The Wolf Of All Streets - DeFi Is The Future Of Finance | Campbell Harvey, World-Renowned Economist

Episode Date: November 11, 2021

Professor Campbell Harvey is a world-renowned economist and professor known for being ahead of the curve in the world of finance. Learning about decentralized finance was a life-changing experience for Professor Harvey, which started him on a path of educating his students and the world on crypto. Professor Harvey has written a book titled, “DeFi and The Future Of Finance” and spends his time diving deeper and deeper down the crypto rabbit hole. -- Arculus: Arculus is the new crypto cold storage wallet that combines the world’s strongest security protocols with an easy-to-manage app. Store, swap, and send your crypto all with a simple tap of your Arculus Key™ card. Order the safer, simpler, smarter crypto cold storage solution today at: https://thewolfofallstreets.link/arculus -- Kava: Kava connects the world's largest cryptocurrencies, ecosystems and financial applications on DeFi’s most trusted, scalable and secure earning platform. Kava lets you mint stablecoins, lend, borrow, earn and swap safely and efficiently across the world’s biggest crypto assets. To learn more visit https://thewolfofallstreets.link/kava -- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co ーーー Join the Wolf Den newsletter: ►►https://www.getrevue.co/profile/TheWolfDen/members

This podcast is sponsored by Kava and Arculus. Stay tuned for more information about both of them later in this episode. What's up, everybody? I'm Scott Melker, and this is the Wolf of Wall Street's podcast, where two times every week, we talk to your favorite personalities

from the worlds of Bitcoin, finance, music, art, sports, politics, basically anyone with a good story to tell. Now, today's guest is a world renowned Canadian economist who is famous for quite a few things. He was the first to show that inverted yield curves can predict a recession. He was the first to argue that half of the empirical research in finance is false, which I think we can all agree with, and has also done important studies in behavioral finance and corporate finance. But maybe most importantly

for us, he recently wrote a book called DeFi and the Future of Finance, which is something that I know that you are all very interested in. I can't wait to dig into that and see what he believes the future of finance is. So Campbell, Harvey, thank you so much for joining me today. Great to be on the show. So first, let's just dive right in. How did you first get exposed to the crypto space and what did you find interesting and why did you go down the rabbit hole like so many of us? Yeah. So first thing is that I'm just not writing this fad and put out a book because I got interested last year. I've been in this game for seven years. And seven years ago, I came off a teaching hiatus. So I didn't have any teaching responsibility for six years because I was editing the Journal of Finance, which is the top journal in my field. It's a full-time job.

And I'm going back into the classroom and I want to do something different. I don't want to use the same slides that I used six years ago. We've all been there in the college classroom where the professor pulls out this old deck from 20 years ago. I didn't want to be that person. So I decided to do something different. And one of the topics I do is foreign exchange. So I figured, well, what about this cryptocurrency thing that I've heard about, but I don't know much about? So the first stop was the Satoshi Nakamoto white paper. So it's a paper that's not published.

It's not peer reviewed in the usual sense. It's just on the internet. It's not that long. I read the paper and, oh, this is a good idea. This is a great idea. And I read it again. And then I was convinced I'm going to do this in my course. I will devote a two-hour lecture to cryptocurrency. And the total number of lectures is 12 in my course. So I started, as you say, down the rabbit hole. And this technology is just so elegant. It is the confluence of research in computer science and distributed systems

and cryptography and economics, game theory, and financial economics. You put that all together and you get something really powerful. I did this two-hour lecture and it was a very weird experience for me because usually I'm super prepared in asset management. I'm well-published. I've got outside relationships. The probability of a student putting me on the spot and embarrassing me by saying, no, you got this wrong. And I know for sure that probably was very high in this lecture because I'm not a computer scientist and I haven't done master's or PhD work in cryptography or distributed systems. So I was really nervous in this lecture. And at the end, you know how it is in college where as soon as the lecture's over, everybody just gets up and leaves and right on the hour. So I finished and

nobody got up. And I said, oh, I made a mistake with the time, but no, it was time. And then my second thought was, oh, this must have really bombed, but it was the opposite. Students came up to me and said, you need to transform this into a full course, not a two-hour lecture. And that's where I began seven years ago. And I've offered a course called Innovation and Crypto Ventures. I've got a second course called tech driven transformation of business. I've got four new Courseras that I put out on decentralized finance. So it's a total of about seven courses total in this space. So I'm all in. It's funny, I've had quite a few professors on the show, and I've interviewed

them, and all of them basically say the same thing, which is that my students often are smarter than me on these topics, and that I fear that they're going to make me look bad, just as you did. But I think that that's obviously a statement as to what the younger generation is interested in, and perhaps that that's a very, very glaring, obvious statement about what the future of finance is going to look like, right? So you, you, you, they're the ones who are going to be in power. Millennials are going to be the ones with all the spending power in the next four or five years as money transfers from their parents as they come into their own.

So you obviously wrote a book about this, Defy and the Future of Finance. What do you think the future of finance then looks like when it's in the hands of millennials? So it's kind of interesting what you just said that they will inherit the money because they will also inherit the debt. So we have racked up just an enormous amount of debt. So my generation is handing off a liability that is massive. And it's not just the headline debt, but all of the unfunded liabilities. So you've got basically three different options here because debt needs to be paid off. And number one is to increase taxes. And we know that that is toxic for growth and nobody wants that to happen.

Number two is to print money. And we know what the result of that is. Inflation, that's just a tax. And number three is to increase growth. And my book is about reducing frictions so that we can increase growth. So decentralized finance, think of decentralized finance in the simplest possible model is you're trading. So you want asset two, you've got asset one.

So usually go and use a broker for that. In decentralized finance, you trade with an algorithm. So you send asset one to the algorithm and it sends you back asset two or vice versa. There's no middle layers, just an algorithm. The algorithm doesn't care if you're a buyer or a seller. And you basically, this is a peer-to-peer mechanism that's very efficient. You get rid of all of these frictions that exist today. Indeed, if you look at our financial system today, I argue it's not that much different than 100 years ago. We've got essentially the same banks, the same exchanges, the same brokers, insurance companies.

Yes, there have been some mergers. Yes, there's some digitization, but the structure is basically the same and it's very inefficient. So this idea of interacting with algorithms, which we call smart contracts and decentralized finance, it is actually not that far-fetched. Indeed, in the future, it's not that unreasonable to think that we will be interacting with algorithms in many different technologies, not just decentralized finance. So this is a technology that fundamentally reduces frictions. And let me give you an idea of what I mean by reducing frictions and economic growth.

So this is an example of an entrepreneur that has got a really good idea. The rate of return that's projected is 24%. She goes to her bank. So she is fortunate to be banked. She goes to the bank and asks for a loan to finance this project, pitches the idea. And the banker actually likes the idea. Hey, I like this idea, but I would rather deal with one large customer than a hundred customers like you. But given that you're a client of the bank, you've got a credit card. What I'm going to do is to increase the credit limit on your credit cards

so you can withdraw from that. And we all know what the interest rate is. So effectively it wipes out the rate of return on the project. The project isn't pursued. This is what I call underbanking. And the problem with this is that that 24% rate of return project is exactly the kind of project that we need to drive economic growth. We in the US are stuck with 2% real GDP growth. In Europe, it's 1%. In Japan, it's zero. So there's no chance of growing out of this kind of lethargic growth without reducing these frictions, making sure that a good project is pursued, like this 24% ROI project.

And traditional finance, I believe, a Western Union transfer from 1873. So it's almost 150 years old. And what's interesting is the following. The transfer is for $300, but there's a fee that's associated with this transfer and it's nine dollars so three percent and we pay three percent routinely when you swipe a credit card so i say that so little has changed uh somebody uh attacked this on on the internet saying it just wasn't true, that they actually went to a Western union and tried to do a $300 transfer. And the fee was way more than $9. Yeah, that was my response to that was going to be if anything's changed, those fees have gone up. Yeah. So we've seen that

coming to the forefront, obviously, with company countries like El Salvador adopting Bitcoin as legal tender, that's really brought in the spotlight the problem with remittances and how predatory those fees really are. It's eight or 9% usually if you're sending it to a foreign country. Exactly. So that type of friction is essentially eliminated in decentralized finance. So think of decentralized finance as a technology of financial democracy. And let me give. But if you're rich in Venezuela, you're effectively hedged because you've got a bank account in US dollars in Miami. So the inflation is annoying, but your wealth is secure because it's in US dollars. Whereas the average Venezuelan is hammered by this hyperinflation. So it's incredibly regressive.

But with decentralized finance, your bank is your smartphone. And most have smartphones. So you can think of your smartphone as a vault. And in that vault, you've got tokens that are linked to the US dollar. So this is, again, an example of financial democracy, where it's not just the rich that can get this bank account offshore in US dollars, it's everybody. And if you think of the implications here, you've got a country who's got a reckless fiscal and monetary policy whose central bank is disintermediated by cryptocurrency. And we can actually make the, the central banks have some competition.

And there's a disciplining effect of the cryptocurrency. see more of that. Indeed, maybe at some point we talk about central bank digital currencies, which I think are purely a reaction to this competition from the current list of cryptocurrencies. Sure. I agree. And what you just described is really step one, right? They can obviously hold their money in stable coins, which holds their value in dollars. And I think a lot of, obviously, crypto enthusiasts would argue that step two is then putting that money in Bitcoin, which then hedges you against those dollars that allows you to grow and hedge against that inflation. So I think that's different. So Bitcoin is mainly a speculative store of value. And I want to make this really clear that when I started my teaching, it was 100% Bitcoin because that was the only thing available practically. So decentralized

finance uses a different blockchain technology. And in Bitcoin, you can send from one person to another person. So it's a transactional technology. In Ethereum, you can do the same thing, but it's got this other feature that you can asset one to the algorithm and then the algorithm sends back asset two, that is a very special feature where you can actually embed a computer program in the Ethereum blockchain and run it. So you cannot do that in Bitcoin. So decentralized finance mainly focuses on the technologies that reside within the Ethereum blockchain or Ethereum-like blockchain. So it's competitors to the Ethereum blockchain. The listeners here are very, very savvy as to smart contracts and obviously Solana, Avalanche, Elrond, Algorand, and all the competitors to Ethereum, of course. And now, obviously, there's a lot of development happening in DeFi on Bitcoin as well through projects like Stacks and Sovereign that are actually enabling smart contracts on Bitcoin. But I want to circle back to something you said. I think that everyone here, certainly all of my listeners and myself, agree that decentralized

finance is a superior system, certainly in a vacuum, the problem is regulation and the countries and corporations that lose out when you eliminate the toll collector and the third party, which is obviously them, right? So we see regulation, heavy-handed regulation likely coming in the United States and perhaps in other countries. But also, this is a major threat to some of the biggest companies, the world banks, Visa, MasterCard, PayPal, Venmo, you name it, anything in payment. So do you believe that decentralized finance will be allowed to exist in its optimal state? Or do you believe that a lot of what we love about it will be regulated away or will be such a threat to those systems that they won't allow it to happen? So not an easy question to answer, but let me try. So the regulators have a difficult job.

I do. And they're fully aware of the trade-offs. So right now we're essentially unregulated. The Securities Act of 1933 obviously didn't mention cryptocurrency. So we're unregulated. The Securities Act of 1933 obviously didn't mention cryptocurrency. So we're unregulated right now, but this is the trade-off that if you do nothing, then people will be taken advantage of. And indeed, that is the genesis of the Securities Act of 1933, all of the abuses that took place in the late 1920s. So the SEC is charged with protecting people, and that's a fine objective. harsh in the regulations, then you basically squash innovation or you drive the innovation offshore. And no country actually wants to do that. So you need to find a balancing point to trade these two things off. And it is a challenge. And it can't be that the objective is to reduce all risk.

With any new technology, there will be risk. If you want something risk-free, invest in treasury bills. So we need to take some risk here. And the regulators are also challenged because this technology is not simple to understand. So you need to invest time in understanding the technology. And then even after you make that investment, the technology is changing so quickly. So this year when I taught my decentralized finance course, 85% of the material was new.

So you need to continually invest. And then number three, it's really hard for the regulator to attract talent that knows this space because that talent has got many other options. So it is a challenge. What we see is the regulator going after low-hanging fruit. So for example, Coinbase says, well, it is really easy in decentralized finance for us to get, let's say, a 6% rate of return on a savings deposit in some DeFi protocol. And so they say, well, what about if we offer 4% to our customers? And they don't need to invest in Bitcoin or Ethereum. They can do it fairly risk-free with US dollar coin. So a stable coin linked to the US dollar that Coinbase actually guarantees at a dollar. So you make a deposit and then you get a 4% rate of return, which is vastly superior to what you get in the market.

Indeed, you would have to take a lot of risk to actually get a 4% rate of return. And this is very low duration. So this is not like putting your money for 30 years. So they get served with the Wells notice saying this is certainly looks like a security. I'm pretty sure that Coinbase knew that already. And they're playing kind of a longer term game. And they had to withdraw this. So I guess if you think about this, why did the SEC go after Coinbase

when there's plenty of protocols out there that you can get 4% or greater rate of return? So they go after Coinbase because Coinbase is a centralized broker slash exchange. So they are not what we call decentralized exchange. So what I described sending asset one to a smart contract and asset two coming back, that's the decentralized exchange. Coinbase is a regular broker. It's got a CEO, a board of directors, a headquarters. So essentially the SEC goes after them. Now think about the alternative where the SEC goes after a decentralized protocol. How do they do that? So how do you serve

an algorithm? And even if you somehow could shut down all of the nodes in the US where that algorithm is running, well, that doesn't shut it down globally. It's all over the world. Like what happened with Bitcoin miners in China, right? The hash rate dipped when they eliminated 60% of the hash rate and immediately came back over a few months. And that's a much bigger system than any of the ones you're describing. Exactly. So I think that it's really a difficult thing for the SEC to go after a decentralized protocol. You might think, oh, well, maybe what they can do is to go after the users.

So these people putting money in, getting a 5% rate of return. But that doesn't make any sense because the SEC is mandated to protect those people. Why would you go after them? So again, it is a big challenge, but nevertheless, we do need some regulatory clarity. I think that's really important because just the fact that there's uncertainty right now, that uncertainty is causing some innovation to go offshore. So let's set up in the Caymans because there's some risk that the SEC is going to come after us. So we do need some sort of clarity, some sort of framework. And I also believe that our policymakers, at least the economists amongst them, understand the potential here.

So there's very few things that economists agree upon. One of them is that reducing financial frictions, reducing transactions costs is a good thing for economic growth. So they see the potential here. They see that our current system is not serving us well enough. They see that economic growth is being held back And a good dose of competition could actually be very helpful. So you can expect that the banks, the exchanges, the insurance companies are going to fight. The Federal Reserve will fight. It's all of a sudden got competition. I'm not sure you've seen this. It's really

interesting. So Circle, who does the USDC, US dollar stable coin, has applied to become a narrow bank. So very interesting because let's say you've got $20 billion, you've issued 20 billion of USDC, you need to keep that 20 billion safe. So you can buy some treasury bills, let's say, but if you deposited that 20 billion in the bank and the bank fails, then you're basically, you break the buck and potentially you could lose a large amount. So the stable coin is no longer stable. So Circle's idea is to become a narrow bank. And for those that don't know what a narrow bank is,

let me describe a usual bank. Usual bank, somebody deposits, let's say $100. They take $10. The bank takes $10 and that goes as a reserve to the federal reserve. And the other 90, they lend out and make some money off of that. So a narrow bank, they take your a hundred dollars and put $100 with the Fed. So there's 10% required reserve and 90% is excess reserve. And the Fed actually pays a small interest rate on the excess reserves. So there's no lending function. This is what the narrow bank actually is. So the reason I'm telling the story is that it's interesting to me personally, because if that ever happened, then effectively,

we have a central bank digital currency, which is USDC, because the Fed is 100% backing it. Without the Fed even being involved, it just happens. So it is remarkable that something like that is even possible, but the Fed will fight that. So that's competition for them. They will fight this, in my opinion. It's a superior to a central bank because they can just print more. Of course, with the central bank digital currency, the Fed has control of the money supply. So a central bank digital currency, while it might use distributed ledger technology, it's not a cryptocurrency. It's a fiat currency that's digital. In fact, one could argue that it's a wet dream for

central bankers because it gives them impeccable and perfect control of every transaction rather than actually having to do some guesswork when there's cash out the system, right? Oh, yeah. So it's really interesting. And the leader here is China. And I think that they will be the leader in central bank digital currency because they can do what they want. Yeah, they don't care about privacy and freedom. freedoms. So can you imagine in the US that a proposal is put forward whereby the government can see every single transaction citizens make? And potentially, again, the government can 100%

tax you. So they could wipe out your account if you've done something that they don't like. So maybe that can work in China. They're kind of used to that. In the US, I think it's an extreme long shot that we'll have even a parallel central bank digital currency in the next 10 years. So it's also interesting that, I said earlier, that part of the interest of the central banks in the CBDC is competition. But there's other reasons. So for example, you have instant monetary policy, right? So you want everybody to have a thousand dollar check. It's just happens with the line of code.

It is extreme precision in control of the money supply. And it's also very efficient in taxing. So you think in Europe, why do they have like a 15 to 17% value added tax? It's so high because many people just use cash, right? So you pay for somebody to do a job for you, you just pay in cash and you avoid that. And they have to keep on raising it. The more they raise it, the more people use cash. So this is a way to transact very efficiently in collecting taxes. So for VAT, for a border adjustment tax, very efficient. You want negative interest rates? No problem. Like today, it is a problem. If the

rates are negative enough, I just hold paper currency. And paper currency is a zero interest rate. So why would I pay negative two in a bank where I could just hold the currency at zero? So they can do whatever they want. But the one thing that they haven't actually taken into account is that, in my opinion, the central banks have already lost control of money, as we know it. There are other ways to actually transact or to hold. And this is the idea in decentralized finance. We talked about exchange. There's also savings and lending, which we talked about a little bit.

But there's also savings and lending, which we talked about a little bit, but there's also tokenization. And tokenization, we've talked about a little bit in terms of USDC, a stable coin, but it doesn't have to be just a central currency. It could be gold. It could be IBM shares or Apple shares. There's many different things that you can tokenize. Well, indeed, I think you can tokenize almost everything.

So your wallet changes. So your wallet used to be US dollars or credit cards linked to US dollars. Your wallet is transformed into a portfolio of different inputs that you can use in terms of transactions. So I believe these central banks are too late, that the horse has left the barn. They will resist, but I think that at some point, they need to realize that they've lost this game. Guys, unless you've been living underneath a rock for the past few months, then you've definitely heard me talk about one of my favorite platforms, which is Kava. Kava connects the world's largest cryptocurrencies,

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That's A-R-C-U-L-U-S. And they're offering $40 off if you use promo code Arculus40. Secure your assets, secure your future with Arculus. And what you just described is why so many people who have been interested in non-fungible tokens and NFTs for a long time believe that that really is the future of value transfer, even beyond obviously the art and collectibles scene that we is the future of value transfer, even beyond obviously the art and collectibles scene that we're seeing sort of bubbling at the forefront. An exchange of literally any value can be made with a non-fungible token if you tokenize the asset, right? Like you said, stocks certainly, but that could be your car title. It can be your mortgage. It could be

your medical records. Literally anything that needs to be sent from one person to another and proven authentic can be done on the blockchain with an NFT. Yeah. So though I don't think you'd be paying for your groceries at Whole Foods with your medical records, but you never know. Yet it is, if you think about the future and think about that stop at the grocery store where you go to your wallet and say, I think I'm going to pay with some gold.

And it turns out that Whole Foods doesn't accept gold. But that's not a problem because you go out and this is completely seamless. You go out and effectively transfer or exchange that gold token for something else that Whole Foods wants. And you're done. You don't even, again, it's really simple user interface. The only thing you need to decide upon is what you're going to pay with. So just so many different options here. So outside of stable coins, which we've obviously discussed, we know that they're pegged to the dollar, very easy for people to understand. I think you start to go further down,

I guess what someone would describe as the risk curve, and you have all of these assets, right? And all of people want to use them for payments. They want to use them for different things, but they're volatile, right? And for people, I think, who are familiar with trading or investing in other assets, they like to make the claim that there's no fundamental value to crypto, right? How do you give it value? There's no P&L and there's no quarterly earnings like a company. So how do we value these individual coins? If I knew that, we wouldn't be talking. I'd be looking to buy a yacht or something. So obviously, this is a very challenging question. How do you value something? For example, a stock, it's got some expected earnings, the dividend yield, something about what they do,

and you can come up with some fundamental value. And maybe there's some disagreement. So maybe the consensus is $40, but some people think it's worth 30, some people 50. So there's a range of value. So when you talk about something like Bitcoin, well, there's no obvious cash flow, there's no dividend yield, there's no expiration or maturity. It's got value because people believe it's got value, the people are thinking that it will appreciate over time, and that will be their cash flow. Luke Gromen, So it doesn't have fundamental tangible value, but it does have intangible value. So it does allow us to do things. It is a method for transactions that are large.

So earlier this year, somebody moved 5.4 billion in Bitcoin in a single transaction. The whole thing took about a half hour. And the fee, of course, everybody can see this. The fee was $19 on 5.4 billion. That's pretty good. Ethereum is different as you know, because you can run computer programs in that blockchain. So it actually has some functionality that's different than the current Bitcoin technology. So Amazon Cloud has got value because it provides a service like this and is the backbone of many protocols that actually do things like savings, like lending. So I think that you put this all together, Bitcoin and Ethereum are very volatile. So think of them as four or five times the volatility of investing in the stock market or investing in gold. Gold has

about the same volatility as the S&P 500. So there's definite risk here. But the key thing is that there's many different ways to mitigate that risk. So you don't need, if you don't want to take the volatility risk of holding Bitcoin or Ethereum, there are other possibilities in terms of much more stable or collateralized coins. So there's a range of possibilities here. As for investment in the space, and, most of the demand for, let's say, Bitcoin is being driven by speculative demand rather than the transactional mechanism, the 5.4 billion that I mentioned. So it's a lot of speculation. It is a risk on asset. And the evidence of that, even though there's not a lot of history for Bitcoin, but go back to March 2020,

the stock market tanks 35%. Bitcoin drops by 55%. Of course, I love that example, but people forget to mention, and not you necessarily, that Bitcoin then went up 17 times while the stock market doubled. That implied volatility is to the upside. Absolutely. Absolutely. It's a risk on asset. So when the stock market recovered, what happened? Bitcoin goes up in value. So again, if there is a crisis where there's a very substantial decrease in value for the stock market, people dump their risky assets, right? They're dumping their equities. They're dumping their crypto.

So you can't be naive about this, thinking that, oh, well, it's just going to keep going up forever. There will be ups and downs. We've seen these ups and downs. So 2018, there was 85% drop. And those that bought at $20,000 in 2017 and then sold at 5,000 in 2018 are obviously the type of investors that they need to take my class. These are investors that buy high and sell low when we should do the opposite. So even if you bought high at 20, but didn't sell, you're looking pretty good today. Absolutely. I would argue that

those people would have lost money in any asset because of the very nature of the kind of investor they are, as you said, and that's not unique to Bitcoin, but we know a lot of people who did it, right? It's very hard to buy when everybody's fearful and to sell when everybody's greedy. Easy to say, very, very, very hard to do, right? Agreed. That's not the way that humans work, unfortunately. So do you believe that the platforms that we're seeing now, sort of in the infancy, I think we could all agree, of DeFi are the ones that will be here in the future? Or do you think that we're going to see a whole evolution of this space and that these will not necessarily be the Facebooks and Googles and Apples, but that those will be replaced by something bigger and better? So there will be

innovation well beyond what we see today. And it's kind of obvious. And indeed, this space invites the innovation in so many different ways. So these protocols in decentralized finance are all open source. So everybody can see the code. So if you've got an idea as to how to improve one of these protocols, well, you just grab the code that's out there

and bolt on your idea and you're ready to go. So you can be ready to go in a week. And if you think about traditional finance, you're, let's say, doing some online banking and you've got an idea as to how to improve that experience for the user, what's going to happen there? Well, it could take years before the bank does anything. They've got to deal with potentially millions of lines of legacy code, often in COBOL, this ancient language that's really difficult and inefficient to work with.

So it's really difficult to innovate in traditional finance, whereas in decentralized finance, oh, well, here's a good idea. Decentralized exchange, Uniswap, all of a sudden you've got SushiSwap, you've got PancakeSwap, you've got all of these other competitors that are out there,

maybe offering a slightly better deal for the user. It's a really interesting environment where the pace of innovation is so fast because of the open source nature of the technology. So will the same players exist in 15 years that are around today? Well, some of them will. But there's going to be many new ideas. And this is all good news because this is exactly what we want. We want this constant and rapid improvement to get as close to possible to the goal. And the goal is to have a financial system that's inclusive. So everybody is banked. Everybody has got access to funding their good ideas. Everybody is treated equally. So financial democracy. That's not the system that we've got today. Our system is centralized.

And what I mean here is the very large banks have huge market power. That's the reason that the savings rates are so low. They've got this huge power. And with market power, it means that prices are distorted. So the users, the consumers, the borrowers, the savers, they don't get the best deal. So this technology has got the potential of changing things. And it's also interesting to me that there's an intermediate step going on, and that's the current fintech. So the current fintech is basically

increasing the efficiency, so reducing costs for the users. And the banks are feeling a lot of pressure, and the traditional brokers feeling a lot of pressure from this. And it's all good for consumers because it drives down the transactions costs. But there's a limit. One of the speakers in my course made the statement that the current fintech, like Stripe and Plaid, was like putting lipstick on a pig. And what he meant was these technologies use the centralized architecture, so they improve upon it. And again, it's a good thing to improve because it actually reduces these frictions. So it's good, but they can only go to a certain level and then they can't go any further using the centralized

architecture. So decentralized finance doesn't use the centralized architecture. It rebuilds our financial system from the bottom up. Yeah, they're all going to be Blockbuster. No matter how much you try to innovate, no matter how many different little things Blockbuster gave you to buy at the checkout aisle to get candy and try to offset their losses, that doesn't work forever. And eventually you're going to see, I think, DeFi replace it all. It's interesting because before the last year or two, before we had sort of a change of the guard in the United States, Brian Brooks, I believe, was at the OCC.

And they put out some pretty compelling material saying, listen, banks are allowed to test stable coins. There's a competitor to Swift and ACH. They allowed, as we've been seeing now, for banks to custody your crypto assets. So it seemed like there was actually a bit of momentum for these legacy systems to start to at least looking at adopting these superior technologies. I mean, just yesterday, MasterCard made the announcement alongside Bakkt that they're going to open crypto to every single one of their merchants. So some of them are not clueless. It's just a matter of them taking that next leap of faith and step

and adopting completely new technology. But like you said, most of them, it's too late, right? They can't do it. They can't do it. It would cost too much and they'd be too far behind by the time they tried. They're pretty much dead in the water. Yeah. Well, again, it's really a challenge because, and I remember 20 years ago making a decentralized finance pitch, a company that I was a partner with. And basically, we saw this friction in terms of foreign exchange trading at a bank.

So you want to buy, let's say, 100 million euros at the end of November, the bank quotes you a price, and then some other customer of the bank might want to sell, and there's a different price that's quoted, and the bank might want to sell. And there's a different price that's quoted and the bank makes that spread. So what we were pitching was a method to put those customers together. And given that a customer might have relationships with multiple banks, they created a network of peer-to-peer transactions that would be intermediated by the bank. So they would take care of the risk of

function and they would get a small fee for this, but nothing like the spread. So can you imagine pitching senior people in the bank? So here, can you spend all this money on this new technology that's going to cannibalize one of the most profitable things in your business. Yeah, very, very tough pitch. But I do believe these banks and exchanges, brokers, insurance companies, I think they get it, or most of them get it. And let me tell you a story that this is before COVID. So in 2019, I'm invited to talk to the senior people at a major exchange group. I can't say who it is. And I said, sure, what is the topic? And well, we're going to talk about crypto, which I thought was kind of a vague agenda. But nevertheless, I fly in, go into this room, and it's a very large table. At the table, the board of directors of this major company and all senior management. And I take my seat

and beside the chairman of the board, and we start, and the chairman says, we have only one question for you. How long do we have? So then kind of figured that out and kind of what you're saying, can they extend the runway? So, for example, the banks, all banks should have their own stable coin because it just makes sense in terms of being able to transfer money all over the world very quickly. Or they should be using somebody else's stablecoin. It's just kind of like a no-brainer that things like that just vastly increase the efficiency. So we will see all of the banks do blockchain type of stuff.

But in the end, it's just so difficult for them to innovate. It's just really a challenge when you get so big. And it's even difficult to attract talent. So the talent is not going to go to one of these big commercial banks necessarily. They're going to go to a startup that basically going to disrupt this bank. So it is, we will see a transition. In my opinion, some of the banks actually will survive. Their business model will be different. They'll be smaller, but they will transform themselves. And I also think, and this is important, that it's not a binary situation where you're 100% decentralized or 100% centralized. There will be certain things that will be more centralized. And this is especially a point that I emphasize in my course when students are pitching new ideas.

And part of the pitch is kind of a choice of blockchain technology. And sometimes they're pitching something that's completely decentralized when you don't really need it to be completely decentralized. So there will be a continuum, but nevertheless, the landscape will just be almost unrecognizable in 15 years compared to today in our financial system. Before we finish as we're running out of time, what's one more key piece of advice or a gem that you offer to your students in your classes? Well, for me as a teacher, and I'm fortunate that I work in finance because finance is about the future. My career has been built around giving people an idea of the future. So you mentioned at the beginning, my inverted yield curve work, where I pitched that dissertation at the University of Chicago, people kind of skeptical because there weren't that many recessions in my sample. Out of sample, I had to stand by my model. And usually after you publish something, the good scenario is it gets weaker, the effect.

And the bad scenario is it completely goes away. It was just a lucky finding. Well, this yield curve indicator has worked for the last four recessions. We haven't had a false signal yet. So this is about the future. And I kind of think that part of my job is to give a sense of the future. So you could be forecasting in different ways.

So you could be forecasting next day stock price. So it's kind of high frequency. You could be doing a more cyclical forecast, like the yield curve forecasting next year's GDP growth. There's a secular forecast also that talks about different phases of the business cycle. That's maybe three to five years. The most difficult forecast is the so-called structural forecast. And that's what I'm focused on in the next 10 to 15 years. What will the world actually look like? And I try to give my students a vision of what that world will look like. And many of my students actually go to traditional finance firms, which is fine. So I say, you're going to get some good experience. You're going to learn mainly about the next job is going to be at a startup in the fintech or blockchain space. So I guess what I challenge my students to do is to think big, to think about

the structural issues. Think about the problems that exist and technologies that offer the potential solution to those problems. after this course, which is pretty a rigorous course, if you think that you understand this technology, then I have failed as an instructor. So my job as an instructor is to guide you and you need to realize what you don't know. And then you need to continue to learn after my course. And only if you do that, will you be a disruptor. And if you don't do that, you'll be the disruptee. I love that. Anyone who's in this space, even part-time, but certainly if you're in it full-time, you can appreciate exactly what you just said because you wake up every day

and there's 10 new challenges and things that you completely don't understand that are presented on your plate. And you have to dig in and just attempt to keep up, but it's impossible for any human being, I think, to keep up at that level. I love it. And I love the vision of the future that you've presented here. Smaller banks, central banks having competition from decentralized finance. I think that's something that my audience can certainly wrap their heads around. So where can everybody follow you and keep up with you after this conversation? Yeah. So I mainly do LinkedIn, but also Twitter, at Cam Harvey. Thank you so much. I absolutely loved it. I would love to take your course myself someday. And I'm sure that some of the book also is available, you know,

DeFi in the future of finance. That's a good starting point. Everybody go out and buy it right now. I think that I think you should be convinced after this hour of conversation. Thank you once again. I really do appreciate you taking the time. Thank you for having me on the show.