MICHAEL GREEN: Charlie, I’m excited to sit down and talk with you. A lot of our viewers aren’t going to know much about you. But you were the founder of Litecoin.
CHARLIE LEE: That’s correct, yeah,
MICHAEL GREEN: In Litecoin, you built off of Bitcoin, the general idea.
And as I understand it, the primary differences are in block transaction size and frequency. And the idea behind Litecoin was to improve the efficiency for transactions, the actual utility of Bitcoin.
CHARLIE LEE: We made it faster. It’s 2 and 1/2 minutes per block as opposed to 10 minutes for Bitcoin. The general idea was to kind of complement Bitcoin.
I saw it as a kind of market as silver to Bitcoin’s gold. I see Litecoin and Bitcoin working side by side.
MICHAEL GREEN: And so this is not a competing cryptocurrency, effectively. You actually really do see it as a symbiotic relationship.
CHARLIE LEE: I do. But in some sense, it’s competing. Right? It’s competing for my share differently.
It’s a different coin so if people using Litecoin, they may not use Bitcoin. So it does compete a little bit but I see it more as complementary.
MICHAEL GREEN: What got you interested? Because I mean, you have a very different background than most people.
First of all, you were not born in the United States or even China as I understand it. You came from the Ivory Coast. How’d you end up there?
CHARLIE LEE: Well, my dad was there. He had a business. So I grew up in Ivory Coast and came to the US when I was a teenager.
MICHAEL GREEN: And did you come with your family at that point?
CHARLIE LEE: Actually, I came by myself.
Boarding school in the east coast.
MICHAEL GREEN: So you went to boarding school on the east coast. Was this a choice of your family’s or was this something that was interesting, important to you?
CHARLIE LEE: It was a choice of my family. I think the environment in Ivory Coast was getting a little bit crazy to overthrow of the governments and just demonstration on the streets. So they decided to send me to boarding school.
Also, for a better education. Yeah.
MICHAEL GREEN: And so from boarding school on the east coast, you then went to MIT where you focused on computer science. Correct?
CHARLIE LEE: Correct. Yeah.
MICHAEL GREEN: And from MIT, you went to the west coast to Silicon Valley.
CHARLIE LEE: Yeah. I went to Silicon Valley and been there ever since.
MICHAEL GREEN: And that was roughly 2000?
CHARLIE LEE: Yeah, at the peak of the dot-com boom.
MICHAEL GREEN: So you got to live through the peak of the dot-com boom. You began working for Google, when?
CHARLIE LEE: In 2006.
MICHAEL GREEN: So this would have been right after Google went public then.
CHARLIE LEE: A couple of years after, I think. Actually, in 2007.
MICHAEL GREEN: 2007. OK. And when you think about that transition to Google, one of the things that Google has encouraged its employees to do is to take time to focus on personal projects.
Is that where your interest in Bitcoin and Litecoin emerged? How did you move from working on Chrome, which was one of your projects as I understand it?
CHARLIE LEE: Chrome OS, actually. Yeah.
MICHAEL GREEN: To focusing on crypto?
CHARLIE LEE: Yeah, I was actually just spending all my time outside of work on cryptocurrencies.
Yeah, I found out about Bitcoin in 2011 and kind of just went down that rabbit hole and been, I guess, in it ever since.
MICHAEL GREEN: What was the motivation? What got you interested? Other than the mathematical challenge of crypto, which I know can be exciting for some people?
CHARLIE LEE: Yeah, I saw Bitcoin as a better version of gold.
Actually, a better form of money than we’ve ever seen and that just captured my attention. I’ve always understood how gold and silver were used throughout history as money and how we came to the fiat currencies we have today. And I just saw Bitcoin as just kind of very similar to gold but better, and it could actually replace the current monetary system.
And I also understood the math and the cryptography behind it. So this really captured my attention.
MICHAEL GREEN: A lot of people became interested in Bitcoin, the work of Satoshi was published in the immediate aftermath of the global financial crisis.
Was that a motivating factor for you? Looking at the current system and saying this didn’t work?
CHARLIE LEE: Yeah, definitely. I saw that for one thing, currently, we have a system of money that the government can inflate away. With quantitative easings and other things, they can just print more money and devalues everyone’s currencies.
And I also saw that because of that, it’s not good to keep your money in the bank because your money will become less valuable over time. So it kind of forces people to essentially gamble with their money. They have to put in the stock market or some other asset class that doesn’t get devalued or that has the potential of making more money. Effectively, it just keeps the same purchasing power because of the devaluation of the US dollar.
And if you make 3, 5, 10% on your investment, effectively, you’re just keeping the same purchasing power. So I think it’s just a broken system. And with something like gold or Bitcoin, it’s a better form of money I would say.
MICHAEL GREEN: And so are you ambivalent between the idea of an alternative currency in the form of gold versus Bitcoin or Litecoin?
Or do you see the need for an electronic version because of the challenges of gold?
CHARLIE LEE: Yeah, definitely.
MICHAEL GREEN: Transactions, et cetera.
CHARLIE LEE: I mean, gold is great. Government can’t evaluate it, its fixed supply rate. But the problem is their storage cost and then if you want to transfer it, it’s not easy to transfer gold across the country, across borders.
But something like Bitcoin and Litecoin, it has pretty much all the good properties of gold except it’s not physical and then you can store it cheaply and you can transfer it cheaply. It’s just a better form of gold.
MICHAEL GREEN: So one of the challenges that I always look at when I look at this idea that it’s a better currency. Right? There’s a school of thought that says currencies are about the efficiency or the ease of use which definitely crypto and even arguments behind things like electronic gold or gold script, et cetera, by and large attempt to address.
Certainly, our credit-based system is much more associated with the ease and facilitation of transactions. But there is a second role, which is the role of the state which has a monopoly, at least under current constructs, on violence and the enforcement of contracts as it relates to those currencies.
How do you think about crypto addressing those dynamics and the transition process in which the state will ultimately have to forfeit that monopoly?
CHARLIE LEE: From my point of view, I don’t think the state needs control of money. Right? Money is just a way where people can transfer and store value. There’s no reason why the state needs to have control of it.
I mean, only recently do we have the concept of fiat currency where the state has control over it. I mean, throughout history, we’ve always used things like gold and silver as real money, as ways to transfer and store the value, and I think Bitcoin will help us get back to that better kind of way of people using money.
MICHAEL GREEN: It’s interesting because I struggle with that history. Right? The idea that fiat currencies are relatively recent. The idea of minting or re-minting coins, or seigniorage, is very simply an idea that a tax is effectively created on top of the metallic content.
So the metallic content of currencies was a reference point but you could always debase it, literally add base metals, lead, to a gold coin, generating revenues for the state in the process. Again, facilitating the role of the state in providing enforcement, how does crypto allocate toward something like that? Or does it just believe there is no need for violence in the process?
CHARLIE LEE: I don’t think there’s a need for that.
MICHAEL GREEN: Interesting.
CHARLIE LEE: I guess the thing with cryptocurrencies is that you can’t add that, you can’t debase it. Yeah, so it potentially could cause some conflict with the current state of things.
MICHAEL GREEN: When you think about that conflict, how does it get resolved? Have you looked forward into that space, that transition?
CHARLIE LEE: Honestly, I don’t know.
Yeah. It’ll be very interesting because the US government definitely has fought wars over keeping control of the reserve currency. So yeah, we’ll see what happens. But I believe in decentralization. I believe that kind of like freedom of money. We should have control of our own money.
One thing Bitcoin and cryptocurrency bring about is a censorship-resistant form of money, where I can send money to you or to whoever and no one else can stop me. Right? It’s my money, I should be able to spend it however I want. The state can maybe say that whatever I’m purchasing is illegal and block me from buying something but they shouldn’t be able to block me from actually sending money.
MICHAEL GREEN: When you think about that though, I mean, how do you think about the difference between buying something that is illegal and transferring money to somebody who then provides you with an illegal service?
CHARLIE LEE: What do you mean?
MICHAEL GREEN: I can execute a transaction that says I buy illegal drugs or I purchase prostitution or I label that a money transfer and those services are provided without any contractual trace.
Right? Which is why the cash economy is typically useful.
CHARLIE LEE: It’s why we have the AML, KYC laws. I personally don’t believe governments should actually regulate money movement. They should actually do it other ways to block illegal things. Right?
MICHAEL GREEN: So when you say otherwise, what would be an example? How are you thinking about that?
CHARLIE LEE: Basically catch criminals in the act of doing illegal things. Right? And not the money movement part. I guess the money movement part is easy for them, easier for them to catch and that’s why they’re blocking it there.
But that really clamps down on the freedom of your money.
MICHAEL GREEN: So I mean, that’s a relatively recent innovation. We highlight Al Capone captured for tax evasion. Right? If we are unable to track the efficient movement of the money, it provides an avenue of enforcement that may not be open in other ways.
When you think about foregoing that, are you concerned about a potential rise in illegal or criminal activity as we saw this with obviously Silk Road? Right? Do you think about that framework or is that more of a user and enforcement dynamic than the engineering challenges?
CHARLIE LEE: Yeah, I would say the latter. I’m more concerned about working on sound money, building something that is good money.
So the reason why Silk Road would use something like Bitcoin is that it’s a better form of money. I would just leave it at that. It’s for the governments and the enforcement agencies to figure out how to catch the bad guys. But I think having sound money where people can spend it however they want or send money to whoever they want is something I think it’s good for the money.
MICHAEL GREEN: When you think about the technical challenges, let’s turn to the technical challenges because you continue to work with the Litecoin Foundation.
What do you see as the barriers to adoption?
CHARLIE LEE: Ease of use. Yeah, like right now, it’s still not easy to use cryptocurrencies. Cryptocurrencies are being speculated a lot but actually like spending it, buying things with it, transferring value, actually transferring value is still not easy to use.
So I think building a better UI and user experience on better hardware wallets, better ways to secure the coins is really important for adoption.
MICHAEL GREEN: When you think about the dynamics of ease of use, again, you kind of come back into this component if you’re replacing the current alternative. If I want to purchase services for a haircut, I can use cash or I can use a credit card. Part of that dynamic is that the accounting systems are in place that facilitates the government’s capturing of its piece of the pie, the taxation.
How do you think about a taxation layer on a global currency like Bitcoin or Litecoin?
CHARLIE LEE: What do you mean by that?
MICHAEL GREEN: Well, the underlying dynamics of US dollar transactions, for example, are that the vast majority of them are conducted on a geographically proximate basis.
So I go to my local barber, he has a tax requirement that is auditable although the frequency of that has fallen with the increased cost of compliance, and he is collecting a local sales tax whether that’s state, federal, local.
If you’re in Europe, it would be a value-added tax, which would be effectively a pure tax on that. If I’m using Bitcoin, it becomes a challenge on how to identify what portion is a capital gain. Did I purchase the Bitcoin at a discounted price and therefore, when I sell that or I transact, a portion of that shows up as a capital gain? A portion of that has to be captured in the equivalent use tax, a sales tax or a value-added tax.
But when you’re operating a global currency, it becomes extraordinarily difficult for the tax enforcement mechanisms to track what is strictly a transfer, what is a useful purchase, et cetera.
How do you think about that in terms of the use component? Is that something that you guys are actively working on in Litecoin?
CHARLIE LEE: Well, for one, Litecoin transactions is more tractable than cash transactions.
So if someone came with cash, they can evade taxes, sales tax and stuff, and we see that happening. So with the cryptocurrency transaction, it’s actually even better because it’s on a blockchain and so it’s public, so it’s harder to evade taxes that way. As far as capital gains on cryptocurrency, I actually believe that we shouldn’t have capital gains on cryptocurrency payments because it’s basically money.
You’re converting between US dollar to another form of money and then converting back. So for small purchases. I think there is some bill that’s being pushed to make it so that for something below $600, that there won’t be any capital gains.
Because otherwise, if you’re buying a cup of coffee and you have to calculate like when I get this Bitcoin or Litecoin, how much did I pay for it and what is it now? And then how much did I make off of it? It gets really burdensome and practically impossible for people to spend the coin.
So I hope something like small purchases will be exempt from capital gains. It would be a good thing to have for cryptocurrency.
MICHAEL GREEN: So when I think about that dynamic and I understand that some form of legislation is actually in motion. I believe it’s on a state, not a federal level though. Is that correct?
CHARLIE LEE: I don’t know.
MICHAEL GREEN: OK. The challenge is that interrupts the monopoly that the state has on the currency.
Right? So if I engage in transactions, certainly at a large scale, If I buy euros and then sell those, I have to pay capital gains associated with that. Would it make sense to advantage crypto in that context? Or do you think it’s more a function of it’s currently at a disadvantage because the record-keeping can potentially be so robust?
CHARLIE LEE: I think it’s currently at a disadvantage that I hope it will change.
Yeah. Right now, you want to spur, at least I want to spur adoption, at getting people to use it. And right now, it’s just too burdensome to spend coins.
MICHAEL GREEN: So that’s actually an area that I’d like to diverge into which is this idea of spurring adoption, it’s difficult for people to get coins.
One of the challenges that exist within the crypto space mirrors a broader concern within society is this general idea of equality.
So the ownership of crypto is very concentrated. We’re all familiar with the statistics behind what fraction of crypto is held by a few very well-placed individuals. How do you think about that getting distributed and back in without a government function of taxation and redistribution?
CHARLIE LEE: I actually disagree that crypto is concentrated.
If you look at the reason why people say to us if you look at the blockchain, a lot of the addresses hold the majority of the coins. And the reason why that is because these coins are actually held on exchanges and exchanges could have like a million users storing all the coins on one address as an extreme example.
So an address holding like a thousand Bitcoins could actually belong to a million users or a thousand users. So we actually don’t know the real distribution but it’s a lot better than what we actually see in a blockchain today.
MICHAEL GREEN: But let’s be fair on this. Right? So in Bitcoin, there are roughly 17 million Bitcoins out of 21 million possible. In the case of Litecoin, I think the statistic is about 60 out of 85. Is that correct?
CHARLIE LEE: 84, but yeah.
MICHAEL GREEN: 84, OK. Close enough for government work. Right? Yet there’s an incredibly small penetration of wallets and participation in Bitcoin exchanges, et cetera. So we know it has to be very concentrated. Right?
CHARLIE LEE: I mean, it’s definitely more concentrated than the US dollar, a lot more. Right?
MICHAEL GREEN: Right.
CHARLIE LEE: But this is early. Right? People getting in, there aren’t that many cryptocurrency users. We’re talking about millions as opposed to much for fiat currency.
MICHAEL GREEN: But that’s part of the challenge.
Right? How do you think about reconciling that? Because three quarters are already in existence, 60 out of 84 to make life simple, and use Litecoin. And yet millions rather than billions are currently participating.
CHARLIE LEE: Yeah. So people who come in later would purchase their coins from people who have coins today.
MICHAEL GREEN: So if I think about that in gold equivalent, that’d be the equivalent of like a million people owning three-quarters of the world’s gold and the rest of us would have to negotiate with them for the purchase of gold so that we could use it in regular transactions.
CHARLIE LEE: There’s a market value for it. You can easily buy Bitcoin. There’s definitely a lot of sellers and there are buyers. So it’s not that you’re trying to negotiate with these million people, trying to buy gold that they’re not willing to sell.
MICHAEL GREEN: I guess that’s the question because effectively, now there’s an endowed class of Bitcoin, Litecoin, Ethereum holders with a small quantity to be mined left.
CHARLIE LEE: It’s not that different from gold. Most people don’t own gold.
MICHAEL GREEN: So you do think it’s that? I mean, most gold is owned by governments at this stage. Right? So, by definition, that is in any form of representation, that is held collectively in the wealth of the people in the form of their currency. That’s a claim on an asset that’s held at the central bank or the government reserves.
CHARLIE LEE: Yeah, but it’s not really. Fiat currency is not backed by gold.
MICHAEL GREEN: It’s not backed by gold but you own effectively, currencies are effectively the equity of governments. Right? And so you can depreciate the equity of your government by issuing far too many shares or establishing an investment pattern that offers negative returns or encourages people to flee the country because of your policies.
But it is somewhat collectively held that it’s distributed in the form of taxation and redistribution. I struggle to see how we transition to that in crypto.
CHARLIE LEE: I mean, governments can and have been buying Bitcoin or cryptocurrencies, so they could easily transition to holding cryptocurrencies as their asset, as backing for a government if they want.So there’s nothing preventing that from happening.
MICHAEL GREEN: And so do you see that as being–
CHARLIE LEE: It’s a free market.
MICHAEL GREEN: Well, if I’m going to respect the fact that the three-quarters of the potential coins are held by a subsegment, now endowed class, is the government going to force those proceeds to be given to them in the form of taxation? Is it going to be a “we’ll buy it from you at a value”, making you phenomenally rich?
CHARLIE LEE: They will buy it from people at the market price if they want it.
MICHAEL GREEN: I struggle with that but I think that’s separate.
CHARLIE LEE: I mean, if you look back in history, if people held most of the gold and governments wanted it, they would buy from people. I mean, of course, they can force people to.
They could confiscate the gold, they can try to do that Bitcoin and Litecoin also but that’s another topic.
MICHAEL GREEN: So that was actually what was done in 1934. Right? They confiscated the gold when it became a barrier to the implementation of the government’s objectives.
CHARLIE LEE: Yeah.
MICHAEL GREEN: Right? I struggle to see how this happens without a similar dynamic in crypto and I don’t know that the cryptocurrency community has fully evaluated that. It seems like many in crypto are surprised by the reaction that governments have had to the emergence of an alternative form of currency. Are you surprised?
CHARLIE LEE: I’m not surprised and we probably haven’t seen the full reaction yet.
MICHAEL GREEN: So when you think about protecting your investment or the potential for others in crypto, how do you think about that?
CHARLIE LEE: At least one good thing about cryptocurrency is it’ll be a lot harder to confiscate your cryptocurrencies than it is to confiscate your gold because it’s not physical.
So that’s one thing going for that. I think confiscating everyone’s gold is a pretty bad move. I mean, I definitely wouldn’t be happy if the government did something similar to what they did back then.
MICHAEL GREEN: Now, you have family involvement in Bitcoin and cryptocurrencies. Your brother is actively involved with BTC China.
CHARLIE LEE: Yeah. He was CEO of BTCO and co-founder of BTTC. He has recently sold the company last year.
MICHAEL GREEN: And is he still in China? CHARLIE LEE: He’s still in China.
MICHAEL GREEN: He’s still in China. Where in China is he?
CHARLIE LEE: Shanghai.
MICHAEL GREEN: In Shanghai. And when you talk to him about the role of crypto in China and the change in government in China, I was privileged to sit with Tim Draper earlier who looks at China and is very concerned about the steps that that government has taken as it relates to crypto.
How does your brother think about that world? Or how do you think about that world?
CHARLIE LEE: As you know, China cracked down on Bitcoin, cryptocurrency exchange a couple of years ago, and all the exchanges either shut down or in China, either shut down or moved overseas to the– Japan, Korea, and Taiwan, and others.
I guess China saw cryptocurrency as a threat to their monetary policy, their monetary control. So that’s why they did that. I honestly don’t know too much about, I don’t live there. I mean, it’s probably a better question to ask Bobby, my brother.
MICHAEL GREEN: It’s interesting that you guys haven’t discussed it that much, though. Hopefully, you guys are regularly exchanging notes on the crypto developments. So the government angle is always one that’s interesting.
What should I expect to see in the near-term out of Litecoin or the Bitcoin community that’ll surprise me as an investor and potential user of crypto in the next couple of years? CHARLIE LEE: One of the things that cryptocurrency, Bitcoin Litecoin specifically ran into the past few years is a challenge of scaling.
There’s always talks about scaling on-chain versus off-chain. So one thing that’s being built out right now is the mining network which is a second layer off-chain scaling solution. So keeping the blocks small on-chain and scaling off-chain. So one of the criticisms of Bitcoin is that the transaction throughput is something small like three transactions per second compared to Visa doing like thousands of transactions per second.
So if Bitcoin wants to take on Visa as a transaction network, it really has to scale off-chain with Lightning Network. So I see that as in the near-term, lots of improvements, lots of work being done on Lightning Network, and I see that being fleshed out and really help Bitcoin and Litecoin scale.
MICHAEL GREEN: And so when I think about the Lightning Network, the analogy you used was the Visa. That’s my understanding of it in terms of a reasonable analogy. Effectively, it’s a transaction-oriented layer that is then aggregated and cleared through the traditional channel.
CHARLIE LEE: Yeah. I mean it’s basically very similar. Visa is a kind of secondary solution on top of cash. So Lightning Network is very similar, it can do much faster throughput, instant transactions, low fees, and at the end of the day, it’s backed by Bitcoin or Litecoin. So transactions can settle and close on-chain, if necessary. You don’t need to.
MICHAEL GREEN: And when I think about, from a user perspective, table of the investor for a second, should I anticipate that I’m going to have a native Lightning app on my phone that’s going to operate through some direct peer-to-peer exchange or ultimately, is this going to be a business-to-business or business-to-consumer technology layer that’s adopted by Visa in lieu of their existing solution set?
CHARLIE LEE: That’s a good question. I don’t know. Not right now, but I think definitely in the future, you wouldn’t have to worry, you don’t have to understand the underlying technology.
So Lightning is definitely a very complicated solution. It works great. But to understand the bits and pieces of it is quite hard for a normal person. So I guess similar to how the Visa network when you’re swiping a credit card, you don’t really know which banks or institutions it contacts to get approval for everything before your payment is approved. All you care about is that within a few seconds they’ll be approved and you get your merchandise.
So I think the same thing will happen with cryptocurrency. You have a wallet, you don’t really care how many lining channels its opening, how the payments are done, all you know is that you’re sending value over the network, and you may not even know that it may go through the Litecoin Lightening Network and things should work. I guess that’s what we’re working on. That’s the hard step to make the user experience fluid-like just seamless and make it very easy for people to spend your money.
MICHAEL GREEN: And so ultimately then, we should anticipate– like if I’m trying to explain this to my mother, my natural approach would be to say, “Mom, you actually don’t have to worry about it. If this is adopted, nothing is going to meaningfully change from your perspective.
You are going to use a credit card or you’ll use Apple Pay or Google Pay in the same way that you would use the US dollar-based system.” Does that sound realistic?
CHARLIE LEE: I think so. I think so but it may take a while.
MICHAEL GREEN: What sort of time frame do you think for adoption?
CHARLIE LEE: Decade or two.
MICHAEL GREEN: Decade or two. So this is a very long–
CHARLIE LEE: We’re talking about like mass adoption where everyone’s using cryptocurrencies and they may not even realize it.
MICHAEL GREEN: Yup.
CHARLIE LEE: Today, if you want people to use cryptocurrency, you have to buy coins on Coinbase or another exchange, and then have a wallet, securely store it with a hardware wallet, for example. All this is quite complicated for normal people, hoops to jump through. So I think all these have to be improved so that it’s very easy.
MICHAEL GREEN: Yeah, I tend to agree with that. I think ultimately, the mass adoption is not going to be people changing their behaviour, it’s going to be a layer underneath kind of a business-to-consumer framework.
CHARLIE LEE: Yeah. We’re seeing that for example, cryptocurrencies could be used by Western Union, for example. They could change their whole underlying system to use cryptocurrencies and it’ll be more efficient, cheaper for them, and then when you’re sending money, it could be the cryptocurrency that’s being exchanged or being sent for you without you even realizing it.
So things like that would happen.
MICHAEL GREEN: When you think about– So Western Union is actually a great example where this is an archaic system that is relatively high cost but operated at an extraordinarily profitable level. Right? So any form of cost reduction strikes me as unlikely to be passed through to the consumer layer, which in turn seems to suggest that you’re not going to see a significant increase in the transactions associated with it. Right? So, if I’m a consumer and I think about using Western Union, even if they’ve lowered their costs.
CHARLIE LEE: Well, there will be competition. If they lowered their costs substantially and don’t pass it along to the customer, they’ll find some stiff competition.
MICHAEL GREEN: So who would be the competition that would emerge in that type of framework? Where would you see that coming from?
CHARLIE LEE: For Western Union?
MICHAEL GREEN: Yeah.
CHARLIE LEE: I mean, if they would find companies doing what they do at a much lower cost using Bitcoin, so customers would pay a lot less.
MICHAEL GREEN: And so when I think about that type of framework, as an investor, how should I be looking to invest in Bitcoin? Is it Bitcoin or Litecoin? Is it in the coins themselves, is that where you see the currency having the value?
CHARLIE LEE: I think a bit of both, right. Invest in companies building stuff on top of the currency and also the currency itself. If you look at a company like Coinbase, it’s done quite well. Recently, it raised a Series E at $8 billion valuations. It’s one of the like really successful crypto companies. So definitely for investment, you should invest in both the cryptocurrency. Cryptocurrency has done well in the past few years too, like extremely well.
MICHAEL GREEN: So I think about a company like Coinbase, and if I understand their business model correctly, it’s ultimately just some exchange.Right? There are no transactions that are actually running over that, it’s just speculation in terms of the currencies itself. Right? Correct me if anything I say is incorrect.
CHARLIE LEE: Yeah, so they make money off of people trading coins. Yeah, and they’re also building a wallet, they’re building a lot of different services. But their bread and butter right now are trading fees.
MICHAEL GREEN: OK. And when I think about those dynamics in terms of the trading fees, New York Stock Exchange, the Chicago Board of Options Exchange, the commodities exchanges, et cetera, Mercantile Exchange, most of these have actually had relatively stagnant markets in terms of the frequency of transactions.
They’ve generated most of their income in the form of proprietary product offerings. Right? So whether it’s a new contract that is created or a new index that is created, the exchanges themselves have largely generated it from an increase in product diversity.
When I think about crypto and I think about something like Coinbase, part of the underlying dynamic of the transactions is because there’s such a wide universe of coins that are currently available. Does that collapse as the coins prove which one works, which one doesn’t? Or do you continue to see a world of thousands of different cryptocurrencies?
CHARLIE LEE: There will definitely be thousands of different cryptocurrencies but there will only be maybe a handful that actually has real value.
So over time, you may see some of the ones that have real value kind of bubble up to the top and the ones that aren’t really providing much value becoming worth less and less.
MICHAEL GREEN: And so when you think about what drives the difference between the two, what is dynamic for you that separates the wheat from the chaff?
CHARLIE LEE: For me, it’s sound money, it’s the underlying kind of properties of money that this cryptocurrency has. That’s why I’m focusing on Bitcoin and Litecoin. I think those two coins are coins that actually kind of have the good properties of money, and I think that’s what actually separates– that’s what actually gives Bitcoin and Litecoin value.
It’s not the transaction throughput, we’re not competing with Visa. We’re competing with gold as a form of money that is decentralized, censorship-resistant, immutable, and just good money in general.
MICHAEL GREEN: I assume you track the price of gold and cryptocurrencies. Do you think the two are linked because when you highlight 2013, 2011,’12, that was basically the peak of gold prices? Right? The emergence of crypto seems to have depressed gold prices.
CHARLIE LEE: It’s hard to say. I do see Bitcoin, cryptocurrency in general, coming up as a new asset class that is in direct competition to gold. So potentially you can say that the reason why the gold price hasn’t moved much since 2011 is because of cryptocurrencies, that’s possible. If you look at gold’s market cap, it’s like at $10 trillion whereas Bitcoin is only $100 billion so it’s only a little bit over 1% of the whole total value of gold. So there’s definitely a lot, there’s still a lot of room for growth.
MICHAEL GREEN: It’s interesting.
So I would flip that. There are about five trillion or five million ounces, 5 billion ounces of gold in total existence, prices give or take 1,200. About $6 trillion in market cap and crypto as I understand it, the market cap has expanded to about $200 billion. So we’re moving in that direction.
CHARLIE LEE: Yeah, yeah.
MICHAEL GREEN: That sounds actually quite reasonable to me that ultimately that crypto in its various forms replaces gold as an alternative currency. I struggle to see it supplanting fiat. Right?
CHARLIE LEE: It doesn’t need to supplant fiat.
MICHAEL GREEN: That’s great. That’s an interesting avenue. Why do you think it doesn’t need to and how do you think it works if it doesn’t?
CHARLIE LEE: It’s an asset class where if you think of it as just being like a better form of gold. Digital gold, then it’s an asset class where it’s like gold, it’s not controlled by the state, can’t be deflated, it’s kind of similar, it’s mined like gold, and it’s just a better form of gold where you can easily send it. So if that is kind of like the ultimate future of cryptocurrency, that’s still going to be extremely successful. It doesn’t need to become the world reserve currency and kill off fiat. It can survive alongside with fiat government-controlled money. So users have a choice. Today, they have a choice also. They can put all their savings into gold. Some people do.
It’s just a lot harder for them to do that right now, they have to buy gold and put it in a safe deposit box, insure it maybe. But it’s just Bitcoin, cryptocurrency gives you another avenue.
MICHAEL GREEN: It’s a compelling vision. I think that’s actually probably the most similar description to the way I think about cryptocurrency. Maybe that’s why it’s compelling. That it ultimately is a replacement for alternative forms of currency, that it’s not going to replace fiat. The challenges of force are just too overwhelming in my calculation to imagine the US government giving up its monopoly on a currency.
CHARLIE LEE: I agree. Yeah. But we can potentially see smaller countries adopting Bitcoin as their currency. So the US with the reserve currency definitely has a lot of power and can really wield that kind of power to their advantage. But a lot of the smaller countries we’re seeing hyperinflation today could potentially be better off adopting a more stable currency, something like gold or Bitcoin.
MICHAEL GREEN: It’s fascinating to hear that. I really appreciate your taking the time to talk with us today.
I know this is– that a long-form interview can be a real imposition. Thank you for leading us here in the direction you did. Would it be possible to come back and talk to you again at some point?
CHARLIE LEE: Sure, definitely.
MICHAEL GREEN: OK. Maybe next time, we’ll meet closer to our respective homes in Silicon Valley.
CHARLIE LEE: Yeah, yeah.
MICHAEL GREEN: Thank you very much, I appreciate it.
Read More: How to deposit Litecoin (LTC) Into A Wallet