In this episode, we discuss the lessons learned from the 2008 financial crisis, and the lessons we can learn from the failure of two major financial institutions, Silicon Valley and Signature Bank. We also discuss the risks and opportunities associated with Bitcoin and other cryptocurrencies in the context of the current financial system. And we are joined by a guest who has a degree in financial regulation from Duke Law School and is a lecturer in the Department of Economics and Finance at the Duke University Law School, Dr. Vivek Kundnani. We discuss the role of government intervention in the financial system and the role that the federal government plays as a broker between large financial institutions and smaller ones. We also talk about the risks associated with cryptocurrency and Bitcoin, and what they pose to the existing financial system, as well as the opportunities that can be created by the use of cryptocurrencies in a financial system that is already experiencing financial instability. The podcast is hosted by Vaynerchuk and is produced by the Center for Economic Policy Analysis at Duke University, a non-profit organization focused on the intersection of economics, finance, and technology. Our theme music is by my main amigo, Evan Handyside, and our ad music is courtesy of Fugue Records, which you can stream on SoundCloud here. Please rate, review, and subscribe to our podcast on Apple Podcasts, and share the podcast on your favorite streaming platform! Thank you for supporting the podcast! Subscribe, share, and spread the word to your friends about this episode! Timestamps: 0:00:00 - What are you're listening to this podcast? 1:30 - What do you think of Bitcoin and cryptocurrency? 3: What are the risks? 4: what are your thoughts on Bitcoin and Bitcoin? 5:00 6:00 | What does it mean to you? 7: Is Bitcoin and crypto? 8:00 -- What are your favorite piece of advice? 9:30 -- What would you would you like to see me do in the next episode? 11:30 | What s your biggest takeaway from Bitcoin and Crypto? 12:30 13:40 -- What's your favorite part of this episode? -- What does Bitcoin and Cryptoconomy? 14:40 - What's a good day? 15:00 //15:00 & 16: Should I'm looking forward to the future of Bitcoin & crypto? /16:00 +17:00)
Transcript
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00:00:24.000one of the remarkable things after the 2008 financial crisis was the supposed restoration of the financial system that we created in its aftermath actually just created and sowed the seeds for even worse in the future.
00:00:39.000not in the form of financial crises, but in the form of financial policies that permanently, I would say, gutted, or at least since then, ever since then, have gutted the essence of American capitalism itself.
00:00:51.000The first thing we did was we ushered in an era of easy money in this country, money raining from on high like mana from heaven from the Federal Reserve that was supposedly a short-term stopgap measure to pump liquidity into the markets on the back of the 08 crisis in the middle of that year became QE1 and then QE2 and then Operation God Knows What that actually continues year after year to create We're good to
00:01:25.000down economics from Ronald Reagan's era when economic growth is really just driven by artificial paper being printed from the top, only planting the seeds for possibly the next financial crisis, which as we have this conversation today, maybe, you know, in the early stages of unfolding, in part because of self-inflicted behavior from the Federal Reserve in part because of self-inflicted behavior from the Federal Reserve on the back of the 2008 financial crisis.
00:01:46.000You saw the rise of the ESG movement, the politicization of capital markets, a sort of dowry that was paid for the arranged marriage between big business and government as effectively a price, a delayed price for the 2008 bailouts on the back of the 2008 financial crisis.
00:02:03.000We learn that these crises are occasions to actually plant the seeds for quite possibly far more damage done over a longer period of time that follows But as a justification for a response to that crisis.
00:02:18.000So let's learn that lesson now as we enter the modern banking instability that we appear to be entering right now.
00:02:25.000What are we going to see on the back of potential bank failures in the United States, of brokered marriages between large banks absorbing small ones?
00:02:33.000We're having this conversation right on the back of the failures of Silicon Valley Bank and Signature Bank.
00:02:39.000What I predict we're going to see is a march towards a new response or a new opportunity really seized by the federal government as they did in the back of the 08 financial crisis to see, for example, the advent of central bank digital currencies or CBDCs on a retail scale saying that these small banks couldn't be trusted.
00:02:58.000We had to intermediate the system through big banks instead.
00:03:00.000Why not use the federal government that brokers those marriages to actually get its ultimate wish list, which is control over its citizenry in a way that Ordinarily, the citizenry wouldn't have stood for, but for the existence of a crisis that justified it.
00:03:15.000We learned that in 2008. I'm afraid we're learning that same lesson in the early stages of it right here in 2023. And today, I'm joined in the podcast by a guest who understands a little bit of something about financial market regulation and even as it relates to the rise of cryptocurrency as a Let's just say a competitive parallel system to the existing financial system.
00:03:35.000Some of the risks that that poses, but possibly the opportunities as well.
00:03:39.000I'm looking forward to approaching today's conversation with an open mind.
00:03:42.000We don't know each other that well, but Lee, welcome to the podcast and I want you to introduce yourself and I'm looking forward to rolling up our sleeves and getting into it.
00:03:51.000So welcome to the podcast, introduce yourself and tell me a little bit about your background and what got you interested in financial regulation and then more recently in crypto and we'll go from there.
00:04:04.000So yeah, I mean, I've been at Duke now for almost seven years in a variety of roles, but I'm a lecturing fellow in the economics department and at the law school.
00:04:14.000And so a lot of my work at Duke is around financial regulation and regulatory policy.
00:04:20.000That's my background before coming to Duke.
00:04:23.000I worked at the Federal Reserve Bank of New York.
00:04:25.000Primarily as a bank examiner, so supervising large, systemically important financial institutions, otherwise known as too-big-to-fail institutions, certainly relevant to what's going on now because that definition seems to be expanding.
00:05:46.000It's a rare opportunity to both be, you know, what I would actually find in law school is like the topics that were then cutting edge at the time, you wouldn't actually get much of the meat of the legal principles because you were just learning like the thing, like the new thing, whatever it was, having nothing to do with law.
00:06:05.000Now, the topics that were most, I guess, like legally rich and intellectually stimulating were, at least for me, stuff like criminal law, hardcore stuff that had been around for a long time.
00:06:14.000But I think something like crypto regulation, you know, crypto-related law could probably be an example that bucks that trend a little bit.
00:06:24.000Because on one hand, you do have this, relatively speaking, new thing, cryptocurrency.
00:06:28.000But you have old foundational principles of financial regulation, market regulation, et cetera, that apply or don't apply, but you can actually sort of roll up your sleeves and still have the intellectual richness of some of the first principles, but as applied to something different than the old banks or securities regimes that we've been but as applied to something different than the old banks or securities regimes that So long way of saying, I guess I would probably take that class if I were in law school right now.
00:07:08.000I think the reason that crypto appeals or is interesting to so many people, because it's been around a while now, and it's kind of polarizing, I've sort of discovered.
00:07:18.000People are either all in, love it, it's the future of money, finance, or they're kind of the Charlie Mungers of the world, right?
00:07:24.000Like, this is all nonsense, it's good for nothing but money laundering.
00:07:28.000You know, the students are more just curious, right?
00:07:31.000I mean, especially law students, you know, you know, they're generally risk averse, right?
00:07:35.000You know, most of them, I pull them at the start of class, like how many of you actually own crypto or used it?
00:08:08.000So there's kind of something in it for everyone is what I like to say.
00:08:12.000And, you know, it's still from a legal and regulatory standpoint, it's nascent.
00:08:16.000So I tell my students, like, listen, when you finish this class, like you are now a crypto regulatory expert, right?
00:08:23.000And there's not a lot of them out there.
00:08:24.000And you can go to your firm or wherever you go and make an immediate impact.
00:08:29.000And so I think that's what makes it so fun to teach and why I like students are just so into it.
00:08:34.000You've got my juices flowing, so I'm pretty pumped for this.
00:08:37.000I'm a little bit, the FOMO instincts in me are right now making me feel like we might not even have enough time here, but let's get as far as we do.
00:09:41.000I mean, you can keep your money there, but it's just far too volatile to be a useful store of value.
00:09:48.000When I talk to crypto proponents, I say, listen, what is your valuation methodology?
00:09:55.000Because at the end of the day, any asset is worth whatever people are willing to pay for it.
00:09:59.000But professional investors have some type of framework they use to make a determination whether or not a given asset is overvalued or undervalued.
00:10:08.000You know, I mean, I think you could say that about any currency, though, right?
00:10:11.000What's the fundamental store of value in the peso?
00:10:15.000Yeah, I mean, there's a sovereign, you know, like there's a sovereign entity that stands behind it.
00:10:19.000So the reason that, you know, the dollar is valuable and people use it, whether or not they think about it, is that they're making an implicit judgment about the United States government, and that the United States government is going to be a going concern, right?
00:10:31.000And, you know, God willing, it will be, right?
00:10:33.000Because we got deep, you know, deep problems if it's not.
00:10:36.000But with crypto, there's no issuer, right?
00:10:48.000So for the first time, you know, so really crypto is, you know, what makes it run is blockchain technology, which is a decentralized database.
00:10:55.000Everyone has the exact same copy of the database.
00:10:58.000And in crypto's context, let's just stick with Bitcoin to keep it simple.
00:11:02.000You know, that database records every single Bitcoin transaction in the history of Bitcoin.
00:11:09.000Every computer that's running that, you know, the Bitcoin blockchain software has the exact same copy.
00:11:15.000And so what that means is that it's a system that everyone can trust the contents of that ledger without having to trust any intermediary or single person.
00:11:26.000So for the first time in history, we have the ability to transmit value peer-to-peer Without the need for any third party intermediaries.
00:11:35.000And I think that aspect is what excites so many people about crypto is the ability to transact peer to peer.
00:11:43.000Now that's in theory, that's the principle behind it.
00:11:46.000That's what Satoshi Nakamoto, the creator of Bitcoin, the first cryptocurrency, he lays out this vision for a peer to peer payment system.
00:11:55.000Of course, as we sit here today, you know, 14 years later, the crypto economy looks very different, right?
00:12:02.000I mean, it's littered with intermediaries, you know, because it turns out people like intermediaries, right?
00:12:08.000People don't want to have to store their money on a thumb drive in a coffee tin that's buried in their backyard.
00:12:14.000I mean, because that's what it takes to kind of secure, you know, there's this adage in cryptocurrency, not your keys, not your coin, because you have a public address.
00:12:22.000If you want to send crypto, you need to have a public address so I know where I'm sending it to.
00:12:26.000But then you sign that transaction with your private key, simply an alphanumeric string of characters.
00:12:30.000So if you don't have access to that, if someone has access to that private key, then they have access to your crypto.
00:12:36.000So for those reasons, People prefer to use intermediaries, right?
00:12:59.000I mean, I thought, I mean, you think you know something, but then you also recite words and you realize you didn't really understand that, you know, some of the details in between.
00:13:04.000Your point is, like, those passcode, you know, the 12 character containing things that you'll see crypto people carrying around that stick into their computer and allow them to log into the blockchain.
00:13:29.000I mean, you have to sign your transaction.
00:13:32.000So, I mean, you basically have to, and if you're running the, you know, most people, like, aren't running, like, the full Bitcoin software on their computer.
00:13:39.000But if you were, you would have to access that and you would sort of enter in your private key directly into that, you know, through that software interface.
00:13:48.000You see a person who wants to buy Bitcoin but not using an exchange or whatever, or wants to transact in Bitcoin you already have but not use an exchange, you know, like a Coinbase type of thing to do it.
00:14:29.000That basically means if someone else has access to your private key associated with your cryptocurrency digital wallet, then that's a security vulnerability.
00:15:14.000And so they were maintaining all their customers' private keys on an internet accessible device.
00:15:23.000And they had very poor security protocols.
00:15:26.000You know, a hacker got in, was able to take all the private keys, and then once they had it, they're able to drain all the cryptocurrency.
00:15:35.000You know, we've seen nation states actually ramp up their activity in this space, notably North Korea.
00:15:41.000So North Korea specifically targets crypto intermediaries who have notoriously lax security protocols.
00:15:50.000And once inside, they're able to gain access to the private keys and then steal the crypto, send it to an exchange in Russia or somewhere else.
00:16:02.000and cash out i mean so there's estimates that last year alone north korea stole 1.7 billion dollars worth of crypto in north korea meaning people in north korea you think they're state affiliated no no um this is what's called the lazarus group so it's a state-sponsored um it's part of the military so it's a state-sponsored state-sponsored that's like a serious amount of money actually $1.7 billion is a lot of...
00:17:35.000So he wrote one called Bitcoin Billionaires.
00:17:39.000And it's about the Winklevoss twins who parlayed their Facebook settlement money.
00:17:46.000Into crypto and built the Gemini cryptocurrency exchange, which is one of the larger exchanges in the US. And the book talks about how when they first invested in crypto, they wrote their private key down on pieces of paper.
00:18:01.000They cut that piece of paper into multiple strips, and then they stored those strips in physical safety deposit boxes.
00:18:09.000So that's the most extreme version of...
00:18:12.000Keeping your keys secure, your crypto secure.
00:18:16.000Again, the average person isn't going to do that.
00:18:18.000And that's why they use exchanges like Coinbase, right, which are holding on to those keys for you.
00:18:24.000And, you know, when we get into like the regulatory aspects, this is one of the, you know, the thornier issues because crypto exchanges are fulfilling multiple functions that are normally separate in traditional securities exchanges.
00:19:04.000And then six, many of these exchanges have a venture capital arm that are investing in crypto projects that, guess what, end up getting listed.
00:19:13.000On that exchange, because once you're listed on exchange, that provides liquidity, right?
00:19:17.000It's very different from the normal model of what an exchange is actually doing.
00:19:20.000That's a kind of an interesting multi-hat model.
00:19:38.000And so that's just kind of one difference between how crypto exchanges operate and traditional securities exchanges.
00:19:45.000Can I just rewind for a second before that, which is an interesting, just kind of like a philosophical question where...
00:19:54.000The thing that backstops the value of most currencies, to borrow your framing of it, was the sovereign.
00:20:02.000Okay, the fact that there's a sovereign nation that stands behind the value of that currency.
00:20:06.000Now, the Mexican peso, we can debate that, right?
00:20:08.000Is it a bunch of drug cartels that actually run the country or which sovereign is backing that up?
00:20:12.000Let's put those geopolitical quips to one side.
00:20:14.000That's philosophically, at least, the way this works.
00:20:17.000Whereas here, as you said, it's math that backstops it, right?
00:20:20.000It's backstopped by math, by code, by a formula.
00:20:25.000Do you think that some people would make even an argument on the theft case, right?
00:20:29.000So if it's not backstopped by a sovereign, if the US doesn't, you know, the US backstops the dollar, but it's not backstopping Bitcoin or pick your other favorite cryptocurrency.
00:20:44.000Is there some argument that even the property rights regime...
00:20:49.000That somebody else, that the US would apply to protect crypto?
00:20:54.000Do you think the people who are hackers would say that it's all math?
00:20:58.000So I hacked in and got your stuff because that's the rules of this road and the rules of this terrain.
00:21:05.000It's backstopped by math itself, not by a sovereign.
00:21:09.000So the rules of the sovereign, which include those property rights, don't apply.
00:21:14.000And so by definition, it's internal to the rules of crypto to say that there can be no such thing as a data breach or theft because data breach or theft is internal to the rules You see what I'm saying?
00:21:25.000I'm not making some argument for crypto hackers.
00:21:59.000So if there's a flaw in the code of an underlying blockchain or cryptocurrency, then, you know, by definition, you're not doing anything wrong if you exploit that.
00:22:15.000And, you know, sort of the I think the most high profile example of this is, Was in 2016, when there was something called the DAO. DAO. It stands for Decentralized Autonomous Organization.
00:22:29.000It ran on the Ethereum blockchain, which is the second most popular.
00:22:33.000The Ethereum blockchain is the second most popular blockchain behind Bitcoin.
00:22:37.000The native cryptocurrency from the Ethereum blockchain was Ether.
00:22:40.000Again, second most popular token behind Bitcoin.
00:22:42.000And what the DAO was, was essentially a decentralized venture capital fund.
00:23:04.000And that DAO token entitled you to vote on various proposals that were put forth to the entire DAO token holding community.
00:23:13.000And if the community voted to fund that proposal, you know, then they would release from the Treasury Ether to the, you know, whoever was proposing this.
00:23:23.000And if it made money, then the proceeds would be distributed back, you know, proportionally.
00:23:26.000So anyway, there was a flaw in the code.
00:23:29.000And someone drained all the Ether, most of the Ether that had been sent to...
00:23:38.000Yeah, so they stole the Ethereum cryptocurrency associated with this project.
00:23:43.000And, you know, there's a real existential debate because, you know, Ethereum was still in its nascent stages at that point.
00:23:48.000And so people are like, well, what do we do?
00:23:50.000And obviously, folks who had money, you know, I don't want to use the word stolen, but who, you know, who had money, you know, had money in and then it was gone, you know, thought like, hey, like, we got to do something about this.
00:24:02.000And so Vitalik Buterin himself weighed in.
00:24:04.000He's the creator of the Ethereum blockchain and I think probably the most high profile figure within crypto because we still don't know who Satoshi is.
00:24:14.000And he said, like, listen, like, you know, we gotta make this right.
00:24:19.000And the majority of folks in the Ethereum community agreed with him.
00:24:22.000And they did what's known as a hard fork.
00:24:25.000So they essentially altered the blockchain code to go back in time to right before the hack happened.
00:24:36.000And in so doing, they sent people a new cryptocurrency that's now called, well, we call that one Ether, but the original blockchain where the hacks still happen is an operational and that one's called Ethereum Classic.
00:24:49.000So you can go on Coinbase, you can go to an exchange and you can buy...
00:25:33.000I mean, that's perfectly a legitimate response.
00:25:35.000But this wasn't where I expected to spend most of the time.
00:25:39.000And maybe we're just going to have to talk about the financial regulatory stuff another time.
00:25:44.000But it is kind of interesting because it reminds me so much of the two-facedness of – and we'll get to the Silicon Valley Bank stuff, but – The Silicon Valley libertarian mindset of wanting non-governmental intervention in the banking system and not having,
00:26:02.000you know, regulatory constraints and capital constraints imposed on Silicon Valley bank that's not systemically important only to then cry to mommy that actually we are systemically important and the depositors need to be bailed out above the uninsured depositor level is something that irritated the heck out of me and that's a Silicon Valley specific Silicon Valley bank episode.
00:26:21.000But there's like a form of that here I have conviction on my views there.
00:26:27.000This is an issue I haven't thought about for much longer than this conversation because I wasn't aware of that incident, but it smells like that to me where code is law.
00:26:37.000We're in the wild west frontier of the sovereign backs the currency, but we're in the post-national environment in which we don't want currencies that are backstopped by a nation.
00:26:57.000But then, when things didn't go the way you expected, that somebody else had code, that you call a hack, he calls more code, that you call a flaw, he calls part of the system, says that I actually drained your money, somehow the people who were the code is law people Go back crying to mommy, just like the Silicon Valley venture capitalists that went crying to mommy who they thought they were the cool libertarians that wanted to declare independence from.
00:27:26.000Same thing here, saying that actually the creator has to change the protocol to allow them to get their money back according to what set of rules?
00:27:38.000It makes me almost want to ask the question of what was the The human phenotype, to the extent we know it, of the hackers, versus what was the phenotype, broadly speaking, of the people who got hacked and who lobbied effectively for their rewrite of the rules.
00:27:58.000I'm just curious what the sociology around that was.
00:28:02.000Yeah, I mean, I'm not as immersed in that.
00:28:04.000I'm not that deeply immersed in the technological community.
00:28:08.000I don't know if anyone actually, I mean, the nature of crypto itself is that It's sort of pseudo-anonymous, right?
00:28:57.000And, of course, in the traditional economy, right, that, you know, the off-chain world, as they say, those disputes are settled in the courts.
00:30:04.000But maybe it wasn't your money in this world, right?
00:30:06.000In the world of the sovereign, it's your money, but it's like Max Weber had this famous sort of paradox of do people have ideas or do the ideas pre-exist in the universe and then we just open our minds and capture them?
00:30:20.000Well, this is like that as applied to the realm of money, right?
00:30:48.000I'm just talking through this and it actually makes me think more about The case and perhaps some of the paradoxes in even the case for crypto regulation that the crypto industry, whatever, crypto advocates or whatever, embrace.
00:31:03.000I'm sure other people who are immersed in this have thought about this more than me, but it seems like there's a basic philosophical decision to be made.
00:31:15.000The off-chain and on-chain world, right?
00:31:19.000So do we want the on-chain world to sort of be this parallel universe where we don't apply the conventional system of sovereign applied property rights, etc., courts, police state, backstop to filter it?
00:31:34.000And like, is that what we want it to be?
00:31:38.000In which case the on-chain world is backstopped by the very state that recognizes the currency also created the court system that recognizes and vests those property rights.
00:31:48.000Like the purist in me, which says it should be, if you want it to be a parallel world, guys, have at it, but stop complaining and using the court system.
00:31:55.000If you now want that to be re-regulated, what's the point of crypto?
00:31:58.000Well, and it's not only just stop complaining and don't use the court system.
00:32:02.000It's, you know, stop trying to integrate into the traditional financial system.
00:32:14.000You know, we want access, you know, the crypto saying, oh, well, you know, we want access to the banking system, right?
00:32:21.000You know, and going back to the first Bitcoin transaction, 2009, it included text to a Times of London newspaper article with the headline, Chancellor on Brink of Second Bailout for Banks, right?
00:32:34.000So the origins of crypto are in the 2008 financial crisis.
00:32:40.000And it was created to be the anecdote to that.
00:32:54.000So, you know, the Bitcoin white paper was introduced by Satoshi to an online cryptographic message board on Halloween 2008. However, the first Bitcoin transaction didn't occur until 2009. So that transaction, that first transaction...
00:33:10.000on the Bitcoin blockchain, included a reference to a Times of London newspaper article about bank bailouts in the UK.
00:33:20.000And really, it was techno libertarians that sort of flocked to crypto initially and sustained it.
00:33:31.000Now, obviously, at this point, there are millions of people that are into crypto for thousands of different reasons.
00:33:39.000But that ideological origin is that current still runs deep through the crypto community.
00:33:46.000And you're hitting on some of the Because I'm a crypto skeptic, right?
00:34:02.000I mean, listen, I wouldn't care really If, you know, we had this code-as-law world, you know, on-chain, there's no connections to the traditional financial system, you know, let them eat themselves, right?
00:34:17.000And yeah, you know, some people are going to lose money, and that's bad.
00:34:20.000But, you know, like, capitalism's risky, right?
00:34:22.000I mean, people lose money in the stock market.
00:34:40.000So if that's all that was happening, I really wouldn't care and I would move on and spend my time doing something else, you know, more pleasant and enjoyable.
00:34:48.000The problem is that that's not the world we live in.
00:34:51.000And crypto creates pretty significant negative externalities, in my opinion.
00:34:57.000So one, you can just start with the energy consumption and the emissions associated with that.
00:35:05.000The Bitcoin blockchain runs on something called the proof-of-work consensus mechanism.
00:35:10.000Remember how I said, every computer running the Bitcoin software has the exact same copy of the database?
00:35:20.000And the way they agree is through what's known as the crypto mining process, where you have select computers running a specialized variant of the Bitcoin software, gathering up the most recent batch of transactions and then effectively competing to solve a puzzle that allows them to post to the broader blockchain those most recent transactions.
00:35:43.000And solving that puzzle, that mathematical puzzle, just requires brute computing force.
00:35:49.000Which, you know, to do that, you need, obviously, power.
00:36:24.000Well, if you're lucky enough or have enough computing power and you solve the most recent puzzle, You get rewarded with new Bitcoins, right?
00:36:34.000So that's how new Bitcoins get put into circulation.
00:37:02.000You could also track the transactions in a blockchain in a way that you never could with respect to actually an opaque banking system with traditional currency, right?
00:37:16.000But dollars were not trackable on a ledger through an opaque international banking system in the same way that Bitcoin or other blockchain-based cryptocurrencies are, right?
00:37:28.000So it is a little bit of an ironic argument to make the laundering argument, you know, national security-based laundering argument for at least a technology that in principle can actually trace its transactions versus one that can't.
00:37:45.000So because the blockchain does provide transparency, you can trace the flow of funds.
00:37:52.000And there are blockchain analytics companies out there that do that.
00:37:56.000So, you know, TRM Labs, Chain Analysis.
00:37:58.000You know, there's another great book recommendation for folks that are interested in this that just came out is Tracers in the Dark.
00:38:04.000And it's about the rise of people tracing, you know, law enforcement and these other, you know, these analytics companies tracing illicit flows on the blockchain.
00:38:12.000The problem is, okay, we can trace it, but we need to tie that blockchain address to a real-world identity.
00:38:22.000That identity, then, that person needs to be located in a jurisdiction where we can get to them.
00:38:29.000And when it comes to illicit transactions in crypto, At this point, it's pretty much all roads lead to Russia because we still live in a fiat currency world.
00:38:38.000It's very hard to spend any large amount of crypto.
00:38:42.000You can't really buy and sell much with it.
00:38:49.000You cash out at exchanges that are operating in jurisdictions that are hostile to American interests, notably Russia.
00:38:55.000And we've seen the Treasury Department since the invasion of Ukraine ramp up They're sanctioning Russian-based crypto exchanges.
00:39:04.000But the issue is once you sanction one, a new one sprouts up.
00:39:10.000So yes, when people bring up, well, blockchain actually helps law enforcement because it's transparent, my retort is, well, that's like saying we should give credit to the tobacco companies for creating Nicorette gum.
00:39:20.000I mean, blockchain created the problem.
00:39:22.000It's a lot easier to move $100 million worth of crypto than it is to move $100 million worth of dollar bills.
00:39:50.000So I think we have, and I think this is useful.
00:39:53.000I'm already officially, if you're down for it, going to declare like we're going to have a second conversation on some of the specifics.
00:40:00.000But I think here to get just the philosophical foundation down is Your case for potentially a regulatory regime governing crypto is based on negative externalities, largely based on energy consumption and secondarily based on the fact that it facilitates bad action that you otherwise wouldn't have won.
00:40:21.000I personally think that the second of those is debatable.
00:40:27.000The first of those, I think, is also this energy consumption as inherently bad Is part of a broader, what I call, climate cult in the country that we have to actually potentially even question the suppositions on which that whole assumption set rests, that energy utilization is at all a negative externality, as long as you're paying for that energy.
00:40:46.000And I think that's a separate point that, you know, we can have.
00:40:49.000But, each of which have philosophically rich, you know, debates in and of themselves, right?
00:40:56.000There's a lot of rabbit holes for sure.
00:40:56.000And by the way, it is fair to say that people who are mining for Bitcoin are paying for their own energy, no?
00:41:01.000Well, in some cases, there's actually government subsidies to do this.
00:41:05.000So if you get the government subsidies out of it, though, internalizing that negative externality solves that problem for you, I mean, as a justification for regulation.
00:41:13.000Like, one way you could just sort of not open a whole regulatory Pandora's box would be to say, if you just internalize the costs of energy consumption to the people who are actually mining for it, that solves that problem and takes that justification for regulation off the table.
00:42:06.000To the extent you're describing it as an externality, we could internalize that externality by actually- You know, you avoid, and I don't know, I've known people in the crypto world, I'm not some person of the crypto world or anything, but I imagine that many of them, if they had a choice to say, internalize the cost of your negative externalities by paying for your energy utilization, but we trade that off for, like, a regulatory regime that doesn't have to exist, I think there are some people in that world who I presume would say yes to that trade-off, and that's at least a first principles clean solution.
00:42:31.000The other negative externality is the potential for there to be some type of, like, crypto-caused financial crisis, right?
00:42:45.000Now, obviously, we've seen with SVB, right?
00:42:47.000Like, ineffective in a lot of cases, right?
00:42:49.000Or even creating the very conditions for the financial crises.
00:42:53.000We have none of that with crypto at all.
00:42:57.000And so a lot of, you know, what I spend my time doing is saying, like, listen, like, Keep crypto out of the traditional financial system, going back to its origins.
00:43:04.000If you want to be this casino off to the side where tech-savvy people play, whatever, that's fine.
00:43:28.000I love this conversation because you know what's so fascinating about this?
00:43:31.000I'm going to put a bookend on this for today and then we're just going to pick up where we left off at some date not too distant future if you're down for that, man?
00:43:44.000You, in this conversation, by airing, I would say, your skepticism of unregulated crypto, have made a stronger case to me, or have, for me, awakened more of a pro-classical crypto bent.
00:44:01.000Then any crypto enthusiast who has been, like, spewing nonsense words at me for, like, the last two years about the future promise of the promised land of crypto, dude, it's like, That did not land well with me, but understanding the cases you've made it, though you come from the other side, has actually solidified, I think, a lot of my instincts in the pure version of it.
00:44:22.000But I think here's what we might share in common.
00:44:24.000I'm going to give you a hypothesis because the last part of what you said probably aligns with what I'm about to say is I don't think the negative externality argument is actually the strong argument, and I'm going to be presumptuous here.
00:44:35.000I don't even think that's actually what is at your intuition, at the heart of your intuition.
00:44:40.000Try this one on with me because here's where I'm at on it is if you want the actual Wild West, go have your Wild West and don't talk to us.
00:44:50.000Do your little pin keys and lose your key and you forget your passcode.
00:45:14.000But the flip side is the sovereign has to have the right to say, we stay out of your hair.
00:45:18.000Don't come crying to me or to my court system or to my property rights regime funded by taxpayers through the traditional financial system.
00:45:27.000Don't come crying to me when things go wrong for you either.
00:45:32.000And I think that that's probably the original ideologues in the crypto world.
00:45:36.000And crypto is an ideology in this purest sense of the world.
00:45:40.000I believe in allowing that to exist peacefully on its own terms.
00:45:45.000But it's the effective cronyism embedded in that to say, "Now we need, actually, you should regulate us so that we can have access to the traditional banking system, too," that creates the hypocrisy.
00:45:54.000And I don't want to, I'm not playing your psychologist here, but hearing your arguments, at least that's the more persuasive strand to me.
00:46:01.000And I think, like, I could just even like watching you in this conversation, I think that's what animates you and gets you going to me, gets me going, too.
00:46:08.000But it could equally be an argument for then saying if the direction you go is saying, okay, if that's the direction you guys want to go, then welcome.
00:46:15.000Welcome to the game of being regulated, and here's what that looks like.
00:46:18.000And we'll have a separate episode on what that looks like.
00:46:20.000But to me, what I would say is don't ever cross that Rubicon.
00:46:23.000In the first place, the thing we should actually have left to one side was the idea that let the alt-world be the alt-world.
00:46:30.000We have off-chain and on-chain, and may the twain be held separate.
00:46:34.000And I think that that's actually something that you've done for this conversation, that the greatest purists in this world haven't been able to persuade me of through the front door, and this was actually quite useful.
00:46:45.000Well, listen, I would be fine with that world.
00:47:07.000They want subsidies, they want light touch regulation, and they want favorable taxation.
00:47:11.000And they're no different than anyone else, despite the claims of their technology.
00:47:15.000I'm against cronyism in all of its forms, but I believe in the purism and being a purist on the true vision of the original vision of what crypto and the promise of the blockchain was, too.