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Chelsea speaks with software engineer and cryptocurrency writer Stephen Diehl about the current crypto crash we're seeing, and what that means for the future of crypto specifically, and the economy more broadly.

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hello, everyone, and welcome back to an all new episode of The Financial Confessions.

It's me, your host, Chelsea Fagan, founder and CEO of The Financial Diet. And today, I am here to talk about something that most of you, if not all of you, have probably been reading about, thinking about, even being affected by in the past few weeks.

We did an interview a few months ago here on TFC with YouTuber Dan Olson, who did a massively viral video breaking down and exposing NFTs, and the broader cryptocurrency world, and all of the underlying problems and dangers. Our episode with him is actually, by far, our most viewed and downloaded podcast ever speaking, I think, to the appetite that people have for real clarity and candor around these issues, which in many cases, are intentionally confusing. And a lot of you might be aware of what has been referred to in the past few weeks as the crypto crash.

People are talking about the entire cryptocurrency market, its underlying structures having a bit of a meltdown and being exposed in many cases for being flawed, or unusable, or rigged from the get-go. And we're already seeing people in many cases losing huge amounts of money that they were in many ways lured in to investing in these coins by the celebrities being paid to advertise to them, the undisclosed influencers who are hyping up these products, and a massive advertising campaign designed to convince people that these were not only legitimate financial instruments, but also the answer to a generation of young adults who are, in many ways, economically disenfranchised and without a ton of opportunity. The meltdown is a complicated thing because on the one hand, the crypto bros, as many people have come to think of them, have been quite damaging to the public discourse around things like macroeconomics, and regulation, and even very combative to people who attempted to point out some of these dangers from the get-go.

In general, not the most sympathetic bunch. That being said, we're also in the same way we might look at a stay-at-home mother who was suckered into an MLM and is now heavily in debt with a garage full of essential oils. We have to see this person as initially being victimized and preyed upon for what are legitimate economic concerns and limitations.

They might have been misdirected in their energy and led into a bad opportunity. But they are still, at some level, victims. And now with Reddit forums and other places on the internet filling up with people lamenting the meltdown and even in some cases talking about serious mental health issues or things like suicidal ideation because of this extreme loss-- because it's not just a loss of money.

For many of these people, it's also loss of a worldview or a perceived opportunity. I think it's more important than ever to really explore what is actually happening in this crypto crash, what its implications are for the broader economy, and what will happen to all of these people who invested in crypto not just as a financial instrument, but as, like I said, that new and exciting worldview. My guest today has probably been one of the most prominent voices in the anti-crypto movement well before it was cool to do so.

He's someone who has put quite a lot on the line and has received a not insignificant amount of harassment from the bros who don't want to hear any of that nagging about their big financial opportunity. He's a software engineer based in London and a writer and educator on all things crypto usually from the extremely anti perspective. His name is Stephen Diehl.

And thank you so much for joining us today. Hi, Chelsea. It's lovely to be here today.

And before we get started, I want to thank Calm, the number one mental wellness app and one of my personal favorite apps for supporting The Financial Confessions. Calm is offering you an exclusive offer of 40% off a Calm premium subscription at And I also want to thank HelloFresh for supporting this episode as The Financial Confessions.

Go to hellofresh.comtfc16, and use code TFC16 for up to 16 free meals and three free gifts. Actually, I'm a big fan of your channel. It's one of the few places on YouTube where we say very sensible things about finance compared to the rest of the sea of YouTube, which is, shall we say, less sensible sometimes?

So it's wonderful to be here today. A little bit about me is a background. I'm a software engineer based here in London.

I'm a blogger, writer, activist, a whole combination, a bunch of things. So I've been working in the software industry for about 15 years, mostly in or around financial services. So I have this weird synthesis of knowledge that I know enough about finance, I know enough about software to be able to look at where those two fields intersect.

And in the last couple of years, increasingly, technology has become a bit more financial [INAUDIBLE] the rise of things like cryptoassets. And in the last two or three years, we've seen, really, what I would call a very large bubble in this asset class and a lot of growth and public interest. And I started writing about crypto about two years ago when I started to regard it as less of a fringe kind of curio and more of a increasingly systemic problem in both the technology field and in the larger economy.

And I obviously have a very, very negative view of these asset classes. And I view them as not all that dissimilar from an MLM. There's some minor distinctions.

But in practice, they're like Silicon Valley's form of an MLM. And I think at the heart of a lot of these technologies, [INAUDIBLE] there's not a whole technology actually there that actually works to do something practical for the world. And a lot of them are actually very deeply predatory.

And that's the real thrust of my writing. So Stephen, I mentioned in the intro that you are probably one of the most, let's just say, active anti-crypto voices. You definitely have a bit of a-- you're quite spicy on Twitter and on some of your other forums and can be, I think-- you've definitely been a target in the past of some of the crypto bros and the target of their ire.

And you've gone back and forth with some of them. And you definitely seem to have what I would describe as a very righteous anger towards a lot of this stuff. And I feel that way as well about crypto.

I also, to use again the comparable example, feel extremely that way about MLMs, which our audience is almost all women. Our company's all women. And we are targeted by MLMs the way men have been targeted by crypto in recent years.

And so we do have that same righteous anger when we do things like anti-MLM content. But often, what we run into the problem of, like I alluded to in the intro, is the nuances, and distinction, and the different tacts to take between people who are truly nefarious and predatory actors, and people who are victims, and people who completely run the spectrum in between. And especially now that you're seeing this meltdown, you're seeing a lot of the, let's just say, lower and middle-tier crypto bros, crypto buyers, we can even say, because they're not all men-- they are majority men, but not all.

Now that you're seeing this lower and middle class of the crypto ecosystem just get their [BLEEP] financially rocked while the big holders, the whales are able to cash out, and skirt the system, and all that stuff, where do you-- can you explain a little bit the righteousness of your fury, but also describe a little bit how you view treating and speaking to the spectrum of those victims who were just suckered in by Matt Damon and the people who should probably be in prison? Yeah, that's the problem with these kind of [INAUDIBLE] MLMs and cryptos, that the line between victim and perpetrator becomes extremely blurry because, by their nature, most of these schemes require you to recruit. That's the only way you basically exit liquidity for yourself, because the only value of a crypto token comes from basically getting another fool to buy it off of you.

They are a zero sum gain at the end of the day. If you bought low and sold high, somebody else bought high and sold low. There's no source of income from outside the system.

And so basically, these systems have this complex myth-making built around them because they need to draw more and more and more suckers in. And they do that by telling these stories about, oh, it's going to be some sort of grand new vision of the future, just like MLMs bring generational wealth. You can have prosperity.

You can be your own boss. And it's exactly the same message. They're tapping into the exactly the same legitimate feelings that people genuinely actually have.

They want to feel financially secure. They want to have a better future. And those are all legitimate things to want.

But unfortunately, just like with MLMs, there's a fundamental economic problem at the heart of all of these pyramid schemes is that you can't create a system that creates wealth out of nothing. You can only create wealth by basically making goods and services or doing favors for other people in exchange for your time. Anybody who tells you can do anything other than that is basically selling you something, basically, at the end of the day.

And the right effective strategy toward these things is to pull people out of them because that's the only thing that breaks the cycle. You need to get your friends who are involved in MLMs or in crypto out. And there's a lot of debate about what's the best way to bring people out.

It's almost as hard as pulling people out of cults sometimes because these things have this ability to warp your thinking in ways that's very, very strange and pathological. And I think we all have friends that we know who have been dragged into crypto or in MLMs. And it's really, really hard to get them to sit down and be like, OK, here's a macroeconomics textbook.

Let's go through chapter one and figure out why this thing you're doing doesn't actually make any sense. So a lot of the righteous anger that I have is actually not directed toward the victims. I'd say mostly the victims because it's blurry.

It's directed at mostly people in my industry. So I used to have much more of a following in the software industry itself because I'm a software engineer by trade, and so things like Twitter where software engineers talk to other software engineers. And what I don't have a whole lot of sympathy for is what I think are basically the perpetrators of these schemes because those are people that legitimately know what they're doing.

A lot of them understand the economics of it. They understand that it's a fraudulent enterprise, but they think that they can profit from it personally by exploiting it. And that, to me, is there's no good faith component to that.

If you're building a crypto token that you know is a scam intentionally and going off to basically intentionally arbitrage regulation to enrich yourself, I don't have a whole lot of sympathy for those people because they might somewhat have disconnected thinking about what they're doing. But they know what they're doing. And at this point, you could read what the eight Nobel Prize winners are writing.

You could read what The New York Times is reporting every day. You could read what the Financial Times is writing. And if you're choosing not to go out and educate yourself about the work that you are doing and its impact on other people and the public, then you're not basically a responsible engineer because part of engineering as a practice is about putting public interest above your own.

That's what separates our craft from other things where we have a professional standard. And what I've seen in the last, I'd say, four or five years is a complete breakdown of that kind of professional ethics and people just choosing to enrich themselves on the back of basically defrauding the public and mass. And that makes me rather sad and angry.

And that's a lot where my anger comes from because I don't see this as-- it's not the level that our profession should aspire to. And we should be doing better than this. I certainly agree.

And the righteous anger that you reserve for your own industry re software engineers/tech people, I feel the same about the personal finance people who have been promoting this stuff taking those ad dollars or doing affiliate marketing, or God forbid, making their own cryptocurrencies. Yeah. Listen, Dante's "Inferno" is all I'm saying is where you guys are going.

You mentioned that your expertise in the fields of both tech and finance, neither of which you're maybe the most expert person on, but you have a level of expertise in both subject matters to speak in the middle of that Venn diagram and to be able to debunk or to disassemble these ideas. From my perspective, what has always made crypto so particularly dangerous is the fact that there are so few people who have the right combination of expertise to not only be able to even understand it, but also to debunk it. And that lack of ability in the layperson or even people with some subject matter knowledge in either category to really fully understand it has been what led to this, I think, really prevalent perception of, well, I can't explain it, so there must be something really special or valuable about it.

Can you speak a little bit to how the marketing of crypto and the presentation of crypto has really benefited from the lack of public knowledge on these two spaces intersecting? Absolutely. I think I'll have to refer back to Dan Olson's interview.

I think he did a very good job at explaining that. And for those who haven't seen Dan Olson's magnum opus, this two-hour deconstruction of crypto, [INAUDIBLE] goes up. Watch that now.

Pause the video, and do that. But what Dan Olson said was basically crypto is this financial myth making. It's the belief that we're going to reinvent money from first principles independent of existing power structures.

And that's really the narrative thrust around the whole project. In practice, it means something very, very different, but there's this myth surrounding it, which is wrapped in all of this level of obscurantism, and jargon, and technical babble. And it's really difficult to be able to see both through the technology, through the economics, and just the myth making itself because these things are just rather complicated myths to deconstruct.

And God bless Dan for basically going through it and doing that in his video. But in order to do those kind of things, you really have to have a level of esoteric knowledge that the general public generally doesn't nor should they really necessarily have. You have to know things about how does money get created in central banks, and what is the philosophical foundations of money, and why are securities regulated, and why are financial assets-- how do they have their value?

And these are questions that the general lay pubic generally shouldn't have to worry about because they should be protected from weird implementation details of the financial system by our regulators. And unfortunately, right now, what we have is this wild west where a bunch of people have basically been able to do a bunch of things that have basically been illegal in markets for the last 90 years or so. And they've wrapped them up in this story and this narrative about, oh, we're going to rebuild a whole new financial system.

And we're going to bank the unbanked. And we're going to create a whole new asset classes. And when you dig into all of these stories and you actually talk to the experts on these subjects, none of them make any sense from both a technology perspective and an economics perspective because crypto has two competing narratives, one that we have this new form of money.

And the second is that we have basically a new form of investment. Now, if we just aside for the fact that those two are diametrically opposite. They literally cannot coexist.

Something that is good as money cannot be a good investment. Something that will go to the moon is not something that you're ever going to buy your own coffee with. Something that goes up and down a lot and has a lot of speculative value can never serve the function of money.

And vise versa, something that's very stable and has 2% inflation for 10 years is generally not a good investment because it doesn't have any potential for price appreciation. And so when you intellectually deconstruct all of the crypto narratives-- and I have a podcast. Basically, every week, I just do exactly this. --you can find all of the various different narratives.

And there are many of them. But when you dig down to the base foundations of them, they all rest on absurdities. They all don't make any sense.

Well said. So as I mentioned in the intro, we're experiencing what many are referring to as a bit of a crypto crash. Can you talk a little bit about what is happening right now from your view?

And we'll get to the macroeconomic implications a bit later. But specifically for the crypto ecosystem, do you feel that this is heralding a bit of an end of things. Or how do you see this current moment?

Well, I wish I had my crystal ball and I could predict the future. But this certainly seems like a really drastic event that's going to force regulators to take a very serious look at the crypto market because I think it's been a long time coming. And things have just really truly gotten out of control.

And we've seen that completely unhinged meltdown in the last week or so with this stablecoin called Luna, which for those who don't know, basically experienced a run much similar to a bank run we used to have back in the 1920s and the Great Depression. But it happened in a very niche stablecoin, which happened to have several hundred billion dollars worth of notional crypto value locked in it. And it basically experienced a run in warp speed.

In the span of a few days, this thing basically just completely imploded. And everybody's, effectively, accounts-- or their holdings in this asset-- basically just completely evaporated. They went to nothing.

And so that was a symptom of the larger crypto market having a series of shocks. And that can have some very drastic effects across the entire market. We saw the entire thing basically lose 50% of its value in the last week or so.

And that's a really extreme shift in markets. Stock markets don't move like that generally. And what we're seeing right now is a period of increased volatility, some potentially systemic risk to the entire crypto ecosystem itself and just a lot more loss of faith in the entire ecosystem.

You've mentioned the word, regulation a few times now. And what I find so inherently fascinating about the entire crypto ecosystem-- and we talked a lot about this in my interview with Dan Olson, which we'll link to you guys too. But the ideological bedrock of cryptocurrency is very fundamentally libertarian.

It's very fundamentally anti-regulatory, very, very much, in my mind, let's just say, fantastical idea of a free market, a childlike idea maybe of a free market. But it's very much a lot of what the crypto narrative and myth making has always rested itself on is this idea that what is limiting about the traditional financial sector economy, et cetera, or what is negative about it is the regulation. And we talk quite a lot in videos about how so many of our most fundamental, systemic, macroeconomic problems that we see in America are directly tied to things like deregulation of the financial markets.

But it is really interesting to see this ecosystem and this ideology that so fundamentally come from this anti-regulatory position now being faced-- And even pre-crypto crash, we saw it with things like people's wallets getting hacked, falling prey to, really, in my opinion, not super convincing phishing attacks, all of this stuff, losing their money, which in the case of a bank would be maybe FDIC insured. Or if it were something you were experiencing with a traditional financial services company, you have things like the Consumer Financial Protection Bureau, which can step in. But you have this system, the wild west, like you said, where people are seeing these-- falling victim to fraud, seeing all kinds of nefarious behavior by these systems, and then in the case of something like Luna, seeing their entire net worth and the coin being decimated with no accountability to any of the key players here.

And now they're, I think, understandably, crying out for someone to hold people accountable or to provide some structure. But what we're fundamentally talking about there is things like regulation and oversight. So I would be really interested to hear you talk about, do you think that the version of crypto that might continue to exist is going to become a fundamentally regulated one, or do we think that much more regulation and oversight, especially from government entities, is so anathema to cryptocurrency as a concept, that the two can't coexist?

That's a really good question. I think I should contextualize it a little bit and talk about the regulation that exists in markets. And I'll just use the equities markets, the stock market. --was largely put in place by our grandparents back in the 1930s following an era, which-- history doesn't repeat itself, but it does rhyme.

And so all of the weirdness in the crypto markets today-- nothing is actually new because we tried this kind of model of markets in the past in the 1920s. They were called the Roaring Twenties There was a lot of speculative mania that happened. There was a lot of things called bucket shops where these fraudulent stockbrokers that would sell people on fantastical shares of oil wells in distant countries and gold mines.

And so this all ended very badly when we had this complete laissez-faire no regulation, anything goes kind of market with the market crash of 1929, which basically saw the stock market retrace itself back to 10% or whatever it was at the height as followed by a series of, I think, almost 10,000 different bank runs across the entire United States. So this was a financial catastrophe on a scale that we largely hadn't seen at that point. And the laws that came into place, which are primarily the Securities Act of 1933 and the Securities and Exchange act of 1934, were set in place to remedy, clean up the mess from the Great Depression.

And largely, they were successful. And these are the laws whose remit is governed by over the entire stock market today. And I think these laws protect people a lot more than they know because they've been developed incrementally over the years in response to all the different frauds that have occurred in the market.

And regulation did not stifle markets. In fact, after the Great Depression, the market [INAUDIBLE] traced themselves back up to extremely new highs after the United States recovered from World War II. And that gives rise to the flourishing of the US economy and having the deepest capital markets in the world.

So regulation is not apriori a bad thing or antithetical to prosperity growth and progress. In fact, it's quite the opposite. Generally, it encourages more trust in markets and more investments.

Now, what we have right now is basically, with the internet, people have figured out a way to basically route around the Securities Act by issuing things that at first approximation look like stocks. So crypto assets are not really currencies, despite the namesake. They're actually much closer to a share of a company, except it's a share in a company that doesn't actually do anything.

It doesn't actually have any underlying cash flows, or business, or product, or customers. So it's a share in nothing. It's basically a financialization of hot air, as Elizabeth Warren often says.

That has happened throughout history. And it's never ended very well. All these speculative meetings back in the 1700s when people first discovered that we're going to create joint stock companies.

And then people were like, what if we create a joint stock company in nothing, and then people just buy it? And so a lot of regulations actually exist for a very good reason because if they're not there, people generally try to financialize nothingness. And it turns out you can sell nothing to a lot of people, and they'll fall for it.

And right now, like that's what's happening. We're creating a new class of basically scofflaw securities, which are being used to arbitrage the Securities Act and create these what are called blue sky securities, basically, securities not backed by any kind of actual economic enterprise. And that's basically what crypto assets are.

They're basically unregistered illegal securities. And unfortunately, Biden's very premise is antithetical to under the rule of law. If you brought illegal securities under the rule of law, they would just be securities at that point.

And that's the essence of it. So I don't fundamentally see that crypto really has any kind of-- what benefit is there [INAUDIBLE] financialize speculative nothingness? What is the value of a Dogecoin?

The only thing backing it is a meme of a talking dog. That's pretty much what crypto assets are. Just honestly, at least during the Beanie Babies craze, you had actual Beanie Babies, or during the tulip craze, you had some pretty flowers.

It's just so sad to think about the same crazed mentality happening around something as utterly nonexistent as a receipt of a JPEG of a dog meme. I just feel like we need higher standards for our scams. OK.

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So you guys sent in a huge number of questions for Steve. And I won't have time to get to them all, but I'm going to get to as many as I can. Feel free to pass on any of these, Stephen.

But let's just go through them. Where did all of the fiat currency that was used to buy crypto go? I presume it's all offshore by now.

But is there any chance that any or all of it could be recovered when everything comes crashing down? Yeah, that's a really good question. So, no, by the nature of the investment, crypto is what's called in economics a negative sum game, which means that basically, more money flows out of the system than flows in.

So crypto assets are not productive. They're not investing in a company that actually does anything in the world. So when you buy an Apple share, Apple makes really great phones.

And they sell them for more than they cost to make right. And that money flows into the company. And that money can be used to either do things like reinvest in the business to produce more awesome phones, or to pay dividends to its shareholders, or to buy back its own stock, which generally has the effect of raising the price and redistributing the profits of the company back to its shareholders.

So generally, stocks are a non zero sum. But crypto assets don't have anything. They're not a claim on the future cash flows of an enterprise.

They are just a token that you can trade based on a talking dog meme or something. So the only money that comes in is from basically recruiting more people to buy out your position forever. That's what they're based on.

That's the economic absurdities we keep talking about. And so unfortunately, when you take into account like transaction costs and the fact that the miners, the computers that's basically responsible for validating the blockchain-- I won't go into the details of that. But there's these big computer farms that basically sit there and spin over and over, and over, again doing useless computations.

Those costs money in the form of electricity. And the power grid doesn't take Bitcoin. They only take dollars.

So all of the Bitcoin that's generated from the mining has to be paid for in dollars. And so the people who run the mining farms have to cash out into dollars. So this creates a net outflow from the system that changes based on the day.

But I think it's around $3 to $6 million a day or something like $30 billion a year or something. And so the entire system is like a giant funnel. Water is just slowly flowing out of it over time.

And so it constantly requires a new inflow of cash to replace the cash that gets siphoned out of it. So, no, unfortunately, it's like a money black hole. I can't believe this stuff.

There's going to be no justice, I know. But maybe in the afterlife, some of these people will meet justice. OK, so you mentioned the blockchain.

And I think, especially for the layperson, there's been a lot of myth making around blockchain technology and everything that it means. But we have people asking about the fact that we're seeing with a lot of these crypto meltdowns that the big exchanges and the more legitimate cryptocurrency operations don't even utilize the blockchain technology. They can't.

So can you explain the actual difference between what is still using blockchain versus what isn't in this scenario? OK. So you could think of the blockchain as basically being like a ledger, which basically records credits and debits classically in the banking world.

But it's a ledger that's basically stored across a lot of computers. And it's basically replicated in this really slow process that allows people to move this native currency on the ledger between each other. The underlying technology is actually a clever trick.

It actually does kind of work. But unfortunately, it doesn't actually work to do anything actually useful. So blockchain is just a very, very, very slow database that's primarily used for applications where you don't want to have a single point of failure because you don't want to be shut down by governments.

So for the most part, it has this property called censorship resistance. Basically, by spreading all of the ledger around everybody in the world, there's no one entity that the US government can come raid and basically say, oh, you have to shut down now because if you were doing this stuff in the United States, it would fall under the remit of the Securities Act. But if you spread it around, there's no that [INAUDIBLE] for governments to basically shut it down.

And so unfortunately, blockchains are very, very slow. They're really, really inefficient. They can do seven transactions a second, which is basically enough to run small supermarket, but not a country.

And so what a lot of these projects have done is they basically moved away from this kind of censorship resistance to basically just using traditional databases. And they run these servers often-- maybe instead of having thousands of them, now there's four of them. And they're all set up in the Cayman Islands or in Switzerland or something.

And that allows them to scale up a little better. But unfortunately, they move the core value proposition that they exist for in the first place. They come [INAUDIBLE] to scofflaw banks issuing their own currency.

And usually, entities that try to do that generally get shut down. And so blockchain isn't a terribly good technology unless you want to do things like break the law, unfortunately. Listen.

Sometimes breaking the law is cool. But we don't need to get all that nerd [BLEEP] involved. Just buy some drugs.

OK. So someone is saying, what does this mean for El Salvador, as their president keeps gambling their money on Bitcoin? Unfortunately, the situation in El Salvador is actually rather tragic because their leader, some might say, a dictator, basically decided to [INAUDIBLE] taking the sovereign wealth of the country and start investing in Bitcoin allegedly as a way to build domestic payment infrastructure for El Salvador, which primarily tends to use the dollar, the US dollar internally because their currency is not generally good there.

So it's really tragic because what they've done is basically spent a lot of public money to basically just let the leader of the country go gamble it away in the markets. And every single investment that the leader has made has gone down ever since he done them, which means that the public and the taxpayers are basically funneling these kind of gambling sprees for no reason because you can't actually use Bitcoin as a means of payment in El Salvador, because it sucks as a means of payment because it's too slow, and it's too volatile. And so I can't see this ending well for the average El Salvadoran citizen.

And this is one of those things that makes me really, really angry because all of these-- the IMF and the United States all warned El Salvador what would happen if this thing happened because it's a really profoundly stupid thing to do. And yet, we had to watch it unfold in real time as the citizens are suffering. And El Salvador is not a great place.

It has a very high murder rate. And so basically, just to take all this public money and just siphon it away basically to use as exit liquidity for a bunch of people in wealthy countries to become even wealthier-- this gets really [INAUDIBLE] because you're basically just using the poor in the global South as your own personal piggy bank. And that, to me, is intolerable.

Well, that's been a huge aspect of the whitewashing of a lot of crypto efforts. We're giving people in developing countries the ability to buy things more easily, whatever. And almost without fail, I think it's manifesting in exactly what you're describing, which is just taking what little money they have and just using it to filter upwards into the liquidity market.

Yeah. He's just using them as the bottom of the pyramid scheme, unfortunately. That's what crypto has become now because they've run out of fools, so they have to kind of extend it off to the developing world now.

And that is really a tragedy. --which is another, I think, extremely pertinent connection between crypto and MLMs. So as we discussed on our interview this season with the professor and MLM expert, Bill Keep, MLMs are actually shrinking in popularity in the US now, finally, finally, although it had an uptick after COVID. But finally shrinking, but it's exploding in the rest of the world and aggressively targeting Latin American countries, Southeast Asian countries.

I think, like you said, when you run out of fools in the US, there's only so many places that you can go. And you have to prey on places that have much lower access to things like education about these issues. Even in some cases, media in general access is super low.

So to get them into the bottom of the pyramid is going to be a lot easier. And in terms of preying on people with limited economic opportunity, which is very much the system here in the US, all the more effective when that economic opportunity is further reduced. What do you imagine will be the second order effects of the crash macroeconomically, i.e., beyond just the companies or VCs directly involved in crypto?

Well, you can see all of crypto is basically being this at a macro level, basically just a wealth transfer from the general public, the global South, into the hands of a few technologists and venture capitalists. So unfortunately, it's the story of the world. The rich get richer, and the poor get poorer.

And I think crypto was basically just a way to exasperate that divide even more. And so the second order effects for that are going to be both financial, social, and I think they're just going to lead to a breakdown of trust in our public institutions because people are going to be like, after every crash, why didn't the government come and save us? Why weren't the laws enforced?

And there's some really strong claims that the government has basically just chosen not to regulate these things or not done [INAUDIBLE] enforcement as they could. And we already live in a time when trust in institutions of democracy is at an all time low. And so my deep fear right now is that on the second order effect of a market crash, we're just going to see an even deepening in distrust in both capitalism, in markets, in Democratic institutions, and in the courts, generally.

And that can only have even a more profound knock on effects for both the culture and the global financial system. Yeah, it's really interesting. We're recording this today after what was probably, I think, the single most successful election day for the progressive wing of the Democratic party in a lot of the primaries that just happened in a few of the general races.

There were many cases of big money institutional Democrats, some even directly backed by crypto billionaires, being defeated by things like justice Democrats, much more labor-oriented Democrats. We have the Amazon Labor Union Movement. We have unionization happening at places like Starbucks where-- I think we are starting to see, in some ways, a real renaissance of left populism as an answer to this extreme wealth inequality, this extreme corporatist, oligarchical increasingly pseudo democracy.

So I do think that there are a lot of positive signs as far as where some of this rage is being directed. And I think a lot of people with access to the right information are understanding a lot of the underlying causes of these real economic stressors. But I have a hard time feeling that the crypto bros are going to get humiliated and then be like, well, I should form a union at my job, or I should advocate for universal health care, or really anything that would materially benefit them.

It seems like from where I am standing that most of them are probably heading into a very destructive deceptive faux populist right movement, which is not dissimilar from crypto itself. Where do you land on that? So I think crypto has kind of-- it's a spectrum, like most things.

There's a degree of extreme behavior [INAUDIBLE].. And you're exactly right in your analysis. I think financial populism is both a phenomenon in both the left and the right.

On the left, it manifests in things like Occupy Wall Street in the United States where it's largely a left-wing movement that was reacting toward the speculative excesses of Wall Street and the moral hazard that led up to the subprime mortgage crisis. And a lot of those critiques were exactly right. That's actually what happened.

The banks basically got bailed out on the back of the taxpayers. And basically, nobody went to jail. And so there's some kid doing it again.

And that's a selling analysis of a deep systemic law in the financial system in the United States. However, unfortunately, crypto is kind of like Occupy Wall Street from the-- I would say a more far-right libertarian perspective where they start from the same premise as Occupy Wall Street and say, oh, the [INAUDIBLE] system is corrupt, and so we're going to build a new one and a Phoenix-- basically, this new financial system will rise from the ashes free of the corruption. And we're going to build this new anarcho capitalist utopia in which basically, the excesses of Wall Street are no longer going to exist.

However, the world is not that simple, unfortunately. And unfortunately, what's happened with crypto is that instead of becoming this revolution in equity and building a more egalitarian financial system, it's become the very apotheosis of the corruption it aimed to replace. It's as if everybody in Occupy Wall Street was replaced by like a Wolf of Wall Street hedge fund manager.

And that's become the movement now. They are basically not even populist anymore. They're basically nihilists where nothing matters except the number needs to go up.

And I'm just going to be in it for myself and enrich myself. And that is a very dangerous ideology that I think is becoming very contagious within the crypto bro community. And I see becoming increasingly more toxic and more toxic.

And it's not even a reaction to politics anymore. It's a rejection of it in its entirety. It's basically this subversive opportunism in which people are just like, God is dead.

Nothing matters. I'm just enriching myself. And that is an ideology I think that we should reject outright because I think it's very bad for everybody.

I agree. And there's not even a cool style to go with denialism. They're not even like wearing cool all black clothes.

Get a look at least if you're going to have that ideology. OK. So you mentioned the big financial institutions, the-- I think the righteous pushback that was seen on both the left and the right against things like the excesses of Wall Street of which crypto is, to some extent, a manifestation, at least, in part in the terms of the popularity.

But as we know, I think, most of us now, there are a lot of legitimate financial institutions that are now getting very involved in crypto. So we have someone asking, which coins to the big institutional investors have the most money in, and how much control can they exert to keep those particular coins afloat? So for all of the failures of regulation in the United States and in Europe, there are a fair number of firewalls that are in place at the moment.

If you happen to work in a bank, and say, you're a mid-level executive, and you want to go to one of your executives [INAUDIBLE] we're going to start a new division of a company that trades in crypto assets, you unfortunately still have to go to the compliance department. And they're stuck with lawyers. And the lawyers are going to ask you a fundamental question, which is, what regulatory regime does this come into?

And then the lawyers are like, I don't know. And so a lot of times, banks-- people don't know this-- are rather risk-averse institutions for a very good reason because they're regulated to the hilt. And generally, when they lose large amounts of customer money, there's consequences in the form of getting their banking license revoked.

And those regulations exist for a very good reason. And so the firewall largely has been that banks have not been able to basically put crypto assets [INAUDIBLE] their balance sheets. They've been able to offer some boutique products to some of their high net worth individuals.

But a lot of those are basically largely unregulated anyways because you're dealing with really high net worth individuals, and it's a whole different set of rules for that. But there's not a large amount of crypto derivatives. They're offering extremely complex [INAUDIBLE] on type of Dogecoin or anything yet being the operative word there.

And it's primarily bracketed to the hedge fund space, family offices, and non-bank financial institutions, the so-called shadow banking world. And that's a big amount of money that's sloshing around, but it's not nearly as much as say, the balance sheet of JP Morgan suddenly buying $50 billion worth of Bitcoin. That's not going to happen anytime soon because the law won't let them do it.

The laws are basically fire walled off crypto assets. So people are talking about crypto is inevitable. There's just too much institutional money.

No, not really. Relative to what's actually out there, mostly, it's extremely risky investment vehicles using it as a speculative plaything. And that's not anywhere close to becoming systemic or causing the entire economy to crash if the entire thing would suddenly evaporate to zero tomorrow.

The S&P would probably not move all that much if Bitcoin basically just stopped existing. Well, on that note, as a final question, a lot of people are asking some variation of, will the crypto crash trigger or exacerbate the next recession? Now, I know that if you were able to accurately predict that, you would be the wealthiest man in the world.

But I would just love to hear your thoughts macroeconomically. Obviously, we are in a very complicated moment for lots of non-crypto economic reasons. But I'd love to hear how you think crypto factors into that.

So think about recessions and market meetings. They're a really well studied phenomena at this point. There's a really canonical text [INAUDIBLE] It's called them Panics, Manias, and Crashes by Kindleberger.

It's historical text. It looks at everything, all these market crashes going back to the 1700s. And there's a singular thing that always happens, that there's a large expansion of credit in the form of rather opaque financialization.

It's pretty characteristic of almost every single financial crisis. And then the subprime mortgage crisis, we saw basically, the amount of credit expands in the form of mortgage lending from-- I don't know. It was $60 billion to several trillion.

In this imaginary value that people had created out of debt instruments. And generally, when you have bubbles that expand that much and this large amount of opaque financialization, that generally tends to have negative consequences. And that's how it's been all the way throughout the 1700s.

And so unfortunately, right now what we're seeing is the same kind of credit bubble, but happening in the stablecoin markets. So the stablecoin markets [INAUDIBLE] are basically these opaque financial pools of assets where basically, I have a dollar, and I want to give you a Chelseacoin. But unfortunately, $1 does not buy $1 equivalent of Chelseacoin.

But you can take my dollar and turn it into 100 Chelseacoins. And there's some very large stablecoins that basically do just that. They basically create this leveraged position on top of a very, very small amount of assets.

And that basically allows them to basically create all of these synthetic bubbles of things that look like dollars, but aren't actually backed by dollars. And that's a form of credit. Now, banks can do this because they have very, very strict rules around reserve requirements, and they have to report all these things.

But these stablecoins look like giant black boxes full of leveraged positions that we have no idea what they're in because they're all held offshore, like the Cayman Islands or the Bahamas. And if there is going to be a kind of systemic risk, it's the amount of debt that's being created at the moment inside of these stablecoins. And we saw in the last week when these stablecoins blow, they go to zero very fast.

They fail violently with very little predictability. And when I look at people proposing we should integrate stablecoins into the wider economy, I think they have gone completely mental. We have no idea what's inside these things, but we know that they're extremely leveraged.

And what does history tell us about what happens when we have these kind of structures? It never ends well. And so I think people should look at the Luna stablecoin crash in the last week, and they should see shades of 2008 all over again.

And that should scare them because if we don't correct the kind of systemic problems, they're just going to repeat themselves over and over again. And a lot of 2008 the pathologies that gave rise to that we're seeing created over in the crypto market. And that would be a vicious cycle to repeat because financial crises are truly, truly awful things that should try to avoid if at all possible and certainly, not for something as illusory in its benefits as crypto and stablecoins, which can't even justify their own existence because they all rests on absurdities.

And so that's the problem I see with this. We could be very much on the path toward creating another financial crisis if these things are allowed to expand into the broader economy and become part of our financial system. We absolutely have to kind of firewall them off from the traditional ecosystem and just make sure that they can grow, because ultimately, they're like monsters.

You have to keep feeding them, and they require more and more food. But if you starve them, eventually, they collapse, like most bubbles do. That was dark, so I'm going to actually end this on a note of levity.

Can I get your opinion on Elon Musk, just for giggles? Oh, I think Elon's discovering that he can use Twitter to do market manipulation on unregulated assets. And the SEC is like, I don't know.

Maybe we should let him. I don't see how this is good. This kind of market manipulation is basically is a direct transfer from the public into Elon's pockets, so he can go do whatever Elon does, which is play more speculative games with the market.

And at some point, our regulators have to step in and basically say, this is not good for capitalism, our markets, the US as a whole. And markets exist to price goods and services, not to be some sort of playthings for billionaire plutocrats to play with on Twitter. So that's my opinion on Elon.

I agree. But as I did mention in my video, excellent, excellent hair transfer surgery. So we have to give them that.

There you go. He might be constantly violating SEC regs and screwing over his own fan base financially, but got to give credit where it's due. Great hair plugs.

OK, so where can people go to find more of what you do? Oh. So I am SMDiehl on Twitter.

I am, which is my blog, if you want to read all of my angry rants about crypto. And I actually have a book coming out in a few weeks, which will be at fine retailers near you very soon. It's called Popping the Crypto Bubble.

Oh, my gosh. We're going to get a copy and display it prominently here in the office. That is amazing.

Thank you so much for joining us today and for all of the amazing work you do slaying the crypto demons on a daily basis. I love being here with you, [? Shelly. ?] [INAUDIBLE]..

Cheers. Yay. And thank you all for tuning in.

And we will see you next week, next Monday to be specific, on an all new episode of The Financial Confessions. Bye, guys. [MUSIC PLAYING]