Bitcoin, Central Bank Digital Currencies, and How Crypto Impacts the Financial Industry – Meltem Demirors on Off the Chain, Hosted By Anthony Pompliano

Check out the Off the Chain Podcast Page

Key Takeaways

  • In the regulated world, not many people know the difference between Bitcoin and cryptocurrencies
    • “We need to differentiate between Bitcoin and everything else … Bitcoin is unique; there is no other Bitcoin.” – Meltem Demirors
  • Countries and corporations are issuing competing digital currencies; Bitcoin is important because it’s the only neutral player
  • Bitcoin faces two systemic risks:
    • Governments black-listing coins/addresses could split the network into fungible and non-fungible tokens
    • Centralized custody of Bitcoin on exchanges
  • “I think the last decade was all about SaaS (Software as a Service). I think this next decade is all about delivering financial services & products through digital-first experiences, and tech companies becoming financial institutions.” Meltem Demirors
  • Tech companies (i.e., WeChat, Facebook, Apple, Square, etc.) are becoming financial institutions and payment networks
    • Entrenched finance industry disruption will be driven by tech companies quickly eroding the power of banks and forcing them to change

Intro

Meltem’s Testimony in Congress

  • Anything that’s not Bitcoin is often called a “Sh*tcoin”
  • In the regulated world, not many people know the difference between Bitcoin and cryptocurrencies
    • “We need to differentiate between Bitcoin and everything else … Bitcoin is unique; there is no other Bitcoin.” – Meltem Demirors

On Tesla

  • Tesla and Bitcoin represent fundamental innovation—they spark interest and excitement
  • The 3 best-performing assets of January 2020:
    • Tesla (up 53%)
    • Beyond Meat (up 33%)
    • Bitcoin (up 28%)
  • Tesla may not look like a good stock from a value investing perspective, but, that said, if you invest solely based on fundamentals, you would have missed Apple, Amazon, and the companies that generated 98% of S&P500 market growth over the last 20 years
  • “At the end of the day, there’s something you can never capture on a spreadsheet or in financial analysis, and that’s this intangible magic quality that captures the zeitgeist of the moment. Tesla captures that zeitgeist.” Meltem Demirors

Investing in Bitcoin

  • Bitcoin has a bigger upside than a company or an altcoin; here’s why:
    • It’s a technology in the form of a protocol
    • It has an extremely large network of users
    • It represents an ecosystem of value creation
  • Timing is important in investing (Compare returns on buying Bitcoin during the 2017 bull run vs. 2018 bear market)
    • People are conditioned by the negative bear-market experience so they underestimate how high Bitcoin can go in a bull-market

Why Bitcoin Could Fail

  • Governments black-listing coins/addresses could split the network into fungible and non-fungible tokens
    • The solution to this? Better privacy tools
  • Centralized custody of Bitcoin is a systemic risk
    • Most bitcoin trades occur on centralized exchanges (off the blockchain) and only settled on the blockchain when a user withdraws their coins
    • Once the government has oversight, the requirements for withdrawing bitcoins could become onerous; here’s where this might lead us:
      • Having to submit personal data and/or a DNA sample to withdraw bitcoins
      • Once someone withdraws bitcoins, they’d be put on travel watch, IRS, and FBI lists
      • TSA agents conducting searches for hardware wallets when traveling

Digital Currencies By Governments

  • Central bank-proposed digital currencies aren’t different from government-backed currencies (and they’re polar opposites of Bitcoin); here’s why central banks will implement them:
    • To enable more surveillance and control
    • For effective implementation of monetary and fiscal policies
    • To reduce Dollar dependency
      • For instance, in a country like Cambodia, 84% of transactions are completed with the USD—this makes their economy susceptible to U.S. monetary policy
  • Digital USD could facilitate access in countries where it’s expensive or dangerous for people to get dollars
  • Meltem discusses the implications of central banks issuing digital currencies in a blog post: (Digital) Currency Wars
  • In On The Great Jihad And Other Possible Futures, Epsilon Theory discusses possible futures for financial markets

Bitcoin is Neutral

  • Some countries are challenging U.S. economic power by undermining the Dollar
  • Tech companies (i.e., WeChat, Facebook, Apple, Square, etc.) are becoming financial institutions and payment networks
  • “The U.S. government takes for granted its unchecked power and assumes it’ll always be relevant to the conversation. For the first time, they now have to compete for that right.” – Meltem Demirors
  • Countries and corporations are issuing competing digital currencies; Bitcoin is important because it’s the only neutral player
    • “Some members of the government believe that, if they want, they can snap their fingers and turn off Bitcoin. They have no idea how the technology works.” – Meltem Demirors

Playing the Political Game

  • Playing the game matters more than getting results in politics, and the current game? Taking money from the wealthy and re-distributing it
    • Society used to celebrate accruing money—this drives people to innovate, achieve, and accomplish. Instead, this game takes money from the greatest capital allocators and gives it to the least efficient capital allocator (the government).
  • It’s unlikely we’ll ever see a career politician as president ever again
  • Meltem doesn’t believe anyone over the age of 55 should be able to vote
    • Why? – People of younger generations have to spend the next decades of their lives working and paying taxes to cover the system shortfalls. As they’re more liable, they should get to decide on political leaders.

How Crypto Impacts the Financial Industry

  • Bitcoin and blockchain enable the finance industry to leverage social media; here’s how:
    • Bitcoin makes it fun to talk about money, and thus, we’re seeing a growing “money education” conversation on social media
      • For instance, check out this tweet from Pomp on the secrets rich people don’t want you to know
    • Digitizing financial products & services will lower the cost of creating and distributing them
      • They will be easy-to-use and delivered seamlessly via mobile phones
      • This will leverage large social media followings to sell products – (For instance, this tweet from CashApp went viral)
  • Financial innovation will lead to significant regulatory reforms (to keep up with the proliferation of digital financial services)
    • Being regulated nowadays doesn’t confer quality; it just means greater barriers to entry
  • In the 1400s, double-entry bookkeeping was published. Today, it’s the foundation for every single transaction.
    • In 1989, A Japanese researcher invented triple-entry accounting (its first application—Bitcoin—is now worth $170Bn, and could be the most important invention of the 21st century)
  • Transactions usually go through 3 stages: Execution (agreeing on a trade) —> compliance and clearing —> bank settlements
    • Blockchains and Bitcoin collapses all of this into a single ledger
      • (Finance as a whole becomes more efficient and interconnected by removing all the intermediation)
  • Entrenched finance industry disruption will be driven by tech companies quickly eroding the power of banks and forcing them to change
  • “I think the last decade was all about SaaS (Software as a Service). I think this next decade is all about delivering financial services & products through digital-first experiences, and tech companies becoming financial institutions.” Meltem Demirors

On Censorship and De-Platforming

  • People no longer respond to facts; they respond to feelings
    • In Propaganda, Edward Bernays explains how facts don’t matter when influencing public opinion
  • What happens when a platform becomes so large that it practically becomes a utility company?
    • Consider this: Should the phone companies refuse to give you service if they don’t like what you’re talking about on the phone?(with a repealing of net neutrality, the answer is “yes”)
  • Twitter is a privately owned corporation with an obligation to its shareholders, but does it have any obligation to maintain free speech?
    • This question led Jack Dorsey to found Bluesky—a decentralized standard for social media