Why Blockchain Poses an 'Existential Threat' to Commercial Banks | NYU Professor of Finance
I'm not sure what future bitcoin has I, think, the technology, has been hijacked, by the income, and flyers in the financial, system the real legacy of Bitcoin is to lay out the roadmap for central banks to do their job better that's not what Nakamoto, had in mind, what's. Up YouTube my name is Jackson today I'll be talking to David your Mac professor, of Finance and business, transformation, at the NYU Stern School of Business how, are you doing today David, just. Fine thank you for having me so. When, did you hear about Bitcoin, and why, did you decide to teach a course on digital, currency, it's. It's, kind of a long story and it begins with just, reading. About it in the mainstream media as a curiosity, I. Had. Taken. A course in high school going back many years in, protest, literature, and we'd. Read a novel by Thomas Pynchon. Called the crying of lot 49 and. This. Is about people who don't trust the government and set up a secret post office, and there's, mailboxes. And codes. And so forth around the country and when, I read about Bitcoin, I thought it was the same thing I said this is just like that novel from high school except it's not a post office it's a bank and I. Like the libertarian. Impulse. Behind it you know there were people. Who were supporting, Bitcoin, who reminded, me of characters, from the novel, so my connection, to this really comes to the humanities. And the. Other thing that I found pretty interesting about it was the algorithmic. Monetary. Rule where, as everyone. Knows the rate, of money growth is cut in half every four years this is actually. Due to happen again in a few weeks and this. Is a very old debate, in macroeconomics. About whether the money supply should be fixed by the judgment, of the central bank or, by some type of rule and this. Is about as rigid a rule that you could have where a computer program simply tells you for the next 130. Years, what's the monetary, policy going to be and so, I thought that this would, potentially, be, interesting, to test, some of the oldest. Hypotheses. In macroeconomics. To see if this stuff really could be made. To work with with. Software, as opposed, to with people being in charge but. Above all I was simply amazed that the thing was. Stable, that it worked that it seemed to be in an equilibrium, where, people could. Use these coins and they wouldn't be counterfeited, and it was never hacked. So. I decided, to learn about the technology and, then once you take a close look you realize what a breakthrough it really is and so it you know this took several steps it. Really, began with you know an interest in the political, aspect, of it more than anything else but once you get. Under the hood and see how clever the consensus, process is and so forth you, realize that this is way better than the banks and the stock exchanges, have been using for hundreds of years and that, this thing might well have a future in the financial, system so this. Led me to begin, writing, and lecturing about it and this eventually grew into a course, we. Offered it in I think 2014, was the first time and we. Were the first major university, in the world to put a course out there on crypto, and blockchains, and now of course everybody's. Teaching this, so. I'm curious to hear how your opinion of Bitcoin has evolved over the years in a paper published in 2015 titled, is Bitcoin a real currency you argue that bitcoin does not behave much like a currency according, to the criteria widely, used by economists, you said Bitcoin instead resembles, a speculative, investment, similar to the internet stocks of the late 1990s do. You still believe Bitcoin. Functions, more as a speculative. Investment, than a currency, yeah. I would say that's even, more true today than it might have been five or six years ago, what. We have come to realize that there are real bottlenecks. In the. Bitcoin, blockchain that, ultimately, only seven transactions. Per second, is the throughput, even. With things like the Lightning, Network and, segregated. Witness there are workarounds but. It simply is not scalable, to the point that it can become a, commonly. Used payment. Mechanism, and there's. All kinds, of data from research, showing that probably. 90%. Or, more of the transaction. Volume on the blockchain is, for, investment, purposes, that you know relatively, few people use this as a payment mechanism what's. Also happened, is that Bitcoin has spawned. A lot of copycat. Imitation. There, are thousands, of other coins now that in many ways are better designed that Bitcoin opened the door and introduced, this technology but, a lot of people have improved, on it since that time, how.
Is The Kovan 19 crisis affected, your opinion on Bitcoin have there been any events, that have changed your opinion, it's. Been very interesting, to watch because, the narrative, that one hears about Bitcoin, is that it's a type of digital gold, and, in. Unstable. Economic times this might become a safe haven for, people who lose confidence in the central banks of the world so. When, this pandemic, hit I thought this is the perfect time to test, this digital, gold story the, central banks are printing, money like they've never done before the, the. Rules of monetary, policy totally. Thrown out the window and, if. Ever there was going to be a flight, to digital, currency, it should be now now. What's happened of course is quite the opposite, that people have been dumping Bitcoin it's, performed. Very, poorly the, stock market, itself has done better than Bitcoin and, it's. Really the US dollar and, galled. Itself, which people have been using as safe havens that it's I think, for all the people with the digital gold narrative, this has to be a deeply, disappointing. Time because Bitcoin simply, hasn't held up as an investment, in fact. It's been pretty well clobbered, in the markets since the start of March and it, just is not being used by anyone as a safe haven, mmm. Well how, do you see this affecting, the future of Bitcoin if it continues, to remain this speculative, asset and doesn't, fulfill this digital. Gold narrative. I'm. Not sure what future Bitcoin, has I've always thought that the real importance, of this was, for. History. That you know this was the. First breakthrough. That launched, the. Blockchain. And the public consciousness. That, introduced. The idea of proof of work consensus. As a validation, system, and. We. Will always have Bitcoin, as a touchstone, as a point of reference but. In. Terms of accomplishing, transactions. There's. A coin. That is better than Bitcoin for all to any purpose, that you could think of and it. Shouldn't be surprising to people it's like whoever, built, the first set of golf clubs and, invented the game of golf they were a genius in their own way but people. Pretty, quickly moved, on to better golf clubs with you know better materials. And different facings. That the, first innovation nobody. Uses the first iPhone anymore, you know we're ten generations, in and, I, think you know bitcoin has been, very. Resistant. To improvement. There is, quite. A bit of gridlock when, people have tried to scale. It up to modify, it there's, really. A lot of resistance from the people in place the miners who are making money off of the current configuration and, don't want to pay for, supporting. A larger. And more versatile, Network so I think in the long run Bitcoin, you. Know really is going to be for history, and posterity, it will always be there as long as there's computer, memory but, it's hard to see that it will become either a widely, used payment, system or in, the long run a serious, investment, either I think there's just better things to be investing, in continuing. To private, digital currency as a whole in a 20-19, paper you co-authored you. Argue that although private. Digital currencies have not replaced the dollar their mere existence may. Have a counterfactual, impact, in that they exist, as a check on both fiscal, and regulatory policy, how. Do private. Digital currencies, provide a check against, regulatory, and fiscal policy, yeah. I I think it's more relevant in countries. That have shaky or financial, systems, and there's a very, clear narrative in, a place like Venezuela, where. The, banking, system has ceased to work the. Government would, probably, just be printing, money like. Zimbabwe you, know to no end if they could but. There. Are people transitioning. To digital currency I in, fact have friends, in the academic world with families, in Venezuela, who, have taught their relatives, to use Bitcoin as a way to transfer, money to them because they can't use the regular banking. System anymore so. The, existence, of this in the background, is a constraint, on the government, because they know they can't print money without limits, because people will exit.
The Sovereign currency and go for private digital currency whether, it's Bitcoin, or ripple, or Manero there there are many, alternatives. But. It really takes you back in history, that until, the, 19th century most. Money in the world was, private, most, government, currency didn't, enjoy. Wide acceptance on the part of the public and. Banks. Competed. To essentially. Create banknotes. Whose value, was fixed by supply and demand in the marketplace we call this the era of free banking, and, when, you have economies, that break. Down in the financial system that's in place fails, you. You revert to this that private, forms of money circulate, sometimes. It's commodity, based it can be gold. Or sacks of sugar I've heard about laundry detergent. In Argentina, and. Private. Digital currency, can can, play the same role as some of these private commodity. Systems because. People do understand, the scarcity, and they know. That it is not going to be debased through inflationary, policy that that, some governments, enjoy. Up. To now you've been able to see this in countries that have been in crisis. Whether. The, pandemic. And the collapse of monetary policy around, the world leads to this on a larger, scale be, interesting, to see but I would be surprised, what do. You think will become the main role of cryptocurrencies. In the future will, they remain a check, against. Regulatory, fiscal policy or will they eventually displace. Sovereign. Fiat currencies, or. Do you think they'll do something different, I. Think. The technology, has been hijacked by, the income, and players in the financial system what's. Really, interesting is, to see the evolution of things like the JPM, coin for interbank settlements. The, People's. Bank of China getting, ready to launch a crypto, Rim NIMBY this year. It's. Very clear that this technology, has. Caught the attention of, the, legacy. Players in the financial system you see stock exchanges, beginning, to figure, out how to use it I think, that the legacy here. Is going to be that everybody's going to copy this and use. It to do better the types of things that the financial, system has attempted to do for hundreds of years you have a a much, better record-keeping. Technology, here in the form of the blockchain and after. A couple of years of ridicule, and denial, and so forth it's now really been embraced by the people in the mainstream and, you're, going to see it not just in the financial, system but for things like supply chain management food, safety, healthcare. Data you, know anywhere with the data is a, value-added. Part of a business it will probably be. Repurposed, onto a blockchain maybe, using digital tokens. Of some type so you don't, see kryptos ever getting. To a point where they are destabilizing. Fiat. Currencies, or even replacing them as a global currency I think. This is unlikely, to the extent, it will occur it will be in weak states, and. We, do have our share there's, always a couple of governments, that are losing, control of their own territory, and their own economies, at the moment then. As well as probably at the head of the list but one could maybe point to places like Syria Libya, and so forth and, there's. A long history of private money filling. The vacuum in failed, governments, and I. Would expect crypto, to now stand alongside other. Forms, of commodity, based currency, but I don't think it's. A serious threat to the sovereign, currencies, in the long run in fact. What you're likely to see is quite the opposite, that all of the central banks will begin issuing digital. Forms of their own currency, that, will be much more secure, and, used. By a much wider segment. Of the population you. Know the real legacy of Bitcoin, is to, lay out the roadmap for central banks to do their job better and that's, that's, not what Nakamoto. Had in mind it's it's hugely ironic but. We're. We're, moving, at breakneck speed. Towards central banks stable coins you know given the events of the last 1224. Months and, so forth and I, think the pandemic, may even accelerate them.
Mm-hmm. Yeah. It's it's. The interesting, kind of role. Reversal I. Guess because a lot of the people who are in crypto, kind, of rely on this narrative of it being yeah outside the financial system, and. I heard of it's less true every day. Then, who's hiring our students. Are the legacy. Banks, you know that they're. Really tooling, up and, have. Have come to understand, this technology is, as important, to break through his double entry bookkeeping was 700 years ago and it's. Gotten to the point that really all the banks need to be doing blockchain, projects, because the competition is it's, a very interesting time, but the, big winners here will. Be the incumbents. Who are, early to understand, and adopt the technology, and there. Is room for growth by entrepreneurs. Who get in but the, financial, system is not going to be remade, and you. Know people who who. Continue, to tell these utopian stories, I think are a little bit naive and somewhat misinformed, about the whole thing. Yeah. But, that's not to say that some disruption. Is possible, i speaking. Of this course, the. Course is called digital. Currency blockchains, and the future of financial, services industry, that's, right in the course overview you say that these technologies appear. To represent an existential, threat for, major parts of the finance, industry and that according to experts, such as McKinsey, commercial. Banks and stock exchanges, may no longer exist or may become much smaller within, the next 10 to 20 years how do digital. Currencies, and watching technology, present this existential, threat, to these entrenched. Financial, bodies I think. The most obvious way to see this is the, likely. Migration, of payments, away from commercial banks and into the central banks, when. You have a digital dollar issued, by the Federal Reserve where citizens, can hold wallets, at the central bank you, don't need to have your paycheck, going to Bank of America anymore. Like I do Bank, of America failed. Three times in the last financial crisis, and God knows what's going to happen in this one I'd, much rather Bank, of the Federal Reserve and that's now going to be possible. People's. Bank of China is laying, this technology. Out there so we're. Really not going to need banks, in the future to perform, the payments, function, that has been the way that they have, funded, themselves, and so I, think. It's a prediction, the merger. And consolidate. The banking, industry, is a pretty safe one and if. Banks, want to continue to make loans they're going to have to fund their balance sheets in a very different way they're going to have to issue long term debt and equity rather. Than relying on short-term consumer, deposits but. All of this will make the whole game, much, safer we won't need Deposit, Insurance anymore. We, won't have bank bailouts, because, you, can't run the central banker so. I think you, know the real. Threat. Comes from people. Questioning, the need for these social institutions. That we we've relied on private banks, to do payments, simply, because the complexity, was way too high for the central bank but, blockchain, changes, all that it. Also allows you to pay negative, interest rates to, a very. Precise targeting, of fiscal monetary, policy, and so forth, the, technology, is almost irresistible. For governments, to annex the payment business, take, it out of the hands of the commercial, banks and then, the commercial banks will basically wither, away and if. You don't think this is happening you, know you're missing the whole story about central banks stable coins. Interestingly, the, two. Trillion dollar bailout, legislation. A couple weeks ago had a proposal, for a so-called digital dollar that would do exactly this, it, it didn't get enacted but that blueprint, is exactly, what the banks. Are. Worried. About this would be more, or less a death sentence, for the, commercial, banks if this were enacted, into law. Speaking. Of that bailout, plan. How. Do you see cryptocurrencies, fitting. Into this current era of quantitative, easing a lot of people and you know they're saying we need hard money because. Everything's. Gonna be inflated and that everything, is gonna be worth nothing, do. You see, this, as a possible use case for hard. Digital. Assets like Bitcoin, or other cryptocurrencies. I, really. Don't if if, this were true you would have seen Bitcoin, performing, much better in the last few weeks the reality. Is that we're in a deflationary, economy. Interest, rates are negative, so, for the government, to borrow almost, unlimited, is not. Only free but actually profit, for the government at the moment so.
And I'll mark it like that there just doesn't seem to be much impulse, for people to use, it as a safe haven. What. I do think, the potential, is is for. Some type of move toward, financial inclusion to, use crypto, assets, to reach people, who are unbanked, and we've. Seen this in the u.s. that the government, has promised. 1200 dollars to everybody, who makes less than a hundred thousand a year it turns, out to reach all those people is very, very difficult because, many, of them pay no taxes, and many of them have no bank account and so. The, technology of digital, wallets, and blockchain settlement. Is maybe, a way to reach, as many as 30 million, Americans. Who are excluded, from the financial, system so, if there's going to be a role for crypto. In this climate. I would think it will be to address those types of problems and in. That sense, it's probably overdue. That the technology, is considered. For, this type of use, so. Do you see so you see this current, crisis that we're in I do you think this will speed up the adoption of digital, currencies. It. I think. Digital, currencies, issued by governments, you know we need to be a little bit careful it's not going to speed up the use of private currencies, at all but, it may well get government's, into the business, of issuing. And tracking, these much. Earlier, than they maybe had wished, much much, sooner than their comfort, levels and their natural conservatism, would, have permitted there's. Also the pressure from China which has been pretty relentless, about, trying. To push, their own project, down the rails because they're worried about WeChat. And Ollie Pei having. Taken, so much of the payments business away from the banking system so I think a combination of the the, pressure from social media companies, and I would include Facebook in that group but also the urgency, of the crisis, seems. To be really expediting. Some of these central bank digital, currency, projects, it's, interesting, is, is there anything that you're, currently, researching or working on that you could, share. With us so that you're excited to, we talked about I'm. Watching. The, current pandemic, very, closely there may well be a paper about the performance, of Bitcoin, in the crisis, I'm giving, a talk on this in a couple weeks at a virtual, seminar hosted by Georgetown. University. I'm. Watching, the having, event very closely too. There. Has been a, huge. Amount of interest, in marketing of hardware, and promotion, of investment, strategies, around, this, 50%. Cut in the mining fees for Bitcoin, it. Looks to me like. A non-event, because, everybody, knows with certainty it's, like the y2k, bug if you tell me something's going to happen years.
Ahead Of time everybody. Can get ready for it and on the day it happens, it's not going to make any difference but there's. Such, attention. Fixated, on this that I'm going to watch it carefully and if something, interesting happens it will probably lead to some academic, projects. I. Have. To say though if you ask me what I'll be writing for the next 12. To 24 months, I may revert, back to corporate finance where. I taught corporate restructuring. Because, we're gonna have more corporate restructuring, in the next year or two then there's ever been this is the. Type of financial, distress, and, recapitalizations. I think. My old field, is coming rapidly, into. Vogue again for, for. All the wrong reasons but. I think I'm you know maybe going to be recalled, to active duty doing, more traditional, finance, because there's going to be hugely. Interesting. Events, that are already beginning, to unfold. Academics. Love this kind of thing because when you gain unexpected. Shock to the financial, system you can test all these theories without bias. And so forth but it's, very very rare that something, like this happens where there's kind of a medical, intervention that, closes, the economy, and, seeing. How everybody reacts, to that gives you a lot of insight into how. Contracts. Work how how. Legal rules shape, and and fail to shape people's behaviors, is an awful lot to study in this crisis, but I have a feeling a lot of it won't be connected to crypto. Yeah. But. I also feel that this crisis. Is probably gonna tell us a lot about what. Bitcoin is really, worth. Yeah. And so far the news is not so good but, so, y'all are hanging, around yeah, we'll, see we'll see well, thank, you so much for taking the time to talk to me today David, okay. Thank you I enjoyed it have a good day thank you, everyone for watching that was David Garrow Mack professor finance of business transformation, at the NYU Stern School of Business my, name is Jackson and if you enjoyed the video hit that like button and subscribe to our YouTube channel coin. Telegraaf like, subscribe, and huddle. You.