Bankless - 176 - What is Money in the Digital Age? with Brendan Malone

Episode Date: June 19, 2023

Today’s guest is Brendan Malone. He currently works at Paradigm’s Policy Department. But before that, he focused on crypto policy issues at no other than the Federal Reserve. In this episode, we get deep into answering one, if not the most Bankless questions. What is Money? And what does the answer look like in the Digital Age? ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-brendan-malone  ------ 🚀 Unlock $1,000+ in Perks with Bankless Citizenship 🚀 https://bankless.cc/GetThePerks  ------ 📣 CYFRIN | Smart Contract Audits & Solidity Course https://bankless.cc/cyfrin  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2    🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask   ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum   🧠 AMBIRE | SMART CONTRACT WALLET https://bankless.cc/Ambire  🦄UNISWAP | ON-CHAIN MARKETPLACE https://bankless.cc/uniswap  🎮IMMUTABLE | GAMING ECOSYSTEM https://bankless.cc/Immutable   🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  ----- Topics Covered 0:00 Intro 5:40 What is Money? 10:34 The Moneyness Spectrum 16:59 How do Current Forms of Money Rank? 21:03 How Much is a Dollar Worth? 29:16 The Difference between Money and Credit 38:30 Losing Trust in the Dollar 48:29 The Role of a Central Bank 54:14 The Future of Money 1:04:26 Why Now? 1:07:14 New Technology Implications 1:10:40 The Case for Crypto  1:18:55 Closing and Disclaimers ----- Resources: Brendan Twitter https://twitter.com/brendanpmalone   Read Moneyness In The Digital Age https://policy.paradigm.xyz/writing/moneyness-in-the-digital-age   ----- 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 

is going to be a precondition to enabling a lot of those future worlds. Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, 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, this is a canonical bankless episode. All right, we're going to talk about moneyness in the digital age. What does that mean?

Moneyness? What is the nature of money? A few things to take away from this episode. with Brendan Malone from Paradigm. Number one, what is money? Has it changed at all in the digital age? And what's more? Why are people even asking this question? Why are they questioning this thing called money? Number two, we discuss the hierarchy of money and the moniness spectrum and what that means. Number three, where do crypto assets sit on the moneyness spectrum? ETH, Bitcoin, stablecoins, how much moneyness do they have? And how are these assets different than digital

dollars in a bank account. And number four, we summarize what all of this means for crypto investing and for the broader world. David, why was this episode significant to you? Everyone, I think, starts their crypto journey asking themselves the question, what is money? Like, that's how you know you're at the start, the top of the crypto rabbit hole. And that's also where this industry started, Bitcoin, redefining what money could be. And the people that saw Bitcoin as money when it was like 2011, 2012, really early, you know, front ran the opportunity. And this is the story. of crypto. Everyone goes down the crypto rabbit hole understanding that, you know, money is just a meme.

It's a shelling point. It's a social construct. And then they go down the crypto rabbit hole from there. And now we are in year 2023. And all of a sudden, more people other than the crypto industry are starting to ask the question, hey, what really is money? And there are a bunch of current events that really have thrown the idea of what's a dollar into question. COVID, the Silicon Valley banking crisis, Russia and the deplatforming of an industry. entire country from the dollar network has posed some very interesting, unique questions as to what is money? What is a dollar? And can money be something else other than the dollar? These are all questions that I think crypto people have been asking themselves for a very long

time in our exploration to make our crypto assets into crypto monies. Now this question has penetrated beyond the cryptosphere. And so we are revisiting this conversation, like Brian said, a canonical conversation about just something that's very, very deep in the crypto space. Yeah, I think sometimes we forget how just that, if you innovate, if you change the nature of money, if you create a better money system, that's the only use case that crypto needs to be worth trillions and trillions of dollars. That is big enough when it comes to impact in the world. And that is certainly the foundation of crypto. In fact, David, I think we started talking about moneyness on our second episode at Bankless. It was literally episode number two. So, David, I'm excited to talk to you more about this episode during the deep. brief. I got lots of thoughts for you, including, I want to talk in more detail about the central bank digital currency and some of the things that I'm seeing on the horizon there. So bankless listeners, stay tuned for that. If you're a bankless citizen, of course, you can get access to that right now on the premium RSS feed. If you're not a citizen, click the link in the show notes. You can upgrade.

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crypto space. And we are here to talk about a subject that is near and dear to our hearts. I think a subject that really kickstarted the bankless podcast, and that is the subject of money. And money-ness. So excited to get to that with Brendan today. How are you doing, Brendan? Welcome to Bankless. I'm good. Thanks, guys. I'm just wondering, am I the first Fiat defector that you've had on here? Oh, we've had plenty of Fiat defectors. Yeah. I don't know how, in fact, we're all defectors of Fiat, aren't we? There you. After a matter of fashion. Well, Brendan, how would you define Fiat defector? Yeah. We've had a lots of flavors of Fiat defection. What was yours? Maybe you're the most defector of them all. Yeah, yeah, no, no. I mean, that's a great question to kick things off.

I should confess, I am not a fiat minimalist, I guess, as you might say. Do believe in the kind of value of fiat in the overall mosaic of items and instruments that we call money. But do increasingly think that we're in a period of intense change, a time where it's really worth asking deep questions about what is money, how might money look in the future, and how can we think about better orienting our systems of social organization around a type of money that works for the digital age that we live in today. Yeah, maybe we could start there, Brennan, because I think David and I are hoping this could be sort of a canonical episode for people, because we're talking about some basic questions here. Most people, I would say, maybe 98% of people out there, particularly those in mainstream outside of crypto, they don't even think about money. I used to be one of those people.

Went through my entire life before crypto, not really thinking about the instrument of money. It was something I took for granted without fully understanding what it actually is. Maybe we could start there, Brendan. What is money? Yeah, so, I mean, first off, your experience really resonates with me. There's a famous David Foster Wallace quote

from a speech he gave where he tells a story of two fish that are swimming around. an old fish swims by and says, how's the water boys? And one of the two fish looks at the other one and says, what's water? And the purpose of the illustration is meant to just signify that some of the most obvious important truths that are around us every single day are the hardest ones to see. And I think the kind of experience that most people have with money and how people relate to money is most likely, I think, the best and most resonant example of this type of thing. Money has evolved over time, and we've come to know of it as pieces of paper and as entries in our bank account.

But qualitatively, those are two very different things and something that in the wake of Silicon Valley Bank and a few of the other bank failures that happened earlier, this year, people are starting to wake up to, and they're starting to ask deep probing questions about whether or not the assumptions that they had backing their belief in the money that they used were really things that were ironclad and sturdy in kind of all future incarnations of the world. I think what I like about that metaphor the most is that it implies that when you are noticing the water, something's up. And I think like when we talk about money, when we talk about moneyness, it's because something's going wrong.

You're actually not supposed to talk about money. It's supposed to just work. It's supposed to be in the background. It's supposed to be invisible. So Brendan, maybe perhaps as a roadmap to this conversation, why is this question of moneyness arising in the first place? Because this is a question that the crypto industry is built on, but this is a question that we are seeing Tradfai start to ask,

especially in the wake of Silicon Valley Bank, but really even the whole banking crisis wasn't even the first. It started with COVID and then Ukraine versus Russia and now Silicon Valley. So I'm wondering, like, what about 2023 makes this question of moneyness so relevant? Yeah, I mean, you hit the nail on the head. I think there's a few trend lines that have been percolating for a while with significant geopolitical changes, China, Russia, COVID being another one, technological change, which I'm sure we'll chat about a little bit later. And I think on top of that, just the crisis in the banking sector, which it has been a bit of a punctuation point on 10 plus years of Federal Reserve monetary policy that led to a lot of cheap money floating throughout the system. And at the beginning of this year, after 10 months or so of interest rate hikes, I think we kind of finally saw the effect of,

loose monetary policy for 10 plus years in the crash of an institution that was due to liability mismatch and overall insolvency of the liabilities that it issues in the form of money, which are ostensibly supposed to be a safe claim on assets that that institution holds. And a lot of the kind of money system that we've grown up experiencing and learning about is really built on this system of claims or credit-based claims that institutions give, that we hold and that we use, believing that at some point in the future, we'll be able to redeem those claims for something that is more like money. So that starts to unpack the actual definition of money.

And maybe we can start there. Again, like first we have the current events of 2023, but we also need to ground those in this idea of moneyness. in the first place, right? Money from first principles. So maybe we could start there. You talked about claims on things that are money, but then, you know, it's a little bit self-referential of a definition. How do we actually start the conversation of like money-ness and how society defines what money is? Yeah, for sure. I think as kind of like a priming point, I think about money and money systems as being in a state of equilibrium. And they're complex.

systems with a lot of legal, technical, psychological structures that build them up. And so there's a lot of ways using that frame to triangulate different definitions or different meanings of money. One way that people kind of commonly frame money is as what it does, a means of payment, a store of value and a unit of account. I think those are kind of aspirational and one lens to think about money and what might constitute money. I think the other side that I typically ground my thinking in is this spectrum or hierarchy of different instruments that you can rank in an ordinal manner where at the bottom of the spectrum are effectively just promises or IOUs. And as you move up the spectrum, the IOUs are exchangeable for things that people believe are like the final means

of settling a transaction or any obligation that they might have. So inherently in this kind of notion of a spectrum and the notion that at the top of the spectrum, there are instruments that people will accept for the discharge of obligations is a need to kind of understand that where you are sitting relatively on the spectrum determines whether or not you will accept something as money or a final means of settlement. So the way that we see this play out in practice is that most people will accept bank deposits as money or a final means of settlement. If you look at, by contrast, at the kind of national level, how sovereign nations are settling international trade balances, they don't typically accept bank deposits or commercial bank money as that form of money.

They'll look to something more like reserves or a higher order form of money. In the past, this was gold. And in the future, it could be something like Bitcoin or Ethereum. Okay, so let's talk about this because I think this is actually, I would say, an essential mental model for anyone on the crypto journey and on the bankless journey. I would say this idea that Brendan is talking about of a spectrum of moniness, okay? So you first established whenever someone asks you kind of what's the definition of moneyness, you hear sort of this three-term kind of definition unit of account, medium of exchange, and a store of value, right? And so that's one way to define it. I think Brennan is absolutely right, though, this other way to define it as a spectrum

of how money a money can be, how much moniness a given instrument actually has is maybe a more practical, more useful way to define what money is. And so if you imagine the spectrum, and we're looking at it on screen right now, the spectrum of moneyness, where you have kind of at the top something that is maximally money. It is a means of final settlement. That is the most money type of instrument. You have at the bottom of the spectrum, something that is more like credit. And credit, of course, is a promise to pay, whereas, you know, something that has more moneyness is a means of final settlement. So it has stronger settlement guarantees, the more moneyness a given instrument has. And so we've seen at various stages like in the 1900s, Brendan has this depiction in his

article. Gold was kind of one of the most, probably the most worldwide money-nest instruments. It had the highest degree of moniness. Whereas central bank reserves, it was kind of somewhere in the middle. You have bank deposits more at the bottom. Now, of course, where in the world of the 2020s, and that has changed. Gold is still up there. It has still strong moniness, but most central bank fiat deposits, like most money is actually settled using central bank type reserves, and they are a higher moneyness instrument than bank deposit. So the money in your Wells Fargo account or securities. And so you often see nation states kind of using the instrument to settle with each other that occupies the most moneyness.

at a given period of history. And it's interesting to me, Brendan, that, like, this can fluctuate, right? Like, the moniness of a given instrument. There was one point at time where, you know, silver might have had a far higher degree of moniness than even something like gold. And it sort of depends on the society and all of these things. But this is a useful framing of where we are today. And that is, again, the water that most of us swim in, but we don't actually see.

That's all around us. And to David's point, we only start to notice. and ask these questions, but something's kind of wrong with the water, right? And so that's why we're asking these questions today. So in the 2000s that we occupy now, what's kind of the spectrum of instruments when it comes to moniness?

Like, how would something like gold rank? How would something like oil rank? How would something like T-bills rank? How would something like the Juan or the euro or some other instrument rank in this moniness spectrum? Yeah, I think it depends a little bit on the perspective of the person or thing or entity trying to do the ranking. It's a good question, though. I mean, I think gold T-bills have both experienced some interesting changes over the past

five to ten years or so. So I think even quite recently, there's been an uptick in the gold holdings of several sovereign nations, in particular the nations that are not aligned. with the U.S. and the broader G20. So you could potentially interpret this as a set of concerns that they might have about their ability to use the U.S. dollar either via official reserves held at the New York Fed or via fixed income securities, government bonds, as like potentially being unusable in the future as a means of final settlement for them, which is sort of what happened to Russia in the wake of its invasion of Ukraine. So conceivably, there's kind of a point at which some of these different instruments that have been historically used might come back into the fold,

and some that have been used increasingly over the years might recede a little bit. So it's basically a matter of, so Russia or let's say China or something, a country that is less US aligned, they look at something like the dollar maybe, and they see an erosion of settlement assurances when the U.S. Treasury apparatus can simply freeze Russian holdings and Russian bank accounts. Exactly. And so then they migrate to a money with higher moneyness,

which according to your definition, Brendan, just means stronger final settlement assurances. And of course, the U.S., you know, Janet Yellen and company cannot freeze gold. Anyway, as long as Russia actually owns sort of the physical gold, it cannot be frozen, so therefore it has stronger settlement assurances. So that's very interesting how different money instruments can lose their settlement assurances and thereby lose some aspect of their moneyness over time. Yeah, for sure. I mean, there's kind of a theory in the international role of the dollar space around the stealth erosion of dollar dominance. And there's a lot of

lot of contributing factors to that. One of them, of course, is the increase in the use of economic sanctions as the primary tool of statecraft. And I think U.S. policymakers are in difficult position because the international role of the dollar is incredibly valuable to the United States at the same time using that power and effectively not letting the dollar, you know, effectively not letting the dollar be credibly neutral has an undercutting effect, I guess in the demand sense of the ability or want of people and nations to hold dollars. I think the Russia-Ukraine incident was probably the biggest shifting point over the past five to ten years. But there were other moments earlier where the U.S. has gone down this path that has caused people to kind of question whether or not

the dollar is that guaranteed international settlement currency that it was for a long time prior. Humans throughout history, we like discover money. We discover like uses in things that can be money. And then sometimes it's imparted upon us, right? Like the dollar. And humans like even inside of the United States where like you have to use the dollar, we also will discover that that's actually the best use of money or else we go to jail. Like that still counts as discovering it. We discover that. the dollar is still the best thing to use. And over time, like, that discovery process can always shift. So like you said, right in the modern age, we have some misaligned countries that have deemed that the dollar is not the best assurances of their wealth because of the ability for

the United States dollar network, the Federal Reserve, the government to cut off Russia and other countries, right? And so when you open up that door, you allow other countries who are maybe less misaligned than Russia to still see that possibility. And that's one half of the equation that is really important to define is like the actual politicization and settlement insurances of money. And I think this also goes all the way back into, we can start this conversation at like World War II, post-World War II. The United States had all the gold and dollars had backed by gold written on them. And then we rugged that in 1971. And so that settlement assurance decayed and for the whole world. And that lasted for a while, like, even though it was not backed

by gold since 1971, it still took time for that to, like, seep into the world. But that's only one half of the equation is like the settlement assurance that a dollar is a dollar. The other half of the equation is, again, similarly, when we defaulted on the gold window, we said these are no longer backed by dollars. We also did something else that I also want to talk about, which is we started to lose the assurance. that a dollar is a dollar, that one dollar is worth one dollar. So not only do we have the equation of some countries are going to be cut off from the money network and lose their settlement assurances that their dollars are actually anything, but then there's the other half of the

equation of inflation and devaluation of a dollar, that a dollar is actually not one dollar, at least it won't be in the future. So Brendan, can you kind of put these two pieces together, the actual settlement assurances of a dollar and also the value assurances of a dollar and how these all relate in the modern age? Yeah, and I mean, I think you can even like trace the erosion of the gold standard to kind of earlier events like the Bretton Woods Agreement, which basically kind of said that currencies have to be redeemable into other currencies that are backed by gold.

So it intermediated the redemption promise of regular fiat currencies that are not the dollar so that the dollar could stay on the gold. standard. And as long as other currencies were redeemable for dollars, dollars could be redeemable for gold. And you had interposition of the dollar in the moneyness spectrum before 1971 and everything just kind of blew up. I think the other question you asked is sort of what is the value of a dollar and kind of is that really worth anything? Today, our dollars physical cash is redeemable for, it's basically a claim on the balance sheet of the Fed. So a dollar gets you a claim on an equivalent amount of the asset side of the Fed's balance sheet. Well, what's on the asset side of the Fed's

balance sheet? As you said in 1971, we changed from the gold standard when a dollar was a claim on a pile of gold into a system where a dollar is now a claim on a pile of treasury bonds. So it's a claim effectively on the future ability of the United States to collect more dollars from people as they pay taxes and other sources of government revenue. Essentially, it's like a debt instrument of the U.S. economy, like your faith in kind of the U.S. economy. Exactly. My favorite meme is dollars backed by aircraft carriers. And so there's the like kind of U.S.D. full node carrier fleet image that I think is in some ways a little bit accurate here because what you have is a claim on this pool of government debt. If you believe that that pool of

government debt is worth something, then you can talk yourself into believing that the money has value. And the way the system currently works is you can kind of always create more of those liabilities in the form of money, as long as you have the ability to create more of the assets, which are government securities. And over the past, I think 20 years or so, the amount of outstanding U.S. government debt that is, I guess, in some ways, backing all of this money has ballooned. And we saw just a few weeks ago there are questions about whether all of it will be paid and whether some of that money will be redeemable in the future. In practice, no one tries to reduce. their dollars for government securities. There's no, like, window at the Fed where you could walk

up to and ask for the equivalent amount of government debt. But conceptually, that's how it's supposed to work. Yeah, that's the part that I actually have a really hard time wrapping my head around. So, like, when the dollar was backed by gold, it was very simple and obvious what the money was. Like, if I want gold, I go to the Federal Reserve and I give them one dollar and I get one dollars worth of gold, whatever it's backed by. And that is just clear as day. And then when we remove from the gold standard and we go back to buy debt, which is denominated in dollars, and the government collects dollars to pay the debts, which are dollars. It seems very self-referential. It is.

And which is like both the kind of the point, but also the demise. Can you just help me and the listeners understand that like self-referentiality of a dollar? Like, in what ways is that a feature? And in what ways is that a bug? It's a feature in the sense that it gives policymakers tools for controlling the amount of outstanding currency in circulation, which has implications for the prices of goods, employment, and a host of other things that the Fed thinks about when it implements monetary policy. In prior regimes, when money was backed by hard assets like gold, it was impossible to flexibly or elastically control the amount of money in circulation in order to try to hit other targets like price targets or employment targets.

Like try to do a stimulus check if it's all gold and you're the U.S. government. Exactly. It ain't going to happen. Unless you find a lot of gold, right? And so you could like think about scenarios and I think this is like effectively what happened where inflows of gold would come to the United States be somewhat unexpected or uncontrollable. And they would result in subsequent expansions of credit in the United States and changes in economic conditions. And so the transition to this more self-referential.

system that's backed by government securities comes with the degree of flexibility that ostensibly lets policymakers more finely tune the amount of credit in an economy in order to get better economic conditions for everyday people. Of course, that, you know, at some point, there are downside effects of all of that. I think to your earlier question to David, I think Brendan's definition of moneyness as a means of final settlement sort of explaining. both the idea like final settlement to me means both that no third party can kind of freeze the account or censor or prevent it and also that a third party can't debase it and so the purchasing power isn't affected materially by a third party so that's why I think in times where

money instruments like the dollar are going through debasement or censorship or freezing and they start to lose their credible neutrality and they start to be more political, we revert to money that is farther up the moneyness spectrum that is more credibly neutral. And by we, I mean, different nation states. Because, Brennan, you also make the point. That's why I sort of think the moneyness spectrum almost explains everything. Like, it just explains so much. Like, if you are a nation state, you certainly can't trust other nation states if you're

engaging in statecraft. or you have to be selective as far as what your alliances are. Specifically, as we move from a, you know, U.S. dominated unipolar world to a multi, like a bilateral world where we have multiple large powers. You sort of, you can't put all of your trust eggs in that basket. And so at the nation state level, you have different needs with respect to moniness than you might at the individual level, right? So like a transaction, Brendan, between you and I, right? right, like, you don't need to give me gold nuggets. Like, I'll just give you dollars, right? That's at the individual level. And that kind of works because we exist in a similar economy and we use a similar unit of exchange. But at the nation state level, things get much different. And this spectrum as well starts to explain almost a two schools of thought that people have about money, which is like the Austrian school of thought. The money is a commodity. It's based on a barter system. That's how it sort of arose and kind of like this low trust environment. and the David Graber kind of debt credit theory of money, that money is sort of a social system,

well, both are kind of represented in the money-ness spectrum, right? And in times of low trust, you sort of revert up to more of the commodity money that requires a lot less trust. It's not a credit-type instrument. It's sort of like a gold or like an ether or like a Bitcoin, right? And then in times of higher trust, then you can go down the spectrum more towards credit forms of money. And credit, of course, is a promise to pay. It's layered. So at the bottom of credit,

there is that final settlement of something, either the dollar or gold or some other instrument, but in higher trust context, you can actually get down to credit. And actually, credit's not a bad thing. I think that's what maybe the Austrian school of thought don't appreciate, or like credit can be a good thing. It's a way to scale society so long as you have trust.

But when you have corruption, and that starts to erode the trust, of the instrument, well, then credit can turn sort of bad. And then people naturally revert up the chain of moneyness to that means of final settlement, to kind of closer to the bare metal. I'm wondering if you could reflect on some of that. How much is explained by this moneyness spectrum? Am I reading too much into it? I personally think I kind of believe that it's good for us to have both sides of the spectrum. And as long as you believe that states are a kind of useful way to organize society and have people doing things, working for the common good, I think there's

probably going to be the existence of some credit-based official monies. At the same time, having other higher order forms of money available and free to use, for when there is more uncertainty or more ambiguity as just one very specific use case, but also as a check on democratic use of power and authority. I think, you know, in a lot of ways, the idea of the dollar as credibly neutral reflects American values around freedom and self-sovereignty, and the less the dollar kind of behaves that way, there's some of the dollar. downstream effects for just the nature of the country of the United States and sort of whether or not it's operating in a way that's kind of aligned with the founding principles. And I think to the extent

that like higher order forms of money are more closely aligned to some of those principles of kind of censorship resistance, freedom from authoritarianism, having a set of instruments that are available for people to use as better forms of digital commodity money is a good thing. I also think it's kind of to sort of go to your point about contrasting individuals and nation states, I almost think about this in terms of concentric circles where even from the perspective of a single nation state that might be the largest circle in a series of concentric circles, whether or not you believe in certain principles of money is going to depend on what your reference point is to the smaller circles within. So if you imagine the United

States occupying like the largest ring, you can think of like Iran occupying the next ring, and you can think of an individual person in Iran representing the smallest circle in this set of three circles. For the United States, it's going to want to have some ability of to control what the Iranian state does as kind of geopolitical grand strategy and the use of money as a means of economic state craft. At the same time, it's going to want to have more free censorship-resistant money for Iranian people who might be trying to look for ways to engage in just normal behavior and avoid a regime that. the United States might not be aligned with. So even from the perspective of like a nation state,

like the U.S., how it might think about money and promoting different types of money is going to be different depending on who the person is kind of at the end of this set of circles. I really appreciate the trust model for money. Back when we used gold, it was in a society, in a world, in a phase of humanity where we just had less credit and trust. And I think think when credit is high on the moneyness spectrum, it's actually indicative of a high trust environment. Like that's actually like the KPI that we are going for. That's what we want. Although I do see that once you get to a high credit environment, a high trust environment, it's also dubious because then you will allow for distrustful people to enter into a trusted

space and kind of ruin it for the rest of us. But I see like a gold as actually in the background and some sort of credit as money is actually the place where the most economic activity is happening. And it's only when something like gold needs to arise as the only form as the dominant form of money is because we are in a distrustful environment. There's something like very holy about having gold in your hand. There's that meme that like possession is nine-tenth of the law. And then also since gold is gold, the economic security of gold is written in explosions of stars. Like you're not going to be able to reproduce that. Like you can reproduce a dollar.

And so that is the most trustless form of money in your hand possible. Like gold in your hand is the most trustless, high assurances form of money that exists. But it's also not what we want to have a society based around, right? Because we want trust. We want as much trust as possible. And so, Brendan, I'm hoping we can move forward into the modern age of 2020. because since COVID, there has been not so many great things happening to the trust around the dollar, starting with COVID, and then we have Russia and China and then Silicon Valley Bank in that order. So so far, the 2020s has been a bad year for the dollar.

Maybe we can unpack the story of the dollar this decade and how it's kind of lost its position in the world or maybe currently losing its position in the world. And then we can go into the world of crypto money after that. Yeah. Overall, there's just been an erosion of state capacity. in general where, I mean, in the 60s and 70s, the place you wanted to go if you were the top engineer graduating from Caltech was to like a U.S. government lab or to NASA. And I think there's just been a broader shift in public trust and the value that the public place is on public institutions. And so one narrative here is just, I think, around the experience that most people have had with

monetary policy and the current posture of the Fed, which is basically be a par maxi by everything when there's a crisis and deal with bigger systemic issues that might be affecting the system as a whole as something for a later day. So for Silicon Valley Bank and the kind of entire system that we have, I think there was a presumption that people could trust that banks were not engaging in risky business and bank regulators were there to make sure that if they were, consumers were protected. And when SBB went down, individual users were made whole. Kind of system was dealt with in a way that led people to not lose significant amounts of money.

But a lot of people, I think, are rightfully asking the questions, whether we should have been able to get to that place in the first place. And do we need to have a system that relies on emergency actions to make people whole instead of one that is architected so that those emergency actions are never necessary in the first place? And when you have kind of going back to a sort of previous thread on low trust environments, making a stronger case for higher order forms of money, when you have a low trust environment and primary monetary instruments are a promise for an institution like a bank, and you have relatively little ability as an individual to verify that those promises are credible.

There's just an overall scenario that creates a lot of complications for individual people. And when you kind of light a torch and get rid of the entire foundational belief, that lets everyone kind of willfully ignore the fact that a commercial bank deposit is credit to a bank and credit exposure for an individual to a bank. You know, you start really opening their eyes and getting to the point where you can ask some really interesting questions about the future of money and if there's a way to better design a system that is inherently lower in its baseline requirement for trust. If you haven't experienced the superpowers that a smart contract wallet gives you, check out Ambuyer.

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went under, there's good conversation to be had about like, okay, the safety of our money system in our banks. But the other half of the conversation is the Federal Reserve's reaction to it, or the FDIC specifically's reaction to it, where all of a sudden, like, banks, M2, the monetary supply, money goes into the banks, and then the banks 10 exit and, like, lend it out as credit. And then some banks, irresponsible ones, go under. And then the FDIC insured every single dollar that was ever deposited into that bank, which really, warps, distorts what money actually is if these banks, which with all of their loans and all of their credit, gets covered one to one, it really distorts how people think about their banks.

And so, Brendan, maybe we could just identify that. Does it distort it, though, guys? What's interesting is, I feel like what the FDIC did is actually they said, oh, yeah, that credit money, that, you know, SVB dollar that you thought you had, okay? We're actually going to change that to a higher order of money where it's, basically FDI insured SVB dollars. And so if you have your money in Silicon Valley Bank, you're happy about that. Right. So didn't the FDIC essentially do its job? What are you saying the implications are there, David? Like, aren't they there to make sure that Silicon Valley Bank

dollar holders have their money restored? And didn't they accomplish that task by saying, hey, it would give you better settlement assurances? Like, they're there to preserve the settlement assurances, I think of savers in their bank account, basically. So yeah, they distorted the nature of money by turning credit into money, like pure alchemy. They snap their fingers, Jesus turns water into wine, and the Federal Reserve turns credit into money. Right. And so, like, you use individuals that have that credit owed to them are happy.

Yes. But the broader system is like, yo, that you just turned not my money into more money. And so the system is distorted as a whole, right, Brendan? Yeah, and the fundamental question is, like, is it? Because, you know, this is not like a clearly choreographed and firmly, legally enshrined policy change to, like, overnight turn the broader set of commercial bank money into effectively government-backed central bank money. It was done as emergency action for a small bank, but it does sort of beg the question, would this apply to every bank? Are we in a system where we have like sort of Schrodinger's central bank money where all of the money in your commercial bank is simultaneously a liability of that commercial bank, but in some effect, guaranteed implicitly by the government. And if that's the case, what does it mean? Isn't this what Bologi was worried about?

We're like all of the credit that was issued by banks, all the banks are going to fail and that credit is going to. be with the snap of the fingers of the Federal Reserve turned into money. Isn't that more or less what Bologi was saying with his whole Bitcoin to a million meme? Yeah, yeah. I think that's kind of the core premise. And there's a question of whether you were to like sort of overnight narrow bank the entire banking system. If you could do that and ensure that all of the commercial banks stayed narrow banked, so they weren't able to go further in a fractionalized way off of that kind of initial expansion of harder money, then conceivably the kind of like hyperinflation effects wouldn't necessarily happen that way. But it is easier to conceptualize his argument as

just one of sort of what sorts of emergent phenomena are possible as we think about a pretty fundamental change to the nature of money, banking, and the role of the state. overnight or over the weekend. But I feel like that's totally what the government basically said, is your dollars are backed. It doesn't matter how much you have an account in any bank in the U.S. You know, it's not legal. They didn't kind of craft a bill pass this through legislation, but it is part of the social contract now.

And by making that part of the social contract, they prevented a wider spread bank run, bank failure. But like implicitly, all M2, there's money, commercial. commercial deposited money just became a kind of like Federal Reserve based money, didn't it? I feel like that's what happened. So if that's what everyone thinks, I mean, that's why I'm, I didn't rush out to like pull all of my money from Wells Fargo and like, you know, turn it into crypto. I just do that more slowly. But I didn't do that overnight because I wasn't worried. Wells Fargo, man. Yeah, exactly. And by the way, Wells Fargo is one of those banks, which is also on the,

you know, top 10, too big to fail bankless. So that makes me feel nice and secure. But like, that does beg the question is like, what's the downside of this? Isn't this what the FDIC, isn't this what, you know, kind of the Treasury and the Fed, in this what they're supposed to do is in times of stress, they're supposed to restore confidence. And, oh, yeah, that credit money is essentially has stronger settlement assurances and will come in and make it so. Are there bad effects to this? David, you were talking about systemic effects to this. Are there dangerous of doing this or is this what they should be doing in the first place? Yeah, I mean, this is the big, like, meta debate. among Fed watchers now.

Gina Smalick from the New York Times just wrote a book called Limitless about the Fed's increasing role over the past 15 years as a crisis fighter. So like sort of traditionally think of the Fed as being responsible for monetary conditions in the form of employment and prices. But there's also an argument that the Fed and the kind of broader crisis fighting apparatus in the United States is really best suited for dealing with liquidity problems, dealing with problems where people have assets that are effectively credit and they need cash today. And the place that's kind of best suited to deliver the high order form of government-backed

money whenever it's needed is the central bank. And they can take illicit. kind of more credit-based assets, turn them into cash today, and break the system, not in the kind of sense that it's broken, but arrest kind of any further spirals. And saw this with COVID, where one of the first things the Fed did in 2020 was rollout a bunch of facilities that just accepted assets and gave cash. And there's a longer debate that will probably have. over like multiple decades of whether or not dealing with short-term pain in the form of crises is worth the longer-term effects of creating a system where losses aren't deeply internalized by the actors that incur them. You know, sometimes those are actors that are doing like bad or

reckless things, but other times those are just individual people. And we've collectively and socially made a decision that it's better to not have to deal with the effects of crises, but we've also kind of blown out the discipline side of the equation. This is very interesting, this idea of like socialized losses, right? Because I found myself personally, it's like when a depositor deposits their money into a bank account, should they be undertaking the risk of bank management, basically? And I feel like myself personally, I'm much more. comfortable with that loss being socialized than with like bank equity holders getting a bailout,

right, and socializing that loss, right? And that's just me personally. Other people might feel different. And there might be some underlying systemic moral hazards that occur as a result of this. Maybe it is a better system if we all have to like think very carefully before we put our money in a bank account as to the management and a trustworthiness of this particular bank account. But when you broaden that and you look outside of the U.S. And you think about the U.S. being the global reserve currency, where other countries essentially store their wealth in the dollar, and you think about those countries taking the socialized losses of the United States economy and the mistakes that we're making,

that becomes pretty unpalatable, right? I would not want to be in a position where I am a different nation state with my own kind of sovereignty, and I am responsible for the mistakes of the fiscal policy of the U.S. government, or for like, you know, bailing out the generation of baby boomers, maybe, for instance, or whatever political decision the U.S. makes, right? And so that starts to erode the credibility of the dollar for other nation states. So this idea of socializing losses is very interesting. And I think that is effectively what, when you have the reserve currency, you can sort of socialize the losses or the mistakes that your country is making to the rest of the world as long

as they are holding those dollars. That's kind of the game that maybe the U.S. is playing. And other countries, other nation states can effectively opt out of that game at any point in time by what, by purchasing non-U.S.-based assets. Maybe that's what they're starting to do. Yeah, there's a lot of theories on this right now and like a lot of questions whether large nation states are aping into crypto. And I don't know that we have good evidence that that's happening, but there's certainly directionally some anecdotal evidence that some countries are thinking more critically about their dollar exposure for a variety of these reasons. Let's turn this conversation to the world of digital money, the frontier of digital

moneyness. And so there's a line in your article that stood out to me, Brendan, that says, maybe it's time to replace creditworthiness with collateral worthiness. And I'm wondering if you just unpack that statement and overall just juxtapose this. digital financial system that is being built versus the entrenched fiat system, which kind of seems to be a little shaky. You know, that line in particular is a bit of a cheeky reference to a few writers who've written more publicly about the nature of moniness in the financial plumbing context, kind of in the context of shadow banking and broader activities that really large institutions and countries are doing in the space of money.

money markets. And the original reference is referring to an article written by Nathan Tankus looking at the situation that happened with Credit Suisse. And kind of effectively, one of the sort of big problems in money markets is that you have a lot of large institutions that end upholding securities like government securities or mortgage-back securities. And at different points in time, particularly in times of crisis, they need to figure out whether those promises to pay are actually worth something. And measuring the economic value of some of these credit-based instruments is very difficult in normal times. It's incredibly difficult in times of crisis. How do you figure out what mortgage-backed security is worth? You can't just walk out

on the street and kind of ask someone to buy your mortgage-backed security, especially when an entire market might be on fire and full of dysfunction. And so there's a kind of, I think, point at which you can make a very strong case that having assets that are not IOUs or promises that are tradable and kind of readily priceable is incredibly valuable. And I think you have that with crypto, which you can hold in a self-custodied manner free of credit risk or credit exposure to an institution. And you can also readily price it. So you get some of the same kind of benefits of moving up the moneyness spectrum that you would going from cash or something else to gold, but you don't have to deal with some of the more kind of cumbersome features that come

with something like gold. Can we talk about the moniness spectrum as it applies to the digital age? I'm wondering if maybe we can pull up the same chart we've been using the spectrum and now talk about some of the various digital instruments. But let's first start by saying it is probably increasingly obvious, which it almost goes without saying to everyone that is listening to this, that humanity has squarely entered the digital age. Okay. This is the internet age.

Our financial instruments aren't going to manifest physically. And while we have things like Nuggets of Gold and, you know, gold bars, these are sort of vestiges of the past, as is, you know, cash money, right? When I was growing up, I had a paper route, you know, we got paid and kind of, you know, cash money, basically door to door, and I'd have to come collecting every weekend. This is a thing of the past.

This is a thing that is quite quaint by today's standards, and we are no longer going to have, there's a phasing out process of actual cash of physical bills. So we have entered the digital age. And in the digital age, when we have these digital instruments, there's a spectrum of moneyness for each type of instrument. By the way, last week, Gary Gensler came out and said, we already have digital money.

There's no need for crypto. It's called digital dollars in your bank account, right? I want to say, but Gary, those digital dollars in my bank account do not have the same settlement assurances as some of my crypto assets do. So let's look at this chart and apply kind of the digital money to it. At the one end of the spectrum, on the credit side of the spectrum, we have bank deposits. That's the digital dollars that Gary Gensler is talking about. We already have digital money, right?

That is very far on the credit side of the moneyness spectrum. A little bit to the left of that, we have stable coins in your chart here. A little bit to the left of that we have reserves that have more moniness. And all the way, on the moneyness spectrum, we have assets like Bitcoin and Ether that are not credit. They are almost like gold in these economic systems. They have the strongest settlement assurances. Brendan, I'm wondering if you could kind of comment on this spectrum here and why you place these assets in these various locations.

Yeah, I first started thinking about this when I joined the Fed in, I think it was 2016. And this is like a very different time when the entire U.S. government was a lot more open to engaging with crypto companies. And one of the first projects I worked on when I started was a bit of an industry stock take. And in some ways, a little bit of crystal wallgazing. We set out to meet with as many companies as we could. And crypto companies you're talking about. Crypto companies. And hypothesize what the emergence of blockchains meant for payments, clearing, and settlement systems. And our remit was to try to think about how to make the payment system and the broader set of financial infrastructures used for transferring assets safer and more efficient. And some of that was a kind of constant in the moment game of looking at the current landscape.

And then there was also a set of projects related to kind of thinking more deeply about what the future evolution of our financial architecture looks like and what that means. for some of the things that we kind of care about. And I think the kind of first round of industry outreach we did, we met with probably 30 or so companies and talked to them about the projects that they were working on in the crypto and blockchain space. And almost everyone at the time said the exact same thing, which was that they needed a native form of money,

a native dollar effectively, that they could integrate with these systems in order to settle transactions and make payments. And for me, that was a bridge into this broader notion that a lot of the systems that we have for transferring value and exchanging things of value require a form of money inherent to them that let you make payments and exchange obligations. And as you look like kind of low down on the money-ness spectrum to things like bank deposits, these are very digital, obviously, but they're also very narrowly constrained. So they are fundamentally a promise of the bank, but also exist mostly on a narrow set of databases

that the bank runs. They don't have a lot of functional use for a broad set of applications that you can imagine being the case for other financial instruments. And this was really the first foray that I had into thinking kind of more deeply about what the digital age looks like, what kind of use cases are going to be coming about and emerging from this wave of innovation, and what types of monetary instruments might be useful to have in an emerging digital ecosystem and what might those look like. Stablecoins really became the, I think, first most prominent one, largely because I think they're the easy way to get something that is functionally similar to a central bank

digital currency without dealing with any of the thorny questions about, like, CBDC that has created a very particular landscape and political economy that is supercharged and full of a lot of interesting and heated debates. But fundamentally, if we're going to be spending more of our time in digital environments, engaging with open digital ecosystems, we need forms of money that are native to those environments and that can function seamlessly in them without needing to rely on third parties to gatekeep or approve entry and exit to them. Going back to the current events of the 2020s decade, again, COVID, Russia, Silicon Valley bank failures, inflation, etc. What tailwinds are the big tailwinds that you see for the

crypto monies, the Bitcoins and the ethers out there or all the other aspiring crypto monies? Why is now, why is this decade the right decade for crypto monies to emerge? Like, what void are we filling here? It depends on the specific. cryptocurrency and questions. I think the... Maybe just crypto assets as an archetype, not any specific one. I mean, I think having a digitally native form of money that is censorship-resistant is a super powerful use case, going to be increasingly so. So I think the transactional ability on a payment side is one. Having an asset that is durable, that is supply controlled,

is another one which gets at the question of whether a dollar is always worth a dollar. We know that one Bitcoin is always worth the Bitcoin. And that is mathematically true and will always be true. And you can sort of think about fluctuations against the dollar, but that is like a separate set of considerations and a separate set of use cases. Going another step further, I think there's just the platform angle, which is that when you have assets that are built on top of platforms that allow for,

a lot of different potential uses and use cases. You have what functions almost like a digital form of oil that can be the necessary commodity to kind of grease the wheels of a ton of possible use cases. I also wrote in my piece a little bit about the potential for AI agents that are going out and conducting things for us on the internet, needing to have access to a digital form of money that is native to the environment that they live in. And I haven't seen any specific implementations of this yet, but I would feel a lot more comfortable giving an LLM trained on my own personal data access to a wallet with a fixed amount of crypto in it, rather than just giving it kind of like carte blanche access to my bank account and everything

else. Yeah, it's interesting as we unpack like the definition of moneyness. I think we all, everyone understands the inevitability of AI coming down the pipeline and all of a sudden like AIs get an opinion too. They don't need to even be like sentient or conscious. This isn't even a conversation about that. It's just about being economic agents in the world of finance, which money suits them better. Well, first of all, you know they're going to prefer digital, right? Almost certainly. And then you know they're going to prefer digital and programmable. Oh, I would say so. That's a second matter. We know this. I mean, maybe like the ultimate hedge against AI existential risk is like their ultimate aversion to physical cash and gold. Like at some point

when they get rid of all of us, we'll just have to like exit to the paper and gold world. We'll be back to cash. Yeah, yeah. We'll be using gold as a form of moneyness that the AI overlords can't censor us from using. I think it just illustrates really, really well. There's two forces moving us towards digital money and digital finance. There's the gaping hole that the current Fiat system is creating for better or worse choices by the money managers of the world. And we've already talked about that again, like COVID, inflation, Silicon Valley Bank, Russia, the politicization of the dollar, the decay of the dollar, all that stuff. Like that, all of that trad world is creating demand for digital finance, new world money. And then there's also just other innovations out

there, other frontier technologies that are producing new use cases that specifically only crypto monies can truly enable or just can enable far better than our old system. It's just a nice way to frame this conversation as like, man, it just feels so inevitable. I mean, that's what I feel. Do you feel the inevitability, Brendan? Yeah, for sure. If you look at the average time spent in front of a screen over the past 10 years, it's like always gone to up every year. People are increasingly spending more and more time online. We knock the word metaverse as like being a little cringe sometimes. But the fact that boomers and other people like so quickly were able to hear the word metaverse, understand what it meant, and then

start making jokes about it tells me that there was a deep, unsatiated, latent demand for having a way to talk about this idea of like digital worlds that people are going to be. living in. There was like immediate product market fit of the term metaverse, like the day it started becoming popular. And whether or not people truly believe that it's going to be a thing, it's very difficult for me to paint a picture that doesn't involve a lot more time spent online, a lot more time organizing social behavior in digital spaces and having a digital form of money that's decentralized and easily accessible to a lot of people is going to be a precondition

to enabling a lot of those future worlds. The way I think about this, in episodes where we explore moniness always make me so bullish on this asset class because to the point you guys both just made, it just seems so inevitable. We are clearly going into a digital world where the AIs and even, you know,

the humans around all prefer something digital and programmable, okay? Points for crypto there. We're moving from global. gold bars and, you know, in cash in physical person to digital money. And the only question now is, is that going to be sort of a digital fiat or is that going to be a more trustless money system? My guess is it's going to be some combination of both. That's definitely how it always turns out. And by the way, if it's stable coins on a platform like Ethereum, well, points for crypto, because Ethereum gets to essentially tax that. And that goes into the economic security and

economic value of ether the asset. And then if you have the choice between these two forms of digital money, some sort of central bank digital currency and some sort of crypto-native digital currency, right? Well, the settlement assurances of both of those are very different. So when Gary Gensler says things like, hey, we already have digital money. It's called a dollar in your bank account. It's digital. It's all ones and zeros. Well, that depends on nested trust, doesn't it, Gary? It depends on do you trust the commercial banking system? You trust Wells Fargo. And that's one layer of trust.

And then back to that, that's backed by trust in the dollar system. That's backed by, you know, trust in actually the balance sheet and the kind of the American economy, the credible neutrality and the dollar demand around the world. All of this nested trust. Whereas you take something like a Bitcoin and an ether, well, that's a little bit different, right? That has final settlement assurances on the chain itself. And obviously supply cannot just be issued. for political reasons. It is credibly neutral with the respect to its supply issuance. But all of this

brings me back to kind of a question I want to ask you guys, which is something I've been thinking of. And I've wondered a little bit if almost like ether, the asset, for instance, is a bit more like in Bitcoin for that matter, is a bit more like fiat or nation state money than we admit. Let me just say, it's almost like gold and fiat kind of had a baby. Because remember this point we were making earlier about, you said, Brendan, the dollar is, you know, your favorite meme of the dollar is settlement assurances, it's backed by aircraft carriers, right? And you see that kind of like, and the aircraft carriers are obviously backed by American taxpayers, which are backed by the U.S. economy, right? So the aircraft carriers are just power projection of the U.S.

economy is one way of thinking. Well, an asset like ether is kind of like power projection of the Ethereum economy, and it's block space sales, essentially. right? And the way Ethereum sort of taxes everyone in the Ethereum economy is through transaction fees and in the future probably MEV ordering type fees. So it's almost like it's not Fiat in terms of supply, but it is backed by an economy, isn't it? Like almost not a nation state economy, but like a blockchain decentralized economy. And its power will scale so long as economic activity increases and the economy of Ethereum continues to increase. It's almost a little bit like, not like Fiat. I hate to say that. Somebody's

going to take this quote out of context and say, Ryan just said Ethereum is Fiat, but there is something that parallels kind of the nation state, right? And what would you say to that kind of analog that I just laid out? Is there something similar here? And for me, that's actually bullish. I don't know what you guys would say, but grab onto something for me here. Yeah, I mean, like one of the reasons why the U.S. is kind of seen as a symbol of economic growth and innovation is all of these preconditions that the nation has enabled that allows other things to be built on top of it. So it's things like a legal system. It's a highly educated workforce. It's technology investment. All of these things create like a platform, which is a country, on which things can be built. And the more things

that are built there, the more clustering and agglomeration effects you have, which make it even more valuable to build future stuff. And I do think at some point, L1's, there's kind of a parallel to the nation state at the L1 level where kind of having a platform that enables the creation of rules and other use cases and generates network effects is kind of a helpful frame for thinking about the future growth. And there's also the kind of like cross country or across L1 comparison where you can like sort of think about the purchasing power parity of Ethereum versus another L1 where what you can do and how you can transact on the network is in some ways like a function of what it costs to do that from a block space perspective, which is like a relative price compared to another network. So

So transacting on something like Solano, which might be incredibly cheap, is on some level comparable to the idea that like different countries have cheaper labor costs or cheaper manufacturing costs. And there's like kind of opportunities to ARB across those for different use cases. I really like the idea of like the hybridization of the fiat and hard money worlds in the world of crypto. It just kind of fits the pattern of technology converging. different components into the same system. Like Ether, the triple point asset thesis, it's a commodity and a capital asset and a store of value. To me, it's not just like, we're not compromising. Like, hey, we have Fiat properties and hard money properties. It's actually we have the best

of nation state economics. And then we also have the best of hard money Austrian economics. So we have the strengths of both. You have the strength of the Ethereum economy and the assurances of gold, of supply changes, of algorithmic monetary policy. To me, the hybridization that you're talking about, Ryan, is actually bullish, just because it seems such like a logical conclusion of where money and finance goes. Yeah, I totally agree. And I think the mental model, and of course, you know, bankless is trying to understand the asset space.

I mean, we've been on a quest to try to understand what is this crypto thing. But the best mental model, you know, I've seen and I subscribe to for understanding at least layer ones, Bitcoin, ether, salon, and all of these things, is it's like investing in an emerging economy. That's kind of what you're doing, right? The monetary asset and almost the stock market of an emerging economy, that's sort of what we're doing here.

And I hope bankless listener, you understood the lesson of what money actually is here. Money, there is a spectrum of moneyness. All the way on one of the spectrum is credit, a promise to pay. That is kind of weak in its form of moniness. And on the other side of the spectrum, the maximally money type.

of instruments are a means of final settlement. So I hope you bring that lens with you when you're evaluating crypto and evaluating all of the digital money instruments. They're about to hit us in the 2020s and beyond. Brendan, thank you so much for joining us today. This has been very helpful. Thanks, guys. Bankless listeners, we will leave you with one action item, which is read Brendan's fantastic article. It's called Moneyness in the Digital Age. We'll include a link in the show notes for you to access that. As always, wrist and disclaimers. Got to let you know. none of this has been financial advice. Crypto is risky.

You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.