[00:00:00] Seamus: Hi, welcome to episode 26 of METACO Talks. This is our series of live conversations with the people at the forefront of innovation around decentralized finance. Today, the title of the episode is Reappraising The Role of Bitcoin. To discuss this, we have very special guest, Izabella Kaminska, editor of FT Alphaville. To give a little background, before that she worked as a producer at CNBC, was natural gas reporter at Platts, and associate editor of BP’s internal magazine. She’s also worked as a reporter on English language business papers in Poland and Azerbaijan, and was a Reuters graduate trainee in 2004.
Isabella, great to have you here at METACO Talks.
[00:00:49] Izabella: Thanks for having me.me of those achievements were very long ago.
[00:00:54] Seamus: Well, impressive nonetheless. I think this is great to reconnect. We were on a round table discussion in April where we talked about the investability of Bitcoin. I think to a degree there’s a similar theme in how the market and you, I guess, are reappraising that.
[00:01:12] Izabella: Yeah, absolutely.
[00:01:15] Seamus: To kick things off, it’s interesting, you’re a writer currently at FT; FT is often characterized as being a little bit hostile to crypto, which is not the case from our last discussion that we had. I’d be very keen to hear your personal journey, how your views have evolved around Bitcoin.
[00:01:34] Izabella: A lot of people sort trash-talk, say we’re haters. I don’t think that’s actually fair, or that we are biased. I think sometimes it’s missed that we are equally harsh on everybody. There is a misperception that we are specifically harsh on crypto. We came out of the GFC being incredibly harsh about the conventional system and about banks. We’re not a voice that is saying crypto bad, conventional system good, by no stretch of the imagination.
I think what we are pragmatists. Certainly my perspective has always been one of cynicism, because it was a fanciful creation. It had an incredibly larger-than-life ambition, to take down the standing system. As a committed pragmatist, I’m always cynical of the idea that systems can evolve in ways that don’t descend back to the path of least resistance. In finance, the path of least resistance is always centralization. It’s always the creation of a trusted intermediaries, because that is just simply the configuration of how finance operates.
I guess my cynicism has always been centred on this idea that, to assume that Bitcoin has solved this problem, is a very big expectation. Over the years, our general perspective has very much been, I would say confirmed, because remember what we were saying is that Bitcoin is not going to suddenly decentralized finance. In fact, it’s created, I would argue, as big an opportunity for new trusted intermediaries as there ever was. That’s the ironic cyclical approach. The life cycle of a FinTech is that you eventually become the thing that you were trying to disrupt. That’s really my perspective.
Now, where it has changed in the last year, and this is just a personal perspective, is that whilst I was very cynical about the standing system and very aware of its problems in terms of the GFC, the fragility, the potential in a lot of cases for fraud, I still very much trusted the government. That is basically where I’m coming from. I think with the pandemic, it’s not that I don’t trust the government, it’s just that I have been quite shocked at how quickly social norms can change. I never really appreciated how quickly that can happen. I’m not sitting here saying I don’t trust the government at all; I do think it has alerted me to the fact that Bitcoin just solves a problem which is in the event that – I never thought that our democratic systems would be fragile to the degree that I now think maybe they are. I That is fundamentally what changed. I think in that environment, Bitcoin does solve a problem, which is that when you have no alternative way to fund yourself because all the systems are controlled by a potentially corrupt government, I do think that it solves a problem.
Of course you can’t create that system when the corruption is already there. It has to be pre-emptive. Now I am future-proofing. I understand the point of future-proofing, is what I’m saying. Does that make sense?
[00:05:23] Seamus: Absolutely. I think it’s great context. I think many of us have had that journey from trust to at least questioning whether. Whether distrust or not, at least having the option; the escape route potentially. Gold’s always formed that to a degree, and now I think people look at Bitcoin.
With that context in mind, what do you think the role of Bitcoin is within capital markets as we see it?
[00:05:50] Izabella: In a hypothesis, and this is a hypothesis, whether there’s been a massive mispricing of the market. Let’s use the conventional Bitcoin cliché, that central bankers have overdone it a bit. I think in that world, it is useful to have a secondary asset that you can do comparative price valuations against. It’s a hedge, and I’m not convinced it’s necessarily going to be the hedge that responds the way people think it will.
I think that’s one of the things about gold. People think gold is very anti-cyclical. But gold, when you look at the historical record, it doesn’t necessarily always behave as you think it would. Even in an inflationary environment, what gold represents is a store of value, a last resort that can be liquidated when you really need it. That’s one of the reasons why often in a crisis gold goes down before it goes up. When you really need the liquidity, you cash out with gold. I think with Bitcoin, it might be similar. But it’s that final resort, that final reserve of liquidity that you wouldn’t otherwise spend.
That’s not to say the value will always be protected in that, but I think it does offer a swing balancing pool of liquidity that can be thrown out a tight liquidity situation, that is now compartmentalized.
We’ve never been in this situation before. Like in the GFC when we run out of liquidity, there wasn’t a third pool of liquidity that you could just tap. Now there is. There is this pool of crypto, and it will be interesting to see what happens if everywhere else gets tight. Will people start liquidating the crypto or will it be a flight to safety? I’m not sure how it will operate. I think it’ll probably be a mix of two; the people who are distressed will liquidate and those who are worried will flight. It might balance itself off. But it offers an alternative tool in that scenario.
I do think institutions now, whether they like it or not, whether they believe in it or not, it’s now probably impossible for them to ignore it. That’s going to change things because the more they come into it and the more they legitimize it, effectively the more it will become a self-fulfilling prophecy that it will behave that way.
[00:08:40] Seamus: That dilemma you talked about, liquidity versus the money of last resort, potentially it’s more of a time horizon question more than anything, because everything goes down to the same. Most liquid things go down first because that’s where you can raise money with. But longer term liquidity can be a function of what the central bank does, how they respond. Excess liquidity can drive a longer term movement into that asset. That’s less limited.
You may have touched a little bit on some comments on Bitcoin. Expanding that a little bit, do you think Bitcoin is potentially a good form of money? I’ve seen you’ve posted on this in the past; I’d love some more colour on that.
[00:09:17] Izabella: In terms of money, I see it more as an alternative asset. I see it as a useful mechanism to balance and anchor different fiat systems. I think it’s pre Bitcoin and post gold. You’ve had all these different non floating currency systems, and it’s hard to compare and contrast because there isn’t a universal anchor against it. You’ve got the SDR, but there isn’t an anchor that you can compare these different fiat systems against the relative benchmark. Bitcoin, because it’s fundamentally anchored to the cost of energy, it provides the ability for different fiat systems to compare themselves.
That is really where the potential I think is. On the ground, when it comes to day-to-day transactions, there’s just too much legacy commitment. We had the Euro come in and trash a load of local currencies, but that was under mandate. That would take incredible buy-in from the political classes, and Bitcoin by nature has to. It can’t do that top-down mandated thing, because that would be hypocritical of what it stands for. To have buy-in from the bottom would be really hard. People will always default to the local currencies; and they understand, they think in those numerator is fundamental.
There is a place for Bitcoin in the end. I know Bitcoin’s people defence, but the one transaction market where it does operate in is the black market. I agree with people who say the black market transactions are not the be-all and end-all of Bitcoin. But it’s also the case that one of the areas where it does get transacted in as an actual money tool, and that’s not necessarily a bad thing. I think now of like for Rotarian regimes under the USSR or whatever, there was always a vibrant dollar market because for a chain system you need a secondary non-controlled money system. Emerging markets are places where there is no trust or buy-in in terms of the government. That’s not a bad thing, because the black market isn’t all just drugs and criminal activity in an authoritarian country. It can be your market for repressed press or the market for repressed goods; or for legitimate things that are about resistance to those authoritarian states. That’s where I think the transactional potential is. But I think the two can coexist. I don’t think it’s one or the other.
I think the system works better when there are challenges to each other. The consumers have a choice. Sometimes you need the resilience and stability of fiat and a controlled and managed currency. If you trust your government, I don’t see the problem with fiat. Other times you don’t, and you need Bitcoin. The best option is to have both.
[00:13:00] Seamus: Great. I think it’s often overlooked that most of the world, we take it for granted that – you’re in UK and I’m in Switzerland, we’re working in financial system, working in banks –we can trust relatively trusted government. Many countries don’t have that. I think that’s often missed as a core view that there needs to be an alternative, or it’s very helpful to have an alternative.
In the context of alternatives, gold and let’s say Gold 2.0 as sometimes Bitcoin is described, is often viewed as a hedge because they’re viewed as limited supply, potentially deflationary. We’ve had Paul Tudor Jones, people like this popularized the thesis that Bitcoin is an inflation hedge, and it’s hedge because it’s because limited supply. But you’ve raised some interesting questions around the potential velocity impact of Bitcoin. Is it as deflationary as people think, this asset class?
[00:13:51] Izabella: Well, yeah, exactly. Because how much of Bitcoin is currently stored in highly immobile reserves? The thing about Bitcoin is that it is effectively at its base a full reserve system. That means that unlike in the conventional banking sector, if you’re just sitting on your reserves at the bank, you’ve got your deposits in the bank. “Hey, I’ve got millions of dollars.” They’re probably being recycled through the financial system. They’re always mobile. You’re not using them. The bank is taking a risk. Nowadays, post GFC we have much stricter regulations in terms of how much of that liability they can effectively recycle.
But I think fundamentally, there is recycling going on, whereas in Bitcoin there isn’t. There was an emerging bottom-up organic recycling in that we have all this DeFi, and people putting their assets to work just to generate a yield in their own way, and it’s coming into Bitcoin regardless. But the base, if you choose not to engage in DeFi or whatever, the default isn’t that your money is being recycled. That means in an inflation period, you’ve got all these potentially immobile stagnant pools of Bitcoin that might suddenly be mobilized, and that the system hasn’t really accounted for. They have, and they haven’t, because we don’t really know how many of those stagnant wallets are forever stagnant because people have lost their keys or they’re just sitting on the side-lines. That is quite hard to analyse as well.
You have all these potential claims that could suddenly be mobilized. If they do, that’s an inflationary effect because there’s suddenly a lot more claimable money in the system that then you might’ve appreciated before, if that makes sense.
[00:15:56] Seamus: I think it’s a point; that’s not discussion, I suppose. Very interesting.
You’ve been somewhat critical in the past, the definition of ESG assets. Obviously ESG has been one of the classic funds in the Bitcoin market. What’s your broader view on how you think how that applies to Bitcoin, or even how maybe that narrative has evolved in Bitcoin?
[00:16:19] Izabella: From a very simplistic ESG perspective, Bitcoin is a no-go area because of its huge energy footprint. But ESG, isn’t just the E, there’s also the S and the G. There’s a little bit of a conflict there.
One other area where this conflict manifests, for example, in the solar panel manufacturing world. On one hand we should be investing in solar because it’s going to be renewable and satisfies E, but now it transpires that like 90% of solar panel inputs are basically made in weaker country in China, potentially with very uncouth labour practices. Well, that doesn’t satisfy SOG. So which one is it, and how do you offset?
I think that’s the simplistic problem that ESG is going to come into more and more, because the more E, the more it’s going to repress the S and G in some areas. The Bitcoin is at the front line of that conflict, because it does, as we discussed earlier, potentially provide a tool for repressed people like the weakers to help defend themselves against authoritarianism. I think that is going to be a conflict.
[00:17:46] Seamus: The devil is in the details. You can’t summarize these things as just one letter, doesn’t summarize the whole story.
[00:17:52] Izabella: Even on the E, it’s very easy to bash Bitcoin on the energy frontend. Superficially, it does have this terrific energy footprint. But I do think there is a false equivalence, because what is worth spending energy on, and is a very subjective perspective. We learned this through the pandemic, in terms of one man’s non-essential activities, another man’s essential activity. When some third party comes in dictating this is essential and this isn’t, and you have a right to spend energy on this but not on that, and doesn’t question how spurious other activities are – there are other energy wasting practices that are at the same time undermining the SNG – I would say huge data farms that support monopolistic corporates that are effectively undermining worker rights and all that stuff, they’re great maybe, but I don’t think we’re looking at it from the full perspective. I think we’re being a bit knee jerk about it.
The other thing about Bitcoin, I haven’t thought this out properly and I always welcome criticism, I’m just putting ideas out there, but I do feel like there is a part of the energy story where Bitcoin creates a much better incentive to create solutions to the carbon emissions problem. Because energy is such a premium in that market, the innovation there already has been quite amazing in terms of how they are adapting to create the cheapest, cleanest energy, much more so than in the conventional market. It just shows you if you’ve got money at the problem often that is going to give you a solution much better than attacks or something. It’s equally powerful to this day.
[00:20:00] Seamus: Makes sense. Bitcoin’s success has been a bit on set incentives, so there’s no question thinking about those incentives instead of getting away from it. Does this have any purpose? If you spend anything on it, it’s a bad thing because it doesn’t have a purpose, which seems to be the main point of criticism. I agree. Are you incentivizing the use of flaring from the petrochemical industry or you’re incentivizing the potentially trapped that renewable energy? There’s huge opportunities to change that narrative.
Another thing you’ve spoken about before, and I’d love to get your thoughts on, is privacy and Bitcoin. Going back to the whole question of weakers, how do you see these two things balancing out?
[00:20:43] Izabella: I am still incredibly critical of the cryptocurrency ecosystem, so to speak. I think it’s incredibly partial to manipulation and fraud. It takes advantage of people who have been quite naive. It’s very hard to differentiate anything that has true value, no value. It’s so subjective in that world, so many pump and dump schemes. We have to be incredibly vigilant. But if I was to put any pro crypto hat on, it would have to be the Bitcoin maximalist one, because that makes more sense to me. Of course, in an open market, you can’t stop duplicates and all these, but that’s fine. That’s an open market. But I think Bitcoin does have this amazing advantage of being the first one, and logically the system won’t really work. What I’m trying to say is that it’s a competing market for different reputations. At the moment the Bitcoin reputation is the incumbent first entrant. I think that really matters and makes a big difference.
What was the question? You were talking about privacy. On privacy, I am very disappointed as a result because I more identify with maximalist perspective. I understand why a community would make these concessions; because it’s about growing the ecosystem and sometimes you have to go backwards to go forward, and get established and to make a name for themselves and grow the market and make it a fundamental force to be reckoned with. But to achieve that, I do think they’ve backtracked on a lot of the original vision of Bitcoin; amongst other things, the censorship resistance side of it, and the KYC, AML.
Bitcoin is just another flavour of the fiat system in many ways, because it’s capitulated to all those requirements. It’s not say I don’t agree with KYC, AML. I’m having issues with it; I’m, I’m not convinced it’s solving the problem it’s wanting to solve. Ian Greek has written about this, and I agree with him a little bit, that we’re being slightly deflected by the whole KYC, AML side of things, that it’s a solution to all the entrenched corruption and criminal things. The reality is, in my opinion core criminals can get around KYC and AML. The fundamental problem in the system is corruption, not visibility. I think anonymity doesn’t necessarily mean bad practice.
When you look at Alphaville and the FT, one of our biggest stories in the last few years has been Wirecard, which is a really great example of a fiat world FinTech that proved to be a massive fraud. It was through the corruption side of it. On the surface of things, it was totally in line with KYC and AML. I think it’s much more complicated than that, and I am disappointed that there isn’t more commitment. I understand why, but I’m disappointed that there’s not a lot more. I would want more privacy proofing in the system at this point. I know that’s hard because you can’t be compliant with the system and maintain the level of privacy that Bitcoin originally had.
I see the market bifurcating, or have the cleared whites Bitcoin world, and then you’ll have the black market non verified. The two will probably co-exist. As it is currently with the dollar market, it’ll be really hard to transfer in and out of it. That’s the way the system wants it. Our arguments have to focus on really addressing whether this approach to encouraging best practice in transactions is actually the right one, because I don’t see in the last 10 years as we’ve intensified all these practices, if it has improved anything. I don’t think it has. I think it’s actually making things worse.
The way still solve the problem is, with respect, reconfiguring something in the side of things, rather than this top-down effectively very anti-privacy campaign against people. I don’t think that’s constructive.
[00:25:40] Seamus: I think that’s a fantastic insight. Yes, the market is being forced to do this, but it has addressed anything in the existing financial system, is this the core question. Why should it be any better?
[00:25:51] Izabella: Well, the thing is you lose the argument. I have often made the case that Bitcoin was sponsoring really bad transactions. It’s not that I renege on that, I don’t. I think the criticisms and my analysis was correct. It’s just I now realize that Meta is probably not the best approach to solving the problem. The problem the system is corruption. That is my revelation.
Corruption is like the garbage in, garbage out problem. If you know someone who has the power to implement an account on your behalf, it doesn’t matter if KYC, AML is there, because they just pretend they’ve seen it. That is the point. It is impossible to regulate unless you solve the corruption problems. You’ve got address, why is the corruption there in the first place?
[00:26:55] Seamus: Totally. We’re a little bit short of time, but given the theme and this line of reasoning, I’d love to just get one final question, about what your views are on CBDC and where that’s going.
[00:27:08] Izabella: I think it has been quite interesting, because the Nigerian Central Bank is now issued. It is e-Naira. I’m very cynical about CBDC’s. I’m not sure what problem it’s solving. I don’t see how it’s very different to the conventional system. I think a lot of it is PR. Having analysed the most recent Nigerian system, I really struggle to see how it’s different. The only different thing is that it creates a full reserve system for the fiat world on the payment side of things.
Really I think it’s misbranded. The biggest innovation or transformation that comes to CBDCs isn’t the digitization of money. It isn’t that it introduces or it makes it easier to access the banking sector, because in Nigeria you still have to have a prevailing bank account. It doesn’t facilitate, because of the privacy access paradox the central bank still has to take your name. That means that as soon as you are evaluating on a standard basis, then you have to have non-accessibility, because you have to have the right to decline people, which inadvertently creates an inclusion problem. I don’t see how that’s different.
Fundamentally, I think it’s a shift from a low reserve system to a full reserve system. That is a completely different argument economically, and no one is talking about that argument. Everyone is talking about the digitization. If they are talking about the problems, they’re talking about, and I agree with this, that it can crowd out the banks. But at the moment, say Nigeria and most flavours of CBDC, they want to limit the amount of CBDCs you can hold on any account. That limits the crowding out stuff.
It looks increasingly like it’s not proper. The real reason you want a CBDC is in a crisis GFC situation, where you can actually withdraw from the bank system and put all your money with no cap in a Fiat government account effectively. That’s what you want. But you can’t do that with CBDC, because they’re going to cap it at like a thousand pounds or whatever. Useless on that front as well.
[00:29:32] Seamus: I’m sure we could spend another half hour talking about just with CBDC, because we’ll want to go there. What happens with velocity? What happens to privacy?
We’re out of time. Isabel, it’s been great to have you, been a real pleasure. Thanks for your time. Anything else you’d like to wrap up with, before we go?
[00:29:52] Izabella: No, I think watch this space. There’s some interesting things coming up in my personal life in the next few months. Get in touch if you want to know more. I’m in this transition point, let’s just say.
[00:30:05] Seamus: Watch this space, as you said. Thanks again for coming. Our next METACO Talks will be two weeks; until then wishing you a great weekend. Stay informed at www.METACOTalks.com/talks.
[00:30:16] Izabella: Thanks.