot of challenges, both product and communication that come from operating so globally. But I think the flip side of that is that we see people all over the world doing amazing things with GoodDollar in different countries. And so like, we’re trying as much as possible to empower the local teams and empower the local ecosystem so that, you know, that can kind of, we can deal with some of the scale challenges we’re facing.

Exploring Partnerships for Crypto UBI

Samantha Yap 44:40

Yeah, cool. Has GoodDollar been received by any organizations or governments that are working on poverty reduction or financial inclusion? Have you had any interactions with?

Anna Stone 44:54

So, it’s a great, it’s actually one of the things that we’re working on today. And it’s one of the areas that we’re the most excited about. So, I’d say that most of our activities today were really focused off of like, standing up the primitive of the system, getting a working protocol up and running, getting the wallet up and running and trying to understand, let’s say some of the existing bottom-up community use cases around GoodDollar. It’s taken us two, three years to do that, right. And that’s been our work, that’s been our work to date. Now we’re at a really exciting point in time where I think we’re starting to feel like we’re starting to feel like in a much stronger conf, more confident place where we can really begin to work effectively with partners.

So, whether these are partners, that actually saw it, like accept GoodDollar as a form of payment for goods and services. So, we’re, for example, we’re working with one company that does solar panels, and we’re going to do a pilot focused on Rwanda, where people are going to be able to pay for their solar panels using their GoodDollars. So that’ll be a huge milestone for us. So, goods and services is we have a range of different pilots that we hoped to do with other goods and services providers this year. And we also have a range of different, I want to say, we call them segmented UBI deployments, but basically like a, you know, deployments of GoodDollar into specific communities that are being administered and run by different NGOs that are testing different things.

So, we have one NGO that’s focused off of understanding what’s the impact of a UBI deployment on environmental sustainability activities. We’re hoping to pull together another pilot that’s focused off of refugees, right? So like, refugees come in, and then they leave. And so how do you know what happens with the money you give them? How do you continue to give money to them over time, right? So that’s another pilot, we’re pulling together. We’ve also been working, there’s a fascinating experiment being put on by a community member in South Africa. That’s actually, she’s a former member of parliament, and she’s actually running her own GoodDollar UBI experiment in South Africa, where she gives a set number of participants $90 worth of good dollars a month and seeing what ends up happening with their journey. So, this is the type of work that like, now that we have, let’s say the fundamentals of the system set up and we have some track record, we’re really able to, we’re really able to like, you know, think more about how do we add more value to this ecosystem, and enable people to use GoodDollars in more exciting real ways.

Samantha Yap 47:49

Yeah, it sounds like, you know, even just you building the, you know, like you said, the fundamental infrastructure, you’ve all these use cases, you’ve made, you know, progress here in terms of, you know, trying to implement, well implementing this crypto based UBI system. I’ve got two more questions:

Stability and Innovation for a Scalable UBI System

One is more technical. So, we’re speaking at a time where, I mean, the crypto market is very volatile. We’re speaking at a time where we’re in a bear market, and also there’s just financial uncertainty. We’ve just come off like a whole few weeks of bank runs, Silicon Valley Bank collapsing, you know, UBS acquiring Credit Suisse. So very drastic moments in finance. Does the UBI, does the value of the GoodDollar is it impacted by the market? Because with, you know, like you said, you tap into DeFi protocols, so probably there’s, you know, there’s pools of money in DAOs that, you know, you’re able to kind of, yeah, that is difficulty in transactions but how’s it going right now?

Anna Stone 49:03

How’s it going with the price? Okay, so, it’s a great, great question. So, when we knew we were going to create a crypto asset to distribute the UBI in, it was really important for us that the, that GoodDollar token itself didn’t perform like a lot of the other tokens that we were seeing in the market. And so, the majority of those like that, we would, I mean, I break those down into basically two categories. It would either be, you know, you have your super volatile tokens, right? Your ICO tokens, the tokens where you know the price is completely correlated to who’s buying and who’s selling in a retail open market. And then you have your stablecoins, right? Which are designed to be like a refuge from those super volatile assets. And so, we saw what was going on there, and we realized that like, we didn’t want to be in either bucket, right? That a UBI token, in order for like a UBI token to work at scale, you would need it to be liquid.

So, you would need people to always be able to convert it into a desirable currency – for the world that’s dollars, right? So that would be very important. It would you have to be liquid to US dollars, you would have to be stable enough. Okay, so I said, like, why? Because you need the incentive for people to actually hold GoodDollars and continue to try to enact in GoodDollars. So, you don’t want it to be a token that’s so volatile that the price is all over the place. But you do want there to be some price incentive or positive price pressure that, you know, creates the incentive for people to hold it and to work around it and to see the value there. And you would also need for it, I said stable enough, and I said liquid, stable enough. And it would have to be designed to circulate. Right? So, we wanted it to be those two principles for us were key to like creating a currency that people actually could build around, we knew that no one wanted to be the guy who spent 10,000 Bitcoin on pizza, right?

So, you need to create some sort of predictable, you need to create some sort of predictable, well, it’s actually up into the right is this way, right? Some sort of theory of change around how do you want your currency to work. And so that actually like is key to the tokenomics of GoodDollar was how we built that system. And so, the way we did it was that GoodDollar is a reserve backed currency, and there are stablecoins that sit in the reserve, which means that there was no ICO, there was no big issuance, so nothing, essentially, it’s a balancing of demand for the currency, drives the supply of the currency. And so as new money is added into the monetary reserve, you got GoodDollars are issued, and they go primarily to support UBI. But they also go to support the operations and the incentives of the protocol anyway. And so, we used, one of the things in DeFi that I think a lot about is actually, a lot of what we’ve seen today is smart contract or software enabled versions of existing financial services products, right? Like that’s a lot of what DeFi has been, it’s been like, oh, let’s create a savings and loans product, oh, let’s create a derivatives product. Oh, let’s tokenize stocks, right? So, like, a lot of DeFi has actually been like a software approach to existing financial assets.

And I think where DeFi actually gets really interesting is like, how can you use those financial primitives of software to create new things that actually aren’t possible because of the existing financial system. And so, I think like, you know, one of the best, one of the coolest best inventions ever of DeFi has actually been automated market makers or smart contracts that can trade against themselves. And so, in GoodDollar, as a token is actually an automated market maker. And that’s the technology that we use to create that issuance flow, which was, I think, an example of us using this new financial primitive, which is like a smart contract that can mint and execute trades against itself in a really innovative way, which was to, you know, create UBI at scale. I’m gonna give a shout out now to like the Bancor protocol And the Bancor team, because both myself and Tomer, who are authors on the white paper, we actually first worked at Bancor, and they were the first protocol to create automated market maker and decentralized exchange and that origin story.

Samantha Yap 54:02

Wow, yeah. So, you played a part in creating automated market makers. Wow.

Anna Stone 54:10

Yeah. So, but that technology, that financial primitive is a great example of how we can use innovation to tackle old problems in new ways that are only practical or only possible, because we’re operating in a pub- in a blockchain network. Right? And I think in DeFi we haven’t been creative enough quite frankly. We’ve like suffered from a lack of creativity, where it’s like, oh, everyone’s motivated to create like, the next big savings and loans product. Everyone wants to like create like, you know, we’re looking at the existing financial services and being like, oh, what’s the decentralized version of that? I feel like that’s a very western world way of looking at the potential for DeFi which is versus actually, let’s say, coming to it from a problem perspective of like, what is the problem that we’re trying to solve here, whether it’s like offering a decentralized payment solution, or whether it’s like, through getting assets to new people, or whether it’s like, and if you’re coming to things from a problem perspective, I think we can use the tools of DeFi a lot more creatively.

Samantha Yap 55:26

Well, I love the way you think. And you really are innovating. And it really comes back to the response that you had to my first question of what is money because you really do see as technology and I can see that crypto and blockchain technology has really led you on this path to think of really innovative ways to change the world and create money as a public good. So, to kind of wrap up this conversation what’s our dream, or your hope for where you want to see GoodDollar in the, you know, next five years?

GoodDollar’s Five-Year Mission

Anna Stone 56:02

Wow, in the next five years, so I’ll talk about that the next year, which is like, the next year is like we just launched the protocol on the Celo Blockchain, we couldn’t be more excited to be there. We are just so excited to like, connect our members who have GoodDollars in their wallets to all of the dApps that are actually designed to like serve, let’s say, a mobile first emerging market use case.

So, we’re working really hard to make 2023 the year when we get to a million users on a GoodDollar protocol. And so that’s like, that’s our first goal, we’ve onboarded around half a million to date, we’re really optimistic that we can like, bear market, bull market doesn’t matter that we would, we’re going to be able to turn it on and achieve that goal. I’d say in the next five years, what I hope for is that one, like GoodDollar has actually contributed- has made a really meaningful contribution to all of crypto and all of like, the all of our industry and improving an example of how Blockchain and crypto can actually be used for positive social impact on the world. Right?

So, I think this is to the good for all of our industry, if you will, is to actually enable people, you know, enable ourselves to dream and to remember, like, what is possible, and like what attracted so many of us to this, in this industry. And it’s that, the technology really is transformational and worth fighting for. But we all need to remember, like what that means, right? And who we’re helping. And so my hope is that like, is that we don’t work, you know, I work in this space, we’re all looking for good examples to keep us motivated and to keep us going. I hope that like GoodDollar will be a flagship example for all of crypto and really all of the world of like, why crypto matters, and why DeFi matters and why it actually enables us to make progress. And with that, I hope, you know, we have like, I don’t even want to name a number, but like we’ve already impacted a number of people, right, around the world. But I want to look past that, right? Like, I hope that GoodDollar is like, at the end of the day, this is technology that’s meant to help people and it’s not just to provide a good example. It’s actually to really empower people. And I hope that like, we’re not talking about the 100 changemakers that we’ve helped or that provide great examples. But we’re talking about millions of people around the world that have actually been able to use GoodDollar to improve their lives. And it sounds idealistic, but I actually think it’s quite achievable, and very, very motivating.

Samantha Yap 58:57

That’s very inspiring. And I look forward to seeing, yeah, what you achieve with GoodDollar this year and in the next five years. So, thank you so much, Anna, for joining me on YAP Cast.

Anna Stone 59:10

Thank you so much, Sam, for having us and letting us talk about our work.

Outro

Voiceover:

That was Anna Stone, Co-Founder of GoodDollar sharing the real world use cases and challenges of implementing a crypto-based UBI.

I know I learned a lot about the potential benefits of using blockchain technology to create a decentralised and transparent way of distributing wealth, but it’s clear there are challenges of scaling up such a project and ensuring that it reaches the people who need it the most.

Big kudos to Anna for embarking on this ambitious project, which sounds like it has huge potential if more people can understand it and see value in it.

Outro Spotify

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Rate and follow this podcast to join us for another thought-provoking episode of The Story of Money by YAP Cast.

Outro YouTube

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Share this episode and subscribe to this channel to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Jun 21, 2023

Can we have Universal Money? with Anna Stone (S3E5)

Can Blockchain and Crypto Create Financial Inclusion? Exploring Universal Basic Income and the GoodDollar Project.
In this episode of The Story of Money, Samantha Yap talks to Anna Stone, the co-founder of the GoodDollar protocol, about the transformative power of blockchain and crypto in achieving financial inclusion. Explore how the GoodDollar project, supported by eToro's Yoni Assia, leverages blockchain technology to create a global and member-owned UBI model, revolutionizing financial inclusion.

Join Samantha Yap on a journey to discover the history of money and to better understand why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.

Anna Stone (aka @TheRealStone) is an accomplished leader and innovator on Web3, strongly focusing on building inclusive crypto products since 2018. At eToro, she provides strategic guidance on Web3 and spearheads impact initiatives that aim to democratize finance through blockchain technology. As the former Executive Director of the GoodDollar Foundation, Anna led efforts to leverage decentralized finance and the GoodDollar UBI protocol, fostering a more accessible digital economy for everyone.

Follow Anna on Twitter at: https://twitter.com/TheRealStone

View transcript

Introduction

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

The utopian idea of a universal basic income has been around since the 16th century.

Universal Basic Income or UBI is often a government policy that regularly provides every citizen a fixed sum of money with no strings attached.

Today it is seen as a social welfare proposal with the aim of providing a basic standard of living for all members of society and addressing poverty and income inequality.

In Kenya, there is a charity called GiveDirectly running a 12-year pilot basic income program in some of the poorest parts of Kenya, Malawi and Liberia.

It is the world’s largest and longest-term test of a universal basic income program and has proven to have benefited public health in the villages

Similarly, in Finland, a two-year UBI trial was conducted where unemployed people were given a monthly stipend. Although the program did not significantly increase employment rates, participants reported feeling less stressed and having greater trust in social institutions.

This makes me wonder, what would UBI look like with digital currency?

In this episode, we have the pleasure of speaking with Anna Stone, Co-Founder of GoodDollar, a crypto-based UBI project.

Anna is an expert in the field of technology and social welfare, with a focus on building a sustainable and effective model for a crypto-based Universal Basic Income. She’ll share her insights on the impact of technology on social and environmental issues and the potential of UBI to address inequality, poverty, and economic instability.

Pioneering Financial Inclusion Through Crypto

Samantha Yap 00:00

Hey, Anna, thank you so much for joining me on YAP Cast. Really excited to talk to you today.

Anna Stone 00:05

Sam, I can’t wait to be here. And thank you for inviting me. And we’ll get into all things crypto, emerging markets and mass adoption.

Samantha Yap 00:14

Yeah, let’s do it. So, I like to start this podcast by asking my guests. What is money? So, what is money to you?

Anna Stone 00:25

What a great question to kick off your podcast with. So, you know, one of the definitions of money that I like to use, or at least resonates with me is that money is actually a technology that enables us to collaborate with each other. Right? So, money, in many ways is like, it’s a technology that we use, that enables us as humans to be able to do things productively, right? And with alignment, and with a sense of, let’s say, shared vision around and a shared language around facilitating that collaboration, right? And so I think, you know, there are obviously, the technical definitions of money in terms of store of value or unit of account, medium of exchange, etc. But I think that when I think of money, I really think of it as a technology that enables people to collaborate and do things together. This is actually very true to the origin, I think of like why money came to be? Right? And we know that in ancient societies, well before, there were countries in nation states, people used all different sorts of, let’s say, natural resources, or, you know, non-traditional money – what we don’t think of today as money, as money, right?

So, people would use shells, they would use materials, they would use spices, they would use all different sorts of valuable assets that would enable people to like collaborate. I’ll give you this shell, you give me a ride on your wagon? Right. And this is the origin story of money. And I think, you know, as we think about what role do we hope like an alternative money system is going to play, right? So crypto, it’s actually, I think a lot of it is like, what are the tools that are going to enable us to do more interactions with one another rather than any one of the formal definitions, but how actually, can this technology change and improve and increase how we collaborate as people?

Samantha Yap 02:46

Yeah. Right. I like that. So, a technology. That’s a great response and great start to what we’re going to delve into. Before we do that, can you tell us a little bit about your background? You know, your experience in Big Data to AI, and then what led you to start GoodDollar. So, do share a bit about your background.

From Economic Development to Blockchain Revolution

Anna Stone 03:10

Yeah, so I have to say, I’ve always been on a mission. I’ve always, I described myself as a recovering idealist and which means that, you know, doing stuff with mission has always been a part of who I am in my professional journey in a way, which is that I actually started off working in nonprofits. This is like, you know, many, many years ago now, but specifically in the areas of economic development, and seeing how economic development and access to money and access to some sort of financial security is really the ground to stand on for so many other issues when it comes to health outcomes or security or even gender rights, like money is, money and financial security is something that underpins almost all of the other social issues, right? And so I’ve always come to, you know, like my early career and working in economic development in some of the big nonprofits like that, that has stuck with me, if you will, throughout my entire life is that like, if you financial security and people being able to feel like their basic needs are covered for is actually what enables on those second, third quarter, you know, level benefits that enable people to achieve their dreams and live better lives, right?

My, funny enough, I actually, like went to graduate school, and this was a time where microfinance was really at the front and center of, I want to say, the economic development in the impact conversation, right? So microfinance is this concept of how are we actually going to get credit and get capital to kind of like last mile communities that are suffering from inabili- like a lack of access to capital, which we, you know, see as really critical to producing productive economies, Capital Credit, etc. And so, I originally was really, I got interested in microfinance. And that actually led to my interest in FinTech in general. So, this was a period of time when around 2012 Visa and MasterCard were, you know, doing a lot of research and thinking a lot about how are we actually going to bank the unbanked, right? And so, I was always fascinated with this area, wanted to work in this area, had some opportunities to but actually decided to move abroad. And I moved to Israel, which is the startup nation, and there was a lot of different types of tech happening there. But one area where there was not, you know, so, so much happening, at least at that moment in time was in terms of retail, consumer finance.

And so, I kind of went in a different direction. I started working in an enterprise tech firm, I, we were selling enterprise level Big Data and AI solutions to executive decision makers at the Fortune 500. And you know, that was a great, great school, if you will, in terms of working in tech, it definitely created a really strong business development, and marketing communications background was really, really useful. But in 2017, I had an opportunity to, you know, kind of like a moment where I was looking off at my career, and I’m thinking like, what am I going to do next? And I started, that was the beginning of my crypto journey.

So, it was at this period of time that I started to learn about what blockchain was, I started to understand what is this ecosystem? What is Bitcoin? What is an Ethereum? What are all of these projects that are trying to build on top of Ethereum? And for me, I was, you know, it was like instant love, right? So, I was like, oh my god, this is the technology that is going to enable the financial inclusion that I’ve been thinking about for the past 10 years of my life and wanting to work on and like, this is the thing that has, actually has the potential to take our existing financial services industry, and not revolutionize it. Okay, but actually begin the evolution of solving for some of these big, big problems we have around how do we actually provide financial services to people? And how do we provide financial services to people in an open model where they’re actually enabled by their mobile connectivity and their cell phones, right?

Samantha Yap 08:06

Yeah.

Anna Stone 08:07

And so, for me like working in and I’ll talk about my first jobs in crypto, because it’s also fascinating, but I discovered blockchain and crypto in 2017. And it was, I was totally, totally fell in love with the potential and the transformational potential of the technology. And it’s been a heart, you know, working in crypto pulls at your heartstrings which we can also talk about in terms of the journey there. But for me, I was hooked. And I knew that this was going to be, this was going to be what I did for like, 20 years, if not longer. And it’s been there…

Samantha Yap 08:49

Yeah. Yeah, I love that. I love that you, the way you shared that, that you were totally hooked. I think I had a similar journey as well and it was in 2017 as well. And so yeah, you’re telling me that what really got you hooked into crypto is the potential for it shaping the way money is being used and also deployed. Right? It’s all about the transformation of how money is being used. I think that’s what’s exciting.

Anna Stone 09:23

Exactly. And what is money, right? To the original question of what you started about, like what is money-

Samantha Yap 09:28

Yep.

Anna Stone 09:28

Right? And I didn’t mention this as part of my origin story, but like my graduate degree was the first time I really got into unders- like macroeconomics, right? And really started to look into and dig into this question of like, how is money created? Like, who controls money? What is money? Right? And I have to tell you, that my experience of like I want to, it’s almost like the, a deflowering in a way of like understanding or like the peeling back of the layers. And understanding that not only, you know, because I was coming to this from a position of inequality, right? Like, coming from an economic development background and trying to, you know, enable people who are living on $5 a day or $10 a day, right?

And the realization to me that, like our current economy and the way capital flows, and the fact that there are winners and losers is a feature and not a bug of the existing money supply, for me was something that I could never unlearn. Right? Once I understood what interest-bearing money was, and that this was something that actually was money that was created by banks to charge us the ability to use, right? I, for me, that was like a really pivotal moment of understanding around why in the existing, in the existing modern monetary theory, and with the existing financial services structure, you would never meaningfully solve for inequality, because actually, capital collating in places where it’s not used efficiently is how, it’s a feature. It’s not a bug, right?

So, this is something that has very much both motivated me to understand the like, to really appreciate, what does it mean to separate money from state? What does it mean for there to be a user owned network? What is the role of an asset in terms of incentivizing the setup and operations of such a network? And how could we actually design that in such a way that individual people benefit, and the individual people that benefit are those that are most in need of basic financial services and new assets? Right. And so this, that was very, very critical to my journey, was actually understanding what money, money is learning about economics in a traditional setting, then coming to cryp, then, you know, blockchain, learning about it from that lens. And understanding that both at the access level and the asset level, blockchain represented a whole new world of what’s possible.

UBI: Promoting Financial Security and Inclusion

Samantha Yap 12:55

Yeah. Well, if we’re gonna, you know, touch on a area that you have built a project in, it’s on Universal Basic Income. So, could you explain what is Universal Basic Income?

Anna Stone 13:12

Yeah, so Universal Basic Income is actually not a new concept. It’s an idea that’s been around since the 1600s actually, and the idea is, how do you actually provide like a baseline level of, standard level of income to any person in society, so that they can support you know, like, live their lives, right?

Um, and there have been over, let’s say, the past few centuries, many, many different experiments done with basic income, very many different proposed programs. Probably the most well-known or the most popular, or that really brought like, awareness to this was actually in the, wow, was it 2016? The, wow, that’s a long time ago, like Andrew Yang running for president in 2016. He was popularizing the UBI program that was $1,000 a month for every single American. Right? And that’s a long time ago. But there’s also been some really interesting in the US, some really interesting pilots in Stockton, California with the mayor’s coalition.

There’s a run, there’s a range of different UBI experimenting, experiments running off in American cities that are focused off of like, getting money to people, right? And so, the premise of UBI is that just for being a human who’s alive on this earth, you will receive an unconditional income that will enable you, you know, that essentially is designed to cover for some amount of basic needs. And there are many, many different UBI experiments that have been run from rich countries to poor countries and every level in between. And what those studies have found every single one of them is that UBI having some sense of financial security, whether you’re in Kinshasa or in Stockton, you know, has a positive outcome and brings positive externalities for the people who participate in this program.

People feel, you know, they have health, positive health outcomes, positive mental health outcomes, positive outcomes regarding their own career development, right? And so, you know, there’s, one of the big criticisms of UBI is like, oh, well, you give people money, and they’re not going to work anymore. Right?

Samantha Yap 15:44

Yeah. Yeah. I was gonna ask about that.

Anna Stone 15:46

So, this is like, one of the criticisms that UBI comes under is like, oh, what you’re gonna give people money. And then they’re just gonna, like, sit around and you know, basically live off of the state, right?

Samantha Yap 15:55

Yeah, like, what if they spend it on drugs or like alcohol? Yeah.

Anna Stone 16:00

And I think one of the things that UBI, that was well-established, before our work started, was that UBI, at any level, in rich and poor society is like, actually, is not used on drugs, and it’s not used on gambling, it’s actually used to facilitate people leading better lives and actually provides the, some amount of security upon which they can begin to dream and scheme, if you will. And so Universal Basic Income is a long-standing concept. It also has traditionally been proposed on like a per country and a governmental level. Right? So, as I mentioned, I brought up Andrew Yang, I brought up in his campaign in the US, there’s been some popular campaigns for UBI programs from the Labour Party in the UK. And, you know, UBI is not a new concept.

But there’s some real challenges with it, particularly when you think of administering it in a government setting, which is first and foremost, like, you need a, you need an advocate that is going to have the political will and influence to take on reshaping the entire social services of a particular country, because like, there are existing social services and UBI is often proposed as a replacement to that. And so, from our perspective, or from my perspective, and the team that we’ve worked with, it’s like, waiting for a government UBI was waiting for Godot, right. Like you’re never it’s not gonna happen. Because if you look at what’s happening in politics, at least in the United States, or, you know, any country really, like, very few, we’re just not set up to institute that sort of like large scale change. But, um, you know, Yoni Assia and the team at Ian, who’s the founder and CEO of eToro, that has really sponsored a lot of the work behind GoodDollar. He was the first person to be like, let’s think of what a non-governmental UBI could look like that’s actually global and owned by its members. And I think that’s a great reason why we at least started to explore this mash up of blockchain in and Universal Basic Income.

Samantha Yap 18:22

Yeah, that’s so fascinating, because, yeah, when you’re explaining that to me on a maybe a governmental level, to sounds like there’s a lot of bureaucracy even to just get laws passed and things done. So Universal Basic Income would be, it sounds very utopian to me and ideal. So yeah. So like, yeah, can you just, you know, share how did you come about? Like you said, one of the co-founders of eToro? How did you come about, like thinking about how crypto and blockchain technology could enable this and leading you to start GoodDollar and share a bit about GoodDollar?

About GoodDollar

Anna Stone 19:00

Sure. So, as I mentioned, like myself, personally, I was already at this point, like a converted believer that blockchain was the transformational technology that was going to enable us to like rethink financial services and open finance and who benefits from those, and who those serve, right? Again, I was far from, I’m far from the only person who like has landed at that same point, right? And good. And so that, and those are the people that we tried to bring in to build the GoodDollar. And certainly the team, the team that we brought together to kick off GoodDollar, I think represents people who believe that The original concept behind GoodDollar or a global UBI system, as I mentioned, was the idea of actually Yoni Assia, who is the founder and CEO of eToro, and a long standing idea that he had around, how could you actually use public networks for public goods, right?

So, Yoni was an early Bitcoiner and a true believer. And I think the power of creating a public network that would be public infrastructure that anyone could tap into, and ultimately was a huge wealth generator for many, many people around the globe and spurred a tremendous amount of goods and services. All of the crypto industry today is built off of was in many ways like kickstarted by the Bitcoin network, and this concept of public networks for a public good.

And I think the design principle that Yoni really wanted to test or to challenge was, how can you create a network that actually, you know, the Bitcoin network rewards its miners, right? Those are the people that it rewards, the people who are contributing value to creating Bitcoin and securing the network, right? And Yoni really challenged himself and I think, and us who work with him, by extension, to think about how could we create a network where actually the value is generated by individuals or communities that, you know, build around this currency? And not just the people who are able to set up mining fields, right? So, what would that actually look like for individuals in the way that they use the money to create the trust in the network, to create the sense of consensus and value in the network.

And Yoni also was a big believer in this concept of Universal Basic Income. And so, he actually with this idea, with this like, with this crazy kind of like idea, he committed real resources to actually advance this research. So, like, could we actually create a scalable, sustainable, Universal Basic Income system that rewards the people who use it, if you will, like using blockchain? And what would that public network look like? And, um, how would we do it? Right? So, Yoni like, brought in a team of professionals, of which I was lucky enough to be, you know, one of the core members there, we also have an excellent technical partner, Hadar Rottenberg, and we had a great protocol partner, Tomer Bariach. And he came and we came in and took this challenge and said, okay, like, there’s this thing called Decentralized Finance that has been created over the, this is in 2018, right? So, there’s this space of 20, in DeFi, there’s all this money that’s happening on chain, there’s all of this different innovation around wallets and how people actually can interact directly with the blockchain, how people can receive assets on the blockchain. And that research and that thinking around where there were opportunities to 1) get money to people at scale. And I think most critically solve for that really critical economic question of like, how do you pay for UBI, right? Because it’s a great idea, in theory, like free money is a great idea in theory, but actually, how do you pay for it, right?

And so, there’s, we tried to be really creative and creating a GoodDollar protocol and saying that there’s all of this money out there on Blockchain, there’s all different sorts of sources of money and funding, etc. What we need to do is channel all of these little microtransactions, towards a productive Universal Basic Income. And so that’s actually what the GoodDollar protocol is, it’s a new standard for free money as a public good, that is distributed every single day to members that are signed up to receive it. Anyone can sign up and become a member, and anyone can integrate their token or their protocol to actually help fund the UBI. And so, it’s designed to both, you know, to be a really powerful use case of both how can we use crypto for good, how can we use blockchain to, and decentralized currencies and economies, to empower people who otherwise don’t have other onramps and actually advance this question of people using UBI at scale?

GoodDollar: Exploring Blockchain-Based UBI

Samantha Yap 24:34

Yeah, no, thanks for explaining all that if you could paint us a better picture – who is using it right now like who are some of the adopters of GoodDollar and can you give us, I don’t know, I know in crypto, prices fluctuate but what’s the dollar figure? What are people getting every day? And how are they receiving it? Just, yeah, you can shed more light into that.

Anna Stone 25:03

Sure. So, we originally launched the, we launched the project, the first like iteration of the project in the spring of 2020. And what we laun, or summer of 2020, deep COVID. And one of, and when we launched, we launched with a few components. The first was a very, very basic wallet that people could use, where people could basically very simply and easily create a noncustodial wallet, they could do so through using web2 credentials. So, you could create a web3 wallet that was linked to your Facebook, your Google account, etc. And that was your Good Wallet. And that was the smart contract account within which you could be, you could receive GoodDollars, okay?

We also launched the protocol, which was actually the minting or the issuance of the GoodDollar token, which again, we distribute a certain amount of GoodDollars divided equally across all members of the ecosystem, or all members every single day. And so those are the core, we figure those are the core components of like, let’s say, a UBI system. You need a wallet within which you could receive it, and you need the money that’s coming every day, which is the protocol layer. And since we launched that, we’ve on boarded over half a million people into the Good wallet, which makes them all GoodDollar members or people around the world who have GoodDollars in their wallet.

Samantha Yap 26:34

Where are they from? Like, where are these people from?

Anna Stone 26:37

Over 181 countries. So, we actually have users –

Samantha Yap 26:42

Wow.

Anna Stone 26:42

Yeah, we have members who come from almost every single corner of the globe. And what’s fascinating is actually seeing where are the countries where, where retention happens, where users come and they stay and they continue to claim every day. And on top of that, now, two, three years down the line, people are starting to build amazing things based off of the GoodDollar system, right? And so, you know, our top countries in terms of where our strongest global communities are definitely in Nigeria, Ghana, Cameroon on the African continent. We have really strong communities in Southeast Asia. So, throughout Vietnam, India, Bangladesh, we have, you know, 30,000 users a day, in each one of those countries sometimes, and then throughout Latin America. So, Brazil, and then alternating Spanish speaking countries throughout Latin America have been popular in Argentina, Venezuela, in Cuba. And so these are places where, you know, for the most part, you have people who, first and foremost, everyone is very digitally connected, because everyone has a smartphone. Right? And they’re primarily, you know, they have relatively high degrees of education, right? People are really well educated in these countries. And what’s missing is not motivation, or ambition, or talent, what’s missing is money, right? And so, what you see is that people are unbelievably creative around creating real value around the GoodDollar and creating these use cases, that actually serves the needs of their own communities. And I’m gonna give you like, a few different examples here. Because I know people are so hungry for the use cases in crypto.

Outro

Voiceover:

It excites me to hear of communities scattered around the world not just experimenting with crypto-UBI but also creating use cases that can serve the needs of their own communities.

We often talk about money and crypto in abstract and hypothetical cases but I appreciate that Anna had tangible, real stories to share about how crypto is being adopted in places like Nigeria, Bangladesh and Cuba.

In our next episode, we’ll delve deeper into the use cases and real-life examples of how GoodDollar has been adopted as well as the challenges that come with implementing it at scale.

Outro Spotify

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Rate and follow this podcast to join us for another thought-provoking episode of The Story of Money by YAP Cast.

Outro YouTube

Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Share this episode and subscribe to this channel to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Jun 14, 2023

The Future of Crypto Regulation with Nikhilesh De (S3E4)

What Does the Future Hold for Crypto Regulation? Navigating the Complexities of Regulating a New Asset Class.

Samantha Yap continues her conversation with Nikhilesh De on crypto regulation. They discuss the challenges regulators face in keeping up with the fast-paced industry and the potential for clear and explicit regulation of the crypto industry in 2023.

Join Samantha Yap on a journey to discover the history of money and to better understand why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.

Nikhilesh De (@nikhileshde) is the managing editor for CoinDesk's global policy coverage of the cryptocurrency industry. He has been covering cryptocurrencies and blockchain technology since 2017 and has become a well-known and respected voice in the industry. Nik's reporting has provided valuable insights into the intersection of cryptocurrency and regulation, making him a highly influential figure in the industry.

View transcript

Introduction

Voiceover:

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

We’re jumping back into my conversation with Nikhilesh De, managing editor for global policy and regulation at CoinDesk, a leading news and media platform covering the digital asset and blockchain space.

Etched on the Genesis Bitcoin Block is a message that reads: The Times, 3rd of January 2009 ‘Chancellor on the brink of second bailout for banks.

It was the front-page news story of the British newspaper the day the first ever Bitcoin block was mined. The mysterious Satoshi Nakamoto never explained why he left this there.

Perhaps it was to signify the beginning of the end of people relying on banks and governments for a bailout.

What this move also marked was the beginning of the tension between financial regulation and the innovation behind cryptocurrencies.

While governments are still able to control the development of Fintechs – Bitcoin and other decentralised cryptocurrencies – introduced a new dimension to the financial system – one that is free from complete control of any government.

Join us on this episode as we chat about how crypto regulation is unfolding and hear from Nik, the very person on the frontlines of covering regulatory developments for crypto as a journalist.

Navigating Crypto Regulation and Bankruptcies

Samantha Yap 28:42

Where do regulators even begin? And how do you keep up with all these different parts to what this technology has introduced?

Nikhilesh De 30:13

I will say regulators have a slightly easier time of it there. Because, you know, a lot of regulators –

Samantha Yap 30:18

Easy? Wouldn’t it be harder for them?

Nikhilesh De 30:20

Well, easier in the sense that you have a different regulator for each aspect of this. So, the IRS taxes, you know, handles tax issues, the CFTC handles commodities. You know, we have three bank regulators at the federal level, plus Banking Finance regulators at the state level, at least in the US. So, it is slightly easier in the sense that they all have their own specific niches that they can look at, and they don’t have to worry about necessarily some of those other aspects of crypto. As a reporter, I get the privilege of looking at all of these things.

Samantha Yap 30:58

Yeah, it’s a hard task for you to keep up.

Nikhilesh De 31:00

There’s so much news. And yeah, it’s interesting, too, because some weeks are quieter than other but some of those busy weeks you have, you know, the different agencies coming together and saying, okay, well, we all have these different views and we’re going to say or do XYZ. It’s obviously gotten more difficult since the bankruptcies began, because now that’s also part of what we cover and a huge part of that is you’re seeing in these bankruptcy proceedings, questions about how exactly the users of the bankrupt companies, mostly crypto lenders, but couple other exchanges and stuff, you know, how are they going to get their money back? And what are they going to get back in the form of? Are they going to get back crypto, are they going to get back the US dollar equivalent, or the local currency equivalent of the amount of crypto that they had at the time the lender or exchange collapsed? And these are some ongoing questions. We’re not even going to get I think, any kind of real precedent from this, because it’s looking increasingly likely that each and every one of these companies is going to have a different type of resolution.

So, Voyager Digital, for example, went bankrupt last July. And a judge just approved a restructuring plan in which Voyager’s assets get sold off to Binance US. And so, you know, there is a written plan that explains exactly how customers might get back their funds, what form those funds are going to look like, what percent is going to be crypto, what percent is going to be in dollars, and this resolution is probably going to look very different from how other bankruptcies are going to resolve. So, it’s difficult to try and really create this kind of common consensus around that, because there is no real consensus to look at or to analyze or to, you know, well weave together.

From the regulators’ perspective, they don’t necessarily have to care. A lot of regulators do have, you know, they have to act within the confines of the laws that set their agency up. So, the SEC, should be in theory, sticking to securities related issues, the CFTC to commodities issues. And while they might communicate with each other, they do communicate with each other. But that’s only gonna go so far. And for a crypto community, if they really wanted to change things, then they would have to talk to Congress, not just the regulators, but they have to convince Congress that, okay, you know, the state of affairs is untenable. We want XYZ, we think this makes sense. And they’d have to convince you know, enough of the legislature that their viewpoint is correct, or that it makes sense to get a bill, law passed and make that all, like, they would have to do a lot to get all that happen. And right now, I think Congress is probably not in a place where it will happen. Certainly not anytime soon. We might see a bill on stablecoins, for example, this year. I’d be surprised if we saw much beyond that.

Regulators’ Response to Recent Crypto Collapses

Samantha Yap 33:59

So there are many layers to crypto regulation. And there’s a different department or different body covering things like tax and things like commodities. Do you think because, you touched on it, but you said, you know, regulators don’t necessarily have to care but do you think they’re caring more now because there have been significant collapses, like there was that Terra Luna collapse, there was FTX And even the domino effect from the FTX collapse. So, I think they’re caring now, right? Because people are being impacted and because of the extent or the amount of money that has been lost.

Nikhilesh De 34:56

Yeah, absolutely. And I should clarify when I say like they don’t necessarily care, I mean like about specific aspects that aren’t perhaps relevant to what they do. So, a regulator might not care that you can build smart contracts on Ethereum, they might just care that Ethereum is issued and minted or whatever, not minted, but you know, people can acquire Ethereum through either staking protocol or through an exchange, like, they’re going to look at the specific aspects that are relevant to their agencies. But yeah, definitely, I think right now, you’re seeing a lot more, not just engagement but also, I mean, frankly, the events of the last year have spooked regulators. It’s not just in the US, but a lot of regulators are saying, oh, wow, so many people lost money over the last year that we have to be a lot more cautious about this. You know, the crypto industry’s promises have not really borne fruit over the last, what are we, it is March? Let’s say June was the starting point of all the collapses because I believe that is when Celsius first suspended withdrawals, right? So over the last nine months, things have been not great for the crypto industry, things have been pretty ridiculously bad. And regulators are really not, you know, a lot of them were freaked out by that. A lot of, I think, progress on whether crypto can be used for certain things has been slowed in favour of looking at harm mitigation and reduction. And, like, okay, well, you know, turns out lending might not be an issue, and that was something that the regulators had already been looking at. We’ve seen settlements with lenders and regulatory agencies going past, you know, last June, over the last year and a half. But now, there’s a lot more alarm, because, whoops, billions of dollars lost. People are harmed, people have lost their money. It’s like ridiculous. It’s pretty bad.

Why do Regulators Drop News on Fridays?

Samantha Yap 37:04

Actually, a side note, are your Friday afternoons really busy? Or do you end up working? Just a journalist question, but doesn’t the SEC and all these regulatory bodies like to drop news on a Friday afternoon?

Nikhilesh De 37:27

Yeah, they sometimes do that. Yeah.

Samantha Yap 37:31

Why? Is it because they don’t want to set off more of alarm or yeah, I guess because I don’t know what the markets. I mean, the traditional markets, for example, the financial stock markets, I guess they close on Friday evening. And so, is it to just soften the blow of the market impact?

Nikhilesh De 37:56

I think that’s part of it. Part of it is to ensure that there’s a full weekend between the news coming out and the reaction to the news happening. I know back during the financial crisis, banking regulators would shut down banks on a Friday and have tried to have them reopen by Monday. And the weekend gave them the opportunity to set up bridge banks and make sure that there was a continuity plan in place. So, it was easier than just trying to do it all at once. Obviously, that hasn’t happened this time. We’re seeing things unfold much more chaotically – a bank was shut down, like before noon on a Friday, which was, as I understand it, extremely unusual. Another bank was shut down on Sunday night, which is again, pretty unusual.

So yeah, those are the norms that where you dropped news on Friday nights, and, you know, let the weekend happen. I think now, we’re not really seeing that necessarily. Lot of what’s come out has come out on just whatever days a week, at different times. And part of that might just be that things are moving much more quickly now. During the great financial crisis, you didn’t really have the communication tools that exist now, you didn’t have Twitter, you didn’t have the speed at which people disseminate information. You do now. So, you know, we’ve seen that, especially with a Silicon Valley Bank collapse. It was fine on Tuesday. It said it needed a little bit of capital on Wednesday, people withdrew $42 billion on Thursday, and it was shut down Friday. I mean, that is staggeringly quick.

Samantha Yap 39:34

Yeah. It’s moving fast now.

Nikhilesh De 39:37

It was hugely aided by communications.

Samantha Yap 39:42

Yeah, and communications is a big part of it.

Nikhilesh De 39:46

Yep. You have Telegram groups, you have Twitter chats, you have viral threads. Like none of that existed 15 years ago.

Samantha Yap 39:53

But also do you think with the focus on crypto regulations, because crypto markets are also 24/7 as well, so I guess they have to react a bit faster.

Nikhilesh De 40:06

Yeah. I mean, I haven’t seen much in the way of regulators responding to specific crypto issues over the weekend yet. That’ll probably comes sooner than later. But the fact that you do have, you know, this weekend, for example, you had USDC depegging for pretty much the entire weekend. That is the kind of thing I imagined regulators are watching and thinking, oh, well, you know, that’s probably not great, do we need to do something?

Regulators’ Varied Priorities

Samantha Yap 40:34

I know, in the UK, Prime Minister, Rishi Sunak and the Bank of England were on the phone with HSBC to buy out SVB’s UK branch for one pound. So if they had the weekend to get busy to negotiate any deals or set up bridging loans. To kind of like wrap up this conversation, I want to take this back globally. So, we’ve spoken a lot about US regulation, and naturally because you cover that, and you follow that daily, and you’re based in the US, but crypto at the end of the day is a global currency. Even if the regulators in the US call it security. I think we’re aware that there are crypto companies who have offshore entities and companies can move to Singapore or Hong Kong. So how do you think, are regulators thinking about the global aspect of crypto?

Nikhilesh De 41:37

Oh, yeah, absolutely. The Financial Action Task Force, for example, is an intergovernmental body that really it sets standards for bank and finance regulations. And for years now, it’s been advocating for this common approach to crypto exchanges, referred to as Virtual Assets Providers with things like travel rules, so reporting of information from one exchange to another – information about the user. So, if, for example, I were to transfer crypto from, you know, in exchange in the US, my account in the US, to you in the UK, the travel rule would mandate that certain information about both myself and you is held by both exchanges that are participating in the transaction. So that’s one example. The European Union has is multinational markets and crypto assets legislation coming into effect, I believe, as soon as this year. That would allow, for example, crypto companies that are based in Germany to be able to operate in Belgium, using a common license and similar approach.

So, there is some effort ongoing to create this kind of global approach. It’s not 100%, not every country is willing to buy into FATF standards, for example. Some countries have their own approaches. But there is an acknowledgement, I think, of the global nature of crypto, and there is at least some effort going to addressing that and trying to ensure that you can’t just jump from one jurisdiction to another to evade regulations. It’s still a work in progress. We’ll see how it develops. But it’s not something that regulators are ignorant of.

Samantha Yap 43:42

It’s a good point you made about the intergovernmental organizations and the FATF, you know, group of countries that are a part of that. But yeah, like you said, it remains to be seen how effective that is. Do you think there’s some sense that regulators are also wary that if they have a hardline approach to say calling Ethereum or Ether or security, that that might impact their competitiveness or the country?

Nikhilesh De 44:29

I would say to regulators who are calling Ether a security are probably aware of it, but that might not be a priority for them.

Samantha Yap 44:41

Right. So, there’s a element of unawareness, that this is a global currency.

Nikhilesh De 44:47

No, they’re aware, that just might not be as important to them as other, you know, as calling Ether a security.

Putting the Brakes on Innovation: A Look Ahead

Samantha Yap 44:57

And the favorite question on the tension between regulating crypto and then allowing innovation of crypto to happen. Yeah. How do you think it’s going to play out in the coming year and in the long term? Cuz I think that’s the tension that we’re seeing that there’s been hardline approaches to yeah, this is what we’re defining that, you know, I think, let’s talk about staking as a service and how staking is treated and I think the crypto community is saying that regulators are not understanding in detail that staking is required to keep the network running. So, what do you think about that?

Nikhilesh De 45:54

I wish I had an answer, I think, you know, we will see. I mean, there’s just so many different ways that things could develop. Congress might pass a bill that will create certain rules. And even if Congress doesn’t pass a bill that addresses crypto itself, they might create and pass a bill that addresses how regulators can approach crypto. That’s one possibility.

Regulators might decide, okay, well, we’re not happy with the current state of affairs, we’re going to publish binding guidance that companies are gonna have to abide by. I would say neither of these seems especially probable right now, they’re possible, you’re not especially likely. It might be that things just come to a boil. You know, again, events of the last nine months have really been kind of alarming, I think, for a lot of regulators. And going back to 2019, if you remember the Libra project, when that was first announced, that freaked everybody out, you know, we had regulators around the world all saying, wow, like, we have to really tamp this thing down. And they succeeded. Libra never launched, it rebranded as Diem- Diem ever launched. Eventually, it was sold to Silvergate. And 10 months later, Silvergate wrote down the entire acquisition of Diem. Clearly, it didn’t work out. I’m sorry, it was either Silvergate or Signature, I’m blanking on which one it was specifically, it’s one of them. One of the banks that starts with S that served the crypto community.

Samantha Yap 47:23

Well, either-or, yeah.

Nikhilesh De 47:24

Like either way, you know, regulators really didn’t like that project.

Samantha Yap 47:31

But it’s interesting, because now they’re not no longer around. Yeah, so you just think they’ve acquired it, wrote it down. And now we’re talking about a time with Silvergate and Signature are like gone.

Nikhilesh De 47:44

Exactly, yeah. But like, it just goes to show that, if there really is enough alarm, and opposition to something, regulators do have quite a bit of power, they never allowed Libra to launch. And I will say, you know, to the extent that Libra tried to go about it, there was an effort to engage with regulators and try and get their approval to launch. If they have just launched it without regulatory approval, I think things probably would have played out differently. But regulators do have some amounts of power on this. And I think part of it is, regulators are still, and even lawmakers are still just trying to come to grips with what exactly happened and how it happened. You know, why did all the lenders go down? How did FTX get to be as big as it was, have the role that it did, and then turn out to be built on a house of cards? So, I don’t even know if the crypto industry really has perfectly clear answers to that. A lot of it, you know, we have fairly, I think decent understanding of the cause and effect. A lot of it does seem to have just been built on possible frauds and mismanagement. But I think regulators are going to be continuing to look at how exactly everything got built up, and then what caused it all to collapse before they really do anything. So right now, the first thing I think we should be watching for is what kind of fact-finding missions or what kind of investigations are ongoing? And what kind of results are regulators seeing from those investigations?

Samantha Yap 49:29

Yeah, there’s a lot to happen, I think 2023 regulation is the hot topic after the events of 2022. So, I think you have a lot of work cut out for you this year. You’re playing a very important job and role. I guess you’ve got a lot of work to do. But what are you most excited or looking forward to seeing at the end of the year? More clarity or more dialogue?

Future of Crypto Regulation in 2023

Nikhilesh De 50:10

Honestly, I’m really interested to see if we do actually get through the year with any kind of legislation, at least in the US that specifically addresses crypto explicitly addresses crypto, it’s not just folding it into whatever, like at FinCEN funding bill, like, will there actually be and there’s a lot of people I talk to believe that there will be, but will we actually see a bill that says, okay, this specific portion of the crypto industry has clear guidelines, has rules, has definitions, it has all these things. Is it clear and explicit, and something that the industry can actually use to either continue developing what they already have or build something new? From a regulatory perspective, I’m really interested in that. And then from the industry perspective, I’m curious if, you know, just what kind of engagement happens, you know, what, kind of, like I mentioned, the CFTC, earlier, the Tech Advisory Committee, what will that lead to? You know, there’s a lot of crypto people on that, what kind of impact will they have? Will the regulators be responding to what the crypto industry says? Will the industry try to engage with regulators in a way to get them to listen? We’ll see. It’ll be fascinating to see how that unfolds.

Samantha Yap 51:36

Yeah, I think part of your job as a journalist is you’re writing history, you’re on the frontlines of history. And, you know, you’re saying that there hasn’t been a very clear piece of regulation that’s actually addressed crypto, and maybe 2023 is that year, so. Yeah, let’s see. And for now, continue your good work and just making sense of everything for us. And reading those government documents. Thank you, Nik, for doing that service for us.

Nikhilesh De 52:12

I mean, honestly, it is fun. So yeah. No problem.

Samantha Yap 52:16

Awesome. Well, Nik, thank you so much for joining me on YAP Cast. I think we’ve covered a lot about regulation and crypto. And really appreciate your time.

Nikhilesh De 52:27

Thanks again for having me!

Outro

Voiceover:

That’s Nikhilesh De, managing editor at CoinDesk discussing the evolving landscape of crypto regulation and its impact on the industry.

As he pointed out, the lack of clear and explicit guidelines has left many in the industry uncertain and scrambling for direction.

The reality is that it’s not possible for one government to fully control and regulate crypto, and part of the challenge for regulators is accepting that and creating the right guidelines for citizens wanting to engage with crypto

A special thanks to Nik for sharing his insights with us.

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Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Rate and follow this podcast to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Thanks for listening to this episode of YAP Cast. I’m Samantha Yap. Share this episode and subscribe to this channel to join us for another thought-provoking episode of The Story of Money by YAP Cast.

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Jun 7, 2023

Money & Regulation with Nikhilesh De (S3E3)

Is Crypto Money? Navigating the Complexities of Regulating a New Asset Class.

In this episode of The Story of Money, Nikhilesh De, the managing editor for CoinDesk's coverage of global policy in crypto, shares his insights on the complex world of crypto regulation. Nik and Samantha discuss the concerns and considerations surrounding regulating money in the crypto industry, the goals of financial regulation, the need for genuine engagement between the crypto community and regulators, and the classification of cryptocurrencies as money.

Join Samantha Yap on a journey to discover the history of money and to better understand why Bitcoin, cryptocurrencies, and decentralised finance may play an important role in our future.

Nikhilesh De (@nikhileshde) is the managing editor for CoinDesk's global policy coverage of the cryptocurrency industry. He has been covering cryptocurrencies and blockchain technology since 2017 and has become a well-known and respected voice in the industry. Nik's reporting has provided valuable insights into the intersection of cryptocurrency and regulation, making him a highly influential figure in the industry.

View transcript

Introduction

Welcome to The Story of Money by YAP Cast where we explore the past, present, and future of money. I’m Samantha Yap.

Intro CTA – Spotify

Follow The Story of Money by YAP Cast to learn more about where money is heading.

Intro CTA – YouTube

Subscribe to The Story of Money by YAP Cast to learn more about where money is heading.

Voiceover:

Join me and Nikhilesh De the managing editor for global policy and regulation at CoinDesk – on this episode of the Story of Money by YAP Cast.

I’m sure many of us wonder what life would be like if we had more money. So why can’t governments just print more money? The short answer is that money needs to be regulated in order to maintain financial stability.

The other objectives of financial regulation include: protecting consumers and maintaining confidence in a financial system.

The earliest financial regulation can be traced back to the 17th century when the Dutch government established the Amsterdam Stock Exchange and implemented regulations to ensure fair trading practices.

But as money evolves so does financial regulation.

There’s no better person to speak to us about the development of financial regulation than a journalist and reporter who is covering it on the front lines.

Nikhilesh De, Managing Editor for global policy and regulation at CoinDesk has been covering the world of crypto since 2017, so he’s seen the ups and downs of the industry.

In this episode he’ll shed light on the goals of financial regulation and how they differ when it comes to regulating crypto.

Tune in to this insightful conversation with Nik, a seasoned crypto journalist, to gain some new insights into the world of money and regulation.

Our guest for today – Nikhilesh De

Samantha Yap 00:00

Nik, thank you so much for joining me on YAP Cast.

Nikhilesh De 00:04

Thanks for having me.

Samantha Yap 00:06

Yeah. So, Nik, you are CoinDesk’s managing editor for global policy and regulation. Can you tell me a little bit more about what your day-to-day job is?

Nikhilesh De 00:19

I mean, I think this is true of most journalists. But the fun part is the day to day does not really, you know, it’s not the same every day. Right now, as you mentioned, I run a team of reporters who cover policy around the world, specifically as it pertains to crypto. So, we have folks in Washington DC, in the US and New York, we have folks in London, Brussels, New Delhi, trying to get just a lot of what’s going on in the world and understand it and trying to figure out how the crypto community is engaging. So, right now, my day to day depends on what the crisis of the week is. This week it was banking, last week it was banking, and I’m sure in a couple of weeks, it’ll be something else entirely. It’s always fun.

Samantha Yap 01:03

I mean, covering global policy and regulation requires you to keep on top of what regulators and governments are saying about crypto. So how do you keep up like, what are the, yeah, I’m sure there are specific sites and government bodies that you track, like, can you explain how you guys really keep up with it all?

Nikhilesh De 01:33

Yeah, I mean, for me, it helps that I do have a really good team that I work with. So, part of it really is I just read what my colleagues are writing and look at what they’re doing and who they’re talking to. A huge part of it is talking to people, of course, just trying to figure out what they have on their radar. So, whether that is, you know, a lawyer in, you know, perhaps a state talking about what their local government is doing, whether that’s trying to talk to a regulator about what their agency is doing, talking to, you know, even just crypto companies about what they’re seeing. I do look at a lot of government documents. So, most governments, I think, publish all sorts of things, whether that is request for information, things like proposals and proposed rulemaking, just summary explanations of what they’re doing, court rulings. Those are all, for the most part very freely available and very useful in getting a sense of what’s going on.

Looking at ongoing court proceedings is another way to get a sense of just how officials in these places are thinking about crypto and thinking about what’s going on with the world and what they need to either update or address even if they feel a need to address crypto at all. Sometimes it’s the case where they look at crypto and they say, okay, well, this is interesting and all but it’s so far out of our remit that we just don’t want to care about this, we can’t care about this. So, we’re just gonna ignore it for now.

Samantha Yap 03:00

Yeah, so how much is your week focus on reading government documents and court proceedings, because that sounds like a lot of reading.

Nikhilesh De 03:11

It is. There’s definitely a lot of it. I don’t necessarily read every single word. A lot of times, I’ll skim things at first and see, okay, you know, is this relevant to us? Is this relevant to our audience? And then sometimes I’ll say, okay, well, this is kind of interesting. But it’s not news. But it could be useful for a deeper analysis later on, in which case, I’ll stick it into, you know, I have a ongoing Google Doc, where I keep certain things like links and stuff. And I’ll say like, okay, look at this link later. Or we use Slack at CoinDesk. So, sometimes I’ll just put a link into a Slack chat that I’m the only one in and I’ll get back to it later. So that helps. If it is interesting, or newsy or whatever then, of course, I’ll read the entire thing. But not reading the whole thing at first, just skimming it really helps with keeping up with the sheer volume.

From Intern to Managing Editor: Nik’s Crypto Journey

Samantha Yap 04:07

Yeah. So, could you share how you got into crypto in the first place? Because I have worked with you for many years now. But can you just share a little bit about your story of how you got into covering crypto?

Nikhilesh De 04:24

Honestly, just coming to CoinDesk, you know, I was an intern at CoinDesk, and I started working at Coindesk. That was the entirety of how I got into crypto. I wasn’t really in crypto prior to CoinDesk. I was just trying to figure out, what this all is as it happened. So, I got lucky, I think. I came in at a very interesting time. I started covering crypto in the fall of 2017. And that, of course, was, you know, there was a

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