On Today's Episode of Let's Talk Bitcoin...
In our first segment, we'll join Andreas Antonopoulos, Stephanie Murphy, Jonathan Mohan, and Adam B. Levine for a look at the varied approaches being used to connect your Bitcoin to credit card style ease-of-use.
After the break, guest host Alex Gladstein and Adam B. Levine sit down for another installment of LTB Global Voices. This time we talk with Aparna Krishnan about the unique situation brewing in India today.
Highlights and Selected Excerpts Courtesy of @ProfessorMeow
HIGHLIGHTS (More excerpts below credits)
“It's almost as if the entire mechanism is designed to put you into debt, hopefully, to get you to a point where you end up racking up fees to enrich some group of bankers..as if the entire system is designed to not only make you a debt slave, but make sure that you work for a wage salaried position to a giant corporation.” - Andreas Antonopoulos
“..if anyone represents themselves as insured, you have to really look into what they mean. I feel like a lot of people are conflating one type of insurance with the other when they're making financial decisions about where they put their money. So when it comes to collateralized lending and engaging in margin, that's the whole point that crypto was trying to escape is that type of understanding of finance” - Jonathan Mohan
“..when you say something like “banking the unbanked,” it's important to understand why people are unbanked in the first place. One thing that I found really interesting in India was that a large number of these people who are unbanked don't know how to use the existing financial system. It's not that they don't have access to financial systems.” - Aparna Krishnan
Episode 404 featured content from Andreas Antonopoulos, Stephanie Murphy, Jonathan Mohan, Adam B. Levine, Alex Gladstein, and Aparna Krishnan. This episode featured music by Jared Rubens and General Fuzz, with editing by Steven and Adam.
Image credit: CC-SA http://www.picpedia.org/credit-cards/credit-cards09.html
More selected excerpts
Crypto Credit Cards:
Adam B. Levine: I wanted to have a brief conversation about some of the different options that are out there as far as crypto credit cards. We're talking about this in the context of how these things work rather than endorsing them. I don't use any, I don't intend to use any, but I think it's an interesting development in the space.
Andreas Antonopoulos: I’ve used one. I used 2, actually. I used the shift card from Coinbase back in 2015, and I also used the Bitpay card that same year, and regretted using both of those.
Adam B. Levine: the Bitpay prepaid credit card is the simplest possible way that you could do this, Essentially you buy this debit card from them and it costs 10 bucks or 15 bucks as a one-time fee. Then you get an address that you can make payments to, and whenever you send Bitcoin to the payment address, it sells it and turns it into dollars and then puts that balance onto your card as a prepaid balance. So when you go to a store you can use it and it's basically the equivalent of a gift card more than it is a credit card but, the advantage is that you hold all your cryptocurrency until you actually want to top-up the card.
Stephanie Murphy: I'm curious, I want to know why Andreas regretted using it?
Andreas Antonopoulos: Once my accountant understood the accounting nightmare and then billed me for it, it was obvious that it was not worth using. Inside the United States with the capital gains accounting rules, it's just too much hassle. The other reason was foreign transaction fees and the exchange rate being applied which in both cases was way too expensive
Stephanie Murphy: Wow, okay so the costs add up really quickly and it's just not worth it. So then that means it's only really worth it to use one of these things if you had trouble obtaining credit from more traditional sources.
Andreas Antonopoulos: Or you're outside the US. If you don't have the capital gains burden which doesn't exist in most of the countries, or you live in a country that's not very well banked, or you're trying to do things like buy things from Amazon and you don't have a credit card that works. For example Argentina would be a perfect example
Adam B. Levine: Coinbase allows you to for better or worse, not sell your cryptocurrency until you actually make a purchase in real life. With Coinbase they hold your crypto within your Coinbase account, and then when you make a payment, they make a sale on your behalf of your Bitcoin or whatever crypto you've indicated.
Andreas Antonopoulos: It was the transaction fees, exchange rates, and conversion fees that killed it. I literally ended up paying you know six or seven dollar fees on a $2.00 purchase it was a bit ridiculous. If you can get credit, even better than not spending crypto until you absolutely have to, is not spending crypto until 30 days after you absolutely have to. So you’d use a credit card and then once a month you pay off the credit card with a single crypto transaction 30 days later. So you hodl for 30 days longer. This is more suited for people who can't get credit cards at all.
Jonathan Mohan: There's someone who used to be prominent in this space who went from a literal non-existent credit histories to a 710 in one year just because they were holding crypto for so long and didn't believe at all in credit. They just needed to buy a house for their family. Then they realized that they need to play the game just to even have a credit history. And because you're succeeding in a way that doesn't play the game the way that the financial system wants you to, you have a new weird gross type of financial non-inclusion. You have all these assets but they won't really recognize the asset, and you have no credit history so they won't extend you any loans.
Andreas Antonopoulos: It's almost as if the credit reporting system is designed to kind of encourage people to become debt slaves. Here's the thing, it's not just crypto. If you have a bank account full of cash, it's not on your credit report. You actually have to go into debt to build credit history. You could have half a million dollars in a checking account and a credit score of 400 because you don't have any history. You'll call up and say, “well, how can I build better credit?” They'll say, “take out a loan.” But you don't want a loan, you've got half a million in your checking account. You have to take on more debts, and different types of debt. A bit of revolving, a bit of personal, a bit of this secured loan, a bit of them rolling over every now and then. It's almost as if the entire mechanism is designed to put you into debt, hopefully to get you to a point where you end up racking up fees to enrich some group of bankers.
Adam B. Levine: When you start looking at like buying a house or getting a mortgage, income is one of those things that, as a person in the cryptocurrency space, sometimes you make a lot of money off investments, and income is a lot lumpier. On paper you might have no income but you have a lot of wealth.
Andreas Antonopoulos: It's almost as if the entire system is designed to not only make you a debt slave but make sure that you work for a wage salaried position to a giant corporation.
Adam B. Levine: I found a couple of projects, notably Nexo and Crypto.com(?), that basically say, alright, we're actually gonna do real credit cards where you have a balance and you have to make payments. There's an interest rate that accrues every month and what they do is in order to give you credit, we want you to deposit a certain amount of crypto with us, and then if you deposit $1,000 worth of Bitcoin with us or $1,000 worth of Tether, then we'll give you $400 worth of credit on this card. When you go out and you make a purchase, your crypto isn't actually sold. It's just like a normal credit card. You accrue the interest, but they know that in the event that you default on it, that they effectively have enough assets that they can be made more than whole, and get their money even in a scenario where the value of the cryptocurrency drops by half.
Andreas Antonopoulos: I mean, that's a collateralized debt obligation exactly like how Maker DAO works.
Jonathan Mohan: Nexo’s proposed model is very interesting. It's sort of like fire, if you know what you're doing, it's valuable, but you're more often then not going to get burned. They're intending to let you collateralize into a credit card, and then as your Bitcoin increases, they will dynamically increase the credit line that you get in your card, with the loan-to-value ratio of your deposit. So if you put Bitcoin in at $10,000 and they give you a $4,000 credit line, if Bitcoin goes to $20,000, it'll just automatically go to $8000, so you can start spending this thing as if it's free money, but you're decreasing your LTV. If Bitcoin adjust back, it's just it's a very easy way to induce margin calls.
Adam B. Levine: I was gonna say, yeah, the margin call thing seems like the real potential danger here is that if the limit can adjust up, that means it can adjust down as well. And if you had spent $3,000 on that $4,000 balance, and now that balance is $2,000 because crypto is decreased in value, then they're going to margin call you and sell your assets.
Andreas Antonopoulos: I'll just keep playing the same broken record. That's exactly how Dai works. That's how the Maker DAO works. So what you do is you collateralize the CDP, which is the contract, and you put in the principal. If the exchange rates of ETH goes up, then you can draw more Dai against it. You have to have it at a loan-to-value ratio of, you know, 150% or greater, or whatever the current ratio is, otherwise you get a margin call. Interestingly enough, first of all this is decentralized, but what happens next is even more interesting, which is that you can now buy margin call insurance, effectively in a secondary market where other people will top up your account for specific fee, to be protected from margin calls if there's a sudden drop in the value. It's a peer-to-peer a decentralized option market that grows on top of Maker DAO.
Jonathan Mohan: The thing that does concern me about Maker DAO versus Nexo, is at least Nexo is a company. So they have obligations towards what constitutes a loanshark limit. If you look at how Maker DAO dynamically adjusts with no lower upper limit fee. Now the fees have gone from under 1% to I think they're talking about potentially 11 or even more percent, and how that keeps increasing. It's really scary because it's decentralized. Everyone gets to pretend that they're not the one who increased the rate, where Dai may go to 50%. You know, Dai may be the next be your own loan shark type of payday lending system. Because I don't know if they have any functional controls and what the upper bound is for the variable rate, ‘cause that's the whole process of it, which is whatever price the market will bear. And because it doesn't have those upper or lower bounds, you can open yourself up to very bad positions that you wouldn't have, had you gone with a centralized provider.
Andreas Antonopoulos: One of the things that concerned me about Nexo model versus Maker Dao is Nexo is a company. They hold the keys, and not your keys, not your coins, so they can basically walk away with your collateral, which they can't do in Maker DAO, so it's half a dozen of 1/6 of another.
Jonathan Mohan: A very important thing to discuss which is a conflation of terms that some of the people who are marketing securitized lending and crypto are doing right now. Which is if anyone represents themselves as insured, you have to really look into what they mean. I feel like a lot of people are conflating one type of insurance with the other when they're making financial decisions about where they put their money. So when it comes to collateralized lending and engaging in margin, that's the whole point that crypto was trying to escape is that type of understanding of finance. It's really hard to exist in the in-between phase we're transitioning from one phase to the other. But I think that when it comes to putting leverage against your Bitcoin, it's sort of like stabbing somebody. You can have a very particular set of skills that a very few of us have, and when you stab someone it's called surgery. But for everyone else it's a crime. And when I think about this collateralized lending, it’s kinda like that.
Andreas Antonopoulos: Can we just summarize that this plastic is the devil? And if you wrap crypto with plastic, it's just the devil again. Then you realize that your friendly cuddly crypto company, it's a bank.
Bitcoin in India:
Aparna Krishnan: I'm currently based in San Francisco I recently did a study in India to understand the scope of cryptocurrencies in emerging markets. So I got into the crypto space some time in 2015. I was passionate about cryptography, I had just heard about Bitcoin. I wanted to understand what was going on there so I started by reading the Bitcoin whitepaper and that pretty much led me down this rabbit hole.
Adam B. Levine: So when you did get involved with cryptocurrency, it sounds like you took a more academic approach to understanding it. As your interest evolved in it, walk us through your journey here.
Aparna Krishnan: Initially I started by teaching a class at Berkeley on cryptocurrencies. I started blockchain on Berkeley's education team, taught a few different blockchain executive education programs, and all that helped me learn a lot about the space. Something I realize through doing all of that, was that people were trying to build on top of a cryptocurrency that wasn't scalable, or wasn’t private, and all the visions that people had laid out in the magic internet money future were not really being built. So that kind of got me to think about the research angle a little bit, which is why I got into proof of stake research. I was doing that for a couple of years primarily because I wanted to build a scalable cryptocurrency. Going from there, I think sometime last year, I started to realize that there were a lot of scalability solutions out there, but very few people actually building on top of these, or very people directly being impacted in their everyday lives. And this kind of got me to a point of almost an intellectual crisis where I was wondering if I was just building these technologies for my own intellectual satisfaction, or there were people out there who were actually going to be impacted by this. And if so, who were these people? How was their life gonna change because of cryptocurrency or blockchain?
Alex Gladstein: How does that connect with your journey to interview folks in India and learn more about what's happening there with regard to cryptocurrency adoption?
Aparna Krishnan: something that people have been talking about for a while in the crypto spaces how cryptocurrencies are going to bank the unbanked. One thing that's actually really interesting that I start to realize as I did this study was that almost 90% of Indians have an identity card issued by the Government of India. So the government of India is issued something called Aadhaar. As part of this, the government's also been opening bank accounts for a large number of people. I would say about 20% of Indians still don't have a bank account, but that is still a very small percentage compared to other countries in the world. That number has been reducing at a very fast pace partly because the government's been taking a lot of different initiatives to bridge that gap. When you have an Aadhaar card, that basically is your identity for everything. From getting discounted groceries, to getting a utility bill, to sometimes I've been having your grades linked to this identity card. That's all you ever need in India and it's all linked to all aspects of your life.
Alex Gladstein: So if the Indian government is on this quest to Bank everybody into this centralized system, then why are people experimenting with things like Bitcoin and cryptocurrency?
Aparna Krishnan: One thing that I started to realize when I was doing this study was when you say something like “banking the unbanked,” it's important to understand why people are unbanked in the first place. One thing that I found really interesting in India was that a large number of these people who are unbanked don't know how to use the existing financial system. It's not that they don't have access to financial systems.
I think where Bitcoin and cryptocurrencies can really help is by providing financial access to people who don't have access to it right now, So even India if you take a look at the unbanked communities, while they might have access to a banking service, they may not have access to other slightly more complex services. Like better loans or being able to insure themselves and products like these I think cryptocurrencies can really help with. Primarily because they're now bridging the gap of providing access where people don't have access.
I realized that the immediate scope of cryptocurrency in foreign exchange remittances markets would actually be pretty huge. I think is an actual problem that a lot of people are currently facing in India and this is something that I've seen a lot of people who are sending money to and from India talked about. Right now the regulation prevents a large amount of money being held in any other currency other than the Indian rupee, and this currently affects not just individuals, but also large businesses.
The conversion both to and from fiat is extremely restricted right now, but despite this, you see a large amount of volume on Localbitcoins.
Alex Gladstein: Why does the Modi government care so much about cracking down on on-ramps and off-ramps? It sounds like there's a vibrant peer-to-peer marketplace, but it sounds like the Democratic Indian government is very fierce, and I think some people even said maybe the most anti-crypto government in the world. Why?
Aparna Krishnan: I think there are a couple of different reasons. They're afraid of people evading taxes and they're afraid of a large amount of money leaving the country. Another reason is they're afraid of large amounts of terrorism being funded through cryptocurrencies and they feel like if it all happened in Bitcoin or cryptocurrencies, that's not something that they have the power to control, or the power to even fix in case of a large attack. The third I think and biggest reason is they're afraid that if they open out the marketsm then the government itself won't have any power over the Indian economy.
Adam B. Levine: There's this thesis that transaction fees matter a lot in the developing world because the cost of say a 25 cent or a 50 cent transaction fee to get a transaction put on to the Bitcoin blockchain is pretty expensive in local currency terms. And so I was curious and would like to ask you, does the transaction fee matter?
Aparna Krishnan: I think until the regulation eases up, transaction fees may not be the biggest concern right now in India, if even acquiring cryptocurrency is so hard. I think people are very willing to pay high transaction fees. The people who are currently buying and selling cryptocurrencies tend to be people who are a little technologically savvy, somewhere in their 20s or 30s, males, usually people who are like profit motivated. These tend to be the people who are currently dealing with it in India, and so any transaction see doesn't really affect them buying and selling it right now. I think if we had to expand it into impacting lives of other people, that's when it'll make a difference.
Adam B. Levine: Are there other cryptocurrencies that you see as being more likely to gain popularity or already perhaps more popular than Bitcoin?
Aparna Krishnan: It's already very clearly just Bitcoin.
Adam B. Levine: We've been hearing that from everybody, and honestly it's been a little surprising to me every time. Because in some cases the cost is very high.
Aparna Krishnan: Yeah, when I was talking to a few different exchanges about this, one thing I realized was that most people who are using cryptocurrencies are buying and holding Bitcoin. And even despite regulations, they've been holding on to it they haven't sold any of it, or converted it to fiat, which is really cool. It's almost like a 90% Bitcoin and like 10% other currencies in India.