Last week, Federal Reserve Chair Jerome Powell declared that the U.S. faces its worst economy ever as a result of COVID-19. However, one crypto innovator looks back all the way to 1971 when the U.S. went off the gold standard to explain how we got here. And, at a time when many policymakers in D.C. consider alternatives to our current monetary policy during these unprecedented times, this entrepreneur is armed with a PowerPoint presentation almost 70 pages in length to support his arguments.
Alex Mashinsky, founder and CEO of Celsius Network, offers customers the ability to earn decent interest on bitcoin, gold and other cryptocurrency, get a cash loan using crypto as collateral, and make payments on the blockchain. As stated on the website, ‘With Celsius Network you can unbank yourself,’ describing their attractive banking alternative to traditional banks, including global financial institutions like JPMorgan Chase and Wells Fargo.
Mashinsky points out how the Federal Reserve, by lowering its interest rates to near zero, offers an unlimited amount of zero percent loans to large banks who offer credit cards during COVID-19. At the same time, these banks are raising their already high credit card interest rates even higher on tens of millions of unemployed Americans.
He refers to Adam Smith’s Wealth of Nations when describing how the ‘invisible hand’ is stealing from the pockets of everyday working Americans in order to highlight the absurdity of monetary policy that benefits the large corporates and bankers rather than the most vulnerable part of our economy.
Three things I learned that I did not know before my interview are that:
1) Mashinsky sees capitalism and the U.S. Fed as being in decline since 1971 when we went off the gold standard;
2) He does not suggest for monetary policy that we ‘reinstate’ the gold standard, but rather instead sees a money race between central bank digital dollar, corporate digital currencies such as that proposed by Facebook, and global ‘Internet’ money that is a zero sum game that will only have one global winner;
3) According to Mashinsky, gold has never been able to accrue interest for its owners in the past 5,000 years until now with Celsius Network, which pays 4% interest in gold on gold.
Jason Brett: I realize there is a lot going on for your company, but would like to dive into monetary policy and fiscal policy discussions for crypto and blockchain as well to get your opinion.
Alex Mashinsky: Sure, you can just listen to Powell, he has all the answers. You don’t need my opinion…
Brett: What is your take on the current policy of the Federal Reserve and the direction taken by Fed Chair Powell during this economic crisis?
Mashinsky: Let me give you the long version of the answer because I think the answer goes back to 1971. That’s when we went off the gold standard. That’s also when the microprocessor was invented, and since then we basically have had four or five recessions, and if you were in the financial or tech sector, you almost didn’t feel any of the downturns. The Fed reflated your assets every time you got in trouble and you did better and better after every cycle. On the other hand the average American’s income has basically stagnated since 1971 while tech and finance did exceptionally well. So really, all this GDP that we are talking about was created through financial engineering either by creating these crazy valuations for tech companies or by banks leveraging free money that the Fed created for them while Americans lost their life savings due to inflation and monetary debasement.
In the last month, the Fed printed more money than it did in the last one hundred years. We are moving in to a Keynesian Modern Economic Theory on steroids. We need to stop and go back to Austrian Economic Theory which relies on savings and no monetary intervention. When you put [this type of monetary policy] in the context of the new digital dollar, the main question is are you creating something that has limited supply, or are you just converting printing money on a Fed balance sheet by just adding zeros to a Fed spreadsheet with a new dollar that will just be in digital form? The big difference between Bitcoin and any digital fiat currency that runs on a blockchain [is that] the Chinese or American [central banks] are not going to put a cap on the amount that can be printed. So really the Blockchain has no purpose there; it is just a way to validate who has what. It does not have limited supply, nor is going to cure our illness of trying to print ourselves out of trouble.
Brett: Based on ideas that have been publicly embraced by the former Presidential Candidate Senator Bernie Sanders (I-VT) as well as Congresswoman Alexandria Ocasio-Cortez (D-NY), a theory called Modern Monetary Theory (MMT) has gained a following, where Congress would print, or mint, two trillion dollar platinum coins in Treasury. MMT states because the U.S. dollar is backed by its full faith and credit, the U.S. can print as much of its own sovereign money as it wants to pay off its debts. This theory shifts the responsibility of Fiscal policy to the U.S. Treasury. What do you think should be the role of monetary policy by Government? If there were a ‘crypto’ monetary policy, what would it be?
Mashinsky: Since the 2008 Recession, we were told, especially by Republicans, it is not the American way to put a safety net under the average worker or the average company. The good companies will survive and the bad ones will fail. They held onto that in a very stern way. After all, we’ve given AIG $200 billion to bail out the financial system. In the last month between the Fed and fiscal policy, we committed to print 10 trillion dollars over that same period of time, so basically we have just proven again there is zero chance we will have any financial responsibility either by the Fed or the U.S. government. So I think creating a system at Treasury where we would have checks and balances would be a disaster for our children, and we already created a disaster for ourselves.
The Fed has been drawing on the magic power of the dollar, …[which] is the most powerful currency on the planet. No other fiat or crypto in the world can step in to replace the dollar. The Fed essentially is saying it can continue and debase the dollar and nothing is going to happen, and this is the justification to soften the coming recession and put a massive safety net under the entire U.S. economy. It doesn’t matter if you have a good company or not, or whether there is a recession or not, whoever is close to the politicians and banks is going to get most of this free money, not the people who really need it as we see on TV every day.
Most recently, this has happened with big companies taking advantage of the small business loan program, who now say, sorry we didn’t hear that part, ‘we thought it was for everybody’. The crypto version of this bailout would be to focus all this borrowed money on the future America, on companies that enable domestic manufacturing and high tech industries like machine learning, Artificial Intelligence, and blockchain technology.
Brett: With over 51,000 Bitcoin deposited to your network, what does that milestone mean to you? Central bank digital currency developers such as the Bank of England have concluded that Bitcoin is not money, as it is too volatile and not good for payments or store of value. What does it feel like to have achieved this milestone, and yet with central bankers suggesting Bitcoin is not money, why do your customers buy Bitcoin if it’s not really money?
Mashinsky: Every Central Bank – there are 200 of them – is like a magician; they have a magic ability to create something out of nothing by just posting numbers and saying words. They are not bad institutions – they are needed by society but are mostly acting in the best interests of the very rich citizens or large companies. Today unfortunately, especially with zero percent interest rates and free loans to everyone who does not need them, what you are seeing is more and more of the central banks acting in the best interest of the one percent and not the 99 percent. We are focused on delivering high interest income on USD stable coins, 26 cryptocurrencies and Gold. We pay rates you cannot find on Wall Street.
Saying Bitcoin is not great store of value is a complete and utter lie. It doesn’t matter if you take a one year, five year, or 10 year look, Bitcoin outperformed the dollar or bonds, and outperformed any other asset on the planet. There is not a single asset that can stand next to Bitcoin and say they did better than Bitcoin. The dollar is exceptional form of payment but horrible store of value, The dollar lost 99.99% of its value against Bitcoin in the past 11 years. Though Bitcoin is volatile, it has been the best asset class on the planet. These are facts, not an opinion. The dollar is a horrible store of value that deflates three percent every year.
For the dollar to be an exceptional form of value, it would have to be a deflationary currency. Bitcoin is the only deflationary currency out there as its ‘monetary inflation’ is currently at 1.8% a year vs about 15% for the USD in 2020. That is the main advantage that bitcoin has because the amount of bitcoin to be created in the next 20 years is going to be dramatically less than the number of people joining and participating in the bitcoin economy.
Having over 100,000 Users, and 51,000 in Bitcoin, that is a good start but is nothing in global monetary terms: the entire Bitcoin community is nothing compared to the larger banking community. Most of the population on the planet don’t even know what Bitcoin is, and of those that do, maybe one percent has tried to own or transact with this asset. Fiat currency in all its forms has started to fail all over the world, places like Venezuela, Turkey, Argentina, Lebanon, and Iran, and people have started to look to different alternatives. With COVID-19, we have seen everyone first run to the dollar. They waited a few weeks to see if it was safe to invest again. Some people went back to the stock market, some people went back to gold, and some people went to Bitcoin.
Brett: What are your thoughts about whether consumers who make the transition into Bitcoin should have any consumer protections and regulations? Also, how are you able to pay such high interest on Bitcoin?
Mashinsky: Our wallet is basically just like your banking app. It is the same thing. It is just an app that allows you to store value, earn interest, or take a loan – those are the basic functions that we do for digital assets. But unlike your bank, we have committed to always act in your best interest. We are not a broker or an exchange. I remember the Goldman Sachs CEO being asked in a Senate hearing if those they bank are customers; he responded that they were not customers but rather counter parties. If your bank is thinking of you as a counter party, they are not acting in your best interest.
Celsius Network goes out to find the best yield for your asset with the lowest risk and then delivers 80% of the value created back to the user, not to the shareholders. No bank in the history of banking has ever done this where you will get 80% of what the bank makes on your money. If I am JP Morgan Chase, I have tens of millions of credit card customers, and I charge them 24% lending them money given to me for free by either the government or depositors. Even though my cost of capital went to zero, I didn’t lower my cost of credit card fees in years.
How does Celsius Network work? We lend out and do all the functions banks do but with crypto-assets. Unlike most banks and financial institutions, I turn back the majority of my profits to my depositors. When you look at the yields that we pay, it looks too good to be true – that is the first thing people say because they got used to earn almost nothing on their deposits. We lend crypto to institutions and charge them interest. Instead of keeping 100% of it like banks do, we share 80% of these revenues with our customers. This equates to about 8% on USD assets and a four percent annualized interest rate for Bitcoin, based on us earning five percent on the assets you lend us. That’s the process and when you start from the point that you will act in the best interest of the customers, then it’s a very easy to bring new customers. But when you start from the point of extracting as much as you can, you end up like JPMorgan Chase or Wells Fargo.
Brett: So with zero percent rates from the Federal Reserve…
Mashinsky: Sorry to interrupt you, but these are basic questions that no one is asking. Banks used to pay five or six percent for your money, now they pay zero. Why haven’t they lowered the rates for charging interest on credit cards and loans? They are charging record rates – they have actually raised their rates and raised their fees. The audacity of doing that in a zero percent environment! They can go and borrow as much money as they want from the Fed with zero costs. Have you seen a single bank lower their credit card fees?
That is the audacity, the stealing in the U.S. economy – a lot of people don’t understand the ‘invisible hand’ that is emptying our pockets. The history books will show how this is 2008 all over again, only this time we bailed out not just the ‘too big to fail’ banks, but also ‘too big to fail’ corporate giants who spent all of their fortunes rebuying their stocks and issuing dividends, and when they got into trouble, the average Joe and our children bailed them out. So my beef with the government and the Fed is that we have this amazing opportunity to reset our economy and focus on the future, but we insist on borrowing from our children to fix the past and spending precious new dollars to do so. Instead of investing in the future such as blockchain, AI, recreating the manufacturing base of the U.S., and breaking up the supply chains with China, we are bailing out the casino companies, airlines, and cruise companies.
Brett: Last year, Congress wrote a letter to Larry Kudlow, Chair of the National Economic Council at the White House, asking for more attention to be paid to blockchain. Now, another letter has been written in which 11 Congress members asked Mnuchin to look at the private sector and blockchain for COVID-19 economic stimulus payments. With explaining the difference between Bitcoin and blockchain, and then Facebook’s Libra, how do we explain to our policymakers the importance of this technology to stay ahead of China, and what Bitcoin or Blockchain even is?
Mashinsky: Today there is no blockchain technology that can take the Fed or Treasury’s money and deliver it in a digital wallet properly to all Americans. China recently gave over one billion people airdropped money through Alipay and WeChat pay and it worked marvelously in their centralized system. For the U.S., it is not about missing the whole Blockchain wave, it is about rebuilding the U.S. infrastructure based on decentralization and open ledgers. Yes, China is working on a crypto fiat currency, and we should have a solution for that as well, and it is going to take a few years to develop but that is not what this race is all about.
So, the issue here is that we have ‘three horses’ in the monetary race to create the future of money: government-sponsored unlimited supply coin, corporate-sponsored permissioned-based blockchain Libra, or an open blockchain (what Bitcoin is) and what DeFi is and Celsius is. We can continue pumping the Keynesian supply model bubble, or the corporate supply economics model. If you pick the wrong horse here, the dollar ends up falling off a cliff. The world economy is going to adopt one solution to replace the old USD.
Brett: How exactly does the gold that offers interest by Celsius Network work?
Mashinsky: We partnered with Tether Gold which holds physical gold you can buy in Switzerland. You are issued a digital token representing the gold which you can deposit in our wallet. We pay you interest in kind and you can redeem these tokens for physical gold. We make money by rehypothecating the gold or borrowing against it.
Brett: Is the primary regulator the FCA of the United Kingdom, and are you considered a ‘challenger bank’?
Mashinsky: We are not considered a bank in any of the countries we operate in as in most of them Bitcoin and other assets are defined as commodities. Since we pay interest in kind it’s like depositing digital sugar with us and getting paid more sugar for storing it with us.
Brett: Are your services available to anyone in the U.S.?
Mashinsky: Different services are available in different states. For example, it took us 2 years to launch interest on Bitcoin in New York State as we had to partner with a custodian that was acceptable to the NYS regulator Department of Financial Services.
Brett: Thank you for your time.