Market Insight

Understanding the Global Financial System

August 17, 2020

This is part two of the blockchain series by TechGC's podcast, The Leading Ege. The series features a variety of experts with the goal of better understanding the blockchain movement, what it means for tech, and the important legal considerations around it.  

Meet Brian Brooks

My guest today for Part 2 of the blockchain series, Brian Brooks, is a TechGC member and was also the keynote at our most recent National Summit at the New York Stock Exchange. Brian is the Chief Legal Officer at Coinbase, one of the largest digital currency platforms in the world valued at over $8 billion. Prior to Coinbase, he was the Executive Vice President and General Counsel for Fannie Mae, the largest financial institution measured by its assets of $3.2 trillion. Brian is also an investor and advisor at numerous FinTech companies, including Andreesen Horrowitz’s FlyHomes, Spring Labs, Earn Up, and Grasshopper Bank. In our conversation, Brian and I cover a lot of ground relating to the global financial system and blockchain’s role following the next economic downturn. We talk about the history of the financial system, government reactions to cryptocurrency projects like Libra, blockchain technology and adoption, the relevance of gold and primacy of the US dollar and many other topics. I’m really grateful for having the opportunity to address some important macroeconomic questions with Brian, and I hope you enjoy our discussion as much as I did. With that, let’s tune into my convo with Brian Brooks.

Transitioning to a Blockchain Lawyer

Chris: Brian, thanks so much for joining me on the podcast. As a start, can you just give some background to why you chose to transition into the world of blockchain and crypto?

Brian:   I started my legal career doing traditional financial services. I worked on bank M&A. I did investigations and enforcement for financial services companies of all kinds, and along the way, I had some interesting experiences, mostly in crisis turnaround sorts of situations, right? Back in 2009 and 2010, I had the opportunity to represent Alan Greenspan, the former fed chairman for the Financial Crisis Inquiry Commission, and that was my first experience really understanding what had gone wrong in the global financial system at the time of the crisis. I was really learning from the maestro, as he was called, about what went right and what really went wrong. That led me to having an opportunity to join a group of people who bought one of the biggest failed banks in US history, IndyMac Bank, and to move out to California from where I had been practicing law in DC to help turn that bank around. The people I got to do that with were Steven Mnuchin and Joseph Otting, who later became Treasury Secretary and control of the currency, the guys who were making the global financial system today. These are guys who I helped fix a broken bank just five, six years ago.

From there, I had the chance to go and be general counsel of Fanny Mae, which was the biggest institutional failure in the history of the United States. This was a $3.2 trillion company that was placed in receivership by the federal government or, if you wanted to be more technical, conservatorship, which is the politer word for the same thing. I spent four years trying to re-platform Fanny Mae. It was when I was at Fanny Mae that I first encountered the idea of FinTech innovation and the idea that technology might have something to teach us about how to make the system better, and I became really intrigued with companies that were incrementally improving credit underwriting using technology models or incrementally improving servicing by using internet-based apps as opposed to call centers. Those all seemed cool.

Then I encountered blockchain, which wasn’t an incremental improvement. Blockchain was a whole different system, right? It wasn’t fixing the old system. It was an entirely different system that wasn’t built on intermediaries and trust. People who have been doing this a long time, this is commonplace, but for listeners who are new to this sector, the whole concept of the financial system that we have evolved since the Middle Ages has been an intermediary-based concept. The way I like to describe it was it was a system that allowed Henry II to borrow money from somebody in China with the Rothschild bank providing the ledger of accounts, and what they were providing in the system was trust. In 1550, there was no way to communicate between England and China, so you needed a bank to maintain all the records.

We don’t live in that world anymore. There now is a way to communicate between England and China. There are wires and internets that connect all of us everywhere in the world, and so the presence of intermediaries in finance is a little bit of an anachronism. It’s just something we’ve become used to, and so we don’t notice. Everybody has status quo bias. This is just a way the human brain works. When you first encounter blockchain, you resist it because of the idea that you think there has to be somebody in the middle of all your transactions, but we learned in Internet 1.0 that you don’t need an intermediary to carry your letter from person A to person B. You can just send it directly on a network of computers. I think we’re finally starting to wake up to the idea that all parts of the financial system that are built on intermediaries don’t need to be, and that can take cost out of the system, friction. It’s just a new system.

To your question, I’ve been spending ten years learning what was broken about the financial system better than most other people. Then I figured out how it could be changed. That’s why I’m here.

Understanding the History of the Global Financial System

Chris:   I definitely want to go deeper into the current financial system and what’s broken about it, but I think it’s useful to give some historical context. We have the Bretton Woods agreement following World War II where leaders from around the globe get together. They decide that, in exchange for America protecting the world’s trading routes through the Navy, all nations’ currencies will be pegged to the US dollar and the dollar of course being pegged to gold. This agreement was fantastic for the obvious reason that it opened up new markets, raised the standard of living for billions around the world, but it was negative in the sense that, after Nixon got us off the gold standard, there was this new ability to weaponize the US dollar for political purposes. That became more and more prominent. This was also in line with this increasing role of the Federal Reserve Bank to pull the right levers, to balance out and soften economic cycles, and in my view, this led us to a more centrally planned monetary system that will increasingly contribute to higher bubbles and higher crashes. When we look at the factors leading up to 2008 financial crisis, for example, I’m looking much more critically at the central bank monetary policy, i.e., artificially low interest rates that encourage reckless borrowing and spending. What are your thoughts on the current financial system and how sustainable this is?

Brian:  You start in I think exactly the right place. You start at the end of World War II, and you’re right; that is where the current global system really was birthed. I think it’s important for people to understand why Bretton Woods created a dollar-based global financial system in the first place. The question is do those same historical considerations still obtain today? At the end of World War II, there was only one economy standing, and it was the United States. We were the only country whose infrastructure hadn’t been bombed, whose economy frankly got stronger, not less strong. I mean, World War II marked the end of the British Empire and the beginning of the American century, and thus, it made sense for the currency of the only strong economy to be the global reserve currency. All of that made sense. While we were at that time only the third largest country by population, we were by far the largest economy as measured by GDP and every other relevant economic measure, so it made sense for the dollar to be the global reserve currency.

A lot has changed since then, right? We are still by far the biggest economy in the world but by a less far than was true at the time, and on a population adjusted basis, we’re not as much more important as we used to be. On the one hand, our productivity, our GDP per capita, etc. is way higher than China’s. Total GDP is not that much higher than China’s. China is three and a half times bigger than us by population, and India is almost three times as big as us by population. What that means is the original underpinnings of Bretton Woods don’t really exist anymore, and as a result of that, what you see – and this is  a little noticed fact, but it’s a really important fact is that global central banks have reduced their dollar holdings relative to other currencies each of the last ten quarters.

Going back several years, even though they still hold more dollars than any other currency, they hold less of it than they used to, so whereas before it was 90% dollars, now it’s 80% dollars. That may not seem like a lot, but in terms of the American dominance of the global financial system, it’s a harbinger of a significantly different future. The reason that should matter to Americans is, when assets trading globally are denominated in dollars, we get an imputed discount every time we buy anything in world markets. Unlike any other country, we don’t have to engage in foreign exchange to buy assets. We can go to the oil markets in Saudi Arabia and buy them in dollars, whereas everybody else has to pay a conversion fee and a tax to do that. It’s important for the American lifestyle and standard of living that the dollar retain its primacy, which explains why policymakers think the way that they think, so I start with that proposition.

Now, you make the point about, at some point along this narrative, the US went off the gold standard. It’s interesting since I was just talking about global asset markets being dominated in dollars that the president who took us off the gold standard permanently was Richard Nixon, who, by the way, was the president who presided over the oil shocks of the early 70s. This was the first OPEC oil embargo among other things that happened on Nixon’s watch, and so it’s not a coincidence that we left the gold standard so that we can manipulate the relative value of the dollar at a time when we really needed to. Like I said, that was not a coincidence.

Chris: Just to clarify, the idea was that it was going to be temporary. When it was proposed, it was not proposed as a permanent off the gold standard. It was proposed as a very temporary, going to get right back on it. Just need this quick little…

Brian: Totally. It’s like tax increases in California which are always sold as temporary, and then the next year they’re made permanent. In the first year, they’re always pitched as temporary. I would urge any listener who’s hearing anything about any temporary spending or any temporary tax to understand that’s not a thing, and it’s never been a thing, though it’s still an effective sales pitch.

Chris: Like income tax, income tax was originally supposed to be just for the top whatever percent.

Brian: Two percent right now, exactly. Why does this matter for the financial system? The reason it matters is there are actually two effects of having dollars or frankly any currency that can be manipulated by the human beings holding the levers. One effect can be positive. The other effect can be really, really negative. The positive effect is generally pro-growth. The concern that some free-marketeers will give you about the gold standard is if you artificially limit the supply of money then the economy’s ability to grow is naturally limited by the available dollars to fund it, and so while prices won’t rise, you also will not have credit to create leverage which allows people to make investments on a scalable basis.

Chris:  But you have savings.

Brian:  You have savings, but there’s only so many savings is the problem. The lessons of personal finance are not necessarily the right lessons for capital markets is all I would tell you. Part one crowd that will say modern central banking is good will tell you it’s true because of growth. The other side of the debate, though, has to do with the politicization of money. That’s the point that you were making. Once people say, oh, wait a minute, what I can do is I can inflate the currency as a way to fund social programs, or to create social justice, or whatever, and that’s, of course, one of the things that led to the inflation crisis of the late 1970s. One could argue it was one of the contributing factors to the financial crisis. I’m going to take the other side of the debate here in just 30 seconds.

One of the reasons people got attracted to bitcoin in the first place was the idea that, unlike fiat currency, there was no fed chairman who could inflate the value of bitcoin. That’s because the amount of bitcoin in the system is determined by a computer algorithm, and there will never be any more of it. That’s why people sometimes call bitcoin digital gold. It is something that looks more like the dollar on the gold standard than it does like the politicized economy that we live in today. Democrat or Republican, there’s only going to be so much bitcoin, and nothing else can be done about that. If you believe that – not to be political, but if you believe that the next Democratic administration was going to fund massive social programs and deflate the currency or inflate the currency in order to do that, you might be very worried that the value of your savings is going to go to zero. Ergo, you might want to buy bitcoin as a safer place than dollars to keep your life savings, for instance.

Now, having said that, let me speak for a minute to the point you make about what happened in the financial crisis. Was it Alan Greenspan and easy money at the fed, or was it something else? Here I actually do have some special knowledge of what I speak because I worked with Dr. Greenspan in his analysis of this as he was going and testifying in front of the Financial Crisis Inquiry Commission on this. What I learned in that process was, in fact, about four and a half years before the financial crisis, the fed under Greenspan’s leadership started raising the discount rate. Starting in Q2 I think of 2003, the fed increased the discount rate by about 25 basis points per quarter every quarter up before the financial crisis. Historically, what would’ve happened had it been implemented is that mortgage rates would’ve risen along with the discount rate, and that would’ve slowly taken some of the wind out of the housing market. This time that didn’t happen, and the fed didn’t really notice it not happening. They just always used this tool. It was the only tool they had, and so they kept trying to take liquidity out of the system.

Weirdly, mortgage rates stayed super low. Why was that? The reason was that, in the early 2000s, for the first time you had an at scale Chinese middle class who had savings, and what they were doing with those savings was they were buying the best yielding asset that was available in the world, which was – wait for it, Fanny Mae and Freddie Mac debt securities. Fanny Mae and Freddie Mac debt securities were perceived as almost as safe as US Treasuries, but they offered a significant yield enhancement over US Treasuries. Because Fanny and Freddie pre-crisis were able to sell debt artificially cheaply because there was so much demand in China for this stuff, to a lesser extent in an aging Japan but especially in China, mortgage rates stayed low even as the discount rate got high. Greenspan’s story is, hey, my failure was not easy money. My failure was in not noticing that the mortgage rates weren’t following the short-term rates, and we had a housing-focused crisis. That’s why I say it’s not at all clear that the Fanny Mae model is a bad model, but what is clear is the fed doesn’t have control over mortgage rates anymore. Markets have control over mortgage rates, and we live in a world of globalized markets where foreign investors really want a safe but high-yielding asset. That’s the little known story of the financial crisis that I find really, really compelling.

It brings me back to this idea, however, and this is another crypto point that I really want to land with your listeners. That is it’s a funny world where we have globalized trade in goods and services, but we still have local currencies being used. When people in China want to trade out of the renminbi and into dollars, that creates a perverse set of incentives and a perverse kind of currency arbitrage that can either be great for a country if it’s lucky enough to be able to sell its debt cheap, or it can be terrible for a country if it’s not the favored place, and the foreign money flees to go into some other currency class, again a reason for cryptocurrencies which aren’t tied to any sovereign government. Cryptocurrencies are inherently global. They exist on the internet, and there’s no country that can choose to boycott another country to raise its borrowing cost. That’s another positive opportunity created by blockchain.

Understanding Monetary Policy Following the 2008 Financial Crisis

Chris:  Just to continue on the 2008 crisis, what is astonishing to me is that between 2002 and 2008, which was the entire business cycle leading up to the crash, the Dow Jones Industrial average went up around 55%, close to 5,000 points. Now, since the bottom of the 2008 crash ‘til now, the Dow Jones has gone up around 242%, up roughly 20,000 points. Now, that should seem surprising that the best stock market growth in history would follow one of the worst economic crashes in history, but the reality is that the Federal Reserve Bank opened up a whole new toolbox to re-stimulate the economy following the crash. In addition to lowering interest rates down to 0% and keeping them there, the Federal Reserve rolled out a $4 trillion asset buying program. They have called this quantitative easing, though simpler minds may refer to this as printing money to inflate asset prices. What is your view on the government response to the housing crisis, and what does that mean for the financial system?

Brian: It is exactly the right question, and this is one of these places where there are two very firmly held contradictory beliefs. I think a lot of people’s personal politics depends on which of these propositions you agree with. There’s one school of thought which, frankly, is more my personal school of thought, which is if you had allowed companies to fail in the financial crisis, if we had let Lehman go, if we let Bear Stearns go, if we let General Motors go, what would’ve happened was there would’ve been a deep but short crisis, right? The crisis would’ve been probably worse than the other crisis we had was, but it would’ve been for one quarter. Those companies would’ve gone bankrupt. Everybody would’ve taken their medicine, and then the system would’ve moved forward with everybody understanding that people who make bad decisions, whether they’re credit decisions, product decisions, or whatever, they’re out of business. That’s the discipline of the markets, the ruthless discipline of the markets.

That’s not what we did, obviously, right? What we did instead was we said, hey, the government’s going to step in, and they’re going to save companies. We saved General Motors. We saved AIG. We saved several banks and bunch of others. Should they have done that? What that did is it created a shallower but much longer financial crisis. Even when the crisis per se abated, we still had this thing inside of the system where there’s all this baked in federal support. Such that anytime the fed tries to withdraw that support, the market goes crazy.

There was something called the taper tantrum a few years ago when the feds started trying to – not to sell all of the securities they bought to do quantitative ease but just to slow down the rate of buying. The market went insane. Interest rates went crazy. The equities markets wobbled. It was really dangerous. What that does suggest is that we now live in a world where there’s a permanent feature of activist monetary policy such that in the event of another crisis – and honestly, nobody’s forecasting another crisis, but in the event of another crisis, there aren’t very many tools left that the fed can use because they’ve already injected so much liquidity in the system that anymore liquidity is going to be at the margins. I mean, interest rates are already low by historical standards, and they just have raised them twice in the last two quarters such that we’re now down in a range where there’s not too many increments to go. That is a problem. Again, it’s another reason why some people look at the system, and they think maybe the system itself needs to be rethought.

I come back to where we started. You asked me why did I make this leap into blockchain and crypto? It’s out of a belief that, incremental fixes, they may work. I hope they work. None of us wants the world as we know it to blow up and need to be replaced, but it would be a good thing to incubate technologies that give us an escape pod if we need it.

What are the competing Crypto Currencies today?

Chris:  Let’s talk about that transition into something more sustainable. Whether it be through incremental change or systemic transformation, we now have various competing institutions and standards when it comes to currency. There’s the US dollar backed by the US government. There’s bitcoin, which is backed by the people, not by a centralized system, and we have projects like Libra, which is largely backed by corporate big tech. If you watch any of the Libra hearings on Capitol Hill, it seems clear the US government views Libra as a significant threat and perhaps fairly so because it could have a major impact on the primacy of the US dollar. What is your view on these competing entities and also on gold? Surely, gold must have a role to play here also.

Brian: Yeah. Let me start with the dollar. I’ll say that I think, at least in this most recent ten year period, global markets have looked at the dollar the same way that Winston Churchill looked at democracy, which is, boy, it’s not very good. It’s merely better than anything else that’s out there, so whatever you think about the dollar…

Chris:   The cleanest dirty shirt, yeah.

Brian:  Exactly. I’d sure rather have it than the euro on any given day. That could change. What I would say is, on the Libra issue, I think you’re right. Let me just begin by saying, obviously, Coinbase, we support Libra. We’ve signed the MOU. We’re part of that network, and we hope it succeeds. We think it has promise.

Clearly, one of the things that American regulators are worried about is, geez, we don’t like a basket global currency. We want a dollar global currency. That’s what we had in Bretton Woods, and that’s what we want today. If you suddenly had a transacting unit inside of the two and a half billion person Facebook nation, that could potentially reduce the influence of the dollar in global markets, and that could be a problem for this country in the short term. You can definitely see that.

I personally think that – one thing I’ve learned in my year and a half in tech is that the sequence of product rollout really matters, and I question whether Libra would’ve been received differently had it been rolled out a year or two later after single currency stablecoins had gotten more traction. I think single currency stablecoins are not nearly as threatening to regulators as Libra is. Nobody’s disputing it’s about dollars. It’s just a better way of transmitting dollars. It’s like the internet for dollars, whereas Libra is both the internet for currency, but it’s also multiple currencies. I have a feeling that this might’ve looked a little bit different a year or two down the road, and maybe it will look different a year or two down the road. I think that’s important.

You mentioned gold. My personal view is the only relevance of gold historically has been – I mean, there’s a mystique to it, but in reality, it’s because it’s scarce. It’s hard to find. It’s costly to dig up out of the ground, and so the rate of new gold in the world is small relative to the total amount of gold in the world, unless it’s not inflationary. This is where bitcoin becomes highly relevant because it’s also scarce. It can just have its scarcity managed by a computer algorithm, and so I don’t personally think there’s any magic to gold. I mean, we all understand that, in times of volatility, gold becomes more valuable. In times of less volatility, people go away from gold. Everybody wants a haven in a crisis, but it doesn’t need to be gold. It needs to be a recognized scarce asset and way cheaper to have that be some sort of a blockchain-based crypto protocol.

Is Gold Relevant in The Global Financial System?

Chris: I think most would take your view that gold is basically irrelevant, and I find that rather strange given gold’s 2,000 year empirical history of being the currency that’s always won out. I think this is largely because of its scarcity and inability to replicate, unlike numerous other currencies that have been tried and failed. Even beyond the scarcity component, its innate properties are far superior than any other metal in my view. You can throw a bar of gold in the ocean. Someone can find it 300 years later and there’s been zero quality degradation. Lastly, it seems to have great utility because of its properties, which is why there’s a tiny amount of gold in every smartphone. It’s used in aerospace. People trust their dentist to put it inside their mouths. I would argue that gold would be much more utilized in common products but not for other alternatives being so much cheaper.

Brian: Look, we have slightly different views of gold, but it’s a really interesting debate. I mean, the debate about whether gold is special has been going on for a long, long time. William Jennings Bryan fought three presidential elections over that specific issue. I mean, probably none of your listeners has read the “Cross of Gold” speech, which I think was in the 1896 election maybe or maybe the 1900 election, but these have been issues for a long, long time. We are not the first people to talk about this.

My personal view is, if gold were really relevant because of its heaviness, or its hardness, or its shininess, or whatever, there are lots of things heavier. There are lots of things harder. There are lots of things shinier than gold. Somehow, gold has a mystique because long, long ago, in our ancient ancestors’ history, somebody made rings and necklaces. It became a token that was very important, and it has this hold on our psyche, I think. I mean, it doesn’t have anything to do with its physical properties. As I say, lots of other things have all of those physical properties or more of those physical properties and aren’t imbued with the same value proposition.

I come back to I really do think it’s about scarcity. The reason I don’t buy it at a currency factor, to get to your question, is there was a time you’ll remember when coins were struck in gold. The reason the coin was worth a dollar or whatever it was was because it was made with a dollar’s worth of gold. It wasn’t that it was said by the Treasury Department to be worth a dollar. It was worth a dollar because it was worth a dollar. It was like if I turned in my earrings. The earrings have a market value, and that’s what this coin was.

Then there came a time, depending on which coin you’re talking about, where we started making them out of copper, or zinc, or other stuff. There was a panic at the time among some people who said wait a minute. Nobody’s going to accept these anymore because they’re not made of gold, but that didn’t turn out to be the case. I mean, I put a quarter in the parking meter earlier today. It’s made out of zinc. Nobody cares. It’s worth a quarter.

It turns out we really have changed our relationship to money at some level. Now, that could change, and again, this I think is where some of the crypto insight comes from. It could potentially change. What if it turned out that America adopted a Venezuela style, like a full on socialist economic policy where the value of our currency was completely inflated away, à la Zimbabwe or Venezuela. In that environment, you can imagine people saying we can’t trust this thing anymore. For 70 or 80 years, when we stopped using real gold to make coins, we trusted it. That’s what the economy became built on, but we don’t trust it. That’s now lost.

Now what do we do? We could go back to wheelbarrows of gold, which is super heavy, or we could say that’s ridiculous. The modern internet equivalent, that is something else, but we’ll invent it. There’s a reason it was gold and not clamshells that was valuable. There are a lot of clamshells on the beach, but you can’t just go pick up the gold. You have to find it, mine it, store it. It’s really hard to get. Can we synthetically produce something that has those same attributes? I would argue we can. It could be bitcoin, or it could be some other crypto token, but it’s more likely to be technology driven than it is physical, I think.

What is the Role of Crypto Currencies in the Next Economic Downturn?

Chris:  Switching gears a bit, we are currently in the largest economic expansion in history. I’m curious as to what you see as potential catalysts or shocks to the system that could contribute to the next economic downturn?

Brian: I think most forecasters do not expect the next recession to be of financial crisis dimensions, and part of it is because they don’t see concentrations of asset bubble inflation. For example, unlike in 2005, ‘06, ‘07, you don’t see nationally rising real estate prices. You see expensive markets on the Coast, but nationally, it’s relatively calm. Housing production has gotten so much less since the crisis. If anything, we have a housing shortage, not a housing oversupply, so that doesn’t look very bubble-like. I think, for me, there are two ways that the recession comes. One is the normal psychological business cycle which is just people got tired. They ran out of gas. They’re expecting it, and so reality starts to match up with expectations. Consumers stop spending, and then you have your normal business cycle recession of a couple of quarters of negative growth followed by moderate increase. Most people think that’s the most likely scenario.

The bigger, to me, more worrisome scenario is a trade induced scenario where a combination of Brexit, China, if we don’t get a deal done with China, if we don’t ratify the new version of NAFTA. If the country’s pulled back from global trade, that could have more systematic effects. Whatever you might hear from elected officials, a lot of our wealth is tied up in being connected to global markets. Think about the things you use every day. You have an iPhone that was designed in California, built in China, shipped by a Dutch shipping company, etc., and when it becomes harder to do those things and friction is put on the system, you can have bigger systemic effect. That’s what I really worry about is a trade shock induced global slowdown, which is a problem, but my hope is we’ll just have a pause. People get tired. We reset, and we come back in.

There’s one other possibility. I would say this is the – I think probably the least likely of the three scenarios, but that is markets have an extremely negative reaction to something that happens along the way to the 2020 election. For example, if markets believe that we really are about to impose a wealth tax and a 90% marginal income tax rate and we’re going to have tax payer funded free college and tax payer funded free healthcare, some combination of those things could cause the markets to say, oh, my God, there’s not enough productivity in the economy to absorb all that cost. That makes you start to think, gee, we’re on the verge of some collectivist nightmare. Who knows if that happens? That could be ugly.

Chris:  However the downturn happens, what do you anticipate the response to be from the government?

Brian: I think the reaction is that there will be some sort of a statement from the bank regulators that they support continued lending by banks. I mean, remember, one of the things that really intensified the financial crisis was the complete drying up of credit, both commercial credit and consumer credit. Let’s be clear. I mean, credit is the lifeblood of any modern economy. The way that we’re differently situated today versus in 2007 is that the banks are, at this point, extremely well capitalized. The places where you had thin capital layer supporting massive asset balance sheets, that’s just not the case today, and so the issue is making sure that bank CEOs feel like they have the confidence of their regulators to allow them to continue to lend through the cycle. At least that’s possible this time. Last time, it was literally impossible. That’s why you had bank failures.

Chris:  There are different tactics that central banks used to fight the drying up of credit. We are seeing negative interest rates in Europe currently. This means, essentially, that the lender pays the borrower. You need to borrow $1,000 from me, and I’m going to give you $50 so I can have the great pleasure of lending you money. Is this as insane to you as it is to me?

Brian: What’s basically happening with negative interest rates is it’s almost like what you thought was a savings product becomes a custody product, so you have to pay somebody to hold your dollars, right? What I would say is there is a form of negative interest rates being proposed in the presidential campaign, and that’s the wealth tax, right? The wealth tax says, if you’re dumb enough to hold dollars, we’re going to take them from you, so go spend them right now. That is in fact what the wealth tax is designed to say is that they don’t want rich people holding money. They want them spending money because they think that’s where the jobs come from. Now, what’s weird about that idea is people with wealth don’t actually hold money. It’s not like Scrooge McDuck who has a swimming pool full of gold coins. You have them in the bank, and the bank is using those dollars to lend out to people who are running businesses and creating jobs, or you have them in the stock market, and companies are using that as capital to fund projects. Nobody holds money, but what will happen with the wealth tax is, like a negative interest rate, it’s a huge incentive to go out and spend now.

Chris: Right. The unintended consequences from that are a little bit concerning. Aside from that, just before you go, I want to touch on something you mentioned before when you were talking about the Libra project, and that’s the idea of stablecoins. Can you give a description of stablecoins and why they’re important?

Are Stable Coins Necessary for Blockchain Adoption?

Brian:  Probably before most people can envision a bitcoin future, it will be a lot easier for them to envision a future where the way that they transmit dollars is in a more efficient way than Venmo or some other bank-based system, and I think that is really likely to be the case over the next couple of years. That probably is the first killer app of crypto. Once people are comfortable doing that, they’ll be a lot more comfortable I think thinking about other crypto tokens. The analogy I have for this is today we send around Signal messages and WhatsApp messages like it’s nobody business. In 1985, if I went to you and I said, hey, in the future, you’re going to have a small pocket computer that you can talk on and also send these magic disappearing messages, you would’ve looked at me like I was crazy, but instead, in 1985, the world brought us the fax machine. That was close enough to sending letters that people can get the idea of, oh, okay, there will be a physical letter, but it’s going to be transmitted over wires. That I get.

I feel like stable-coins are probably the fax machine of crypto. They’re the gateway drug that will help people understand what a blockchain is and why it’s good, and once they understand that, bitcoin is going to seem a lot less weird.

Chris:  Brian, this has been awesome and really, really appreciate your time and contributing to this conversation. I will remain optimistic about the future of our financial system and remain excited about the prospect of blockchain.

Brian:  Chris, I think this is a great conversation. So glad you’re doing it.

TechGC is a private, invitation only organization for General Counsels of leading venture-backed technology companies and venture capital firms. Our mission is to drive innovation, education and mentorship in the legal industry while creating a strong peer group and community whose members support each other throughout their lives and careers. Our membership includes over 1,500 GCs across New York, San Francisco, Boston, Los Angeles, Chicago, and Seattle.

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