Defending Crypto to the Middle-Class American | Austin Campbell

they charge you money if you don't have money in your account right like what is that hold on let's talk about check cashing fees like what happens if you don't even have an account right welcome to bank list where we explore the frontier of Internet money and internet Finance this is David Hoffman here with ran and Sean Adams and we're here to help the US banking system get an upgrade so you listener can become more bankless bankless listeners do you remember the 2008 crisis did it

leave an impression upon your younger self did it radicalize you against corrupt bankers and politicians many of us on the bankless journey have found crypto as a reaction to the 2008 financial crisis and the impression that it left us about money finance and Banks Bitcoin of course was birthed in the wake of the 2008 crisis and has turned into not just a solution but also a symbol for opting out of that system but most people have not found this path and despite the bankless tools that crypto has to offer the current US banking system is still structurally the same as it was when the housing market crashed

in 2008 inherent leverage in the system normal middle American depositors putting their savings into Banks which then put that Capital At Risk capture all the profit and socialize all the losses today on the show we have Austin Campbell who presents a new way for the crypto industry to rebuild the financial system into a new structure that does not connect mom and pop stores or your average wage saver from being exposed to the risky choices being made by the world's largest Banks Bitcoin allows you to escape from monetary displacement but

that solution has only gone so far with protecting the world's Financial system Austin on the show today presents a new mechanism for 2008 proofing our financial system and protecting all users of the financial system from the risk that they did not sign up for guys this has been one of my personal favorite episodes of the year I don't think I mentioned that to you David but after recording this was just awesome it was maybe because it was so unexpected but Austin Campbell was great in this episode and also there's a call to action at the end of this episode but if you like this episode send it to someone who needs to hear it I think it's a

different route in to helping them understand what this crypto thing is all about and of course leave us a review too that helps the episode propagate whether on Spotify like it on YouTube subscribe on YouTube all of these things help the bankless message spread all right guys we're getting right to the episode bankless station I'm excited to introduce you to Austin Campbell a professor at Columbia business school where he teaches on blockchain markets infrastructure Austin previously worked as the chief risk officer over at paos the stable coin issuer so he knows a thing or two about stable coins but he's

also worked at city and JP Morgan so he also knows a thing or two about trafi today he's here to defend crypto to the middle- class American who has no idea about why they should care about crypto Austin welcome back to bankless thank you very much happy to be here again so Austin not too long ago you put out this tweet thread that kicked off this podcast episode I thought it I wanted to do a podcast episode but even halfway through reading the thread I thought it was very interesting I want to read this this first tweet really to kind of set the table set the agenda for us uh and you invoke this guy Gary Winslet and

we'll kind of go into to who he is you say so Gary W Winslet recently asked for defense of crypto and why he as a well situated middle-class American who largely thinks our system works should believe in it or support it I think this is a totally legitimate question to ask and one that cuts to the heart of the debate which has been so broken I think it was asked in good faith so I believe it deserves a real answer one of my crypto criticisms of the crypto space is that CT has a bad habit of just screaming at people instead of actually debating real concerns and questions and

I don't want to behave like that myself thus I'm going to Endeavor to answer Gary in a few parts and specifically point to some things that I think align with the worldview of many antitrust folks yimes classical liberals and those who care about financial inclusion in other words good question Gary I'm glad you asked and uh BOS nation and myself uh you might be asking who's Gary Winslet uh turns out he's a PhD and a political science and econ professor at Middlebury with a focus on the technology sector as it relates to cooperation with regulatory concerns and

the government I think perhaps Austin the specifics of who Gary Winslet is I'm not sure matters I'm sure he's a great guy but I'm kind of interested in the audience that Gary represents uh an audience that largely thinks our banking system already works and that crypto really can't benefit Middle America so as we proceed in this conversation how can we frame who this talk target audience really is for the content that we're about to discuss is this like for Middle America who still remembers the trauma of 2008 Bankers who think our banking Plumbing works just fine

politicians who don't see how crypto fits into America who who's this conversation for yeah I would say my target when I was discussing this are to put it simply a lot of the people I run into in my everyday life right because you know crypto you live on Twitter you go to conferences you have people that you talk to on Telegram it's a very sort of unique and insular community in some ways and it doesn't well represent the concerns of the average person right so if you're like a small business owner Running a Restaurant if you're somebody

who's like a public school teacher if you are a PhD student you know many of these people probably don't care about don't think about and don't know about crypto and I don't mean that in some sort of negative or offensive way I mean it in they genuinely think it's not relevant to them and probably don't understand why there's a lot of Sound and Fury around this topic secondarily the other group of people I'm talking to is quite frankly most of my former trafi colleagues right many of whom are very familiar with the traditional Financial

system and honestly if you were to you know get them off the Record familiar with a lot of the failings of the traditional Financial system but probably haven't looked into Bitcoin or crypto Beyond like headlines they're going to see in the journal or Bloomberg or something like that and thus are probably not so much opposed to but rather unaware of many of the elements that the crypto Community brings into the financial discussion Austin as you I I think I know a lot of the people who uh you just mentioned particularly in that in that first group I've gotten to

know some Trad five folks too but in that first group it's everybody I mean it's the people like I I go to the bus stop with with you like my kids it's the people I hang out with it's kind of the average American let's call it at least in my Social Circles and I uh I often I maybe Bank list listener you can identify with this like I don't often bring up crypto around normies because I just like don't want to get into it it's kind of like um bringing up politics at Thanksgiving like there's all of these preconceived notions different

information sources like ideas you just want to have a good time and talk about the weather talk about your kids something like that you don't want to bring crypto into it because it often gets messy and then what I I always feel like I'm put in the position of I don't know being a crypto advant well it's not actually this it's this and it's just awkward anyway when you think about kind of the the normies the middle class Americans that you interact with um what do you think their impression of crypto is when you have these conversations at least right now

the average person on the street so I'd say I think there's two different sort of main threads that you run into for crypto with the average person one is if we're being totally honest the most notable person in this entire space to the mind of the average American is still say that really right no but let's be honest right like here let me ask you a slightly different question what is the worst bank that you can think of right off the top of your head the worst bank

I can think of off the top of my head I mean there's a lot on that list honestly most most people I ask will answer Leman right and that was 200 that was one of them that popped in my mind yes exactly and so my point is these impressions are sticky and they're hard to get rid of right now that's not a critique of crypto anymore that Leman is a critique of banking or Bernie ma off is like a critique of asset management but it is a statement that those are going to stick at people Austin by the way this is why I avoid these conversations CU you know like they're

like uh oh you know oh SPF and I'm like oh yeah he's been on the bankless podcast and then they think I'm a scammer it just doesn't go well from there I'll teach you guys a few tricks that I've been using to deal with people in the Regulatory and sort of like call it real world space CU I think there are some ways around that but it involves a deep understanding of what these concerns are so one is that it's a bunch of scammers the other one is cool you're a bunch of weirdo tech people but why do I need to use this which is not like negative so much as in the sense of like

the guy building the Drone that does like 3D mapping that he's like flying around in a canyon and again back to the average America they're like how does this impact my life it's more just this like what is this why should I tear why should I even spend time on this is the other main thread that I get and which group do you think is larger the the group that thinks we're scammers or the groups that's kind of undecided but thinks it's too nerdy to care about I think the second group is actually significantly larger and I think what you will find with the first group is a lot of them Loosely hold the opinion

that a lot of crypto is scammers because again it comes from the news but most of them don't have personal experience themselves so they could be pushed off that prior more easily than people who are again back to I don't use this why do I care yeah even in that second group one thing that I've observed is they're always though a little bit curious in that second group right they're kind of like yeah but like is the number going to go up from here like you kind of get this sense when you talk to um people like they sort of secretly want to have purchased Bitcoin at a much lower price and be part of the thing but that it's

just passed them by and they're not you know they're risk adverse and they've got their money in 401ks and so they're secretly curious always about price I will remind everybody here it's very likely you can get your Bitcoin into a four one but that aside one I agree they're often curious about price but two that leads me to one of the points that I use talking to a lot of people which is if I'm talking to what I will call a normie audience as we've been describing it here I won't talk about crypto prices at all right like I'm just completely uninterested in talking price

of crypto with those people where if you start with prices they think you care about making money if you start with how does the system work why does anybody build this how do you do these things they're forced to engage on a totally different intellectual okay so even if they ask you a question about price you try to redirect them to something more wholesome yeah I I immediately lead off with I'm not here to prognosticate about prices right like I can fall back on the being a business school professor and being like look all prices are a product of Supply meeting demand and that's the end of the story next question it's interesting Austin that

you brought up uh Lian because I think everyone has some sort of notion of 2008 as an emotional response to them I was a kid in 2008 uh but like yeah and I didn't understand money or Finance at the time but nonetheless like it left it scars on me all Millennials I think has the 2008 scar uh and everyone uh older than us as well uh and I think we all know as crypto Bitcoin was a reaction to 2008 but I think understanding Bitcoin as a reaction to 2008 is not something you can carry back to your average

coffee purchaser at like the 4th of July like cookout like that explaining why those things connect is like you have to go down like the rabbit hole and become a bitcoiner and then you're kind of the crazy person who's a who's a crypto person uh but today's in in today's day and age we actually have something a little bit closer to that that I think uh is going to be the subject of today's episode some something that's like a reaction to the 2008 financial crisis the stickiness that you have identified as it's in people's brains uh but is less of the you know the the crazy guy who's like in

the basement talking about Bitcoin from like 2008 yeah you you start your your Tweet thread talking about this uh this question you introduce this question do you believe that you have to lend money to a real estate billionaire at below Market rates to buy a coffee what is this question doing what what's the function of of this question what's its role here so two parts one a good way to get people's attention and get them to listen as opposed to coming with preconceived notions is ask them an unexpected question right because they

start trying to answer it for them celles or start trying to figure out you know exactly as you're doing now like why did you ask that question so the rhetorical technique of start with an unexpected question that's thought-provoking is one that you will find a lot of Educators use in general right like my class on stable coins at one point I started with why do you guys have a bank account like don't answer me right away take 30 seconds think about it write it down why do you have a bank account right and just asking people these kinds of questions I think creates a different mental space that if you

begin you know with a statement or an assault on like certain beliefs two inherent in that particular question is a sense of fairness right like if you understand the mechanics of what is really going on with the modern banking plus payment system which we've stapled together there are some inherent issues of fairness there that are accessible to the average person where they don't need all of the background of crypto to understand that wait why do I have to lend money to a real estate billionaire

to buy a coffee right like that seems weird right there's just something fundamentally unnatural about that Arrangement and before you even get to crypto if you have somebody agreeing with you that wait a minute okay this does feel kind of funny then you can start discussing why certain things might be solutions to those sorts of problems I think maybe some people listening to this are like wait so uh when I'm buying my coffee well how am I also lending money to a real estate agent can you connect those two things yeah absolutely um specifically uh real

estate Builder more than the agents so let's think about what I'm going to call the conception of a bank that people have in their head and then what banks actually do in reality so in your head the simple model that most people have of a bank is you go to the bank you give them money like let's literally do the caricature of like you show up in person and you hand them dollar bills and people somehow have in their head that the thing the bank does is like takes those dollar bills goes into the back and like throws them in a vault and I am here to tell you that if you think the banking system works that way boy are

you wrong and two right so the next step out from that is well obviously they do something with the money but like the thing they do nowadays is mostly making loans and if you look at bank balance sheets it is not like call it home lending to the average person that remains On A bank's balance sheet those things are called agency mortgages they get packaged up into securitizations and so sold into the market Banks do a little bit of risk retention but if you look at Major bank balance sheets it's

not like super majority agency mortgages they're going to have riskier stuff on there you're going to see like credit card loans small business loans private student loans like commercial real estate large scale residential real estate like jumbo loans Etc and even more exotic stuff like trade Finance you know all of those sorts of things and I want to be clear many of those things do have legitimate econom purposes to them I am not here to criticize lending or banking I think that's a mistake what I

am here to criticize is that the way we've created our current system it becomes mandatory for you to participate in those activities just to use the system for payments because we've kind of given Banks a monopoly on the payment system in the United States right so there are many places in the world and many times throughout history where Banking and payments were not synonymous but here because of how we regulate the bank like when you pay for something with a debit card or with a credit card ultimately that's going back to your bank balances and what's that bank doing

with your bank balances lending money to a like real estate billionaire to build stuff so there's essentially unless you want to be all cash right like physical cash no way out of this problem in the United States using electronic payments okay and I think the punchline that I think we really want to to land here is that the expectations of your average Joe uh buying a coffee or you know mom going dropping the kids off of school stopping at Starbucks is that their money in the bank is safe uh it's ready for them whenever they want it uh

there's there's no risk to them you know going and retrieving their money uh and what you're what you're alluding to is that for banking to work at all there's actually some social contract of depositors that there's risk uh behind on the other side of the trade but there's a gap there the users of banks the customers of banks assume on a on a just a systemic level that there's no risk but systemically there has to be risk because that's how the banks operate and that's kind of like the Gap

that I think uh has led to things like perhaps the 2008 crisis but also uh I think also you're kind of when you ask this question uh do you believe that you should have to lend money at a real estate billionaire below market rate to buy coffee you're kind of exposing that Gap that's really the Gap that you're kind of like uh allowing to come to the surface well I think there's two levels to that Gap um one is ex L what you just said I I think that's a pretty fair summarization and the other one right as I would put it here is an incentive

problem of the way we've designed the system where Banks essentially because they have this sort of Monopoly can pay depositors zero on their checking accounts are also taking essentially a large amount of money that could in theory be allocated to people using the system for payments and instead giving it to the borrowers right like put differently the systemic like design of our system gives a large subsidy to people using the system for borrowing versus people using the system for payments because if I step back and say

I don't want to lend money to anybody other than the US government I totally want to use this only for payments I should be able to basically be like I want to get paid the risk-free rate minus a fee on my deposits spend them as I see fit and like that's the entirety of my activity okay byy and by the way guys the risk-free rate as of the time of like you know record this podcast is about 5% go look at what you're getting paid on your checking account I guarantee you it is much lower than that that piece to me starts to resonate

with the the norm one um issue I I wonder if you have at this point in the conversation Austin is like a lot of people aren't Finance man uh like uh minded and so when need to start talking about things like risk-free rate and you start talking about like basically how the banking system works and um you find yourself like going hearkening back to to mental models like oh fractional reserve and then now you have to explain that and like the Normie again they don't think this way they're not a finance bread they're not a a finance professor at colum you know hundreds of

hours of the bankless podcast so they start to tune out and they're a little bit like Austin I don't need to know how it all works I don't care how the sausage is made I use my computer I don't need to know what a motherboard is or how the internet works in order to use my computer I just use my computer and when I show up at the bank and I go and I try to withdraw ,000 they let me have it so it kind of seems like it's there and yeah I understand that there's some risks and I understand that the bankers kind of take a cut on the system and it's sort of lopsided and

unfair and like billionaires are sort of you know managing the strings or they have some notion of that but like I don't need to know all the details of how it works because when I show up at the bank I get my money and even when there's crisis scenarios and by the way this goes back to Generations I don't know anyone in you know living memory my parents have always been able to go to the bank and get money out and uh their grandparents like mostly have too and like there's some ancient stuff from like you know movies like It's a Wonderful Life where there's runs on the bank but that doesn't happen anymore right we we've got that figured out so

like why does this matter to me you're saying there's risk but like I don't feel or experience any of the risk and so I could just ignore it I ignore a lot of things in you like complexity in life and why not ignore banking complexity too yeah no exactly what you have just summarized as why Jamie Diamond is a billionaire and you're not right um so what what you're talking about fundamentally is two different things one is opportunity cost is not something that people are good at measuring in their head so the way I tend to summarize that question talking with normies is okay cool so why do you

think it's okay for a bag to pay you zero and then just go hand the money to the Federal Reserve and get paid 5% with no risk like is 5% per year a fair price to manage all your money right question number one right let's just have that discussion question number two that I ask people is so have you uh seen the movie Office Space M right to which most people thankfully have seen that movie the trick of the banking system is essentially what the guys in office space were doing which is they're

shaving pennies off of every transaction that you're doing and it feels small but adds up to a giant number over time so what you've got to understand is the system is going to charge you over a 10-year period like $100,000 to you it but they're never just going to charge you $100,000 because you'd lose your mind they're going to charge you $1 $100,000 times and that's why it's invisible and essentially you're being screwed and the fact that you don't know it is exactly

what they're relying what about this risk piece so being screwed Okay I accept that part of the argument what about this risk piece so I put my money in the bank it's safe right I have FDIC Insurance there's they got the logo there I've seen this yeah and so my answer to that with people is realistically if you have under $250,000 in a US Bank you are actually probably safe ignoring the issue of timing so long as the US Financial system continues to function like the FDIC is not infinite it can totally get

wiped out at some point we will have much bigger problems if that happens see like the fears in 2008 but the bigger problem is and this is one of the great sins of Finance in general is starting with your personal situation and assuming that applies to the system so I tell this story to people who have doubts about that I have a personal friend I'm not going to say which of the banks that failed that he banked with but he banked with one of the banks that failed in that whole Spain of bank failures you know of all the SN named Banks failing and he ran a grocery store

okay and so here's the problem that he has his net profit margin so that is if I sell $100 of stuff he makes about a buck 50 right so one .5% as a net profit margin for a grocery store almost every day of the week he has more than $250,000 in his bank account just because turnover in volume because people are buying like tomatoes and butter and bread and milk like things that we all kind of take for granted and a business at any scale very quickly

breaches your $250,000 FDIC limit and this whole argument of well why do you keep more than $250,000 in the bag works very well at the idual level and works terribly even at the small corporate level because what you're really asking this guy is yo why are you selling people groceries right which I think all of us believe that selling groceries is probably a social good I would prefer people have food to not but once you understand that the problem is not on your end it's probably on the small business's end and actually know they might not get all their money back like

to think the banking system is safe for them is crazy because issue number one is once you're over that limit are you going to get your uninsured deposits back but issue number two is just are you even going to get them in a timely fashion like that guy's got to pay his employees he's got to pay his vendors he's got to pay his rent he's got to pay his electricity bill and so if the money is like frozen for three to six months in some Bank resolution that can bankrupt him just as easily as not having it at all and so I would tell you the area in which our system is the most unfair and the fact that it's this is

part of why it's persisted this way is probably small to medium corporates and indiv uals of call it medium high net worth right because they don't have an easy way out like you're not yet I have $25 million in my own private Banker at UBS levels of rich but you're also not I can easily stay below $250,000 at a single bank and so it simplifies Ryan to okay so you're cool as long as you keep your money but you don't care if the grocery store goes bankrupt so the

structure really that comes out of this system is that you have you know Millions tens of millions of you know Bank users with you know they their savings they're below $250,000 Savings in a bank and Banks is taking the aggregate amount of user deposits and making like in Investments they're making risky maybe not that risky but risk is present investments in choices that they are making and the the scale of the financial system is like built on this structure which really begs the question who is doing their risk

management because a small number of people are making very large choices for the rest of us and for the structure that is built on top of this banking system so who is doing the risk management and how how does that work yeah so one the answer to who is doing the risk management is when you look at Banks it's this complicated chain of what are called firstline people which are going to be all the people like making loans or like for instance I was one of those people at JP Morgan and city like I was a Trader in global rates

in both places making decisions day in and day out about where to allocate the Banks money doing things that ranged from in my opinion pretty non-risky to sometimes hilariously risky if we're being honest with each other about how like markets Works um though hopefully if it's hilariously risky not in large size because one way you keep yourself alive doing that is small positions and so they're making the first decisions the second set of decisions come from all of the people who are supposed to be controlling them so your risk officers like Market risk credit risk like

treasury management all of those people who are supposed to be keeping the lights on and making good decisions there you have a third line behind that in Risk which is audit and then behind them you have The Regulators but the problem with this system even with all of those multiple layers is all of it relies fundamentally on these people making good decisions and number one transparently they often do not make good decisions otherwise Banks would not fail but we have seen plenty of bank failures and number two it's not really

possible to police that from the outside right because you know back to the FDIC discussion the other thing you often hear from people is well just make sure that your bank is safe and like how like somebody explained to me how to do that with your hands if you are not like a psychopathic fixed income Trader trading like a bank Capital book at a bank like I did that professionally for a decade at JP Morgan and I'll tell you right now you know and I said this in my tweet thread I don't think I had a 100% handle on the capital position of all of the

banks that I was trading with right and I'm like professional doing this 80 to 100 hours a week and thinking about this constantly the idea that my friend running the grocery store should oh by the way go get an MBA and become a bank Capital expert just to have a bank account to me is like ludicrous on the face there there's one part of the story I feel like we need to flush out because I think there's still a question in the Norm's mind given the the case you uh like presented so far which is basically you said look banks are extorting you if

you're a depositor right and like I can show you how and maybe we'll get back to that and secondly he said your dollars in the bank are actually at risk you know even the FD 250k but certainly above the 250 uhk they're at risk and I want to like push back on that or ask a question right so I think that there could be some social contract that depositor bailouts are a thing now whether they are acknowledged or unacknowledged you mentioned the the banks the S banks that um had some trouble back in 2023 we saw signature we

we saw Silicon Valley um we saw silvergate right all all of these s banks that um like went uh like above the FDIC amounts and what ended up happening well the FED uh cannot have these Banks go bankrupt and so they have to bail them out so it's basically like unless the fed or the US government somehow bails out depositors the entire banking system will collapse we've seen the the government inter to not have the banking system collapse

therefore I'm safe right so like you were talking about the concern of isolated risk and yeah there's no way somebody knows whether Wells Fargo Bank of America is like safer for their deposit but they don't really have to because everyone's kind of in the same boat and so as a depositor you know for you're talking about the individual versus the systemic problem right from an individual perspective if I have $50,000 in a bank account it goes to zero that feels real bad but but if I have 50k and I suffer 20% inflation in

the real value of that that uh 50k and everybody else around me all my other Normie friends also get that 20% in like inflation cut because something went wrong that I don't fully understand well that's not an ideal outcome and I might protest the bankers and Occupy Wall Street for a bit but like it's not that bad I suppose anyway do you think that basically the FDI C insurance is to Infinity for depositors and they will bail ba it out no matter what and so kind of the risk of you having your your funds in a bank and and picking the

right bank is just like not there so I think the answer to that is it depends on the scale of the problem for small to medium problems the answer in the United States has historically been we're trying to bail these Banks out now especially from 2008 onwards and forwards and that also has some interesting systemic implications because rather than an implicit guarantee you're probably better off having an explicit guarantee with a lot of strings attached it because the really unfair situation there is the bank fails but the executives made tens to hundreds of millions of dollars and

walk away with most of it but we all experience inflation and by the way there are like functional banking systems in the world like say Japan where essentially all of the deposits are insured and this understanding is more explicit so one critique I would have is if you believe that you're probably either in favor of Bankers extorting everybody or you don't realize this you're in favor of a lot more restrictions on Bank activity something like for those who are familiar with us Financial history going back to glass