On The Brink with Castle Island - Alex Pack (Dragonfly Capital) (EP.24)

Episode Date: December 9, 2019

Alex Pack, Co-Founder and General Partner at Dragonfly Capital joins the show. Alex has been investing in the cryptoasset/blockchain space since 2014, and prior to founding Dragonfly, led cryptoasset focused investments for Bain Capital Partners. In this episode we discuss:  - The blockchain landscape in China - Dragonfly's investment thesis - Regulatory implications of starting a protocol - Stablecoins - The evolving nature of venture investing

Thanks for tuning in to another episode of On the Brink with Castle Island. This week's episode is with Alex Pack, co-founder and general partner at Dragonfly Capital. A lot of you will know Alex. He's a prominent investor in the crypto circles, and he's held a number of roles over the years investing in the space at Arbor Ventures, at Angel List, and at Bain Capital Ventures. So we wanted to have Alex on the show today because we haven't talked much about the crypto markets in Asia, and this is certainly a growing and very vibrant ecosystem. So we spent a lot of time today talking with Alex about that.

We also discussed Dragonfly's investment strategy, which involves investing in companies, investing in tokens, as well as investing in funds. We talked a bit about stable coins and how Alex views that market. And we also spent some time talking about the regulatory environment internationally, as well as in the United States. I think you'll find it's a wide-ranging conversation. There was a lot to discuss, and Alex was very generous with this time. So without further ado, here's our interview with Alex Pack.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of constituted easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something, called a Bitcoin. Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. And we are really lucky to have Alex Pack, a general partner at Dragonfly Capital in the host. Thanks for joining the pod, Alex. Thanks for having me, guys.

So Alex, like every guest, we'd love to just start with how you got interested in crypto, what your origin story is now, and then just dovetailing into what you're doing at Dragonfly Capital. Sure. I have been a VC investing mostly in financial technology. since around 2014 at a FinTech Fund in Hong Kong at the time. And I sort of raised my hand to become the blockchain guy. So I've been doing crypto investing for about five years at this point across the U.S. and Asia. I left that fund and worked in the U.S. for the last few years.

I was a partner at Angelist, the crowdfunding platform for startups. and I led a lot of crypto activity at Bain Capital Ventures after that. At the time, we were one of the most prolific investors, institutional investors in crypto, actually. And then about two years ago, I left to start my firm, Dragonfly Capital. We are a global crypto firm with offices in Beijing and San Francisco. I'm the guy heading up the San Francisco part. And our goal is really we bridge the two worlds in crypto, the sort of activity that's going on out here in the West and a lot of the adoption and frenzy happening in Asia. And that's awesome.

We definitely want to get into a lot of detail on what's happening in Asia. But one of the things that you said really kind of jog my memory, and you're talking about investing in this category in 2014, and that's probably not something that a lot of people can say that they're making crypto investments. in 2014, particularly from a fund, a venture fund. So what was it that first got you excited about the space and maybe talk a little bit about what your worldview was on the crypto markets back then and how that's changed over the years? Yeah, for me, crypto is really about disrupting industries that haven't been changed in usually about 50 to 100 years.

Things like money, central banking, government. governance, really the core building blocks of the financial system that we all take for granted today. I love that because before I was in crypto, I was always quite interested in politics growing up. And now crypto is almost like the introduction of politics and governance to technology. It's one of the only sectors of technology disruption you can invest in that really changes the world on a civilizational level.

And in particular, I got interested in it while I was in Asia because we could, and there's a lot to talk about here, but the big thing about crypto is that while a lot of the people talking about it and while a lot of the core technologies are out here in the West, actually by far the most adoption is in Asia. And most of the users of crypto today, most of the mining, most of the trading volume is happening out in Asia. And when you see these users firsthand, people who have access to the internet and are in a global middle class and are on Twitter and so forth, but are very underserved financially, you understand sort of how impactful crypto could be on a global scale.

So this is fascinating because I think you have a very unique position, obviously, straddling, you know, the U.S. and Asia. something I find fascinating about Bitcoin is that it's almost like an export in that like most of the commits on core mostly come from U.S. entities, MIT, DCI, Blockstream, you know, chain code, square crypto. Most of the core developers are European or American. And yet, you know, as you say, a significant fraction of the users and the miners are in Asia. you know, what do you make of this? Is there a feeling that it's like an Anglo-Western-dominated software, or does that not really matter? Yes, I think that's absolutely true. It's undeniable that most of the commits of the major projects and most of the sort of technology research that underpins crypto comes out of the

Western world. And it's not just the U.S. or San Francisco, by the way. It just happens to be places where cryptography is dominant. MIT. Berlin as well, Toronto, Israel, of course. But what I think, it's really like crypto in many ways is exporting the best parts of the Western dominated global financial system to the rest of the world. So is there a feeling of resentment, for instance, in China that it's a, you know, American and dominated technology

in terms of the actual production of something like Ethereum or Bitcoin or not really? I don't think so. The internet is the same way. Telephones. The story of Asia venture capital and technology innovation

is often adapting core technologies that are built in the Western more developed countries and creating interesting business model innovation on top of that and exporting it to at scale to massively larger user bases.

And so we're seeing that happening in crypto today. It's all open source software and you can use it anywhere in the world. Would you say this, we might be getting into questionable territory here, but would you say that Bitcoin and Ethereum or the notion of decentralization, censorship resistance, are these Western values which are encoded? Or are these just kind of universal values, which everybody finds useful, and that's why these have global appeal. Yeah, I think the most important thing that crypto brings to the world is permissionless innovation.

Very similar to the Internet, but taking even more to its extremes and impacting other parts of the economy, like the financial system. And permissionless innovation is a global phenomenon. There is entrepreneurs all over the world. the venture capital ecosystem in Beijing is on many metrics actually larger than it is in Silicon Valley, right? So I think people want to innovate permissionously and build new things anywhere in the world. In a lot of ways, I'd say the Asian market has been something that a lot of people have opinions on in the crypto sphere. But I would say very few people actually understand what's going on. And that's especially true right now when we've had comments from Xi Jinping talking about how blockchain is a national priority.

What is your view on what's actually going on on the ground in Asia right now as far as this technology? Yeah, the last few months have been some of the most important or at least impactful for crypto ever, I think. a few weeks ago in late October, President Xi made a major announcement where he basically said that blockchain technology is a national priority. It's key to making sure that China continues to be the world leader and technology innovation, and it's core, it's crucial to China's development in the world stage. And so what has come out of that has been unprecedented, really. The amount of – because when President Xi says something and says something in this direct way,

I mean, he said the word blockchain 30 or 40 times in this speech, right? It was huge. It's more times than any global leader has talked about this before. And the outcome of that is massive top-down resources that are going to – in terms of human capital, in terms of actual capital. There have been regional blockchain funds set up, innovation centers within large state-owned enterprises and so forth.

So the amount of resources that are going into such an early stage technology is unprecedented. I mean, the closest comp is maybe the space race and NASA in the 60s, right? So I think we're seeing a transformation now where, yeah, it's just going to get crazier from here, I think. So you hear those type of kind of comments and it's really hard to understand as an outsider kind of what that means in terms

of what types of companies are starting to get really relevant. It's especially difficult to understand with the backdrop of, you know, historically China has had crackdowns on mining and crackdowns on public blockchain cryptocurrency exchanges, for instance. Not to mention capital controls. Right. Yeah, exactly. Not to mention the fact that it's been historically really hard to get capital out of the country. And in public blockchain, represent kind of a seamless ability to do that if used to their full design capabilities. So when you hear that blockchain is a national priority, what types of categories get you excited?

And what do you think that means? What type of investments are about to be made over there? So to be clear, the categories of crypto that get me excited are not necessarily the same as President Xi and China's state-owned enterprises. We've been studying this for years, right? We have ideas about the value of public chains versus private chains, all sorts of nuances that average people who aren't fully in crypto,

especially government employees and politicians, have not really figured out yet. I think what we saw in the U.S. was the first thing that incumbents and traditional players grapple onto in crypto is private blockchains. And that's like all the banks were doing that right from 2015 onwards. You guys were involved with a lot of this too. And it takes about four or five years to figure out that that's not really the most interesting part of crypto. I think that's probably going to happen in China too. Actually, it'll probably mirror what happened in the U.S. too, but on a much larger scale.

Yeah, I was about to go down that path because if you think about, you know, large financial services firms a few years ago, there was just a lot of experimentation around private blockchain. Some of that manifested itself with R3 and digital asset holdings and chain and a number of companies that were proposing consortiums. And then you had the Enterprise Ethereum Alliance, which kind of came out with this private version of Ethereum that a lot of people were doing proof of concepts on. And none of that stuff actually made it to production. At least I'm not familiar with anything that's actually in the wild working from a private blockchain perspective right now. But the net effect was that a lot of people started to learn how to use these things. And a lot of talent started to migrate into the industry. And now you have people that are working on public blockchain infrastructure projects.

Do you see a similar type of thing unfolding at a national scale here, potentially? Yeah, absolutely. Whether it's a private or public chain you're building on, you, the first thing you do as a developer, as a user, whatever, the first thing you do is you learn about Bitcoin's origin story, you learn about Satoshi, you read the white paper, and you learn how to code in solidity because what else can you code on, right? So everyone becomes familiar with how smart contract, public smart contract platforms work. But yeah, it will take a few years, I think. And you see this also with, you saw this with the internet and with China adopting the internet and even with America adopting internet. China went through this crazy phase in around 2000, where they had their own sort of private internet versions, too. And there was this 2G era, basically, where there was this development of massive, very primitive internet infrastructure

that was going on all around the country. And there were portals in China in 2000 for each municipality, like AOLs for Shanghai or for Guangzhou province or things like that. And they were government back and they had licenses. And of course they went nowhere. I mean, and some of them were very large at the time. They had millions of users. And now it's Tencent, Alibaba and Baidu, right?

These sort of portals didn't make any sense. They were an anachronism. We'll see that, I'm sure, with private chains in China too. So this is interesting. So your claim is essentially that although, generic blockchain is the priority right now. Over time, this will be refined and we might get the equivalent of China embracing something like a public chain just because it makes more commercial sense or it's more efficient. Because I mean, just taking the internet metaphor,

you know, China's internet is obviously very kind of restricted and so on. So it doesn't exactly interoperate with the rest of the world's internet, right? It's mixed. Yeah. I think the best technology, the best product always wins out, right? Private chains are iterations on their minor improvements over cloud databases, you know? They're not that groundbreaking. So if you want to be bullish on, if you want to be pro blockchain, and China really is all in on blockchain, then of course eventually you have to adopt public blockchain. chains and the permissional innovation that happens on top of them. So I think it's inevitable to some extent. Now, the time frame, we'll see. What would you say would be the incentive for a state which, you know, has an interest in controlling the behavior of citizens? What would be their interest in a permissionless financial network? Is it just that that potentially interesting, it could be an interesting interoperability layer for a variety

of commercial projects like the open banking APIs, just a high-powered open banking API kind of situation? Yeah, sure. China has always, most of Asia has always been quite a bit behind the Western world in terms of financialization and sort of open, sophisticated capital markets. So, yeah, having a technology. that can bring a country closer to the number one in the finance or financial system,

that's amazing. I mean, people would kill to, every country in the world would kill to be the next New York or the next London or something like that. And just GDP growth, right? Everyone knows that tech is what drives economic growth. You know, over the years,

you've seen a lot of these, you know, you've seen private blockchain proposals, you've seen how this kind of migrated back to the public chains, as an investor right now, do you have a mental model for the categories of companies or tokens even that you're most excited about where you think that the biggest opportunities lie? Yeah. So we, Dragonfly, we invest in three things. One, the thing that drives everything is sort of the protocol and token economy, which we think will be massive and it will spawn new economies, create new forms of money and new forms of marketplaces and financial networks across multiple

industries. The second is the centralized infrastructure, on ramps, things that sort of shepherd people from the centralized, sort of decentralized economy. And then the third is world-class fund managers like you guys, because we're building a global ecosystem and crypto is very diversified and varied. So we like to partner with some of the best fund managers around the world as well. And yeah, I think in protocols and tokens, we think for sure we're building a decentralized economy here. And it will be driven by tokens.

And there'll be massive trillion dollar tokens in the next few decades. And this is an area I'd love to dig in on. And I'd say Nick and I are in a camp that might not be the most popular camp within the crypto. quote unquote fund managers in the sense that, you know, our view is that value accrual at the protocol layer will really go towards the assets that have the potential to be non-sovereign stores of value. And, you know, we're pretty skeptical on tokens that are not treated as money. Like, for instance, like a file storage network, we would be skeptical that the token on such a network would accrue meaningful value unless it's hoarded and treated like a wealth store.

You know, curious if you view the world in a similar way and you just think that we're going to have a lot of different forms of money or whether or not you disagree centrally with that hypothesis. I agree largely. I think most tokens today, with the exception of sort of more cash flowing tokens that look like innovations on equity, but most of the big tokens, smart contract platforms, Bitcoin, other forms of private money and so forth or privacy currencies, they're all competing to be money. I just think that money is a, actually a lot of assets today have money like properties and have store value properties. Beyond actual currencies, art, real estate, stocks, oil, various commodities, they all have massive store value properties. There was this great analysis that Nick Sabao did, like 10 or 15 years ago before Bitcoin was invented, where he tracked how.

during oil crises basically barrel oil has money like property and becomes a massive store value as a hedge against inflation and because it's really easy to custody them you just store oil in the ground

what could be a better way to custody if you're a nation state or something that owns this oil and so I think it's totally plausible that assets that will be globally used massively will power all sorts of applications on top of it.

We'll have money like properties today. And the market for a non-sovereign store value, which is today mostly taken by gold, it will grow to eat a lot of sort of the moniness of oil. It will grow to eat the money value of stocks or SaaS companies right now or things like that. Yeah. I mean, when you think about some of these total arrestable markets

for money, quote unquote, characteristics, it's staggering, right? Like you could look at gold, you could look at offshore bank accounts, you could look at fine art, oil commodities. So we're really talking about some of the largest total addressable markets in the world. Yeah, there's that other good essay by Nick Zobo on how shells became a form of commodity money in the Americas, you know, specifically finding that they were not treated as money in the places they were produced. Typically, they were exported inland normally. So, you know, they would be produced or found, you know, and refined, you know, at the beach.

But then they actually obtained this moneyness quality the further that they were from the ocean. It's a proof of work to... Precisely, yeah, there was a proof of work. That's why they had this characteristic because it was difficult to make more. What do you think the application is to crypto then? I just, it's a, I think it's a good case study and why. a money-like commodity doesn't strictly need utility, so to speak. You know, the shells had no utility.

They were just decorative, and they were decorative because they were valuable, you know. It wasn't that their innate beauty is what made them, you know, is what gave them their money. It was the other way around. It's like the same thing with gold. People make jewelry out of gold because gold is valuable. Yeah. I think the core, stepping back, you know, a product has to be 10 times better. General, this is the rule.

It has to be 10 times better to get adoption. Maybe for something like gold, which is so ingrained in human society, maybe a product has to be 100 times better. And I think there are several crypto assets today that are 10 to 100 times better than gold, right? maybe Bitcoin is one that is like more scarce or has a more defined monetary policy or is a little bit more decentralized in others or something. But if you're like there's 20 different cryptocurrencies, I think, that are still massively better than gold. I think in some ways they're worse as well in that you like there's like a lot of dimensions when it comes to the qualities that constitute moniness, right?

I would say they're worse than that you can't display a cryptocurrency. You know, you can't use it as a status thing. That is one of the use cases at gold to cheaply generate a signal that you have, you know, value that you have worth and to do that in a very visible, externalized way. Nobody's figured out yet how to demonstrate your third party that you, like, own a lot of Bitcoin. Except your open dime is on your keychain, right? You're walking around with that. Yeah, but you can, there's no way to obviously.

prove that the open dime has X amount of Bitcoin on it. Yeah, I think it's the same thing for NFTs and collectibles. If there was a way to showcase some of these items in very public ways, I mean, people showcase their baseball cards, people showcase their magic cards. I wonder if we'll start to see companies that innovate on ways to just display your digital wealth. Yeah, I think that would be awesome, actually. Yeah, I request for startup. Well, maybe.

Most gold is hidden in the ground, right? A huge fraction of it. Fraction exists as jewelry. But yeah, a lot of it just sits in art and in vaults. Yeah. And most wealth tries to be as private as possible, right? It's held in Swiss bank accounts and things like that. Yeah, it goes both ways.

Like some people's wealth is in their homes, of course. And people like to have ornamental, nice homes. Yeah. It's one of these things where, the most number of users of gold probably use it for ornamental reasons, but the actual largest amount of gold, the biggest dollar market cap amount of it, is used for very,

very private reasons and is used for its custody benefits and its privacy benefits and things like that. So I think we're doing fine. I mean, Bitcoin is much better custody and so forth than gold. The other axis where I'd say it's worse is just the fact that it's very easy to lose. But that goes hand in hand with it being very difficult to seize. So, you know, you got to take the bad with the good, I guess. I see one of the structural barriers from a world where there are a lot of competing public blockchain forms of money is just how did these networks

launch? I mean, Bitcoin is at a tremendous advantage in the sense that it has this immaculate conception and it was fair launch. There's a number of assets like that. Ethereum conducted an ICO, but it's been grandfathered in, and according to the U.S. government, or at least the SEC, it's not a security. A lot of these other assets haven't even launched yet, and they've raised capital under simple agreements for future tokens. And I'd say at least in the United States, it's totally murky as to whether or not they can actually go live on a main net. So how do you think about that as an investor? I mean, do you think that these things will launch? How do you think about the regulatory risks associated with these things just getting out there in the wild?

Yeah, I think the SEC and a lot of the agencies in the U.S. have done terrible harm to the crypto ecosystem in America. The good thing is this is why we're global investors, and it's never been easier to opt out of America. And I think today what we're seeing is, it's ironic, there's the Internet, there's a global firewall around China. And today were many crypto companies, they firewall the U.S. They have international entities that can service 100 plus countries. And then they have a little entity in the U.S. And then even the U.S. entities, they have their own sort of separate way to deal with New York State. It's ridiculous.

Maybe there was a time where that would just shut down an industry entirely. But entrepreneurs are global, teams are global. You can move. You could set up anywhere you want. I think this is probably one of the two main reasons why Asia is doing so well in crypto. One of the adoption, two, because international regulatory arbitrage is happening. And there's way better jurisdictions to launch a token than in the U.S. And so there's whole realms of tokens that if you're an entrepreneur, I would not advise you starting

if you're doing it in America or even have an American-only citizenship. areas like decentralized finance, like cash flowing tokens, ICOs. You should just not bother with the U.S. Yeah, it's been super frustrating for me from the perspective of looking at the companies that are attempting to launch and the structural barriers in the United States. So you reference the state of New York and you see a lot of startups that actually have language on their websites that, you know, residents of Sudan, Iran, North Korea, OFAC sanctioned countries and anyone that lives in the state of New York cannot use this product,

which is like a staggering thing and it's really unfortunate. You know, and so you have the SEC under attack from a couple different angles. One is, you know, there were a lot of ICOs that were conducted in 2017 that definitely were unregistered securities offerings. And we've been really surprised that the SEC hasn't come down and, you know, punished some of these actors. So that's one thing. But from the totally other perspective, you have a lot of financial firms that are looking to custody digital assets and they want clarity from the SEC or Finner

around whether or not they can do it and there's no clarity from that perspective. Really law-abiding firms that are just trying to figure out what the rules are and there's no clarity there. And so is your view that we're just going to start to see entrepreneurs just leave the country or just start these things elsewhere and that's how we're going to start to see these things launch? Yeah, already happening. We've backed a lot of entrepreneurs who live in India or all sorts of countries.

who normally they would apply to YC or they would take money from U.S. and they would move to San Francisco and maybe they have an engineering back office back home or something. But they would set up shop in the U.S. And now we tell them to go to Singapore or Hong Kong or stay home. Yeah, there have been numerous of these. And it's just going to continue to happen. It's tough. I mean, I understand I have sympathy for U.S. agencies because

you know, this is an innovation on what they do. And they're not very well equipped to handle technological innovation on, you know, the laws that govern them are almost 100 years old. But it's too bad. You know, if we can't move fast enough in America, people will go elsewhere. So we ask the same question of Ash as well. So like if you look at like the spirit of securities laws instead of the letter, Um, you know, ultimately they come down to like, if you want to sell something which resembles an investment contract to, you know, the general public, like you have to figure out how to give them the material information they need to evaluate the investment. And there's also penalties if you lie about that, right? So I would say that's really what it boils down to. And then of course, there's a lot of ways that's implemented. But, um, you know, just for the sake of argument, let's consider the spirit. So I think that's actually a pretty fair, uh, request, right? Um, But then, like, in the world of crypto, it's like either you go through some sort of really onerous, like disclosure regime, like blocks stacked.

If you, if you're trying to sell, you know, a token to retail. Or you just opt out of that situation altogether. And then you do it in the, you know, you don't bother with the disclosures because, you know, why bother? So do you think there's a way to take, you know, some sort of common sense, you know, questions about disclosure, you know, ask those questions of token launches and get them to disclose? Or like, don't you believe that they would still have an obligation to surface kind of material information about their projects to the people that they intend to have buy these things? Yeah, it'd be nice. It'd be great.

I understand the spirit of the law. It makes sense. But I think it'll probably take a few decades worth of experimenting. to figure out what that should look like in the crypto worlds. Hopefully it could be automated in some way. I mean, the core innovation of ICOs and tokenization that came out of Ethereum is that you could cut through all of this regulatory and other red tape. Before I worked at Angelus, I was a partner there, which is a crowdfunding platform.

And crowdfunding makes perfect sense. And there's all, we backed before as a VC. I've backed companies that try to give their users shares in their stock. You know, you could like when you go to Starbucks, you could get a gift certificate worth of Starbucks shares or something. Like all of these ideas make a lot of sense. Your users should own part of the network. They should have some buy-in. And if you can figure out a way to enable that, you can be a massive company that has an edge over your competitors, right?

People have been trying to do this for decades. eBay tried to give some of its merchants part of it, you know, access to its IPO. And the problem is you just, it's just too hard. eBay couldn't do it. Uber tried to do it. They couldn't do it. The regulations we were dealing with at Angelus and other crowdfunding platforms made it very, you know, our market size, the market size for what we were doing would have been 100,000 times bigger if we didn't have a lot of these barriers. And crypto cuts through all that.

I think that's great. I think that's a tremendous innovation. and it will change the way business has run, but certainly will have its dark sides, no doubt. Do you feel that large issuers have an obligation to service material information on the nature of the investment, even if they would like to believe or imagine that it's not an investment contract per se,

like a telegram, for instance? Well, yes, certainly, but crypto sort of changes what it means to be an investor, right? Anyone is an investor now. Like, people around the world in Iran even are buying, or Iraq, are buying the same assets that you might be buying in your fund. You know, not exactly the same, right? Or the same assets that we own in our fund.

So the world is, I mean, we now live in a world where it's not just, people who are accredited who can be investors. Everyone can be with technology. And so I think we have to learn how to do regulation and do disclosures in a way that undertakes the world as it is, right? Otherwise, we're just philosophizing. Do you, like, with the internet, really a watershed regulatory moment was the telecom act of 1996, and that really unleashed the commercial internet as we know it. What would it take for the United States to actually be at the forefront of this technology? Are we talking about a rewriting of the Howie test? What's the, I guess what's the wish list?

I'm not sure. I don't really have a wish list. It would be a lot. It would probably end up being a sandbox, the way we kind of see it happening in Singapore and Hong Kong right now, where you let a lot of things happen and you take notes along the way and you try to figure things out a few years from now. It's hard to imagine being able to anticipate,

I mean, crypto moves so quickly. It's hard to imagine regulators being able to anticipate. paid something. I mean, if you look, the reason New York is siloed was originally, it was supposed to be an innovation. Everyone was clapping in crypto for the New York being at the forefront of creating policies specifically for digital assets. And it turned out to be the worst thing, imaginable, right? Because you can't imagine all of the things that would come out of crypto, even one or two years later, let alone 10 or 20 years later. Alex, do you do you, so since you, you know, don't believe the U.S. is probably an inferior jurisdiction, if you're, you know, a crypto company and you have a token, what would you say the best ones are? Do you have an opinion?

Singapore is very good right now. There's smaller places like Malta and Switzerland to some extent. But somewhere like Singapore or Hong Kong, probably the best. This sort of implies to me that, that, you know, call it sensible regulation on crypto is still an extremely fringe thing when it comes to any of the places where capital markets, you know, really exist and are super robust. So do you think that it's going to change anytime soon? Do you think that a UK or another, you know, traditionally large center of capital markets would, you know, adopt a favorable policy? towards crypto? I don't know. I hope so. But it's a, it will take a lot of lobbying. It will take a lot of grassroots organizing.

I think we should all, like American should think about it when they go to the polls, but it's not even clear how we do it, you know, if there's specific candidates or specific policies. And frankly, they're just much bigger fish to fry in American,

most like Western liberal democracies right now, you know? Most people aren't. thinking of crypto too highly, which is unfortunate, but that's the way it was with the internet too, you know. I mean, it could be that we just haven't reached the penetration level where this is a significant public interest subject. I mean, globally, you might have less than 5% of the population that actually owns

crypto, maybe 8% in the U.S., maybe a bit more in Korea and Japan, but maybe we're just not at critical mass yet. yeah I think the difference between jurisdictions like Singapore or the US is Singapore is sort of glass half full about it you know it's a small thing let's see where it goes let's not try to stifle the innovation and when it gets to massive scale we'll figure it out then and hopefully you know we'll have learned along the way and it'll be in our jurisdiction so our jurisdiction will benefit our regulators will be very knowledgeable. about it. And then there's the glass half empty, which is let's see it happen maybe in other jurisdictions, I guess and

and you know, intentionally or not stifle it along the way. So when we were talking before and we were talking about your kind of taxonomy for tokens and, you know, this is an issue I've had with a lot of the discourse is that people don't disaggregate

the way that they talk about tokens, especially in terms of value of cruel. So you were saying that we have the currency-like or the money-like tokens, and then we also have the pseudo-equity tokens out there like Maker. So I'm curious to get your thoughts on that. I mean, you're certainly a fan of the latter group, right? Oh, yeah. The concept of equity ownership has not changed in a few hundred years.

And this is the biggest innovation in the taxonomy of equity and being a shareholder and so forth in a long time. So there's still a lot to go with these things. Most of the equity-like tokens in crypto are very early stage, very young. They don't have all the components that you would expect in equity in terms of like governance and an automated way to distribute cash flows in quotation marks. But it's very exciting. I think you have to follow it and see when it eventually will become massive. but it's one of the most interesting things in crypto.

Yeah, I certainly find it to be one of the most compelling parts of this industry. Also, if you think about equity, it's like a bundled thing. You know, you get, you know, depends, but you'll get some governance capacity. You'll get some claim on the assets of the company. You might get a cash flow. And you might have influence over the directors. But then in crypto, you know, These things are teased apart.

Like you have tokens which exist purely for governance over a network or you have purely cash flow tokens. And then you know, you have weird tokens where like if you hold them on an exchange, you get lower fees. So we have this like mix and match situation which is which is pretty interesting. Do you think about it as securitization at a micro level like at a company level where you could securitize the cash flows of a specific product might be a way? way to think about it. Yeah, I mean, that's, I think that's what we've seen with some of these proposals already. I think they're inferior still because the claims you're getting are sort of very loose, kind of vague.

In some cases, the actual obligation that the company or the entity has to the token holders changes. Like, I think Binance actually changed the passage in their white paper discussing what rights BNB holders had. So there's this kind of like unilateral nature of the agreement where the token holders are very much disempowered. So I would say the issuers of these tokens have disproportionate power relative to token holders.

I would like to see that change probably. Yeah, claims and governance are inextricably linked, right? Because if you have claims without governance, you're just dealing with like a little kingdom or something and a king who has complete control over. what they want to do with you. So you can't unbundle them too much, but certainly, yeah, the way equity works today is just the most massive bundling. I mean, everything gets thrown in, and there's too many disclosed, you know, regulation after regulation. And so it's quite interesting to see how far you can unbundle one thing and so forth. Yeah. I guess there's,

like, digging into the taxonomy more, you actually have, you, you can probably further subdivides them where you have the tokens which are cash, you know, generative, which are a function of some corporate entity's ability to generate revenue, which they then distributed token holders. And then you have the ones which do not have a corporate entity, which is the cash accruing mechanism, but you have something like a smart contract, like maker or compound. And so, like, in some sense, that's more pure or maybe a better fit for this, because because you can kind of on-chain, see the activity of that contract and see what the cash flows are. And then maybe it's even a programmatic distribution now to token holders,

as opposed to like a finance or a Leo or FTT, where you sort of have to trust the corporate entity. So like perhaps we're moving towards a world where we have like trust-minimized equity-style tokens, which exist just as a tax from the activity of some smart contract or something. Yeah, I think that's the key point. The closer the revenues are, cash flows are, to being on-chain, the better. In fact, you can't really have this work where the cash flows are off-chain. So we'll need very good oracles, interoperability solutions, ways to port revenue onto chains.

There may be some really offline businesses that you'll never really be able to bring the revenues on chain, right? But things like MakerDAO and early DAWS, all the revenues are, of course, on chain in a smart contract. And exchanges, I think the reason we're seeing all these exchange tokens is because the revenues are for the most part on chain. They're all exchange tokens for exchanges that are crypto to crypto only, right? So the revenues of Binance or BitFinex are mostly in Bitcoin. So you can actually track a lot of this. And yeah, BitFinex, Leo has a dashboard where you can see their revenues in real time. And you can sort of approximate it back to the exchange volumes that they report as well.

It gives them a good incentive not to overreport their volumes because you can back out their revenue from the volumes. and then the revenue is the, you know, that's where the distribution for the token comes from. Yeah, it's a pretty elegant, not full, but elegant solution to wash trading and misrepresenting volumes. So I think that we'll get to a point where these exchange tokens look sort of like hybrid dexes, right, where the revenues, the exchange fees are reported right on chain and they're diverted immediately. into buy and burn mechanisms or something. And that'll probably be the future of exchanges, actually. And so this is why exchanges are very interesting

to look at how exchanges develop, especially in Asia, where they're crypto to crypto and they're very crypto-native, because how exchanges evolve will be how I think corporations and business, especially digital businesses in general, evolve over a 10 or 20-year time frame. They'll look more decentralized. They will have tokens. They won't be based in one jurisdiction, really, except for the need for bank accounts and maybe rent, things like that.

They'll pay their employees in maybe their own cash flowing token, similar to what finance looks like today. One of the first, I would call it a killer app already, use cases for public blockchains has been stable coins. this idea of pegging a fiat currency to an asset on a blockchain and moving that around. And so curious to get your perspectives on stable coins. And also, if you think that this is going to be a big category, what is the best way to express that thesis in the form of investment? Like how does one get exposure to the idea that this is going to be a big category? Yeah, I think, Nick, you were showing me some analysis you did a few weeks ago

that stable coins are empirically one of the most economically dense and like clearest use cases of crypto today. Yeah, I mean, I would almost describe them as the first killer app of crypto. So the analysis I showed you was basically demonstrating that stable coins have far more usage per unit of market cap than your generic crypto assets. Yeah, I think stable coins are, they obviously make sense. like Bitcoin and other store they're way too volatile to be used in medium exchange to be used even maybe for global settlement, right?

If you need to stay in the asset for a long period of time. And so stable coins make perfect sense. I've been investing in stable coins since about 2015. Very, very early on. We backed MakerDAO and SELO, which are two quite different approaches,

but both quite interesting, decentralized stable coins. And then there's, of course, the biggest stable coins are obviously the Fiat-backed ones like Tether and now USDC. But they're almost like email or something at this point. They're like back in the 90s, every portal, every internet company popped out an email service. And it was just a free sort of way to get a bunch of users and get goodwill and sort of ease the friction in your portal or your like little economy that you've set up. But it wasn't a massive monetization opportunity or anything.

thing like that. Well, in a negative interest rate world, it's hard, it's very hard to monetize the stable coin, right? Well, it's a liability at that point. Yeah. Do you, if you're to guess which stable coin would be the first past $10 billion in market cap, which would it be an unlaunched one? Would it be one of the current ones that exists? Well, do you count the, depends on if you count China's DCEP as a stable coin. coin. If you do, then that's, I would give that the highest chance. Maybe Libra is the number two. And then I think, you know, Tether obviously is one of the most used coins today. And that people sort of forget that in the West. It's extremely useful. And many OTC markets around

the world, like P-to-P OTC markets, local Bitcoin style, they are now predominantly denominated in tether, like tether to the local currency, as opposed to Bitcoin. So Bitcoin isn't even losing its value as a global settlement layer to tether. This despite all of tether's bad press and so forth. So maybe tether will be the one too. But the problem is these things like tether, which are sort of in this global gray space or regulatory gray space, they have dis-economies of scale. Because they rely on fundamentally marginal banks that can't necessarily support this

level of activity. Yeah. So you need a big player like China or Facebook. to, I think, get past the $10 billion mark. And then past that, I think, we'll probably start seeing decentralized stable coins grow quite significantly as well, like MakerDAO or Sello. But often that will probably come after there are major shocks to the centralized stable coins and after they are tested. What would you say to that question, Nick? I would guess Tether just because so many traders seem to like it these days.

So the interesting thing about your framing on $10 billion is $10 billion is not a lot. I mean, $10 billion, you could have a marginal credit union. The United States launch a stable coin. It could probably be close to $10 billion. We're not talking about these markets right now are quite small. Yeah, and there's trillions of dollars in euro dollars, which would be my nearest comparison to what the stable coin market is like. Yeah. Something I thought to myself the other day was if we count stable coins in the index, so to speak,

then Bitcoin dominance is going to shrink massively over the next decade, just because more fiat is just going to get captured into the crypto system. We might have to devise a new taxonomy at that point or say, well, look, we're not going to count stable coins or something. Yeah, it's interesting. I think we all rag on security tokens. It's like a great idea for a second, and then it becomes a terrible idea. But actually, stable coins are, yeah,

they may be massively larger than Bitcoin. There are probably some ways to monetize. I think MakerDAO has a really clever solution. There always needs to be collateral that backs a stable coin, and that collateral grows in value, and there's insurance premium. There's all sorts of, like, mechanisms. that make perfect sense for why MakerDAO or Sello will accrue value.

But yeah, well, I agree. I think in the next couple years, stable coins will be multiple of the overall, you know, of everything behind them. I think one of the interesting second order effects of this proliferation of stable coins will be what are the businesses that need to be around in order to service them. So first of all, what infrastructure are these stable coins going to be built on? Is it going to be Ethereum? Is it going to be some proprietary?

blockchain will be some yet to be launched public chain maybe. If you think about the distribution advantages that will come maybe to other public blockchains as a result of the fact that if you want to custody a stable coin, you're going to need to build wallet infrastructure. You need to figure out how to get pricing data off of a blockchain. You're going to have to figure out how to exchange these assets. In some ways, this could be the best thing that ever happened to public blockchains, even though they're not necessarily public blockchain use.

cases, like security tokens and stable coins. We're going to build a lot of infrastructure that will be extensible to a number of crypto assets. Yeah, it depends how interoperable they want, the issuers want them to be. If, yeah, the question of whether Libra or the DCP, the Chinese stablecoin, in their wallet, they're, you know, they'll build a wallet with it, the question of whether they will except Bitcoin or ETH is an important one

for the crypto ecosystem. If it does, then you have billions of more crypto users around the world, and if it doesn't, then it stalls things for a few more years. But, yeah, the benefit of these things ultimately is interoperability around the world. And whether they would let developers build third-party wallets, right?

I think that was a big question around Libra, whether Calibra would be the only means of using it or it would interoperate seamlessly with just wallets than anyone would build. Yeah. But that takes it outside of the more surveilled kind of walled garden. Yeah, I think the DAP ecosystems that develop around stable coins, like both on-chain and off-chain, will be quite interesting. But it is interesting.

Dye is still the largest stable coin for decentralized finance on Ethereum. Even though, now we'll see. I mean, Tether joined Ethereum, what, a month ago at this point? And I think compound is just getting around to listing Tether in the next few weeks. But many of the early or the biggest DFI projects haven't really supported Tether. And we'll see. That'll be very interesting to see if Tether replaces dye in the area of DFI. So far, USDC is losing quite a bit to – you see usage of Dye to USD is like 80-20.

right now. The interesting thing is that just tether volume on Ethereum, you know, ever since it really made the switch to the Ethereum version of Tether as opposed to Bitcoin, it has actually eclipsed ether transaction volume in dollar terms. So there's more transactional value on Tether on Ethereum than there is the native unit. So do you think that this is like potentially risk actually in terms of the value cruel for ether in that to use the chain you might prefer to use a stable value token

as opposed to like ether itself so you might have less incentive to actually acquire ether in the first place yeah certainly the idea that any yeah the idea that any of these volatile assets would be used as a meter exchange is I think has always been crazy

and and now with stable coins all over the place, it become very obvious. That's the case. So I think they all have to become stores of value and they have to become collateral that, in a way, they're all, like, ETH is sort of a collateral from a security perspective

that supports Tether, right? That's what ERC20 Tether means. It's, the link is tenuous, right? It's not collateral in the way that ETH is collateral for MakerDAO in an actual financial way. So I think we just have to get to a point where we realize that the underlying

layer one asset just has to be collateral, right that's its that or collateral store value that's its sort of way it accrues value but i mean i would say it's almost parasitic in that tether benefits from the security that ethereum provides to the tokens while providing relatively little in return although what it does provide in return is like you have to use eth to pay fees to move tether so there's like the the the buy pressure from that perspective um but but it's competition for block space right so you're the fees is would be the argument. I think you hit that right. Yeah. It's a competition for Blackspace and like if you're

denominator in a contract on Ethereum you might prefer to use USDC or Tether as opposed to ETH. Right. So like if it were dye, which was the most dominant stable coin, then the loop is nonetheless closed because what backs die is ultimately ETH. Yeah. At the bottom. But you know, that's not strictly the case for for your Fiat backed stable coins. Yeah. I would, this is a bit of a tragedy of the common situation that could be brewing.

I think, and like what I think will happen actually would be, we would have fee abstraction too. So I think some smart developers is going to figure out how to use an ERC 20 token to pay for fees as opposed to the native unit. But, you know, the developers could always like discard that, basically. Yeah, I think there's a doomsday situation that happens. But the doomsday situation is, quite obvious to predict how it happens. And every party understands how it happens. And I think typically things like that, they can get solved.

I think there's ways it can be resolved. It's probably best not to bet that nothing will change. Yeah. I mean, I think what will happen would be people would understand that the nature of Ethereum is collateral is different from a stable coin. There's always convertibility risk with a stable coin. There's always counterparty risk. Not so with the native asset.

So I think there would always be some usage of Ethereum for a system collateral. And it also could be the case that there's like a Black Swan event, which just wipes out a lot of these Fiat backed, especially the more tenuous Fiat back stable coins. Yeah. All right, so Alex, transitioning a little bit here. I feel like we talk about the technical stuff forever. One of the things that Nick and I think a lot about,

and we've actually become kind of students of venture capital over the years and going back and looking at the early days of the internet and what the response was from the investment community around how to get exposure to that. I mean, you have some crazy quotes. And from, you know, 1994, 1995, you have people that really had no idea what the internet was. There's this great clip of Bill Gates going on the David Letterman show and Letterman basically asking him, like, what is the internet?

Isn't that just a way to listen to baseball games that you could otherwise listen to on the radio? Like, what's the big deal here? And as a consequence, you started to see a lot of dedicated funds emerge. You had CMGI ventures started dedicated Internet fund. All of a sudden, you had venture funds establish internet, quote-unquote, practices. And it kind of reminds me of what we see here in the crypto space. And so I guess, first of all, do you agree? Do you think that this is a similar type of beast where you're starting to see dedicated structures?

And I'm curious what your views are on whether or not this is going to continue or whether or not you'll start to see funds bring crypto practices in-house after a number of years? How do you think about that fun landscape? I think it's 10 times a bigger problem than you make it out to be. The thing actually about the Internet and lots of tech trends like AI is you saw a few funds that were started that were very early state venture or speculative hedge funds that focused just on this sector. But actually, I've never heard of that fund you just mentioned.

It's not a 10 billion or 50 billion. asset manager right now. The biggest investors in the internet today are, you know, Sequoia and benchmark and soft bank and fidelity even, right? I mean, they're the largest investors

and Wellington and so forth. So for the most part, with the internet and AI, it's you just, the institutes, they just create an AI team or an AI partner and they invest.

And I think the difference, the reason that's not happening in crypto, and empirically, it's definitely not happening in crypto. We ran the numbers recently, and there's over 800 crypto funds. They have about $20 billion in AUM. That's actually probably a slightly conservative number. And they contribute the largest amount of activity of crypto investing, far more than the incumbents, the sequoias, and so forth in the space. And empirically, too, we see this on the, from a grassroots perspective, bottoms up.

I left Bain Capital ventures to do my own crypto fund. You guys left Fidelity. I've had lots of friends leave other places like Sequoia to start their own crypto funds too. And the reason I think this is happening is because crypto is a new asset class. That was not the case with Internet or AI. You just had more Internet stocks, more AI stocks, right? here when you have a new asset class, it calls for a new category of asset manager, right? From the whole back office is different, like custody and accounting and auditing and things like that, of course.

But the bigger change is that in crypto, because it's a new asset class, it resembles other asset classes. Like it has echoes of venture capital, pretty large echoes. It has echoes of macro trading. And that's why you see firms like Galaxy and Mike Novigrat's in it. but it's its own beast, its own unique thing. And so investing in crypto is its own thing, totally new. Just as being a private equity investor in the 80s, like what Henry Kraviss and Steve Schwartzman were doing,

was totally unique. There was not really any direct comp to do it. And you had a lot of sort of esoteric or sort of fringe people doing it back then, and so you have it in crypto today. Yeah, that's a really, interesting comparison. Esoteric people and infringe kind of players is definitely what it feels like in crypto, but it's,

you know, one of the things that Nick and I often say is that if you have a disruptive technology, that there are not those esoteric and kind of fringe people around the edges of it, and it doesn't feel a little bit, you know, there's scams going on over here, then, you know, if that's not happening, then, you know,

chances are it's not actually a disruptive technology that you're dealing with. I mean, same thing happened with the birth of the radio. something happened with the birth of the same with even going back to our regulatory discussion if you're if you're building a company and you don't bump into the government and regulatory issues at some point I mean the government exists to like oversee and monitor the most important parts of society so just means you're not thinking big enough it means you're not doing something

important or world scale enough to matter and crypto certainly certainly large enough scale to matter yeah the stakes couldn't be higher when you're talking about money right I mean you're talking but fundamentally changing money. So I think the question of how crypto funds invest and what it means to be crypto-native is also, this is a little bit of maybe investor baseball. But it's interesting.

We've never had an asset class where you're investing in early stage, really deep technologies, but also after about six or 12 months, pretty much everyone can invest in it and there's liquidity, but there's also not really liquidity. It's fragmented. It's across the world.

Nobody really knows how to invest with these various characteristics. I think we're all still trying to figure it out. When do you think that the first really good valuation models for the crypto commodities, like the Bitcoins and Ethereum, do you think those exist already or not? I'm hoping you'll write one. And maybe you'll be up for the Nobel Prize in 10 or 20 years, if the Nobel even still exists in post-Bitcoin.

I would never accept that. Yeah. That's a fake Nobel Prize, the economics one. It's a Nobel Memorial Prize. It's a made-up Nobel Prize. Is it? It's not like the others. Well, Bitcoin is just made-up money.

That's true. All right, so Alex, I feel like we could talk for hours here. So maybe in closing, what are you the most excited about over the next 12 months for crypto assets? Yeah, for us, the big catalyst that we watch on the horizon are the launch of the 2.0 blockchain platforms. the Ethereum 2.0 and all the ETH killers, right? They're all bringing tremendous innovation. And these will be platforms that will, they're 10x better in many ways,

and they'll enable 10x more innovation on top. And that'll be things like maybe the scaling of decentralized finance applications or other types of applications that we haven't really identified yet. And then just the next billion crypto wallets happening in the next really, really few months even with the China rush happening with the Libra, with Messenger tokens coming

from Telegram and Line and Kikau and things like that. And that's when an industry, you know, what, there's like under 50 million crypto users today, something like that. So when you 10, 20 or 30x the size of the user base in about a year, pretty interesting things are about to happen. Well, that's a great place to leave it. Certainly a bullish place to leave it. Thanks so much for joining us today. Yeah, thanks guys.