On The Brink with Castle Island - Hunter Horsley: Bitwise Asset Management (EP.06)

Episode Date: October 7, 2019

Hunter Horsley, the co-founder and CEO of Bitwise Asset Management joins the show to discuss the crypto-asset-management landscape, the macro thesis for cryptoassets, and the state of play for the Bitwise Bitcoin ETF proposal.  Learn more about Bitwise Asset Management at: https://www.bitwiseinvestments.com/ For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.  

Welcome to the On the Brink podcast. I'm Matt Walsh. And this week, we have an exciting episode with Hunter Horsley. Hunter is the founder and CEO of BitWise Asset Management. For those of you who don't know, BitWise is a crypto asset management firm that builds index products and exchange traded products for crypto assets. They notably have a Bitcoin ETF proposal that is in process with the SEC. And so we get into some of that in this conversation. And we also talk about how Hunter got involved in the industry. He has a, very interesting background. He was at Facebook and Instagram before starting BitWise. And he's done a great job of building a team with deep financial services expertise, as well as general technology expertise. So we get into discussion about BitWise. We talk about the state of the industry. We talk about Libra. It's a wide-ranging conversation. We hope you like it. Full disclosure, Castle Island is an investor in BitWise asset management. So just want to get that out front. Without further ado, let's take it away to. Hunter. 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 quantitative 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 the Bitcoin. Bitcoin.

Welcome to the On the Brink podcast. I'm lucky enough to have Hunter Horsley, the co-founder and CEO of Bitwise Asset Management on the pod. Thanks for joining us, Hunter. And thanks for hosting in your office. You bet. Glad to have you here. So Hunter, a lot to talk about today. Would love to just dive in by giving the listeners a sense of your career trajectory.

How did you get to where you are today as the founder of Bitwise? Sure. Yeah. So here at Bitwise, Half the firm comes from the tech world and the other half of the firm comes from the asset management world. My background is on the tech side. I was at Facebook previously, Instagram before that, and before that I was at the Wharton School. So at Facebook and Instagram was a product manager, was really fortunate on timing,

joined Instagram at about 70 million in revenue, left at about a billion in revenue, and got to work on products that were, I think, a quarter of a billion or 300 million in revenue. And it's actually funny. There are some moments of working on Instagram's new ad platform that remind me a little bit of crypto. in what way could it possibly be similar? The funny similarity is that giant advertisers like Procter & Gamble, they didn't trust digital ads. So they would give us test checks, small amounts of ad budget,

like $100,000 or a million dollars, just to make sure it didn't disappear. And that's not dissimilar from institutional investors and CIOs and financial advisors that we work with today, who often will write a test check of their own to make sure before they've evaluated it for a portfolio that it doesn't disappear. So, anyway, sometimes I get a little deja vu,

and I think that's a bit of what it's from. But anyways, from Instagram, went over to Facebook. I was fortunate to get to work on a bunch of different things, was in charge of the branded content ecosystem, which is a multi-billion dollar business on top of Facebook, got to work on putting ads into videos. So as people increasingly consume videos on the internet, Facebook wanted to monetize that for themselves and for publishers.

So that was a lot of fun. And then left, teamed up with my partner here at BitWise, our CTO, Hong Kim. Did software security in the military, worked at Google, a longtime friend, and somebody I'd build. software within the past to start a company, and that ended up being billwise. That's a great story. One of the things that continually fascinates me about this space is just

the talented people from different disciplines that are just streaming into crypto right now. So you have people that have been heads of trading technology at huge hedge funds or you have people like you who are on the tech side of it in getting in. What was the initial hook for you that you just got obsessed with this industry and decided that you needed to make a full-time core? Well, I don't know if we've talked about this before, but I actually, actually left Facebook with Hong to start a company. So we raised a little bit of money to prototype for a year or for two years. And then we stumbled on crypto as so many do. So we were working together prototyping various things. Our initial investors were Alad and Vichel who

invested in us leaving our jobs and are looking for something to build. So anyways, if you're in San Francisco in 2017 and you're two software people looking for something to do, sooner or later, somebody says, hey, do you remember that Bitcoin thing? And so that's what we're in San Francisco. having us and I said, gosh, I think I bought some of that on some website. And of course, that website was Coinbase. And of course, I bought it in 2013 or something like that. And what we actually started doing was arbitrage trading. So just for fun, we were harvesting arbitrage opportunities that sometimes were between 10 and 60 percent in an instant risk-free. And that's not what we do today here at Bitwise. But I think for so many, there's some circuitous experience that gives them a reason

to spend time thinking about crypto. And once you spend time thinking about crypto, I think many people find themselves wanting to spend even more time. And that's certainly what happened to us. It gave us pause to interact with some of the difficulties of investing, managing money in the space, gave us time to meet people building blockchains and working on the space, pretty small community at the time. And also to pause and think about, why are we rooting for this? De novo, I think for many people, it's not clear that this is a cause that you want to root for. Having an additional currency, most people in first encounter crypto and they think, oh, it's another currency. What do we need another currency for? That sounds like a nightmare. I already have cash in my wallet. I don't want to

deal with some sort of, and so that's what drew us to it. That's fascinating. I didn't know that backstory. That's great. So I want to get back to Facebook maybe a little bit later in the discussion, but let's talk about Bitwise. So tell us a little bit about the company for those listeners who haven't heard about Bitwise. What do you do and what products and services do you offer? launched the first and today the largest index fund in the crypto space. The way to think about us is that we strive to play a role like BlackRock or Vanguard or dimensional fund advisors does for mainstream professional investors. So for financial advisors, for private bankers, for family office CIOs, for multifamily offices, that's our focus. And what we try to do is to be a

partner to them in understanding what's happening in the space, understanding how they can benefit from it, and then getting access to the space. So we launched the first index fund. We managed a lot like index mutual funds. They're transparent. They're liquid, no performance fee, no lockup. They follow rules-based strategies. Today, they're only available to high net worth individuals and RAs who want access to the space before an ETF is possible. They want their clients to have access to something that not everyone else can. But we work with that audience to help them come into the space. And I think that in crypto, oftentimes we group all investors together. And we talk about them as a whole. We say investors. But there's quite a spectrum, right? So there's self-directed individuals. they in the U.S. manage about $3 trillion.

They might be on Robin Hood, buying Lyft's IPO. They might be on the Schwab brokerage. There's 4 million Schwab brokerage users. They trust themselves with investment decisions. They may not trust other people with decisions. They're nimble. It's their own money. That's really the first audience that came into crypto.

And they're using Coinbase and Gem 9, Cracken, and Ledger and Treasur and doing research on on-chain and coin metrics and so on and so forth. On the other end of the spectrum, you have institutional asset owners, pensions and And it's and foundations. At some point, insurance companies, hospital system, sovereign wealth funds. These are paid professionals, very sophisticated investment committees. Many of those groups like investing through venture managers and liquid fund managers. But in between, so that group, pensions and downments and foundations manages $24 trillion in the U.S. In between, so you got three trillion with people who are trust themselves investing their own money, comfortable using a mobile app,

comfortable starting with a credit card, comfortable with a $10,000 minimum, and then uploading their driver's license to get that higher. On the other end of the spectrum, you have endowments working with people like you and other venture managers. In between, you have mainstream families and individuals who are working with a financial advisor. That audience is about $22 trillion in the U.S. It's not widely spoken about in the crypto space. That's fine with us. But that's who we serve and that's who we're focused on making sure has the opportunity to take advantage and participate in the opportunity of crypto. $22 trillion. That's no joke. So my perception of that RIA channel right now is that there's a wide.

disparity in terms of education, wide disparity in terms of willingness to engage on this topic with their clients. And there's also just a lot of narratives in the crypto industry, whether that be Bitcoin is digital gold or whether that be more tech-focused narratives around smart contract platforms going after established tech monopolies. So how do you frame the conversation when you walk into one of these offices and start talking to a financial advisor? Yeah. Yeah, I think a good proxy for people in the crypto industry to impact. sympathize with this audience is to imagine somebody talking to you about CRISPR gene editing technology. It's a breakthrough. It's the basis of a few multi-billion dollar companies. It is changing people's lives,

fundamentally changing the development of some pharmaceuticals and therapies. And you can start from that exciting kernel, and you can then alienate people by going into too much jargon and too much complexity, or you can find a way to relate it to what people are familiar with. And I think one of the accidental sins of much of the crypto industry is that there's more damage than good done with the opportunity that the industry has right now to tell its story to people who are curious. So I think for this audience, you need to be very mindful of the fact that they're interested in the same way they're interested in crypto, sorry, in CRISPR, but they don't have that much time. It's maybe 1%, 5% of the portfolio. They have a family. They're trying to recruit new clients. They're servicing their existing

clients. They're dealing with changes in Fed interest rates. They're looking at the equities market. And so this is one of a thousand meetings that they're going to have this month. And they're just going to have one on crypto or two on crypto. So the first, I think, most important thing, regardless of the analogy you use or the way you frame it up, is just to keep that context in mind. I think for so many of us in crypto, it's easy to get it excited about the details and lose track of that. So with that said, I would say that most advisors, family offices that we interact with, they're interested in crypto. They're trying to follow along, but they're not full time. and they got a lot of the things going on.

So they're actually not following most of the day-to-day narratives on Twitter or in telegram groups or on trade publications. And a lot of them actually are essentially, they know what they learned in 2017 when they heard about it for the first time between the summer and Christmas during the run-up. And then they know that it didn't end up going to zero. So they backed away from the tulip bubble stick

that plagued the first six months of 2018. And they've heard this steady drumbeat of, you know, I think a number of institutions that I respect, I think someone like Fidelity or maybe New York Stock Exchange, but then, you know, not 100% sure what is actually changed. And that is usually where you're entering the conversation with most advisors. And certainly there are exceptions. How do we frame it up? Depends the amount of time. But generally we say, the thing that I like to say is that the right analogy is to think a little bit about oil in the car. Before 1895, gasoline was a waste byproduct. Between 1895 and 1910, there was experimentation with the automobile. There were three competing technologies. There was steam power. There was electric. Believe it or not,

in 1902, you could take an electric car from New York to Philadelphia, charge it at Edison electric charging stations along the way. Some things haven't changed. And then there was a new technology, which was gasoline combustion, which had an explosion of gasoline. And that ended up emerging as the winning technology. And in 1910, Ford popularized the automobile with a gasoline combustion engine and did multiple orders of magnitude of availability of the automobile. And suddenly, gasoline became valuable. Why did it become valuable? People wanted to use the automobile. Tons of obvious benefit. You can get long distances. You can carry heavy payloads. You don't have to feed it, so to speak, worry about it, you know, like you would an animal.

But in order to use and receive the benefits of the automobile, you needed to buy gasoline. And so gasoline has been, was invaluable for hundreds of years, but since the turn of the century is intuitively something that we regard is valuable, now involved in other industrial use cases. All right. So why am I sitting here talking to you about oil? I think that it confers most of the right mental model for thinking about crypto assets. There's this new type of program. It's called a blockchain. In the same way that the software that runs on servers, it doesn't have an interface or any buttons you can click, but it's software. There's software on your phones. We call it apps. There's software on the web. We call them web apps. There's a new type of program.

We call it a blockchain. And the blockchain is like the car. It has certain benefits. If you want to use it, you've got to buy the fuel, which for the car is gasoline, which was invaluable before the car. And for the blockchain, it's cryptocurrencies, or crypto assets or coins. which weren't valuable before the blockchain. So if we can, and that probably, I don't know if you're timing me, that took me maybe three minutes. If we can, then that's the mental model I like to try and get across. We, of course, have different blockchains trying to do different things and therefore different coins associated with those.

But I prefer that to the digital gold analogy. If there isn't enough time, then digital gold will suffice. I like that example in the shifting paradigms. And I'm not a financial advisor, but I often think that when you go through these paradigm shifts, we're clearly in the middle one right now. I mean, the name of this podcast is on the break. And so we have the invention of non-sovereign money with Bitcoin. And then you have all of these crypto assets that are followed and some are not trying to be non-sovereign money, trying to do other things. But in the broader macro environment, I would think that if you're a financial advisor,

you could be tremendously motivated by just this fear of missing out on this big wave. And so I'm curious as you speak to these advisors, how much of this is a fear of, induced. I don't want to wake up 10 years from now and I didn't even alert my clients that something was happening here versus something that they're more. It's significant. Yeah. I think if you speak with advisors, a common question is what am I not doing that everyone else is doing? It's a really fragmented, particularly for independence, RAs. It's really fragmented. And so they're always trying to make sure that they're delivering the best service, the best practices. And so always looking at what are the things that I need to be getting ahead of. That being said, so oftentimes the urgency comes from

fear, but then when they look at it, there are a huge number of merit. So we run a survey every year that benchmarks financial advisor attitudes towards crypto. We ran one last year. It's online available for free. And just to share a little bit from that, 80% of respondents said that they were getting questions from clients. So the first thing is, it's on their radar. It's something their clients are talking about it and they're not stopping. A second stat that stood out from that was really interesting is that a third of advisors said that their clients just went ahead and bought it without them. So what does that mean? That means that it's a part of their investment portfolio that the advisor now has to worry about but doesn't have any insight into, doesn't have any

control over, can't help manage towards their financial goals. At some point, the client might say, I have this huge problem. Can you help me? And it's going to be a hassle for the advisor. So a third advisor said their clients were just going ahead and doing it without them. Another third said that they don't know. They think their clients are doing without them, but the clients won't talk to them about it, either because they're not comfortable or because they're afraid or embarrassed to talk to their advisor about it. And then a third said their clients aren't doing it. So what that means is 80% are getting questions from clients. And somewhere between a third and two thirds, their clients are just already doing it. And so I think that that is a strong impetus. We meet with hundreds of advisors every month.

That is a strong impetus for most of them to say, this is something I should be looking at. And now advisors are allocating. It's the early adopters, of course. And they have a few different, the ones that are allocating of a few different motives. So they listed three, the top three in the survey, number one was low correlation to other asset classes, which I think will ring familiar to any professional investor or allocator. They're interested in the role it can play in hedging a portfolio, either just quantitatively, the low correlations do nice things for max drawdown, volatility, sharp ratios, or from a macro perspective, you know, it's not an asset whose returns are driven by interest rates or corporate earnings growth or employment or that rely on the stability of financial system.

So that's number one, and the vast by margin. Number two is returns. Everyone who's, you know, trying to help people save for retirement goals, college, etc., is thinking about how can we help people manage their wealth towards that. You've probably seen studies like this before, a 1% allocation to crypto through our index fund holds a meaningful portion of Bitcoin over a really tough period, 2017 through 2018. So including the drawdown, if rebalanced quarterly, I believe, 360 basis points of total return to the portfolio. That's a 1% allocation. So in the worst case scenario, everyone's wrong. Matt Walsh is wrong. Nick Carter's wrong. Fidelity digital assets is wrong. New York Stock Exchange is wrong. Jane Streets wrong. Everyone's wrong. And it heads towards zero.

lose 1% of return for the year. And that assumes that you're the last person out. But if that doesn't happen, it has the opportunity to really contribute to returns. And that, again, is a goal for most clients. And also for advisors, it's something that they say, we can help you manage your portfolio to deliver that. The third motive is particularly for independence, which is our main audience today, RIAs. They want to have a way of appealing to the next generation of aging families. They want to be able to better serve millennials and tech savvy clients. They want to build their book of business. and they want to have something that the wirehouses don't have. So because we don't have an ETF, it means that the local wirehouse advisor couldn't offer it

if they wanted to, which is structurally perfect for an independent. And independents are trying to differentiate from a Morgan Stanley advisor or Wells Fargo advisor. So this is also something that they can offer. It's liquid. People size it usually with a very small allocation. It allows them to accomplish attracting new business differentiating. So those are three reasons. Low correlations, returns, attracting new business, serving clients,

that the ones who do end up allocating usually do, but it often starts from, I've heard clients asking for it. I hear that they're doing it themselves. And then they have moments of a little bit of fear. They hear about somebody local who's allocated, or they hear about endowments allocating, or they hear about Facebook launching a cryptocurrency. And they say, oh, wait a minute, are the people moving ahead with this and I'm not? So you touched on something that I want to go a little bit deeper on. So the notion of exchange traded products. And certainly this has been in the popular discussion for the past several years. I haven't heard anything about it? Yeah, have you heard the Winklevust twins have one. So let's talk a little bit about

the Bitcoin ETF. You have an ETF filing for Bitcoin ETF, but let's maybe start with just ETFs in general. So maybe could for the listeners who might not be familiar, could you just touch on the approval process for how an ETF gets approved and maybe dovetail into where we sit right now with the Bitcoin approval process? Absolutely. So there's a process to launch a publicly registered regulated product, which an ETF would be. You know, we have the first set of review for that. We've been working closely with the SEC over this past year. Actually, one of my colleagues just shared with me. This year, we've written over 500 pages of research for the SEC on the UTIF filing. We've had eight meetings with different constituents. You wrote a letter about the state of the

industry as it pertains to questions around the filing and about eight letters that were written. So we've been trying to do the work to help the regulator, who's an ally, ultimately, to all of us, understand what's happening. And there's a lot of great improvements to understand. Somebody just needs to do that work. But anyways, to answer your question about process, for an exchange traded fund in ETF, you team up with an exchange. For us, it's in your stock exchange. There's another filing by a great traditional firm, Veneck with CBOE. And then your exchange partner in conjunction with you files what's called a 19B4. And the 19B4 goes through a 240-day review process. That process has four windows. So there's a 45-day period, a 45-day period, a 90-day period, and a 60-day period.

And at each of those windows, as you see in various headlines, the staff approves, denies, or delays. The default assumption for a novel product, which a cryptocurrency ETF, I think would be. What do you think? That's novel. Yeah, I consider it novel, yeah. We have gold ETFs. We have gold ETFs. Oh, absolutely.

For a novel product, the assumption is that you would take the full 240 days. And so it's not really a strong signal if you delay from one window to another. So that's the process. You have meetings. And again, you try and provide the context that the same thing. staffers need to understand what they're looking at. One of the things that must be helpful to you in this process is that, so I mentioned the Winklevoss ETF application that was ultimately denied, but it was denied, I thought, in a hyper-specific

manner. And the reasons why it was not approved are very specific. So maybe just talk a little bit about what those stated reasons were and then where we are as an industry in terms of addressing some of those infrastructure gaps. Yeah. It's incredible how far we've come. So the Winkle-Loss filing, I should say the very first Bitcoin ETF filing was 2013. It's hard to believe. Six years. Extraordinary. To contextualize that, I'll say that it took several

years for the first fixed income ETF, took several years for the first leverage ETF, several years for the first gold ETF. So anytime, and actually just recently, we have the first actively managed non-transparent ETF, and that took about eight years. So each of the ones I mentioned took somewhere between three and eight years. So crypto, we're now six years into this project. And that really, you know, I think for people who are less familiar with the ETF space is normal and to be expected. And I think we're seeing the progress we'd want to see. Hard to imagine a filing in 2013. In 2018, the Wink of Law filing, as you've mentioned, was rejected formally by the SEC. They wrote 90 pages of a response in August. And the benefit of that is they made very clear the things that were on

their mind, which was custody, market manipulation, how do you price Bitcoin? And those have really continued to be really the issues that are the things that the staff is trying to understand better and we'll ultimately have to get comfortable with. In May, we wrote about 180 pages that responded to every single question in the Winklevoss rejection. That's public. And again, it is part of our effort to be a partner to the SEC in getting answers to understand how the space is evolving.

In terms of how the space is evolving along those two dimensions, custody and market manipulation, it's amazing. It's amazing. In 2017, just to give some examples along these lines, in 2017, there were three custodians that had, let's call them regulated. had trust charters, very safe to call them regulated. Compliance requirements, surprise exams, certain filing requirements. Fast forward to 2019, we have eight, and we have seven or eight that have insurance policies. So that's 12, 24 months. The number of regulated custodians has over doubled,

and now they have insurance policies, custody and assets. Several of them are custody billions of assets. They're familiar names doing custody now, fidelity, of course. So that has gotten so drastically better, so much better just in the past year, that it's a fantastic thing for the possibility of an ETF, which of course needs to know that there is a reliable third-party custodian that can hold the assets. In the case of the Winklevoss filing, if I remember incorrectly, the custodian was the Gemini company. So they were using their own company to hold the assets. Our filing generally tries to stick to standard best practices for ETFs. We don't try to do anything sort of clever or unconventional. Crypto itself is a whole new

things. So we try to stick to, you know, regulated third-party custodians, pricing off of public spot markets and a number of other features. So custody has gotten just drastically better. And then on the market manipulation pricing side, the markets have matured incredibly over that period of time. So I want to dig into that market manipulation a little bit more and couldn't agree more on the market infrastructure around custody. So you published a 226 page report called the Real Bitcoin Report that looked like a lot of work. We're long-winded here at Bitwise. Yeah. This was a very impressive. I think it was a great thing seriously for the community because really highlighted a lot of the spot market shenanigans that are just happening on some of these unregulated exchanges.

And so, for example, 95% of reported Bitcoin spot market volume, according to the report, is fake, happening on unregulated exchanges that are manipulating. I mean, it's really unbelievable. In some cases, this quote unquote exchange before people in a college dorm put up a website. And they said, well, you know, how are we going to attract people to trade on our website? Well, one way to do it is if you report either through falsifying the data in your database or through an erroneous API that you have more trade volume than Coinbase, somebody will notice and you'll get ranked on, you know, on Coin Market Cap or some other service as having more volume than Coinbase is so people say, wait, I need to check out this, I need to check out this

site. And traders will go and set up accounts because they want to access liquidity and arbitrage and people who are doing ICOs in 2017 would say, oh, we want to provide liquidity. Let's approach this exchange and see if they'll list our coin. So there's a strong incentive for people to fake. volume, but it'd be as absurd as if that same group of four people in this dark room said, let's set up a U.S. equities trade volume reporting site. And then they reported the trade volume on Tesla stock, and they just multiplied it by 10. It's not like every ETF issuer, every trader,

the industry wouldn't freak out and go, oh my gosh, wait a minute, we're confused. You know, does Tesla have 10 times the volume? You know, it is really the appropriate response is to ignore. There's no reason to take it seriously. But what we try to do with this report, because everything in crypto is so new. Most people haven't heard of any of these exchanges. We tried to draw a line and say, these are the ones that we can confidently say have real trading activity. Digging into that a little bit.

So these are crypto assets are bearer instruments. So it's unlike a stock in the sense that you wouldn't see exchanges like this popping up for stocks because ultimately the certificates are held with the DTCC. Yeah, you'd have to do a lot of work. Right. So for an ETF, it's unrealistic. to expect that 100% of spot market volume would be regulated in the United States on U.S. venues that are filing surveillance-sharing agreements. So there will be these rogue exchanges.

Imagine gold. Okay. Gold is trading around the world. Might be two individuals who are making an exchange of gold. So I think, I think it's a proxy. What you're saying is right. Do you believe that we're at a point with a regulator in question where they're comfortable with the notion that there will be a bifurcated market here with a lit market?

of properly surveilled spot market volume and a kind of rogue element that we will not take their price feeds that will not inform our constituency. Are they comfortable with that notion? I think that what, you know, has been publicly articulated is that they need to be comfortable that a material proportion of the market is sufficiently surveilled. So if you wanted to, you know, maybe you could find a million dollars of buy or sell order somewhere. But if you wanted to really push the market around that you would ultimately have to interact with the surveilled portion of the market. And so that's sort of the framing that intersects with the topic that you're bringing up. The surveilled portion of the market has been rapidly expanding over the last

year. So end of 2017, CME launches, surveilled market. Today, CME is, you know, hovers around 30% of the total value of the real Bitcoin spot market. So CME alone is a very material chunk of that market. Of the 10 exchanges that we talk about in our research, and we put together this site, Bitcoin Tradevolume.com. You go to it and it just shows the 10 exchanges, their volumes. It makes it simple to look this up. Of those 10 exchanges, I have to check the latest, but six or seven of them have bit licenses in New York. A similar number, it might be eight, have surveillance programs in place, either surveillance from NASDAQ smarts program, which you can license. And there's one or two others. Much of that volume is also surveilled. And if the

SEC or an enforcement agency needed to pursue enforcement action, they would reasonably be able to get a hold of the relevant, the important information. So I think that that's drastically maturing. I think it's wrong to expect that you will ever be able to root out 100% of trading activity and exchange activity in the same way that you could just never do that for gold or other commodities, which obviously have markets both in person and outside of the U.S. But what's important rather, so the right here is not, is all of that going away. The right here is. is, is the regulated, surveilled market growing to be of material size. And that's happening. And so we're really optimistic about that. And I think the whole industry should be proud and

optimistic about that. Ultimately, to take a step back, I think for everyone who is long crypto, long Bitcoin, for it to become the asset class and the liquid instrument that people want and hope it to be, it will have to slot into regulatory compliance. So I think that this is a good development. Yeah, I think that that's a great point. I mean, there is, this cyphropon crypto-anarchy side of this, and that is great. We often talk about it. I think that there's an exit valve here if you want it, but it's unrealistic to expect that these assets will not be financialized in the way that they're currently being financialized. For example, you have $22 trillion worth of AUM from the advisor channel, and some of that will want to hold exposure to

this through conventional means. Maybe to transition a little bit just to the industry in general. So we said we'd come back to Facebook. So we'd love to get your impression. on the big story of the year Libra. Yeah, you're right. Well said, yeah. And where do you see this fitting in the broader context of the industry that we're operating in?

Yeah, Matt, I frequently feel, I mentioned we got started in 2017, I frequently feel that amidst the headlines about price, behind the scenes, almost everything that you could pray for to go right has happened. It's almost unbelievable. I mean, you know, fidelity custody is one that comes to mind. People underwriting insurance for custodians.

The amazing collaborative way in which the SEC is coming to the space, set up FinHub, continued wallet growth, continued developer growth, firms like Square coming in the space, Robin Hood, and then of course, you know, if you said which organization would be best suited to teach consumers how to use this new thing for the first time, Facebook would be on that list somewhere. And for them to proactively embrace it is a huge deal. So yeah, we, as you know, we write a monthly letter to investors, our clients and there's about 10,000 others who read it. We wrote about Lerra being a big deal in February. We wrote about it again in May. And then in June, when the rubber hit the road, they unveiled the consortium.

They unveiled the architecture for it. And then there was that huge response. We wrote about it as well. And I would say that the mainstream world took note in June. The House Financial Services Committee obviously had them come in for a hearing. The Senate Banking Committee, the U.S. Secretary of Treasury made a statement on it. The IMF spoke about it. President of the United States of America tweeted about it. There's a massive institutions. But I think what we saw is, as an anecdote, we host private lunches around the country, St. Louis, Denver, Chicago, Columbus, we saw turnout double. So I think what that did for many professional investors is I talked a little bit before about the journey that most people are on. Again, if you pull up that, you imagine yourself again

thinking about CRISPR. You heard something a few years ago. I wonder what the latest is with CRISPR. Didn't a company go public for a few billion dollars? Is Veritas? What wonder what the latest is? And then you hear that, I don't know, what company you admire, you hear Facebook is working on new, you know, CRISPR implementation to help save life. And you're like, oh, gosh, maybe I should catch up on what's really happened there. And so I think that's the experience that many people had. They'd heard sort of in the background, a faint volume of the steady drumbeat of progress. And Facebook gave them the reason to return their focus and get an update. So I think it's a big deal. There's a lot of ways in which is a big deal. I have more thoughts on it. But at a minimum,

I think one of the really significant things is that it just, I think it caused people to say, okay, wow. If Congress is taking it seriously, if one of the largest companies in the United States is taking it seriously, it might be time for me to make sure that I know what I really think here. Completely. I mean, there's so many different layers of the onion to peel back here with this Facebook story, right? So you have the awareness, no doubt. Right, right. Yeah, it's simple, yeah. Which is great, by the way. And then you have infrastructure build out that will come as a result, right? So you'll have more wallets and more exchanges. And that will be a net good. You talk about the end of the end of the end of the way. education. I think the interesting thing that's come up to me in several of the conversations I've

had with folks who are not every day in this industry is just the concept of rethinking what money is. I had someone, someone talked to me about the free banking era around the Civil War and the United States and this idea of private money. And I guess that's really what it is. We're seeing entrepreneurship attempted at a level, an ambitious level that we've just never seen before. If successful, as articulated, this would be a non-sovereign money control. by largely controlled by a tech company. I mean, what do you think about that? Do you think that this is likely to be the way that it materializes when it eventually goes to market? Do you think that we'll see a scaled back version, a dollar-back stable coin? How do you think this plays out?

I mean, that provokes a bunch of thoughts. I think for most people in crypto, this is a corner of crypto that people are pretty interested in. The first thing I would say that just comes to mind from that is it's important to note that the way the monetary system works today has actually not been around for that long. I think it's easy to take it for granted. say, well, it's always been this way. Actually, it hasn't. We're currently in an unpegged floating rate regime that has been around for, gosh, I guess it's 50 years now. Fifty years is not that long. It's not that many generations. Most people interact with people who are over 50 years old. And so that's not that long ago. So it's definitely not the case that floating rate has been

around that long. But even central banking administered monetary policy, it's not been around that long. The central bank in the U.S. was chartered three times, and its charter was expunged twice. So it lost its charter twice. And people were on, actually, Alexander, excuse me, Andrew Jackson ran on a platform of getting rid of the central bank. And people were frustrated with the way they were influencing monetary policy. So even just in the short history of 200 years of 250 years of the U.S., you can already see multiple different attempts and views on the right way to coordinate commerce inside

of a country. So I think that on this scale of months, on the scale of quarters, you can take for granted that things will continue to work the way they work. But on the scale of a decade, it's not clear that things will continue to work the way they work. So I think that's definitely something that a possibility that crypto is intersecting with and may provoke a larger conversation around, and in fact, is provoking a larger conversation around. And I think that projects like Libra, certainly the PBOCs, what we might call a cryptocurrency or a digitized currency and others are raising the question of maybe we're about to unfold a new chapter or open a new chapter in how monetary systems are coordinated.

I think as it pertains to Facebook's endeavor specifically, I think the lens that we were just speaking about there is a fascinating but academic one. I can't speak for the Facebook team. And there's a bunch of incredible people there, Morgan Beller, who started beating the drum before anyone else to get something off the ground. I think the motive is just a really practical one. Let's offer, you know, we have 2.7 billion monthly active users around the world. Only 180 million of them are in North America. So all over the world. and let's offer them the ability to transact with one another, to hold some value on their phone.

That's a really practical. And what its implications are for monetary systems and I think are interesting to think about it. I imagine their mode of simple, practical. We're watching play out in real time. It's going to be fascinating to see how that plays out. I want to transition to some of our closing round questions here. So I'm going to... One more thought for you on Facebook.

Yeah, let's hear it. I think that an analogy that comes fine for Facebook, we're just having a conversation about central banks working on digitized public blockchain versions of their currencies. I think that two of the ways I think about why this is great for Bitcoin and everything else. One and sort of the simple on the education piece, once upon a time, somebody had to teach a consumer how to use a credit card for the first time. You walk up to a vendor, you got this piece of plastic. What do you do? You hand it to them. This is a little device here. You stick it or you swipe it, you wait. Should I be waiting this long? You know, what happens? Once you've learned

how to use a credit card, you use a bunch of credit card. You use a bunch of credit card. That understanding spreads across a lot of different things. Once you've learned how to text on a phone with just regular SMS, you can use WhatsApp, you can use WeChat, you can use Telegram, you can use Signal, you can use messaging in Facebook or Facebook Messenger, you can use Instagram's messaging service. So you learn it once, you can use it a bunch of times. And so I think that those analogies are helpful for thinking about visualizing more vividly the way in which firms like Facebook, Central Banks, JPM Morgan with the Treasury Services coin, going out and teaching people how to use a coin, which is different than a wire for the first time.

Once you know how to do that, you can say, oh, what is this other? What is Bitcoin? What is Zcash? So I think that that is a fascinating dimension in which it's really compelled things. And the other, I could talk about this for days. I'll wrap up. But the other is that I think that is something that I think many people in crypto often talk about non-sovereign money who spoke about it, decentralization, censorship resistance.

Again, I think sort of going back to the CRISPR analogy, it's a lot of phrases that professional investors, mainstream investors, they sound interesting, but they have to go pick up the kids after this or they just got an email. And so it feels very theoretical and academic. And I think what Facebook did incidentally was provide sort of like the clearest large scale A-B test or demonstration of the difference between centralized and decentralized. Facebook announces Libra and the House Financial Services Committee says put a moratorium on development, come in and we'll have a hearing. The Senate says the same thing. Central bankers around the world comment on it, demand meetings. And ultimately, where that stems from is they have to decide, they have the instinct

right or wrong, that they're going to need to decide if they can trust these executives or this corporation. And in that same moment, nothing happened to Bitcoin. So I think it provides sort of an anecdote, an example of the difference between decentralized and centralized and centralized and what that looks like in practice. Yeah, I do hope that if and when it's released, then we will have this open standard where we do have the public. private key cryptography aspect of it, and it's not this wall garden where people won't learn those basics. I do hope it unfolds like that. I couldn't agree more about the point around Bitcoin. I mean, you will not see Satoshi Nakamoto testifying in front of Congress. It really does.

If you do, let me know. If you do, it might not be great. So maybe moving on to the closing round questions, I'm going to throw a couple things at you and you can let me know if they're overrated or underrated, overhyped or underhyped based on where we are right now. And one, the bit wise, underrated. Bitwired, yeah. The first one I want to throw at you, you just brought up. So central bank digital currency, this notion of central banks using blockchains to issue

their own currency, overrated or underrated. I think appropriately rated for the wrong reasons. I think the people who take them seriously think that they compete with crypto, I think that's wrong. I think that the people who don't take them seriously are not seeing the merit in, as we just discussed, their ability to teach organizations. instead of sending a wire, get the wallet address and make the transfer and make sure you put enough gas in it. So I think that it's very similar to Facebook Libra. It is a big deal, but it's not

a big deal because it's a Bitcoin clone. It's a big deal because it's an opportunity for institutions with huge reach and trust to teach people how to use credit card for the first time, how to use a messenger for the first time. The incentives here are pretty strong for the central bank to want to do something like this, right? So the ability to surveil the populace and see every transaction and who you're making payments to, do you worry about the privacy implications here? You know, I think that when you're interacting with the U.S. financial system, today, by and large, if they want to know, they know. They can subpoena information. First all the financial institutions have KYC and AML in place. Many won't take your cash. They'll only

actually take a wire from an institution that did KYC and AML. Obviously, if you're using credit, it's surveilled. So I think already most monetary transactions in the U.S. and developed countries are surveilled. I think the knock I would say on central bank cryptocurrencies is what's different. What about it is different? I mean, great. So again, from my perspective, great for crypto that you want to teach everyone how to use this new format. I don't know what it does for you. Maybe it reduces some of the time it takes to get information through a subpoena, which can take time. And instead, you can just query the blockchain. But it feels logistical.

It feels incremental in terms of how it advantages them surveillance-wise. The bigger thing that countries can do if they want to expunge all privacy, you've seen in certain instances, is you have to get rid of, you have to get rid of paper currency, right? Like in India, certain denominations were removed. Yeah, so much of transactions and money today is already virtual and intersects through regulated counterparties that I don't know. I think it'll be incremental. Got it. Got it. So a lot to unpack there. And I think we're going to see the PBOC is likely going to launch a central bank digital currency at some point in the next year. So I think we're

going to see what happens. So I worry tremendously about the privacy implications. I worry about this notion of moving to a cashless society. I think that the ability to, I believe that it's a constitutional right. Do you think that the launch of a central bank cryptocurrency, is attached to a policy to remove cash? I think that in some countries, it will be. I think that the United States, to imagine the Fed issuing a retail central bank issued digital currency, to me is unlikely because the banking lobby is so strong

and this would remove their ability to create the money supply. In a more oppressive country that doesn't have that worry, I think that this could be used as a tremendous tool for harm. I think the same for pulling cash out of the system. These are not all illegal transactions that are taking place, right? These are transactions that maybe you don't want everyone to see that you're making, but there's a difference there. So I worry about it. I think that it does highlight the need for cash. It highlights the need for cryptographically secured bearer instruments in particular. So maybe the knock on effect is that

it just makes people more aware of these exit valve opportunities that are represented by some of the the cryptocurrencies that are going after those use cases. I think that's right. It would accentuate that value of crypto assets. The next one I want to ask you, overrated, underrated on is decentralized finance. So I come out here and I visit you in San Francisco. And I feel there's a big vibe out here around new smart contract platforms and about people called defy. This is a lot different from the East Coast. I think there's kind of this bifurcation. And we've talked about it, about money focused crypto and tech focused crypto and New York and Boston. I feel like are a little bit more focused on infrastructure to operating companies and things like that. A little bit different

out here. So curious your views on the whole decentralized finance movement and if you think it's overhyped or underhyped. Yeah. So we were talking about this for a minute before. First of all, I'll say I'm not an expert. You know, I just have a general view as a industry participant. I'm basically rooting for experimentation. So my view on most projects in crypto is a little bit like apps in the App Store. There's something like 2 million apps in the iPhone App Store. You probably use daily five of them. And for all the people who want to figure out which apps haven't been built yet that could be in that five or ten, I applaud that. My default expectation is that almost everything will not be useful or worthwhile, but I'm appreciative of the experimentation

and attempts. There's some promising activity in Defi right now. As we talked about before, There is a legacy in tech of operating outside of regulations. Uber went to market this way. You remember Airbnb six years into its life or something had its hand slapped by London and San Francisco and was forced to stop doing short-term rentals, PayPal with money transmitter licenses. And so I do think that there's a playbook that for some in tech, which is solve problems, serve people, and you'll figure out the rest as needed. And that has created value for people. I don't know if it'll be possible to do that in tech in 2019 where it's a highly scrutinized industry.

And I don't know if it would be possible to do that in crypto, which of course is monetary in nature. Most monetary systems are highly scrutinized and regulated. But I'm rooting for it. If nothing else, I think that that category has attracted a ton of talent. A ton of talent. Yeah, a crazy stat that I saw, gosh, I think it was 2017. Cambridge did a paper on the state of crypto. Did you read that by any chance?

Cambridge Associates. Cambridge University. Oh, I did read that. Yeah. And they reported 1,700 people working full-time of crypto, which is mind-boggling. Actually, from my perspective, it's mind-bogglingly than is small. Yelp has 4,000 four-time employees. And it's like, I don't know, today, it's a three or four-billion-dollar public company. So the entirety of crypto is being advanced by less people than are working on Yelp. So anything that anyone taking the risk, the initiative, to come build something, I think is very exciting. I think today, electric capital put out that developer report, and I think that they found there's something like 2,400 full-time developers working on crypto.

So it's still very small. And yeah, I'm excited that people are experimenting. What advice would you give to a young person that is looking to break into this field right now? To break into crypto? Yeah. Oh, man. I would say absolutely good instincts. Come join the industry.

And I think at this point, do something productive with a high integrity group of people. But I think the experience is going to age well. I think back to, you think about people who worked on like, the Mac Lisa. Didn't work out for the Lisa, but built a set of experience, likely a network for those people, and insight that probably fueled the rest of their careers. And so I think it's probably I think there's a lot of opportunity to be an early contributor, just something that will gone to be big. The second dimension of why I think it's really great for young people is in 2007, I don't even remember this, this moment, but the iPhone came out and the iPhone was written in

an Objective C. And none of the good engineers wanted to write this bastardized version of C. And so there was this brief window for three or four years where a new grad could be, there was a title. People would say that they're iOS developers, right? They're in software engineers. They're iOS developers. They wrote Objective C. And people were getting paid hundreds of thousands of dollars to go work at Google and Facebook to just write Objective C because the really senior engineers wanted to write Java or C or PhP. They didn't need it. It was beneath them. Why would I relearn this bastardized language for this phone that is, you know, not that many people use? And so there's a brief winter of time where if you were a college student who taught themselves

objective C, you hacked some apps at a hackathon or on your own for a year, you got an internship, boom, you can now be contributing hugely to a company, you know, highly compensating. So I sort of see, you know, a similar thing in crypto today. We just, you know, threw some numbers out there. There's, you know, maybe 3,000 or 5,000 people working full time in the industry. That's, that's pretty small. People working on developing blockchains, very small, you know, a number of people. So I think also there's a chance for young people to be as experienced as anyone. else because it's only been around for a short period of time. I couldn't agree more. There's such an opportunity here to shoot yourself up the ladder. As you're speaking, I'm actually thinking that

there's an opportunity on the other end of that spectrum as well. I can't tell you how many people that I worked with at Fidelity and in the industry that were on the end of their career, but they have experience that is very translatable to what we're trying to do in the crypto industry, whether that's build exchange traded products or build out custody, build out trade platforms. And so there's a ton of opportunities, I think, regardless of where you are in your career. Yeah. And you see a lot of people from traditional industries who have a lot of experience coming into crypto.

You've hired some. Yeah, that's right. We have a great team here at Bitwise. A funny thing, I think, for people in software, I think that crypto feels very intuitive. You've interacted with protocols before, TCPIP for sending information, HTTP for the web, SMTP for email. For Facebook, we used HLS for video at the time that I was there. And so someone says there's a new protocol.

It allows you, you know, you don't send, you have VoIP, you send voice over the internet. HLS you send video over the internet. SMTP, you send email over the internet. We got a new one. It sends money or assets over the internet. You go, oh, wow, that's really compelling. Is anyone using it? You go, yeah, actually, a lot of people are using it.

You know, hundreds of billions of dollars have been transferred. No one's hacked it. That's incredible. You know, so it's very intuitive from that direction. I think for many people at Bitwise who come from the asset management world, it reminds them a lot of early ETFs. In 2001, so we've a lot of people from early I shares, people have been in the industry for 20 years.

When ETFs first came about, what were the issues that people had? People said, it's retail only. No institution needs this. people said regulators won't be comfortable with it. There's some nuances of how an ETF operates, but they said they won't allow it. It doesn't matter. It's too small. We don't have time for it. And all of these things, or they're not liquid enough, all of these things are the exact same sort of concerns people have about crypto today. So I think from that dimension, from a completely different world, it pattern matches as familiar and exciting. So, yeah,

so I think one of the really incredible things about crypto is it's pulling together some of the most fascinating disciplines, capital markets, asset management, finance, law, regulatory software. These are fascinating disciplines. To get to work at the intersection of all three, I can't imagine a better thing to get to do. Well, I think that's a great place to drop it and to continue the conversation. So I think that's a great place to wrap it up. Hunter, where can people learn more about Bitwise? Bitwiseinvestments.com. We're on Twitter at Bitwise Invest. Thanks so much. Yeah, absolutely. Thank you. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visit Castle Island.

And a big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology, but not cryptocurrency. You know who you are.