Episode title: Blockchain, Crypto and Stablecoins – Danger or Opportunity? With Dr. King and Dr. Park
Hosted by: Chris Raper (Baby Boomer)
Guest: Dr. Michael King, Associate professor of Gustavan School of Business, University of Victoria and Dr. Andreas Park, professor of Finance at the University of Toronto's Rotman School of Management
Description:
This episode explores the evolving role of cryptocurrencies and blockchain in our world. Host Chris Raper speaks with Dr. Michael King, Associate Professor at the Gustavson School of Business and author of FinTech: A Primer on Technology in Financial Services, and Dr. Andreas Park, Professor of Finance at the University of Toronto’s Rotman School of Management. Together, they debate whether crypto is a revolutionary force or a risky experiment, touching on Bitcoin, Ethereum, stablecoins, and even gold-backed tokens. We also reference insights from Cam Harvey of Duke University, whose research paper compares Bitcoin and gold. This conversation is for educational purposes only and not financial advice.
Michael King
Ethereum is a better design, has a better use case, and ultimately is the really revolutionary cryptocurrency. Even though it was, it was a fast follower.
Chris Raper
This podcast is about the evolving roles of cryptocurrencies in our world. We will explore their promises and their pitfalls. Yes, we will discuss blockchain, bitcoin, Ethereum and various stablecoins. None of what we're going to talk about today is to be construed as financial advice. It is merely our attempt to educate ourselves and our audience about an industry that is changing our world, seemingly at warp speed. For the record, I do not own any cryptocurrencies because part of the appeal of cryptocurrencies is a hedge against excessive money printing by central banks, AKA inflation. I do feel the need to disclose that I hold investments in the gold complex and at this point more percentage wise than at any other point in my career. Hint we're going to talk about gold backed stablecoins with those disclosures out of the way. I'm Chris Raper, a baby boomer dad and wealth advisor at Aspira Wealth. Welcome to From Generation to Generation, where we believe that wealth comes in three forms. Wealth of character, wealth of intellect, and finally, the money. It is my belief that we must sow into the next generation the character and the intellect aspects if we want the money to last. To quote the Rockefellers, every right implies a responsibility, every opportunity an obligation, and every possession a duty. End quote. Today we're going to concentrate on the intellectual side of wealth as we unpack the role of blockchain, cryptocurrencies and stablecoins. And to do that, I am super pleased to introduce two intellectual heavyweights. Dr. Michael King, Associate professor of Gustavan School of Business, University of Victoria, and one who describes himself as a crypto skeptic. And in the Believer camp, Dr. Andreas Park, professor of Finance at the University of Toronto's Rotman School of Management. Gentlemen, thank you for being here. I'm so excited about this discussion and market wise, it couldn't be more timely.
Andreas Park
Thanks for having us.
Michael King
Thank you, Chris. Great to be here.
Chris Raper
I want to give you the opportunity to get any qualifiers on the record. Did I describe you accurately? Andreas, why don't we start with you?
Andreas Park
Sure. Let's start from the top. I am a believer in the technology. When it comes to investments in crypto assets, I want to be a little more cautious because. Because that's a very broad statement that really requires a lot of different disclaimers and provisos and so on. You know, again, I, I, I would not give investment bias on this topic either. As I said, I'm, I'm interested in the technology and what it can do.
Chris Raper
Appreciate that I'm on the same page. Michael, how about you? Did I describe you accurately?
Michael King
You did, you did. So, Chris, I'm the author of a book called Fintech Explained, published by University of Toronto Press, and it looks at all of fintech and how technology is disrupting financial services. And there are two chapters devoted to cryptocurrencies and something called decentralized finance or DeFi, which is basically an alternative financial system that's built on a blockchain, largely on Ethereum. But today we're going to be mostly focusing on cryptocurrencies. I have not invested in cryptocurrencies myself, largely because I was not smart enough to figure out how to protect them from hacking or attacks. And I always believe that if I downloaded a free bitcoin wallet, it would be likely that the programmers gave it away for free because there was a backdoor in there that they could use to steal my crypto. So I decided not to buy and of course, like many people, probably have regrets, but I sleep well at night.
Chris Raper
Andreas, how do you respond to that?
Andreas Park
Well, what can I say, Michael, touches a very important point. The wallets and the technology thereof is a central piece of how blockchain operates and the trust that you need to put into the wallet working as intended is meaningful and is often misguided, not in the sense of backdoors, but any piece of software there are, that can be weaknesses.
Chris Raper
Michael, I know you've written extensively, I know Andreas has done some YouTube videos on this, but how would you describe blockchain to your 85 year old aunt?
Michael King
I've come up with the analogy of an old bookkeeping ledger, like a physical book. And you think of a ledger that used to be held by business and they would record their accounts and they have all the transactions on different pages. Think of the blockchain as the digital version of that ledger of that book where each block is one of the pages. Inside a block or on a page is a list of transactions and in this case it's records of who owns bitcoins that have been created. Nothing else is in on that ledger, there's just the bitcoins and the address, you know, something that identifies who wants the coins. And as you add pages, you are actually putting them into a physical book, while on the blockchain you're actually, you're connecting what are called blocks. Using hashing, which is a cryptographic way of combining these transactions, these blocks together, in a way almost like you cannot tear out the first page of the ledger without ruining the whole ledger. So blocks are added about every 10 minutes, and every block has. Can only record so many transactions, and they get added sequentially and in a way where you cannot go back and modify or change the earlier pages of the ledger. So another unique thing about this ledger is that there's not just one copy. It's actually available for download whenever anyone downloads the Bitcoin software. This ledger, a copy of it, which is transparent and no one can look at it, comes with that software. And so it's on different computers all around the world. And these computers together are called nodes on the. On the Bitcoin network. And so everyone can look at the ledger. It's open, it's fully transparent, it shows all the different coins, but the names against each coin are basically anonymous or pseudo anonymous, because they're basically some sort of combination of letters and numbers, what you would call a hexadecimal signature that basically shows so that it's private. Each of us has passwords for getting into our email or into our banking information. So we have a password in a similar way, you have a password that allows you to access.
Michael King
That record or that account where you're holding your Bitcoin.
Chris Raper
So it's like having a physical ledger spread around between millions of people, millions of computers. Everybody's looking at the same ledger. Nobody can go in and change that ledger.
Michael King
Yeah, except there aren't millions. There's about, I think, about 30,000 computers that have the blockchain ledger. Everyone can see it. It's hard to figure out who owns the coins. And the only people who can change it are people who do some work to verify transactions, who are called miners. Right. And we can get into that in a moment.
Chris Raper
Okay, so, Andreas, how. How would you describe it? Like, do you have a different way of describing it?
Andreas Park
So I see the technology as a financial infrastructure. And so if you take a step back and think of our current world, it is, you know, basically it requires. Any financial transaction, requires multiple databases to be put into sync. Right. So if you want to move money from one bank to another, the banks have to communicate, possibly involved in the bank of Canada and so on and so forth. There's a lot of different databases. If we want to do a stock trade, same thing. The moment you try to involve multiple assets, like actually money and a stock or something of that nature, it becomes really complex. It's a very, very difficult process. The part what essentially a blockchain accomplish is that it is a database with arbitrary functionality and arbitrary operations that you can do. And this is for Ethereum, not for Bitcoin. And it essentially runs as a single source, so which allows multiple parties to compete and multiple parties to collaborate on the single source. Now, the blockchain component comes with is that there is. And in the case of ethereum, there's roughly 100,000 different nodes that keep the data. And the process that is involved. Let's refer to this consensus protocol is the process by which changes to the database are made such that the 100,000 different computers can all work as one.
Chris Raper
If I wanted to defraud, whether it's Bitcoin or Ethereum.
Chris Raper
It would be necessary for me to get control of those 30,000 nodes or 100,000 nodes and somehow unwind those transactions. There's no way in the world that that could be done with today's current technology.
Chris Raper
Is AI or quantum computer computing in the future a threat to that blockchain?
Andreas Park
Possibly. It's a tricky question. I think we shouldn't dismiss it, especially when it comes to Bitcoin. The process by which transactions are used is you need to create a digital signature. For that you use a cryptographic tool which is called elliptic curve, an elliptic curve algorithm. Eventually, when quantum computers are sufficiently powerful, it is possible to crack this cryptography. Now, mind you, if that kind of cryptography can be, can be cracked, we have probably bigger problems at the moment than just blockchain because any banking transaction would be possibly crackable and there is no such thing as secure communication anymore. But at the same time, there is also a very strong research area which is quantum resistant cryptography. And I would imagine that the Ethereum network will probably convert to that kind of cryptography long before quantum computing is powerful enough to break it. Bitcoin is a different question because Bitcoin has all kinds of other problems. So Bitcoin essentially is a one trick pony, more or less. Right? It can do one thing and one thing only, which is allow users to transfer Bitcoins from one account to another. What something like Ethereum does is a completely different thing. It's completely general. It allows you to do arbitrary operations and arbitrary computations, and the Ethereum network guarantees that a particular computation has been done.
Chris Raper
Good explanation. Michael wants to get in here. Go ahead.
Michael King
Yes. So this, this is an opportunity for me to give a shout out to someone that both Andres and I know, a fantastic Canadian, Campbell Harvey. Cam Harvey professor at the Duke University Fuqua School of Business, Cam is also a, an expert on cryptocurrencies. And he's writtenly written a paper about bitcoin and gold. And in that paper he looks at the threats to the security of the bitcoin blockchain. He, he highlights the two main threats, one which is you. The idea that quantum computing could be used to sort of crack the blockchain, the bitcoin blockchain. And he dismisses that. And he gives lots of facts and has done lots of research. He says basically that's not going to happen. That's very unlikely. A more likely problem, which is one that people in the, in the crypto community are aware of, is what's called a 51% attack, because Bitcoin is done by consensus, it's done by majority vote of miners who are operating on the bitcoin network. And that's what's called the hashing power or basically the computing power on the network. In principle, if someone was able to get 51% of the network hashing power or computing power, they could alter transactions starting with the latest block. They couldn't go back and change the earlier blocks, but they could shift things into a different name. And that is what's called a 51% attack.
Chris Raper
To do that you would have to.
Michael King
Have enormous computing power. And Cam actually goes to the trouble of figuring out what it would cost to do it if it was feasible. He points out that yes, you could do it. It would cost you about 1% of the market cap of all Bitcoin to pay for the servers and the electricity and everything. But then you would destroy the value of all the Bitcoin itself. It would fall in value basically to zero. He asked, well, why would you do that?
Chris Raper
I can do that math. It doesn't work very well.
Michael King
Yeah, it doesn't work very well. Now, it's not to say that it's not possible. Right now. There are actually four mining pools. We'll have to get into mining and pools in a moment. But basically think of them as consortiums of, of people running different computers, computing networks that are verifying, they're competing to, to verify transactions and get the, the remaining coins that are being given as a reward. Four pools account for about 65% of capacity, competing capacity or the hash bitcoin network. And there's a great website where they show you, you know, what it is day by day. Three of those pools unfortunately are headquartered in China and one is headquartered in the United States. So interesting.
Chris Raper
I wasn't aware of that.
Michael King
When people say bitcoin is a decentralized network, it is. But the computing capacity is actually getting more and more centralized over time because it costs a lot of money to buy these specialized computers or these chips, set up these servers, cool them, run. And so, you know, big businesses are focused on this, and it's a profitable business.
Andreas Park
So can I add two pieces here that I. So first, I want to make a little asterisk to the. To the headquartering of the. Of the mining pools, because it's important to distinguish the headquarter of the mining pool and the miners themselves, because the miners are just simply computers that run in data centers, usually, and they can run in a large number of different locations, not necessarily in China. So it's not the case that there's, you know, four gigantic data centers. Right? There are, as Michael says, There's 30,000 different nodes that keep the information that contribute to the mining. And what a mining pool does essentially, is just a computer system which gives different miners tasks to complete in the process of whatever mining is. So that's essentially. This is how this works. It's just a way how to distribute the workload, make it more efficient. Now, the second thing I want to say, and this is actually probably the one thing I want to add as a start, as a footnote to what Michael said, is like, why would you destroy the bitcoin? So here's one scenario where you may want to do this. The United States of America comes up with a brilliant idea that they create a bitcoin strategic reserve, which is a bad idea on so many different levels. But let's give you one level. So this is something that they want to do. At that moment, the bitcoin network actually becomes a target, and not in the sense of I want to steal funds, but I want to destroy it. Because if you could destroy the strategic reserve in some form, hey, well, you know, that's. That sounds like a good idea for North Korea to do.
Chris Raper
Right, right.
Andreas Park
And so at that point, actually, you know, the whole consideration about what bitcoin mining is, what's the security of it, and it becomes a national security issue, it's a completely different consideration. So I just want to put this out there because it's probably important to keep that in mind.
Chris Raper
Andreas, great curveball. I did not see that one coming. Thank you. Okay, I'm glad we're talking about Bitcoin here, because I really want to dive in. And this question comes from our analyst, Alex Bozian. He has Much better questions than I do. And you'll see the analogy here. Bitcoin, digital gold, or digital tulip. Andreas, why don't we start with you?
Andreas Park
Just like gold, it doesn't have a fundamental value in the sense of we can't describe a present discounted cash flows to it. So that's a very simple fact.
Andreas Park
From an economics perspective, if we think of pricing, one has to be slightly cautious. Just because something doesn't have a fundamental value doesn't mean that the price is necessarily zero. Right. It just means that the price is indeterminate. So that's, There's a bit of a difference here. That's number one. Number two, I think there is a. There's always a possibility. So again, here's the economic theorist thinking. There's always the possibility that the price of Bitcoin goes to zero. Right. So that's something which we can't exclude. It's not like Apple. Right. And Apple shares. If the price of Apple goes to zero, for some reason, you can buy up all the shares and then you have the assets available. Great for you. Right. That's not the case with Bitcoin. Right. If the price goes to zero, it goes to zero. That's it. That's where it stays. Now, the idea of why, why Bitcoin could be digital gold is the idea if you have it, some form of store value. You know, we can obviously argue whether with the high volatility that it has, that's correct. So you cannot exclude that possibility that, that the price of Bitcoin could be zero. Right. And in that sense, it could be a tulip.
Chris Raper
Michael, how do you respond?
Michael King
Okay, so I'm going to say neither. I'm going to say Bitcoin is an alternative investment. Cryptocurrenc General. People say, are they money? Well, they were created to be electronic money, but they're not being really used as money. I think there's only one country in the world that allows them, like Ecuador. And as a form of payment, the. It's. It's become impractical as a means of payment, but as a store value. Well, you know, gold has gone through very big swings over time. The stock market has gone through very big swings over time. It just so you know, as Bitcoin has evolved, it's, it's gone through large swings, but it's becoming a more mature asset. And I, I did some work ahead of this call and I gave Andreas a little warning about it. I was looking at the volatility of bitcoin prices and I was. And the volatility of gold. And I thought, well, why not? I could also look at the volatility of the S&P 500. The S&P 500 has annualized volatility of about 18%, 15 to 18% a year. That's about the same for gold. Actually, the gold price, bitcoin, has been a little higher. It's been more like 40 to 60%. So it's more volatile. But it's been, it's been coming down over time. It used to be quite a bit higher in volatility, but as it's getting more institutionalized, the price is becoming less. As it's getting higher, the price is becoming less volatile. You know, the analyzed return on bitcoin, well, if you look in recent years, last year, great year, 111%. This year, down 3%. You look at gold this year, up 60%. Last year, up 27%. So, you know, they're. They don't appear to be correlated. And by the way, the S&P 500 as well, right? We've had two. Two banner years. Three banner years. All three of them were down S&P 500, down 19%. Well, actually, Bitcoin down 65% and gold was flat. So I just put it in the category of. It's another asset class where you probably want to view it as an alternative investment, not put more than 10% of your portfolio in it and hold it over time. Which unfortunately, I'm supposed to be the skeptic, supposed to be the proponent. So maybe I've undercut myself there.
Chris Raper
There will only ever be 21 million bitcoins. How does that contrast to ETH?
Andreas Park
So this is a really good question. It's a very complex question too. So eth, essentially, this is where it gets tricky. So when you want to make a.
Andreas Park
Transaction that you want to run on the network, you have to attach a fee to it. Now, this fee essentially has two components. One component is a mandated component, and the other component is if you want a tip that you pay in order to get your transactions processed faster, the mandated component is essentially taken and destroyed. It's burned is the process. Now, on the other hand, when you are somebody who contributes to the validation of these transactions, and in Ethereum, by the way, this doesn't work with mining anymore as a different process. But let's set that aside because I don't think it helps actually the conversation very much. But if you are a validator and you create a new block, you get a reward for that service. For that you get freshly minted cryptocurrency. So now the question of whether or not the amount of ETH outstanding expands or contracts is a function of the usage of the network. Essentially, I think for the last two years the net amount of ETH has been shrinking. So in other words, it was deflationary. But it is entirely possible that in the future becomes inflationary.
Michael King
Again, if your listeners are interested in cryptocurrencies, they're going to learn about Ethereum. Second, and for many people who believe in cryptocurrencies, Ethereum is a better design, has a better use case, and ultimately is the really revolutionary cryptocurrency. Even though it was, it was a fast follower. So just to give you Some idea, a ETH or ether one coin costs $3,000. One coin of Bitcoin cost roughly around $92,000. Right now, both in US dollars. The, the market cap of Bitcoin is around 1.8 trillion. The market cap of Ethereum is around 380 billion. They are separate coins and, but they tend to move together. I mean they're, they're correlated. I also, because I'm an Ethereum fan, I also ran the same statistics on the returns and, and the volatility Ethereum has because it's been, it's been created more recently. It's actually, its volatility is currently higher than, than Bitcoin. Remember, Bitcoin over the last year was around 39, 40%. Ethereum is around 70%. So very volatile. But it's been coming down over time when it comes to the annual return. The annual return this year for ethereum is down 10% versus 3% for Bitcoin. But last year it was up 40%. The year before that up 90%.
Michael King
When many people look at investing in cryptocurrencies, Bitcoin is not the only place to go. Although the whole market of cryptocurrencies tends to be dominated by movements in Ethereum and sorry, in Bitcoin, which is why over the last three years that the correlation between Ethereum and Bitcoin is around, let me see.
Michael King
75%.
Chris Raper
Interesting probably.
Andreas Park
Also I want to actually, since we're on this right, let me just add two factors here too. So number one is maybe this is what your listeners are not aware of, that Ethereum was essentially created in Canada. And if you want to be patriotic, you can say that Ethereum essentially is the most.
Andreas Park
Valuable entity ever created in Canada. So the market cap for Ethereum exceeds that of Shopify, it exceeds that of RBC these are the two largest companies in Canada, so probably worth mentioning, unfortunately Ethereum had to leave has is a, is a, is a sad story for Canada but, but it being created here.
Chris Raper
Yeah, it's a sad state that we have a habit of chasing some of our most valuable companies out of the country. Hopefully that changes soon. I want to move to Stablecoins if we may. And before we move to stablecoins.
Michael King
Chris?
Chris Raper
Yes please.
Michael King
One thing I want to point out that for both Bitcoin and Ethereum you can now buy them through exchange traded funds, ETFs. And there's also a futures market that developed first through bitcoin back in 2020, 2017 and for Ethereum. So these, these two currencies, cryptocurrencies are becoming very institutionalized. A lot of institutional investors are, are, are playing in them. Even though their, their market size is small. Retail investors can buy them through stock exchanges using ETFs.
Chris Raper
Correct. And that is just such a great segue into stable coins. And here's why.
Chris Raper
You and I, all of our listeners, you know, either the online broker thing or call me and can execute a trade of an exchange traded funds for Bitcoin or you know, some of these digital currencies. But if you live in Africa or India and you're a day laborer, that, that gets pretty complex. It's undoable. So can you describe a developing world scenario where stablecoin is useful to the inhabitants of that area?
Michael King
How about I describe a stable coin and then let Andreas explain when it would be useful. We can divide our divide and conquer.
Chris Raper
Sure, let's do that.
Andreas Park
But Michael, we need to find the spot where we disagree. This is.
Michael King
So stable coins. If you think back in the 1980s we had money market funds where you could actually have a money market fund with Fidelity or Vanguard and you could write checks against it. A stable coin is the cryptocurrency equivalent of that. It is basically a coin whose value is pegged to the underlying or holdings of either fiat currency or some other collateral. And a moment ago Christy mentioned that there's actually gold backed stablecoins. Now the idea is that you have as many say if it's a US dollar backed stablecoin like Tether, which is has got the initials usdt. They they actually hold US Treasuries and then issue their coins against it and they're supposed to hold it roughly one to one. But there's been some issues around that. But now stablecoins are becoming more regul in the United States with this Thing called the Genius Act. And it was announced that we're going to introduce regulation of stablecoins in Canada in the most recent budget. So stablecoins are kind of a crypto, a digital currency backed by some sort of collateral, usually fiat currency or something else that you can use and transfer online. So over to you, Andreas.
Andreas Park
So, you know, obviously everything Michael says is correct about what a stable coin is, what it allows people to do is essentially instead of using a cryptocurrency to move funds around, you can actually use US dollar equivalent to move around. It's. It's of great use for people who have a poor currency, you know, generally speaking. And it is a great, it's a great value to move money around, particularly across borders. I mean, there's so many countries where the money that people use is not worth a paper that is printed on, where people just simply would like to have a better currency in their hands. If you travel around the world a little bit, and if you, if you look through history, there's so many countries that for some point or another used another currency as the means of payment and also as the storage of value. This is almost like a given everywhere. So I grew up in Germany. I vividly remember the fall of the Berlin Wall. And at the time, people in East Berlin were extremely keen to use the Deutsche mark as opposed to the eastern German arc. Same in Russia. Russia for the longest time used dollars as a means of payment for anything that was of value. You want to buy an apartment in St. Petersburg, you need to have US Dollars to do it. You can't do it in rubles. Now the problem for all of these, in all of these transactions is you actually need to have the physical dollars in order to make the transaction. And that makes it very, very difficult because you need to get the money from the United States and move them over. And that's a real constraint for many countries with stablecoins. It's no longer that big of a. Of a deal, right? So you can do a trade internationally in any different form, and the money essentially is available in your crypto wallet. It doesn't. There's no physical movement. There's nothing restricting the usage of the dollar anymore. So this makes it incredibly, makes a stablecoin incredibly powerful tool for people in countries that face, for whatever reason, a weak currency or other pressures and who need a store of value that is not given by their own currency. For a small business that deals across the US it is just very difficult to arrange. With a stablecoin, you can make the transfer seamless and fast. This is where actually the threat for Canada comes in, by the way. Because if we don't have a mechanism by which small businesses can off ramp the US Dollar stablecoin that they receive in payment, then they have to find other ways to use it and then it becomes the payment tool of choice, maybe between other suppliers, possibly even domestically. This is where the risk arises for Canada for dollarization, if you want.
Chris Raper
So do these stable coins drive us towards an increased dependence on the US Dollar, or does it have the potential to go in the other direction?
Michael King
Okay, so let me jump in here. So I did work at the central bank. So central banks actually hold foreign exchange reserves and they used to hold gold to back the money. And in some cases they also hold government bonds. The Canadian government holds a lot of US dollar reserves as well as euros, yen and Swiss francs. So is the Canadian dollar a stablecoin? Is it backed by foreign currencies in some way? You could argue that it is. What's a stablecoin doing? It's providing us with an electronic means of payment. It's not an investment. Just so everyone knows. You don't buy stablecoins because you want the value to fluctuate. You absolutely want it to stay at $1 per stablecoin. You just want to be able to transfer it very quickly and electronically. So I don't think it's a question about us losing our sovereignty by having stablecoins, although we might have stablecoins backed by some other asset other than US Dollars. We could hold a mixture of currencies just like we do with our current foreign exchange reserves. It could be dollars, euros, yen and Swiss francs as well as we could go back to gold, which we sold.
Chris Raper
Yeah, we were real brilliant on that one. Yeah, Every.
Michael King
Every central bank did, except for Switzerland, I believe.
Chris Raper
Yeah, yeah. I say today we have central banks back buying gold hand over fist because of money printing going on primarily in the US dollar.
Andreas Park
But there is a question about the transactional use of a stable coin, I think. And so this is what I was trying to. Everything Michael says is Obviously I agree 100% with. Right. About the backing and all and like. But there is a real question. If people find, for some reason or other, they find a certain type of transaction is only doable in the US Dollar or is more convenient to do in the US Dollar, then that becomes a problem. I think for us as Canadians, the importance is that we simply have a very convenient, easy to use equivalent to the US dollar so that we actually don't you're not forced to use the the US Dollar. I think this is so that you want to remove as many frictions as restrictions as possible so as to compete in the transaction domain. My Michael may disagree because you may say it's not necessary. Right. You have to disagree with me. Go for it.
Michael King
Oh well I have to disagree with you because you know, for the listeners who can't see it, Andres is wearing a just a classic Christmas sweater right now. And I just have to say it's far too early to be wearing Christmas clothing. Andreas, on a P.O. now over to you Chris. Which topic do you want to talk about next?
Chris Raper
Well, this is a related question. If the US continues to spend on beyond its means and clearly they are and not to throw all the market US most central banks are doing the same thing. Could we see a world that moves away from the US dollar to a gold backed stablecoin?
Michael King
Well, there was a suggestion about five or six years ago where Facebook was trying to put together a consortium to come up with a coin that they called Bibra which would be used for electronic money. And they had a lot of partners, no banks, but a lot of financial partners. They were basically seen as a competitor to the US dollar and they got shut down very quickly and that project basically didn't go anywhere. Stablecoins seems to be, you know, another alternative. But you don't have to have US dollars as the backing of a stable coin. You could have euros or other, you know, as you point out, gold.
Michael King
Will. We're, we're seeing kind of many different countries and many different central banks getting nervous about the rising debts and deficits in the United States. So I think the markets are going to decide they're, they may continue to hold a large percentage of US assets but they're not going to be exclusively holding US assets. So I do think that we're going to see a move away from say the US dollar for stablecoins to other currencies.
Chris Raper
Andreas, what's your take on other currencies and specifically gold backed stablecoins?
Andreas Park
Well, I mean at the end of the day money has network effects, right? And so the question of usage derives from whether or not people want to use it and find it convenient.
Andreas Park
When it comes to so if the question is one, will we move to a gold backed currency per se, I think this is always we know that this is problematic because the amount of gold is fixed, the amount of economic activity is still growing in the world. So that means that the price of my money has to Decrease. If you have decreasing price of money then that essentially means you get deflation. So that's why we actually think that gold is not a very good currency. It is entirely possible though that people believe that for some transaction of value or another, a goldback stablecoin is useful. At the end of the day though, you have to ask yourself why bother with the goldback stablecoin then may just as well have to go directly. Right. And own it.
Chris Raper
It's pretty inconvenient to carry around though.
Andreas Park
Well, what I'm trying to say is it could emerge. Right. I find it hard to imagine that it does. Right. But because, because the problem again if actually if you have a gold backed stable coin, let's say you come again back with a deflationary argument. So means that, you know, the price of the gold backed stablecoin would have to increase over time which means that it's a bad idea for me to spend it because I want to hold on for it. Right. And so that makes it, that reduces its transactional value.
Michael King
Okay. Yeah.
Chris Raper
And the actual gold supply only, only increases about 3% a year. So it's, it's not fixed but it, it doesn't expand very rapidly.
Michael King
Yeah, yeah. I was going to say that this is another topic that Cam Harvey takes up in that paper on Bitcoin versus gold. And gold is very impractical for many reasons. Digital money has so many ways that it can accelerate economic growth and solve so many problems and pain points. I think that different countries are, are looking at currencies, what they call central bank digital currencies which are digital versions of their own currency.
Chris Raper
Right.
Michael King
Canada is not. They've done a lot of experiments and they decide that they don't need it now but in it's still moving forwards in Europe. So you'll probably get a digital euro and you already have a digital version of the Chinese one. So you know, the question more you might want to ask Chris is do we need stablecoins if we have a digital version of currencies? And that's another whole other conversation.
Chris Raper
So what's the answer?
Andreas Park
Well, you can look at the UK solution. In the UK Stablecoin issuers will actually have access to reserve accounts. At which point the more as in reserve accounts, the more it's actually going to look like a cbdc, a central bank issued currency for in all but name. And then if you think about the, I mean if you just think of the bare principle of how stablecoins have to be backed by the genius act and also by whatever comes from in Canada from the Department of Finance. They have to be backed by essentially high quality liquid assets, which means very, very short term Treasuries and overnight reverse repos. And that is essentially almost the same as a reserve. This is the safe asset. This is by definition there's no more risk in it than the CBDC would have. So in all but name, it's already a cbdc. It's just not something that is issued by the bank of Canada or by a central bank, which has enormous advantages on a number of dimensions. In particular, if you want to create a CBDC in a country like Canada is a very complex problem because you can create a stablecoin for your customers. Right. This is a market. You choose what your market is. A CBDC has to be something which is created by the public sector and has to be available to everybody. So that includes people that live in remote areas where there's no Internet connection or Internet connectivity. It has to be for people who are illiterate. It has to be done for people who live on the street. So you need to have this available for anybody. And that is such a complex problem which is so expensive and difficult to solve that, you know, this is probably the, you know, the Eglinton LRT is nothing against that.
Chris Raper
And that's been a challenge. Yeah, for sure. I just want to roll back. We talked about Tether briefly and Tether being the issuer of probably the, the biggest US backed stablecoin and they're also the biggest issuer of gold backed scale coin XAut. They're also headquartered in El Salvador and they don't have full audits yet.
Chris Raper
So there's always this, this conundrum and Andreas wants to get in here. But I'll just pose the question.
Chris Raper
You know, Tether is competing against Circles, USDC and to a lesser extent PayPal's PyUSD. PayPal has a worldwide network. Where do we all land in this?
Michael King
Can we trust them if they're based in El Salvador? And the answer is that their compute servers may be there, but they actually are originally headquartered in Hong Kong. Hong Kong, Yeah.
Chris Raper
Yeah.
Michael King
Tether definitely has the, the hugest, you know, the first mover because they started actually in 2014, whereas the second one started in 2018. You're going to see more competitors to these, these coins, but they have to be regulated. And that's what's in our, the federal budget is that they will be regulated because we don't want runs on coins.
Andreas Park
Okay.
Michael King
Like a bank run.
Chris Raper
Right.
Michael King
The regulation and auditing of the collateral is going to be probably an important part. Andreas, you want to get in on that?
Andreas Park
Yeah. So if I may, actually. So I think so we have to just think about the, the where we are in time. Right. We are in 2025. Stablecoins like Circle and Tether have been around since 2018. I think Circle came 2020. So essentially what we currently see, the regulation, is solving this problem from five years ago. Now, if you project forward, what is actually the right way to issue a stablecoin? The right way to issue a stablecoin is as follows. Government bonds make it to the blockchain. And so instead of issuing them in the old fashioned system, actually the government directly issues its treasuries as a token on Ethereum or whatever blockchain you have. Once you do that, you can actually create the stable coin directly against each of these bonds. Right. So then the asset is secure. You know exactly how many stablecoins are outstanding. So you know exactly the liabilities, you know exactly the float of this, a run on these is just unfathomable. Right. And so that's actually where the future is going to go. This whole business that we're now building up where there's somewhat like some, some server sitting on top of a blockchain doing stuff and we need to audit it every once a month to make sure that everything there is hunky dory. Where we still jerry rigged together the old system and the new. That's just not very imaginative. The real way to do it is the government does it directly and we're done. Then it's as secure as it gets.
Michael King
Yeah. Because Chris, the word blockchain has now become generic to mean any kind of distributed cryptographically secure ledger. You can put anything on that ledger, including U.S. government bonds. People would be able to see all the collateral. Many copies would be distributed across computers, which is why we call this decentralized finance. It's now the ledger recording both the government bonds and the coins issued against it. Anyone can see it, everyone can download it and can verify it, but only certain parties are able to update that ledger, just like they do with Bitcoin.
Chris Raper
Okay, so how many years away are we from a central bank issuing their bonds on blockchain, whether it be Ethereum or somebody else. And who's the first country to do it?
Andreas Park
The US is going to do it and they're going to do it within the next two, three years.
Michael King
Yeah, I agree. I don't think Canada's ever been a leader when it Comes to technology. Just think about the Phoenix system. If we, if we can't get our government payments correct, we're not going to be pushing on blockchain. But I wouldn't be surprised also Switzerland because that's where Ethereum is based and Switzerland has a huge crypto community.
Chris Raper
So once, once a central government, whether it be Switzerland or the US issues their bonds on blockchain, does that potentially put Tether and circle and, and PayPal's USD.
Chris Raper
Stable coins out of business, so to speak?
Michael King
No, I think it actually helps it because they'll be able to hold those assets as, as collateral for their, their, their stable coin and you won't have to be worried about, you know, people, you know, what happens to those assets. You're gonna, they're gonna be safe, you're gonna see where the ownership is and there will be no auditing problem.
Chris Raper
So one of the things I'm getting out of this conversation is.
Chris Raper
Blockchain specifically and I guess to a certain extent cryptocurrency or stable coins are here to stay. It's a bit like AI we're not stuffing this genie back in the box.
Chris Raper
So as you think out, I was going to ask 10 years, but that's, that's too far for most of us to think five years from now. Andreas, what does the world look like in this realm?
Andreas Park
Okay, so.
Andreas Park
There, there are major problems to be solved still, right. But I think at least we're now on a path where this system can evolve in such a way that it can also be done legally and that we can actually solve some of the real problems with crime and so on better, which was very hard to do when everything already operates in the gray zone anyway. So the way I see this unfold is as follows. First of all, I think blockchain does not get uninvented, so it doesn't go away. I don't think it is going to be a replacement for everything that we do in finance. Right. So that would be a growth overstatement. What I will see is that it will be used, it becomes an important settlement infrastructure for a very large number of transactions. Cross border transactions, capital markets operations, they are much better, much easier to arrange actually on a blockchain than they are in the current world. There's lots of problems that have to be solved, but I think we're going to see a move there. And you know, at the end of the day, capital markets and financial institutions, they do whatever is best for them, right? We see the tokenization of assets, of equities of anything that exists. And we will see markets emerge for that. And so we're going to see a huge integration and usage of that space. But it will not replace everything that we have in our current market. It's going to be a competitive competitor in many aspects toward the existing world. But I think financial institutions will actually be one of the adopters of it and actually make it use for them.
Chris Raper
And Michael, your take?
Michael King
Yeah, so my whole book basically is looking at how technology is changing financial.
Michael King
Services in general, of which blockchain and cryptocurrencies and decentralized finance is one part of it. But technology is changing many different industries. Donnelly Finance and technologies like this are going to make our lives better. They're going to be. We're going to have access to financial services faster, cheaper, more customized. 24 7. In a, in a way.
Michael King
You know, that is a more delightful experience for us. We're not going to be think, you know, we're right now we're captive to banks and other financial intermediaries that overcharge us and nobody. These are pain points that many people like. Going to a bank is something I would, you know, I do not like doing as much as I don't like going to a dentist to have a cleaning, you know, but we, we, we sit through it in the future, not, not so distant future, technology is going to hopefully remove these pain points and we can all get on with what we enjoy doing every day, whether it's being with family, having experiences, going for education, you know, contributing to society. And hopefully this is all going to be plumbing that we don't see anymore.
Chris Raper
That would be too totally awesome. Here in Canada, we have the technology. We verified that. What we don't have is the regulation that allows the technology to be used. And we have tremendous vested interest in the existing system, particularly within our Canadian banking system. Any comment there?
Michael King
Yeah. I mean, one of the CEOs of the banks describes our banking system as a ruthless oligopoly. The senior Deputy governor of the bank of Canada said that one of the obstacles to productivity growth and wealth creation in Canada is a lack of competition in our banking sector. I think we all experience that and those are so. Yeah, it might. When I'm asked, you know, what do I think about the oligopoly of Canadian banks? I say, well, you better buy their stocks because otherwise you're going to be paying and then you're not going to be benefiting at all.
Chris Raper
I wonder if that changes in the future, like if this technology.
Chris Raper
Inevitably there's.
Michael King
Going to be like a reduction in their market share, which is going to lead to lower costs and thinner margins for the banks. And that's going to benefit Canadians because it's going to make life more affordable.
Chris Raper
Andreas, do you want to get your dibs in there?
Andreas Park
Well, I certainly would. Look, I mean, on the one hand, our banks are incredibly important. Nothing works without financial institution borrowing and lending and so on. Our banks make an enormous amount of money. Right. They have, they have unfathomable margins compared to what we see in other countries. And they actually don't even earn that much money outside of the country. Right. So they're not that super that they're basically extracting rents. And I think I would like to see a world where that ends. Right. And I think we all would benefit from it. It is essentially, it's a tax on all economic activity in Canada and we allow it to happen. And it's, it's, it's, it's just simply harmful for us.
Michael King
Right.
Andreas Park
For banking.
Chris Raper
Good deal. Gentlemen, we started out this conversation. Michael, you, we, we coined you as a skeptic. But the more I talk with you, I actually don't believe that is true. I think maybe you're a skeptic on bitcoin, but you're certainly not a skeptic on blockchain technology and how it's going to transform our world. Did I get that accurately?
Michael King
Yeah, I would say, you know, unfortunately, blockchain was overhyped when it first came out. But many commentators at the said, look, the, the changes that we're going to see in 10 or 20 years are going to be extremely large. The change in one or two years is going to be, you know, imperceptible. So with a lot of these new technologies, we do see the, the benefits over time. We don't see them immediately. And I think we're going to see some big changes to financial services, including the crypto space that are, they're underway right now.
Chris Raper
And Andreas, you came in as a believer or promoter, or at least that's how I positioned you. And the. I'm curious if there's anything that.
Chris Raper
If something in the future occurred that would make you change your mind. What do you think that would be?
Andreas Park
I think the one thing that I'm really concerned about is the usage of crypto assets for crime and what it can enable. And, and I think with a proliferation of stablecoins, we really need to think about this very carefully. So let me explain this as follows. A lot of people say Bitcoin is All about crime, right? That is a. It's a silly notion on many ways, but in particular when it comes to the usage by criminals as a silly notion, because what makes any kind of item valuable to criminals for money laundering is when it is also used by legitimate users. And so the more legitimate use case there is, the more valuable it is for criminals. And so with the proliferation of stablecoins and them being used in real transactions, this is where it becomes difficult, it becomes a really big challenge because all of a sudden we don't want to have a situation which these assets can be used to move money around from criminals at scale. Now Michael will immediately say, well, but everything is traceable and so on. It's going to be easier found. But that raises then all the entire privacy complex, which is that Michael said correctly that transactions on the blockchain are pseudo anonymous. But once I send money to Michael, Michael knows exactly who I am and can look at everything that I ever done. And I'm not comfortable with that. Sorry Michael, I love you, but not that much.
Andreas Park
That's a problem. So we need to solve that. Now I think there's many ways in which we can solve it, but we need to make it happen, right? We need to incentivize it. So I give you one example. So one common problem that we have in our current world is somebody sends money to the Prince of Nigeria or something in a fraud scam or I mean you have this in the so called pig butchering romance scams, but people send money to some party and say this is Person X. Now this is not verifiable. It's not verifiable even in our current Interact system, which is really mind blowing to me.
Andreas Park
With a well designed crypto wallet, you could actually have a world in which you say, I'm sending money to the cra, but before I send money to the cra, my DS piece of software, check if the recipient is actually from the cra, because that's a common scam that people have. And then you would see the wallet would say, buddy, no, this address has nothing to do with the cra, so to speak. Right? So you can avoid, you can actually use technology possibly to avoid being scammed, being taken advantage of and so on and so forth. Right? You can create environments in which Michael and I can securely and privately transact. And we can do this because we both know we're sort of like authenticated users, but we don't need to know each other and we don't never really find out who we are. From the wallet and itself, this can be done, but we need to incentivize doing it and we need to support people who want to work on this.
Andreas Park
So unless we solve that problem, I'm, I'm actually very worried that this could be also abused for great evil.
Chris Raper
Good and bad and everything. Michael, how do you respond?
Michael King
Yeah, I agree, I agree that.
Michael King
One of the biggest use cases appears to be crime as well as payment of hackers ransomware. There's, I was looking for it, but I can't put my hand on it right away. There was a study that looked at this because the US government has, you know, seized seized assets from some criminal activities and have recovered their actual digital signatures and have been able to, to take the ownership of the, the bitcoin. And you, a number of researchers have, you know, traced through hacks of decentralized exchanges the actual addresses of different criminal act criminal actors and been able to put together a picture of how, you know, cryptocurrencies like bitcoin have facilitated this. Unfortunately, real money is used for the same kind of illegal activity, which is why we have such a stringent anti money ring, anti money laundering laws. Know your customer rules.
Michael King
This is a new financial system that is evolving and it's got the same problems that our financial system did. And it's the wild west right now and it's coming under regulatory control. And perhaps people who originally liked decentralized finance because it was not regulated are not going to appreciate that. But for it to be really valuable for society, there's going to have to be controls. And it's like adding seat belts in cars. Not everyone liked it, but it, it saved lives. And we also put in place speed limits on roads. So I think this financial system is going to evolve and they're going to be very valuable use cases and we're going to have to stamp out the ones that are, that are destructive.
Chris Raper
Gentlemen, that seems like a good place to end things today. Dr. Michael King, Associate professor from the Gustafson School of Business, University of Victoria and author of Fintech How Technology is Transforming financial services. And Dr. Andreas Park, professor of Finance at the University of Toronto's Rotman School of Management. Thank you for being here today. I've learned so much and certainly expanded my thinking and I have to believe that's true of our audience as well. I deeply appreciate you taking the time. If you are interested in learning more about how technology is transforming the financial landscape, the link to Dr. King's book is in the show notes or in the transcript in addition to that Cam Harvey's Duke University study Gold versus Bitcoin. Very current. A link there as well. It was Only published on October 28th. To our listeners, thank you for taking the time today. If you are curious as to what else we do to help our clients live out their greatest aspirations, you can check out our website@aspirawealth.com and book an appointment from there. My name is Chris Raper. I am co Founder and Wealth Advisor at Aspira Wealth of Raymond James limited Bidding you good day and may God bless. My thanks go out to Nathan Clark for composing our music. And thank you to Jasmine Manus, our Marketing Director and Editor in Chief for this podcast.
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