It's going to go to zero. It's a scam. It's a Ponzi scheme…" I've never been keen on those arguments. What I have said is that it lacks the potential, in my opinion, of course. I'm speculating when I say this, lacks the potential to become widely adopted as a medium of exchange for ordinary purchases, to go buy your coffee, to go to this, to pay for your bills and all that.
And as I've tried to emphasize, the fact that it has appreciated a lot in value since its introduction doesn't itself make it attractive for those general purposes, and doesn't more specifically mean that it can overcome the huge advantage an incumbent, well-established money generally has, because of its established network. Selgin: So, network economies are very important here, and of all the monies in the world, the dollar has by far the biggest network worldwide. So it's the hardest currency for any alternative upstart to unseat or compete with.
Now, sure enough, El Salvador has tried to throw a wrench into my argument, but not really. Because what they've done in El Salvador, what the government has done, is to pass a law that not only makes Bitcoin legal tender in the standard sense of the term in El Salvador, that is, something that can be used to settle outstanding debts, but also makes it a compulsory tender.
That is, anybody who is equipped to receive Bitcoin in exchange for goods that he or she is selling, is supposed to accept it, is legally required to accept it. That's Article 7 of the Bitcoin law. The fact that it has appreciated a lot in value since its introduction doesn't itself make it attractive for those general purposes, and doesn't more specifically mean that it can overcome the huge advantage an incumbent, well-established money generally has, because of its established network.
So, network economies are very important here. Selgin: So what the government is doing, and particularly what the president Bukele has done in El Salvador, is to jumpstart a Bitcoin standard there, using the law to overcome the network disadvantages that would make it practically impossible that Bitcoin would have spontaneously, yes, displaced the US dollar, which had been El Salvador's official currency since Let me be the first to say, in case others reading my criticisms of what's happened in Bitcoin, which I know we're going to get around to, but unless they should think that I find this decision of Bukele's entirely incomprehensible.
I want to make clear that if I were he, and my goal was to give Bitcoin a chance of becoming El Salvador's money, I might have done just about all the things he's done. Selgin: I think he's rushed it. I think we're all seeing evidence there are bugs in the arrangement that has been set up, and they're starting to get those ironed out.
But generally speaking, the strategy has been absolutely good, given that end. So forcing people, merchants to accept Bitcoin if they're well equipped, seeing to it that more of them get equipped, providing the wallets that are necessary, public wallets.
Not necessary, but that are alternatives to other wallets that can also be used in the system, and removing the risk of accepting Bitcoin from the merchants and placing it on the broader public. That's also a very useful device. Buying and distributing ATM machines around the country. All of these things are exactly what should be done if you're going to get Bitcoin used.
Now, that doesn't mean I like what's been done there or that I think it's good for the Salvadorian people. I like some of what's been done, but I have real problems with the coercive aspects of the law. Beckworth: Now, part of what they did is they actually gave out Bitcoins to every citizen.
Is that right? Selgin: Well, no, not quite. It's not true. So they're actually dollar stable coins, and then you can go an ATM or whatever. But that's only if you download the Chivo app. So far, the downloads are reported to have exceeded ,, half a million, but the population of El Salvador's is much larger than that.
Beckworth: For listeners who don't know, why is it important to have this digital wallet when you have Bitcoins? Selgin: So in order to use Bitcoins, both the merchants and the buyers have to have some digital wallet to store the Bitcoin, as it were, we're talking about storing digital media. Now, these wallets aren't devices. They're just apps. You put them on your phone. That way, the information can pass from the wallet in one phone to the wallet in another phone, and that the credits get moved.
We're really talking about, these Bitcoin of course exists only in the wallets and the phone. If people convert to dollars, they have essentially the equivalent of dollar credits with the government. What's interesting is my immediate reaction to this law, to Article 7 in particular was, well, this is terrible because there's so much risk involved.
In fact, since the law was implemented back in June, there have been huge gyrations in Bitcoin's price. What they've done in El Salvador, what the government has done, is to pass a law that not only makes Bitcoin legal tender in the standard sense of the term in El Salvador, that is, something that can be used to settle outstanding debts, but also makes it a compulsory tender.
Selgin: Merchants had been receiving Bitcoin in their exchanges who didn't really want Bitcoin, and polls have shown that most would have just as soon stayed with dollars, not surprisingly. Then by the time they converted into dollars, apart from fees that would have been involved in the conversion, even a short interval between the sale and the conversion could have meant taking some big losses.
Now, the government has addressed that in the actual Bitcoin law, but it has done so, it has assumed the risk, but let's be clear, governments don't actually assume risk. What they do is they transfer the risk to other parties. So in this case, the government has set up an exchange fund and an exchange bank, as it were, and it will instantly convert merchants' Bitcoin receipts into dollars at the original dollar posted price, because the dollar is still the unit of account in El Salvador.
So, prices are posted in dollars. Selgin: So the merchants get their dollars, at least they get virtual dollars. Then, and there is some risk there, because these virtual dollars are not necessarily fully back. They're essentially claims against the El Salvadorian government, so it's not as if it's no risk at all that they could turn out not to be fully backed, or that there could potentially be a convertibility problem.
So it turns around, well, it can hold the Bitcoin that it has received, but it is assuming the risk. It's the one that's actually investing in the Bitcoin if the merchants choose to have dollars. Beckworth: This is your point that the risk of this transformation to Bitcoin usage is being borne by the public via the government.
Selgin: It is ultimately being borne by the public. Obviously, if the value of Bitcoin goes up, then the public gains to that extent, other things equal. But here's the hitch. The hitch is that when Bitcoin is expected to appreciate, then more merchants can be expected to just keep it in their wallets.
When it's expected to go down, as when it's actually falling in value on the market and they have a big sell off, that's when they're going to be offering it to the government. So the government's going to be, as it were, buying in the down markets and not buying in the up markets. When it's expected to go down I think that what that means is that there's a considerable risk that the trust fund will be depleted, and it will have to be replenished, and then the taxpayers will take another hit.
So I think it's this dangerous scheme, but of course it should be obvious, right? If something is risky and the government is covering the risk out of using public funds, that means there's no free lunch. Somebody is likely to lose money.
Beckworth: Well, if it does become widely used as a medium of exchange, it becomes money in El Salvador, that would, I think at least mitigate some of that risk, right? Because the demand for Bitcoin would be up, and that would increase the value. Selgin: It'd be a very small part of the whole world, because the global market for Bitcoin is much bigger. We saw this, actually. On the day that the Bitcoin law took effect, on the 7th, this is kind of a funny sad story, but there was this great effort on the part of the Bitcoin community to-.
Get the value of Bitcoin up. Everybody's saying, "Let's express our approval and support for what's happening in El Salvador by all going out and buying Bitcoin. Let's all buy some. Selgin: Yeah. So that's an illustration of the fact that El Salvador's a small part of the Bitcoin story in the world. Beckworth: This sounds very familiar to the international gold standard, right?
A country that has gold as its reserve, as its unit of account, is going to have challenges if a global demand for gold varies or it goes up or go down, like the interwar period. Now, it's true though, but in the case of the gold standard, what made it relatively stable or one of the things that made it relatively stable, was the fact that it was many countries.
Now, if many countries are on the same standard, that does tend to stabilize its value. But if one small country is, that doesn't. Look at the argument against dollarization, which is what El Salvador relied upon, until now, for a couple of decades. The argument is that if you're a small country and you're on this dollar standard, you just have to take what's given, all these fluctuations.
The gold standard, same thing. If El Salvador were to adopt gold as its monetary standard, that wouldn't make the gold any less volatile a standard than it is today, would not return us to the stability of gold circa So one country going on a Bitcoin standard is like one country today going on a gold standard. There will be many more to follow. Selgin: That's right, yes. Well, there, I would say too, that just as El Salvador is small, relative, its demand for Bitcoin is a small part of the total world demand.
It's not that capable of driving the market. The same is true for the network effects, that yes, now you have a bigger network of people willing to receive Bitcoin as a medium of payments, but not enough to convince the rest of the world that this is now the network worth joining. Beckworth: No, but it might send a signal that hey, they've tried it, let's try it too.
Not that you're tapping into a bigger network, per se, but that you're part of the fad. Well, if you were going to do that, I think it would be wise to wait a year. Selgin: They're already saying that. They're already saying that Argentina and a bunch of other countries are going to jump on that. Beckworth: Let's move on, George.
Let's talk about something related to this, and that's stable coins and Fintechs. You mentioned stable coins already, and Larry White was on the show previously talking about them. But the stable coins is a former cryptocurrency, tries to stabilize the value of the cryptocurrency relative to some underlying asset, often the dollar. Fintechs are doing something similar. You had a proposal for how they could operate, and it has to do with having access to the Fed's balance sheet. So walk us through that proposal.
Selgin: Okay, yeah. Well, the proposal is not entirely related to stable coins, but more generally to a dollar substitutes. They don't have to be token based. They could be more like conventional bank deposits. Indeed, in my specific proposal, they are conventional bank deposits if you allow that a special purpose bank is a conventional bank for the purpose of that discussion.
What I've argued is that, well, let me put it this way. We have a setup right now where banks, that is just plain old banks, not special purpose banks, are the main suppliers of media of exchange substitutes for Federal Reserve dollars, base dollars. Then you have stable coins that are operating outside of the Federal Reserve system quite independently, and outside of the general umbrella of regulations and all that.
This is what makes people worry about them a lot. I should add, we also have money market funds as well-. Selgin: That do something similar, but are subject to some regulation. I think it's very important to understand why the stable coin issuers exist, why there's a market that's been growing very rapidly for stable coins, and the reason is that they can serve some purposes that ordinary banks don't serve very well.
Particularly for exchanges involving cryptocurrencies, where ordinary banks don't want to get involved with that. They're worried about the regulatory backlash, et cetera. So you don't have alternatives to stable coins that can do all the things that the stable coins are able to do. Now, some of that is also people trying to avoid know your customer or anti money laundering restrictions and that sort of thing. Particularly for exchanges involving cryptocurrencies, where ordinary banks don't want to get involved.
Selgin: On the other hand, we have the movement for having central banks issue their own digital currencies for retail use. What we don't have, and what we need, are more opportunities for private sector, monetary or payments service innovators that are not conventional banks, to offer digital retail exchange media that can do things that ordinary bank deposits can't do, or serve markets that those bank deposits can't serve, or what the banks won't serve, and that can do so in a highly efficient way.
This includes being able to supply mobile digital monies and that sort of thing. We've seen how effectively that's been done in many other countries. We should be able to easily go around and pay for stuff using our telephones and without having to resort to stable coins or to Bitcoin instead of dollars, anything like that. Well, there's a middle ground solution that's neither relying totally on the Fed to supply retail, digital, person to person payments media, and it's not relying on stable coins that have nothing to do with the established legacy US dollar system.
That is: let fintech firms have accounts with the Fed, even though they're not fully fledged, conventional commercial banks. Let them supply payments media where the Federal Reserve is supplying the wholesale back room settlement system, and the money can move around through the Fed settlement system, but the retail media are provided by these private sector firms that really can do it very efficiently, so the Fed doesn't have to learn the retail digital money business, which is a big learning curve.
To do that, you need to give these fintechs access to the Fed's books. You need to let them have whole master accounts at the Fed. Selgin: So what I'm proposing is a compromise that could be summed up this way. Let's have central bank digital currency for retail, fintech suppliers of retail digital currency. That's one way you could think of it. Let them have the front end, let the Fed cover the back end. That's what firms are trying to do, some fintechs have been trying to do by acquiring special purpose bank charters, either from states, especially Wyoming, but also some other states that offer these charters.
Or from the OCC, which has a couple of different kinds of special purpose charters. And then once they have these charters, they can apply for Fed Master Accounts, that is, to keep their money at the Fed like banks do and certain other agencies. And then they can settle payments on the Fed's wholesale rails through the Fed wire, particularly. In this way, we let these firms have the best opportunity to use their technological know-how to reach a broader public, and provide services that banks don't supply very well, including cheap payment services, including payment services for cryptocurrency, exchange, activities and mobile money, et cetera, et cetera, et cetera.
Selgin: The only reason this is controversial, and it's not a small reason, is the banking lobby particularly are saying we shouldn't let anyone have a Master Account and have dollar deposits or their equivalent unless they are subject to the same regulation as banks. But that doesn't make any sense if the holders of these Master Accounts, if the special purpose banks are not engaging in the same risky activities as ordinary banks, then when you come right down to it, there's one major risk ordinary banks take that's driving all the special regulations and that's maturity transformation.
It's taking short duration liabilities, deposits, and using them to fund longer term loans or investments. There's always risk involved in that activity. So it's mainly for that reason that we have deposit insurance and strict capital requirements and so on. There's a middle ground solution that's neither relying totally on the Fed to supply retail, digital, person to person payments media, and it's not relying on stable coins that have nothing to do with the established legacy US dollar system.
That is: let fintech firms have accounts with the Fed. In that case, you still want the banks to have some capital, because there are costs to winding up at institution for any reason. I suppose it fails because of malfeasance or who knows what, right? So you want to have capital requirements, but you don't have to have quite as strict capital requirements.
None of these special purpose charters allow the banks set up under them to have no capital. In fact, they have pretty substantial capital requirements. Deposit insurance is completely unnecessary when you have no maturity transformation risk.
Beckworth: So what would be the appeal of these accounts? They're very safe. I mean, why would I as a retail customer go there? Selgin: You wouldn't go just for safety. Safety is essential. So to attract you and to make you use them instead of ordinary bank accounts, safety is important, I should say, but you're going to do business with these banks not just for that, but because they're providing special payment services that other banks don't.
Particularly you can do crypto exchanges, et cetera. Some of the things that these special purpose banks would do, other fintechs could do without acquiring banking charters if they could get a commercial bank to act as an agent for them. So that's the other possibility, but it's more expensive, and fewer and fewer banks want to deal in certain kinds of-. Beckworth: If you've got to have a middleman to give you access to the Fed's Master Accounts, it's more expensive. That's business. Selgin: There are also fewer and fewer ordinary banks that want to get involved in those things, because they fear the regulators.
Beckworth: So I could have an app on my phone in the future that gives me access to the Fed's balance sheet? You'd be dealing with some private payment service supplier that is not an ordinary bank. It might be a special purpose bank.
It presumably would be. Under current law, the Fed cannot give a Master Account to a non-bank or non-depository institution, so you have to have a charter that says you're a bank, whether you're an ordinary bank or a special purpose bank.
So I'm taking that for granted. But you could have an app on your phone from a special purpose bank, which makes no loans. If it's taking deposits, it makes no loans. Selgin: Now, some special purpose banks might make loans, but they can't fund them with deposits. That's a different category. That would still be okay. But in any event, it doesn't make loans. What this fintech does for you, the special purpose bank does for you, is that it helps you to undertake exchanges in the cryptocurrency markets and another places where ordinary banks are not willing to take you on to provide that service.
Or it's providing you access to real time payments. There's some advantages involved in the payment services that it's doing. It's the fact that it's on your phone. It's the fact that it's real time. It's the fact that you can buy crypto.
It's something that ordinary banks don't do very well at all. Beckworth: This is interesting for a number of reasons. One, there's been people like our friend, Morgan Ricks, who's wanted a Fed account. This would be one way to provide it, but it would also be one way to do it without some of the concerns that people have with central bank digital currency. So I've been thinking about this, talking to people about central bank digital currency.
What are some of the issues we think about, and I'm sure the Fed itself is now thinking about it, because it has this paper coming out shortly, a study paper on central bank digital currencies. So here's just a brief list I came up with why we might be worried about the Fed providing retail central bank digital currencies. One would be privacy issues.
Maybe another would be, is this the backdoor for the Fed to do negative interest rate policy? Banks might worry about losing business. Technological innovation, would the Fed be able to continue to innovate? Beckworth: And then the cost issue.
The Fed by law has to recover cost, and what you're proposing I think at least addresses some of them. It definitely addresses concerns about technological innovation. It would cover the cost issue. Probably would be fine with the privacy issue, and maybe banks might still have some objections, but there would still be a private sector, so that the private financial intermediation concern would go away. Maybe you wouldn't address the negative interest rate issue, but you would, I think, address a lot of the concerns that critics have with this approach.
Selgin: I think this would address a lot of the criticisms, if the critics would be willing to recognize the fact. They said, "they shouldn't grant the Master Account to Kraken because Kraken is going to be risky. Wyoming's SPDI law doesn't require them to hold as much capital as banks and blah blah blah.
If it quacks like a duck and walks like a duck, et cetera. Well, in fact, I went back to these guys. They specifically said, I should add, that the problem is maturity transformation. That's a bank. We're not going to do maturity transformation. Selgin: I got a kind of Ralph Kramden response. Anyway, it turns out that in fact, Wyoming's law, it's been modified a little bit, but Kraken could never have made a loan.
Under current Wyoming law, it could only invest in high-quality liquid assets. Their business model doesn't require them to. There's no need for them to hold anything else. First of all, because for one reason, it's that reserves pay just as much as other high-quality liquid assets. Sometimes they pay more. They seldom pay a lot less. So why should they care? As I was saying before, their customers aren't doing business with them because they want a high return.
These are payment services. It's transferring funds. They're not there to earn a return on their balance, so it's not important for most of these SPDIs to be able to invest in commercial paper, let alone make loans. They don't need the return.
That's not their business model. Beckworth: This is, again, fascinating, because it does address many of the calls for a central bank digital currency. At the same time, it addresses the concerns. For most, I mean, there'd be some groups, as you mentioned, that may still object, but it's fascinating to think that the people who want Fed accounts might be excited about your idea, while the banking industry may still have some reservations about it.
But this may be the modest step forward. The Fed's not going to do something really radical. If I had to make a guess about what they're going to do with CBDC, it's going to be a modest step, because they're a conservative, small seat. They want to be careful. They don't want to rock the boat. This could be the middle ground that they land on. Selgin: Yeah, I think it could be, and I hope they'll give it serious consideration. I think that the Fed is very poorly equipped to offer directly retail digital payment services.
Even many of the proponents of central bank digital currencies would want them to be supplied in directly through the banking system. This is hardly any different, except why limit it to banks? It's important not to limit it to ordinary banks, because we have to recognize there's a lot of different markets digital currencies conserve. We need specialized firms to take full advantage of it and do it differently, different ones offering different services, and we want them to keep on innovating.
We want to make sure we don't exploit technologies that allow more things to be done with digital currency than we know can be done now. All those things require having a private competitive system. It's heterogeneous. Selgin: The Fed is one firm. It might have different branches, but it's not obvious at all that it could, I can't imagine it providing different kinds of specialized digital payment services. There's going to be one business model that it's implementing, whether it deals with banks or not.
I don't think we need that. I think we need new a plurality of digital payment service suppliers. I think if we had that, there'd be little, very little if anything, that the Fed's own product would be capable of adding to the mix. This doesn't mean that you might have some goals that you can only achieve through public policy.
In the context of Konkin's revolution - Where are we? Where do we need to be? And how do we get there? My March appearance as a recurring guest on the Traditional Catholic Knight podcast, where I discuss current events from an agorist perspective along with host, Eric Gajewski. Vertical counter-economics is all about the creation of local production facilities that bypass parasitical state regulations. What better example of this than the homestead?
On that note, Nicole Sauce joins us to breakdown the basics of homesteading. Two of the world's leading Austrian economists, Dr. Walter Block, school us in Advanced Austrian Economics. This episode assumes the viewer has some background knowledge of the field.
Professor Timothy Terrell delivers a crash course on Austrian economics. In this episode, we cover a wide range of economic topics every libertarian worth their salt NEEDS to know about.
Bitcoin: Problems and Prospects. George Selgin, Director. Center for Monetary and Financial Alternatives. The Cato Institute. Washington, DC George rejoins David on the podcast to discuss cryptocurrency, stable coins, CBDCs, and a push for a higher inflation target. Specifically.  See George Selgin, Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, ;.