The Pomp Podcast - Caitlin Long: Wall Street Isn't Bitcoin's Friend

Episode Date: August 27, 2018

Caitlin Long spent 22 years on Wall Street, including Morgan Stanley, where she was Head of Corporate Strategies and Pension Solutions.  In this conversation, Anthony Pompliano and Caitlin discuss why Wall Street's involvement may hurt Bitcoin (rather than helping it as many think), including why the Bitcoin ETF could actually be a bad idea and how Wall Street could actually kill Bitcoin.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Caitlin Long spent 22 years on Wall Street, including stints at Morgan Stanley, Credit Suisse, and Salomon Brothers. She's been a Bitcoin proponent since 2012, and most recently help the state of Wyoming adopt crypto-friendly legislation. In this conversation, we cover why Wall Street may not be Bitcoin's friend, how the Bitcoin ETF could actually be a bad idea, and whether or not Wall Street could actually kill Bitcoin. I really enjoyed learning from Caitlin and hope you find this recording just as valuable as I did. Anthony Pompliano is a partner

at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, we're here with Caitlin Long. Super excited about this conversation. Thank you so much for coming. It's my pleasure to be here. Thank you. It's nice to finally meet you.

Absolutely. Let's just go through your background, but I don't want you to kind of gloss over anything. I want you to actually go through every step of it so we can really get into kind of the Wall Street aspect and how you got into crypto. Been in crypto since early, probably 2013. I discovered it in 2012. Didn't actually get my first bitcoins until 2013. um had to keep my head down so uh and the reason is because i was on wall street at that time i was running a business at morgan stanley and uh spent 22 years in total on wall street from 94 through 2016 have a legal background um although i've never practiced law i've been a member of the bar since uh way back when um and then uh prior to that grew up in wyoming which is going to be relevant i think when we talk about the wyoming blockchain bills yeah so so uh when you

get to wall street what was kind of your first job and then walk me through the different you know parts of the business on wall street i worked in investment banking at solomon brothers doing financial institutions so just let you know landed there by luck not a particular interest it's just that's where i got assigned absolutely and found financial institutions incredibly interesting so did a lot of of uh of work in bank mergers and insurance company mergers and ended up um kind of steering over towards insurance. I find that a fascinating industry. And all of the 22 years had something to do with insurance that I worked on Wall Street. Why is that so interesting? Well, it's the law of large numbers. It's actually a really math-based industry. So

and part of the reason I didn't practice law is I discovered I was better at math than words, to put it simply. And so the math has always interested me. And I don't have a, you know, certainly a high-level math background like a cryptographer would, but I knew enough to know and ended up running a couple of insurance companies within Wall Street firms during those years. Very, very cool. Okay, and so walk me through, you're on Wall Street, you know, at that point you'd been there almost 20 years, right? And what's the first time somebody tells you about Bitcoin or you kind of stumble across it and what was your reaction? Yeah, it was the libertarian community. It was Free State Group. I discovered Austrian economics out of curiosity during the

2008 financial crisis. I figured out that the mainstream explanation of the financial crisis just didn't make sense. And it was a contradiction that Tim Geithner made on Charlie Rose's show, where he talked about how interest rates were too low going into the crisis. And he had just been arguing that interest rates needed to be lowered still. And so obviously, I just thought it was illogical and dug. And at the time, stayed in touch with a lot of hedge fund friends. They were all trying to figure everything out. They had found Austrian economics before the financial crisis in a lot of cases. But they dug in and, you know, they even pointed me to the Garrison PowerPoints. That's an obscure Austrian reference that a lot of folks probably, a lot of

your listeners will understand. But if you haven't seen those, they are incredible. Absolutely. And so as you're kind of going into that rabbit hole and you're discovering all this stuff, you hear about Bitcoin. What's kind of that first reaction? Oh, I didn't believe it. And it was also, you know, in those days there was no UI. And so it was, I'm not a technologist by background and I was intimidated by it and just scratched my head and couldn't believe it. Like a lot of people.

And you start reading. And the reason I remember it was February 2013 when I first started to set up a wallet is Jeffrey Tucker sent an email around. And in fact, a few months ago, I actually saved that email and I had sent it back to Jeffrey a few months ago to remind him of when's the first time he started writing about Bitcoin. It was in an email on Laissez-Faire Books. And I happened to be flat on my back after having had a surgery for a couple of days. So I had time to really dig into it. it takes time and it takes a lot of repetition. And Jeffrey had some, some how to advice in that email. It was never published on a website, although when I sent it back to him a couple

of months ago, he published it just so he could kind of have a record of it. Yeah. And so what, where'd you go to buy Bitcoin? Right. So this is 2013. It's pretty early. There's not really that many places where, you know, one, people are talking about this stuff and two, kind of uh what i would consider a really great user experience or a user interface so without the technology background what do you do yeah that was the um there were a there was an atm up at liberty forum amazing yeah and so yeah that wasn't actually my very first bitcoin came from the blockchain.info guys they were up at liberty liberty forum explaining and they they they hosted a how-to and it was very well attended by a lot of curious people and and um set up another

wallet through them and uh and then they sent us fraction you know a few satoshis uh and then i went out and uh put twenty dollars into a bitcoin atm yeah that is an amazing story yeah uh all right so we go from 2013 to over the next two three years kind of what is your relationship with bitcoin crypto i'm assuming you go deeper and deeper into the rabbit hole get more excited about it yeah still on wall street still on wall street and and and a very good friend of mine Ari Levy-Cohen, who's one of the co-founders of Singular DTV, he was also at Morgan Stanley at the time. And he had gone down the rabbit hole, more so than I and more technologically savvy than I was. And so, you know, was already digging.

He was already running a full node, I think, at that point. And so he was really helpful to me in understanding it. And there was another, the third of the three Morgan Stanley Musketeers, Jake Dienelt, who you probably crossed paths with. Unfortunately, he passed away, as you know, but the three of us came from very different parts of Morgan Stanley and we connected with each other over Bitcoin. I'd known Ari previously, but we really got to know each other more closely. It's like the secret society of crypto on Wall Street. Well, and there was an internal Morgan Stanley Bitcoin email list, a forum that got going. And what was fun about it is when I saw when I joined it, there were already probably, I don't know, 50 people on it.

And it grew to hundreds of people very quickly. And this is like 2014, 2015? Yeah, 2014. And, you know, everybody was afraid, right, of the compliance department. No one knew what the implications for being involved with this would be. And so in the beginning, I just lurked. And I noticed that most of the people were younger, i.e., more junior. But they were from all over the place.

It wasn't just the technology department. And it wasn't just the United States. It was literally all over the world, a very diverse cross-section of people who were interested in this, and it just really blossomed, and as it blossomed, I started to participate, and then I got a phone call from the chief technology officer because I was a managing director running a business, and so I had a little gray hair, so to speak, and he said, come on into my office and tell me what this is. And, you know, the board, it turned out, just asked him at the time. I think this was 2014 to to make sure that he understood what this was and didn't miss it because the hype was starting to form already by that by that time. And I had already been in several meetings. The first the first blockchain company that I met at Morgan Stanley was Ripple. They came in through a friend and he pulled me in not knowing I knew anything about about Bitcoin.

and I remember about five minutes into the meeting putting my pen down and saying oh my god this is going to tip um and all the Morgan Stanley people that we were arrayed across the table from Chris Larson and and Patrick Griffith and the the whole ripple team at the time uh there were probably five of them and then five of us and Morgan Stanley people looked at me like I was just from Mars they were like what the heck because they didn't know anything about what was um what the Ripple folks were saying. And I just remember Chris Larson, the look on his face, he just he relaxed because he knew he wasn't fighting an uphill battle to educate everybody on the other side of the table. And it was just like the smile that came across his face when he's found a

champion. Yeah. And at that point, I that was the first time I realized that you could apply this technology to the mainstream financial sector. And it took a while for me to make that connection because the um i didn't understand that that you could separate in quote unquote uh separate the blockchain from bitcoin of course you can't and we can probably talk a little bit more about that later i'm i'm one of many who made a detour around enterprise blockchain and have come back um jimmy song just gave a great interview a few weeks back to laura shin about that about his trip through through um do you think this is really important right so do you think that it's almost uh a requirement in order to start out get excited you find out the technology and then

you have to explore all of the intellectually possible scenarios and then you end up coming back to what is in reality probably the most likely application well it's interesting that's what jimmy did and he's obviously a technologist so we came at it from different perspectives but both ended up in the same place, essentially concluding, you know, the enterprise stuff is okay for things probably outside of financial services, right? Supply chain is where it's taking off. Do you really need a blockchain for that? Probably not. But the truth is that it's a marketing gig and it's causing some very interesting things to happen in supply chain. There's a company in Wyoming called Beef Chain that is doing exactly that, to track the provenance

of Wyoming beef. It's solving a problem that nobody knew how to solve. And now this technology has sort of opened up the conversation. So I don't mean to impugn enterprise blockchain across the board, but I do believe, and I did say in a Forbes column recently, a lot of enterprise blockchain was essentially made obsolete by the ICE announcement because what ICE did was break the seal

in embracing digitally native assets. And that's what Jimmy said to Laura was ultimately why he concluded that it was very difficult to apply blockchain, not Bitcoin, so to speak, to the enterprise world because you have a lot of things like trade breaks and reversals that the regulators have to be able to come in. So effectively, the regulators have to be a super node. And therefore, you really aren't decentralized. Therefore, you're better off

working in a centralized database architecture. To paraphrase Jimmy's, I hope I haven't misstated, I came at it from a different perspective, which was I knew that Wall Street wasn't going to accept Bitcoin. So I was more from a legal and compliance perspective thinking, all right, how do we actually figure out how to go through that intermediate step of the walled garden, to use Andreas's phrase, where, you know, the intranet first before internet. That's the way enterprises think. They don't take big, big leaps. They do take more incremental steps. And nobody was interested in wholesale replacing their IT architecture, in which they've invested billions. So I knew this was going to be a slow process, but I was pleasantly surprised by the ICE announcement that they are embracing natively digital assets.

That is a big deal because that means they just leapfrogged over that whole tokenization, blockchain, not Bitcoin philosophy. And ICE can do a lot that's very positive with that. I hope they do. Absolutely. So one thing that we spent a lot of time thinking about is this idea that you can own four types of assets, right? stocks bonds currencies commodities and in this digital world there should be digital stocks bonds currencies commodities right and so bitcoin being probably the most attractive asset to date right in the currency bucket yeah um and over time as these other assets or digital assets get introduced

how does wall street interact with that right because i think to your point they're more evolutionary than revolutionary yes how how do you you know see this playing out and shouldn't frankly, the crypto community trust Wall Street? Well, that latter question is a whole can of worms. But how I think this is going to play out is, look, we all understand that natively digital assets can trade and settle instantly or in near real time. The technologists would correct me. But but but but a lot faster than than the T plus two days trade date plus two days settlement that we have now on Wall Street. And it's going to cut out a lot of the intermediaries that take cuts and create counterparty risk where it otherwise would not exist.

So I actually think very much that the that the ICO craze, a lot of folks are thinking that there's there's a lot of scams. And of course there are. But there's something really important from a corporate finance perspective that comes out of that, which is that investors are rationally, in my opinion, willing to give up the traditional covenants and preferences that they use that they're used to getting in investments in exchange for not having to deal with this crazy clearing trading, clearing and settlement infrastructure on Wall Street, which exposes them to all kinds of risks that they just don't need to be exposed to. So they get instant settlement with no counterparty risk if they are trading these utility tokens or security tokens. How much of that is driven by human greed and just the idea that price will appreciate? Oh, a lot of it. Right. Okay. So talk to me about, do you think that investors are actually making a rational tradeoff in terms of, hey, I actually don't like that settlement system, and so therefore I'm willing to give up? or do you think some of it is human greed and by proxy that's what the trade-offs that they're

making i think it's i think it's the latter i'm not sure that that a lot of folks are necessarily going through that thought process that we just talked about they instinctively understand that they outright own this asset it's not an iou from anyone and therefore i'd rather own that it's it's real property it's it's something that i can that i can maintain on my own and and and if my broker dealer goes bust i'm not stuck as a as an unsecured creditor to a leveraged institution like the customers of mf global or lehman brothers were right where they end up taking a haircut right um so i think a lot of people do intuitively understand that how are they actually rationally making a um applying a probability and a loss severity to a broker dealer default when they

buy securities? Probably not. But I but again, you know, the wisdom of wisdom of crowds right there. It is intuitive. And I also do believe that this market has shown that the crowdfunding rules and the Jobs Act that Congress passed to help make crowdfunding a lot easier. They failed and they failed because of the bureaucracy involved in raising capital. So what this market, I think, is doing is pushing, I hope, the policymakers towards, let's actually have a Jobs Act 2 that actually tears down even more of those bureaucratic barriers, because it's pretty clear that there is something special here in the structure of these ICOs, and let's actually help clarify the regulations. So far, the SEC has not been friendly to that, but there are folks on

congress who are absolutely it's almost like we're going back to the beginning of equity investing etc right in in terms of uh when people first started investing in companies there was no such thing as liquidity preferences or shareholder rights etc uh but you actually had the bear instrument yes you know you actually owned your um your shares and so we've almost come full circle to an extent just now in the digital world right and and so how do you see uh that ripple impact across wall street right if the retail investors are willing to do this without going through financial institutions yeah does that force the financial institutions to you know kind of move in this direction as well or do you think that they can hold out oh i they're they're going to

be forced to move in this direction because they're just going to be disintermediated and what's fascinating to me is that there are there's a whole parallel infrastructure of of wall street right there are structurers of these capital raises we call them icos but they can be security token offerings whatever you want to call it there there's a whole capital market that's that's built up around around these products so um you've got that you've got the advisors you've got the exchanges you've got research firms that that specialize in all of this and and wall street is going to get disintermediated by them and the thing that they cannot that wall street does not offer right now and frankly isn't set up very well to do it

is to be able to build tech you don't have people who can design an erc20 token and understand how To market an ICO or an STO out to the investor universe, that's not something Wall Street can do. But I've had a number of companies talk to me about corporate coins, corporate ERC-20 tokens. And I think it's very real. It's, as I've said in one of the Forbes.com pieces, this is actually, I think, cheaper capital. It's securitization by another name. And so for a company to go out and raise capital that way is very rational. And I think that they're going to find cheaper capital either for startups.

And we've seen that, right? The amount of VC investment in this industry compared to the token investment in this industry. You know, the tokens surpassed VC investment in blockchain 18 months ago. But now the whole token industry is is 30 percent of what VC of traditional VC across the board, not just blockchain. Right. This is it's already happening. It's already disintermediating. And and it's 45 percent of the size of the IPOs in in the first quarter. Sorry. Sorry. In the second quarter and 41 percent, I think, was the number in the first quarter. So it wasn't just a flash in the pan.

We've had six months of, you know, that this token market has raised a very material amount of capital, institutional sized, and that is attracting companies to this market. I think we're going to see, you know, more than just Kodak coin. Absolutely. Well, and, you know, I think a lot about like this power shift, right? So if you think of when Investee first started, the founders or owners of the business had a lot of the power. And so they would go to people and say, hey, give me money. You can have a claim on my cash flow. over time investors realized hey we have money and so we have we've got some leverage here and they continued to kind of ratchet down on business owners or founders and now what we're seeing is a shift in power back to those founders and entrepreneurs because what we're doing is on

a global basis you just open it up and there's always an investor who's willing to take less egregious terms yeah but i also think that that it is a trade a trade offer the market's actually been pretty good at weeding out the scams uh so you know that's one of the one of the benefits of crypto twitter is that uh you know people are ruthless yeah and uh and and so if if it's just an outright scam um so but i think there's a difference because i think the detail here matters so there's a difference between a scam yeah and let's say a an in a founder who says look when i raise capital i'm looking for two things i'm looking for money and i'm looking for help. Right. And so if I believe that there's an investor who will give me money and help,

but the terms are erroneous or kind of egregious, then I'm willing to open that up to a wider set of investors to find a better market equilibrium for what this round pricing should be. Absolutely. And I think one of the interesting things that comes out of that is that this is a big competitive threat to the state of Delaware. And having worked while I was at Symbian, symbiont uh it was symbiont's idea to go start the delaware blockchain initiative mark smith got that done before i got to symbiont and we were gung-ho moving forward with the former governor and then the incumbents came in and uh then threw sand in the wheels under the new governor and uh and and and here's the irony based on what ice just announced that it's going to natively

digital assets it just takes away delaware's competitive advantage i don't see any reason why a startup would register in Delaware. Why? Because of exactly what you just talked about. They now have a capital markets alternative where they don't have to go and be a Delaware corporation where investors really are most comfortable

with the state of Delaware because the law is most defined there. There's great case law. There's the Delaware Chancery Court. All of those things fit the traditional corporate equity issuance and preferred share venture capital funding model But now if you can actually issue tokens, you're just going to have a very different looking balance sheet.

You're going to have a big contingent liability on your balance sheet. But it doesn't matter where you you organize as a company because you're not raising capital by selling equity. You're raising capital through this securitization type, secured financing type of vehicle, which means that Delaware law is not a competitive advantage at all. And I find that it's just disappointing. Delaware squandered its huge head start. We're two and a half years after the announcement of the Delaware Blockchain Initiative. And, of course, they were working on it before Governor Markell announced it at consensus in 2016. That was, I think, April.

And they are just maybe later this year, I think, going to have a prototype to consider at the state of Delaware. So, I mean, it's pretty clear what happened there. yeah unfortunately for them so uh sticking with state-specific legislation let's go uh to wyoming right you've done an incredible job there um walk us through there's five pieces of legislation just walk us through kind of what happened uh and kind of where we are today and why wyoming has been able to kind of get the stuff across the finish line well it was just a fortuitous thing i was just quietly um because i happened to get into bitcoin pretty early had like a lot of folks um gains and was willing to share the wealth and and uh also wanted to solve a problem which is that

there are not a lot of female engineers and out there not just in this industry but across the board my dad had been department head of electrical engineering for at the university of wyoming so i thought well just this you know endowing with bitcoin gains a fund for female engineers um checked a lot of my boxes right and i just quietly did it i wasn't telling anyone about it and and uh just assumed the university of wyoming could you know get an account with coinbase i used to be on the foundation board there. So I was, you know, helping them through that and then ran smack dab into the Wyoming law problem, which was that they had one of the worst money transmission laws and was one of three states Coinbase couldn't do business in and nor could BitPay or Circle

or any of the other competitors. And so I said, guys, let's go fix that. And it turned into let's more than fix that let's actually you know define utility tokens as a new class of property digital property that is exempt from securities laws and from money transmission laws um and we exempted um open blockchain tokens from property taxes uh we we did all kinds of interesting things uh that that basically made it a very crypto friendly uh state it is the most crypto friendly state right now. Absolutely. And so what do you think that does? Obviously, it's going to incentivize people to move to Wyoming, their business, right, in terms of to get a lot of this work done there. Do you think that it can have an impact on other states or at the federal

level? Well, great question. Wyoming is the state that invented the limited liability company in 1977. So it wasn't actually that far-fetched that it was going to be doing some interesting things because it has a history like Delaware of being a leader in a particular type of business entity formation. And so we wanted to, but Delaware stepped in and sort of stole Wyoming's lead over the years as being the place where most LLCs formed. And so this was a chance for Wyoming to try to steal that lead back. And, you know, it's been good. A lot of folks have formed companies in Wyoming. I haven't looked at the recent numbers, but I just see it through the Wyoming Blockchain Coalition. Still, every day, a couple of companies reach out looking for

attorneys in in wyoming looking for references for people who can help them structure their their token offering um um you asked a question about the federal impact i i there there definitely are some congressmen who are who watched what happened in wyoming and who very much like what happened in wyoming but the federal uh issue is a whole new can of worms um and and it's fascinating because security's law is it has been adjudicated by the supreme court to be a federal jurisdiction But property is the jurisdiction of the states. So actually, in the next Wyoming legislative session, the task force that I'm on, we're going to have a couple of new bills. And one of them is going to actually pull out the utility token language from the securities title, which is where it resides right now in the chapter, if you will, of Wyoming law.

That is securities. It's an exemption from securities. We're actually going to pull it out and create it as a new class of property. That is for the legal minded folks out there. The Uniform Commercial Code is state law. Commerce is state law. And so if we can actually get it into a classification of property as opposed to securities, it actually increases the probability that if there ever is litigation that a judge is going to say that's not federal jurisdiction. So we're setting it up for folks to come in who want to stay in the United States but recognize that there's legal risk. I'm certainly not advising folks to do anything without getting independent counsel. I'm not giving legal or investment advice here.

But we have had a number of companies who have very publicly said they want to stay in the United States and they're coming to Wyoming because they just don't believe that the federal government should be running American businesses offshore. Absolutely. No, I completely agree. what um what's something that you believe in the crypto space that you think a wide majority of people would disagree with you on oh uh that bitcoin's gonna take over as money that's the i really do believe bitcoin's gonna take really money okay explain to us the logic of how you get there well i think it's gonna take 20 years um i may be wrong uh because again what ice did that's

one of the benefits of what ice did was embrace natively digital um assets and so i think that changeover from how we do it now where we have this crazy system where every financial asset with very few exceptions is an IOU from a leveraged financial institution that might go bust most people don't realize that yes the stocks in your brokerage account are not stocks they're an IOU from your broker the the bank account deposits that you have it's not your money it's an IOU you from a bank and they may not pay it back to you so I do think that that you know I thought that it would take a while to take to tear down that infrastructure and I do think it will take a while but the the the that's why

I said ice broke the seal that's that's one of the things I complimented them on they they leapt over the blockchain not Bitcoin detour if you will that I thought was going to take the industry 10 or 20 years and just went straight to natively digital assets so i you know we may be surprised at how at how fast this takes off the technology needs to come up to speed pretty clearly i'm i'm excited about lightning network i now that i understand what that is in not certainly at a technologist depth but more sort of um from a from a philosopher and business depth of understanding that you know that really could make a big difference yeah do you think that the uh accelerate do you think that the

adoption of Bitcoin as money is being accelerated by some of the hyperinflation we're seeing around the world? Oh, no question. Yeah, no question. We're on the day where we're recording this is, you know, Turkey is we're having an emerging market correction, shall we say, in in in a number of emerging markets. And yeah, the the Bitcoin's already having a big impact in places like Venezuela. And historically, it has been a safe haven asset. The Wall Street flows did make it more positively correlated to traditional financial assets. It was, say, in the Cyprus situation, very non-correlated. It was a safe haven flow. And one of the things that I've literally just written in the book chapter draft is that Bitcoin will return to its roots as a

safe haven asset it is very very interesting and if that occurs and given what ice just did do you think ice is one of or the most important company in crypto right now i i do and and um it's a double-edged sword i've been positive about them in the in the conversation here that we've recorded so far but as you know uh as we were chatting earlier there there there are definitely a lot of downsides to the way that wall street is going to approach bitcoin what's the biggest sphere there? Well, they're going to rehypothecate it and they're going to create more claims to Bitcoin than actually exist. And it's so fascinating than, you know, than the 17 million Bitcoins that exist. It's so fascinating to talk to both the Wall Street folks as well as the

crypto folks and folks understanding what that really means. I think a lot of my Wall Street compatriots don't understand that that's a big part. Rehypothecation is a big part of how Wall Street makes money. It creates more paper claims than there are actual assets. So the Dole Food case is exhibit A for that, 49.2 million brokerage statements saying that the folks owned Dole Food shares, but there were really only 36.7 million shares outstanding. And all 49.2 million brokerage statements were valid. That was a Delaware court case. How did the financial system create one third more claims to dole food shares than there were real dole food shares it's the it's the market for pledged collateral it's it's all the securities lending um re-hypothecation uh and and

and the like that that takes place on wall street where the accounting systems lose track of who really owns what and basically turning those assets into ious if if you actually owned the real dole food shares you would never have had anything like that happen yep if you own the real Bitcoin. You will never have anything like that happen. But Wall Street, that is a big part of their business model. They want to intermediate trades. And so if they can inflate the number of underlying assets, they intermediate more trades. And a lot of folks have been shocked on the crypto side to hear this is how Wall Street works. And interestingly, there have been some Wall Street people who stood up in the crypto, in the Twitter debates and said and defended this. And that is

absolutely a rational position they're defending it as this is what brings liquidity to markets this is what greases the skids of trading and this is what's going to bring liquidity to bitcoin and a very respected person actually said to me that this is i won't identify folks just just because this is these are not personal debates they're substantive debates and i don't want to personalize it but said to me that wall street is is going to fix the quote-unquote problem that that bitcoin has which is that it is limited to 21 million coins and um that scarcity is its quote-unquote problem and that is that is absolutely how wall street thinks about it but the crypto folks obviously that's like no that but they love the scarcity exactly that's

listening to and reading the quotes from the ceo of of ice um talking about needing to centralize bitcoin talking about needing to bring trust and transparency to bitcoin these are just antithetical to bitcoin and the crypto folks are you know lumber number of people use the word word cringe worthy when hearing them talk about this um but the wall street folks read that and say well exactly there's such a a misunderstanding between the two but it is not just a communication misunderstanding it is a deep philosophical difference absolutely what do you wish that people on wall street understood about the crypto community that maybe they don't like what is the biggest disconnect that if that got solved you think a lot of this would uh would kind of be

easier that uh that that we're all druggies and um dark web users and uh yeah that there's still an enormous um overhang of of of that perception in um in the community in from wall street's perspective yeah i i say all the time i say the uh the currency of choice of every drug dealer terrorist you know money launderer in the world is the u.s dollar you're right 100 right right yeah um and the other piece too i think that you know wall street hasn't yet figured out is um there's a a gentleman i know in the law force community who said uh look from our perspective we want every criminal to commit crimes with their hands on a keyboard yeah right absolutely and so bitcoin is a perfect example of um what can occur when there is the you know kind of the trackability

et cetera, of a currency. It's more trackable than U.S. dollars for sure. And I believe FinCEN, the new head of FinCEN just came out and said that speaking at a Bitcoin conference or blockchain event in Chicago, if I'm not mistaken, and said exactly that. This is actually more traceable than the U.S. dollar now that they understand how to trace it. It's amazing.

Yeah. Okay. So let's fast forward. Wall Street bangs their head against the wall for a while, right? ICE kind of broke the seal. We've 10, 15, 20 years from now. what do quote unquote retail products in crypto look like once washer gets involved like what do you think are the the kind of most obvious things is an etf is it something else what does that look

like well i do think it's an etf and again that's a double-edged sword there are a lot of folks who are thinking that that's going to be a savior of uh of of the price correction that we've had in crypto and i'm not so sure about that um and and i just saw tour de mister make reference to the when the gold etf was um introduced i think gold prices were up 350 percent um within that period and there's a big difference between the between what wall street was back then in 2004 and what wall street is today there's so much more securities lending and re-hypothecation of collateral than happened back then and so the price action was more pure uh and and now i'm not so sure um because of of i i was just talking over the weekend um up at a free state picnic with

some folks who work in in the wall street industry we were just comparing notes and we were talking about the securities lending market um and and how basically after the financial crisis so many of the mutual funds especially defined contribution plans like 401k has turned off securities lending after the northern trust fund um had a problem with securities lending and the entire defined contribution market went non-lending. A lot of the defined benefit market went non-lending as well. And everyone in the lending market thought, well, gosh, securities are, we're going to have a lot more, you know, spreads are going to widen out. We're going to make more profit on what we're trading. And we're going to have a lot more scarce assets, the sort of hard to borrow or special

assets that are so meaty for Wall Street to intermediate because the profit margins are so wide. And guess what? Actually, the number of scarce and hard to borrow assets went down. You took out the entire defined contribution and defined benefits markets out of securities lending. How did that happen? The reason is because the accounting systems are manipulatable, shall we say. So I don't think that looking back at the 2004 gold example is actually, we're not going to see a replay of that because Wall Street has figured out how to re-hypothecate assets. And that whole securities finance market has now consolidated. It used to be very disparate, but what was happening was the hedge funds were arbing the investment banks' funding desks themselves.

So they'd go to the prime brokerage desk and put on one side of the trade and then take the other side of the trade with the repo desk at the same investment bank and collect a spread. Because the two parts of the investment bank weren't working with each other, and they were pricing things differently. And now what's happened is that's all consolidated at all the investment banks into one department. And so all those different places where assets are lent and relent in any sort of re-hypothecation, I'm using that term very broadly. But that's how Wall Street makes its money. And there's so much more of that than happened back 15, 20 years ago. Absolutely. Absolutely. We talk a lot about the decentralization of the currency,

prevents it from being killed by a government. Yep. Do you think that some of Wall Street's tactics can kill Bitcoin? Well, I think they can re-hypothecate it. I put out a piece yesterday, the RNC words, re-hypothecation and commingling. Excuse me. Those are dirty words. But that is how Wall Street makes its money. And what's fascinating, this is kind of an inside baseball.

you're a financial guy you this is kind of an inside baseball um um piece and i would have thought that it wouldn't have gotten much uh much play but it was already not even not probably about 20 hours after putting it up it's already had more than 6 000 views so a lot of people are wanting to learn they understand that there's something here and and and um i don't mean to be the bearer of the news um some folks have i've wanted to shoot the messenger but i i stood up the moment that ice came out and announced it and said this is not good for the price of bitcoin and the and um you know look at what's happened since then it's had about a 20 percent correction a lot of folks said a lot of folks expected that this to be a huge positive right and and and i i'm

so sympathetic and and and feel the same myself empathetic probably a better word of about wanting to have the mainstream acceptance that we've all been craving this is validation that we have something really special here and we're no longer these sort of you know kids off in the corner playing with their you know fancy tech toy we're we're being taken seriously and there's so much positive to take away from that but it is a double-edged sword and I do believe that it has suppressed the price and the reason is because now the the I mean it's it's it's hard to say everything that has suppressed the price. But if you look at it that day, it's pretty clear that that ICE news actually, there was a lot of selling in Bitcoin that day. And that was the only news

that particular day. It was a week ago, Friday. Absolutely. If you're sitting there and you're running a Wall Street bank today, right? You're Diamond or whoever, right? And you see this asset class emerge, start to grow. And you say, I'm willing to sacrifice my short-term profits for long-term sustainability with this as a you know mainstream asset class what do you do right what would you do as the head of that wall street bank well i think you do what goldman does and i and i i've i've multiple times written that goldman was the one that among the banks that was different when when i and my colleagues at morgan stanley were going to meetups clandestinely on you know after hours and on weekends and you know 2014 um trying to keep our heads down and not reveal to

the world that we who we worked for and not to reveal our interest internally either um and our day job um goldman folks were the ones that didn't feel that there was an acceptance a cultural acceptance within goldman of um accepting curiosity and accepting um wanting to branch out and think outside the box and the other investment banks all seem to ratchet that down uh and i just was chatting with somebody who's uh who's working at another investment bank literally yesterday And he said, you know, the compliance department is still, these things are so risky and it's dark web and no one, you can't verify who, you know, the counterparty on the other side and very negative still. So I think a lot of the banks are still being, you know, run by their compliance departments in that regard, but they're missing out. So why am I singling out Goldman?

Goldman is, you know, they're putting together a crypto trading desk. Lloyd Blankfein was was at the time the CEO, one of the one of the only CEOs, one of the only Wall Street titans who actually came out and and said positive things about Bitcoin and said, you know, there was a time when paper money was thought of, looked at askance as well. And this was when Jamie Dimon famously said he'd fire anyone. And, you know, when he said that, I understood that because that's exactly how I felt if I popped my head up at Morgan Stanley at the time. You know, and a lot of these banks have pushed out their crypto people. And now, ironically, they're scrambling to find them. Absolutely. It is an exciting time that we're living through.

What's the one area people aren't talking about that you think they should be? well this wall street um the wall street entry this is a big deal and uh it's clear that that it's going to take a lot of patient education of of folks to understand both on the wall street side why it is such a big deal but you've got now the 10-ton gorilla of market infrastructure in the u.s embracing negatively digital assets and i think the fixed income market is going to go in that direction pretty fast because why would you bother to issue in paper form anymore in global security form it just you know now that ice is accepting natively digital assets game changer for wall street i think a lot of folks don't understand that and then on the crypto

side it's wait a minute wall street really isn't your friend here there are yes they're going to bring liquidity yes they're going to bring institutional investors in but they're also going to create bitcoin substitutes off the chain and it's not as though you know the the custodial exchanges someone just today said hey mount gox did that absolutely we didn't own real bitcoins if we owned bitcoins at mount gox we owned an iou for mount gox and a lot of folks didn't understand that but i like to repeat what charlie shrem has said you have to lose money in bitcoin before you before you make it um and i lost some coins in mount gox because that was the place when i was buying that everybody bought and i didn't fully understand that but boy that was that was

really cheap tuition. It was money well spent. That loss to me was money well spent because I learned that lesson. I didn't own real Bitcoin. And it wasn't until I pulled my private keys off and I pulled my Bitcoins off that I understood that I finally owned real Bitcoin. Absolutely. It's so funny, right? For somebody who learned about in 2012, got in 2013, 2014, right? For us to be sitting here, you know, just a few years later and to be reminding people that wall street's not your friend yeah right that probably wasn't something you had to be saying in 2013 right with the people around the table but it's so fascinating the knee-jerk reaction was oh my god this is so positive and yes in some ways but it's not universally positive

and and i just want to be very patient and respectful because a lot of really smart people just haven't gone down that other side's rabbit hole yet and it's smart people on both sides It's the Wall Street people saying, what? ICE is getting into Bitcoin? And it's the crypto people saying, what? We can have off-chain, fractionally reserved Bitcoin substitutes? So, boy, it's time for a lot of folks to go down the other side's rabbit hole and really learn. Well, and I think, too, it's a technologist's view, right?

It's math, right? And so you kind of look at the numbers that you've got there. When they get exposed to what is essentially financial engineering, right? It's something that they've just never thought about. Absolutely. And so it's this you tell, you know, you mean to tell me that people are actually going to buy a thing that represents Bitcoin, but they're not going to buy Bitcoin. Well, and interestingly, when we start explaining that and we now the Twitter's gone absolutely nuts. People are talking to each other. A lot of folks really understand this and explain it to help explain it to to peers. um it's people are kind of again realizing oh my god you mean that's what kraken and bitmex are

and okex are doing yeah they've been doing it all along they've been they're basically web 2.0 companies that create a centralized layer application layer and they record transactions to the underlying chain but they're co-mingling the bitcoins in an omnibus account anytime you have a you use a custodial exchange or a custodian um you know you store your coins at at coinbase or circle or bitpay guess what you're doing you know you have an iou from them unless you're in coinbase vault and it's the same thing and so a lot of folks didn't really realize that i know andreas has been trying to help people understand that you don't own your private keys unless you don't own your bitcoin unless you have your private keys he he can't repeat that often enough

is what i found because even within the hardcore crypto community there were a lot of folks who didn't understand that nuance and so again it's just patient respectful education and um this ice news definitely has caused a lot of folks to open up and and learn absolutely um we end each podcast uh i let you ask me one question it's my least favorite part of this because i never know what people will ask, but anything that you'd like to ask? Where do you think, what do you think the ICE implications of Wall Street are? Because I know you've submitted a letter to the SEC regarding the ETF. Do you agree with my approach? So I do agree, right? I think that there's two separate pieces here, right? One is I truly believe that there's a lot of people who are

interested, they're intrigued, and they don't have the technical competence or the intellectual curiosity to go figure out or the time yeah you know how do i figure out what is bitcoin what are the risks associated what is the potential benefit and how do i purchase hold securely etc all they know is this bitcoin thing's interesting people are talking about it they keep getting stolen uh i'm just gonna go about my day right and so i think when you get an etf or these retail products ice etc right um there's a there's a line to thread there between you're giving access to a class of investors or you know a subset of investors that probably probably would never go to coinbase right and go try to buy because they want to buy it through their financial

advisor yeah they just want they they want somebody to yell out when something goes wrong right and so i think that you know for those people this is good because it will give them some exposure even though it's not the best exposure at the same time the financial engineering that comes in is quite scary right and so i think that one thing that i don't have an answer to but to keep thinking through is what is the trade-off, right? How the positive effect of the news, right, for this base of retail investors, who frankly, it's a pretty big aggregate number of investors that have a lot of money. And so there will be an inflow of capital once these things actually come online and are operational. But does that actually outweigh the 10,000 pound

gorilla of Wall Street now having the ability to go do what they do, right? And so there's an element of, is this almost a Trojan horse, right? You know, you get into the fort to attack by saying, hey, we're going to give access to these retail investors. Everyone's cheering. And to your point, they don't see, you know, kind of what's happening in the background. I don't know, right? And so frankly, I probably haven't been around long enough in the kind of traditional financial world to really understand how to measure that, you know, kind of pro and con impact. But I think it's one of the most fascinating things because you you move from uh you know bitcoin four or five years ago was in you know billions tens of billions of you know market cap or circulation

yes now we're moving into institutions that that's on their balance sheet right and now all of a sudden you're playing with you know an institution that three years ago or four years ago could have just bought the entire supply of bitcoin right and so you know you're uh uh one of my partners always talks about going straight from high school to the pros like bitcoin just went straight from high school to the pros and are we ready right i i don't know yet and i think that's going to be one of the most fascinating things to watch yeah great great points great points uh thank you so much for joining us we really uh really appreciate it i know that uh that this was on short notice so uh you're you're uh you're fighting the good fight and i think that a lot of people are listening so

so thank you it's my honor and pleasure to to great to finally meet you i can't believe we've Never actually crossed paths personally previously. And yeah, let's just help educate, keep up the good work. Absolutely. Thanks so much. Thank you. Hey, everyone. If you like this podcast and want to help crypto take over Apple, Spotify, and wherever

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