Global Macro View, Blockchain 101 & the Stablecoin Thesis

Jeremy Allaire: Hello, I'm Jeremy Allaire, and welcome to The Money Movement, a show where we explore and chronicle the issues and ideas driving this brave new world of digital currency and blockchains. Why this show right now? We're at an inflection point in the adoption of this technology. The current global macro context is driving radical change in business models in this accelerated drive to digitalization, new rules of the road for how we transact commerce, and there's just so much to figure out.

Now, for the vast majority of business leaders in the world today, the technology and business opportunity presented by digital currency and blockchains have been elusive, perceived as either highly experimental or just outright speculative. The Money Movement aims to connect the dots and bring more people and more leaders along into the world that's happening now that we're building together.

As many know, Bitcoin was launched in the ashes of the great recession. For the past 10 plus years, the ideas behind it have exploded onto the scene. Over these years, an incredible global movement has been building, a movement of tens of thousands of companies, tens of millions of people, and increasingly a movement that reaches the highest levels of global power.

It now seems clear that there is a chance to reshape and rebuild the very building blocks of society, and the economy, and our relationship with money and economic activity. Now, the global pandemic is driving intense acceleration of this change. All of the talk from business leaders around the world is around how to become more digital more quickly, it's about how to become more resilient in the face of shifting global relationships.

Without a doubt, it's also about dealing with exploding amounts of risk all around us, not only health risks but fundamental risks in the economy, in currencies, and very likely in the banking sector itself. These systemic financial risks are cascading into how every firm thinks about counterparty risks, who's good for their money, and which money is any good. Here on The Money Movement, we want to explore these issues with thought leaders, business leaders, economic leaders, startups and entrepreneurs, and smart investors who are fueling this movement and can provide perspective on the ideas that matter.

Look, there's been a lot of navel-gazing in the crypto and blockchain world, but now's the time for bringing this out into the mainstream. I want to challenge our guests to connect the dots to the real issues and real-world implications of this technology. At the same time, this was a movement filled with visionaries who are imagining a radically different world, and we want to hear from them and help them inspire us all with what's possible, indeed, what may even be inevitable.

Coming up, my first guest is going to be Michael Novogratz. I'm really excited to welcome a guest who has seen and watched global macro issues for decades, starting at Goldman Sachs, then at Fortress Investment Group, and for the past several years has been leading Galaxy Digital assets. Very excited to have you here, Mike. Welcome, Mike.

Michael Novogratz: Jeremy, how are you doing?

Jeremy: I'm doing great. Thanks for joining us today.

Michael: Good day to be a crypto holder.

Jeremy: It is an exciting time. I'm really happy to have you on the show. Thank you so much. Hey, look, I want to start with a bit of discussion about what's happening in this broader global macro environment, what's happening not just in the US but all around the world. Stepping out of crypto for a moment, what are you seeing happening?

Michael: Listen, pre-corona, the US was running a 5% fiscal deficit. If you believe Trump with the greatest economy of all time, that was insane. I worked at the White House in 1984 in the Office of Management and Budget and David Stockman was there. That was when we first had to say the twin deficits. It was a crisis that the US was running a 5% fiscal deficit. Fast forward, we're running a 5% fiscal deficit over at full employment [unintelligible 00:04:38].

Now, we hit the single greatest economic collapse in history literally. The response, probably correctly, had to be we got to throw a lot of ammunition at this fire, and so we are going to run out of it. 20%, 25% fiscal deficits, unheard of. In the great financial crisis, we got to 12. Just as importantly, the federal reserve is monetizing all. They are buying everything at a pace that makes the QE1, QE2 era look very, very tame. You've got the monetization of debt. At the same time, Japan is running a 25% fiscal stimulus, again, unheard of.

Jeremy: It happened all around the world. The US is doing a lot, but it's no one can escape this, so we have this monetization happening everywhere.

Michael: When you debase, when you just keep printing currencies and you got M2 growing faster than the-- or equity economy, that money becomes worthless versus something. The classic hedge to that had been gold, but there are other yield [unintelligible 00:06:04] get very steep because why would I want to lend someone money in 30 years at 1% when they're just printing it like crazy?

Jeremy: One of the things that everyone wants to have a crystal ball here, and I think a lot of us are thinking about maybe the next two or three years. We know there's going to be aftershocks from this initial shock. It seems like that's going to be the case. I guess that the higher-level question is, how will all of these systemic shocks cascade and ricochet across each other around the world?

Michael: You have to think that the first impetus is a deflationary nuclear bomb [makes sound] because you've got 25% unemployment coming. Right now, what's really interesting in the US, and it feels so bad because disposable income is actually higher than it was last year because the federal-- the unemployment insurance is $600 a week higher than it normally is. If you're on unemployment insurance, you're making $25 an hour, where most people in jobs at Walmarts and at fast-food restaurants make $13 pay. It's double.

We've got a lot of income still because the government is giving it away. That ends in July, and all of a sudden, purchasing power goes down, we'll have a deflation, first impulse. When you have so much money being put on the table though, printing out this money-- and it's different in another way. Another way, you had this rise of the tea party that said, "Enough, enough, enough, we're not going to allow this to go on forever." You don't have that same politics there.

All of a sudden, now we have this corona has exposed the rich-poor gap, this inequality gap. That's the story right now. It's not a tea party story, it's an AOC story. I'd love to buy calls on AOC. The populous wave is coming, that is a spending way, not a saving way, and so you're going to have a deflation followed by an inflation. The question is, are markets looking ahead? We'll go--

Jeremy: I guess as you look at the different economies around the world, I think here in the US, we're obviously seeing what's happening here. You look at these different economies around the world, and maybe talking a little bit about currencies specifically, different sovereign currencies, dramatic things happening there and--

Michael: Currencies are really tricky because they're all relative gains. I bought a bunch of calls on the Chinese currency. I'm sorry, dollar calls or puts some of the Chinese currency yesterday partly because I see China being the scapegoat for the US, the Republican Senate, and the Republican president's plan is, "It's China's fault, they started this, they knew about it." It's going to be China-bashing at a level we haven't heard before. I think bad for the Chinese currency, people are going to try to move supply chains out of China.

That's [unintelligible 00:09:06] in the world quite frankly, but I think it's going to happen. Emerging market currencies also I think are shit out of luck in that-- the world borrowing dollars for the last 30 years as globalization happened, more borrowing dollars, more borrowing in dollars, and now, when you're deleveraging, and this is a big deleveraging, you need to buy the dollars to pay them back, in some places like Turkey and Lebanon. One of the great pluses for crypto unfortunately is, as those emerging market currencies become less stable-- You saw it in Latvia, you saw it with Venezuela, and Zimbabwe in the past, but now, Lebanon this year, Iran, Turkey.

Jeremy: It's [unintelligible 00:09:50] everywhere.

Michael: It's like it's going to [unintelligible 00:09:52] because past six, who knows where it goes.

Jeremy: This is this drive to dollars. Now, coming into this digital currency realm, we're also seeing, in particular, this drive to digital dollars such as Tether, such as US dollar coins, so-called stablecoins. What do you think is driving the surge in circulation and usage of stablecoins, and clearly some of this global macro is fueling this. I would love to just hear this connection between what's happening in the world of sovereign currencies, global macro, and this rapid growth.

Mike: I'll give you a two-sided story because you look at the growth of Tether, which has been explosive, and Tether, for the most part, it was an Asian phenomenon, Chinese not willing to pay taxes moving money around, and that accelerates when you have uncertainty and chaos, and that's what we have. I think there's one part of that, which is, "Hey, believe it or not, people trust Tether. It's standing the test of time."

There was lots of debate about it early, and maybe there still should be some debate about it but it's become trusted. People still see themselves and value their net worth in dollars. There are very few real crypto complete junkies that either measure their net worth in Bitcoin or Tether. We measure it in dollars. The dollar will stay the dominant player in the world as a measure of wealth for a long time, unless something really bad happens. I think even Libra was going to plan to do a dollar stablecoin or the euro stablecoin. There are five different stablecoins. My hunch is when they do that, the dollar stablecoin will dominate because all the different places will want to buy dollars. Your stablecoin I think is growing same reason.

Jeremy: 75% growth in six weeks.

Mike: The second reason I think stablecoins are growing is, the Microsoft CEO said we did two years of innovation in two months. The shift of digitalization in this COVID thing is happening at lightning speed, from the fear of germs on your paper money to the broader scheme of just we're going to digitalize everything. We can do a conference call on Zoom. I never did Zoom, and now I do it six times a day. That is accelerating digitalization of dollars. I think you're going to see that wildly accelerated.

Jeremy: We certainly agree. We're going to be talking about that a lot on The Money Movement. Obviously, I can't leave this interview, Mike, without a price prediction. Price of Bitcoin end of 2020, price of Bitcoin a year from now.

Mike: I think something really significant is happening. We always talk about on-ramps into Bitcoin and who are the new buyers. Well, I tell you, macro hedge funds are now buying Bitcoin as a macro investment. I just read Paul Tudor Jones's investment letter for this month and Bitcoin is all over it. Bitcoin as a hedge inflation expert has taken the first major hedge fund from a legend in the hedge fund industry not buying it PA but buying it in the fund. That's a significant shift.

We're seeing that in our business more and more people coming in. There are more and more rails going on. Listen, I think Bitcoin 20,000 at the end of the year, I think we'll probably pause a little, you're going to have the happening. You'll probably have a buy the rumor, sell the fact for a few days, and you take right back off. I think 14,000 first target, 20,000 end of the year. I think we're starting a four to five-year bull market.

Jeremy: Pretty dramatic, the macro themes here as we're talking about throughout this conversation are intensifying. It's sort of made for crypto, made for these kinds of digital assets, made for stablecoins. Really exciting. Hey, look, Mike--

Mike: I'll leave you with one last thought because I think it's important. I lived in Asia '93 to 2000. The Asian financial crisis was the first time I saw markets just break apart. What I've learned through that crisis, the [unintelligible 00:14:23] crisis is when we have these wild paradigm shifts, shit happens that you can never expect. The possibility and the probability of really weird outcomes changes immensely. Will the US rates trade negative?

They started to today. It used to be with swap spreads never trade negative, but they traded negative 90 basis points. Will the US dollar lose its reserve status? Tiny, tiny delta. Probabilities are changing. I want investors to wake up to the fact that the old rules might not exist. I'm not saying they won't, but the probability that-- so crypto, even as just a hedge on all that, becomes a much more compelling story.

Jeremy: A lot of structural stuff. Mike, this has been fantastic. Thank you so much, and looking forward to having you again as well.

Mike: Awesome. Take care.

Jeremy: Certainly, interesting times. The global macro view is something that we're going to be coming back to a lot on the show. A big thing we're going to explore in The Money Movement is the idea, and related to what we just talked about, that we're building a new architecture for the global economy, and then that architecture is being built on blockchains and digital currency. Now, the global economy is built on trust, and the blockchain is a new architecture for that trust.

To help us explore this, I'm excited to welcome our next guest, Kevin Werbach, professor of legal studies and business ethics at the Wharton School, and author of The Blockchain and the New Architecture of Trust. Welcome, Kevin. It's so nice to see you.

Kevin Werbach: You too. Thanks so much for having me, Jeremy.

Jeremy: Excellent. Well, I really appreciate you joining the show. I think we first met over 20 years ago. You and I were both around and active in some of the formation of the early internet. Maybe you can just start, just talk for a minute about your time leading tech policy at the FCC as this new decentralized permissionless open network dubbed the internet was emerging.

Kevin: I graduated from law school in 1994. I wanted to do internet law, and it didn't exist. I literally looked around for a job because I was convinced that the internet was this unbelievably transformative technology. It had impacts for law, but it was going to just change the world, and that's where I wanted to be. There were a few startups out there, the Netscape browser had just gotten launched. There were not a lot of places to do it.

It turned out that the Federal Communications Commission was hiring law students that year. I went to the FCC and I said, "I want to do internet policy." They looked at me kind of cross-eyed and they said, "Okay, well, Al Gore in the White House keeps talking about this information superhighway thing, and so we should probably have some people looking at these issues." That turned out to be dumb luck and dumb luck of timing that I got in on the ground floor and became counsel for new technology policy.

I ran internet policy at the FCC in the Clinton administration, was part of the Interagency Working Group on E-commerce policy that developed the overall US approach to internet.

Back then, again, my community, the people I talked to, what I saw, what I was doing, was this was the future. This is how we were going to communicate, it's how we were going to transact. Everything was going to go to internet technology, but at that time, that was really controversial.

We talked with AT&T and the big companies and they'd say, "Oh, no, no, no, this is just a fad." There were 10 million people on the internet then in the whole world, of which I think seven or eight million were on AOL. No one in China could legally have a personal internet account when I got started. We were convinced it was going to change the world and everyone was going to adopt it, and it turned out that happened. A lot of that colors my experience on technology policy and on blockchain going forward.

Jeremy: Really, obviously, a lot of amazing parallels. The permissionless open infrastructure, these open protocols, things like that. I think just on the topic of blockchains, I want to kick off this discussion a little bit with some basic definitions and understanding. One of the key things that we're trying to do here on the show is help bring more business leaders into this movement.

I think that just starts with understanding some of the basics. Maybe just take a minute for people, why are public blockchains or blockchains that are open to anyone to use and accessible on the internet so powerful and disruptive?

Kevin: Because of trust. Trust is the foundation for all value, whatever you're talking about, whether it's a fiat currency or gold or a stock or anything. The reason it has some value is because of trust because you think and you're confident that if you get the thing, then you can go and turn around and give it to someone else and it still has value. I don't need to tell you, I don't need to tell the people listening in we have a global crisis in trust right now.

This has been reinforced by survey after survey and academic research, trust in government, trust in corporations, trust in media, trust in really all institutions is going away. We need a mechanism that can allow for confidence to that value. Trust is, I talked about it in the book, it's the fusion of confidence and vulnerability. If there's no vulnerability if I've got a gun to your head, it's not trust. Trust has to have some risk, but it's a productive kind of risk. How do we get to that state without being dependent upon central actors? That is the potential of blockchain technology.

Jeremy: Yes, and I think a public infrastructure similar to the early days of the internet where anyone with a computer could join, the permissionless nature of that is one of the things that makes it powerful, and if we can have an architecture for contracts, for transactions for money that is both open and permissionless, but also something that we can all trust and rely upon, that is very fundamental and quite a big deal.

I wanted to touch on this broader digitalization theme. Mike touched on this as well. Clearly, we're seeing this being accelerated. Public blockchains have the potential to play a massive role in that, and this global economic crisis, and this sort of pandemic new normal, how do blockchains, these deeper issues of trust, and digitalization, how are they going to be manifest? What do you see happening with those pieces coming together?

Kevin: Well, there's two things. One is, anytime you have a crisis, things blow up, and there's a chance to build something new. Some of that is just a lot of the incumbents are not there anymore. They're not as powerful anymore. Some of that is people are willing to engage in some new thinking, and there's an opportunity to rethink, there's particularly an opportunity to rethink money and the idea that we are still using paper bills in the United States seems kind of odd and antiquated now. Part of it is just that general change in thinking, but part of it is that, again, there are challenges with the financial system that we've known about for a long time.

There are all the intermediaries and all the inefficiencies of that, and there's the problem that it's not fully programmable. It's not fully digital like our internet technology. If blockchain-based systems can realize that promise-- and I keep saying "if" because the reality is these things, you can call something a blockchain and it can actually turn out to be very centralized, or it can turn out to be something that's really useful for criminals.

You can also ignore the law, and my argument as a legal scholar has always been this is about trust. We need systems that are consistent with regulation. Sure, there can be too much regulation, there can be bad regulation, but the idea that there should be a mechanism that prevents all the money from going to North Korea or to terrorists, I don't think it should be a controversial notion. We can do that in a way that allows for the decentralization.

Jeremy: It's an interesting connection to a related topic, which is, as you said, you're a legal scholar, you've worked on critical legal and policy issues, and obviously, one of the things that you talk about in your book, and which is really important is this concept or potential of "smart contracts." In some ways, these layers of interaction that companies can have with each other or people can have with companies, what are these smart contracts? How might companies apply them to reduce risk, increase trust in this new, pandemic new normal, enable safer forms of global commerce?

Kevin: Right, so smart contract is an agreement on a blockchain that's self-executed and self-enforced. We have centuries and centuries of contract law. Contracts are the foundation of all business activity, all exchange. Economists describe, they define a corporation as literally "indexes of contracts." Contract serves many different purposes. It's not just a legal formality. It enables trust, and this insight goes back to the Scottish philosopher Thomas Hobbes in the 17th century.

If I make an agreement with you, a contract, I trust you because I know if you try to cheat me, I can sue you in court. I can use the power of the state to enforce my private agreement. That's why I'm going to do the deal. That's why I'm going to trust you because I hope that doesn't happen, but I know it can. Smart contracts are potentially importing that power into the blockchain world and allowing us to not just have assets that are value in and of themselves but to make them truly programmable, and we're seeing the kind of sophistication and logic that we can think of into this decentralized digital world.

Jeremy: We're even seeing, and we're going to talk about it in an upcoming episode, decentralized forms of jurisprudence, decentralized arbitration, interesting things that are kind of backstops to the machine-enforced contracts as well. I know you've recently taken an interest in stablecoins and digital currencies backed by central bank money. We're convening some sessions around that. Just quick thoughts, how many of these will be used in this new world of automated contracts in this new architecture?

Kevin: Well, I mean, you were the one who turned me on to this with the work that you were doing with the USDC and center and so forth, but I tend to think about it as the convergence of the blockchain, crypto world, and the traditional financial world that if we truly believe in the idea of money going fully digital and fully programmable, you need to have some way to, for example, not deal with the risk of fluctuation of price that we have with traditional cryptocurrencies, and you need to have some way, again, to have that confidence and that trust in what the value really is.

It's a facilitating step, it's a bridging step, but going back to where we started, you look at the way the internet happened, there were people going out and saying, "Okay, everything's going to change, we're just going to start over," and then there were people like you with a layer who said, "People develop applications, let's come up with a way to develop internet applications, and take the best of what we did traditionally with software development and the potential of having something be online and put them together." In hindsight, that was the foundation for the revolution really, and I think the same thing is going to be true now.

Jeremy: I appreciate that. Thank you so much, Kevin. It was really great to see you, and I look forward to speaking to you again very soon.

Kevin: You as well. Good luck with the podcast.

Jeremy: Thanks, Kevin. A lot of important themes there, and we're going to continue to explore these in the coming weeks, including an upcoming episode focused on trust and risk in this new global economic crisis. I was getting hands-on with real-world use cases for programmable money and smart contracts. Now, a theme running through all of this is the rise of stablecoins and their role as a building block for this new global economic architecture.

Of course, this is near and dear to my heart, and I know it's also a big theme on the mind of Kyle Samani, one of the smartest people in the crypto and blockchain world, and co-founder of the prolific crypto fund, Multicoin Capital. Welcome, Kyle. It's nice to have you here on The Money Movement.

Kyle Samani: Hey, Jeremy. Great to be on the show. Thanks for having me.

Jeremy: Absolutely. Well, maybe very quickly, just tell our viewers a little bit about Multicoin Capital and the broader thesis behind the firm.

Kyle: Sure, Multicoin Capital is an investment firm based in Austin, Texas. We are a thesis-driven firm, and we invest in the crypto ecosystem. We run two funds, a hedge fund and venture fund, venture investing in the private side of the market, and the hedge fund in the public side of the market, and we've got 13 employees now in the US, East Coast, West Coast, and Texas, and in China. We spend a lot of our time energy doing deep diligence research and developing high conviction theses and making concentrated bets.

Jeremy: Some of the best reads in this space come out of you guys. Really tremendous thought leadership, and the thesis work is phenomenal.

Kyle: Thank you, Jeremy. I appreciate it. I love writing and getting a chance to share it. I'm really glad all the people enjoy it. Glad to be here on the show.

Jeremy: Excellent. I want to dig into your stablecoin thesis. Maybe you could just start, maybe describe at a high level what your thesis is about, why these have emerged and where they're going, and what role they're going to play in the broader global economic system.

Kyle: Yes, we've been watching the stablecoin ecosystem evolve now for about two or three years, and it's really just sort of hit it stride recently in a major way. At the end of the day, I find that the legacy system, whether it's Venmo or PayPal, or Bank of America, JPMorgan, transferring dollars in those systems is archaic and painful. Transferring USDC or other stablecoins on the Ethereum or other blockchains is a really just a magical experience. Fees are much lower, it's instant, everything works seamlessly, and so when I kind of take that and extend it to other just payments opportunities, it's very clear to us that the crypto payment rails are the payment rails of the future, and putting dollars on them in the form of USDC just creates such a better user experience for all kinds of users.

Jeremy: I mean, it's amazing. I think for people who haven't used the ability to beam, so to speak, a dollar at the speed of the internet, with irreversibility at virtually no cost to any internet-connected device in the world is sort of magical as the first time you maybe used internet email or the web or whatever. It's just one of those experiences that's really dramatic.

Kyle: Like we're at the point now where we settle trades with our OTC counterparties. Our OTC counterparties prefer that we settle trades in USDC rather than using the legacy banking system.

Jeremy: Right. Where do you see this going? Are we moving into a phase where-- obviously, stablecoin has got their start in the digital asset trading markets, just as you've noted even in your own business. Are we at a place, are we approaching a tipping point where real-world businesses are using these to pay their suppliers, pay each other, receive payments, really starting to become a real payment of settlement medium on the internet?

Kyle: Yes. You have better insight on a granular basis than I would given the nature of circles business, but what I can tell you we see happening from our vantage points is a lot of interest in people making payments faster and better in all instances, all of the world commerce, both like B2B as well as B2C. The other thing we've seen that's been really interesting has been just a flight to the USD from citizens all over the world. That is such a powerful opportunity for these people to be able to have digital US dollars in a bare format.

Jeremy: Right. That is profound in and of itself, the ability to hold a dollar, and in something like a USDC where it's not commercial bank money, it's not fractional reserve money. It's backed by short-term US government treasuries. It's a full reserve system, it makes it a little bit unique. What you just shared relates to one of the themes I wanted to talk a little bit about, which is this broader Global Financial Inclusion, and that's a lot of different things.

It's getting more people into the realm of money, the economy, make it safer for people to exchange value with each other, even in a localized way, helping individuals participating in global labor markets. Some of these themes, and related-- going what I say is over the top, which is, you're just going over the top of the internet, and you're going around weak governments and weak currencies to access something like a digital dollar. Where do you see stablecoins in all of those dimensions in the next couple of years?

Kyle: Yes. There's so much opportunity in the space. I think we're only just starting to scratch the surface. There's now tons of anecdotal stories around people in Venezuela, in Argentina, in Turkey, and all kinds of jurisdictions around the world where they're trying to escape their local fiat currencies, and they want digital dollars. That demand is for sure today anecdotally already doing this. Most of those people don't volunteer their names, but we know lots of anecdotes that's happening. It's probably happening at a larger scale than most people realize although it is hard to quantify. As we look out ahead, there are some really big catalyst coming that are very clear.

Probably the biggest of those is Libra. Facebook is going to be putting digital dollars on a blockchain, and they're going to be rolling it out in WhatsApp, in the Facebook Messenger app, and in the Facebook proper. Obviously, those apps collectively reach more than 3 billion people. That is going to be a big catalyst. I think in the wake of that happening, there's going to be tons of opportunities.

It's going to clearly just push this whole stablecoin ecosystem forward. It may be good for Libra, but it's also going to be good for the other companies and the other stablecoins in the space simply because you want competition because people will want to experiment and try other things. That is by far out the largest mega catalyst that we can see.

Jeremy: Yes. Absolutely. These models which are more of these closed networks but still using the same fundamental technology, and then as we talked about earlier, open permission with blockchains and the power of that for true peer-to-peer transactions for smart contracts that can intermediate different types of business relationships or labor relationships, other things. Clearly, there's going to be multiple significant growth platforms coming from that as well. Excellent, Kyle. We could go on for a long time on this theme, and I'd love to have you back on the show to explore more, and it was just really great to have you on here today.

Kyle: Hey, Jeremy, it's an honor to be on the first episode. Thanks so much for having me. I can't wait to see how the show progresses and evolves, and yes, looking forward to coming back whenever it makes sense.

Jeremy: Awesome, Kyle. Thanks. Have a great day.

Kyle: Bye-bye.

Jeremy: Some big themes this week as we explore the issues and ideas driving The Money Movement. Next week, we're going to be joined by a number of excellent guests where we'll be talking about the big picture of risk, safety, and trust in our financial system. We're going to explore more on the global economic outlook, the risks in our current banking and financial system, and how the Chicago plan from the Great Depression era may fit into this new economic architecture being built on stablecoins and blockchains.

We're also going to talk about the fundamental benefits of blockchains for managing risk and security with payments, transactions, contracts, and so forth. Until next week, stay well, stay safe, and stay informed. Thank you.

[music]