WBD264 Audio Transcription

Bitcoin: A Novel Economic Institution with Yassine Elmandjra

Interview date: Tuesday 29th September

Note: the following is a transcription of my interview with Yassine Elmandjra. 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 interview, I talk to Yassine Elmandjra, a Thematic Analyst at Ark Investment, who recently published two whitepapers on Bitcoin. We discuss trust-based v trust minimised systems, property rights and institutional investment in Bitcoin.

“Bitcoin is not going away… whether or not you like it, whether or not you have qualms with it, whether or not your government has banned it or you know of a government that has banned it. It lives and breaths on the internet and is effectively unstoppable.”

— Yassine Elmandjra

Interview Transcription

Peter McCormack: It's good evening here, Yassine; I'm not sure what time it is there.  It's probably afternoon, right?

Yassine Elmandjra: It is 1.30pm, so New York time.

Peter McCormack: Right, well you've got a bit of your day to go, but this is the end of the day for me.  This is my last job.  Listen, great to get you on.  I've obviously known about ARK for a while and I was really fascinated by these two pieces that you recently wrote.  But, I think just as a setup, because not everyone's going to know ARK Invest, do you want to tell what you guys do?

Yassine Elmandjra: Absolutely.  So, we are an asset management firm that was founded in 2015 by ARK's current CEO/CIO, Cathie Wood, and we focus exclusively on disruptive innovation in the public markets.  So, our general view of the public markets is that they tend to be very short-term in their thinking and their approach.  When you look at a traditional sell-side analyst or an investor in the public equity space, they're going to look at the next quarter, the next few quarters and base their decisions on that.

We take a completely different view.  We're much, much longer-term in our investment horizons.  In particular, we think that the most inefficiently priced parts of the market are those focussed on sort of technological innovation, just because they take longer to play out.  And so, we thematically invest across a wide array of what we like to call innovation platforms; so, this ranges from genomics and DNA sequencing to energy storage to automation robotics, and then one of them being crypto and blockchain. 

So, we were actually the first public fund manager to gain exposure to GBTC.  Back in 2015, Bitcoin was trading around $200.  At the time, we also published a seminal piece called, Bitcoin: Ringing the Bell for a New Asset Class, that really analysed Bitcoin in the context of different asset classes and came to the conclusion that the characteristics that Bitcoin present are very unique from traditional asset class definition.  And in fact, the recent whitepapers that we published are really just an extension to that piece.  So, we've been very bullish on Bitcoin for the last five years and quite vocal about our growing conviction.  So, it's great to be here and thanks for having me.

Peter McCormack: No worries, man.  Look, I appreciate you coming on.  Both whitepapers were excellent.  They actually got cited in an interview I did previous to this today.  I interviewed the CEO of Kraken Financial and their lead counsel, I think he's their lead counsel, Marco.  We were talking about -- well, the reason I cited this is because those kind of four predictable economic assurances, which we'll get into, they talk about this new world, this new Bitcoin financial system; and I would say to them, we're in this legacy trust model and I never really understand the leap. 

And the great thing that Kraken Financial is doing, they're essentially building that bridge whereby you can operate with both the trusted and trustless model within their infrastructure.  So, I read out those four points and I said, I see how what they are doing is this bridge between those two worlds.

Yassine Elmandjra: Right, precisely.  To your point, I think the idea that when you look at Bitcoin in the context of this institution, which is really what the first part of the whitepaper presents, it's really best understood in the context of that traditional financial system.  So, that's sort of one of the bigger things that as we talk to institutions, and they ask, "Hey, where do we start?", or, "How do I try to understand this thing?", in my experience, I think its promise is really understood in relation to those traditional financial systems.  And, even when you look at what the whitepaper lays out, Satoshi Nakamoto himself kind of alluded to the inherent weaknesses of traditional financial institutions to shed light on why something like Bitcoin would be so promising. 

So, that's sort of how this paper was initially set up where, if you look at the promise of Bitcoin and it being best understood in relation to traditional financial systems, where these institutions themselves were centrally controlled, or relied on a trust-based model, and were created to standardise the exchange of value, to manage wealth, to facilitate economic activity; but that the integrity of the institution itself was only a function, or exclusively a function of those controlling the institution.

And so, the single point of failure was actually left to the hands of sort of human decision-makers.  When you look at how decision-making is made in this trust-based model, it tends to be much more opaque and much more unpredictable, and that is really just a function of how we operate as humans, where any sort of rule change to an institution is to the discretion of those who are in control.  And as we gain more power in being able to control those rules, there is the potential for a complete misalignment between those participants and those controlling the institution.

So, that's what we started to see as the evolution of trust-based institutions is, I think, reaching its peak; and then in doing so, we identified where they fall short and why something like Bitcoin can at least help to, at the very least, discipline these trust-based institutions and perhaps even replace them entirely.

Peter McCormack: Well, that's the thing, because it kind of felt like almost an anarchist whitepaper.  I know your conclusions weren't completely anarchist, but I was reading this and thinking, like, I didn't plan to do this, but let me jump to my conclusion because I feel it's right based on what you said now.

So, there's this great book I've mentioned on my show a few times called, Engines That Move Markets, and it talks about electricity and the light bulb and the railway and the industrial revolution.  And, I think the final chapter was the internet, and I always imagined at some point they might reprint it in the future and Bitcoin would be part of it.  But I was kind of thinking, there's this journey; we have the industrial revolution and the digital revolution and then really, the information revolution.  And then, the next one is essentially the financial revolution, but the financial revolution could lead to the breakdown of these institutions, the governance structures, and move us to a more -- like I say, it just felt like it was almost like an anarchist white paper.  But, you laughed as I said that?

Yassine Elmandjra: I did, because what's very funny is that when writing this paper, and it was in collaboration with Coin Metrics, who's the provider of the data for part 2 primarily; but, my goal was actually creating an institutional version of the cypherpunk manifesto.  It's like, that's what I really sought out to do in that I think that, you know, there's a really interesting paradox between what Bitcoin presents in its value proposition as an asset, and the threat that that value proposition has to, let's say, our existing structure and what we know.

With that being said, as an investor, it's counterproductive to dismiss the implications of that, even if it means that it could potentially sort of shrink the relevance of traditional financial institutions and institutions more broadly.  And I think that that's sort of part of the technological advancement, is that you're slowly replacing humans with machines.  I kind of like, in part of the backdrop that we presented in part 1 and what you alluded to, is looking at the evolution of economic organisation more broadly is also helpful to understand just how unique we are in being in the cusp of what could be a complete upend of the monetary systems that we know today.

Peter McCormack: Well, even more than that.  The timing of this, it's like chicken and egg, right, but this is happening at a potential breakdown in …  You know, we're seeing people hitting the streets again, another interview -- sorry, because I interrupted you.  But, another interview I had the other day, somebody mentioned, The Fourth Turning, right.  And, I was out in Santiago, Chile recently; massive wealth disparity there; they've got issues with their pension system, which they changed; and some people are rioting on the streets.  We've seen it in France; we've seen it across the world; We're seeing it now in the US.  We're seeing this kind of, I don't know how to explain it, but it feels like a revolution on the streets where people have had enough of this shit.

But, it's happening at the time when we have Bitcoin, which all kind of feels like everything's coming together at the same point.  And, I don't know about you, but I always just imagined I would always live in the same kind of societal structure.  I didn't imagine that I would potentially live through a time where society would evolve from one place to another, where we'd go from this place of standard democracy, standard financial systems, to one where we might have a completely new financial system and completely new governance structures, and we might live through all of this.

Yassine Elmandjra: It's only something that we'd realise after the fact too.  That's part of the thing that makes this so unique, is that -- in fact, I'd like to mention what's kind of a continuation of your point that this is almost anarchist.  I mean, I wouldn't call it anarchist, but a lot of the inspiration from the part 1 was after reading, The Sovereign Individual, and I was like how exactly can I make that more digestible, let's say, to the everyday institution.  And part of the thesis in The Sovereign Individual is that human cultures in general have these blind spots, right, and it's very difficult to describe paradigm changes that are extremely large, especially those that are happening around us and in the moment.

So, the idea is that really before an age can be reasonably sandwiched in the middle of two other ages, it must have already come to an end.  So, this kind of comes in where we are living in a very unique position where, let's say a few centuries down the line we look back at this and we're, wow, this was actually a very significant paradigm shift, and just how we economically organise.  So, that's an excellent point that you bring up.

Peter McCormack: Well, listen, we should work through it, and I will send people to read them, especially part 1, as I said to you before we started.  Part 2, I think most people know a lot of that stuff, but part 1 was a real eye-opener to me.  I knew it all, but you structured it all in a rational argument.  By the way, how long have you been working on this?

Yassine Elmandjra: I've been working on this, it took a few months.  Yeah, it took a few months.

Peter McCormack: So, an interesting thing with that is whilst you've been working on this, MicroStratgey has happened?

Yassine Elmandjra: Yes.

Peter McCormack: How was that for you, because essentially, and I brought this up in another interview yesterday, but it probably validated a lot of what you were working on?

Yassine Elmandjra: Absolutely.  As a firm that looks at public companies, I think the fact that there was a significantly, I would say, prominently public company that decided to convert their entire cash balance sheet to Bitcoin was a huge, huge testament to, I think, where we're headed.  I think the idea that, you know, the case that Michael Saylor even makes for holding Bitcoin is also quite fascinating, where it's like you would almost think he was part of Bitcoin Twitter for the last five years, and he's the one that's been posting everything that goes in from the monetary uncertainty to the hedge against an economic apocalypse to the devaluation of the dollar; and, we had these negative yielding assets and we need something like Bitcoin.  But, to hear that from an operator that actually pulled the trigger is much, much different than, you know, someone who has an individual portfolio and holds Bitcoin.

Whether or not this was maybe part of a PR move, because I would say that MicroStrategy isn't a particularly sought-after company in general, as an investor.  The fact that they have the hindsight and are willing to take the risk to be the first to move here, I think will create a very fascinating ripple or domino effect and we'll start to see a trend where it will become normalised to have a portion of your balance sheets in Bitcoin.  Whether or not this pertains to institutional investors, at the very least it provides validation.

We like to sort of say that there a lot of very interesting catalysts that suggest that we're reaching a very crucial tipping point where five years ago, as an institution, you couldn't necessarily have the same discussions that you're having today, and part of that is institutional adoption and validation; so, anything from the Paul Tudor Jones announcement earlier this year to Fidelity working on it for the last few years, to Square to Cambridge Associates, all these institutional players who acknowledge that this is a worthy enough asset to explore.  I think that arguably, the MicroStrategy decision is one of the most important validators from an institutional standpoint, so definitely will perk some ears.

Peter McCormack: Yeah.  And I guess you talked about the institutions, you can point them to MicroStrategy as a case study.  Well, listen, let's run through this.  So, I guess to explain where we're at, we've got to talk about the journey and how we've got here.  So, could you just talk through that part where you've explained how we've evolved to create increasingly complex modes of economic organisation, and then we'll touch on why that's become so inefficient?

Yassine Elmandjra: Sure.  So, I would say the real punchline there is that economic activity in general, and the basis of economic organisation, over the last centuries, has migrated from the physical to the digital world; and with that, there has been a complete shift in power dynamics.  And, the mechanisms by which we can actually scale and facilitate interaction have shifted as well.  In fact, this section was largely influenced by Nick Szabo's Money, Blockchains, and Social Scalability piece, where he talks about these sorts of novel digital institutions. 

And in the context of where we are historically, where we start with hunter-gatherer society that really just relied on face-to-face interaction in very small groups, it was hard to scale that interaction; and communities were really established in rural areas; very limited labour beyond just manual labour, we transitioned to the agricultural revolution where we could scale interaction.  We adopted new forms of social organisation; towns and cities were formed; centuries of trade and commerce were created; and then we effectively shifted from agricultural to industrial where there, the productivity increased ten, hundredfold.  We could basically complete tasks extremely efficiently.  And through that process of industrialisation, that's what effectively enabled the information age; and that's where now, power is not granted through traditional industry developed through industrialisation, but really to those who are in charge of storing and distributing information.

The interesting thing to note here is that there are specific institutions that are really defined as a mechanism by which you could govern the behaviour and rules that facilitate coordination, that evolve as the ages evolve, right, where in the early days, we may have had just marriage as the primary institution.  Now, we're starting to see, in what we define as Bitcoin, these digital, novel, economic institutions that have been unlocked and facilitated by specific advancements of technology more broadly.  So, that's anything from the Facebooks and the Twitters of the world, that are themselves institutions that facilitate communication and interaction, to the Amazons of the world that help facilitate commercial matchmaking, to the Netflixes and the YouTubes of the world that allow for the streaming of content libraries consumed on demand.  So, all of these are really actually breakthroughs in novel institutions that allow for humans to scale interaction in an unprecedented way. 

With that as a backdrop, we think that really the most notable institution to rise from the information age is one that puts into question the very basis of economic organisation.  And it's really a combination of facilitating economic organisation, but doing so in a trust-minimised way.  So, before I even wrote this paper, there were a lot of people who defined Bitcoin as really this trust-minimised institution that eliminated the need to trust a single, central point of failure, and replaced that with very hard-to-break cryptography.  And in doing so, you basically eliminate, or transcend, any sort of political control that one might have. 

So, by having an institution in the form of Bitcoin that is borderless in nature, that doesn't really have a state that is tied to it, this becomes extremely profound in the implications that it has in basically transacting and storing value more abruptly.  And in fact, we think we'll be probably the largest and most dramatic contributor to the evolution of economic organisation than any other breakthrough in history.  So, that's sort of that section that we were discussing.

Peter McCormack: Before we get into that, let's talk about the shortfalls of the current centralised, trusted institutions.  I mean, I studied very basic economics at school, but one thing that always stuck with me was when we talked about diseconomies of scale; when something gets too big, it becomes inefficient.  Obviously, these institutions, these government structures, central banks, whatever it is, they've all become super-inefficient as the systems have become more complex.  Talk about those inefficiencies, and I guess the thing that really stood out to me was the biggest issues with all of this, I mean you mentioned it earlier, I wrote it out here, "Trust-based systems tend to fail because of the failings of human character".

Yassine Elmandjra: Precisely.  To put it simply, the model of a trust-based institution is that as it scales, you become further and further exposed to the risk of a single point of failure, and that single point of failure is largely in decision-making.  So, there is a very sort of interesting quote that Satoshi has in his whitepaper where he basically says that, "Financial institutions basically still suffer from inherent weaknesses of a trust-based model". 

And that trust-based model again, as I alluded to earlier, basically can be through of as the integrity of the institution being a function of those who are controlling the institution.  So, the idea of trusted third parties; they can't be trusted.  On one end of the spectrum, you have massive data honeypots where really few are in control; and then, on the other end of the spectrum, you have things as big and important as monetary policies that are dictated by a few people behind closed doors.

So, when you have a trust-based model that relies on a few people to make decisions, it becomes very difficult as a participant in an institution to monitor what those decisions are, why they've been made, and is it to the benefit of that participant.  So we see, even today, central banks, in their ability to govern monetary policy, we can get into this further, but all the way to commercial banks and their custody and management of assets, tends to be opaque and unpredictable.  And that's because the very nature of a trust-based model, where it's hard to audit these institutions; it's hard to create a system by which there are clearly aligned incentives between those who control the institution and the participants.

So in general, the conclusion is that the financial system that has been founded on this trust-based model fails, or has failed to provide, a predictable economic system.  We, in this paper, lay out specifically four what we call "assurances" that we think that a predictable financial system should meet, if it is considered to be predictable.  And so, I'll just quickly lay that out.

Peter McCormack: Well, can I ask something first just before you go there?  When you talk about the people in control of the systems, what we're basically saying is that it's the politics of these systems which cause these biggest issues.  So, election cycles require votes; votes require maybe economic stimulus; or certain political parties may have certain policies; you could talk about Trump's tax cuts when he first came in; you could talk about more socialist ideas of someone like Bernie Sanders.  But, they aren't neutral.  They are monetary decisions which are made specifically to benefit a specific group of people?

Yassine Elmandjra: In a really just emerging property of how the system is set up.  It's not like there is an optimal way to, let's say, manage a trust-based institution; it's just that it is a fundamental consequence of relying on a trust-based model.  So, as it evolves, you start to say that there are a few people that are exerting control over an institution that impedes people to participate and live under a predictable economic system.

Really, I would say the only way to eliminate or correct that is by eliminating the trust-based model entirely, and that goes back to Hayat's point as it pertains specifically to money where it's like, "Okay, the only way that we can trust money is if we just leave it out of the hands of the government".  I paraphrase that quote, but it's that very idea where the reason why Bitcoin shows so much promise is because it doesn't even give that option to exert control.  And so users, basically, what you see is what you get; and, that's something that is fundamentally different to what we're used to.

Peter McCormack: These four, because we're going to get into these; these four economic assurances, is this a framework that you developed yourself, or is there some other backing to it?

Yassine Elmandjra: Yes, so this is a framework that I developed, but that was largely influenced and inspired by previous work, I would say, namely Hasu's work on The Skeptic's Guide to Bitcoin, where he basically laid out Bitcoin's properties that it guarantees.  So, I basically tried to generalise that to broader systems, but that's some seminal work that this piece pulls from.

Peter McCormack: Okay, so let’s work through them.  So firstly, "Value should be exchanged globally and freely"?

Yassine Elmandjra: So, that's the first assurance.  So, the single sentence that suggests why the trust-based model fails to meet that assurance is because centralised parties themselves determine the eligibility of participants, and they control the flow of capital.  So, that is a fundamental barrier by which people can exchange value globally and freely.  So, there's this common critique of Bitcoin in that it facilitates criminal activity and that we have to stop it because criminals and drug lords are using it.

The reason why the traditional financial system is able to, let's say, identify a "criminal" is because they control the flows of capital from top to bottom.  What that means is that they also define what is, let's say, criminal or malicious or worth censoring.  What that also means is that if a single transaction can be censored or controlled, then all transactions can be censored and controlled.  And if all transactions can be censored and controlled, then your ability to exchange value permissionlessly, globally and freely is severely impeded.  And we've seen specific examples of that. 

PayPal and centralised payment processors is a prominent example where you might see some de-platforming without really any rationale, because they are a private company and yet we rely on them for a lot of the mediating consumer transactions.  Even governments might end up pressuring these private companies to do so.  We actually saw that when PayPal froze the WikiLeaks accounts.  And so that, combined with the fact that these are private companies that need to abide by local jurisdiction, it becomes very easy to see how the ability to freely transact is near impossible.

Peter McCormack: Whereas, the Silk Road is a kind of validation of this?

Yassine Elmandjra: Right, exactly.  There are ways where people have said, "Okay, we want to eliminate or lift any barriers, but we can't necessarily be responsible for what goes on; very similar to how you could create a private network and access resources that, in today's jurisdiction, would be considered criminal.  So, that's at the private level.

There's also at the state level, and that is actually a large function of macroeconomic policy, where you often hear the capital controls that the government is going to impose on citizens of a country.  That's really just a function of what macroeconomic policy the country decides to employ.  So, if a monetary authority is going to fix exchange rates and then control the money supply, then they have to actually limit the net flows of capital.  And by limiting the net flows of capital, as you see, let's say, in Venezuela and in Lebanon, then citizens are basically stuck with currency that is slowly being debased that they cannot move out.  So, that's very interesting.

In the paper, we show a chart that basically shows that over the last 15 or 20 years, the share of countries that are increasing capital controls have increased by threefold; while the share of countries that are reducing capital controls have decreased by 60%.

Peter McCormack: Wow!

Yassine Elmandjra: Basically, what this suggests is that countries are definitely being over-protective in not allowing for anyone to move currency outside of the country.  So, if you have a relative abroad and you want to send them dollars, it's going to be very difficult to convert your local currency into dollars and then send those dollars.

Peter McCormack: Okay, well let's go onto the second one.  This is an obvious one for the libertarians: "Wealth should be owned wholly and protected".  This is just the basics of property rights which, by the way, as a topic was something I'd never heard of before Bitcoin; just never something I'd been introduced to.  I hear it a lot when I listen to, I don't know if you know, Tom Woods' show, Tom Woods' podcast?

Yassine Elmandjra: Yes.

Peter McCormack: I listen to a lot of his and they talk a lot about property rights.  Stephan Livera as well talks a lot about property rights.  But, this was very new to me but again, this shouldn't be a controversial topic?

Yassine Elmandjra: Honestly, this assurance, the one on property rights is, personally, I think my favourite in terms of Bitcoin's value proposition and what it provides, and also one that in the institutional world, is quite underappreciated.  Where a lot of times we talk about the separation of money and state as what Bitcoin is enabling, I would go further to say really, it's the separation of property rights and state.  And that is a very, very fundamental paradigm shift that not many people fully appreciate.

To your point, something that's a given is yeah, you would think that an indicator of prosperity is the ability to wholly own your property and have it be protected.  If we look at the history of property rights and the private property systems, there is the basic conclusion that a lot of it is reliant on a local protector.  And again, Hasu actually wrote a piece on this called, Bitcoin and the Promise of Independent Property Rights, that really dives into this.  But the idea is that Bitcoin, as a system, embeds an entirely independent property system, and one that doesn't necessarily rely on the existence of a local protector.

When you look at assets today and the suite of asset classes that we have, most of them, while of course presenting varying trade-offs, are highly reliant on a local protector to enforce those property rights; some more than others.  So, we created this asset protection spectrum that pulls from this mental model of shallow versus deep protection, where shallow protection is defined is sort of protection that's derived from authority; while deep protection is sort of protection that can be derived in the absence of authority, or that is inherent to the asset itself.

So, for example, the shallowest of assets is something like digital cash, where you need to rely on authority to tell you that you own this digital cash.  So, I am custodying my digital cash at my local bank.  At any point, that local bank can choose to freeze that cash; can tell me I can't withdraw that cash; can put restrictions on who I can send that cash to.  And that cash itself is also then further tied to the country's monetary policy, where okay, I might have a reliable local bank, but is my monetary authority reliable, or are they going to end up implementing a monetary policy that will completely debase my currency.

So, that's where the concept of property rights comes in, where you think you own that your digital cash, but you really only own it to the extent that someone, ie the government, tells you that you own it.  But, as soon as there is an issue with the government being able to reliably enforce those property rights, then it's effectively out of your hands.  And so, that's what we're seeing today.  We're seeing that, even in developed countries, there's an increasing lack of reliability in being able to protect basic property rights. 

This includes anything from the early 1930s, the famous US ban on the ownership of gold, something that a lot of bitcoiners like to bring up, that persisted for more than 40 years and then ultimately, led to the complete abandonment of the gold standard.  But even more recently, in 2016, the demonetisation of all 500 and 1,000 rupee bank notes by the Government of India, which many considered to be confiscation of property without due process; to even more recently, anyone who was affiliated with the Hong Kong protests had their funds frozen from the HSBC.

So again, we're starting to realise, in the midst of all this sort of economic and macro turmoil, that your wealth, for the most part, is guaranteed only if institutions are willing to protect it.

Peter McCormack: Massive, and I understand why that's your favourite.  Number 3 was kind of my favourite: that, "Rules should be enforced reliably and predictably", because I've always been a fan of Bitcoin's monetary policy because it's so simple.  It's essentially two things: it's a fixed cap of 21 million and a known change in the emission schedule, and that to me has always been so simple. 

But, the thing that clicked with me, and I was talking to Dan Held about it once, is that what we currently have is a group of guys in a room, 10, 15, 20, whatever it is, making decisions, pulling levers, which can have all different kinds of impacts on different people in all different ways, and it can be kind of unfair at times, right.  You can be punished by decisions that other people have made, or other choices people have made.  So, for example, you could be punished as a saver, because there's high inflation because of the poor decisions that other people have made.

But, what I like about Bitcoin is that actually, it's such a simple monetary policy that I know what it is.  Therefore essentially, it's pure capitalism; I'm rewarded for what I've done; I'm rewarded for my productivity, for the Bitcoin I create, the Bitcoin I save; and there's no central authority that can ruin that for me.  Somebody said to me once, "Essentially you have a Bitcoin score, and that is the percentage of Bitcoin you own"; so, you know, divide that into the 21 million.  At that percentage, as long as you don't spend it or use it, that can never go down; nobody can do anything to make that go down, but you can do things to make that go up.  So, this is why I like this one.

Yassine Elmandjra: I think you summed it up perfectly.  I mean, the idea of having a credible monetary policy in Bitcoin, I think even beyond just its strict scarcity, is its biggest, biggest value proposition, because it's something that as a participant in the Bitcoin network, you're effectively guaranteed rules that you can verify won't be broken.  And this is, I would argue, the biggest contrast to what we see in the trust-based model. 

Bitcoiners, and even in the paper, like to cite central banks in their ability to dictate monetary policy as being the prime example, but I could even extend that to any sort of modern day trust-based institution.  So, going back to the example of PayPal, right, where you might have, in the bylaws, a very, very small change in the terms of service, and now your entire business is effectively destroyed because you can no longer bank or use PayPal as a service.  So, it's the idea that you have specific rules that are embedded in this institution that are very, very difficult to change, if not impossible. 

I think the central bank example is the most prominent example because, at the end of the day, Bitcoin is seen as this sort of emerging monetary asset; and the reason why it's such a sought-after asset is because it has arguably the most predictable monetary policy of any asset.  When you compare that to modern central banking, it's a completely different story.  And, there's a very interesting chart that I show in this section that basically highlights what the implications of that unpredictable monetary policy might be.  It extends beyond just having a few Fed governors telling you that they're going to be printing money; there are, I would say, global impacts. 

So, if you look, there's a chart that basically shows how the share of countries whose domestic currency lost more than half of its purchasing power over a five-year period saw massive spikes during three of the biggest, I would say, US-based monetary policy decisions.  The first is that creation of the Federal Reserve in 1913 where immediately after that, we saw 50% of countries lose half of their purchasing power over the five years.  The enactment of the Gold Reserve Act in 1933 was the second one.  And then ultimately, the US abandonment of the US gold exchange standard in 1971. 

What this really suggests is that we see that the US dollar in the United States is that global hegemony that has the world reserve currency, when making a decision, often affects the monetary policy of other countries.  The unfortunate thing is that if a developing country, or a different country, were to follow a similar monetary policy, it would be far more affected by that policy than the United States, which is undoubtedly today, the global reserve currency; but, that could change. 

So, the idea is that not only do you have unpredictability that can cost to the user experience of a participant when they are part of an institution, but also can have global damaging effects on countries at large; and that's really just a function of unpredictability.  One day you say that you're going to be on the gold standard and the next day, you abandon it.  So that's, again, something that Bitcoin does not have.

Peter McCormack: All right, last one: "The integrity of the system should be verifiable".  Pierre Rochard will love that one, especially as he's been going after the ETH nodes, unable to verify the total supply.  But again, I guess the important point with this, which we should just put out there which, you know, this isn't me identifying that you have this in your document, is that without this, one, two and three don't work.

Yassine Elmandjra: Exactly.

Peter McCormack: This is the bedrock for the entire model.

Yassine Elmandjra: Precisely.  This is the umbrella assurance for all of those to even be worth anything.  I think the unique thing about Bitcoin that doesn't exist in trust-based institutions is that it's almost binary, right, where you have an assurance where you can basically verify and audit the network or the institution and if you don't, then you are subject to massive unpredictability and unreliability.  So, you need to have a system that can be verifiable for you to reliably feel that all previous assurances are being met.

In the case of a trust-based institution, there is little to no transparency, and that is the function, again, of just the very makeup of that other trust-based institution, but also because there is really no incentive to be accountable; because, if there are just a few people controlling it and the switching costs are high, or there isn't really any other option, then there is no necessary need to prove that previous assurances are being met.  That's what I kind of alluded to earlier where I think Bitcoin will, at the very least, discipline institutions that rely on a trust-based model, because now there's optionality to participate in an institution that doesn't.

So this kind of re-highlights the global financial crisis and the lack of auditability with the kind of capital requirements for commercial banks that effectively was the catalyst for the financial crisis.  Even things like today, commercial banks and their cash reserve requirements are slowly decreasing over time.  In fact, the US recently announced that their minimum reserve requirement for deposit institutions is now zero.  And since 1995, we've seen an 80% drop in that reserve requirement ratio; all that to say that the need, or the perceived need to have transparent and auditable backstops is slowly degrading as single institutions gain more and more control over the financial system.  So, that's the final one.

Peter McCormack: It sounds very fragile, having zero reserve?

Yassine Elmandjra: I mean, it does.  We'll see if we learn from our mistakes, but that's one of the things that a lot of the crypto banks, or the new-age banks, ie exchanges, are trying to shed light on; "We're a new-age bank with transparencies", so things like proof of reserves is something that is increasingly part of discussion in the Bitcoin and crypto community, just because of the implications of not having those reserve requirements in the traditional financial system.

So, I think a lot of the evolution of the infrastructure and the expectations for companies building on top of Bitcoin are inspired by the limitations that we've seen in this trust-based model.

Peter McCormack: Again, I'm going to bring up Kraken Financial again today, because the conversation I had with them, they mentioned that they're operating with 100% reserves, which means they can't obviously be involved -- I mean, that's natural for their Bitcoin exchange component; but, for their fiat component, 100% reserves means they can't fractionally lend.  But, it does mean that they don't require FDIC insurance, which is something that I came across when I did a study into -- I did a four-part about Steve Mnuchin and looked into what happened in the housing crisis, and how essentially, the FDIC bailed out all these banks to billions of dollars, and it's just kind of insane.

But, that migration to this fully-reserved, fully-backed; it becomes the bank I want to bank with, as somebody who's responsible because, and this is something that comes up.  We don't often reward prudence now.  Saving isn't rewarded; it costs money to save.  Unless you're investing and getting a better return, the interest rates in banks are so low at the moment, you're lucky if you get 0.05%.  So, there's no incentive to save; you are penalised for saving.

And also, you're at risk for the banks themselves defaulting, having a run on the banks; but at least what's happening with something like Kraken, and hopefully other banks, which I think there's one which Caitlin Long's involved in, they're moving to that model where you feel like, okay, prudence is something that's back on the table?

Yassine Elmandjra: Precisely.  I think that in addition to that, whereas the sort of trust-based model or institutions have that excuse of, it's very, very hard to, let's say, audit all of our capital and balance sheets and share that with the world, and this is why we need auditors and trusted third parties because we're not setup to have fully transparent auditing mechanisms; with this new age in Bitcoin, it's very cost-efficient to verify reserves as well. 

So it's like, the way Bitcoin is set up for these exchanges to be fully backed and the ability for those exchanges to prudently verify that they are backed, is far easier to do than anything we've seen before.  So, there's an element of convenience as well that we're starting to see.

Peter McCormack: So, the second part, again I'll link in to people, but the second part is really about the investment opportunity and the size of the opportunity.  Before we get into that, what is the general kind of feedback you get from people when talking to institutional investors about this?  Is it evolving; has it changed over the time you've been with ARK; are people warming up to it; or, are you getting the same kind of knockbacks?

Yassine Elmandjra: It's a good question.  I would say that we were starting to reach an inflection point where, for those who previously dismissed Bitcoin and did not conduct any research in their dismissal of Bitcoin, have now come to the realisation that if they are going to say no, it needs to be an educated no.  So, three or four years ago, we'd walk in a room and we'd be laughed out the door.  Today, we'll receive sort of a respectful no, but they'll have to check that box of having listened to it and being "on top of it". 

Are institutions fully embracing this?  I would say that not yet and not entirely.  Or, do institutions fully understand this?  I would say definitely not.  I think that part of why we set out to right this whitepaper and the research that we conduct is really because I think that there is a fundamental missing core component in the education of Bitcoin to institutions.  We also published, a few months ago, the whole response to Goldman Sachs and their stance on Bitcoin, where they came up with arguments that are not only stale, but fundamentally misunderstand what Bitcoin is. 

So that, for us, is like that just means that either they do not have access to the right resources, or they are kind of purposefully being ignorant.  So, this is really just an attempt to further educate.  I would say we are still a few years out before you have like a pension or endowment fund who's going to be comfortable, let's say, custodying their own Bitcoin, but we're getting there.  I think it's a positive trajectory, but I do think we're still far from widescale adoption.

Peter McCormack: Maybe one more cycle then.  But then again, I guess it's a bit like the internet, right?  There were a lot of people dismissive of the internet early on and those that embraced it did well.  I mean, we saw what happened to Blockbuster; it's such a cliché.  And, a lot of these technical evolutionary points; Kodak is another great example.  I mean even myself, guilty.  When I had a digital agency and social media blew up, I dismissed it and then, it could have been a very successful part of my business.

I guess people like MicroStrategy could end up being rewarded royally and become more expensive for others later on, but that momentum shift appears to be coming.  And in some ways, based on your risk points, maybe that's a good thing, because you have the over-institutionalisation of Bitcoin as a risk anyway?

Yassine Elmandjra: Absolutely.  And I mean, that's the thing; Bitcoin is inherently an uninstitutional asset at its best.  With that being said, the way that an institution would probably eventually look at this is that Bitcoin is not going away; that's the thing, very similar to how the internet is not going away.  Whether or not you like it; whether or not you have qualms with it; whether or not your government has banned it, or you know that a government has banned it, it lives and breathes on the internet and is effectively unstoppable. 

There are arguments that yes, you can ghettoise Bitcoin and you can figure out ways to heavily restrict its access points but at the end of the day, there's this game theory going on across nation states, across institutions, that again I think, to your point, MicroStrategy may have unleashed where if it isn't going away and people are buying it and people will continue to buy it, well it is in my best interest to buy it as well.  So, that's how I think the eventual sort of shift will see, where it's just too many people have it and now, there's just going to be a FOMO at not just the retail level, but institutional level.

Peter McCormack: Yeah, true of the next bull run.  So, what is the size of the opportunity here then?

Yassine Elmandjra: Sure, so we sort of size the opportunity of being in the multiple trillions.  Depending on the estimates, I would say between 1 trillion to 5 trillion over the next five years, and that is from its $200 billion market cap today.  So, you know, Bitcoin has seen a massive appreciation and people think that, oh, this is the beginning of the end.  But, we really just think that this is just the beginning and there's a lot more upside to come.

I think the very unique thing about Bitcoin's opportunity, and something that we like to tell investors, is that one, it's a non-productive asset.  So you can't really think of it like a traditional equity or a bond, in that you project some sort of cash flow based on usage or profitability and you come up with a price target.  By being a non-productive asset, that means that the value accrual dynamics are very unique in that value accrues exclusively as a function of demand relative to supply.  What that means is that all sort of Bitcoin use cases end up being additive and by being additive, ends up being a positive sum for the network and the network value.  So people like to think that there are several use cases, opportunities, and each of them sort of compound one on top of the other. 

We have four that we've sort of sized as we think are the primary opportunities over the next few years.  Obviously, you have Bitcoin as the digital gold, which is the primary narrative that a lot of institutions are comfortable with.  We think that Bitcoin improves upon a lot of gold's limitations, and part of gold's demise was a function of limitations or characteristics that Bitcoin doesn't have; namely, that it is much easier to divide, it's very pliable, it's portable, it's transferrable, so it isn't necessarily subject to the centralisation of reserves, although we're starting to see that slowly shift in the "over-institutionalisation".

But, if you were to buy the fact that Bitcoin is a better version of gold, and you look at where Bitcoin is today, less than 2% of gold's market cap, it could very easily take sort of 10% of its share over the next five to ten years, and that's a trillion dollar market cap. 

You also have Bitcoin as a global settlement network, which Saifedean first introduced, where you can imagine a world where Bitcoin network settles transactions to banks in a global network and effectively replaces the Fedwire, because Bitcoin is very, very effective at settling large-value transactions, more than those small micropayments, at the base layer at least.  So, if you were just to take deposit and settlement volumes of the United States as a proxy for what that opportunity might look like, Bitcoin could go from 200 billion to 1.5 trillion, if it captures 10% of settlement volumes at a similar deposit velocity.

One of my favourites is the kind of Bitcoin as protection against asset seizure, or as insurance policy.  I think that that's something that a lot of people underappreciate, where if Bitcoin has enabled a new paradigm for owning property and with the right key management, then it is effectively an unseizable asset.  In a world where we're starting to see both direct and indirect arbitrary asset seizure, as we alluded to earlier, having some sort of hedge against that becomes extremely valuable.

So, if you were to just estimate the probability of loss of assets over a lifetime, let's say it's 1/1,000 in any given year; so then over a lifetime, or 50 years, that's a 5% chance of your assets getting seized.  Then, if you basically translate that probability into an allocation into Bitcoin, 5% of let's say total high net worth individual wealth, that opportunity alone is from 200 billion to 2.5 trillion.  So, that's a massive underappreciated opportunity.

Then finally, Bitcoin as a catalyst for currency demonetisation in emerging markets.  We've seen, at a high level, different grassroots organic dollarization in emerging markets.  We might see that same thing happen with Bitcoin with the right infrastructure.  So right now, Bitcoin really isn't mature enough, I would say, to service an entire economy; but, we might start to see a grassroots movement of people demanding Bitcoin instead of fiat, and that will effectively catalyse the debasement of local currencies. 

So, if you were to size that opportunity and take all of M2 base money outside of the top four currencies, and Bitcoin let's say captures 5% of that M2 outside the top four currencies, that again is a multi-trillion dollar opportunity.  So I think where we are today, and where we can be in 10 to 15 years, really as an investor presents a very compelling case.

Peter McCormack: Yeah, and your numbers were pretty conservative as well.  You based them at like 1%, 5%, 10%; I thought they were fairly conservative.  It did make me even more bullish.  I keep making these shows at the moment and I think what it is is that the big difference between now and say the last cycle, I remember 2017, is like away from all that DFI nonsense, the Bitcoin ecosystem just seems so much more mature now; the players are more mature; the understanding of Bitcoin is more mature.  We also have this weird timing with the world going fucking mad, but it just seems so much more mature now.

So, yeah, make me ultra-bullish; I thought both papers were excellent.  I will share them out in the show notes.  Is there anything you wanted to add before we close out?

Yassine Elmandjra: No, I mean I really appreciate you having me on.  I think that what we try to do at ARK is provide as much education as possible.  I think actually Michael Saylor from MicroStrategy was a very big eye-opener for content creators, in that in his podcast with Pomp, he was name-dropping a lot of Bitcoin Twitter users that we think we know well, but we don't realise how much of an impact they might have on the outside world.

All that is to say that if you are a content creator, if you're trying to put out research, I think that it has sort of compounding effects on the implications of bringing more and more people in.  So, that's really what the intention of these two parts were.  I hope that your viewers and listeners can enjoy it and again, I thank you for having me on.

Peter McCormack: No worries, any time.  You're always welcome on the show.  Like I say, very high quality; I'll share them in the show notes; people should definitely check you out.  But look, if they want to follow you, or access directly, where should they go?

Yassine Elmandjra: Sure.  You can follow me on Twitter, @yassineARK, and you can also download the paper at ARK-invest.com and get a sense of the other research that we're looking into as well.

Peter McCormack: All right, my man.  Well listen, Yassine, nice to meet you; hopefully in person one day.  I'm not flying at the moment, but I used to spend a lot of time stateside, so hopefully when the flights are going again, we can meet up in person and hang out.  But listen, appreciate your time, take care and we'll chat soon.

Yassine Elmandjra: Thank you so much, Peter.