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Werbach: So if we're talking
about the blockchain technology,
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if you are going to your Robin
Hood account and you're deciding
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whether to buy Bitcoin or to buy
some meme stock, it's just
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another name, and you can think
about it as an investment. But
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that's not fundamentally
revolutionary.
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Welcome to <i>The Ripple Effect</i>,
the podcast that takes you on a
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journey through the minds of
Wharton faculty. I'm your host,
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Dan Loney, and in each episode,
we'll be diving deep into the
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inspiration behind the
groundbreaking research that
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Wharton professors have
conducted and exploring how
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their findings resonate with the
world today.
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Well, the conversations around
cryptocurrency are surging right
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now, and the path of what might
happen with crypto investing and
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regulation in the next several
years has turned many investors
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thoughts to be very robust. But
there is also other areas to
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focus on when you're talking
about cryptocurrency, and that
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is blockchain, the tool that
makes a lot of these digital
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assets and digital payments
possible. Pleasure to be joined
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here in the studio today by
Kevin Werbach, who's a Professor
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of Legal Studies and Business
Ethics here at the Wharton
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School. He's also Chair of the
Legal Studies and Business
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Ethics Department. Great to see
you again. It's been a while to
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do this face to face.
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Always great to talk to you, Dan. - Thank you.
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You've done a lot of
research and work in and around
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blockchain. Where do you think
we stand right now with its
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understanding, its adoption,
its kind of place in the
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overall business landscape?
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Blockchain technology has been
around since 2008, when Satoshi
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Nakamoto— and we still don't
know who that is or was— issued a
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white paper developing the idea
of Bitcoin. And Bitcoin's a
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cryptocurrency. It's a form of
digital asset, but it rides on
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this ledger technology called
blockchain. And blockchain is
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actually much more general in
terms of its applications, as
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you mentioned. So we're
something like 16 years in to
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blockchain technology being
widely available. It was
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actually built on even earlier
foundations. And the question is
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whether that's a long time or a
short time. We see a great deal
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of interest. We see lots of
experimentation. We see
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certainly lots of trading
activity around digital assets.
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We see building of distributed
platforms on the vision of Web3,
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a kind of distributed
internet powered by tokens.
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We also see use of blockchain in
payments, and we see companies
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using it as a record-keeping
technology for understanding
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information as it flows across
their networks and between
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companies. We don't yet see any
real scaled use cases that are
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not predominantly powered by
financial investment type
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incentives. And so that's really
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the question of how far along
we are.
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How do you think, then, we kind of
take it from where it is now to
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get to that point where there is
more of a larger scale use of
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blockchain?
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It's not clear exactly what
blockchain is going to be best
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for. When I— when I talk about
this—and as you said, I've been
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studying this for a decade at
least— I always say there are
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these different application
categories, these different use
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cases. And it may be the case
that the significant use case is
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just as a— an investment asset,
and that's really the one that
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has the most heft around it in
terms of the activity. Or it may
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be the case that when we look
back 20 or 30 or 50 years from
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now, we say, "This is the new
rails, the underlying technology
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that powers the financial system
as it evolved in the next stage."
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Or we might say something else.
I don't think we should assume
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that we know the answer to that.
We should think about looking at
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applications and use cases as
they develop. And then if it
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actually is a better technology,
if it really has advantages,
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then it will ultimately succeed
in the market.
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What's interesting is that as we try
and find out more about what it
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can do and how it can help, it's
really— it feels like it's kind
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of up and down the spectrum in
terms of who is trying to figure
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this out. You have conversations
about this going on with the
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Federal Reserve. Commentary by
Chair Powell. You have so many
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different companies in different
sectors that are kind of
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wondering, is it something that
works with how they run their
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operation? It truly is, it still
feels like it's very much a
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learning process right now.
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Yeah, I think people don't realize how
foundational a change this
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technology represents, if we're
talking about the blockchain
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technology. If you are going to
your Robin Hood account and
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you're deciding whether to buy
Bitcoin or to buy some meme
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stock, it's just another name,
and you can think about it as an
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investment. But that's not
fundamentally revolutionary.
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The technology, though, really is.
It's a decentralized ledger
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technology that provides trust
without any central entity that
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is the administrator that
everyone relies on. And that's
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incredibly powerful, and that's—
has implications for all sorts
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of use cases. It has really
significant implications for
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finance in many ways. So that's
why we have all these
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conversations. Unfortunately,
though, it always tends to get
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pulled back or influenced by
this conversation about the
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speculative investments. And
again, there's nothing wrong
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with an interesting new
investment asset class, but
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that's really the piece that
everyone gets fixated on. But
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then when you look at what's
happening out there, we see
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really interesting growth of some of
these other use cases as well.
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Does the up and down nature of
things like cryptocurrency have
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an impact on the mindset around
the potential use of blockchain?
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Oh, absolutely. And again, that's
what I'm talking about, that
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people assume that it's inherent
to blockchain that it is highly
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volatile, and all about crazy,
wild speculation. And also, we
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should mention fraud, scams,
illicit activity. We saw the
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collapse of FTX. Celsius, another
company that collapsed in fraud.
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The CEO just plead guilty to
criminal charges. So all of that
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gets wrapped up into this. But
when you actually talk about the
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ledger technology, it doesn't
necessarily have that attribute.
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So for example, one of the major
applications of blockchain
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technology in finance is to
create what are called stable
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coins, and these are digital
assets that are typically pegged
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to the US dollar or to some
other stable reference point.
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They're not volatile at all. Now
they potentially could be risky
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if the assets that are
backing them are not truly
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stable, or they don't actually
have the assets they claim to.
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So there's certain important regulatory
issues. But those— those really
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aren't at all about volatility.
So I think it is important to
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differentiate it out when we're
talking about something that's
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purely investment versus
something else.
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So you mentioned regulatory, and
that's obviously another area
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where you focus. And there's a
lot of conversation right now
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around digital assets in
general. We're going into a time
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of switching administrations in
the White House, and the belief
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is that maybe we're going to see
a shift in terms of mindset.
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When you think about regulation
and all of these components
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around digital assets, where
should we potentially land, do you
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think, at some at some point?
- Well, one starting
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point is that you look at
history. Every time there has
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been a major, unregulated, new
kind of financial instrument
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that is accessible to lots of
people, there have been horrible
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abuses and fraud and crimes. Now
that doesn't mean that those
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financial innovations were bad
or should have been or were
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prohibited, but that's why we
need regulation. That's why we
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had the birth of things like the
Securities and Exchange
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Commission coming out of the
Great Depression, where there
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was horrible abuse and fraud in
financial markets. We see that
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with digital assets. We see that
with crypto, which doesn't mean
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that it should be prohibited.
Unfortunately, what happened was
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that the Biden administration
was actually on its way to what I
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think was a really thoughtful
and sensible approach to coming
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up with what it called
responsible digital asset
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regulation. So, you know, we want to
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allow this technology
to exist and
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promote the innovation, but
ensure that there were the same
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appropriate kinds of checks. If
you, again, go to your Robin Hood
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account and you're investing in
a digital asset, you have the
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same kind of confidence that
you're getting accurate
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information and the information
you need, and the person on the
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other side is not trying to scam
you, as if you're buying an
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equity that's traded on the New
York Stock Exchange. That makes
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sense. What happened was, in the
interim, we had the explosion of
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the crypto bubble and the
collapse of things like FTX,
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which really soured a lot of
people in and around the US
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government at that time in this
whole space. They really, I
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think, over indexed on
protecting against any harms
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happening. Those are true of the
banking regulators as well. And
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unfortunately, didn't
differentiate out between the
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firms that were really shady and
questionable, and the ones that
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were saying, "Tell us how to
comply. Tell us how to— we don't
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understand. It's really hard to
map all of the existing rules
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onto this new technology. We
want a path to clarity."
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They didn't make that distinction,
and as a result, you got a
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backlash from certain loud,
powerful voices in the industry
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and in the venture community,
who eventually seized on Donald
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Trump as the one who would bring
them a new, less regulatory
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environment for crypto. And they
started supporting his campaign.
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Not the whole industry, but some
very powerful figures. And they
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are now part of the new
administration, and will very
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certainly take this in a very
different direction.
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So then are we, to a degree—
should we,
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with the growth that we have
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seen in terms of the pricing of
things like Bitcoin and Ethereum
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and some of the other assets in
recent months, should we
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believe that there is an
unbelievable strength that's
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kind of building up around
cryptocurrency, or is it still
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kind of a wait and see, because
there is this influence that's
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kind of pushing things forward?
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I don't give investment advice,
and especially in this space
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where, you know, there are so many
uncertainties. I think it's
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really easy to come up with
simple explanations. This— this
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decision happened, and then the
price of Bitcoin moved this way.
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When you actually understand how
the Bitcoin market works,
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actually very highly
concentrated, actually fairly
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illiquid. There has been,
historically, lots of evidence
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of market manipulation, and
it's— it's a kind of a meme
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currency. People are buying in
because of their belief about
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the potential of the technology.
And again, that in and of
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itself, doesn't mean that it's
not an investment that you can
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make money on. But it's really
not a simple answer that this
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happened yesterday and the price
went up or down today. You even
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look at the crypto market
behavior after the Trump
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victory. Bitcoin went up a lot.
A few of the other ones, like
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XRP, which was associated with
this company, Ripple, that had a
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lawsuit against the SEC and so
forth, that went up a great
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deal. Ethereum, which is the
second biggest cryptocurrency,
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barely budged after Trump's
election. Many of the other
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coins, at least right after the
initial time, didn't seem to
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have a big impact. So look, this
is— again, these are investment
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assets. There are ways to invest
thoughtfully. There are
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different ways to come up with a—
an understandable valuation.
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And certainly it is affected by— by
the vibe, certainly is affected
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by regulation. But I think
people too often just assume
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that that's a simple equation
when it really isn't.
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Well, and for a while there,
there was a conversation about,
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you know, whether or not we were
going to see digital assets used
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as currency by different
countries. And there were
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attempts to do that. But then
you hear, you know, the
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commentary from Chair Powell
about, it should be more tied to
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gold than it should be
traditional currencies. And so
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are we past the point, do you
think, of— of believing that it's
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something other than really an
investment of a, you know, of
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that type of nature?
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That's different. That's what
are called Central Bank digital
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currencies, or CBDCs. So
going back to what I said
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before, blockchain is the
underlying technology. You can
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use it to issue these tokens
which are not really backed by
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anything, and are volatile, and
essentially are investment
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assets— or they're used for
payments. Bitcoin itself, the
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whole idea is that it's a store
of value, independent of
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governments, and it's a new
kinds of mean of— means of
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payment. Or you can think about
having them be stable assets,
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either privately issued stable
coins or publicly issued digital
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currencies. China has issued a
central bank digital currency.
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It's not— none of these are on
exactly the same kind of totally
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decentralized blockchain
technology as assets like
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Bitcoin and Ether, but they have
a similar kind of ledger
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technology. The European Union
is fairly far along in a digital
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euro. The UK is somewhat far
along. They're still skeptical,
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but trying to come up with the
foundation for a digital pound,
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and the Federal Reserve has done
a good deal of research on a
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digital dollar. But it is true,
they have been fairly skeptical
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that we should implement this.
The question is always, really,
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what problem does it solve? So
much of the currency is already
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digital.
- Yeah.
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And what problem does
it solve that these private
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stable coins, which create this
new decentralized platform are
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not already solving in the
marketplace?
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Where do you think, then, we head
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with blockchain and that technology
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in terms of kind of building the
framework so that it becomes,
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you know, something greater than
what it already is right now?
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One thing is that the technology
is maturing. For a while, there
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were serious issues about
scalability. There's been a lot
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of progress on that. There's
been a lot of progress on
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privacy and other aspects. There
is also development in that
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marketplace, once you get beyond
Bitcoin, which is kind of a
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unique thing. There are
questions about different
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platforms. Ethereum, which for
the longest time has been the
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second most valuable and the
most prominent digital asset for
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these other kinds of uses of
blockchain. There are other
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platforms like Solana that have
certain advantages that seem to
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be maybe catching up. So
there's— there's all of these
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questions about maturation. But—
but I think ultimately, it's
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just a matter of, first of all,
we do need a good, clear
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regulatory environment so that
we can put that to the side and
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we can address these appropriate
concerns, the concerns about
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investors, the concerns about
fraud and crime and sanction
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violations, very real issues
that need to be addressed. And
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it's not just a matter of
deregulating. It's a matter of
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actually regulating and having a
clear framework, which will
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almost certainly take
legislation to address these
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issues. We need that
first. And then we just need
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time. Because again, we're
talking about here, just to take
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one of these use cases, use for
payments in the financial
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system. This is re-architecting
the pipes of global finance.
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There are trillions and
trillions of dollars at stake
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here. This is not something
that's going to happen
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overnight. I believe it's going
to happen. It's just
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fundamentally a better
technology than the accumulation
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of things that we have now
underlying the financial system.
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But that's— that's a period of
many years to really realize
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that potential.
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Great to see you again, Kevin.
- Thanks very much.
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My pleasure. Kevin Werbach,
Professor of Legal Studies and Business
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Ethics here at the Wharton
School.
00:15:41
Thank you for listening
00:15:41
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00:15:44
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