 And, you know, in their own paper, they're saying that dollarization and then cryptoization are both mechanisms by which you reduce the control of central banks and more specifically the IMF over the ability of normal people to live their lives and engage in commerce. And they're explicitly stating it. And so if anything, the whole darn reason we got involved in Bitcoin in the days that we did. This is like a cheers, you know, they're raising their champagne glass to saying the thesis is not only correct, but good God, could you please stop because it's actually doing what you want it to do. Bitcoin, or at least cryptocurrency, is one of the biggest threats. Number two out of three, in fact, facing our world today, or at least that's the story being told by the International Monetary Fund, better known as the IMF. The IMF is one of the supernational organizations that plays a very large role in the coordination of international monetary policy among other things. But what are they concerned about? And why is it so dire? Well, it's cryptoization, of course, a word that you've probably never heard of, I certainly hadn't. But on this episode, boy, oh boy, are you going to. But before we get to that, my name is Adam B. Levine, and this is Speaking of Bitcoin. Today I'm joined as always by the other host of the show, Andreas M. Antonopoulos. Hello. And Jonathan Mohan. Hey, hey. Stephanie is out this week. So in their introduction to this section, the crypto ecosystem and financial stability challenges, the IMF explains that the rapid growth of the crypto ecosystem is ushering in a new era that makes payments and other financial services, quote, cheaper, faster, more accessible, and allows them to flow across borders swiftly. And quote, then going on to say that, quote, bank deposits can be transformed to stablecoins that allow instant access to a vast array of financial products from digital platforms and allow instant currency conversion, end quote. On the subject of DeFi, they say, quote, decentralized finance could become a platform for more innovative, inclusive, and transparent financial services, end quote. But it's not all good news, quote, despite potential gains, the rapid growth and increasing adoption of crypto assets also pose financial stability challenges, end quote. And it seems the biggest threat of all is a word that I don't think that we've heard much, but which I suspect that we're going to be hearing more in the future. Cryptoization. What is cryptoization? The IMF explains, quote, for emerging markets and developing economies, greater use of crypto assets presents some benefits, but also macro financial risk, especially with respect to asset and currency substitution, which, as I said, they refer to as cryptoization. So cryptoization is what happens when companies start to use cryptocurrencies in addition to or in place of their traditional currencies. Now, guys, I want to bring you in on this real quick before we kind of go deeper because there's actually a lot to go through here today. But this idea of cryptoization, is this just like a bastardization of hyperbitcoinization? Or what's your read on this particular word? And have you ever heard it before? No, I think that was the most appalling thing in this report was the damage done to the English language by these people, let alone traditional economics. But yeah, it's really a horrible word. It's one of those jargony words that mean nothing. Cryptoization is a conversion of some of the basis of your economic activity to cryptocurrency or crypto assets, I don't know. I think what it is really is a bastardization of digitization. And it's incumbent upon incumbents to try to vilify the new by coming up with some word. So digitization is the thing lamented by the music industry, right? Digitization is the thing lamented by the news industry because they've got unwanted competition from people who simply can't be sued out of existence or anything like that and who are making an old industry obsolete. And I think that's the essence of cryptoization. It's jargon for the thing we'd like to control but can't. And now we're going to turn it into some kind of scapegoat scarecrow thing. Well, the other term that they use that's rather jargony is dollarization. And I think that they use it as pacing, which is dollarization is apparently something that needs to be reversed or altered because of the dollar's infusion into the global economic system. And so cryptoization, I think, is them pacing this current term of let's destematize the risk of the US dollar in every single aspect of global finance and then pacing that term to crypto, which I think is sort of a hopeful statement because I too believe that we should defuse the dollar from the global financial system. So it's great that they're in the same breath attack in crypto that they do the dollar, but I can at least agree with 50% of what they think needs to be done. I'm just really surprised and shocked that they would come up with a list of the top three threats and cryptoization would make the top three, let alone the top 10. Really? I look at even the news that you can find everywhere, and this isn't even a niche opinion. And what I've been hearing for the past couple of months is supply shocks, supply chain inflation, inflation, inflation, supply inflation, inflation, stagflation, inflation. That's not in the top three, but cryptoization is. That's really surprising to me. It seems like such a missed opportunity because honestly I think the vast majority of even mainstream economics, pundits at least and economists more broadly, are really beginning to sound the alarm on inflation and the worst possibility of stagflation. Where is the IMF going? You know, cryptoization is the real threat for stability. I just find that like a complete misfire. I think it also comes down to just the whole Keynesian notion of, you know, you're right, you know exactly what you're doing. And if it weren't for that pesky 2% of the world that you didn't control, your model would have operated perfectly. And I think what they're looking at is this MMT death cult projection where everything works perfectly, but the moment you butterfly effect half a percent of the world that doesn't conform to your rule, that's where you blame the reality not mapping to your models. And I think what they're doing here is pacing the global collapse that's about to occur financially on to the fact that this half a percent of a butterfly of crypto is the reason why our perfection and our model didn't work as it was supposed to. A lot of people were posting this as well as the Bank of England report that said that crypto assets may cause the next big financial crisis alongside a talk I gave in 2016 called currency wars where I said listen, I'm going to blame us. The ultimate endpoint of this is that they're not only going to pretend that the economy isn't on fire, but they're going to blame the salespeople of fire extinguishers and those pointing to the fire exits for causing it. They're going to blame Bitcoin for causing the financial crisis inevitably happening. I said to 2016, this is one of the predictions that I didn't want to come true, but it seemed to be heading our way. And I ended that talk by saying, we didn't start the fire. It was always burning since the world's been burning. And it's exactly this. I mean, it basically starting to build the narrative and kind of put that in people's minds now so that when things start falling apart, they could be like, well, you know, as you said, Jonathan, if it wasn't for this pesky crypto that we don't control, everything would be perfect. Yeah, I mean, even within the report, something I thought was telling was when the IMF said that, quote, the banking sector can also come under pressure if the crypto ecosystem becomes an alternative to domestic bank deposits or even loans. Stronger competition for bank deposits through stable coins held on crypto exchanges or private wallets may push local banks towards less stable and more expensive funding sources to maintain similar levels of loan growth. To unpack bullshit when you hear it, imagine if a bank had to offer you more than 0% in order for you to deposit into your savings account and there was a market where they had to compete for you to deposit your money and interest bearing accounts. Their fear is that all of this defy lending and crypto deposit lending may make rates go above zero and that, you know, commercial banks just can't compete with that type of interest rate environment. The collapse in demand for our delicious rat kebabs and squirrel on a stick that we're selling in the park is caused directly by the recent opening of a steakhouse that offers delicious steak. Exactly. Exactly. Oh man, we haven't talked about this at all yet. I sent you this topic like an hour and a half ago and I was like, hey, we're going to talk about this, read this and you guys are already jumping way ahead in terms of where I wanted to go. But let's just talk about that for a second. This idea that the thing that is least able to be tolerated is any alternative to our singular mandated solution is the underlying theme in all of this, right? Is the just the fragility of the argument that they make, which is effectively that things would be going great if only people had no choice but to do what we're telling them to do. I mean, like in what non bureaucratic setting, right, where the whole purpose is just like an exercise of control is that even an argument that you can make much less one that you can make without getting laughed out of the room. That's not how things work in real life. But as far as the IMF is concerned, and this is not just the IMF, of course, the IMF is emblematic of a much sort of larger, you know, we know what's best. And if only you would just do exactly what we tell you to do without asking any inconvenient questions or saying, hey, maybe there's another way to do this, then everything would be fine. Again, it's just such a weak positioning to not be able to withstand even a single bit of competition in any sort of meaningful capacity or to be able to withstand a system or survive within a system where any alternative leads to the inevitable collapse. Because people don't want to do the thing you're talking about anyways. It's wild anyways. Well, here's the other thing. Again, to bring in the other report that came out today with commentary from the second chair of the Bank of England, Vice President, I don't know what their name is. Anyway, the second in command, who said that it may seem like a $2.3 trillion crypto market can't bring down the $250 trillion world economy. But if the price of crypto goes to zero and people have to call in their loans in order to pay off over leveraged positions, we'll see a repeat of what happened in 2008. And don't forget that in 2008, the collateralized debt obligations on real estate were only $1.7 trillion, which is smaller than the crypto market. And all I can think of when I hear that is, it may just be one tiny straw, but the camel's back was robust until that moment. It's like, do you not see the irony in the fact that you're saying that less than 1% of the economic activity, one that you claim is entirely based on idle speculation and has no backing in the quote, real economy, unquote, can actually bring down the 99.5% of the quote, real economy? And that isn't an indictment of crypto. That's an indictment of the fragility of the entire economic system that you're saying that unwinding those leverage loans are going to bring us down this time. Let's think this through, though, and I think that we do have vulnerability to this narrative because when the financial collapse happened in 2008, right? This narrative of, well, how much our credit default swaps as a percentage of the economy. And you're telling me the economy was so weak, you know, all we were doing was doing finance. I feel like they're going to set us up with the cryptocurrency community, the Bitcoin boxing community, to be the fall guys for when the next 0-9 happens. This time they're going to throw people in jail. But because it's not Goldman Sachs, it's Coinbase, it's MakerDAO. They're going to be like, you see, guys, we did learn we're now throwing the bad guys in jail. And the narrative is going to be like, these are the fault swap guys with their tethers and their, you know, smart contracts. And we did it. We learned our lesson. And now we're going to throw them in jail. And this is the priming for that narrative. Hey, listeners, this episode of Speaking of Bitcoin is brought to you in part by EasyDNS.com. EasyDNS and its CEO, Mark Jeftavik, have been a friend of the show since virtually the beginning, or the sponsors of more episodes than anyone. Just like us, their interest isn't in making money. It's about helping grow these revolutionary ideas, offering more and better choices to real people, while empowering free, very much legal speech, even as that's become increasingly unpopular. They offer domain registration, DNS, and email back-end service, along with anything else you might need to manage your little part of the internet. They've provided services to and stood up for outfits like WikiLeaks, even in moments when that was most difficult and have been extremely responsive whenever we've run into problems of our own, as of course we use them too. Typically, sponsorships of this show are just that. Sponsorships, not endorsements. But in the case of EasyDNS, I am willing to put my personal reputation on the line unsolicited, and strongly suggest that if you're looking for more from your DNS provider, I strongly recommend EasyDNS.com. So check them out, and you can use the coupon code SpeakingOfBTC, that's all one word, SpeakingOfBTC, to get 50% off your initial purchase. That's EasyDNS.com, and thank you very much for listening. So on the next episode of SpeakingOfBTC, we are actually going to dig into this particular question a little bit more, just in terms of like the current system versus a future system, and whether the current system and what parts of it perhaps are actually worth having if you have an alternative that doesn't work like this. I think, again, there's this broad argument sort of that financial stability must be maintained because the alternative is chaos. But the truth of it is that disruption always leads to disruption, and the people who are being disrupted are always the people who are the beneficiaries of the current system. And so there's very much like there's a conflict of interest here when these types of parties argue, and it's worth noting that this entire report is sort of written in this way. So we read the 24 pages or so that are devoted to cryptocurrency, and as you might expect, it's full of very cherry-picked data to attempt to make their case more convincing. And it desperately needs to be more convincing, because it's not particularly convincing even with this, but just to go through one very small example. On page 42 of the report, they say, quote, despite significant price appreciation, the return on non-stablecoin crypto assets are less impressive when adjusted for volatility. For example, the risk-adjusted returns of Bitcoin over the past year are similar to the performance of broader technology equities or the S&P 500 end quote. And then, however, investors are exposed to larger drawdowns. That's the next four words. Exactly. So again, like it's a weird thing to say because the S&P 500 is up 18 percent year to date 2021 while Bitcoin is up 97 percent year to date. So how can they say that the returns are comparable? The key is in that adjusted for volatility line, which means that even though Bitcoin has returned more than five X and equivalent investment compared to the S&P 500 just this year alone, because of the 40 percent drop in the spring of this year, which has basically all been recovered at this point. I think we're a couple of thousand below the all time high using the sharp ratio. They can say that Bitcoin, which again adjusts for volatility, they can say that Bitcoin returns a reading of one point seven five while the S&P 500 returns a reading of one point five. Now, the S&P 500 hasn't gone up very much, but it also, again, by nature of the extraordinary monetary stimulus and injections that basically have been driving markets for quite some time at this point. That again, like it has less volatility, so they picked the metric that makes the best case for them. And it's even worse than that. Actually, let's not forget that Bitcoin tripled in value that is grew more than 300 percent in the last quarter of 2020 alone. So we had 300 percent growth in Q4 of 2020 and then 97 percent growth off of that inflated number so far in the first three quarters of this year. There are a lot of ways to present data. And without belaboring it, it's just worth noting that the report is written in such a way where they can say that an asset which according to market watch grew from a price of eleven thousand two hundred and thirty one dollars exactly a year ago to fifty six thousand nine hundred and eighty eight today or four hundred and seven percent growth over last year's price is somehow an equivalent return to the S&P 500, which fifty two weeks ago was trading for thirty five percent above what currently trading for today. The same amount of money invested into Bitcoin returned more than a thousand percent better results than one into the S&P 500 over the last year. And I didn't have to cherry pick the data to do that. That was literally the first set of calculations that I did going to mainstream non crypto sources. Again, like the only reason why you cherry picked data in the way that they're doing is because your case is weak and you are desperate to make it appear even just a little bit stronger. Well, I think the funniest thing about this paper is that their greatest concern it seems with the adoption of blockchain technology is in dollar denominated stable coins because of their desire to invest away from their people using dollar and dollar denominated instruments and crypto is creating a mechanism for their citizens to maintain that exposure. So when you look at their usage of the word dollarization, I really liked on page 52 where they're saying more extensive degrees of adoption such as adoption of stable coins as a means of payment and store value can pose more significant challenges by reinforcing dollarization forces in the economy. Dollarization can impede central banks effective implementation of monetary policy and lead to financial stability risks through currency mismatches on the balance sheets of banks, firms and households. This can be further amplified by liquidity risks such as central banks not being able to provide liquidity backstops in foreign units of accounts. Cryptoization could moreover pose a threat to fiscal policy and senior revenues may also decline due to the shrinking role of central banks money in the economy. I think that's basically what the entire paper's about. The great crisis here is that, you know, Chinese, Africans, Europeans might be using an instrument of currency notes that aren't their country's currency, which means they can't hyperinflate against their own people, and only the US dollar could if it's a dollar stablecoin, and that that may lead to a declining role of their central bank in the money of their economy. It's interesting that this comes right on the heels of El Salvador adopting as legal tender. I think that really put the fear in the IMF. It almost seems like a lot of the statements made in this report are hinting very directly. You know, don't get me wrong, I don't think the El Salvador experiment is the smartest or best thing that's ever happened to El Salvador or Bitcoin. I think it's incredibly risky, and I've expressed my concerns and hesitation over that. But that's not the point. The point is that it's scaring the IMF for all different reasons. And if you ask the average person in El Salvador, I'm guessing, as if you ask the average Greek from my experience in my childhood, the word or the acronym IMF is a curse word in every developing country, in every second world country. It represents basically international infusory and a takeover of national sovereignty through terrible debt obligations that then allow them to dictate policy. I experienced that in the 80s and 90s increase, and pretty much anyone from a developing country has experienced that. The IMF is the topic of protests in developing countries all the time. If you're interested in this topic, there's a phenomenal book called the Confessions of an Economic Hitman, which details the types of things that the IMF have done over 20 years. Yeah, that's a great reference, Jonathan. And so it's funny that instead of El Salvadorians being afraid of the IMF, the IMF is now afraid of the El Salvador experiment with legal tender, which we end up being catastrophe for El Salvador. Who knows? But the IMF isn't worried because it might be a catastrophe for El Salvador because the IMF was a catastrophe for El Salvador. I think the IMF is worried because it might be a catastrophe for their control, as we've said again and again on the show. More important than whether or not it harms El Salvador, as you said, Andreas, is does it reduce the power of the IMF? And in their own paper, they're saying that dollarization and then cryptoization are both mechanisms by which you reduce the control of central banks, and more specifically the IMF over the ability of normal people to live their lives and engage in commerce. And they're explicitly stating it. And so if anything, the whole darn reason we got involved in Bitcoin in the days that we did, this is like a cheers. You know, they're raising their champagne glass to saying the thesis is not only correct, but good God, could you please stop because it's actually doing what you want it to do? The stablecoin angle I think is really interesting also. We've heard again and again from the IMF that they see stablecoins as the bigger threat than just decentralized cryptocurrencies. Although they don't talk about decentralized stablecoins as much, they mostly talk about dollar-backed, asset-backed stablecoins. I think that's really revealing. And the reason for that is of course that the IMF is the creator of one of the world's first nonnational stablecoins, the special drawing rights, the SDR. And this is kind of an obscure, esoteric concept and topic for most people who haven't really spent any time looking at what the IMF does. But if you are interested in reading more about that, read up on SDRs. SDRs are basically this artificial stablecoin currency that's based on a basket of national currencies. And so stablecoins, whether algorithmic or dollar-based, directly compete against SDRs. And I'm not surprised that they keep putting the emphasis on stablecoins as the bigger threats in crypto. So on the subject of the things that the IMF is concerned about, on page 44 they actually summarize it pretty well. They note that in 2018 they looked at the same topic and they weren't really concerned about sort of the strategic or kind of the macro implications of this stuff. But that things have changed substantially since then. And their short list basically is the market cap of these things is now 10 times bigger than it was in 2018, which I didn't actually realize. I thought that we were maybe three or five times bigger. I didn't realize that it had grown quite that much. That's kind of interesting in and of itself. Secondly, crypto failures as they describe them haven't yet, but they are now concerned could impact traditional markets. The legacy banking system is slowly taking on more exposure to crypto assets, which they say makes it more vulnerable. The use of crypto assets for payment and settlement is still limited, but they say that cryptoization is starting to change that, along with meaningful industries that have emerged like stablecoins and DeFi. The IMF is basically concerned about all of this. I'd like to talk about the specific angle of this, which is the concept of contagion. And this was mentioned even more directly in the Bank of England report where they said that what they're worried about is contagion of traditional markets because of the need to repay or recollateralize loans taken out on margin for trading in crypto or exposure to crypto. That then require them to liquidate other assets in the traditional financial markets. Specifically, the second in the Bank of England said if crypto currencies were to go to zero and in other parts, there was a quote about them being just strings of digits on a computer and backed by nothing in the quote real economy. Hello, it's 2021. How can you be in a central bank leadership position and say things that ignorance? Like at this point in 2021, it's going to go to zero. It's just a string of digits on a computer and it's not backed by anything in the quote real economy on quote. It's just basic ignorance. I mean, it really is. And how can you really deal with risks if you don't even understand how they work? I mean, that's just embarrassing. That's embarrassing. So this idea that it's going to go to zero and then cause a run on the bank in order to recollateralize the crypto assets, I think it's a bit of a stretch to even mention it as a risk. But again, it's quite telling. It's the straw argument. Well, I think this one paragraph says it all, but you have to use your Orwellian, like Shakespearean or Wellian doublespeak hat to really unpack it, which is towards the end or right at the end of the cryptocurrency component of this. They say that reversing or averting dollarization requires strong macroeconomic policies, but these may not themselves be enough. Crypto assets on their own do not change the economic forces that lead to the international use of currencies or increased dollarization. Yet the technological advance of the crypto ecosystem and especially stablecoins could reinforce the incentives behind currency and asset substitution and ease adoption. Hence, the tolerance for policy missteps is greatly reduced, which is to say, if a central bank destroys their own economy, the ability for them to try to cover that up with another horrible mistake is greatly reduced because people have the out of going with Bitcoin or going with a dollar denominated stablecoin. And so because there is a release valve for the capital flight when they try to burn the fire of everyone's life savings, that their tolerance for policy missteps is greatly reduced. And countries that want to fend off dollarization will need to strengthen monetary policy credibility and safeguard the independence of central banks, which is to say, strengthen monetary policy credibility. You have to strengthen the credibility and safeguard the independence of central banks, which is to say, give them more authoritarian unilateral power. And this is what it all comes down to. It's just about power. This is let me paraphrase it for you. As the captain said, the presence of sufficient lifeboats on the ship will reduce the tolerance for iceberg collision mishaps among the passengers, leading them to think that orange painted ships are much safer than our own cruise ships. I was thinking exactly the same thing. Yeah, it's really kind of funny. I mean, it's funny and it's horrific, right? Like it's both of those things at once. And again, like we've been talking about this stuff for eight years. This is continued validation of the concerns that we've had about these structures and of the resistance to any type of alternative in terms of why they would want that. Like just taking central bank independence for a second. Central bank independence is a concept that seems really weird used in this context, right? Typically when you're talking about, when you hear someone talking about central bank independence, the concern is that there are going to be political considerations from, you know, the elected government of whatever the country is that will then influence the monetary policy decisions made by the central bank. The central bank is supposed to be independent because short-term political considerations can lead to long-term problems with your money if your monetary policy is captured by politics, which is really only beholden to this short-term time frame. So the idea of applying it to this particular circumstance where they're not saying, well, someone is going to force us to do something because they have authority over us, but rather they're going to force us to do something to offer a better version of the product that nobody likes that we create. I mean like... Or because people are beginning to feel the consequences. Essentially what we're talking about here is independence from the economic reality of the consequences of our choices and monetary positions. Yeah, exactly. We want to gain independence from consequences. We want to gain independence from reality. We resent facts getting in the way of our beautiful monetary policy. Exactly. Legalizing divorce reduces the tolerance for policy missteps. Yeah, the ability to leave. We talked before about exit and voice. And they're basically saying that, you know, we're not tackling the voice, we're tackling the exit, and the one thing that they cannot handle is the reduction in tolerance for missteps to their own people that the ability to exit provides. The danger of exit to the everyman is as dangerous that they talk about two things in this damn paper, catastrophic climate change and Bitcoin. There's actually a third thing. They also talk about COVID-19. That's the third one. But that comes after crypto-ization. They're less concerned about COVID than they are about crypto-ization. Ah! If you want to grok the IMF's full nuanced perspective, which is not an enthralling read, but very interesting if you want to understand people working the levers of power in the world actually think at least as far as what they're willing to say to us, you can find that in the show notes for this episode. That's all the time we have for this episode of Speaking of Bitcoin. This episode featured Andreas M. Antonopoulos, Jonathan Mohan and myself, Adam B. Levine. This episode was edited by Jonas with Music by Gertie Beetz. If you have any questions or comments, send us an email at adamatspeakingofbitcoin.show or leave us a review on your favorite podcast player. We definitely appreciate that. Thank you very much for listening. We'll be back with another episode next week.