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George Selgin and Diego Zuluaga return to the show to talk about how the capability of bitcoin is still in its infancy.

Aaron Ross Powell
Director and Editor
Trevor Burrus
Research Fellow, Constitutional Studies

George Selgin is the Director of the Center for Monetary and Financial Alternatives at the Cato Institute. He is an expert on banking, monetary policy, and macroeconomics.

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.

George Selgin and Diego Zuluaga are back on the show today to talk about the potential of bitcoin. Throughout the conversation they discuss how bitcoin has had it’s up and downs, but this fluctuation does not indicate whether bitcoin is a successful alternative money.

How old is Bitcoin? Does the price of Bitcoin tell us anything meaningful? Is Bitcoin a meaningful money alternative? Where is Bitcoin accepted as payment?

Further Reading:

The Future of Money, Free Thoughts Podcast

Cryptocurrency vs. Censorship, Building Tomorrow Podcast

Crypto History, Building Tomorrow Podcast

Facebook Friends Libra, Building Tomorrow Podcast



00:07 Trevor Burrus: Welcome to Free Thoughts, I’m Trevor Burrus.

00:10 Aaron Ross Powell: And I’m Aaron Powell.

00:11 Trevor Burrus: We live in a time of rapidly emerging and evolving technology, and perhaps no new tech in the last 10 years has been as exciting among libertarians as cryptocurrency. Bitcoin promised to end state control of money and decentralize finance.

00:24 Aaron Ross Powell: But has it? Ten years and multiple booms and busts later, what’s the state of Bitcoin in the broader dream of cryptocurrencies? Does it still have any hope of becoming the global currency, or even seeing anything like widespread use? And can the founding vision of decentralization free from the heavy hand of government survive as big institutions like banks, and yes, even governments, embrace crypto for their own ends?

00:46 Trevor Burrus: Today we take a sober look at the state of cryptocurrency and assess where it’s headed, and whether that early optimism is still warranted. Joining us today from the Cato Institute Center for Monetary and Financial Alternatives, are Director and Senior Fellow George Selgin and policy analyst Diego Zuluaga. Welcome to Free Thoughts gentlemen.

01:03: Thank you.

01:04 Trevor Burrus: Now, we first discussed cryptocurrency about 2017 on this show. That would make us a pretty late adopter, I guess, for libertarians. We can get into what crypto represents for libertarians but, that… I think at that time Bitcoin was about 3,000 or 5,000 when we discussed it, maybe, or was it like 20,000?

01:24 Aaron Ross Powell: No, that was the month before it hit 20,000.

01:25 Trevor Burrus: Oh, was it the month before? And then there was a big big bubble and then it popped, and there was optimism and it crashed. So, what’s kind of happened in the crypto world since the Bitcoin bubble of late 2017?

01:40 George Selgin: I don’t think very much has happened at all, actually, because it remains very popular among enthusiasts and most people who deal in Bitcoin at all, they tend to be enthusiastic, and they tend to be bullish, and they have some good reason for that, despite that crash back when. So, the capitalization is still very high and Bitcoin is still the most popular, to judge by capitalization, and that’s an issue we need to go into a little bit more, still the dominant cryptocurrency by far. So I don’t think that that little hitch has had much of an effect on the movement as a whole.

02:25 Diego Zuluaga: One thing where I would say there has been a lot of development since is on the policy side. Of course, since the first installment of the crypto discussion on Free Thoughts, and if nothing else, it’s proof that you shouldn’t take your investment advice as to how you time your crypto purchases, when crypto is discussed on Free Thoughts. We…

02:41 Trevor Burrus: Maybe you should. Who knows?

02:42 Diego Zuluaga: We have had a lot of focus on the boom and bust, first of all, then secondly, the question of how people started raising money by promising new crypto projects that offered the same returns as Bitcoin and Ethereum and some of the other larger cryptocurrencies. And as a result of that, policymakers not just in America but around the world, looking both at payments innovation and the technology underlying the payments innovation that was Bitcoin and looking at the potential for implementations both in the private sector and, more recently, in the form of Central Bank digital currencies. All of these are related derivative projects. They’re not exactly like Bitcoin, but I wouldn’t deny that they’ve been spawned by the boom and then the permanency of Bitcoin, which is by now 12 years old, which is difficult to imagine, we still talk about it as an innovation, as something new. It’s been around for a while.

03:35 Aaron Ross Powell: Well, on that boom and bust because, like we said, it hit 20,000 shortly after and its fall and it fell sharply, and now it’s at 9,000 as we’re recording, 9,000 and something. Does the price matter? For those of us… For people who own it, and for people who are paying attention, the blogs, the cryptocurrency blogs, it’s like every other blog post is “Bitcoin is defending this price point,” or “This weird algorithm says it’s going to get to this.” And that seems to be the bulk of the conversation, but if we’re talking about this thing, both as The future of money and as an underlying technology that’s still in development, should we be paying attention to the price at all? Does it tell us anything meaningful?

04:14 George Selgin: Well, that’s absolutely a crucial question, because the truth is that there are two aspects of Bitcoin’s success that need to be sharply distinguished. One is, its success as an investment vehicle, for which of course the price is not only an important criterion, it’s the only criterion. If you’re an investor, all you care about is the return you can make on an investment. So, price is everything. On the other hand, in judging a medium of exchange or something’s capacity to serve as a medium of exchange and the extent to which it already does serve that purpose, the market valuation, stock market valuation or equity valuation is not crucial.

05:09 George Selgin: It has some bearing, because if something has… How the price of an asset that could be used as money changes has some bearing on its desirability as money, on how good a medium of exchange it is, how practical it is. But ultimately the test of whether something is succeeding at becoming a medium of exchange, an important medium of exchange, is not a function of its capital value, it’s a function of how many people actually accept it in trade for goods, services, what have you, and in other payments.

05:45 Diego Zuluaga: Some people might say that the increase in price that Bitcoin has experienced over the long term since its birth, is an indication that it has good long‐​term prospects, because this indicates that a lot of people believe it will become attractive as a medium of exchange or in some sort of other useful capacity other than as an investment. But I don’t know to what extent that justifies the movement in price. I think a lot of it is short‐​term speculative, and based on what other people believe will happen in the short term.

06:00 Diego Zuluaga: So, even if you take price as a reflection of what is the business proposition behind this, at least to some extent, I think one needs to be cautious, because, as George explained, the primary purpose for which right now this is useful is for payments, and to the extent that this would be adopted as a more widely accepted medium of exchange, that itself is related to the stability of price in terms of the purchases that people want to make, so, that in itself, the volatility of the Bitcoin price is in itself a bit of a hurdle.

06:46 George Selgin: The argument you hear a lot from part of the Bitcoin community is simply that, of course, this is a successful new money, because look how much it’s appreciated. And that’s just an extremely naive argument as far as it goes, because we could name all kinds of equities and other assets that have appreciated, some of them more rapidly than Bitcoin, that nobody would say are therefore succeeding as alternative means of exchange. A means of exchange is a very special sort of thing. It’s something that is widely acceptable in exchange, you can use to go shopping in lots of places, to pay off all kinds of, to pay debts that you contract debts in in the first place. So one has to look beyond the capitalization of something in order to assess its success as an alternative money. And I should add, money is a special kind of medium of exchange that is generally accepted and that more people accept than don’t. And by that criterion, Bitcoin is not money at all, and neither is any other cryptocurrency.

08:01 Trevor Burrus: Well, couldn’t I give… I probably could buy a lot of things in Bitcoin, like I might have to raise the price, it’d be like, if I brought Romanian money to an American store, there’s some price of Romanian money that they would take, right?

08:16 George Selgin: Maybe.

08:16 Trevor Burrus: Because it would be worth enough and with Bitcoin you’ve figured out…

08:19 George Selgin: But at that point you don’t have a general accepted medium of exchange. If you have to pay an extra price, a higher price to buy something, to convince somebody to do a trade with you, all you’re doing is talking him into a barter exchange by making it sufficiently attractive. You’re not establishing something’s status as an actual money. So what we want to look for in deciding whether something is catching on as money is lots of shops accepting it, lots of prices being quoted in it and that sort of thing. It’s true that Bitcoin is accepted by a lot of, by a substantial, let’s say a non‐​trivial number of stores and other places in payment. So I don’t want to downplay the fact that it has caught on to some extent and more so than most other cryptos, but it’s still a long, long way from qualifying for the standard economist definition of a generally accepted medium of exchange.

09:24 Aaron Ross Powell: How does the specifics of the tech behind all this play into that? Because what we want… So if Bitcoin became a medium of exchange widely accepted, what that would mean in practice, setting aside economist definition is, if I own a bunch of this stuff, I can go and spend it wherever I want to get the things that I want in a seamless fashion. And if I spend it to buy something from you, George, you get the value of it seamlessly and transparently. But it seems like technology could address that in all sorts of ways.

10:04 Aaron Ross Powell: So we could have, and I think we have, there’s nascent versions of this, like a credit card where I fill it up with Bitcoin, and then I go to buy something from you and you don’t accept Bitcoin, you accept dollars, but at the moment that I swipe, my Bitcoin are behind the scenes converted into dollars and transferred to you at some standard rate and then you could convert it back or you can take the dollars and we could do that with all sorts of different coins and it happens instantaneously.

10:33 Trevor Burrus: Does that exist, are you saying? I don’t…

10:35 Aaron Ross Powell: The credit cards or debit cards do. Does that change the equation that Bitcoin therefore from the perspective of the holder of Bitcoin and the person who wants to purchase things with Bitcoin, it looks like it’s accepted everywhere, but the people who are accepting payment don’t actually all have to accept it and they don’t have to care that I’m paying them kind of in Bitcoin versus something else.

10:58 Trevor Burrus: And just to add onto that, and if that’s true, is it different than going to Europe and swiping my card and having it paid, having it, it doesn’t matter, I earned American money and turned it into Euros on their side.

11:12 Diego Zuluaga: I think it’s worth going back to the title of the foundational paper for Bitcoin, which is a peer‐​to‐​peer electronic cash system. The idea was to avoid intermediaries altogether and Bitcoin, while it’s an extremely attractive and useful and impressive technology, it’s still quite expensive to operate. It uses a lot of electricity to encourage people, peers, to fulfill transactions on behalf of the people who want to exchange things. Now, one of the arguments I have been making is that for crypto to succeed, intermediaries will have to come in to help fulfill transactions. And the emergence of the sort of cards that you’re talking about and payment providers who are willing to do the instant conversion into dollars is part of that process of making it attractive for third parties, including merchants, to accept crypto, although they don’t really accept it, it’s a payments processor that does it.

12:00 Diego Zuluaga: I’m all in favor of that. As of now, the transaction costs of it, a bit like you using your credit card abroad, are higher, and that’s why you have to pay a foreign exchange fee on your credit card. And this is similar because there’s not only the short‐​term volatility of crypto, in terms of its relationship to fiat currencies in various countries, but policy in the US and many other countries right now is such that you have to record its, it’s treated like property, and so it would be a bit like using bits of housing as a medium of payment that the tax authority will say, if in the time that you’ve held this you’ve earned some in terms of dollars, you have to declare that as tax. That’s of course a major deterrent in using crypto for transactions. But we’re certainly, there’s no doubt that we have more and more private sector institutional corporate interest in crypto and more innovation in terms of making crypto attractive, more secure, more transparent, more attractive for law enforcement as well to tolerate transactions.

13:01 Diego Zuluaga: But the paradox of it is that the ideals of crypto were precisely to move away from that corporate intermediated. Well, it’s bit like the internet, we’re moving to a different stage and I think it’s a very interesting set of developments.

13:15 Aaron Ross Powell: How does the fact that… So we’ve been talking about Bitcoin but there are lots of different cryptocurrencies and people are creating ones all the time, some for good technical reasons or at least plausible, others as potential cash grabs and so on. Does that create a problem as far as the long‐​term acceptance of cryptocurrency that there are a lot of them? I mean, I’m thinking of, George, like your work in private and alternative currencies going way, way back to very pre‐​crypto days where there were lots of issuers of currency. Would things be better if the entire community standardized on a single coin, Bitcoin or whatever else?

13:57 George Selgin: The tendency, of course, is for that kind of standardization to happen, because money is the ultimate network good, and despite technologies for exchange, etcetera, what we find is that what really makes a medium of exchange convenient for people is for prices to be ordinarily posted in terms of that medium and it counts to be posted that way. And of course, we see in the world today the overwhelming tendency, not entirely driven by regulation and government, but to a significant extent spontaneous for particular currency standards to dominate whole economies and sometimes to dominate the world economy, as the dollar has been doing for some time.

14:49 George Selgin: So that tendency is natural. I think that that doesn’t mean, though, that it’s undesirable to have people trying to introduce a large, new monies, that’s all part of the competitive process, but it still doesn’t mean that they can all survive. And you’re going to have some that’s only a relative few that become a widely used medium of exchange, and of course, it’s possible that among all these new alternatives, these cryptos, that none of them will ever be able to gain a status such as allows it to compete with any established national monies, because those all have a substantial head start. So there’s nothing wrong with it, it’s not a problem to have a lot of alternatives but yes, there’s a network factor in there that ultimately means you’re going to have a horse race where only a few become very important; in any one area, there may be only one that’s particularly important.

15:55 Trevor Burrus: When you talked about competing against national currencies, doesn’t it matter that the state of national currencies that… So, I think for some Bitcoin advocates, kind of like gold buggers, which was George’s… We’ve done an episode on the Gold Center with George. The long‐​term prospects, they think, of crypto are much better than the long‐​term prospects of state fiat currency, with debts being accrued, no sign that America’s debt is going to be paid down. So like they may even agree, they may be long‐​term bullish on crypto and say like by 2100, fiat currencies are going to… Are going to be run in to the ground by politicians, self‐​serving, and running up debts and all this stuff, and the thing that won’t be run in to the ground is Bitcoin. And at that point, its comparative advantage, competing against national currencies, will make it be able to be used in the way that people hoard gold, so they can hoard Bitcoin and still have it. And on that point, don’t we even see that in some countries where currencies have failed, like Venezuela, or relatively failed, and more transactions have occurred in the crypto world because it just depends on how well the national currency is doing.

17:05 Diego Zuluaga: I wouldn’t present it as two‐​way competition, though. When we talk about national fiat currencies, these are fiat currencies that oftentimes are competing against each other, and a major safe haven for people in unstable countries has been the US dollar. And indeed, Ecuador dollarized in 2000, partly in a way to instill confidence in its people, that it wasn’t going to continue devaluing the bits of paper that it was issuing. In addition to that, we will often see that chart of the dollar used to be worth this in 1925 and look how much purchasing power it’s lost in the last 100 years, but of course, people are able to buy real assets to protect themselves against the long‐​term effects of inflation. They’re able to buy, whether it’s gold or whether it’s housing, or some other…

17:47 Trevor Burrus: Or a Monet painting, I guess.

17:47 Diego Zuluaga: That’s right, durable. And so it’s not obvious that even if there’s a steady trend of purchasing power loss in a fiat currency that that guarantees the success of crypto because the… Because consumers have many other alternatives. So you would have to get to a situation, a bit like Venezuela, where you have the government banning people from moving capital outside of the country, the dollar becoming absolutely scarce, and there being few other means of resources. Of course, in Venezuela, you also had the circumstance of electricity, because the country is a major oil power, is very cheap, so actually running Bitcoin transactions is cheaper perhaps than in other places. For all of that to converge, to make Bitcoin comparably attractive… But that’s a very crisis‐​like scenario which I don’t know how much it represents the rest of the world or it will ever.

18:35 George Selgin: Yes, I totally agree with what Diego just said. And in particular, I would go even further on the question of inflation by saying that the argument that because a currency is losing, let’s say, 2% of its value every year, which is presently a little higher than what the dollar is losing, that can go on forever. There’s… I’ve detected in discussions with people in the Bitcoin community arguments that seemed to suppose that at 2% inflation, eventually the dollar is going to become worthless. Well, it doesn’t work that way, it can lose 2% forever and it can continue to be money forever. This is an asymptotic [chuckle] quality of inflation. So it’s not as…

19:26 Aaron Ross Powell: Can you just explain briefly how that works?

19:28 George Selgin: Well, it’s kind of like Zeno’s paradox, you can lose 2% every year…

19:33 Trevor Burrus: But you never hit zero.

19:33 George Selgin: But you still… You still have plenty of purchasing power left and the dollar can just very gradually lose money, but it never becomes valueless. And since we can adapt to this gradual depreciation very easily, relatively easily, I’m not saying inflation even at 2% is entirely costless, but the fact is, it can go on forever, it doesn’t mean, it’s not like an ice cube melting where eventually, the last little bit melts off, and you have nothing left but water, it’s, you still have a viable dollar forever. Now, hyperinflation, or very high inflation is a completely different situation, where you really do have the possibility and even the likelihood that something’s… Ultimately the money is going to become quite worthless, but most inflations in the world today certainly are not, not posing that possibility.

20:36 Trevor Burrus: Well, that’s, it’s interesting in that, with these two responses, ’cause it reminds me when Aaron and I were setting up the Cato library, which was mostly Roy Childs books and they were in boxes in the parking garage, and we were going to go through and pick the ones that were supposed to be there and there was just a bunch of books and we started a pile of libertarian collapse literature, it was like how to survive the coming crash 1978, how to survive the coming crash 1982, it was sort of this constant, it’s like the Jehovah’s Witnesses predicting, or used to predict the end of the world every 10 years and there’s a high overlap. As Diego said you would need a significant crisis with a lot of things to come together for many of these cryptos to become more, to be better than the national currency, but and there’s a lot…

21:19 George Selgin: Yes, and especially better than other…

21:21 Trevor Burrus: Other national currencies.

21:22 George Selgin: Available national currencies people can switch to.

21:24 Diego Zuluaga: The paradox to me is that the existence of Bitcoin is itself a barrier against its future success, because the prospect of people taking on Bitcoin as an alternative will deter some central banks, perhaps, from engaging in truly destructive behavior, because now people have another exit option and constraining them because of the features of Bitcoin, this is one of the reasons I’m a big Bitcoin fan is that because the transaction ledger, the system runs everywhere in the world, no government can easily shut it down. They can shut down access, they can ban computers, but that would be very onerous logistically to undertake. So, paradoxically, the existence of Bitcoin changes the set of behavioral options for the planners, the central bankers, in a way that perhaps encourages them to behave more virtuously, in the way that Bitcoiners would like.

22:11 Trevor Burrus: Well, that goes to that question of these crisis people, the coming collapse people, there’s a, the Venn diagram of catastrophic libertarians, preppers and like Bitcoin gold buggers is there’s an overlap here. It’s not constant, but that they really do think it’s going to get that bad and therefore Bitcoin.

22:29 George Selgin: Yes, I was asked once by a journalist when there was some kind of crisis going on whether this was it, whether this was really going to be the great cataclysm that everybody has been waiting for? And I said yes, it’s definitely happening, again. [chuckle] The fact that it takes a big crisis, it would take a big crisis for Bitcoin to become really widely accepted anywhere and it very much is possible in some places, shouldn’t prevent us from acknowledging that there is also an important niche market that is driving the use of Bitcoin as a medium of exchange for certain kinds of transactions and it’s an important niche market, it’s not just this Silk Road sort of thing, that perhaps was much more important at the beginning, but rather all kinds of transactions where a greater degree of privacy is demanded, and where the use of cash, that is paper money, is not convenient. And that’s a very, very important niche that Bitcoin fulfills and it’s extremely, it’s extremely valuable for protecting people’s privacy and some of their civil liberties.

23:58 George Selgin: And it’s also the stepping stone that allows Bitcoin to be a candidate, maybe not a successful candidate, but a candidate for adoption in crises, because it does have an established basis and network, and all of that, that particular special role that Bitcoin plays, is another reason why I’m also pro‐​Bitcoin. I think that it’s like a lifeboat, it’s an emergency lifeboat for lots of circumstances, but that doesn’t mean it’s likely to ever become an ocean liner.

24:36 Aaron Ross Powell: One of the things that seems to get in the way of everyday people using this as a medium of exchange, is the swinginess of the price that it was, in December 2017, it was 20,000 and then it dropped to a few thousand, I think, and now it’s back up to 9000, and the effect of that is, if I own it, and I’m going to use it to buy something from you, I might really regret buying that thing from you tomorrow because the price goes up three times and…

25:00 Trevor Burrus: Like the 10,000 Bitcoin pizza. Yeah.

25:02 Aaron Ross Powell: Yeah, so why, what’s causing the swinginess? And is there a way to stop it from being so up and down?

25:16 Diego Zuluaga: I don’t think we quite necessarily understand all of the factors that are driving the price. I mean, some of it may be speculative bouts day‐​to‐​day, good news, bad news. It may be that people are using it as a haven. Some people say, also, most of the Bitcoin tokens are held by people who don’t sell day‐​to‐​day, and so the markets are, in market parlance, it’s not very liquid and so the price moves a lot because of the small amount of sales. The point I would make is that in a world in which, as some Bitcoin fans propose, Bitcoin really becomes something that a large part of us hold, you would expect volatility to go down because you have fewer people outside the market, so to speak, and many more people in the market and that itself just drives stability.

26:05 Diego Zuluaga: For example, if Bitcoin became an asset that was included in what’s available for people to buy as part of their index funds, that might drive that, you might get more stability as a result of that. There’s no guarantee, but we don’t know of any asset that is widely traded that has that degree of volatility on a sort of constant basis. You will have tech stocks that in particular times have, you know, significant double digit price swings, so I think that’s potentially a factor. And we do see volatility over time and Bitcoin going down down compared to the past and not necessarily in dollar terms, but certainly in percentage terms.

26:39 George Selgin: Yes, and you don’t… Bitcoin, if it became a widely used, more widely used medium of exchange, that would also tend to stabilize its value, because it would of course have a much wider market then as well. One thing it cannot do is to take advantage of a non‐​monetary demand for Bitcoin, that is a demand for it that’s neither speculative nor monetary in the more strict sense of demand for a medium of exchange. Whereas for commodity monies like gold and silver you had a buffer mechanism in that non‐​monetary uses of golden and silver were always there to be taken advantage of when the value fluctuated. So if the stuff got, if the purchasing power of gold got too high, why, people would start to melt their jewelry and vice versa. So you don’t have that kind of a buffer effect with cryptocurrency that you could have for certain commodity monies in the past.

27:42 Trevor Burrus: We’ve seen, also seen some big businesses, tech players, get into the crypto market, which maybe seemed a little bit odd, especially as Diego pointed out, the beginning of Bitcoin it was so anti‐​establishment and having Facebook propose this Libra and there was the one who’s named… The Winklevoss twins, didn’t they one, there were ads in the Metro that said first…

28:04 Aaron Ross Powell: Gemini?

28:04 Trevor Burrus: Gemini, it was like first the revolution then comes the rules or the regulations.

28:08 Aaron Ross Powell: Yeah, the regulated exchange.

28:10 Trevor Burrus: The regulated crypto kinda thing. What does that indicate this sort of move and some banks using it and stuff like that too about the nature of crypto or the state of crypto?

28:18 Diego Zuluaga: I think it mainly indicates two things. One, that some of the underlying technology is attractive and offers a lot of potential benefits and doesn’t have to be used wholesale. You don’t have to take all of Bitcoin to benefit from some of its innovations and the idea behind it. And the second thing is that people realize it can also be a useful asset and attractive. There’s a lot of demand for crypto from the younger segment of the population and it seems that that gets them into investing. So if you’re an investment manager, a way to make it attractive to, say, for a 401K is to get them in by saying you can put your money into Bitcoin and Ethereum, mainly Bitcoin right now because there’s some sort of regulatory uncertainty about the status of other cryptos, whereas there isn’t so much with Bitcoin.

29:01 Diego Zuluaga: But the first one is very interesting, because you do have banks, JP Morgan is attempting a distributed ledger type of management for its international accounts. This is when businesses that operate globally want to pay employees in India using money from the US, JP Morgan because it’s so large will say, “We have a universal account for you. We can push the transaction through on our private distributed ledger, so that the funds get to your division much more quickly than they would have in previous circumstances.” There’s that, then there’s Libra, and Libra is a multi‐​fiat currency basket or is going to be.

29:37 George Selgin: So far.

29:37 Diego Zuluaga: Yes, exactly, that is administered in a slightly decentralized way. Right now you have 20 different players who are supposed to be involved in this, handing, being, so to speak, the store fronts at which you would buy Libra tokens, and they also fulfill the transactions. And the reason they have an incentive to do so cheaply is that they have to preserve their reputations because they have brands. So that’s another way to do it. And now you have central banks attempting to use some of this technology, although they’re very vague about what they want to do with it, to digitize even further the national currencies we’ve had for a time. Whether that involves the end of cash, circulating currency, physically circulating currency or not is an open question.

30:22 Diego Zuluaga: How much privacy users of central bank digital currency would get is another open question. But what’s fascinating to me, I was talking to some people who’ve been in this world for 10 years the other day, very deeply involved, has been over the last 12 months that the outside world, the non‐​crypto non‐​libertarian world has moved so swiftly from saying, “Bitcoin’s a scam and all cryptos are a scam too,” central banks should use this technology and all of them go the CBDC way, that we almost couldn’t notice it. You had that, you had briefly Libra and everybody was up in arms about it and now it’s all about central banks.

30:55 George Selgin: Yes, one thing that’s I think ironic about this development is that the more central banks move in the direction of getting rid of ordinary cash, paper money, into digitization of their currencies the more demand I think there will ultimately be for Bitcoin and other cryptocurrencies. Cash is the main truly anonymous and private medium of exchange alternative, so if you get rid of that then of course you’re creating a market for the next best relatively private, not anonymous, but at least pseudonymous medium of exchange.

31:41 Aaron Ross Powell: Going back to the underlying tech, as institutions start to adopt blockchain and the tokens that go along with it and using those as a way to, say, settle accounts because it’s more secure, it’s more efficient, or it has advantages, and so behind the scenes a lot of our cash transactions or digital cash transactions, swiping our credit cards or paying with debit cards or whatever, end up being, happening via tokens that aren’t dollars, getting passed around to other countries and things, does that walk us in the direction of at some point just kind of saying, “Well, if we’re really using the tokens behind the scenes we might as just as well be using the tokens up front and embracing them,” or does increasingly moving into digital applications for our payments, so everyone pays each other in Venmo instead of using cash, that that those sorts of applications, Venmo could at any time drop in a Bitcoin module, just like Square Cash lets you transact suddenly just decided now you can transact in Bitcoin, and so the switching costs become a lot less.

33:00 Aaron Ross Powell: Whereas five years ago if you wanted to use Bitcoin instead of cash it was this very arduous process. Is that like a way we can just walk ourselves slowly into adoption by just making the barriers to entry easier and easier until we just fall back into it?

33:17 George Selgin: I’m skeptical.

33:19 Aaron Ross Powell: Okay.

33:20 George Selgin: Because the Venmo and other dollar‐​based, just to pick on the dollar‐​based digital payments media that we’ve seen are developing substantially in the last few years, the so‐​called real‐​time payments media, they do ultimately take advantage of an established infrastructure, payments infrastructure. They build on it and they improve it, but they don’t entirely dispense with it. And that infrastructure serves dollar transactions only. For many of these applications, in particular, ultimately settlement, that the Fed is involved in the process. It also not surprisingly is where the process gets mucked up and slowed down because the Fed’s payment system is itself not as high‐​tech as it could be. But you can’t just have a switch, or plug in a non‐​dollar based medium into these same arrangements, or swap to it, because you wouldn’t have the same settlement infrastructure. You’d have to rely on what’s present for those alternative currencies.

34:41 Aaron Ross Powell: Let me ask a similar question, but coming at it from kind of a different direction. One of the things that makes cryptocurrencies appealing is that they sidestep a lot of the processing headaches that you just mentioned, George. That you don’t have to engage in those institutions that cause those problems. But instead, if I want to build an app that can send and receive Bitcoin or any other crypto, it’s done with just open‐​source code that I can grab and I can install and my app does it. And we’ll set aside regulatory and legal issues that might impinge on this right now.

35:21 Aaron Ross Powell: And so from a developer standpoint, it’s simply just very easy to use, and I can settle up accounts and I can send this stuff without any intermediaries. And so that makes it like… So Venmo right now, could presumably, if they decided they wanted to just go straight to Bitcoin use and bypass settling out to dollars, it would enable them to send money to, say, Square Cash clients or PayPal clients, like interoperability becomes very easy. Or you can build things like tokenized rewards in your… In social media. So Twitter has launched this, I think, Bluesky initiative, where they’re looking at ways to decentralize Twitter and turn Twitter into an open protocol.

36:05 Aaron Ross Powell: And they’ve talked about integrating. Jack Dorsey is behind Square and is very into Bitcoin, very bullish on it. Build that in for tipping systems or revenue systems. And so these kinds of real benefits from the technological side, how much can these drive adoption simply because consumers like cool new technology? We like to embrace the new thing, and if a lot of cool new things are enabled by using this, we’ll end up using it not because we are digital gold bugs or not because we’re preppers who want an alternative to the dollar, but simply because it comes along with the cool, fun new social media tech.

36:52 Diego Zuluaga: I think what you are raising there, which is an important question in all of this, is how much disintermediation can make things better, more attractive for the average user. One of the things that Square has recently been involved with is launching a project to encourage people to develop the Lightning Network. This is a program within Bitcoin, or an initiative within Bitcoin, to try and take some transactions, small dollar, so to speak, small Bitcoin transactions out of the main ledger, so that it becomes less computationally intensive to process. A lot of them, and I’ve been reading a lot about it because it’s difficult to understand, because it’s hard to understand to what extent they’re somewhat independently in a non‐​Bitcoin centralized way running transactions for a while and then putting them on the ledger, which would basically be intermediation.

37:43 Diego Zuluaga: I don’t think… I used to think that was in fact the case, I think now, it’s still decentralized, and it’s operating under the Bitcoin protocol. But it’s also much less flexible than we’re often led to believe, in terms of the computational capacity of the Lightning Network, in terms of the flexibility of borrowing from one of the parties, those sorts of things. And so with crypto the question of… You mentioned it’s open‐​source, the question that always arises is, can we deal without brands, without a central party that has some sort of stake other than computational power in the system being viable?

38:19 Diego Zuluaga: And I think there’s going to have to be room for intermediaries, and Bitcoin itself is a demonstration of it. One criticism that people used to make about Bitcoin, because it has no commodity value, is that anyone could take the Bitcoin code, replicate it, and then run a new network that was exactly the same, much more cheaply, because the tokens were newly minted, and you didn’t have to buy them on the open market, so to speak. Of course, that never happened, because people don’t believe that an exact copy of Bitcoin is Bitcoin. They want to run things on the Bitcoin network, because to some extent it’s proven. So Bitcoin itself is a sign that having trust in whatever is the name at the top is important.

39:00 Diego Zuluaga: And I think that… This is, of course, a few things coming together, but I do think that the role of intermediaries, be it in the form of an exchange or some sort of payments process, or someone like that who will bear the risk, not just of fluctuations to the dollar, but payments security, reversing transactions if they’re fraudulent or false or mistaken, will have to take place for it to be more widely adopted.

39:22 George Selgin: Yeah, and I would also… I want to push back a little bit, Aaron, against the idea that the existing dollar payment system is a clunky system, I didn’t mean to imply that at all. It is true that there are aspects of the system, particularly, as I said, those operated by the Fed, that need improvement, but let’s be clear, the dollar payments with even the existing system, and it’s being improved all the time, both by private innovations and to some extent, by Fed changes, is infinitely less expensive for any given speed and it can be instantaneous than comparable Bitcoin exchanges and that’s true despite the Lightning Network, which has its own disadvantages.

40:13 George Selgin: So it’s not that the dollar payment system is itself a clumsy system, it could be much improved and it probably will be, but we now have, for example, private real‐​time dollar payments arrangements where for a very, very small amount, you can have instantaneous dollar payments on a private network with some Fed involvement, yes, but relatively little. So it’s in comparison with those dollar payments that it’s relative to those fast cheap dollar payments that we have to compare the available cryptocurrency alternatives.

40:56 Trevor Burrus: We have all these other cryptocurrencies which we brushed on a little bit, and there are a lot, and Ethereum is probably the most well‐​known outside of Bitcoin, but many of them market themselves as different things or doing a different thing, or adding a different, of course, flavor to crypto and to the blockchain in general, some of them for computing applications and things like this. Is it the case probably because of the first mover status, it’s going to be almost impossible to de‐​throne Bitcoin in some sense, or at least as the gold standard, I mean, almost metaphorically true, that people will hold it and it’ll be the, that other ones will be trying to compete, but not really do. Or is it possible that Bitcoin could be displaced by one of these upstarts in terms of the most valuable and most talked‐​about crypto?

41:44 Diego Zuluaga: I think the developments, the very specific developments around Bitcoin from its start, lead to it being more attractive than others, because there was no one, no individual person identifying themselves and saying, “I’m the leader of this project. Give me your money, and I will give you Bitcoin tokens.” So none of the securities questions, fraud questions have arisen. There also isn’t this quasi‐​messianic adoration of a person who pronounces themselves on Twitter, in the way that happens with Ethereum with Vitalik Buterin who’s a very smart…

42:14 George Selgin: Yes, the messianic adoration is attached to the actual currency itself.

42:18 Diego Zuluaga: I suppose, but that’s pre‐​programmed.

42:21 George Selgin: Yes, that’s right, yeah.

42:22 Diego Zuluaga: That’s not going to change its mind on the basis of adulation…

42:25 George Selgin: That’s right.

42:25 Diego Zuluaga: Or criticism.

42:26 Trevor Burrus: And the currency can’t tweet something that would make everyone mad, so yeah.

42:30 Diego Zuluaga: Right. So Satoshi did us all, Satoshi Nakamoto, the pseudonymous founder or founders of this, did us all a favor by remaining anonymous, pseudonymous. And I think that, together with the fact that it came around about six or seven years before its closest current competitor, suggests that it’s going to be difficult to challenge it. If I had to point to ones which I think are attractive in terms of how they improve upon what Bitcoin has, those are the privacy coins, Monero, Zcash, they have a technical advantage which is that you want units of any money to be fungible, meaning that you could swap one for the other and the person taking them from you wouldn’t care. With Bitcoin right now you don’t exactly have that because if I’ve used… I’m not saying I. If someone has used Bitcoin to purchase something illegal, and you can track it on the open ledger, then law enforcement might come to the seventh holder of those specific tokens and say, “You’re not the rightful owner of those because they were used for an illegal transaction, we’re seizing them.”

43:37 Diego Zuluaga: So in terms of my accepting tokens that becomes a bit trickier. And in fact, we have had situations where some Bitcoin tokens were more valuable than others. These privacy coins resolve that problem, and it seems that they do so without undermining trust, in that there is a ledger that’s registering transactions. So I think, technically, that’s a very attractive innovation.

43:57 George Selgin: And it’s important that we never say never, when it comes to the possibility of a dominant standard being displaced ’cause it’s certainly has happened in history. If you were thinking about monetary standards and the problem of their persistence or the question of their longevity in 1850, you would be talking about the silver standard and how well ensconced it was, but 20, 30 years later, it would be gold. So, of course, governments had something to do with the switch, but it isn’t just a matter of governments, it has to do with the behavior of the gold and silver output and price ratios and that sort of thing.

44:44 George Selgin: Likewise, of course, with national monies, we’ve seen sterling give way as a dominant international currency to the dollar. Again, this is a result partly of government actions, and but also partly of market forces. So I think the same is, I think it would be equally unsafe with respect to Bitcoin to say that no other cryptocurrency will ever bypass it, pass it as a dominant crypto‐​currency.

45:16 Aaron Ross Powell: Diego, those advantages that you listed for Bitcoin, not the first mover ones, but the fact that it doesn’t have a person making pronouncements and an organization that’s running it, are those also disadvantages for its long‐​term use in the sense that they don’t allow it or they make it much harder for Bitcoin as a protocol, as kind of a piece of software to evolve and upgrade so that it can’t change to like, so Bitcoin is not, doesn’t have privacy baked into it and so we can’t… It would be very hard, because you have to get consensus and if there’s one thing that seems to not exist at all in the Bitcoin community, it’s consensus, to upgrade it, to say add that, or the costs of running the ledger, because of the way that the proof of work protocol requires all this computing power, which is lots of electricity, is costly and so we want to… We want to switch to something else.

46:15 Aaron Ross Powell: That becomes very hard. And so one of the benefits of having an organization that runs things is that they can innovate faster, in a way that Bitcoin can’t. And it’s one thing if we’re talking about, like we’ve got paper money, and as long as you are holding paper money, then you can kind of make up different things to do with it, but if you’re always stuck using this network, and it’s a network that’s in the Internet which moves very quickly and it’s a network that can’t ever really be upgraded, is that eventually going to just drag this whole thing down?

46:43 Diego Zuluaga: I think it’s a bit like the US Constitution. It’s something that gives everyone who’s involved a stake in stability and yes, periodically people will want to make changes, but you have to get a lot of consensus to happen, but that’s by design. So that if the original document is close enough to perfect, we actually are all much better off by having something that is reliable where we know that nothing is going to arbitrarily change or suddenly change. Compare that to however many constitutions France has had since the mid‐​1800s. And I think there the… This is of course in central banking also known as the rules versus discretion debate. Rules give predictability, and they encourage people to rely on the system because they know what’s given. Discretion allows the authority if it’s benevolent and sufficiently knowledgeable to react to changing circumstances.

47:35 Diego Zuluaga: In general, I think libertarians like the rules approach better because we don’t believe that people running things are all‐​knowing, or close to it, or that they have the adequate incentives to act in terms of the social good. And so in the case of Bitcoin, I think overall the system is very well designed and we really haven’t had a competitor that genuinely makes such a substantial improvement technically that everyone switches away from it. So everyone has a stake in Bitcoin, and that’s part of the reason why change is so difficult, but that’s also part of the reason why Bitcoin represents two‐​thirds of the market cap for crypto because they can… First of all, it’s much more expensive to attack, to defraud the network than for others, but also people believe that the very permanence of this system is a guarantee of stability and future.

48:24 Aaron Ross Powell: Given that and everything that we’ve talked about today and the changes that have happened over the last several years in the crypto and Bitcoin space, as we said at the beginning, this was Bitcoin began among very libertarian people who were pursuing it for a lot of very libertarian reasons, and it’s evolved, and the community around it and the institutions around it have evolved quite a lot in the subsequent years. So, looking forward, should libertarians still be excited about Bitcoin and related tech, and not just excited because it can do cool things, but excited for libertarian reasons?

49:03 George Selgin: I think they should be, yes, I think they should. As I said before, this technology is a very, very important means by which people could engage in exchanges with much greater safety from both from government scrutiny, and from the risk of governments preventing them from trading than is the case with the national money, certainly with digital national monies, which pose all kinds of hazards, depending of course on the nature of the governments involved. So it’s a very, very important development. It’s a new source, a new means, relatively new means, by which people can secure and protect their liberties that without which, people would be much worse off, and I think it is important to consider that it remains relatively young, and we may see further gains in the potential of perhaps Bitcoin, but also of other cryptocurrencies to further enhance the degree to which this technology supplies a new means for preserving civil liberties and economic freedom.

50:30 Diego Zuluaga: The closest thing, I think, that is encouraging to libertarians in the way that the Bitcoin and related technologies are is language, because it’s something that can be used to promote and enhance people’s freedoms, but there’s no one controlling it. It evolves of its own and we don’t really have in terms of the movement of capital and payments, we haven’t really had something like it before, other than in small communities having tokens that people, that are just available and people exchange. And in that way, I think it’s absolutely liberty‐​enhancing and it’s something that’s hopeful… I think it has a future and will. Bits of it will be used for good, in a way that the libertarians I think will like.


51:22 Aaron Ross Powell: Thank you for listening. If you enjoy Free Thoughts, you can find our Free Thoughts discussion group on Facebook or on Reddit at r/​freethoughtspodcast. You can follow us on Twitter @FreeThoughtsPod. As always, please rate and subscribe to us on Apple Podcasts, Spotify, or wherever you get your podcasts. Free Thoughts is produced by Tess Terrible and Landry Ayres. To learn more, visit us on the web at www​.lib​er​tar​i​an​ism​.org.