#1147 Matthew Ferranti | Harvard Says Bitcoin Is Sanctions Hedge

Matthew Ferranti is a PHD candidate in economics at Harvard University. In this conversation, we talk about a brand new paper that Matthew published titled: "Hedging Sanctions Risk: Cryptocurrency in Central Bank Reserves." We talk about bitcoin, US sanctions, and how central banks around the world use cryptocurrency to hedge the risk of the sanctions. ======================= Announcing LYCEUM | Miami, a day-long event on March 4th, 2023 in Miami hosted by Pomp. We’re gathering an explosive group of experts to engage in a series of fascinating discussions. We'll cover topics from investing, emerging tech, scientific research, sports, music and more. We have some massive names being announced via Twitter throughout January so stay tuned for details. This will not be your typical event and it certainly won’t be one you want to miss. We’re going to learn a lot, make some smart friends, and as always, we’re going to have fun. Spots are limited so head to lyceummiami.com to buy your ticket today. ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= With a Messari Pro subscription, you gain access to exclusive industry-leading long-form daily research reports, daily crypto news & insights in your inbox, advanced asset screeners, curated sets of charts and metrics and so much more. Try Messari Pro today! Get up to 25% off their Messari Pro membership by visiting www.messari.io/pomp and entering promo code "POMP" at checkout. ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp =======================

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

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast. Simply the best podcast out there. Now let's kick this thing off. Matthew Ferranti is a PhD candidate in economics at Harvard University. In this conversation, we talk about a brand new paper that Matthew published titled Hedging Sanctioned Risks: Cryptocurrency and Central Bank Reserves. We talk about Bitcoin, the US sanctions, and how central banks around the world may use cryptocurrency to hedge that risk of the sanctions. I really enjoyed this conversation with Matthew, and I hope you guys enjoy it as well. Once you get done listening, jump on Twitter and let us know what you agreed with, what you disagreed with, what you liked and what you didn't like. I always appreciate the feedback and it helps us get better.

• 0:45Anthony Pompliano?

  Okay, here's my conversation with Matthew Ferranti.

• 0:50Speaker 01

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  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:07Anthony Pompliano?

  All right, guys. Bang, bang. I've got Matthew here with me. Matthew, you recently published in November a paper that is titled "Hedging Sanctions Risk: Cryptocurrency and Central Bank Reserves." And this paper got whipped around the internet, obviously, by a lot of Bitcoiners, but also I saw quite a bit of conversation coming from traditional finance and even people who would fancy themselves kind of central bank experts. Maybe we could just start with why someone from the Department of Economics at Harvard would even be interested in the intersection of central banks and something like Bitcoin. Where did that interest come from and kind of what put you down this path?

• 3:46Speaker 06

  Yeah, so first of all, thank you for having me on your podcast. It's always fun to have an opportunity to talk about my research, especially with an audience that's big as yours. I think actually I got into this topic not through the crypto angle, but rather through the sanctions angle. So I was thinking about, I was sort of long been interested in the effects of sanctions on the international financial system. And especially after what happened with Russia last year, where a number of countries froze their central bank reserves. It got me thinking about, you know, one of the effects of this might be that central banks might think about reallocating their reserves

• 4:27Speaker 06

  in anticipation of this type of risk of trying to protect themselves from it. And so, you know, kind of logically following from that, the question you want to ask yourself is, well, what could they buy that would protect themselves from this type of risk? Obviously, gold, at least if you have physical custody of it, would be one potential answer. And but I think Bitcoin might be another. And so that was where the paper came from, sort of exploring whether Bitcoin can serve as either a substitute or a complement for gold in that sense. Yeah.

• 5:10Anthony Pompliano?

  So what's fascinating with the latest round of US sanctions in the Russia-Ukraine conflict is the United States has been using financial sanctions for a long time now against a number of different countries. But I think that there was a fairly widespread belief that these sanctions, both the speed and the severity of them, kind of signaled a new regime or a new paradigm of financial sanctions. There was the freezing of central bank assets. There was kind of a global coordinated effort. Talk a little bit about the actual use of sanctions and kind of how you evaluate, you know, maybe their historical use. But then also, what's your take on these sanctions against Russia and how severe they were and kind of the global coordination

• 5:55Anthony Pompliano?

  that was used to actually implement them?

• 5:58Speaker 06

  Yeah, so I mean, so my paper doesn't estimate like the impact of sanctions on the Russian economy per se, but it certainly seems that they've had some effect. We've, the Western world has sanctioned Russia's imports more than its exports. So that really causes them some major supply chain issues when it comes to trying to manufacture and build stuff.

• 6:28Speaker 06

  I think what makes this an interesting topic is that when it comes to these sanctions, there's not just one thing that can get you sanctioned. So obviously, in the case of Russia, the sanctions were applied because they invaded a neighboring country. But there are other central banks that have also had their reserves frozen by the US for a variety of other reasons, ranging from building nuclear weapons, to terrorism-related concerns, to just having a government that the US doesn't recognize, like Venezuela, for example. So, and also, which, you know, maybe the human rights-related concerns thrown in there too. But there's this kind of this grab-bag of things, and that's what makes it interesting,

• 7:12Speaker 06

  is that there's not just one thing. And the other thing, too, is the sanctions are up to the US president, and Congress can overrule the imposition of sanctions, but that would take a two-thirds majority to do that. So, really, if you're thinking about the central bank, if you're thinking about holding assets in the United States, you've got to ask yourself, how much you trust the US president?

• 7:39Anthony Pompliano?

  When you see the sanctions, I think, for me, someone who does not spend a lot of time studying sanctions, even studying maybe central bank kind of chess moves, if you will, on the geopolitical stage, the thing that surprised me was the freezing of assets that were not in the actual sovereignty of the nation, right? So, these are dollars or other foreign currencies that are being stored outside of Russia. There were gold reserves being stored outside of Russia. I believe that there was another situation where Venezuela's gold was stored at like the Bank of England, if I remember correctly.

• 8:13Speaker 06

  Yep.

• 8:14Anthony Pompliano?

  And there was the kind of rejection of Venezuela's request to return their gold to them. And so it became very obvious to me, like, you would think the central bank would have the national assets at the central bank, but then it kind of highlighted, like, no, that's not how this works. And so, how common is it for there to be sanctions on these assets that are not held within the country?

• 8:38Speaker 06

  Yeah, so, well, first of all, let's get to how common is it that countries store assets outside of their own borders? It's relatively common, and it really gets actually this sort of tension between, like, what are the benefits of having a centralized financial system versus a decentralized one? Well, in a centralized system, you have lower transaction costs because you have these central clearinghouses that can facilitate transactions. You know, a good example of that being the New York Fed. So, they, in the vaults of the New York Fed, are quite a bit of gold that belongs to about thirty-six different international organizations and central banks.

• 9:19Speaker 06

  And it's nice, the benefit to them is that there's low transaction costs. Well, first of all, because the New York Fed kind of handles the custody and the security of it and all that. But also, if they, if one of those countries wants to transact with another country that also got their gold at the New York Fed, then some staff from the New York Fed will literally just take the gold bars off of one shelf in the vault and move them to the other shelf. And, and so it's just very easy to, to conduct transactions. On the other hand, yeah, you then, you know, once you, once you store your assets outside of your own borders, yeah, I mean, you, you do have to ask yourself the question of, are they going to be returned if I want them? And, yeah, you're right, that Venezuela has had a dispute with, with the Bank of England,

• 10:03Speaker 06

  which as far as I'm aware, they've pretty much lost. So, so the British courts have not given Venezuela any relief in terms of repatriating its, its gold. So, yeah, I mean, and I, I think that, that in, in general, you know, there's also just the fact that the, the traditional sort of Western financial system is well-regulated and stable, and so that also makes it an attractive place to store and, and custody assets. So, yeah, I mean, I think it's, I think it's quite common that, that, you know, people would store, and institutions would, would have accounts outside of their home borders.

• 10:50Anthony Pompliano?

  When I think about Venezuela asking the Bank of England for their gold back, one, I'm imagining that the British courts have an issue with Venezuelan government, human rights, all the things that, you know, probably the US also would take object to. But also, there's this element of if we tell them to kick rocks and we say you're not getting your gold back, they can't really do anything. And if you kind of compare that to, you know, maybe the United States, if a country somewhere in the world said to the United States, "You're not getting your gold back." We got a pretty powerful, swift and effective military, and it feels like we actually could do something. Now, whether we did or not would be up for debate

• 11:29Anthony Pompliano?

  and the details of that situation. And so is there this element also of not just which country it is and human rights and stuff, but also just like if you don't have a really strong military, then like you kind of are at a disadvantage and countries know that?

• 11:47Speaker 06

  Yeah, so that's an interesting point. And I do believe that in some of the military conflicts, like in Europe, for example, in the 19th century, that like one of the motivations for conquering another country was to acquire its gold reserves for yourself. And so, yeah, I mean, I think historically, maybe that's been a motivation or one motivation anyway for conflict. You know, in your example, it's sort of, it's actually asymmetric because I don't think the US stores any of its gold outside of its own borders. They would never have a situation where a country

• 12:26Speaker 06

  would be refusing to give the US's gold back to itself. But yeah, no, that, I mean, you are, you are right that in terms of, you know, Venezuela, if the British courts don't give relief to Venezuela, that there's not a whole lot they can, they can do.

• 12:47Anthony Pompliano?

  Yeah, it's crazy to think about. And so if we then take like the Venezuela example, and maybe we just extend that out to the Russian situation. It seems very similar, like Russia had a bunch of foreign currencies, gold, other assets that were on their central bank balance sheet. They had them stored elsewhere. And it seems like this, although likely was led by the US, it was NATO. It was kind of this global coordination. And many countries decided all at once that they were going to freeze assets and kind of cut Russia off from this global financial system. Once that occurs, is it the belief that like we've breached kind of this new paradigm? And therefore, this will become the playbook? I kind of think of it like the 2008 global financial crisis.

• 13:32Anthony Pompliano?

  QE becomes all the rage. And now it seems like every time we have some sort of market downturn, people start talking immediately about QE. And QE is like the new normal. Is that how you see this playing out with sanctions?

• 13:46Speaker 06

  There may be some element of that in the sense that there's a, maybe a

• 13:55Speaker 06

  a tendency or a, yeah, a tendency for politicians to reach for sanctions as a tool because they're perceived as, I mean, it sort of looks good like they have, like you can go in the press and say, oh, you know, we're doing something about this bad situation. Like, look at this big sanctions package we're unveiling. And you can unveil many of them, right? Like, you can step them up and step them down. But at the same time, you don't have to actually commit military resources to addressing whatever issue is going on that's the root cause of the sanctions. So maybe, you know, in a world where military conflict is very expensive and where countries are maybe more, at least a little bit more inclined towards isolationism, perhaps.

• 14:40Speaker 06

  At least there are political movements towards that regard. These sanctions do seem to be kind of like a very appealing alternative. And so, yeah, I mean, I don't necessarily know that I would call it like a new paradigm, but I think it is maybe sort of a continuation of a trend.

• 15:04Anthony Pompliano?

  Got it. And what's fascinating about Russia on just the sanctions part, I actually tweeted this a couple of days ago, is I saw a graphic that showed the imports of all goods between February and August of 2021, so kind of February being the time when Russia invaded Ukraine, and the fact that EU trade with Russia on a whole increased in 2022 despite the sanctions. So I'm sorry, February to August of 2022. Now, the nuance there is that commodity prices were highly volatile. And so in dollar or euro terms, there's actually been an increase from 21 to 22 with EU country going ahead and exporting into Russia or Russian imports.

• 15:45Anthony Pompliano?

  And so what that told me was like, forget for a second the nuances of importing and exporting and dollar changes of the commodity prices and all that. It's just that sanctions on imports and exports are very, very hard to have the intended consequences because the economy is like this big, complex machine. But in contrast, if your gold's in my custody and I say you don't get it back, I'm very direct in the in the kind of impact that I want to have. You don't get the gold. Right? So that sanction almost feels like it's easier to actually have control over and implement than maybe playing games with the nuances of imports and exports and dollar values and various commodities.

• 16:28Speaker 06

  Yeah, I think I think that's right. I think there I think whenever there's when when a country tries to country A tries to prevent country B from, let's say, importing good X. If country B really wants it, they can look around the world and find other people are willing to sell it from it. Maybe they have to pay a higher price for it. But yeah, I mean, as long as there's an economic incentive there, you know, it seems that that they probably will find somewhere that the will is away. You know, maybe a good example is countries like Turkey where they're kind of turning maybe a bit of a blind eye to enforcing these sanctions. And so there's a lot of business getting set up there where they're they're

• 17:12Speaker 06

  essentially acting as middlemen between firms, like let's say in Europe, who can't who don't want to export directly to Russia, but they can export to Turkey and then the Turks will, you know, just move stuff onward. So yeah, yeah.

• 17:31Anthony Pompliano?

  That makes sense. And so in the paper that you wrote, again, the title of it was hedging sanctions risk cryptocurrency and central bank reserves. You had this data point early on where you say that from 2016 to 2021, countries facing a higher risk of US sanctions increased the gold share of their reserves more than countries facing a lower risk of US sanctions. And really, I think what you're trying to get at there is countries are not dumb. They know who's at higher risk and lower risk, and therefore, they were almost pre or kind of in anticipation, trying to become more resilient with the central bank reserves. Is that correct?

• 18:06Speaker 06

  That's the argument I make. Yeah, no, I can't necessarily rule out that countries facing a higher risk of sanctions, which by the way, I proxy for that based on where they're getting their military imports from. Because I can't like compute exactly what a country's risk of sanctions is. I don't think there's really a way to do that. But I can like try to find some other variable that's probably correlated with it. And yeah, and I can't necessarily rule out that there the countries that are getting more of their military imports from Russia and China, and therefore, at a higher risk of US sanctions, that they're increasing their gold reserves because maybe just because of political considerations, like they find it distasteful to hold US Treasury. So it's not necessarily that they're explicitly

• 18:51Speaker 06

  considering the risk of sanctions. It might be that they're just making a political decision through a political statement. So I can't, I can't necessarily rule that out. But certainly, yeah, the evidence is consistent with the notion that central banks are at least starting to think about this. Interesting data point also is that last, the last couple of quarters of 2022, there were some big gold purchases by, by central banks, I think, including China's. So, yeah, it is, it's happening.

• 19:26Anthony Pompliano?

  The paper, in the way that I read it, I think came to kind of three conclusions. And you basically make the argument on the first point that if sanctions risk exists or is increasing, that would diminish the appeal of US treasuries. So I think that historically, central banks have held US treasuries. Your kind of first conclusion or first point is really the fact that like, they may get rid of those because of that sanction risk. Explain a little bit more, if a country is holding a large portion of their central bank reserves in US treasuries, what the potential damage could be if they come under the scrutiny and potential sanctions of the United States?

• 20:04Speaker 06

  Yeah, well, I mean, they lose, so if they happen to be sanctioned, then they lose access to that, that portion of their reserves. They can't touch that money, you know, sort of like, it's almost as if it's been destroyed. I mean, because, because really, the value of money is in, is in the ability to exchange it for something. So if you have an account that has $50 billion in it, but you can't, you can't touch it, you can't withdraw it, you can't deposit into it, you can't do anything with it, it's kind of useless to you. It's almost as if you didn't even have that, that money. So, yeah, I mean, so it's, it's quite, quite pernicious. And, and yeah, so the, the conclusion is, is that this, this risk, even at relatively

• 20:48Speaker 06

  low levels, has potentially substantial effects on, on the portfolio allocation decision of a central bank. So, really what it does is it, it kind of takes treasuries, which are traditionally thought of as being sort of safe haven, risk-free asset, and it turns them into a risky asset. So it doesn't mean you wouldn't necessarily buy any of them. And there are many other reasons why you might like them too. I mean, they're very liquid, there are swap lines, for example, you can set up with, with the Federal Reserve. So there are, there are nice things you can do with these things for, for a central bank. But, but, yeah, I mean, with, with this risk of sanctions, they sort of turn into, they turn from a risk-free asset to a risky asset.

• 21:33Speaker 06

  And it's, so it, yeah, I mean, it changes, it changes the nature of treasuries.

• 21:40Anthony Pompliano?

  The second conclusion that you come to is that a increased risk of sanctions would propel broader diversification in central bank reserves. So one is like, okay, the US treasuries themselves may become less attractive, but also central banks may think about, forget anyone asset, we just need broad diversification to kind of increase the resiliency. Explain that a little bit more.

• 22:00Speaker 06

  Yeah, that's right. Well, so as long as, as long as the, the risk of sanctions is sort of imperfectly correlated, which is to say that, um, you know, in the case of Russia, the US is pretty good about going all around the world and, and getting, you know, a large number of countries to, to freeze the reserves and not just NATO, by the way, but also Japan and Australia, New Zealand and a number of other, I think even South Korea. So, so, you know, in the case of Russia, it was, I guess, almost perfectly correlated. But, but as long as it's not, it's not perfectly correlated, that there's a chance that some countries might sanction you and some may not, then there's an incentive to really diversify

• 22:41Speaker 06

  so that in the event you get hit with sanctions by some countries, you might still have a portion of your reserves accessible in other countries that didn't sanction you.

• 22:51Anthony Pompliano?

  And then the last thing that you conclude is that, that increase in sanctions risk could bolster the long run fundamental value of both cryptocurrency and gold. And so we already talked about gold as something that central banks are adding. Talk a little bit about cryptocurrency as a whole, and then you specifically single out Bitcoin in the paper a number of times and kind of talk about why you think that could become one of these like imperfect substitutes. Hey guys, I hope that you're enjoying this interview. Before we continue, I want to quickly remind you, I'm hosting a conference, March 4th, at the Miami Beach Convention Center. That's right. It's a big venue for a big event. On March 4th, I'm bringing together some of the absolute fan favorite guests from the

• 23:35Anthony Pompliano?

  podcast and this show, and we're going to debate ideas. The event is called Lyceum Miami. The Lyceum was the public gymnasium in Athens, Greece. That ancient gymnasium was important because it's a place where people from all walks of Life came together to have a war of ideas. You were able to not only participate in the debates, but also people could sit and watch some of the smartest people in the world talk about important issues. That's what we're going to be doing on March 4th at the Miami Beach Convention Center. If you want to join us, go to lyceummiami.com or click on the link in the description and I'd love to see you there. Okay, let's get back to this conversation.

• 24:14Speaker 06

  Yeah, so the paper really thinks about cryptocurrency. And so let me actually start with the second part of your question, which is sort of why Bitcoin? Bitcoin is by far the largest cryptocurrency and Bitcoin and Ether combined are like 70% of market value of all cryptocurrencies. So, you know, just looking at Bitcoin gives you a pretty good proxy for the sort of the whole non-stablecoin cryptocurrency market. And non-stablecoin is kind of important here because stablecoins don't really help you if you're worried about sanctions because US dollar coin and Ether can be sanctioned.

• 24:59Speaker 06

  And because of the way they hold US dollar collateral, they can probably be bullied by the US government into implementing sanctions if that's really what the government wanted to go down that path. So really, when it comes to cryptocurrency, it's got to be sort of the fiat, sort of fiat cryptocurrencies. And it's got to be, for a central bank, it's got to be cryptocurrencies that are big, where you can conduct potentially a billion dollar transaction, let's say, without, you know, having a massive impact on the market price. Bitcoin, of course, today is a lot smaller than it was when I first started writing this paper.

• 25:41Speaker 06

  I think it was, you know, like $40,000 maybe around the time that the sanctions were applied to Russia. But it's still, you know, the market cap's about 300 billion, something around there. So it's plenty big enough to conduct, you know, not transactions of non-trivial size.

• 26:02Speaker 06

  As far as the fundamental value is concerned, I think there are a lot of use cases for cryptocurrency that involve just transacting, sort of like you exchange fiat currency for crypto. Let's say you then send the crypto as a remittance to somebody somewhere else in the world. And then that person swaps the crypto for another type of fiat currency. But that type of transaction is not really going to contribute to a fundamental value because it's just buying and then reselling. So the real question when it comes to fundamental value is who's going to be holding on to this stuff? And this paper kind of conceives of cryptocurrency as being a form of insurance.

• 26:45Speaker 06

  Holding on to it gives you insurance against the possibility of you facing sanctions and having a large portion of your wealth potentially destroyed. And in that scenario, you still have these digital assets and also maybe gold. And so that generates the incentive then to hold on to this stuff, sort of to protect yourself. And so that's the sense in which it's insurance.

• 27:17Anthony Pompliano?

  When you think of Bitcoin specifically being added, is your expectation that central banks would buy the asset, let's say they're able to acquire a large portion in dollar terms of Bitcoin? Have you gone deep enough down the rabbit hole to start thinking about like how they would custody it? Are they putting it on like hardware devices and they're like holding it in a vault somewhere? Are they like creating their own cryptocurrency custody solution? Like, how do you just think about something that is, I think, to the Bitcoin and crypto crowd, very native to them and they understand, but to a nation state or a central bank, it's very different than customing almost any other type of asset?

• 28:00Speaker 06

  Yeah, that's right. And certainly, like, the FTX case illustrates that, you know, just another example of how it's important to choose your custodian wisely.

• 28:12Speaker 06

  I think that a central bank would almost certainly want to self custody its Bitcoin. They might rely on exchanges to make the initial purchases. But I don't see any reason why they would want to take the risk of, you know, having an exchange blow up and lose access to a large amount of cryptocurrency. So, yeah, I think they would have some kind of self custody solution. Now, what, you know, exactly what that looks like, I comment sort of delved into the details of that.

• 28:42Speaker 06

  But, yeah, I think they would want to keep it off the balance sheet of some other, you know, sort of corporate entity that potentially, maybe not that stable. Yeah, I mean, this question of exchanges is another interesting one more broadly. And it's definitely something that the crypto community has got to figure out.

• 29:08Anthony Pompliano?

  And what I think becomes kind of fascinating to me is also, in some way, you are mitigating one risk, which is US treasuries or sanctions risk. At the same time, we know that Bitcoin is a bearer asset. And you are increasing the, like, honeypot or the target of malicious actors around the world. Now, all of a sudden, you're almost increasing the financial reward for a adversarial nation-state or adversarial group to hack your central bank and be able to somehow get custody of the asset. And again, how you custody it may determine whether that's a real risk or not or whatever. But in some ways, it almost feels like you're mitigating one risk, but you may be increasing another.

• 29:52Anthony Pompliano?

  Is that true? Or do you think that nation-states would figure out a way to kind of mitigate both?

• 29:57Speaker 06

  Yeah, no, actually, I think that's absolutely true. And so the paper doesn't think of cryptocurrency as being a sort of a free lunch at all. I mean, it is, it is very much optimizing by trying to sort of balance your exposure to different, different risks. Now, the risk you just pointed out about sort of custody risk and sort of the implications of self custody as far as cybersecurity. There's also, of course, the risk if you're self custodying that you do lose access to your wallet, you know, you're kind of up a creek. So, yeah, yeah. So those are absolutely things they would have to think about very, very carefully.

• 30:38Speaker 06

  The other thing I would say, though, so this paper thinks more about, actually more about sort of the price volatility and sort of trading that off versus the risk of, of sanctions. That's another, that's another area where you're sort of optimizing these risks where you're, you're adding Bitcoin to your reserves, you're adding an asset that's much more volatile than, than the exchange rates of fiat currencies. But on the other hand, it does also have this type of insurance value. So that's, that's kind of the trade off that the paper is thinking about.

• 31:11Anthony Pompliano?

  Yeah. And one of the other pieces of this that it gets into is, I'll call it like the game theory. So if all of a sudden a major country in the world decided to go ahead and add Bitcoin to its central bank reserves and openly stated, right? So it was a known fact to the world. Does that then kind of kick off, hey, everyone's got to go buy it because you almost need a good defense? And naturally, a finite asset is going to go up in price if there's an increase in demand? Like, how do you kind of think just about, like, maybe the repercussions of a major central bank somewhere in the world saying, we are buying this and putting it in our central bank reserves?

• 31:51Speaker 06

  Yeah, it is an interesting question. So certainly El Salvador is the sort of the, I think, the one of, well, really, one of two countries that hold Bitcoin, the other being Ukraine. I think they basically hold it because they've gotten donations, not because they actually went out and actively bought it. But El Salvador certainly sort of went out and said, yeah, we're buying Bitcoin. Here's what we're doing. I think their wallet, they made their wallets publicly known, or at least some of them. And, you know, of course, they got a lot of criticism, people saying, this is crazy, like, why are you doing this? You know, you're just basically lighting money on fire, which, and I think the average price they paid for their Bitcoin is somewhere in like the 30 to 40 K range.

• 32:35Speaker 06

  So they have lost a fair bit on their Bitcoin in terms of the market price. But, yeah, I mean, there is this interesting question of if you're going to buy Bitcoin, do you reveal it? In the paper, I also talked about, like, maybe not revealing it also makes you a little bit more resilient to sanctions, because the US Treasury can certainly add cryptocurrency wallets onto a sanctions list, and that has the force of law behind it. So as a US person, you cannot lawfully transact with a cryptocurrency wallet that's on the US sanctions list.

• 33:16Speaker 06

  And if you do, the penalties are quite severe, like civil and criminal penalties. So, but of course, the US Treasury can't sanction something it doesn't know about. So if central bank, you know, X is buying Bitcoin, is thinking about it as this type of insurance, then it seems that it might actually be better for them to just kind of do it quietly. A couple of other points about that, too, are that, yeah, as you pointed out, if a number of larger central banks started announcing they were buying Bitcoin, yeah, you'd think you probably would move the price up, and so they probably wouldn't like that, because they'd rather buy Bitcoin when it's cheap than after they've moved the price up by announcing if you're doing it, right?

• 33:59Speaker 06

  So like, there's always, there's never an incentive to tell the financial markets in advance what your plan is, right? But you always want to tell them after the fact, so you don't move the prices before you trade. Yeah. Yeah. Yeah.

• 34:15Anthony Pompliano?

  And when you start to really almost critically think about a nation-state somewhere in the world doing this, is it fair to say it'd be the nation-states with the highest sanctions risk? Like El Salvador, I don't think has very high sanctions risk, at least when they started. They were doing it more from like a financial incentive standpoint, a prosperity for their future citizens, or at least that was what the talk track was. What you're talking about here is like people who almost are doing it out of necessity. Is that really the thought process of like the major countries are only going to do that out of necessity? They're not going to go and essentially speculate on the future price of a commodity?

• 34:56Speaker 06

  Yeah, so I think you're right that at least I never saw anything about El Salvador claiming that they were thinking about Bitcoin as a form of insurance. And I think that speculation is a very bad reason for anybody to purchase anything. And that includes just ordinary people and central banks. I mean, it's supremely difficult to forecast the prices of financial assets. So especially when you have something as volatile as Bitcoin, I think if you're going to buy it, the reason really ought to be that you're buying it because it's still some particular need in your portfolio. There's something about the characteristics of it

• 35:38Speaker 06

  that are well-aligned with the risks that you personally face as an investor, rather than that you just think the price is going to go up. Because maybe it will, but maybe it won't, right? So yeah, so yeah, and along those veins, yes, the paper would suggest that certainly would suggest that the countries facing the highest risk of sanctions have the strongest incentive to think about acquiring some Bitcoins. Now, whether they want to or not is also going to be a function of whether, for example, they feel like they can get enough gold. I mean, gold in the paper really emerges as The sort of premier or the primary or first choice for protecting yourself against

• 36:20Speaker 06

  this type of risk because it's just so much more stable than cryptocurrency and it has a multi-thousand-year history behind it. So, but if you've got a central bank that, for example, doesn't have the capability of storing physical gold, like it doesn't have any vaults for doing that, and they think they're kind of worried about this type of risk, then potentially they might want to acquire a decent amount of cryptocurrency.

• 36:46Anthony Pompliano?

  Do you think that there are any countries around the world who likely have already done this and just not revealed it? Or is it too hard to kind of guess in terms of where we are from like a adoption standpoint of nation-states and central banks?

• 37:00Speaker 06

  Yeah, I mean, of course, I wouldn't know for sure, but it wouldn't surprise me at all if there are some that are doing it or not revealing it. There is actually some interesting evidence that countries tend to under-report their gold holdings because they don't like having to report that they've taken a loss on their gold when the price drops. And so if there's an incentive to do that for gold, then certainly there'd be a much stronger incentive to under-report cryptocurrency holdings, not only because they get exposed to criticism from kind of the more traditional finance community, but also because, you know, it's so much more volatile than gold.

• 37:42Speaker 06

  So they have this incentive to not reveal it for a number of reasons. First, they don't want to move the market price. Second, there's this volatility that they don't necessarily want to have to explain away. And then third, that not disclosing it really kind of maybe boosters the insurance value of having these decentralized tokens. So, yeah, I mean, I think the incentives are there not to reveal it. And I also, I wouldn't be surprised also if there are some countries where they acquired some Bitcoin, let's say, but they're doing it to their sovereign wealth fund rather than to their central bank reserves.

• 38:23Speaker 06

  So there may be just some accounting as to, you know, which entity they use to buy it or how they kind of keep it off the books, so to speak. But, no, I mean, it wouldn't surprise me at all.

• 38:37Anthony Pompliano?

  As you see these central banks, whether they are actually announcing it or not, whether they're buying it or not, one of the things I've been most surprised by is it seems like central bank digital currencies has gotten a ton of momentum, support, a lot of mind share, a lot of papers. You just see like kind of the wheels are churning, right? Bitcoin seems to be the, maybe the enemy, and maybe that's like an exaggeration, but like it's very much like, no, not Bitcoin, yes, this central bank digital currency is interesting. How much of that is, they may not be educated or taking the time to understand Bitcoin versus these central banks are very educated and they kind of understand exactly

• 39:21Anthony Pompliano?

  what the pros and cons of a central bank digital currency, a Bitcoin and everything in between is, and they're kind of taking more of a aspirational position in terms of what they hope happens versus, you know, kind of almost being ignorant to something like Bitcoin?

• 39:38Speaker 06

  Yeah, I mean, I don't think any central bank sort of wants to willingly just abandon kind of its job as far as sort of facilitating the currency transaction and sort of guarding and safeguarding that that system and then just sort of throw off their hands and say, okay, we give up and, you know, we think everybody should just start using crypto. So, you know, it almost, there's almost like a sense of self-preservation here that, you know, they don't necessarily want to kind of just close up shop. But, I mean, you know, the price volatility of Bitcoin is really quite, quite problematic. I mean, you just

• 40:20Speaker 06

  can't run an economy on an asset that swings up and down, you know, five, 10% in a single day. It's just too, too much. And, and, as far as the digital currency too, I mean, I think, I think a lot of that is also more sort of technological, or as far as just thinking about kind of improving the plumbing of the financial system, like how are transactions settled and cleared, things like that. I mean, those are very important questions and they do have implications for financial stability and so they're important to, to understand. But that's, that's also why, you know, I think there's a lot of ink getting spilled on, on that.

• 41:05Anthony Pompliano?

  You mentioned earlier before we got started that you had seen some of the past interviews I've done on Bitcoin and some stuff we agree on, some stuff we don't agree on. Rather than bore the audience and probably you and myself on the things we agree on, what are some of the things that you believe we disagree on? Maybe we could kind of talk through those and I'd love to learn from your side and maybe you could stumble into one or two things if I put my foot in my mouth.

• 41:31Speaker 06

  Okay, sure. Yeah, yeah. And of course, just because we disagree on it doesn't mean I'm right and you're wrong, right? I mean, we may just have a difference in opinion. I guess maybe one of them we could talk about is that there's kind of this, I think there's this tension between the notion that Bitcoin is, sort of represents free speech and that it's used for sort of legitimate purposes, you know, related to like furthering democracy and people's own, you know, free will and so forth. There's like a natural tension between that and then this notion that it's resisting against sanctions.

• 42:11Speaker 06

  Because if the government doesn't want you doing something, they're going to declare it illegal and if you're going to do it anyway with Bitcoin, then you're breaking the law. So, you know, I think that a part of, even if Bitcoin is not used to a great extent today for the purpose of facilitating illegal activity, I mean, like for example, the, there's an analytics firm called Chainalysis that looks at blockchain transactions and they say that a pretty small portion of Bitcoin is used in illegal activity. Now, maybe, maybe they're just not counting it correctly, but, but I think that like

• 42:50Speaker 06

  if you're going to argue that cryptocurrencies are not used for illegal things, maybe that's not true, maybe that's true today, but you have to at least acknowledge that like an important aspect of them is that they could be, like they could be used for that in the future and that actually is like an important part of what, what gives them value. Like I was describing them as insurance. Now, you can certainly argue whether the government should be making certain things illegal or not, but the fact that you have the option of bypassing that, you know. There is kind of that tension there.

• 43:30Anthony Pompliano?

  Yeah, I think it's a very fair question. And if we separate out for a second, the illegal activities from the legal activities. I think when people say that Bitcoin is kind of free speech codified, right? The first thing is, in the United States, you have the right to free speech. Now, there are limitations around certain things, you know, yelling fire in a movie theater, all of those types of things. But generally, if you're trying to do good things or legal things, you are allowed to say what you want. And actually, the true test of free speech is almost to protect the speech of the people you disagree with, right? But they're not inciting violence or any of this stuff.

• 44:13Anthony Pompliano?

  And so what Bitcoin does, which is unique for money, is that it provides this censorship resistance. Right now, what is censorship meant to be? What is it not meant to be? When is it appropriate? When is it not? That's definitely debated, and I think that gets more into like the legal and illegal transactions. But just from a technical basis, the fact that I can send Bitcoin to you, and I don't need to ask permission from anyone else, is a technical innovation when it comes to being able to use economic value, something with a market price and use for medium of exchange. So I think it's like pretty well accepted, let's say on the technical basis, of just like, there is this censorship resistance.

• 44:55Anthony Pompliano?

  You know, you mentioned the insurance is a form of that censorship resistance for the central banks, whatever. Now, when it gets into legal and illegal, I actually think most people look at the illegal transactions. And I always joke that like, yes, there are anarchists, yes, there are like hardcore libertarians that believe like there should be no rules or laws or whatever. But like, generally, most people in a society agree on the illegal things that they should be illegal, right? If you are financing terrorism or whatever it is, for the most part, I think the majority of these societies say, hey, we should not allow that to happen. And it's good that we prevent bad things from happening to our citizens.

• 45:35Speaker 06

  Well, wait a minute. Let me, let me, let me interrupt you just for a second. And what about, for example, protesting Canada's vaccination policy? I mean, the government declared that illegal and they, they froze their banking house. So if they were, if any of those protesters were transacting in Bitcoin, they were breaking the law, right? So, so the question is,

• 45:57Anthony Pompliano?

  But just because the government makes it a law, doesn't mean that it is a ethical law, right? And the example I always, the example I always use is like, if they had done that in the United States, right? They would have violated the constitution. Now, I'm not an expert on Canadian politics, nor what their legal documents are. So like, maybe it's legal, maybe it's not, I'm not sure. But in the United States, if the government had said, hey, we are basically going to remove you, we're going to eject you from the financial system because you are not complying with a, whether it's vaccination or any other law, I think that there would have been a line out of the courtroom door of lawyers saying,

• 46:38Anthony Pompliano?

  hey, you know, you're violating people's various constitutional rights. And so like, it's a very weird thing because in some ways, without censorship resistant money, the default is the government's right, the individuals are wrong. When there is censorship resistant money, in my opinion, and again, this is just me individually, it kind of balances out the powers. And now all of a sudden, it is the individual is right and the government, the burden of proof goes to the government that they broke the law or whatever. Now, what I think we have seen, which, you know, kind of gets at this a little bit, is we've actually seen a lot of law enforcement organizations, a lot of politicians and governments all say, like, look, bad people have done bad things on the blockchain, 100%, right? Like, we know

• 47:23Anthony Pompliano?

  that's happened. And they've been able to go track those people down and kind of bring them to justice, whatever that ended up being. And so it, it almost gets at this question of like, who should be believed by default? Or like, who should be given the, the default right to continue until something changes? And it's like, is it the government or is it the individual? Ultimately, as you know, I'm assuming you would guess is like, it just comes down to like political perspectives. Which is like a weird thing because Bitcoin is technology, it's software, it's like the least political thing from a technical architecture. But it gets almost kind of brought into these political discussions.

• 48:03Anthony Pompliano?

  Because to your point, it allows for people to do things that they previously couldn't have done, which opens up this whole can of worms, right?

• 48:11Speaker 06

  Yeah, yeah, yeah, that's right. I mean, yeah, so I think, I think basically, you know, you just have to acknowledge that it it can be used for things that government doesn't want people to use and that's, that's, that's part of the, the, the value of it. But, but yeah, I mean, whether that's, whether that's good or bad, I guess also depends on, you know, how, how good you think governments are at being the arbiter of, of right and wrong. Yeah, these are very sort of philosophical questions.

• 48:46Speaker 06

  But yeah, so okay, maybe a couple of other things too. I think you've also mentioned before that like, uh, bank failures and maybe like the potential for confiscation, like what happened in Cyprus is a good reason for people to hold Bitcoin is, do I have that right?

• 49:01Anthony Pompliano?

  I, I think it's less about like, hey, that's a reason everyone should go out and, you know, buy Bitcoin. I think it's more so the idea of self custody, similar to the central banks, right? The more custody you have, the more sovereignty you have of the assets, it prevents against those edge cases. And they're very much edge cases in the developed world. In the less developed world, they're probably more common. And there's also not things like FDIC insurance, et cetera, but it's definitely one of the reasons why sovereignty becomes important, in my opinion.

• 49:34Speaker 06

  Yeah, okay, I guess, I think, I think maybe we would, we would then mostly agree on that, that, uh, you know, in the, in the developed world, it's not so much of a concern.

• 49:45Speaker 06

  There are, by the way, ways to, to, to increase your, your FDIC insurance like quite a bit. I mean, you could open up multiple bank accounts. You can actually add beneficiaries to them. So if you add beneficiaries to a bank account, it actually stacks up the FDIC insurance to, to, up to 1.25 million. So, so yeah, I mean, I, I think that.

• 50:07Speaker 06

  The the number of people who would actually need to to start thinking about buying Bitcoin because they like run out of banks to open, you know, to deposit their money out, I think it's it's it's got to be vanishingly uh vanishingly small. Um, so ano- another thing, and I maybe we'll we'll disagree a bit more on this is I'm actually not necessarily convinced that cryptocurrency is currency. Um, I it's obviously the term that people call it, and so I I use it, but I don't think that Bitcoin is it it is not a currency, it's not a unit of account, it's not a medium of exchange. I I can't go to the grocery store and hand up Bitcoin for for groceries.

• 50:47Speaker 06

  Uh, I can't go to the movie theater and and pay Bitcoin to to go watch watch a movie. Uh, Amazon will not accept my Bitcoins for selling me, you know, whatever it is that Amazon sells as everything. Um, so so it's it's it's more of a niche thing. And now I I do, however, think it is a store of value. Um, but but it it's not, i- it's not yet at the level of a currency. Um, now, it like gold, for example, isn't isn't a currency either. Um, you know, if I, none of those places I just told you about will will accept my uh gold bullion, right?

• 51:30Speaker 06

  So if I if I bring a bar of gold to the grocery store or whatever, then they're not going to accept that. Um, but, yeah, I mean, so so I think I think that, um,

• 51:43Speaker 06

  thinking of of of these things as as, I mean, so they're just not yet currencies. Uh, that doesn't mean that they won't ever be. Um, and maybe part of the the the, again, part of the sort of the insurance you're you're getting when you buy Bitcoin is that you're kind of protecting yourself against the scenario where somehow the US dollar becomes a worthless or something like like there's some major uh either policy screw ups or like a nuclear war or something. And in that scenario, maybe cryptocurrencies actually start becoming like a unit of account because like society is sort of broken down or something. Um, but uh but but I don't know, just today, I I just, I I don't see it.

• 52:29Anthony Pompliano?

  So I have two things that kind of jumped to mind. The first is I'm gonna throw out a like definition of a currency and you tell me if this is aligned with yours. I heard you say a couple things. I'm assuming it's like store value, medium of exchange and unit of account would be the three things.

• 52:44Speaker 06

  Yeah, that's true. Yeah, yeah.

• 52:46Anthony Pompliano?

  Okay, so I would agree with that and I think that's like a good framework and my guess is that most people who are quote-unquote currency experts would would say, hey, yes, that checks the boxes of that. Now, where I may question some of those currency experts is a lot of times when I hear people talk about is something a currency or is it not, obviously, given what I do on a day-to-day basis, a lot of time they're talking about Bitcoin, but there are other assets that you, you know, you mentioned gold and others that can kind of come under this scrutiny. One of the things that I've started to think about more and I frankly don't have a fully formed opinion, so I'll kind of throw it out there as a maybe a prompt and you can respond to it, is that actually some assets are currencies in one situation,

• 53:27Anthony Pompliano?

  but not currencies in another. And what it made me think about is like environment matters when evaluating if something's a currency or not. And where this came from was I used to use the example of cigarettes inside of a prison. And so like, again, kind of extreme example, right, but but it highlights the point of like, they're used as a store value, they're used as a medium of exchange, and to some degree, they're used as like a unit of account, right? It's more of like a barter type system and they're used. Now, I don't think anyone who wants to be taken seriously in the financial world or in the academic world would go and say, you know, cigarettes are a currency all around the world and if you got cigarettes, you're good to go. But in that, you know, kind of more insular environment, they do act as a currency. And so if you take that and kind of extrapolate it out to Bitcoin,

• 54:11Anthony Pompliano?

  it's unique in that I think most people who hold Bitcoin, and even people who don't but but kind of evaluate it, they would agree, yes, Bitcoin serves as a store value. Now, whether it's a good one or bad one, that's debated, you know, free market kind of determines price and it changes or and fluctuates, but store value, I think most people are like, okay, you know, I can see that. When it comes to the medium of exchange and the unit of account, that's where I think you're highlighting, hey, look, this is not widespread. This is not global. And so if you use that like, well, what environment are you talking about? In a physical environment, if you go to Bitcoin Beach, there's a lot of people who are using it for transactions. Things are priced in Bitcoin, but I don't know. Maybe there's a couple hundred, maybe, you know, single digit thousands of people in that one insular economy that are using it.

• 54:55Anthony Pompliano?

  Again, does that make it a currency on a global scale? Does that mean that it's just within that insular economy? Is that the first data point on a upward trajectory of adoption globally? All up for debate, but at least in that insular thing is being used as a currency. But I would agree with you on a global basis. It is not unit of account. There has not been this hyper Bitcoinization idea, all of those types of things. And so like, you know, the prompt that I would almost kind of want to hear your thoughts on is like, how do folks who look at these currencies think about, you know, global evaluation versus more of like these insular economies? And can something almost serve, you know, to some people as a currency? And to other people, it's actually not a currency? Like they actively are on the other side of that debate?

• 55:39Anthony Pompliano?

  How does that work? Hey, guys, I hope that you're enjoying this conversation. As you probably realize, we don't run any ads on this show. That's right. All the other podcasts, all the other YouTube shows that you watch, they have advertisers. We don't have any direct relationships with advertisers, and we simply create this because we enjoy doing it. Now that we do that, though, we have a team. And if you'd like to support us, one way you can do that is to go subscribe to the Pomp Letter. It's a daily letter that I write to about 235,000 people about my personal opinion on financial markets, business, technology, and Bitcoin. Just go to pompletter.com and you can sign up there. I'd love to have you join us, and it's a great, easy way

• 56:21Anthony Pompliano?

  to support the work that the team and I are doing on a daily basis. All right, let's get back into this conversation.

• 56:27Speaker 06

  Yeah, that that actually is an interesting question because, for example, the things that I just described, like going to the grocery store or the movie theater or whatever. If I'm doing that in the United States and I brought a euro banknote to the grocery store or the movie theater, they wouldn't take that either. So i- in that setting, it's not, the euro banknote is not acting as a currency, even though, of course, we we would generally recognize the euro to be a currency and certainly anywhere in the European Union and many countries besides that, it would be accepted for for those kinds of transactions.

• 57:07Speaker 06

  So, um, yeah, I mean, I guess there is inherently a sort of like a fine place and manner type

• 57:19Speaker 06

  notion to the concept of a currency, but but still,

• 57:25Speaker 06

  I I think that it's got to be more, a lot more widespread than than Bitcoin currently is.

• 57:32Anthony Pompliano?

  Yeah, and I think to your point, it's like, you know, one of the things I've always said is like, if Bitcoin becomes a store of value, it does not necessarily achieve what is written in the White Paper, right, electronic peer-to-peer cash, like it's very much intended to be both a store of value, medium of exchange, and then eventually that would lead to the unit of account. But at the same time, if it became the global store of value that was used by billions of people, like, that would be a pretty big success, right? So just that alone would kind of, I think a lot of people would point to and say, hey, Bitcoin worked for that specific use case. Now, obviously, people in the Bitcoin community believe that it is going to become the medium of exchange and that unit of account. And so the other thing I always laugh about, it was kind of like with the inflation talk in the United States.

• 58:16Anthony Pompliano?

  They're like, you know, it's transitory, it's not transitory. I used to always say like, well, what what makes, like, where's the line, right? If it's only here for six months, is that transitory? But if it's here for seven, then it wasn't transitory? You know, it's kind of like this, like, very arbitrary, loose definition that's used. And so the same thing with like medium of exchange, right? As I almost think about like, if 100 million people used it for everyday transactions, is that enough? Well, there's like, you know, seven and a half, eight billion people, whatever it is in the world, like, eh, you know, we're not even really at like, you know, 10%. Does it have to be a billion? Like, where's the line? And a friend of mine said to me, he goes, nah, it's more of like a you-know-it-when-you-see-it thing.

• 58:56Anthony Pompliano?

  And I think that's kind of how people feel a little bit is like, okay, I feel like it's a store of value for enough people where like I'll buy that. I don't know enough people who use it on a day to day basis. So like, I kind of don't believe that story yet. And then I, when I go to the store, I don't see it priced in Bitcoin. So like, I don't believe the unit of account. Um, but I don't know, maybe like there are definitions of this stuff that like, you know, the Bitcoin community just hasn't talked about yet. It's like a very fascinating thing that, um, in some way, the Bitcoin community and myself personally, like we've gotten a crash course in economics, the banking system, like currencies, like all this stuff. And I always wonder like, how much of it is we're learning versus like, we're trying to recreate the wheel? And like, we maybe should just like, learn from history a little bit at the same time?

• 59:43Speaker 06

  Yeah, yeah, no, I mean, I certainly don't know off the top of my head of any kind of like specific definition as far as, let's say, how many people have to use something in order for it to be considered a currency.

• 59:57Speaker 06

  You know, I guess I just go back to your beauties in the eye of the beholder, right?

• 1:00:01Anthony Pompliano?

  Yes.

• 1:00:01Speaker 06

  So, um, on the other hand, the one thing I will, I do want to respond to in, um, that you just mentioned, like talking about millions of people using it. Um, you know, my, my paper actually kind of gets really is thinking more like, you know, like a hundred institutions or something, right? Like, or maybe no more than 150 or something. Um, and so like, in terms of, Bitcoin becoming used as a unit of account or medium or exchange, you know, I, I think actually those are quite, quite separable from, from being a store of value and what, and the store of value doesn't necessarily imply the other two at all. I mean, again, go back to the example of gold. I mean, people have been using gold as a store of value for,

• 1:00:47Speaker 06

  thousands of years, but, um, it's been quite some time and it's been thought of as, as a unit of account or a medium of exchange. So.

• 1:01:00Anthony Pompliano?

  Yeah, I look, I completely agree. And again, it goes back to this idea of like Bitcoin layer one, right? Kind of the core blockchain is very much built for security, right? I don't think anyone would look at a blockchain that has 10 minute settlement times. And they would say like, obviously, that is optimized for global adoption to be used as a medium of exchange. And so that's where the Bitcoin community is trying to build the scaling technologies of Lightning and, you know, kind of all of that stuff. And, you know, I would argue that, like, so far, it looks pretty good. But I do think that there's a lot of things that, you know, still need to be built out. And also, I think the critique being, okay, I theoretically understand what you're trying to do, but like, prove

• 1:01:43Anthony Pompliano?

  it. Show me the adoption. It's very similar to like a venture capitalist showing up to a company and saying like, this is a beautiful deck. But like, show me the users, show me the retention, show me the growth, right? And I think that's kind of like, the market will ultimately be the referee a little bit, in terms of how far along the like Bitcoin vision do we get? And obviously, that's where markets get made, because the Bitcoin community is very, very, you know, optimistic and enthusiastic. And then I think that critics are saying, you know, that I don't see a path from where we are today to that vision. And we'll kind of see what happens. The only thing I hope for is, you know, it happens in our lifetimes. Really, I want an answer before I die. It's like the way that I've

• 1:02:25Anthony Pompliano?

  now come to the conclusion. This isn't a 12 month exercise, it's probably a couple decades. And so like, let's see where it kind of goes. But I don't know. What is your kind of, maybe we'll end here in terms of like, what are your thoughts in terms of the biggest milestones? Like, I take you as somebody who maybe is cautiously optimistic, is maybe where I would kind of characterize your view of Bitcoin. Optimistic being like, you see some use cases like the insurance for central banks, but like cautious in terms of the critiques of it's not a medium of exchange, it's not a currency, things like that. Is that like, maybe a fair kind of bucket to put you in, if you would allow me to put you in a bucket?

• 1:03:06Speaker 06

  Yeah, and I would also just say I don't think it's for everyone. So, so like, you know, if you're living in a developed country and you have no real reason to believe that, you know, your assets are likely to be confiscated or that, you know, you're in a situation where, where, you know, the government's going to pursue like civil asset forfeiture or something against you, then, then I think the argument for you to, to buy Bitcoin, certainly buy a lot of Bitcoin, is, is very tenuous. Like, like, there's just, you know, because again, like, you're not getting an insurance benefit out of it.

• 1:03:49Speaker 06

  So if all you're doing is just speculating, that's, that's probably not a game you want to be playing for, for the vast majority of people. So, so, yeah, so I think, I think there are absolutely some use cases for, for some people, but it's, it's not, it's not for everybody. What would change my mind a lot on that would be if it became a lot less volatile. So if, if the, if the price volatility really came down, then, you know, then it might actually, because then it's almost like you have your case and you just, you get this insurance value and it's also sort of the stable, you know, thing where you don't have to worry about it dropping, you know, 75% in one year like it did last year.

• 1:04:33Speaker 06

  So, yeah, I, I, so I think, I think, I think you, you, you had me mostly pegged correctly.

• 1:04:45Anthony Pompliano?

  So the volatility question is actually pretty interesting. I want to throw an idea out there and I'm going to allow myself to say Department of Economics, Harvard, you probably are much better versed in this than I am, but from kind of a layman's view of this, one of the questions around volatility that I struggle with, one articulating, but also two even just understanding, is that like, it's very clear Bitcoin's volatility because we use the dollar exchange price, right? So I will take one Bitcoin, today someone will buy it for $17,300, two weeks ago they would buy it for 15, and a year ago they were buying it for $69,000, or, you know, whatever the numbers were. So obviously that exchange price is super volatile.

• 1:05:27Anthony Pompliano?

  When I think of dollars, no one really thinks of them as volatile because I get paid in dollars, I save in dollars, I buy all my goods and services in dollars, I pay my taxes in dollars. Like, everything around me is denominated in dollars. But if I was to pull back and look at like the purchasing power, obviously with, you know, the official inflation numbers compounding at over 7% for multiple years, you're like, okay, I don't know, you know, 12 to 20% inflation over, let's call it the pandemic era or whatever, depending on kind of what numbers you want to believe.

• 1:05:57Anthony Pompliano?

  But we don't think of dollars as volatile, right? Because it's like $1 buys you $1 worth of goods, it's just the amount of goods has changed. How do you think about, or maybe if you were even me, like, talking about Bitcoin volatility compared to like dollar volatility? Or do you think that they're just apples and oranges and it's like unfair to try to compare them?

• 1:06:16Speaker 06

  Well, I mean, that's, that's kind of the concept of a real exchange rate, right? Sort of like, how much, how much does a currency move around in terms of the amount of consumption that it buys you? And in terms of a dollar, yeah, that's a rote sum because of inflation, but also, just also in terms of it's moved around relative to other currencies. So, yeah, I mean, you always have to, when you're measuring an exchange rate, you're always there measuring against something, right? You have to measure it against the dollars, against euros, dollars against yen, you know, Bitcoin against dollars, whatever.

• 1:06:59Speaker 06

  But I think no matter how you measure it, you know, Bitcoin against X, you know, whatever X is, I think you're going to find that that's very volatile in terms of whether you measure it in terms of just the X itself, or you then take a step further and measure it in terms of units of consumption.

• 1:07:17Speaker 06

  Yeah.

• 1:07:18Anthony Pompliano?

  Well, the one other thing I would say about this that, again, it kind of adds a complexity to the analysis. And sometimes I wonder if we're just like intellectually stimulating ourselves because we're all bored and have nothing else to discuss. But if you think of the day to day volatility, it would be very hard for anyone to argue that Bitcoin does not go up and down in value at a much rapid rate compared to the US dollar, right? I think that's pretty clear. But if you were to look over, again, let's go back to kind of 2020 to now, I'll call it the pandemic era, if you will. The dollar is down, whatever that number is, right? Whether it's on the lower end of 10 or maybe on the upper end of 20, it's down some double-digit percentage. Bitcoin has gone up and down and up and down, and it's been like, you know,

• 1:08:01Anthony Pompliano?

  just whipped around, but it's up 200% from where it started 2020, right? So kind of over that three-year period, it's up kind of 200% or so. And so the way that I think about this is like, on one hand, with dollar denomination, assets and goods and services have gotten more expensive over that three-year period. But if you had the Bitcoin denomination, things have gotten cut in half in terms of like your purchasing power and your ability to buy goods and services. I don't think many people are picking their day-to-day currency based on a three or, you know, even five or 10-year time horizon. I think it's more that store of value, as you mentioned earlier. But how would you kind of think through that? Or and maybe you even doesn't work on it of like, in the short term, something super

• 1:08:46Anthony Pompliano?

  volatile compared to a more stable asset like the dollar, but in the long term, it seems to actually have a better store of value and kind of almost have this tailwind for people who hold it that then want to consume using it? This episode is brought to you by LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of liquidity and they have 100% uptime track record through all the volatility spikes. LMAX Group's liquidity relationships and ultra-low latency technology means that LMAX Digital is the market-leading solution.

• 1:09:17Anthony Pompliano?

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• 1:09:56Anthony Pompliano?

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• 1:10:12Speaker 06

  I think you have to be careful when you're conducting an analysis like this because it's going to matter greatly where you choose the starting point and the ending point, right? So, I mean, as you pointed out, you know, one way of looking at Bitcoin is that you're up 200% over the last, what, like three years? Did you say three years or since 2020 or something? Another way of looking at it is you're down 75% last year.

• 1:10:33Anthony Pompliano?

  Correct.

• 1:10:35Speaker 06

  Yeah, so.

• 1:10:36Anthony Pompliano?

  The shorter the timeline, the more the pain. I think of like the shorter the timeline, the more the pain, the longer the timeline, the more it looks good for you know, the Bitcoin holder, if you will.

• 1:10:45Speaker 06

  Yeah, but I do, I do think that Bitcoin holders have got to expect, even over longer timeframes, that the returns are not going to be as high as they have been. I mean, I think the early adopters of Bitcoin, I mean, if you bought Bitcoin in like 2010 or something, like, you know, clearly you've done super. Yeah, yeah, clearly you've done super, super well. I actually remember taking a course on cryptography as an undergrad where people brought up Bitcoin like as an interesting, like academic curiosity almost, and I think it was like $10 or something back then. So, yeah, I kind of wish I had.

• 1:11:25Anthony Pompliano?

  I wish I knew you and was in that class.

• 1:11:28Speaker 06

  Yeah, but.

• 1:11:35Speaker 06

  You know, in order for, like, like, there's just, there's just no, like, economic rationale for why over, let's say, ten, then like the next ten years Bitcoin should return, you know, thousands of percent. I mean, it's just, like, I, I, I just struggle to come up with any kind of plausible reason for, for why that ought to be the case. I mean, if it's, if it's gonna act as a store of value and sort of a real asset, then the rate of return ought to be much closer to the rate of inflation. And, you know, I, I think that that, if you're gonna buy Bitcoin, that, that ought to be, you're closer to your, your expectation than,

• 1:12:18Speaker 06

  you know, the kinds of fantastic returns that people got when Bitcoin, and, and, you know, back then, it was, it was a riskier thing. I mean, people had no idea whether it was gonna work out. I mean, it, you know, it could have had, maybe someone could have successfully attacked it or found bugs in the, in the protocol, right? I mean, like, there are all kinds of risks related to the early adoption of a cryptocurrency that have, I think, nowadays been more or less settled that, you know, we know that this thing is fairly secure and, and robust because there, there certainly are enough people using it today and that have, you know, kind of looked at the code and everything and, and made sure that, that everything checks out. But back when, when it got started, I mean, I, I don't think that, that was necessarily the case. So, you know, the early adopters got some,

• 1:13:03Speaker 06

  some risk premium for that. And, but, but there's no, there's just no reason why it, it's gonna keep producing these kinds of tremendous returns. So I, I think, yeah, you gotta expect inflation, maybe inflation plus one, inflation plus two or something. But, you know, that, that's, that's probably the long, the long run for, for Bitcoin.

• 1:13:26Anthony Pompliano?

  Yeah, I actually agree with you. I don't think that you will continue to see like I call like video game number returns, right? I think at some point those taper off. And yes, everyone loves the stories of hundreds of thousands of percent, you know, tens of thousands of percent. But I think you nailed it in that like you get paid for the risk you take. And now Bitcoin has been drastically de-risked in a number of different vectors. There's still, you know, plenty of people who have certain risks or concerns or whatever, but many of the major risks have been at least mitigated if not completely removed. And so you should expect the return to go down. But the other thing too, and again, maybe this kind of gets at the dollar Bitcoin thing, is I don't know if they necessarily

• 1:14:11Anthony Pompliano?

  are competitive on a short to medium time horizon. And so like, I think that the Bitcoin community does a great job of like pointing, you know, a century away. And they're like, look what's gonna happen 100 years from now. Maybe, right? I don't, I don't think I'll be alive for that. But I do think that in the next, you know, I don't know, let's just say 10 or 20 years, like the US dollar likely will continue to strengthen against other fiat currencies and kind of become, you know, at least hold its position, if not become more dominant against weaker currencies. And that will continue to be used as a day to day medium of exchange. But Bitcoin, maybe it just continues to gain steam as a store of value, right? And it kind of has this rise with the dollar,

• 1:14:52Anthony Pompliano?

  and they coexist for quite a bit. And that can be separate and distinct from what happens in the long run. Right? Like, to me, it's not a, just because they're structurally set up some way, you don't necessarily have to conclude that the end game is what happens, you know, even in our lifetime, let alone in the next 10 or 20 years. Which is unique, because then it kind of, again, if you unpack it, the dollar is designed to lose a little bit of value through inflation every year to spur the economic activity and kind of all the things that people understand. Bitcoin is almost engineered in a way that although it'll have short term volatility, in the long run, to kind of continue to gain some purchasing power, just because it's a finite asset and as more people adopt it.

• 1:15:35Anthony Pompliano?

  It should go up in that purchasing power terms. But I think as you kind of started the conversation, like we don't know for sure, right? Like it is, these questions are worth asking because ultimately the market will kind of determine it. But we need to kind of understand what we're, what the risks are and what the potential pros are and we go from there.

• 1:15:57Speaker 06

  Yeah, I mean, I, so I'm not actually not necessarily sure that over a 10 or 20 year period, the dollar will appreciate or depreciate. I mean, that's also going to spend a great deal on the course of monetary policy in the US compared to the, the rest of the world. And then whether the US dollar continues to gain traction as, as a, you know, sort of a medium of exchange or unit of account in international trade. I, I don't know. I mean, I, I think, you know, the countries like, like China, for example, has been very insistent and, and interested in trying to peel countries away from dealing in US dollars to dealing in, in, well, probably they prefer renminbi, but if not that, then at least something else.

• 1:16:42Speaker 06

  So yeah, I mean, I, I think, I, I, I actually think we're probably headed more towards the sort of a multipolar international financial system where the dollar maybe is a plurality, but it's not going to be like the dominant majority force like, like it has been. And I think that Bitcoin may be one of the smaller things that's part of that and maybe it's just used as a store of value.

• 1:17:08Speaker 06

  But, but yeah, you know, actually, so as far as like the long run of Bitcoin, the last Bitcoin will be mined, what in like 2136, 2140, something like that. Yeah. So, so certainly, you know, it'd be interesting to, to know what'll happen with, with Bitcoin after that. I mean, like, are the, are the transaction fees going to be enough to sustain it? You know, to, to incentivize miners to continue, to continue mining, are people going to be willing to pay fees that are that high? I mean, that's sort of an interesting question, but yeah, unfortunately I will be dead by then. So.

• 1:17:45Anthony Pompliano?

  You and I both will be on our deathbed wondering, I wonder what's gonna happen? And hopefully, we unfortunately will never know. Matthew, I really enjoyed talking. This is fantastic and I've really appreciated, I think, kind of just your critical thinking around so many of these topics. If anyone wants to reach out or learn more of the work that you're doing, where can we send them to find you on the internet?

• 1:18:09Speaker 06

  Yeah, so I have my contact information on a Google site. So if you just Google my name, it'll come up. And there's also a link there where you can download my paper or whatever the current version of it is. I'm working on a revision. And if you want to read it, I'm always interested in hearing from people of thoughts and feedback on my work. So, yeah.

• 1:18:36Anthony Pompliano?

  Awesome. And for those that want to go check out the paper again, it is titled Hedging Sanctions Risk: Cryptocurrency and Central Bank Reserves, published back in, or the original was published in November of 2022. But Matthew, thank you so much. I learned a ton today and I hope that this was valuable for everyone watching and listening. And please, kind of keep pushing forward because there's a lot of people, I think, as you realized, once you publish the paper, who are paying attention to this space and found your paper valuable as well. So, thank you.

• 1:19:05Speaker 06

  Yeah, thank you very much for having me on. It was a fun conversation.