Unleashing Blockchain’s Transformative Potential with Balaji Srinivasan

Some observers think months or even years ahead. Balaji Srinivasan thinks decades ahead. 

But Balaji is no mere theoretical futurist. Across a storied career that includes stints at a16z and Coinbase, the acclaimed investor and bestselling author of “The Network State” has helped build and launch some of the crypto industry’s most successful companies and assets, including a key role in developing Circle’s own USDC. 

In a conversation they recorded during the Singapore Fintech Festival in early November, Jeremy and Balaji discussed a wide range of topics, including solving for scale adoption, unlocking super high utility value, and new competition for fiat currencies. Some key ideas they discussed:

  • Why half the world’s population may well store a substantial portion of their assets on chain by 2040. 
  • Why we haven’t yet accepted the idea that there ought to be no borders to economic activity.
  • Why companies may increasingly put their financial statements on chain.
  • How blockchain technology can expand property rights to marginalized populations.
  • Why our reality and virtual reality may increasingly be defined by digitally gated space.

Balaji and Jeremy also discuss how the Bitcoin ecosystem is comparable to the early days of the internet and how blockchain technology has the potential to revolutionize the way that companies are formed and managed.

In their Money Movement conversation, Balaji and Jeremy cover:

👉 [00:01:00] Mainstreaming crypto technology 

👉 [00:06:42] Leveraging the economic value of blockchain

👉 [00:08:00] The future of blockchain and its gradual success rate

👉 [00:10:50] How companies can be formed on chain

👉 [00:12:40] The global crypto economy

👉 [00:14:27] Blockchain hybrid models 

👉 [00:17:52] The benefit of holding assets in digital currency 

👉 [00:34:00] Digital currency vs fiat, the battle for sovereign recognition

If you’re interested in the far-reaching applications of blockchain technology, tune in to this episode of The Money Movement.  

Subscribe here:

👉 YouTube: https://bit.ly/3lUcJFN 

👉 Apple: https://apple.co/3G3CrPZ 

👉 Spotify: https://spoti.fi/3lUd6jF 

👉 Email: https://bit.ly/3aXWYY5 

And connect with Balaji here:

👉 Twitter: https://twitter.com/balajis

👉 LinkedIn: https://www.linkedin.com/in/balajissrinivasan

👉 Website: https://www.coincenter.org

Interviewer: Hello, and welcome to an episode of the Money Movement. I'm really excited to be here in Singapore, here for the Singapore FinTech Festival and spending time with amazing people, and very excited for this episode to have a repeat guest Balaji. Someone who I've had a chance to get to know for many years. Welcome back to the Money Movement.

Balaji: Well great to be here.

Interviewer: Awesome. There's always so much we can talk about, which makes it really fun. I think one place to start might just be, given the arc of where we are in the development of crypto, there's a lot of discussion about, what is it going to take for this to go from where it is today? Which is still in the Jeffrey Moore context, an early adopter environment. Maybe there's a couple 100 million people or whatever it is, to 1 billion, or 2 billion people.

I think about that through a lot of different lenses, and I think we can pull a few threads on that topic in the conversation. As a technologist, both of us being technologists, what do you think the hardest technologies are right now, and the problems that are going to solve for scale adoption?

Balaji: Good question. Crypto is, first of all, it is useful to, I'm glad you said, hundreds of millions of people because in a sense, it's early, but in a sense, we've also made real progress, right?

Interviewer: Huge.

Balaji: Huge. From where the white paper came out, and Bitcoin launch in 2009 to here, if you had said, "You're going to be a global phenomenon with hundred millions of users in about 10 years with nation state recognition by multiple countries and sense of some of--"

Interviewer: The biggest financial institutions and mainstream, main street, et cetera?

Balaji: That's right. Multiple unicorns and blah, blah. All the giant ecosystem that has been built, you need to book that as a win overall, net.

Interviewer: Totally. It's like, Wow."

Balaji: The analogies are sometimes overdone, but I think it's roughly comparable to the early 2000s.

Interviewer: That's exactly where I think we are.

Balaji: We're past that initial .com bubble phase. We have the early infrastructure players similar to-- The exchanges are a combination of the portals and the AOL types, actually getting you online like-- I was going to say fiber, but the-

Interviewer: Sure. DSL.

Balaji: -DSL. Exactly. DSL early providers at that time. Now, what we need is the ecosystem to mature and the tooling to mature. People forget how long it took for the internet to actually mature.

Interviewer: Absolutely. Back in early 2000s, writing software for the web was-

Balaji: Not that easy.

Interviewer: -really not great. Building a rich application actually delivering any media of value really couldn't do it. It was posted stamp, blah, blah, blah, that kind of thing.

Balaji: It was 2004 before AJAX and Gmail and Google Maps were extremely difficult things to do in the browser. HTML was actually built off of a book programming environment, where to do 2D, let alone 3D layouts like VR, was something that was initially built for laying out books. It was actually not where you could--

Interviewer: Remember, you could help blame me for Flash. We tried to solve it with a different client, which was actually quite good.

Balaji: Yes [unintelligible 00:03:28].

Interviewer: No. Macromedia.

Balaji: Great. Flash had its heyday, but then with iPad or whatever--

Interviewer: Sure. It was a closed system.

Balaji: It was fine for a while. It was just something where that was the best we could do during the 2000s, so all IE. The thing is that people forget. I spoke to a very senior exec at Microsoft, and they said something interesting which is, for them, the internet was basically nothing other than Google as late as 2009. From their perspective, Google was the only significant internet business as late as 2009, which is really not that long ago. Then what happened was, after 2009, you had the iPhone, and Google Ad revenue, and Facebook revenue, all went vertical, and Facebook adoption all--

Interviewer: E-commerce scaled much more--

Balaji: Everything. That's right. All this ad spend shifted because the financial crisis had to go into efficiency, and it was finally there to capture that reign. A social catalyst, as well as technological catalyst for adoption. I think a bunch of things. Then actually, even Stripe was only around then. Uber was only found around then. Airbnb was found around-- A lot of things we think of as the modern internet environment is basically about 10 years old.

Interviewer: You needed mobile broadband. You needed these very high-quality client user experience environments. You needed that wide distribution of those things before you could turn on super high utility value for a lot of things.

Balaji: That's right. The experience we have today, where there's an app for everything and so on, is really mid-2010s. Really, I'd say maybe 2020, you could say it was the first year that you had the digital flipping and now it was digital first. Using that build out, the reason being because on an exponential, people tend to forget how long that that took.

Interviewer: It's a long curve and then it feels like it's extremely fast.

Balaji: Exactly. Here's my mental model on this, which is, if you put time on this axis, in the 1990s, only academics and so on were spending any time on the internet. The 2000s, maybe you and I spent a little bit of time on the internet. Maybe you more than I. Only as small percentage of the world was spending a few hours a day. By the time you get to 2010, a much larger percentage of the world was spending more time. Then by the time you get to 2020 or 2022, we have three or four--

Interviewer: Didn't have a choice.

Balaji: Exactly, 3 billion or 4 billion people were spending multiple hours a day on the internet, and probably 1 billion people were spending most of their waking lives on the internet. If you think out those two axes like just the number of people in the world, so the percentage or amount of people in the world. Then the percentage of time they're spending, that goes from a little box over here, less than 0.1%, less than point percent, up to something like 50% of the world spending 50% of their time on the internet.

I think if you think about that, here's one comparable metric. Just as we put all of our time on internet, I think we're going to be putting all of our money on chain.

Interviewer: Our economic value exchange.

Balaji: Exactly.

Interviewer: The ways in which we trade our value, so to speak.

Balaji: That's right.

Interviewer: As humans, as entities, that will just become mediated by that.

Balaji: That's right. I think, the graph would be on the X-axes, the number of people in the world or the percentage of the world, and the Y-axes, the percentage of net worth on chain. In 2009, perhaps only Satoshi had-- Actually, even Satoshi didn't because Bitcoin was worth less than a dollar or whatever, or didn't have a value. Let's say 0% of the world had 0% of their assets on chain. Five years later, less than 0.1% of the world had some percentage of their assets on chain.

10, 15 years later, by 2022, I don't know, it might be-- Of the 300 million people, that's about 5% of the world. Maybe 1% of the world has 10% of their assets on chain or whatever the number is, 5%. I don't know the exact number. That's a little bit more of a rectangle than a square. It's a small demographic that has a large fraction of their assets on chain, and then it drops off like this. I think as we go three years, five years, et cetera, I don't know, it's a very-

Interviewer: Long tail.

Balaji: -long tail. That's right. Certainly, by 2040, I would expect it's similar to where we are now, where 50% of the world has 50% of their assets on chain. Go ahead.

Interviewer: I think that's exactly right. One of the things that was attractive about getting into this space, like now 10 years ago was that you could see the way in which the web played out, and the arc of that adoption curve and what it meant, all that. You could see the exact same thing happening in value exchange. What was interesting to me was that's like a 10, 20, 30-year thing. That's actually exciting to be involved in-

Balaji: In something that's got that long arc.

Interviewer: -that's got that long arc. You probably hit milestones, like you were just saying, nation state awareness and adoption is the trickle of that. To say, "Wow, this is going to be something that basically is going to force reconstitution of even political and economic systems at a very fundamental level." It's like, "I want to work on that. That's really worth working on."

Balaji: Absolutely. I want to come back to your question, which is, today, we're at about 50% of the world spending on the order of 10% to 50% of their time online. How do we get to 50% of the world spending on the order of 10% to 50% of their time on chain? What are the specific things. First is, with USDC, which I think you did quite a lot of--

Interviewer: Just a reminder for the world, Balaji was a huge part of the launch of USDC, collaborated super closely with Circle when he was CTO at Coinbase. I'm super grateful for that collaboration, and where it is today. It's pretty amazing.

Balaji: It's awesome.

Interviewer: I had [unintelligible 00:09:29] Armstrong on the show later today.

Balaji: Great.

Interviewer: We're both super excited about where USDC is.

Balaji: It's been an amazing collaboration, and it's really great to see it. I don't know what the exact ratio is, but it's 1,000x or 10,000x larger than it was then. I don't know the exact ratio, but it's on that order, right?

Interviewer: Very much.

Balaji: The thing about that is, here's how I think about it, first, we have Bitcoin and you have a single point-to-point payment on chain. Then you have Ethereum, and now you can do not just a single A to B payment. You can do A pays B, and then B gives back A token.

Interviewer: Scramble of of money.

Balaji: Exactly, or a--

Interviewer: Providing a little value exchange.

Balaji: Providing value, or you have A pays B, and then B pays A back in a loan over time. You start to have more complicated payments. Then we have sale of coins. What comes after that? You have payments, you have basic contracts, you have payment structures. Now, one direction you can take this is you start going to thinking of full entities on chain. Like Aragon and other things, and the Wyoming DAO law.

You can form a company just like you can set up a-- You can do instantiate new just like in JavaScript create a new object. You form a company on chain, and now that company has financial statements on chain.

Interviewer: Perfectly auditable.

Balaji: Exactly.

Interviewer: Transparent at real time.

Balaji: Exactly. That's right. Now you can get-

Interviewer: Inherently global.

Balaji: -inherently global. That's right. Potentially, dominated in USDC if you want to do US dollar base.

Interviewer: Every org will have a treasury management strategy and people, generally, entities are conservative over here, and their mandates not like, "Go speculate on all this," but they might need derivatives, they interacting across different tokens and other things to hedge risk. They're going to have whatever they have-

Balaji: That's right.

Interviewer: -for strategy.

Balaji: All the stuff, the various differences between GAAP and IFRS, or accounting and so on, you can actually, like the LIFO and FIFO stuff, you can put those into rules where you slurp up the on-chain stream of raw payments data, effectively your general ledger with some annotations, and you turn that into a cash flow, and income statement, and balance sheet. You have real time financial statements. First of all, that's really awesome. Now what does that facilitate? That means you've got a transparent investor environment on-chain.

Interviewer: Yes, totally.

Balaji: Then over time, those companies and those financial statements, now you can go one more level and you can have companies doing an M&A, and you can do investments. That's how you get the global crypto economy. That's one vision for how today we think of like the US as a single largest integrated market and China as the second largest, but I think this division for--

Interviewer: The internet.

Balaji: The internet, exactly. That's right. That brings in India and Brazil and the Middle East with the Midwest. It bridges essentially the free world as the free internet, where now people cannot just do-- We take for granted that somebody in Brazil can collaborate somebody in India and in--

Interviewer: In the world of information and communications, we've kind of accepted there's no such thing as a border.

Balaji: That's right.

Interviewer: Basically. Other than some extreme scenarios.

Balaji: That's right.

Interviewer: We haven't yet accepted the fact that there's basically no such thing as a border in economic activity, but people in a crypto have accepted that.

Balaji: That's right.

Interviewer: Basically, it's just the rest of the world's catching up.

Balaji: That's right. What that means is if we think about the cryptocurrency, fiat currency exchange and how wildly important, lucrative, difficult that was, perhaps disproportionate to most people's expectations, even in the early 2000s, to some extent, Satoshi, to my knowledge at least, didn't write about the exchange rate or things like that. People thought you could bootstrap a pure crypto economy. It turns out that even if, from a historian's lens, you might look at the rise of Bitcoin as almost a step function, it was flat and then went totally vertical. In practice, as we know, it was a continuous thing.

Interviewer: S curve.

Balaji: Yes, exactly.

Interviewer: Up until the right S curve.

Balaji: That's right. With a lot of ups and downs in the middle. It didn't look like this straight ascent.

Interviewer: Except for the people with the log charts.

Balaji: Exactly. Except the log charts.


Balaji: That's right. I still have faith in that log chart. Let's see, log chart. By reference to that, the bridge between the crypto world and the fiat world is the thing that a pragmatist knows is important. Somebody who's totally centralized or totally decentralized wouldn't think is important. By analogy of that if the cryptocurrency, fiat currency exchange bridge was so important, I think the crypto identity, fiat identity bridge, so digital passports after digital currency.

Interviewer: Totally.

Balaji: Crypto company, fiat company like the Wyoming DAO law where you're taking the off chain--

Interviewer: I have this philosophy, as you know, we've always had this view of we're building these hybrid models. USDC itself is a hybrid model.

Balaji: Exactly.

Interviewer: Identity, you're going to need hybrid models, and then real-world entity or a legal entity and an on-chain entity, hybrid models. There's a period of time where it's going to be innovative companies, innovative jurisdictions, other things that are going to allow those hybrid models to exist.

Balaji: That's right.

Interviewer: Then eventually, it all blurs like the tipping point in living digitally in 2022 versus where you were in 2010.

Balaji: That's right. Actually, USDC is one of those hybrid models where you've got the fiat dollar and the crypto dollar, and there's that interface. I remember when steel coins first came, people were like, "Okay," it said, "Dollars, we're on the blockchain. [laughs] What's the point of that?" If you recall, in the early 2000s, people were like, "Oh, great, I can edit a document, but online. Did you hear about Microsoft Word? Can we do it offline? Obviously, the Windows toolkit was actually better at that time, and they didn't get--

Interviewer: Yes, [crosstalk] skepticism of that.

Balaji: Inherent skepticism. That's right. What they didn't get was that putting it online got you all the stuff we now take for granted like synchronization, and a single copy rather than attachments, all that stuff. Putting something on-chain, it gets you the stuff we were talking about. It gets you transparency, it gets you a single copy, the accounting statements are right there.

Interviewer: Probability, interoperability.

Balaji: Exactly. It's funny, I remember one thing that you and I are both aware of that maybe the world isn't aware, when you have a big four and they're doing audits or something like that, the big four, they will actually use the Bitcoin, Ethereum blockchains as the gold standard of truth, because they have triple entry accounting. This is totally different from the model of, "Oh my god, Bitcoin, Ethereum, oh, it's scams, or whatever." Actually, it's a gold standard of truth. You actually have a gold standard of truth for international accounting in a way that's never been there before. Go ahead.

Interviewer: No, no, I [crosstalk]--

Balaji: That boost investor confidence, all this stuff.

Interviewer: Yes. I want to pull a couple threads because-

Balaji: Yes, please.

Interviewer: -you've touched on things that I wanted to talk about. We'll go deeper on. One is this idea of effectively on-chain debt capital markets. When I think about growth in stable coins in particular, a lot of people oftentimes will think, "Well, stable coins are going to come in and they're going to disrupt payments." I think that's probably true and over the long run, payment utility will be commoditized like data transmission was commoditized on the internet.

You do have that, but that the real breakthrough is what I call time value of money applications where basically money in motion and money at rest. If you have money at rest, which a lot of people do, and that money at rest could be like, "Literally, I have money at rest right now," that's in a demand deposit account and might be a healthy amount of money. The banking system has a way of leveraging that and then doing money multiplication through lending.

If you have a full reserve asset like a dollar, a digital dollar in the form of a stable coin, and you have money at rest, can you actually build credit intermediation models that are entirely sourced on-chain, that are entirely delivered on-chain, where effectively, the entity, the underwriting, the data, the actual value itself all happens there? Could that lead to long tail debt capital markets that can actually service entities, households, and firms is way, way better than the traditional banking model?

Balaji: This is actually a really interesting question in terms of, I am not sure if the money multiplier would hold up in an on-chain environment where you can actually see the money being created. That's to say--

Interviewer: There's no money creation.

Balaji: Okay, fine, fine. Basically, the typical understanding of the money multiplier is that you've got a fractional reserve and you can lend out essentially, "More than you have." Let's say people's 101 mental model is I give money to the bank and the bank can lend it out. The 102 is actually the bank can create money by lending out money that it doesn't have, but based on this money multiplier, the reserve model. The 103 model is, "Well, that's bad. Actually, what you want is full reserve and they shouldn't be able to lend that money that they don't have."

The 104 is, "Well, anything is okay so long as there's some consent and transparency on it, then we see what the market will bear. It's interesting, question is I actually, in the environment where you have everything on-chain, I don't know if you'll be able to have a very low reserve ratio, because some will try to [unintelligible 00:19:09] that. Right now, the fact that people can't actually see it, the flows of funds, may actually be the reason that people can do the--

You don't see all the other loans the bank is doing, they're not on-chain. The transparency of that. To give a small analogy, it's like with Google News, it showed the same headline being printed in 100 different newspapers. That just wasn't transparent unless you were buying the Miami Herald and New York News Day and so on all at the same time and holding them up, which no one was doing until Google News started doing that.

I feel like, I don't know, I think the transparency is good in many ways, but it may constrain what people are willing to pay in that environment, or willing to accept in terms of loans and stuff. Go ahead.

Interviewer: My thought is a little different, which is essentially that-- Well, this gets into privacy and identity these two which are all necessary components of this. I think that the premise that I have is that you don't actually have money multiplication in the form of money creation.

Balaji: You will not or you do not. You currently do not?

Interviewer: Well, you will not. With stable coins today, you do not.

Balaji: Correct because it's a one for one.

Interviewer: There some prep things that try to do that, but like those are not--

Balaji: USDC doesn't have that, because it's a one for one fiat dollar to crypto dollar.

Interviewer: You essentially have US treasuries and soon cash at the Fed.

Balaji: That's right.

Interviewer: It's a straight government debt obligation dollar. Then let's say someone has a working capital need, and so your typical model the bank creates money, and and says, "Hey, I've got this much here in a form of demand deposits, and I'm comfortable with the risk profile of liquidity needs. I'm going to create these additional deposits," basically. This model's a little different. It would effectively say users would elect to time lock value.

Instead of there being actual money creation, there's just time locked money. You could do it programmatically. You could have that all be very much handled programmatically and users could, just like you have flash loans is an example of this. Today where someone's created a pattern on chain where basically it's like capital utilization for seconds, or minutes, or whatever is actually an early indicator of a model of lending.

Balaji: New capital markets.

Interviewer: New capital markets that can exist there. If entities, let's just say I'm a corporation or I'm a startup, or I want to like build a new solar plant or whatever it is. If they could tap capital markets and it would be helpful if more and more of their own treasury operations, et cetera was on chain so that you could have automated underwriting, and you could have risk scoring, you could have other things. It is essentially classic savings investment as opposed to money creation by banks.

The premise is that I think if you did that, you could end up with a world where you have a safer foundation at the core, but where you actually have just dramatically more efficient and accessible markets for capital.

Balaji: It's interesting. I have thought about this, and I do think here's one thesis on the world, which is, I don't quite call it variance, but just maybe stressing different aspects. I think overall what we may see, let's call this a scenario, let me put this a scenario, right? We may see is a world which is much more shifted to equity versus debt in terms of the difference like primary and secondary investment. Of course also debt versus equity. It's much more shifted towards equity and maybe even much more shifted towards primary investment for equity rather than secondary sales equity where the money is going directly into the company to go buy profitable machinery or goods or whatever versus secondary sales.

The thinking is why would we see that? Well, if in the on chain environment you can see everybody's reserved because you got proof of solvency all the way down. We know that people prize, for example, the fact that USDC has a one to one ratio and things like that. Then people will want the audit to show, "Okay, there's maybe zero fractional reserve stuff happening." Instead what it is if I'm taking out a loan, it's actually a power user tool. That is to say in general, for example, with companies we typically advise them take venture capital maybe, but be very cautious about venture debt.

Unless you have very steady cash flow streams, you can get wiped out. Venture debt can kill you because they want a stream of cash today, whereas with venture capital, they're willing to tolerate uncertainty as to when you make money. Debt is still necessary because you need to know whether something's a 3% or 4% rate or what have you. You need to compare various investment scheme share. I do believe that most people are probably in more debt overall side of than we need to be, and we're probably doing less equity than we need. Equity you can build value,

Interviewer: With tokenization of cap tables or of whatever org. form you have, DAO is like the purest form or that's whatever, like a token based entity. That gives you a pure form to underwrite and so on. The bridge, the hybrid scenario also could work.

Balaji: Hybrid scenario also works. That's right. That is the direction which I couldn't [unintelligible 00:24:54]. I think it's perhaps more beneficial where people can tokenize themselves for example, and they can sell a piece of their own equity. This is like the Hernando de Soto model, where people who are in countries that don't have great property rights, suddenly have great property rights because we can teleport rule of law as a service anywhere.

That's like, "Now you can represent that thing on chain," and of course you're going to need some enforcer of that offline, that non-trivial problem. However, I do think that for a fair number of things, smart locks will get you there. ENS, there's a demo on this, but you can open smart locks for doors or cars or things and that can be gated on chain, and that's relatively difficult to hotwire offline. That gets you houses that gets you cars.

Interviewer: A lot of property.

Balaji: A lot of property, right? Now you can actually think of crypto.

Interviewer: That is really cool. I had not thought about that. Very cool.

Balaji: Okay. Very important piece of the puzzle, because that doesn't get you everything, but it pushes it one step further. Then with potentially augmented reality, depending on how well those glasses work. Apple is talking about this, Meta is talking about this, those could also be lenses or filters that disappear or appear because they're gated on chain. Various kinds of information might only be accessible as overlays if you have the keys on them. I think we might need some creativity, but I think smart locks get you a big unlock of a lot of things.

In theory you might be able to smash the glass, and still live in a house or something like that. In practice you're not going to be able to easily start a Tesla that is being Ethereum locked because that's some solid state electronics. Where you going to find that in the car? How are you're going to boost that? All right, so that means that you have new forms of equity, from personal tokens to other things. You have also deeper capital markets because you've got this international pool.

Interviewer: Yes. Those capital markets can be equity, like, and debt like, and people can mix and match as appropriate to the nature of where they are in their life cycle.

Balaji: Exactly. Just like now we think of information as like a stream of bites that's on tap. The internet is there, you can just stream bites look at your computer. The money will flow under some terms from some provider as this incredibly powerful abstraction of millions of people. Part of this concept I call the DeFi matrix. Did we talk about that before?

Interviewer: No, it sounds cool.

Balaji: It's cool. DeFi matrix I think of as to this decade perhaps in part with the social graph was the last one. The idea is that, right now, we had-- We used to have just four X, right? Like USD versus JPY. That, that matrix. Then we added in cryptocurrencies. Then you can actually though think of this giant table of every asset versus every asset. Fiat currencies, cryptocurrencies, stocks, bonds, et cetera, NFTs, ENS, et cetera.

A gigantic table like this and everything with automated market makers gets a quote from everything else in real-time, right? That market may be very thin, but some algorithms will take it from you at some price. What that means actually, which is interesting, is potentially it reduces the need for cash, why? It's a separate way of thinking about it. If any asset you have--

Interviewer: It can be in a sense it makes barter markets efficient in a way, because everything at the end can price against everything else. You couldn't do that before.

Balaji: That's right. That's one aspect. The second aspect is just like the Google News thing from before, once Google News Indexed every newspaper for the first time their geographical advantage was undermined. Now you have the Kansas City Star versus Miami Herald versus this. Now basically just reprinting the same writers' article wouldn't do it and they all had to compete with each other on unique content, and many of them didn't make it.

The national papers became international papers, and so on. I think similarly what's going to happen with the DeFi matrix is every fiat currency is put into competition with every other fiat currency. Some of them like well-managed currencies like maybe the Swiss Franc or the Dollar potentially, or depending on-

Interviewer: Synthetic stables at some level, right?

Balaji: I would, but we could discuss the dollars management, but at least the dollars popularity is still there, right? Maybe synthetics, maybe the Singapore Dollar, some currencies with either popularity or reputation for sobriety, those will go worldwide. You know the concept of like dollarization in Latin America. You're very familiar. Of course, you're familiar. You've being dollarizing the world. That's right. For the viewers, dollarization is when a country often in Latin America sometimes Africa will try to stabilize its currency by pegging it to the dollar one for one, so it's got this external thing.

Interviewer: Where just the population just decides to do it before the government even gets to it.

Balaji: Exactly. The government's printing too much money and then they'll say, "Okay, the dollar is a stable thing for us." That concept basically means now countries for the first time, they don't have a defacto geography lock. They are competing on features. We're starting to see this, in Sweden, their central bank digital currency will they're thinking about adding privacy to it. For others, maybe okay, their currency allows you to do contracts in Switzerland or something like that. That's a new thing where they're not competing.

Interviewer: Think they've got you compete more on policy than on technology in the sense of I think what's happening with stable coins from a policy perspective, it varies from this place, but in some ways, like in the US where we're going to see a bill that gets passed. It is in effect saying digital dollars, the innovation around digital dollars should happen in the private sector, on the open internet using this new infrastructure layer. We want to see a lot of people compete in that. I think it's an acknowledgement that the form factor and the features and other things are going to get driven by innovators.

Balaji: I think so.

Interviewer: You want a policy environment where people can issue dollar digital currencies that have unique privacy characteristics, or that have other things. As opposed to the government doing it itself.

Balaji: That's right. I think we might end up seeing three spheres. There's the Chinese sphere, which is the digitally Yuan CBDC. There is the US establishment sphere, which is different entities that are making US dollar pegged stable coins. That effectively get defacto new banking licenses. The reason is with a stable coin you can reinvent many of the features, traditional features of banking. You can basically build like a Wells Fargo or JPMC interface for the most part on top of the stable coin. Then you might get a third group, which is things that are not dollar pegged.

That are things like frax for example, which are like a global stable coin or what have you. We'll see how those different things play out. Those are complimentary. There's another part I wanted to talk about which is with that DeFi matrix, you have something interesting, which is most people don't really actually think about what a CBC means and what a CBC actually means is the central bank now is giving, is distance meeting banks.

Interviewer: It's in its purest retail form,

Balaji: In its purest form, in its purest form. What it means is right now because most people don't have a good mental model of what CBC is, and why is it different, don't we actually already have digital banking or whatever.

The way I've thought about it is or try to explain it is, okay, we understand the physical dollar bill, you can feed it into an ATM, and I can also hand it to you, and that's valuable. It's fully peer to peer over here and I can feed it into an ATM and then you can pull it out at an ATM.

I can feed into ATM, send it to you. The thing that we can't do though is after you feed into an ATM and you upload it to the cloud. When in its digital form, I can send it from let's say JPMC to Chase or whatever your bank account is. What you cannot do is you cannot do the equivalent of pulling out from ATM on your computer. You can't download a local--

Interviewer: Unless you use USDC.

Balaji: Unless you use USDC. Exactly.

Interviewer: That's right.

Balaji: USDC or now you actually have a private key local on your computer. Now you have a digital representation that's on your computer, and that is a--

Interviewer: It's fully reserved instead of fractionally reserved.

Balaji: That's right. Essentially you go from a physical currency and then you've got two branches. You have the National Quasi Digital Currency which is JPMC to Chase. Then we have the digital quasi national currency, which is USDC. The reason is USDC is it's getting more and more sovereign recognition, but it's not directly there. Whereas JPMC and Chase are right there, we'll get there. I think where that merges is the national digital currency.

Which has the full sovereign recognition of a JPMC and the full aspect of being able to hold a private keys locally on the computer of a USDC. Is that aspect of being able to hold the private keys locally on the computer where people don't understand that CBDCs actually mean that you can hold dollars, you can withdraw dollars, you can download dollars to your computer--

Interviewer: Essentially the conveyance of bear asset features.

Balaji: Exactly.

Interviewer: Digital bear asset features Digital Bear,

Balaji: The best analogy is just like you can download a PDF of a bank statement to your computer. Currently you cannot download the dollars from JPMC to your computer, and that is a new thing.

Interviewer: I think. We'll look, what I'm seeing from a policy perspective, if you look at the stable coin payment stable coin act that's working its way through Congress is I think we'll get there next year. Where we'll have some version of that and there'll be competition in that as well. Many more things to talk about and thread's full on. I want to ask one last thing.

Balaji: Sure.

Interviewer: Which is a huge can of worms, so we'll keep it tight, which is a huge barrier to scaling a lot of this is that representation of identity. Many of these use cases, whether it's an entity that is an individual, an entity that is a firm, or what whatever it is, it's very clear, if you have cryptographic representations of identity that can then be proven and used and exchanged, that's a huge improvement. That's right in front of us.

Balaji: Absolutely.

Interviewer: I think the harder question has been, it's one of those chicken and egg issues, what is it going to take? We've got a bunch of stuff we're working on in this, and we're trying to promote standards verity and stuff, but what do you think the most concrete thing that's possible just in the next couple of years to make real world entities and ultimately governments to some degree as well, comfortable with on chain identities that then can allow more and more of these economic interactions to happen?

Balaji: I'm a big believer in standardization, following adoption. Sometimes you can do the standard first and then use that to drive adoption, but usually it's easier to codify what already exists. In a bottom up way. There's exceptions, but the the way I'm thinking about this is a sovereign issues two things. At least a currency and a passport. Obviously we're used to now currencies that are non sovereign issued. We talk about fiat currencies and digital currencies or cryptocurrencies.

I think this decade will show fiat identities and crypto identities, or fiat passports and crypto passports. Why is that? Versus obviously remote is a huge thing now. it's always been huge, but it took a huge dog leg up. The interaction of crypto and digital nomad and remote and VR and so on will mean that we need to actually think about programmatic identity. More people are going to have more complicated identities than before. You're living in location X, you're citizen of Y. You're talking to a friend and Z you're doing business.

Interviewer: The crypto password layer is going to be the where a lot of the innovation is happening.

Balaji: Stuff. That's right. Just like digital currency, it subsumed not just digital gold, but stocks, bonds, digital dollars, all these, anything that you can do, debit and credit. I do think that in the fullness of time, the digital passport or crypto passport that subsumes your Google login and Facebook login. Your ENS, your private keys, your API keys. Also your key card to your house. Your apartment, or your office.

Interviewer: You can have identity custodians as well, because most people are terrified to lose their keys.

Balaji: Exactly. That's right. You have the keys, the identifier to your smart lock, and so on and so forth. All of those things that are presentation of credentials and eventually your password itself. One interesting way of thinking about this by the way, is a thought experiment. If you're in New York and you're looking at all the buildings. In a sense the US passport actually only gets you access to the surface streets. The shops are in the surface streets.

To gain access to one of those windows that you're looking at, you need to have a key card to that hotel and that specific room or you need to have a lease on the office in that specific building. Actually if you had augmented reality glasses, most of New York probably by percentage, maybe 80%, 90% is red. Unless you paid for a second private passport. Meaning the key card to that hotel room. On top of the first public passport, which is the public space.

Once you think of that, you're like, "Actually, wow. Most of a city. Is actually digitally gated private space. Only a small subset of it is publicly accessible space with your public passport." Once you think about that, you're like, "Okay, digitally gated private space, that is a lot of what's online." That also means just like much of an economy can be with cryptocurrency, much of a society can be with crypto passport. This is the thing I think a lot about.

Interviewer: I love that.

Balaji: Cool.

Interviewer: I love that. This is awesome.

Balaji: Great.

Interviewer: Thank you for coming on.

Balaji: Yes, it was great.

Interviewer: Absolutely.

Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Balaji S. Srinivasan
Angel Investor & Entrepreneur

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