WBD032 Audio Transcription

Tuur Demeester on the Looming Debt Crisis and Central Banks for Bitcoin

Interview date: Friday 31st August

Note: the following is a transcription of my interview with Tuur Demeester. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this episode, I talk with long-term Bitcoiner, economist and investor, Tuur Demeester. We discuss his Medium post about why he separated himself from his family, government-issued cryptocurrencies and Ethereum’s scaling issues.

“The overall thing I am excited about is to have this free market in money, it amazes me.”

— Tuur Demeester

Interview Transcription

Peter McCormack: Morning, Arthur.  How are you?

Tuur Demeester: Hi, Peter.  Good morning.

Peter McCormack: Thank you for agreeing to come on the podcast.  We've avoided a disaster with recording equipment, so we owe a big thank you to Spencer this morning.  So, how are you?

Tuur Demeester: Doing great, thanks.

Peter McCormack: I've known about you for quite a while.  You're obviously somebody who stands out within Bitcoin and I say loosely crypto, but within Bitcoin.  When I last interviewed Jameson Lopp, he suggested I come and meet you and talk to you about economics of Bitcoin.  But I've also been doing my own research and, as I said to you before we started, I went through your Medium posts and I actually found this very interesting post where you talked about separating yourself from your family. 

I know it's a strange start, because we're here to talk about Bitcoin, but that article seemed to resonate with a lot of people.  So, if you don't mind, I'd like to explore that.  Where did that come from?  What happened?

Tuur Demeester: Yeah, I guess it's a hard thing to summarise.  I guess it was a step in a long process that is still ongoing, where I was thinking about my personal life and my relationships and also my personal health, emotional health, physical health.  Before I made that decision to separate myself from, you could say my family of origin and from my family where I grew up, it was, I would say, ten years went by where I was trying to mend things or trying to come to a relationship that would have some balance and where I would feel good, and it kept not working out. 

So eventually, I considered making that big step of living my life independently and really deliberately choosing who would be a part of my life and who wouldn't.  So, it involved a lot of therapy, it involved a lot of thinking.  I think it was definitely the hardest decision that I've ever made; it was really tough.  But, in hindsight, I still feel that it was a good decision and I don't consider it to be something that I can never reverse.  I can always decide next month or next year that I do want to reach out to them or that I want to try something. 

But, as far as my personal health, it's been the best decision, yeah, I really feel.  So, yeah, I have gotten a lot of emails and response from people who are in a tough situation with their family and who have a similar struggle and who just have the same experience of, "Well, I didn't choose to grow up in this environment and now I'm here and I'm growing into being an adult, or I have been, and it's a constant struggle and so I'm really wanting to know what all the options are". 

So I would say it's still a taboo thing to consider or to do, so it's been really rewarding to read those emails, and I usually respond.  I guess I want to clarify, I don't have a prescriptive view on this.  I think it's extremely personal; it's extremely subjective; what's right for one person isn't for the other, and so that's also why I don't really write about this often.  It was just helpful at the time and I'm glad I put it out there.

Peter McCormack: Have you maintained the relationship with your sister and her children, because that felt like that was the tough bit?

Tuur Demeester: Yeah, that's still hard because I grew attached to her children and then I was like, "Where do I draw the line?"  I did talk to other people who've made similar decisions to ask them like, "How did things go over the years?"  It's been, what, like four years now, three or four years.  As difficult as it was, I made it clear that I was always open if they wanted to reach out to me, and I'm talking about my -- what is the word again, cousins?  I always mix it up.

Peter McCormack: Yeah, nieces and nephews?

Tuur Demeester: Nieces and nephews, yeah.  So, I'm still open for that but, as far as me actively reaching out, I haven't done that and I would say that's been the hardest part.  But I felt that it was important to make it very clear and complete, at least in the beginning, and then later I can go back and reconsider and are there particular members of my family that I do want to reach out to?  I might decide that later on, but literally I feel nervous talking about this. 

Then, I think the nervosity or the sensation, even talking about considering reaching out is anxiety‑provoking.  There's definitely stuff there that is related to trauma that I've been through.  So, yeah, it's constantly something that -- and it's also because of it being a taboo thing and it is scary for other people to even consider that, you often meet sceptics or people who, anytime there's something online about this there are people who will be, "Oh, but why don't you live and let live?" and, "You might regret this", and it's all suddenly try to communicate that I might have made the wrong decision. 

So, it's a valid question to ask, but the way it's worked for me is it's my perspective, it's hygiene really.  I think it's fair to say that I grew up around a lot of psychological dysfunction, and so it's hard to then not become dysfunctional yourself if you keep being exposed to that psychological dysfunction.  So, from that perspective, the hygienic decision has been the right one for me.

Peter McCormack: Okay.  The reason I wanted to bring it up is because I'm going to recommend everyone goes to Medium and reads pretty much all your posts, because there's not a lot over the years, but they're all very important.  Then, in the middle, there is this article though, and I was quite interested to understand why you'd put it out there.  Was it for personal cleansing or was it because you hoped it would help others?

,Tuur Demeester: It was mostly personal.  It's like this double-edged sword of putting things out there in the open, but I think it's basically helped me find peace with it.  It was just doing the exercise of writing it in itself was therapeutic, but then putting it out there it kind of makes it real, and at the same time it's a potential conversation starter, and that's what I still think looking back on it.  It's like it's out there; people can see it and read it and make up their own. 

So, having those people reach out to me over the years, it's just been really helpful in terms of like, yeah, it is an okay thing to do.  I am an adult, I make my own decisions, and this is the kind of decision that's extremely difficult but, for some people, it's the right thing to do.  So it's kind of like doing the opposite of what was difficult over the years is that this taboo thing, to break the taboo, basically.  For me, that was the most important. 

Yeah, looking back, and I might do some more writing over time, I'm glad that it's helpful to people.  So, it's definitely a great additional thing that I hadn't really expect would happen, because it's one of my articles that gets the most reads, definitely evergreen in that sense.

Peter McCormack: Yeah, okay.  Well, listen, I do also want to talk you about Bitcoin.  I will share that out though.

Tuur Demeester: Yeah, of course.

Peter McCormack: So, yeah, might get some more people read it and contact you.  So, just for those people who don't know you, Arthur, could you just give a little bit about your background in terms of college?  I read that you've got no degree, but you did various classes.  So, your educational background, career background and how you've got to where you are now in crypto and Bitcoin.

Tuur Demeester: Yeah.  So, I was always interested in philosophy and history, quite academic type of subjects, and so one of the things that I knew when graduating from high school was that I really didn't know what I wanted.  I knew I didn't know, so I worked for a year as a volunteer in Norway, I started to study African language and culture, then I switched to economics and political science.  Then, being at university, I met some people who were starting a little private school, a K-12 school, so I jumped on board with that and I helped them do that.  Later, I lived in Holland to do the same thing, starting another private school that was K-12.

Then, the academic interests, I had some friends and we were all frustrated with what we thought we were lacking at university, and so we founded our own academic institute, which was the Rothbard Institute.  So, we would translate books and put together seminars, summer university, those kinds of things.  So that was, to me, I would consider that, more than the actual university, to be my academic training. 

I had some aspirations, thinking like, "Oh, maybe I want to become a professor and now that I'm nearing being 20 years old, maybe I'll do that".  But then, just looking at how long that roadmap was and then also meeting professors and seeing them be stuck in tenure and being in an environment that was not friendly to them, again, maybe this hygiene thought of like, "Well, it's kind of miserable to be in that institution and maybe you can't speak your own mind", and those kinds of things.

Then, at the same time, my knowledge about the financial system grew, and I just grew more worried about what is going to happen if we get a financial crisis that's severe?  This was before 2008.  It was reading about the history of banking crises and how inflation happens and then it seemed to me that, yeah, this is like a forest that is very, very dry and there could be a forest fire, economically speaking, in the West and in Europe.

So, that's how I started writing more about current day economic affairs and then, in 2011, I struck a deal with a publisher and I started my own financial newsletter.  It tied in with my own personal experience of feeling very vulnerable financially, because I never had an education about how to manage money or how to be responsible career-wise.  I really felt like I had to do it myself, and it was my lifeline.  If I could become financially independent, then I could make my own decisions better, I could decide where to put my kids in school, because I was involved in these private schools and then realising like, "Oh my god, if I keep doing what I'm doing right now, I won't even be able to afford sending my kids to a school like this".  So, I really had to reinvent myself. 

So, part of that was making trips to Latin America and learning about economies that are less burdened with debt, but that have their bouts of crises over the years, and then trying to find out like, "What do individuals do to protect themselves against that?"  It really was my intention making those trips.  Then, of course, it was also maybe I would move to Latin America because I knew I wanted to work online and so, in a way, I had that freedom. 

That's how, in 2011, I learned about Bitcoin in Buenos Aires in Argentina.  Then it took me a little while to really be like, "Yes, this is valid technology that could help protect people who want to be independent".  I was already researching gold quite a bit as well.  So, I started writing about it and then, early 2012, recommended it as an investment to my readers.  We had a subscription-based newsletter.  Then, from 2013 onwards, I just went full time into Bitcoin.

Peter McCormack: Wow!  Okay, so quite a journey.  You mentioned 2008 and, since then, we've had the largest bull run in history, right?

Tuur Demeester: Oh, the stock market?

Peter McCormack: Yeah.

Tuur Demeester: Yeah.

Peter McCormack: Funnily enough, it was on the news last night.

Tuur Demeester: Yeah, we had new all-time highs, right?

Peter McCormack: New all-time highs, the longest bull run in history, and they've put it down to a number of factors, but one of the ones is monetary policy.

Tuur Demeester: Yeah.

Peter McCormack: Yet, behind this, we have increasing debt and increasing debt burden, especially in the US.  So, do you feel like there is a potential that this is all going to come crashing down at some point and this is one of the reasons why people are so interested in Bitcoin, is that it won't have -- as people say, like Saifedean says, it's our money.  How do you feel about that?

Tuur Demeester: I need to read up on it again, refresh my memory, but in the Roman times, there was this tradition of every time there was a new emperor, you would have a debt jubilee; the debts would be eradicated and people could start from scratch.  Because, historically, this is how a lot of slavery came into being, is that farmers would have a bad crop and they'd have to borrow to buy new seeds and to maybe even rent land.  Then, if they had a few bad years, they would basically become chronically indebted, and then that debt would be transferred to their children. 

So, you would be born in debt and be a slave.  You'd have your master that you would have to constantly pay debts to, and over time you would even forget that there's a particular amount of debt to be owed and it would not even be conceivable to pay it off.  So, it was their welcome to have this tradition of debt jubilees. 

Of course, that's disappeared and I don't think that should necessarily be reinstated, but it's just something that happens in the economy when there's too much debt, at some point it just gets eradicated.  Either it is that the party who owes the money defaults, which is basically saying like, "Look, I can't pay this anymore.  I'm just going to go bankrupt and you can't make that claim anymore.  I'm going to walk away from this", or the money that the debt is owed in, the money default so to speak, the money has very high inflation and then it becomes very easy to just pay off the debt; it's worth pennies in the end.

So, that's been my observation, is that, eventually, debt gets wiped out.  But the problem that we have in our economy today is that debt has been securitised, it's been made into financial instruments and their bonds, government bonds, private market bonds.  Then those bonds have been bought by pension funds, by endowments, by banks.  So to them, they are assets and people count on those bonds to pay their retirements years and years from now; they count on that.  So, if the money that the bonds are expressed in, if that becomes valueless, then all that value gets wiped out, so it's a bond crash.  So, that can happen by defaults, or it can happen if the money inflates or hyperinflates. 

So, that is the looming crisis; the debts are too high to ever be paid off, the interest rates are artificially low which causes the debt to blow up more, to become larger, and at the same time, it's kind of a fuse to this bomb, because if at any point interest rates are pushed up, then it becomes impossible to pay them off, right.  Imagine if you have a $1 million debt and you have a 1% interest on them, it means if you pay $10,000 a year then you don't incur more debt; you're flat.  But of course, if that interest rate jumps to 4% or 5% or 6%, all of a sudden it's $50,000, $60,000, $70,000 that you owe and if your income doesn't allow for that, then the debt is just going to explode in your face. 

So, rising interest rates are very dangerous and, right now, central banks know that.  They know that governments would just have to default if the interest rate were to go up, and so they choose to just keep printing money, keep the interest rates low.  I think it's $12 trillion in debt is already at negative interest rates, which is kind of weird.  You actually have to pay money to be indebted.  So, I think eventually, this process of 0% interest rate policy and printing money up to wazoo is going to lead to very high inflation. 

So, that's how I see things happen in the next 10, 15 years, and it's hard to predict when exactly that'll happen because these things tend to take forever until they all of a sudden happen in a day, but I struggle to see how it's anything else but inevitable.

Peter McCormack: So, an inevitable financial crisis on what scale; bigger than 2008?

Tuur Demeester: It's just a different type.  I think that it'll be more impactful than 2008, because usually what happens when there's very severe stagflation, when there is a bond market problem, is that banks will really get in trouble.  Then you have to more think about what happened in Argentina in the year 2001 with the Corralito, basically that the government declares a bank holiday, and it sounds kind of nice, but it means that you can no longer access the money in your bank account; they freeze the assets because usually there's a run on the bank. 

The way it happened in Argentina was that the local debt, local government debt, was bought up by the banks and that was backing the bank accounts, but the local governments started defaulting on the debt, and so people made the connections.  It's like, "Hey, whoa, these banks all of a sudden are becoming insolvent because those bonds are crashing.  Let's just run and try to withdraw our money".  Then, obviously the bank didn't have enough money to pay everyone, which is what happened in the movie, The Beautiful Life; it's one of the few movies where you see an actual bank run. 

So, the government then just goes like, "All right, we'll just close the bank", and then they devalue the currency to relieve the debtors from how much they owe; it's kind of a partial default.  Then they open up again, but all of a sudden your money is worth way, way less than it was before the bank holiday.

So, yeah, this is very severe.  Money is like the blood of the economy and, once that goes wrong, it's tough.  You look at Turkey today, very high inflation, like Venezuela.  It hits very hard.  It's like extremely tough medicine, and it usually takes in the West when it happens.  Hyperinflation, it lasts about one or two years and then things start slowly normalising again. 

Peter McCormack: Wow!  Are you seeing an alignment between an impeding financial crisis and the opportunity for people to protect themselves with Bitcoin?

Tuur Demeester: I don't want to proclaim that it's absolutely inevitable that we'll have Venezuela-style hyperinflation.  I think that there's a possibility where we'll have stagflation, kind of like in the 1970s, where inflation is double-digits, but it doesn't go to absolutely insane levels.  But even so, people's savings will be eroded in a situation like that, especially the middle class, the working class, people that have more cash than the wealthy people; they can have stocks and things that preserve value over time, and gold, and those kinds of things.  

So, yes, I do think that especially for millennials, they grew up, once they end their early adulthood, they saw the Financial Crisis happen, and then there was this whole notion which their parents has always told them like, "Oh yeah, invest in real estate and invest in stocks".  Then that story had a big crack in it.  So, I think that many millennials, they've never owned a blue-chip stock or traditional investments, and they've never had a lot of capital either; and they do, at the same time, see that the baby boom generation is very huge and is going to be an increasing burden on them, right.  The millennials are paying, in many respects, directly for the pensions of the baby boomers, so it's like, "Huh, wait a minute, what about my pension?  How do I know that my pension is going to be there?  If it is there, how do I know how much these dollars, or euros, or whatever, are going to be worth?"

So, I think that yes, millennials have an appetite for Bitcoin from this point of view.  It's like, "Huh, I understand the internet; I understand that there's such a thing as an intangible digital asset; I was torrenting movies in my teenage years; I understand peer-to-peer".  So, I think that there's something there where it's like, "This could be something that can hedge potential bad outcomes for me".

Peter McCormack: So like an insurance on fiat?

Tuur Demeester: Yeah.  I think Pierre Rochard on Twitter was talking about that people who caution about Bitcoin being a bubble, at the same time have no problem recommending that 18-year-olds go into debt for $100,000 or $200,000 to get an education in a very insecure job environment.  So then I brought up the suggestion of like, "Well, maybe you can buy 1 Bitcoin and that can hedge your student debt, all right?  Maybe ten years from now you can pay off the entire debt with that 1 Bitcoin".  I'm not saying it's guaranteed, but it's something to consider. 

Peter McCormack: Well, I think that there are certainly hints from Venezuela and Turkey that people do consider Bitcoin a hedge, or they do consider it a store of value.

Tuur Demeester: I think ING actually did a survey two months ago in Europe, and they only had 15,000 respondents, I think about 1,000 in every country, but at least from that it looked like Turkey had the highest Bitcoin adoption in Europe; it was the highest, 13%, 14%.

Peter McCormack: We're aware people obviously have been using it in Venezuela, and I think people keep getting lost in the store of value, expecting that a store of value means it's going to hold value in every single country in the world.

Tuur Demeester: Right, or it's going to be perfectly stable.

Peter McCormack: Yeah, which is not realistic.  But the store of value seems to be when economies are in trouble.  People could come late on, like they have with Turkey, or people could hedge right now, which seems like, say, millennials are.  So long term, you're obviously bullish about the opportunity with Bitcoin?

Tuur Demeester: Yeah, just to jump in on the store of value comment, people don't realise, but for example being in Argentina when the country's locked down, literally the government knows the value of their currency is being doubted by the entire population, and everybody is wanting to get out of the peso, so what they do is they try and ringfence the entire country, prevent money from flowing in and out.  So, if you're in that situation, what can you do?

You can buy some real estate that's crashing; you can buy some stocks which, interestingly, that happened in 2012.  The Argentine stock market actually had a massive bull run because people were using that mechanism to move money out of the country.  They bought stocks in Argentina and they sold the same stocks for dollars in the US. 

So having Bitcoin, even if Bitcoin goes down 20% or 30% temporarily, it's still something that you can spend abroad.  You can travel abroad; you can spend it.  You cannot do it with cash dollars, which they might get taken from you at the border.  You cannot take gold on your person.  Then, if you try and send pesos abroad, the government is going to give you a 40% penalty.  So, those are the things to keep in mind from our western point of view.  The same in India, the same in so many other countries that have capital controls.  It's not just the monetary value or volatility that's a factor, it's also, is this something liquid that I can carry with me, that I can spend when I'm abroad?  Can I send it to my kids who live aboard?  Can my kids send the money to me?  Those are all factors that have to be taken in account, I think.

Peter McCormack: So obviously, long term, a more stable Bitcoin price would be better, but I guess it's difficult for Bitcoin to be stable in every country when there are different interest rates, different depreciation, devaluations of currencies.  The primary use case, therefore, as I see it, the two are for people to protect value in struggling economies but also future insurance, even in western economies then, which is pretty interesting, which is therefore a very bullish long-term view.  But also, at the same time, you are still short-term bearish?

Tuur Demeester: Yeah, Bitcoin has these cycles.  It's a start-up currency, it doesn't have the properties that we think it can have a few years from now, and it probably will have.  At the same time, the attention of Bitcoin, it comes in waves; it's driven by the prices, the signal that people pick up on.  So, when a lot of people buy Bitcoin, it gets in the news and then more people come in and more people buy it.  Even if they don't understand it, they will have some exposure. 

Then, when the price goes down, all of a sudden, it feels like a very different asset.  "I bought this asset that I thought was going only go up, and now all of a sudden, it's going down aggressively, and I panic and I sell".  So, Bitcoin adoption happens in these waves, and we've seen three big ones so far, and I think it'll keep happening that way, even though the actual volatility is going to slow down. 

But really it's different than, for example, the radio as a technology; when that was adopted, if more people wanted it, the manufacturers could just make more of them, but you can't do that with Bitcoin.  You cannot make more Bitcoins.  Of course, we've seen this proliferation of altcoins.  People can create kind of knockoffs, but they don't have the same properties, they have a lot more risks involved with them, and so it's just the way it goes; adoption happens in cycles. 

So, yeah, we've just come down off this gigantic rise in price.  People don't realise often, but the bottom of the bull phase, this very start of the bull phase was over 30 months before the peak.  The peak was $20,000 in December/January, about 8 months ago.  You have to go back 30, 35 months to find the very beginning of that rally, and that was when Bitcoin was $150.  So, we went from $150 all the way to $20,000. 

So, I think it's only reasonable that the market just needs some time to digestive that and like, "Man, what just happened here?"  Let the dust settle and the regulators are going to have some things to say, and people need to pay some taxes.  People have also kind of thrown Bitcoin together, lumped it together with all these other coins and bought a basket, and so now they feel horrified that some of these coins are down 85%, 95%.  So I think often, they throw Bitcoin away with the bath water.  They're just a little disgusted and they need a break.

So that's why I'm not super-bullish for the rest of the year.  I think we could see lower prices, the price could go sideways for a while, but then there are going to be huge catalysts going forward and we're going to likely see a Bitcoin ETF.  Bitcoin supply is going to be cut in half by 2020; I don't know if you've talked about that to your listeners.

Peter McCormack: A little bit, yeah.  I've been wondering if that will just be gradually priced in rather than a dramatic single event.  I wasn't involved during the previous halving.

Tuur Demeester: Yeah, it was actually a catalyst, and it was a pretty strong catalyst because people realised like, "Huh, the previous annual increase in supply was 12% before the previous halving, and then 12% got cut down to 6%.  Then, right now what's going to happen is we're going to go from 5%, I think, to about 2.5%".  So, I think the market understands that miners are, overall as a whole, pretty agnostic to Bitcoin.  They just mine the coins and they sell them into the market.  I'm not saying, when there's a very strong rally usually they hoard more coins, but then they will sell more on the way down.  So, the net is that they're actually pretty flat Bitcoin.

So, all that supply just gets dumped onto the market, and the market feels that.  Well almost like imagine, it's hard to say, if oil production would get cut in half, oil prices would obviously go up, so it's kind of similar to something like that, and the market knows this.  But the market just needs stories; it's just a story that will likely drive the price up, right.  It's not a mechanical thing.  There's always psychology in markets and so I look at that and it's real but it's also, I think, going to be a story, the story of an ETF as well.  But at the same time it's real, because Bitcoin will become accessible to so many more people in such an easy way, and the funds, etc.

Peter McCormack: What do you think are some of the most important things for Bitcoin adoption over the next few years?  You've talked about ETFs coming.  I expect we'll get another denial today, but at some point between now and next year, one will be approved. 

I'm interested, I would also love to know your view on Caitlin Long's comments; I don't know if you've seen them.  But obviously financial products will open the market to -- it's more institutional investors, or wider institutional investors; also the technology, better wallets with Lightning Network, we'll have faster payment opportunities; and then also education, just educating people about Bitcoin.  What do you find, out of those three areas, what are the most important, or is it all just important for you?

Tuur Demeester: Well, I think they all interplay.  I think Trace Mayer, he identified correctly these seven drivers to the Bitcoin price over time, Bitcoin adoption, and they're all factors that are tailwinds and they complement each other.

So, one of the things that I think is underestimated so far is the amount of financialisation that will happen around Bitcoin.  There are going to be Bitcoin futures, Bitcoin options, Bitcoin ETFs.  So Bitcoin will become a part of what institutions invest in, like insurance companies, endowments eventually, pension funds, and I think that'll be more than is visible now.  That'll be the strongest part of Bitcoin adoption in the next ten years, and I think that baby boomers will not so much have Bitcoin on their phone, I think they will be exposed to it even without them knowing it.  It'll be their insurance company all of a sudden owns Bitcoin.  It'll be their pension fund that has it, those kinds of things.

So, when we're talking about how do we go from 2% or 5% adoption today, to 70% or 80%, I think that'll be the main driver.  Of course, at the same time, the fact that Bitcoin is decentralised, the fact that Lightning Network is going to grow and grow and that we'll have this trustless way of interacting with Bitcoin, is going to validate the main idea that this is censorship-resistant.  That'll be the cutting edge where we'll see all these applications that, over and over will prove that, yeah, you can't really mess with Bitcoin.  You can try and hijack it, you can try and make a better Bitcoin or something like that, well you'll probably fail. 

So, I think in a way it'll seem like two different worlds, but they will strengthen each other.  The fact that ETFs exist, the fact that insurance companies own it, they will legitimise the more radical use cases, just like with the internet; the fact that banks plugged in and became online, the fact that governments started coming online, it legitimised the kinds of things that people were scared of, "Oh my god, am I gambling?" or all these weird opinions, or you can be anonymous on the internet, it's like they both complement each other, and I think a similar thing's going to happen with Bitcoin adoption.  So yeah, I'm excited about both, absolutely.

Peter McCormack: As I mentioned before, I notice you've shared a section from Tamás Blummer's article.  I'll just quote it, "I argue in this writing that central bank controlled digital currencies will soon challenge Bitcoin.  The main motivation there is to allow for sustained and significant negative interest rates". 

So I've got two questions there, but the first question really relates to central bank control of digital currencies as a being a threat to Bitcoin.  So, we obviously have our first in Venezuela, we have the petro.  It's obviously a shitcoin.  It's obviously something that can't be trusted, but it's happened.  Obviously, we've seen stories about other countries and other governments considering central bank‑issued cryptocurrencies, which will never be able to be trusted as much as Bitcoin, but they are still a potential threat.  Can you explain why?

Tuur Demeester: Yeah, I had a tweet that's out there and I've kind of made it into a thread over time, and it says, "The period of 2018 to 2020 is going to be the 'hold my beer' phase for governments and Fortune 500 companies".  The idea is that they're all going to launch their own currencies.  Before, it was like ICOs were scrappy and they were kind of scammy and start-upy; but at the same time, there was this massive amount of money that went around in it.

So, I think that this is being observed and watched, and I think that, in some way, it's very interesting; all of a sudden, central banks are no longer the king of the world.  They have to start having some humility that competition exists and that when consumers make their decisions about which currency to use or to save in, now they have more choice than they had before.  So, just to think about central banks issuing digital currency, it's probably not going to be a cryptocurrency because it won't be decentralized.  But they will try to build in some features that people like, maybe auditability and maybe inflation control or whatever they think that people might want, which I think is great. 

I don't know if you'll agree or the audience will agree, but recently I watched this interview which came out which was with John Cleese and I think it was Palin, Michael Palin.  It was right when The Life of Brian came out, which was this movie that is kind of a Jesus story, how do you call it, kind of a caricature of the Jesus story.  So, they asked them about it, and I think it was in 1979, and they actually had two members, very prominent members of the Anglican Church also come in; I think it was a bishop and another person. 

The way these two individuals were talking about that movie and that it was so horrific and that they were poisoning the minds of these young, impressionable kids with that movie, and also even the tone that they had, it was really kind an arrogance that oozed from that.  I think it was that they can came from a position where they just always had that monopoly.  They had the monopoly on the public and this authority, position of authority. 

So, I think that some of the things that we hear from central bankers now come from that same place, where they just assume this is all just something in the margin and will never get anywhere, so I can just talk down on it.  I think that tone is going to gradually change just like how the tone of the church, however you define that, has kind of milded and become a bit more humble over the years.  I don't know if that makes sense to you.

Peter McCormack: No, it does, and we have seen a change in narrative, and not just from central banks.  We've seen it from JP Morgan, we've seen it from Goldman Sachs.  We've seen a recognition that this isn't going away and it is part of our economy and people do want to own it.  Where I struggle with central bank cryptocurrencies is that I already really have a digital currency with my pound; I can spend it on my card, I can move it from bank account to bank account.  So, unless they create a Bitcoin-type clone, government altcoin, I struggle to understand what is the point of them creating a cryptocurrency.

Tuur Demeester: Right, yeah, and there can be different schools of thought.  If you read papers written by the Bank for International Settlements, the IMF, and this goes back; I've found papers that went back all the way to 1986, because theoretically, people knew that this is possible to create a digital currency that's private market-based.  So, what you see there is concern about seigniorage.

Basically, if you have the monopoly over currency, then you can generate revenues for yourself, and that's your income.  Some of the money that central banks create, they keep for themselves or they benefit the government, because central bank will buy the government debt and then finance the government in that way.  So they were afraid that, "Look, if this really catches on, we could lose that income".  So, that's the place where they were coming from.

You see this when originally, in the 19th century, we were on a gold standard, so governments were disciplined because they could not just create new gold.  But eventually the paper that the gold was backed by was detached, and they actively worked to detach that, and so what you saw happening in the 1940s, 1950s, and 1960s is that, even though the US officially was on a gold standard, only very large banks and governments were able to redeem paper dollars for gold.  So, General de Gaulle did that, the leader of France, he actually kept redeeming physical gold and put it in the French vaults for the dollars that they had.  This was a problem because the US gold has been depleted.  

That's why, in the early 1970s, Nixon closed the gold window and cut the tie.  So, from then on, nobody could redeem dollars for gold anymore.  So gold was this thorn in the heel of governments, because it performed better than the dollar.  So, there's literature on this where the founders of the euro, they were thinking about this since the 1960s.  One author is Alexandre Lamfalussy, who is considered to the godfather of the euro, he has this paper in the 1960s where he's talking about the demonetisation of gold and how do we do that?

So, my interpretation of that effort is they created the euro to create this spectacle where the dollar was going to compete with the euro and then people would forget about gold.  Rather than have the gold can be with the dollar, and that is an obvious win for gold because it's obviously scarce, we'll create this -- in some way it's like you create this strawman that people can then root for or root against, and they've done that, right.  Then, at the same time, there was the London gold pool where central banks would come together and actively try and control the gold price by strategically selling gold reserves into the market and depressing the price.  Then of course, by the year 2000, 2004, they were exhausted, and that's why the gold price hasn't recovered.

So, it's kind of a long story that I'm telling you.  So I think that, for central banks to support or create a digital currency that is a little bit more Bitcoin-like, it would maybe create the same story where it's like the dollar versus their own currency and then people would be distracted by that, and not want to go to Bitcoin so much anymore.  So maybe it would be a Bitcoin airdrop or something like that.  So I think that's possible.

I think the other route that is, I think, likely eventually to happen, maybe even more likely, is kind of a central bank for Bitcoin.  Bitcoin exchanges, they occasionally will get in trouble; either they will have fractional reserve, which we saw happen in the wildcat banking era in the 19th century, where banks would emit more gold certificates than they had gold in their vaults, and then there was a bank run and then the emperor had no clothes, they didn't have enough, they would have to go bankrupt.  So, you had these occasional crises. 

So that's how actually the Federal Reserve Act was conceived.  There was a series of bank runs in 1907.  Banks went bankrupt and the government was like, "Hey, we can no longer allow this, so let's just pool all the gold in a central repository, in several, and that's going to be the network of Federal Reserve banks, and then those are going to be insurers of the private banks.  So, whenever a private bank gets in trouble, they'll get a bailout from the central system". 

I think that something like that is very conceivable, where the government will mandate -- and I'm not saying I'm advocating for this at all, I think that would actually add significant vulnerability to -- the crises would happen less frequently, but would be a lot more severe if the central bank of Bitcoin gets hacked.  Imagine, right; all people's real Bitcoin that gets stolen, that would really be a huge problem.  But I do think that that kind of thinking that we'll see.  The next ten years, there'll be a lot of worry about that, because right now, that's what institutions worry about, it's like, "I want to get involved in Bitcoin but are my deposits insured?"  How do you insure an asset that increases in value, on average, by 40%, 50% a year, right; who wants to do that? 

So self-insurance, which is what happens in the security sector, which is the DTCC system, basically a share in Facebook or Google or any kind of company, it has to be scarce.  You can't just replicant that.  So you need a system to keep those certificates secure, and people do that with clearing houses.  It's kind of a network where the big players insure each other, rather than they outsource that work to one insurance company, because then you have this additional vulnerability.

So, I think that will be the struggle, are we going to have this Federal Reserve central bank of Bitcoin or is it going to be more a voluntary-based system where the big players have each other's back and there are no subsidiaries involved, or there's not a huge amount of government involved; or maybe a third one that I'm not thinking of, because there's a lot more possible in Bitcoin with multisig and time locks?  So there could be this market-based solution that doesn't really look like DTCC today that could be a joker card.  But anyway, these are my thoughts on where the regulators' minds are at.

Peter McCormack: Or Bitcoin could just end bank bailouts?

Tuur Demeester: Well, I think that yes and no.  Yes to some extent, because Bitcoin is highly auditable.  With Bitcoin, you can basically put pressure on an exchange or a Bitcoin bank and say, "Hey, come on, don't kid me, okay?  The Bitcoin blockchain is the most transparent database on the planet.  Surely you can point us to where these assets are where you can somehow prove cryptographically that you control those assets, so that you show that you have all the reserves, that you didn't go behind our backs and lend it out to somebody else to make some profit on the side".  So it's, at least in theory, highly transparent.

Then also, executing a bank run, it's a lot easier because you can wire the money to anywhere in the world; whereas, if you're dealing with the peso in Argentina, you try the bank run, well what are you going to do?  You're going to withdraw physical pesos?  Then who's going to want to accept that?  What are you going to exchange it for, etc?  Whereas, If you're in Turkey and you want to do a run on your Bitcoin bank, you can send it.  Once it's in your wallet, you send it to a family member who's 5,000 miles away in a flash.  So there's a lot more vigilance possible from the saving population.  I think that is going to diminish the severity of future financial crises, yeah.

Peter McCormack: Okay.  Very interesting.  One of the other things that I noticed going through some of your old articles is your very early articles on Ethereum.  You were saying things that people are starting to say now about it, and I noticed one of your articles, you were short.  Obviously you were wrong in terms of the financial bet.

Tuur Demeester: Actually, Ethereum went down 70% against Bitcoin after I published that.

Peter McCormack: Oh, did it really?  Okay.  I'm thinking more long term.

Tuur Demeester: Of course, if you look at the long term, but actually that was a profitable trade for me.

Peter McCormack: I was also looking at the dollar value of Ethereum from there, because I think the network was, what, $1.5 billion or something then.  But do you feel a little bit vindicated now with your point of view?

Tuur Demeester: Yeah, absolutely.  I'm even seeing a hedge fund who just has this 40-page report about why they're short Ether versus Bitcoin.  My best trade of this year was to short Ether versus Bitcoin.  I've been trying to separate fundamental analysis from the narrative that's alive in the market.  So markets can be wrong for long periods of time. 

If you look, for example, Theranos, this huge scam or huge fraud, that company was alive for 12 years.  Enron was up and running for many years before they went bankrupt and went up in flames.  So, something I'm trying to be aware of is that, like what Keynes says, "The market can be wrong for a lot longer than you can stay solvent".  So yeah, in terms of vindication, I'm just seeing --

Peter McCormack: The market can be irrational.

Tuur Demeester: Oh yeah, exactly, irrational.  But yeah, my concern was how is this going to scale?  There are probably some other points that you've seen there.  It was about how does this work with multiple implementations?  People are saying that it's a positive thing to have all these different clients that supposedly run the same network, but what if they conflict?  Also about the vulnerability of these smart contracts I was concerned about. 

So, all these things we see Ether run into, and still I don't know how long it's been, two or three years, there is still absolutely no clear path to scaling for Ether today; that was my biggest concern, is that something can work in the short term, but then if you think it through, it's like, "How is Yahoo --"  Yahoo was one of those search engines that worked in the short term but it all human powered.  It was humans that were passing through the internet and making these portal websites, and of course that's absolutely not scalable.  It was successful for a while and they got a lot of revenues, because all the start-ups were advertising on Yahoo; but once Google came around and they had to actually scale the solution, they crushed Yahoo. 

So, that's a metaphor, I think, that works pretty well for me where Bitcoin was slower, just like Google.  Google was search engine number 21 to go live on the internet.

Peter McCormack: So, I agree with a lot of what you say, and I understand it.  I think it takes other people some time to get their heads around this, but do you see any value in any of the work that Ethereum, or any of these other protocols, have been doing, anything they've developed, any other value?

Tuur Demeester: Yeah, with Ethereum I struggle.  The main premise, in my opinion, was this architectural flaw, the idea that rejecting the notion that, if you want to build something complex, you start with something simple and you bolt on another simple thing and another, and then each of those modules has a different function and that's how you scale, that's how you create complexity that's sustainable and robust.  That notion was rejected from early on.  Vitalik had a lot of feedback from very smart, very accomplished people that he rejected.

So in a way, because of that, I think people who just had a long-term view and who had a high pedigree and very accomplished, they just kind of backed off and like, "Okay, I'll do my own thing [or] I'll focus on Bitcoin or something".  Like Andrew Poelstra for example, he had a great paper on proof of stake and other altcoin ideas in 2014/15 and that was just ignored.  So, he was like, "All right, I'll just do my thing and work with people that do agree on this modular idea".  Then, if you look at how the internet is layered, there's a stack of protocols.  If you look at biology, that's also extremely modular where everything has its own specific function and everything then works together eventually. 

So, yeah, with Ethereum I really struggle.  If anything it's showing the market what doesn't work, which there's some value there.  Also, there were some signals where there's definitely a demand for securitising, for start-ups or organisations to basically sell a part of the ownership in their enterprise in a less bureaucratic way.  Then in terms of other protocols, I think fundamentally, modularity is just sound, in my opinion.  Proof of work is also sound.  I think anything else, pretty much anything else, is voting.  Proof of stake is a voting system, and voting is, in essence, a political solution and I think we've seen over time that political solutions are not robust over centuries.

There are now these theories that under the Sphinx in Egypt, under the pyramids, there was a library.  They were trying to preserve knowledge for the ages or some kind of secret, or of course if it's a burial site, you're trying to preserve that.  So if we imagine, had the Egyptians built some kind of political hierarchy, so like, "We're going to vote, we'll have these guards and then we'll try to get consensus and this and that way", at some point after 3,000, 4,000 years, somewhere in that line that would have broken down.  What they did instead was they built this giant pile of rocks on top of it which is proof of work, right.  You need a certain amount of work to remove that, and nobody bothered, and so the secret was actually preserved; it's kind of illustration that proof of work.  In biology, you also see all kinds of proof of that. 

So, yeah, I think when I look at the protocols, I want to see that it's built on sound principles and I also look at the involvement of the engineers.  I want to see that there are engineers who have significant achievements in areas that are relevant.  So, peer-to-peer protocols, it could be the backbone of the internet, I want them to have some serious achievements there.  I want them to have achievements maybe in memory compression, because bloat is almost the biggest enemy of a blockchain; it has to be lean and that's how it gets decentralized.  Maybe also in mathematics or cryptography.  I want to see those achievements and then I'll pay attention. 

Then I also want to see some Bitcoin developers that somehow have done some peer review or endorsed, because really Bitcoin is so difficult and it's such a fine line to walk on to try and do this.  You're creating a database that is going to be copied, and you're going to start everything forever. That's crazy; why would you do that?!  But Bitcoin, there's a strong reason to try that, because you're going to store billions of dollars' worth of value, so it does make sense.  So those are the things that I look at.

Peter McCormack: So, do you think governance protocols are overrated? 

Tuur Demeester: I think it's almost an oxymoron to me, whereas a governance protocol, doesn't that imply some kind of political mechanism to make decisions?  I remember having somebody pitch Dash to me for quite a long time and it was this idea like, "We'll all going to vote and it's kind of democratic".  I think, first of all, I don't see any large publicly-traded companies that have democratic decision-making.  There are signals from the market, right; the people vote with money.  But when it comes to design decisions, like Ford didn't ask the market, "What should I make?" because they would have told them, "Make me a better horse carriage".  He did his own thing and then people voted with their money and then he built more stuff, because he was a visionary. 

Peter McCormack: So do you think governance protocols are ignoring the fact that a lot of advancements in technology and innovation has come from leadership?

Tuur Demeester: Yeah, I think so and also there's just a certain mindset that just requires a lot of maturity.  I really don't mean anything like charisma or anything like that, I mean technological leadership where you really know the direction to make something sustainable.  So you have this engineering community, this open-source community, this whole process where you innovate very slowly, kind of like the way Bitcoin Core does it; it's a decentralised community.  Or Linux; Linux is robust.  Imagine if you were to have public polls on like, "What is the next feature we need in Linux?" a lot of the value would go lost, because people have no idea what might undermine the fundamental value proposition if they voted on it. 

So, I'm very wary of voting when it comes to protocols.  I think, in the long term, you make a good product and then the market will decide, "Do I want it, or reject it?", but don't let the market literally decide, hold your pen for you, or hold your engineering, your keyboard for you.

Peter McCormack: It's therefore, I think the point you're making, which I agree with, is in these scenarios, not all votes are equal in terms of where the vote is coming from, not in that there are an equal number of votes?  Do you understand what I'm saying?  For example, if we all voted on the next feature for Bitcoin that should be looked at, the development could be very different because they all come with different aspects.

Tuur Demeester: Yeah.  The average person's time preference is lower than a Bitcoin developer has been working on for 15 years and who's invested in it and whatever; they have a longer time horizon.  I think maybe a platform like Reddit shows a little bit the weakness of making everything vote-based, because the top voted posts or comments are not necessarily the ones that will reflect scientific truth.  It agrees with whatever the average person agrees with, which doesn't mean that Reddit has no value; but if it was so powerful, we would just see, what's his name again, the new Apple CEO, or Jeff Bezos, he would just go to Reddit and be like, "All right Reddit, what should be the next Amazon product?" and everybody would vote and then he would just do that and it would be the best. 

There's a reason why CEOs don't do that, because the market doesn't always know what it wants or it doesn't always know how to make something sustainable.

Peter McCormack: I think a lot of people, from where I'm from, would argue Brexit is the result of a similar problem; false information, wrong information, perhaps something we shouldn't have had a vote on.

Tuur Demeester: Yeah.  It gets hard when you start thinking, implementing it or thinking about real-life politics, because I think it's a different arena.  To me, cryptocurrencies and all these things and the internet, there are no barriers, there's no geography.  So, just as well as you invite votes from the world, one attacker can pretend to be a million people; you can have civil attacks.  These are all vulnerabilities to political systems.  That's why proof of work, I think, is so valuable.  It's just like, "All right, you want influence?  You do the work".  There's no way to spoof that. 

One way that I often explain Bitcoin is like, "Well, people have this idea that you could have a decentralised way of making decisions on what is a valid transaction and what is not.  So what if everybody with an IP address could vote?"  But then immediately you run into this problem like, "Well, yeah, but you could have bots that pretend to be 5 million addresses and they have 5 million IP addresses, and they attack the network that way.  That's a valid attack vector for any proof-of-stake system.  The only way that you can make it a little more robust is to add more work.  Literally, all these penalties that they try and build into it, it's basically obfuscated proof of work.

Then it's similar the way they try to prevent political problems, is that you build in all these rules to prevent political attacks; well in a way, that's also work.  You're introducing work into what originally was this pure vote-based system.  Work is just this meritocracy, it's something that has worked for thousands of years.  It's why markets work.

Peter McCormack: Do you know what, actually we've done over an hour, but what I would say is my overriding thought from this interview is all roads lead back to Bitcoin.

Tuur Demeester: Well, yeah.  I want to be careful to not be dogmatic, but I do think that it's important to look at technology and try to take a step back, and like, "What are the underlying principles that make something work or valuable?"  Then, from that framework, look at today, and it's like, "All right, what makes sense?"  So for me, so far, Bitcoin makes sense.  I do think there are iterations on proof of work, who might be interesting, that might be complementary to Bitcoin.  There are some privacy innovations that will either be integrated into Bitcoin or be their own protocols. 

So, I want to just be careful.  I'm very aware that I'm early Bitcoin adopter.  I could have this survivor's bias where Bitcoin is great because I know about it and all the new stuff, that's how old people think.  Your brain isn't flexible enough to learn about everything and so you kind of reject it outright.  I just want to be careful to not do that and more power to anyone who can improve upon Bitcoin in any way.  I think the overall thing that I'm excited about is just to have this free market in money; it amazes me.

Peter McCormack: Yeah.  Well, this has been absolutely great.  I would love to do it again in the future.  Just before I close out, any final thoughts and how can people find you?  I'll obviously share everything out in the show notes, but let them know.

Tuur Demeester: Sure.  Just google my name.  I think the top link is my Twitter account, which is @TuurDemeester, and then my Medium account I think is number two.

Peter McCormack: Okay.  Well, I'll share it out, but thank you so much, Arthur.  It's been great having you on.

Tuur Demeester: It's a pleasure.  Thank you.