Mostly Money

95: Bitcoin, Ethereum, Blockchain and more, explained by economist Andreas Park

April 24, 2021 Preet Banerjee
Mostly Money
95: Bitcoin, Ethereum, Blockchain and more, explained by economist Andreas Park
Show Notes Transcript

If bitcoin, cryptocurrencies, and blockchain have you feeling confused, THIS podcast episode is for you. 

There is a strong correlation between bitcoin cheerleading and bitcoin’s price. Whenever the cryptocurrency has seen a rapid increase in price, mainstream media coverage rises and social media goes crazy like it always does. But… how many people really know what they are talking about? 

Is this another case of return-chasing behaviour combined with “a little knowledge being a dangerous thing”? My guest on today’s podcast is one of the few people who can help answer a lot of questions about cryptocurrencies. Dr. Andreas Park is a professor at the University of Toronto and his research and interests have been focused on financial market structure, financial technology, and studying innovations in cryptocurrency and blockchain. 

And don’t worry, whether you already know a bit about cryptocurrencies or are starting from scratch, I think we hit a nice balance between explaining the basics and diving a bit deeper into the actual economics to explain how you can judge for yourself if the space is suffering from too much hype or not. 

Resources and Links for this episode:

Twitter: https://twitter.com/financeUTM

Website: https://sites.google.com/site/parkandreas/

YouTube: https://www.youtube.com/user/andreaspark2812/



Andreas Park:

Imagine that you doubled your population that wants to do economic activity. If if all these new people would want to use money in the future, then they they just need the coins available to themselves. And so if you have a limited number of coins that are available, I think this is a problem right? Because you you have scarcity in the coins, and that all of a sudden creates value to holding on having these coins all by itself. And that's a problem right because because you know the act of holding money should not be something that is that is valuable.

Preet Banerjee:

If Bitcoin cryptocurrencies and blockchain has you feeling confused, this podcast episode is for you. There is a strong correlation between Bitcoin cheerleading, and bitcoins price. Whenever the cryptocurrency has seen a rapid increase in price, mainstream media coverage rises, and social media while it goes crazy, like it always does. But how many people really know what they're talking about? Is this another case of return chasing behavior coupled with a little knowledge being a dangerous thing? Well, my guest on today's podcast is one of the few people who can help answer a lot of questions about cryptocurrencies. He's a professor at the University of Toronto and his research and interests have been focused on financial market structure, financial technology and studying innovations in cryptocurrency and blockchain. And don't worry, whether you already know a bit about cryptocurrencies or are starting from scratch. I think we hit a really nice balance between explaining the basics and diving a bit deeper into the actual economics to explain how you can judge for yourself if the space is suffering from too much hype or not. I think you're gonna find this episode. very enlightening. This is mostly money and I'm your host Preet Banerjee, joined by Dr. And Dre is Park is going to explain Bitcoin, blockchain and all things crypto in a mini Crash Course. Let me introduce my guests with a bit of his background. Andres Park is an associate professor of finance at the University of Toronto with appointments to the Rotman School of Management and the Department of Management at UTM. He currently serves as the research director at the fin hub, which is rotmans Financial Innovation Lab. He's the co founder of the ledger hub, the University of Toronto's blockchain research lab, a lab economist for blockchain at the creative destruction lab, the economic adviser to conflux chain and a consultant to the Ontario Securities Commission, and Iraq, the investment Industry Regulatory organization of Canada. Andres teaches courses on FinTech and financial market trading and His current research focuses on the economic impact of technological transformation such as blockchain technology. He recently co authored a design proposal for a central bank issued digital currency commissioned by the Bank of Canada. And that was actually the impetus for me reaching out to them. And I've had the pleasure of participating in a number of events with Andres at Rotman either as a speaker, panelist or moderator. And so when the email came in from Rotman events about an event where three different groups who had authored design proposals for the Bank of Canada for what a central bank digital currency might look like, and I saw the entry This was one of the presenters, I tuned in and it was incredibly enlightening. Andrei is welcome to the show. Well, thanks for having me, Preet. There are a lot of people talking about various aspects of cryptocurrency, mostly Bitcoin. What percentage of people know what they're actually talking about?

Andreas Park:

Well, that's a really small number, if you ask me.

Preet Banerjee:

Yeah, you talk to me about, you know, the different voices, you have people who are cheerleaders, you've got people who really know what they're talking about. And you've got a whole bunch of people in between. So tell me what your sense is being an expert. From when you hear either things in the media, you're reading blogs, looking on Twitter, what's your sense of how much talk is actually backed up by people who know what they're talking about?

Andreas Park:

Well, you got to be cautious on which part of the area you're actually talking about. Right. So you know, I think people have by now understood reasonably well what Bitcoin is not necessarily how it works, but you know what it is and what it isn't is, or that's that's a mouthful. But then when it comes to you know, the the part about That has potential impact. And that's really interesting. I think very few people are actually in the know, understand, well, what is going on, and then even even the people that are in the blockchain space, that there is still, you know, a whole spectrum of knowledge and necessary knowledge that you need in order to understand that. So let's take this. So I'm an economist by training. So I understand, you know, some of the economic implications and the mechanisms that are necessary for, you know, some of these tools that exist. And then there are a lot of people from engineering, computer science, they understand the tech really well, but they don't understand, you know, in the design that you put in this economic implications, there's design questions that are directed to economic incentives, and they're not aware of them, or they don't care about them, or they don't understand them, like, and then on the other end of the spectrum, I am I don't really understand all the technological details of how things are done. And I still ask them really dumb questions all the time to some of my colleagues. Right. So it's, it's interesting times there, which makes this what makes his area so interesting is also that it really requires a big view of many different thought processes to come together. So it's not just tech.

Preet Banerjee:

Yeah. And and I think, you know, a lot of the conversation is centered around Bitcoin. But there's so many other implications for the underlying blockchain technology. There's so many different cryptocurrencies themselves beyond just Bitcoin. So Bitcoin gets a disproportion amount of attention generally for definitely the lay audience. But we'll get to all that let's let's start from the beginning, if you will, or at least we'll pick a point in time and call this the beginning. And that would be 2008. With the publication of the Bitcoin white paper. Can you explain the significance of that white paper? And what it led to?

Andreas Park:

Well, yeah, no, it's actually a pretty clever piece, right? So what what this person Satoshi Nakamoto did was he took two existing pieces of technology and put them together in a smart way to create Bitcoin, right to create digital money if you want. And, and so the genius is, and let me say what first what the problem is the, the problem is that there were attempts before to have digital money. And the problem that people couldn't overcome is a double spend problem, right. So like, if I want to give you money on the internet, I have to give you the original if you want, right, when I send you a PDF, or a picture, that's really just a copy, it's never the original. But for money, you need the original. And so they could never really nobody could really solve the problem of, you know, making sure that you don't spend the same dollar twice. And what Satoshi did was he basically combined the idea of a blockchain, which is the linking of pieces of information in a cryptographic manner, so that you could see you could detect any manipulation with what's called the proof of work protocol, which is does a number of things, it is one, it creates the ability of a network to have consensus about, you know, a change in the network. And it also makes it really hard to, you know, to manipulate the past. Because what it really is. So there's a lot of talk about, you know, the energy usage and all of that. But really what it is about it is a random mechanism to give people in a very large network, the ability to create a new entry in the blockchain on the accounting statement if you want, right, and so,

Preet Banerjee:

yeah, well, I want to dive into that a little deeper. But before we do, I want to talk a little bit more about the motivation behind coming up with this idea. So I think you you talked about part of it. And that is solving the double spend problem, because with physical cash, you don't you have minor counterfeiting, maybe it's not minor in some circles. But effectively, if I have a $20 bill, and I pass it to someone, I can't spend that same $20 bill and give it to someone else, because someone else has that. So there is no double spend problem with regular cash for the most part. And so the double spend problem was the one of the main motivations, but when it comes to, you know, a trustless network, the decentralization of this ledger, which is maybe we can explain the blockchain itself for Bitcoin and the other types of blockchains out there is basically a big accounting ledger.

Andreas Park:

Yes, that's right, exactly.

Preet Banerjee:

And so what this ledger does, and the reason it's called the blockchain is that is a chain of blocks and this block chain gets longer longer as more and more blocks get added, and each block represents the last batch of transactions To add a block onto the official blockchain, you have to as a sense of, you know, all the nodes who are out there taking a look at all the transactions, they're basically solving a cryptographic problem. And part of solving that problem add to that chain means it has to line up with all the previous transactions that have ever done, been done in order to get accepted by all the nodes. So let's talk about this decentralized idea. So when you take a look at a regular ledger, you know whether it is a company that is selling things, they have a record of accounting of inventory, a bank has a record of all transactions that go in and out between their customers and other banks with a central bank. But they are centralized, they are owned by in many cases, a single entity. So what is the idea of the blockchain in terms of it being decentralized? And why is that important?

Andreas Park:

So and this is a great question, actually feet. And I think this actually goes exactly at the core of what the what the benefit of a blockchain is. Now, it's often portrayed as you can do transactions without needing a trusted third party, right. So you can basically anybody can contribute to it and everybody is happy, but nobody has to trust anybody for it to work. Now, this is a pretty cool idea. But I think the more important idea here is, is that you think about a common infrastructure and a common resource that anybody can use, where there's no restriction of usage. So there's no nobody or controlled access to it. But really, the important part is, it's that it is common for everybody. So you know, you don't need you know, it's not, it's not a siloed ledger, if you want a siloed piece of where the information is kept. And I think if you think about, you know, collaboration of firms of individuals, when when we all work on the same item, or the same, you know, same problem, or the same on the same data at any given point in time, that creates, what it takes a lot of inefficiencies. So think about you and I read, you sent me a Google document here before, before we talked right? Now, you give me access to this document, and we can edit it at the same time. Imagine what that does to a workflow on a phone. And the same holds. If you think about a blockchain network, as we all see the ledger of entries of where, where the money is, for instance, and, you know, I can trust, you know, if I trust the ledger as it is, and I want to make a promise statement for a payment for you in the future, I can get the information from that single resource. It's extremely powerful. You know, I mean, it's, it's goes completely against what, especially firms think, right, so firms like to think of, they have their own piece of information, it's theirs, and you know, nobody else can look into it. And to have something like data or, you know, sensitive, sensitive information in some form of a common resource. That's a bit scary. But at the same time, it's, it could be very empowering.

Preet Banerjee:

Let's talk about the the use of this blockchain technology. And first, maybe it should sort of separate, you know, blockchain versus Bitcoin as a currency. These are two separate ideas. So I want the listeners to think right now we're talking about the blockchain and the technology that underpins a number of different use cases, the biggest one that gets the headlines is currency and transactions. So when it comes to payment networks around the world, these are, you know, you have big payment processors like Visa, MasterCard, interact. And they are tracking all these transactions. And they each have their own ledger, which sort of says, Here are all the reconciliations between all these different parties. And so they have a lot of power and a lot of ability to charge people and merchants people a lot of money for these transactions to be processed on these networks. And so by disintermediating them and just having a ledger where people can just interact and make transactions directly recorded. The promise was that this would lead to much less transactional costs, maybe faster transactions. So can you talk about what that sort of motivation is and how that is actually playing out in the real world?

Andreas Park:

So maybe we should. So this is, again, it's a it's an interesting and excellent question to think about the maybe we should take a few steps back and just the sort of first a few things about Bitcoin, right? Because I think actually Bitcoin, if you think is like blockchain one point, or what's the first implementation of the whole thing, and it really has only the single purpose of shifting money back and forth, right. So by the way, it's with bad structured, and maybe it's useful if we think about aetherium for a second, which is the blockchain 2.0, which is really what you're alluding to right so that you have a ledger and a network as well. Robots can do a lot of different things at the same time. And maybe it's maybe just, you know, I had some really cool stories about how ethio magic came into being. This is secondhand information that may be useful for your listeners anyway. Right? So,

Preet Banerjee:

because literally

Andreas Park:

the story behind it, there is and it's actually quite cute. Right, so you've you've heard of vitalik boo Turin or Butera? anwers. Right. And so the story goes like this is he when he was a kid, and he's still pretty close to being a kid. But he, when he was a kid, he was into computing. He was into computer games, and you know, computer games, you have these characters that you create over time, right? So they have weapons and special skills and all that. And then from one day to the next, the gaming company decided to kill that character off, right, so to restrict access to it. And, you know, it's been months actually creating that character, and it was absolutely furious about it was, you know, I actually was not just furious, very sad, I was crying asleep and all that rain. And that's how his dad got him into bitcoin. Why? Well, because Bitcoin is what's called censorship resistance. So no, no higher authority can take away your Bitcoin, which is, again, a very powerful statement, you know, if you think of many countries in the world, where you know, that you have authoritarian governments that can take away your money for whatever reason they want, right? legitimate or not. And so, you know, Bitcoin, you can't do any of that. So this is how the kid got into bitcoin. And then, you know, when you started, he was working on Bitcoin and he had this idea that he worked on a problem which is so called colored coins, which is where you use the Bitcoin network to create different types of coins or assets, such as a character and again, right and then he realized this was a problem was was really hard to solve with Bitcoin, it's just he was just was made for that. And so then he had this idea of because it was also in computer science and all one maybe we can create a network which can, you know, just execute code for us. So that we all agree on, on any change of of computing code at any given point in time. And that's how a theorem came into being right. So it is really a gigantic computing network. Now not not to be mistaken for a supercomputer, which can do a lot of computations. This one can do in a very rudimentary computations, but it can do them in a decentralized manner. Yes, so now I want to because here's where the difference comes into the interface. Right? So if you're an also has a cryptocurrency, but it serves a completely different purpose than Bitcoin. So if theorem is not set up to be an infrastructure to shift digital stickers around, the reason why you have the cryptocurrency in aetherium, is because when you have a piece of code, you can write just a corporate is just four lines long, which goes into an infinite circle, right? And so if you would run something like this on a decentralized network, you would crash networks. So for that reason, you need to have a way to limit that. So how do you do this while you do it by paying, so you have an economic incentive not to run code, which goes into infinite loops. And so the reason therefore, for this network to work is actually that there is something of value, which is, you know, the ether that you have to pay for the execution of code, and that there is a limited resource for that. So you know, it's a philosophically, that's actually really different from how Bitcoin was conceived, and what Bitcoin was doing, which is pretty, it's, you know, using z already how the, for me personally, is really interesting how the economics comes into this.

Preet Banerjee:

Well, I was gonna ask you to, to sort of, you know, put on your economists hat and sort of say, comparing, you know, Bitcoin and the Bitcoin ecosystem to aetherium. It looks to me like aetherium has so much more possibility behind it, then then Bitcoin, like you said, 1.0 versus 2.0, is probably a really great way to think about it, because it tackles maybe more head on some of these issues, that would be a very much interest to an economist. And so maybe I can, you know, if we go back to, to Bitcoin, and in he talked about how a lot of people pay attention to the electricity consumption, I do want to spend a little bit of time talking about the whole notion of mining and incentives, you know, and what is the incentive to commit resources to verifying the next block that gets added to the blockchain? So can you talk to me about the incentives in that, and how that relates to electricity consumption?

Andreas Park:

Yeah. So let's talk about how this actually works. So So the basic principle that you need for this network to work is that actually, let me let me put it differently. So if you want to steal from this network, right, what you need is you need to have the ability to create multiple blocks predictably over time. Okay, so I mean, you If you had the ability to do that you could steal the money and basically take whatever you want. Now, in order to prevent that, what you have to get is you have to have a mechanism by which, you know, the the next generator of the block is is found at random. So you have, you know, let's say, a million people that all want to be participating in this for whatever reason. And you pick only one of them at random to be doing this, man. So that's, that's basically the mechanism. This is what this Bitcoin mining is actually really all about. Now, why is why is this picking at random, this cryptographic puzzle that you have to solve is really nothing is on Sunday, which you can only solve by making random guesses. Okay, and so, therefore, these random guesses essentially serve as the random mechanism to to select somebody at random to be the winner of this. Now, you can temper this by committing computing resources to it, right, so the more guesses you can make per second, the more likely it is that you will win. But it's still still a random mechanism only for each individual.

Preet Banerjee:

And sorry to cut you off. So when it comes to, you know, the computing power. So a couple years ago, I was building a PC. And as I was sorting out the different parts, I was looking for a graphics card. And I noticed that there was either some anomalous sort of premiums being set on the regular price of these cards, or I just could not get these graphics cards. And then I realized that one of the reasons for this and maybe the main reason was, all these miners, were buying up bunches and bunches of these graphic cards and daisy chaining them together, because that serves the basis of a lot of the computing power that goes into bitcoin mining, is that correct?

Andreas Park:

That is absolutely correct. Because so this solution is random guessing as it is, it's an extremely trivial process, right? Because all that it is, is that you take a bunch of data, and then you add another piece of data to it. And then you run a piece of code, which is roughly 200 lines long. It's called a hashing mechanism, developed, by the way, by, you know, the NSA, the National Security Agency, which is used also encryptions. And all that, that's all that you do. So you know, and that's something which graphic cards are really good at, to do these, these really, really small tasks, but many, many, many times over, as it's, it's not like a computer processor, or, you know, quantum computer, which has to do something really, really difficult. Now, this is really trivial to do.

Preet Banerjee:

That's interesting, because I was gonna ask you about, you know, what, what potential risk is a, you know, quantum computing pose to blockchains integrity, because, you know, in the white paper, the Bitcoin white paper itself, it talks about as long as the majority of CPU power is not controlled by a bad actor, then the integrity of the blockchain is good. In fact, the blockchain itself has never been hacked. Right. That's how good this is. Correct?

Andreas Park:

That is absolutely correct. Yes. There's never been down and never been hacked.

Preet Banerjee:

Yeah, I mean, that in and of itself is a such an incredible innovation, technological innovation. But again, as you said, that's just 1.0 there's so many other things that can be now done. And I get the sense that people are maybe putting too much weight on Bitcoin and they're kind of tying everything together into this one thing. It's cryptocurrency. It's Bitcoin, but there's so much more to cryptocurrencies in the ecosystem, as as you're enlightening our audience with so. Okay, so to get back to the electricity consumption, I do have one more question on this. And I don't know if you saw this, but Kevin O'Leary recently made some headlines because he said that he would no longer buy bitcoin that was mined with unethical energy sources. And the question I have is how the heck would you even know that?

Andreas Park:

This is ridiculous.

Preet Banerjee:

The conversation with Professor Andreas Park continues in just a minute. But first, a few thank yous to listeners who left comments on Apple podcasts, as saw on br z or B or Zed, who found the podcast after watching some of my YouTube videos. Thank you for dropping bias on and smoking Joe who left burger joint recommendations for me the next time I'm in Ottawa, and he recommended the old Dubliner and the poor house, and I'll be sure to check those out. So thank you for those tips. And thank you to everyone who leaves ratings and comments on Apple podcasts. I appreciate them. I do read them all. And if you have either burger recommendations or donut recommendations, please do feel free to leave those in the comments. I'm a sucker for both. And now back to the conversation with Professor Andres Park.

Andreas Park:

Now let's let's be sorted. So you know, I fully agree by the way that so this Bitcoin energy consumption is, is a very sad side effect of it right. But let's, let's take one step back. And let's think about, you know, the energy consumption per se, I would argue, now there's this, there's two things, I'm going to make a little provision at the very end of what I'm going to say. But let's just think about where electricity is produced and how. So we have hydro electricity, we have wind, electricity, and nuclear power, right. So these are major sources of electricity, forget about coal plants and the dirty electricity. But these are, for practical purposes, not co2 in you know, harming technologies at this point. Now, nuclear, of course, we know that there's issues with this. I don't want to put that aside, but it exists for now. Right? So let's go with that. Now, all of these technologies create electricity at times when it's not needed, right. So hydro runs at night, nobody uses electricity at night, windmills, mostly run at night, nobody needs electricity at night. And the same holds for nuclear power, nuclear power is always on. And it doesn't create electricity at night, it just creates electricity at nights when it's not needed. So you know, Belgium had nuclear power stations very early on, and they have all their highways, they have lamps, street lamps, on all their highways, forgetting about the, you know, the damage that you create by light, you know, to the environment. But the reason why they built them is because they had all this excess electricity, and they didn't know where to put it in, it's actually a problem, right? for nuclear power plants. So you have to have batteries of some form, which now we can have an entire discussion about how you know how great electric cars actually are, because they're charged at night, and they can use all of this excess electricity. But you can but when you look at where these Bitcoin mining farms are, so where people put their server farms in order to do the Bitcoin mining, they put them where you have hydro electricity, they put them No, I would not go with wind farms, but they've really put them in areas where electricity is cheap. And and usually in abundance available in abundance. So I would argue if you if you run a Bitcoin mine at a hydro dam at night, right? You know, I you cannot go out and say that this is a waste of electricity as such, to the same degree as it would be if you run it during the day at a coal factory. So the same holds for nuclear power. So if you use excess electricity for that purpose, maybe it's not so bad. Having said that, these farms also create a lot of heat. So that, you know, contributes to global warming. So right. Now, all I wanted to say here is that it is not a it's not entirely accurate. If you just look at the overall energy consumption say, Well, this is all terrible if you have to build new coal mine coal plants in order to to use this. That is not the right view on this one. But over time, we want to get rid of this proof of work protocol, for sure.

Preet Banerjee:

Right. So let's tie this back to the incentives that we talked about from miners to why would they commit all these resources to doing this?

Andreas Park:

Well, there's two things that they get right. So first, they get fees from users, that is in a theorem is now a major source of income, it's on the order of several million dollars a day, right. And the second thing is, is that every time you create a block, you get to give yourself a reward for it. And that reward is coming in for Bitcoin and your bitcoins in ether, it comes in New eath it's sometimes referred to as the Coinbase. reward. Right? So and that all that means is you basically create or you mint, new cryptocurrency at that point.

Preet Banerjee:

And so let's talk about parallels to traditional mining industries such as, let's say gold. So, with gold, if you take a look at all the gold that has ever been extracted from the earth, compared to the rate of extraction today, you have stock versus flow, and that ratio is about 50 to one. And it's getting harder and harder to find more gold, right? Yeah, to expend more energy and resources to to find the next, you know, tonne or whatever. And with Bitcoin, part of the thinking behind building it, use some of those principles and so that there is a finite number of coins that could ever be mined. And the reward decreases over time. I think. So, can you explain how that works and how they build scarcity into the system?

Andreas Park:

Well, you know, this is essentially okay. So, so first let me let me just say one thing quickly, e theorem actually has no limit to it, right? And many blockchain networks that are built now I don't have that limit. This is really something unique to Bitcoin. Okay. And it was a bit of a so this is where technology sort of get mixed with philosophy right of what they thought was right and wrong. So, you know, the so part of this white paper of satoshis was that you have a limited supply of Bitcoin. And it sort of came at the time, the financial crisis when, you know, there was, you know, this whole talk about flooding of markets with extra money, and so on and so forth. I think there was a lot of misconceptions about what that actually meant and how it works. But let's just take that aside, right. So the way the Scarlet is recreated, it's essentially it's an automated process. You know, there's a Bitcoin runs on a protocol, which is agreed upon by anybody who does the mining. And so according to this protocol, the amount of Bitcoin that you can give yourself and the block shrinks. Every I forgot about this. Now, I don't know the numbers that contract them, but it's, I think it's about every half year or so, or every year, and here is is not in terms of time, but it's in terms of the number of boxes that being created, the reward rings, and eventually goes to zero. Now, if you think about money, this is not a great way to think about money, right? Because just imagine that you doubled your population that wants to do economic activity. If if all these new people would want to use money in the future, then they they just need the coins available to themselves. And so if you have a limited number of coins that are available, I think this is a problem, right? Because you you have scarcity in the coins, and that all of a sudden creates value to holding on having these coins all by itself. And that's a problem, right? Because Because you know, the act of holding money should not be something that is that is valuable. So that's let's go to history for one second to Canada. So in Canada, when we were still a colony, we got our money from from the UK, right, it had to be shipped over with ships. And you know, Canada was a growing economy as a growing country. And we had shortage of money. So there was just not enough money coming into the country for people to have it in circulation. And for that reason, people had to find other ways how to pay. So then if you go to the Bank of Canada Museum, they actually had playing cards that they use, you know, like your poker cards, the or the equivalent of it, they use that as a way how to create money as an IOU so that you could actually have enough money flows going on, even though there was no physical money available to you. And so, but that tells you is that there was so this essentially is like printing new money, right? And so with Bitcoin, if you really wanted to run Bitcoin as money as real digital money, for people in a world economy, in particular, in a growing world economy, that's never going to work. Right? This is conceptually wrong. Right?

Preet Banerjee:

Yeah. And I think that, that has been one of the one of the issues, a lot of people saying this is the reason why it has value. But I think that has also led to why as you said, there's so many people are willing to just sit on coins and think of them more as investments as a mean, instead of as a means of exchange of value. And so this presents an economic problem in the long run, because ever, as you said, growing number of people, and a finite number of coins, at some point, it could be an issue. So let's let's

Andreas Park:

not, let's just one thing, just think about this through to For instance, if you had a network, like aetherium, which started in a crowdfunding campaign, so what you do in a crowdfunding campaign, you can say, basically, say the network as a whole is worth, I think it was $150 million. And let's assume that this number is constant, right? When you give people the miners a block reward, what you do is you create essentially dilution of the existing coins. And what you therefore do is you pass in value on from everybody else in the network, to the miners, for the service of maintaining and securing the network. That sounds actually it's pretty cool idea, right? So it's important to think that if each eath, for instance, will be worth $1, and you create a new issue new ease, it doesn't mean that you give people $1 worth of an IP, because that will be creating an out of thin air, what you do is you create basically, you know, if you say over a year, you create an extra 100 50 million, then each eath would be worth half $1 at the end of this year. And so all that you've done is you shifted value from those who have the coins to those who maintain the network, which is so this is actually the economic mechanism that underlies that idea. Now, you know, obviously, there's questions of what the value of the network of a hold is right? But conceptually, this is actually pretty clever. They're Bitcoin on the other hand, Bitcoin, on the other hand, was basically created out of thin air.

Preet Banerjee:

Right. And so my last question on the incentives for the Bitcoin blockchain is Once because there's a finite number of coins. At some point, you will not get rewarded with a new coin being minted by adding to the blockchain. So once that point has been reached, what would be the incentive for all the nodes, the mining nodes to ensure the integrity of new transactions on on the blockchain.

Andreas Park:

So twofold. Number one, they get fees from the miners and up on the miner from the users right now. But if you can, if you think about the amount of fees that are currently paid, compared to what the what the value of the coin base reward is, ignoring the dilution effect, it's about the fees make up only about 5% of the mining rewards currently. So that would have to be in some form, you know, be switched to fees, that would make Bitcoin transactions really expensive. But keep in mind that the miners are usually long term players, so they actually also owners of the network. So in that sense, they actually have a fixed stake in it. And so they will have an incentive to continue operating this network.

Preet Banerjee:

So my my gut take on it so far is that you seem much more enthusiastic about Ethereum than you are about Bitcoin. Is that fair?

Andreas Park:

Yeah, absolutely. Because I think Bitcoin has no functionality with aetherium or related networks have a lot of things functionality, they, they actually have some really cool ideas, so that you want to talk about those, because I can get very excited about that.

Preet Banerjee:

They absolutely do give me give me an example of an application that that makes you so excited about, you know, aetherium versus Bitcoin.

Andreas Park:

So I am a I've come from the, from a trading background, that's what my what my research was on. And this is why I got interested in, in crypto currencies. And I did not get excited about the, the currencies as an as a new trading tool, or as a new asset to trade. What I thought is actually really cool is the way how you can trade them on this decentralized network. So let me give you just a big round of of how a trade works in a normal equity market. So if you and I want to trade say, AB x, right, so Barrick Gold, right? So let's say I want to sell it to you and you want to buy it, by law, we cannot actually agree mutually on exchange in Israel, right, we have to actually go through the normal channels, which means I have to go to my broker, my broker sends an order to a stock exchange, right. And so you have to do the same thing, you have to go through a broker enter a stock exchange. And it's entirely possible that between you, within your broker and the stock exchanges, actually other intermediaries, could be tech intermediaries could be also that, you know, your broker uses another broker to, you know, get the trade down. So then, if we happen to agree on a price, the stock exchange really just collects information, it doesn't really do anything other than, you know, matching us, then they send that information to the clearing and settlement agency that then arranges for the clearing and settlement, which involves custodian banks that hold our stock certificates. And there has to be a change in the beneficiary ownership of who owns the stock. And, you know, critically actually, nobody, we call it actually you and I, per se, but it's actually the owner is essentially technically the brokerage because they have, you know, hold your assets. And then we have to also do, and this is only for the stocks for the stocks itself, we still have to change the money, which involves the entire payments network, going via the Bank of Canada ledger. And so all of this takes three days or two, two days to come to an end right.

Preet Banerjee:

Now, this is why we get the settlement of you know, time of trade Plus, you know, two days, three days getting shorter, but still days.

Andreas Park:

days. Exactly. Right. And you go you know, it's 2021. Why? Right? I mean, you know, if computers can do this directly, and this is precisely what blockchain does. In a blockchain, here's what you do is you create a contract, think about this. It's almost like an escrow, right. So you basically, what you do is you create an a contract into send this way I want to sell it to you. So I take my shares, I put them to that contract. And it's a conditional contract, which says, if somebody else sends money to that contract, the amount that I want, then I give that person my share in exchange for the money. And so now all that you have to do is you have to you see this contract, you sent the money there. And the contract does what's referred to as an atomic swap. So, you know, the shifts, gives you the share, and gives me the money all in one go.

Preet Banerjee:

And so is this what is called a smart contract.

Andreas Park:

That is essentially what a smart contract is. It's just a piece of code. Really, right,

Preet Banerjee:

right. You know, if you were to create a diagram of all the participants required to facilitate the exchange of shares between one person and another, there are, you know, six, seven, maybe eight different intermediaries involved in that just with the exchange and then Of course, then there's also the payment networks, as you said, and all of that could be replaced with this, you know, smart contract that could execute it in seconds.

Andreas Park:

Exactly. It's phenomenal. And now in here, yeah, so this is, I mean, this is just a single contract, and we still have the problem of having to find one another. Right. So if you think of trading alone, you don't solve the solve the use of the tech problem, but you don't solve the liquidity problem, which is actually quite critical, right? Because, you know, two people finding one another on the market is actually pretty hard. And here's where, you know, the blockchain network has created an even better solution. And what that is, essentially is referred to as automated market makers. And so now, here's how that works. Imagine you have cryptocurrencies or and some other token that you you know, both hold, what you can do is you can deposit them into a smart contract, which collects the same pairs of, of cryptocurrencies or of a digital items, you know, you can imagine the same thing with stock certificates, of course, and you put this all into a smart contract. And then individuals can trade against that smart contract at any given point in time and buy or sell any of these items that are in this smart contract, add in automated Lee created price, which reflects the liquidity of the entire contract. So the system that I'm referring to here is something called uniswap. This is like the, you know, automated market making 1.0. There's actually clever mechanisms already out there. But, but the genius of this is, essentially what you create is the equivalent, if you want of a bank, right, because what the bank really is, is a is a is a gigantic liquidity generator, it takes deposits from people, and it takes, you know, and then gives out loans, which, you know, it's sometimes it facilitates interactions and financial interactions in that, too, is now being put into a smart contract, which is, you know, really a very, very cool idea and, and, and development.

Preet Banerjee:

So it's, it seems like the the applications of this technology, we're just starting to scratch the surface. But before we get to that point, I want to talk about regulation. And, again, I think there's a lot of people who look at the underlying technology, and the impact that will have on society is being tremendous. And there are other people who look at, for example, Bitcoin, and other coins, as investment vehicles, right, this is a way to grow their money right now with their speculative. And there's a question as to how do you regulate? Who is in charge of regulating? What is it a money services business? Is it you know, just currency exchange? Is it something else? And then, you know, we're going to talk about central bank, digital loonies or digital currencies, and what your proposal was for what things could look like. And so my overarching question really about regulation? The existence and proliferation of Bitcoin is this. If there are central banks around the world who are looking at creating their own digital currencies, because there are many who are exploring this right now, what does that mean for Bitcoin and the adoption? And lifespan of Bitcoin going forward? Does that this debt displace these unregulated? cryptocurrencies, when you have central banks taking this technology and saying, No, we're going to take all the things that are great about this technology, plus government oversight and regulation that we can see. And because that's what we're going to accept and transact on and except for paying taxes. That's all there is going to be. What do you see happening in the future when it comes to Central Bank digital currencies versus the current swath of cryptocurrencies that are out there?

Andreas Park:

So what you're really asking is, Do I have time to talk to until 2022?

Preet Banerjee:

Yeah.

Andreas Park:

Because there's a lot of questions. There's a lot of things. Yeah. And very interesting ones. So let's so let's start.

Preet Banerjee:

That was probably the worst question I've ever asked in the history of this podcast. There's so many different parts going on. But do your best you're you know, you're the smart one here.

Andreas Park:

Well, you know, what, if you had been a student of mine, I would just say, can you ask so I don't understand your question. Can you formulate it again? Just just frustrated with

Preet Banerjee:

your teaching pedagogies. I see. Interesting.

Andreas Park:

Yeah, it's it's always a battle when people challenge you with a question you usually ask a question back, but in a very subtle way to flatter the other side.

Preet Banerjee:

All right, well do the best with what you can with that dog's breakfast have a question I asked you?

Andreas Park:

Well, let's start with a regulation as a first step, right. So, if you if you take a step back and just think about what the what the founders of aetherium wanted to do is that they had no intention of, you know, creating money and, and, you know, whatever, money laundering machine or anything, all that the one has to do is create some technology, right? And, and, you know, people do this all the time, right? People create any number of pieces of code. And there's actually some, you know, when you create a piece of code, there's actually a protection that you have about it. Right. So, you know, it's, there's, there's the I think it's called, what does it did a gmu license or whatever it's called, right? So you basically take if you want to use this code, use it, but I'm not responsible for anything that could go wrong, right? That's kind of the approach to people talk, except that becomes a little iffy when you are both an operator and somebody who develop this code, right. And this is how they basically try to grab people in terms of, you know, whatever the activity is. But here's where this gets difficult. In the following sensors, you because you touch about trade value transfers, and therefore you touch what is inherent to the financial system. Right? And that is a very, very heavily regulated market. But the regulations all have developed over time organically, right? I would argue, so in the sense of that, okay, so we have banks, banks, you know, get established, banks use that banks have used to issue their own money, we realize that created a number of problems, then we have a new regulator, which regulates what money can be there, then you regulate what kind of conditions you can put on loans, and so on, and so forth. So this is like, one piece builds on the next piece, both on the next piece built on the next piece, and then you tried to take this regulation, which has essentially developed, let's say, since the late 1800s, at least, and you try to put that on top something which is conceptually very different, right, because the concept of a bank is, you know, it's an it's, it is a entity of power between that sits between borrowers and lenders, essentially, right, because if your deposit is a few 100, as a deposit, I'm implicitly a lender. And as you know, and then you are the borrower, right. And so you kind of have to regulate how this is done, you have a fractional banking system, which, you know, which means that you need to make sure that if you, you always lend out more money than what you have in your coffers. So you want to make sure that at any given point in time, you have enough solvency so that when you know, when when people want to have their money back that, you know, you're not going to falter. Because we know what if that happens, we have riots on the street, all of those things, right? There's a lot of concerns around this. This is why we have regulations. Now the first question you have to ask is, should that really apply to, you know, to to this new world? And why would it apply? It's not. So just because there's items of value doesn't mean that the concerns that lead to a particular type of regulation apply in the same sense, right? So if you have a smart contract, for instance, which effectively is a loan contract, all the conditions are objectively visible, there is nothing hidden in it, right? So you can see everything that you get into it, which is different from when you go and have a contract in you sign a contract with annoying entities such as such as a bank, they may actually know something that you don't know, this is the real big problem. And this is where you get regulation to solve the imbalance of power. That is not the case when you interact with with a piece of code, I would argue, right? So should we apply the same rules for that? I'm not sure, I think we should really reconsider some many of the rules that we have in place. Now at the same time. You can also say what somebody from the OSC said to me is just because you sit, you know, in your pajamas in your basement and say, Oh, I'm so innovative doesn't mean that the rules don't apply to you. Right, yeah. So, you know, you got to be really cautious about but I think you and I think the right way to think about this is to be a little hands off and just see how it pans out. And not to slap people right away with regulation. But I can tell you, you know, so just imagine, for instance, this uniswap contract that I talked to you about this, this this trading contract effectively, what this contract does is it takes custody of assets, right? And then it has a particular rule that is assigned to the running of these of these interactions. And when you take the custody of the assets, the question is, Are you already a bank? Does the bank regulation apply to you? Do you have what regulatory compliance Do you have to follow? This is a really tricky question. That people who want to just create a particular tool cannot answer cannot possibly answer. And to get a legal opinion, I probably have to spend several months dollars and they may still not get an answer from from anybody. Right? So in that sense, I am, what I is what I think. And what I really worry about is that people use regulation not in the sense of Oh, we have to protect people, which is really what regulation is, therefore, it's used as a way oh, we have to, we have to protect the incumbents, because God forbid, they may lose some income by, you know, people trying to build technology, which could replace them. Right. So, because so last thing I'm gonna say. So this is the there's a very famous economist Stigler, who said, this, he was, you know, he was basically the godfather of economic analysis of regulations, if you want. And he said, regulation is made for industry, by industry. And that's all regulation that you see that is in place has been created by industry players. It's not like there's a bunch of lawyers that sit together from a regulatory office and say, here's what we come up with. There's always a consultation process. And the consultation process is always by interested parties, usually made by, you know, the incumbents. So, I could go on on a rant forever, for instance, about open banking regulation in Canada, but let's just let's just say this, right, so what incumbents would like to do is unless they see an upside for them a definite guaranteed upside and guaranteed one, right, not a possible one, they they will try whatever they can to kill new, you know, agree with which would, which would impede on their on their playground? So

Preet Banerjee:

yeah, of course, of course. Okay, the last thing that I want to leave off with, although it sounds like you wanted to say something else, so I will not

Andreas Park:

want to do now you wanted to talk about the cbdcs. Right. So you kind of did from go went from regulation to cbdcs?

Preet Banerjee:

Yes, yeah. So

Andreas Park:

let's talk about that a little bit. I mean, we set up some time. I mean, you can always cut me out, right?

Preet Banerjee:

No, I look forward to hearing your thoughts on this. Because again, that's that that was the impetus for for bringing you on because I wanted to learn more about where central banks stand on their thoughts on on central bank issued digital currencies, and what your contributions were to those proposals to the Bank of Canada.

Andreas Park:

So, so there, again, this, this is a broad area with many different components that one should think about, and I think I think it's fair to say that the central banks were actually not getting into cbdcs thinking so much because of Bitcoin or the like, but it's more, you know, General developments that happen in other parts of the of the financial world. So I think, seeing what friends and payments are have done in India and in in China is much more interesting for a cbdc on developments of cbdcs, then thinking about Bitcoin or aetherium, even though there's a certain common thread. And so let me just say the first thing, and that's important, I think it is what's not gonna happen, what was very unlikely to happen is that a cbdc, as such as the alternative, not alternative as a substitute to cash is issued on something like aetherium model, this is not gonna happen, right? And the reason is, is it's going to be a systemically important technology, right, or infrastructure, which has to be under the control of a government. And a cryptocurrency and a decentralized network simply is not. Now I think there's there is merit to central banks issuing digital cash on aetherium, but not as their cbdc, their single thing that the one they have, they could do it in order to enable commerce. But it doesn't even have to be a central bank doing that you could actually have, you know, a province could issue you know, mine alone. But what's called like the T bill, right? So you could do a $1 denominated t bills and issue those on the blockchain, and then they will be essentially the same as money. Right? They could do that if they wanted to. So but what I'm saying with that is cbdcs, will always run on a network, which is controlled by, you know, at least in large part, where are these supersede overs overseen by a central bank, where they have the ability to know exactly who is what actor? That's, that's the bottom line of that, right. So, but that does not mean that this new system cannot interact, for instance, with the likes of an Ethereum blockchain is very much to the contrary, I think, actually, if we had a cbdc this would actually make the use of something like aetherium or, or these decentralized blockchains, generally speaking, even more powerful, and even more interesting.

Preet Banerjee:

Let me let me give you a very hypothetical scenario. Let me know how far off the mark this is. Let's take a look at taxpayers in Canada. And let's say government wanted to enact a program similar to serve where they wanted to give cash directly to certain people who qualified for it. Is there a possibility with technology like this, that you would be able to say things like, Listen, we know that there are government benefits for people who have kids who don't contribute to an RSP, but their incomes below a certain level. And so they have access to what's called the Canada learning bond, you don't need to make a contribution to get the benefit. It's designed for lower income households. But so many people don't get it because they don't know to apply for it. But the government could, if they had, you know, this super blockchain that takes into account everything they know about taxpayers, they could file tax returns for them, they could say, this person has a child, there's a cin number been registered, they would get this Canada learning bond payment, we want to give people serve because they've lost their income, we can see when their income stops, and we could give them money. Is that something that could be done with technology like this? And how many centuries would that take?

Andreas Park:

But of course, you can do that. There's no question about it, you you, I mean, you want to be slightly cautious in separating knowledge, right? So because I think you need to maintain to have the ability to maintain people's privacy, but that even without even with what you said, it could be done, right, so you can, you know, keep people's financial activities with cbdcs entirely private and at the same time, you can still give them the benefit of everything that you described. Now, what you described sounds very, to you may sound like utopia. utopia is the word. But so as part of this is already a reality in say Scandinavia, right. So when you are self A fun fact, I spent a year in Denmark, you don't really file your tax return as such, like as you have to do here, we have to enter all the information is the other way around. Basically, they tell you look, this is what we have for you, do you have anything to add? Right? So so because they know all the pieces of information they're already collected, simply because effectively they have a digital system with digital identifiers. So they actually know an awful lot about what you do, then. So if you go to a bank, you have a bank account, you have a, you know, you have a savings account or whatever, you have a brokerage account, and you do your stock trades, they would know what you have done. I mean, not not in all details, but basically the bank, would we make a report and say, here's how much interest his person earned, and so on and so forth. Now we have this technically to, it's just that the pieces are not put together. You know, which which could be right.

Preet Banerjee:

And of course, if you did sort of enact the technology and the linking piece databases to do this, you would then cost industry a lot of money who get paid, you know, fees to prepare these things and whatnot, which is a huge impediment, as we've talked about.

Andreas Park:

Yes, it is, actually. So I think this is a I think there's almost I heard, I may be wrong on this, it is almost a deal that the CRA made with, you know, tax accountants, ha ha block and service, or whatever the software service providers have not actually do do, you know, provide their own mask for enter all in entering all the tax information? Which is ridiculous, right? If you ask me. Yeah. But well, you know, why do we have to Why do I have to pay an external service provider to do my taxes? It's just ridiculous. Right? And this is, this isn't between me and my government, there should be no intermediate, no interested third party in between.

Preet Banerjee:

And I think there are other current my partner lives in the UK. And she says, it's basically your taxes are done for you. And you only file if you disagree, or you want to disagree and say, Hey, no, I've got extra credits to apply. But for the most part, it's just sort of done.

Andreas Park:

That is great. Actually, the UK I was there too. Obviously, as a student, I thought that was the best experience ever alive. Yeah, because it was just like, it was a one piece one, like three numbers Enter to me, obviously, because I was, you know, low income student and all that, but I was just like, wow, this is how this could work. This is amazing. Now, having said that, I think one has to I think we want to be slightly cautious though, right? Because there's this huge temptation, especially for governments to collect all kinds of data and to know a lot about you I feel very uncomfortable with that. And I think everybody should feel uncomfortable with that. You know, not to put too fine a point to it, but when I get my census form, and they asked me about my religion, I actually you know, it just makes my head set up right because it's what What business do they have to know my religion and you know, is there a possibility that at some point we get a government which you know, misuse abuses the data and then you know, rounds me up because I I say I'm I believe in the force and Majid Mr. saw something

Preet Banerjee:

you know, if that's an option, I'm going to put that on there for sure. And I don't know can you hear all these horns in the background like i think it's it's trucks and cars. No, this is

Andreas Park:

the suburban life to you. This is a lawn mower.

Preet Banerjee:

There it is. I don't know what's going on outside, but it

Andreas Park:

Oh, you have the horns. Okay, so I have I have a lawn mower, which is very loud.

Preet Banerjee:

I don't I don't hear that at all. So, in any case, I think I'll start wrapping up only because I've had you here for an hour. And I think no

Andreas Park:

one I want to say I want to say something more now. So absolutely, yeah, because that's actually also critical. So let me just say a few things. Because we wanted to talk about CBD C's. And then there's things to say about that, I think that that are relevant also where this is coming from. So first, I want to say a few things. Let's talk about China for a moment and WeChat. Right. So I'm not sure if you've been to China recently. there if you go there, you usually have to use either alipay or WeChat. Pay to make any payments. Most stores don't accept credit cards or actually not even cash, right. So you go into a restaurant, you sit down at the table, you take out your app, you order on your app, right, the the food arrives at some point, and then you just leave, because they have basically solved so many they have been able to integrate payments with a lot of services. And essentially WeChat as a as a chat software. And they have they created the ability to use that self chat software to do make to make payments. And what that allowed China as a whole was to basically leapfrog over several development cycles that we have in the Western world. So they don't need credit cards, they don't need debit cards, they don't need this whole separate system of you know of a network where you have lots of different parties that benefit of you tapping your cards, and so on and so forth of a visa system, none of that everything goes with his one app. And what this app is effectively it creates a common resource which can be used by multiple service providers. And many of the services that are provided on WeChat pay actually are provided by we reach our pay, but by external server service providers. So that as a vision of thinking of a financial infrastructure, as a common resource is the same as what blockchain really tries to do. Except, you know, it's it's open to anybody. And you know, it's it's much more decentralized, right? And then now, and now let's talk about the different development, which is also coming our way, which is the so called dm network, or infrastructure or whatever it is Association. It's something which was founded by Facebook, or initiated by Facebook, it was earlier called Libra. It changed its name to dm

Preet Banerjee:

o vision like QRP dmdm.

Andreas Park:

I think the maybe Yeah, maybe like the data,

Preet Banerjee:

sees the data sees the day. What's the difference? Yeah.

Andreas Park:

Well, but it's also, to be fair, by the way, Facebook actually disassociated itself with it. So it's basically runs by itself. Okay. But, I mean, they're still supporting it, I think financially, but the important part is, the judge will stay away from it, because I think they themselves realize that their presence harmed actually this network. But you know, that again, it's the same ideas, what they tried to build is a blockchain, but there would be a permissioned blockchain, where service providers and so on and so forth, create an entire network of a new financial infrastructure. So for instance, Shopify as part of this over as part of this Coinbase, the crypto exchange as part of this, our creative destruction lab at U of T is part of it. And so the idea is also that you create this financial infrastructure as a common resource that people can use in order to shift money around and to access particular services, not just financial services, but basically use this network for payments as a payment system. And as a digital payment system. Again, you know, one, which is not siloed or siloed, with, you know, a central entity for clearing as what Currently our central banks have as a role. But it is something which is run, you know, by many different entities, collectively. And I think that in particular, that latter development is what really supercharge the development and the thinking of cbdcs why people say, okay, maybe there's actually maybe these guys are onto something, maybe this is something that we should actually enable to do it. Maybe our financial sector such as it is, you know, wouldn't do it by itself, either because nobody has an incentive to do it by themselves and can do it by themselves, or because they're just making so much money. They just don't want to do it. Right. But if you are government and you say so in particular Canada, right. So dm has its own money denominated in US dollar, there's also probably a coin, which would be the RMB, the sterling and the Euro, maybe the yen, right? Not a Canadian dollar. So but what you will see is that people use this network and say, Hey, this is really this works. For me. This is really useful, right? I can now shift my money around fast. I can make faster payments. I get my refunds right away. Whatever. It is right. So there's extra functionality is going to come your way. And at some point, the the usage and the, you know, the helpfulness becomes a necessity. So if you want to access certain services, you need to be part of it. At that point, the Canadian dollar becomes irrelevant.

Preet Banerjee:

Right. Interesting. So, so, a number of questions here, and now I'm going to take you for like an extra half hour. First question, a Bank of Canada, central bank, digital currency, five years, 10 years, do you think that it will happen? Yes. What is the timeframe? Do you think? So I have no

Andreas Park:

inside information, I want to be very clear that whatever they say publicly is also what they say privately.

Preet Banerjee:

Okay, they're very

Andreas Park:

early about this. So they say we have no plans on it. You know, but we're just still exploring, and we're trying to prepare ourselves for it. That's what everybody says. Now, Brazil, put up a it's not entirely a CVD system. But the Bank of Brazil, the central bank, put out a real time payment system, which is akin to, you know, at least the first stage of a cbdc. And they created that within nine months. Okay, so it's not a technologically hard problem, right. And Brazil is our is a much bigger country than Canada. Right? I mean, you know, landmass wise, obviously Canada is bigger, but Brazil is, is much more dispersed in terms of where people live. And it's probably much more complicated, because most likely, we could argue it's not as technologically advanced as us, I hope at least we can say that. Right? Great. Yeah. So they can pull it off. Clearly, Canada can pull it off clearly. Right.

Preet Banerjee:

And when it comes to, let's say, different central banks launched their own digital currencies, certainly some of the smaller countries, maybe less developed countries would say, well, we're not going to do it. But we could use your infrastructure, is that correct?

Andreas Park:

Well, I would argue, so if you are a small country, for getting more technologically advanced or not, because that's actually, that's not so clear what that means these days anymore, right. But as a small country, and you want if you want to maintain power over your monetary system, you definitely need a cbdc you need more than the US, right? The US is probably good for now, right? But if the US comes up with a cbdc, before your small country, it's entirely possible that people go well, we're just going to use us etc, the end, right. And particularly, if you have any trade with the US, as a small country, money will come into your country because Americans buy your product, right? And then so then you have US dollars in the country, and then all of a sudden you can already have that money in circulation. This is actually different from even the current monetary flows, right? Because currently, if you have a trade within with a foreign country, yes, there's money, US dollar essentially coming into the country, but it stays with the banks. When you have a cbdc payment actually going on a digital ledger, it's entirely possible that you have the real dollars available in that small country. For the general consumption of the population. That's very different, right? It's a little bit like if you if you make a cash payment for trade, which not not doesn't happen much anymore, right. So this would be a game changer for small countries, but not necessarily. I mean, sometimes I would say, in a good way for the people of the country, but for governments that want to maintain monetary policy power, not a good thing.

Preet Banerjee:

Yeah, I was gonna ask, you know, and this is tying in a bunch of different areas all into one. But if you take a look at me, let's say the introduction of the euro, and all these different countries and their currencies, they used a common currency wasn't one of the criticisms that, you know, if your economy as itself is doing poorly, then if your currency goes down in value makes it more attractive to buy your stuff. And it's sort of a sort of a self leveling mechanism to a certain extent, would you lose that if you know, other countries adopted a single central bank digital currency?

Andreas Park:

Yeah, that's exactly the problem that would arise. Right. So so in the European Union, that they obviously the getting the Euro has many dimensions, including a political one. So you kind of create a little bit the thinking was to create more unity. But you absolutely right, if you have no free movement of people and have resources available, and which is the case, right? You even in Europe, you can you can move but you actually can't easily right, because language because of pension systems and healthcare and all of that, then you know, you by losing monetary power over your monetary policy, you potentially when when say Germany is doing well, and you're not doing well, there's no way we can use you know, the value of your currency to continue to compete with them. And so you're absolutely right. So that is a problem. Can I just say want to say one more thing about the digital advancements of current country? Absolutely. So if you look at our Africa, not in terms of cbdc, but in terms of, you know, the development of, of money. So you may have heard about m pesa, which is, which is not digital money, but is mobile money. So it's money that you can transmit with even the most basic cell phones, that has been a game changer for the development in countries like, like Kenya. So it increased financial inclusion, and so on and so forth, even though really all that this country has, I mean, they have a cell network, of course, right. And so that alone, if you think of technological advances is enough to create a great deal of financial inclusion. And the DM network actually tries to go into exactly the same direction and say, Look, all that you need is a is a is a cell phone these days or a smartphone these days and and you know, with dm now you actually have access to an entire financial infrastructure that otherwise you do not have. So for development of weaker countries, in that sense, this could be a huge game changer. So I'm extremely, I find this extremely exciting from that perspective, if it turns out to be actually used for the common good. Okay,

Preet Banerjee:

we'll leave it there, Andres. Thank you so much. I'm going to compile a list of links to some of the things that we've talked about for people who want to learn a little bit more, including links to your website. If you want to follow more of Andres, his work, his YouTube channel, has some great videos explaining blockchain cryptocurrency, a lot of things that will help bring you up to speed. And he doesn't have, I would say, a vested interest, not a promoter, he is just trying to get towards truth, which I think is so hard to find these days, because there are so many commercial interests in all these technologies. And sometimes, they embellish the good things and they don't tell you about the downsides. And I feel like injuries is a real straight shooting resource on this. So Andres, thank you so much for coming on the show, though. Thanks

Andreas Park:

for having me. It's great fun.

Preet Banerjee:

If you want more personal finance content, or you have questions for me or topic suggestions for the podcast, you can follow me on Twitter or Instagram and ask away it's the same handle in both cases at Crete bannerjee. spelled just like it sounds. Good luck with that. I also have two YouTube channels, you can subscribe to my main channel which covers personal finance and investing topics that are global in scope, and a Canadian specific channel as well. That is it for this episode. Thank you for listening.