Angelica Montagano

August 19, 2022

Understanding Crypto

Understanding Crypto 12: David Gerard: Crypto Realities

Angelica Montagano

August 19, 2022

Understanding Crypto

David Gerard writes the cryptocurrency and blockchain news site Attack of the 50 Foot Blockchain. He is the author of the 2017 book Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts and the 2020 book Libra Shrugged: How Facebook Tried to Take Over the Money. Until he reinstalled the laptop they were on, he was the proud owner of six Dogecoins. He remains a frequent, if occasionally annoyed, user of Facebook.

As well as being a crypto journalist, David also works as a Unix system administrator, where his job includes keeping track of exciting new technologies, and advising against the bad ones. He has also been an award-winning music journalist, and has blogged about music at Rocknerd.co.uk since 2001. He is a volunteer spokesman for Wikipedia, and for skeptical wiki RationalWiki.org. Originally from Australia, he lives in east London with his spouse Arkady Rose and their daughter.

Picture credit: Pauline Martindale

What is the real value of cryptocurrencies? Can crypto technology be applied to traditional financial markets? In this episode, we welcome David Gerard, a technologist and author of the books Libra Shrugged and Attack of the 50 Foot Blockchain. He uses his skills as a journalist to investigate the uses and hype around cryptocurrencies and is an outspoken skeptic of the technology. Although not originally from the technology sector, he has become an authority on the topic and has briefed the UK House of Commons Science and Technology Committee on the technology. He also runs a blog covering important aspects of the cryptocurrency space. In today’s conversation, we learn some harsh realities about the benefits of cryptocurrencies and why they will not last in the long term. We learn what the real value of crypto-markets is, why he considers it to be a Ponzi scheme, what needs to change about cryptocurrencies, whether there are any benefits to the technology and the role of financial journalism in the crypto space. Listen as we unravel the political ideology which underpins crypto and whether it can be separated from the technology. We also discuss the outcome of El Salvador’s bitcoin experiment and why it did not work. We also learn the reasons behind the recent crash in some crypto markets and find out which book David thinks everyone should read.

Key Points From This Episode:

We start the show by finding out the real dollar value of crypto markets. [0:03:45]
The role financial journalism played in getting crypto to where it is today. [0:06:02]
Reasons why he does not trust the value of cryptocurrencies. [0:11:04]
Why he thinks cryptocurrency journalism is not credible. [0:12:00]
He explains Bitcoin’s underlying political ideology and the associated problems. [0:13:25]
The classic debate of who should have control over financial markets. [0:16:41]
Whether it is possible to remove the political ideology from crypto-technology. [0:17:34]
What the most important aspect of cryptocurrency technology is. [0:18:24]
The reasoning behind the argument, ‘You just don’t understand the technology.’ [0:21:52]
How to make cryptocurrency work in traditional financial markets. [0:23:50]
Why the recent crash in the cryptocurrency markets occurred. [0:28:03]
Find out if cryptocurrencies can be beneficial for the ‘bankless’. [0:30:25]
We discuss the outcome of El Salvador’s bitcoin experiment. [0:32:20]
He outlines why Salvadorans did not like the proposed bitcoin market. [0:38:11]
Learn what the UK House of Commons Science and Technology Committee wanted to understand about cryptocurrency. [0:41:23]
How his views on cryptocurrency were received by the commission. [0:43:46]
An example of a crypto-based business that was operating illegally. [0:45:01]
Whether NFTs will allow artists and musicians to keep more financial gains from their work. [0:46:13]
We discuss whether crypto-based technologies will improve over time. [0:47:57]
Examples of good uses for crypto and blockchain technology. [0:49:22]
What would need to happen for David to change his opinion on crypto. [0:52:25]

Read the Transcript:

Is the Crypto market measured in dollars as big as it looks?

No. You see a lot of numbers thrown around, millions and billions and even trillions of dollars that are supposed value. That's all imaginary. It's all virtual dollars that someone calculated and went, "Yeah, that looks like a cool-looking number." This is the myth called market cap, which is a term taken from stock markets and so on where you take the price for stock, multiply it by the amount of stock, and you've got the price for company. That's approximately what a company's worth. If you want to buy the company, then that's how much money you've got to put up, on the order of, plus or minus a bit. That concept doesn't make any sense in cryptocurrency. It's literally just whatever amount someone made up. It's the number of tokens that someone thinks are in play multiplied by the last stock price. This turns out not to be useful information in any way. It literally doesn't tell you anything useful.

You can't get that much money out, that much money didn't go in. The concept of buying up lot doesn't make sense. It doesn't tell you anything about what the price is going to do or why. The useful numbers you need are things like if you're a trader, you need numbers like how liquid is the market? How thin is the market? That sort of thing. Those numbers are harder to get. How many actual dollars went in and out of Crypto? That's a number that's almost impossible to actually get your hands on, so you have to guess at it a lot.

Also, there's a real thing in, you see headlines about hundreds of millions of dollars hacked from protocol and they say, "Then you look down at this hundreds of millions of dollars worth of their made-up whatever token." There was never hundreds of millions of dollars. There might have been thousands of dollars maybe. They literally took the price of the token, multiplied by a hundred million or however many they created, and that's supposed to be the number. You could never realize it because there's no market. The reason for these numbers is to market cryptocurrency because nothing gets a headline like a big number. When you see numbers in hundreds of millions, that's a headline, doesn't matter if it's actually false. Yeah, all those numbers are lies.

Let's carry on with this headline theme. Can you tell us what role financial journalism has played in getting Crypto to where it is today?

There's no interesting story in finance than a number going up, because that's the point. The point of financial journalism is the found out markets where numbers are going up so you can make some money. You get a lot of phenomena where the Bitcoin price goes up or something and they go, "Wow, look how high it went." There's a real tendency, one tendency to narrative where people think things happen for complicated reasons because of market signals or whatever. The FED announced an interest rate change or something. That's because people are way too used to sensible, rational markets that are well regulated. We've had 90 ideas of the SEC in the U.S. for example, where the stock market were absolutely nuts before. Lots of manipulation, all sorts of shenanigans, extremely like the shenanigans in crypto, much of the same shenanigans.

They partied so hard they ended up breaking the economy, the black Friday crash of 1929 leading to the great depression. When the SEC was started, that was started because it was the minimum the public would put up with to allow stock trading to happen at all. It was the compromise option to allow people to do things. I'd say it worked out really well. It turns out that regulated markets with rules like you can't lie about material facts. That rule, it's worked out really well. We had quite a prosperous 20th century following on from that. The thing is that financial journalists in particular, and they should know better, but often they don't, treat that as normal. It's not, it's not a natural thing. It's an artificially constructed regulated market. Well behaved markets have to have a regulator because purely fair markets without any regulation failing obviously in hilariously predictable fashions as we see in Crypto. Crypto's a good worked example of all the dumb stuff that happens without a regulator.

Finance Journalism talks about this unregulated manipulated market as if it's a regulated, sensible market with depth to it and that's wrong. It's not very large Bitcoin, say, is about the size of say a small commodities market and a rare metal or something. That's a good comparison. Few producers, a few consumers, not much regulation, and price is basically a lot of manipulation. Bitcoin's type price graphs a lot in small commodities, where basically external events are completely overshadowed by internal events. There's actually been a study on this. I forget who it was who did it. The price of Bitcoin and Ether does not reflect regulatory announcements at all, either in price or volume of trading. It's basically internal shenanigans. Usually they manipulate the price that try to trash the margin traders. What does happen? This is what happened in December 2020.

A lot of manipulation finally pushed the price over $20,000, which was the previous peak in 2017. That made headline news because it was a new high. That made the mainstream papers. They pushed the price up more through January. This was peculiarly bloodless. There wasn't a lot of evidence of ordinary retail interests until Elon Musk announced that he'd bought a pile of Bitcoins for Tesla. At that point, ordinary mom and dad investors, retail investors, they dived in head first and put in a bundle of cash and drove the price up to about 64,000 at that peak. Then, of course, Musk sold out because he'd made Tesla's quarter one numbers, I think. The interest dropped off. A lot of the price in the second half of 2021, I think was a lot of manipulation. They were pumping out dubiously backed stable coins, which was supposedly worth a dollar.

They weren't backed by dollars. They were backed by loans or other Cryptos, or things that they could say were worth that much and had a price tag of a dollar on them. It's amazing how far you can pump a price if you have all the fake dollars you want to pump it with. I do not trust the Crypto markets. I think all the numbers are lies. Finance Journalism tends not to realize this or want to say it, how realizable the prices can be a tricky one. That is, it doesn't take much to drop the price. If you sell off any substantial number of Bitcoins, you will drop the price quite notably. Sell off a few million dollars in Bitcoins, you'll drop the price a few thousand dollars, that sort of thing. Yeah, it's difficult because these guys, they have a lot of... Cryptoists should not be considered an industry with a bunch of competing players.

Functionally, it's a single unified casino. All these guys know each other. They're all in each other's pockets. They all have deals with each other. We've really seen this in the recent collapse. It turns out all the companies were in hock to each other. When one collapsed, the others tended to fall like dominoes because it's an unregulated industry. Now, they're attracting regulatory heat because some of these companies, particularly Celsius and Voyager attracted investments from ordinary people who thought this was a real investment. That means these people are screaming at the regulators, "Why was this allowed to happen?" I think the regulators should have shut these companies down a year ago. There's no real excuse for them not doing that, but they didn't. Now, they're coming to clean up after the mess when it's too late. Yeah, all these companies are in each other's pockets. It's one industry. It's one casino. It's not really a bunch of competitors, not really.

How credible do you consider cryptocurrency journalism to be?

Not. We can just talk about the facts about the Crypto news sites. Real newspapers, if you write about an asset, you aren't allowed to own that asset. You are not allowed to have an interest in assets you write about. The allowable level of interest is zero. Financial Times, Bloomberg, they tell you, "If you want to write about this stuff, you are not allowed to own it." That applies to any asset.

These guys know things. They want to trade assets, but they're not allowed to write about assets they own. That's sensible. No Crypto news site has that rule. They all allow you to hold cryptos. CoinDesk, which wants to be the most credible Crypto news site, has explicitly stated that it wants writers who have "skin in the game." That is, they're looking for people with a whacking great conflict of interest. Then, these people are surprised when, say, they can't be cited in Wikipedia or something. I'm a stressed CoinDesk. I read it every day. There are writers there who I am a huge fan of. I read this stuff. I think, "This is going to be great." They're very informative, but you have to take them with a stack of salt. Literally all of the Crypto media is conflicted, all of it. My blog isn't, but I'm just a blogger.

How do you describe Bitcoin's underlying political ideology?

This is a matter of... Occasionally I say Bitcoin was founded by extreme libertarians. Bitcoiners get terribly upset and say, "How dare you? Can you prove that?" I go, "Dude, read a history book." Bitcoin was never a technical project. It was founded by very sincere, extreme libertarians, anarcho-capitalists. They believed that the way money worked was wrong. They believed in a version of Austrian economics. There's gold bugs with a solid gold standard for money.

They thought they could do an electronic version of that. That was literally the point of Bitcoin. It was constructed to make a money that would work in a particular way. Now, Crypto is full of scams. These guys weren't scammers. They were very sincere. A lot of them are still around and they really, really wanted a form of money that would exist without governments, without any interaction. Their threat model was basically, they might be taxed. That's why Bitcoin transactions are irreversible. They carried through the rest of Crypto. If transactions can't be reversed, then the government can't garnish your account. They thought that would be the worst thing in the world. They didn't want something susceptible to that. Now, the big problem there, of course, is who wants governments out of their money, sincere libertarians. Who else wants governments out of their money? Crooks.

It was like crooks flooded in. As soon as we could exchange Bitcoins for money, about 2011, when Mt.Gox Starting to go immediately, all the cooks came swooping in. They had a fresh field of suckers who had weird and wrong ideas about money. The thing about gold standard economics is it doesn't work. That's why we went off the gold standard. There's a lot to object to in our current system, but it actually was less worse than the one before it. You had naive, well meaning people who had no idea what they were doing, but just thought, "If I keep doing the things, I'll get rich for free." Then, scammers came into skin them. That's been the story of Crypto since.

Yeah.

Always there. That's fine. That's not the wrong thing to want. Governments are annoying. They can say wrong things, get in your face. They're stupid quite frequently, but they thought that a completely unregulated market would just work fine because people have rational self-interest. That turns out the account of what that is, on the other hand, history.

Basically, these are wrong ideas that have been shown wrong repeatedly, but they sound really cool to certain people. Unfortunately, sounding really cool doesn't make things work. That hasn't really worked out. Even if particular regulations are annoying, and you should absolutely push back on bad regulation, but money exists in the context of a society. When you have the concept of money, you have the concept of other people's money. When you have other people's money, you have some people who think, "I'd like that to be my money." You're going to need rules. Those rules are going to come from society, as well. The foundation of the SEC was because society would not put up with free for all stock markets anymore. How did it work out? It worked out great.

Yeah. It's so interesting.

But, much better than what we had before it.

Yeah. It's like the old debate from the 1600's between Thomas Hobbs and John Locke about where power should lie and where the power should be located between government and individuals.

Yeah. All the enlightenment and early liberal philosophers covered this stuff in full in 17th and 18th centuries. I don't know how someone can read Adam Smith and turn into a libertarian. The guy was absolutely, in the 21st century, he'd be a member of the liberal Democrats in the UK on the socially fluffy, socially concerned wing of the liberal Democrats. He wouldn't be a hard libertarian. He was very into markets are cool, but we've got to manage them. That sort of thing. That's all through that. I made it through wealth of nations once and survived.

Me too, once.

Guys, they never heard of editors.

Do you think it's possible to separate the ideology from the technology?

That's a good question because literally the design of Bitcoin was to work in a particular way. Both advocates of Bitcoin and critics of Bitcoin have said, "Yeah, the ideology flows from the way it works. Irreversibility, gold standard of a certain number of Bitcoins can ever exist." It's difficult. What we've tended to see is the unfortunate fact that you can just take Bitcoin and it's open source code. You can cut and paste it, change a couple of numbers, and you've made your own new magical internet money.

A lot of actual Austrian economics fans, the actual gold standard people, noticed that immediately and said, "Yeah, Bitcoin's interesting. We like you, people we can talk to, but we think your idea is bad and we don't actually like it." Australian economics, fans like the bloggers on Mises Wire, that sort of thing. They're fascinated by Bitcoin. It's really interesting. I'm not into this stuff at all. I'm fascinated by it. They get along with Bitcoiners and they can talk to each other, but they don't buy the pitch.

Which do you think of the technology and the ideology are more important to the phenomenon as a whole?

Technology is not important. The thing about Bitcoin is it was originally this libertarian pitch, but even then very early on, they were realizing if this works as we've described it, we are all here at risk for free. Hal Finney, the second Bitcoiner, the guy who beta tested the software for Satoshi. He was saying that very early on. He noticed we were all going to get very rich. He was a very sincere end cap as well. He was a very nice, good fellow. Everyone loved him. A top good bloke. He died in 2014 or something taking a lot of Bitcoins with him. He noticed really early on. Basically, if you hear the word Bitcoin, what someone is trying to sell you is you can get rich for free. If you hear the word Crypto, it means you can get rich for free. ICO, you can get rich for free. NFT, you can get rich for free.

Now sensibly, there's no such thing as a get rich quick scheme. The promise is so appealing. If you say you can get rich for free people will flop to give you money. All you need is a small excuse, like yeah, but how do I get rich for free? Technology. Oh, technology, that must be it. Who knows? Technology can do anything. Yeah, it's a pitch that you can get rich for free using technology as the excuse every time. That's all the pitch during this last Bitcoin bubble, which is now popped, has been basically get in early. If you're missing out, get in while you can. Get in on the ground floor. Are you brave enough to throw your money at us? That's a great pitch.

Are you brave enough to give us your money? It's awesome. It's all the get rich quick scheme. That's the whole pitch. No part of it was not get rich quick. Or, it's put aside money for later but in the meantime, get rich quick. Get in early. Get in while you can.

Yeah. I was reading the old re-mailer list that these guys used to communicate on. Hal Finney, I read the post, I think, that you're talking about where he said something along the lines of, "If this thing gets big, these things could be worth $10 million each, something to think about." It's just like, huh? They really were thinking about that early.

Yeah. They thought this was the perfect financial scheme that would make money that worked properly. Obviously, everyone would want that. Everyone would flock to Bitcoin. People would just love this. It turns out they didn't because they did not realize that they were actually strange people who wanted strange things. Then, there were other people who didn't understand it and just got the idea that it doesn't matter if you don't understand, just keep saying the phrases and you'll get rich for free. This is what you see on. It's very prevalent on Twitter. Crypto Twitter is full of people who've more or less turned themselves into bots, like a self recruiting cult where they just say the phrases over and over. "Have fun staying poor." They stop saying that one for some reason.

Onto your comment about technology, how important to this whole Crypto narrative is the notion that you just don't understand the technology?

Extremely important. It's the excuse for the get rich quick scheme. Obviously, there's no such thing as a get rich quick scheme, but if you say, "Aha, but excuse," and then people go, "Oh, well that's all right then." In this case, technology is the excuse. I'm actually a technologist. I'm a system administrator. I know how this works. Blockchains aren't complicated. They're quite simple technologically. There's no software magic involved in this. I have a talk that I do for targeted bankers and long technical people that says, "Look, this is what a blockchain is. This is how it works. It's quite simple. You'll see there's no magical bit here." The magic comes in the political pitch for Bitcoin, a lot of which sounds good until you think about it for five minutes, like trustless, decentralized, irreversible. Why do you want these things? Do you actually want these things?

It turns out in practice, consumers want customer service. They will pay a central organization to be someone they can call when things go wrong. If my credit card got hacked and I got a call from my bank saying, "Hey, did you make these transactions?" "No, I didn't." "Good. We reversed them and send you a new card in five days." I like my bank. That was very good. That's precisely what I wanted from them. Not everyone wants this. There's various sorts of people who don't wary of that thing. I'm a comfortable middle class person. I benefit greatly from being part of the system. Some people don't. There's two sorts of people like that, one marginalized people, and two, crooks. Bitcoin has pitched this bank the unbanked narrative since 2013, which targets marginalized people in poor countries and so on.

It's all a lie. What they actually mean is crooks, people who don't want the government looking into their large amounts of money. They never have a coherent plan that would actually serve the poor except move the entire world to Bitcoin. The only way it could possibly work is that none of the barriers are technologically or regulatory. The problem of having the unbanked as a problem is actually an artificial problem. What happened was some people who were comfortable decided that everyone should be required to have a bank account to live in the world. That wasn't the situation before, but now it is. Suddenly, the unbanked are a problem. Why are they unbanked? We'll, they're obviously dissolute cause. Well, no, it's because someone made up the fact that everyone had to have a bank account and now everyone has to have a bank account.

Now, not having one is a problem. Various countries deal with it in various ways. In the UK and Europe, the law requires banks to offer no frills accounts for free, that sort of thing. In the U.S, you don't have that. I believe it's quite possible that someone can be kicked off their account and they can't get another one. Having been kicked off one account gives you troubles getting another. This is a regulatory problem that should be dealt with by law, not by making up a technological work around that can only be temporary by its nature. The whole pitch is false. A lot of the stuff that people don't understand in Crypto, like how does DeFi work, it's not technology. It's not software technology. It's not software engineering. It's financial engineering. That is, you build boxes of leverage for the leverage, to other boxes of leverage.

Things are derivatives of other derivatives. It can get very complicated and hard to understand what's going on there. You'll have some idea if I tell you that chains of leveraged leverage are what caused the 2008 financial crisis. When a pile of money market funds, there was so much demand for dollars, because there was so much money sloshing around, people needed cash for those assets. They created assets that were worth a dollar, very like stable coins, you may have heard of. Assets that are worth $1. They didn't have enough actual dollars in the system. It was the point where they were running short on treasuries. The U.S. didn't need that much money even. They were trying to come up with other things that could serve that purpose. They do things like created stable dollar that was backed by the most stable asset you could possibly use, houses. Housing prices are stable. They won't go down.

Then, they add ones based on derivatives of house prices and derivatives of derivatives of house prices. The moment the real estate market caught a cold, the whole thing came crashing down. Funds would crash. Everyone depending on those funds would crash. Companies where money in those funds would be in trouble, at risk taking down the whole economy of the UK and of the U.S. I mentioned that in detail because that's precisely what just happened in Crypto a couple of months ago. They definitely needed dollar equivalent because these people are too dodgy to be able to get a bank account or too involved with crooks that they can't actually get dollars. Everything in Crypto is denominated in dollars. They tried using Stablecoins, which are a Crypto that's priced at $1 supposedly backed by dollars, then by other assets, then by squirrels and confetti as far as I can tell. Then, they came up with ones that were backed by nothing at all, Cryptos backed by other Cryptos, both of which were made up one day.

Then, they decided that's worth a dollar. Why do people accept they were worth a dollar? Because they were so desperate to have a dollar, a dollar equivalent. They needed it for the crypto trading economy to work. You ended up with this thing called UST. UST was backed by another token called Luna. Luna was backed by UST. It was just this thing floating in space, backed by nothing. There was supposedly 18 billion pseudo dollars floating in air, floating in space. People had said months before, "This is really unstable. This cannot possibly hold up." Then, one day in May someone realized, "Oh, that's a good exploit. I can make some money here," and crashed it. This turned out to take out all sorts of other markets, which have been dependent on this thing. We have the ongoing Crypto crash going on right now. This ended up taking down Celsius and Voyager, which were very unstable already, but this was the final blow.

Basically, the whole market was a pile of Ponzi boxes where you could not possibly make money except by early investors being paid by later investors. I don't know if there were literally Ponzi schemers who knew what they were doing, but the whole thing worked in that manner. Yeah, it was very much a small contained 2008 went into the depth there. You needed to understand precisely what just happened. The summary is if you have unregulated markets, this is one of the ways they go south. This is why we have regulators who should be able to say, "No, you can't do that." When it's just rich guys or knowledgeable traders who know exactly how risky the business is, that's one thing. When they go to retail investors, moms and dads, and regional investors can easily be defined as people who do not understand that zero is a number.

They will never understand that zero is a number, that their personal bank account can go to zero and they can lose the lot. Celsius and Voyager, they had nice websites. They looked like proper financial institutions. Voyager straight up lied that your deposits were FDIC insured. That was literally just a lie. They should have been busted on the ages ago. They weren't. The FDIC has now issue have noticed telling to stop, so that's nice, after they declared bankruptcy. The SEC should have shut down these schemes a year ago and they did not. They need some serious questions as to why they did not. They were marketing it to ordinary people and screwing them over really badly. People don't understand 5, 10, 20% interest rates don't exist in this economy. They just don't. I'm 55. I remember the 80's when interest rates actually did hit 18%. To me, that still feels like a number that could happen even though in my head I know very well it isn't. It's hard to get people out of that because they remember it, interest rates being that high. Maybe the good times will come again. Well, no they haven't. It's just something that works like a Ponzi even if it isn't technically a Ponzi.

I want to come back to underserved markets. I watched some of the 2022 Bitcoin conference. They had three people, North Korean, a Palestinian, and someone from Togo talking about how Bitcoin had given them and people in their country, economic freedom. Is there validity to that argument?

Some individuals have done quite well. This is the case where the only use case for Crypto is working around regulation. That's literally the only use case, is to evade regulation. Some regulations are dumb and bad. If you have money that you want to move to another country and you can't get it in or out, that's a use case, sure. There are a few people this works for. It's something that won't scale and won't work. Often, if you look at these people, you'll see that they often turn out to have been into Bitcoin since 2014 or something. They happen to have a huge Crypto business. When they say this helps the ordinary people of their country, they mean themselves. Rich people moving their money out of Venezuela is a use case. I guess that's a human rights in a way sure.

Obviously, it's temporary, not scalable, and can't possibly actually work as a solution when the actual problem is regulatory. If people work around the rules enough, they go, "Fine, you know what? Have it your way," eventually. You could argue that's negotiating. That's one of the ways to negotiate regulations, sure. Fundamentally, it's mostly promotional lies. There was a whole thing about Venezuela being a huge Bitcoin hotspot. This literally started from one article in reason where the writer of the article wrote about how some of his mates in Venezuela were busted stealing electricity to mine Bitcoins. That heavily subsidized electricity. They were using it for this business purpose, which they weren't allowed to. This was then amplified to, "Bitcoin activity up hugely in Venezuela, from negligible to negligible." This somehow transmuted in the press into, "Bitcoin's hugely popular in Venezuela." Of course, that was always false.

What has been the outcome of El Salvador's Bitcoin experiment?

Absolute disaster, absolutely terrible disaster. It just didn't work. Nothing about it has worked. Nothing about it has actually helped anyone or done anything. It set about $200 million on fire. I'm actually trying to put together a book proposal on this, on El Salvador's Bitcoin disaster. Basically, the problem that El Salvador has is it's a poor country. It shouldn't be as poor as it is, but it is. It's got resources. It's got people. It's got industries. The currency in El Salvador is the U.S. dollar. They don't have their own local currency. They had one, but it was so untrustworthy that people just went for dollars. Eventually, the government went, "You know what? Fine, we're going to dollar U.S." This means the government has to balance this budget every year. They make up the difference by borrowing on the international financial markets, on the sovereign debt markets.

Bukele, the president, is hugely popular. He is genuinely very popular. That's because he spent a lot of public money. People went, "Well, all our presidents are crazy crooks, but at least this one's doing well by us." El Salvador's history is amazing. Basically, all the presidents have always been crazy crooks. It's quite wild. That's somewhat of an oversimplification, but not much of one. They decided Bukele was good and he was the man. If there was an election tomorrow he'd win. His problem is he spent all his money. He's got to pay those bills. He had to print his own dollars. He couldn't print his own dollars. He thought, "Let's bring in Bitcoins." He'd been sniffing around Bitcoins before for years. Then, around 2019, various of his family members, he trusts his family and takes their advice. They're basically his shadow cabinet.

He's the boss but he listens very closely to them. A couple of his brothers, Yusef and Ibrajim Bukele both got into Bitcoin big time. They were talking to a couple of Crypto companies and they eventually went with just Bitcoin. I think what he wanted to do... I think this and a lot of other people think this, we don't have smoke and gun evidence, but we think he basically wanted to print his own dollars, claiming they were backed by Bitcoins, and thereby create money out of thin air to pay people, make up his debts and so on. This didn't really work out. Bukele is a very smart fellow. He's a very good talker. He's not stupid, but his actual job is he was a marketer before this. He is not technical. He's very well known for making big plans that don't come through.

The Bitcoin thing, he didn't even tell anyone locally. The first that anyone heard about it was when he announced it on stage at Bitcoin, Miami in 2021 in English. Even the Spanish language press locally had to look at the Reuters reports and so on to try to write something. They'd ask local economists, "What do you think of this idea?" All the local economists went, "This is dumb as hell. This can't possibly work." He gave himself three months to do this thing. He had to create a payment system, which became the Chivo wallet, which it is actually impossible to build an entire national payment system from nothing in three months. It is just not possible. I'm an IT guy. I know this. You cannot build a system that size, have it work perfectly in three months. You can build a prototype in three months and run a small pilot program.

But, he wanted to deploy this thing live in three months. It was a disaster. He deployed it in September 2021. It didn't work properly. They were offering $30 free for signing up. That's a lot of money in El Salvador. That's equivalent of $300 in the U.S. in purchasing power. That really attracted attention. People signed up to get their $30 because they didn't understand technology, didn't understand Bitcoin. They just wanted their $30. It turned out that the identity checking system didn't actually work. There's a lot of people in the El Salvador who don't have bank accounts. This is actually a solved problem because El Salvador has a national I.D card system. Every adult has a card, a DUI it's called. You can get a basic bank account just waving your DUI at a bank and you get an account.

Still, most people don't have bank accounts because they have no use for them. They use dollars and they use very few dollars because they're poor. Chivo was there to solve a problem that didn't exist in that sense. People use their DUI, you were supposed to create your account using a photo of your DUI, a photo of yourself, your DUI number, and your date of birth. It turned out the photo checking didn't do anything. You use a blank photo or a photo of someone else or the picture of a DUI that's in Wikipedia or something like that. A lot of people were creating accounts, just using DUI and date of birth. It turns out there's long lists of DUIs and date of birth available publicly, typically create dead people to make sure insurance companies put this out to block fraud.

I have heard rumors. I don't have association that many of the drug gangs operating in the country were creating Chivo accounts on mass to skim the $30. A lot of people got their identity stolen. The government, in a startling display of efficiency, would then arrest the victims for fraud. Bukele is very into doing things that are spectacular, even if they're not sensible. Yeah. Salvadorans hated this whole system. They're actually okay with the idea of Bitcoin. They don't mind the idea of Bitcoin. They think, "Oh, it's a thing. You can trade it. It goes up and down, fine." They get that. What they did not like was it was made mandatory that businesses had to use it. It was forced on people. They all thought, "We don't know what the scam is, but it just sounds like a scam."

They're already poor, but they're not stupid. They're very keenly aware of money and everything that happens with money. They know what a scam looks like. This looked very like one. Chivo rapidly fell out of use in 2022. Almost nobody has signed up for it except for young men who are into Bitcoin. There was a National Bureau of Economic Research survey. They surveyed 2,000 people door to door doing their best to design the survey properly, to get a real feel for what people felt. Yeah, basically Chivo's still there because I doubt Bukele is going to shut it down because he likes the project too much. On the other hand, he has a real problem in that he has to keep borrowing to pay his bills. The IMF said they would not loan him money. He wanted a billion from them and they wouldn't loan him the money because of the Bitcoin thing.

El Salvador's sovereign debt is in the toilets. The market thinks that it's going to just not be paid off, that it's going to default. He has a pile of bonds that are due very soon. It's absolutely disastrous because the default would absolutely screw the whole country because they have to make their national budget on borrowing internationally. The current scheme, it's actually quite a good scheme, is he wants to buy the distressed junk quality debt himself, 30, 40 cents on the dollar and then write it off. That would actually solve the problem. Other countries have done that previously. It's a tricky one, though. That way he doesn't technically leave default because technically defaulting would be a disaster. It's a really bad situation. The guy is good at plans and bad at following through. What he's done now is negotiations with the gangs broke down because he's been caught negotiating with the gangs to reduce the number of murders because it has a stupendously high murder rate.

Basically, El Salvador is on the way for all the drugs to go from south America to the U.S. There's other complicated historical details. When you write about the material forces of history, the main material force on El Salvador has been the U.S. screwing with them for the last century. That's just it. They try to stay on friendly terms with the U.S. The U.S. is their market and it's their money. It can be tricky at times. Basically, negotiations with the gangs broke down, so Bukele has gone full authoritarian. He's suspended certain civil rights, declared a state of emergency which has renewed every month for the last several months. He's arrested something like 2% of the adult male population of the country. He's building a new giant jail to hold them in. He still ranked high own popularity because he makes enough of his base to have better material conditions. Yeah, it's very much not a free country. His scheme didn't work and now he's got even bigger problems.

When you spoke to the UK's House of Common Science and Technology Committee on blockchain uses, what were they trying to understand?

They were trying to understand it as a possible technological thing. I tried to get across that none of this was technology. The tech is really simple. Also, to understand that magic doesn't happen. Fundamentally, magic doesn't happen. If someone says, "I have a magical solution to all your problems," maybe they do. Technology can do some pretty amazing things, but fundamentally magic doesn't happen. It just doesn't. If anyone says, "You can fix your bureaucracy with our blockchain based system. It'll suddenly be much more efficient." That's false because magic doesn't happen. You know better than that. All your problems are people. It doesn't solve that. Blockchains won't magically reconcile your data.

The other thing is that append-only ledgers and sharing them has been around in technology since the 90's. It has a very few use cases and that's fine, but it isn't the magical panacea because there isn't one of those. If they could have done the magical panacea job, they would've been adopted in the early 2000's at latest. They weren't because they don't. Mostly, when you see blockchains promoted to business, they're using literally the same buzz phrases that were used for Bitcoin. Why the hell does a business want a trustless, decentralized, uncensorable system? They don't. That doesn't do anything. How do we run a consortium of businesses? Well, we arrange it legally. We have a considerable legal precedent on how to do this and forms of how to do this without breaching antitrust rules. We have the technology. It's called the law.

Tech is not a magical cure. Maybe there will be a use case. There are existing systems that have blockchains in the back just as a data store. As a technologist, I would say if it works, don't rip out the system, but that's not a reason to build another one. It's always a stalking horse for cryptocurrency to make cryptocurrency sound like there's something to it. You can tell it because it's promoted by the same people in the same venues using the same buzzwords. It's the cryptocurrency guys. They're trying to make crypto's look interesting and cool not like a get rich quick scheme.

How was your skeptical position received by the committee?

Some of them thought I was coming on a bit strong, but I think I had basis for what I said. I chatted to a few afterwards. They were pleased that I'd come along and said this stuff. The key point is you have to regulate Crypto based industries to protect retail investors. That's the big message for the UK. They were concerned about crypto mining, but electricity in the UK costs 19 cents a kilowatt hour. You're not going to get mining in the UK. The actual problem is mom and dad investors getting ripped off. Then, they go on morning television saying, "The nice man stole my money." That is absolutely the nightmare position for a politician because people will say, "Why didn't you protect us?" You had people saying, "All these businesses, they're being driven out of the UK by regulatory rules." The answer is that's because all of these people couldn't pass money laundering regulations. Now, there's a lot to object to in the anti-money laundering structures we have. They don't catch all of the big crooks. They're so inconvenient for ordinary people that people get cut off from their PayPal a lot, that sort of thing.

There's a lot to object to there, but it is the regulation we have. You have to allow for that as part of your business. You'd have, a good example is one, there's no Bitcoin ATMs that are legal in the UK anymore. There might be some, but they are operating illegally. That's because the Financial Conduct Authorities said to them, "You can't do this anymore." Why? Because one of the companies, they rejected them. Then, this company actually appealed. The appeal document is great. It documents the fact that the guy running this company had lied repeatedly to the banks about his business. Where was this revealed? When he was investigated by the police in a money laundering case. Why'd he lied to the banks? He thought that if he told he was in Crypto business, they wouldn't give him an account because they wouldn't have. It turned out that they were correct in this. He actually thought that he would be allowed to pass money laundering checks, having documentedly lied repeatedly to banks already. The appeal was rejected and the original decision to kick him out was upheld. I think that actually the UK could do without this businesses, really.

Here's a question I've been most looking forward to asking you since you're an award-winning music journalist. Will NFTs allow artists and musicians to keep and reap more from their work?

No. This is a pitch that was literally one of the blockchain pitches in 2016 and 2017 to the extent that I wrote a whole chapter in Attack of the 50 Foot Blockchain about why blockchain would not solve the problems of the music industry. There's a lot of problems in music, basically that artists get ripped off left right and center. It was solved to artists as the way that big companies could not rip you off anymore. That's never going to work. They kept selling these systems that would not actually do the job, tried to work around legal issues with the technology, and which basically would never scale as well. The new version with AFTs is basically digital rights management with a different crypto token. No DRM has ever worked. You can always get through it. There is no DRM that's ever stood up to interested parties and consumers hate it. They loathe it.

The music industry, people have said, "If there's a DRM, you must realize there's a DRM we've already lost." Yeah, it turns out the thing that actually worked to stop people using, say, BitTorrent or whatever to get music and movies was convenience. Spotify, Netflix, you subscribe, you stream. It's super convenient and the torrent sites still exists. It used to be a third of all internet traffic was BitTorrent. Now, a third of all internet traffic is Netflix. It turns out if you make something convenient and readily available, people buy it and give you money.

What do you think about the argument that we're still early and that all these criticisms are maybe going to go away over time?

I would need anything to have changed since 2011. All the problems and all the pictures are literally old pictures. This is an argument that's aggressively a historical. Crypto people don't have a memory. I think they cycle through on roughly a 6 to 18 month cycle. They give in. They tell the critics that, "You out of touch boomer. You don't understand that two and two makes 10 or 20 or a million if you have enough imagination." Then, they lose all their money and the new bunch come in. Crypto's great, because it really appeals to the scammer, to the sucker who thinks he's the scammer. NFT scams particularly appeal to these people. They can see it's scammy, but they think they'll be the winner, not the loser. It turns out they were always the meat.

This creates a world where the winners never shut up and the losers never speak up cause they lost and they're embarrassed. They just quietly go away. One thing that has been notable about the Voyager and Celsius bankruptcies is that the ripped off investors are all speaking up. It makes it clear that what was going on here, but that's the same all through Crypto. They always say it's early days, but all the problems have been here for years unsolved because they're insoluble. The answer is no, actually it's late.

What is the closest you've gotten to thinking you've found an actually good use case for Crypto or blockchain?

None, really. The only use case for blockchain is cryptocurrencies. They're only useful if you want to get around regulations. Occasionally, there might be a payment use case that's good. In all cases, because someone has trouble getting money moved, a bank account, or whatever, you might say that they can't get one. There's bad reasons for that and you need to work around it. Sure, there are tiny use cases for it, but there's nothing really substantial. There's a weasel phrase, Blockchain Technology, which is when you have something you want to sell it using blockchain marketing, but it isn't even a blockchain. You just have the append-only ledger or something.

The word blockchain in enterprise marketing is literally meaningless. It literally doesn't have a defined technical meaning. I was disconcerted to find when I went looking for. The word blockchain is literally a bundle of marketing promises, trustless, decentralized, resolve your data for free, that thing. I've seen everything down to SQL databases marketed as blockchain. Any of these things that are marketed as blockchain will be used as excuses for all the other things marketed as blockchain. My favorite one is a lot of people talk about Estonia's Blockchain Revolution. We have this software KSI Guide Time, which was done by an Estonia company and widely used in industry in Estonia and by the government, too.

They used that as a fabulous blockchain success. This proves that crypto's are good, actually. It doesn't because it's literally just a time stamp ledger. There's even a CoinDesk article where the guy from Guard Time admits, "Yeah, we heard the hype and we went, oh it's got a ledger in it. We should call ourselves blockchain for marketing. Yeah. When blockchain goes out of fashion, we'll change the name again." As far as I know, the software does what it says. Fine, but yeah, it's literally just a marketing term. There are some cases of blockchain like technologies like append-only ledgers, shared ones that are useful and do things, but none of them are called blockchain. The term itself is not a technology. The term itself is a marketing term for a bundle of marketing claims that are then applied to technologies by people trying to sell you on cryptocurrency. Or, if your IBM on people trying to sell you on consulting services. Even IBM ended up shutting down its blockchain division in 2020.

Oh, they did? I didn't realize they shut it down.

Yep. They absorbed into the Watson unit, which sold vaporware AI instead of vaporware blockchains. It's the perfect place for it. If you look at some of the marketing for IBM Watson, you'll see it's very blockchain like in its promises and in its results. Everyone in health goes on about what a scam Watson turned out to be and how it was selling absolute nonsense. STAT News, which is a news site for nurses and medical people, had a whole series on this, which was amazing.

Interesting. All right. Last question we have for you, David. What would, if anything, what would have to happen for you to change your skeptic position on Crypto?

Show me a solid use case that actually works. I won't say philosophically it can't possibly work, but I've been looking closely at this stuff for years and I've yet to see something that doesn't fit a very small number of templates, which don't work because really the whole purpose is number go up. You can absolutely get rich in Crypto. Let's be clear. You can absolutely make a bundle in Crypto, but basically it's a zero sum trading environment where winners make their money from losers. No dollar comes out that wasn't put in by someone else. Even by the brochure version of how economies work, it doesn't manufacture wealth. It's literally just the zero sum trading environment.

They do much more complicated versions of this zero sum trading environment that ultimately every dollar out has to be someone else's dollar in. Basically, you can make money in Crypto if you are a better shark than all the sharks who built the shark pool. Trade carefully. You can make money from it, but you probably won't. You'll probably be the sucker. Mostly, it's a way for the big guys in Crypto to make their money from the small suckers who come in hoping that this will be the thing that will get them out of economic desperation. A lot of the marketing is to desperate people. That is reprehensible and has to be spoken out against. It's interesting to talk about this stuff and chat to Crypto guys and talk about the details. It's fun and interesting in its way. But also, there's that reprehensible element, which has to be called out as reprehensible. This is something to get angry about. A lot of people have been skinned for ages and now we've got really prominent cases of people getting skinned by a bunch of scammers. It's the scams we were warning about for years. It happened and it has to be dealt with.

It makes me think of what you said earlier about the history being the evidence that totally free markets don't work very well, which I think is largely true. It's like the real use case is that you can get around regulation. There's some regulatory arbitrage, whatever want to call it in there, built into the technology. When that exists, you end up with what we currently have. Therefore, to fix it, you have to regulate it, which eliminates the actual use case.

Pretty much. I've been saying for years, this is a future of Cry... Bitcoin will be around for decades. Obviously it will. All you need is a copy of the software, a copy of the blockchain data, and two or more enthusiasts. There will be nerds in decades to come trading Bitcoins between themselves happily. How much it interacts with the actual world of real money is a completely different question. Is this the end for Bitcoin? Not unless regulators actually stamp on it. If they don't, this will bubble up again in a few years, I'm sure. Suckers never change. There are some people who just go out looking for scams. They look out for things to be ripped off by. They go looking for get rich quick schemes. We all know someone like this. Maybe if they win one day, they will have money for a few months and then they'll blow it all on another scheme.

These people are eternal. It's hard to protect people from themselves. I don't know if you could completely block ordinary people from buying into Crypto. Maybe you shouldn't be able to block people entirely. If they really want to spend their money on magic beans, that's their God given right. Anyone, most people would agree with that. What you don't have to do, you don't have to make it easy. You don't have to make it easy for the people selling this stuff who are the ones who tell... People have a right to blow their money on my thing. It's always the sellers saying this because there's actual predators out there. They are predatory upon ordinary people. Celsius was absolutely predatory, for example. They were just utterly incompetent as traders. They were basically insolvent last year. Alex Mashinsky of Celsius is a great salesman. He's very good salesman. He's really bad at detail. That turns out to be a problem when you're talking about hundreds of millions of supposed dollars and a lot of real dollars. It's like he just doesn't get the details side. This turned out to be bad.

Unreal. All right, David. Well, this has been a great conversation. Your book, I read 50 Foot Blockchain. I haven't actually read Libra Shrugged. 50 Foot Blockchain is great, definitely a good way for anybody to get their foot in the door on this topic.

Yeah. I'm disconcerted about how current its. You could add more stuff to it, but basically it's about the psychology of this stuff. It's not a text story, it's a psychology story. I often say my favorite, the best book about Bitcoin is Memoirs of Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay, which was published in 1841. If you read that book, you'll understand why Bitcoin has this attraction. It's a great book. Everyone should read it. It's hilarious, covers tulip bubbles. He's the one who popularized tulip mania, the South Sea Bubble, which is still taught its schools in the UK, that sort of thing. It's amazing. John Law, Mississippi Land scheme. Yeah.

Interesting. Great to meet you. David, thanks so much for joining us.

Thank you.