The Threat of Fractional Reserve Bitcoin from Wall Street with Saifedean Ammous & Caitlin Long

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Negative interest rates are purely a construct of the artificiality of the monetary system. There is going to a major bond crash - the challenge is that this could be years if not decades away, or it could be tomorrow.
— Caitlin Long
What is going to be interesting in the next crisis is whether Bitcoin behaves as a speculative asset. Will people exit it towards more safer, more liquid assets like the Dollar or gold, or whether it is going to behave more like safe haven asset itself, and people will be exiting other things, particularly the altcoins for the relative safety and liquidity of Bitcoin.
— Saifedean Ammous

Interview location: Skype
Interview date: Friday 21st September 2018

Following the 2008 market crash, analysts are highlighting new risks for the global economy with rising government debt presenting a risk of a bond crash. The last 12 months have also seen a fall in the value of the local currency in countries such as Iran, Turkey and Venezuela. Data from Local Bitcoin’s highlights that in failing economies, Bitcoin is often seen as a safe haven.

Bitcoin is playing an increasingly important role in the global economy with regulators and Wall Street coming to the table.

In this episode, I talk with the author of The Bitcoin Standard, Saifedean Ammous and Wall Street veteran, Caitlin Long. We discuss:

  • The state of the global economy

  • Keynesian economics

  • Negative interest rates

  • Deregulation of the banking industry KYC/AML

  • The Bank Secrecy Act

  • Privacy and is it dangerous for Bitcoin

  • Rehypothecation

  • Fractional reserve Bitcoin

  • Implications of Wall Street adoption of Bitcoin

  • How the Bitcoin revolution will happen

  • Cross-border payments with Bitcoin

  • Liverpool winning the Premier League



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Peter McCormack: Hi, it’s afternoon here in London, so good afternoon Saifedean, good afternoon, Caitlin. I’m not sure what time it is there for you, but thank you both for coming on the show. Could you both just introduce yourself and then obviously let me know why Bitcoin is so important for you before we start talking about more of the juicy subjects.

Saifedean Ammous: Okay. Well, I’m a university professor in the Lebanese American University in Beirut in Lebanon. I’ve been in this job for about nine years and I’ve been interested in Bitcoin. For seven or eight years or so of those has been researching it from an economics perspective because I came at it from the perspective of an Austrian economist, that was what I was interested in studying for a while and recently I published The Bitcoin Standard, which is basically the summation of all the Austrian ideas that I’ve worked on over the past few years.

Caitlin Long: And I’m Caitlin Long. I’ve been involved with Bitcoin dating back to 2012. I have a Wall Street background, left Morgan Stanley, where I had been running a business on the pension side in 2016. Spent 18 months at Symbiont, which is an enterprise blockchain company and this year left that to work on passion projects in Wyoming, my home state, my native state. We have got five blockchain friendly bills passed in Wyoming and have just finished a hackathon. I’m headed back out there for another legislative task force meeting where we’re going to be hopefully putting even more favourable blockchain legislation through the state of Wyoming.

Peter McCormack: I think it’s good to bring you both together, as in both of your work I’ve noticed you mention each other. Most recently in your bulletin Saifedean you’ve mentioned Caitlin. I’m struggling to find where you might have disagreed on things. I think possibly the only areas that Saifedean with you, everything apart from Bitcoin as a shitcoin, whereas Caitlin, I think you’re a maximalist, but because of the work you’re doing, obviously with the Wyoming blockchain coalition, I guess you’re exposed to other non-Bitcoin items.

Caitlin Long: Sure. Yes. I’ll go first. I suspect it’s that we don’t disagree on a whole lot of fact. Actually, when we first connected, when I gave a speech to the Mises Circle in San Francisco about the future of money and a big chunk of that speech, it was in April or May of this year, a big chunk of that speech was telling every Austrian that Saif’s book needs to be in their library and explaining why. In fact, I remember saying, I don’t even know how to pronounce his name, but my mentor in Austrian economics had sent it to me and said, this is the book that I wish I’d written and when I read it I fully agreed and, it doesn’t need to be written because Saif did it.

Peter McCormack: Okay. So I just want to set the picture, just on a personal level and from what my podcast is about. So two years ago I was working in advertising living a standard life, earning my money, putting it in the bank, saving a bit for my pension and going on holiday once or twice a year with my children. And now two years on, I found myself in this world of Bitcoin, where everything I know has been turned upside down. Everything I know about the government, money, economics, and if anything, there’s a huge amount of fear and I think obviously there’s a great opportunity with Bitcoin. It’s become the work of your lives, but how do you think we raise awareness with what’s happening with the global economy, with people like, who I used to be?

Saifedean Ammous: Okay, well, the way that I see it as, these, sort of things, these sort of questions I used to think about much more than before Bitcoin. For Bitcoin, you used to have this compelling desire to tell people, you know this isn’t how things should be. We could be living a much better, healthier life with a lot less conflict, war, destruction if we separated the monetary system from the government and you start alienating your friends because you never shut up about this. But, Bitcoin for me, there is one beautiful thing about it is that you don’t have to tell the people anymore. You don’t have to argue with people anymore. It’s just the economic reality that is imposing itself on people. So that people who don’t care about any of that stuff, we don’t even think that separating money and government is a good thing, people are still getting into Bitcoin because it’s just much better as a store of value.

Saifedean Ammous: And so, I think it’s beautiful to not be in a position where you need to keep arguing theoretically with people. I liked the fact that Bitcoin just imposes economic reality and then people keep adopting it. And so I think it’s going to teach people proper economics once they start really realizing the impact that it has on them in terms of how they lower their time preference, they start thinking more of the long run and then when they start imagining or seeing how a new economy is being built online around Bitcoin. Bitcoin based transactions are going to offer a much more compelling alternative to the current government dominated monetary and financial system. I think that it will just speak for itself. It won’t lead us to evangelize it.

Peter McCormack: And I think people know something is up but they’re not sure what it is. Amongst my circle of friends, people have got no money, they’ve got no savings, they can’t put anything towards their pension. They’ve got children going to university about to embark on an experience that’s going to lead to a lot more debt for them not knowing how their children are going to afford houses. I get the feeling people know something’s up, but they don’t know what it is. What are your views on that, Caitlin?

Caitlin Long: Oh, I completely agree. I’ve been saying that for years as well. When back when I was working with corporate treasurers and CFOs, even they knew something was up and one of the reasons why when I laid out what was really an Austrian argument to them, of course, a lot of them said, oh my gosh, that makes so much. And they loved it because it was so contrary to what they were hearing from the standard line. And it was interesting. Then Morgan Stanley encouraged me to go do it because the client feedback was so great. They did not actually try to shut me, shut me down, even though it was very, very critical of how money and credit are created in the economy, but you know, it just, once I laid out the Austrian economic view, it just makes sense.

Caitlin Long: The light bulbs start going off for a lot of other people. I will say, I was careful not to call it the Austrian view because that conjures up controversy and if you lay out the substance without calling us Austrian sometimes to people who are indoctrinated, maybe that’s too strong a word, but people who don’t know anything other than the standard economic line, they shut down. But the moment that you lay it out substantively, they get it and they realize, yeah, there really is something wrong. And it forces them to think through what might happen, you know, in, in, in how this is going to play out. Everybody knows, except for the people probably even the people who come out and say, this is sustainable and everybody realizes it’s not. And so I think a lot of people just either have Stockholm Syndrome and bought their own line of you know, what, or alternatively they really don’t believe it, but they’re just so stuck in the group think to them, the cost of getting out of that group think is just too great.

Saifedean Ammous: And why do you think Saif that Keynesian economics propaganda survived so long? Is it purely a construct of the governments need to print money?

Caitlin Long: Yeah, it’s, it’s the fact that government printing money makes it a sustainable cycle in that the government prints the money that’s finances and economics departments and then the economics department teach that government should print more money. And so, as long as they both scratch each other’s backs they continue on until that is Satoshi shows up and then ends their sweet gig, basically puts them out of business. The thing is, it’s very hard to make that into an academic debate, when the preconditions for participating in the debate is that you have to get effectively funded, published, and hired by institutions that get paid from the government. So, the notion of trying to argue the perspective of government doesn’t need a role, you don’t even have to invoke some sort of conspiracy that keeps people out. It’s just the not the nature of any government institution is that it won’t be able to hire somebody who thinks shouldn’t exist. And so if you look at the debate that goes on within all government funded universities, it’s going to just naturally be biased towards that perspective because that’s how you’d get hired in that university.

Peter McCormack: Caitlin, I heard the Marty Bent interview, and you talked about this government finance bubble and then a couple of things stood out to me as somebody who doesn’t really understand economics that well. You talked about it almost like you’re talking about some huge mega crash is coming because, governments are running out of balance sheet capacity. And I interviewed Tuur Demeester and he talked to me a lot about a bond crash, and then the last thing is you also talked about negative interest rates and I was trying to understand negative interest rates and I was thinking this just doesn’t make any sense, but is that essentially a hedge, almost like shorting money?

Caitlin Long: Yes. Somebody is paying you to borrow. Right? Which in a free market, that would never be the case when interest rates are negative. In a free market, they would never be negative, because to Saif’s point from earlier time preference is always positive, right? You would always prefer to consume something today instead of having to wait until tomorrow, all else equal, and so why would you ever pay somebody else to wait until tomorrow? You wouldn’t. In a free market. So negative interest rates are purely a construct of the artificiality of the system. And Tuur is absolutely right. There is going to be a major bond crash. The challenge though is this could be years if not decades away or it could be tomorrow. The hard part is none of us knows. I look at it and say, when interest rates turn negative, it’s a sign that the balance sheet of the country is pretty much done, right?

Caitlin Long: Because to the extent that central banks can continue to lower interest rates toward that zero bound, then that suggests that the market says there is still some balance sheet in aggregate left in the country. Implicitly. What I think fiat currency value represents is that balance sheet. What I mean specifically by that is the amount of assets collectively owned and in that economy that are not yet encumbered by debt. So if you think about a balance sheet, your assets, you’re only solvent if you have positive equity. In other words, if your assets are greater than your liabilities, and when interest rates are negative, it means that in aggregate the country’s liabilities are probably greater than its assets. It just hasn’t had that crisis of confidence yet, but it’s coming. And, and what’s interesting in the US, I like to look at the 10 year treasury bond yield.

Caitlin Long: There’s been an incredible downward trend of lower lows and lower highs for 30 plus years, I think it was 1982 is where that trend began. Literally every single time interest rates start to go up and the Keynesian say, you know, the economy’s turning, rates are going to go up, we’re going to mean revert on interest rates every single time. We never hit that previous peak before the wheels start coming off because every time the Fed’s tightening, financial conditions start to get tighter across the economy and the malinvestment starts to become revealed, right? We have not yet broken that trend of lower lows and lower highs even though rates the 10 year, I think as of today is hanging right around three percent might have broken through it. Last I looked, I think it had a breakthrough 315, if it breaks through 315, as of a quarter end, which would be September 30th, then we might have actually broken that previous trend that started since 1992.

Caitlin Long: But I laugh every time the, the mainstream economists come out and say, this is the time interest rates are finally going up. We all know they have to go up. I don’t just disagree with them. They all know that we all know they will go up because they’re artificially low. But every time the Fed starts tightening and the wheels start coming off somewhere in the economy, you start that downward trend again. And I don’t think that trend is broken yet. And the reason I say that is because we’re not at zero yet. And once we’re at zero, that’s when the balance sheets done.

Peter McCormack: And is this almost like a perfect storm building for Bitcoin?

Caitlin Long: Sure, absolutely. Yeah. And I do think that Bitcoin will resume its countertrend price performance against fiat currencies. It’s been procyclical with other financial assets, in the last year as Wall Street money has started to come into it. So what we had actually is a leaking into Bitcoin, have all of this paper money that’s been created, that paper money goes to where assets are cheapest and right now, or at least you know, a year ago, Bitcoin was one of those cheap assets and you started to see a lot of hedge fund money and high net worth individual money come in and then you had the Bitcoin futures contracts from the CME and CBOE, which by the way, right at that time was the top of the price of Bitcoin. Right? And ever since then it’s come down, but I think some of that easy money was leaking into Bitcoin’s price in that run up to the peak last December

Peter McCormack: Said, do you perversely enjoy this kind of market crash, this market narrative? Because it is good for Bitcoin. Everything that’s happened in let’s say, failing economies, what we’ve seen in Venezuela and recently mentioned in Palestine and Iran and Turkey. I’m not sure how widespread use is, but the narrative is, that Bitcoin is a lifeline. So do you personally enjoy this?

Saifedean Ammous: I have to say no, I don’t, I’m not one of those people who, we call them doom porn people who just fantasize about economic collapse and how it’s going to vindicate them. I don’t think of it in that way, but also, we have never seen Bitcoin under the financial crisis. There’s definitely truth to the fact that it’s usage is increasing in Venezuela and Argentina compared to countries similar to them, where they would it be experiencing those problems. However, we have no idea what a rich, modern country going through a financial crisis would be like. In fact, there’s a lot to suggest that Bitcoin will likely crash during something like this because when these financial crises happened, what you get is a flight to liquidity.

Saifedean Ammous: People can’t afford to hold money that is in high return, high risk assets, which is what they do during the bubble, when the interest rates are low. So now people are speculating, people take risks. And so they put money in all sorts of crazy thing including things like Bitcoin and other digital currencies and so on. You can afford to do that when credit is easy because you can borrow on your credit card at the low interest rate, your house is at low interest rate and you’re getting paid. Now it says recession interest rates might rise so it’s harder for you to borrow and then you might lose your job, or your pay is reduced or some of your income’s reduced. All of that leaves less of a margin for speculating on high risk things. And so people will liquidate things like Bitcoin.

Saifedean Ammous: Like we saw in 2007 and 2018, people liquidated highly risky debt assets and tried to go dollars and gold in the financial crisis. So I think it’s going to be really interesting about the next crisis is whether Bitcoin behaves as a speculative asset, with people exited towards safer more liquid assets like the dollar and gold. Or if it’s going to behave more like a safe haven assets itself where people will be exiting other things, particularly, you know, the altcoins and particularly digital assets. People will start exiting that for the relative safety and liquidity of Bitcoin, which at the end of the day is at least nobody’s liability and is much more secure than any of the other coins. And so, you know, it’s more liquid and it’s more secure and so most likely if there’s a big crash in the market, people are going to start taking their money out of the digital currency space.

Saifedean Ammous: But if they’re going to keep anything, they’re going to likely keep it in Bitcoin. So the question now is whether we are going to be seeing a bigger flight out of Bitcoin than a bigger flight into Bitcoin. I don’t think it’s settled one way or the other. And I think, we might end up seeing Bitcoin crashing very, very severely. It might drop below 100 bucks or something like that. And it’s not entirely out of the question, I’m not one of the people who thinks Bitcoin can only go up. It’s could definitely the crash and we have no idea how it will behave in a recession.

Caitlin Long: Can I add something? I think maybe we actually found a couple of things we might slightly disagree on here, but very slightly. I actually think that the price aspect of Bitcoin is the least interesting aspect of it right now because, it’s really being driven by speculators, but your point about potentially dropping to 100. I do agree with that, but with a subtle change, which is that everything’s going to drop in dollar terms when we hit that balance sheet wall. And The name of the game, I’ve always thought is not your absolute return performance in your own wealth compounding. It’s whether what you own falls less in value than your personal inflation rate. That’s the real concept. And so to me, the absolute price of Bitcoin versus the dollar is kind of irrelevant. As long as Bitcoin retains its store of value there we would vehemently agree, as long as Bitcoin, Bitcoin retains its store of value better than other assets, and it’s one of many assets that I think will retain its store of value in that scenario, better than other financial assets. ,

Saifedean Ammous: I think it’s going to be hard to disagree on this because I think it might take a while and it might be another few financial crises for this to happen, but I think in the long run, what’s going to make Bitcoin continue to gain more of a monetary role. It’s just that it’s going to prove itself on the test of the market of this cycle of crises and speculative bubbles. In other words, you know, as you were saying, dollars would leak into Bitcoin because dollars are easy and money’s being printed and people have low interest rates. But the differences that, with every other assets out there, once money leaks into it and owners leak into it and people start speculating on it and the price rises. It’s possible for the producers of that asset to make more of it.

Saifedean Ammous: It’s true for housing. It’s true for stocks. It’s true for any kind of assets. Any metal oil, oil. Gold is the one that resists this the most and that’s why it was money. It was the hardest to make, but Bitcoin is even harder than gold to make. And so even if we do witness a massive crash down to 100 bucks with this crisis, because of the fact that nobody can make more of it, the recognition of Bitcoin, the people who have heard about Bitcoin, are likely to just put it back on the map and then more and more people will buy it and then we’re going to witness more and more of a rise in the price. And that I think that resilience is going to illustrate to people how it is different from other kinds of monetary assets so that it could survive many, many crashes and still nobody can increase the supply. And so the scarcity of it continues to prove itself on the market.

Peter McCormack: So, it’s almost important for people to have a diverse set of investments for whatever scenario may play out. Gold, own your house, Bitcoin, obviously a whole bag of shitcoins right Saif.

Saifedean Ammous: Of course. Yes.

Caitlin Long: Well we don’t know, right? I think nobody really knows and we don’t know what the timing is. We don’t know what the path is. There’s an interesting book Saif and I talked about the first time we actually spoke to each other, which is called a book called When Money Dies with by Peter Burton, I believe. He’s a historian, not an economist. And he wrote the history of the German hyperinflation. And to me the most interesting lessons coming out of that currency collapse, how many head fakes there were as the currency was collapsing, we tend to look at hyperinflation graphs and you know, the Venezuelan graph is now even more extreme than, than the German hyperinflation because the inflation has been higher. But in order to see them, you look at them on a long basis and what the log graphs obfuscate is just how many head fakes there were, where people are actually thinking that they were out of it because things had actually reversed and the currency appreciated.

Caitlin Long: And really importantly towards the end, you were seeing 20–30 percent intraday moves in the currency value against the French franc and also in the German stock market. Think about that. 20–30 percent intraday moves. Now the businesses weren’t fluctuating in value 20 or 30 percent in one day. It was the currency collapsing that was happening. That’s a wonderful book for anyone who’s interested in learning about what happens because that the path to currency collapse is not a straight one. The markets have a way of throwing curve balls at you thinking that we’re finally over. We finally hit the bottom. And there’s still unfortunately a lot more to come.

Peter McCormack: And do you think a currency collapse is inevitable with the dollar?

Caitlin Long: Oh, I do. I just a question of when, and again, you know, it could be 20, 30 years from now because we still in the US have balance sheet leftover. We’re really on a Euro Dollar standard is what we are right now globally and I don’t think that that’s going to end anytime soon, but there’s a lot of evidence that it’s fraying at the edges for sure.

Peter McCormack: But you’ve also said before that you think the Euro has less space on its balance sheet.

Caitlin Long: When I say Euro Dollar, that’s a financial market term. That has nothing to do with the Euro currency. Euro Dollar standard basically means Dollars issued outside of the United States. It’s basically the Dollar as the world’s reserve currency and all Dollar trade has to settle through the Fed. Ultimately what foreign banks, who have the ability to settle through the Fed actually can issue Dollars. And in fact, you know, during the financial crisis we saw an awful lot of offshore Dollars issued. That’s what a Euro Dollar is. It’s basically offshore Dollars issued through foreign banks in the financial system, all of which still settled through the Fed, but it’s not just us banks that create that Dollar based credit, foreign banks can do it too.

Peter McCormack: I thought you said with Marty Bent that you think Europe has less capacity on its balance sheet.

Caitlin Long: Yes. Sorry, I didn’t answer that specific question. Europe does. When I’ve done that math, there’s a lot less and by the way you can see it in the evidence, if you buy my theory that when interest rates are essentially at zero, the balance sheets basically done and if you happen to go to negative interest rates, it means that you know, you’re pretty close to that crisis of confidence moment. Look at Europe, Germany and the Netherlands and Belgium are carrying the rest of Europe right now and there’s a reason why you’ve got essentially zero interest rates in Europe and it suggests that it’s closer. For the last three, four years, the 10 year treasury bond in the US has traded at much higher interest rates than the 10 year treasury bond in Spain or Italy, does that make economic sense on the face of it? No, of course not because we know that Italy and Spain weren’t carried by northern Europe, they probably would have defaulted already.

Peter McCormack: And do group the UK in with Europe, or is the UK separate, having kept its own currency and you know, we are facing Brexit. Are we a different case?

Caitlin Long: Yeah. The UK is a different case and actually one of the things that I was hoping that the Brexit team would pursue when the Bank of England, a couple of years ago was very forward thinking in digital currencies. One of the things I was hoping that they would pursue was some sort of a Bitcoin standard because that would have, in my opinion, solidified London as a global financial centre. It does not appear that they’re going to be pursuing that. It appears that that’s all been put on the back burner. And I’m not surprised given that the head of the Bank of England is a classic Keynesian.

Peter McCormack: One other thing I heard you talk about is you would like Trump to deregulate the banking industry. What would the implication of that be? Would that help the current situation?

Caitlin Long: Well, what I was specifically referring to in the interview with Marty Bent is the Anti Money Laundering and Bank Secrecy Act rules. The Trump administration has deregulated a lot except in the financial services industry. He’s actually gone the other way. We’ve actually had significantly increased standards on Bank Secrecy Act, Anti Money Laundering. I think the Bank Secrecy Act is unconstitutional, but it just hasn’t been challenged yet. And specifically I wrote a piece of reforms for, about the constitutionality of the Bank Secrecy Act and the context of the Carpenter Supreme Court decision that came out regarding cell phone data that said, no, we do have a privacy interest in our cell phone data. The government just can’t really know a collect that data. Well, actually the original cases that were cited were cases that from the 1970’s pertaining to the Bank Secrecy Act where all they were doing was collecting the name. I think it was literally just the name of the account holder.

Caitlin Long: Well since the seventies when the bank secrecy act was deemed constitutional, now we actually have to have every piece of information about the account holder. We have to know who the source of the account holders money. We have to know the customers of the customers of the account holder. We have to know the beneficial owner of every asset that is owned in a legal entity instead of by a person. So we’ve gone so far and the irony is that the conviction rate on the Bank Secrecy Act, and I think there were some incredible statistics. I don’t remember. It’s something like 26 million bank secrecy act suspicious activity reports are filed every year and the conviction rate is 0.6 percent or something like that. I may not be remembering those numbers correctly. It’s in the Forbes article, but think about the cost to the entire financial industry for having to collect all that information, think about the privacy rights that are being impeded by that law and then look at the cost benefit relative to the conviction rate.

Caitlin Long: And unfortunately, I was just made aware yesterday that Senator Grassley and Senator Feinstein, two people who are worrying very publicly in the United States with each other right now, have joined together to propose a bill that would make all of the cryptocurrency industry subject to these same laws. So, it’s, again, it’s unfortunate. I suspect that the Trump administration is going to sign that bill if that bill becomes law, but this is the sort of thing that is really putting the United States backwards and harming business across the board. I could not be a bigger critic of the Bank Secrecy Act. I also threw in one of my other interviews. I actually think it’s discriminatory against women, and I’ll tell you why. Because women tend to have changed their last names when they get married. My hair dresser literally had account open under her maiden name for 30 years, and because of the new bank regulations, they don’t recognize because the cheques are all made in her married name, they don’t recognize that she is the legitimate owner of that bank account. So she now has to have cheques bouncing and dealing with all the bureaucracy and the mess all simply caused by this crazy law that has gone way overboard and frankly, as a woman who has changed her name, I really do think the bank secrecy act is disproportionately borne by women.

Peter McCormack: It’s funny when you say that because it also makes me think of how ridiculous the drugs war is. The prison system is. I interviewed Ross Ulbricht’s mum, Lynn and did a lot of research and the prison system and a nonviolent criminals being held in prison. It seems to be that there are an awful lot of laws which are pointless..

Caitlin Long: Well, it’s the extra inexorable march to build up government power. And, you know, the saddest thing is so many people buy into the fearmongering, that this needs to be done. How many of us gave up our rights? We just passed the anniversary of 911 again and I was working on Wall Street. I used to work at seven World Trade Centre, I wasn’t there that day, but boy that was the event in my life that has changed it more than anything precisely because of all of the privacy that we’ve had to give up. People willingly give it up out of fear and for what, a lot of people don’t really think things through and they’ve been manipulated. And it’s very sad.

Peter McCormack: How important is for you Saifedean, because you do talk about it occasionally, it’s not like something that’s big for you. I don’t see it come through a lot in your work.

Saifedean Ammous: No. I have to say, I’m not particularly concerned about Bitcoins privacy and the privacy of Bitcoin transactions because the way that I see it, blockchain structure, the way that it functions, the only way that Bitcoin functions is through everybody keeping track of everybody else’s balances. And the only way that I can verify that you paying me is it is not fraudulent. So you’re not double spending is that I know all the balances of everybody. So that’s a terrible starting point for a privacy because you already have all these addresses and then there’s never going to be as simple technical solution for this issue.

Saifedean Ammous: This is what I like to keep emphasizing. The privacy is not some magic software upgrade that we are going to add to Bitcoin that’s going to make it magical. It’s just like privacy on the internet or you know, any kind of adversarial as scenario where one person is trying to uncover who you are and you’re trying to hide your tracks or the other way around. It’s always going to be adversarial, and it depends on how well you hide your tracks and how well they look, what tools they have. So there’s no panacea, there’s no simple solution that’s going to just make us have privacy as a default. It’s always going to be very, very hard to stay private on something like Bitcoin because of the fact that it relies on transparency and all nodes and then linking identities to address.

Saifedean Ammous: This is just always going to be complicated. But primarily I think the real reason I care about it is that I think privacy is going to be a much easier thing to implement on second layer solutions on Bitcoin. Eventually, Once these become more and more useful, there’ll be far more used and then it’s much easier to implement second layer solutions. And I think the important thing, as a person who doesn’t like the idea of government spying on people, for me, the way we solve that is not going to be through scaling blockchain transactions on-chain so that everybody can make private dark market transaction without the government tracking them. I think we just the only reliable way of solving it is just the defunding government by breaking their money printer and then just making it so that whatever stupid bullshit they want to do, they need to raise taxes for it beforehand.

Saifedean Ammous: So, if want to start spying on people, they can’t just print money, spy on people and then use the they print to tell people that that’s a good thing, And then, just keep the system operating. The way to fight that is to defund governments that do this. Under the gold standard, governments didn’t do any of the stupid stuff. There was no war on drugs. There was no intelligence agencies going around. There weren’t all these bureaucracies obsessed with what every single person was doing. You could buy whatever you wanted and there was far more economic and personal freedom back then simply because if you were the kind of government that would waste the hard money that you have on these kind of counterproductive and destructive things to your citizens, you just didn’t do well.

Saifedean Ammous: You didn’t survive, and you lost your money and you went and broke and you are likely taken over by other governments. So I think this is really the long run solution that and that’s why I’m not too keen or optimistic or, or even concerned with all these coins that pretend that they can add privacy as a default solution to their coins. I don’t see that as a, as a fruitful avenue. We’re just going to have to kill the Leviathan and then we can have our privacy.

Peter McCormack: I wonder whether privacy might be potentially dangerous for Bitcoin in that the defence against a fractional reserve Bitcoins is the Open Ledger, but if the ledger was private, the only way you would find out if a fractional reserve Bitcoins were being created would be a run on the bank itself. It feels like to me, therefore, privacy on the ledger is actually dangerous with Bitcoin.

Saifedean Ammous: Precisely. This is the problem the ZCash and Monero have specifically, which is that, in order to do their privacy technology, you never really know what’s going on with the supply. It might be possible for somebody to break the supply and increase the supply. It’s not entirely clear, but with Bitcoin, because of the transparency that’s far harder to accomplish. I care about individual privacy because the way that I see it is that Bitcoin on-chain transactions are just going to continue to become more and more expensive over time because block space is scarce and I think the demand for hard money is very high. So the increasing demand for hard money as opposed to increasing demand for on-chain transactions is going to naturally lead to scaling Bitcoin happening on second layer solutions because. People don’t need trustless digital cash transactions as much as they need hard money. And so I think the demands for that will be much higher, so people will prefer a second layer of trusted Bitcoin a to first layer or second layer of trusted shitcoin and government shitcoin well. That’s how I see Bitcoin scaling primarily.

Peter McCormack: Would you therefore against any proposal to add privacy to Bitcoin?

Saifedean Ammous: I don’t know, I wouldn’t dismiss that because I’d need to look at what it says and what the proposal says in general, but you know, there are trade-offs that are no such, with the technology there is no magic button to press where we just add privacy. So the way that Monero and ZCash transactions become much bigger in size, it’s much harder to scale and you compromise on your certainty with the supply. So obviously in that case of introducing things like that, for Bitcoin, that would not be worth it, but potentially there will be additions to happen there. But I think, you know, things like lightning make privacy much simpler to implement.

Caitlin Long: Right. And if the privacy is implemented at that level, then we don’t compromise the, the transparency regarding supply, the challenges that we have a lot of people doing things on a second layer already, right? The custodial exchanges, the Coinbase’s of the world, the Bittrex’s is Bitmex’s and crackheads, right? They’re all pulling coins into what they’ve built as a web 2.0, basic second layer, and we have zero transparency into those, so we lose the certainty regarding supply. For All we know there could be fractional reserve Bitcoin happening already even before Wall Street comes in and in fact actually I would point to one specific example, which is the OKEX futures loss. There was a $400 million futures default in OKEX about a little over a month ago and they just bailed in all their other customers who by definition had the $400m gain except the person with the loss defaulted and so they basically failed in all the other customers and made them give up the gain just to keep the exchange alive.

Caitlin Long: That $400,000,000 loss was a fractional reserve Bitcoin. That was off the base layer. You wouldn’t have been able to detect that because these custodial exchanges are, you know, they’re a custodial exchange. They’re keeping the Bitcoin off the chain and only reporting to the chain what they want to, and we have zero visibility into that. When Wall Street comes in, that’s going to be compounded massively in scale. It’s going to be the same issue though. So that’s why lightening network is so important because we’re not changing the supply. If the second layer solution that you’re transacting on is lightning

Peter McCormack: And Wall Street is coming, I’ve got a quote of yours here, Caitlin: “Preventing the problem is easy, but preventing them requires a sea change to how Wall Street does business.”

Caitlin Long: Yeah. And they’re not going to change how they do business. I know intimately how they do business and they create fractional reserve interest in financial securities. That’s an integral part of their business and they’re going to do the same with Bitcoin. That’s going to happen. There’s, there’s probably not much we can do to stop it, but at the end of the day, if you own your own Bitcoins by owning your own private keys, you’re going to be fine.

Peter McCormack: Back to what Andreas always says, own your private keys. So let’s talk about this a bit because before, I’d never heard the term fiat two years ago and now I know fiat, and now I know libertarianism in an Austrian economics and all these new things I’ve read in Saif’s book and other people’s things. The two new towns I’ve had to come to understand are rehypothecation and commingling, and I’m still don’t fully understand them, can we tackle them each individually? Can we, can you please explain what rehypothecation is? So I can explain to my eight year old daughter when I collect her from school.

Caitlin Long: It’s three card Monte. If you’ve ever played three card Monte or a shell game with her, that’s the way she would understand it, that you tell her that there’s one ball, but magically that you slip a second ball under the other shell and magically there are two balls, so two people think they actually own it. But in fact there was really only supposed to be one. That’s the easiest way to understand what rehypothecation does, the mechanics of how that happens are very subtle. In fact, actually a group of five of us submitted a letter to The SEC commenting on Bitcoin ETFs and other fund products, like City Group is doing a depositary, receipts, etc, and basically cautioning. Bitcoin is a really different animal. It’s applying traditional clearing and settlement and regulatory rules to it are going to create some very interesting things in there.

Caitlin Long: There are a couple of Bitcoin core developers who signed to that letter and we put a very, what I hope what is a very clear explanation of what happens in rehypothecation, why you ended up with multiple parties believing legitimately that they own the same asset and it shows up on their brokerage statement as them owning the same asset. So they wouldn’t have any reason or there are auditors would not have any red flags to believe that the system has created more paper claims to assets than there are assets. But that’s standard operating procedure on Wall Street and it’s coming to Bitcoin. Unfortunately,

Peter McCormack: How was it solved then? You know, what, how would you solve it, Caitlin?

Caitlin Long: Well, I think first of all I’ve said very emphatically that no taxpayer backed, or Federal Reserve backed financial institutions should be leveraging Bitcoin. There is no lender of last resort. There’s nobody who’s going to bail them out and if you choose to buy your Bitcoin that way, buyer beware because if there’s a Bitcoin ETF, physical Bitcoin ETF, and there’s a rug on that fund, everybody’s trying to get out the door at the same time, you’re going to see a massive divergence in the value of that fund relative to the underlying Bitcoin. It could be staggering in size. And then if you have a leveraged financial institution who’s got exposure to that, I’m out, you know, and taxpayers could be on the hook. It’s just inappropriate for any leverage financial institution to be playing in a leveraged version of any crypto asset that has scarcity.

Saifedean Ammous: Yeah. And I would say that’s basically how it’s going to be stomped on. I don’t think it’s going to get as big as Caitlin probably seems to suggest because I think it will probably die much earlier because I don’t think it’s sustainable. And so, you know, if you remember in my last research bulletin that I wrote for about 20 pages, my interpretation for why I don’t think fractional reserve banking would work on Bitcoin, I think it will be tried, but I think we are well versed to begin. Fractional reserve banking and rehypothecation are practically different ways of saying the same thing in financial terms. So in other words, you know, you have obligations for things that you owe people things, but you don’t have enough to meet the obligations for everybody at the same time if they all ask for them.

Saifedean Ammous: But if they don’t ask for them at the same time, you can coast along. I think with Bitcoin it’s not going to be possible to pull off something like this for a very long time because the value of Bitcoin is extremely volatile and so changes in it will make people’s positions become extremely risky. I think they know it’s a very long analysis and there are many factors that go into the way that I see it. There’s the reason that it won’t survive on Bitcoin for long is because of the absence of a lender of last resort. In other words, when we had fractional reserve banking with the gold standard, it was not stable. It kept on creating crisis and it led to having to abandon the gold standard. First of all, implementing a central bank and then secondly getting rid of the gold standard and gold reading ability in order to keep the central bank able to support banks that were engaging in fractional reserve banking.

Saifedean Ammous: So you can’t really have a hard money and fractional reserve banking because the bank is effectively creating new money. When it creates new debt obligations added, there might come a point where it would meet that money and the only way that you could keep that bank from going insolvent is if you have a lender of last resort that is able to increase the money supply and give it to them. So that didn’t work with gold. Although it did work with gold in a way because gold clearance was more centralized and so as I discussed in my newsletter, I think because the fact that transporting gold and moving it around is very expensive, it leads to the economies of scale of the process mean that the person who does the clearance or the banks who handle it just become extremely valuable and so they are able to abuse that value because the consumers don’t really have many other choices.

Saifedean Ammous: But I think what Bitcoin is, it’s very different. There’s no lender of last resort and it’s much harder for a lender of last resort to come and do what they did with gold because the only reason that works with gold primarily is the fact that gold was massively confiscated less because it was centralized. So I think it’s the decentralized nature of Bitcoin that’s going to really protect it from something like this. In other words, if a bunch of banks using Bitcoin started doing something similar to fractional reserve banking, you know, we’ve already seen that happen. That’s effectively what Mt Gox did, and the result was that the price crashed. The price came crashing down after the Mt Gox trash. But actually that’s not the price, it’s the Mt. Gox that crashed. That’s the important thing about it. But I think we’ll see things like that.

Saifedean Ammous: I don’t see them collapsing. And if a Wall Street bank is going to try it, I think it’s going to get ugly. In particular, if an institution protected by the central bank wants to engage in something like this and then they left exposed, the central bank is going to be in a very serious dilemma because if you let it fail, it fails and it might have systemic problems. But if you want to bail it out with Bitcoin, well, you know, how does your Bitcoin printing operation work? Obviously not very well and you can’t really just print the Bitcoin on demand, you can print Dollars and buy Bitcoin, but you know you’re then going to be essentially just adding dynamite to the fire of Bitcoin, Bitcoin would already have it. If we had a fractional reserve banking collapse, then you had something like a liquidity flight towards Bitcoin where people were dropping assets backed by Bitcoin to get the Bitcoin. You would expect Bitcoin’s price to be rising. And at that time for the central bank to step in and try and buy more Bitcoin to meet those obligations is likely going to lead to the price appreciating a lot. So I, I think, nobody’s going to listen to my warnings, but it’s going to get ugly.

Caitlin Long: We do. We totally agree on this one. It is going to get ugly, but I think the question is how quickly it can go on for. And, and as you were just saying, this actually I was thinking one of the ways that the Fed and other central banks could get involved is if they actually allocated a portion of their reserves to Bitcoin in the first place because then they could basically do what they’re doing with government bonds right now, which is setup a repo facility and repo that back out into the market so that the banks could actually get access to the Bitcoin to deliver into their short obligations, which is exactly what they’ve done with government bonds, right? It used to be that reserve of central banks was exclusively gold. And then in the last 30, 40 years, increasingly everybody’s just gone out and bought government bonds of their own government or other governments.

Caitlin Long: We all know through the IMF analysis that the central banks that the system is net short government bonds, right? There are more people who believe they own government bonds and who’s brokerage statements show they own government bonds than there are government bonds and the way the central banks can play that three card Monte game is that they actually are the biggest owner of government bonds and they’ll just lend them out when markets get tight. So one of the ironies, as I was just thinking through what you were saying, Saif is If you did actually have central banks come in and start buying Bitcoin as a reserve asset, then they would have the ability to basically be a lender of last resort. But right now they don’t have those and they certainly can’t print any more. Just like they can’t print any more government bonds.

Caitlin Long: So central banks are not the ones who create government bonds. I can’t remember who it was who said that’s the fly in the ointment of, of how the shadow banking system is working and the fact that we’ve basically moved away in the last 30 years from banks, traditional banks created and credit to now the securities market, creating credit. Instead of base money being the base money of the system, it’s actually now government bonds. But the problem is central banks can’t print more government bonds, they can only print more money. That’s one of the reasons why I think they’ve gone out and bought a bunch of government bonds and frankly they could over time do the same with Bitcoin if they felt like they needed to.

Caitlin Long: The differences are that government bonds settle in the money that the central banks print. Bitcoin Doesn’t settle in anything. Bitcoin is settlement itself. So, the tricky part about them buying reserves is that they allow banks to do fractional reserve banking and they have a hoard of Bitcoin. Then they’re just asking for trouble basically. That’s like a honeypot for hedge funds and the vulture capitalists to come and attack them effectively. Once the banks start over leveraging their Bitcoin reserves, they are in a precarious position where it is possible for me to go and put it in a big deposits in that bank and wait for them to start lending it out and then go and ask for it. Now they can’t give it to me because it is illiquid. If the bank didn’t have a lender of last resort, it could put the bank out of business and I could speculate on it by shorting the stock of the bank before making that deposit.

Saifedean Ammous: I discussed this scenario in the newsletter as well, this is how I see vigilante hedge funds destroying fractional reserve banking on Bitcoin. It’s going to be a massive opportunity for people to make money from it. So now imagine if a central bank is going to want to back that up with Bitcoin, it is going to be an even bigger opportunity to profit off of the collapse of the bank and off of the collapse of the central bank effectively, or at least it’s running out of its Bitcoin because you can just keep milking them at a discount by redeeming the fractional reserve assets issued by the banks backing up the banks. So effectively if they want to use, if they want to buy Bitcoin to back up a fractional reserve banking system that effectively going short on Bitcoin there, they have bigger obligations on Bitcoin than they have Bitcoins and good luck with that one.

Caitlin Long: We agree on that. But they are going to try.

Peter McCormack: One of the things I found quite scary in doing my research for this, and I think you both talk about it and it’s something I wasn’t truly aware of, is the shadow banking system. I think it is within your bulletins Saif, you highlighted that it was the shadow banking system that caused the 2008 collapse. What is going on here? Because it seems to me like this seems to be almost like the wild west of money printing.

Saifedean Ammous: Historically, here’s how to think about it. Banks were engaged in fractional reserve banking and that kept under the gold standard continued to collapse and make problems. So then they had to abandon the gold standard and as you know, in order to have the central bank as a lender of last resort, to allow banks to operate fractional reserve banking, the central bank has pretty strict restrictions on banks in terms of how they lend and what they lend and whether they can create credits, and so banking narrow banking, deposit banking has been pretty much neutered in terms of its ability to create money. It does create money of course, but it’s well under the control of the central bank, at least in the more advanced economies. It’s usually under the control of central banks.

Saifedean Ammous: But then what happened after the 1970’s and 80’s and 90’s is the shift towards the investment divisions of banks or the financial institutions that are not banks, what is called the shadow banks; not the deposit taking institutions that are guaranteed by the FTC in the US or their equivalent worldwide. These institution started engaging effectively in fractional reserve banking on a maturity transformation or rehab quantification. So they were creating money. They were increasing the money supply and over time, narrow banking, deposit banking just became a boring service that, you know, it doesn’t make any money. Banks ran it as a small part of their operations, but the real profit is in shuffling around hocus pocus financial obligations in the shadow banking system and essentially that is what it is. You just keep working your financial magic over all of that and everybody keeps buying it from everybody else.

Saifedean Ammous: We keep all pretending that it has value. And then suddenly, if we all market to the value that we all pay for each other, we can meme that value into existence. And that’s essentially how this industry has worked for many years. We talk a lot about government inflation, but this is similar to it in the same way that government can finance its operations. The banking sector could finance itself through the creation of money , in the shadow banking system. But the crazy thing about it is there’s no lender of last resort. There’s no official central bank behind the shadow financial system telling these people, you can create this much money and if you fall in a crisis then we can , bail you out these terms. That’s what the FTC does for the banks and that’s how banks are kept relatively safe and stable and money creation doesn’t go out of hand.

Saifedean Ammous: But in the shadow banking system, the thing is so enormous, it’s so huge. Nobody has any, any sort of grasp on how big it is except Caitlin of course, but pretty much the money creation is just going on all the time and 2008 was the first crisis in order to stop it from destroying the Dollar and everything. The central bank had to intervene as a lender of last resort with these financial institutions acting towards them. Like they would act towards regular banks. You want to add to that, Caitlin?

Caitlin Long: No, that’s absolutely right. When Saif and I spoke first, I was encouraging him as an academic to take on the old Mystery of Banking book from Rothbard, which is an amazing book, but it is a period piece. It’s outdated at this point. I think Rothbard wrote it in ’72, something like that. It described how credit was created and fractional reserve banking worked in the system back then, but it doesn’t work that way anymore. And unfortunately Rothbard’s gone. I think if Rothbard were alive today, he would have updated the scholarship to reflect the fact that the credit creation mechanisms have broadened out so much, and the traditional, tracking end zero to see how many times it’s multiplied into. M2 is really not that relevant anymore because most of the credit, to Safe’s point, is not created in the traditional banking system anymore.

Peter McCormack: This is a problem that is being created by experts like you as I cannot keep up with the number of books that I have recommended. I’ve got two here. I’ve got my Debt the First 5,000 years, I’ve got The Sovereign Individual. I still haven’t finished The Bitcoin Standard. I think you need to ease up a little bit on the book recommendations because it’s not going to be good for the trees.

Peter McCormack: So Saif. Look, I’ve read your bulletin, by the way, which I just say it’s fucking incredible. I signed up when I was expecting an email maybe like 20 paragraphs and I ended up spending half a day reading it and digesting it and I’ve been through it twice now. I think everyone should sign up to it. I think it’s excellent. One of the things that grabbed me in there was trying to envisage how the revolution happens and you talk about the benefit of countries such as China, Iran, Russia, being able to bypass sanctions and use Bitcoin to trade with each other, but at the same time that would devalue their own currency. So have I interpreted that correctly?

Saifedean Ammous: Sort of. Yes, but I guess the bigger point that goes back to what I was referring to earlier in terms of central banks and treasuries. I think in my bulletin I also discussed the idea about whether it would make sense for central banks to buy Bitcoin. And the more I think about the more that I lean towards it not being really likely, I think it’s not very likely that they would do it. And you know, primarily it’s that central banks are fully staffed with people that don’t understand the value proposition of Bitcoin. And secondly, even if they did, they realized that it essentially it’s a threat to them and so you can’t really expect them to embrace it. And that even that, even the central banks that make a lot of noise about rejecting US hegemony and so on.

Saifedean Ammous: The Chinese or the Russians might talk about how much they hate having to live in a world that is unfair because it’s all based on the Dollar and the US gets to print the dollar. They might hate the Dollar but they like having their own government shitcoin much more than they hate the Dollar. And so the problem is that, you know, the same way that they’ve been making a lot of noise about shifting to gold and they have increased their reserves to gold. They won’t move towards a system where they clear things between one another with gold or where they back their currencies with gold because if they do something like that, that takes away their ability to create inflation and if there’s anything a government wants, loves, it’s inflation and so the ability to finance itself with money printing. So they would be cutting off their oxygen supply of being able to print money to finance themselves. And I think that applies to any government. So I don’t see it intellectually.

Saifedean Ammous: And in terms of the mental models that these people have, it’s very far from registering. And even if it did register, even if they did think about it, it’s extremely against their self-interest. And so this is why the subtitle of my book is the Bitcoin Standard, The Decentralized Alternative to Central Banking. A lot of people have mistaken my book as a call for central banks should buy Bitcoin and use it, and I really don’t think that is the case. I discussed it in the book and I leave the option open. I think it might happen and of course it still might happen, but the more that I think about it, the more I lean toward Bitcoin being an alternative to central banks rather than a tool that they can use. So instead of using central banks and their currencies for international clearance, now we have another option which is Bitcoin, is decentralized, controlled by nobody and it will function as a system for international clearance that is separate from an alternative to central banks.

Saifedean Ammous: And I think the old finance and the central banks and the banks and the shadow banking system that is going to try and come towards Bitcoin. They’re going to want to assimilate it and they’re going to think that we’re going to bring it into the traditional financial system. I think they’re going to burn their fingers by trying to play that game. And I think the future for Bitcoin financial services would likely emerge natively from the where people who start from scratch building things around Bitcoin, that work on Bitcoin, the way that Bitcoin works.

Peter McCormack: So where does the revolution start? Where’s the tipping point? Is this a Trojan horse?

Saifedean Ammous: In my mind it’s already over. We’ve won. It’s over just the method of you adjusting your own frame of reference for it. So it’s, it’s all in your head man.

Saifedean Ammous: But I mean like I’m kind of joking, but the way that I see it as just that it’s going to be different from the way that we view a revolution and victory. I think that sort of 20th century terminology needs to go away. It’s not going to be an election and it’s not going to be, you know, some politician who’s going to come into the office and implement a Bitcoin based world. It’s going to emerge out of individuals acting. It’s going to be something that emerges out of human action and not human design, and so people are just going to start using it more and more if it continues to succeed, if it continues to not die and it continues to maintain its hardness, you would expect that more and more people will use it more and more systems and financial markets will be built around that.

Saifedean Ammous: I’ve been recently thinking that it and I’m going to be including this in my next research bulletin. I’m even not so sure that Bitcoin necessarily needs to have a very big destructive crash of the traditional economy for it to succeed. Everybody has this sort of idea that the Dollar is going to collapse. And I was discussing this with Caitlin the other time. It might, it might not. It might all end with a whimper, not a bang. We generally think about examples like hyper inflationary collapses. But I think the difference is that in those situations, the monetary system collapses and people have nothing to move to. On the other hand, what’s happening with Bitcoin is that it’s not that the thing that people are using is collapsing and they’re left with, essentially, an unworkable monetary and financial system.

Saifedean Ammous: It’s that they are leaving it behind and moving onto something else. And so when it crashes, you know it’s going to crash after people have deserted it more or less. So in a sense, I think that maybe the better analogies to compare it to, say when countries Dollarized. So if you think about when Ecuador, when their currency collapsing and then they moved to the Dollar, it was nasty while the currency was collapsing, but then once they move to the Dollar, the economy stabilized and then, products were back on the shelves and life got back to normal because Inflation was over. People could calculate, people could make economic decisions and trade. As more and more people move onto a Bitcoin based world, I think the benefits of hard money and the economic boom from having harder money that is going to benefit everybody around the world, who moves into this, might make it just like an economic upgrade rather than an economic collapse. It’s not even clear that debt is going to be such a big problem because everybody owes everybody at this point that everybody’s in dept. And so, you know, people just move onto Bitcoin and it appreciates, they pay off their debts.

Caitlin Long: When we talked previously, you made the good point about the British pound sterling losing its reserve currency status without a bang. I mean, obviously it was tied into the war history of Europe, which was terrible during that period, but it ended with a whimper when it finally ended, not a bang and the Dollar just took over. That is one scenario that could very well happen on the revolution though. I wanted to add, I think one of the things that will happen and is already happening in a small way is that businesses will start to use Bitcoin for transacting, cross border value exchange. And in May of 2014, I started talking to corporate treasurers about Bitcoin. I was invited to speak to a mega cap corporate treasurers market and this is essentially the Fortune 20.

Caitlin Long: I want to disclose, identities. But that was, that was one of the most amazing discussions because at that point nobody had been talking about it, there were a couple of corporate treasurers who dug in and started using it quietly. You won’t see corporate America make announcements about it or corporate Europe or corporate Asia. They’ll just do it because it’s in their economic interest. They have an obligation to find the cheapest way to move money and, in small value coming out of countries with, without really any developed banking system, Bitcoin has actually been that way. Now they’re not using it to my knowledge in developed country, cross border exchange because Bitcoin can’t compete. The bid offer spreads are too wide. But it’s going to be happening. And I, I think one of the things they said earlier that I agree with as Bitcoin is actually a high value payment network.

Caitlin Long: People are actually trading the actual on chain base layer, Bitcoin. That’s going to be high value payments. Not necessarily, buying your cup of coffee, which is going to end up on the lightning network. We’ve consistently held above $5 billion of daily liquidity in Dollar terms in the Bitcoin market. That’s big enough for cross border payments. It’s effectively the way corporate treasurer is going to think about it. It’s just another currency. They’re going to look at how do I route my payments so that it costs me the least, and not far from now Bitcoin will actually be one of the cheapest if it isn’t already.

Peter McCormack: Do you know the company Wyre who are in San Francisco? So when I was there recently, I met up with Michael, Michael Dunworth, the CEO and they’re using Bitcoin to do, six hour bank account to bank account, cross border deposits and mainly representing I think like trading companies who have to take money from one jurisdiction to another for settlement

Caitlin Long: Abra has been doing that on a retail basis as well. And I’m not talking about medium sized businesses, I’m talking about Fortune 20 sized business, in very small amounts. In one case, the treasurer said he wanted to start doing it in tiny amounts just to be able to show that they’d been doing it for a long time so that when the regulator came asking, he could prove that this is something that wasn’t new. I thought that was very smart. That’s how very smart corporate treasurers think they see this and see what’s coming. It just might not want to use it right now and they certainly don’t want to have their name associated with it yet, but that doesn’t mean they haven’t been using it. It’s like when Fidelity came out and announced that it had been mining Bitcoin, in the consensus conference in the spring of 2016 and the CEO came out and said they’d been mining Bitcoin for a couple of years. That shocked everybody don’t. You shouldn’t be shocked when big companies come out and announced they’ve already been using Bitcoin. They just weren’t telling the world about it.

Saifedean Ammous: I think it’ll come from companies and businesses and individuals and not from a government and central banks and I think time will show how this is going to emerge more organically than people expect.

Peter McCormack: I think we’ve come to a nice kind of natural conclusion. I’ve got a couple of, of off topic questions for both of you, but just before I do that, do you have any closing thoughts? Anything you’re excited about, anything you find interesting that’s coming up that, we should be thinking about?

Caitlin Long: I’ll throw one thing out. We are proposing a narrow bank in Wyoming that would be able, if it passes, it’s a bill that has to go through the legislative process. If the law passes, it’s still gonna take six months, so realistically, the earliest that this narrow bank could open is the end of 2019, but it would serve the crypto industry. And because it’s a state charter bank, it’s not subject to the same level of scrutiny under the Bank Secrecy Act. I think it’s going to help solve the crypto industries bank account problem. Saif, you’ll love this. It’s going to have 100 percent reserve requirement.

Saifedean Ammous: Yeah, I was really interested with that. And then there was another story of another bank that they weren’t allowed to do it. The central banks stopped them from doing it, because it’s amazing. It’s like the reductio ad absurdum of the monetary system where you just have a bank that can make an enormous profit that would be enormously profitable if they just allowed the common peasants to access the central bank’s deposits. That’s it. That’s all they’ll do. They’ll just arbitrage it away. I think about it, you know, all the other businesses. How many businesses do you know out there that are, you know, they perform a business. It could be consulting or it could be whatever it is, but it’s just a mechanism for them to play that arbitrage game. Again, you get interest rates and pass it onto their customers.

Saifedean Ammous: So much of modern business and so much of modern work in a modern fiat-based economy is just bullshit. It’s just a make work exercises so that you could get low credit, low interest rate credit and then pass it on and you know, I can’t wait for the Bitcoin based economy or a hard money economy to happen in my lifetime so that we get a very thorough accounting of what jobs in a bullshit world in which we grew up. What were the bullshit jobs that survive into the future?

Caitlin Long: Well, and the bank you’re alluding to is the Connecticut Bank that was just going to pass on the interest on excess reserves, which is right now 1.95%. It’s a lot more than anybody could get, from a classic bank deposit. They just going to cut out all the middlemen. And interestingly, the Fed denied the application and for two years they were going back and forth until finally this lawsuit was filed. The Fed doesn’t have the right to deny it, but they denied it anyway. So because of that the Wyoming bankers are not really trying to arbitrage the interest on excess reserves, that that’s not what we’re trying to do. We’re just trying to create a money warehouse, 100 percent reserve money warehouse, you know, classic like the gold warehouses, you have to pay fees for storage of your money, but you’re not going to lose access to it.

Caitlin Long: And the Fed would have to grant the master accounts under federal law, and because of the Connecticut situation, we have put into the draft bill a requirement from Wyoming’s attorney general to sue the federal government if the Fed doesn’t grant the master account within six months of application. So again, none of this is final yet we’ve got to go through a legislative process. It may fail, but we’re trying to do something really special, and I think it’s going to help the industry. It’s going to help the state of Wyoming. There are a lot of industries that are not politically correct that are very big in Wyoming. Tyler Lindholm likes to say we do coal, cattle and crypto. Well, pretty much those three industries are not politically correct. And, also I would add there’s a fourth which is the gun industry and all of those industries have been targeted by the banking system.

Caitlin Long: They’re losing access to their bank accounts and frankly this is going to help, this concept isn’t going to be crypto specific. It could be for the coal industry where the Bank of the West just pulled out of banking, just one day they just announced we’re not going to bank coal companies anymore. So a bunch of Wyoming companies lost their bank accounts.

Saifedean Ammous: I did not know that, is because of global warming?

Caitlin Long: Exactly right. And the city pulled out of banking the gun industry. Right? So I mean this is what’s happening to the crypto industry with regard to getting access to bank accounts for basic businesses. You know, for basic expenses like paying your vendors are paying payroll if you got to pay your employees in Dollars still because this has been a major issue and it ties right into what we’re talking about, about not having fractional reserve banking. This is going to be a true money warehouse that is not going to be making loans and it’s available for businesses only, because it’s not going to be FDIC insured. It would be businesses only. And just again to reiterate, it’s not the law yet. We know we have a tough road. We know the banking industry and probably the federal agencies are not going to like this, but Wyoming’s the kind of state where we don’t shy away from fights like that. And so we’re going for it.

Peter McCormack: It’s funny. I’ve been rejected by five UK banks or a bank account for my crypto business. I don’t actually have a bank account right now for it. I took my first advert for the podcast recently and I’m part of the Let’s Talk Bitcoin Network, and I had a payment into my account from BTC media. The next time I logged into my account, I had a form I had to complete with who is my employer and what do I earn.

Caitlin Long: Right! Yeah. Well, there was just a bank that lost access in Wyoming, a company. It’s a trade association that lost access to their bank account, it’s not necessarily the banks against the Bank Secrecy Act and all the federal laws that are the issues, but because of the US reach globally, they’ve basically put pressure on all of their global partners, which is why you’re seeing it happen in the UK as well. It’s the same thing. And it’s this crazy Bank Secrecy Act. It is harming commerce, not just in crypto industry. This is why I hope that this industry prepares itself to take on the constitutionality of the Bank Secrecy Act. I think that the constitutional challenge can and will come from this industry. I hope that some of the players have significant means will step up and support whoever actually wants to litigate that, because it’s time to test this and, get this, get this heavy weight off the shoulders of commerce.

Caitlin Long: The weaponization of the financial industry is unethical and I think we’re shooting ourselves in the foot. But again, like maybe just to wrap it up, I haven’t said this yet. Bitcoin is what makes me so optimistic. You don’t see me so pessimistic and saying, oh, the sky is falling and things are going to crash and you should be spending your life thinking about, you know, building a bunker. I’m not saying that at all because we actually have a way to opt out of this crazy system and that’s Bitcoin.

Peter McCormack: That’s very, very cool way to end up. I do have a couple of final questions for you both. Firstly, Caitlin, are you a carnivore?

Caitlin Long: Yes.

Peter McCormack: Full carnivore?

Caitlin Long: Yeah. I grew up on Wyoming beef. Yep.

Peter McCormack: But like these guys, nothing but meat?

Caitlin Long: Oh no, I eat vegetables too, but I’m mostly a Paleo Diet. Yeah.

Saifedean Ammous: Okay. That is a good start Caitlin? But we need to work on it.

Caitlin Long: Oh, I didn’t realize.

Peter McCormack: Yeah. So I was a vegetarian up until about three weeks ago and I’m now having ribeye for breakfast, shamed into it by you and Pierre and Bitstein. Caitlin also who’s going to win the Premier League this year?

Caitlin Long: Liverpool.

Peter McCormack: Are you feeling about it Saif? How do you think we will do?

Saifedean Ammous: I feel really great about it. I’ve never seen a better Liverpool team in my life. I started watching ever since they stopped winning. I’ve never seen anything this good. It’s quite an amazing team that was pulled together. Could be something really, really special. Like we could win many trophies. I think it’s going to be a team that will be remembered for many, many years from now.

Peter McCormack: I think we deserve it. Caitlin, have you ever in London, I’ll take you to a Premier League game? And my final question is for you Saif. I’ve got a question for you. So, when I was in San Francisco, I was at the Museum of Modern Art and my perspective on art has slightly changed. There was an exhibit which I took a photo of, I’m going to send it to you. It was some plastic bottles hanging off some string. But my question for you is, is Rothko, good art?

Saifedean Ammous: No, it’s not. I mean I’m not an artist and I’m not an art critic, but I have one simple metric which is if it can be recreated by somebody in 15 minutes, then you know it’s not worth paying attention to. If it’s easy to do, if it requires no skill, if it requires no time and you have to spin some story about how it represents something or another then it is just pretentious bullshit. Build something hard and then try and spin a story about it. But of course, you know when you build something that’s hard to build, you don’t need to spin stories about it. You don’t need to talk about it. Beautiful art speaks for itself.

Peter McCormack: Yes. Rothko is the one area I disagree with you because there’s a Rothko room in an art museum in London, which I’ve stood in and I’ve looked at it thinking about you and I still disagree, so I’m going to disagree with you on Rothko.

Saifedean Ammous: We have something to disagree about.

Peter McCormack: This has been absolutely great. I want to thank you both because you do so much, thank you for coming and helping me with my podcast. How can everyone stay in touch with you?

Saifedean Ammous: Well for me. I’m mainly on twitter. But I’m also active on several other podcasts all the time, but you can find my website also or twitter. My handle is also @saifedean and just by knowing the spelling of my name and you can find me on many different places.

Caitlin Long: And same for me at @caitlinlong_ on twitter. I’m pretty active on LinkedIn as well and my website is Also a contributor on periodically. But I always link everything back to twitter and LinkedIn as well as my own website.