00:00:08
Hello everyone. I am Itai Goldstein,
00:00:11
professor of finance at the Walton
00:00:12
School. This is the future of finance
00:00:15
podcast. This is our second season. We
00:00:19
did the first season on the future of
00:00:21
finance and we talked about different
00:00:23
dimensions of the future of finance
00:00:26
including fintech and AI and finance and
00:00:29
uh banking and meme stocks. And in the
00:00:32
second season we are hoping to dive
00:00:34
deeper into the issue of
00:00:36
cryptocurrencies, digital assets, uh
00:00:39
decentralized finance. This is our
00:00:42
opening episode in the second season and
00:00:44
we're going to talk more generally today
00:00:46
about the rise of uh crypto and digital
00:00:50
assets more generally. And for this we
00:00:52
have two perfect guests and they're
00:00:56
perfect for this uh particular purpose
00:00:59
because they have been early movers uh
00:01:02
in uh the direction of uh crypto and
00:01:05
digital assets. uh I would say they
00:01:07
identified uh the potential of this
00:01:10
early on about a decade ago and uh stuck
00:01:14
uh with it. Um and I'm happy to start
00:01:17
with uh Kim Harvey who is a professor of
00:01:19
finance at uh Duke University. Kim and I
00:01:22
over overlapped at Duke for uh three
00:01:24
years uh which was my first academic job
00:01:26
and he was already a senior professor uh
00:01:29
at the time. Um and he was as I said uh
00:01:32
starting to think about uh crypto and
00:01:34
digital assets uh at least a decade ago
00:01:37
and I remember having some early
00:01:39
conversations with him on this uh at the
00:01:41
time. Hello Cam.
00:01:43
>> Hello. Thank you for inviting me.
00:01:46
>> Sure. It's great to have you. And our
00:01:48
second guest is uh Nha Narula who is uh
00:01:51
the director of MIT Media Labs digital
00:01:54
currency initiative. also identified uh
00:01:57
the movement towards uh crypto early on
00:02:00
and her TED talk uh from 2016 about the
00:02:04
future of money has over 2.5 uh million
00:02:08
views on TED talk website I I believe.
00:02:11
Hello Neha, it's great to have you.
00:02:13
>> Hi, it's great to be here.
00:02:15
>> So uh we have a lot uh to discuss. Uh so
00:02:18
uh let's uh dive uh right in. Um I I
00:02:23
would like to start from kind of the the
00:02:25
big uh picture. Uh when we are thinking
00:02:27
about digital assets and uh
00:02:29
cryptocurrency,
00:02:30
uh we are thinking about a potential
00:02:33
change in the financial system, how the
00:02:36
financial system works and what we
00:02:37
should expect from the financial system
00:02:40
going forward. Um so in your view, what
00:02:44
do you think are the the main gaps in
00:02:46
the traditional financial system the way
00:02:49
that we were used to having it? what are
00:02:51
the main gaps uh that crypto is trying
00:02:54
to fill?
00:02:55
>> Yeah. So I think the key word is gap. So
00:02:59
change just for the sake of change
00:03:02
might not be that useful. You need to be
00:03:05
solving problems
00:03:07
and this new technology offers the
00:03:10
potential to solve many problems. So I
00:03:15
think kind of starting off looking at
00:03:17
the original Satoshi Nakamoto paper, it
00:03:20
was about transactions
00:03:22
and the inefficiency of the current uh
00:03:25
transaction system. So the cost of
00:03:28
transferring money uh the cost of
00:03:31
transferring money to different
00:03:33
countries the the weight that's
00:03:36
necessary to do a simple uh transfer
00:03:40
the middle people that are involved in a
00:03:44
sort of transfer and it's not just about
00:03:46
money transfer uh in our system of
00:03:50
equities at the time of kind of the
00:03:52
foundational sort of work in crypto it
00:03:55
took three days to settle a stock
00:03:58
transaction. So, so you think you buy it
00:04:01
instantly, but to actually get ownership
00:04:03
took three days. Now, we've improved to
00:04:07
one day, and one day is not impressive
00:04:09
for me. It should be a matter of
00:04:11
seconds.
00:04:13
And I guess um the last thing I'll I'll
00:04:16
say and there's a long list of issues
00:04:20
uh is that our current financial system
00:04:25
is very exclusive.
00:04:28
So there are four mill four billion
00:04:30
people uh in the world right now that
00:04:32
are unbanked and many that are
00:04:35
underbanked.
00:04:36
And and this idea effectively allows
00:04:41
people to become
00:04:44
banked in a different way. Your your
00:04:47
smartphone uh is your bank and you can
00:04:50
participate in the global financial
00:04:53
system. So this is is really about
00:04:58
inclusion
00:05:00
and fundamentally
00:05:02
economic and financial democracy in this
00:05:06
space. Everybody is a peer. So there's
00:05:09
no banker and customer institutional
00:05:12
investor or retail investor.
00:05:15
People are peers
00:05:17
and we play on the same level ground. So
00:05:21
I think those are some of the gaps that
00:05:25
crypto has attempted to bridge. We're
00:05:28
not there yet but we are moving in a
00:05:31
positive direction.
00:05:33
And nha where do you see the big gaps
00:05:35
that we are trying to fill. Yeah,
00:05:37
echoing that maybe just summarizing I
00:05:40
mean I think you know three major things
00:05:42
number one you can't settle 247 365
00:05:46
can't settle money you can't settle
00:05:47
equities you just you can't do that
00:05:49
today with the existing financial system
00:05:51
uh second you can't really make
00:05:53
programmable payments it's really
00:05:55
difficult to marry software with the
00:05:58
movement of money um and then third the
00:06:01
fees are way too high um in the United
00:06:03
States merchants mostly bearing the cost
00:06:06
which they passed on to consumers, you
00:06:08
know, up to 3%. But, you know,
00:06:10
everywhere we're we're paying way too
00:06:13
many fees, especially unfortunately for
00:06:15
things like remittances and crossber
00:06:17
transactions. But the thing that I want
00:06:19
to emphasize is that, you know, I really
00:06:22
think what crypto and blockchain
00:06:24
technology is addressing is not a
00:06:27
technology problem. It's a market
00:06:29
structure and incentive problem. So,
00:06:32
it's not that we didn't have the
00:06:34
technology to settle 24/7 on the old
00:06:37
technology stack or it's not that we
00:06:39
didn't have the ability to reduce fees.
00:06:42
It's that the existing players didn't
00:06:44
want to deploy better technology. They
00:06:47
didn't want to change. There wasn't, you
00:06:49
know, whether it's based on regulation
00:06:50
or whether it's based on incentives, it
00:06:52
there just we weren't getting that
00:06:54
change. So if you look inside any of the
00:06:57
major banks today, they're using
00:06:59
software that was developed in the
00:07:01
1960s.
00:07:03
And what unfortunately happens, and it's
00:07:06
not that they couldn't upgrade that
00:07:07
software to modern software, they just
00:07:09
they just don't want to. And so what
00:07:12
happens is that when you have a whole
00:07:13
new tech stack, a whole new platform,
00:07:16
you get these new properties and you get
00:07:17
new opportunities. you get new
00:07:19
opportunities for new players to come in
00:07:21
and to experiment and to build in the
00:07:23
cryptocurrency blockchain world is this
00:07:24
new opportunity,
00:07:26
>> right? And in your uh TED talk, you
00:07:29
basically talk about money as a
00:07:32
collective fiction and I believe that
00:07:34
Yuval Noah Hari was also using similar
00:07:37
terms to talk about money and how it
00:07:39
helps communication and coordination
00:07:41
among among people. And basically when
00:07:44
we are thinking about that we are
00:07:46
thinking about crypto as kind of the
00:07:48
next step in that process of evolution.
00:07:51
So where do you think crypto is going to
00:07:53
fit into that story and what kind of
00:07:56
collective fiction are we going to get?
00:07:58
>> Yeah. So, so the idea of the collective
00:08:01
fiction is that, you know, if we look at
00:08:03
this rich history of objects that have
00:08:06
been used as money, shells, beads,
00:08:08
coins, you know, it's certainly the case
00:08:10
that there are properties of these
00:08:12
objects that make them good at being
00:08:13
money. Uh, and it's also the case that
00:08:16
there are institutions, whether public
00:08:18
or private, that stand behind the
00:08:21
objects. But it really comes down to
00:08:24
will someone accept payment in this
00:08:26
currency? Do I have faith that this
00:08:28
currency will be usable tomorrow, that
00:08:31
anyone will take it? That it'll be
00:08:33
roughly worth the same amount? And this
00:08:35
faith is part of the fiction. Money
00:08:38
isn't something, you know, even when
00:08:40
we're thinking about it as objects. It's
00:08:42
not something you can eat or use. It's
00:08:44
not actually useful in and of itself
00:08:46
outside of this faith and context. And
00:08:49
it's even more obvious when you get
00:08:51
beyond the objects to things like
00:08:52
ledgers and accounts that we use to mark
00:08:55
who has what. oftentimes it's just
00:08:57
digital bits and databases. It's it's
00:08:59
markers for our collective belief. And
00:09:01
I'd say that crypto is not so much
00:09:04
reshaping that story as much it is the
00:09:07
next iteration of that story. And
00:09:09
something that's coming out of it that's
00:09:10
really interesting is that it's
00:09:12
revealing the set of underlying
00:09:14
assumptions behind something that we
00:09:16
very much took for granted. The global
00:09:18
monetary system. The global monetary
00:09:20
system as it exists today is mostly just
00:09:22
bits and databases. And you know, with
00:09:25
the advent of cryptocurrency, people are
00:09:28
asking questions like, wait, what do
00:09:30
these bits actually mean? Who vouches
00:09:32
for them? Why why can't you write over
00:09:33
them? Uh why do people believe in them?
00:09:36
Why do they have value? And so, you
00:09:38
know, I think what's happening is that
00:09:39
with the advent of cryptocurrency, it's
00:09:41
really illuminating uh a lot about our
00:09:44
monetary system that your average person
00:09:46
maybe didn't necessarily think about or
00:09:48
understand or, you know, really they
00:09:51
they really took it for granted before.
00:09:53
>> Yeah. So I agree with this but I want to
00:09:56
push this a little further. So I agree
00:10:00
fundamentally that something has got
00:10:02
value because people believe it's got
00:10:04
value. Uh, and in my book I tell the
00:10:07
story of the Iraqi Swiss dinar
00:10:12
um, which was printed uh, with Swiss
00:10:16
printing plates uh, in England. And when
00:10:19
sanctions were put on Iraq, they needed
00:10:22
a plan B. So they started printing
00:10:26
Saddam uh DNRs and you had to trade your
00:10:30
Swiss dinars in uh for the Saddam DNRs
00:10:34
or the Swiss DNRs would go to zero.
00:10:38
Well, it turned out that Saddam
00:10:40
undertook massive inflation and the new
00:10:44
DNRs were pretty well useless, but
00:10:46
people still use the old ones,
00:10:49
especially in the north. and
00:10:52
it wasn't backed by anything, but they
00:10:55
believed that it was useful in terms of
00:10:58
transactions.
00:11:00
And and this is an important lesson that
00:11:02
we've had kind of historically that you
00:11:05
have to have faith. Uh we live in a fiat
00:11:08
currency sort of system. The US dollar
00:11:11
has got value obviously because it is
00:11:14
number one legal tender. Number two, you
00:11:16
need to pay taxes in US dollars. Number
00:11:19
three, you could be incarcerated if you
00:11:21
don't pay your taxes. So, there are like
00:11:23
intangible values uh from uh the US
00:11:27
dollar, but in the end, you can't redeem
00:11:30
it uh for gold like you could have uh
00:11:34
before August of 1971.
00:11:37
Uh it is based upon belief that it's got
00:11:41
value. But the thing that I want to add
00:11:44
is that crypto introduces something
00:11:49
different. So we could think of a stable
00:11:52
coin that's linked to the US dollar as
00:11:55
just a more efficient mechanism for
00:11:58
dealing with the fiat currency.
00:12:01
But in general, we've got the ability in
00:12:04
this space to tokenize anything.
00:12:09
And when we tokenize anything, this idea
00:12:12
of money becomes very fuzzy. So that I
00:12:16
can go, let's say, to pay for groceries
00:12:20
and I usually pay in US dollars, but in
00:12:24
the future I can pay with a token that's
00:12:27
linked to something else. So I can pay
00:12:30
in gold if I want. I can pay in Apple
00:12:33
stock. I can pay in real estate. So the
00:12:36
whole idea of money I think
00:12:39
fundamentally changes and indeed in my
00:12:42
book the first sentence is we've come
00:12:45
full circle and that's referring to the
00:12:49
origins of trade being decentralized
00:12:52
the very inefficient barter system and
00:12:56
where crypto takes us is a totally new
00:12:59
direction where we have a a host of
00:13:03
things that we can use to pay and
00:13:06
effectively it is a more efficient
00:13:10
barter system and that changes things
00:13:13
fundamentally. It means that monetary
00:13:16
policy is not as important. It means
00:13:18
that fiat inflation could be in 15 years
00:13:22
a historical relic. So this does
00:13:25
structurally change what we will look
00:13:28
like in the future.
00:13:31
So both of you mentioned faith and trust
00:13:34
and this is indeed crucial for the
00:13:36
success of a financial system, the
00:13:38
success of a monetary system and I
00:13:40
wanted to connect back to your uh book
00:13:43
uh Cam um DeFi and the future of
00:13:47
finance. uh and I think one of the
00:13:49
points that you're making there is that
00:13:51
uh this did not happen now uh as a
00:13:55
coincident but rather this is uh an
00:13:58
outcome of the global financial crisis
00:14:00
that we had in 2008 that maybe led uh to
00:14:04
breaking in in the trust that we had in
00:14:06
the financial system. So can you
00:14:08
elaborate on this a little more? Do you
00:14:10
see a direct connection indeed to the
00:14:12
global financial crisis? Yes, but it
00:14:15
goes even before the global uh financial
00:14:18
crisis. Indeed, the global financial
00:14:20
crisis was the last straw. Uh and and
00:14:24
certainly most people know that the very
00:14:27
first block uh in the Bitcoin blockchain
00:14:30
makes a reference to a second bailout
00:14:33
from a headline in the Times of London.
00:14:37
Um so there is a link but this idea of
00:14:42
uh some sort of digital money goes back
00:14:47
well before indeed there was active
00:14:49
research going on in the 1980s.
00:14:52
There were hundreds of initiatives in
00:14:55
terms of digital currency. Um the
00:14:59
problem was that it was very difficult
00:15:02
problem because just like you can make a
00:15:06
digital copy of uh a document or a
00:15:10
picture or a video that causes problems
00:15:14
for currency perfect counterfeiting and
00:15:18
most of these initiatives uh failed.
00:15:21
However, when Satoshi Nakamoto published
00:15:25
their 2008 uh paper, the game uh changed
00:15:31
uh because this was a way to avoid uh
00:15:35
the so-called double spending or
00:15:36
counterfeiting uh problem. And that
00:15:39
movement that he was involved with um
00:15:42
had a number of people, the so-called
00:15:45
cipher punks,
00:15:47
kind of libertarianbased, very
00:15:49
suspicious of big government monetary
00:15:52
policy and the current financial
00:15:55
institutions.
00:15:57
The last straw was the financial crisis.
00:15:59
I remember being in Davos in 2005 and
00:16:03
having an audience with the chair of the
00:16:06
Senate Banking Committee, Richard
00:16:08
Shelby, and telling him he need to do
00:16:12
the basic due diligence on the big banks
00:16:15
because I saw extreme leverage. I saw
00:16:18
these banks acting as hedge funds and I
00:16:21
certainly hoped if there was a crisis
00:16:24
that they would not be bailed out. But
00:16:27
they needed to investigate the risk to
00:16:30
at least know the risk. Um those
00:16:33
suggestions were ignored and then you
00:16:35
get this situation where these banks
00:16:38
that were operating under extreme
00:16:41
leverage were bailed out and that seemed
00:16:45
very very pugnant to many people
00:16:47
including me. Um and I think that that
00:16:51
was kind of the impetus for um kind of
00:16:55
the first wave of interest uh in
00:16:59
Bitcoin.
00:17:01
>> So Neha you also mentioned incentives
00:17:03
and the fact that we had the big players
00:17:05
using old technologies not having the
00:17:08
incentive to change and as a result the
00:17:11
progress was uh stifled. Um what do you
00:17:14
see as the big trigger that led us uh to
00:17:17
where we are now?
00:17:19
Yeah. So, um I think definitely it was
00:17:22
the case that we had projects that were
00:17:24
trying to do digital money in the past.
00:17:28
Um eCash is one of the most famous
00:17:30
examples and um there were uh there were
00:17:34
attempts to commercialize ecash to turn
00:17:37
it into a uh to turn it into a product
00:17:40
that people could use. The big big big
00:17:42
problem with all of these services was
00:17:45
that they relied on a centralized
00:17:47
intermediary. So they used cryptography.
00:17:50
They had, you know, really interesting
00:17:52
properties. They um they provided a lot
00:17:54
of privacy, but they relied on some kind
00:17:58
of intermediary custodying the funds and
00:18:00
being at the center of everything uh to
00:18:02
solve the double spend problem. The real
00:18:04
innovation behind Bitcoin, the first
00:18:07
cryptocurrency, was that they figured
00:18:09
out how to solve the double spend
00:18:11
problem, not entirely, but in a
00:18:13
decentralized way. That's that's that
00:18:15
was the key part of that. And so that
00:18:17
meant you didn't need a bank. And so,
00:18:20
uh, the problem with all of the e-cash
00:18:21
projects is that they all got shut down.
00:18:23
Um, it wasn't, you know, they they were
00:18:25
sort of kind of skirting around the
00:18:26
edges of the law. It was very hard for
00:18:28
them to find banks that wanted to kind
00:18:30
of offer this as a product. um with you
00:18:33
know without a bank it it wasn't legal
00:18:34
but with Bitcoin it didn't require a
00:18:37
bank it didn't require any financial
00:18:39
institution it just required a group of
00:18:42
peoples to start running software that
00:18:44
was it and I think that was like the
00:18:46
really key innovation the really key
00:18:48
difference there was the fact that you
00:18:50
could bootstrap these systems with just
00:18:53
a group of people with computers that
00:18:55
that was the real key idea that you
00:18:57
didn't need to get a financial
00:18:59
institution on board to custody money to
00:19:01
plug into the financial system. And you
00:19:03
know, of course, when it started, no,
00:19:05
you know, nobody really wanted any
00:19:07
Bitcoin. It wasn't really worth
00:19:08
anything. But, you know, we've seen
00:19:09
we've seen how that story plays out.
00:19:11
Right now, today, as we're recording
00:19:12
this, Bitcoin's worth over $120,000 US a
00:19:17
coin. Um, and and so that it was
00:19:20
realizing that you could bootstrap the
00:19:22
platform in the system and then let let
00:19:25
it figure out how to attain value over
00:19:27
time. you didn't have to plug into the
00:19:29
existing financial system immediately.
00:19:31
That was really the key idea.
00:19:33
>> Can I just build on that a little bit?
00:19:35
And just to just to emphasize
00:19:39
that the situation that we're in right
00:19:41
now with our financial system is really
00:19:45
not that different than kind of like 12
00:19:48
years ago or or 14 years ago.
00:19:52
So, I was at uh a discussion that was
00:19:56
sponsored by a multi-t trillion dollar
00:19:58
uh asset manager with senior people and
00:20:01
I asked the question uh what happens
00:20:05
within the next few minutes
00:20:09
if the swift system goes down. So this
00:20:13
is the best of system that we use to
00:20:16
transfer uh funds around the world
00:20:20
and um people started looking at each
00:20:22
other and it was very awkward and then
00:20:26
finally the most senior person in in the
00:20:30
room answered
00:20:31
uh and the person said well we'll give
00:20:34
people the day off and then everybody
00:20:37
chuckled
00:20:39
and I'm saying wow I I I just can't
00:20:42
believe that. So that means a a
00:20:47
fundamental lack of risk management. You
00:20:49
need a backup
00:20:51
and and currently there is no backup.
00:20:56
And what the crypto space provides is a
00:21:01
backup, an alternative,
00:21:03
an alternative that does not rely as NA
00:21:08
said upon a centralized system.
00:21:11
It's decentralized.
00:21:13
So I think that this is it's not just
00:21:16
about making payments more efficient and
00:21:19
lower cost. It's about having a system
00:21:23
that is also more secure. So let me uh
00:21:26
put the skeptic hat on uh for a minute
00:21:29
because so far you have been emphasizing
00:21:33
mostly the positive aspects of uh
00:21:35
decentralized finance and crypto and and
00:21:38
bitcoin but I think a lot of people who
00:21:40
are looking at it from the outside uh
00:21:43
they might say well we haven't really
00:21:46
seen any of this progress so far. I
00:21:48
think the promise about Bitcoin
00:21:50
initially was that this is going to be a
00:21:52
new means of payment and if not Bitcoin
00:21:54
then other cryptocurrency but we haven't
00:21:57
really seen that taking off as fast as
00:22:00
some people promised and then we started
00:22:04
talking about other rationals other
00:22:06
narratives for uh cryptocurrencies that
00:22:08
it's going to be a store of value it's
00:22:10
going to be a hedge and other things
00:22:12
like that the question is when we are
00:22:15
seeing this shifting narrative and we
00:22:17
haven't seen a use case that was fully
00:22:21
established yet. Is this a sign that
00:22:23
things are not going as planned that
00:22:25
it's not as good as we thought or maybe
00:22:29
this is just a learning process and uh
00:22:31
we we are uh going towards a much better
00:22:34
place uh in the end. So how do you see
00:22:36
that?
00:22:37
>> So I think the answer is a little bit
00:22:38
both. Um and uh you know there there
00:22:41
legitimately was a tremendous amount of
00:22:44
overpromising and underdelivering and
00:22:46
there's been a lot of trying on
00:22:48
different narratives and seeing what
00:22:49
fits. The thing is is I think this is
00:22:52
actually pretty normal for any you know
00:22:55
new innovative risky technology. It's
00:22:58
just that this particular case was about
00:23:01
something as fundamental as money and
00:23:03
our global monetary system. So it had a
00:23:05
lot of attention very early on. There
00:23:07
were a lot of eyeballs. there were a lot
00:23:09
of expectations um so you know and there
00:23:12
and there was also an incentive to
00:23:14
create a lot of hype uh because there
00:23:15
was a lot of money to be made so
00:23:17
definitely overpromising underd
00:23:19
delivering not clear to me it was more
00:23:21
so in this space than it was in other
00:23:24
technologies I think there were just
00:23:25
more eyes on it but you know we could we
00:23:27
could debate that absolutely I think
00:23:29
that you know as we iterate as we go
00:23:32
through these cycles uh more and more of
00:23:34
what doesn't work gets flushed out and
00:23:38
So that's what we're seeing happening is
00:23:39
that the people who overpromised and
00:23:42
underdelivered, the people who were
00:23:44
outright scammers or were perpetuating
00:23:46
fraud, they're getting flushed out of
00:23:47
the system. And this is good. This is
00:23:49
what should be happening. Um, you know,
00:23:51
in venture capital, a very small
00:23:54
percentage of startups actually succeed.
00:23:57
And so we should expect to see the same
00:23:58
thing here. There's going to be a lot of
00:23:59
projects that try to do a lot of grand
00:24:01
things and they're not going to succeed.
00:24:03
But there will be a few there will be a
00:24:05
few that do really, really well. And I
00:24:07
think, you know, given the stage we're
00:24:10
at right now, you know, there are two
00:24:12
things I see that are really promising
00:24:14
and that are doing really well. Number
00:24:16
one, Bitcoin has found product market
00:24:19
fit as a potential for new digital gold.
00:24:23
We are seeing that happen day after day.
00:24:26
We are seeing actual countries decide to
00:24:29
hold it as an asset. We're seeing uh,
00:24:31
you know, public companies put it on
00:24:33
their balance balance sheets. So, you
00:24:35
know, we're seeing we're seeing people
00:24:36
kind of adopt the narrative around
00:24:38
Bitcoin. So, Bitcoin has found product
00:24:40
market fit or is or is finding it. It's
00:24:42
still in the early stages as digital
00:24:44
gold. And then I think the second um you
00:24:46
know major uh use case that we've seen
00:24:50
is stable coins for crossber
00:24:52
transactions. So, um and for
00:24:54
international transactions and and also
00:24:56
as kind of a hedge against inflation. So
00:24:59
we are seeing a lot of use for stable
00:25:03
coins and bitcoin in the global south in
00:25:07
countries that are experiencing high
00:25:08
inflation. People really want these
00:25:10
things and you know merchants and
00:25:12
economies are kind of slowly starting to
00:25:14
develop around them. So those are like
00:25:16
the two areas where I think we have seen
00:25:19
you know actual success and we are
00:25:22
seeing like real evidence of product
00:25:24
market fit. Of course, the really
00:25:25
interesting question is, well, what's
00:25:27
going to be the thing in the next few
00:25:29
years? Um, you know, real world assets.
00:25:32
Are they going to be tokenized and move
00:25:34
around primarily on blockchains instead
00:25:36
of on uh exchanges, traditional
00:25:38
exchanges? Um, is it going to be more
00:25:40
about payments? Is it going to be more
00:25:42
about a platform for the internet,
00:25:44
digital goods? You know, these are the
00:25:46
questions that we're still trying to
00:25:47
answer.
00:25:48
>> And I know that you're very optimistic
00:25:50
about it. So, what do you have to add to
00:25:52
that? I'm not sure optimism is the right
00:25:54
word. Uh kind of implies a a bias. U I
00:25:59
think I'm realistic about it. Uh and I
00:26:02
do think it's important to look at the
00:26:04
history of innovation. Uh this is a very
00:26:08
significant innovation. It happens to be
00:26:12
um occurring at the same time of other
00:26:15
disruptions
00:26:17
which is interesting. Historically,
00:26:19
we've never had, for example,
00:26:22
decentralized technologies competing
00:26:24
with AI and quantum technologies all at
00:26:28
the same time. So, that that's to me
00:26:31
very interesting. Um, because we've
00:26:34
never had a situation like this. Uh, but
00:26:38
with any innovation,
00:26:40
uh, it's hard to guess the timing of how
00:26:43
it plays out. And you always want it to
00:26:45
happen faster than it actually does. And
00:26:48
with any innovation, there's risk. So,
00:26:52
some things will work and some things
00:26:54
will not work. Uh one of the great
00:26:58
things in this space um especially I
00:27:01
spend most my time in the Ethereum space
00:27:04
rather than Bitcoin is this idea that
00:27:07
you can very quickly innovate by
00:27:11
literally looking at the code somebody
00:27:14
else has uh put up grabbing it and
00:27:17
making changes to improve it. So the
00:27:20
innovation very very fast. So I I do
00:27:24
worry uh again there there are risks
00:27:27
here. Um I worry about companies adding
00:27:32
Bitcoin to their treasury or their cash
00:27:36
management. Um uh that to me doesn't
00:27:41
make a lot of sense. The idea to have a
00:27:43
reserve uh for kind of like bad times uh
00:27:48
I totally get. And usually you have your
00:27:50
most liquid assets there that you can
00:27:52
draw upon. Bitcoin is highly volatile
00:27:55
asset
00:27:56
uh and it may not be reliable. People
00:27:59
talk about it as being a hedge uh
00:28:02
against various things. Well, it is
00:28:04
unproven.
00:28:06
So theoretically, yes, its money supply
00:28:08
is not tied to anything um other than an
00:28:12
algorithm. It's not impacted by
00:28:15
governments, but nevertheless, it is
00:28:17
untested. we know it's volatile and just
00:28:20
the fact that it's four times more
00:28:22
volatile than the S&P 500 um that almost
00:28:26
guarantees that it will be unreliable
00:28:30
some of the times. So I worry about uh
00:28:34
for example Satoshi's vision for Bitcoin
00:28:37
is completely different than what exists
00:28:40
today. So, as Niha said, Bitcoin is a
00:28:43
store of value, a risky store of value
00:28:47
with four times of all of the S&P 500.
00:28:50
Uh, it is done well and maybe it's done
00:28:53
well because there's some momentum. So,
00:28:56
these companies adding it to their uh
00:29:00
their balance sheets. Uh, but at some
00:29:03
point that's going to stop. Um, and I
00:29:07
worry about that. Again, I'm more
00:29:09
interested, frankly, in the Ethereum
00:29:11
space. So, this idea of tokenizing real
00:29:15
world assets. I agree that the the big
00:29:18
success story in RWA is the stable coin.
00:29:23
So, it's done very well. We saw Circle
00:29:26
uh IPO. Uh this is a great innovation,
00:29:29
but to me, it is just the tip of the
00:29:33
iceberg. So there's so many other things
00:29:37
that can be tokenized and I'll give you
00:29:40
just an example here is stablecoin is a
00:29:43
great business to be in. So circle uh
00:29:46
IPOed for a very uh rich valuation
00:29:50
because you think of what happens people
00:29:53
give circle money. Circle gives them a
00:29:56
token that is one to one uh with the
00:30:00
dollar. Circle takes that money, invests
00:30:04
in lowrisk treasury bills and repos,
00:30:08
and Circle keeps all the interest. So,
00:30:11
it's like a money market fund that the
00:30:14
money market fund keeps all the money
00:30:16
and the consumer gets nothing. So, we
00:30:20
could do this a little differently. So,
00:30:22
we could have a tokenized bond
00:30:26
and that bond is going to pay interest.
00:30:31
So you got the the ability to use this
00:30:35
token to pay for things, but it's also
00:30:38
earning yield. So I think that stable
00:30:41
coins are great. Um it is the most
00:30:44
successful uh innovation in the space to
00:30:47
date. Uh but they in my opinion will be
00:30:51
disrupted by yieldbearing stable coins.
00:30:55
So just another wave of innovation that
00:30:59
makes it even better experience uh for
00:31:02
consumers.
00:31:04
>> Yes, thank you for saying that. We will
00:31:06
also have an episode that is going to be
00:31:08
dedicated to stable coins. So certainly
00:31:10
a lot to think about there. The the one
00:31:12
last aspect that I want to talk about is
00:31:14
uh decentralization which is clearly key
00:31:19
uh to uh cryptocurrencies and and
00:31:21
fintech more generally. When we did the
00:31:24
fintech initiative at the review of
00:31:26
financial studies, we started with that
00:31:28
in 2017 and that was kind of the first
00:31:31
batch of academic papers that came out
00:31:34
on on these uh topics. uh we we talked
00:31:37
about what is different in uh fintech
00:31:40
revolution relative to previous
00:31:41
technological innovations in in finance
00:31:44
and we noted that it is certainly the
00:31:46
aspect of decentralization and also the
00:31:49
disruption and both of you talked about
00:31:51
it quite a bit but I think that when we
00:31:53
are looking at it now uh with the
00:31:56
perspective of almost a decade later it
00:31:59
seems like we haven't really gotten to
00:32:02
the decentralization as much as some
00:32:04
people expected rather We see that there
00:32:06
are forces within the DeFi system that
00:32:09
are uh interestingly pushing back into
00:32:12
uh centralization. Uh and there is the
00:32:15
power of intermediation.
00:32:17
There are certainly advantages to being
00:32:19
a large centralized uh player. And so we
00:32:22
see that you know maybe the functions
00:32:24
are a little different but at the end of
00:32:26
the day we might end up in a system that
00:32:29
still has the big intermediaries and
00:32:31
still is centralized to to a large
00:32:34
extent. So where do where do you see
00:32:36
that the tension between uh
00:32:38
centralization and decentralization and
00:32:41
are we really going into a system where
00:32:43
everyone is a peer as as you both
00:32:45
mentioned before or it'll still be an
00:32:49
intermediated system but just looking a
00:32:51
little different.
00:32:52
>> Yeah. So a few things here. First of all
00:32:54
definitely want to echo your point that
00:32:56
there are great forces towards
00:32:58
centralization there. You know with
00:33:01
centralization you get better
00:33:02
efficiency. So just think about if
00:33:05
there's two businesses that are kind of
00:33:07
in the same area and then they merge,
00:33:10
there's an opportunity there to reduce
00:33:12
redundancy, right? However, you've also
00:33:15
made the ecosystem a little bit more
00:33:17
fragile and that's what happens with
00:33:19
centralization. So we we see these
00:33:22
cycles play out, right? We see these
00:33:24
cycles where, you know, just due to this
00:33:26
increase in efficiency and and this
00:33:29
ease, there's more and more and more
00:33:31
centralization. It becomes winner take
00:33:32
all, winner take all, winner take all
00:33:34
and then things become too fragile and
00:33:37
we see a big break and then um you know
00:33:41
if there was any decentralization in in
00:33:43
that ecosystem those are the players who
00:33:45
win because because they were you know
00:33:47
they had there's more fall tolerance
00:33:48
there was more redundancy and so we see
00:33:50
these cycles and I think we're going to
00:33:53
continue going back and forth like it's
00:33:55
very important to note that it's not
00:33:57
like centralization is evil and
00:33:59
decentralization is good and you know we
00:34:01
we need everything to be 100% super
00:34:03
decentralized. You know, just just
00:34:06
thinking about using an intermediary,
00:34:08
for example, it's often the case that
00:34:09
it's the right choice for someone to use
00:34:12
an intermediary or a custodian or an
00:34:14
exchange. It's not the right choice for
00:34:16
them to try to custody their own keys or
00:34:18
to try to do something directly
00:34:19
peer-to-peer. I think what's most
00:34:21
important is that we have platforms and
00:34:24
systems where you always have the option
00:34:27
to exit to your own self-custody to be a
00:34:31
part of the system to run your own node
00:34:33
to do your own verification. Not that
00:34:35
you have to do that all the time, but
00:34:37
you always have the option to be able to
00:34:40
do that. And that I think allows us to
00:34:43
kind of seamlessly move between the
00:34:46
centralized and decentralized. When we
00:34:48
offer the people to sort of seamlessly
00:34:49
kind of like exit the centralized
00:34:52
intermediaries, start running their own
00:34:54
nodes, start, you know, custodying their
00:34:55
own funds, things like that, then we can
00:34:57
we can create an overall system and
00:35:00
ecosystem that is a bit more resilient.
00:35:03
So, I I agree with some of that. Um, and
00:35:08
and let me kind of add like my spin on
00:35:11
it. So,
00:35:14
centralization is not always the most
00:35:17
efficient. And indeed, we've got plenty
00:35:20
of examples that are in our face today
00:35:26
of centralized institutions that are
00:35:29
extracting monopoly or duopoly. uh rents
00:35:34
and and that leads to welfare loss in
00:35:37
our society.
00:35:39
So let me be clear that I am not a uh
00:35:44
the type of DeFi person that believes
00:35:47
that in the future everything is going
00:35:50
to be 100% uh decentralized. We have
00:35:54
come from a time where
00:35:57
we were 100% centralized. So I believe
00:36:02
that the key word is efficiency
00:36:06
that in certain applications it might be
00:36:10
more efficient to have some degree of
00:36:13
centralization.
00:36:15
In other applications it might be more
00:36:18
efficient to have it decentralized and
00:36:21
these work together. So I give an
00:36:24
example of decentralized ride sharing.
00:36:28
Well, um that you know the matching of
00:36:32
the drivers and the writer is purely
00:36:34
algorithmic. You can imagine reward
00:36:36
systems and stuff like that. You can do
00:36:38
this in a way that greatly reduces the
00:36:43
45% fee that Uber or Lyft might take or
00:36:47
whatever it is. So, we can do that, but
00:36:51
there's certain things along the way
00:36:53
that need to be centralized. for
00:36:55
example, the certification of the
00:36:58
driver, the certification that the car
00:37:00
is safe. It's hard to think about doing
00:37:03
that in a fully decentralized way. So, I
00:37:07
believe that there will be kind of a
00:37:09
combination of centralization and
00:37:12
decentralization in the future that's
00:37:15
really focused on efficiency.
00:37:18
And the last thing I will say is that
00:37:21
this tension between centralization and
00:37:26
decentralization
00:37:28
plays out in in real time uh in the
00:37:32
decentralized space even today. So think
00:37:35
about the reliance of decentralized
00:37:38
protocols like decentralized exchanges
00:37:41
and things like that on centralized
00:37:45
stable coins. So to be clear, the
00:37:48
leading stable coins Tether and Circle
00:37:51
are centralized. Their token is used in
00:37:56
decentralized finance. We do have
00:37:59
decentralized stable coins, but they're
00:38:01
smaller. So the success of the
00:38:04
decentralized finance uh kind of
00:38:06
platform is greatly reliant upon
00:38:10
centralized technologies.
00:38:13
So again I think that uh in the future
00:38:16
there will be a balance uh between the
00:38:20
centralization and decentralization
00:38:23
that depends on the particular
00:38:25
application and the balance will drive
00:38:30
the costs to a point that makes it best
00:38:34
for the consumers and the producers and
00:38:37
the sellers and the economy uh in
00:38:40
general and that's where I hope uh that
00:38:42
we hand up.
00:38:43
>> Thank you very much. I certainly agree
00:38:45
that this tension between centralization
00:38:47
and decentralization is key to
00:38:49
understanding this new wave of uh
00:38:52
technologies and potentially the future
00:38:53
of finance and that we will probably end
00:38:56
up in some uh middle ground where we
00:38:59
have a combination of the two or maybe
00:39:02
partial decentralization. But hopefully
00:39:04
it will take us to a much better place
00:39:06
in terms of the financial system and how
00:39:09
we uh transact.
00:39:11
um with each other. Uh thank you very
00:39:14
much uh both Nha and Kim for uh diving
00:39:18
into these topics with us and providing
00:39:20
the introduction into the rise of crypto
00:39:23
digital assets and decentralized
00:39:25
finance. We're going to continue and
00:39:28
talk about these topics in the next uh
00:39:30
few weeks. Uh so uh stay tuned. Thank
00:39:33
you.
00:39:34
>> Thank you.
00:39:36
>> Thanks.
