Good Disruption: Cryptocurrency

The following is a special series of the Darden Ideas to Action podcast, focusing on the power of disruptive innovations.

The Disruption, a lively discussion between UVA Darden School of Business professors Yael Grushka Cocaine and Mike Lennox on cutting edge technologies and practices that are challenging the status quo.

Welcome, Yael.

Welcome, Mike.

Nice to see you.

It's good to see you.

I am very excited about today's topic here.

I'm excited and a little bit mystified, you know.

It's gonna be interesting to hear where, where we come down on this hot topic of cryptocurrency, cryptocurrency.

But before we do that, I wanna, you know, think a little bit about our podcast here.

We're obviously still kind of launching here, uh, of course, a few million subscribers obviously by this point, but we've talked about a theme song, right?

And so you and I have talked about good vibrations.

We have, yes, right, right.

But you tell me which good vibrations version you're thinking here.

Oh my goodness, I'm going to date myself, but is it the Beach Boys?

The Beach Boys.

There is the Beach Boys version.

That's the only one I know.

But this is where I want to change because I actually want to go to the iconic 1990s Marky Mark good vibration.

Yes, absolutely.

So Gary, our producer, we need to work on getting the rights to Good Vibrations by Marky Mark, and, and I'm wondering if we could like get him to like re-record it so we can change Good Vibrations to good disruptions.

I like that.

I like that.

After my time in the, in the Boston area, I'll bring him on, you know, like I, are you a fan of Mark Wahlberg?

I am actually.

Are you?

I do appreciate what he brings to the world.

All right, well, that's enough of that fun stuff.

Let's, let's talk about cry.

Cryptocurrency.

So, so yeah, do you own any crypto?

I do not own any crypto, and I told you I was gonna ask you exactly the same question.

Do you own any crypto?

I do not, and I'm, I'm gonna put my cards on the table right to begin with.

I am a skeptic.

I am, I'm gonna put it out there.

I know there's a lot of people who are, you know, all in on this.

I, I'm a skeptic.

Well, we've, uh, last, you know, we talked in our previous podcast about, um, Um, EVs and electric vehicles, and you are a big fan of those, and we know that you're a believer in that disruption and you think it's all good and leading to a, to a brighter future.

You seem pretty strong in your position around this, and I'm curious, like why is it that you think that?

Why are you so skeptic about cryptocurrency?

Yeah, I mean, I'm, I'm, uh, you know, usually a technology enthusiast.

One of the reasons we're doing this podcast, um.

Have you ever seen the South Park episode with the underpants gnomes?

OK, all right, this is like a classic that goes back like 10 years.

And so this is what I feel like when you talk to like a crypto enthusiast.

It sounds like the underpants gnomes.

So just to set the stage here, Kyle, one of the kids on South Park, is having his underpants stolen at night, and they figure it's the underpants gnomes who they then follow to their lair.

I can see where this is going.

Yes, and they ask them, you know, what are you doing?

And so the underpants gnomes.

Explain their three-step process.

Step 1, steal the underpants.

Step 2, question mark.

Step 3, profits, right?

You get it.

So like this is what I feel like they say.

They like are talking about this as if this is an amazing opportunity, but when you press them on that kind of middle part, like the actual like business model here, you get a.

A lot of words, but I'm not sure you get a lot of certainty here about what exactly we're talking about here.

Well, it's interesting.

So if I were to try to translate your skepticism and kind of distill from it why it is that you have this resistance or you're this negativity or this doubt in your mind as to whether or not this is a disruption, a good disruption, or where it's headed.

I would say that it's um a little bit perhaps for a gap in knowledge or this black hole of information that we can't quite grasp or the novices, those folks on the outside seem to not fully understand um and so perhaps I would kind of turn it around and say to you, well, what about all those people who are participating in it and those who have taken the time.

To study it, I agree and I acknowledge that most of them are a little bit younger than us in some sense, or many of them tend to be on the younger side, savvy, pick up new technology, do some, you know, coding, pick it up, learn how to do it themselves, and they seem to get all in enthusiastic, invested, making money, knowing how it grows, understanding the ins and outs, and drinking the Kool-Aid.

So could it be a little bit of like maybe we just need to try, maybe you and I need to go and, go ahead and buy some cryptocurrency and invest and and figure it out for ourselves.

Uh, this sounds like Dutch tulip bulbs to me, right?

You know, everybody, all the cool kids are doing it.

You need to get in on this trend before it goes away, right?

Um, for those of you who aren't familiar, Dutch tulip bulbs is this famous case of an inflationary market where we had a bubble, uh, around the prices of Dutch tulip bulbs, um, and you see this with various markets every once in a while.

You look at, uh, Bitcoin, of course, it was, uh, up around.

But it was at 60,000.

It's down now to like 400.

It was down to as low as 30.

Uh, volatile.

Oh, it's been volatile for sure.

Uh, Dogecoin and all these others are coming on the market.

What was it about, uh, 1500, or sorry, 4500 different cryptocurrencies now, uh, in distribution.

Um, I don't know, it's, it just seems to smack of a, of a bubble here in many ways, and the investment thesis seems to be the, uh, the famous, you know, greater fool theory here.

As long as you're not the last one out, uh, you'll be, you'll be good.

Well, I do, um, if we go back a little bit and kind of try to unravel where this all came from and what is the some of the motivation behind the whole industry, you know, emerging, the whole cryptocurrency idea, I do buy the fact, um.

That people were getting fed up with with paying lots of fees, right?

Having these intermediaries, having these banks, having these third parties controlling all the transactions, it does seem in a world of, um, you know, Napster and the world of, of, of Venmo that we can find better ways to do things, right?

And we can connect directly and we can use our computers in more.

Sophisticated manners that you know we don't need to go to Bank of America or to the Wells Fargo in order to do all of our transactions, don't you see that?

I mean, I'm sure, yeah, I mean I think if we start to unpack it, you know, again, I'm a crypto skeptic.

I'm not a blockchain skeptic.

I actually think the underlying technology of blockchain has a lot of use cases that I think, you know, create value.

In the case of and let's just clarify like that distinction, OK, like the blockchain is the technology that allows us to actually exchange this currency, this money, without actually having physical money, right?

Well, it's, it's even beyond that, right?

It's this idea of a distributed ledger so that this idea that think of it as a database of transactions here is not controlled by.

Single party uh that it exists out there uh in the world um and in fact it's transparent and others can see this ledger uh available whereas in most financial transactions there's a trusted intermediary, the bank or some other intermediary who is kind of providing that role of kind of managing the database.

And and I think that's where I, I struggle because when I think about what's the problem crypto's trying to solve, at least for me, my bank works really well.

I find that like when I write a check or I use my credit card, like, transactions go through and I'm able to make payments.

So, um, I mean, I definitely think there are certain things like foreign exchange and the like where Uh, this could, could make sense.

It's the fees.

It's paying all those fees that is painful.

Yeah, but it's not clear to me that even with something like, uh, Bitcoin, you still have third-party intermediaries, these wallets that you're paying fees.

So, again, what problem is it exactly solving here, uh, is not clear to me.

And look, the evidence is not good.

That Bitcoin and these other currencies are being used as actual transacting mechanisms.

All they're being done is trading on speculative buying here, um, probably with the one exception of illegal transactions, right?

It's great for money laundering, it's great for illegal transactions here that you don't want to go through a reputable third-party bank, um.

But it's unclear to me that there are that many use cases that motivate the need here.

Now there is more and more tension globally, uh, locally in the US, but also globally around the world from the regulators like around the fact that they have to start interfering and intervening and put in place certain mechanisms to ensure that everything is done that is legal and that it's not used for the wrong purposes.

Um, so if it were to disrupt, so let's go down the route that wrote, you know, the route and say let's assume that cryptocurrency is a disruptor, who is it going to disrupt?

It's a great question.

I mean, I think first and foremost, the, the ones who fear this would be the banks, right?

So like if, if you can disintermediate the role of the banks or the other financial institutions here, that clearly would be disruptive.

Now again, I'm, I'm skeptical of whether that will actually manifest itself to the degree that the kind of crypto champions are saying, uh, uh, here, um.

But, but clearly they at least would be one.

I don't know any others you'd think of.

Well, it's a good question.

It could, uh, uh, open up a string of new type of commerce, I think, and be in the way that people interact with each other, right?

So it's, yes, it's the banks, but it's the PayPals and the Venmos, and it's all of the ways in which we exchange payment.

Like if I want to go down the, down the road and I, you know, wanna use a service that is a little bit.

Um, you know, vague, and I'm not familiar with the environment and I'm trying to use, let's say, Internet, right?

We've both of us read an article this morning about an Internet provider that basically is using cryptocurrency to encourage people to share their hotspots with each other and kind of share their broadband with the world.

I can see that I would need, I could go ahead and use that service and so my Internet service provider will eventually feel the hit, right?

They, they'll see that there's a change in.

The contracting and they'll start to think about their own business model moving forward, right?

Well, this is, this is a game where I struggle because I think again there are obvious solutions that blockchain can help, um, or needs where blockchain can help.

Um, take something like Venmo or PayPal, right?

They're not blockchain solutions, right?

Uh, they require you to have a bank account and they are providing a service, uh, that allows you to transact more efficiently.

Um, again, I'm not against like FinTech innovation.

I think there's a lot of that going on, but whether a blockchain cryptocurrency solution is necessary.

Uh, I don't know.

Helium, who we were talking about, who's doing this, uh, networking piece, clearly, you know, they've created an interesting world in which third parties basically are providing services to build out the network, and you need to incentivize people to do this.

So they've created a cryptocurrency that you get as part of this.

Uh, it's not clear your ability to make money basically while you're providing broadband access to other people, but do you need a cryptocurrency to do that?

Like, can't you just like have.

Like US dollars going into people's accounts again, I'm, I'm struggling with why the cryptocurrency part of this is so, is so necessary and so hyped in all these examples.

One repeated theme in all of these, uh, business models that seems to work is this distributed approach, this idea that there's no centralized body, that I don't put too many eggs in one basket, and I'm not relying on a single company to rise and fall and succeed, but that we're all part of it.

And that we all, you know, own a piece of this business and this, this company.

I think that's the philosophy behind it.

That's what is so appealing to many people who jump in and participate is that they are part of this network.

They are part of this chain, they are part of regulating this whole industry and that we're not relying on a single entity outside.

Yeah, this is a definite kind of libertarian Silicon Valley, stick it to the man, right?

Like it to the man.

We don't, we don't need these big bad banks, you know.

Doing this for us.

Um, maybe, maybe, but again, um, take, take, you know, actual currencies like US dollars, right?

I don't know, it like, it's kind of feels good to have the weight of a large federal government behind that currency guaranteeing basically that it is a method of, of exchange.

Um, so, I mean, yeah, stick it to the man, but, but why again?

Like why isn't US dollars working for me that I need, you know, Bitcoin?

Um, I, I'm at a loss.

Well, um, I'm gonna call a friend.

Can I call a friend?

Absolutely.

I'm gonna call.

We definitely need help on this topic here.

I'm gonna call a friend.

I'm not sure if she's actually gonna, uh, side with me or side with you, but she'll definitely shed some light on all of it and give us some more things to think about.

Kina, um, HM is a, is an associate professor of business, business administration, and Kinda, you've developed quite a reputation for knowing a thing or two about cryptocurrency.

Um, you know, we're talking about cryptocurrency in the context of disruption.

Do you think it's a disruption?

It's a disruptive technology.

Uh, Tell us your position.

So I think you guys have it right with separating the crypto from the currency.

I would equate the currency part to money, money supply issues, and then the crypto part is more the payment rails.

And so, the initial motivation was really about the fees and the banks are extracting large rents through fees.

But if you actually look at the initial, um, the white paper that set up Bitcoin, it set up this entire infrastructure without really specifying how we were gonna have such low fees in this, this new system.

To the extent that it would generate lower fees, I think it would be disruptive.

It puts some competition in the banking sector.

But look at the Bitcoin system the way it is now.

I, I think, Mike, you mentioned, there are still high fees and the way the system is set up, it automatically trends towards high fees because you need to incentivize um the miners that are kind of collecting. the blocks and putting them in the blockchain to actually expend the computing power and the energy, which is very costly to create these blocks.

And so, to do that, you have to, you know, give rewards.

Um, and the blocks are sort of set up so that there's a limited amount of information that could go into them.

The reason being that if you want to store, uh, yeah, as you said, if you want to store this in a decentralized fashion, lots of people need to store it.

Storage costs are extremely high as the, uh, the size of the blockchain gets exponentially larger.

So, until that technology, storage technology, uh, uh, makes it such that we can store massive amounts of information on multiple computers very cheaply, um, the block size in blockchain is going to be, uh, restricted so that we don't accumulate too much data at any given point in time.

But, OK, so, what does that mean?

That means that if you want to get your transaction put in a block, you can do that by incentivizing the miners and kind of essentially tipping them.

So, you do see these spikes where, um, you know, mining, uh, power is either down because of some, you know, shock, uh, to, in the locations where the miners, uh, exist.

In those, in those scenarios, you actually see a big spike in fees, higher than what you would have to pay a bank.

So, the system itself, it's a very noble objective.

If it was able to achieve um lower transaction costs, that would be competitive against the banking system.

But it's done in such a way that we haven't actually seen that, um, that play out.

So that's the payment part.

Can, can I, could I try to put this in my, in the layman's terms, the way I, I've tried to articulate this to like students and the like is you need somebody to balance the books.

And so in the kind of financial intermediary side that would be the bank kind of make sure the books are balanced.

Here in a decentralized system, you need to incentivize somebody to basically. the books and then that's the minors.

That's where they come in to make sure that, you know, multiple transactions are taking place at the same time that the book's clear at the end of the day.

Is that, is that the right way to think about it?

OK.

What about, what about, can you speak, and we're getting a little technical here, but like the proof of work piece, um, and my understanding, like this is what's leading to huge energy needs in the Bitcoin model, and is that the only way to do this?

Well, so there's been innovation since then, but the, the proof of work is actually interesting because that's gonna lead us back to the money supply part.

So, if you think about what the miners are doing, In theory, they're not doing anything hard.

Transactions, so, you know, you, you have your Bitcoin wallet on your computer, you enter into a transaction, your computer emits a signal that other, that nodes uh in the system will pick up.

They will then send those transactions to the miners who package them into blocks, send it back to the full nodes, who can add the block back to the blockchain.

None of this is complicated in that if you think about all the miners are doing, they're just taking a bunch of data.

Packaging it into a block and sending it back to the note.

So, why does it involve so much, uh, computing power and so much energy?

Well, that gets us to the second part of what Bitcoin was supposed to disrupt, which is the monetary system.

So, on the payment rail side, they wanted to disrupt the banking system by lowering fees, but they also wanted to disrupt essentially the market for US dollars by introducing another form of currency.

Um, now, when you think about introducing a currency, there's got to be something that determines how the money is, is enters into the economy.

So, with the Fed, there's US monetary policy.

That's the, that's the mechanism through which, uh, money enters the, the US economy when we think about US dollars.

So, how would money enter the Bitcoin system?

Well, the, the creators of Bitcoin, um, whoever they may be, decided that they were gonna set up this game.

So there's a, there's a can I interrupt right there for a second?

You, you, you, you've hit on an important point here.

So maybe to help people who are listening, so you said, whoever they may be, like, do we have any sense of who, you know, Joe Shirley and Adam, who start, yeah.

Started this and like, do you think that matters because if we're talking about kind of influencing our global monetary system here, is there, could this be nefarious?

Like could there be some nefarious party behind this?

It, it goes back to your question, Michael, what are we trying to solve?

And this was sort of presented as this could have these big societal benefits, but it's not clear that it does.

Now, now that we're sort of 10 years from when Bitcoin started to take off, maybe 12 years from when Bitcoin started to take off.

We've seen all the problems that can create the benefits.

Um, we can talk about this in a second, but then you go to, maybe this was just somebody who was trying to make a quick profit and they did this.

They did this by, by creating this infrastructure that, you know, people sort of herded on.

Um, for various reasons that we can also talk about, and maybe they're out.

Maybe they cashed out and they're, you know, off an island somewhere just watching the rest of the world go crazy about, about Bitcoin.

But the fact that we don't know who created it and the fact that we still have yet to come up with a, um, a compelling answer to what big social problem.

Are we trying to solve really does put some question marks around what the true motivation of this was.

And just to bring it back to your point, you started to describe to us kind of how these currencies get put into the economy, so to speak, or, or thrown out there for trading.

So can you just complete that process?

So whoever those individuals are, wherever they are, how do these new currencies get.

Generate this new money get generated.

Right.

So, this, the idea in Bitcoin was that, all right, we're gonna make these quote unquote miners um solve complicated uh computing problems.

So, essentially they collect all these transactions, they have to put it through a function that will, that it turns a bunch of text into another text of string.

Um, and that type of string has to have certain properties.

You can adjust the properties that the output has to have to make it harder to generate a piece of string with those properties.

That's what generates this increase, the, the increased cost of doing so.

And the idea was that, well, we're gonna inject money into the, the quote unquote economy.

As rewards for engaging in this sort of effort, this kind of costly effort where, you know, it may not be costly for you as, as an individual, but it's costly for um your computer.

You need to have like this big, fast hardware and pay high energy costs in order to do it, and you're willing to do that if you're getting compensated.

So, the miners and this proof of work, this costly proof of work is the, uh, flip side of injecting the money into the system.

So we're gonna create something that's costly in order to compensate it, and that compensation is what's going to essentially be the monetary policy of the Bitcoin system.

Fascinating.

And so you, you did mention, sorry, Mike, yeah, no, go ahead.

I, what's so fascinating is the The parallels between some of the things that you mentioned and what we talked about in a different different disruption which was the um electric vehicles you mentioned this notion of computing power and the fact that we have to store information uh these chains get longer and longer, uh, this proof of work is work that somebody has to do to invest uh, could it be in a future where technology continues to evolve and cost of computing and transaction continues to, to decline or to, to change.

Is there still maybe a glimpse of hope that we can, uh, reduce some of these costs to the technology optimist now?

Yeah, exactly.

Yeah, for sure.

And so, even, you know, even in the short term, there's been a shift away from this proof of work, which is, you know, it's costly and it's very bad for the environment.

I mean, people have estimated that Bitcoin, and this was a couple of years ago, takes up more energy than, than the country of Argentina.

So, you know, That's not ideal for the environment.

So, one option is, yeah, computing power, um, gets better.

The problem is if it's not costly, you sort of lose that game that was set up in order to release Bitcoins into the economy.

So, you need to have people incur, um, some sort of cost in order to justify giving them this currency that the hope is will be valuable.

So, what you don't want to do.

I give out currency um for free because then there's no, there's no way to sort of regulate the monetary policy.

The way that Bitcoin was going to regulate the monetary policy is if they want to slow down, if that, where they, in this case is the algorithm.

So, it's sort of programmed into the algorithm that was initially set up in Bitcoin that we're gonna release a certain amount of Bitcoins like every, um, you know, 10 minutes.

So, By changing the cost, you can actually change the speed at which Bitcoin uh is released into the economy.

So, if the, if the thing becomes costless, then you've sort of lost that lever of um the Bitcoin monetary policy and you'd need to come up with another construct that would be able to regulate the flow of the currency into, into the economy, which is why I think you guys hit the nail on the head at the beginning.

When you said, is this about the crypto, which I would equate to payment rails, or is it fundamentally about the money supply?

So, could we take this crypto technology and just build it over the US dollar and not have to worry about, um, you know, how do we set a monetary policy with this artificial game, this artificial costly game.

I'm curious, when you think about analogies here, I, I've heard people make the analogy like this is gonna be like gold at the end.

This is gonna be an asset class that gets traded, um, like gold.

Is that, is that the right way to think about this, or is that in your mind, not, not correct for something like Bitcoin?

So I think the biggest difference between, so there's a similarity and there's a difference.

So the, the biggest difference is that gold still has some residual fundamental value.

Um, part of it may be cultural, but ultimately this is a metal.

You can build stuff with it.

Um, yeah, I'm watching the Olympics.

There's a lot of gold going on there.

Rings too for gold rings.

So exactly, um, you know, you could use it in infrastructure if need be.

So let's say people didn't covet it, people didn't value it, you could use it to build stuff, you could use it to like adorn buildings, and so there's still some fundamental value to it, exactly, right, that will mean that means that you're not.

Even if no one is willing to accept it for transactions, you, you'd still be willing to accept it for yourself.

The problem with these sorts of what we call fiat currencies, which are intrinsically worthless.

So the US dollar is also a fiat currency.

The US dollar is intrinsically worthless.

You, you can't do much with it.

It's, you know, it's just a piece of paper.

Um, the, the problem is it relies on it being generally accepted in exchange for goods and services.

So, what the, the issue with how, how do we resolve it with the US dollar?

Well, the US dollar gets it's, let's, let's call it fundamental value.

The court system.

So, by being declared legal tender by the government, that means that if a seller refuses to accept your US dollars uh in exchange for their product, he has no recourse unless you, you pre-signed a contract with him saying that you would pay in some, something other than US dollars.

So, that designation by the government and its recognition by the, the judicial system is what helps resolve, you know, some of this uncertainty about whether US dollars or what equilibrium we settle on with US dollars.

That doesn't mean that US dollars will never lose their value.

There is always the possibility that people just wake up and say, we don't want to accept US dollars, but the probability of getting to that equilibrium is so low.

Whereas with Bitcoin, There's no legal designation, there's no judicial designation.

And so, you rely on just how many sellers are willing to accept it, which is why when someone like Elon Musk comes in and says, oh, I'm not, I'm Tesla's not going to accept Bitcoins as payment anymore, you see a massive drop, um, in the value of Bitcoin, because now there's a big question mark over, well, if this big player isn't going to accept it, then maybe others won't.

Whereas if Elon Musk went out and said, I'm not going to accept US dollars, I really don't think.

You would see a change in the value of the US dollar, and that's a good point.

So I mean the US obviously and the US dollar is in a privileged position in our, in our global financial community.

Um, there are countries that peg their currencies to the US dollar.

We, we have seen at least I think one example of a country, wasn't it El Salvador, who is now pegging their monetary system to, to Bitcoin.

I mean, does that have any legs?

Is that, you know, could we see a global movement to get off the US dollar and, and really move towards Bitcoin?

So I think in, in countries where People don't have trust in the central bank to maintain the value of the currency.

Something like Bitcoin, um, or another, another form of cryptocurrency could, um, could be beneficial because, so what is the problem?

It goes back to how much do you trust the monetary policy.

And so, when we say what is the problem, this is now kind of on the money side as opposed to on the payment side.

It's, it's interesting in the, so just kind of an anecdote.

On the, on the blockchain, the very first blockchain, the very first block, sorry, in the Bitcoin blockchain encodes like a piece of text that's a, a headline from a London Times article that was basically talking about how central banks around the world are trying to bail out their banking systems.

I'm paraphrasing heavily, but it, it, and There's actually no need for this text to be in the blockchain.

It's, it's, it doesn't change anything, except like the ultimate hash that you get when you take that, that, uh, set of transactions in that piece of text, and you run it through the function to get the text to fixed length.

But so that sort of raised the idea of like, OK, maybe this isn't so much about payments.

Maybe this is actually people. were upset that um governments and central banks were trying to bail out the financial system after they created such a mess and that led to an increase in the money supply and everyone was talking about how there would be massive inflation.

We didn't see it in the US as a result of the financial crisis.

We actually didn't see it for a very long time.

We're only seeing it now for a completely different set of reasons.

But in a country where you don't trust your central bank to retain the value of of currency, then a rigid system that has a predefined algorithm for releasing money into the economy gets rid of this fear that will this currency preserve its purchasing power.

Um, so it Kind of gets rid of the inflation threat.

So, in a country like, like El Salvador or a country that would otherwise peg its currency to the US dollar, adopting Bitcoin is a way to say, hey, look, I mean, we, you, we don't have a really good track record of preserving the value of our currency, but you don't have to worry about it anymore because we're not in charge.

That's the benefit on that side.

The, the, the cost is, and this was actually one of the big failures um of the gold standard.

So, Mike, since you said like, what is the, the parallel with the gold standard, so, we talked about the deference.

Gold is physical and has some fundamental value.

A similarity between gold and Bitcoin is that there's no easy way.

To increase supply in a crisis.

So, one of the, what, what's argued by some economic historians, one of the, as one of the big failures of the gold standard was during the Great Depression.

So, the US would have benefited tremendously.

The US banking sector would have benefited tremendously from some liquidity injections by the Fed.

Um, to deal with all the runs on the banks, not all of which were related to fundamentals.

Some of them were just pure panic-driven runs.

But the, the Fed was arguing that we're on the gold standard, so we can't increase the supply of US dollars and give it to the banks unless miraculously, there's a big increase in the supply of gold reserves.

And so that, I mean, that's been argued by some as one of the reasons why you went from like a stock market crash in 19. 29 that could have just been a normal course recession into a very prolonged and protracted depression because there was no way, no channel for the central bank to step in and provide liquidity to the banking sector that needed it.

So that's that's like the same, yeah, because I mean this is like saying at one level, you know, again, getting it back to the stick it to the man.

I was kind of you, I was kind of had me convinced they're like, all right, I'm, I'm privileged being here in the United States.

We have Some faith, you know, uh, in our government that they'll continue to, to make this a viable currency, but if you're in a country where that's not the case, this makes sense.

But now you're highlighting that the very features of Bitcoin that make it, um, stable, if you will, this predictability on how it increases actually hinders your ability to address some of the financial crises you might face because you can't increase the money supply.

You've taken away the, the external decision making, that kind of authority that.

Make decisions and can kind of take things in different directions when you need to act exogenously in, in response to a crisis, right?

Exactly.

And I, I guess that a bit, not that I'm a Bitcoin defender, but if I had to put myself in the shoes of a Bitcoin defender, they may argue that, well, if, if we kind of get rid of the banking system in the first place and everything is done through, like, you, you know, on decentralized platforms, then maybe there won't be a financial crisis in the first place.

As much as I disagree with that argument, I would think that the bigger counterpoint to that is, look at what happened in COVID.

That has nothing to do with the banking system.

The banking system was very sound, but, you know, the Fed had to step in and provide liquidity, um, to cut, so that, you know, we could shut down the economy and for, I Like in that, uh, what happened, you know, over the past two years at the very beginning was you basically shut down the economy and you rely on the Fed and to some extent fiscal policy, which takes longer to make decisions on to keep the economy on life support.

And so, if we were on a Bitcoin system or if we were on a gold standard, that would be impossible.

So there's a few things that I'm hearing, um, and, and we're gonna kind of wrap things up in a moment and ask you to take a position, Kinda, around whether cryptocurrency is a good disruption, a bad disruption, or perhaps not a disruption at all.

So we're going to come back to that question in a moment, but if I were to flip things around and say, well, One of the things that is preventing cryptocurrency from being accepted by more people and being kind of thought of as a more mainstream kind of uh uh avenue is a lack of trust that people are reporting this question mark that uh uh Mike spoke of earlier in the process that people don't really understand it, people don't trust it, and this notion of volatility that it seems to be fluctuating and that there's a very little ability to predict.

Um, do you think that either of those things can be solved, at least in the US in the near term, in any meaningful way to change people's perception?

So, I think the first thing is that those are related.

They're very closely related.

The volatility, so, there's a fixed or a deterministic supply of Bitcoins or on many of these cryptocurrencies, a fixed supply, um, and demand is what's bouncing around as people don't trust it.

So, the volatility is really coming from this lack of trust.

Now, if you had a more flexible mechanism through which you would change the, the Bitcoin supply, then, you know, if people don't trust, if, if the supply of, sorry, if the demand for Bitcoin goes down, the supply of Bitcoin should also go down by the same amount.

That would create some stability and that may actually improve trust.

But the way the system is set up, it doesn't, it doesn't allow for it.

So, Uh, on the bigger question of, you know, what can be done to improve trust, I think it does go back to Mike's question of what does Bitcoin want to do in the first place.

It says that it wants to be a currency, um, but in order to be a currency without any sort of fundamental value, you have to have people trusting it.

And in order for people to trust it, they have to believe that other people trust it.

And so, there's no way to get rid of this multiplicity of equilibria.

Um, even, you know, the declaration of it as a fiat currency doesn't 100% get rid of it.

So in that sense, to me, I view, maybe we're getting now to the point where you're, I'm going to take a stand.

I don't, no, good, bad or no disruption.

I don't see that.

I don't see this as a viable currency.

To me, it fails as a currency.

Um, because of the issues that, that, that, um, you know, we've talked about.

There are situations where you want flexibility.

It doesn't give you that flexibility.

Um, And the the, the, the, uh, what's encoded in it to prevent it from giving that flexibility also magnifies, um, the volatility when there's lack of trust, and when you have this big amount of volatility, it's much harder to get people to trust that this is a good medium of exchange.

So, to me, I think it fails as a currency.

Um, now, could it, could the crypto part, could the payment rails part be a, a, a disruption?

I think yes.

I think it has pushed the banking system to be a bit more efficient.

Uh, so, you see it, a good example is JPMorgan.

So, JPMorgan, I think, has created its own internal token.

Um, so, you know, one of the, the types of payments that I guess are the slowest and the most costly are cross-border payments.

And a big part of that is all this anti-money laundering compliance that has to be done.

Typically, it seems like that's just, that hasn't been efficient.

So, the, the compliance gets checked at multiple steps in the process.

So, by using this idea of a token that that where you can kind of keep track of where that token has been.

So, each US dollar for the institutional clients that participate in this arrangement with JPMorgan is associated with a token, and you can kind of encode in that token where it's been before.

So that the checks can be faster.

The checks of the, um, anti-money laundering compliance can be faster and more efficient.

Wonderful.

As somebody who has family in Israel and in England, I need something that makes those, those types of transactions much quicker.

Yeah, yeah.

So that, I think that, so to the extent, now, would the banking system have eventually done this?

I think so, but I, I would, I'm favorable to the argument that, um, Crypto and the blockchain technology by sort of introducing a potential competition on the payment rails, push these guys, the banking system to sort of, you know, all right, let's kind of get our act together.

It was, it's not like a massive innovation.

It really It is just better data storage and a better database and querying it more efficiently.

So a small, a small, good, a small, a small disruption.

So I, I do think on the payment system, it's, it's probably gonna leave like a positive footprint.

Now, but on the currency side, no way.

Well, I'm, I'm right with you actually.

I'm, this is very consistent.

Like I said before, I think blockchain, I hope we'll spend some time on another podcast about blockchain and NFTs and, uh, and the like.

I'm gonna go out on a limb and I'm gonna say no disruption in the following sense, you know, we can think about Betamax.

We can think about, you know, all of these artifacts, fax machines that like name a particular point in time.

I think we're gonna look back on the 2020s and, you know, mention of cryptocurrencies like.

Bitcoin will peg you to this point in time and will not be something that has this longevity that that people think this is gonna be a fad that we're we're seeing.

So I, I, I think I agree with the with the two of you.

Uh, the currency side of things doesn't seem like that's the appeal here.

I think the empowerment, the fact that we're giving, uh, um, young folks who know how to code some capability to come up with new ways to kind of connect and new business models to innovate and create.

I think that that's where the excitement lies.

Maybe that's more on the block blockchain side of things.

You, you are just always the optimist.

I'm usually, I am very optimistic.

You are, you're, you're putting a positive spin on this.

I love it.

I love it.

I'm gonna get all the negative tweets from the crypto.

Exactly, exactly.

Spend enough time on Twitter, and sometimes, some days you'll be optimistic.

Um, I want to make sure that we thank Kina.

Kinda, thank you so much for your, um, expertise.

It was hugely valuable to us and uh we really enjoyed chatting with you.

So thank you for joining us today.

Thank you so much.

This was fan.

Fantastic.

Thank you.

And Mike, our conclusion is no disruption, or I'm saying no disruption, no disruption, OK.

And I'm saying part of it is good disruption and as always half full, yeah, yeah.

And as always, let's thank our producer Gary, our, uh, lead researcher Becky, and I also want to give a preemptive thank you to Mark Wahlberg for agreeing to, uh, re-record his classic Good Vibrations for us.

So we're looking forward to that, Mark, and we really appreciate you, uh, contributing to our podcast.

Love it.

Can we call out a celebrity every time?

Absolutely.

OK.

Disruption is a podcast from the University of Virginia Darden School of Business.