176 - What is Money in the Digital Age? with Brendan Malone

it's very difficult for me to paint a picture that doesn't involve a lot more time spent online a lot more time organizing social behavior in digital spaces and having a digital form of money that's decentralized and easily accessible to a lot of people is going to be a precondition to enabling a lot of those future worlds welcome to bankless where we explore the

frontier of Internet money and internet Finance this is how to get started how to get better how to front run the opportunity this is Ryan Sean Adams I'm here with David Hoffman and we're here to help you become more bankless guys this is a canonical bankless episode all right we're going to talk about moneyness in the digital age what does that mean money-ness what is the nature of money a few things to take away from this episode with Brendan Malone from Paradigm number one what is money has it changed at all in the digital age and what's more why are people even asking this question why are they questioning

this thing called money number two we discuss the hierarchy of money and the money-ness Spectrum and what that means number three where do crypto assets sit on the money in a spectrum eth Bitcoin stable coins how much moneyness do they have and how are these assets different than digital dollars in a bank account and number four we summarize what all of this means for crypto investing and for the broader World David why was this episode significant to you everyone I think starts their crypto Journey asking

themselves the question what is money like that's how you know you're at this start at the top of the crypto Rabbit Hole uh and that's also where this industry started Bitcoin uh redefining what money could be and the people that saw Bitcoin as money when it was like 2011 2012 really early you know front ran the opportunity and this is this is the story of crypto everyone goes down the crypto Rabbit Hole understanding that you know money is a it's a it's just a meme it's a shelling point it's a social construct and then they go down the crypto Rabbit Hole from there and now we are in year 2023 and all of a

sudden more people other than the crypto industry are starting to ask the question hey what really is money and there are a bunch of current events that really have thrown the idea of what's a dollar into question uh covid uh the Silicon Valley banking crisis uh Russia and the D platforming of an entire country from the dollar network has posed some very interesting unique questions as to what is money what is a dollar and can money be something else other than the dollar these are all

questions that I think crypto people have been asking themselves for a very long time in our exploration to make our crypto assets into crypto monies now this question has penetrated beyond the cryptosphere uh and so we are revisiting this conversation uh like I said like like Ryan said a canonical conversation uh about just something that's very very deep in the crypto space yeah I think sometimes we forget how just that if you innovate if you change the nature of money if you create a better money system that's the only use case that

crypto needs to be worth trillions and trillions of dollars like that is big enough when it comes to impact uh in the world that is certainly the foundation of crypto in fact David I think we started talking about moneyness on our second episode at bank list it was literally episode number two so David I'm excited to talk to you more about this episode during the debrief I got lots of thoughts for you including I want to talk about more detail about the Central Bank digital currency and some of the things that I'm seeing on the horizon there so bankless listeners stay

tuned for that if you're a bankless citizen of course you can get access to that right now on the premium RSS feed if you're not a citizen click the link in the show notes you can upgrade all right guys we're gonna get right to our episode on moneyness with Brendan bankless Nation we are super excited to introduce you to Brendan Malone who works at Paradigm the VC firm paradigms Policy Department prior to working at Paradigm Brendan actually worked in the belly of the beast at the Federal Reserve he also focused on policy issues there as it relates to the crypto space

and we are here to talk about a subject that is near and dear to our hearts I think a subject that really kick-started the bankless podcast and that is the subject of money and money-ness uh so excited to get to that with Brendan today uh how are you doing Brandon welcome to bankless I'm good thanks guys uh I'm just wondering am I the first Fiat Defector that you've had on here oh we've had plenty of fear factors yeah I don't know how um in fact we're all defectors of Fiat aren't we after a

matter of a fashion well Brendan how would you define Fiat Defector we've had lots of flavors of Fiat defection what was yours maybe you're the most effector of them all yeah yeah no no that I mean that's a a great uh question to kick things off so uh I I should confess I am not uh a Fiat minimalist I guess as as you might say um you know do believe in the kind of value of Fiat in the overall Mosaic of

items and instruments that we call Money uh but do increasingly think that we're in a period of intense change a time where it's really worth asking deep questions about what is money uh how might money looking feature and how can we think about better orienting our systems of social organization around a type of money that works for the digital age that we live in today yeah maybe we could start there Brennan because um I

think David and I are hoping this could be sort of a canonical episode for people um when they because we're talking about some basic questions here most people I would say maybe 98 of people out there particularly those in mainstream outside of crypto they don't even think about money I I used to be one of those people went through my entire life before crypto not really thinking about the instrument of money it was something I took for granted without fully understanding what it actually is maybe

we could start there Brendan what is money yeah so I mean first off the your experience really resonates with me uh there's a famous David Foster Wallace uh quote from a speech he gave where he tells the story of two fish that are swimming around and old fish swims by and says how's the water boys and one of the two fish looks at the other one and says what's water and the

purpose of the illustration is is meant to just signify that some of the most obvious important truths that are around us every single day are the hardest ones to see and I think the kind of experience that most people have with money and how people relate to money is most likely I think the best and most resonant example of of this type of thing uh money has evolved over time and

we've come to know of it as pieces of paper and as entries in our bank account but qualitatively those are two very different things and something that in the wake of Silicon Valley Bank and a few of the other bank failures that happened earlier this year people are starting to wake up to and they're starting to ask deep probing questions about whether or not the assumptions that they had backing their belief in

the money that they use were really things that were Ironclad and uh sturdy and kind of all future incarnations of the world I think what I like about that metaphor the most is that um it implies that when you are noticing the water something's up and I think like when we talk about money when we talk about money-ness it's because something's going wrong you're actually not supposed to talk about money it's supposed to just work it's supposed to be in the background it's supposed to be invisible so so Brendan maybe perhaps as

a road map to this conversation why is this question of moneyness arising in the first place because this is a this is a question that the crypto industry is built on but this is a question that we are seeing tradify start to ask especially in the wake of Silicon Valley Bank but really even so the the whole banking crisis wasn't even the first it started with covid and then uh Ukraine versus Russia and now Silicon Valley so I'm wondering like what about 2023 makes this question of money-ness so relevant

yeah I mean you hit the nail on the head I think there's a few trend lines that have been percolating for a while with uh significant geopolitical changes China Russia uh covet being another one technological change which I'm sure we'll we'll chat about a little bit later and uh I think on on top of that just the crisis in the banking sector which it has been uh a bit of a like punctuation point on 10 plus years of Federal

Reserve monetary policy that led to a lot of cheap money floating throughout the system and at the beginning of this year after 10 months or so of interest rate hikes uh I think we kind of finally saw the effect of loose monetary policy for for 10 plus years in the crash of an institution that was due to liability mismatch and like overall insolvency of

the liabilities that it issues uh in the form of money which are ostensibly supposed to be a a safe claim on assets that that institution holds and a lot of the kind of money system that we've grown growing up experiencing and learning about is really built on this uh system of claims or credit based claims that institutions give that we hold and that we use

believing that at some point in the future we'll be able to redeem those claims for something that is more like money so that it starts to unpack the actual definition of money and maybe we can start there again like first we have the current events of 2023 but we also need to ground those in this idea of money-ness in the first place right money money from first principles so so maybe we can start there you talked about claims on things that are money but then you know it's a little bit self-referential of a definition how do

we actually start the conversation of like money-ness and how Society uh defines what money is yeah for sure I think uh uh as as kind of like a a priming Point uh I think about money and money systems as being in a state of equilibrium and their complex systems with a lot of legal technical psychological uh

structures that build them up uh and so there's a lot of ways using that frame to triangulate different definitions or different meanings of money one way that people kind of commonly frame money is as what it does a means a payment a store of value and a unit of account I think those are kind of aspirational and and one lens to think about money and what might constitute money I think the other

side that I uh typically ground my thinking in is this spectrum or hierarchy of different instruments that you can rank in an ordinal manner where at the bottom of the spectrum are effectively just promises or ious and as you move up the Spectrum the ious are exchangeable for things that people believe are like the final means of

settling a transaction or any obligation that they might have so inherently in this kind of notion of a spectrum and the notion that at the top of the spectrum there are instruments that people will accept for the discharge of obligations is uh a need to kind of understand that where you are sitting relatively on the Spectrum determines whether or not you will accept something as money or or a final means of settlement so the way that we

see this play out in practice is that most people will accept Bank deposits as money or a final means of settlement if you look at by contrast at the kind of national level how Sovereign nations are settling International Trade balances they don't typically accept uh Bank deposits or Commercial Bank money as that form of money they'll look to something more like reserves or a higher order form of money in the past this was gold and in

the future it could be something like Bitcoin or uh ethereum okay so uh let's talk about this because I think this is actually I would say an essential mental model for anyone on the the crypto journey and on the bank list journey I would say this idea that Brennan is talking about of a spectrum of moneyness okay so you first established when whenever someone asks you kind of what's the definition of maniness you hear that sort of this three-term kind of definition unit of account meaning of exchange and a store of value right and

so that's one way to define it I think Brennan is absolutely right though this other way to define it as a spectrum of how money something a money can be how much moneyness a given instrument actually has is maybe a more practical more useful way to define what money is and so if you imagine the Spectrum and we're looking at it um on screen right now the spectrum of of moneyness where you have kind of at the top something that is uh maximally money it is a means

of final settlement that is the most money type of instrument you have at the at the bottom of the spectrum something that is more like credit and credit of course is a promise to pay whereas um you know something that has more moneyness is a means of final settlement so it has stronger settlement guarantees the more money-ness uh and a given instrument has and so we've seen it at various stages like in the 1900s Brennan has this depiction in his article

um gold was kind of one of the most probably the most worldwide money-ness instruments it had the highest degree of moneyness whereas a Central Bank Reserves it was kind of somewhere in the middle you have Bank deposits uh more at the bottom now of course we're in the the world of the 2020s and that has changed gold is still up there it has still strong moneyness but most um Central Bank Fiat deposits like most money is actually settled using a central bank type reserves and they are

a higher money-ness instrument than Bank deposits so the money in your Wells Fargo account or Securities and so you often see nation states kind of using the instrument to settle with each other that occupies the most moneyness at a given period of of History it's interesting to me Brendan that kind of the like this can fluctuate right like the moneyness of a given instrument there was one point at time um where you know silver might have had a far higher degree of moneyness than

than even something like gold and it sort of depends on the society and all of these things um but this is a useful framing of of where we are today and that is again the water that most of us swim in but we don't actually see that's all around us and it's to David's point we only start to notice and ask these questions and something's kind of wrong with the water right so that's why we're we're asking these these questions today so in the 2000s that we occupy now what what's kind of the the spectrum of instruments

when it comes to to money-ness like how would something like gold rank how is something like oil rank how it's something like t-bills rank how would something like the Juan uh or the Euro or some other instrument rank in this moneyness spectrum yeah I think it depends a little bit on and the perspective of the the person or thing or uh entity trying to to do the ranking um it's a good question though I mean I

think gold t-bills have both experienced some interesting changes over the past uh five to ten years or so so I think even quite recently there's been an uptick in the uh gold Holdings of several Sovereign nations in particular the Nations that are not aligned with the US and the broader G20 so uh you could like potentially interpret this as a set of

concerns that they might have about their ability to use the US dollar either via official reserves held at the New York fed or via fixed income securities government bonds uh as like potentially being live uh potentially being unusable in the future as a means of final settlement for them uh which is sort of what happened to Russia in the wake of its invasion of

Ukraine so um like conceivably there's kind of a point at which some of these different instruments that have been historically used might come back into the fold and some that have been used increasingly over the years might reseed a little bit so it's basically a matter of so Russia or let's say China or something that is less U.S a country that is less U.S aligned they look at something like the dollar maybe and they see an erosion of

settlement assurances when the U.S treasury apparatus can simply freeze Russian Holdings and Russian bank accounts right and so then they migrate to a money with higher moneyness which according your definition Brendan just means stronger final settlement assurances and of course the US you know Janet Yellen and company cannot freeze go gold anyways as long as Russia actually owns sort of the the physical

gold it cannot be frozen so therefore it has stronger settlement assurances so that's very interesting how different um money instruments can lose their financial their their settlement assurances and thereby lose some aspect of their moneyness over time yeah for sure I mean there's kind of uh uh like a theory in the international role of the dollar space around the the stealth erosion of dollar dominance and there's a lot of contributing factors to that

one of them uh of course is the increase in the use of economic sanctions as the primary tool of statecraft and I think U.S policymakers are in a difficult position because the international role of the dollar is incredibly valuable to the United States at the same time using that that power uh and and you know effectively not letting the dollar be

credibly neutral has an undercutting effect at the I guess in the demand sense of the ability or want of people in Nations to to hold dollars I think the Russia Ukraine incident was probably the the biggest shifting point over the past five to ten years but there were other uh moments earlier where the US has gone down this path that has caused people to kind of question whether or not the

dollar is uh that guaranteed International settlement currency that it it was uh you know for a long time prior human's historically throughout history we like discover money we discover like uses and and things that can be money and then sometimes it's imparted upon us right like the dollar and humans like even inside of the United States where like you have to use the dollar we also will discover that that's actually the best use of money or else we go to jail like that still

counts as discovering it uh we discover that the dollar is still the best thing to use and over time like that always that Discovery process can always shift uh so like like you said right in the in the modern age we have some misaligned countries that have deemed that the dollar is not the best assurances of their wealth because of the ability for the United States dollar Network the Federal Reserve the government to cut off Russia and other countries right and so when you open up that door you allow

other countries who are maybe less misaligned than Russia to still see that possibility and that's one that's one half of the equation that is really important to Define is like the actual politicization and settlement insurances of money and I think this also goes back all the way back into we can start this conversation at like a World War II post World War II the United States had all the gold and dollars had backed by gold written on them and then we rugged that in 1971 and so that settlement Assurance

uh decayed and for the whole world and that like lasted for a while like even though it was not backed by gold since 1971 it still took time for that to like seep into the world but that's only one half of the equation is like the settlement assurance that a dollar is a dollar the other half of the equation is again similarly when we defaulted on the gold window we said these are no longer backed by dollars we also did something else that I also want to talk about which is we started to lose the

assurance that a dollar is a dollar that one dollar is worth one dollar so not only do we have the equation of some countries are going to be cut off from the money network and lose their settlement assurances that their dollars are actually anything but then there's the other half of the equation of inflation and devaluation of a dollar that a dollar is actually not one dollar at least it won't be in the future so Bren can you kind of put these two pieces together they the actual settlement assurances of a dollar and also the value assurances of a dollar and how these all relate in the Modern

Age yeah and I mean I think you can even uh like trace the erosion of the gold standard to to kind of earlier events like the Bretton Woods agreement which basically kind of said that uh currencies have to be redeemable into other currencies that are backed by gold so it intermediated the Redemption promise of uh regular Fiat currencies

that are not the dollar so that the dollar could stay on the gold standard and as long as other currencies were redeemable for dollars dollars could be redeemable for gold and you had uh interposition of the dollar in the money-ness Spectrum uh before 1971 and everything just kind of blew up I think the other question you asked is sort of what is the value of a dollar and and kind of is that really worth anything uh today our dollars

physical cash is redeemable for it's basically a claim on the balance sheet of the Fed so a dollar gets you a claim on an equivalent amount of the asset side of the fed's balance sheet well what's on the asset side of the fence balance sheet as you said in 1971 we uh changed from the gold standard when a dollar was a claim on a pile of gold into a system where a dollar is now a claim on a pile of Treasury bonds so

it's a claim effectively on the future ability of the United States to collect more dollars from people as they pay taxes uh and uh like uh other sources essentially it's like a debt instrument of the US economy like exactly your faith in kind of the US economy exactly my favorite meme is um dollars backed by aircraft carriers and so there's the like kind of USD full

node carrier Fleet um image that I think is in some ways uh a little bit accurate here because what you have is a claim on this pool of government debt if you believe that that pool of government debt is worth something uh then you can talk yourself into believing that the money has value and the way the system currently works is you can kind of always create more of those liabilities in the form of money as long as you have the ability to

create more of the assets which are government securities and over the past uh I think 20 years or so the amount of outstanding U.S government debt that is I guess in some ways backing all of this money has ballooned and I mean we saw just a few weeks ago there are questions about whether all of it will be paid and and whether some of that money uh will be redeemable in the future in practice no one tries to redeem their dollars for

government securities there's no like window at the FED where you could walk up to and ask for the the equivalent amount of government debt but uh conceptually that's how it's supposed to work yeah that's the part that I actually have a really hard time wrapping my head around so like when we have with dollars backed by gold it was very simple and obvious what the money was like if I want gold I go to the Federal Reserve and I give them one dollar and I get one dollars worth of gold whatever whatever it's backed by and that is just clear as day and then

when we remove from the gold standard and we go back to buy debt which is denominated in dollars and the government collects dollars to pay the debts which are it seems very self-referential and which is like both the kind of the point but also the demise can you just help help me and the listeners understand that like self referentiality of a dollar like why is that in what ways is that a feature and what in what ways is that a bug yeah I mean it's a feature in the sense that uh

it gives policy makers tools for uh controlling the amount of outstanding currency in circulation which has implications for the prices of goods employment and a host of other things that the FED thinks about when it implements monetary policy uh in like prior regimes when money was backed by hard assets like gold it was impossible to flexibly or elastically control the amount of money in circulation in order

to try to hit other Target it's like price targets or employment targets like try to do a stimulus check if it's all gold and you're the exact government ain't gonna happen unless you find a lot of gold right right um you know and so you could like think about scenarios and I think this is like effectively what happened where inflows of gold would uh would come to the United States be somewhat uh unexpected or uncontrollable and they

would result in subsequent expansions of credit in the United States and and changes in economic conditions and so the transition to this more self-referential system that's backed by government securities comes with a degree of flexibility that ostensibly lets policy makers more finely tune the amount of credit in an economy in order to get better economic conditions for everyday people um of course that you know at some point

there are are downside effects of of all of that I think um it's your earlier question to David I think Brendan's definition of of moneyness as a means of final settlement sort of explains both um the idea like so final settlement to me means both that no third party can kind of freeze the account or or censor or prevent it and also that a third party can't debase it and so the

purchasing power doesn't isn't affected materially by a third party and um so that's why I think in times where money money instruments like the dollar are going through to basement or um censorship or freezing and they start to lose their credible neutrality and they start to be more political we revert to money that is farther up the money-ness spectrum that is more credibly neutral and I by we I mean

different nation states because because Brennan you also make the point that's why I sort of think the money in this spectrum almost explains everything like it just explains so much like if you are a nation-state you certainly um can't trust Other Nation States if you're engaging in statecraft or you have to be selective as far as what your alliances are specifically as we move from a you know us dominated unipolar world to a multi like a bilateral world where we have multiple large Powers you

sort of you can't put all of your trust eggs in that basket and so at the nation state level you have different needs with respect to moneyness then you might at the individual level right so like a transaction uh branded between you and I right like you don't need to give me gold nuggets like I'll just give you dollars right that's at the individual level and that kind of works because we exist in a similar economy and we use a similar unit of exchange but at the nation-state level things get much