TFTC: A Bitcoin Podcast - Tales from the Crypt #43: Caitlin Long

Episode Date: September 16, 2018

Join Marty as he sits down with Wall Street veteran Caitlin Long to discuss her journey to Austrian economics via Wall Street, the extent of the shadow banking system, the situation public pensions and social security find themselves in, and Caitlin's efforts to make Wyoming the most Bitcoin-friendly state in the US. Follow Caitlin on Twitter: @CaitlinLong_ Follow Marty on Twitter: @MartyBent Check out Caitlin's website: https://caitlin-long.com/

what is up freaks welcome back to tales from the crypt it's your boy marty bent here on a thursday night a bit of an odd night to be recording for this podcast um recording on thursday night because we have a very special guest in town from wyoming uh we've got a lot to talk about tonight so we're going to jump right into it i'd like to introduce you all to Caitlin Long. Caitlin, welcome to the podcast. Howdy. Great to be here, Marty. Thank you. Thanks for coming through. I appreciate it. This is awesome. I'm excited about this talk. There's a number of topics to talk about. Your career and pensions. We're going to dive into pensions. Great. Your recent articles and tweet storms and stuff about the backed product in

particular. Sure. If you're okay with that. And then we start out here. We start out with your So how did you find Bitcoin? How did you get the Bitcoin? How'd you end up here? Basically? Wow Well, I I after the financial crisis got very curious because the mainstream explanation of What caused the financial crisis left me really wanting and specifically was the logical contradiction that? Tim Geithner secretary of the Treasury at the time had made on a Charlie Rose show where he said he Acknowledged that interest rates had been too low going into the vine into the financial crisis and just previously a few days he'd argued that interest rates need to be lowered still so that logical inconsistency got me diving into alternative schools of economics austrian school of economics was the one that actually

made the most sense to me once i dug into it light bulbs started going off and the the gist is in the austrian community it was pretty hard to avoid bitcoin after 2012 i was late by by by Austrian school standards because I'm not a particularly strong technologist and and just was it just didn't make sense to me like so many people they just when you first hear about Bitcoin you scratch your head and think it's too good to be true and you don't waste your time and you move on yeah and the the Austrian school for a while there was sort of like the indie school there were the bad boys of economics I too studied economics in college and awesome so we

both had to unlearn a lot of what we learned I was gonna say I learned a lot of Keynesian or was I I indoctrinated with it. I was trying to check. Interesting question. Interesting question. You certainly, increasingly there are Austrian professors around universities, but 10 years ago there were almost none.

They'd all been run out of the economics department for being, you know, being contrarians. And they fled to the internet, found them on Twitter. Yeah, that's true. That's true.

Or at institutes like the Mises Institute, right? But it was Jeffrey Tucker who sent me an email from laissez-faire books that was never published that got me actually to get my first bitcoin wallet and he would he had been up at liberty forum in um new hampshire part of the free state project and uh and he had he had a how-to guide and jeffrey's also not a technologist but he has a brilliant way with words and that's what got me really started to get my first wallet set up and and get going on it and uh it's it is interesting also the austrian austrian school a lot of them still don't like bitcoin uh because

it's not gold and um you know there's a lot that's great about the austrian school but there's also a lot that i've been publicly pretty critical of as well no but i think there's a good uh a good um how do i want to put this there's heated debate but it's very good debate and yes and uh sure i would argue um our cordial debate it's it's very it's intellectual it's not just It's not personal. Right versus left or, yes. Actually, Saifedean Amos' book, The Bitcoin Standard, is the one that I hope will bring a lot of Austrians around.

Right? It's an incredible book. It is amazing. My mentor in Austrian economics, who used to be a portfolio manager, I met him in the late 90s, and he's the one who helped guide me along 10 years later during the financial crisis when I was figuring all this out. And he said, this is the book I wish I'd written. Really?

And I think that's an amazing line because a lot of us wish we had written. And incidentally, for him, he was so skeptical of Bitcoin. I go back to, I save a lot of the emails because he's such a brilliant teacher. And I went back from a few years ago where he was just on me about Bitcoin and he was very skeptical, but he turned. So it shows that even the biggest skeptics in the Austrian school actually, once they really dig in, realize there is something special about Bitcoin. There's a scarcity to Bitcoin that is not there with gold.

And as a result, in many ways, this is, he calls it history's first honest ledger. And I think he's right. And Savity Namus actually has an awesome footnote in the book where he said, actually, the Bitcoin blockchain may actually be the only objective set of facts in the world. Yeah, exactly. Think about that. You're expending energy to prove something that happened at a certain point in time. And I've I've been having conversations with people on the side like Bitcoin actually reminds me a lot of the tablets that were used for accounting in Mesopotamia back in Sumerian times where people would just go to the center of town and they'd hash out. There was one ledger keeper who would keep the accounting and keep the credits and debits.

And that's where they go. That centralized courtyard or wherever it was in town to pay their their debts or settle their debts. And Bitcoin does that just with the technology that it has. That certainly has in common with Bitcoin, easy and cheap verification. But you still had to trust the central ledger keeper. There was great verification in that case, but you still had to trust that person writing it down. And what's different about Bitcoin is that it actually is expensive to add facts to the Bitcoin blockchain by design. And that's what makes it secure, because if you are adding facts to the Bitcoin blockchain, i.e. adding transactions, you have to expend money.

It costs you money to add that information to the blockchain, and it should. Yeah, and hopefully that'll make people more efficient over time and more frugal over time. Yeah, that's the idea. In fact, one of the things I'm working on right now is a story about Bitcoin mining. I've had an opportunity through the Wyoming work to get to meet a lot of the Bitcoin miners. A lot of them were looking at deals in Wyoming. We love talking about mining and squashing mining FUD here. Oh, my gosh.

Yeah. Well, there are a lot of people, including some well-known people in the Bitcoin industry, who are overestimating the electricity use. And a lot of it has to do with the way the large-scale miners are fabricating. that they actually have there's some serious engineering that's going into they're not just buying the mining units for bitmain they're they're working on the ones they get them you bet and they and and the the engineering behind the cooling um and and how they're actually arranged relative to each other within the server farms yeah and then uh on top of that like how

how you even measure how much energy is being expended yes and how expensive it is that's uh That's even up in fluxes. A lot of these reports that like to FUD Bitcoin's energy expenditure are citing energy expended per transaction. And actually, Laurent, I only know him as Laurent out of Paris. He's been writing a series on how we should measure the amount of energy expended via the Bitcoin blockchain. And there's a lot more variables that need to go into that calculation.

And a lot of estimation that's not correct, unfortunately, which overestimates. Yeah, they were saying like 1% of the world's power. That's been the big buzzword. but some people dove into it and were like, maybe 0.3%. Well, I think he was the one who drew the analogy to Ireland. But what I learned is a couple of interesting things. That in China, a lot of the electricity that's being consumed by the Bitcoin miners was actually going to be wasted because it was overbuilt hydro

and there's no transmission capacity to move it anywhere. So the Bitcoin mines could literally just move in and sop it up. Similar story in Sweden. There's there's excess energy that because of the EU rules can't be fed into the EU grid. But but Sweden's part of the EU. So, yes, this energy may be X in usage, but that X number would never have made it into the grid for other uses in the first place. Exactly. And we're seeing a West Texas, too, with miners going to get the excess natural gas and methane. um and uh no it's it's we uh i do a weekly show at mad o'dell where we try to we try to

defeat fud and mining awesome mining energy yeah uh the boogeyman meme out there is one of them well and and at the end of the day safety namus's book doesn't uh doesn't dive into the fud and some of these stories that we're talking about right now but he makes a simple point which is of course it should be expensive to record a transaction in the ledger otherwise you're going to get a lot of spam and fake transactions and you you should be required in order to verify your transaction and your wealth to spend some money on that and he's unapologetic unabashedly unapologetic about that and i agree with him that's one of my favorite traits of safe he's uh very unapologetic yes very in your face and um and has a brilliant way with words yes and i think particularly let's

talk about the bitcoin center a little bit here i think particularly with that book he did an incredible job of explaining monetary history and how Bitcoin sort of weaves into that history in this period of time. Because that's one thing, people don't understand money to begin with and then the history of money. Well, he and I had a great conversation about his book and what's next because I've challenged, even before I met him out at a Mises Institute event in the spring in San Francisco, I challenged the Austrian school. I've been frankly challenging them for years and been a big donor to the Mises Institute and trying to find academics who will actually dig into the Wall Street the way the way credit is created

today because the Austrian school is right directionally but they've been wrong on a couple of things just simply because it's outdated yes so the traditional banking system is not where most most credit is created today but most of us learn you know if you study mystery of banking or even if you've studied basic macroeconomics in college Keynesian macroeconomics you're focused on M0 to M2. That used to be the way credit was created, and all credit was created in the banking system. But today, most credit is actually created in what's called the shadow banking system, in other words, the securities markets. And the Austrian school has not updated that scholarship.

So I'm trying to convince him to be the one who writes the mystery of shadow banking, the sequel that updates the scholarship for all of this rehypothecation and other forms of fractional reserve banking that we wouldn't recognize if we just studied the traditional banking system. You need to understand how those credit creation mechanisms work in the shadow banking system. And it's ultimately, I think, one of the reasons why, unfortunately, a few Austrians predicted hyperinflation and dollar collapse after the financial crisis, and it didn't happen because they missed how the credit creation was happening in the shadow banking system do you think that's uh mainly a product of graham leach bliley uh uh well you think that

it actually goes back further um it goes back further it actually goes back to the volcker fed on my own research um one of the things that happened back when nobody was really paying attention to the fed was the um in 1983 there was a subtle change and that was the fed stopped trying to control the quantity of money and started to control the price of money you can't control both. And up until 1983, they had been trying to target M2. And they started losing control. It was early in the Reagan administration when the Reagan deficits came. And the Reagan administration figured out they could fund those deficits by issuing treasury bonds. And the securities market started to take off. That's when Louis Ranieri started to get into it.

Yeah, he was a couple years later, I think it was 1985, but it was related, and that was all absolutely part of this whole, the rise of the shadow banking system, that the traditional banks lost their grip on credit creation, and it started to leak into the securities markets, and then, to your point, we actually had Glass-Steagall coming down later in the late 1990s that allowed the banks and securities firms to merge back together, so now it's all kind of one jumble, But that that fateful error was 1983 when the Fed handed the keys to the kingdom proverbially to the financial industry and let them decide what the quantity of credit was. The Fed said, as long as the price of credit is X, i.e. the federal funds rate, we don't care what the quantity is. And of course, the financial industry went to town and I'm writing a book as well. And I'll detail just the incredible growth of what we Austrians would would know as circulation credit, which is essentially credit above and beyond real resources saved in the economy. And and that's when you really see it was 1983 when you really see the that the amount of circulation credit starts to start to boom. Yeah. Now it's been insane. I was reading about it. Yeah. Yeah, and we're in another bubble.

Some would argue that it's the granddaddy of them all because it's a government finance bubble. We have now actually created such credit risk at the core. With the last financial crisis in 2008, the governments and the central banks still had balance sheet capacity to bail out the system. Again, I think that's what the Austrians missed. The Austrians, in a lot of cases,

have been predicting a dollar collapse since the 70s. What they missed is that there was balance sheet capacity because our parents and grandparents and grandparents and grandparents respectively bequeathed us a balance sheet with no debt on it. And in 1968 is when we started as a country borrowing money above and beyond the amount that was saved by Americans. And that's when we switched over from what had previously been an equity-financed economy to what is now a debt-financed economy, and it got turbocharged in 1983.

So that's the history. 68 was the first time we really started borrowing above our, you know, putting leverage on the balance sheet of the U.S. in aggregate. 83 was when it turbocharged. Yeah, and it seems like the crises created by this expansion are getting more frequent and more severe. The amplitude is increasing. As the interest rate averages down towards zero. Well, and it's interesting. I tried, I started writing this book three different times.

And we'll see if I get it done this time. But each time it would have been a downer of a book. And frankly, nobody wants to, there are a lot of people who make their careers on fear mongering, but I'm a, I'm a generally an optimistic person. And I was pretty bummed when I figured all this out and thought this is going to be awful. It's not, you know, there's going to be some sort of a transition away from the fiat based currency system in my lifetime. And how do I prepare for this? And, and then Bitcoin came along and it made me optimistic because we have an option to, to, to opt out of this crazy system. It's pretty crazy how presciently timed it was, too. Oh, amazing. And where did I see? It was August 2018. So we've just passed the 10th anniversary when Satoshi Nakamoto registered the domain name.

Yeah. Yeah. So the white paper, I think we're coming up on the 10th anniversary in about a month. Halloween, I believe. Is that what it is? And then the first. November 1st UTC time. Oh, okay.

So we're coming up on it in a few weeks. And then the first Bitcoin mined was in January. January 3rd. Yep. So we're coming up on a few 10th anniversaries, but we actually just surpassed the first one. I didn't see a lot written about that, but Satoshi registered that domain name in August. And actually, in my book, I'm going to talk about some interesting things that were happening also in that period of time related to geopolitics and what was happening with the dollar. A lot of what's gone on in the last 20 years has been geopolitical with the dollar.

which which makes perfect sense because in history most wars are fought over balance of payments imbalances one country defaults and you know then they go to war with each other right so we have gigantic balance of payments imbalances right now in the world and that's you know that's why we're fighting a trade war that's a proxy for a shooting war right now yeah but uh but but back in the financial crisis there were some interesting shenanigans and i'm i'm going to put a lot of of puzzle pieces together. That financial crisis was an attack

by America's enemies on our financial system and it is 100% America's fault because we allowed our financial system to become that vulnerable. It was an obvious attack vector. Did it have anything to do

with fossil fuels and the movement of them? No, no. It had, the Russia, Russia, Russia folks will be yelling and screaming about this. I'm not going to break any news.

I'm just going to put puzzle pieces together it's all out there and publicly available I've just never seen anybody string it together the way the way that I strung it together living it and looking for all these you know alternative answers it was obvious to me that there was there was a coordinated attack on the United States and a lot of people will naturally say well you know we should fight against our enemies and go after them but my response is the opposite which is we made ourselves vulnerable.

And unfortunately, guess what? We're even more vulnerable now because we're even more leveraged and more unstable. Exactly. I can't wait to read the book. And yeah, this is a product of our making. It's a situation we've allowed ourselves to get in. That's right.

And it will be obvious in retrospect, but like so many things, even the housing crisis at the time. It's like a frog boiling in water. Absolutely. There were so many smart people yelling and screaming, no there's not a global housing glut or global housing bubble it's never had that we've never had a nationwide housing crisis i distinctly remember a lot of smart people saying exactly

that we've never had a nationwide housing crisis and then uh actually until we did i had a tweet storm a few months ago now i actually have to follow up with it i told people i was going to write another one the day after but it was on ben bernanke and his comments leading up to uh 2008 i I believe it was March 2007, the S&P corrected 5% because of the housing market. And at that point, he said the total damage of a housing contagion right now would be like $50 billion and it turned into 10 trillion, so.

Well, see, this is what the central planners don't recognize, is that to them, there's no cost to continuing to put debt on the economy. And they claim that we owe it to ourselves. Well, guess what? that's not really true especially the marginal debt it's not americans buying the marginal debt it's foreigners buying the marginal debt and at the end of the day the price is set by the marginal buyer and if those buyers disappear ouch yeah um and i do worry about that i actually think

that the that the treasury market is the place is the most likely place for the accident to appear okay um it's it probably the real crisis is is going to start in europe because the balance sheet in Europe is a lot more tired than the balance sheet aggregate in the U.S. We still have some balance sheet capacity left, which is why I'm not a dollar bearer like so many of the Austrians. I think there are other parts of the world that are going to get hit first. And we could have the head fake to end all head fakes of a dollar short squeeze where the dollar spikes. And that's kind of what happened in 2008. That could easily repeat again. And the dollar bears will be discredited during that period.

There's going to be a flight to safety. That's right. Quote-unquote safety. Yeah, exactly. That's the best. But it's not really safety. It's polished turd on a pile of shit. That's exactly right.

That's exactly right. But as long as you own your own Bitcoin and your own cryptocurrencies, you'll be okay. I think what's happening in Venezuela right now and Argentina and Iran with cryptocurrencies is proving out the model that they truly are safe havens.

Yeah. in uh in times of currency stress no just anecdotally i've heard uh my wife coincidentally just works with a lot of venezuelans in her line of work uh making commercials and uh i was talking to one of her co-workers who her family was back in venezuela and the only way they could get money for cancer her father unfortunately had cancer and the only way they could get money back to them was with bitcoin and right it is really helping people but again it does have a long way to go um for sure it's definitely not a panacea right now but it is just a tool they can use yeah um which is great to see and absolutely um all right let's pivot here to

pensions i really want to talk about pensions for some reason i don't know i'm just like it's part of the balance sheet equation of the united states that's for sure so you worked on corporate pensions yes corporate pensions i'm fascinated with public pensions but let's first dive into corporate pensions your synopsis of the space and then let's talk shit on illinois and california Okay. Fair enough. The corporate pension world, in general, most corporate pensions are actually going to be paid. I'm not worried about defaults to the pensioners because the corporate pensions in the United States are very well funded. That's not true in countries like Germany and even the UK. But America's pensions are pretty well funded. That's not true also, though, of America's public

sector pensions. And there's a huge distinction that's really important to understand between private sector pensions in the corporate world and public sector pensions in the government world in the U.S., and that is government pensions are inflation-indexed, private sector pensions are not, and I did the math a long time ago, so it's very far outdated, but the gist is a dollar of pension obligation from a corporate pension compared to a dollar of inflation-indexed pension obligation given the exact same demographics and the exact same math is worth $1.40 for the public sector pensions. In other words, that's how valuable that inflation indexation option in the public sector pension plan is. It's worth another 40

cents in economic terms above the private sector. So that is why the public sector plans, more than anything, are underwater. And then, of course, they just haven't been funded. So it doesn't matter what the asset performance is. If you're not funded, you can't possibly make up the deficit. The corporate plans went through a big pension regime change in 2006, and ever since then, they've actually been pretty well-funded. They report deficits, but it's not enough that corporate America is going to be defaulting en masse. There will be some defaults, but in general, the corporate pension sector is in pretty good shape. And I would argue that corporations are more realistic about their pensions.

Of course they are, yeah. And the accounting, huge difference also between the accounting. the when the pension proverbial shit hits the fan the accountants and the actuarial firms are going to have a lot of liability and i believe they will have they do have culpability and they will probably be sued for it okay pension accounting is very different between the private sector accounting fasbi standards and the government sector accounting gasby standards the gasby standards allow the governments to use as their discount rate at which future cash flows are discounted back to the president to the present they allow them to use their

expected rate of return so most government pension funds are using seven or eight percent discount rates based off of economic projections that's just it's finger in the air um now there are some limitations they just in the last two years they they they ratcheted back on that but they didn't ratchet back enough by contrast the private sector also has aggressive accounting um they are required to use a high quality double a corporate bond yield so you're kind of looking at three or four percent discount rates right but if you're just take the the simple math just to make it easy if the public sector is using an eight percent discount rate and the private sector is using a four percent discount rate if the demographics are the same that means the private

sector liability is twice as high as the public sector's liability in accounting terms and it is actually much closer to reality because they can actually go off and settle the pension this is what I did at Morgan Stanley, helped companies settle their pension obligations by buying annuities in the private market from insurance companies that are high quality, overfunded, de-risked from an asset liability standpoint, very low credit risk in the asset portfolio, much safer than in the corporate pension world. So AA corporate bond is not quite economic cost, but it's pretty darn close what's happening in the public sector is so far off it's a joke right yeah let's get into it uh yeah so i was saying you're saying you don't remember the

chapter maybe it's the mandela effect with me but i vividly remember it was either boomerang or one of michael lewis's books where he's riding around with arnold schwarzenegger talking about cowpers and how terribly funded it is and it is yeah i don't remember the chapter but it is yeah terribly underfunded yeah um so let's just pretend like the freaks out there have no idea what's going on public pensions they have no idea how they're structured or how they plan to be paid out um i know this is probably a big task an onerous task to ask you to do right now but um if we're gonna like do and explain it like i'm five right now for the situation they're in uh can we do that uh sure that explaining it like you're five is the government has promised

wages in the future to its workers that it can't possibly pay yeah and so these are firemen policemen pensions where and this is a actually in jersey i know so we'll get an anecdote here so jersey i believe a decade ago at this point probably a little bit more uh the teachers uh the the state cut the teacher's pension and that was like a huge deal um so a lot of these people are working um some people only work till 50 55 and uh then they get hundreds of thousand dollars salary in perpetuity until they have a pass um so it's just not sustainable inflation indexed keep in mind yes public sector pensions are almost always inflation indexed so they're compounding at three percent a year yeah and so what you see or at least what i've observed is a

lot of these pensions are restructuring anecdote i was about to go into is jersey teacher's pension about a decade ago and if you're over a certain age or certain tenure you got grandfathered in and everybody else yes that's standard for pension yeah reforms yeah and so you never really you can never really trust what you're signing up for right public pensions my advice to people my age i'm 49 um is don't count on those pensions i have a good friend whose husband is a teacher and she was talking about you know he's got the safe retirement and she's in the private sector and And I said to her, I hate to break it to you, but I don't think at our age that he's got a safe retirement. I don't think you can count on those pension promises to be there.

What's going to happen is there are going to be soft defaults first where they're going to raise their retirement age, like you talked about. And they'll try to grandfather in everybody. But, you know, in Illinois and Detroit, places like that, it's too far gone to do the grandfathering. so you actually go in and you're cutting benefits and they'll try to keep the benefits higher for the older workers that can't possibly go back and make it up and you know people age 50 and below 50 is not a magic cutoff but you know give or take um they're the ones that are going to have to work longer and to try to make up for the fact that promises were made to the past generation that our current generation can't possibly pay no and that was a actually crazy stat that i

came across when i was writing that uh tweet storm on the fed uh is that since the crisis and after qe and all that if you look at participation numbers uh participation rate of 55 to 65 year olds in the country it's gone up considered yeah it's got to work more and uh yeah and that's the thing that really irks me about the fed in particular is what they deem as a successful policy and to them i want appointments what at 4.1 right now or no it's it's three three point it's something yeah it's very low right now yeah kind of gdp right but we're missing 16.8 million workers i was just reading today from the labor force exactly so that's the thing that what what we deem as successful quote-unquote right it's really like it's like orwellian speak almost

well they're they're setting the definition and they're patting themselves on the back because that's what they're managing to but you know that's part of the reason why there's so much populism in the world is because everybody out there unless you're a keynesian economist understands there's something wrong yeah there's something rigged in the system it's pretty clear if you look it's it's hiding in plain sight but you've got to have the willingness to be curious and set aside your pre-existing biases in order to see it no i feel like i feel like everybody's got that intuition deep down absolutely and i've talked about this in the past in this podcast like i probably got to this point where i am now because of we're like oppression time like

being a senior high school in 2008 taking an economics class like yeah lucky it was like the serendipity that happened at that time at least to send me down this path in the question early but it takes time for people to come to this realization and yeah but i think everybody intuitively knows something something's up right especially the millennials who are really getting screwed yeah yeah oh yeah yeah i mean you're never even like a pension your social security money i just look at it as extra taxes yeah i'm never gonna see that money ever yeah there was a there was an estimate that social security is gonna go bankrupt by like 2025 well so this is interesting this brings us back to the to the treasury market yeah one of the mechanisms you know i i think

that's that's where the the accident's gonna happen so to speak we're gonna have a failed treasury auction at some point in the u.s and one of the mechanisms is exactly what you're talking to. Social Security and Medicare are actually having to raise money. So this notion that our Social Security money went into a quote-unquote lockbox is a load of bull, because what happened is the U.S. Treasury borrowed against the cash that we all pay into that quote-unquote lockbox and issued IOUs. Well, in order to pay the cash out to Social Security and Medicare, they actually have to issue treasuries in the capital markets, i.e. borrow from Japan and China and the Middle least in order to finance the payments going to pay today's medicare and social security

recipients social security has been in and out of negative cash flow on a monthly basis it flips back and forth you know for the for the last couple years but it increasingly it turns like perpetually negative in the next couple of years and you know at some point we're not going to be able to finance that by issuing new treasury bonds to the rest of the world yeah yeah the music can only play for so long yeah absolutely and i i just have a theory just like from optics looking at the charts especially the fed fund rate like it's fallen from like nine to six and then like six to three and then like three to 25 bps and now it's going back up to like one and a half 1.7 right now it's going down again in in my opinion i think once it hits nerp if they ever

it's i mean oh they will the keynesians will they're in they're in control but i think once that happens like what we're seeing in turkey now like a lot of people say like hyperinflation will lead or hyperinflation is caused by money printing in particular um but it's also like a loss of confidence of course it's a confidence game yeah and i think if nerp is ever implemented the confidence will be completely lost yeah uh actually i don't know or do you think people are educated enough to be well to lose their confidence at that point it's interesting i worked in switzerland in 2001 2002 and switzerland has had negative interest rates for for more than a decade now and um the banks have not paid negative interest rates on retail deposits yet

so that's when the rubber really does meet the road is when the banks pay negative interest rates on retail deposits what's happened is everybody the banks have tried to make it difficult for you to deposit money because they don't want to hold it because you know cash becomes a hot potato because for them it's it they have negative float um and and it's because they don't pay negative interest rates um but i think the dam is going to break and i've said this before when you start to see corporations issuing bonds at negative interest rates and that's gonna it we actually have already seen some of the high rated uh highly rated swiss companies issue short-term bonds at negative interest rates i was um that's great it's crazy i know think about it it's a

mind bender right and it wouldn't exist in a free market because you would of course never ever pay somebody else to borrow from you no no but it's um it's it's a function of of this crazy financial system that we're in and it interest rates inherently are always positive because time value is always positive you can't turn back time you absolutely and so the fact that we even are talking about negative interest rates is pretty ridiculous well it's it's a construct of today's artificial system now how have they kept it going in switzerland it's a pretty small country and most of the Swiss banks are dealing in currencies other than Swiss francs, et cetera, et cetera.

But yeah, it tells you that they can keep this going longer than we all think they can. That's true. But what I was trying to pull up, couldn't find it, but there was a bank in Germany, Hamburg Cassie or something. They just instituted negative interest rate policy on depositors with over 200,000 euro in their accounts. Some of the large banks, I think, have effectively made it through fees.

I don't think they're doing negative interest rates. That's the first one I've heard of. It's possible I'm wrong, but they're doing it through fees. They're effectively making it very difficult for depositors to deposit money. They just don't want it. So how do you see a world as hyper-leveraged and chaotic as it is behind the scenes right now, transitioning to something like Bitcoin? uh i suspect that it's not going to be an easy transition in other words you know we're going

to have an accident in the financial system and of course most people will say it was unpredictable you and i and the folks listening to your podcast will know it was entirely predictable but um uh but it's interesting when when safe and i were talking about um doing some some work together a couple weeks ago we had this exact conversation and he's more optimistic you know the British Empire fell relatively peacefully. In other words, the pound sterling was no longer the world's reserve currency and it transitioned over to the dollar.

Basically, the rest of the world is starting to align against the U.S. because we've weaponized our financial system and made it so difficult for them to get dollars. And it's basically the biggest way, aside from the military, that the U.S. projects power right now. And that's caused a lot of people to resent us.

Yeah, it's the petrodollar. So what you're seeing with China and Russia doing the oil futures based in yuan and rubel. Right. This is all part of moving away from the dollar. Yeah, slowly but surely. And they're all buying gold, too, which is interesting. They are. They are.

They are. Russia had a currency crisis in, was it 2015, 2016? I wrote about this on my blog. I did the Trans-Siberian Express, which was so much fun. after I left Morgan Stanley, because they lock you up, you can't talk to anybody. So it was a time when I could just take three weeks and be out of communication with everyone. And it was awesome. And I wrote a travelogue after that. And I went back and talked about the fact that Russia is, historically, it's been on a very different cycle than the rest of the world. It's just in

its own cycle. And so many times when the West was booming, it was in a depression. And when the west has been in depression or recession it's been booming and um and we and i talked about how the imf was encouraging russia to sell its gold to defend its currency back in i think it was 2015 and you know what they did they bought more gold and godspeed to them they get what's going on if you do if you read into the uh the history of european and latin american financial crises in particular the IMF has always made the situation a shit ton worse they just go in lever them up the private equity of the geopolitical world yeah well the IMF is one of those you know the World Bank and the IMF are two organizations that came out of World War II

that allow the U.S. to project its power globally and it's part of what keeps you know a lot of companies de facto satellite states and what I mean by that is not derogatory I mean they affect are keeping their currencies to peg to the dollar yeah now it's uh but again you can never time it though like I remember when I was an analyst I was an analyst at a hedge fund I was like fresh out of college like this is gonna end this year like this is gonna be terrible no you never know no and and I think this can go on quite a quite a bit longer than most people think but that said I wouldn't be shocked if it ends tomorrow because when you look at how

unstable the, the situation is, it's pretty obvious. Again, in retrospect, it will be very obvious why it happened to people who know where to look. The, the, uh, one of the things that I did, um, was, was take a trip to a couple of years ago to Paris to try to dig into, and I hired a historian to walk me around, um, to try to dig into the French revolution versus the American revolution. Cause Thomas Paine was involved in both of them and an instigator of both. Right. And try to understand why did the French Revolution go socialist afterwards and the American Revolution went individualist? And, you know, different, of course, they had different reasons for building up. But it's an interesting question.

What will happen to the world? Who wins the hearts and minds? Who wins the narrative? if we do have a big accident in the financial crisis in the financial system and suddenly there's a big you know depression that comes out of that who gets the blame for that it's an interesting we don't know we can't answer this question but i do think it matters that uh no i do as well i was just like daydreaming there like maybe why did when you said why did uh france go socialist in the u.s go individualist maybe like america went individualist because like this is

weird to say because native americans were there first but it felt like a clean canvas to everybody like hey we can start something new here and let's just run with it well it was a clean canvas but if you look at what they what they did the the colonists actually set up a lot of their existing system in america because that's what they knew right yeah yeah so you know there was they definitely made some brilliant changes and patrick burn when i talk about um criticisms of what's happened in america he always reminds me you are so fortunate to have been born under that constitution because most people in the world were not and they're suffering as a result and it's the best one short of everything else well that's uh that's interesting you bring that up the

constitution in particular because there's conversations going on this month in general about uh pseudonymous uh like being anonymous on twitter and fighting for this bitcoin revolution whatever and uh the federalist papers were written by anonymous founding fathers it's funny to see Because they were afraid to reveal their identities. Satoshi was honest. Maybe this is the next big revolution. I hope so. But, you know, we've gone the opposite direction in the financial system.

This is one of the things that disappoints me about Trump. I'm not a Trump supporter, but he's done some things that are very good on deregulation. I wish he would deregulate the banking system privacy issues. And, in fact, he's actually gone the opposite direction. KYC, AML. Well, now you actually have to not only identify. You have to know your customer. You have to know your customers customer. In other words, you have to know the travel rule

Yes, that's those are new regulations that have just come into effect. That's really absolutely So it makes it even harder for crypto currencies, right? Because you have to know not you're just not just your customer but their customers Well, they have you have to it's the travel rule And then and and and other rules related to that That that that get at why it's so difficult for banks to bank this industry and they most of them it's

not illegal of course unlike the marijuana industry people have asked about some things we're doing in Wyoming could that be helpful for the marijuana industry marijuana is not legal yet in in Wyoming or decriminalize is a prop probably a better word for it and it's obviously not decriminalized at the federal level either so I think it's gonna be tough for any bank to touch that industry for that reason it's got to be decriminalized both federally and state for a bank for a bank to touch them but the cryptocurrency industry we're not illegal at a federal level so why why are the banks so averse to banking us it's because the compliance requirements just

got ratcheted up i just got a haircut yesterday and i'll give you a story and actually candidly i i think the bank secrecy act is is really discriminatory against women and i'll tell you why okay because my hairdresser has always had her maiden name on her bank account and she went to deposit a check for 30 years she's banked at this same bank and because of these new requirements they rejected her deposit oh my god because she changed her name when she got married this is why I actually think the Bank Secrecy Act creates more problems for women because women tend to change their names of course not always and unless so today

but she's in her I don't know 60s maybe and and for 30 years she's been banking with the same bank and now they told her she has to close her account because her name doesn't match her legal name this is the kind of stuff that it's just like come on right it's probably like a local bank too yeah it's a local bank yeah yeah and and and so so what's happening in the crypto industry is is a is a symptom of an underlying problem which is the Bank Secrecy Act I actually think that that's unconstitutional and we're going to challenge that. And it's probably going to be in the crypto industry where that challenge comes from. Boss, I'd love to hear that. So let's jump

into the banking problems in Wyoming with cryptocurrency companies in particular. Just lay the land. I don't know if everybody out there completely understands what's going on because Wyoming has been one of those states where it's been pretty, they've been pretty ardently steadfast and sort of stifling cryptocurrency in general. Well, historically, Wyoming was one of three states that had a really bad money transmitter act and essentially required 100% reserve for everybody doing business in Wyoming, a cash reserve on top of the value of the Bitcoin. And so Coinbase and BitPay and Circle pulled out in 2015.

Cash reserve on top of the Bitcoin? Yeah, made it uneconomical. Even if you had access to an exchange, you'd liquidate? Yes. But there are three states. Actually, Minnesota and Hawaii still have that law, to my knowledge. Wyoming, we got it changed. But when we decided to get it changed, actually, it's kind of a fun story.

I grew up there, and my dad was a professor at the University of Wyoming for 40 years. I saw how hard it is to find women engineers, and I thought, well, why don't I just try to spread the wealth with some appreciated Bitcoin and endow a scholarship for women engineers? I thought I was going to do it really quietly. It checked a lot of my boxes. And then I ran smack dab into this Wyoming law where the University of Wyoming couldn't take my Bitcoin.

And so I said, OK, guys, I'd been on the foundation board there. I said, let's go change the law. and not only did we do that but we actually reached farther that and and wyoming is such a cool place oh yeah because it um just to give you an example we just had a hackathon out there and there's a big poster right outside the field house where the hackathon was it said bucking the system since 1886 and that's wyoming for you it's a pretty libertarian small l libertarian place they don't mind fighting the feds and um yeah um it's we we touched into into that zeitgeist in in passing these bills um and and and wyoming really truly wants to attract the blockchain

industry and we've made it as friendly as possible to do so mining somewhat economical in wyoming isn't it yeah why doesn't have a lot of hydropower so um only on the western side of the state i have heard of mining operations wyoming there are yeah but not the not the really large scale ones the really large scale ones are washington state yeah well they're getting well they're all they're global, the really large scale miners, but they're getting sub four cent a kilowatt hour power cost. And most of the power in Wyoming is about five cents. So right now it's uneconomical for the really big guys to come in. There definitely are some that that are. And with Bitcoin, where it is right now, it's still profitable at five cents. But but if the big

guys are global and they can sop up, you know, unused power capacity in China or Sweden that would otherwise just get wasted and they're paying, I don't know, two and a half cents for it they're going to sop up all of that power before they come and pay five cent power in wyoming exactly no that's the consensus i've been hearing around the uh the mining industry in particular is that in the next few years if you're not at two and a half to three and a half cents a kilowatt hour it's going to be tough to mine profitably i think that's right but as this industry grows i think there will be over time demand for five cent the kilowatt hour and given wyoming has such amazing tax incentives and it's a cool climate so those that are not liquid cooling

their boards would have lower cooling costs. It's fascinating to look at the engineering that the different miners have used for different climates. It's crazy. It's all of the incentives of the Bitcoin network just driving

efficiencies, not even only in the monetary policy and the way the code's written, but the way the hardware is set up. Absolutely. It's a big deal. It's making people creative. Very. Right? And that's what these crazy estimates of power usage are missing right yeah so what do you what do you think the number one thing they're missing is in particular uh they're assuming like coal's being

used or yeah it's the power cost yeah just just how cheap that power is yeah and they're the fallacy that they're making is that that power that is so cheap would ultimately be useful that's what i learned that you know as we talked earlier that that hydro capacity in china that is just being wasted because there's no transmission to transmit it out of that geographic zone you can bring miners and bring miners in and they can they can turn something that would otherwise be wasted into something economical yeah of value yeah same thing with sweden it can't by eu rules send its excess hydro power back into the eu grid why is that in eu rules well welcome to the eu and there's a lot about the eu that doesn't make sense yeah it's protecting the power companies in the other

in the other zones yeah going back to boomerang the uh the stories of how greece and italy got accepted into the the eu or yeah or or fascinating because a lot of fraud a lot of fraud they cook the books to to manipulate their that's a gdp ratio that's right it's very well documented that's oh yeah everyone knows it yeah and it's uh it's funny we just take it you know people just accept it yeah so but i think that is changing yeah for sure let's jump into let's jump into back products so backed is coming out with um i'm blanking here what is their product their product is just they're simply it's a bitcoin physical bitcoin futures contract and then they've got the deal with starbucks as well so you are sounding the alarms of uh basically

the problems that are emagglutinating in our traditional financial system might be leaking into Bitcoin via rehypothecation based off of these contracts. So how do you see this playing out? Well, and to be clear, I'm not critical of Bakkt itself. I'm critical of the product. Yeah, Wall Street coming for physical Bitcoin products. Citigroup just this week announced that it's going to be putting

a depository receipt program together for Bitcoin that's going to be going through the Depository Trust Corporation. that makes me laugh because we all know what the problems with the depository trust corporation are right a lot of us have been talking about them for years i don't know what is it the depository trust corporation yeah it's effectively the federal reserve but for securities it's the central securities depository it's a central clearing institution um and and stepping back 99.9999 percent of the securities outstanding in the united states are legally owned by the depository trust corporation really and what we own in our brokerage account is an iou through them

that actually goes through two different layers at minimum. So there's you at the bottom. There's your broker-dealer who owes you your share of Apple stock. There's their custodian who owes your broker-dealer your share of Apple stock. And then at the top is the depository trust corporation who owes the custodian your share of Apple stock, who then owes it to your broker-dealer. And then there's you at the bottom. We all think that we own securities in our brokerage accounts.

We don't. We own IOUs. it's the same thing as in your bank account you got the fed at the top and then a correspondent bank and then your bank and then you right you got layers of intermediaries and um if if anybody's listening out there who's an attorney you know that you have no contractual privity anywhere up the chain except for the the institution with whom you have a direct relationship so the only one you can sue if anything goes wrong is your bank or your broker broker doing right you can't if the dtc screws up you can't you can't sue them you can't go all the way it's

Right. And the DTC did screw up royally in the Exhibit A for rehypothecation problems in the securities market, which is the Dole Food case, where there were 33% more valid claims to Dole Food shares than there were Dole Food shares. Yes. It's funny how that can happen. Right. But I've experienced it. And it was during my pension business that I uncovered just how a lot of this happens, because we were trying to transfer assets from the pension fund over to the insurance company. You actually have to have all the assets in the account in order to be able to do that. And we actually had to transfer it same day. Otherwise, the annuity contract would not have been valid. So if any assets were straggling and didn't make it over through the plumbing of the system from party A to party B, the whole thing would have been invalid, right? So we had to get it done on one day, intraday. In the GM pension transaction, we moved $26 billion worth of assets in one day. And yeah, it was big. And trust me, we spent months figuring out how to do that.

and make sure that no balls dropped so that the pensioners were protected. But what I discovered in one of my pension deals, it was not the GM deal, was that there was unauthorized securities lending happening that would not have been discoverable by the brokerage statements because the custodian didn't have to report it to the pension fund. So you all individuals out there right now think your brokerage statements are accurate. They're not inaccurate, but you don't know what's going on behind the scenes. You don't know how many times the right to that certain security has been given.

Are given, right. And there's nobody auditing that. There's nobody auditing that. This is how the dole food situations happen. Until there's some sort of what I call a reckoning event, like a merger where you're actually going to retire the shares. That's when you figure out how big what Patrick Byrne calls, he was citing a John Kenneth Galbraith phrase, the bezel.

Okay. The bezel in the financial markets is how many people claim they own the same asset when there's really only one asset It's fractional reserve banking Yeah, yeah, it's the same thing and in the dole food case. It was 1 3rd So do you think we can solve this problem with Bitcoin like with these products? Do you think so? I think with these products in particular. I think people should Start being more vocal like hey these products are gonna be Hitting the market and especially if you're claiming that their Bitcoin back like yeah throw up some public addresses

prove that you're bingo that would be awesome yeah i think it was nick batia proposed that that if we're gonna have physical backed etfs then show us the public keys let us track it give us verifiable and net asset value let us let us track it and i hope they do um um it's funny just today i tweeted out a picture from the cftc conference room and somebody was like well why were you at the cftc well it wasn't i said don't read anything into that because the regulators have ongoing conversations with Bitcoin and blockchain people all the time. I've been there many times. But yeah, they're asking about all this because they need to learn. And they, you know, one of the things that Chris Giancarlo, who's one of the industry heroes, he's like one

of the good regulators, right? I forget the nickname. Bitcoin sign guy would say he's fifth pillar. He's an insider trying to help Bitcoin. Yeah. But by the way, that's not new. He's been saying this for years because he's very critical of rehypothecation that that and and i hope in his position as chairman of the cftc that he's trying doing everything he can to bring that rehypothecation down it's insidious and what i mean by that is you can't tell that this is happening like this example that i just talked about in the pension fund where unauthorized securities lending was happening there would have been no way for the pension fund to figure it out because the brokerage statements didn't show it it was happening behind the brokerage statements

in an unaudited part of the system. Yeah, exactly. There's no mutual ledger where you have to cancel that out. Exactly. So he looks at blockchain and says, this is the way we're finally going to be able to solve that problem.

He's right. But here's the irony. With all of the products like Bakkt and the VanEck physical ETF and the Citigroup depository receipt, they're all dealing in physical Bitcoin. They're trying to fit that square peg into the round hole.

We're actually in some ways going backwards because we're actually fitting Bitcoin into the crappy existing clearing and settlement system as opposed to taking Bitcoin's awesome clearing and settlement system and fixing Wall Street. Building on top of it. Yeah, that makes a lot of sense. Yeah.

And do you think we could de-alienate between types of Bitcoin futures products right now? So like Morgan Stanley came out today and they announced a synthetic price return swap. So that's different than what these are. That's a cash-based, yeah. It's a synthetic, so it's a cash-based swap. Dealing in cash, some people argued with me on Twitter

that that actually swings the price around more. And I must say the people who came out and said, go back and look at when the CME and CBOE Bitcoin futures contracts were announced, that corresponded with the top in Bitcoin. Yeah, the all-time high. Yeah. So look, derivatives in general

do suppress the price of the underlying. But I'm less worried about the cash derivatives than I am about the physical. Okay. Because that's the way to... basically wall street can create paper versions of bitcoin paper claims that people will accept as if they were the real thing thinking they own the real thing but they are not and if they let leverage into the system that's how this rehypothecation works that that's where you end

up with one-third more valid claims to bitcoin than there are real bitcoins and that's that negates the the scarcity problem and i will say some very smart people who i respect tremendously have that sort of Keynesian view of the world that that's not a bad thing. And one in particular said, we need to quote unquote solve Bitcoin's scarcity problem. He views it as a problem, right? A lot of people think we need to embed inflation into it.

I don't think. Right, and that his point is we need to embed inflation. That's exactly his point. And that we're not going to get liquidity in Bitcoin until we create, until we inflate it. I think that's a product of some, it could be analogous to Stockholm syndrome where you've been born into the system

and you think it needs to operate in a certain way and you think everything going forward needs to operate that way. That's exactly right. And in the short term, he's right. That would create more liquidity. But the problem is... Exactly, when the music stops, it's a crush.

There's no lender of last resort in Bitcoin and holy cow, you better own your private keys if that ever hits the wall. Well, that's the point. I think maybe if Wall Street tries to mess around and fuck around with this a little bit and they'll learn a quick lesson and then people will demand

And we need public keys. We need this to prove that you're reserved to a certain extent, at least. And it's funny. I mentioned my mentor earlier in the interview. He disagrees with me that I should raise the flag and let people on Wall Street realize that they don't know what they're dealing with. And this is very different than a traditional asset. And the risks are much greater. And there's probably an accident coming.

He disagrees. His attitude is, let them fail. They are going to fail. because bitcoin is not they can't really affect bitcoin they can suppress the price and i think they have but they're not really going to affect bitcoin over time and all they're going to do to trace's point trace mayor's point is basically just suppress the price so the rest of us can buy the real thing yeah exactly cheaper and um those that are not educated enough and they're buying the substitutes um you know good luck as jim grant is somebody who i respect tremendously

and he had a um a financial um crisis redux over the weekend and talked about one of the lines he had was about etfs and and he said none of us know what's going to happen when every but when there's a rush for the door yeah i think some of us do um he was of course proverbially saying because he's obviously you know none of us can predict the future but like in the thomas friedman world you kind of know generally what's going to happen you know there's a big accident waiting to happen it's been hyped up like the housing market was and the mbs is where like pre-housing crisis etfs are allowed to play a little bit of three-card monty how does that happen it's it's the dole food situation all over again it's unsettled trades because it takes t

plus two days after trading to settle a trade there's tremendous securities lending happening this is how, you know, a lot of these funds are now zero fee. Well, of course, the asset manager has expenses. How are they charging zero fees? Because their security is lending your securities, right? So there's a lot of rehypothecation that's happening in those ETFs. Nobody really knows how leveraged they are. There are lots of ways they can play games. In the derivatives world, a lot of ETFs are invested in futures. In the derivatives world, there's something called collateral substitution, where you don't actually have to post collateral for the actual asset. So let's say in a physical Bitcoin futures contract, the collateral substitution allows you to post cash

or U.S. treasuries instead of the actual Bitcoin. That's a way, another way, that hidden leverage can insidiously creep into the system without anybody really realizing it. And it's just the way that Wall Street works. They allow all this clearing and netting of exposures and substitution of collateral and when you've got an asset that is finite like bitcoin um those two things don't mix it's gonna uh it's gonna it's gonna make you humble real quick yeah well i don't know how quick that's an interesting question yeah well because i think you go it's just like what we're talking about with the financial system with how volatile the price has been especially up to this point like it could it could go on but it you know they are going to require one day collateral posting

So that means that really what you have is the gap risk intraday. Okay. And that's pretty big, right? Look what happened to OKEX early in August. Well, we see that with GBTC, too. Of course. The gap risk, yeah. But GBTC was gapping pretty hard before competitive products that were more accessible came out.

So GBTC, the Grayscale Bitcoin Investment Trust, was trading at a huge premium to the price of Bitcoin for a while. Yeah. But it should be converging back to the price, correct? Because there's more accessible. Well, I haven't looked at it in a while. But yeah, a lot of those trusts, that's the most responsible way to do a Bitcoin-backed financial product. And that one's pretty close to one-to-one, as far as I know. But again, in a lot of these, you don't have audit rights.

And GBTC on the forking issue is the best of the ones I've seen. Let's jump into it, forking issue. And before we jump into it, GBTC is trading at $6,700 right now and Bitcoin's at $6,500. So it's actually come back down a little bit. Yeah, it's come back down a little bit. It's a little tighter. But forking, this is very interesting. This is something that exists in blockchains that traditional financial system doesn't exist.

It is a whole new animal. Absolutely. And it is hairy. Well, and Larry Tabb and I were back and forth on this because he was saying, well, isn't it just a... Larry Tabb's a very respected financial services guy from Tabb Financial. He was saying, well, isn't it just like a rights offering or a stock dividend? In concept, yes, but in reality, no, because, of course, as you know, you actually have to do a tech integration and you're exposing your private keys

and you may not accept all the forks and airdrops if you don't think that the forked coins are stable. That or if you just don't want to give up your privacy. That's true. But as you're thinking about Wall Street, they're run by fiduciaries, right? So they've got asset managers who have to make the decision. But what I discovered in digging into this, I looked at the VanEck filings. I looked at, Bakkt hasn't come out with anything yet, but I looked at GBTC.

And I even looked at the cash-based futures, the CBOE and CME. None of them have made a firm promise to actually pay the forked coins. Okay, so now you get into this unjust enrichment issue. Yeah. Where, you know, think back, Coinbase sat on its Bcash for six months. And it's Ethereum Classic. Yeah. For longer.

For longer, right. And so what were they doing with those coins? We don't have any idea whether they actually revealed their private keys and claimed them and brought them into their own balance sheet and income statement, right? We have no clue. And that, as a regulator, you could tell that that's going to be an issue, right? And it's also going to be a fiduciary issue. I'm an attorney by background. I'm dormant. I'm a member of the bar part of me in the back of my mind is thinking God

I'm gonna have fun being an attorney going after some of these fiduciaries For the accidents that I think are gonna happen over the next ten years in some of these financial products Because if they've made no promise whatsoever to deliver the forked coins You know and they're and they're and they sit on those forked coins I'm gonna figure out in discovery whether they actually claim those coins on the first day and just happen to you know sit on the sit on the float for a while before giving them out um and and if and you know but there are real fiduciary reasons why you wouldn't want to claim those coins too right but the point is what are

you really buying when you buy a wall street product that says our risk committee is going to determine the right course of action they're making you no promises gbtc is the best that actually says they're they're a little more specific that i think they refer back to gemini that they're going to follow the Gemini policy and... Yeah, because they're indexing off. They're indexing off Gemini, yeah. But none of the others make any promises whatsoever. And when I looked at the VanEck filing,

they make no promises whatsoever about custody, whether they're going to be lending their coins or not. It just doesn't say anything. It just says the trust is going to custody. You don't have to disclose it? You have to disclose everything material, absolutely. And it's not disclosed. So, yeah.

And that's one thing I learned working at the futures market for futures fund like the due diligence so i was a portfolio analyst and we were a fund of funds so we had to do due diligence on my job was to do due diligence on funds and sure the amount of due diligence the boxes you have to check the abundance of caution you have to write into your prospectus and everything that goes on with your fund is ridiculous and i just haven't seen it in the cryptocurrency space in general yeah i don't i don't think a lot of the cryptocurrency focused funds are following those processes at all well and and we don't have legal agreements with the exchanges that we do business with right none of us asked none of them asked us to sign a legal

agreement when we signed up no so at the okex situation is interesting because that was a 400 million dollar loss on a futures contract and they did a bail-in i have no idea if and what and what that meant was somebody defaulted on the 400 million dollar loss and they basically said everybody who was on the other side of the future con futures contract ended up having to give up 400 million dollars worth of their gains in order to keep the exchange solvent um and that's what a bail-in was so basically a lot of people thought they had gains and in the end had a lot smaller gains or or maybe even losses in order to keep the exchange alive right i doubt they had legal agreements i don't know for sure it's hong kong and i i just don't know their situation um but

think about if that had if that happened out of bittrex or a kraken or somewhere you know one of the u.s exchanges gemini etc well that's uh we just talked about that on this uh week's edition of rabbit hole recap my weekly news show uh bittrex just filed in malta they're trying to domicile malta which is interesting to see like uh huh well the shapeshift announcement last week i think reading the tea leaves tea leaves the people well it look the regulators are coming right and it's and and i i think the exchange is i don't know anything definitive so don't read anything into this other than just me putting the tea leaves together of what's happening ShapeShift made a difficult decision

and was very criticized for it to go ahead and become it seems like Eric Voorhees didn't really have a decision to make it was either do this or but maybe that's why Bittrex is I didn't know they were looking to go to Malta this is news earlier this week

it just came out so it's interesting the most interesting one is going to be Jesse Powell because he doesn't do business in New York at Kraken and he was so critical at Consensus in, was it April or May, the big conference. And then later, somebody asked him about New York

and he had gotten a subpoena from New York and he very publicly and openly refused to comply because he said, you can't touch me. I don't do business in New York. You don't have extraterritorial jurisdiction. I owe you no response whatsoever. And he was very public about it. So we'll see, you know, what happens to some of the exchanges that happen to be doing business onshore in the U.S.

Are they going to be forced into compliance or are they are they going to just go offshore? It's a tough decision for the I mean, for the executives of those firms that I mean, the regulatory arbitrage is is the the valley of arbitrage. And the regulatory structure right now is huge, is vast. It's an open canvas and it's gonna see who like at the geopolitical level like who flinches first and like we got a mini Example with what's happening. I mean Wyoming's not really blockchain specifics more banking specific But here in New York State with the bit license in particular. Yeah, sort of seeing how that's curbing Oh, it totally hurt the industry. Well, Wyoming basically took all the regulations off so we passed five bills one of which essentially said all all

virtual currencies are exempt from money transmission and and securities laws. And then we created a new class of property called open blockchain tokens that are, so this is utility tokens essentially that are exempt from securities laws if you meet specified standards, which essentially is it has to be exchangeable

for a good or service or content and it cannot be marketed as an investment. There are a couple of others as well, so don't take that summary as legal advice. Go read the fine print. um and then we exempted all crypto from property taxes there is no income tax in wyoming anyway so we basically said there's just not going to be tax on any of this in wyoming because um i might move to miami i know that's why a lot of people okay and that's why we did

wild hackathon as well and then we we copied the delaware corporate registrations bill so you can keep books and records and we're hoping to integrate with the secretary of state there were two hackathon entrants that proposed integration with the secretary of state So that you could create a virtual entity that will never exist in paper form. It will always exist on a blockchain, including a DAO. The one that won the consensus prize was an Ethereum-based LLC registration platform for DAOs. Fascinating. If you're interested, go to yohackathon.io and you can see.

Because everything's open source and you can see their video. And then the fifth one we did was series LLCs. Yeah. It's fascinating, like the innovation that's happening. Right. And now we're talking about doing the special purpose bank. Yeah, that's that's that's that's going to be coming up in the next legislative session. So we got those five previous bills passed. That's why Wyoming is becoming a blockchain haven.

It's inside the US. So you still have to comply with federal law if federal law trumps you. But what we've set up is for utility tokens. If you are not a security, you're not marketing it as an investment. And it is truly something that is that fails the Howey test. then you're considered property under wyoming law and property is the purview of the states securities law is pretty clearly federal law but property law is pretty clearly not and so wyoming gets to define whatever property is and they're they're they define digital property so it looks like you guys are going the opposite direction in new york which is we are 100 the

opposite yeah yeah wyoming that's why we did wyo hackathon that's why joe lubin and patrick burn and Eric Voorhees and Jeff Garzik all participated in Wyoming Hackathon. A lot of people were like, wait a minute, there's a small town hackathon with these big name sponsors and big name speakers. And you know what? It helped a lot of people come out. And guess what? A lot of people are staying. Wyoming put an amazing foot forward. The winner of the Best for Wyoming prize, which incidentally was judged by all three gubernatorial candidates, the Republican, Democrat and Libertarian. They all worked together to judge that prize i'm so proud of that because that indicates we're going to have continuity of in in the blockchain support under the new governor who will be elected in

november but um we we had um there are four companies that are going to going to get free office space in wyoming there were 27 entrants and we're just going down the list and we're going to fill that and i hope keep those companies in wyoming um there there's a company called Active Ether that's moving out of New York to Jackson. They're relocating their headquarters to Wyoming for this exact reason. Node Haven is already in Wyoming. You're going to see a number of announcements about companies redomiciling out of Delaware into Wyoming, even though they're not moving to Wyoming. They want to avail themselves of the Wyoming crypto-friendly laws. And there's really no reason to stay in Delaware anymore. So a lot of companies, the lawyers will just say

domicile in delaware but if you're in crypto wyoming is going to become the default option pretty quickly wyoming is much more scenic than delaware i would imagine yeah well delaware's got the delaware chancery court so again attorneys that are listening to this will be like wait a minute wyoming doesn't have a chancery court and that's true yeah um but the delaware chancery court really matters for like s&p 500 companies it doesn't really matter for startups yeah so let's jump into utility tokens do you see a future where they're viable like there's so that's a big debate like i would i just so you know i'm considered a bitcoin maximalist and uh i just think um you till i get the idea of utility tokens i don't know if we need a token for

everything though oh i completely agree with you there but so i consider myself a bitcoin maximalist too but i think it's going to take 20 years i think bitcoin's ultimately going to be the the one that nudges everything else out but i do i do think securities are going to be tokenized and so it's not into ken that's not mutually exclusive okay um in other words i don't think everything's going to be bitcoin i think you're going to actually have tokenized securities and the way i look at utility tokens it's an it's the next generation crowdfunding okay and there's a lot about it from a corporate finance perspective that makes a lot of sense because the bezel in the financial industry that you expose yourself to when you issue traditional securities is huge

And what I mean by that is not just the inaccurate accounting, it's also just the expense of all those layers of intermediaries and all the delay in settling transactions. If you can settle transactions instantly, you have a lot less expense and you have no counterparty risk. So investors, I think, are rightfully giving up some of the investor protections that they demand in the existing system, which try to protect them from all that bezel, right? and in the crypto system of of quote-unquote securities or capital raising more broadly you don't have exposure to that bezel you get your money instantly and you don't have counterparty risk you're if you're broker defaults who cares exactly no but that's it's what i'm most interested to see is how this plays out because i can definitely see this future it's just like is it is it going to be built on layers on top of bitcoin is going to be multiple blockchains

with specific functions and that's what uh i think that's what the big debate is right now oh yeah well and i'm neutral on that so when i say bitcoin maximalism i think that's going to be money exactly but i don't think that that's necessarily going to be securities it could be um but but but money is the best use case for crypto no question and i do believe bitcoin's got that one um is it ethereum or eos or something that hasn't even been invented yet that's that's that's going to tokenize capital that we don't know yet yeah yeah it's going to be fascinating to see how it plays out there's so many that's the other thing is driving creativity like people just to think about like we were talking about in in different areas of computer science and hardware and energy

efficiency i think it's the best incentive system ever we've ever seen on earth oh for sure and i I would encourage your listeners to go to wyohackathon.io. We've posted, because it's all open source, the descriptions, the GitHubs of 27 different projects. We had the corporate registration ones. We had tokenizing cows to help ranchers finance the cattle so they don't have to borrow from the bank every year. We had water rights. These were very Wyoming-themed projects in a lot of cases. The winner was Token Subscription, which isn't Wyoming-themed, but it basically created an automated platform for purchasing tokens without having to go through and do it every day.

Yeah, I mean, there was some awesome—oh, there was a great one on Billboard Music that wasn't Wyoming-connected. They won the Singular DTV prize. There was just some awesome projects. And how long was that, like three days? Three days, yeah. Yeah, and I got to say, the thing that I'm proudest about is there were two high school teams, one of which came from the central part of the state just outside of the Native American Reservation. And I don't know the ethnicity of the kids, but a teacher brought down three kids.

And each of those two high school teams won a prize from the Descent Foundation. And, you know, those kids could not have been happier. They pumped. Oh, my gosh, yeah. and the sad thing is neither one of them was there because they had to leave to go back shoshone is in the center of the state laramie's in southeast so it's probably a four-hour drive and they had homework that they had to do so you know they left in the morning and even the local kids didn't stick around for the award ceremony because they didn't think they'd win anything but

what happened is the descent foundation was so amazed at the skill set of the kids the high school kids that they they awarded to both sets of high school kids the laramie kids actually built on the decent platform and they looked at that and said that's evidence of how easy it is to build because you had beginners who'd never done anything on blockchain before actually building on the decent platform so it was amazing advertisement for them and just a great human interest story and a lot of these kids were not exactly from significant economic means and the the engineer got emotional when he said look i didn't come from a advantaged background i know what we just did for them is going to change

their lives. It's very cool. It's crazy how software and computer science is lowering the barrier to entry to create incredible things. That's what I just wrote in an op-ed. Software doesn't care about demographics. Software doesn't care about location. Joe Lubin made the point in Wyoming, there's no

reason why the next Google can't be can't come out of Wyoming. And the guys who are going to be mentoring these high school kids were from Slovakia and Switzerland. And they came to Laramie, Wyoming. They said But they traveled a collective 60,000 miles to come to that hackathon.

Yeah, that's the point I was going to say. There's no reason the next Google has to be founded anywhere. It could be a completely autonomous distributed team. Absolutely. That's crazy. And go look at the EtherEyes.it submission, which won the consensus challenge.

It's basically a way to register, to use Wyoming LLCs to register DAOs. It's awesome. And Joe Lubin himself judged it. So I saw Joe passing out multiple business cards at that at that hackathon so i'm you know fingers crossed and egging on all the all the teams go start your business that's good and hopefully keep them in wyoming to some extent yeah it's good to know he's not worried about price right now it's definitely uh oh he's so clearly not

focused on that i got to interview him on the stage it's the least interesting thing about it he's focused on the engineering he's focused on continuing to start new businesses looking for good ideas to invest in yeah and that's what all of us should be focused on i think price is the least interesting part of this industry we need to be focusing on engineering and i frankly i'm kind of glad that the attention's off off us right now yeah that's the thing uh especially during these bear markets uh the the stress on the blockchains because they're not as popular so there's obviously not as much activity on them yes so there's enough downtime to to try to figure out how to scale these things yes which is the hardest problem yeah we're working on lightning

network and boy does that look promising it's crazy what's coming out like so you were talking about earlier how um marijuana industry specifically dispensaries cannot connect to the traditional banking system and with lightning network jack moller is out of chicago and what he's building with zap their uh their first uh sort of user that they have in mind is these dispensaries where they're going to allow them to accept uh lightning network payments or bitcoin payments in general from a pos system they're building from scratch that's interesting yeah i know um um on on one One of the people out at YOHackathon asked Patrick Burnham from Overstock, who's been very publicly outspoken in support of decriminalizing marijuana,

about a blockchain platform that is tracing the origin of marijuana to verify it because, frankly, a lot of what you get, you don't know where it came from, and it could be impure, et cetera. And so he said, call Collect to the companies working on that. He wants to finance that. So you can actually finance it from both sides. It'll be interesting to see how a legitimate marijuana industry pops up. Because right now it's like, oh, I mean, I pick up my pot from a buddy who's got a cousin in Northern California and shipping it to him and like that.

Ergo, you don't know about the purity of it, right? Exactly. But the market has sort of figured it out. I mean, weed as a black market has worked functionally well. And there's not many weed over deaths or poisonings. It'll be interesting to see how that. We're just walking. We're sitting in Brooklyn right now, walking around New York City. It's so clear that it's de facto decriminalized because you smell it every time you walk out. It is. You only get a ticket if you if you get caught with smoke. You have to be smoking it as well.

Yeah. I mean, you know, the feds need to need need to decriminalize it. But it's just it's it's time. Yeah. Right. And it's not even necessarily because people want to use it. It's just why are we throwing people in jail for this? exactly it makes no sense i one of the things i hope that trump does before he leaves is mass pardon of non-violent drug offenders that would really help he did it with uh who was that what was that woman's name that kim kardashian helped him yes yeah that was what a terribly sad story it's all not like victimless drug but but how many thousands or if not tens of thousands if not hundreds of thousands of people are are in jail for similar things right now and and it just

makes no economic sense exactly think of the waste of human capital it's a waste of human capital and taxpayers are paying for this yes you don't even have to make a judgment call about drugs to say that it doesn't make sense and and look and look at the racial disparities too it's just clearly it's just wrong and and and um i've liked the pardons generally that trump has done so far i very much hope that a lot more are coming and you know there are a lot of people signing petitions to try to get them to do it it just for so many reasons makes sense but you know the attorney general right now is 100 opposed to it and not going to decriminalize drugs jess sessions is not a weed fan but it's so ingrained in our culture right like it's it's look i mean

most most states it's either already decriminalized or de facto decriminalized and in most states they're looking at it as a tax benefit that's why i made the distinction between decriminalization and legalization when they say legalization they mean we get to tax it yeah um i i i'm not for that i'd rather just decriminalize it and you know stop having the government harass people for victimless crimes yeah it'd be like a nuisance ticket at that point yeah and then we can or not even a nuisance ticket why would we even bother with that exactly well that would be the first step and then you go here this actually isn't a nuisance so get away from me right but yeah well but you know the blockchain industry can can really help some of those industries but right

Now, to be clear, at least in Wyoming, that's not on the table because the special purpose bank that we're working on, it wouldn't be industry specific, but it would be it would be if it passes able to transact in crypto and fiat. It would not be FDIC insured because the FDIC does not want any FDIC insured bank touching crypto. So therefore, our way around that is, well, let's just not have it be FDIC insured and let's have it be high dollar value business deposits. deposits. And the cool thing about it that got a lot of applause when I talked about this at YOHackathon, it's going to be a mutual. In other words, it's not a for-profit corporation. And so it's very consistent with the ethos of this industry of open source and shared. It will still have to do Bank Secrecy Act. So all that know your customer and anti-money laundering, if it passes, is still going to apply. But at least it, I hope will solve the problem that we

know is out there which is that a lot of companies in this industry have trouble not just getting but keeping their bank accounts open yeah now it's uh it's uh it's a weird situation we find ourselves in where we're trying to create a new financial system while working it's like we're working within the traditional financial system it's like hey hey well yeah because you know most companies still have to pay their vendors in dollars yeah oh yeah including their employees in dollars so You have to pay your taxes in dollars. Definitely have to pay your taxes in dollars, yeah. And it's interesting to see how it's going to play out.

Yeah, it's interesting. I had an exchange back and forth with Nick Szabo speaking of taxes. Some states are in the process of or have already passed bills allowing you to pay your state taxes in crypto. Arizona, right? Arizona, I don't know if they passed it.

I think they didn't pass it. It might have been raised. They did propose it. It was proposed in a couple of other states as well. I just don't know what the status is. But so he said, I asked him, you know, what would you do if you had a blank slate in a state? And he said that.

And I said, well, Wyoming has no taxes already. So we don't have to go there. But his point was that if you start allowing people to pay taxes, you take away that last straw, which is that you're forced to pay taxes in the fiat currency. and it's it's a that point is well taken yeah yeah and it's that would be incredible and maybe that's the the first domino that falls that really pushes uh maybe if the financial crises potential future financial crises we were speaking about earlier comes to fruition maybe some states

like hold their hands up like all right we want to accept bitcoin send it to us we need money well of course well and and four states i believe now have passed gold as legal tender laws right And the reason that they can do that is because well, it's gold and silver so it's specie there They are recognized in the Constitution. So I proposed well, why don't we have crypto recognized as legal tender in Wyoming? So that is actually on our agenda. Let's go and it doesn't look like that's gonna be constitutional so we may have to drop that one, but Yeah, but but you know, we're trying there was a funny theory I don't forget of his Twitter telegram today, but if Trump is running for 2020

uh president and uh bitcoin's mooning at that point so it's right around the next having is when oh right of course yeah that's a good point i hadn't thought about that like think about the bitcoin price skyrocketing to new all-time highs as he's about to go into office he's like you guys love this you love this bitcoin yeah we're gonna start accepting it for taxes all right or something like that like i could see him playing off like that meme the problem is if you look at who his financial advisors are they're they're core wall street people right it was gary cone previously and now larry kudlow and um steve mnuchin is treasury secretary i think they understand that they can't push it too far yeah but trump's populist instincts yeah he doesn't care yeah

he'll give him advice but he'll just be like i hope i gotta tweet this out right now i don't know if anybody's been able to get into his ear um about this yet you know hey donald if you're listening yeah mr president excuse me right right yeah i'd love to discuss it with you right yeah no certainly i i mean he should he should i i'm all about free competition and money and um i'm not about forcing people to use gold i'm not about forcing people to use bitcoin i'm not about forcing people to use anything free competition and money let's let's let's see which one wins in the in the in the free market i'm pretty sure i know over time which one will i do too and our time is precious here you're gonna get going to peter luger's oh wow bitcoin yeah true bitcoin carnivore

fashion oh i'm a proof of steak i'm a big steak eater i grew up and grew up on steak in wyoming and when you invited me to come here and i realized how close it was to peter luger so yep i'm gonna go get myself some beef before you get that beef uh there's something going on next week in wyoming what do you yeah we have a blockchain task force meeting where we're going to be talking about this special purpose bank bill. And I would love for your listeners to write me a letter. Contact me on caitlin-long.com or message me on Twitter or LinkedIn and send me a letter if you have ever had a problem getting or obtaining a bank account. We want legitimate crypto businesses, crypto funds, crypto, you know, software companies, anybody who's had a problem

getting or keeping a bank account please shoot me a quick letter address it to the wyoming blockchain task force sign it and shoot me a pdf i want to be armed with what we know is going to be opposition from the banking industry to prove that this is a problem in the industry we all know it is but the local bankers don't necessarily know it and i want to be able to to just come in with a stack of letters so by next friday the 21st of september please shoot me that letter uh do your part to try to help favorable regulation we you don't need to send us any money you don't need to do anything other than just shoot us a letter share your tail share your tail put your name to it and your company's name to it and i'll get it in the record in the testimony in wyoming if

If you think you might want to have a bank account that no bank can withdraw for these crazy compliance reasons, then it's worth it to you to take the time to write us this letter. All right. I'll probably post this on Sunday just so there's more time for that to happen. Or even just send it out on your social media. You've got a big following. Yeah.

I've called a number of people. I've already gotten a few. But the more the merrier. I want to be able to kind of go in with a stack. It doesn't have to be 100. I know there's hundreds who have had this problem, but even if I just get a couple dozen, that's, you know, that's all we need to basically prove. So they're not just taking my word for it. Yeah.

Thank you for standing on the front lines. It's my pleasure. And fighting this cause. Look, I think that we all, I'm not a technologist by background. I so admire the ones who are. You guys are on the front lines. I'm somebody who's using my talents to try to pave the way for you. and without you it's multifaceted everybody can do their part it has to be and there's so much

that we each of us can do one last thought is each of us who understands this should pick one charity and go work with that charity and teach them how to accept crypto think about what would happen to demand for crypto if every charity out there accepted crypto i got one in mind in particular awesome that do that as a as a service project to the industry i've been spending the basically the last nine months almost a year now coming up on service projects for the industry i'm not earning any income this is all volunteer what i'm doing in wyoming between both the legislation and the hackathon uh it just happens to be something that i can do to give back to two causes i love blockchain and wyoming but um each of us has a way to contribute and please do

because we've got to advance this industry i didn't even have to ask for your final thought because that was so perfect. Awesome. No, I really appreciate, again, I appreciate you. Thank you. This was fun. What you're doing in Wyoming

might set precedence for the rest of the country. I hope so. So thank you for doing that. I appreciate you coming through. Thank you. You have to go enjoy a steak. This has been fun, yeah.

Peace and love, freaks. Take care, everyone.