The Breakdown - How 2,000 Years of Monetary History Led Us to Bitcoin, Feat. Nik Bhatia

Episode Date: February 19, 2021

Nik Bhatia is a financial researcher, a CFA charterholder and an Adjunct Professor of Finance and Business Economics at the University of Southern California Marshall School of Business.  Nik’s new book “Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies” puts the rise of bitcoin into a larger historical context - from the first coinage of Rome to the introduction of credit in Renaissance Florence to the beginnings of interest rate trading in Antwerp to the genesis of the central bank system that shapes money today.  In this conversation, he and NLW do a rapid tour across those two millennia of economic history, ultimately helping reframe what it means when we say that bitcoin is the new “digital gold.” Find our guest on Twitter: @timevalueofbtc -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

I've always thought of Bitcoin as digital gold, but the analogy needed a story. It's not digital gold now. It's the first layer money of the future using gold as the first layer money of the past as an example to set up why. It's more than digital gold. It is a first layer money that can anchor a whole financial system. Gold failed at doing that. So we don't want to emulate gold. We want to take. the important properties from it, but then build a better system on top of it. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world.

The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, February 18th, and today I'm so excited for this conversation. You know I geek out when I get to do a historical episode, and that is exactly what we have for you today. There are many people, especially in the sort of bull market we're in, who will extol Bitcoin's virtues. It's hard cap, its unconfiscatability, its censorship resistance, it's predictable and unchangeable monetary policy. There are far fewer people who can actually explain Bitcoin's place in the evolution of money over millennia. who can help make it clear why the innovation contained here is so historically relevant. That's exactly what Nick Batia's new book, Layered Money does.

I started following Nick years ago when I was doing a Sunday thread on Twitter curating all of the best Bitcoin content that was, in fact, the original Long Read Sunday. And so I was thrilled to see him write this book. In addition to being an author, Nick is a CFA charter holder and an adjunct professor of finance and business economics at the University of Southern California's Marshall School of Business. He also has extensive trading experience in money markets and interest rate futures, but all of that for today is secondary to his awesome brain when it comes to the history of money. In the next 15 minutes or so, we plow through 2,000 years of monetary evolution from Turkey to Rome,

to Florence, to Antwerp, to London, to Washington, to the internet, where we all find ourselves today. Strap in because you're not going to want to miss a minute of this show. All right, Nick, welcome to The Breakdown. How you doing? I'm doing great. Thank you so much for having me. This should be super fun. So as we were just discussing, I've been following your writing forever.

I loved seeing it come together in kind of the full length form. And what I wanted to do today is actually kind of go back through history. I mean, I think what layered money does so well, is it gives people the context to understand this, rather than kind of just being like, here's why Bitcoin is awesome, here's why Bitcoin is amazing. Let's actually dig into the history of money that got us here. And so what I thought would be really fun today is actually walk the listeners through some of that history of money starting way back at the beginning.

But before that, I guess like let's just start with defining the kind of the central term here, the central concept of layered money. So it's the name of the book. It's obviously a really important concept. what does layered money actually mean? Layered money is a new framework. And so what I did was I took this idea of assets and liabilities. And in our monetary system, the way that the way that the system works is that financial institutions have assets and liabilities.

They have relationships with each other. And through these relationships come monetary instruments. And monetary instruments, because they are within these relationships between financial institutions, there is a natural hierarchy there. And so the hierarchy of monetary instruments is not something that is a commonly discussed term. So my goal with layered money was to bring that to the forefront. And instead of talking about assets, liabilities, talking about a pyramid, of money in which there is a hierarchy.

And at the top of the pyramid are certain financial instruments or commodities and certain financial institutions right below them using those assets as the base for a whole monetary system. And so the idea for layered money actually came directly from a paper in academia called the inherent hierarchy of money by an economics professor named Perry Merlin. And what he wrote was that money is inherently hierarchical. And he provided this academic framework for this. And he had a three-layered system, gold, government currency, and deposits. So a three-layered system. And I found that paper so fascinating. And so what I did was I actually tried to trade.

the roots of that paper, that paper didn't have a historical context to it. It was about the hierarchy of balance sheets in the financial system. What I did with layered money is I tried to trace the roots of that paper, and I ended up starting the story about 800 years ago in Renaissance Florence to describe how I saw this evolution occurring. So I want to get into Florence, but you actually start the book even farther back. You kind of pull the earliest experiments with coinage and kind of set it in historical context. So let's talk about in the sort of, you know, AD era, I guess, those early experiments with money with coinage. What were the important kind of steps on the journey

to get to where we get in that kind of Renaissance, that early period? What were the important parts of the earliest phases that you were looking at? So the transition between gold and gold coins, is what, you know, I identified as the first important transition. So before gold coins, gold was used and gold and silver were used as mediums of exchange, but it was in the form of non-standardized bars, jewelry, etc., these gold and silver items, but not necessarily uniform in their measure and weight. So what the coin did was it changed this idea that we had to measure our gold and silver every time we transacted with each other. Because now I had a coin that you recognized.

You have a coin that I recognize. I know how much your coin weighs, you know how much my coin weighs. And so we can change, we can exchange a lot quicker than if we didn't have the coin. So that was a very important advance. And that happened for the first time, you know, several hundred years before Renaissance Florence. And actually in ancient Lydia, which is in modern day Turkey. So after the after we start getting gold coins, then we actually see the Greek and the Roman empires use coins to midcoins and to use these coins in order to expand their empires and exert their influence over their subjects. And what you saw in the Roman

empire was really an example of devaluation. So this idea that a government can come in, mint a coin, but then the next year put less gold or silver in the coin and progressively keep cheapening the currency, but try to really get away with this idea that the currency that they issued this year is the same as the currency that they issued 10 years ago, which had twice as much silver or gold in it. And so the manipulation of currency through government started to happen as well along this time before we get into the Renaissance. So we've got coinage as a way to simplify the way that exchange happens by not forcing people to remeasure the valuable underlying asset each time. we have almost as soon as it, as governments get into it, kind of attempts to fiatize in some ways,

you know, the value of this money and decouple it or at least get away with there being less of the actual underlying asset. Are there any other kind of important steps during this phase or maybe more kind of directly? What are the, what are some of the challenges, what are the issues that are arising from this that others would later try to solve? There are two. One is this idea of coin multiplicity where we have several hundred or even thousands of different cities, empires, monarchs, rulers issuing their own coins. So we have confusion there. And that slows down the exchange of money. Another was just the risk of money. being metal itself. So with money being physical, you have the risk of loss, theft, or any type of, you know, shipwreck, all these types of activities that can only happen with something physical. And so money also, while it was getting consensus around gold and silver and gold and silver coins were recognized around the world, you still had these challenges that only

really paper and a network of bankers could solve. So this is the dominant system, or at least some vestige of this system, is pretty much how the world works, or at least the kind of post-Roman, you know, proto-European world works for the next thousand-ish years. What starts to happen in the early days of what will become the Renaissance that changes that? And how does that come about? It comes about with a financial instrument called the Bill of Exchange. The Bill of Exchange is a financial promise. It's an agreement to pay where one party agrees to pay one, another party in the future, in a different currency at a certain time, in a certain amount.

And so it's a promise. It's a promise to pay. And so these bills of exchange that were issued by this new class of merchant bankers, you know, in the 1100s, 1,200s, these instruments, they really transformed the way that people dealt with money in Europe because now they didn't have to change, they didn't have to exchange coins each time that they transacted. They could issue these promises, these bills of exchange, to each other, and it was a way to do bridge financing, you know, in modern terms. And this bridge financing where merchants could basically bridge all debts for three months with any of their suppliers or anybody in their supply chain, up or downstream.

This facilitated economic progress and activity across Europe because it was also a system of credit. So people were borrowing now. people could borrow through these bills. They could borrow money to buy a raw good, make that good, and then sell that good, and take the money that they earned, pay back the loan and keep the profit. So this is like business 101 that, you know, in the way that we think about today, you start a business, you borrow some money, you invest it, and you reap the profits down the road and you can pay back the interest and the principal, hopefully, you know, if your business is

successful. This all started to flourish around this time in pre-Renaissance Europe. What were the preconditions that made this viable? I mean, we, you know, we kind of have a sense of what makes the modern monetary system work in terms of, you know, big, you know, national or transnational arrangements like Bretton Woods, backed by a military with agreements around, you know what I mean? Like there's a set of underlying conditions. What were the sort of things that were going on geopolitically, socially, you know, kind of economically? Was it just that there was this set of people who are innovative? Was there something else about what was happening then in terms of the way that trade was actually happening? I mean, if this is kind of a little bit

more depth, but I just think it's fascinating when history has these kind of huge inflection points. Yes, I think that it is the synthesis of a few things. And this is the point I tried to get across in the book. This flourishing activity, it came from a couple different sources, geopolitically speaking. One was this post-feudal northern Italian city republic origins. So you had city republics like Florence and Venice start around this time in a post-feudal era. And these city Republic's had property rights and things that are that we think about in the United States from our Constitution and they had there are there's traces there to this era in pre-Renance Florence. So these city republics, something about them gave way to mince in which they're

making coins, you know, striking coins from gold and silver, with such a stability, these mints had such a stability that wasn't present under kings and queens. It just wasn't. And so the Florentine mint in particular issued a coin called the Fiorino de Oro, the gold Florin, that had an unchanged weight and purity for over 300 years. It was struck in 1250.2.000. So for 300 years, you had this gold coin that every year it was issued, it was the same as the last year's issue. And so all of Europe adopted the Florin as its denomination because it was so stable and trustworthy. And so everybody measured their wealth in Florin. The highest paid administrators were paid in Florin.

International business arrangements were done. in foreign. International business balance sheets were kept in Florin, and at least one side of all bill of exchange transactions across the continent were denominated in Florin. So it's not only the class of merchant bankers that really emerged with this solution of credit instruments and promises to pay, but it was that plus the stability of this one coin that birthed the system. The system then moved away from Florin, right? And it progressed without the Florence stability. But the foreign stability, in my opinion, and the book puts this forth, it was one of the most crucial components to this emergence of layered money. So one other question before we follow this trajectory

and move away from Florence as well. What is the relationship? I mean, in some ways, this is like the birth of the private sector as well, right? So it's, you're taking these key functions of money, these key innovations of money coming not from government, but from a group of obviously closely intertwined, but theoretically separate, you know, a class of people. Was there even a conception of that, or was this whole era in some ways a part of it figuring out the balance of power between, you know, officials? and the sort of private merchants? The private merchant class was booming during this time.

And it's hard to diagnose it, looking back and say how much of that boom was due directly to the advancements in the monetary system or how much bankers facilitated growth that wouldn't necessarily be there. But what I found through my research is that the, The boom in Florence around the time of the Florin and the birth of bills of exchange and a credit money system absolutely coincided with the birth of maritime insurance, the birth of double entry accounting, the birth of these new organizational structures in which businesses could form with a pool of capital. from different people, these, you know, joint stock, the predecessors of the joint stock company that, you know, is, you know, worldwide ubiquitous today, there were so many things that started during this era. So it's really impossible to separate. It was, it was a renaissance in so many

ways. Okay. So let's now continue our journey on through history up through time. We've started in Florence, how does the center of gravity start to shift or I guess maybe even not that, but where do you visit next and sort of your trying to kind of pull back the pieces to this layered money system? So as the foreign was, as the foreign got its first devaluations around that time, there were other coins that were central to the financial system, namely the Venetian Ducat, which was, which had a very similar measurement to the gold. of Floren. What I found through my research is that the center of the money market, this idea of a money market, was, it didn't really exist during that time. So what you had were these traveling fairs

where merchants traveled around Europe from France to Belgium, to Italy, to Germany, and they would trade with each other, and different merchants would show up at different fares, but you would have this calendar of events. And via this calendar, you had bankers traveling to all these cities, Geneva, Lyon, and bridging all the financing from, you know, from one fair to the next. And so it was this traveling fair of bankers. In Antwerp, in 1531, for the first time, an exchange opened, an actual physical location in which bankers could trade with each other and settle debts with each other all year long. So it was called the continuous fair. And so this, this, you know, transition from the traveling fair to the continuous fair really marks the birth

of the money market. This happened in the early 1500s. Antwerp became, Not only the center of European commerce, it was the international economic hub of the time, but it was also the place where the first money market was born. And these promises to pay, we had mentioned, like bills of exchange, actually found a price. They had a liquidity for the first time. That's the segue into time value of money. The first time, pieces of paper and promises to pay themselves were considered an asset. class. This is where in the story in the book, you introduce this concept of the time value of money.

So maybe we can take a minute there or here to describe that. The time value of money, you can think of it as if a piece of paper is worth more tomorrow than it is worth today because you're paid to wait. You're paid for your time. And so it's a tradeoff between today and tomorrow. And the tradeoff between today and tomorrow has a price to it. It has a value. And we call that in, you know, in financial academic terms, the time value of money. Now, the time value of money doesn't really apply to a gold coin because it's a physical item. But it applies to promises to pay pieces of paper because promises to pay have a maturity on them. And so when the agreement is made today, when, and you measure the cash flow in the future.

When you compare the cash flow today and the cash flow in the future, there's a mathematical derivative of that, and that's the interest rate. And so the time value of money is associated with this idea that things have interest rates. They have a difference between their value today and tomorrow. So how did this concept start to shape or reshape these emergent money markets? What happened was in Antwerp, Bills of Exchange and other financial instruments called notes, you know, the predecessors of what we think about is our currency notes, our paper cash. These types of instruments started to all trade with their own individual prices.

And each one of these prices corresponded with an interest rate. And now you could trade, basically, you could trade interest rates for the first time in Antwerp. And so this business of trading interest rates, or what we think today as the bond market or the money market, had its birth in Antwerp. And really a whole financial system can trace its roots to the beginning of this type of trade. Looking for the best way to stay on top of your investment game? Nexto.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited.

Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. The next kind of innovation that you point to or change transformation is the rise of what would be the predecessor of the central banking system. So maybe you could talk about that, kind of how this starts to occur, what the functionality is, how it differs perhaps from how we think about central banking today. So at the end of the 16th century, we had the Dutch revolt. that what happened during the Dutch revolt is that the Antwerp literally got blockaded and trade couldn't flow to and from Antwerp.

So the center of economic trade in Europe transitioned from Antwerp to Amsterdam at this time. And in Amsterdam, there was really a boom in financial innovation. you had at the same time the Dutch East India Company starting to form and officially formed in the year 1602. They were reaping, they were reaping profits. They were the first ever joint stock issuer. The shares in the Dutch East India Company were skyrocketing in value. People wanted to cash in on their shares. when they wanted to cash in, there was no place to do it.

So we had the birth of the first stock exchange as a response to this, the Amsterdam Boris. And as a response to the first stock exchange, you now had a demand for financial settlement. When people sold shares, they needed to buy cash. Or when you wanted to buy shares, you had to have a form of cash that was accepted at the exchange. And so it was really a three-step process to get to the first ever central bank. It was the foundation of the first joint stock company. It was the foundation of the first ever stock exchange because of the need to trade those shares.

And then we had the birth of the Bank of Amsterdam, which is the predecessors of central banking. It's really the first central bank. And central because all payments had to be routed. through that institution. The only form of cash allowed in the financial system were the Bank of Amsterdam's deposits. And so, you know, in the layered money framework, the Bank of Amsterdam as the first central bank monopolized the control between the first and the second layers of money, the first layer of money being gold and silver coins, and the second layer of money being the Bank of Amsterdam's deposits. They eliminated all other promises to pay gold and silver from the mix. They banned them

from the system. Only Bank of Amsterdam deposits were valued as a second layer money that could be transacted. This also, this monopolization also facilitated an instant settlement on the second layer itself because if you had Bank of Amsterdam deposits and your business partner or your business counterparty has Bank of Amsterdam deposits, when you guys trade with each other, it's just an accounting transaction at the Bank of Amsterdam. Easy, free, instant settlement. So that was a tremendous advance in money and monetary systems itself. But it came at the cost of the government taking control over the layered system. Got it. So that was actually, you kind of jumped ahead to the question I was going to ask is, you know, we've had for now hundreds of years this really powerful merchant class, probably constantly kind of jockeying to figure out roles with, you know, governments, municipalities, etc. Central Bank presumably represents a pretty significant power shift in favor of governments. And so I was going to ask kind of what the tradeoff, what the payoff of, what the benefit was that made it worthwhile or at least palatable. And it sounds like that if

efficiency in that settlement was a really key piece of that. It was. And what you had during that era was different. You had this idea really for the first time of a global reserve currency that was a second, that was a second layer money. And so the Bank of Amsterdam's deposits became demanded as money by a pan-European audience. and so they didn't want the coins. They wanted the deposits that facilitated the economic activity on the second layer of money

with the intra-bank transfers between depositors. And so the gilder, the deposit itself was demanded. And that really changed the game. And that is, you know, sets up how we think about the dollar being demanded. the dollar is issued by the Federal Reserve, and it's issued by other financial entities. It's not in itself a commodity. And so that really is traced to the Bank of Amsterdam. So before we jump over the pond to the American case, is there anything worth noting in our kind of extremely quick jump through monetary history? You know,

the next few hundred years of European history from a political perspective are dominated by kind of colonial expansion around the world, competition that comes with that, sort of the, geopolitical and economic power that comes with that. How, are there any key things that we want to kind of extract from that era as central banks or as sort of the idea of money is evolving at that time? In England, the Bank of England was founded in 1694. And the reason it was founded was to purchase government debt so that the British Navy could rebuild after a lost war. So that in itself is a very important lesson to take from history that central banking oftentimes is merely just to facilitate the financing of governments on the fiscal side. So if we think of it sometimes as

independent central banks, but really central banks and governments are joined at the hip. And we have the original example with the Bank of England at the time and the crown in the late 17th century to go upon for that. We also have this idea that we get from Walter Badgett. He's the gentleman who founded the Economist magazine and he was a very famous writer on a wide range of topics. He wrote the first book ever written about the money market. And in this book, he argued that the central bank was there for one thing and one thing only. It was to be the lender of last resort. It was to lend when times are tough to businesses that really have the ability to pay over a long term, but are in a cash crunch. And so don't give them free money. Don't just spread, you know,

spread money to everybody who's coming to ask for it, but diligently lend money to those in need at times of need. As the central bank, you can do that. You can do that because you have the power of elasticity. This is the idea that central banks can create money because it's their second layer. It's their liability that they can create. All they have to do is create that money and buy something.

So at the time, the something that they were buying in order to save the system was the debt of small businesses through the bill of exchange market. And so Walter Badgett, cemented this idea for the Bank of England and for all of central banking, that central banks were there to be the lender of last resort in a crisis. That was their express purpose. Everything else was secondary. And you had to do this in order to preserve the currency. Those are the two most important lessons to take from the Bank of England before we hop over the pot. Awesome. Yeah. And I think

we'll come back to this lender of ex-resort concept in a little bit too. Okay. So, before we get to the Federal Reserve system and the creation thereof, what did proto-federal reserve American money look like? What was the monetary system? I mean, this is a huge question, right? Because we have the colonial era, the revolutionary era, the, you know, kind of like the Civil War era, the antebellum era. Like there's all these kind of the frontier era. There's all these different phases. But I guess, you know, kind of what are the important takeaways before we get to the sort of the early 20th century in the beginning of the Federal Reserve? There are a few things I focus on in the book.

Obviously, you can't tell the history of American money and finance. It's a very long story. So I quickly go through the first couple hundred years. One of the early lessons is that the dollar was picked over other forms of currency or other units of account or measure because of its consensus. There was this idea from north to south that the dollar was a unit that people identified with. It was a Spanish coin. It was the Spanish dollar.

That's where the name comes from. But it wasn't the only coin that was traded or the only form of money. Tobacco was used as money in Virginia and other colonies in the south. Wampum, which, you know, our shells were used as money throughout the northeast. And so we had different forms of money, different coins, but the dollar, the Spanish dollar in particular, was known throughout America. And so that was the unit that was decided on. And then they struck, you know, exact amounts of gold and silver for the dollar. But after that, you really had a monetary ambiguity for

quite a while. We had a couple experiments with central banks that expired after 20 years. and then you had several decades of more or less a mix of monetary instruments that functioned as money. You had gold certificates issued by the Treasury. You had private banking notes that were forms of credit backed by U.S. government bonds. And then you had the green back during the Civil War, which wasn't backed by anything. And so you had really this mix of monetary instruments. But what kept happening is that in every financial crisis, they can't. hearing the echo of Walter Badge's advice. You need a lender of last resort to make the system

not fail every time. And so finally in 1907, there was a financial panic that was triggered by an earthquake in San Francisco. This financial panic really broke the system until J.P. Morgan had to come in and save it himself, essentially. And what happened was the response to it in Congress, in the financial circle, for the banks themselves, the response was, we need a central bank in the United States once and for all, enter the Federal Reserve Act of 1913, and then in 1914, the Federal Reserve system becomes the central bank. of the United States. The next part of this story, because you kind of, I was going to ask what spurred the

creation, and you articulated that a little bit. Another kind of, just fast forward. So the Federal Reserve comes online in 1913, 1914. And then there's this transition over the next 20, 30, 40, 50 years from, or I guess the next 30 years at least, from kind of a gold-based system to Bretton Woods in the modern era. talk about that sort of transition, the early decades of the Federal Reserve system in the U.S. One of the most notable things about the early Fed is that they did not intend to own U.S. treasuries as assets.

They were supposed to be more of a facilitator in the Bill of Exchange market if things went poorly in the financial system. But World War I happened around the same time, and the United States government had to issue a lot of debt to raise money to fight the war. And so right away, the Federal Reserve Act was amended so that the Fed could purchase U.S. treasuries. And that is a foundational change that happened, you know, almost immediately. The other noteworthy thing that happened in the early years of the Fed, and this is about two decades into it, was that you had the great stock market crash and then the ensuing Great Depression.

During the Great Depression, the United States government, through an executive order, 6102, seized all the gold of the citizens and made them surrender gold to the banking system and forced to take, they weren't, it wasn't seized from them. They were, it was, they were purchased. The government purchased the gold from all the citizens, but they were forced to sell it.

And so that act, of the government seizing control of the gold itself and then and then they ended up making the Federal Reserve surrender all the gold to the treasury itself, that act was really this first idea that gold is a restriction on the financial system. It doesn't make everything work better. It's actually the constrictor. And this idea was really the origin, is the blame, the blame for the Great Depression and how long it lasted was it was placed on gold, that gold wasn't an elastic enough system. This idea that we had to have a 35 to 40 percent gold coverage ratio at the Federal Reserve, meaning that they had to have gold in the vault if they were to

create currency. This very idea was being blamed as why growth couldn't get off the ground. So it was really, this was gold as the villain. And gold as the villain is a story that has lasted still to this day, long after it left the financial system. Gold is blamed for the depression lasting so long. So whether or not you agree with that, gold was removed from the financial system really over the course of 40 years prior to the 70s, not just starting. not just starting in 1970. We come up through the Depression, we get to Bretton Woods, the world reorganizes itself around a dollar system, that system has a major shift in the early 70s.

I feel like a lot of where you wanted to focus your energy in terms of this part of the story was around the early cracks in the dollar system as it started to decline. So I guess anything that you want to kind of specifically mention around those periods or those transitions. And if not, we can kind of move into, you know, questions of the shifting nature of the lender of only resort, questions of interbank trust, sort of the set of issues that you flag before we get into the Bitcoin part of the story. Really, the most important thing to take away from the last few decades of the dollar system is that in 2007, specifically in mid-August of 2007, we had a break in interbank trust that has never healed itself.

And so all of the financial crises since 2008 and every subsequent spill around the planet can trace its roots to August of 2007. And really every, you know, you talk about the lender of last resort, the lender of only resort, the Fed is now the lender of only resort because after this point in which the banks could no longer trust each other, there was nothing to save the system other than the Federal Reserve. Up until that point, up until 2007, you had a culture of interbank trust that was equivalent to the Wild West. There was so much counterparty risk slinging around the system, but, it had never busted, so nobody ever thought to correct it. But it got so out of hand, it broke the

system, and we're still really healing the wounds from all that, all that, the demise of interbank trust. Let's zoom now to the Bitcoin part of the story. You have a great chapter that's sort of set up to frame it for, if someone just picks up your book, who's never really spent any time thinking about Bitcoin, they could get into it. Obviously, I think that this audience is probably a little bit more up to speed than that. But let's talk about your concept of layered Bitcoin. What does that framing mean to you? Layered Bitcoin, the basic idea of it is that as money is inherently hierarchical, as we proved with gold, Bitcoin is the same. Because Bitcoin is money, there are those that will demand the Bitcoin itself, and there are those that are okay with accepting

the promise to pay Bitcoin in the interim. And in Bitcoin 101, this is the idea that if you have Bitcoin private keys, you have first layer Bitcoin. And if you have Bitcoin on an exchange, you have second layer Bitcoin. You don't actually own Bitcoin. You have a liability of an exchange, which is due to a Bitcoin balance. If you demonstrate, mandate. And exchanges have gained the confidence for people to hold their second layer forms of money because when people ask to withdraw and provide a Bitcoin address and hit withdraw, the Bitcoin settles to that address. And the mere fact that exchanges, when faced with a withdrawal request, meet that withdrawal request, has built a trust in that exchange's deposits. I'm not naming

any single one, there are now many exchanges that have had the trust of the public for many years now. And we don't have to single any out one way or the other. We know we have had exchanges in the past that have failed, but that's only a small part of the story. When you demand your Bitcoin from an exchange and it pays, that itself garners a trust. And that is, that's layered Bitcoin. This first and second relationship between Bitcoin and Bitcoin on an exchange is the basic premise. We can apply it to the Lightning Network, and that is the origin of a lot of my research in Bitcoin. But that's actually a separate idea away from this idea that Bitcoin is inherently hierarchical because people accept promises to pay it. how has this way of looking at Bitcoin, how does it change your thinking? How does it change one thinking

as they kind of engage with the space? What is kind of the practical utility of this way of looking at the space? I know that this has been a journey for you that's kind of been your own kind of rabbit hole around it. How is it reshaped how you look at, you know, kind of both the current landscape, but also what comes next? It's my way of giving the moniker digital gold a whole book to explain why. So I've always thought of Bitcoin as digital gold because I studied gold before I came to Bitcoin. So I've always thought about it as this idea of digital gold and I've loved that analogy. But the analogy needed a story. And so that's what layered money tries to do. It tries to tell the story of why Bitcoin is the, it's not

digital gold now. It's the first layer money of the future using gold as the first layer money of the past as an example to set up why. It's not, Bitcoin is more than gold. It's more than digital gold. It is a first layer money that can anchor a whole financial system. Gold failed. at doing that and was removed. So by definition, we don't as, you know, those that theorize about Bitcoin, we don't want to emulate gold by itself, an only gold. We want to take the important properties from it, but then build a better system on top of it. So that I think that is why I wrote the book, it's to tell that story.

I mean, it sounds like, you know, to kind of try to like add a little clarity to the analogy. It's like digital gold is an incomplete assessment when we're just thinking about gold as a brick, right, as an asset, rather than as the foundation for an entire economic ecosystem that has it as a central pillar. Right. And that's kind of your point is that digital gold insofar as we understand that a new set of institutions, interactions, exchanges, you know, tools, et cetera can be built on that digital gold. Then it becomes an accurate analogy. It's not just a Bitcoin equals a brick of gold or something like that. Can you write my outro?

Yeah. No, you're absolutely right. You know, that it's a great way to describe it. because you don't want to call it just gold because gold is a brick. If you just call it digital gold, you're not assuming that the reader or the audience understands that gold was the anchor of the financial system for a thousand years and more. So, you know, it's a great point. One of the things that I found most interesting about the book was the, you kind of do a little bit of forward looking into the central bank digital currency era. I guess talk to us just a little bit about how you started to kind of pay attention to what was going on in that space and what how you think it interacts with this, what you're paying, like what you're trying to keep an eye on, just how you see it kind of playing out or from where we know, where we are now and what we know now.

I'm an adjunct professor at the University of Southern California Marshall School of Business. And as a professor teaching my students fixed income, the bond market and interest rates, it's not. not a Bitcoin class or having anything to do with financial technology. But as I was teaching this class, I started to realize that central banking digital currencies, central bank digital currencies, CBDCs are going to be part of my curriculum, whether or not I want them to in a few years or maybe even next year. So that was the catalyst for me starting the research on it, just trying to understand what they are and how to how to, how to, explain them to my students.

And then, you know, zooming out and thinking about this book and delivering a book about Bitcoin and about money to the world, we have to look at how central banks are going to change the way that they transmit monetary policy. CBDCs are going to be at the center of that. And really, I stumbled upon a lot of the, you know, my projections in the book really late into my research. It wasn't something that I had been focused on. really expressly.

How do you think about the relationship between Bitcoin and potential future central bank digital currencies? Is it an adversarial relationship? Is it adversarial but also symbiotic in terms of sort of opposites functioning in totally different ways? Is it something where it's just simpatico and it creates new digital rails that Bitcoin can flow through? I mean, there's a lot of different interpretations right now.

And a lot of kind of, we're still a little bit of. I find at the, I don't want to talk about that. I want to just dismiss it because it's not what I'm interested in kind of phase of CBDCs, whereas I think a lot of folks who are digging in are like, it feels inevitable. We got to sort of understand how it plays out. Yes, I think that it only adds to the adoption of Bitcoin because people understand now that money is, money is maybe not as it seemed to them before in a post-Bitcoin world. So Bitcoin will coexist with all these CBDCs that are going to be issued. They will be issued, by the way, they're all coming. I talk about it extensively in Chapter 9, but if you are bored by Central Bank digital currencies, you know, you can feel free to skip it.

It's not, there's nothing there that really changes the story. And the story is that Bitcoin gives us the freedom of currency denomination. We can now choose our country. currency. So in the future, people won't just keep their own government currencies as their only currency. That's the bottom line. It already has happened for over 100 million people around the world, that this idea that they only have one currency in their wealth arsenal is obsolete, completely. Many, many have two and some have even more. And one of those currencies is going to be Bitcoin, everywhere you look at the individual level, the family level, the investment management level, the corporate level, the government level, the banking level, and the central bank

level. They're all going to own Bitcoin, every single one of them. And so when we see a world in which every member of society owns Bitcoin, it simply functions as a complement to the rest of it. Bitcoin is an independent currency. governments might not accept Bitcoin for taxes or they won't pay Bitcoin for your benefits. And so by definition, other currencies will exist that are not named Bitcoin. And so that's the world I think that we're heading to.

It's the world that we're living in today where Bitcoin is the complement to everything else. People that choose it have the freedom to choose it as long as they are in most of the countries in the world. Governments are not going to come in and ban the ownership of business. Bitcoin together. That's not going to happen. There are too many companies that pay too many taxes that are dealing in Bitcoin now for that to happen. Take the United States. The United States is not going to come in and ban the ownership of Bitcoin or the trade of Bitcoin. It is the center of the Bitcoin entrepreneurship boom. All the companies are here,

you know, relatively speaking. And it's amazing to watch. Bitcoin is a very American idea itself because it's a freedom tool. And people recognize in America the empowerment it gives people that are not American in other currencies, I'm sorry, in other countries that want to earn Bitcoin and give themselves independence from a corrupt government. And so that is the conclusion of the book. It's chapter 10, freedom of currency denomination. Central Bank digital currencies are coming, but it doesn't change the fact.

that we have Bitcoin now and Bitcoin is empowerment. Nick, I love the book. I'm super excited to talk to you today. I guess just to kind of wrap us up here, when you think a few years down the line, when you're updating this, what do you think the next chapter that you'll have to add is? That's a great question.

I've been thinking a little bit about that. I think it's more technical on how the Bitcoin layered money system is evolving. because right now it's a little bit of the Wild West, but there are a lot of interest rates emerging, and there's a yield curve emerging on Bitcoin. And so it might have something to do with how much the Bitcoin system itself is developing. And really, the speculation that I do at the end of the book is how are CBDCs and Bitcoin and bank-issue tokens we call it. call them stable coins all going to interact with each other. What are central bank digital currency

is going to look like? Are they going to be retail facing or not? If they are retail facing, do they replace banks? What happens to the banking system in the United States? What happens to it in China where they say that there are going to be no renminbi denominated stable coins allowed in their financial infrastructure? All of that is going to unfold over the next two to three years and then we'll get an update. Awesome. All right. Well, we're going to have to have you back to chat about it soon. Nick, thank you so much for hanging out today. Really appreciate it. Thank you for having me. I had a great time.

Reflecting on that conversation, I want to come back on what I think is the key distinction that Nick is trying to make in his book. When we say Bitcoin is digital gold, most people hear a digital store of value, a digital inflation hedge. They focus on the properties of gold that are about limited supply and value over time. Nick, I think, is arguing that the gold analogy actually needs to come back in some ways to our previous understanding of gold, an older understanding of gold, as the foundation of a larger, complete monetary system. In that analogy, the evolutions we're witnessing now are the layers forming around Bitcoin the asset that are allowing it to fulfill that role of financial system foundation, albeit in a radically more dynamic

way than gold ever could. It's an important reminder that while analogies can help us make sense of complex phenomenon, they can also become traps, as limiting as they are illuminating. With that, though, I'm going to wrap. I hope you guys enjoyed this show. I hope you go follow Nick. I hope you order and download this book. It's an awesome read, and I know that you're going to like it. Until tomorrow, guys, be safe and take care of each other. Peace.