On The Brink with Castle Island - Matthew Le Merle and Mitch Mechigian (Blockchain Coinvestors) on 2024 Predictions (EP.496)

Episode Date: January 8, 2024

Matthew Le Merle and Mitch Mechigian of Blockchain Coinvestors join the show. In this episode we discuss the Blockchain Coinvestors 2024 Predictions. To learn more about Blockchain Coinvestors: Website Webinar

Today on the podcast, I sat down with Matthew Lomeryl and Mitch McKeegan of blockchain co-investors. We've had Matthew on the podcast several times before, and I was excited to add Mitch alongside him today to talk about the blockchain co-investors 2024 predictions. I think you'll enjoy this one. So without further ado, here's my conversation with Matthew and Mitch at blockchain co-investors. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement

to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. 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 in 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 into Britain's ailing economy with a new round of quantitative easing. And 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. Matthew and Mitch, thanks so much for joining us on the podcast, calling in from all areas of the world. So excited to talk about the 2024 blockchain predictions from you guys today. It's great to be here, Matt. glad to be able to revisit Castle Island. As you mentioned to me a couple of minutes ago,

I think this is my third visit. And this is our first for Mitch. Mitch, over to you. Yeah, really happy to be here. And we're both longtime listeners of the podcast, so very excited to participate. Well, excited to have you. And maybe we'll start with you, Matthew. Folks have heard you on prior podcast, but we're always adding new listeners. So before we hop into the predictions, maybe you could just tee up what's going on at blockchain co-investors, how the firm has evolved over time. Well, thank you very much. Yes. It's 10 years. now that we pivoted to be 100% focused as a firm as investors into blockchain and blockchain technology. Prior to that, about 20 years, we'd been internet and fintech investors. But Allison and I,

when we first read Satoshi's white paper, got very excited by the space. We helped launch blockchain capital with Bart and Brad, who I think you know well, and then eventually decided to focus exclusively on investing in the space. And we operate a leading funder fund. Our investors can make a single investment and have global diversified investment in early stage blockchain projects and startups. And in that vein, we're very excited to be Castle Island investors in, I think, all of your funds, Matt. That's right. We're very excited to have you as well. And excited to hop into these predictions. I mean, what a crazy year it's been. So I'm sure we'll touch on some of the 2020 three happenings. But when you really zoom back, it's been quite an eventful year for the price of

these assets, obviously coming off the carnage of 2022 and a lot of reason to be optimistic here. So why don't we just hop into the first one here? The dot com crash provides insights for 2024. Talk a little bit about this, Matthew. Yes, happy to. It was a funny thing. We agree with you, 2023 and 2022 before it were crazy years in many respects. And a funny thing happened as we sat down as a team, our investment team, to really think through 24 and the tailwinds that are blowing hard now. And what started to happen is the longer we went through our discussion about what's going to happen in 2024, the more optimistic we became. And I think that that was really quite a surprise to us. And this first prediction really is for investors. Sometimes we run the risk of missing

the forest for the trees. And that's what happened 20 years ago. We had just heard and been a part of 10 years of internet investing, and we had the dot-com crash. And I think it's fair to say that almost the entire world became very negative about the internet all of a sudden. Prices fell, investment capital dried up. Senators and congressmen said the internet should be banned. Journals, including some of the best in the world, started saying the internet had just been a fraud. And most investors went cold on tech investing. They either reduced their allocations to the space. Some of them eliminated all of their tech investing. Some of them did worst of all. They started selling and unloading the investments that

they just made over the last few years at high prices. They unloaded them at very low prices, which, of course, is the reverse of what you're supposed to do. Of course, what we learned from the internet and the digitalization of communications and content was that in 2001, it was only just beginning. In fact, almost all of the global adoption, almost all of the value creation, and many of the most exciting companies and projects were formed in the zeros and afterwards. So the learnings of that time when the world thinks the technology innovation is going to slow down and go away, you probably should take a second look because blockchain and the innovation that we all invest in is just beginning. We are digitalizing finance and commerce and the movement of value, and that is much

larger than communications and content in terms of its usage and its impact globally. And we're just beginning. And we'll talk more about that in the following predictions, but I think for investors listening in today, think very carefully about what you did in 2001, two and three. I think you probably didn't do the right thing. What we should have done is increase our allocations, invest more and double down into those years because the vintage returns were highest. And that's what we need to be doing in 2024, 2025, and 26. I think about this one also from just the underlying technology perspective. If you think back about how the internet actually worked in 1999 and how slow it was, you don't have to squint too hard to see some similarities in

terms of these new L2s that are launching, net new L1s coming into the world that are making the surface area for what you can actually build on top of blockchains significantly improve. And so maybe there's also a technology lesson there around, hey, these protocols are ever evolving and performance is improving on a yearly basis. Well, I would generalize that, Matt, too. That is a learning of all software-based innovations. Software always gets better over time. we innovate it and make it better as we learn.

So AltaVista and Ink to me were not that good. Google was better. MySpace was not that good. YouTube was better. Early web browsers and search engines were just not that great, and they got better over time. And by the time you come to open source software, it's even more true. Open source software, by definition,

provides the opportunity for innovators that come later to make it better and improve it and build upon it. And I think it'd be very unwise to think that the best innovations in blockchain have already happened. I think that's right. So Mitch, this next one is all about blockchain innovation being at an inflection point. Say a little bit more about what you mean with that prediction. Yeah, I mean, I think it's very closely related to what you just said. I mean, if we step back and look at the blockchain sector, I think that we can say we've actually innovated very quickly. Of course, there's still work to do. But for instance, again, taking the internet, if it took about 30 years for the internet to reach commercialization. Arpinet was created in 1960s, first email sent

in 1971, but it's not really until 1993 in the World Wide Web that we see broad commercialization. That really took off with web browsers and Netscape Navigator, which launches in 1994. So basically, we have about 30 years of technological development before any broad commercial applications. And if we look at blockchain, I think we actually see that innovation has occurred quite quickly. in a lot of ways we've actually reached commercialization much faster than the internet. The Bitcoin white paper, of course, was released in 2008, network launched in 2009, Ethereum white paper in 2013. You know, and by today, only about 15 years after that Bitcoin white paper,

we have several commercial applications ranging from Bitcoin itself to defy to stable coins, and the market cap is over a trillion and a half dollars. But I think that we can also say that today, blockchains, they have not reached a technological point where they can contain that trillion dollar economic activity that we're hoping for or compete with the speed and customer experience of the Web2 giants, like a Facebook or a Twitter. And it goes back to what you're just saying. Right now the costs are just too high.

So the average cost on Ethereum, I think this year is something about $5. Obviously, there's spikes and troughs, but it's right about there. Bitcoin's around $40 when I last checked. That's obviously gone up due to ordinal activity. But I think we're really are at that inflection point for innovation that'll scale blockchains. And it really does come down to that increased efficiency of roll-ups. And some of these new layer ones we've seen launched. You know, obviously, roll-ups basically move the execution of these transactions to another chain and settle the balance to the base chain.

And, you know, we're investors in about 45 funds, 30 GPs. We've seen a lot of investment into this space from our GPs and the roll-ups, other aspects of the modular thesis. I think Castle Islands made a few. You know, Celestia was one. I was speaking to Ria about. So this is a subsector in crypto that just has a ton of cash and development underway. And right now the layer two's costs are already down to, I think it ranges from like two cents to 20 cents.

So we've already seen a lot of that on-chain activity move to roll-ups. It was a great site called Layer 2B, that shows the activity of Layer 2's versus Ethereum. And right now there's something like 5X, the transactions happening on top of Ethereum versus Ethereum. These costs, we think they're going to keep falling. I wouldn't bet against technology, not scaling up and optimizing. And this will drastically open up the use cases, potential way developers can explore the technology.

But we're still waiting for that Netscape Navigator moment. But maybe once we're below a cent or a fraction of a cent to use this, we'll really open up things. I think that's a very good prediction. I mean, you just think about how the internet evolved and you couldn't do streaming video on the early internet. You couldn't do things like Zoom calls on the early internet. And I think some of these layer twos and some of these layer twos and some of the internet, of these modular projects that are underway could certainly get us there. I guess that dovetails us into the next prediction that you guys have around crypto adoption exceeding 500 million.

I assume this means 500 million people engaging with blockchains, but we'd love to hear how you guys are thinking about that one. Yeah, thanks, Matt. I'll take this one. So those first two points are about tailwinds. And when you have such forceful tailwinds blowing, our experiences that innovation tends to accelerate. Now we're going to get a bit more specific. In terms of the number of users of crypto globally, right now, I think Nick estimates it's about 250 million. We think we'll end the year at about 500 million. And that sounds like a big increase of 2x in a single year. But of course, the adoption of innovation doesn't occur in a straight line. What tends to happen is we have early adopters, very few of them. And then as more and more people

begin to get on board, we start getting into the mass adoption phase and everything starts. accelerating at a never-increasing rate. Eventually, that slows down as we get to the later adopters. In the case of the Internet, that took about 15 years to get through that rapid increase. I already mentioned that you go back to 2001, the U.S. adoption of Internet access was about 40 percent, but most countries in the world were averaging 10 to 15 percent online, and only about 40 percent of the people online were using electronic commerce, just to give your sense. So here we are today. We only have two-thirds of the world online. So you can see that the acceleration of adoption occurred in those, we didn't play it out. We're still getting more and

more people online around the world. Well, in the case of blockchain, what's very interesting is about two-thirds of the people who are already using crypto are digital natives. And there's so many more of them who today are not, about 60% of the world's population, about five and a half billion people are digital natives, and only perhaps 150 million to 200 million of them have experimented with crypto. And the next few predictions will underline this, but we see more and more now that the mass adoption is beginning. We obviously have to make it easier. It's got to be a lot easier to create a wallet, to move your money into it and begin to participate in blockchain activities. But I think there isn't a blockchain engineer today who isn't worried and working

on the UIUX for their offerings. We're also pretty sure that we'll have easier and easier ways to participate in Web3 and in blockchain created in 2024. And that will also accelerate adoption. I like that one because there's a lot of different ways you could get to the 500 million. And maybe this dovetails into the next prediction around the developing world really adopting fastest because I look at stable coins and just look through our portfolio at the companies that have integrated stable coins internationally. And I think there's a real path to getting to that 500 million over the next year or two just in terms of US dollars moving on chain. So we'd love to hear how you guys are thinking about the developing world chipping away at that 500 million

prediction. Yeah, absolutely. And I think we're co-investors in a company called Yellow Car that's in Africa where we see that happening. It's a really interesting, fascinating stuff. But in general, in the developing world, we've seen technology jump or skip a generation, so to speak, before. Cuba's an interesting example. And several African countries, they never finished installing landlines or telephone lines. Rather, they just jumped right to having cell phones. They skipped a technology. And I think that's sort of the analogy that I want to make here and say the same sort of thing is happening in emerging economies with regard to finance and payments. And you've had on the folks from chain analysis before, but in 2022,

19 of the top 20 countries ranked by adoption or what we could categorize as emerging economies or non-high-income countries. The only one in the top 20 was the U.S. And the 2023 report that just came out, it's still 16 of the top 20. The UK, Japan, and Canada have added to the list. So really, this prediction could say, you know, the developing world will continue to adopt fastest because it's really what we're seeing. And the reason for this, I think, is quite simple. The use cases for crypto right now are immediate and salient to those populations. And there's an interesting way of seeing this. If you divide cryptocurrency ownership by age, and you actually rank the countries from youngest to oldest, Matthews right, about two-thirds globally are under the age of 34 of these

digital natives. But in places like the U.S., UK and Germany, young people, those are the ones that are really interacting and owning crypto and driving the adoption. But if you look at Vietnam or Kenya or Venezuela, it's basically split evenly between young and old people. Actually, in Vietnam, some of that out of shows that people over the age of 65 have higher rates of ownership than people under the age of 34. That's super fascinating because the conclusion that I think we can draw is that in these countries where payments have been historically, exceptionally high, inflation persistent, or perhaps they've experienced hyperinflation. People simply need to use these technologies to get access to dollars, to send remittances to family members, or to look for

non-state stores of value because of historical reasons. So that really, I think, is what's going to continue to drive the story here. And in the West, we really need the technology and consumer experience to scale up to compete with the Apple Pay and the Venmos. I think that's spot on. I was actually talking to someone right before we started recording just around the Indonesian market and more individuals in Indonesia own a crypto-based asset than actually own equities in that market, which is just remarkable. So I completely agree. And I think it's stable coins. It's really driving a lot of this innovation. You pointed out yellow card. We're also seeing a proliferation of new companies getting off the ground in Latin America that are really catered towards money movement

and primarily U.S. dollar money movement. So completely agree on that developing world thesis there. The next one is a little bit scarier, maybe to me at least, this prediction that CBDCs will proliferate to half of the world's population. So is this a good thing or a bad thing? And how do you guys see this one unfolding? Yeah. So let's talk about that. But just before we leave the last one, I also want to say that for us, for you, Castle Island, and for us, we do tend to be very financial services oriented. But for the first 20 years of our internet investing, Alice and I and our firm, we were very focused also on digital content, which meant things like video games, MMRPGs, virtual worlds, and so on. And what we learned to then was that if we provided a

digital economy and if we provided people the opportunity to play and earn, the adoption was greatest in those parts of the world where small amounts of money were worth the lots. And so most of the people on this are listening on this may have played games in the past. They may have grinded away to earn some points to buy something that they thought that they might be able to sell either within the game or in a secondary market outside the game. But actually, the big farms were all in places like the Philippines and Thailand, Vietnam, because to be able to earn a few cents really made a difference to those people's lives. And I think there's a little bit of that going on in Web 3 right now.

A lot of the Web 3 initiatives, the airdrops and so on, are being fully embraced in the developing world because those tens of cents really add up fast when you're only earning a few dollars a month in terms of your day job. So going to this next prediction, this is the one actually that made us sit up and take notice and really opened our eyes because we hadn't added this up prior to doing this prediction. exercise. I think everyone listening is quite aware that China has a digital central bank digital currency, the digital yuan, and they've been piling it. They have millions and millions of people using it, billions of yuan transactions on it, and they're beginning to talk to other countries around the world about doing their trade in digital yuan rather than digital dollar.

So there's a lot going on there, and that's about 1.4 billion people who are essentially being told by their government prepare for the arrival of this digitalized way of finance and commerce. Well, it turns out that India, Brazil, Russia, Indonesia, Nigeria, Malaysia and others are also all preparing to launch their pilots in 2024. And that means that in 2024, about half the world's population, about 4 billion people are going to be told by their own governments that digital wallets, digital ways of using money and digital central bank digital currencies are in their futures. And we think that's very profound because once your government is telling you, you need to open a digital wallet and you need to start doing things with digital money, it's only one click away to explore the worlds of Bitcoin and crypto and other things, even if your government isn't supportive of those. So if you think about the acceleration of the learning and the acceleration of the adoption of digital monies and commodities and assets, I think you can see that 2024 could be

very much a turning year if governments are telling 4 billion of their people that they want them to do this. Now, you ask the other question, Matt, which is, is, this a good thing or a bad thing? And I think you can view that through different lenses. We tend to focus on today when we ask the question, how bad are things? And we believe that innovators tend to make things better. So if you ask me, how bad is the global monetary system today? I'd tell you it's very, very bad. International remittances, just to use one example, are very slow. They take about a week. They're very complex. It's hard to get a monetary.

transfer started with your own institution, they'll have to work with correspondent banks around the world to get it completed. It's going to be very costly for you, especially if your transaction is small, and it can be risky too. So it's not very good. And can we innovate and make that better with digitalization and blockchain. We certainly can. And in fact, in a minute, we'll talk about stable coins, which are proving that point. So bad to better, I think central bank digital currencies take you from bad to better. Are they best? Well, I know a lot of people fear that they'll be used to censor specific groups of people, to censor certain types of transactions and payments to potentially turn people off if they don't behave in the way your government

wants you to behave. Of course, we can tell a story where that goes from bad to better to very bad, but we tend to believe that central bank digital currencies make the world's financial system work better, and that's a good thing. And then, of course, it's up to governments to make sure that they don't take advantage of the information they have. And in that regard, we should all be concerned all the time about the overreach of governments and government actors, because we, at least in America, we all highly value our freedoms as well as our constitutional rights. So I think that there's a legitimate debate, but bottom line, we think that digitalized monies provided by governments are enormously better than the current status quo. And we need to make things quicker,

cheaper, and easier for everyone. And the deadweight loss of today's global financial system is extremely heavy. That's a really interesting point and very nuanced. I would say that the second order effects there would be fascinating. If you get to half of the world having access to a CBDC, as you point out, a lot of this infrastructure would be extensible to public blockchain assets that are non-state owned. And so you wonder if the second order effect there would be individuals saying, well, look, I don't want this expiration date on my money or I don't want this surveillance. And really, maybe I'll take a closer look at something like BTC or ETH in addition to

my central bank digital currency. Yes. Well, I think everyone knows that the hardest single thing about innovation is to learn to do it the first time. So the first time you got your iPod, plugged it into your Apple and tried to figure out iTunes, it wasn't actually that easy. But as soon as you got it to work, you never look back. The first time you went online, the first time you did a Zoom conference call, probably you were trying to figure it out. And then it became easy. Well, I think the same is true of digital wallets. The first time, when you have no digital wallets and you try and have one, there's a lot to

learn. But once you have one, it's very easy to have two, to have three, to have four. And that's essentially why this prediction is so important, because the world's largest governments are about to tell four billion of their citizens that they have to get ready for digital wallets in 24. And that hasn't been happening up to this moment. It's a dramatically transitional year. It's a true inflection point, 2024. We're kind of back to the era of private money. right? And so citizens do have the opt out. As you noted, they can purchase Ethereum or Bitcoin. So it's really important why, you know, what we're doing as a sector to keep building these private market alternatives so that there is competition. And we have to make sure that those

private market solutions are faster, easier, and offer more protection because there will be a government alternative out there. That's just what's going to happen. That's what this prediction's about. So we have to make sure that we're investing to make sure that those private market alternatives are compelling as well. And so you're preaching to the converted on this one, but you guys imagine that this private sector stablecoin market will continue to grow and exceed $250 billion next year. Oh, absolutely.

And yeah, we know that Nick in particular has made lots of speeches about this. You know, we were at token 2049 when he made one. And, you know, just very quickly, I mean, according to Brevin Howard's report, Stablecoin settled about $11 trillion on chain last year. So PayPal did $1.4, visited a little more 11.6. I think that's come down this year a bit. We know we're at the end of the year just yet. But still, this is already a huge market.

So you can say that these private market stable coins, particularly dollar denominated stable coins, really are a killer app and with clear product market fit in our view. This prediction, right, so the market cap of U.S. dollar stable coins today is about $140 billion. It's come down a little bit, but stabilized around there. And so really that's zero to $140 billion in four years. Again, really quite impressive.

And so if you look at kind of the last time that the industry was firing on all cylinders from mid-2020 to mid-2020, we saw the market cap of these private stable coins rise by about 80%. And so that is what we think is achievable in 2024. That gets us to that $250 billion level. So it's really not that crazy to assume that. And we have a bunch of catalysts to watch. So PayPal's launched a stable coin, major financial institution. You know, it's unprecedented.

We think that others are going to do the same just because of the profit they can make from the interest rate spread. You have Mika in Europe creating a regulatory regime for Euro-denominated stable coins. That could be very interesting. And then you have companies from Visa to checkout.com basically saying that they're going to start doing settlement with merchants in stablecoin. So this is really an area where we think that as more economic activity comes on chain, will we fully expect the stable coin market to grow?

Imagine what this number would be if you had a stable coin. bill pass in the United States. We might need to revise this prediction. It might be four to five times higher than that. No, no, absolutely. Yes. But you've made interesting points in the past on your podcasts, Matt, about how the euro dollar market grew so large specifically because there weren't enough offshore dollars to go around. And that's sort of what's going on here too. The longer the US takes to get its mind around the digitalization of the US dollar, the more you're opening up, the window for global, private, stable coins, because the whole world wants dollars. And we see that everywhere we go in the sense, in most of the countries that we just talked about a moment ago,

if they have fears of hyperinflation, devaluation, expropriation in their countries, then if you ask them, well, what's your backup plan and where else will you hold money other than in your government issued fee of currency? Some countries will go to gold, as their choice. Some will go to Bitcoin, but a lot of them want US dollars. And the challenge they have today is if the US dollars have to be in a government-sanctioned bank account, then they still fear expropriations since their own government knows that they have the dollars. So digital dollars open up another opportunity and probably the best of all, because it's backed by the US government and it is digital and can be held and moved at rapid speed, and it doesn't have all of the challenges of either

gold or Bitcoin. So we actually do see the digital dollar offshore market as growing exceptionally quickly in 2024. And that's what's driving this $250 billion production. Clearly a killer application for blockchain technology. Maybe going back to the first application for blockchain technology, which is, of course, Bitcoin, it's setting up to be a pretty fascinating year. You have the Bitcoin having coming up in April. You have the potential of a Bitcoin ETF here pretty soon. Within the next week or two here, we have 13 sponsors that have applied. So this next prediction is around the price of Bitcoin.

We'd love to hear how you guys are thinking about that. Yeah. So we're talking at both sides of our mouth on this one. We always tell our investors that we are venture capitalists and we focus on early stage venture investing in blockchain and make a single investment and get global diversified. exposure in the early stage. And we also tell them as a corollary of that, that we're not traders and we're not actively buying and selling public liquid crypto, at least not within the firm. So we don't normally go out and make price predictions on public liquid crypto. But obviously,

the world is interested in Bitcoin. They're talking about what's going to happen next. And it's our view that in 2024, Bitcoin will definitely get to an all-time high. and we're excited by that because we're hoddlers. And for all of the hoddlers listening in, there won't be any hoddler anywhere in the world who has not made money in 2024 by believing in Bitcoin, buying it and holding it, because we believe it will be at an all-time high.

Obviously, unfortunately, a lot of people will have lost money by buying and selling Bitcoin, but they'll be the people that didn't really believe they bought and sold it as a trade rather than because they really, really believed in the thesis. So what's going on in 2024 is just the continuation of Satoshi Nakamoto's monetary policy. It's not very complicated in a way. The halving obviously means the marginal issuance of Bitcoin declines, and it gets harder for the miners to earn their rewards. because we have limited supply, there's only one way for that equation to solve, and that should be

that the price of Bitcoin goes up. I know there's a lot of fear about the halvings in the sense that if the mining community earns less, there is some fear that they'll be less motivated and incentivized to mine. But when you do the mathematics, Bitcoin only has to go up about 15% per year to keep them whole. And obviously, a geometric progression of 15% per year eventually gets you into trouble, but not for the next 20 years or so in our opinion. So we see the halving as being one of the drivers. The second driver is not written down in the prediction, but it's everything we just spoke about. The underlying users of Bitcoin, holders of Bitcoin is itself going up around the world. and that obviously means more demand into a fixed supply environment.

And then ETFs. ETFs are a practical way for institutions that are not allowed to self-custody to gain Bitcoin exposure through the pathways that they're using today. And that includes all of the RIAs and the independent financial advisors of the world who want to get exposure for their clients into Bitcoin and are not allowed to go off platform and use other products, even if they're available today. So there's an awful lot of folks that would like to have some Bitcoin exposure that find it very hard today, and ETFs are an efficient and easily accessible approach.

We would be very surprised if they don't get approved in 2024. But I will also say our predictions in 2020, 2021 and 2022, whether the Bitcoin ETF spot version would get approved. And of course, we were wrong. And so here we are expecting this year will be different, but we'll find out in just the next few weeks we expect. Well, I guess maybe you were just looking at the actual law and interpreting that it actually ought to have been approved, which I guess the good news is that the courts have finally weighed in on the issue. And so I think there's some positive momentum. But Matthew, I totally agree with you on that RIA channel.

I think that's $7 trillion in assets that is effectively 0% penetrated right now. So it'll be fascinating to see what impact the ETF has on just that pool. of capital. Yeah, if I could just make an aside on that one, I know you know, Matt, but probably the listeners don't know that Alice and I did work on the launch of what was then BGI and eventually became Black Rock's, I share family of products. I worked on the strategy. Allison was CFO and had a strategy at BGI when I shares was launched with Lee Cranefus at the helm eventually scaled up to be first the one and a half trillion and today about a four trillion dollar financial product. The thesis was very, very simple. When we launched iShare's, the goal was to provide

easy access to everyone in the world to efficient products. And if they're efficient and you take out cost, one thing always happens in financial products, the return goes up. And in the world of 3% loads on mutual funds, 50 basis points added 2.5% 250 basis points to the return. And so all of a sudden I shares were superior returning products, but the other half of what I just said was they were globally accessible. Anyone in the world could access them. And that's why ETFs today is so fundamental and so important in wealth management and investment management. They are extremely accessible, very efficient. And as a result, they tend to have higher performance than other financial products. So a spot ETF for Bitcoin and later on, hopefully for a

Ethereum and so on, is simply a natural progression, something that is lower cost, more accessible, and enables investors to get what they should be getting, which at the end of the day is higher returns. And going back to my earlier comment that we think the global financial system is not that good today, you only have to look at the costs and the complexities that most investors have to get exposure to something like Bitcoin to understand that it could be so much better, is so much easier. I couldn't agree more. So Mitch, sometimes I like to say that this is the regulation podcast. I feel like there's so much to talk about on the regulatory landscape. I guess the good news is this year there were several bills that were introduced. Unfortunately,

they haven't passed yet this year. But this next prediction is all about the U.S. competing to drive more regulation and hopefully sensible regulation. No, exactly. And you guys do a great job covering on the podcast. This year, regulation really picked up around the world. PWC just came out with a a very interesting report that said 42 countries discussed or passed crypto regulation over the past year, and more than 20 of those had actually passed some sort of comprehensive crypto regulatory framework. Coinbase also has a very interesting graphic in their earnings report you may have seen that showed 80 plus percent of the G20 or major financial hubs had passed crypto regulations. So a lot's happening, but the U.S. is clearly the laggard here.

And while we have some good laws making it through Congress, you really haven't worked out who regulates the spot market. And we haven't given any comfort. around how we legally issue a stable coin. And those are two major, major issues. I mean, look at what Europe's done with Nika, the market in crypto assets regulation. They've laid out clear rules of the road. And we can argue over whether, you know, they may be that onerous here or there. But in general, you have some guidelines that if you follow these rules, you can offer your

product in the 27 member states, basically to a population of 450 million relatively wealthy consumers. Same time in the UK, they're engaged in crypto asset rulemaking. We've seen a lot of government effort to attract businesses and projects. Singapore, there's a lot of energy happening. The MAS, the Monitor Authority, they finalized a framework for stable coins. Hong Kong said they're preparing to introduce a framework for stable coins by the end of 2024. So the U.S. up until now, obviously, has been much more antagonistic from a regulatory action perspective.

And from a legislative perspective really hasn't done much. So that's obviously started to change this year. We've seen two major bipartisan bills announced, one from the Senate, the other from the House, You guys have covered a lot the McKenry Thompson bill. That's probably the most successful. It made it through committee at a few Democrats vote for it. So there is bipartisan effort growing, but right now that's stalled. But basically our prediction here is that the fact that the rest of the world is moving and moving quickly on this will force the U.S.'s hand because they don't want to basically have to adopt the European regulations because of how big that market is.

But the last thing I'll say, of course, is I think this is one of those predictions that we can say definitely has significant risk. We're gearing up for an election. And there's a possibility that the election just consumes everything and we don't pass any major bills next year, let alone any crypto bills. And that would really put the U.S. behind. But in general, I think we are optimistic. Something will get done. But of course, there is that risk. I always think about the 1996 Telecommunications Act is really the hallmark of sensible regulation that really opened up the consumer internet, obviously bipartisan legislation. And you would hope that this market structure bill and stablecoin bill would be almost the equivalent, really

opening up the blockchain industry in the United States in a way that frankly just hasn't happened yet. If I could just build on what Mitch said, we added a couple of words into this prediction, which we need to just explain, and that's need to compete. So unlike most many countries in the world, the way America works, and I may have a British accent, but I have been American most of my working life, the way America works is we are a democracy, but we're a democracy in which business law and business regulation tends to get driven by the lobbying organizations that have a lot of clout and a lot of influence. And those two tend to be the incumbent players. And so what we've seen in area of innovation after area of innovation is that the incumbents do tend to resist at the outset.

They're confused. They're not quite sure what's going to happen and they're not ready. and then at some point they tip over because they understand what the technology can do. They are ready and they're willing to embrace it. And at that point, they lobby hard and the whole direction of the dialogue shifts 180 degrees. And so I could give you examples of that, for example, in digital music. Sean Parker and Napster got us all started downloading digital music, Graham and the BitTorrent team who are now at Chia Networks, accelerated it all with file sharing. But the fact of the matter was the music industry of America

resisted very aggressively and not just the music industry, the digital content industry of that time. So you'll remember blockbuster saying, we don't need this. We've got a blackbuster on every corner. Netflix would ship you your DVD to your home and you could return it the next day after you'd watched it and so on and so on. So the digitalization of music and video entertainment took quite a long time to happen. And in those years, the incumbents resisted it. And then all of a sudden, they were ready and they flipped the switch and they were much more supportive of it. Now, Matt, you're correct that safe harbour and net neutrality had already been passed in the US. So the US was already way out the head in embracing internet technology.

But the real acceleration of the industry accepting it didn't occur. until they were ready. In most areas of innovation, that's sort of how America works. So what's been going on in blockchain is that for the last five years, the incumbents have resisted it, but they've had their own teams working on it and getting smarter about how it works. And so by today, if you're a bank, a payment company, an asset manager, you're very aware that Tether has a hundred billion dollars worth of digital dollars and is more profitable than any of you. And you're beginning to say, right, we need to embrace this. We need to get started. And then you've got Larry Fink demonstrating that every day in what he's saying

as one of the most influential figures in the financial industry of the US. And our view is 24 again is a tipping point year. It's a year in which the largest US financial players start realizing that they must get to work. Santander is launching this. Sochgen is launching that. Deutsche Bank is launching something else. The big Japanese players are now moving. You can't be an American bank payment company or asset manager if you don't embrace digitalization. They know it, and they're now willing to go to Washington and tell Washington to get moving. And I know we have very visible exceptions to that, but I think that is part of what this prediction is about. The U.S. now knows it needs to compete, and that will mean that the discussion around regulation

will begin to reverse. I think that's spot on. Another area that is obviously heavily in the forefront of everyone's dialogue, not only from a regulatory perspective, but just from a consumer use case perspective, is artificial intelligence. And if you just look at the amount of companies getting off the ground that are at that intersection of blockchain and AI,

it seems like there'll be some interesting use cases popping out of that category. How are you guys thinking about AI and blockchain? So I want to go first on this one, but Mitch, you can perhaps can add some of the better use cases and I'm sure Matt can too. I'm going to start off with a negative story. And basically it goes back to the internet. The internet that we have today, which powers digital communications and content globally, is fundamentally flawed. It's fundamentally broken. And Alison, I wrote about this six years ago in our book, Blockchain Competitive Advantage.

It's broken because it has no system of digital identity, not for people, not for devices, not for packages of data. It is insecure. It's exceptionally easy to hack, breach, scam and fish by way of it. It did become highly centralized as well, which is a separate issue. When Satoshi Nakamoto wanted to launch a global peer-to-peer cash, it needed to run on the internet. And the problem was that the internet was so broken, it wouldn't work. You couldn't have a peer-to-peer monetary system built on top of the internet as the internet is today. And so an

invention was required. And that invention was blockchain. So blockchain was an invention to solve the vulnerabilities of the internet. It provided identity, security. It was by definition decentralized and distributed, and it was a perfect complement. So Bitcoin operates and works because we have the internet plus blockchain, and the two of them together provide a complete solution for a peer-to-peer global store of value system. Well, that the challenge is the vulnerabilities of the internet are about to be taken advantage of not by human being sending emails to Matt Walsh to convince him to click, we're about to turn on artificial intelligence enabled programs and schemes that will manipulate Matt until he eventually clicks. And so if you think about the fishing

that you're receiving today, imagine you're getting 100 or 1,000 or 10,000 as many coming at you, and they're more sophisticated. They know you much better and they know how to talk to you in ways. that will get you to click and take action. We think that the first massive AI use cases will be by bad actors taking advantage of these new tools to greatly turbocharge and take advantage of the vulnerabilities of the internet. And the reason why that's so good for blockchain is what I've already said. Blockchain was created to solve those vulnerabilities.

So we may one day have much more secure databases than a blockchain database. But as we sit here today, all of the world's databases are vulnerable. All of the world's databases will have to be upgraded. And a blockchain database is a superior solution. So with identity, all of a sudden we're going to find that we really do need to have robust digital identity. And we can have that on blockchain. We already do have it. We don't have it through traditional identity means. Your social security number your passport, your driver's license are not going to do it, they're not going to be sufficient. And then, of course, we're going to want to know the identity of all the inbound coming at us.

Is that really Matt Walsh? Is that really a human being? How would I know? So these are the bad cases, but with many technologies, it's the bad cases that drive adoption because it's the superior technology that gets picked up faster when the old technology is vulnerable, and beginning to fail. And that's where we are today. The internet is vulnerable and failing. Blockchain is a powering up of the internet and the databases upon which it runs. And artificial intelligence is going to flip that switch and force all of the world's companies to figure out how to make their databases more secure with better identity and less vulnerable to the computers that are going to be trying to crack, breach, fish them and so on. Now, this was all a negative

conversation. There are positive uses of AI, obviously, but we start with the negative one because it is so profound for the internet that we all rely upon today. But Matt and Mitch, maybe you can share some positive AI use cases too. Yeah, I mean, the one that I would mention that it actually pairs very well with what Matthew is saying is obviously WorldCoin. So imagine, and this has a negative and positive use case, but imagine that a large language model can train itself on all of the public content you've ever put out there. I mean, for someone like you, Matt and Nick, I mean, you have hundreds of hours of speaking. So you could see an AI get a pretty sophisticated way of impersonating you.

And so WorldCoin, which is a project full disclosure, we're invested in through some of our partner funds, basically creates a blockchain-based proof of humanness, proof of identity that allows you to basically verify that you are who you say you are. And that can really cut down on some of that. But some of the positive use cases are also basically more efficient and faster ways of signing in, not having to use CAPTCHA and things like this. That's fascinating. Yeah, I certainly think that the surface area for use cases in this category is quite large. And tracking provenance and inputs to models is very much a no-brainer,

in my opinion. So it'll be fascinating to see how that evolves. The 10th and final prediction here is around VC vintage performance, which is obviously at the top of a lot of people's minds in this industry. So we'd love to hear how you guys are thinking about 2024, maybe 25 and 26 as well. Yeah. So in order to do this justice, because we are primarily investors, venture capital investors, I think it's worth just sharing what are the best practices of early stage venture investing. You can go back over the last 20 or 30 years and what you see holds pretty much true. Unlike public markets, unlike public equities or hedge fund investing, which are normal distributions and reasonably efficient marketplaces, early stage venture is not.

It's a power curve distribution with the best returns going to the best investors in each category, and it is highly concentrated. The best returns go to the best investors. Those investors, in turn, see the best deals coming to them. And so it perpetuates, which is why persistency is much higher in early stage venture than almost any other asset class. Because it is a power curve, it's a hit-driven business. You need a high level of diversification. And innovation also, even though it has been concentrated geographically, you still need to have global exposure as well because no part of the world monopolizes innovation in new technology anymore. So these are some of the best practices, find a way to invest with the best investors in the category,

work closely with them and co-invest in them when you have the opportunity to do so, invest in a diversified way, and stick to the early stage where the returns are highest. Well, there is another corollary of that, which is when you look at venture returns, you have to be very aware of the cycle. And the way venture returns work is that averages tend to lie. The average returns of venture are exceptionally high. The failure rate is also very high, but the two things move through the cycle. And what we actually see, and we saw it in 2001, two and three, we saw it in 2008, nine, and ten, is that the failure rate goes up in a time of recession, but also the vintage returns go up in a time of recession. And the reason for that is because valuations fall significantly. The best investors are able to concentrate their resources on companies that will have less competition because most VCs will be withdrawing support from, if you will,

the marginal players in any category. And so the competition for the best companies in a sector or a segment or a theme are likely to experience will actually go down. And then the last point, which is, again, a nuance point, is that the large companies which exit the innovation space at the beginning of a downturn, they don't have capital to spend, they're told to invest less, they're not allowed to make large acquisitions, they can't make big investments, they tend to come back in the second and third year after the depth of a recession with a need to power up their own growth. And so they begin to invest heavily, they make larger acquisitions, and all of that is very beneficial for venture-back companies. So if you put all of that

together, what you actually discover is that the two and three years after the depth of a recession will have the highest vintages in terms of returns in the venture industry. And so this prediction is that 24, 25, and 26 will be exceptionally good vintages for blockchain venture capital. And here we're talking about early stage venture capital. And as a result, going back to how we opened up this podcast, this is a time when investors should look back at 2001, two and three and ask themselves the questions, what should I have done? And what you should have done is you should have increased your allocations to technology. You should have increased the deployment of capital to early stage venture. And in particular, you should have increased your allocations to the internet

because that was the powering of digital communications and content. Here we are 20 years later, and blockchain is digitalizing finance and commerce, which is an even bigger horizontal. It's going to unlock even more value. And so we think the same things apply. The irony is that it isn't the way the world's investors operate. Many investors around the world will be investing less in the next two years, not more. And as Warren Buffett famously said, if you're a collector of socks and socks are on sale, what should you do? And the answer is don't sell your socks. It's buy more. So if you believe in venture, if you believe in innovation, if you believe in blockchain, you should be buying more of it when the price is low. I think that's spot on. And

certainly propelled by a lot of these use cases that we've talked about, right? That's right. And that's the other point, which is innovation never stops. So if anyone thinks all of the blockchain and the digital money, commodity and asset innovation has already happened and there's no new innovation yet to come, then by all means stop investing. The difference between a public equity and an early stage venture startup is with a public entity, you can buy Amazon today, you can sell it tomorrow, and you can buy it. back the following day. In early stage venture, if you're an ink to me investor, that does not mean you're going to be a Google investor. If you're a Myspace investor, you do not automatically

become a Facebook investor. You have to dollar cost average through the innovation cycle. You can't stop investing because the best companies may come later. Well, I think that's a great place to wrap it. These are some great predictions. I'm really looking forward to having you guys on next year to talk through how they all played out. But maybe in the interim, where can we send folks to learn more about blockchain co-investors and stay in touch with you guys? We believe it's very important to make everything that we do accessible and transparent. You can just go to blockchain co-investors.com. You can learn about us, but you can also go to the insights tab and you'll find a host of resources, newsletters, webinars, obviously information

about our funds are there too. There's also pages for people who are just beginning to learn about blockchain and want resources at their disposal. We really, really believe that we and you at Castle Island and the other 40 venture capitalists that we have invested in, part of our role is not just to make capital available to the best entrepreneurs who are building in this area and with this technology, but the other part of our role is to educate the other seven and a half billion people that this is not fakery, this is not fantasy, this is real. And it's, It's very much like 1995. I can't tell you how many congressmen and senators were telling us that we should stop the

internet now. In fact, many of them carried on saying that through until 2011 and 12, as we all know. And some of them are still saying it. Net neutrality is not definitely out of the weeds even today. So it's our job to go out there, tell the story. If you come to blockchain co-investors.com, we make everything that we do available. Well, we're huge fans of what you guys have built and continue to build. So thanks so much for making the time on a holiday week to come on the podcast. Enjoyed chatting with both of you. Thank you very much, Matt. Thanks a lot, Matt.

Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island.Vicc.com. To listen to all of our podcast episodes, please go to On the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.