“How do you see the role of debt changing in
a society with the advent of cryptocurrencies?” That’s a really interesting question, Kenny. When you first get involved in this space, you may not
initially notice but bitcoin and other cryptocurrencies… like it are not debt instruments.
When you hold bitcoin, nobody owes bitcoin to anyone. It is an asset. Most other systems we use for money
are actually debt instruments, created through credit. When you hold a dollar, somebody owes somebody
for that dollar. Somebody is holding a debt. That means it’s a very different system
[from] traditional currencies. The other big difference is, in traditional currencies,
lending is done [through] fractional reserve banking, meaning that banks can effectively create money out of
nothing by lending $9 for every $1 they have in deposits. That mechanism allows them to expand the availability
of credit in the economy, to inflate the economy, by producing more credit.
If that credit is properly invested, it’s great and might… increase productivity, creates returns. That’s fine. If it’s not properly invested, of course it creates bubbles
and inflation in the underlying currency. That’s not fine. So how does that change with cryptocurrencies?
Well we don’t know yet, but one thing we do know is… you can’t do fractional reserve banking
with cryptocurrencies like bitcoin. You can’t give out bitcoin that doesn’t exist or that you
don’t hold. You can’t give out more than already exist. You can’t issue debt in bitcoin. Not directly, at least. However, one of the interesting phenomena is
the emergence of all these other blockchains… While some are differentiating in terms of capabilities
and features, creating technology innovation, many perhaps are not doing much else other
than creating another pool of currency… that they’re injecting into the system.
In a way, that’s inflating the supply of money. That’s one of the ways that you (effectively) get credit.
We see this particularly [with] so-called airdrops, where you have a fork, [such as] “Bitcoin
Gold,” but there might be many others. This fork isn’t aiming to differentiate much on features. I don’t want to disparage Bitcoin Gold, that’s not the
point. The point is that when a fork like that occurs, it creates a new supply of money. For every bitcoin you held before, now you have
the original bitcoin plus [the new forked coin]. If the price of bitcoin doesn’t drop [much],
and the price of the new coin is greater than zero, then the sum of them is greater than you had before.
They’ve effectively increased the supply of currency. So one way we might see the expansion of credit
is through the so-called airdrop / fork coins. [It’s] not necessarily a good thing
because that also creates inflation. It doesn’t create inflation in Bitcoin’s [supply], which
continues to be constrained, but it creates inflation… in those airdropped currencies. [QUESTION] “Why is the Japanese government pushing
adoption in bitcoin, legalizing it in such positive ways, [while] the Chinese government made
ICOs and their exchanges illegal?” I’ll make one assumption.
This is a very difficult question to answer. I didn’t want to go into this because I have very little
insight into the thinking of the Japanese government, and the Chinese government, for obvious reasons.
I don’t live there, I haven’t visited Japan for a long time. I haven’t been to mainland China at all, actually.
I’ve been to Hong Kong a few times. [For me] to claim to know what they’re thinking would
be hubris, but one of the big differences between… what’s happening in Japan and what’s
happening in China is the following: China has this very big issue [with] growth
and development which is underlined by… an enormous amount of stimulus, debt, and a very big
real-estate, construction and manufacturing.. bubble. I don’t know if I should necessarily call it a bubble, but
certainly a lot of people are worried there might be… over-investment, malinvestments, capital mis-allocation.
A lot of these massive projects are pumped by… government funds, by printing currency. Underneath this, you can imagine there’s
a great deal of fear about inflation. If you think there is a lot of debt, a lot of malinvestment,
then obviously as the government prints more money… this is going to lead to inflation.
Maybe not right away, but eventually. When you have growth rates of 6%, 8%, 10% per year, the possibility of inflation suddenly
getting out of control is very high. As a result, if you’re a Chinese investor, if you’re
someone [with] money in China and you fear inflation… What do you do? Well, one thing you can do
is get your money out of the Chinese yuan… and try to invest it outside of the markets that you feel
are bubbly, outside of the currency you feel is inflated. That leads the capital flight.
Capital flight is a very big problem in China. It’s a big problem for the Chinese government. This
capital flight, which has been happening quite a lot, found one of its [flight] avenues in
Bitcoin and other cryptocurrencies. One of the reasons we saw billions of dollars flowing
into cryptocurrencies, was because Chinese people… were trying to get their money out of the country. I don’t think it’s a coincidence that the Chinese
government made ICOs, exchanges, trading to fiat… [They] didn’t make them illegal, they just [shut
them down] and passed some policy rules. It’s not like they wrote a law. A lot of this happens
[on a] regulator, state agency policy basis. They blocked those because of the capital flight.
It’s not a coincidence that this happens right when… the five-year National Congress of the
ruling Communist Party was happening. The leader was laying out the latest five-year plan that,
among other things, had a lot of comments about… money, investments, currency, national
imperatives, and things like that. Meanwhile, what’s happening in Japan
is they have the opposite problem. They’re not worried about inflation. In fact the biggest
problem they have is that they’re on the tail-end of… a 20-year deflationary spiral that has
continued to affect their currency. They have a problem with
demand and under-investment. They have a problem with the fact that their
economy is not overheated – it’s frozen. It has been frozen for 25 years in this deflationary trap
with near negative interest rates and an inability to… really stimulate the economy. So for them, something
a bit bubbly [such as ICOs], a surge of investment, people spending their money instead of hoarding it, even
if they’re spending it to move into cryptocurrencies… Obviously you can see the incentives are [involved here]. That’s one of the reasons why you
might be seeing a difference in policy. I’m trying to not make any kind of strict pronouncements
here because I’m not sure [about their situations]. I hope that was useful. The next question is really interesting. It comes
from Pierre. On money supply and deflation. [QUESTION] “Restricted money supply in Bitcoin is
virtuous to create trust in the system, avoid inflation. Most economists, however, advocate for a flexible
money supply so that it matches economic conditions… and a need for credit. If the current fiat system
inflates endless bubbles through cheap credit, doesn’t Bitcoin have the exact opposite problem? Two problems come to mind: 1) future prices are
unpredictable and do not match productivity either. 2) too much deflation might discourage investment. In summary, if Bitcoin is its own central bank, how do
you know that its monetary policy, deeply embedded… in the system, was a good one in the first place?
Any advice on good readings about [these issues]?” I think this is part of a broader issue. That broader
issue is this assumption that there will be one money, and that one money is the mandatory
money that everyone has to use. Central bankers have to get it right because
they’re forcing everyone to use their system. If they get it wrong, they [still] force
everyone to get it wrong with them. Bitcoin may not [have] the right monetary policy,
but it’s an opt-in voluntary system. If you don’t like its monetary policy, don’t use it. In a world where that choice exists, in
a world where all of the choices exist, where you could pick any monetary policy, [pick any]
currency you want to use on a day-to-day basis, where you can’t be locked into a system, where you
can’t be taken hostage, where you always have an exit… is a world in which there is no ‘wrong’ monetary [policy]
because there is no permanent monetary system. There is no unchangeable monetary system. Bitcoin’s monetary system is [relatively] unchangeable
within Bitcoin, but you don’t have to stay with it. You can leave if you don’t think it’s right. The problem with monetary policies of nations is that
not only do they change at the whim of bureaucrats, but you can’t really leave.
It’s easily to look at that and say, “We wouldn’t want Bitcoin to replace central banks with
a deflationary monetary system imposed on everyone.” Well, guess what? I don’t want Bitcoin to replace central
banks with a monetary system imposed on anyone. That’s not what it’s about. It’s about choice. Once you have choice, then your choice of monetary
system is the right one for you because you chose it. If nobody else chooses it, that’s their problem.