A meeting of the World Economic Forum is held in Davos, Switzerland at the end of January every year. It brings together politicians, academics, religious leaders, NGO’s and companies to discuss key issues of global concern. What better place than to host an event with a panel discussion and debate on the changing capital market environment.
In collaboration with PeakViews, Cardano Foundation brought together 5 notable speakers on Thursday evening. The topic of discussion was:
From pit to bit. Gold is old – bit is hip! What will be the future guarantor of financial stability?
About the Topic
“From pit to bit” seems like an odd title but it told a great story. The word ‘pit’ derives from the Latin word puteus which means a well or a shaft, and in this discussion represents gold. Gold is seen as the quintessential symbol of a centralized storage of value and a tangible monetary collateral. On the other hand, we have ‘bit’, the short form of a ‘binary digit’. A bit is the basic unit of information in digital computing and for this discussion represents digital currencies. Cryptocurrencies pose as the opposing player to gold as it is decentralized and intangible.
Like ‘pit’, crypto has its Latin background with kruptos meaning “I conceal” or hidden and secret. So we begin this discussion with a metaphor that we have evolved from digging up gold in the dark pits of the Earth to the future of digital technologies, but yet again, find ourselves in another dark hole of the secret and hidden world of crypto-assets. Both dark holes are connected via a concept of trust. While gold has proven to be a trusted, tangible monetary collateral with its limited supply and indestructibility, digital assets have come into the scene with the promise to be an intangible arrangement of trust in a trustless environment.
About the Panelists
Each of the panelists invited to this discussion represent different key aspects in their chosen context of global capital markets.
Pictured left to right: Sean Boyd, Ugo Panizzo, Stephan Murer, Matthew Schwartz, Nathan Kaiser.
- Sean Boyd serves as the Vice-Chair and CEO of Agnico Eagle Mines, a multi-mine international gold mining company. He joins the panel to present the tangible, ‘old world’ that has been proven, tried and true.
- Ugo Panizzo is a professor of International Economics at the Graduate Institute of International and Development Studies in Geneva, where he is also the director of the Centre for Finance and Development. His latest paper looked at debt sustainability in Greece and the possibility of creating an odiousness rating system. For the purpose of this discussion, he represents central banks and global governance.
- Stephan Murer is the former CTO at UBS and is a Professor at the University of Oxford in Software Engineering, and is also an expert in AI in Finance. As a hardcore computer scientist himself and over 25 years of experience in banking and academic, Stephan discussed the idea of converting the tangible to the intangible with the necessity of addressing the banks and market players.
- Matthew Schwartz is a Partner at Boies Schiller Flexner LLP. He was named a Cryptocurrency Trailblazer by the National Law Journal. He was also the first lawyer to represent a cryptocurrency company before the Department of Justice in an anti-money laundering investigation. He represented the need for contracts, the rule of law and legislation across jurisdictions for enabling safety and transparency in asset management.
- Nathan Kaiser has practiced law around the world and is the Chairperson of the Cardano Foundation and the Chief Legal Counsel for IOHK. He, of course, represents cryptocurrencies in this discussion and debate.
For the discussion, panelists deliberated on 3 questions.
1. Why should we trust your system?
Stephan, representing financial institutions, started by explaining how they have been around for a long time. We have basically gotten used to them and over time, this gives us trust. There are also laws and regulation in place for these banks and institutions that will put forth punishments if they don’t behave well. Of course, it’s not always a sure thing that this process is enough to work well, but that comes down to good business ethics.
Ugo is then asked why we should trust global governance, especially when it has let us down in the past. To which he responds, “what would have been the alternative?” Of course, everything can be done better and everything can be improved. But, are we sure that without the current systems that recession would not have been deeper or that more recessions and more crises would not have occurred throughout history? This was an interesting point raised by Ugo but without being able to observe the counter factor, it is impossible to answer the question on whether the world would be a better place without the often-criticized central banks or institutions like the IMF. Ugo’s argument is that things would’ve been much more worse without them.
Gold is heavy, expensive, hard to store and centralized. So why should we trust gold? Sean Boyd, as the CEO of a gold mining company, explained in the panel discussion that for thousands of years, gold has been a storage of value, a portfolio diversifier, a form of money and currency. It has been challenged over the years but today, here it still is. It is still doing well in the face of record high stock markets. To him, it is something that will not stop progressing because of technology and instead will work side-by-side to it. Therefore, it will remain as the tried and true insurance policy.
The discussion then turned to an Apple iPhone. It stood as a metaphor to something we can touch, yet many of us don’t know how it works, it can crash, it can be hacked. So why can we trust it? Nathan, as the representative of intangible assets such as cryptocurrencies, used this analogy to tell the audience that trusting in crypto really means you are trusting the math. And you can trust math. 2 + 2 will always be 4 and nobody can fake it. It is objective and it can be verified.
Throughout this discussion, there were mentions of past failures in the market like recessions, and in these cases, the system of laws failed us too. So why trust it? As a lawyer, Matthew argued that the system of law is still and always needed. The problem is that there are people in the process, not the laws. Law creates incentives (usually negative, like punishments) and these incentives act as one way to influence people. But that’s not always enough. He also shared insight to the event attendees about one of the laws that was recently proposed in the US Congress. In the US, there is no firm definition of what a token is. Is it a commodity, contract, security, money, the list goes on. Subsequently, last month, Congress proposed a definition with certain requirements of a token; one of which is that it is ‘tied to a decentralized, independently-verifiable ledger without the involvement of people’. This is very interesting. This proposal works to create a law that takes people out of the math, which Nathan tells us we can trust, so perhaps the rule of law will be part of the answer in trusting crypto.
2. Nathan was quoted as having said “Gone the banks, gone the bankers – we are building the financial system for the next 100 years.” What makes you claim that one can build a system that can last the test of time?
As it was his quote, Nathan starts off the discussion and explains that crypto-assets are merely adding layers to what gold or the ‘old world’ is doing. If gold is seen as the ‘layer one’ of value storage, you can build upon this and get more sophisticated. And as new, additional layers are added, perhaps old, inefficient layers will be removed in the process. But one things for sure, there are better ways to manage and operate payment systems and value storage than what currently exists.
Stephan gave his opinion that whilst he sees distributed ledger technology and blockchain to be an interesting tool to build applications, he does have doubts of cryptocurrencies replacing fiat in central banks. Even if technically possible, it is not politically reliable and it will be regulated away. For the application of DLT, Stephan did not think money would be it and that the system of fiat will stay over the next 100 years.
For this question, Ugo talked about commercial banks and how it does many things like provide utility and a payment system but it also provides information. It observes behaviours of its client which allow it to better allocate resources. Perhaps that is what allows it to be a system that will last.
Finally, Sean reasoned that gold will continue to last the test of time, because it already has. It has been maintained over the last thousands of years. And this is because of its simplicity. To counter Nathan’s point that new layers will be added, Sean adds that each layer brings a new layer of complexity. Once you start introducing complexity, people and consumers begin to have trust issues. With the gold industry, the most complex aspect is the mining to find it and to extract it. Even if the value of gold goes up, the industry itself cannot flood the market with supply. (Interesting fact: Sean shared that gold grade (output) for mines continue to decline around the world. Currently, gold grade is on average 1 gram of gold per ton of rock moved!)
3. Does your system contribute to financial stability?
The question is first posed to Ugo who studies global governance, who explains that there could probably be improvements. He says that if you live in a country like Switzerland, where the government and institutions are credible, then you as a consumer feel its safe and stable. But if you were to live in a country like Venezuela, of course, you don’t trust the government and you would try to escape the national governance system.
The moderator, Kaspar, used this to add that there have been cases in which assets were in banks, and when these banks failed, consumers could not get their assets back. This is despite being in a “stable” OECD country. So he asked Matthew whether law really provides financial stability and safety of these assets. With this, Matthew shared a story of his time as the prosecutor in the Bernie Madoff case. If you aren’t aware, Bernie Madoff, former founder of a Wall Street stock brokerage firm, ran a stock and securities Ponzi scheme for over 40 years. In this fraud, it is approximated that approximately 20 billion dollars was taken in and redistributed throughout the world through layers of intermediaries. As a prosecutor, Matthew not only had to hold someone accountable but also worked to find a substantial amount of these perceived-as-lost assets. To which, they were able to recover about ¾, or 15 billion dollars! This was possible because it was distributed through traditional banking systems and they were able to use these corresponding bank systems and record-keeping to trace the money. This case proves that international rule of law can work and that legal frameworks are needed. He did however include a caveat that this may be an issue in the governance of DLT and cryptocurrencies because of the fact that no one is in charge. So how does governance work in this case and who is held accountable? His example showed that he was able to hold an individual, Bernie Madoff, accountable for the crime but also they were able to prosecute the banks which facilitated the transactions. JP Morgan was found responsible and guilty of this, and for cryptocurrencies, this cannot be done.
The discussion then turned to talk about the unbanked in the idea of financial stability. The current systems, institutions and laws work but it only works for the banked. Nathan talks about the billions of the world population who cannot get access to bank accounts and how the current systems do not provide solutions to this problem. Financial technologies and cryptocurrencies can, and inevitability is creating financial stability where it doesn’t exist now.
Stephan adds too that he thinks DLT is very important where you don’t have trust in institutions. He talks about an African nation which uses DLT for property registry and because it is non-personalized and independent, trust can be provided. It can also help for international money intermittence for areas where these institutions don’t work. Indeed, there will be a major impact for those in these areas.
Following the discussion, we hosted an Oxford-style debate with the 5 speakers. This involved the attendees voting at the beginning after hearing the topic and after the debate to see whether panelists were able to sway their vote. The question for the debate was:
Who thinks that gold is old and belongs in the dustbin as a historical provider of financial stability?
Because all statements and discussion should be included to fully understand a debate, it has not been summarized in this Forum post. But the event was filmed so we will be posting the video once it is ready!
Special thanks to Dr. Kaspar Bänziger from PeakViews for moderating and leading the discussion at this event. PeakViews holds annual panels and debates that aim to address global opportunities and challenges of capital market structures. They are non-partisan and strive to always focus on the interactions of: academics/industry, finance/markets and policy/law.