Zachary Kelman is a New York-based attorney specializing in political, legal, and regulatory issues in and around Bitcoin, crypto and blockchain technology. Prior to this he was working in banking, monitoring international money transactions, looking for suspicious activities. Coming out of this environment he was introduced to Bitcoin by his brother Daniel Kelman, who was the architect of the civil rehabilitation plan for Mt. Gox creditors and Zachary afterwards left banking for crypto projects in the Caribbean and Southeast Asia.
- The correspondent banking system
- How all worldwide transactions are monitored
- The history of the US centered global financial system
- What happened in 1971
- The consequences for “high-risk” countries and their citizens
- Patriot Act and money laundering
- How different countries try to regulate Bitcoin
- A worldwide ban of Bitcoin
- Iran, China and Venezuela mining Bitcoin
- His personal privacy tactics
- Lawyers and their cryptocurrency understanding
- Change will come
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ShownotesRecording Date: September 24, 2020
- Insiders, Outsiders and Experimenters in Crypto Regulation, Articles by Zachary Kelman
- Zachary Kelman Website
- Zachary Kelman on Twitter
This is the human edited transcript for Episode 80 with Zachary Kelman.
Anita Posch [00:04:27] Hello, Zachary. Thanks for taking the time to do this interview with me.
Zachary Kelman [00:04:32] Thank you, Anita. It's a pleasure to be here.
Anita Posch [00:04:34] Thanks. Please introduce yourself to our listeners. That's what we always do first. What's your current position? Where are you located, if you want to tell us that? What's the main focus of your work?
Zachary Kelman [00:04:49] Well, my name is Zachary Kelman. I'm a managing partner at Kelman PLLC. You can find us at kelman.law. We are a New York-based law firm, operating pretty exclusively in the crypto space. We do litigation work in the US. Any kind of litigation you might need that has a crypto focus. It's contract disputes, founder disputes, ICO issues, anything that has a crypto focus that might result in litigation.
But that's not where I started in this space. I've been in this space pretty early on. Starting off more as an investor and working in compliance and working with various projects internationally. So, I've been in this space since pretty early on. My partner, my brother Daniel Kelman, has also been in this space from the early days. He's pretty well known for the whole Mt Gox rehabilitation claim situation. We've just been focused on trying to help crypto projects with their legal litigation issues. We also do a bit, in terms of regulatory advising, with getting licenses and compliance programs, international structuring things like that.
Anita Posch [00:06:00] Okay, great. Then you are the perfect partner to talk with me about international crypto regulation because I usually find this very dry. I'm really not the type of person who would want to be a lawyer but to see how these regulations play out in the global power system, I think, is very interesting. I also want to dive into the question of if Bitcoin and cryptocurrencies could disrupt the system that we have at the moment and this power hegemony that's basically in the US at the moment.
Zachary Kelman [00:06:38] That's great. Well, yes and I think you're right it seems dry at first glance but I actually find that this subject is pretty interesting to most people. It's opening up a Pandora's box to an extremely important part of global politics and international affairs and global economics that's not commonly discussed or commonly understood. Crypto. Bitcoin, in particular, opens that up in a way that wasn't quite as transparent before it existed.
Anita Posch [00:07:08] Yes, exactly. Tell us, how did you find out about Bitcoin in the first place? When did you hear about it?
Zachary Kelman [00:07:15] So I was working in banking in New York around 2011/2012/2013. My background is doing compliance, as I've mentioned, in New York-based banks. I worked with Credit Suisse and Morgan Stanley. Most of what I did, I worked most of the different roles that you'd have in a compliance office. There's the transaction monitoring role where you're looking at transactions for suspicious activity and detecting them and dealing with it. Actioning those items up the chain as well as enhanced due diligence where you're looking at the clients very in depth, doing extra research on them. Most of this occurred in correspondent banking which is a fancy word. All of those wire transfers, money that is sent around internationally through banks, is done through this system which is mostly centered around New York City. You have about 12/13 banks that have what's called 'dollar clearing'. Meaning they're authorized by the US to be able to clear US dollars and transfer them. So all of the banks in the world center around that.
So let's say you're sending money from Mexico to Spain. You might have a direct banking relationship but if you're transferring through US dollars, chances are you're sending it from a small bank in Mexico to a larger one then, to the US in a New York-based bank. It's dollar cleared and then goes through another chain to Spain or somewhere like that.
So I was looking at those wires and analyzing that world and around this time, my brother got into Bitcoin actually. He started telling me about and I don't want to say I was following but I was a bit skeptical. I love the technology and I believed in it almost immediately but my first thought was, "They're going to make this illegal. There's no way that this will be able to continue." I understood immediately, the threat that it posed to the system so I was skeptical at first but at some point, I started getting dabbling into it. I ended up never looking back. I eventually left and worked for a project in the Caribbean. I worked there for a year, helping them work with the government to become able to offer crypto services in that country. Then, I worked for a similar country in Southeast Asia there as well and had a pretty international footprint prior to focusing primarily on this US litigation firm.
Anita Posch [00:09:32] What's so interesting for you? What's the most interesting characteristic or property of Bitcoin in your eyes?
Zachary Kelman [00:09:40] Well, for me it was coming from that lens of working in banking. I hadn't realized this beforehand but the way that money moves internationally is through this very linear correspondent banking system. You can move money in pallets of cash and gold and things like that but the ways that you would do that would then heighten your risk of having access to that system. So it's almost like, I don't want to use a religious analogy but it reminds me of a church or something or the Catholic Church back in the medieval times, prior to the Reformation. Where the church blessed everything and the church's seal of approval was everything that you needed. That's not to say that the US dollar and US regulators decide what has value and what doesn't but if you pass through these dollar clearing banks up at the top of the system, once it goes to the other side, the dollars are cleared and cleaned. So realizing that and realizing that all these international wires transferred through this bank and knowing that my role was to filter them for what is high risk, what's low risk, what's money laundering, what's not money laundering.
When I saw this system which presumably allowed huge amounts of value to pass internationally without any, at the time that it felt a lot more anonymous than it does now, but without any intermediary and with a sense of being private, much more so than the bank was at the time. That really intrigued me. I saw it as a hedge on the current system in a way that nothing else, prior to which, had offered. It was the first competitor to that system, in my view, in modern times.
Anita Posch [00:11:17] You just spoke about that these institutions or these banks are like the church, basically, back in the days. You might have heard from Tuur Demeester`s paper on the Bitcoin reformation. He exactly says the same – that it was a hierarchical system that came down because people didn't want to pay the church anymore. So, the great reformation started. It's interesting that you say that and please tell us about the historical development. How did we get here? I mean, when did this all start? The system that is so US-centric.
Zachary Kelman [00:12:05] So I'd look at the rise of the US economy in the early 20th century. In a world which was this kind of mercantile world. Where most of the world was carved up by European powers. They had overt protectionist policies and their own monetary systems in these areas and protected them. So you really had many different monetary worlds, you could say.
Look at the Great Depression and what caused it. After the First World War, you can see the seeds of this happening. So at the end of the First World War, you had the Versailles treaty and a complicated, very impoverished world reeling after the war. You had, for the first time this group, the League of Nations which was somewhat ineffectual but it did allow for coordination amongst these countries, on some level, or at least planning around coordination. So we can look at what they wanted to do and what they were concerned about and how the different relationships between these countries worked during this time.
Clearly, they were all worried about global economic issues. They were worried about deflation. What are all these countries' monetary policies? How are they coordinated? So most of the European countries owed significant debts to the US. Germany owed lots of war reparations, mostly to the French and also to the British and were unable to pay them. The French policy was something similar to that sort of thing gold bugs today would like. Which was a very deflationary policy where they were trying to hold as much gold as possible. The US ended up with this Smoot-Hawley Tariffs which tariff the rest of the world.
Ultimately, it was a disharmonious international economic world. US policymakers in the early 20th century, leading up to the Second World War, wanted to eliminate this mercantile world. They wanted a world that was a free trade world which we have today, for the most part, since the end of the Second World War. It's hard to even conceive of this as a revolutionary thought in the early 20th century but it was. It was a 'we're going to eliminate these borders'. To do that, especially at the end of the Second World War where this system emerged, palatable to these countries. The mercantile system protected workers and wages and things like that. So you had the Marshall Plan as a way of rebuilding Europe which ultimately allowed Europe to enter into this global free trade system, centered around the US dollar. We call it the Bretton Woods system. Ultimately, it led to settlement happening on the dollar. The dollar became this global peg. It eliminated, what you might call, this monetary policy coordination issue. Rather than having every country on their own monetary policy, you had everyone centered around the dollar. If you want to look at a modern analogy, look at the Euro crisis and how budgets worked. European countries can't really coordinate around budgets in the same way. They coordinate around many things but a lot of the issues between Northern Europe and Southern Europe in the Europe crisis were the fact that the Southern Europeans wouldn't change their budget. The European Union is more or less threatened by that. If Europe had one government that controlled the budgets of every country, they could coordinate policy but they can't.
So previously, you had a system where central banks were all hedging with gold and other currencies but they didn't have a centralized system. So that was the appeal of the dollar system emerging after Bretton Woods - one central hub. Obviously, that's not the only source of value. You still have gold and everything else. It's not as it's not quite as centralized you as I'm making it sound but comparatively, to the earlier model it, was much more centralized. We've had that since the '40s essentially, where most world banks hold dollars. They treat dollars as gold and the US controls that dollar supply. So, the New York Department of Financial Services in New York licenses those banks that are allowed to clear dollars, are allowed to take currencies to trade them in, rather than just trading Forex. They're actually able to clear them effectively at that bank. That's where the policies are centered. The US has its own financial policies. You can you know you can talk in later 20th century rolled the AML policy, the money laundering policies, the Bank Secrecy Act and then ultimately, the Patriot Act and everything else came from the Us and because of the US system, it caused all the other countries to have to develop their own internal systems. If they didn't do it then, the US-based banks at the top would have to start de-risking them, classifying them as being higher risk, paying more attention to them. So it just emanates from this New York chartering system.
Anita Posch [00:16:50] I think in Bretton Woods, Keynes proposed the bancor which would have been a global currency or something like that. The US were, after the Second World War, as the winners they were so powerful to say, "No we use the US dollar." Is this correct?
Zachary Kelman [00:17:07] I think that's right, yes. It was but if you look at the policy discussions beforehand, that system was something the US had long wanted. It's not to say I think that what Keynes proposed would have been more sensible but this was a time where the US power was at a max. It would have been difficult to convince them, for the good of the overall system, to do a monetary unit like. The IMF tries to push out a similar model today. To this day, they still have an alternative they'd like to push out.
Anita Posch [00:17:39] Then, the US dollar was backed by gold up until 1971. In 1971, Nixon, how was this called? The conference where he dropped the gold standard.
Zachary Kelman [00:17:55] I don't remember the name of the conference.
Anita Posch [00:17:57] Me too.
Anyhow, what the fuck happened in 1971? There's a website about that because you can see on the charts since then, the Fiat managers went overboard, in a way.
Zachary Kelman [00:18:16] Yes, I just think it's obvious that the gold-backed dollar was not long for this world. If you think about how long did that last? 20 to 25 years. If you look at previous Fiat systems, they last about maybe 25 to 30 years. I just think this system, because it's been so universal, has lasted longer than the other system. So, you can just start it in '71 after the gold standard collapsed and look at it until now. Yes, you're right. These graphs show global outstanding debt is a hockey stick curve coming out from that period but the US had promised to be able to repay the debts in gold and could no longer do that. There's a limited supply of gold. There's an unlimited supply of dollars. It's not surprising.
Anita Posch [00:19:03] I think France wanted its gold back.
Zachary Kelman [00:19:06] France, Britain did, a number of countries did. Maybe, the best case I could make for it was just shortsighted international planning and the US-controlled like a third of the world's GDP and most of the world's oil supply and so forth at the end of the Second World War. So, they just didn't foresee Japan, Germany and many other countries rebuilding within a couple of decades and it no longer being sustainable.
Anita Posch [00:19:34] As far as I understand, we have a US hegemony and the Western World driven hierarchical financial system. Where, I would say, maybe some thousand people decide on the fate and chances of billions of people worldwide. Is that right?
Zachary Kelman [00:19:49] I think that's the traditional system but I think that model has been eroding over time. It's mostly from democratic means. If you want to jump into some of the more recent policies we've seen from countries, particularly in Western Europe, in the past couple of years, that system is beginning to erode a bit. You can see that change but generally speaking, you look at the late 20th century, the banking policies we've seen. It's been emanating from the US policymakers and international organizations like FATF that have coordinated with these US policymakers.
Anita Posch [00:20:27] What are the consequences for maybe smaller countries or countries that are not so economically well established, in a way? If I can say that, that way. Do you have maybe an example of a nation-state that is affected by these regulations and these so-called 'high risk' country? What are the consequences then, for the citizens of these countries?
Zachary Kelman [00:20:53] Well, it's dicey territory. I can talk a lot about these countries and how this diversity affects them. The first thing that comes to mind is if you look at certain countries in Subsaharan Africa. Particularly countries that have a lot of guest workers. South Africa has a lot of guest workers from other countries in Southern Africa and those guests workers pay up to 20 to 30 percent, at certain points, on remittances. That's because there's a huge chain of funds going back and forth and the risk rating is considered very high. To be clear, when it comes to risk rating who sets these risks is international organizations like FATF, following up on the US. There isn't an objective measurement. There aren't academics and scientists and people measuring the exact risk. It is inherently political. Again, I don't say it's without merit. It's not 100% political. There are higher money laundering risks and it's not, not measuring it at all but it's certainly not measuring it on a one-to-one basis. One of the good examples to look at is, how do sanctions work? The international community would sanction North Korea or Iran or what have you and effectively, what we're saying is that entire country are criminals. They're blacklisted, effectively. Now we're not literally calling them criminals but we're saying, we're treating them in the same way that you'd treat a known criminal money launder who has been proven to be a money launder in another country.
Or, if you look at more individual sanctions, when the US is upset with another country and decides, "We're going to sanction Russian oligarchs or someone like that."
Russian oligarchs that are money laundering are already, I don't want to say sanctioned, but their funds are meant to be investigated. They're meant not to be customers of most international banks and their activities are considered money laundering. If they have a criminal background and you can show their source of funds is illegitimate, which in many cases it is. When you formally sanction and say, "These are the bad guys. You can't do business with them." It's the international community deciding that and that's not the bulk of where this unfairness in the system comes from.
I'm just highlighting that as a way of saying it's irrefutable that not everyone in Iran is a criminal. Again, there are geopolitical reasons I won't get into as to why Iran is sanctioned but the point is that it shows that the system does have an inherent political element to it. I wouldn't say that's the case in the developing world. It's more that banks in New York have a much more thorough understanding of the other banks. These banks are wealthy and powerful institutions.
The US passes a number of policies. You can look at Patriot Act, for example, which requires banks to not only record information, not only track all the movement of funds but also to do some level of transaction monitoring and investigating and reporting. So the US required that of its banks. Then, it began in the correspondent banking system looking at the correspondent banks. So like the next step in the chain. So maybe rather than New York-based banks or major European or Japanese banks that have New York clearinghouses, they then look at the second chain. So third-tier banks in Germany or large Italian banks or Spanish banks or some larger banks in Eastern Europe. They would then be told, "Look, you need to implement anti-money laundering policies." FATF would agree on that. FATF is made up of all these member states. The nation-states would then pass their own laws and start developing it. It goes down the chains and so, smaller banks in places like Subsaharan Africa aren't seen as being able to do this.
Also, in order to gauge the money laundering risks, you have to be able to look at a lot of information about people. You have to have complex databases. I don't know if you're familiar with the Aadhaar system in India but this is India's attempt to get everybody in that country on some sort of registered ID and name and identity. That's sort of a way of trying to catch up for India's banks in the system. So again, it's not an objectively unreasonable system but the way it plays out is grossly unfair to the developing world.
Anita Posch [00:25:05] Do you see any chances that Bitcoin and other open cryptocurrencies can, say, better the system for everybody? Make it a fairer one in a way?
Zachary Kelman [00:25:18] Yes, I think so. I think Bitcoin and other cryptocurrencies are really apps that use blockchains as a way of transferring value. Maybe stablecoins. We'll see how it works in the next decade or so. Yes, they are a counterweight to this because what you have is this system emanating out of New York and it's missing a lot of the world for the reasons I laid out because these other places can't develop the types of transaction monitoring systems that these, originally New York US-based policies and then Europe and elsewhere require them to. To be able to vet their clients, vet their transactions, gauge risk, hire people to look at these risks. So yes, I think that they will.
I would note to the earlier point, if you noticed earlier this week, the information that came out about all this money laundering going on in the US. Through these banks and again, this is coming because these banks are reporting this information to the treasury. The part that was leaked was from the treasury. These banks said, "Hey, we found this stuff. Take a look."
What it shows you is that a huge amount of the money laundering is happening in the developing world. So groups that list what are high risk and what are low risk. FATF makes a list of who's high risk, who's low risk, who's on the blacklist and things like that. These things don't have any formal mechanisms. It's not like FATF can sanction or harm countries but the banks look at this. So when these correspondent banks are figuring out, do we want to quote, unquote "de-risk" this lower bank. Cut them off from being able to have access to this system. That FATF list is very influential and it's not totally transparent. It's somewhat political. FATF is deciding this. Again, that isn't to say that there's no validity to it at all and they're just pulling countries' names out of a hat or going after the ones they don't like but it is political because it's not being done through some objective decision making. As we know from seeing the revelations that came out this week, at the very least a lot and I would argue the bulk, of the money laundering is happening through these banks. Through the countries that are deemed low risk. So, yes it's inherently political.
Anita Posch [00:27:30] Do you see ways to regulate these kinds of things and find money launderers and people who do illicit activities? It's also a question. In one country, an activity is illicit or illegal, in another one not but what's your idea or your take on that? How should we regulate this or should we not regulate it because that costs a lot of money also?
Zachary Kelman [00:28:01] Well, I'd say look there's clearly a trade-off. A lot of what gets stopped is illegal activity. If you speak to people that work for FATF. I'll tell you right now if anyone from those organizations is listening to this what they're thinking right now is, "Well there's there's human trafficking. There's all these horrible things. We're preventing that," and they are.
You have to figure out where you sit politically.
There's trade-offs, right? It's not so transparent. You have this system as you have it now. The people in these organizations would argue we should keep it and perfect it and try to make it better and fine tune it. I don't think that you'll ever not have the trade off of harming financial inclusion and also having these controls and rules. I don't trust that these international organizations are totally apolitical. I think most of the people working for them believe that they're apolitical or well-intentioned. I'm not saying that they're not. I just think that this system itself prevents from having the financial inclusion. I think we benefit overall from the financial inclusion.
I don't know, my personal view is that protecting journalism and transparency and figuring out what's going on in the world and exposing it, is a better approach. I think some of the best things that these banks do, is they go after dictatorships and corruption in countries. To some extent, if you can prove that this country is corrupt and it comes out publicly and again, it's a bit subjective. Sometimes there's corruption that's protected and sometimes there's corruption that's exposed but to the extent that that happens, these banks are doing a good job of preventing that. To put it succinctly, it's a trade-off. Either you have the freedom to do this and it's not being monitored and prevented and there aren't people deciding what is the bad money and what is the good money. What are you allowed to use banking for and what are you not? There's no gatekeeping. You have much more freedom of transactions. To the extent you have that, you have less of it but then you also have less international crime. I don't think banks and the banking system should be as involved in international policing. So I don't agree with it, to that extent.
I think, more importantly, Bitcoin and cryptocurrencies and other alternative means of payment are a stopgap. To me, they're a counterweight that will exist as a way of preventing the system from moving too far. So I don't think the system's going to collapse or go away. We'll just have a multi-tiered system and the system will have to compete with something, rather than be a monolith.
Anita Posch [00:30:44] Yes but don't you think that the regulations that many nation-states are working on will also crackdown on Bitcoin transactions the same way as on, let's say, traditional financial transactions?
Zachary Kelman [00:31:02] Well it depends on the country, right? So if you're talking about Venezuela or Iran or Russia and some of the countries that are passing laws that are literally cracking down on it. Then yes, that's heinous, right? So Iran's not allowing people to transact but having them do their mining. Or Venezuela, requiring them to mine but you have to be sanctioned by the government. Things like that.
Those are examples of that but for the most part, they're trying to map out the blockchain. Show who's transacting on it, require what FATF calls VASPs to show who's using their platform. Then, they're enforcing the laws that they already have on the books. They're not necessarily coming up with new laws but more so, allowing them to force these companies involved in the crypto space to disclose who's using it. Then, force them to do the same kind of anti-money laundering techniques banks do.
Anita Posch [00:33:00] Just today, I read that Russia's finance ministry wants crypto users to have to report their digital wallet addresses, transaction history and balance. If the wallet receives more than 100,000 Russian rubbles. That's around 1,300 US dollars during one year. So, basically, that's every transaction one does. Do you think that these kinds of measures are also possible in other countries? Or will the, like say, Western World be more easy on that?
Zachary Kelman [00:33:39] I'll say this first about Russia. One of the things that is quite common in banks dealing with Russian clients, are that often you'll see a lot of suspicious activity that turns out to be innocuous. A lot of the time, a lot of the techniques you see in money laundering are used by people that are not money laundering. In Eastern Europe, former Soviet Republics, a lot of the time they're trying to hide money from their own government. So it looks like it's money laundering and you investigate it and it's legitimate.
I will say this, I think you have big, powerful empire states like Russia or even like the United States, China and to an extent, the European Union that are not totally accountable because they're so large and they're pursuing policies that are to protect their own currencies and to protect their systems. Whereas, I think the smaller political units are not.
So you can look at some of the laws that European nations have passed that seemed to be at odds with the EU level policy. There's a French law that's exempting, again this is undermining it but not directly attacking it. The French have a law that they recently passed. I believe it exempts or there's a lower tax rate for crypto transactions. I think Portugal has got a similar law exempting onchain transactions. So crypto to crypto. So that's intended to bolster the crypto space. Germany is allowing banks to engage in crypto services. Now, these are things that if, on an EU level, you're looking to undermine the rise of cryptocurrencies and protect this financial system and pursue these anti-money laundering goals that you hear at high level discussions at EU level and obviously, the United States, FATF and other NGOs talk about, it undermines them. So I think that it's complex because on an individual nation-state level, strategically and the world becoming increasingly bifurcated or balkanized, I guess you could say. On this level, the NGOs are waning. As a result of that, on a nation-state level, I think certain countries are going to pursue policies that foster this and try to bring the business to their shores.
Actually, if you look at the flow of funds in 2017 during the ICO bubble, most of the flow of funds comes out of places like China and Russia and into places like Western Europe and the United States. So there is an incentive for a place like France to do that, to try to foster a community and bring the projects there. So it's a tug and pull. I think, to the extent that these countries are democracies that are not beholden to NGO or ultra national level decision making and interests. You'll see a tug of war on a smaller nation-state or regional level. You'll see them move away from the supernational interests.
Anita Posch [00:36:36] That sounds as if you would think that there would not be an agreement on the international, global level that all governments or many governments would agree on a worldwide ban of Bitcoin. What would you say?
Zachary Kelman [00:36:51] It brings us back to that World War One conversation. The world was not organized in a global system that could make these decisions back then. That's what led, in many views, to the Great Depression. The world League of Nations tried to get France to not go with the gold standard. They tried to get the US not to pass these tariffs. They tried to get the European countries to change the Versailles treaty to allow Germany not to have to hyperinflate and things like that but they couldn't coordinate it because you didn't have this massive NGO world. Many of the countries, the US included, didn't even sign up for this structure. So it's a battle. I guess my point is I think that these NGOs that we've had since the end of the Second World War are waning in influence of power. So maybe the moment where you could have seen a ban on Bitcoin, if there was one, was a few years ago and that's passed. I think it becomes less and less likely over time because certain places have it in their interest to do it.
Also, it reminds me of international attempts to get rid of online gambling about 15 to 20 years ago. It was like a game of whack-a-mole. Banks would try to make it illegal. They'd go to different countries. The international community tried to stamp it out but it just kept going to different jurisdictions that saw it as an opportunity to foster that industry and it's worth a lot of money. So we still have a Westphalian system. We still have nation-states in the world. We have NGOs applying pressure but they don't have direct control over these countries.
Again, I'm reminded that for European listeners it's a bit like the European Union. The European Union has a lot of control. It doesn't have budgetary control, it doesn't control the voters. It can't force austerity on countries. Similarly, NGOs and international groups that want to set these agendas, they can't go into small developing countries or offshore jurisdictions and force them to follow the rules they want them to. Their major mechanism of control is through the banking system. The US will pass bank regulations. They'll start de-risking and charging more money and punishing banks that don't follow a similar regulation, all the way down the chain. With Bitcoin as a hedge against that, it's not direct control in the same way that a country can just pass this law and say, "You have to do this."
The extent to which countries don't allow or don't go along with this path, it makes it very risky for the countries that want to pursue it. So I could see an attempt down the line to do something like that. I just don't think it would work and I think it'd be too little, too late.
Anita Posch [00:39:23] You just were talking about online gambling like 15/20 years ago. As I read today, that Iran is also going to mine Bitcoin with their own power stations and Venezuela also the government wants to mine by themselves. Also, China is a country where many miners are. It reminds me also a little bit about criminals use Bitcoin because now everybody's using Bitcoin in a way. Maybe other nation-states start to mine Bitcoin too.
Zachary Kelman [00:39:59] Totally. You could even look at it as a microcosm in the US. I'm sure that the Fed and banks and treasury. We've heard Steven Mnuchin, the treasury secretary, talk about this. They don't like Bitcoin. So Donald Trump's tweeted about it. We've had congressmen come out and say, "Bitcoin's a threat to the dollar," straight up.
Congressman Henry Wachsman said that a year or two ago. They can pass policies. They can encourage banks which are now very tightly regulated by the Fed ever since the Dodd-Frank laws, after the financial crisis. They're all regulated directly and in very close contact with the Fed in a way that they weren't beforehand. The hedge fund community is not. Home offices are not. So individual people looking at the system and starting to worry about it are hedging against it. So it's not really possible to stop it because there just isn't that level of control. The amount of power and control that the system has, has always been illusory. Most of its power comes from the collective belief in that power but it's never really been that. The world's always been much more decentralized than that. If you time scale it and you look at it over a long period of time, it's inevitable it'll spread out and that more people will be incentivized to hold Bitcoin.
On an international level, it gets more complicated. So countries like China and Venezuela and Iran, I think I mentioned this in that article at Cointelegraph around the end of the year. Basically, the way I look at it is, it's like a moon landing thing. In the short term, adopting crypto-friendly policies for these countries is bad because it erodes their own currency base and it harms their ability to have monetary control, trying to keep their money in their own economy. Their biggest threats are the dollar itself. They're outside the system a bit. Trying to maintain their own currency or currencies in the case of China. So for them, Bitcoin allows people to move money in and out in a way that they don't totally control which is why you see policies like Russia saying, "Oh no we're going to track it all." Or Venezuela and what have you but in the longterm, it's like a moon landing or a Manhattan Project or some big project. If they can actually use Bitcoin or accelerate this process to the point where it knocks the dollar off of its position as a global reserve currency, then it was worth it, right? On some level, it's in their interest to topple this system. So they'd like to do that but to do it harms a lot of their near term goals and their own monetary stability. It's a tough system for them which explains the policies you mentioned.
That's why Russia wants to make sure that they know everyone's wallet address and know what's going on. If they catch someone with Bitcoin that didn't register it, they can throw them in jail as a way of preventing people from not having to use rubles and trade with rubles and keep that system afloat but also they want to foster it. These countries want to foster mining because it's bad for the US dollar hegemony.
Anita Posch [00:43:03] The article you were referencing is 'Insiders, Outsiders and Experimenters in Crypto Regulation'. I will put the link to it in the show notes. It's a three-part series of articles and it's very interesting. Zachary, we were talking a lot of these regulations and stuff. You were also working in the center and allowing transactions or controlling them. How do you protect your personal privacy while using Bitcoin?
Zachary Kelman [00:43:35] I think, there's a lot of good projects you can use. Well, first of all, obviously don't hold money on exchanges. Use hardware wallets to the best extent that you can. You have to have key maintenance, I recommend Casa. I don't have any secret sauce for that. I just followed the standard advice from practices. We do custody for third parties as well and escrowing and things like that so we have to be pretty careful.
Anita Posch [00:44:04] Oh, you do that with your company?
Zachary Kelman [00:44:06] That's right.
Anita Posch [00:44:08] Oh, I didn't know that. I thought you only do consulting and stuff.
Zachary Kelman [00:44:12] Litigation, consulting, things like that but yes, if people needed it. We do our own vetting and things like that but we can also do escrowing. It's mostly a service we do for clients that need it and that we're already working with, as opposed to like a standalone service.
Anita Posch [00:44:29] Interesting. I wanted to ask you also a general question about lawyers. [laughs] Do you see a difference between the, let's say, a little bit older generation of lawyers and young ones in terms of their position to cryptocurrencies?
Zachary Kelman [00:44:45] Yes, it's a funny question because the way I look at it is, law is one of those skills that you get better at as you get older. So most of the best lawyers are a little bit older. If you want a lawyer that understands crypto, it's hard to learn about crypto. If you're in your forties, it's not intuitive. Also, most of the American lawyers are vested in the US system. So when I talk to US lawyers, it does seem that A, they're so used to how the US system works and B, they take for granted that it's always going to exist and always have this international reach. So they just seem to want to be protecting the US and the US system. They seem to defend all the US laws whenever they're out there and look at the upside of those laws as opposed to taking an international focus on it. That tends to be the case with most of the crypto lawyers. Many like Bitcoin. The ones I know in America that like Bitcoin, they're more just like libertarian-ish gold bugs that don't like the dollar. They're not as interested in the international effect of Bitcoin as a hedge on the system, per se. This is true, I think, in the US in general. The focus is, "Hey, Bitcoin is a good gold replacement as an investment."
Not Bitcoin is a way of allowing the vast unbanked world to have access to financial services and develop that part of the world.
Anita Posch [00:46:14] Or to personal freedom and stuff. What I can say, I was 47 when I started to learn about Bitcoin. It works.
We can do it if we want.
Zachary Kelman [00:46:28] That's right.
Anita Posch [00:45:29] Yes. What do you think most people overlook when they talk about Bitcoin or maybe, what are you missing in the public discourse about it?
Zachary Kelman [00:46:42] Yes, it dovetails on the point I was making just now. I think most people don't understand the financial inclusion issue in the developing world and they don't understand why people would use Bitcoin. To them, they're looking at it as an asset class with their investment profile. That's the way it's discussed. As this sort of CNBC approach to Bitcoin. It's a good tool to hedge your profile of US-based assets and fixed income and inequities. You want to include a little bit of Bitcoin in your in your portfolio. It's seen as that. As a hedge, as a deflationary asset in an inflationary world rather than, it's a tool for international settlement outside of the system. The censorship-resistant component got forgotten. I think a lot of it is the 2017 bubble. It does seem like there's this permanent, innate pyramid scheme feature in the crypto space. It's the shiny object attracting everyone's attention. The actual alternative system that it presents is something that's moving very slowly and growing very slowly. So you don't notice it but that, to me, is a much more interesting and ultimately impactful difference. An impactful feature of Bitcoin and crypto in general. I don't want to say it's overlooked. It's not as exciting and the information about that is not as relevant to people.
Anita Posch [00:48:07] Exactly. It's not such a hype about it but for me also, it's the more important part of Bitcoin.
Zachary Kelman [00:48:14] Yes, it's important because I think most people are looking at it from a self-interested standpoint. They're looking at, "What am I going to make money off of?" If you're looking at it from an intellectual standpoint or academic standpoint or even just political standpoint, the other feature is more interesting than just a price action.
Anita Posch [00:48:32] Yes. In general, we are very concentrated on our next surroundings, in our daily life and we don't look outside our own borders or the borders of our country. But I think that the real impact that Bitcoin can have will be a support or a tool for, as we say it always, underdeveloped countries. They need it, actually, much more than we do.
Zachary Kelman [00:49:01] Yes. I would say too, I think one of the things that bridges the gap for me with people who are more in, I call it the CNBC focused world of crypto, is people are wondering when are the other features of Bitcoin going to become relevant to people? When are people going to care about Bitcoin as a non-stablecoin, non-US dollar settlement tool? It's not as good, obviously, as credit cards and things like that. To me, when a major currency collapses, it changes overnight.
Right now, the understanding of the dollar versus Bitcoin. When you would use Bitcoin. If the dollar loses 20% of its value, and this happens in other countries when their currencies lose huge amounts of value, that you become a different person. The people become different people in terms of their economic outlook on these different assets. We only don't truly appreciate the deflationary component of the hedge against the dollar that Bitcoin provides. An ability to transfer it because the dollar has lasted so long. If that changes just briefly, for a period, we look at it radically differently. We look at it as all the other features of censorship resistance. The freedom component of it becomes a lot more attractive. Why most people living in the developed world don't understand that because we've been privileged enough to have, especially in the US, a stable currency for so long.
Anita Posch [00:50:29] Exactly but we don't know how this will play out in the coming years with all the pandemic situation and the endless printing of money.
Zachary Kelman [00:50:39] Yes. Exactly but most people, I think, if you really talk about it with them, they know that it's going to end. There's some people that work for major financial institutions. Most of the time if you really discuss this with people that really believe that, they'll eventually cave to the point where, "Hey, yes, maybe but we're decades away" or "What's the replacement?" or those kinds of arguments.
Just look at the US political situation. The US didn't have significant national debt or most of the developed countries didn't 20-30 years ago. Now, they all have debts that are well in excess of their GDPs. Their central bank's discount window or the rate at which they lend that is becoming zero or negative. These are all new things. It didn't happen before. Just look at the US as an example. Does anyone really think that the US Congress is going to come together and pass laws and pay down the debt? It's just not going to happen. That alone is one issue. Maybe the US craters and the dollar remains. You look at Fed policy. That's headed in a direction that increasingly feels like it's a point of no return. So, I don't think it's if but when. I think most people know that at this point. Maybe they didn't know that 20 years ago. Maybe they didn't even know it after the financial crisis but I think at this point, most people intuit that it's a matter of when and not if.
Anita Posch [00:52:06] Yes and I think financial basic education would be so important because most people do not know where money comes from. Just some days ago, I had some friends here at my place. We were talking about Bitcoin and I asked them, "What is money?"
One of them said, "It's backed by gold." and I said, "No, it's not." Everybody believes this because we don't learn about it and I think that could be a main focus of educational work, in a way.
Zachary Kelman [00:52:39] Well, I'll be honest with you. Let's say, just look at any country where you have someplace where everyone has a lot of money and then, you have someplace where it's high crime. The people living in the high crime area tend to develop higher social IQs and have what's called 'street smarts''. It's not because their parents teach them to have street smarts, to some extent they do. It's because the reality of not having that and the consequences of not having that is very apparent to them. They get hit by the pain of not having that awareness, over and over again. So I think the only thing that's going to change this is the school of hard knocks and that is the actual consequences of the policy over a long period of time. So once the market changes. Whether it's the dollar or some big other currency, but most likely the dollar, actually has an actual crash, a serious crash. It'll just be a sudden realization for everybody. It'll be a very quick change of opinion, I think.
Anita Posch [00:53:39] Yes but I guess it would be great if some of the people would be prepared.
Zachary Kelman [00:53:46] That's true, yeah. Well, what can you do? Some people are. Hopefully, the people listening are. That's what's great about these podcasts.
Anita Posch [00:53:54] Yes. We're coming to an end now. I have one last question. Actually, I stole this one from Tim Ferris. I'm saying it every time. It's if I were to buy you an ad on all social media platforms and you could decide the text, the short message that we are pushing out into the world, what would it say? What would you like people to know?
Zachary Kelman [00:54:18] That's a tough one. I'm going to give you a boring answer. It's going to be lame but I don't think I'd even say anything about Bitcoin or crypto or anything like that. I think I'd say something simple like, "Life is short and be kind to people while you still can. While you're still alive."
Anita Posch [00:54:37] Yes, it's true. Thank you for that, for that reminder.
Zachary Kelman [00:54:43] It's easy to forget but it's really important. I don't know why I'm bringing this up but I was driving and I just saw an old woman walking across the highway with a little one of those walkers in front of her. It just struck me how fragile life is. We're all thinking about politics and Bitcoin and crypto and everything else but you can't forget how fragile it is. How short it is. I know this has nothing to do with crypto but that's why that's present of mind for me right now. Is that you have to be kind to the people around you, no matter what.
Anita Posch [00:55:17] That's true. I completely agree with you. Thanks for that. So Zachary, where can people find you and follow your work?
Zachary Kelman [00:55:26] Okay, well I'm you can come to the website. It's www.kelman.law. On Twitter, @Zkelman. K-E-L-M-A-N. I'm on Cointelegraph. I do articles periodically. Just Google Zachary Kelman. That's probably the first thing that comes up. That's pretty much it. You can reach me on the website. If you just go to kelman.law and send me an email. It's an email@example.com but yes, just www.kelman.law.
Anita Posch [00:55:53] Great. I will put that all into the show notes. Thank you very much for your time and this interview. It was great. Very great insights into the world of regulations and have a nice day.
Zachary Kelman [00:56:08] Thank you, you too.