How and why did you get into the blockchain industry?
I was working in investment banking, and I was studying money a lot on the side. I decided to leave my job to dedicate myself to educating people on the problems in the banking sector. Then, I lectured all around the world. I presented at about 200 different universities on systemic risks in banking. Also, I blogged and wrote a book called 'Bank to the Future' on the future of finance.
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| Simon Dixon, CEO of Bnk to the future |
I was invited by somebody who was working on Bitcoin’s development side, to speak at the very first Bitcoin conference in the world, which was in Prague. I included Bitcoin in my book which was the very first published book to talk about Bitcoin. I started investing in the industry and was fortunate enough to invest in many of the companies that are now the largest and most valuable companies in the industry.
The reason why I got into this industry is that I believed that it was a counterforce to problems in the banking system. The banking system is very resilient. Every time it encounters a big problem, it uses financial engineering to try to solve itself. Eventually I believe that the problem will create a very large systemic risk in the entire banking system. By that point I want cryptocurrency to be at a stage where people have choices, so they wouldn’t have to have disastrous financial consequences because of the risk in the banking system. In the meantime they can hedge and start to learn how to generate wealth outside of the traditional financial system.
Bitcoin at the time was very unclear whether it would succeed. But I believe it's now become unstoppable, where it will become a force of that can help people. It's got its problems, but to have a financial system that operates outside of the traditional financial system, it is one of the most valuable and important inventions the world has ever seen.
The reason why I got into this industry is that I believed that it was a counterforce to problems in the banking system.
Would you explain how Bitcoin or blockchain can solve the existing problems in banking?
In my book I talked about three very simple problems in banking. It was written to help people to understand some of the risks in finance. And the first is, when you deposit your money with the bank, the bank becomes the legal owner of your money.
The second is, when they become the legal owner of your money, they spend it as they wish. At the moment there's a very big controversy in Korea around one of the crypto exchanges spending people's money. That is legal in the banking system. People’s money is actually being directed in the flow of how the bank thinks it should be lent. While it's unacceptable to spend clients’ money and that's a very bad practice that should be punished, it is also legalized in the traditional banking system.
The third is, when a country has a goal to use their currency to serve their country, it might do things with that currency that'll be great for the country but not so good for the individual. For example, in order to create a stable currency, you have to exercise monetary policy, which makes your money become worth less and less over time. While that's good for the economy, it's bad for the individuals because they have to work harder and harder to add to their money supply and their savings. Because the value of the money continually goes down relative to what they can buy, it has this effect of encouraging people to go into debt, rather than to save money. And all traditional currencies have the same system. So you have what's called an inflationary currency. Inflationary means that, over time, your money lets you buy less and less things.
What happens with crypto is that crypto takes those three problems, and gives you the ability to own your own money. When you own Bitcoin it exists on your phone, on your hard drive, or anywhere. Because you can own it just like cash, you can also spend it how ever you want. So it created a peer to peer payment system that is independent of any censorship. Because it's independent from censorship, it means I can find anybody in the world that's willing to accept it.
People don't really realize because it doesn't really affect everyone day to day. But people that travel around the world start to realize when they land in a country that your government doesn't want you to be in. All of a sudden your money gets switched off and you have to call your bank and get permission to use your money. When you try to send a large amount of money around the world, you have to call your bank and get permission to get access to your money. When your government is trying to prevent some kind of financial crisis, they switch off ATM withdrawals, bail in people's money at the bank, or they bail them out in order to take taxpayers’ money. While these things are completely right for the countries, it's not necessarily right for the individual.
What Bitcoin did is that it came and gave people a choice. Because you can own your own money and you can spend your own money, there's nothing a government can do. It creates a competition with your national currency. Your national currency does things which are good. It gives you stable money and allows you to pay your rent. It does good for the national economy, which is why you want it. But it's very bad for your savings. And crypt has its own problems because it has a fixed money supply. It creates lots of volatility and that is really bad for everyday spending, because if your money has gotten powerful twice as much, that's quite bad for spending. But it's good for saving in the long term. I believe that these two things come together and create a really healthy market. It keeps currencies more honest.
Cryptocurrency can do very innovative things like pegging itself to a traditional currency when it needs stability. For the first time in history, people have global choices what to actually do. And that keeps government more honest. And it also creates cryptocurrency more honest because people will, in times of very bad behavior like the hacking, convert crypto into the traditional currency and a fiat system starts to win at that point. These competing forces are very important for the economy and for the good of people. Having these two tiered financial system is very important, just like the invention of the internet. The ability to have a financial system outside of the traditional financial system gave people a lot more choices.
What Bitcoin did is that it came and gave people a choice. Because you can own your own money and you can spend your own money, there's nothing a government can do.
Cryptocurrency has two characteristics as currency and asset, so the public is confused how they should use. Do you think the public can regard it as currency, asset or both?
The answer is that everyone can do whatever they want. Some people use it as a digital asset. Others use it as a median of exchange. The important point there is that entrepreneurs all around the world can create solutions that allow them to use it as a median exchange, allow them to use it as a digital asset, or allow them to use it even as store of value. Because we now have this thing called Bitcoin which has a sound monetary policy but also has lots of problems like volatility, entrepreneurs can now come along and take this technology. Because Bitcoin is like a bank in a box, they can just build on top of it and think of very clever ways to create all the optimizations. In the crypto industry, we are at a very healthy stage right now. But it seems very unhealthy. The reason it seems unhealthy is that people are arguing about what crypto is and have attached their values.
What cryptocurrency did is that it changed the world from using the currency that your government told you to use. Now people argue about which one's more important. And really it's an argument about human values. One is saying it's more important to have a currency that everyone can spend everywhere in the world, and others are saying it's more important to create a savings account where everyone can become financially wealthy as a result of this. And those two things are not the same thing. If you look at gold today, gold is used to preserve wealth for people that have questions about their government's policies. But they don't use it to spend.
And what’s amazing here is that the entrepreneurs all around the world, through incubators like Hashed, can focus on one particular use case. The reason this is growing so fast is we have now got the entire world building things that they think are important. What will happen next is blockchain actually becoming a self-funding mechanism whereby people that became wealthy as a result of investing in this industry to start speculating and investing on future innovations with this technology. Because Bitcoin made so many wealthy people and Ethereum made so many wealthy people and ICOs made so many wealthy people, they started to redistribute that wealth. It became a self-funding mechanism where it needs no bank, no venture capitalists, no private equity, because everyone could fund themselves. And that completely disrupts Wall Street, Silicon Valley, the US dollar, the retail banking system, and the central banking system. Those four things now have competition. They've never had competition before. That's very healthy, both for them, and for crypto.
What is your opinion on the stable coin projects?
Stable currency is a very important thing. I'm very grateful it exists. I'm a user of Tether. But you have to understand what it means. Changing cryptocurrency into fiat means you introduced counter policy risk to the equation. Your money is subject to the whims of how the government and the banks flow your money.
On the other hand you have cryptocurrency. Stable coin is normally backed by a fiat currency, and it means you have to rely on someone else normally. But at the same time, it gives you the best of fiat and some of the properties of crypto. There's only one cryptocurrency in the world that has full utility right now and no speculative value. And that's Tether. Nobody speculates on Tether, because it's always worth a dollar. But it’s 2.2 billion dollars market cap because people are using it. They're using it as a way to get from one crypto exchange to another crypto exchange and allow people to exchange these crypto assets for something that looks like dollars in a very fast way, without the slow and inefficient dollars. It does have its risks, but the utility is really clear. The people still want stability but they want to keep it in crypto.
Stable coins are such an important innovation to this industry. I can't wait to see the different ways entrepreneurs are going to come up to make it less counter-party risk. In the future, entrepreneurs are simply going to create very good applications that sit on your phone and it's going to say, ”I have this amount of Bitcoin, I would like to hold it with no volatility risk. I need to pay my rent for the next twelve months, please keep twelve months rent here." Other blockchains will be optimizing like Ethereum optimizing for smart contracts, Bitcoin Cash trying to be digital cash and Bitcoin having a store of value as it becomes more and more clear.
I used to be a bitcoin maximalist where I believed Bitcoin could be everything for everyone. I was wrong. The market proved me that actually when you have teams centered around a value or vision, they innovate that blockchain faster in a certain specific use case. And in the future, the way that the development's going is that they are all going to be interoperable. So entrepreneurs will seamlessly create applications that optimize for the best blockchain and you just keep it in the currency that meets your values. There are all sorts of problems with our crypto industry, and that's just a change for an entrepreneur to create something that solves that problem. Now you can build upon that technology and it can't be taken away. This Bitcoin cannot be uninvented, just like the internet cannot be uninvented. So every country in the world needs to figure out how they're going to adjust to this.
Do you think its possible to make stable coins without any backed assets?
The government has been doing that for decades. Every single fiat currency is backed by nothing. It's not backed by gold. It's not backed by anything. The governments just determine what's right for their country and change the monetary policy based upon their thoughts about what's right for their country. Some of them get it wrong, like Zimbabwe. Others might get it right. And others have unfair advantages, like the US dollar.
But the fact of the matter is that there are all sorts of different models now. The market is going to determine what is more useful. And the market capsulation of their stable coins is what's going to determine how people want to use it. So if someone says it's backed by nothing, then people with values on fiat currencies that are backed by nothing can actually use it. Others are going to say this needs to be backed by gold and people are going to use that. Others are going to say, “well we don't mind the US dollar, we can take the counter-party risk of the federal reserve” and use that. But here's what's really important. The US no longer has a monopoly on the dollar. That's really important.
Before the federal reserve gave the banking system the ability to create digital USD, they issued a loan. So the banking system and the federal reserve had a monopoly on the creation of US dollars. But now, anyone can come along and create a US dollar backed crypto. It's not the US dollar, but it's competing with the US dollar. And more and more money is getting sucked into crypto through ICO. Every single ICO, every single project that now raises funding through tokenization and every single asset is now backed by a token.
One of the really interesting things, that I thought was really game-changing, was the telegram. Telegram will be raising two billion dollars in US dollar, not in crypto. And it was from institutions. Those institutions are taking their US dollar and Telegram is converting it into cryptocurrency. One thing that we've seen is that once it goes into crypto it doesn't leave crypto because it gives people so many more choices and options of what to do with that money.
This Bitcoin cannot be uninvented, just like the internet cannot be uninvented. So every country in the world needs to figure out how they're going to adjust to this.
If there are hurdles to tackle for your project to succeed, what are they?
Two things are always the the hurdles: regulations and banking. That's it. This industry grows very, very quickly without regulations and banking. But it also scams lots and lots of people, because there are lots of people that are willing to take advantage of this innovation and fool or trick people to steal their money. When people get fooled and tricked, they all go to regulators and say, "Why did you let this happen?" Then the regulators come along and they have to try and protect their investors. They over-regulate to protect the consumers. This is not new. This has been happening for hundreds of years. Originally we had the invention of the stock market. All the fraudsters and banks started actually selling them to people that shouldn't buy them. That crashed the market and they created derivatives. All the investors complained to the government and the government said, “no more, we'll create more regulations.” And then those regulations decrease competition and slowed everything down and created natural monopolies by who are connected to the government. This will happen again in crypto.
But there's one difference here. The harder the government and the banks make it, the more entrepreneurs will push to decentralization. So you'll have decentralized solutions. You'll have crypto-backed things. You'll have all these things that happened exactly how Bitcoin worked. Decentralization has a horrible user experience. But when the government makes your experience bad, you are willing to learn how to use the decentralized. Over time as more and more people use the decentralized user experience will get better and better. Therefore you have these two competing forces both going grow and boom. How countries adapt is going decide whether they're significant or insignificant in the future.
You see the market is bleeding right now. Do you see any resemblances compared to the 2008 economy meltdown?
No resemblance at all. This is a market crash. This is just a correction from people that were over-speculating and over-valuating things that have no value. We had cryptocurrencies that were doing absolutely nothing that people were valuing at billions. That was insane. But this is still all built upon a sound monetary policy; therefore this is a market correction, which is driving people back to innovation and which is flushing out lots of people that don't understand the economics of the industry.
There isn't a systemic risk here. People lose their money because they over-speculated on the wrong things. The fundamental value of Bitcoin being a world reserve cryptocurrency of cryptocurrencies. Ethereum came along and created a small contract platform that no one can stop or censor. And everything is being built on top of those just because you invested in something that was actually scam or not even interesting or it was over-valued by the market. It just means that you lost your money. That's going to hurt a lot of people. That's going to upset a lot of people. However, that's just the nature of speculation. And it's just going to make the industry stronger. This is not going anywhere.
What I think they will do next time, in the next systemic risk in financial crisis is that we'll see everyone take the bank deposits and exchange it for cryptocurrency-based projects. It won't be cryptocurrency, but it'll be a centralized government-backed currency. They will allow the banking system to go bust and the central bank will issue their own digital assets. And then what essentially happens is the central banks competing with the retail banks. Now the central banks are not set up in order to do retail banking. So what they'll do is that they'll create technology that allow fintech companies to build their applications on top of the central bank. And therefore you'll see this huge movement where the financial system will move from this ginormous few monopolistic banks to a central bank that is issuing the digital currency with hundreds and thousands and millions of financial technology companies building on top of them.
But there's a problem. When the central bank is issuing a currency and also controlling the applications it means that they can switch you off for whatever reason they want; therefore that threat means that people will also store money in the system that works without them. And again, the cycle will repeat.
There are more than 6,000 cryptocurrencies. Do you think they will survive in the end, or one will survive like whole market as a monopoly like Walmart in retailing?
That's a really interesting question. 90% of what you invested in will be rubbish. But that's the same in venture capital. If you take 100 investments, 10 of them succeed and 90 turn out to be rubbish. But there's a really interesting dynamic in crypto that doesn't exist in these traditional financial assets. And that is they exist on the blockchain and they never die, even if it's a scam. It still continues trading. And people continue to trade scams. If something was a scam in traditional finance, then it would be delisted from the exchange and the products would disappear. In cryptocurrency it stays forever.
Even scams create speculative value, and these projects just stay forever. There are so many projects over 6,000 that have proven to be very illegitimate and scammy, but they are still traded. And people can still go peer to peer, speculate on them and create decentralized marketplaces for them. So it's a very interesting question that it changes the risk model in that even if you get it wrong there's still something that still carries on. And you can still liquidate somehow and people still make markets and scams. This is a quirky part.
The blockchain works in the following way. If there's a buyer and a seller, that can be put together at a decentralized way, most centralized authority cannot stop people taking that buy and sell. So if two people want to transact, no matter what the mechanism is, they can. Now you might create something nobody wants to buy. And so once you invent these things they continue forever.
This is 100% market driven. And what happened in 2017 is that we over-speculated on what the potential of the technology is. Because anyone that came up with an idea of decentralizing everything could raise millions and millions of dollars just based upon an idea and they were out with nothing behind it, it went through a correction. The large silicon valley companies like Telegram that have built real users are looking at the technology and saying, "We want a piece of that. We want to be able to flow global money through cryptocurrency into our thing. We want the speed.”
Now there's a big problem for the investment banks. Telegram just raised two billion dollars without an investment bank. They now need to figure out what they're going to do with that. The reason there had to be this huge regulatory clamp down right now all around the world is because they saw what was going to happen in 2017. The entire industry was going to buy out every type of asset in the whole world and put it into cryptocurrency. And it was going to cause a systemic risk in the entire financial system.
The money flows so much faster here, and it's global. They had to have a huge regulatory clamp down because they saw what was happening to their investment banks, what was happening to their retail banks, what was happening to their venture capital funds and what was happening to their private equity houses. They were being disrupted by people all around the world just wanting to trade peer to peer. That is definitely the opposite of what governments want.
Will our traditional finance system work well with cryptocurrency and the blockchain ecosystem in the next 30 years?
I think that the traditional financial system are going to do certain things better than the blockchain and other ecosystems because centralization does have advantages. A centralized database is the cheapest, fastest and most effective of transferring things. Blockchain is not what most people think. Blockchain is not the cheaper, faster way of doing things. It's actually quite expensive and pretty slow way of achieving decentralization. Now what the banks are all doing is that they're saying, "oh no we've got this new database technology." And they're getting very excited. It's not a database. It's about decentralization. It’s about taking them out. What they're all doing is they're building and spending millions and billions on applications that add zero value. At the end of it, they realize this is more expensive and clunky. Banks used the word blockchain as code word to try and retake over the industry. And every corporation, every large financial institution, every bank, every retail bank, every government started going "Blockchain, blockchain, blockchain." But the real application and the significant change is decentralization. So they scammed themselves when they told the world about blockchain.
To answer your question, in 30 years, what do I see? I see every single government, every single central bank, and every single financial institution and corporation competing on a global basis, on an ultra-competitive market. I see monopolistic power being broken down by decentralization. And it's not that the decentralized are going to take the whole market from the centralized. It's that everyone's competing. There's no longer a monopoly in currency. There's no longer a monopoly in the government. There's no longer a monopoly in the financial institution and the bank. There's no longer a monopoly in the regulators. Who regulates the regulators has always been the question. That's what blockchain is trying to do. It's trying to create a self-regulatory environment where even the regulator that has the power can't corrupt and make a monopoly in the banking system. Which is essentially what regulations ends up.
Blockchain creates competition in everything. But it's a scary prospect and an interesting prospect. People often ask me that the best thing that can happen to Bitcoin is the banking system collapses. I'd say you don't want the banking system to collapse. Your Bitcoin might do very well but what about your mom, your grandma, your sister and everyone else that has traditional fiat money in the bank. You don't want them to be harmed by such a tragic event. But they do have to be prepared.
I'm not necessarily saying that this world is even going to be a better place in 30 years time. It's going to be very different and everyone needs to adjust. And if they don't adjust then it's going to be a big world for redistribution for those that to adjust early. I'm not sure whether that wealth redistribution will end up better. I personally believe that competition is going to change the world in a very positive way. But I also recognize that there are very negative consequences that come from some of these technologies as well.
I don't have a perception about what's wrong and right. I just have a perception that this is changing fast and everyone needs to change with it.
I'm not necessarily saying that this world is even going to be a better place in 30 years time. It's going to be very different and everyone needs to adjust.
What do you think about these projects like Bitcoin Cash or Bitcoin Gold?
Originally I was very scared of them when we had the first Bitcoin Cash. For the last seven years, since 2011, Bitcoin was based upon a sound monetary policy. There would only be 21 million of them. There will never be more. There will never be less. And every year they were going to become more and more useful and more and more people were going to compete to get ahold of Bitcoin. And that was my investment thesis from the very beginning.
When the hard fork came along and said “we're going have two Bitcoins,” I was concerned that 42 million Bitcoin changes the entire economics of the system. What it turned out is that it wasn't like that at all, because no one saw Bitcoin Cash as Bitcoin. It was just a very effective way of creating an alternative coin. And so for me, what I get very concerned about is people that are going around the world saying Bitcoin cash is Bitcoin. And that's something that I don't think should happen, because that confusion is a very irresponsible thing to tell people. As it's growing, it's trying to just become something else.
You might want to take another version of Bitcoin and optimize it for cash, which is very good, very healthy thing to do. We don't want Bitcoin to become very dishonest by monopolizing everything. I mean we want to compete in with different development teams. What actually turned out is that people still see BCH as BTC. My concerns come if someone sees BCH as BTC, they'll get confused and then there's 42 million Bitcoins. That ruins the entire industry altogether. So I think that's the very thing that should be really, really fought against.
The fork occurred because we had a disagreement for three years on how Bitcoin should scale. Some people believed that you should not risk hardforking the chain. But in order to increase block sizes to allow it to scale, you had to do a hardfork. They didn't want to hardfork Bitcoin because they thought it could create a divide in the community which was very dangerous in the economics of Bitcoin. What it turned out is that people went off and fought their own way. I don't know whether off-chain scaling or on-chain scaling is right, but I am really grateful to have two empirical evidences on what's going to work the best. And my hope is that the development teams learn from each other.
Here's the one thing. If it deviates off and Bitcoin gets disrupted by something else, that's fine. But Bitcoin is always Bitcoin. And Bitcoin has a network effect and advantages that we should not ruin right now. When it originally started, Bitcoin was very centralized. The same people were mining and the same people were building businesses and the same people were developing. What happens when you create a new chain is that you have that centralization. The same people are developing. The same people are promoting. The same people own the media sites. The same people are investing in all the businesses. And you have a very centralized network. It took Bitcoin years to become decentralized. Ethereum the same.
Blockchain is like the internet. You could create a much better version of the internet today with all your knowledge but there's still only one thing that everyone's using. And we have not got Bitcoin to the point where every person on the planet is using it right now. But it's got to the point where every single person on the planet has heard its name. And you can go any country, anywhere and speak to the most obscure tribe in the world, and someone will have heard of Bitcoin. That is a network effect that we can never stop.
The argument on Bitcoin vs Bitcoin cash should not be the first perception of the new comers. The first perception should be as follow, “There’s this amazing technology that's changing the world. One of them is optimizing the cash, the other's optimizing to be a digital savings account. They've got different solutions for how to scale but in the end the right one will be adopted.” If you're saying this is bad, that's good. People are just like “okay, this is just about speculation. I've got to pick the right one.” Picking the right one is what drives speculation. And that's not the healthy way to enter the industry.
What's your strategy to expand your business to the Asian market
bnktothefuture.com, since 2010, has been working on acquiring the securities license needed for the type of investment the government allows to invest in. We were doing this way before the word ICO. We've done every deal that's ever pitched or gone through on our platform in compliance with security source. When decentralization and ICO started to disrupt our business model, we started investing in all of it, because we believe that the best way to protect against disruption is to invest in the disruption. But we also knew that ICOs were doing things that the government didn't want to happen. We always knew that securities will always be securities.
And we go through the same cycle. If you get lots of retail people investing in something, when they lose their money they complain to the regulator and the regulator implements reasons why they can never invest again. The same cycle will happen right now with ICOs. All these retail people have the opportunity to get wealthy. But the ones that didn't get wealthy will complain to the regulators and the regulators will say this is just for rich people. What you see in this industry is a very hypocritical thing. They're all for decentralization when they're making money, but they're all about running to the government when they don't make money.
We can't change human psychology. we can only change the products that they work with. But the cycle continues. Our goal has always been to take this funding model and do it in compliance with securities. That leads to the very slow and painful process that we've been following since 2010 which is working with each jurisdiction figuring out its local securities laws, integrating into our platform and working with, acquiring or starting regulating businesses that allow to operate in that jurisdiction. One of the things that PayPal did is that they one by one, step by step, worked with every single bank in every jurisdiction to figure out all the compliance until they could create one platform that worked in a seamless way. We see ourself in a similar fashion where we take one jurisdiction work on securities law in that jurisdiction and we've been doing it since 2010. We've currently done 45 jurisdictions and we'll continue to do more.
We got legal partners in most markets and South Korea is one of the major markets. There are still some countries which are harder, and South Korea and China are two of those. They just happen to be two of the most interesting markets as well. The government knows they want to keep all that money inside not outside. We're always open to more innovative lawyers that can work in more innovative ways. We spend a lot of money in lawyers and we're always looking for new talent. If there is any creative legal team that thinks that they're on the edge of securities laws and financial innovation, we'd like to have them on our team.
A dollar bill’s past usage is not traceable, but Bitcoin’s and Ethereum’s are. Do you think Bitcoin, Ethereum or any other cryptocurrency needs to adopt the technology to hide traces?
I don't know whether they should adopt that technology but I know that they will and have to adopt to privacy concerns. So Bitcoin will certainly have to have a privacy solution. My thinking is that they'll improve privacy on-chain and off-chain. And there will be off-chain ways of having 100% complete privacy but there will be on-chain ways of opting into privacy or non-privacy as well. And the fact that we've got alternative chains working on those things is really good.
What is your ultimate goal for Bnk to the Future and yourself?
Bnk to the Future has still got the very same mission that we started when I wrote the original book, Bnk to the Future. We believe the future of finance is going to look very different from the past. And we wanted to invest in anything that was going to make the traditional financial system less significant in people's lives. And we will continue to do that. One of the phrases that people ask me is what's the type of companies you like to support at Bnk to the Future? We like to support things that actually make more competition in the banking system. I'm not really interested in what people are doing to make the traditional financial system.
Our next goal is to credit security token exchange, because we believe that if we can get every asset in the world traded against Bitcoin then the next use case of Bitcoin is not just the world reserve currency of cryptocurrencies which it currently is with Ethereum, but actually the world reserve currency of every asset in the world. When you trade every asset against Bitcoin rather than the US dollar, you have a neutral currency that has no opinion about any political agenda. It is the reserve currency of all these assets.
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