The Breakdown - What Davos Thinks of Crypto

Episode Date: January 21, 2023

On this edition of the “Weekly Recap,” NLW looks at the discussions around crypto and blockchain from the World Economic Forum’s annual gathering in Davos, Switzerland.  - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Swoon” by Falls. Image credit: GanzTwins/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.  

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Saturday, January 21st, and that means it's time for the weekly recap. Before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friendos, well, for this weekly recap, we are turning our attention to Davos. I think in many ways Davos and the World Economic Forum more broadly are one of the more fascinating and telling phenomena of our time.

Certainly from the standpoint of big picture power shifts and people's appreciation or lack thereof of the global elite and globalism more broadly. When people talk about Davos, what they're referring to is the annual meeting of the World Economic Forum. Each year it happens in Davos, Switzerland, in January. It has since its beginnings been an elite global gathering, and so in many ways one can chart the shifts in attitudes about global elites and globalism and globalization on how people discuss Davos. One of the big themes of discourse from the past few years has been, for example, the contrast between the stated goals of working towards a greener world and fighting combat change and the images of hundreds of private jets that brought the guests there. And of course, that's just the tip of the iceberg. For some, Davos and the

WeF represent the Illuminati, a global conspiracy of elites trying to shape the world to benefit themselves in their own objectives. TBD's Mike Brock wrote, I don't really care about Davos, like at all. But I am always somewhat amused by the crazed, unhinged conspiracy thinking on social media in and around it. His colleague Daniel, who works on decentralized identity at TBD, writes, I don't think Davos is some conspiracy event. There are just a bunch of politicians slash elites there who people despise.

Many have earned it. It seems Davos has become something of a lightning rod for the collective expression of dislike for those attendees. And indeed, even if one doesn't think the Swiss gathering represents a hotbed of global conspiracy, it's hard to deny that as people and countries around the world have shifted away from the globalism of the 90s and early 2000s, the event has become more discordant and disresonant with larger global trends. There's also the critique that it's just a bunch of people jawboning. As Elon Musk put it on December 30th, my reason for declining the Davos invitation was not because I thought they were engaged in diabolical scheming, but because it sounded boring AF,

Lull. Still, I do think that Davos provides a chance to get a sense of what the world's establishment thinks about various big issues of the time, and for the last few years, there has been a perhaps small but still solid crypto industry presence at the event. As you might expect, the crypto presence there this year was significantly down compared to last year, but you still saw big firms showing up, holding mini-conferences, panels, etc. The attendees of those events have included United Nations representatives, officials from the U.S. Commodities Futures Trading Commission, and numerous global lawmakers. So what themes have been on display at these events?

One big theme is the ways in which cryptocurrency and blockchain technology can integrate with the other subjects the attendees of WEF are interested in. For example, some of the topics that have been covered include how crypto adoption is driving growing dollarization of the world, tokenized climate solutions and use cases in delivering humanitarian aid. Another huge theme this year, as you might well imagine, has been image rehab. Significant energy is going into rehabilitating the industry's image following the collapse of FTX, with speakers drawing the distinction that although,

FtX was a crisis for the industry, it didn't represent a crisis for the underlying technology. PayPal president and CEO, Dan Shulman, said, quote, it's important not to conflate cryptocurrencies and CBDCs. Stablecoins and distributed ledger technology. They're very different things. He said that although the crypto markets have crashed, quote, the underlying tech has performed perfectly. The promise of a distributed ledger is that it can be faster and cheaper to settle transactions simultaneously with no middlemen. That's an important thing. End quote. Dante Desparte, chief strategy officer for Circle, expressed his eagerness to move on

from the events of last year. We're coming in with guns blazing. 2022 was Crypto's dot-com bus moment. Now we're bringing in key executives and putting on a lot of content that shows that the technology is here to stay. It's durable. It's a crucial part of modernizing the global financial system. This is an agenda-setting moment that matters. No mini-Rubin, Hedera's head of global policy, sees this year as a chance to rebuild a more credible industry. In the wake of FTX, we have a real opportunity. You're seeing the bad actors fall away and what you're left with is the more stable, better-governed crypto players. This is a an opportunity to reclaim what crypto is and what it can be. Speaking of what it can be,

another big theme was crypto industry folks saying, hey, look, there are real-world use cases. Brad Garlinghouse, the CEO of Ripple said, my take on Davos 2023. I honestly think it's healthy the change in how crypto showed up this year. Folks are focused on utility and how these technologies solve real problems. The only way the industry will grow moving forward. Great to catch up. Lynn Martin, president of the New York Stock Exchange, spoke about the possibility of using blockchain technology to make equity issuance more efficient and reduce settlement time for financial trades to seconds rather than days. Tiana Baker-Taylor, Vice President of Policy and Regulatory Strategy at Circle said it's very clear that the speculation period is drawing to a close, and every company

that you see featured is really focused on real-world use cases. Cameron Hutt, treasurer for the United Nations High Commissioner for Refugees, discussed a recently launched blockchain payment product for distributing humanitarian aid in Ukraine. The pilot project launched in December is at the stage where blockchain donations can provide transparency and visibility, while deployment of aid can be virtually instantaneous. Hutz said that's an amazing proposition. If we were to get $500 million to deploy, we can actually do that today. So this is not a process that will take weeks and months.

Ukraine's deputy prime minister spoke later in the day, lauding cryptocurrency use in funding the war effort. Now, in that context, you will not be surprised to see that there was a bit of a return to the blockchain, not Bitcoin, that old canard, that lets so many TradFive folks feel sophisticated when they say it. Have a listen to J.P. Morgan Blowhard and Chief Jamie Diamond re-express it for all the world. We pretty much always have some crypto conversation with you. I'm just curious because I don't think we've talked to you since.

I think all that's been a waste of time and why you guys waste any breath on us totally beyond me. Because you just think the whole thing just is going to zero? Going to zero and it's fake. Bitcoin itself is a hyped up fraud. It's a pet rock. You're back to that? Really? Of course, yeah.

So what do you make then of Black Rock and other firms that are investing in? infrastructure. That's different. Blockchain is a technology ledger system that we use to move information. We've used it to do overnight repo, intraday repo. We've used it to, we're going to use it, we've used it to move money. Right. So that is a ledger. That's a technology ledger type of thing that we think will be deployable. But remember, we've been talking about that for 12 years too, and very little has been done. There's some tokens that I agree with you on, but Bitcoin's based on a distributed ledger. It has all the characteristics of a store of value. It's immutable, it's scarce. Totally untrue. It's...

21 million. Well, yeah, really. How do you know it's going to stop at 21 million? Because it's... I mentioned this to people... Everyone says that. Well, maybe it's going to get to 21 million, and then Satoshi's picture's going to come up and laugh at you all. And say, nah-da. There isn't a picture. And by then, Satoshi, you'll take out billions of dollars. Now, a few quick notes about that TV appearance. First, you got to love Joe Kiernan's. We're back to this, really? It is absolutely notable that the host were pushing Diamond on these statements.

A couple of years ago, that just wouldn't have been the case. It would have been head nodding and moving on. Second, it sort of feels to me like a fairly significant part of Diamond's ire towards Bitcoin and crypto is how much airtime it gets, especially relative to whatever talking points his PR team coached him on. He even says so at the beginning of the clip. However, the fact that through so many different cycles, crypto just keeps being a topic of conversation, is worth some of Diamond's consideration, me thinks.

Lastly, while JP Morgan hasn't offered any of their own Bitcoin products, they have been offering a range of grayscale crypto products to their wealth management clients since mid-20201, and have been continuously developing their interbank blockchain system dubbed Onix. But whatever, Diamond is just a tiny part of our larger conversation. Join CoinDesk's Consensus 20203, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse.

immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.coindex.com or check the link in the show notes. Back to other big conversation themes from Davos. On the regulation side, there was criticism placed on global regulators for being overly concerned with the minuscule cryptocurrency lending industry, unleashing systemic risk on the global financial system, while entirely ignoring the very real and very present risk of individual consumers getting ripped off by crypto scams. Isabella Chase, for example, senior policy advisor at TRM Labs, suggested that the UK's push to

regulate crypto under the financial services and markets bill might represent a shift in focus for regulators. Quote, there's a real, real emphasis on consumer protection this year. Unfortunately, the UK is a real hub for frauds and scams, and governments are really aware of this because it's a real human cost for them. Lee Schneider, General Counsel for Aval Labs, praised the EU approach with their recently past markets in crypto assets legislation, which provides a distinct regulatory framework for financial instruments, stable coins, and others using similar tech. He said frankly, the Europeans

are just doing it the best of anyone right now, and contrasted their approach to jurisdictions like Singapore, Japan, or Hong Kong, which are, quote, just sort of saying all crypto assets are one homogeneous asset class. At the only main stage panel explicitly focused on crypto, there was consensus around the need to supervise the industry on a global scale, as well as more than a little focus on the recent calamities of the last year. Omar bin Sultan al-Ala-Lama, the United Arab Emirates Minister of State for Artificial Intelligence in the Digital Economy, claimed that his jurisdiction's innovation-friendly regulatory approach was far from a light touch, noting that no crypto companies had so far past the UAE's

registration standards. Stacey Marie Ishmael, Bloomberg's managing editor for crypto, pushed back on this assertion, pointing out that the rogue's gallery of displaced crypto founders and scammers had sought refuge in Dubai over recent years. On the more direct question of rumors that Tara's co-founder Doe Kwan had been holed up in Dubai, Minister Al-Lama said, I actually read an article that he was in Dubai and I went out and looked for him. The guy wasn't there. Klaus Knot, president of the Dutch Central Bank and head of the Financial Stability Board and international body, took aim at lax jurisdictions that allow malfeasance to occur,

stating, quote, many of these crypto assets are offered from places that I would call sunny places for shady people. Ripple CEO, Brad Garlinghouse, who is the sole industry representative on the panel, attempted to defend the use case of the technology, saying, quote, As time goes by, I think we'll spend less time talking about Mount Gawks and Silk Road, and more time talking about the real enterprise-scaled use cases where it's not an experiment. Then, of course, there was another threat of commentary around the event, including from people who weren't even at Davos, basically saying that FtX's collapse

disqualified crypto companies from showing up at Davos at all. Harvard economist Jason Furman said, this feels like a last gasp for crypto. It's like an ad I saw in a magazine saying the real estate market has never been hotter. You know those people paid for that ad six months earlier, and by the time it came out, it was just wrong and off. That's Crypto and Davos. Hillary Allen, a law professor at American University, said there was a whiff of desperation in the air. What the crypto industry really wants is to be established, to be integrated with mainstream finance, to be regulated, but on its own terms. It wants the patina of regulation to attract new investors. The need for new money

has become more dire. So what better place to go than Davos? I almost hesitate to give breath to these folks who just say different versions of the same thing every year for whatever audience will listen to them. But right now, it's crypto's turn to take its lumps, so there you have it. Now, about the only substantive announcement I saw from the CryptoSpace came from Circle. On Tuesday, they released their state of the USDC economy report, which read, Our History of Pioneering Transparency underscores our commitment to providing USDC holders in the general public with open, timely reporting on how we minimize risk and maintain liquidity in the USDC Reserve.

Backing up that sentiment was an announcement that Circle will now be partnering with Deloitte, one of the so-called Big Four accounting firms, on its proof-of-reserve audits. Deloitte is also the accounting firm for Coinbase, which of course contradicts the sentiment expressed in the past by other crypto leaders like Binances CZ, that the big four accounting companies aren't willing to work on proof of reserves with crypto companies. And going back to this theme of real-world use cases, Davos also saw Circle release a new paper in partnership with Uniswop Labs that argues that defy can be used to reduce settlement risk in foreign exchange markets. According to a paper released by the Bank for International Settlements in December,

almost a third of deliverable FX trades are currently subject to settlement risks around $2.2. That problem, they say, is increasing at a rapid rate. Settlement risk manifests when a trader fails to deliver the currency owed to settle the trade. The BIS mainly pin the problem on a range of issues from lack of suitable settlement infrastructure to coordinate cross-border settlement to simply market participants finding risk minimization methods too expensive. The Circle Uniswap paper concludes, On-Chane FX can offer faster and more affordable transaction processes as well as greater liquidity and stability. Now, the last big theme I want to touch on was that of CBDCs.

This has been a major theme both for the establishment elites as well as the people who are most concerned with the establishment elites. On Tuesday, the WEF released an article outlining what they see as the desirable upgrades a CBDC could bring over the existing financial system. As the number one feature, it listed the ability to self-custody digital funds and transact without an intermediary, even going so far as to evoke Bitcoin's not your keys, not your coins mantra. The article then curiously argued against itself, pointing out the security.

drawbacks of self-custody and suggested that in designing CBDCs, quote, we should consider when offering self-custody as an option to users increases overall dignity and welfare. The rest of the article pointed out open topics around CBDC design, including accessibility and hardware requirements for use of CBDCs, speed of settlement and how the processes around transaction reversal should be designed, the data trail associated with digital transactions and who should be able to access this data, and hammering out a common understanding of how cross-border payments should be conducted, with a view to interoperability between different CBDCs.

These themes continued in a panel discussion where it was pointed out that interoperability may be a difficult achievement. Now, overall, it just didn't seem like a huge theme this year. And I'm not sure whether that's just because there are bigger fish to fry or because the idea of CBDCs is losing steam. Whatever the case, coming back and trying to sum up a little bit, when you look at the people who showed up at Davos,

it's definitely the companies in crypto that are most trying to court the global establishment audience. To the extent that you're looking to understand how crypto is doing right now, you'll probably do a lot better at Eath Denver or Bitcoin, Miami. Dean Aginman said, if you're in crypto and going to Davos, you're probably in it for all the wrong reasons. The incumbents might play nice, but they don't want disruption. Institutions in compliance is not how we get to adoption.

So that is the story from Davos and the WEF this year. I hope you are having a great weekend. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.