Transcript: Nic Carter, Episode 79

This is the human edited transcript for Episode 79 with Nic Carter.

Anita Posch [00:04:55] Hello, Nic. A great pleasure to have you on the show.

Nic Carter [00:04:59] Thank you, Anita. I’m a fan of your show so it’s a privilege to finally appear on it.

Anita Posch [00:05:05] [chuckles] Thanks very much. I also appreciate your work and I’m a regular listener of your podcast. Maybe some of our listeners don’t know who you are. Please give them an introduction about who you are and what you do.

Nic Carter [00:05:21] Well, first and foremost, I’m a Bitcoiner. I’m dedicating my career and my life to elevating Bitcoin and advancing its objectives, which I really believe in. I think it’s much deeper than just a monetary protocol. I think it has certain core philosophical values which are embedded in it. Which I aligned with. We can get into that later but I think it’s an extremely good thing to spend one’s career on and that’s what I’ve decided to do. The actual way that I instrumentalize that is, I am a co-founder of a venture firm and a partner at a venture firm called Castle Island Ventures.
We’re based here in Boston, Massachusetts. We invest in startups that are building infrastructure and applications in and around Bitcoin and more generally, the public blockchain industry as well, which includes building on stablecoins and the like. We support seed-stage startups that are building, in particular, on the financial services side because at its core, this is a monetary and financial asset class. I know there are other applications that people believe public blockchains are good for but to me, they’re primarily a financial phenomenon.
The other thing is that I am the co-founder of a blockchain analytics startup called Coin Metrics which is dedicated to creating really reliable capital markets data as it relates to the asset class as a whole. If you wanted to understand the economic throughput of any of these blockchains, that’s what you would use Coin Metrics for. That was built to solve a specific problem I had in business school which had to do with getting reliable data on the nature of these assets and these monetary protocols, which didn’t really exist at the time. So I built it, initially, to solve a problem for myself and then I discovered that lots of other people had that same problem. Now it’s a Series A business. I don’t actually run it on a day to day basis. We secured a CEO to run the business but it’s a post-Series A startup with about 25 employees so it’s doing well.
Aside from that, I was Fidelity Investments’ first crypto asset analyst. So I was the first dedicated analyst to cover public blockchains and digital assets for them. That was before they’d launched Fidelity Digital Assets. That was back when they were still in their exploration stage.
That’s the reason I ended up in Boston, was to take that job. I had the privilege of working for them and helping to educate the senior leadership as they went through their Bitcoin journey so hopefully, I helped to guide them in the right direction there. I think Fidelity has been a great asset to Bitcoin and the industry as a whole so I’m extremely proud to have worked there. Now, of course, there’s a lot of employees in their digital assets unit and some extremely talented analysts that are undoubtedly surpassing the work that I did there but yes, I’m very proud to have been an alum of Fidelity. Hopefully, I can end up working back there one day. We’ll see.

Anita Posch [00:08:31] Why would you want to work back there when you have your own companies?

Nic Carter [00:08:36] Well, yes I mean, maybe, collaborate with them in some capacity.

Anita Posch [00:08:39] Ah, okay yes. It seems you did good groundwork there because now they are one of the greatest asset managers but how did you get into this space in the first place? I think you studied philosophy.

Nic Carter [00:08:55] Yes. Undergrad. I mean, my story isn’t really that exciting, I would say. I don’t know. A lot of people have these really compelling stories about how they found Bitcoin so they could buy drugs on the Silk Road or something like that. Or they had to get their assets out of Dodge and Bitcoin was the only way to do it.

Anita Posch [00:09:19] Or their mom was dying and they needed some medicine or something like that. I also don’t have these stories. [laughs]

Nic Carter [00:09:27] Yes, my story is very mundane. I was an avid Redditor, I read Slashdot. I just read all those tech-related forums and I found it that way. Probably the 2011, 2012 kind of era. I didn’t take it seriously though. The first serious thing I did relating to cryptocurrency was I tried my hand at mining Dogecoin in late 2013, I think, or early 2014 when I was still at university and managed to melt one of my laptops doing that. [laughs]
I lost sight of the industry for a while and after Mt. Gox, I thought that Bitcoin had died. Then, it was actually in 2015 when Bitcoin had failed to die that I took a second look at it. That’s when I was starting to take finance much more seriously as a career path. I decided I was going to go to business school and get more of a formal training in finance.
That’s when I understood that it was actually an asset class. Not only that, but it was a very important phenomenon. A virtual commodity, effectively, that exists outside the boundaries of the nation state. It took me a long time but it was people like Chris Burniske and Tuur Demeester that were very influential in my thinking.
My undergrad was philosophy. I studied ethics and epistemology. These are concepts that have some intersection with Bitcoin. Obviously, no direct overlap but a lot of my writing does center on relating these philosophical concepts, which I think are quite useful to Bitcoin to help us understand the asset.
What is it?
What does it mean to talk about the existence of Bitcoin? What is the substance of Bitcoin? What does that entail? These are really important questions and I think people don’t consider them enough. I mean, how could it be said that Bitcoin has persistence over time? What differentiates Bitcoin from some imposter chain that calls itself Bitcoin?
These are pretty tricky questions so I’ve tried to help elucidate them. I don’t know if I’ve succeeded but that’s definitely something that I wonder about a lot.

Anita Posch [00:11:50] What’s the most important characteristic or property of Bitcoin that you have investigated, like from the philosophy side, that are interesting to you? Or what do you think was the greatest intersection with other sciences or thought schools?

Nic Carter [00:12:11] Well, that’s a great question. I think metaphysics has some useful lessons for Bitcoin. Basically, that’s just a fancy word for saying the study of existence. Bitcoin is a very troublesome asset from an ontology perspective. As in, what is the essence of Bitcoin?
Because depending on whom you ask, you get a different answer. Some people say Bitcoin is the longest chain or the heaviest chain. Other people will say it’s the asset with the ticker BTC. Some people will say, it’s the asset the Bitcoin Core works on. Some people will say, it’s the UTXO set or other people say it’s a protocol.
So there’s actually not a lot of consistency in terms of what is Bitcoin and this has been harmful to Bitcoin, in a certain sense, because you’ve had assets which effectively duplicated the UTXO set and they claimed that common history and lineage. Then, they went off in a different direction by changing the protocol and having a fork and those assets laid claim to the essence of Bitcoin. Not only did they duplicate the UTXO set but they actually claimed that they were the genuine article. They claimed they were the true thing.
So then the question is, can you devise a rule such that the Bitcoin we consider Bitcoin, is the original Bitcoin and these other assets are not?
That’s actually a much more troublesome task than some people would think because any rule that is sufficiently stringent, it has the potential of actually having the consequence that Bitcoin itself is not considered the original. So you have to design a rule that’s flexible enough to accommodate the changes in Bitcoin itself because Bitcoin has changed a lot. The composition of the developers has changed. The nodes that constitute the network, they’ve changed. Of course, we’ve had hard forks, historically, in response to bugs. The UTXO set is obviously changing all the time. The software that we use to access the network, that has changed as well. The miners that construct the blocks, those are constantly changing and depreciating the actual machines. So you’ve designed a rule that’s fairly flexible but still takes note of the fact that it’s important to resist fragmentation and to retain this unity, this property of there only being one Bitcoin.
Because you don’t want to design a role such that any network could copy-paste some features of Bitcoin and then, genuinely claim affiliation. It’s after puzzling over that, that I would say the best answer is probably a hybrid where we look at some of the things that give Bitcoin continuity.
This actually has lots of intersections with discussions of consciousness, I would say, and that was the first way I looked at it. How could you say that a person is the same person that they were a year ago? If their body is changing and maybe their cells and their actual atomic composition is constantly changing and their memories are being updated. Even the composition of their conception of their self is changing.
If I were to ask you to describe yourself. What your personality is today, that might be a very different answer than what you gave me a year ago.
So I think that notion of personhood and identity over time, you can borrow some of those concepts and try and devise a test that yields a stable conception of what Bitcoin is. To me, for Bitcoin, that would probably be something like, “Well, we’re gonna look at the stability of the core values, undergirding the protocol.”
We have to effectively ascertain what they were because they weren’t really made that explicit by Satoshi. Then, try and find some other ways to track the persistence of the protocol. Whether it’s the rules itself, the protocol, or the UTXO side. I think it’s an enormous challenge and it’s also something that service providers have to worry about.
If you ask major exchanges and custodians, they will have a fork choice rule or a fork legitimacy set of rules to ascertain which is the genuine Bitcoin in case there’s another fork. So this isn’t just a completely navel-gazing, philosophical discussion. It’s actually something that’s incredibly pragmatic.It has a real-world purpose to it so it’s questions like that, that fascinate me.

Anita Posch [00:17:29] I’m also fascinated about that and you just said the set of values, it’s what I understood or what I think of myself when I think about how my perception of my own identity has changed in the last decades, in a way. I still, I think have a basic set of values that I follow or that I lead my life upon. When people ask me, “What are the values of Bitcoin?”
I always say, “Well, I think you can decide upon another cryptocurrency if you agree with it or not, or want to buy it or whatever.”
If you compare it to the basic values or principles of Bitcoin. Like being uncensorable, transparent, open noninflatable and all those things, that would be like my own set of values for my life. Is this something we can use to compare that?

Nic Carter [00:18:32] Yes, I think so. Although, I would say the distinction is that the things we believe in, as humans, can change and society would consider us to have that persistence and effectively be the same person. Whereas a point I’ve tried to make recently, is that the system specified by Satoshi and that was baptized with the name Bitcoin, that’s actually a fairly specific set of traits and values that were assembled into a whole.
Some of those values are statutory or sort of constitutional and can’t really be changed too without creating a new system.
The analogy I would cast would be a kind of a constitutional one. You know? So the United States is a federal republic where individuals can vote to elect representatives and senators and we have the judiciary and an executive branch and legislative branch. Then, you’ve got a bunch of states that themselves have certain powers and to a certain degree that arrangement of powers can be malleable and it can change. So we’ve had new additions to the states and the judiciary and the legislature and the executive have hashed out their power over the years. That’s changed. The balance of power has changed a little bit but some of the very core features are also static. The fact that there’s a Bill of Rights so individuals and States have rights that are meant to be unimpeachable. That federal government can’t necessarily abrogate those rights.
So I would say similarly, there are certain absolutely core values that are embedded into the Bitcoin system that are also unimpeachable. If you were to change them, you might still call it Bitcoin, but it would be a different system. The same way that if you said, “Okay, there’s no more states, there’s just a solely federal republic here and also we don’t have voting anymore. We’re abolishing the judiciary.”
That would just be a different system. Whoever would be in charge at that point might still call it the United States but that name would be empty because the core features of the system, that define the system, wouldn’t be present.
So the same with Bitcoin. If, for instance, the digital scarcity element of Bitcoin was suddenly no longer present, I would say that’s actually not really Bitcoin. Maybe it’s a useful system. Maybe it’s a great system, who knows, but I would say that it’s something totally distinct. So I think you can only stretch the boundaries of what Bitcoin is so far before you break it. We have to acknowledge that, “Okay, this is something new.”
That’s not to say that the system can’t change. It’s definitely changed a lot but can only change in some respects and not in others if we are to consider a Bitcoin and that’s kind of a controversial view,. I’d say a lot of people out there think, well, actually, if it comes down to it, we can bust the 21 million cap or something like that. Or we can change the commitment to property rights in the system to make them slightly weaker if we have to and it would be important for us to still be able to call that Bitcoin. That’s a very pragmatic view but I would say, I pretty much disagree with that. I think it’s important to enumerate these very fundamental values because that’s the thing that actually gives Bitcoin persistence and that’s one of the hardest things to do is to take an unopened largely ungoverned system, which is built by millions of people worldwide and give it a notion of persistence. And that’s actually something that’s incredibly special.
That it hasn’t fragmented hopelessly and its persistence over time, despite the fact that there’s no leadership. That completely differentiates it from every other cryptocurrency out there. There’s no other successful example of that, in my opinion. That’s something that’s very underrated.

Anita Posch [00:22:58] I guess one reason for that strength is that so many people are on the same page. They got into Bitcoin and I have the feeling that most of us Bitcoiners are on the same page regarding privacy and censorability, free speech and these things and all of us maintain this and Bitcoin how it is because there has to be a consensus on it.

Nic Carter [00:23:30] Yes, I agree. Sometimes I meet people that like Bitcoin but don’t seem to value the properties that Bitcoin gives them. I kind of wonder why are they even interested in Bitcoin? It seems like just a fashionable thing to them. The whole point of Bitcoin, I like the way Hasu puts it, is to create an independent system of property rights that’s not dependent on any legal or political construct. You could consider Bitcoin’s protocol its own internally, consistent legal system that governs behavior in a very narrow context with respect to moving monetary units around. In countries with functioning legal systems and respect for property rights, Bitcoin is seen as irrelevant.
It’s like, “Okay, why do you need this? We have our own very functional financial system and legal system.”
The state takes care of everything and disputes can be settled through police and the courts and so on. So that’s why many Westerners think Bitcoin is just this complete folly, this irrelevance. Then again, it’s all contextual as you know, there’s lots of countries with completely indifferent, legal systems that don’t sanction and protect the rights of the individual and, even corrupt, judicial or political systems that are completely arbitrary. Relative to those settings, Bitcoin is far superior because even its narrow domain, where it delineates a very small set of things you can do, the individual’s rights are protected. Or they’re protected in a different way. Whoever has knowledge of the key is the owner, effectively. So depending on the context, Bitcoin seems completely surplus to requirements and completely irrelevant or incredibly potent and incredibly useful in terms of protecting the rights of the individual.
I would say, Bitcoin skepticism is often couched in this like Anglocentric view of the world. Where people couldn’t conceive of a situation where property rights are respected, at all.

Anita Posch [00:26:07] Yes. I also see that here in the German-speaking world that people don’t really understand why we would need something like Bitcoin and they always, or very often, that’s also how the media frames or the politicians frame it. That it’s only for criminals and terrorists.
As we know, just like today, there are the FinCEN files that have been leaked. Those show again that big banks like HSBC, JPMorgan, Deutsche Bank and others moved money for organized crime terrorists and drug traffickers and interestingly, also money from OneCoin and Ruja Ignatova appeared in the FinCEN files. So today Andreas M. Antonopoulos commented on that and said that’s not really a good thing for Bitcoin because authorities will build tighter regulations using more surveillance and control methods upon money and that will, of course, include cryptocurrencies. Sometimes I feel a little bit, how shall I say, pessimistic about all of this and I hope that it will play out that way. That we can still use cryptocurrencies in a private way. What’s your take on that or your view for the future?

Nic Carter [00:27:34] Yes, this is the existential question, really. If you’re a participant in the crypto industry. Crypto means ‘hidden’ and fundamentally, that’s what we’re trying to accomplish here. We’re trying to restore the notion of cash but in a digital context and restore the assurances that you get transacting with cash. Which includes not producing metadata, not informing any third party of what you’re doing for that transaction and having full discretion and full autonomy over the nature of that transaction and it’s still a work in progress.
The cypherpunks were obsessed with fully anonymous payment systems. DigiCash, arguably, had better privacy protections than Bitcoin does. If you look back at the mailing list, it’s all ‘privacy, privacy, privacy’. Then, Bitcoin was kind of a ‘worse is better technology’ where Satoshi had to make some compromises around privacy, in order for the system to work. It would have been probably too difficult to include something confidential transactions in Bitcoin in day one and the data overhead would have been too big. We needed that auditability, that transparency in order to have confidence in the integrity of the money supply.
So there’s a lot of really good practical reasons why Bitcoin could only be pseudonymous and not fully confidential so it’s still a work in progress. I’m actually quite optimistic over the potential to create a sort of fully confidential stablecoins, that would effectively mirror digital cash or cash in a digital context.
So I’m optimistic about the scope for innovation there and obviously, to create more privacy-preserving ways to transact on Bitcoin. That’s the central conceit of the industry is autonomous and private transactions. I think if you are sincere and you’re in this industry for the right reasons, you acknowledge that.
and you also acknowledge that this is something that’s fundamentally at odds with the objectives of the modern state. Which seeks to surveil, virtually everything. The state has never met a surveillance power it didn’t like and its scope and its Dragnet grows. Inexorably. It doesn’t ever shrink, right?
The domain of life that the state seeks to have insight into always grows. I think financial surveillance is the best example of that. Prior to 1970, you could really transact with cash, in the U.S. at least, without too much oversight. Without disclosure. Those transactions were final and an arbitrary size and it was great. Then, of course, we had the Bank Secrecy Act. There’s a case, I think it was called the Miller case, in 1976 which added to that. Which basically formalized the idea that my transactions within a bank are surveillable by the government without a subpoena. So my financial information that’s held within a bank and this is called the third-party doctrine, those are surveillable by the state. Then, the other thing that happened is that those cash transactions were increasingly marginalized and your reporting requirements steadily grew, this is something Bitcoiners talk about a lot. That $10,000 threshold for cash transaction report, where you basically have to report that you are making a cash transaction or deposit, that was never indexed to inflation. So that threshold got lower and lower, in real terms, as the dollar became worth less and less. So the combination of all those things and obviously as transactions became more electronic in nature, meant that financial activity became completely surveilled within the US.
Now, if you look at organizations like the FATF, the Financial Action Task Force. That is a transnational organization, dedicated to surveilling, or developing guidelines, on counter-terrorist financing and global guidelines on AML and KYC and FinCEN as well.
FinCEN was created in the early ’90s. I think FATF was created around that time, maybe in the late ’80s or early ’90s. I don’t think it’s a coincidence that these organizations and this objective of the United States as the global hegemon. It’s not a coincidence that they were created after the Soviet Union fell or, just as the Soviet Union was falling. If you remember the triumphalism in the US at that time. I wasn’t alive exactly but from what I understand, there was this view that the end of history had been reached and liberal democracy, as guided by the US and its stewardship of the Bretton Woods organizations was supreme, and wouldn’t be challenged.
The world had gone from a bipolar world, with the Soviet Union being the other center of power, to a unipolar world with the US as the sole hegemon. A superpower in the truest sense of the word. Then, the electronification of the world and the digitization of transactions. Those two things, together, combined to make regulators think that for the first time, they could not only have full surveillance ability into global networks or transactions but at that point, they realized that the dollar was powering virtually all commerce globally. They could create a surveillance apparatus, which penetrated through this entire global financial markets. They could create standards which every single bank, in every single country on earth, if they wanted to be part of that US dominated financial system, those banks would have to adhere to them. The threat would be that those banks would be excluded from the New York based correspondent banking system. They’d be excluded from Swift and that’s basically a death knell for foreign banks. Over the last 30 years, this has been the default. This has been how it’s worked.
So I think the timing, you have to look at it in context. We’re talking about the total ascendancy, the apotheosis of US power and this Washington consensus or this theory that international organizations stewarded by the United States, would create a single, unified regime. Both of political projection of power from organizations like the UN and then, trade organizations like the WTO. Then also, all unified by the financial system, the dollar-based financial system which was stewarded by these organizations that the US effectively controlled. So I know this is a very long-winded answer but I think the point is that American policymakers saw the opportunity to impose a homogenous surveillance regime. I think this is actually where the opportunity lies because now sanctions are the primary weapon of war, right? As opposed to actual warfare.
That’s because of this tight grip that the US holds over the banking system and they can even threaten China. It’s a very credible threat with sanctions. Even their allies now are starting to think, “Okay, this regime isn’t working for us. We don’t love the fact that there’s effectively one node in the network and they control everything.”
So I think the patience for the international orders, for this really enormous financial surveillance dragnet, is wearing thin. Especially as with the FinCEN leaks recently, we’ve seen that it’s not really that effective and it’s just a pretext for collecting as much data as possible. It’s not really aimed at reducing terrorist activity. The proof is in the pudding. It’s not very successful there.
I think it’s possible that the pendulum is going to swing the other way soon and there’s going to be defections from the system. Russia and China are already aggressively trying to defect but even our ostensive allies in Europe are saying, “Hmm, you know, we don’t really necessarily agree with this. Maybe we want to trade with Iran. Maybe we’re going to try and route around US sanctions to trade with Iran.”
So the long and short of it is, I think the system is fraying at the edges. That’s clear to everyone and I think the surveillance overreach is probably going to have these effects soon where people start to defect from the system and the US realizes it probably has less power, to impose such a regime, than it did maybe in the early ’90s.

Anita Posch [00:38:16] The thought of being able to control elicit activities or people who do that through financial surveillance, do you think this will not be also used in Europe or in other countries? Because I have the feeling that, I don’t know, do people outside the Bitcoin privacy small bubble think about privacy in any case because why do all those people build this stuff and say yes to it in a way? Don’t they see what they are building here? I mean, most people also say, “I have nothing to hide.”

Nic Carter [00:38:57] Yes. Most people, I think when given the choice to drink convenience and privacy, always choose convenience. I agree most countries are doubling down on their commitment surveillance and that’s not going to change. I think the important thing is though that this regime where everyone had to adhere to the U.S.’ standard of financial surveillance, that might not last forever. In theory, you could have nations which are defector nations. Maybe in the Caribbean, maybe tax havens would regain their autonomy and in a free market system, they can offer financial services to individuals which are more privacy-preserving. That’s been heavily discouraged and if you were a marginal nation or a tax haven, you’d have a very real chance of ending up on the FATF grey list or blacklist. So, I think that’s what I was alluding to. Maybe there’s going to be more of a free market for more private financial services in the future.

Anita Posch [00:40:01] I think this is also something you stated in the Cryptodollars paper. You went to your partner from Castle Island Road. Can you explain something to me please? [chuckles] I read the paper and I understand that crypto dollars are basically stablecoins and they are backed by different currencies. On the one hand, you have them backed by Fiat currencies like the U.S. dollars because the advantage would be that there is not such a high volatility as in Bitcoin, for instance. Then, there are also crypto dollars backed by Bitcoin or Ethereum and I don’t understand how they are more stable than Ethereum or Bitcoin.

Nic Carter [00:40:48] Yes. So it’s effectively, in that latter case, to achieve that stability, you’re transforming the risk profile but you have to pay for that. The way you pay for it is by introducing capital inefficiency.
The way it works for MakerDAO, which is the biggest of all of those crypto-backed stablecoins. To create $1 worth of DAI, you have to immobilize at least $1.50 worth of Ethereum. The theory is that based on Ethereum’s historical volatility and the natural risk management of the system, that it’s unlikely you would see enough downside volatility that that system would become insolvent. So you’re making an estimate over your view of Ethereum’s riskiness, relative to the dollar.
That’s like the fundamental business of finances, is transforming risk into a different flavor of risk but the problem with that system is that it’s much less capital efficient than simply taking a dollar and producing a tokenized dollar, which is the way that Tether or USDC works, which is why those Fiat backed stablecoins are way more popular than the crypto-backed ones.

Anita Posch [00:42:08] As far as I understand, one reason why Tether, for instance, or other stablecoins are used is not only the less volatility or the stability but also the ease of use but I don’t quite understand. Why is it easier to use Tether than, for instance, Bitcoin?

Nic Carter [00:42:28] Well, from a UX perspective, it’s about the same, right? We’re talking about digital bearer assets and it’s all the challenges that accompany that, from a mechanical perspective but I would say people have a hard time entertaining multiple different units of account in their heads at the same time.
I roughly know what a dollar is worth, relative to goods and services. Then, I know what a Bitcoin’s worth but that Bitcoin, I know what it’s worth relative to dollars. I don’t really keep track of what a Bitcoin is worth relative to men’s suits or a pound of beef or anything. That’s probably about the most I can manage.
I might know what a Pound Sterling is worth too but I think the reason people prefer stablecoins, if you look at the velocity of stablecoins, it’s much higher than native crypto-assets like Bitcoin or Ethereum. They prefer them because they’re all already familiar with dollars. The constituency of people that know what a dollar is worth is much bigger than the people that are willing to do the work to know what a Bitcoin is worth, from a commercial sense. So I think it’s really that. It’s just that mental friction of introducing new units of account but I think in the longterm, stablecoins are going be issued against Bitcoin. That’s going to be a very popular way to issue them because it’s very fragile and risky to issue them against dollars in bank accounts.
I think that might be more of a short term phenomenon. I don’t think that’s going to last forever. Or at the very least they’ll be reckoning there and we’ll see who wins. My guess is that, similar to the way that DAI operates with Ethereum, people will devise sophisticated ways to create dollar denominated risk out of Bitcoin. Treating Bitcoin as a reserve, and then creating this alternative note on top of that Bitcoin to transact with. To a certain extent, we’re already seeing some experiments there. So it’s actually pretty exciting, I think, to see this multilayered system of a unit of accounts developing.

Anita Posch [00:44:41] Stablecoins, most of the time, have a central issuer as far as I understand. So what if the regulators step in? They are not so uncensorable like Bitcoin.

Nic Carter [00:44:55] Yes, that’s correct and that’s why the different models really matter. So that’s why I alluded to the fact that the Fiat backed stablecoins are more fragile because ultimately, it’s the issuers and then it’s really the banks that are custodying the dollars. With the onshore ones, by onshore I mean based on the U.S. financial system, like USDC or TrustToken or Paxos. Those are actually in U.S. banks and then, they’re issuing tokens against those dollars in the banks. That’s obviously completely, trivially regulatable. We’ll see what happens there because it’s interesting, a lot of these stablecoins are freely circulating in the crypto economy, in a way that regulators would find unacceptable for FinTech companies like PayPal, for instance.
So they have much looser standards than normal FinTech companies have. So I think there’s probably going to be some sort of come to Jesus moment, at some point, when regulators realize that. So we’ll see. Then, Tether is slightly less accountable to U.S. financial regulators although, they’re trying to get them because the banks issuing Tether are all offshore banks. It’s not exactly clear what banks. Apparently, there’s a network of offshore banks where the actual dollars backing Tether are held and those are more difficult to get access to. But again, those banks are still part of the US-based correspondent banking system. So there exist levers that regulators can pull if they really want to get access to them.
Already the New York attorney general, it’s no coincidence this is New York, is going after Tether and trying to bring them to heel. The reason the New York attorney general cares about Tether, even though there’s basically no New Yorkers that were affected by Tether and Tether’s worked just fine for its whole history. So there’s very limited cause of action there. The New York attorney general cares because they have this monopoly on dollar clearing. There’s something like 11 banks that are all based in the state in New York that are global clearinghouses for dollars and every other bank ultimately has to transact with them.
Sometimes through various layers of separation but it’s New York where dollars ultimately clear. Tether, and Bitfinex really, represents an alternative dollar clearinghouse that’s a node completely outside of New York. So they object to the creation of a new node which routes against them.
So that’s their motivation for going after them.
Just to finish the thought there, the stablecoins that are issued against native crypto collateral in a programmatic way, they’re much harder to interfere with because the only thing that’s happening there is that users interact with smart contracts where they lock up certain crypto collateral and they produce IOU against that collateral but that’s the bottom-up thing that users do independently and that’s much, much harder to regulate. So it’s that category of stablecoins that I’m much more optimistic about. The ones that are being issued against liability-free collateral. Dollars in bank accounts are someone’s liability.
They’re liabilities of the banking system and the bank, in theory, could fail. Obviously, there’s deposit insurance and so on but they’re ultimately a liability of the banking system. Whereas Bitcoin is no one’s liability. There’s no one that guarantees the value of that Bitcoin. People say that’s a weakness.
That’s actually a strength. That means there’s no situation where the backer of that Bitcoin could withdraw their backing. The backing of Bitcoin comes from the fact that the market, as this collective view, the Bitcoin is worth whatever it’s worth $10,000. I don’t know exactly what the price is today.
I would put Bitcoin in the category of liability-free collateral. Which is similar to gold or another monetary commodity. Now, this isn’t new to you but it really matters in this situation because now we have stablecoins that are issued against collateral which can’t be undermined for any reason, aside from just the market changing its mind about the price.
That’s the strongest way to create a crypto dollar. That is reminiscent of the free banking era. We talked about this in the paper. Where you had banks, they were issuing notes against gold in reserve. They weren’t issuing notes against government guarantee or their soundness as a bank.
They’re issuing notes against gold itself because gold was a truly liability-free collateral. So this is just the modern equivalent of that.

Anita Posch [00:49:59] As far as I understand, back then the money supply was not controlled by the government and it still worked.

Nic Carter [00:50:09] Yes. So the free banking system I’m alluding to is the, in particular, the Scottish experience, in the 19th century and parts of the 18th century. In that case, the money supply, as you say, money was privately issued by banks. They weren’t really accountable to a central bank
and the system was exceptionally stable. There were very few bank failures. The banks themselves were fractional reserve. Rothbardians may not like this but the banks issued notes on fractional reserve but it was stable because it was a competitive system. If one bank felt that their competitor was over issuing notes, they could have a speculative attack on that bank where they bought up all the notes and they redeemed them for gold. Immediately, all at once.
If they didn’t have enough reserves, the bank that was conducting the attack was getting a good deal on redeeming those notes for gold, right? So there were market mechanisms that kept banks in check and kept them from over issuing. It was a moderately deflationary period.
It was a period of significant economic growth in Scotland. There was no need for federal deposit insurance or anything like that because the market regulated activity nicely. There have actually been other periods of free banking but that’s the one that’s best documented.
So I’d to encourage Bitcoiners to look into that historical epoch because I think where we’re going is something somewhat akin to that. I think that’s probably a good model for the direction this industry is going. Although, this time on a global scale and in a digital context which means that it’s much more scalable and those trust signals aren’t just limited to local geographies, to a few hundred square miles.
Now you have crypto banks which are global by nature. They have credibility. They have crypto reserves. The next step would be potentially to issue notes against those reserves in a transparent manner which you can do with cryptocurrency because it is natively auditable. So I think that’s one potential direction for the industry, is the reprivatization of the issuance of money. This time against Bitcoin as opposed to gold which is still a great asset but it’s not natively auditable and it’s not digitally portable either.

Anita Posch [00:52:43] I think I can remember that Scottish banknotes are not issued by the central banks.

Nic Carter [00:52:51] That’s correct. Yes. So the banks that issue Scottish notes are Clydesdale, RBS and –

Anita Posch [00:52:01] Bank of Scotland. I just Googled it, to Wikipedia. [laughs] I remembered it because when I learned about Bitcoin and blockchains and why we believe in money or that money has value, you also learn about what is legal tender and so the Scottish banknotes are, technically, not legal tender and still they work, people use it.

Nic Carter [00:53:26] You wouldn’t believe how many issues you have. So, I went to a school in Scotland, undergrad and grad and I would get these bank-issued notes. In theory, they were redeemable for British pounds because they all track the same unit of account, right? Now they’re effectively just a wrapper for pound Sterling.
But you’d go to spend them in England and there would always be disagreements. Shops didn’t want to take them and sometimes you’d hear an aggrieved Scotsman trying to convince the English shopkeeper that his notes were valid. It’s a vestige now because of course, it’s all just wrapper for English, central bank money but it is a reminder that there was a time, until 1844 when Scottish money was issued by the banks and not by the central bank.

Anita Posch [00:54:21] Interesting. Also because you mentioned banks or the potential of crypto banks in the future, there’s big news. Last week Kraken did get the approval to be the world’s first special-purpose depository institution from the state of Wyoming. I heard you talk about this and that you’re very positive or bullish on that. Can you explain what is so special about this?

Nic Carter [00:53:52] Yes. Actually, if you look overseas, there are already situations where banks have had the legal, formal right to hold cryptocurrency, including Bitcoin and the relationship between depositors and those institutions has been formalized. So actually in Germany, I think, there’ve been some recent developments there. In Switzerland, there are already some banks which can hold Bitcoin.
I believe Singapore is already progressive there. So world’s first is maybe slightly a stretch but this is a really important development in the U.S. for a couple of reasons. So, first of all, the SPDI is new legislation in Wyoming. Which is only about a year old and it’s really thanks to the efforts of people like Caitlin Long, who’s an amazing advocate for the industry. She was part of this committee on banking and convinced the Wyoming legislators, that they could make a name for themselves by really clarifying the legal nature of Bitcoin and digital assets, in particular, in a custodial setting.
Which is actually, believe it or not, really not clear in the U.S. at present most exchanges and custodians are actually regulated on a state by state basis. It’s a patchwork and the States regulate them in their capacity as money transmitters. They’re not really looking at whether they are responsible custodial organizations but exchanges are more like banks than they are like remittance companies, right?
So there’s an enormous challenge which is hashing out the rights of depositors and the obligations of those custodians, relative to those depositors. Especially in liquidation, really messy situations where it’s not clear that the Bitcoins held on deposit are actually the property and the legal entitlement of the depositors.
So you could imagine a situation where an exchange becomes insolvent, for whatever reason, maybe not even because they lost their coins and creditors have a claim on the assets of that business. If they hadn’t clarified their terms of service, those creditors could plausibly say, “Our right, Our claim is senior to that of the depositors’ and we want to be paid off first. We want to be paid off before the depositors.”
That’s what we saw in Mt. Gox and likely what we’re going to see in other situations like Cryptopia. So this isn’t unprecedented. There are lots of situations where depositors are at the bottom of the totem pole, so to speak.
So, what Wyoming said was, “We’re going to change this. So if you are going to get a bank charter under our system, you have to clarify that. You have to include bailment, effectively.”
So bailment means that a third party takes custody of your assets but they don’t have ownership of them. So custody without ownership.
To me, that’s basically the proper way that these exchanges should be regulated. I know lots of Bitcoiners say we shouldn’t have regulation but if you’re undertaking custodial arrangement, I think there should be some legal framework that depositors can use to know if they’re empowered. relative to the exchange. Where do they stand? Basically.
So it’s been about 11 years now since Bitcoin was created but this legal arrangement hasn’t really been formalized in the U.S. to date. So this is the first really crystal clear instance, where a state regulator has said, “Okay, we’re using this legal framework which takes into account the true nature of Bitcoin and what it is as a digital asset and we’re going to regulate exchanges and custodians accordingly.”
Now, obviously, there are other states like New York, which have written legislation relating to custody of digital assets but it wasn’t really done in a crypto native way. Even the Wyoming law talks about the potential for exchanges to prove their reserves, using cryptographic methods, which is pretty amazing and very progressive.
So that’s one important thing, is that it formalizes this relationship between depositors and exchanges. Kraken, led by my former colleague, David Kinitsky who I worked with at Fidelity. He runs Kraken Financial. They were the first to get it so I’m really excited for them.
Now the important thing to understand is that it’s a full reserve bank.
It’s not fractional. So full reserve, both for dollars and for crypto assets, for digital assets. So what this means is they don’t necessarily need Federal Deposit Insurance FDIC. This is very important as well because the FDIC, together with the Department of Justice, was the way that previous administrations have cracked down on industries they don’t like through the nexus of banking.
So some Americans will be familiar with this thing called Operation Choke Point. Whereby, I believe in 2013, the Obama administration basically, informally through the FDIC, advised banks that they would be unbanked or that they would lose their deposit insurance if they kept doing business with certain marginal industries. Now, these weren’t illegal or black market industries, they were just the industries that the administration didn’t like. So firearms, manufacturing and payday lending. I’m not a fan of payday lending but the point here is that the administration extrajudicially exerted their influence on whole industries through the vector of banks. Specifically, because banks are beholden to the federal government through deposit insurance, through the FDIC.
Now, if you have a full reserve bank, you don’t need deposit insurance because you can’t default, right? So if you have a Rothbardian full reserve bank, you’re exempt from that. That’s exactly the case with the Wyoming SPDI. Wyoming was targeted through Operation Choke Point. A lot of those banks that were pressured were in Wyoming and a lot of those businesses were in Wyoming. So the deeper significance here is that this is a riposte from the state of Wyoming to the federal government. Saying, “We’re reasserting our federal right. We’re going to create a new way to create bank charters.”
It’s virtually impossible to get a federal bank charter these days. It never happens. The number of banks is shrinking rapidly. So they’re reopening the free market of banks and they’re doing it in a way that says that they’re going to be much more independent from the federal government. So not only is it amazing in terms of clarifying a really muddy legal question we’ve had in the industry for a long time, but it’s actually an expression of political freedom from the federal government, which has massively abused the trust that we put in it through FDIC for political purposes in the past which is why it’s so exciting to me.

Anita Posch [01:02:30] It’s also, I guess, an example for following crypto banks and as far as I understand Caitlin Long and all the other people that were doing this have great knowledge about how Bitcoin works and how cryptocurrencies work. About hard forks and all those stuff and I think it’s important to have framework for the future.

Nic Carter [01:02:57] Yes. and the regulators in Wyoming have been spending a lot of time learning about these things. Now, we have a Senator who is most likely going to be elected in the fall. Cynthia Lummis in Wyoming. She’s a Bitcoiner. She’s been a Bitcoiner since 2013. So I think it’s very important for our representatives to be aligned with the cause.
It seems to me that the representatives that speak positively about Bitcoin are growing. There’s still a small constituency but they’re growing steadily and I’m not relying on that to bail us out or I don’t expect the U.S. to flip to being a super Bitcoin-friendly place, but the existence of enclaves like Wyoming that are clearly aligned with the cause is incredibly useful. It also shows the strength and the clout that we wield as an industry now.

Anita Posch [01:03:54] It’s so interesting. I could talk with you endlessly but we have to stop now, thanks for this. I have one or two last questions. One is a more general question. It’s a question I stole from Tim Ferriss’s podcast. [laughs] What is something that you would like the world to know? What would you put on an ad that is published on all social media platforms? A short message for everybody to see. What would you like the world to know?

Nic Carter [01:04:27] This interview, it covers that because these are the things I care the most about, right? What I would say is something like, you know, our financial infrastructure is politicized from top to bottom. From the very local level to the banking level, to the state level, to the national level and the transnational level. The entire thing is politicized but nobody should have their right to financial infrastructure withdrawn, based on who they are or the political views that they hold. Although that is the default today and I don’t know if this is a fact or a normative message but I think that needs to change and I believe it is going to change.

Anita Posch [01:05:12] Okay, Great. Thank you for that. Please tell our listeners where they can find you and follow your work.

Nic Carter [01:05:19] Well, I made a personal website recently, so that’s, niccarter.info. That’s N-I-C carter.info and you can find all of my writing there. Maybe with the exception of the pieces that I wrote that I don’t like but that’s the number one. If you want the full Nic Carter archive, which I don’t know if anybody actually wants that besides me.
[laughter]

Anita Posch [01:05:41] Oh yes, I do.

Nic Carter [01:05:47] Then of course, on Twitter, Nic__Carter. That’s two underscores. Pretty much there I think. I looked at the stats recently. I’ve tweeted something like 20 times a day for the last five years. So it’s really more of an addiction at this point but you can pretty much find me on there.
My DMs are always open, by the way. So I try and answer every DM that’s not something totally crazy. So feel free to hit me up in the DMS.

Anita Posch [01:06:13] Okay, great. Thank you very much. I will put your link in the show notes. Also for our listeners, I made an interview with Caitlin Long. It’s number 14 on the Bitcoin & Co. podcast. Okay, thank you very much, Nic. It was a pleasure to have you on and I hope that maybe next year we can meet in person.

Nic Carter [01:06:35] That would be great. Anita thank you so much. Big fan of the show. Thanks for having me on.

Anita Posch [01:06:40] Thank you. Bye bye.

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