20VC Former Governor of the Bank of England, Mark Carney on Why Only the Niche Will Survive in Crypto, How Governments and Central Banks Retain Control in a World of Decentralised Finance & The Winners and Losers in Crypto Exchanges and NFTs

In this episode of 20 VC, Harry Stebbings interviews Mark Carney, Vice Chair of Brookfield Asset Management and former Governor of the Bank of England, about the future of finance and the intersection of climate action and investing. Carney discusses the potential of central bank digital currencies (CBDCs) to reshape payments, the impact of technological innovations like NFTs and decentralized finance (DeFi) on income inequality, and the role of crypto in the financial system. He predicts rising long-term interest rates due to climate investment and highlights the importance of decision-making and adapting to systemic changes. Carney also emphasizes the need for empathy, curiosity, and perseverance in personal development. The conversation also touches on the challenges traditional banks face with fintech innovation and the potential for a new set of financial incumbents.

• Harry Stebbings introduced Mark Carney as a special and unique thinker.
• Mark Carney is the vice chair of Brookfield Asset Management and head of transition investing.
• He served as the governor of the Bank of England and the Bank of Canada.
• Mark Carney was also the chairman of the Financial Stability Board.
• He is an advocate for sustainability and the UN Special Envoy for Climate Action and Finance.
• Carney is on the boards of Stripe, Bloomberg Philanthropies, and the World Economic Forum.

"Mark is vice chair of Brookfield Asset Management and head of transition investing. Prior to Brookfield, Mark served as the governor of the bank of England from 2013 to 2020, and prior to that served as governor of the bank of Canada from 2008 until 2013. Mark was also chairman of the Financial Stability Board from 2011 to 2018 and Mark is a longtime and well known advocate for sustainability and is currently the United Nations Special Envoy for climate Action and finance."

This quote highlights the extensive career and roles of Mark Carney, emphasizing his leadership in finance and sustainability.

• Harry Stebbings spoke highly of Harvard Management Company (HMC) and Mercury.
• HMC manages Harvard University's endowment and invests in venture capital.
• HMC is seen as a partner providing insights to help managers succeed.
• Mercury offers banking services for startups, including FDIC-insured accounts, debit cards, and integrations with various tools.
• Mercury also provides features like API access, custom team management, and connects startups with investors.

"Harvard Management Company is constantly seeking out the next generation of great investors and entrepreneurs. HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital."

The quote explains HMC's role and experience in managing Harvard University's endowment and its pioneering involvement in venture capital.

• Mark Carney became an economist and entered finance to understand the world and make money.
• He worked at the intersection of private and public sectors, including at Goldman Sachs and as a public servant.
• His roles were influenced by historical events and deliberate choices, particularly in climate transition and the future of finance.

"Became an economist and went into finance and particularly the macroeconomic end of finance because out of interest, I wanted to understand how the world worked, make some money along the way, but understand how the world worked."

Carney's motivation for entering finance was to gain a deeper understanding of how the world functions and to prosper financially.

• Mark Carney discussed the impact of witnessing multiple economic cycles on his perspective.
• He emphasized the importance of understanding fundamentals and being skeptical of things that don't make sense.
• Carney looks for larger trends like sustainability and fintech, while being aware of potential downsides.

"I take a lesson from that and other experiences that if something doesn't make sense, it doesn't make sense."

This quote captures Carney's approach to finance, where he stresses the importance of clarity and understanding in financial concepts.

• Carney discussed the role of central banks in a decentralized financial world.
• He believes that private monetary innovations eventually reconnect with central systems.
• Innovations must fulfill new payment needs or bridge gaps in the system.
• Carney sees enduring potential in fintech and crypto, given they meet genuine needs and are well-executed.

"Well, if it is completely decentralized, by definition, they don't have control. But what has happened over the ages is private monetary innovations eventually reconnect to the center."

The quote explains that while decentralization implies a lack of control by central banks, historically, private innovations tend to eventually integrate with centralized systems.

• Carney sees crypto as a major innovation that could fundamentally change financial systems.
• He acknowledges that while some use cases of crypto are undesirable, others like NFTs and metaverse transactions represent positive developments.
• The challenge lies in ensuring these innovations are resilient, effective, and properly integrated with existing financial systems.

"First off, I think it's a major innovation. So there's lots of attempted innovations in finance and money. And quite often there's, in many cases, there are repeats of old attempts that are boom market, if I can put it, that boom time innovations and ultimately are undercut."

Carney regards crypto as a significant innovation that stands out from previous financial attempts, acknowledging its potential to create lasting changes in the financial landscape.

• Crypto exchanges will evolve to focus more on exchanging underlying assets, such as art, video game functions, or fractionalized real estate ownership.
• Smart contracts and their execution will become integral to the operation of crypto exchanges.
• Exchanges will serve as a platform for various types of transactions beyond traditional currency exchanges, reducing the need for multiple exchange rates within an economy.
• The role of exchanges will shift from currency-centric to asset-centric transactions.

"Over time, I think the role of the exchange will increasingly be about exchange of the underlying asset, whether it's a piece of art, whether it's a function in a video game, whether it's a fractionalized ownership in a building, that's where the exchange comes to the fore, as well as the protocol for executing smart contracts."

This quote emphasizes the anticipated shift in crypto exchanges from currency transactions to a broader role in exchanging various types of assets and executing smart contracts.

• Digital gold, like Bitcoin, has value because people believe it has value, known as a coordination game.
• An asset's value as a hedge is partly determined by its correlation with broader risk appetite.
• Bitcoin's role as a hedge is questioned due to its recent behavior as an amplifier of risk appetite.
• Bitcoin's efficiency as a payment system is limited due to liquidity issues, which raises concerns about its practicality.

"Critical to the value is the extent to which that expression of value, the desirability of the asset, is not correlated or is less than fully correlated with broader risk appetite."

This quote discusses the importance of digital gold's value being independent of general market risk, which is a key characteristic of traditional gold as a hedge.

• For a payment system to be widely adopted, it must be operationally resilient, well grounded, and efficient.
• Regulatory oversight becomes necessary as a cryptocurrency scales up and becomes more integral to the economy.
• The value of crypto assets enabling new types of transactions through smart contracts is significant.
• There is a balance between the success of a cryptocurrency and the need for it to be integrated into the broader financial system, possibly alongside a stablecoin.

"When it gets to that scale, it becomes, in the interests of the authorities to provide some oversight, regulation we've just seen, in effect, the US authorities state that pretty clearly with respects to a subset of what we're talking about, albeit, but saying that very clearly with respect to stablecoins, a similar logic will hold for crypto."

This quote highlights the inevitability of regulatory oversight as cryptocurrencies become more significant in the economy, particularly in the context of stablecoins.

• The movement of money and wealth creation in digital economies can be linked to central bank digital currencies (CBDCs) or stablecoins.
• The integration of crypto with traditional financial systems can reduce friction costs and improve transaction efficiency.
• Central banks may retain control over fiscal and monetary policy despite the rise of decentralized financial transactions.

"So there's a way to get the benefit of the smart contracts, the benefit of the nfts, the benefit of this massive opening up of the digital economy...but link them, link across these various nodes through what in effect is ultimately a central bank digital currency, it may be back to a stablecoin between the token for the application and the CBDC at the center."

This quote suggests that the benefits of blockchain technology can be harnessed while maintaining a connection to traditional financial systems through central bank digital currencies or stablecoins.

• Seamless, decentralized financial transactions are positive, but individuals must still declare and pay taxes on income and capital gains.
• The design of the financial system should consider the points at which gains are realized and taxable.
• The desire for liquidity and yield from crypto assets introduces systemic risks, especially if individuals borrow against volatile assets.
• Planning for potential failure and ensuring liquidity is crucial in managing investments in crypto.

"One of the lessons, if you asked me earlier about lessons, is you should always plan for failure. You should always think about not just why something is unlikely to happen, or convince yourself it won't happen. Ask yourself what would happen if it did."

This quote advises investors to always consider the worst-case scenario and prepare for potential downturns in the value of their crypto holdings.

• When interest rates increase, risk assets typically experience an amplified impact on their interest or discount rates.
• The effect of rising interest rates on the crypto market is uncertain but expected to test the relative yield benefits of crypto versus traditional fiat currencies.

"What tends to happen when interest rates increase is that there is an amplified impact on the interest rates of risk assets or the discount rates on risk assets."

This quote explains the general market reaction to rising interest rates, which often leads to a more significant effect on the cost of capital for riskier investments, including potentially crypto assets.

• The interest count rate increase of 1.5 to 2.5 points affects the value of assets differently across the risk spectrum.
• Assets at the far end of the risk spectrum face more significant temporary devaluations.
• The income generated by an asset must increase to offset the impact of rising interest rates; otherwise, a price adjustment occurs.
• This results in an overall tightening of financial conditions.
• Cryptocurrencies and various DeFi applications, which have seen large run-ups, are likely to experience pullbacks.
• However, a pullback does not signify the end but rather a new starting point for resilient applications.

"Count rate tends to go up by one and a half to two and a half points, depending on where the asset is on the risk spectrum. And so unless the income from that asset is rising more rapidly, you get a price adjustment, and this is an overall tightening in financial conditions."

The quote explains how the interest rate affects asset values and leads to tighter financial conditions if the asset's income doesn't rise correspondingly.

• The mindset of being prepared for failure is crucial.
• Winners in the financial world are those who can determine their interaction with new technologies.
• The future of banking may involve central bank digital currencies at the wholesale level.
• Retail-facing companies will likely become digital wallet providers, serving as the primary interface for clients.
• Banks must decide on the range of services they will offer, from transactions to treasury functions.
• Incumbent banks face challenges due to competition from fintechs and decentralized finance, which may erode their balance sheets.
• The banking industry's competitive landscape is rapidly evolving, and incumbents are not always the best innovators.

"Fail is one of the lessons. And having that mindset, when we think about winners and losers again, when we spoke before, you said that the winners will decide what is my interface with this world."

This quote highlights the importance of being prepared for failure and the ability of winners to adapt and choose how they will interface with evolving financial technologies.

• Traditional banking incumbents may struggle to innovate and keep up with the changing ecosystem.
• Some banks may transform into white-label credit providers, renting out their balance sheets.
• Authorities face the challenge of preventing the dominance of a few new entrants and avoiding the "uberization" of money.
• The financial system's organization may need to change to accommodate innovations like fractional reserve banking did in the past.

"I think that some will, but they'll be the minority. I think a number of them will shift towards becoming more white label credit providers because in the end somebody needs a balance sheet to make the loan and that service isn't necessarily that expertise isn't necessarily the same as a retail facing provider."

This quote suggests that while some traditional banks may innovate, many will likely become background credit providers due to the different expertise required for retail-facing services.

• The concept of money is being unbundled into separate functions and services.
• Store of value, means of payment, and unit of account are experiencing changes.
• Digital currencies may replace fiat currencies for payments, which could lead to significant innovation and improved services.
• The domestic fiat currency is expected to remain the ultimate store of value and unit of account.

"Yes, it's a short answer. So you have the store of value role, and we talked a bit about digital gold. But I think what's really interesting about this is the unbundling of the means of payment and a series of competing means of payment that are opening up new possibilities."

The quote discusses the separation of money's traditional roles and the emergence of new, competing means of payment, which could transform financial services.

• Technological innovations often initially increase income inequality before eventually decreasing it.
• Innovations like NFTs and machine learning could lead to a rise in inequality during the transition period.
• Changes in institutions and the financial system are necessary to distribute the benefits of innovation more broadly.
• Innovations also provide opportunities for SMBs and individuals to reach global markets and monetize creative work.
• The digital revolution allows for less capital-intensive business models, enabling mass artisanal commerce.
• Despite the potential for creator enablement, there is a concern about the concentration of power in major corporations.
• Historical patterns show that technological revolutions lead to an "Engels pause," where productivity increases but real wages stagnate, contributing to inequality.

"Certainly the vast historical experience is that technological innovation increases income inequality before it decreases income inequality."

The quote reflects the historical pattern where technological advancements initially lead to greater income inequality before broader societal benefits are realized.

• The disentanglement is not a new phenomenon; it has been observed historically with major innovations.
• AI and robotics are contributing to the current disentanglement, but they also create new job opportunities.
• AI, when combined with human interaction and judgment, can lead to the discovery of new strategies and improvements in various fields.

"Well, I agree with it in the extent to which it's not the first time we've seen it. We've seen it over history, when we've had these big innovations."

This quote explains that the separation of GDP growth from labor productivity is a recurring event throughout history, typically associated with significant innovations.

"The AI will enable new jobs. I mean, these prediction machines have a value, but ultimately they get layered with human interaction, human judgment."

The quote emphasizes the potential of AI to create new job opportunities by enhancing human capabilities rather than replacing human labor entirely.

• AI can discover new strategies and ways of playing games, such as the example of AlphaGo, which found a new local maximum in the game of Go.
• This discovery by AI has revitalized interest in the game and opened up new possibilities for human players.

"The machine has then enabled them to do a bunch of other. And so Lisa Dole, I believe, well, I know he said this a few years ago, there's never been such an exciting time to play go in his career, because a whole new element of the game has been opened up by the machine, as opposed to, oh, we're just going to lose to the machine every time and the game is over."

This quote illustrates how AI can be a tool for enhancing human experience and skill in areas like games, where it can lead to the development of new strategies and rejuvenate interest in traditional practices.

• NFTs are innovating the art world by changing the dynamics of ownership and provenance.
• The fractionalization of hard assets through NFTs allows for new portfolio constructions and risk-return frontiers.
• Winners in the NFT space include those who facilitate portfolio construction and those who create new assets and experiences that thrive in the NFT economy.

"I think will be those who help. And it's not quite picks and shovels on this, but help individuals, institutions develop new portfolios of ownership that kind of push out the risk return frontier."

This quote suggests that enablers and facilitators who assist in the creation of diverse portfolios with NFTs will emerge as winners by expanding the possibilities for ownership and investment.

• Speaker C's favorite book is "Arcadia" by Tom Stoppard, which covers a wide range of themes including reason, passion, and machine learning.
• The three traits Speaker C values for their children are curiosity, perseverance, and empathy.
• Speaker C identifies their biggest strength as making big decisions and their biggest weakness as making small decisions.

"Favorite book is actually a play. Arcadia by Tom Stoppert. And the reason? It's this amazing blend."

This quote highlights Speaker C's appreciation for literature that combines various intellectual themes and human emotions.

"Curiosity, perseverance and empathy."

Speaker C values these traits as essential for personal development and success.

"Biggest strength? I making big decisions. And to be honest, my biggest weakness is making small decisions."

Speaker C self-assesses their decision-making skills, recognizing a disparity in their ability to make decisions of different magnitudes.

• A good decision made today is better than a perfect decision made tomorrow; action is preferred over inaction.
• Speaker C has revised their belief about long-term interest rates, now expecting them to rise due to structural forces like climate change investment.

"Plan beats no plan. Yeah, good decision today."

This quote reflects Speaker C's philosophy that decisiveness and action are more valuable than waiting for perfect information or conditions.

"I believe long term interest rates are going to rise notably to this decade."

Speaker C shares a change in their economic outlook, anticipating a significant increase in long-term interest rates, influenced by global investment trends.

• Speaker C joined Stripe's board due to the founders' qualities and the company's potential in innovation.
• Mario Draghi is mentioned as the most memorable board member Speaker C has worked with, due to his strategic acumen and courage.
• In the next five years, Speaker C aims to achieve significant financing for emerging and developing countries, successful strategies for Brookfield, and a thriving Canadian economy.

"Patrick, and know the founders, their quality, their curiosity, their perseverance, empathy."

Speaker C's decision to join Stripe's board was influenced by the founders' characteristics and the company's innovative potential.

"Mario Draghi, who is currently the prime minister of Italy. And I worked closely with him on a number of boards in the official sector and just a remarkable combination of sense of history, strategic now and huge courage."

Speaker C praises Mario Draghi's leadership qualities, which made him a memorable colleague on various boards.

"I would like the world to get to what it needs to, which is a trillion dollars of additional financing for the emerging and developing world."

Speaker C expresses a desire to contribute to significant global financial goals, particularly in support of developing regions.