95: Bitcoin, Ethereum, Blockchain and more, explained by economist Andreas Park

Episode Transcript
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Andreas Park (00:00):
Imagine that you doubled your population that

(00:04):
wants to do economic activity.
If if all these new people wouldwant to use money in the future,
then they they just need thecoins available to themselves.
And so if you have a limitednumber of coins that are
available, I think this is aproblem right? Because you you
have scarcity in the coins, andthat all of a sudden creates
value to holding on having thesecoins all by itself. And that's

(00:25):
a problem right because becauseyou know the act of holding
money should not be somethingthat is that is valuable.

Preet Banerjee (00:43):
If Bitcoin cryptocurrencies and blockchain
has you feeling confused, thispodcast episode is for you.
There is a strong correlationbetween Bitcoin cheerleading,
and bitcoins price. Whenever thecryptocurrency has seen a rapid
increase in price, mainstreammedia coverage rises, and social
media while it goes crazy, likeit always does. But how many

(01:06):
people really know what they'retalking about? Is this another
case of return chasing behaviorcoupled with a little knowledge
being a dangerous thing? Well,my guest on today's podcast is
one of the few people who canhelp answer a lot of questions
about cryptocurrencies. He's aprofessor at the University of
Toronto and his research andinterests have been focused on

(01:29):
financial market structure,financial technology and
studying innovations incryptocurrency and blockchain.
And don't worry, whether youalready know a bit about
cryptocurrencies or are startingfrom scratch. I think we hit a
really nice balance betweenexplaining the basics and diving
a bit deeper into the actualeconomics to explain how you can

(01:51):
judge for yourself if the spaceis suffering from too much hype
or not. I think you're gonnafind this episode. very
enlightening.
This is mostly money and I'myour host Preet Banerjee, joined
by Dr. And Dre is Park is goingto explain Bitcoin, blockchain

(02:15):
and all things crypto in a miniCrash Course. Let me introduce
my guests with a bit of hisbackground. Andres Park is an
associate professor of financeat the University of Toronto
with appointments to the RotmanSchool of Management and the
Department of Management at UTM.
He currently serves as theresearch director at the fin

(02:36):
hub, which is rotmans FinancialInnovation Lab. He's the co
founder of the ledger hub, theUniversity of Toronto's
blockchain research lab, a labeconomist for blockchain at the
creative destruction lab, theeconomic adviser to conflux
chain and a consultant to theOntario Securities Commission,
and Iraq, the investmentIndustry Regulatory organization

(03:00):
of Canada. Andres teachescourses on FinTech and financial
market trading and His currentresearch focuses on the economic
impact of technologicaltransformation such as
blockchain technology. Herecently co authored a design
proposal for a central bankissued digital currency

(03:20):
commissioned by the Bank ofCanada. And that was actually
the impetus for me reaching outto them. And I've had the
pleasure of participating in anumber of events with Andres at
Rotman either as a speaker,panelist or moderator. And so
when the email came in fromRotman events about an event
where three different groups whohad authored design proposals
for the Bank of Canada for whata central bank digital currency

(03:44):
might look like, and I saw theentry This was one of the
presenters, I tuned in and itwas incredibly enlightening.
Andrei is welcome to the show.
Well, thanks for having me,Preet. There are a lot of people
talking about various aspects ofcryptocurrency, mostly Bitcoin.
What percentage of people knowwhat they're actually talking

(04:06):
about?

Well, that's a really small number, if you ask
me.

Yeah, you talk to me about, you know, the
different voices, you havepeople who are cheerleaders,
you've got people who reallyknow what they're talking about.
And you've got a whole bunch ofpeople in between. So tell me
what your sense is being anexpert. From when you hear
either things in the media,you're reading blogs, looking on
Twitter, what's your sense ofhow much talk is actually backed

(04:35):
up by people who know whatthey're talking about?

Well, you got to be cautious on which part of the
area you're actually talkingabout. Right. So you know, I
think people have by nowunderstood reasonably well what
Bitcoin is not necessarily howit works, but you know what it
is and what it isn't is, orthat's that's a mouthful. But
then when it comes to you know,the the part about

(05:00):
That has potential impact. Andthat's really interesting. I
think very few people areactually in the know,
understand, well, what is goingon, and then even even the
people that are in theblockchain space, that there is
still, you know, a wholespectrum of knowledge and
necessary knowledge that youneed in order to understand

(05:21):
that. So let's take this. So I'man economist by training. So I
understand, you know, some ofthe economic implications and
the mechanisms that arenecessary for, you know, some of
these tools that exist. And thenthere are a lot of people from
engineering, computer science,they understand the tech really
well, but they don't understand,you know, in the design that you

(05:41):
put in this economicimplications, there's design
questions that are directed toeconomic incentives, and they're
not aware of them, or they don'tcare about them, or they don't
understand them, like, and thenon the other end of the
spectrum, I am I don't reallyunderstand all the technological
details of how things are done.
And I still ask them really dumbquestions all the time to some
of my colleagues. Right. Soit's, it's interesting times

(06:03):
there, which makes this whatmakes his area so interesting is
also that it really requires abig view of many different
thought processes to cometogether. So it's not just tech.

Yeah. And and I think, you know, a lot of the
conversation is centered aroundBitcoin. But there's so many
other implications for theunderlying blockchain
technology. There's so manydifferent cryptocurrencies
themselves beyond just Bitcoin.
So Bitcoin gets a disproportionamount of attention generally
for definitely the lay audience.

(06:37):
But we'll get to all that let'slet's start from the beginning,
if you will, or at least we'llpick a point in time and call
this the beginning. And thatwould be 2008. With the
publication of the Bitcoin whitepaper. Can you explain the
significance of that whitepaper? And what it led to?

Well, yeah, no, it's actually a pretty clever
piece, right? So what what thisperson Satoshi Nakamoto did was
he took two existing pieces oftechnology and put them together
in a smart way to createBitcoin, right to create digital

(07:16):
money if you want. And, and sothe genius is, and let me say
what first what the problem isthe, the problem is that there
were attempts before to havedigital money. And the problem
that people couldn't overcome isa double spend problem, right.
So like, if I want to give youmoney on the internet, I have to
give you the original if youwant, right, when I send you a

(07:37):
PDF, or a picture, that's reallyjust a copy, it's never the
original. But for money, youneed the original. And so they
could never really nobody couldreally solve the problem of, you
know, making sure that you don'tspend the same dollar twice. And
what Satoshi did was hebasically combined the idea of a
blockchain, which is the linkingof pieces of information in a

(08:02):
cryptographic manner, so thatyou could see you could detect
any manipulation with what'scalled the proof of work
protocol, which is does a numberof things, it is one, it creates
the ability of a network to haveconsensus about, you know, a
change in the network. And italso makes it really hard to,

(08:24):
you know, to manipulate thepast. Because what it really is.
So there's a lot of talk about,you know, the energy usage and
all of that. But really what itis about it is a random
mechanism to give people in avery large network, the ability
to create a new entry in theblockchain on the accounting
statement if you want, right,and so,

yeah, well, I want to dive into that a little
deeper. But before we do, I wantto talk a little bit more about
the motivation behind coming upwith this idea. So I think you
you talked about part of it. Andthat is solving the double spend
problem, because with physicalcash, you don't you have minor
counterfeiting, maybe it's notminor in some circles. But

(09:08):
effectively, if I have a $20bill, and I pass it to someone,
I can't spend that same $20 billand give it to someone else,
because someone else has that.
So there is no double spendproblem with regular cash for
the most part. And so the doublespend problem was the one of the
main motivations, but when itcomes to, you know, a trustless
network, the decentralization ofthis ledger, which is maybe we

(09:32):
can explain the blockchainitself for Bitcoin and the other
types of blockchains out thereis basically a big accounting
ledger.

Yes, that's right, exactly.

And so what this ledger does, and the reason it's
called the blockchain is that isa chain of blocks and this block
chain gets longer longer as moreand more blocks get added, and
each block represents the lastbatch of transactions To add a
block onto the officialblockchain, you have to as a

(10:06):
sense of, you know, all thenodes who are out there taking a
look at all the transactions,they're basically solving a
cryptographic problem. And partof solving that problem add to
that chain means it has to lineup with all the previous
transactions that have everdone, been done in order to get
accepted by all the nodes. Solet's talk about this
decentralized idea. So when youtake a look at a regular ledger,

(10:32):
you know whether it is a companythat is selling things, they
have a record of accounting ofinventory, a bank has a record
of all transactions that go inand out between their customers
and other banks with a centralbank. But they are centralized,
they are owned by in many cases,a single entity. So what is the
idea of the blockchain in termsof it being decentralized? And

(10:54):
why is that important?

So and this is a great question, actually feet.
And I think this actually goesexactly at the core of what the
what the benefit of a blockchainis. Now, it's often portrayed as
you can do transactions withoutneeding a trusted third party,
right. So you can basicallyanybody can contribute to it and
everybody is happy, but nobodyhas to trust anybody for it to

(11:17):
work. Now, this is a pretty coolidea. But I think the more
important idea here is, is thatyou think about a common
infrastructure and a commonresource that anybody can use,
where there's no restriction ofusage. So there's no nobody or
controlled access to it. Butreally, the important part is,
it's that it is common foreverybody. So you know, you

(11:40):
don't need you know, it's not,it's not a siloed ledger, if you
want a siloed piece of where theinformation is kept. And I think
if you think about, you know,collaboration of firms of
individuals, when when we allwork on the same item, or the
same, you know, same problem, orthe same on the same data at any

(12:04):
given point in time, thatcreates, what it takes a lot of
inefficiencies. So think aboutyou and I read, you sent me a
Google document here before,before we talked right? Now, you
give me access to this document,and we can edit it at the same
time. Imagine what that does toa workflow on a phone. And the
same holds. If you think about ablockchain network, as we all

(12:26):
see the ledger of entries ofwhere, where the money is, for
instance, and, you know, I cantrust, you know, if I trust the
ledger as it is, and I want tomake a promise statement for a
payment for you in the future, Ican get the information from
that single resource. It'sextremely powerful. You know, I
mean, it's, it's goes completelyagainst what, especially firms

(12:48):
think, right, so firms like tothink of, they have their own
piece of information, it'stheirs, and you know, nobody
else can look into it. And tohave something like data or, you
know, sensitive, sensitiveinformation in some form of a
common resource. That's a bitscary. But at the same time,
it's, it could be veryempowering.

Let's talk about the the use of this blockchain
technology. And first, maybe itshould sort of separate, you
know, blockchain versus Bitcoinas a currency. These are two
separate ideas. So I want thelisteners to think right now
we're talking about theblockchain and the technology
that underpins a number ofdifferent use cases, the biggest

(13:29):
one that gets the headlines iscurrency and transactions. So
when it comes to paymentnetworks around the world, these
are, you know, you have bigpayment processors like Visa,
MasterCard, interact. And theyare tracking all these
transactions. And they each havetheir own ledger, which sort of
says, Here are all thereconciliations between all

(13:50):
these different parties. And sothey have a lot of power and a
lot of ability to charge peopleand merchants people a lot of
money for these transactions tobe processed on these networks.
And so by disintermediating themand just having a ledger where
people can just interact andmake transactions directly
recorded. The promise was thatthis would lead to much less

(14:11):
transactional costs, maybefaster transactions. So can you
talk about what that sort ofmotivation is and how that is
actually playing out in the realworld?

So maybe we should. So this is, again, it's
a it's an interesting andexcellent question to think
about the maybe we should take afew steps back and just the sort
of first a few things aboutBitcoin, right? Because I think
actually Bitcoin, if you thinkis like blockchain one point, or
what's the first implementationof the whole thing, and it
really has only the singlepurpose of shifting money back

(14:45):
and forth, right. So by the way,it's with bad structured, and
maybe it's useful if we thinkabout aetherium for a second,
which is the blockchain 2.0,which is really what you're
alluding to right so that youhave a ledger and a network as
well. Robots can do a lot ofdifferent things at the same
time. And maybe it's maybe just,you know, I had some really cool

(15:06):
stories about how ethio magiccame into being. This is
secondhand information that maybe useful for your listeners
anyway. Right? So,

because literally

the story behind it, there is and it's actually
quite cute. Right, so you'veyou've heard of vitalik boo
Turin or Butera? anwers. Right.
And so the story goes like thisis he when he was a kid, and
he's still pretty close to beinga kid. But he, when he was a
kid, he was into computing. Hewas into computer games, and you
know, computer games, you havethese characters that you create
over time, right? So they haveweapons and special skills and

(15:35):
all that. And then from one dayto the next, the gaming company
decided to kill that characteroff, right, so to restrict
access to it. And, you know,it's been months actually
creating that character, and itwas absolutely furious about it
was, you know, I actually wasnot just furious, very sad, I
was crying asleep and all thatrain. And that's how his dad got

(15:56):
him into bitcoin. Why? Well,because Bitcoin is what's called
censorship resistance. So no, nohigher authority can take away
your Bitcoin, which is, again, avery powerful statement, you
know, if you think of manycountries in the world, where
you know, that you haveauthoritarian governments that
can take away your money forwhatever reason they want,

(16:17):
right? legitimate or not. Andso, you know, Bitcoin, you can't
do any of that. So this is howthe kid got into bitcoin. And
then, you know, when youstarted, he was working on
Bitcoin and he had this ideathat he worked on a problem
which is so called coloredcoins, which is where you use
the Bitcoin network to createdifferent types of coins or

(16:39):
assets, such as a character andagain, right and then he
realized this was a problem waswas really hard to solve with
Bitcoin, it's just he was justwas made for that. And so then
he had this idea of because itwas also in computer science and
all one maybe we can create anetwork which can, you know,
just execute code for us. Sothat we all agree on, on any

(17:01):
change of of computing code atany given point in time. And
that's how a theorem came intobeing right. So it is really a
gigantic computing network. Nownot not to be mistaken for a
supercomputer, which can do alot of computations. This one
can do in a very rudimentarycomputations, but it can do them
in a decentralized manner. Yes,so now I want to because here's

(17:23):
where the difference comes intothe interface. Right? So if
you're an also has acryptocurrency, but it serves a
completely different purposethan Bitcoin. So if theorem is
not set up to be aninfrastructure to shift digital
stickers around, the reason whyyou have the cryptocurrency in
aetherium, is because when youhave a piece of code, you can

(17:43):
write just a corporate is justfour lines long, which goes into
an infinite circle, right? Andso if you would run something
like this on a decentralizednetwork, you would crash
networks. So for that reason,you need to have a way to limit
that. So how do you do thiswhile you do it by paying, so
you have an economic incentivenot to run code, which goes into
infinite loops. And so thereason therefore, for this

(18:09):
network to work is actually thatthere is something of value,
which is, you know, the etherthat you have to pay for the
execution of code, and thatthere is a limited resource for
that. So you know, it's aphilosophically, that's actually
really different from howBitcoin was conceived, and what
Bitcoin was doing, which ispretty, it's, you know, using z
already how the, for mepersonally, is really

(18:32):
interesting how the economicscomes into this.

Well, I was gonna ask you to, to sort of,
you know, put on your economistshat and sort of say, comparing,
you know, Bitcoin and theBitcoin ecosystem to aetherium.
It looks to me like aetheriumhas so much more possibility
behind it, then then Bitcoin,like you said, 1.0 versus 2.0,
is probably a really great wayto think about it, because it

(18:56):
tackles maybe more head on someof these issues, that would be a
very much interest to aneconomist. And so maybe I can,
you know, if we go back to, toBitcoin, and in he talked about
how a lot of people payattention to the electricity
consumption, I do want to spenda little bit of time talking
about the whole notion of miningand incentives, you know, and

(19:20):
what is the incentive to commitresources to verifying the next
block that gets added to theblockchain? So can you talk to
me about the incentives in that,and how that relates to
electricity consumption?

Yeah. So let's talk about how this actually
works. So So the basic principlethat you need for this network
to work is that actually, let melet me put it differently. So if
you want to steal from thisnetwork, right, what you need is
you need to have the ability tocreate multiple blocks

(19:56):
predictably over time. Okay, soI mean, you If you had the
ability to do that you couldsteal the money and basically
take whatever you want. Now, inorder to prevent that, what you
have to get is you have to havea mechanism by which, you know,
the the next generator of theblock is is found at random. So
you have, you know, let's say, amillion people that all want to

(20:18):
be participating in this forwhatever reason. And you pick
only one of them at random to bedoing this, man. So that's,
that's basically the mechanism.
This is what this Bitcoin miningis actually really all about.
Now, why is why is this pickingat random, this cryptographic
puzzle that you have to solve isreally nothing is on Sunday,

(20:39):
which you can only solve bymaking random guesses. Okay, and
so, therefore, these randomguesses essentially serve as the
random mechanism to to selectsomebody at random to be the
winner of this. Now, you cantemper this by committing
computing resources to it,right, so the more guesses you
can make per second, the morelikely it is that you will win.

(21:01):
But it's still still a randommechanism only for each
individual.

And sorry to cut you off. So when it comes to,
you know, the computing power.
So a couple years ago, I wasbuilding a PC. And as I was
sorting out the different parts,I was looking for a graphics
card. And I noticed that therewas either some anomalous sort
of premiums being set on theregular price of these cards, or
I just could not get thesegraphics cards. And then I

(21:27):
realized that one of the reasonsfor this and maybe the main
reason was, all these miners,were buying up bunches and
bunches of these graphic cardsand daisy chaining them
together, because that servesthe basis of a lot of the
computing power that goes intobitcoin mining, is that correct?

That is absolutely correct. Because so this
solution is random guessing asit is, it's an extremely trivial
process, right? Because all thatit is, is that you take a bunch
of data, and then you addanother piece of data to it. And
then you run a piece of code,which is roughly 200 lines long.
It's called a hashing mechanism,developed, by the way, by, you

(22:09):
know, the NSA, the NationalSecurity Agency, which is used
also encryptions. And all that,that's all that you do. So you
know, and that's something whichgraphic cards are really good
at, to do these, these really,really small tasks, but many,
many, many times over, as it's,it's not like a computer
processor, or, you know, quantumcomputer, which has to do
something really, reallydifficult. Now, this is really

(22:31):
trivial to do.

That's interesting, because I was gonna
ask you about, you know, what,what potential risk is a, you
know, quantum computing pose toblockchains integrity, because,
you know, in the white paper,the Bitcoin white paper itself,
it talks about as long as themajority of CPU power is not
controlled by a bad actor, thenthe integrity of the blockchain

(22:55):
is good. In fact, the blockchainitself has never been hacked.
Right. That's how good this is.
Correct?

That is absolutely correct. Yes. There's never been
down and never been hacked.

Yeah, I mean, that in and of itself is a such
an incredible innovation,technological innovation. But
again, as you said, that's just1.0 there's so many other things
that can be now done. And I getthe sense that people are maybe
putting too much weight onBitcoin and they're kind of
tying everything together intothis one thing. It's

(23:25):
cryptocurrency. It's Bitcoin,but there's so much more to
cryptocurrencies in theecosystem, as as you're
enlightening our audience withso. Okay, so to get back to the
electricity consumption, I dohave one more question on this.
And I don't know if you sawthis, but Kevin O'Leary recently
made some headlines because hesaid that he would no longer buy

(23:49):
bitcoin that was mined withunethical energy sources. And
the question I have is how theheck would you even know that?

This is ridiculous.

The conversation with Professor Andreas Park
continues in just a minute. Butfirst, a few thank yous to
listeners who left comments onApple podcasts, as saw on br z
or B or Zed, who found thepodcast after watching some of
my YouTube videos. Thank you fordropping bias on and smoking Joe
who left burger jointrecommendations for me the next

(24:31):
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the poor house, and I'll be sureto check those out. So thank you
for those tips. And thank you toeveryone who leaves ratings and
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all. And if you have eitherburger recommendations or donut
recommendations, please do feelfree to leave those in the

(24:52):
comments. I'm a sucker for both.
And now back to the conversationwith Professor Andres Park.

Now let's let's be sorted. So you know, I fully
agree by the way that so thisBitcoin energy consumption is,
is a very sad side effect of itright. But let's, let's take one
step back. And let's thinkabout, you know, the energy
consumption per se, I wouldargue, now there's this, there's

(25:25):
two things, I'm going to make alittle provision at the very end
of what I'm going to say. Butlet's just think about where
electricity is produced and how.
So we have hydro electricity, wehave wind, electricity, and
nuclear power, right. So theseare major sources of
electricity, forget about coalplants and the dirty
electricity. But these are, forpractical purposes, not co2 in
you know, harming technologiesat this point. Now, nuclear, of

(25:49):
course, we know that there'sissues with this. I don't want
to put that aside, but it existsfor now. Right? So let's go with
that. Now, all of thesetechnologies create electricity
at times when it's not needed,right. So hydro runs at night,
nobody uses electricity atnight, windmills, mostly run at
night, nobody needs electricityat night. And the same holds for

(26:10):
nuclear power, nuclear power isalways on. And it doesn't create
electricity at night, it justcreates electricity at nights
when it's not needed. So youknow, Belgium had nuclear power
stations very early on, and theyhave all their highways, they
have lamps, street lamps, on alltheir highways, forgetting about
the, you know, the damage thatyou create by light, you know,

(26:32):
to the environment. But thereason why they built them is
because they had all this excesselectricity, and they didn't
know where to put it in, it'sactually a problem, right? for
nuclear power plants. So youhave to have batteries of some
form, which now we can have anentire discussion about how you
know how great electric carsactually are, because they're
charged at night, and they canuse all of this excess
electricity. But you can butwhen you look at where these

(26:54):
Bitcoin mining farms are, sowhere people put their server
farms in order to do the Bitcoinmining, they put them where you
have hydro electricity, they putthem No, I would not go with
wind farms, but they've reallyput them in areas where
electricity is cheap. And andusually in abundance available
in abundance. So I would argueif you if you run a Bitcoin mine
at a hydro dam at night, right?

(27:20):
You know, I you cannot go outand say that this is a waste of
electricity as such, to the samedegree as it would be if you run
it during the day at a coalfactory. So the same holds for
nuclear power. So if you useexcess electricity for that
purpose, maybe it's not so bad.
Having said that, these farmsalso create a lot of heat. So

(27:42):
that, you know, contributes toglobal warming. So right. Now,
all I wanted to say here is thatit is not a it's not entirely
accurate. If you just look atthe overall energy consumption
say, Well, this is all terribleif you have to build new coal
mine coal plants in order to touse this. That is not the right
view on this one. But over time,we want to get rid of this proof

(28:04):
of work protocol, for sure.

Right. So let's tie this back to the incentives
that we talked about from minersto why would they commit all
these resources to doing this?

Well, there's two things that they get right. So
first, they get fees from users,that is in a theorem is now a
major source of income, it's onthe order of several million
dollars a day, right. And thesecond thing is, is that every
time you create a block, you getto give yourself a reward for
it. And that reward is coming infor Bitcoin and your bitcoins in

(28:36):
ether, it comes in New eath it'ssometimes referred to as the
Coinbase. reward. Right? So andthat all that means is you
basically create or you mint,new cryptocurrency at that
point.

And so let's talk about parallels to
traditional mining industriessuch as, let's say gold. So,
with gold, if you take a look atall the gold that has ever been
extracted from the earth,compared to the rate of
extraction today, you have stockversus flow, and that ratio is
about 50 to one. And it'sgetting harder and harder to

(29:11):
find more gold, right? Yeah, toexpend more energy and resources
to to find the next, you know,tonne or whatever. And with
Bitcoin, part of the thinkingbehind building it, use some of
those principles and so thatthere is a finite number of
coins that could ever be mined.
And the reward decreases overtime. I think. So, can you
explain how that works and howthey build scarcity into the

(29:35):
system?

Well, you know, this is essentially okay. So, so
first let me let me just say onething quickly, e theorem
actually has no limit to it,right? And many blockchain
networks that are built now Idon't have that limit. This is
really something unique toBitcoin. Okay. And it was a bit
of a so this is where technologysort of get mixed with
philosophy right of what theythought was right and wrong. So,

(30:00):
you know, the so part of thiswhite paper of satoshis was that
you have a limited supply ofBitcoin. And it sort of came at
the time, the financial crisiswhen, you know, there was, you
know, this whole talk aboutflooding of markets with extra
money, and so on and so forth. Ithink there was a lot of
misconceptions about what thatactually meant and how it works.
But let's just take that aside,right. So the way the Scarlet is

(30:24):
recreated, it's essentially it'san automated process. You know,
there's a Bitcoin runs on aprotocol, which is agreed upon
by anybody who does the mining.
And so according to thisprotocol, the amount of Bitcoin
that you can give yourself andthe block shrinks. Every I
forgot about this. Now, I don'tknow the numbers that contract

(30:48):
them, but it's, I think it'sabout every half year or so, or
every year, and here is is notin terms of time, but it's in
terms of the number of boxesthat being created, the reward
rings, and eventually goes tozero. Now, if you think about
money, this is not a great wayto think about money, right?
Because just imagine that youdoubled your population that

(31:13):
wants to do economic activity.
If if all these new people wouldwant to use money in the future,
then they they just need thecoins available to themselves.
And so if you have a limitednumber of coins that are
available, I think this is aproblem, right? Because you you
have scarcity in the coins, andthat all of a sudden creates

(31:34):
value to holding on having thesecoins all by itself. And that's
a problem, right? BecauseBecause you know, the act of
holding money should not besomething that is that is
valuable. So that's let's go tohistory for one second to
Canada. So in Canada, when wewere still a colony, we got our

(31:55):
money from from the UK, right,it had to be shipped over with
ships. And you know, Canada wasa growing economy as a growing
country. And we had shortage ofmoney. So there was just not
enough money coming into thecountry for people to have it in
circulation. And for thatreason, people had to find other
ways how to pay. So then if yougo to the Bank of Canada Museum,

(32:16):
they actually had playing cardsthat they use, you know, like
your poker cards, the or theequivalent of it, they use that
as a way how to create money asan IOU so that you could
actually have enough money flowsgoing on, even though there was
no physical money available toyou. And so, but that tells you
is that there was so thisessentially is like printing new

(32:37):
money, right? And so withBitcoin, if you really wanted to
run Bitcoin as money as realdigital money, for people in a
world economy, in particular, ina growing world economy, that's
never going to work. Right? Thisis conceptually wrong. Right?

Yeah. And I think that, that has been one of
the one of the issues, a lot ofpeople saying this is the reason
why it has value. But I thinkthat has also led to why as you
said, there's so many people arewilling to just sit on coins and
think of them more asinvestments as a mean, instead
of as a means of exchange ofvalue. And so this presents an

(33:16):
economic problem in the longrun, because ever, as you said,
growing number of people, and afinite number of coins, at some
point, it could be an issue. Solet's let's

not, let's just one thing, just think about this
through to For instance, if youhad a network, like aetherium,
which started in a crowdfundingcampaign, so what you do in a
crowdfunding campaign, you cansay, basically, say the network
as a whole is worth, I think itwas $150 million. And let's
assume that this number isconstant, right? When you give

(33:46):
people the miners a blockreward, what you do is you
create essentially dilution ofthe existing coins. And what you
therefore do is you pass invalue on from everybody else in
the network, to the miners, forthe service of maintaining and
securing the network. Thatsounds actually it's pretty cool
idea, right? So it's importantto think that if each eath, for

(34:09):
instance, will be worth $1, andyou create a new issue new ease,
it doesn't mean that you givepeople $1 worth of an IP,
because that will be creating anout of thin air, what you do is
you create basically, you know,if you say over a year, you
create an extra 100 50 million,then each eath would be worth
half $1 at the end of this year.
And so all that you've done isyou shifted value from those who

(34:31):
have the coins to those whomaintain the network, which is
so this is actually the economicmechanism that underlies that
idea. Now, you know, obviously,there's questions of what the
value of the network of a holdis right? But conceptually, this
is actually pretty clever.
They're Bitcoin on the otherhand, Bitcoin, on the other

(34:52):
hand, was basically created outof thin air.

Right. And so my last question on the incentives
for the Bitcoin blockchain isOnce because there's a finite
number of coins. At some point,you will not get rewarded with a
new coin being minted by addingto the blockchain. So once that
point has been reached, whatwould be the incentive for all
the nodes, the mining nodes toensure the integrity of new

(35:16):
transactions on on theblockchain.

So twofold. Number one, they get fees from the
miners and up on the miner fromthe users right now. But if you
can, if you think about theamount of fees that are
currently paid, compared to whatthe what the value of the coin
base reward is, ignoring thedilution effect, it's about the
fees make up only about 5% ofthe mining rewards currently. So

(35:43):
that would have to be in someform, you know, be switched to
fees, that would make Bitcointransactions really expensive.
But keep in mind that the minersare usually long term players,
so they actually also owners ofthe network. So in that sense,
they actually have a fixed stakein it. And so they will have an
incentive to continue operatingthis network.

So my my gut take on it so far is that you
seem much more enthusiasticabout Ethereum than you are
about Bitcoin. Is that fair?

Yeah, absolutely.
Because I think Bitcoin has nofunctionality with aetherium or
related networks have a lot ofthings functionality, they, they
actually have some really coolideas, so that you want to talk
about those, because I can getvery excited about that.

They absolutely do give me give me an example of
an application that that makesyou so excited about, you know,
aetherium versus Bitcoin.

So I am a I've come from the, from a trading
background, that's what my whatmy research was on. And this is
why I got interested in, incrypto currencies. And I did not
get excited about the, thecurrencies as an as a new
trading tool, or as a new assetto trade. What I thought is

(37:00):
actually really cool is the wayhow you can trade them on this
decentralized network. So let megive you just a big round of of
how a trade works in a normalequity market. So if you and I
want to trade say, AB x, right,so Barrick Gold, right? So let's
say I want to sell it to you andyou want to buy it, by law, we
cannot actually agree mutuallyon exchange in Israel, right, we

(37:23):
have to actually go through thenormal channels, which means I
have to go to my broker, mybroker sends an order to a stock
exchange, right. And so you haveto do the same thing, you have
to go through a broker enter astock exchange. And it's
entirely possible that betweenyou, within your broker and the
stock exchanges, actually otherintermediaries, could be tech
intermediaries could be alsothat, you know, your broker uses

(37:43):
another broker to, you know, getthe trade down. So then, if we
happen to agree on a price, thestock exchange really just
collects information, it doesn'treally do anything other than,
you know, matching us, then theysend that information to the
clearing and settlement agencythat then arranges for the
clearing and settlement, whichinvolves custodian banks that
hold our stock certificates. Andthere has to be a change in the

(38:08):
beneficiary ownership of whoowns the stock. And, you know,
critically actually, nobody, wecall it actually you and I, per
se, but it's actually the owneris essentially technically the
brokerage because they have, youknow, hold your assets. And then
we have to also do, and this isonly for the stocks for the
stocks itself, we still have tochange the money, which involves

(38:29):
the entire payments network,going via the Bank of Canada
ledger. And so all of this takesthree days or two, two days to
come to an end right.

Now, this is why we get the settlement of you
know, time of trade Plus, youknow, two days, three days
getting shorter, but still days.

days. Exactly.
Right. And you go you know, it's2021. Why? Right? I mean, you
know, if computers can do thisdirectly, and this is precisely
what blockchain does. In ablockchain, here's what you do
is you create a contract, thinkabout this. It's almost like an
escrow, right. So you basically,what you do is you create an a
contract into send this way Iwant to sell it to you. So I

(39:09):
take my shares, I put them tothat contract. And it's a
conditional contract, whichsays, if somebody else sends
money to that contract, theamount that I want, then I give
that person my share in exchangefor the money. And so now all
that you have to do is you haveto you see this contract, you
sent the money there. And thecontract does what's referred to
as an atomic swap. So, you know,the shifts, gives you the share,

(39:32):
and gives me the money all inone go.

And so is this what is called a smart contract.

That is essentially what a smart
contract is. It's just a pieceof code. Really, right,

right. You know, if you were to create a diagram
of all the participants requiredto facilitate the exchange of
shares between one person andanother, there are, you know,
six, seven, maybe eightdifferent intermediaries
involved in that just with theexchange and then Of course,
then there's also the paymentnetworks, as you said, and all
of that could be replaced withthis, you know, smart contract

(40:08):
that could execute it inseconds.

Exactly. It's phenomenal. And now in here,
yeah, so this is, I mean, thisis just a single contract, and
we still have the problem ofhaving to find one another.
Right. So if you think oftrading alone, you don't solve
the solve the use of the techproblem, but you don't solve the
liquidity problem, which isactually quite critical, right?
Because, you know, two peoplefinding one another on the

(40:32):
market is actually pretty hard.
And here's where, you know, theblockchain network has created
an even better solution. Andwhat that is, essentially is
referred to as automated marketmakers. And so now, here's how
that works. Imagine you havecryptocurrencies or and some
other token that you you know,both hold, what you can do is

(40:53):
you can deposit them into asmart contract, which collects
the same pairs of, ofcryptocurrencies or of a digital
items, you know, you can imaginethe same thing with stock
certificates, of course, and youput this all into a smart
contract. And then individualscan trade against that smart
contract at any given point intime and buy or sell any of

(41:15):
these items that are in thissmart contract, add in automated
Lee created price, whichreflects the liquidity of the
entire contract. So the systemthat I'm referring to here is
something called uniswap. Thisis like the, you know, automated
market making 1.0. There'sactually clever mechanisms

(41:37):
already out there. But, but thegenius of this is, essentially
what you create is theequivalent, if you want of a
bank, right, because what thebank really is, is a is a is a
gigantic liquidity generator, ittakes deposits from people, and
it takes, you know, and thengives out loans, which, you
know, it's sometimes itfacilitates interactions and

(41:58):
financial interactions in that,too, is now being put into a
smart contract, which is, youknow, really a very, very cool
idea and, and, and development.

So it's, it seems like the the applications
of this technology, we're juststarting to scratch the surface.
But before we get to that point,I want to talk about regulation.
And, again, I think there's alot of people who look at the
underlying technology, and theimpact that will have on society

(42:36):
is being tremendous. And thereare other people who look at,
for example, Bitcoin, and othercoins, as investment vehicles,
right, this is a way to growtheir money right now with their
speculative. And there's aquestion as to how do you
regulate? Who is in charge ofregulating? What is it a money
services business? Is it youknow, just currency exchange? Is

(43:00):
it something else? And then, youknow, we're going to talk about
central bank, digital loonies ordigital currencies, and what
your proposal was for whatthings could look like. And so
my overarching question reallyabout regulation? The existence
and proliferation of Bitcoin isthis. If there are central banks

(43:22):
around the world who are lookingat creating their own digital
currencies, because there aremany who are exploring this
right now, what does that meanfor Bitcoin and the adoption?
And lifespan of Bitcoin goingforward? Does that this debt
displace these unregulated?
cryptocurrencies, when you havecentral banks taking this

(43:46):
technology and saying, No, we'regoing to take all the things
that are great about thistechnology, plus government
oversight and regulation that wecan see. And because that's what
we're going to accept andtransact on and except for
paying taxes. That's all thereis going to be. What do you see
happening in the future when itcomes to Central Bank digital
currencies versus the currentswath of cryptocurrencies that

(44:07):
are out there?

So what you're really asking is, Do I have time
to talk to until 2022?

Yeah.

Because there's a lot of questions. There's a lot
of things. Yeah. And veryinteresting ones. So let's so
let's start.

That was probably the worst question I've
ever asked in the history ofthis podcast. There's so many
different parts going on. But doyour best you're you know,
you're the smart one here.

Well, you know, what, if you had been a student
of mine, I would just say, canyou ask so I don't understand
your question. Can you formulateit again? Just just frustrated
with

your teaching pedagogies. I see. Interesting.

Yeah, it's it's always a battle when people
challenge you with a questionyou usually ask a question back,
but in a very subtle way toflatter the other side.

All right, well do the best with what you can
with that dog's breakfast have aquestion I asked you?

Well, let's start with a regulation as a first
step, right. So, if you if youtake a step back and just think
about what the what the foundersof aetherium wanted to do is
that they had no intention of,you know, creating money and,
and, you know, whatever, moneylaundering machine or anything,

(45:25):
all that the one has to do iscreate some technology, right?
And, and, you know, people dothis all the time, right? People
create any number of pieces ofcode. And there's actually some,
you know, when you create apiece of code, there's actually
a protection that you have aboutit. Right. So, you know, it's,
there's, there's the I thinkit's called, what does it did a
gmu license or whatever it'scalled, right? So you basically

(45:47):
take if you want to use thiscode, use it, but I'm not
responsible for anything thatcould go wrong, right? That's
kind of the approach to peopletalk, except that becomes a
little iffy when you are both anoperator and somebody who
develop this code, right. Andthis is how they basically try
to grab people in terms of, youknow, whatever the activity is.

(46:07):
But here's where this getsdifficult. In the following
sensors, you because you touchabout trade value transfers, and
therefore you touch what isinherent to the financial
system. Right? And that is avery, very heavily regulated
market. But the regulations allhave developed over time
organically, right? I wouldargue, so in the sense of that,

(46:31):
okay, so we have banks, banks,you know, get established, banks
use that banks have used toissue their own money, we
realize that created a number ofproblems, then we have a new
regulator, which regulates whatmoney can be there, then you
regulate what kind of conditionsyou can put on loans, and so on,
and so forth. So this is like,one piece builds on the next
piece, both on the next piecebuilt on the next piece, and

(46:53):
then you tried to take thisregulation, which has
essentially developed, let'ssay, since the late 1800s, at
least, and you try to put thaton top something which is
conceptually very different,right, because the concept of a
bank is, you know, it's an it's,it is a entity of power between

(47:14):
that sits between borrowers andlenders, essentially, right,
because if your deposit is a few100, as a deposit, I'm
implicitly a lender. And as youknow, and then you are the
borrower, right. And so you kindof have to regulate how this is
done, you have a fractionalbanking system, which, you know,
which means that you need tomake sure that if you, you
always lend out more money thanwhat you have in your coffers.

(47:36):
So you want to make sure that atany given point in time, you
have enough solvency so thatwhen you know, when when people
want to have their money backthat, you know, you're not going
to falter. Because we know whatif that happens, we have riots
on the street, all of thosethings, right? There's a lot of
concerns around this. This iswhy we have regulations. Now the
first question you have to askis, should that really apply to,

(47:58):
you know, to to this new world?
And why would it apply? It'snot. So just because there's
items of value doesn't mean thatthe concerns that lead to a
particular type of regulationapply in the same sense, right?
So if you have a smart contract,for instance, which effectively
is a loan contract, all theconditions are objectively
visible, there is nothing hiddenin it, right? So you can see

(48:20):
everything that you get into it,which is different from when you
go and have a contract in yousign a contract with annoying
entities such as such as a bank,they may actually know something
that you don't know, this is thereal big problem. And this is
where you get regulation tosolve the imbalance of power.
That is not the case when youinteract with with a piece of

(48:41):
code, I would argue, right? Soshould we apply the same rules
for that? I'm not sure, I thinkwe should really reconsider some
many of the rules that we havein place. Now at the same time.
You can also say what somebodyfrom the OSC said to me is just
because you sit, you know, inyour pajamas in your basement
and say, Oh, I'm so innovativedoesn't mean that the rules

(49:02):
don't apply to you. Right, yeah.
So, you know, you got to bereally cautious about but I
think you and I think the rightway to think about this is to be
a little hands off and just seehow it pans out. And not to slap
people right away withregulation. But I can tell you,
you know, so just imagine, forinstance, this uniswap contract

(49:25):
that I talked to you about this,this this trading contract
effectively, what this contractdoes is it takes custody of
assets, right? And then it has aparticular rule that is assigned
to the running of these of theseinteractions. And when you take
the custody of the assets, thequestion is, Are you already a
bank? Does the bank regulationapply to you? Do you have what

(49:46):
regulatory compliance Do youhave to follow? This is a really
tricky question. That people whowant to just create a particular
tool cannot answer cannotpossibly answer. And to get a
legal opinion, I probably haveto spend several months dollars
and they may still not get ananswer from from anybody. Right?
So in that sense,I am, what I is what I think.

(50:06):
And what I really worry about isthat people use regulation not
in the sense of Oh, we have toprotect people, which is really
what regulation is, therefore,it's used as a way oh, we have
to, we have to protect theincumbents, because God forbid,
they may lose some income by,you know, people trying to build
technology, which could replacethem. Right. So, because so last
thing I'm gonna say. So this isthe there's a very famous

(50:30):
economist Stigler, who said,this, he was, you know, he was
basically the godfather ofeconomic analysis of
regulations, if you want. And hesaid, regulation is made for
industry, by industry. Andthat's all regulation that you
see that is in place has beencreated by industry players.

(50:52):
It's not like there's a bunch oflawyers that sit together from a
regulatory office and say,here's what we come up with.
There's always a consultationprocess. And the consultation
process is always by interestedparties, usually made by, you
know, the incumbents. So, Icould go on on a rant forever,
for instance, about open bankingregulation in Canada, but let's

(51:14):
just let's just say this, right,so what incumbents would like to
do is unless they see an upsidefor them a definite guaranteed
upside and guaranteed one,right, not a possible one, they
they will try whatever they canto kill new, you know, agree
with which would, which wouldimpede on their on their
playground? So

yeah, of course, of course. Okay, the last thing
that I want to leave off with,although it sounds like you
wanted to say something else, soI will not

want to do now you wanted to talk about the cbdcs.
Right. So you kind of did fromgo went from regulation to
cbdcs?

Yes, yeah. So

let's talk about that a little bit. I mean, we
set up some time. I mean, youcan always cut me out, right?

No, I look forward to hearing your thoughts
on this. Because again, that'sthat that was the impetus for
for bringing you on because Iwanted to learn more about where
central banks stand on theirthoughts on on central bank
issued digital currencies, andwhat your contributions were to
those proposals to the Bank ofCanada.

So, so there, again, this, this is a broad
area with many differentcomponents that one should think
about, and I think I think it'sfair to say that the central
banks were actually not gettinginto cbdcs thinking so much
because of Bitcoin or the like,but it's more, you know, General

(52:36):
developments that happen inother parts of the of the
financial world. So I think,seeing what friends and payments
are have done in India and in inChina is much more interesting
for a cbdc on developments ofcbdcs, then thinking about
Bitcoin or aetherium, eventhough there's a certain common

(52:56):
thread. And so let me just saythe first thing, and that's
important, I think it is what'snot gonna happen, what was very
unlikely to happen is that acbdc, as such as the
alternative, not alternative asa substitute to cash is issued
on something like aetheriummodel, this is not gonna happen,

(53:18):
right? And the reason is, isit's going to be a systemically
important technology, right, orinfrastructure, which has to be
under the control of agovernment. And a cryptocurrency
and a decentralized networksimply is not. Now I think
there's there is merit tocentral banks issuing digital

(53:41):
cash on aetherium, but not astheir cbdc, their single thing
that the one they have, theycould do it in order to enable
commerce. But it doesn't evenhave to be a central bank doing
that you could actually have,you know, a province could issue
you know, mine alone. But what'scalled like the T bill, right?
So you could do a $1 denominatedt bills and issue those on the

(54:01):
blockchain, and then they willbe essentially the same as
money. Right? They could do thatif they wanted to. So but what
I'm saying with that is cbdcs,will always run on a network,
which is controlled by, youknow, at least in large part,
where are these supersede oversoverseen by a central bank,
where they have the ability toknow exactly who is what actor?
That's, that's the bottom lineof that, right. So, but that

(54:25):
does not mean that this newsystem cannot interact, for
instance, with the likes of anEthereum blockchain is very much
to the contrary, I think,actually, if we had a cbdc this
would actually make the use ofsomething like aetherium or, or
these decentralized blockchains,generally speaking, even more
powerful, and even moreinteresting.

Let me let me give you a very hypothetical
scenario. Let me know how faroff the mark this is. Let's take
a look at taxpayers in Canada.
And let's say government wantedto enact a program similar to
serve where they wanted to givecash directly to certain people
who qualified for it. Is there apossibility with technology like

(55:08):
this, that you would be able tosay things like, Listen, we know
that there are governmentbenefits for people who have
kids who don't contribute to anRSP, but their incomes below a
certain level. And so they haveaccess to what's called the
Canada learning bond, you don'tneed to make a contribution to
get the benefit. It's designedfor lower income households. But

(55:30):
so many people don't get itbecause they don't know to apply
for it. But the governmentcould, if they had, you know,
this super blockchain that takesinto account everything they
know about taxpayers, they couldfile tax returns for them, they
could say, this person has achild, there's a cin number been
registered, they would get thisCanada learning bond payment, we

(55:50):
want to give people servebecause they've lost their
income, we can see when theirincome stops, and we could give
them money. Is that somethingthat could be done with
technology like this? And howmany centuries would that take?

But of course, you can do that. There's no question
about it, you you, I mean, youwant to be slightly cautious in
separating knowledge, right? Sobecause I think you need to
maintain to have the ability tomaintain people's privacy, but
that even without even with whatyou said, it could be done,
right, so you can, you know,keep people's financial
activities with cbdcs entirelyprivate and at the same time,

(56:25):
you can still give them thebenefit of everything that you
described. Now, what youdescribed sounds very, to you
may sound like utopia. utopia isthe word. But so as part of this
is already a reality in sayScandinavia, right. So when you
are self A fun fact, I spent ayear in Denmark, you don't

(56:48):
really file your tax return assuch, like as you have to do
here, we have to enter all theinformation is the other way
around. Basically, they tell youlook, this is what we have for
you, do you have anything toadd? Right? So so because they
know all the pieces ofinformation they're already
collected, simply becauseeffectively they have a digital
system with digital identifiers.
So they actually know an awfullot about what you do, then. So

(57:10):
if you go to a bank, you have abank account, you have a, you
know, you have a savings accountor whatever, you have a
brokerage account, and you doyour stock trades, they would
know what you have done. I mean,not not in all details, but
basically the bank, would wemake a report and say, here's
how much interest his personearned, and so on and so forth.
Now we have this technically to,it's just that the pieces are
not put together. You know,which which could be right.

And of course, if you did sort of enact the
technology and the linking piecedatabases to do this, you would
then cost industry a lot ofmoney who get paid, you know,
fees to prepare these things andwhatnot, which is a huge
impediment, as we've talkedabout.

Yes, it is, actually. So I think this is a I
think there's almost I heard, Imay be wrong on this, it is
almost a deal that the CRA madewith, you know, tax accountants,
ha ha block and service, orwhatever the software service
providers have not actually dodo, you know, provide their own
mask for enter all in enteringall the tax information? Which

(58:16):
is ridiculous, right? If you askme. Yeah. But well, you know,
why do we have to Why do I haveto pay an external service
provider to do my taxes? It'sjust ridiculous. Right? And this
is, this isn't between me and mygovernment, there should be no
intermediate, no interestedthird party in between.

And I think there are other current my
partner lives in the UK. And shesays, it's basically your taxes
are done for you. And you onlyfile if you disagree, or you
want to disagree and say, Hey,no, I've got extra credits to
apply. But for the most part,it's just sort of done.

That is great.
Actually, the UK I was theretoo. Obviously, as a student, I
thought that was the bestexperience ever alive. Yeah,
because it was just like, it wasa one piece one, like three
numbers Enter to me, obviously,because I was, you know, low
income student and all that, butI was just like, wow, this is
how this could work. This isamazing. Now, having said that,
I think one has to I think wewant to be slightly cautious
though, right? Because there'sthis huge temptation, especially

(59:11):
for governments to collect allkinds of data and to know a lot
about you I feel veryuncomfortable with that. And I
think everybody should feeluncomfortable with that. You
know, not to put too fine apoint to it, but when I get my
census form, and they asked meabout my religion, I actually
you know, it just makes my headset up right because it's what

(59:32):
What business do they have toknow my religion and you know,
is there a possibility that atsome point we get a government
which you know, misuse abusesthe data and then you know,
rounds me up because I I say I'mI believe in the force and Majid
Mr. saw something

you know, if that's an option, I'm going to
put that on there for sure. AndI don't know can you hear all
these horns in the backgroundlike i think it's it's trucks
and cars. No, this is

Andreas Park (01:00:00):
the suburban life to you. This is a lawn mower.

Preet Banerjee (01:00:05):
There it is. I don't know what's going on
outside, but it

Oh, you have the horns. Okay, so I have I have a
lawn mower, which is very loud.

I don't I don't hear that at all. So, in any
case, I think I'll startwrapping up only because I've
had you here for an hour. And Ithink no

one I want to say I want to say something more
now. So absolutely, yeah,because that's actually also
critical. So let me just say afew things. Because we wanted to
talk about CBD C's. And thenthere's things to say about
that, I think that that arerelevant also where this is
coming from. So first, I want tosay a few things. Let's talk
about China for a moment andWeChat. Right. So I'm not sure

(01:00:41):
if you've been to Chinarecently. there if you go there,
you usually have to use eitheralipay or WeChat. Pay to make
any payments. Most stores don'taccept credit cards or actually
not even cash, right. So you gointo a restaurant, you sit down
at the table, you take out yourapp, you order on your app,
right, the the food arrives atsome point, and then you just

(01:01:02):
leave, because they havebasically solved so many they
have been able to integratepayments with a lot of services.
And essentially WeChat as a as achat software. And they have
they created the ability to usethat self chat software to do
make to make payments. And whatthat allowed China as a whole
was to basically leapfrog overseveral development cycles that

(01:01:25):
we have in the Western world. Sothey don't need credit cards,
they don't need debit cards,they don't need this whole
separate system of you know of anetwork where you have lots of
different parties that benefitof you tapping your cards, and
so on and so forth of a visasystem, none of that everything
goes with his one app. And whatthis app is effectively it
creates a common resource whichcan be used by multiple service

(01:01:48):
providers. And many of theservices that are provided on
WeChat pay actually are providedby we reach our pay, but by
external server serviceproviders. So that as a vision
of thinking of a financialinfrastructure, as a common
resource is the same as whatblockchain really tries to do.
Except, you know, it's it's opento anybody. And you know, it's

(01:02:09):
it's much more decentralized,right? And then now, and now
let's talk about the differentdevelopment, which is also
coming our way, which is the socalled dm network, or
infrastructure or whatever it isAssociation. It's something
which was founded by Facebook,or initiated by Facebook, it was
earlier called Libra. It changedits name to dm

o vision like QRP dmdm.

I think the maybe Yeah, maybe like the data,

sees the data sees the day. What's the
difference? Yeah.

Well, but it's also, to be fair, by the way,
Facebook actually disassociateditself with it. So it's
basically runs by itself. Okay.
But, I mean, they're stillsupporting it, I think
financially, but the importantpart is, the judge will stay
away from it, because I thinkthey themselves realize that
their presence harmed actuallythis network. But you know, that
again, it's the same ideas, whatthey tried to build is a

(01:03:09):
blockchain, but there would be apermissioned blockchain, where
service providers and so on andso forth, create an entire
network of a new financialinfrastructure. So for instance,
Shopify as part of this over aspart of this Coinbase, the
crypto exchange as part of this,our creative destruction lab at
U of T is part of it. And so theidea is also that you create
this financial infrastructure asa common resource that people

(01:03:32):
can use in order to shift moneyaround and to access particular
services, not just financialservices, but basically use this
network for payments as apayment system. And as a digital
payment system. Again, you know,one, which is not siloed or
siloed, with, you know, acentral entity for clearing as
what Currently our central bankshave as a role. But it is

(01:03:55):
something which is run, youknow, by many different
entities, collectively. And Ithink that in particular, that
latter development is whatreally supercharge the
development and the thinking ofcbdcs why people say, okay,
maybe there's actually maybethese guys are onto something,
maybe this is something that weshould actually enable to do it.

(01:04:16):
Maybe our financial sector suchas it is, you know, wouldn't do
it by itself, either becausenobody has an incentive to do it
by themselves and can do it bythemselves, or because they're
just making so much money. Theyjust don't want to do it. Right.
But if you are government andyou say so in particular Canada,
right. So dm has its own moneydenominated in US dollar,

(01:04:38):
there's also probably a coin,which would be the RMB, the
sterling and the Euro, maybe theyen, right? Not a Canadian
dollar. So but what you will seeis that people use this network
and say, Hey, this is reallythis works. For me. This is
really useful, right? I can nowshift my money around fast. I
can make faster payments. I getmy refunds right away. Whatever.
It is right. So there's extrafunctionality is going to come

(01:05:01):
your way. And at some point, thethe usage and the, you know, the
helpfulness becomes a necessity.
So if you want to access certainservices, you need to be part of
it. At that point, the Canadiandollar becomes irrelevant.

Right.
Interesting. So, so, a number ofquestions here, and now I'm
going to take you for like anextra half hour. First question,
a Bank of Canada, central bank,digital currency, five years, 10
years, do you think that it willhappen? Yes. What is the
timeframe? Do you think? So Ihave no

inside information, I want to be very
clear that whatever they saypublicly is also what they say
privately.

Okay, they're very

early about this.
So they say we have no plans onit. You know, but we're just
still exploring, and we'retrying to prepare ourselves for
it. That's what everybody says.
Now, Brazil, put up a it's notentirely a CVD system. But the
Bank of Brazil, the centralbank, put out a real time
payment system, which is akinto, you know, at least the first

(01:06:08):
stage of a cbdc. And theycreated that within nine months.
Okay, so it's not atechnologically hard problem,
right. And Brazil is our is amuch bigger country than Canada.
Right? I mean, you know,landmass wise, obviously Canada
is bigger, but Brazil is, ismuch more dispersed in terms of
where people live. And it'sprobably much more complicated,

(01:06:31):
because most likely, we couldargue it's not as
technologically advanced as us,I hope at least we can say that.
Right? Great. Yeah. So they canpull it off. Clearly, Canada can
pull it off clearly. Right.

And when it comes to, let's say, different
central banks launched their owndigital currencies, certainly
some of the smaller countries,maybe less developed countries
would say, well, we're not goingto do it. But we could use your
infrastructure, is that correct?

Well, I would argue, so if you are a small
country, for getting moretechnologically advanced or not,
because that's actually, that'snot so clear what that means
these days anymore, right. Butas a small country, and you want
if you want to maintain powerover your monetary system, you

(01:07:17):
definitely need a cbdc you needmore than the US, right? The US
is probably good for now, right?
But if the US comes up with acbdc, before your small country,
it's entirely possible thatpeople go well, we're just going
to use us etc, the end, right.
And particularly, if you haveany trade with the US, as a
small country, money will comeinto your country because

(01:07:38):
Americans buy your product,right? And then so then you have
US dollars in the country, andthen all of a sudden you can
already have that money incirculation. This is actually
different from even the currentmonetary flows, right? Because
currently, if you have a tradewithin with a foreign country,
yes, there's money, US dollaressentially coming into the
country, but it stays with thebanks. When you have a cbdc

(01:07:58):
payment actually going on adigital ledger, it's entirely
possible that you have the realdollars available in that small
country. For the generalconsumption of the population.
That's very different, right?
It's a little bit like if you ifyou make a cash payment for
trade, which not not doesn'thappen much anymore, right. So
this would be a game changer forsmall countries, but not
necessarily. I mean, sometimes Iwould say, in a good way for the

(01:08:21):
people of the country, but forgovernments that want to
maintain monetary policy power,not a good thing.

Yeah, I was gonna ask, you know, and this is
tying in a bunch of differentareas all into one. But if you
take a look at me, let's say theintroduction of the euro, and
all these different countriesand their currencies, they used
a common currency wasn't one ofthe criticisms that, you know,
if your economy as itself isdoing poorly, then if your
currency goes down in valuemakes it more attractive to buy

(01:08:51):
your stuff. And it's sort of asort of a self leveling
mechanism to a certain extent,would you lose that if you know,
other countries adopted a singlecentral bank digital currency?

Yeah, that's exactly the problem that would
arise. Right. So so in theEuropean Union, that they
obviously the getting the Eurohas many dimensions, including a
political one. So you kind ofcreate a little bit the thinking
was to create more unity. Butyou absolutely right, if you
have no free movement of peopleand have resources available,

(01:09:23):
and which is the case, right?
You even in Europe, you can youcan move but you actually can't
easily right, because languagebecause of pension systems and
healthcare and all of that, thenyou know, you by losing monetary
power over your monetary policy,you potentially when when say
Germany is doing well, andyou're not doing well, there's
no way we can use you know, thevalue of your currency to

(01:09:46):
continue to compete with them.
And so you're absolutely right.
So that is a problem. Can I justsay want to say one more thing
about the digital advancementsof current country? Absolutely.
So if you look at our Africa,not in terms of cbdc, but in
terms of, you know, thedevelopment of, of money. So you
may have heard about m pesa,which is, which is not digital

(01:10:10):
money, but is mobile money. Soit's money that you can transmit
with even the most basic cellphones, that has been a game
changer for the development incountries like, like Kenya. So
it increased financialinclusion, and so on and so
forth, even though really allthat this country has, I mean,
they have a cell network, ofcourse, right. And so that
alone, if you think oftechnological advances is enough

(01:10:33):
to create a great deal offinancial inclusion. And the DM
network actually tries to gointo exactly the same direction
and say, Look, all that you needis a is a is a cell phone these
days or a smartphone these daysand and you know, with dm now
you actually have access to anentire financial infrastructure
that otherwise you do not have.

(01:10:55):
So for development of weakercountries, in that sense, this
could be a huge game changer. SoI'm extremely, I find this
extremely exciting from thatperspective, if it turns out to
be actually used for the commongood. Okay,

we'll leave it there, Andres. Thank you so
much. I'm going to compile alist of links to some of the
things that we've talked aboutfor people who want to learn a
little bit more, including linksto your website. If you want to
follow more of Andres, his work,his YouTube channel, has some
great videos explainingblockchain cryptocurrency, a lot
of things that will help bringyou up to speed. And he doesn't

(01:11:33):
have, I would say, a vestedinterest, not a promoter, he is
just trying to get towardstruth, which I think is so hard
to find these days, becausethere are so many commercial
interests in all thesetechnologies. And sometimes,
they embellish the good thingsand they don't tell you about
the downsides. And I feel likeinjuries is a real straight
shooting resource on this. SoAndres, thank you so much for

(01:11:55):
coming on the show, though.
Thanks

for having me.
It's great fun.

If you want more personal finance content, or you
have questions for me or topicsuggestions for the podcast, you
can follow me on Twitter orInstagram and ask away it's the
same handle in both cases atCrete bannerjee. spelled just
like it sounds. Good luck withthat. I also have two YouTube
channels, you can subscribe tomy main channel which covers

(01:12:37):
personal finance and investingtopics that are global in scope,
and a Canadian specific channelas well. That is it for this
episode. Thank you forlistening.

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