Is Crypto a Scam? with Crypto Skeptic Patrick McKenzie

Patrick, at least inside of the crypto world there are some uh prescriptive things that we crypto people think that civil society ought to do. Uh there's a couple of like lines that we like to repeat, right? Not your keys, not your coins, uh Federal Reserve, root of all evil, uh tokenize everything. Which one makes you cringe the most?

Oh man.

Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is Ryan Sean Adams. I'm here with David Hoffman, and we are here to help you become more bankless. Guys, uh, this is an episode of Bankless, but we're talking about banks today. We have a conversation with a crypto critic today who is also very, very knowledgeable on the traditional banking system. His name is Patrick McKenzie, and he writes about the modern financial system and all its strengths and all its flaws and all its quirks. I think this uh is a conversation really in two parts. In the first part, we talk about the existing banking system. Questions like, why do banks get holidays? Most people don't get these banker holidays. Why do they get them? And uh, why do they make us sign receipts every time we use our credit card? What does Patrick McKenzie think of AMLKYC? How did that come to be? And then we get into crypto. Uh, it's definitely safe to describe Patrick as a longtime crypto bearer. He's a skeptic. He considers crypto overhyped. He says it hasn't delivered on its promises. Uh a lot of speculation and little substance, so of course, we have more to discuss there.

Patrick certainly isn't uninformed about crypto. His takes and positions about crypto definitely come from a perspective of someone who watched the modern banking and fintech and payment system kind of rise around him in over the last like two, three decades. And so his perspective is very, very useful. He is very aware of the fact that despite being bearish on Bitcoin in 2013, that its price action indicates something else is happening than what he was thinking about. Yet he still thinks he considered his perspective to be at least uh lucid at the very, very least. Uh but overall, I think like in the crypto world, we have a lot of just like memes that we like to chant. Uh, you know, like the dollar is trash, uh, the central bank is the root of all evil, uh, all the like not your keys, not your coins. And I think uh likely, I'm guessing, uh, from somebody who has watched the modern banking system, the infrastructure being built around him, uh, there are probably some things as crypto people that we say that make people who are much more knowledgeable about the traditional banking system cringe. Uh and so we are taking a peek into Patrick's head about what his takes are about our world as well. Uh so there's a lot of just like fun facts that you're about to learn in this episode about the traditional banking system. But and then also you'll kind of get into the shoes of somebody who's viewing us from the outside in and what their takes are.

Yeah, and I think uh our our approach with this was uh we didn't push back a lot. We just sort of list we wanted to get Patrick's perspective and we invited him on for that perspective so he could uh bust bust through our crypto bubble a little bit and get a different perspective that you won't typically hear on bankless. But of course, David, that leaves a lot for you and I to talk about. There was uh definitely a lot that I disagree with Patrick about in this episode, but we'll save uh some of that conversation for the debrief. And if you are a bankless citizen, you have access to the debrief right now on your premium RSS feed, so you can go access that. Now, if you are not a citizen, go upgrade so you can get access to that debrief and all of the other bonus episodes that we put out on the premium feed. All right, guys, we're gonna get right to the conversation with Patrick. But before we do, we want to thank the sponsors that made this episode possible.

Including.

Bankless Nation, very excited to introduce you to Patrick McKenzie. He is a writer. He is a strategic advisor to Stripe. He knows a thing or two about how finance works, how the banking system works. I think from first principles, which we always enjoy on Bankless. Um, I th I think he knows where it's broken too, where some of the bodies are buried. So we'll talk about that. He also has some hot takes, some opinions on crypto. It's safe to say Patrick, while he is bullish on the internet, is very much a crypto skeptic or has been up to this point. So I'm sure we'll have much to discuss on that topic as well. Patrick, welcome to the show.

Thanks very much for having me, folks. So I'll start out with the obligatory disclaimer. I worked at Stripe for a number of years, uh, but uh everything I say is in my own capacity. Uh they're a bit more bullish on crypto than I am. Uh I write a newsletter called Bits About Money about Financial Infrastructure, uh, which is, I guess, my main gig during this uh semi sabbatical I'm on right now. And uh brief uh history of time for me. Uh I

uh got an engineering degree, went over to Japan because the Wall Street Journal said that no engineers would ever be hired in the United States again. And the Wall Street Journal has never been wrong. Uh and so uh spent about 20 years there, recently moved back with my family to America. Uh

Ran a couple of uh uh companies. One startup failed, joined Stripe for a while, worked there for six years, and uh currently have that advisory relationship.

Uh have a bunch of uh funny being uh close to the epicenter of crypto stories uh during uh that time. Um among others, let's see. People asked me to launder money to get it out of Gox when it was failing. That was fun. I said no. Uh I guess even before that happened.

And they asked you this.

Yeah, proximity. It's like, oh, you have uh uh Japanese yen banking. Could you take a uh domestic uh transfer from a Japanese uh company and wire it as USD to the United States? And I'm like, that sounds like a really odd request. What's the company? Oh, it's Tibane. I'm like, ah, you want to get money out of Gox, uh, and you can't do that because they're not doing USD wires. And uh they said, no, no, no, it's just that uh the the uh the banking system in Japan is effed up. And I'm like, you think that the Magic the Gathering online exchange has DDOS, the second largest bank in Japan, which is currently incapable of doing USD wires? Pull the other one, it's got bells on. Um, anyhow, uh even before this, like 2010, uh, so I'm I'm living in Japan. I am deeply in the technology industry. A bunch of my buddies are uh like

What's the phrase for it? Crypto hacks? And no, not that. Um crypto punks. Like the the the kind of people who uh do security research for fun and for profit. Uh and so uh uh you know, people were saying programmable money, this smashes all of your interests. And since 2010, I've been looking at it rather closely and just never come to the opinion that it would actually be useful for my interests, which explains why a bunch of my friends are now much richer than me. Uh but uh just like uh I like to be epistemically humble about this kind of stuff, uh and and also like

do not simply want the dollar signs to flash over my eyes and cause me to be blinded to the reality, which is I think how I feel about like the traditional banking system too. There's there's good parts and bad parts about it, and the way that it actually functions is not the way that it is described function a lot of the time. And so that's one reason I I keep writing about this thing. But anyhow, let's talk about uh whatever you folks would like to talk about, and then we can come back to fun stories about crypto.

There's so much we could talk about. I I uh let me let me just say I love your writing. I love Bits About Money is is the blog, Patrick, and and you uh publish essays that are kind of uh deep banking uh topics, and I'm sure there's a lot of things we'll we'll talk about in in today's episode. I I actually don't want to start with crypto though. We'll we'll get into the crypto skepticism and it's good for folks to hear that uh you've you've been around it for a long time and you have friends that have been around it, so you're not coming at this from uh you know just looking at crypto in 2024. I mean, you remember the Mt. Gox days. Actually, where I think we'd like to start this conversation is on the banking side, weirdly enough, because this this podcast is called Bankless. Uh so uh Patrick, yeah, we have a bias here. Um, you know, we we think there are some issues with the existing uh banking system. I think actually uh so do you. And uh, you know, I I'm wondering, uh, you've um you you've spent, I think I believe like, what is it, two decades in in Japan? Was it like almost 20 years or something like this?

20 years in Japan.

Okay, and then you came back to the US. First like question from you. Has anything changed with the banking uh structure in in the US over over the last twenty years or is it pretty much how you left it?

Oh, uh well, lots of things have changed. Uh, you can

I think there's a like a frog boiling water thing uh where you don't realize changes as they're happening incrementally, and when you uh you hop out after like a 20 year period, you see like massive changes sitting all at once. And I could say that about a variety of things about US culture. Um, just as a thing that like every listener of this podcast can can observe.

All banks, without exception, were absolutely horrible at consumer facing technology in I'll pick a year, 2005. It is no longer the case that banks are horrible at consumer facing technology in 2005.

Most of your customers, despite it being called bankless, uh are uh like probably banked, uh probabilistically in the nation they resigned.

Yeah.

Yeah. Uh

uh a fine institution. Uh I

Or for social reasons, I shouldn't comment on any individual institution for all the reasons. Anyhow, uh, like you have a phone in your pocket, there's an app on it, that app can move money around, and that app does not suck by the standards of Silicon Valley products, where a short amount of time in recent like living memory, uh, that either didn't exist, or if it did exist, it was terrible. Uh, and things are getting like far less terrible. A lot of things that you used to uh have to call in and have extremely non deterministic resolution of, like say uh chargebacks for disputed transactions on your credit cards, are now essentially like one or two taps to uh uh to get it done. That is a decision that has consequences all over the economy. But from like the perspective of a user, like your car just got more useful. Uh there are um

We used to go like decades between there being uh

really new payment methods uh introduced, and now uh it seems like we get more new ones per per like decade in one country than we would see across the world in uh typical decades previously.

So uh just one of the new ones that interests me, uh, not because I'm a user of it, but just because it's a like finance uh fascinating bit of financial engineering, is uh buy now, pay later, where uh they essentially decided like, okay, one of the pitches from um the payments industry to uh businesses since forever has been like payments is partially about moving money, but it's not solely about moving money. It's also about an embedded marketing expense. And if you were willing to like allocate more of your marketing dollars to us versus allocating it to, I don't know, Google or Facebook or whomever, we could uh build a really attractive product uh for your customer by decreasing the uh perceived cost of the customer cost of credit to the customer straight down to zero. And so, like the the core, for those of you who don't use uh by now pay later, the core offering is called pay in four, where your uh purchase set without loss of generality, Sephora, uh gets chunked up into four payments. You pay the first of four payments immediately on your debit card, and then uh the next three payments happen in two-week intervals. Uh and uh uh there is no interest charge. People are like, well, how do I get loaned money without actually paying interest on it? And the answer is the uh Sephora in this case uh pays more to the buy now pay later provider than they would to a credit card uh provider. And then they do a little bit of uh financial engineering that we can go into if you want to. And uh that ends up getting them to have a private source of capital to uh to essentially like buy the receivable from you slash cephra. Uh and thus you get your makeup today, uh, Sephora gets its uh money today, and uh through this financial engineering, a uh synthetic high interest loan is created without the customer being directly charged the interest. Uh so like that's a fun thing that exists and creates some value in the world, at least if you're the kind of person who likes to buy makeup that you don't currently have money in your pocket for. Uh and then there is um uh less in the United States, although Fed now, maybe someday, uh like it could possibly happen in our lifetimes, but uh less sardonically, like we can look at other nations, like say um uh Brazil with PICs, India with the

uh the uh UPI that uh uh there are these um sort of government public

uh government slash private industry public private partnerships which uh allow for substantially instantaneous subs like very low cost uh payments within a country which are achieving massive massive adoption and so it's a uh an interesting time to be alive from the uh perspective of someone who uh uh looks at uh both like the financial industry side of things and also the more like tech slash user focused side of things. What is the thing that people actually have on their phone? What what are the actual buttons they are pushing when they're um interacting uh with the banking system at perhaps like

A hop or two of remove.

So so Patrick, your your perspective is that it's actually gotten like it it sucked twenty years ago and it's actually gotten a a lot better since then. And you're saying the the the banks have made it better. Is your impression that it's really been the the banks themselves? I I will admit I I do think the um bank bank apps have gotten uh better. They still kind of suck, but I would I I would say that um fintech has gotten like really good. Like sort of the the layer, the apps built on top of it. You know, stripe stripe is obviously uh one thing, but kind of like the Venmos of the world, the the the revolutes of the world. Uh it's really the the fintech, fintech uh app layer. It's kind of like the the user experience uh built on top of the banking system that has really improved over the last 20 years. And I've definitely seen that being in in kind of the US and North America. I've also heard stories from from places where it's even far more advanced, right? So, you know, China, they have kind of the super super app with the WeChat uh uh of the of the of the world, and you know, just payment is as as seamless as sending a text message, uh, and they are moving increasingly towards a kind of a cashless society. Is that where you're saying we've we've actually uh it gotten a lot better? The banking system's gotten significantly better. Has it been on the FinTech side, the app uh layer side of things, or is there something deeper here?

I absolutely agree that FinTech, although FinTech is a kind of squishy word, uh the the historical definition of it was uh basically any company that moves a lot of money and uh is capable of employing competent software engineers. And it turns out that like banks are both moving a lot of money and capable of employing competent software engineers. Uh, they had a multi decade decision to like maybe lean less into that. And then uh over the course of the last

I would call it fifteen years or so, uh, really since the uh advent of smartphones, uh, have uh uh kind of been forced by market conditions to get better at this. Um

banking

Payments, the fine, the like the economy is an ecosystem. And so there is no single unitary actor or small group of actors that controls the uh experience that is uh fundamentally put in front of users. So there um there is a certain amount of credit that should be given to banks, I think. Uh there is a lot of credit that should be given to what are like you know traditionally considered fintechs or like pure play fintech companies or et cetera. There's a lot of credit that should give be given to PayPal. There's a lot of credit that should be given to Apple and Google, uh, less in their capacity as fintech providers, although both of them have very material fintech uh arms, and more in their capacity as uh uh ecosystems, which uh simultaneously onboarded uh hundreds of millions and then billions of people onto like uh extremely connected platforms, and then uh figured out how to integrate financial rails into those platforms and got people more comfortable with uh uh with using them. One of the um uh things that is kind of like undersung about the history of credit cards is that uh credit cards of themselves were also uh sort of like incentive systems that uh that incentivize the creation of networks of uh disparate organizations going out to disparate people and getting them to all agree on sort of common underpinnings for commerce, uh even when they didn't necessarily share a common language, a common culture, et cetera, et cetera. And uh so

Um it's kind of miraculous that it works. It was fifty years ago and uh more than fifty years ago now, predates the internet. Uh and uh and yeah, like it is

A true observable fact about the world that uh the uh Visa, MasterCard, et cetera, et cetera, systems uh somehow managed to send out like the rest comp the right combination of sales forces in uh Japan and the United States, such that someone banked at a Japanese bank can like get on an airplane, be in the middle of Detroit airport where they know nobody, walk up to a sandwich shop and say, That thing looks tasty. Can I have that thing? Give them a piece of plastic.

Might not even say anything about it. And uh like everything just works after that point. They get the sandwich, the sandwich shop gets the money. And then uh there are somewhere between like five and seven players in the middle that make uh uh some offsetting uh transactions happen in Japan and the United States such that uh it all bounces out at the end of the day. So this is the sort of thing that I find like endlessly cool as uh as someone who likes looking at comp at complex systems. But yeah, broadly speaking, I think that uh banks as a sector were laggards on technology uh until quite recently. I think

if you were to like do a shootout between, you know,

uh engineering organization at Google versus engineering organization at like pick a large bank, I have a

Pretty confident point of view on how that shootout would go. But on the optimistic side of things, like there has been progress in our lifetimes, and it's easy to see.

Yeah. I think f maybe um coming from like the younger generation's perspective, the zoomers, even the millennials who are used to like TikTok and YouTube reels and things moving at a mile a minute, like the incremental improvements that we've seen in the banking and fintech layers over the last twenty years is still like

Really slow. It's still like a turtle's pace. And there's still like a bunch of just like structural things in the banking system that I think are just like completely anachronistic that I kind of want to like tap into. Because there are things that like I don't really think that we're ever going to change. For example, like banks close at like 6 p.m. every single day. Like my wire cutoffs are 2 p.m. Holidays, can't do any banking. Stock markets closed most of the time. So like maybe let's pick one of those things. Like uh banking holidays. Like if all of our banking is digital now and like we have apps, why do they close still? Like, why do we have to actually shut down these systems on like the weekend and on holidays and stuff like that? Like, do we still actually have to do that, or is that just like an anomaly?

Everything we do is a choice, and every choice we make is made in the context of some amount of legacy choices that we've continued through the present day, through some combination of culture, built infrastructure, the built environment we work in, et cetera, et cetera, et cetera.

I I do have to say, like, and not to grind anybody's nose in it, when you when you say like banks close during banking holidays, like particular windows into the banking system definitely do close on like particular uh timescales, and then other windows don't. And you know, whether that uh affects you or not, uh kind of depends on which window, uh what activity you're trying you're trying to do during uh various times. Uh like there uh a thing that used to drive me crazy as someone lives in Japan is there was a true, what we call, as technologists, stop the world uh event in Japan, uh which coincided every day uh every year with uh the New Year's holiday. And uh uh substantially all banks would decide from like uh January 1st through January 4th, we're taking all the computers offline for the annual upgrade, and money stops. There are no bank transfers, no debit card transactions, can't use an ATM, et cetera, et cetera, et cetera. And like we did that for 40 years, more than 40 years. Uh and then in the last couple of years, they were like, hey, hold on, wait a minute.

We still do need to do system upgrades, we still do ha and need to have the books balance, but the geeks tell me you don't actually have to turn off every computer for four days to do a database backup. Wow, that's cool. Maybe we shouldn't do that anymore. And so like some amount of improvement.

Why do certain things still still take as long as they do? There's a dependency tree for many products that you work with. So, like to use an example from payments, a lot of the reason that if a customer comes into your uh shop and pays with a debit card or a credit card today, or if they go to your online store, uh like why doesn't that money arrive to you instantaneously? Uh even though databases can move substantially instantaneously. The big reason is probably that uh the actual settlement of that transaction happens over networks that uh are just like fundamentally not instantaneous at the moment. Uh and so, you know, in the United States it might happen over ACH, which uh uh ACH timelines, like this is one of those improvements in our lives. They've been getting shorter over the years, but uh it still takes like plus or minus a business day to uh to get the money. And so you are rather unlikely to have an agreement with your credit card processor that would result in you getting uh credited all your money today for free. Uh you know, it will typically be the next business day or the next next business day or some other agreement that you can mutually strike. Another reason that is often underappreciated for like why isn't everything moving at in uh internet speeds is that uh

There is a cost associated with making things virtually instantaneous, uh, which is that uh uh making things other than instantaneous gives you sort of more bites of the apple to uh interdict uh uh bad activity happening over the system. Uh so for example, fraudulent use of cards, um uh takeovers of people's accounts, etc. etc. Uh when money moves instantaneously, it is possible to like, you know, uh

Uh download someone's password from a popped uh uh bulletin board on the internet, use that against the bank because most users reuse their passwords everywhere, take over their bank account, and then like move out all the money out uh immediately. Uh nobody wants that to happen. Well, okay, fraudsters want that to happen, aside from fraudsters. Nobody else in civil society wants that to happen. Uh, and then there's a kind of curious thing on like the the businesses that have been closest to real time for the longest have invested.

Incredible amounts of money into uh getting better at defying that risk, mostly because when they don't do it correctly, they end up paying out of pocket for it. And so um thing I've said on Twitter a couple times is like PayPal shareholders have done the sacred duty of equity in like multi hundred million dollar sizes over the years uh to pay out the fraudsters that PayPal was not sophisticated enough to catch. Uh and uh that is not grinding anyone's nose in it. Like there is a, you know, there is a

A social purpose in like shareholders saying, like, I'm going to backstop the cliched but kind of real Kansan grandmother that is using PayPal to uh transact on eBay. Like, if if she loses money, she doesn't lose money, I lose money. And in return, I get the upside of the PayPal enterprise. Uh and there's, you know, uh some social utility in like PayPal deciding, like, okay, we're going to invest a huge amount of money into the um

the technical and organizational underpinnings that will allow us to have this uh substantially real time payment method available over the internet uh without getting our pockets picked. Uh and then there's uh some amount of like the good parts of capitalism where that uh where that being available as an option uh uh kind of

Suggest to the rest of the banking system, like, okay, Venmo is capable of doing like substantially instantaneous peer-to-peer payments.

You're not.

I should move transactions to Venmo when I want to give money to my family and have it arrive like right now instead of a couple of days from now. Uh uh, and then you know, the banks kind of get dragged along to uh uh to keep up with the uh uh other options on the market. And then there's like things you can say about that too. Like the ways that the banks have been dragged along are uh not always optimal, either by their lights or by our lights. Uh if you want me to talk more about Zell and uh how you would compare it to other real time payment systems, happy to do that. It's a it's a fascinating but kind of wonky topic.

Sure, sure, yeah. I think like kind of the

The vibe that I get whenever I explore the world of like traditional banking, what we call TradFi in the crypto space, uh, is that it's just like layers upon layers of technology that spawn back like decades. And so some of the choices that were made like 40, 50 years ago, are still alive in some of the layers of technology that are being um like wrapped around finance today. And like it kind of seems that like the world of banking, FinTech, TradFi is like um uh a fridge that has never been cleaned, right? We just keep on putting more stuff in. We actually never take any of the stuff out, clean it up, and put it back. Like, so maybe just as like a thought experiment, Patrick, like if we were to like, you know, quote unquote clean out the fridge of TradFi and like just rebuild the system from scratch, maybe we were given some sort of like God mode where we could just pause time, I'll come to a meeting, determine like how we would want to rebuild the traditional finance system. Would like would much change? Would there be a lot of interest in like reconstructing uh and and like rebalancing the the networks and payment rails and and banking system that we currently have? Or is like, do you think if we were to re-roll the dice, we would just actually kind of get the same system that we have today? Like, is there all that much like tech debt or like financial debt to to like clean up in the world of Tradfy? Or do you think it's actually more of a more or less a system that has like a true achieved its true north?

Nuanced point of view here. The traditional system, Wartz and all, has created an incredible amount of value in the world. There is no way that we would like get together in a room and say, okay, we're gonna like go up to a blackboard and make a new financial system, and it is magically free of all legacy constraints. There's no way we would adopt all of the decisions that were adopted 70 plus years ago.