Thibaud Marechal Show Notes

The French government has recently criticised big tech companies and have come out with a law targeting FAANGS who don’t pay tax in France. They are using offshore companies set up in Ireland to avoid paying tax inside European countries where they do business. Do the French people support this?  For sure, it is well supported because all French people love their government.  Perhaps there is a minority that is very vocal. We have a socialist government before Macron.  Even though Macron has been saying he wants to cut taxes and reduce spending, at the end of the day government has two financing mechanisms – monetary policy if they are a sovereign nation-state and fiscal policy. So taxes are a huge part of that. Now the reality is companies like the FAANGS, their job is to maximise value to shareholders and if that includes cutting tax spending and finding loopholes and exploiting them to reduce their bottom line, then they will do it.  It is a really good example of how a market will always try to go around constraining regulatory frameworks that states or agencies put together. Politicians want to feed on companies.  In the end, you have very smart accountants who can find ways around this. And I personally support this, taxation is a very limiting factor for a lot of companies.  Taxation is necessary for investing in infrastructure, roads etc. and the welfare state.

How do you reconcile taxes as a Bitcoin Maximalist in a world in which Bitcoin is the dominant currency? Well, it is very hard to tax Bitcoin once you are in the Bitcoin circular economy because Bitcoin as a settlement network is not in a jurisdiction of any government entity.  Fiat to BitCoin transactions are obviously taxable but as capital gains. Once you are moving Bitcoins between addresses, you don’t know when you are moving between people or between wallets.  The Bitcoin network does not let anyone know this information or view the data behind these events.

Would you say that governments do provide a service when they build bridges, roads, schools, hospitals, or the things that are used by the general commons? Or that taxation is a necessary part of having a civilised society? But why is that? I would argue that it is not necessary. It is today because we have governments that are extremely predominant and skilled in managing projects whether we are talking about roads, bridges, healthcare, in urban planning, it’s buses, metros… but it doesn’t have to be that way. Government, because of its size, its scale and its economic incentives, it is not a good capital allocator. Governments do not allocate capital in the most efficient way. Efficiency being defined as the ratio between the input that you are requiring and the output you are producing. It is perhaps effective in that it produces a lot of output but it requires a lot of input to do it. For-profit organisations, whether we call them corporation today or something else, are much more efficient at allocating capital. If you have for-profit entities designing products and services people love, that people pay for today because you buy it as a consumer because it makes your life better. Why would this not apply to public services like roads or hospitals?

But are private companies efficient or are the losses absorbed? The shareholders or key stakeholders will get you fired if you are not efficient.  Governments do not have these incentives.  They are playing a game with limited downside risk. Today we both know that governments finance themselves by issuing bonds, which get bought on the open market operations by Central Banks which end up issuing new liquidity to acquire those assets to put them on their balance sheets and that is money that is printed out of thin air. It is diluting the money of everyone else which distorts price signals for everyone else.  In a market where we have sound money like Bitcoin; you cannot print more money to buy toxic assets or to print money. Today if no one wants to do that, the central bank can print money to put on their balance sheets. It creates misallocation of capital and mal-investment.

In Canada, there are very remote towns which are not candidates for investment or infrastructure products.  My thought is there a local offer that will this need, a municipal entity that can focus on local markets and allocate to meet these needs.  This could be focused by a local taxation or a subscription model; this is a much better way as it has proximity.  They have skin in the game and reputational risk as politicians. Government doesn’t work because it is too big. The complexity of the new century have not been fully captured by government yet. They have not kept up with changes across human history.

It is natural to do this on a local scale, not on such a large scale… most people do not like their government or its not relatable, or they don’t like their elected officials. There is an issue with trust in large institutions anymore. The ruling class has always existed throughout history.

In a society where all taxes would have to be voluntary, how would tax collection have to change in a society where Bitcoin was the currency of choice? Now we have a system where people have to self file, claim their income, the IRS has collected data from employers and it is up to people in USA and Canada and the rest of the world, they determine how much people own.  It is usually pre-paid by employers.  It would still rest with employers, I assume. What I don’t think would exist would be income tax or Value-added Tax… I think the main point you made that taxes could be voluntary in the future is critical. You will see individuals move around to find a jurisdiction with the trade-offs that meets their needs.  This could be very good social security if they have a family or a great schooling system as opposed to tax minimisation for other folks. If you give optionality for people that has to come from transparency, then it will be a much fairer system.  If you are paying a $1 to your local government you know where that dollar is going, it is much easier to make a rational economic decision.

This decade was the time we had the emergence of surveillance capitalism where we have private companies who are collecting private proprietary behavioural data into different processes with different intelligence and then fabricate this into different prediction products to anticipate what we are going to do soon, now and later. These products are then used by different companies and sold as a type of behavioural future on our individual lives. We have 100s of companies trying their best to figure out what we are going to purchase and what we are going to spend our money on.  They are tracking everything – starting at the financial sector of our lives.

Does Bitcoin actually break the cycle of surveillance capitalism? Is it actually able to get us away from where we have companies like the FAANGS who are not liable to us for the privacy of that data? Or does it enable that? Or does it not allow us to escape any of that? It gives us pseudo-anonymity and transactions but with the ever-growing use of KYC and AML at every exchange now, does it break the cycle of trying to connect identities to purchase and understand that predictive value of the individual in the future?

I would start with the difference between abundance and scarcity. Today we are living in a world of abundance. The worst abundance we have is easy money.  That easy money that is injected into the money through the mechanisms we have discussed earlier.  This ease of money created deep behavioural changes.

All of the governments have caught up with KYC/AML for bitcoin to collect your information at an on-ramp fiat point.  They can use chain analysis and other systems to track your wallets and accounts as you move your bitcoin between your accounts.  In the bitcoin network, you will be able to connect groups of wallets to individuals will make the transactions visible. You are going to see the extreme ends of both spectrums on view. On one hand, you are going to see surveillance because of all that transactional data on the public ledger and by design. You prevent issues on-chain for security principles. But on the other end, you have tools to break this surveillance capitalism through CoinJoin etc. to mix the coins and increase your anonymity.  CoinJoin exists in a more decentralised way to prevent people being targeted for money laundering.

There is not much governments can do about Bitcoin. They can only control the exchanges. Once you are in the circular bitcoin economy, over time with the development of privacy-enhancing features, KYC/AML will be much less effective.  The lightning network is not traceable even for ChainAnalysis companies.  The reality is they cannot track this.  How private is that transaction? What other data other than then UTXO is available?  The UTXO is locked on-chain. The recipient of that UTXO does not know the context around the transaction.  If you are a routing node on lightning network and you are the second or third hop, then there is no way to trace that… it is by design.

TOR is a system of individual nodes. The TOR network spreads it around and then it is finally sent by the last output node that puts the transactions together, which then sends the data. That is one attack vector into TOR.

Good privacy requires company.  Verification bugs represent vectors of risk that are unacceptable on the base layer.  I don’t believe there is any future for privacy on the base layer, but that is my understanding on privacy, it comes in layers. We see CoinJoin and Liquid emerge as a layer on top of the network. The trade-off is that private transactions are double the size in bites so that is unacceptable on the base layer to verify the ledger. You want that as a second layer.

If you look at the history of protocol development, they will optimise for different levels of trade-offs and will be built on each other.  We will see Layer 2, Layer 2 and Layer 4 on top of the base layer of the bitcoin protocol.  It is enshrined at the base level as it is for posterity.

Why is there such a push back by the Bitcoin Network on DeFi?  Building stablecoins and collateralised loan obligations, there is a lot of impatience to build everything quickly. When you are dealing with information that has monetary value, you need to address concerns and risks. Bitcoin will get the financial instruments and deep, complex engineering of derivatives and products… when it comes to financial instruments. DeFi is move fast and break things, and Bitcoin has had the complete opposite views. Let’s do stuff on testnet and build layers and see how it goes.

There is this anti-theoretical position of Bitcoin where you are supposed to own as much as you can, but on other hand, you are suppose to use it as a payment system in the future. But if the price in the future is going to go up forever, it will encompass all money in the future; then you should not sell anything because you are losing money.

There is a point where Bitcoin will reach an equilibrium point and a reduction in volatility from 2011 to today. There have been reductions in the extremes of volatility. Volatility is based on the volumes traded.  The number is still going, but the rate of increase is slowing down as a function of time.  Bitcoin is inelastic, and it is immune to demand changes.  It is growing to a store of value but it may not happen for years.

The halvings every four years create a supply shock in the Bitcoin Network. I just assumed this point that all Bitcoin is already here. There is already 18 million Bitcoin Network are already in circulations. Halvings do not have anything to do with supply at this time.

Do you think money is a function of politics in that there is an unbreakable connection between things that have to be done politically?  Every government type is tied to money. There is a money connected with it. There is a very close relationship between national fiat currency and politics. They are brilliant tools for political control. In the USA, you have the federal reserve, which has a monopoly on money production.  It is still a massive instrument for political will.

Currency is a tool for financing government project and programs. There are still ways to interact within our democracy to change the laws.  How does a currency, like Bitcoin, is it outside the sphere of politics? It is entering the political sphere and public debates.  We saw it this summer with Libra and Facebook hearings.

As a fiduciary, you have responsibilities because you hold and act as a custodian for other people’s money. Highly supervised regulatory bodies can find ways to access bitcoin.  Are IOUs something that will trade at a discount in the future?  Synthetic bitcoin is much easier for them.  Open-ended public fund where you buy shares of the physical asset. The custodian of the assets of those funds need to prove reserves and that they have the assets.  I work at a bitcoin custodian called KNOX we have very sophisticated ways to transfer risk to let participants enter the network through custodianship.

What do you think the percentage of people who actually use bitcoin care about its unique features? Definitely a small minority.  I can’t speculate, maybe under 10%. Speculation is the best use for Bitcoin.  The censorship resistance/privacy rabbit hole is important to a small minority of people.

Regulated entities will always win because governments enforce rules with violence.  Regulated environments create a system for companies to exist in it and to know what they can and cannot do. Bitcoin network is still a big grey area; that indecision and uncertainty is bad for companies to build and grow as fast as possible in the network. I don’t see how Bitcoin moves out of the world of regulatory arbitrage and into the mainstream. We can let the market decide.

Bitcoin is not a get rich quick scheme; it is a long-term proposition.  Lower your time preference. The point is do your own research, look at your allocation and treat it as a savings vehicle.  Millennials should use Bitcoin as a great asset for saving and a great wealth preserving mechanism.  It allows me to preserve my wealth.