A Safe Haven - Risk, The Chicago Plan & Safer Payments

Dan Morehead is one the leading macro investors in the blockchain space and Founder and CEO of Pantera Capital. Dan brings some of the deepest global macro chops to the table — formally CFO and Head of Macro for Tiger Management, Global Head of Foreign Exchange for Deutsche Bank and started his career as a trader at Goldman Sachs. Dan (and Pantera's) most recent Investor Letter has sparked incredible interest in the past week.

Dan will provide his global macro perspective, and help to give context on the insane levels of risk facing the global financial system, while also discussing the incredible potential of 100% Full Reserve Money.

From there, we'll take the conversation deeper into history with CSU Professor Ronnie Phillips, author of The Chicago Plan and New Deal Banking Reform, an incredible narrative on the attempt (and failure) by the world's leading economic thinkers to establish a safer financial system during the depths of the Great Depression. Highly relevant to today's emerging economic landscape, and critical in understanding some of the fundamentals of digital currency and stablecoins.

Finally, Dragonfly Capital's Haseeb Qureshi will join the show to talk about some of the basic tenants behind blockchain based infrastructure for safety, security and trust in a world filled with insane risk. Hasseb is one of the sharpest minds in the space, and one of the earliest to help articulate the concept of stablecoins in an accessible way.

Join Circle CEO Jeremy Allaire and these guests as they discuss the insane risks of today's global financial system, The Chicago Plan and New Deal Banking Reform, and how digital money leads to safer payments. Listen now!

Jeremy Allaire: Hello, I'm Jeremy Allaire and this is The Money Movement. 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. Welcome back to this week's episode where we talk about the insane risks facing our global financial system and what this means for the prospects of full reserve money including digital currency. For that discussion, we'll be joined by legendary crypto macro investor and crypto fund OG, Dan Morehead of Pantera Capital. We're going to go back in history a bit to revisit and discuss the famous Chicago Plan, which emerged from prominent economists during the depths of the Great Depression. We'll be brought along that journey with Colorado State University Professor Emeritus Ronnie Phillips, author of The Chicago Plan and New Deal Banking Reform. We also want to get a little bit more hands-on and concrete with the fundamentals of digital currencies.

Digital currencies hold promise as both a safer form of money and a safer form of payments. In this world of "insane risk," we want to explore those issues in detail with Haseeb Qureshi, a crypto guru, and investor who knows how to break things down in really understandable terms. I want to step back for a moment and do a little bit of context setting. The bigger mission we have here with this show is to help the average business leader to better understand the power and potential and real-world value of stable coins, digital currency, and public blockchain networks. It's pretty easy in this industry to zoom in and focus on the technology, but I think this often misses the bigger picture. Business leaders need a broader global perspective and a way to translate what's happening in the global economy at large into concrete strategies for how to thrive, survive and compete. In this new area of technology, it so happens that the technology and broader fundamental issues of the economic system are deeply intertwined.

Now, if I were running a small or medium business with customers or partners or suppliers around the country or around the world, I'm going to be asking the question, why bother? Why is this so important? Why is this technology and adopting this technology so important? For me, how is this going to help me as a business leader to set my company up for success in the next decade? To answer these questions, we need to look at both the forest and the trees, and we're going to be doing a lot of that here on The Money Movement. Momentarily, we're going to be joined by Dan Morehead from Pantera Capital, who's going to help us start to explore some of these global macro issues. We're just waiting for Dan to pop in. It looks like Dan is joining us now. Thanks, Dan for zooming in for this. Dan, you are obviously the founder and CEO of Pantera Capital, one of the most successful and long-standing crypto macro and crypto venture capital funds in the world. Welcome, Dan. It's great to have you on the show.

Dan Morehead: Jeremy, thanks for having me on.

Jeremy: Excellent. You've spent your career in these global macro-areas, you own global macro and currency trading, and so forth for some really major firms. You've seen a lot over the years. I imagine with that global macro background, it's very much part of what drew you into the crypto space itself for many years. With that background and perspective, I have to imagine that what you're seeing right now is pretty unprecedented. Earlier, I talked about the "insane risk" that exists out there right now. Talk to us about what you see, what are the major global macro risks that exist for the world over the next, say, 24 or 36 months?

Dan: Yes, I have been doing this for 35 years, I've seen a lot of cycles and seen a lot of strange things, invested in some pretty asymmetric trades. Bitcoin itself when I first saw it in 2011, I realized it was orders of magnitude bigger than all those other trades that I traded. This thing that's happening right now, we are seeing an unprecedented use of the word unprecedented. This thing is just off the charts. There's a lot of things I don't understand about what's going on in the macro situation. The absolute clarity is very, very positive for blockchain asset prices, that if you're going to increase the quantity of money to an infinite amount, it will certainly float things that have fixed quantity like blockchain. I think this is an amazing time, the next 24 months, our time for blockchain proves up both in terms of actual functionality and fundamentals, but also the technicals that are really overwhelming.

Jeremy: Yes. What are the macro risks? What are the major risks that are out there for the financial sector with different economies? What do you see as the deepest risks that we're seeing?

Dan: Yes, this virus has prompted a lot of different responses around the world. Countries are trying really, really different regimes to combat it. One of the most common, particularly in the United States is essentially just fiscal and monetary stimulus to combat the virus. The amount of that stimulus is just off the charts and people have been successfully walking that back from, this is the biggest recession since 2008. It's the biggest one since World War II. Even people are stopping at the Great Depression. The fiscal stimulus we're doing now is larger than the Great Depression. The stimulus is expected in just 2019-20, the fiscal year now to be larger than the average of the years during World War II. There is no qualifier to it, it's the biggest deficit ever. That's going to have profound impacts on households, corporations, banking and my business blockchain.

Jeremy: No, without a doubt. We're seeing this flight to safe-haven assets such as bitcoin and gold. Bitcoin that's actually now the top-performing asset in 2020 to date. We're seeing this tremendous flight to dollars, as an example, from pre-pandemic levels to today, USDC has surged almost 75% in terms of coins in circulation, it does not appear to be slowing down. Talk to us for a minute about this flight to digital dollars. Where do you think that's headed?

Dan: Yes, I think that one's simple. Would you rather have your money in the Lehman Brothers in 2020 or in USDC? USDC or things like it are tokens. You control, they're fully backed by US Treasuries, there's no fractional reserve lending or any of those things. I think it's entirely rational. That goes for people in the developed world. You and I live in the United States, our banking system is pretty sound. If something bad happens, the government probably going to bail it out. Most of the people on earth don't live in a country like that, they live in countries where the currencies are terrible. If the banks go under, they're just going to lose all their life savings. For those people, I can totally see why they're putting their money in a token that's backed by US Treasuries.

Jeremy: Right. Obviously, we're excited about the use case, but you touched on something I want to come back to, which is the amount of fiscal and monetary intervention, this is these depression-era levels of economic contraction. Are we not inevitably going to see very real and very deep global solvency risks at the household level, at the firm level, at the bank level, and even at the National Sovereign level? How quickly could the solvency issues become much more fundamental banking sector issues? Obviously, as you said, we're not just talking about the US, we're talking about banking sectors all over the world.

Dan: Yes, I share your view. I think it's going to be a really serious financial scenario for each of those stacks. The household sector, the municipal sector, the state, national government. There's early talk of a V-shaped recovery, which I think is completely crazy, that we have an invisible physical barrier to commerce that then will precipitate a psychological barrier to commerce. I think it is unfortunately much more like an L-shaped recovery that we had this big step down. If the Fed cut 1000 basis points, I'm not going to the movies. It's just there isn't any kind of fiscal or monetary stimulus that's going to make me want to go to the movies. I think it's going to take a long time. The last recession 2008-09, it took three years to achieve the same level of GDP. This one's bigger, I think it's going to take a long time, and that will, unfortunately, have a huge impact on the solvency of all those different stacks you're talking about.

Jeremy: There's this interesting intersection here. Obviously, this raises much more fundamental questions, questions that have really been raised now for almost 100 years and I think they're as pertinent as ever today, which is this question of what is truly sound money? What does a sound banking system look like here? I'm talking about full reserve banking, full reserve monetary systems, this "the real bills doctrine" and so forth. We have a prominent guest coming up next to talk more about some of the history behind this thinking, but right here, right now, we have Bitcoin, which is by definition, a full reserve asset. Even the new Chinese digital currency DC/EP, it's a full reserve digital currency. Of course, stable coins, such as USDC as you note, these are by definition, fully reserved systems of money. What do you think, is this the future of the banking system?

Dan: I think it is. Again, if you look around the world, not just [unintelligible 00:10:47] in the United States, the US dollar is one of the least bad paper currencies. It's only lost 90% of its purchasing power since 1950, but most people live in countries where all the purchasing power has been wiped out. It's for two reasons, one is there's excessive risk-taking in the banking sector like we saw in 2008/09, and then they just print more and more of it. Now we even have an official term quantitative easing. They're actually advertising the fact they're trying to increase the quantity of paper money. A great example would be the British pound Sterling. It used to be exchangeable for a pound of Sterling silver and they've printed so many of these pieces of paper, it takes 184 paper pieces of the Pound Sterling to buy one pound of Sterling silver.

If you keep debasing the currency like that, people are going to look for alternatives. Before Bitcoin, there really wasn't an alternative. Gold obviously has been working for millennia, but there wasn't kind of a modern version of that. Now with all these different stable coins like USDC and Bitcoin, you can store your wealth, move your wealth in something that's not being eased. Actually, on Monday, we had a quantitative tightening. The amount of Bitcoins issued to the market was cut by 50%, which is the opposite of the way paper money is going. It's always there's no leverage in it. There's no default risk or whatever. You buy the Bitcoin and you can hold it--

Jeremy: No reserves, right?

Dan: Yes, there's no reserves. You can hold it for 20 years and it's still going to be exactly the same percentage of the total outstanding that you started with. I think people will shift to those and you've seen it in USDC 75% growth in the last six weeks. A couple of years from now that could be thousands of percent growth.

Jeremy: It's incredible. Dan, as usual, your perspective has been tremendous, really appreciate you joining us today on the show and hope to have you back again soon as this global macro tsunami does not appear to be settling down any time soon. Thanks so much, Dan.

Dan: Great. Thank you, Jeremy.

Jeremy: Sound money, full reserve banking. In my mind, it's not very coincidental that fundamental breakthroughs in the monetary system, based on these new technologies, including Bitcoin, including stable coins and blockchains and new initiatives in central bank digital currency are rooted in this ideal of full reserve or 100% money. There's really an incredible history here. Much of it was anchored in the thinking of the great economists of the Chicago School of Economics. We're going to take a little stroll back in history and try to contextualize the here and the now with that history and to help us explore that I'm incredibly pleased to welcome a professor emeritus of economics at CSU Ronnie Phillips. Welcome Ronnie, thanks so much for joining The Money Movement.

Ronnie Phillips: Thanks, Jeremy. It's a pleasure to talk to you. Can you hear me okay?

Jeremy: Yes, we can hear you great. Thank you. In your book the Chicago Plan and New Deal Banking Reform, you chronicle an incredible amount of thinking and debate and ultimately policy outcomes that happened during the Great Depression and that period. It's a fascinating read and obviously a really valuable contribution. I'd like it if you could just set the scene for us a little bit here. It's the height of the Great Depression. We've seen dramatic failures in the banking system, fiscal policy errors as well, and a bunch of economists out of Chicago put forward a plan, the so-called Chicago Plan. What was happening and what was this plan?

Ronnie: On March 4th, 1933 Roosevelt is inaugurated. That's on a Saturday. He gave his famous speech. "We have nothing to fear but fear itself." Shortly thereafter, he was notified that the banks in New York would be closed on Monday. What was he going to do? Fortunately, Hoover's treasury officials had prepared the emergency banking act. Which was to close all banks in the United States and Roosevelt said, "Okay, let's go with it." They closed all the banks beginning of March 6th. Now on March 12, Roosevelt goes on his first famous fireside chat. He explains to people that we've closed the banks, we're going to reopen them and things are going to be okay. By March 15th, when they opened 90% of the banks and [unintelligible 00:15:20]

Now on March 16th, the Chicago economists led by Henry Simons sent a memo to Henry Wallace who was then Secretary of Agriculture saying that what they needed to do for long-term recovery was make all Federal Reserve notes legal tender, and require all commercial banks to hold 100% in cash reserves or own account at the Fed. This would create safety in the payment system, but would it also enable fiscal operations to create as much money as was needed to restore economic viability in the economy.

Jeremy: We have these two pieces here. We have the classic scene in it's a wonderful life. What do you mean my money's not in the bank? I put the money in the bank. The fact that money is created by banks and there's this fractional reserve. They're only holding, say 10% of the money that they're actually lending out. It leads to this fundamental risk. It sounds like these leading economists were saying, we don't need to have this risk. We don't need to put ourselves in a position where basically banks go bankrupt and people go bankrupt.

Ronnie: To put it real simply we know banks do two things. They make loans and they also provide a convenient means of payment, your checking account, and so on. David Ricardo in 1823, a famous economist pointed out, there's no reason why these two functions have to be in the same institution. That's what the Chicago economists are saying. These can be in separate institutions. That's what we're seeing today with PayPal, with digital currencies. The private sector can get into the payment system, but they don't have to be involved in lending. There's no reason to believe that there's something special about banks that they can do both of these most efficiently.

Jeremy: We're trying to contextualize some of this for business leaders today. If you're a business leader, you're running a business, why should I care about this? Why should I be interested in participating in a full reserve system versus this high-risk fractional reserve system?

Ronnie: One of the things to talk about is basically problems of illiquidity and insolvency. Illiquidity is when a financial firm can't easily exchange assets for a medium of exchange. Insolvency is when your assets are less than your liabilities and you go under. What we really need is, first of all, a safe payment system and that's 100% reserved and again, backed by safe assets. Then for lending, it can be mutual funds or other types of things. If the government, and one of the things I can point out, is a problem in the past and maybe a problem today is the Federal Reserve should be concerned about illiquidity. If the Fed is also involved in bailing out insolvencies, that's where we have a real problem. The treasury and Congress to do insolvencies, the Federal Reserve for illiquidity.

Jeremy: Coming back to this theme of insane risk and where we are today. For the past 90 years, we've continued to build on this fraction reserve money system. We've continued to see excessive bank risk-taking, driving all kinds of challenges in the economy. Here we are today, the world is facing another depression and a likely widespread insolvency crisis. What are the steps that we can take to move towards sound money? You've talked a little bit about that, but what does the banking system look like if we embrace this? Obviously this fully reserved payment system, how does lending happen? This mutual fund, talk a little bit more about how do we move to a new model. Maybe that new model gets built in this new all-digital realm and the legacy system remains this higher risk system.

Ronnie: When I was working on my book, I thought at the time that legislation is not the most efficient way of achieving this type of change, a fundamental change and it really, the market would do it. I think that's what we're seeing in the payment system, Apple Pay, Walmart, everybody wants to get into the payment system. I think the private non-bank sector can have a larger role in the payment system and making that safe. Again, the Federal Reserve can help with any liquidity problems in the payment system. The lending has to be through basic mutual fund institutions, assets, and liabilities have to be consistent. If there are insolvencies-- when banks go under and are insolvent, you have the FDIC, which has an insurance fund, and it also has a line of credit to the treasury, they can intervene to deal with insolvencies. That's the role of the FDIC, the Treasury, and Congress to deal with insolvencies. The payment system, that's the private sector and the Federal Reserve. Those things have to be really separate. I think that's where we're going.

Jeremy: Right. Now, obviously here on The Money Movement, we're talking about digital currency, blockchain. As I noted earlier, earlier, nearly all of the major innovations in this specific space, nonsovereign money, like Bitcoin leading stable coins such as USDC, even cutting edge Central Bank digital currencies like China's DCEP are all built on a full reserve model. It's, as I like to as, the native physics of digital assets. Do you think this is the key piece of the puzzle in-

Ronnie Oh yes.

Jeremy: -financial system?

Ronnie: Yes, for sure. That's very important. The development of the stable coins, the US digital coin, and so on, those are key to the future development of the payment system. I think that those developments should be allowed to continue. I would like to point out, remember that the Federal Reserve has a track move they can make here in that Federal Reserve liabilities are legal tender. One of the things that they could do is say, "Hey." If the Federal Reserve starts issuing digital coins, they can say, "This is legal tender."

Jeremy: Sure.

Ronnie: That restores their monopoly that they've had. I don't think, that's necessarily a good thing

Jeremy: A version of this happening in China, literally unfolds as we speak. Ronnie, this is has been an incredibly fascinating discussion, and I really want to thank you for making yourself available to us today, and hope to speak again soon.

Ronnie: Okay. Thank you.

Jeremy: Thank you, Ronnie. Zooming out for the forest is I think really critical right now, and these ideas have not just inspired economists, but increasingly are a fundamental part of the inspiration behind crypto and blockchains. Sound money, full reserve banking, a safer, more trustworthy financial system, these are all goals that motivate and inspire the technologists and entrepreneurs who are actively building this new global system. These are the real leaders of The Money Movement.

With all that context, I now really want to zoom in and look a little bit at the trees and a fundamental premise of digital currency and an economic system built on public blockchains is the idea that this is actually a safer, more secure, and more trustworthy infrastructure for money. I'm excited to bring on our third guest himself, a highly thoughtful creative technologist. One of the sharpest people I've met in this space and now managing partner at the up-and-coming crypto fund Dragonfly Capital, Haseeb Qureshi. Welcome, Haseeb. It's great to see you again.

Haseeb Qureshi: Good to see you as well, Jeremy. Thanks for having me on.

Jeremy: Absolutely. I just wanted to start providing a little bit of context for the audience on how we met. I think, which was over two years ago. You had released actually one of the best Medium posts on the ideas of stable coin. You were incubating a startup to launch a stable coin called none other than USDC.

Haseeb: [chuckles] That's right.

Jeremy: We were talking to you about the imminent launch of a stable coin called USDC. A lot has transpired since then and I suspect a lot of things that got you excited about stable coins and public chains back then, they're as exciting as ever for you right now.

Haseeb: I'm more excited than ever. It's very clear that the macro situation that we're in right now puts us on this precipice. COVID-19 has accelerated a lot of things in our lives, but one of the things that I think it's very obviously going to accelerate is all the trends that you and I were talking about two years ago about the adoption and acceleration of stable coins. I think it's a really important time right now to keep your eyes wide open.

Jeremy: This adoption cycle people are always looking for like, what are the killer apps, and where are we in adoption cycle? With stable coins growing and really, as you said, in the COVID world, like really starting to grow. Where are we on that cycle? How do you see them becoming literally a fundamental part of the way the economic system functions?

Haseeb: I tend to think that the really interesting thing about stable coins is that they basically give you a new, different substrate for transferring money. Historically, blockchains have been ways to transfer new kinds of currencies that were untethered from the real economy, right? Obviously, they started with Bitcoin, Ethereum, now hundreds of other stable coins-- not stable coins, cryptocurrencies that you can trade and speculate on.

The real thing that has started to unlock this bridge between the old economy and the new economy has been stable coins. Has been-- the reality is today, Bitcoin, as much as I love it, it's one of the most exciting assets in the world to hold right now, it's not money. There is one thing that we don't have to ask ourselves a question of whether it's money. Is if you're tokenizing your fiat currency and you're transferring it through a permissionless blockchain that is money, and it's being treated like money. On any given day, stable coins, have actually trade more in volume than Bitcoin or Ethereum, or any of these other crypto assets.

Jeremy: Certainly the killer act on these blockchains.

Haseeb: That's right. Sort of pound for pound if you look at market cap to transaction volume. You could argue there's more product-market fit for stable coins than anything else in crypto. That has accelerated pretty intensely in the last three months with the advent of COVID-19. In large parts, you've seen growing demand for dollars around the world, and a lot more just this transition from risky assets to safe assets, this is getting mirrored in the demand for stable coins all across crypto.

I think, sorry, it sounds like you're--

Jeremy: No, no, go ahead.

Haseeb: What I was going to say was that as the global macro picture becomes increasingly uncertain and as demand for dollars increases, especially outside of the US, all of that global demand for dollars is getting siphoned to the most natural place that it can go, which is through instant permissionless access to dollars, and that's happening through stable coins today.

Jeremy: Right. This is fascinating. I think you're someone I think who you do a great job of clearly articulating things. As we look a little bit more deeply here, as I say at the trees, I'm hoping you can help the audience get to some of the fundamentals. You touched on safer lower risk, these things. For business people who are thinking like why would I use this, et cetera? Safety risk, trust around payments on blockchains, fundamental concepts here. Why are stable coins, as a form of digital currency, why are these safer for payments?

Haseeb: Why are they safer for payments? Actually, maybe I should ask you that question because that's not how I would answer it. [chuckles] What I would say, and you could feel free to, to correct me on if you think I'm wrong here, but I think that there, it's not so much safer as it is a fundamentally different set of trade-offs that you're making with a stable coin. I have this line that crypto is financial unbundling.

This idea is that if you're signing up for the traditional financial system, you're using traditional payment rails, then basically you're buying a bundle of things all at the same time of which you cannot opt-out of any individual component. The beauty I think of stable coins is that it basically goes back to that unbundled version of money where you can say, "Look, all I want is to send this much value from A to B.

If I want insurance, if I want reversibility, if I want some other constraint on the way that this money can be sent or transferred or reverted, I can add those in, I can program those in. That's the value of being able to write contracts directly on top of money is that I don't have to accept anybody else's definition of how money ought to be transferred. I can take all that on myself.

Jeremy: It has to be in layers. The base layer is like this digital cash, digital unit of account that is, as you said, it's unbundled and atomic and works like any other piece of data on the internet.

Haseeb: Exactly, exactly. In that way, it very much mirrors the internet itself. The internet began with these kinds of super bundled experiences like AOL with the idea, it was like, look, you don't know what you're doing. You can't be trusted to just go to the internet. We're going to give you this nice little landing page, and there would be this portal and you'll go here, and this part will be just for kids, and this part is just for cars, and we'll manage everything. It became very clear that the innovation of the internet was really unlocked by unbundling things, by letting anybody, first of all, build anything on the internet, but second, letting anybody opt into what parts of the internet they wanted to have access to and to access it on their terms.

Jeremy: Building network, permissionless infrastructure, fundamental concepts here and now we have that being applied to money, basically.

Haseeb: Exactly, exactly.

Jeremy: Here's the question. I think, for a lot of people who are new to this or let's say you're running a business, you're new to this some sort of blockchain, one on one fundamentals. Help explain how, how is it that a completely decentralized infrastructure it's not controlled by any corporation, it's not controlled by a government. How can that be more secure or safer than the centralized systems that people are so accustomed to?

Haseeb: That's a great question, and I think for many corporations it's tough to wrap your head around how something that nobody is in charge of can actually be robust and resilient. The best analogy that I can think of is, again, coming back to these old themes of thinking of the internet. The early days of the internet, of course, the dominant way that corporations interacted with the internet was to create this cool idea that you can share documents and send packets and information very cheaply.

Let's create our own personal intranet so that only people within our corporation can contact each other. The internet, that's a cute idea. Maybe it'll go somewhere, but it's not really meant for real industrial use. It's very clear that is reversed, where today actually if you're running your own data center, that actually ends up being more difficult to run. You have probably worse downtime. You have probably worse performance than relying on somebody like AWS to run that system for you in a way that benefits from this giant economy of scale. In the same way, Ethereum you can think of as the largest economy of scale of any system in the world where literally everybody in the world has an incentive to keep Ethereum running because there are the miners, there are the users. Sorry, go ahead.

Jeremy: No, go ahead.

Haseeb: Everybody in the system has an incentive to keep the system running, and so it does. Ethereum has had better uptime than AWS over this quarantine. Ethereum hasn't been down for a single minute, and what that reflects is a new way of thinking about what infrastructure should look like when it comes to resilience and robustness. Something that is orchestrated by centers.

Jeremy: This is like a public infrastructure.

Haseeb: Yes.

Jeremy: It is, and it is this fundamentally public infrastructure which makes it so unique and designed as people say to be resilient against nation-state-level attack factors which in this world is there. For the novice, Ethereum is secured through an incentive system and through this "proof of work" model. What is that security model actually? Can you just explain in really simple terms, what is the security model that makes [crosstalk]?

Haseeb: Sure, sure. Let's see. Proof of work in two minutes. Basically, the idea of proof of work is that you have-- The whole idea of proof of work, this started with Bitcoin, of course, and Ethereum is a continuation of the same model. The whole idea of proof of work is that the way that the system is secured is that basically, the way Satoshi Nakamoto put it is one CPU one vote. The idea is that you have all these people all around the world, essentially using their computers to try to mine Bitcoin, and for now, we can ignore what mining actually means, but basically, it means you're voting with your computer.

The idea is that it's possible that there are enough bad people out there with enough computers that they might make Bitcoin or make Ethereum do the wrong thing. They might make it disobey its fundamental rules of operating one step at a time and never reverting any transactions. The way that we know that these things are secure is basically by the fact that we know that the majority of people out in the world, the majority of the computers are actually voting in these systems. Their incentive is to keep the system going because the system is paying them. The system is paying them to keep it going.

If the validity of the system were jeopardized because of the fact that somebody were voting maliciously with their computers and overtaking the network if they had more than all the computing power of everybody else combined in the network, they could do that, but the problem is there's so many people who are making money mining that it's not worth it for them to do that. Right now mining is a business on the order of tens of billions of dollars in the world. What that tells you is that economics, not altruism, but economics is what drives the security of these protocols.

It's been 11 plus years now that Bitcoin has been operating and it has never had a 51% attack, meaning, in other words, that it is always operated in this game-theoretic way. No matter how much value-- you can already see over a hundred billion dollars of value secured by this network and not once in 11 years. This is in its infancy, not once in 11 years has the system been corrupted, which tells you that incentives work.

Jeremy: They're working. Yes, and we're seeing that with Ethereum too.

Haseeb: That's right.

Jeremy: We have this public infrastructure. It's essentially this global secure database transaction system, operating system, everyone can connect to it, everyone can rely upon it. It's nation-state attack resilient, et cetera. We have this layer. We have this layer, we were touching on stable coins before I guess just coming back to the topic, are stable coins basically like an app on these operating systems and they sit on top of the security of these underlying networks and operating systems?

Haseeb: You could say that a stable coin inherits some of the security of the underlying chain. At the same time, the stable coin also depends upon the security of the organization that's actually issuing the stable coin. You have these two security constraints simultaneously. Provided that the organization, the largest stable coin today is Tether, and a lot of people rightly look at Tether and they say, "Okay, well, this is a shady corporation. Is this really a trustworthy instrument of commerce?" A lot of people say no, which is why tether isn't really used for trading in the US.

Then you have other stable coins like USDC, like Gemini dollar, like packs that are issued by organizations that are regulated by the NYDFS, and at that point basically, you're trusting the regulatory body that governs the issuance of these stable coins and the underlying blockchain, which I think is as robust as anything you could ask for. It's a yes, it absolutely inherits from the security of the underlying blockchain to make sure that when you transfer money that transfer money is secure.

Jeremy: We're definitely seeing policy and regulatory around these stable coin arrangements is really coming to the forefront. [unintelligible 00:36:34] the same as-- is involved in a lot of that. Again, back to the basics for like just you're a business owner. We talk about risk and settlement risk and other things, just apples to apples. If you're paying someone with a card or a bank transfer, there's typically a delay, there's this possibility of reversals and chargebacks. That's really different than say if I give someone cash.

You give them the cash, they have the cash. Which it's pretty much an irreversible transaction. Maybe you could try and enforce something in court, but how does stable coin-based payments compare? It is this instant digital electronic money, but it behaves more like cash. From a risk perspective, a counterparty risk perspective, how do you see that?

Haseeb: That's absolutely right, and it is really the first version of digital cash that we really have today. Because consumers do not have access to deposits at the fed, which are really the only version of "digital cash" that you can say truly exists in the world today besides stable coins. Stable coins have become the first way that you get the same settlement properties of cash, where there's no way for the system to revert. There's no T+N settlement time. It's instantaneous, and the moment you give it to somebody it's a bare instrument.

Cool, you can move on with your life. You never have to ask another question. That kind of commerce has been increasingly eroded over time with basically regulators and governments attaching more and more strings to the traditional financial system. It's one thing to talk about how frustrating that is for small business owners who might get their accounts frozen by PayPal or frozen by their bank or whatever and basically locking themselves completely out of commerce. It's even more frustrating for people around the world. One of the things that I pay a lot of attention to is the demand in emerging markets for stable points. They have even less access, even less recourse to be able to use dollars, which of course, for many international transactions it is the reserve currency of the world for a good reason.

Jeremy: Even if they can use dollars it's maybe a regional bank, and we were talking earlier, obviously, about some of the full reserve versus fractional reserve, insolvency risk, and in today's world, these are deeper issues and so stable coins obviously represent these tokens in a sense on us government bonds. It's a different safety as well in that sense.

Haseeb: That's right. That's right. Look, the equation at the end of the day is that if you want what PayPal is offering, you can use PayPal, but if you want USDC is offering, you can use USDC. That's what I mean by financial unbundling, is that ultimately it's only ever a good thing to give more choice to people, and USDC or any of the stable coin gives people that choice to say, "Look, here's the bundle of things that I want with my money, and these things I can either pick and choose or I can say, look, I don't want that. I don't need that for my business." That trade-off won't be right for every business, but it will be right for some.

Jeremy: You bet. Haseeb, your insights have been incredibly helpful. I'm sure the audience would agree. I want to thank you for joining the show today and I hope to speak to you again soon. Thank you.

Haseeb: Likewise. Thanks for having me, Jeremy.

Jeremy: Absolutely take care Haseeb. Really interesting conversation and obviously a lot more to explore here from the global economic crisis and its impact on our financial system to looking back in history to find answers, connecting the dots to the here and the now, we're trying to bring you to the front lines of The Money Movement. If you agree, don't forget to hit subscribe, like this video, spread the word. I'm also really excited about next week's show. We're going to dive into the power of programmable money, these smart contracts, and code that can be deployed on these blockchain networks. While stable coins in and of themselves are incredibly cool and powerful, it's their synthesis with other smart contracts on blockchains that really unleash the potential.

These are the Lego bricks of the new economic system and are being built by incredible creators and entrepreneurs all around the world. Next week we're going to be joined by the founders of three projects that are innovating in really different ways. Compound Finance Founder, Robert Leshner is going to join us to talk about using stable coins with decentralized credit markets. Sablier founder Paul Razvan Berg is going to join us to talk about their new open protocol for streaming payments which is a really powerful idea for paying people by the second, by the minute, by the job, and streaming those payments through blockchains using stable points.

Then finally, Kleros founder and CEO Fedrico Ast from Buenos Aires is going to join us to talk about their smart contract-based escrow system and decentralized arbitration model. As Haseeb was mentioning, if you want that layer, you want the base digital cash layer, but let's say you want to have an escrow relationship or you want to have some rules around that. Kleros has built a system to do that and they've even built a system that allows for arbitration around disputes on escrows and other things. That's all decentralized runs on these blockchains, very fascinating stuff, so excited for next week. Until next week stay well, stay safe and stay informed. Thank you.

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[00:42:16] [END OF AUDIO]

Haseeb Qureshi
Managing Partner, Dragonfly Capital
Ronnie J. Phillips, Ph.D.
Economist, Author & Professor. Emeritus of Economics, Colorado State University
Dan Morehead
CEO & Co-Chief Investment Officer, Pantera Capital

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