Bankless - 153 - Why Crypto is Underrated with Tyler Cowen

Episode Date: January 16, 2023

✨ DEBRIEF | Unpacking the Episode: https://shows.banklesshq.com/p/tyler-cowen-debrief  ------ Tyler Cowen is an American economist, columnist, and blogger. He’s also a professor at George Mason University, where he also produces the Conversations with Tyler podcast with guests like Vitalik Buterin. Marc Andreessen, and Ray Dalio. In today’s episode, Tyler shares why he thinks regulators should pause and wait before passing crypto regulation in the wake of FTX, how FTX and Enron are similar, why he calls himself a crypto-hopeful (even though he thinks Balaji’s Network State idea is utterly wrong). And finally, we play Tyler's favorite game—Overrated vs. Underrated—about everything relevant in 2023: Crypto AI, Inflation, America, China, Social Media, Wealth Inequality, and more. ------ 📣 Crypto Tax Calculator | Free Crypto Tax Calculator https://bankless.cc/CTCpodcast  ------ 🚀 JOIN BANKLESS PREMIUM: https://newsletter.banklesshq.com/subscribe  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken  🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🚁 EARNIFI | CLAIM YOUR UNCLAIMED AIRDROPS https://bankless.cc/earnifi  ------ Topics Covered 0:00 Intro 6:10 Tyler’s 2023 Crypto Thoughts 6:50 Why Crypto is Confusing 9:04 Is Crypto Overrated? 10:25 Is Crypto Worth it? 12:19 Regulation 19:33 On-Chain Privacy, Taxes, Surveillance 24:00 FTX vs. Enron 27:35 Wealth Inequality 32:05 Crypto Regulation vs. Innovation 34:48 Can the U.S. Choke Crypto? 36:24 Crypto vs. the Internet 37:56 Whose at Fault for FTX? 40:00 Crypto Self-Regulation 45:16 A.I. Regulation 46:46 A.I.’s SBF Moment? 48:05 Is the Future Closer than it Appears? 50:31 Human Self-Regulation 51:16 Economists & Crypto 53:20 Vitalik 54:16 Free Markets & Greed 55:21 Overrated vs. Underrated 1:00:24 Balaji’s Network State 1:01:47 Banks 1:02:15 Closing & Disclaimers ------ Resources: Tyler on Twitter https://twitter.com/tylercowen  Tyler’s Blog https://marginalrevolution.com/  Tyler’s Podcast https://conversationswithtyler.com/  Beware the Dangers of Crypto Regulation https://www.washingtonpost.com/business/beware-the-dangers-of-crypto-regulation/2023/01/03/27f6f31a-8b63-11ed-b86a-2e3a77336b8e_story.html  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Welcome to bankless where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, special treat today. We have Tyler Cowan on the podcast. Tyler is an economist. He's a columnist. He's a polymath. He makes the case for why crypto is underrated. I feel like we need this case right now as we enter 2023. Three things to look for in this episode. Number one, why Tyler thinks. regulators should pause and wait before passing crypto regulation, especially in the wake of

FTCS. This would be the absolute worst time to do it. Tyler makes that case. Number two, we talk about how FTCS and Enron are similar in the lessons we should all learn from those two events. Number three, why Tyler thinks crypto is underrated, why he calls himself a crypto hopeful, even though he thinks Belagie's network stake idea is utterly wrong, a complete farce. And finally, we play Tyler's favorite game near the end, overrated, underrated, We talk about everything that's relevant right now. AI, inflation, America, China, social media, wealth inequality, these things overrated or underrated.

David, we had a lot to talk about during the debrief. What do you want to focus on? I really want to focus on why polymaths seem to understand crypto better than everyone else. And that was one of the big questions that we asked, Tyler, is people that are siloed inside of their one institution, be it government or academia or the banking sector. They never really understand crypto. They kind of just treat it with really.

But people that operate across these verticals, across these sectors do seem to get crypto. And that seems to be Tyler. And just the nature of Tyler's very punchy, concise answers about almost anything that we ever would want to ask, he's got an answer for. This type of persona, this person, I think, is worthy of exploration that I want to unpack in the debrief. And also why this episode, Bankless Nation, is faster. It's a very fast-paced episode in comparison to other podcasts that you would listen to. So, guys, if you want to get that episode, the one we've released for, right after this episode, it's our thoughts on the episode of Tyler Cowen. Then stick around for the show,

which is called The Debrief. Premium Subs have access to that. If you're not a premium subscriber, you can upgrade now by clicking the link in the show notes. Okay, we're going to get right to our episode with Tyler. But before we do, we want to tell you about our sponsors, starting with Cracken, which is our recommended exchange for crypto users in 2023. Let's get to it. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products.

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Check out Ben the analyst's DGENPIT, where you can ask him questions about the token report. Got a question? I've got my own Q&A room for any questions that you might have. At Bankless, we have huge things planned for 2023, including a new website with login with your Ethereum address capabilities, and we're super excited to ship what we are calling Bankless 2.0 Soon TM. So if you want extra help exploring the frontier, subscribe to Bankless Premium. It's under 50 cents a day and provides a wealth of knowledge and support on your journey west. I'll see you in the Discord. Bankless Nation want to introduce you to Tyler Cowan. Tyler is an American economist. He's a columnist.

He's a blogger as well. He's also a professor at George Mason University, where he also produces a fantastic podcast. I think you should go subscribe to called Conversations with Tyler. He interviews many thinkers across many walks of life. He's had guests from crypto like Vitalik Buteran. He's also had people like Mark Andreessen, Ray Dalio. He even had SBF on, I believe, at one point, maybe in the last year or so. Tyler, welcome to Bankless.

How you doing? Brian Armstrong, too. Brian Armstrong. Hello, thank you. Can we just start here? All right, so, 2023, what do you think of crypto? What is this crypto thing? How do you explain it?

What is crypto now? I think we're at a margin where crypto has become underrated by most intelligent, honest observers. So the collapse of FTX has led to a lot of bad publicity. Whatever you think of that episode, I don't feel it matters for the long run prospects of crypto. The decline in prices has cleaned out a lot of the fraud. there are serious people building things. I think we should be genuinely uncertain as to what will succeed. But I would say I'm cautiously optimistic. Tyler, there's one thing we noticed frequently as represented as other crypto industry is that people outside of the crypto industry

have a really hard time understanding what crypto is all about. But you seem to not exhibit that. Like people that are inside of one institution, whether they're an economist or they're in government or they're in banking, they don't really seem to get crypto. But the more that people, span many walks of life and are skilled on many different areas of knowledge, seem to get crypto a little bit more. And that's kind of how I place you. Why do you think crypto is so confusing to people on the outside? Well, I'm not sure anyone gets crypto. There are plenty of people on the inside who get some part of it. But if you think of crypto, as Vitalik does, as a new kind of computer, more fundamentally than being any sort of money or being a new way of programming contracts,

it's one of the few truly new ideas in many decades. So you could say, well, Einstein, that was like a very new idea that as you approach the speed of light, your mass becomes infinity. That's insane, right? Does anyone understand that today? So crypto isn't that weird, but it's deeply weird. It's counterintuitive. It's perhaps misleading to call it cryptocurrency.

You know, it's not necessarily a money. and we still don't know which are the use cases that really will succeed. You say deeply weird like it's a good thing. Are things that are deeply weird good? Some are very good and some are very bad. I think with crypto, for instance, is there the potential to take remittances and rather have the fees be often as high as 7%, make those fees 1 or 2%, that quite possibly will happen,

that will help poor people around the world to a great extent. are we convinced it will happen? No. Is there another scenario where simply competition from crypto makes the current suppliers of remittances lower the fees through competition? And we never see crypto have a major role there, but it's still been very beneficial. Absolutely. But is there potential for danger in crypto? That's true as well. You said earlier that you think crypto is underrated at the current moment. Is that sort of new? Would you have said that last year? Have you said that at other points during your observation of crypto that it's underrated? Or have there been times where it's been overrated?

And if so, how? Well, one has to be very careful with the exact dates here when you asked last year. But if you take whichever date was the highest, say, Bitcoin price, at that point in time, I believe crypto is overrated, not by everyone, but by a significant contingent of people who simply thought it was an almost automatic way to riches and it was going to do everything and revolutionized the nation-state. That was never a majority opinion. But you had a large block of people believing those things,

which I have never believed in. I think having crypto be cheaper is healthier for crypto. There's a bunch of things you can do with it that will work. But the key event here really is SBF and FTX, big headlines, a celebrity figure. Everyone can damn and criticize him. And crypto bears a lot of the blunt of that. And now crypto to me clearly is underrated.

But yes, it was overrated when Bitcoin hit its peak price. It was what, December of 2021? Or was that November? November, I think, was when we hit, yeah, all time highs, yeah. So you feel like we're much more grounded with the reality of what crypto can do? Let me ask you this, though, Tyler, there are some critics who say that this whole crypto thing that you guys talk so much about, and they might acknowledge potential future use cases such as remittances of the type that you said.

They also say, this technology, and you just mentioned that, you know, weird things can have the capacity for good or bad, but this particular one increases the surface area for scammers, for fraudsters, for people like the SBFs of 2022. Maybe this starts to get into your regulatory post, but let me ask the more general question. Are you sure it's worth it? Is crypto worth it when you have greater surface area for the frauds and the scammers and anyone can launch their own coin and send it to the moon with populist use of social media? What do you think about this argument. Well, I don't think you can send your own coin to the moon anymore. It was a bad state of affairs when you could. On the issue of scammers, I view it this way. Because of the

internet plus AI, the supply of scams is now infinitely elastic, or it will become so rather quickly, especially with AI. Now, crypto is a kind of intermediate step in the amazing proliferation of scams and ability to reach people with mobile devices. So you can blame crypto for that, but with or without crypto, it was headed toward infinitely elastic supply anyway. So I don't think crypto will have made a difference in the ongoing trajectory, really. So crypto scams obviously are bad, but I think you're picking out one thing from the universe. It would be as if you said, well, horse races. Are there scams related to horse races? Well, I'm sure there are. But in the final analysis, whether those are there or not,

you know, the final scamming equilibrium will be what it is. Tyler, you recently wrote an article, which is actually how we ended up recording this podcast with you today. And the article was, beware the dangers of crypto regulation, where you urge caution on over-regulation. And I want to read a quote from that article that you put down. With systemic risk currently low, perhaps it's better to wait and learn more before moving a head with regulation. I am not arguing, by the way, for zero regulation of crypto. I'm merely saying that a hurried bipartisan move against crypto following a highly visible public event with an identifiable villain, SBF, of course, would be a mistake. Tyler, can I get you just to elaborate and unpack that statement?

What's motivating this pause for reflection among regulators in the crypto industry? I don't think the regulators know yet what they're doing. And I give them credit for at some level realizing this. They actually haven't passed truly systemic crypto regulation. I don't know that there is a way to do it without shutting down good crypto. Now, if you focus on exchanges, I do think regulators can regulate exchanges in a more or less sensible way and could do that now if, say, FTX had been a legitimate institution and had done more in the United States. But I myself doubt if exchanges are the future of crypto.

I think Coinbase, which is already regulated, will end up regulated more. We won't treat it exactly like a bank, but our regulators are quite good at imposing restrictions on well-identified third-party institutions, and Coinbase is one of those. And a lot of those institutions want regulations, so the environment can be predictable. But crypto as a whole, how we classify it, again, I don't think there's anyone out there who knows what they're doing at all. And the fact that we don't currently know the sustainable use cases of crypto is the flip side of that coin, right? Like, are we regulating remittances?

Is it, you know, online identification? Is it prediction markets? Is it Web 3.0? Whatever your opinion might be, I don't have the conceit of knowledge to think that I know, and I'm quite sure the regulators don't know. Yeah, and certainly crypto as a concept, as an industry, is so incredibly broad. that a single global bill that tried to regulate everything about crypto would probably miss the mark. To your point, I agree with you that I don't really trust regulators to understand what they're really getting into. Do you have any sort of like roadmap or suggestions for how, because people do want to

regulate crypto and to some degree we also want good and fair regulation from inside of the crypto industry as well. Do you have any thoughts or for a potential roadmap for how we go from where we are now with the lack of current regulation to where we need to go, which is having some semblance of good regulation. Well, assuming we're talking about the United States here, I would say simply wait for now and see which use cases are sustainable. There's a chance it's none of them. I mean, it's not, it would not be my bet. There's some chance crypto just ceases being a thing, and you can forget about the whole problem. The better guess is some of the use cases will stick, see which those are, and then see what are the appropriate bodies of law for regulating

those use cases. So that to me makes perfect sense. I just don't see that we're there yet. So one take or one reply to you, Tyler, and this might be say, you said, regulators can't regulate crypto without regulating out good use cases. A reply might be, there are no good use cases, Tyler. We could just eliminate crypto and nothing of value will have been lost. I want to get back to that question, but read a quote from your article. where you say, yet a primary use case for crypto is to get capital out of China, Russia, Venezuela, and other financially repressive countries. That is one reason for the U.S. to support rather than to undercut the current crypto ecosystem. This starts to make a case almost of like a

Western liberalism, sort of democratic, free case for why the U.S. should be supportive of crypto. Can you talk about that? What about the lawmaker who says, look, Tyler, there's actually no good coming from crypto. When you say good use cases, I haven't seen them yet. What's your reply to that? There are tyrannical governments all over the world. They try to control their people's capital movements and how they deploy their wealth and their money.

Crypto is a partial antidote to that. I think if it weakens the governments of Venezuela, China, Russia, you can debate exactly who else belongs on that list. That's a good thing. Another example would be Argentina, which is not a tyrannical government, but it's not a well-run government. And for whatever reason, people use crypto in addition to U.S. dollars as a hedge against Argentinian inflation. That's also a valuable use. So those are proven by the market.

Now, they're not USA functions. So I understand from the perspective of the regulators, there's a nervousness that the main benefits right now are overseas. But you want to keep those benefits. It's their international security interest. I think it's quite possible there will be more tyrannical places in the world five to ten years from now. So the notion that you want to either crush this ecosystem or sever it from the United States, when the one for sure use it has is, in my opinion, a net good, I think we should let it rip along those dimensions. Tyler, it's not clear to me that the U.S. actually wants to support anti-terranical technologies.

Can you make the case that they do? why would they want to support these things? Isn't there an authoritarian bent to the U.S.? And it's your financial policy as well? And I can understand why it might not want China to take the lead here. But is the U.S. coming from a place where it can really say we are pro-ante authoritarian technology? The U.S., the United States government, is a big complex entity. Different parts of it want different things. It often in the aggregate acts in a very clumsy way. I don't think it is mainly aimed at, you know, stamping out all of our liberties, but sometimes it does that. To the extent crypto is a protection against that, so much the better.

But there are legitimate concerns about funding terrorists, tax evasion, black or gray market transactions. The people worried about those issues aren't crazy, but as you know, at least as well as I do, if you simply in a superficial way, quote-unquote, crack down on current crypto, that will encourage people, to move into truly anonymous forms of crypto, that will be harder to control. That may happen anyway. So if I thought there were a simple regulatory button I could press that would get rid of the bad sides of crypto, I would at least think about doing it, but I don't know that there is. It seems to me it would simply speed harmful innovation in the crypto space. What's your take, Tyler, on privacy, on chain privacy, for example? We have seen some U.S.

action that has to summon the crypto space seemed somewhat repressive. in the adding a smart contract. This is the tornado cash privacy mixer, which is a smart contract on Ethereum to the OFAC sanction list. So effectively, US citizens cannot use on-chain privacy, this tool on Ethereum. Do you think that privacy is an area

that crypto and kind of U.S. foreign policy and domestic policy can coexist? Or do you think on-chain privacy is completely off the table for the U.S. to sort of accomplish its goals? How do we balance these things? I don't think you can have a tax system and a complete right to financial privacy. That said, you don't want to ban people from innovating with Ethereum and other crypto ecosystems.

Do we have a good way now of writing regulations that I know of that will achieve all of those ends? I would say no, but I think it's unrealistic to expect that simply citing privacy will turn over all rights to people who want to do anything they want to do with crypto, One way or another, that will be regulated to make sure people pay their taxes. Do I think we're in an ideal place with that? Now, I would say no, but I genuinely don't know what we should do. Tyler, are you saying that as crypto people who frequently use Ethereum and other blockchains that in order for really a progress with a relationship between nation states and crypto, that the individuals are going to have to compromise on our ability to access

privacy tools in crypto for the nation state to really be accepting of this. industry? It depends on the country. In the United States, I certainly think that's true. I think we are by and large a legitimate government, and some of the governments I mentioned earlier are not. So I hope the United States is able to continue collecting its taxes. I hope we don't have to go too far to maintain that state of affairs. But again, I think the technology is evolving so rapidly. It's very hard to get a good sound prediction from someone that's still going to be true two or three years from now. But what you don't want is for the United States government to decide it needs to regulate everything about your life and somehow try to look into your wallet and every single thing

you do and move to total surveillance. And if we're too lax with crypto, the risk actually is we'll get this much bigger overreaction. And that, I think, would be much worse. So the fight for some kind of absolute privacy of all crypto, that makes me nervous too. Are we de facto headed towards that more surveillance state though in this digital world. Is crypto not kind of in your mind a bulwark against that or a counterbalance against that? It seems to me, Tyler, and I'm not sure if you share this opinion, but it seems to me with the digitization of everything, we're kind of de facto heading in that direction anyway because all of this information is available and because the government or social media, for that matter, can peer into your wallet at any point in time. And they seem to be sort of just

claiming that as their territory and is their right. There's really no counter. balance against that. What are your thoughts on that statement? Well, there is a big ally on the side of individuals. You could call it a counterbalance, and that's what I would describe as indifference. Most of the rest of the world, maybe all of the rest of the world, doesn't care. And so there's some abstract sense in which your privacy levels are quite low, but de facto, no one knows what you're doing. And that may be the most comfortable equilibrium we can achieve. Not everyone has that now, but a lot of people have that now. I worry that balance will be disturbed and we'll have to make more of these extreme choices where either it's very hard to collect tax revenue or the government in a very

ham-fisted way is just controlling and observing, literally observing all of your life. So we're in this funny intermediate space right now where most people do in fact have a lot of privacy and the violators of their privacy tend to come in, you know, small village settings and not on the internet. Or it's your best trends or your relatives who gossip about you. Not that, you know, meta or the CIA discovers your big secret and puts it on a billboard. We've moved forward in this conversation to talk about like the long-term collisions between what crypto promises, which is things like privacy and what the nation states wants, which is to collect taxes. But I want to actually kind of roll back to one of the main points that you were making in your article that you wrote, which is to

not have this gut spinal reflex to regulate crypto as a result of FTX. And one of of the examples you used was Enron. So, Tyler, could you walk us through some of the similarities you see between FTX and Enron? And what lessons can we really pull out between these two events? There was a big Enron scandal, roughly 20 years ago. The firm collapsed. It was based on a certain amount of fraud. It was worth zero. Many people lost a lot of money. There was a trial. People went to jail. It was decided that U.S. corporate governance is not regulated tightly enough. passed something bipartisan, the Sorbanes-Oxley Act, which made it much harder for companies to be publicly traded because the disclosure requirements and the bureaucratic and legal requirements

were much tougher. And that set off a 20-year period where, in essence, we have many fewer publicly listed companies. Equity markets are thinner and less liquid. And if you're, you know, the proverbial little guy, it's harder to get in on the big money in the early years. Those returns are reaped by venture capitalists. Some amount of the rise in income inequality actually stems from the Sorbaines-Oxley Act. You have venture capital firms getting returns that otherwise through public markets might have gone to some degree to ordinary investors. So that was just a big mistake. It passed by some, you know, very strong vote, both parties, everyone, rah-rah, we got to do this. There were villains, news stories. When America acts in that impulsive, bipartisan kind of

I get very nervous. And there's a chance we'll do that right now with the new villains being SBF and, you know, the FTX collapse. And so your fear is that our lawmakers and regulators have this just like gut overreaction that does imposes some similar regulation that limits the expression of crypto moving forward, which I really want to drill home. That would be bad, but also that would be critical as it relates to crypto because we need our networks to be decentralized. We love that word in the crypto space. And when you tell me that the net effects of this Sarbanes-Oxley regulation was the funneling of capital through the hands of VCs and not the public. To me, that represents a failure case for this entire crypto experiment. Do you share these concerns?

Yes. I just see in American history, we often blunder and react too quickly before we've thought through the secondary consequences of what we're doing. There's one big news story. We address the problem in that news story. So in the case of FTX, it's an exchange taking your money and defrauding you. That sounds like a perfectly reasonable thing to regulate against, and it is. But if you do that and you do 20 other things that squash good crypto or crypto innovation, in fact, you've made a big mistake. We're now in a situation where through the lame duck session of Congress, we have divided government. It's not even entirely clear where the two parties will fall long term with respect to crypto regulation.

But the chance of something being done immediately seem a bit lower than, say, even a month ago. So, Tyler, I just want to double click on the comment about Sarbanes-Oxley, right? Because you said some amount of the wealth inequality in America right now is actually due to Sarbanes-Oxley, which was legislation passed to stop the next Enron, right? It was, for all intents and purposes, supposed to be a pro-public kind of legislation. Can you just walk people through the link between that and wealth inequality? If I were to try to explain that, I might talk a little bit about accredited investor laws, for instance, or I know you mentioned it, but the kind of the lack of companies going public until much later in their

life cycle and their higher valuations. So all of the returns going to private investors who are already wealthy, multi-millionaires to begin with. Can you just talk about this in a little detail? Because I don't know that that happened in the 2000s, right? I don't know it's necessarily clear to folks in crypto what actually happened and what you're talking about with respect to wealth inequality in Sarbanes-Oxley in that legislation. Well, for much of the last 20 years or part of the last 20 years, we had this tremendous run-up in equity values. Some of it was driven by tech companies doing very well. Some of it was driven by lower real interest rates. But if you were holding those companies, both in tech and just more generally, you had some pretty phenomenal rates of return

during a lot of those years. Now, that was not anticipated when we passed Sorbain's Oxley. It was simply thought this would reign in fraud, but it imposed a lot more accounting requirements on publicly traded companies. And the result was you had many fewer of those companies. The valuation still went up a great deal, but most individuals did not have the opportunity to buy into those companies at their earlier stages. And so, Tyler, this also has to do with kind of accredited investor laws as well, because non-public companies, you know, there are securities laws around purchasing equity in a non-public company. And in particular, there's a certain kind of threshold of income that an individual

or a couple needs to make or a certain amount of assets that they need to hold. I think the number is something like $1 million or something in net assets that they have to hold in order to invest in these private assets. And that's why they can't buy them before the assets hit the stock market and go public. What do you think of these sorts of accredited investor laws? Some people have talked about maybe making them education-based rather than income-based or rather than net worth-based. Do you think it's a fair system that we have in place in the United States?

States. That's all absolutely correct. I think those are terrible laws and we shouldn't have them. There's plenty of ways you can waste your money. Do you think lower income or lower education people have no way of wasting their money right now? Obviously, that's untrue. I mean, one such way is the most dubious of crypto assets. What about sports betting? What about going to Las Vegas and so on and so on and so on? So the notion that, oh my goodness, we can't let these individuals invest in an early stage tech company. That's too dangerous. dangerous, that's one of the better ways they can take risk. So I think there should be no such laws. Tyler, why do we still have these laws in the books? Like, I mean, some people would say it's

because the wealthy and they want to stay in power. I'm not sure if it's that or something else. I think in general, conspiracy in our world is overrated and bureaucratic inertia is underrated. It's very hard to get rid of laws and regulations on the books. There's a lot of steps. People have all sorts of misgivings. We have divided government often. There's some amount of polarization, things move slowly in government. The people who would benefit don't understand all these mechanisms. You add all that up, the thing just doesn't happen. I don't think it's a conspiracy. Okay, so that answers my question, but I'll ask it anyways. Is between Ryan and my co-host and I, the conspiracy hat probably fits a little bit better on my head than his. So you're saying that

the notion that accredited investor laws are a secret way to protect the wealthy and keep the poor poor, you're saying that that whole take is overrated. Well, I'm I think that has turned out to be the case, but I don't feel there's been a conspiracy to put them in place for that reason. Okay. In your article, you wrote a line that I really, really liked, and I'll read it here. It's hard to imagine Satoshi Nakamoto or Vitalik Buterin at Goldman Sachs. And I think that's a pretty easy thing for all the listeners to imagine or not be able to

imagine. What message do you have to regulators and lawmakers about the risk to reward of crypto-regulation as it relates to innovation? You don't want to make your crypto firms more like Goldman Sachs and nothing against Goldman. I'm an admirer of certain things they do. I've zero against them. They are the financial establishment. Someone is going to be.

If it's them, well, okay. But at the same time, you need crypto innovators to be nimble, low cost, willing to think outside the box, dynamic, not concerned about cannibalizing their previous revenue models. worked for them, you know, probably not regulated by the Fed in the FDIC. And that's not Goldman. So you need something different. Goldman is not going to drive this kind of change. That's okay, not a complaint, but in understanding you need part of your sector to be much more dynamic and freewheeling. Uniswop is the largest on-chain marketplace for self-custody digital assets. Uniswap is, of course, a decentralized exchange, but you know this because you've been listening to

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And for just under $21 a month, it probably pays for itself with just oneirdrop. So plug in your wallets at Earnify and see what you get. That's E-A-R-N-I-F-I. And make sure you never lose $1 a month. another air drop. We've definitely noticed that the crypto movement attracts younger generations, much more so than older generations. And it's pretty obvious why that's true. People that were born with the internet just understand crypto a little bit better. And so when you say that we don't want our new crypto institutions to look like Goldman, this seems to be of a similar vein as just

a movement and industry that resonates with younger people much more than it does older people. And I'll be cognizant of the fact that our regulators tend to be of the older generations. And so is this a fair perspective to take that the regulators might be overbearing on crypto because they are of an older generation who doesn't understand it as well as younger generations? I believe that is true. If you look at many innovations, take something simple like the automobile. In its early years, and really for quite a while, automobiles were very dangerous, airplanes were very dangerous. If you had our current regulatory apparatus and applied them to automobiles and airplanes, I'm not sure they ever were. would have succeeded. So, oh, that's too risky. You know, have you passed all of these tests,

all these regulations? And that's insane, right? At some point, you have to wake up, pinch yourself and say, hey, wait, in the early stages of change, there are, in fact, a lot of costs, a lot of risks. You know, we do get through it. And fortunately, when automobiles and airplanes came around, we didn't have as much regulation as we do today. Tyler, part of what I'm curious about on this question is, I mean, what's at stake for the U.S. here when you talk about innovation and losing someone like a Vitalik Buter in kind of the jurisdiction of the U.S.? Is it even possible for regulators and lawmakers to kind of choke crypto out, or at least damage its potential? Or maybe damage its potential for being located in the United States? What is actually the threat

here? Some crypto people would say, it doesn't matter what the U.S. says or does about crypto. Crypto will continue to exist, one block at a time. They don't have a problem. They don't have a have jurisdiction over this decentralized technology. What's your take on that? I don't think the U.S. can choke off crypto globally, no matter what it does. But look, the U.S. is the world's financial center, along with London, parts of China, formerly Hong Kong, tiny bit Singapore. And you want your world's financial center in some way to integrate with what might be a significant innovation. So the U.S. could de facto drive enough crypto drive enough out of the United States so that doesn't happen. It's not that it all can be banned,

but if you make it such that very wealthy individuals feel they're taking a significant risk, if only reputationally, by dealing with crypto, we could eradicate the U.S. as a place where crypto innovation happens and is adopted and integrated into other things that go on. That our regulators could do. Globally, no. How did we avoid doing that with the Internet, Tyler? I don't remember. I was a kid in the 90s, but it seems to me that this is a transformational technology in some ways similar to aspects of the internet. And yet the U.S. was very quick to adopt the internet. Why hasn't that story played out with crypto? Some of the internet story is that things developed so quickly the regulators couldn't keep up. But some of it was that we had a series of telecommunications deregulations acts that were genuinely wise and well thought out in the 19th.

1990s, and, you know, liability of people who put up sites on the Internet is limited in the proper way. We just made a bunch of good decisions. And right now, the EU is making some bad decisions on AI. The U.S. doesn't show signs of making those bad decisions, so we still can get it right. But there's no guarantee. And one reason AI has been lucky so far is there's no like AI demon in the news. But now with SBF, you have a kind of crypto demon. even though a scandal was not at all unique to crypto, it was just misallocating funds, which can happen in all sorts of different sectors.

You can do it in a life insurance company. So that's why we have a bigger risk with crypto right now. Another thesis is that in the 90s, our governments were more competent. Do you buy that? Some parts of our governments were more competent. I wouldn't say they all were, but yes. At the same time, regulators might say

people are looking for us to help them in situations like SBF. And in fact, they're blaming us for the events of SBF. And so if your counsel, Tyler, I'm coming from a regulator's position, is that we shouldn't do anything more. What about the public who's asking us to do more, to protect us from the SBFs? What, they want some blood, right? Who is that fault for the FTX fiasco, actually? How do you respond to something like that when the public is the one actually, in some cases, seeking regulators to step in and help them? Well, I think you have to blame the governance structure at FTX, above all. Public wants all kinds of things, right? We shouldn't always do with the public wants. It's not that I have no sympathy for those who lost money,

but it's remarkable to me how few sob stories have come out, the widows and the orphans who put their life savings in FTX and now they're in the bread line. You haven't seen much of that. So, you know, probably a fair amount of it was pretty wealthy people. and if in fact you put a lot of money in a non-U.S. regulated exchange that deliberately located in the Bahamas, I don't want to say it's your fault. But to me, it sounds a bit like saying, well, you lost a lot of money betting on NBA games. A lot of the time you win, a lot of the time you don't win. And if you're putting money in a crypto exchange in the Bahamas, even without fraud, you should be prepared to lose that money. So again, if you want to worry about financial victims, that's very far from where I would want to start. You end the article's statement. It would be nice if there was a simple way to give more regulatory clarity to the crypto market as many crypto participants themselves desire. But without further market evolution, there isn't. For now, the best option is to tie our hands to the mast and hang on. Tie our hands to the mast and hang on. That's what I feel like I'm doing every day with crypto. And Tyler, I guess my question to you is, um,

Do you actually think this industry can self-regulate? Is that a pipe dream? Does self-regulation ever actually work? I don't know if I would call it an industry. It's something weirder than that. I don't think complete self-regulation in the long run is enough. But again, I think until one knows which are these sustainable use cases, you literally don't know what to do. so let's let people experiment more and sit tight in wait.

That is somewhat underrated, and it's psychologically a difficult thing to do. You know, like something must be done, this is something, therefore it must be done. But often it's better to wait, and I feel right now we're in that situation. Do I think we should wait forever? No. I think there will come a point where the demands of legitimate institutions for regulatory clarity, for what they're doing, which is already working, will be more important than keeping it completely unregulated. But I don't see that we're close to that point today.

So your basic message is just hands off till we know what this thing is. Yes. We're in this three-way standoff between the crypto industry, the CFTC, and the SEC, where the SEC is going after people that they have deemed to issue securities, but then the crypto industry raises the flag and being like, well, you guys haven't even helped us define what a security is, and more or less similar relationships are coming between the crypto industry and the CFTC, where the CFTC recently went after a Dow to charge them with commodities fraud. And in the middle, you have the crypto industry. And what Ryan's saying, and the question I have for

you is, like, is self-regulation even possible? Is the concept of self-regulation where we say CFTC, SEC, SEC, pause, we'll figure this out. We got this. Is self-regulation, is that too hopeful of us for aspirations for the crypto industry? I think it's too hopeful, but let's put aside crypto for the moment. I know this is a crypto podcast, but a number of other innovations are coming, and you can disagree what they'll be.

You know, it may or may not be Mark Zuckerberg's metaverse, but there will be all kinds of other new transactions on their way, maybe between AIs, might be with crypto, it doesn't have to be, and we will need over time a whole new set of regulations for things other than critical, crypto. It's not just a crypto issue, but we don't know what in the metaverse will work or what not, or what in virtual reality, or like how AIs might trade, you know, GPU space with each other.

So I don't think it's even primarily a crypto issue. Crypto could be a like only modestly sized part of this elephant. Eventually, whether we like it or not, it will end up being regulated. You want it done in a clear way that's not too terrible. I think it's a mistake to hold out hope for all this staying unregulated forever. But I don't think it's just about figuring out the one thing crypto. It's about figuring out how is the internet revolutionizing finance more generally. And it will be, I think, a pretty long and significant story. Tyler, we are pretty laser-focused on crypto at times. Can you update us on like, what are regulators thinking?

What are some of the issues at play for AI, for example? I mean, are our systems of governance at the nation-state level actually able to keep up with the pace of innovation? You're making the case that they're not able to keep up with the pace of innovation in crypto, therefore they shouldn't touch it, is basically AI going through the same things? Absolutely. What are some of the stakes there? And that is arguably harder to understand than a lot of crypto. And it might move more rapidly, especially once it's teaching itself. It has in some ways much more dynamic potential than crypto.

And the notion you hear like, oh, we pass a law to make the algorithm transparent. For most AI, that's absurd. It's not even a well-defined concept, what it means to make the algorithm transparent or transparent to whom. Or what are you hoping to accomplish? Somehow you get sent to big zip file and you stare at it, and then you feel you know how, like, the boss, the man is screwing you over. It's incoherent.

So, again, I think the problem goes well beyond crypto. You're the kind of carrier of the message. like, oops, like there are new pieces of this world that don't fit with the old pieces. That's the fundamental thing going on. It's easier to see with crypto. You see it because you're focused on crypto. But again, I think it will be, if anything, more of an AI issue, possibly a metaverse issue, though I'm skeptical on the metaverse than crypto.

Tyler, I'm trying to imagine, you know, how AI would have its SBF moment. Is this some kind of like rogue AI creating deepfakes and some technology that the government says, nope, you know, this is too dangerous for the population to hold? Like, do you have any scenarios here? You know, possibly that will happen. But keep in mind, what you need for these moments is an identifiable villain, not just bad things happening. When there's no villain, it gets processed very differently. So whatever bad things AI might end up doing, which of those will be connected to a villain? I don't really have a prediction. But I would say until there's a villain, the stories will resonate in a bit of a flatter manner with the public, at least for a while.

That villain needs to be a human being. It has to be a human being, in my opinion. It has to be able to sit down in court. Okay. So if you have this one evil person who like buys up, you know, an AI company and he has a sinister look and some bad thing happens, like then you're approaching those moments. It has to feel like a movie so we can all relate to it. In my opinion, yes. And the FTX scenario was perfect for that.

Right? There's a clear villain. Well, the movies are already in progress there, Tyler. We've got documentaries. They're having to rewrite the script. That's right. We definitely see in the crypto industry, people who are in crypto tend to be futurists. We like to explore the frontiers of things, be it crypto or maybe AI.

So there's a lot of AI chatter around the crypto communities these days. And my mind goes back to Kathy Woods' fundamental thesis at Ark Invest is that the future is actually closer than it would appear. And really all her thesis is is, things like AI. biochemical engineering, blockchain, like battery, lithium battery technology, all of that source of innovation is much more closer and implying that the future is actually much more closer than it may appear. Yes.

Tyler, I want to get your take on that. Do you think the future is closer than it may appear? Absolutely. Another example would be embryo selection. If you just told people what was going on and asked them, well, do we need to regulate this, you'd get a lot of knee-jerk yeses. Like, oh, people can just pick. But when you actually think about how are you going to regulate embryo selection, it's a daunting

prospect. Most regulators don't understand it. It's here already and expanding very rapidly. I personally don't know what we should or should not do with embryo selection. I think about it a lot. I don't have a well-formulated view, but I know it's not going to be easy. Well, that sounds like how crypto regulation sounds to crypto people, where if you tell me that Congress is going to regulate crypto, I would get really scared because exactly what you said, I don't really trust that they fully understand what they're getting into. If you're telling me that that is also true for embryo selection, I'm going to guess it's also true for AI. I'm guessing it's going to be true for other technologies that are on the frontier of progress. It sounds to me that there's many, many, many different sectors of technology

these days that are accelerating far beyond our government leaders to be able to get a wrap on things. How is this going to play out if they can't catch up? Well, we need some kind of big regulatory rethink. The notion that we take all these new things and others we haven't mentioned, and fit them into the current boxes, I just don't see how that's going to work. Oh, embryo selection, is that a security? No, that's the wrong question. You have new stuff in the world,

and regulation is very slow to change, and the mistake is to just think you can take the categories and institutions you have. I don't think that's going to be feasible. I think this kind of brings me back to the original question of, is human self-regulation even possible? Because it sounds like to me we're going to be going into that future where we have to attempt to self-regulate our own industries

because we're the only ones who are actually informed on this matter. It will happen no matter what you and I say to each other. But, you know, as outside observers, I don't think we should expect at all to go so well. Again, early years of cars, people crashed them like crazy, died. You'd be driving in the road, there'd be some big pothole, no one regulated that either. Plain deaths in 1950 were scary high. You know, don't think this is just a walk in the park. Tyler, you've called yourself a crypto hopeful. And I think you've shown that

in this episode at the very beginning. You think crypto is underrated. You're also an economist. This has puzzled me for a while. Why do you think, Tyler, more economists aren't interested in crypto? Here's what I see. Something it's a completely open source, transparent economic system, much more transparent than the central bank or central banks around the world, for instance. Why aren't more economists looking at this stuff? I think it reflects an intellectual failing of my profession, that you do well by specializing in known methods that can be readily evaluated by your peers and thereby you get promoted and you work through established channels.

Most of academic life works that way. And crypto is a new thing. Like who referees your paper? How do we tell if you're right or not? It's too real world. It's a thing for doers, more than theorists. There's an actual real world test ultimately, even if it's delayed. And that doesn't attract academics who by their nature are risk-averse or grumpy or over-specialized.

Maybe you don't always have a lot of experience. So it's sad. You know, I apologize for my profession. At the same time, I mean, I think that if you paint your profession with a broader brush, maybe there are some economists on the frontier. I mean, someone like Vitalik, if you mentioned earlier, is he an economist? I mean, at some level, he's designing an economic system, isn't he, in this Ethereum project? So what is he? What are some of the Ethereum researchers, if not some branch of economists? Well, if it were up to me, I would give Vitalik a Nobel Prize in economics.

I don't think he's going to win one, at least not anytime soon. He's written papers on economics that are not crypto per se, and they're very, very good. So I absolutely, think of Vitalik as an economist. But I don't try to win that war of semantics. It seems at this point not worth it. Can I ask you just a question about Vitalik, since he's been on the show many times, and he's been on your show. It sounds like you're part of the mutual admiration club of Vitalik. Why do you think he's not more widely known? Sometimes I'm mystified that he is kind of just in this niche within crypto, and so few people know about him. He's not a household name yet. Do you have any thoughts on that? Well, first, I thought he was more widely known. I hear reports that when he walks

down the street in different countries, he's recognized very frequently. How many people or economists, for that matter, can say that, right? Not many, if any. But I'll say this, when Vatalic writes, he does not make concessions to his audience. He's writing for Vitolic, which I think is how it should be. I give him an A-plus for that. And most people, and I include PhD economists, they just can't read it. Tyler, one thing that we've seen at play within crypto in 2022 is this force of corruption, this corrupting force called greed at play in crypto. And I think it's shaped a lot of the outcomes in 2022.

Is there anything the free market can do to thwart the problem of greed and the corrupting power that it has? Or do we have to always depend on regulators and those with bigger sticks to do this sort of thing? I'm not sure I would pinpoint greed as the problem. People are self-interested. They want to earn more money. That encourages both good and bad activities. There's plenty markets, or for that matter, governments can do to educate people about crypto.

I'd like to see more of that on all fronts. I think the government of Singapore has, in fact, done a bit of that. We could do much more. And that would, to some extent, lower the quantity of fraud. I'm not sure how much. It may not be a major improvement, but it would help a bit. Tyler, I believe you're familiar with this game that we would like to end this podcast with. It's called Overrated or Underrated.

We've got a list of things we want to get your opinion on whether it's overrated or underrated. You want to play? It's an underrated game, so let's go. That's great. All right, starting with number one. AI, overrated, underrated. It's still underrated. It's striking to me.

I was at Washington, D.C. dinner party last week. And most of the people there did not know what ChatGPT was. One of them had never heard of it. A bunch of the others had heard of it. of it, but didn't know what it was. So I think it's a major development. AI is still significantly underrated. How about the problem of inflation? Overrated or underrated? Well, we're doing this, chat. I think it's January 9th. The last two monthly reports on U.S. inflation have come in at very low levels. Ideally, you'd like to see three months of that in a row, not just two. But my guess is

we're going to have a reasonably soft landing. And with a huge lag, team transit. Tory will turn out to have been correct. So the problem of inflation at the moment is maybe a slightly bit overrated. Interesting. Interesting. All right. Overrated, underrated, the United States of America. Oh, underrated. I mean, so many parts of the world feel they have to hate on it. Americans themselves have this self-loathing. They think we're on the verge of fascism or no democratic government. They read all these pieces and periodicals I won't name, but they're the famous ones. All the bad news gets reported. I think our system of governments in pretty good shape. And we have incredible talent, and I'm super excited to see the next few decades. I think we're going

to do amazing things. Same question for China. China, overrated or underrated? Because of pandemic, I haven't been there in four years, and I feel very out of touch with it. And with China, you can't just read media to figure out what's going on. I've actually turned a lot more optimistic about China in the last few weeks, keeping in mind this is January 9th. So the speed at which they dropped zero COVID policy, has made me more bullish on China. A few months ago, I would have said China overrated, but now I'm inclined to think China underrated. Social media, Twitter, Facebook, Instagram, overrated, underrated. Oh, they're great. I mean, people think they're terrible. I don't think they're good for 12 to 14-year-old girls. That's bad. I don't know what to do about that.

I think we should change social norms, so that is less bad. But for most people, they're fun and incredible for learning, and they spread science and help collaboration and inform people about the world. So I think they're way, way underrated, all of them. How about classically liberal values overrated or underrated? Well, I'd want you to name the values, but most values are underrated, right? Why are most values underrated? There are a lot of people who are not very moral, so those people, at the very least, are underrating the values. The people who are moral, presumably are rating them more or less correctly. On net, that makes them underrated. How about a follow-up? Our friend SBF

was a fan of effective altruism, and that's taken a hit recently, effective altruism, overrated or underrated. It's become greatly underrated, again, because there's SBF, this demon. It's a set of mostly good ideas that try to convince people to give to charity more effectively.

I'm not like an EA person with the big capital letters, but I think it's been a healthy development, and it's very impressive how much young talent it attracted. So right now, it's significantly underrated. Podcasts overrated, underrated? There's still a lot of room to capture mind space from people with podcasts.

I'm amazed more of it doesn't happen. It stuns me how much people listen to these things and pay attention. It's like, what's this? So I'd say way underrated. How about the problem of wealth inequality? We could talk about in America and then talk about in the world. Well, the problem of wealth inequality has diminished radically in the last year and a half. A lot of great fortunes, Zuckerberg, Musk.

They're really worth much, much less than they had been. So wealth inequality's gone down. I don't see that that's helped anyone. I think we'd be better off if they still had the many more billions and would give it to charity or do whatever. So wealth inequality is way down, and I feel sad about that. Universities, undergraduate education, colleges, overrated or underrated. There's a lot of different stuff in there.

The U.S. system is still the best in the world. It's way too bureaucratized. It's driving out some talent. It's not dynamic enough. A lot of the old formulas are no longer working. I'm not sure that's news, though. So maybe it's at the moment properly rated. This has been great, Tyler.

Thanks so much. I had a note for something you said earlier in this episode that I wanted to get back on. Maybe this will be kind of our close-out question, but wanted to get your explanation of this in a bit more detail. You said earlier in our conversation that you don't think crypto is going to revolutionize the nation state, maybe replace the nation state. So I don't know if you're familiar with Bellaghi, Srinivasin, his idea. Oh, of course, and I know him.

Okay. And I did a podcast with him, yes. Tell me about it. I don't agree with any of that. Okay, tell me about this. I think the predictions are looking much weaker now than when he made them. Okay, so let's get into this. This idea of the network state, the Belagian network state, do you think that's

overrated or underrated? And then just extrapolate. You know, tell us why you completely disagree with Belagie. It sounds like you think it's overrated, maybe. Look, nation states can get things done. They're big. They have weapons. I look at the borrowing rates on government bonds, which for legitimate governments are quite low.

And I think these are institutions with the future. So am I bullish on the EU, on France, on Canada? Like, of course, do I think some weird, whatever is going to replace them? I mean, in some very, very long term, but basically, no, I don't. I mean, those are the institutions that have worked. And I think we should all realize that. And market prices reflect that. Tyler, last overrated or underrated, and then we'll bring this to a close.

But this is called bankless, okay, this podcast. We've got to ask you, banks, overrated or underrated? Well, by whom? I think we now take them for granted. We've stopped villainizing them, which was often the case, 2008, 2009. We should think about them more. But at the moment, I think they're basically properly rated. Tyler, this was great.

Thank you so much for joining us. It's a pleasure to hear your thoughts. They're always so concise and on point. And I'm glad you're looking into crypto in the depth that you are. It's been a pleasure to have you on bankless. My pleasure. And have a good evening, both of you. Bankless Nation, some action items for you. Learn more about Tyler. Read his blog. Marginalrevolution.com. We'll include a link in the show notes. Also, we'll include a link to the article. Beware the dangers of crypto regulation written by Tyler that we talked about in this episode. Got to end with this, as we always do. Risk and Disclimation. gamers, crypto is risky. You could lose what you put in, but we are headed west. This is Frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.