Michael Green and I discuss Bitcoin’s defects, the future of the U.S. dollar, and potential problems with programmable money.
Guest: Michael Green – widely known investor who serves as Portfolio Manager and Chief Strategist at Simplify Asset Management.
Immutable: Episode 7, with Michael Green “Is Crypto a Solution in Search of a Problem?”
Josh Burek: This is Immutable, from Harvard Kennedy School’s Belfer Center for Science and International Affairs. I’m Josh Burek. In today’s episode, we hear from investor Michael Green. He’s the Portfolio Manager and Chief Strategist at Simplify Asset Management. He’s also widely known for his debates on digital assets. Michael and I discuss Bitcoin’s defects, the future of the U.S. dollar, and potential problems with programmable money.
Josh Burek: Michael Green, welcome to Immutable. It is great to have you on the program. Michael Green: Thank you, Josh. I appreciate it.
Josh Burek: One theme we've been exploring in this podcast, Michael, is the dual nature of transformative technologies, or really any tool. A carpenter uses a hammer to pound a nail. A thief might use a hammer to pry open a window. Nuclear power was used to destroy two Japanese cities at its outset. But it also promised an era of energy “too cheap to meter.” Now, seven decades later, we're still wrestling with those challenges and have yet to see the fulfillment of that promise. Today, more acutely, social media presents itself as this existential dilemma: Is it connecting the world or destroying democracies. Engineers have a saying, “No bad materials; just bad applications.” Which brings us to blockchain and crypto. How do you make sense of blockchain-based systems? In what ways are they being applied well? In what ways are they being applied poorly? How do you ultimately net out this technology's upside and downside?
Michael Green: What I would start with is this question of, what is blockchain? How is it potentially valuable? How can it be useful? And the importance of blockchain is this, that it is a distributed database.
In other words, it takes the traditional database out of a central entity. And creates a massively replicated database where verification can be done by any number of parties that are involved to the process. Right? So it's very similar to when you enter into a mortgage contract, you receive a physical copy of the mortgage.
The bank has a physical copy of the mortgage. The servicer has a physical copy of the mortgage, and everybody should theoretically be able to revert and evaluate that mortgage on the documentation that's written there in the event some form of conflict emerges. Blockchain just takes that and basically makes it broadly available.
And it can be a private blockchain so that customers and a supplier exclusively have access to that information. Or it can be a massively public database similar to what you have with Bitcoin. For example, the Bitcoin blockchain, there's obviously value in having multiple parties retain a copy of the document of record and the, information that is available to us. The question around whether that is good or bad, I think really depends on what you're trying to accomplish.
And I think they can be simultaneously good and bad. One of the things that I would highlight, for example, in a blockchain like Bitcoin, is that for transaction purposes, you actually want to have certain types of transactions that never show up on a blockchain, never show up in a record for the very simple reason that they might be viewed as socially unacceptable, but at the same time, they convey an important message.
Josh Burek: Can you give me an example?
Michael Green: A perfect example would be, do you want to buy drugs from your local drug dealer? Right. Sounds terrible. In principle, not something that I think we should be encouraging as a society. But the ability to actually effectuate that transaction carries important price signal information to the market.
Likewise, my ability to go buy a pack of gum and not necessarily have the government or every party involved be able to track that transaction, for the very simple reason that maybe I don't want people to know that I like sugary bubblegum that may adversely affect my insurance policy, for example, or my dental insurance in a somewhat dystopian world in the future.
But I think most of us would argue that we should have the freedom to make those choices. And the point that I would make is importantly, you're conveying information to a marketplace when you have that type of anonymity. So cash is a bearer instrument, has that unique feature. Blockchains don't necessarily have that.
What they do facilitate, the Bitcoin blockchain does facilitate is exceptionally large transfers without having to register through the anti-money laundering facilities or the know your customer type dynamics. And so perversely, not well suited for the small transactions. It's exceptionally well-suited for things like money laundering activities and that infuriates people.
But unfortunately those are the realities.
Josh Burek: Michael, you've identified two major dangers with Bitcoin in particular, first it's facilitation of criminality. And second, some of the geostrategic vulnerability it creates, including some special risks for America's traditional role as a global reserve asset.
Can either of these risks be mitigated or are they essentially congenital disease?
Michael Green: I view them as congenital defects. And unfortunately, the criminality dynamic, when the solution set to that emerges, whether it's through improved enforcement tools or whether it is through substantive change in protocols, the issue that I have is that there's not an awful lot of uses for Bitcoin outside of that.
This is one of these situations where the utility function of the instrument is intimately bound up in that dynamic. There's a million solutions that are available if you want to do KYC and AML.
Making Bitcoin compatible with, in my view, doesn't add much to the system at the same time that it destroys much of the impetus to participate in the system in the first place.
The second issue in terms of the threat to the United States. You know, I just want to be clear. while I am a U.S. citizen, and while I deeply value the importance of the U.S.’s status in terms of reserve currency, I fully understand that that is not something that belongs uniquely to the United States.
So the question for me is who is harmed and who is helped in the process? And there's an awful lot of focus on the relative that, you know, on the bad actions of the U.S. government and its abuse of its reserve currency status, its ability to fund wars in various places, its ability to run significant trade deficits.
That's often perceived as a significant negative. But that fails to consider what I would argue is the contra-factual dynamic, which is if you weaken the U.S., do you simultaneously strengthen competitors to the U.S. on the global stage and are their actions necessarily going to be significantly better?
The U.S. is far from perfect, but it has been remarkably benign in its willingness to travel around the world and for the most part return control to the local owners or the local government of, you know, systems, whether that is Europe and World War II, or that is Japan after World War II or in many other situations.
Now we're far from perfect. Right. You know, we can debate the occupied lands of Hawaii and everything else. But in general, I would argue that the U.S. has broadly been a force for good, certainly relative to competing empires like the Soviet Union or competing spheres of influence like the Soviet Union prior to the 1990s, or, increasingly, the quote-unquote “threat” that is represented by players like China.
So I don't want to emphasize it as exclusively a unique dynamic for the United States. All fiat currencies and the flexibility of government to behave in one way or another are influenced if we were to decide to move away from something like the U.S. dollar as the reserve status or inside a country as terrible as Venezuela or Lebanon, to as functional as the UK, if we were to choose to reintroduce something like Bitcoin, as you know, a new gold standard.
I grow increasingly concerned that people are far too focused on the power of the printing press, when what they're really saying is I don't want the money spent in a way that benefits others, versus my perception of how it's benefited.
Josh Burek: Michael, you've helpfully broaden the discussion to fiat currency generally. And I want to ask you, if we were to take on the project of optimizing the U.S. dollar to better meet the needs of a 21st century global economy, are there any functional changes we might make?
Michael Green: Again, I think it depends on your perspective, right? So are you speaking from the perspective of an American, are you speaking from the perspective of a global citizen
Josh Burek: Let's take the lens of the Washington DC policymaker community.
Michael Green: There are significant disadvantages that exist under the current system. To obtain the necessary impulses from their perspective, of the U S dollars that exists today. So for example, if we send out stimulus checks, we cannot send them out in a targeted fashion that say they have to be spent by X date.
They have to be spent in X way. You know, if you remember the loans that went out in March of 2020, the dynamic there was, well, you have to spend 65% of these funds on labor, right? In other words, you have to maintain your payroll. The ability to audit that type of dynamic is weak under a dollar system.
And so there are, there's overwhelming temptation to move toward a system of control that can be captured with things like a central bank digital currency. Where individual dollar bills effectively could be tagged with expiration dates, right? Or it could be limited to certain usage. This is part of the reason why I bring up this dynamic of the importance of privacy, the importance of bearer instruments, because I don't necessarily want the government telling me exactly how I should be spending that.
I certainly don't think that a bureaucrat in Washington has perfect insight in terms of the best way for me to stimulate the economy. That very well could be to add to my stock of savings and make me feel more comfortable, in my lifestyle versus going out and rushing and spending it on, you know, various sundry goods that they may have wanted me to spend at a certain point in time.
Josh Burek: I guess that’s the flip side of programmable money is that it's controllable money.
Michael Green: A hundred percent. And this is part of the reason why I emphasize things like the recently introduced e-cash initiative in the U.S. Congress. That works very hard to preserve dynamics of anonymity and bearer bond type instruments, because of the importance of spending money as a signal in the economy. As much as possible, I want to free people and allow them to spend, as they see fit. I continue to believe that that's the best outcome. The thing that I find frustrating and difficult in a lot of situations is in part because we have so much outrage and anger against the existing system, we're failing to consider that the systems we're talking about introducing may have far less privacy features, may have much more control features. And that's certainly what we're seeing with the development of currencies in places like China.
Josh Burek: It makes me wonder, is crypto effectively a solution in search of a problem?
Micheal Green: I think that there are legitimate problems, right? The world that we inhabit, while it feels very digital – you and I are speaking over an Internet connection from thousands of miles away using electronic signals. That world feels incredibly digital. But the reality is, is that most of the investments that we make, the money that we spend, et cetera, has at its core, an analog legacy system, similar to, you know, when you're running Windows on your desktop, you still have kind of a DOS overlay, right?
You're still working off the old MS DOS, disc operating system. Those dynamics will eventually have to change. And if we were doing this visually, I'd hold up an example that I show all the time: My mother bought for my children individual stock certificates of companies who make products that they like.
So my son, for example, has a single share of Nintendo framed on his wall. Because of that, I continually receive paper checks. Cause it's technically registered to my name in person as compared to street name, which is how it's normally held. And I'll receive checks for one penny, two pennies, 5 cents, completely ridiculous situation in which I'm receiving an analog of the ownership of that asset.
Moving to truly digitally native securities, which crypto plays a role in, is in my opinion, imperative, inevitable, and something that will happen. But the idea of as it's currently being proposed is very much a solution in search of a problem. Right. It's we have to replace the currency. We have to privatize money, et cetera. I just don't think that's correct.
Josh Burek: Many Americans take for granted the immense benefits that flow from the U.S. dollar’s role as a global reserve currency. The dollar, while still dominant, is facing significant headwinds today. And we occasionally see headlines about de-dollarization. How might the American public begin to experience changes if the dollar's global power is eroded substantially in the years ahead – and is there anything policymakers can do to shore up its standing?
Michael Green: When you think about the role of the U.S. dollar and you talk about the benefits that accrue to Americans. First I think it's important to recognize that when you talk about the dynamics of the reserve currency, it's referred to as an exorbitant privilege, and the reason is not for nothing, right?
So there is by definition, if you are going to be the reserve currency for the world, you have to run a trade deficit. You have to have the ability of people around the world to sell goods and services effectively to the center of the empire so that they can obtain the currency that then allows them to pay taxes, byproducts that they might need, et cetera.
While there are benefits that accrue to the center of the empire because of that, perversely it also means that many members of society are going to be underutilized because the currency by definition has to be more expensive than the products that you're ultimately purchasing. So we have to be able to run that surplus, which means that a fraction of our population is not going to be as fully employed or fully utilized as they should.
That's part of what creates the stress that many feel in middle America today, where we've been hollowed out in terms of our manufacturing sector or components of our service sector, about call centers in India, et cetera. That's created those conditions that I think many Americans correctly look at and say, I'm not benefiting from this.
The traditional approach to that is to introduce things like social support systems, unemployment, welfare, et cetera. But those in and of themselves, if not properly designed, create their own feelings of frustration, stress, despair, you know, nobody wants to be a non- contributing member of society and perceived as such.
It's a very mixed blessing. When you think about it from that framework. It also raises the issue of when we elect politicians, do they work in our interest? Or do they have to take a portion of our concerns and ignore them to the benefit of the rest of the world? Because we're responsible in some way for the rest of the world, for our behavior. Nobody wins in that situation.
And so, you know, you're trapped in a very difficult dynamic, but just to emphasize the types of benefits that accrue on a global basis because of the worlds that us having the world's reserve currency. We can do things like patrol the seas and create the peace that allows easy logistics, the flow around the world and a global trade system that becomes optimized and allows everybody to afford more than, than they otherwise could, whether you're in Africa, you're in Japan, or you're in the United States. Losing that means that many of those benefits reverse. And you see the rise, not necessarily of another global hegemon, similar to the United States, but the rise of local power brokers, warlords, et cetera. If you can't police the border, it's effectively the might equals right. Drops down to a much less sophisticated player.
Josh Burek: That's a big if, though. How real is the risk that the U.S. dollar could lose that status?
Michael Green: So I think it's currently low. And the part that I would emphasize is when we talk about the threats and we talk about de-dollarization, et cetera, we're not actually seeing a tremendous amount of evidence that that's true. So you often hear it referred to the Chinese yuan as you know, the rising threat. The Chinese yuan is not a convertible currency. It's largely pegged to the United States. China's source of dollars and source of spending power around the globe, still devolves from their relationship as a trading partner with the United States where they're running a huge trade surplus, giving them a supply of dollars and similar to Russia, you know, we could cut that off.
If we were to decide to, we then just have to deal with the ramifications of having severed a significant fraction of the supply chain and replacing that. Stressful situation. We're going through an element of that today, where we are weaning ourselves slowly, but significantly off of the supply relationship with China, for example. When you think about it from that framework, the odds are relatively low that the U.S. loses influence in its own sphere of
influence, right? So Japan, the United States, Australia, et cetera, if anything, we're seeing evidence that the U.S.’s relationship is rising there. Certainly versus the euro, for example, the U.S. is becoming more important, not less important. But the flip side of that is that it's entirely plausible, that we returned to a world that looks much more like the end of the cold war, where the U.S. dollar is not the reserve currency for the world, it's the reserve currency for a trading block. And a separate trading bloc similar to the Soviet sphere of influence arises under a Russia-China partnership. You can interpret that how you like. I personally think that that's effectively a bad actors club that in many ways, that's what the Soviet Union facilitated and enabled and the competition between those great powers, the United States and the Soviet Union facilitated all sorts of bad governance behavior around the globe in the period from, you know, give or take 1946 and the adoption of Bretton Woods through roughly, you know, 1990.
The assumption under you know Francis Fukuyama’s the end of history was that that competition had ended. I would argue we're seeing more than anything else is a return of that competition. And a lot of the language that you see around de-dollarization, et cetera, I would argue is influenced by social media, with the objective of trying to convey to people or create the impression that that's actually happening either to benefit private initiatives like Bitcoin or to benefit China, Russia, et cetera, by sowing uncertainty and doubt within the U.S. economy.
Josh Burek: Michael, this is not a podcast about investing and we emphatically do not recommend any course of action to listeners, but we do want to help people ask better questions. And we're fortunate to have a terrific investor in you on the program. So I want to ask you, can you walk us through your thought process that led you to reach some skeptical conclusions about Bitcoin and other cryptocurrencies? And how can the rest of us be sharper when we evaluate emerging tech?
Michael Green: Well, so first of all, I actually became involved in Bitcoin super early on. So, you know, in 2010, 2011, I owned and was invested in Bitcoin, was a proponent for some of the components, the dynamics around it. I actually thought that it represented an interesting adjunct to gold. Um, my skepticism around Bitcoin emerged following the, the events of 2000, 19 and 20, where, you know, a very small investment in Bitcoin had, I had always advocated that you wanted to effectively get yourself to neutral.
In the fourth quarter of 2020, I began to hear a uniform language that was some variant of Bitcoin is the dominant trade. Right, that it is the only solution. And as I began to evaluate those claims, I actually began to do what I always try to do from an investment standpoint, which is to model out the system and play it forward.
The issue with Bitcoin is that it attracts adherence because of the perception of it being quote unquote hard money. It's only available in limited supply. The thesis there is the harder the money, the better the money. The problem with a Bitcoin type system is two-fold. One is you have an exceptionally hard form of money in which there is no capacity to replace it, right.
There is no capacity to expand the supply of it. Yes, that removes a control feature from a central bank or from a government. But those control features are not necessarily bad. All right. So things that I would highlight for people that require flexible currency are things like bankruptcy protections, right?
The, the 19th century and the rise of many individual freedoms accompanied things like bankruptcy protection, limited liability corporations, et cetera, that give people the ability to restart. If I lose something that is perfectly scarce, I have no capacity to restart. Right. It's gone. My carelessness contributed to a permanent contraction of the global money supply that affects every participant.
And it actually incentivizes those who hold the assets and the wealth – effectively, the stock of savings – to refrain from economic activity that could put it at. So the natural conclusion of a super hard money system like Bitcoin, is that it consolidates to a single holder who takes no risk along the way.
Now, if you gameplay that through the system, that's what you end up with. Now, the Bitcoin community has adopted the language of divisibility, meaning not just pennies out of a dollar, but I can take millionths out of a Satoshi, out of a Bitcoin, for example, and has tried to argue that that allows for distribution. The simple reality is, is that 18 and a half out of the 21 million Bitcoin that will ever be mined have already been mined. 3 million of those have been lost, slightly more than that actually.
And the rest is held in a fantastically consolidated way mongst a very small fraction of the population. There is no mechanism other than a government, for example, to distribute Bitcoin in a way that would allow everyone to participate in the system as it plays through. Right now, that's just a fundamental flaw in the underlying structure.
And it's built on a misunderstanding of how monetary systems work. An attempt to link Bitcoin to something like gold, where the presumption is there's only so much. But the reality is, is that the supply of gold responds to human innovation. If I figure out a better way of mining, I can get more gold.
If I figure out how to extract gold from sea water, I can get more gold. The deflationary aspects of the 19th century, so people will be familiar with the fact that we had a period of deflation from roughly the Civil War period until, you know, William Jennings Bryan and the 1896.
Josh Burek: The cross of gold.
Michael Green: The cross of gold dynamic, right. That was actually created by relative shortage of bullion that could only be addressed by human innovation. The single most important happened in a change of recovery technology called the cyanide process that allowed much greater production of gold. Even then, it wasn't enough to keep up with the growth in
population, which created many of the characteristics that we saw in the Great Depression with the collapse of the value of goods and services relative to hard money.
The ability to respond to human innovation and to say, we can do more. And by the way, we should forgive people who try to innovate and screw up. That's what bankruptcy is. Right. I try to start a business. I try to make a bet and I screw up and I take bank. Limited liability corporations prior to the innovations in the 1840s in the UK and the 1860s in the United States, if you were an investor in a company and the company went bankrupt, you could be liable for the losses over and above what you'd already contributed. That discourages investment in equity, it discourages innovation, and risk-taking behavior. We want to do the opposite. Right. From a societal standpoint, you want to work to optimize the resources; you want to encourage innovation.
We want to encourage risk-taking, and a flexible currency is actually part of that. You can disagree with the policy choices that are made around that, how those are expanded or who is saved and supported in that. That's the benefit of democratic system. You can vote the bums out, who don't do what you want them do.
Josh Burek: Larry Fink made news recently for his evolving views in this space. The BlackRock Chairman famously called Bitcoin quote, an index of money laundering several years ago. Today, he says that a global digital payment system could bring real value. Leave aside evolving views for a minute. Is the technology itself effectively mature or is the technology also evolving in ways that could lower downside risk and improve its utility?
Michael Green: The technology is unquestionably evolving. Most of the improvements that have happened in Bitcoin specifically, and I just want to emphasize that when Larry Fink says crypto or digital, he's saying effectively the same thing. I'm saying that we are unquestionably going to move away from the analog world, where there is a physical paper stock certificate, there is a physical paper mortgage, there is a physical paper debt contract that exists, and enter into a realm in which those are held digitally because digital can be changed so easily without any obvious aspects to it. That's where the tight, the dynamics of distributed databases become increasingly important because it allows me to, you know, trust, but verify type dynamics.
Same thing you would see if you went back and you read your mortgage, nobody does. But we all know that we have the legal right to refer to that document. And by the way, standards around mortgage applications and mortgage documents that have been adopted on a legal framework can actually govern those as well.
And so we’re absolutely moving in that direction. I think Larry and I are saying the exact same thing in that context. The question of whether Bitcoin is the right answer to that is an entirely different one. And by the way, can extend to Ethereum or Solana or Cardano or any of the other, um, digital assets that we're referring to.
The question is, is the technology advancing in a way that is useful for utility purposes, or is the technology largely advancing in a way that facilitates financial speculation? So far, I would argue that the majority of the innovations have been around financial speculation rather than utility innovation.
I'd love to see this financial speculation break and see us move forward toward a utility innovation. Cause I, I agree with Larry. I do think that a fully digital financial system offers distinct benefits over its analog peer.
Josh Burek: Michael ,you've made this fascinating point about money's core purpose, to retire debt. Can you say a little bit more about that?
Michael Green: Sure. So, you know, there is always this broad question of what is money. And a lot of people, you know, will link to history and say, well, gold is money, or, you know, money has to have some form of intrinsic value. Well, the intrinsic value that exists for money always been to cancel debt. Debt is simply a social obligation, typically enforced by a contract law.
So when I go to the local barista and I buy a cup of coffee, I am entering into a debt contract. His obligation is to pour a cup of coffee. My obligation is to provide him with a dollar amount that I have explicitly agreed to, by saying, I'd like to buy a cup of coffee. That type of debt contract is retired almost immediately. A much more complex contract, for example, a mortgage, could take me 30 years to retire. And the role of money is to provide the legal mechanism for retiring those obligations. In other words, money exists to cancel out debt.
Josh Burek: Michael, on a personal front, what do you wish more people understood about you?
Michael Green: I'm not going to focus it specifically on me cause I don't think I'm particularly interesting. But what I would broadly say is this, is that the type of engagement that you and I have had here in which there's a thoughtful exchange of ideas is in my view, something that is broadly missing from the interactions that many people have.
And so there's going to be a temptation from a subsegment of your listeners to dismiss, you know, what I am saying as somebody who is salty or who upset because I sold my Bitcoin too low, or I didn't buy enough or whatever, that’s simply not true. Right. People's motivations can actually be quite genuine and they aren't necessarily working against your interests simply because they are saying something different than you.
And so what I would just encourage people to do is, is to try to take the advice and insight that I'm offering from the right place. I don't actually care if people want to speculate on financial assets. I do care that people are laboring under a misinformed position as to the value of those financial assets or those, those speculative assets.
Josh Burek: Michael Green, thank you so much for your time and insight today.
Michael Green: Thank you for having me. I enjoyed the opportunity to chat with you.