Local expert decrypts cryptocurrency

S1: Welcome in San Diego , I'm Jade Hindman. If cryptocurrency and its future are confusing to you , we've got a finance professor who will tell you everything you need to know. This is KPBS Midday Edition. Connecting our communities through conversation. Words like cryptocurrency , the blockchain and Bitcoin have been in our vocabulary for a while now , but what they are and how it all works can seem a bit clandestine. Timothy O'Donovan is here to explain it all. Out in the open , he is a finance professor at the University of San Diego. Timothy , welcome to Midday Edition.

S2: Thank you very much. Thanks for having me.

S1: Glad to have you here. Okay , let's start simple here. So what exactly is cryptocurrency ? Cryptocurrency.

S2: So it does make sense , I think to start explaining what a blockchain is. And if we think about a blockchain , it's actually something that's very simple. It's simply a database that holds information. And I think a very easy analogy is similar to using a notebook to keep track of information , to keep track of payments , to keep track of accounting debits and credits. You might use a notebook , and you can think about each page in the notebook as being equivalent to a block within a blockchain. And a blockchain is nothing new at all. These blockchains have existed for many decades , but the breakthrough in blockchain technology comes with the introduction of cryptocurrency. So this is how the two are related. You can imagine an old fashioned notebook that keeps track of transactions and information Formation. Someone has to maintain that could be a store owner , or it could be a household , and someone has an incentive to make sure that the information in the notebook is maintained properly and has the truth. But if you create a blockchain that holds information , you need a way to verify that there isn't fraudulent information going into this digital database. And the way to do that is to have many people keep a copy of the digital database , and then if they approve only non fraudulent information , good information , truthful information , they will be rewarded for doing good work by receiving a cryptocurrency token that has monetary value.

S1:

S2: The truth of the block , meaning the information that's presented on the block , on that sheet of of notes. The reason we know that it's truthful is because all the people that are verifying the accuracy of the transactions are competing to be rewarded money to make sure that they're only telling the truth. Hmm.

S1: Hmm. When you say the blockchain is like a notebook , right ? With a bunch of transactions in my head , in my brain , I'm visualizing my Venmo feed. Is that an. Would that sort of be. Absolutely.

S2: Absolutely. No , it's absolutely a great analogy. Now Venmo is obviously a company that's owned by PayPal. And so they have an armada of people that work at PayPal that are verifying the transactions are accurate and non fraudulent. And but it obviously comes at a price. It comes at a fee for Venmo or using any banking services. The value proposition that blockchain offers is that because all of these independent verifiers all over the world are being rewarded with cryptocurrency , then the cost of me moving money or adding a transaction to the block is incredibly low , close to free. And so that I think is like the key question. There are two things. Two. Two directions. I think we should go. Number one is if you think about a bank and it all it comes down to really is just one big ledger , one big notebook , really keeping track of all the transactions. My deposit into , let's say , Chase Manhattan and then chase loans out to their individual customers. If you think about a corporation , there are really three major parts to a corporation. Number one is they're the people that make the product to the people that sell the product. And three of the people that keep track of all of the debits and credits that are coming in and out of the company. That function of keeping track of sort of like a ledger can be done in a much more efficient , much cheaper manner , and the blockchain aims to solve that problem. So.

S1: So. And we should know you are in general a proponent of blockchain and cryptocurrency. Yes.

S2: Why yes. I think here are a few good analogies that I always go back to. So there's this great telegram that exists from 1873 , and it shows someone trying to wire $300 from New Orleans to New York City. And the cost of that wire transaction is $9. So 3% of the total transaction cost. That feels to , you know , to us , I'm sure like that's a reasonable fee. In 1873 , that was 150 years ago. So it was very difficult to get money from New Orleans to New York. Today , that 3% number is still used on all of our , for example , credit card transactions every time we use a credit card. And that idea of we live in 2025 when money is in 95% of the cases digitally represented , were no longer dealing in cash , with no longer having to move cash money by horse from New Orleans to New York. That transaction cost should be incredibly low , nowhere near 3%.

S1: And let me go back to this all being backed by money. Okay.

S2: Okay.

S1:

S2: No , but it's I. Okay , I see what you're saying. Is it backed by , um , a US dollars or another commodity ? Yeah.

S1: Yeah.

S2: Yeah. No , it is not. But it is backed by the faith and the participation of all of the members of the blockchain. Number one. Number two is we know that there is a finite number of , for example , Bitcoin tokens that can be created. And therefore we can envision that we know what the total amount will be outstanding , and therefore we have a general sense of what the value might be. Here's another way to think about it as well. If you took all the gold in the world , the value of that both underground and above ground , can fit inside two Olympic sized swimming pools. All of the gold that's ever been mined or above ground on in jewelry and machines. And the value of that is $20 trillion. If we think that cryptocurrency can be a substitute for gold as a store of value , then we think we can assign a value that is maybe 1% or 5% of the total gold that exists in the world.

S1: So is it fair to say then , that how how people feel about something ? Yeah , um , is valuable in this , like understanding a group. Group thought and psychology is worth gold when it comes to cryptocurrency.

S2: I think I think that's exactly right. And I would say something , you know , the comparison would be the US dollar. Do we inherently intrinsically. Does the US dollar have value. Not intrinsically but it has value because we know that we both recognize that it.

S1: We believe it. Does.

S2: Does. Exactly. It's accepted in stores and accepted by our government , and we believe it does.

S1: So if folks believe that cryptocurrency has some value , then so be it. Right. Okay. All right. I suppose I understand that. Um , you know , one strong argument though against crypto is , is that it's anonymity and lack of regulation makes it a popular space for major fraud and money laundering. How do you respond to that ? Right.

S2: It's a it's a , um , no , it's definitely something I hear quite often. So two things I would say. Number one is the most , um , Anonymous asset we have is cash. And so by far the most fraud and sort of illicit activities we would expect to find in the cash market. And , and , and we do observe that with cryptocurrency and the movement of digital money , there is always a digital stamp related to who owns the cryptocurrency , what time you sent the cryptocurrency and then who received the cryptocurrency. So very recently in the administration , the FBI , there was an interview that was done where a representative from the FBI said , we actually love cryptocurrency because there is always a publicly available record of money moving through the system , whereas cash is something that's still close to impossible for us to trace and track. So I'd put it in that stack of anonymity. I would put it in below where we are in traditional banking , but above the illicit cash market.

S1: Okay , crypto has become popular with many young people or other communities who have become perhaps wary of Wall Street and traditional finance.

S2: And I think it falls into this bucket of , are we actually getting the security and the services that we're paying for ? And I think the younger generation is a little bit more maybe in tune or a little bit more willing to , um , not necessarily go the traditional route when it comes to finance. Obviously , the younger generation is very comfortable on their mobile phones , and they're very comfortable switching banks a lot quicker than the older generation. And maybe one , one sort of big event that happened , obviously , was the great financial crisis in 2009. And I think what the generation below me saw was , there is a lot of corruption , a lot of overcharging , a lot of risk taking within traditional banking. And I think it really comes down to one major thing , and that is we all pay an enormous amount of money in the way of fees to our traditional banks. It shows up in very sneaky ways to , for example , when we pull cash out of an ATM and it's not our bank , that ATM fee is just , to me , crazy high. Another one. When we wire money , especially overseas , if we want to remit money to a family member in Mexico , that charge can be 50 to $100 to wire money. Another one is , if we look at the rate we're receiving on our deposit in a bank account , it's well below 1%. And the sneaky secret is that a bank can take our deposit and then lend it to the government , the Federal Reserve , and earn more than 4%. And so this collection of fees and sort of the observation that we witnessed during the financial crisis , and then one final point is 50% of all of the deposits in America are held at the top five banks. That concentration of power and money just is something I'm quite skeptical of. Hmm.

S1: Hmm. You know , President Trump has an interest in seeing the U.S. crypto industry grow. He's faced criticism for selling his own Trump coin and making a lot of money from it. What impact is his second term likely to have on the adoption of blockchain more broadly in the economy ? Right.

S2: Here's what I'm and I think the community is hopeful for. The regulation that we're using right now in crypto has really just not been solidified and not been written. And so I think that has led to a obviously a whole bunch of uncertainty. But be it is also led to maybe undue risks taking and the fraud that we've seen in cases like FTX and other high profile cases. I think if we were to get a set of regulations that determines whether a cryptocurrency , for example , is it a commodity , is it a security , is it a currency ? Would be very helpful to help us sort of navigate better than what we have in the past. And so that's what I'm hopeful for. I think we'll take quite a bit of time , though. I think I'm looking more in the back end of the administration's term , but I actually think it's not even a Trump thing. He obviously it is a focus of his , but I really think it is a left , right , uh , place that we can actually agree on that we just need better regulation , a little more clear , a little bit more transparency for this asset class.

S1: Well , finally , there are a lot of crypto Dough scams and related fraud. What should people be skeptical of and how can people avoid being scammed ? Right.

S2: I think the best way to do it , it's sort of like the first 5 or 10 years of any industry that has been born. So if you think the auto industry , the aerospace industry , in the beginning , there were hundreds of car companies that were trying to break into this market , and there was lots of fraud and accidents and um , players that were , um , not necessarily playing by the rules. Another one , another great example that I always use in my class is the state of California. So if you think back to 1849 , the state of California was a place where everyone rushed in to try to find gold , and there was lots of lawlessness and lots of chaos. And it took a hundred years plus in order for us to get all these wonderful things that we now see in California the freeways , the universities , the national parks , Disney World , Hollywood. And I think that's probably what's happening in crypto. The model itself makes a ton of sense , but in the early days , of course , as people chase , quote unquote , gold , there's going to be illicit and sort of irresponsible activity. But the good news is now in 2025 , much of that has been washed out. And the advice I would give or the guidance I would give is that even though there are more than 10,000 individual cryptocurrencies , you just have to focus your effort on the top five. And they're big enough , they're old enough , they've taken a beating in the sense of security , and they're still around and they've been proven to be best in class.

S1: All right.

S2: No need to set up a wallet and they will be good stewards , I believe. Of your cryptocurrency holdings. And then , like I said , stick to the top five and also start very small as well. Start to get to understand how they move. They can be quite volatile , but as long as you're not risking too much.

S1: I've been speaking with Timothy O'Donovan. He is a finance professor at the University of San Diego. Timothy , thank you so much.

S2: Thanks for having me , I appreciate it.

S1: That's our show for today. I'm your host , Jade Hindman. Thanks for tuning in to Midday Edition. Be sure to have a great day on purpose , everyone.