Plain English with Derek Thompson - Crypto Crash Part I: The Case Against Crypto

Episode Date: July 25, 2022

Today, we have the first in a two-part series on lessons from the crypto crash. Crypto, also known as Web3, also known as blockchain-based technologies, remains the weirdest space I’ve ever reported on. I’ve never learned so much about a topic where there were people I trusted roughly equally, whose intelligence I trusted roughly equally, coming to completely opposite opinions. People I consider brilliant think this is the wave of the future. Others are fairly positive that the bulk of this world is a giant Ponzi scheme that’s even worse than most people realize.Today's guest is Molly Wood, a financial journalist turned venture capitalist who also hosts the podcast 'This Week in Startups.' I would summarize Molly’s case against crypto in three main points: It is a double-enemy of the environment—an energy-intensive speculation that pulls money and talent from climate technology. It is an unregulated bonanza of investor shenanigans—Molly explains why the very structure of crypto tokens invites a kind of Ponzi-scheming dynamic, which deserves our attention. Even if you have nice things to say about crypto—and we do have nice things to say about it—there’s a strong case to be made that the promises and the grandiosity is wildly out of line with the actual use cases. The timing on this episode feels right. Last week, several employees of the crypto trading exchange Coinbase were charged with wire fraud, the first insider-trading case involving cryptocurrencies. This is our little podcast trial of crypto. Today, the prosecution. Tomorrow, the defense. Host: Derek Thompson Guest: Molly Wood Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up, everybody? Are you tuning in to the Challenge USA on CBS? Well, tune in to me, Tyson Apostle, as I break down each and every episode with my co-host, Amelia Weddemeier. I'm also a contestant on the show, which gives you all the insider scoop. Amelia, how stoked are you to do this? Tyson, I'm freaking excited. I cannot wait to sit my butt down every single week to watch the show, then come here and recap it with you on the Ringer Reality TV podcast. Today, we have the first. in a two-part series on lessons from the crypto crash. Crypto, also known as Web 3, also known as blockchain-based technologies, remains the weirdest space I've ever reported on.

I've never learned so much about a topic where there were people I trusted roughly equally, whose intelligence I trusted, roughly equally, coming to totally different positions about a single thing. I know people I consider brilliant who think. that crypto is the wave of the future. I know others who are fairly positive that the bulk of this space is a giant Ponzi scheme. I know people who think that the bulk of this space

is worse than a giant Ponzi scheme. Tomorrow, in part two, you're going to hear from Paki McCormick, a fun and popular Web3 writer who spars with me about why crypto still, after a mild wipeout, could be an important tech platform. But today we hear from a wise skeptic.

Molly Wood is a financial journalist turned venture capitalist. She also hosts the podcast This Week in Startups. And today we talk about the case against crypto. I would summarize Molly's case in three main points. Number one, it is a double enemy of the environment. Crypto is an energy-intensive speculation that also pulls money and talent from climate technology. Number two, it is an unregulated bonanza of investor shenanigans. Molly explains why the very structure of crypto and crypto tokens in particular invites a kind

of Ponzi scheming dynamic to this technology, which deserves our very close attention. And number three, even if you have nice things to say about crypto, and we do have nice things to say, there's a strong case to be made that the promises and the grandiosity is wildly out of line with the actual use cases. So this is our little two-part podcast trial of crypto. Today, the prosecution, tomorrow the defense. I'm Derek Thompson. This is plain English.

Molly Wood, welcome to the podcast. Thanks so much for having me. It's nice to talk to you again. I want to split our conversation into two. First, I want your impressions from the crypto peak and the crypto crash. I want to know what it was like to be in Silicon Valley when things were at their frothiest, what it was like to be in Silicon Valley

when things were crashing, what happened, what mattered. And then second, I want to talk a little bit about why this is important in the first place. Is it simply as straightforward as, you know, a couple trillion dollars went poof? Or are there deeper lessons to be learned here about the investment climate of Silicon Valley

and the future of tech and finance? But first, I want you to cast your mind back to before the Matt Damon ad, before the Larry David ad, before the crash, back to September 2021. And from my perspective, Bitcoin is trading in $61,000. Sports stadiums are being renamed left and right. You got Crypto.com Arena in Los Angeles. You got FtX Arena in Miami.

Every morning a new celebrity is spending a couple million dollars to acquire some ape or doodle. You're a venture capitalist. You were closer to the actual industry than I was when things were at their zaniest. what was it like at the peak? What were you thinking as things were swirling around at their most insane? So this is, I should probably preface this by saying this is not my first boom living here in Silicon Valley. I moved here in 1999 for the original, you know, dot-com run-up. I was here then during the Uber.

We work. You can't even say we work. You almost want to say we crashed immediately. I was, you know, here for that run-up. I have been in a million taxi cabs with people saying, I'm an app developer. And they all have this kind of remarkably similar cadence, which is that even though you know perfectly well,

that it's a boom and that there is going to be a bust, you still have FOMO. You cannot resist the siren call of the boom. And so it's this kind of fascinating thing that just keeps happening over and over, which is like you can tell that it's a big, deal because everyone is talking about it is the only thing other than housing prices that you talk about at every event and every dinner and every meeting. I was still a journalist then, so every

question that you're having with your editors is, how should we be covering this? What should we be saying? What kind of explainer should we do? And yet, you also want to open that Coinbase account, because even though you know better, you still feel like there could be something here. And it's just a, wave that you can't help but get carried on. So tell me how this peak and the first inning of the crash felt different than the dot-com bubble in 2000. Because immediately after prices started crashing among cryptocurrencies, you had all these problems among the crypto banks, people were saying, oh, this is dot-com 2.0. It's dot-com 2.0. What did it feel like to be in it? So I think at first, when it was clear that there was going to be some downturn, the big question, because the dot com, the original dot com crash was very tightly correlated to the actual stock market.

You know, these were big, huge IPOs, and so there was a lot of contagion in some ways because these were public companies that took down public markets. And it seemed, given that crypto was a decentralized asset that was supposed to be sort of a parallel financial system that shouldn't impact the stock market at all, the initial feeling was like, okay, some of this stuff is going to start to drop. The scams are washing out. There are going to be a lot of individual bagholders, which is terrible, but it is most likely not going to have a lot of contagion. It's not going to affect the broader market. And I think what's so interesting is that very quickly, it became clear that actually Bitcoin price drops were moving in concert with the broader market. And it almost exposed, I think, the fact that it was actually all the same investors.

That, you know, the people who were invested in Black Rock and Exxon, sorry, Freudian slip, were also quite clearly. also quite clearly a lot of institutional investors in the biggest crypto names, right? So crypto.com, certainly Coinbase, obviously, was a massive hit for the venture capitalists who invested early, but it was also a huge stock market darling. And then a lot of institutional investors had pretty obviously piled into Bitcoin. So I think for me, the surprise was seeing that exact correlation, that in fact it was pretty centralized as, you know, less of a revolution and more of an asset class. And as a venture capitalist,

what did you think about the amount of money that was being sucked into these projects? Like, you're working in climate tech. I wonder if you considered crypto to be a sideshow, a carnival, like a waste. Or did you think, oh, no, there's a lot of money that's sloshing around in VC. This is an interesting side bet.

There's obviously some bullshit. There's obviously some pure fomo. But maybe there's the kernel of an interesting substantive idea that could bloom into a product that could be useful for some people. Where did you land as a VC in this space? I mean, as a climate tech investor,

I see all of this money in crypto as my enemy. And I actually see crypto as almost literally my enemy, right? It was hard for me. And again, this is because of this very specific lens of somebody who's a climate tech investor, watching people pour tons and tons and tons of money into something that is, look, my job is to invest in things that are speculative, but this is like speculative that lights the world even more on fire.

And say a little bit more about that, about why crypto and the blockchain is bad for energy generation. Right. It's a super energy intensive exploit, the process of creating coins and building the, you know, we already know that, for example, data centers are super energy intensive. If you put a bunch of computers in a building, and that's what you, you know, you need to process lots and lots of information, it's going to use a lot of energy. And so big companies have already been spending the last several years and decades trying to figure out how

to make data centers less energy intensive, both for cost purposes and for emissions purposes. Now, you take that concept and you multiply it, you know, nearly by infinity because the process of creating, let's just say, a Bitcoin on the blockchain. And there have been improvements in the technology. But let's just start with creating a Bitcoin on. on the blockchain. I first got interested in and became aware of Bitcoin in, I don't know, I'm going to say, 2009 or 2010. And I had a friend, Trent, who was mining Bitcoin. So he just had his home computer and he was creating Bitcoin. And he was finding that he had to upgrade his computer more and more and more and more because he needed a faster processor. Because

the process of creating a Bitcoin is that you are basically validating that are millions and then trillions of math problems and saying, does this thing add up? And whoever can validate these math problems, the fastest will be rewarded with the creation of a coin. So it's like if you want to play Fortnite without your computer skipping, you need a fancy graphics card, and you've got to upgrade your motherboard,

and then you're going to want like a 4K monitor. And then Bitcoin is all of that, and it just keeps getting more and more energy intensive by design. Because the more coin there are, the more coin that are created, the more transactions there are in the blockchain. So the more math problems you have to solve, it's like an exponentially increasing curve. It's an arms race. It's an energy intensive arms race. Well, we're going to get into the responsibility of the money being spent and invested in just a second. But I think that it's, you know, when you talk to people that are, let's say, more bullish on crypto than us,

they'll say one of the wonderful things about this space is that it's a beautiful petri dish for all sorts of experiments. And there's a beautiful petri dish for all sorts of experiments. And there's true to this. It's true that it's a lovely petri dish four experiments, but what your point makes very clear is that it's not a free experiment, right? It's not a free experiment for the planet. It's an experiment that is extremely costly in energy generation, and therefore it's an experiment whose costs are being borne by the atmosphere, right? By the oceans, by the biosphere. There's another aspect of this that I want to get your brain on, because you're a venture capitalist and the behavior of the venture capital community in crypto is very controversial.

So there's this old model that I think a lot of people are used to when it comes to investing. It starts with a new company. A new company comes along. A VC writes them a check in exchange for equity in this new young company. That company grows. It succeeds. And after a few years, if everything goes right, it goes public. It IPOs.

And after that, everybody can buy equity in that company, but only when the company files with the SEC and accepts all this regulation to protect investors with crypto. With crypto and with tokens, the model has changed a little bit. Walk me through how VC works here. A project comes along and you make an investment in the job of a VC, and I know everyone knows this, but I'm going to say it again, is to make an investment in exchange for equity in a company. That equity is not liquid.

Sometimes it's not liquid for a really long time, 10 years, maybe more, because the company doesn't have an exit and you don't get your money back for a really long time. If you get 10 to 15 to 20% equity in a company that also issues a token, and you're one of the early investors, you're going to get an early distribution of those tokens. And those tokens are liquid. So that even if they're issued and you have a lockup period, like maybe you can't sell your token for six months or a year or three years, eventually you can sell your tokens. And if your bet is that this company is going to become a really big deal,

and it does, then even if you don't get your 20% equity as liquid money for a decade, you could get a lot of money from the fact that you might have been issued 30 or 40% of all the tokens in existence when this project launched, and you can sell that. So just as a purely like mercenary play, of course you want to make that investment. That's so interesting because these tokens, they're basically securities, like stocks in that way. And so investors can acquire tokens, list the tokens on exchanges where the public can buy them, and then the public buys them. But now the VC or the people in the company, the owners of these tokens, are in a position where maybe they can, you know, talk their book, boost the value of these tokens, and then sell off in a year or so, way before the company is acquired, it goes public. I mean, this is sort of a pump and dump.

And I'm not saying that this kind of pump and dump is the only thing happening in crypto, but let's just say it's clearly something that can happen. Before we get into the crash, I don't want this episode to be purely you and I are somewhat crypto-sceptical. It's not extremely crypto-sceptical. And then we just talk about and share Schadenfreude about the crypto crash. I want to take a brief, you know, say something nice about crypto Web 3. What were the most interesting ideas that you found in this space, that you still see in this space? What use cases other than buying and selling crypto and paying Matt Damon to talk about your crypto exchange, do you think are the most important? here. What a world where Matt Damon is going to be forever the bet noir.

Poor Matt Damon, honestly. I really actually do profoundly believe that Bitcoin could be hugely transformative as a currency. And that because I, because there's so much money made in the middle of financial transactions that it ends up being massively gatekeeping. So if you think about the unbanked and the idea. that without, you know, some institutions standing in the way, taking 30% of the money that you're sending from one country to another, you could start to have a lot of economies that are born just out of it being so easy to send money back and forth. Like the example is- Are you talking about the unbanked in America? Are you talking about the unbanked in, you know? All over the world.

Okay. All over the world. Like I'm saying if you're in, if you're in, I mean, Africa is such an obvious example, but it's also a really great example because, like, a lot of devices and internet infrastructure have just skipped Africa and everybody went straight to mobile phones. So you've got a country where everybody's on phones, but they're largely unbanked, and they want to participate in international commerce, but sending money internationally is incredibly difficult and takes a long time to settle. And, you know, somebody sits in between and skims money across, off the top at every stop. If you can get rid of all of that, and just say, I've got a wallet on my phone, and if you want to pay me for my goods,

you just send it to me. And it's there instantly. It's capital I can immediately access and use, and I can sell to anybody anywhere without anybody getting in the way. Then when you look at, like, you know, Jack Dorsey's weird tweet about how Bitcoin will bring about world peace, you start to imagine where he's coming from there, because all of a sudden, anybody has the freedom to transact with no gatekeepers. that's a genuine, that's as powerful as the internet, if you think about it. Everybody can have access to information, all of the world's information, anywhere in the world, anytime they need it.

That was really powerful. Or 4G. 4G internet access is why we have Uber and why we probably have Netflix and why we have all of these things that rely on and always on connection that didn't exist with slower mobile speeds. So, you know, I'm holding. some Bitcoin because I buy that. Yeah, it's interesting. We had this other conversation with Paki McCormick, which we're going to air in a separate episode, I think. But I know people that work intermittances very well. I know people that work in money transfers in Africa very well. And I don't want to speak for them,

but what they seem to be building is something much more like an Apple Pay Venmo for these countries than a crypto.com for these countries. Because fundamentally, what you need is, currency that you can spend at your local market. And Bitcoin is not a very good medium of exchange. And it may never be a very good medium of exchange. Precisely because it's scarce, it is probably always going to be extremely volatile. People are going to bet on it, I think, as if it's any kind of volatile currency like a tech stock or gold. And there's not a lot of people that are, you know, buying onions with their bullion. And so I think that, you know, I personally think, and I know that I'm putting a position of trying to defend crypto and then saying, you know, I don't agree with that

particular defense. I'm ready. I'm ready. Right. I understand that I'm putting you in a very unfair position here. But it just seems to me that the solutions for, you know, Senegal, Uganda, Ethiopia are not going to look like crypto.com. They're not going to look like Coinbase. They're not going to look like a Bitcoin remittances program. They're going to look more like Venmo Apple Pay for the local currency. So you're right that they're going to skip over the generation. of banking institutions, potentially, but they're going to go straight to local currencies on their phone,

and that that is going to be more useful than trying to bend Bitcoin, which is this weird, extremely volatile store of value into a medium of exchange, into something that you can buy your lattes and onions with. I could not agree more that at this point, Bitcoin has become such a valuable asset class that it's going to be really hard to make the transition to currency.

Where I will, though, push back is on the idea that local currencies, like, we're sitting here with the world's reserve currency. The dollar is stable. It's now super strong globally. Most of the world's, like, of the richest countries' currencies are stable. That is not the case all over the world. And so Bitcoin volatility, I mean, honestly, the best thing that can happen for Bitcoin, is that it can settle into a pretty low price.

And then we can start to talk about it as a currency, or we can start to talk about the things that could enable it as a currency. If we assume that Bitcoin will become less volatile because it will be less attractive as a pure asset class, and we invest in the technologies that make it more usable, then I think you could sort of say, there's more value in transferring this thing that is transparent, that has a limited amount, no Fed can come in and just print more and more and more.

You know, I mean, I think downstairs I have a, my son's grandfather gave him a Zimbabwe and billion dollar bill. Like, that's never going to get printed in Bitcoin. Maybe one day it'll be the equivalent of a billion dollar bill and then the next day it'll only be worth $22,000. But if you assume that its volatility is going to be less than the basket of global currencies, I think there's still something there. in terms of using it as a payment method.

And also the government can't come in and mess with it. Yeah, and I agree. There's a lot of governments that are total assholes to be pretty unsophisticated about it. And I can totally understand why, especially people with lots of money that face capital controls, would want to have some of their money in a currency like Bitcoin that could be transferred internationally without the kind of capital controls that exist with the local currency. So especially when you get to sort of the upper income, when you get to sort of richer people in more unstable countries,

I can understand some of the case for cryptocurrencies or for Bitcoin replacing local currencies. But I want to move to the crash that we're seeing right now because it actually revisits some of these issues. I want to talk about a couple of different aspects of the crypto crash, and each of them have a vocabulary term that I'd love you to help us unpack.

So the first thing that's happened is that, and this is just obvious, a bunch of cryptocurrencies crashed. Most famously, Bitcoin is down something like 70% since it's November high. And several stable coins have failed as well. What is a stable coin and why is their failure particularly significant? So a stable coin is the thing that was supposed to solve the problem that we were just talking about, right?

The idea that Bitcoin is so volatile that you can't count on its pricing. And so this idea of stable coins was created and it would be a coin, a currency, whose value is pegged to some other currency. And that other currency could be either an actual, like an existing currency, like the U.S. dollar, it could be pegged to some kind of a commodity or it could be pegged to another financial instrument. And as is the way of cryptocurrency,

it was like not appealing to have it be pegged to the dollar or the remedy because that's just, you know, more centralization and banking. And so stablecoins were created that were pegged to other cryptocurrencies. And there's this idea of an algorithmic stable coin, which is like, I'll create this stable coin. The most obviously famous recent example is Terra and Luna, where a stable coin was created called Terra. Its value was going to be pegged to this Luna coin.

And the value would always be held stable by the buying and selling, the transacting of the Luna coin. And as long as enough of that happened and also people believed that the lunacoyne was a real thing, even though it had been created effectively out of thin air like all of this had, then the whole thing would work out fine and Tara would stay stable. I mean, there's something beautifully Orwellian about the concept of a stable coin when one cryptocurrency is being 100% backed by another cryptocurrency. You know, it's like pricing your beanie babies in Dutch tulip bubbles, right? Like, it's all a bubble. A hundred percent backed and secure doesn't mean anything. It can be backed by gold.

It can be backed by real estate. It can be backed by literal beanie babies. It can be backed by Dutch tulip bubbles that are preserved in amber, right? I mean, you can call anything a stable coin. Stable coin is an aspirational term. It means we hope that this cryptocurrency has a stable value. But as we've learned in the last six months, it hasn't necessarily had a stable value. Why has that been particularly disruptive to the general ecosystem

of crypto, that some of these stable coins have started to become a little bit volatile. Yes, and again, we should make the distinction between like a Fiat-based, a Fiat collateralized stablecoin, something that's based in a dollar or a basket of global currencies that isn't likely to fluctuate. That's like USDA.

That's like USDC, which I think also became unpegged for various reasons. Oh, we're going to get to USC in a second. Yeah, we're going to get there in a minute. And then these idea of sort of algorithmic stable coins which rely on smart contracts and other crypto. And that is, and I'm not trying to be ungenerous here, a fiction based on a fiction. So this is where I should point out, and my inner Kai Rizdahl would say that even the U.S.

dollar is itself a fiction, right? It is based on our trust in the dollar is based on the concept of full faith and credit of the United States of America. and that credit has been hard-earned, but it could go away at any time. In theory. So cryptocurrency fundamentally and the people who are involved in cryptocurrency will tell you that what this really is, and it sounds kind of fuzzy and ridiculous, is a community. Right.

And it is. They're building the full faith and credit of the cryptocurrency universe. All money is intersubjective. It is only a dollar is only worth. something if you believe that it's worth something and I believe it and I believe it, right? If we're paying each other, right? It is intersubjective in that sense. So yeah, this is all being held under a much more philosophical and pot-addled conversation about the fact that the nature of money is somewhat magical and intersubjective and it is all a kind of shared fiction, a useful

collective hallucination, stipulated. Even so, we are dealing with extraordinary fictions based on fictions in some of these cases. I want to ask about USDA specifically, because USDC, as you said, is not one of these cryptocurrencies that's based on another cryptocurrency, based on another cryptocurrency. It's not one of these sort of infinite regress. It is based on, backed by, theoretically, a reserve of a significant amount of U.S. dollars. The journalist Matt Taiibi recently looked into the company that, owns USC. It owns the right term here, the relationship between Circle and USC. Maybe just tell me a

little bit about what this company is, what USDC is, and what Matt Taibb figured out. So Circle is the payments company that created this USDC stable coin that is a dollar-pegged token. And I, crypto, sorry, Circle also is. a, like a lender, you know, because it's a payments company. So it's a holder, it's a lender, it acts a little bit like a bank, where a lot of this, you know, this is a minor tangent, but not really, where a lot of this has fallen apart, and this is a lot of what Matt Taiyb pointed out in this article about Circle in USDC. So on the one hand, there's this token that, according to Circle, is backed by the U.S. dollar

and collateralized by a bunch of holdings that are entirely secure. So you have that. Then you have, in the case of Circle and many other companies in this arena, the desire to do more with the money that they've created. Lend it out, earn some interest on it, you know, borrow against it in order to do other things. And what happens is you get this sort of snowball of these companies acting like banks, but without any of the oversight regulation and transparency of banks. So Matt Taiba does this big deep dive into Circle, and this is partly as a result of a recent set of stories that came out about Coinbase, where it was suggested that in the event of Coinbase going bankrupt, people who had put their money in Coinbase wouldn't be able to

get it out. Like what happens if it goes bankrupt? Who are, in fact, what is your protection if your account is wiped out? So savings in traditional banks, commercial and savings banks, are pretty much. protected by the federal deposit insurance corporation, which means that like 100,000 or even hundreds of thousands of dollars in deposits in these member banks are backed up by federal guarantee, even if the bank fails. But crypto or decentralized finance, as a part of crypto sometimes called, is like at least partly about rejecting that very centralization of power. And everything in life

has tradeoffs, right? Centralization has downsides. But if you reject centralization, right, If you try to create a banking system outside the FDIC, you're in this gray zone when it comes to protected deposits. And so this is what Taibi wanted to know, right? Do USDC holders bear bankruptcy risks or not? But will the reserves be protected or not? And people think they're protected. And I think that fundamentally is the key because a lot of these institutions look like a bank,

walk like a bank, and quack like a bank, and do not have any of the protections of a bank. So Matt Taibyip compared this to what? happened in the run-up to the 2008 financial collapse, where, you know, banking institutions, some, it's like when it comes to figuring out how to make money, the water finds a way, and they always find the way to the lowest ground. So some regulations may have been put into place, but around, you know, in the run-up to 2008, banks had figured out various increasingly more complex ways to make money, including, let's say, you know, packaging up high-risk mortgages and selling them as collateralized debt.

Something similar has been happening in the case of these big crypto banks. They're doing all of these financialization tools that get increasingly complex and make them a lot of money. And it's not clear what these moves are backed by. So some of them have been accused, Celsius was accused of this thing called

re-hypothication, which I'm now obsessed with. And let's just take a brief beat here. So Celsius is a, another crypto bank. This was a institution that lived and died on trading crypto assets. Essentially, if I'm a crypto trader, I could store my money with Celsius. They would guarantee a rate of return. And then in the back end, they're making a bunch of extremely risky bets to create a higher rate of return for that bank so that they can guarantee me my high rate of return in response. Celsius makes these trades. It's rolling along. But then all of us,

sudden the price of all these cryptocurrencies crashes, there's only so much financial gaming that you can do to get out of the fact that, oh my God, everything that you're invested in is going to zero, or at least is going down by 70%. They, on June 12th, halt withdrawals, with drawls. How do you pronounce that word? Withdrawals. Yeah, with withdrawals. You pronounce it with a drawl. I pronounce it like a Southern gentleman from 1940 or something. So on June 12, You stop being able to take your money out of the bank. Let's put it that way. And then a couple weeks later, it declares bankruptcy.

That's Celsius. And Celsius has been just a really critical linchpin in this overall story of the crypto crash. So, sorry, that was me taking a beat on Celsius. And explain why this story matters to you in the general picture of what's going on in crypto. Yes, and how it relates to circle. Because Celsius, which will explain a little bit more in a minute, is one of the reasons, Celsius plus Terra and Luna, are part of the reason that Matt Taii B started asking these fundamental questions of Circle, which is what is the backing, right?

How are your loans backed? How is your stable coin backed? What happens to people in the event of bankruptcy? Can they get their money back? Super basic questions that have been born out of recent, very high profile, very real incidents. And the answers that he got were pretty... vague, nuanced is what he calls them throughout. And he came, his conclusion coming away from this story was like,

God help anybody who's invested in this. I think it was an actual quote from that story. Now, it is important to note that since we talked about that story on this weekend startups as of July 15th, Circle did issue a big, very public report in which it detailed all of its holdings and collateral. All of the, because the big knock has been that it's non-transparent. These institutions are non-transparent. We have no idea if the collateral for their coins is, you know,

Pokemon cards or Solana or dollars. And how different is that from a traditional bank? I mean, how easy is it? They have to tell you. A traditional bank, go ahead. Yeah. Yeah, a traditional bank has to tell you what their holdings are, how your money is backed.

I don't know that they always have to be totally honest about it, but that's the goal. I do feel like this is actually really important because Circle has been held up as, and USDC have been held up as pretty good actors in this arena. And Circle is so far, I think, one of the only institutions of its size that we know that has, in fact, put out a report detailing all of its holding. So its report shows it no longer holds commercial paper. at some point it had 9% of its reserves in commercial paper, which is like just a short-term unsecured debt kind of thing, has now moved almost completely to cash and U.S. Treasuries,

detailed the amounts of each of those things, $42 billion in U.S. Treasury bonds, which again, full faith and credit of the United States, right? That is actually very reassuring. $13.6 billion, the remainder of its reserves, are in cash, and then it listed the banks where that cash lives. So right now, there are 55 billion U.S. D.C. tokens in circulation, and Circle has $55.7 billion in reserves that are held in U.S. treasuries and cash. So, like, that's the answer they probably should have given Matt Taibi. Right. Yeah, they might have hired out their engineering team a lot faster than they hired out their communications team because there was,

look, let's face it, in 2020 and 2021, a lot of demand for these products and not a lot of people we're asking the hard questions. And now suddenly here's the crash and here come the hard questions. And so, you know, they're not exactly sophisticated on the investigative journalist response team. I understand that. And I, to be honest, you know, I think that, you know, your podcast partner Jason Kalikannis, who's been on this show, I think that there's a way in which, you know, he might be right about USC and Circle. You know, the fact that there is fraud somewhere in the crypto community. And I would say there's fraud, you know, in more than just somewhere or at least pure greed. in more than just someplace in the cryptic community, it doesn't mean that every single product should be handed with the same brush.

A lot of different people, tens of thousands of people are trying to build stuff in this space, and you're probably going to have a diversity of ethics, a diversity of success, and a diversity of essentially well-protected and well-balanced financing.

I want to move to the future and what this crash says about the future. How do you think the crypto crash has changed Silicon Valley already, if at all? Well, with the last two crashes in my rearview, I'm going to suggest not at all. I mean, among other things, we've seen, I think, A16Z raise like another $4 billion. $4.5 billion, yeah, and Jason Howard. 4.5 or $4.6, yeah, billion for a crypto fund. There does not seem to be a huge diminishment in appetite for these projects right away.

And why is that? I mean, as someone who has been a bit of a skeptic and definitely felt a little bit of FOMO, certainly in 2020 and 2021, why do you think the appetite for crypto investment hasn't diminished given the wipeout to some of these products

and to some of these just sort of entire asset classes? Well, because even the wipeout has still left Bitcoin alone. Bitcoin alone remains a trillion dollar asset class. It just recovered that status this week. I mean, we're still talking about a coin. So, you know, back in 2012 or 2011 or something like that, I bought 300 Bitcoin at $1 each,

and they were all wiped out in the, you know, this hack of the exchange that I had used. And so we're talking about a coin that at one time was worth a dollar. Somebody tipped me one, one, or tipped me 30 Bitcoin. that was at that time worth 18 cents that I didn't even bother to redeem because I'm apparently too stupid to be rich because it went from, let's say, 18 cents for 30 to at its peak, $68,000 each. And its crash is still $19,000 each. Name me another asset in the world that's worth $19,000 each that isn't like a Birken bag. So there's that. At a minimum, there's that. And then there is the real,

there is the reality that this is a new infrastructure and it's not going anywhere. There's a new technology infrastructure and it is often compared to the birth of the internet. Time will tell whether that's going to be true, but let's say it's something that's akin to the birth of a new banking system long term. That's still a massively valuable investment, no matter how you look at it because it isn't going to go to zero. It's never going to go all the way to zero if there's a trillion dollars invested in it. And if you look at the internet as a corollary, there are still, I still know people, you know, mostly boomers, who like won't put their credit card into a website because you can't shop on the internet. It's all scams. Like, not only did I

live through the 2001, you know, boom and bust, I'm old enough to remember a time when the internet was for suckers. If you went on the internet, you were getting ripped off. You were going to lose it all. But it did not go to zero. It developed into a huge economic infrastructure that has created trillions and trillions of dollars of value. And so the bet that these VCs are making, and they're probably going to, and for N, I should remind everybody,

the job of the VC is risky capital. That's your whole job. I think you're totally right that there's a lot of people in the crypto community who think they're akin to the founding of the modern banking system in the mid-1800s. Like these are just a bunch of J.P. Morgans fighting their way through the railroad,

and they're not wrong about history. They're just wrong in how they're using history. Like, yes, there was a lot of fraud in rail and a lot of overbuilding and a lot of financial crises, but like modern banking, that was a thing. Railroads turned out to be useful. But I sometimes feel like these sort of historical metaphors, like early banks had a bust and then succeeded, or Web 2 had a bust and then succeeded. They're very alluring, but they're very unpersuasive when you dig down because they

prove too much. They say, since other things have failed and then succeeded, this failure is actually proof of later success. But there is no discipline to that argument. You can make that argument about literally anything in the world that doesn't work. If I tape my dog's chewy toy to a straw and I say this device can discover alien life or something like that, and you say, no, it won't. It's a Dog toy taped to a straw, dude, it's totally useless. Like, I can say things like, well, email used to be useless. Now look at it. The internet used to seem useless.

Now look at it. But, like, yes, some things succeed after they fail. That doesn't mean that every failure is a portent of future success. Like, sometimes things fail because they just don't work. So, sorry, that rant has been on my chest for a while, obviously. But I just think this history metaphor stuff is just way overplayed. I can't believe you're tricking me into being the crypto defender on your show, but here I go. I would say the counter argument to that is that there is a difference between a product and a category.

And so if you look at what has succeeded over time, even in metaphor, that a product could come and go, that Bitcoin alone could come and go. A digital token that you use to, you know, exchange things back and forth that lives on a ledger. that could go away. What we now have is infrastructure, a technology infrastructure for the continued creation of these types of technologies. We have a category that, again, I'm going to remind you as a whole, is worth over $1.5 trillion. dollars. Trillion dollars. With the T. Yes. Right? So it's not the George Foreman Grill here. It's, and that that when you sort of think in terms of systems, which is I think how venture capitalists try to think about these types of

types of things. Like, I'm not interested in one consumer product. I'm interested in a consumer product that somehow becomes or changes a system and becomes a category and ideally becomes like a household name and a parlance. And that can be. almost infinitely built upon. And so there's no universe in which cryptocurrency, heaven help me, does not check all those boxes. Now I have to go write somebody a damn check.

Exactly. I've actually been sent here by Andreessen Horowitz to convince you that crypto has a future so that you began investing in it. My very last question for you actually is about this somewhat, you know, more sanguine vision of the future. Give me one discrete case for optimism. If this isn't just a bunch of dog-chewy toys taped to straws, and by the way, I don't think it's 100% that either, tell me how this space might evolve, other than maybe investors getting a little bit savvier about distinguishing pure bullshit from the more promising long shots. You might also see less investment in these kind of financial institution middlemen, like the Coinbases and the Celsius and the three-euro's capital, because those are basically banks and hedge funds. And so if you're going to invest in that, first of all, if you're really a true believer, that's sort of counter to the spirit. You know, you saw OpenC got in all that trouble because it stopped selling certain kinds of NFTs. That's not supposed to happen in crypto. It's supposed to be decentralized with no middlemen.

So I suspect you'll see less emphasis on the middlemen or you will see a push for more and more regulatory certainty. Because if these middlemen have the same regulations as banks, because that's what they are or hedgemen. funds, then they're a safer investment because you know that they're not going to go to zero because they're going to have to tell you upfront how their reserves are held and what happens to your money if they go under. It's just interesting because there's a future in which you can imagine these crypto exchanges or the marketplaces for NFTs like OpenC, they become more regulated. They become a little bit less risky. They essentially become very similar versions of that which they were meant to replace. I mean, this isn't purely.

like, you know, the pigs and animal farms starting to walk on two legs and, like, becoming that which they were trying to overturn. But, like, it's a little bit like that, right? It's, you can, you can imagine ways in which they're just the new establishment of finance, the same way that, you know. I remember, like, whatever, like 20 years ago or maybe it must have been 15 years ago, people were talking about, you know, like, you know, Mark Zuckerberg and all these sort of tech titans are going to totally change the way the companies are run and we're going to look at Silicon Valley as a totally new model for, you know, bringing on new workers and allowing, you know, full people to come to work. And now, you know, we think about these tech giants in a very similar way that we think to a lot of other legacy companies. They're just all big companies with highly paid employees that do some good work and some disastrous work. And they're all a part of this bundle that's corporate America.

And so I just wonder if maybe the ironic future of the upstarts is to become the establishment they seek to overturn. Oh, yeah. I mean, they already have snouts and curly tails. Yeah. Like, come on. And the best way to make money in the history of all time has been banking and financial services. Like, there's no universe in which this new money does not evolve into more and more and more banking and financial services. And there will probably be purists and holdouts just like there are people who are still using Linux

and insisting on direct TCPIP connections between computers without, you know, DNS intermediaries. but the truth is that the World Wide Web made the Internet work. And a bunch of companies came along and made it, you know, prettier and easier to use. Yeah. When the Web 3 giants become just like the Web 2 giants, I hope that you and I can get together and start a fund to get in on Web 4. Because that's the craze that I really think is going to rise and rise without a peak and fall. I am all in on Web 4, and I hope you join me. Apparently it's called Web 5 now.

Excuse me. Oh, my God. They're skipping Web 4. Yep, I got a guy for you. The guy who runs all of the crypto stuff at Block, formerly Square, recently coined the term Web 5. It's all going to be about identity. I can't. I can't.

I'm not going to do the seven-minute abs thing. We're not going to go all the way to 10. We'll end it there. Molly Wood, thank you so, so much for breaking this down with us. I really appreciate it. Derek, it's my absolute pleasure. Thank you very much for listening. Plain to English is produced by Devin Manzi.

If you have a comment, a concern, a question, an idea for a future show, Please email us at plain English at Spotify.com. That's plain, no space, English at Spotify.com.