Evolving Money: Money Without Borders (Sponsored Content)

0:00Since you're a subscriber to this Bloomberg Podcast, we thought you'd be interested in a new four-episode sponsored podcast called Evolving money. Produced by Coinbase and Bloomberg Media Studios, it explores some of the monetary system's biggest changes over the centuries. And today's companies that are making big bets that cryptocurrency could be money's next evolution. You can subscribe wherever you listen to your favorite podcasts. Here's a recent episode. Last year, I went to France on a climbing trip. Scaling mountains takes a toll, of course, but I was prepared for that. The unpleasant surprise was the experience of managing my money.

0:45There was so much friction involved in converting and spending my US dollars in another country away from home. Well, frankly, I could have started a small fire at the top of the mountain. To change dollars into euros, well, first you need to find a bank that's open. Once you've done that, you need to stand in line, pay a fee, and then try not to blanch when you see that usually highly unfavorable exchange rate. If you use your credit card in an ATM, which you can, of course, you pay an ATM user fee, plus a foreign transaction fee, plus a service charge, depending on the card. And then there's that appalling exchange rate again.

1:20Of course, I could have exchanged dollars for euros before I left, but then I'd have to weather the risk of taking a huge amount of cash with me to the airport and keeping it on my person as I navigated a foreign country. So mostly I just paid for everything with my American credit card, which worked fine and felt friction-free. But just a glance at my statement showed it was anything but. Fees abounded on both ends of my transactions. It's as if I'd been taking a toll road every time I threw down my plastic. That convenience came at a cost. I don't begrudge paying someone who provides a service.

1:55But these days, when it can be so easy and inexpensive to travel across the globe, it's ridiculous that we're still paying fees like we did last century. Frankly, I think we can do better. And I'm not alone in that. From Coinbase and Bloomberg Media Studios, this is Evolving Money. And I'm your host, Paddy Hirsch. On this podcast, we'll be taking a different look at cryptocurrency. It's been cast as a radical departure for the monetary system. But what if it wasn't radical at all? Just the next logical evolution of how we pay for things and store long-term value. Along the way, we'll explore how money has changed over the centuries and look for lessons that might predict its next evolution.

2:36Throughout history, financial markets have struggled with the issue of borders. Borders create friction, add cost, and cause headaches for anyone who wants to spend money across them. On top of that, various national currencies can be wildly unstable. So could a borderless global currency ease friction and enhance financial inclusion and stability around the world? Cryptocurrencies offer an intriguing possible solution to money's border problem. And a particular kind of cryptocurrency called stablecoins could become a powerful medium of exchange for international payments and offer people around the world economic freedom.

3:15In a bit, we'll be joined by Brian Armstrong, co-founder and CEO of Coinbase, as we ask, could cryptocurrencies be the future of global money? First, I'll be joined by Jacob Goldstein, author of Money, the true story of a made-up thing.

3:40The issue of borders has long been a perplexing one for our monetary system. And it's not even limited to international borders. In the not-too-distant past, it was a big issue within the borders of the United States. The 1830s, 1840s kind of was peak wild amounts of money in the United States. This is Jacob Goldstein. How many kinds of money did America have back then? There were thousands of kinds of money. Like you're not indulging in hyperbole here. At one point in the 1800s in the United States, there were 8 ,370 different kinds of paper money in circulation in the United States of America.

4:21And why did America have 8 ,370 different kinds of money? Well, it was all about what else? Trust. In the early 1800s, Americans had become skeptical of the Bank of the United States, which was a financial monopoly, the country's only national bank. After President Andrew Jackson decided to kill that bank, the only chartered banks that existed did so at the state level. 8 ,370 different local banks with 8 ,370 different currencies, which made things complicated. If you're traveling from, I don't know, California to Kentucky and you've got a pocket load of Sacramento bank printed money and you're showing up to Kentucky and trying to spend it in a general store.

5:08How did that go down? I mean, bad. Bad is one answer. There are these sort of notorious cases of people, you know, just kind of getting hosed and nobody knows what their money is. Talk about friction. The storekeeper behind the counter would look at your bill and would have to flip through a big, fat periodical to verify that it even came from a real bank. More problematic, the value of each currency fluctuated too. Currencies were given discounts based on the distance to the bank and also based on the bank's financial health, which was constantly changing. And how did that affect commerce? Travellers did, you know, lose something when they exchanged paper money.

5:50Something like 1 % or 2%. When the Civil War broke out, the federal government needed to raise money to fund the war effort. And this led to the reestablishment of national banks and drove Americans towards the one single currency we now know. The days of thousands of different kinds of money were over. But we can draw important lessons from that chaotic time. People were just like, I guess that's the way money is. I guess there's just 8 ,000 kinds of money in America. And like that kind of meta lesson of like, oh, right, there's all these different ways that money can be, has been, will be. is just a really useful thing to keep in mind.

6:31Hopefully, the days of thousands of different types of banknotes are over for good. But today's global monetary system can feel every bit as head-spinning and as full of friction as 1800s America. Across the world today, there are 180 different official national currencies. Almost all of them are what are called fiat currencies, backed not by a commodity like gold or silver, but simply by the relationship between supply and demand and the stability of the issuing government. And while the world's more connected than ever, moving money across borders is still slow and expensive. Take remittance fees, which are astronomically high.

7:11Americans spend around$12 billion a year in fees just to send money to friends and family abroad. Those remittance fees are a huge problem when about one in nine people globally depend on workers living abroad. Business-to-business cross-border payments are expensive too, and those costs stifle global commerce. And on top of all of that, currencies can fluctuate wildly. And that brings us to Argentina. Beginning in 2017, the Argentine peso began to suffer wild annual inflation rates. Each year was worse than the previous, with annual inflation eventually hitting 211 % at the end of 2023. When Argentinians began seeing the value of their savings depreciate to almost nothing, they started buying US dollars as a safeguard.

7:59The way to hedge against inflation is getting to dollar. That's Eduardo Novillo Estrada, CEO and co-founder of Agrotoken. And by the way, you should know that Coinbase has no financial relationship with Agrotoken. So imagine all the people who are rushing to buy dollars. Basically, they got their salary at the end of the month and they were rushing to buy dollars. But then... The government were running out of dollars. So what they did is they said, OK, you cannot buy more than$200 a month. $200 a month. Wow, that's not much. $200 a month, yeah. That opened a big black market. Today, because of that limit, lines and wait times at the bank for dollars are interminable.

8:39And transaction fees are costly. People had to get very creative again to get dollars. Many Argentinians acquire U.S. dollars through black markets, where the exchange rates are two times better than the officially sanctioned exchanges. And then they effectively store the cash under their mattresses, ensuring its value cannot depreciate should hyperinflation continue. I spent about a year living in Buenos Aires, Argentina, and it was the first time I had seen a society that had gone through hyperinflation. And that was pretty eye-opening. That's Brian Armstrong, CEO of Coinbase.

9:42physical coins that you put in there to ride the bus. And coins actually became somewhat scarce because you had to bring like a whole handful of coins just to have enough to ride the bus. But in a deeper, more profound way, I think it sort of created this pessimism about the future. In the early 1900s, Argentina was one of the top 10 economies in the world. It was like the Paris of South America. And over a period of 100 years or so, they've now fallen to, you know, less than a hundredth in the world in terms of their economy. And it's basically been by a series of policies, you know, around corruption and lack of economic freedom.

10:17When I say economic freedom, by the way, I mean, in some ways it's about free trade. It's about sound money. It's about enforcing private property rights. You know, it's about reducing corruption and things like this. Pessimism and lack of trust in an unstable financial system isn't just an Argentinian story. Hyperinflation has recently hit Turkey, Egypt, Venezuela, Sudan, and Zimbabwe. Turmoil makes it even harder to move money across borders. Brian saw money's border problems firsthand while working at Airbnb over a decade ago. The vacation rental startup was looking to expand, which, naturally, meant a lot of international transactions.

10:55I saw how difficult it was for Airbnb to move money into and out of 190 countries around the world. And I kind of had a front row seat into how much of a patchwork quilt, how broken the global financial system was to move money into all these countries and receive it from those countries that was like delays and fees. The internet has introduced a global borderless system of information sharing. But the system for moving money internationally hasn't caught up yet. Think about the internet, right? When you're loading a website or you're sending a message to somebody, you don't think about what country they're in at that time.

11:26If I'm loading a website in the UK, I don't expect to pay an exchange rate when the website comes in from the UK to load into my American browser. Imagine if you had to pay an exchange fee at the border to load a UK website or something. It would be silly. And when I send people WhatsApp messages, it's instant and it's free anywhere that they are in the world. So why can't payments be like that? There's no technological reason why we can't do that. It is purely a matter of will and inertia and, you know, politics and things like that. And Brian began to see a potential solution to the problem when he read Satoshi Nakamoto's Bitcoin white paper.

12:05Living in Argentina was one of the pieces of the puzzle that clicked in my mind when I finally read that Bitcoin white paper about what it might be like to return to sound money globally. I saw crypto as a very liberating force for the world to make the world more interconnected and fair and free. When I read the Bitcoin white paper, I said, okay, this is exciting as a potential solution, but it's a long ways off. You know, what could happen? How could I help make this happen? And so I kind of couldn't help myself. I started on nights and weekends working on a prototype. And I realized like if this technology is ever going to be used by people, we'd have to make it more trusted and easier to use for the average person who, you know, they didn't understand how cryptography worked or the technical details.

12:45I started working on a prototype that would be a simple way for people to use Bitcoin. and that became Coinbase. Brian was inspired by the idea that cryptocurrencies could have true utility in day-to-day transactions and could even make the global economy freer. It's a decentralized form of money that is provably scarce. And, you know, that was a very powerful idea for many reasons. But if you apply it through the Argentina lens, it's powerful because the temptation in many of these countries, when you have a fiat currency that's not backed by any hard commodity, is for the government to inflate the money supply and have deficit spending and inflation.

13:25What would it mean for the world if everybody could sort of return to sound money or have sound money that couldn't be manipulated or abused by folks in government in various countries around the world? That would be an incredible tool for economic freedom. We talk about signed money and the gold standard, but I mean, there was a reason we moved away from the gold standard because we found that it wasn't particularly sound and it was particularly volatile and particularly disruptive to economies. So can you square that one for me? Yeah, well, so there's a debate about volatility, which kind of goes back to the Great Depression and sort of Keynesian economics.

13:58That's sort of the question of should we have a Federal Reserve that can change interest rates? And that's a whole interesting topic on its own. It gives you enormous soft power. And it gives you the ability to, by the way, you know, inflate the money supply and purchase things without devaluing your currency too much because it is the reserve currency. But like every one of those empires before us, as the empire kind of hits the peak, you start to see excessive debt, excessive inflation. Crypto is many things to many people. Bitcoin, I would say, specifically is sort of a return to the gold standard in a digital form that is more portable and divisible than gold.

14:37And that's a really powerful idea. To Brian, the most powerful idea of all is the idea that crypto could offer economic freedom. And he's convinced that the tool to make that a reality is here, in the form of a type of cryptocurrency called stablecoins. So there's a couple different forms of stablecoins, but the simplest one is a digitized dollar. It's backed one-to-one by a dollar being held in a U.S. bank or trust company. often they're held in US treasuries, right? Which is kind of the lowest risk item you could have. And it's important that we have stable coins because again, I mentioned earlier, crypto is a technology to update the financial system and payments are a big source of friction.

15:20So you can now send, for instance, USD coin on a layer two called base for free instantly anywhere in the world. It'll settle in a few seconds. That's a game changer because payments flow to the path of least resistance, kind of like water. We want to reduce friction in our economy so that more transactions can take place. Brian says stablecoins are as stable as US dollars, but with all the benefits of crypto. Transactions are fast, cheap and secure, and they're accessible to anyone with internet access, which means that they can function as a stable currency alternative for those who don't have access to stable fiat currencies.

15:57In recent years, the popularity of stablecoins has skyrocketed as a way for people in countries like Argentina to safely store their money in a digital currency. I discussed this with Eduardo. When you have restrictions even to buy dollars, what do you do? You go to something that you can hedge against inflation and the valuations and it's something that people start believing. So that's why there's a lot of adoption of blockchain and cryptocurrency in Argentina. Stablecoins are safe from the inflation of the Argentine peso and safe from having to navigate the US dollar cash market. And that reliability is welcome in any place experiencing hyperinflation.

16:38Nigeria, for example, is another country where people turn to stablecoins for protection and stability and to make day-to-day transactions. There's quite a few people in those markets who, they essentially are just holding USD stablecoins on their smartphones now as their primary way of using financial services. They're doing it for peer-to-peer payments, like to send money to friends and family, whether they're in the same country or not. They're also using it for B2B type commerce. Like, you know, if they need to order goods and supplies from Europe or Asia to stock their shelves in their store, they can make those payments now with USDC stablecoins and do it fast and cheap and cross-border in a way that's just not available to them any other way.

17:21But the emergence of stablecoins hasn't been an altogether smooth ride. One area of economic freedom that people blanch at a little bit is the idea that cryptocurrency is being used by criminal organizations to facilitate their business. What are your thoughts about that? Yeah, so unfortunately, there's a lot of misinformation out there about this topic. If you look at the best third-party data that we've been able to find using blockchain analytics companies, they publish reports on this every year. and it looks like all illicit activity in crypto is about half of 1%. Global money laundering transactions, meanwhile, are estimated at 2 % to 5 % of global GDP.

18:03Companies like Coinbase, you know, we work closely with law enforcement. So what a lot of criminals have realized actually is that crypto is a really terrible choice if you want to do illicit activity because your transactions are being tracked on a public ledger. That transparency is part of the reason why Brian believes stablecoins can drive quality of life improvements across the globe and act as a human rights tool beyond inflation-affected countries. Freedom over finances correlates with overall freedom, and in countries that suffer from socio-political upheaval, governments can treat access to traditional financial services as a censorship tool.

18:39Banking access is another area of inequality. There are more than 7 billion smartphones in the world, but far fewer bank accounts. More than a billion people are still unbanked. But now many of them have the technology to access digital currencies right in their hands. And that could change people's lives everywhere, including, as Eduardo says, in Argentina. We foresee more use of this because the people, they don't have a way of saving. Giving more people the financial infrastructure they need is the mission of Agrotoken, which Eduardo founded in 2021. Agrotoken creates stablecoins that are backed not by US dollars, but by grain.

19:16The end goal, though, is the same. We are giving the people the opportunity to hedge against inflation and devaluation and they won't be so much exposed at the decisions of the government about, you know, macroeconomics, economy or whatever. This bold vision of economic freedom is one he shares with Brian. If you have a smartphone and an internet connection, you now can have world-class financial infrastructure. You can have property rights. You can have access to sound money that can't be eroded via inflation or seized if you're a refugee fleeing at the border. And so it's a really powerful idea, actually, that crypto could increase the economic freedom of the world.

20:01So crypto is sort of saying, hey, well, we have the internet now and we have smartphones. Why can't we provide financial infrastructure to everybody in a new updated financial system? that could be an incredible tool to lift the world out of poverty and increase economic growth and all kinds of tools like that. Even the biggest skeptics can agree. A new technology that can increase economic growth and economic freedom to more people around the world is worth giving a chance. When it comes to our financial system, we've seen time and time again that there is always a better way and that money always evolves.

20:38Thank you to Jacob Goldstein, Eduardo Novillo Estrada, and Brian Armstrong. This has been season one of Evolving Money, a podcast from Coinbase and Bloomberg Media Studios. I'm Paddy Hirsch. Thanks for listening.