unstoppable podcast, episode 49

What Happens to the U.S. Dollar When Crypto Takes Over?

Jun 04, 2021

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Host:  Hey everybody.  Welcome back to The Unstoppable Podcast.  I'm your host, Diana Chen, and I'm joined today by my Co-host Matthew Gould Co-founder and CEO of Unstoppable Domains.  Matt is here today with me to talk all about the US Dollar in Crypto.  Right now, the US Dollar is the world's most popular currency for not only trading, but also is the standard currency for most commodities like crude oil, precious metals, and a lot more, but as more and more people are starting to use crypto, I'm curious to hear Matt's thoughts on what's going to happen to the US Dollar.  Is it still going to be around?  Is crypto going to fully place the US Dollar one day?  And so thank you, Matt, for being here and sharing your insights with us.

Matt:  Yeah, it's an interesting topic.  And, I mean, to say the least, it's going to be interesting over this decade.

Host:  All right, so let's go back to history and talk about how did we get to where we are today with the US Dollar being in the world's most popular currency for trading?

Matt:  Yeah.  So, it's basically World War II.  Uh, the US came out of World War II in just a really strong position globally and everyone else was in a world of pain.  Like Europe was completely devastated after that, there was a lot of problems figuring out who was going to hold the global order, and the US stepped into that vacuum, set all the rules for how the world would participate in trade with each other over that period of time, and that put them in a really strong position.  They also had the world's largest set of gold reserves at that time, and they were in the best shape.  You know, all our factories here were humming and ready to go after the war.  We didn't have, really, the war hit our shores except in such a very small amount, and so that we were in the best position and we took advantage.

Host:  Okay.  Cool.  So more generally speaking, what are some things that cause a national currency to be—to become more powerful or less powerful?

Matt:  Yeah.  So, I would say that if countries are responsible and they run good economic balance of payments, then over time that currency will be seen as much more stable and then it will be in use by trading partners.  However, I will say that the biggest things that have contributed to the power of the US Dollar has actually been our military and our foreign policy initiative.  So the fact that the global oil market is priced in US Dollars, as part of our security guarantees to several of those countries in that region strongly contributed to the dollar's dominance.  

Also, the regulations and infrastructure we set up around the financial system for things—for, you know, like trade violations and other ways of controlling international money.  Money flows have made the US dollar the go-to currency for people who want to participate.  And the other thing that's also really important is the US economy is big, and I think that's notable as well because if you want to trade with us, you have to follow our rules.  So not only are the world's largest commodity markets priced in US dollars based on our security guarantees, but also, oh, by the way, if you want to sell us stuff to our large global market full of consumers who buy everything, then you have to follow our rules as well.  

So it's having a really strong domestic economy with a large market plus or our military presence and dominance since World War II.

Host:  Got it.  And so, with how powerful the US dollar is today, it's sort of hard to imagine a time when the dollar isn't powerful or when we see it's full demise, but what are some things that might cause the US dollar to weaken or to fully fall apart?  And when would you expect to see something like that start to happen?

Matt:  Yeah.  So I just put a note at the top here.  I don't expect the US dollar to completely collapse or anything like that.  But, I do expect the US Dollar to shift in terms of how it's exerting itself in its power around the world.  So what changes?  Well, first of all, the US economy is a much smaller portion of GDP than it was 50 years ago.  So US used to basically be half the global economy.  Now, we are much closer to 20% and actually by some measures, other economies may even be bigger than the US like China, for instance.  

So if you're no longer the largest domestic market, like I said earlier, people want to deal with you and sell to your consumers, they have to play by your rules.  Well, all of a sudden US is not the biggest anymore.  So they actually care more about somebody else's rules in this case is China than they do ours.  So that's one thing that you're going to see kind of change the shift.  Maybe the US won't be able to dictate as many financial controls internationally because people are not as concerned about the US market as they are the Chinese market.  So that's one shift, the domestic economy size.  

Then the other one is our military commitments and it's expensive to have military all over the world.  And so if we, have to cut back on our military commitments, which we have been doing here in the United States, other countries have to provide those services for themselves, and then maybe they don't have a strong of an incentive to ensure that their markets are priced in dollars as they did previously.  So we'll see how that plays out.  It'll be interesting.  But one thing is for certain is that the US economy is definitely not as big a piece of the global economy as it was previously.

Host:  Then, when we look at the US dollar compared to cryptocurrency, for instance, what are some of the—maybe start with, what are some of the problems with the US Dollar, and then how does crypto solve these problems?

Matt:  So the biggest advantage of crypto or something like Bitcoin over the US dollar is that it's a really good stored value that anybody on the planet can access easily.  So you cannot create more Bitcoin but, you can create more US dollars.  Actually I should say, you can print US dollars but, you can't print more than 21 million Bitcoin.  So, that's the biggest advantage of crypto is that you're not reliant on some government being responsible with the amount of currency that they're creating because you are relying (inaudible) of the computer code which is hard written, but it will not be updated.  

So and we talked about this in the previous episode, you know, with the US dollar, is that, when they create more money, they create this inflation and the situation where people with assets end up much better off than people who don't have access to the capital or assets.  And so, there's all sorts of like problems that happen from the US dollar system which spill over globally as well.  So crypto essentially, helps realign financial incentives globally.  

It protects from governments being able to create as much money as they want, and it also gives people direct access to a hard asset where they can save easily.  So that's the major advantages that crypto has over a US dollar system.  And then the disadvantages are kind of the flip side of that, where, you know, if you do have an economic problem or something, you can't create more money as a way to kind of tax people, in order to pay for maybe some of the public services that you need.  So there, you know, you have less authority by not having the ability to make changes the code, or you have less flexibility, I should say.  But in exchange, you have guarantees that I think more than outweigh the loss in flexibility that you get.

Host:  Got it.  And so, looking forward as more and more people start using crypto, do you see Crypto ever fully replacing the US dollar?

Matt:  And, I said this earlier, no, I don't.  I don't think so.  I think that we will continue to have the fiat currencies, national currencies that people are used to for trade, for uh, lots of reasons.  Mainly, I think that governments are going to want to have a little bit more control over the money supply.  But, you know, we can talk about this a little bit more.  It's not a matter—binary replace or not replaced.  It could also be a matter of, kind of melting together and we'll see what that looks like in the future, but I'm actually kind of excited what central banks are going to do with block chain payment risks.

Host:  Yeah.  And then, just to clarify too, when we're talking about crypto or, at least, when you're thinking about crypto, are we talking about just like the main ones like Bitcoin and Ethereum, or are we talking about like all the different ones that exist out there like Dogecoin, and then, I'm also curious too, like where do stable coins fit into this whole picture?

Matt:  Yeah.  So you hit a couple things there.  When we're trying to think about—so, I think it's probably good to split it into—so let's take the US dollar and what the US dollar does or fiat currencies, you know, whatever you use to pay for in your local economy.  Whatever that legal tender is for you, it's serving two purposes.  One of those purposes is as a stored value, like, so as a hard—as a asset.  

And then another purpose of serving is so that you can buy things.  Okay.  And if you look at cryptocurrencies like Bitcoin, it is really good at being a stored value and you can buy Bitcoin.  They're not going to create more of them, but I would say that Bitcoin is not very good for buying coffee because the transaction fee is $45.  So who's going to want to pay a $45 transaction fee to buy a $4 coffee?  You're just not going to do it.  So, if we split, like what do you use currency fee for every day?  You use it to save and then you also use it to buy things.  

I think that you're going to see, cryptocurrencies like Bitcoin and Ethereum, they are going to be really good ways to save.  And, so I think that they're going to compete really well versus your legal tender, fiat currencies for savings.  And so, I think it's going to be hard for the US dollar to be as good at savings as Bitcoin and Ethereum.  But on the other side of it for doing everyday transactions, all those intermediary financial players that you have, I think they're going to figure out how to use this crypto technology and um, to make it super, super cheap and super, super easy to do daily transactions.  And so that is where this combining of cryptocurrency and central banks.

So you get central bank digital currency come in and we to get things like dollar coins.  So I think dollar coins are going to be very important in the future, and I think that this is how Wall Street and banks are most likely to interact and use cryptocurrency to grow their existing businesses.

Host:  Got it.  And so when we think about like the shift from the US dollar into adopting more cryptocurrency and not moving off of the US dollar fully, but to integrate the US dollar and crypto, how will the US Dollar adopt crypto technology from the way that you see it?

Matt:  Yeah.  I like the way you phrase that because I think it's going to be crypto and the US dollar, not crypto versus the US dollar.  And I think the way it's going to be adopted is actually through the banking industry, like US banks will use crypto technology to do their jobs more efficiently.  Everything from sending money around the planet, for international transfers, to verifying information about individuals and loans and things like that, they will use crypto.  

The US has the world's deepest financial markets.  We have the world's most experienced financial markets.  The finance industry are some of the—in Wall Street are some of the smartest people on the planet and, you know, they are paying attention.  I think they're going to launch US dollar coins, and we already have several.  You know, we're going to have JP Morgan coin, Gouldman Sachs coin, all these dollar-backed coins that they'll then use to go to international markets.  

And the first ones to do it, I think are going to make a fortune.  Like, the first banks that figure out, hey, I can take this crypto is—open source cryptocurrency technology, and I can build on top of it, you know, I don't need to create my own blockchain or anything like that.  I can actually just build on top, and then all of a sudden my international transfers are a lot easier, auditing the books of the people I'm giving loans to is superfast.  They're going to-–they're going to save a ton of money, and they're going to cut out a bunch of middlemen.

Host:  Got it.  And so for people listening that are, you know, wondering, like, what's the difference?  Like, what's the purpose of a JPMorgan coin that's pegged to the US dollar?  Why not just use the US dollar?  Maybe just explain that again real quick.

Matt: Okay.  Yes, so most people don't realize this, but banks already create dollars.  When you go to the bank and you get a bank loan, they have what's known as reserves that sit on their balance sheet, and they're able to make dollar loans out to people based on the reserves that they're sitting with at the Federal Reserve Banking System.  So in  essence, now this is not actually how you interact with it, but in essence, every bank is making their own dollars when they're lending through fractional reserve lending.

And if you go all the way back into the deep, you know, deep cave with the financial system, there is essentially a JP Morgan dollar and a Gouldman Sachs dollar, even though when you withdraw them from the bank, you're still getting dollars.  The credit ratings of those banks are different and  the financial position of those bank’s a little bit different.  Now, they're regulated so they're all in good shape and they're all backed up by the US government, and they have different price to cost of lending, because of that. 

So what I'm trying to say is, these banks are already in the business of creating new money supply.  And what they're going to learn how to do is instead of creating new money supply like they do now in their current financial systems, and then, you know, putting money into the ATMs and then you can pick it up when you go to the ATM or something like that, and you go withdraw some cash, they're going to learn how to create this new money supply on the blockchain. 

And that's going to give them access to much more visibility into the–-into how that money is being deployed by the businesses they lend to, because they can see the transaction on the blockchain if they would like to.  It's going to make it significantly cheaper.  No longer have to have those ATM machines where people are pulling money out, they can just get the money direct to their phone, and then, they're going to be able to go international much, much more easily.  Because, you know, it's really hard to make sure that the dollars in your accounting system are accurate when you go to Turkey, or Argentina, or China, or India or wherever.  It's super easy to do that with the blockchain.

So that's what I mean.  They're going to-–when I say they're going to be creating dollar coins, I don't know exactly if they're going to have JP Morgan coin and Gouldman Sachs coin, although I think they might we already have US dollar coin from Coinbase and Circle as a stablecoin and Paxos and a few others.  And PayPal may create a dollar coin here soon, at least that's the rumor.  So we could have multiple companies creating dollar coins.  We could also have a coalition of companies or banks creating dollar coins to go out and do lending.  And I'll say again, like, they're going to save just a ton of money on compliance because blockchains are really great for tracking things if all the parties want to be tracked.  If someone wants to be secretive, you can figure out how to do that.  But in most cases, you know, people running businesses are going to be totally fine with being compliant.

And that means that because it's easier to be compliant means the interest rates on the loan's going to be lower, because they can cut out the middlemen.  Like, if the Bank of America wants to make a loan in Turkey today, they’ve got to find an intermediary bank in like three countries before it gets to Turkey.  And then they've got to trust whoever this banker is in Turkey that they're not lying about the financial conditions of this individual.  Whereas, in a cryptosystem, instead of going through three intermediary banks and signing, God knows how much paperwork, they can just shoot the money over the blockchain to this individual and build an online finance app for the cell phone or a web app, and then the person come in and do an application, and lend that money direct. 

So how much money does that cost financial compliance?  Financial and accounting compliance in the US alone is a several hundred billion dollar industry.  So I think there are several hundred billion dollars in savings to be made by US financial institutions for jumping on the crypto rocket ship as quickly as possible.  And I also think that the first ones to do it will make a fortune.  So I think the finance people on Wall Street are pretty smart, and they're already figuring it out.

As we can see, some of these stablecoins are already existing and I think they're going to build huge businesses globally for US financial institutions, assuming US figures it out, maybe some other country figures it out, but we'll see.

Host:  Yes, for sure.  Can you talk a little bit more about that?  Like,  globally, how will the US adopting crypto either help it to maintain its strong position in the global financial market, or to even boost that financial position even more in international markets?

Matt:  Well, so I should make a note.  All this is predicated on US regulators in, you know, getting out of the way here and then US banks, you know, tuning in and putting some brain power behind figuring out how they can adopt this technology to be successful.  And, you know, I would really like the US financial markets to continue to expand globally because I think that for all the flaws the US has, we do have one of the better systems for capitalism, and exporting that globally is probably a net good for the world. 

So let's talk about where we're currently at.  So I think 80% of global trade currently, you know, like, the big trade things are denominated in US dollars, and that's international, right.  But only a very small percentage of intra-country trade is denominated in dollars.  So there are some countries out there who have adopted the dollar standard.  I think Ecuador, I'm not actually sure I'd have to go look it up, but they use dollars in everyday transactions as part of their daily activity.  But most countries have their own fiat currency. 

And there's 200 plus of these currencies around the world.  And I'll tell you, 90% of them are much, much, much worse than the dollar in terms of its store value properties and its fairness for how it's-–how loans are gotten for those individuals.  So with digital dollars, now we can—US financial institutions can skip all those middlemen and just go straight to people in those countries and just directly say, hey, download this app, and then boom, you can start saving in dollars, you could start participating in US stock market, you can get a loan to start a business in dollars, right?  You can do all these things in dollars.  

And you just cut out these kleptocratic financial institutions in these other countries, like Russia, or China or Brazil or wherever, where access to capital is more difficult for entrepreneurs and access to financial markets and savings is harder for individuals.  And US is great at building financial applications.  We've been doing it since the nineties.  PayPal is huge, you know, 200 plus countries.  So I think that overall, it's the–-if the US gained to lose here adopting crypto technology to get involved in more global trade.  So I think the dollar could be even more dominant, using crypto rails in the future for trade.  And as I said earlier, I think that crypto money is going to continue to dominate for savings just because it's a good savings asset.  And overall, I think that these things will be able to work in concert to help everybody achieve better outcomes.

Host:  Got it.  Okay, cool.  So let's sort of play this out, like, how this is going to look in real life for the average person.  So let's just envision now we're 20 years into the future.  The US has adopted crypto as one form of payment.  Let's start with, you know, people are going about their daily lives buying coffee, saving money, earning a wage, all of these things.  What are people using crypto for?  And then maybe what are people using stablecoins for?  And then what are people still using fiat for?

Matt:  So I think people are going to be using crypto technology for everything and–-but let's –- so let's talk about some of the pieces of that.  I think that they will most likely pay for things with stablecoins, you know, like euro stablecoins, dollar stablecoins, yen stablecoins, yuan stablecoins, and because they'll just be so much easier to manage and track and cheaper, right?  So you'll be using crypto to make those stablecoin payments, but it'll be, you know, denominated in US dollar or whatever.  So it'll be a crypto dollar, yuan, euro, whatever.  

And then for savings, I think that people are going to store a significant number of assets inside of these hard asset crypto monies like Bitcoin or Ethereum or what have you, because the inflation rate is just going to be lower.  It's going to be hard for national currencies to have an inflation rate as low as some of these cryptocurrencies that even have a deflation rate.

  So I think as a store of value, they're going to be very competitive.  Crypto money's going to be very competitive versus the current financial system, and that's going to be a state of affairs.  Hard to see exactly what the long, long term is, but over the next 10 years I think it's stablecoins for everyday interactions, and then crypto money for savings in the bank.  And I think that that's–-that's a reasonable way to see how things would roll out.

Host:  Got it.  And so are there any scenarios where you think it would make more sense to use, like, a US dollar over a stablecoin?

Matt:  No.  So like, it would be—I would have to think because stablecoins are much more programmable and open.  So I honestly think that, like, it's basically just a full system upgrade for–-to move stablecoins for all these banks and they're going to do it piecemeal.  You know, it's a huge financial system.  It's not going to be an overnight thing.  It's going to be step-by-step and I think that's fine because it interacts with a lot of pieces of the economy, so they should take their time to make that move over, but ultimately I think it's better technology.  It's like the difference between broadband and dial-up.  There's no reason to use dial up if you can get broadband.

Host:  For sure.  Yes, I love that analogy.  Well, thank you so much for joining me, Matt, again for another episode of The Unstoppable Podcast and talking to us all about the US dollar and crypto and I guess, you know, I came into this episode thinking crypto is just going to completely take over the US dollar in the future and that is not the case.  I've learned from you from this episode.  So I'm really interested to see how things play out, and see how your predictions for the next 20 years play out.  Thank you listeners for tuning in to another episode of The Unstoppable Podcast and we'll be back again soon with another episode.