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Diego Zuluaga discusses potential applications of blockchain tech even in what is still the early stages of cryptocurrency adoption.

Paul Matzko
Tech & Innovation Editor

Matthew Feeney is the director of Cato’s Project on Emerging Technologies, where he works on issues concerning the intersection of new technologies and civil liberties. . Before coming to Cato, Matthew worked at Reason magazine as assistant editor of Rea​son​.com. He has also worked at The American Conservative, the Liberal Democrats, and the Institute of Economic Affairs. Matthew is a dual British/​American citizen and received both his B.A and M.A in philosophy from the University of Reading in England.

Diego Zuluaga is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, where he covers financial technology and consumer credit. Before joining Cato, Zuluaga was Head of Financial Services and Tech Policy at the Institute of Economic Affairs in London. Originally from Bilbao in northern Spain, Zuluaga holds a BA in economics and history from McGill University, and an MSc in financial economics from the University of Oxford.

Cryptocurrency advocates often praise its decentralized nature, which promises to strip out intermediaries that both slow and function as a tax on private exchanges of goods and services. But even the most decentralized cryptocurrency still needs go‐​betweens in order to function for a mass consumer audience. Simply put, most consumers are willing to give a little on transparency and privacy in order to get more convenience and ease of access.

Even so, cryptocurrency should provide significant improvements in multiple venues, including international payments. Also, as Matthew Feeney notes, crypto‐​fueled alternatives to popular payment processing platforms could be a needed response to the rise of de‐​platforming and corporate censorship by tech giants like Apple and Google. However, to succeed, cryptocurrencies need to effectively respond to a wave of “double spend” attacks that exploit the dive in crypto prices over the past year for fraudulent ends.

What is a decentralized currency? How do consensus and virtuous behavior relate to cryptocurrency? What is the problem with intermediaries? Does crypto‐​technology have potential applications for anti‐​corruption schemes and programs? What is a double‐​spend attack? Does Alex Tabbarok possess mystical, prophetic gifts?

Further Reading:

The Future of Money, Free Thoughts Podcast

What’s in Your (Crypto) Wallet?, Building Tomorrow Podcast

Is Bitcoin the Future of Money?, Free Thoughts Podcast



00:05 Paul Matzko: Welcome to Building Tomorrow, a podcast about how tech and innovation are making the world freer, healthier, and more prosperous. Today we’re talking about cryptocurrency and the dream of decentralized currency. I’m your host, Paul Matzko, and with me is Cato’s Director of Emerging Tech, Matthew Feeney. He’s also the one among us who actually owns most crypto, I think.

00:26 Matthew Feeney: Shh. Don’t say it. [chuckle]

00:26 Paul Matzko: Let’s give out your cold wall address here and…

00:30 Matthew Feeney: Yeah, no further comment.

00:30 Paul Matzko: Yeah. For a comment, he’s a HODLer through and through though so… And joining us in the studio is special co‐​host, Diego Zuluaga, a policy expert at the Cato Institute’s Center for Monetary and Financial Alternatives. He’s also the snazziest dresser, I should say, on our floor of the office. So that’s obviously the real reason we’re having you on. But welcome to the show, Diego.

00:53 Diego Zuluaga: You know why I am, it’s because I didn’t lose any money on the crypto that I don’t own over the last few months.


01:00 Paul Matzko: You can actually afford clothes, unlike Feeney.

01:01 Matthew Feeney: Also didn’t think on the Cato’s sixth floor there’s a particularly high bar about dress… No offense to Diego, but we’re not the most…

01:06 Paul Matzko: Yeah, it’s true, it’s true. You came in…

01:09 Diego Zuluaga: You’re very kind, though.


01:11 Paul Matzko: Let’s start with a basic concept. So cryptocurrency advocates love to talk about how Bitcoin, either other currencies are decentralized, as opposed to traditional currency. What does that mean in theory when we talk about decentralized currency?

01:30 Diego Zuluaga: So usually what we mean when we say that these networks are decentralized is that a change that these networks facilitate is not made possible by someone standing in the middle and talking to the person sending, let’s call them A, the person A sending something to B, and then interacting with B and making sure that whatever A sent was, in fact, actually sent and that the payment that B promised in exchange also happened.

01:55 Paul Matzko: So I send you a check for $10. You wanna make sure that that $10 is real, that… ‘Cause that’s just a piece of paper.

02:02 Diego Zuluaga: Exactly. So whether it’s on eBay or on Uber or, say, a payments network, Visa or Mastercard, there’s traditionally always been an institution in the middle that, first of all, designed the conditions under which exchange should take place, the sort of information you needed to provide, what sort of characteristics you had to have, what sort of licenses, and so on, and then verify that, in fact, the exchange had taken place as it should have. And the idea was that that way you increase trust, you minimize fraud, and you enable more economic activity that’s productive for everyone to take place. Now, the innovation of networks like Bitcoin or Ethereum is that they don’t rely on a centralized counterparty, and instead, the conditions are created in the software protocol that gives birth to these such that individual users can help other individual users verify the information. And the reason they do so is because they have some sort of monetary reward that comes as a product of that.

02:53 Diego Zuluaga: So let me give you an example with Bitcoin, which is the first decentralized network. It was proposed as a system in late October 2008 by someone writing under the pseudonym of Satoshi Nakamoto, and he called it a “peer‐​to‐​peer electronic cash system.” And in that particular case, you would own tokens, you would own Bitcoins, that you could send electronically to anybody else with a Bitcoin address, which is basically your identifier on the network. And the way in which that transaction would be fulfilled is not by someone in the middle saying, “Actually, the funds have been sent, and you have the means to deliver,” but rather other people will work very hard at resolving a mathematical problem. Whoever resolves it, gets the reward and gets to write the transaction into what’s called the Bitcoin Blockchain, which is the ledger that’s visible to everybody in which all transactions are recorded.

03:54 Diego Zuluaga: Now, in order to win this contest, if you disagree with everybody else, say, because you want to defraud the system, you want to push through a transaction that isn’t true, you have to expend an enormous amount energy, because otherwise you have a very little probability of being assigned the transaction. So it’s not very rewarding to go against the consensus of the system. And in that way you encourage virtuous behavior. You’re leading other users to do the things that serve other users best without having to have someone in the middle. So that’s the contribution.

04:25 Paul Matzko: It’s a way of having trust without an intermediary…

04:28 Diego Zuluaga: Exactly.

04:29 Paul Matzko: Is the kind of the idea.

04:30 Diego Zuluaga: That’s right. So the role of the intermediary is instead performed by a combination of good mechanism design at the outset, and then virtuous behavior encouraged by economic incentives as the network evolves.

04:41 Paul Matzko: Now, you wrote a chapter for an upcoming volume, Voices of Liberty, that we’re actually putting out as part of the Building Tomorrow project.

04:49 Matthew Feeney: Visions. Visions of Liberty.

04:50 Paul Matzko: Visions of Liberty, yeah, sorry. Visions of Liberty. I’m the editor and I don’t even know the name. [chuckle]

04:54 Diego Zuluaga: There you go. Publishing two books now.

04:56 Paul Matzko: [chuckle] That’s right. And you have a nice turn of phrase. You have a nice way, I think, of putting this problem of intermediaries, making it accessible, I think, to a broader audience, which is imagine if we inserted a new intermediary into every one of your transactions. And the example you give is that of a translator. And this actually isn’t all that out there, there are people who need translators to perform basic functions. And it’s a major drag, both on their ability to be a productive part of the economy and just, it’s a pain. So imagine if every time you had to go buy groceries you had to hire a translator to come along and negotiate or be the go‐​between between you and the cash register person. And this introduces lots of problems like, do you really trust your translator? Are they saying that those groceries cost $100 but in reality, they only cost $80 and the translator’s pocketing the difference? You will never know because you have to rely on this intermediary.

05:55 Paul Matzko: I think that’s a really great way of conceptualizing the problem of intermediaries and thus why we have this kind of energy behind early cryptocurrency advocacy to… Well, let’s get rid of these intermediaries, if we can. This introduces friction in the process and that friction is bad, we want a frictionless transaction. At the same time though, you do seem a bit skeptical of the idea of complete decentralization and maybe you can explain for the audience some of why. So we have this vision of, “Hey, Bitcoin, Ether, these other cryptocurrencies we can remove all intermediaries, it’s always gonna be just point‐​to‐​point exchanges,” why might that not be an achievable vision?

06:41 Diego Zuluaga: Sure. Can I first perhaps give three examples just to make a more graphic illustration of what I mean when I talk about intermediaries?

06:47 Paul Matzko: Yeah.

06:47 Diego Zuluaga: So imagine yourself as a European or an American tourist in a Moroccan souq, in one of those street markets where you’re buying things and you have someone accompanying you, telling you what the merchant is saying. You can’t understand what they say, but they can make you understand what the merchant says, hopefully and also they talk to the merchant on your behalf. Now it’s obvious that he might be put in a position where the merchant gives him a share of whatever gains he makes and he doesn’t necessarily have an incentive to tell you the entire truth. He might say that a bargain you want to make is not actually… You cannot strike it, that he might lead you to someone that is not providing you with the best goods and services or whatever it is, and on that basis, take advantage of you and try to vitiate the transaction.

07:31 Diego Zuluaga: That’s a way in which sometimes the market power, we would say in economics of translators, can cause bad outcomes. Another case is North Korea. We’ve all watched probably documentaries about life in North Korea and when people visit North Korea, they’re assigned a government chaperone that leads them everywhere. And that person is overseeing their activity while these people are in North Korea, but also are reporting to the government on what these people are doing, what these people think, they read their emails and so on. So another way in which this role of intermediary can be violated is through government surveillance and we have plenty of examples of this, even in freer societies, with the NSA eavesdropping scandal and so on.

08:10 Diego Zuluaga: Now, the third case is when you’re trying to navigate the legal system and you hire a lawyer for that, the lawyer effectively is your translator for those activities. Now, in that case, of course, the lawyer is also vulnerable both to government abuse and perhaps to his or her own abuse of your ignorance of certain things, for his or her own advantage. However, it will probably be too costly for us to navigate the legal system on our own. So it’s probably efficient to have something like a lawyer. And the question is, to what extent, on what scale does it make sense to have an intermediary or not? And this is when I come back to cryptocurrencies because even though I think it is technically feasible to have a completely disintermediated system where everybody interacts and appear to be a basis, I don’t think very many people beyond crypto enthusiasts who are expert in the technology and then libertarians who value particularly autonomy and privacy very highly would necessarily want to do everything on their own.

09:07 Diego Zuluaga: They’d be quite happy for somebody else to take custody of their crypto, for somebody else to provide some oversight, for somebody else to make sure… Provide certain information to government authorities for tax purposes and other things, and that might be efficient because it’s much less costly than doing everything on one zone. And my own expectation is that if this technology is to become something mainstream and major in competing with the traditional intermediaries like Visa, MasterCard, Amazon, Uber, you name it, there’s going to have to be some sort of intermediary function performed there. And indeed, we’re already seeing it.

09:44 Matthew Feeney: What I was gonna ask if exchanges like Coinbase might be an example of something like that. In part, perhaps, because they do a lot of the heavy lifting, new entrance find difficult, which is handling your keys and actually buying crypto. Do you think that’s right? Are those kind of institutions you’re talking about when discussing crypto intermediaries?

10:08 Diego Zuluaga: Absolutely. I think Coinbase is a good example because it serves several functions. First of all, if you’re new to this world, you go to Coinbase and you find one of the biggest exchanges and whatever they list, you know will, to some extent, be compliant with existing regulation. There’s of course a lot of uncertainty, but you can be pretty sure that if a large company like Coinbase lists them and you buy them, you’re not gonna be immediately in trouble, or at least you’ll have some recourse, someone to talk to if you have any issues or problems. The second thing they do is they collect your information, and so, for in the world that we live in, where government does control a lot of our activity, and you have to comply with a lot of those regulations in order to operate, it’s good to have somebody do this on your behalf, to ask you for the information that you actually need to report and to do it in a way that minimizes the hassle for you.

10:56 Diego Zuluaga: And then the third thing they do is, they facilitate interaction in faraway places because Coinbase happens to be licensed all over America, and it happens that if you’re a cryptocurrency exchange, you need a license in every state that you operate in. So being part of Coinbase means that you can trade with a lot more people than you otherwise could. So those are three key functions of an intermediary that Coinbase is serving, not to cite just Coinbase, there are plenty of other exchanges there, but it’s just one of the bigger examples. And it’s one way in which the mainstream adoption of this stuff is facilitated.

11:28 Paul Matzko: It seems like it’s partly a question of not allowing the ideal to be… The best to be an enemy of the possible. So we can acknowledge that in an ideal world, everyone would have equal levels of knowledge, would be equal entrance into an idealized market. There would not be barriers of language, of power structure, of surveillance, etcetera. But at the same time, we don’t live in that kind of world. While it might be great if we all went to our Moroccan souq and we said, “You know what, I don’t like the fact I have an intermediator, this translator, who I can’t fully trust, so I’m going to learn a little bit of Moroccan, enough to get rid of… ” Well, that might help. Some people might have the time and luxury of learning a little Moroccan, but have you learned enough Moroccan that truly have a superior advantage over… Are the risks of misunderstanding with a little bit of limited Moroccan, are those risks greater than the risks of having an interpreter you can’t fully trust? But most people don’t have that luxury. We can’t go learn a new language, we can’t go and study law by ourselves, most of us. So sometimes if the goal is the minimum amount of friction in transactions between individuals and institutions, sometimes an intermediary is the way of having the least amount of friction for the maximum number of people.

13:00 Paul Matzko: And I think the same thing applies to cryptocurrency where just as not everyone can learn Moroccan, not everyone can study the law, not everyone is capable, or at least at this point in time, of figuring out the in’s and out’s of buying their own cryptocurrency, of maintaining a cold wallet, and the security, not losing their code and etcetera. In fact, there’s probably some experts who aren’t capable of that, given all the stories of people losing their Bitcoin passwords to their chagrin. It makes for a great article but when you lose $100,000 in cryptocurrency, I’m not sure that’s worth it. So it seems like that that’s one of those things is that there is an early energy that says, “Here’s an ideal, a completely decentralized intermediary, free way of exchanging goods and services,” with the original vision of Bitcoin. But it’s possible to allow that vision, the kind of purist vision, to obscure the ways in which, “Well, actually sometimes intermediaries are good and helpful,” if you want this to be a going mass market proposition, we need to come around to understanding that.

14:03 Matthew Feeney: Well, yeah, I thought along those lines about the wake of the most recent crash and then the publication of the Bitcoin white paper. Because if the last 10 years, I think, have taught us anything, is that actually… While a lot of people were upset about the crash, they weren’t upset at the concept of intermediaries per se, they were upset at a lack of regulation or oversight. They actually liked the fact that, “Well, I have a bank account, so I don’t have to carry money around everywhere and I have deposit insurance, and if there’s ever a transaction dispute, I have a party to go to,” and people like that. And I think Diego’s really onto something pointing out the actual narrow or small population of people that are really enthused by this. Not least of course is the issue we haven’t talked about, which is the price fluctuation which, if the original point of the thing was to be an actual competitor to the dollar or the Euro, or the pound, it’s been a bit of a failure at that. But there are potentially other applications. Decentralization isn’t just something applicable to currency.

15:11 Matthew Feeney: So Diego, do you think that currency is still the field in which crypto has the most potential? Or do you think in 50 years we’ll look back and we’ll actually see it as a technology that started that way but became applicable to many other things?

15:25 Diego Zuluaga: I think it’s going to be difficult for any cryptocurrency to become money, because it’s not a sovereign money in the first place, so you cannot pay your taxes with it. And again, the world that we live in, a lot of our liabilities on a year‐​by‐​year basis, and one of the most certain of our liabilities are taxes, nothing more certain than death and taxes. There’s some truth in that. And then the second item is that sovereign currencies have been in circulation for a long time, and so a bit like the first mover advantage with any social network, launching a new money means that you have to persuade enough people to adopt it, that other people will have a strong incentive to adopt it. And that makes it, unless you have a huge technological advantage or the incumbent, that’s a terrible job.

16:08 Diego Zuluaga: Like in Venezuela, where people are actually taking up Bitcoin because it’s more stable than the Venezuelan bolivar… It makes it very difficult for a challenger to succeed. I think the payments function is probably still the best or the most… The closest use case that will be viable in the future. I see a lot of… First of all, because payments are in many ways quite inefficient at the moment, particularly in America. And then secondly, because the technology is very well‐​suited to the transfer of value in that sort of way, and I think their disintermediation actually stands a chance of, in the short term, overcoming some of the costs that have traditionally affected the payment system.

16:53 Matthew Feeney: Do you think that crypto‐​technology has applications for anti‐​corruption schemes or programs? Your mention of Venezuela prompted me to think of this. One of the applications people talk about are smart contracts, that if you can show that actually, no, this is my title deed, I do own this property, this is how… If that became more widespread, and I’m just thinking off the top of my head here, it might be harder for governments to engage in bullying of citizens or bribery, corruption, if it’s easier to prove who owns what, it seems to reduce incentives or that kind of behavior.

17:34 Diego Zuluaga: I think that’s right. I think in a lot of low trust societies, removing the role of the government in assuring a lot of these very basic identity issues: Who you are, what you own, who your family member is, what belongs to you; can be very advantageous. Of course, government still have a monopoly on force, which means that if they’re very stubborn about it, they could very well still impinge upon you and abuse you, and so on, but they’re gonna have a hard time justifying to the outside world that what they’re doing is actually legitimate, because you will always have something to point to that is outside of the control of the government that shows that in fact the government is lying about the state of affairs.

18:14 Matthew Feeney: Yeah.

18:14 Paul Matzko: It’s kind of an additional hurdle or a barrier. At the end of the day, if you’re in a country with a unreliable governance structure and the wealthy landowner in the next village wants your plot of, little plot of farm land, they go bribe an official in the capital, you can’t even make it to the capital and leave work that long and they go drop a bribe and, “Hey, guess what? The central record repository says this land actually belongs to the wealthy landowner.” Well, you can say, “Well, no, here’s my smart contract showing that this land actually belongs to me.” And yeah, at the end of the day, if the police force comes and kicks you off the land at the behest of the major landowner, that only helps you so much, but it’s an additional hurdle for them to overcome, and that’s a marginal improvement and a significant improvement, either in some people’s lives, that hurdle is enough to prevent them from losing their property rights or to allow them to turn that into a security, a way of leveraging for a loan or improving their life other ways. “I can show I have property, so I can get a loan on the basis of this,” right?

19:26 Matthew Feeney: Mm‐​hmm.

19:26 Paul Matzko: That’s a big deal even if it’s only a marginal improvement. I like something else you said Diego, which was from the Venezuela example. So you have a place where a dysfunctional central government with runaway inflation, so their Central Bank has been, I guess, printing money to try to keep up with inflation, destroyed their currency. And you also have subsidized electricity, so the costs of mining Bitcoin are lower, are artificially low. So you get a lot of crypto‐​mining there and so what’s interesting is that Bitcoin, based off its original premise by Satoshi, is a failure arguably in the US, at least, with its original intent, but that is kind of his intent in Venezuela as an alternative currency, a way of hedging against government incompetence. That’s actually really interesting to me. So, even if Bitcoin doesn’t become a transactional currency in the US or other more stable developed nations, you can argue it’s a good thing for the global community to have it there as kind of a backstop when countries go to hell, kinda like they have in Venezuela. And I think that’s interesting.

20:38 Diego Zuluaga: Yeah, absolutely, and perhaps the way to describe it, this is a deterrent to the worst forms of tyranny the moment you know. Some people believe that nuclear arms, that their one saving grace was the fact that they act as a deterrent to people behaving in very bad ways, particularly great powers. And I think there’s something to that. And in this case, you are lowering the cost of opting out of the state for a lot of people who are oppressed, and I think that’s a very beneficial effect. And indeed, what you see is that, precisely the jurisdictions which are most subject to tyranny, or most vulnerable to tyranny are the ones that have most enthusiastically adopted this technology. In some places like Russia, the government is actively trying to co‐​opt a lot of the programmers because they have some experience in co‐​opting a lot of the smart people who otherwise would deploy their talents to undermining the system.

21:26 Diego Zuluaga: But in Venezuela, it seems like a good escape for some people who are suffering a lot. So, to the extent that cryptocurrency always will exist as an alternative, that, I think, changes the game a little bit for would‐​be tyrants. And the other item of course is that, it’s just been 10 years, electricity took about 40 years to deploy all over the US. If you look at the statistics around the impact of electricity on US GDP, they only really become visible in the 1920s, late 1910s, 1920s. The network effects take a while to take hold. So I wouldn’t give up on the technology just yet because it hasn’t been absorbed by a large enough number of individuals. I think that can eventually happen and of course, the technology will keep improving. There’s a tremendous amount of work going on, it’s not something static that Nakamoto invented and then he went off and disappeared, and that’s going to be it. That’s the revealed word. No, these things will be living and improved.

22:26 Paul Matzko: And arguably, I think the real test, at least in the US, will be, this is Bitcoin’s kind of live by 2009, he writes in 2008, [22:36] ____ into the economic recovery then, and we’ve been in a fairly steady pattern of recovery in the 10 years since, who knows if that’ll continue? But for now, we have, we’ve had this. So Bitcoin has only existed in the period of economic prosperity in the United States. It’ll be interesting to see what happens next time we have a major financial or economic crisis. Will that provide room? In a sense, will act even as a backstop for a developed country like the US.

23:05 Matthew Feeney: I’m in the middle of getting ready for a, one of the semi‐​regular lunches we do here at Cato where a bunch of colleagues bring lunch and we have chats. And for an upcoming one, I was looking over one of the Mueller investigations indictments of a bunch of Russians for their behavior during the 2016 election. And through reading the indictment, it’s fascinating actually, the amount of state use of crypto that’s gone on, so that these Russian intelligence officers allegedly, they had Bitcoin so that they could purchase VPNs and new servers in Malaysia. It’s a technology like any else. It can be used for pretty nefarious reasons as well as laudable ones, but that’s an unavoidable feature of any technology, I suppose.

23:51 Diego Zuluaga: Absolutely. And if you watch spy movies from the ‘60s, you will see that a lot of the deals that happen are in Swiss francs and done in Geneva under some Swiss bank account. It doesn’t mean that Swiss bank accounts are a bad development. In fact, they were a very good innovation and they saved a lot of German Jews from being completely expropriated by the Nazis in the 1940s. So, as Matthew says, it can be used for good or ill, but technology is neutral.

24:11 Paul Matzko: We actually have a writer writing a column for Building Tomorrow right now. I asked him, he’s Swiss and has some knowledge of Swiss financial history, why the Zug Valley in Switzerland is such a hotbed of cryptocurrency innovation and speculation. We’ll see what he says, but I’m interested in if there are ties to that tradition of Switzerland as a haven from phantom regulation if it’s just kind of a continuation of that legacy for the digital age. So we’ll see. Keep an eye out for that article. A few other points you made, Diego, in your essay, and you mentioned it here, which was the idea that there is a legitimate use of decentralized cryptocurrency to smooth the process of payments. You mentioned specifically international payments in your essay. Why international as opposed to domestic? Why is that one of the most promising avenues for crypto being relevant?

25:12 Diego Zuluaga: I think the main reason is that you have so many hurdles to exchanging funds across borders. First of all, because you’re dealing in separate sovereign currencies, then second of all, because those sovereign currencies are managed by central banks, and then thirdly, because a lot of banks in countries like the United States, particularly, with a fragmented financial system, simply don’t have international ties, which means that if you’re trying to send money from, say, the US to France, you have to probably send… First of all, you have to have funds in your bank account. That bank will have a relationship with the bank in New York to which it sends the funds you wish to send to France in the first place. From your New York correspondent bank, as it’s called, that will go to the Federal Reserve. The Federal Reserve will transfer the funds. This is all simplified, but will transfer the funds to the either European Central Bank and then to the Bank of France, which is the Central Bank of France, or directly to some French correspondent bank. And then finally, it goes to the recipient. So we’re talking about five or six steps there.


26:11 Diego Zuluaga: Now, because of the various regulatory regimes and the banking structure that we’ve got, it’s simply very costly to transfer funds across borders, and you’re always exposed to exchange rate volatility. Now, for a limited period of time, the risk will be borne by your bank, but they’re not gonna do it for free, they charge you for it. And the end result is that for a lot of retail transactions, say, $2000 or $3000, which is what most people send at any given time, that kind of number or even lower, that kind of figure. You will have 5%-7% of it being lost in fees, so it’s very easy for even a relatively costly new technology, which is what cryptocurrency currently is, to overcome that, if they reduce the number of steps that you have to go through. A prominent example is Ripple, which I think at this particular moment is the third biggest cryptocurrency by market cap, but it’s been fluctuating with Ether for the second spot for sometime now, and they are a bit different from most cryptos, in that they were originally designed by a group of programmers as an international payments crypto.

27:16 Diego Zuluaga: And then those people said, “We’re gonna set up a separate company to use this cryptocurrency to transfer funds across borders.” And so, it doesn’t operate on the same kind of process electricity‐​heavy process that I described for Bitcoin earlier, but the point is that what they do is they will take your dollars, they will transfer them into XRP, which is the native currency of Ripple, and then they will convert those into Euros, and all of the transfer of value happens within the XRP network, which means that you don’t have any of the hurdles that I described previously and all you’re left with is the exposure to XRP and the exchange rate value with whatever currency you’re transferring from and into. And so, as a result of that, they claim to be able to lower fees by about 60%. So that’s a major improvement over what’s given, they’re still small, they are still relatively experimental, but from what I’ve seen, they seem to have a compelling proposition and it’s one of the applications that as I say, looks like it will be at least competitive with existing technology in the near future.

28:20 Paul Matzko: Yeah, and if you can make that transaction cost 60% cheaper, well, that’s… You’re avoiding a deadly loss in a sense that this is activity that doesn’t have to happen now, this is money that can be spent on other economically productive things. And I think it’s, you know in there that a disproportionate amount of international money transfers are by the most impoverished, so it’s workers in one country transferring relatively small amounts of cash to families in the home country. These are people who… That bump, a few percentage points extra income can make a really big difference in their ability to sustain the family back home and the like. So it has a very progressive social impact as well on these folks. There was something else, we’ve talked about smart contracts, international payments, this might not be as quite as sexy as some of these other implications, but you also mentioned internal corporate supply chains, this wouldn’t be cryptocurrency as much as the Blockchain itself, so it doesn’t actually have to be currency, and maybe explain that for our audience a little bit.

29:35 Diego Zuluaga: Sure. Well, anyone who works in a relatively large organization knows that database management is a nightmare, and one of the problems with database management is that right now most of us have them as files on our computers, on our desktops, and oftentimes they won’t even be updated with new information unless we actively do so, even after other people have input new information. And if you’re trying to coordinate with other people, it becomes a nightmare because somebody’s name is wrong or you didn’t realize that they were married or they lost their job and it’s not incorporated, and things like that. And so it can reduce or it can lead to a lot of waste of effort and time within an organization. Obviously, the advantage of decentralized ledgers is that they’re automatically updated, and the advantage of using it within an organization is that you don’t have to rely on electricity‐​heavy processes to make sure the transactions remain true, because after all, it’s still within an organization, the organization controls the ledger, and it can define who has access to it and who doesn’t.

30:31 Diego Zuluaga: So it removes some of the issues that we’ve described with what I called open blockchains, these are called permission blockchains or private ones. And from a transformative perspective, it’s probably less impactful simply because you’re dealing still within an organization, but it probably has quite widespread applications. It’s a bit like a more heavy duty use of Google Sheets or Google Docs, sort of things that we sometimes use when we’re sharing documents across people. We use Notion to put together a list of topics that we would discuss on this podcast, things like that. So I think that’s what I would compare it to.

31:09 Paul Matzko: Now, I think we’re ready to move topics to something that you brought to the table, Matthew, which is, it fits with that decentralized vision. There’s a group of cultural, social, political commentators in the US, Dave Rubin who’s a podcaster, Jordan Peterson who’s kind of a public intellectual, and there’s been a growing concern among certain corners of, we call them the… The New York Times called them the Intellectual Dark Web, a dramatic term, but among folks who don’t feel like their views belong in the mainstream rhetoric, that they’re being squeezed out by payment processors like PayPal and by platforms like Patreon, and they’re looking to crypto as kind of a decentralized answer to their problem. Can you explain some of that more for our audience and what the significance of that is?

32:05 Matthew Feeney: Sure. Some listeners might be familiar with this controversy but it really fits into maybe a corner of the battlefield where the ongoing culture war is being waged. So, there is ongoing concern about what people call deplatforming or censorship with popular platforms, whether they’re Twitter or sites like Patreon, which is a site where content creators can raise money for their projects. There was a recent controversy about Patreon booting a particular user for comments he made of off Patreon, but nonetheless, was accused by Patreon of violating its terms of service. And this prompted some high profile people like Peterson, Rubin, and Sam Harris, the neuroscientist and atheist commentator, to say they were gonna leave Patreon.

33:01 Paul Matzko: And there’s some real money at stake here. I think Peterson was getting $80,000 a month through Patreon.

33:05 Matthew Feeney: Yeah, they’re making quite a bit of money from this. And it’s a big move, for especially, I think more so probably Rubin and Harris and Peterson because for people like this, this is probably their primary source of income. The reason I threw this into the notes is, because Rubin, since announcing he was gonna leave and leaving, has mentioned crypto quite a few times, saying, “Well, it’s not just pressure from companies like Patreon, but there’s pressure from payment processors” and he cited complaints with Mastercard, for example. And as most people know, banks and payment processors do discriminate certain customers, whether they’re gun manufacturers or people who work with pornography. And this, I don’t know, it got me thinking. At the moment, I don’t know if crypto, if there’s an asset out there, cryptocurrency, that’s ideal for this. Bitcoin may be the closest but the price fluctuates so much, it’s also not anonymous, but Rubin and Peterson are in the middle of building a competitor to Patreon where I’m sure they’ll be taking crypto as payment, but that’s one way I support one application of this as a way to circumvent processors that, for better or worse, feel under pressure to not associate with people of certain political views. So, in the long‐​term, maybe crypto makes it harder to push people out of the public sphere, but I think it’s too early to tell.

34:37 Paul Matzko: Yeah. Well, there’s an interesting degree to which Diego laid out some values in his essay in here on the show about, well, you want efficiency in transactions. Most people also want convenience, so things like cost, efficiency, convenience, transparency, and…

34:56 Diego Zuluaga: Accountability is another one.

34:58 Paul Matzko: Accountability, yeah.

34:58 Diego Zuluaga: Having someone you can turn to for redress, if something goes wrong. Libertarians perhaps less so because we are more conscious of risk and more willing to bear it if the reward is more autonomy, but I don’t think that represents the typical person. I think we need to be aware of that when we discuss these things.

35:17 Paul Matzko: We’re weird, let’s just…

35:18 Matthew Feeney: Yeah, there is a real… I just said a little anecdote but last week, as Paul mentioned, I have some holdings in this stuff, but I have a cold wallet and you have to put in your password, but there is no bit​coin​.com that you can email or phone number to call if something goes wrong, and I kept on putting my password in and it just was not working and panic start setting in about the sixth time that this doesn’t work. But the lesson is, make sure that your Caps Lock is off when you’re trying to do this stuff. But it was a real moment of… If you send these kind of assets to the wrong address, they’re just lucky. There’s no redress at all but yeah, it’s a cost‐​benefit analysis here.

36:06 Paul Matzko: And maybe you’re willing to bear that additional inconvenience or risk or the lack of accountability in exchange for, well, I can say whatever I want on here, there is no intermediary or maybe an intermediary with a lighter touch between me and my payers and so it’s worth it. That’s I guess, the calculations that people like Rubin are having.

36:33 Matthew Feeney: Right, but even Rubin I think and his allies have to be careful even in making the shift to crypto, because if they shift to an intermediary like Coinbase that we discussed earlier, they could run into the issue that Gab, the kind of the alt‐​righty racist Twitter, because they had a Coinbase account and then Coinbase booted them off. So, it seems like just adopting crypto isn’t enough, you actually have to adopt it in such a way that there is no intermediary like Coinbase or a company like Coinbase who can still influence you, it’s got to be a kind of cold wallet, do‐​it‐​yourself operation.

37:13 Paul Matzko: You kind of got in trouble a bit with the Rubin fan base ’cause as I understand it, you were defending Patreon’s right to push them off for…

37:26 Matthew Feeney: Well, I think anyone who looks at these debates will find plenty of examples where platforms can be accused of hypocrisy, and for not applying their standards consistently. So, Patreon claims that this guy called Benjamin violated their Terms of Service. Whether you want to treat Patreon as the authority on Patreon’s Terms of Service or community guidelines is another conversation. But there were plenty of people who seemed upset at Patreon because they think this is being arbitrarily dulled out, and that Patreon’s not really being fair. What I wrote was, well, if Rubin and Peterson are upset, then they’re welcome to go and start their own thing, and then find the more information in the market, the better. You’re always gonna be disappointed by intermediaries like this. But I think in the long term, I’m skeptical that the kind of competitor that they’re building will be successful because their unique selling point is that we’re more tolerant of this kind of speech, which is speech that I think a lot of people find distasteful, but time will tell, I suppose.

38:36 Paul Matzko: Yeah, there’s a certain irony of folks entering into the marketplace with opinions and being annoyed when the marketplace isn’t a huge fan of their opinion, right? I mean…

38:48 Matthew Feeney: Yeah, yeah. Well, we had news today, so we’re recording this on Wednesday, the 16th of January. Roku announced that they’re actually going to pull the plug on Alex Jones, right?

38:58 Paul Matzko: Alex Jones, yeah.

39:00 Matthew Feeney: So, I’m sure we shouldn’t be surprised if Alex Jones starts talking a lot about crypto as well because part of the problem is not just getting a platform for the channel, but getting funding for the channel, ’cause people don’t want either their bank knowing that they support this guy or they don’t want that found out.

39:18 Paul Matzko: This is really bad PR for cryptocurrency though, ’cause you imagine a world… I mean, the last attempt to create an alternative to Patreon was the Gun, 3D printing, Cody Wilson…

39:32 Matthew Feeney: Oh, Defense Distributed.

39:33 Paul Matzko: Defense Distributed. He tried to kick‐​start Hatreon.

39:37 Matthew Feeney: Hatreon. That’s right, yeah.

39:38 Paul Matzko: Which, again, not… You know. So the idea of alternatives to these mainstream payment processors and platforms, and these alternatives being fueled by crypto is like, this is where hateful people can go and exercise their freedom of speech, and we would defend their freedom of speech. But if your concern is the long‐​term viability and thus the image of cryptocurrency, is not just a place for Silk Road drug exchanges and sex trafficking. If you’re concerned about that image, it’s probably not great that the big people who are flocking to your banner are Alex Jones and Jordan Peterson. Not that I put them in the same category as Alex Jones per se, but…

40:20 Matthew Feeney: Yeah, no that’s…

40:20 Paul Matzko: It’s at the same time that’s why these things exist to provide access to free speech for even unpopular and people’s opinions.

40:31 Diego Zuluaga: And that is precisely the dilemma of decentralization is that there’s no one there to put a fence on anybody joining.

40:38 Paul Matzko: Yeah.

40:39 Diego Zuluaga: So long as you own a token that is native to the network, you can interact whether you’re Alex Jones or Mother Teresa.

40:45 Paul Matzko: Yeah.

40:46 Diego Zuluaga: And so that’s a virtue in a way because it makes censorship very difficult, but it also means that perhaps distasteful people who we would like to counter, I mean as individuals, I don’t mean there’s any sort of kind of justification for trying by statute to counter these people, but it’s not easy to limit them. On the other hand, when we leave it to intermediaries to decide and let people in or out on their own judgement, there’s the danger that they will do it excessively.

41:16 Paul Matzko: Yeah. Yeah.

41:17 Diego Zuluaga: This is what John Stuart Mill warned us against, saying that we shouldn’t discount the possibility of social tyranny, not one that is enforced by the government, but rather by a group of people who find themselves a large enough majority to be able to impose their mainstream opinion on people who disagree, and often the people who disagree are wrong, but other times they’re right and they’re revealing a new truth and they’re making us better as a result of that, and that is a possible danger. The other consequence, of course, particularly in the world that we live in, is that intermediaries will find themselves with a politically‐​imposed duty to serve everybody, because they exercise this function of being the gatekeeper so much that a certain corner of representative politics gets annoyed and forces them to welcome everybody.

42:01 Paul Matzko: Make them a common carrier and they… Yeah.

42:03 Diego Zuluaga: Exactly. Like a public utility.

42:04 Matthew Feeney: Right. You’re seeing arguments like this coming from of all people, self‐​described conservatives and some people who call themselves libertarians is the, “Hey, we should just treat Twitter and Facebook as if they’re common carriers or monopolies, and that they have an obligation to carry speech that’s legal, which is certainly one approach I would support, but I think that’s indicative of actually where we are in a public political rhetoric, that this is being seriously considered by people who describe themselves as fans of limited government.

42:34 Paul Matzko: I think we have a robust philosophical apparatus as libertarians for dealing with this question like, here are people who are… Some of whom are legitimately hateful or are not promoting edifying conversation into the public conversation, but at the same time, if you don’t extend the… Sometimes it’s like the right to exit. This is historically the question of regulation of religion. In places like Great Britain, well, if you have a state church, are you going to tolerate dissidents? And dissidents say, “Well, we want the right to exit, to go to another country, to Netherlands, to the colonies, to Massachusetts.” And so battles over right to exit. What we are talking about here is, in a sense, a right to exit, where we allow people to leave these mainstream processors and whatnot, to exercise their potentially hateful or paranoid speech.

43:34 Paul Matzko: But if we want to have that freedom for ourselves, ultimately that’s the price we pay. The price we pay for freedom of speech is allowing Nazis to speak hateful speech, which is why groups like ACLU will defend the famous Skokie, Illinois case. We’re used to that as libertarians in the IRL world and the non‐​digital world, when it comes to legal jurisprudence. It’s not that hard to imagine applying those same principles to cryptocurrencies, the world of payment processing to these realms we’re talking about here, we just have to realize, “Oh, it’s really not that different of a use case.” I think one last thing I wanted to touch on here, I don’t know if you guys had heard about the double‐​spend attack on Ethereum, it happened earlier this month?

44:22 Diego Zuluaga: On Ethereum Classic.

44:22 Paul Matzko: Ethereum Classic.

44:23 Diego Zuluaga: Which is a smaller version of Ethereum that was created as a result of what’s called the Hard Fork that happened in 2016.

44:30 Paul Matzko: Most people took the fork, right?

44:32 Diego Zuluaga: Just to clarify because Ethereum is the second largest cryptocurrency.

44:37 Paul Matzko: Yeah, by size.

44:38 Diego Zuluaga: If you hold an Ether, don’t worry, it was a different network that was attacked. Maybe you should worry about for other reasons because it hasn’t been doing very well recently but not for the double‐​spend attack.

44:48 Paul Matzko: So I think some of our listeners are kinda like they know what the double‐​spend attack is. So real quick, maybe Diego, do you think you can walk them through simply what is a double‐​spend attack?

44:58 Diego Zuluaga: So we call a double‐​spend attack a situation in which I, Diego, promise Paul to send him funds in a cryptocurrency network and in some way, I’m able to promise them to somebody else and both of you record that the transaction has gone through to both of you so that I can actually obtain more value than I can afford. And normally this shouldn’t happen. If a cryptocurrency network is well designed then it should prevent by this mechanism of competition and the resolution of a complex mathematical problem, the situation in which someone can write wrong information on the ledger. But we mentioned the importance of computing power. If you have sufficient computing power in one of these networks, you can actually fool the rest because you have a majority of the effort that’s being expended and therefore, you can at least, for a period of time, you can fool everybody else into believing that both of those transactions are truthful. And because of the design of these networks, that whoever has put more information into the ledger is the one that is followed, it can sometimes be successful. That is a double‐​spend attack and that’s a situation which it can happen. The reason it happened on Ethereum Classic is that it’s a small network, it’s relatively easy to summon enough computing power to do so and they happen to be able to do it, it was relatively cheap.

46:20 Paul Matzko: It’s hard to imagine that happening for Bitcoin or either the non‐​classic Ether because of the sheer size and cost.

46:27 Diego Zuluaga: Yeah. To give listeners some idea, it would cost anywhere between $3 and $500,000 to attack the network for an hour and that still doesn’t guarantee you that you’ll be able to defraud anybody. So unless you have a tremendous amount of overwhelming computing power, which gives you a lot of certainty about the ability to defraud the system, you probably don’t have an incentive to do it. The other reason of course, is that Bitcoin, if you’re involved in this space and you have the ability and the incentive to attack the network, you probably have holdings in crypto and an attack that discredited the network would probably hit your bottom line. So even if you’re in a position to do it, you probably don’t have a long‐​term incentive in doing so because it’s bad for you.

47:08 Paul Matzko: Maybe to put this in an easy conceptualized manner, it strikes me as fundamentally similar to cheque kiting or various forms of cheque fraud. So I go to the bank, I’ve created a fake cheque saying that you paid me $10, and I take it there and they cash it for me but the problem is, you actually haven’t agreed to that transfer, your bank is not going to send that money over, but they won’t know until the end of the business day or when they settle up their accounts. All the banks communicate with each other with the Federal Reserve, with the Central Bank and say these are all the payments that were approved, but there’s a lag of time between the cheque being written and cashed and the settling up process, and people could take advantage of that. Banks usually tolerate a certain amount. They’ll prosecute you but they’re willing to put that risk because people demand convenience, so usually they’ll release a certain amount of a cheque you deposit right away even though there’s a risk that you are defrauding them, but they’re willing to do that again because people want convenience.

48:18 Paul Matzko: But that’s fundamentally what’s happening here. You have a block of the Blockchain that’s still being written, and our transaction, the money you’re sending to me, is written on there, but the settling up process isn’t done until the entire block is written, or a number of blocks are written. And that gets more complicated, but there’s a period of time at which it’s on the block, but will that be the final block that makes it on the ledger, and whose block gets to settle up, depends on how much computing power you have.

48:48 Diego Zuluaga: That’s right.

48:49 Paul Matzko: Am I kind of getting that right?

48:49 Diego Zuluaga: That’s right. Because the heuristic is, whoever has the longest chain is the one that everybody else follows. That’s the chain on which everybody continues to build, so that if you have enough computing power, you, for a period of time, will be able to get ahead from the…

49:03 Paul Matzko: You’re longer.

49:03 Diego Zuluaga: From the truthful chain. And in that way, yours becomes the truthful one. And in that event, and if that is discovered, you need to have a Hard Fork, which is a redesign. It’s basically going back in time on the Blockchain, which is not supposed to happen, because these things are immutable. And then, two chains emerge. And you get Ethereum Classic and you get regular Ethereum, as a result.

49:21 Paul Matzko: It also requires some kind of central action to do that, which is kind of a big no, no.

49:25 Diego Zuluaga: That’s right.

49:26 Paul Matzko: That’s why Hard Fork is so controversial is, because the whole point was that a central authority shouldn’t be allowed to go in and…

49:31 Diego Zuluaga: That’s right.

49:32 Paul Matzko: Make those kinds of decisions. So it often causes… It was a big deal when Ether made that fork…

49:36 Diego Zuluaga: Absolutely.

49:37 Paul Matzko: Back in the day. Why shouldn’t we be all that concerned about that, though? You mentioned it’s really expensive to amass that kind of computing power. There’s something else you mentioned, which had to do with, if you have amassed that power, there’s a handful of minors who tend to exercise disproportionate amount of power could do this, they shoot themselves in the foot though, if they are involved in that kind of action. What is that? Can you flush it out for us?

50:04 Diego Zuluaga: Sure. Let me make the following analogy. Imagine you are someone who has the resources, is very wealthy and has the resources to rob a bank, effectively. But it happens that that person is also a major depositor at the bank and has a lot of their funds at the bank. It could get a lot of funds as a result of robbing the bank on one day, but if the bank goes bust and cannot pay back its liabilities on the next day, because not only of the robbery but because it’s completely lost its reputation and it’s had a run by every other depositor, then you’re probably hurting yourself in the end because of your actions. And there’s a similar thing in play, I suspect, with a lot of the people who would be in a position to attack any cryptocurrency network, because they own a lot of computers or they somehow are able to rent them, and that means they have knowledge and they have access to resources. And that probably means they’ve been doing the mining for sometime, which means that they have some stock of crypto, and therefore attacking the network, unless the potential gains adjusted for the probability of winning, which is another thing, outweigh your existing stock, you’re not gonna do it.

51:12 Diego Zuluaga: So I think it’s more difficult than most people assume. Alex Tabarrok pointed out this event on Marginal REVOLUTION, his blog with Tyler Cowen, and he said that one of the deleterious consequences of crypto prices going down is that you suddenly have a lot of spare capacity among computers because you no longer require as much computing power to push through transactions, nor do people have an incentive to be involved and that, that spare capacity might be deployed for deleterious purposes to try and rob networks. But I don’t think we have enough evidence to argue that’s the case.

51:45 Paul Matzko: It was good timing for him ’cause he wrote that article on January 8th, and then the double‐​spend on Ether Classic happened on January 9th.

51:51 Matthew Feeney: Right.

51:52 Paul Matzko: So, you know…

51:52 Diego Zuluaga: Maybe he had a tip. We should… [chuckle]

[overlapping conversation]

51:53 Paul Matzko: We should be investigating Alex here. Yeah, that’s right. Well, thank you guys for coming in, and talking about decentralization and crypto here. We can all rest a little bit easier. You’re probably not gonna be falling prey to a double‐​spend attack, but we should cut things off here because our Intermediary with a capital I, our producer, Tess Terrible, will give me a hard time otherwise. So, until next week, be well.


52:22 Paul Matzko: Thanks for listening. Building Tomorrow is produced by Tess Terrible. If you enjoy Building Tomorrow, please subscribe to us on iTunes, or wherever you get your podcasts. If you’d like to learn more about libertarianism, find us on the web at www​.lib​er​tar​i​an​ism​.org.