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: Life Sciences, SALT NY: Technology

Programmable Biology & Institutional Innovation | #SALTNY

Guest User

October 15, 2021

SALT NY: Life Sciences, SALT NY: Technology

Programmable Biology & Institutional Innovation with Jason Kelly, Founder, Ginkgo Bioworks. Dr. Uma Valeti, Chief Executive Officer & Founder, UPSIDE Foods.

Moderated by AJ Scaramucci, Managing Director, The SALT Fund.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Jason Kelly

Co-Founder & Chief Executive Officer

Ginkgo Bioworks

FULL BIO

MODERATOR

AJ Scaramucci

Founder & Managing Partner

SALT Fund

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

AJ Scaramucci: (00:04)
Welcome Jason, welcome Uma. Happy to have you at SALT. This is a topic on something I'm extremely passionate about, the intersection of software and biology. I'd love to start with you, Jason. So back in 2008, you and your team at MIT really predicted this technological Renaissance in biotech, you saw the convergence of technologies, including CRISPR for gene editing, low cost genome sequencing, using software to literally program cells. And today you're synthesizing things in the food industry, things in the pharma industry, among others.

AJ Scaramucci: (00:51)
This Friday, guys, this Friday, Jason is taking his company public in what will be the largest biotech IPO of all time, raising $1.6 billion from Viking, ARC, and a number of others. Can you explain to the audience what programmable biology is and what the vision for Ginkgo is?

Jason Kelly: (01:14)
Yeah, happy to do it. So the core idea is that inside of every cell is digital code in the form of DNA, so it's ATCs and Gs, it's not zeros and ones like in a computer, but you can read that code with DNA sequencing, genomics, and you can write that code, and this is really important, with DNA synthesis, DNA printing, which literally means you go on a computer, you type ATCGGG you hit print, and out of our labs in Boston or other companies like twist Bioscience in San Francisco, a piece of DNA gets printed.

Jason Kelly: (01:48)
And so if you can read and write code and you have a machine that would run it, which is sort of how we think of a cell, you're programming. And so the idea behind Ginkgo, we realize this idea, like you mentioned back at MIT, because we were engineers that came into biology later in life, computer scientists, mechanical engineers and so on, and there's this realization that, well, if you look across all of life, the DNA is the same, and inside of every cell, the infrastructure is the same to read that code. And so why is it that you don't have the kind of horizontal platforms like we saw in computers? Where are the operating systems? Where's the Amazon Web Services?

Jason Kelly: (02:29)
The idea behind Ginkgo was, well, let's build that. What does the platform look like that makes it easier and faster to program cells year over year? What application? All the applications. Just like you wouldn't ask, what application is Windows being written for, it's all of them. Which website is AWS for? It's all of them. The idea behind Ginkgo is, what engineered cell are you trying to produce? All of them. And our customers basically come to us, ask us to program them a cell, and then we deliver for them, and then we make money like Apple would in the app store. We basically take a royalty of value share on the value of that end app.

Jason Kelly: (03:08)
We'll talk about it today, but that can range, like AJ mentioned from you have $100 million joint venture with Bayer crop science to engineer microbes or produce fertilizer. We just announced a partnership that concluded with a company called Aldevron, which is one of the biggest MRNA vaccine manufacturers, where we optimized a cell to produce vaccinia capping enzyme, one of the supply chain components in MRNA vaccines. To Roche and antibiotics. To we work with Altria's joint venture Kronos in Canvas. All of these things are actually cell programs.

Jason Kelly: (03:40)
Real excited to be here today to talk about how that technology is improving and share it with you all. And yes, we all are listing. We're excited about it. We're going to trade as DNA, which used to be Genentech's old ticker before they got bought by Roche, which is, for a bio nerd like me is like Nirvana, so I got really excited about it on Friday.

AJ Scaramucci: (04:00)
That's awesome. So moving to you, Uma. So just to rattle off a few quick stats, I think 33% of the planet's non-ice land mass is used for agriculture. We're seeing 80 billion animals a year being slaughtered. And not only that, the demand for meat is expected to double by 2030. Can you explain what you're doing to change this, to solve this problem? And also what the essence of cultivated meat is?

Uma Valeti: (04:33)
Absolutely. AJ, it's great to be here back in New York. So cultivated meat is a field that's moving rapidly from science fiction into reality, and the idea behind this is you could cultivate meat directly from animal cells without having to raise an animal. So this has been a field in the waiting for the last several decades. You've put a lot of stats on the table, but I want to restate some of them because they're so important.

Uma Valeti: (04:58)
We right now have seven and a half billion people, and we eat about 75 to 80 billion animals every year. And the demand of meat is supposed to double by 2050. That means we need to figure out a way to grow 150 billion animals every year to feed 10 billion people. And these numbers are just mind boggling because of the amount of meat that needs to be produced, and in doing so, it clearly have a clear impact on the environment, climate, animal welfare, and health.

Uma Valeti: (05:26)
The idea for cultivated meat that Upside Foods pioneered is in late 2015 we started the company saying we want to grow meat from animal cells so you don't have to raise billions of animals every year. And we started off in 2016, we released first a beef meatball, and that just blew people's minds because we took a few cells from an adult cow, the cow doesn't need to be slaughtered, by the way, for this, and we grew it into a meatball and did a tasting, the Wall Street Journal wrote about it. And it just took off in people's minds because imagine if you can start producing meat across any species, meat, poultry, seafood, and you start doing it with significantly less resources.

Uma Valeti: (06:09)
Because when you think about a beef cattle, it takes about two to three years to get to slaughter. For a pig, it's about a year. For a chicken it's two to three months. If you think about those lifespans for those animals, and we can do all of that in two to three weeks independent of any species, it could be beef or it could be tuna, that opens up an enormous opportunity. And that's really what Upside Foods has pioneered.

Uma Valeti: (06:38)
We have done beef in 2016. We've done chicken and duck in 2017. We are just in the process of building the first production facility that can show end to end production of meat in a clean environment, right from the first cells. So we expect people to come on tour. We call it a slaughterless house. It's just obviously in trend with all the things we want to see happening in the next 10, 20 years in the world reduce use of resources, reduce greenhouse gas emissions, improving awareness of where food is coming from.

Uma Valeti: (07:08)
I think we are tapping onto a trend just like you've seen in 2008 of programming biology. We think we can basically bring any edible species of meat, poultry, or seafood to the world.

AJ Scaramucci: (07:18)
Wow. You guys have a lot of intersectionality in your work and in your companies, and one of the big mega trends in the food and ag tech industry in recent decades has been plant-based alternatives to meat products. You see Beyond, Impossible, in the burger category, you see people like Oatly in the milk category, and this has been phenomenal. Many of these companies are now listed publicly.

AJ Scaramucci: (07:48)
But there are two other paradigm shifts in the space we're also seeing, maybe in the earlier phase. One is precision fermentation, this is an area you do a ton of work on. You've got another joint venture in Motif, which is operating in the dairy industry, and let's perhaps start there, and then we'll go to Uma. I'd love for you to compare and contrast the differences and distinctions and the nutritional profiles of these things like Impossible and Beyond relative to what you're working on. Start with Jason.

Jason Kelly: (08:18)
I think there's going to be two generations here, and I can speak to the first one, Uma may speak to the second. So the first generation is exactly what you're saying, things like the Impossible burger, which, by the way, I know you're a vegetarian, I'm not a vegetarian. I grew up having a cheeseburger every day for lunch, and so you bite into an Impossible burger, it's pretty interesting. It bleeds.

Jason Kelly: (08:43)
That's a bit weird. There's not a lot of blood in plants, so how are they doing that? And what they've done is they've taken the gene for hemoglobin, which is the protein that makes blood red, and they take a yeast cell, like a brewer's yeast, and they program the genome, which is what we were just talking about, you're essentially installing some new code in there. It's ATCs and Gs, but it's new code. And then you grow that yeast cell up almost in a brewery, except instead of beer coming out, hemoglobin comes out. And then you add that back into this veggie burger and suddenly it smells right, tastes right, it's the Impossible Whopper at Burger King. First real innovation, as far as I'm concerned, in the burger industry, probably in 100 years or something.

Jason Kelly: (09:23)
There are other animal proteins like hemoglobin. There are key proteins in milk that makes cheese stretchy. If you've ever had a vegan cheese, it's not a great experience. That's because there's no casein in vegetables. And so these types of proteins will be made by fermentation of microbes or yeast, and then added back into largely plant-based products. That's the first generation and one of our app developers, Motif, is doing exactly that at Ginkgo.

Uma Valeti: (09:49)
I want to add onto that. So there's a couple of generations of food that are evolving very rapidly and Beyond and Impossible, and all plant based categories have done a fantastic job improving awareness of why food has to come from a place where it can be scalable, sustainable. And I think they've done great in improving even the quality of taste of vegetarian products. The burgers used to taste really terrible, and imagine what Beyond and Impossible, they've made them tastier. And they've done it through various combinations of color, taste, flavors, and they've used recombinant proteins in the case of Impossible to make it have the little ion or metallic paste when you bite into a burger. And that's been fantastic.

Uma Valeti: (10:28)
I think the evolution is going to be continuously going to, what's the holy grail? When we think about the food that we all fall in love with, for 10,000 years meats been the central plate. And when you think about what's on the central plate, it's a piece of steak or a piece of chicken breast, there's billions of cells in that and cells are the building blocks of all food. And what we're trying to do is to say, well, let's take the cells, keep them intact, because the cells are already programmed with the DNA or the code of what they're supposed to do, and let the cells grow on their own way that nature has already programmed them to do, and we provide them with the nutrients and the cells make the proteins, they make the fats, they make the little molecules that give you the taste and the texture and the aroma.

Uma Valeti: (11:13)
In our view, we think the palette is enormous. We don't think that one single protein can really make up for all the millions of molecules in a cell, so we're trying to harness the power of a cell and say, let's figure out a way to find the best quality cells for any species, and let's grow them outside the constraints of an animal, and that's step one.

Uma Valeti: (11:34)
So you put a product that has the taste and the texture, aroma, features, and then the next step, this is where I get really excited as a cardiologist is, what don't we start making the meat that we eat healthier? Can we start making it better for patients that have risk of developing cardiovascular disease or already have cardiovascular disease? Can we make this meet how characters that do not provoke inflammation in the human body?

Uma Valeti: (12:00)
Think about athletes. They want high, bioavailable, dense, protein. What if you make meat with higher protein? Think about patients with chronic kidney disease, they love to eat meat but as a doc I used to write the prescription, low protein, two gram sodium diet. Now what if I can tell them, you can eat meat, you could eat chicken, you can beef, but we can keep it low protein so your kidneys don't have to bear the brunt of that demand.

Uma Valeti: (12:22)
It opens up the pallet in a very different way and that's really what I'm excited about this generation of bringing meat to the table that maybe for the next 10,000 years could start evolving differently.

AJ Scaramucci: (12:33)
So to yes and this a bit, there are 400,000 plant species that are edible to us humans. We're eating less than 5%. And that's agnostic of culture, whether you're here in the US, China, Europe, et cetera. And in the meat category, there's a few animals that we eat. It's really just cows, chickens, pigs, et cetera, a very narrow experiential band. And I'm curious, for you, Uma, perhaps, first, where do you see this going? What other unique combinations of food and protein do you expect to see on plates going forward in the future?

Uma Valeti: (13:15)
It's a great question. I think Upside Foods is starting by launching chicken first. So we've already said Upside chicken is going to hit the markets as soon as we get regulatory approval, but we're working with the FDA and USDA to do that.

Uma Valeti: (13:26)
We picked chicken because chicken is universally loved in every culture and it's very versatile to cook, and that's the reason for chicken. But we have a portfolio of products that we're working on that includes beef, and pork, and seafood, crustaceans. But the thing that, as you talk about what's the next generation products, there's only a small number of animal species that are being eaten right now because it's easy to grow them in confined spaces. But what if we take those confines out? That we can literally take any edible cell from meat, poultry, seafood species, and start producing them in a clean environment.

Uma Valeti: (13:57)
Now game animals don't have to be at risk. The biodiversity doesn't have to be as much as the risk, especially if you're hunting them down for meat. That opens up an incredible possibility. And think about seafood. There's enormous numbers of species we don't even know about, but we're just losing them on mass because of whether it's deforestation in the Amazon, or, if you watch Seaspiracy there's a pretty nice account of what's happening with the species.

Uma Valeti: (14:22)
We think that if it's for food for humans, we can solve that problem. In doing so, then you have a ripple effect. You don't have to plant lots of crops in the Amazon. You don't have to transport... Transportation of meat is a huge burden. If you start producing meat locally, that just changes everything. Local, regional, decreased transportation, not need to have the level of refrigeration and fear of salmonella are E.coli. I think it opens up a lot of possibilities.

AJ Scaramucci: (14:51)
Sure.

Jason Kelly: (14:52)
So have you tried to do it? Have you tried to grow cells from like a panther or something just to see if you can grow them?

Uma Valeti: (14:59)
Our engineering and scientific team are incredibly creative. They'd love to get their hands... I can tell you, we have someone who is actively trying to figure out, can we bring the wooly mammoth back? So it goes back pretty far away, so it's not for a lack of imagination.

Jason Kelly: (15:13)
Mammoth steaks.

Uma Valeti: (15:14)
As a business, we need to make sure it's right front and center we're putting products people want to eat right now.

AJ Scaramucci: (15:19)
I want to move to another really hot button issue, particularly here today with Dr. Scott Gottlieb here, and that's the pandemic. And Jason, you've been operating on hyperdrive at Ginkgo. In the midst of the breakout last March you were working in collaboration with not only US government, but also Moderna to help synthesize different aspects of the MRNA vaccine. I'd love your commentary on where things are today in regards to the pandemic, from your perspective, and secondarily, how you guys at Ginkgo are thinking about prevention of future pandemics, how are you building a societal immune system, if you will?

Jason Kelly: (16:05)
This is a super good question. I think one of the interesting things about the pandemic is we now have a lot more broad based awareness of biology. Everybody suddenly knows... My parents know what MRNA is and PCR tests and all these things. And so that's actually a good moment, I think, and not a great situation right now globally with the pandemic, but it's not a situation that is leaving our minds tomorrow. And so I think actually we're a little bit lucky in this happening before we got very good at programming biology. In other words, we're just at the beginning, we're just inflecting. It's kind of like semiconductors in the 50s or 60s, or personal computers in the 80s, with synthetic biology today, programming cells.

Jason Kelly: (16:50)
And so we're getting a chance to build the equivalent of cybersecurity before the internet, and that's what COVID offers us an opportunity to do. And so I think that the big pillars to this are rapid vaccine manufacturing, rapid therapeutic development, and then surveillance testing. In other words, monitoring, kind of like you would with a weather satellite, so that what's going on.

Jason Kelly: (17:14)
We were lucky enough to be able to help. Obviously I mentioned this project we did with Aldevron, one of the vaccine manufacturers, to optimize the production of one of these enzymes that's used in the MRNA vaccine manufacturing process of places like Moderna.

Jason Kelly: (17:27)
The other area we've actually spent a lot of time in is in the surveillance testing category. So at this point we're doing, I believe, more K-12 testing in the country than anybody right now, which the country's done a good job giving a lot of money to states to say, hey, let's keep schools open by monitoring so that you could close a classroom, not a school, and that's the power of having this ability to see what's going on, to allow governors and other leaders to have less disruptive public health interventions, less quarantining, these sorts of things, while in the midst of an epidemic. And that, I think, is something we need as a country just from a national security footing at a minimum, and certainly during COVID so that our lives can be more normal.

Jason Kelly: (18:09)
We're happy to be participating in it. It is certainly a big problem, but I think you are seeing the country, and the rest of the world, muscle up to build the technology that hopefully then persists to make it way harder for us to get hit this hard again in the future.

AJ Scaramucci: (18:26)
Definitely. And to double click on this a bit, Jason, so there's been a number of talks this week about longevity, cellular reprogramming, Yamanaka factors among other things. You've got quite a bit going on in the cellular therapeutic space, in the biotech space, synthesizing small molecules among other things. Can you touch a bit more on that?

Jason Kelly: (18:51)
The good thing about Ginkgo is we're not a product company. So I mentioned all these things we're doing, that vaccine [inaudible 00:18:58], that's Aldevron's product. The work we're doing in antibiotics, that's Roche's product. And so there is a big opportunity.

Jason Kelly: (19:04)
We just announced a partnership with Biogen, one of the big gene therapy companies, to work in AAVs back in the first quarter of this year, earlier this year. That whole category of cell and gene therapy, I think particularly after the success of MRNA vaccines, you're going to see that category get substantially bigger in the future. You're getting manufacturing built out to make it cheaper. All these things are happening right now. So we expect that to be something that a lot of our customers come asking for in the next couple of years, would be, hey, Ginkgo, could you program me a more efficient gene therapy or cell therapy, TCRs, things like that, for sure.

AJ Scaramucci: (19:41)
And over to you, Uma. I mean, I remember, I think it was back in 2009, there was a breakout of H1N1, or the swine flu, and there were 153,000 people killed over a six month period. That was, at the time, an unmitigated disaster. Today, you've got COVID-19, there's over four and a half people dead in the last 14 months. Both of those instances emergent, one from a wet market in Wuhan, the other from a slaughter house. I'd love for you to touch on how what you're doing really affects food security, both here in the US and abroad.

Uma Valeti: (20:23)
Thank you for asking the question here. This pandemic has touched us really closely. I lost my dad to COVID about seven months ago, and I lost a first cousin to COVID about nine months ago, and this was all before vaccines were available. And after vaccines were available, my dad's family members, my mom's family members, all got vaccinated and they all survived after getting COVID.

Uma Valeti: (20:50)
It's very clear how we innovated under pressure and got the vaccines out. So I lost my dear dad, who has been a big supporter. He's a veterinarian, by the way. I grew up with him, with cattle, sheep, everything around me. But nature has given us a clear mandate to adapt and if we continue to raise animals in intense confined production facilities like we have now, it's just a place of intense concern. It's like a, I won't want to use the word, but it's a ticking dash dash.

Uma Valeti: (21:24)
So every effort should be made for us, number one, to walk back from that with what we've done to produce food. And that's where I hope cultivated meat can play a big role. It's going to take a long time to transition away from the number of animals we are raising and that is still needed to put high quality protein on the plates. Meat alternatives, plant based, are doing a great job, but if we want to preserve the choice of eating delicious meat, that is climate friendly, that is healthy, and doesn't increase the risks of pandemics. I think this is a really big opportunity for us.

Uma Valeti: (21:55)
Even before COVID we were talking about this all the time, but during the last 18 months, the amount of interest in the work we're doing just has gone up 10 X, and there's dozens of companies across the world, in nearly every meat producing country, meat consuming country, that have been started. Governments have been giving grants on this, undergrad and PhD research programs have been started, lots of regulatory agencies are really active thinking through how can we get these products out to market? So I think we have a pretty big opportunity to adapt, and it's just the time to pay attention to it.

AJ Scaramucci: (22:26)
Uma, you've done a lot of R&D across many different cell types. You seem to have settled on chicken as your beachhead product. When can we taste it? When will it be out in the world? And does is your product pipeline look like today?

Uma Valeti: (22:42)
Absolutely. So we announced Upside chicken will be coming to the market. We are awaiting regulatory approval from the FDA and the USDA. The agencies have been remarkable in producing a guidance on how we can regulate the cultivated meat industry [inaudible 00:22:57] working with them. So we've announced our first partner, Dominique Crenn, who's one of five three Michelin star women chefs in the world, and she's in the Bay Area. So we plan to release our initial products through a collaboration with Dominique Crenn at Atelier Crenn restaurant, but just to follow up right after, there's a number of restaurant partners and also smaller grocery chains that we're talking to, and we hope to be able to announce that.

Uma Valeti: (23:20)
We can't make enough at the moment. That's really why the first industrial scale production facility opening in the Bay Area, I think it's going to be a crown jewel for innovation. But based on that, we expect to build much larger scale commercial production facilities in the US and also outside the US, that could make 10 to 20 to 50 million pounds of meat every year.

AJ Scaramucci: (23:43)
That's very exciting.

Uma Valeti: (23:44)
The of portfolio products, chicken will be our first one, but like I've said, we're working on beef and pork, seafood, and crustaceans. We want to be able to release them directly as an Upside brand, because we also see this as an incredible brand building opportunity, a platform that can bring the foods we love to the plate. So if I say what's our ultimate vision and goal, we want to be the most desirable brand of choice for meat lovers across the world in 10 years from now.

AJ Scaramucci: (24:12)
Fascinating. And as the last question we'll go to you, Jason. So really this programmable biology mega trend is just getting started. And I like to think about it myself as evolution going from natural selection to intelligent direction. We're now able to shape, shift, and program biology at will. Where does this go in another 10 years, in another 20 years, another 50 years? If you wouldn't mind.

Jason Kelly: (24:41)
What I think is cool about it is it's going to touch a whole bunch of different industries. The way I get it in my head is I think about computers. That was a programab;e technology, you put in different code, it does new things, it gets better every year. What industries did it disrupt? Well, media, finance, telecom, advertising, all the information based industries. Well, why is that? Well, a computer is a programmable machine, but fundamentally it moves information around, it moves bits, zeros, and ones.

Jason Kelly: (25:09)
Well, a cell is programmable. You put in new code, I swear to God, it does new things. Incredible. It literally runs on digital code. But it doesn't move information around, it moves atoms around. So if you think of the industries that are going to get disrupted in the next 10 to 20, 50 years, it's all the physical goods industries. It's building materials, it's electronics, it's food, it's all the stuff, all the things, that, by the way, you know what computers didn't disrupt, hamburgers. These industries have been left alone for the last 50 years of innovation and they're all biotech industries. They just don't realize it yet.

AJ Scaramucci: (25:42)
Fascinating. And with that, we've got an IPO coming out this Friday, keep an eye out for that at DNA. And hopefully we'll be tasting your chicken soon. [crosstalk 00:25:52]. Thanks, guys.

Uma Valeti: (25:53)
Thank you.

Guest User

October 14, 2021

SALT NY: Technology, SALT NY: Finance

Data Discovery to Data Intelligence | #SALTNY

Guest User

October 14, 2021

SALT NY: Technology, SALT NY: Finance

Data Discovery to Data Intelligence with Heidi Lanford, Chief Data Officer, Fitch Group. Thomas J. Lee, Managing Partner & Head of Research, Fundstrat Global Advisors. Charles Poliacof, Chief Executive Officer, Knoema.

Moderated by Marc Lopresti, Co-Founder, BattleFin.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Heidi Lanford

Chief Data Officer

The Fitch Group

FULL BIO

Thomas J. Lee

Managing Partner & Co-Founder

FundStrat

FULL BIO

Charles Poliacof

Chief Executive Officer

Knoema

FULL BIO

MODERATOR

Marc X. LoPresti

Co-Founder & Board Member

BattleFin

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Marc LoPresti: (00:07)
Hello, everybody. My name is Mark Lopresti. I am the co-founder of a little company called BattleFin. You may have seen our pavilion down the hall on the fourth floor. I co-founded it with Tim Harrington, sitting there in the front row, about eight years ago or so. We were really early in the alternative data space. Very proud of what we've done since we founded the company. We've developed what we believe is one of the most compelling and robust platforms for alternative data. And we're going to get into that. This panel is of course all about data, from data discovery to data intelligence.

Marc LoPresti: (00:50)
But before we get into that, I want to say a big thank you to Anthony, the entire SkyBridge production team, John, Joe, Kat, everybody that makes this possible. We have an events business at BattleFin. I know a little bit about what it takes to put a production on of this magnitude. And I think you'd all agree this was an absolutely fantastic event to attend. We've loved every minute of it. And what a way to cap off my Salt experience, but with this unbelievably distinguished panel of experts that I have here with me.

Marc LoPresti: (01:25)
To my left is Heidi Lanford, from Fitch. To her left, a face you may be familiar with if you watch CNBC, Mr. Tom Lee from Fundstrat, one of the smartest people I know. And Mr. Charles Poliacof from Knoema. I have known Charles for a very long time, even before we were in the data business. So it pays to be nice to everybody because you never know when you may bump into them again. So, why don't we start? Heidi, a little bit of your background and what you're doing in Fitch with data?

Heidi Lanford: (01:58)
Sure. Sure. So nice to see everybody here, and thanks for having me. I started off my career as a data scientist and spent most of my formidable years working as a consultant and a data scientist. And then I spent my time before joining Fitch as the chief data officer, I had spent years in the technology space.

Heidi Lanford: (02:23)
And I recently joined from Red Hat open source software company that was acquired by IBM recently. And I have been really building strong, competitive data organizations as the latter part of my career. So really excited to be here. And I'm excited to represent Fitch.

Marc LoPresti: (02:44)
Thank you. Well, we're happy to have you. Tom?

Thomas J. Lee: (02:48)
My name is Tom Lee. I'm the co-founder and Head of Research for Fundstrat Global Advisors. It's a research advisory firm. We've really got two businesses. One is providing macro research and digital asset research to institutions in 22 countries. And we have a family office, a RIA business called FSInsight, and it's largely the same focus, which is education.

Thomas J. Lee: (03:16)
I'm very interested in doing this panel because I've been doing research for almost 30 years, really the first 15 as a wireless analyst. And when I started in '93, there were only 34 million cell phone users versus six billion today. So a lot of the business and knowledge that we needed to do to make equity calls, was gathering alternative data.

Marc LoPresti: (03:38)
And you touched on something. I want to put a pin in and come back to, the digitization of the modern economy and what that means for the data space. But that's a little teaser. But before we do, Charles, wonderful to have you on stage with us. Tell us a little bit of the company that you've built in your background.

Charles Poliacof: (03:54)
Yeah. So I am Charles Poliacof, the CEO of Knoema. For starters, I just want to thank you and Tim, and of course, SkyBridge and everybody else for putting this amazing event together. It is fantastic to be back, after having spent two years or so in this two-dimensional space. It's been great to be around people in a three-dimensional form again, and seeing a lot of folks that I haven't seen in a long time, and having the opportunity to interact with prospects and clients. It's been great. So, thank you for that.

Charles Poliacof: (04:21)
So a little bit about Knoema, a little bit about my background, although I'm probably not as interesting as these two folks here. So Knoema, we're a data technology company focused on making data accessible and usable. One thing that people know that are users of data is that there's far too much time that's probably spent making data useful. So we focus on three main pillars of capability. The first is discovery.

Charles Poliacof: (04:46)
So making sure that folks have access to data that they need, or new data sources that are interesting, that could potentially impact policy decision and investment thesis, or any sort of data-driven insight. The second is just around managing data pipelines. So data is the lifeblood of digitization. So somebody needs to manage that lifeblood, manage that infrastructure, making sure that everything is arriving in the formats that they're expected in, so that folks can consume that data on the other side.

Charles Poliacof: (05:14)
And lastly is workflow integration. As we all know, anybody that is a knowledge worker, works in their tool of choice. So looking at the color of my hair, you will guess that my tool of choice is probably Excel. But there are others that use Python, R, Tableau, Power BI, their own native applications. And that's really a core of what we do, is being able to integrate in those native applications so people can use their workflow or productivity tools of choice, so they can make those insight-based decisions.

Charles Poliacof: (05:42)
My background, I spent 15 years on the buy side, and then was part of the management team over at Novus, where we built a portfolio analytics solution which was focused on measuring portfolio manager skills. We'll talk about that a little bit later on in terms of what top line alpha and bottom line alpha actually means. And then part of the management team over at Visible Alpha, when it was a very early stage company. It's now a data stalwart. So, that's my background.

Marc LoPresti: (06:07)
So almost all of us on this panel are a good combination of TradFi, I think we're calling it now. I've heard that phrase used a few times this week. And DeFi and the data revolution. It probably makes sense just for a second to contextualize what we're talking about here. And what exactly is alternative data?

Marc LoPresti: (06:29)
And at BattleFin, we think about alternative data into 42 or 43 separate categories, but it is essentially that which you cannot derive from traditional sources like your Bloomberg Terminal, although that's obviously changing now as well. Satellite imagery, geolocation, credit card, point of sale receipt, email receipt data, sentiment, and many, many others.

Marc LoPresti: (06:56)
And this data, this resource, we often talk about alternative data as a resource or as a commodity, being used in ways that five or eight years ago we, when Tim and I started the company, we never could have anticipated. So Tom, maybe to have you start us off, you've been a data junkie, a self-proclaimed data nerd, part of why I love you. Tell me how you've observed the evolution of the use of alternative data in context of Fundstrat's work.

Thomas J. Lee: (07:28)
Yes. Well, first of all, alternative data has been a tool used by the best investors for decades. Many of you guys are probably familiar with Phil Fisher, and he wrote the book Common Stocks and Uncommon Profits. And his original thesis was visit companies, go visit warehouses, talk to sellers and vendors. That, he was the original.

Thomas J. Lee: (07:54)
That's the original alternative data model. And he had extraordinary returns, many 100X stocks. And I think in today's investment world, stock investors, the ones who really find the big opportunities are the ones that are exploiting alternative data, especially where they find variance versus either consensus or conventional views.

Thomas J. Lee: (08:15)
And I think in the past year with COVID, it's been enormously important to use alternative data to really have informed views on macro and investment decisions. Because in the past, people might have only looked at the bond market or VIX to have an understanding what the market is saying. But I think in the past year, there's been so much uncertainty created with COVID that the alternative data was critical for people who did well.

Marc LoPresti: (08:41)
And we were talking the other day about inflation by way of example, and how looking at these various traditional metrics to try to anticipate inflationary trends. How has using alternative data help refine that and make its predictive capabilities enhanced?

Thomas J. Lee: (09:01)
Inflation is a great example of why investors need alternative data right now, because in the past, CPI and understanding what the CPI print would be, has huge ripple effects across credit sector positioning, single stocks, and even commodity prices. And in this current context, we've got supply chain glitches, we've got shortages, and we've got demand build-up, and then explosion of demand. It's been very difficult for people to know what the real trajectory of inflation has been.

Thomas J. Lee: (09:35)
So I would say right now, if people are using alternative data to be informed about the trajectory of inflation, they're going to have a huge edge because it's the difference between thinking we're in ... As you know, there's a lot of people hyperventilating about inflation. I think a lot of our clients who've been using alternative data have realized a lot of these things are transitory, and you're seeing it play out. Even Stevie Cohen yesterday mentioned it. The bond market is telling us this is probably transitory.

Marc LoPresti: (10:01)
Right great. So Heidi, maybe turning to you.

Heidi Lanford: (10:04)
Yeah.

Marc LoPresti: (10:04)
So you've got a big job on your hands, building up this whole new division. Tell us how you are viewing the integration of alternative data into Fitch.

Heidi Lanford: (10:13)
So for us, I think this is a transformational shift in how organizations start thinking about data as a strategic asset. Whereas in the past, it has maybe been something that you go to IT or your tech team, and you ask them to provide you with data or give you access to things. As we start to see this data organization being a strategic asset for the firm, that's where over the past 10 years, a relatively new role, that chief data officer has emerged, because it is that strategic asset.

Heidi Lanford: (10:51)
It's a member of the C-suite. It is helping to influence new product innovation. And with that in mind, we have to recruit people who are not just great at the technology, data warehousing, data lakes, and data mesh. We're also looking for people that think about data as a product and how we can productize that, whether it's for our internal analysts that are consuming it, or our external customers that want to buy data from us.

Heidi Lanford: (11:21)
And so the talent and the recruitment is top of mind for me, as I've been building out my organization, because thinking about strategic players, great at technology, but also have that innovation and product mindset, this is not for the faint of heart. This is about moving resources and organization. This is a little bit about data is powerful. Data gives people in some ways, control. And to see that shift in mindset, it requires grit and determination from your leadership team and your company.

Marc LoPresti: (11:54)
And there are some practical challenges associated with it, too, I would imagine. Divergent datasets, different departments across the organization in different file formats and servers, and things of that nature.

Heidi Lanford: (12:04)
Absolutely. Yeah.

Marc LoPresti: (12:06)
That's a good transition. I know I see Charles chomping at the bit. That's a good transition to you and Knoema. That's a big part of what you guys do, right?

Charles Poliacof: (12:13)
That's a huge part of what we do. It's all about empowerment. What Heidi was talking about, data productization, the types of data assets that people used to rely upon 10 years ago, 15 years ago, channel checks, speaking to management. I know in the '90s, we used to send folks to the mall and count how many people were actually walking in and out of stores.

Charles Poliacof: (12:36)
And now all of a sudden, you have data that you can get in near real-time, maybe by looking at Carvana or some of these other inputs, near real-time visibility into what's going on in used car pricing, which is of course, influencing some of the inflation numbers. The Fed actually looks at those numbers, at least according to our friends over at M Science, which is one of the data providers we work with.

Charles Poliacof: (12:56)
But when you think about the challenges that organizations are going through right now, to be data-driven, to understand what that actually means, to be able to access different data products, there's a high variability problem. So there's a lot of data that comes from a lot of disparate sources. You have a subset of aggregators that collect a certain amount of data, but then you have a long tail of data that may or may not be relevant depending on the regime that you're in.

Charles Poliacof: (13:25)
And then there is the pain that you just surfaced before, Marc, which is this idea that folks need to build these connectors to constantly have this influx of products that could continue to inform their views, and then what it means to build an organization that supports that. And is an organization saddled with legacy technology? So it limits what they can actually do.

Charles Poliacof: (13:48)
Is an organization, to Heidi's point, thinking about data as an actual product, and an asset, and as an input that influences their digitization or digital strategy as they move forward? You see this in the insurance space. You see this in retail. You see this now in policymakers. The state of Texas is making all of their data available publicly, so they can attract capital to come in.

Charles Poliacof: (14:11)
So people are viewing data as a strategic asset. They are viewing data as an internal product. And I think those that continue to think that way, McKinsey just wrote a piece recently about this, are going to have a substantially greater advantage than those that do not. And again, I'll end on this point. I think it was Stevie Cohen and Dmitry Balyasny's panel when they talked about their firms that have enormous resources, and markets are fairly efficient.

Charles Poliacof: (14:36)
So understanding how to find those differentiated datasets and being able to unify them in a way where you can contextualize those insights. So you're not just relying on one or two datasets. That's going to be a big differentiator going forward, not just in our space, but in all industries.

Heidi Lanford: (14:55)
And use them over and over again.

Charles Poliacof: (14:55)
Sorry. Go ahead.

Heidi Lanford: (14:55)
And use them over and over again.

Charles Poliacof: (14:55)
Yeah. Yeah.

Heidi Lanford: (14:57)
All those great nuggets that you're talking about, or that Tom talked about, you don't want them to be one-offs. And that does require some discipline and getting into a data organization, and maybe doing some of those traditional things that we've done in terms of storing data.

Marc LoPresti: (15:13)
The challenges remaining are abundant. And that's one of the reasons why companies like Knoema and shameless plug, BattleFin are such an important part of the data industry. It's about aggregation, organization, curation, purification, and visualization.

Charles Poliacof: (15:30)
And I think one thing to think about also is I think a lot of firms, particularly in the financial services space, whether it's on the asset management side or even wealth management, there's been a very DYI mindset.

Charles Poliacof: (15:41)
And I feel like DYI should be left to like Home Depot and Lowe's. And folks really need to start thinking about what it means to leverage trusted partners. There's a lot of great new technology out there that can be leveraged to introduce ROI that didn't exist just two, three years ago.

Marc LoPresti: (16:00)
So Tom, maybe bringing it back to you, with Fundstrat's organization and structure, you really thought about it from the beginning as a data-driven organization.

Thomas J. Lee: (16:09)
That's right.

Marc LoPresti: (16:10)
Tell us a little bit about that process for you.

Thomas J. Lee: (16:14)
Well I would say Fundstrat, when we started the firm in 2014, we did come with a mindset that we wanted to do evidence-based research, and really help investors navigate markets not with opinions, but the idea of helping them understand future probabilities based on what we can observe.

Thomas J. Lee: (16:36)
And so capturing data and aggregating it, and ingesting it and cleaning it up has been really important. I think one of the challenges that we found with a lot of data is that one, there is a lot of noisy data and a lot of errors in the data. And sometimes things look like contemporaneous indicators, but they're not necessarily helpful with future.

Marc LoPresti: (17:02)
Give us an example. That's a great point. Give us an example there.

Thomas J. Lee: (17:05)
Well, some examples of things like ... Here's something interesting, because a client pointed this out to us once. So he felt that there were some things that really helped explain the PMIs on a real-time basis. And I would call that an observable relationship, but it didn't work influentially. We weren't able to then say, "Okay, well, six months from now, what are the values of these different things?"

Marc LoPresti: (17:31)
Right.

Thomas J. Lee: (17:32)
So now you need to make an inference. And if you don't know what those are, then you're just making it up. And now it's just an opinion. Yeah, so that's a challenge. And I think another thing we found was that sometimes, you can get a very complete picture from alternative data, but it only just tells you what everybody else knows.

Thomas J. Lee: (17:47)
And so it's difficult to find something that gives you an edge that's actionable. Like something, can it give you an idea of how a data point might look? Or is it going to help you understand positioning? But obviously, the goal would be something that helps you know where things are six months from now.

Marc LoPresti: (18:04)
So, what has worked? So we touched on inflation before, CPI, consumer confidence, very volatile in a COVID exit, whatever the heck that means, I'm not even sure at this point that I know. What's worked?

Marc LoPresti: (18:16)
Have you taken things like sentiment, which is one of the most popular categories on our platform, I think on yours as well, Charles? Has that helped with predictability, with actually extending the usefulness of these insights in the way that you've described?

Thomas J. Lee: (18:32)
Yeah. Marc, this is a great question, because we've found some really interesting things over the past year that are actually helpful. But then it's not clear to us if it's because of what's happened during COVID. Because in COVID, the world has become very digital. Really, last year, everybody lived a digital life.

Marc LoPresti: (18:51)
Right.

Thomas J. Lee: (18:52)
So things in a digital world are much more measurable. In fact, I think one of the most interesting conversations I had at JPMorgan was our economists had said that at the time, he said if you looked at the previous 15 years, 50% of all global GDP was pure digital. But the idea is that the next 20-year interval, it'll be 75% digital.

Marc LoPresti: (19:15)
That's an incredible statistic, right?

Thomas J. Lee: (19:17)
Yeah. And it probably goes to 95% in the following 20-year interval.

Marc LoPresti: (19:21)
Yeah. Yeah.

Thomas J. Lee: (19:22)
Which means alternative data becomes way more comprehensive than what the BEA collects, or what you can see in weekly claims. The cadence of the data is so different. So I think to us, what we think, and we brought in a new guy, Adam Gould, who's from Empirical Research, but he's going to be doing a lot of machine learning work, is that the shelf life of a lot of the products we develop might be quite short, too.

Thomas J. Lee: (19:47)
And of course, that's why we would want to use guys that you guys have on your platform, because it saves us the homework. Because now, we can just spend more time trying to curate it or understand it.

Marc LoPresti: (19:58)
Charles, so how are you positioning Knoema to help your clients address these challenges?

Charles Poliacof: (20:03)
So I do want to just address one point that Tom just made. I would say that on that last point, data tends to be a bit regime dependent. So you will see data assets become popular during a certain time period. And they ebb and flow. I would say three years ago, macro data was probably more focused for macro strategists. Now, macro data is a part of just about every strategy that's out there. So you'll see these data assets become more relevant or less relevant, depending on what regimes and themes are being surfaced.

Charles Poliacof: (20:34)
With respect to our clientele, we work with a really wide range of clients. So it's not just buy-side firms. It's buy-side firms. It's sell-side firms. It's corporations. It's wealth managers. It's government agencies. We work with data providers as well. So I would say there's two fold. I think one, for large organizations combining legacy data or first-party data assets with third-party data assets continues to be a challenge. And folks are really started figuring out how to optimize for that.

Charles Poliacof: (21:07)
You have legacy infrastructure, legacy technologies, and to some extent, some legacy thinking. So for example, in the wealth management space, I think a lot of people are starting to really try to understand what it means to have a customer 360 view. And what are those inputs that they can start to use? So, what are the primary datasets about my customer that I've already collected, that has to live inside some kind of a clean room? And then what kind of third-party data assets can I collect to have a more informed view? So investing preferences.

Charles Poliacof: (21:36)
Does my customer care about ESG, or socially important companies, or environmentally conscious companies? So if they do, I want to make sure that I start sending campaigns that are going to be interesting to them. So you have folks that are starting to build these data-driven practices. You're seeing this a lot in retail. You're seeing this a lot on the supply chain side. People really just trying to understand how they can react to supply chain disruption on the corporate side. So it goes on and on, and on, and on.

Charles Poliacof: (22:04)
With respect to the data providers side, I think data providers need to start to think what it means to offer a data product that is consumable. So, how do I create a data product? What does it mean to tickerize that product? What does it mean to start thinking about omni-channel distribution, so that my data could be consumed through various exchanges, through various portals, through various tools? You want to be a gateway and not a gate keeper. If you're a gatekeeper you're ... Sorry.

Marc LoPresti: (22:34)
No, please. No, it's really about making that process of discovery and ingestion doable, because you mentioned tickerization. We've been talking about that since the beginning of the data industry. Nobody's done it yet, right?

Charles Poliacof: (22:49)
Or even entity resolution.

Marc LoPresti: (22:50)
Right.

Charles Poliacof: (22:50)
So if I'm looking at Athleta, I want to know that that maps up to Gap. And somebody is taking the time to actually do that work. So I think on the data productization side, there's still some work to do. And that's what we found that we've been doing work to help customers. For example, on the Snowflake marketplace, we're a partner with Snowflake. And we're one of the largest contributors of public data over there.

Charles Poliacof: (23:10)
But we're also working with alternative data vendors to actually productize their data on the marketplace. So, what does it mean to actually create a data product? Great metadata tables, source data tables, all those things. It's not sexy work, but it's necessary work so that people can have access to these insights.

Marc LoPresti: (23:29)
And as we expand, as we've seen with our business at BattleFin, from when we started it to today, that evolution beyond just the hedge fund as the main consumer of alternative data, or even the financial services world, generally, as we expand out into more corporate use cases, government and NGO use cases, that prospect or that challenge of ingestion, standardization, and consumability and visualization, which we could do a panel just on that, becomes much more relevant. Heidi, challenges.

Heidi Lanford: (24:03)
Yeah.

Marc LoPresti: (24:03)
There's been a lot, and I'm going to give you a little hint on something I want you to touch on. There was huge, huge news in the data industry yesterday. There was an SEC settlement, the first time ever, ever. And I've been talking about it. For those of you that have the misfortune of listening to the regulatory and legal panels that I do for BattleFin over live or in person, or over Zoom, which are a real snooze if you can't fall asleep, this was big.

Marc LoPresti: (24:30)
We were talking about this. Is the Gensler Administration going to be the first to actually bring an enforcement action against a participant in the data industry? How do you see regulation, changing regulation as one of the challenges that you face in this massive project that you've undertaken?

Heidi Lanford: (24:46)
It definitely affects us because obviously part of our business on the rating side is highly regulated, and then part of our business on our solution side is not as regulated.

Marc LoPresti: (24:57)
Right.

Heidi Lanford: (24:57)
And I guess with everything, I think there's pros and cons to both. One of the benefits that a lot of people get from regulation if done well, is standardization and consistency.

Marc LoPresti: (25:10)
Yeah. Right.

Heidi Lanford: (25:11)
We've all read every week, an article in the paper about ESG, and how ESG scores are sometimes challenging to interpret and understand like for like, because they're done differently.

Marc LoPresti: (25:24)
There's no standardization.

Heidi Lanford: (25:25)
And I'm not suggesting that we regulate that, but Fitch just released a sustainable Fitch product actually today. And so we're all doing a lot in the ESG space, and we think we've got an innovative way to look at that. The con though, is if you over-regulate it and you've not necessarily got the right people who understand data who are making these regulations, becomes really challenging then, too.

Heidi Lanford: (25:52)
It's all about, we want to get the benefits of data. We want data to give us insights so that we can make better decisions. And if it becomes too bureaucratic in making those laws, that can hinder us. But I did want to actually touch on a topic that we've been talking about. And that's Tom talked a lot about, inference. And it's the classic causation and correlation thing.

Heidi Lanford: (26:16)
I'm not trying to steer things a different direction, but I think this really gets down to building a culture of data literacy within your organization. So again, and I don't know if data literacy has been a big topic as you've talked about in the past couple of days here, but data literacy is not creating a bunch of PhD data scientists in your organization.

Heidi Lanford: (26:41)
What it is, is educating those consumers of information so they can make the best decision possible and take action on it. That might mean offering some training and education on how to deal with missing values or data that's a little sketchy, or understanding the difference between causation and correlation and when to phone up a data scientist in your organization.

Heidi Lanford: (27:08)
And that's another part of my job, is to actually build out a data literacy program for our entire company, to get folks essentially comfortable and confident enough to work with data, and make those data-driven decisions. And it's not just a learning and development program. It is a cultural mind shift. And it's a thing now. People are relating data literacy to, it's like data as a second language. There are various dialects within data. There are levels of proficiency.

Heidi Lanford: (27:37)
There could be a fluent I dream in data versus I have conversational knowledge of data. And that's okay. But that's what this shift is about. And all these challenges we've been talking about, about integrating data and the platforms, they are going to be here for the next foreseeable future. It's just, are we going to get better at it using awesome tools like knowledge graph, and AI and ML, and RPA, and things like that?

Marc LoPresti: (28:05)
And challenging in particular, talking about the regulation or regulatory perspective, when we have an alphabet soup or dog's breakfast of regulators. Whether it's the FCC from the consumer privacy, from the SEC.

Marc LoPresti: (28:23)
It's not just one entity. We've got unfortunately, like a minute, 20 seconds on the clock. So in 30 seconds or less, starting with you, Tom, 2022, biggest thing you expect to see changes in alternative data. What's in store for us?

Thomas J. Lee: (28:41)
Wow. In 30 seconds? I'll just say, I think that the next 12 months are going to be really critical. And again, Stevie Cohen mentioned it yesterday. It's no longer going to be a macro market. This is going to be single, stock winners and losers, operating leverage, people connect with customers. This is really important to get the alternative data sources correct.

Marc LoPresti: (29:06)
Fantastic. Fantastic. Well, I want to thank ... I was going to do for all of you, but unfortunately I don't think we have enough time. I'm getting the nod from backstage. I want to thank all of you for joining us this afternoon and listening to this unbelievable panel. Charles, Tom, Heidi, thank you for agreeing to do this. It was absolutely my pleasure.

Marc LoPresti: (29:24)
We hope that we taught you something about alternative data and the evolution of the space. I'm sure all of my fellow panelists would be available to answer any questions that you have after the panel. And I would be remiss if I didn't invite you all. If you haven't already done so, well, hell if you have go again, come visit us at BattleFin on the fourth floor.

Guest User

October 14, 2021

SALT NY: Technology

The Future of Space: Exploring New Frontiers & Improving Life on Earth | #SALTNY

Guest User

October 14, 2021

SALT NY: Technology

The Future of Space: Exploring New Frontiers & Improving Life on Earth with Chris Kemp, Founder & Chief Executive Officer, Astra. Delian Asparouhov, Co-Founder, Varda Space. Anousheh Ansari, Chief Executive Officer, XPRIZE Foundation.

Moderated by Justin Fishner-Wolfson, Founder & Managing Partner, 137 Ventures.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Chris Kemp

Founder, Chairman & Chief Executive Officer

Astra

FULL BIO

Delian Asparouhov

Principal

Founders Fund

FULL BIO

Anousheh Ansari

Chief Executive Officer

XPRIZE Foundation

FULL BIO

MODERATOR

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Justin Fishner-Wolfson: (00:07)
So thank you all for being here. I have the pleasure of hosting this panel with a bunch of really interesting people. Space usually wins for the most interesting topic that you can have with other folks. And today's a particularly auspicious day because there's also a launch in approximately four hours, where SpaceX is taking up an all-civilian crew for really the first time to space. So it's a great panel to have here.

Justin Fishner-Wolfson: (00:34)
We've got Chris, who's the founder of Astra, a launch company. We have Delian, who's both on investing side and a founder of Varda, which is working to build manufacturing in space. And then we have Anousheh who's actually been to space and probably makes for the most interesting person here, but also the CEO of the XPRIZE. I thought given today, it might be nice to start with your experiences in space, Anousheh. What does it mean that there is a civilian launch in probably four hours?

Anousheh Ansari: (01:06)
Yeah. I'm super excited about it, obviously. And it happens to be the 15th anniversary of my launch. So I think they planned it just for me. But I'm excited because it's a indicator of how far we've come. My family and I sponsored the first Ansari X Prize, which was about opening up space to commercial activities, to reduce the cost of launch, to open up access.

Anousheh Ansari: (01:32)
And the fact that we had so many launches this year for civilians, and this one being particularly important because you have four civilians without any astronauts on board, on their own, going to an orbit above the space station and spending three days in space, this has never been done before. And it shows that we have been able to create a safer, lower cost, plausible access to space.

Anousheh Ansari: (02:07)
And this will be one of hopefully, many that we will see. And if you haven't seen the story of the people who are launching, there's a documentary on Netflix called Countdown that tells their stories beautifully. And I will be watching and praying for their safe return tonight.

Justin Fishner-Wolfson: (02:29)
Given that this is the trend and you were one of, I don't know, approximately 500 people who's ever been to space, what does it mean to you to be very special today, but potentially not very special in the not too distant future, at least in that regard?

Anousheh Ansari: (02:44)
Yeah. No, I think just going to space will be special regardless. It's like now, a lot of people go to Mount Everest and go to the summit. Whoever is able to achieve that, it's a special moment in their life and it touches them in a different way. And I think space has that potential for humanity. For me, the experience of being in space has given me a complete new perspective on what's important in my life.

Anousheh Ansari: (03:11)
It has given me a global perspective on what's important and what I can do in my life. It relates to this world, this planet that we call home. And it has triggered the fact that we all know, we read reports, but when you're in space, you can see it with your own eyes that this beautiful planet, the only place we can call home right now, is changing and it's not going to be pleasant for us to live on it anymore.

Anousheh Ansari: (03:41)
And a lot of people talk about protecting our planet. It's we're not protecting the planet at all. We're protecting ourselves. The planet will be fine without us, probably better off without us. But if we want to continue living here, or have a plan B and go someplace else and live on another planet, which will not be as nice as our own planet still, so we need to pay attention.

Anousheh Ansari: (04:03)
And there's a lot of work we need to do. And that's why we need these type of conferences, investment, and the risk takers who are willing to invest in the future.

Justin Fishner-Wolfson: (04:12)
So this is a question for everyone, but Delian I thought maybe you could give us your perspective, having been both on the investor side and also the founder of a company that's in the space industry. Why now? This seems like there's been a huge proliferation of companies, both from launch to services, to actual space travel. What has changed in the last few years?

Delian Asparouhov: (04:38)
I always think of space as being three separate waves, and that we're only at the very beginning of the third wave, where the first wave was government funded hardware doing government projects, IE the Apollo days. Second phase being for the first time government-funded, but the hardware is produced by external groups. So the early work of SpaceX or Planet Labs being that second wave.

Delian Asparouhov: (05:01)
And the third wave being entirely commercially funded and entirely commercially built where now for the first time, there's companies that are going public, like Astra, and a recent one that also went public, Spire, where a significant portion of their revenues and what keeps the companies afloat is entirely commercial revenues. And obviously, that just has a much larger scale and depth than just being entirely based on the government four-year revenues.

Delian Asparouhov: (05:26)
And so I think that's what makes it fundamentally different is there was this glass ceiling in the space 2.0 days that you just should never break through because there's a limited scale that you can get to, versus now, just the scales that companies can operate at in terms of number of launches, satellites that are going up. The amount of engineers you can afford is just so much greater than anything that we've done in the private industry.

Delian Asparouhov: (05:46)
And that's what's allowing now for space to be safe enough and proliferated enough that you can actually have now, individual citizens out. Just as the Falcon 9 landing the first time was extremely exciting, I'm sure a day like today in another five years is also going to seem extremely boring. Like, "Oh, private civilians going up to space on a three-day trip? Grandma did that last week."

Anousheh Ansari: (06:07)
Yeah. And I think there is this really nice time where the Moore's law and miniaturization and reduction of causing satellites and other sensing technologies has enabled to have more customers for the launch companies that you mentioned. So if we didn't reduce the cost of access to space, they could build really cheap satellite, but they couldn't get it to space. So they need this type of solutions.

Justin Fishner-Wolfson: (06:33)
I think that's a great transition. I was lucky enough to invest in SpaceX in 2008. So it's been a very long time, but they've really brought down the cost of launch to enable this. It sounds like this is an enabling fact. But Chris you've built Astra.

Justin Fishner-Wolfson: (06:48)
You're really trying to accelerate that trend. Can you give people a sense of what the launch market looks like today? But I think more interestingly, what is the launch market going to look like in the next five to 10 years?

Chris Kemp: (07:01)
I think building on Anousheh, this isn't 1960 anymore. In 1960, when NASA built the Apollo and the Mercury or the Gemini programs, this was about 1% to 2% of GDP. NASA had hundreds of thousands of employees. They were hiring everyone who graduated. This was a program that was only possible if the resources of one of the most wealthy nations on the planet put a considerable amount of its wealth to work. SpaceX has now built Starship.

Chris Kemp: (07:37)
And you might think SpaceX has raised a lot of capital, but it's nothing compared to 2% of GDP. And so I think with what Astra is doing, we're building a rocket factory where we can churn out a rocket a day, like a car. The robots and the automation and the software that exists today, has enabled a level of safety, a level of cost efficiency, both in the production and the operation of these systems.

Chris Kemp: (08:00)
The idea that with a planet's constellation, a single employee runs a constellation of hundreds of satellites from a browser. The technology to make this accessible is as I think, the really big story here. And this year, will have maybe a dozen pure play space companies go public. Astra might have been the first, but there have been six since.

Chris Kemp: (08:25)
And some of these companies are going public through spec mergers or through direct offerings, but they're all going to have billions of dollars to help improve life on earth from space, to help connect the planet, observe the planet. Space is the ultimate high ground.

Chris Kemp: (08:42)
And now, we'll finally have all these entrepreneurs building disruptive technologies to provide global context, new sources of information. This will be probably the most significant decade in the history of space.

Justin Fishner-Wolfson: (09:01)
Delian touched on this when he mentioned that SpaceX landed the Falcon 9. It was really only six years ago. And so it's become not only passe, but expected. If the rocket doesn't land, people actually think that there was a huge problem. So, what are the sorts of things that are going to be passe as we look forward to what people are excited by now?

Justin Fishner-Wolfson: (09:24)
I remember at the beginning, I literally went to every SpaceX launch. If I did that now, I would probably just camp out in Florida and only be at SpaceX launches. There are so many of them, there're barely events. What are the things that people can look forward to being commonplace in the future?

Anousheh Ansari: (09:41)
I can maybe jump in. One thing that I try to talk about, how access to space is opening up new opportunities, comparing it to the internet era. So when companies like Netscape came around, just making it easy and understandable so people can be creative, created an opportunity. No one could predict what would come next. And none of the things we have today, anyone would've predicted it back then. But just opening up and creating a playground was important. And I think that's what we are doing.

Anousheh Ansari: (10:16)
I'm personally very interested in looking at how we can put things we're doing here on the surface of our planet, up in the orbit and do it more efficiently, and without an impact on our planet. I think there will be opportunities for manufacturing things in space. There are things that we can manufacture better in space than you can in the gravity well of our planet. So I think that's a huge opportunity. There are medical opportunities.

Anousheh Ansari: (10:46)
There are some problems to be solved, but I think maybe we can take our data centers, especially for non real-time applications, all the pictures that we get on our FaceTime and Instagram and all those things, we can put them and store them in computers that have already been built for space. So there may be opportunities like this that I think will be exciting to see happen.

Justin Fishner-Wolfson: (11:08)
You mentioned manufacturing. It seems like the easiest toss over to talk about Varda. We've seen in the current environment with the pandemic, that supply chains are very hard.

Justin Fishner-Wolfson: (11:20)
Can you talk a little bit about how to build manufacturing, not just on this planet that's easy, but you're going to do it in space? You're going to have to build the supply chains. What exists today and what needs to exist to make this work?

Delian Asparouhov: (11:32)
See, I think one thing that sometimes is underappreciated is the United States has been manufacturing in space now for almost a decade. They've just been small scale, like research projects that have been done on the International Space Station. But the reason that they've never gotten much larger than that comes back to supply chains, where if you're a commercial company relying on a research station that has a lot of safety, security protocol, et cetera, can be difficult to rely on when you need products on a regular basis.

Delian Asparouhov: (11:59)
And so that was the, I'd say intuition or thesis that we had around Varda, which was we're not going to try and do fundamentally new science. That's what the International Space Station is for. We're just going to take that work and scale it up in a way where now, commercial customers are going to be comfortable with us being a part of their supply chain because ideally, Chris prints a rocket every day.

Delian Asparouhov: (12:19)
We buy a launch on that rocket, send whatever good it is, whether it's fiber optic, semiconductors, pharmaceuticals, bring them back down to our customers down here on earth, I think the following day. And that relates my answer to your original question, which was, I think the thing that will become much more normalized over the next five to 10 years is people's lives outside of just the space community being touched by space.

Delian Asparouhov: (12:39)
Right now, it's really special if you get to be a Planet Lab satellite operator operating 100 satellites. But most people out in New York City don't really get to appreciate the benefits of space. Whereas I think five to 10 years from now, you're going to start to see whether it's a hobby of satellites being set up, or these types of products that can be produced in space impacting people's life down here on earth, and bringing the benefits of space to a much, much wider group than has ever had it before.

Justin Fishner-Wolfson: (13:03)
And Chris, you must be seeing this from a customer perspective. Who are the people that are ... What industries? You don't need to give us specific companies, but what are the industries that are buying launches today that you never would have done this historically?

Chris Kemp: (13:17)
I think that it has traditionally been government customers. That's just a small fraction of our current backlog of launches. We have over 50 launches under contract now. Most of them are commercial companies that have new sensors that are able to see CO2 in the atmosphere, or use radars to understand where things are moving around in the ocean, where weather patterns at much higher level of fidelity can be predicted to make aviation safer.

Chris Kemp: (13:47)
For each of these, there's probably a dozen companies that are competing to build technology to create some killer, and they all have to be in space. And when space was really hard to get to, that became a barrier. As companies like SpaceX and Astra and Rocket Lab and others are building these more affordable, but differentiated launch services, we can get them to space much more easily.

Chris Kemp: (14:13)
It just blows open the opportunity for new innovation. When a startup can get funded and fly in space, it's like back in the days where internet companies had to build data centers. Well, that was really hard. What's harder than building a data center is building a data center in space. So the more we can make space accessible, the more innovation and the more we're going to see more companies start up and solve really important problems.

Justin Fishner-Wolfson: (14:38)
So you mentioned this, and given your role with the XPRIZE, you've tried to catalyze commercial investors, commercial companies. Where do you see that going forward, and what do you think the role of government is in this industry, if it's not necessarily to help build launch anymore?

Anousheh Ansari: (14:58)
So I think specific to government, there are two areas that government can be helpful. When we launched our first competition, which now it's almost 20, 25 years, more than 25 years, we had to really fight hard. And it took us 10 years to get FAA to agree to give a launch license for our teams. And now, that group has become the group at FAA that gives launch licenses to commercial companies. So supportive regulatory system, at least a regulatory system that's open-minded to allow for innovation to happen, it's important.

Anousheh Ansari: (15:38)
The next stop is the moon. Right now, we're talking about commercial companies actually launching and landing on the moon. The ownership rights of who owns one what on the moon, and when you extract something and then say you bring it back, or you throw it back, you launch it back and it lands someplace else, who owns that? All these ownership, there are so many interesting question that needs to be solved, that I think regulatory bodies need to come together and make sure one, we use space for peaceful reasons, so we don't turn it into another war zone.

Anousheh Ansari: (16:15)
And two, that they create an environment of creativity and collaboration, so people can easily work together and innovate. That's I think very important. At XPRIZE, we're looking at the next 25 years. What can we do? Of course, the fact that we are launching so much, it's important for us to actually clean up after ourselves too. So we're looking at orbital debris as one area of work. We're looking at protecting our planet and asteroid impact. And how can we predict if there will be an asteroid impact? Because right now, we don't track all the objects in orbit easily.

Anousheh Ansari: (16:53)
And I think there are opportunities again for closed loop systems. If we're going to go to the moon, we need closed loop systems. They're good for space, but they will be also good for us here on earth. So there's innovation there that we're looking at. And fuel and energy. So when I say manufacturing, I also include manufacturing using Institute material for fuel, for building material and other things that we need, if we want to build a permanent habitat on the surface of the moon.

Justin Fishner-Wolfson: (17:25)
You mentioned regulatory. Where does the US fit into that, relative to international cooperation? Are you seeing leader at the US level? Are you seeing it elsewhere?

Anousheh Ansari: (17:38)
I'm seeing everyone protecting their IP and not even wanting to get to the table right now, because they don't have the right answer. And so they don't want to talk about it. That's what I'm seeing right now.

Justin Fishner-Wolfson: (17:49)
So it'll get sorted once it has to get sorted?

Anousheh Ansari: (17:53)
It has to get sorted. And the more they wait, the more difficult it will be. And maybe it's a good thing, because people will go there and they will make up their own rules. So then they have to catch up.

Justin Fishner-Wolfson: (18:03)
That has certainly happened throughout history.

Anousheh Ansari: (18:04)
Yes. Yes.

Justin Fishner-Wolfson: (18:06)
Delian, you're obviously investing, in addition to being a founder at Varda. How do you think about the regulatory environment? How do you think about the government in terms of support for companies that you're looking at within the sector of space?

Delian Asparouhov: (18:22)
I think one thing that's been a really exciting change in space specifically over the past, let's say three or four years, has been that both the DOD and NASA have recognized that they no longer have an innovation problem, but purely an adoption problem. That they are no longer the ones that are pushing the fold on technology as much, but they need to create systems to actually bring that in and draw that in.

Delian Asparouhov: (18:42)
And so as an investor, I think what it's allowed me to do is because you have institutions like the Defense Innovation Unit, that is the only acquisitions group that rolls up directly to the Secretary of Defense, now you can actually rely on the DOD and NASA as a much more consistent stepping stone for much deeper technologies.

Delian Asparouhov: (19:00)
I think in even 2008 or 2009 when you originally were investing in SpaceX, that in some ways was probably as far as one could possibly extend. Versus now, I feel like relative to where technology's at today, we can extend even further because you don't have to go through suing the Air Force to get them to give you contracts. Instead, now, there's just la much more standardized process for that. And if anything, they're incentivized for it.

Delian Asparouhov: (19:22)
DIU actually tracks how many venture dollars their companies actually raise, and very much wants to collaborate with private industry. And so I find it to be a really exciting time where things that previously I always talk about in space investing, you have to get careful to not go so far into the future that you're investing in sci-fi and just never make returns.

Delian Asparouhov: (19:40)
But I do feel like it has actually fundamentally shifted further out where maybe before, I had to really focus on okay, commercial revenues within four years versus now, it's like well, maybe the DOD satisfies even the first two or three. So maybe it's commercial revenues within seven years. And I think that's a really exciting time.

Justin Fishner-Wolfson: (19:56)
So you think there's a transition point that's happening, where the government can still step in for the first few years, but commercial revenues are close enough for commercial investors to take advantage of?

Delian Asparouhov: (20:06)
I still think in today's day and age, people talk about, "Oh, you should be investing on 20, 30, 40-year time horizons." I think it's also just hard to incentivize employees to work on such long time horizons. People want to see equity prices going up and things getting more exciting. And that's just hard to do unless you have somewhat near term commercial revenues. Otherwise, you do get this glass ceiling.

Delian Asparouhov: (20:25)
And yes, back in the day, we had 2% of the US' GDP focused on this and so the glass ceiling was really high. But right now, without the potential for commercial revenues, you're artificially limiting your company. So even if in theory, there were investors who were willing to invest on such long time horizons, I don't think employees are willing to.

Justin Fishner-Wolfson: (20:45)
This is very fundamentally venture investing. And the good thing is venture has a long time horizon. I don't think it has that long a time horizon. And you have this weird dynamic that venture time horizons are actually longer than human time horizons in many respects, so you need these things to line up to make the incentives work.

Chris Kemp: (21:03)
I think building on Delian's earlier phases here, when the phase was the government was paying for things, that's what led to the aerospace industry, where you have cost plus contracts. You can only have so much growth if your revenue is cost plus 10%. And so I think what's happened is we've seen a new space tech industry, just like there was the pharmaceutical became biotech. Because when you're commercially driven, you can grow revenues faster.

Chris Kemp: (21:30)
And so pure play space companies that are out building new capabilities, that are directly marketing new data that never existed, to new customers, are growing faster. They're growing the revenues faster. And so the way that analysts have to look at companies is not like an aerospace and defense cost plus selling 100 airplanes to United Airlines kind of business.

Chris Kemp: (21:51)
But it's about the growth that you would see when you have a pure play, tightly integrated, vertically integrated company. It's creating a new capability and delivering it to customers. I think we've entered the space tech era this year.

Justin Fishner-Wolfson: (22:06)
Right. Where it's now actually businesses, right?

Chris Kemp: (22:08)
Pure play.

Delian Asparouhov: (22:09)
That sell products, and are contractors.

Chris Kemp: (22:12)
That's right.

Delian Asparouhov: (22:12)
That's what I love about the DIU or amongst many of these various groups, AFRL, SpaceWorks, et cetera, that are now interested in no longer just providing contracts to commercial companies, then trying to convince them to follow our spec. But instead they saying, "Oh, you've got a product that's already on the market? Let me go utilize that product."

Delian Asparouhov: (22:27)
So I'm sure when certain DOD groups are coming to Chris and saying, "I would like a rocket lunch," they're not saying, "Oh, I need the rocket's paint to be this color, and for the engines to work like this, et cetera." They're just saying, "Oh great. You have a certain number of kilograms. You can get me to orbit. This is how much you're going to charge me? Great." This is now a product that I can purchase, rather than a contract that I'm trying to put together.

Chris Kemp: (22:44)
I guarantee NASA is not telling Elon how to build rockets.

Justin Fishner-Wolfson: (22:48)
I am pretty certain that they have a spec sheet that they very much dislike deviating from. There's been a lot of talk about all these mega constellations. SpaceX is obviously the furthest along in terms of launching and providing services.

Justin Fishner-Wolfson: (23:04)
Chris, how is that playing out from a launch perspective? Where are you seeing the innovation in these constellations? Because you mentioned Planet also. I think Planet and SpaceX represent 99% of the satellites in orbit.

Chris Kemp: (23:17)
Today.

Justin Fishner-Wolfson: (23:18)
Today. SpaceX may just continue to try to keep that number going.

Chris Kemp: (23:22)
Yeah. I think that there's probably half a dozen mega constellations that are either being deployed now or about to be deployed. And there are companies like Amazon that have designs around multi 1,000 satellite constellations. The difference is instead of a space-based capability being a billion-dollar satellite, developed over 10 years by an aerospace defense company, you're having high tech startups use the technology that's in your smartphone, and by the way, it's way better, and the satellites are flying lower, which means you're inside the earth's magnetosphere. So you don't have to worry about radiation. And you're also refreshing the satellites.

Chris Kemp: (23:59)
Even with Starlink, they're replacing the satellites with new satellites that have in-space laser links. So the kinds of technology refresh cycles, like in Moore's law and in the consumer electronics industry, is now applying to space. And that wasn't true even just a few years ago. And so the rate of innovation in these mega constellations is going to eclipse anything we've ever seen before. And as cars become covered in cameras and drive themselves, they're going to need software updates. They're going to need to take the data that they're collecting and bring it back up to the cloud. There will be an incredible revolution in how we think about space as being intertwined in what we do here.

Delian Asparouhov: (24:41)
These same trends are entirely what enabled Varda as well, where it's people talk about, "Oh, space manufacturing is finally viable because of decreasing launch costs." And it's like, yes, that's a portion of it. But in some ways, an even bigger portion is the fact that a decade ago, we would've had to build our entire space path from the ground up, entirely from scratch. It would've been a multi-billion dollar project.

Delian Asparouhov: (25:00)
Instead, today, I can focus on what we're particularly good at, which is making those products in space and then bringing them down. Everything from the flight computer to the solar panel, to the in-space propulsion, all that stuff has numerous commercial providers, all of whom are increasing their capabilities, decreasing their costs every single year. And that's a lot.

Delian Asparouhov: (25:19)
There'll be cost curves and capability increases that are actually allowing something like Varda to exist today. In some ways, even more so than the Falcon 9 becoming reusable. That's the cherry on top. But the fact that we can close a deal with Rocket Lab to purchase their Photon platform, which is their in-house satellite platform, rather than develop it ourselves is the only reason why something like Varda is capable to be done today.

Justin Fishner-Wolfson: (25:41)
Here, you're seeing a lot of stack developments that started in software, has moved into hardware, has now moved into the hardware of space. You talked a little bit about trying to invest in science, not science fiction. How can people draw the line as investors, for the things that are actually possible today, versus maybe one day?

Delian Asparouhov: (26:04)
I think these things are actually simple with logical analysis in the space industry, especially as I've gotten deeper into it. I think people think of space as this very broad, hand wavy. How do I actually understand it? But when you actually dive into it, the number of CEOs or founders that have raised north of let's say 10 million is actually probably on the order of I would guess 20. There isn't a space industry. There's 20 people.

Delian Asparouhov: (26:27)
And so if you can solve a problem for one of those 20 people in the next four years, then you have a viable company that's not sci-fi. And if you do not, then it's sci-fi because who's going to be your customer? And that's especially true if you're selling into space. Now, if you're selling the more broad groups, like Varda is, where it's like our customers aren't actually other space companies, it's a little different.

Delian Asparouhov: (26:46)
But a lot of times I get impatient on a space thing, and you're like, "Yes, we're going to sell to the other space companies." And I'm like, "Great. Which one?" They're like, "Some future hypothetical one." I'm like, "Okay. So in order for me to believe in your company, I also need to believe in a hypothetical other company that hasn't been started yet, doesn't exist, and nobody is working on to work in order for you to have a customer?"

Delian Asparouhov: (27:04)
That's I think, the simple delineation. If Chris or the other 19 CEOs aren't going to buy your stuff, there's probably nobody that will.

Justin Fishner-Wolfson: (27:11)
Right. I refer to that as startup squared. It's like, you need this startup to work, and then you need this other startup to work. And you're not really sure the likelihood of it, at least the second one. Chris, you've gone through the whole capital formation cycle in this industry. How has that conversation with investors evolved over the last ... When did you start Astra? How long has it been?

Chris Kemp: (27:31)
We started in 2016. Yeah, we're not yet five years old.

Justin Fishner-Wolfson: (27:34)
Okay. So I feel like that's a lifetime right now. So it's like the equivalent of 25 years. How has the conversation changed during that period?

Chris Kemp: (27:42)
Yeah. I think that if you go back five years, we were still in the pioneer and the hobbyist phase, if you will. So you look at Anousheh, you look at what Richard Branson and Jeff Bezos just did, they're pioneers. It's like the Charles Lindberghs and the Amelia Earharts of the space generation. And so tonight, when the SpaceX launch happens, we're going to go from being pioneers to being passengers. And I think that's a huge evolution. And going from the hobbyist to the entrepreneur phase is a huge evolution.

Chris Kemp: (28:15)
So now we see entrepreneurs going, and there are space funds. There are space ETFs. There are business models. There are companies, there are many companies going public in this space. So we've reached a point in history where space is mainstream, and we've got analysts saying it's going to be a one, two trillion-dollar industry with double digit growth over the next decade. That's a real business. And so it's not hobbyists anymore. It's real, it's venture capitalists, entrepreneurs, ETFs, analysts covering it as a sector, space tech sector.

Justin Fishner-Wolfson: (28:50)
I wanted to close with you, Anousheh, because I think there's something from ... I've talked to a few people who've been to space, and it always seems to very fundamentally change their viewpoint. And so maybe I would just close it with, what are the things that you wish people understood, had they had the opportunity to go to space like you've been?

Anousheh Ansari: (29:12)
It's an important question. And one of the reason I tell people I wish our policymaker, our leader, the government's leader would actually have this opportunity to go to space, because one fundamental truth that intuitively, but it becomes real when you're in space, is the fact that there's only one planet. That those maps that you see in geography books that has these lines drawn, there is nothing separating us.

Anousheh Ansari: (29:44)
If the pandemic taught us one thing, it's that you cannot contain anything, any particular part of the world. So problems spread, and good things spread too. So we need to look at our planet as our collective home, that it requires our collaboration to make it a viable place for life. And it requires us to live in peace and harmony, and in a sustainable manner with the environment we live in.

Anousheh Ansari: (30:13)
We do that in our own homes, but we think that our home protects us from everything else. And that's not true. This is a realization I had in space, and I really hoped I had a way to convey it. So it becomes part of the decision-making for everyone in every business, in everything you do in life, and everything you do on a daily basis.

Anousheh Ansari: (30:35)
Because that's what it takes to make this planet a place for all of us to have children, to raise our children and their grandchildren, and be very happy and hopeful about the future that we are going to have.

Justin Fishner-Wolfson: (30:51)
Well, hopefully, more people get that experience. And I want to thank all of you for having this conversation.

Anousheh Ansari: (30:57)
Thank you.

Delian Asparouhov: (30:58)
And thank you.

Guest User

October 13, 2021

SALT NY: Finance, SALT NY: Technology

Titans of Data: Leveraging Alternative Data to Enhance the Investment Process | #SALTNY

Guest User

October 13, 2021

SALT NY: Finance, SALT NY: Technology

Titans of Data: Leveraging Alternative Data to Enhance the Investment Process with Carrie Lazorchak, Chief Revenue Officer, Similarweb. Rodney Pedersen, Chief Revenue Officer, Visible Alpha. Matt Ober, Managing Director & Chief Data Scientist, Third Point.

Moderated by Tim Harrington, President, BattleFin.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKERS

Carrie Lazorchak

Chief Revenue Officer

Similarweb

FULL BIO

Rodney Pedersen

Chief Revenue Officer

Visible Alpha

FULL BIO

Matt Ober

Managing Director & Chief Data Scientist

Third Point

FULL BIO

MODERATOR

Tim Harrington.png — Tim Harrington

Co-Founder & Chief Executive Officer
*BattleFin*

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Tim Harrington: (00:06)
Thank you, Rachel and thank you to the SALT team. It's nice to actually be back in person and interacting with people, not having to worry about whether you're on viewed, whether you you've got pants on. So this is live we're all back in person. We have an exciting topic. It's alternative data. I'm Tim Harrington, CEO of BattleFin. Our mission has always been to help source evaluate test and find datasets for the financial and corporate community. We're really excited. SkyBridge is a new investor in BattleFin. So really excited to be working with Anthony, John, Joe, the whole team, and really excited to be sharing alternative data with the audience. So why don't we get started? We'll do a couple of quick intros, try to make it as informative as possible. So Carrie, tell us a little about yourself and SimilarWeb.

Carrie Lazorchak: (01:03)
Okay, great. First of all, I'm very excited to be here. As Tim said, it's nice to be able to interact with people again, I didn't realize how exhausting it is though, I will say, forgot about that. But just as by way of introduction, my name is Carrie Lazorchak and I'm the chief revenue officer of a company called SimilarWeb. First of all, to our clients in the audience, I want to say thank you very much for your business. And for those of you that aren't familiar with SimilarWeb, our mission is pretty simple. We want to help companies win in their market. And the way that we do that is we measure the digital world. We look at the trends across both consumer trends and business trends, across millions of digital properties globally. And we provide that insight and information back to our customers through a very easy to use platform and visualization.

Carrie Lazorchak: (01:56)
Now, Tim was very clear that the big thing people want to know is how and where and what kind of data, et cetera, which obviously some of that's the secret sauce, but I'll try to break it down into a little bit of the art and a little bit of the science. The sciences is, we have a lot of data. We're processing about 10 billion digital signals a day, about two terabytes of data daily that we analyzed. But the art of it is really in how we blend all of the data sources. And those sources are a combination of direct analytics data and anonymize traffic data, partnerships that we have in public data. And we combine that all together with machine learning and unique algorithms, and then deliver that to our clients. Like I said, through a very easy to use visualization platform. And I think that's a key thing we'll talk a little bit about today.

Carrie Lazorchak: (02:49)
There's a lot of data out there. I think the key for this audience is to really understand how to consume that data and how to use that data towards all of your objectives. So really excited to be here and look forward to being part of this panel.

Tim Harrington: (03:02)
Great. And SimilarWeb went public recently, so congratulations.

Carrie Lazorchak: (03:05)
Yeah, thank you. Thank you very much.

Tim Harrington: (03:07)
I've been following you guys for years. I know you've had some of the best Netflix calls I've ever seen [crosstalk 00:03:1] growth. For those of you that follow Netflix, huge subscriber growth story started to fade. You guys called it then international took off, called it again. So kudos on that. Really awesome data set for you guys and the audience to check out. Rodney, tell us a little bit about Visible Alpha.

Rodney Pedersen: (03:35)
Yeah. Thank you, Tim. So Rodney Pedersen, chief revenue officer with Visible Alpha. Visible Alpha came to the market about five years ago to address a pretty significant gap that we saw being consensus estimates, or forecast data for publicly traded companies. All of you have seen this play out, if you've ever read the wall street journal. Company expectations were always made available at a high level, so sales or EPS and never at a granular level, but the investment debate and the investment thesis is always about more granular issues with companies and the sell side analysts that contributed to those revenue and earnings forecasts have always modeled companies at a greater degree of depth. It was just never information that was made available at scale.

Rodney Pedersen: (04:22)
So Visible Alpha came to the market to expose that content and bring value to that content in ways that hadn't been done before. So we source data from full working Excel models, from the sell side. We extract all of the data from those models and align it into a common structure for a publicly traded company. We to process a lot of data, I think on a trailing three month basis, we process about 90,000 models, from the south side it's about 6,000 contributing sell side analysts and ultimately give the buy-side the most comprehensive picture into the market forecasts for any key issue on a company.

Tim Harrington: (04:59)
Great. And I've read a bunch of your work. I think you had an airline piece out recently. I had no idea how many KPIs are actually in the airline industry, key performance indicators. But, if you follow the airlines, check out that report, pretty awesome. And a man who needs no introduction, but we'll let you give one ,Matt over to you.

Matt Ober: (05:20)
Thank you. I'm Matt Ober, I'm the chief data scientist at Third Point. We're about a $20 billion asset manager investing across equity, structured credit and venture investments. And our team looks to take data and technology to provide insights into the different investments we make.

Tim Harrington: (05:39)
Great. And Matt and I actually met years and years ago when he was at WorldQuant, was one of the first people to attend some of the battlefield events in Miami. So it's great to be back on stage with you after whatever, five or seven years. But let's dig right in. I think the space has seen a tremendous amount of growth, email receipt data, geolocation, satellite imagery. Rodney, from your perspective, what's been the real growth driver, what have you guys been seeing from that space?

Rodney Pedersen: (06:11)
I think it starts with a fact which is that the buy-side has to have a differentiated view to outperform and they have to do that on a sustained basis. If anybody sat in on the hedge fund comeback panel yesterday with Steve Cohen and Dmitry Balyasny, that was a key theme that came out of it. And I think that the expansion of data that's been made available in the marketplace over the last 10 years, which Visible Alpha certainly been a part of, has made it possible for the investment manager to get much more specific and much more granular and how they come up with an investment thesis, how they challenged the thesis and ultimately how they monitor that thesis in real time. And I think those that have done the best job at embracing the state of that's come to market have really put themselves in a position to use data in a way that will allow them to outperform. It's been fun to be a part of.

Tim Harrington: (07:07)
And Matt does that jive, are you guys hearing a lot of pull from analysts? Are you guys seeing that from the analyst perspective of I need more data, I need more answers or how does it play out from a buy-side perspective?

Matt Ober: (07:20)
Yeah, I think from our standpoint, all of this data just allows us to go deeper into our research on individual companies. And I think we're able to extract more insights. We have a really strong team. And I think at this point it's becoming part of the playbook that you have to take advantage of working with these great companies and figuring out how to leverage that across all the different investments we make, whether it's earlier in the private stage before they go public or further along. And I think just being able to distill insights from these large data sets is really the difficult part of the investment process. But it's where we find the true value.

Tim Harrington: (07:59)
And Carrie, we had talked a little bit about this. Do you guys feel a lot of pull for this real-time data? Especially given the COVID environment where we're coming out of, is there a really a pull from the buy-side and corporates to now, now, now?

Carrie Lazorchak: (08:14)
Yeah. I think to answer that direct question, the answer is, yes. It's definitely one of the main value propositions of our solution today and whether you want to understand right now at this moment, what are the major keywords that consumers are looking forward to understand where they're going, or you want to observe and understand what are the major purchase decisions that people are making on Amazon marketplace right now, at this minute, we definitely see that as a trend.

Carrie Lazorchak: (08:43)
I'm curious for this audience maybe by a show of hands, how many of you use alternative data today? Yeah. Okay. All right. Yeah. Okay. So my first, I think vis-a-vis back when we started talking about this whole panel on alternative data is, to me alternative data is a very weird name for this space, because I think as these guys just said, it's more necessity data and really what it comes down to now, it's like, how do you use that data? How do you consume all this real-time information? But definitely the acceleration of digital transformation is making the need for understanding of what's happening right now at this moment more important.

Tim Harrington: (09:24)
Yeah. And maybe to Rodney, as a recovering portfolio manager, you mentioned Steve, like I worked at SAC and I remember earning season being one of the most intense things, because you had your models, you were waiting for things to come out, you were kind of you're right or wrong in that instance. And I always thought about consensus was our bogey, so if our model is a lot higher then we'd figure out what the delta is, put a multiple on it and position size it. Trying to think about how to navigate through COVID, I can't even imagine the disparity of analysts. Like what, what did you guys see from the Visible Alpha side? You know, aggregating all of these data sets, these different estimates and where are we now?

Rodney Pedersen: (10:19)
Yeah. It's a great question. It's been really interesting to watch the data as we've gone through COVID. And with forecast data, you're respective of the issue that you're looking at. What you usually see is well ahead of the reporting period, estimates are relatively wide. And then as you approach the reporting period and companies release more information spreads narrow, and there's less uncertainty in the marketplace. But as you look across sectors 18 to 20 months into this environment, there's a lot of uncertainty that we see in forecast data. You mentioned airlines earlier. We were actually looking at airlines travel and leisure companies in the US a couple of weeks ago. And we were comparing dispersion and estimates today, versus what the dispersion estimates look like pre COVID. And today estimates are actually three and a half times wider. There's three and a half times more dispersion and estimates in September of 2021 than there was for a similar forecast horizon pre COVID. So I'm not telling anybody, probably something that you don't intuitively know, which is we're in a more uncertain world, but understanding the magnitude of that uncertainty has been an interesting.

Tim Harrington: (11:29)
And Matt, does that help your analyst, hurt your analysts? What do you guys feel when you see this dispersion of analyst estimates?

Matt Ober: (11:38)
I think volatility presents opportunity. And when there's unknowns, it allows us to have a differentiated view and having all of this information allows our team to do a deeper dive, better understand the company, the KPIs, and really understand what is it that we're seeing in real time? And I think that's become a big trend. Especially during COVID was all the digital transformation we're seeing across all companies and every sector, having information at our fingertips, understanding what's happening when we're all at home, it's beyond important.

Tim Harrington: (12:13)
And Carrie following up on that disparity opportunity. Do you guys tend to get more calls or more interest when things are all over the place, and then you can add value a lot more in those situations? Or what do you think on the disparity like this happening? Does that play well for you guys?

Carrie Lazorchak: (12:34)
I'd say the message we hear is twofold. Both from the companies and from this audience, historical data is not as relevant anymore. So a lot of times people are just studying it to the side and seeing whatever used to be the trend, just assume it's not going to be the trend and start with fresh new data. So we're seeing a lot of people come to us, come to the platform, not spend as much time on the historical data, but really trying to understand what are the more recent trends and then try quarterly those trends to how that may look in the future. So we're definitely seeing that both from companies trying to build strategies and from this audience who are really trying to track performance and understand what's happening.

Tim Harrington: (13:18)
Great. And on some of the calls prior to this, we discussed a couple names just because it's obviously a financial community here. The one that we wanted to take a look at first was Peloton, just giving, so much going on in that name. Rodney, set the stage for us, give us the view on Peloton and what's happening here.

Rodney Pedersen: (13:40)
Yeah. Well, just to the conversation earlier, I think the first question is about revenue, but it's really about much more granular issues. And so we see analysts grappling with a few different issues with Peloton. One is new unit deliveries, which is something that we track invisible office. So how many people are going to buy bikes and treadmills that didn't already purchase them. And there's actually a pretty wide dispersion of estimates for the coming quarters when you look at that. And I think this quarter will be the first quarter where we see results on the lower cost products that Peloton has put out in the marketplace. So pretty big spread in estimates there, a lot of uncertainty. And another key question that we see in the models is churn in their subscription business. So as people contemplate going back to gyms and maybe working out less at home and more at the gym, there's a decent amount of uncertainty on how much churn Peloton is going to see in the quarters to come on their subscription model.

Tim Harrington: (14:37)
And Matt, how do you guys key in on that? Is that, I don't even know if Peloton is a name that you guys look at fairly frequently, but is it also just trying to pick up trends within that space or will you dive right down into the single stock name?

Matt Ober: (14:54)
Yeah, I think for us, we think about even in the fitness industry in general. With Peloton being that first mover in the digital transformation, how are they getting their bikes? What does that supply chain look like? How does the data at the ports look? And then really, how does that look for all the gyms across the country? Not only the large chains, but some of the boutiques. So we think about that as a way to gauge how people are thinking about COVID. And it has a larger impact on just macro trends. So I think we see even individual companies as ways to look at a broader sectors that may not be specifically related, but it helps us just map out our thought process.

Tim Harrington: (15:36)
Great. And Carrie, over to you. What's the data going to tell us here?

Carrie Lazorchak: (15:41)
Well, first of all, I find this a very biased area because I'm a huge Peloton user. So I don't know about you, but when you're tracking investments for the companies you like, you want to root for them. So I'm rooting for Peloton, for sure. I think the one area of our data that's interesting right now is we can see, one of the things that they've been trying to do is really expand the market share, expand the audience of people that can have access to their services and their products. And they introduced this, buy now, pay later model, which is something that's new. It's definitely a new set of data that you have to look at because now you're not getting that immediate view of exactly the people that have purchased the equipment, but the people that are purchasing the equipment and being able to track that, I think that's going to be an interesting insight that we see, we do see positive trends around that as a new consumer opportunity in the new expansion of their market capabilities

Tim Harrington: (16:38)
Yeah. I think this is also why alternative data is so important because you're able to look at what SimilarWeb's saying, you're able to look at how maybe the brand is trending. You're able to see anything from geolocation, are people returning back to those gyms, are they doing different things? Just as we've talked about earlier, being able to combine some of these data sets and get a full picture and leverage the Visible Alpha detail is just so important going forward.

Rodney Pedersen: (17:10)
Yeah. And Tim, I think that also highlights a significant shift from where we were 10 to 15 years ago with data just in the intelligence that you can get intro period as to what's happening with the business. And I don't think that's just limited to people that are trading in the shorter term. Anybody that's looking for insight into a business, you can get a lot of really interesting signals of what's happening in real time. We actually see with our models data, 40% of all the models that we process come from the south side outside of earnings. So if you think about, we process 90,000 models on a trailing three months basis, 40% of every data point that we process is not around earnings. That's a lot of information flow that's happening in real time. Yeah.

Tim Harrington: (17:55)
And let's turn to Zoom. This is obviously one that everyone has probably lived through the past 18 months. We've seen probably one of the greatest success stories of a right time, right place type of company. Rodney was this from zero to a hundred? And set the stage for us with zoom. And then let's talk through it from a data perspective.

Rodney Pedersen: (18:21)
Yeah. The debate that we see in the models on Zoom is your classic software debate, which is what will their new client acquisition look like going forward? How many new customers can they attract that didn't already come onto the Zoom platform? The second question, which is probably more significant for the business, which is how can they expand revenue from their existing client base with some of the new products that they have coming to market? And just like I talked about with Peloton, but any key issue per subscription businesses churn. And so as people are going back to work back to the office, will companies start to pair back on their Zoom subscriptions and Zoom accounts, just like with Peloton? There's a wide dispersion of views on those topics. And actually with the customer count numbers, Zoom had a long history of beating visible office consensus for net new customer additions until last quarter, it was the first time that they had missed. So I think there's a lot of uncertainty that's been introduced there and it'd be fascinating to watch it play out.

Tim Harrington: (19:24)
Yeah. And it seems this highlights some of your data. It seems like the story is changing as well, so you've got what people think about the traditional Zoom subscription. Now they start layering on the telephone offering, which is two or three times the ARPU. So, having the ability to drill down and say, okay, year over year comps are getting tougher and tougher. And I think we talked about it and it wasn't till like...

Rodney Pedersen: (19:54)
Really difficult comps for what they achieved last year. For sure.

Tim Harrington: (19:57)
Yeah. Maybe it's not next year, even the 2023 or wherever it is. How are you going to be able to figure out what the next step is and what's working? What's not? And I can remember as an investor, you never wanted to see decelerating comps at a tech company. So that was always a warning, but now you've got this whole telephone side, high margin, probably lower customer acquisition costs. So it'll be interesting to see how it plays out. Matt, any perspectives on Zoom?

Matt Ober: (20:29)
I think for us, Zoom is a great way to gauge the work from home and the hybrid workforce. And are we going back into the office? Rather than focus on it just as a single company itself, it really gives us a sense of what's going to happen with business travel. Are coming back into the office? are we all moving to this work from home hybrid? So is that the new standard? I think that's been one of the big things on our mind and what a lot of people are watching Zoom for outside of just how Zoom is doing on its own. And I think with these tools that we have now, whether it's Visible Alpha or SimilarWeb like, we have so many more tools at our disposal that it makes us more efficient to be able to look at that quickly and get a good sense of where we're moving.

Tim Harrington: (21:14)
Got you. And Carrie, what's the data telling us?

Carrie Lazorchak: (21:17)
Well, first I think it's a really interesting space to watch right now for two reasons. One, I think one thing that we see with alternative data of Austin, you can watch and industry and you use what you see happening in one industry to correlate to another industry. So that's one thing. Specifically as it relates to Zoom, I think it's interesting the comment you made about the phone and they've been very clear about a strategy to really go after unified communication, broaden the range for which they're providing services to companies. In some way, I think the delays and they get back to the office are going to work to their advantage. It's going to give them more time to condition what is an audience that they have a lot of attention with right now, on the opportunities to continue to use Zoom and to use some of Zoom's new offerings.

Carrie Lazorchak: (22:05)
I know they did an acquisition recently of Five9, which is interesting to watch and see what happens there. So I'd say it's a great space to watch. I think there's other correlating industries to some of the points that were made here, that you can also look at what's happening in those trends, whether it's business travel and some of those things and correlate the speed and rate at which we think people will start to come back to the office and whether that's going to have more impact presumes specifically. But right now I think they have a really good opportunity, because the more people are home and the more people get used to being at on, I think the more businesses are going to accommodate a hybrid structure going forward and that's going to work to their advantage.

Tim Harrington: (22:47)
Yeah. It's interesting. You don't really think about, you're probably not getting rid of your Zoom account. You're always going to have it. It's just a new way of life. But at the same time as with everything it's earnings expectations, are they going to continue to grow, things like that. And now I guess one of the things, we constantly get pinged from different buy-side clients on the bigger themes. So, whereas alternative data can be great very much on a company by company basis. I think it's also incredibly important right now, when you think about some of the larger investment themes, whether its inflation, Matt touched on the work from home trends, unemployment with some of the things happening there. I guess Rodney, as you look to 2022 and see across the different analysts out there, what are some of those themes that you guys are keying in on for next year?

Rodney Pedersen: (23:44)
Yeah. We actually put out a blog post a couple of weeks ago on inflation on our website. And did a little bit of what Matt was talking about, which is looking at company data as an indicator for something broader. And so we looked for companies in our data set that have significant exposure to the lumber industry, which lumber has been a key talking point in the pricing debate and then companies with exposure to use cars. So Weyerhaeuser is one of the larger lumber producers in the world. All the analysts that model that company forecast lumber prices well into the future. Analysts correctly predicted that lumber crisis would peak in Q2 and begin to taper off. But what was interesting to observe is that analysts are actually forecasting by the end of 2022 for lumber prices to remain 80% above pre pandemic levels. And it doesn't feel so transitory and those expectations may play out to be correct.

Rodney Pedersen: (24:47)
They may not play out to be correct, but as all of you work to formulate your own views on inflation, how it impacts your businesses, your investments, there's some interesting signals that you can look for in a company oriented data. Another thing that we looked at was Carvana, which is one of the larger providers or larger sellers of used cars. In the inflation readings that came out this morning, there was a slight deceleration in relation and used car prices had come down. What's interesting in those models is the consensus for used car pricing. Next quarter is 11%. But if you look under the hood, the spread is negative 2%, all the way up to 20% growth year over year on used car prices. Consensus is probably a bad descriptor for that. It's really more of a range of estimates. Into the point that we've been talking about in this panel, I think it highlights uncertainty. And to what Matt said, where there's uncertainty there's opportunity.

Tim Harrington: (25:46)
Yeah. The auto sector in general, to leverage alternative data for trading that in the last 12 to 24 months has been, looking at even the Fords that have had these huge accelerations, stocks performed really well, raised numbers. Next thing you know, you see supply chain issues, you see chip shortages, all of a sudden you're back, nine to 15 to 12. So layering on alternative data, it can be so powerful. Matt, as you looked at 2022, any blind spots? Any things that you're looking for data to help answer these different questions?

Matt Ober: (26:25)
I think it's some of the topics that were just been touching on, it's watching the supply chain, seeing how that's going to be affected around the world. I think the digital transformation we saw accelerated during COVID, I think we think that's going to continue to accelerate and looking at how do we better track that. We have a huge presence at this conference in digital assets, how is digital assets going to affect all of these different sectors, whether it's cryptocurrencies defy the metaverse. So I think for us, it's just being able to look at all these sources and think about it not only in the public markets, but also private companies as we invest earlier.

Tim Harrington: (27:00)
Is there a big disparity in terms of the data sets that you look for, or that you currently work with on the private side versus the public, or they cross over to bowls?

Matt Ober: (27:12)
I think a lot of them cross over to both. I think, SimilarWeb is a great example that they're covering all these companies as they move more and more digitally, and we're able to see them earlier and earlier. So for a company like ours, it helps our analysts know who the potential disruptors are to the public markets. So I would say it's exciting to see a lot of the data providers we've been using for many years, expand the universe that they're covering.

Tim Harrington: (27:37)
Interesting. And what stage do you guys look at, is it an early stage? Is it more series B, C, D? Where do you guys get in-

Matt Ober: (27:47)
Typically series B and further along the line.

Tim Harrington: (27:50)
Okay. And yeah, because I'd imagine the private world is so much different than the public world. Rodney, you guys, I don't think you do any private stuff, correct?

Rodney Pedersen: (27:59)
No, everything that we cover is publicly traded equities. I will say that we work with a relatively small number of private equity firms that look for insight in publicly traded equities for the impact on private markets. But yeah, we cover publicly traded equities.

Tim Harrington: (28:14)
And Carrie, it sounds like from Matt, you've covered both, then is it corporate or is it also kind of the PE and VC firms and...

Carrie Lazorchak: (28:24)
All the above. I think that one of the key reasons people come to SimilarWeb is because you can see consumer trends, you can see broad market trends, consumer behavior trends in real time and it's applicable to all segments. I think Matt said it very well, actually. Yeah.

Tim Harrington: (28:45)
And I know we're running out of time, but kind of speed round closing. We want the audience to walk away smarter, thinking alternative data as the answer. Carrie, if you wanted to have those bullet points, what would they be in the minds of the audience to walk out of here with?

Carrie Lazorchak: (29:06)
I think one of the most interesting things to consider right now is the movement of a lot of legacy brands to D to C. We see very interesting correlations of data when you look at our technographics information and the number of classic indirect companies implementing technologies like Shopify and e-commerce, B2B software, there's a huge trend towards more direct to consumer relationship. We hear it from the customers directly when we talk to them about how they're using our data, because they want to understand what's the demand and what's the trends. And we see a lot of investment there. So I think the B2B software space is a very interesting space to watch. And I think that trend to D to C is going to really create a new dynamic of, and a new area of data that people are going to need to evaluate companies.

Tim Harrington: (29:59)
And one thing, when we started BattleFin, it was very quant driven. So a lot of the quant funds were the first ones to engage cause they could understand the various data sets. And I was just like, give me everything, just throw the data at me. I don't want any insights relative to it. And then we saw an evolution where the fundamental funds and even some of the corporates were coming in and trying to understand it. And I think one thing that you guys seem to have done a good job of was, I don't know, I call it mapping it to tickers, but actually talking about things in terms of companies and public companies. When you guys did that, did you guys start to see more traction? Because it seems like it's a lot easier for us to talk about Peloton and different KPIs than it is to say, okay, here's the algo, here's the machine learning answer. From that perspective, did you guys see a jump in attention and traction once you did that?

Carrie Lazorchak: (31:07)
First of all, I think we're starting to do more of that. I think one area that you'll see from SimilarWeb and I think my solutions head is here. He'll tell you, you'll see more and more information from SimilarWeb that looks at ticker symbol, tickers themselves and aggregates the data for you. But it really depends on the audiences and what you're looking for. But yes, I think we'll do more and more of that. We have more and more demand for that. So you will see that, but obviously because we also play in the private space, there's people that are just coming to look for the trends and understand who's the next big player in any given market. And we provide insights to that as well.

Tim Harrington: (31:47)
Rodney, speed round, minute left, you got, you and Matt, bring us home.

Rodney Pedersen: (31:52)
Yeah. The first thing that I would say is a lot of people think about data and acquiring new data sets as a strategy to come up with better ideas. And that's certainly valid. I would encourage everybody to think about your data strategy also as looking for data that will challenge your views. And I think the more that you can find data that will challenge your own views, ultimately the greater conviction you can have in your ideas and a better probability of differentiating in the long run. That's one really important thing.

Rodney Pedersen: (32:24)
The second thing that I would say is, I think it's very rare that a single data set is going to give you a lot of really great answers. And ultimately where I think people like Matt have created opportunity is by connecting data sets in very meaningful ways. SimilarWeb and Visible Alpha, maybe we should, but we don't really talk. One another we don't create linkages between our data sets. So the managers that invest the time and the energy to create meaningful connections between data sets can uncover insights that others will never see. And I think that's an important part of any data strategy and encourage everybody to think about that.

Tim Harrington: (33:06)
Matt bring us home.

Matt Ober: (33:07)
I just think, in the last 10 years, if we think about where we've come with data and hedge funds, it's become a staple. It's no longer alternative like Carrie said, and working with these strong providers, these are great companies that are out there and we don't have to do everything ourselves makes our team more efficient, allows us to dive deeper into understanding companies and what data can really uncover unknowns. And I think the opportunity is only growing with all of this unique data that's out there.

Tim Harrington: (33:35)
Great. We have 50 of probably the most amazing alternative data providers down on the fourth floor doing one-on-one meetings. So if you have an investment thesis, you want to figure out inflation, you have a company, come down, join us, ask the questions. Thank you guys. Great panels. Look forward to seeing the rest of the conference.

Carrie Lazorchak: (33:54)
Yeah. Thank you.

Guest User

October 12, 2021

SALT NY: Finance, SALT NY: Technology

A Digital Revolution in Emerging Markets with Kevin Carter | #SALTNY

Guest User

October 12, 2021

SALT NY: Finance, SALT NY: Technology

A Digital Revolution in Emerging Markets with Kevin Carter, Founder & Chief Investment Officer, EMQQ.

Apple | Spotify | Amazon | Google | Stitcher

SPEAKER

Kevin Carter

Founder & Chief Investment Officer

EMQQ

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Kevin Carter: (00:07)
So thank you all for showing up to hear my talk. I'm going to do three things today. First, I'm going to tell you who I am and how I think about investing, how I got involved with China and emerging markets 15 years ago. And then I would tell you everything I think you need to know about investing in emerging markets. I will tell you how we do it and why we think it's the best way to invest in both emerging and frontier markets. And then I'll talk a little bit about China and what's been going on there.

Kevin Carter: (00:44)
I live 15 miles east of San Francisco in a town called Lafayette. I've lived there my whole life, and I've worked in the investment business in the Bay Area for 28 years. I started at a company called Robertson Stephens & Company, which some of you may remember. It was a technology focused investment bank. We used to call it the Goldman Sachs of San Francisco. We don't say that anymore because young people think that means the devil. But that's where I started.

Kevin Carter: (01:15)
And I had one interview. It lasted about 30 minutes. We talked about college basketball for most of it. And then the guy said, "You can start Monday." And I said, "Well, how can I possibly start Monday? I don't know anything about investing." And he said, "Go buy this book." And he wrote down A Random Walk Down Wall Street. And I went to the bookstore and picked up the way home. I read it and went to work Monday.

Kevin Carter: (01:40)
And many of you are probably familiar with this book. It was first written almost 50 years ago. And in the first edition, the author, Burt Malkiel suggested that somebody should make an index fund. And a couple of years later, his friend John Bogle did. And so this book and its author have long been associated with indexing and ETFs.

Kevin Carter: (02:05)
Now I however, very quickly gravitated towards Omaha. And I try to think about every investment and business decision through a Charlie Munger and Warren Buffett lens. But for the last 22 years, I've actually worked with Dr. Burton Malkiel, the author of A Random Walk Down Wall Street. So I've had one foot in the active world, one foot in the indexing world. And in 1998, I was a very young, cocky value investor. And I was shorting amazon.com, which cost me about a third of my net worth in one day. And the same day I saw a company changed its name from KTEL to ktel.com and the stock went from $1 to $30. And I said, "I've read about this. I know I've read about this."

Kevin Carter: (02:58)
And I found my copy of A Random Walk Down Wall Street. And there was a quote from Jack Dreyfus about the 1960s electronics bubble. And the quote was basically, take a company called Shoelaces Incorporated, change the name to Silicon and Electronic Furth Burners. The stock used to sell for eight times earnings, but by changing the name, it can now sell for 64 times earnings. And it was exactly what it just happened with this company, KTEL. And I said, "I have to call this guy. It's right out of his book."

Kevin Carter: (03:33)
And so I used the search engine of the day, which for me was Ink to me. And I put in Dr. Burton Malkiel, and up came a Princeton web page with his picture and his class schedule and his phone number. And I picked up the phone and I dialed it, thinking I'd get a secretary or something. And lo and behold, he answered the phone. And I said, "Geez, Dr. Malkin, I don't know you, but I read your book." And I said, "You got to see this." And he asked me to fax him a Bloomberg print out or something. And I did.

Kevin Carter: (04:04)
Anyhow, one thing led to another. And now 22 years later, we've been business partners for two decades. So I've had one foot in the active world, one foot in the indexing world.

Kevin Carter: (04:15)
One of the companies we started in 2002 and sold to Natixis at the very end of 2004 was called Active Index Advisors, which still exists as a division of Natixis. It was a pioneer in what's now called direct indexing. But right before we sold the company, Google went public. And when Google went public, they asked my partner, Burton, to give a talk to the employees about investing. I wasn't involved with that, but Burton was on the West Coast and had dinner with me the night before. And then he went down to Mountain View and talk to the Googlers before their IPO.

Kevin Carter: (04:54)
And a few months later, my phone rang and it was a guy from Google who had googled me and he said, "Hey, I heard about this active indexing you do. How do I invest?" And I said, "Well, who's your advisor?" He said, "I don't have an advisor." I said, "Well, we're available at Morgan Stanley and Credit Suisse and Deutsche Bank. And I'm happy to introduce you to an advisor at one of those places." And he said, "No, I don't want an advisor. I just want to invest directly."

Kevin Carter: (05:20)
So I drove down to Mountain View and met with this 25-year-old with a nine-figure piece of stock and ended up becoming his investment advisor and the advisor to several of the earliest engineers at Google over the coming months. But while I was going back and forth to Mountain View, Burton was going back and forth to China. And he ended up writing a white paper, making the case for China. The Google people found out about it and called me and said, "Can Burton come down to Mountain View and talk about China?" And I said, "Sure. Next time he's on the West Coast, we'll come on down."

Kevin Carter: (06:02)
So 15 years ago, this spring, I drove to Mountain View one morning with Burton. He gave a talk about investing in China, and then all these people looked at me and said, "We want to invest in China."

Kevin Carter: (06:18)
Now at that point in my life, I didn't know very much about China. I had never been to China. All I knew was what I had read in Burt's paper. But from the moment that talk ended until today, my entire life has been focused on figuring out what on earth does that even mean to invest in China, and how should you do it? So with that, let me tell you what I've learned and what you need to know.

Kevin Carter: (06:49)
First of all, when we talk about emerging markets, we're talking about the world. And in terms of GDP, market cap population, this is about 60% Asia. It's about 20% the emerging Americas. And then 20% scattered between Eastern Europe, Middle East, and Africa. So that's what it looks like on the map. Fundamentally, it's the world. It's 85% of the world's people. It's even more of the future as measured by young people, for which it's almost 90% of the world. So this is the world and it's even more of the future. And it's a big deal.

Kevin Carter: (07:29)
And what's happening. You can see on this slide, on the left side, they're now larger than developed markets on a GDP basis. But on the right side, you'll see the emerging market share of a number of categories, three of which have red arrows. The top red arrow is showing you again, that this is where all the people are. The bottom red arrows are showing you that in the consumption categories, retail sales and consumer spending, emerging markets are way behind. And it's the delta between those three bars and the closing of that delta, that is the story, the rise of the emerging market consumer.

Kevin Carter: (08:19)
Now, let me come back to that because that's what is EMQQ is all about, and let me tell you something that's wrong with the way people have been investing in emerging markets. There's a lot of problems with indexing, as it turns out in emerging markets. And they're pretty big. And it took me about five minutes to figure out the first problem after we got back to San Francisco that day from Mountain View.

Kevin Carter: (08:56)
So we drove back to San Francisco, went up to our office. I walked over to the portfolio managers and I said, "The Google guys want to invest in China. Give me a list of all of the companies in the FXI." That's the iShares China ETF, which was the only China ETF at the time. And I assume that's what we would use for the Google guys. And I like to look under the hood with my Omaha head and see what exactly are the companies in this ETF.

Kevin Carter: (09:29)
And so I asked for the list, and Burton pulled me aside and he said, "Look, when you get the list, you're going to see that almost all of the companies are Chinese owned banks and oil companies." And I said, "Yeah. I've heard about that. It doesn't sound great."

Kevin Carter: (09:49)
And he said, "Well, let me give you an example of how these things work. You've got a Chinese manufacturing plant with 15,000 employees. It's been losing money for a decade, and it's about to run out of money again. But it has 15,000 employees. The management of the bank goes to ... or the management of the company goes to the bank, the state owned bank and says, 'Hey, we need more money.' Now, a normal banker would say, 'No, you can't have any more money. You didn't pay us back the last money.' But the state owned bank says, 'Well, if you run out of money, then these 15,000 people are going to be out in the streets protesting.' So it makes another low."

Kevin Carter: (10:26)
I got literally nauseous inside when I thought about that, because with my simple Omaha brain earnings equals value and the growth of earnings equals the growth of value. And if the people running these companies don't care about that, why would you invest in them at all? And in the case of the China ETF, it was over 80% state owned enterprises. And the consumer piece was like 8%. And it's not as bad in the broad indexes, but it's bad. About a third of the Vanguard fund and the iShares fund, the Schwab fund and all the other funds, not all but most of them, certainly the broad emerging markets funds, they've got about a third of their assets in these state owned enterprises, which are conflicted, they're inefficient.

Kevin Carter: (11:16)
Poor corporate governance is putting it quite mildly as corruption is everywhere. And you don't have to look very far. It's in the papers almost every day. The best example is in Brazil where the state owned oil giant Petrobras was being systematically looted by the people that ran the country, including the last two presidents who both went to jail for basically stealing your money if you're using a broad emerging markets approach.

Kevin Carter: (11:47)
And the problem's even bigger, if we count two other groups of companies that have a lot of the same problems. The Chaebol in Korea and the Russian oligarchs that took over the Soviet SOEs. If we counted those two, it's 50% of the index, then those two groups have lots of problems like people going to jail, like this guy, the Chairman of Samsung, who's been in jail, in and out of jail twice in the last six or seven years, once for bribing the president of the country who went to jail as well.

Kevin Carter: (12:22)
So this is why, if you think you're going to make any money buying these broad emerging market products like Bridgewater's five of their top 25 holdings, I think you're going to be disappointed. FXI, for 10 years, when I talked about that company, that product, I called it the worst investment product in the world.

Kevin Carter: (12:48)
You got to do emerging markets 3.0. You have to evolve and get more precise. And ... Can you go back? Thank you. You've got to get more precise. So in my first eight years on the China's scene, Burton and I launched a number of China ETFs with Guggenheim that now have the Invesco brand. But when I wasn't working with Guggenheim, I spent my time in New York City and Boston with family offices and foundations and endowments. And I watched how they evolved.

Kevin Carter: (13:25)
They saw they weren't making any money. They're increasing their allocations and they get more precise. Now, if you're Yale, you can set up Hillhouse. But most people aren't Yale. And so when people would ask me, "What's the best way to invest in emerging markets," I said, "That's easy. You buy econ, the emerging market consumer ETF," which I didn't make, but I knew it existed. And if you believed McKinsey and me, then all you really want is the consumer. Econ was the product to buy. 30 largest emerging market consumer stocks.

Kevin Carter: (14:08)
Now, one day, about eight years ago, seven and a half years ago, I woke up one morning and I thought, "What on earth have I done with my life?" I was this young, cocky Charlie Munger wannabe. And somehow I get mixed up with this guy at Princeton and I'm building Chinese index funds for God's sake. And I've obviously lost my way and I need to go back to my roots. And so I set up an investment partnership.

Kevin Carter: (14:35)
Once it was organized and my own money was in it, I invested in five stocks. And then I thought, "Well, I should see if any of my friends around town want to invest in this fund." And so I scheduled some meetings and the morning of those meetings, I made some slides to show the people I was going to be meeting with. These are the five companies I own was one of the slides.

Kevin Carter: (15:00)
And when I made that slide, the first three stocks I put on it were stocks that were in the emerging market consumer ETF. Those three stocks traded in Hong Kong were Want Want which is like the Nabisco of China, branded crackers. Second and third companies, Chinese sportswear makers, Li-Ning and Peak Sports. Can think of these as the Reebok and Converse of China. So those were the first three stocks, food, clothing, traditional consumption.

Kevin Carter: (15:28)
But then I had two other stocks that were clearly part of the emerging market consumer story, but the database didn't call them consumer. The database said they were technology companies. And that's why they were not in the emerging market consumer ETF. The first one traded on the New York Stock Exchange was WUBA. This is the Craigslist of China, which has since gone private. And the fifth and final company trades on the NASDAQ. It's called MercadoLibre, MELI, which is the amazon.com and PayPal of Brazil and Mexico and every other country in Central and South America.

Kevin Carter: (16:09)
And I looked at the slide after I made it, I thought, "Hmm, these first three companies, these consumer companies are great. They're growing at 15% or 20%. I think they have moats in form of brand equity." But then I looked at the two internet companies and they were growing at 100% literally and had incredible margins. WUBA had a 94% gross margin, which is by far the highest gross margin I've ever seen. And that's where I look for moats. And while the PE multiples were higher for those two stocks, when you divided the PE by the growth rate, it was lower and quite reasonable. And I just remember thinking my two best emerging market consumer stocks are not in the emerging market consumer ETF, because they're called technology companies.

Kevin Carter: (17:07)
Printed my slides, went to my meetings, got three checks, driving home. My phone rings, and it's a friend of mine with a three-year-old daughter. And she says, "What's the best emerging markets ETF for my daughter's college fund?" I started to tell her to buy the emerging market consumer ETF, but then a light bulb appeared above my head. And I said, "Wait a minute. The best emerging markets ETF for long-term investors doesn't exist." And I went straight back to my office and started to organize EMQQ.

Kevin Carter: (17:46)
Now, at the time I could see the incredible growth rates, I could see the incredible margins, and I can see that the valuations were reasonable. But what I didn't appreciate was what was causing this incredible growth. And, excuse me, it's quite clear to me now. It's quite clear to me now. It's really a combination of three things, three big things, three mega trends happening at the same time, and they are creating what I'm pretty sure, but not positive is the fastest growing sector in the world, ever.

Kevin Carter: (18:34)
What are those three mega trends? This is the first one. We've already talked about it. Billions of people moving on up and they want stuff, more and better food, more and better clothing, appliances, vacations, cars, Harvard. That's what they want. It's a big deal. McKinsey calls it the biggest growth story in the history of capitalism as we said.

Kevin Carter: (18:59)
Now, when I got that call, I answered it on my iPhone, which was sitting on my car seat next to me. So I had a smartphone eight years ago, but I hadn't had it very long, and I could already see how it was changing my family's consumption. Back then, my family went to this store four times a week, which is easy to do. It's three miles from our house. The roads are paved. There's free parking. But all of a sudden the trips to the store started to go down. And this guy started showing up at my house once a week, and then twice a week. Now my family doesn't go to Target. And this guy, Mark, is at my house five times a week, seven times a week, all the time.

Kevin Carter: (19:47)
So if you think about how the smartphone has changed us and you map it over to the emerging market consumer, the story gets quite big. It gets quite big because I had a computer for 20 years before I got my smartphone. Most of the people in the world have never had a computer before. All of these people are getting their first ever computer. It's not on their desk and it never will be. And in most cases, it doesn't have an Apple logo. We're talking about $50, $60, $80 Android-based smartphones made in China getting better every year, getting more affordable every year, and bringing the third mega trend with it. Something we also take for granted, something I've had for 25 years called the internet.

Kevin Carter: (20:47)
I got the internet in 1995 in the Marina District of San Francisco on the telephone line. Then it went onto the cable. Now it just shows up in my pocket. Well, most of the world has never been wired before. So all of those billions of people, in addition to getting their first ever computer, they're getting their first internet access. And because they don't have a bank account and there's no TV on their wall with a thousand channels and there's no Target store, they're leapfrogging what we think of as traditional consumption. And the result is this.

Kevin Carter: (21:36)
This is showing you the revenue growth for the emerging markets internet sector, the EMQQ index. And you can see that for the last 11 years, the average annual growth rate was 37% a year. Now that's hard to do for any single business, let alone an entire sector. I'm not 100% sure of anything in the world, but I've given this presentation to hundreds of professional investor groups and I offer $100,000 reward to anybody that can show me a sector that grew for 38% a year for a decade.

Kevin Carter: (22:21)
I could be wrong. I haven't gotten any emails from the people I offered the bet to. I've asked everybody I know who's smarter and older than me if they know a sector that had revenue growth of 38% a year. And so far, my inbox is empty. So I could be wrong. But I think this is not only the fastest growing sector in the world, but the fastest growing sector in the world ever.

Kevin Carter: (22:46)
Now, what comes with that fundamental growth? Value creation. You can see on this chart in yellow gold, how the internet sector has done over the last 12 years. And bouncing along the bottom in blue, the broad indexes, the biggest value trap in the world, the MSEI, emerging market index. Look how cheap it is. Half the price of the S&P. That's what they always say when they say they're pounding the table on emerging markets and recommending you buy the broad index.

Kevin Carter: (23:25)
So what are the companies? Alibaba, not the largest anymore. Our fourth largest holding, the most popular, at least best known of the emerging market internet companies. And let me point out one more important thing. When this company came public, it revealed another problem with the indexes, something that I also learned on my very first day when I got back from Mountain View 15 years ago. So once Burton gave me his warning about SOEs, and then they gave me the list of all the companies in the China ETF, I went through every company and I got to the bottom of the list. And I said, "Where's Baidu," because Baidu was not in the China ETF.

Kevin Carter: (24:18)
So we called the iShares people and said, "Where's Baidu?" They said, "Well, we don't own Baidu." I said, "I know. I can see. It's not on the list. Why don't you own Baidu?" "We don't consider it a Chinese company." And I was like, "What do you mean?" Said, "Well, it trades the United States?" I said, "It's the Google of China, and being the Google of anything seems like a good idea. And being the Google of the biggest country in the world seems like a really good idea." They said, "Well, we don't include it because it trades the United States."

Kevin Carter: (24:49)
Now it took the Alibaba IPO for this problem to finally get fixed. It bothered me a lot. Nobody else cared, certainly not consumer reports and USA Today who actually wrote about this problem, because you couldn't get Jack Ma off of your computer screen or your TV for a month. They're telling you how big a deal this is, and it's not going to be in the Vanguard fund. It took them three years to finally add Alibaba. So the indexes are terrible. Half of these companies are still not included in the index. And the reason is because they trade here, which is a shame. And the reason they trade here is because they're getting funded by our best investors. And they're listing on our exchanges with the highest listing standards, and investors are getting penalized for this.

Kevin Carter: (25:45)
Examples. You had Yahoo put a billion dollars into Alibaba, which turned into the only thing they really had at the end and a lot of money. And in my favorite example from the last couple of years, my heroes in Omaha, bought 5% of this Brazilian FinTech company, Stone, on its IPO, the first ever investment IPO investment I believe for Berkshire. Stone's not in your iShares shares fund, not in your Vanguard fund.

Kevin Carter: (26:14)
So corporate governance is bad in emerging markets. These companies on a relative basis to things like Petrobras, you'd have to say they have exceptional corporate governance. And meanwhile, a lot of them still get left out. You'll get Petrobras, the corrupt Brazilian oil giant twice in your Vanguard fund, your iShares fund, but you won't get Stone.

Kevin Carter: (26:39)
And now let's talk about Tencent. And let me say a few things. We'll wrap up the China part of the story and get into the next frontier, which is getting quite exciting. Tencent, most of you probably know this company. It's now the biggest market cap wise, Alibaba, Tencent neck and neck for the last decade. Plus, to make it simple, we've always told people Tencent's the Facebook of China. And it's true. The WeChat platform is the social network. It's how I talk to my Chinese friends and colleagues. So that's a fair assessment. But you can't call Facebook the Tencent of anything. Because in the case of Tencent and Alibaba, there is no equivalent.

Kevin Carter: (27:18)
And the reason is because the consumption infrastructure in emerging markets is by definition underdeveloped. And when I say consumption infrastructure, I mean bank accounts with debit cards, TVs on the wall, Target stores. Because those things don't exist, not only are the consumers leapfrogging, but Alibaba and Tencent are digitizing every consumer vertical.

Kevin Carter: (27:42)
These are not technology companies. These are all things consumer, companies operating in a smartphone world. They're in healthcare. Alibaba, JD, Tencent, all have healthcare businesses. Two of them are public. One's coming. Entertainment, Tencent's the Spotify of China, Tencent owned majority trades on the New York Stock Exchange. Food, groceries. This is the most amazing thing I've ever seen. This is a photo I took in Alibaba's Hema market. And I could spend an hour telling you how amazing it is, but it's the closest thing I've ever seen to the Jetsons. And it's also FinTech and the money. So everything's getting digitized by far, by far the biggest part of the story is FinTech.

Kevin Carter: (28:37)
And it starts with payments. You get the money on the phone. Anybody that's been to China knows every place you want to buy something, you'll find two QR codes, everywhere. And once you get the money on the phone, you're in business. And Alibaba and Tencent have the money on the phone now. And that has allowed them to get into investment products, insurance products, and to ... that is [inaudible 00:29:05] financial ... the banking and credit products. We'll come back to that. But all things are getting digitized, FinTech and the money especially, and it's quite a paradox. You would think someone like me, a FinTech entrepreneur in San Francisco, that I would be on the cutting edge and zap my phone to buy everything. Not me. Africa. We'll talk more about FinTech.

Kevin Carter: (29:29)
Now, there's lots of other Chinese companies. These are some of the bigger ones, Pinduoduo, an amazing company, and a great stock as well, jd.com, Baidu, Meituan. This has been largely China's story so far. But there's something else really big happening, and we're pretty excited about it. So let me tell you what is happening outside of the China story.

Kevin Carter: (29:57)
China's big. It's our biggest weight, 65%. That's for good reason. It's by far the biggest e-commerce market in the world. You can call it emerging market, but in the internet world it's developed and it's big. In fact, it is four times the size of the other 45 emerging and frontier markets on an e-commerce basis.

Kevin Carter: (30:25)
So it's dominated our weights for a long time. But, the other part's starting to get pretty exciting. You can see here that same revenue chart, the blue being the China portion, the gold being the non-China portion. You can see the China piece crossed $100 billion seven years ago. You can see the non-China piece crossed $100 billion today, basically.

Kevin Carter: (30:53)
So outside China, the story's getting hot. This has been the company that showed us this, showed us how big the FinTech part of the story was, the Amazon and the PayPal of Brazil and all of South America, not in the indexes. Sea Limited might be the best performing stock in the world for the last several years. Trades here, headquartered in Singapore. This is a mashup of gaming, e-commerce, FinTech.

Kevin Carter: (31:26)
Yandex, the Uber of Russia or the Google of Russia rather is also the Uber ... The Google of Russia is also the Uber of Russia. Now that's Yandex, not in your index. You'll get the oligarchs. Africa. Nigeria has got a company trading on the New York Stock Exchange, JMIA. E-commerce leader in several Sub-Saharan African countries.

Kevin Carter: (31:51)
Poland has its own Amazon, largest company now in the Warsaw Exchange. Kazakhstan has a super app trading in London. We didn't buy this stock after it went public because they didn't put Kazakhstan on the list of eligible countries when I made the fund. It didn't occur to me that Kazakhstan would have its own super app publicly traded.

Kevin Carter: (32:17)
Uruguay, this company is amazing, dLocal. Check it out. Hepsiburada, Turkey. Everything is here. Indonesia. These are all recent. And it's a big, big deal. The rest of the world's getting the internet and lives are changing. And this company marked a pretty big inflection point. This is an Indian IPO that happened in the last several weeks, Zomato. This is a milestone.

Kevin Carter: (32:51)
There are now more non-Chinese companies in the internet space than Chinese, and they've doubled in the last 12 months, doubled, 30 to 60, and lots more coming. We could have 25 India internet IPOs in the next 18 months. Flipkart's coming, e-commerce leader controlled by Walmart, Tencent, and investors. One of my favorites, my heroes again, FinTech leader, Alibaba, largest shareholder, Paytm, the Indian payments leader in the papers this morning. Southeast Asia has got so much going on.

Kevin Carter: (33:39)
This is one of my favorites. This is a new merger, a mashup of two companies, Tokopedia, the Amazon of Indonesia is hitching up with the Uber of Indonesia, Gojek. They're both the Venmo of Indonesia. This company will come public. You'll hear about it, owned partially by Tencent and Alibaba and Google. Biggest online bank in the world, Brazil, Tencent, and again, Omaha, early ... Well, Tencent, an early investor. Warren Buffett and his guys just invested two months ago. This company is coming. I love this company, Nubank out of Brazil.

Kevin Carter: (34:22)
So this is a big deal. And there's lots of awesome elements as you read and see how these people's lives are changing. They're getting information for the first time. They're getting access to stuff for the first time. And it's a big deal.

Kevin Carter: (34:42)
So in summary, this is where the growth is. This is where the growth is in the world. And it's certainly where the growth is in emerging markets as these three mega trends happen at the same time, billions of people getting a computer and the internet, leapfrogging. Important side benefits in a part of the world where getting your money stolen is your biggest problem? I think you can rest a little more comfortably with these companies and you get exposure to what's going on beyond China. So it's still pretty early.

Kevin Carter: (35:24)
Now, we have a crisis right now. The Chinese word for crisis is a combination of two symbols, danger and opportunity. I think this is an opportunity. We've been crushed since February, down almost 40%. Most of that, a result of China. And July wasn't a very fun month for us, as you might imagine. I'm not going to go deep into the stuff since I've spent the last six weeks talking about China, trying to calm people down. Everyone's scared. Everybody's been scared of China for the 16 years I've been involved and the main thing I hear is fear. The Chinese government, they're communists, they're going to steal all my money. And it finally happened, not in this case, but in this one.

Kevin Carter: (36:20)
Now, this is the online tutoring crack down that freaked people out in a major way. I think it was ... Well, I don't think it's going to work what they're doing, but they had to do something with the online education and the tutoring frenzy in China. But I didn't think they'd actually make them go non-profit, but they did. And I think it's unfortunate, at least for the way people think of China. I don't think it was the wrong thing to do by the Chinese government, but it sure freaked out US investors, because finally the Chinese government did steal your money if you owned TAL or EDU. Tiananmen Square moment? Maybe. Stephen Rote's even getting scared.

Kevin Carter: (37:10)
You got to know what Kathy's doing. She sold it all. Ironic. Ironic. The front page of the New York Times has an article about Joe Biden's team coming for the FAANG stocks that are making new highs. The Chinese government's involved? Sell. Run. I don't think it means all that much negatively when I look at the fundamentals of each of the different regulatory actions starting with the Ant Group. Sure helps valuations. Easy to pound the table when blood is in the streets.

Kevin Carter: (37:48)
I like the way Ray Dalio thinks about China. He articulates what I think is a more appropriate way to think about China for investors. But I'm not going to go into all the details of the Chinese government. I'm not here to do that. But they did tell me when I was young, you're supposed to buy fear. And on the 27th of July, I had never seen so much fear about China coming to steal your money.

Kevin Carter: (38:19)
So they told me to buy fear, and that's what I was doing on the 27th of July. Could get more fearful. Maybe they will steal more people's money, but I don't think so. I think they're all in favor of capitalism. Valuations are good right now. The peg ratio about 0.75, maybe 0.8, about half the peg of the US tech leaders, a third, the peg of the S&P 500.

Kevin Carter: (38:50)
So I don't make short-term stock market predictions, but I'm pretty confident if you've got three years or five years or seven years, you're going to do very well in the EMQQ and its companies. It's been the right way to go since we made it. When my friend asked me what was the best emerging markets ETF for long-term investors, even after a 40% decline. And I think, if we come back here five, six, seven years from now, I'm pretty sure it will be number one again, or maybe number two out of everything.

Kevin Carter: (39:38)
And the reason I think we might be number two is because there's something new that we are putting together that we're pretty excited about that I think ... I think it's going to be close for long-term investors, but we have a new thing coming, a new index that'll be available sometime soon. It owns all of the same companies as EMQQ, but it doesn't own China. So the next frontier, all of the non-Chinese internet companies are going to have their own vehicle for investors, and I think it's going to do pretty darn well too. And actually, I think investors should be excited about it and they should be excited because of two things, of two statistics.

Kevin Carter: (40:36)
You can see here, again, in purple that these companies, the non-Chinese companies have just passed $100 billion basically today. That's what the Chinese companies did seven years ago. There's four times as many people in this next frontier. Four times as many people. And the e-commerce penetration is about a quarter or a fifth of China.

Kevin Carter: (41:20)
So thank you for coming. That's all.

Guest User

October 11, 2021

SALT NY: Finance, SALT NY: Technology

How Gold Fits Into Modern Portfolios with Ashraf Rizvi & Anthony Scaramucci | #SALTNY

Guest User

October 11, 2021

SALT NY: Finance, SALT NY: Technology

How Gold Fits Into Modern Portfolios with Ashraf Rizvi, Founder & Chief Executive Officer, Gilded.

Moderated by Anthony Scaramucci, Founder & Managing Partner, SkyBridge.

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

Ashraf Rizvi

Chief Executive Officer & Founder

Gilded

FULL BIO

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Anthony Scaramucci : (00:07)
What do we have coming out here? Introduce the product that you're bringing out here. What is this?

Ashraf Rizvi: (00:13)
So Anthony, pretty excited to show off something really special that most people never get a chance to see in their lifetime. We got a million dollars worth of real gold coming out and here it comes. So we've got a 12.5 kg bar. That's $750,000 and five little guys, which are 1.0 Kg, each, about $60,000 a piece, right from the vault. There we go. Okay. [crosstalk 00:00:41] Now grab it, you want to grab it?

Anthony Scaramucci : (00:43)
The larger gold? I do want to grab it. Okay guys, ladies and gentlemen enjoy the rest of the conference. I'll see you guys. It's just going to be hard for me to get out of here with this thing though, okay?

Ashraf Rizvi: (00:53)
You can't run with that. Pretty amazing?

Anthony Scaramucci : (00:57)
How much does this weigh?

Ashraf Rizvi: (00:58)
That's about 27.5 pounds.

Anthony Scaramucci : (01:01)
Wow. 12.5 kg, $750,000.

Ashraf Rizvi: (01:05)
Getting the workout in. You can get a few curls in.

Anthony Scaramucci : (01:07)
Yeah if you haven't done a workout in a couple of days, a couple of years. All right, here we go. And what about these? What do these weigh? Thank you, sir.

Ashraf Rizvi: (01:14)
Little over two pounds, about $60,000.

Anthony Scaramucci : (01:16)
So when it says 99.99 that's what?

Ashraf Rizvi: (01:23)
That it's 99.99% pure. So that's why it's got that beautiful shine.

Anthony Scaramucci : (01:30)
Okay. And so that's sort of the purest gold that you can get, that's it? [crosstalk 00:01:35] And this is a representation of $1 million of gold.

Anthony Scaramucci : (01:40)
All right. So before we get into gold and Gilded, sit please, tell our delegates a little bit about your background.

Ashraf Rizvi: (01:48)
Well first I want to just start by saying Anthony, it's great to be on stage, great conference, and excited to be here.

Ashraf Rizvi: (01:55)
So, I feel like I've been preparing my whole life for this opportunity to do what Gilded is doing and what we're building starts with 30 plus years on Wall Street, like you. I had a chance to work for all the big Swiss banks: Credit Suisse, UBS, Swiss Bank Corporation. Run a lot of different businesses, emerging markets, FX, fixed income repo, and probably more importantly, the global metals and commodities businesses. Was fortunate enough to start two successful companies, one in 1986, fresh out of school. And then another one in the heights of the Great Financial Crisis, just like you managed billions of dollars for endowments, foundations, pension funds, family offices.

Ashraf Rizvi: (02:42)
And then there's also a personal story for me. My parents are first generation immigrants from India, and I can remember as a kid growing up, my dad telling me about how he was sending money back home to his family and how expensive it was. The Indian rupee was a 7.5 rupees to the dollar. Gold was at the time 35 bucks to an ounce. Today, of course, we're looking at 74 rupees to the dollar and we're looking at $1800 per ounce.

Ashraf Rizvi: (03:11)
And so as I look back now, after all these years, I see why Indians loved to buy gold because it's been such a great store of value for them. And of course, that's the big topic these days: store of value, given the decline of currencies worldwide.

Ashraf Rizvi: (03:27)
And the last thing is, I think at this stage in my career, I really wanted to do something where I thought I could make a difference and help people, whether it was in terms of financial planning, longterm wealth creation for their family, for their kids, and also making things easy.

Anthony Scaramucci : (03:44)
So gold culturally, 5,000 plus years of history as a store of value. And now you've created a company called Gilded. We have a lot of cryptocurrency people here, digital currency people. And tell us about the intersection, give us the elevator pitch for Gilded.

Ashraf Rizvi: (04:03)
Yeah, so I think the really exciting thing is that we're using blockchain technology, a smartphone and modern day apps to deliver that physical asset in a digital, mobile, and a usable form. And so that means making it functional like money, right? So that's the beautiful thing here is that we can make it such that you can buy it, hold it, store it, send it. We can already do that in 12 countries across the world, instantly 24/7. And then in the future, I'm expecting that we'll be able to add things like spend it through a debit card or credit card or borrow money against it, or even pledge it as collateral, for example.

Anthony Scaramucci : (04:54)
What's the benefit of using gold as a base asset in the crypto space?

Ashraf Rizvi: (05:00)
Yeah, so I would say two things. So one, it's important to know we're not a crypto or a stable coin or in fractional banking. So, and the reason for that is that in our case, we allow you to own that asset directly. It becomes your property, your title. So that's, that's very important. The second part I think is what we talked about, the store of value. This is not about getting rich quick or anything like that. It's about storing and preserving your value. And we all know that inflation has been eating it. Whether it's the dollar or currencies across the world. And I think gold has served that purpose for 5,000 years. And so we're now making that possible that we can bring it into 21st century where we can access it easily.

Anthony Scaramucci : (05:44)
So you've been in the currency space, the commodity space, three decades on wall street. And we've watched an erosion of fiat currency. How does this help against that erosion?

Ashraf Rizvi: (06:02)
So I think if we think about investors everywhere, whether it's the retail person, the hedge fund, the asset manager, the pension fund, the government, the corporation, everybody is faced with this and that today we're earning little or no interest on our currency, but we have inflation of 5%. So we're eroding our value. Gold has over the last 20 years returned about 9% a year. Our interest accounts are earning one and a half percent. Last 50 years, gold has earned 8%. Doesn't seem like it would be that high given it's a non-yielding asset, but money that you kept in the bank only four and a half percent over those 50 years. And so it's providing that protection. It's not fiat and it's no government's liability.

Anthony Scaramucci : (06:50)
When you think of the traditional cash apps versus Gilded, what is the analysis that you would give us there and what's the benefit of Gilded?

Ashraf Rizvi: (07:02)
So the nice thing here is we can make it easy, simple. I have the app and anybody's welcome to come by our booth. You can sign up, create an account, literally in five minutes, complete the whole KYC AML process. So we're very focused on good regulatory compliance, but you can do it in matter of minutes. Think about how long it takes to open a bank account. We don't have any of those problems and you can make a purchase with your debit card, credit card, or even through your bank account and you're off and running. And now you've got your store of value and independently audited verified and see even that you can actually see the bar that you have and that you own right on your app.

Anthony Scaramucci : (07:44)
So everybody talks about the future of smart wallets. At some point on our phone a secure, smart wallet, it'll have, perhaps some cryptocurrencies, maybe a fiat currency that's been digitized. Do you see Gilded and your digital gold in the wallet? People could transfer in and out of it into other currencies? Is that what you're seeing?

Ashraf Rizvi: (08:06)
I think the opportunity is big on so many different levels. I said, I think right from the beginning, once you digitize it and fractionalize it, which is what we've been able to do, now we can do so many things with it. And I think the really powerful thing, which is that we can make it happen instantaneously. So now we're no longer limited by the banking system. We can operate 24/7 and once other people are on that network and who've gone through the necessary KYC AML process, you can transfer value to them as well.

Anthony Scaramucci : (08:41)
So tell us the vision for the company. How do you see the company evolving over the next five years?

Ashraf Rizvi: (08:49)
So I'm really excited about a whole bunch of things. I think first, probably most important is that we can give people an opportunity to have that store of value and be able to do that easily by leveraging the fact that we're making that physical gold digital, mobile, and usable, and that we're making it your title, your property. And so, as you know, from the great financial crisis, if it's not your title or your property, it's often sitting with somebody else, the bank or some other custodian, and you could be at risk. And so given that a lot of people use gold as that ultimate store of value, you don't want to buy, as I would say, you don't want to buy CDSes on Bear Stearns from Lehman. That's not a good business. So I think that's the most important thing is to give them that store of value.

Ashraf Rizvi: (09:35)
The other is, I think we can do some social good too, which is we can help people who are trying to send money back home, very expensive, 6% on average, we can do it for far less, typically half that price or less, depending on the country involved. We can help in the fact that we can get the asset directly to the person who's intended to be the recipient. And we can also help with things like illicit or nefarious activity, because we're storing all the information on blockchain, so we can trace whoever's the owner of the asset or the product.

Ashraf Rizvi: (10:09)
Not to mention, the big opportunity, which I'm really excited about in the future is the unbanked space. Billion people who don't have access to a bank account. They've clearly been left out of the financial system. We can do something of value for them, too. They have phones, they have smartphones. If we can reach that audience so that they can have that ability to save and store value and create wealth for their family, that's I think a really good thing.

Anthony Scaramucci : (10:36)
We've known each other a long time. I'm obviously very good friends with your brother Suhail as well. You've been traveling the entire world during a pandemic to explain this company to people. What's the in general international reception?

Ashraf Rizvi: (10:54)
So I've been really excited about the fact that we're seeing interest on so many different levels. We started in India, initial beta testing. We've got a few hundred thousand downloads pretty quickly with relatively little advertising.

Ashraf Rizvi: (11:08)
I started showing it to friends, others, and what we've seen is interest now, not just at the retail side, family offices, corporations, financial institutions, and governments who want to leverage our technology for cross border trade or store of value, things that apply to them. And of course, the things that apply for all of them are: one, store of value; two, the ability to actually move value on an instantaneous basis. They care about that. Three, they care about the fact that they can operate on their own terms. They're not limited by the banking system, et cetera. So all of these things matter to each of them, and again, I think this is the beauty of having the asset where it's your title, your property, nobody else's liability, and being able to leverage the fact that you're making it digital, mobile, and usable. Really resonating with people.

Anthony Scaramucci : (12:07)
So some of the largest commodities in the world, like oil, are denominated in US dollars, or sometimes other fiat currencies, but predominantly US dollars. Is that a vision for you that at some point you would be transacting in gold over the blockchain, nations doing that?

Ashraf Rizvi: (12:28)
I think that's exactly where we're headed. I think there's the possibility once you've leveraged that blockchain technology, the mobile phone, and the app, and digitized and fractionalized, the possibilities become so widespread. And so I think that's exactly what, when we're thinking about companies or financial institutions or governments, thinking about is that how effectively they could use it in so many different ways.

Anthony Scaramucci : (12:55)
And how does this differ from cryptocurrency?

Ashraf Rizvi: (12:57)
So I think there's a number of different [video skips 00:13:00] but here, the biggest difference I think, most important is, it's your title, it's your property so it becomes your asset. And so if you think about it like a house or your car, but it goes back to a law which is around bailment, which is about English common law, hundreds of years of history, and only applies in commodities. And it's because it's a real asset and so when we move things, even if it's partially yours and somebody else's. You and I, let's say our tanker, half of it is mine, half is yours. That's bailment. It's similar to a coat check or a valet. When you valet your car, you didn't give that person your car. You expect it back, so that bailment concept is very powerful. It's part of English common law and all around the world. So it makes it your property, your title, your asset.

Ashraf Rizvi: (13:50)
And that's not the case, as you know, with the banking system. It's an IOU, that's fractional reserve banking where a stable coin even is sort of an IOU because they've got the money in a bank, et cetera. So that's really the big difference at the end day.

Ashraf Rizvi: (14:04)
The similarity I would say is freedom from fiat. We also share that vision. We want freedom from fiat.

Anthony Scaramucci : (14:11)
Okay. Ladies and gentlemen, Ashraf Rizvi from Gilded. Thank you very much Ashraf.

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: Finance, SALT NY: Technology

Investing in Innovation & Deeptech with Josh Wolfe | #SALTNY

Guest User

October 6, 2021

SALT NY: Finance, SALT NY: Technology

Investing in Innovation & Deeptech with Josh Wolfe, Co-Founder & Managing Partner, Lux Capital.

Moderated by AJ Scaramucci, Managing Director, The SALT Fund.

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

Josh Wolfe

Co-Founder & Managing Partner

Lux Capital

FULL BIO

AJ Scaramucci

Founder & Managing Partner

SALT Fund

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

AJ Scaramucci: (00:08)
Josh, great to see you here at SALT, I've been a long admirer of your work at Lux and happy to have you here with us today.

Josh Wolfe: (00:15)
Great to be here, AJ.

AJ Scaramucci: (00:16)
Yeah, so to kick things off, Josh, you recently raised a new fund, congratulations, earlier this year you announced a billion and a half dollars in fresh capital for Lux. And one of the many unique aspects of your firm is you have this thesis driven approach and I'd love to understand what verticals will you be focusing on with this new capital?

Josh Wolfe: (00:40)
Yeah, so we love to find directional arrows of progress and the directional arrows of progress are basically it doesn't point to who the entrepreneur is or what specific company it is, but it tells you with a reasonably high level of confidence where things are headed. When you think about lighting, we went from flames, to incandescent bulbs, to LEDs, and then computing, we went from mechanical disks that were moving to solid state storage and end compute, in automobiles we went from a horse-drawn carriages to cars, to electric vehicles, to autonomous electric vehicles. We're not going back to sconces and offices with fires, we're not going back to horses on streets and we're not going back to spinning disks.

Josh Wolfe: (01:14)
So, what are those directional arrows of progress? One definitive one is the control interfaces of how we compute. We went from when I was a kid, my mother would say, "Turn the TV," and I would have to get up and literally change from channel two to channel four, and then you get a remote control. Today you have neural brain machine interfaces that are wearable devices that will let you make a simple gesture to control the world around you without actually hitting control devices or button pads or remote controls. And that will be the same thing with our thermostats and basically any sort of smart thing inside of a home. So, I think that's a directional arrow of progress where you're going to see a lot of entrepreneurs at the intersection of neurotech and design and consumer devices.

Josh Wolfe: (01:51)
Another one is resolution, and this is resolution of imaging in life sciences, the tools and techniques and instruments that let us see ever fine a resolution of things to be able to make discoveries, whether it's for new materials or for drugs that save lives, so I think that's a critical area.

Josh Wolfe: (02:05)
And then a third area where there's a clear directional arrow of progress is space, and in space it's everything from manufacturing to satellites and autonomous systems that are basically doing the dull, dirty, dangerous things that astronauts ought not be doing.

AJ Scaramucci: (02:19)
Sure, let's go ahead and double click a bit on that third piece, which is space, right? You've been very active in this particular vector. There's actually a company here that is one of your portfolio companies called Varda, which you basically recently made an investment into.

Josh Wolfe: (02:35)
Amazing entrepreneurs.

AJ Scaramucci: (02:36)
Amazing entrepreneurs, how are you thinking about that space, pun intended? I've heard you use analogies of, "Hey, it's almost like the railroad days, except we're building up." There's a lot of launch companies, many of them are actually here including Astra, what other elements beyond just launch are you excited about?

Josh Wolfe: (02:56)
Well, I think cliches, like stereotypes, have merit in elements of truth, and so that cliche that history doesn't repeat but it rhymes is true. And here, if you look to the history of 19th century build out of the railroads, first you had infrastructure and steel rails that got laid, then you had competition of the locomotives and the kinds of engines that were powering these, and the fuel systems from coal and steam, and then you had infrastructure that got set up around these. So, it makes sense, obviously, that you had commerce, you had way stations, you had logistics and storage, you had home development, and then you had communication, which quite literally went along the rails.

Josh Wolfe: (03:28)
So, now take those rails and flip them vertically 150 years later. And that's what we're doing, instead of having actual steel rails, we've got the rockets of SpaceX and Rocket Lab and others that are launching us. The beautiful thing about that is as there's more competition the cost per kilogram to get things up into space is decreasing, and therefore the assets that we can launch is much greater. So, those are assets today that are satellites, small satellites, instead of a billion dollar ball aerospace satellite that might depreciate over five years with capex, today you can launch dozens, if not hundreds of small sub $100,000 satellites.

Josh Wolfe: (04:02)
Well, what do those satellites do? They're taking images of the earth thrice daily, in a company like ours called Planet, that's now public, you've got people that are then processing the imagery over time using AI and machine learning to look at longitudinal analysis, whether that caravan in China is really going to productive facilities or whether it's going to ghost town residential, whether the ship building is on track or it's delayed, and they've been able to document and discover all kinds of interesting things from human rights abuses to natural resource and natural disaster issues with refugees and so forth.

Josh Wolfe: (04:34)
Then you've got people that are like Varda that are saying, "Wait a second, we can actually manufacture things in space." Now, that sounds absolutely crazy, and that's what we're in the business of, of investing in things that people think are generally crazy. And I love to find the intersection of something that is inevitable, that directional arrow of progress, when everybody else in the market believes that it's impossible, because then ultimately you're paying a lower price than what the market consensus believes.

Josh Wolfe: (04:56)
The guys at Varda basically said, "There are certain materials, exotic materials and products that are going to make sense to develop in low or zero earth gravity, and then the key thing is to bring it back down in capsules to earth." So, if you sort of were to bifurcate the two billionaires that are taking us to space right now, of Musk, who has sort of more of an escapist vision, "Let's go to Mars and there'll be amazing things that come off of that," and Bezos who is sort of like, "Let's manufacture things off planet and bring it back so that the earth can be cleaner." We're more in that latter camp.

AJ Scaramucci: (05:25)
Got it, it makes a ton of sense. And sort of parlaying from space perhaps into defense because those two are very related or co-entangled together, Lux has worked very closely and cooperatively with the Department of Defense, you yourself have been an advocate for Silicon Valley's sort of merging or collaborating with the military-industrial complex. I'd love to understand how you're thinking about that, how Lux is positioning itself to invest in defense?

Josh Wolfe: (05:58)
Well, it starts with an appreciation that the roots of Silicon Valley and venture capital investing were not just Hewlett Packard in the garage with a bunch of groves in Silicon Valley, it really was electric warfare. When Lockheed Martin came to Sunnyvale, there were zero people. Pretty soon we have tens of thousands of people and they were developing pretty cutting edge technology that helped us in the cold war. So, I think there's a return to that ethos and zeitgeists after probably 20 years of people that have been saying, "Beware," going back to Eisenhower, "of the military-industrial complex." And you've had an aversion from some of the brilliant entrepreneurs and engineers that have gone to the Valley to say, "We want to work with government." And part of that is for political reasons, for geopolitical reasons, part of it is immigrants that have come that haven't felt that same appreciation that we had in the 1980s when people were escaping as immigrants from Russia really looking to come to the US.

Josh Wolfe: (06:42)
I think that's starting to change, you have people that are patriotic that believe in what the US stands for that most importantly want to develop cutting edge technology, both hardware and software, for the men and women who are on the front lines. About three years ago, then head of US Special Operations, Tony Thomas, who has subsequently become a partner at Lux, four-star general, ran all of USSOCOM, sent me out to the Far East with some of the people at the edge of the spear, and said, "I want you to do what you do on a daily basis, which is identify things that suck."

Josh Wolfe: (07:08)
What sucks? Is usually the great question that an entrepreneur is asking to identify a market opportunity. And he said, "I want you to go and sit with these men and women and understand what sucks." And this is everything from Blue Dart Tracking. If you're tracking your family members on an Apple iPhone, that's something that some of these guys in triple canopy conditions in the Philippines chasing terrorists are not able to do for a variety of technical reasons, the ability to have satellite communication with no moving parts that can send very high bandwidth also under a triple canopy.

Josh Wolfe: (07:33)
So, we looked at this and said, "There's amazing technological things that are happening outside of DOD and Pentagon that are happening in the commercial world, and it's time for those things to come back so that we can be advantaged, particularly when we have peer adversaries in China and Russia that are completely intertwined in a military civil fusion.

AJ Scaramucci: (07:50)
Yeah, that's another perfect segue. So, in China, obviously over the last few decades, they have risen as a preeminent economic, as well as technological superpower. And today, based on my knowledge, they're graduating five times more software engineers than we are in the US, they're pouring hundreds and hundreds of billions of dollars into areas like AI, like biotech, quantum among other things. How does the US sort of navigate and not fall into this Thucydides Trap, if you will, while simultaneously keeping its competitive edge in technology?

Josh Wolfe: (08:29)
Well, the first thing is a qualitative and cultural one. As a culture, you get what you celebrate. So, you have a culture that is celebrating scientists and engineers, also go back to the, again, Cold War in Russia, you had brilliant chess players and engineers and doctors and scientists. So, I think as a culture, we should be celebrating the people who were quite literally inventing the future, and those are our scientists and engineers. We should be attracting them from other parts of the world, they should be developing their degrees here and getting their doctorates and staying here and starting companies, that would be a beautiful thing that would give the US a competitive advantage.

Josh Wolfe: (08:58)
I think that China is a very formidable foe in every one of the things that you named. While quantum is an area that I'm a little bit more skeptical about, I think that there's going to be a lot of frauds and a bit of a faddish element, certainly in AI and biotech in particular, and the ability for them to use mass surveillance to be able to collect troves of data that we have civil liberties that in many cases prevent. But I really believe it starts with a cultural thing, and then I think it happens from capitalists that are willing to fund these cutting edge technologies and then work with the government.

AJ Scaramucci: (09:24)
Sure, and pivoting away from sort of this macro economic piece or the investment piece or the space piece. Back to the actual founders that you invest in, one of the quotes that I've heard from you, which I've used as well is, "Chips on your shoulder put chips in your pockets." And I'd love for you to expound on that as it relates to how you think about the [inaudible 00:09:48] you use to identify founders that have that resilience and grit to actually get it done, make these visions happen?

Josh Wolfe: (09:56)
It's one of the almost a heretical things to say, but a very popular thing in Silicon Valley and throughout the country at the moment is mindfulness and meditation and being at ease. And I actually think for the individual, that is a beautiful thing. For society, it is a horrible thing. You want disaffected, really unhappy, miserable, motivated people, because that is where all great progress and changes has occurred.

Josh Wolfe: (10:17)
And you look at what the great people that we've celebrated, whether it's Steve Jobs or Larry Ellison, Oprah Winfrey, you listen to the backstories of what these people endured, whether they were in... And Bezos as well, whether they were adopted, whether they were abandoned, whether they were abused, you might be the only African-American or black person in a mostly white neighborhood, you might be the overweight person in a very skinny area, you might be the person that's the nerd in a Friday night lights Texas football town. Whatever it is that makes you that outlier, it's a thin line where you could end up sort of in a malicious, bad path, or you can be incredibly motivated to have that chip on your shoulder. There is nothing more powerful than the words I'll show them.

AJ Scaramucci: (10:55)
Mm-hmm (affirmative), I love that. And perhaps, can you tie that back to some of your own story, your own origin story? I think that people would love to hear more about that.

Josh Wolfe: (11:05)
For me, my mom, I grew up in Coney Island, Brooklyn, she's a special ed teacher, public school teacher, my parents split when I was very young, for me, my father's absence was more of the presence of what I wanted to be as a husband and a father, but all I ever wanted was a strong nuclear family, but I saw people that grew up with resources and advantages, and I resented that. And I was still born a white kid in New York to a mom that was very loving, and so in many ways, I'm like absolutely privileged, but I think when I saw wealth that was inherited from people and I felt like I was more intelligent than them, I've always been psychotically competitive about that, wanting to sort of... To be the man, you must beat the man mentality.

Josh Wolfe: (11:43)
And I just love people that are absolutely psychotically driven and that it comes from some... No matter how much money they make or achievement that they achieve, there will always be this sort of hole in them, and I believe that that is the great source of human progress. So, in founders, certainly in myself, I just, I love finding that in people, that chip on their shoulder.

AJ Scaramucci: (12:03)
Yeah, I love that. And it's not enough at Lux for you guys to invest, you also very regularly incubate businesses across a wide smattering of different fields, including nuclear waste, biotechnology, immunotherapies among other things, I'd love for you to talk a bit about that from an historical context at Lux, but also going forward, where are you looking to actually start businesses from scratch?

Josh Wolfe: (12:29)
So, it often starts with what is the consensus in the market, and then what's the variant perception? What's the thing that everybody else is talking about, and what's the thing that nobody is talking about, and why are they not talking about it? Do they have a smarter insight than us or have they missed something or overlooked something or are they experiencing and enjoying too much success over years so they're not motivated to look here?

Josh Wolfe: (12:46)
If you take nuclear, which was an interesting example, the entire venture world was going crazy about clean tech, green tech, alternative energy going back 10, 11 years, nobody was looking at nuclear. In a part, it wasn't an Al Gore's movie, Inconvenient Truth, so it just wasn't being celebrated in the sort of mega church about alternative energy. And we looked and said, "Nuclear is really interesting." And then we looked at every part of the fuel cycle from the uranium miners who were mostly hucksters and fraudsters in New Mexico and Nevada, so we said no to that. The modular reactors, which were really the domain of billionaires or sovereigns that wanted to arrive instead of building a gigawatt power plan for a billion dollars, you can build 30, 30 megawatt arrays, that was interesting. But the biggest unsolved problem, going back to that earlier quote of what sucks, is what do you do with the waste?

Josh Wolfe: (13:22)
So, we ended up saying, "Is there anybody that's doing high-tech waste treatment?" And as we've dug into this, there was this entire complex in the Department of Energy, about 25%, one in every $4 they spent was on clean.... It wasn't on clean and green and alternative energy, it was on nuclear waste cleanup at places like Hanford and Savannah River that nobody had ever heard of for pre and post Cold War bomb making.

Josh Wolfe: (13:38)
So, we ended up starting a company named after Madam Curie called Kurion, locked of the best talent, because there was this LIBOR arbitrage where all the smart people in nuclear sort of moratorium on new build, went into quant shops and hedge funds like Renaissance and in Two Sigma and D.E. Shaw. And we locked up the best people, started this business, in licensed a whole bunch of technology, and then frankly got very lucky when Japan got very unlucky, and this little company called Kurion was the only game in town when the Fukushima disaster happened to clean up the radioactive cesium, strontium, technetium, uranium and plutonium. So, that was pretty crazy, it started as a brain fart of an idea, we pulled together a team in the Capitol and do that.

Josh Wolfe: (14:11)
Another area where we've done this, and then I'll give you one that I'm super excited about, was the world was going crazy about the microbiome. So, what you eat and how it affects you and your gut and then so forth. And there were probably 40 companies at the time focusing on the microbiome. And one of our very smart partners, Adam Goulburn at Lux, who's a PhD stem cell biologist said, "What about the gut brain access? So, forgetting about your nutritional health, could you go into the brain for everything from the sense of satiety when you are full for metabolic diseases and obesity, or for psychosocial disorders?" When you say, "I have butterflies in my stomach," or, "I have a gut feeling," there is a physiological truth to that. And so, we started a company around a bunch of Nobel laureates and Howard Hughes medical investigators out of Columbia called Kallyope, brought in an incredible woman, Nancy Thornberry, who ran all of [inaudible 00:14:56] discovery programs and then just capitalized that today.

Josh Wolfe: (15:00)
The thing that I'm most excited about really started... and I love the intersection between science fiction and science fact. It started as a sci-fi idea, and a lot of the things that Lux funds, you can find these examples, whether it's in the literature or graphic novels or in movies that show the decrease in gap between that which was once imagined by some sci-fi author and an entrepreneur who is making it science fact.

AJ Scaramucci: (15:19)
Sure.

Josh Wolfe: (15:20)
X-Men, I'm sure you've seen the movies or read the comic books, but Professor X puts on this helmet, Cerebro, and he's able to, in a crowd, spot mutants. And those mutants have ridiculous powers like lasers out of their eyes and conjuring fire from their fingers. But it got us thinking with seven and a half billion people on earth, could there be a one in a billion chance of somebody with some crazy phenotypes, some trait? And therefore there should be seven or eight people of these types walking around.

Josh Wolfe: (15:43)
And sure enough, we would go to people at Cold Spring Harbor and found these PhDs. And they said, "Oh my God, this is all I've ever wanted to do my entire life." So, we started a company called Variant about two years ago that went out and now has 14 partnerships globally. They hate when I talk about this idea of mutans because it's not really that, it's outlier people in outlier parts of the world who may possess the secrets in human genetics for the rest of the masses.

Josh Wolfe: (16:14)
There's a population in South America because of where they are, there's nine families that remain, when the temperature drops late at night, they have a heat shock protein that the body produces to raise their metabolism.

AJ Scaramucci: (16:24)
Sure.

Josh Wolfe: (16:25)
Now, if you could give that to the masses with a third of our country massively obese, and they were able to take something like a pill that would raise their metabolic activity while they slept. I mean, that is a $50 billion drug.

AJ Scaramucci: (16:33)
Oh, for sure.

Josh Wolfe: (16:34)
You could save lives.

AJ Scaramucci: (16:35)
Yeah, it's fascinating, on that point, we at SALT sort of think of programmable biology or the intersection of software and biotech through the lens of evolution from natural selection to intelligent direction.

Josh Wolfe: (16:49)
Mm-hmm (affirmative).

AJ Scaramucci: (16:51)
And I think that's sort of what you're alluding to here. How do you think about that on a long-term time horizon 20, 50 and beyond, if you could opine on that? Where are we going to go there?

Josh Wolfe: (17:04)
The intellectually honest answer of 20 years out, I really have no idea, and what I do is try to find the brilliant people who are quite literally inventing the future that are doing that. What you touched on though, is dead on, which is the intersection between tech and biotech. And so, specifically the metaphors that we use in programmability of cells, even when people are explaining something like CRISPR, gene editing technique, they talk about almost like copy paste, control C control V, like we would in Microsoft Word. But I think it's really the use of artificial intelligence machine learning to be able to look at cells and understand what is going on to be able to understand from genetic sequences the same way that you might use natural language processing to understand texts and search where these worlds are combining.

Josh Wolfe: (17:40)
We have a public company in called Recursion that was taking computer vision and AI to be able to look at the typology of cells to understand what happens when you introduce a drug to be able to improve the effect on a whole variety of populations where you could do tens of thousands of these things in silico at the same time.

Josh Wolfe: (17:57)
So, I think the intersection between biotech and AI is going to be absolutely explosive, and it's really at the interstices between these two disciplines where you classically had biotech investors in one domain, you had software and AI investors in the other, but where those two are meeting is going to unleash a lot of opportunity.

AJ Scaramucci: (18:13)
In addition to biotechnology, another one of the mega trends here at SALT this year is crypto and blockchain. I know Lux has been thinking and investing in this area. There's a lot of froth as an emergent by-product of sort of the crazy liquidity in the area, but how are you filtering through the noise, and what opportunities are you seeing that you think will have real staying power?

Josh Wolfe: (18:37)
We have thought that the arms dealers in this case, while we're not in Coinbase, we have an incredible company called Anchorage, which is the main custodian for a lot of crypto assets. When Visa announced that they had bought this NFT, it was Anchorage that was the main proponent of that, their supplier for the infrastructure. So, I think we're in a speculative mode right now, there are frauds, there are fads, there are promoters. Generally my view here would be listened to the things that you don't hear. In other words, the people that are making a ton of money are the ones that are not really speaking that much. The ones that are constantly pumping and promoting are the ones to be more wary of.

AJ Scaramucci: (19:06)
Fair point, I think that's a great universal heuristic, candidly. So, in the last few minutes here, a few rapid fire questions for you. One is, right now, there is a massive abundance of capital, particularly in private markets, sloshing around and the late stage hedge funds are kind of coming down [inaudible 00:19:24] stage, as are sovereign wealth, pension, I mean, it really is crazy what's going on. How does Lux in this abundance of capital differentiate? What are the key differentiators relative to other venture firms, whether it be in Silicon Valley or hedge funds here in New York?

Josh Wolfe: (19:40)
So, most of the crossover funds for us are partners, they are providers of later stage capital. And they're all very smart and they've been great partners. So, the [inaudible 00:19:47] is D1s, [inaudible 00:19:49], et cetera. Early stage, I think for us, the bread and butter is really, can you start to [inaudible 00:19:54] companies? Can you put entrepreneurs in business and be their very first day one check?

Josh Wolfe: (19:57)
Today, I don't know, there's 1800 venture firms, again, history doesn't repeat, it rhymes. You go back to the 2000 dot-com boom and bust, within a year and a half of that peak number, I think at that time it was about a thousand then it got cut down to about 400. So, the difference here is you also have the rise of solo GPs, where individuals are basically raising SPVs in large multi-hundred million dollar funds, capital is abundant, what happens when capital return gets scarce? Why do returns get scarce? Because you're paying a high price for a cheery consensus, as Buffett says. So, you want to invest where capital is scarce. And that means more esoteric areas, things that people might think are impossible, things that people might think are going to take longer, things that people think are more capital intensive than they actually are, and try to have that varying perception. And then if you can form new [inaudible 00:20:39] you can get disproportionate ownership early on for relatively low capital.

Josh Wolfe: (20:43)
But I think we're in a world for the next few years where the pools of capital formation very much feel like 1998, '99, 2000, where everybody is getting into the game, and eventually there'll be a massive shakeout, the distress guys will clean up. We've had probably eight or nine of our companies go through spats, we were telling all of them, "Husband your cash, be really smart about this because when the downturn happens the amount of cash that's been delivered to the balance sheet of many of these companies is an arsenal, is a war chest to do consolidation in certain industry sectors." So, that's how we're sort of thinking about the next year.

AJ Scaramucci: (21:12)
And as our final question, love a hot take from you, give us sort of what in the deep tech landscape is severely overrated and perhaps what's severely underrated? And we'll wrap there.

Josh Wolfe: (21:25)
Overrated, for me, I would say is quantum. I think it's an area that preys upon people's ignorance, and anytime there's ignorance arbitrage you get frauds and you get people making all kinds of crazy claims. Part of that is FOMO, part of that is people not wanting to admit that they don't understand it, but I'm very skeptical about vast majority of things in quantum computing. The thing that I'm most excited about that I think is under hyped by others, and we build the portfolio, so I can talk about it pretty actively, is what I call the tech of science, the technologies and instruments that are enabling people both on the hardware side, we have a company called Eikon, Nobel Prize winning work of the guy, Eric Betzig, that is able to look inside of a cell in real time and image what is happening when you introduce a drug. And then you've got a company like Benchling that is doing that on the software side to automate labs and science.

Josh Wolfe: (22:09)
The reason that's important, and I know that macro is a big part of this conference assault, the geopolitical competition that we're having with China and others, historically on the stage you had hard power and US soft power, and soft power was a combination of winning Olympic medals and exporting MTV and music and movies and so forth and winning Nobel Prizes. And I think that the race for scientific prestige is going to see a big tailwind, whether that's in space or down in the scientific labs, and the instruments and tools and hardware and software to fuel that is going to be a really big deal.

AJ Scaramucci: (22:37)
I love that. With that, Josh Wolfe.

Josh Wolfe: (22:39)
Thank you, AJ.

Guest User

September 30, 2021

SALT NY: Technology, SALT NY: Life Sciences

The Future in 2050 with Dr. Michio Kaku & Alex Klokus | #SALTNY

Guest User

September 30, 2021

SALT NY: Technology, SALT NY: Life Sciences

Dr. Michio Kaku is one of the most renowned figures in science and the world today. He is a theoretical physicist, bestselling author, acclaimed public speaker, futurist, and popularizer of science, he co-founded “String Field Theory” and continues Einstein’s quest to unite the fundamental forces of nature into a single grand unified “Theory of Everything.”

Dr. Kaku holds the Henry Semat Chair in Theoretical Physics at City University New York, graduating summa cum laude from Harvard with a Ph.D. from UC Berkeley. He has written numerous New York Times bestselling books including The Future of Humanity, The Future of the Mind, Physics of the Future, and Physics of the Impossible.

Kaku’s latest bestselling book The God Equation: The Quest for a Theory of Everything explores the history of unification theories from Newton’s Law of Universal Gravitation through Quantum Mechanics and The Standard Model of Particle Physics — culminating in his own landmark contributions to the most cutting-edge ideas in theoretical physics.

Moderator Alex Klokus is a Founder and Managing Partner at the SALT Fund. Alex is a serial entrepreneur who built and sold both the media company Futurism and the sleep and wellness business Gravity.

PRESENTED BY

Apple | Spotify | Amazon | Google | Stitcher

MODERATOR

SPEAKER

Dr. Michio Kaku

Henry Semat Chair in Theoretical Physics

City University of New York

FULL BIO

ALex Klokus.png — Alex Klokus

Founder & Managing Partner
*The SALT Fund*

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

Rev.com

Alex Klokus: (00:07)
Hello. Thank you all for coming here today. It's going to be tough to top Paris Hilton, but if anyone can do it, I think Dr. Kaku can. Seriously, I think we can do it.

Dr. Michio Kaku: (00:25)
[inaudible 00:00:25].

Alex Klokus: (00:26)
He is better looking. I'd like to take one second quickly to thank the SALT team. If you can imagine this entire event is put on by a full-time team of less than five people. Less than five people does all of this. There's two people in particular, a Mr. Joel [Alito 00:00:52], and then Mr. John [Darcy 00:00:54], who are responsible for everything you see here. So please.

Alex Klokus: (01:02)
Okay. Dr. Kaku, we've got a great conversation in front of us. The objective for this conversation, we've got about 40 minutes or so, we want to visualize the future at two key times. The first is 2050, about 30 years from now. And the second we're just going to go even further because the weirder, the better, we're going to go to 2121, so 100 years from now. We want to get granular, we want to get specific and Dr. Kaku, we want to make some bold predictions. Are you ready?

Dr. Michio Kaku: (01:34)
Let her rip.

Alex Klokus: (01:35)
All right. So let's start with 2050, 30 years from now. And this is extremely consequential I think for most of us in the audience, because we will be living then. We will be alive, we will be inhabiting this world, this reality and things are going to look extremely, extremely different. Dr. Kaku when we visualize this future, what do you think are going to be the main drivers of change for us in 2050?

Dr. Michio Kaku: (02:03)
Well, to get the most accurate description of the future, I've interviewed over 300 of the world's top scientists for the Discovery Channel, BBC Television, the Science Channel. And I asked them the key question, the question of all questions. I asked them the question, is there intelligent life on the earth? Well, I was watching the soap operas last night and I've come to the conclusion, nope, no intelligent life on this planet. But take a look at the big picture, take a look at humanity just a few hundred years ago. Throughout human history, people lived in poverty, disease, war, average life expectancy for most of human civilization was 30 years of age. You were born, you got married, had kids, and then you died. Life was a bitch. But then something happened. Something magical happened 200 years ago. What was that? You talk to a politician and a politician would say, "Where does wealth come from? Taxes. That's where wealth comes from, taxes."

Dr. Michio Kaku: (03:28)
But if you tax Peter to pay Paul, that is zero sum game. You don't get anywhere. You talk to an economist, where does wealth come from? And the economists would say, "Printing money. That's how you make money." But if you print money, you're simply borrowing against the next generation. I say, all wealth comes from science and technology. Because around 1800, we physicists worked out what is called thermodynamics, the laws of heat. From that we created the heat engine, the locomotive, the factory, the industrial revolution based on oil and coal, great wealth was created. In fact, that's where the Rockefeller fortune comes from.

Dr. Michio Kaku: (04:22)
The great Rockefeller fortune, which helped to create New York city as we know it, came from when we physicists worked out thermodynamics. Then we physicists worked out electricity and magnetism, and that gave us dynamos, television, radio, electronics, and that created wealth. General Electric, utilities, Westinghouse, tremendous wealth. Then we physicists worked out the quantum theory and that gave us the laser, the transistor, the computer, the internet, and that created Apple computers, created IBM. That was the third grade revolution.

Dr. Michio Kaku: (05:07)
Here's the question for all of you today. What is the fourth wave of wealth generation and what is the fifth wave of wealth generation? That's what we're going to talk about today. I say the fourth wave of wealth generation, the great fortunes that don't even exist yet, the fourth wave is physics at the molecular level. Meaning artificial intelligence, nanotechnology, and biotechnology, and the Rockefellers of that era haven't been created yet. We're witnessing the creation of the next generation of wealth with artificial intelligence, nanotechnology, and biotechnology. And that, let me go even farther to the fifth wave. The fifth wave is simply a gleam in the eye of a physicist.

Dr. Michio Kaku: (06:10)
The fifth wave of wealth generation is going to be first of all, fusion power, which gives us unlimited energy from seawater. Second, quantum computers. Because one day Silicon Valley will become a rust belt, because the age of Silicon is slowly coming to an end. We are now witnessing the slowing down of Moore's law. And the third component of the fifth wave is BrainNet. What will replace the digital internet? What will replace the digital internet is the neural BrainNet. We already can read memories in a mind, we can extract pictures out of the living brain. In the future, you will telepathically control the world around you, and we are laying the groundwork for that today. Machine brain interface with enormous implications for the future. In other words, digital immortality could become a consequence, living forever. Anyway, these are just some of the glimpses we are seeing now. Physics at the atomic level, the fifth wave, which will dominate wealth generation toward the middle to late part of this century.

Alex Klokus: (07:44)
There is no better way to get everyone here to perk up and say the next generation of wealth. So I think you really nailed that. And this is a finance conference, so we're all listening. And I had some questions here, but let's just ignore those and let's keep going into this. This is way better. So we're in 2050, okay. We talked about nanotechnology, we talked about biotechnology, we talk about artificial intelligence. Help us visualize what this world looks like. So we're here in this conference center in 2050, 30 years from now, there are drones in the skies. Are there people on Mars? Did Elon Musk get one million people on Mars by 2050?

Dr. Michio Kaku: (08:23)
Well, Elon Musk is a great Pathfinder and a great prophet in terms of setting a vision, a vision for the future. Because well, the dinosaurs did not have a space program. The dinosaurs did not have Elon Musk, that's why there're no dinosaurs here today because they had no space program. We are here today, we do have a space program, so we have a shot at it. But you have to realize that it's going to take time before we can colonize Mars. I think we should do it as plan B. We need an insurance policy. It is a law of physics that the earth will one day be destroyed. One day, everything we love about this planet will be gone. In five billion years, the sun will eat up the earth. In a 50 million time period, a gigantic asteroid could wipe out humanity like it wiped out the dinosaurs.

Dr. Michio Kaku: (09:28)
On a 10,000 year timeframe, another ice age. This place was covered with half a mile of ice 10,000 years ago. This room was under a half a mile of ice 10,000 years ago, we are living between glaciations. And then on a scale of a few hundred years, we have to worry about city busters, meteors from the sky that could land down and wipe out Moscow or Washington or something like that. And then at a scale of decades, we have to worry about nuclear proliferation, the next pandemic and global warming. So it is a law of physics that at some point we may have to leave the earth, but my attitude is there's no rush. We don't have to leave the earth immediately, but it does mean that we should think about an escape clause. Plan B on Mars.

Alex Klokus: (10:17)
Plan B on Mars, and in 2050, maybe Elon gets people there. Do you think that we, earth will be even more consequentially impacted by climate change?

Dr. Michio Kaku: (10:29)
Yes and no. The bad news is that all the indicators show that the earth is heating up. Glaciation is receding, average temperatures are increasing, summer is a week longer than normal, winters are a week shorter than normal. Farmers know that the weather has already changed for the growing season. For all these reasons, we know the atmosphere is changing, but there's an ace in the hall. The ace in the hole is two things. First fusion power. The joke is that every 20 years we physicists say, "We will have fusion in 20 years." 20 years comes and oops, there's no fusion power. But we're very close to attaining breakeven now, in France and in California, and you've read the headlines. We are very close now to hitting break even with fusion power. And where does hydrogen come from? Seawater. Seawater is a source of hydrogen.

Dr. Michio Kaku: (11:30)
Does a fusion reactor melt down? No, it doesn't melt down. How much nuclear waste does it create? Almost none. Helium is the nuclear waste from a fusion reactor, and helium is commercially valuable, you can sell helium. So that's an ace in the hole. Another possibility is quantum computers, which can initiate the solar age. Now we've been talking about the solar age for decades.

Alex Klokus: (11:57)
And for people that don't know, can you explain what that is?

Dr. Michio Kaku: (12:00)
The solar age is when we have solar power from the sun and the wind to replace oil and coal on the earth.

Alex Klokus: (12:08)
Got it.

Dr. Michio Kaku: (12:09)
It never came. Why? Why aren't we in the middle of a solar age, celebrating the sun not worrying about global warming? Everybody forgets, it's the battery. The battery is the weak link. We think that everything obeys Moore's law, that computer power doubles every 18 months. We think everything obeys Moore's law. Nope, batteries do not obey Moore's law. We need a super battery. And where is the super battery going to come from, we think from quantum computers. Quantum computers can model quantum processes. Batteries... There's no digitization of a battery. It's a chemical reaction, it's hit or miss. It's done by hard luck, hard work in a laboratory by some nameless person in a chemical laboratory, it's sheer luck getting a super battery. But with a quantum computer, we can roll the dice and perhaps create a super battery, when the sun doesn't shine and the winds don't blow. So two technologies could save us from global warming, fusion power, and quantum computers.

Alex Klokus: (13:21)
So super battery created by quantum computer? Okay.

Dr. Michio Kaku: (13:24)
Right.

Alex Klokus: (13:25)
2050, hopefully. I'm curious, do you think that there are any existential risks that will prevent us, us as in humanity, from making it to 2050? It sounds like climate change, no, not an existential risk. Asteroid. Is an astroid and existential risk, do you believe by 2050?

Dr. Michio Kaku: (13:45)
Well, we monitor these things in outer space, except down to the size of a football field. Things smaller than a football field, we don't monitor that well, but anything bigger than that, we do monitor. But there's always a chance that an object smaller than a football field or a comet that goes behind the sun catches us off guard. That's always possible.

Alex Klokus: (14:06)
So it's possible.

Dr. Michio Kaku: (14:07)
Possible. [crosstalk 00:14:07].

Alex Klokus: (14:07)
... to be wiped out by 2050 by asteroid?

Dr. Michio Kaku: (14:09)
Right.

Alex Klokus: (14:10)
What do you think about this general AI, super intelligent AI? Elon Musk talks about this a lot, the idea that we will create an artificial intelligence that is conscious, that starts to take over. If we look around, AI has already proliferated throughout our society. Perhaps one can argue, it's already running the show, although it's not conscious. Do you think that that is an existential risk for humanity in the next 30 years by 2050?

Dr. Michio Kaku: (14:42)
I think maybe the next 100 years. How smart is a robot today? We've been brainwashed by Hollywood. Hollywood seems tell us that [Shorts and Egor 00:14:52] and the Terminator robots are around the corner. Our most advanced robot today, how intelligent is our most advanced military robot? Our most advanced robot compared to an animal would be a cockroach, a stupid cockroach, a retarded, stupid cockroach. You put a cockroach in a forest, it looks for food, looks for a mate, finds shelter. You take our most advanced military robot and put it in the forest, and what does it do, falls over and can't even get up again. But eventually there'll be as smart as a mouse. Eventually they will be as smart as a rat, then a rabbit, then a dog or a cat, and by the late 21st century, perhaps as smart as a monkey. Now, why is that dangerous? Because monkeys know they are not human. Now, dogs are confused.

Dr. Michio Kaku: (15:56)
You see dogs think that we are a dog. We're the top dog, and they're the underdog and that's why they slobber all over us because we're the leader of the pack. They're pack animals. Now cats are not. Cats are solitary hunters. You cannot fool a cat, a cat knows that we are not a cat, but a dog is confused. Now, monkeys do not get confused. Monkeys know they are monkeys. So when a robot becomes as intelligent as a monkey, perhaps by 2100, we should put a chip in their brain to shut them off, if they have murderous thoughts.

Alex Klokus: (16:32)
Yeah. I like that. So you think humans, we, us, need to merge with machine. We have to become one.

Dr. Michio Kaku: (16:42)
Yeah. I think beyond 2100, robots will be so smart, they'll remove that chip. They will redesign their own brains, such that the fail safe chip is removed, and then what are we going to do? They're conscious, they can set their own goals, at that point I think we should merge with them. And that process is a slow process, but I think it's already starting. Humans have been altering ourselves ever since day one. Makeup, tattoos, [sorins 00:17:13]. Sorins are an extension of the hand. We've been altering our body ever since we came out of the forest.

Alex Klokus: (17:19)
Yeah. I love that. There's a phrase called [Homo Evolutis 00:17:24], the idea that we have entered a new species, we've now taken control of our own evolution. And it sounds very much like what you're talking about here. And again, I guess we go to Elon. Elon's got Neurolink. He seems to be spot on with your predictions. He is trying to put chips in our brains and it sounds like we've got a ticking clock. We've got about 80 years to become one.

Dr. Michio Kaku: (17:47)
One benefit of this is digital immortality. Digital, not biological, that's also coming. But digital immortality means we will digitize ourselves, our credit card transactions, our Instagram photographs, our memoirs. Everything will be digitized and you'll live forever. I would love to talk to Einstein, that's coming. Some person who will eventually digitize Einstein, all his thoughts, all his feelings. Winston Churchill, presidents, they'll all be digitized in the future. And we will become immortal in the sense that we'll talk to our great, great, great, great, great grandkids and our great, great, great, great, grandkids will be able to talk to us, because we'll live forever.

Alex Klokus: (18:34)
And so when you say a mortal, maybe let's drill down on that for a second. I think there is one form of being immortal. Let's say we take all of Einstein's notes, we upload it to an AI. It speaks to us like Einstein, it looks perhaps like Einstein. Okay, that's great. But it's not conscious, it is not thinking new unique thoughts, it is not aware of itself. When you say digital immortality, are you saying that we will be able to take our consciousness, Me Alex, you Dr. Kaku and upload that to a computer?

Dr. Michio Kaku: (19:06)
Yeah, I think so. I think it's [crosstalk 00:19:08].

Alex Klokus: (19:07)
By 2050?

Dr. Michio Kaku: (19:09)
Around 2050, we'll have a reasonable approximation of who we are. We'll talk to George Washington or everything known about the guy and have a great time. And also by the way, what are we going to do with this digitize personality? I say we should put all this digitized information on the laser beam and shoot it to the moon. In one second, you will be on the moon, in 15 minutes, you'll be on Mars. Four years, you'll be on the nearest star. You will be able to explore the universe at the speed of light with your digitized consciousness on a laser beam shooting at the speed of light throughout the galaxy. So I think that... and in fact, on the moon, we'll have a mainframe computer on the moon, which downloads your consciousness and puts your consciousness into an avatar.

Dr. Michio Kaku: (20:02)
And this avatar will roam Mars, roam the moon and explore the universe. In other words, a digitized version of ourselves will conquer the universe. No problems with radiation, no problems with accidents, no problems or the weightlessness, nothing, pure light. Our consciousness will colonize the galaxy at the speed of light. And in fact, I'll stick my neck out. Everything I've said so far is well within the laws of physics. I think this already exists.

Alex Klokus: (20:35)
Okay.

Dr. Michio Kaku: (20:36)
I think in outer space there's a highway. A laser highway carrying the souls of digitized aliens, and we, humans are so stupid we don't even know that it's there.

Alex Klokus: (20:49)
Yeah, okay so-

Dr. Michio Kaku: (20:50)
Right next to us, there could be a laser highway of digitized alien souls. And we are so primitive of their technology that we don't even know about it.

Alex Klokus: (21:01)
So you've hit on something that I'm obsessed with, which is aliens. Let's just keep going. Let's keep going. Should we clap? Let's clap. Better than Paris Hilton? Better than Paris Hilton, a little bit. I love this. Okay. So aliens, a highway. You're saying there is a highway in the universe of digital remains of other intelligent life in the universe.

Dr. Michio Kaku: (21:26)
That's right.

Alex Klokus: (21:27)
And you believe this?

Dr. Michio Kaku: (21:28)
I say it's something that we have to seriously think about. And by the way, some people email me claim that I'm all washed up because the aliens are not there. They claimed that the aliens are here on the earth and they visit us. And they know that because they've been kidnapped, they've been on the flying saucers. Well, I have a word of advice. The next time you are kidnapped by a flying saucer for God's sake, steal something. There's no law of physics that puts you in jail for stealing from an extra terrestrial civilization, it's perfectly legal to steal from an alien. And you'll have proof, an alien chip, an alien hammer. That ends the debate right there.

Alex Klokus: (22:15)
But in all seriousness, and I think we'll all go home, we'll remember that note. Next time we're abducted, we'll steal something. But the Pentagon has come out, they have come out, they have said, "Hey, there is some weird going on. We don't know what it is. We've got video footage, we've got camera footage." They released an 80 page report that concluded, there were 120 incidents that cannot be explained. Have you seen the videos?

Dr. Michio Kaku: (22:42)
Yeah, I've seen all of them.

Alex Klokus: (22:43)
You've seen all of them?

Dr. Michio Kaku: (22:43)
Yeah.

Alex Klokus: (22:44)
What do you think?

Dr. Michio Kaku: (22:45)
Well, before this military report came out, it was hearsay. Now we have the gold standard. The gold standard is multiple sightings by multiple modes. Meaning not one person, but several, not just radar, but infrared sensors, optical sensors, eye witness accounts, all with one sighting using multiple individuals, multiple modes of detection. Now we have it. We physicists have analyzed frame by frame those 120 videotapes, frame by frame. And we now realize that these objects, whatever they are can travel between mark five and mark 20, 20 times the speed of sound zipping across the ocean, zipping across the planes. And when they zigzag, they create G-forces of several hundred, enough to crush the bones of any living creature that we know of inside a flying saucer. They can descend 80,000 feet within a matter of a few seconds, all of this on videotape, incredible.

Dr. Michio Kaku: (23:54)
And then these things dive into the ocean. They can actually go into the ocean and there's a videotape showing all these things. Now the military for the first time in history has now admitted, quote, "They're not one of ours." They never admitted that before. They hinted maybe it's a stealth bomber, maybe it's some kind of hush-hush project. Nope, "Not one of ours."

Alex Klokus: (24:17)
And that's unbelievable. I think that is not only unbelievable, it is unbelievably consequential. That would reshape society, it would allow us to reimagine our role in the universe, but we're not talking about it. We're all sitting here, we're at a finance conference, we're talking about the markets, we're talking about crypto, NFTs, all these other things, but this is more consequential. So why are we not talking about it? You Dr. Kaku, you are a very well-respected esteemed leader in this space, right here you are saying, "Hi, hello, something is happening. This is consequential. It seems like it could be aliens." But then that's it. Everybody goes home, we live our lives. Why are we not talking about this more? And then if you were to speculate and I promise we will not hold you to this, what do you think it is?

Dr. Michio Kaku: (25:11)
Well, first of all, we don't yet have a smoking gun. We have these suggestive videotapes. The military is saying, maybe they're Chinese, maybe they're Russian, I don't think so. But the Russians do have hypersonic drones. We are working on hypersonic drones. Hypersonic drones can duplicate some of these maneuvers, but the military admits that no, "These are more advanced than any of the hypersonic drones that we are developing in our laboratory." But we don't have the smoking gun. We don't have an alien ship, we don't have an alien hammer, an alien paperclip.

Alex Klokus: (25:45)
Do you think the government has that?

Dr. Michio Kaku: (25:47)
Well, they haven't led onto it. We can't rule it out that maybe they've been able to retrieve something from a crashed flying saucer, but I haven't seen any evidence.

Alex Klokus: (25:57)
You have not seen.

Dr. Michio Kaku: (25:58)
I'm not seeing any... I've talked to my friends and they have not seen any either.

Alex Klokus: (26:02)
Got it. But if you were to go out on a limb here and just speculate, you think that what we're seeing in these videos is some other form of intelligent species from somewhere else in the universe?

Dr. Michio Kaku: (26:16)
Well, it can't be ruled out. Now we physicist believe it or not have actually written about civilizations that are millions of years, more advanced than us. We scan the galaxy, we realized there's a hundred billion stars in the galaxy, on average, every single star has a planet going around it. I repeat on average, every single star you see at night has a planet going around it. How many of them have liquid water oceans? Maybe 10, 20%. So the galaxy is teeming with these life forms, and we physicists have categorized their level of advancement. A type one civilization is planetary, like Buck Rogers, they control the weather. They control volcanoes, earthquakes, anything planetary, they control, like Flash Gordon or Buck Rogers. Then there's type two, which is stellar. They have the power of a star, they roam a piece of the galaxy like Star Trek. The Federation of planets would be a type two civilization, harnessing solar power. Then there's type three. Type three is galactic. They roam the galactic space lanes like Star Wars. Star Wars would be a type three civilization. Now on this scale, what are we?

Alex Klokus: (27:35)
We're type zero.

Dr. Michio Kaku: (27:38)
We're type zero.

Alex Klokus: (27:39)
Oh my God.

Dr. Michio Kaku: (27:40)
We don't even rate on the scale. We get our energy from dead plants, oil and coal.

Alex Klokus: (27:46)
By 2050, will we get to level one?

Dr. Michio Kaku: (27:48)
Well, by 2100, if you just do the math, by 2100, we should be a type one civilization. For example, what is the internet? Why is it so magical? The internet is the first type one system to fall into our century. It's a type one technology, it's planetary. The internet is the first planetary technology that we have. That's the glimpse of what's going to happen around 2100. Everything's going to be planetary after 2100. You'll communicate, your friendships, your relationships will all be planetary.

Alex Klokus: (28:23)
Planetary relationships. [crosstalk 00:28:25].

Dr. Michio Kaku: (28:25)
Yeah. And what language will they speak? Well already the two dominant languages on the internet are English and Mandarin, Chinese. What about type one sports? Soccer and the Olympics, the beginning of a planetary sports. What is Chanel? What is Gucci? The beginning of a type one culture. What is [crosstalk 00:28:44].

Alex Klokus: (28:43)
Wait. Chanel and Gucci are type one culture?

Dr. Michio Kaku: (28:45)
Yeah. The beginnings.

Alex Klokus: (28:46)
The beginnings. Okay.

Dr. Michio Kaku: (28:48)
Right. What is Rock and Roll? The beginning of type one music. You see what I'm saying? We're seeing the beginning of a type one culture and the engineer is spearheading that because it's a type one technology, monetary.

Alex Klokus: (29:03)
Just so maybe we can all recap, understand, there's a lot that was said in the last 10 minutes. So you believe there is a universal digital highway in the universe that has remains of other intelligent extraterrestrial life, maybe they're sending data back all across the universe. Okay, that's happening. Now, there is some seemingly intelligent species that is coming to earth and they are evaluating us, they are looking at us, they are watching us-

Dr. Michio Kaku: (29:33)
And laughing.

Alex Klokus: (29:34)
... and laughing. They're perhaps laughing at us, but we must be important enough for them to watch us. There's got to be something... There may not be a lot of things going on here, but there's got to be something important for them to watch us.

Dr. Michio Kaku: (29:49)
Well, this is where we physicists argue with each other because we don't know, there's no hard data. Some people think they maybe it's like an interplanetary zoo, that we are the zoo animals and they are like the zookeeper, and they just come and watch us. Another possibility is when you go walking on a country road and you see a bunch of ants on the road, do you go down to the road and tell the ants, "I bring you trinkets, I bring you beads, I give you nuclear energy, take me to your aunt queen." Or maybe you step on a few of them? Well, if these aliens are entomologists, alien entomologists, they will consider us to be the aunts. In which case they would like to play with us a little bit, but after a while, they would probably lose interest.

Dr. Michio Kaku: (30:37)
If you were in a forest and you meet a squirrel, do you try to talk to the squirrel? Well, initially, yeah. But after a while you get bored because the squirrel doesn't talk back to you, the squirrel has nothing to offer you. So I think initially an alien civilization would be curious about us, but after a while they just get bored. They'll say, "What, soap operas again, turn the channel."

Alex Klokus: (31:00)
There was a great quote about this, I think from someone named Chris [Melanie 00:31:05], I believe he was at the Pentagon. He's leading a lot of this research initiative. And he said, "Hey, if we imagine, let's say we extrapolate out and we're now in 2100, we humans are exploring the universe. How would we do that? Well, what we would do is we would send an unmanned drone. They would go, they'd travel for X amount of time, many, many decades, if not centuries, until they reached their target planet. The drone would then observe, it would take a map of the planet. It would then go hide, maybe under an ocean, like what we're seeing. And then every, so often, every 20 years it would pop out, it would map everything and then it would send that data back, and it would go back into hiding." That sounds a little bit like maybe what we're seeing here. It seems like logically it checks out.

Dr. Michio Kaku: (31:48)
However, that's type one. Let's talk about type three now.

Alex Klokus: (31:52)
Okay.

Dr. Michio Kaku: (31:52)
Type three is when you have galactic power, the power of a black hole. At that point, Einstein's equations begin to break down and you enter the realm of what I do for a living, string theory. String theory is the theory of everything. The theory before the big bang, the theory that would answer the question, is time travel possible? What happened before creation? Are there gateways to other dimensions? Is there a multiverse of universes? All these questions are far beyond Einstein's theory, but well within what I do for a living, string theory. String theory is for type three, a type three civilization is galactic. At that point, space and time could become unstable. If space and time become unstable, they may be able to break the light barrier. In which case they don't have to wait thousands of years to reach the stars, they simply create a gateway.

Alex Klokus: (32:45)
And how would we break the light barrier? Can you help us visualize and Imagine that?

Dr. Michio Kaku: (32:49)
Well, if I have a black hole... Already, we know that black holes exist, we photograph them, we study them now. But at the center of a black hole, there could be a gateway, like Alice's looking glass. Think of the looking glass of Alice. Alice sticks her hand through the looking glass and her hand winds up in Wonderland. So two universes are stuck back to back through the looking glass, and what is the looking glass, a black hole. So you need fantastic amounts of energy, like type three, before you can begin to play with hyper velocity rockets that can go faster than the speed of light. Again, this is still conjectural, we don't know for sure. String theory has not been verified.

Alex Klokus: (33:35)
Do you think it will be verified by, let's go further 2100? Do you think string theory will be verified?

Dr. Michio Kaku: (33:40)
Yeah, I think so.

Alex Klokus: (33:41)
You think so?

Dr. Michio Kaku: (33:42)
Already the next generation of Adams Smashers are the Japanese, the Chinese and the Europeans are proposing the next generation beyond the large Hadron Collider. But personally, I think that it's a math problem. Somebody who's smart enough will solve the string equations and be able to answer it once and for all, whether this is the theory of everything, the theory of the black hole, the theory of the big bang.

Alex Klokus: (34:06)
And you said somebody, what about something?

Dr. Michio Kaku: (34:09)
Or something, or somebody? If I do a TV interview, I tell people out there, that maybe one of you in the audience will discover the theory of everything.

Alex Klokus: (34:18)
This is the finest conference [crosstalk 00:34:19].

Dr. Michio Kaku: (34:21)
And if you ever find the theory of everything, tell me first, we'll split the money and the Nobel prize, you and me.

Alex Klokus: (34:31)
And so I'm curious, when you think about stage three, we are stage zero. There's another, I guess, group of thought or school of thought, which says, "Hey, maybe we're just living in a simulation. Maybe this is a simulation." There is another species, they have developed compute. They have developed their own digital world. They're now simulating their own realities. Many of them, millions of them, billions of them, trillions of them. And we are not the ultimate or the original reality. It's turtles all the way down, as they say. I know Elon Musk talks about this quite a bit, is that what you believe?

Dr. Michio Kaku: (35:11)
No. This theory says that we all live in the matrix. Somebody just hit the play button and here we are. We're nothing but a CD ROM, and somebody has to play button. First of all, why would any super being want to duplicate our life forever on a PC or a super PC? Second of all, even if you were to model the weather, just model the weather, it turns out that the number of molecules is trillions upon trillions and to model each atom would exhaust the power of any computer. The smallest object, which can simulate the weather is the weather itself.

Alex Klokus: (35:55)
That is a great line, I love that. The smallest... What did you say, the smallest what?

Dr. Michio Kaku: (35:59)
The smallest object-

Alex Klokus: (36:00)
The smallest object.

Dr. Michio Kaku: (36:01)
... that can simulate the weather is the weather itself.

Alex Klokus: (36:06)
And so when we think about the things that we simulate in our digital world, let's use maybe an example, like the Sims. Okay, are you familiar with the Sims?

Dr. Michio Kaku: (36:15)
No, but go on.

Alex Klokus: (36:15)
Okay. It's a game where you just simulate these little guys and they do basic things, like use the bathroom and talk to each other. So let's say you're talking about the smallest system that can simulate the weather is the weather. But I feel like we can simulate a lot of things in our computer, you're saying we can't simulate the weather?

Dr. Michio Kaku: (36:31)
Yeah. Because the weather has too many molecules, each molecule going in a different way. When we do something like Sim city, we're taking shortcuts, tremendous shortcuts, and as a consequence, the model we make is not realistic. To get a realistic simulation of this room, would exhaust the power of any known computer for billions and billions of years.

Alex Klokus: (36:56)
Yeah. When you say that, just so we understand, you're saying that because there's nuance. There are little things that happen in this room, there's a lot of unique actors. I can put my foot over here, I can put my foot over here, but that is not consequential, it doesn't impact the outcome of this entire experience. But you can take shortcuts. We can simulate this talk, maybe 95% of the time, it goes really well, 5% of the time you don't like me and this whole thing sucks.

Dr. Michio Kaku: (37:20)
That is possible. Some people say that maybe the simulation is not perfect. So that in this corner of the room, there's a ragged hole because the computer program hasn't fixed up that hole.

Alex Klokus: (37:32)
Yeah, it's like a glitch when you're playing-

Dr. Michio Kaku: (37:32)
A glitch.

Alex Klokus: (37:32)
... a video game, it's not loaded.

Dr. Michio Kaku: (37:34)
Right.

Alex Klokus: (37:34)
Yeah.

Dr. Michio Kaku: (37:35)
So a simulation that is not realistic but 99% realistic, that's possible. How would you test it? You would test it by looking for rips, tears and inconsistencies in the fabric of reality. So if all of a sudden a hole erupts here, a tear, it's because ah, the computer program didn't fix that hole correctly.

Alex Klokus: (37:55)
And do we have any evidence of that at all-

Dr. Michio Kaku: (37:57)
No.

Alex Klokus: (37:57)
... that you're aware of? No.

Dr. Michio Kaku: (37:58)
No. We see no evidence of a rip reality.

Alex Klokus: (38:01)
Okay.

Dr. Michio Kaku: (38:01)
If you ever find one, tell me first.

Alex Klokus: (38:05)
Okay. So I think we're approaching the end here just to summarize, and then we'll end with one parting question. So 2050, we have probably some people on Mars, Elon's going to push us there. Climate change is going to be consequential, but it is not an existential risk. We will have some form of digital longevity, maybe some meaningful extension of biological age, may be in there as well. And then by 2100 things are getting extremely weird. We are talking about taking our consciousness, uploading it and shooting it via laser all across the universe, and then reanimating as avatars across every... by 2100, 80 years from now. Maybe if we're lucky enough, we'll see that. We will do that?

Dr. Michio Kaku: (38:54)
That's right. That our consciousness will explore the universe. We'll download our consciousness on the moon into an avatar, and we are now Superman. Superman, Superwomen on the Moon, Mars exploring the universe at the speed of light, downloading our consciousness into avatars. And who knows, maybe some of you are an avatar that has been downloaded from outer space visiting us right now.

Alex Klokus: (39:17)
Yeah. If anyone is an avatar, Anthony Scaramucci is the avatar, for sure. He's amazing, he's unbelievable. And then there's aliens everywhere. There's aliens perhaps here, there's aliens in the universe out there.

Dr. Michio Kaku: (39:31)
Let me say that, if our grandparents could suddenly see us, what would our great-great-grandparents think about us? They would consider us to be magicians and sorcerers, able to conjure up images and things that can fly and go into space. So our great-grand ancestors will consider us to be sorcerers. When we talk to our great, great grandkids, how will we view them? We will view them to be gods. And what do gods do? Gods have the power of life and death, they have the power over their environment. That's where we're headed. We are headed to become gods. The gods that we used to worship, we will become the gods that we used to worship, power over life and death.

Dr. Michio Kaku: (40:26)
For example, take a look at cancer. We now know that cancer is not one disease, but thousands of smaller diseases that are genetic. We'll simply live with it like a common cold. We'll never cure cancer, but it's not going to kill people. We don't worry about the common cold because we can stop it, but we don't cure it. Same thing with cancer. So in other words, our descendants will have the power over disease. If they can't conquer it, we'll simply live with it. And they'll have the power to change our environment at will.

Alex Klokus: (40:58)
I love that.

Dr. Michio Kaku: (40:58)
That's the power of a God.

Alex Klokus: (41:00)
So the parting takeaway is that, as long as we don't blow ourselves up, we as in humanity, we will become gods.

Dr. Michio Kaku: (41:12)
That's right.

Alex Klokus: (41:13)
Okay. Dr. Kaku, thank you so much. I love it. Thank you all. This was a lot of fun. I hope you stay and enjoy the rest of the conference.