Brett Messing: (00:07)
Well a year ago I was working out on a Peloton because it was a pandemic. And I was studying about Bitcoin because it was a pandemic. And I was listening to a podcast by Peter McCormack about the Lightning Network and I was blown away and I got off the podcast and I called Ross Stevens of NYDIG, our sponsor. And I said, can they really do that? Because if they can really do that, this is so much bigger than I realize. And he said, they can do that. You have to speak to Elizabeth Stark. So here we are. What is the Lightning Network? No E by the way, Lightning without an E. And why is it important?

Elizabeth Stark: (00:50)
Thanks, Brett. First of all, it's so incredible to be here today as a New Yorker with this crowd here, being in the financial center of the world and one of the tech centers of the world. So, Ross is correct. This is possible. And the Lightning Network is a technology that enables instant high volume transactions over Bitcoin. You can think of it as kind of this second layer as we call it or a transaction layer operating on top of the Bitcoin blockchain. So today on the internet, and by the way, I'm a tech geek. I come from the land of magic internet money as we say in the Bitcoin world. Today on the internet, it's really easy to send a photo in any application to somebody anywhere around the world instantly, right? You can do it in text message. You can send it via Twitter, WhatsApp, in a variety of ways. But why can't you send value?

Elizabeth Stark: (01:46)
So being the internet geek that I am, in the early days of the internet I wondered why can't you actually just send money? For example, I love music, to a musician, to a band, to a DJ, to somebody that created a video and just embed it natively in the internet. So the goal with Lightning is to be able to natively embed value and payments in the internet. In fact, the early creators of the internet, Tim Berners-Lee, in the early nineties envisioned that this would be the case back then. They created an error code it's called HTTP 402 payment required, which is kind of like 404 not found, it just was too early.

Elizabeth Stark: (02:21)
So when I learned about Bitcoin, I thought, this is really cool. You know, will this actually scale? And will people be able to use it to natively embed payments on the internet? And then I learned about the possibility of this second layer operating on top of Bitcoin that can scale it to billions of people and I was sold. And this was actually back in 2014 when I first learned about this concept. So a lots happened since then, and I'm excited to chat about it today.

Brett Messing: (02:47)
So what is a use case for the Lighting Network? Because you know, I think for many people they look at Bitcoin, they see the price go up, particularly I think Americans, they don't see the utility of it. And I think the thing that's interesting about Lightning is it is bringing utility to Bitcoin. So why don't we talk about what Lightning can do? Why are we so excited?

Elizabeth Stark: (03:11)
Definitely. So Bitcoin's first killer use case or killer app is that of Bitcoin the asset. So in 2009, Satoshi, third January 2009, the [inaudible 00:03:22] creator of Bitcoin launched the Bitcoin network. And everyone's familiar I'm thinking here today with Bitcoin the asset. You buy it, the price has gone up substantially. The community has a meme. We call it number go up technology, right? The idea that the price of Bitcoin will go up and there are only 21 million that ever exist. But what got me interested in Bitcoin was less of the asset element and more of the idea that Bitcoin can really be this internet of money. So with Lightning Network we're actually building Bitcoin, the monetary network, and it's really about three years old. So Lightning initially launched as a protocol in 2018 on the main Bitcoin network. We call that main net. My company, Lightning Labs built some of the leading tools for developers to build on this technology.

Elizabeth Stark: (04:06)
And the goal there is to have internet native digital money. If Bitcoin is just the equivalent of digital gold or a digital rock, then we don't actually tap into the use cases where you can natively embed payments on the internet and have programmable money. So the goal with Lightning is really to enable this. So you asked about use cases. So the way that I think about it, in the early days of the internet, people didn't envision the use cases that are commonplace to us today. Something like a Google, a Wikipedia, Airbnb and Uber, that's the same for the internet of money. There are all sorts of use cases. For example, in game payments for video game developers, streaming SATs, or Satoshis as we call it, for streamers, for podcasters, for people, creators on the internet. We also have the ability to have cross-border payments instantly with extremely low fees, adoption and emerging markets.

Elizabeth Stark: (04:56)
So there are these use cases that weren't previously possible. And then also people that did not previously have access. Some people think, okay, why do I need Bitcoin today? I have my credit card. Well, there are billions of people around the world that do not have access to the existing credit card networks who charge something like 250, maybe even 300 basis points for a transaction. And we're actually seeing today adoption in many of these markets. El Salvador, some people may have heard recently made Bitcoin legal tender. Today, Starbucks, there's a great company called IBEX Mercado, McDonald's, one called OpenNode and a variety of major retailers are using the Lightning network today, built on the technology that my company has created. Which if you'd asked me a couple months ago if this would happen, I probably would not have believed it, but welcome to 2021. So there are huge opportunities for people globally that don't have access to the financial rails that we do here in the US.

Brett Messing: (05:53)
So you mentioned like Uber and Airbnb, sort of disruptive technologies. It seemed to me that the thing that exploded in my mind when I heard about Lightning was the remittance market. And can you just explain how that works? So let's just say I'm sending money to someone in Mexico City on Lightning. I just think people would find it interesting just how functional it is.

Elizabeth Stark: (06:18)
Definitely. So there's some great companies already out there. There's one called Strike, another one called Paxful that are enabling cross-border payments with Bitcoin and Lightning. So the way that this would work is a user using a service could convert say US dollars to Bitcoin's sent over the Lightning network and Lightning enables these instant high volume transactions. And then it could be converted back at the point of receipt to say peso. And you have Western Union and major players out there that are charging very high fees, especially for low value transactions. You might have to physically go to a location. All this can be done with a smartphone, right? And we see in emerging markets a huge amount of smartphone penetration, many people have access to those. So in these markets, people are able to leapfrog over the outmoded technologies to be able to adopt instant, high volume transactions over Bitcoin and Lightning.

Elizabeth Stark: (07:13)
And one key element is people say, okay, volatility. That can be a question. Well, when you have instant transactions and you want to go from USD to Bitcoin over Lightning to another currency, say peso, you actually aren't exposed to that volatility, which is key. In that case, of course, some people want Bitcoin. I like to say, Bitcoin is a millennial retirement account. I have a number of friends here in New York City, they are very short on dollars and they hold a lot of Bitcoin as part of their strategy.

Elizabeth Stark: (07:40)
But it depends on the individual. But in this case, Bitcoin is serving as a value transport layer, as I like to think about it. And the vast majority of users in the future likely will not know that they're using Bitcoin. They just think they're sending value on the internet and maybe denominated in their local currency. And that's the way the internet works today. For example, people that use say email may not know that SMTP is a protocol underlying email. They just use their Gmail. Email's not even that cool anymore. But that will be the same with Bitcoin and Lightning and the internet of money.

Brett Messing: (08:14)
Okay. So we mentioned El Salvador, just like I guess in the development of Bitcoin, which you've been a part of for a long time now, big deal, little deal? I think when I think about what you're doing, you're really bringing Bitcoin to the masses. It's like, what does this mean Bitcoin being legal tender in a country?

Elizabeth Stark: (08:40)
Definitely. So my company Lightning Labs, we're about 25 people these days and we have a number of brilliant developers and credit, for example, to my co-founder and our CTO, his name is Olaoluwa Osuntokun, who was born in Nigeria, came to the US when he was younger and has seen the value of all of this, especially with family back in Nigeria, brilliant engineer. And so if you had told me even six months ago we would have seen nation state level adoption of both Bitcoin and Lightning, I would not have believed that. And it happened. And even though, El Salvador being a small nation, six some odd million people, I believe it is historic and significant that this level of adoption has occurred. And a number of retailers are now using the Lightning network. So Bitcoin, the community loves Twitter, right? People are on Twitter.

Elizabeth Stark: (09:37)
I'm sure you've seen a lot of that. And there was a tweet this week because last Tuesday was the launch of this law in El Salvador and a number of these retailers were using Lightning, the technology that we had built called L and D from my company, and a fee at Starbucks for a user paying over the Lightning network was five hundredths of a cent, which I thought was just incredible. I mean, compare that to the types of fees that people would pay for the traditional card networks. So there's a joke in the community about paying for coffee with Bitcoin and in the US it is not necessarily hard to pay for coffee, but in many other emerging markets, the rails are not there and they're actually able to use this technology. So to me, I believe it is quite significant. There's also been a domino effect.

Elizabeth Stark: (10:27)
There's a great company out there called Galoy who's building an app called Bitcoin Beach. And this actually is what got the whole El Salvador movement started. They have a community in the south of El Salvador, a surfing community, where they've been using Bitcoin and Lightning for two years now in what we call a circular economy. So their vendors don't have access to card networks, but they have smartphones. So they're actually using Bitcoin and Lightning to send and receive money and vendors are able to accept it. And to me, that community is just the big beginning. That company has heard from so many other governments, communities around the world that are interested in this technology. So El Salvador is the first, it's certainly not the last. And I believe we will see a variety of other particularly emerging market nations move forward on Bitcoin adoption.

Brett Messing: (11:13)
So you mentioned Twitter, which is important in the Bitcoin community, the community sort of lives on Twitter. No one or very few people have done more for Bitcoin than Jack Dorsey, who also had the wisdom to invest in Lightning Labs. Jack Dorsey, according to public reports is about to integrate Lightning into Twitter. Can you speak about, to the extent you can, what is forthcoming? Again, I think the thing that's really interesting is the utility and what services Lightning is empowering.

Elizabeth Stark: (11:50)
Definitely. So I'm just speaking from kind of the outside here as an observer. And yes, Jack Dorsey is one of our investors and has been incredibly helpful and also just somebody who really understood Bitcoin at the outset and seeing that it can be this native protocol for value and currency of the internet. And so I believe that fits into a strategy with Twitter. So part of what got me interested in Bitcoin and Lightning in the first place is this idea of internet native digital payments and the creator economy. And what better place for this than Twitter? Yes, the Bitcoin community loves to, sometimes they have lots of fights on Twitter and debates. I've definitely been in the middle of those, but also there are a lot of people that will create tweetstorms and post videos and have all sorts of really interesting, I mean, I learn so much from Twitter and it's a way for me to find really interesting links and research and discover new people.

Elizabeth Stark: (12:45)
We've made hires for Lightning Labs of people from Twitter. And we love memes in the Bitcoin and Lightning community. So the idea there is, well, okay, Bitcoin and Lightning enable instant high volume, low fee transactions around the world globally. If we were to use existing payment rails, and I think what they would likely do is have a variety of options. Some on the existing rails, some using Bitcoin and Lightning, you can get to far more people globally than you would be able to, and it makes a lot of sense. You have a younger population as well that very much wants more Bitcoin. They want to be able to hold us. They want to be able to earn Bitcoin. Sometimes people say, well, I don't want to spend Bitcoin, but Lightning enables people, unlike say a Visa, sometimes people say, okay, Lightning's like a decentralized Visa.

Elizabeth Stark: (13:30)
And there are elements of that, but you don't really earn money on Visa, but with Lightning you can. So we see a lot of really interesting use cases like the Twitter one, which will enable content creators to earn over Lightning. There's an incredible company called Stack, which enables people globally, Latin America, Southeast Asia, to earn Bitcoin over Lightning performing small tasks like for AI and machine learning. There's another one called Zebedee for internet gaming where today gamers in Brazil are earning more over Lightning with Bitcoin than they would in a normal job for their salary by actually just doing what they love, which is playing video games. So we're able to unlock these incredible opportunities that would not have previously been possible. And that's where I see Twitter fitting in as well.

Brett Messing: (14:13)
So it's sort of like tipping, right? Is that a way to think about it, right, that if I post something you think it's cool, Lightning's going to enable you to tip me in Bitcoin?

Elizabeth Stark: (14:26)
Yeah. I mean, there are all sorts of interesting examples. People could participate say in certain campaigns as well. There was a really incredible campaign recently where a group called Bitcoin Smiles in the Bitcoin community raised money for people in El Salvador who could not afford dental or hence smiles. And just, this community, people by the way, they do this on their nights and weekends, this is not their job. They just love it and they really care. And so you could have charity contributions and things like that as well. I think there are a lot of really interesting opportunities.

Brett Messing: (14:58)
So I want to just scope out a little bit, as I'm sure everyone can tell you're super enthusiastic about this. And the thing that brought you to it is sort of a passion for open source decentralized networks. I can speak for myself, I don't think I fully appreciated the significance of a decentralized network until recently. And I would say the China ban on mining hammered it home for me, but I'm probably still not as far along on it as I should be. Can you just speak to that? And I mean, I want to hear your answer, I'm sure other people do too as well.

Elizabeth Stark: (15:33)
Definitely. So the way that I like to think about it, being the internet geek that I am, in the early days of the internet folks may remember AOL, CompuServe, Prodigy, and the like, right? Those are proprietary networks. To have an AOL keyword, you had to go to AOL and get permission. And then there was a worldwide web and anybody could build on the web. And ultimately it was the web that won out in terms of all of the incredible sites and businesses that have been built on the web today. And I see the same for Bitcoin as this internet of money in that the ability for anybody to build on top of Bitcoin, you don't have to ask permission, you're able to do so and Lightning makes it easier for developers to build on top of it because you have these instant transactions as opposed to the 10 minute block time of Bitcoin. You have the scalability as opposed to the five to 10 transactions for a second.

Elizabeth Stark: (16:22)
And then you have the fees that can spike on the base layer of the Bitcoin blockchain. So the open nature of Bitcoin and Lightning means that it's available to people around the world. For example, there's an incredible entrepreneur named Bernard Parah out of Nigeria who just built an application called Bitnob. And he just spun up a group of developers, and now they have this business and they're building for Bitcoin and Lightning, and he didn't have to go and get permission. It's just open. And now you can use the Strike app to actually send remittances to Nigeria because Bernard was able to tap into this technology and the Lightning network. And to me, that's what's extremely powerful. And then some people might ask, okay, well, there are all these other cryptocurrencies, why focus on Bitcoin, as my company Lightning Labs and as our community in the Lightning Network community? And the answer is ultimately network effects.

Elizabeth Stark: (17:15)
Right now, Bitcoin is the most secure cryptocurrency. It has the most hash power for miners backing it up. And folks are probably well aware, it is the most valuable cryptocurrency with the most adoption around the world. And in emerging markets, it's even more so by the way. In Nigeria, 32% of Nigerians use cryptocurrency, the vast majority of which is Bitcoin. And then something like 50% of Nigerians are 18 and under. So there's a very young population that is very excited about this technology. And we see that in other places, in emerging markets and around the world. And of course here in the US, lots of incredible developers and builders on this technology. So my answer there is the idea that you have all these existing users, you have people that are building upon the technology. There's something called Metcalfe's law. And one of my favorite researchers, Lyn Alden has written a lot about that.

Elizabeth Stark: (18:08)
Check out her macro research and her Bitcoin research. And she has a piece on network effects. And she talks about how breaking a network effect means if something is not 10 times better, it will not break it. If it's slightly better, it's very difficult. So Bitcoin already has a substantial network effect. And there's a concept of Metcalfe's law, Robert Metcalfe, who created this for networks in the internet, as each individual user joins a network, the value of that network goes up exponentially. So to me, the open decentralized nature of Bitcoin combine with the network effects, and then you have Bitcoin, the monetary network, which is Lightning combined with Bitcoin the asset, that creates this virtuous cycle. And we call it a flywheel effect, which just keeps growing and growing. And we've seen a lot of network growth. A lot of people running these nodes on the network that are like servers, and a lot of developers building in the technology and an increasing amount of capital that is deployed onto Lightning as well.

Brett Messing: (19:02)
So we have a minute left, there are about a hundred something million people that own Bitcoin. And there are projections that in four years, that number will be billion, billion plus. What gets us from here to there? That's S curve stuff. That's an acceleration of adoption. What do you see as the driving forces for that?

Elizabeth Stark: (19:29)
At the end of the day, real use cases for real people in those categories of enabling use cases that weren't previously possible and enabling access for those that previously did not have it. And there's something in the broader, I'm in this cryptocurrency world in the industry, and in some cases I think people are working on solutions in search of a problem. And I really care about solving real problems for real people and making this technology accessible. In the early days of Bitcoin and Lightning, even three years ago, it was hard to use.

Elizabeth Stark: (20:02)
It was like command line based, it was like the early days of the internet. Now we're seeing it become more and more accessible, more and more usable. And I think in the early days, people underestimated the power of the internet. There's this great quote by an economist, by 2005 the internet's impact on the economy will be no greater than the fax machines. Clearly that person was wrong. And similarly, I think a lot of people underestimate Bitcoin and Lightning, but at the end of the day, I would highly recommend not to sleep on this technology as my friend Max Webster wrote because we're really at the beginning and there's so much left in store.

Brett Messing: (20:33)
All right. Fantastic. Well, thank you very much.

Elizabeth Stark: (20:36)
Thank you.

Guest User

October 16, 2021

SALT NY: Technology, SALT NY: Digital Assets

Building Innovative Crypto Trading Infrastructure | #SALTNY

Guest User

October 16, 2021

SALT NY: Technology, SALT NY: Digital Assets

Building Innovative Crypto Trading Infrastructure with John Peurifoy, Co-Founder & Chief Executive Officer, Floating Point Group. Raghu Yarlagadda, Co-Founder & Chief Executive Officer, FalconX. Basil Al Askari, Co-Founder & Chief Executive Officer, MidChains. Kapil Rathi, Co-Founder & Chief Executive Officer, CrossTower.

Moderated by Michael Bodley, Editor-in-Chief, TheStreet Crypto.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

John Peurifoy

Co-Founder & Chief Executive Officer

Floating Point Group

FULL BIO

Raghu Yarlagadda

Co-Founder & Chief Executive Officer

FalconX

FULL BIO

Basil Al Askari

Co-Founder & Chief Executive Officer

MidChains

FULL BIO

Kapil Rathi

Co-Founder & Chief Executive Officer

CrossTower

FULL BIO

MODERATOR

Michael Bodley

Editor-in-Chief

TheStreet Crypto

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Michael Bodley: (00:07)
Awesome. Well, thanks so much for being here. Good to see some familiar faces in the crowd. Just a quick introduction again, we've got John from Floating Point here, Ragu from Falcon X, Bazel from Mitchains, and we've got Kapul from CrossTower. So, bit of background about myself. I'm a former hedge fund journalist who fell down the crypto rabbit hole at some point like everyone else. And I saw more and more portfolio managers at places like Millennium, Point72 had nice cushy jobs leaving to get into crypto, going back to 2017. I'm like, "What are they doing? Why are they doing this?" And eventually I decided to try and play some catch up. So, with that said, I was hoping that all of you could go down the line and kind of give, to use some superhero talk, your crypto origin story. What got you into the space?

John Peurifoy: (00:55)
More than happy to take it first. Although Michael, I can't quite compete with the seeing other people and jumping in, because I think that was the origin of how I got in. So, previously I was a researcher at MIT. I did a lot of work in data analytics and things like that. So, I did a lot of work in taking large sets of data, extracting patterns from them, analyzing trends and things like that. And I solved various problems in physics with that. But numbers are numbers. And if you've ever seen the movie Margin Call, there's a good quote, says the money's a little better in finance than rocket science. And so I joined the crypto space back in 2017, initially working as a fund and then previously transitioned to kind of being more of a services provider, doing execution settlement, things like that.

Raghu Yarlagadda: (01:36)
Great. And I started my career as an engineer, specialized in machine learning. After that I'm a senior entrepreneur. Started two companies. Got very lucky with both of them. Then someone gave me terrible advice. Engineers must go to business school. So, went to Harvard business school. Right after that, I joined Google. At Google I led a product line called Chromebooks. Did that for three years. Got incredibly lucky. It's one of the fastest platforms in Google in terms of revenue growth. Towards the later part of Google, some of the brightest engineers that I know were not shutting up about blockchain. And for me as an engineer, blockchain is probably one of the most inefficient databases that's out there. Say, "What are you talking about?"

Raghu Yarlagadda: (02:19)
But all my life, I chased the brightest engineers on the planet. So, I have nothing to lose and I partnered with them and we started jamming ideas. After a year of working with some of the brightest engineers on the planet, I had no question in my mind that a lot of world's value will be tokenized. Starting with crypto. We are seeing stable coins in the form of Fiat getting tokenized in the form of stable coins. Eventually fortune find the tokens. And CBDCs. So, super excited to basically jump on that mega trend. So, started building Falcon X about three and a half years back.

Basil Al Askari: (02:56)
Thanks everybody for having me here today. It's a real honor to kind of be around these role models in the space here. So Bazel [inaudible 00:03:04]. I think I'm the only guy on the panel here whose business is originally from Abu Dhabi, UAE. And previously I was in private equity. I looked at direct investments in the financial services sector. Bitcoin and crypto investing kind of caught my eye in 2016, 2017 on a personal level. And really just wanted to get involved from the perspective of seeing how we could get this industry to Abu Dhabi and to see how it fits in the space there. And three years later, we've got a licensed trading and custody venue.

Kapil Rathi: (03:40)
Hi guys. My name is [Kapul Rachi 00:03:41] . Thank you for having me here. My journey, I think I'm probably the most different one among this panel coming from a traditional wall street space. I started my journey on the floor of New York Stock Exchange. Had a technology background, but after spending seven, eight months on the floor of New York Stock Exchange in 2003, I realized that this yelling and screaming and trading is not going to last that long. So, I pivoted towards electronic trading. I helped build couple of electronic options. Exchanges, IIC, bats, then ended up at CVOE. And then in 2016 and '17, I got involved into a few projects at CBOE at bats, the first ETF on Bitcoin, the future's on Bitcoin. And this sort of kind of hit me that what electronic trading has done to the traditional trading market, the way we knew floor exchanges. Finance generally has not been disrupted by technology.

Kapil Rathi: (04:46)
We know Apple, Netflix, they have been disrupting many other industries, but I think the banks have done an amazing job in protecting their turf. They know how to play that regulatory angle. I think electronic trading is probably the only space till now that has touched the finance industry and digital asset is probably going to be the next innovation that has the power to disrupt. So, for me, it was almost like a dejavu moment. I got to jump in this. I'm not going to be one of the floor traders sitting on the other side. Here I am in this rabbit hole.

Michael Bodley: (05:24)
So, crypto gets a lot of headlines where we're all talking about the institutionalization of the space. Right? What Wall Street bank is going to be jumping in in next? What kind of traditional hedge fund? But then you stick a step back and you look at the flows and it's still mostly dominated by retail investors. So, just kind of throwing out for the room a two part question here, which is the first, would you agree with that categorization that it's still a retail space? And when you're building your trading platforms, these guys have some of the best trading platforms in the business, how do you cater to both retail and institutional investors? Because they have both very different needs in terms of order flow, in terms of best execution, even in terms of counterparties. Right?

John Peurifoy: (06:04)
So, I'm happy to maybe take the first part and then I'll defer to the experts for the second. So, I agree with you. Retail dominates the space. Right? You can see that in public filings, you can see this in analysis, you can see this in just general discourse. Right? You can look at the Coinbase filings and still the majority of their volume's coming from the retail. And that's not assumed to be kind of dominated by institution until 2024, 2025. But I think the important comment to say about the institutional side is I would kind of split institutions a little bit. I think it's a little bit unfair to generally categorize them. You're definitely seeing a lot of institutions in crypto. Right? You're seeing Renaissance. You're seeing HFT firms. You're seeing a lot of groups. But really I think a lot of that's more prop trading capital, more family office, things like that where their regulatory burdens are lower. Right?

John Peurifoy: (06:47)
Their mandates are more broad. Their regulatory filings are less stringent. More of the actual more say pension funds or insurance, things like that, I think that's definitely still taking time getting into the space. And you're seeing that. Right? And in particular you're almost seeing them choose different ways of allocating that. Right? You saw that with [Andreson's 00:07:05] raise of 2.2. You saw that with [TenT's 00:07:05] raise of 750 million. Right? You're seeing them almost allocate to kind of funds of funds or more crypto native funds. And that's how they're getting that exposure. So, I think it's definitely true. Retail dominates the space. It will for some time. But institutions, I think, it's more interesting to kind of split it up and think about how are they thinking about the allocation side. But maybe the second question in terms of technology, be curious to you guys' thoughts.

Raghu Yarlagadda: (07:28)
Yeah. In terms of the split, I do think institutions are almost at par with retail. Now the measurement systems, if you look at it, the coin market caps and the exchange flows, that is one part of the overall flows. There is a lot of institutional data pool trading that's happening. Over the OTC desk and the rest of the places. So, I think about half the volume in the space is actually institutional. And the second very interesting artifact is institutional is not only half, but it's growing incredibly fast. If you look at the amount of volumes on Binance, the most recent quote that I heard is it's about 60, 70% is institutional market makers that are on there. Now the question is, yeah, it's a small collaboration whether retail or institution is bigger. Institutional is growing incredibly fast. That has proven over the last three years.

Raghu Yarlagadda: (08:19)
And in terms of what type of institutions are coming, there is a sea change in terms of the type of institutions. When we first started the company for two years, it was quote unquote the crypto natives, AKA the hedge funds that are built in crypto, buy crypto, and only crypto. From the last year, especially May 2020 onwards, we went from 80% crypto native on Falcon X, which is the largest institution platform, to about 50% is crypto native and 50% is traditional institutions. So, that's a huge change. Now the last part, before we go to the technology side of things, why are institutions coming? I typically hear three things.

Raghu Yarlagadda: (08:58)
The first and foremost, Bitcoin being an inflationary hedge. That is something that is very important for institutions, especially as the world is printing a lot of money. The second thing is uncolation with the traditional asset classes. The third thing is the yield generation. When your banks are paying zero on 40 basis points, crypto in different form factors is paying about 400 to 600 basis points simply because the volatility is there so the traders are willing to take that money and fund their positions. As a result, the interest rate of the yield generation is very high. As a result, institutional growth is happening, but I completely agree with you guys that it's debatable which is big.

Basil Al Askari: (09:38)
I definitely agree with all the points raised and maybe to add further to that, what at least we're starting to see is kind of a convergence of interest from institutional retail. Having to cater to both types of investors from the same venue to maximize kind of liquidity exposure. And, at least as an international farm, what we're trying to as well build up with our infrastructure is to be able to offer a window for international institutions to get exposure to this very big kind of retail investor base that we know exists. And that at least dominates in my part of the world for now.

Kapil Rathi: (10:14)
So, I'll probably take a little positive view. I think 2017 bull run was all about retail. 2020 bull run, '21 bull run is about institution. What we have seen, and for those who don't know CrossTower, we are an institutional focus, a Wall Street grid infrastructure exchange. When institutions in 2020 started coming, they quickly noticed that there are certain fundamental gap in this infrastructure. The prices to trade are still very high. The market is really fragmented. There is no best execution benchmark. The products that institutions need to come in this market space, trade financing, portfolio margining, these products don't really exist. Investment products are really limited. They're very opaque. The best you can do is gray scale, which trades 20% up and 20% down. So, I think institution demand started happening in 2020. The infrastructure probably was not ready for this institution demand.

Kapil Rathi: (11:22)
In last one and a half year, operators like Falcon X, us, we have started kind of satisfying the demand. And that has helped explode the growth of institution. If I break it into two part institution as market makers, high frequency market makers, they didn't have a place to go with the Coinbases and the Krakens of the world. Now they have platform where they can actually manage risk properly. Same thing on the institution side. The custody has always been a problem. Now we have qualified custodians. So, I think in the last one and a half year, the story is all about institution. Retail honestly has moved on beyond the CFI. They are now in DeFi. And that's one area where I think institution is still kind of lagging behind.

Michael Bodley: (12:12)
Custody is a really important aspect of this. Right? Just convincing institutions that you are a good, safe place to store their assets. Many of which may not understand how to do that themselves. So, I'm wondering when you all are offering custodial solutions or you're talking to counterparties who might offer them, how do you vet that? And then what's the educational piece where you're going after potential business development, potential new clients, and convincing them that this is the right way to go about doing it?

Kapil Rathi: (12:42)
Yeah. I'll take this, John, maybe in the reverse order from here. Last week, two weeks ago, we were in Texas. We were presenting in front of 400 pension funds. And the type of cautions... We actually asked the question, "Anybody here invest in crypto?" Literally five hands went up. So, the fire fighters, policemen, these sort of standard fire pension funds, I think they are still craving for a lot of education. There were some really fundamental questions about how do I know it's not illegal. A big portion of traditional large asset group is still skeptical about this asset class.

Kapil Rathi: (13:39)
We actually just participated in a survey with the asset managers, endowments, pension funds, they highlighted three main issues. Why they are sitting on the sideline. Number one is education. They still are not clear of what this a asset class is able to. So, us as an industry, we have to do a lot of work to educate pension funds and endowments. Number two is regulatory uncertainty. I think until we have a clarity from DC, we will see some of these large asset managers and pension funds sitting on the sideline. And then number three is operational risk. Managing private keys, managing issues related to cyber security. They are front and center of these institutions. They are still looking to kind of find the solutions.

Kapil Rathi: (14:34)
Funds like us try to kind of ease it out for them. We create wrapper for them to get exposure to this asset class, without worrying about these type of risks. We have created products that are very similar to other products they are investing so they're getting market exposure but they're not worried about the regulatory exposure or an operational exposure. So, there's a lot of education that still need to do. There's an opportunity to innovate products, to bring institution in this system.

Basil Al Askari: (15:04)
Definitely I agree with that. I think the goal is to get institutions interested in acquiring spot exposure to the asset. And I think that's been less popular because of all the reasons that that were just raised. Where I kind of see things moving in a different order, from at least a Middle East perspective, is that regulations seem to have come first for us. And having now this very clear framework, the next step is to then educate the general market on how we're doing things within the regulatory framework. That this regulatory framework exists and that we are operating under it and heavily scrutinized by it in order to provide that comfort. And sort of with that comes the technology governance, governance associated with getting these licenses, and also the very institutionalized workflows and processes when it comes to custody in particular.

Raghu Yarlagadda: (16:02)
Yeah. I think if you look at what institutions care about, the first thing is custody. Trading credit. So, these are three things that institutions care about. Custody. I need access to the safest custodian possible, which gives me the ability to diversify my portfolio. It's not just about Bitcoin anymore. That was 2017. It's about Bitcoin, Ethereum, and a lot of people are talking about a lot of layer one solutions similar to Ethereum. So, talking about the custody part of it, 2017, it was a nightmare. Why is it a nightmare? It actually very difficult, fundamental problems solving crypto. You lose your private keys, you lose your money. It's as simple as that. That was 2017. From 2017 to 2020, one of the fundamental shift in the ecosystem is how seamless custody has picked up. Right? The reason why it became seamless is you can not simply go to one custodian and then park all your assets there.

Raghu Yarlagadda: (16:56)
That was 2017, 2016. Now what some of the biggest hedge funds on the planet, what they're doing is whether it's Falcon X or players like anyone on this panel, they come to us and they look for how do we think about my custody strategy. From that standpoint, we understand whether they are thinking about Bitcoin and Ethereum only, or are they going to be much more diversified? So, what we are doing is based on their needs, we help them pass to custody solutions. Sometimes to cater to Bitcoin specifically, sometimes to cater to Ethereum, Solana, and some of these other tokens. So, lot of hedge funds are now taking up multi custodian path through our white glove service providers like Falcon X or any of those brokerages in the market. As a result, it became much, much more seamless. So, in 2021, if you were thinking about [assets 00:17:47] , custody is not the first thing that you think anymore. That was 2017.

Raghu Yarlagadda: (17:51)
And I think that's going to become far more seamless because security in the space took a leap frog in terms of what happened over the last three years. If you look at the number of exchange hacks, they're actually coming down over a period of time. So, that's a good move because all the players are collaborating on the back. We see a sense of security hack anywhere in the industry, all of us are talking in terms of how to improve the industry going forward. So, custody, I think, it's a largely solved problem, number one. Number two, it's the approach to custody these days is multi custodian footprint where you're not just relying on one custodian through whoever your brokerage is.

John Peurifoy: (18:30)
Yeah. I think Ragu's point on this is actually really good. I'm really glad you asked this question. Right? I think it's something that I'm really passionate about. And if you think about it, crypto solves two of the hardest problems in society. Right? It solves data privacy and it solves worker automation. And I think those are really fundamental problems, but the question is why don't you see crypto see larger adoption? Or why do you see crypto being more so used for speculation reasons instead of the others? I think the reality is it's a different framework. Right? Crypto is a bare asset. That is a very foreign concept. Right? That is a reality and a factuality, which both empowers it to be such a disruptive technology, but at the same time contains massive risk. Exactly as you were phrasing, if you lose your private keys, you lose your money.

John Peurifoy: (19:06)
And so I think since crypto's a bare asset, it's something that is very top of mind and people talk about a lot. I actually think the point made about kind of the diversification of people on the custodian side, I think it's very fair. Right? That's something that we kind of saw and it's something that we've observed in the space where when you talk to people about custody, it's really a broader conversation about risk. Right? It's really a broader conversation around what are my exposure points? Where can I be vulnerable from a technology side? Where can I be vulnerable from a counterparty side? Where can I be vulnerable from pricing side? And so I think when you start thinking about it in that way, kind of talking about it as a custodial strategy, I think that's actually really beautiful terminology for it. And I think you're right on the technology.

John Peurifoy: (19:42)
And I think what you guys are mentioning on more of the regulation side, I think is very true. Right? In the US, it was pretty crazy when the Office of the Comptroller came out and said, "Yeah, banks can actually start custody in crypto." Right? And you saw that after July of last year, you really saw proliferation across most of the system. And I think that the reality is that while the technical side of this can be well understood. Right? There's technologies like MPC, hot wallet, cold storage. Right? These are things that are well understood. I don't think it's true that they're well understood in the regulatory frameworks. And I don't think they will be for a while. That's why you saw banks coming in with non-deliverable forwards because they can structure them under is does and it's much more straightforward framework. So, in some, I would say I think custody is something top of mind for people.

John Peurifoy: (20:18)
I think when you think about crypto, that is a paradigm shifting idea that is going to be with us for forever. And I think you're always going to see two classes of people say my keys, your keys. Do I keep them here? Do I not? There's always going to be these ideas. Think about it from a custodial strategy, I think it makes a lot of sense if you're an institution. So talk. These are conversations that we have. I assume similar conversations across the rest of the panel. And I think the other side of it is being mindful of the regulation. Right? And being mindful of how that's changing over time, because it's really funny how you were actually mentioning that different places were being more innovative than the US. Because I agree with you. I think actually the US is far behind a lot of that. So anyways, that's how I think about custody. Right? I think this is something top of mind. I think technology is getting there and it's getting pretty good. I think the regulation will take a little bit of time to get there.

Michael Bodley: (20:59)
Branches mean exactly what I was going to ask next, which is regulation. I'm sure everyone saw lots of headlines about the infrastructure bill. Right? Lots of concerns in the US about regulation. So, just the kind of broach the third rail here, do US regulators at the federal level understand cryptocurrencies? And do they understand your businesses?

John Peurifoy: (21:20)
Someone else want to start with this? The blockchain caucus is really cool.

Kapil Rathi: (21:22)
Yeah, I'll go. Of course, after spending 20 years in that regulator world have helped for SCC regulated exchanges working. It takes two years to work with SCC to bring something new. Those who don't know, if you want to build a regulated entity in US for crypto, it's a totally fragmented structure. If you are trading derivatives, it's regulated by CFTC. If you're trading spot, you have to get license from treasury and then you have to get licenses from 50 different states. And most of these states... Forget about the lawyers in DC don't know how fast this blockchain and crypto technology is moving. Expecting a state regulator to understand what is blockchain? What is crypto? I think it's just not fair.

Kapil Rathi: (22:19)
It is really hard to operate a regulated infrastructure in US at this point. And my past experience has told me that regulation has sometimes benefited an industry. I kind of help grew up in the options industry. Equity industry. When reg NMS came in, it brought cost down for customers back in '04, '05. Retail wasn't even trading options. It was only a professional or an asset class for nerds. And then now everybody's trading options. That has a lot to do with regulation, because now we have put together proper investment protection mechanism in place. Those things don't exist in crypto. Overall, I think we need a proper regulatory infrastructure. The current structure is not healthy especially when we are competing with some other nations. Switzerland and Europe is well ahead of us. Let's see where it goes. Of course there is a lot of tussle between SSE and CFTC, but we need to have some proper regulation in this.

Basil Al Askari: (23:37)
I can't really comment necessarily on the situation here, but what I can say is about fragmentation and we look at regulatory fragmentation globally. I don't think that's a unique problem to the jurisdiction here, but it's a global problem. And we're starting to see certain regulators look at the space and how things should be regulated in very different ways. Even in neighboring countries in the Middle East, for example, or neighboring cities in the Middle East that have different free zones. What the takeaway there is that until there's a good precedent for rules to be set and processes to be followed. It's going to be drastically different depending on where you are and which regulator is looking at it before it gets uniform. And I think the uniformity is kind of where we need to be as far as setting up globalized infrastructure.

Raghu Yarlagadda: (24:33)
Yeah. Completely agree with that. Number one, institutions care about regulation. Period. If you expect crypto to be a mainstream asset class, you cannot have crypto without US institutions participating. US institutions will only come if the regulatory clarity is better than where it is. But the amazing news is over the last three years, there was a sea change in terms of how regulators approach crypto. For three reasons. First and foremost, I think this is not as talked as often, but this drives industries. Right? Whether it's internet or e-commerce. The amount of venture funding or the amount of equity funding with all of us that can help us educate regulators and help navigate regulation is one of the most important metrics for an industry to become mainstream. In the early days of internet, this was exactly the problem. People don't know how to process payments. Regulators didn't know either. E-commerce. E-commerce was banned from the country that I come from. India e-commerce was banned.

Raghu Yarlagadda: (25:34)
So, the largest e-commerce company in India was based out of Singapore. So, what happened is in whether it's internet or e-commerce, venture money, getting confident that crypto is the next big thing is the single most important tipping point. And that happened around 2018. If you look at the number of crypto companies and the amount of money that all of us put together raised is staggering them up. So, the first thing that we are going to do with that money is to make sure that we play really well with regulators. So, we are spending a lot of time educating regulators. So, number one, we are using all the venture money to make sure that regulators understand and come up with the framework. Now, once we have the willingness to pay, willingness to do, is there a willingness to do or come to the table from the regulatory standpoint?

Raghu Yarlagadda: (26:25)
Absolutely. Yes. Infrastructure bill definitely was very noisy because of the collapsed timeline that it came with. But the amount of limelight crypto got in a close to a trillion dollar infrastructure bill where 50 billion dollars, or 35 to 50 billion dollars was related to crypto. The amount of limelight crypto got was just incredible. Those conversations are still going. So, what that means is we are actually seeing collaboration from the other side. Number three, regulators also understand that two pressure points if they don't solve regulation for crypto. First is decentralized finance. For those of you in the room who are not familiar with that, this is like finance without any middlemen. What that means is with or without regulators, decentralized finance is just spiking up significantly. So, it's important for regulators to understand that decentralized finance is spiking up so that we better regulate the crypto markets fast enough. Otherwise, a lot more people will transition to decentralized finance.

Raghu Yarlagadda: (27:21)
The second thing is there is competition between countries. There is a massive competition in terms of the global reserve system. The global currency of the future. So, from that standpoint, whether it's China testing its own CBDC or El Salvador legalizing Bitcoin as the legal tender, there is enormous pressure for regulators to move in. I think for the next two to three years. However, I don't think all of this is going to happen in six months. The next two to three years, regulators are going to provide a lot more clarity, which is going to be super helpful for institutional investors. But the one thing that's different from 2017, 2018 to 2020 is most of the hedge funds who are coming, the five or top ten hedge funds are already in crypto. They see this as the future. They're in crypto, they're working with regulators all by themselves. They're also working with industry to navigate this. So, I'm quite optimistic, but definitely at least here in the US, there is a major bridge to cross. I completely agree with you guys. It's fragmented.

John Peurifoy: (28:24)
Yeah. Coindesk has a really good podcast on this where they actually interviewed some of the senators involved with the infrastructure bill. So, if you guys are interested to learn more, a hundred percent highly recommend it. Shout out to the team there who are kind of crafting it. Regulation is fertilizer. Right? That was a really good quote that the CEO of Wisdom Tree once told me. And I think it's really true. Right? The reality is institutions don't want to touch something unless it's regulated. And as we were talking about earlier with Bazel, the reality is that you took three years kind of getting it right with the regulators in order to make sure the institutions were comfortable touching that. Right? Full stop. That makes a lot of sense. And I think that it's certainly true. In the infrastructure bill, particularly, it's quite interesting.

John Peurifoy: (29:00)
Fred Wilson also has a really good quote that says if you consider it back to say when the Internet was coming out. Right? The two big questions were data encryption. This was a foreign concept to people. Is it valid? Is it a safe way to do it? How is on-prem versus cloud? How do these things work? Right? And then the second question was around actually how you do taxation. Right? How does sales tax work state by state? And it's interesting because you really saw a very focused group, both by the private industry at the time, as well as by various consortiums to really educate people about this.

John Peurifoy: (29:29)
And I think you're right, the limelight that crypto got out of the infrastructure bill was actually pretty compelling. Right? What it's argued to generate about 20 billion dollars more in revenue out of it. But the reality is that we probably got more than... I don't know if we got more than 20 billion. 20 billion can buy you a lot, but crypto got outsized exposure unquestionably, and I think it's certainly fair that the fact that the amendment didn't actually get reworked or an amendment got passed. Right? There were two different amendments proposed. One just striking it entirely from the bill. The second actually reworking it to at least give better definitions over what institutions are. Right? That was the big point of contention in the bill was really what is an institution? Are you going to require everyone in crypto to report? Certain groups? How do you kind of play those angles?

John Peurifoy: (30:08)
So, I think with respect to the infrastructure bill, I think it was very exciting because it definitely gave a lot of attention to a lot of the key issues. I think how this question gets solved is I think it gets solved through very dedicated and focused education. And I think it's going to, honestly, this is kind of an issue that it'll be make or break in the next year. It's actually going to probably be really interesting to watch because I think it has the potential to really shape the future. Right? And I think that's the really exciting part. Yeah. And you're exactly right about DeFi. What DeFi is right now at about 80 billion dollars locked in protocols. It was at 20 billion in March. You're seeing a four X gain. It's unquestionable that if people are going to be serious about this space, you have to tackle these questions. So, anyways, those are kind of some of the thoughts on the infrastructure bill and regulation in general.

Michael Bodley: (30:46)
So, as Ragu put it, there's a competition between countries. Right? Who's going to get this done first? Who's going to get this done right? There's also a growing competition for talent. Right? In the space. And I'm wondering, I was talking to an equity trader, who will remain unnamed because he's happy at his current job, earlier today who was saying he's interested in making the jump to a crypto firm. Right? Doesn't know a lot about it. Doesn't know how to trade it. But wants that kind of a seat. So, you all operating growing companies, when you're looking to make a hire, do you care how much crypto experience someone has? Are we at that point in the cycle? Would you be comfortable hiring a talented derivatives trader to help build out your infrastructure from a Wall Street firm? How much is this crypto native versus not argument matter?

John Peurifoy: (31:29)
Yeah. Okay. So, I'll actually give a controversial answer to this. I'd be actually really curious what you guys say. So, we work very much in technology. Right? So, we're building systems like enabling institutions to be able to trade directly on exchanges, enabling institutions to take advantage of things like staking or things like that. Right? These are things that are near and dear to our heart. So, I think the reality is that now in the space, it depends on the role. Right? I think if you're looking for a back-end engineer to build something or you're looking for a front-end engineer to kind of get it done. Yeah, I think that's reasonable. Right? Or you're looking for someone on the op side of the business. I do think it's reasonable on the sales side. And if you're doing roles, building actually on chains themselves, I think those are actually where blockchain experience is starting to be more critical. So, I'd say unquestionably, everyone can still break in. But I do think you're starting to see some of the sea shift, at least in terms of specific roles. Be curious what you guys are saying.

Raghu Yarlagadda: (32:20)
Agreed. I think the most important nuance is by function. If you are thinking about an engineering role, whether you worked on four X, whether you worked on traditional equities or crypto, for the most part, it doesn't matter. A lot of crypto infrastructure today, about 90% of the volume flows on crypto, flows on centralized systems. And these centralized systems are very similar to how you actually architect traditional equity system. So, if you're thinking about a software engineer, there's no issue at all. You need to jump to crypto ASAP because we are hiring. So, there's lot of interest in terms of bringing people from the traditional space so that we don't reinvent the wheel all the time. But exactly as what John pointed out, there are functions where crypto experience is very, very helpful. Sales on the market making side. When you're selling to the projects that are out there, if you're acting like a Goldman Sachs taking Snowflake public, you better understand everything there is to understand about Snowflake. Those places, the crypto experience counts.

Raghu Yarlagadda: (33:24)
But, in summary, as a much more broader statement, crypto is still in the very early stages. We are in the second or third innings of crypto. So, if you're considering or thinking about crypto, now is a good time to jump in because this is going to be the next 10, 20 years of finance. Because what finance really cares about is three things. Right? Can it be truly 24/7? I still can't believe that most of your banks, most of your trading, doesn't work over the weekend. Would you be okay if Google and Facebook doesn't work over the weekend? So, how are we all okay with traditional infrastructure not working 24/7. So, it's not crypto, it's digital assets. And digital assets provide you 24/7. It's truly elastic and it's truly global. And any kind of talent who's excited to basically make these three things happen need to come to Falcon X. We're all hiring. Falcon X is also hiring.

John Peurifoy: (34:11)
Yeah, I was going to ask we're all hiring, I assume. Right? Like very rapidly.

Kapil Rathi: (34:16)
Yeah. Can't wait.

Basil Al Askari: (34:19)
Yeah. So, definitely agree with you guys. It really depends on the role, but I think in general, in the Middle East for example, talent is scarce. Specifically talent with crypto experience. So, I'd say more often than not, we let people break in. Especially when it comes to ops rules. Ops rules, I think, are the easiest for people coming out of traditional finance to kind of readapt themselves and just learn the products and really what they're operating. And it's just workflows at the end of the day. So, fully agree with the rest guys.

Kapil Rathi: (34:51)
Yeah. So, I have sort of kind of two comments to that. Number one, it depends on the company's mission. For someone like us, our mission is to bridge the gap. Bring digital asset to mainstream. Especially we are institution focus. So, for us, the traditional Wall Street talent actually is working out really well. Of course, there is always a demand for tech talent. For a company who's actually building a DeFi protocol, probably the Wall Street talent is not going to be helpful. I think the two main challenges as the operator of am institution focused business, number one, COVID has changed the whole landscape about hiring and talent. You can't really compete with the exchanges or operators in Ukraine or China or in Asia somewhere, because the talent outside of US is much more economical.

Kapil Rathi: (35:55)
So, bring that has been the sort of biggest challenge for us is of course Wall Street demands a pretty good substantial amount of investment if you want to bring that type of talent. And I think overall we are looking at both outside and inside. We actually in fact just launched CrossTower India and we are hiring Wall Street caliber talent from there, not just necessarily technology compliance, regulation, legal. So, any crypto infrastructure you're building, you have to see it as a global. Get a dip into the global talent pool. Just the staying local talent pool is not going to help because you're competing with some really cheap or at least low expensive operators out there.

Michael Bodley: (36:43)
Yeah. Well I think we're up on time. Thank you all so much. Don't forget to drop your resumes off with these guys in the back and we'll see you at the happy hour.

Guest User

October 16, 2021

SALT NY: Technology, SALT NY: Digital Assets

Do We Need a Digital Dollar? The Future of Central Bank Digital Currencies | #SALTNY

Guest User

October 16, 2021

SALT NY: Technology, SALT NY: Digital Assets

Do We Need a Digital Dollar? The Future of Central Bank Digital Currencies with Yaya J. Fanusie, Adjunct Senior Fellow, Center for a New American Security (CNAS). Julia Friedlander, C. Boyden Gray Senior Fellow & Deputy Director of the GeoEconomics Center, Atlantic Council.

Moderated by Michael Greenwald, Director of Digital Asset Education, Tiedemann Advisors.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Yaya J. Fanusie

Adjunct Senior Fellow

Center for a New American Security (CNAS)

FULL BIO

Julia Friedlander

Deputy Director of the GeoEconomics Center

Atlantic Council

FULL BIO

MODERATOR

Michael Greenwald

Director

Tiedemann Advisors

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Michael Greenwald: (00:07)
Future role of central bank digital currencies. It seems that the US dollar is at a critical inflection point, and that we're in an era of dollar dominance. We've been stuck at this era since 9/11 and afterwards. And so, Julia, I want to start with you, how do we move from an era of dollar dominance to dollar innovation?

Julia Friedlander: (00:33)
Thanks, Michael. And it's a pleasure to be here today to chat about a very crucial topic that bridges between national security and financial policy. To start out, I would say, we've been in a period of undoubted benefit from the dollar, in the Bretton Woods system in the interwar period and post 9/11, when the dollar really became one of the principal tools at fighting international crime and terrorist financing. But things are changing, the global environment. We've opened markets up incredibly, according to a US model over the past 70 years, and other countries have certainly learned to benefit from that. So as we move into a period of increasing digitization and the economy of global growth, we need to enter a new period where you the US dollar becomes a force for US innovation and for technology growth, and not just to preserve the status quo that we have enjoyed for the past [inaudible 00:01:41]

Michael Greenwald: (01:41)
So, Yaya, does dollar innovation mean a digital dollar? I mean, we'll get to what China's doing and what other countries are doing, but should the United States react to move to a digital dollar right now, and is that good for the United States?

Yaya J. Fanusie: (02:00)
Well, Michael, it all depends on how you assess the world around you, what's happening? I would frame it as the format of digital money is changing. So it's not even necessarily about dollar innovation, it's about digital money innovation. Previously, digital money has been the purview of financial institutions; where we use PayPal, or Zelle, or Venmo. Now, it is just the fact that there is a stretching of what's possible in terms of digital money. That's happening, whether the US makes a policy decision to create account-based or token-based central bank digital currency, it's happening. So really, I think, we have to frame the problem, or we have to frame the situation, which is digital money is changing. And if we're going to operate in this new environment, we're going to have to do something that's, maybe, at the end of this panel, we'll decide exactly what that is.

Michael Greenwald: (03:01)
So, Julia, it seems to me that we're in a multi-polar world, and we are really entering a period of a basket of currencies, where countries are retreating from the dollar. They're looking to go around the dollar at every turn. I've heard you say this in recent testimony on the Hill. Can we live in a world where DeFi, central bank digital currencies, a digital dollar, and stablecoins live alongside each other in a future global digital wallet? Is that possible?

Julia Friedlander: (03:37)
Yeah, I think so. I mean, we have to design it carefully, and the road there might not be easy. To preface what you were saying, Michael, I mean, of course, I'd also like to caution that the retreat from the dollar will be very gradual. And that if you see the international holdings of a dollar drop by a half a percent or something, so there should be no cause for alarm. I also don't necessarily think that the emergence of strong, properly regulated currencies alongside the dollar should be something to be discouraged, like the pound, the yen, the euro, for example.

Julia Friedlander: (04:15)
So I think that the framework, we shouldn't paint a false dichotomy between saying, we're going to have a CBDC and that leaves no room for stablecoins, or that leaves no room for crypto. In the world that is emerging, that we are trying to create for ourselves, there is ostensibly a role for essential bank digital currency, perhaps in direct payments between governments and individuals; for digital wallet in the form of fiat-backed stablecoin that facilitates retail payments, and then also crypto as an investment vehicle. All these things are possible.

Michael Greenwald: (04:54)
So, Yaya, to push you. 25 years ago, the dollar was at 75% global central bank reserves. Today, it's below 60%. I don't see any data pushing it up above 60 right now. It seems to be in a downward trend. So with that, has the United States become complacent about the dollar. Its complacency are Kryptonite, and our only alternative is to get on board with the 80 plus central banks that are developing a central bank digital currency right now.

Yaya J. Fanusie: (05:30)
Well, I think our moms always told us, if someone were to jump off of a bridge, would you do it? And she was telling us that that wasn't the reason to do anything. So I take the same, I think we should take the same approach. It may very well be that the United States should launch a CBDC, but it shouldn't be because other countries are doing it. It should really be because we have assessed... And I know we're going to talk about China and other countries, but you mentioned other countries. What are other countries doing? They're assessing the technology, they're assessing their currency, they're assessing the global economy. And many of them have decided that, "Oh, this technological innovation could allow us to do something that will help our currency, our economy, et cetera."

Yaya J. Fanusie: (06:16)
I think the US needs to do the same. We have to get away from this dichotomy like Julia said of, "Oh, it is this type of CBDC or it is nothing, and it's just crypto stablecoins." That's not the policy posture. The posture should be, let's assess it, and let's not see the legacy, the status quo of digital money be intrinsic, or in perpetuity that that's going to be the way things are.

Michael Greenwald: (06:43)
So, Julia, it seems, though, that the United States is a proactive country. But it seems that we have been admiring what other countries are doing. And the Feds are supposed to come out with a white paper this month or early next month about the usefulness of a digital dollar verse stablecoins. For the first time in a long time, I'm seeing a great debate at the Fed between Lael Brainard, pushing a digital dollar; Randal Quarles and his great Parachute Pants speech, pushing stablecoins. Is there a point in the middle, and why is the United States admiring other countries rise right now?

Julia Friedlander: (07:25)
You could say we're admiring the problem, but also the United States bears a very particular role in the global economy, as the global reserve currency. It's a very different story, if you are a small island economy looking at a digital inclusion and financial inclusion and your GDP is a couple billion dollars a year. So I think that the caution that some members of the Federal Reserve, Chair Powell first and foremost, is not to be directly criticized. But on the other hand, as you say the US has always been at the forefront of financial regulation, and it shouldn't give that role over to other countries that might create a framework and design structure for central bank digital currencies that do not work in the US interest or of the global financial sector at large.

Julia Friedlander: (08:25)
So the US's role should, as Yaya says, not necessarily to jump into the deep end and say, "We're going to have a central bank digital currency as soon as we physically can." But to create new fora to develop standards that are globally applicable. And this is, we would argue with the Atlanta Council, first and foremost, in the G20 format to develop these standards before it's a little bit too late and other models have gone far enough that we cannot pedal backwards.

Michael Greenwald: (09:06)
So, Yaya, speaking of our allies, it seems that we're in an era of a new digital asset foreign policy. You have authoritarian governments like China, Russia, Iran. You've seen what Belarus is doing in the last couple of weeks. Using central bank digital currencies for control to understand the consumer and every turn, where you then have other central banks like Sweden or allied countries of the United States trying to use CBDCs for equity, for inclusion, to promote the consumer. Talk about what China is doing, and are they creating a precedent for other authoritarian countries to follow?

Yaya J. Fanusie: (09:55)
What China is doing should be framed as less a currency issue, which is how most of the public is talking about it, and more of a data issue. So if the stance is going to be, "Oh, the digital yuan versus the dollar, of course, the digital yuan will not win." That's actually not really the issue. And I don't think China, from my looking at it over at the Center for a New American Security, we produced a report on China's digital currency. And we assess that China's playing a different game of strategy with this project. It's really trying to develop a digitized economy, and is trying to lay down infrastructure where the government can capture financial data, in a way that it can't with the current infrastructure where Alipay and WeChat and the companies behind them do not provide direct access of data access to the government.

Yaya J. Fanusie: (10:52)
So China's trying to create this new infrastructure and collect more data and analyze it. And I would say it would support digital authoritarianism. And so that's the way to see it. And then there's also maybe the competitive advantage. As China is able to collect, as the government is able to collect more data, it can innovate with the data. And I think we should see that China is operating under the idea that the nation with the best data wins. I think that's how it sees its pursuit of the CBDC.

Michael Greenwald: (11:25)
So, Julia, on that point about data, and obviously cyber is being a huge tool used right now, do we need a new National Security Strategy in the United States? The last one highlighted great-power competition. We all know great-power competition. Do we need to be more strategic about the US dollar rather than seeing it as a long term threat, admiring that down the road, should it be seen in a short and medium lens for the United States to actually be proactive, given what Yaya just said about China?

Julia Friedlander: (12:03)
Yes. But I think that it's something that's much more easily said than done. I've been part of the drafting process for National Security Strategies. It's a catchall process, where everybody feeds in a little bit, and what comes at the sausage making process is always a big compromise. It is very hard, and I'll say this as a structural issue of someone who works at economic statecraft. This is the intersection between finance, economics, and national security. Both of us work in the space that to frame economic and financial issues using national security language. And what makes it so nice to be able to speak with a community like you guys today, because I'd grown up in the Washington National Security Framework is to understand the role that financial markets play in national security going forward.

Julia Friedlander: (12:56)
I almost feel sometimes, and I don't want to be alarmist when I say this, especially with Department of Defense colleagues around, but it almost feels like financial market integration is the new nuclear deterrence. And how do you manage that appropriately with cross border transactions and geopolitical tensions? And so I I don't necessarily think it has to be framed in terms of the dollar itself, but understanding and being able to speak capital markets language in the halls of the Department of Defense. And it's hard.

Michael Greenwald: (13:30)
So, Yaya, back to China. It seems there's consensus in Washington that China's far off from internationalizing the digital yuan. They haven't been able to change Belt and Road into digital yuan yet. They haven't been able to really change SWIFT. They haven't been able to have cross-border contracts. Why are we waiting for China to internationalize? Why are we waiting for China to make improvements, rather than us fix our own plumbing here in the United States?

Yaya J. Fanusie: (14:08)
I wouldn't say that we're waiting for China to... We being US policy makers. I think there a good contrast that you're pointing out, which is America, we have a very complex system, our democratic system. It's not so easy to lay out a top down strategy. Maybe even getting back to the idea of the National Security Strategy idea when it comes to finance. It's not our thing to implant this, "Hey, this is the direction we're going to go." And then everyone fall in line. That is a Chinese Communist Party methodology, how you structure the economy. And that's actually what we see happening.

Yaya J. Fanusie: (14:48)
So what we're seeing, while we're... I won't say we're twiddling our thumbs. I'm not going to say that about the US policy. But while we're having discussion papers that might come out in a few weeks about a CBDC, like our first white paper, China has already assessed the strategic direction of the economy. It has done research for several years on digital currency, it has produced just pilots white paper. And now it is solely trickling down into the rest of the economy, the financial sector, big banks, small banks, and they're falling in line. So it's not that we are waiting for them, but they are positioned differently. We have to figure out what's the US approach to innovation.

Michael Greenwald: (15:31)
So, Julia, on that point, since the United States is in the white paper phase. And we all know what happens when things go at committee and things go to white paper, usually not that much action in the short-term. Does the United States need to convene a new digital asset Bretton Woods, where even if the United States isn't ready yet to create a digital dollar, and we're a couple of years off, we can convene the EU key-allied central bank governors, New Zealand, Sweden, Japan, and create a new digital asset framework. We're all sitting here today and there's no guardrails, regulatory-wise, yet for the digital asset space. Everyone's yearning for it. Shouldn't the United States convene that group under a new digital asset Bretton Woods?

Julia Friedlander: (16:21)
I think it could be useful. I don't necessarily know if using the term Bretton Woods is putting a stamp on the format, especially because certain aspects of crypto and of the AML/CTF framework are being discussed in the Financial Action Task Force already. There are already a G7 working groups under the finance minister's track to discuss these things. But Michael, I think, you're right in the sense that we can develop a growing consensus first among partner nations who have a similar conception of the balance between privacy and regulation and free markets. And that's ultimately the bread and butter right there.

Michael Greenwald: (17:10)
So, Yaya, speaking of privacy, there's fear in the United States that if the United States creates a digital dollar, it'll follow the China's model. And that after 9/11, the PATRIOT Act used a lot of power to gain information about Americans. How can the United States create a balance, where it promotes the consumer, it promotes privacy, it promotes inclusion. Is that possible, and what type of framework would you envision around that?

Yaya J. Fanusie: (17:44)
Everything is possible right now because we're at this stage where CBDCs are being fleshed out. There is no one size fits all, there's no one way that... Everyone thinks is the way to go. Everything is really on the table. And so that's why it's important, in the US, for policy makers and the private sector to actually be asking that question, what does it look like?

Yaya J. Fanusie: (18:07)
I mean, I'll let you know that recently, I don't want to get too technical, but recently there was an academic research paper that came out of a university in Germany about how you could have a CBDC and have cash-like privacy. It's not really a policy question, it's a technical question. So we may say policy-wise, CBDC, they need to have a level of privacy. But then you need people to actually do the work and technically figure out the computer science of doing that. And there are people that are doing that. So we need to... Well, we have to get more in the game. I mean, that's an academic paper. Hopefully, our US policy makers have read it, since I got it.

Michael Greenwald: (18:46)
I've read it.

Yaya J. Fanusie: (18:47)
I sent them the email-

Michael Greenwald: (18:47)
I've read it.

Yaya J. Fanusie: (18:48)
Oh, you read it.

Michael Greenwald: (18:48)
I re-read all your stuff and Julia. Julia, let's pick back on privacy. So how do you envision the digital dollar working for the consumer? How would it work for all of us? Isn't all of our banking already digital? What does it mean for commercial banks? Will we need an Act of Congress? What do you think about the consumer, is this good for the consumer, or is this good for central banks because of responsive China?

Julia Friedlander: (19:21)
So they're all a bunch of different questions. I think the answer is that it really depends. The ability of CBDC, and this is a question that both of us received in our testimony in July in House Financial Services, was how do you actually reduce the cost of transaction essentially to nothing for underbanked or unbanked sectors of the population, those who did not receive their CARES Act checks in time, those who defaulted on loans as a result of friction in the payment system. Now, I mean, I think, Michael, you're correct to say there are improvements that can be made in commercial banking that would, I think, maybe take that role as well.

Julia Friedlander: (20:07)
And so what we also like to emphasize is that there is, again, in not creating this false dichotomy, is that central banks would never be able to implement this by themselves. They don't have the personnel, they don't have the technology, they don't have the client interface. And so the design of a central bank digital currency would, at least in the United States model assess, but defacto require cooperation with the private sector, which is a huge opportunity.

Michael Greenwald: (20:39)
So yeah.

Yaya J. Fanusie: (20:41)
I just wanted to jump on the issue, because I want to maybe give an example of like... Because you had asked before about the framework, what it should look like. So practically, most of the CBDC papers out there say that the government would not necessarily have direct access in real time to transactions. But here's the question, all of these proposals do say that for AML/CTF reasons, they'll be able to get this information. So here's a practical issue. So how do we manage the fact that government doesn't have access to your transactions? But let's say they can, let's say eventually they do. And let's say a bad guy went to your store. You own a store, bad guy went to your store, and they get not only his data, but your data. Now that they've unmasked you, what do they do with that data? You're not the suspect, but now it's in their database. So this is a policy question, and it's a technical question. This is why is practical [crosstalk 00:21:38]

Michael Greenwald: (21:38)
And this came up after 9/11 with SWIFT. And Julia, we all tracked terrorist financing, so that's become a key issue. So does a digital dollar make it easier for the United States to track terrorist financing? What are the illicit finance implications, as we know, terrorist financing moves outside of banks more than it does inside of banks right now. So what does it mean for those implications?

Julia Friedlander: (22:10)
I actually think that it provides an increasing incentive for illicit financial actors to leave the formal financial system. I think this is a conversation that we were having, in the context of China and saying, "Well, won't the Chinese designers reuse this with the purpose of evading US sanctions?" If I were a money launderer, I would absolutely not use a system that, regardless of the design choice implemented, provides greater oversight into where the money's moving. There are very good ways to launder money without a CBDC.

Julia Friedlander: (22:47)
I think you touched a nail in the head here, in the sense that US authorities currently have to go through a due diligence, subpoena process to have access to financial data that is possessed by or held by a commercial entity. With a CBDC, there is a potential that there would be direct access by the central bank. That's not necessarily true. You were talking about Act of Congress. Most people believe that there would have to be amendment to the Federal Reserve Act to be able to implement a CBDC, you can write in privacy and consumer protections into that.

Michael Greenwald: (23:27)
So, Yaya, moving forward. It seems that there's a lot of competition right now at digital asset space. That stablecoins have one narrative, CBDC have the other narrative, Ethereum is pushing its own narrative and others. What is the argument you see where stablecoins and a digital dollar can coexist given, like we saw during COVID, getting payments to people quicker, a stable coin couldn't do that. So can't they coexist?

Yaya J. Fanusie: (24:07)
Yeah. There's not going to be one coin to rule them all, necessarily one digital currency to rule them all. And I think the reason why that would be the case, the reason for coexistence, it doesn't say which one would be prominent or most prominent. But the reason for coexistence is simply because you can't put the technologies back into the bottle. And so even as regulators figure out, as the US decides, "Okay, we're going to go with the CBDC, or we're going to regulate stablecoins in this way." Even as we do that, I don't think there's anything we can do to say, stop cryptocurrencies from existing. That just doesn't exist.

Yaya J. Fanusie: (24:44)
So I think the world we are going to see is one where these different formats of digital money exists. Some of them will have certain use cases. Some of them may become less prominent, or their uses will shift. Maybe stablecoin once they get more regulated, they're going to be used for a specific thing. Maybe Bitcoin is going to be used for a specific thing. Maybe more people will be using CBDCs, but I think they will all exist to different degrees.

Michael Greenwald: (25:09)
So building on that, Julia, you know that I follow the art market very closely. And I think that speaking of markets, the art market has truly legitimized digital assets in the last couple years. And we've seen how it's playing out. How do you envision markets like the art market using a digital dollar? Won't it be easier, won't the compliance costs in others be less because it's a digital dollar and it's governed to buy the central bank?

Julia Friedlander: (25:42)
It's possible. I know you moderator here, but to put it back on you-

Yaya J. Fanusie: (25:49)
Ask him.

Julia Friedlander: (25:49)
Yeah, exactly. I'll ask you a question. I mean, do holders of physical assets of value actually see... I mean, obviously there's frictionless movement of payment and potentially a greater transparency in the providence of a... If that's where you're going with, but do you actually see that taking off?

Michael Greenwald: (26:11)
Well, I think that when it comes to the art market, reputational risk is everything. And so these auction houses want to make sure they know where it's coming from. And I think they don't always know the beneficial owner, as we discussed. And so I think if there's a system where they can use a digital dollar and there's a framework in place, you could see more of a surge in art sales because of that, because it's quicker, cuts faster. So I think it's going to have to be part of whatever framework comes as speed, efficiency, but also protection. One thing that I want to touch on with you is predictions. And do you envision the digital dollar becoming a political issue where this could be on the debate eight stage in the next presidential election?

Yaya J. Fanusie: (27:05)
I don't know if that would ruin the ratings of debates if they're talking about CBDC by then. Actually, I'm going to take a different tack. So the CBDC could be a political debate issue. I could actually see it. But you know what? Maybe more prominent, something we haven't mentioned, which I should have, the idea of digital ID. Digital ID, digital identification, like a national ID is something that probably has to happen for a lot of this stuff to work. A lot of the CBDC stuff, a lot of the privacy stuff, a digital identity. And that's something that we don't have in the United States. A lot of countries are trying to figure it out. So I can imagine a world where we figure out we want a CBDC, but then we figure out, "Oh, well, maybe we need to have a digital ID to make that work." And I could see that being a huge debate issue and a provocative controversial one.

Julia Friedlander: (27:59)
But hard to imagine that being necessarily partisan. Because I think we see in the regulation of a digital space, even if you're talking about anti-trust or taxation, there are different coalitions that are not Democrat or Republican, necessarily. So if it's coming up on the debate stage would be very interesting. I think, for me, I see the question about government-sponsored finance versus private enterprise being the way that it's framed.

Michael Greenwald: (28:29)
So last lightning round question. We have around a minute and a half left. Yaya, so we're at the Beijing Olympics, and we've got the digital asset awards ceremony. And right now, would you consider that the gold medal in the digital asset space goes to Beijing, and you've got probably Sweden, given their work on central bank digital currencies, are they getting silver? And then you have perhaps the Euros getting bronze. How do we help the United States not be in the stands watching this ceremony and get on the medal stand?

Yaya J. Fanusie: (29:09)
Understand that we're in the trials right now. So we have to show up. We have to show up to the trials, figure out where we want to focus and what our training regimen would be. But we just have to, I think, realize that the games are going on. That's step one.

Michael Greenwald: (29:25)
Julia.

Julia Friedlander: (29:28)
I like the metaphor. I agree that we need to put our imprint on this now. I'm not necessarily concerned that next year, if China pilots a CBDC at the Beijing Olympics for limited trials, that it is any imminent threat to US personnel who are there, or to the potential for the United States to leap frog.

Michael Greenwald: (29:53)
Julia, Yaya. It's a pleasure. Thank you very much.

Yaya J. Fanusie: (29:56)
Thank you.

Guest User

October 15, 2021

SALT NY: Digital Assets

Inside the NFT Boom | #SALTNY

Guest User

October 15, 2021

SALT NY: Digital Assets

Inside the NFT Boom with G Money, Delphi INFINIT. Snowfro, Art Blocks. Justin Aversano, Twin Flames Artist. Noah Davis, Specialist, Head of Digital Art & Online Sales, Christie's. Priyanka Desai, Vice President of Operations, OpenLaw.

Moderated by Les Borsai, Co-Founder & Chief Strategy Officer, Wave Financial.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Erick Calderon.png — Erick Calderon (Snowfro)

Founder & Chief Executive Officer
*Art Blocks*

FULL BIO

Justin Aversano

Twin Flames Artist

FULL BIO

Noah Davis

Specialist, Head of Digital Art & Online Sales

Christie’s

FULL BIO

Priyanka Desai

Vice President of Operations

OpenLaw

FULL BIO

MODERATOR

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Les Borsai: (00:07)
Thanks for being here today. My name is Les Borsai I'm a Co-founder of Wave Financial. We're one of the larger regulated asset managers that primarily do crypto and blockchain. I started my career in the music business so community has been something that's really special to me. I got involved in cryptocurrency in 2013. Bitcoin was really high at 200 back then and was destined to try to find the next one. And did the Ethereum presale and many other pre-sales. I want to start off, we're so lucky to have all these people. These people are the core to NFTs. So it's really great that SALT was open to let us do this and kind of let us do it our way. But why don't we start with introductions?

G Money: (00:55)
Hey guys, I'm GMoney. I'm a collector and investor in the NFT space. I'm well known for buying a CryptoPunk app at the beginning of the year and forming a thesis around it that went viral on crypto Twitter. And I've been pushing the space forward ever since.

Snowfro: (01:14)
Hi everybody. My name is Erick also known as Snowfro. I'm the founder of a NFT platform called Art Blocks. Have been in the generative space for a long time. Have been in the NFT space since claiming CryptoPunks in 2017 which is kind of the, at least for me, the beginning of this. And yeah, crazy to be here. Thank you very much for having me.

Justin Aversano: (01:34)
Hi everyone. I'm Justin Aversano. I'm an artist, a non-profit community art leader and an art collector as well. And I'm excited and grateful to be here. Thank you.

Noah Davis: (01:46)
Hi everybody. I'm Noah Davis and I'm definitely the newest transplant to the NFT space on the stage. I joined in March when I sold the Beeple NFT at Christie’s where I'm a specialist in the contemporary department now very, very much focused exclusively on NFTs.

Priyanka Desai: (02:04)
Hey everyone. I'm Priyanka Desai I work for a project called OpenLaw. OpenLaw has put together several different decentralized organizations including Flamingo which is an NFT DAO or collective of individuals that come together and purchase various NFTs including digital art, collectibles, digital land in different metaverses and invest in different NFT related projects.

Les Borsai: (02:31)
Okay, so let's start with community. And I want to do this kind of free form instead of like calling on people, jump in as it's a topic that might relate to you or be near and dear to your heart. So community has always been an important aspect in crypto, whether it's been for impact or just building economies around projects. Can you guys speak a little bit about the community and what it means? Any one of you.

Snowfro: (02:59)
I'll jump in kind of rewinding there. There's a platform called Discord. Discord is essentially like a Slack or a AOL instant messenger, I don't know how much everybody knows. But it's a big community, everybody gets together. And in 2017, right after the CryptoPunks project launched, CryptoPunks' project is 10,000 unique eight bit cartoons bases that are represented on the blockchain as an NFT or quasi NFT. A community was built then with about 20, 30 people. On a regular basis nerding out about this weird project of 10,000 pieces that everybody was just kind of like early on and kind of feeling this weird energy because this is where this all kind of started. Over the course of those four years, we've gone from 30 people, a hundred people, maybe a whole week with not a single comment in that chat. And then a couple of days where it was just like day after, comments every minute. To a community of about 20, 25,000 people where there hasn't been silence in that conversation for at least six months.

Snowfro: (04:04)
I mean not one moment when someone isn't typing. And what that means is that you have this individuality that's associated with owning something that's unique, a shard of the artist's vision, a shard of this NFT madness that's kind of happening. And people talk about that and they share it. And they describe what it means to them and then they describe what it represents. I'm represented by a green zombie with a bunch of hair, that's kind of how people know me in this space because that's how I'm represented in there. And that community, I don't know that has existed to that degree before.

Snowfro: (04:37)
I'm not a historian, I just think what we're experiencing is something different and disruptive from a human standpoint. Something that we can all kind of belong. Not belonging to the NFT space as a CryptoPunk owner could cost anywhere between a hundred and $600,000. So that level of inclusivity is gone. It's like if you had it, you had it. But there's projects that come around every day that allow a new level of inclusivity, a new level of originality. And I think there's something really special there that goes beyond the value of these JPEGs that are just selling for a lot of money.

Les Borsai: (05:12)
Pri can you talk about how community plays into a DAO and what a DAO is?

Priyanka Desai: (05:17)
Yeah, yeah. And I think that's a great primer. Discord is sort of the backbone for a lot of these NFT and internet communities. So if you're ever interested in a specific NFT collectible or something else, there's definitely a Discord for you. When anyone asks me how they can get involved, I just recommend popping into the CryptoPunks or Art Blocks Discord. So I'm just going to plug that for you guys right now. On the DAO side, that sounds complicated. It stands for Decentralized Autonomous Organization. OpenLaw launched Flamingo which is this NFT collective I was speaking about in the introduction in September of 2020. There's about I think 67 different members now, including GMoney and Snowfro here. The membership really, there's an active Discord community for Flamingo.

Priyanka Desai: (06:07)
We have weekly calls where we talk about different NFT collectibles, develop thesis and strategy around specific NFTs. Pop into different communities. And what's really nice about these DAO structures, and just to kind of background on what a DAO is, I kind of skipped over that. It's a way for all of these members of this DAO to pool together their capital and then self-govern through on-chain proposal processes and then proposals to really distribute these strategies or allocate capital to these strategies. So Flamingo as a collective owns about 220 punks. They own, I want to say over a thousand Art Blocks. And beyond that again digital land. They've invested in several NFT related projects as well. And so it's just like this wide swath where they have decided to allocate a certain percentage of their capital into these different categories. And so that one you're speaking to communities really, really important, and it's a really interesting way for these members to kind of cut through the noise of Twitter and the internet and maybe some of these other discourse and just come together and rally around specific projects that they're really excited about.

Les Borsai: (07:19)
One of the things I love about this space is really just the innovation and the disruption that happens in this space. If we take a look at DeFi, DeFi I think really came out of a frustration in finance which is good for this panel. NFTs to me kind of carried on that same ethos. And the disruption I'm talking about is obviously returns in DeFi and existing gallery systems and NFTs. Do you want to talk about that initial disruption?

G Money: (07:51)
Yeah so I think what really attracted me to the NFT ecosystem at first was if you have this view of assets going digital longterm, you want to be owning NFTs because everything in the real world is an NFT. So everything is non-fungible except for cash. So when I think about it through that lens and I think about the future and I think about the way things are headed, I'll give you a little anecdote. On the first day of quarantine last year I bought a PlayStation. I hadn't played a video game in over 10 years. I had to download Fortnite. I start playing Fortnite with my friends and their 12 year old nephews. And the first thing these kids ask is what skins did you buy? And I'm like skins? I'm like they don't give me any special powers. There's no way I'm spending $8 on a skin. Fast forward two or three weeks later, I'm buying every skin I could possibly get my hands on.

G Money: (08:47)
And so it was then, and this is before I knew what an NFT was. This was in March, April of 2020. And it was then that I was like that kid today is 12 years old. 10 years from now he's going to have his own discretionary income. He needs to be totally okay with owning an asset in a totally digital form, it doesn't need to be physical. So there's going to be this massive supercycle here over the next 10 to 20 years where more things will be coming in a digital format. So when I found NFT that started making sense to me right away. Where it's like here you can totally own an asset. It's provable on-chain with this immutable ledger which is the essence of blockchain. And you can have this ownership structure. So as I started formulating a thesis around NFTs, I was like well, I think that there's this massive supercycle over the longterm and NFT art and NFT assets will be one of the first ones that will be taking advantage of this.

Les Borsai: (09:42)
I think going along those same lines and thinking about curation, one of the things that's also been really amazing is the ability for Art Blocks or Christie's or even you Justin with the Twin Flames to really take, not just taste and perspective on an artist, but the ability to select those artists and support them. Do you guys want to talk a little bit about that and maybe quantum as well?

Justin Aversano: (10:09)
I'd like to talk a little bit more about how GMoney and I connected through the Discord that Snowfro was discussing earlier. And that conversation led to not only my work being collected by a whole plethora of new age, crypto art collectors but creating a public art exhibition around the art we are talking about. And I think it's important to recognize that without these communities we're creating online and integrating it in person in the public space. And I think that's a place where I like to spend my time is bridging the worlds of physical and digital and how we get our online community in a space like we are here all together right now. And it's as simple as the art leading the way, inspiring us to work together and create a public art exhibition like GMoney and I have curated through my nonprofit called Same Art Space.

Justin Aversano: (11:06)
The show was called Pixelated and we did three cities. We crowdfunded through the punk collector ship. And I think that alone, seeing collectors band together for art for the community, for the artists was probably the most impactful thing to witness because when have you seen Picasso collectors or Francis Bacon collectors get together and say, let's do public art around this as a unit? No, they're all putting in their vaults or they're putting in their homes. So I think the online distribution brought us together as not only friends and collectors and business partners but we're building the space out as we move forward. And I think it's incredible what just one online conversation can bring about. How we're here today because of this. I met all these people, these amazing trailblazers in the space through that one Discord and I think it's magic. What community can achieve if you just have the conversation with the person sitting next to you or the screen name you see. And I think that one conversation could change your lives, it has changed mine.

Noah Davis: (12:15)
You stole my joke. I was going to say nobody gets together from the Mark Rothko fan club to do an exhibition in the streets when a big Rothko comes to market. That's how Justin and I met. Justin contacted Christie's when we announced we were selling the CryptoPunks from the collection of Larva Labs and our evening sale. And Justin and SaveArtSpace did incredible work to realize this vision of the punks invading New York city through public advertisement. And that was incredible. I mean Justin and SaveArtSpace and G money helped to promote this sale in a really impactful and important way. And that just never happens with any other artist.

Les Borsai: (12:57)
One of the things that's really interesting and I'm actually curious about is how hard was it to sell Christie's on doing the CryptoPunks? Because I mean Christie's has been around since what? 1760. And follow up to that is how impactful is that for the NFT space? Does that validate the piece as real art? I mean not that it isn't real art.

Noah Davis: (13:19)
Yeah. So punks was easy because it was after Beeple. Beeple was a little trickier because that was the first art that doesn't exist that we sold. And I think that the timing was really crucial because we got this opportunity towards the end of the first round of the pandemic I guess, in the beginning of this year. And we had spent the last six or eight months doing a lot of things for the first time. So doing something for the first time is no longer scary. Usually Christie's is a very risk averse company, but it was actually surprisingly simple to get this across the finish line.

Noah Davis: (13:56)
And I think it was especially attractive because of the opportunity to take cryptocurrency for payment. That was actually the way that I wrapped up the entire opportunity for the business to review. We're selling this asset that is non-traditional. It doesn't technically have a physical representation so you don't have to photograph it. You don't have to take care of it, you don't have to insure it, that's all good. And we can take cryptocurrency for payment because I knew there were certain executives who were really curious about this and definitely very many of our top clients were really curious about when we were going to step into the cryptocurrency ray. So taking ETH for that NFT was really the way that we moved it all forward.

Les Borsai: (14:38)
And now you're doing a collaboration with Art Blocks. How does that come about where you make a decision on what you're going to collaborate on, what's coming next?

Noah Davis: (14:47)
So the Art Blocks consignment is coming from the collection of a guy who goes by the [inaudible 00:14:55] in Canada. And most of the works in the consignment were minted directly from the smart contract. So that's actually really a collaboration between Christie's and Barcella. But I'm working directly with Erick and Art Blocks to help to promote this consignment. We did an after dinner mints episode recently which is Snowfro's and Art Blocks weekly. Is it weekly?

Snowfro: (15:18)
Every Sunday.

Noah Davis: (15:19)
Every single week and talk about community. Weekly podcast, live podcast, video session I guess, with the people. So that's the new paradigm. It's really about engagement and having a constant connection and a meaningful, organic, true connection to your audience.

Les Borsai: (15:38)
Did it feel like a validation when Sotheby's did the Bored Ape?

Noah Davis: (15:42)
I'm not going to talk about Sotheby's brains.

Les Borsai: (15:47)
Considering you did it first it's okay.

Noah Davis: (15:48)
Well hey, no it's look. A 101 in one lot is a lot, that's all I'm going to say. I'd rather focus on one Ape at a time.

Les Borsai: (15:59)
Exactly. So let's, I mean obviously this is an audience of finance people. Let's talk now a little bit about NFTs as an asset class and where we see it going in finance. That might be a good one for you to start on.

G Money: (16:13)
Yeah. So one of the things to me that I found interesting right from the start, like I said earlier is that if everything in the real world is an NFT that means you can bring everything on-chain. So as I was thinking about that, I'm like okay, great. As I look 10, 20 years into the future besides just let's say this massive supercycle of younger kids growing up and being okay with digital ownership, what happens if we bring financial products on-chain, right? Where the market cap is massive? What happens if we bring mortgages on-chain? You're not going to bring mortgages on-chain tomorrow because there's trillions of dollars of assets there. But you need to kind of get that TVL, the total value locked up so that the chains prove themselves and they prove that they have that security.

G Money: (17:01)
And then over time, as people feel more comfortable with the security of all these assets, you will be bringing stuff on-chain. What is a mortgage? A mortgage is an NFT. What is a house? A house is an NFT. So as those things come on-chain, you're going to have this massive opportunity where these products and the photo calls are being built today to support the art market and collectibles and things that we know and understand as humans. But then long-term you're going to be getting all these assets that are coming. And that to me is a really interesting part from an investor standpoint. I've spent 20 years in traditional finance and to me, looking at NFTs I'm like wow, this is much the same way if you look at the global GDP and you take a look at the finance sector and what percentage is that of GDP. DeFi is going to be an important to NFTs but NFTs to me is the major market.

Les Borsai: (17:52)
NFTs definitely has a broader appeal, so it impacts so much more. Generative arts been around since the '60s. And we talk a lot about on-chain and off-chain and I'm not sure that everyone understands that. So we might want to just explain that a little bit. But we really saw the acceleration in sales I believe with anything that was on-chain. A lot of the great art that is sadly off-chain may not have the same impact. Is there a reason?

Snowfro: (18:22)
Well to touch on the concept of on-chain. So we say the phrase on-chain all the time. And what that basically means is that the information relevant to the asset, in this case an NFT is stored on the blockchain versus not stored. So within NFT, you can't actually put a home inside of the Ethereum blockchain. So it's considered an asset represented by a token. And the token is represented on the Ethereum blockchain. In the art world, a traditional NFT is stored as an image on a decentralized infrastructure in general called IPFS, InterPlanetary File Storage. That is not a blockchain. It is a source of information that can be managed and uploaded to by anybody, but it's not on the blockchain. What's on the blockchain is the actual proof of ownership based on cryptographic hash of the information that's on IPFS.

Snowfro: (19:25)
So sorry if I'm kind of losing you guys here but it's a little bit complex. But the point being is that even though there's a lot of commentary about stuff like art not being on-chain, no matter what, you can still prove that you own it. Even if these other sources and these infrastructure places go down, you can still prove that you own that digital photograph and that digital image with information that's stored on a chain. And really at that point it's your job when you buy a $10,000 piece of art that's not stored on-chain, for you to also put it on a thumb drive, maybe put it in a safe. If I go into a gallery and I buy a piece of art I'm not just going to shove it in a box, I'm going to be very careful with it. I'm going to put it on my wall.

Snowfro: (20:04)
And that responsibility lies within the NFT space as well. What he's alluding to with on-chain art is essentially all of the information or most of the information necessary to reproduce an image actually lives on the Ethereum blockchain which is beautiful but incredibly limiting as well. So in many cases, what I specialize in is generative art. Art Blocks is a platform that enables generative art to be created and managed on-chain. There's something really special to me about it being on-chain and to a lot of the community that participates but it's not the same. It's not like a one is better than the other. It's just two different technical qualities of NFTs that are to be discussed. Sorry if I totally lost you there. I don't know if that, does that kind of cover?

Les Borsai: (20:53)
I think that does. And the other thing is when we talk about chains, we're primarily talking about Ethereum right now. Even though we're seeing noise being made from Solana or Smart Chain, the Binance stuff. So can we talk about the differentiation with Ethereum? Obviously there's well culture that exists with Ethereum that drives a lot of these prices and how are other chains going to impact it and how important is Ethereum in the ecosystem?

Snowfro: (21:24)
Anybody else want to take that? I mean to me Ethereum is the gold standard. It's where I claimed my CryptoPunks. It's where I've been for the last four years. It does not mean that something not on Ethereum is not going to be successful. It's just Ethereum is the Christie's right of the blockchains. And so yeah, there's many other I'm sure auction houses.

Noah Davis: (21:49)
I think when good art starts appearing on Solana, that's going to change the conversation. But for right now, it's really just copy and paste what we already have on the Ethereum blockchain. So until that changes then this conversation is a little irrelevant. I think Solana is a great chain for DeFi. But right now for NFTs, as far as I can tell there's room for improvement.

G Money: (22:12)
So yeah. So as a collector one of the things that I always tell artists that are coming on-chain is like, drop it on Ethereum. There's a certain sense of gravitas with it. It's like branding. It's like if you're going to go on a side chain, you could be like the world's best artist but there is some sort of branding that goes around with it. If you're selling a piece for $10,000 or more, a couple of thousand dollars, do the hundred dollars amending costs necessarily matter? Not really in the long run.

Les Borsai: (22:42)
No, and for me, it's even something else. I take a look at DeFi and what they did in DeFi is they made markets. These are market makers and it's exactly what has happened with NFTs. So when we talk about someone buying the floor, because at the end of the day these are also financial instruments. That can't happen without the whale culture that exists in the Ethereum and I think a lot of the other chains don't have that. So can we speak about some of the whales and I won't call them out that might by the floor and we see the prices move. That's a good one for you.

G Money: (23:15)
You want to talk about people buying the floor?

Les Borsai: (23:18)
Yeah.

G Money: (23:18)
Okay. I mean it's just like a financial asset. It's like if you want to deploy money into a project, it's like you could buy something either at the really high end or you can buy something that's a floor, the cheapest ones. And those are generally more liquid. If you buy something at the really high end, when you do go to sell it, you might need an auction house to sell it. You won't get instant liquidity when you choose to sell it.

Les Borsai: (23:42)
I think I'm talking about buying the floor wide. Buying many pieces and it actually moves the price, sweeping the floor.

G Money: (23:48)
Yeah, it definitely happens. But I think the mindset is for sweeping the floor is I want to be able to, let's say if I want to get 10. I want to be able to sell them on the way up like kind of position size it and manage the risk. And I think that to me is a lot of the thought process behind sweeping floors.

Les Borsai: (24:10)
And in terms of that happening, obviously it creates value for the collectors. How does it impact the artist or does it?

G Money: (24:21)
Oh, the royalties. Every project has a different set of royalties but generally it's around somewhere between 5 and 10% for the most part. And so Justin can speak to that. When we spoke, I remember he came to me and he sold a hundred of his photos for half an ETH each. And they sold out in a week maybe.

Justin Aversano: (24:46)
Like three days.

G Money: (24:48)
In three days. And now you get, you have a 10% royalty?

Justin Aversano: (24:51)
10% royalty.

G Money: (24:53)
10% royalty. What was the last sale?

Justin Aversano: (24:54)
Like $2 million.

G Money: (24:57)
And that was a thousand dollars to original sale.

Justin Aversano: (25:01)
Yeah.

G Money: (25:02)
Yeah. So as an artist [crosstalk 00:25:05].

Justin Aversano: (25:04)
Royalties for me as an artist is the key most important part about NFTs in general because it's doing something that the traditional art world has lacked for living artists forever. And now the artists get to take their power back. And I think that's the most game changing aspect about... I guess the financial tools are great,, the liquidity is amazing. But I think as an artist, as a consumer and a user, an activist for it, it's like the royalties saved my life and changed my life and brought a whole new self-sustainability that I could only have dreamed of. But this new technology is literally the caretaker for artists to finally do their job and create art for humanity and not struggle or be in debt.

Justin Aversano: (25:52)
This allows you to propel and be abundant. And I think this is why I got into NFTs is simply because there was a royalty aspect and seeing it play out and receiving royalties changes your whole perspective. And once you understand that, you realize how important it is for not only in this moment with NFTs but for art moving forward forever. This is the new standard for artists signing contracts and smart contracts. It's like if you're not getting a royalty you don't do the job, you don't make the art.

Snowfro: (26:26)
There was a huge controversy about secondary market royalties in 2019 and 2020. And somebody just put it very simply. And I can't say this enough, NFTs are allowing artists to participate in their own success, period. That has never existed in the traditional art world. And that now exists on a weekly payout basis without having to have somebody like say, oh the check is in the plate. It literally is happening. And everybody in the space is being elevated as a result of it. We're not there yet where this happens automatically. This happens automatically with some platforms, not others, people are coming around. But the important part is that the precedent has been set and it's being abided to for some massive sales. So my best friend sold a NFT the other day for about $6 million. And he just turned around, he did it in a private sale. And he turned around and sent 5% to the artist which is the standard for Art Blocks. Two and a half percent to Art Blocks.

Snowfro: (27:29)
The platform is participating in its own success. The artist is participating in their own success. And what that does is it brings joy to the people selling the piece to a degree. Like it almost you can be proud, not shy or like awkward with the artist like oh man, I just sold your piece. I just sold your piece and I just sent you $300,000 because I sold your piece. And it's special. It sounds really crazy. I think there's no way that if you guys aren't totally ingrained in NFTs that this doesn't sound totally crazy. I think everything that we're saying has to sound crazy. Especially to anybody that's educated. And I mean it is, I think the more educated you are, the harder it is to just kind of really want to understand what's happening here. But I just encourage people just to take a step back and understand that everything that you've learned about community and art and intuition is changing here. And give it a chance and give it a shot because it's really special on so many different levels.

Noah Davis: (28:33)
I really want to say. Oh, I'm just going to say for the record, I'm all for it. For artists resale I think it's very much overdue. And probably the traditional art world needs to give artists a lot more credit than they normally do. I mean we wouldn't exist if it weren't for artists. So the idea that artists don't deserve to participate in their success is the idea that they weren't already participating in their success is really upsetting to me. That's part of why I gravitated towards NFTs because this stuff, I feel like there's a utopian edge to everything that we're talking about, a utopian capability or a possibility. And if I can help to push it forward then I'm all for that.

Snowfro: (29:15)
When Christie's secondary market royalties.

Noah Davis: (29:18)
So-

Snowfro: (29:18)
I say that jokingly. I spoke to Marcella who was actually going to manually pay out to the into the artists [crosstalk 00:29:25].

Noah Davis: (29:25)
Yeah. So this is the new paradigm. My clients are not going to great lengths to avoid compensating the artist. They are going to great lengths to compensate them. To do the thing that people used to try to not do.

Les Borsai: (29:39)
So innovations often have kind of pushed back from traditional infrastructures. I read something that [inaudible 00:29:47] had put out being kind of vehemently against NFTs.

Noah Davis: (29:50)
I used to intern there.

Les Borsai: (29:51)
What's that?

Noah Davis: (29:52)
I used to intern at Larry's shop.

Les Borsai: (29:54)
So the question is, well you probably got a call from Larry. How do you balance the innovations that you want to do and the way it moves forward when you're getting push back from these galleries that have the biggest artists in the world?

Noah Davis: (30:09)
Controversial, maybe hot take. But I think that those galleries that run the world are probably going to not run the world soon. And the people who will run the world have the mindset that GMoney was describing. My entree, my accidental entree to NFTs was also Fortnite. And I ended up in this position where I'm trying to explain the appeal of NFTs to the old guard frequently given I'm a specialist at Christie's. I was recently giving a talk in Aspen to people who had never heard of NFTs before, trying to wrap their mind around it. And I used the Fortnite example. And the guy I was engaging with the audience in the Q and A was like, oh so this is something that like kids are into right. And he said in a really kind of cynical way. And I said, yeah and do you know what kids turn into right? And there was this really awkward moment where he's like, oh yeah. So they're going to want this stuff. This is what people want going forward.

Les Borsai: (31:05)
We hear a lot about it being a bubble. We've seen a pull back over the last handful of days. What do you say to people who say it's a bubble? Pri, why don't you?

Priyanka Desai: (31:16)
Yeah, that's a good question. I firmly disagree. I feel like we're just kind of going. Of course, I'm a bit biased here. Flamingo as a community it's right now 67 people. We constantly are getting emails and individuals wanting to join this collective of people that are collecting NFTs. There's actually several DAOs that are spinning out of Flamingo. Some of the membership is overlapping but it's really to harness certain subcategories of NFTs. So for example, we have one that's going to be focused on the metaverse and buying digital land and building up the digital land, almost like a virtual real estate collective if you will. We have something that's in the gaming space, there's these games that are kind of dubbed play or earn. And so you play them and can earn real money for playing these games.

Priyanka Desai: (32:12)
And it's definitely mobilizing people in developing countries and all over the world. So setting up a guild for that. We talked about possibly shared ownership over a specific NFT. There's this alien punk that we have which we actually purchased back in January and are thinking about almost giving that to the community through a DAO structure where they can kind of decide the fate of this NFT and decide like whether or not it should be a podcaster or like a real character in the metaverse. And so thinking about beyond just collecting NFTs and it is a bubble is I guess in my view, a little bit simplistic just because there's so much energy around this community that we discussed. And there's so many more innovations happening around specific NFTs and NFT sub categories.

Priyanka Desai: (33:09)
I mean every single week on crypto Twitter or through Flamingo DAO I'm hearing about a new, incredible NFT. And so I think people are thinking really critically about this. For example I mean it's really still a pretty young, I guess as far as I mean the technology itself isn't that new, I guess it's been around for a couple of years. But as far as the mainstream institutional interest in NFTs through the auction houses and elsewhere, I think we're really just getting going. So yeah, it could be like a short-term. And there's a lot of it's commemorative to the price of ETH at a given moment. So some people might want to be liquid. They see the price of ETH going up so they're like, well, let me sell an NFT right now. And that drops the floor price for a couple NFTs. So there's some mechanic between the price of ETH and the price of an NFT. Oftentimes sometimes that doesn't affect certain collectibles. I think yeah.

Les Borsai: (34:15)
Anyone else want to touch on the bubble?

G Money: (34:17)
Yeah. To build on what PRI said is I agree. I think when price action escalates quickly, it's because there's a good narrative there. It's because people are getting excited. But more so than that it's like when people tell me, oh this is a bubble or whatever. To me, the way I look at the world is everything's in a bubble right now. I can make a case the S&P 500 is in a bubble. So to me, when I take a look at NFTs and I take a look at like every asset class and as an asset allocator. As somebody that positions my money for myself, of course I want to belong in NFTs because NFT has given me the most convexity on the upside. To me, being long, Art Blocks being long a path is the same exact trade as being long the S&P 500. But if I'm right, I'm going to get paid better because there's only a limited amount of quantity. There's a much smaller market. But to me it's like to people saying that it's in a bubble, you can thank your central bankers.

Les Borsai: (35:24)
Okay. So we've got about a little more than 20 minutes left. I wanted to open it up to questions because I'm sure there are some. I don't know if there's a mic out there. If not, just stand up and ask.

Speaker 7: (35:42)
[inaudible 00:35:42].

Noah Davis: (35:42)
Oh I have a funny answer to that one. I got a cold email from the IRS like karen@theirs.gov during the Beeple sale. But I just forwarded it to the lawyers so I don't know. But they're definitely interested. That's what the email said, we are interested in NFTs.

Les Borsai: (36:01)
Yeah, after the Beeple sell I'm sure.

Noah Davis: (36:03)
Yeah, right. During. Yeah, during the bidding. When the bidding was like at 13 million I think it was when I got that email.

Les Borsai: (36:08)
Wow. Anyone else want to touch on the tax question or should we move?

G Money: (36:12)
I mean, I'm based out of Puerto Rico so.

Snowfro: (36:17)
I should be out of Puerto Rico too I guess. The tax question is going to kind of overlap with the KYC question as well and kind of people revealing who they are. There's this kind of theme in crypto where there's a relative anonymity for three, four years. Three years I was this green CryptoPunk went by Snowfro. Now my name is out there and I feel like I can act like a normal human. But I miss very much my internet persona. But yeah, there's a lot of tax implications. There's some things that are actually pretty wild. Like for example in some countries there's a maximum to how much you can donate to charity. And so with for example, with our blogs, we are cognizant of kind of how intense things have been with the platform and are helping artists divert money to charity.

Snowfro: (37:08)
So we're a nine month old organization that has facilitated $28 million to charitable contributions in the last nine months. And what that means is that the artists might be, this is stuff that's actually breaking stuff. The artists might receive $3 million to give because they made $15 million in three minutes on a [inaudible 00:37:30]. But there's a maximum amount of contributions that they can make without actually having to be taxed for it. And so they're actually being taxed on the amount of money that they were going to give to charity. In some countries they're accountants, governments are asking for letters saying, where is this money coming from? It just seems like such an absurd amount of money. And there's some really serious tax implications kind of involved there because if they can't get an accountant because the accountant doesn't want to do the work because they don't have a really legitimate way of proving who made this purchase.

Snowfro: (38:00)
And in the crypto space nobody knows who made the purchase. It's just a bunch of numbers. There's some kind of concern there. And then finally, once you get into a point where you're regularly selling something for a pretty big chunk of money, the IRS says, I don't really care if it's crypto or not, we want to know who these buyers are. And so for tax implications and also just KYC implications. So it's all very, very, as a platform scary. But we have incredible regulators, people that come from regulation that we get to work with on a regular basis and consult with. And we're just going to be proactive. That's the best that can do. We can't actually take any measures because we don't know what those measures are.

Snowfro: (38:39)
The clarity is not there. So we're just being as proactive as we possibly can. And as transparent as we possibly can in anticipation of the government kind of coming in and saying, hey, we need more, we need more information. And I think in a year, just a year from now in this conference, there will be a much more direct answer. And I think the conversation, like core panel could exist specifically on taxation principles in the NFT.

Les Borsai: (39:07)
What about the regulatory concerns you just brought up? When we look at tokenization that's clearly security. Do you have any regulatory concerns at all being a platform?

Snowfro: (39:17)
We don't have regulatory concerns in terms of securities because we are, I mean as weird as it is, we are just selling art. But we are starting to get to a point in dollar value of per initial sales where it does start becoming a little bit more scary. So again, we're just going to be very proactive and ultimately KYCing inside the crypto space is like that one, just like you just don't do it.

Snowfro: (39:40)
But if we're forced to do it, we're going to do it. I mean I'm not shutting down Art Blocks because of some dogma of everybody having to be anonymous, I'm not. If we lose 80% of our market, we lose 80% of our market but we're going to comply because we think we're doing something that will transcend crypto. That's our target. I get to talk about that all the time. And to transcend crypto if it's required to KYC and for people to know who they are. Then that's what's going to be required. But we're not just going to jump into doing it for fun. I don't want people's data. I don't want to be responsible for anybody's information as long as I possibly can avoid it.

Priyanka Desai: (40:13)
And I would just like to add on the DAO side. With Flamingo, everything is really compliant. We make sure everything's above board. So on the KYC side, on the tax side, it is a limited liability company based in the US. Because it is for-profit, everyone has to be accredited. We get all the proper requisite information. Just mailed the annual KY1s last week. So in some sense, joining a DAO could mutualize some of those concerns which is great.

Les Borsai: (40:43)
I actually didn't know you did all that. So that's-

Priyanka Desai: (40:46)
Yeah, it's fun.

Les Borsai: (40:47)
Oh, there you go.

Noah Davis: (41:00)
I sold Beeple and I also sold Warhol like a month afterwards. So it already happened. But I loved the Beeple sale, it was really fun. I thought it was an incredible price and it sent a message to the world that what artists are doing in NFTs and virtual art is meaningful and valuable. But we already did Warhol. Damien Hirst has a collection of NFTs called The Currency. Tom Sachs has a really successful collection of NFTs, his Rockets. So we're already seeing that in real time.

Les Borsai: (41:33)
Yeah, I flew out here for the Rocket launch. It was fun. The global appeal is something that also really kind of creates impact around the sales. I mean are we seeing, when we list a Beeple versus a Warhol for instance. You're having a wider appeal with the Beeple right? Just based on the way it's been brought up and presented in the marketplace? That's actually a question.

Noah Davis: (41:55)
So the Beeple sale very much spoke to a specific new audience, new to Christie's audience. It's actually a very established and sophisticated audience in and of itself which is why I've just dove into this. But for Beeple we had more than 40 bidders place bids, something like 48 or 49. And there were 20 bidders above a million dollars which is amazing. But only three of those 40 plus bidders were previously known to Christie's. So everyone else is brand new. That kind of shift is just insane. We never see those numbers in any category ever. And especially for a nearly $7 million purchase is just kind of staggering.

Noah Davis: (42:38)
But with Warhol, when we did the Andy Warhol machine made NFTs, we did see more engagement from the traditional fine art world. Three of the five lots in that sale went to established collections. Two went to new NFT crypto collectors. But three went to people we've done business with previously. So we went from three people placing bids out of 50 in Beeple to three out of five of the lots in the Warhol sale going to the old world blue chip fine art collecting scene. So yeah, you're seeing a shift in real time too.

Les Borsai: (43:17)
Go ahead. And boy I can answer that one. So my perception on that is we just haven't got there yet with music. And when you have labels and publishers as rights holders, it's incredibly difficult to license content. So that puts musicians in a place of either owning the content outright so they can do things with it in terms of NFTs or do something that isn't music related. There's a whole bunch of complexity around that. And I also think the audience and you guys might disagree, they're not a hundred percent focused just on pure music NFTs right now. I think when we get into sharding and creating these other initiatives around those music NFTs, we'll see kind of more of a demand.

Noah Davis: (44:15)
I mean I think we'll also see a lot with 3LAU, with Royal, the platform that he's developed. So I don't know if you're familiar with 3LAU and, and his album sale by NFT but he also recently just announced the creation of a platform called Royal which will allow artists to basically sell futures for their careers. If you love an artist, I like to use the example of Nirvana because when Nirvana became super popular a lot of their initial fans resented that and they were seen as sellouts. But Royal what they're proposing is to allow the audience to also share in an artist success. So instead of leaving the concert and buying a t-shirt at the merch booth, you can buy a token. And based on when you buy that token, you potentially can profit off of the artist's success. So that's, to my understanding part of what 3LAU is trying to do with Royal. And I think it's one of the more innovative and exciting projects in the music NFT space so far.

Les Borsai: (45:14)
I think my kind of point on that is then you start to see the regulatory stuff kick in and that's going to be complicated. And the thing that's so great about 3LAU and RAC and all those guys is they were a part of the crypto community kind of way before and it shows the impact of being part of the community. And I think back to your question, when you have an artist that comes in to try to do an NFT. And I don't know about you guys, but when the NFTs first start really hitting, every artist in the world want to do one of these things because everyone wants to make a million bucks for a song. And I think that's where some of the problems are going to come in.

G Money: (46:45)
So thank you for the question. I think that's really relevant compared to stuff that's been going on over the last couple of days. I don't have anything against NFTs on other side chains. The thing that I've seen with Solana projects for the most part, I think Solana Monkey Business is great. I love the artwork. But what I've seen is a lot of copycat projects like Solana Punks, Bored Ape Punks, I don't know what they're called.

Snowfro: (47:12)
Solana Apes.

G Money: (47:13)
Yeah, whatever they're called. That's just copy and paste. So to me, that kind of like unless people within the Solana ecosystem can kind of self-regulate themselves. I'll use Tezos as a great example. There's a lot of great art on Tezos. There's a big collectors community going around Tezos because artists are going there, high-quality artists.

G Money: (47:34)
I think the advantages that Solana has is obviously backed by SPF. You have your On Labs which is going to make stuff much easier. But I think you need to bring the talent. And so to me, it's like I'm by no means a maxi for ETH NFTs but as a collector before. I wasn't first with punks. I bought punks a year ago. But to me it's like what do I see with regards to creativity and community and stuff like that? Interestingly enough I think I reached out to Monkey DAO literally yesterday or the day before because I'm interested in it. I haven't made a decision yet but it's interesting.

Les Borsai: (48:18)
I think the other thing we should touch on is the fact that when ETH launched, consensus did a really good job creating development on top of the chain. You have such a kind of outweighed proportion in terms of just development on Solana versus something like ETH. So those other guys got to catch up before they see the scale.

Snowfro: (48:40)
I also-

Priyanka Desai: (48:41)
Yeah.

Snowfro: (48:41)
Oh go.

Priyanka Desai: (48:43)
No, no I was just going to totally agree. I think the answer to the question, what we were touching on earlier about ETH. It's just the developer community there, the solidity language, everything there is just so far along in development that that's I think what we were noting towards more before. Solana, kind of agree that copy and paste thing is kind of. But yeah, Tezos is, I felt like we touched on that but the digital art community on Tezos I think is brilliant. And I think there's actually several people buying on Tezos since there's a lot of similar artists, both on EVE and Tezos. And Tezos is a bit less so it's almost like an arbitrage opportunity for a few people as well. So yeah, I think it's ETH is a starting point for sure.

Snowfro: (49:29)
I just want to like-

Noah Davis: (49:29)
Sorry for hurting Solana.

Snowfro: (49:30)
No I don't think hurting Solana shouldn't even be relevant here. Ethereum has been around for this many years and I think that they have to prove themselves. And so I am very much an ETH maximalist. However, anybody in this space that can be closed off to innovation of any sort is completely counterproductive to the reason why we have had success in this space. So there's a couple of things. Number one, Solana has trade-offs in terms of decentralization which will eventually be addressed as the chain grows but that is a very real trade off. Ethereum is significantly more decentralized than Solana at the time being. In exchange for that, you get millions of transactions per second, that's fantastic. On Art Blocks, our problem is not trying to be able to handle millions of transactions per se.

Snowfro: (50:21)
We are however interested in potentially having the minting of an Art Blocks piece happen on Solana while provenance exist on Ethereum layer one. So we believe at least that each blockchain will have a really good solid use case. And we will use each blockchain for each specific use case that it offers. And I think the friction is so high right now for new people entering this space and understanding what a gas fee is and purchasing something. And it costs you more than a meal just to pay the network to process your transaction because that's what it's like on Ethereum. And that's not what it's like on Solana. But that friction is already really high.

Snowfro: (51:04)
And understanding MetaMask, which is the bugin that everybody uses to operate on Ethereum is really high. And then asking that person that has decided to dive in to also try to wrap their brain around a whole another blockchain and potentially another extension and understanding that they're transacting on it's just too much. So Solana's going to have to prove itself. I believe in Solana, I have a couple of projects that I'd like to see happen on Solana. Right now there's a knockoff of my own project called Soul Squiggles that literally is copying my code and generating 10,000 my piece of art on Solana. And it's literally like every project on Solana right now that has come across my desk has been a knockoff. And I know that they're not all like that but it just feels.

Les Borsai: (51:54)
Well having said that, Noah, in the traditional art world, you can look at Warhol than anyone else. I mean it's the greatest compliments of derivative work from an artist. So I you can argue that CryptoPunks having so many derivative works elevated CryptoPunks.

Snowfro: (52:11)
Totally agree.

Noah Davis: (52:12)
100% yeah.

Snowfro: (52:14)
It's the derivative difference versus derivative and straight up just like carbon copy. That's where it kind of feels, I feel kind of naked on Solana. Just because my project is out there without my signature.

Noah Davis: (52:23)
It also is not using appropriation as a conceptual technique. It's really just about securing the bag and that is not cool.

Snowfro: (52:36)
Solana will be, there's internal conversations and we believe that Solana will be one of very few competing layer one blockchains that will be around in 5 years and 10 years. So I have nothing against Solana but it needs to work its way up. Much work has gone into Ethereum for another one to come in and within the first year start saying, well, what about me? No, let us get there. And that's my stance.

Noah Davis: (52:59)
It could be the Pepsi to the Coke. There will be a Pepsi.

Snowfro: (53:01)
Oh yeah, yeah There will.

Les Borsai: (53:02)
Go ahead.

G Money: (53:40)
So I'll take that. I think it's going to happen slowly over time and then suddenly. That's something we always use slowly then suddenly. I think the real advantage to that is to having stuff on chain. And every time we have a massive draw down in crypto, I love it because it just makes us more anti-fragile. In May, we had a 50% draw down and nobody needed to get bailed out. So what if I had mortgage backed securities on-chain and they're collateralized and everything. You have your counterparties and all this stuff. And then there's some seismic event that happens and it causes a massive draw down and you don't need central bankers coming in. So that's to me is the advantage you're not re-hypothecating a collateral. You don't necessarily have counterparty risk as much cause it's on-chain.

G Money: (54:27)
So to me, that is like the best advantage of all. We just had 20 or 30% draw down last weekend. Nobody needed to get bailed out. People that took on a ton of leverage, for sure. They lost a ton of money. But for the most part if you're operating well in the system you don't have to worry about losing your money. Which is kind of the essence of where crypto came from. Satoshi came up with Bitcoin from the depths of the financial crisis. So to me bringing these assets on-chain is just the perfect compliment to that.

Snowfro: (55:17)
Oh man. Oh yes. Oh my God.

G Money: (55:35)
He has good taste. He has great taste.

Speaker 8: (55:37)
[inaudible 00:55:37].

Snowfro: (55:37)
It's just growing pains. This is really happening fast for everybody here. It's simply, there's an oversubscribing towards what we have to offer and there's a limit to what we can offer. And there's more people that want something than what we have to offer. And our goal for example at Art Blocks long term is to have open projects ready for minting at any given moment in time. And we just can't get there right now because things are completely bad shit crazy. But we will because this is also, I don't think we're in a bubble but we're also in an unsustainable.

Snowfro: (56:42)
Somebody said the other day, if Art Blocks continued at its pace, it would be 10% of the entire worldwide art market. Like no, just like Solana can't have authority in decentralization in its first year, Art Blocks cannot have authority in the art world in its first year. And so it's just going to have to calm down a little bit. We're all just kind of waiting for that to happen. Really excited for it to calm down a little bit. And I promise you that there will be the ability to mint things on Art Blocks and other NFT platforms for 50 bucks, a hundred bucks in the next few months.

Noah Davis: (57:15)
Well you guys are also addressing this in real time too with like the Dutch auction style that you've rolled out more recently. So I mean that's the...

Snowfro: (57:24)
It's completely crazy. Oh I would disagree. I think it's very much doing what it's especially when there's not too much oversubscription. So last week both the attractions ended up with the very base price. That's exactly what we need. And I'm pretty. Not on the curated, but they also didn't drop. They didn't sell for $30,000 a piece either. But yeah no, I think we're on the right track and there's just a lot going on and a lot of things to address.

Noah Davis: (57:51)
And if the gas fees are high, it means that people want to use the network. So I think it's a good problem to have. It's the best problem you can have because it means there are tons of people knocking at the door.

Snowfro: (58:02)
For now but there was four months where it was not. So that's the thing. We just have to kind of be patient. A lot of people are coming in and be like, I can't participate. And I'm like, just wait a little bit because it is, you're right. Right now I don't introduce anybody new to Art Blocks right now. Whereas for four months I literally, anytime I was like check this out, for 200 bucks you can have this piece. I don't do it. I'm the founder so I'm not buying at these prices and I'm the founder. So we just kind of have to take a step back and understand that it is going to go back to normalcy. And if it doesn't then we're onto something really, really, really crazy here too.

Les Borsai: (58:35)
But it think that's also one of the cool things is I'm an advisor to an NFT thing. You guys are all owners of companies. And when a drop happens, often we don't get anything. There's been plenty of times where we couldn't get it. On the gas fees it's like there's enough demand with a lot of the hotter projects that the gas fees don't even matter. People are like pumping the gas to get the art.

G Money: (59:04)
Yeah I think with regards to user adoption it's like you just need a more consumer friendly thing. If you take a look at probably some of the more successful stuff in the space that brought in let's say normal people. You're looking at NBA Top Shot, Nifty Gateway. What do they have? They have a great user experience. Just because we don't have that just yet doesn't mean we won't get there. The beautiful thing is we're going to get there.

Snowfro: (59:29)
We will get there.

Les Borsai: (59:31)
I think we're going to have to wrap it up. But we want to thank SALT and the panel. Go ahead, Justin. Sorry.

Justin Aversano: (59:35)
Before we wrap it up I do want to say something and then we can clap. I think it is important what you said about assessability and education and onboarding. I think we're so locked up in our echo chambers it's like second nature at this point. But to step back into the place of how do we create accessibility for people who can't afford a thousand dollars Yesware. I think the way to do that is to create experiences and proof of attendance. Things one of us should have created a proof of attendance token and gave everyone here in NFT like the Los Robbie's. And I think that's a great start in getting people a wealth redistribution of some sort through NFTs. And I think as we keep having conferences and events and whatnot, we'll have those NFTs to be given out.

Justin Aversano: (01:00:26)
And I think that's where you could start. And maybe it's our responsibility to onboard and educate you all as well as creating the dialogue of what your feedback is like. Hey, how do we get involved and we want to. And I think it's how do we make it more accessible where the price isn't only for the 1%? And on top of that, I think I would love to end this conference with a positive note in saying I think NFTs and having a non-profit organization will create a huge disruption in how nonprofits will start fundraisings as an NFT as a tool. Just from my own experience with SaveArtSpace and seeing how we could raise like $500,000 in three days when it took us the past five years even accomplished that is a testament to what NFTs can achieve. If you have the right audience that will back you and we don't have to rely on donors anymore but just projects we create that create sustainable in perpetuity value. I think we'll start seeing a lot more nonprofits creating a wallet so they could take our crypto money.

Les Borsai: (01:01:33)
I want to thank SALT, Anthony and John for letting us do this. And thank the panelists.

Guest User

October 8, 2021

SALT NY: Digital Assets

How Crypto Is Eating Wall Street | #SALTNY

Guest User

October 8, 2021

SALT NY: Digital Assets

How Crypto Is Eating Wall Street with Nathan Mccauley, Co-Founder & Chief Executive Officer, Anchorage Digital. Dan Morehead, Chief Executive Officer, Pantera Capital. Zac Prince, Chief Executive Officer, BlockFi. Katherine Molnar, Chief Investment Officer, Fairfax County Police Officers Retirement System. Michael Shaulov, Chief Executive Officer & Co-Founder, Fireblocks.

Moderated by Michael Casey, Chief Content Officer, Coinbase.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Nathan Mccauley

Co-Founder & Chief Executive Officer

Anchorage Digital

FULL BIO

Dan Morehead

Chief Executive Officer

Pantera Capital

FULL BIO

Zac Prince

Chief Executive Officer

BlockFi

FULL BIO

Katherine Molnar

Chief Investment Officer

Fairfax County Police Officers Retirement System

FULL BIO

Michael-Shaulov_CEO_Fireblocks_viaFireblocks-748x1024.jpeg — Michael Shaulov

Chief Executive Officer & Co-Founder
Fireblocks

FULL BIO

MODERATOR

Michael Casey

Chief Content Officer

CoinDesk

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Michael Casey: (00:00)
So you can tell from the way that they walked in that they're really not going to follow my lead here at all. I got a panel that's going to be autonomous and independent, which is great. So I'm Michael Casey. I am the chief content officer at CoinDesk, which is the leading media platform for the cryptocurrency digital assets and blockchain space. And I'm thrilled to have a tremendous panel with us today to talk through what truly is I think, I've been covering this space for eight years as a journalist. And I feel like we're at this moment right now where things are getting really quite interesting. Just the SALT Conference itself speaks to that in terms of the crypto presence here.

Michael Casey: (00:48)
But before you want to hear from me, you want to hear from these guys so quick introductions, we have Nathan McCauley who is the CEO of Anchorage, Dan Morehead, the CEO and founder of Pantera Capital, Zac Prince from BlockFi, Katherine Molnar who's the COO of Fairfax County Police Officers Retirement Fund and Michael Shaulov from Fireblocks. So look, Dan, I thought I'd throw it to you first, if you don't mind, just to give people a sense of the journey. You, something of a visionary, started investing you really as a VC back in 2013 in this space. You've seen a lot change over the time. What are the big lessons that you take away from this for anybody here who's looking to get their feet wet?

Dan Morehead: (01:31)
Yeah, I think we're still in the early innings of the multi-decade transformation that's going to have a huge impact on literally billions of people. And this conference is a great example of how much the interest has grown in this space. The community used to be a really tiny little thing. And I was thinking back when you first asked about that, when I first was pitching endowments and other institutional investors on Bitcoin, the space had one asset manager with one fund with one asset. That doesn't really sell very well. People certainly didn't want to take that very focused risk.

Dan Morehead: (02:06)
And I remember going into meetings with big endowments. You'd say, "Hey, I'm willing to come out to your college and talk about what Bitcoin is," in 2013. And you get the CIO and 20 people in a room and you have this great conversation for an hour. And you kind of get to the end of it and nothing happens. And it's obvious you're not going to get any interest or any subscription from the endowment. So then you say goodbye and they're walking out to the elevator and everybody's whispering, what's the minimum? Because they all want to invest personally. And now it's flipped. Institutional investors are calling us and it's much more engaged. So I love seeing that this journey we're on, which I think still has a couple more decades to go, is really taking off.

Michael Casey: (02:49)
So on that note, Katherine, you are one of those institutions that, earlier than most, I would say from certainly from the pension fund world, decided that this was something that you were going to get into. Yeah. First of all, how did you convince your trustees and others to dive into this crazy space?

Katherine Molnar: (03:09)
Sure. Thank you. And it's a pleasure to be here today. So a colleague and I, we managed two different systems, but we work closely together. We started looking closely at the Bitcoin, but really more blockchain technology space in the spring of 2018. And we identified a manager that we were really interested in investing with. And to be very clear, it's venture capital. So we were not trying to invest in Bitcoin. We were not even trying to more broadly invest in cryptocurrency only, rather the infrastructure that underlies all of the cryptocurrencies and all the protocols, so really blockchain technology itself. So we've made four investments now. Going back to how the approval process, we went on site to see the manager in the summer of 2018, so a little more than three years ago. And of course staff went on site as we always would do.

Katherine Molnar: (03:58)
But in addition to that, we took a number of trustees from the different systems with us because we wanted them to really hear the message directly from the manager. So a group of probably eight to 10 people that represented Fairfax County between staff and trustees went and stayed there for about four hours. And so the following month in September of 2018, I presented it to my board and they approved it. But I would tell you that it wasn't without a lot of discussion. And even once it was approved, there were definitely employee groups within the county that were pretty upset about it actually. And there were concerns such as is this a way to launder money? And of course, representing a police officer's retirement system, that's something that's pretty important to them. And just in general there was some pushback, but I think ultimately we tried to impress upon them that we thought that this was a really potentially high growth area.

Katherine Molnar: (04:56)
It's part of a broader innovation allocation. We consider it venture capital, even though there is a certain portion that's actually liquid. Up to 20% to 30% can be liquid cryptocurrency, but nevertheless, we consider it to be venture capital. Its size is venture capital. So starting out initially and for my system is about a 50 basis point allocation. We re-upped once to one percent, so doubling it. And then we've since made two additional investments. So we're now at four investments so far. Are all of them so far in venture capital I would tell you. That two percent target is now worth over seven percent in our portfolio. It's done that well. And we are potentially or planning to recommend a new manager next month that will be truly classic liquid cryptocurrency, to put like a proper long, short hedge fund evergreen structure.

Michael Casey: (05:46)
So those doubters now are a little bit more comfortable with the steps you took then.

Katherine Molnar: (05:52)
Were they more comfortable now?

Michael Casey: (05:53)
Yeah. The trustees, the people who had their doubts, they're probably happy to see those sorts of returns I imagine.

Katherine Molnar: (05:58)
Yeah. So I think that definitely the second and third and fourth time around were certainly a lot easier than the initial approval naturally. But the performance has been very good. And then I just think in general, the service providers in this realm of asset management are better known. There are some very well known institutions that are now willing to custody digital assets. That wasn't the case three years ago when we made our initial investments. So even just some of the community around digital assets, I would tell you, has become more institutional, certainly better known to investors. And so I think that's also gone a long way.

Michael Casey: (06:34)
Yeah. I mean, we were talking in the green room before about say the emergence of [inaudible 00:06:37] in the custody space and Fidelity. These are sort of common names and how that has helped people to, I suppose, just feel more comfortable with it. But Fireblocks might have a different take on this and on what really the quality of custody. So first of all, if you don't mind, Michael, explain your service. You're a custody provider, but you've got an interesting structure there where you service both institutions and you've got two custody models. Yeah.

Michael Shaulov: (07:02)
Yeah. So I think that from where we stand and what we do, we basically provide a technology infrastructure that is custodial for the different players in this space, which is relying on technology that's called multipart competition that I'll explain in a second.

Michael Shaulov: (07:17)
But the idea is that the way that we provide our technology service, if it's basically directed to funds or for companies that consuming it directly, it's almost, it's basically self-custody, right? So they basically able to manage the wallets. But although people have this kind of notion when you tell people self-custody, they think that someone has a [inaudible 00:07:44] key in their back pocket. And they're basically running with million dollars of crypto on a [inaudible 00:07:52] key. It's actually the complete opposite. Basically there are very sophisticated systems that are able to protect the wallet and they are able to protect the keys that secure the wallets in a way that creates all those layers around security, governance, approval processes, compliance. And first of all, people can basically access it directly. So you have hedge funds that can basically consume it. And then in a sense, it's basically like self-custody. But it is secure.

Michael Shaulov: (08:23)
On the other side, we do power some of the biggest custodians. So the earlier this year, it was made public that Bank of New York Mellon invested in our company. And we are working with Bank of New York Mellon to basically establish their custody technology and offering. And we're working with quite a few of the other Tier 1 banks.

Michael Shaulov: (08:43)
So when this technology is basically consumed by a licensed institution, then you're basically getting the sort of the traditional custodial infrastructure through which people can access. But again, highly secure with all the right protocols and then also the operational procedures and the balance sheets that I think a lot of the people, the balance sheet and the brand that a lot of the people on in the traditional financial side on Wall Street really looking for to partner. And I think that the most interesting and most fascinating thing about maybe people like [inaudible 00:09:20] and the Bank of New York Mellon and Fidelity is that they already have agreements in place with pretty much most of the hedge funds or asset managers on Wall Street and they can basically service them under the same agreements.

Michael Casey: (09:37)
One of the aspects of that question around custody and the two models you're talking about, I think inevitably leads us to questions around regulation. There's this sort of inherently different regulatory structure when there is a custodian of the client's assets. So to Nathan, I thought of just throw to you just to give us some picture. Anchorage has taken a very distinct path as to how you are going to get yourself regulated. You've opted to be a bank. Maybe talk a little bit about that and what the logic behind that is and how you see the regulatory framework kind of evolving right now.

Nathan McCauley: (10:14)
Sure. I think on our side, our animating force at Anchorage continues to be service of our clients. And so when clients look at looking to invest in crypto assets, looking invest in blockchain-based technologies, certainly they need very secure custody. They need flexible custody so they can do whatever they want with their assets. But they also need that to be inside a regulated entity and a regulated environment. And so we kind of took it upon ourselves to do what we think of as some of the trail blazing in that space. We actually went to the federal regulators, the OCC, and got a bank charter. And so what we did was we took our state charter trust company, converted it into a national bank. And so when you're holding your Bitcoin or your Ethereum or any of your other long tail of assets that you might have, whether it's some of our clients have bought NFTs and they're holding those in our bank or Ethereum other assets and they're say, staking, their assets, you do all of that within a chartered bank.

Nathan McCauley: (11:17)
So this is extremely meaningful for any kind of institutional investor. Their primary regulator is the SEC. And so we want to make sure that we can help our clients meet any of their obligations to the SEC. And increasingly one of those sets of clients that wants to do that is FinTechs and banks. Others who are kind of looking to roll out services in this area really like the idea of working with a technology provider that is also regulated at the same level as them. There's a lot of kind of joint shared responsibility that you can do if you have kind of blockchain focused compliance people. And as we look at banks coming in, especially looking at all of the compliance and regulatory obligations they might have as a bank, looking at how to make sure that they properly think about capital adequacy and balance sheet versus non balanced sheet treatment for the assets. There's just a really irreducible complexity when it comes to coming into the space.

Nathan McCauley: (12:15)
And so we look at packaging kind of all of that together, both the technology to do the custody, and kind of a partner on the regulatory and compliance side to really bring things to market sooner. Whole reason we want to do this is that we think that this is probably the most exciting asset class that has come up and certainly the most exciting asset class that will come up in our lifetimes. And what we want to do is make sure it's available to everybody. And the best way to make it available to everybody is that every bank becomes a crypto bank. And really every business becomes a crypto bank in the same way that there's no notion at this point of an internet business. Everybody is an internet business. We assume that everybody will become a crypto business and we want to be an enabling force for that movement.

Michael Casey: (13:02)
So everybody becomes a crypto bank or a crypto business, because a bank is a very specific regulatory status. Or is it that we are moving to a world where these lines get blurred somewhat?

Nathan McCauley: (13:14)
I think the way we think about it is that increasingly, say over the next several decades, it is very likely that most banks will decide that they want to hold Bitcoin, will decide that they want to hold this asset class for their clients. And a lot of that is going to be because of their retail clients wanting to do it, but also their institutional clients doing it. So especially when you look at the diversity of kinds of assets that you look at, sure, you've got Bitcoin and Ethereum, which are primarily right there as investment assets. You start to look at stable coins, stablecoins might well be the underpinning of the next generation of payments for America and for the world globally. If you're going to be a bank that builds on USDC or other stablecoins, you're going to want a partner that you can work with. In our case, just to take an example of that, Visa is working with us in order to settle USDC payments entirely within the Visa network. So you can settle a payment entirely in USDC using the Anchorage infrastructure that is built up there.

Nathan McCauley: (14:22)
And so we think as there is a ongoing proliferation of digital assets, a lot of these use cases will start to come together. So yes, it will be banks that come, but then it will be all of the other businesses will be processing and looking at maybe accepting payments in stablecoins, holding assets, and really kind of building up their infrastructure on top of this blockchain ecosystem.

Michael Casey: (14:47)
[inaudible 00:14:47] one of the most interesting and dynamic areas of digital assets in the past year has been the lending business and been built on top of that. And BlockFi is truly a trailblazer in that. But you've run into some challenges lately on the regulatory front, speaking of that. I know there's probably limits to what you can answer here. But how is this all going to play out? And what's your expectation? You've had a number of cease and desist letters from state regulators. And of course we had the case last week where Coinbase revealed that they had a Wells letter from the SEC about their own lending program. It looks to some as if there's a big bucket of cold water being thrown on this business. Is that the case, or is there a more positive outlook from all of this?

Zac Prince: (15:35)
Yeah, so I certainly think there's a positive angle. So first off, in case anyone's not familiar with BlockFi, we're a financial services provider to both retail and institutional market participants in the space. So on the retail side of our platform, we're most well known for being one of the first news that enabled folks to earn interest on their cryptocurrency and also stable coin holdings at really attractive rates. Recently, we also launched the world's first Bitcoin rewards credit card where you earn Bitcoin instead of airline miles or regular cash back. And then on the institutional side of our platform, we provide bespoke financing and trade execution for both this spot and derivatives market to institutional clients that include hedge funds, asset managers, market making firms, proprietary trading firms, and crypto corporates.

Zac Prince: (16:23)
Prior to starting BlockFi, I was in the online lending industry. And like a lot of other FinTech sectors, I think the cryptocurrency and specifically the cryptocurrency lending sector is starting to go through a regulatory come to Jesus moment in time. And these things happen. It happened in online lending. It happened in payments if you read books about PayPal. And so what's happened so far for BlockFi is New Jersey sent us a order requiring us to stop accepting new clients to earn interest on our platform. This happened back in July. The order initially had a 48 hour effective date or a 48 hour effective window of time. That's now been pushed back multiple times. But there have been four other states who have jumped into the fray and sent information requests or public hearing notifications to BlockFi.

Zac Prince: (17:16)
And ultimately, I think, and the Coinbase news points to this, there needs to be clarity at the national level. So we're not going to decide what box crypto lending belongs in based on what New Jersey does or what Texas does or what any one other state does. It's going to come down to federal regulators like the SEC or the OCC creating a path for this type of activity to happen, which I believe is fundamentally activity that's good for consumers. It's good for the cryptocurrency market. And it's activity that we want America to lead on.

Zac Prince: (17:52)
So from the early days of BlockFi, we've blazed trails in terms of regulation. Going back to 2017, we were the first company in a lot of states to get licensed to make loans to people secured by their Bitcoin as collateral. And I think that we're having very productive conversations now. I can't talk too much about who we're having those conversations with and what that may result in. But I think that ultimately we'll get this right. There's going to be a period of time where things are getting sorted out for BlockFi and others in the industry. But I think that America will land on the right side of this, and there'll be clarity provided, which will just further fuel growth of the industry.

Michael Casey: (18:34)
So I want to, in a moment, drill down into all of the interesting things that can be done with these new lending protocols and the like, and what that means for institutions like the Fairfax County Police Officers Fund. But just running with the regulatory story for a little bit, because it has become, I think, quite interesting of late. Certainly it feels more intense. In both directions, you feel as if there is a growing awareness of the opportunity here and on Capitol Hill. A bipartisan interest amongst certain lawmakers in some sort of very constructive, innovative approaches to regulation, but also a somewhat more vociferous voice of the antagonist as well. So first of all, Dan, I was just thinking, because you've been watching this again for eight years now, what's your read on where it's going? Is this just sort of a natural part of the evolution? Because you say there's still a number of decades to go until we end up wherever this is supposed to be. What's your read on the current regulatory outlook for the space?

Dan Morehead: (19:32)
Well, I think it's important to focus on the fact that most of the regulatory bodies in most countries have ruled very favorably about blockchain. And most of them ruled eight years ago. The IRS ruled that cryptocurrencies properties, you get long term capital gain tax treatment. The OCC, CFTC has always been very progressive. So most of the regulatory bodies have ruled. There's a few that are still trying to figure it out, which it's going to take it a little bit of time. But most of the bodies have ruled and that's globally, too. Most countries, they're regulatory bodies are at least neutral. There's a few countries like Luxembourg who are very positive on crypto. So, and it's a global phenomenon. China has a blockchain. And so the blockchain toothpaste is out of the tube and the U.S. has to have a policy and catch up. And the federal reserve is building a blockchain, but it is one of those things that whether you love it or hate it, blockchain is here. And so regulators have to get on it.

Michael Casey: (20:36)
Nathan, Zac was talking about this kind of this almost pivotal moment. Somebody has some sort of reconciliation or it needs to happen perhaps at that national level. And there are folks who are saying it's time for a legislative response that it's just the SEC might be sort of dealing with some outdated laws at this stage. And I think you've mentioned to us in one of our conversations that there's this international component to this. Dan was alluding to it that U.S. leadership in many respects is at stake. Talk us through that if you don't mind. How do you see that playing out?

Nathan McCauley: (21:10)
Yeah. Yeah. I mean, I think, to Dan's point earlier, we are in very, very early innings of what maybe decades or centuries long movements that'll be I think we all on stage probably feel that this is going to be extremely important for America and kind of America's place in the global financial system, global financial capital markets really dominance in a lot of ways. And so getting a real handle on the way we want to set that up, strategically the way that the United States financial system will kind of continue to have increased relevance in this new ecosystem. All of these are kind the core policy questions that need to get answered. But we're incredibly [inaudible 00:21:58] that. I mean, we are the first crypto bank to kind of be live, be taking clients' assets on and processing that.

Nathan McCauley: (22:08)
And so there's just one so far. There are a few folks that are doing lending programs like Zac's. So there's just a lot of work to do. And we're very early on with this. Likely the rise of the kind of the tech and internet ecosystem is helpful to kind of think about this. It is very good from a national security sense, from a global policy sense that some of the biggest internet companies are based here in America.

Nathan McCauley: (22:38)
And I think that we would do well to make sure that the big crypto companies are based here. And any nation on earth should probably want that. And that is kind of the core policy question on how do we do that? How do we do that while maintaining the safety and soundness of the system? But how do we make sure that the value accrual that comes from being such a big player in the global financial markets perpetuates? And I think that a lot of that is around keeping the innovation here, making sure that lots of that kind of innovation can happen, but then also providing the clarity that's needed and likely clarity at the federal level will be the most helpful and the highest impact.

Zac Prince: (23:26)
Yeah. If I could expand on that a little bit. So one of the things that I think is often a misnomer from folks who are learning about crypto for the first time and they come in with an expectation that inherently the cryptocurrency industry is anti-dollar or Bitcoin is meant to disrupt the dollar and take over as the global reserve currency. And I actually think that if you look at what's happening in the industry, if you look at the growth of stablecoins, if you look at adoption on platforms like BlockFi and others of not just folks in the U.S. but companies and individuals outside the U.S. borrowing in dollars, which is a massive market in the traditional financial system. It's over a $12 trillion market of dollar denominated debt that's held by ex-U.S. companies and governments, which has typically had very restricted access in terms of smaller companies and individuals. But the cryptocurrency industry and the platforms like the ones represented on this stage enables that to become much more available on a global scale.

Zac Prince: (24:33)
And so I think that as education happens, folks will learn that the cryptocurrency industry and the technology that supports it is actually very positive for the interest of America and the interest of the dollar. And that's a storyline that I think will continue to come out as data is shared and folks educate themselves on what's happening in the industry.

Michael Casey: (24:57)
On that note, Michael, when Dan first started investing in this space, he said there was just one asset. That was all you really focused on. And now there's this proliferation of so many different, not just assets, but actually investing strategies. There's lending strategies and a whole host of yield farming games and so forth. What are you seeing as a provider to this industry about where the activity is going right now?

Michael Shaulov: (25:22)
I mean, we actually see that there is a tremendous momentum around DeFi, decentralized finance. And for people here that are not familiar with what DeFi is. So DeFi is essentially sort of those autonomous financial applications that are able to run on the blockchain and facilitate whether it's trading or lending or anything that you basically familiar from the traditional financial shelf space. They're able to perform that by running on top of the blockchain in a way with where there is no sort of single counter party that you're taking risk into and it's all programmatic. So clearly in the last 18 months, we've seen an explosion around the utilization of DeFi protocols. And it's actually like almost everything in crypto it's actually started from retail.

Michael Shaulov: (26:16)
It was a retail phenomenon. You had retail investors that were basically working with those DeFi protocol using something's called MetaMask. It's like a really cute plugin for Chrome with a fox that you can use. And suddenly, I would say a bit over a year ago, we started to see this massive influx of hedge funds and market makers and essentially anyone who was interested in this technology coming in. We were sort of a bit lucky because we've made some technology investments to support it ahead of time. And about nine months, I would say, we created institutional capabilities to do it in a secure way with the policies and workflows and all that. And nowadays we have say about 25% to 30% of our clients are basically using DeFi as part of their strategies. Everything from yield farming, which is basically creating some financial incentives, but we are seeing a real world use cases around using DeFi.

Michael Shaulov: (27:28)
So I'll just give an interesting example of how this relates to stablecoins. So stablecoin is basically a token that it represents a real FX currency, one to one. And there are protocols like Uniswap and Curve that essentially allow you to do this exchange between one stablecoin to another stablecoin. So you can do it between one form of U.S. dollar such as USDC to USDT, which is the stablecoin that is actually popular in Asia. Or you can do it between, for example USDC to a tokenized Japanese yen. And the efficiency of those markets that you see on DeFi protocol are in some cases are actually better from a slippage standpoint than the FX rate that you would get through the bank.

Michael Shaulov: (28:19)
So you're actually starting to see people basically looking into that. And interesting enough, we have been seeing quite a lot of those banks, quite a lot of the banks that we working with, or having conversation with seriously looking into DeFi because now when you're basically thinking about what does it mean for FX? You have 24/7 system that settles immediately. You don't have cutoffs. It's not like 5:00 PM, that's it. You cannot send the wire. You can basically execute hedge on a foreign exchange and every given point. You can do it over the weekends. So it has this amazing promise. The caveat there is really that if we talked earlier about compliance and regulatory oversight, DeFi is probably in the most extreme area of the non-regulated right now.

Michael Shaulov: (29:17)
Those are completely permissionless protocols. Anyone can access those protocols from anywhere in the world. And clearly there is a lot of questions that comes from an anti-money laundering over there. So there are multiple initiatives right now going on in the industry in terms of figuring out, I would say that part and basically make it more kosher and basically bring it to the very regulated institutions that they will be able to use those protocols as well, and basically push it into the mainstream.

Michael Casey: (29:53)
I want to bring Katherine in a moment, if I could hear about the sort of a very regulated, or at least more conservative institution would feel about these opportunities. But just before I do, what is the profile of the 30% clients that you referred to? What kind of investors are we talking about who are really sort of using those services right now?

Michael Shaulov: (30:09)
Yeah, so right now we are seeing mostly I would say hedge funds, market makers, prop traders. But we actually seeing asset managers sort of stepping in and want to use there are two very famous protocols over there, Aave and Compound that are basically are able to generate yield on stablecoin or on other assets. And, but I would say for the next right now, the people that are interacting with those protocols, they're able to wrap their head around the compliance aspects. The next wave of investors that I think we are going to see coming in is once we are able to solve the compliance issues that surround those protocols. And there are a few initiatives over there that are being some of them already in beta and some of them will launch by the end of the year.

Michael Shaulov: (31:09)
So just as an example, we have a project going on with Aave, which is sort of like this multi billion dollar DeFi protocol which creates a sanctioned sort of pool. You only interact with people, although it's running on DeFi, you only interact with people that pass the same KYC, AML procedures as you are. And we already have about 40 institutions that are participating in that beta. And you actually see over there, banks, you see some of the biggest asset managers that are in that beta. And it's like a very different demography of people that are coming to [inaudible 00:31:51]

Michael Casey: (31:51)
Yeah. It's amazing how quick it's moving. But Katherine, are you looking to take those policemen's money and farm some yield in the DeFi world at this stage?

Katherine Molnar: (32:02)
Absolutely. And so some of the companies that have been mentioned today up here are portfolio companies and the funds that we already have investments in. And so happily, some of them have done very, very well already in the last few years. And so I guess as an investor, and I'll just, I'll pivot this a little bit, but when we started looking at the space, there's a lot to look at and it depends on if you want to be completely liquid. So on the cryptocurrency side, it depends on if you're willing to be locked up. So venture capital, which is making obviously private investments in some of these companies. And so that's just one thing to mention. And as I mentioned earlier, our investments today have all been in the venture capital realm. But in each case also, there is a certain portion that's liquid cryptocurrency.

Katherine Molnar: (32:47)
As I also mentioned, we're about to recommend a manager which is completely liquid cryptocurrency, and it's long and short. And I mentioned that because they do do yield farming. They do do basis trading. They have part of their strategy that's market neutral. And it's not something when you think about like a classic hedge fund that might be market neutral, that they're typically taking out beta to equities. Well, in this case, they're market neutral, they're taking out beta to Bitcoin and other cryptocurrencies themselves. So we think of that as a hedge fund strategy like we would think of a market neutral equity market neutral manager, or other type of a relative value strategy. So it's really interesting. So in that case, it's not directional, whereas as I keep kind of going back and forth here, but whereas the cryptocurrency that I have in my venture capital funds is completely long only. So I have long only beta, if you will, to cryptocurrency over here. And then over here, I'm going to, hopefully if it gets approved, have a classic hedge fund.

Katherine Molnar: (33:43)
And I think that there really are a lot of inefficiencies. I mean, this part of this realm, if you will, is still really new. So I think that there's still a decent amount of inefficiency, which hopefully means that there's a lot of interesting alpha opportunities for the crypto hedge funds to take advantage of.

Michael Casey: (34:01)
Zac, it's useful to think about this because Michael was talking about 24/7 markets, realtime settlement and so forth. And I think the not so well informed folks who look at the lending space, the DeFi space as well, and look at these yields and say, okay, this has got to be some scam. The fed funds rate's at zero. And how are you getting four or six, seven, eight? Walk us through the math because some of it is in fact, the efficiencies of this settlement process. And or is it just opportunistic lending? Because you've also got this institutional marketplace that you're operating in on behalf of others, maybe just explaining how all that comes together to enable the kind of yields that are available would be useful.

Zac Prince: (34:49)
Yeah, sure. So I think one of the things that can be confusing is that it is quite different on the dollar or stablecoin side versus the cryptocurrency side. But in both cases, the fundamental reason why you see platforms like BlockFi offering mid or high single digit annual interest rates on these assets is that the cryptocurrency sector is not connected to traditional debt capital markets yet. You don't have large scale banks making loans to cryptocurrency companies, maybe with the exception of Coinbase and MicroStrategy now who are in the public equity markets and able to raise debt using their publicly traded equity. But other than that, you don't really have connectivity there. So as a result, you're left with private debt markets or just higher cost of capital debt markets like BlockFi and other alternative lenders.

Zac Prince: (35:43)
And this happens in other sectors. I frequently reference a publicly traded [inaudible 00:35:49] called Innovative Industrial Properties. And they do triple net leases on warehouses where folks grow cannabis. And you can't do bank financing for that. If they were growing carrots, it would have a three, four percent cost of capital. But they're growing cannabis, so it's 15%. And so by participating in these lending programs, you're helping to finance this market that doesn't have access to traditional financing. And therefore the cost of capital is higher. And what's I think particularly compelling if you're thinking about a risk adjusted return as a debt investor, is that when you're lending in these markets, you typically have liquid collateral. So it's kind of like this super low risk form of lending where you can manage the risk in the book, liquidate a position if needed. And in the three and a half years since BlockFi has been lending, we've never lost a penny across any of the lending that we do. So despite it being in an asset class that's very volatile, it's low risk and you're getting very well compensated for that.

Zac Prince: (36:49)
And then on the cryptocurrency side, if you are a market making firm or a proprietary trading firm and you're make a market or participating in any asset class, commodities, FX, generally you want to have some inventory. And in the cryptocurrency sector, the inventory that you need is Bitcoin and Ethereum. And furthermore, there are lots of compelling arbitrage opportunities. It could be the futures basis, which, which blows out very frequently. It could be trust products that are traded over the counter at big premiums or discounts to nav. And for these types of trades, you want to be short the underlying for one leg of that trade to execute it effectively. And so you need to borrow cryptocurrency for that. So the institutional clients at BlockFi generally borrow and cryptocurrency. Dollars are borrowed by institutions and retail investors participating in the space. And I think the rates will stay high for quite a while.

Michael Casey: (37:49)
Yeah. Often reminds me of the repo market, this activity which is interesting seeing how these models emerge in a digital world. Dan, as somebody who's gone on this journey, what are you excited about now? I mean these new DeFi lending models, what's the next big zeitgeist you think?

Dan Morehead: (38:09)
Yeah, I guess I would say that to bring it full circle is there is more than one asset now. And a lot of my friends are Bitcoin maximalists and it's got to be about Bitcoin. But the only thing I would share as advice to investors is there are so many different interesting protocols to invest in out there and so many different companies. And so a portfolio should be more than just one thing. And the perspective I would have is Bitcoin's been amazing. Our fund is up 600X. So Bitcoin's done great, but and I think it's going to go up another 10X or something from here. But I'm not sure that I actually think the majority of future gains are from things other than Bitcoin. And I know that sounds radical to some people in the audience, but it's kind of like in 1998, saying that majority of future tech gains were not in Microsoft.

Dan Morehead: (39:02)
Microsoft did great. It was worth $260 billion then, but Amazon was worth $10 billion. Apple was worth one and Google and Facebook were zero. They weren't even existing yet. And since then, Microsoft's only been 20% of the gains since 1988 in tech. All these other companies that didn't even exist in 1998. And that's the spirit I have here is that I think Bitcoin's going to go up a ton. It's a huge, great investment. If that's all you can get through your IC, you should be long Bitcoin. But if you can be long a basket of things, I think it's going to outperform.

Michael Casey: (39:38)
Did they let you speak at Bitcoin Miami? That would've been heresy. How about you, Nathan, what do you see from your sort of-

Nathan McCauley: (39:51)
I think just to kind of piggyback off what Dan is saying, this is one of the things that is clear in the conversation we having with many of the global financial institutions, say banks or others. They're really kind of looking at the next 10, 20 years and understanding this is an asset class. And this is truly a comprehensive asset class [inaudible 00:40:12] think about strategically. And so anybody kind of developing a strategy in this, whether you're a bank or an investment advisor, or even a pension, is to look at what is the sum total of the opportunities here? The way that I think about Bitcoin is Bitcoin was in many ways it was a gift to the world. And that Bitcoin functionally acts as a global public utility.

Nathan McCauley: (40:39)
It is owned by no one. Everybody gets to participate in it. And the most optimistic version of what's what's coming within crypto is that we can have dozens if not hundreds of global public utilities that are available and co-owned as know really infrastructure for the world. And so Bitcoin kind of blazed that trail for us. But there's a huge, huge amount of these that are going to come out over the next several decades. Going to be really exciting and going to be really kind of leveling of the playing field for a lot of financial inclusion acts-

Dan Morehead: (41:16)
... Of all the crypto gains have been things other than Bitcoin. Since mid-February, Bitcoin has kind of drifted down and other tokens have created hundreds of billions of value.

Michael Casey: (41:30)
So the market cap itself has grown, but Bitcoin has not been driver.

Dan Morehead: (41:34)
Yeah. And during that time it's been non Bitcoin tokens that have done more than 100% of the game.

Michael Casey: (41:39)
Yeah. I mean, there's a lot of focus on the flippiting with the [inaudible 00:41:42] and that may be just missing the point really. It's actually sort of this bigger universe. So this is the vision, Katherine. You heard it from Nathan, this sort of this emerging asset class, this idea of all of these sort of opportunities that exist in what I think you described as it almost like a technology player, bet on the internet, almost a new internet. But what needs to happen so that a lot of these other funds can follow the Fairfax County Policemen into this space. We've talked about custody, but there's other elements of the infrastructure that need to be in place, right?

Katherine Molnar: (42:18)
Obviously we were comfortable doing this three years ago. And, I wouldn't say that it was perfect. And I guess I wouldn't say that many investments are probably perfect. But as I said earlier, the service providers weren't kind of as institutional in nature, if you will, three years ago. And that's changing. But I think that in general, I made that comment that if we see a manager that self-custodies, if this were five years ago and I we're looking at a different strategy, and I would think I would never hire a manager who would do that. But indeed we did. And I understand the reasons why when some of these tokens initially get released and you can't find a custodian that is able to custody them for a certain period. So I understand the rationale for why people do self-custody.

Katherine Molnar: (43:04)
In the case of one of the managers I mentioned, they self-custody and but then they do also use an external custodian, but then they actually own that custodian as well. And so there can be a lot of kind of entangling potential conflicts of interest that if you were looking at any other sector, and I spent a lot of time looking at alternatives and hedge funds prior to my current role. And there are a lot of reasons to say no. There are plenty of reasons to say no, to be perfectly frank, as an institutional investor. Plenty of reasons to say no. But I wouldn't say that you should just suspend your judgment. But I would say that you need to look with an open mind and realize that it's an emerging area. And that means that all of the service providers and everything around it is also still emerging and for all of us to be a little bit open-minded.

Katherine Molnar: (43:47)
But I think it'll get there. And I think we happen to be somewhat of the mindset that we do think eventually that most assets are probably are going to be digitized. And so if you think that, then you ought to be an adopter of everything that we're talking about. So I think people will get there. I mean, I will say the following. I think that that crypto is extremely volatile. So I think you need to go into it expecting that and size it appropriately and have an appetite or at least a willingness to accept a lot of volatility. And I do also think that, and I think this comment was made this morning on a panel, but I think that if every institution were today or tomorrow going to go out and populate one percent of their portfolio with Bitcoin, I think you'd have some tremendous issues with liquidity as well. So, I mean, I think that it's still growing, but I think we'll get there.

Michael Casey: (44:40)
Be careful what you wish for in a way. You don't when them all coming in at once. But just to draw that a little bit more, it seems to me there's been quite a bit of discussion about these [inaudible 00:44:49] providers and prime brokerages for example. You went into this without the kind of handholding of a prime brokerage. How valuable will it be for maybe funds that don't have the capacity to sort of take this more radical views that you did to have something like that kind of more focused service?

Katherine Molnar: (45:12)
Yeah, absolutely. I think that would be great. I'm sure that would be really helpful. I mean for us, it just even, honestly, just even trying to get a sense of how large the universe is of managers. You have people like Pantera that are very well known, and they've been doing this for a long time. And there's a group of managers who I would put in that camp.

Katherine Molnar: (45:35)
But you have a lot of people who've been doing this two years or less. And I mean, I don't know how many crypto funds there are, but there are a lot. So even just honestly trying to get your hands around, okay, how large is the universe? Who's doing this? Are they doing crypto? Are they doing venture? Are they doing tokens? Even just trying to get your arms around that, when we forget understanding that the actual technology part of this, it's a lot to take on. And so depending the size of your team, and we have a very small team, I mean, it's a lot to get your arms around. So and I think as a result of that, I think the consultant community is probably kind of coming up to speed now. And, but I think things will get there.

Michael Casey: (46:12)
Michael, what have you seen in terms of that kind of educational element to it? I mean, these clients who come to you and you've got to walk them through this new field. Explaining something like NPC for one is difficult, but then all these other elements as well.

Michael Shaulov: (46:27)
I mean, I think that I spend probably 50% of my time on education. I think that it takes time to familiarize people with the concepts of this brave new world. And I think that to Katherine's point, I think a lot of the concepts in this space are actually contradictory to the way that finance was working for last 500 years, 100 years. And in many aspects, really blockchain is a revolution that probably is the most impactful revolution since the federal reserve was set up in terms of how clearing and settlement is working and this technology. Yeah, I remember that we spent about maybe three hours on the workshop with all the sort of the chief information officers and the CISOs and one of the big banks. And after two hours, they basically, we need a break. Our mind has just exploded from everything that you guys were explaining.

Michael Shaulov: (47:35)
So we spend a lot of time on education. I think that there are many layers. And I think that clearly different people want to understand different things. But it's also very clear that this is going to replatform finance. I mean, the aspect around the fact that the assets are going to be tokenized. I think if two years ago people were not so sure about it. I think that now it's sort of a common thesis among pretty much all the practitioners. And I think that understanding exactly how it works is sort of important because it does fundamentally changes the way that things work.

Michael Shaulov: (48:24)
I mean, just an interesting example, I was sitting with one of the partners of a hedge fund that was affected in the GameStop saga. And when I explain to them how blockchain works and especially how the clearing works, they like suddenly there was silence and they say, hey if this was actually tokenized and there wasn't this three day gap between the point that the trade was booked and until it was actually cleared, we wouldn't be short squeezed. And that's just something that is sort of very technical aspect, but it's important to the level of the partners and the people that really take the decisions.

Michael Casey: (49:12)
Yes. It's like where I come from, the penny drop moment, the sort of sudden realization that it all comes together. And I think that's one of the experiences that a lot of us have had in this space. I did want you to have one quick, last word, Zac, just we've got half a minute. We don't have much time, unfortunately. But just you service both retail institutions. We have a lot of focus on the institutions here, but it seems like the trailblazers in terms of investors in this space have always been retail. Is that going to continue?

Zac Prince: (49:39)
Yeah, I think absolutely. And I really wanted to answer the question of what am I excited about because I did something the other day that wowed me. It reminded me of the first time I transferred money off of Coinbase to buy Ethereum back in 2016. And that was really scary for a year because Ethereum crashed 60%, but I remember it being wild. And that happened to me recently with Solana who I know is here and Phantom wallet. So I would encourage everyone to, if you can find five minutes, 10 minutes, interact with some of the actual tools out there in the ecosystem. Try Meta Mask, try Phantom wallet on Solana, there's some really, really cool stuff. And when you see it in action, you really have this kind of aha moment. And I think that can be eye opening and motivating to take it into whatever your professional day job is and help create some advocates within the firm.

Michael Casey: (50:38)
So there go folks. You have your CTA, some homework to do. Get out there, play around with it. It's definitely the best way to learn. A round of applause for this tremendous panel. Thanks very much.

Guest User

October 7, 2021

SALT NY: Technology, SALT NY: Digital Assets

Institutional-Quality Digital Asset Infrastructure | #SALTNY

Guest User

October 7, 2021

SALT NY: Technology, SALT NY: Digital Assets

Institutional-Quality Digital Asset Infrastructure with David Mercer, Chief Executive Officer, LMAX Group.

Moderated by Rachel Pether, Senior Advisor, SkyBridge.

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

David Mercer

Chief Executive Officer

LMAX Group

FULL BIO

Rachel Pether, CFA.jpeg — Rachel Pether

Senior Advisor
*SkyBridge*

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Rachel Pether: (00:07)
I'm doing a fireside chat with David Mercer on institutional quality crypto infrastructure. It's very exciting for me, because we actually did a prerecord for this last week, thinking that David wouldn't be able to make it out from London.

Rachel Pether: (00:21)
But he has indeed been able to make it out from London. Mercer, the CEO of LMAX Group, to the stage. David and Rachel, take two.

David Mercer: (00:45)
Isn't this better?

Rachel Pether: (00:46)
So much better than virtually. Let's start from the very beginning. You have had experience on the FX side, and LMAX Group started off as an FX trading firm exchange, moved to crypto currency. When did you personally have your "Eureka" moment on the cryptocurrency as a legit legitimate asset class?

David Mercer: (01:11)
Well, I'd love to say it was eight years ago. It wasn't. It was actually the tail end of 2017.

David Mercer: (01:19)
Now, look, someone had presented it to us in 2013, and we were just busy building out our FX exchange. So we let that slide. And then, in 2017, some of my biggest trading partners ... So, to give you an idea, all the world's largest banks, 34 banks, are connected to me, all the major proprietary trading firms in the world trade within LMAX Group, when one of our five exchanges.

David Mercer: (01:45)
So, the end of 2017, the sort of first crypto summer, they started knocking on the door and said, "Look, David, we need some institutional grade infrastructure. We need something robust, where we can exchange risk in size with like-minded participants."

David Mercer: (02:03)
These are the biggest prop trading firms in New York, Chicago, Amsterdam, and London. So if you like, we said, "Okay, let's, let's have a look at it."

David Mercer: (02:12)
I engaged Compliance, Risk, Technology, set off the R&D guys at the end of 2017, and said, "Is it feasible? Is it viable?"

David Mercer: (02:22)
What we discovered was the trade formation, the clearing the order book was identical to what we do in our five FX exchanges. So I remember, to this day, we had a sort of all hands meeting at the end of 2017.

David Mercer: (02:38)
The answers had come back positive. I had Compliance in the room, Risk in the room, Liquidity in the room, Sales, Technology. Are we doing this or not? Everyone said yes. So we went from field to fork, as I like to say, in six months.

David Mercer: (02:53)
We launched LMAX Digital, which was the fifth of our exchanges, at the start of 2018. It's our fastest growing exchange. Today, we trade $2.5 billion dollars a day in crypto, and about 30 billion overall in FX.

David Mercer: (03:10)
So, a little bit late to the party, going back to your question about the "Eureka" moment. But certainly, 2017, we knew we had to be in this exciting new asset class.

Rachel Pether: (03:21)
So let's talk a bit further about that, from the FX experience that you've had, that LMAX Group has had, and also the experience on the cryptocurrency side. Are you seeing much convergence between those two asset classes?

David Mercer: (03:36)
The short answer is yes, but then, that would make for a pretty short interview. So look, these are the way to say it is, 40% of LMAX Digital customers trade another asset class within LMAX Group.

David Mercer: (03:52)
What does that mean? They trade FX or us. Our biggest five liquidity providers in LMAX Digital are in my top 10 FX traders, day in, day out.

David Mercer: (04:06)
It was them that pushed us to enter the space and to launch LMAX Digital, because they actually want to trade with each other. We want to trade with each other on a central limit order book.

David Mercer: (04:18)
So I think that's just going to extend. Why I'm super excited overall for the industry, and certainly for us, is that the banks haven't come yet, but I knocked on 34 doors, 34 bank doors, in 2017.

David Mercer: (04:34)
I said, "Hey, any interest in this new asset class?" And they said, "Look, keep us informed, but we can't trade it yet." And today they're not really actively trading yet.

David Mercer: (04:45)
But roll forward to this crypto summer, 2021 crypto summer, 10 of those banks now take my market data, and three are actively onboarding. I expect them to trade, look, within the next six to 12 months.

David Mercer: (05:02)
It all depends on their external/internal approval. I think there's going to be a convergence of, of customers. In terms of the technology, in many ways, that's how many converged.

Rachel Pether: (05:14)
What do you think? So you mentioned, you know 10 of those banks have actually come on board, starting to do more in that space. What do you think is holding the institutions back or the banks? I mean, it can't be from lack of client interest, I'm guessing, because there was quite a push.

David Mercer: (05:31)
Well, I mean, let's look at that client interest. So we're here, this is primarily a crypto event, and we're all believers in the future of that, but it's still quite early, it's still quite small.

David Mercer: (05:46)
So the total market cap of crypto today is in the region of one and a half to $2 trillion. Foreign exchange trade's $7 trillion every day. Gold currently is valued at $10 trillion.

David Mercer: (06:02)
So, so far, they've just been exploring it. They haven't had to do it. Now I think they do have to do it, because if you talk to any of the large banks around, people are taking money out of their bank account with those household names, and they're putting it to work on some of the crypto platforms out there.

David Mercer: (06:22)
Look, the biggest thing, really, is you need the ABC of crypto, you need adoption, which is market access. You need banking of crypto entities, and you need clearing and credits, right? And credit is the big thing stopping institutions, enter the space today.

David Mercer: (06:42)
What do I mean by that? They're used to trading multi-asset classes through the same credit intermediary. That's normally a bank or their prime broker. That's the big hurdle at the moment, and part of credit and clearing is the safekeeping, or the custody of assets.

David Mercer: (07:00)
Again, typically the biggest custodians in the world are those banks. That's the real hurdle for say, the real money or the asset managers, with funds of the world. The hurdle for the banks is more internal approval, risk approval, and the slightly hazy regulatory framework that's there at the moment.

Rachel Pether: (07:23)
Yeah. We did speak a bit about that before, on this tension between regulation and innovation, as well. What role, then, are you seeing the institutions play in this transition?

Rachel Pether: (07:38)
You mentioned credit. What else needs to happen, and what impact do you see that having on your business?

David Mercer: (07:44)
Well, I mean, to be clear, there's a lot of people out there, who are sort of crypto evangelists, think, "This should be peer to peer. This should be all to all." In many ways, I believe in that, and that's the ethos of crypto.

David Mercer: (07:58)
But we have to be pragmatic about it, right? We have to, at least in the short term, use existing channels. So every efficient market, every efficient capital market, needs a robust, solid institutional framework.

David Mercer: (08:18)
So if you like, when I entered the space, God help me, I guess, 20 or 30 years ago, people were paying 1% back in the day to buy equities. Now, I guess, you're going to see that you can buy an equity for free, or not feel free to discuss.

David Mercer: (08:36)
But again, so it's, all of that comes down to the framework, and the nature of that institutional trading environment that's been created, that offers greater price discovery, greater market access, all the way through the market segments to the private investors. So it's essential that we build that institutional framework.

David Mercer: (09:02)
I mean, price discovery is key. So if you come to our LMAX Digital today, you're going to see, he price in Bitcoin, and the price in Ethereum is going to be the price of Bitcoin and the price of Ethereum.

David Mercer: (09:12)
Why do I say that? Well, you've got only institutions trading it. You've got 500 institutions trading it. You've got the biggest 20 institutions in the world, trading it, making markets.

David Mercer: (09:24)
And more importantly, they price every other venue on the street. So they price all the retail environments. They see the smaller tickets, and exchange bigger tickets on LMAX Digital, with like-minded participants. So that bit, that liquidity, that price discovery, is essential for this to thrive.

David Mercer: (09:44)
Of course, when you then get into the sort of borrowing and lending market, or what crypto guys are calling yield farming, that starts at institutional level. I think all of those will only help the ecosystem, the overall or the wider ecosystem grow, in the next five to 10 years.

Rachel Pether: (10:08)
But the lending, that's also the part that I feel is getting the most regulatory ...

David Mercer: (10:14)
Sure.

Rachel Pether: (10:15)
Sort of view at the moment. So do you think that will be one of the harder ...

David Mercer: (10:17)
But you know, regulations ...

Rachel Pether: (10:19)
[crosstalk 00:10:19]?

David Mercer: (10:21)
Yeah, sorry to break in. I'm sure it's a question mark right now. Is it a security, is it not a security?

David Mercer: (10:29)
In fact, believe it or not, it's been there for 70 years that it's a security, that a bank account's effectively a security, but then there's a Bank Act that says, "No, it's okay, you can be regulated as a bank."

David Mercer: (10:41)
I think everyone in the ecosystem just needs clarity around the framework. I mean, most of the institutions in the room, most of the institutions I deal with, are heavily regulated, right?

David Mercer: (10:53)
I'm heavily regulated and regulated in four jurisdictions as a broker, as an MTF, which is like a SEF in the UK. So we just need to know, if it's a securities framework? Okay, we'll abide by that. If it's a broker framework, we'll abide by that.

David Mercer: (11:10)
If it's a banking framework, okay, that's a heavier lift, but it's also possible. We just need clarity, and you don't want to get into the situation in crypto, that I see in other asset classes like FX, where you have this regulatory arbitrage between regions.

David Mercer: (11:29)
At the moment, I'm going to tell you that Singapore and the Asia-Pacific region, is very, very crypto friendly. The US can lead, it can lead in crypto, but it needs to be crypto friendly, right?

David Mercer: (11:42)
That doesn't mean allow this free for all, allow a Wild West, just give the major players a framework they can work to. And then the US can be the leading market for crypto. The risk you have at the moment is that the leaders could end up being Asia-Pacific.

Rachel Pether: (12:01)
Yeah, and I think we're really noticing that, I must say, and obviously I'm biased, but Abu Dhabi has done a really great job in the regulatory framework around crypto, and it has based itself on Singapore.

Rachel Pether: (12:12)
There's really no legacy systems to deal with, right? So we can just go on and say, "Let's have a good robust crypto framework, starting from scratch." Are you seeing that I know you're opening, or have recently opened in Asia, is that what you see as one of the [crosstalk 00:12:31]?

David Mercer: (12:30)
Yes, I'm hugely excited by that. So we're going to launch our sixth exchange in Singapore, in Q4 this year. For the first time within LMAX Group, you'll see fiat and crypto on the same platform, fiat and crypto under the same regulation.

David Mercer: (12:54)
The way I see it is, a lot of crypto today, or what you're seeing as crypto today, is basically an on-ramp. So fiat currency is an on-ramp to other investments, right?

David Mercer: (13:05)
Why is Eurodollar the biggest traded currency there? Well, because a lot of US entities need Euros to invest in European companies, or even to buy European stocks.

David Mercer: (13:15)
Today, Ethereum is the on-ramp to DeFi, right? People are now coming to FX exchanges like LMAX Group, and simply, they want to get access, wider market access to, be it something in Bitcoin or Ethereum, or Mexican pesos or dollars, or Euro.

David Mercer: (13:39)
So I think that's the future. By the way, we're not perfect in the UK, the sooner we can get it right in the UK, and get it right in the US, the better it's going to be for the ecosystem, and those institutions I'm talking about, who will ultimately make this asset class grow, and make this asset class fly, potentially, to be bigger than gold within three years.

Rachel Pether: (14:05)
I was just about to ask you for a time frame for that, that you've said within three years. That's quite punchy.

David Mercer: (14:11)
Yeah, Bill Gates said technology never moves as fast in two years as you think, but it was further than you think in 20. It's probably going to be the same for crypto.

David Mercer: (14:22)
I mean, there's no doubt in my mind that you will trade BTC USD as easily as you trade Eurodollar, or sterling or Mexican peso, on LMAX Group today. There's no doubt in my mind that will happen within that three- to five-year time horizon.

David Mercer: (14:41)
It's just going to become de facto. It's going to revolutionize payments settlement. That's the key for capital markets, right? That's where things normally go wrong.

David Mercer: (14:53)
It's going to revolutionize that. Then, for the next generation, they're going to expect to trade Bitcoin as easily as they trade Euros and dollars today.

Rachel Pether: (15:00)
Well, and if you had to look, I know we just have time for one more question. What are you most excited about, then, in the next two to five years?

Rachel Pether: (15:11)
I know you're working on so many different things across the institutional side. What are you most excited about?

David Mercer: (15:16)
Look, I think we're just at the very start. I've absolutely no doubt that Crypto Land will be a multi-DeFi. It's hugely exciting. We recently become a member of the Pyth Network, which I think is going to be the leading oracle.

David Mercer: (15:32)
Now that's amazing, right? You can have all the prices of every asset in the world in one place, from an oracle. That is Pyth. That's exciting for us, a centralized exchange to move into this decentralized DeFi world.

David Mercer: (15:51)
So I think, watch that space, but I think if you're in crypto today, and certainly within LMAX Group, today, it would be 30% of my revenues and 11% of my volumes, but I expect crypto to get on parity with foreign exchange within the next three years.

David Mercer: (16:11)
As I told you already, you know, FX is a $7 trillion a day market. So those are big aims.

Rachel Pether: (16:17)
Excellent. Well, David, thank you so much for your time. It has been a pleasure to do this in person, so thank you very much. Ladies and gentlemen, David Mercer, from LMAX Group.

Guest User

October 6, 2021

SALT NY: Digital Assets, SALT NY: Finance

Macro Forces Driving Crypto Adoption | #SALTNY

Guest User

October 6, 2021

SALT NY: Digital Assets, SALT NY: Finance

Macro Forces Driving Digital Asset Adoption with Dan Tapiero, Chief Executive Officer & Managing Partner, 10T Holdings. Bill Campbell, Portfolio Manager, International Fixed Income, DoubleLine. Matt Hougan, Chief Investment Officer, Bitwise Asset Management.

Moderated by Perianne Boring, Founder and President of the Chamber of Digital Commerce.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Dan Tapiero.jpeg — Dan Tapiero

Chief Executive Officer & Managing Partner
*10T*

FULL BIO

Bill Campbell.jpeg — Bill Campbell

Portfolio, Global Bond Strategy
*DoubleLine*

FULL BIO

Matt Hougan

Chief Investment Officer
*Bitwise Asset Management*

FULL BIO

MODERATOR

Boring%2C+Perianne.jpeg — Perianne Boring

Founder & President
*Chamber of Digital Commerce*

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Perianne Boring: (00:08)
Hi there. Good afternoon. I'm Perianne Boring, the founder and President of the Chamber of Digital Commerce. We're a trade association headquartered in Washington working on crypto policy, the public policy impacting digital assets and blockchain technology. Today we'll be talking about the macroeconomic drivers impacting the adoption of digital assets. We have an A-class team of speakers here. I'll have each of you just introduce yourselves, name, where you're from, and maybe just a quick overview of your firm's focus in the crypto space. Dan, let's start with you.

Dan Tapiero: (00:47)
Sure. Hi. Hello, everybody. Dan Tapiero, 10T holdings, founder and CEO. We are a mid to late stage private equity firm that focuses exclusively and only on businesses in the digital asset ecosystem, and as far as I know I think we're the only ones out there right now focusing just on the mid to late stage businesses. So we've put quite a bit of money to work in the first six months of the year, and look forward to being involved in the space for the foreseeable.

Bill Campbell: (01:21)
Hi, everyone. Bill Campbell. I'm a portfolio manager at DoubleLine Capital. DoubleLine is a $135 billion multi-asset management firm. I manage the global currency and global interest rate strategies. We like to think of ourselves as a forward thinking macro firm. A lot of my research has been in the crypto space on CBDC, CBDC adoption, and the DeFi wave and the macroeconomic implications across economies, both developed and emerging markets, and how it's developing itself but how it impacts the more traditional investments, and more specifically how it could be a disruptor to macroeconomic models, currencies, and interest rates.

Matt Hougan: (02:12)
Amazing. Hey, everybody. Matt Hougan, I'm the chief investment officer at Bitwise Asset Management. Bitwise is a crypto asset manager, we're best known for having created and today running the world's largest crypto index fund called the Bitwise 10 Crypto Index Fund. We also have the first and largest DeFi index fund. We manage about a billion and a half in crypto assets, mostly for professional investors, hedge funds, institutions, and the advisor market.

Perianne Boring: (02:39)
Thanks, Matt. So let's just start with the basics, when we think about the macroeconomic trends impacting the adoption of digital assets, and just starting with money. Of course Satoshi called Bitcoin a peer-to-peer electronic cash system. Just last weekend, the front page of the New York Times, an article on crypto that started with, "Bitcoin is changing the definition of money. For thousands of years, civilizations have flocked to commodities like gold and silver as money. Today, money looks very different." What is your... And I'll just open this up to either of you. To you, what is money? How is it changing? How is Bitcoin and crypto impacting that?

Bill Campbell: (03:25)
[inaudible 00:03:25] Do you want me to start it off?

Dan Tapiero: (03:27)
Go ahead, please.

Bill Campbell: (03:28)
Well, I think maybe just taking a step back, obviously besides a unit of account, store of value, the legal tender, the unit of exchange in an economy, I think we need to think about money as a public versus a private asset, and a public versus a private good. For a long time, money has been thought of as a public good, and I think that people in general have been willing to accept that premise. Then we hit the global financial crisis in 2008, and we saw the expansion of extraordinary policies by governments, and that caused a rethinking potentially of a lot of the policies that were being put in place that maybe are expanding the monetary base faster than people would necessarily like.

Bill Campbell: (04:13)
So that moves us to the private money side. I know crypto has deemed itself as the new bastion of private money, but in the past we've had private money. We've had bank issued private notes, and some of the issues that have come with that is there's preference of credit between different banks. If you have individual notes that are issued, there's going to be a credit preference between those [inaudible 00:04:37] as so, there's going to be credit preference between different cryptocurrencies.

Bill Campbell: (04:41)
We've also had forms of private money throughout the credit card space. When we think about the transactions from Visa and MasterCard, even though that's thought of as credit, it's transactional. That also has been a form of retail private money. So really crypto is now bridging that gap I believe between the purely public good that we initially thought money was, to maybe more of the idea that private actors, and now decentralized private actors, can be a bigger player in this space, and maybe can provide more institutional credibility than some of the governments. Not to jump the gun, but just to whet your appetite a little bit, I think especially in emerging markets where institutional strength and policies are fairly questionable, and where economies tend to not trust their sovereign currencies anywhere and are dollarized, crypto has a very big window of opportunity to potentially disrupt and transform those economies.

Matt Hougan: (05:47)
Yeah, I agree with all of that. One thing if you study the history of money is that the history of money is never over. I think a lot of people assume that the history of money was over with the dollar being the king, and all currencies being public goods. And crypto is one challenge of that. But really it's evolved many times in the past. As you mentioned, this is not the first time that the relationship of what money is to public and private sectors has changed.

Perianne Boring: (06:13)
Yeah, that's a great point. And we're seeing significant tectonic shifts underway in what money is, how it's issued, how it's regulated, how we use it. And I think one of those big macroeconomic decisions was just over 50 years ago, in 1971, when Nixon closed the gold window, which really launched us into this global fiat experiment. So just in either of your minds, how has that impacted where we are today? And what do you see as the future of fiat, given how much has changed just in the past 50 year timeline?

Dan Tapiero: (06:54)
I wanted to just say a word on the other question just for a second, and I'll link it into this one, which is that money, at least for me, has always been about return. And look, you've got negative 3, 4, 5% interest rates in the U.S. if you're using the CPI as the deflator, and I think that's caused a lot of people to think about the nature of money, that never thought about it before. And one of the interesting things is that crypto really has been a retail led phenomenon. You have average Joes out there who have [inaudible 00:07:34] Bitcoin since 2011, '12, Ethereum from '15, and the institutions have been late. And they're still very late, as far as I can see. It's still early for the general trend.

Dan Tapiero: (07:45)
So I think the idea that there is return on your money or your cash, or however you think about it in this new digital asset ecosystem, is really what's driving it. Bitcoin as a store of value, Ethereum is a little bit different, but also something of lasting and permanent value. So I think that when you're looking for alternatives, there have to be alternatives, and I think this has now grown up as a real alternative.

Dan Tapiero: (08:19)
So, sorry I didn't answer your question. And I'm a gold guy, too, so I didn't answer your question about the Nixon depeg. I'm not sure... What was the gist of... What as the impact?

Perianne Boring: (08:36)
Yeah, and when we went off the Gold Standard, and how that's changed money, and how that has impacted the future of fiat.

Dan Tapiero: (08:46)
Right. Well, I mean...

Bill Campbell: (08:49)
Go for it [crosstalk 00:08:50].

Dan Tapiero: (08:50)
I mean, it's allowed the authorities to inflate in an unlimited way. They're not pegged to anything. So again, another reason for Bitcoin, which is in finite... There's a finite amount of it. And even the other cryptocurrencies, even Ethereum is not really... The supply doesn't really expand in the way that fiat has. And of course post COVID you saw massive expansion in the balance sheets, and again, I think the average person out there is saying, "Hey, I'm losing purchasing power. I used to be able to buy this, and now I can't." And so there's no anchor.

Dan Tapiero: (09:25)
But that being said, life is better today than it was, for most people, in 1971. So I don't want to say, "Okay, well that decision 50 years ago was a disaster." I think we've had tremendous prosperity. So I think the answer to that's more nuanced.

Perianne Boring: (09:43)
Sure.

Matt Hougan: (09:44)
I want to build on that nuance, if it's okay, and then you can jump in. I think that's exactly right. Studying gold standards through history, they don't work that great in terms of launching economic growth either. The problem with fiat and inflationary fiat currencies is that eventually it ends poorly. And it gets worse in an exponential fashion. So the fact we went off the gold standard in 1970 makes it necessary to have an alternative, which Bitcoin is emerging as an alternative, and it becomes more and more important, and more and more important as a break on the natural tendency for fiat systems to eventually hit a bad state of inflation. I think it's just a time pattern. I think that's the nuance in it.

Bill Campbell: (10:32)
And if I can then further build on it, the inflation point and the debasement point are fantastic points, and depegging off the gold standard allowed the explosion of debt, allowed the explosion of credit. But what we've seen more recently, especially across developed markets, is the explosion of the monetary base, the explosion of all of the central bank activity, has actually caused anemic growth. I don't think anybody can argue that Japan has seen very strong growth, that Europe has seen very strong growth, and then after the bounceback from the recession that we saw in March 2020, I think the U.S. glide path is coming back lower.

Bill Campbell: (11:07)
Now, people can say, "Look, the cause of that might be a big debt burden," but what I really think is happening is, in the quantitative easing policies that have happened, what we've seen is a taking of private assets out of the market, but really the explosion of institutional digital money, which is wholesale reserves. And banks ultimately have not been willing to lend that out, or lend it out beyond large institutions. So I'm getting to the point that I think one of the structural drivers of low growth over time has been the headwind to productivity that large banks consolidating small regional banks, and the unwillingness of them to lend to the SME sector, is actually causing.

Bill Campbell: (11:48)
This is where DeFi and crypto could actually become a potentially game-changer, not only in our economy but other economies in addressing this problem of productivity growth, because if, say through pass-through tokens, small and medium sized enterprises are able to then access their customer base, get new sources of credit, get new sources of lending, and be able to spend that both on new business lines and potentially more hiring, I think that that can both address the productivity problem, but it could also address the structural overhang that we have on the employment side as well. And I'll maybe stop that, but happy to dive in if you want.

Perianne Boring: (12:27)
Yeah, to build on that, Bill, you've highlighted that we're in a really critical moment, and key moment, of government intervention. What are some of those areas where you have government influence on the markets? What type of distortions is that making? And ultimately what are the results of those?

Bill Campbell: (12:50)
Well, I think I touched on a few, but I can't over-emphasize the importance of the central bank policy, not only on being a headwind to productivity growth, but also squeezing out returns. When we look across the risk asset spectrum, a lot of my credit colleagues are telling me that we're back to the historical lows that we saw in spreads prior to 2020. So I think that central banks are unwilling to allow markets to clear. Crypto markets are completely unregulated, but I still think that they're in much of the adoption phase, there's a lot of risk embedded in them, they to me look much more like a VC market that has tremendous potential upside, opportunity, but also a tremendous amount of volatility.

Bill Campbell: (13:37)
But I think that, just sticking on the government intervention side, the other big aspect of it is the amount of fiscal policy and regulatory policy that's been put in place. We're seeing continued expansion of fiscal, trying to actually push money to individuals. And to get back to the inflation argument, this time around is different from prior cycles after recessions. Fiscal policies actually pushing money to areas where we can see inflation, we're seeing higher commodity prices, we're seeing higher housing prices, we're seeing higher wages right now, so all of that is real on the inflationary side.

Bill Campbell: (14:17)
And finally, just my last point on this, I think blockchain is unique in the technological solution that it's providing. It provides low latency, immediate settlement, it provides protection of individual privacy, and it's potentially the new wiring for the financial system. So for people who are pushing the whole DeFi blockchain revolution aside, I think they're missing that this could potentially be the new plumbing for the financial system that we all need to pay attention to.

Perianne Boring: (14:47)
Yeah. Very key point. Just to highlight the point on inflation, when I was a columnist for Forbes, I did a story penned, "If you want to know the real rate of inflation, don't bother with the CPI." And I interviewed a statistician at the Bureau of Labor Statistics, and talked about how they come up with their numbers. And it's very convoluted. Of course they're tracking the price of goods, where as someone who studied monetary policy in college, really it's the monetary base that really is I think the key thing you should be looking at, in terms of inflation. So I think some of those numbers that are put forward to measure inflation are a little funny. But I don't think anybody can argue that there's been this unbelievable expansion of the monetary base.

Perianne Boring: (15:36)
We hear a lot about concerns of inflation. Even Senator Cynthia Lummis has very publicly said this is a huge concern for her and her constituents, and that's why she's bought, invested in Bitcoin, and even encouraging her constituents in the State of Wyoming to do so as well. So Matt, maybe I'll focus on you, given what you guys do at Bitwise, really looking at this as a financial advisor. Bitcoin has really proved itself to be a non-correlated asset. The Federal Reserve Bank of St. Louis published a report in 2018 that said Bitcoin has the potential to emerge as its own asset class, to be used for diversification purposes in portfolios. And I think that speaks a lot to your thesis at Bitwise. However, there's been a bit of hesitancy with financial advisors advising people to use Bitcoin as a diversification tool. Can you speak to how you guys are thinking about that, and how you see that, and where we're at today from a fiduciary oversight perspective?

Matt Hougan: (16:43)
Sure. If you didn't know it was called Bitcoin or crypto, and you put it into a portfolio optimizer, you would definitely want 1 to 5% of your portfolio to be allocated to it. The reason is, over any meaningful period, if you put crypto into a portfolio and you rebalance, as advisors do, it contributes to your absolute and risk adjusted returns. They have a white paper on bitwiseinvestments.com. I mean this literally. Every three year period in history, including periods with 80% drawdowns, if you put into a portfolio it increases your absolute and risk adjusted returns.

Matt Hougan: (17:18)
When we talk to advisors about it, there's really two key things that matter to them. The first thing that they have to get over is that it's not going to zero. The reason it's important to get over the fact that it's not going to zero is that, if you want to put it in a portfolio and rebalance it, you have to assume it's not going to zero in order to harvest the volatility, or you can make a small allocation. The other piece is just to appropriately size your allocation. As long as you keep your crypto allocation at a reasonable level, it doesn't create mass drawdowns in your portfolio.

Matt Hougan: (17:58)
We've seen enormous growth from the advisor market. There's enormous interest from the advisor market. I'll end with one more stat on that interest. In January, we wrote the CFA Institute's first ever guide to Bitcoin, blockchain, and crypto. I believe it's their most downloaded research report ever, just as a sign of how much interest there is. So I think that's the next big market in crypto, it's the advisor space. That's coming soon.

Perianne Boring: (18:20)
Yeah. We represent about 30 private equity funds at the Chamber, so we've gotten the opportunity to see how different fund managers are evaluating crypto, and really the general principle across the board is, if you introduce Bitcoin into your typical portfolio, 1 to 5%, you see volatility go down and performance go up. So I've heard a number of people who had said, once that is more widely understood, it will be seen as almost irresponsible to not recommend for clients to invest a percentage of their portfolio into Bitcoin for that diversification piece.

Perianne Boring: (19:03)
Further, in March of this year, the Chairman of the Fed, Jerome Powell, in his testimony to Congress, he said that Bitcoin is more of a substitute for gold than the dollar. So just to expand on this concept, would love to get, Dan, or Bill, your thoughts on... Since the Fed owns gold, and other central banks around the world own gold, what are your thoughts on the Fed and central banks substituting gold for Bitcoin?

Dan Tapiero: (19:33)
Well, I don't know that they're ready to substitute it. I think he was really talking more theoretically, that the principles behind Bitcoin as hard money are similar to the principles behind gold as hard money. People don't generally think of the dollar really as hard money, it's used to transact, and it's the currency of the world, and it's super liquid, and it's not physical. So I think he was thinking about it in those terms, but I think that's very right, that store of value... Bitcoin as store of value as a high form of collateral. I think that's absolutely right. There are other cryptocurrencies potentially that you might use for other purposes, but in terms of that pristine collateral, and again it's all laid out in Satoshi's white paper, and I think he's acknowledging this too, that it really is an invention, Bitcoin is an invention, and I always say it's an invention akin to the invention of the combustion engine or the discovery of electricity.

Dan Tapiero: (20:48)
That paper, people don't I think understand, solved a problem, the Byzantine Generals' problem, that had been unsolved for hundreds of years, and the problem of distributed trust. And so that aspect of Bitcoin as a solid, secure, backed by the proof-of-work algorithm, I think is absolutely right. But not necessarily a replacement for the dollar.

Perianne Boring: (21:18)
We'll come back to that thought. Bill, I want to focus on central bank digital currencies for a moment. We've all seen the Grayscale Drop Gold commercials, and just this past month El Salvador adopted Bitcoin as legal tender. So looking at it from the central bank perspective, there's now, according to the Bank for International Settlements, over 80% of central banks around the world are already experimenting with CBDCs. So how do you see things like Bitcoin, ETH, other cryptocurrencies living in a CBDC world? Are these a threat? Are these a complement? Will they be interoperable? What does this look like, fast forward 10, 20 years from now?

Bill Campbell: (22:03)
It's a great question, and I think in my mind we need to start segmenting different parts of the market out to try to get a framework for understanding and thinking about it. I think that central back activities, the way that they really control markets and economies are through controlling the monetary base, setting interest rates, and controlling credit. And DeFi in general, and blockchain technology, is actually disrupting each one of those. For the monetary base, obviously you're having new cryptocurrencies come out that are being accepted as legal tender in El Salvador, for example. Interest rates are obviously manipulated across the globe, and you're having new interest rate markets via staking. And then when we think of credit creation, I do think there is a lot of potential for credit creation in the crypto and blockchain network.

Bill Campbell: (22:57)
In emerging markets, you're seeing about... Especially across Latin America where we think Peru, Colombia, even Mexico, about half the population is unbanked. So crypto is actually... You see a lot of DeFi protocols being picked up fairly aggressively, because it's permissionless and you get a lot of the debit card style transactions, that come with that... I would call it Banking 1.0. But you can imagine that there's going to be a lot more banking services that are going to be provided across the globe across these different networks. So I think that central banks are looking carefully at... I don't think they want to stifle this growth, but they also don't want to lose control of the credit making mechanism in that.

Bill Campbell: (23:41)
As far as the currency itself, when we think of CBDCs, I think you're just thinking of... This is true retail digital money, and right now we have that in the form of stablecoins. And when we look at digital transactions, I'm sure Dan you've seen this, 85% of one side of all transactions are very a stablecoin, whether it's USDC, USDT, or the like. So once you introduce the digital dollar, and you don't have to have the issue of trying to understand the collateral backing of the stablecoin, and I know there's been some questions about Tether, there's a big debate, but would the CDBC or the digital dollar become the preferred stablecoin in this ecosystem, as long as it didn't do what China did and set a centralized blockchain that removes your privacy. If it truly is in the form of a stablecoin that's settlable on ETH, that's settlable on any other of the blockchain networks, potentially it becomes the superior solution.

Bill Campbell: (24:38)
And then the final point is, I think that the U.S. dollar's reserve currency status is threatened by the DeFi revolution. And just to quickly expand on that, we're seeing... I think it's more the digital payment systems and the cross-border payment systems that provide the threat more than the CBDC itself. So the BIS through Project Dunbar is looking at, in Asia, between Australia, Singapore, Malaysia, and I think a couple of other banks, trying to integrate the payment systems via blockchain, in that region.

Bill Campbell: (25:06)
And by the way, there's a new trade agreement, RCEP, that is looking at the regional cooperation of trade in that region. So as countries begin to develop this technology, as you have new regional trading agreements, isn't it logical that 60% of reserves being denominated in U.S. dollars might not be necessary? Don't you think that you as a country would prefer to settle the majority of your trade on a bilateral basis with your balance of payments trading partners? And I think that removing the dollar as that fundamental denomination for trade, fundamental denomination for commodity settlement, runs the risk in the long term of being a potential dethroning of the dollar's U.S. reserve currency status.

Dan Tapiero: (25:54)
Yeah, I'm not so sure about that. I just think that... Look, 60% or whatever the number is too big. After the war, it made sense, all the other economies were at zero, they were flattened. And for many years, I think people just got used to having the dollar in the center. But if you just look at GDP, the U.S. is I think, what, 25% of world GDP? [crosstalk 00:26:20]

Bill Campbell: (26:19)
It's actually come down. It's closer to 20, and China's gone up to 20. And Europe's about 22.

Dan Tapiero: (26:26)
Right. It's been inconsistent for years, that the dollar was overweight in everyone's portfolio. So I think it's just a slow transition. As a macro guy for 25 years in the hedge fund business, I always remember the quip that macro always takes longer than you think it will. Sitting there with investments, and you think it's going to be three months, and it's three years. And I think this is perfect case of this. I don't think the dollar's going away, I don't think America's going away. I think, and this might segue into the next question you want to ask, but I think that if we start to make some very poor decisions on the regulatory front here, vis-a-vis the digital asset ecosystem and blockchain technology, I think that is dangerous for us, because the U.S. is already behind I think the rest of the world in adoption and understanding. 90% of total world cryptocurrency volume is outside the U.S.

Dan Tapiero: (27:29)
So there is a chance here that the world moves forward without us at the lead. And that worries me a lot more than...

Perianne Boring: (27:39)
Yeah, is that the real... [crosstalk 00:27:40]

Dan Tapiero: (27:42)
Okay, I stole a little bit your thunder there, because I know you wanted to talk about that, but...

Perianne Boring: (27:42)
No, no. Especially in my role as an industry advocate working with public policymakers, very careful not to pin the crypto against the status of the U.S. dollar as the world reserve currency. In fact, I don't think it's a helpful argument to say they're competitors, especially with something like Bitcoin that's really operating as a store of value, akin to a digital gold. That serves a very different function than payments. And I think both can coexist, and you have U.S. dollars and stablecoins as your transactional layer, and Bitcoin as that store of value.

Perianne Boring: (28:21)
Dan, I did want to come back to your thought on the combustion engine. You have said Bitcoin and blockchain, they're a history invention, akin to the invention of the combustion engine, and will have a similar transformative impact on our world. I think what you're getting to is that this isn't just about money, there's a revolution beyond just money in the crypto and blockchain technology. So one of the things I really challenge our members to help articulate better is how this technology is going to have an impact on the daily lives of normal people, not necessarily just your hedge fund managers and your investors, but the citizenry. How is this technology going to impact the average person for good?

Dan Tapiero: (29:10)
Yeah, I'll just say one quick thing and then I'll let the guys answer as well. But I think it's a revolution in trust, and so it's a permanent record. I've read, and other people have also called it, a truth machine.

Perianne Boring: (29:24)
The cover of The Economist a couple of years ago.

Dan Tapiero: (29:26)
That's right. And there was a book also. But I think that's what the real... If you want to be abstract, think about all of the things in the course of human interaction that rely on trust. And a lot of times there isn't that trust there. And so I think that's the really big revolution. I don't know if you guys...

Bill Campbell: (29:53)
Yeah, I completely agree. The other interesting aspect of blockchain is being able to protect privacy and anonymity while still having a vast amount of publicly available information. So far, we've been lagging China as far as AI development, and network effects, because of the concerns about privacy. So blockchain, moving outside of finance, has the potential to allow network effects, the Internet of Things, like take off medical records, there are a lot of potential use cases that can come out of this technology. And I think that all comes from your point that the key element is trust and keeping privacy.

Dan Tapiero: (30:34)
And this also is a massive decentralized network that, from a security perspective, is really bulletproof. It could end up becoming... And I'm not saying which network specifically, could be the Bitcoin network, could be another one, ends up becoming the value layer for the entire internet. And so, I don't want to bring it back to this again, but I worry just now about the U.S. not being innovative enough and not seeing these bigger picture concepts.

Matt Hougan: (31:08)
Yeah, I'll agree with that, and then I want to talk big picture as well, because that's fun. I think we're already blowing it from a regulatory perspective. To put one very narrow, maybe controversial dot on it, if I agree with Dan that the U.S dollar and the U.S. position is in a slow fade as a relationship to its GDP, we had this sterling opportunity, once in a lifetime, to delay that and extend it if we had embraced Libra as a dollar backed stablecoin. What better way to get the entire world to use dollars in every transaction than to put a huge amount of money in a dollar backed asset? And we just turned up our nose at it. It was literally a once in a lifetime opportunity, and I think we totally blew it, and we can't get that back.

Matt Hougan: (31:54)
What will your daily life look like is something that crypto struggles with. And the reason it struggles, I think, is that the primitives that crypto introduces are so large. Dan, you mentioned trust. You can talk about digital property rights, you can talk about instantaneous settlement, and the landscape of possibilities that are created by these primitives is so massive that the crypto industry typically falls back on small examples, like improving the remittance system, or lowering fees, or allowing people to make their financial assets more usable. And those are all true, and those are all the baby steps, but just like in the early '90s, predicting all the things that the internet would do was very very difficult, it's often good to dwell on one or many of those primitives, and just spend a week thinking about what is digital property rights mean 20 years from now?

Matt Hougan: (32:43)
It's easy to look at $3 million digital JPEGs of rocks and laugh at NFTs, but if you stop thinking of it like that and start thinking of it as the first instantiation of digital property rights, and allow your mind to wander for a little bit of time, thinking about what that means in ten years is huge. So it's hard to make them very specific, because it's hard to predict the future, but the primitives in crypto are so powerful and so world changing, it's very exciting to think out five, ten years.

Dan Tapiero: (33:10)
I would say one thing is that older people, they say, "What do I need digital property rights for?" Versus the under 30 crowd that are gamers, and it's very natural for them to think about digital property, because a lot of their assets are already digital. And so... Go ahead, what were you going to...

Matt Hougan: (33:31)
No, I had this great conversation with a reporter, and he was like, "I don't understand why someone would spend $5,000 on a sword, and it's not even a real sword, it's digital." It's got so much more utility to people than a physical sword. When's the last time you used a physical sword? Been a long time. But these kids are using digital swords all the time to create status, to win rewards...

Dan Tapiero: (33:54)
It's also because they're spending eight hours a day online, and that's something that none of us older guys can really... We're on the phones and everything, but literally, I think it's eight hours a day is the average usage, and these gamers are on even more. So they are going to the Metaverse, to these virtual spaces, to actually meet people and hang out and live in digital land, and all of this stuff. People are living their actual lives. We're not, but it's more and more that way. So for them digital property rights, that's not even a jump. Right?

Matt Hougan: (34:35)
Exactly. Yeah, that's exactly right. And it is hard for older people to get their head around that, I agree.

Bill Campbell: (34:42)
But the digital property rights is such a huge concept, and I think we need to figure out on regulation or litigation what exactly is protected when we start writing individual code. But when that's figured out, it has the ability to provide a lot more liquidity to venture capital space, private equity space, a lot of spaces that historically maybe haven't been accessed as widely. But also we need to think about, now we have these new entities that are digital autonomous organizations that are made up of a bunch of individuals that vote on what the platform should do. So what rights are afford to those organizations? How can they link into the true economy? Can a DAO, a digital autonomous organization, make a contract with a private company? And then what happens if the DAO does something that harms an individual? What liability do all of the holders in the DAO actually face?

Bill Campbell: (35:39)
And these are the things that need to be sorted out, and when they are, I think you'll have a tremendous amount of institutional capital chase it, because I think the scope for expansion is tremendous. But right now we're just not clear on a lot of these key issues, and I think those are where rubber meets the road issues.

Perianne Boring: (35:58)
So coming back to the public policy arguments for crypto, this year has been a year of transformation in Washington, D.C. We have the Biden administration, of course a change from a Republican to a Democrat administration. Both the House and Senate, Democrats have the majority. So there's a very strong focus on the social issues today, and how those are applying to crypto. We are not a partisan organization at the Chamber, we're very, very careful to make sure this technology is not seen through partisan lenses, and we don't think it should be. However, it does seem that there's a more critical view from the left than the right. So as we're trying to think of the social case, what is the social case for blockchain technology? What are the benefits from a progressive perspective, in your view, for digital assets and blockchain technology?

Bill Campbell: (37:05)
I think the most basic item that I would say is it's the democratization, a way to democratize finance and lending. The permissionless aspect that is provided by all these DeFi protocols, and what that opens up for people in underserved communities in the U.S. and underserved communities in emerging markets, is tremendous. And just putting the proper protections in place to prevent bad actors from hurting people. I think a light touch would be the right way to do it. Defining what exactly activities are between credit and lending securitization is also important, but I think from the social aspect it's the true permissionless democratization of providing that access to everyone.

Matt Hougan: (37:58)
I live in the People's Republic of Berkeley, California, so I have some [inaudible 00:38:02] the thing from a liberal perspective is that they hate banks. And our financial system is built so that the poor people pay the highest fees as a percentage of assets. So the story for how crypto improves that is by making that not true, by democratizing access, by lowering fees, by opening opportunity. The examples we have today again are either isolated, like remittances. The cost of sending remittances home is about one twelfth. In other words, you work one month a year just to pay those fees, and those can go to zero. But there are more and more examples. In the DeFi space, it's not just Jane Street that's making markets and earning money from that, you could be too. Anyone could be. And people are doing that today. So I do think there's a progressive story to crypto that's maybe poorly told, but I think it'll gather steam.

Perianne Boring: (38:53)
So we've got about a minute left, so I'll just do quick closing statements from each of you. We've talked about macro, I'm going to come to micro. Within that 12 to 18 month period after the Bitcoin halving, there's different theories different investors have on what's going to happen. Between now and the end of the year, are we going to continue to see a bull market, or will we see a correction like the past two halvings? 20 seconds each. Dan, we'll start with you.

Dan Tapiero: (39:23)
I think you have to be a long term holder in this business, so what it does now over the next three or four months is sort of jump ball. But I think we're going to head up over 100,000 probably in the six to nine months in Bitcoin, and Ethereum could also continue. But it's more long term, I think in the next five, six, seven years we can be at three, four, five hundred thousand on Bitcoin, and I don't see why not 20, 25,000 on Ethereum.

Bill Campbell: (39:54)
I'll just say I think it's a long term play, and I completely agree with what Dan said.

Matt Hougan: (39:58)
I also agree it's a long term play, but I'd remind people that crypto is the single best performing asset class in the world this year, and it went down 50% this year. So I think...

Dan Tapiero: (40:09)
Well, the 10 year is 250% annualized, so the greatest return of any asset in the history of the world that we could find, going back to, I don't know, caveman times. So you just need a little bit, right? Just a few percentage points.

Matt Hougan: (40:22)
Yes. And then you need to not panic when it sells off.

Perianne Boring: (40:26)
Very macro answers from the macro team here. We'll end on that high note. Please help me thank each of our speakers. Thank you Dan, Bill, and Matt.

Guest User

October 5, 2021

SALT NY: Digital Assets

Blurring the Lines Between Crypto & Traditional Asset Classes | #SALTNY

Guest User

October 5, 2021

SALT NY: Digital Assets

Blurring the Lines Between Crypto & Traditional Asset Classes with Brett Harrison, President, FTX US. John D’agostino, Director of Institutional Sales, Coinbase. Ari Rubenstein, Co-Founder & Chief Executive Officer, GTS. Thomas Gallagher, Chairman & Chief Executive Officer, Miami International Holdings, Inc. (MIAX).

Moderated by Jon Najarian, Co-Founder, Market Rebellion.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Brett Harrison

President

FTX US

FULL BIO

John D'Agostino

Senior Advisor, Strategic Partners

Coinbase

FULL BIO

Ari Rubenstein

Co-Founder & Chief Executive Officer

GTS

FULL BIO

Thomas Gallagher

Chairman & Chief Executive Officer

Miami International Holdings, Inc. (MIH)

FULL BIO

MODERATOR

Jon Najarian

Co-Founder

Najarian Advisors

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Jon Najarian: (00:07)
You guys are going to get the idea as we start the presentation, we can all sit down, gentlemen, that this is a crypto conference and it's not, of course it's an alternative asset conference, but one of the hottest alternative assets, of course, is crypto right now. And I think we have a great panel to talk about that with you guys, to talk about DeFi and some of the exciting things that are going on. So I'd like to introduce immediately to my left, Brett Harrison from FTX.US. Brett and most of us, by the way, come from a traditional finance background, I think it's safe to say. And like a lot of you, we've migrated over towards crypto because of the opportunities and just this is one of the most exciting areas of finance to me. I mean, I'm launching a hedge fund this month, crypto hedge fund.

Jon Najarian: (01:04)
You see me walking around here, please grab me, talk to me. We'll be happy to talk to you about it. But this is about them, not about me right now. So Brett Harrison FTX.US. John D'Agostino. When I first really got into crypto, it was John D'Agostino and I that were talking and, in some cases with John's partner at the time, traveling over to Europe and Asia talking about crypto. And Johnny is with Coinbase. I've got Ari Rubenstein from GTS where he is the co-founder and has some fabulous new news for us, Ari, today. And Thomas Gallagher from MIAX or the Miami stock exchange, options exchange, crypto exchange. And Thomas, of course, it's hard to get more traditional finance than an exchange that has broken into the traditional finance space the way MIAX has. And Tom and Brett will have to tell you why out of all the places on earth that they could have put their headquarters, they both put them in high tax states instead of down in Puerto Rico or in Florida.

Jon Najarian: (02:19)
But let's in fact start with Brett Harrison, president of FTX.US. Brett, some of the things that are going on in crypto, of course, Sam was here yesterday. Bankman Freed and talking about FTX, your FTX.US. Describe for the audience quickly maybe what the difference is between the international and the US space.

Brett Harrison: (02:44)
So FTX.US is a spot crypto exchange. It was founded about a year ago. We've had enormous growth in the past year. I think back in January, we were doing something like a million dollars a day in spot volume. We're now doing around $200 million a day in spot volume. And we're looking to push into other, especially regulated assets, stocks, derivatives. Recently, we acquired LedgerX, which is a CFDC regulated DCM, DCO and SEF, to be able to offer futures and options on crypto to US customers.

Jon Najarian: (03:19)
And why Chicago, Brett?

Brett Harrison: (03:21)
Because I live there.

Jon Najarian: (03:23)
Exactly. And from the traditional finance side as I said, Thomas Gallagher, I'm going to pronounce it like they pronounce it in Ireland, Thomas, because I'm a dual citizen.

Thomas Gallagher: (03:33)
There you go. Me too.

Jon Najarian: (03:35)
You're oh fabulous. Well, see the rest of you guys are jealous now, probably. Thomas, how does a regulated traditional exchange like MIAX fit into this new DeFi world? How are you guys making that move?

Thomas Gallagher: (03:51)
Well, thanks for the question, Jon. I think the way we fit in is by buying new platforms where we can launch really innovative new products. So, last year we bought the Minneapolis Grain Exchange and the Minneapolis Clearinghouse, one of the oldest clearinghouses, if not the oldest clearinghouse in the United States of America. So what we want to do is we want to bring to market new proprietary products and innovative products that the global trading community can use. And the first one we're bringing to market in the last six months has been our SPIKES Futures Volatility Product. It's really gotten off to a great start.

Jon Najarian: (04:35)
Fabulous. And I'm sure those of you in the audience who are active in crypto know that crypto, in particular Bitcoin, that I trade a lot of derivatives on is in the neighborhood of five times to 12 times the volatility of the S&P 500. And your SPIKES product, of course, is on traditional stocks rather than crypto, but that's probably going to be one of the next moves, I'm betting.

Thomas Gallagher: (05:05)
Well with the licenses we have, John, we can pivot. No one knows where this is going to end up in terms of the regulatory bodies that are going to be looking at things, whether it's the SEC or the CFTC. So owning US stock exchanges and options exchanges and a futures exchange gives us the ability to kind of be ready. Whether it's the CFTC looking at crypto derivatives or the SEC looking at an ETP, spanning both regulatory regimes is one of the reasons that we wanted to get into Minneapolis.

Jon Najarian: (05:43)
Fabulous. John D'Agostino and Coinbase, you guys of course have been in the news and Ari's got some news that he broke this morning, and he's going to break even more to you guys here, but Johnny, you guys have been in the news and you have wanted to be in the news. Because the SEC has been saying to Coinbase, well, what about this lending and all the rest. Tell us a little bit about some of the challenges that you have when you're trying to have a discussion with a regulator that you don't even know if they really regulate you.

John D'Agostino: (06:16)
Well, thanks for the easy and not at all uncomfortable question. Softball, softball, big announcement, a hammer to the face. I really appreciate that. So I'm going to show you an expert's lesson in how to answer and divert which I'm going to do right now.

Jon Najarian: (06:31)
You've always been good at that.

John D'Agostino: (06:32)
Look, we go way back. I was head of strategy for the New York Mercantile Exchange. Exchanges as price discovery mechanisms are fascinating vehicles. They're always going to be at the forefront of a relationship with the government because they are they're the last legal monopolies. They're essential to the critical financial infrastructure. When 9/11 hit, the NYMEX was one of the first entities that the US government wanted open. We were flown over on helicopters to get it open. That's their absolutely essential. And so by definition, because of that critical importance, they're going to, when they innovate, have massive repercussions for the entire economy and therefore the government's going to be watching and regulators are watching very, very closely. So I don't think it's unusual that anyone here, because everyone here is looking to innovate in the exchange space is going to have to engage and evolve. And so if those things aren't happening, that means you're not moving forward.

Jon Najarian: (07:28)
Well, and that's a great diversion, John, and I'll say it for him, but I think it should have been the office of the controller of the currency or perhaps even CFTC if somebody's going to talk to Coinbase about regulation, not the SEC, but-

John D'Agostino: (07:44)
That's got to be worked out, right? They have to work that out. And it took, people forget it took, I mean, try trading compos swaps versus single asset swaps, right? You're dealing with the CFTC versus the SEC. So that tension and that land grab has a existed way before crypto, it'll exist way beyond crypto. So we can't control that. That's going to happen. We can only just keep an eye on what's going on and try to make everybody happy to degree possible.

Jon Najarian: (08:11)
Great. Thank you, John. And sorry about the fetch ball.

John D'Agostino: (08:15)
Now on to Ari's great announcement.

Ari Rubenstein: (08:17)
Someone's got to take a rough one.

Jon Najarian: (08:18)
Yeah. And I thought when we were going to talk with Ari today, that I'd be talking about Pyth and Virtu and Jump Trading and all this, but all of a sudden, you guys broke news this morning through a Wall Street Journal story, Ari. Tell us a little bit about Radkl with this Radkl investor that he brought in for Radkl, Steve Cohen. You tell us the rest, rather than me tell the story.

Ari Rubenstein: (08:43)
I had nothing to do with the timing. Nothing. But thanks, John. Radkl is a digital asset trading and investment business. And our goal is to provide liquidity to the marketplace, make the markets more efficient that way and ease the access for investors to get involved in digital investing. And we were talking earlier, it reminded me of what we did with GTS. GTS right now is a global electronic trading business. We're one of the largest market makers on the New York Stock Exchange. We provide liquidity to all sorts of investors, retail investors, institutional investors. On a daily basis, we might trade 5% of US equity markets. And now we trade nearly 20% of the Grayscale Bitcoin Trusts which have become a huge business. And really what happened 20 years ago, I was a floor trader on the commodity markets in the '90s when everything was traded open outcry in a pit, and very quickly, they went all electronic.

Ari Rubenstein: (09:53)
Your partner was a big part of that. And investors at the time were very apprehensive because you had all of these different centers with complicated technology protocols where trading was happening. So it became very fragmented. So what GTS did was we had a very sophisticated technology. We were able to figure out how to write to all these different venues and produce algorithmic pricing in securities and bring that efficient pricing to investors, whether it was anonymously on the exchanges or directly. And the same thing is going to happen in the digital asset space. It's even more multi-dimensional and more complicated with centralized and decentralized protocols, staking yield farming, all of these things are going to influence the digital asset prices. So we need scale liquidity providers to come in and do two things. Provide accurate pricing by leveraging technology to connect up to all of these different protocols, and provide risk transfer services, which is a fancy way of saying we'll hold inventory in different securities as a dealer.

Ari Rubenstein: (11:05)
Once that starts to happen, all of the things that everyone at this conference are talking about where there'll be more mainstream institutional investors in like your business in crypto are going to happen because there'll be more liquidity, there'll be less volatility and larger institutions who have large size to move will feel more and more comfortable net of all risks to get involved. So we're really excited about it and Radkl will be a separate business from GTS. It'll leverage a lot of the technology and experience we have at GTS, but it'll be a separate global business.

Jon Najarian: (11:41)
Yeah. And for those of you who have watched CNBC, Bloomberg, anybody, and seen the New York Stock Exchange, you've seen their logo everywhere, GTS. And a billion shares a day or something like that goes through-

Ari Rubenstein: (11:56)
Sometimes not every single day.

Jon Najarian: (11:57)
Not every single day, but it's close to a-

Ari Rubenstein: (11:59)
Sometimes. But it's interesting. Slow days, right? You mentioned the New York Stock Exchange and GTS has been the leader in the last five years in IPOs, essentially being the secondary market liquid provider on IPOs down at the exchange. But what I think you could see happen and what a lot of folks at the conference talked about is that companies themselves might be thinking about raising money in different ways than the traditional IPO route. And I see that because we talk to a lot of these companies at early stages before they go public, but I believe the future is going to be one where companies are raising money differently and they're accessing the capital markets differently. So we intend to take some of that experience and bring it into the digital spaces as well.

Jon Najarian: (12:55)
Brett, with the new challenge you've got coming over from Citadel traditional side over into FTX, and like you say, more or less, I guess, Sam picking you to head up FTX.US, be the president here. A lot of that is because of your traditional finance background, but also applying some of those things that, of course, we've been following what Solana and FTX have been doing in terms of this central limit order book and things like that. What can you tell us about the sort of liquidity that you guys are drawing into FTX.US and so forth?

Brett Harrison: (13:34)
So as you said, the builders, the founders of FTX, a lot of us come from the traditional finance background, which means we understand what it means to not just build an exchange, but to trade on exchanges. We know what traders need in order to have a platform that's reliable, that's scalable, that has great uptime and has good margining and risk systems. And so FTX from the scratch, it was really built for institutions. So we've attracted huge liquidity pools from name your favorite high frequency trading firm, hedge funds, big institutions are trading with us. And we're now really starting to go in the other direction and doing user acquisition more in the retail space, but that's primarily been our big push has been with the big institutions, which is again why we're so interested in working with the regulators in the US, the CFTC, the SEC, to bring regulated products to the US space, because there's so much institutional demand for things like NDFs on Bitcoin or options on Ether.

Brett Harrison: (14:47)
And we will see even more the explosion of the institutional demand for these products, as it starts to overlap more with the kind of liquidity they're used to providing on exchanges, like more traditional exchanges.

Jon Najarian: (15:00)
And Johnny, now with Coinbase, but as you said, starting the career and really growing yourself and your exposure with commodities in particular, and then looking to new asset classes, no big surprise that you get grabbed by Coinbase and charged with helping build liquidity out of all these basically 22 million accounts that Coinbase already has plus the institutional side. Well, he's given me the thumbs up, like 25 million, 30 million?

John D'Agostino: (15:35)
It's republic. I can say, just look at the filings, but yeah, the rising tide has lifted all the boats including us. Yeah.

Jon Najarian: (15:42)
And as far as providing that liquidity in these new asset classes, the fact that you've gathered this much on the retail side and yet Coinbase pro also is a liquidity pool that you guys hope to use one side to feed the other, if you will.

John D'Agostino: (16:01)
Well, look, I mean, it's encouraging to me to hear how well Brett's doing because I generally believe, and I believe this since the days of NYMEX ICE. I remember the NYMEX board and saying let's kill ICE. And I remember saying, well, hold on. When we overlap trading hours, our volume spiked by 30%. So traders love oligopolies. They don't want all of their order flow in one place. So there's not going to be one winner. There's going to be multiple reputable, regulated, lit market winners and the basis trading and the innovation, because the separates we are talking about, we're all going to be pushing each other and competing with each other. In my experience, you sit with a whiteboard and you create a beautifully structured options contract or some type of risk that you think is going to be traded and work and it flops, and you don't know why it flops. It flops for a variety of reasons.

John D'Agostino: (16:49)
And so it takes a lot of energy. It takes a lot of innovation. We're lucky to have scale. Scale is a significant competitive advantage in the exchange space, but we need others. And that activity and that variance trading is going to really get more and more institutional investors excited because having one trading venue or having one type of product is like having one soccer team. There's no one to play against. It gets boring really, really fast. So it's encouraging to see all the success. It's encouraging to see all the innovation because in the mix of all this innovation, we're going to see what the next big contract is.

Jon Najarian: (17:27)
I agree. I think it's going to be, like I say, we avail ourselves. We're derivatives traders. This week marks my 40th year as a trader. I started in Chicago, still live part of the year in Chicago, part of the year in Puerto Rico because I love kite surfing and that's always my reason for Puerto Rico. But I think that a lot of what these guys are talking about here, and a lot of what you guys look for, either in the investments you make or the businesses that you guys are running is access to liquidity pools. And so what John just touched on is that access, what Ari talks about all the time is that access. So the fact, Ari, that Pyth has become so big, so fast, and that Jump Trading, yourselves and Virtu are on that platform and yet there'll be dozens more pushing throughput through there. 50,000 transactions a second sort of thing versus 12 or 20 Ether or whatever.

Thomas Gallagher: (18:36)
John, I don't know if you realize, but MIAX was the first US exchange group to participate in the Pyth network through the Bermuda Stock Exchange. And went live earlier this week and it wasn't by accident that we got approached by the foundation, the Pyth foundation. They saw what we had done creating liquidity over the last eight years in the US, in the multi listed options. This year, we're number 15 in the world. We didn't exist. We did not exist eight years ago. And so we got that call early and I thought about it, and I said, you know what? This is really the cutting edge. We're going to leapfrog several generations of technology. We want to be a part of it. So obviously others have announced, IEX has announced behind us. We were the first one. And we went up live and it's going well this week.

Jon Najarian: (19:28)
Well, and you guys have the benefit, Thomas, if you don't mind me saying so of a lot of... I was lucky enough to sell a firm to E-Trade folks in 2016. You guys have seen how traditional brokers like that many times bolt on things on top of their existing platform. And it's kind of wonky the way it works then. But you guys were lucky to be able to start out after the international securities exchange, the other ICE instead of the Intercontinental that John spoke of. But you guys starting eight years ago have been able to start with a clean slate without some of the legacy issues. So how important is that technology to allow you to make that first move, Thomas, into Pyth and some of these exciting protocols?

Thomas Gallagher: (20:19)
The whole basis, the whole thesis for MIAX was that you could innovate, you could invest in technology, invest in people and keep them together. And that innovation and that technology, we've been up now almost eight and a half years, John, we've had two outages. So you talk about 5 nines reliability. You look at the incumbents, and I'm not being disrespectful to them, but we've had two or three down incidents since 2012. And we're a brand new exchange, built all the technology in-house. So we started with the options issue, because it's much harder technology-wise. We have 11 market makers trading 1.1 million securities at any given moment and they may want to refresh their prices.

Thomas Gallagher: (21:05)
So we created liquidity as a result of good technology, partnering with our members who now own about 33% of us, I don't know if you realize that. And so we think we can bring that knowhow, how to build an ecosystem and how to bring flow. And we're going to put that effort into things like Pyth and we're really proud about it. And I have to applaud the folks on the panel who are looking at this next generation and looking at it thoughtfully.

Jon Najarian: (21:38)
Thank you, Thomas. Ari, as far as this Pyth network-

Ari Rubenstein: (21:41)
Well, I think the speed of that. It's a very interesting [crosstalk 00:21:44].

Jon Najarian: (21:46)
You have to have that. A human being can't step in front of high frequency. You can access liquidity there.

Ari Rubenstein: (21:51)
What's interesting about the architecture there because what Pyth is it's just a building block but it's also the potential connection between decentralized trading and centralized trading, and a connection between the trading of something real in spot and trading of things that are based off of that in a digital way. So it's not just the equity markets, which is what Pyth is, but it could end up ushering in a tremendous amount of secondary market activity in things that there isn't a secondary market today. Our interest is twofold. We believe our responsibility is to supply technology, to create efficiency and liquidity in any market. Our technology is infinitely scalable. Today, we make a market in half a million instruments, but in a few years it could be 5 billion instruments. And we see digital assets explode as the secondary market exploding and both in centralized and decentralized manners and oracles are going to be very, very important for that. So it's something to watch out for. And so far it's been a pretty big success.

Jon Najarian: (23:15)
Oh yeah. I'd say so. Brett, with the ledger acquisition, how do you guys see that playing into your strategy at FTX.US?

Brett Harrison: (23:27)
Sure. So what makes LedgerX special especially as an acquisition target for FTX.US is that, so in order to be able to offer derivatives in the US, you need to be licensed by the CFTC. And there are a few different licenses that are relevant here. There's a DCM, the Designated Contract Market, which allows one to become an exchange. I actually host the matching engine for derivative products. There is a SEF or Swap Execution Facility, which allows you to basically print swap trades between two different eligible contract participants. And then there's the DCO or the Derivatives Clearing Organization, which is the clearinghouse of which there are very few in the US, and MGX, Minneapolis Grain, is also one of them. So LedgerX has all three of those licenses, which took an enormous amount of time and effort and dedication and constant collaboration and dialogue with the CFTC to get them comfortable with the kind of model that LedgerX wanted to do, which is this dis-intermediated model where LedgerX can offer derivative contracts, not just to institutions, but directly to retail.

Brett Harrison: (24:38)
And that fits in very well with the FTX and FTX.US strategy which is FTX is not just the matching engine. We are also a custodian, we're a money transmitter. We are a payment service, we're an NFT marketplace. We are an iPhone app. We're a web app. We have the full stack. And so what we think could be incredibly unique for our strategy in terms of bringing these kinds of products to the US masses, is that we can provide not just that whole vertical stack for spot cryptocurrency, you know Bitcoin USD, Ethereum USD, but also for these derivative contracts, which have enormous amount of interest from the institution and retail user base. And so we're very excited to be able to integrate these two platforms together over the coming months and year, to be able to kind of put LedgerX and FTX together behind the FTX front end and offer those products in our usual way to our customers.

Jon Najarian: (25:32)
The more we get a direct connection to those sorts of things, the better the liquidity pools are going to be. One of the things, folks, that I look at when I look at some of these value moves that, for instance, Bitcoin made last week that whatever three and a half billion dollars worth of liquidations. Three and a half billion dollars worth of liquidations on a $2 trillion market, or in the case of Bitcoin itself, nearly a trillion dollar market shouldn't really make as much of a difference. But it's the that these folks are using or misusing because some of that 20 to 1, 50 to 1, 100 to 1 offshore leverage that folks have, that's one of the things that I think the regulator... In a DeFi world, how do you deal with that? How do you deal with the fact that there are Deribit and others offshore that are offering that kind of offshore leverage when domestically, people can't access that kind of leverage?

Ari Rubenstein: (26:39)
Well, I would just say we're in early days. I mean, this is I think the garage band days of this industry. And I remember when we first started automating our trading systems, we were one of the first ones to connect directly to the matching engines. And with this one exchange, which I'm not going to mention, we connected right into the matching engine, I don't even think the exchange had any idea. And we were sending an obscene amount of order flow. This is in like early to mid 2000s. And I mean, it's like I cringe to think about it. And we had the server stacked up in this office overheating and there wasn't any market access rules, there were no regulations with regards to what we were doing. I think I had maybe a few million dollars in my account and we had like billions of dollars of open orders trading.

Ari Rubenstein: (27:34)
But these were our capital markets, and we ended up being part of some of the input for some of the market access rules that came about in the later part of the 2000s. And we ended up commercializing our risk management platform that would risk manage direct access flows. And I bring that up because we're in those early stages where not just in leverage, but connectivity, resiliency, the market is vulnerable and is going to be volatile. And it's up to us to get involved and bring our experience and our technology, which over time will increase the amount of liquidity available, increase the resiliency, regulators will catch up and write rules. I think the sequencing of that is going to be a lot more tumultuous than people would like. I don't think they're ready to do Vinyasa yoga with everybody in the morning, but eventually it'll catch up and the markets will be more stable and more appropriate, I think, for scale institutional players. That's going to happen.

John D'Agostino: (28:40)
John, if your business model is to target and grant excessive amounts of leverage to retail investors, I'm not sure that's sustainable long term, and I'm very confident that the rest of the market will grow to a point where it'll temper the volatility of that business model. So it's something to be careful about, but I don't know if over time as the overall breadth and depth of the market continues to grow as it's growing that that should hopefully start to be modified a little bit.

Brett Harrison: (29:15)
Even on the international platform for FTX, there are larger amounts of leverage offered sort of as a default parameter. But the average leverage on the platform is somewhere between two and three X and it varies based on, for example, the size of the position, the volatility of the asset. So one thing we're seeing is even though there's no SRO for crypto, there's no existing ground rules for how these things are supposed to happen, the exchanges are incentivized to have orderly and fair markets. And that's what enables something like FTX to be able to handle the multiple billions of dollars worth of derivative trading that's happening every day. And it's up to us to police that and enforce that. And so I think that what we've seen over time is yes, the platforms which have encouraged irresponsible leverage are not going to win in the long run and I think we're already seeing that. And the ones that do make sure that we are having reasonable risk parameters around leverage are going to last.

Jon Najarian: (30:16)
Right. Well, and for instance, some of the comparisons US to offshore leverage, Thomas, when I look at the CME and I see the open interest on the CME contracts, for instance, the derivatives, whether it's the futures or the options, it's one-tenth of what's trading overseas. And yet the spreads are much better versus what we're seeing overseas. So, that maybe plays into what Brett just said and John as well, as far as people eventually not only do they blow themselves up, but they get tired of having the spreads be wide and they need that liquidity to tighten up those spreads, to what Ari's saying, but I'll throw it to you first, Thomas.

Thomas Gallagher: (31:01)
Well, I'm having a little trouble hearing the question, but one of the things I think is coming is more regulation. And whether it's looking at margins, leverage, who's trading on platforms. Jay Clayton about three or four years ago said that a lot of these digital securities are securities and he sits on the ninth floor with the commissioners. But the people that actually have to make the functional regulatory changes to allow crypto derivatives and these type of securities to trade are on the fourth floor. It's going to take some time to figure this out. So when you talk about the margins and the leverage overseas, I think you're looking at three or four years before the regulatory regimes that actually create the trading regulations are going to be ready. So I applaud people like Sam and the guys on the panel here for buying something like LedgerX to adopt a regulated environment, because it's coming.

Thomas Gallagher: (32:04)
And I think my strategy is we bought the Bermuda Stock Exchange because they've embraced digital securities in a big way. The DABA act. Bermuda had some tough challenges the last 18 months with COVID and a big part of their economy has seized up. So we found that a welcoming place to start doing digital securities opportunities while the US regulatory regime figures out exactly how some of these products are going to be margin traded, listed and cleared. So I think having a dual strategy will help us. But I do think regulatory regimes, whether it's the CFTC or the SEC, they're going to start to develop the specifics and we need to be ready for it.

Jon Najarian: (32:50)
Ari, how much do you guys access some of that offshore? If your algorithm determines that things are too much one way or the other, do you guys access that [crosstalk 00:33:03]?

Ari Rubenstein: (33:02)
On the GTS side, it's our responsibility to access liquidity wherever it's being priced and how it's being priced. You have obviously spot and you have derivatives and our markets today, I'm talking about the traditional financial markets are very much interconnected, which is why security's prices reflect investor sentiments so fast now. You've heard things like flash crash, flash rally. All that means is that the markets move very quickly and they reflect that sentiment very quickly, because they're all connected in and fairly automated. Radkl just launched, so we're actually not live. We'll be live trading in 48 days. So we're actually not in production yet, but we intend to take that experience in pricing multidimensional instruments that are traded across the world with different technology protocols and synthesize them into prices that investors can consume. So we will be overseas, we intend to have personnel all over the world.

Jon Najarian: (34:16)
John, retail versus institutional and the liquidity that you guys provide there. Obviously the mix has been evening out a little bit, but it's still very heavy on the retail side through Coinbase. No?

John D'Agostino: (34:30)
Yeah. I mean just because there are large numbers, right? It grew so incredibly rapidly even the success of the institutional side looks small in comparison. But as with Brett, we're growing very, very fast in the institutional side, which is what I represent. You talked before about the sustained vault that exists in even the very sizeable market. Well, that has repercussions which scale helps, which scale assists. So when that price move you talked about, we're still seeing between the different liquidity pools onshore offshore for Bitcoin price inversions we're seeing, which are significant. So if you don't have the scale and the capital, because it's expensive to put capital at all these venues and to be able to access them, then your customers are not getting the benefit of best pricing.

John D'Agostino: (35:14)
So, again, I think that you're going to see the players on this stage continue to grow because they're at least from the hedge fund institutional investor side, there's significant advantages to that. We need Ari and we need Radkl to start trading a billion lots a day or a billion round turns a day because that's what's going to start to temper some of these price differentials. But until that happens, you've got to be there. You've got to be willing to give your customer access to those menus.

Jon Najarian: (35:43)
Yeah. Brett, you guys are plugged into virtually everything, both domestic and offshore in order to do exactly what John just described. Do you see that as more and more of your competitors doing the same thing? That they have, that's the price to pay to enter the game is you have to be able to access those liquidity pools and or those price points otherwise your customers say I'm not really getting the best price in this market.

Brett Harrison: (36:11)
I think it's interesting that the spot exchange is a very competitive business in the US. And there's only so much one can do with offering the same sort of suite of products to be able to trade your basic crypto pairs on exchanges. And so what we're seeing is there's all this innovation of the spot exchanges moving into different niches. And I think that there's a lot of room for Coinbase, for FTX.US, for a lot of our competitors to sort of coexist and do different things. So for FTX, it's been primarily grown up as a offshore derivatives exchange, but now we're coming onshore. I'm sure Coinbase has plans for international expansion, and we welcome that because the international markets are not as mature and well developed and well organized and self-regulated as we have been in the US, in general. And being able to bring more of our sort of like-minded competitors into the space on the foreign side will eventually help those markets mature and be seen as important institutions globally, and not treated as something that is the wild west or something like that.

Brett Harrison: (37:22)
So I think that it's going to be an important part of the development there.

Jon Najarian: (37:27)
Thomas. I mean, again, I applaud you for the moves you guys have made so quickly into things, into liquidity pools like Pyth. Do you see these other 16 or the other exchanges that you regularly compete with following your lead very quickly? Or can they not because that technology issue that we discussed earlier?

Thomas Gallagher: (37:51)
I think that-

Jon Najarian: (37:52)
And we're in our final minute, by the way.

Thomas Gallagher: (37:54)
Yeah. I think that we have some advantages that we can pivot quickly. The other thing is I don't have a huge data business. So the New York Stock Exchange and NASDAQ and SIBO, everybody's complaining about the cost of data. I don't have that problem because we don't have a data business. So being able to distribute our equities pricing vigorously with putting a lot of technology behind it is where I think we gain our advantage.

Jon Najarian: (38:21)
All right. Well, ladies and gentlemen, if you wouldn't mind giving these gentlemen a hand for a great crypto panel.

Guest User

October 4, 2021

SALT NY: Finance, SALT NY: Digital Assets

Investing in 2021 with Cathie Wood & Andrew Ross Sorkin | #SALTNY

Guest User

October 4, 2021

SALT NY: Finance, SALT NY: Digital Assets

Investing in 2021 with Cathie Wood, Chief Executive Officer & Chief Investment Officer, ARK Invest.

Moderated by Andrew Ross Sorkin, Co-Anchor, CNBC.

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

Cathie Wood

Founder, Chief Executive Officer & Chief Investment Officer
*ARK investment Management*

FULL BIO

Andrew Ross Sorkin

Co-Anchor, Squawk Box

CNBC

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Andrew Ross Sorkin: (00:07)
Thank you all, for sticking around for this final act of the afternoon. Cathie Woods is here. And we were just talking backstage. I haven't seen you since pre pandemic, at least in person.

Cathie Wood: (00:20)
That's right.

Andrew Ross Sorkin: (00:21)
And so much has happened to you and to Ark during this period. It has been a remarkable ride. And just to put it in perspective, you started Ark in 2014. Dare I say, you were 57 years old at the time. You don't look any older now. So you had no assets under management. Today, at age 60, she's at the peak, I would argue of your career, but I hope there's more to come. And you're managing something on the order of 85 billion.

Cathie Wood: (00:51)
Range, in that range.

Andrew Ross Sorkin: (00:51)
Which is a pretty remarkable thing. She has been called on social media, and I hope this isn't considered sexist or something else, Mama Cathie. They call you Aunt Cathie. And then in South Korea, they call you Money Tree, which I love.

Andrew Ross Sorkin: (01:11)
And this is what Art Laffer, who you used to work with, said about you. "The thing that's amazing about Cathie, even back then," when he was working with you, "her horizon is forever. She wasn't in it for next week or next month or next year. She was in it for the long haul."

Cathie Wood: (01:28)
Yes.

Andrew Ross Sorkin: (01:29)
And so I want to start with this, before we even get into what's going on the markets today, and it's just an investment sort of horizon thesis question. When you think about the "horizon" for your fund, and the way that investors who invest in your fund should also think about that horizon, what is it?

Cathie Wood: (01:50)
Well, in terms of our investment time horizon? Five years. So we have to believe that one of the technologies, the 14 technologies around which we have based all of our research, is going to inflect within five years. Or at least start to be discounted in the market as though it is about to inflect.

Cathie Wood: (02:16)
So five-year investment time horizon. Our minimum hurdle rate of return is 15% at a compound annual rate over five years. And so I think that combination of five years plus exponential growth trajectories, is what is finally starting to get into the market. I've been waiting for years.

Andrew Ross Sorkin: (02:39)
I know you've been waiting for years. So to put this in perspective, the fund over the last two years, is up about 164%, give or take. Year to date, it's down a little over 3% at a time. We all know the S&P 500 so far is up a little over 18% this year, thus far. So put it in perspective. Where are we in this market, given your five-year horizon?

Cathie Wood: (03:08)
It's going to be incredibly confusing I think to people. Just look at what's happened to the bond market this year. Against all expectations, yields have dropped from, I think it was 1.75 at the peak in March, down to 1.3 as inflation expectations are exploding.

Cathie Wood: (03:28)
We believe the reason for that is that probably, when all is said and done, and the dust clears from the supply chain problems and everything, we're probably in a highly deflationary world. And we see three sources of deflation. One is very good. It's called technologically-enabled innovation. Artificial intelligence training costs are dropping 68% per year.

Andrew Ross Sorkin: (03:54)
Right.

Cathie Wood: (03:56)
When a cost drops that much, the demand for it picks up. And artificial intelligence is probably the biggest reason we're seeing the convergences between and among technologies. So we've got one S-curve feeding another, feeding another. Explosive energy, incredible deflation. That's the first deflation.

Andrew Ross Sorkin: (04:15)
While the rest of the world thinks, if you were here for part of the day, everybody's talking about inflation.

Cathie Wood: (04:20)
Oh, and that's what I love. If the whole world thinks that's going to happen, and a portfolio manager and the analyst team thinks that's going to happen, well, if we're wrong, it's not going to matter that much because nobody's expecting it. It's not in the market. But if we're right, the returns are enormous. And I think that's what's going on with the technologically-enabled innovation that we see, especially in healthcare, by the way. But there are two other sources of deflation.

Cathie Wood: (04:54)
Disruptive innovation, there's another side to it. It's called creative destruction. And I think we're going to see more creative destruction than we have in all history, during the next five to 10 years. Now, you can say, "Oh, you're just talking your book." We have rights law teaching us about learning curves and cost declines that suggest we are going to see incredible boons out there in parts of the world. But it's going to mean tremendous destruction in others.

Cathie Wood: (05:27)
So when I say confusing, I mean that. And then the third source of deflation, I think will be cyclical deflation. Most people are fighting us on this one. It's hard to fight us, given our research on those other two, but this cyclical deflation, it started with lumber. $1,711 in May. Now, we're at $500. Copper, 490 I think. Now, we're at 425. Used car prices are surprisingly good. And I know we're getting pushed back on this one, too. They shot up 60% as everybody decided to avoid mass transit last year.

Andrew Ross Sorkin: (06:07)
Right.

Cathie Wood: (06:07)
Right. And now, we find ourselves supposedly in a chip shortage. I do believe in the chip shortage, because-

Andrew Ross Sorkin: (06:16)
You believe there's a chip shortage?

Cathie Wood: (06:17)
[crosstalk 00:06:17] I do believe there's a chip shortage because the world's going digital. But I believe-

Andrew Ross Sorkin: (06:22)
But wouldn't that be inflationary?

Cathie Wood: (06:24)
Well, I believe chips are the new commodities. That's the point I'm making here. So chips are going to be what Dr. Copper has been in the industrial world. This is Dr. Digital, I don't know, in the form of chips. But you hear the auto industry screaming. Auto sales have dropped from 18-and-a-half million units in April, to 13 million.

Cathie Wood: (06:52)
Now, these are annualized rates in August. That's more than a chip's shortage. What happened last year is people bought the cars, they're in their driveways, garages, didn't want to take mass transit. And now, there's a decision. What do I want to buy, a gas-powered car or an electric vehicle? Well, that's where the short supply is.

Cathie Wood: (07:16)
And I think the excess supply is going to be in the gas-powered side. So this is a really important test case of why I formed the firm when we did. I think the disruption is happening to the auto industry now.

Andrew Ross Sorkin: (07:32)
I want to get into Tesla, obviously, and a number of your picks in just a moment, but I do want to just note Morgan Stanley, City Group, Deutsche Bank, Bank of America, these are all firms that have published notes within the past month, effectively saying the opposite. Most of them believe that we are expecting to have inflation. And I think across the board, either pullbacks or much flatter returns.

Cathie Wood: (07:57)
Right.

Andrew Ross Sorkin: (07:57)
You just think they're off? You think they're wrong?

Cathie Wood: (08:00)
I think as I said, if you're looking at the traditional benchmarks, they may very well be right. All I know is when we are looking at the transformative growth that's going to take place in our space, and we're completely devoted to nothing else but disruptive innovation, we see explosive growth.

Cathie Wood: (08:22)
I think one of the reasons they will look right in terms of GDP is if the other side of create of disruptive innovation is creative destruction, well, what's happening? It's the industrial world evolving into the digital world, as more of the physical world goes digital.

Andrew Ross Sorkin: (08:40)
Right.

Cathie Wood: (08:40)
Transportation importantly. And so the traditional benchmarks, GDP, the statistics that we look like are probably going to look pretty lousy at times, I would say. Certainly, sector by sectors, these transformations take place.

Andrew Ross Sorkin: (08:57)
What do you think the role of millennials and the next generation will be? And I ask this because I've seen you make comments about demographics, both in terms of the role that millennials play in terms of the actual economy, but also the role that they may play in the markets themselves.

Cathie Wood: (09:13)
Yes.

Andrew Ross Sorkin: (09:13)
Because a lot of people look at what's happened over the last 18 months, and this new generation that's now in retail, often in your fund, on Robinhood, on Reddit, and think something has changed. Some people think it's tulips, other people think it's forever.

Cathie Wood: (09:29)
Mm-hmm (affirmative). Well, we just learned from Jolyne Caruso that millennials are 70 million strong in our economy, and now bigger than the baby boomers as a demographic. And I'm going to harken back to Stan Salvigsen, most of you won't remember who he was. He made one very important call in the early '80s.

Cathie Wood: (09:55)
He said, "Baby boomers are going to be the reason that the equity market goes up for the next 20 years." It was a brilliant call. He's no longer with us. We're in the echo now. And I do believe that both crypto and the equity markets are going to be powered by millennials. In fact, Tom Lee had fenced that.

Andrew Ross Sorkin: (10:17)
Tom Lee? Yep.

Cathie Wood: (10:18)
Yeah. He has done the arithmetic the way that Stan did. And I think he says this bull market will not end at least until 2026. And maybe not until 2038 when the number of millennials peaks out there. Well, I went through the '80s and '90s and nobody believed him, thought it was a ridiculously simple call. But when you look back in history, it was a pretty good call.

Andrew Ross Sorkin: (10:45)
Okay. I want to get into meme stocks and that whole phenomenon in just a minute, but I want to touch on a couple of your big investments. And also, touch on one other theme, which is China, because it's in the news. You have been thinking about that space or that region in a big way, or that country, I should say in a big way.

Andrew Ross Sorkin: (11:05)
And I know you've reduced some positions, but what's your overall thesis at this point on China and what we're seeing in terms of this regulatory crackdown, which seems to be worse every single day?

Cathie Wood: (11:15)
Yeah. I think there's something going on there socially that the government is very worried about. Many of the same things that the rest of the world is worried about, where there's the divide between the rich and the poor. I saw today, Evergrande, there are protests around the Evergrande offices because the wealth management products that weren't highly regulated are not paying interest, are not paying back and so forth.

Cathie Wood: (11:48)
So I think there's social unrest taking place there. And that's why common prosperity has become the rallying cry, and hostage to capital has also become a rallying cry. So I don't think it's a very friendly place for capital now. However, focused only on innovation, China has in its various five-year plans, made innovation. And it's an incredibly important plank.

Andrew Ross Sorkin: (12:15)
Right.

Cathie Wood: (12:15)
And so we don't want to avoid it, but what we do want to avoid is very high margin companies. So you look at JD Logistics or jd.com, some of the companies that are pushing innovation and access into tier two and tier three cities, we'll play with that. So what we did in the series of moves recently around China, we have taken our position down significantly, but stayed with a few of the lower margins.

Andrew Ross Sorkin: (12:50)
What would it take for you to turn?

Cathie Wood: (12:50)
They need-

Andrew Ross Sorkin: (12:50)
Invest more? What would you need to see?

Cathie Wood: (12:51)
What would I need to see? I think it would Xi Jinping saying, "Whoops, we made a mistake. We're open for business." I don't think he'll do that. So I don't think we'll be hugely involved with China. The other thing that I think is, and we've seen this in the crypto space, by shutting open source movements down, which is what they're doing, all open source movements, no, I think this is going to give the US a competitive advantage.

Cathie Wood: (13:21)
So we have allocated more of our innovation assets here in the US because of what's happening. China was going to be one of our biggest competitors. We saw them in the AI space, making the league tables in chips. I'm not so sure. I think they have to do some housecleaning right now, that we probably do not understand all the causes. But I think there's social unrest. That would be my guess.

Andrew Ross Sorkin: (13:46)
Let me ask this. Do you think that the regulatory environment there is either going to open up opportunity in the US, or will it give and embolden regulators in the US ...

Cathie Wood: (13:56)
To shut it out?

Andrew Ross Sorkin: (13:57)
To shut down what's happening here? Because it used to be that the big tech companies in the United States would say, "Well, no, no, no, you can't shut us down. Because look over there in China."

Cathie Wood: (14:06)
Right.

Andrew Ross Sorkin: (14:06)
"Those companies are so big, we need to compete with them." But if they're being shut down or cracked down upon, will it just embolden Washington here?

Cathie Wood: (14:15)
It's a good point. But I think this is much more than China as RuPaul on the last panel said. France is becoming very innovative.

Andrew Ross Sorkin: (14:29)
Right.

Cathie Wood: (14:29)
And Southeast Asia has stolen the March from China. So companies like Sea, it's a social media, social commerce, gaming company. It's exploding throughout the world. And capital is shifting towards that kind of name, because there are big populations in Southeast Asia, and Latin America as well.

Andrew Ross Sorkin: (14:51)
Okay. Can we talk about our favorite topic?

Cathie Wood: (14:53)
Tesla?

Andrew Ross Sorkin: (14:54)
Yeah.

Cathie Wood: (14:54)
Okay.

Andrew Ross Sorkin: (14:54)
Let's talk about it. And we have sparred over the years. I love Tesla. I've never loved the valuation of Tesla. And you have loved Tesla and the valuation of Tesla. And you've liked the valuation. You've been at much higher levels.

Andrew Ross Sorkin: (15:06)
And I have always thought, as you know, that that's crazy. And you have been right. So here we are. You still believe that this is a company, still believe that the valuation long term is $3,000. That's your price tag?

Cathie Wood: (15:20)
That's our base case.

Andrew Ross Sorkin: (15:20)
That's your base case?

Cathie Wood: (15:21)
Yeah, that's not even our bull case. But let's just stick with the base case from $700.

Andrew Ross Sorkin: (15:27)
3,000 by when?

Cathie Wood: (15:28)
Five years. Always five years.

Andrew Ross Sorkin: (15:30)
Always five years?

Cathie Wood: (15:31)
Mm-hmm (affirmative).

Andrew Ross Sorkin: (15:32)
You recently sold some last week, right?

Cathie Wood: (15:35)
Yes.

Andrew Ross Sorkin: (15:35)
About $180 million?

Cathie Wood: (15:38)
I read that it was 130 million. So it got so much press.

Andrew Ross Sorkin: (15:43)
Okay. Oh, I'm sorry. 180,000 shares at 130 million?

Cathie Wood: (15:46)
Yeah.

Andrew Ross Sorkin: (15:46)
Right. Why'd you do that?

Cathie Wood: (15:48)
So Tesla is still the largest position in our portfolios. On that particular day, and I can tell you this because we disclose our holdings every day and we publish our trades every day, I'm always looking for cash, in especially the flagship fund, which is very concentrated and involves all of our technologies. So a company in the automation space, UiPath was down 11% that day on its earnings release.

Cathie Wood: (16:19)
And Tesla had just gone up 30%. So it was really a tactical move. So just to give you a sense, Tesla is a 10 point, I believe it's 10.5% position in the flagship fund. The next highest position is I think 5.9%. So the conviction, this was, I will take a trade, up 30% down 10%. That's like a 40% difference. That's all that was.

Andrew Ross Sorkin: (16:47)
But this is not a stock, at least recently, that has been on the move higher. In fact, it's been flat to down.

Cathie Wood: (16:52)
No. Actually, if you look at it, it has been levitating. It has. We got into the 500s. It got well below 500, I believe in the-

Andrew Ross Sorkin: (17:04)
But it must have crossed 10% a while ago? Meaning you must have been much higher actually?

Cathie Wood: (17:09)
So when a stock moves from 10%, we can no longer buy. And thank you, I want to address this because we keep getting questions about it. We cannot buy a stock if it is 10% or higher in the portfolio. We can sell, of course. We do not have to sell. And what we usually do, this is not science, very unpredictable, you can't replicate this in terms of trying to figure out what we're going to do, but when a stock gets to 11% or 12% in the portfolio, it means that, or that means it has appreciated by 10% to 20% relative to the other positions in the portfolio.

Cathie Wood: (17:52)
And usually, what we're doing is being opportunistic and taking advantage of a drop in a stock. Again, need the cash. Largest position above 10%.

Andrew Ross Sorkin: (18:04)
Okay. Let me ask you this.

Cathie Wood: (18:05)
Does that make that a little clear?

Andrew Ross Sorkin: (18:07)
No. No, it makes sense. I know there'll be bulls and bearers on this. Let me ask you a different question, though. And it's really about how to assess and think about some of the comments, projections, and other things that Elon Musk makes about the company, and how you interpret them and how the public interprets them. And frankly, how bearers interpret them.

Andrew Ross Sorkin: (18:28)
Which is to say that there's a lot of times where Elon will come out and say something, whether it be about robotaxis, or when there'll be full autonomous driving, or all sorts of things that I imagine at some point, because we've had these conversations in the past, do get baked in, or should be getting baked into some kind of assessments of the stock.

Cathie Wood: (18:48)
Mm-hmm (affirmative).

Andrew Ross Sorkin: (18:50)
And as optimistic as you can very well be about all of those things, they haven't come true. And so, how do you grapple with that?

Cathie Wood: (19:01)
This is one of the hardest problems that we are going to solve technologically. So actually, in the last three months, we have increased our projection for autonomous taxi networks.

Cathie Wood: (19:18)
Now, in the $3,000 base case, we assign a 50% probability to autonomous. So it's a really hard problem. But if anyone is going to solve it, our confidence that Tesla is that company has gone up dramatically as we've learned more about it.

Andrew Ross Sorkin: (19:38)
But I guess when I ask you, when Elon says that robotaxis by the end of 2020, what numbers would you therefore have put in, in 2000 I think 19 when he said that or 18, when he was saying that?

Cathie Wood: (19:50)
Yeah. Again, five-year.

Andrew Ross Sorkin: (19:51)
Oh, I know. Okay.

Cathie Wood: (19:51)
As in, our probability last year, or whenever he said that, was lower. I think we had a 25% probability.

Andrew Ross Sorkin: (20:01)
Okay. So, do you discount what he says? By what number? It's a-

Cathie Wood: (20:05)
Elon, if you really look at what he's doing at SpaceX and at Tesla, he's changing our world, right?

Andrew Ross Sorkin: (20:11)
Oh, you're not going to get me to dispute that.

Cathie Wood: (20:13)
So electric vehicles-

Andrew Ross Sorkin: (20:14)
I think it's simply about the valuation and how investors should think about these numbers.

Cathie Wood: (20:18)
He was the first person. When we were talking about autonomous taxing networks, he said, "The last mile is going to be so hard. I'm not sure it can be done." This was about five years ago.

Andrew Ross Sorkin: (20:32)
Right.

Cathie Wood: (20:33)
Maybe longer. The resources that he's putting into this program, and the talent that he's attracting, and the advancements that he's making and that are possible now, that artificial intelligence training costs are dropping by 68% per year, we think the probability of autonomous is going up.

Andrew Ross Sorkin: (20:55)
I don't disagree with you. But does it frustrate you?

Cathie Wood: (20:58)
No, he's a visionary. And he sees the future so clearly.

Andrew Ross Sorkin: (21:06)
Right.

Cathie Wood: (21:06)
The fact that he changed from saying last mile, I don't think that's good. There'll have to be some combination system. He changed from that, with his partner, Andrej Karpathy, who is one of the most brilliant artificial intelligence engineers. I think this is going to happen in the next few years. He is always a year or two or three too early. We adjust for that in our forecast.

Andrew Ross Sorkin: (21:36)
What do you think about that prospect, that one of the-

Cathie Wood: (21:36)
Oh, and by the way.

Andrew Ross Sorkin: (21:36)
Yeah?

Cathie Wood: (21:36)
May I say one other thing?

Andrew Ross Sorkin: (21:36)
Please.

Cathie Wood: (21:37)
One of the reasons Elon does that, is he wants to get the supply chain in motion. And when the supply chain does not cooperate, he brings it in. He's becoming much more vertically integrated.

Cathie Wood: (21:52)
So auto suppliers and technology companies know that if they don't march to his drum and at his cadence, instead of these four to five-year design cycles, they're going to lose the business.

Andrew Ross Sorkin: (22:05)
A lot of short sellers have lost a lot of money betting against Elon, as you know.

Cathie Wood: (22:09)
Mm-hmm (affirmative).

Andrew Ross Sorkin: (22:10)
And one of the things that a lot of short sellers will tell you that they missed was not actually the technology or anything else per se, but was the scale and ability to go back to the market over and over again, to get more and more capital.

Andrew Ross Sorkin: (22:26)
That the scale of the capital unto itself, that could become almost a self-fulfilling prophecy, if there were people out there willing to impart their capital to you over and over again.

Cathie Wood: (22:38)
Mm-hmm (affirmative).

Andrew Ross Sorkin: (22:38)
How much of that is in your thesis?

Cathie Wood: (22:43)
Well, the way we would frame that is we believed that Tesla had four barriers to entry. And all but one have increased in the last few years. So they have the artificial intelligence chip. They have the best battery technology, costs lower and will be lower for the next three to five years.

Cathie Wood: (23:06)
They have the most data to do the training and find corner cases. And then the last one, which I would've thought they would've lost already, is over the air software updates. I haven't had to take my Model 3 in since 2018. They have the best cars on the road.

Andrew Ross Sorkin: (23:23)
So, your base case is 3000. What's your best case scenario?

Cathie Wood: (23:28)
The best case is about 4,000, because we won't go to a 100% in that autonomous. But let me give you the dynamics there. If you had asked me last year, I would've told you that the autonomous taxi network opportunity in the year 2030, would be a six to seven trillion-dollar revenue opportunity. We have in the last year, raised that to 10 to 12 trillion.

Cathie Wood: (23:57)
And it is because, before we had been modeling as though the cost would drop to where they should, given competition, which is 25 cents per mile, right now, it costs us 70 cents per mile to drive our own cars. We are learning, and it's through Uber and ride-sharing services, that convenience matters a lot. And not having to drive matters a lot. And so our price for the robotaxi service has gone up from 25. I think we're up to it's either 50 or a dollar per mile.

Andrew Ross Sorkin: (24:30)
Okay. New topic, our other favorite topic. You know what it's going to be? Bitcoin.

Cathie Wood: (24:33)
Bitcoin.

Andrew Ross Sorkin: (24:37)
Five years from now, what's it worth?

Cathie Wood: (24:40)
If we're right, and companies continue to diversify their cash into something like Bitcoin, and institutions, institutional investors start allocating 5% of their funds towards I'll just say Bitcoin for right now, because we did that, we framed it for Bitcoin, could be for other cryptos as well, we believe that the price will be tenfold of where it is today. So instead of 45,000, over 500,000.

Andrew Ross Sorkin: (25:20)
If you could own Bitcoin, Ethereum or some other crypto currency, and you could only own one, which would it be?

Cathie Wood: (25:32)
That is becoming a harder and harder question to answer. I think I'd default still to Bitcoin because countries are now deeming it legal tender. And we haven't even put that into our thinking. Ether, however, is seeing an explosion in developer activity, thanks to NFTs and DeFi. I'm fascinated with what's going on in DeFi, which is collapsing the cost of the infrastructure for financial services in a way that I know that the traditional financial industry does not appreciate right now.

Cathie Wood: (26:06)
So it does have to move from proof of work to proof of stake. That transition is underway and seems to be taking hold. So here's how I'll answer that question. Our confidence in Ether has gone up dramatically as we've seen the beginning of this transition from proof of work to proof of stake. We'd still probably do 60% Bitcoin and 40% Ether.

Andrew Ross Sorkin: (26:34)
For all of that to happen, do regulators, especially US, regulators need to buy into this in a major way? I would also say that we just saw it in the last week, Brian Armstrong runs Coinbase.

Andrew Ross Sorkin: (26:48)
You have steak in Coinbase, has now gotten into a somewhat bitter feud with the SEC, over how the ability to offer effectively a yield product on some of these cryptocurrencies, specifically Bitcoin will work.

Cathie Wood: (27:05)
Mm-hmm (affirmative). Yes. I think regulators, our working assumption from the beginning was that, and this was based on meeting with them, meeting regulators, both state and local and federal, was that no regulator wanted to be blamed from preventing the next big technology breakthrough to happen in the US. And that has proven true. Now, we've got Chairman Gary Gensler.

Cathie Wood: (27:34)
I'm really happy he understands crypto, and understands the merits of Bitcoin in particular. He is a regulator though, and he's a hard core regulator. What Coinbase did, I was shocked when I saw it. Wells Notice? Are you kidding? They haven't even released the product. What is this? And I think what that Wells Notice is doing, it's a call out by regulators saying, "We got to discuss this stuff, because this is happening very quickly."

Cathie Wood: (28:03)
And I think we are going to bring courts into the system. This happened in Canada. A company called 3iQ sued the regulator there, and won in court. So they were able to issue Bitcoin ETFs and closed-end funds. And Ether as well. So I am beginning to think that Coinbase doesn't mind this at all. And if you saw the stock reaction, it hardly budged.

Andrew Ross Sorkin: (28:32)
Right.

Cathie Wood: (28:32)
Right?

Andrew Ross Sorkin: (28:34)
We're going to have to wrap up in just a minute, but I do want to talk to you a little bit about the social media-enabled phenomenon that is happening. And it's impacted your fund, it's impacted the interest in all of this, diamond hands and the like. What do you make of that?

Andrew Ross Sorkin: (28:50)
And also, how do you think about your own responsibility in the context of one of the things you do? Which is so interesting, is you are transparent in terms of what you're doing every single day. People see what you're doing. There's also people that are therefore trading off of what you're doing. And how you think about that?

Cathie Wood: (29:07)
I'll start with the later one. Was the first one about meme stocks? Or was it about-

Andrew Ross Sorkin: (29:11)
Yeah. Well, it wasn't really a question, but it was in the context of just thinking about what's happening here, and the whole new generation that seems to be talking about these stocks. Some saying things that are factual, some saying things that are not factual. Some saying that they want to have less regulations, so that they can do more.

Cathie Wood: (29:32)
Okay.

Andrew Ross Sorkin: (29:32)
But it's a very different world than it was-

Cathie Wood: (29:36)
It's a different world.

Andrew Ross Sorkin: (29:36)
... post-financial crisis.

Cathie Wood: (29:38)
Yes.

Andrew Ross Sorkin: (29:38)
Where everybody said that the job of the financial industry was to protect if you will, the little guy, the little investor. And now, I think the little guy is saying, don't protect me. And in fact, by protecting me, you're not protecting me at all, because what you're really doing is protecting the suit, the big guy.

Cathie Wood: (29:55)
I think it was on your show this morning, wasn't it? That Robinhood's legal council-

Andrew Ross Sorkin: (29:59)
Yes.

Cathie Wood: (29:59)
... said something like that?

Andrew Ross Sorkin: (30:01)
Mm-hmm (affirmative).

Cathie Wood: (30:01)
That's really insulting to these people that you are going to protect them.

Andrew Ross Sorkin: (30:04)
Right.

Cathie Wood: (30:05)
Right? Okay. That was pretty interesting. So I'll first talk about the trading around what we do. I have been managing money since 1990. So, for 31 years. And I've always had other investors or speculators shooting against us, because guess what? Even when I was managing separately managed accounts for wire houses, I would be posting models. That word would get out there of what we were doing.

Cathie Wood: (30:39)
When we posted our models out there, it would get out. And lo and behold, these stocks would take off. So I've been managing with that in mind for years and years. And so we don't have to buy a stock. If someone wants to take it up 20%, the day after we buy, and we haven't finished our buy, I'll finish it another time. Because I know disruptive innovation is inherently controversial, and we'll get another shot.

Cathie Wood: (31:03)
In terms of what's going on now, I so admire the millennial generation. Yeah. As you say, I'm sure there are people trading just because their friends are trading. But the hunger for knowledge that they have, and the gratitude to us for the kind of research that we put out, the depth of our research, our tweets. Our analysts are all tweeting. We're on the right side of regulation. We know what we're doing there.

Cathie Wood: (31:32)
And we have someone from the SEC who became our CCO. So their hunger for information and their gratitude, has been extremely humbling in a way. We get a lot of people coming up to us and thanking us for that, because we've opened their eyes to a new world. Let me give you a bit of a difference. When my children were in high school and college, I was trying to teach them about the stock market.

Cathie Wood: (32:02)
I was trying to get their interest. Nada. It's almost like crypto had to happen. That got them interested. And to the extent they were looking at our research around crypto and others. They're educating themselves, and they love of education. It's one of our mission of values.

Cathie Wood: (32:21)
So we meant to do that, not because we knew this was going to happen, but because we want parents and grandparents, and the children themselves, to understand how rapidly the world is about to change. And to get your children, grandchildren, yourselves, on the right side of change, whether it's investing or your education, or your career.

Andrew Ross Sorkin: (32:44)
Okay. Couple quickies. Do you own any NFTs?

Cathie Wood: (32:48)
I do not, but I gave one as a birthday present to Sig Segalas, Chief Investment Officer at Jennison Associates. He turned to 88, and he thinks it's the best present he's ever gotten. Angie Dalton, I don't know if you know her, from Signum Capital Growth. And I did, we split it. And his grandchildren now, get to do layers of art on top of his digital art.

Andrew Ross Sorkin: (33:15)
Do you think there's a bubble in NFTs?

Cathie Wood: (33:21)
Well, when I saw this original $69 million piece, I thought, "Okay, this has gone too far, too fast." We're now talking about the creative world. And when I heard about Async Art, I don't know if you've heard of that company, Async Art has developed a digital ecosystem where artists can put out their digital art, and then anyone can buy pieces, pixels.

Andrew Ross Sorkin: (33:47)
Right.

Cathie Wood: (33:48)
And change it. And so you can do layers. And the original artist gets paid. I was walking when I heard the CEO tell his story, and my smile went ear to ear. Because I said, "Oh man, this is going to be so explosive."

Cathie Wood: (34:05)
This is how I felt when the internet first came about. Like, "Oh man, this could be really big." Remember when everybody was saying, "what's the internet?" I had the same feeling here, because creators they don't get paid for every iteration.

Andrew Ross Sorkin: (34:24)
Right. Robinhood, do you own a steak? Do you also own-

Cathie Wood: (34:27)
We do. It's a 1% position. Yes.

Andrew Ross Sorkin: (34:28)
What do you think, long term?

Cathie Wood: (34:30)
Again, we are into the millennial generation. Pay-

Andrew Ross Sorkin: (34:35)
The payment for order flow?

Cathie Wood: (34:35)
Payment for order flow. I'd be shocked if it goes away. I agree with the general counsel, because it has been so good for zero commission trading and so forth. And you can look at the spreads and you can analyze exactly who's taking what, or how big the pie is.

Andrew Ross Sorkin: (34:50)
Right.

Cathie Wood: (34:53)
I'm glad it's a discussion because it keeps coming up. Let's get some regulators making the final decision.

Andrew Ross Sorkin: (35:02)
We're out of time.

Cathie Wood: (35:03)
Oh.

Andrew Ross Sorkin: (35:04)
Cathie Wood, everybody. Thank you.

Cathie Wood: (35:06)
Andrew Ross Sorkin.

Andrew Ross Sorkin: (35:06)
Thank you.

Guest User

October 3, 2021

SALT NY: Digital Assets

Institutional Crypto Adoption: Opportunities & Obstacles | #SALTNY

Guest User

October 3, 2021

SALT NY: Digital Assets

Institutional Crypto Adoption: Opportunities & Obstacles with Brett Tejpaul, Head of Institutional Sales, Trading, Custody & Prime Services, Coinbase. Glenn Barber, Head of Sales & Business Development, Copper. Brian Brooks, Former Acting Comptroller of the Currency. Jalak Jobanputra, Founding Partner, Future\Perfect Ventures.

Moderated by Daniel Roberts, Editor-in-Chief, Decrypt.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Brett Tejpaul

Head of Institutional Sales, Trading, Custody & Prime Services

Coinbase

FULL BIO

Glenn Barber

Head of Sales & Business Development

Copper

FULL BIO

Jalak Jobanputra

Founding Partner

Future\Perfect Ventures

FULL BIO

MODERATOR

Daniel Roberts

Editor-in-Chief

Decrypt

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Daniel Roberts: (00:00)
All right, finishing out the day here with more Crypto Talk. Thank you to everyone who's here, delighted to be with this all-star panel.

Daniel Roberts: (00:14)
Let me just start quickly by saying, when you do a lot of these conferences, you start to see some of the same folks on the circuit. I remember when SALT, just a few years ago, had maybe a little touch of Crypto in the mix. And you look around today at the lineup for the last three days, and I think that, that says a lot about institutional interest in Crypto. I mean, half the sponsors and a good mix of the panelists are about Crypto, I think that really tells you where institutional interests stands in the space. But we only have a little time, let's dive right in.

Daniel Roberts: (00:43)
Brett, good way to start would be to talk about this Coinbase, $2 billion debt offering that reports indicate you guys had hugely oversubscribed, tons of interest. What's going on there, especially an obvious indication of maybe some investors that, a few years ago, were more skeptical, ready to dive in?

Brett Tejpaul: (01:01)
I think it's an awesome moment for Coinbase and for Crypto. The fact that so many hundreds of investors put in orders for that deal is fantastic. The fact that they bought seven and 10 year debt is amazing. Particularly if you contrast it versus an investment in equities, right? When you're on the fixed income side, you're making a bet of the longevity and stability of the platform. You'll get your money back at the end of 10 years. So I think it's an enormous endorsement for the industry and for Coinbase too. And then with respect to the investors, it's quite frankly amazing to see the biggest, largest, most sophisticated asset managers in the world, in that transaction. Many of whom are already clients, but actually so many, I hope, will join the platform thereafter.

Daniel Roberts: (01:50)
You guys are going to hear me hit this a lot, but the idea that we've seen the interest from institutions, especially maybe firms or individual investors that I think as recently as three years ago, were dismissing Crypto. Now they're ready to rush in, people can ask, "Are they late? Maybe they're still early." But Brian Brooks said "Kick it over to you." In case anyone here doesn't know, I don't want to assume Crypto knowledge of everyone's background, but Brian was the CEO of Binance.US until just recently. And before that he was a regulator himself.

Daniel Roberts: (02:19)
Brian, what did you see in your time at Binance.US in terms of the institutional interest? And what I'd really ask all of you guys is, was it really the pandemic that changed everything? I mean, there was this narrative that the actions of the fed and inflation, and that's why a lot of people changed their tune on Crypto. But it was kind of happening before the pandemic started, right?

Brian Brooks: (02:39)
Yeah, for sure. I mean, look, we've had an accommodative, monetary and fiscal policy in this country going back 10 or 12 years at this point. So it's an incredibly risk-on environment, which means Crypto. It means anything with vol in it. Anything that's new is awesome. What I think is interesting though, and Brett on the Coinbase side, it's really interesting, is yet today most institutions are not willing to hold primary Crypto assets. Institutions that are licensed, can't participate in DeFi. So how do they to get exposure if they want to be risk-on in crypto? And the answer is, you find a public company and you would invest in their debt. That's an exposure to crypto, but it's not actually crypto. So I think the big regulatory question is, how do we actually open this up for real institutional participation in the underlying projects we're all working on? That's the heavy lift for the next year or two.

Daniel Roberts: (03:26)
Jalak, I mean, let's talk about what you do at FuturePerfect. Another way to get exposure to crypto, obviously, is on the VC side to invest in some of these crypto companies, how has your thesis been affected by the obvious rise in institutional interest?

Jalak Jobanputra: (03:41)
Well, I started the fund in 2014 on the thesis that everything was going to be tokenized and started with Bitcoin. And Bitcoin was really the primary crypto asset out there. But I invested early in the internet and I looked at any technology developments. And you first have to invest in infrastructure, and then you invest in connectivity, middleware, and what's now considered layer two. And then the applications, which we're starting to see happen right now. And, so it's been, obviously the last year has been phenomenal in terms of the growth, but we always knew that the institutions were going to come because of the macro environment we're in.

Jalak Jobanputra: (04:26)
I think one of the things that was missing is that regulatory uncertainty, and it's still not quite there. And I mean, you look at DeFi, we're very actively investing in DeFi. We're actively investing in NFT infrastructure. We're actively investing in institutional infrastructure, but it seems like the technology is ahead of the regulation, but given the demand we've seen from institutions as well as retail investors, this will all be figured out. And I think the next five years are going to be the most exciting time to invest in the sector.

Daniel Roberts: (05:02)
Let's talk a little bit more about your portfolio at the firm. You mentioned regulatory uncertainty, I mean, that's an understatement, right? And as you look at companies to invest in right now, is that coming up as one of the main topics of, "Well, how do we deal with this? This might be an obstacle for us." What are the primary things that you were looking for when you're investing in the crypto space right now?

Jalak Jobanputra: (05:23)
So when we first started investing, there was a lot of regulatory uncertainty, Mt. Gox had just happened, that's actually what got me into this.

Daniel Roberts: (05:31)
Way back.

Jalak Jobanputra: (05:32)
And that's what got me into the sector because of the resilience that Bitcoin, and then the entrepreneur is building on this technology showed. And so I thought this is not going away. And obviously when everyone else is running away, that's the best time, especially to be a venture investor. But we do pay attention to and invest in entrepreneurs who understand that there are regulatory constraints. We invest globally. So I was just talking to Brian before, I've been talking to regulators around the world, educating them about this new asset class. And so we help the entrepreneurs navigate different jurisdictions, including the US, and I don't think one size fits all. Every environment is different there. I mean, we have legacy infrastructure here. We have legacy regulation here that doesn't exist in some other places, but the US is still going to be an important market for the sector.

Daniel Roberts: (06:31)
Please.

Brett Tejpaul: (06:31)
Just one reflection on this, given the crowd that we have here today. So I spent my first 25 years in investment banking, bringing new asset classes to institutional investors. So leading them into emerging markets and illiquid assets, so on and so forth. And during all those years, usually regulation follows innovation. And so there wasn't a moment in time where it was crystal-clear of what the regulatory backdrop was and enabled the capital income. So if you just look at what's actually happening now, our debt deal, but also our balances, people are actually taking the brave step to make direct investment. So I think that the space will certainly prosper with more clarity, but I think it'll continue to grow on unbounded in the meanwhile.

Daniel Roberts: (07:15)
Glenn, I want to bring you into this. Let's talk about Copper.co and working with the institutional clients you do, especially on custody. Especially keeping with the fact that this is SALT. This isn't just a crypto conference. I don't want to assume any automatic knowledge. Can you explain just briefly for everyone what it even means to work with institutional clients on crypto custody and that part of it? When people are coming to you guys, what are the different questions they're asking and what is it they're looking for?

Glenn Barber: (07:40)
Sure. And I think this ties back into what we started the panel with, right? In terms of institutional adoption. I mean, I think one of the things that people that are getting into crypto or new to crypto don't realize are, that we have so many investor protections that have been layered into our systems in traditional finance, whether it's equities, bonds, fixed income, even over years, right? We've had calamities, we've had theft, we've had problems and, therefore new things are brought in. So we're talking about custody, clearing settlement, depository trust corporation, options clearing Corp, right? And really what I think people here really want to see is, "Okay, I'm familiar that if I have assets that I'm managing on behalf of other people, and I have a fiduciary responsibility, well, what is Mike Williams of State Street? Or Bank of New York? Or Citigroup? Or JP Morgan in custody?"

Glenn Barber: (08:31)
And that's what Copper and some of our other competitors and colleagues are, right? We are designed to provide safekeeping of assets, and each of us does it in a slightly different way, but the bottom line is that no one wants their assets that they're being managed on behalf of investors or LPs to go away and to get hacked, right? And so, crypto custody is very technical in nature. It involves military-grade security and technology, but the base layer value proposition is simply, "How do I make sure that if I'm going to buy digital assets, they're stored in a place where I really don't think they're going to leave?" Right? And I think that's part of the pipes and plumbing that a lot of people here would like to see and will have been being built over the last couple of years, to get them to a comfort level where they can explore further.

Daniel Roberts: (09:20)
And how much does the narrative play into it? Being from the media side, I know that a lot of people who still have stayed away from crypto, it's because it is an extremely narrative-driven, headline-driven space. When you talk about custody, you mentioned the fear of getting hacked, the fear of losing your investments. I mean, of course, and I think that there are a lot of people from the traditional investing world or traditional Wall Street types who, every so often they see a headline about either an exchange being hacked or the New York Times story a year ago about people who lost their keys, and so they can never access that Bitcoin. That went kind of viral, and I understand why. People see a headline and they say, "Wait a minute. You can just lose it? It's so unsafe." How do you guys combat those kinds of misconceptions? We kind of have the opportunity here today, maybe, to combat some of those misconceptions. When you're hearing from more conservative, cautious investors, is that the concern a lot of times is, "I could lose this stuff"?

Brett Tejpaul: (10:12)
Well, at least our approach to it is, it's like your own, which is to make it a fortress, an un-penetrable fortress that's never been hacked, which is where we're at. Custody for us is a foundational element for the prime platform. But you don't want to just buy an asset and have it sit there. You may want to finance it. You may want to stake it. You may want to do other things. And so in a similar way, we've built a platform to meet the rigorous due diligence requirements of institutional investors in the same way that they would undergo diligence of Goldman Sachs or JP Morgan or others. And so if you can put crypto and position it relative to other financial assets and evaluate its operational risks, security, and other elements of risk relative to financial assets, you'll find that, actually, crypto, in many cases, is more secure and it's at a step above.

Brian Brooks: (11:02)
Can I just jump in on this for a second? One of the things that we don't do a great job as a community in conveying to the world is, we're new so we seem risky. And we never asked the question risky compared to what, right? So think about the Equifax data breach, where all of your credit bureau information was leaked to a bunch of Russian hackers and sold. Okay? Or imagine the Target hack where all of your American Express numbers were sold on the dark web as a consequence of it.

Brian Brooks: (11:30)
When I was the controller, I fined two banks $140 million for cyber breaches on the main banking platform. When people talk about crypto, nobody talks about that because those risks, we believe, are the state of nature and we're new. We need to start talking more about the problems we're solving, right? Incrementally, there might be new risk, but on net, there's probably less risk, Brett, just as you say, and that's the story we don't do a great job of telling. So we let the incumbents win the narrative, even though the less risky option probably as a public back-to-back transparent blockchain.

Brett Tejpaul: (12:06)
Well said.

Jalak Jobanputra: (12:07)
Yeah. 100%. I'm just nodding because I'm a technology investor, and why I got into this sector was what was possible with the data security and the technology and the tokenization. And I am amazed all the time when I hear people talking about how they still believe you can't track these transactions. They don't understand the private public key cryptography and how that has kept the Bitcoin blockchain secure all along.

Jalak Jobanputra: (12:39)
And so there's just a lot of misunderstanding. And if you look at our healthcare data that's sold all over the dark web, that premiums, the credit card data. And a lot of this underlying technology can solve that and our assets. And if you believe everything's going to be tokenized and we're going to have hundreds and thousands of different crypto assets there that are tokenized and they can be kept secure. And we can say our healthcare data can be kept secure, and we can potentially trade with that data and make sure that it's secure and we can monetize it. And so it's a world I think a lot of people don't yet grasp. And I do think as an industry, we're coming along on all of that, and it's great to see the institutional adoption because a lot of these institutions do a lot of diligence before they invest and they see that.

Daniel Roberts: (13:37)
Brian, you said something interesting there about what problem is actually being solved. And a lot of the times, when I'm hearing from kind of crypto skeptics, that's what they ask is like, "Well, why do I need to own Bitcoin?" And in many ways the narratives have become, "Bitcoin digital gold, hold on to it as an investment."

Daniel Roberts: (13:54)
And then Brad, earlier you mentioned that firms increasingly want to do something with their investment, stake it, lend it out, make more money on it. You're really getting into DeFi, Decentralized Finance. And there are still, obviously, so many people who they're just at surface level, they're still starting to try to understand Bitcoin. And then you bring in Ethereum and staking and protocols and layer two and all this stuff. And your mind races. Long way of asking you guys, are you hearing from firms now that are also trying to get a one-on-one and understanding it's gone beyond just, "I think we're ready to buy some Bitcoin and we'd like you to custody it for us." Now it's become, "Well, how can we build on our investment and do more with it," right? But they need to learn about those tools.

Brett Tejpaul: (14:34)
Yeah. So the light bulb on moment for institutions, I think, is shining bright right now. And one thing I'll say is, it's not all about Bitcoin. And so the four buckets that I would put different inquiries into is direct investment, for sure. It could be Bitcoin plus others. About 75% of our institutional clients own more than just Bitcoin. And then of that lot that owns more, most own E and at least 25% of them own at least five cryptocurrencies. So direct investments, obviously, number one.

Brett Tejpaul: (15:07)
Number two is, institutions are thinking through business-to-business critical applications. So that's using coin basis pipes and plumbing to enable their end clients. So that's bucket two.

Brett Tejpaul: (15:18)
Bucket three is stable coins. And so that's going through stable coins and smart contracts and thinking through the utility function of crypto beyond and away from speculative investment.

Brett Tejpaul: (15:27)
And the last one is what I call Future of Finance, which is where I'll group in DeFi and NFTs. And so there's a whole surge of interest and enthusiasm from art, sports, everything in NFT, as you know right now. And so those are the four buckets that I put investor interest into.

Glenn Barber: (15:46)
And I think I'd like to add to that, right? And one thing I'd like to impress upon the audience is that, like Brad, I come from the traditional world, I've got 30 years global capital markets experience, and I want to come off as reasonable and understandable, right? So I'm going to say two things that I hope people can get their heads around.

Glenn Barber: (16:06)
Number one, I think people don't really understand quite yet how revolutionary blockchain technology is and how it's going to scale and make the world more efficient in several different industries that we're all aware of, whether it's transportation, real estate, logistics, finance, and the like.

Glenn Barber: (16:23)
And the second point I'd like to leave you guys with is that, make no mistake about it. Digital assets is the capital market's opportunity of the next generation, right? And I don't want this to come from someone like us on stage where it's just a bunch of crypto guys and girls trying to show their product. This is the new global economy being built as we speak as in investors and financial market participants, I believe in, and this might sound controversial, but I believe you owe it to yourself to do the research, to figure this out because the returns are going to be there. You're investing in the new world that's coming down the pipe, that's going to be run by the people that we consider our sons and daughters. And this is just the facts.

Brett Tejpaul: (17:11)
Yeah. Mic drop. Love it. We already have billions of tokenized assets in our inner custodian. And so I love walking around my neighborhood, which is full of traditional finance people and telling them we've just tokenized five different real estate buildings in the Houston area. And no one believes me. But yet to your point earlier, tokenization is certainly an enormous opportunity.

Jalak Jobanputra: (17:35)
And it's also the access. And if you think about broadening financial access, and I've been investing in FinTech for a while, I was born in Kenya, spent a lot of time in the emerging markets, and you think of how much of the world is excluded. First it was just banking, but being able to invest and save and lend. And we're seeing this happen with DeFi, where people can connect peer-to-peer, they can decide what their risk and reward profile is. And we're still not quite there 100% yet, but that will happen in the next five years.

Jalak Jobanputra: (18:10)
And then I view it as this is going to benefit all of us. Where you said, I started off on Wall Street before I was a tech investor and worked on the Netscape IPO in 1995. And so I've been watching technology evolution. And I think we're in 1996 internet, and in terms of where we are with crypto, the differences, because this is open-source technology and because we have the global connectivity, that the internet and mobile enabled, we're going to see much faster development than we saw in previous technology and with the internet. So this is like, "Get on this right now for that opportunity in the next five to 10 years."

Daniel Roberts: (18:56)
To Glenn's point about making sure that it's not just a panel of crypto people saying, "Hey, believe in crypto," decrypts, we are aggressively neutral. We cover the good, the bad, and the ugly in the industry. And I do think there's a little bit of, over the last few years, crypto panels or conferences or media, it's people who have fully bought in saying, "It's great. Come on in." And maybe what has changed recently is people who were cautious getting in. But I think it's a good segue to talk about the regulation side, because there's a little bit of the same thing where you have lawmakers who recognize, at the very least, this is a thing that is going to continue to exist. And for many of them they're saying, "So we need to regulate it."

Daniel Roberts: (19:33)
But first there's a learning curve and they need to understand it. It's what tech companies always say, "Well, first let us teach you about how our tech works. Then you can regulate us." And I just want to get, all of you, let's not square them too much, but in terms of regulation, what do these companies do when you have a, uncertain at times, opaque framework? And basically you're hearing, "We're going to regulate business, but we're still not quite sure how we want to regulate it." We could start with Brian, who's obviously been there and done it.

Brian Brooks: (20:02)
I mean, my first advice to you is, don't go work in a regulatory agency and live this life. That would be my first advice. But one of the things we have to get a grip on in this country is what activity should be regulated. So it's a weird question. "Hey, you're doing something. Show me what regulation you're compliant with." Imagine that you were starting a lemonade stand or a clothing business or a fashion design house or any number of other things. The first question would never be, "Show me how you're regulated." But it kind of is nowadays. You hear stories of kids' lemonade stands being shut down by the local health authorities because they don't have a permit. There's a weird cultural thing going on. So I think I don't start with the regulation. I start with, "What is the activity that we're doing here and what aspects of it ought to be regulated?"

Brian Brooks: (20:48)
And I don't start with the assumption that everything that's happening in crypto land ought to be subject to banking or securities regulation. And the reason is because most banking and securities regulation is about individual human issues. It could be about human negligence. It could be about self-dealing. It could be about fraud. It could be about discrimination. But if you go through the US code and look at all of the American financial regulations, the significant majority of it is about the people who work at the bank. And here's sort of a mission statement about crypto. There are no people there's only code, right? That's why the mission of crypto is to say it in code we trust. We're taking all of the discretion and the negligence and the fraud and the self-dealing out of the equation. And what's left is a need to make sure that there's basic disclosure, to make sure that losses are compensated, and things like that, hacking and cyber standards, that sort of thing.

Brian Brooks: (21:42)
I don't think we have a consensus on this in this country right now. And if you just look at yesterday's hearing in the Senate Banking Committee and the way that Gary Gensler was treated by the Democrats versus the Republicans, you could see that there's a fundamental chasm between the Democrats who believe every activity that involves value should be subject to securities regulation, and the Republicans who were asking, "Well, why don't we understand what this is and figure out if there is a regulatory regime that makes any sense?" I'll just end with Balaji Srinivasan's comment that I always quote, which is, "When the YouTube people founded YouTube, did anybody think they should get a broadcast television license? I don't think so."

Daniel Roberts: (22:22)
Brett from Coinbase's perch, we have a recent news peg to ask about this, which is of course, Brian Armstrong, your CEO tweeting out the news that the SEC had basically indicated that if you launch this upcoming high yield lend product, we're going to have an issue there. How are you guys approaching and dealing with the different regulatory indicators?

Brett Tejpaul: (22:41)
I'll let Brian's comments stand for themselves. I suppose my perspective is informed by the fact that I worked 25 years within the context of investment banking. And as a pragmatist, I assume that at some point, these are my personal views of those of Coinbase, but I assume that there'll be some form of regulatory regime. So when I was at Barclays and JP, I ran global businesses and we had to meet the regulatory requirements across every country in which we operated. And so I hope we'll get to the right place on the balance of regulation. And I assume that we'll be compliant as Brian opted early in the Foundation of Coinbase to opt into regulation, to actually avoid and try and control some of the self-regulation and bad behavior that might otherwise be there if you hadn't made that election. [inaudible 00:23:31]

Glenn Barber: (23:31)
The way I look at it, I think there's a lot of news articles out there, and there's a lot of varying positions. Look, let's face it. We're a fractured country at this point, right? The way that I look at some of these things is that we have an opportunity to either do something that's going to affect the future and maintain what could be a very significant competitive advantage in terms of financing and the way that we do things with technology, or we're going to lose it, right?

Glenn Barber: (23:57)
Because the one thing that a lot of people that are citizens of a particular nation state, for example, whether it's United States, China, somewhere in Europe, don't really think about a lot, is that this is a global border-less, permission-less ecosystem. And that the United States wants to take its time or do something silly because the politicians that are way too old to be native and understand this technology for it to make sense to them, if they're going to screw around with it, well, there are countries that are not going to screw around with it. So it will simply migrate to Switzerland or Japan or Australia or the UK or anyone that has a favorable regulatory environment that says, "We're not going to be silly about this," right? And it's like that ball that you squish and it shoots out in different areas. That's going to be the way the world develops, right? And not enough people pay attention to this because this is a unique asset class that started globally in nature without sort of morphing from some domicile that we're all kind of familiar with.

Daniel Roberts: (25:00)
And it goes back, Jalak, to your point about investing globally.

Jalak Jobanputra: (25:04)
Yep.

Daniel Roberts: (25:05)
Is that causing a shift in terms of, maybe, the best areas for investment growth are outside the US if regulation is going to look unfriendly?

Jalak Jobanputra: (25:12)
Yeah. And that's right from the get-go. So it also goes into this whole ethos of what the technology is about is decentralization. So we've never believed that there's one place that is going to dominate. And I also believe that the emerging markets are going to be places where we're going to see some of the most interesting business models, because we don't have the legacy infrastructure within finance and financial assets. People want access to real estate, and just like you can buy $5 worth of Bitcoin. You can maybe buy $5 of the coffee shop down the street from you and share on the revenue. And that's something that just seems foreign to people that are used to abundance and used to having access. And so I think the US really suffers from an incumbent problem, which, frankly, a lot of Wall Street did for many years around this technology.

Jalak Jobanputra: (26:14)
And this has happened with the internet, right? I mean, the blockbuster story. Did anyone actually think that we were going to be watching videos at home streaming? And so I think these business models are going to emerge. They're going to emerge very quickly. They are emerging very quickly. And there are a lot of regions around the world, India is an example. We've invested quite a bit in India. They basically shut down the crypto sector for several years. My view was that they're always just trying to fit similar to China, trying to figure out how they're going to regulate the sector or how they're going to get involved in it. MADEC. We have amazing entrepreneurs coming out of India right now. And they all just went underground, built to be a peer-to-peer technology. And the government realizes they can't stop that. And so the US should realize that soon that they're not going to be able to stop this. If we want to keep talent here, we want to keep innovation here, they're going to have to be a friendly environment.

Daniel Roberts: (27:22)
Love blockbuster.

Brett Tejpaul: (27:23)
Well, if we let this thread run too long, I think it would give the audience the wrong impression that it's a massive binding constraint. And so, one of the things I want to call out is for our institutional platform, since we set it up in mind with being compliant, being regulated and adhering to KYC and AML, we route to 12 different venues, all of whom uphold KYC and AML. And so while the crypto landscape is huge and stretches across geographies and to unregulated spaces, at least the business that we've set up is purposeful to operate within a subset of it where we think that we can conduct business safely.

Daniel Roberts: (28:04)
Well, and I want it to end on asking you guys, and I feel like you did this and Glenn, you talked about this too, but just real quick in the couple of minutes we have left, what are the biggest misconceptions that you hear from either peers in tech or investing that haven't gotten into crypto or potential customers or clients who've come to you? From your time at Binance, Ryan, what have you heard that you think are the most common misconceptions you're often battling? It might be a useful thing for, for this audience.

Brian Brooks: (28:29)
Yeah, well look, one thing that I've heard people, both when I worked at Coinbase, when I worked at Binance, and when I was the regulator, was the idea that, "If I'm touching crypto, I can't get access to the traditional financial system. A bank won't bank me if I'm touching crypto or whatever." One of the things I tried to do in my time in government was to make clear that these are investible assets, that banks can participate in payment systems that are built on blockchain, the same as payment systems that aren't, it's fully safe for the traditional financial system to interact with us. And they now are at some amount of scale. So I'm very proud of that.

Daniel Roberts: (28:58)
Jalak?

Jalak Jobanputra: (29:02)
Well, I think there's still a misconception that this sector is full of money launderers and people who have nefarious kind of objectives in mind. And we've moved so far beyond that. And actually, Satoshi, everyone that I got to know in the sector in 2013, and ...

Daniel Roberts: (29:21)
Wait, you knew Satoshi?

Jalak Jobanputra: (29:21)
What?

Daniel Roberts: (29:22)
You knew Satoshi?

Jalak Jobanputra: (29:25)
No. I misspoke on that one. But Satoshi started Bitcoin out of this desire to give people self-sovereignty. And that is the ethos of most of the people, and it's not necessarily nefarious. And a lot of these people care about giving broader financial access and so many people have lost their livelihoods over government policy. And I think the majority of people involved in this sector just care about, first of all, taking advantage of this opportunity that we have. I think, for me, it's a second in a lifetime opportunity next to the internet, but a once in a lifetime opportunity to really make an impact on the world.

Daniel Roberts: (30:24)
Okay, awesome.

Glenn Barber: (30:27)
Can I run this out in 10 seconds or less?

Daniel Roberts: (30:27)
What's that?

Glenn Barber: (30:27)
Can I round it out in 10 seconds or less, hopefully?

Daniel Roberts: (30:29)
Please.

Glenn Barber: (30:29)
One of the biggest misconceptions that I find, and it's not necessarily a misconception, but I think it's just the nascent state of the industry and the investment process. And I'll make a really poor analogy that Jalak alluded to earlier. I think most people look at cryptocurrencies in particular, as sort of this bifurcation, it's either going to zero or it's going to a million something, right?

Daniel Roberts: (30:50)
Yep.

Glenn Barber: (30:50)
It's either the moon or bust. And what people don't really pay enough attention to, or don't know enough about yet, is that it's really about the underlying blockchain protocol, right? The really bad analogy is that it's not. There is value transfer, right? If you think of the blockchain protocol as the new evolution of a company, and you think of the digital currency as the new evolution of the equity, there's no one-to-one correlation in that analogy, and it doesn't hold as much water as we would all like it to, but it's an easier way for people in this room, I think, to get their heads around.

Glenn Barber: (31:23)
And once you start thinking of that, I'll speak frankly, if the blockchain protocol sucks, it's not going to recruit value into the digital currency that it runs on, right? And it's going to go away or become obsolete. And it's going to go the way of pets.com. But we are going to see in five to 10 years, things that resemble Amazon, Facebook, and Tesla from blockchain technology that are going to sit alongside these very same companies. And it's going to be awesome to see, but it's hard to imagine right now.

Daniel Roberts: (31:54)
Wow. Very bullish. Thank you so much to the four of you. I wish we could talk longer. I hope everyone enjoyed. A lot of great knowledge from these four. And we'll talk again soon at some other conference, I hope.

Guest User

October 2, 2021

SALT NY: Digital Assets

Crypto Regulation: Present & Future | #SALTNY

Guest User

October 2, 2021

SALT NY: Digital Assets

Crypto Regulation: Present & Future with Sydney Schaub, Chief Legal Officer, Gemini. Ryne Miller, General Counsel, FTX US. Zach Dexter, Chief Executive Officer & Co-Founder, LedgerX.

Moderated by Robert Hackett, Senior Writer & Tech Editor, Fortune.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Sydney Schaub

Chief Legal Officer

Gemini

FULL BIO

Ryne Miller

General Counsel

FTX US

FULL BIO

Zach Dexter

Chief Executive Officer & Co-Founder

LedgerX

FULL BIO

MODERATOR

Robert Hackett

Senior Writer & Tech Editor

Fortune

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Robert Hackett: (00:07)
Hi, everybody. I'm Robert Hackett, a senior writer and tech editor at Fortune. And today, we're going to talk about crypto regulations with our esteemed panelists here. It seems lately, like there's been a bit of an unfriendly turn, especially here in the US. A lot of regulators are getting a little bit more aggressive about regulation, or at least talking more about it, that things are going to come and some things are not going to fly.

Robert Hackett: (00:31)
The recent news, I think that everybody really caught, was Coinbase getting told by the SEC that they would get sued if they launched a high yield product for crypto lending. So Sydney, as somebody at a rival exchange at Gemini, which offers a lending product that gives people yield for lending out their crypto, what was your reaction to the Coinbase news?

Sydney Schaub: (00:58)
Well, first of all, thanks so much to Salt for having me here. And it's great to chat with Ryan and Zach and Robert, about these timely issues. There's always a lot going on in crypto, but it feels like at this moment in the regulatory space, there is really a lot going on. And obviously, we are aware of the Coinbase dustup with the SEC, and we're following that. I'll say, as a general matter, there's two things. There are a lot of crypto yield products out there, and they're all different.

Sydney Schaub: (01:33)
So Gemini does have a crypto yield product as well. Many other players in the space have products, and they vary wildly. And Coinbase's product is if you've seen the news about them recently, is not live yet. So it's hard to make any kind of comparisons. But I'm not surprised to see these things happen, because crypto is so new that there aren't always perfect analogies or perfect fit between the new products that we all want to offer, and the existing landscape that's applicable to more established products and financial assets.

Sydney Schaub: (02:11)
So you do sometimes see these things happen. And of course, it's our view as Gemini and many other of our peers who are actually seeking regulation, that it's better to make regulation through a dialog with regulators, as opposed to through enforcement. And it's unfortunate when you see those dialogues break down. So obviously, it's on our radar. It's something that we notice. And it's something that we're cognizant of.

Sydney Schaub: (02:36)
And I think it's hard to imagine it now, but thinking back even just a couple years ago there, wasn't the kind of trust in the asset class that you see now. Bulge bracket banks weren't looking to offer their customers exposure to it. So I think we and Coinbase, and many of our peers, actually do want a regulatory landscape to be applicable. They want clarity, they want trust. And that's what we're all going for at the end of the day.

Robert Hackett: (03:05)
Did Gemini reach out to regulators in the wake of Coinbase, what they revealed about their discussions with the SEC? Are you having these conversations as well? And what's coming out of them?

Sydney Schaub: (03:18)
I wouldn't say so much in the wake of Coinbase, of what's happening with Coinbase. We're sort of always talking to regulators because one of the things that is somewhat unique about Gemini is that we are a DFS, New York Department of Financial Services regulated trust company. And there's a lot of talk about how regulators, including in this instance, the SEC, from Coinbase's perspective, are obstructionist and they don't get it, and they're slow.

Sydney Schaub: (03:47)
And there's a lot of frustration. And we experience that from time to time as well. And we get that. But the DFS has been our regulator since we launched in 2015. They really blaze the trail in terms of crypto regulation, and they dove in and got it right away, and actually applied one of the oldest structures that are applicable to financial assets, which is the trust company charter, to one of the newest innovations, which is crypto.

Sydney Schaub: (04:19)
And that was back in 2015, and was the precursor to the BitLicense that a lot of people love to hate because it's hard to get them. But we've been really happy with our dialogue with the innovation team at DFS. And that is a dialogue that we have to have with respect to every product that we offer out of our exchange in custody business, which is DFS regulated. That's ongoing, no matter what else is happening in the landscape.

Robert Hackett: (04:45)
I figure I should ask. Is Gemini's high yield lending product, a security?

Sydney Schaub: (04:49)
No, it's our position that it is not.

Robert Hackett: (04:51)
I had a feeling that you would say that.

Sydney Schaub: (04:53)
But thank you for asking.

Robert Hackett: (04:55)
Sure. Ryan, tell us about FTX US. You are sort of related to FTX, the global exchange, but you are particularly focused on the US market, which has a host of its own regulatory requirements. What are the differences between that global operation and what you need to do to craft something for the US market?

Ryne Miller: (05:18)
Sure. Yeah, it's a great question, one we get a lot. So under Sam Bankman-Fried, I think he spoke earlier this morning, he is the majority owner of a business called FTX.com, and also a business called FTX US, that we run under the brand FTX US. I'm the general counsel of FTX US. So, speaking for that entity. A big part of the market, globally, for the crypto space is derivative.

Ryne Miller: (05:42)
And that can be a margin product, that can be options, that can be futures, but a big part of the global demand is derivatives. And there's a handful of exchanges not in the United States that have offered those products. FTX.com is one of those. As Sam saw that business grow, he kept looking over his shoulder and saying, "The US market's there. It would be great to have a presence."

Ryne Miller: (06:03)
He's from the US. I think a lot of his leadership team had experience here. And he said, "Let's build a US business." And the one product that you could launch by partnering with some trust companies, by working with different regulators and licenses on the money transmitters side, was a spot cryptocurrency exchange. So FTX US today, is a spot cryptocurrency exchange. We have an NFT marketplace, and then we have ambitions.

Ryne Miller: (06:26)
And we've talked to the CFTC a lot about this, of getting into derivatives in the United States, for US users. And so I think that's probably the two things you think of us, FTX US spot exchange, FTX.com, derivatives exchange, not available in the us.

Robert Hackett: (06:42)
And this is probably a good segue to hear from Zach, whose company that you are purchasing.

Ryne Miller: (06:48)
Sure, I'll let Zach introduce that.

Zach Dexter: (06:50)
Yeah, sure. So I'm CEO of LedgerX. We are a commodity futures trading, commission-regulated clearinghouse and exchange, which means we have the necessary federal licenses to offer derivative products on cryptocurrencies that are considered commodities, like Bitcoin and Ethereum.

Zach Dexter: (07:08)
We've been operational since 2017. We offer future swaps and options on Bitcoin and on Eth now, and convenient one 100th contract sizes. And we're very excited to be working with FTX US to take everything to the next level.

Ryne Miller: (07:25)
Yeah, a little color on that. So we announced, I don't know if it was a week or two or three weeks ago, but we've agreed to acquire LedgerX. They'll be under the FTX US structure. And we've talked with the CFTC about this. They've been encouraging and supportive. Their real goal is engagement and dialogue.

Ryne Miller: (07:41)
And both with our team and with Zach's team together, we've done a lot of that with the CFTC and a handful of other regulators. But there are some closing conditions to sort out. And hopefully, by some time in October, we can say that transaction is closed and done, and moving forward.

Robert Hackett: (07:57)
And at that point in time, people will be able to trade derivatives on FTX US?

Ryne Miller: (08:02)
Well, they'll be able to trade as they are today, futures and options on LedgerX. LedgerX will be an FTX US company. Whether it's someday called the FTX Derivatives Exchange, who knows? Smarter people than me will make those marketing decisions.

Robert Hackett: (08:16)
Got it. How has the uptick in usage been since your big commercial? You had Tom Brady feature in an FTX US commercial, getting people's attention.

Ryne Miller: (08:26)
Well, my mom texted me when she saw the commercial with Tom Brady that said he's on the FTX team. And she said, "Where do you work again? It seems interesting." So it was a hugely positive reaction. It was a national audience.

Ryne Miller: (08:38)
There were some commercials that played during the week's NFL games. Anyway, Tom Brady is one of our endorsers. He's been hugely enthusiastic with his wife, and we're proud to be able to partner with him to reach potential users of our business.

Robert Hackett: (08:51)
Excellent. Zach, tell me a little bit about the outlook for derivatives in the US. It seems like it's caught on slower here than it has abroad. There were some businesses that Ryan mentioned that were big on options trading, one of them, the hammer came down on, BitMEX.

Robert Hackett: (09:09)
The founders got indicted for some funny business that they were up to. And FTX filled in the gap and got a lot of customers after they fell by the wayside. Why has it been so much slower going in the US than it has been abroad?

Zach Dexter: (09:24)
I think it just takes a while to get through the registration process as a clearinghouse, as an exchange. And here in the US, because of the split regulatory regime between the SEC and the CFTC, there's been a lot of attention paid to just getting the spot businesses up and running. Most people have started there. We actually decided to start on the derivative side, but the registration process for a clearinghouse, for an exchange de novo, can take four to five years.

Zach Dexter: (09:49)
So it is an intensive process. And for that reason, I think just because of how new crypto is, that's how long it's taken. And it's as simple as that. But that doesn't mean that it's on a constructive regime to work under. I think it's extremely constructive. And if you approach the regulators, you register, you fill out the paperwork, you walk them through what you're doing, it can make a lot of sense for people to enter the US derivatives spaces.

Robert Hackett: (10:14)
What is the biggest change you would make to the US regulatory regime right now?

Zach Dexter: (10:21)
I think the biggest change should come from the industry side, actually. The framework is there. The CFTC has a website where you can see the forms for registering for any kind of derivatives activity that you want to engage in. And the response from the industry to date has been somewhat tepid. There hasn't been a lot of registration, frankly, over the years. And I think I'd like to see more of that.

Zach Dexter: (10:42)
And the more engagement there is from the industry, the more walking in the front door there is. As opposed to trying to seek no action relief or get around the regime, I think the more we'll see from the regulators in terms of a positive response to innovation. But I think it's the responsibility of the crypto industry to approach them constructively and through the front door.

Robert Hackett: (11:03)
Although I think it might depend, because Coinbase certainly seemed to try this, at least in the telling of their CEO, Brian Armstrong. He said they knocked on the door, tried to do everything by the book, and they sort of got slapped as a result. So I wonder whether that is the right approach, asking for permission, and whether people will be received warmly.

Ryne Miller: (11:26)
I've been with FTX almost two months, so I'm a legacy employee at this point. But we've found the regulators receptive to meetings, all the way up to the top of the SEC and the top of the CFTC. They're going to give you those meetings, and across the state regulators, too. They want to hear what you're doing. They want to hear what your plans are. They've had very thoughtful questions.

Ryne Miller: (11:48)
They've done their homework on I think, all the businesses in this space that have notable profiles. And what they don't always do is say, "Here is a clean and clear, unambiguous path to what you want to do." And that's not their job. And it's not their job to give you the legal counsel and to create a strategic plan that works for you and them.

Ryne Miller: (12:08)
And it really is an engagement. And sometimes it takes longer, I think Sydney alluded to this, than just one meeting, answer, go forward. And that can be frustrating. And I think what we've seen in some of the recent posting is folks, you get tired, you get frustrated. And you try to ... let's push another way and see if that has a different result to be seen.

Sydney Schaub: (12:29)
Yeah, I agree with that. Obviously, it's been a long road, and a longer road with some regulators than others. I think that the CFTC has been much faster to weigh in and offer guidance and thoughts, as Zach mentioned. And obviously DFS, a success story there. I think there's been some criticism of the SEC, not only recently by Coinbase, but going back prior to that, that they were a little bit slow under the prior chairman to take a position on crypto. I think that there were some regulators and some industry players, financial industry players who didn't think that crypto was real.

Sydney Schaub: (13:13)
And if you think back, I remember we were talking before the panel again, a bit just about how much more legitimate crypto has become, and how much more regulators have started to pay attention to it. Even when I started at Gemini, which was almost three years ago, the notion that the Treasury, that Janet Yellen would be paying attention to crypto and putting out a statement and thinking about stable coins ...

Sydney Schaub: (13:38)
Gemini launched our stable coin, the Gemini dollar, through our DFS regulated entity in 2018. And the notion that Treasury would be thinking about or caring about this technology, that seemed improbable at the time. And so much has changed. So I think there is a learning curve for all of us to come up, and regulators are no exception to that. And different agencies vary in terms of their response to the crypto industry. And it depends on the personalities, who's there, whether they're curious about it, whether they're open to it, and what else is on their plate.

Robert Hackett: (14:17)
Now, you mentioned stable coin, so I want to just double click on that for a second, because the Fed is obviously very interested in looking at digital currency initiatives.

Robert Hackett: (14:25)
They are kind of doing a survey of the space and trying to understand whether there's a place for the government itself to offer a stable coin of the US dollar. What is your best estimation of how that's all going to shake out, and whether Gemini dollar can exist in that world, where maybe there is a sort of Fed coin?

Sydney Schaub: (14:46)
Yeah, I wish I knew the timeline. I think there's a lot of speculation and questions around the timeline. It is clear that the Fed and many other regulators are looking at this. And it's again, gotten too big to ignore. I think this is an incredible proof point for the technology, that the notion of a central bank digital currency is a real, legitimate notion.

Sydney Schaub: (15:15)
And that a number of governments, not just the US, obviously China and others are looking at it. It's again, an incredible proof point for blockchain technology. It's our understanding that the president's working group, which is made up of a whole host of federal regulators, has been looking at this. They've been engaging with the industry.

Sydney Schaub: (15:37)
And that they're planning to release a white paper. Again, no real sense of the timing there. And it'll be interesting to see what it says, and what regulators do to actually promulgate any kind of regulation around that.

Robert Hackett: (15:54)
Are you speaking with the Fed members about that? Are they canvasing private industry for-

Sydney Schaub: (15:58)
Whenever anyone reaches out to industry players for our thoughts, we always respond.

Robert Hackett: (16:03)
Got it. By the way, I want to make it known also that I'm going to open up the floor to questions in a little bit. So we will reserve time. If anybody in the audience has something they want to ask, you can start thinking about that now.

Ryne Miller: (16:18)
You're already quitting being the moderator?

Robert Hackett: (16:20)
I am, yeah.

Ryne Miller: (16:20)
You just started.

Robert Hackett: (16:20)
No, I'm bailing.

Ryne Miller: (16:22)
Okay.

Robert Hackett: (16:23)
Ryan, I'd like to get your view on this as well, because I asked Zach. What is the biggest thing you would change in the US regulatory regime, as it relates to crypto?

Ryne Miller: (16:35)
Yeah, it's a good question. I think I'm tempted to say it would be awesome to have a single federal source to go and get your crypto regulatory stack, as opposed to, let's say navigating a 50-state maze and other territories, et cetera. But I'm not sure that's where I want on a land.

Ryne Miller: (16:54)
I think I want some clear policy priorities from regulators, and they've given us these in many senses, and then an ability to engage towards a solution that meet those policy priorities, even if they don't fit inside of the technology that regulation was designed for many years ago.

Ryne Miller: (17:12)
And so customer protection, transparency, risk management, if you can show up with really strong faith, not just good faith, really strong faith products that meet customer protection, investor protection, transparency, disclosures, then let's find a path to get that to the market. Particularly when you've got this non-US market that's become super competitive for US investor dollars, US institutional investors, let's acknowledge it.

Ryne Miller: (17:38)
Maybe it's at the federal level. Maybe it's federal and state partnerships really engaging on this, but I think it's being open to new products that we all admit on day one don't fit inside of our traditional regulatory structure. And Zach mentioned the laws are already there. I think they pretty much are. Certainly, the principles behind the different policy goals that we want to see pursued, are there. So let's use the regulation and legislation we have.

Ryne Miller: (18:03)
If there's new legislation, great. Let's not overdo it. But I think just a real encouragement, maybe it's a sandbox, or maybe it's a movement towards a sandbox, and say, "If you've got a really strong faith product that meets our policy priorities, we're going to get that to market." That's a big ask, but I think that's the idea.

Robert Hackett: (18:20)
And this single front door you've described, is this a new governmental entity, or is this an existing one, a partnership across various ones? It seems like the SEC would like to be that place. And Gary Gensler is certainly positioning the agency in that way.

Ryne Miller: (18:34)
So look, the banking regulators are prudential regulators. They care about systemic risk. The prudential safety and soundness of the financial institutions that we authorize provide those services to users. And then the CFTC is a markets regulator. They care about integrity of markets, efficiency of markets. And the SEC is sort of investor protection and disclosure and capital formation.

Ryne Miller: (18:56)
So, do we need a new regulatory body to come up besides those? Probably not. But I think what you're seeing in Treasury and FinCEN, I'm sorry, Treasury and FSOC is an ability to bring those regulators together and maybe figure out ... You don't see a lot of partnership among regulators for new regulatory programs, but something like a partnership with our existing regulators where they're working together and say, "This can work."

Ryne Miller: (19:21)
And a lot of it does depend on the products itself. So investment products, you're thinking CFTC or SEC. But as you get more towards traditional banking products, I think it's fair for the bank regulators to have an interest. So it's maybe not one single front door, but the ability to have the regulators partner on regulating those entities or products.

Robert Hackett: (19:41)
Got it. Before we open the floor to some questions, I want to ask Sydney the same question. What's the number one policy proposal you'd push through, or something you would change about the current regulatory regime?

Sydney Schaub: (19:53)
Yeah, I was thinking about that as Zach and Ryan were responding to the question. And I think that it is really challenging, given how many different regulators have an interest in crypto. Ryan went through some of them, and there's also the sanctions in money laundering, know-your-custom component that FinCEN brings to the table.

Sydney Schaub: (20:14)
So between markets and prudential regulation around safety and soundness, and consumer protection disclosures, and market surveillance, et cetera, that's just the way that the US system has grown up over the years, for better or worse. You have a number of different constituents that potentially have a perspective on the asset class.

Sydney Schaub: (20:38)
And again, Gemini has been fortunate to work with DFS, that brings all of those things to bear from the state perspective. And because we're in a federalist system, you have 50 states that have the ability to regulate as well. And then the Feds can come in and there's preemption, but only in part. And so it's a complex a host of folks.

Sydney Schaub: (21:03)
We again, have been by and large, very happy with our relationship with the DFS and with the innovation team there. I think to the extent that federal regulators could take that perspective, and as Ryan suggested, perhaps come together, and as Zach suggested, there's perhaps an opportunity for some self-regulation among industry, to come together.

Sydney Schaub: (21:28)
And obviously, FINRA came out of that spirit in the securities industry. So I think that there's a potential for some self-regulation for the like-minded crypto companies that do want to continue to foster a sense of security, safety, and trust in the asset class.

Robert Hackett: (21:46)
That's something that Tyler and Cameron, the founders of Gemini have been pushing for a while now, to have a self-regulatory body. How has the progress been on that initiative?

Sydney Schaub: (21:56)
That's right. We have long been in favor of self-regulation and for a level playing field with respect to that, actually a statutory mandate around a self-regulatory organization. I think people differ about whether the CFTC in particular, has the statutory authority to mandate an SRO. I think that from a principal's perspective, we continue to believe it.

Sydney Schaub: (22:22)
And actually, since those conversations, and I believe it was 2018, there has been a great example of industry coming together, not as an SRO per se, but the US Travel Rule Working Group, which has now been renamed Trust, is an industry consortium of which Gemini is a part, Coinbase and others, is creating a technological solution to the travel rule.

Sydney Schaub: (22:49)
Which not to go into too much detail and have everyone's eyes glaze over, there's a rule in the traditional banking industry that certain information has to be transmitted along with certain transactions. FATF and FinCEN have mandated that with respect to certain crypto transactions from a technical standpoint, just because of how crypto works.

Sydney Schaub: (23:11)
It's very challenging to implement that, but industry has come together to think it through and to bring expertise to bear on how the government's legitimate interest in anti money laundering and protecting the ecosystem can be applied to this novel technology.

Robert Hackett: (23:33)
Excellent. So let's toss it over to the audience for questions at this point. We've got a little over five minutes left. I see one in the back. We'll start with you. Yeah. Oh, and please give your name and title.

Speaker 5: (23:48)
[inaudible 00:23:48].

Ryne Miller: (23:55)
You just yell. Yell very [crosstalk 00:23:57].

Robert Hackett: (23:57)
We can hear you.

Speaker 5: (23:59)
[inaudible 00:23:59] My question, from the legal [inaudible 00:24:11].

Robert Hackett: (24:21)
Okay. So the question is, with the software upgrades and changes to the Ethereum network that have recently been passed and are still to come, is that going to affect the classification of Ether? Before, there was an SEC advisor who had suggested that it was decentralized enough not to be a security, but could these changes affect Ether's status?

Ryne Miller: (24:45)
I think Bill Hinman, the former Director of the Division of Corporation Finance said directly that transactions involving Ether were not securities transactions. And I think he came out the right way there. In fact, I'm sure he did. The background to me is, who knows?

Ryne Miller: (25:01)
Who knows what tokens are or are not going to become a security? I think the SEC has done a decent job trying to show us at least their thought process. We've got the framework. We've got the Howey Test. We've got the Dow Report. I think all of those things give counsel a lot of tools to do the analysis and come to reasoned views.

Ryne Miller: (25:22)
I think without jumping on Eth 2.0 and what the new analysis is, if it's more or less decentralized than it was before, we do know that the SEC cares about decentralization. And to me, it's important that they gave that guidance. And I think it's helpful. I don't know, Sydney, if you have thoughts past that.

Sydney Schaub: (25:38)
Yeah. The changes to Eth 2.0 and how exactly they will come out, and what exactly the chain will look like and the ecosystem will look like, I think it's TBD. And Ryan is right, that there has been some guidance in Bill Hinman. Obviously, not so much an official guidance, but in creatively titled speeches and through the FinHub, which has been a very helpful source of information from the SEC around how we should think about token taxonomy and whether or not a crypto token constitutes security.

Sydney Schaub: (26:14)
There has been some guidance there. Exactly how Gensler and his SEC will apply that and change that and augment that, and particularly with respect to the specific changes in Eth 2.0, I think that's a little bit beyond the scope of this panel. But I generally agree with Ryan's comments here, of course.

Robert Hackett: (26:37)
Excellent. Thanks for your question. Over here. I don't know if our microphones are working.

Rhonda: (26:42)
Hi, I'm Rhonda. I am running a [inaudible 00:26:43] school for the underserved and to get the message to persons who are not in the room. So a question for when earlier Sam mentioned three jurisdictions that you had approval, regulatory approval in. You mentioned Bahamas, Gibraltar, US. Are those the three? And what can you do in those countries? Thank you.

Ryne Miller: (27:10)
Yeah, it's a good question. So remember at the beginning, we've got the FTX US business, which is a US focused business right now. And then in the US, we do the spot cryptocurrency exchange, and through LedgerX, futures and options down on the road. LedgerX is doing those now. FTX.com is looking at several different jurisdictions globally, two of which are The Bahamas and Gibraltar.

Ryne Miller: (27:33)
And they have different licensing regimes there that have been open for us to explore. And I think that's the path we're going down, both in The Bahamas and Gibraltar. What we're able to do with those licenses, it's dependent on different jurisdictions, how they structure their derivatives industry. But part of our derivatives business will be there's.

Robert Hackett: (27:54)
We've got a question right here. We've got a mic coming.

Mitchell Dong: (28:04)
Hi, I'm Mitchell Dong. Pythagoras' crypto hedge fun. So Gary Gensler is thinking about going to Congress to get spot exchanges regulated. And obviously, the CFT is already regulating derivative exchanges. In Asia, like Huobi, Binance, OKEx, they're unregulated exchanges with both spot and futures, which some of us traders find very convenient.

Mitchell Dong: (28:31)
It's going to be kind of funny or awkward to have spot exchanges regulated by the CFTC. I mean, excuse me, SEC, and derivatives by the CFTC. How do you think you're going to sort that out?

Ryne Miller: (28:44)
I have so many thoughts on this.

Robert Hackett: (28:45)
Well, we've only got one minute left.

Ryne Miller: (28:47)
It's the time. Yeah. Look, there are a handful of provisions in both the SEC's statutory authorities and the CFTC's, that if they jointly decided to go after any financial products set out there, I think they could create a regime where they partnered together and had some credible jurisdiction over that. And so I think there's at least an intellectual path for spot exchanges to find a spot somewhere between CFTC and SEC regulation.

Ryne Miller: (29:18)
As you know, today, all the CFTC gets is fraud or manipulation authority over the spot exchange itself. And then they've got the clear regulatory authority over the derivatives. I don't see the SEC's clear or direct path to the spot exchanges right now, but I think if they're willing to partner with the CFTC, who's got that fraud and manipulation authority, and potentially do some exemptive-based language where both sides preserve some ability to be involved, you could have a path for some federal regulation.

Ryne Miller: (29:46)
The question is, does it solve for any of the 50 states? And if not, then it's just another layer on top of it. But if you got there, if you got an SEC CFTC partnership over spot, then you could probably have a much more direct relationship between the spot and derivatives markets, which would be a good outcome for US traders, I think.

Robert Hackett: (30:05)
Well, that is all the time we have. I hope that everybody took something away from that conversation. There's certainly no shortage of things to discuss when it comes to regulation, as it applies to crypto. Sydney, Ryan, Zach, thank you so much for being here. And thanks for your time, people.

Ryne Miller: (30:18)
Yeah.

Guest User

September 30, 2021

SALT NY: Digital Assets

How Crypto Changes Everything: The Future of Finance & Culture | #SALTNY

Guest User

September 30, 2021

SALT NY: Digital Assets

How Crypto Changes Everything: The Future of Finance & Culture with Sam Bankman-Fried, Chief Executive Officer, FTX. Kevin O’Leary, Founder, WonderFi. Anatoly Yakovenko, Founder & Chief Executive Officer, Solana. Jeremy Allaire, Co-Founder, Chairman & Chief Executive Officer, Circle.

Moderated by Kristin Smith, Executive Director, Blockchain Association.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Sam Bankman-Fried

Chief Executive Officer
*FTX*

FULL BIO

Kevin O'Leary

Chairman

O’Leary Ventures

FULL BIO

Anatoly Yakovenko

Founder & Chief Executive Officer

Solana

FULL BIO

Jeremy Allaire

Co-Founder, Chairman & CEO

Circle

FULL BIO

MODERATOR

Kristin Smith

Executive Director

Blockchain Association

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Kristin Smith: (00:07)
All right. Well, good morning everyone. We have a fantastic panel here this morning. I feel like any one of these speakers could be a keynote at an event like this, so really honored to have them all on stage together. So we have a very bold topic, How Crypto Changes Everything: The Future of Finance & Culture. I think for those of us who work in the crypto industry, we really do see on the horizon that crypto networks and the tokens involved with them are incredibly powerful and are going to change the way we do so many things. Not just finance. So very excited about the discussion today. Real quickly, I'd like to introduce everybody then we'll dive right in. I'm Kristin Smith, I'm the executive director of the Blockchain Association, which is a trade association based in Washington, D.C.

Kristin Smith: (00:59)
We work on crypto policy is on behalf of the crypto industry. To my left here, we have Sam Bankman-Fried. For those in the crypto space, this man needs no introduction. He is one of the youngest brightest minds in this space. I also super love his personal style and his hair FTX that is a crypto derivatives exchange. And then FTX US, which is the U.S. component to that. And he's also co-founded Alameda Research. To his left we have Anatoly Yakovenko, who is the founder and CEO of Solana Labs, which is the creator of the Solana blockchain, which for those of you who follow crypto prices, last week everything was down double digits, but so Solana tokens were up. It's been an amazing ride for Solana. They're definitely having a moment right now, very exciting.

Kristin Smith: (01:54)
To his left we have Jeremy Allaire who I've had the pleasure of knowing for several years now. Jeremy is the CEO and founder of Circle which is founded way back in 2013. So they've been around for a long time. Circle helped create USDC, which is a dollar backed stable coin, which is very important for many of the DeFi applications, which we'll get into later today. But also one of the founding members of the Blockchain Association. So wouldn't be here without Jeremy. And last but not least, we have Kevin O'Leary who is many of you probably already know is the co-host of Shark Tank. But also has become a recent convert into the cryptocurrency space and has is a primary investor in a platform called WonderFi, which aim to bring DeFi to the masses.

Kristin Smith: (02:43)
So really a fantastic panel. One quick thought before we get started is several years ago, Mark Andreson wrote a very famous piece I believe it was in the Wall Street Journal that said, "Software is eating the world." Crypto is software and as a good friend of mine Amanda Casa pointed out to me last week. That means crypto is eating the world. And I think what our conversation today will hopefully help you hone in and grasp this point. So with that, why don't we start with you Sam, I want to talk about culture a little bit before we get into the finance piece. FTX has engaged with some major celebrities before we get into how crypto's impacting culture. Can we talk a little bit about how culture is impacting crypto and what you see that role is in bringing crypto to the masses?

Sam Bankman-Fried: (03:36)
Totally. Thanks for me, first of all. When we think about where crypto is today, and I think even more so where FTX is, were one of the newest crypto platforms, certainly the newest of the large ones. We are really proud of what we built and I think there's a lot of exciting things going on in crypto and despite all the adoption that we've seen for the ecosystem over the last few years, it still is touching a pretty small fraction of the world. When you put it into context, a pretty small fraction of transactions are happening through crypto, a pretty small fraction of people transact with crypto in any ways. And so I think a lot of what we've been thinking is like, what are ways that we can take what we see as an exciting growing set of products in industry, and introduce them to tens of millions of people in a way which doesn't dilute the brand, but instead strengthens and underscores it.

Sam Bankman-Fried: (04:37)
We've been working with Tom Brady, you've been working with Stuff Curry with Major League Baseball with TSM and others. And I think that a lot of what we're looking at there is how do we get tens of millions of people engaged with the cryptocurrency ecosystem? And we could buy tens of millions of Facebook Ads. And I don't know, maybe we should, at some point, we'll hire a team to look into whether that is worth doing, but that's not a thing which is going to really make the same sort of impact on people. Anyone can potentially do that.

Sam Bankman-Fried: (05:14)
And instead what we've really been looking for, like who are partners that we're really excited about and are really excited about us? Who can help represent us and who we can really work with in a way to build something stronger and more powerful than what we had. And I think I'll let him talk about more, but we've been working, with Kevin as well on this, which we're really excited about. And on other [Madison 00:05:45] work have been working with Jeremy and Anatoly on the product side a lot, which has been super exciting too.

Kristin Smith: (05:52)
Awesome. Anatoly maybe we could go to you for a second. I always thought of Solana originally, which by the way, I had heard about for the first time from your son, Jeremy, who told me to buy it like 18 months ago. And I really regret not doing that.

Anatoly Yakovenko: (06:08)
Think you heard about from me.

Kristin Smith: (06:09)
But in Anatoly, when I first thought abouts Solana, I thought of it for decentralized finance or I applications, but it turns out it's also been a great place for NFTs. And actually just like over the weekend, there was an NFT that was sold on Solana that was valued at over a million dollars for the first time. So, super exciting. Can you talk a little bit about what the role of blockchains is on culture and how artists are getting involved and some of the cool things that you're working on there?

Anatoly Yakovenko: (06:40)
For sure. I think the beauty of this technology is that it really gives the tools for artists to scale their work globally, without depending on traditional finance infrastructure, where if you're an artist that wanted to sell paintings, hundred million dollars worth of volume of paintings, you would need galleries lawyers, legal support in every jurisdiction in the world. And that's just a huge ask. For an up and coming artist. You really need to build up to that level, but with blockchain, those rules are enforced with software and they're unbreakable. So somebody that catches the right idea at the right time can spend maybe a day, maybe it took him like years to build this, but if they release it on chain, they're guaranteed that the financial support that they need is already there, and it's free. And the code and the infrastructure that is based on blockchain is designed to really give us much value to the artist as possible and extract the least amount of value from the process. That's really the goal of this technology is how do you eliminate the sand and the gears?

Kristin Smith: (07:56)
So Jeremy NFTs are for much more than just artwork. Can you talk about some of the other types of assets that can be incorporated into NFTs and then also what Circle is doing to help empower some of these businesses?

Jeremy Allaire: (08:10)
Sure. Yeah. I mean, I think the way that we look at it, I mean, the general concept is crypto's really good at proving a record, it's great at establishing providence of ownership and allowing that ownership to be highly liquid and exchangeable and tradeable. And I think a lot of people years ago, if you remember the interest in the space was like, how do you tokenize real estate? Or how do you tokenize stock in a company or real world things? And I think what NFTs really represent is that the friction is pretty high when you cross over into those established kind of juries, sort of legal frameworks, but with intellectual property, especially digital intellectual property, the barriers are super low. And so it's naturally, I think the first place where you're seeing this really explode, and that obviously is finding it's way in particular creative expression, creative outlets, but it's now moving into other arenas.

Jeremy Allaire: (09:12)
So owning moments, owning entitlements, owning brands that are attached to entitlements, all these kinds of things that were hard to do are now really easy to do. And so there's just a huge amount of experimentation beyond that. And I don't know if I have it right Sam, but I think you could buy like a pair of FTX socks that includes a lunch with you, or so something like that, but something like that, pretty powerful stuff. But in all seriousness, I think what we're seeing is just lots and lots of people who are trying to take lots of categories of intellectual property and digital intellectual property and represent that using this methodology.

Jeremy Allaire: (09:54)
And so what we're doing I mean, basically, I mean, we provide payment and treasury infrastructure for digital currency applications, for financial applications. And one of the very fastest growing categories is just people building different types of NFT apps, NFT markets, these kinds of things. And we're really just trying to make it really simple and seamless for people to go from the legacy fiat system into actual digital currencies. So you can transact in these markets and transact with these items. So we're a bit of a arm supplier to all the different people who are trying out lots of different stuff in creating NFTs.

Kristin Smith: (10:27)
So Kevin, as a bit of a cultural icon yourself, what brought you to crypto? It seems that this wasn't something you were always bought in on. What changed your mind and what makes you excited about this space?

Kevin O'Leary: (10:40)
I was a very vocal non advocate back in 2017 because I'm forced to live in a world. I service pension funds and institutions with indexing. We are a 100% compliant, 100% of the time. And my first purchase was not in our operating company. I just bought some Ethereum and some Bitcoin in a wallet myself back in 2017. And one day just talked about it on television, on business press. And my compliance officer called me up while I was still in the green room saying, "Are you outta your mind? Are you out of your mind? We cannot have this dialogue because we're going to get a call." And sure enough, we did. And what's changed is the regulatory environment because I don't have the option to be noncompliant. I don't even have that at all, but slowly and surely in other jurisdictions first Switzerland, Germany, France, Australia, England, Canada, which has allowed ETFs now with Ethereum and with Bitcoin.

Kevin O'Leary: (11:53)
So I changed when the regulator changed and I'm very interested in crypto now as an asset class and in my world, let's say you're running a billion dollar mandate, which is a typical mutual fund or ETF or whatever. And generally, if you're compliant with your own compliant department, there's 11 sectors in the S&P for example you're allowed to go up to 20%, in one sector and up to 5% in any one name, that's generally how it works. I argue today that crypto is the 12th sector of the S&P that's what it is. It doesn't mean I have to have everything in Bitcoin and I don't want to have everything in Bitcoin.

Kevin O'Leary: (12:38)
I want to have a portfolio of crypto coin, chain, tokens, whatever is compliant, and what's going to happen here and what we need to do and why I'm so happy. We have these dialogues and these conferences think about the typical institution every night at 4:01, they mark to market every position they have, the internal compliance department sees it, how much leverage is used, what the positions are. Is it within mandate? Not over 5%, whatever it is. Then their external auditors come in on a weekly or quarterly or annual basis and sign those auditing statements. Then they issue that report to the regulator. We don't have that infrastructure in crypto right now. On this stage there's two guys trying to do it, Sam and FTX and Jeremy here with Circle. And I'm definitely involved with both of them because I want to be getting that, but it took me months just to get my first purchase done on Circle with my own compliance department barking at me like a dog saying, "No, no, no, we can't do this."

Kevin O'Leary: (13:44)
And I'm saying, we got to do it. We got to get there. We have to figure it out. And my auditor and the regulated reports we going to put out and it's working same with Sam. I want to build a portfolio in FTX, because it's big enough that I can be compliant. I'm saying to everybody on this, if we solve this, there's trillions of dollars coming into this in the 12 sector of the S&P that's what it's going to be. So that's our job. We got to solve for compliance. It's boring, but it really matters.

Kristin Smith: (14:14)
Well. Yeah. And as somebody who's on the ground in Washington, looking at the regulatory side we have had some great progress, but there are still some things that if we could clear up, I think, would address that misconception that many compliance teams have. So well, why don't we pivot then into financial services a little bit because we do believe that finance is one of the first places that we're seeing crypto networks have an impact. And maybe we'll start actually with you Anatoly, can you talk a little bit about Solana and why it's different from other blockchains and what are the types of decentralized finance services that are being built on top of Solana?

Anatoly Yakovenko: (14:59)
Sure. In a lot of ways, Solana is ideologically very close to every other blockchain, it's a decentralized ledger that records AMP that has happens on it. The differences in terms of the architecture, how it's built is it's designed for speed. It's a technology. And when I think of technology, I think of Moore's law, Intel, the folks that build chips that are faster and faster every two years, if you're building a technology then as those guys make progress, your technology should get cheaper and faster. And this is the core thesis of how we architected the whole thing. Is that every two years when Intel, AMD ships a faster and cheaper chip than the network itself gets twice as performant, has more bandwidth, more capacity, and the cost to users should drop accordingly. And that's really the thesis of it.

Anatoly Yakovenko: (15:55)
Can we build a network that extracts the least amount of value from the applications running on top of it? And the rest is a high performance operating system that in my case, I spend my career at Qualcomm building brew and a bunch of mobile operating system. A lot of the ideas that went into developing those are now being developed on top of Solana. And we see it as a technology that is very well aligned to the tools and development practices that were prevailing at places like Apple, Intel, Google and stuff like that.

Kristin Smith: (16:31)
That's very cool. Sam, you own an exchange, you own a derivatives exchange in crypto exchange. But you've also been involved with Project Serum, a decentralized exchange. Can you talk a little bit about that and how that works and maybe to slowly ease into the regulatory conversation any sort of regulatory concerns you have around that?

Sam Bankman-Fried: (16:54)
Yeah, so really the genesis for that was, we started looking at DeFi a year ago. Well, I guess a year and a half ago now. And what became clear really quickly was that first of all, there were some really cool things going on in DeFi. And I think just to illustrate part of that, if you have a DeFi protocol which basically it's a company or a program, or some protocol, some system, which is built entirely into a blockchain, it's all transparent. It's 100% transparent, it's 100% predictable, what will happen given how people interface with it. And that means that if a third party comes and wants to integrate that protocol they can, and you can get potentially the sort of exponential explosion of creativity and innovation because all of these different parts can be composable into each other.

Sam Bankman-Fried: (17:48)
If you build a borrow lending protocol, then any other protocol on that blockchain can integrate it natively in which just doesn't work in centralized finance in the same way. And so it was really cool. There's a ton of hype around it. And it also absolutely sucked to use, it was unbelievably bad. And I think for those who haven't used DeFi and a lot of those who have it's worth just running side by side a DeFi protocol in a centralized one, just reminding yourself of how painful it sometimes is. And the reason is it was taking five minutes to finalize a transaction because the blockchain was completely overwhelmed. It cost $50 to click a button because you had to outbid everyone else trying to get their transactions in. And what became clear really quickly was that scaling the problem of scaling a blockchain wasn't one of the 17 constraints on a blockchain. It was the single blocker to mass adoption.

Sam Bankman-Fried: (18:54)
You cannot have a billion people using a chain that has 10 transactions per second. It just doesn't work. There's no two ways around it that map doesn't work. And in order to take these programs and scale them to masses or even scale them to a single large enterprise, you needed to get into tens of thousands, hundreds of thousands, millions of transactions per a second just take your favorite big enterprise. Whether it's a protocol, a company, a messaging protocol, whatever, it's going to have a million transactions a second, that's what it means to have a billion users. And you needed a blockchain that could keep up with at that. So we just had phone calls with a lot of blockchains.

Sam Bankman-Fried: (19:33)
And I don't know, our call with Solana was very different than our calls with other blockchains, one of the first things that Yakovenko said was, "Hey, we've been thinking about how many transactions do we need to do things like we want to get wherever we need to get? And like, here's where we are now. And here's a place you can go test it out." And so anyway, what I'm think I'm really excited about is a lot of the applications that bring built on so Solana and it's one of the few places in DeFi right now where you can see it scaling to a billion users and it's not there right now. It probably has another factor of what, 50 to go or something.

Sam Bankman-Fried: (20:16)
But that's a lot better than a factor of 50,000. And like Anatoly said, one of the foundings or principles of Solana is that it gets better over time, that it gets better with Moore's law, that it has an ambition to be able to service billions of users with millions of transactions per second. And we just see that sort of the holy grail of what DeFi could become. And so we've helped people build out Dexus on the Solana blockchain, serum being one of them. I don't know, as I've invested in a number of projects on the Solana blockchain in the serum ecosystem. We've worked a lot with Jeremy, Circle has added Solana support for USDC stablecoin, which now all of a sudden you have a massively scalable, stable object that can act as a pricing reference and pricing currency for transactions happening and for payments happening on Solana.

Sam Bankman-Fried: (21:17)
And again, you go to a payment company and you're like, "Hey, can you try to integrate crypto?" And they're like, "Great, we have 17,000 payments per second in this subclass that we'd like to test out on your network. How does that sound?" And your answer, but be like, "Yeah, we can make that work rather than can you try 17 without the thousand." And that's really where it all came from. Nothing is there yet. No DeFi protocols are at the level where centralized protocols have to be quaking in their boots because they're going to be overtaken tomorrow, but that's not the goal. The goal is moving, making progress and building the fundamentals and the infrastructure is something that could get there, that could get to a point where real large systems decide that it is the correct decision for their business to build on a blockchain. And I think up domestically we're a year or two away from getting real adoption there. If the industry builds its products right, plays its cards right. And I'm really excited about that progress.

Kristin Smith: (22:20)
Yeah, no, I think when I'm in Washington and I'm talking to policy makers, they're like, "This stuff, isn't useful. There's nothing that anyone's actually doing with this, is improving their lives." And I'm constantly having to reframe the conversation to this is still early stages, and there's a lot of great development that's going to lay the groundwork for all of these things to come. But Jeremy why don't you tell us a little bit about USDC and stable coins and what their role is both on the payment side, but maybe also as they work with the decentralized finance world. Because I think as Sam alluded to there is a lot of use of USDC in the world of DeFi.

Jeremy Allaire: (23:04)
Yeah, sure. I mean, I think the problem that we set out to solve was even when starting the company and then eventually when the technology got to a point where you could actually build something like USDC was, how can you build a protocol for dollars on the internet? How can we actually have something akin to being able to have photos like JPEGs on the internet or music files or streaming video, but actually have a protocol where anyone anywhere connected to the internet, can transact with anyone else anywhere. With the backing of something like a dollar and that technology really only became viable with second generation blockchains to do it well. And that's when we introduced, we started working on it four years ago and introduced it a few years ago, but a lot of people asked, "Well, what's the use case for this?"

Jeremy Allaire: (23:53)
And my use case is what's the use case for a dollar? And so I really think that it's actually going to have more use cases than existing dollars because you can do more things with a digital currency dollar than you can with a traditional dollar. And we see this even today, you see micro payments for a piece of digital intellectual property on a network, like an NFT on Solana to people who are using this to settle billion dollar trades and everything in between. And I think there's been boots strapping of this in the capital markets function of crypto. And so it's been really, really important for people who are trading to have stable settlement, irreversible settlement around the world. And I think that's been really key and we're just now as Sam was pointing out and really looking at infrastructure like Solana as well, we're really just now getting to a point where this can now start to be connected to everyday payments.

Jeremy Allaire: (24:49)
And if you have a way to I mean, the USDC on Solana today, as an example, you can settle a transaction in milliseconds, several hundred milliseconds. It has throughput to handle like real consumer scale applications and a tiny fraction of ascent. You that's incredible. And that's not with the centralized network, that's running on a decentralized infrastructure. And so I think we're just now starting to see, and we're seeing this in our own business, mainstream institutions, whether they be financial institutions, FinTechs, consumer companies, commerce companies connecting up to this. And I think that's tremendously exciting. And I think the timeline of one to two years is right in terms of when this will reach many, many hundreds of millions of people and then eventually billions of people. So I think we're making progress.

Jeremy Allaire: (25:33)
And then the payment utility piece is great and I think our vision has always been that payments is just going to be a commodity free service on the internet. There's not really going to be a business model and payments in the future. It just like, there's not a business model for transmitting data or emails or things like that. Those are just commodity free services for everyone. And the real value is going to be once you have hundreds of billions or even trillions of dollars in these stable value, digital currencies that they'll be used in capital allocation, capital markets, they'll be used really, really broadly in a lot of other applications. And so I think part of what we're excited about is all these building blocks in decentralized capital markets infrastructure, which is what like serum represents and so on are starting to come online and will be major, major uses of this in the coming years.

Kristin Smith: (26:25)
Kevin, tell us a little bit about WonderFi and how you see a roadmap for bringing DeFi from this early stage to something where a consumer can actually go and get a loan or do some financial service without going through traditional intermediate?

Kevin O'Leary: (26:44)
Well, what I hope WonderFi becomes and I'm very proud of it. The genesis of it is that it's a use case in our operating company. About 18 months ago, we reduced our exposure to commercial real estate and it generated a lot of cash. And we went to our cash desk and said, what can we do on short duration? And they said, 20 basis points, 21 basis points. Inflation is 2%. So that was the first time I said, wait a minute, this isn't going to work. And we started to look at platforms like FTX and Circle to try and solve for that. That's what got me into stable coins, because we started to explore that. But if you are a consumer and you are 18 years old, and you're making zero in your bank of whatever account, and you want to actually get some yield that keeps pace with inflation, you can't do, it's not easy to set yourself up unless you're really out there in the crypto community.

Kevin O'Leary: (27:46)
WonderFi is going to attempt and I think it's going to do a great job to really simplify this for anybody, an app based product, you download it, you ACH X dollars into your account. It writes the contracts for you. It generates the 1,099 for compliance. It does everything you have to do to stay compliant, even as a regular individual being taxed in whatever jurisdiction you're using it in. And that's the beginning of it. I'm very fortunate I took it public a couple of weeks ago and now it was well received. It's one of the very first public DeFi consumer platforms in the world. It's in Canada, where the regulator is very accommodative. It will soon be in Germany and we will continue to do it around the world. And then have the different use cases for it. I'm very interested in NFTs for example, but not every NFT, I'm investing in NFTs for high end watches.

Kevin O'Leary: (28:47)
There's a community of people out there that have billions of dollars tied up in watches. They're all insane. I'm one of them. And we want to be able to have a way to authenticate our inventory of ones we own with a maker of proving it. I want the WonderFi app to also be able to allow people to easily own those NFTs without knowing anything about how to set up a wallet or anything else. It's attempting to simplify it. Now, I'm very fortunate I have a very large social media following. I'm getting a lot of feedback from our base, Josh Richards who's a phenom on TikTok is an investor, as well as Sam. I think he supports some democratization of this and we're very excited about where this is going, but it's really about simplifying it and making it really easy.

Kevin O'Leary: (29:41)
I mean, we're all in tuned and excited about crypto, but it's not easy to use. And it's nearly impossible to be compliant. You cannot afford not to disclose your capital gains and your income, if any, to the tax man, I don't care if you're 18 or 84, I'm the compliant guy. I live in that world saying, okay, how do we get the forms out? How do we get the 1090s? How do we make sure these people never get in trouble? That's the value of WonderFi.

Kristin Smith: (30:12)
Well, in the last third of the conversation here, I do want to talk about something you brought up earlier Kevin, and that's the regulatory issues, but maybe we'll start with Sam. Sam, where do you live and why?

Sam Bankman-Fried: (30:26)
It's a good question. And I grew up here in the States. I worked here in New York for a number of years for Jane Street had a great time there. I was in the Bay Area till 2018 and then spent a bunch of time in Hong Kong. And the context there are a number of pieces of it. One of which is that crypto is really a global business. And there is a U.S. economy there's an Eastern economy, there's a European economy, there's an African economy. And especially, I think coming from a Western background, it was really important to be able to meet a lot of people in person to form those connections and those relationships to build up a multicultural team that could help understand where different users are coming from.

Sam Bankman-Fried: (31:33)
And I think you see really different demands and use cases from different parts of the world. I think, especially if you have less trust of banks in a country, you're going to start to see a lot of demand for an alternative way to store your assets. And I think that that creates very different dynamics in different places. We've recently been building out our offices in a number of places in Bahamas Gibraltar. And we also have a U.S. operation, which is at this point, biggest offices in Chicago, I've been flying between them because helping to foster the international exchange, helping to foster the U.S. exchange. We've hired a really great leadership team there with Brett and Ryan and others. In Chicago, I've been a little more stuck than I wanted to be recently because of quarantine and COVID as the world, hopefully it will open things up.

Sam Bankman-Fried: (32:39)
I have to be mobile one way or another. We're frankly trying to decide where the right places are to have the bulk of our workforce. And I think that the factors that are going into that basically are a combination of who's taking the lead on crypto regulation? Who's taking the lead on licensing? We have licenses, a number of jurisdictions and we are applying for licenses in a number of other jurisdictions. And I think getting to your question here, that's a really important piece of this is right now, many, many regulators are looking hard at crypto. And I think some of them are taking the lead on building out regulatory frameworks. Some examples that obviously the MAS in Singapore we've been in discussion in Singapore, been working on licensing, we don't have one, but we've started that process.

Sam Bankman-Fried: (33:31)
We've been in the United States, recently acquired a features exchange license through [inaudible 00:33:41], which we're really excited about, really excited about the paradigm the CFTC has, I think built for a while there. And I think it's been sort of living a little bit below radar. But I think that could be a huge piece of the industry going forward because it allows for futures and frankly, a lot of other contracts and you look at what call she has built on top of LX through the CFTC regime with event contracts. We're really excited about that. And there are a number of other regulars who are popping on the map.

Sam Bankman-Fried: (34:14)
And so I think basically the biggest things we're looking at actually are where is their licensing? And I think especially actually, there are a lot of countries that have started the licensing process, but haven't yet built licenses that can accommodate futures or derivatives that haven't built licenses that can accommodate a lot of the types of products that frankly are the bulk of volume in every asset class. And then frankly, honestly, quarantine's, I important to us to be able to get employees into a now future jurisdiction. This is not something we were thinking about three years ago when we were choosing office locations. It's now like our number two criteria. Can we get people basically into the country if we can. It's hard to hire. It's hard to grow.

Sam Bankman-Fried: (34:57)
And I think that that's becoming one of our top criteria for where we're going to be building out offices, where people are going to be moving and frankly that's changing on a monthly basis. It's pretty frustrating not to have sort of long term clarity on that, but those are the factors I think, going forward. And I'm going to be help building out our regulated offices is in probably four or five jurisdictions over the next year.

Kristin Smith: (35:27)
Okay. Jeremy, Circle is one of the most regulated crypto companies, I think in the United States you have just about as many licenses as anyone has. Can you talk a little bit about your regulatory structure that you have to deal with? But then maybe also talk a little bit about, there was some news last week that Coinbase announced that they aren't going to be moving forward with their lend product, which was related to USDC maybe give your thoughts on that. And I know Kevin, you have some thoughts on that as well.

Jeremy Allaire: (35:59)
Yeah, sure. I mean, I think when we got started in 2013, there was zero regulation. But the Treasury Department had basically said, "If you're going to sit at the intersection of the banking system and virtual currency, as they called it, you needed to be a money transmitter." So that was the first thing we did is we went out and got licensed in all the states as a money transmitter, the sort of first crypto company to get all those licenses. And then New York had a special license called the bid license and we got the first bid license. And then we did the same thing in Europe and went after an e-money issuer license. We also operate a broker dealer and then ATS. So those are a few of the things, and then an international entity, a couple international entities that are licensed as well.

Jeremy Allaire: (36:45)
But I think the big thing is regulation around global scale stable, coins is definitely a moving target. The framework for electronic money, and mission and stored value money transmission, I think has been a good one. But clearly as these go from tens of billions to hundreds of billions to potentially trillions of dollars of value, banking regulators and national regulators are looking a lot more seriously at it. And so that's one of the reasons why we're in the process of preparing an application to be a national commercial bank but we're interested in full reserve banking, not fractional reserve banking. And so there's a journey ahead for us on that. But I think the reality is as these get used at scale and if other financial institution want to build on top of this and do that at scale, that structure is definitely going to evolve we think certainly for centrally issued stable coins like USDC.

Jeremy Allaire: (37:50)
I think there are a lot of other major regulatory issues in the space, not just related to payments and banking, obviously exchanges and securities and all that fun stuff. But I think that maybe ties in, we all know that and referencing Kevin's comments as well. There's been a rapidly growing lending and borrowing market in USDC itself and in other crypto assets but USDC has become a really common form of digital currency to borrow and lend, and that's really grown significantly. So we have a product which is a yield service that's available exclusively to businesses, so we're not offering it to retail individuals.

Jeremy Allaire: (38:39)
But our view is that if you're going to offer a product where people are essentially making an investment and getting essentially like a fixed income type product, that that's a security. So we designed and launched our yield as a security and it's exclusively available to accredited businesses and it's offered through a regulatory regime as well, where there's a supervisory framework around it and around the risk management. And I think for these markets to really take, hold and get scale, and if you really want this to be something that is ultimately grow into tens or hundreds of billions of dollars of borrowing and lending, it's going to have to fit in those kinds of models. I think that's somewhat different than of the retail products that are out there.

Kristin Smith: (39:27)
Kevin, did you have any thoughts on the Coinbase news last week?

Kevin O'Leary: (39:31)
About regulators?

Kristin Smith: (39:32)
The regulators.

Kevin O'Leary: (39:34)
Yeah. I would make this comments. Somehow over the last, I don't know, two years the popular press position, the crypto community as an adversary to regulators globally, and that's simply not true. And it's very stupid because probably some large percentage of the constituency in this room is somehow tied to financial institutions one way or another. And we have not even tapped. There's so many institutions that don't even play in this space of although they want to. And the primary reason is their compliance departments and the tone of that relationship between the crypto community and the regulator. And every week, we hear another case of somebody in a position of power let's call it that that's running a large crypto company striking out at the regulator really bad idea.

Kevin O'Leary: (40:38)
There is zero upside in that, because the regulator wants to solve for this because this, and I'll say it again. It's going to be the 12th sector, the S&P there's no question about it. It's not going away. And the demand is huge. The tone should be that of accommodating their concerns. I'll give you an case study this NFT investment I'm making in watches. Is it a security, or is it a piece of art? I can't go forward until it's resolved. I can't just throw it out there and start trading it all over the place, not knowing that outcome. And so I'm willing to reach out as an advocate to that one little sliver of NFTs and say to the regulator, "Give me guidance. Let's work together."

Kevin O'Leary: (41:23)
And if it is security, tell me I'm good. I'm good with it. I will treat it that way. I'm not fighting you on it. Just give me the rules so I can play football. You can't play football without the rules. And that's where we're at here. And the upside to solving this problem is trillions of dollars of assets that will pour into this. You want to see Bitcoin at a $100,000? You got to let the regulator determine what terms they'll allow it to go into an ETF. It's that simple. Look, what happened in Canada. They got a billion dollars demand in a matter of hours in just the first Bitcoin product. And it wasn't even institutional. It was just simply retail saying, "Oh, it must be safe. I can buy it and put it in my count online." And the regulator said, "It's okay." So my thing is, as a community, we have to form a lobby voice and say, "We are here to serve and protect just like you are, give us the rules so we can go back and play football." That's simple.

Kristin Smith: (42:29)
Well, and as that voice we represent 50 companies in watch, Washington, D.C. that are part of our trade association. And we do go and speak with regulators and are actively trying to bring ideas to them. That makes sense. Because what we don't want is to just put regulation on this new system and that doesn't address the actual risks, but we need something that is appropriate and gets the same goals, but doesn't in a way that's that makes. But one of the things that we focus on when we're interacting with regulators is it's very important to distinguish between the people developing the software and yes, crypto does have centralized intermediaries that are interacting with customers or taking custody of funds. But Anatoly can you give us your thoughts as you guys have built out and your company has helped contribute to these projects? Have you had regulatory concerns or do you feel that you're free to do what you want without having to think too much about regulation?

Anatoly Yakovenko: (43:30)
The challenge, I think it really hits teams that are trying to build and innovate in the space, like the example that Kevin brought up this idea that at 401, they check all the positions and check leverage and manage risk. Two guys built this as a smart contract. It runs on Solana. Those checks happen every 400 milliseconds and they balance a bunch of lenders and a bunch of borrowers without ever taking custody of the funds. It's just a bunch of software. So what does this team do in terms of regulation? How do they define the risk for themselves as founders? Where should they base their product out of, which jurisdiction? So if you're a startup and you just raised a really successful one and a half million dollar seed raise, which is massive amounts of runway for two, three people and the compliance in the U.S. is going to cost you 3 million compliance, somewhere else is going to be much, much cheaper, those folks are making those choices every day.

Anatoly Yakovenko: (44:32)
And that's really, I think the risks aren't that these products are not going to get built. They're going to get built because they're awesome. It's that they're going to get built elsewhere. And that's really, me as somebody that's been living in United States since my family were refugees from the Soviet Union in '91, that's really sad for me to see, I just want all this stuff happen to happen here.

Kristin Smith: (44:57)
We only have a couple minutes well left, but I want to do one more quick question before we get some final thoughts from everybody. How do we see in maybe 30 seconds or less the traditional finance world, or I guess tradfy, is that what we're calling it these days? Will they be embracing DeFi or is that going to be attention between those two worlds, but maybe just quick answer Sam.

Sam Bankman-Fried: (45:26)
I mean, I think there's a lot of work that has to be done before that decision can even be made. I think that right now DeFi isn't quite ready. I am optimistic it will be in the next couple years. Once it does, I think you're going to see companies decide that they are best off working with decentralized ledgers. I think we've already started to see those. I mean, you've seen Visa as an example, really embrace blockchain technology in a large number of ways. And they've seem to have made the decision that they want to try to find a way to work with I think emerging technologies and grow stronger from it.

Sam Bankman-Fried: (46:09)
I'm guessing you're going to see a number of companies make those statements. I'm guessing you're going to see a number of companies not make those statements. And I think that's going to be a task way of saying maybe they're not going to be actively fighting against crypto. But they're not a planning to work with DeFi, they're not planning to work with blockchain and they're going to be trying to hold their turf there. I think you're just going to see a split depending frankly, on gut calls from the leadership of lot of different companies with some going in one way, some going in another way it's going to be messy.

Kristin Smith: (46:43)
I see only have about five minutes left, so I'm going to just cut to the last question which I want to ask of everybody. Maybe we'll start with you, Kevin. So what is your prediction for where we will be 10 years from now, in the crypto space since it's going to change everything?

Kevin O'Leary: (47:03)
Let me tell you the one of the I'll make it short and sweet. Let's say a traditional mandate such as I want to go long Europe. I'm going to buy 50 stocks. I have to buy Swiss Franks, Euro based stocks, and British Pounds because I want to trade them on their domestic exchanges. In between me and that transaction is what called the bane of the earth. The FX trader, the currency trader who clips me every time I buy and sell, adds zero value, zero value and sucks friction out of the system and has my entire adult life as I've traded in Europe. I can't wait until we solve this problem and give them a new career shining shoes because they add no value whatsoever. This is where DeFi can take us on just one use case, but it's a multi-billion dollar one, and I want to be alive to have a regulator domestically, allow me a payment system to a Swiss Frank back and forth if I want to trade it 50 times a day with zero FX traders, that's my mission in life to help them find a real job.

Kristin Smith: (48:15)
Jeremy, where will we be 10 years from now?

Jeremy Allaire: (48:18)
Yeah, I mean, I guess I look at this from a couple of lenses, I think from the payments finance commerce lens. I mean, I think we'll be in a world where exchanging value is just this ubiquitous commodity free thing, and people don't even think about that and things like what Kevin described will be obviously the case. I'm really interested in the impact on capital markets and the internet has been amazing at creating these multi-sided platforms that create these incredibly like long tails, so long tail markets in advertising and content and media and retail. And I think that access to capital will be transformed on internet capital markets. And that will be a radically different world than things like Nasdaq or the New York Stock Exchange. But I guess the final comment is just I look at this way beyond finance. I mean, I think these are operating systems that are going to really restructure how the basic units of the economy function or corporations, everything else.

Kristin Smith: (49:25)
Anatoly?

Anatoly Yakovenko: (49:27)
I mean, in 10 years, imagine a world with more than a billion people with self custody, with cryptography that hold their own keys and understand how to use them at the same level of people understand how to browse the internet. That world is going to be as unpredictable as the internet in the '90s trying to predict that sharing pictures that are cats is going to be worth a trillion dollars. It's just something that I feel will revolutionize, like Jeremy said, every industry that we know today. Communities will never need advertisement to self monetize, folks can communicate and make financial decisions without any intermediaries at global scale. So what you see today with 10 million users in crypto, it's really going to be a dramatic change.

Kristin Smith: (50:16)
Sam?

Sam Bankman-Fried: (50:18)
I think the downside is the industry can't find it's footing. But I think in the upside case, which I'm optimistic will be able to reach, I don't know, 25% of activity could be on blockchains. I don't think 100% will be. I don't think a Bagel really will be, because you can't eat a blockchain or a block. But when you tweet, I think that tweet could be natively on a blockchain when you pay for something that payment could go through blockchain rails when you invest that can go through blockchain rails, huge swabs of industry can be rebuilt in open, composable, efficient ways on blockchain technology. And I think could really lead to a [inaudible 00:51:03] explosion of innovation if it's done right. And if it's done in a compliant way, and if industry can work with regulators to make that happen.

Kristin Smith: (51:14)
I'm going to make my own prediction. And that is that we were going to spend more money on digital goods than on physical goods in our home. Because all I know, I don't know about you guys, but I usually just wear yoga clothes and I stare at a computer screen all day long. So I would like that world to be more reflective of my personality, so. Well we are right at time. So why don't we give a round of applause to our fantastic panel.

Guest User

September 29, 2021

SALT NY: Digital Assets

Building a Multichain Digital Asset World | #SALTNY

Guest User

September 29, 2021

SALT NY: Digital Assets

Building a Multichain Digital Asset World with Steve Kokinos, Chief Executive Officer, Algorand. Jeff Schumacher, Founder & Chief Executive Officer, NAX Group. Anthony Scaramucci, Founder & Managing Partner, SkyBridge.

Moderated by Sarah Kunst, Managing Director, Cleo Capital.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Steve Kokinos

Chief Executive Officer

Algorand

FULL BIO

Jeff Schumacher

Founder & Chief Executive Officer

NAX Group

FULL BIO

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

MODERATOR

Sarah Kunst

Managing Director

Cleo Capital

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Sarah Kunst: (00:07)
Awesome. I am so excited to chat about this, because there's some fun stuff happening that you guys have announced this week, and we're going to dive in. So Steve, why don't you tell us a little bit about what Algorand is?

Steve Kokinos: (00:20)
Sure. So Algorand is a developer of public blockchain protocols and technology. And I think if you take a step back, what blockchains really represent is a shift where the world can transact with people that ordinarily would have no reason to trust each other. And I think in the world that we know, you really need to understand who the person is on the other side of the table, who the firm is, and whether that's acceptable to you. And I think what that really means is there's a broader shift from a world where we're trusting people to one where we're trusting code.

Steve Kokinos: (00:58)
And I think the reality of that is it opens up all sorts of fascinating possibilities for new markets and new opportunities. But it also means that you really need to trust the underlying technology and code and understand that security. And at Algorand we have some of the most interesting researchers in the world, led by Silvio Micali, and have really thought through how you scale these networks from relatively small networks to billions of users around the world. And I think that's something that we've been focused on from day one and are really excited to see the evolution of.

Sarah Kunst: (01:44)
I'm excited too. I think we all are. Jeff, tell us about NAX group.

Jeff Schumacher: (01:45)
NAX stands for New Asset Exchange. And basically what it does is it works with corporate partners and takes assets that they have that are at scale and transforms them into new digital assets or alternative assets. It's like we're building the NASDAQ with the exception of everything that goes on our exchange we've built. So we have a development arm that mines the corporate assets, a technology arm that helps us transform them, a securitization arm that allows us to create liquidity and then a DeFi platform which we depend heavily on Algorand for. So that's the connection.

Sarah Kunst: (02:23)
I love it. The young man on the end, do you mind introducing yourself?

Anthony Scaramucci: (02:25)

Sarah Kunst: (02:31)
I think everybody knows you. So guys, this is an interesting point in time, right? What's happening in the market? Why now? Why have you been making, one, tell us about your big announcement and why this week, why now?

Anthony Scaramucci: (02:44)
Well, there's many different reasons, but I think the number one reason after doing extensive research on tier one protocols, it became clear to SkyBridge and the research team that Algorand is going to have a very big future in DeFi. Will there be a hundred? I can say that, likely not. Will there be three to five that will say that? Well, we believe that there will. And when you think of Algorand's interoperability and you think of the anti fragility of Algorand's technical properties in terms of the way you can lay out transactions.

Anthony Scaramucci: (03:20)
And I'm going to quote Gary Gensler for a second. For those of you that remember this, Gary was on the faculty with Silvio Micali who created Algorand. And Gary said prior to entering his posts, his political post at the SEC, that this was going to be the big backbone, the big DeFi engine, the big blockchain. And he said that as an example, he actually used this and I put it up on Twitter about a week ago, the exact quote was, as an example, you could build all of Uber on the back of an Algorand. And I think what Steve and Jeff recognize is that combining their forces and having us have institutions take a look at it alongside of us, this is going to be a very powerful trinity or trifecta that will start laying out lots and lots of great applications and great, great ideas.

Sarah Kunst: (04:11)
I love it. So that, I mean, what... This is the time, right? And what better place than SALT to how have this conversation about why now. So tell me more about unlock, right. What does this mean, particularly for the institutional space?

Jeff Schumacher: (04:30)
Well, I think it means, if you look at what Anthony just shared and what he can bring is this institutional infrastructure to this. And if you look at the NAX, what we're bringing is we're bringing at scale corporate infrastructure to this. And then you take in what Steve has and what Algorand has is the DeFi infrastructure. And you put that together and we're capable of unlocking completely new different business models. And where I see it as like the Dutch Indie company in 1670 created stocks. And what grew into that is the current financial infrastructure we see today. Well, what we have at the NAX and these new assets doesn't require all of that infrastructure. So you can create entirely new businesses. You can go a lot quicker. You're not necessarily going around regulation. NAX, we embrace it because regulation walks you back, but you do not need this massive infrastructure that exists today. And I think this is the time.

Steve Kokinos: (05:30)
One thing I'd add is that what we're starting to see are scaled applications like you're building at NAX but also we're seeing scaled user bases show up. One of the things that we focus on at Algorand or we're seeing a lot of adoption are national projects. One example of how these things are crossing over already is the Italian music right system deployed about four and a half million NFTs onto Algorand to represent the rights of a hundred thousand Italian artists. And now we're seeing DeFi applications like Opulus, where now those artists can unlock value that they've created in the form of borrowing and lending against those music rights, selling partial royalties, and ultimately being able to create more music and art. And I think that's sort of a simple example of some of the power of how you combine these technologies, because now you have applications that never could have or would have existed in a traditional setting starting to empower people in new ways. And we think that that's pretty exciting.

Sarah Kunst: (06:36)
That's really exciting. That's, awesome. So piggybacking on that, is this a transition, or like you said, just a completely new way to get things, new things into fruition? What is not existed in traditional settings that you're able to unlock now?

Steve Kokinos: (06:56)
Well, I think it's a follow up to what I just said, which is if you put the example of the creator economy and also you bring the example of expanding audiences, we think that's a fundamental piece. And again, it goes back to this trust of code versus trust of people. But you may be an artist and have fans that would be interested in participating all over the world. We're seeing this in more traditional settings too, example would be residential real estate. We see applications on chain for that where people can invest in residential or commercial real estate in increments of as little as $50.

Steve Kokinos: (07:34)
And so now another project for the national blockchain for El Salvador, there's people there that don't typically have enough money to invest in large real estate projects. But now they can put relatively few dollars in and the universe is, or the liquidity and universe of participants is expanded in such a way that now you can reframe things and you end up with a better outcome for the investor who had no access in the past. You also end up with a better outcome for people creating assets because now they can have different forms of price discovery and liquidity than previously.

Sarah Kunst: (08:15)
More access and more assets, I love it. That's perfect. So what about you guys?

Jeff Schumacher: (08:20)
I think we have a number of, this initiative unlock has got earmarked about a handful of projects that are coming out right now. So we have a, the first one that's coming out is around consumer finance. And this craze around buy now pay later, you saw Square acquire Afterpay for 29 billion or so. And so there's this opportunity here and we're taking one that's in the consumer product space where large ticket purchase. So we're bringing that out. It'll have millions of customers that's going to launch just around black Friday and will do about 500,000 loans or so right then and there. And then we're capable of putting that on Algorand and then at the same time capable of securitizing it on the back. So it creates an entirely new financial instrument. We call it Caddy.

Jeff Schumacher: (09:09)
We have another one that's coming that's in the art space. That's again, going to come out on this unlock initiative on Algorand. And we have one of the world's largest underwriter of art. And if I just simplify this for the room, it's like, just look at the data, right, the data. And so we're all data. So if I look at the data of underwriting, there's about 25 attributes that requires you to underwrite art. But if you look inside that there's a subset of attributes, about 12 that's required to lend. So we take those 12, we stick it in a new instrument, we call the instrument watercolor. And we put a couple of our banking partners together, and we've just, bam, created the world's largest art lending platform. So if you think about it today, you can walk out of here and go into a Ferrari dealership and buy a Ferrari and get a loan right then and there for it, car financing. But you can't walk into a gallery and get art financing. It doesn't exist. So this product does exist.

Jeff Schumacher: (10:07)
If you think of even further with the COVID discussions that have been going on here at SALT, you have museums out there that have been just pummeled by COVID. Well, now we have a means to give them working capital. If you have people that are asset rich with art, you now have a means to give you working capital. And then on the backside, we're also our securities business and our trading partners, the exchanges, we're able to package that up. So you have mortgage back securities, and now you'll have art back securities. So these are just two examples, but these cannot exist without the environment we have today.

Sarah Kunst: (10:40)
I mean, I'm hearing art, I'm hearing Lamborghinis, I'm hearing black Fridays. Sign me up, you're speaking my language. So I love it. This is awesome. So what role does interoperability play in all of this?

Steve Kokinos: (10:54)
Well, if you think about the, I think the early days of the internet would be the best example I can come up with. There was AOL and computers, those platforms all largely lived on their own. And I think the early internet was seen as a strange wild place. I think the reality is that what it ultimately created though was a place where information largely flows freely anywhere that it wants to, and it's given rise to a whole variety of applications that couldn't really have been imagined in the early days. And I think that that's blockchain interoperability is of similar importance.

Steve Kokinos: (11:35)
And I think Anthony is right, we'll see a handful of scaled winning protocols that people use, but ultimately they're going to have to talk to each other because assets need to move wherever people want to use them. Users need to be able to move back and forth. And so that's something that we've done a lot of work on at Algorand, in particular, this idea of being able to capture state and cryptographically guarantee it on other platforms is something we've done a lot of work around. And so I think it's critically important. And just one last point on this is that we also believe that decentralization gives, again, people ways to transact that needs to carry through to interoperability as well. And so I think right now the first early attempts have largely been centralized. And we think that needs to shift over time as well.

Sarah Kunst: (12:28)
Awesome. What about you Jeff?

Jeff Schumacher: (12:30)
Well, I think interoperability is key. We have, and I'm trying to, I think projects make it the most relevant. Otherwise, it's a little bit esoteric what you're talking about. And Anthony and I were talking about the SALT conferences family offices, right, and institutional investors. And again, if you think about these digital assets that are getting created, they don't require that financial infrastructure that exists. So you can create these entirely new ways. So we have a product coming out that's a secondary exchange for digital assets. That doesn't work if you can't have interoperability of these assets across which again, we're going to put on the Algorand platform.

Jeff Schumacher: (13:08)
And then we've even pulling in a business that'll help the family offices plug in. It's a current venture that we're invested in. It's called iPaladin, that basically connects all of the family offices activities, the trust, the assets that they hold because if you're going to start to trade between, you have to have a way to normalize it. And that for me is that interoperability and then putting it in a decentralized environment so you can trust the data, allows for this idea of commerce to happen so.

Sarah Kunst: (13:41)
You have the best product names for, that I've ever heard from a crypto company, watercolor, iPaladin. It's like everybody else is like, magnesium train or whatever. So I like it. I like it. Shout out to the product people at NAX. They're doing-

Jeff Schumacher: (13:54)
It's just the names of Anthony before we actually roll them out.

Anthony Scaramucci: (13:57)
It's not true, but they also have the greatest peril, trust me. My wife dear just wearing that NAX hat. So that's a good sign, okay. From, she doesn't like any hats, but.

Sarah Kunst: (14:06)
There you go.

Anthony Scaramucci: (14:07)
I want to say something because I think this is all about relationships, building relationships, expanding relationships. So 20 years ago, my old boss, Rob [Nats 00:14:18] had bought my first company. He was the President Chief Operating Officer at Neuberger Berman. We stayed close. I think Bob's been to every SALT conference since inception, probably sponsored the first one when less than 300 people were in the room. And he came to me and he said, listen, I like what you're doing with Bitcoin. I like what you're doing with Ethereum. But I want you to look at Algorand. It's faster, it's got better technology. My former team at Golden Tree has looked at it, likes it. It's got a negative carbon footprint, which Steve could take you through. And I think it's very, very important for you if you're going into this space to understand that there's going to be a few next generation leaders, tier one leaders. And I want you to go take a look at it. I'm going to introduce you to Sean who works with Steve and spend some time looking at it.

Anthony Scaramucci: (15:09)
Now this is the of human relationships. Jeff and I have been friends, I don't know, at least a decade. We sponsor a wine party in Davos Switzerland together, which the minute you tell people they can't go to the party, everyone wants to show up. Right, Jeff. And so we've got this world class VIP list, but we're also serving very expensive wine. But I go to lunch or breakfast, go to breakfast with Jeff at Beverly Hills hotel. I'm on his Advisory Board at the NAX. We start talking and I say, "Jeff, what do you think of Algorand? Have you done any work on Algorand?" He drops, I mean, look how thin he is. He like eats chicken sausage and some food, LA stuff. And looking at him, he drops the chicken sausage in the plate. He looks at me he's like, "Okay, you're not going to believe this. I flew back from the Bitcoin conference. I went up to Boston and I met with the Algorand team yesterday." I think it was on a Monday. You and I were having breakfast on a Tuesday.

Anthony Scaramucci: (16:09)
That was several months ago and then I said, "Okay, let's see if we can put these pieces together." So one of the reasons why we love doing this conference is the relationships. So we want people to meet each other, have fun with each other, but we want them to connect commercially to see if they can find some universal qualities about each other that they like, but also can they put a business together that could be a next generation exponential business.

Anthony Scaramucci: (16:37)
So I just wanted to lay that out for people. It's important for us to explain the story. It's important for us to break it down, which Steve and Jeff are obviously great at. And so if you have an interest in this, you could reach out to me, any of us. And we'll sit down, we're going to do a ton of one on one meetings. Steve and I are going to have a six city roadshow going to our relationships around the country. And we're going to cap the first fund to 250 million because there's no need to do more than that in this space at this time. But it will be a series of funds. And this is a long-term committed five to 10 year strategy of working together. And I think it's important for people to at least have the intellectual curiosity to understand why. Go ahead, Sarah.

Sarah Kunst: (17:25)
I love that. There's a lot of intellectual curiosity about what you guys are doing in this room I think. What are the macro trends, right? What's driving this overall because you're talking a lot about some awesome stuff that's happening in the blockchain. You're talking about some great real world applications. What are the big trends driving this?

Jeff Schumacher: (17:44)
Well, we see digital assets now there, we see a couple of big trends. First, the amount of money that is moving into this new value that's being created, I mean, it's gone up exponentially. I think digital assets get about a five trillion dollar market cap. It used to be just Bitcoin, it's now diversifying. So you're seeing that. You're also seeing the participation in these markets of these different, you see NFTs and some of the things that have been talked about. So around that you need infrastructure to support that and Algorand and what it's doing is quite capable of it. And then the unlock initiative that we put together is very much there.

Jeff Schumacher: (18:23)
There's another big trend if you look at what we're dealing with, which is around ESG. And we're at Davos and the Paris Accords, are a big thing. I fundamentally do not believe we will meet the Paris Accords. It just won't happen. We're not going to get there. And the reason for it is you can't get there with corporate responsibility capital and social impact capital. It can't be just throw away money. It's got to be, there's got to be new financial instruments that get created. And this type of platform allows for that. And you can get in, we have an entire ESG initiative that's led by Juan Bruce, who's somewhere sitting in here. And our partner AXA on that, which has pivoted their entire organization around this.

Jeff Schumacher: (19:05)
And the instruments that we can create that can attract new capital that this fund will actually put in money into, it's a game changer to what currently there. So you can create these new green bonds that then they attract capital. You can tokenize different activities that allow for investment in new buildings to pour the capital in to make sure that they're sustainable. And then the idea of decentralized by itself goes after not just the E but also the S and the G, the social and the governance. And you're basically democratizing markets. And so I think this ESG trend is significant. I think unlock will participate pretty heavily in that. The digital asset trend is significant. The follow the money analogy is moving that way. So these things are helping, and it's pretty exciting for what I see.

Steve Kokinos: (19:56)
Well, and just to add on the sustainability front, we agree that's hugely important. And I think somewhat overlooked in a way in this area. Algorand in particular as a network uses about, don't hold me for the exact number, around 10 homes worth of electricity. And we have seen several [crosstalk 00:20:18] what's come on chain with really novel applications. Climate trade is one example of that, where they work with the UN to source sustainable carbon credits. And they bring those into a marketplace that's on chain, on Algorand that anybody can use. One of the consumers of that is the network itself which automatically looks how much carbon is being consumed and then uses transaction fees to, in effect, purchase carbon credits that more than offset the amount of carbon being consumed by the servers that are supporting the network around the world. And I think that that's a really interesting way or use of the technology to sustain itself. But also do it in a way that isn't consuming huge amounts of power and huge amounts of computational resources that aren't needed.

Steve Kokinos: (21:06)
And I think one thing further is if you look at a simpler example, that climate trade is enabling, there're a Spanish company. If you take a flight on a Iberia during the checkout process, they enable people to click a button to buy the carbon offsets for that flight and to offset their seat. And we think that things like that lead to sustainability in different ways, because it gives people an opportunity to take responsibility for that.

Steve Kokinos: (21:32)
And I think a different side of the same coin, we, there's a project called PlanetWatch, they deploy air sensor, air quality sensors in different cities around the world. And especially in Europe where air quality problems lead to carbon tax. Sometimes it can be questioned whether the right information is making it into the logs. So now they have people walking around, they're deployed to all different places. All that data is stored imutably on the blockchain, and so now it can never be changed and they know exactly where the air quality looks like. And that's leading to better outcomes in cities around the world. And so I think you're right, for sure. There's not only examples of, or there's not only the case that technology needs to be sustainable, but we also need real world examples of how technology is empowering people to make the world a more sustainable place. And we're excited to be contributing to that.

Sarah Kunst: (22:23)
And I love that. Anthony, what do you... How does the ESG piece fit into all of this for you?

Anthony Scaramucci: (22:30)
Couldn't hear I'm...

Sarah Kunst: (22:30)
How does the ESG piece fit into all of this for you? How do you guys think about the sustainability?

Anthony Scaramucci: (22:37)
I love Jeff's vision because it's sort of like, it's Steve on technological properties, the integrity of system. NAX on vision and the exponential growth of taking those properties. And it's me on access and creating a bridge to the institutional investor. We had a couple of ESG panels on yesterday, and I think what Jeff is basically saying is that we can create a financial product, a financial token, a protocol that's designed to incentivize people to be more ESG friendly. And it'll have certain properties related to it that you'll have a financial incentive and now, economic incentive to do that.

Anthony Scaramucci: (23:19)
And so, remember, we have this big debate going on in the crypto community about whether something is green or something isn't green. Steve took that off the equation with this team by making this carbon negative. But just stop and think about the Petro dollar, or stop and think about the banking system, or think about all the ESG unfriendly things related to our current financial system. And then think about this backbone and the fact that this backbone will take out so many different intermediaries.

Anthony Scaramucci: (23:53)
Last night, we had dinner, I think Sam Bankman-Fried was there. And I think we were discussing the, a stock transaction. There are seven layers of different people and I was very impressed with Sam Bankman-fRIED because he actually listed all seven of them off the top of his head. Before you buy apple, before it gets you, it goes through seven different intermediaries before it ends up with you. So just think about all of the carbon that's used as a result of that process. And I think what NAX is going to do with the help of Algorand is going to take all of that out of the equation. So even if it isn't just ESG incentivizing when we created tokens related to that, just the fact that it's going to take all those intermediaries out of the system, it's going to make it very economically friendly.

Sarah Kunst: (24:40)
Yeah, absolutely. So we get it, you guys get it, right. You've gotten it. I think this room gets it. But what does it take to drive global adoption? How do we get everybody else to get it? And to take up the mantle of what you're doing?

Jeff Schumacher: (24:55)
Well, I think three guys in a garage and a vision is a pretty hard way to get adoption, right? One in 5,000 startups get to a hundred million dollar valuation, that doesn't even mean they work. So there's a lot of failure in here. And if you looked at it, I wrote a piece a while back of what makes something investible. And so our, we have a method that we look to uncover these ventures and there's 13 components in there. But if you look at it, most fail for three reasons. One, product market fit was wrong. Two, the team was wrong. Or three, capital. And capital is a key reason.

Jeff Schumacher: (25:33)
And if you look at capital, what we learn from is most of the money is spent on growth. You have to get the people into it. So we start with the volume and this is why corporates are very important to us. And if you think about it, data is the most valuable commodity in the world now, right? It's more valuable than oil. But if you figured out oil is the most valuable commodity and nobody knew it, what would you do? You would go buy all the land. So what we do is we secure long-term contracts with corporations, to mine their assets, to find volume assets that we can put onto this market. And then if you have volume, you create scale. You create scale, you create change. And that's the key here. And in order for that to work, you have to have a protocol that can handle the volume. And this is why the Algorand and, put that together with unlock and you bring the institutional capital support and you got the source.

Sarah Kunst: (26:24)
I love it.

Steve Kokinos: (26:24)
I, go ahead Anthony.

Anthony Scaramucci: (26:25)
I just wanted to ask him a question. I'm going to cross-

Sarah Kunst: (26:28)
Hey, it's your world Anthony. We just live in it.

Anthony Scaramucci: (26:30)
What was the eureka moment for you with Algorand and your team?

Jeff Schumacher: (26:40)
We were looking for a protocol that could handle the volume that we're putting on. And at the same time, technically, it's not proof of work it's proof of stake. And because if you-

Anthony Scaramucci: (26:53)
I'm going to stop you because there's a lot of people out here that actually still don't know the difference between proof of work and proof of stake. So just quick climber on that.

Jeff Schumacher: (27:01)
Proof of work, you got to do something thing to get something. That's like, you solve a puzzle and they give you a token, now that's Bitcoin, Ethereum, and such. Proof of stake, you have to stake something and they reward you for that. Proof of stake has far less carbon impact. Algorand with their carbon negative aspects are even better. So that was the eureka moment on that. And then the eureka moment on, well, we're not just trying to take something that exists fine today and make a ww.blockchain to, or .blockchain something. We're actually creating entirely new businesses that wouldn't otherwise exist without this infrastructure.

Jeff Schumacher: (27:38)
And then the third point was if you're going to do that, do it at scale. So we've launched ventures that, in the past, that didn't have scale and it required hundreds of millions of capital. You're not going to decentralize Uber. They spend 6 billion a year in marketing, right? So it's a really hard thing to do. But if you start with all the customers or the volume or what have you, and many of our ventures are starting with that volume, that's where this starts the change. And that's where this gets really exciting for the people in this room. And for that all to work, we had to bring these three parties together, which you did Anthony. And for this to get enabled, we need a protocol that can handle it.

Sarah Kunst: (28:19)
That's awesome. Steve, tell us, where do you see global adoption coming from? What's it going to take?

Steve Kokinos: (28:26)
Well, I think it comes from a few different places. I think the work that Jeff and NAX are doing is certainly a good place to start. And I think coming from organizations that have in some cases, hundreds of millions of users already gives you a way to launch things at scale that I don't think you see very often. So I think that's certainly very exciting. We do see other sources of demand though. I think one of the things that's interesting about any new technology is you don't know how people are going to use it. And so we do think, we see a lot of really cool work happening on De apps, so DeFi applications. NFTs, the creator economy, pursuing big shifts in really quickly. And then as I mentioned a couple times earlier, the other area that we see a lot of demand coming from are national projects where large portions of a country's population just get brought online into blockchain applications very quickly.

Steve Kokinos: (29:23)
We actually just, Columbia just announced last week that they have turned on their COVID-19 vaccine passport. And so a big chunk of their population will be on chain. And what we're excited about there is we think that that's a great application, but we also think that'll lead to more applications. And even in a number of those users being able to take advantage of applications like NAX i creating. And so again, I think in new application platforms, new protocols, it's not any one application itself that creates an ecosystem. It's when different applications within that ecosystem end up using each other. And that makes for really strong communities. So I think that's what we're really most excited about. And again, the more you can bring users at scale, they may come for one application or for one reason, but once they're using the network, they can use it for many other reasons too. So I think that's a really powerful effect that we're looking forward to seeing more of.

Jeff Schumacher: (30:27)
And I would say just his point on ecosystem is critical, right. So unlock in itself as an ecosystem, institutional corporate DeFi, right. So putting that together creates this peril, first of its kind ecosystem. If you think about the NAX, we've created an ecosystem over the last number of years now around to make this stuff work. You need an underwriting partner, you need a banking partner, you need a trading partner and you need a DeFi partner. So we built that on one side and then we built our platform. And then as we think about, I don't have COVID, by the way, I got my shot and everything. So every time I cough now I freak out. I'm like, no, I'm okay

Anthony Scaramucci: (31:07)
No, I trust you.

Jeff Schumacher: (31:11)
But we actually call, everything that comes out of our NAX platform, whether it's the green NAX on ESG, we call them scale ups because they're not startups. They start with the volume and that's, and I don't think it's an or you can only do it this way. You can do it both ways. But this gives us an advantage, a leg up as we get going.

Sarah Kunst: (31:33)
Awesome. And then to really look at the future, right, what does 2025 look like? What does 2030 look like for investment, for access? Where does this go in the near term?

Jeff Schumacher: (31:45)
I mean, from our perspective, we're seeing exponential growth. So it's not, it's exponentially, it's compounding. You take 30 meter linear steps, you've gone 30 meters. You take 30 exponential steps you've circumnavigated the earth a couple of times. So I think you're going to see just an explosion of growth now. And now that we have at scale protocols in ways to fundamentally create them at scale, that this is far different than it was a couple years ago. So I see it to be exponential growth over the number of years here.

Anthony Scaramucci: (32:17)
Just want to say something quickly. We made the announcement through $100 million, we're going to raise another 150, then we're going to cap it and we'll deploy it. And then we'll think about what we're going to do on our next round. But the very cool thing about this is to open up your eyes and to understand it, take the time to understand what is going on. Dan Lok was up here this morning, I don't know if you guys had a chance to see him. But he was a [inaudible 00:32:46] investor and he was a immediate naysayer on Bitcoin crypto and the blockchain.

Anthony Scaramucci: (32:53)
And then he did the work. He did a substantial amount of work, and now he's in the coin space. He owns crypto currencies including Ethereum. I've asked him to look at Algorand, and he's he's backed FTX. Sam Bankman-Fried was up here speaking before. He's one of the smartest investors I know. And he took the time and the energy and deployed his intellectual curiosity in his team, and to understanding it. And that's my message. Everybody here take the time to understand it. And then you can make an informed decision whether you want to be an investor or not.

Sarah Kunst: (33:27)
I love it. Steve, where does this go in the next five, 10 years?

Steve Kokinos: (33:32)
Well if maybe if, I'm not sure the exact time horizon, but I think if you look back, say 20 years ago, there were a lot of people questioning why anyone should care about the internet or why you wouldn't just go to the store or why would you shop online. What do you use this thing for? I think you fast forward to today, obviously it's changed the way people communicate and shop and consume media in ways that probably were maybe expected by a few, but not by many.

Steve Kokinos: (33:59)
I think when we look back from where we are now in the future, I think people will be using blockchain networks every day, using apps that folks like NAX created. And I think victory here from our perspective is that protocols like Algorand become part of the infrastructure that's used. We don't really care that much if people know that they're using Algorand. And I think when you fire up Netflix today, they use Amazon web services, but nobody needs to care about that. And so I think that really what, in a way, what we're building is the next major public utility like the internet or the phone network or electricity or wear wolves before them.

Anthony Scaramucci: (34:39)
It's a really good metaphor. It's really true.

Sarah Kunst: (34:42)
I love it. Well, thank you guys. Steve, Jeff, Anthony, thank you. And thank you all guys for being here.

Guest User

September 28, 2021

SALT NY: Digital Assets, SALT NY: Finance

From Reality Star to Business Titan: A Conversation with Paris Hilton & Carter Reum | #SALTNY

Guest User

September 28, 2021

SALT NY: Digital Assets, SALT NY: Finance

Paris Hilton is one of today’s most recognizable entrepreneurs and international influencers, Paris Hilton is a pioneer in television, podcasting and NFTs and an innovator in building businesses, social media and celebrity branding. With annual press valued at $702M in media spend equivalency, 28B monthly PR impressions, 130,000 press mentions over the last year alone and a global audience of over 54M across all socials, Hilton continues to solidify herself as a prominent tastemaker and powerful business leader.

Since starring in “The Simple Life,” Hilton has built a global empire as a businesswoman, influencer, activist, DJ, designer, investor, recording artist, philanthropist, host, actress, chef, model and author. In 2006, she created Paris Hilton Entertainment (now known as 11:11 Media), a multi-billion-dollar company that started with 45 branded stores and 19 product lines surpassing $4 billion in revenue. Today, 11:11 Media is a full-stop, integrated media and product company with verticals covering TV (Slivington Manor Entertainment), podcasts (London Audio), digital (11:11 Digital), licensing, NFTs, music, impact and more. Always attuned to emerging trends and opportunities, Hilton continues to expand 11:11 Media and use her platform to inspire, empower and create lasting positive impact.

Hilton has also solidified herself as an NFT leader as was recently seen by her being named #7 on Forbes’ NFT 50 most influential people in NFTs and through being awarded “Winner of Best Charity NFT” at the 2020 NFT Awards. In staying true to her goal of fostering empowerment and in collaboration with Sevens Foundation, Paris curated and launched “Empowered By Paris: Empowered Women Empower Women Exhibition”, which is an NFT exhibit dedicated to showcasing and equipping female artists with a platform to succeed.

Moderator Carter Reum is a Partner and Co-Founder of M13, a venture capital platform that invests in and incubates cutting edge consumer technology businesses. M13 now has two top decile funds and recently launched a $400MM Fund III - M13 now has AUM of over $750MM and is currently launching its 10th incubated business.

PRESENTED BY

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

Paris Hilton

Chief Executive Officer

Paris Hilton Entertainment

FULL BIO

Carter Reum

Partner & Co-Founder

M13

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Carter Reum: (00:07)
All right. Well, we're going to try to have a little fun here. Just in case there's any skeptics in the crowd that are trying to figure out why Paris Hilton is on stage as a keynote for lunch, let me just run through a few stats. I am going to warn you, they take a few seconds, because she's accomplished a lot, but let's just run through a few things. She has 19 product lines that have done over four billion in revenue the last decade globally. She's the highest-paid female DJ in the world. If any of you are having a birthday party, a bar mitzvah, wedding, she likes seven figures the most when she DJs. She has a social audience globally of over 65 million people, and her #thatshot hashtag on TikTok has been viewed over five billion times. Your PR reach the last 12 months makes you one of the largest 25 advertisers effectively in the country, bigger than Coca-Cola, Citigroup, and Adidas.

Carter Reum: (01:12)
I wish I could tell you I'm close to the end of this list, but I'm still about a third of the way through the list, but I'll try to speed it up a little bit. Your documentary, This Is Paris, was viewed 25 million times globally, you had 175,000 people sign your change.org petition, as a result of your documentary. This is easier though than dancing for 23 seconds on the jumbotron at the US Open on Friday, right? You've launched an audio company with iHeart during the last year, with three podcasts. You launched a production company with three TV shows already with Warner Brothers. You recently were number six on Fortune's top 50 Power Players of the NFT space. You have an investment portfolio with unicorns like Viome, Daily Harvest, things like Podz, and [inaudible 00:02:04]. I'm almost done, you're credited with being the first one to do reality TV, the original influencer, and even created the selfie, and last but not least importantly, you are marrying me this fall. Is that correct? Did I miss anything? Yeah. All right.

Paris Hilton: (02:24)
Thank you.

Carter Reum: (02:24)
Did anyone time that? Was that longer than the 23 seconds of the jumbotron at the Open on Friday? Go ahead, Paris. Did I miss anything?

Paris Hilton: (02:32)
Yes, but I think we'd be here all day if you had to list them all, but I just want to say thank you guys so much. I am so honored to be here today with so many people that I look up to and respect. I want to thank our friend, Anthony Scaramucci, for having me here today, and so many other friends in the room. Mike Novogratz, Dan Loeb, Congressman Ro Khanna, and many others. So thank you all for being here today, and I look forward to doing this with you, mister.

Carter Reum: (03:02)
All right. This is the first time we've ever done this in person, so this is definitely a special moment. Let's start with the easy but important stuff. Let's talk about your documentary, This is Paris. It launched last September. It had the equivalent of 150 million opening box office weekend. As a result of that, seven state laws have changed. The world saw a side of you I don't think they were expecting, very authentic and real, and you opened up about some stuff you never thought you'd talk about. Was that the original intention of the movie, or what was the original intention of the documentary when you were filming it?

Paris Hilton: (03:36)
With my documentary This is Paris, the original intention was just to show the true person I am, the businesswoman I am, how much I've accomplished. I feel that being in this industry for the past two decades, I was playing a character, so there's a lot of misunderstanding about me being underestimated, and I just wanted to show everything that I was very proud of. And then I ended up just getting very close with the director and started opening up to her about things I'd never discussed in my life publicly, and because of that film, it's now changed state laws in seven states, and next, I'm going to be going to Washington, D.C. in October to take this to federal legislation. So it really just shows the power of telling the truth and turning my pain into a purpose, and I'm very proud of using my voice to speak up for others.

Carter Reum: (04:33)
And for those of you who haven't got to watch the documentary yet, I expect you'll be watching it this weekend in between that and Cooking With Paris, which we'll talk about, but she talks about these schools she went to in Utah where children are sent, and physically, emotionally abused, sometimes sexually, thankfully, not in her case, but all kinds of kind of awful schools. And I have to say, it's been pretty awesome. I remember before the documentary launch, you said, "This is going to be great. It's going to shine a light on these awful schools and effectively hopefully encourage change," but I'll never forget, two weeks after the movie came out, you and I sat in our house and you read, I don't know, a thousand letters that had come in, and people just saying how much it had meant to you that you had shared your truth, and whether their truth was similar or something different, how it inspired them. And did you think a year later you would have helped pass seven state laws regulating the industry, and be on your way to D.C. in October? What's it meant to you?

Paris Hilton: (05:35)
This means the world to me, and I'm just so proud just to stand up for others and children, and make that the abuse that happened to myself and so many others no longer happens.

Carter Reum: (05:47)
That's awesome. Maybe one quick round of applause for that.

Paris Hilton: (05:50)
Thank you.

Carter Reum: (05:56)
So just switching gears a little bit here. So obviously, at M13, we kind of invest behind kind of leading consumer tech brands. We try to think about what consumers are going to be doing 10 years into the future, and invest behind the technologies that power that change. Obviously, no one has been two steps ahead of the game more than you, when we talk about things like reality TV, things like the selfie, things like social media. What trend are you most excited about in the future? I have a good feeling you might talk about NFTs, but what are you excited about?

Paris Hilton: (06:30)
There's just so many things that I'm excited about, especially all these virtual worlds and metaverses, and everything I've been doing in the NFT space, something that has just been a huge passion of mine. Back in 2018, I released a documentary called The American Meme, where I basically created this virtual world with avatars where people can come and meet, and now today in 2021, to see all of that really coming to life. So just doing things like that and being involved, and always being an innovator and someone who sees into the future, so that's something I've always been very proud of.

Carter Reum: (07:09)
And just to fill in the gaps for people, when did you do your first NFT and how'd you get to be number six on the list on Fortune?

Paris Hilton: (07:16)
Way before the whole NFT craze started, so I did my first NFT in March of 2020, where 100% of the proceeds went to charity.

Carter Reum: (07:25)
Yeah. I think one of the things that you always tell me what you love about NFTs is it just makes too much sense not to be a technology of the future, and for you, you have the unique ability to think about NFTs. I don't think I said it on my list, but you did set the largest female auction comp of an NFT. If anyone has any digital currencies burning a hole in their wallet, she sold her [inaudible 00:07:49] for 1.2 million. So, but she'll have some drops coming up, but I think it just does make too much sense for you around collectibles, music, the creator economy, kind of all these different things, so it's fun to watch you tackle it.

Carter Reum: (08:03)
Obviously, a big topic of conversation the last two days here has been crypto. People like Michael Saylor and the Winklevosses, and many others were very excited when you changed your Twitter profile about six months ago to you with laser eyes. Some people on Twitter immediately said, "Oh, here she is jumping on the bandwagon," but then a lot of other people on Twitter immediately came due to your defense and pointed out how long you'd been talking about digital currencies. Can you fill in the gaps for us in terms of kind of how you got excited about Bitcoin, and Ethereum, and the different digital currencies?

Paris Hilton: (08:40)
Yes. I have been involved and interested in this since 2016, when I had dinner with the founders of Ethereum when I was in Berlin, and just hearing about it, I just thought it was the future, and now to see today just how it's blown up, is something very exciting. So I'm very grateful that I invested back then.

Carter Reum: (09:02)
Yeah. So just to set the record straight, she was talking about metaverses in 2018, so well before Zuckerberg started talking about them two weeks ago, and she was buying digital currencies in 2016. So if you guys could Tweet that out to set the record straight, that would mean a lot to everybody.

Carter Reum: (09:20)
All right, all right. We're going to insert some light questions along the way too. Let's talk about brand evolution. One of the things people talk about when it comes to you, Paris, is no one understood brand like you did, coming out of The Simple Life. I think some people have said, "She's famous for being famous," but the ones who know you correctly point out that you were famous for being the first one to understand you were a billboard 24/7, and you could be a brand, not just a traditional brand. This year, it was fun to watch you during COVID, you made me lasagna, you put it out on YouTube, the world went nuts for it. Two months later, you had sold a deal with Netflix, and it launched to a lot of fanfare, two weeks, I guess, two or three weeks ago. But what is it that gives you the ability in one second to be cooking lasagna, in the other second to be going to D.C. and introducing federal legislation, in the next minute DJing? How do you think about kind of experimenting or being one step ahead?

Paris Hilton: (10:23)
I just feel very blessed that I get to do so many things that I love and that I'm passionate about, and I feel that I have this ability and this power to really elevate things and share my platform with so many. And even though it's constant, it's 24/7, and travel and working, it doesn't even feel like work because I really love what I'm doing, and I love inspiring and empowering others. And right now, just building my new media company, which is very exciting. So yeah, that's my next focus right now.

Carter Reum: (10:54)
Are you trying to steal my talking points? That's the next question, Paris. We talked about this, don't steal my thunder.

Paris Hilton: (11:00)
I'm psychic. I told you.

Carter Reum: (11:00)
In all seriousness, okay. So most people think you were the first creator. For VCs like me, all we talk about is the golden age of the creator. One or two stats, so far in 2021, 3.3 billion has been invested in creator economy technologies, sponsored influencers are worth about $8 billion today, meaning payments going to creators, and they think that number will be 15 billion by 2022. You just kind of teased it out, but obviously, you've been building a media company. I know your partner, Bruce Gersh is here today. You've hired 10 people during COVID. Why are you going from what you've been doing previously, which was just building on your own, to now building out a media company?

Paris Hilton: (11:46)
I just feel that I'm ready to take this to the next level, and what we're doing is something that's very innovative and exciting, and just seeing people like LeBron, who's built SpringHill, and also Reese Witherspoon who built Hello Sunshine, which was sold for 900 million, I feel that I have the same ability to do the same thing, and that's what we're doing right now. And I want to thank you, Bruce Gersh, so much. You are incredible, and I love having you as a partner and founder with me, and I'm so excited for what we're doing together in the future, so thank you.

Carter Reum: (12:17)
And I'll take the clap. I appreciated that, a little golf clap. Yeah, no, I appreciate that. Yeah, exactly. It's the lunch session, people. We got to keep it light here. Now, I do think it's a really interesting time in the creator economy from where we sit. You kind of have a diverge of kind of of two different types of creators, right? We've never lived in an era where your son or daughter who's kind of funny on TikTok, can somehow figure out how to monetize his influence. So on one hand, you have all these great tools that VCs like me are investing behind on the creator economy. On the other hand, people like Paris, Kevin Durant, Reese Witherspoon, LeBron are building these big media companies, because why should a media company be anchored by a news publication, versus somebody like Paris? I think what's fun to watch is how you can be the heartbeat of that media company, but make it so much bigger than you. All right, let's keep it light here. Which one of my light questions? All right. What is one thing nobody knows about you?

Paris Hilton: (13:13)
There's a lot people don't know about me. Well, one, I'm an undercover nerd. People don't know that. I am a huge tomboy. I love to go fishing, and surfing, skydiving. I was on my high school ice hockey team.

Carter Reum: (13:32)
And that's a true story. If anybody wants to Google that, you will enjoy the photo. It's one of those photos where you're like, "Who doesn't belong in the high school ice hockey team?" Keep going, Paris.

Paris Hilton: (13:45)
Yeah, there's there's lots, but we'll talk about it now in a second.

Carter Reum: (13:49)
I think the one thing that people don't know about you that I always tell people, is it is very well documented that Paris Hilton loves shopping, right? I think everyone knows that. What people don't realize is her favorite store, does anyone know what her favorite store is? Has anyone heard her talk about it? The Hudson Books in the airports. This girl will buy 8, 10, 15 business books. We have a carry-on that we take everywhere with us, just with those books, and I'm like, "Hey, maybe we just bring one or two books. Do we really need all 15?" She goes, "Well, I don't know which business book I'm going to feel like reading today." So everywhere around the world we go, we take that small carry-on with all the business books. All right. Let's do another fun one to keep it light here. Again, this is the lunch session. If you were a weather forecast, what would you be?

Paris Hilton: (14:40)
Hot and sunny.

Carter Reum: (14:43)
Hot and sunny, you heard it here first. It'll probably be on page six tomorrow. All right. Let's keep going on audio and podcasting. So you formed a partnership with Bob Pittman and iHeartRadio, obviously the industry leader in podcasting. You launched This is Paris, your podcast, you have a second podcast, which you can talk to the audience about what that is, and you have a third that will be both a podcast and a television show. Let's just talk about audio, and I'll prompt you along the way. What got you excited about audio and podcasting?

Paris Hilton: (15:17)
I got excited when we had dinner with Bob Pittman and we were talking just about the power of audio, and during the pandemic was the first time I ever even listened to a podcast, and I really loved how you could not only be listening to it, but you could be doing other things at the same time, and I also loved that I could have my own podcasting company. So when Bruce came up with that idea, I was like, "This is genius." So launching my podcast was so much fun because I've been interviewed like a billion times, so I love being able to turn the tables and be the one who gets to ask the questions, and make a really safe space for my friends to come and talk about anything they want, and also being able to control my narrative, because I feel like for so many years, the media has controlled my story, and I want to be able to tell the truth, and when things come out in the media that aren't true, I'm able just to go right on there.

Paris Hilton: (16:10)
And I invented something called Podposts, so it's basically more short form where I can talk about anything that's happening and literally have it up within an hour. And we've been doing a lot of that and correcting a lot of the information, and also being able to share my platform with others. We just launched another podcast with Cindy Eckert who sold her company for a billion dollars, and that one is called DOMINATED, and we are about to launch another one with a TV show along with it, and that is going to be about the social advocacy work and the troubled teen industry. And then some more coming up soon, which I can't announce yet.

Carter Reum: (16:49)
Just so people know whether they should go to your podcast tomorrow, will you be doing a Podpost on the SALT Conference and Anthony?

Paris Hilton: (16:55)
100%.

Carter Reum: (16:57)
All right. Quick show of hands, who's going to download it? Every download counts. Can I count on you? Okay, yep. A little over here. Oh, okay. All right. Every podcast counts, every download counts. All right. Let's switch gears a little bit from audio. I Googled it, because I wanted to see. You have five words in the Urban Dictionary. You actually hold the record from the time you first said a word to the time it showed up in the Urban Dictionary, I think it was two weeks, but you have famous catch phrases like, "That's hot." Actually, funny enough, my cousin Chloe was telling me she read a case study at Georgetown Law School about how you sued Hallmark and won, for infringing on your trademark. You obviously have catch phrases like, "Loves it," and "sliving." why come up with these catch phrases? Is it just that you're really good at creating them, or how did you think about it?

Paris Hilton: (17:48)
I just, I think I'm really good at coming up with words, and I just think it's important, I feel like every brand, they have their slogans and what people remember them for, and I don't know, sometimes when I just say something it catches on, and I think that's just what about being an influencer and a trendsetter is about.

Carter Reum: (18:08)
Cool. Just one thing I wanted to put you on the spot on while I have all my friends here at the lunch session, it was kind of news to me, but when you went on Fallon the other day, you said you have 10 dresses you had custom made for the wedding. Is that right? I thought you promised me this was going to be a low-key affair.

Paris Hilton: (18:25)
Well, it is a three day event, and I do love my outfit changes, so 10 or maybe more.

Carter Reum: (18:31)
So how many tuxes should I be thinking about?

Paris Hilton: (18:33)
Not 10.

Carter Reum: (18:34)
Okay, less than 10. All right, everyone heard it here first. Let's talk about your TV production company, because obviously, you're doing something leading up to the wedding, but you just launched Cooking with Paris on Netflix. For those of you who think she's going to teach you how to cook, you're going to be sorely disappointed. She mostly makes you laugh, with a side of teaching you how to cook. Things like Unicornoli, things like caviar and French toast with Frosted Flakes, so very cooking light. It's been recently in the press that you launched Paris in Love, leading up to the wedding, with NBC Peacock. Can you talk about Paris in Love and that show, and what's it going to kind of chronicle, and why did you decide to launch a production company with Warner Brothers?

Paris Hilton: (19:19)
Well, yes, I'm so excited for my new production company with Warner Brothers called Slivington Manor Entertainment, and to partner with Mike Darnell. He was the one who started out my career with The Simple Life, and being the OG who started reality television, I just thought it was the perfect next step to own my own production company and really just make content not only that I'm in, but also where I can be behind the camera and produce, and really just put out empowering, and inspiring, and thought-provoking content. And Paris in Love, I'm having so much fun. We've been filming it the past few months, every single day, so it's a lot of work. So just the whole lead-up to the wedding, which being a bride is already stressful enough as it is planning a wedding, but having a camera crew follow the whole time makes it even more stressful, but it's going to be a very interesting show, and very excited to partner with Peacock on this, and that will be out in the next few months, so stay tuned.

Carter Reum: (20:19)
Cool. And talk about, because I've heard you mention it plenty of times, why a TV production company now? You obviously had the opportunity to do it over the last 20 years. I know you mentioned just kind of the proliferation of streaming content, but just talk through why now, in terms of why the production company?

Paris Hilton: (20:36)
I just have so many things on my plate. I'm doing so many things and there's not enough time for me to be on camera all the time, so that's why I wanted to really do this so I could create, so that other people I could share my platform with, and really put out content that I think is going to be entertaining and fun, and really part of my brand.

Carter Reum: (20:56)
Cool. One thing that I had written down here to keep it light, let's let's ladder back to The Simple Life. Well before I knew you, I remember seeing a trailer for The Simple Life, and there's this cute little scene that put The Simple Life on the map, when I think you're probably in Arkansas or somewhere nearby, the family you're staying with, they're talking about Walmart, and you say in your cute cartoon, fake voice, "Do they sell walls there?"

Paris Hilton: (21:25)
I said that.

Carter Reum: (21:25)
Did you really not know what they sold at Walmart? Just clear the air for everybody here.

Paris Hilton: (21:31)
I say nothing by mistake. I'm not a dumb blonde, I'm just very good at pretending to be one.

Carter Reum: (21:38)
And for those of you... Okay, I like it. Yeah, yeah. Okay. And we do spend a lot of time. We don't have a Walmart near us, but we do spend a lot of time at Target. So I know that you knew what was Walmart.

Paris Hilton: (21:52)
Yeah, I like Walmart. It's fun.

Carter Reum: (21:54)
All right. Let's talk about investing. Obviously, it's what I spend my day job doing at M13. You've obviously, as I mentioned, you've invested behind great companies like Viome around gut health, Genies around avatar, the unicorn Daily Harvest, and a lot of others, and I think we'll see a lot more of it in the future. In the crypto space, you've been involved with things like Origin Protocol. Why get excited about investing, or how do you think about investing?

Paris Hilton: (22:22)
Well, I have you to thank for that, because you really got me involved in this whole world of investing. I have just been so blown away with everything you guys have done at M13, and just everything that you have ever told me about has always been a winner, so I trust everything that you say.

Carter Reum: (22:38)
No pressure, no pressure. To be fair, the first thing I had her invest in, she hit 18 times her money in four months, and now she said, "That can happen every time, right?" I was like, "Well, not exactly." We have two top decile funds, but that's going to be tough to beat.

Paris Hilton: (22:54)
But yeah, I love investing behind entrepreneurs that I really believe in, especially female entrepreneurs, just because being in this industry for so long, it took a while for people to take me seriously. So that's something that's always been a huge focus of me, and I just love to be involved in things that are innovative and the future, and just projects that again, I want to share my platform with, and that I want to help promote all around the world and get the word out there, and I have the power to do it, so I do it.

Carter Reum: (23:24)
Cool. I think what's been fun for me to watch the last year is the power of your platform is so big, so global. It ranges from teenagers who sing your songs, to adults who grew up watching The Simple Life, and everything in between. But now, I think what is going to make you so powerful the next decade is the fact that you've realized you can use your platform to influence your own companies, you can use your platform to influence companies you invest in, and in this particular case, obviously Congressman Ro Khanna I know is somewhere in the building, but he and others are very excited to see you take your federal legislation to D.C., and see if you can affect change the there.

Carter Reum: (24:04)
So it is really fun for me. I can tell you very proud for me is that people accost us everywhere and say, "Hi," and take a selfie and want to talk to Paris, and a year ago it would be like, "Oh my gosh, I love you, Paris Hilton. Can I take a photo?" And now it's just inspiring to see how many people come up to you and say, "I love what you're doing. I love that you're making the world a better place." So as your future husband and fiancé, I want to tell you I'm extremely proud of you, so I love you.

Paris Hilton: (24:33)
I love you too. Thank you.

Carter Reum: (24:38)
All right. Probably the last two or three minutes here, and maybe even shorter. So we've talked about a lot. We've gone through everything. I do want people to be able to eat their lunch a little bit here. Anything that I didn't talk about? Anything on the horizon or anything you're thinking about for the future?

Paris Hilton: (24:55)
Yes. You know me, I never stop, I keep going, and I'm going to continue to do what I'm doing to expand my brand and my empire all around the world, and my goal is the next time that I'm speaking at this conference, that I'm here to talk about selling my media company for a billion.

Carter Reum: (25:12)
All right. You heard it here first. Thank you.

Paris Hilton: (25:16)
Thank you all. Thank you so much.

Carter Reum: (25:20)
All right, thanks.

Paris Hilton: (25:21)
That was fun.