Why Crypto Will Never Fix Payments (Feat. Patrick McKenzie) – Crypto Critics' Corner
Bennett and Cas are joined by Patrick McKenzie of Bits About Money to discuss why cryptocurrency is not a solution for the problems of payments.
Bits About Money
Patrick McKenzie Twitter
Protos coverage of Moonstone Cease and Desist
Federal Reserve Cease and Desist for Moonstone
Bennett's video about Cash App/Interchange Fees/Durbin Amendment
This video was recorded on October 12th, 2023.
Cas Piancey and Bennett Tomlin are joined by Patrick McKenzie of Bits About Money to discuss why cryptocurrency is not a solution for the problems of payments.
This episode was recorded on October 12th, 2023.
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Other episodes mentioned in this episode:
Other resources mentioned in this episode:
- Bits About Money
- Patrick McKenzie Twitter
- Bennett’s video about Cash App/Interchange Fees/Durbin Amendment
- Protos coverage of Federal Reserve cease and desist for Moonstone
- Federal Reserve cease and desist for Moonstone Bank
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English Transcript:
00:00:05:05 - 00:00:11:07 Cas Piancey Welcome back, everyone. I am Cas Piancey and I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you 00:00:11:07 - 00:00:12:14 Bennett Tomlin I'm doing well. How are you, Cas? 00:00:12:14 - 00:00:25:15 Cas Piancey Hanging in there. We're joined by a very special guest today, Patrick McKenzie, writer and expert in financial infrastructure, and the author and operator of the newsletter: Bits about Money. Patrick McKenzie, how are you today? 00:00:25:15 - 00:00:42:13 Patrick McKenzie I'm doing very well, everybody. And before I get started, I have to make the obligatory disclaimer. We're going to be talking a lot about payments today. I previously worked at the company Stripe, which does, as many of you know, quite a bit of payments for six years. But I'm speaking entirely on my own behalf, even though I am still an advisor there in some capacity. 00:00:42:13 - 00:00:50:23 Cas Piancey I think it'd be a good place to start just in payments, payments, payment infrastructure, like financial payments, infrastructure. You're an expert in that 00:00:50:23 - 00:01:00:10 Cas Piancey do you want to talk about how you think cryptocurrency fits into payments and finance in general and perhaps some of the issues that you see with it? 00:01:00:10 - 00:01:04:05 Patrick McKenzie So let's take a step back for the moment to talk about payments. Generally speaking, 00:01:04:05 - 00:01:21:23 Patrick McKenzie the economy is this overwhelmingly complex machine that includes a lot of various actors that are bouncing off of each other and exchanging value. Typically, a transaction will involve one business and generally a customer of that business, whether that is a business customer or a consumer customer. 00:01:22:00 - 00:01:27:03 Patrick McKenzie I like, you know, at least three handsome blokes that are doing a podcast about cryptocurrency 00:01:27:03 - 00:01:40:04 Patrick McKenzie transaction typically takes multiple steps so that that exchange value is actually like kind of complicated. When you get into the details about it. You might think like some are pretty simple. Simple. You go up to a café, you get a cup of coffee, you hand over your money. 00:01:40:06 - 00:01:47:06 Patrick McKenzie But some of them, you know, they involve an invoicing process, a multiple month contract negotiation, etc., etc.. And so a payment happens. 00:01:47:08 - 00:01:51:09 Patrick McKenzie As an important part that is very much not the. 00:01:51:09 - 00:01:52:12 Patrick McKenzie Whole of the part, 00:01:52:12 - 00:01:56:22 Patrick McKenzie which is an adjunct to these transactions and adjunct to these customer relationships. 00:01:56:22 - 00:01:58:09 Patrick McKenzie And all payment is. 00:01:58:11 - 00:02:09:17 Patrick McKenzie Is a message between the the customer, the pay and the business that tells the business something that is useful to know about, whether they will ultimately receive 00:02:09:17 - 00:02:13:07 Patrick McKenzie money for the good or service that that is under issue. 00:02:13:07 - 00:02:20:07 Patrick McKenzie typically the form of the payment encodes some information as to the level of certainty the business should have that will ultimately pay about this. 00:02:20:09 - 00:02:41:06 Patrick McKenzie And kind of like the most interesting thing that payments as a field has ever done is convincing people that a payment is actually much more than a promise that there's, you know, math and infrastructure and yada yada, yada, and there is math and infrastructure and yada yada. But at the end of the day, all payment is is a formalization of a promise that could have been made on words or paper or via smoke signals. 00:02:41:06 - 00:02:49:17 Bennett Tomlin Could you walk us through an example or prototypical payment just to show how like the payment itself is a promise and how that works kind of in practice? 00:02:49:17 - 00:03:14:05 Patrick McKenzie I will disclaim that at the start that everybody who works in payments or crypto or the finance field, I grew up in a particular place, perhaps many places, and they often filter their views on the field through the experience of that particular place. And when you look at payments worldwide, the very different payment methods have very, very different user experiences and sort of ergonomics associated with them. 00:03:14:07 - 00:03:19:03 Patrick McKenzie Let's use like the world's most terrible payment method and. 00:03:19:05 - 00:03:20:11 Patrick McKenzie You can make a long list. 00:03:20:11 - 00:03:41:05 Patrick McKenzie Of payment methods that are vying for that, for that crown. But I would claim that the the system of checks in the United States is a system of payments that nobody would invent in 2023 because it is unsafe for all possible use. But it's a good thing to sort of get a mental model for how payments used to work. 00:03:41:07 - 00:04:02:14 Patrick McKenzie And so back in the day, you like going to a grocery store, you pile up a basket full of groceries, you take them to the counter, and when you pay to check, all you are doing is saying, Hey, grocery clerk, the total comes to you. Well, it was back in the days it was probably like $16 and I promise to pay the grocery $16 for this here basket of groceries. 00:04:02:16 - 00:04:03:23 Patrick McKenzie And actually 00:04:03:23 - 00:04:23:23 Patrick McKenzie prior to checks being being much of the thing that was the end of the payment, because the promise was literally that it was a promise, the grocery store would just increment your account by, okay, you owe $16 more than you used to. And then a few months later you would go there and pay cash or specie or, you know, beaver pelts or whatever it was. 00:04:24:04 - 00:04:30:22 Patrick McKenzie But when the grocery stores largely tried to get out of the extension of credit business, they would say, okay, give us a check. 00:04:30:22 - 00:04:31:10 Patrick McKenzie And a check. 00:04:31:15 - 00:04:32:12 Patrick McKenzie Is still. 00:04:32:12 - 00:04:48:14 Patrick McKenzie An extension of credit. Old says is okay. That verbal promise that we used to make that I will be the $16. I'm going to write that promise down here on a piece of paper and this promise and this piece of paper magic, because you can take this here piece of piece of paper in this promise on it. And hand it to my bank. 00:04:48:19 - 00:04:52:22 Patrick McKenzie And my bank will will hand you 16 actual American dollars in back of this. 00:04:53:00 - 00:04:57:07 Patrick McKenzie And importantly, despite that being the transaction, the grocery store almost never. 00:04:57:07 - 00:05:03:12 Patrick McKenzie Actually did that. But the grocery store would actually do is take the at the promise over to their bank, which. 00:05:03:12 - 00:05:03:23 Patrick McKenzie Is typically. 00:05:03:23 - 00:05:24:21 Patrick McKenzie Not the customer's bank. And they would say, hey, this person has has promised to pay me $16. And the customer's bank would say, well, it looks like another bank has promised the bearer of this instrument here, $16. You could deposit that in your 16 in your account. I would credit you $16 perhaps today, perhaps five days from now, it doesn't really matter. 00:05:24:23 - 00:05:26:08 Patrick McKenzie And then I the. 00:05:26:10 - 00:06:08:16 Patrick McKenzie The bank that you bank at, I'm going to go to the customer's bank and say, hey, the customer has made a promise for $16. I would like to collect on that promise in satisfaction of this credit extension that I have made to my customer. And then you layer on that like fascinating Rube Goldberg contraptions of the infrastructure built to it to support this used to be back in the days that there were massive massive courier operations between different banks attempting to carry like literally tens of thousands of checks a day between them because the check was only actually good at the particular institution written on the check. 00:06:08:18 - 00:06:17:09 Patrick McKenzie And then we developed this clearinghouse infrastructure where everyone said, you know, it is crazy that every bank needs to send out 4000 couriers and 4000 other banks. 00:06:17:14 - 00:06:20:05 Patrick McKenzie Well, he send all the couriers to this one place in the middle. 00:06:20:10 - 00:06:47:06 Patrick McKenzie And they will do the math and handle this for everybody. And then and they made that that clearinghouse system electronic. And if you've heard of it's the automatic clearinghouse. The automatic stands for computers involved. And we've had, you know, progressive layers of infrastructure built on top of that like fundamental, terrible. The check is a promise written to physical paper infrastructure. 00:06:47:09 - 00:07:08:07 Patrick McKenzie By the way, why is a check a absolutely terrible payment method? We would never design a payment method in 2023 that had all the secrets necessary to steal all the money printed on the face of the payment method. But Jeff actually does have all the secrets necessary to steal all the money printed on the face of it. And so any time you give a check to anyone. 00:07:08:09 - 00:07:16:01 Patrick McKenzie Both the person you were giving it to and anyone who even glances at that check for one moment can debit all of the money in your bank account. And the reason that doesn't happen constantly. 00:07:16:06 - 00:07:17:23 Patrick McKenzie Is because banks are extremely. 00:07:17:23 - 00:07:18:20 Patrick McKenzie Aware of this. 00:07:18:22 - 00:07:24:10 Patrick McKenzie Terrible, terrible decision made several decades ago and like constantly squashing attempts to do that. 00:07:24:10 - 00:07:30:13 Patrick McKenzie Anyhow, that's a brief, simplified, simplified understanding of like. 00:07:30:15 - 00:07:31:07 Patrick McKenzie The huge. 00:07:31:07 - 00:07:52:22 Patrick McKenzie Amount of societal effort that goes into the back office of simply trying to buy $16 worth of groceries. Now scale that up to there are many, many different competing payment methods. You probably very familiar with credit cards, you're very familiar with various forms of bank payments, and they undergird all of the essentially all the economic activity in the economy. 00:07:53:07 - 00:08:04:22 Patrick McKenzie One can quibble on whether cash is a payment method used in in this case, but cash is a relatively small portion and decreasing portion of payments in the economy. And getting smaller every year in most markets. And 00:08:04:22 - 00:08:16:16 Patrick McKenzie there's a variety of reasons for that. Happy to go into them. But payments is this like giant, multifaceted infrastructural beast, which is hugely interesting to do deep dives. 00:08:16:16 - 00:08:22:10 Patrick McKenzie And then I heard crypto got mentioned somewhere in this podcast. Maybe we should talk a little bit about crypto. 00:08:22:10 - 00:08:25:07 Cas Piancey I do want to delve into that a bit. 00:08:25:08 - 00:08:50:08 Cas Piancey I think that's a good a good statement right there, because I am actually a huge fan of physical cash. I, I resolutely mentioned this like all the time on Twitter and Bennett when he when he visited me out here, knows that I was using it to pay for like gasoline and things that most people do not use cash for. 00:08:50:10 - 00:08:56:20 Cas Piancey Why is cash dying? What do you think and what do you think will come to take its place? 00:08:56:20 - 00:09:11:21 Patrick McKenzie what are the downsides to cash? Why? So one, why is cash cash dying? The fundamental fundamental reason cash is dying is because every payment method exists in competition with every other payment method for business. They want to get business from the businesses that are selling things. 00:09:12:02 - 00:09:22:20 Patrick McKenzie They want to get business from the customers that are paying for things. And the reason cash is losing share against other payment methods is because other payment methods give people a variety of benefits that they can't get from using cash 00:09:22:20 - 00:09:33:03 Patrick McKenzie other payment methods. You know, credit cards will offer to give you a reward points to the cost of doing a transaction is literally negative, where most customers would say that the cost of doing a transaction in cash is zero. 00:09:33:05 - 00:09:56:05 Patrick McKenzie It's not actually true. But from the perspective of most customers, it rounds to true, the ergonomics of using cash or painful, you know, you have to count out change, etc., etc. The cost of using cash for business is much higher than people believe it to be because you need to actually count it, make sure it's not stolen and cash doesn't have a. 00:09:56:07 - 00:10:24:14 Patrick McKenzie Most payment methods have built in infrastructure to track the relationship between a payment and between the customer who made the payment and the transaction that the payment was made for. Cash doesn't have that built in infrastructure. And so every business in the economy that touches cash needs to build their own software, accounting and contractual infrastructure in place of the stuff that they would ordinarily buy from, you know, Visa or their bank or PayPal or any other provider of a payment method in the company. 00:10:24:16 - 00:10:58:11 Patrick McKenzie And so that that is fundamentally the reason why cash is being outcompeted. And I don't expect cash to go away. Some people like like two thumbs up you do you the but people often say, it's a conspiracy. The government wants to get rid of cash. One, the difference between conspiracy and policy goal is a matter of degree like if you were to go to Japan and say, is it a conspiracy that the government wants to get rid of cash, they would say, there's a actually, you know, a position paper that we have on this exact subject where currently the percentage of cashless transactions in the economy is plus or -20%. 00:10:58:11 - 00:11:15:01 Patrick McKenzie Our goal is to get that to 40% within the next five years. Here are the initiatives that we have going on with the financial industry to do this goal. The reasons why we have this goal are, one, we think it will decrease the tax gap, particularly with regards to small businesses. Two, we think that this will help modernize Japan and allow us to engage more international commerce. 00:11:15:01 - 00:11:36:16 Patrick McKenzie 3.2. the dot. So but the fundamental reason why, you know, any businesses fortunes go up or down is their position in relation to competitors and cash is just, you know, not what you would come up with in 2023 for a payments experience that is destined or, you know, designed to gain share versus modern payment systems. 00:11:36:16 - 00:11:50:17 Cas Piancey mean, this leads us into the cryptocurrency debate. I think a bit here is that with the with the death of cash in general, for a multitude of reasons that are totally fair and reasonable when it comes to the future of money and the current state of money. 00:11:50:17 - 00:11:55:20 Cas Piancey Do you think that the future is closer to, let's say in China? 00:11:56:01 - 00:12:20:11 Cas Piancey I know everyone uses like WeChat or some sort of centralized, social media app to usually pay for things. The way anyone is known as a tourist is less whether they know Chinese know Mandarin and more if they have like WeChat and a bank in China that they can use to pay for this stuff. If they're using cash, they're a tourist. 00:12:20:13 - 00:12:35:05 Cas Piancey Or do you think it's something closer to cryptocurrency where you have it decentralized to a degree or a centralized kind of stablecoins, which are crypto currency, I guess, right? 00:12:35:05 - 00:12:37:08 Patrick McKenzie I think one of the interesting things that 00:12:37:08 - 00:12:43:22 Patrick McKenzie looking at payments, the like give you a glimpse of the future is that there isn't one future for the world of payments. 00:12:44:00 - 00:12:48:19 Patrick McKenzie We are likely have multiple different equilibria in multiple places. 00:12:48:19 - 00:13:12:02 Patrick McKenzie is always difficult to look in the crystal ball and predict the future, particularly for a country where everyone is less invested. But if I were to, you know, be in the crystal ball business, I would say, it does look like China will increasingly go in the direction of a very small number of payment systems that are nominally privately administrated, which are as nominally privately administrated as anything else that exists in China. 00:13:12:04 - 00:13:16:12 Patrick McKenzie And those systems will probably be, you know, fully electronic, not touch. 00:13:16:12 - 00:13:29:05 Patrick McKenzie cash and be relatively separate from the formal banking system unless and until the Chinese government decides that it would be more advantageous for them to be in the formal banking system, in which case they will be in the formal banking system immediately. 00:13:29:05 - 00:13:32:08 Patrick McKenzie That equilibrium doesn't prevail in other places. 00:13:32:11 - 00:13:48:11 Patrick McKenzie So in many markets there is and like a Cambrian explosion of competition between payment methods happening right now. And so I am something of a gamer. And until recently I lived in Japan. And if you were to go to Steam right now, Steam lists 15 different ways you can pay them 00:13:48:11 - 00:13:54:21 Patrick McKenzie for, you know, video games in Japan and 15 is actually like a small segment of the Japanese payment market at the moment. 00:13:54:21 - 00:14:07:19 Patrick McKenzie If you go to a convenience store, the number of loans they have in the door will be plus or -40 and 40. It does not touch the entire market. That's just like the teams that were smart enough and big enough to get the largest convenience store chains in the world to accept their money. 00:14:07:19 - 00:14:28:11 Patrick McKenzie that's a very different experience from what we have here in the United States, where for the longest time the payments industry in the United States that the credit card was the final evolution of payments in the United States, and that all interesting work in payments heretofore would be like different variations on let's make it a reward card, 00:14:28:11 - 00:15:01:03 Patrick McKenzie let's put different credit terms on it. Maybe we can make a credit card and take off the credit apart to call it a debit card, and that will allow us access to a new market, etc., etc.. And then just in the last few years, there's been an innovation both within the United States and coming from places outside of the United States, greatly impacting the U.S. market with respect to things like buy now pay later as an offering where they said, you know, we can entirely like take out the credit part of this or rather take out the card part of this and make it palatable for the merchant to underwrite the credit extension and knock 00:15:01:03 - 00:15:19:22 Patrick McKenzie down the cost of credit to zero for the customer and work. The numbers such as this works out for everybody. And we see, you know, different things in places like India, where India has a public private partnership that has sort of like the Platonic ideal of what people who say central bank, digital currency, 00:15:19:22 - 00:15:28:10 Patrick McKenzie like most people who say central bank, digital currency and I care probably less about the slow database involved and more about like the fundamental user interface. 00:15:28:10 - 00:15:51:21 Patrick McKenzie And voluntarily any person in the economy should be able to pay any other person in the economy at an arbitrarily low cost in India. Roll that out with their sort of public private partnership payment method that is tied to individuals, identity cards and etc., etc.. Brazil also has an option called PIX, which is spiritually similar, although there are some important differences. 00:15:51:23 - 00:16:14:20 Patrick McKenzie And in India, like virtually no one has a credit card and, you know, given a like really strong publicly endorsed alternative payment method, I think one would probably be bearish on the perspective of like India, you know, credit cards in India as a payment method, capturing the majority of share in that country. But who knows what the future holds? 00:16:14:20 - 00:16:20:11 Bennett Tomlin What do you think? The largest unsolved problems in the payments industry still are? 00:16:20:16 - 00:16:21:12 Patrick McKenzie there's so many of them. 00:16:21:12 - 00:16:27:22 Patrick McKenzie this surprises a lot of people. But the largest and most sophisticated businesses in the world. 00:16:28:00 - 00:16:28:07 Patrick McKenzie Hate. 00:16:28:07 - 00:16:50:07 Patrick McKenzie Money and why do I say they hate money? It's because they have a team that's in charge of payments. The team is in either an organizational backwater at their company or in many cases doesn't work for their company. They work for a middleman or a systems integrator or an Accenture or similar, and the actual interface where their customers come and pay them. 00:16:50:12 - 00:17:08:15 Patrick McKenzie Literally all of the money is like in some cases, it's literally a particular web page you can click on. In many other cases, there is a million different interfaces, all flawed in their own way. But that like the the actual experience of a customer attempting to pay is broken. 00:17:08:17 - 00:17:10:15 Patrick McKenzie Profoundly in so. 00:17:10:15 - 00:17:12:00 Patrick McKenzie Many different ways, 00:17:12:00 - 00:17:20:14 Patrick McKenzie in the same fashion that science can demonstrate that cigarets cause lung cancer. This web page causes you to lose billions of dollars, 00:17:20:14 - 00:17:23:18 Patrick McKenzie and that persists. And so that like. 00:17:23:20 - 00:17:24:21 Patrick McKenzie The high level biggest. 00:17:24:21 - 00:17:31:13 Patrick McKenzie Problem in the world for payments is that the adoption story of it for businesses is just. 00:17:31:15 - 00:17:32:11 Patrick McKenzie Tremendously. 00:17:32:11 - 00:17:50:23 Patrick McKenzie Suboptimal relative to their goals for it. You can also say the same about the adoption story for individuals, you know, be quite a bit of the like the general distaste for banks and etc. is ultimately transactional friction around routine transactions in the economy that 00:17:50:23 - 00:18:03:11 Patrick McKenzie the parties expected to go. Well, that didn't go well for various reasons. And then, you know, you need someone to blame for that going head going badly and for whatever reason, the the banks end up carrying the ball sometimes extremely deservedly. 00:18:03:13 - 00:18:07:06 Patrick McKenzie But other times it's just because we haven't figured out a way to. 00:18:07:06 - 00:18:08:15 Patrick McKenzie At a societal level. 00:18:08:17 - 00:18:32:03 Patrick McKenzie Deal with conflicts between renters and landlords, for example, in a way that doesn't bring the payment method into it. And indeed, that is actually one of the things that payment method offers to the world. We have this gigantic society wide system for resolving disputes between people involved in commerce. It's called the legal system. It is galactic, slow, galatically expensive. 00:18:32:05 - 00:18:35:10 Patrick McKenzie And to think that payment methods offer is to say, okay. 00:18:35:12 - 00:18:38:18 Patrick McKenzie You will always retain the right to go to the legal system. 00:18:38:19 - 00:18:43:02 Patrick McKenzie To argue over the $16 basket of groceries. But neither. 00:18:43:02 - 00:18:44:12 Patrick McKenzie You nor the grocery store. 00:18:44:12 - 00:18:51:03 Patrick McKenzie Wants that to happen. And so if you use your debit card to pay for the groceries. 00:18:51:05 - 00:18:54:00 Patrick McKenzie And an apple spoils and you go to the grocery. 00:18:54:00 - 00:18:57:09 Patrick McKenzie Store and can't get a happy resolution with regards to your apple. 00:18:57:11 - 00:18:58:15 Patrick McKenzie Called the one 800 number on. 00:18:58:15 - 00:19:04:10 Patrick McKenzie The back of the debit card debit card and say, I am unhappy and you get your money back and there is this like. 00:19:04:10 - 00:19:06:00 Patrick McKenzie Massive machine and. 00:19:06:00 - 00:19:08:13 Patrick McKenzie Capitalism that exists to guarantee that invariant for. 00:19:08:13 - 00:19:15:17 Patrick McKenzie You. You don't have to care about that machine at all you just have to know call the one 800 number on your debit card and your problem goes away. 00:19:15:21 - 00:19:22:17 Patrick McKenzie And you don't have to pay $600 an hour for a lawyer to like, fight this case in court for four months because no one wants that to happen. 00:19:22:17 - 00:19:43:07 Bennett Tomlin How much are these experiential problems in payments tied to the infrastructure choices that have been made so far? The building it up from checks to this automated clearinghouse to this various small kinds of credit on top of it. How are those related to these experiential problems, or are they related? 00:19:43:07 - 00:19:47:22 Patrick McKenzie there extremely related to the the word we like to use a lot is path dependency 00:19:47:22 - 00:19:56:22 Patrick McKenzie many people in the United States and many people in the crypto industry who are heavily exposed to the United States think that transfers between bank accounts, they take forever. 00:19:56:22 - 00:20:13:17 Patrick McKenzie And to the extent that they don't take forever, they still take way too long for computerized transaction and then costs a lot of money if you're doing wires. And all of those are path dependent there because transfers between banks in the United States is ultimately based on this model of like sending checks from one end of the country to another. 00:20:13:23 - 00:20:21:10 Patrick McKenzie It's like various iterations we've made on top of that model, there are reasons why those iterations persist. The banking industry does not lack for smart people, 00:20:21:10 - 00:20:30:12 Patrick McKenzie it turns out that when you're dealing up to the scales of the economy, things that you could do that would make like certain aspects of these better for some people also create losers. 00:20:30:14 - 00:21:03:14 Patrick McKenzie And society has both like, you know, negotiations between firms and also negotiations that are society wide level through the government. I'm like, you know, we want a compromise here because we, you know, do want to allocate like the winners and losers in a way that achieves society's desired political life, moral, ethical goals for them. So as an example of that, one reason that payments is slow in the United States isn't because anyone is pounding the table and saying, slow payments, man, that is what we need for the world. 00:21:03:16 - 00:21:27:16 Patrick McKenzie What they're actually saying is community banking. Man That is really important for the world. It is like extremely important that a person in a you know, rural Nebraska has a point of presence nearby. They can ask questions of about the financial system and about their relationship to the government, which is brokered through the financial system that requires community banks to exist for various reasons. 00:21:27:16 - 00:21:52:20 Patrick McKenzie Community banks would find it very difficult to continue existing in a world where all payments were substantially instantaneous. That would result in lots of them going under due to operational risk and technical risk if they can't take on right now, we can't bankrupt a third of the US financial system. And so we need to have due deliberation in having instant payments being available, which is one reason for many of the negative news stories regarding Zelle. 00:21:52:20 - 00:22:07:11 Patrick McKenzie And it's one reason why FedNow that the real time net settlement payment method that the Federal Reserve has had in the book here for a while now has been sardonically referred to as Fed later for the last couple of years. 00:22:07:11 - 00:22:40:18 Cas Piancey I'm hit with two questions here and feel free to answer whichever one you think is more reasonable. But, one, I think we're talking about the payment infrastructure and I wonder if the payment infrastructure is also hindered by something that we've all kind of accepted as normal now, which is KYC, AML. But KYC AML was only really introduced within, I mean, my lifetime, like in 2001 after after 911. 00:22:40:20 - 00:22:48:02 Cas Piancey So KYC, AML is a relatively new construct. I wonder if that actually does slow things down on purpose 00:22:48:02 - 00:23:05:01 Cas Piancey as a policy goal or the other side of this that I think is relevant to what you were stating is that you're talking about community banks, you're talking about kind of the banking structure of the United States. And I know that we have a lot of banks here or things that are close to banks. 00:23:05:01 - 00:23:13:21 Cas Piancey And I wonder if we're watching that kind of collapse now and if that indeed will change the payments infrastructure in America. 00:23:13:21 - 00:24:01:13 Patrick McKenzie One, it is not the case that no, your customer, KYC or AML anti-money laundering regulations started in 2001 and they were refined by the Patriot Act in 2001 in the wake of the 911 attacks. But the sort of legislative history of them dates back to, I believe, the late 1970s, the United States under what's called the Bank Secrecy Act or BSA, and the Bank Secrecy Act basically says, like banks, please have less secrecy from government, but originally codes the notion that banks are required to have for their accounts, which have an ongoing relationship with the customer, you need to discover what you believe the true identity 00:24:01:13 - 00:24:18:14 Patrick McKenzie of that customer to be and persist information about that customer for and their identity for the lifetime of the account. And sometime after and all KYC kind of like flows from that original fault in the United States. In an international point of view, it's kind of complicated because there are these 00:24:18:14 - 00:24:43:18 Patrick McKenzie national, quasi judicial, quasi private organizations that promulgate KYC standards, which are like somewhat rubber stamped by various international treaties and government policymaking, and sometimes sort of like adopted by the banking infrastructure less because their government has said you, you know, legally must adopt this thing and or because they don't want their wires like the physical, you know, copper wires to other nations 00:24:43:18 - 00:25:01:13 Patrick McKenzie getting yanked out of the source. And so there's a big ball wax there. But so clarifying that I think it is useful for more people that are involved in cryptocurrency, in example, for example, to understand that the genesis of KYC enabled dates back to a while ago. 00:25:01:15 - 00:25:04:20 Patrick McKenzie And does that intentionally make. 00:25:04:22 - 00:25:07:03 Patrick McKenzie Payments products worse than they would be? 00:25:07:03 - 00:25:29:19 Patrick McKenzie This is a complicated topic, and one thing that I and if folks haven't followed me for a while and haven't gotten this impression already, I am something of a crypto skeptic myself and more than something of a crypto skeptic. I remember back when Bitcoin was $17 saying that it was overpriced by $17 and I have not seen any evidence over the course of the last ten years to change me from the point of view. 00:25:29:21 - 00:25:55:16 Patrick McKenzie Be that as it may, and I think that the crypto folks are fundamentally right about is that AML and KYC regulations are a matter of choice for society. Society should choose them to the extent that it believes that it advances society's instrumental goals and achieves our values. And to the extent that they don't achieve our instrumental goals and values, we should like change the amoral quasi regime. 00:25:55:16 - 00:26:16:22 Patrick McKenzie AML, KYC creates winners and losers. One of the things that you hear over and over again in talking to people who are unbanked or underbanked and that you will see in the scientific literature about this sort of thing, is that the, you know, difficulty of formally verifying one's identity to a bureaucratic process causes people to not be able to open bank accounts. 00:26:16:22 - 00:26:20:19 Patrick McKenzie And that's one of the reasons that they remain unbanked or underbanked 00:26:20:19 - 00:26:29:22 Patrick McKenzie that's negative to the extent that we want everyone to, you know, be able to partake in the economy and equal footing and to be able to like trivially do things like order from, you know, DoorDash, 00:26:29:22 - 00:26:41:18 Patrick McKenzie that both is true, but it's not like the entirety of the story and often that gets blamed on AML, KYC, where it is not actually required in the regulations that it be difficult to demonstrate your and 00:26:41:18 - 00:26:50:08 Patrick McKenzie your identity to a bank if you are, for example, a an immigrant and under documented the circumstances. 00:26:50:10 - 00:27:16:14 Patrick McKenzie And but banks are like kind of okay with a maximally sort of risk averse version of their AML KYC policies because it turns out that you know, sort of tightening the dial on AML KYC improves their metrics with regards to operational losses and fraud losses. That, by the way, is another thing, like, you know, independent of any like. 00:27:16:16 - 00:27:49:21 Patrick McKenzie So obviously nobody nobody is in favor of tax fraud and nobody is in favor of terrorism because kind of without saying and but emails less KYC don't only impact tax fraud and terrorism. And in fact, they probably impact those a little bit less than the drafters of the policies think. And but they also the notion that, like every credit card has a you know, an identity attested to with like some degree of credence to it causes that having a credit card to be an excellent risk signal for a variety of businesses throughout the economy. 00:27:49:23 - 00:28:15:10 Patrick McKenzie Whether that is a e-commerce merchant that is sending you a PlayStation five in the mail or whether it's a hotel that you're checking into, which is trying to like run a process on every customer and the checks in. Are you going to be the one who, like, you know, invites in the prostitute and then sets the bed on fire and like you coming up with a credit card in your name, checking into the hotel says surely persuasively to most hotels on the basis of a whole. 00:28:15:10 - 00:28:17:22 Patrick McKenzie Lot of historic evidence that this will not be the. 00:28:17:22 - 00:28:18:18 Patrick McKenzie Person that burns the. 00:28:18:18 - 00:28:19:08 Patrick McKenzie Hotel down. 00:28:19:08 - 00:28:30:13 Cas Piancey we're watching the collapse of regional banking or we did see a minor. Minor? No, not minor. Significant collapse of regional banking in the United States with First Republic, Silicon Valley Bank. 00:28:30:13 - 00:28:59:05 Cas Piancey We saw Silvergate go under. We saw a signature. It seems like this hasn't quite finished yet, that there's still going to be more banks that suffer, more banks that come to the same realizations that maybe they've got a balance mismatch. And I'm just wondering if you think that could change the fact that there could be a shift in community banking services and regional banking services in the United States in the next few years. 00:28:59:07 - 00:29:02:01 Cas Piancey Do you think that could alter payment processing services, 00:29:02:01 - 00:29:15:21 Patrick McKenzie there's both the the concrete, what we actually expect to see in the United States spill out over the next couple of years version of this. And then there's also kind of like the if everyone were spherical cow like we have in physics classes, what would you expect? 00:29:15:23 - 00:29:52:20 Patrick McKenzie The spherical cows version is that society society ultimately has goals for the structure of the banking system. One of the goals for the United States having such a vibrant community banking sector is that it helps bank the I forget the numbers off the top of my head, plus or minus like 50% of the United States to live outside of a major metropolitan area that might actually be like 20 or 30%, but helps them get access to a local point of presence for the financial system and through their government, which interfaces with them through the financial system. 00:29:52:20 - 00:30:07:07 Patrick McKenzie When I when I say that kind of glibly, that means like, you know, your bank is the place where you pay taxes and your bank is the place where you get government benefits, checks, etc., etc.. It's a it is another branch of government and all, but they've in a lot of ways 00:30:07:07 - 00:30:08:01 Patrick McKenzie historically 00:30:08:01 - 00:30:22:11 Patrick McKenzie it was broadly believed that if there was not a physical bank branch within a reasonable travel distance from your house or workplace, that that was a bug the system should fix in the same way that the system, you know, the United States of America decided as a policy priority, 00:30:22:11 - 00:30:23:03 Patrick McKenzie we don't. 00:30:23:03 - 00:30:24:04 Patrick McKenzie Care where you live in the United. 00:30:24:04 - 00:30:45:00 Patrick McKenzie States of America, you are going to get a phone line and you're going to get electricity because the standard of living that we expect for Americans will in the future include a phone line, an electricity and that happened in people's living memory, by the way, and they'd be very old at the moment. But the rural electrification or Rural Electrification Act, there are some people who were alive before the passing of that 00:30:45:00 - 00:31:03:02 Patrick McKenzie what if it is not actually true about the world that that we need a physical bank branch around you to give you banking or bank like services? What if that can be delivered more efficiently through the internet? What if the thing that people have wanted for forever and the advocacy space, postal banking, Let's put a bank. 00:31:03:03 - 00:31:25:18 Patrick McKenzie Every post office can be delivered much more efficiently. Let's just put a bank in every iPhone and every Android. And that will be like the basic bank account available to people. And they can layer on like more complicated banking services, potentially including a branch if they want them. But from a perspective of like the bare minimum thing you need to exist in a society exists on every phone. 00:31:25:20 - 00:31:49:16 Patrick McKenzie I think that that, you know, a spherical cow world is like a very reasonable thing to expect to that most banking and you know with lower ends is going to be intermediated by various players like for example cash app which cash app is not a bank. I'd be a very bad financial technologist if I said cash app is a bank, but let's say cash app is from the perspective of an unsophisticated consumer of banking services, a whole lot like a bank. 00:31:49:16 - 00:31:50:11 Patrick McKenzie If you squint at 00:31:50:11 - 00:31:58:01 Patrick McKenzie that is not a criticism, by the way, I think Cash app is a wonderful thing to exist in the world at that. It's probably one of the best things the technology industry has shipped in the last 20 years. 00:31:58:01 - 00:32:01:17 Patrick McKenzie don't work for Square BLOCK or whatever they call themselves these days and never have. 00:32:01:22 - 00:32:05:11 Patrick McKenzie They're just, you know, existing like two thumbs up guys. 00:32:05:11 - 00:32:22:13 Patrick McKenzie now let's talk about like in the world we actually live in, what will happen over the next couple of years. Community banks aren't going away. Regional banks aren't going away. And I do believe we're in a bit of a banking crisis at the moment. Banking crisis crises are not good things for the world. 00:32:22:15 - 00:32:31:21 Patrick McKenzie Nobody should celebrate them. But this one seems to be less severe in scope than previous ones that we have weathered and, you know, come out the other side as a nation slash economy. 00:32:31:21 - 00:32:53:07 Patrick McKenzie sort of addition to issues such as the, you know, retail and facing experience for like basic payments and you need some place that isn't your mattress to hold money banks off often sorry they also have a very important to credit creation and monetary creation function inside the United States economy. 00:32:53:09 - 00:33:28:16 Patrick McKenzie And those functions aren't going away and conveniently be substituted by any other player at the moment. So, you know, every apartment building, every dentist, office, etc., there is a capital stack behind that and that capital stack in almost all places outside the big cities for almost all buildings materially involves community banks, the regional banks and it would be a catastrophic outcome for the United States of America if that was not true because of the way that we have our banking system set up now, again, there are many equilibrium is that you can, you know, imagine different countries falling into in the world. 00:33:28:20 - 00:33:34:20 Patrick McKenzie I think if we look over at our friends in the UK, the UK is in a lot of ways a near peer to the United States. 00:33:34:22 - 00:33:36:17 Patrick McKenzie And the UK has like basically four. 00:33:36:17 - 00:33:53:10 Patrick McKenzie Banks and they're cool with that. And you know, that's one way to do it that Japan has a system that is closer to the United States in character in that there are sort of like large money center banks and also smaller community focused institutions. But these quote unquote. 00:33:53:12 - 00:33:54:11 Patrick McKenzie Small community. 00:33:54:11 - 00:34:22:22 Patrick McKenzie Focused institutions are much larger than they are in the United States, and they're far less numerous on a per population basis. And but, you know, these are multiple equilibrium step we ended up in due to a variety of like straight up geographic factors, due to history, historical factors due to this past dependance that were on and the transition the United States would have to undergo to go from having more than 6000 financial institutions to having like, let's say, 200 financial. 00:34:22:22 - 00:34:25:16 Patrick McKenzie Institutions would be basically. 00:34:25:16 - 00:34:33:04 Patrick McKenzie Cataclysmic and unthinkable. So I don't expect cataclysmically unthinkable things to happen in the course of the next five, ten, 20 years. 00:34:33:04 - 00:35:04:16 Bennett Tomlin The thing I hope to kind of get at with this episode is why cryptocurrencies, at least generally don't solve most of the problems people have with payments. And I think what I've been hearing from you over these last 30 minutes is that most of our payments infrastructure is built around managing the trust of various actors in this entity and making sure that things behave in a repeatable way that is reasonably acceptable to most of the participants in the system. 00:35:04:16 - 00:35:29:01 Bennett Tomlin as we've been going over that, it has just been reiterating in my mind how different that is from the goal of like crypto currency as a payment method. All of this infrastructure you're talking about isn't really about transferring the actual dollars from point A to point B at least most of the stuff built on top of it is it's about managing the expectations about everyone who needs those dollars or has them. 00:35:29:03 - 00:35:51:17 Bennett Tomlin And cryptocurrency people always focus on the actual transfer and specifically focus on trying to make that a transfer that can happen to anyone, like at any time for no reason. And I think what's becoming clear to me is you're talking through to this. Becoming more clear to me is how often that would fail. For most payments use cases. 00:35:51:19 - 00:36:02:13 Bennett Tomlin You were discussing the example with the grocery store and just a normal person trying to buy a cart of groceries discovered the cart of groceries was not up to their satisfaction. For whatever reasons. 00:36:02:13 - 00:36:17:05 Bennett Tomlin In a world where cryptocurrency is the default payment method and you're using it in the way most crypto advocates would expect, you don't have that option to call the one 800 number you need to go back to the grocery store and try to convince them they should give you your money back 00:36:17:05 - 00:36:41:10 Bennett Tomlin So what it really looks like to me in a lot of ways is cryptocurrency. People saw one of the problems of the financial system, meaning that sometimes these entities slow payments, stop payments or will not allow you to be one of their users who makes payments and decided that that was the largest problem in payments and set about solving that. 00:36:41:12 - 00:36:53:08 Bennett Tomlin And assuming once that was solved, everything else was solved. Does that match up with kind of the tension you see between what crypto advocates think is wrong with payments and in your experience, what is actually wrong with payments? 00:36:53:08 - 00:37:14:19 Patrick McKenzie I tend to think people think that I deserve more trust than I have. So you shouldn't take my point of view as gospel on this one. Like I don't like McDonald's burgers flat out. I would do many things to avoid eating in McDonald's burger. But we you know, we can observe the universe outside of us and see that a lot of people like McDonald's burgers for a lot of purposes. 00:37:14:21 - 00:37:16:15 Patrick McKenzie Now we can observe the universe. 00:37:16:15 - 00:37:19:02 Patrick McKenzie Of crypto payments which exist in like, 00:37:19:02 - 00:37:20:07 Patrick McKenzie crypto people have been. 00:37:20:07 - 00:37:26:07 Patrick McKenzie Saying, yeah, adoption is coming any year now for about ten years. And you know, buy now, pay. 00:37:26:07 - 00:37:27:09 Patrick McKenzie Later can say the same thing. 00:37:27:11 - 00:37:29:10 Patrick McKenzie Yeah, buy now, pay later like you can actually. 00:37:29:10 - 00:37:32:07 Patrick McKenzie Use that to pay for stuff at Sephora If you walk into Sephora today. 00:37:32:09 - 00:37:33:16 Patrick McKenzie You can't use. 00:37:33:18 - 00:37:36:20 Patrick McKenzie Dogecoin, you can't use it Usdc, etc. etc.. 00:37:36:20 - 00:37:40:03 Patrick McKenzie Why is the market telling crypto thanks for. 00:37:40:03 - 00:37:44:04 Patrick McKenzie This cool slow database. It doesn't solve problems for me. 00:37:44:04 - 00:37:58:13 Patrick McKenzie I will not put it on my payments website. Will not use it to transact with Google, with Delta, with Hilton, with all the with McDonald's, with all the other businesses that I transact with because crypto kind of like Nike. 00:37:58:15 - 00:37:59:07 Patrick McKenzie Focuses. 00:37:59:07 - 00:38:03:01 Patrick McKenzie On that settlement, part of the payment experience and not the. 00:38:03:01 - 00:38:03:12 Patrick McKenzie Many. 00:38:03:12 - 00:38:06:20 Patrick McKenzie Many other things that Payments app brings to the table. 00:38:06:22 - 00:38:09:01 Patrick McKenzie Some of those are about money movement. 00:38:09:03 - 00:38:35:08 Patrick McKenzie Frequently payments is bundled, bundled with things that are not directly about money movement or the software and contracts that make money movement go. And so if it's from the credit card companies to and to every other is there in the ecosystem, since time immemorial has been the reason you pay for credit cards is not simply a convenience fee for getting cash from their pocket into your pocket. 00:38:35:10 - 00:38:42:06 Patrick McKenzie It is because if people use our plastic, the people that come in bearing our plastic will be the most desirable customers. 00:38:42:12 - 00:38:44:20 Patrick McKenzie And they will spend more money on our plastic. 00:38:44:20 - 00:38:48:01 Patrick McKenzie Than they would if they were using something else. And since you prefer. 00:38:48:01 - 00:38:51:14 Patrick McKenzie More money to less money, you should be willing to pay a convenience fee for that. 00:38:51:19 - 00:39:04:00 Patrick McKenzie Just like you're willing to pay for it. For example, advertising and that that many people don't appreciate. It's like different credit cards have different prices for different businesses in the economy. So if, for example, if you use. 00:39:04:00 - 00:39:06:15 Patrick McKenzie Not an endorsements, etc., etc., not using. 00:39:06:15 - 00:39:18:18 Patrick McKenzie Any private information for use the Chase Sapphire Reserve. Chase Sapphire Reserve is like sort of the credit card of choice for, you know, professionals in the Bay Area. Why Just to give a lot of points that are very nice to the customers 00:39:18:18 - 00:39:24:05 Patrick McKenzie creating the Chase Sapphire Reserve required chase to get in touch with that visa and say. 00:39:24:05 - 00:39:26:13 Patrick McKenzie Look you've got existing tiers. 00:39:26:14 - 00:39:46:11 Patrick McKenzie At four different visa cards and they get more expensive for businesses. You go up in tiers, we see an entirely new tier because we're bringing an entirely new like primo experience to the visa ecosystem and in that tier is like materially more it's like a yeah, I can't remember how many basis points it is that it's Google and it's like 60 basis points. 00:39:46:11 - 00:39:57:09 Patrick McKenzie So 6/10 of a percent or 1% more expensive for businesses to take a Chase Sapphire Reserve and has to take the next tier of chase card. Why? 00:39:57:11 - 00:40:00:16 Patrick McKenzie Because like they successfully got it into the hands of a bunch of rich. 00:40:00:16 - 00:40:13:11 Patrick McKenzie People in New York and San Francisco and many other places. And when those people like, pull out the the card at the top of their wallet, they spend a lot of money in businesses like transacting with rich people for a lot of money. And that is the thing that can be bought and sold in the economy. 00:40:13:11 - 00:40:21:23 Bennett Tomlin I don't know that I realized that before today that like credit card fees for different for different tiers of credit cards because normally when I've been seeing it, it's abstracted away. 00:40:22:04 - 00:40:36:01 Bennett Tomlin I'm looking at, say, Stripe's example, and they're charging 2.9% plus $0.30 or whatever. But that then is like in aggregate with their margin based on like the distribution of fees they're paying to the credit card networks, specifically. 00:40:36:01 - 00:40:51:23 Patrick McKenzie a good link heuristic for for thinking about this is like what is the price of coffee or coffee. It's like $0.25. If you buy it at a diner, it's free if you get it on an airplane or it's like $6, if you get it from a Starbucks. But if you buy like 50 gallons from Starbucks at a time, they will cut you a deal. 00:40:52:00 - 00:41:05:20 Patrick McKenzie But if you buy those 50 gallons in the specific context of, you know, delivering them to a hotel event space, it'll suddenly cost you like five times more than Starbucks would have charged you. And this is just like built into those various commercial relationships and ways to deploy it. 00:41:06:01 - 00:41:07:11 Patrick McKenzie So what is the. 00:41:07:11 - 00:41:25:22 Patrick McKenzie Underlying cost of like charging a credit card? Well, it kind of depends like, you know, who you are in the economy, what sort of relationship you have, what other things are getting bundled into that transaction. And if you are Walmart, you don't pay the same amount for charging even a Chase Sapphire Reserve as for example, I do if someone uses that to buy my newsletter. 00:41:26:00 - 00:41:31:17 Patrick McKenzie And partly that's due to like different levels of negotiating power, partly that's due to things like 00:41:31:17 - 00:41:55:04 Patrick McKenzie you know, providing financial services and involves like a variety of different goods. Like, you know, you need a 24 seven phone team and ops team etc. etc. and is difficult to build for those things directly and the economy went away from email in which most companies said, okay, it starts like it's $100 a month for your basic card, basic charge to get hooked up to international financial rails. 00:41:55:10 - 00:42:03:02 Patrick McKenzie And then we charge you like a free percentage fee and mostly with like some holdouts. The financial system is that. 00:42:03:02 - 00:42:05:06 Patrick McKenzie Actually like that $100 a month? 00:42:05:08 - 00:42:30:18 Patrick McKenzie We're going to absorb that. And, you know, we will pay for the ops team, will pay for the customer support people, etc., etc.. We will adjust our our percentage rates in various places to be to like have the entire business work off of transaction fees or software fees or etc., etc.. That pricing story would be entirely different. Podcast hopefully by an entirely different person who wasn't constrained by having like written so many documents about it. 00:42:30:18 - 00:42:53:04 Patrick McKenzie But it's a useful thing know in the world. And by the way, so probably not new information for you, but will be new for many of your listeners. The there's a greatly different cost in the cost to process credit cards versus the cost of processed debit cards. And that was created largely due to financial regulation in the wake of the 2008 banking crisis 00:42:53:04 - 00:43:02:23 Patrick McKenzie more or less And I don't know if this would be endorsed by many other people as a way of saying, darn it, base, you screwed up, you're going to hit back as a result of that. 00:43:03:03 - 00:43:21:05 Patrick McKenzie And again, when you know, our elected representatives were saying, banks, you screwed up. We are going to like punch you in the face and like decrease the amount of money that you can earn from debit cards. The Community Banking Association put their hands up and said, okay, you can do that to bank of America. You can do that to chase. 00:43:21:05 - 00:43:22:09 Patrick McKenzie They will continue existing. 00:43:22:09 - 00:43:25:18 Patrick McKenzie But we find it extremely, extremely. 00:43:25:18 - 00:43:41:04 Patrick McKenzie Useful to have like material interchange fees. They're called for swiping debit cards because that is like built into the cost model, providing banking services in middle America at the moment. And if you take away, that will collapse. And it's decided society wide calamity will follow. 00:43:41:04 - 00:43:47:01 Patrick McKenzie And so there was the Durbin amendment to the legislation about this, which said basically there's a. 00:43:47:01 - 00:43:50:04 Patrick McKenzie Threshold above that threshold. You are a big bank. 00:43:50:04 - 00:44:05:11 Patrick McKenzie And you are not allowed to charge very much at all for swiping debit cards below that threshold. You are a Durbin exempt bank and you're allowed to charge quite a bit for swiping debit cards. That was the choice society made through our elected representatives. And then the choices knock on consequences. Like if you, for example, use 00:44:05:11 - 00:44:13:12 Patrick McKenzie cash app cash app has a debit card offering available, I would guarantee you that that debit card is issued by a Durbin exempt bank. 00:44:13:13 - 00:44:25:17 Patrick McKenzie Just cash app likes the idea of being paid a lot of money for doing their debit cards and indeed, if you look at almost any fintech offering there, and their debit card will be issued by a government except bank because of money 00:44:25:17 - 00:44:31:03 Patrick McKenzie and people like here that I think that's right regulatory arbitrage that nobody expected that to happen. 00:44:31:05 - 00:44:33:22 Patrick McKenzie True No one explicitly expected that to happen. 00:44:34:00 - 00:44:35:06 Patrick McKenzie Not necessarily a bad. 00:44:35:06 - 00:44:57:17 Patrick McKenzie Thing, though. I mean, if to the extent that we believe that like capture of banking underbanked people throughout the United States or I can't believe it's not banking underbanked, people throughout the United States actually provide societal value that like an economic model which makes that possible for cash app to do without charging the end user of cash app directly for it is positive in some respects and the like. 00:44:57:20 - 00:45:13:23 Patrick McKenzie Flurry of additional fintech, financial technology products that are where a material part of the model is underwritten by these Durbin exempt debit card charges has provided some amount of, you know, customer perceivable value in the last couple of years. 00:45:13:23 - 00:45:33:20 Patrick McKenzie And so, you know, if you were hypothetically a regulator or a the staff at a congressional office looking at like, there's this like weird little thing that happened in the Durbin in the Durbin amendment to this legislation back in the day, which seems to have these like huge knock on consequences that weren't intended. 00:45:33:22 - 00:45:34:21 Patrick McKenzie Should we maybe, like. 00:45:34:23 - 00:45:40:23 Patrick McKenzie Poke at that a little bit? Like you'd have to understand that, okay. That, you know, due to this path 00:45:41:00 - 00:45:42:05 Patrick McKenzie Dependance that has also. 00:45:42:05 - 00:45:47:16 Patrick McKenzie Created a huge amount of things that are now hanging off that amendment and like. 00:45:47:18 - 00:45:48:09 Patrick McKenzie Just. 00:45:48:09 - 00:45:51:19 Patrick McKenzie Nixing it would cause consequences in the real world. 00:45:51:19 - 00:46:00:14 Cas Piancey you brought up, like, a Chase credit card as an example of, like, well, people in the Bay Area, like, the specific things that they get with this card. 00:46:00:14 - 00:46:10:19 Cas Piancey you know, you're talking about regulatory arbitrage now. I wonder if everyone doesn't wish that they could also provide those same kind of offers to their customers. 00:46:10:19 - 00:46:57:22 Cas Piancey If every bank doesn't wish that they could do that, they're just not able to. And I and almost like I think about what happened with Silicon Valley Bank and it's like they it's almost like they were desperately trying to get to become chase like that was the end goal of of their business model sort of like this idea of if we just keep we just need to keep growing and I guess I, I wonder if that's like if that's a pitfall because then the only real business model for these smaller banks is to constantly grow and like, is that what we want in our, in, in the community banks, in these smaller organizations that are 00:46:57:22 - 00:47:04:07 Cas Piancey supposed to be for the people that they're around the community that they are centered around? 00:47:04:07 - 00:47:27:12 Patrick McKenzie I'm a little bit constrained in what I can say about like any individual bank in the banking system, partly due to, you know, reasons that have been exposed to them to to prior employment and partly due to like the unfortunate social reality that banking is a very small world when you get down to it and there's like probably someone who was controlling all mentions of their bank today and will send out nasty grams to anyone who says the wrong thing as well, occupying the wrong social position. 00:47:27:14 - 00:47:30:12 Patrick McKenzie That's not a conspiracy theory, by the way. I was one of those people in a prior life. 00:47:30:12 - 00:47:48:20 Patrick McKenzie one the United States has had a number of bank failures in the course of 2023. The banks that failed were largely not community based. They were largely not tiny institutions that bank grandma and the Little League team. They were large regional banks with one or two exceptions. 00:47:48:22 - 00:48:01:05 Patrick McKenzie That's would, on a global scale, be among the largest banks in the world. And, you know, some banks prefer growth there. Many large, sophisticated businesses prefer growing versus not growing 00:48:01:05 - 00:48:06:11 Patrick McKenzie financial regulators. And big CEOs at community banks would say that they prefer 00:48:06:11 - 00:48:15:07 Patrick McKenzie measured, steady, sustainable growth. And that growth, which is not measured or steady, is likely unsustainable and likely concealed risk for the banking system. 00:48:15:09 - 00:48:17:21 Patrick McKenzie And so, you know, that should be 00:48:17:21 - 00:48:20:12 Patrick McKenzie Smarter people than me will. 00:48:20:14 - 00:48:38:09 Patrick McKenzie Look at the actions that regulators took over the last couple of years with respect to some banks that are no longer with us and say, was there an identifiable person in an identifiable office who could made certain identifiable choices that are different that would have resulted in like the United States having a different number of in 2023 than it actually. 00:48:38:09 - 00:48:38:19 Patrick McKenzie Does. 00:48:38:19 - 00:48:41:00 Patrick McKenzie And maybe some of some. 00:48:41:00 - 00:48:46:00 Patrick McKenzie Decisions that were made in prior years will be, you know, rethought in that light 00:48:46:00 - 00:48:50:02 Patrick McKenzie stripped of euphemism. There was a bit of failure to go around there 00:48:50:02 - 00:48:56:06 Patrick McKenzie there are banking management teams that did not apparently do a great job of banking management. There are banking supervisors. 00:48:56:08 - 00:48:57:13 Patrick McKenzie Who should not be. 00:48:57:13 - 00:49:20:11 Patrick McKenzie Captured by banking management. That's the entire point of being a supervisor who did not do a very good, good job by society's lights with respect to, you know, the goals that we have. And we were we were trying to extraordinary intervention to ameliorate the societal fallout of failures of banking supervision, also failures by you know, the banking teams, the risk departments. 00:49:20:11 - 00:49:25:10 Patrick McKenzie Yada, yada, yada. There's also like external to banking supervisors and the banks. 00:49:25:10 - 00:49:39:13 Patrick McKenzie can one look at the Fed and say, hey, we understand that it is a important societal goal to get inflation under control because obviously Americans, as many people worldwide, have been really feeling the pinch in the pocketbook the last couple of years. 00:49:39:16 - 00:49:41:03 Patrick McKenzie So that's important. 00:49:41:05 - 00:49:43:13 Patrick McKenzie However, you also must not. 00:49:43:13 - 00:49:46:03 Patrick McKenzie Collapse the banking system while you are doing this. 00:49:46:05 - 00:50:00:06 Patrick McKenzie And if you look at the written record, we told you that if you keep moving rates up very, very quickly, you will collapse the banking system. Do you remember reading those documents and that, like smarter people than us. 00:50:00:06 - 00:50:01:22 Patrick McKenzie Will have to we'll have to have those discussions. 00:50:01:22 - 00:50:04:18 Patrick McKenzie But society does have to have those discussions at some level. 00:50:04:18 - 00:50:06:14 Bennett Tomlin I know you can't speak to specific banks. 00:50:06:14 - 00:50:29:08 Bennett Tomlin I'm not going to ask you to buy new cars, can't speak to specific banks. I might ask him one like specific bank that we have covered was Farmington State Bank up in Washington State, and this was a small local bank. Like their primary function was extending credit to like farmers in the local area who needed it to fund a piece of equipment that had like a predictable impact on their business. 00:50:29:13 - 00:51:01:01 Bennett Tomlin And like this bank being embedded in the community was better able to provide that services than others. And it was taken over by a new management team who had ambitions to transform this small community bank into something much grander. And they believed that with the appropriate partners in the right investment from Alameda Research, they would be able to take this bank and the deposits from Alameda Research and turn it into like the future of online banking and all those things. 00:51:01:01 - 00:51:01:20 Bennett Tomlin And so 00:51:01:20 - 00:51:31:14 Bennett Tomlin When Cas was talking about banks that felt compelled to grow. That was, of course, the example I was thinking about, and I couldn't help but think about the Federal Reserve cease and desist letter issued to Farmington State Bank after. Yes. Yes. Issued months after they had already discharged the problematic deposits in question and had already begun begun the process of being acquired by a different, slightly larger bank in that region. 00:51:31:16 - 00:51:41:11 Bennett Tomlin The Federal Reserve finally got around to issuing their cease and desist that says, Wait a second, you guys did a whole bunch of things over those years without telling us. Well, that's not okay. 00:51:41:11 - 00:51:53:02 Bennett Tomlin And it was a funny document to read both because it highlighted how many things that this bank was doing that was apparently against the rules without anyone realizing it. 00:51:53:04 - 00:52:12:10 Bennett Tomlin And like the fact that the regulator didn't issue this document until months and months after any danger from Farmington behavior was already passed. And that tension, just that case has always been one that's stuck in my mind since we've covered it. I can see that. You have thoughts on this case, Cas? 00:52:12:10 - 00:52:24:08 Cas Piancey Well, yeah, I want to let Patrick jump in here, but I just wanted to say that it's funny that you brought up this cease and desist order, because I. I reached out to Bank of Eastern Oregon. I think that's the one that bought them or 00:52:24:08 - 00:52:32:18 Cas Piancey Farmington got purchased by this bank, I reached out to that bank on the day of the cease and desist letter, and they basically were like, Yeah, well, this is no surprise. 00:52:32:20 - 00:52:34:19 Cas Piancey We knew this. We knew this letter was coming 00:52:34:19 - 00:52:43:10 Bennett Tomlin it was filed like explicitly with their like, knowledge and consent to whatever, like it was said, as they've already consented to, as agreed by whatever 00:52:43:10 - 00:53:12:12 Cas Piancey and I think this is my my point just being that Farmington knew this cease and desist was coming as well. Right. Like everybody intimately involved with the bank itself or the purchase of the assets of the bank or, you know, whatever it was, whoever was intimately involved knew that the season cease and desist was coming long before anyone in the public did, which almost speaks to the weird regulatory nature of the Federal Reserve, where you go like, So who was this for 00:53:12:16 - 00:53:29:03 Patrick McKenzie Let's step back from the specific example of a specific specific bank that might have been puppet by a specific bank that does a lot of business with crypto. Maybe I'm letting a little too much show there. But to step back from the specific example and talk more broadly about banking regulation. 00:53:29:03 - 00:53:30:13 Patrick McKenzie So one example, 00:53:30:13 - 00:53:30:22 Patrick McKenzie of. 00:53:30:22 - 00:53:32:13 Patrick McKenzie Like who is this. 00:53:32:13 - 00:53:41:06 Patrick McKenzie Regulatory action for? It's like every regulatory action will have an address on the top of like who is supposed to, you know, get it and take immediate action based on it. 00:53:41:08 - 00:53:42:19 Patrick McKenzie But it's also like essentially. 00:53:42:19 - 00:53:48:01 Patrick McKenzie CCed to every other bank in America. And so if your bank gets. 00:53:48:01 - 00:53:48:18 Patrick McKenzie Killed. 00:53:48:20 - 00:53:53:06 Patrick McKenzie For misdeeds and misstatements that you have made. 00:53:53:08 - 00:53:59:16 Patrick McKenzie The the the document ordering the execution of your bank that gets key to every other bank in. 00:53:59:16 - 00:54:00:15 Patrick McKenzie America is. 00:54:00:15 - 00:54:19:19 Patrick McKenzie Basically a like a not so quiet instruction like this shit will not fly. Do not do it. You don't need to hear us tell you explicitly. Do not do it. Because if you do it, we will kill your bank. Signed the Fed and every other investigative agency 00:54:19:19 - 00:54:21:00 Patrick McKenzie people have a like an. 00:54:21:00 - 00:54:28:21 Patrick McKenzie Interesting sort of background belief that, like regulators are naturally in kind of an acting antagonistic relationship with the regulated. 00:54:28:23 - 00:54:36:09 Patrick McKenzie We're actually they're in like a quasi partnership and like a quasi trust relationship. 00:54:36:11 - 00:54:41:19 Patrick McKenzie And I think you said on Twitter is that like big CEOs in specific. 00:54:41:21 - 00:54:44:07 Patrick McKenzie Are kind of like the and. 00:54:44:09 - 00:54:47:15 Patrick McKenzie The old British Empire is sea captains in that 00:54:47:15 - 00:54:48:17 Patrick McKenzie at sea. 00:54:48:17 - 00:54:50:21 Patrick McKenzie its master and commander. 00:54:50:22 - 00:54:52:19 Patrick McKenzie They have been bred into this role. 00:54:52:19 - 00:55:06:13 Patrick McKenzie They have the full trust of the government and no action of theirs. And any Tuesday will be countermanded. However, if they screw up, the empire will descend with its full force upon them in a. 00:55:06:14 - 00:55:12:01 Patrick McKenzie You know, like let's snap your saber over any or etc. tribunal later. 00:55:12:01 - 00:55:13:02 Patrick McKenzie it is not factually. 00:55:13:02 - 00:55:26:15 Patrick McKenzie The case that there is in most small institutions the regulator watching every email or every wire or etc. etc. that happens at the bank. They they don't have the resources to do that. They don't want to do that. The banks don't want them to do that. 00:55:26:17 - 00:55:27:13 Patrick McKenzie And a lot. 00:55:27:13 - 00:55:29:06 Patrick McKenzie Of regulation is ex 00:55:29:06 - 00:55:44:11 Patrick McKenzie and a lot of regulation involves like an ongoing dialog with respect to, you know, regulators like largely are above the level of particular commercial relationships the bank has. They they expect the bank to have a portfolio of commercial relationships 00:55:44:11 - 00:55:45:18 Patrick McKenzie They want to heavily inform the. 00:55:45:18 - 00:55:59:14 Patrick McKenzie Bank's thinking of how the bank assembles that portfolio and manages that portfolio every versus like getting into the weeds of like, I noticed on August 2nd that you paid out this money to this like one customer. I'm not very happy about that payment. 00:55:59:16 - 00:56:00:05 Patrick McKenzie Now they will. 00:56:00:05 - 00:56:19:10 Patrick McKenzie Get into that level of detail, but in the context of a larger, you know, quarterly inspection of says, okay, like I'm going to sample a couple of transactions from your bank and you're going to walk me through how this and this shows that this plan that we have agreed upon together is getting followed on a day to day basis. 00:56:19:10 - 00:56:26:06 Patrick McKenzie And if that sampling comes through, okay, then and we're okay with this plan like E plus plus, or. 00:56:26:07 - 00:56:27:07 Patrick McKenzie Maybe we're not entirely. 00:56:27:07 - 00:56:52:04 Patrick McKenzie Okay with the plan, maybe we're not entirely okay with what we've seen coming out of the banks and in the last couple of months. But we certainly don't want to kill the bank because there's community dependent on you and you haven't done anything that is like egregiously out of bounds yet that will say, okay, you know, here's a like here are some comments that we have close commentary like kind of on an optional basis and maybe we'll put them on a spreadsheet here. 00:56:52:06 - 00:56:53:14 Patrick McKenzie Here's something like mandatory. 00:56:53:14 - 00:56:55:05 Patrick McKenzie Issues and timeline associated with. 00:56:55:05 - 00:56:55:08 Patrick McKenzie Them. 00:56:55:08 - 00:57:06:00 Patrick McKenzie We want those addressed by the mandatory time plan, like example, mandatory issue. They can you know, many of these records are public, but like a bank might be told. 00:57:06:01 - 00:57:07:01 Patrick McKenzie Hey. 00:57:07:03 - 00:57:10:17 Patrick McKenzie We took a look at your chief risk officer and that guy. 00:57:10:19 - 00:57:14:19 Patrick McKenzie Yeah, that's not the guy. Well, you need you need some. 00:57:14:21 - 00:57:16:22 Patrick McKenzie You know, more seasoning in your risk department. 00:57:17:00 - 00:57:18:01 Patrick McKenzie It takes a while to. 00:57:18:01 - 00:57:20:17 Patrick McKenzie Hire a chief risk officer. We understand this. 00:57:20:19 - 00:57:27:17 Patrick McKenzie So we got nine months, come back nine months and show us more seasoning in your in your risk department on the pain of our displeasure. 00:57:27:19 - 00:57:34:15 Patrick McKenzie And displeasure can mean a variety of things and the like. You know, the nuclear option in the case of displeasure is we. 00:57:34:15 - 00:57:36:09 Patrick McKenzie Closed the bank immediately. 00:57:36:11 - 00:57:39:12 Patrick McKenzie Which is what the season is is limited to that particular case. 00:57:39:15 - 00:57:43:20 Patrick McKenzie And that happens very, very infrequently. It will happen very, very. 00:57:43:20 - 00:57:53:09 Patrick McKenzie Frequently, if you like, hypothetically sell your bank to an offshore crypto exchange. Like and part of the purpose of the cease and desist letter is like, hey. 00:57:53:11 - 00:58:00:04 Patrick McKenzie Things no bank should ever contemplate. In case you be this that explicitly this would be a bad. 00:58:00:04 - 00:58:00:18 Patrick McKenzie Idea 00:58:00:18 - 00:58:31:20 Cas Piancey Well, it's interesting that you're talking about how regulators maybe are inclined to move in afterwards, but it's like in in and, you know, like you said, it doesn't necessarily have to be this bank that we're discussing. But in this case of of Farmington and Moonstone is you have a bank that, according to the Federal Reserve, if we believe what they are suggesting when they moved their regulatory oversight from the FDIC to the Federal Reserve, they told the Federal Reserve, look, we're not going to change our business model. 00:58:32:01 - 00:58:39:07 Cas Piancey We're not going to do anything crazy. Nothing silly is going to happen. We promise. And then they did it anyway. And I guess 00:58:39:07 - 00:58:53:04 Cas Piancey if they're making this promise and it's the only promise they have to make, you would expect, especially an entity is as large and important as the Federal Reserve to be like, okay, well, let's monitor that one thing then. 00:58:53:06 - 00:59:01:18 Cas Piancey But they didn't. And you go like, okay, so is the only time that they do this when it's too late. Is that is that really just that's the only time. 00:59:01:18 - 00:59:26:02 Patrick McKenzie in banking, the thing that often happens is that there's various layered controls and the promise itself is a form of control, like the like every contract in existence, you know, even if there was no legal system to enforce contract, just forcing people to come to the table and agree this is the thing we will do and, this is the thing we all have to that creates value as there's now a mutuality of understanding as to what the expectations are. 00:59:26:04 - 00:59:28:05 Patrick McKenzie And so even if a promise is not. 00:59:28:05 - 00:59:34:00 Patrick McKenzie Monitored, that promise creates value. Even if this promise is not later for enforced, that promise creates value. 00:59:34:16 - 00:59:36:07 Patrick McKenzie It is factually not the case. 00:59:36:08 - 00:59:37:05 Patrick McKenzie This promise will not be. 00:59:37:05 - 00:59:39:19 Patrick McKenzie Enforced and. 00:59:39:21 - 00:59:42:16 Patrick McKenzie I would hate to do caste like any particular person. 00:59:42:18 - 00:59:44:09 Patrick McKenzie But. 00:59:44:11 - 00:59:50:21 Patrick McKenzie You know, I think that the like again, using that the master and commander example a British sea captain doesn't. 00:59:50:21 - 00:59:55:03 Patrick McKenzie Have to be explicitly told the British Empire not a fan of. 00:59:55:03 - 00:59:55:21 Patrick McKenzie Piracy 00:59:55:21 - 00:59:58:08 Bennett Tomlin Now. Privateering 00:59:58:08 - 01:00:01:05 Patrick McKenzie and by the way, we will check if you wander into piracy, you will. 01:00:01:05 - 01:00:09:14 Patrick McKenzie Be dealt with most severely. That is the most basic thing that anyone who is a British sea captain, you know, who has grown up in the. 01:00:09:14 - 01:00:16:07 Patrick McKenzie English countryside at their family estate and has the proper breeding to walk into a court of Admiralty, understands about the world. 01:00:16:07 - 01:00:36:15 Patrick McKenzie That they live in. But if piracy is actually discovered on behalf of behalf of a Navy ship that is flying a flag of the British Empire, everyone involved will be dealt with most freaking severely so that for a thousand years no one forgets that one does not do piracy under the British flag. 01:00:36:15 - 01:00:44:08 Patrick McKenzie Now, what could possibly happen to bankers who have wandered into doing extremely non prudential things with banks under their control? 01:00:44:10 - 01:00:46:02 Patrick McKenzie One can only speculate. 01:00:46:02 - 01:00:49:11 Bennett Tomlin there, Ex-banker said. A year from now. 01:00:55:10 - 01:00:59:08 Patrick McKenzie That has not historically been the only punishment they can get. 01:00:59:09 - 01:01:05:08 Patrick McKenzie Handed out to people who have done not wonderful things to the banking system. 01:01:05:08 - 01:01:08:16 Bennett Tomlin Yeah, but it's been a while since we sent anyone to prison for that 01:01:08:16 - 01:01:09:20 Patrick McKenzie Shrugged. 01:01:09:20 - 01:01:14:07 Patrick McKenzie Yeah, you want to do the like. Simon versions of stable stablecoins this payment method. 01:01:14:07 - 01:01:32:15 Patrick McKenzie Acknowledging my anti cryptocurrency bias because I prefer my databases to be vast databases and that slow databases. Let's like factor out cryptocurrency out of the stablecoin discussion entirely. Let's say we live in the Harry Potter universe and someone comes up with a way to compete with like physical exchange of nuts and galleons and they say there's. 01:01:32:15 - 01:01:34:15 Patrick McKenzie New spell and you can wave your magic wand. 01:01:34:15 - 01:01:59:00 Patrick McKenzie And it instantly transfers money from point A to point B at a arbitrarily cost. Isn't this going to, like, outcompete the wizards who use their visa credit card? And the answer is, well, it competes on like multiple dimensions with Visa credit cards and with bank transfers in the UK or elsewhere in the Wizarding world and with buy now, pay later and all the other things that the Wizard has access to, including potentially other magic spells that could be developed in the future. 01:01:59:02 - 01:02:07:14 Patrick McKenzie And just the fact that is instant and just the fact that it is low cost is not competitive with some of the other things because like a credit card can make your cost of. 01:02:07:14 - 01:02:08:19 Patrick McKenzie Using it actually negative. 01:02:08:19 - 01:02:10:06 Patrick McKenzie When you factor in rewards 01:02:10:06 - 01:02:22:10 Patrick McKenzie you know, the magic spell, it doesn't have like explicit semantics around getting refunds. You like plausibly if you're buying something from a company that you've never used before and where you, you know, just Google the name of the product ended up on this random shop. 01:02:22:12 - 01:02:27:19 Patrick McKenzie If it looks like a website, but can I trust them really? Then you wouldn't be. 01:02:27:19 - 01:02:39:09 Patrick McKenzie Inclined to like magically wave your wand at them and transfer money over or, you know, we defined the semantics of the spell as being like you wave your magic wand and money and it moves from point A to point B 01:02:39:09 - 01:02:44:16 Patrick McKenzie is there a subscription capability built into this magic spell? No, because we didn't put that in the magic. 01:02:44:18 - 01:03:04:18 Patrick McKenzie And like being able to bill someone on a subscription basis is enormously useful for a huge variety of commerce, like, you know, buying magazines to storing a payment method so that your checkout experience in the future doesn't have to involve explicitly invoking that payment method at all. Indeed, some of the best payment methods in the world and a lot. 01:03:04:18 - 01:03:06:02 Patrick McKenzie Of axes don't do. 01:03:06:02 - 01:03:30:07 Patrick McKenzie Very well with respect to the stored thing. And they introduce friction and again, like we can science out that friction and how much it costs businesses. It turns out it costs a lot of money. And so like there are businesses that would say, even if you like, hypothetically had the magic wand available, we would get more money supporting visa and paying for the payments via the payments ecosystem than we would and taking free magic wand payments. 01:03:30:07 - 01:03:35:01 Patrick McKenzie the free magic wand isn't free. You have to be a member in good standing of. 01:03:35:04 - 01:03:36:18 Patrick McKenzie Wizarding Britain. 01:03:36:18 - 01:04:01:15 Patrick McKenzie To get a magic wand issued to you. And it turns out that the number of people in the world who have magic wands is canonically like very small, and the number of people who have payment instruments available to them is very large and the like. If you are, you know, Amazon and you have a team of very smart people that are in charge of like prioritizing 800 payment methods in the world and saying which one of these should actually make it on to the Amazon dot com website. 01:04:01:17 - 01:04:02:15 Patrick McKenzie Like plausibly you would. 01:04:02:15 - 01:04:20:22 Patrick McKenzie Think like magic wands there's like 10,000 people in Britain that have them. Those are very small portion of our book of business relative to like buy now pay later. I will prioritize magic wand very low on my stack and then the people all in magic wands are like, Well, this kind of sucks. I can't use it to pay money on Amazon. 01:04:20:22 - 01:04:24:10 Patrick McKenzie Even if it were free and instant, I can't use it to buy a burger at McDonald's. 01:04:24:10 - 01:04:27:00 Patrick McKenzie Even if it were free and instant, etc. etc.. I guess I should. 01:04:27:00 - 01:04:28:00 Patrick McKenzie Use the other. 01:04:28:00 - 01:04:32:17 Patrick McKenzie 800 things that are competing for my attention. So that is the problem with Stablecoins In a nutshell. 01:04:32:17 - 01:04:34:15 Patrick McKenzie It has been reported. 01:04:34:17 - 01:04:42:02 Patrick McKenzie That Stablecoin volumes are increasing massively and this is and this is a sign of real user adoption. 01:04:42:02 - 01:04:43:11 Patrick McKenzie often think that cryptocurrency. 01:04:43:11 - 01:05:10:05 Patrick McKenzie Says, you know, our slow databases are publicly available and this allows you to like verify facts about them. Is greatly oversold. If this is true, then we are getting information about with without loss of generality like the FTX bankruptcy at a time, which is not the same time as those relevant facts were published to the world for Blockchains, which should give people some pause about how reliable the information is and how comprehensive and how many people are looking it, etc., etc.. 01:05:10:06 - 01:05:10:16 Patrick McKenzie But 01:05:10:16 - 01:05:29:17 Patrick McKenzie let's say hypothetically, many people involved professionally in Stablecoins believe that Stablecoins are helping to make people who are on the of the, you know, global financial system. Like maybe they are being used quite a bit for dollar denominated transfers of value in various countries then without loss of generality. Africa 01:05:29:17 - 01:05:32:06 Patrick McKenzie that's the thing that exists in the world. 01:05:32:08 - 01:05:51:17 Patrick McKenzie The edges of the financial system are kind of the edges of the financial system by nature. And sort of the oldest story in tech is that things start at the edges of the ecosystems. And Clayton Christensen said, creative destruction pieces like Work it worse is better happens in various places and existing incumbents don't look at those various places. 01:05:51:17 - 01:05:56:08 Patrick McKenzie And eventually the thing that was was worse becomes better in almost all the places and takes all market share. 01:05:56:08 - 01:06:00:14 Patrick McKenzie You can believe that Stablecoins are going to take all the market share payments in the United States. 01:06:00:14 - 01:06:12:05 Patrick McKenzie There are some pretty huge structural reasons why that is extremely unlikely to happen, not least of which the United States government has an enormous stake in payments in the United States and would. 01:06:12:07 - 01:06:12:21 Patrick McKenzie Like. 01:06:12:23 - 01:06:20:10 Patrick McKenzie Viscerally oppose that. In a lot of ways, I would be a competitor that has a lot more adventures going to it than any random stablecoin team has. 01:06:20:10 - 01:06:34:15 Patrick McKenzie and often you hear like central bank digital currency is like, okay, a government backed stablecoin would be a really commanding entrant in the you know, in the payments market in a particular country. 01:06:34:17 - 01:06:59:09 Patrick McKenzie You say, okay, well a government backed payment payment method like sometimes are, and at every payment method is government backed to a greater or lesser extent because every banking system is government backed a greater or lesser extent. Break it out for a moment. In some countries like the government, that is either through first party or through public private partnership, brought a really compelling payment method to market. 01:06:59:14 - 01:07:14:12 Patrick McKenzie And that payment method has gained a lot of share that we talked about India, Brazil, for example. In other countries, the government has brought out a payment method and nobody cared and nobody came. And you still use, you know, debit cards or interbank payments or yada in those countries. 01:07:14:12 - 01:07:19:05 Patrick McKenzie Does the slow database make the government payment method better or worse? 01:07:19:07 - 01:07:24:08 Patrick McKenzie I contend that anywhere you can use a slow database, you can use a vast database, and it will have. 01:07:24:08 - 01:07:25:09 Patrick McKenzie All the benefits of the slow. 01:07:25:10 - 01:07:27:02 Patrick McKenzie Database but be faster. 01:07:27:02 - 01:07:37:03 Patrick McKenzie people in crypto have often said, Patrick, you are being unfair. The slow database allows you to have this be an entirely trustless system and trustless and this is a good thing. 01:07:37:05 - 01:07:38:14 Patrick McKenzie Trust us, this is not generally. 01:07:38:14 - 01:07:43:10 Patrick McKenzie Considered a good thing by the kind of people who make central bank payments. 01:07:43:12 - 01:07:46:08 Patrick McKenzie So it seems extremely unlikely. 01:07:46:08 - 01:07:52:13 Patrick McKenzie To me that the like product features around trustless ness or product features around, 01:07:52:13 - 01:08:01:08 Patrick McKenzie an intense concern for privacy will be features of like future central bank delivery payment systems. Most countries that are of interest to listeners 01:08:01:08 - 01:08:03:03 Patrick McKenzie that bit about privacy is interesting 01:08:03:03 - 01:08:07:21 Patrick McKenzie Plausibly we care a lot about privacy. 01:08:07:23 - 01:08:19:14 Patrick McKenzie And you know, but plausibly society cares a lot about other things too. And so, you know, like every other concern and value and instrumental role that we have these existing tradeoffs with each other, 01:08:19:14 - 01:08:21:19 Patrick McKenzie people in crypto don't believe this, but the 01:08:21:19 - 01:08:29:05 Patrick McKenzie you know, institution that is credit cards in the United States are fairly privately protecting by default relative to a lot of other. 01:08:29:05 - 01:08:31:04 Patrick McKenzie Things you could do, like for. 01:08:31:06 - 01:09:01:09 Patrick McKenzie You can buy things on a credit card without necessarily having to give your address. That didn't used to be true about checks. They had your address printed on them by default and you can, you know, often have like semis pseudonymous sending using various payment methods where that did not used to be very capable. And so in like I future payment methods that got lots of share in the world like privacy will be one thing you can offer to users candidly 01:09:01:09 - 01:09:03:22 Patrick McKenzie I think the financial is largely going to say, well, we. 01:09:03:22 - 01:09:05:09 Patrick McKenzie Shouldn't we certainly shouldn't do. 01:09:05:09 - 01:09:18:17 Patrick McKenzie Stupid things with regards to privacy. Actually, I don't know that all teams will necessarily decide that there apparently are some payment methods that broadcast every transaction to a world readable feed by default. That strikes me as a extremely crazy decision. 01:09:18:17 - 01:09:25:10 Patrick McKenzie But like firms have made it in the past, but like most users. 01:09:25:10 - 01:09:45:21 Patrick McKenzie their revealed preference is that they don't make decisions in life based on what maximizes for, like the privacy advocates view of their privacy. They use Google for their for their email, not because they believe that nobody will ever be able to read their email at Google, but because, like Gmail has a better client, because Google is a trusted brand name. 01:09:45:23 - 01:10:11:01 Patrick McKenzie And I think privacy advocates probably don't appreciate the fact that, like Google is better at securing your email from both a random hacker and from, you know, a legitimate government authority than J random host is from as hearing your email in those cases because they will have Google's resources backing up the response to a subpoena versus like g random host but so stablecoins taking over the world of payments. 01:10:11:04 - 01:10:12:12 Patrick McKenzie I don't see it. 01:10:12:14 - 01:10:14:16 Patrick McKenzie Willing to be wrong, willing to look at evidence. 01:10:14:19 - 01:10:15:10 Patrick McKenzie You know, tick 01:10:15:10 - 01:10:17:12 Patrick McKenzie tock Guys, we are ten plus years into. 01:10:17:12 - 01:10:25:22 Patrick McKenzie This and a lot has happened in payments in the last ten years and very little has happened in the you tens of. 01:10:25:22 - 01:10:30:02 Patrick McKenzie Billions of dollars invested effort to make slow. 01:10:30:02 - 01:10:31:15 Patrick McKenzie Databases the future of it. 01:10:31:15 - 01:10:36:08 Patrick McKenzie So if you want to change my mind you are welcome to publish evidence to the. 01:10:36:08 - 01:10:37:21 Patrick McKenzie Internet and I will look at it. 01:10:37:23 - 01:10:39:15 Patrick McKenzie But you got to get people actually. 01:10:39:15 - 01:10:40:17 Patrick McKenzie Using the thing and if. 01:10:40:17 - 01:10:52:07 Patrick McKenzie You don't, well then yeah, you know there's a lot of fun toys in the world. I like computers built out of redstone in Minecraft as much as the next guy. They will have 0% market share in all cloud work. 01:10:52:09 - 01:10:53:15 Patrick McKenzie Workloads in the future. 01:10:53:15 - 01:11:18:19 Bennett Tomlin It's actually funny because we are almost exactly today, four weeks out from the very first, from the nine year anniversary of the first stablecoin being issued. The very first tethers were issued in November of 2014. Like November 9th or something were almost exactly four weeks out from the nine week anniversary. They used to have a merchant API that was taken out at like month six for their stablecoin. 01:11:18:19 - 01:11:21:23 Cas Piancey Yeah. And don't forget the ability to trade Bitcoin for U.S. 01:11:22:09 - 01:11:25:13 Bennett Tomlin I never forget Cas. 01:11:25:13 - 01:11:44:23 Patrick McKenzie I think we are all peas in a pod with respect to our views on tether here. But just for those in the audience who don't know, I once said that tether is the internal accounting system for the largest fraud since Bernie Madoff. I think I wrote that in 2019. After years of looking into them. 01:11:45:01 - 01:11:57:15 Patrick McKenzie That is obviously untrue. Right now, they're bigger than Madoff ever was. But yeah, I don't know. The tether was necessarily the first stablecoin. I think there were a few abortive attempts at like basis coin, etc. before that. But be that as it may 01:11:57:15 - 01:11:58:10 Patrick McKenzie They're far and. 01:11:58:10 - 01:12:01:21 Patrick McKenzie Away it's largest stablecoin to the. 01:12:01:21 - 01:12:03:01 Patrick McKenzie Enduring. 01:12:03:01 - 01:12:22:07 Patrick McKenzie Irksome this how do you say that in English it irks legitimate businesses that are attempting to bring stablecoins to market that like the largest stablecoin in the world that's operated by criminal conspiracy and that the largest stablecoin in the world is for the people that are legitimate competitors, like essentially counterfeiting the U.S. dollar and then exchanging that for the reserves. 01:12:22:10 - 01:12:24:00 Patrick McKenzie The people who are 01:12:24:00 - 01:12:30:21 Patrick McKenzie attempting pretending a little bit of both at different times to comply with all the rules of. 01:12:30:23 - 01:12:33:03 Patrick McKenzie So yeah I don't. 01:12:33:03 - 01:12:54:16 Patrick McKenzie Expect tether to continue being the largest stablecoin in the world for forever. I also don't expect them to stay out prison for forever. Madoff got what, 17 years before getting substantially more years as a guest of the United States government. And I expect they will eventually get what is coming to them. And it won't be a 5.25% and two year T-bill on the reserves. 01:12:58:07 - 01:13:11:05 Bennett Tomlin I think that wraps this up. Thank you very much for joining us, Patrick. I highly recommend everyone listening. Check out Patrick's newsletter bits about money, which will link in the description and on the website. And just one more time. Thank you very much for joining us. 01:13:11:05 - 01:13:25:22 Patrick McKenzie thanks much for having me, folks. You can find you're on the Internet. I’m Patty 11 and most of the places including Twitter, slash X and whatever they call it these days and if you like these topics, I write a weekly or biweekly about them at bitsaboutmoney.com
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