The Wolf Of All Streets - Why Ernst & Young Is Already All In On Crypto | Paul Brody, Global Blockchain Leader At EY

Episode Date: November 24, 2022

Paul Brody is Global Blockchain Leader At Ernst & Young. In this interview, Paul explains why Ernst & Young is building a crypto business, and what role this big 4 accounting firm wants to play in the world of crypto. Paul Brody: https://twitter.com/pbrody ►► JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen  GET UP TO A $8,000 BONUS IN USDT AND TRADE ALL SPOT PAIRS ON BITGET FOR ZERO FEES! ►► https://thewolfofallstreets.info/bitget   Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  #Bitcoin #Crypto #EY The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

Paul Brody is the global blockchain leader at Ernst & Young. Yes, I said Ernst & Young, one of the big four accounting firms, which nobody ever credits for innovation in the blockchain space, but I think that you will be absolutely mind blown by what they're building and how they're already using blockchain technology to better the lives of their clients and to improve the world. So when you think of the big four accounting firms, you don't generally think of cryptocurrency, right? You're right.

And, you know, accounting firms by nature are very conservative, but they have really no choice but to get into and understand this space. And the reason for that is that starting about 10 years ago, we started to have clients who had material quantities of Bitcoin and digital assets on their balance sheets. And nobody wants to issue an audit opinion that says, we're fine with everything except for this. Like that, you don't want to show that to investors. It looks like you're taking a lot of risk. It looks like you don't know what you're doing. And so they came to realize that all the big four did, that you have to have at least some people who understand this stuff

in order to pronounce upon it. And I came to EY, came after working in technology industry. And very shortly after arriving, I think when I initially came in, it was really focused on blockchain and IoT. But very shortly after arriving, I really convinced the leadership at EY that blockchain is not just something that is kind of interesting or that we need to do.

It is a transformational part of the global economy and that we need to treat this as a real business, as a real technology transfer opportunity, not just a minimum thing that we need to be, we need to treat this as a real business, as a real technology transfer opportunity, not just a minimum thing that we have to do. So you're actually adopting the technology rather than just figuring out what someone's cost basis is on their taxes. Right, we are EY much more than any of the other

like big professional services firms. It's all in on blockchain technology and very specifically, we are laser focused on public blockchains. And we're the only firm kind of in that category. Expand on that. What does that mean to be laser focused on public blockchains? How are you utilizing it? How are you incorporated it in your business?

So there's kind of three parts to our business. The first is financial statement audits. And there we cover like Bitcoin, Litecoin, Ethereum, Ethereum Classic. We cover like a whole bunch of different blockchains. All of them, the major public blockchains that have substantial digital assets in them. And our goal there is to support all of our clients who have quantities of assets on the balance sheet. We make a technology that does something very simple, which is reconcile your public blockchain transactions with your business transactions.

Can show that you control the wallets and that kind of thing. So that's one part of our business, financial statement audits and related assurance activities. And by the way, we've invested hugely in the core technology to do that. We're the only people who built

our own blockchain audit technology. Which I assume also accounts for cost basis, long-term, short-term. Yep. Wallet balances. Just like the Zemmagers and all the sort of retail-focused platforms, but on a much higher business scale.

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Go ahead and sign up right now using the wolfofallstreets.info slash BitGet. Claim that huge reward and use the world's best trading platform. Second part of our business is helping our non-audit clients use blockchain as a part of their business. And they're really three big things

that are sort of shaping up. Number one, top of the list finance, right? Our clients are heavily driven by their interest in crypto assets and DeFi. So we're building stable coins for clients. We are developing DeFi protocols. We've built tools for, we built a whole blockchain simulator that allows you to test smart contracts in a simulation environment before you deploy them. And DeFi is our number one business.

Number two business for us, supply chain, traceability, origin, we can show, is it organic? You go to Italy, you pick up a bottle of Peroni beer, there's a QR code on that. Every Peroni batch of beer is tracked on the blockchain through EY's OpsChain technology on public Ethereum. That's absolutely incredible. Why does nobody know about this?

We're an audit firm. We're not exactly the biggest advertisers, but we're very focused on where we are. I don't want to call us ETH maxis, but we are laser focused on where we are. I don't want to call us ETH maxis, but we are laser focused on public Ethereum. The only really big partnership we have is with Polygon because they're also heavily focused on public Ethereum. So we do finance.

We do a lot of supply chain. We're rapidly growing our ESG business. A lot of companies, especially post-merge, are looking at tracking their carbon outputs and offsets on Ethereum or Polygon. What a world. It is. It's kind of amazing. companies, especially post-merge, are looking at tracking their carbon outputs and offsets on Ethereum or Polygon.

What a world. It is. It's kind of amazing. We were talking about using Ethereum to track ESG when Ethereum was until very recently a culprit, right? Yeah, but to a very small degree. In the mind of regulators and legislators and the ESG narrative. Yes, to some degree. And then last thing that we do is we are huge investors in core blockchain technology with

one particular focus, which is blockchain privacy. If you think about enterprise transactions, public blockchains are the only type of blockchain worth having, to be clear. At the end of the day, I always like to say private blockchains, not really a thing, right? What is the point of having a centrally managed decentralized ledger? I would argue there really isn't.

Might as well just be the Visa network and be centralized and be faster. Exactly. It would be faster and cheaper. If you want a centralized network, just build a centralized network. So for us, we're laser focused

on public blockchains, fundamentally key to decentralization. But we also know that enterprises are never going to use these at scale for sensitive business activities if they don't have privacy. And so the big investment we have made over the last six or seven years is blockchain privacy technology. And we've developed two really key technologies that we have donated into the public domain. The first is called Nightfall. Nightfall is a zero knowledge proof based optimistic roll-up that lets you transact under privacy ERC20, ERC721, ERC1155 under privacy as a layer 2 on Ethereum. We developed all the technology for this, we donated in the public domain. I'm really happy Polygon is now running

Polygon Nightfall as an enterprise-focused layer 2 privacy network. I'm a huge Polygon fan so I keep up on top of all of it, yeah. The relationship that we have with Polygon is amazing. We looked at all the layer 2s and I'm not dissing the other Layer 2s, which are quite amazing. But when we started talking to Polygon, and we realized a lot of people at Polygon have a real enterprise background. When we talk to people about privacy, a lot of them don't really understand it. The Polygon guys got it immediately.

Like, yes, that's for enterprise. You need that. And so Polygon's been amazing to work with. And Polygon Nightfall is kind of the first scaled up layer to that's privacy centric. So that's super exciting. And we have another technology coming called Starlight. So Polygon Nightfall lets you move tokens around under privacy.

Starlight allows you to encode business logic, the core stuff of smart contracts, as a zero-knowledge circuit. So the goal eventually is that I can have the full ecosystem, smart contracts, shared business logic, and private transfer of assets on public networks. It's absolutely incredible. And you talk about Polygon, I mean, Starbucks, Facebook, Ernst & Young, right? It makes sense. But that seems to be who's sort of winning the Layer 2 battle as far as big name partnerships. It is. They're doing an amazing job. I will say like the Layer 2 game is, that's where now all the competition is moving. The most,

especially post-merge, I believe the landscape has changed. For a long time, we've sort of been very Ethereum-focused at EY for a variety of reasons. Number one, it's pragmatic, right? If you're going to be, if you can only pick one thing, if you have a limited engineering budget, just be good at one thing. I want to be, and I think we are, the best on earth at Ethereum. I don't want to be pretty good at 20 blockchains, I want to be the best at Ethereum. So we've been laser focused on that and they're the biggest, I think that makes a lot of sense. Yeah they have the network effect, they've been around

the longest. But a lot of people have doubted Ethereum. They've said, oh you know, they've been talking about the merge for years, have they really done it? Now that we're post merge, I really believe the competitive landscape has changed. This idea of ETH killers is over. Where we are headed now is a battle for layer two. That's the most important competitive battle going on in the whole blockchain ecosystem today. So moving forward, you view Ethereum as the sediment layer underneath all of these layer twos, threes, fours. Last time I

interviewed Sandeep, actually, we were talking about layer six and layer seven, because that's where he believes it'll have to go. If we're going to scale to billions of people, like the entire world using the Ethereum network, even layer twos and potentially layer threes won't be enough. So we did do our math. And I think, I don't know if we'll get to layer six or layer seven, but we did a calculation that we've sat down, give you an example. Our biggest industrial client mints a half a million NFTs a day. Now, that's one product. And on average, that product moves four times before it gets to the end of its kind of end user.

So that's two million transactions a day per product under privacy. By our calculation, even with sharding, layer two is not enough, right? Because if they say you mint on layer two and you move then to manage your privacy in layer three, I think we're going to get to layer threes pretty quickly. And our calculation is when we bring on kind of a lot of the world's industrial infrastructure, we're going to need about 4 billion transactions a day capacity.

That's my expectation for the industrial side of the blockchain ecosystem. When you talk about moving the industry onto the blockchain, are we talking about supply chain? Yeah, global supply chains, right? You've got a car, a car has 4000 parts in it, each part has a token. So if you look at that car, if I looked at the car as a data set on chain, I would say that car based on the tokens that make it up. And each token will have all these values and data attached to it. So I can look at that, that collection of tokens that makes up this car. And I can say this car is 42% American, it's 15% Canadian, it's 19% Mexican. The total is enough that it qualifies for MCA or NAFTA, right? The combined

carbon footprint of all the tokens in this car is 6,000 kilograms and then the combined offset is 6,000 kilograms. So combined offset is 6000 kilograms. So your car is carbon neutral. I know where it's sourced. I know where it came from. I know I can identify all the potential manufacturers and all of this could be done under privacy. And then the token holders, the car owner can see the history, but everybody else cannot. Mind blowing.

I mean, I don't know if it's mind-blowing, but it's... I think it's... think of it this way. Everyone in industry talks about a digital twin. This is a digital twin that's transactable. I can move all the pieces around. I can buy it. I can sell it. I can borrow against it. This kind of makes a true financial and operational digital twin.

I liked that you said that the notion of an Ethereum killer is dead. Yes. I would argue it was never a viable argument. I think in the early days, it was. I'm a huge fan of technology history. And one of my observations is that when ecosystems seem to be about less than 10 years old, there's a lot of churn.

And if you go look at the early days of PC operating systems, it wasn't clear super early on that Windows or Mac were going to be winners. But it emerged within about a decade. I've been a believer that the market for Ethereum killers has actually been dead for like four or five years. But I think the rest of the world is coming to see that as truth now. I mean, other layer ones will certainly continue to exist and largely be successful, which means the story becomes interoperability. I don't think they will be that successful. So I think this is a classic example of Metcalfe's law.

The more valuable the network becomes and the longer it exists, but also like bridges are what keep getting burned up and blown up. So this idea of interoperability based on bridges doesn't carry a lot of weight. It looks risky to me. If I could, with Layer 2s, the big issue with Ethereum was transaction costs. And speed. And speed. Although I think speed is overrated.

I always used to joke with clients, I'm like, the 30 and net 30 at the enterprise level is not milliseconds. It's days. Right. You know, I think if you're a financial trader, maybe the speed matters. I think for almost all business applications, payments, B2B, purchasing, procurement. It doesn't like... So basically the bar is set so low by what we have right now that Ethereum is lightning fast relative. Relatively speaking.

And once we solve the gas price issue with layer twos, the value proposition of, hey, I can bridge this other chain seems not just low value, but actually more risky. Yeah, that makes sense. How did you land here personally? What was your story? How did you end up doing this? You obviously have a deep passion and knowledge. So I spent many years.

I had some of the circuitous path. I spent quite a few years at IBM. I ended up at IBM as a vice president of the global electronics industry, which was an awesome job. And it was a lot of fun. And the greatest perk of this job was that each year, we would pick one topic to like really dive into and understand what the future looks like. And the cool thing about that is when you're doing that, you're going to talk to like Nobel Prize winning experts, like really like IBM research,

brilliant people. And so one year we picked IoT networks. And we were trying to figure out like, why is it that companies spend all this money in centralized computing infrastructure, when the devices that they're trying to manage are really smart? Can't they manage themselves? Shouldn't there be distributed computing? And so we started going down this path of like, shouldn't device networks manage themselves and shouldn't they be able to monetize themselves? And we were looking for technologies that would help enable this, to build a prototype. And one of my colleagues came to me and said, what do you guys think about Bitcoin? I'm like, I don't even know what Bitcoin is. Yeah, what's that? Right? This is June 2013.

Oh, early. Yeah. And I was like, what is Bitcoin? And I learned about Bitcoin. So I was like, this is really cool. And we were sort of going down the Bitcoin path. And one of my colleagues came back to me and was like, dude, I met this guy, Vitalik. And I think Ethereum is what we really want.

It's a computing platform, not a money platform. And so we built IBM's first prototype blockchain on the alpha version of Ethereum. Wow. And once I went down that rabbit hole, I was like, I have to do this. And although IBM is famously now very pro-blockchain, at the time wasn't so enthusiastic. And I was like, I need to do this. This is what I have to go do. And so in the end, I went to a place where I thought there was an appetite for blockchain and crypto that I could kind of build on. You've been tracking, using, programming on Ethereum since day one. Yeah, pretty much the alpha version. And, you know, since I've been at EY now for about seven years,

I've been the global blockchain leader since we invented the title. I made it up six and a half years ago. I am the global blockchain leader. Right. And at this point, I think I've outlasted like every other blockchain leader and every other large SI enterprise. Like, I've been very fortunate, even though EY is a very old school firm, the senior leadership have been like,

we believe in what you're doing. We believe in your vision. And they backed me numerous times when other people said, we should be doing private blockchains. We should be doing this. We should be doing that. And they're like, no, we're sticking to the public blockchain vision. We're sticking to the Ethereum vision. We have a plan. We're going to follow it. I mean, you're talking about having customers that meant 2 million NFTs. That means that you didn't just catch on to the trend last summer when everybody was printing cartoons.

You've obviously been very passionate and way ahead of the curve on that. Yes. And at times it's been very lonely. I always joke like now that everyone's like, oh yeah, public blockchain's a theory and we're on board. I'm like, I don't know how to feel when other people agree with me. Yeah. It's very awkward. So what's the future for Ernst & Young in blockchain? I mean, you're far beyond what everybody else is doing, but it's still early. These are still the first iterations. So the future is a couple of things for us. So big priority for me, just like we got to

industrialize privacy. It's not enough to make a prototype. You've got to industrialize it. You've got to bake it into product. You've got to sell clients on it. You've got to deliver. So that's like, we have, we got to deliver on that. And that's a big personal priority for me. Second big, like priority for us in the future is expanding the range of use cases. So supply chain, NFTs, ESG, DeFi, what else like in the end, what I really want to get to is I believe any B2B transaction can be done on-chain. Tokenize everything. Tokenize everything and smart contract all of your business relationships. So that's my second big priority. And then I think that the third big priority is educate our clients, regulators, central banks,

show them that you can be regulatory compliant, you can be a good actor, that this is an ecosystem that can be trustworthy and functional and we can accelerate transformation using this technology. It's not something that we should be afraid of. Let's say you're Tesla or Ford or General Motors and your grandest vision of everything's tokenized and on a blockchain. What do those companies look like in the future versus where they're at now? So I think a sort of fully blockchain native company of the future has a couple of important

characteristics. And one of them is it can transact. It first of all, it needs virtually no capital, right? Because anything that's in your business can be tokenized. You can embed all the financial services in the core. So you need far less capital, right? Transacting with other businesses should be lower risk. It should be much faster. Like one of my measures is SG&A, right? Companies spend,

depending on the company, five to twenty percent of their business on operating the business. Right. And it's not productive, it's not product development, it's not making products, People. It's administration matching invoices with purchase orders, right? We ought to be able to, we know, I know we we can, like we built a smart contract system from Microsoft for the Xbox video game network. We cut the cycle time for completing monthly statements from 45 days to two minutes. The process improvement that we can

deliver with blockchain is out of this world. I also think, and this is something that is less for the Fords and the big companies of this world and more for the small companies, we live in the golden age of digital monopolies. There's never been more. The power of networks means that if you become the center of a network, you're extremely powerful. And these companies, they are extracting more than their fair share of value. In a blockchain-based world, we can have digital commerce on public networks without a central authority to take an outsized share, without an organization that can say, you know what? I've been monitoring all the data going back and forth, and I like your business.

I want to enter your business. And now that I've seen all this data, I know what your prices are, I know what your customers are. That's the kind of thing that's going on in these digital monopolies. They're not just benignly connecting buyers and sellers. They are monetizing the data. They are maximizing their own profit. And they're maximizing their profits. And I think a public blockchain centric world is one where small businesses have a fair shot of capturing the value that they create. And so we will create a fair commercial ecosystem in that world. My next question is a trap, and you don't have to answer it. But it sounds like in this perfect world, your part of Ernst & Young could put the rest of Ernst & Young out of business.

You know, we used to get, very early on, we would have these conversations. We'd talk about the value of blockchain, the power of the distributed ledger, the verification tools. And some of the partners, especially on the audit side of the business, were like, is this going to put us out of business? Yeah, if it's all there on the blockchain, what do you need a human for to audit the... Fraud springs eternal. There will you need a human for to audit the... Fraud springs eternal. We'll always be a need for auditors because... And we've seen this, we just saw a round of this, right?

People will always find clever ways to conceal the truth, to overcomplicate it, to make things seem transparent when they're not. And to blow things up. And to blow things up. And to blow things up. And there will always be a value for a thoughtful third party. I think the power of blockchain isn't that we get rid of trusted parties. The power of blockchain is that we get rid of powerful monopolists in the center. They'll still be a role for trusted parties,

but you'll be able to choose and there'll be competition. But those trusted parties could also be blockchain native, oracles and... Exactly. So it's sort of this infinite regress of technology where eventually it's just people being replaced by smart contracts. Yes. Although I think again, right, I'm a big believer in the value, like automation usually leads to more consumption, not less. Well, I wish that everybody knew Ernst & Young's story better. I'm glad that we can share it here because I don't think people know that this is happening at this level. And I think they know of some small crypto projects that are doing little parts of this. And you're already doing it at scale with massive companies.

The thing I always strive for is like you started the interview like talking about the big four. I don't want to be lumped in that category. I want us to be a category of one, the best in the world at public blockchains, period, end of story. Well, I think you're doing it. So thank you for your work. Appreciate it. My pleasure.