SLP538 The Real Origins of Money with Natalie Smolenski

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In this conversation, Natalie Smolenski discusses the intersection of Bitcoin, anthropology, and political economy. She explores the debate on the origin of money and the clash between anthropologists and economists. Smolenski argues that money is a social technology that can take different forms based on trust and use cases. She examines the limitations of fiat currency and the importance of trust in debt settlement. Smolenski also discusses the rise of Bitcoin as a competing institution to traditional currencies and the threat to open source development in the EU. We also discuss various topics related to jurisdictional arbitrage, the Texas Bitcoin Foundation, the challenges facing universities, and the future of higher education.

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Podcast Transcript:

Stephan (00:00.318)
Natalie, welcome to the show.

Natalie Smolenski (00:02.377)
Hi, great to be here.

Stephan (00:04.354)
So Natalie, I’ve seen some of your work and I thought you have some definitely some interesting things to say about Bitcoin, anthropology and political economy. So why don’t you tell us a little bit about your background as an anthropologist and then sort of how you’re thinking to mesh these worlds of Bitcoin and anthropology.

Natalie Smolenski (00:25.528)
Sure, yeah. So I trained as an anthropologist in the early 2010s, historical anthropology. Also, did quite a bit of work in philosophy, and then kind of made a transition into industry. So I’ve been in a number of roles as a brand planner.

as a technology sales executive, co-founded a company in 2016 that built the first Bitcoin-based digital identity wallet. So we recognized pretty early on that an immutable ledger for verifying transactions can also be an immutable ledger for verifying digital claims.

you know, is increasingly important as we move into an era of disinformation, misinformation, AI generated, just explosion of data, the need to verify the provenance of that. But it’s also quite important to do that in a self sovereign manner, meaning in a manner that privileges the, the individual as the

and authority of information about themselves. So that’s kind of my background. My company was acquired in 2020. I still lead business development there. And I also co-founded the Texas Bitcoin Foundation, which is a 501c3 public charity specializing in research and education about Bitcoin and political economy.

Stephan (02:21.346)
Great. And so, yeah, I think there’s a lot of implications and things we can get into around what kind of impact Bitcoin will have on society. And I think another interesting area is this

I guess, debate between, let’s say, some anthropologists and some economists on where money formed and what is the real origin of money. I know you’re writing a paper on this that’s in draft. So do you want to just tell us a little bit about this and how you got this idea to write about this?

Natalie Smolenski (02:53.508)
Yeah, absolutely. So, you know, my anthropological training focused on a set of literatures that tend to not take economists and economics into account. Or if they do, they treat it in a very polemical fashion. And this often comes down to just ideological disagreements between

many anthropologists and many economists about the value of capitalism as a form of political economy. And so a lot of anthropologists sort of treat the entire discipline of economics as an extended apologia for capitalism and feel this need to discount and disparage it as a result. Of course,

As you know, I’m sure economics is not all one thing. There are many different schools of economics. A lot of what gets branded as economics is in fact some flavor of neoclassical economics or Keynesian economics. And there are, of course, many different interpretations and schools of thought around everything from money to

credit to entrepreneurship, to the role of middlemen in an economy, to most fundamentally this question of value, which both anthropologists and economists deal with. It’s sort of the master concept of both fields. And so what I perceived coming at this from an anthropological standpoint is that the discipline was not actually making use of.

some valuable insights from the discipline of economics, valuable, ha, that could in fact inform anthropological investigations of value. And so that’s the direction that I’m going. And in this paper, which I’m authoring for the Satoshi papers, this is the first edited volume of peer-reviewed essays on Bitcoin that I believe has been published ever.

Natalie Smolenski (05:17.32)
So the focus of my paper here is just to address David Graeber’s theory of money. So Graeber is an anthropologist. He’s also a very effective popularizer of anthropological concepts. I have a lot of respect for Graeber. This is why I take him seriously enough to offer an extended rebuttal, I think, to his theory of money, which, you know…

is kind of in this place of, you know, when a lot of people talk about anthropological theories of money, they’re really implicitly talking about Graeber’s theories of money because he is one of the few anthropologists who have elaborated systematically a theory of money. And so I wanted to kind of address his work specifically as an entryway into this broader question of

value and bringing the disciplines of anthropology and economics together.

Stephan (06:18.506)
Right, and I notice in your paper, or at least the draft, that there’s this clash. And I, funnily enough, I remember seeing that clash on Twitter, and so David Graeber in that clash is arguing with Nick Szabo, who’s also a legend in the Bitcoin world, obviously, for his work. And also, it gave me these tones of…

Natalie Smolenski (06:29.675)
Right?

Stephan (06:42.726)
On one camp, you sort of had the Austrian economists who are arguing this commodity money theory, right? Karl Menga, origins of money in the 1870s, talking about how money evolves. It’s this theory of like a bottom-up thesis, whereas there are different theories of money, of course, there’s this top-down charter list or state theory of money, and so…

And as I’m understanding, David Graeber’s view is more like, oh, no, it started as debt and it’s credit. And that’s really what it is. And then on the other hand, you sort of have the Austrians and others, Austrians and related other people who are arguing, no, actually, it’s a commodity money theory. That’s how money, at least started. Is that would you say that’s kind of a high level summary? Or how would you add to that?

Natalie Smolenski (07:30.296)
Yeah, you know, there are these two broad schools in monetary theory that are interdisciplinary. So economists, social scientists, anthropologists, you know, there’s the chartalist school and the medalist school or the commodity school. And they have different theories about how money originates and what it is. You offered a pretty effective summary there.

Money is a creature of law. And law is the provenance of the state. So in effect, whatever the state decrees to be legal tender within its jurisdiction becomes money. There are commodity theorists of money who argue by contrast that money is the most saleable good. And so it emerges bottom up.

from countless interactions of market actors trying to transact and not being able to transact directly, which is barter, good for good. And so they need an indirect mode of transacting. Money becomes this literally medium of exchange because it’s the thing that most people in that market are likely to want. So if you can’t sell…

you know, good A or good B or good C, you probably can sell money. And so, you know, these are two different points of view. My proposition in this paper is that it’s not an either or. There are, in fact, examples of chartless money, state declared, legal tender, fiat.

Currencies mean these things exist. They are they are out there their material phenomenon in the world. They’re used as media of exchange but they’re not a Universal monetary technology and so what I’m what I’m arguing is that money is a social technology But like any technology it can be sort of tailored to different use cases so credit money is

Natalie Smolenski (09:55.44)
very useful under conditions of high trust. And when we say credit, all we mean is deferred payment. So, you know, transacting on credit is as old as time itself. And in this regard, I agree with Graeber. I think he’s saying something true. But not all forms of transacting are high trust.

to that extent. There are entire categories of transactions that are either with strangers or with enemies or with people you may not just have an established relationship with, you encounter them only peripherally and so you don’t really trust them and you need to transact with them. So what do you use under those conditions? Well, you use something that has

use value in and of itself. And commodities are that. So they’re a category of good that’s useful. And then when they are used as money, they also attract a monetary use value. So what economists call a monetary premium. And these currencies, these forms of money are used, again, low trust or with people you don’t trust very much, but also…

under conditions of very high risk transactions. So the stereotypical example in anthropology is the wedding. A marriage is an institution. It’s a social institution. It’s extremely fraught. The entire community has an interest in making sure that the marriage endures and succeeds and produces offspring and generates.

value and wealth that is then passed down as inheritance in the community and so The families that are coming together in a marriage and then the wider community in which those families are situated They have a lot on the line in this working out And so in effect a marriage is a contract that needs to be heavily collateralized with items of real value where you know, you’re putting real things at stake

Natalie Smolenski (12:21.868)
And so, you know, whether we talk about dowry systems or bride price systems, very often those are denominated in commodity monies to a large extent, because there has to be there have to be teeth to this contract, so to speak. So to two types of money.

Stephan (12:41.438)
Yeah. And in a sense, I guess people are showing that they’ve had to make a certain amount of sacrifice, right? Like if I’m going to give you my daughter, you need to pay X amount of gold and this number of cows and, you know, et cetera. I, at least historically, that’s what it might’ve, you know, happened. And maybe today still in parts of India or something, you know, that kind of thing might still happen. Um, but so I am curious on

Natalie Smolenski (12:49.797)
Right.

Natalie Smolenski (12:55.994)
Right.

Stephan (13:09.31)
I think you might have seen some of the debates that have gone back and forth between some of the, let’s say, commodity money theorists, the Austrians and other people and people like the late David Graeber. I think one area that’s interesting is if we’re going to think of it as, okay, it’s just this ledger, it’s this credit system.

What’s the credit system denominated in? Because we could ask the question, well, even in some of these examples where David Graber talks about Mesopotamia or something like this, you could ask the question, well, hang on, how did they know to use silver? Was there a process of market discovery? And then the state in that system had to sort of piggyback off that and say, okay, we’re gonna now take control of this institution.

Natalie Smolenski (13:35.62)
Yeah.

Natalie Smolenski (13:45.723)
Right.

Stephan (14:01.531)
and turn it to our purposes.

Natalie Smolenski (14:03.764)
Mm-hmm, absolutely. And this is again where we get into different types of money as different social technologies. So both credit money and commodity money at the end of the day are redeemable in some value. There’s always, even with credit money, the IOU eventually has to become something of real value.

And in fiat currency systems, what that is GDP. So instead, so the difference between credit money and commodity money is that a commodity money, the IOU at the end of the day, at the end of the chain of IOUs is redeemable in a fixed amount of a concrete commodity. So that’s why it’s considered much more stable.

from a lot of people’s point of view, because they know that, you know, at the end of the day, it’s redeemable in silver, in this much silver. This IOU is redeemable in this much silver. This IOU is redeemable in this much gold, or this much Bitcoin. Whereas with fiat money, at the end of the day, what backs it is the economic power of the state as a whole, of the jurisdiction over which the state has sovereignty, ostensibly.

Um, but that is a lot.

Stephan (15:30.79)
So I’m just curious there, you mean, I guess you’re implying like the taxation revenue, right? Like the in that context, it’s like the state is sort of asserting its power over its citizens and residents and taxpayers. And it’s saying based on your future revenues, we’re going to tax some of that and pay that back to our debt holders, which is the government bond holders in this case, right?

Natalie Smolenski (15:53.048)
Right, and it doesn’t even have to be taxation revenue. It’s the full assets of the state. And so in situations of like dire economic extremity, like for instance, the Weimar Republic or the Bolshevik revolution, where both of these polities were seeing hyperinflation around the same time historically, they both…

said, you know, forget tax revenues, we don’t have tax revenues. Our GDP is, or our fiat is backed by the productive economic power of the people of this country. But how do you denominate that? I mean, how do you determine that X amount of currency translates into X amount of units of GDP?

You can’t. And this is why, you know, for like international lending, state to state, often the foreign nation creditor will just seize productive assets like ports or factories or land because, you know, the country they’ve lent to, the debtor country, can’t pay them back in money. So they go in and seize

productive assets. This is what China is doing worldwide as many countries default on their debt. So this is the problem with fiat currency is that, or with credit money in general, is that it works as long as you trust that the debtor can pay it back. The moment you don’t trust the creditor to pay it back,

Then the question of measurement comes into play. Okay, well you’re $100 billion in the whole. What does $100 billion translate into in terms of concrete productive assets? And the debtor has to come up with that value. Whereas if it was a commodity money, they were $100 billion of debt in a commodity peg currency.

Natalie Smolenski (18:15.844)
that would translate into a very clearly measurable amount of a specific commodity. So that’s really the main difference is like, where does the chain of IOUs end? In a credit money system, at the end of the day, it’s assets or specifically in a fiat money system because there are different types of credit money. Credit money can of course be backed by a commodity. We’re talking about fiat money where the…

the credit money is backed by the productive capacity of the country that is issuing the fiat currency. And this works as long as the economy is productive, it continues to grow, but the moment you have economic collapse or even downturn, the sovereign credit crisis begins.

Creditors begin to wonder like hmm like is Sri Lanka able to pay back this debt is Is the United States in fact generating enough economic value to support this massive debt? and at that point they start asking for real things either commodities or real estate or land or Industry

Stephan (19:38.826)
Right. And so I guess that can also become a heated thing because maybe the people of that country, like let’s say of Sri Lanka might say, Hey, we didn’t, we didn’t want this. Or this was, you know, this is by a corrupt government who were take, putting money in their own pockets. And now, you know, there’s this kind of justice question of, is it really right to kind of enforce this, uh, you know, uh, obligation? I mean, it’s, it’s kind of a hard, there’s not really a right answer, right. Um, but I think maybe that’s, that’s a situation.

Natalie Smolenski (19:45.68)
Yeah. Right.

Natalie Smolenski (19:52.601)
Right.

Stephan (20:08.566)
where it’s a breakdown in trust.

Natalie Smolenski (20:10.48)
Yeah, exactly.

Stephan (20:13.822)
And so when we’re talking about all of these aspects, it’s important to also consider what are the four, what are the purposes of money, right? Like people normally talk about the three, right? Like unit of account, store of value, medium of exchange. These are kind of the main three that most people would talk about. Is there another category? And the reason I’m asking this is if you look at some of Nick Zalbe’s work, which I know you have, he talks about collectibles. And so…

Natalie Smolenski (20:42.281)
Okay.

Stephan (20:42.73)
maybe there’s this proto-money form, this kind of collectibles, and then you sort of have the other stages. What’s your view on those?

Natalie Smolenski (20:45.485)
Yeah.

Natalie Smolenski (20:52.596)
Yeah, so Zabo’s theory of commodity money is that commodity monies always emerge from stores of value. So proto-money is a store of value. And I think that’s fairly uncontroversial. His theory is that one of the ways that…

humans have evolved to store value is through our capacity to appreciate beauty. So it’s our aesthetic enjoyment that we derive from things from adornment, you know, jewelry, fine textiles, shiny metals. These, these are technologies of value that we have learned how to store.

and then to exchange for other necessities. So every example of commodity money that emerges in the anthropological record is tied to some collectible, or emerges from some collectible that is used as a store of value. What’s interesting is that in order to truly become money,

like a medium of exchange and a unit of account, as well as just a store of value. The collectible over time has to be refined into a high volume of in effect interchangeable, fungible units that have a reliable, that serve as reliable measures of value. So that is the unit of account.

and the medium of exchange. You know, if I have a beautiful gold necklace, that’s a store of value, but that doesn’t, it doesn’t, it has to be appraised, and there’s a cost to appraisal. So this is Asabo’s other point, is that we often underappreciate the role of accounting in the historical development of…

Natalie Smolenski (23:18.664)
both money and mercantile economic systems and ultimately capitalism. The question of measuring value is actually extraordinarily hairy and measuring value itself is a costly process. And so the more that we can reduce the costs of measuring value, the more we can facilitate exchange. And so that’s what money does. It basically serves as a shorthand.

for measuring value, that makes it much easier to transact.

Stephan (23:54.198)
Right, and so maybe, I guess the commodity money theorist might say, well, it starts as, you know, barter, and then eventually evolves. And over time, there are different goods competing, right, as we said, the most sellable commodity. And over time, historically, that’s typically been gold and silver. And so that then forms the basis for the accounting system, I presume. And then that accounting system becomes like, oh, okay, if we’re doing business, it’s worth…

you know, 200 ounces of gold or whatever, how much that price is, that’s where the accounting aspect comes in. Another aspect you mentioned in your paper is this distinction between payment and settlement. So can you just elaborate a bit on that, on the payment versus settlement distinction?

Natalie Smolenski (24:37.177)
Right.

Natalie Smolenski (24:41.944)
Yeah, so thank you for reminding me, because you had asked about the three characteristics of money as a store value, a unit of account, medium of exchange, and are there other perhaps characteristics of it. Yeah, these three elements are kind of where the consensus of most economists has come to rest on, but if you look at the literature,

One of the other characteristics that is frequently mentioned by both anthropologists and economists is money as a method of payment. And, you know, what is payment? Payment is the settlement of a debt, or it’s the method by which a debt is settled. But it doesn’t necessarily have to always result in settlement. So, you know, and this…

This psychological distinction is really important because when we talk about settlement, what we’re talking about is satisfaction of the creditor. Like the term satisfaction is a psychological term. The creditor has to feel that the debt is settled because if they don’t, they’re gonna cause trouble. There will be social unrest. The creditor’s gonna try to get what’s owed them in some way.

And so human communities have a really high stake in ensuring that all debts are reliably settled within their jurisdiction because otherwise there’s potential for violence, social violence. And this is why the governing authorities tend to step in and try to define legally.

what constitutes settlement of various debts. So in criminal codes, it’s, you know, as old as they are, any criminal code you look at historically has, you know, a list of crimes and then the compensation that is due, the victim of the crime, or if it’s a victimless crime, sometimes the compensation that is due the community or the society.

Natalie Smolenski (27:08.952)
Um, and that then becomes a normative, uh, practice for settling debts. But there’s still no guarantee that in any particular case, the creditor or the victim or the wronged party, the plaintiff will be satisfied with whatever the legal prescriptions for debt satisfaction are. Um, and so like.

You know, to give an example, there was a shocking case, I believe in the 1980s, of a mother who discovered that her child had been raped and murdered by this man, who then she pressed charges against, was taken to court, was convicted, and the mother appeared at the sentencing in court.

hold a gun and shot him, knowing that she was going to go to prison for this act. This was an illegal act. You know, the justice system had done its work. He was going to be given the prescribed payment for his crime. But she, as the creditor, found that payment insufficient. And she determined as a creditor that through violence, she was going to settle the score. So

you know, this is where we get into vendetta, vengeance, the institutionalization of the blood feud, which is characteristic of many human societies across history, particularly stateless societies, where you don’t have a court system to enforce the payment of debts. You often get this chain of retribution that becomes a vicious cycle and that is extraordinarily destructive.

of life and property. And so a lot of the reasons that we human societies evolve a state is because they’re trying to tamp down the violence of either individual or small groups like families or clans engaging in this chain of retributive violence for a debt that can never be settled because the creditor can never be satisfied.

Natalie Smolenski (29:34.144)
And that process, you know, we’ve managed to achieve rule of law that precludes the blood feud, but that system is always in danger of breaking down. And when does it break down? It breaks down when people lose trust in the institutions of justice to actually deliver, to reliably deliver, you know, more or less satisfactory settlements of debt.

If people start believing that the justice system is rigged or unfair or is captured by interests that is not going to serve them, then they begin to take matters into their own hands and creditors begin deciding outside of the law much more frequently when they are satisfied.

Stephan (30:29.858)
So yeah, I guess it can be like a vigilante context or maybe it can be a context where maybe people look for a extra legal judge even. Maybe that could be something we start to see where people start to go outside of the jurisdiction that they’re in, they look for somebody outside to sort of rule what’s the right course of action. It’s interesting though, even with the blood feud aspect of it, you know,

I’d have to be a bit skeptical that we’ve solved that with the state. I think many states have in fact exacerbated that with, you know, if you look at the war on terror and how there are all these people who, you know, then they cause all this blowback and this is a point that people like Ron Paul has been making, you know, for decades. So you know, I guess it’s unclear to me whether that we’ve had a net saving there. But even that aside, if we were to… Yeah, go on.

Natalie Smolenski (31:10.85)
Mm-hmm.

Natalie Smolenski (31:18.331)
Right.

Natalie Smolenski (31:27.292)
Actually, I’d like to speak to that, because that’s a really important point. And this, the war on terror is an interesting example, because it’s an example of a blood feud that is between a state and a series of non-state actors around the world. It’s a kind of asymmetric warfare, where

You know, the states that the parties labeled terrorists are living in or coming from are not strong enough.

to directly engage in state-to-state warfare with the United States. And so what has happened is you’ve had entrepreneurial individuals in those countries take the initiative to attack the state that they have blood-feed with in ways that the state cannot easily predict or defend against.

not dealing with another state. They’re dealing with a decentralized network of actors around the world. And so.

That also calls into question, I think, particularly the system of international law because the United States doesn’t have jurisdiction in these other countries. So its court system is designed to resolve domestic disputes internally between debtors and creditors within its own country.

Natalie Smolenski (33:15.27)
on terror though is this attempt to, and not just the war on terror, the practice of empire in general is to subject other countries to the domestic jurisdiction of the United States. So you have like, you know, the 9-11 attackers being tried in a court in New York City. Well, they’re not US citizens and they don’t reside in the United States.

Natalie Smolenski (33:42.764)
let’s say the regime of international sanctions that the United States imposes on other countries and on specific individuals in other countries. Many of those countries are, many of those individuals, they’re not US citizens, they don’t do business in the United States, but they’re being tried in courts in, say, Virginia for violations of sanctions, because at some point, some transaction in their economic network

touched the Swift-based financial system, which is, you know, a sort of this extension of US jurisdiction globally. And so you’re absolutely right. There is an international component to blood feud that exceeds the state and shows the cracks, the vulnerabilities and the limitations of the state as a purveyor of rule of law.

to not even say justice.

Stephan (34:44.19)
Right. And I think the other thing that’s interesting from a Bitcoin perspective, now you spoke about this idea of institutions, right? So I guess if you could just first define how you’re thinking of institutions and then we could talk a little bit about that.

Natalie Smolenski (34:59.332)
Yeah, so an institution is just a…

a social technology for coordinating action. So, you know, human beings have to cooperate to do things and they evolve these institutions, some explicitly, many just implicitly, bottom up, to increase the costs of defection. So if you can tell something’s an institution because it’s expensive to leave,

and to decrease the costs or increase the rewards of cooperation. So there are incentives to stay within the fold. So whenever you encounter that structure as a human being, you’re dealing with an institution.

Stephan (35:49.042)
Right. And so, yeah, like you said, it can be informal, it can be a formal thing. When it comes to social technologies, things like money, there’s also this element of competition because, you know, you’ve got the US dollar system, but you’ve also got the Bitcoin system. And these systems are in some sense competing with each other that over time, you know, I think as more people start to adopt Bitcoin, doesn’t that create an interesting competing institution dynamic?

Natalie Smolenski (35:59.332)
Yeah.

Natalie Smolenski (36:18.424)
Absolutely, yeah. So institutions compete. Institutions can be rendered obsolete. They can cease to exist. New kinds of institutions can arise. Absolutely.

Stephan (36:38.678)
Yeah, and so then I guess one other thing to tie back to, and you mentioned this idea as well, that you’re not going to trade for some particular good unless you think it’s going to be a long-lived institution, that there’s some durability, right? So if somebody’s giving you a gold necklace instead of some lesser quality metal, you’re more likely to take the gold one because you think that’s going to be more durable. So I wonder then…

Natalie Smolenski (36:55.013)
Right.

Stephan (37:09.334)
How much is it a matter of time for Bitcoin, right? That Bitcoin has been around now for 15 years, that people in their mind feel that it’s been around for long enough that they can start to trust this system.

Natalie Smolenski (37:22.776)
Yeah, well, if you zoom out, you know, and look at the trajectory of Bitcoin adoption from its introduction in 2008-9, it’s the fastest.

appreciating asset in human history in terms of value, like value in terms of, let’s say, denominated in other currencies. So

You know, even though from our point of view, living through the monetization of Bitcoin, it can often seem painfully slow. On a macro historical perspective, Bitcoin adoption is actually happening extraordinarily fast. And, you know, people understand what it is. Like, human beings have lived in ecosystems with different forms of money.

as long as humanity has existed. So they use different monies for different purposes. And so I think a lot of the criticisms lobbed against Bitcoin that it’s…

it’s not going to be useful as a day-to-day medium of exchange, for example, are perfectly fine. It doesn’t have to be. It is a form of pristine collateral that is a store of value with significant technological advantages over gold, which is its closest analog.

Natalie Smolenski (39:08.852)
And it could be used as a medium of exchange in extremely low trust or high stakes transactions. And so, you know, the types of transactions that Bitcoin is most likely to be used as a medium of exchange for are like,

transactions between states who don’t want to use the US dollar, for example. So when you read a lot of the chartalist literature on money…

The exception that they always make to charterless money is interstate trade or international trade. Why? Because if money is a creature of law, then it’s also a creature of jurisdiction. And, you know, unless you’re a one world government, you don’t have jurisdiction over every country. And so when you trade internationally, by definition, you’re trading in units of account that have to be commensurate based on market principles.

and those tend to be high value commodities. So gold, silver, and other high value commodities. And going back to our discussion earlier about different forms of settling debt, like in ancient Mesopotamia, for example, there were really two categories of debt. There was debt that was denominated in barley and debt that was denominated in silver.

that was denominated in silver was, you know, the kind of debt that the wealthy, either the state or the creditor classes used. Everybody else, all the peasants, you know, their debt was denominated in barley. And so the practice of like jubilee, of forgiveness of debts, it was only for barley denominated debts. It was not for the silver denominated debts because the people at that end of the

Natalie Smolenski (41:12.546)
They were using money in a different way than the peasants were. And you see the same thing in like, you know, the medalist monies of the early modern period, even into the 20th century, where, you know, governments basically had your everyday medium of exchange money that was often, you know, worth very little with some, you know,

Natalie Smolenski (41:42.326)
or gold currency. And then you had sterling or true gold. And that was used by international merchants and states to conduct trade across states. And the value of that money had to remain very stable. Whereas the government felt free to devalue the kind of everyday currency used by most people. So again, two types of monetary technologies.

Thanks for watching!

Stephan (42:13.802)
Right. And in a way, it’s fascinating today because we have the choice. So you can opt into Bitcoin today early and you can use the high power money today, which is, I guess, the novel thing that maybe historically, if we were just everyday, you know, quote unquote plebs, we might not have had access to the gold or the best level money, which I think I would argue in Bitcoin, it is the best level money. And it’s interesting you make the point as well about how governments have this.

Natalie Smolenski (42:18.54)
Right.

Natalie Smolenski (42:30.107)
Right.

Natalie Smolenski (42:34.011)
Right.

Stephan (42:38.654)
In their mind, they think it’s okay to just devalue. And that’s what we see in many parts of the world, whether that’s much of Latin America and Zimbabwe, where they sort of, parts of Latin America, they just go through these devaluation cycles, whether it’s Brazil, whether it’s Argentina, whether it’s Venezuela, famously, and they sort of, now you’re paying 30,000 units to buy even a coffee or something, whereas those of us used to like a Western context might be thinking, oh, the coffee is $4. It’s not…

Natalie Smolenski (43:02.032)
Yeah.

Stephan (43:08.434)
$40,000.

Natalie Smolenski (43:10.328)
Yeah, yeah, no, exactly. I mean, devaluation serves, it solves a problem for the state. And, you know, if to some extent it can solve a problem.

for people if there’s a shortage of currency, for example, or a liquidity crunch. But it always, the devaluation solves that problem by creating another problem, which is devaluation of the unit of account. And so this is why these monies that fall into these devaluation cycles just have a limited lifespan. Like eventually they become worthless. And so the question is often,

problem for central banks has been, you know, how can we keep the devaluation slow enough to where, like most people don’t really notice, and how long can we prolong, you know, the life of this currency? Because eventually it’s going to have to be either re-denominated or a new form of currency is going to have to be introduced.

Stephan (44:20.054)
Right, and one other area I was curious to get your thoughts on is around…

Stephan (44:26.974)
In this world with Bitcoin, and I guess this is sort of related to what some people are calling like the sovereign individual thesis, let’s say this idea that more and more people can use Bitcoin and maybe they can go overseas and there’s sort of a jurisdiction competition aspect, or maybe some people are just remaining where they are and they’re just transacting with Bitcoin. But at the same time, you’ve got the state that’s trying to tax these people.

I’m curious if you have any reflections on, you know, like a Red Queen theory of money. It’s almost that like people are adapting out, you know, to other forms of money, because those forms of money are maybe less easy to surveil or to tax.

Natalie Smolenski (45:00.112)
Mm-hmm.

Natalie Smolenski (45:07.18)
Right, absolutely. So the 20th century was an interesting time because it was the era in human history when the state had the most capacity to dominate money, and not just dominate money but dominate information, dominate trade, dominate war. Like, I would suggest that

the 20th century was kind of the apogee of state power. It was the era of high nationalism, of high homogenization of culture within states. But with the advent of information technologies, the monopoly of the state on information, on commerce, on warfare has been

fundamentally undermined. And there’s no putting that cat back in the bag. And so what we’re seeing is private challenges.

to the monopoly of central banks over money. So whether it’s Bitcoin or Tether or other experiments in privately issued currencies, we’re getting back to an era that existed everywhere before the advent of central banking, which is that privately issued monies were common. That didn’t mean that

state issued monies didn’t exist, they still existed. But there was no way that the state could monopolize the use of money within even its own jurisdiction because it was one actor among many. And so that’s the world I think we’re heading back to is that it’s not so much that central banks are going away. It’s that the central bank is a political institution.

Natalie Smolenski (47:15.136)
It serves some people better than it serves others. And so the people that it doesn’t serve are going to find or create forms of money that do serve their interests better.

Stephan (47:30.282)
Right, I think we’re coming, yeah, it’s almost a return. It’s like, as my friend Vijay Boipati likes to say, we’re living in this fiat interregnum. And so, you know, like you said, I think these central banks will continue to exist for some time, but their power is going to wane comparatively, and that will be really interesting for people who are more interested in Liberty, let’s say.

Natalie Smolenski (47:39.451)
Yeah.

Natalie Smolenski (47:55.579)
Yeah.

Stephan (47:57.03)
One other area I wanted to touch on with you, we’re sort of jumping a little bit, but there’s been a recent move in the EU moving against open source development. I don’t know, you commented on this recently. So I wanted to get you to elaborate on some of your thoughts there. What’s going on here and what’s the threat for Liberty and for open source?

Natalie Smolenski (48:17.688)
Yeah, so the European Union is in a tough position right now. It’s in recession. It has been for a while.

it, you know, policymakers in the EU recognize that they’re, they’re losing the economic competition, both to the US and China. And so there’s, there’s a political debate happening about how to rectify this issue. And for some policymakers in the EU, they see the answer as small medium enterprises

Like that this is this is where innovation is going to come from and policy should support these businesses Which again great intentions nothing wrong with that the problem is that they’ve taken a look at the software stack and Recognize that oh, you know ninety five percent of the software stack of many of these SMEs in Europe is open source So

But we want these businesses to be able to demonstrate compliance with a whole set of new cybersecurity regulations that we’re rolling out. And we recognize that there’s a high cost to compliance that can be anywhere up to 25% of the total operating budget of many of these firms.

So how can we lower the cost of compliance for small and medium enterprises so that it’s not just the big dogs who are able to comply with these laws? Well, what if we required all the open source code to comply with these cybersecurity regulations?

Natalie Smolenski (50:20.736)
So that’s the law that’s been proposed. And of course, it’s undoable. Like you can’t…

Stephan (50:26.903)
Yeah.

Natalie Smolenski (50:32.992)
somehow corral and demand every volunteer of every open source project to be certified, a certified developer by the EU, and to then regularly submit open source code bases for security review and certification. These are volunteers, it’s just impossible. And so they’re going to actually…

Stephan (50:56.626)
I mean, it’s a complete joke, right? And from what I’m understanding, yeah, and from what I’m understanding, they are going to impose some kind of legal liability for security defects found in applications that have some underlying open source code. So the scenario could be, you could be some, you know, open source developer in the, you just, you know, in your volunteer time, you’re just contributing on some open source project. That open source project,

Natalie Smolenski (51:02.381)
Yeah, go ahead.

Stephan (51:25.966)
gets called or touched by some company’s code and now you can get pulled into a lawsuit? That sounds ridiculous.

Natalie Smolenski (51:30.368)
Yeah. No, it absolutely is. And there are some, you know…

People in the EU say, no, that’s not the case. It’s not, that’s not what’s gonna happen. The problem is it’s very similar to like some of the legislation that’s been proposed by Senator Warren and others in the United States around like reporting requirements for cryptocurrency transactions. Is, you know, the definition is expansive enough to include miners, you know, to M-I-N-E-R-S.

to include people of no way of complying with these reporting requirements. And so…

no matter how well intentioned it is, what it’s doing is creating enough regulatory fud and like literally fear, uncertainty, and doubt on the part of contributors to open source or industry that relies on open source to where these people are just going to start looking for alternative jurisdictions to do business in because they don’t want to be caught in the

Natalie Smolenski (52:47.442)
law, they see enough ambiguity in it that they’re like, oh, that’s a huge risk. I need to get out of here.

Stephan (52:55.21)
Right. And even in a case of ambiguity, you could be worried that you may be politically targeted, right? Because now they can sort of just get out, go after anybody. But the broader point really is that I think the EU is just shooting themselves in the foot, as you were saying earlier, that their intent may have been to try and lower the cost of compliance, but this is going to massively raise the cost of compliance.

Natalie Smolenski (53:01.156)
Right.

Stephan (53:17.406)
And to a level that people are just not willing to pay and so they’ll like probably the net result is there’ll be just less Opensource developers in the EU and what we’ll see is probably EU

developers who are really focused on open source will just leave. And so that is also going to create a, you know, a broader problem for the EU with it, with an aging population and low fertility and so on. Like it just, uh, is going to make them very, very uncompetitive. And, you know, maybe that comes back to competitive institutions, right?

Natalie Smolenski (53:30.788)
Yeah.

Natalie Smolenski (53:47.064)
Yeah. Yep. Exactly.

Stephan (53:51.018)
Yeah, so fundamentally, it just looks like a very awkward situation there. And, you know, maybe they will actually just have to take some pain, right? Like if they go through with this, if they’ve passed this law and it looks like it’s going to go into effect, I believe early next year or early this year, sorry, 2024. So I think it was passed in December. And so.

Natalie Smolenski (54:06.561)
Yeah.

Stephan (54:11.774)
maybe people in the EU just have to live without certain applications. Right. I think another example I heard is that apparently Signal, the application that people use for texting and stuff, is going to be moving out of the UK because of their laws about end-to-end encryption.

Natalie Smolenski (54:24.923)
Mm-hmm. Yep.

No, absolutely. We’re in an era now of full jurisdictional arbitrage. The costs of leaving a particular jurisdiction have in some ways never been lower. We have higher both physical mobility and mobility of information, digital mobility, than ever in human history. So why governments would be taking pains to increase the costs of doing business in their

in their jurisdictions is completely beyond me.

Stephan (55:01.866)
Yeah. All right. Well, one other thing, let’s talk about Texas Bitcoin Foundation. So I know you are a founding member. Tell us a little bit about this and what are you hoping to achieve there?

Natalie Smolenski (55:11.384)
Yeah, so I founded the Texas Bitcoin Foundation because I saw a gap in the Bitcoin ecosystem that there are a lot of policy-oriented organizations, but often the questions…

that underpin policy recommendations also require a high level of scrutiny and a rigorous approach. So the thinking behind digital self-sovereignty, why if we make policy recommendations favoring digital self-sovereignty, the first question that many lawmakers will have and even many voters will have

is why does this even matter? And so it’s that 30,000 foot view of political theory and political economy that wasn’t being developed. And within the academy, which is kind of where I come from, there’s a lot of skepticism and hostility toward Bitcoin. And the language that kind of the Bitcoin community is using

language that many academics speak and vice versa. And so there’s this huge gap. So basically what I wanted to do is create a organization whose mandate was rigorous scholarship on the topic of Bitcoin and political economy to begin bridging the gap between the university and policymakers and the Bitcoin community.

Stephan (56:58.786)
Got it. I am curious, uh…

Is university, as it is today, a lost cause? Have they just been captured? I’m curious what you think.

Natalie Smolenski (57:11.152)
Yeah, I mean, universities are often established institutions on a model of education that is frankly medieval in many ways. It’s still feudal structurally. And the challenge with

with institutions in general is that they are conservative. Institutions don’t innovate. Institutions repeat and preserve. They’re characterized by risk aversion. Their main objective is preservation of the institution. It’s not innovation. And the motivation of individual actors within institutions is to maximize their position within the institution

even at the expense of the institution itself. And so this set of incentive structures in the context of the university has created cultures of ideological conformity, of group think, of profound aversion to change that are inimical to the search for truth. That said, you know,

departments within specific universities that are doing excellent research and good work. And so I wouldn’t say the university is such a lost cause. I think rather it is, like many of our institutions of the state, in this era of decline and kind of sclerosis that needs

either a refounding or startup institutions that begin competing with these older institutional forms and eventually replace them because they’re more competitive.

Stephan (59:20.202)
Right, yeah, and I mean the reason I asked that as well is because as I’m sure you know, the recent news with the Harvard president being basically removed from that position because of plagiarism and people are sort of…

A lot of people are critical of universities because of how high the cost is to go to university. And it’s, you know, I think I saw Rob Henderson was commenting that the IQ, the average IQ of university attendance has come down a lot. So in other terms, it’s almost like the signal that you got from having a university degree is almost

gone because now it’s just so many people are going to university. So I guess that that’s where I was coming from. But at the same time, like you said, it’s a time for universities to ship up or shape out, right? They have to improve or they’ll be disrupted. Somebody else will come in and say, hey, I’ll do that same thing for I’ll provide not just the education, but maybe the credential and the signaling in some other cheaper way. And maybe that’s where the where the rubber meets the road.

Natalie Smolenski (01:00:07.504)
Yep.

Natalie Smolenski (01:00:19.192)
Right, absolutely.

Stephan (01:00:22.774)
All right, well, I think we’ll finish up there, but I’ll make sure listeners check out the link. So it’s N. Spolensky on x.com, SatoshiPapers.org and TxBi So listeners check out the links. And Natalie, thank you for joining me.

Natalie Smolenski (01:00:37.264)
Thank you so much for having me.

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