@ ARVIN

• ORIGINAL TITLE: TWO RAILS DIVERGE: FROM BANK FAILURES TO BITCOIN PAYMENTS
• SPEAKER: PARKER LEWIS
• CONFERENCE: BTC PRAGUE 2024

INTRODUCTION

Bitcoin vs. Bank Failures. In today’s rapidly evolving financial landscape, the dichotomy between traditional banking systems and the burgeoning world of Bitcoin has never been more stark. As bank failures become increasingly frequent, with notable collapses such as Silicon Valley Bank and First Republic Bank, the fragility of our legacy financial infrastructure is laid bare. The systemic issues, fueled by unsustainable levels of debt and rising interest rates, underscore a critical need for a more resilient and adaptive solution.

Enter Bitcoin, a decentralized digital currency offering a compelling alternative to the traditional banking model. With its fixed supply and antifragile nature, Bitcoin not only addresses the insolvency issues plaguing fiat currencies but also presents a robust framework for secure and efficient transactions.

This transcribed article delves into the contrasting worlds of failing banks and resilient Bitcoin payments, exploring how businesses and individuals can leverage Bitcoin’s unique attributes to navigate and thrive in an increasingly uncertain economic environment. Presented by Parker Lewis, discover how Bitcoin’s innovative rails provide a secure pathway amidst the ongoing turbulence of the global financial system.

EVERYTHING IS ALWAYS AT RISK

For this talk, I am going to really split it up into two parts. I’m going to have the first half of the talk really based on explaining something fundamental about the economic system and then the second half of the talk focused on a solution to that problem. When you’re talking to a group of Bitcoiners, kind of trying to account for something for everyone. With that, I’m going to start with one of the few jokes that I actually know, and some of you might have heard this joke, but it is: what did Socialists use before candles? The punchline, of course, is light bulbs.

The point of this short story joke is that everything is always at risk and that if we’re all sitting here today, it is because humans are adaptive. They are adaptive to risks, and we are all ancestors of people that have adapted. The people who adapt not only survive but they thrive. Complacency is the enemy of adaptivity. So, capitalists turn candles to light bulbs and socialists do the opposite—they take light bulbs and turn them to candles.

One of the problems, and it’s going to get into the legacy system being a problem and Bitcoin being a solution, is that when I talk about everything being at risk, oftentimes, in this idea of complacency, you think about a current level of success, a current level of wealth, a current level of health. Socialists assume it to be a given, and then they see a pie and start carving it up, not thinking that that pie can shrink. The idea that everything is at risk is that if we are not constantly moving ourselves forward, we are at risk of actually regressing. That’s why we always have to be forward and be adapting. I’ll come back to this idea in a few slides.

THE LEGACY SYSTEM IS INSOLVENT

The first thing I’m going to talk about is why the legacy system has a problem and why it’s not just a problem in terms of a store of value, like why our wealth isn’t just getting destroyed when they’re printing money, but why it’s also a problem for our rails. What I’m showing here, this is the slide that really got me into Bitcoin. For people who are new, this is showing the US system. I tried to find a comparable slide for the Euro system. The Fed might be worse than the ECB, it’s debatable, but they’re very equivalent. The problems are relatively similar. I’ll tell a story about this.

What this is showing is the amount of debt in the US system relative to the number of dollars. When I was getting into Bitcoin, I first had to understand why they had to print all the money they did. The conclusion I came to was that it was a function of an unsustainable degree of leverage. In 2007, there was only 900 billion in the US system and there was 52 trillion of debt.

Each dollar had been lent out over 5 to 1. When they put more money in the system, it causes the debt problem that already was there to actually grow and metastasize. The way that this whole system works is that it always dictates that there need to be both more debt and more money put into the system. This is unsustainable. If Bitcoin is valuable because of its fixed supply, that’s what I put forward: the real fundamental value in Bitcoin derives from its fixed supply.

This is the problem that it solves. The legacy system is insolvent because there’s far too much debt relative to the number of dollars. It is unsustainable, and the only way to correct it is to put more dollars in the system, more Euros in the system. But all that does is put us further out on the same ledge of over-leverage. It is why they have to print money, it’s why banks fail. The bottom line is it’s a problem not only for our balance sheet, our savings, but also how any business actually interacts with its customers.

THE BANK RUNS & FAILURES WILL CONTINUE

Regarding Bitcoin vs. Bank Failures, this is a slide that got me hyper-focused on Bitcoin payments. There were a slew of bank failures last year: Silicon Valley Bank, First Republic Bank, and over here Credit Suisse. Credit Suisse didn’t fail, but here in Europe, you guys now have two of your largest banks that were merged without a shareholder vote on either side. It was because Credit Suisse was failing. Honestly, all of the entire system is failing somewhere. A bank is failing in the US and in Europe. The only question is whether it’s yours.

What I have on this slide is showing the amount of deposits that fell from these banks in the last quarter of their existence: Silicon Valley Bank, 209 billion to 175 billion; First Republic Bank, 176 billion to 103 billion. Money can move fast these days. Credit Suisse, 260 billion to 195. It doesn’t have to go to zero for your bank to functionally fail.

LEVERAGE + RISING INTEREST RATE = BANK RUNS

Bank failures are inevitable because of a combination of leverage and rising interest rates. Back in the old day before all of our money was monopolized by the central bank, if you increased interest rates as a bank, it would actually attract more money to your bank and to the banking system as a whole. In this day of a monetary system, when they actually raise interest rates, that’s what causes the bank run. What I’m showing here is the amount of unrealized losses in US banks, which is 675 billion. You can see that it started as they started to raise interest rates. The raising of interest rates is actually what causes the bank failures. It’s what causes the money to run from the weakest link, and they’re all weak. It’s just ultimately a turtles-all-the-way-down problem.

BANK FAILURES ARE LIKE A MAGIC TRICK

The other important thing to remember is that bank failures are functionally like a magic trick. Banks will fail functionally overnight. They will fail before most of you know it. On the left, I’m showing Silicon Valley Bank. Its share price going sideways and then boom, overnight. Literally, when people figured out that there was a bank run, the next day it was gone. First Republic was similar, took a little bit longer, but this is the “gradually, then suddenly.” The title of my book came from a quote in Hemingway, from his book The Sun Also Rises. One of the characters asked the other, “How did you go bankrupt?” The other character said, “Two ways. First, gradually and then suddenly.” It is true of banks.

BALANCE SHEET PROBLEM + CASH FLOW PROBLEM

This is not just a problem for your savings; it is a problem for your rails, for how you receive money. When Silicon Valley Bank failed last year, the first thing that businesses that banked with Silicon Valley Bank thought about was how am I going to make payroll? Which is the right side. Where do I save my money? But the next problem is your bank is also how you access your customers. It is how they pay you. It is both a balance sheet problem as well as a cash flow problem. When you think about a bank run, you think first and foremost about your savings, but those banks are also the rails.

BANKS ARE THE RAIL OF THE FIAT SYSTEM

This is a demonstration of what the US banking system looks like, which is a functioning clone of the European banking system. On the right side of this page, I have credit card networks, acquirers, issuers, gateways, ISOs. There’s a lot that’s built on top, but there’s a bank on one side, there’s a bank on the other side, and there’s a central bank in between. The banks are all functionally insolvent because the system is. Now, it’s not that banks are bad. Banks provide value.

There are banks in Bitcoin, and banks in Bitcoin are good. They might not be licensed as banks yet, but people that help you hold money, it’s not a purity test. The point is that banks can fail faster than you can move your money, and even if you have multiple banks, it’s a turtles-all-the-way-down problem. As the banks fail, the banking system actually gets more fragile.

THEY ARE ALL THE SAME (MOSTLY)

The banks themselves—I don’t know how many of you guys are Zoolander fans, I don’t know if that humor translates to Europe, it might not—but the banks are all functioning the same because the system is leveraged to a point that it’s not sustainable and that all of the money is functionally captive to the banking system.

There are two banks in the US that are different, as there are in Europe. It’s the Federal Reserve of New York and JP Morgan. But what functionally happened was the system was unsustainably leveraged, and they codified too big to fail. Some might think that the winners are the big banks and we should just go all to the big banks. The problem is that the fiat system centralizes, and as that happens, it becomes more fragile. It becomes more leveraged, it becomes more insolvent. It dictates more printing, more trust is required, and more censorship.

DIVERGENT RAILS PRESENT TWO GREAT CONTRASTS

So, the fragility of the rails is twofold. They are because of the leverage itself, but also because as the system centralizes, it becomes less resistant to censorship. That is why Bitcoin presents such a great contrast in terms of the rails. Matias asked me to leave people with a call to action, and this is ultimately going to be a call to action to Bitcoiners, not to go out and try to create a circular economy, but that if you run a business or if you are an important cog in a business, that you don’t look at the Bitcoin rails as a novelty or as a niche. You actually view them as security.

So, the way that I think about the contrast between the central banking rails, which is the legacy world, and the Bitcoin rails is there is a single point of failure, whether it’s the ECB or the Federal Reserve. In Bitcoin, there is hyper redundancy, and the hyper redundancy is really important. There are insolvent banks as the foundation of the rails of the fiat system, and there are funded nodes that are the foundation of the Bitcoin system. Central banking is inherently a trust-based system because fiat currencies have no inherent monetary properties. Gold, which preceded fiat, had inherent monetary properties.

What a trust-based monetary system means is that counterparty risk is everywhere. Bitcoin is and can be trustless. The central banking system has credit-based payment. Every payment is: do they have the money? If so, I will settle later via multiple different counterparties and systems. Bitcoin is and can be an equity-based payment system. Central banking is closed-source proprietary systems. Bitcoin is ultimately and fundamentally built on interoperable standards. Central bank is permissioned innovation. Bitcoin is permissionless innovation.

TWO RAILS DIVERGE

These are the two rails diverging. The thing I like to visualize here, you’re not going to be able to read all the fine print, but there are single points of failure everywhere in the fiat system. The Bitcoin system has hyper redundancy, and that redundancy is ultimately what reduces its fragility over time. It’s not static. When I talk about these rails diverging, the fiat system is fragile today. Bitcoin is antifragile. But the fiat system also becomes more and more fragile as it centralizes. Bitcoin actually becomes more and more antifragile as it decentralizes, as layers of redundancies are added to the network. When you think about the contrast, it is centralized versus redundant, fragile versus antifragile, censored versus permissionless, and insolvent versus Bitcoin flourishing.

CALL TO ACTION: DIVERSIFY YOUR RAILS

The fiat system is turning light bulbs into candles, and the Bitcoin system is going to turn candles into light bulbs. My call to action is to diversify your rails. The life advice is always to get out of bonds. Bonds are the worst financial asset. Equities might be next unless it’s an equity in your own company. But this message is to diversify your rails. Using the Bitcoin rails and accessing the Bitcoin rails does not mean not using the fiat rails.

Just as saving in Bitcoin and the fiat scientists out there really struggle with how people deal with Bitcoin’s volatility, they fail to understand that Bitcoin is not an all-or-nothing proposition. You can save part of your money in Bitcoin, and you don’t have to just rely on the Bitcoin rails to also rely on the fiat rails. You can use both at the same time. What’s in the best interest of your business is to diversify. Also, if you are a Bitcoiner and you run a business and you want Bitcoin, it should be intuitive to you that adding an entirely different currency system would not just be a source of risk to get the Bitcoin.

It would be a high degree of unnecessary cost. It is not the same to go from dollars to a dollar bank to a payment processor to a merchant processor to a merchant bank account to a Bitcoin exchange to get into Bitcoin. Again, if you want the Bitcoin, you don’t have to do this non-custodial. You can use a Bitcoin bank, but it is still far more efficient if your customers paid you directly.

RECOGNIZE THE RAILS MUST BE REBUILT

Also, recognize that the rails must be built—every last one of them. If you have a trust-based system, it is very easy to add one currency and then the next and do copy and paste. In Bitcoin, we are fundamentally having to rebuild from the ground up every transaction type, every type of commerce. Think about the different types of transactions: oil settles different from power, which settles different from real estate, escrow, booking, subscriptions. There are also three different layers that have to be built: the protocol layer, the transactional layer, and the commerce layer. Then that data needs to go everywhere. This is a process, but those rails are actively being built, and it takes business owners.

CASE STUDY: INTEROPERABILITY + CROSS-BORDER

The call to action is that if you are a business owner or you are high up in a business, it’s not to say go run into a brick wall over and over. Use some common sense. But if you are in a position to, it is to use those rails. When I talk about the power of Bitcoin, when you think about a permissioned system and permissioned innovation versus a permissionless system and permissionless innovation, the people that are building the Bitcoin rails, it is compounding, and compounding equals acceleration.

One example of this: Strike. I don’t work for Strike, but on their behalf, they just recently launched in Europe. We had Zaprite built on top of Strike without having to write another line of code, although we are not a money transmitter. We are now lit up to all of Strike’s customers because we speak an interoperable language of Bitcoin. But we also support—you guys can use Mutiny right here in Europe, non-custodial. You can use Voltage, non-custodial. I use Trezor, non-custodial. We even have customers that use BTC Pay Server through Voltage. All of these companies are building the rails for payments, and they are all interoperable, which allows us to move far faster and make progress far quicker.

THE MORE OF YOU WHO ACCESS THE RAILS THE BETTER THE RAILS WILL BECOME

So, the final call to action is this: the more of you who access the rails, the better the rails will become. It is cause and effect. This is Saifedean’s latest book, The Principles of Economics. This is how progress happens. You start with a small little fishing boat, you build a sailing boat, and then you go all the way down to the cargo ship. More representations in the wild and live application make us better, and more input and feedback from actual customers make us better.

More profitable businesses attract more capital, and more capital attracted to build more tools, then there becomes more competition, which delivers more value to you for less. Then there’s more actual liquidity on the Lightning Network, which makes more routes. There’s more nodes, there’s more routes, there’s more redundancy. Bitcoin actually becomes harder to stop, and then your business becomes more resilient, and your businesses flourish, and we all flourish.

TAKE THE WHITE PILL. CONTROL YOUR DESTINY

So, my message is take the white pill, control your destiny, don’t be complacent. The rails are there, and they need to be used. There’s this imaginary theory, and I actually hate it, that we should go build a circular economy. The reality is you just control you. The tools are there. You can use them. If you wait till you absolutely have to, you’ve waited too long. When did Noah build the ark? It was before the flood. So, I encourage you all, the rails are there. Bitcoin payments are important, and I encourage you all to access them. Thank you. I’ll be back in the Expo signing books and would love to catch up with many of you. This has been my first time in Europe. I’m from Texas. I’ve loved Prague, I’ve loved Europe, and I’ll be back. So, thank you.

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