 I'm not sure what future Bitcoin has. I think the technology has been hijacked by the incumbent players in the financial system. The real legacy of Bitcoin is to lay out the roadmap for central banks to do their job better. That's not what Nakamoto had in mind. What's up YouTube? My name is Jackson. Today I'll be talking to David Yermak, Professor of Finance and Business Transformation at the NYU Stern School of Business. How are you doing today, David? Just fine. Thank you for having me. So when did you hear about Bitcoin and why did you decide to teach a course on digital currency? It's kind of a long story and it begins with just reading about it in the mainstream media as a curiosity. I had taken a course in high school going back many years in protest literature and we'd read a novel by Thomas Pinchon called The Crying of Lot 49. And this is about people who don't trust the government and set up a secret post office and there's mailboxes and codes and so forth around the country. And when I read about Bitcoin, I thought it was the same thing. I said, this is just like that novel from high school except it's not a post office, it's a bank. And I like the libertarian impulse behind it. There were people who were supporting Bitcoin who reminded me of characters from the novel. So my connection to this really comes with the humanities. And the other thing that I found pretty interesting about it was the algorithmic monetary rule where as everyone knows the rate of money growth is cut in half every four years. This is actually due to happen again in a few weeks. And this is a very old debate in macroeconomics about whether the money supply should be fixed by the judgment of the central bank or by some type of rule. And this is about as rigid a rule that you could have where a computer program simply tells you for the next 130 years what's the monetary policy going to be. And so I thought that this would potentially be interesting to test some of the oldest hypotheses in macroeconomics to see if this stuff really could be made to work with software as opposed to with people being in charge. But above all, I was simply amazed that the thing was stable, that it worked, that it seemed to be in an equilibrium where people could use these coins and they wouldn't be counterfeited and it was never hacked. So I decided to learn about the technology. And then once you take a close look you realize what a breakthrough it really is. And so this took several steps. It really began with an interest in the political aspect of it more than anything else. But once you get under the hood and see how clever the consensus process is and so forth, you realize that this is way better than the banks and the stock exchanges have been using for hundreds of years and that this thing might well have a future in the financial system. So this led me to begin writing and lecturing about it and this eventually grew into a course. We offered it in I think 2014 was the first time and we were the first major university in the world to put a course out there on crypto and blockchains. And now of course everybody's teaching this. So I'm curious to hear how your opinion of Bitcoin has evolved over the years. In a paper published in 2015 titled Is Bitcoin a Real Currency? You argue that Bitcoin does not behave much like a currency according to the criteria widely used by economists. You said Bitcoin instead resembles a speculative investment similar to the internet stocks of the late 1990s. Do you still believe Bitcoin functions more as a speculative investment than a currency? Yeah, I would say that's even more true today than it might have been five or six years ago. What we have come to realize is that there are real bottlenecks in the Bitcoin blockchain that ultimately only seven transactions per second is the throughput even with things like the Lightning network and segregated witness there are workarounds but it simply is not scalable to the point that it can become a commonly used payment mechanism. And there's all kinds of data from research showing that probably 90% or more of the transaction volume on the blockchain is for investment purposes that relatively few people use this as a payment mechanism. What's also happened is that Bitcoin has spawned a lot of copycat imitation. There are thousands of other coins now that in many ways are better designed that Bitcoin opened the door and introduced this technology but a lot of people have improved on it since that time. How has the COVID-19 crisis affected your opinion on Bitcoin? Have there been any events that have changed your opinion? It's been very interesting to watch because the narrative that one hears about Bitcoin is that it's a type of digital gold and in unstable economic times this might become a safe haven for people who lose confidence in the central banks of the world. So when this pandemic hit, I thought this was the perfect time to test this digital gold story. The central banks are printing money like they've never done before. The rules of monetary policy totally thrown out the window and if ever there was going to be a flight to digital currency it should be now. Now what's happened of course is quite the opposite that people have been dumping Bitcoin. It's performed very poorly. The stock market itself has done better than Bitcoin and it's really the US dollar and gold itself which people have been using as safe havens. I think for all the people with the digital gold narrative this has to be a deeply disappointing time because Bitcoin simply hasn't held up as an investment. In fact it's been pretty well clobbered in the market since the start of March and it just is not being used by anyone as a safe haven. How do you see this affecting the future of Bitcoin if it continues to remain the speculative asset and doesn't fulfill this digital gold narrative? I'm not sure what future Bitcoin has. I've always thought that the real importance of this was for history. This was the first breakthrough that launched the blockchain and the public consciousness that introduced the idea of proof of work consensus as a validation system and we will always have Bitcoin as a touchstone and as a point of reference but in terms of accomplishing transactions there's a coin that is better than Bitcoin for almost any purpose that you could think of and it shouldn't be surprising to people. It's like whoever built the first set of golf clubs and invented the game of golf they were a genius in their own way but people pretty quickly moved on to better golf clubs with better materials and different facings that the first innovation nobody uses the first iPhone anymore. We're 10 generations in and I think Bitcoin has been very resistant to improvement. There is quite a bit of gridlock when people have tried to scale it up to modify it. There's really a lot of resistance from the people in place the miners who are making money off of the current configuration and don't want to pay for supporting a larger or more versatile network. So I think in the long run Bitcoin really is going to be for history and posterity. It will always be there as long as there's computer memory but it's hard to see that it will become either a widely used payment system or in the long run a serious investment either. I think there's just better things to be investing in. Continuing to private digital currency as a whole in a 2019 paper you co-authored you argue that although private digital currencies have not replaced the dollar their mere existence may have a counterfactual impact in that they exist as a check on both fiscal and regulatory policy. How do private digital currencies provide a check against regulatory and fiscal policy? I think it's more relevant in countries that have shakier financial systems and there's a very clear narrative in a place like Venezuela where the banking system has ceased to work. The government would probably just be printing money like Zimbabwe to no end if they could but there are people transitioning to digital currency. I in fact have friends in the academic world with families in Venezuela who have taught their relatives to use Bitcoin as a way to transfer money to them because they can't use the regular banking system anymore. The existence of this in the background is a constraint on the government because they know they can't print money without limits because people will exit the sovereign currency and go for private digital currency whether it's Bitcoin or Ripple or Monero. There are now many alternatives but it really takes you back in history that until the 19th century most money in the world was private most government currency didn't enjoy wide acceptance on the part of the public and banks competed to essentially create banknotes whose value was fixed by supply and demand in the marketplace. We call this the era of free banking and when you have economies that break down and the financial system that's in place fails you revert to this that private forms of money circulate. Sometimes it's commodity based it can be gold or sacks of sugar. I've heard about laundry detergent in Argentina and private digital currency can play the same role as some of these private commodity systems because people do understand the scarcity and they know that it is not going to be debased through inflationary policy that that some governments enjoy. Up to now you've been able to see this in countries that have been in crisis. Whether the pandemic and the collapse of monetary policy around the world leads to this on a larger scale be interesting to see but I would be surprised. What do you think will become the main role of cryptocurrencies in the future? Will they remain a check against regulatory fiscal policy or will they eventually displace sovereign fiat currencies or do you think they'll do something different? I think the technology has been hijacked by the income and players in the financial system. What's really interesting is to see the evolution of things like the JPM coin for interbank settlements, the People's Bank of China getting ready to launch a Crypto Remnambi this year. It's very clear that this technology has caught the attention of the legacy players in the financial system. You see stock exchanges beginning to figure out how to use it. I think that the legacy here is going to be that everybody's going to copy this and use it to do better the types of things that the financial system has attempted to do for hundreds of years. You have a much better record-keeping technology here in the form of the blockchain and after a couple of years of ridicule and denial and so forth, it's now really been embraced by the people in the mainstream and you're going to see it not just in the financial system but for things like supply chain management, food safety, healthcare data. Anywhere with the data is a value-added part of a business, it will probably be repurposed onto a blockchain maybe using digital tokens of some type. You don't see cryptos ever getting to a point where they are destabilizing fiat currencies or even replacing them as a global currency? I think this is unlikely. To the extent it will occur, it will be in weak states. We do have our share. There's always a couple of governments that are losing control of their own territory and their own economies at the moment. Venezuela is probably at the head of the list, but one could maybe point to places like Syria, Libya and so forth. There's a long history of private money filling the vacuum in failed governments. I would expect Crypto to now stand alongside other forms of commodity-based currency, but I don't think it's a serious threat to the sovereign currencies in the long run. What you're likely to see is quite the opposite, that all of the central banks will begin issuing digital forms of their own currency that will be much more secure and used by a much wider segment of the population. The real legacy of Bitcoin is to lay out the roadmap for central banks to do their job better. That's not what Nakamoto had in mind. It's hugely ironic, but we're moving at breakneck speed towards central banks' stable coins, given the events of the last 12, 24 months and so forth. I think the pandemic may even accelerate that. It's an interesting role reversal, because a lot of the people who are in crypto rely on this narrative of it being outside the financial system. The narrative is less true every day. Who's hiring our students are the legacy banks. They're really tooling up and have come to understand this technology is as important a breakthrough as double-entry bookkeeping was 700 years ago. It's gotten to the point that really all the banks need to be doing blockchain projects because the competition is. It's a very interesting time, but the big winners here will be the incumbents who are early to understand and adopt the technology. There is room for growth by entrepreneurs who get in, but the financial system is not going to be remade. People who continue to tell these utopian stories I think are a little bit naive and somewhat misinformed about the whole thing. That's not to say that some disruption is possible. Speaking of this course, the course is called Digital Currency Blockchains and the Future of Financial Services Industry. In the course overview, you say that these technologies appear to represent existential threat for major parts of the finance industry, and that according to experts such as McKinsey, commercial banks and stock exchanges may no longer exist or may become much smaller within the next 10 to 20 years. How do digital currencies and blockchain technology present this existential threat to these entrenched financial bodies? I think the most obvious way to see this is the likely migration of payments away from commercial banks and into the central banks. When you have a digital dollar issued by the Federal Reserve where citizens can hold wallets at the central bank, you don't need to have your paycheck go into Bank of America anymore like I do. Bank of America failed three times in the last financial crisis, and God knows what's going to happen in this one. I'd much rather bank at the Federal Reserve, and that's now going to be possible. People's Bank of China is laying this technology out there. We're really not going to need banks in the future to perform the payments function that has been the way that they have funded themselves. I think as a prediction, the merger and consolidation of the banking industry is a pretty safe one. If banks want to continue to make loans, they're going to have to fund their balance sheets in a very different way. They're going to have to issue long-term debt and equity rather than relying on short-term consumer deposits. All of this will make the whole game much safer. We won't need deposit insurance anymore. We won't have bank bailouts because you can't run the central bank. The real threat comes from people questioning the need for these social institutions. We've relied on private banks to do payments simply because the complexity was way too high for the central bank. Blockchain changes all that. It also allows you to pay negative interest rates, to have very precise targeting of fiscal monetary policy and so forth. The technology is almost irresistible for governments to annex the payment business, take it out of the hands of the commercial banks, and then the commercial banks will basically wither away. If you don't think this is happening, you're missing the whole story about central bank stablecoins. Interestingly, the $2 trillion bailout legislation a couple of weeks ago had a proposal for a so-called digital dollar that would do exactly this. It didn't get enacted, but that blueprint is exactly what the banks are worried about. This would be more or less a death sentence for the commercial banks if this were enacted into law. Speaking of that bailout plan, how do you see cryptocurrencies fitting into this current era of quantitative easing? A lot of people are saying, we need hard money because everything's going to be inflated and everything is going to be worth nothing. Do you see this as a possible use case for hard digital assets like Bitcoin or other cryptocurrencies? I really don't. If this were true, you would have seen Bitcoin performing much better in the last few weeks. The reality is that we're in a deflationary economy. Interest rates are negative, so for the government to borrow almost unlimited is not only free, but actually profitable for the government at the moment. A market like that, there just doesn't seem to be much impulse for people to use it as a safe haven. What I do think the potential is is for some type of move toward financial inclusion to use crypto assets to reach people who are unbanked. We've seen this in the US that the government has promised $1,200 to everybody who makes less than $100,000 a year. It turns out to reach all those people is very difficult because many of them pay no taxes and many of them have no bank account. The technology of digital wallets and blockchain settlement is maybe a way to reach as many as 30 million Americans who are excluded from the financial system. If there's going to be a role for crypto in this climate, I would think it will be to address those types of problems. In that sense, it's probably overdue that the technology is considered for this type of use. So do you see this current crisis that we're in? Do you think this will speed up the adoption of digital currencies? I think digital currency is issued by governments. We need to be a little bit careful. It's not going to speed up the use of private currencies at all, but it may well get governments into the business of issuing and tracking these much earlier than they maybe had wished much sooner than their comfort levels and their natural conservatism would have permitted. There's also the pressure from China, which has been pretty relentless about trying to push their own project down the rails because they're worried about WeChat and Alipay having taken so much of the payments business away from the banking system. So I think a combination of the pressure from social media companies, and I would include Facebook in that group, but also the urgency of the crisis seems to be really expediting some of these central bank digital currency projects. It's interesting. Is there anything that you're currently researching or working on that you could share with us so that you're excited to potentially talk about? I'm watching the current pandemic very closely. There may well be a paper about the performance of Bitcoin and the crisis. I'm giving a talk on this in a couple of weeks at a virtual seminar hosted by Georgetown University. I'm watching the halving event very closely too. There has been a huge amount of interest in marketing of hardware and promotion of investment strategies around this 50% cut in the mining fees for Bitcoin. It looks to me like a non-event because everybody knows with certainty, it's like the Y2K bug. If you tell me something's going to happen years ahead of time, everybody can get ready for it and on the day it happens, it's not going to make any difference. But there's such attention fixated on this that I'm going to watch it carefully. And if something interesting happens, it will probably lead to some academic projects. I have to say, though, if you ask me what I'll be writing for the next 12 to 24 months, I may revert back to corporate finance where I taught corporate restructuring because we're going to have more corporate restructuring in the next year or two than there's ever been. This is the time for financial distress and recapitalizations. I think my old field is coming rapidly into vogue again for all the wrong reasons. But I think I'm maybe going to be recalled to active duty doing more traditional finance because there's going to be hugely interesting events that are already beginning to unfold. Academics love this kind of thing because when you get an unexpected shock to the financial system, you can test all these theories without bias and so forth. But it's very, very rare that something like this happens where there's kind of a medical intervention that closes the economy and seeing how everybody reacts to that gives you a lot of insight into how contracts work, how legal rules shape and fail to shape people's behaviors. It's an awful lot to study in this crisis, but I have a feeling a lot of it won't be connected to crypto. Yeah, but I also feel that this crisis is probably going to tell us a lot about what Bitcoin is really worth. Yeah, and so far the news is not so good, but hang around. Yeah, we'll see. Well, thank you so much for taking the time to talk to me today, David. Okay, thank you. I enjoyed it. Have a good day. Like, subscribe, and hodl.