Caitlin Long: Will Blockchain Free Us from Wall Street?


This is Mises Weekends with your host Jeff Deist. Ladies and gentlemen. There are a lot of people, probably too many people, writing about and talking about Bitcoin, Blockchain, and Cryptocurrencies in general. But, one person in that field actually knows what she’s talking about. She’s our guest this week, our great friend Caitlin long. She gave a presentation recently at our event in San Francisco. A really fantastic and informative survey of what Blockchain could mean for the financial industry and how it could revolutionize that industry in ways that are good for you, and not so good for the institutions that currently make a lot of money by being Fed connected. She also works with her home state of Wyoming to draft some Crypto and Blockchain friendly technologies. She’s a fascinating person. She’s a prolific writer and speaker on this topic. So, stay tuned for a great weekend show. I’d like to organize the 40 minutes that we’ll have prepared remarks, by talking about two problems to which the solution is Bitcoin and Blockchain and I’m going to frame them in an Austrian way, but do it in maybe a little bit non-Austrian, not precise Austrian methods because I believe that some of the Austrian methods have been a little too narrow and we’ve missed some things and I’ll explain that as I go through. But, the problems I’m talking about are, the moneyness of credit and inaccuracies in Wall Street ledger systems. The moneyness of credit is a phrase that Doug Noland, one of my favorite economists, uses. He’s not strictly Austrian, but he writes the Credit Bubble Bulletin and history will be very kind to his chronicling of the credit bubble that we’ve been in for the last 30 years. And what he means by moneyness of credit is that debt instruments in the fixed income markets, things like bonds, treasury bonds, Fannie Mae, Freddie Mac bonds, actually function as money and in institutional markets and I’ll go into that and explain why that has helped proliferate the debt bubble that we’re in. The second problem is Wall Street’s ledgers are inaccurate. Inherently, they lose track of who really owns what and we should not trust our brokerage statements. The solution to both of these problems, which of course, both stem from the fact that we have unsound money, is creating sound money, creating an honest ledger system. The current system creates more claims to wealth than there is real wealth in the economy and yet, the solution is fixing that. It’s right in front of our faces with this new technology. I’m not going to give you a downer of a speech, though, when talking about these problems because I’m actually quite optimistic. Bitcoin is what makes me optimistic that the future is not bleak. It is history’s first universally honest ledger. It’s the only one that truly exists in many ways and it has fomented the rise of a parallel financial system that is now quite large and I’ll explain. All of us have read Murray Rothbard’s Mystery of Banking. That book was written in 1983. Hold that date in your mind. I believe, and he explains how fractional reserve banking works in this book. We all understand how it works in the traditional banking system. You take a dollar of monetary base and it gets multiplied up into $10 of M2, but the reality is, that’s not how the financial system works anymore and most of the credit that has been created in the last 25 years, has been created outside of the traditional banking system. It still exists, but it’s just not that meaningful. What’s more meaningful is the shadow banking system and I believe that if Rothbard were alive, he would have written a sequel to The Mystery of Banking, which would be called the Mystery of Shadow Banking. That’s a book that I very much hope that an academic picks up and writes. And that’s because money has taken on a much broader definition in the securities markets, than the traditional definitions of fiat money. Effectively, money is anything that can be financed in the securities financing markets, especially that which the primary dealers can finance at the Fed, either through the repo market or through the discount window. And that means Treasury bonds, Fannie Mae and Freddie backed bonds, mortgage backed securities, even corporate bonds, effectively become money because they can be financed at the discount window and in the repo market. A repurchase agreement is an agreement to pledge a security in exchange for a loan of cash and then repurchase it later at an agreed price, so that’s an implicit discount rate. Most of the repo market is overnight and in fact actually, instead of the Fed injecting monetary base into the traditional banking system, the Fed creates money by injecting monetary base into the repo market. It is a very important market that is not well understood by Austrians and I think that that’s one of the reasons, as I’ll talk in a little bit, why some of the Austrians miss the impact of the financial crisis, predicting that we would see hyper inflation and we didn’t. I’ll explain a little bit more about that in a moment. But, the degree of moneyness of fixed income assets fluctuates. It ebbs and flows. Sometimes the repo market will finance non-investment grade bonds. Sometimes there’s no bid for those. But, what got me down this path was, scratching my head, wondering why sometimes in the repo market treasury bonds are more valuable than cash. You actually have a negative interest rate to borrow a treasury bond. It’s what’s called the general collateral financing rate, GCF rate, when periodically that goes negative. What that means is that in the institutional money markets, treasuries are more valuable than cash and the reason is, that they can be repoed, they can be rehypothecated and leveraged multiple times whereas cash cannot be. The impact of all of this, I want to spend more time on the definition of it, but I wanted to lay it out because the impact of all of this is ballooning debt, particularly since 1983 when Rothbard happened to write his book and again I think if he were alive, he would have known this, he would have been all on top of it. But, let’s explain, let’s dive into now some of the numbers explaining why the moneyness of credit has resulted in this monstrosity that’s on the graph right here, which is nonfinancial sector debt. We’re now in the United States at 72 trillion of nonfinancial sector debt. And as you see, there’s been no deleveraging, has not actually declined and I’m focusing on non-financial sector debt instead of total debt for one simple reason. The financial sector intermediates debt out into the real economy. And so, if you look at total debt where you count financial sector and non-financial sector debt, you’re actually double counting. The real borrowers in the economy are of course, outside of the financial sector and that’s why I focus on this. And it turns out, this analysis, if you define money and credit more broadly to include the entire fixed income market, effectively, what you’re picking up is some very interesting things about the economy. Of course in here in this, you see that the federal government was the bulk of the increase in the borrowing, as well as the state and local governments and the Fed itself, since the financial crisis We’re going to track this area in this graph as a single red line, in the next couple of charts and there’s our red line, our total nonfinancial sector debt is now 72 trillion, that’s just the sum of all of the different colors in the previous graph. But, what I’ve added to this chart is, cumulative private sector savings. This is an Austrian analysis, in effect, by saying that we need to compare the amount of debt that’s been borrowed to the amount of savings that was saved because, as you know, Mises would say that the amount of debt that was borrowed from real savings is legitimate debt. he called that commodity credit and the amount of debt that was borrowed in excess of real savings was the illegitimate debt, the circulation credit. And in effect this chart puts some numbers to that. Everything from zero up until the green line is commodity credit, in effect. That’s the legitimate amount of debt. Everything between the green line and the red line is the circulation credit and it turns out that, as you see, the red line is significantly above the green line and that’s cumulatively since World War II, almost entirely since we went off the gold standard, we’ve borrowed $40 and a half trillion of excess debt, in effect, $2 of debt for every $1 of savings in the US economy since World War II. We’re now going to look at this exact same dataset, except instead of looking at the stock, we’re going to look at the flow. Instead of looking at the period end amounts outstanding, we’re going to look at the change and it turns out, we’re going to follow that in the next three slides, it turns out that there’s some tremendously interesting observations that you can pull out both about the economy and about financial markets, by looking at it this way. So, there’s our red line, except now we’re looking at the change in debt borrowed and the green line is just the amount of savings in each of those quarterly periods dating back to just after World War II. But, what I wanted to share with you here, is that if you look at the left hand side of the chart, the red and green lines are basically right on top of each other. That’s not a function of the scale of the chart. That is a function of the fact that we actually had a tether on the amount of debt that could be the financial system It was called the gold standard. And before 1968, it turns out, that those two lines in any given year were, one might be a little bit ahead of the other, but they’d always equal out. It was just a timing difference. If you if you dive into the numbers, we really truly were an equity financed economy, where the amount of debt that was borrowed, was actually equal to the amount of savings saved in the economy prior to 1968. 1968, we started cheating, as we know, because of guns and butter and then afterwards, every year except for one, you see where the financial crisis was, right there, a little itty bitty bit of deleveraging in one year, in one quarter actually, but debt has increased savings every year since we broke the tether on debt growth, which was the gold standard. And now, let’s look at that same graph in highlighting two different things, which is monetary policy decisions. The first one, of course, we just talked about. We all know in 1971, we broke the tether on debt growth by abandoning Bretton Woods, after having been cheating since 1968. But, it turns out I think the bigger…maybe not the bigger mistake, but a tremendous mistake that I haven’t seen anyone write about, happened in 1982. Remember Rothbard wrote his book in 1983 and that was when the Fed shifted from targeting the quantity of credit to targeting the price of credit. When they did that, they gave the keys to the kingdom to the financial sector to create as much debt as it wanted as long as the price of credit, the Fed funds rate, remained in the target area and that’s when we really started to see, you see it on the chart, beginning in 1983, under Volker, you really started to see that red line start to take off, relative to the green line and ever since then the financial sector has gone to town creating debt. That was a tremendously colossal error. It happened again under Volker and what’s interesting is, they never announced it. So, Rothbard wouldn’t have been able to pick it up at the time unless he were reading the Fed minutes, which were released several years later. I only found it because of an academic who was writing about it, understanding that it just happened in one meeting, it was never publicly announced. But, you can see how that was a meaningful change. Instead of targeting the quantity of credit and trying to control M1, they were now targeting the price of credit and ever since then, have targeted the Fed Fund’s rate. Now let’s look at that same dataset, but highlight different things. It turns out, that every time that red line grows a lot faster than the green line, we have a financial market bubble. And I’m tracing five bubbles here, only the first of which happened before that fateful 1983 decision. And you see in 1974, we had a financial market bubble. The S&P went from 68 to 107 between 1974 and 1976 and then it crashed. And then, we had that fateful decision beginning in 1983 where you really start to see the debt numbers take off and that culminated in the ’87 crash. Then you see, in the late 90s, the third bubble is the tech stock bubble and then of course, the housing bubble, which is the biggest one to date, at least by these metrics. And then I believe we are in a government finance bubble and we are not at the end of that bubble yet and that is probably the granddaddy of them all. So, how much debt capacity remains? If you look at it on this basis, it’s an interesting question because it helps to explain why we haven’t had the collapse yet. A lot of Austrians were saying when we abandoned the gold standard in 1971, the dollar was going to collapse, but I think what was missed at that point in time, was an understanding that we had a tremendous balance sheet. There was basically no debt…no net debt on the balance sheet of the United States at that point in time. Because our grandparents and their grandparents and their grandparents had bequeathed us a tremendous balance sheet with which, against we could start to borrow. And we really started borrowing beginning in 1968, as you saw and we haven’t stopped. We’ve gone to town. But, the blue line I’ve introduced in this chart is US net wealth and you notice it’s always above the red line. U.S. net wealth is the amount of unencumbered assets owned by Americans, unencumbered by debt. The red line is the total amount of nonfinancial sector debt. You may be thinking aren’t I double counting because I’m pulling out the debt from net wealth and then I’ comparing it again, to the debt. What I’m really trying to get at is a macro level, I know we hate that word, but when you aggregate all the borrowings of individuals and aggregate all the assets of individuals, how many unencumbered assets are there that can support all that dollar denominated debt and it turns out that there are more. The total amount of US net wealth right now is $92 trillion and the total amount of nonfinancial sector debt is $72 trillion. We’re adding about 2 and a half to 3 trillion of nonfinancial sector debt a year. So, what this suggests potentially is that it could keep going. I think it more specifically explains why the dollar hasn’t collapsed yet because there’s asset value implicitly supporting the dollar. That’s the spread between the blue and red lines. But, here’s the fly in the ointment of this analysis, it’s circular because the asset value is supported by the debt itself. And so, at some point, this is not to say that we’re going to continue forever, being able to support asset values with issuing more debt and pushing interest rates down. And there’s a $20 trillion spread right now between total US net wealth and nonfinancial sector debt, but remember the circulation credit that will in theory be liquidated, is $40 and a half trillion. So, it does suggest that unfortunately this is not going to end well. This doesn’t help tell us when it’s going to end, but it helps, I think explain why we didn’t see the crash and the end of the dollar, yet. Let me turn now to the second problem, which is issues in Wall Street’s ledger systems, that are prone to inaccuracies and it’s related to the earlier problem. I’ll connect them in a moment, but the way securities used to work was very simple. Issuers issued this stock certificates in paper form to the investor. When I say by investor there, is either you individually or through your agent, like a pension fund or a mutual fund or an insurance company But, you always owned the stock certificate in paper form, that’s how it used to work. Since 1994, we’ve got this very convoluted procedure here, where you see that the issuer issues securities to a company called Cede & Co, which is owned by the Depository Trust Corporation and then the custodians hold the securities on your behalf. So, there are a minimum of three, sometimes five or six layers between you and the issuer. When I first figured this out, it was amazing. I was working in capital markets and looking at a bond prospectus and in the prospectus, is language that says that the issuer of the bond has no obligation to pay interest and principal to the investor. Think about that. That is expressly in the bond prospectus, you are buying a bond and you are not getting an obligation to pay interest and principal from the issuer. What’s happening is the issuer is paying Cede & Co., who has an obligation to pay the custodian, who has an obligation to pay you. These layers of intermediaries create unnecessary counter party risk, operational risk and the risk that the system gets out of sync because each one of those layers is reconciling against each other until five…probably more like 10 years ago, all of these companies batch processed their transactions overnight. That’s part of the reason why it took three days, now it’s two days, to settle securities transactions because it’s got to go through layers of intermediaries each one of them needing a day, overnight, to process the transactions. And so, you can see that this system inherently foments inaccuracies because they’re not all going to be in sync at the same time and it also creates settlement delays where it takes, it requires two days to settle securities transactions. However, the technology no longer requires that. We’ve long past moved the need to have this crazy system, but we’re stuck with the legacy. What are the problems? Some of you are probably skeptical and thinking, I trust my brokerage account. I trust my broker. I’ve never found a mistake. They’re honest. Well, let me give you some examples. The first one was just about a year ago, in litigation in Delaware, Dole Food, there was a class action lawsuit and the details aren’t important, but here’s what matters. There were 36.7 million shares of Dole Food outstanding and in a class action lawsuit, there were 49.2 million claimants to the consideration in the class action lawsuit. Again, 49.2 million people had valid brokerage statements showing that they owned Dole Food shares, all of whom had valid brokerage statements, 49.2 million, but there really were only 36.7 million Dole Food shares outstanding. That’s what Patrick Byrne will call the bezel, when he talks in a moment. If that makes you not trust your brokerage statement, good, because I don’t trust mine. All of those 49.2 million showed up on valid valid brokerage statements. And again, it’s because of these layers of intermediaries that can get out of whack at any given moment in time. Procter and Gamble, you might have read there was a big proxy fight. It was all over the business newspapers at the end of last year. Well, in the first count in the proxy vote, it came out that Procter and Gamble’s candidate won by 6.2 million votes. They did a second count and it turned out that the challenger, Nelson Peltz, won by 42,780 votes. And then they did a third count and it swung back, Procter and Gamble won by 498,312 votes. Let me go through that again. The first vote was plus 6.2 million. The second was minus 42,780 and the third was plus 498,312. If this doesn’t give you any confidence in financial systems, good because it shows you how wildly inaccurate the accounting systems are that you can’t even get an accurate proxy vote count. The reality is, Procter and Gamble after that third count, threw in the towel and said, and invited Nelson Peltz on the board. They had already spent $125 million between them fighting over that board seat. And they knew there was no possibility of getting an accurate vote count and so they just decided to stop fighting and invited Nelson Peltz on the board. Yahoo had a similar situation. There was a recount of a proxy contest that revealed 20% of the votes had been miscounted. I won’t go into the details about Dell, they’re a little more complicated, but the gist is, it cost T. Rowe Price $194 million because of something that wasn’t even their fault, related to the fact that they were no longer the record owner of the securities. I personally ran into a situation where I observed unauthorized securities lending happening in a pension fund that would not have been discoverable because it wasn’t showing up on the brokerage statements. There’s a lot of shenanigans that happen behind the scenes in the accounting systems and they’re inherently… they inherently don’t stay in sync with each other. But, here’s the granddaddy of them all. By the way, on the bottom right, I actually put the title of a speech, the Blockchain Plunger. There’s a judge in Delaware who’s been a huge supporter of Blockchain technology and his speech that he gave to the Council of Institutional Investors is called, the Blockchain Plunger: Using Technology to Clean up Proxy Voting and Take Back the Vote. He’s as huge believer that the current system is fundamentally broken and we need to deploy Blockchain in order to fix it. But, on the upper right is the granddaddy of them all. The market that most over issued securities through the ledgers, accounting systems of Wall Street and that’s the US Treasury market. There’s an IMF economist who’s done a study to try to estimate how much treasures have been overissued. And he doesn’t call it that, he calls it collateral velocity. It’s back to that repo market I was talking about. The repo market is how most funding happens and how most money and credit is created in the financial system. It’s a huge market. It trades, on average, $4.6 trillion a day in the United States. And he estimates how many times as single treasury bond has been posted as collateral, the very same treasury bond has been posted two times as collateral, down from three times, since the financial crisis, so there’s been as little bit of deleveraging, but in plain English what that means, is that one in every three parties who thinks they own a US Treasury security actually does because there’s really only one Treasury security and even though all those financial institutions are reporting that they own the Treasury security because that’s how repo accounting works, the way it works is, you put a dollar of debt against that asset and then you turn around and repledge that asset and the other party puts a dollar of debt against that same asset and that keeps happening. That’s how fractional reserve banking happens in the shadow banking system and it happens on a much larger base because remember, money in the shadow banking system includes every Treasury bond and Fannie Mae and Freddie Mac bonds too, whereas the Fed’s balance sheet in the traditional banking system is a much smaller number. So, what effectively he’s saying, when you think about in the traditional banking system and zero typically gets multiplied by 10 to become M2 well, the M zero of the shadow banking system is a much larger base and that gets multiplied by two to get a much, much bigger number. In effect, this is a money creation and it’s very opaque, but this economist has done a tremendous amount of work identifying just how over issued government bonds, it’s not just in the US, but all over the world is. So, that ties back that moneyness of credit point to the fact that the accounting systems of Wall Street don’t keep track, keep accurate track of who owns what. It’s a game of musical chairs and it’s not going to end well. If I’d given this speech to you in 2014 or 2013, I would have ended here and it would have been a downer because it would have made everybody feel really uncomfortable. But, the good news is, we have a solution and that is history’s first honest ledger and that is as blockchain, a universally honest ledger. It is a ledger system that is governed by the laws of math, not the laws of man and therefore it can’t be tampered with because the laws of math are immutable and there is no subjectivity in it. A blockchain allows multiple parties to see the same data at the same time and trust that it’s valid. Again, a blockchain, in simple terms, allows multiple parties to see the same data at the same time and trust that it’s valid. It is a new form of database technology that creates a single golden copy that all of the parties can share, shared infrastructure. That’s why the banks are all interested in this. They all keep their own copies of ledgers and then reconcile against each other. Well, if there’s as a way that they can keep only one ledger and not have to reconcile, they can cut a lot of costs maybe they can cut all the time to settlement of securities transactions and payments out to. Bitcoin was the first blockchain. It was created in October 2008, by Satoshi Nakamoto We don’t know who he, she or they is or were, but what Satoshi did was create the first truly denationalized money that wasn’t specie. It has a finite number. It will never have more than 21 million Bitcoins issued, by algorithm, that really can’t be changed. I’ll talk about that in a minute. But, what Satoshi’s breakthrough was, was he solved what’s called the Byzantine General’s problem, which is the computer science problem that computer scientists had been grappling with for almost 40 years. Which is, when information moves across time and space, how do you know that it hasn’t been tampered with in between where it was sent and where it was received? They called it the Byzantine General’s problem because in Byzantine times, the generals were sending messages back and forth to each other on the battlefield, information moving across time and space. How do you know that the information that was received is exactly the information that was sent? And Satoshi solved that by creating a brilliant system, that is not just about technology. In fact, the brilliance of the system is that it’s a combination of technology and game theory. And this is a very important thing to understand. It’s built on both cryptography and incentives, economic incentives. I’ll talk about that more in a bit, but it’s not just about technology. It’s very much about understanding incentives. And because of that beautiful balance of technology and incentives, it’s never been hacked. You may think gosh, wait a minute, I read about hacks all the time. The hacks that have happened have happened on applications that were built on top of the underlying Bitcoin blockchain, but the underlying Bitcoin blockchain has never been hacked and it’s been out there for almost 10 years now and no one’s figured out how to hack it and it’s got a heck of a hacker’s bounty, it’s now worth about $140 billion and keep in mind mind it’s sitting out there with no firewall in the wilds of the internet with everybody attacking it every day. Because of its balance, beautiful balance between technology and economic incentives, it has withstood all of those attacks. It’s also a marvel of technology, though. Let me give you the network uptime statistics since the first Bitcoin was mined on January 3, 2009 and that is, 99.9922904%. That is in excess of six sigma quality control and the crazy thing about it is there’s no system administrator. They do network upgrades on the fly. They don’t take the network down. It is an incredible piece of software, but it’s an even more incredible piece of money because of, again, the incentives that are built into the system. In general, the Bitcoin network has had everything go up into the right in terms of the number of users, the number of wallets, the hash rate,which is the which is the computer processing power supporting the network and in general the price. Obviously, it fluctuates wildly, but it is still in a bull market uptrend technically and the things that have happened in this market are just crazy. Coinbase, which is the largest player in the market, was opening 100,000 accounts a day in November and December of last year and that company’s not even five years old and it now has more customers than Schwab. So, it’s crazy what’s happened in this sector. It does indicate, of course, a speculative frenzy, but it also indicates a desire for something other than a financial system that I think most people understand, isn’t fair and doesn’t quite work the way we want it to. Let me talk about the two Austrian objections to Bitcoin. I put the regression theorem on this slide, but there’s another one that’s more general that I hear and it’s related, which is, Bitcoin’s not backed by anything. That’s what Peter Schiff’s big critique of Bitcoin is. But, a lot of Austrian scholars critique it and stayed away from it because of thinking that it violated the regression theorem and in fact, the answer to both of these critiques is the same, which is that Bitcoin is really a payment system inextricably intertwined with the token. It’s not right to compare Bitcoin against the dollar, yen or euro. It’s apples-to-apples to compare Bitcoin against the dollar, yen, euro, etc., plus Visa and Mastercard and Pfizer and Fidelity National and all of the companies in the payment’s ecosystem that process and confirm transactions. And so, what’s backing Bitcoin? What’s backing Bitcoin is that payment system. It’s the service that people are willing to pay for in the form of, in the case of Bitcoin, being diluted by the inflation that happens as the miners are paid new Bitcoins as they confirm transactions. That is what backs Bitcoin. There is a utility to it, there is a user value to it. It is the payment processing system. In fact, the US payment system, I looked it up, has a market value of $600 billion and that’s just the S&P payment sector. There are a lot of other technology companies that make the hardware and the payment system, like the ATMs and the point of system swipe machines for credit cards and the like, that are not included in that $600 billion number. So, there’s clearly value to payment systems and what I think these critics are missing is that the value of Bitcoin is that the payment system is intertwined, you cannot separate it from the token. And indeed, that’s how I would answer the critique of the regression theorem. The regression theorem says that the origin of money is that it was a commodity that became valuable in exchange and we can trace money back to the actual commodity that was used in exchange, in barter transactions and that money’s initial value must have use value. Well, in fact, actually, I would argue that Bitcoin’s use value is that payment system and in the beginning, Bitcoin didn’t have value because it was just simply a unit of account in as ledger, but then people started using that ledger to confirm transactions and keep track of value. Once people started using that ledger, then Bitcoin started to have value. That is the utility, that is how we can trace that it spontaneously arose as a commodity, it had utility and that’s how I would answer that it doesn’t violate the regression theorem and hopefully walking through that made you think a little bit, if there are skeptics among us, which I’m sure there are. I’m actually in the process of doing some research digging into valuing Bitcoin as if you were valuing it the same way you’d value Visa or Mastercard. Looking at all the cash flows in terms of transaction fees and that block reward that’s thrown off of the Bitcoin network and valuing those cash flows, using as discounted cash flow model, just the way an equity research analyst would or looking at the return on invested capital relative to the invested capital, Bitcoin has as much, much, much lower invested capital in confirming payments than the existing payment system does. Think about all the bricks and mortar in the existing payment system, all that hardware and every merchant that has a credit card machine. You don’t need any of that in Bitcoin, none of it. So, it’s a very capital light technology, a payment system and therefore the return on invested capital is going to be a lot higher and so, per transaction, the Bitcoin system in theory, if you looked at it the way an equity analyst would, is worth a lot more and so you pay a much higher multiple than you would for a Visa and Mastercard, which has to have all that bricks and mortar and all that hardware. Haven’t done that analysis yet, so that’s a theory. I’ll report back at some point when I get that done, but I’m almost positive that that’s going to justify Bitcoin’s value in some zip code. Again, if the total payment system in the US is worth $600 billion and Bitcoin, which is much more efficient, is worth $140 billion, that tells you, it’s actually not that far off and that $600 billion payment system value I think is understated. And by the way, that’s just the US as well. So, more to come on that. I just have two more slides, but this one I need to spend some time on because there is a tour de force book some of you have probably read it, but as I’ve chitchatted with folks, a lot of you didn’t know this existed. It’s been out for three weeks. It’s called the Bitcoin Standard and it’s written by an Austrian. I’ve never met him, Ammous, I assume, is how you pronounce his name. It’s called The Bitcoin Standard: The Decentralized Alternative to Central Banking and he’s a professor of economics at Lebanese American University. This should be in everyone’s library, every Austrian’s library. It is a tour de force. The first seven chapters get into the history of money leading up to why Bitcoin is so special and so unique. And to me, there’s so many things you can take away from this book, but to me, the big thing is that money historically has been supplanted by new versions of money, when technological innovations come in and necessitate the move to a different form of money. He goes through the Rai Stones in Yap Island. Some of you are probably very familiar with that and how they suddenly cease being money When somebody figured out a way to produce them, but the reason why they retain their value for so many years in that economy was because they had a high stock to flow ratio and were so expensive to produce, which is analogous to what Bitcoin is. I want to read a few quotes from his book because I think that’ll help you understand just how special the book is, special the book is, but more importantly how special Bitcoin is. One is: “Whereas in a modern central bank, the new money created goes to finance lending and government spending, in Bitcoin, the new money goes only to those who spend resources on updating the ledger.” That’s pretty interesting. There’s never been money created where those who who create the new money, who mine the gold or silver or collect the sea shells, there’s never been money where the seigniorage went back into the money itself and that’s how Bitcoin was designed. The people who get the benefit of the inflation are the ones who are securing the network and confirming the transactions. Here’s another one. “Bitcoin is the hardest money ever invented. Growth in the value cannot possibly increase its supply. It can only make the network more secure and immune to attack”. As more people come into Bitcoin, the incentive for more computer power to process the transactions increases because the miners can make more money, so you get more and more secure as more and more people come into Bitcoin, but that does not change the supply of Bitcoin. So again, the incentives are very nicely aligned. The difficulty adjustment, which is essentially that the math problem becomes harder as Bitcoin goes up and more people come into the network… the math problem that the miners have to solve. “The difficulty adjustment is the most reliable technology for making hard money and limiting the stock to flow ratio from rising and it makes Bitcoin fundamentally different from any other money.” Again, if we get a big discovery of gold, that’s going to cause the value of gold to drop because it’s becoming cheaper to produce, but in Bitcoin, if you get a big discovery as in a whole bunch of people come into the network, Bitcoin becomes more expensive to produce. That’s in part what keeps it so valuable and there is no other money like it. Bitcoin and cryptography in general, are defensive technologies that make the cost of defending property and information far lower than the cost of attacking them. That’s an incredible statement because it means that the cost of defending your property right, is a lot cheaper than the cost of somebody trying to take it away from you. And again, that’s the design of Bitcoin. I really hope you dig into this book. But, the last char…the last comment that I’ll share is, I think the most pointed, which is, “The Bitcoin ledger of transactions might just be the only objective set of facts in the world.” And that is because of the verification methodology in Bitcoin. You hear the phrase, lies, damn lies and statistics. There is no such thing in Bitcoin because everything on the Bitcoin network has been verified using math and it’s immutable, it cannot be changed. It is the first honest ledger in history and that is why it’s so powerful. Let me end by talking about how this sector has flourished and Patrick Byrne I’m sure is going to pick this up in talking about something called utility tokens or securities tokens. Blockchain has now been used to effectively issue what are securities-like instruments, but they’re not securities. They are something called utility tokens. They are issued and traded and settled on a blockchain, but they’re redeemable for consumptive goods. So, you can now download music on a blockchain called Ujo or you can trade photographs on Kodak Coins blockchain or airline miles, I suspect will probably eventually be on blockchains, issued and traded on blockchains. And my native state of Wyoming, as Jeff said, did something really interesting. We passed five blockchain bills. I spent the entire month of February in Wyoming with this gentleman, Tyler Lindholm. He’s my hero. By the way, it’s funny, when I was at the Satoshi roundtable, right before I went to Wyoming, I predicted, I said, there’s this guy who’s very Ron Paul-like in Wyoming and he’s going to help us get these bills passed and the skeptics in the room said, well then of course they’re going to fail. But, in fact, actually we got them all through and two of them were passed unanimously in the House and the Senate. And the most important one in some respects is the Utility Token Bill, which exempts utility tokens from securities and money transmission laws in the state of Wyoming. We also exempted crypto assets from the money transmission laws generally and we exempted crypto assets from property tax. There’s already no income tax, so we made Wyoming this really, really interesting state from the perspective of the crypto industry and, by the way, Tyler got through as bill independent of this, that recognizes specie as legal tender. We’re going to be working on getting crypto assets recognized as legal tender in Wyoming next. So, we can always come back to those who say that the dollar has to exist because we have to pay our taxes in it. Well, legal tender in these states that recognize specie as legal tender, can be something other than the US dollar and the same thing is true if we can get crypto assets recognized as legal tender. But, I wanted to share with you, there’s a parallel financial system that is arising as a result of these utility tokens and some of you probably have never heard of them and some of you probably have. There’s as frenzy in the market right now, but this market is huge. It’s huge. It’s a whole new form of venture capital where startups are now funding their businesses through issuing utility tokens on as blockchain. And again, these tokens are redeemable for consumptive goods in their network, but they’re also a way to finance the company in a way that traditional venture capital… it’s supplanting traditional venture capital. And folks, here’s the number. In the first quarter, $6.3 billion was raised in the initial point offering market. That is 40% of the initial public offering market and traditional stock markets. That only raised 15.6 billion in the first quarter and it’s 30% of the venture capital raised in the first quarter. So, you’ve got a market that didn’t even exist three years ago that’s now 40% of the size of the IPO market and 30% of the size of the venture capital market. This Bitcoin thing is a thing and I think it’s fantastic because it’s all happening in parallel and completely outside of the traditional financial system and all of the tokens that are issued and traded on blockchains, are traceable back to the owner. And in conclusion let me say, I think capital markets won’t be fair unless and until they use honest ledgers and the great thing about the utility tokens is that they are using honest ledgers, where the real owner is the record owner that’s recorded in the ledger. The assets are issued, traded and settled on a blockchain. I really do believe that the future of money to make reference to the theme of this event, the future of money is Bitcoin and also believe that the future of capital markets is blockchain. Thank you. With that I think we’ll take some questions. [Applause] Subscribe to Mises Weekends via iTunesU, Stitcher and SoundCloud or listen on Mises.org and YouTube

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