On The Brink with Castle Island - Weekly Roundup 05/26/21 (The Mining Council, Lael Brainard's Free Banking mistake, Kazakh FUD) (EP.217)

Episode Date: May 27, 2021

Matt and Nic are back for another roundup. In this episode:  Elon is back Our take on the mining council Is Twitter Spaces killing Clubhouse? Prepare yourself for Kazakh FUD Is Chia driving up hard drive prices? OneRiver's green Bitcoin ETF The SEC asks for help regulating crypto The key catalysts we're watching in China Lael Brainard spreads historical fake news about free banking The Fed is concern trolling stablecoins Why neo Free Banking can work today Content mentioned in this episode:  Hass McCook on OTB Fed Governor Lael Brainard's speech  This episode supported by:  Sovryn, DeFi on Bitcoin Eventus, global leader in trade surveillance, market risk and transaction monitoring solutions

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So wherever you are in the world, you can start earning today by heading over to sovereign. app and put your crypto to work. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And I think Elon's back. He's back in the camp. Don't say that. He's certainly present and still doing stuff in kind of the Bitcoin space. But I don't know if he has, can he claim to have rehabilitated his reputation along Bitcoiners? I'm not sure about that. I don't know, but he's doing stuff. He's doing stuff that's not terrible stuff. He's active.

He's certainly active. A lot of news this week around the mining council. Excited to get your take on that. I mean, I have a different take from what, you know, a lot of the, what the plebs have. I mean, I think that generally it's a good idea. I think the optics were pretty unwise. If you're not intending to create, you know, an actual membership organization maybe don't call it a council.

Call it, you know, the loosely associated confederation of minors or something. I mean, I don't know. The council makes me think of the council of bricks from Rick and Morty. I don't know if you ever watched that show. I actually have not. But for those who are not familiar with what we're talking about here, so two days ago, well, we're actually taping this on a Wednesday. So as usual, I'm sure Thursday is going to be a big day.

and we're going to miss a lot. Yeah, something crazy is going to happen for sure. Elon's going to do something and totally put himself back on the wrong side of the Bitcoiners. But so on May 24th, Elon tweeted out, spoke with North American Bitcoin miners. They committed to publish current and planned renewable usage and to ask miners worldwide to do so, potentially promising. And I guess the backstory here is that he got together with Michael Saylor and they had a little powwow and asked for some minor disclosures for some of the largest publicly traded companies. Do I have that roughly

accurate? Yeah, they had a Zoom meeting, or as some Bitcoin's described it, a very sinister closed door meeting, you know, in which the miners collusively cartilized in a bid to commandeer Bitcoin, just kidding. They had a Zoom meeting with a bunch of the North American miners, and they talked about why they should probably disclose their energy mix, which is a good idea. It's just they didn't really consult, you know, I don't know, they didn't consult someone who could tell them how most Bitcoiners would interpret this, which was with great suspicion. So I continue to think it's a good idea to publish facts about the energy mix of miners because generally speaking, those facts are good. And so why not be transparent about that?

but Elon's involvement has a lot of people very leery about this. And of course, you know, people are still upset at him. And they're nervous about, you know, miners instituting specific protocol rules or, you know, engaging in sort of compliant mining or adding different transactional rules. Ultimately, this is only like 10-ish percent of hash rate, though. So it's not like an actual cartel. And of course there's, you know, good reason to be skeptical of closed-door meetings. People's sensitivities around Segwit 2X and the New York Agreement, and, you know,

which frankly was protocol-related changes. I don't think anything we're talking about here is coercive or suggesting a change to the consensus mechanism. So it's really just a bunch of people thinking that it would be better for Bitcoin if they had some disclosures around energy usage. And you can agree with that or not. but they're not suggesting that you would censor transactions over this. Yeah, there's no actual protocol changes being proposed here. It is a voluntary registry of information.

I mean, it doesn't even strictly exist yet. All we've just seen is sort of this loose agreement from some mining CEOs. Again, representing a relatively small portion of the hash rate may be growing. That's the other news of the week. this ongoing story about China possibly forcing hash rate out of its borders. So maybe that will grow the amount of hash rate in the U.S. We'll see. So we'll talk a little bit about the China situation a little bit further in the podcast,

but let's talk about the week of content. I mean, did you just single-handedly kill Clubhouse this week? You had Twitter Spaces last night with a couple thousand people on it. Yeah, Twitter Spaces is great. I'm officially off clubhouse. I'm on Spaces. First of all, all my mutuals are on Twitter. So why would I go to a different platform

to talk to all my Twitter friends? Just, it's all integrated. It's great. I love Twitter. Twitter is innovating along, I mean, maybe innovating is a bit of a strong word. They cloned a product that a different firm made. But yeah, Twitter Spaces is excellent.

We actually had the Riot blockchain CEO, in that space explaining what happened at the closed door council meeting. It was great. That was, yeah, it was a pretty entertaining room. You also had a conversation this week with Haas McCook around Bitcoin's energy use. That was a popular episode. Super, super popular. Has has done some good work quantifying gold, the sort of ecological cost of gold, the energy cost of the banking system, and of course, comparing it to Bay. Bitcoin, really precise, you know, really nuanced approach. I mean, Haas actually schooled me on a few issues.

You know, he corrected my HBR piece because I was conflating energy and electricity consumption. Huge difference. So, so Haas. You have to go back and edit that. I did. I sent a note to the editor and they actually changed it. That's great. Yeah.

So Haas is a really great resource. He actually wrote a comparison of Bitcoin's energy. cost to gold in 2014. So he's been having the energy debate longer than anyone, probably. It must be tired. It's kind of tiring to have this debate. Can you imagine having that debate for seven years? That's like Bill Murray and Groundhog Day.

You just wake up and you argue about Bitcoin mining. I feel like I could do another 12 months of the energy debate and no more. I think some fud is getting knocked off the dice though so that's good we're going to need new fud like too much mining in former Soviet republics yeah oh yeah the Kazakhstan fud is totally imminent I'm just we're Kazakhs have all the hash power

all this China Central Asian coal Central Asian coal yeah although that is what I've heard is one of the near term destinations for those miners that are potentially fleeing China which doesn't actually strictly ameliorate the carbon intensity because you're going from Chinese coal to

Kazakh coal. It's not clean coal over there in Kazakhstan. I can tell you that. It's just from one sort of communist regime to a former communist regime. Yeah. Nothing really changes, although I guess the CCP commandeering Bitcoin fud, we can probably retire that one. Yeah, that fud is quickly changing.

We're going to have to get new fud dice. so thanks for aggressively buying up all of our stocks of Fuddice by the way that's cool do we have any left or are we I don't know if we had we were sold out there for a second

we might have a little bit more I think you have some on your person right you're going to start handing some I commandeered some from our corporate treasury of Fuddice so I intercepted the package and like took one of the boxes I should do I

have to remunerate on the brink for that or something i actually don't have one yet so i'm going to need to swing by and and grab one but head over to on thebrink dot shop you can also get some some some good t-shirts they i've saw some really funny commentary this week's from some of the cell side institutions and i think some of those cell-side firms just need a just in it for the underlying technology t-shirt because they they hate crypto but they really love the underlying technology the technology talking points never die they never die you just you just sound really smart. And as Patrick O'Shaughnessy said, your reputation is hedged, but your business is not. So you know that mug that we sold for a short period of time? I don't want to talk about the mug.

Yeah, with your face on it. One of my face on it. People keep sending me pictures of it of like the mug is like all over the place and it's haunting me now because it's just such a cringe orly and embarrassing a mug. I hope everyone like chips that mug so that they like have to throw it away or whatever. like I'm kind of sick of seeing it at this point. It's a great mug to bring to the beach. So let's get into some deals in the week. There were a couple in the Castle Island portfolio. So Talos, a trade execution and settlement platform.

They raised a $40 million series A. It was led by Andreessen Horowitz with participation from Fidelity, PayPal, Nydig, Castle Island Ventures, Notation, Initialized, and others. So a huge round and big congratulations to the Talos team, really working behind the scenes on just a ton of different trade execution and settlement initiatives across the industry. So big fan of what these guys are building. Massive deal, Talos on an amazing trajectory. Another Siv deal this week, Pintu, an Indonesian crypto brokerage. There is 6 million from Pantara and Tudu, Coinbase Ventures, Us, blockchain.com, and Alameda.

And check out our podcast episode with Jeff Satojo from Pinto. He's an industry veteran and building a great company in Indonesia. We've got to go visit. Yeah, I find this proliferation of brokerages worldwide so interesting. I mean, critics just so often miss that this is a fully global phenomenon. And we're talking about vibrant crypto markets in every emerging market. And Pintu is one of the, you know, one of the standout exchanges. Indonesia has a ton of uptake.

I believe the Indonesian crypto markets have higher volume than their actual domestic equity markets. Yeah, it's super popular. Which is insane to think about. I mean, that flippinging is going to happen in a bunch of countries as the crypto markets just become more interesting than local public equity. Kind of crazy to think about. Oh, and especially since you're going to be able to buy local public equity probably in a synthetic way on public blockchains. It's really going to eat it alive, I think. Next one up is Salinas Lab.

So this is a trade surveillance platform. There is $20 million from Evolution Equity Partners, Avon Ventures, and others. Next will be of Ludden, which is a crypto brokerage and lender based in Canada. they raised $30 million from Kingsway Capital with participation from Alan Howard, Susco Hunter Ventures, Parify, and others. Next one up is Chia. Chia is a public blockchain platform

launched by Bram Cohen. They raised $61 million in a Series D from Richmond Global Ventures, A16Z, Breyer Capital, Slow Ventures, True, and others. So that's a big round. I've been hearing the storage cards are really flying off the shelves

for Chia I don't know, you don't call it mining, do you? Chia cropping? Farming or whatever, yeah. So, Chia is 100% contributing to a shortage in various storage drives and shortages and, you know, price increases. So you can actually track the price chart of, you know, generic SDD. They're basically sold out. And to be clear, Chia is not like file coin. It is not serving up storage on a digital.

distributed basis. It just uses hard drive space as part of its proof of work function effectively. They call it proof of space time, but it's basically a proof of work demonstrating that you have consumed this economic resource in exchange for handing out the CHIATOcons and because the CHIATOQA prices have skyrocketed, people are just consuming astronomical quantities of storage. Again, not utilizing the storage. And I sound like a no-corner, you know, criticizing Bitcoin right now. It's like, oh, it's wasting energy. It's wasting storage.

But it's just an interesting dynamic. There was a Guardian piece today tracking it. Brian Ventura went on Bloomberg yesterday to explain. They actually farmed Chia. And he explained that now Chia is causing disruptions in the storage hardware space. It's kind of crazy. they thought that there would be like a greener Bitcoin that was kind of the selling proposition. That was the claim.

The claim was that it would be a greener Bitcoin because there's so much storage in the world that they wouldn't make a dent in it. Well, guess what? They made a huge dent in it. And their consumption of resources is rival with societies, you know, need. So this is why we've money. This is a great case study and why we have monetary goods that are not, why having monetary commodities not having. not have a non-commodity use case is a great idea. So like let's say that we all collectively decided to use corn futures as are like monetary

good of choice. That would drive a ton of value into corn because people would store value in it, right? That would massively drive up the price of corn futures and spot corn. That would make people worldwide starve, right? this is why it is great that Bitcoin is this pure synthetic commodity and has virtually no industrial use. You don't need Bitcoin, you know, in everyday society or like to build a house or to live or anything like that. So as you move off of these like commodity standards towards pure like monetary premium commodities, those that actually dramatically improves society because you have an ex-sociital monetary sync. but Chia is now going back to like the corn standard and relying on the consumption of this actual

resource that we need storage for their monetary system. So like I wouldn't have a problem with it if they weren't selling against Bitcoin as this like green alternative to Bitcoin. So they've basically been rebutted by cold hard economic reality within like two weeks of launch. Yeah, it's a really fascinating experiment. there. Next deal is one of, which is very impossible to type because it just autocorrects into two words, but it's one word and it's one of. And it's a music focused NFT platform built on Tezos,

and there is $63 million. I haven't actually looked into it, but does it entitle you with the rights to just be the single owner of a song? Is that kind of the promise? I haven't looked into it, but probably, right? Just judging by it. the name. Next up we've one of yeah. Next up we've airtm. We've actually had Ruben Galindo on the show before one of the founders of Airtem digital wallet, peer to peer exchange platform based on you know dollarizing Latin America. They raised $15 million from the Stellar Foundation. Congratulations to Airtem. Next one up is one confirmation. Crypto Venture fund started by Nick Tomeo. They raised $125 million for their third fund.

Big raise there. Congrats to Nick and team. So so much news relates to mining and energy consumption these days. It's pretty interesting. And something that I think we kind of expected to happen has begun to happen, which is that we are seeing bundled financial products incorporating Bitcoin and offsets alongside the Bitcoin to create a green Bitcoin financial product. So we saw filing for a carbon neutral Bitcoin ETF courtesy of One River and actually Jay Clayton is an advisor to one river

and the way this works is there's Bitcoins in there and there's also for each Bitcoin there is a apparently an equivalent carbon offset or possibly carbon credit I might be getting the nomenclature wrong I know it's like incredibly fiddly

and people are going to get mad at me if I use the wrong word The point is it comes bundled with these credits, which apparently trace back to forestry management in the Amazon. It should buy a provider called Moss. And the economics are interesting. It only costs about 10 basis points, maybe even slightly less, to completely offset the carbon emissions from a unit of Bitcoin. So just 10 bips of the value of that Bitcoin for, you know, to fully offset the emissions. And the way it actually works is this firm is a broker and they, you know, pass through the, you know, those funds to entities that perform forestry management in the Amazon in Brazil and apparently stop forest fires from happening, thus meaning that the forest do a better job of sequestering.

and retaining carbon and stop logging from occurring, thus, I suppose, keeping more carbon locked in the forest. And so that is apparently the causal mechanism that traces a purchase of this ETF all the way through to keeping units of carbon out of the atmosphere. That's the premise at least. So let's talk about just the product itself. I would think that this would be a pretty compelling product, especially if you're a large capital allocator that has an ESG mandate

or has just pressure from your limited partners or your investors around ESG issues, that this would be a potentially address an issue for you. And so, you know, I could see there being some demand for this. The interesting thing is that the economics are virtually indistinguishable from a regular Bitcoin ETF or Bitcoin tracker product. I mean, it's 10 bips of difference. Yeah. So if you're long, you know, Bitcoin and your thing that this has venture like returns associated with it, it's really doesn't matter. Yeah, it's almost insignificant. Yeah. So it's interesting because intuitively, if you'd ask me what it would have cost to hedge

the carbon emissions from Bitcoin, I would probably would have guessed like, I don't know, 20 points, you know? So it's kind of amazing, I guess, that it's so cheap. I think it has something to do with the structure of the offset market, but I, you know, I'm certainly not an expert there, trying to learn about it. Part of me does just view this with a huge degree of skepticism, because where are the offsets for Amazon? I mean, you know, Amazon has huge warehouses. They have trucks driving around burning a ton of fuel. I mean, there are publicly traded equities that presumably have a massive imprint.

And so I think this is just because Bitcoin's in the headlines for being, you know, burning down the planet and there's a lot of fud. So, you know, I think it's fine. It's just there's a lot of others. It's kind of a double standard, in my opinion. The big tech companies are actually really good as far as sustainability is concerned.

So I, they do like, power purchase agreements so they make sure that a lot of the energy that they use is renewable they buy offsets they've all got their commitments to it's like all the other companies that don't do this stuff but the biggest ones can certainly afford to like to greenify themselves so amazon apple google you name it they all have a climate pledge they all have a net zero by 2030 by 2040 trajectory so i'll give them some credit for that yeah i guess you don't want to be Exxon right now dealing with Black Rock as an activist around ESG issues. And so, you know, we'll see probably more of this. Yeah, I mean, that is incredibly troubling, by the way.

Can we talk about that? Yeah. That is horrifying. I mean, you remember those Matt Levine takes about index funds being Marxist a few years ago? I do. This is that. This is Marxism. So like why in Earth does Vanguard or BlackRock, why do they even get to vote on behalf of people that own passive equity through them? The people that own those shares are regular savers, people with 401ks. You know, Vanguard and BlackRock are just like the vehicles. And yet they presume to be able to vote on behalf of like millions and millions of Americans. Well, I guess they likely distribute proxies. And there's a lot of people that don't care enough to log in and to vote their shares, is my guess, right?

I don't know exactly how it works, but it sounds like it's completely up to their discretion. And they're now empowering some, like, lunatic activist investor that's, you know, looking to take down Exxon from the inside. I mean, I don't have a view on the Exxon thing one way or another. But the fact that so much power is concentrated in these past. asset managers is completely crazy to me. I mean, this isn't like corporate governance. It's just like corporate like authoritarianism. Like what if like their agenda changed and it, you know, wasn't like pro-clim. I mean, it could be anything. They could have an agenda that consists of anything. There's no oversight. There's no, you know, political, uh, restraint on what they're doing.

I don't know. I find it incredibly troubling personally. Yeah, I think it's a tough one. The other thing I find troubling about this specific application is just Jay Clayton's role. And so what is, I mean, what is Clayton going to say, you know, as an advisor to one river here to the SEC? I mean, is his case that the facts and circumstances on the ground warrant a Bitcoin ETF, but I just didn't realize it when I was in charge of approving Bitcoin ETFs? I mean, what has really changed in the past month or two since he's been gone that would warrant. this being approved, whereas all the other ones hadn't been.

And, you know, is it just because it has a little carbon offset thing? That has nothing to do with the risen the SEC to climb the previous ETF. So I find this pretty odious. Really? That's a stronger take than we normally get from you. I just, all these former regulators, I mean, they don't do anything when they're in the seat. And then they come out and they just want to get paid to be advisors to these big companies that innovating and it's like what were you doing when you're there with the exception of

brian brooks there was really no one trying to advocate for the industry you know brian brooks and hester of course the game is the game matt i mean that is the whole point of being regulator and they're all the revolving door between industry and regulation i mean this is exactly what we expect there's there should really be some guardrails there that prevent you from going from a regulatory position and then just walking straight into private practice and doing things like this. It's just... I mean, if you think of the revolving door as, you know, deferred compensation from industry for favorable regulation, then you can think of it as like an incentive which, you know, ensures that talented, uh, profit seeking individuals

become regulators in the first place. So you could think of it as an Earth. form of stock-based compensation. Yeah, I mean, is that what it is? Is that also why the insider trading laws are a little bit loose for politicians? You know what we should do. Yeah. What we actually should do is bump up regulator salaries by a factor of like five, make them extremely well-compensated roles, but then be extremely draconian with regards

to preventing the revolving door later on. So you get talented civil servants. but they are not able to demonetize their status as regulators after the fact. So that's kind of my weird contrarian view is that we actually underpay our regulators. Yeah, and I guess there are, you know, right now the system just seems to really benefit people that have been in private practice for a long time, made a bunch of money, and then decided that they want to go back and serve others. So Gary Gensler made a ton of money at Goldman, and now he can afford.

afford to be, you know, as SEC paid chairman, which, you know, presumably doesn't pay a lot. So that's kind of the path right now. But yeah, to your point, you don't really get people that are young up-incomeers that are trying to get into these positions because they just don't pay very well. On that Gensler front, so during a hearing today at the financial services and general government subcommittee of the House, Gensler started talking about the regulatory regime for cryptocurrency and said that he wants to work with Congress to bring investor protections around some of these exchanges, basically suggesting that some of these things are commodities, some of these things are securities.

He also referenced the fact that right now the budget at the SEC does not really allow them to put the resources that they want to against this problem. And so part of this looks like also just, hey, we need a little bit more resourcing over here because we think that we should be cleaning up some of these crypto venues and we just don't have the bandwidth. So the signals we're getting that the SEC is looking to be more aggressive in cleaning up the crypto markets are getting louder by the day. Is that the takeaway? That's my takeaway. But, you know, it'll be interesting because it's unclear to me that they can start to regulate, you know, DFI protocols, you know, automated market makers necessarily, right?

I mean, even if they went after some of these teams and said, hey, your securities exchange, you need to register it as an ATS, these things would just be forked in their open source software. So there's always so much they can do. Could they impose more regulation on the likes of Coinbase and Erasax and Paxos and all these centralized exchanges? Yes, they definitely could and maybe they will. I just, it's less clear to me how you'd actually go after some of the volume on like a unison. swap or a sushi swap. Well, some of them

have onshore teams backed by you know, American firms, American corporations. So there's definitely paths to do that if they wanted to. There's definitely paths, but the second order effects here would be

immediate in terms of just, you know, you'd see these things fork, you'd see anonymous founders of new front ends, I don't think they could really shut it down. So it'll be interesting to see what they try to do here. Speaking of shutting things down, let's talk about China. So China banned Bitcoin again. Yeah. Interestingly, so it's worth clarifying that apparently the way China makes policy is pretty different from the way the U.S. does. So like if you consider the FinCent thing, we have long lead time, a lot of comment, period.

They're taking input from the industry, and then, you know, the ruling will occur and it'll be final, and that's kind of it. With China, apparently, from what I'm hearing, it's much more sort of experimental, hypothesis-driven, iterative. So, policies is made, you know, a dictate is handed down. and then if it doesn't fully make sense, it gets rolled back to a certain extent. So this will there, won't they approach that we've seen from China with regards to Bitcoin ban, kind of comports with that. And in fact, we, so last Friday was when the vice premier came out with this, you know, note about, you know, cracking down on mining and exchanges in China.

and then the idea was that it would be formalized over the course of this week. So we might be out of date by the time this podcast comes out. But apparently word is that it's maybe not as bad as some people had feared. But it's also incredibly opaque. And we're probably not going to know for a long while whether hash rate is actually about to leave China or not. One thing we know for sure is minors did respond aggressively. by derisking their positions, liquidating into fiat, they mostly avoided exchanges. They were skittish about using exchanges.

OKEX and WHOB, the executives of those exchanges had already been detained in prior months. So everybody knew that those exchanges were being watched closely. So that would be the next shoot-a-drop in my mind would be if something happens to those exchanges if China really aggressively goes after those specific on-ramps. Lucas Nuzzi of Coin Metrics had a really good blog post on this situation and monitoring some of these on-chain flows. And so, you know, what's your take here that a lot of this is just miners selling, you know, trying to get into either stable coins or back to Rem and B and just dumping on OTC desks. So, you know, a ton of spot liquidity. But then also,

Also, we're hearing that they're selling their machines. Yeah, the ASIC market has definitely softened. I mean, if you're a minor and you're like, you have to relocate 100 megawatts to Kazakhstan, you're not going to be able to do that in an expedient way. So there's going to be enormous frictions there. You have to physically move the devices. You have to source new power, you know, purchasing agreements. I mean, there's a lot involved there.

And so it doesn't surprise me that something. of these miners went to Fiat in order to in anticipation of this transition period. Of course, if it doesn't happen and it's a huge nothing burger, then they might, you know, reenter the market or take on a more risk on attitude. But if this whole thing turns out to be a nothing burger, I'm going to all confess to being a little disappointed because I was hoping that hash rate would become more decentralized and that we would slightly get away from this dependency on not on Chinese coal yeah I guess more to come on this I did see a funny tweet from Dan morehead at

pantera with the returns of the tech stocks after they were banned in China and then the returns of Bitcoin after every time that it's been allegedly banned in China and I guess the message is if China banned something you probably want to invest in that thing yeah China banned Google in 20 tonne. I guess they did okay after that. I will say, though, that this was the vice premier coming out against Bitcoin mining was the highest profile government body that had ever done so. And independently of this, the inter Mongolia province, and some people get confused between Mongolia, the country and Inner Mongolia the province. Inter Mongolia is a Chinese province in northern China, to be clear.

They are genuinely aggressively banning Bitcoin mining. They're rooting it out. It is, we just got some more confirmation of this. It will not occur in the province anymore. So that's happening regardless. And that was one of the two most coal-powered provinces in Chinese mining. So regardless, that's still pretty good. I mean, this really should come as no surprise if you just back out.

I mean, what is the number one most destabilizing thing to the CCP? It would be the emergence of a non-sovereign store of value asset. So it's not surprising to me at all that we're seeing moves like this. I've seen some commentary that China is going to have to allow the R&B to float freely on international markets. Obviously, it's a managed currency, which is why they have capital controls. Maybe that era is ending. But for now, they still maintain a very tight grip on it. And, of course, Bitcoin undermines that.

So it doesn't surprise me that they're banning it. All right. So our favorite Federal Reserve Governor Lael Brainerd made a speech this week, which had some real lab, dare I say, historical fake news, fake history, I guess. She was misrepresented history in an effort to basically trash stable coins or privately issued money. What'd you say? I was extremely triggered by this. She's your favorite Federal Reserve Board of Governors? That was sarcastic.

She's my least favorite. I mean, I hold them all in equal contempt, but her especially because she's pretty clearly anti-crypto. Actually, I mean, they all are. So, well, I can't speak to some of them. But she's very vocal. Anyway, listen to this passage. Listen to this passage. Given the network externalities associated with achieving skill in payments, there's a risk that the widespread use of private monies for consumer payments could fragment parts of the U.S. payment system in ways that impose burdens and raise costs for households and businesses. A predominance of private monies may introduce consumer protection and financial stability risks because of their potential volatility and risk of run light behavior. Now imagine this passage in bold and italics, emphasis added by me.

the period in the 19th century when there is active competition among issues of private paper banknotes in the United States is now notorious for inefficiency fraud and instability in the payment system. It led to the need for a uniform form of money backed by the national government. And then she basically, her whole point here is that we can't have stable coins. We need to have a unified CBDC most likely. And she uses this historical anecdote to basically. make her point. So what's wrong with that? I mean, obviously there was just massive issues in the free banking era around bringing assets from state to state. There was a ton of counterfeiting. So my read on that is that she's just referencing some of the convertibility issues between some of

these wildcatting private bank notes. Is that not your- Well, it's funny that you mention that. It's funny that you mention that she's taking very, very shallow read of history here, very shallow. She really needs to read some George Selgin and Larry White. Asap. Those... Uh-oh, all right. Hit me with it. So if I were to prescribe you, you know, some literature, I would say George Solgians money-free and on-free would be a good, you know, layperson starter into getting into this debate. but George and Larry, the two of them, have spent like the bulk of their careers, distinguishing between genuine free banking epics and effectively pseudo-free banking.

So what we had in the antebellum period in the 1830s, the 1860s in the U.S. was not genuine free banking. We need to make this excruciatingly clear. People call it free banking. It was not true free banking. It wasn't true free banking. there were significant restrictions on the banks, which are what led to these failure modes, basically. So the banks could not engage in branching, which means that they couldn't really have multiple branches.

So they were geographically constrained, which meant that the banknotes couldn't really travel far. Those trust signals couldn't travel far, which is what caused these discounts. If you got a banknote from a bank in Indiana and you took it to Philly, the local newspapers would actually tell you about the credibility of the different bank notes. And so the further you went from the bank, the less your notes were worth. So it's kind of like if you had a stable coin issued in Shanghai and you took it to Mexico City, it would be worth like 80 cents on the dollar or something. So this is one of the things that Lyle is referring to. But this was due to regulatory restrictions on the banks, right? So this is like the arsonist calling itself a firefighter, right?

It's like they caused the issue and then the government bills itself as like, you know, the savior, right? Because she's saying, oh, well, that's why we need to develop central banking. The other thing is that the banks were forced in many cases by the states to hold state bonds, which were a really inferior form of assets, basically. I mean, a lot of the banks failed, but partially that's because they were forced to hold these terrible asset portfolios by the states themselves. So the bank failures during the pseudo-free banking era in the anti-bellin period were not due to market failures. They were due to the states and the state itself imposing these additional restrictions on the banks, which meant that they couldn't diversify

their asset portfolios, right? Like if you are limited to a geographic restriction, you're like an Indiana bank, you're going to lend only to farmers. So you're going to have an undiversified portfolio. You know, they couldn't engage in branching. So national banking brands couldn't develop. So this caused this parity convertibility issue. And they were, forced to hold its inferior collateral. So it's pretty unfair and a historical to trash the institution, the glorious institution of free banking with reference to this particular episode, which was not true free banking. And so this is insidious because a lot of people won't know this reading her speech. And she's...

Yeah, I didn't know that. That's, that is fascinating. She's using this to attack basically stable coins. She's suggesting that stable coins can't function. They're going to fragment the payments landscape. They're going to make payments experiences worse. But we know that using stable coins is better than bank wires. Yeah. You can't really argue that. It's orders of magnitude better.

It's a 10x improvement. Furthermore, I guess you wouldn't really run into any of these branching issues. This is an asset where you could have, you know, not only geographic diversification of customer base, but you'd have just a proof of reserve on the back end. So a lot of these issues around counterfeiting and just banks going under, you wouldn't really run into that with this type of technology. They're abated by technology, right? Like the trust signals now can obviously travel far. But I would say there's a historical parallel.

Like if you look at the issues that stable coin issuers like Tether have faced, arguably a lot of Tether's problems stem from its inability to obtain banking services, right? The fact that it's always had to operate as this kind of shadow bank. And so there's a historical parallel there. You know, its convertibility and parity issues stem from the fact that it's being chased around by the American regulatory apparatus for most of its history. Speaking of Tether, the New York AG, there, do to opine on the disclosure, right?

So maybe we'll get an output on that in the next week or so. Do we know if they are actually going to produce anything or if it's just a transaction information sharing between Tether and NYAG? I don't know. I hope it's not something where they just, you know, check a box and put it in a file cabinet. I'd like to know if there's been a kind of oversight there. Yeah, that would be helpful if NYG actually said something about that. So just to wrap up the free banking thing, Canada, by contrast, had an unrestricted, genuine free banking epic.

That is one of the favorite case studies that Selgin and White talk about. So it was pretty free until the 1890s. And Canada did have branching and their system was incredibly stable. There are very few bank failures and the notes traded sort of at par with each other. So you can look at these historical counterfactuals to see what is genuine, what is not genuine free banking. The other one that everybody knows, well, maybe not everyone. Lots of monetary history enthusiasts are very aware of is the Scottish free banking epoch, which was extremely stable. And, you know, you actually had moderate deflation.

You had very few financial panics, very few bank failures. And the notes pretty much all traded apart with each other. just the market competitive dynamics that kept the notes, kept the bank reserves, you know, appropriate on the capital reserves, you know, in check, you know, contrasting with the English system in the equivalent period, which was much more centralized, they had central banking, and it was much more unstable. So, you know, I just, I can't stand our monetary high priest misrepresenting history here like this, especially if she's going to use that to trash stable coins.

Lil Bernard, who knew? That one got right past me. I'm glad you were there to swat that away. Yeah, I'm not going to abide that. Should next time, she'll know better. All right, so I think that's it for the week. We'll be back on Monday with an episode covering Uniswap and Flipside Crypto. So a big episode on Uniswap v3.

Are we going to be able to record during Bitcoin Miami? I don't know. It doesn't seem like we're going to be, I don't think there's a booth down there for us. I have to bring my podcast equipment, though. Well, I can bring mine. We could have a, probably should have planned this ahead and have like a live event or something. Brink Nation finally in the flesh. Yeah, we might have to miss a week.

I don't know. Are we allowed to miss a week? I hadn't thought about this. We probably should have planned ahead of us. We're doing it live. Maybe I'll bring my, maybe I'll bring mine. Maybe we can just record a weekly roundup a week in advance and just try and guess what is going to happen in that week. Yeah, why don't we prepare for all eventualities?

So one is going to be Bitcoin 100K. There'll be a section on regulatory crackdowns that could happen at any minute. So we'll talk about some of our favorite stable coins and derivatives exchanges. We can talk about some of the huge asset managers they're getting into crypto. Yeah, we can just assume they announce their initiatives. We can just record soundbites for if an ETF is and isn't approve and just slot it in based on what happens. Yeah, huge news. All seven Bitcoin ETF proposals that were originally in before the one river, Jay Clayton one,

they all got denied. The Jay Clayton won. That got through. That's a lot of different permutations that we're going to have to record sound bites for. Yeah, you're right. Maybe we should just do an episode. All right. So we'll see about doing an episode. I don't know. It might be a challenge. We'll see. All right, everyone. Have a great weekend.