To investors,

Christine Lagarde is the President of the European Central Bank and a previous critic of Bitcoin and cryptocurrencies. This is interesting though as it seems like her position is rapidly changing. Over the last few months, the ECB has started to research the creation of a potential central bank digital currency.

While it is encouraging to see a traditional institution with such legacy and power dipping their toe into this new industry, we didn’t have a lot of information on their thinking until recently. A recent article in Cointelegraph found an interview that was published on January 8th that shed more light on what Lagarde and her colleagues are thinking.

It appears that the main driving force for the change in heart has been a realization that the world is demanding fast and low-cost avenues for payments and/or money transfers. The existing infrastructure obviously doesn’t support this, so the ECB is faced with two options:

1. Sit back and do nothing.

2. Try to disrupt the existing system.

We know from historical precedent that it is really, really hard for incumbents to disrupt themselves. This “Innovator’s Dilemma” can be caused by the lack of understanding that change is happening, the inability for leadership to recognize they will eventually be disrupted, or the over reliance on the existing model to continue the status quo. In the case of the ECB, they appear to recognize that change is occurring, but it remains to be seen whether they can get ahead of that trend or they will suffer from the disruption that it brings.

Currently, Lagarde and her team are assessing the pros and cons of a central bank digital currency. In the interview, she said:

“ECB will continue to assess the costs and benefits of issuing a central bank digital currency that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines.”

She then went on to set the expectation that no one should expect a short term decision:

“We are working on all aspects of CBDC, with in-depth analysis of costs and benefits of such a new form of central bank money. It will take a while before we will communicate on our conclusions.”

The language she is using here is really interesting. It appears that one of the pre-determined talking points is around “costs and benefits” which would suggest that the ECB is looking at this opportunity from the lens of a business decision.

What resources will be required to build a central bank digital currency? What are the potential benefits? Can we drive more revenue? More transactions? Could we stabilize the Euro and related economies? What are the potential drawbacks? Will people use a central bank digital currency? What do we do with the physical cash notes that are in circulation? How does the banking system react?

All of these questions are rational and appropriate if you are running the European Central Bank. You have to think like a big company. The decisions you make, and their subsequent actions, can have a profound impact on millions of people. If you make bad decisions, you will be publicly pressured and embarrassed. If you make good decisions, people will simply say “they did their job.” In essence, there is much more downside than upside in my opinion.

Now compare that to the launch and early days of Bitcoin. There was no master plan. There was no worry about the impact on millions of people. No one did a costs and benefits analysis. Focus groups were non-existent. There was no marketing department. In fact, no one was paying attention and no one really cared what happened with Bitcoin for quite awhile.

These two strategies couldn’t be in more direct conflict with each other. One is pre-determined, intentional, and feels like a large corporation moving slowly with the goal of not screwing up. The other, Bitcoin, feels like a young startup with nothing to lose.

Neither is necessarily the “right” way to do things, but the startup approach has fewer opportunities to fail. The pressure is lower. And the stakes are nowhere nearly as high as the large corporation. This is the beauty of Bitcoin’s launch.

The product spoke for itself. People naturally discovered it and they chose to use it or not. They weren’t mandated by a government. There was no central bank pitching them on why it was better. Every individual had numerous reasons to ignore Bitcoin, but slowly more and more people gravitated towards it. Eleven years later we are now seeing tens of millions of people adopting the digital currency.

This only happens for one reason — Bitcoin has product-market fit. When a technology finds product-market fit, it is really hard to stop it from growing. People start demanding the product. They seek it out. They find ways to adopt it. They will do this in the face of incredible obstacles and difficulties too.

While many people think the central bank digital currencies are dumb, I actually think they are going to be an important part of the Bitcoin story in hindsight. The ECB is essentially validating the need for Bitcoin by (1) saying that people want fast, low-cost payment infrastructure and (2) admitting that they are going to spend the time to research and potentially build a competing product. Bitcoin would still succeed without the ECB jumping into the game in my opinion, but large central banks are only going to accelerate education and adoption.

Imagine a world where central banks help to onboard hundreds of millions of people onto digital wallets that support various cryptocurrencies. They will do this under the guise that the ECB-issued digital currency will gain adoption, but instead it isn’t a far stretch of the imagination to think that people will gravitate towards the most sound money on the market (Bitcoin).

Regardless of what happens, I am encouraged to see Lagarde and her colleagues not only spending resources, both intellectually and financially, on the potential creation of central bank digital currencies, but I am even more excited to see them publicly talking about it more frequently. Every conversation around digital currencies, whether fully decentralized or otherwise, is an advertisement for Bitcoin. And the ECB has a giant megaphone so let them go out and do some of the hard work for us :)

-Pomp

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THE RUNDOWN:

Bux Acquires Social ‘Social’ Cryptocurrency Investment Platform Blockport: Bux, the Amsterdam-based fintech that wants to make investing more accessible, has acquired the European “social” cryptocurrency investment platform Blockport. Terms of the deal remain undisclosed, although Bux says the move paves the way for the company to launch its own branded cryptocurrency investment app. Dubbed “BUX  Crypto,” it will be available in the nine countries in which Bux operates, and is planned to go live in Q1 this year.Read more.

Bitcoin Sign Guy Is Back, Bringing Sound Money to Urbit’s ‘Sound Computer:’ If bitcoin is digital cash and ethereum is digital law, Urbit is digital land. The highly ambitious cloud computing project imagines nothing less than a rewiring of the internet, allowing users, not corporations, to own their online identities and data. Urbit quietly has built bitcoin integrations and added an iconic crypto personality to its roster of developers: Bitcoin Sign Guy. Read more.

Nervos Network Will Hand Out $30M to Encourage Third-Party Development: Nervos Network has set up a $30 million public grant fund to sponsor external developers building on its blockchain infrastructure. Announced Thursday, the fund will pay developers in cash-equivalent CKByte tokens, and all submitted projects will be made public to source feedback from the broader community, Nervos co-founder Kevin Wang told CoinDesk. Individuals, teams and companies can begin submitting applications for improving the firm’s layer one blockchain Common Knowledge Base. Read more.

New York Governor Proposes Giving Financial Watchdog More Teeth: New York Governor Andrew Cuomo wants to give the Department of Financial Services more powers in regulating certain licensed entities, including cryptocurrency startups. Cuomo presented his 2020 "State of the State" report on Wednesday, a 321-page list of proposals. While NYDFS, the creator of the notoriously hard to acquire "BitLicense," can already bring enforcement actions against unlicensed entities, some companies can claim they are not subject to the regulator because they do not directly sell their products to consumers. Read more.

Interpol Collaborates With Cybersecurity Firm to Tackle Cryptojacking: Interpol has collaborated with cybersecurity firm Trend Micro to reduce cryptojacking affecting MikroTik routers across South-East Asia. Though the collaboration reduced the number of affected devices by 78 percent, this is unlikely to have made a significant impact on mining hashrate. Cryptojacking is a malicious practice where attackers infect common devices with crypto mining malware, utilizing the victim’s resources to mine cryptocurrency.Read more.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE

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In this conversation, Michael and I discuss:

• Rugby

• Why nerds go to Silicon Valley

• How to build compelling products

• How Wyre is building the essential infrastructure for fiat on and off-ramps

I really enjoyed this conversation with Michael. Hopefully you enjoy it too.

LISTEN TO THIS EPISODE OF THE OFF THE CHAIN PODCAST HERE

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Nothing in this email is intended to serve as financial advice. Do your own research.