 Bitcoin is just a speculative asset without no fundamental value. Anonymous fundraising tools, such as digital currencies, are an enemy of Russian state. Blockchain in principle can be used as a technology for cross-checking, manipulation and fraud. That said, I strongly suspect that it only works when the owner of the technology wants it to work. Hi everyone, I'm your host Giovanni and today I have the pleasure to be joined by Sergei Guriev, Professor of Economics at Stainz-Poll University and former Chief Economist at the Bank for Construction and Development. Thanks for joining us, Sergei. Thank you very much. Thank you very much for inviting me. For those who don't know, Sergei used to be one of Russia's most important economies and member of the board of directors of Russia's largest bank, Sberbank. He fled Russia in 2013 out of concern he could be prosecuted for criticizing Vladimir Putin's regime. In a recent interview, you defined Bitcoin as a merely speculative asset with no fundamental value. Why do you think so? Well, it is a statement of the fact that Bitcoin is just a speculative asset without no fundamental value. It's not backed by any asset, any currency. The purchasing power of Bitcoin is only contingent on all parties being happy to use it as a medium of exchange. Now, a lot of means of payments are assets like this. A lot of fiat money is eventually based on the belief in the institutions that issued that money. And a lot of means of exchange are means of exchange because markets believe in institutions that back the purchasing power of that means of exchange. Now, in case of Bitcoin, the situation is quite unique in a sense that we don't know how Bitcoin was designed and we have a predicted rule of supply of Bitcoins, but this rule is not connected to purchasing power of Bitcoin. And in that sense, unlike central banks that try to make sure that, for example, the dollar today can buy almost as much by say two percentage points less than as much as last year. But there is a rule which is linked to purchasing power of the dollar with regard to how much of goods and services of your everyday life you can buy with the dollar. In case of Bitcoin, this rule is completely unrelated to the state of economy, to the purchasing power of Bitcoin. And that's why we see jumps and busts of Bitcoin's purchasing power of value. A few years ago, Bitcoin was at $20,000 per Bitcoin today. It's eight or nine. And in between it was three and 10 years ago, it was zero. So in a sense, it's not surprising that value goes up and down because the value of Bitcoin is linked to the market's views on how valuable Bitcoin is. That's interesting because a lot of Bitcoin supporters points out at several fundamentals that should back Bitcoin value. For example, Bitcoin's limited supply, which makes it similar to gold. The censorship resistance of the technology, it can be used as a cross-border payment system, aren't these valuable fundamentals that kind of just could be considered as justifying Bitcoin's intrinsic value to you? Well, saying that these are fundamentals is just a redefinition of the term fundamentals, which is used in monetary economics. So fundamentals is related to things I was talking about. And what you're talking about is just like to say dollar is printed on a nice green paper. Isn't a green color fundamental to the value of the dollar? Or the fact that you cannot fake the dollar isn't a fundamental? Of course, it's important that you cannot produce counterfeit dollars easily. But what is fundamental is that there is an institution that backs the purchasing power of a currency. In case of Bitcoin, as you rightly said, there is limited supply. And in that sense, you can predict how many Bitcoins you will have today or 50 years from now or 100 years from now. You will not have any more than this amount simply by the rules of productions of Bitcoin. But that doesn't mean that you can predict purchasing power of Bitcoin. In the end of the day, you don't care about how many Bitcoins you have in your pocket. You care about how much food or entertainment or travel you can buy with one Bitcoin. In case of a dollar, I can predict that. I can tell you the dollar inflation 10 years from now. In case of Bitcoin, Bitcoin can go up by factor of two, go down by factor of two. And that will still happen despite Bitcoin's limited supply and the rules of mining Bitcoin. So this is something that is clear. And if you say that limited supply is a fundamental, it's not. It's just part of the technology. You were talking about Tesla stocks. And you made a differentiation between Tesla stocks and Bitcoin. And you said that basically Bitcoin is very much different from Tesla stocks because in Tesla, you can predict that the company is going to produce something of value. But at the end of the day, you cannot be sure about the future of Tesla or what is going to be the actual results of its business activity. So at the end of the day, I don't see the difference between the trust that you put in a company like Tesla and the trust that you put in a technology like Bitcoin. This is a great question, Giovanni. For every stock, for every equity of every company, you would have concerns like this. Even if you have a huge company that is producing positive cash flows today, you cannot be sure, as you rightly said, that the company will continue to exist tomorrow. You have oil companies, which are very valuable today, but oil price can go down even to negative values, as we saw a couple of months ago. And your cash flows suddenly become negative. And that means that the stock price may also tank. And in that sense, it is normal for every company to have uncertainty about its future profits. And therefore, the stock price, which is the discounted value of, the net present value of future cash flows is, of course, very uncertain and volatile. However, there is a fundamental difference between company stock and Bitcoin. Every company is at least trying to produce something of value. If you produce something of value, it's no longer a zero sum game. You produce value added, you pay your employees and contractors, and eventually you end up with cash flows you can give to shareholders. And in that sense, you have a chance to generate positive cash flows and get your money back as a shareholder. In case of Bitcoin, Bitcoin is used as a means of payment, which is never producing anything of additional value. So when I buy Bitcoin from you, it's not because I'm thinking that this Bitcoin will generate some social value. It's because I think that in the future, there will be another person who will be happy to buy it from me at a higher price. And this person will buy it from me at a higher price, not because he thinks that he will generate some additional social value from this Bitcoin, but because this person will think that there will be another person who will be happy to buy the Bitcoin at an even higher price. And this is a definition of speculative asset of, if you like, an everyday language Ponzi scheme. I'm not saying that this is really bad, but what I'm just saying, Bitcoin per se is just a piece of dead nature, if you like, that is not producing anything of social value. Tesla may burn the shareholder's money, but it may also produce additional value in the market's belief it will. So I guess that you don't consider the network value of Bitcoin as a valuable social value. You said that Bitcoin doesn't promise to produce any social value, but a lot of Bitcoin supporters are boasting the network value of Bitcoin. So the combination of all people that believe in it, I guess that's what you define as the essence of the Ponzi scheme. I think you can say that Bitcoin makes a lot of people happy. That may be a value of Bitcoin, so you buy Bitcoin and you feel that you're independent of the government and that makes you happy. What I'm talking about is Bitcoin is not producing any physical value. So Tesla is producing cars, Facebook is producing social network experience, Google is producing search experience and advertising, Bitcoin just making people happy because they talk to each other. And in that sense it's not social value. Right, so maybe talking about something slightly different, so moving from Bitcoin to digital currency in general. So can you imagine a future when centralized banks will include Bitcoin or another digital currency as part of their reserves? So I don't see how central banks will rely on Bitcoin as part of their reserves. So if Bitcoin suddenly becomes, for some reason, which I cannot foresee, but if Bitcoin becomes an important means of payment in international financial and international trade transactions, then yes, central banks may actually include it as part of reserves. This is unlikely. What I can see as a likely scenario is when central banks move to central bank digital currencies or synthetic central bank digital currencies, and that's completely different. So what is a central bank digital currency? It's a creation where central banks move away from cash. And instead of Swedish Kronos, you settle in electronic Kronos. And essentially you have an app or card which gives you eventually an account with the central bank. So instead of having cash, you have a piece of plastic or piece of electronic equipment which gives you non-paper cash. So this is something that's been discussed, and now I think the debate moves towards synthetic currencies where the digital currency is created by private sector, by fintech companies or social networks, who then have reserves with the central bank, where you create electronic Kronos, be in a fintech, and for each electronic Kronos you issue to your customers, you have to hold a Krona within your account in the central bank. And that is a two-tier system which is similar to how paper money operates now. And that is something that is more likely to happen. Why? Because it creates competition between intermediaries and it creates certain stability and of course it creates efficiency because paper money is eventually inefficient. So I think it's completely likely. Digital currencies, either central bank digital currencies or synthetic central bank digital currencies, and that may include stable coins or currencies like Libra, that may actually be the future of monetary change. The stock market has been rallying for a while since the coronavirus crash, showing that investors expect the global economy to quickly recover from the crisis. In a recent interview you said that the market sometimes is wrong and investors are too optimistic. Do you think this is one of those cases? Well, if I had an answer to your question, I wouldn't be sitting here with you and I would short the stock and become a multibillionaire. I don't do that because I think there is a lot of uncertainty and it's always very hard to say, this is the time when the market is wrong, this is the time to sell or this is the time to buy. Fortunately, the market is where it is and it's very hard to say for sure if market is too optimistic. Market today is optimistic. Market is back to where it was in January. Some companies are actually doing much better than in January and that includes Big Tech. So companies like Apple are worth more than they were worth ever before. Some companies are almost gone. So there are sectors which were hit hard such as airlines or tourism and of course these companies are suffering. We are talking with you on Zoom. Zoom is doing extremely well, of course. So it's very hard to give you one aggregate picture. But if you look at stock price indices, these indices suggest that market in general believes that the worst is over. The global economy and the American economy starts recovering and you need to understand that stock prices are forward-looking indicators. Stock price today is today's value of future profits and so when you no longer are in crisis, you expect that future brings you only positive developments. Your stock price goes up and in that sense what the market's price in is that we will not have a second wave of coronavirus. This is I think what the market's price in. And in general I think you can believe in that. There are some forecasters that don't believe in that and so one thing which happened last week, OECD came out with a forecast where they say that there is a double-hit scenario which is something like 50% chance of being true and in that scenario things are much worse. And so if you read OECD forecast, overall you walk out with the perception that stock markets are too optimistic but if you're perfectly sure that the market is optimistic you shouldn't talk to me but go and run and short markets and become very rich and I don't recommend that because I'm not sure. Many Bitcoin supporters say that central banks printing money to support the economy during the COVID-19 pandemic will bring hyperinflation and investors will be increasingly attracted by assets with anti-inflationary properties such as Bitcoin. What do you think about this analysis? I don't believe there is a risk of hyperinflation in dollars or euros. So let's give an example of a dollar. So in dollars market you can buy US Treasuries denominated in nominal dollars. For example 10-year bond. So you can bet against this bond losing purchasing power 10 years down the road. If you think that the dollar is going to be very strong you buy this bond and you benefit from the dollar being strong 10 years down the road. And then you can also protect yourself from inflation because in the US as well as in many other countries you have the real price index bond. So Treasury inflation protected securities tips are the securities where the return is indexed for inflation. Which means that if you believe that inflation is going to be very high what you can do you can short nominal bonds and you can go along you can buy those tips inflation protected bonds. And so if you disagree with the market price of inflation which is now 1% per year over the next 10 years you can make enormous amount of money. So if you're a Bitcoin supporter who believes that dollar is going to be inflated in the next 10 years you can stop talking to me but just go to the market and make a lot of money. Vice versa, if you believe that inflation is going to go down then you can actually do the opposite. You short the tips, you go along the nominal bonds and you again make a lot of money. But the current consensus in the market is that for the next 10 years inflation in the US will be around 1%. 1.2 decimal points to be exact. So there is a market price for inflation. If you disagree with this market you can make a lot of money and the reason for that is markets have confidence in central banks. Maybe not in some central banks like independence of Turkish central bank has never been strong or you may not believe in Argentinian macroeconomic policy framework but Federal Reserve System has a lot of respect for the market. Federal Reserve System says we will not allow hyperinflation in the US and markets believe it. And if you don't believe Federal Reserve System if you're afraid of hyperinflation in the US you can make a lot of money today in the deal that I'm suggesting you. Go short, nominal, go long inflation protected bonds and you're fine. Regarding why central banks can print so much money and inflation is still not going up the answer is in a recession like this and this is a huge recession the biggest recession since Great Depression in a recession like this there is a risk of deflation and so central banks print money exactly because they want to avoid deflation and create some moderate inflation and that's what they do now that's what they didn't do in 1920s and 30s and that's why we had deflation in 1930s and recession was so long that it turned into a depression and this is what was avoided in 2008-2009 and this is what's going to be avoided now so we'll have a reasonably short, deep but short recession and global economy will probably start recovering already this year. In the upcoming referendum for constitutional reforms in Russia Moscow citizens will be able to have their vote registered on the blockchain Do you think blockchain technology has the potential to make the election procedure more transparent in Russia and in other countries where election frauds are a major problem? I think we should separate blockchain and Bitcoin these are different things and blockchain in principle can be used as a technology for cross-checking manipulation and fraud and distortion of information by allowing independent cross-checkers, observers and so on and in principle I think it's a useful technology there is nothing super innovative about this technology but this technology has a lot of merits and DLT technologies of course are important in situations like you mentioned that said I strongly suspect that it only works when the owner of the technology wants it to work and we know that Russian electoral authorities have all the interests, all the ability and they... to manipulate the results of the elections and I'll just give you one single argument by Mr. Stroh so Russia is still going through a very risky stage in the COVID-19 epidemics so holding this constitutional amendment vote July 1st makes no sense you want to delay that until the epidemic is over there is no urgency in this constitutional vote and Russia has actually one electoral day per year which is in September so in Russia normally all voting, all elections happens in September this year it will be September 13 yet Russian government said no we will not wait until September we want to do it now we want to do it as fast as possible why? because in a normal electoral day you would have observers, physical observers and so the fact that they want to do it as soon as possible means that they actually want to manipulate the results and all this talk about blockchain to me suggests that they will say there is electronic vote blockchain but they will not allow for at least massive representation of independent observers independent blockchain observers and so they will try to manipulate the results because the whole idea of holding this vote as soon as possible not waiting until the end of the epidemic running in a situation where a lot of reasonable people will just not show up in the election because they are scared of the infection and scared of being infectious bearers of the virus and infecting and killing their relatives and colleagues I think this is an indication that Russian government is not interested in using technology that would verify the results of the election and reduce the fraud we've already seen how Russian government used electronic voting last year that resulted in flaws, vulnerabilities and outright manipulation in Moscow city parliament election last year and so Moscow's and Russian government's track record in electronic voting is not very clean Yeah right, so basically you are saying that blockchain itself cannot by itself guarantee fair election there should still be an environment which guarantees that this technology is used in a fair way This regime as well as many regimes like this use modern technology for their own proliferation and this is normal and so we should be prepared that even though we have many modern tools including online media for example including internet in this regime there is a constant effort to abuse those new technologies to proliferate non-democratic governments Russia is currently considering the implementation of a law that will ban all issues and operations involving digital currencies in the country Why do you think Russia is so adverse to cryptocurrency? This question is very easy to answer In the west, Bitcoin is criticized by the governments because it allows evading taxation facilitating payments in the black economy drugs, arms and so on but in countries like Russia, non-democratic countries Bitcoin is also used as a fundraising tool for the opposition because it allows contributing to the opposition anonymously Russian government made sure that non-anonymous donors of the opposition are somehow harassed or prosecuted You mentioned that I left Russia in 2013 One of the reasons I left Russia probably because I was harassed probably because I openly donated to Mr. Navalny's foundation and today in Russia many people who support Mr. Navalny non-anonymously get somehow harassed as well This is why anonymous fundraising tools such as digital currencies are an enemy of Russian state not just of Russian state in many non-democracies digital currencies which allow for anonymous transactions are the only tool of supporting the opposition which the governments don't have full control of And in that sense, of course with all the problems that we identified in Bitcoin in the beginning of our conversation in non-democratic countries Bitcoin exactly because it's not a government-issued currency exactly because it's independent of any government may actually play this important role of supporting the opposition See you next time