Cryptocurrencies such as bitcoin and ethereum are popping up everywhere. But many Americans may not completely understand what they are.
As governments around the globe struggle to legislate on this new digital money, it can be useful to know exactly what’s going on.
Heritage Foundation research fellow Peter St. Onge, an economist, says he sees incredible possibilities for a future with various forms of cryptocurrency.
“You could replace the entire insurance industry with a couple of lines of code, and then you could run those on something like ethereum, so the concept of cryptocurrency is astoundingly powerful,” St. Onge says. “The main application most people are aware of is bitcoin, but there are many, many applications. We’ve only just begun with it.”
Unfortunately, governments seem intent on limiting cryptocurrencies.
“There are a number of government agencies that have been trying to either harness bitcoin or to destroy it intentionally and they haven’t really resolved who’s the top dog on that hill,” St. Onge says. “It has created an enormous amount of regulatory risk within crypto.”
St. Onge joins “The Daily Signal Podcast” to discuss what the future holds for cryptocurrencies and what you need to know.
We also cover these stories:
- President Joe Biden announces a ban on energy imports from Russia.
- The Florida Senate passes the Parental Rights in Education bill amid distortions from the left.
- U.S. gas prices reach a historic high.
Listen to these stories and the full interview on the podcast, or read a lightly edited transcript of the interview below.
Doug Blair: My guest today is Peter St. Onge, a research fellow in economic policy here at The Heritage Foundation. Peter, welcome to the show.
Peter St. Onge: Thanks for having me on, Doug.
Blair: All right. Let’s talk about cryptocurrency. I am, I think, probably not alone amongst Americans in not knowing what the heck cryptocurrency is. So can you just, to start with, explain what is cryptocurrency?
St. Onge: Yeah. Cryptocurrency is, fundamentally, it’s a currency that’s based on something called a “blockchain.” A blockchain is simply a list of who owns what, OK? So it’s called a “ledger” or a “digital ledger.” That’s a pretty simple thing.
But it turns out that this guy, Satoshi Nakamoto, who we don’t know his real identity, he had the insight that you could run an entire monetary system using a blockchain. He really didn’t know if it would work. Nobody knew if it would work.
He came out with a white paper in 2009 in response to the financial crisis at the time and it turns out this thing works like a charm. You can effectively run an entire currency system on roughly an Xbox worth of processing. It’s absolutely stunning.
Blair: When you say “an Xbox worth of processing,” you’re saying that there’s not a whole lot of tech involved in this process?
St. Onge: There is surprisingly little in tech involved in it. I think the original white paper is like two or three pages.
There are thousands and thousands of people who have self-taught themselves how to code various aspects of crypto. That’s part of the reason why there are so many cryptocurrencies, right? There are tens of thousands of them because you could take a couple weeks, teach yourself how to code one, and you’re off to the races.
Blair: Right. That’s actually an interesting point because it’s not just bitcoin anymore, which I think was the original cryptocurrency that everybody thinks of, but now, there’s things like ethereum, there’s things like dogecoin, which I think was a joke for a while and then Elon Musk tweeted about it and it took off. What is the difference between all of these different currencies?
St. Onge: Bitcoin is a specific application of a blockchain, which, remember, blockchain is just a list of who owns what. But it turns out that if you put more details into each of those entries, you can do a whole lot more with it. Right?
So the idea behind ethereum is that you would have executable code in there. In other words, each little entry, instead of saying, “Account X owns coin Y,” that little entry would actually contain, essentially, a piece of software. …
And so by doing that—now, the code is always very transparent, that’s a very core concept in the community. But by doing that, you can then do all kinds of applications.
You could run an insurance policy, for example, that, if Orlando is freezing, then I, the orange grower, will get paid $100,000, and then that can automatically execute, right? It’ll go out and search up what the weather is on weather.com. The software will decide if the contract was fulfilled, and if it was, then it gets paid to you.
Now, keep in mind what that would mean, right? You could replace the entire insurance industry with a couple of lines of code, and then you could run those on something like ethereum.
So the concept of cryptocurrency is astoundingly powerful. The main application most people are aware of is bitcoin, but there are many, many applications. We’ve only just begun with it.
I think in terms of a technology, blockchain is probably comparable to a database. Of course, databases run the entire world, right? Amazon.com is a database with a pretty interface on front. Then the question there, in terms of “Why do most people think of crypto as only bitcoin?”, I think, is largely just because regulators have gotten in the way. They’ve made it very difficult to establish a lot of these different business plans that fundamentally could be internet scale in terms of how they impact us.
Blair: I want to get to that point about regulation and government response to cryptocurrency. But first, how has cryptocurrency impacted the current financial system and the markets that we’re seeing right now?
St. Onge: Right. Again, probably the biggest impact has simply been in currency. Those sort of programmable functions, they still have pretty small reach. It’s still a regulatory gray market. That’s really scared a lot of them out.
Now, in terms of currency, bitcoin, of course, is the dominant cryptocurrency. Probably the biggest impact it’s had, first of all, it’s just proof of content that you can, indeed, run an entire financial system on almost nothing, which is kind of shocking, and of course, one that is completely decentralized. Nobody owns bitcoin. You don’t have any Wall Street banks to bail out.
But probably in terms of real-world impact, the biggest, in my opinion, has been on the gold markets, right? Gold traditionally was the backup plan in case the dollar collapsed. Most people aren’t afraid of that, but there is a substantial community of people who are interested in that sort of currency insurance.
A lot of those people now have switched over to bitcoin so that you’re starting to see that when there’s inflation news, or when something happens in the economy that makes people concerned that there’s going to be inflation, a lot of that impact used to go to gold. Now, it goes over to bitcoin.
Blair: That’s an interesting point you just raised because, from my limited understanding of what cryptocurrency is, one concern that some people have brought up is that it functions currently more like an asset, like gold, for example, than actual money.
St. Onge: Correct.
Blair: I mean, I looked at numbers right now, and one bitcoin is worth almost $44,000. So to own one bitcoin, you would have to pay $44,000. Is that a problem if we want this to be a form of currency as opposed to just an asset class?
St. Onge: Right. In the long run, it’s not a problem at all. Each individual bitcoin can be broken up into a hundred million units called satoshi. If a bitcoin were worth a million dollars, then each of those units would be worth one penny, and indeed, the designer probably chose a hundred million with that intention. It’s not a problem. People would just stop thinking in bitcoins, then they would think in satoshi.
Now, the question of asset versus currency is interesting. In the long run, bitcoin is intended to be used as a currency. But of course, the question is, how do you get from here to there?
OK, so, if bitcoin were the world currency, you can take all the money in the world and you can divide it by the number of bitcoin, which will never be more than 21 million, and you get to a price of something like $5,000,000, right? Then you would have each satoshi would be a fraction of a dollar. Good enough.
But the problem is, as you’re getting from here where bitcoin is only worth $44,000 to that $5 million, what take bitcoin to that price rise is more and more people beginning to think that bitcoin will actually take over.
The day before bitcoin takes over, it’ll be $4.999 million, because the market will be almost certain that it’s taking over. Currently, the market apparently believes there’s only like a 1% chance that bitcoin will take over. Therefore, it has a price of whatever, $44,000.
Now, the problem, of course, is that those future expectations change all the time, right? If [Federal Reserve Chairman Jerome] Powell or [President] Joe Biden or somebody says a good thing or a bad thing about bitcoin, then that probability that bitcoin becomes the dominant currency, that could go from 1% to 2%, it could go to half a percent, and that would make the value of bitcoin double or half.
So, fundamentally, bitcoin’s price today is mostly coming from a bet whether bitcoin is going to take over the monetary system. Now, the vast majority of people, even bitcoin fans, don’t necessarily think that’s the case. That’s why it only has a 1% probability. But what that means is that bitcoin is jumping all over the place because it’s not a currency yet.
If bitcoin were to become a currency, it would not jump around. We know this because that’s what we saw with gold, right? Gold was used for hundreds of years, gold was extremely stable, it was far more stable than the U.S. dollar, but after gold was demonetized—since particularly 1970—gold is all over the place. It doubles, it drops in half, right? It’s all over the place.
If you looked at gold today, you would say, “Oh my gosh. Gold can never be a currency. It’s all over the place.” Well, sure. When something is a currency because the demand is so large and stable, it levels out. That would be the case with bitcoin as well. If it were to become a currency, it would likely be more stable than the U.S. dollar is today.
Blair: Why, particularly, if it becomes a currency, it doesn’t fall into the trap that gold, oil, other resources that we’ve used throughout history as currency will fall into?
St. Onge: Right. The key is the supply dynamics. U.S. dollars are printed. Basically, they’ll print as many as they think the public will accept. So they’re printed, typically, about 5%-10% per year is the increase in the number of dollars in existence. In gold’s case, that’s closer to about 1% a year historically, right? That’s new gold mining.
In bitcoin’s case, there’s an equation built into bitcoin that makes it grow slower over time. … And you can’t change the equation. If you wanted to change that equation, you would have to get every bitcoiner, every person who owns bitcoin would have to change it, and they would never do that because it would destroy the value of bitcoin.
Anyway, you have this equation. The equation grows at a very predictable rate. That predictable rate is currently lower than gold. In other words, gold is mined faster than new bitcoins are created, and every four years, it continues dropping in half. Eventually, in 2140, there will never be any more bitcoin created.
When you have that stable supply, most of what’s happening with the dollar, most of the fluctuations—I mean, really, it doesn’t fluctuate, just loses value every year—most of that is coming from the fact that so much of it can be printed, and there’s really no constraint on how much can be printed, right?
Over the past two years, since COVID, the money supply’s increased by about 40%, which is pretty shocking in two years. That’s about twice the pace of the worst of the 1970s when we had double-digit inflation. So the fact that there is no fundamental constraint on how many dollars can be created introduces a risk and it brings fluctuations to dollars.
Blair: What are we seeing in terms of how widely adopted cryptocurrency has become across the globe? Are we seeing that there are countries that are moving in the direction of cryptocurrency as official currency?
St. Onge: There are. Starting with the U.S., adoption is about 10%, so about 10% of Americans either own or use crypto. That tends to skew younger, of course, right? For older people, it’s a little bit harder to grasp new technologies. This true for anything. This is true for TikTok and it’s certainly true for bitcoin. People tend to trend younger.
Now, the U.S., of course, it’s almost the worst-case situation for bitcoin. We have a fairly stable currency. Our government is not that repressive financially, but people in other countries have much more need for bitcoin. Usage in Venezuela, Argentina, India, countries that either have high inflation that people want to protect themselves from or countries that have oppressive governments who go after activists.
The main cases, for example, of activists getting funding through bitcoin because governments can’t control it, this was the case with a trucker convoy up in Canada, right? They had trouble with various fundraising. The Canadian government is going after fundraisers directly, but bitcoin, you don’t have to ask permission. Bitcoin is like cash or gold in the sense that you can just use it. You don’t have to ask a bureaucrat for permission.
Blair: We have this idea that cryptocurrency has some of the advantages over a fiat currency where it’s not as volatile in terms of inflation. Are there security or stability concerns with cryptocurrency? One of the reasons that central banks exist, or at least the argument is that central banks exist because there’s security concerns with having regulated money out there. Does cryptocurrency have that concern?
St. Onge: From the beginning, that was always the question. Nobody knew if this thing would work. One of the concerns early on was, is this thing going to get hacked?
There was a very famous security researcher—I believe [Daniel] Kaminsky. Anyway, there was a famous security researcher, and very early on, he was dismissive. He said, “Ah, this thing.” And so he sat down and got a team of top security guys to try to hack it. They could not. He actually flips sides and he said, “This thing is amazing.”
One guy, [Andreas] Antonopoulos, he’s likened bitcoin to a sewer rat, right? It’s been shot, stabbed, run over, burned, doused in gasoline, and thrown in a volcano, and the thing is still alive. Now, what, 13 years later, the security of bitcoin, I think, has astounded all of us.
Now, of course, you put that up against the security of the financial system, which is horrific. There are thousands of bank thefts every year. There are hacks constantly.
The solution that the banking system has is that it bribes government to give it various forms of insurance, where the government is basically saying, “If you lose all your money, I’m just going to go and create brand new money.” Now, of course, creating brand new money is also known as “stealing it from existing savers.” That’s a cute way to provide security.
But in terms of pure security, from a technical side, bitcoin has been shockingly good and far better than the traditional databases used by legacy banks.
Then, of course, the other question is, really, when you are saving something, whether it’s gold or anything, the kind of security you care about is, yes, will it get stolen—what we’re talking about here—but also, will it lose its value?
Paper money, even the U.S. dollar, it is a guaranteed loser. Particularly over the past hundred years, it has lost value year in, year out. I don’t believe we’ve actually had a year since the Fed was created where the dollar actually gained value. It is a guaranteed losing proposition.
Blair: One of the things that you’ve done recently, you wrote a piece in February for The Heritage Foundation titled “Biden’s Anti-Crypto Scaremongering Threatens to Impose Surveil-and-Control on All Americans.” First off, we talked a little bit about how governments respond to cryptocurrency. It’s sort of a gray zone right now, so we’re not sure how it needs to be or whether it needs to be regulated. First off, is the Biden administration particularly hostile toward cryptocurrency?
St. Onge: I don’t know about particularly hostile. [Former President Donald] Trump was similarly hostile to cryptocurrency. Governments in general have a very good thing going with paper money, right? They can print up as much as they want, so I mean, almost every single government worldwide has been hostile to some degree or another.
What makes the U.S. government unique, of course, is that we give it so much money that it has incredible capabilities compared to some of these other governments. The U.S. government is capable of harassing new technologies or new monetary technologies much more than other governments.
Yeah, I mean, most of what they’ve focused on so far is regulatory restrictions. The trick with regulators in general is that they’re often deer in the headlights, frozen by new technologies, right? It takes bureaucrats and regulators a while to get out of bed in the morning.
There tends to be turf battles in the beginning where each individual regulator is trying to keep that new thing as its own. We saw that with the internet, for example. Different, whether it’s the [Federal Communications Commission] or [the Federal Trade Commission], various government agencies try to grab this new, exciting thing and gain control over it.
We’ve been seeing that with cryptocurrency, really, from the start. There are a number of government agencies that have been trying to either harness bitcoin or to destroy it intentionally and they haven’t really resolved who’s the top dog on that hill. It has created an enormous amount of regulatory risk within crypto.
If you outlaw wine, then only criminals will make wine, right? All those lovely vendors in California will all be, they’ll be a cartel, they’ll be a band of criminals. The same thing has happened within crypto because government has never really sat down and proactively said, “We’re going to leave this thing alone. We’re going to let it develop, see what it becomes.” That’s what they did with the internet.
Because they haven’t proactively done that, there’s an enormous amount of gray area within crypto that has really scared off a lot of legitimate actors. … Banks, for example, have been almost nonexistent in crypto because they’re afraid of getting their licenses pulled because some random regulator takes offense at something they did.
Blair: Well, God forbid we boycott wine, we forbid wine again. But with that in mind, what should government policy toward crypto be then? If it’s a gray area, what direction should governments go toward?
St. Onge: I think certainly a hands-off approach. The Hippocratic oath should be up on the wall of every regulator’s office, “First, do no harm.”
The early internet was probably delayed by several decades because there was a ban on commercial activity on the internet. If you can’t have any commercial activity, then things don’t develop, right? You don’t have entrepreneurs who put in the time to build services on that. So the internet may have been delayed by 20, 30 years because of that regulatory ban.
That finally was removed partly by [former Vice President] Al Gore, hence his “inventor of the internet.” What he did was he removed the regulation that was strangling the internet for decades.
Again, with the early internet, the FBI initially tried to ban using credit cards on the internet. That would’ve been absolutely catastrophic. Early operators did gray area. They just went right in and they basically dared the government to do something about it. Thankfully, they did, and people quickly saw the benefit of it so that there was a public consensus to let this thing be and not kill it. But regulators always try to kill anything disruptive.
When you go back to crypto, fundamentally, if you can replace an insurance company with effectively a single database, or if you can replace Wall Street with effectively a single database, that is extraordinarily threatening. The early internet mainly threatened Barnes & Noble, right? I mean, it’s hard to even say who was threatened by the early internet. You didn’t have incumbent industries who looked at the internet and said, “Whoa, I got to stop that thing.”
In crypto, you have those in spades. You’ve got Wall Street, insurance, you’ve got all of these industries that are potentially threatened. Wall Street knows how to call senators, right? Every individual state has their own regulators. You’ve got little crony fingers through all of this.
So in a sense, crypto needs a lot more protection than even the internet did because of the potential, right? The potential for allowing people to interact with each other one-on-one to trade assets, to make loans to each other, to start a business, and get investors without going through banks. … Economically, you could say it’s more important than the internet, but it will absolutely be stopped if cronies can do it.
Blair: Well, Peter, we are about to wrap-up this interview. I’m curious, if you could describe maybe in a sentence or two, what is the future of crypto?
St. Onge: I think governments are going to try to crush it. They will not succeed because it’s decentralized. It may be 30 or 50 years out, but I think that crypto is going to have a massive impact on the world. It’s going to switch power from the elite, from the powerful, to regular people. I think it’s a big deal.
Blair: That was Peter St. Onge, a research fellow in economic policy here at The Heritage Foundation. Peter, I very much appreciate your time.
St. Onge: Thank you, Doug.
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