WBD299 Audio Transcription

Critiquing Bitcoin with Frances Coppola & Nic Carter

Interview date: Friday 15th January

Note: the following is a transcription of my interview with Frances Coppola & Nic Carter. 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 moderate a debate between Frances, an economist and financial author, and Nic Carter, a Partner at Castle Island Ventures, to discuss some of Bitcoin's most fundamental questions.

“What I am objecting to is this kind of position that says it is morally good, and state money is morally bad… money is neutral, money is just a thing there is no morality in money.”

— Frances Coppola

Interview Transcription

Peter McCormack: Well listen, Nic's been on the show six times previously, so I'm going to welcome you first, Frances, because this is your first time on the show, first time we've spoken apart from a little bit on Twitter.  How are you and thank you for coming on?

Frances Coppola: Fine.  It's good to be here.

Peter McCormack: Great.  And, Nic, welcome back.  You've been here many times before.  I appreciate you coming to debate the other side.

Nic Carter: Thank you, Peter.  I'm excited to regain my crown as the King of What Bitcoin Did; appearance number seven.  Let's go!

Peter McCormack: Well, it puts you joint with Jameson, so we'll have to squeeze another one in.  Okay, well listen, look, one interesting thing, Frances, that happens quite regularly is I get lots of emails from listeners, and I'm regularly being asked to bring on detractors.  They're saying, "You're too positive about Bitcoin; you're not dealing with the arguments; you're all about the moon", etc.  So, it's actually great to get you on.  I actually find you one of the more reasonable detractors, even though I don't entirely agree with you, so I appreciate you coming on.

Just so anyone listening who knows, I am pro Bitcoin, but I'm going to try and sit outside of the argument and just try and moderate this and allow you two to discuss it.

Just to begin with, Frances, can I ask you, with regard to Bitcoin and in all honesty, if you heard good enough and solid enough arguments, do you think you would change your viewpoint with it; or, do you feel very entrenched in your view with Bitcoin and you're unmoveable?

Frances Coppola: Can I distinguish between two things?  There is Bitcoin itself and a lot of the stuff around that, a lot of the economic arguments around that; and there's the wider cryptocurrency ecosystem, and there are two different things there.  I am quite negative about Bitcoin itself, because I think the economics doesn't make sense.  That doesn't mean I'm negative about the whole of cryptocurrency; I'm certainly not.  I think there's something exciting going on in the space; I just have serious reservations about Bitcoin itself because of the economics.

Peter McCormack: That's kind of funny, because I would say me and Nic probably -- well, I will let Nic answer it for himself, but I'm kind of the opposite.  I'm quite negative about the cryptocurrency industry and positive about Bitcoin!

Frances Coppola: Oh!  We could have an interesting discussion about why that is then; why I, as an economist, think the economics of Bitcoin doesn't make sense, but the cryptocurrency industry as a whole has some interesting things going on.

Peter McCormack: But, do you think your mind can be changed?

Frances Coppola: I am really not a fan of very hard money.  I mean Bitcoin, as it is now, seems to have taken over from the extreme gold bugs that crawled out of the woodwork after the Financial Crisis, and I had lots of arguments with them too; and, they never managed to change my mind either.  So, I'm not entirely sure why Bitcoin will succeed when they failed.

Peter McCormack: Okay, that's fair.  What about you, Nic; do you think there's any chance or any possibility, if the right arguments were put in place, you would actually turn against Bitcoin, turn negative?

Nic Carter: I think that's unlikely.  I mean, I try to be Bitcoin-moderate.  I jokingly said that I'm a Bitcoin moderate now, so I try not to be completely evangelical about it.  I think that Bitcoin is a good system, it functions well and I think it's a morally good system.  I think it's something that should exist in the world and it's a safety net for potentially a lot of people.  It's an alternative to central banks.

If Bitcoin were to fail though, I would happily embrace whatever the successor is, so it's not all or nothing for me.  I totally accept that there is a possibility this experiment fails.  At that point, I'll look for whatever's next.  But, I think something like Bitcoin should exist.

Frances Coppola: I really want to ask a question if I may, because you said something there, Nic, that I think really kind of hits to the heart of what's going on here.  You said it was a morally good system and I actually fundamentally disagree with that; I don't think it is.  And, I think a lot of the discussions I've been having recently have been around this kind of question; not so much of economics, but of morality and what is a moral good. 

The moment you start saying you think it's morally good, I think we are kind of discussing -- we've gone way beyond economics and money and things like that, into much more existential and philosophical questions really that I think may be worth picking up.

Peter McCormack: Well, we can start there.  I mean, it jumps in ahead of some of my questions, but my first point there to you would be, do you actually think Bitcoin should not be allowed to exist, Frances; do you think it should be banned?

Frances Coppola: I'm generally a little bit libertarian in some respects, so I don't have a problem with Bitcoin existing; I have a problem with bitcoiners trying to seize the moral high ground.  Something can exist just as a thing, as a product, as a good.  If people want to invest in it, that's their choice; I'm not going to interfere with that.  Where I have a problem is with the normative, "You should invest in this because it is morally good".  I don't agree with that and I think that is unfair reasoning.

Peter McCormack: Well, let's unwrap that then.  What is your argument for it not being morally good?

Frances Coppola: I think it boils down do what you consider to be the role of money and of governments particularly, and whether you regard money as a good thing in itself, independently of the state and the community and the identity that you hold.  And, I am troubled by the idea that our governments and our states, our nation states, our identity as who we are, really, is so bad that we need something outside those to attach ourselves to to give us a moral anchor.  That doesn't seem quite right to me.

I'm also concerned with the idea that there is some kind of permanent, immutable, unchangeable anchor and that people can attach themselves to, which will protect them against anything that can happen in the world.  Because, down the centuries, that's been the role of God, really, so are you regarding Bitcoin, in some respects, as a replacement for God; you known, the "Change and decay in all around I see; O Thou that changes not, abide with me"?  And, are you seeing Bitcoin as that immutable, unchangeable thing upon which people can always rely for all eternity, replacing faith in a God who will take care of you, who will provide for you and can be completely relied upon?

So, there are lots of issues with this that I struggle with, and I struggle with that.  I'm going to pin my colours to the mast and say, I struggle with the idea of Bitcoin as the immutable, unchangeable, totally reliable thing in which you can put your faith; I struggle with that as a Christian, because it seems to me to go against what the Bible teaches about relying on God to provide.

Peter McCormack: Well, I'm an atheist, so I can't really add to that, but Nic?

Nic Carter: I mean, for the record, I'm a Christian as well, and I haven't found a contradiction between my faith and Bitcoin.  That's an interesting argument, though; I don't know if I've ever heard that before.  I tend to think that they're very distinct concerns.  One has to do with protection from a capricious nation state; and the other one is, you know, metaphysical, sort of ontological pursuit.  And, I know it's very popular to describe Bitcoin as religious in nature, and you can certainly identify the trappings of religion in Bitcoin, if you look hard enough; but, I like to push back against that.

To me, Bitcoin is a pragmatic thing.  It's a way for individuals to safeguard their savings relative to the state, and it's an independent property rights system, which exists outside of the established legal system, and doesn't rely on our current institutions for it to function.  It functions on its own through cryptography and incentives.  So, I think that's really the focus of it.

If you look at where it's popular today, it's in places where those institutions are decaying or absent, or property rights are not being respected; so, it's popular in China, popular in Venezuela, Columbia, Turkey, places where you see currency crises.  And while a lot of people see money as inherently a creation of the state and totally indexed to the state's role on the economy, I think there's always going to be a role for non-state monetary commodities.  Historically, gold has served that purposes and then today, Bitcoin is just, in my view, a slightly more high-powered version of gold essentially.

Peter McCormack: So, Frances, what do you think about Nic's point there in that, should we all accept the state and the state's mistakes and the impact that might have on us; or, do you not see actually a solid moral argument for Bitcoin in that, it gives people an opportunity to opt out from the state and the mistakes they might make, which impacts the wealth that we've created.

For example, we've seen what's happened in Lebanon and there's high inflation in Turkey right now, we've seen what's happened in Venezuela; can you not see a moral argument for people to actually have that opt out?

Frances Coppola: Oh, no, I can see the argument for that.  And, I've said already that I don't have a problem with people opting to use that, and there are cases where that would seem the sensible thing to do.  I think what I'm objecting to is this kind of position that says, it is morally good and state money is morally bad, and I've seen that argument made in a book recently, which purported to be a Christian book.

I struggle with that, because money is neutral, money is just a thing; there is no morality in money.  The love of money is identified as being a bad thing because of the distortions it creates in human behaviour and the way in which it cuts them off from the love of God; but, money is just a thing, it's a means to an end, it's not a thing in itself.  So, the moment you start trying to claim that some kind of money is intrinsically moral, then I think you're on fairly swampy ground, really.

Nic Carter: So, a few sentences back, you mentioned the morality of Bitcoin is being -- you notice in the Bitcoin community, it's seen as people exhorting others to invest in Bitcoin, I think.  That's definitely not my stance, to be clear.  I brought up the morality of the Bitcoin, because I believe that it's good, ideologically and fundamentally, that it exists, period.  And, I wouldn't ascribe a moral status to investing in Bitcoin or not.  I think that's an individual's decision and I'm not encouraging anyone, at least not right now, to invest in it.  So, just to briefly clarify my position on the thing.

But, I do think fundamentally, it's good that there are alternatives to sovereign currencies.

Peter McCormack: Frances, I've been through your Twitter and I've collected up some of your strongest arguments against Bitcoin, but just to help us, you've already mentioned the economics, but could you articulate the main issues that you have, and we can use those as a framework for the next section?

Frances Coppola: I think a lot of my issues with Bitcoin are to do with the incentive structure really.  I mean, the whole concept of a deflationary asset, an asset that naturally appreciates over time, actually makes it very difficult to use as a medium of exchange.  And yet, if you go right back to the beginning of Bitcoin, where it started, it was about a medium of exchange; it was presented as a peer-to-peer payment network; that's what the whitepaper says.  And, that's what it was promoted as in its early days. 

I was there, I remember it as a payment system, disintermediating the banks that had nearly blown up the world; that was what it was supposed to do, and lots of us were in favour of it because of that; and improving international payments, which are a mess.  And, they're better now than they were, but not hugely better; and on which the banks had a stranglehold and a very expensive one too.  And governments had a stranglehold; the US governments with its sanctions actually making it impossible, for example, for charities in Gaza to get any funds; things like that. 

Bitcoin offered a way of getting round that kind of unreasonable thing.  And, somewhere round about 2015, it lost the plot.  I think it happened when Bitcoin started to hit capacity limits.  It was around about 2015, I recall, when the whole scaling debate blew up, and it became apparent that Bitcoin, as it stood then, in that design, its original design, was not going to handle the capacity needed to become a main international medium of exchange.

We then had the big block size debates and SegWit and all the rest of it.  And Bitcoin itself, Bitcoin Core, we had the Bitcoin Cash hard fork, yeah?  And Bitcoin Core, at that point, that's when the pivot happened to this kind of digital gold, Bitcoin standard, underpinned the whole world currency, let's all save in Bitcoin and it will appreciate naturally over time; and that's really when the whole kind of hard money economics took hold.

Prior to that, it wasn't so dominant, which is why I said that in Bitcoin's early years, I was having these arguments with gold bugs, not with bitcoiners.  So, it's almost like there's been a pivot at some point for Bitcoin Core, and I'm using that term carefully, to in a way take over from the gold bugs on the, "We need a form of hard money", the whole, "We should return to the gold standard; everybody should save in gold".  All this kind of stuff we were getting straight after the Financial Crisis seems to have transplanted itself to Bitcoin Core.

That's a lot of my objection to it, that I feel that although it's reasonable to have something like gold, Bitcoin, whatever, as an asset for people to save in; trying to use that as a medium of exchange is a recipe, actually, for rising inequality and scarcity and really, a lot of difficulty for people for whom that asset is going to become increasingly expensive.  And, if what you want to do is fix poverty and hunger and all those things, adopting a deflationary currency isn't the right way to do it.

Peter McCormack: Okay.  So, I think I understand your argument; I don't agree with your entire version of history; but, I don't think we need to analyse that in terms of dates and stuff.  I actually have a small amount of sympathy for the idea that Bitcoin was originally meant to be a medium of exchange.  I've often found it confusing that people argue against the fact that it did say a peer-to-peer currency and it did talk about online transactions; I don't know what your feeling on that is, Nic?

But, just before I hand over to you, Nic, it does sound to me therefore, Frances, you were originally a bit of a fan?

Frances Coppola: I was in its early years, yeah, I was, because I started writing in the monetary space after the financial crisis, because I knew about banks.  I understood banks, I knew how they worked, and I could see the need for something better in the form of a payment system than certainly what we had at the time.  It's a matter of some sorrow to me that Bitcoin itself seems to have deviated off in this other direction which I don't think is particular constructive.

Peter McCormack: Nic, do you have any sympathy for people who read the whitepaper and saw a peer-to-peer electronic exchange and talked about the ecommerce online and it all being a free commerce; do you have any sympathy for the people who think it might have changed, or feel like Bitcoin changed?

Nic Carter: Sure, yeah.  And, if you look at arguably the number one promoter of Bitcoin, from the early days to present, Andreas Antonopolous, he promoted Bitcoin as an alternative payment system for the internet; cheap, effective, global, low fee, fast.  Obviously, Roger Ver, another kind of infamous now advocate of Bitcoin, saw it the same way.  And, it was this conflict of visions that led us to a schism of sorts, or a falling out, or disillusionment.

But, yeah, a lot of Bitcoin's real advocates saw it, in my opinion in a somewhat reductive or wrongheaded way, as a payment system in the mould of Venmo or Paypal.  Now, I would stress that the whitepaper says a peer-to-peer electronic cash system; my understanding of the way that Satoshi meant cash is a fast-settling payment system where transactions are final, so there's no transactional recourse.

So, the question is, how do you build a cash system on the internet with finality, and you know that expression, "If you want to make an apple pie from scratch, you have to invent the universe first"; it's kind of that situation, because there had been other attempts at digital cash before; Bitcoin wasn't the first.  Basically, they were centralised and they mostly failed.  So, the question is, how do you build a cash system?  You need a base.

So, my understanding of Bitcoin is, it's a monetary system at the base, and then a payments or transactional system on top of that.  If you look at DigiCash, for instance, that was a cash system online, but it was completely centralised.  It basically failed because it was indexed to the fate of this single company.  Now Bitcoin, Satoshi had to figure out a way for it to be resilient and robust, and he basically couldn't work out a way to have it reference an external asset, like the dollar, in a decentralised way.  And, we still don't really have a truly decentralised stablecoin in my opinion.

I think Satoshi didn't have the opportunity to build that dollar-based medium of account into the system and instead, had to devise a monetary policy which was completely internal, completely endogenous and self-referential monetary policy.  And so, he opted for the limit of 21 million units.  It could have been any limit, but the point was he had to devise monetary policy because had to build the monetary system so that he could build a payment system on top of it.

You can sort of trace how those design decisions were arrived at, based on the constraints that he faced at the time.  So, we've tried digital cash systems based on sovereign currencies in the past, but my view of Bitcoin is you had to create the underlying monetary basis first and then build the transactional network on top.

The other point that I would briefly make would be, certainly early Bitcoin adopters and evangelists did see Bitcoin as a store-of-value style asset, as opposed to merely a payment system.  So I would point out Hal Finney, the first person outside of Satoshi to edit the software, talked about Bitcoin as a high-powered reserve asset for an analogue of a neo free banking system basically.  So, Bitcoin is a gold-like analogue.

If you look at some of Satoshi's other writing, he explicitly compares Bitcoin to gold, really talks about it as more of a monetary commodity, although you could say that he's contradicting himself in doing that.  So, there were certainly factions of early bitcoiners that saw it as a gold-like commodity to serve as the base of that monetary pyramid, as opposed to merely just a payment system.

Peter McCormack: Something I've brought up recently, Frances, in a couple of my interviews is, I've recently read the Jonathan Haidt book, The Righteous Mind, while I was trying to understand political division, and one of the things he talks about there is the different moral foundations of Conservatives and Liberals.  And, when you raised the issue of Bitcoin becoming more expensive and you worry about it creating wider inequality, that makes me think you're probably more likely therefore progressive, you're a Liberal, and that falls under the care/harm moral foundation that your first foundation is you worry about the harm to others.  Would I be accurate in that assumption?

Frances Coppola: Yes, I think that is a fair assessment.  And like I said, if you think about where I come from, what I said about my background and how I got into this space in the first place, was to do with the fact that the existing system was doing a great deal of harm.  In my whole book, which is about QE, it's about the harm that QE does and that way which we could do things better.

So, no, it's not that I'm a fan of what we're doing in the conventional system; I just don't think that Bitcoin solves the problems.  I think that Bitcoin potentially creates different problems, or other problems, and it doesn't solve the fundamental problem of poverty and inequality at all.

Peter McCormack: Well, there's a lot of conservatism that wraps around Bitcoin; the socialist bitcoiners or the progressive bitcoiners tend to get shouted down quite a bit.  There's a lot of conservatism around Bitcoin, a lot of individualism and therefore, the moral foundations you have don't tend to sit with some of the bitcoiners.

Nic, what do you think of that point, though, that as Bitcoin becomes more expensive in terms of the nominal price, do you think that creates wider inequality; that can create wider inequality; or, is that a moot point?

Peter McCormack: Well, I'll just briefly respond to Frances' point about inequality.  I think it's probably a little bit of an unfair standard to require that Bitcoin were to solve something like inequality; I think that's a broader societal issue and I don't see any single asset, or asset class, being able to solve that, and that's ultimately something that I would place at the feet of the central bank.

And I agree; I think QE and extremely loose monetary policy has been very much a cause of the inequality we see in society, especially take 2020, a year when asset prices skyrocketed and most regular working class folks were unemployed, while we were injecting trillions of dollars into the economy.  For the most part, those weren't direct injections to households, but it went through the corporate sector and ended up trapped in the financial sector.  So, I would place a lot of the blame for the extreme inequality we see in society at the feet of the central bank.

Frances Coppola: Can I jump in, because I disagree with you?  I'm critical of central banks, yes, but if I may jump in, the problem --

Peter McCormack: Well, Frances, shall we -- Nic, sorry, was there anything you needed to finish there?

Frances Coppola: Oh, sorry!

Nic Carter: No, go ahead, by all means.

Frances Coppola: Is that okay?  Sorry, I really do want to pick you up on this, because I keep hearing this, and I hear it in the conventional world as well; this is not just a Bitcoin thing, that it's all about central banks.  And, one of the things I've been saying, I think for ten years, is it's not all about central banks.  If you actually look at the wide wealth inequality we have, that actually goes back to the 1980s.  And, the original cause was actually the Reagan era tax cuts; in other words, it was fiscal policy that caused wealth inequality.

Yes, okay, so QE doesn't help.  It raises asset prices, which it is designed to do.  It's an interest rate tool and when you raise asset prices, you depress interest rates and you depress yields, and that's what it's designed to do; and so, you've benefitted asset holders and you haven't benefitted people who don't, and you've priced out people who don't have assets, right, which is the criticism.

But, fiscal policy, where we have tax cuts for the rich, like we had in the 1980s, and we had again in America within the last few years, they widen inequality much faster and much more effectively than anything central banks do.  I think my main criticism of central banks is that actually, what they do is not very effective generally.  Fiscal policy's way more powerful and we have frightened ourselves into not using it.

Nic Carter: Yeah, that's fair.  I mean, my pushback to that would be that Reagan only governed for 8 years out of the last 50.

Frances Coppola: Yeah, but the tax cuts remained; the tax cuts were never restored.

Nic Carter: Yeah, but I think if you had to devise an ultimate cause for the inequality in the US, at least, that's been growing since the 1970s, I would place it at the feet of the petrodollar system, which kind of structurally transformed America into a country that does not have a manufacturing base, that outsources a lot of those middle- and working-class jobs abroad and turned into a more consumption driven society and caused the dollar to be kind of structurally overvalued, would be my ultimate assessment there, as opposed to tax cuts.  But, the point is well taken.

Frances Coppola: I agree with you about the petrodollar system and it doesn't get talked about enough.  It was the way that after the Nixon shock, when the convertibility of the dollar to gold was suspended, I mean it was very unstable there at the time.  In about 1974, I think it was, was the OPEC agreement when they agreed to price oil in dollars.  And then you had the recycling, the dollar recycling, with OPEC recycling their surpluses back into US treasuries and all the rest of it; and, we're kind of still on that really.  That's been the story of the last 50-odd years.

I agree with you that it's a system which has proved stable, but it comes at a price which, in America, has been the loss of your manufacturing base really; structurally overvalued dollar; the dollar dominance, which has actually increased in the last ten years, since the Financial Crisis.  Despite the Financial Crisis, the dollar is even more dominant now in international trade than it was before, so we're actually going kind of in the opposite direction.

That's another thing that makes me quite sad about Bitcoin, because it was maybe an opportunity to just start to nibble away at that dollar dominance; it actually went in the opposite direction.

Nic Carter: Well, I wouldn't count Bitcoin out just yet, you know.  I think that, one of the cases for Bitcoin is that it is a neutral settlement asset which could potentially denominate international trade between mutually untrusting counterparties.  My guess here is that, if the dollar system wanes, I think that would have to be accompanied by a due political realignment, maybe America becoming more isolationist structurally and dialling down the military adventurism and so on. 

If the dollar's dominance actually does wane, I think there's no suitable replacement that's ready to go.  I don't see an alternative; I don't see the euro or the yuan being a full replacement.  I think instead, we'll have a patchwork of alternatives and I think Bitcoin could well be one of those; it's just a function of getting it ready and having it be sufficiently monetised in preparation for that.

Peter McCormack: But, would you agree, Nic, that Bitcoin itself is not ready?

Nic Carter: It's too small to serve as -- it's too small, market cap-wise, liquidity-wise, to denominate significant international trade, or to be the asset that commodities are priced against.

Frances Coppola: Can I add to that, that it never solved the scaling problem.  It has never solved that scaling problem.  And without that, it's not viable as an international settlement asset.  It may be viable as a reserve asset; that's a different matter, replacing it in parallel with US treasuries and particularly, non-USD assets, because there is a shortage of non-USD denominated reserve assets.  But, it's not suitable as an international settlement asset for the volumes of global trade we have while it's unable to scale.  And, there is no solution at the moment.

Peter McCormack: Yeah.  I think if you say Bitcoin hasn't solved the scalability issue; not absolutely, but I know myself that I recognise it is being solved, especially with the work recently I've seen completed by Jack Mallers with Strike, which is very interesting.  Nic, what do you think on the scaling; where do you think we are with this?

Nic Carter: We actually have three different opinions on this, so I'm actually not with you on that, Peter.

Peter McCormack: Okay.

Nic Carter: Yeah, so I think it's actually a misstatement to talk about scaling as something that needs to be solved.  I think that's actually the wrong question to ask, basically.  So, if you think about what Bitcoin actually is, it's a big database of everyone's transactions, right?  There are certain physical limits to how big a database can be, and we can still run it on a commodity hardware.  So, there are bandwidth limits, there are storage limits and there are computation limits; and those are all different model decks.

I have personal experience running enormous blockchains, non-Bitcoin ones; EOS, Ripple.  Ethereum's pretty big, but not impossible to run.  Some of these blockchains are in the terabytes and at that point, it actually becomes functionally impossible to stay current on the chain tip.  So, Frances is going to interpret this as total confirmation of her point, but I promise I'll get to the rebuttal.

So, my view is, if you want to replicate a transactional ledger for global usage, such that everyone is an equal peer on the network and it's a non-hierarchical network, there absolutely are limits to the size of that, and there's really not that much you can do fundamentally to change those realities.  We're bounded by Moore's Law, you know, we're bounded by the amount of bandwidth.  We're having bandwidth issues on this call; it's a clear demonstration of the limits.  So, what I would say is Bitcoin scales with transactional size and not with transactional count per unit time. 

So, I would compare it to more of a Fedwire system, where your average payment is large, in the millions of dollars.  So, I consider Bitcoin, the settlement network, to be a utility scale settlement system.  I know a lot of bitcoiners disagree; they want it to be peer-to-peer petty cash, but I consider it more to be probably suitable as an inter-exchange, or inter-institution, cross-border settlement system, with payments happening at other layers, or payments happening within those entities.  For instance, if we're both on Coinbase, we can transact with each other without hitting the blockchain.

So, that's kind of my view of it, that we cannot scale the data throughput by another order of magnitude, but we can scale the transactional value arbitrarily, and that has been happening over the history of Bitcoin.  I think, if you looked at it today, the average Bitcoin transaction would be close to probably around $100,000; I haven't checked recently, but it's in that sort of range.

Peter McCormack: So I guess, Frances, is that your view on scaling is that it supports lower cost, smaller payments, and that hasn't been solved?

Frances Coppola: I'm kind of cold faced here looking at how businesses are trying to do international business and trying to solve some of the problems they have with correspondent banking and the cost of Fedwire and all those things, and so I do not see how Bitcoin solves those problems right now.  I don't see developments in it that even move in that direction, because what I'm seeing is a lot of naval gazing and let's have digital gold and a reserve asset, which actually isn't the problem that I'm trying to solve from a payments point of view; international payments.  I don't see these things as compatible.

For example, one of the things that Bitcoin has never really got to grips with is the fact that the international reserve asset, that the US dollar represents, is actually not the US dollar; it's the US Treasury.  The US dollar itself is a settlement asset.  You know, China doesn't hold huge quantities of actual dollars; it holds huge quantities of US treasuries and those are its US dollar reserves.

That kind of distinction between I guess what you could call future money and current money, which is how we do it with fiat currencies; we have present money, which is physical dollars, pounds, euros, whatever in the form of bank reserves, or broad money, or bank money, or physical notes and coins, whatever it is; and then we have future money in the form of government debt.  And, it's the government debt that is the reserve asset really.  And, it's not just the dollar-denominated ones.  There's a bit of a hierarchy of reserve assets, as you probably know.

What Bitcoin seems to me to be trying to do is to be both reserve asset and settlement currency, and that's why I keep coming back to the incentives.  The incentives, when you start talking about digital gold and things like that, are for it to become this high value reserve asset anchor that central banks can have on their balance sheet as universal foreign exchange reserve; at the same time as you're trying to say that businesses can use it for international transactions.  I'm going, "How?" because it seems to me they're two different things here, and you haven't actually quite got your heads around the two different needs and the characteristics of the things you need to use to meet those two different needs.

Nic Carter: Yeah.  I think that's a very astute point, honestly, and I completely agree.  Bitcoiners haven't really reckoned with this bifurcation of what Bitcoin's trying to be.  If I had to pick one, I'd say that Bitcoin is much better suited to being a reserve asset in the mould of a de novo gold style monetary commodity, which is a high powered collateral; it's auditable, which it improves upon gold in that respect.

I think what I envision is a neo free banking system emerging where entities, financial institutions, issue notes against Bitcoin held on reserve; so really, looking at the work of George Selgin, Larry White, looking at that, the free banking episodes in Scotland, Canada.  We had sort of free banking in the US, but not really.  Whereas the protocol, if you look at Bitcoin as a monetary settlement network means of conveying value, that's more fragile, because there are certainly other potential technological innovations that can steal Bitcoin's thunder in that respect.

If you look at the way it's really being used today, the most popular settlement, or medium of exchange on blockchains, is not Bitcoin, it's not Ethereum; it's stablecoin dollar-denominated tokens.  So, there's a clear revealed preference for dollar-denominated transactions from a medium of exchange perspective.

Bitcoin itself has been tokenised and inserted onto other settlement networks like Ethereum, so now we're seeing the asset being distinguished from the settlement network, which is a totally fascinating development.  To me, that confirms the idea that Bitcoin is being treated much more as this reserve collateral, as this asset that you would hold to store value over time and space; and less so as a system for conveying value.

Now the question is, can Bitcoin last; does it depend on the settlement network to exist, because that's where the fees come from that pay the miners?  So, I think that would be, you know, I don't want to make your point for you --

Frances Coppola: You just did, actually!  I mean, you have got this declining block reward.  Over time, you have got the halvings.

Peter McCormack: Can we come back to that, Frances?

Frances Coppola: Yeah, sure.

Peter McCormack: I'll come back to that.  So, what I'd like to get into with you there though, Nic, is that I guess what you're saying here, what your vision of Bitcoin is, is quite different from a lot of other bitcoiners, who are seeing this vision of hyperbitcoinisation, that we get to this place where suddenly everybody's paying for everything on Bitcoin, whether they're settling on the main chain, or using Lightning to buy their cups of coffee.  You don't actually see that as a scenario; you see Bitcoin more as a reliable, global settlement?

Nic Carter: Well, to be clear, I don't speak for Bitcoin, right; I am just a bitcoiner with a particular attitude towards the thing.

Peter McCormack: But, it's a rational argument.

Nic Carter: But, I don't mean to privilege my view over any other bitcoiner's view, by any means.  And actually, to be clear, I probably hold the minority view here within the Bitcoin community.  But, yeah, many bitcoiners see a world where Bitcoin-denominated payments are occurring, that we actually switch the unit of account to Bitcoin.  I think that's unlikely.

With gold, like a lot of households hold gold, but they're not making transactions in gold.  They hold gold as an heirloom and a way to store wealth safely; not in the US as much, but overseas in other countries.  So, I don't really anticipate that many Bitcoin-denominated payments occurring in the future.  I occasionally buy things with Bitcoin, but that's just to encourage merchants who are selling stuff, for Bitcoin.  I always regret it when I buy stuff with Bitcoin, so I don't see that many Bitcoin-denominated payments taking over.

I think it's very possible that we have stablecoins issued against Bitcoin in a kind of maker-style model; I think that's very promising and that people would prefer to transact with a medium of exchange, or unit of account that's dollar-based.  But then, ultimately, the collateral backing that would be Bitcoin.  So to me, that's like the synthesis of all of this, that eventually you would issue stablecoins against Bitcoin, whether in a programmatic way, or through an institution issuing notes.

Peter McCormack: Frances, what do you feel about Nic's points here, which are quite different from many of the bitcoiners' you would have argued with on Twitter; do you warm to that?

Frances Coppola: Not really.  Again, you have to think about the incentives.  You have to remember that during the period of free banking that George Selgin talks about, we were on a gold standard.  I think people forget about this and I'm always amused when Americans talk about the gold standard, because they never, ever mention the British Empire, and yet we're on a global gold standard because of the British Empire; that was the reason, because the British pound was a gold currency.  It wasn't just gold-backed; it was a gold currency.  The international monetary standard at the time was the British Gold Sovereign and prior to that, the British Gold Guinea was the international monetary standard.  So in a way, you're trying to go back to that. 

Now, I might look back 120 years and say, "Yeah, okay, 120 years ago, the whole world was on the classical gold standard with an actual gold currency", so in 120 years' time, maybe the whole world will be on a Bitcoin standard with Bitcoin as the main international currency; it's possible.  It's just hard to see that that's necessarily going to happen, particular with a piece of technology that is going to be obsolete by then.  You have to start thinking about where does this take us.  Gold is not a technology and you have to look at the political economy.

The issue I have with this is that, when you're dealing with fiat currencies or national currencies, the whole incentive structure around money and banks and everything else is all about keeping control of banking.  Nation states keep control of banks; they really do.  So, the chances of a nation state that wasn't a basket case, and there are some basket cases, like Venezuela, actually allowing its banking system to adopt Bitcoin as its reserve asset, rather than its central bank's money, is not great, I would suggest.

So then, you're into weird offshore entities and things like that.  You're ending up with this kind of parallel banking infrastructure that is separate from nation states, independent of it, somehow tethering itself to it, which is what's happening right now, by creating a system of shadow banks, which claim the backing of central banks by tethering themselves to a fiat currency, but who actually have no right to it; and like we've never seen that before; and that didn't end too well last time, did it?

So, I'm wondering why we're going down that path again, because I'm not seeing how this is going to resolve itself in a way that leaves Bitcoin as a reserve asset that is adopted by nation state banks; I don't get it.

Nic Carter: Yeah.  So, I think you're absolutely right to focus on the political economy; that's clearly the right way to analyse the predominance of currencies.  I think a lot of bitcoiners see the US-led petrodollar regime as degenerating right now, and I think it's not too difficult to arrive at that conclusion.  If you look at the fact that foreign central banks are generally divesting themselves of treasuries, as opposed to acquiring them right now; you look at China and Russia trying to build alternatives; even our European allies trying to build alternatives to route around American dollar infrastructure. 

Structurally, the US is a smaller share of GDP, of global GDP, than it was after World War II, so its ability to sort of maintain that dollar system seems to be decaying.  I think the Bitcoin hypothesis here is that there isn't a worthy successor to the dollar and there'll be a number of alternative modes of commerce and alternative reserve assets which emerge, once treasuries are -- I think it's very possible the treasuries could be an extremely bad asset to hold over the next decade, if the US adopts a more inflationary stance and holds interest rates really low.

But, to your point about central banks not holding Bitcoin, right now it's limited to pariah states, but there are sovereign currencies that do hold Bitcoin on their balance sheet.  So, we started with, as you say, the basket cases; so, it's rumoured that North Korea has Bitcoin, I personally believe that; Iran seems to be undertaking an interesting approach where they have semi-nationalised mining facilities and it seems like they are accumulating Bitcoin for international trade finance purposes; but again, it's hard to get good data on this.

Venezuela absolutely holds Bitcoin; that regime does.  They seized a bunch of miners so they have state-sanctioned mining operations and you can -- well, look, I'm just pointing out reality here, not casting aspersions.

Frances Coppola: I'm just finding this hilarious.  How is this consistent with Bitcoin, this decentralised asset independent of nation states, when you've got miners being nationalised by nation states; I don't get it?

Nic Carter: Well, that doesn't really grant them a lot of control over the protocol.  They're subservient to Bitcoin, right?  Bitcoin is the dominant player in that relationship.  So, Venezuela can try and change Bitcoin all they want.  They're welcome to submit a pull request on Bitcoin Core, but I mean the hash power argument; sure.  If Venezuela had 90% of hash power, I'd give you a different answer, but they have 5%.

I guess the point I'm making is, right now Bitcoin is in its infancy.  It's still being adopted by sovereigns, albeit the least credible ones and the ones that are the most excluded from the financial system.  However, it's not like Bitcoin has pariah status in the US.  The Office of the Comptroller of the Currency literally said the banks can hold Bitcoin for their clients if they want.  They said the banks can use public blockchains for settlement purposes.

So, Singapore; there are actual banks in Singapore which hold both fiat and cryptocurrency, with state mandate.  We've got banks in Wyoming which are narrow banks holding Bitcoin and dollars; those charters have been approved.  So, it's not like this is not happening.  We're seeing the progressive acceptance of Bitcoin at the banking layer.  There are certainly a lot of examples I could point you to there.

Peter McCormack: Frances, are you smirking because the examples here are rogue states with questionable governance and democratic institutions?

Frances Coppola: No, I'm not.  It's actually, I'm smiling a bit because of what it's saying about banking.  So, my interpretation, for example, of the Office of the Comptroller's letter was that it gave permission to banks to issue their own stablecoins and to take over existing stablecoins, mindful of the fact that Goldman Sachs already has a stake in Circle.  So, I didn't see that letter quite the same way you did, Nic.

Nic Carter: Well, I'm referring to two letters, to be clear.

Frances Coppola: Okay, fair enough.

Nic Carter: There was the prior letter, where they said they can custody Bitcoin on behalf of their clients.

Frances Coppola: And I think also, there's a huge difference between custodying an asset on behalf of your clients, and adopting yourself as a reserve asset, are two entirely different things; and, I don't think we should confuse the two.  It's perfectly reasonable for banks, with the approval of the regulators, to custody any asset, and that might include Bitcoin.  That's very different from using it themselves as reserve asset.  As it stands, any bank that wants access to Fedwire has to use dollar reserves.

Nic Carter: Yeah, that's correct.  There are accounting issues to be worked out and just acceptability issues as well.  I guess the point was that we're progressing from Bitcoin having zero acceptability to now, partial acceptability in banking use cases.

Frances Coppola: I think it's more that Bitcoin is more accepted as an asset.  I keep coming back to the fact that banking is not a custody model.  Banks will custody assets; they will act as custodians.  But, the basic banking model is not a custody model. 

When you put a deposit in a bank, you're not putting that money in custody; you're lending it to the bank.  And that model, that fundamental model of banking, where you lend your money to the bank and the bank lends money to other people, and it makes money on the spread between the rate at which it lends and the rate it pays you; that fundamental model of banking, Bitcoin's not part of that at all at the moment.

Nic Carter: Well, I mean, so Peter knows, because one of the sponsors of his show is BlockFi; they do exactly this.  They have billions of dollars of Bitcoin being lent to them by people like myself and Peter and they lend it out on the other end.  So, they're engaging in banking activity, maturity transformation, whatever you want to call it.  They're not a chartered bank in the US, but we have these institutions that are doing this at that scale.

Frances Coppola: Well, I did say shadow banks, and unregulated banks; that's what shadow banks are.  So, you've got unregulated banks with no banking licences and no access to the Federal Reserve, taking deposits and lending.  They're called shadow banks and they always exist.

Nic Carter: Well, whatever you want to call them.

Peter McCormack: Frances, what's wrong with shadow banks, just out of interest; give me the argument against them?

Frances Coppola: Well, I don't think shadow banks can ever be stopped.  There will always be institutions that exist outside the regulated infrastructure; there always will be.  I think where we get into trouble is where they start to become very big and very dominant, and they tie themselves into the regulated system and transfer their risks to the regulated system; and, that's when we end up with something like 2008, which was a shadow banking collapse, where the risks of those shadow banks ended up in the regulated system bringing down regulated banks, and forcing central banks and governments to bail them out.  That's the risk.

Peter McCormack: So, you blame the 2008 Crisis on shadow banking?

Frances Coppola: Oh, yes, there's nothing controversial about that, Peter, at all; it's absolutely about shadow banking.

Nic Carter: I'm with Frances on that, honestly.

Peter McCormack: Sorry, just so I understand, explain to me which are the shadow banks?  Give me an example and whey they caused the 2008 Financial Crisis?

Frances Coppola: Well, shadow banks at the time included things like, would you believe, Goldman Sachs, Lehman Brothers were shadow banks; they weren't regulated banks.  They were huge.  And also, the foreign arms, the US arms, of regulated European banks were part of the shadow banking infrastructure in the United States.  You can think of it as the offshore banking structure. 

But, it's surprising how many of what we think of as investment banks were actually shadow banks.  Lehman Brothers was a shadow bank, and Goldman Sachs was at the time.  It became a regulated bank after the Financial Crisis.

Peter McCormack: Sorry, just so I understand; so, if they were regulated, what would they have been doing differently?

Frances Coppola: Well, I mean, it's jurisdictionally how banks qualify for banking licences, full banking licences.  The structures they have to have and the regulations they have to submit themselves to depend on the jurisdiction.  But basically, any bank that is now regulated does have to submit itself to the regulations of that jurisdiction.  Now, a lot of those are governed these days, not governed, but certainly influenced by the Basel requirements for capital and liquidity, which have been beefed up considerably since the Financial Crisis. 

But also, in the United States, things like the Dodd-Frank legislation; in the UK, things like ring-fencing; in Europe, in the EU, things like the Bank Resolution Directive.  Those are all jurisdictional and any bank that acquires a banking licence within that jurisdiction will have to be governed by those regulations and supervised by whichever regulators in that jurisdiction are appropriate for it.

So, anything that is doing bank-like things that is operating outside those regulated structures is a shadow bank, and there are lots of different kinds of them; and, it's not surprising that the cryptocurrency ecosystem is growing a lot of shadow banks.  The question is whether they'd ever be brought back into the fold.

Peter McCormack: So, you think it's important to have regulation, and this will be something that not all, but Nic, a lot of bitcoiners hate; they have regulation.  They want no regulation, perfectly free markets; but the idea that actually, it was the lack of regulation that caused the 2008 Financial Crisis, and without regulation we could see other financial crises within, say, Bitcoin?

Frances Coppola: Yeah.  We've actually seen financial crises within Bitcoin already.  I mean, what do you think some of the exchange crashes are; and exchanges are unregulated banks and you've had exchange crashes like -- you're littered with them!  They're not a problem, as long as they stay within that ecosystem and as long as people take losses within that ecosystem and the exchanges do whatever they have to do to recompense their depositors, you know; Bitfinex supplying haircuts to everybody and then issuing a token to try and recover the money and all that kind of stuff.  But, as long as they're doing that, they're not causing a danger to anybody.

The problem with this pre-2008 shadow banking was, it was built on top of the regulated structure, transferred its risks to the regulated structure, and then we ended up with an awful lot of spill-over effects to the real economy; and, at that point, you have central banks and governments stepping in because the social harm is so great, and that is the problem.

Where I start to feel worried with crypto shadow banks is when they start trawling for retail customers, because that's when you start to see that kind of level of potential social harm developing.  It worries me hugely when I see -- I don't know if you saw this, Nic, earlier this year, when I think it was Uphold was blatantly trawling for retail customers, and saying that its deposit accounts were the equivalent of FDIC-insured bank accounts when they weren't?  And as you know, Cred went belly up in November. 

Nic Carter: Yeah.  To be clear, I find that kind of thing reprehensible, making misleading claims about the quality, especially when lending is occurring.  And obviously, there's no FDIC in crypto; that's impossible, because you can't print more Bitcoin.

I think, though, generally my reaction to this would be, as you point out, the risk is largely contained when exchanges fail, because there's not a lot of sort of risk-sharing between exchanges, banks, whatever you want to call them.  I think another thing that would make Bitcoin less likely to have these build-ups of credit bubbles that then explode all at once, would be the nature of Bitcoin as collateral.

So, Bitcoin is highly auditable.  I can prove to you cryptographically that I own some.  You can't do that with gold; it's very hard with regular financial assets.  That was one of the issues, I think, with the Financial Crisis, is that there were multiple claimants on the same collateral; the same collateral was hypothecated many times.

With crypto assets, they're inbuilt to be strongly auditable by definition.  From scratch, they're natively digital; that's the special thing about them.  So, an exchange, for instance, if I asked, could prove to me that they had coins, that they had reserves, corresponding to all the outstanding liabilities.  Now, that doesn't happen a lot, much to my chagrin, because trust me, I asked the exchanges and they don't do this very often.  There's a process called Proof of Reserves; it doesn't happen very much; I wish it would.

But, in theory, we could achieve a very strong level of transparency from these deposit-taking institutions.  We could have provable reserve ratios, or some of them are narrow banks, right, so we could have full reserve, proofs of that.  So to me, crypto assets help prevent this unsustainable build-up of leverage and credit, at least if users are willing to take advantage of that actual cryptographic auditability that these assets afford us.

Peter McCormack: Frances, what do you also think about the fact that the FDIC insurance actually creates the wrong incentives for banks?  As far as I'm aware, from when I did my research on a recent project, it was under the Clinton regime where they actually changed the rules for the banking infrastructure. 

They wanted to be able to encourage more people to be able to borrow and I think they reduced the rate, I can't remember what they reduced the rate to, but essentially the FDIC insurance became a kind of backup for banks to be able to lend more, and not really have too many concerns about delinquent loans.  Do you not actually think that FDIC insurance actually encourages poor behaviour as well?

Frances Coppola: Yeah.  And the moral hazard issue from deposit insurance is one of these long-running arguments about how you make banks safe and how you protect the money of depositors.  There is a fundamental problem at the heart of banking in that, it doesn't matter what banks are lending, you always have this problem which is that, on the deposits side, you have a bunch of people lending money to the bank thinking the bank is going to keep it safe for them and just let them take out money whenever they want, and make whatever payments they need to make from their bank accounts and whatever.

On the other side, the bank is lending it out -- it's not; it's lending money, let's put it that way.  We have to be careful about terminology, because banks don't actually lend out the money they take as deposit; it's a bit more complicated than that.  But, lending money, which puts those deposits at risk, because the deposits are not in custody; it's not client funds.  This isn't like asset management; they've actually lent the money and therefore, their claim on the bank is one of a creditor.

Now, they may be senior creditors but, unless there are other things in place to protect those depositors in the event of the loans going sour; and loans do go sour, it is of the nature of lending that a proportion of loans either won't be paid, or won't fully be repaid; and of the nature of you investing in loan assets, so tradables, that their price various; there needs to be some kind of buffer to protect those depositors.

A lot of the regulation since the Financial Crisis has been about ensuring that fiat currency banks have those buffers in place.  It's not about having cash reserves; it's about having equity; it's about having shareholders with some skin in the game.  That's what it's been all about.  And, I have been very concerned about the opacity, and I share Nic's concerns here, about the opacity of crypto exchanges and stablecoin issuers, because it seems to be they're not doing a lot of the things we've had to make banks do to protect depositors.

Peter McCormack: But strictly speaking, with bitcoiners, you have the ability to be self-sovereign in a different way that you can with your dollars.  It's slightly different with your pounds and dollars to keep them under the bed.  The fact that you can custody your own Bitcoin does mean that you aren't reliant upon exchanges and such.  And so we all, within the Bitcoin world, pretty much encourage people to learn to be self-sovereign so you don't have to have that risk.  So, it is slightly different.

I think, if you're moving risk around, if you're relying on somebody else to custody it, you're taking that risk, but that's the risk you take.  But, you have the opportunity to self-custody?

Frances Coppola: Well, that's true.  But, when you self-custody, you lose liquidity.  That's true in Bitcoin as anything else.  So, if you want to have an instantly liquid account from which you can make payments, it's actually extremely difficult to do if you're self-custodying; so, it's not quite that simple, is it?  It's always that trade-off between safety and liquidity, and this is true even in conventional bank accounts.  The more secure you make your account, the more difficult it is to use.  And that's true in the Bitcoin world, in cryptocurrencies as well.

It's also the fact that, in a way, banks are the gateway to real-world payments in a way that crypto exchanges aren't.  They're not managing main payments in the way that mainstream banks are.  And, until we have that kind of payment infrastructure operating through in the crypto world, they're not comparing like with like. 

Nearly all crypto transactions at the moment are just simply to buy other cryptocurrencies; they're not to pay your mortgage or fill up your car with gasoline, or whatever.  But, that's what people use their bank accounts for.  And, until we've got that kind of functionality in the crypto world, we're not comparing like with like.  So, I think we need to be a bit careful comparing crypto banks with conventional banks, because they're not doing the same job right now.

Nic Carter: Yeah, that's an interesting point.  I mean, they definitely are different, because using a crypto bank is like using -- well, maybe it's not, but it kind of reminds me of using a bank and then having, as a retail individual, access to the Fedwire system as well, and able to access that sort of high-powered settling infrastructure.

I guess the disanalogy also that Peter was referring to was the fact that you can easily reserve that base, you can withdraw the base asset from the bank, whereas that's not really possible with a regular commercial bank.  I mean, I suppose you can pull out physical currency, which I guess I would call base money, from the bank; but, for the most part, people's deposits stay trapped in the banking system.

So, there's something different about fiat regular, conventional, commercial banking and crypto banking, whereby you're less indexed to the system; as a crypto depositor, you can always exit should you choose to.  I mean, I guess I agree.  I think there are serious disanalogies.

Frances Coppola: You see, I'm older than you and I grew up in a time when cash was dominant and most people worked in cash, and quite a lot of people didn't even have bank accounts.  So, in a way, I look over my lifetime and see how things have changed, so I don't really agree with you there.  The fact that people now choose to operate mostly through the commercial banking system is a development of the last 50 years.

Nic Carter: Right.

Frances Coppola: It's not necessary; we could revert to using physical cash, it's just less convenient.  It's just a convenience thing.

Nic Carter: Well that's why we invented digital cash, right!

Peter McCormack: But, the thing is, I think it becomes even worse with the advent of CBDCs whereby you have nothing you will be able to withdraw.  You will never hold or own your cash; everything will be an IOU.

Nic Carter: Well, worse than that is that CBDCs can be weaponised for surveillance or control, right.  So, to me, that's why cash, physical cash, is a great product; it's amazing; I love it.  I mean, I don't love having lots of cash, I don't really use it ever, but I wish people did use it more.

Frances Coppola: No, I'm in agreement with Nic on this.  It's been a theme of mine for some years, that the power to shun, really to shut somebody out of everything that makes life possible, is a power that governments shouldn't have.  So, I actually think we need things that people can use outside the government controlled system.

Peter McCormack: Like Bitcoin; you sound like a bitcoiner, Frances!

Frances Coppola: This makes me sound like a bitcoiner!  I said, Peter, I have never been wholly opposed to the principle; I told you that!

Nic Carter: We're making progress!

Frances Coppola: But, I was disappointed that it has suddenly become this digital gold asset when for me, that wasn't what was needed.  What was needed was a means for people to transact outside the government controlled system; they've always need that, because it has to be possible for people to live.

Peter McCormack: Nic, I think we take the win here!

Nic Carter: I agreed with a lot of what Frances had to say too, so I think she's scored some points for sure.

Peter McCormack: This is highly reasonable.  Well, there is another thing we need to talk about, something that's been a bit teased about; we need to talk about scarcity.

Frances Coppola: Oh, yeah, I knew you were going to get to that.

Nic Carter: Well, I think that you're going to find that we're actually on the same side of that one too, potentially.

Peter McCormack: Well, do you want to explain your point with regard to scarcity, Frances?

Frances Coppola: I'll try!  Okay, there are two aspects to this.  So, we can look at scarcity from the point of view of Bitcoin of the hard cap, and also the subdivision; and, I dealt with the hard cap first, which is a lot to do with obsolescence and belief and community and networks and stuff like that.  So, let's talk about the hard cap first, because there's a lot of faith involved in this.

We're told that there will only ever be 21 million Bitcoins and I go, "Pull the other one", because, and you've alluded to this already, that as the number of Bitcoins being produced, as the block reward diminishes, so transaction fees become more important.  And, as your transaction fees rise, which they must, then the number of transactions on your network is going to decline.  If you're not careful, you're going to end up compromising your security model.

So, it may well be that the 21 million limit does have to be rethought at some point; it is something the community may have to face.  I wouldn't personally rule that out and for that reason, I would not like to say that 21 million was necessarily fixed in stone.

My second point about this concerns obsolescence.  Remember what I said earlier about 120 years ago, the whole world was on a gold standard and nobody would have foreseen that in 120 years' time, gold would be demonetised and the whole world would be on a dollar standard, right?  Equally, we cannot foresee what the world will be like in 120 years' time when the block reward finally ends; and it is that far away.  I know it diminishes over that time, so in a way, these things will have to be thought about sooner, but the actual 21 million limit isn't hit until about 2140. 

Now, that's long after all of us are dead.  We have no idea what the community of that time will decide.  We have no idea if they'll even still be using Bitcoin.  I mean, if you look back to the technology of the year 1900, there's not a great deal that was being used then that was new technology then that we're still using now.  It would be like still driving around in antique cars.  So, I'm very concerned by this 21 million hard limit, because I don't think it's credible as a hard limit like that.

I think what's more importantly actually, in terms of scarcity, is actually the supply rates, the rate of increase, which is fixed and known and reduces at each halving, right.  That's actually much more important because it means that, when you have changes and swings in demand for Bitcoin, which you do, so in the last few weeks we've had quite an increase in demand for Bitcoin, right; the production rate can't increase.  So, the only thing that can adjust is the price.

So, volatility; I know people are saying that volatility will decrease over time, and I'm going, "No, it won't", because the whole thing is, demand is volatile, naturally volatile; demand for anything is volatile.  And, Bitcoin cannot respond to demand changes, so there will always be volatility in the price.

Now, it's of the nature of a market, of a free market, that some people are priced out of the market.  So, when demand for Bitcoin is rising, more people are going to be priced out of the market.  It will become, in that sense, more scarce, simply because the price is rising.  And similarly, when price falls, more people will come into the market.  I mean, heavens, this works on the mining side.  This is how the difficulty adjustment works on the mining side.  There's no particular reason why it wouldn't work in the price market for Bitcoin itself.

What muddied the waters considerably regarding those kind of innate changes in supply and demand equilibrium, whereby the price adjusts to equilibrate supply and demand, which is basic economics really, is the subdivision; as I got pilloried quite a lot on Twitter for saying that this subdivision made Bitcoin less scarce, which upset quite a lot of people and made a lot of people laugh and there were lots of jokes about pizza.

But, what I'd like to say is that, by subdividing something like Bitcoin, you make it possible for more people to buy into it, so you've increased its liquidity, yeah?  So, even when its price is rising, in a way you're still supporting demand for it.  Does that make sense?  The more you can subdivide it, you can maintain your demand by dividing.

Nic Carter: Yeah, because let's say the smallest unit of Bitcoin was 1 Bitcoin, then your point is it would price out people as the unit price rose?

Frances Coppola: Absolutely.  And, to talk about pizza for a minute, there are physical limits to the amount you can subdivide pizza obviously; and Bitcoin, you can subdivide down to much tinier fragments.  But, if you think about it --

Nic Carter: Sorry, I think I see the point you're making.  You're saying that subdividing makes it more abundant, because it makes it more liquid at higher unit prices, basically.

Frances Coppola: Yeah, and it can bring in people who would not buy whole Bitcoin.  Just as, if you sell slices of pizza, you can attract people who wouldn't buy a whole pizza.  So, you've almost got -- here he is with the pizza!

Peter McCormack: I've got one here!

Frances Coppola: Peter, I had to bring the pizza in, didn't I; I mean, it just was necessary!  So, as you see, he's got a slice of pizza.

Peter McCormack: Actually, I've not run out.  I've been eating it the whole interview and every time --

Nic Carter: This is unfair; I'm getting really hungry, dude.

Peter McCormack: -- every time I run out, I just get the pizza cutter, cut it in half, and I've got more!

Nic Carter: Okay, all right.

Frances Coppola: Okay, we got the idea.  But, the point I'm making is it can actually create a new market.  The people who would not have bought a whole Bitcoin might actually buy a small amount of a Bitcoin; it makes it more accessible.

Nic Carter: So, Frances, are you saying that the smaller subdivisions of Bitcoin potentially increases demand, basically, by opening it up to a bigger market sector?

Frances Coppola: Exactly.  It opens it up to the kind of market that might have come in earlier if it hadn't been so geeky in its early years and nobody understood it, you know, back in the day when it was worth a few dollars.  It's opening up to those sort of people, to much lower income people; people who can't afford to buy a whole Bitcoin, but they can buy a few satoshis.

Peter McCormack: But, they can do that now?

Frances Coppola: Yeah, that's exactly what I'm saying and that's all I'm saying when I said that this subdivision, this ability to buy satoshis rather than just Bitcoin, makes it more abundant, makes it less scarce than it would be if all you could buy was single Bitcoin; that's all I meant.

Nic Carter: But, it sounds like you're making a point in favour of the subdivision being good for Bitcoin, good for the unit price of Bitcoin?

Frances Coppola: Well, it kind of is.  We had a bit of a debate on Twitter about whether subdividing something increased the price, and it was kind of an economist's discussion.  It was a very interesting one and I need to write up what I think.  Because I think, that when you start --

Nic Carter: You think it does?

Frances Coppola: It does in the short run, right; I don't think it does in the long run.  It's one of these short run versus long run things that we get in economics where, in the short run it raises the price, but then you get diminishing returns, once everybody's got some, or everybody's got, whatever, then the price falls back down and over the long run, it doesn't make any difference.  That's my opinion.

But, economists don't agree on this.  There are other people who said it didn't make any difference at all; others said, "Oh, yes, it definitely raises the price", and none of us actually know!

Nic Carter: Can I give my view on Bitcoin scarcity?

Peter McCormack: Yes, please do, because I disagree with Frances, but I don't know how to articulate it!

Nic Carter: I mean, honestly, I think it's totally contingent what the subdivision of Bitcoin is.  So, you can divide Bitcoin into 100 million units.  That's what Satoshi picked.  You could optionally make a change to the protocol; it wouldn't be that hard to add more decimals.  So, there's nothing about Bitcoin that really requires that the smallest unit is a satoshi; you could go smaller if you wanted.  We could make an agreement for us to exchange a tenth of a satoshi and there, we've subdivided Bitcoin.  You can do probabilistic payments on Lightning; that's sub-satoshi payments.

So anyway, the point is, there's no lower bound, there's no plank length equivalent for Bitcoin, right?  In the real world, we have the tiniest subdivisions.  I don't know that much about subatomic particles, but let's just entertain the fact that there's a truly discrete unit as you get small enough.  With Bitcoin, it's software; you can get as small as you want, infinitely.

So, I don't even think about units of Bitcoin; I think about quantities of Bitcoin.  So, I think of Bitcoin more as a kind of like a liquid and you can put it in cups in your mind; UTXOs, those are sort of cups containing certain amounts of Bitcoin; so, that's when it's useful to reason about it in the sense of dividing up a pizza, because you don't ever really have one unit of Bitcoin; you have one twenty-one-millionth of the entire supply.  I think that's really the way to think about it.

Frances Coppola: Yeah, that's another way of looking at it.

Nic Carter: And, I don't think Bitcoin can be really scarce or abundant; there's just a set amount of it and there's a set amount of purchasing power that is allocated to it.  The same way that earth allocates $9 trillion worth of purchasing power in real terms to gold, we allocate $500 billion, or whatever it is, of purchasing power to all the outstanding Bitcoins.  But, as you say, Frances, demand is what determines the price of Bitcoin; the supply is totally invariant really.  I mean, it changes a little bit, but not really, so we just reprice Bitcoin based on what demand happens to be at a given time.

So, I don't really think of it as scarce or abundant; it's just, there's a certain quantity of it and the value varies in real terms as demand fluctuates.  So, I don't really understand the brouhaha around Bitcoin's scarcity at all; it doesn't seem that complicated to me.

Peter McCormack: Well, for somebody like myself trying to understand it, there are 21 million and we have eight decimal places per Bitcoin.  If you subdivide that further, it still doesn't change the fact that there are 21 million.  Yes, more people can access it, but the scarcity… yeah.

Nic Carter: I don't consider Bitcoin scarce, though. 

Peter McCormack: Limited?

Nic Carter: Yeah, it's kind of fixed in supply.

Frances Coppola: Finite?

Nic Carter: Finite, yeah.  But, scarce; there's no necessary quantity of Bitcoin that the world needs.  There could be one unit of Bitcoin and in my view, that would be sufficient, right; we'd just have to figure out how to divide it up.  Scarcity is something like water where we have a necessary physical amount of it that we need to survive.

But with Bitcoin, there's no physical tether; there's no requirement that we have a certain amount of it, so I don't consider the word "scarce" to apply to it, basically.

Peter McCormack: But I think the important point is, if we subdivide it further, it's not going to materially change the price.  It's not like, if we suddenly went to 42 million and we changed the issuance rate; if we subdivided it further, that's not going to dilute the price?

Nic Carter: I don't think that's the point Frances was making though.  I think she was pointing out that there's second order effects on the price based on how the market is able to engage with Bitcoin.  Certainly, if there was only one unit of Bitcoin, then it couldn't have reasonably monetised, so having the subdivision helps the monetisation.

Frances Coppola: Yeah, that's exactly right.  It simply makes it more liquid.  And generally speaking, over the long run, making something more liquid tends to reduce its price, but in the short run it can increase it; which is why I said I would expect the price to go up in the short run, and fall again in the long run.  And, over the very long term, I don't think it would make a great deal of difference.  But, it doesn't change how much Bitcoin there is.

But, I think this use of the word, scarce, is a little bit loose.  And actually, to be fair, because somebody picked me up on this on Twitter about this rather loose use of the word, scarce, because actually in economic terms, everything is scarce, because economics is about the allocation of scarce resources.  In markets, what markets do is allocate scarce resources, and price is the mechanism by which they do it.

So to say, kind of as a good thing, "Bitcoin is scarce"; well, everything's scarce.  What exactly are you trying to say here?  You're saying that Bitcoin has a finite supply; there can only be 21 million of it and to have any more of it, the community's actually got to change its mind about what it wants; there's actually got to be a change to the code.  Then there are those who say, "Well, that would be a hard fork and that wouldn't be Bitcoin", and we can have that argument all over again.

Nic Carter: That's my side, that's the point.  That's the side I would take!  I forgot to even address that.  That's maybe less interesting, because we've been over it like a zillion times.

Frances Coppola: It's actually not interesting!

Peter McCormack: But I think the scarcity point, Frances, is helpful for people to understand.  We're not all economists.  I think there are a lot of people like me who actually are just trying to figure out how to invest in a few things and make a bit of money and get by in life, right?  We're not economists like you, or we're not all smart like Nic; some of us are just trying to understand this.

The 21 million; the point of the scarcity is that to me, the scarcity says that this is a race.  This is a race to get as much Bitcoin as you can, because there isn't a lot to go around, right; there is a limit.  It isn't unlimited, let's say, and I think that's the point that someone like me understands from it.  So, whilst Nic says it isn't, as such; for me, it is scarce because I think, "Right, there is only 21 million". 

Nic Carter: Well, we could talk about it being fixed or finite; I think those are maybe better descriptions of what it is.

Peter McCormack: Yeah, but I think it has the same meaning to somebody, whether you're talking about finite or scarce; I think the intrinsic meaning to somebody is there is a limited amount and they might become harder to get as the issuant rate changes with every halving.  And, I think that's what is an important concept to us.  And then for someone to say, "Well, you can subdivide it further to make it less scarce", I don't think it changes that, because there is still 21 million Bitcoins; there's still that limitation.

Frances Coppola: Sure, and I'm not saying differently.  I mean, I certainly wasn't saying that subdividing it created additional Bitcoins; it's not cloning.

Nic Carter: We were knocking, well not me, but bitcoiners were knocking down a strongman version of Frances' argument, to be fair.

Frances Coppola: They were a bit, although I did feel like pointing them towards cloning as an example, or even just any form of asexual reproduction as a case of subdividing something and creating more of it; but then thought, no, perhaps not.

Peter McCormack: But again, I don't think it does create more of it; I don't think it does.  If things are priced in Bitcoin and you subdivide it further, you've just got further decimal places.

Frances Coppola: No absolutely, that's all we were saying.

Peter McCormack: Yeah, but reproduction does create something new; it does increase the total population.

Frances Coppola: Absolutely.  And I wasn't saying that was what was happening; not at all.  What I was saying was simply, all I was saying was that subdividing it made it more accessible --

Peter McCormack: That's true.

Frances Coppola: -- and therefore, it could create new markets for people who are currently priced out, if what you're selling is whole Bitcoins; that's all.  So, you've potentially got greater demand, at least in the short term, and that's going to push up your price a bit.  That was all I was saying, really.

Peter McCormack: I think that argument's correct though, but I think that saying it isn't scarce, whatever the language is, I think that's wrong.  But, now you've explained it, I agree with your point.  One of the funny things is, I've let people know this show's out, people can't wait; and one thing I will say is, debating you like this and talking to you, it's a lot more rational and better than on Twitter, and I think some people are going to be surprised by this.

Frances Coppola: Twitter's awful.

Nic Carter: People are going to be disappointed, I think.  We didn't yell at Frances; we were too nice!

Frances Coppola: They think I'm going to be a head-banger!

Peter McCormack: Yeah, but I think one of the other things is, I think by the end of this, I think I would say, you'll probably disagree, I think you're slightly more of a bitcoiner than you were at the start; I have that feeling.  You might not want to admit that, or I might be wrong.

Frances Coppola: Not really.

Peter McCormack: I disagree.

Frances Coppola: Well, I said at the start, the whole space I think is interesting.  And like I said, I do think it's important that people have something they can use that is outside the government controlled system.  I'm not very MMT, you know, this kind of, "The state is everything and you shall all use state money and we must clamp down on everything that isn't state money"; sorry, I'm not very into that really.

Peter McCormack: So, Frances, if I sent you some Bitcoin, what would you do with it?

Frances Coppola: I might sell it!

Nic Carter: Disappointing.

Peter McCormack: Sell it because you think the price is high now, or sell it because ethically you don't want to hold it?

Frances Coppola: I think ethically I don't want to hold Bitcoin.  I have real concerns ethically with Bitcoin for a number of reasons, which we haven't gone into, to do with its energy use and stuff like that.  I do think proof of work does need to be reconsidered if it's to be a mainstream thing.  So, I might exchange it for something that's less environmentally damaging, but that's a personal view.

Peter McCormack: Well, I've got that on my list.  The other thing I've got on my list is Tether, but we have done nearly two hours now.

Frances Coppola: Yeah, we have.

Peter McCormack: So, we could either carry on, or we could reconvene and do a part two and touch on energy consumption and Tether.  So, I would suggest this is a good ending point.  I think this has been fantastic.  I think we should reconvene and do a part two and talk about energy consumption and Tether and perhaps, see if there's anything else.

Frances Coppola: Yeah, that would be good.

Peter McCormack: How do you feel about that, Nic?

Nic Carter: Well, those are two of my favourite topics!

Peter McCormack: So, we're going to have to do it?

Nic Carter: I mean, as long as Frances is game.  You might be getting sick of us at this point?

Frances Coppola: No, I'm cool, it's good.

Peter McCormack: Right, well I'm going to draw this one to a close.  I'm going to reconvene over email and book a part two when we can cover those parts, but I just want to say, Frances, you are very different in person from how you come across on Twitter.  I thought you were like a raging Bitcoin-hater.  I don't agree with everything you said, but I think this has been a very fair debate.  I think people are going to be very disappointed; but at the same time, I've learnt a lot from this. 

I'm very intrigued to spend -- I actually want to make another show with you, Nic, about your thesis that we covered, kind of, of what Bitcoin really is, because I think I'm more drawn to that than the hyperbitcoinisation one.  So, we can get you up to number eight, Nic, and leading the chart.

Nic Carter: Okay.

Peter McCormack: Well listen, thank you, both of you; appreciate your time and let's reconvene for a part two soon.  Yeah, take care, thank you.

Frances Coppola: Pleasure, it's been good.

Nic Carter: Thanks, Peter. Thanks, Frances.