On The Brink with Castle Island - Weekly News Roundup 6/12/20 feat. Christine Sandler (Fidelity's institutional survey, the GBTC premium trade, Coinbase at a crossroads) (EP.89)

Episode Date: June 12, 2020

Matt and Nic review the stories of the week, featuring special guest Christine Sandler, head of Sales and Marketing at Fidelity Digital assets. Christine joins the show to discuss Fidelity's newly-released survey of institutional investor attitudes on digital assets. We talk about what FDAS is up to, client enthusiasm for the asset class, and how institutions are thinking about it today. Also covered in the episode:  The Web3 dream – does it require blockchains? Bank Frick adds support for USDC Rebranding stablecoins to cryptodollars Bitcoin Billionaires is greenlit for a movie Other events in Bitcoin history which are movie worthy Three Arrows owns 6.26% of GBTC The fate of the GBTC 'premium trade' and the in-kind contribution Stephanie Kelton's NYT op-ed and unspoken constraints on MMT Coinbase is at a crossroads  

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 into Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. And what a busy week. A lot of content in the Castle Island world this week. Yeah, it's popping off. I mean, we're not quite pomp level, but, you know, we'll get there one day. Yeah, I mean, you really have to tip your hat to pomp. Does anyone work harder than that guy? He's prolific. Got a newsletter. He's got the podcast. He's got a new show with Paulina now. I mean, that guy is a hard worker. Daily newsletter, audio version of the newsletter, shows three to five times a week, and a whole bunch of tweets as well. I mean, that is honestly pretty impressive, not going to lie.

Yeah, I mean, he might be the hardest working guy in the game. But we're getting there. We're doing a lot of work this week. So we had an interesting Tether podcast to start the week with you. Yeah. So we've been covering crypto dollars. I felt that it would be incomplete if we didn't get someone from Tether on the show. And Paolo Arduino was kind enough to come on and state his case, you know? Yeah, I didn't realize. So it sounds like Tether has more banks.

then I thought I thought that they had one bank and sometimes no banks and maybe that had been true but it sounds like it is professionalizing is that the right interpretation yeah so that was one of the interesting takeaways from the show

we're actually going to have another episode covering Tether so we can't get enough they've definitely been trying to build in resilience as far as I can tell on both the banking side and the blockchain side, they're live on seven blockchains, which is kind of insane to think about. So, you know, like these crypto dollars don't necessarily have any allegiance to any particular chain. So they're kind of like a fickle beast.

What's going on with the $100 million prints on the Tron Tether blockchain? I'm getting these alerts on whale alerts. Is that real? Yeah, so Tron has had more growth. TetherTron has outstripped Tether Ethereum in terms of growth in the last two months. That's the new place that all the tethers are being printed these days. Then I had a podcast this week with Mark Cassidy. Mark is the co-founder and he's a general partner, he's a general partner at Vestigo Ventures, which is a fintech fund here in Cambridge, Massachusetts. And Mark was also the chairman and CEO of LPL Financial,

which is the world's largest independent broker dealer. So this was a fun episode. We talked about advice. So we talked about kind of how Americans receive financial advice and what those relationships look like, how they've evolved over time, how financial advisors think about crypto assets in the context of that advice. We talked about blockchain, talked about fintech. So that was a lot of fun as well.

Yeah, that was a great one. And then in terms of additional content, so you wrote an article for CoinDesk this week, it was titled, Your Property Rights Should Extend to Social Media. And then you did a quick recap podcast with NLW, which I enjoyed. So why don't you weigh the case out here? Yeah, so this is an idea that I've kind of been kicking around for a long time. I actually got the direct inspiration to write this article after a conversation I had with Balagy, actually after we interviewed him on the podcast, and if you listen to that podcast, which will link in the show notes here,

he talks about some of these same concepts and about the notion of private keys being a new form of private property. So basically the idea is pretty simple. You put a lot of work and labor and commercial and social value into your handles on social media platforms. Why should that not be considered your own property? So not exactly, you know, the most original idea. But I think there's a very strong case to be made for it today when the people that run these platforms are getting more and more kind of aggressively intrusive. in terms of censorship, de-platforming, de-boosting, you know, algorithmic changes to timelines.

And my contention here is that we should think of censorship as a form of property theft, not just stripping your right to use the platform. It also strips something of commercial and social value, which you've built up over time. So that's the idea. I mean, if you apply it to the way that actual social media systems work today, it doesn't make sense because their terms of service say something very different. But what I'm saying is this situation is pretty fragile.

The social media systems that are likely to succeed in the future will actually be more respectful of the property of end users and kind of acknowledge that reality. And they'll look very different, is my guess. But so this is a trend that I'm going to see if I can explore for a bit more. Yeah. So what excites me maybe the most about this is just what it does to the existing data monopolies if something like this were possible. So you're basically talking about a world where as an individual, you can control your social graph.

So you can effectively maintain a list of everyone that you're friends with and how you're connected with them. And then you can transport that social graph onto new products and services. So, you know, if what you're proposing and what you're, you're kind of doing the thought experiment on. If that works, then that just destroys value of these large kind of, you know, social media companies and data monopolies. If I'm thinking about that the right way.

Yeah. I mean, they're monopolists and they are currently capturing value, which probably should belong to end users and should be returned to the end users in the form of a consumer surplus. But right now they're successfully harvesting it. And the way that they're doing that is, A, through network effects, B, through pretty anti-competitive acquisitions, if you ask me, and C, by making it impossible to exit these platforms with your information and social graft intact. You can't really seamlessly exit.

If you could, there would probably be much more competition, that's my guess. Now, what's probably really going to be interesting here is just how business models can be built on top of this. I think some who are hearing this will probably jump right to, you know, what if you tokenize a network like this and provide incentives. But even without a token, you could imagine a world where people, we can just have a traditional advertising-based model and just have a pass-through in terms of sharing that revenue and opting into being targeted for certain types of ads and getting paid for that.

So it might not be that you need to live in a, let's tokenize everything world here. It could be that these business models just incorporate that surplus being passed directly onto the individual based on their interactions on that system. Yeah, I don't think public blockchains are actually necessary here. I think they do enhance the system. So if you think about Erbit, which is based on ideas just like this, they do use Ethereum to register the namespace, but aside from that, they don't lean on blockchains at all.

So it's very possible to envision this idea without requiring the use of a token or even requiring a public blockchain. But as these cloud registrars, which are purportedly neutral, maybe they do have a role to play here. Well, I think that a public blockchain, even just for timestamping audit logs and holding central parties accountable, that could be an interesting use case,

you know, to effectively not rely on trusting that third party and maybe having some degree of visibility into, you know, who's doing what with your data at the end of the day. Yeah, I think they have a role to play, although I do also think that the Web 3 movement was a little overcooked in 2017. Hard to argue there. Okay, and then I guess two last content things that we did this week. So you went on the bankless podcast, which is a good podcast. I listened to that one.

I need to throw that into my regular rotation. So you spoke about Ethereum, which some people think you hate Ethereum. It's pretty clear that you don't based on that podcast. Well, well, don't put new words in my mouth. I mean, I have a complex position on the issue, you know. I think you're very, you came across as someone who is very open to new ideas and not religious in your views. So that was good.

Well, they threw me a real curveball with the first question. They asked me if I was an Ethereum. So I had to filibuster that one a little bit. And then I did a YouTube show, which was the first, I think it was the first YouTube show. I guess we did the BlockFi one a few weeks ago. But I appeared on Constantine Kogan's show. So he's a GP over at BitBull Capital, which is a crypto hedge fund of funds, actually. And so we talked about the current state of play for blockchain venture capital.

And that was a fun conversation as well. And we have a link to that in our newsletter. So a lot of content. And today we are really excited because we have a new report out from a big financial firm. The last time this happened on the podcast, it was the Goldman Report two weeks ago. And that was a little bit of a negative report. I'm happy to say that we have a little bit of a happier story today. So Fidelity Digital Assets this week, they released a new survey on institutional views on digital assets.

It has a lot of good information in it about how these institutions are thinking about Bitcoin. and Ethereum, other crypto assets. So we thought, who better than the head of sales and marketing at Fidelity Digital Assets, Christine Sandler, to come on and have a discussion just around what they're seeing in the marketplace, how Fidelity is custody and trade execution business is growing in what the last few months have been like. So why don't we pass it over to Christine? Christine, thanks so much for joining the podcast. Really excited to have you.

I'm thrilled to be here. Longtime listener, first time guest. That's great to hear. We always like to have fans of the pod on the pod. And it's an interesting time to have you on the podcast. The last time, the first time that we did a kind of a guest host on the Friday Roundup was to talk about the Goldman Report. And that was a rather negative report, I'd say. But it's exciting to have you on the podcast today in the context of a very positive fidelity report, which we'll obviously talk about. But maybe before we do, I think it would be helpful just to hear, for the listeners to hear your background and how you got to. to be the head of sales and marketing at Fidelity Digital Assets. Yeah, sure. I'm happy to tell you. So I came from traditional finance. I spent about 30 years in traditional finance. I traded both on the buy side and a proprietary basis.

I left trading in the mid to late 90s and began to focus on the electronification of the equities business. So worked at Bloomberg and then went to a startup based in Chicago called Archipelago. that company fundamentally changed how we trade equities. The business that I ultimately ran was spun off and sold to Merrill upon the merger with NYSE. So entered Merrill as an MD, stayed there for a year, and then went back to the New York Stock Exchange to join the rest of the team as global head of sales, reporting to the CEO, part of the management committee. It was a wonderful experience. Having that vantage point during the crisis was really quite extraordinary. I left after the acquisition, the ICE acquisition, and then joined Barclays to execute a cross-sale for their global equities.

And quite honestly, it wasn't a great fit. So after about 18 months, I left and I resigned. I didn't work for about two years. And I ended up advising startup firms and really considering what the next step might. might be. And I found that I was happiest when I was surrounded by smart people solving challenging problems. And I found that in crypto. So in late 2017, I began to speak with Coinbase and ended up joining the firm in March of 2018, stayed there for a year, helped to build up their custody business, and then ultimately joined Fidelity in March of last year and have it look back. It's been a great,

It's been a great experience. You have such a unique background in the intersection of traditional financial services and then crypto assets. And it's rare to find people that have that type of experience in this industry. So I'm curious, what was it about crypto assets apart from there being a lot of smart people, which I totally agree with, by the way. I think it's, if you just followed smart people, maybe you'd always end up in the right place.

But what was it apart from just the smart people that drew you to crypto assets? Ironically, it was the fact that the crypto markets were fairly dysfunctional. So you had these extreme swings of volatility. You had pretty homogenous matching pools. And I thought, wow, you know, as someone that's seen kind of an evolution on the equity side, maybe there's something to do there. So the real hook for me was a market structure piece. And then truly fell in love with the elegance of the,

digital asset, you know, the digital asset ecosystem. So, so yeah, it was the, it was the market dysfunction that actually drew me to the, to the industry. Christine, can you talk a little bit about your role at Fidelity and maybe just starting with what Fidelity is up to in this space for those who might not be familiar? Yeah, I mean, well, I hope they're familiar with what we're doing. So Fidelity's digital journey began many years ago. And right now, we are focused on providing institutional custody and institutional execution services. So we are a purely institutional platform, you know, no retail. We are Bitcoin only. So we're very focused on building very deep, strong infrastructure to support institutions. And we also partner with other entities,

whether they're digitally native businesses or folks that are on the traditional side that are looking to gain access to this asset class, we're a very viable partner for that. So we view our focus is very unique and strategic and also very focused. So I guess the news of the day is this week, FDAS announced that you had concluded a second annual survey on institutional investors and their adolphs. attitudes relating to crypto. So can you tell us what the motivation behind this survey was? I guess this is now the second year that it's been running. So we ran the survey last year and we surveyed U.S. institutions. We surveyed about 400 institutions. And it was a, it was a really, it was a benchmark

survey for us. And we thought, look, if we could potentially run this survey every year, we would begin to develop maybe a picture of what the institutional landscape looks like. So we got some great information last year, and I think there were some, there were some unique takeaways. And we ran the survey again. It ran from November of 2019 to early March of 2020. Last year, we surveyed about 450 U.S. investors. This year, 775 U.S. and European investors. So it was equally divided among U.S. and European investors. And our objective was really to learn, okay, has there been an evolution in terms of sentiment in terms of obstacles? What is the, so what was the year-to-year change in terms of institutional perception of digital assets?

And I guess the headline is the numbers seem to be getting better. I mean, the warmth towards digital assets and the willingness to consider the asset class keeps growing year on year. Yeah, I think from our perspective, we were pleasantly surprised at how robust the numbers were. I think one of the most telling signs, but almost 80% of investors found something appealing about digital assets. And I think that that was a really telling sign. Also, we were really impressed with the strength of the European numbers as well. So there were some things that even surprised us, but there was also a natural carry follow-through of like last year we found 22% of U.S. investors had access to digital assets. This year we found that that had increased to 27%. So we felt that it was corresponding to what we were seeing in the marketplace, that adoption was accelerating based on the strength of the,

the infrastructure offering from folks like ourselves and our peers. The thing that we thought was really interesting was we found that 36% of all investors surveyed were allocated to digital assets through an array of different products, whether it was direct investment, futures, funds, or digital asset companies. So there was a fairly broad. And that was something that we had also seen in the marketplace, that our clients were looking at different ways of expressing an interest in a single asset or multiple assets by leveraging different products, whether it was just literally holding physical Bitcoin or whether it was

investment in a fund. That 36% number of institutional investors that currently invest in digital assets was really surprising to me in a positive way. And I guess that's gotten up significantly from last year. What's the profile of one of these survey takers in terms of institutions? You know, without obviously naming names, what did these institutions look like? Yep. So we surveyed folks. We surveyed crypto hedge funds, venture funds, high net worth individuals, financial advisors, family offices, endowments and foundations, traditional hedge funds, and defined benefit plans as well. So it was a really broad view of the institutional landscape.

And that's what also we found valuable. So it wasn't just a specific survey focused on hedge funds or FAs. It was very broadly based. So there was no typical investor. which is why I think the numbers are even more favorable. Yeah, I think the numbers are also more favorable if you think about it in the context of when the survey was taken. So I'm sure that after the Paul Tudor-Jones letter, institutional, and I'm going to

like to ask you about that, you know, what's it looking like ever since that letter? But this was before that letter came out and before this was a popular macro theme in this context of additional money printing. So, I mean, what do you think? I'd imagine the numbers would have gone up if you took this today. You're exactly correct. So my expectations are that the numbers would even be stronger if we reissued that survey or extended it even a month. And it's also validating what we're seeing in the marketplace.

So we're seeing an acceleration of demand across all institutional segments in our own business, which is pretty telling as well. And you're absolutely right. Had it been, look, I think the survey ended in very early March, had the survey extended to beyond March or into April, I think we would see a pretty significant difference in the overall numbers. You also probed these investors on the concerns they had about crypto. Was there any change in terms of the worries that you had in terms of on a year-to-year basis?

The top three obstacles continue to be volatility, concerns about market manipulation, and a lack of fundamentals to appropriately gauge value. And I think all of those gaps are beginning to be closed as well by price volatility clearly as the markets get broader and deeper and less homogenous. You know, you'll see a dampening of volatility. Concerns about market manipulation as exchanges become even more regulated and have more robust policies and procedures, you will begin to see those concerns abate as well. And the lack of fundamentals is really just because digital assets are just kind of a young asset class. Incidentally, one of the things that we found were that 40% of folks that have digital assets in their portfolios felt they belonged in the alternative asset class, 20% of those of those folks believe that they belong in an independent asset class. So an asset class of their own. So we actually found that having, so we've found that

20% to be pretty telling. We found that to be, you know, a very positive sign that there's a tremendous runway in digital assets in general. So is someone who's spent, a career looking at market structure and how things are supposed to work, you know, how close are we to this being an institutional grade market structure? And, you know, what needs to be built and improved in order for that to happen? Yeah. So we've talked about it a couple of times. I think for us to have the same type of experience that we have, either in foreign exchange or equities, there's still quite a bit of infrastructure to be built. However, I think smarter clients, are beginning to stitch together that ecosystem

in their own way. So we talk about what's necessary for a prime offering. It's not a trading interface and custody and some sort of borrow and lend, but it is actually really robust risk management and capital. And so we have clients that are figuring out a way to trade on a more capital efficient basis

by the use of leverage. but they have to go out and find that. So there's no one that's actually putting it all together until you think about how we are building our business as well. So I think we are a potential natural prime. So I find that term, it's a pretty popular term. But I think the key pieces of offering prime services are actually risk management and capital.

Yeah, that's a great point. Prime services is such a kind of a catch-all phrase right now in the industry that people are talking about it and meaning different things. It's almost like qualified custody. I think that took on a leg of its own past a couple of years. So what's your day-to-day looking like these days? I'm curious, is the pace of kind of new sales increasing here? Are you in rooms that you thought that might take three or four years to crack into these type of rooms and it's happening now? What's the day-to-day look like? Yes and yes. So I'm pleasantly surprised. I shouldn't say pleasantly surprised. This fully

expected this. Fully expected this. No, we've had, the pace has been relentless. So we've had great interest from, and I would say preface this by saying most of what we're working on is on the traditional side. So I would say 80% of it is truly traditional. So non-digital asset holders. looking to acquire that asset or looking to custody that asset. They may be perhaps exposed to futures. So if they're a hedge fund, they may have dabbled in the futures or they may have traded one of the publicly traded trusts. But we continue to see very broad-based and very traditional uptake for digital assets

on an almost consistent basis. We're also seeing really strong interest in terms of folks looking to particularly, potentially outsource their custody function, so whether they're a digitally native business, or whether they are someone that's looking to establish a digital presence. So that's been a pretty big lift for us as well. So we're spending a lot of time on really meaningful opportunities as well. You'd have to imagine that the market structure could evolve such that that will become a bigger opportunity to be the outsourced custodian for retail brokerage type of firms. That's the way things work in the traditional space, right? Establishing a digital asset custodian is no small feat. So whether it's the

regulatory lift or the actual infrastructure, it's a significant build. That being said, you don't really have to, you don't really have to build this. You can actually leverage some of the infrastructure that we built in order to test your hypothesis, whether a digital business is for you. Christine, this has been great. So where can people stay in touch with Fidelity Digital Assets, if they're an institution? Where can they learn more about your offerings? Absolutely. Definitely visit our website, FidelityDigitalityDigualassets.com. You'll find some great content from our head of research, Rehobitoria, and also some wonderful insights from us as well. Please stay connected because we were in the process of beginning

an outreach campaign as well to provide, you know, more topical information to the institutional community as well. Well, that's great. There's so many exciting things happening over at Fidelity. We're excited to keep an eye on it. Thanks for joining us. Pleasure. Thank you.

All right. So what do you think of that? It's such a striking contrast between the Goldman Report and Fidelity, which has run this, this survey now for two years. All the relevant numbers are up into the right. Um, you know, awareness and exposure to this asset class is growing fundamentally in kind of the right segments. I mean, this is the institutions that people talk about. So it's happening.

I like how Christine called out, um, just following the smart people around is, is how she got into crypto. And, you know, Fidelity is hiring a lot of smart people right now. So that team is really ramped up. So excited to see what they continue to build over there. Um, you want to jump into some news. Do you see that backed, which is the crypto asset affiliate of ICE, the intercontinental exchange, they've partnered up with Galaxy.

It looks like they're launching a custody and trading business catered to institutions. So, you know, something else for institutions. Yeah, speaking of institutions. Yeah, something that really caught my eye this week was this European bank has added support for USDC, the stable coin, which is kind of something I think we expected. from USDA, they've always been much more proximate to the actual financial system. But it's really cool to see. I mean, we're talking about stable coins settling cross-border transfers or bank transfers

instead of Swift and, you know, the bank wire correspondent bank system. So I don't know. This is pretty cool, actually. Yeah, I'm really surprised that it's happening so fast. It's clear that they have a good kind of business development function. over there at USDC. So this is exciting. And I think their USDC is hiring and adding roles to that team too. So folks, you know, listening to this podcast are interested in what they're building. Go check out USC. Go check out Circle's website, CoinBasis website to learn more about that.

I think this is, you know, a huge story. This is the story of the year, I think, you know, in crypto. Yeah. So we're investigating the stable coin. Actually, we're rebranding stable coins. They're called crypto dollars now. So just FYI on that. They're not stable points anymore. Okay. Yeah. Yeah, the other crypto dollars. But this is, as you say, this is the story. In, you know, in certain cases, you could say that they settle faster than their counterpart transactions in the financial system. Did you see this story that Bitcoin Billionaires, which is the book that was written about the Winklevoss Twins by Ben Mesrick, it has been greenlit and it's going to be a movie. Yeah. I didn't read it, so, you know, full disclosure, but how exciting can that be?

I mean, it's not like exactly social network tier. It's just, you know, a handful of guys getting very rich. No, it's a good book. It's a really good book. It picks up actually. So Ben Mesrick wrote the book about Facebook, which is the accidental billionaires. And so the Bitcoin billionaires picks up at the Facebook settlement where the Wink of Us twins get the $60 million and took it in Facebook stock and ended up making a lot more on it. And it sort of picks it up there and then talks about their early journey, how they heard about Bitcoin, goes into all of the fun anecdotes just around how crazy the industry was.

It's a fun read. I would actually highly recommend it. And I'm sure it's going to be a great movie. I think a dramatized version of just the events of Mount Gawks would be movie worthy. Oh, for sure. You know, because like that's real drama. You know, there's like there's all kinds of crazy stuff that went down. Yeah, well, that's in this book.

I mean, they talk about, you know, Bit Instant and having Mount Gawks as a counterparty. the Winklevoss twins were buying a lot of Bitcoin on Mount Cox. It's, yeah, it's all there. What I also would like to see is real history of the events of 2017, like, with regards to Bitcoin protocol upgrades. So UISF and the 2X affair, you know, I actually haven't read a good history of those events. And, you know, we lived them, but I'm also interested in the historical record being established because it's kind of important that we learn some of those lessons.

Yeah, I'll never forget that moment with the New York Agreement. So I was at Consensus that year, and Abby Johnson was delivering a speech the next morning, but the night before the New York Agreement was struck. And so I woke up early, and I saw all this news on Twitter around the New York Agreement and we're going to get Segwit. It was truly a crazy day. That was spring 2017.

Yeah. Yeah, springs probably May of 2017, I think. Yeah, the one that sticks in the memory is the cancellation of 2X. We're going deep in the weeds now, but I mean, it really was to live through that was just crazy. People had one vision of where the protocol was going and it did not go that way. I mean, there were times when it didn't seem too far out of the question that Bitcoin cash would flip Bitcoin. I distinctly remember when it listed on Coinbase, I distinctly remember thinking it could easily go ahead of Bitcoin here.

Yeah, like there was some real high drama. We haven't had anything even closely as dramatic as thought in the last year. No, we haven't. Which is honestly like pretty refreshing because that was emotionally pretty intense. Yeah, I mean having the ossification of the base layer, I think allows for more things to be built and for more commercial business models to be realized with the company's building on top of it. So it's good. Although the issue is now that because Segwit was so challenging to deploy on the base layer,

now there's uncertainty around how we're actually going to do a soft fork again this next time around. So the soft fork to get Schnorr? Yeah, schnoor and top route, which is probably about at least a year away still. so it's not exactly urgent, but we're back at the point where we have realized that, you know, actually gaining consensus in a political and extra protocol way is pretty challenging. I don't think that we have any of these civil war type of issues on the horizon. It seems unlikely that we would ever have a confidential transactions proposal to go into the, you know, Bitcoin protocol. So hopefully the future forks here are not contentious.

Yeah, I can't imagine there would be. And plus every failed fork is more evidence against the idea of activist forking. Right. Did you see this story about three hours capital, which is the hedge fund focused on crypto assets? They filed a 13D today revealing that they own a 6.26% share of the Bitcoin Investment Trust, GBTC. So, you know, that's a huge position that's like $275 million, something like that. So it's unlikely to me that Three Arrow's Capital is that large of a hedge fund. But what is likely to me here is that they've borrowed a bunch of Bitcoin and that they've created shares at NAV in the Bitcoin investment trust.

So effectively they borrow Bitcoin, they put them into the trust, and then they sit on that Bitcoin for six months until the trust is tradable on the secondary market. under Rule 144, in which case you can trade it, it's GBTC on brokerage accounts, and there's a premium. And so that premium is there because there's just tremendous retail appetite to get Bitcoin exposure in brokerage accounts. And so it trades that, I think today, you know, trades at an implied rate of $12,600 or so per Bitcoin, you know, and Bitcoin is trading at about, what, $9,600 as of right now. So it's an interesting trade.

Basically what you do is just you keep on rolling that trade. You keep on, you know, creating shares at NAV, and then six months from now you sell and you collect the premium. And there's all sorts of other ways that you can enhance that trade. You could probably be locking in prices by selling, you know, the forward end of the futures or something like that. I'm sure there's other things out there. But this is a pretty clever move.

I have to say this is kind of a go big move for this hedge fund. Yeah, I mean, we've known that this was a trade that was occurring for a long time, but this is probably the first concrete example that we have of a fund running this trade. And, you know, as you say, it's unlikely they just wanted to go long Bitcoin, and the mechanism of choice they opted for was GBDC. So almost certainly this is the premium trade. Yeah, the premium's 30% as of today. I remember saying I thought we would see premium compression this year because we saw a lot of those subscriptions at NAV last year.

But that is absolutely not what has happened. The premium is still very strong. So, I mean, it's interesting because we pointed out a long time ago on this show that a lot of the contributions to GBDC were in-kind contributions, which was evidence of this trade. Now that idea has percolated into the mainstream. People realize it's a thing. And they say, well, that suggests that the coins held in GBDC aren't actually long-term capital. But the counterpart to that is, well, the premium is there for a reason. There's retail investors that are still buying this product.

Even as these funds exit out of that trade, someone's taking the other side of that. The persistent premium is still evidence of appetite for this product. for this product. So I got to say I've been actually been pretty shocked by the persistent premium this year. Yeah, I think that premium sticks around for a while until we have an ETF. It's just reflective of the fact that how else are you going to buy Bitcoin in your IRA on a brokerage platform? I know that there are other options out there, but they're more cumbersome. This is just a point and click solution. So it's probably going to be around for a while. Until we get an ETF. Right. Moving on to the next story, people know we love our private blockchains, but I did just want to spend a second here.

So Vanguard has completed another phase of their blockchain trial with Symbion, which is a private blockchain company. So they have effectively digitized asset-based securities. And they've done a pilot with Bank of New York Mellon, Citigroup, and Stays Street. I did just want to spend a second on it. I mean, historically, I think we've been kind of saying that private blockchains aren't that. interesting. I just want to clarify that. I think these things will be interesting in time. I think that they're automating a lot of things that are very necessary. A lot of this automation really has nothing to do with a blockchain. But I do wonder, and I continue to believe that what we'll likely

see here is private layers that eventually timestamp down to public blockchains, you know, to secure records. So I think all of this workflow, is probably really beneficial. I don't necessarily think it all needs a blockchain per se, but you can see how this would be really helpful to build as a layer on top and just use a blockchain to timestamp and notarize things.

The other thing that I think is really great about this, and it's great to see Vanguard and Bank of New York Mellon, Citigroup, State Street, you know, all of this actually feeds a big education hurdle at those large institutions around building out blockchain wallet infrastructure and how these things work. you know, effectively a lot of these private blockchains are forks of public blockchains.

And so they, they force these conversations to happen at big institutions. And I think they will unlock. It'll just be positive, I guess, what I'm trying to say is that all of this energy is not kind of wasted. And I think we'll see some good things come out of these experiments. Yeah, that's certainly the theory that, you know, these engineering teams and product teams cut their teeth on private. in blockchains and then eventually they go to the real thing. TBD on that, I guess. But, you know, I guess you could argue that JPM sort of went through that phase and they ended up being more favorable to public blockchains. I guess time will tell. Did you read Stephanie Kelton's

op-ed in the New York Times this week? I did. Yeah. So she talked about modern monetary theory and sort of laid out some interesting arguments. Why don't you kind of take us through her argument here? Well, it was a restatement of her basic case, and she's actually written a textbook in case you want to learn modern monetary theory from scratch. But effectively, the idea is that deficits don't really matter. We've kind of been thinking about it all wrong. You know, governments can borrow.

their own currency, you know, without limits, really. And in fact, there's kind of a normative element there. They probably should be if it means that they can pay for social programs and infrastructure and so on. And she says, the only real limit is inflation or the possibility of inflation. And the way that you rein in inflation, when it does recur, is actually you just raise taxes. Taxes force people to obtain dollars. They force. horse to hold him preference for dollars. They also destroy dollars. So taxation is the way to defeat inflation, according to this theory. So it's kind of like the spherical cow approach to physics. You know, you just sort of, you wave away all the political constraints, and then you have a really

nice, neat theory around how to allocate resources in an economy. But there are certainly constraints that she's not mentioning here, which probably deserve to be mentioned. Yeah, I'm having such a hard time wrapping my brain around MMT. And I guess at the end of the day, it doesn't even matter because we're all MMTers now. And it's not like you have to decide if you like it or not. It just is a thing that we're doing. You talk about constraints. To me, the big constraint that maybe she's not considering is just the general population.

Looking at some of these bailouts and entire industry is being subsidized through the creation of new dollars. and saying to themselves, well, why can't, like, why do I have to pay taxes? Or, you know, why can't my loans be forgiven as well? And so the social contract breaking down and people just stopping to, you know, to submit their tax bills, I guess. Yeah, I mean, I think the moral obligation to pay taxes has declined substantially because it's clear that the government can finance itself with issuance. So it's, and it's also like,

If inflation recurs and you're already debasing people's savings, they're probably going to have a pretty hard time consenting to really high taxes, like the kind of tax rates that we saw in the 40s, which is probably the analog here. The other thing is, now that we've seen this kind of corporate welfare at a really massive scale in the last year, people are probably going to demand more direct. issuance to individuals, which in theory goes right into the real economy, you know, those UBI style programs, stipends, direct household stimulus. That goes into the real economy. That's kind of higher velocity issuance. So that's more inflationary issuance. So it's possible to me that, you know, the market has been training its expectations

of inflation based on the prior decade of issuance, which we're. was kind of low velocity issuance because it just stuck and it stayed stuck in the in the financial industry and on corporate balance sheets and so on and they didn't really make it out into the real economy. If we get this new flavor of issuance in response to political pressure, to me, that has the potential to be much more inflationary. So I think it's very possible the risk of inflation is being mispriced here. That's a really interesting point. I guess what we'd have to see there is just more of these, you know, stimulus events that, you know, I guess a lot of the talk around creating a digital dollar and having these direct transfer payments made would really feed into

what you're talking about. I would think that that definitely would be inflationary. I mean, remember Andrew Yang's platform seemed crazy 12 months ago, and now it's a pretty mainstream idea to talk about. Yeah, timing's everything on that one. The other constraint, I would say, is actually just the frictionless nature of assets today. So, you know, cryptocurrency is a thing now, right? So you don't necessarily have to have this really tight linkage between, you know, your country of residence and your wealth. The same way that you did in the 40s, let's say, the last time we had a situation that looked a little bit like this with crazy deficits and really high. tax rates, people might just rebel and flee to a tax haven. And because we have this enormous

kind of Eurodollar system, shadow bang system, and we have cryptocurrency, I think it's much easier for people to exit their local jurisdiction if taxes become super, super onerous. So there's kind of exit valves in the system, which I don't think people like Stephanie Kelton are, you know, really taking note of. Yeah, Ballagy's, um, wide. combinator speech from 2013, it really still holds up talking about free exit. So the other kind of exciting news of the week was Coinbase released this blog saying that they're evaluating 18 crypto assets to add to their platform. They weren't strictly speaking, adding them. They're just thinking about adding them. So what did you make of this?

Yeah. So I think, you know, every time Coinbase does this, people lose their minds on Twitter and they're talking about, hey, you're adding things that look like securities, why are you doing this? No institutions want to hold these random assets. But I guess I take a little bit more of an optimistic view on some of these things going on here at Coinbase. So, you know, I think this is a corporate strategist's kind of dream right now what Coinbase has going on. So let me kind of run you through that logic. So they're the 800-pound gorilla in the crypto industry. They have a last round valuation of north of $8 billion.

They're well capitalized. You know, they're making a ton of money on their existing lines of business. So these guys are going to be a publicly traded company at some point. And, you know, I think it's a case, the Harvard Business School kind of case study in the making right now just in terms of where do they go from here. So there's probably four paths that, you know, if I was a corporate strategy person and I'm sure, you know, some people at Coinbase are thinking this way. It's probably four paths that I'd be kind of looking heavily into. One is retail crypto spot market exchanges and basically what they're doing now with like adding more assets on the platform.

And you have to look no further than Benance and some of the offshore exchanges to see that that's a market, right? I mean, some of these offshore spot markets are making a ton of money. Now, the flip side of that kind of positivity is that that is a market segment that is fraught with regulatory risk. And so Coinbase will probably struggle to compete with finance in the sense that they're going to be hampered by, hey, are these tokens unregistered securities? Can you actually do some of this stuff? So, you know, that's bucket one. Bucket two in terms of potential growth areas, I think, you know, you should be looking at offshore derivatives

exchanges and at least forming a point of view on is this a ongoing area of opportunity or is this a regulatory arbitrage play. So I'm sure it's not lost on Coinbase that, Deribit and FTX and BitMex are just printing money right now. I mean, hundreds of millions of dollars a year probably in revenue and, you know, maybe profit. So I think this is, again, there's a big regulatory risk question. Does Coinbase want to be involved in something that's not regulated by the CFTC and that's effectively an offshore retail derivative exchange? Maybe, maybe not, but I'm sure they're looking at it. Then the third and fourth areas are a little bit more institutional in nature, and I happen to believe that Coinbase could, you know, could play

pretty well here if it wanted to. So institutional prime services. So, you know, getting into more of these prime brokerage style services that, you know, blockfy and Genesis are seeing such explosive growth on. So Coinbase has just this massive war chest of retail deposits. They have a ton of crypto assets just sitting on the platform, and they have a ton of retail order flow. So they'd be really well positioned to get into some of these lending and, you know, prime services. think, you know, like the Togomi acquisition maybe signals that they're aware of this and pushing in that direction. And then I, before I come up for error, the final one that, you know, I'm sure they're looking pretty heavily into is regulated derivatives. So U.S. domiciled

crypto asset derivatives. And so the theory here would be, you know, if you're going to be traded, a publicly traded company in the next few years, you know, let's look at how these businesses are valued. So you look at a retail brokerage comp, like a Charles Schwab or a like TD Ameritrade. So TD Ameritrade trades at an 11.4x PE ratio, E trades trading at a 13.7x, Schwab's 14.5x. So, you know, that's about what you'd be compared to if you're a retail brokerage. If you go out in your derivatives exchange, you're talking about a significantly higher kind of multiple there. So CBOE trades at 25.5 X, CME, 26.8. So I'm not saying this is the only reason you'd do it, but I think you'd get a lot more credit on the public markets from a multiple expansion standpoint if you were in this

business. And oh, by the way, like, I think it makes a ton of sense for them to be in the business because they have this big custody platform so they could play really big in the physically delivered space. So they could be a formidable threat if they kind of decide to build or buy something there. So I don't know. I just kind of look at this move by Coinneum. base and say like these guys are trying a lot of things right now. It's pretty clear that they have some great options in front of themselves. And the next two or three years are really going to be, I think, where it's make or break in terms of like, is this, is this a hundred billion dollar company? Is this a $20 billion company? Like, I mean, this could be massive company.

That's quite the analysis. Yeah. I mean, it took a little Ben Thompson in me there. Yeah, it's like a business school case study. It does seem like they're at a crossroads here. They've been weighing their options for for about at least a year now. Yeah, I mean, I think they've just been, you know, trying a lot of stuff, right? They have USC. They have the Coinbase wallet. So they can, you know, I think I hold a bunch of non-fundibles on the coin base wallet.

Like these guys have tried a lot of things. And I think they're seeing where the market goes. I think the market for Binance and some of these things might have cut them a little bit by surprise. And so they're sort of scrambling to get to some sort of parity there on the retail side it looks like. I think the institutions don't really care about these long-tail assets. So I think the last two things I've talked about prime services and regulated derivatives, I mean, you don't really have to be adding these assets to play well there. It's just become really good at what people want on the institutional side, which is probably Bitcoin and Ethereum.

I think that's it for the for the news of the week. That was a good, good run, a lot of news this week. So we have some exciting podcasts coming up next week. I think we're going to do two or three next week. Yeah, we have a whole bunch in the queue already recorded. So some pretty high quality guests too. All right. Well, everyone stay safe this weekend and we will see you on Monday.