{ "episodeId": "SLP244", "speakers": { "stephan": { "name": "Stephan Livera", "role": "host", "tag": "STEPHAN" }, "nik_bhatia": { "name": "Nik Bhatia", "role": "guest", "tag": "NIK" } }, "segments": [ { "speaker": "stephan", "time": "00:10", "start": 9.89, "text": "Hi, you're listening to Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today for episode two hundred and forty-four, Nik Bhatia rejoins me on the show. Now, Nik Bhatia is most well known in the Bitcoin space around his research and work and writing on the concept of Lightning Network reference rate, and now today we're talking about his new book that's- Launching very soon, it's called Layered Money. So we talk about Bitcoin and its role in a layered money world, as well as historically what that meant, and we also chat about this idea that Bitcoin could be the safest layer to operate at. This show brought to you by Swan Bitcoin. Bitcoin has emerged as a major player on the global stage. 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Unchained Capital also offer an OTC desk, so if you are purchasing fifty thousand dollars or higher, you can buy over the counter and have that directly stored into your multi-signature vault. Unchained Capital also are a great option for those of you looking for self directed Bitcoin retirement accounts, and obviously for a company looking to move Bitcoin to treasury and adopt a corporate Bitcoin standard, this is the place to go. Go and check out unchained dash capital dot com for more. Nick, welcome back to the show. Thanks for having me, Steph. So Nick, you've got a new book that's coming out soon, and I, I ha-- I've had a chance to read it, but let's hear a little bit from you. Why, why this book, and why another book on money?" }, { "speaker": "nik_bhatia", "time": "03:56", "start": 235.71, "text": "Yeah, so the book is called Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies. And the reason I w-wrote the book was because I, you know, I come from a traditional finance background. I sat on a US Treasury Treasury's trading desk for several years and, I tr- I traded bonds, you know, in the, you know, at the highest level of the asset management industry, but while I was doing that, I fell in love with Bitcoin and I felt that, you know, my, my background in traditional finance and, you know, brings a unique perspective on Bitcoin and I feel that, you know, my way to explain it is a little bit different because instead of coming from an economic standpoint or Or a computer science standpoint, I'm coming from a purely capital market standpoint, and I wrote this book kind of through that capital market lens, thinking about how United States Treasuries, the product that I used to trade, are the world's risk-free asset today, and risk-free meaning not that it's free of risk, but that it is the, you know, considered the most counterparty, worthy asset out there in the US dollar spectrum. And how Bitcoin, you know, the goal of Bitcoin, its destiny is to become that, the next world risk-free asset. And I think the path from going from treasuries to Bitcoin, it takes a, it takes a capital markets approach to understand that, because US treasuries are a capital market instrument, and, Bitcoin is on its way to becoming a full capital market itself. And so, you know, it's- Kind of, the reason that I wrote the book." }, { "speaker": "stephan", "time": "05:44", "start": 343.52, "text": "Of course, and I think that's the thing when you're coming at it from an Austrian economics perspective, it's like, it's not like the Austrian analysis is wrong. I think it's more just like, as someone who has more of a, an insider view, you, you actually see some of those nooks and crannies of the actual system of how things are operating in practice a little bit more clearly. but I think it would be good to just kind of step back and, talk about the- Title, so it's called Layered Money. Why Layered Money?" }, { "speaker": "nik_bhatia", "time": "06:14", "start": 374.32, "text": "So Layered Money starts from a paper in financial academia that came out in two thousand twelve. Professor Perry Merling is an economics professor, and he wrote a paper called The Inherent Hierarchy of Money, and I suggest everybody go read The Inherent Hierarchy of Money, maybe even before they read Layered Money. Professor Merling set up a framework in which he describes money as inherently hierarchical, because if you look at the way that our financial system evolved, we had gold as the pure money, right, the counterparty-free money, and then we have a hierarchy of balance sheets underneath gold, where central banks will issue currency that promise to pay gold, and then banks will issue deposit currency that's a promise to pay central bank currency. And so this three-layered hierarchy you know, Professor Merlin refers to it as the hierarchy of money, and it's an academic framework, as you'll see in the paper. What I chose to do was take that framework and actually trace it to the beginning of its story. And think about today's financial system in this hierarchy framework, and then look to tomorrow and try to figure out where Bitcoin will land in the hierarchy of money tomorrow. And so that's where the, the, the title comes from is, so it, it, it combines this hierarchy model with, of, of course, this idea of Lightning Network and how it is a layer two technology of Bitcoin, and so it kind of merges these two ideas into this layered framework." }, { "speaker": "stephan", "time": "08:02", "start": 481.58, "text": "I like that, and also it's important to understand where we came from and how did things evolve in the way they did, because I think obviously many of us are critical of central banking and of fiat money, but it's, it's probably fair to say that from their perspective, they thought they were doing the right thing, they thought they were, you know, that they-- from their perspective, they had a reason why the system evolved in a certain way. so perhaps we should go back to the beginning and try to think about, well, why is it that people- People weren't just na-- just natively just transacting with gold, for example. Why didn't they just use only gold coins to transact?" }, { "speaker": "nik_bhatia", "time": "08:39", "start": 519.02, "text": "Yeah, I mean, there's a variety of reasons. One of them comes down to the convenience, right? And so that's why, you know, paper is easier to handle than, than metal, and so paper promises to pay metal can move a little bit more quickly than metal, you know, that's one of the basic things. But, you know, as the Austrian school understands, that today's money system is a- A credit money system, which means that in order to expand the money supply, money has to be lent into existence. And in order for people to transact, back in the thirteenth, fourteenth, fourteenth century when this book begins, it was a lot easier to extend credit in this form of bills of exchange, which is the, the credit, was the credit instrument of the day. And when people issued bills of- Of exchange, people, you know, the people that were, buying these instruments, they weren't necessarily buy- paying for them upfront, which means that when they were issued, it was a loan. And These bills of exchange allowed people to, transact money across borders, across geographies, and across currencies. More impor-more importantly, and that's where the word exchange comes in, in bills of exchange, where it's a simultaneous wire transfer to another part of the world, but also a currency conversion. And that was a very convenient monetary instrument to use at that time. And bankers, the ones that were issuing these bills, did so As a, an instrument of credit or a loan or a way to issue money. And, so I think this, this really convenient way of transacting in bills of exchange is one of the main reasons why, we have a credit money system today. It's because people found that these customizable contracts, could bring money into existence and it developed a culture of promises." }, { "speaker": "stephan", "time": "10:42", "start": 641.66, "text": "So it was essentially that these other layers- had some kinds of features that straight base layer money didn't have at the time, and I guess that also brings up this question which you explore in the book, which is deferred settlement versus final settlement. What does that mean?" }, { "speaker": "nik_bhatia", "time": "11:00", "start": 660.44, "text": "I mean, de-deferred settlement versus final settlement, it comes down to this idea of counterparty risk. A deferred settlement is a situation where you have counterparty risk and y- the settlement of the money is In the interim, whereas final settlement is the settle, the money has settled into your hands, however you consider final settlement is up to you. So if you determine that, you know, in, in during that time Gold or silver were the only way that you would accept final payment, then anything except gold and silver coins is a form of deferred settlement because it's a promise to pay you in the future. So it really is, just think of it like counterparty risk. Deferred settlement has counterparty risk and final settlement, doesn't." }, { "speaker": "stephan", "time": "11:55", "start": 714.55, "text": "Fascinating, and it's, interesting, and we can get into all the parallels with Bitcoin and the Lightning Network and settling your, and closing your Lightning channel and so on later on, but, I think Just generally, people would consider the risk differently. So if they are holding the bearer asset, then it's like they're not taking that risk on. And so the different layers have different levels of risk. And so I think this is an interesting point in the book as well, where it's like people, during times of uncertainty, they retreat back to safer layers. So can you, outline that dynamic for us?" }, { "speaker": "nik_bhatia", "time": "12:36", "start": 755.61, "text": "Yeah, you're ab- you're absolutely right. And what you said earlier about how different layers have different features, that is true, and it goes hand in hand with the risk that exists on different layers. So, you know, in, in my framework, the first layer of money is, you know, historically gold, right? It doesn't have counterparty risk, but the next layer of money, it has, there are promises to pay gold, they have more convenience with them, but- And they have-- it, it introduces risk, right, into the, into the picture. And on down you go where, on, on the third layer of money, you, you are now exposed two times to risk. Once you're exposed to the currency, the national currency or the central bank currency, and then the central bank currency is exposed to the metal, right? The cur-- the currency has its own default risk, and the bank has its own default risk So as you go on down the layers, it gets riskier to hold each instrument, even though each layer on down can come with, an additional convenience to it." }, { "speaker": "stephan", "time": "13:46", "start": 826.32, "text": "Right. And I think it's also, an interesting point to, as we're gonna sort of start earlier and move forward in, into the future or move forward in history, the interesting nature of accounting and how double-entry accounting evolved, and I, I believe, I can't remember, I can't recall exactly, but I think we're talking thirteenth or fourteenth century in Italy where it was popularized. So what's the significance of double entry book accounting?" }, { "speaker": "nik_bhatia", "time": "14:13", "start": 852.84, "text": "So I think that double entry accounting, the reason why it was so important was because it brought everybody onto the same page on how we treat books and specifically credit between bankers. So the system of double entry accounting that was formalized, at the end of the fourteen hundreds in Italy and had been developing for a couple centuries, in Europe before that. Those methods, once they were formalized, it allowed even more financial instruments to be issued, because bankers across borders could, you know, they could balance their debits and credits with each other on, in, in the same exact language. And you know how people call mathematics the language of accounting? The accounting is the language of banking. Right? And so it really comes down to language. Like the double-entry accounting, accounting had existed for thousands of years, you know, we know the, the tally sticks and, you know, the clay tablets, from, you know, thousands of years ago. But when everybody around the continent got onto the same accounting page, they were all speaking the same language, and that's what allowed economic activity, specifically banking activity, to flourish." }, { "speaker": "stephan", "time": "15:34", "start": 933.59, "text": "Yeah. And in the early- Earlier days, it's that the goldsmiths were functioning as a banker, weren't they?" }, { "speaker": "nik_bhatia", "time": "15:41", "start": 941.12, "text": "That's right. Well, in England, the goldsmiths were the bankers, before the Bank of England started to monopolize the issuance of money. And the reason was because the goldsmiths were the most capable of storing the gold, and they became deposit issuers because people wanted to keep their gold with the goldsmiths, and the goldsmiths would issue paper deposits deposit saying, \"I owe you one piece of gold, here's a piece of paper.\" Those pieces of paper started to circulate as cash because people-- there were certain goldsmiths that were trustworthy enough where you would accept the, a piece of paper issued by that goldsmith, in place of a gold coin, and, you know, then they started to develop more sophisticated, financial like techniques like discounting and things like that." }, { "speaker": "stephan", "time": "16:29", "start": 988.63, "text": "Yeah, it's fascinating as well when you think from a Bitcoin perspective, because, you know, Bitcoin banks of today, if you will, some kind of like Bitcoin exchanges, but we aren't, at least not yet, in a scenario where people trade the IOUs around of, let's say, one exchange versus another and treat them at par value. So it's a bit of a, you know, w-w- you know, the future remains to be seen, but I think in Bitcoin we obviously have the strong self-custody culture, but, if the system were to evolve in that way, then That would be a kind of a similar, I guess, a historical parallel, right?" }, { "speaker": "nik_bhatia", "time": "17:08", "start": 1027.63, "text": "And I can almost guarantee you that that's going to happen, Stephan, if you look at the way that the cryptocurrency landscape has evolved since the first altcoins, you can almost call every other-- you can almost call every altcoin a second layer of Bitcoin because of a price relationship where its base price is-- all of their base prices are Bitcoin. And even when you think of Tether, you know, its value- Value is derived from the fact that it can be priced in Bitcoin or that it buys Bitcoin on those exchanges. And so if you think about a future where we have, we'll have BTC-denominated stablecoins, which are targeting a one-to-one price with Bitcoin, just so they can circulate out there and, you know, issuers can offer benefits that go along with holding those BTC replacements or BTC deposits or BTC stablecoins, however you wanna describe them, you know? I can almost guarantee that that's gonna happen." }, { "speaker": "stephan", "time": "18:05", "start": 1084.79, "text": "I'm curious actually there, because I think it depends on which way the culture goes. Because if the culture is more like, \"No, if it's not my keys, then it's not my coins, and that's an IOU, that's not real Bitcoin,\" so what in your view, me, means that people would seed that kind of thinking?" }, { "speaker": "nik_bhatia", "time": "18:22", "start": 1101.82, "text": "Well, I, I mean, people already keep their Bitcoin on exchanges and with custodians today. So when those deposits or exchange balances, start to trade themselves- themselves, or get liquidity themselves, then, I think that'll just be an evolution of those instruments and not necessarily a comment on, the culture of the people that are using it. I think the culture is already kind of spoken for where the people that want to self-custody do, and the people that don't care about it keep their Bitcoin on exchanges, and we already know that, you know, the statistics are out there that, you know, the vast majority, you know, of the hundred million crypto- Currency owners around the world are keeping their Bitcoin on exchanges, so I think eventually we'll see those balances trade." }, { "speaker": "stephan", "time": "19:10", "start": 1149.73, "text": "Yeah, that's a fascinating question, and I think there are sites and, you know, things like Glassnode, for example. So now I've, interviewed Raphael Schultze-Kraft, on the show, and he has spoken about how, I think if you look on Glassnode, their metrics are something like two million or so, coins, and it, it seems that the number is actually coming down over time. So two million of the, let's say In coins are sitting on an exchange or probably with some kind of custodian, but I'm, yeah, I guess it's an open question there. also one other factor that might be interesting as well is nowadays with cryptography and the, you know, technology that we have available to us, I wonder whether things like liquid Bitcoin and this kind of idea of, cryptographically ensuring that the system remains full reserve, so to speak, but then Then people still trade around, as an example, a liquid Bitcoin IOU token, and, you know, would people then treat a liquid Bitcoin the same as a, you know, on-chain Bitcoin? And what do you think about that?" }, { "speaker": "nik_bhatia", "time": "20:17", "start": 1216.77, "text": "Yeah, I think, that's a great point, and I think Liquid is a great example of this, you know, BTC substitute that has really, you know, these new blurred definitions of what counterparty risk really is. And in the book, and I have these graphics in there You'll see that the relationship between layers and money, of layers of money, used to be only balance sheet relationships. then it started to form, evolve into price relationships, like when in nineteen forty four we had the Bretton Woods Agreement and countries came together and said, \"Where our currencies aren't valued in gold anymore, they're all valued in dollars only. \" And so then you have a price relationship between the layers of money. well now with Lightning Network, for example Example, you have a relationship in layers of money that only is related to smart contracts, has nothing to do with price or balance sheets or counterparties, right? Because of the way that Lightning Network is designed. So, yeah, liquid is something that is, you know, right there in that, you know, smart contract type of relationship where we know that it's reserved, and that's a fascinating, you know, unique, something that is totally unique to Bitcoin It just can't exist anywhere else. Like, think of, you know, think of a gold ETF that had to prove its reserves twenty-four seven. What do you have like a video stream of all your vaults twenty-four hours a day on the web? Like, it doesn't make sense in the old term-- you know, in the old financial system, but in the future with Bitcoin, we can imagine these things." }, { "speaker": "stephan", "time": "21:57", "start": 1316.82, "text": "Right. And I guess just to-- just for any listeners who might not be following along, liquid, essentially, it requires peg- In and peg out of bitcoins, and so I've got an episode with Alan Piscitello from Blockstream, so that's the episode to go and look at for listeners. But I guess the important point to note is that it is a custodial in some sense, right? So you are trusting that your peg out of liquid bitcoin back into on-chain, you know, real bitcoin, quote unquote, is not going to be denied by two thirds of the, I think the federation or the functionaries, like the members of the Liquid Foundation, which- I, it is kind of like independently operating, but it's like a blockstream, I guess, product that they support. But it's, it's an interesting sort of parallel to, in the past historically, where this idea of gold tickets and, let's say, paper tickets that represent a claim on those, you know, pieces of gold, just to make it simple, that those, pieces of paper circulating around, in the community is, what can, if, if those aren't, fully Reserve, then in the Austrian school, that's sh- and that's the leading, that's one of the factors behind what creates the business cycle. And so that's, now that is a debate even, you know, amongst the full reserve Austrians, of which I, I'm in that camp, versus some of the others who believe in a more fractional free market example where they think, actually, yeah, there will be fractional reserve, but it'll be kind of in a different way, but w- Yeah, so I suppose, bringing it back to, you know, layered money and how layered money evolves, I think, another interesting, historical component to explain is what happened in Antwerp. So can you tell us what happened there?" }, { "speaker": "nik_bhatia", "time": "23:48", "start": 1427.75, "text": "So in Antwerp, what was fascinating in Antwerp was that the-- these bills of exchange, these credit instruments, previously, before Antwerp, they never had liquidity, which means that they could never be sold before they matured. They had to be held till maturity or exchanged with the underwriter for cash or metal, precious metal. But in Antwerp, what happened was for the first time, merchant bankers bought and sold bills on a daily basis from each other and created, you know, a money market and liquidity for second layer money, or, you know, meaning that for the first time ever, pieces of paper Paper that promised to pay got prices themselves, and, you know, that really birthed, you know, the whole money market and what we think today as, you know, these monetary instruments, these, short-term debt obligations that trade you know, like treasury bills or discount notes or commercial paper or, you know, other monetary instruments like that, like Eurodollar deposits or certificates of deposits. These are all monetary instruments that have their root in Antwerp because for the first time ever, those pieces of paper were treated like money themselves and cash, e-even." }, { "speaker": "stephan", "time": "25:14", "start": 1513.75, "text": "Right. And so it's kind of crucial that people, how people treat those. Equivalents, if you will. Right. And so, and I'll just quickly say that," }, { "speaker": "nik_bhatia", "time": "25:22", "start": 1522.31, "text": "you know, the only thing that was considered cash before Antwerp and these developments were coins themselves. And so we can see that the, you know, the most important thing that happened there was that our, our thought, our idea of cash really transitioned from metal to paper." }, { "speaker": "stephan", "time": "25:41", "start": 1541.29, "text": "Right, I see. Yeah. And, taking it to nowadays with money market funds, I think that was also another interesting element which you, skillfully explained in the book, what are money market funds and why do people use them?" }, { "speaker": "nik_bhatia", "time": "25:57", "start": 1557.0, "text": "Yeah, so money market funds are these tidy monetary instruments that allow, you know, huge- Huge sums of capital to be stored safely with daily liquidity. the example that I give in the book, it, it's, you know, imagine that you win a lot-- the lottery, and you win a billion dollars, but your tax bill is gonna be nine hundred and ninety-nine million dollars next month, because your government has some obscene tax on lottery winnings. So how do you store? You know, you can take the million dollars and go and spend it. But how do you store the nine hundred and ninety-nine million dollars for a month until your tax bill is due? You can't just, you know, take dollar bills. you're not gonna want to just leave it on deposit with your deposit bank because then, you know, that is beyond your, federally insured deposit amount, and, you know, if the bank goes belly up next week, you owe your government nine hundred and ninety-nine million dollars and you have no recourse. so how do you store your money? we-- today we use these things called money market funds, which are these essentially fund vehicles that go out and buy treasury bills and other bank deposits and other short-term liabilities and essentially diversify your exposure to all the different types of money out there. but it allows you to buy and sell on a daily basis, so if you need your money tomorrow, you can, you know, sell your money market fund share And get cash, for it the next day. And, the unique thing about money market funds is they all target par, meaning you're supposed to be able to get a dollar for every share all the time. It's like a perpetual You know, a, a dollar with, sorry, a fund with a perpetual dollar price. It's always worth a dollar. And, and that fact that it's always worth a dollar makes it really, really convenient to, the world. So, you know, there are several trillion dollars in money market fund assets out there, and, these are big, you know, big players in the, in the industry, and they played a role in the, great financial crisis of two thousand and eight, and, Some of their, some of the risk was legislated away, in 2016, I believe, if I remember correctly, when Money Market Reform happened, but they still do, you know, carry, a significant amount of risk in the financial system because so much capital is concentrated there." }, { "speaker": "stephan", "time": "28:41", "start": 1721.39, "text": "Right, and so I think it's kind of like in some weird way, keeping your money in the money market fund is safer than leaving it in the bank account, and that's why, when, when we're talking about large amounts of money, not necessarily retail level people, but, you know, for businesses and, large entities, that's the kind of, situation where it's theoretically safer for them, right?" }, { "speaker": "nik_bhatia", "time": "29:04", "start": 1744.34, "text": "Magnitude safer. I mean, do you want to be exposed a hundred percent to a single bank? Like, imagine- If you're in Europe and you win this lottery in Europe and you have to keep your money at Deutsche Bank or, you know, BNP Paribas, these banks have had-- they've had so much trouble that anything can happen at any time, to any one of these banks, and we know that. So why would you just be exposed to one bank with, with that type of scenario? And of course, this is a hypothetical, but you're gonna want to own a money market fund instead of a bank deposit to a single bank all day." }, { "speaker": "stephan", "time": "29:40", "start": 1780.11, "text": "Yeah. I think that- That's also an interesting point because, you know, when we look at bond markets and you look at, okay, well, the real return on these things is obviously so negative, so why is anyone holding these things? And it kind of points you towards that answer of, well, some people have to hold it for regulatory reasons, and, you know, maybe this is also part of the reason why, some of these markets are so large is that there's certain systematic reasons why it still makes sense for people to hold these things." }, { "speaker": "nik_bhatia", "time": "30:11", "start": 1811.07, "text": "See me right now, Steph, but I have a huge smile on my face because you hit the nail on the head right there. This is something that I've been hammering the table on for several years, starting, you know, when I was on the trading desk, on why rates are going lower, have been going lower, and will continue to stay low. It has nothing to do with anything except what you just described, which is that the demand for safety, the demand for these types of instruments that have a- The next level of safety relative to e-- literally everything else out there, that's why the price is so high and why the interest rates are so low and, and even negative in so many parts of the world, because it is the alternative to being exposed to the banking system. That's why-- that's how people should look at negative rates. It's just a, a premium on safe money. That's, that's all it is. It's the, it's the certainty that you'll get par back, that you'll always get par. Whether or not that par is devalued in your home currency, you know, people that are denominated in that currency, they don't really care about that, there's nothing they can do about that, you know, that's why people leave their denomination for Bitcoin, is they try to escape that. But if you- Can't escape that, or if you're not ready to make that jump out of the denomination, you buy government bonds, you buy them all the way down into negative interest rates, and you keep rolling that position, meaning you keep buying it when it matures, you buy it again, and you buy it again, and rates- you know, I don't talk about this in the book because, you know, I didn't, I didn't feel like it really would have added to the story. It's really difficult to kind of explain this idea that, interest rates are gonna stay low forever because of this reason. you have to explain a lot more, but, it's a very important point, and thank you for bringing it up." }, { "speaker": "stephan", "time": "32:06", "start": 1926.07, "text": "Well, there you go. And I think that's where, you know, if I think of what other people in the Bitcoin world are talking about, they're ripe for people, for Bitcoin to kind of take over, because there's a lot of these people who are just stuck, in some sense, either for regulatory reasons or this reason we were just outlining, that they're buying bonds and they're staying in these, you know, for perceived safety, but the reality is we are starting to see in, particularly in Europe, we're starting to see some banks start to levy, negative interest rates, and basically it's like a cost of carry. So, and I've been commenting on this as well, that in the fiat world, we got a customed to having basically a free cost of carry, and now the game is changing, well, over the, you know, in recent years that has been changing and it is continually going in that direction. And so now what happens when you have to pay, you know, point two five percent or point seven five percent, I think in some cases, where you could hold a large amount of Bitcoin for a small fraction of that cost?" }, { "speaker": "nik_bhatia", "time": "33:07", "start": 1987.39, "text": "Absolutely. I mean, it has to be one of the reasons that people are driven into Bitcoin, and the risk profile is so- unique in Bitcoin that you can't make the same, relative value assessments. And so what do I mean by that? When you're a traditional bond manager denominated in US dollars, and let's say there are only two instruments out there available to you, there's treas- US Treasuries and there's a basket of corporate bonds. The corporate bonds have higher return and a higher risk, and obviously the Treasuries have a lower yield and a, a lower risk. And when you make that judgment, you are looking at the spread of interest rates Between the corporate bond and the treasury, and you are determining whether that spread, or whether, you know, the spread and the risk combined to make it the right decision for you to get out of the treasury and to buy the corporate bond, because in the absence of the corporate bond, you own the treasury, right? That's your risk-free asset, that's your base instrument. You don't own nothing, you own treasuries. So when you make that decision to jump out of treasuries into corporate bond, you make that, you know, you say that that's a A, you know, a good risk, risk assessment, and you decide to make that decision. Well, in Bitcoin, the decision, you know, you're not looking at relative risk and a relative interest rate, it's a whole, you know, separate risk assessment that you're making, which is, do I need to be in this denomination or do I, do I need to hedge away from the dollar itself? Because, you know, people that look at Bitcoin's return You know, just only in USD terms, you know, they're gonna have a hell of a time, you know, dealing with that type of volatility and, you know, You know, writing letters to their, to their clients and explaining, you know, why the returns are so up and down. But, you know, if you're not thinking in those terms and you're actually thinking in terms of, I should be outside of the dollar for the next five years for this percentage of my portfolio because there is an X percent Risk that the dollar, you know, rapidly loses value because of reasons X, Y, Z. I wanna make that decision. And so, you know, to answer your question, it, it just is a totally separate way to evaluate that relative value." }, { "speaker": "stephan", "time": "35:37", "start": 2136.51, "text": "Yeah. And as people start to become more acutely aware of these things, right? In personal finance circles, for example, they'll say things like, \"Hey, you need to look at your returns net of fees and taxes, because those are the returns you can actually eat.\" But it's funny because in, you know, the normal fiat banking world, they're not thinking in purchasing power terms, the-- and because if they did, they would really start to see, okay, look, inflation is actually more like ten or fifteen percent, or in some things, it's even higher. Higher, whereas, you know, yes, Bitcoin is volatile, but historically over the last ten years, it's returned two hundred percent per year on average. So it's kind of like, I think it's, it's, it's gonna be a matter of time until more people wake up to that reality." }, { "speaker": "nik_bhatia", "time": "36:20", "start": 2180.42, "text": "Yeah, the volatility does prevent certain people from adopting Bitcoin, and that, you know, that will persist and that is part of the reason why the volatility will still continues because, the Bitcoin price behaves in this- This very hype boom-bust type of pattern, and, you know, we see that it's se- you know, seasonal, you know, in terms of having cycles, and we've had, you know, now th- the third- Post having rally like this, and, you know, and I'm sure that it will go too far and correct itself before the next rise. It's something that I think is becoming Very obvious to, you know, at least the Bitcoin world, we're paying attention to this four-year seasonality, and, I think that that'll, that'll persist." }, { "speaker": "stephan", "time": "37:12", "start": 2231.9, "text": "Back to the show in a moment. Knox is a Bitcoin custodian dedicated to ensuring comprehensive insurance coverage for client assets. Much of what passes as insurance today isn't purchased for the sake of protection, but for pure marketing reasons. Knox believes insurance should exist to make fund recovery possible, no sharing coverage between customers. Knox Knox takes a unique approach when it comes to purchasing insurance for customer assets. Coverage is set aside exclusively for every customer in a one to one capacity, all with a comprehensive policy covering a range of loss and theft events, including internal collusion. If you are a Bitcoin company, RIA, fund, trust, or family office, make sure to contact Knox to discuss Bitcoin custody and insurance. Lend at HodlHodl is a global Bitcoin-backed lending platform so you can lend and borrow anonymously. This is done in a peer-to-peer way using multi-signature escrow. So if you hold bitcoins and you don't want to sell, well, you can put them up as collateral and get stablecoins, and that way you can keep on hodling. Whereas if you have stablecoins, such as USDT, you can create offers and earn interest on those stablecoins by lending them out and then receiving back that plus some additional stablecoins as interest. So with HodlHodl's lend platform, you can go Go and set your own terms and put up offers depending on how long you want to borrow or lend and interest rates. Go and check it out at lend dot hodlholdl dot com. Now back to the show. Yeah. Another interesting point when we're talking about fiat money inflation is that there are parts of the system that the US Federal Reserve doesn't have good oversight. One example is the Eurodollar system, and I know, Jeffrey Snider is probably the most famous person for talking about this and really bringing attention to this, but you also mentioned it in the book as well. So can you tell us a little bit about that? What is the Eurodollar system of offshore dollars?" }, { "speaker": "nik_bhatia", "time": "39:11", "start": 2350.86, "text": "Sure, and I do think- I thank Jeffrey Snyder in my book because his work on the Eurodollar has been, you know, eye-opening, and, he's been one of the loudest voices, that, you know, is out there pounding the table again on the fact that people need to be paying attention to this offshore dollar system or the way you described it, the dollar system that is outside of the Federal Reserve's purview. And, yes, the Federal Reserve doesn't-- they, they're not able to see all the- Dollars out there, because, for example, dollars that are issued as deposits outside of the United States, while they might appear to be dollars outside of the United States, they're not actually dollars within the Federal Reserve definition of them. And that, that breakage, that dichotomy, and it has to do with Basel III regulations and, you know, things that are maybe a little bit beyond the scope here, but the fact that dollars outside of the United States aren't fungible With dollars inside of the United States creates really this state of disrepair of the dollar, where it, you know, the system can break in different parts of the world and the Fed has to go put band-aids on, you know, this country's banking system or that country's banking system by issuing a central bank swap line. You know, the most famous example of this is in December 2007, when, it was clear that the eurodollar apparatus- was going down as LIBOR was increasing at an alarming rate relative to other money market, interest rates, and that represented that the European interbank trust had died, and, you know, it was dead. And until the Fed said to the ECB, \"We will let you...\" Print euros and, post them to us as collateral and borrow, borrow dollars so that you can lend those dollars to your banking system. you know, that's when the Fed had to capitulate on the euro dollar, and they still, you know, still have that implicit bandaid on, on the whole system, even though they can't really see or control how much of it is being issued, and that's a problem. And" }, { "speaker": "stephan", "time": "41:27", "start": 2487.24, "text": "interestingly, you mentioned how they had to capitulate on this because previously their policy was against- This kind of practice, right?" }, { "speaker": "nik_bhatia", "time": "41:35", "start": 2495.07, "text": "Yes, I mean, you know, they're, they're not gonna implicitly back the world's, you know, lending activity, but when the instability's built up over the course of the, you know, five, six, seven years before two thousand and seven, when the notional derivatives were getting into the almost to the one quadrillion range, that instability, you know, the Fed, they had to capitulate. they can't, go out there and say, \"You shouldn't be doing this in two thousand and four, two thousand and five, two thousand and six, \"to the European banks, because, you know, they're outside of their regulation, but then when the system broke, it's all denominated in dollars, and banks are about to fail, the Fed has to step in because the financial system, goes through the US dollar, and if there's any instability there, the Fed is the one that's on the hook. So you have to save the currency, That's why the Fed views these decisions to, implement central bank swap lines as, you know, they view them as mandatory or, you know, necessary now." }, { "speaker": "stephan", "time": "42:44", "start": 2563.75, "text": "Yeah. And I think it's an interesting idea. It's this kind of idea of like, all these people outside of the US had made their own, almost like a synthetic dollar, if you will. And I guess it's kind of, maybe it's not a perfect example or it's a bit of a strained ex-analogy, but it's almost like if you look at some of those Bitcoin only, exchanges like Don't actually have any US dollar, it's all synthetically done. So it's kind of like, imagine if the world was all doing like US dollar on like BitMEX and other similar exchanges, right?" }, { "speaker": "nik_bhatia", "time": "43:13", "start": 2592.81, "text": "Yeah, it is, it is a synthetic-- The word synthetic is a good way to describe the Eurodollar, and, you know, there are definitely parallels in, in the Bitcoin world where we have these synthetic dollars that are, you know, circulating because they're easier to transact than the real dollars, which move On what we know to be the ancient financial rails, you know, not the cryptographic, financial rails that, you know, the world is heading in that direction. Yeah." }, { "speaker": "stephan", "time": "43:45", "start": 2624.93, "text": "And you had an interesting, framing with the Federal Reserve in the book because you say it is the-- now most people would know it as the lender of last resort, and you frame it as the lender of only resort. Why is that?" }, { "speaker": "nik_bhatia", "time": "43:57", "start": 2637.22, "text": "Yeah, it's just like we talked about, the, the whole financial system is now, you know, whole- Dependent on the Fed for support. the reason is because anytime we get pr- correction in prices, the Fed steps in. And so the analogy of being hooked on drugs has been used with the Fed. Every, you know, the whole system is hooked on this monetary stimulus and this reserve creation that they do or the central bank swap lines that they, you know, issue or now the treasury repo facilities that they- They're willing to lend, unlimited, you know, capital against all treasury collateral. you know, they are basically the only source of liquidity because nothing is allowed to fail anymore. if, if things were allowed to fail, then we wouldn't have to call them the lender of only resort because things could fail and they wouldn't be, the lender of only resort. But the truth is that every time something happens, the Fed comes in and, And, you know, bails out whoever needs to be bailed out, and that happened in two thousand seven, eight, nine, ten. and then they took a break for a few years, and they tried to raise interest rates under the Janet Yellen term, and when they hit two percent, the markets broke. You know, I was on the desk at that time, the markets completely broke. The Fed had to say, \"We're done hiking rates,\" and then the market still didn't respond, and then they had to start cutting rates so that, you know, prices started to go up again. You know, I'm talking about stock prices, for example. you know, we all know It is the S&P 500, and it's, it's, unofficial, but it's as official as you can get. All you have to do is watch the price of the S&P 500 and listen to the Fed speak, and you can see that, and they haven't been shy about this, you know, let's be honest, they have, they have- Said, and Bernanke said this during QE, \"We are targeting the wealth effect. So if we can get stock prices to go up and home prices to go up, Americans will feel wealthier and they will spend. That is their economic justification for QE, and it's their economic justification for having their third unofficial, but official mandate being the price of the S&P 500 index.\" So, you know, they're not shy about it." }, { "speaker": "stephan", "time": "46:38", "start": 2798.01, "text": "Yeah, certainly a very troubling situation that the world is in right now, but I also wanna get to the point in your book where you talk about Bitcoin as, you know, as, and Bitcoin's role, going forward in this kind of layered money vision. So, can you tell us a little bit about what your vision is there with Bitcoin, as part of the financial system going forward?" }, { "speaker": "nik_bhatia", "time": "47:01", "start": 2821.36, "text": "Yeah, so, you know, it really comes down to the freedom to choose Choose your currency denomination. And I think that the reason a lot of people own Bitcoin today is they desire to have a money that isn't tied to a government. You know, we've talked about the separation of money and state for a long time in Bitcoin, and I think it is one of the main drivers of people owning it, besides the obvious number go up technology that it has. If that is the case, and people are free to choose their currency denom- Combination, Bitcoin becomes the new neutral currency of the world, and I think it already is on its way there, and, you know, I wrote the book because of that reason, I think that we, we have already determined as a global society that Bitcoin is the new neutral money now. Because Bitcoin is the new neutral money, then all other currencies will be measured in Bitcoin. And, you know, I, I am projecting out a few years here and with a lot more Bitcoin adoption worldwide, you know, going from a hundred million users to a billion users, but it'll happen quickly. It'll only ha-- it'll only take a couple years for us to, you know, get to a billion cryptocurrency users in some form, sh-shape or form around the world. And when that- That happens, you're just gonna have all these sta- you know, bank-issued stablecoins, central bank digital currencies, all of these, you know, cryptocurrencies, they'll all, or most of them, or many of them, will have the ability to be You know, atomically swapped back into Bitcoin in some sort of trustless way, and in that sort of scenario, Bitcoin's scarcity, its incorruptibility, its decentralization, and its neutrality, Its lack of a leader, it, you know, its lack of a single jurisdiction where it's under, all of these factors make Bitcoin the center of digital money. It already is the center of digital money today, you know, in terms of it being the reserve currency of the, the cryptocurrency landscape, but it will progress to the center of the- whole digital monetary realm, especially when central bank digital currencies are built on distributed layer technologies that enable atomic swaps, then you're gonna have central banks that are trading between their currency and Bitcoin because they're targeting the Bitcoin price of their CBDC. And, it will take time for this to unfold, but I think it really comes down to the fact that, this neutrality of Bitcoin can never-- arguably can never be duplicated again in the way that it was with Satoshi in '09, and it really is, An earth-shattering, innovation and moment in mon-monetary history, and that is what I wrote the book about. I do, you know, officially claim that the monetary and cryptography sciences have merged. They merged on January 3rd 2009 or October 31st 2008, however you wanna say it, we didn't know it at the time, but we know it now, and we have to go back and mark that date. Or and what Satoshi did for what it is, and it was a monetary renaissance, and, just look at the way that we're tracking." }, { "speaker": "stephan", "time": "50:40", "start": 3039.84, "text": "Yeah, it's certainly ve- been a very, very rapid, advance, advancement up to where we are today in January twenty twenty-one. and I guess as part of that transition period, there may be a period where central banks have a Bitcoin trading desk. So what does that look like to you?" }, { "speaker": "nik_bhatia", "time": "50:56", "start": 3056.31, "text": "Yeah, it, it comes down to, think of the We, think of the example in the '60s of the Gold Pool. This is when governments came together to try to keep a lid on the price of gold at thirty-five dollars, per ounce by basically selling gold into the market, to, to bring that supply, that sup- that supply heaviness and try to, try to keep a lid on the price. So that type of activity is basically a- A government's way of saying that, you know, we don't want the pr-the base price of our currency to be devalued. And so they'll try to, you know, keep the price. And I do imagine in the future that central banks will try to replicate that sort of activity to keep a lid on the Bitcoin price of their currency, and they'll need a trading desk to do it. And, certain central banks will be able to be way more successful than others, and I do believe That, you know, in ten, twenty years from now, we're gonna have a lot fewer currencies. Government currencies aren't going away, but I think that there's gonna be a tremendous amount of consolidation, and that's not something that, You know, people are talking about today really is that, oh, that, you know, we have over two hundred countries and we'll have only fifty curren-- fifty government currencies in ten years. But I think that that sort of thing can happen, especially if, you know, the smaller central banks aren't able to keep a Bitcoin desk and, you know, keep a lid on their, on the, on the price of their currency in Bitcoin terms." }, { "speaker": "stephan", "time": "52:42", "start": 3162.07, "text": "Maybe then, I guess, you're projecting that it's likely that the whole- CBDC, central bank digital currency thing happens, but those of us who are smart hold Bitcoin instead, and over time, it's gonna be extremely, extremely bullish for those people who do hold Bitcoin, because that's actually the scarce one, as opposed to the central bank digital currencies, which will just simply have to reflect existing monetary policy." }, { "speaker": "nik_bhatia", "time": "53:07", "start": 3186.83, "text": "Yeah, I do believe that it accelerates the adoption of Bitcoin, and it, it certainly demonstrates to- To anybody who wasn't already in Bitcoin, that Bitcoin rails are the future of the financial system, and, then it'll, it'll drive people into it. And CBDCs are themselves a capitulation to Bitcoin, and it's, it's obvious. I mean Why would they be creating these things if Bitcoin had never existed? They wouldn't have any FOMO, but they do, and so they have to get on board, and it's just actually driving the Bitcoin adoption, it's driving the awareness that money doesn't need to be issued by a central bank, and, you know, they're, they're-- Listen, they're definitely coming. I read all the research reports while I was researching this book, the one that the ECB issued. I read the Fed papers from a couple years ago. the Reserve Bank of Australia is already now testing, and, you know, you know, we already know that China is in the lead in terms of, you know, who's gonna be the first big, major country central bank that's gonna put one out and be in public circulation. So they're all on their way, but I don't think it, for a second, does anything to change the direction we're going, which is a Bitcoin-centric financial system, that's built on these cryptographic rails." }, { "speaker": "stephan", "time": "54:36", "start": 3276.38, "text": "So previously some of our earlier episodes were about the Lightning networks, I think it'd be interesting now to just talk a little bit about that and whether there's been any evolution in your thinking on this idea of the Lightning network reference rate or, well, yeah, whether your thinking has shifted there?" }, { "speaker": "nik_bhatia", "time": "54:52", "start": 3292.17, "text": "no, none of it has shifted, it's only gotten, stronger. And, you know, shout out to the Lightning Labs team for pool and the product, releases this year, centered around Lightning Network routing activity, Lightning Network liquidity, and transaction types, and all these, fascinating innovations that are going on. we do now see that people- We're talking about the income that they're earning on the Lightning Network in interest rate terms, which was the goal of my work, when I set out to write The Time Value of Bitcoin in twenty eighteen. So I'm thrilled that, the capital market has taken a turn in that direction and people will now be refer-referencing, Lightning Network interest rates, whether they call it, LNRR or not, you know, really doesn't matter anymore. The fact is That the rates are out there and, it'll only get more public and, you know, we'll get more data as the number of users grow in the Lightning Network. one of the things that I didn't think about back then, in terms of the potential of the Lightning Network, is the fact that these hash time lock contracts that are now available with Bitcoin because of Lightning Network enable this world of atomic swaps swaps with Bitcoin, via Lightning that really will drive, the Bitcoin-centric financial system. So, you know, it's not the fact that people will use every digital currency they get and automatically atomic swap it into Bitcoin using the Lightning Network and that'll pump the price forever. It's the fact that you have this, instant way to transact between currencies and with Bitcoin Bitcoin as the ultimate form of digital scarcity, it does allow people to, again, going back to double-entry accounting, Bitcoin is called triple-entry accounting. It's the first language That we've ever shared as a world on the internet with money. The first ever language that's really a common tongue, and it is-- that is why Bitcoin is the most important monetary invention since the world settled around gold as its consensus money. So it is a once-in-a-millenia or more innovation, and, I think the Lightning Network, to get back to your question. plays an important role in, the future, and it really comes down to SegWit and these, and, and, you know, and then the The BIPs that set up SegWit with, you know, check sequence verify and check lock time, these updates to Bitcoin have made Bitcoin a full monetary system platform in addition to this, meme of digital gold, which it is and it'll, it'll continue to be. So that's probably the most exciting thing about Lightning Network, and I do cover this briefly in the book, about the atomic swaps." }, { "speaker": "stephan", "time": "58:09", "start": 3489.07, "text": "Yeah, that's a really cool part to, acknowledge. And so with the creation of Lightning Pool as, the first- We can call it a channel marketplace, when people want to open channels to each other, they can put up a bid and then say, \"Hey, I, I want some inbound liquidity for this much money, and I'm willing to pay this much.\" And that's where the basis of some of this first, Lightning Network reference rate can come from, and that's where you are essentially earning a non-custodial return. So it's not without risk, there is a hot wallet risk, obviously, but it's- Non-custodial, so that's probably the key part because basically, as you were saying, the smart contracting and the way, when you update the state of your lightning channel, you're basically passing back and forward a new state and you're, you're revoking the old state and you're saying, \"This is the new one.\" And at, and at any given point, let's say I've got a channel with you, then, you know, either of us can unilaterally close that channel and claim back our funds on-chain. So that's a really interesting, Aspect, and it kind of ties back to what we were saying earlier about, you know, final settlement as well." }, { "speaker": "nik_bhatia", "time": "59:23", "start": 3562.58, "text": "Yeah, absolutely. And, you know, the, the, like you said, there isn't-- it's not without risk. your, your risk is, Coming down to your technical expertise and you have channel management risk and all these other things, but, like you said, you still have the unilateral power over your funds, and, that is something that it can't really exist in the physical world. and that's, you know, part of what makes Bitcoin so unique." }, { "speaker": "stephan", "time": "59:55", "start": 3594.79, "text": "So, any other, points in terms of the outlook on the future of money and what it's gonna look like with Bitcoin as the center of this Bitcoin layered money future?" }, { "speaker": "nik_bhatia", "time": "01:00:07", "start": 3607.46, "text": "you know, I think that we talked about really the neutrality, and that's really the point to drive home here, is that in, in the realm of digital currencies, it doesn't matter, it's not going to matter necessarily what the counterparty is of the money it won't be able to compete with Bitcoin's, neutrality, and I think that that's something that will drive Bitcoin's adoption going forward, as people realize that their money doesn't have to be issued in the way that they previously thought. most people walk around with bank deposits and, in my framework, that's a third layer money, but, you know, they could be walking around with first layer money, Bitcoin, and, and just completely avoid counterparty risk. And once that sets in, and I hope that the layered money framework, you know, elucidates that for people, I think, Bitcoin will just continue on its current adoption path, which is an exponential rise." }, { "speaker": "stephan", "time": "01:01:10", "start": 3670.57, "text": "So we could maybe summarize that as Bitcoin as the safest layer." }, { "speaker": "nik_bhatia", "time": "01:01:14", "start": 3674.64, "text": "That's right." }, { "speaker": "stephan", "time": "01:01:15", "start": 3675.84, "text": "Very cool. Alright, Nick, well, I think it's probably a good point to finish off here. where can listeners find the book and follow you online?" }, { "speaker": "nik_bhatia", "time": "01:01:24", "start": 3684.56, "text": "Great, so I'm hoping that the book is live on Amazon by the time that this airs. the book is called Layered Money. You can find it on Amazon, it'll be available in both print and, in e-book format. the Audible version is on its way, that should be out in February. so you guys- You guys can find that, just go to Amazon Layered Money. You can find me at layeredmoney dot com, and I'm on Twitter at timevalueofbtc. Fantastic." }, { "speaker": "stephan", "time": "01:01:54", "start": 3714.34, "text": "Well, I really enjoyed chatting with you. Thank you for joining me today. Thanks, Steph. Quick note before we finish up, just remember there is a new Bitcoin Core version out, it's zero point two one. So I encourage listeners, if you are a node runner, to go and upgrade because this one has support for Tor v three. So it would be great to get, some, upgrades going on On our Bitcoin nodes for that. So just a reminder, stop your Bitcoin Core, go and download the new one, ideally verify the PGP signatures, and then install the new Bitcoin Core and then run it, obviously. And obviously for those of you using a package node such as Umbrel or Mineo or Raspiblitz or Ronin Dojo or Nodle or, Embassy, just wait on an update from the package node developers and that way you can update to the newest version with that. Otherwise, thanks for listening and you can find My show notes at stephanilivera dot com slash two four four for this episode. I'll see you in the citadels." } ] }