Is Crypto a Scam? with Crypto Skeptic Patrick McKenzie

✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-patrick-mckenzie ------ Why do banks have holidays? Should we redesign the banking system? Is there a future for crypto? Today we’re joined by Patrick McKenzie, an advisor at Stripe who writes about the modern financial system helps us answer these exact questions. First, we talk about the inner workings of the existing banking system. Then we get into crypto, where Patrick shares his reasons for skepticism. ------ 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 ⁠ 💸 CRYPTO TAX CALCULATOR | USE CODE BANK30 https://bankless.cc/CTC 🦄 UNISWAP | SWAP SMARTER https://bankless.cc/uniswap 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku ------ TIMESTAMPS 0:00 Intro 6:35 Patrick’s Background 9:48 Banking System Evolution 20:09 Banking Holidays 26:44 Financial System Redesign 40:12 Transactional Freedom Trade-offs 1:03:39 Crypto Slogans 1:11:36 Crypto Predictions 1:21:42 Closing Thoughts ------ RESOURCES Patrick McKenzie https://twitter.com/patio11 Check Out Patrick’s Blog https://www.bitsaboutmoney.com/ Molly White Episode https://www.youtube.com/watch?v=y9Itd3g23QI ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Hoffman?

  Patrick, at least inside of the crypto world, there are some prescriptive things that we crypto people think that civil society ought to do. There's a couple of like lines that we like to repeat, right? Not your keys, not your coins, Federal Reserve, root of all evil, to tokenize everything. Which one makes you cringe the most? Oh, man.

• 0:25Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, this is an episode of Bankless, but we're talking about banks today. We have a conversation with a crypto critic today who's also very, very knowledgeable on the traditional banking system. His name is Patrick McKenzie, and he writes about the modern financial system and all its strengths, all its flaws, and all its quirks. I think this is a conversation really in two parts. In the first part, we talk about the existing banking system, questions like, why do banks get holidays? Most people don't get these banker holidays. Why do they get them? And why do they make us sign receipts every time we use our credit card? What does Patrick McKenzie think of AML KYC?

• 1:09Ryan Sean Adams?

  How did that come to be? And then we get into crypto. It's definitely safe to describe Patrick as a longtime crypto bear. He's a skeptic. He considers crypto overhyped. He says it hasn't delivered on its promises. A lot of speculation and little substance, so of course, we have more to discuss there.

• 1:28David Hoffman?

  Patrick certainly isn't uninformed about crypto. His takes and positions about crypto definitely come from a perspective of someone who watched the modern banking and fintech and payment system kind of rise around him and over the last like two, three decades. And so his perspective is very, very useful. He is very aware of the fact that despite being bearish on Bitcoin in 2013, that its price action indicates something else is happening than what he was thinking about. Yet he still thinks he considered his perspective to be at least lucid, at the very, very least. But overall, I think like in the crypto world, we have a lot of just like memes that we like to chant, you know, like the dollar is trash, the central bank.

• 2:10David Hoffman?

  Is the root of all evil, all like not your keys, not your coins. And I think likely, I'm guessing, from somebody who has watched the modern banking system, the infrastructure being built around him, there are probably some things as crypto people that we say that make people who are much more knowledgeable about the traditional banking system cringe. And so we are taking a peek into Patrick's head about what his takes are about about our world as well. So there's a lot of just like fun facts that you're about to learn in this episode about the traditional banking system. But then also you'll kind of get into the shoes of somebody who's viewing us from the outside in and what their takes are.

• 2:48Ryan Sean Adams?

  Yeah, and I think our approach with this was we didn't push back a lot. We just sort of list. We wanted to get Patrick's perspective and we invited him on for that perspective. So he could bust bust through our crypto bubble a little bit and get a different perspective that you won't typically hear on bankless. But of course, David, that leaves a lot for you and I to talk about. There was definitely a lot that I disagree with Patrick about in this episode, but we'll save some of that conversation for the debrief. And if you are a bankless citizen, you have access to the debrief right now on your premium RSS feed. So you can go access that now. If you are not a citizen, go upgrade so you can get access to that debrief and all of the other bonus episodes that we put out on the premium feed. All right, guys, we're getting right to the conversation with Patrick. But before we

• 3:32Ryan Sean Adams?

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• 3:43David Hoffman?

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• 6:35Ryan Sean Adams?

  Bankless Nation, very excited to introduce you to Patrick McKenzie. He is a writer, he is a strategic advisor to Stripe. He knows a thing or two about how finance works, how the banking system works. I think from First Principles, which we always enjoy on Bankless. I think he knows where it's broken too, where some of the bodies are buried. So we'll talk about that. He also has some hot takes, some opinions on crypto. It's safe to say, Patrick, while he is bullish on the internet, is very much a crypto skeptic or has been up to this point. So I'm sure we'll have much to discuss on that topic as well. Patrick, welcome to the show.

• 7:09Speaker 02

  Thanks very much for having me, folks. So I'll start out with the obligatory disclaimer. I worked at Stripe for a number of years, but everything I say is in my own capacity. They're a bit more bullish on crypto than I am. I write a newsletter called Bits About Money about financial infrastructure, which is, I guess, my main gig during this semi-sabbatical I'm on right now. And a brief history of time for me. I got an engineering degree, went over to Japan because the Wall Street Journal said that no engineers would ever be hired in the United States again. And the Wall Street Journal has never been wrong. And so I spent about 20 years there, recently moved back with my family to America, ran a couple of companies. One startup failed, joined Stripe for a while, worked there for six years and currently have that advisory relationship.

• 7:52Speaker 02

  Have a bunch of funny, being close to the upper center of crypto stories during that time. Among others, let's see, people asked me to launder money to get it out of Gox when it was failing. That was fun. I said, no. I guess even before that happened.

• 8:06Ryan Sean Adams?

  They asked you this. It was a proximity thing.

• 8:09Speaker 02

  It's like, oh, you have Japanese yen banking. Could you take a domestic transfer from a Japanese company and wire it as USD to the United States? And I'm like, that sounds like a really odd request. What's the company? Oh, it's Tibane. I'm like, ah, you want to get money out of Gox? And you can't do that because they're not doing USD wires. And they said, no, no, no, it's just that the banking system in Japan is effed up. And I'm like, you think that the Magic the Gathering online exchange has DDoS'd the second largest bank in Japan, which is currently incapable of doing USD wires? Pull the other one, it's got bells on. Anyhow, even before this, like 2010, so I'm living in Japan. I am deeply in the technology industry. A bunch of my buddies are like.

• 8:53Speaker 02

  What's the phrase for it? Crypto hacks? No, not that. Crypto punks, like the kind of people who do security research for fun and for profit. And so, you know, people are saying programmable money, this smashes all of your interests. And since 2010, I've been looking at it rather closely and just never come to the opinion that it would actually be useful for my interests, which explains why a bunch of my friends are now much richer than me. But like, I like to be epistemically humble about this kind of stuff. And also, like, do not simply want the dollar signs to flash over my eyes and cause me to be blinded to the reality, which is, I think, how I feel about like the traditional banking system, too. There's, there's good parts and

• 9:35Speaker 02

  bad parts about it. And the way that it actually functions is not the way that it is described to function a lot of the time. And so that's one reason I keep writing about this thing. But anyhow, let's talk about whatever you folks would like to talk about. And then we can come back to fun stories about crypto.

• 9:48Ryan Sean Adams?

  There's so much we could talk about. I let me, let me just say, I love your writing. I love bits about money as the blog, Patrick, and you publish essays that are kind of deep banking topics. And I'm sure there's a lot of things we'll, we'll talk about in today's episode. I actually don't want to start with crypto, though. We'll get into the crypto skepticism. And it's good for folks to hear that you've been around it for a long time. And you have friends that have been around it. So you're not coming at this from a, you know, just looking at crypto in 2024. I mean, you remember the the Mt. Gox days. Actually, where I think we'd like to start this conversation is on the banking side, weirdly enough, because this podcast is called Bankless. So you can tell, Patrick, yeah, we have a bias here. You know, we think there are some issues with the existing banking system. I think actually,

• 10:32Ryan Sean Adams?

  so do you. And, you know, I'm wondering, you've, you've spent, I believe, like, was it two decades in Japan? Was it almost 20 years or something like this?

• 10:41Speaker 02

  20 years in Japan.

• 10:42Ryan Sean Adams?

  Okay. And then you came back to the US. First, like, question from you. Has anything changed with the banking structure in the US over the last 20 years? Or is it pretty much how you left it?

• 10:53Speaker 02

  Oh, well, lots of things have changed. You can, I think there's a like frog boiling water thing where you don't realize changes as they're happening incrementally. And when you you hop out after like a 20 year period, you see like massive changes hitting all at once. And I could say that about a variety of things about US culture. Just this is a thing that like every listener of this podcast can can observe. All banks, without exception, were absolutely horrible at consumer facing technology in, I'll pick a year, 2005. It is no longer the case that banks are horrible at consumer facing technology in 2005. Most of your customers, despite it being called bankless, are like probably banked, probabilistically in the nation they

• 11:35Ryan Sean Adams?

  So are we. Full disclosure, David and I bank with Wells Fargo.

• 11:39Speaker 02

  Yeah, a fine institution. I, for social reasons, I shouldn't comment on any individual institution. For all the reasons. Anyhow, like you have a phone in your pocket, there's an app on it, that app can move money around and that app does not suck by the standards of Silicon Valley products, where a short amount of time in recent like living memory, that either didn't exist, or if it did exist, it was terrible. And things are getting like far less terrible. A lot of things that used to have to call in and have extremely non deterministic resolution of like, say, chargebacks for disputed transactions on your credit cards are now essentially like one or two taps to to get it done. That is a decision that has consequences all over the

• 12:21Speaker 02

  economy, but from like the perspective of a user, like your card just got more useful. There are, we used to go like decades between there being really new payment methods introduced. And now it seems like we get more new ones per per like decade in one country than we would see across the world in typical decades previously. So just one of the new ones that interests me, not because I'm a user of it, but just because it's a fascinating bit of financial engineering is buy now, pay later, where they essentially decided like, okay, one of the pitches from the payments industry to businesses since forever has been like, payments is partially about moving money,

• 13:06Speaker 02

  but it's not solely about moving money. It's also about a embedded marketing expense. And if you were willing to allocate more of your marketing dollars to us versus allocating it to, I don't know, Google or Facebook or whomever, we could build a really attractive product for your customer by decreasing the perceived cost of credit to the customer straight down to zero. And so like the core, for those of you who don't use buy now, pay later, the core offering is called Pay in Four, where your purchase set without loss of generality, Sephora, gets chunked up into four payments. You pay the first of four payments immediately on your debit card, and then the next three payments happen in two week intervals. And there is no interest charged. People are like, well, how do I get loaned money without actually paying interest on it? And the answer is the Sephora

• 13:51Speaker 02

  in this case pays more to the buy now, pay later provider than they would to a credit card provider. And then they do a little bit of financial engineering that we can go into if you want to. And that ends up getting them to have a private source of capital to essentially like buy the receivable from you slash Sephora. And thus, you get your makeup today, Sephora gets its money today. And through this financial engineering, a synthetic high interest loan is created without the customer being directly charged the interest. So like, that's a fun thing that exists and creates some value in the world, at least if you're the kind of person who likes to buy make it that you don't currently have money in your pocket for. And then there is less than the United States, although

• 14:34Speaker 02

  Fed Now, maybe someday, like it could possibly happen in our lifetimes, but less sardonically, like we can look at other nations, like say, Brazil with PICS, India with the The UPI, that there are these sort of government, public, government slash private industry, public, private partnerships, which allow for substantially instantaneous, like very low cost payments within a country, which are achieving massive, massive adoption. And so it's a, an interesting time to be alive from the perspective of someone who looks at both like the financial industry side of things and also the more like tech slash user focused side of things. What is the thing that people actually have on their

• 15:19Speaker 02

  phone? What are the actual buttons they are pushing when they're interacting with the banking system at perhaps like a hop or two of remove?

• 15:28Ryan Sean Adams?

  So Patrick, your perspective is that it's actually got like it sucked 20 years ago and it's actually gotten a lot better since then. And you're saying that the banks have made it better. Is your impression that it's really been that the banks themselves? I will admit, I do think the bank apps have gotten better. They still kind of suck, but I would say that fintech has gotten like really good, like sort of the layer, the apps built on top of it. Stripe is obviously one thing, but kind of like the Venmos of the world, the revolutes of the world. It's really the fintech, fintech app layer. It's kind of like the, the user experience built on top of the banking system that has really

• 16:10Ryan Sean Adams?

  improved over the last 20 years. And I definitely seen that being in kind of the US and North America. I've also heard stories from, from places where it's even far more advanced, right? So, you know, China, they have kind of the super, super app with the WeChat of the, of the world. And you know, just payment is as seamless as, as sending a text message. And they are moving increasingly towards a kind of a cashless society. Is that where you're saying we've, we've actually gotten a lot better? The banking system has gotten significantly better? Has it been on the fintech side, the app layer side of things? Or is there something deeper here?

• 16:44Speaker 02

  I absolutely agree that fintech, although fintech is a kind of squishy word, the historical definition of it was basically any company that moves a lot of money and is capable of employing competent software engineers. And it turns out that like banks are both moving a lot of money and capable of employing competent software engineers. They had a multi-decade decision to like maybe lean less into that. And then over the course of the last, I would call it 15 years or so, really since the advent of smartphones, have kind of been forced by market conditions to get better at this. Banking, payments, the like the economy is ecosystem.

• 17:24Speaker 02

  And so there, there is no single unitary actor or small group of actors that controls the experience that is fundamentally put in front of users. So there, there is a certain amount of credit that should be given to banks. I think there is a lot of credit that should be given to what are like, you know, traditionally considered fintechs or like pure play fintech companies or et cetera. There's a lot of credit that should be given to PayPal. There's a lot of credit that should be given to, to Apple and Google, less than their capacity as fintech providers, although both of them have very material fintech arms and more in their capacity as ecosystems, which simultaneously on boarded hundreds of millions and then billions of people

• 18:06Speaker 02

  onto like extremely connected platforms and then figured out how to integrate financial rails into those platforms and got people more comfortable with, with using them. One of the things that is kind of like undersung about the history of credit cards is that credit cards themselves were also sort of like incentive systems that, that incentivized the creation of networks of disparate organizations going out to disparate people and getting them to all agree on sort of common underpinnings for commerce, even when they didn't necessarily share a common language, a common culture, et cetera, et cetera. And so. It's kind of miraculous that it works. It was 50 years ago and more than 50 years ago now,

• 18:48Speaker 02

  predates the internet. And yet, like, it is a true observable fact about the world that the Visa, MasterCard, et cetera, et cetera, systems somehow managed to send out like the right combination of sales forces in Japan and the United States such that someone banked at a Japanese bank can like get on an airplane, be in the middle of Detroit Airport where they know nobody, walk up to a sandwich shop and say, that thing looks tasty. Can I have that thing? Give them a piece of plastic. Might not even say anything about it. And like, everything just works after that point. They get the sandwich. The sandwich shop gets the money. And then there are somewhere between like five and seven players in the middle that make some

• 19:30Speaker 02

  offsetting transactions happen in Japan and the United States such that it all bounces out at the end of the day. So this is the sort of thing that I find like endlessly cool. So as someone who likes looking at complex systems. But yeah, broadly speaking, I think that banks as a sector were laggards on technology until quite recently. I think if you were to like do a shootout between, you know, engineering organization at Google versus engineering organization at like pick a large bank to have a pretty confident point of view on how that shootout would go. But on the optimistic side of things, like there has been progress in our lifetimes and it's easy to see.

• 20:09David Hoffman?

  Yeah, I think maybe coming from like the younger generation's perspective, the Zoomers, even the millennials who are used to like TikTok and YouTube reels and things moving at a mile a minute, like the incremental improvements that we've seen in the banking and fintech layers over the last 20 years is still like really slow. It's still like a turtle's pace. And there's still like a bunch of just like structural things in the banking system that I think are just like completely anachronistic that I kind of want to like tap into. Because there are things that like I don't really think that we're ever going to change. For example, like banks close at like 6pm every single day. Like my wire cutoffs are 2pm. Holidays, can't do any banking. Stock market is closed most of the time. So like, maybe let's just pick

• 20:54David Hoffman?

  one of those things, like banking holidays. Like if all of our banking is digital now and like we have apps, why do they close still? Like, why do we have to actually shut down these systems on like the weekend and on holidays and stuff like that? Like, oh, do we still actually have to do that? Or is that just like an anomaly?

• 21:13Speaker 02

  Everything we do is a choice and every choice we make is made in the context of some amount of legacy choices that we've continued through the present day through some combination of culture, built-in infrastructure, the built environment we work in, et cetera, et cetera, et cetera. I do have to say, like, and not to grind anybody's nose in it, when you say like banks closed during banking holidays, like, particular windows into the banking system definitely do close on like particular time scales and then other windows don't. And, you know, whether that affects you or not, it kind of depends on which window, what activity you're trying, you're trying to do during various times. Like, there, a thing that used to drive me crazy as someone lives in Japan is there was a true, what we call as technologists,

• 21:56Speaker 02

  stop the world event in Japan, which coincided every day, every year with the New Year's holiday. And substantially all banks would decide from like January 1st through January 4th, we're taking all the computers offline for the annual upgrade and money stops. There are no bank transfers, no debit card transactions, can't use an ATM, et cetera, et cetera, et cetera. And like, we did that for 40 years, more than 40 years. And then in the last couple of years, they were like, hey, hold on, wait a minute. We still do need to do system upgrades. We still do need to have the books balanced. But the geeks tell me, you don't actually have to turn off every computer for four days to do a database backup.

• 22:41Speaker 02

  Wow, that's cool. Maybe we shouldn't do that anymore. And so like some amount of improvement. Why do certain things still, still take as long as they do? There is a dependency tree for many products that you work with. So like to use an example from payments, a, a lot of the reason that if, you know, a customer comes into your, your shop and pays with a debit card or a credit card today, or if they go to your online store, like, why doesn't that money arrive to you instantaneously? Even though databases can move substantially instantaneously. The big reason is probably that the actual settlement of that transaction happens over networks that are just like fundamentally not.

• 23:22Speaker 02

  instantaneous at the moment. And so, you know, in the United States, it might happen over ACH, which ACH timelines, like this is one of those improvements in our lives. They've been getting shorter over the years, but it still takes like plus or minus a business day to to get the money. And so you are rather unlikely to have an agreement with your credit card processor that would result in you getting credited all your money today for free. You know, it will typically be the next business day or the next next business day or some other agreement that you can mutually strike. Another reason that is often underappreciated for like, why isn't everything moving at internet speeds is that there is a cost associated with making things virtually instantaneous,

• 24:02Speaker 02

  which is that making things other than instantaneous gives you sort of more bites of the apple to interdict bad activity happening over the system. So for example, fraudulent use of cards, takeovers people's accounts, et cetera, et cetera. When money moves instantaneously, it is possible to like, you know, download someone's password from a popped bulletin board on the internet, use that against the bank because most users reuse their passwords everywhere, take over their bank account and then like move out all the money out immediately. Nobody wants that to happen. Well, okay, fraudsters want that to happen. Aside from fraudsters, nobody else in civil society wants that to happen. And then there is a kind of curious

• 24:46Speaker 02

  thing on like the the businesses that have been closest to real time for the longest have invested incredible amounts of money into getting better at defaining that risk, mostly because when they don't do it correctly, they end up paying out of pocket for it. And so, and thing I've said on Twitter a couple of times is like PayPal shareholders have done the sacred duty of equity in like multi hundred million dollar sizes over the years to to pay out the fraudsters that PayPal was not sophisticated enough to catch. And that is not grinding anyone's nose in it. Like there is a, you know, there is a A social purpose in like shareholders as saying like, I'm going to backstop the cliched, but kind of real Kansan grandmother that is using PayPal to transact on eBay.

• 25:31Speaker 02

  Like if, if she loses money, she doesn't lose money, I lose money. And in return, I get the upside of the PayPal enterprise. And there's, you know, some social utility and like PayPal deciding like, okay, we're going to invest a huge amount of money into the, the technical and organizational underpinnings that will allow us to have this substantially real time payment method available over the internet without getting our pockets picked. And then there's some amount of like the good parts of capitalism where that, where that being available as an option kind of suggests to the rest of the banking system like, okay, Venmo is capable of doing like substantially instantaneous peer to peer payments. You're not. I should move transactions to Venmo when I want to like give money to my family and

• 26:16Speaker 02

  have it arrive like right now instead of a couple of days from now. And then, you know, the banks kind of get dragged along to, to keep up with the other options on the market. And then there's like things you can say about that, too. Like the ways that the banks have been dragged along are not always optimal, either by their lights or by our lights. If you want me to talk more about Zelle and how you would compare it to other real time payment systems, happy to do that. It's a, it's a fascinating, but kind of wonky topic.

• 26:43David Hoffman?

  Sure, sure. Yeah. I think like kind of the, the vibe that I get whenever I explore the world of like traditional banking, what we call tradFi in the crypto space is that it's just like layers upon layers of technology that spawned back like decades. And so some of the choices that were made like 40, 50 years ago are still alive and some of the layers of technology that are being like wrapped around finance today. And like, it kind of seems that like the world of banking, fintech, tradFi is like a fridge that has never been cleaned, right? We just keep on putting more stuff in. We actually never take any of the stuff out, clean it up and put it back. Like, so maybe just as like a thought experiment, Patrick, like if we were to like, you know, quote unquote, clean out the fridge of tradFi and like just rebuild the system from scratch,

• 27:28David Hoffman?

  maybe we were given some sort of like god mode. Where we could just pause time, all come to a meeting, determine like how we would want to rebuild the traditional finance system. Would like, would much change? Would there be a lot of interest in like reconstructing and like rebalancing the the the networks and payment rails and banking system that we currently have? Or is like, do you think if we were to reroll the dice, we would just actually kind of get the same system that we have today? Like, is there all that much like tech debt or like financial debt to to like clean up in the world of TradFi? Or do you think it's actually more of a little more or less a system that has like a true achieved its true north?

• 28:06Speaker 02

  Nuanced point of view here. The the traditional system, Wartson all has created an incredible amount of value in the world. There is no way that we would like get together in a room and say, okay, we're gonna like go up to a blackboard and make a new financial system and it is magically free of all legacy constraints. There's no way we would adopt all of the decisions that were adopted 70 plus years ago. One would be alarmed if that was the case. That would like be implicitly saying, we've learned nothing in 70 years with this thing that is like, what, one sixth of the economy? All the smart people, all looking sources, all the king's men, they didn't have a thought in 70 years. And like, specific examples of things that we probably want to, number one, there probably won't be mainframes kicking around anymore, which there are definitely

• 28:49Speaker 02

  mainframes kicking around today, both in the traditional finance system. And they're like important things that are not usually considered in the traditional finance system, like say the Social Security Administration slash the IRS, which like, on the one hand, you don't see on those on the org chart of banking system. On the other hand, like, the software that runs on a mainframe in the IRS is to like, a very real degree, the United States of America, written in computer code. And if that computer code stops running, like there are food riots in Kansas. So, like, we kind of can't ignore that software. And so, mainframes, like, throw them away. We've got better computers now. They're faster. We can put them, we can put them in the cloud somewhere. Amazon will probably host them for very reasonable fees, yada, yada, yada. And checks.

• 29:32Speaker 02

  Oh, boy. Checks like.

• 29:34Ryan Sean Adams?

  I hate checks, Patrick.

• 29:36Speaker 02

  Can I just can I just explain using crypto lingo what checks are?

• 29:40Ryan Sean Adams?

  Yeah, please, because it seems like a piece of paper and you write your it has your private keys.

• 29:45Speaker 02

  Exactly like.

• 29:45Ryan Sean Adams?

  These don't seem like a good idea.

• 29:47Speaker 02

  The private key for all of our for that allows us to access all of the money in our wallet on every payment, but not just that. No, that private key might be hard to read. So we are going to develop a special machine readable type so that the private key is only ever read correctly. So that anyone who ever glances at your check can like produce a substitute instrument, which will move arbitrary amounts of money from your bank account. That, by the way, like absolutely real thing. Industry has spent tens of billions of dollars to like defying this fundamental property of checks, which is that if you know an account number, you can attempt to withdraw money from the bank and it will look as good as a lot of other withdrawals to like presented to your bank unless your bank like makes affirmative

• 30:32Speaker 02

  efforts to to do anti fraud measures there. Bank or other processor.

• 30:36Ryan Sean Adams?

  The signature for a check, by the way, Patrick, is just bizarre that we still kind of carry that forward, even into like if you if you pay for something in your coffee shop with Stripe, they still ask for your signature. I mean, sometimes I sometimes I put a smiley face and just like, no one cares. No one notices rather than my actual signature. And I'm just like, what is the ceremony behind this? Like, why do we still do this?

• 30:59Speaker 02

  So this is fascinating. It's when we say signature in crypto or in technology, we're usually talking about some conflation of authorization and authentication. Like, I am a one, you can trust that I am Patrick versus I am someone who is assuming Patrick's identity. And two, with respect to this money that is controlled by Patrick, I have authority to make this transaction that I'm putting my digital or physical scanner on. Signatures in the banking system are not primarily used for authentication or authorization. Despite people having that misconception, they're used for solemnization. solemnization is basically saying like, I, an unsophisticated user of the banking

• 31:40Speaker 02

  system, understand that, like, we might have just been chatting about potentially doing a transaction up until this point, but in the culture that I exist in, I understand that when I sign my name on a piece of paper, I am agreeing to something in a way that like-

• 31:56David Hoffman?

  It's like pressing an "I accept" button, sort of thing.

• 31:59Speaker 02

  Yeah, it is exactly that. And so, if your signature doesn't match the signature that your bank has on file, eh, nobody cares. In the vast majority of cases, like, no human will actually look at that. If the transaction is actually, the bank doesn't know whether a particular check was actually signed by you or not. One, if they've gotten to that point, that's kind of problematic for them, but they will try to get signal on that question exactly versus like, okay, let me examine the four corners of the check document and try to figure if this forensically matches it. I can't produce my own signature most of the time. Theoretically speaking, the legal system has handwriting experts.

• 32:42Speaker 02

  Legal system has a lot of forensic experts in various things. Some of those fields are officially witchcraft. I strongly suspect that signature authentication is like, physical, handwritten signature authentication is not all that valuable, given that nobody in the financial industry actually organizes their affairs to care about it.

• 33:03David Hoffman?

  Yeah. My signature personally turned into a scribble about six years ago, and my original signature is like, lost to history. I do not have a signature.

• 33:13Speaker 02

  Yep. And I think that describes most people these days. And if you're a sophisticated angel investor who's DocuSign-ing stuff these days, you click the DocuSign button, you click "I OK," and most of the time DocuSign will just fill in a font for you.

• 33:27David Hoffman?

  Generate, yeah.

• 33:28Speaker 02

  Like, billions of dollars goes on this, like, we're not even pretending anymore method of signing legally. binding documents and we're certainly not like pretending about the documents being legally binding. Those are as legally binding as any documents could be, but like the the signature bit, it's like, yeah, we're, you know, this is a fun tradition we used to have. In Japan, we had this fun tradition about inking stamps. I kind of loved the ink stamps to authenticate things. A couple of years ago, the government was like, hey, inking stamps to authenticate, you know, bank transfers and legal documents doesn't seem to be best practice in the modern world. So we're going to suggest that private industry deprecate that. And I was a little sad because I love my stamps, but we're moving away from that.

• 34:10Ryan Sean Adams?

  Stamps. I'm just not even sure what that means.

• 34:13Speaker 02

  Are you familiar with the word chop? You have a carved, essentially a signature, your name written in characters on a piece of traditionally wood or horn or something. You you've carved the bottom, you have a pad of ink, you stamp the the stamp into the ink, which transfers ink. And then you make an impression of that stamp on the document and that will transfer the ink to the document and then service your legally binding signature. And so there's, just like in the United States where there is legal and social infrastructure around this and Japan, there is legal and social infrastructure around like the institution of, they're usually called Hanko in Japan, called chops by Westerners with regards to China, whatever.

• 34:53Speaker 02

  There is like legal and social infrastructure around Hankos being a proxy for authentication slash authorization. And anyhow, fascinating, fun story. The government said, eh, we we kind of want everyone to be done with this, which surprised me. I thought we were going to continue with it for another 50 years or so at least. And then the financial industry taking excuse from the government because in Japan, like everywhere else, the financial industry and the government are buddy buddies in a lot of ways. They've been moving away from chops very quickly over the last few years.

• 35:28Ryan Sean Adams?

  Okay, so Patrick, David was asking if you'd redesigned the financial system, what you'd do. And we talked about a few things. You'd kill mainframes, you said, and you'd redo the check process to not make them basically vectors for security holes. There's probably some reason that checks are designed the way that they are, that we don't have to get into entirely. I think you've written an entire essay about this. What other things would you change? And one thing I want to ask you about specifically is, what about cash? The idea that we still have like cash money, would you still preserve that? And I'll say a few things, maybe in defense of cash and in support of cash.

• 36:12Ryan Sean Adams?

  One thing I really like about physical cash money, even though I hardly use it, is that it is a bearer asset. And so if I give it to you, I no longer have it, and the transaction has been completely completed and settled. And it's very primitive. It's very basic, just like peer to peer, one person to another. It's almost crypto in its ethos from that perspective. It's also anonymous. It's also private. It's not being surveilled by any third party. It's just between the two of us in kind of like a local economy. All of those things feel great. Now, it's also very inconvenient. I hate storing cash. I hate holding it in my wallet. I have a nice, thin wallet. And just too much cash kind of like

• 36:57Ryan Sean Adams?

  cramps my style. My pocket's too big. All these downsides of cash as well. And now, of course, there's an association with cash is like, it's drug money, right? It's like briefcases full of cash. If you use cash, are you like involved in something illicit, right? There's almost the implication now there. It's kind of like just moved to that element of society. What would you do with cash in your redesigned banking system?

• 37:22Speaker 02

  I honestly don't have super strong opinions on that. I understand that advocates of cash have a bunch of properties that they associate with that they rather like. I jokingly call myself the state of shill when I'm talking with most crypto people because jokes are jokes. But people have a fundamental right to privacy. And to the extent that they think cash is an important part of them maintaining a fundamental right to privacy, including vis a vis their own government legitimately constituted or no, like I say, oh, well, you know. If that works, great. I would say like, there are some asterisks around like claims like cash is not surveilled.

• 38:05Speaker 02

  Cash very much is surveilled. The like one mechanism for it is that if you move more than $10,000 into or outside of the banking system, and you don't fall in one of a small number of exceptions, your bank will file a currency transaction report with the Financial Crimes Enforcement Network, which is in no way a sign that your bank or the government thinks you did anything wrong. This is just this mechanical tripwire that society has decided everyone needs to go over every time they move money in and out. And there are various documents you can look at from government law enforcement agencies about how they use

• 38:43Speaker 02

  currency transaction reports, both to interdict like per se facilitating crime cash transactions, but also how they like use the existence of currency transaction reports to create sort of webs of accounts like correlating, okay, if you are a business owner, where are your personal accounts so that I can more easily do my investigative process with regards to those kinds of things? And through this circuitous route, get access to information that they wouldn't otherwise have in a conveniently queryable database. And when I read those like extremely candid, you know, for internal publication, things that are published because the United States is a democracy,

• 39:25Speaker 02

  about like the, you know, the use of currency transaction reports as opposed to like the story that was sold under with regards to like interdicting lots of drug money moving in and out of the system. It feels like kind of disquieting, like, you know, ICE, back when it was still called ICE. ICE in 2004 has a currency transaction reports, how to use them as an ICE officer. This is great for investigations, yada, yada. And like, it's for an internal magazine, which is published in it because we're a democracy. And they're like, yeah, basically like currency transaction reports are the database for like all national bank accounts that we wish we had access to, but don't. Like, wow, wow.

• 40:07Speaker 02

  What? Like, that doesn't feel great.

• 40:11Ryan Sean Adams?

  Well, this is interesting, Patrick, because you know, you've outed yourself at this point in the podcast as kind of a state of chill in kind of a joking type way. And I want to talk about that. But, you know, I think you have a very nuanced position when it comes to things like money laundering and AML KYC and that sort of thing. And even some of the Bank Secrecy Act type things that you were talking about. And you were saying, hey, it doesn't necessarily all of this sit right with me, some of the things that they're using this data for. I'll just make one point, which is broadly observed as we've talked about this. If we were tasked with redesigning the financial system, you were on this board, this group

• 40:51Ryan Sean Adams?

  of people who's redesigning the financial system, there's a, I guess, an axis of optimizing things for efficiency that would be very important. So we get rid of mainframes and, you know, we increase the security of the system by getting rid of kind of the checks and that sort of thing. But there's also another axis that we haven't talked about, maybe the next conversation will. It seems like there's something inherent with money, which is a civil liberty as well. You know, there's some that have argued that money is a speech. And if you don't preserve the freedom to transact in an economy, in a democracy, do you actually really have, you know, freedom? If you are attending a protest and you want to, you know, create signs or use transportation to get to that protest, that's going to require economics, that's going to require commerce,

• 41:36Ryan Sean Adams?

  that's going to require some sort of participation in the money system. If you're barred from doing that, if you don't have the civil freedom to actually do that, are you preserving freedom? And so as we like, think about redesigning this system, what's your take on how civil freedom and civil liberties kind of factor into this? And what do you think of the current apparatus that we have around money laundering, AML KYC, and even Bank Secrecy Act type things? What are the good parts about it from your vantage point? And where does it sort of fall short? And what would you reform if you could redesign the system?

• 42:13Speaker 02

  Sure. So.

• 42:16Speaker 02

  Broadly, and again, you know, we are not going to successfully redesign the financial system in talking about a hypothetical meeting redesigning the financial system in an hour and a half long podcast, but like fundamental to the financial system, society has a long list of aims. It's not a one dimensional space. It's not a two dimensional space. It's not 100 dimensional space. There are a lot of things we want and we have to accept trade offs between them. And so there are like certain things where, you know, if you were maximizing for, I just want to interdict drug smuggling, like that is my, that is my core North Star value, then you're going to accept a system that has much less efficiency, much less respect for civil,

• 42:56Speaker 02

  respect for civil liberties, cares much less about the experience of like recent immigrants in your country, et cetera, et cetera. And, and so like the ultimate question about like, how do we, you know, balance this like complex bucket of competing aims is like ultimately comes down to a political process. And, you know, the like fiscal and technical reality of the, of the systems interacts with that political process in like funny ways. So let's talk about the AML slash KYC stuff. The, the thing I agree most with like the stereotypical crypto advocate on with regards to the banking system is that the financial system is used as an

• 43:39Speaker 02

  element of policy and occasionally as an element of state control, like an absolutely true statement, which relatively few people in the financial system would disagree with. And for like complicated social reasons, relatively few people in the financial system would say in as many words. And so

• 43:56Ryan Sean Adams?

  And state control, you mean state control over their own populace or geopolitically over other countries, do you mean?

• 44:02Speaker 02

  Yes, like all the forms.

• 44:04Ryan Sean Adams?

  Okay.

• 44:05Speaker 02

  And so anti money laundering and KYC regulations impose some sort of like frictional costs on all transactions in the economy. And

• 44:17Speaker 02

  I think that is possible to both overestimate and underestimate those frictional costs, like the sort of like, quote unquote, median typical user of the United States banking system will go years between like ever understanding that that is a thing. They got asked some questions that they probably forgot about already when they when they opened their bank account, they had an immediately responsive answer to the questions. The bank didn't really care about the answers anyhow, it got written down, life moves on. However, if you have like certain fact patterns in your life, you will hit AML/KYC stuff a lot, and you might hit it a lot relative to like our true desire as a society for you to keep paying that frictional cost. An example near and dear to my heart says I was an immigrant for 20 years is like,

• 45:02Speaker 02

  if you're an immigrant, you are per se less legible to the system than other people are legible, you will like not have documents that the system just expects you to have. And this is, by the way, invariant on whether you are a legal immigrant or otherwise. But like, you're gonna constantly throw up errors. And one of the errors that I threw up in Japan all the time was that various computer systems, due to like being created in an environment where the types of names we test the computer system for are Japanese names, there's a culture that is Japanese people. In that culture, people don't have names with 23 characters in them, because like, what kind of crazy nonsense is that? And so, like, the backend system and the frontend system do not agree that your name can actually be a name.

• 45:47Speaker 02

  And so, any number of times, I've been called down to the bank office to deal with an AML or KYC issue, which is like, not caused by the bank having any suspicion about me, not caused by the government having me on a watch list, not caused by me doing anything strange. It was just like, two computers at two different institutions can't agree on your name, bro. So can you come down and explain this to us in person for the 400th time? And, you know, I'm throwing myself under the bus here, because I don't want to embarrass anybody else, particularly people that are in like, somewhat rough social circumstances. But if you were to ask like immigrants in the United States, hey, like, how much friction do you have dealing with the banking system? The answer is like, a lot relative to this sort of like bog standard, middle class American, including doing things that we like...

• 46:35Speaker 02

  Essentially, nobody in society thinks should be hard. The people that are maximally enthusiastic about like AML and KYC as practiced would say, "Okay, when we were drafting the regulations, we definitely didn't mean for you to like, you know, deny a savings account to a 12-year-old who is trying to like do this project for their fifth-grade class, which requires getting a savings account over AML KYC stuff. Like, we only intended that to like a consequence drug runners. But there is no way to write that regulation such that it only consequences drug runners, or if there is, it requires other trade-offs.

• 47:15Speaker 02

  And so like AML and KYC as practiced do really impose like fairly substantial constraints on people that are constraints and costs on folks that are in the social economic margins. They also impose like very real costs on the financial industry and various organizations within it.

• 47:35Speaker 02

  I don't want to talk the book of any other like fintech company, but you know, there are any number of folks that you can Google that have said something like 25% of all the people who work in my company work in the compliance department. And so they're paying like an awful lot of money for people to go click, click, click, click, click, click, click on alerts every day. And the like, for folks who don't realize, your job, if you work in a compliance department and they're clicking through alerts is basically like a computer says that this transaction, about which we know one tweet worth of context, is fishy or not. For legal reasons, we have to have a human like take notice of the fact this computer thinks this is possibly fishy. You are a human, like, please take notice of the fact.

• 48:18Speaker 02

  And what you will almost invariably do, like more than 99.5% of the time, is false alarm, false alarm, false alarm. And so 25% of the employees in like real companies are like sitting there every day looking at this like constantly scrolling feed of alerts, false alarm, false alarm, false alarm, false alarm, false alarm, false alarm, false alarm, false alarm, false alarm. 3pm rolls around, oh, we finally caught something that might actually be an issue. Now I have to do like clear the next two hours to type up a report to send to the Financial Crimes Enforcement Network, which in all probability, no human will ever read. AML KYC, like that is the system we have.

• 48:56David Hoffman?

  And so Because the people that they're submitting a report to, are they also kind of just doing eh, click, click, click to the report that they get?

• 49:04Speaker 02

  So when you submit a report to FinCEN, that doesn't go to a human. It just like gets put in a massive database. And then a lot of law enforcement organizations in the United States have the ability to query that database on things like name, address, bank account number, et cetera, et cetera. And then if you like query it based on those things, you will be able to read all the, they're called SARs, suspicious activity reports related to that, or CTRs, currency transaction reports, which don't require any suspicion of wrongdoing.

• 49:33David Hoffman?

  So any like time, a compliance person in any of the fintech companies, of which there are tens of thousands, if not more, they do something manual. That is simply manually taking a transaction that they have deemed potentially suspect, adding it to a library that might be queried by crime enforcement agencies on an automated basis, just in case that one bit of data is useful for some crime in the future at some point in time.

• 50:01Speaker 02

  Yep. The, the BSA regime, Bank Secrecy Act regime, and all the KYC AML stuff that goes with it, like just descriptively, this is not a criticism. It is, this is just like, the thing we decided to do as a society was deputize a large portion of the financial industry as intelligence officers and have them cast a huge dragnet and write extremely large number of memos for an audience of no one in the, in the expectation that some of those memos would eventually be useful for the criminal justice system. And, and there are, there are mechanical consequences to SARs that are not actually in the criminal justice system. Like SAR is not in itself evidence of a crime in most cases.

• 50:44Speaker 02

  It is often not even evidence of like anyone suspecting that you have a crime. It's like the, the criteria for you as a financial institution, you must file if blah, blah, blah, blah, blah. It's basically like, I couldn't figure out a legitimate purpose for this transaction. Well, you know, like, there are a lot of things that I do in my life that my best friend would not do in my life. And there are a lot of things that I do in my life that my bank would not do in my life. And believe me, in some of my banking relationships, I am that weirdo who we spend more of our time with than anybody else. But like, none of that is criminal. But just because, you know, you like have some cultural disconnect or like, maybe you have quirky hobbies, whatever.

• 51:26Speaker 02

  That causes you to be outside the norms for whatever randomly drawn person is like looking at the tweet sized gloss of your activity that day. You can get a SAR filed on you. When a SAR gets filed, the bank is going to have to spend a couple hundred hours of serious professional time writing up that memo that goes to law enforcement, which law enforcement will probably never read. And most bank accounts are not worth $100 or $200 of staff time on an ongoing basis. And so what will happen at a lot of US banks, if you're a retail customer of the bank, is like, anybody can get one SAR filed out of innocent activity. Two, though, we want you to be somebody else's problem. And the bank will send you a letter saying, and a crazy thing about SARs in a democratic society

• 52:09Speaker 02

  is that you're not allowed to disclose the fact of a SAR, not to the user, not to other people at the bank. You are not even allowed to disclose the existence of a SAR if you're asked to testify about the existence of a SAR in a US court of law. Like, that is black letter law. And that is mind blowing to me. So when you are the bank and you are firing someone essentially for getting SARs, you don't say, "We're firing you as a customer because you're getting SARs." You will use language like, "The bank has made the independent commercial decision, which will not be reversed, to close your account." Possibly you will say, "We've made the independent commercial decision, which will not be reversed, to close your account because it is outside of our personal risk tolerances."

• 52:49Ryan Sean Adams?

  Yeah.

• 52:49Speaker 02

  Those personal risk

• 52:50Ryan Sean Adams?

  Patrick, I've gotten one such letter like from Bank of America. And it was, I believe, because there was some exchanges between Bank of America and my own personal account and Coinbase. And this was many years ago where I was kind of like unbanked. And they wrote me that sort of a Dear John letter, which is like, risk, risk, you know, you're a candidate falls outside of our, you're a customer falls outside of our risk spectrum will no longer be able to serve you. So I have no idea what went on in the background. It was just like, please go away. You're no longer a customer. We're closing your account. We're cutting you a check within 30 days. A lot of the stuff that you've described, I think, Patrick, will strike many. And I think, you know, a crypto advocate would say is like, this is

• 53:35Ryan Sean Adams?

  really creepy. Like, why do we have to construct things in this way? And maybe there are some good reasons for them. But you have said earlier that, hey, you know, no doubt about it. This is the, the nation state uses the banking system for power, for some element of control, either domestically or, you know, externally as well. And I think that a lot of the things that you just described with the existing system, I'm actually thankful that they're so inefficient and crappy. Because imagine if they were hyper efficient. And there is a world where they can be made hyper efficient, right? There's talk of central bank digital currency, for instance. And I know China is very much moving to a pure cashless society that I think takes many of the ideas of

• 54:20Ryan Sean Adams?

  central bank digital currency and actually deploys them through some of their tech platforms. I think to a lot of Americans, this feels like an infringement. This feels kind of creepy. This feels like the state shouldn't have that much control. And there is some element, you're right, when we design a society, right? In a democratic society, we also don't want criminals. We also don't want drug dealers. We also don't want fraudsters and hucksters, you know, preying on our elderly and stealing their money. So we want to try to avoid those circumstances. And I guess the best interpretation is some of these laws, you know, remove the bad actors from the system. But there's definitely this This feeling, the sense that we are losing some of our civil liberties as a result.

• 55:04Ryan Sean Adams?

  And crypto is kind of like a pushback against that. And I'm wondering if you see any merit to that. Like, have our AML KYC laws gone too far? Or could they go too far? What do you think of a central bank digital currency? Does that get into kind of creepy territory to you? Or, you know, would you, yeah, what would you say to defend this?

• 55:25Speaker 02

  So, again, personal opinion is only central bank digital currency. I don't know anyone who is not either like a consulting firm trying to pitch a central bank and we will build it for you, or a central bank itself that actually wants that as a product. It's not a compelling end user experience. It's not a compelling rail to build on top of relative to other financial rails that are available. And I think in most countries of interest, which definitely excludes China, the like, we are unlikely to see them deployed in a meaningful fashion versus other systems that accomplish a lot of the same goals, but are definitely not a CDBC as you usually described.

• 56:09Speaker 02

  Like UPI is sometimes conflated with a CDBC, but it doesn't one. You know, fundamentally, like the money is held at actual banks and they transfer money between them in the usual fashion of transferring money between banks. So, you know, not to grind anyone's nose in it, but just like society has choices on, has this n dimensional vector space of how it wants to configure the financial system. Like various people who are building their own systems from scratch, like have, you know, also a vector space where they have to like make some choices and make some hard trade offs. And one thing that the United States was, and the banking system was historically like not willing to do, is give the government a instantaneous like Ctrl F to find all your transactions.

• 56:51Speaker 02

  And apparently like the, you know what I'm going to say next about like the crypto, cryptocurrency like ecosystem next, right, guys? It's like, let's put all the transactions in a publicly readable database for privacy.

• 57:04Speaker 02

  And I do think there is an important part there on the, you know, we have some amount of acceptance for the system we have that is both based on like the system as it is described to act. And also is like the system that it actually acts. And so inherent in, you know, you, me, us as a society, accepting like the US's regulation of banks is that we have some impression for like how much state capacity the United States has. And we would probably be like very unhappy if the amount of state capacity the United States had like suddenly went to, you know,

• 57:41Speaker 02

  like to the moon with respect to like some of these things, because that would allow somebody to like get the control F over all the transactions that basically at will. And essentially, nobody in the US polity is okay with that. And the like a consequence of, you know, the banking system getting much better at technology, financial technology companies getting much better at technology. The government getting dragged, kicking and screaming to getting better at technology is like state capacity is going up versus like the late 1970s where, you know, the BSA was altered in during a time where it was like, okay, the United States federal government,

• 58:21Speaker 02

  like what's the realistic number of like complex money laundering investigations that the entire United States government can do at the same time? It's probably like between 10 and 100. And now with like much faster computers and like Dragon Net capabilities and potentially AI in the future, et cetera, et cetera. Oh goodness, like the number of people that you can keep tabs on in intrusive manner is like much more than 100. And so like plausibly, we as civil society should kind of like renegotiate the compact with government on, okay, we gave you very broadly drafted powers earlier and we've hooked up billions of dollars of infrastructure in the financial system to those powers. We need to have a chat about like what powers that you should actually have and like

• 59:04Speaker 02

  what the threshold is for for getting access to some of these things like a thing someone could possibly say is, you know, there's a traditional understanding in the United States that you can't search someone's books and records without a warrant from a magistrate. It's written in this obscure document called the Constitution. Like plausibly, your transactions with a with a bank are, you know, for like historical legal reasons, it's assumed that you like waive any rights to privacy when you give the bank your data because like you're the government isn't getting the data from you, it's getting it from the bank. And if we say like, look, guys, honestly, we've intentionally structured the system such that like the vast majority of economic activity moves through the banking system,

• 59:45Speaker 02

  which must mean that like constitutional protections apply to to this, like, let's, let's like draft, you know, a warrant regime that's that's cognizant of that, like, just how you can't say like, oh, you know, I don't like the cut of your jib, and I'm curious about who you correspond with. Give me a copy of every letter you've ever written, and I'm going to read them and then tell you if I have reason to suspect you of a crime, like, you would get laughed out of court. It's just like, you can't just like, if just because you're a federal agent, go Ctrl F on somebody's name and like, start developing a list of all their bank accounts, just because that is convenient for you to do. This is a thing that civil society could choose to do. It is not a thing that civil

• 1:00:25Speaker 02

  society has chosen to do yet. I'd be broadly supportive of it. But we'll, we'll see how that goes. Sadly, you know, it's not really incentive compatible for anybody in the in the system to like, you know, put a big stake in the ground and say, I'm in favor of making it more easy to launder money, where this is not that proposal, but it would be characterized as that on both sides of the aisle. And so we, for better or worse, we have the the optimismist society that we keep voting for.

• 1:00:55David Hoffman?

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• 1:01:39David Hoffman?

  that provides milestone-based funding to promising projects that help expand, secure, and decentralize Mantle. If you want to get started working with the first DAO-led Layer 2 ecosystem, check out Mantle at mantle.xyz and follow them on Twitter at @zeroxmantle. Cello is the mobile-first EVM-compatible carbon-negative blockchain built for the real world, driving real-world use cases like mobile payments and mobile DeFi. And with Opera MiniPay as one of the fastest-growing Web3 wallets, Cello is seeing a meteoric rise with over 300 million transactions and 1.5 million monthly active addresses. And now, Cello is looking to come home to Ethereum as a Layer 2. Optimism, Polygon, Matter Labs, and Arbitrum have all thrown their hats in the ring for the Cello Layer 2 to build upon their stacks. Why the competition?

• 1:02:22David Hoffman?

  The Cello Layer 2 will bring huge advantages, like a decentralized sequencer, off-chain data availability, secured by Ethereum validators, and one-block finality. What does that all mean for you? With Cello Layer 2, gas fees will stay low, and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using social connect. But Cello is a community-governed protocol. This means that Cello needs you to weigh in and make your voice heard. Join the conversation in the Cello forums. Follow Cello on Twitter and visit cello.org to shape the future of Ethereum. Are you launching a token? Is it already live? How are you managing the legal and tax obligations for providing token grants to your team? It's no secret that token management gets complicated. Between learning all the legal language and tax obligations in every country that your team is in,

• 1:03:05David Hoffman?

  And grant management can feel like an obstacle course, but it doesn't have to. That's where toku steps in toku provides practical tools to handle token grants, allowing for effective oversight of token distributions and payroll tax compliance for employees, contractors, advisors, and investors. They also handle tax withholdings through their real time tax calculations that can be done by toku or integrated into any payroll EOR providers in any jurisdiction. Toku is a trusted provider of protocol labs, DYDX foundation, mean a protocol and many more. Get started for free and make token compensation simple at toku.com slash bankless. Patrick, at least inside of the crypto world, there are some prescriptive things that we crypto people think that civil society ought to do. There's a couple of like lines that we like to repeat, right?

• 1:03:50David Hoffman?

  Not your keys, not your coins, which means like, you know, generally civil society should think about taking custody, right? Federal Reserve, root of all evil, to tokenize everything. Maybe in civil society, we should like tokenize everything, put it on a blockchain.

• 1:04:05David Hoffman?

  What about the many quips that crypto people have to say on Twitter and on podcasts and around the world, which one makes you cringe the most? I know you already like mentioned the let's put everything on a public permissionless, totally auditable, readable ledger. I know you've got that one, but like, what one comes to mind first and foremost?

• 1:04:26Speaker 02

  So, oh, man.

• 1:04:31Speaker 02

  Crypto, you know, and the crypto ecosystem is a big one. And there's no like single strain, a single strain of it, right? But to the extent that we we accept this generalization, like crypto presents a lot of faces to a lot of different people. And those faces say like different sales pitches for it. And a lot of those pitches are mutually incompatible. And I think crypto is less than reflective about this fact. So it's the, you know, unbank yourself, no trusted intermediaries. The central bank is the root of all evil, yada, yada, yada, when convenient to it. And also it's like, and there were $10 billion of inflows to the Black Rock ETF for Bitcoin. Woo, number go up.

• 1:05:14Speaker 02

  And like those are fundamentally incompatible pitches and kind of always will be. The thing like people are voting for with their wallets, both like the crypto kind of wallet and the more figurative uses of like, where is their capital going? Is they want increasing. Uh, integration into the uh

• 1:05:37Speaker 02

  TradFi, I would call it the grown up financial order, or whatever you want to call it, like uh increasing integration, increasing legibility, et cetera, et cetera. Uh, and like all things come with trade offs. Like that is going to come with a trade off too. Uh, and uh occasionally it's going to come with like having to, you know, people at banks don't sing from the AML slash KYC hymnal because they like were uh were baptized into that religion. They do it because like uh performing enthusiastic compliance is a thing that you have to do, or you get thrown in jail. Uh, and so to the extent that like crypto firms are uh, you know, want to increase the integration, like they're increasingly going to have to sing from that hymnal, or they will be like heavily consequence for not doing it,

• 1:06:17Speaker 02

  unless we, you know, make the broader societal change to uh, to reform those practices. And so that that's the biggest thing. Uh, like the the intellectual consistency is kind of sporadic. Um, with respect to like the, the individual uh slogans, like not your keys, not your coins, just as from a product perspective, the vast majority in the world, a majority of people in the world will never be capable of understanding the difference between a public key and a private key, and they will not be capable of self custodying uh keys in like any form of legible format to them. And so uh, and I think crypto as an industry is largely cottoned on to this view, uh, although it might not say it uh in as many words, like uh, there are, you know, good products, the Coinbase

• 1:07:02Speaker 02

  wallet, et cetera, et cetera, which like fundamentally have those primitives backing it somewhere, but uh, it, you know, feels like a normal tech product that doesn't require you to get a uh degree in the like, you know, quirky things crypto expects you to know about the world, like what is a Merkel tree, et cetera, et cetera. Uh, like the vast majority who have interacted with crypto and never have to know what a Merkel tree is. Uh, and I think that is good. Like that is the way the vast majority of tech products work. Uh, I will, I will say I'm one of the relatively few crypto skeptics that actually could diagram out a Merkel tree. Uh, so yay, yay for me. I have wasted enough uh hours in my life on uh reading Bitcoin code. Uh, but there are lines that we, that we use about uh sovereignty, et cetera, et cetera, that are

• 1:07:44Speaker 02

  Like not lines that will reflect the reality of the world that we build into products and they're, you know, observationally false. When you look at, like, pick any population of crypto users, aside from true long-term maniacs, I don't know how folks in the community describe themselves, whatever. But like, if you were, you know, if you were really enthusiastic about crypto, because it can provide a dollar-denominated currency to people in Argentina and like, get them out of bad choices that their government has made. I'm not making that statement, but I'm putting in someone's mouse, because a lot of people have like, put that statement through their own mouse. Like, you have to actually care about how the median Argentinean person interacts with that crypto product. And that answer is probably going to be, it's

• 1:08:27Speaker 02

  a hosted product with a like, single point of failure company in it, which wraps another single point of failure company. And that might be like Tether, for example, and et cetera, et cetera. And so like, this is the alternative financial system that we, the broad we are building. And to what degree are we happy with that? And to what degree does it like, does it provide something that is better than than alternatives? Like, would that, you know, would the single point of failure that the Argentinean person is using be better if it was like backed by Tether under the hood versus being backed by like, a receivable from that company that happens to be denominated in dollars and is really trapped in an Excel spreadsheet? Do those things look a whole lot like each other? And at certain points in time, I think they do. But life is complicated. And maybe

• 1:09:12Speaker 02

  more complicated than any short series of slogans will encapsulate.

• 1:09:16David Hoffman?

  Are there any like, properties or merits of the crypto industry that you're just a big fan of? Like, there are some like ideologies that we have that we would like to bring to the world, or which, or if any, would you be just, you know, double thumbs up on?

• 1:09:29Speaker 02

  Less from ideologies. There is a

• 1:09:35Speaker 02

  I'm gonna say the word toy systems. And I'm not saying this as a means of disparagement. I'm trying to like identify class of systems where you can make a CPU in Minecraft. And that is like clearly a toy system. No production workload will ever run over a CPU in Minecraft. But the discipline of constructing a CPU in Minecraft is useful. And also, like after you have an avatar in the world who can like walk up to a CPU and look at it run. Like that teaches you more about how actual real world CPUs run than seeing the same description in your textbook. There are a lot of metaphors about like how real finance works that crypto expresses in like kind of self consumed toy systems.

• 1:10:17Speaker 02

  And unlike the real financial systems, they're like one relatively interesting property is like you can, you know, as a 16 year old at a hackathon, like actually start playing with those toy systems and poking them and moving money from like pocket A to pocket B. And like that feels interesting to me from a, you know, this is useful for education, this is useful in getting people more enthusiastic about these kind of wonky topics like 20 years ago, if I had come up to somebody in a coffee shop and said, okay, let's have an in-depth discussion about the foibles of AML and KYC, particularly as it matters for like immigrants and other socio-economically marginalized people.

• 1:10:59Speaker 02

  They would say, get away from me, you're a stalker. And now there is like some space for having that conversation. So those kinds of things are interesting from a perspective of like this is going to be the rail that the vast majority of all commerce travels over. I kind of bet against. Is this like the, you know, the new internet? Are we in the 1996 of the crypto era? And just like right away from the hockey stick where everyone in the world starts using it. Been hearing that since 2010. The world looks like what it looks like. Kind of bet against it being the next internet. And yeah.

• 1:11:36Ryan Sean Adams?

  Patrick, do you feel like you've been on the right side of that bet so far? And I, you know, I ask this in the context of maybe another question is crypto is now close to, I believe, $3 trillion. And as you know, it has this kind of like property where it sort of bubbles and then busts and then bubbles and busts. But every bust is higher than the last, you know, kind of bubble. And Bitcoin is close to crossing a trillion dollars. So I guess when I talk about the bet, it's less from a, you know, financial perspective, right? And it's more from a, like, the perspective of how do you explain why this thing is valuable?

• 1:12:20Ryan Sean Adams?

  Why there are so many people using it? Why there are crypto, like podcasts and evangelists, you know, talking about it? Why there's so much excitement about it? Have you seen that pick up? And yeah, how do you feel about the bet that you've made so far with respect to crypto not being the kind of the next internet or the next, you know, financial rails?

• 1:12:42Speaker 02

  One of the reasons I write so much on the internet, particularly in places that keep records of it, is to keep myself honest about things. Like that, the thing I've been professionally speaking the wrongest on about the internet was there was this little company called Facebook or something for college graduates. And they were said to be worth a lot of money. And that was clearly never going to be a real business. So there's a comment from me in like 2006, frozen in amber about that one. And I periodically go back and read the comments that I wrote about like Bitcoin in like the 2011, 2013, et cetera, et cetera versions. And I feel pretty happy with those comments. How do I explain? Let's talk about the number first, like epistemic humility, but it's clearly the case

• 1:13:24Speaker 02

  that if I had made some like counterfactual choices with respect to my personal capital allocation, I would be much richer right now. Like, that is a bit of evidence. It's also the case that like, if I had a crystal ball, I would do very well in the options market, too. There's, you know, an arbitrary number of like ways to deploy capital that would make a lot of money. And people often say like Bitcoin is the best performing asset class since yada, yada. And it's like, oh, you know, When you're saying something, something like that, you're trying to convince someone who is relatively low information with respect to capital allocation. Okay. Like the broader thing, you know, the fundamental use case is speculation.

• 1:14:03Speaker 02

  The like largest reason there exists in ecosystem on top of it is because get something for nothing. It's like the best converting pitch in the history of all pitches known to man. The that will always have product fit. And to the extent like it is not successfully legalized, that will like occur in 10,000 different guises and has occurred in 10,000 different guises over the course of human history. By the way, it's the best crypto book that is not a crypto book that people should read. Lying for Money by Dan Davies is just the history of financial fraud. And like, if we think that, you know, SBF and etc. were like pioneering researchers. And like what nastiness you could do with financial fraud.

• 1:14:46Speaker 02

  You'll see how creative people were in like the 1600s and how much those stories rhyme.

• 1:14:52Speaker 02

  The, there was a story a number of years ago that crypto would be this, this platform for, you know, peer to peer cash adjacent transactions. And that would eventually like swallowed up a lot of the world's volume of like all transactions. That didn't happen. We have like publicly accessible databases. If, when you hear people like Tether saying we are successfully banking the non-banked. Okay, let's go to the numbers. Like the Tron network is public. You can look at the like median transaction over the Tron network and it's between 10 and 3, sorry, 100 and $300. Without giving you any private information, if you were to look at like comparable numbers in the

• 1:15:33Speaker 02

  United States for like credit card transactions, the median transaction is like between 40 and $80, maybe a little towards the higher end of that range, thanks to the currency environment the last couple of years, but that's neither here nor there. And so like, do you buy that you are banking the unbanked in the third world? Who are like moving a lot more money around at a time than people in the United States do? And no, I don't buy that. And then, you know, if you look at like the day to day numbers on like Tether issuance, it's pretty clear that it attracts the price of Bitcoin and that there is something going on there versus like the, you know, continent of Africa decided that it was 10% more useful to move money on a particular Monday because like the price of Bitcoin is up.

• 1:16:18Speaker 02

  And I'm stealing this point, by the way, from a gentleman who runs the stablecoin. It was on the on the BRINK podcast recently. His name escapes me, something Young, Stuart Young, maybe. Sorry, folks can folks can look that up or at me on Twitter to get a citation for it. But yeah, so long story short, I fundamentally have not like materially changed my point of view on this.

• 1:16:45Ryan Sean Adams?

  Guy Young.

• 1:16:47Speaker 02

  Guy Young, thank you.

• 1:16:48Ryan Sean Adams?

  Guy Young from Athena.

• 1:16:50Speaker 02

  I I don't think that stablecoins are going to be like a, you know, if we fast forward to 2050, I would be very surprised if stablecoins are something that is like recognizably the lineal descendant of stablecoins in the way that like Ethereum is recognizably lineal descendant of Bitcoin. Don't think that a lineal descendant of stablecoins is going to be a huge portion of the payment mix. Other people have different point of views on that. That's fine. When 2050 rolls around, it's going to be like really obvious whether it happened or not. You know, there were a lot of claims made about Bitcoin in in 2010, some by me. And the one where I said it was going to zero really obviously didn't happen. And the one where people said it's going to take over the world and be like a, you know,

• 1:17:35Speaker 02

  broadly deployed transactional network also didn't happen.

• 1:17:38Ryan Sean Adams?

  Well, Patrick, I'm wondering if you do find some space between sort of it dropping to zero and it being sort of this this peer to peer money system that, you know, the entire world uses. Because you're right, it has fallen somewhere in between. And, you know, some would say the strongest use case for Bitcoin, at least to date, has been this kind of this store of value property. And I think you've maybe called a part of that speculation. And maybe that's it depends on what you mean by speculation. I feel like I still haven't heard the explanation for like, why you think Bitcoin is, you know, worth something in the in the range of a trillion dollars. And if you lend any merit to this kind of store of value type use case and how you'd judge that against something like gold, for instance.

• 1:18:20Speaker 02

  I largely don't buy the store of value use case. You know, it's a granted gold. Gold also probably shouldn't have nearly as much value as it does. And yet we have tricked ourselves into believing that it's quite valuable anyhow. I'm very much on the Warren Buffett side of the the gold thing. Like, what would you rather have? A football field sized block of gold or like productive assets in American business? And that is a it's a very persuasive point of view to me, to put it mildly. But be that as it may, the like, what are the properties that you want? That you want to store value to have? And does it actually like sustain those properties over multiple year increments? Like, is that, you know, does it correlate highly with growth stocks? It correlates really highly with growth stocks.

• 1:19:03Speaker 02

  That's like a problem from a store of value perspective. Like, you needed to you need to be to be uncorrelated with them, not anti-correlated, but uncorrelated. And like, you know, that is a fact about the world that we can observe with numbers. And the numbers do not do not like come out the way you want them to. If one like sincerely believes in the store of value use case. I think the I also think that like the cycles, you know, oh, we have a bull market. Then we have a bear market, then we have a bull market, then we have a bear market. The way crypto thinks of cycles is like we

• 1:19:37Speaker 02

  overgeneralize from a relatively small, small years of experience. And then assume like we have discovered this like fundamental law of physics where we haven't discovered the law of physics, we have discovered, you know, this thing that combination of market market structure and user sentiment and painfully but true like Nvidia's acts by like specifically named people who are now in federal prison, like cause wild swings in the price. And it is like not guaranteed that we will have the right combination of like market structure and user sentiment and Nvidia's acts to like keep that cycle going forward in the future in the same fashion that the cycle has gone in the past.

• 1:20:19Speaker 02

  From like a speculative use case, the fact that there is a huge amount of volatility system is really useful from a like store of value use case, huge amount of volatility in the system is like the the opposite of useful. And so it's difficult for a number to keep going up and like the store of value thing to be actually true. And and there is no way to resolve that that tension.

• 1:20:42Speaker 02

  And so the Again, there's many tribes within the ecosystem and there's various people saying various things at different times to different audiences. But you can't both believe like store of value and also believe to the moon. And like in a hypothetical world where you get to the moon, like it kind of intellectually, you would understand like, okay, people are not going to say like to the moon, but no further, they're going to say to, you know, we got to the moon, yay, to Saturn. And you like, at some point, the answer is no, right? And it kind of like has to go into a much lower volatility regime, like say gold to solve for that store of value use case. But like, I fundamentally think store of value

• 1:21:27Speaker 02

  is more a talking point than it is a description of the world that we actually live in. And so like, don't expect that, you know, it being measurable with numbers is going to convince that many people. And I don't think that people actually care about that that much as long as numbers going like up at least half the time.

• 1:21:43Ryan Sean Adams?

  So Patrick, you have a very analytical mind and, you know, a great sense for distilling concepts and clearly a lot of knowledge with respect to kind of finance and how money works. And you also have an open mind, I think, and are fine sort of admitting, you know, where you've been wrong in the past. And I'm curious, as we kind of draw this to a close, what would change your mind with respect to crypto? So what would you have to see in crypto to persuade you that, you know what, there is actually something here. This is worth my time professionally, this is worth society's time in general, and maybe in areas I've been too harsh. What would have to change in order for you to take a kind of that revised perspective?

• 1:22:27Speaker 02

  Sure. We've invested tens of billions of dollars into crypto infrastructure, not in terms of like, you know, the market cap is like three trillion or whatever, but in terms of just like, amount of people's time, amount of like GPUs, etc., that we've thrown at this, the numbers in the tens of billions by now. Like, is there a user activity in the real world that is? Like, obviously worthwhile, that is extremely common and valuable that justifies the expenditure of tens of billions of dollars of society's resources after like some, some like reasonable period of time. And one, if there is, if there are like the initial glimmerings of it, I, you know, I'm in the business of seeing like the initial glimmerings of things early and then

• 1:23:08Speaker 02

  like believing in it, you know, just have not like had that accomplished with regards to crypto. But like, there are, you know, other things that have happened that like the initial glimmerings are, oh, that's kind of interesting. So you can like, look at user activity in the wild, like the, by my lights, you know, there, there have been any number of times where people have tried to declare like, oh, we have, we have come up with a valuable crypto use case. It is ICOs. No, it is NFTs. No, it is banking the unbanked in countries that have very volatile currency markets. And of those, the only one that, you know, if we, if we look at the numbers and like judge them by like normal, you know, tech industry, et cetera, standards, like the, the

• 1:23:52Speaker 02

  only one that has like an interesting graph associated with it is the, the payment systems in the third world, descriptively, the third world, the, and yeah, you know, like, if I've done like graph it against competitors, like say, M-Pesa, et cetera, et cetera. Well, okay. If, if, if you really want me to, if you really want to, to say like, that is the use case that I'm going to compare you against competitors and you're, you're not winning share and the graph is not shaped like your, your best functioning competitor. So, but like, if there was, you know, what's the thing that my, that my dad or my aunt or some random person

• 1:24:32Speaker 02

  in Chicago that has no, like, you know, not speculation, not, not facilitating international money laundering, but what's like the actual use case that I would see when I go out to Potbelly, like that would, that would cause me to change my point of view in a hurry. Random thing that I saw the other day when I went to Potbelly, apparently there's this user behavior among kids who are old enough to go out with friends, but not old enough to either have purchasing power or

• 1:24:58Speaker 02

  Methods where like the way you order potbelly sandwiches or McDonald's is to send a text message to your mother. And your mother orders for you on the app and pays for you on the app. And so this like forces a touch point and gives her like total control of your spending. And I thought, wow, that's like, kind of interesting. And even as, you know, someone whose job it is to understand like weird ways to use the financial system. I never would have guessed that anyone uses this like financial infrastructure in this way. And so, you know, if there was a like text message to mom to authorize purchase of fast food startup, like I'd be in on that seed round right now. But like the, the, the stuff that people point out and say, this is like equivalent evidence to crypto. I have looked at that evidence that I'm just not persuaded.

• 1:25:43Ryan Sean Adams?

  Though if you saw the evidence, then you would change your mind, but you have not seen the evidence. And your point is it's been over a decade at this. Patrick, this has been a pleasure to have you on Bankless. I think David and myself, we put you in the category of like good faith, honest crypto skeptics. So obviously we

• 1:26:01Speaker 02

  One of the few, yeah.

• 1:26:02Ryan Sean Adams?

  We draw a very different conclusion on all of this than, than you do with all of these data points, but I do find you well researched and good faith. I think another person that comes to mind, we did an episode with Molly White, who is also just a good faith crypto critic and, you know, comes up with compelling arguments. So, you know, thank you for being that. And appreciate all the work that you do. Maybe there's one last thing you could leave us with. We have a lot of folks who are obviously active in the crypto community. These are not the, the Sam Bankman Freed's of the world. These are not the fraudsters and hucksters. These are, as we say, the settlers, not the tourists. The people who've been here for a while and continue to try to build in this space.

• 1:26:46Ryan Sean Adams?

  Speaking to them, do you have any advice for people in crypto? Like what would you, what would you say to them? How would you guide them if you have any parting words, I suppose?

• 1:26:59Speaker 02

  Maybe exercise a little more skepticism with regards to pitches that are out there in the community. The, one of the things that I'm most predisposed to, to believe that is used as a pitch is, you know, spend your time actually building things that are useful to people and then you will have built things that are useful to people and then, you know, the price is an epic phenomenon of that rather than the other way around. And I think that pitch is sometimes deployed cynically, like when Coinbase puts in their, puts in their advertising, like Coinbase is for the builders, plausibly so, but Coinbase is not doing advertising on, you know, channels like the Super Bowl, etc. to reach the builders. They are trying to reach

• 1:27:40Speaker 02

  gamblers to extract a fee from them. So like, if you, you know, genuinely believe in this and you believe in the evidence, then get as close as possible to, to building things that will be used by a large number of people to create value in the real world. And then, you know, everything follows from that.

• 1:27:58Ryan Sean Adams?

  Thank you so much, Patrick. It's been great having you on Bankless. Thank you.

• 1:28:03Speaker 02

  Thanks very much for having me.

• 1:28:04Ryan Sean Adams?

  Bankless Nation, some action items for you in the show notes. Number one, I will include a Patrick's Twitter, so you can go follow him. Also, check out his blog. It's called bitsaboutmoney.com. Fantastic articles and essays on primarily the traditional financial system, although he does touch upon crypto from time to time. Also, since we mentioned her, Molly White, we, she was another crypto skeptic that we've had on the show. We'll include a link to the show notes for her as well. In case you're in the mood for a bit more crypto skepticism, I know it's hard during the bull market, but we've got to check our biases at all points and times. Got to end with this. Of course, you know crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.