This Week in Startups - Coinbase battles SEC over Lend + How DeFi interest rates work with Genesis’ Matt Ballensweig | E1279

Episode Date: September 9, 2021

Coinbase CEO Brain Armstrong took to Twitter to call out the SEC for what Coinbase considers unclear guidance & hostility around their Lend product, Jason breaks down the situation (1:43). Then, to better understand how DeFi lending works Jason interviews Matt Ballensweig the Head of Institutional Lending at Genesis, a crypto prime brokerage (9:51). We close with three "Ask Jason" questions (50:23).

Okay, everybody, it's a big news day. Today on the program, we're going to talk about Coinbase and Brian Armstrong calling out the SEC over litigation as regulation and the fact that they're being investigated and they received a Wells notice that they will not be allowed to release Coinbase's lending program where you lend cryptocurrency to get a 7% or so return on your money. And we were lucky enough to have Matt Balance Sweig, Matt Balance, Week? Swig? Matt Balin Swig, from Genesis.

He's the head of institutional lending, and we went down the rabbit hole with Matt. He's an incredible guest because he loans cryptocurrency out to institutional investors, and we go deep on Tether, on USDC, and on what would happen if the Bitcoin network went down. Stick with us. I do a couple of S. Jasons at the end that are really interesting. It's going to be a great episode. This week in startups is brought to you by LinkedIn.

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Okay, Coinbase is having a dispute with the SEC over what is a security and their new lend product, the SEC, has issued a Wells notice informing the company that the regulatory body will take legal action. Coinbase launches their crypto lending platform. called Lend, very creative of the Coinbase team there. It is what they say it is, that you lend your crypto in order to make a return on it. We'll get into that. It's kind of confusing, and hopefully our guest will clarify it for us.

According to Coinbase in a blog post by their chief legal officer, Owell's notice is an official way of letting a company know that are regulatory plans to sue the company. And Brian Armstrong did a long tweet storm last night about this, which sort of set Twitter on fire. And he used some pretty charged language. Here's from the blog post, which says, the SEC has told us it wants to sue us over Lend. We don't know why. And it outlines the background of Lend and its relationship with the SEC, what they provided to the SEC thus far and the next step. Basically, Lend is going to let Coinbase users, members, customers.

I guess customers would be the best word, earn interest on their digital assets. Now, this means it's considered a security by the SEC. And Coinbase's blog post states, Coinbase's lend program doesn't qualify as a security or to use more specific legal terms. It's not an investment contract or a note. Customers won't be investing in the program, but rather lending the USDC, which is the stable coin that Jeremy O'air, who's supposed to come on the podcast, we haven't kind of went dark on us. I don't know why, but we asked him to come on the pod. He agreed. I've known him for 20 years, so it's a little bit weird.

But USC, they hold on Coinbase's platform in connection with their existing relationship. I like the Brian Armstrong quotes a little bit better than the blog post written by their general counsel. He starts with a barn burner here. And I don't know, the general counsel told him this is a good idea, but this seemed ill-advised. I'll be totally honest. And we don't have the whole story here. So what you'll see is the press will make all kinds of sensational headlines around this to get clicks. What I'm going to do here is kind of present what I think is happening, knowing. that we only have partial information. We don't know exactly what the SEC is investigating

and why they're so concerned, and we actually don't know what Brian Armstrong's position is exactly and what his motivation for coming over the top of the SEC is. But here's what he starts the tweet storm with, some really sketchy behavior coming out of the SEC recently. Storytime. That's the first part of the tweet. Millions of crypto holders have been earning yield

on their assets over the last few years. It makes sense if you want to lend out your funds You can earn a return. Everybody seems happy. Tweet number three, a bunch of great companies in crypto have been offering versions of this for years. As Coinbase came out recently and said, we would be launching our own version. Tweet number four, we were planning to go live a few weeks ago. So we reached out to the SEC to give them a friendly heads up and briefing.

They responded by telling us, this lend feature is a security. Okay, seems strange. How can lending be a security? So we ask the SEC to help us understand and share their view. We always make an effort to work proactively with regulators and keep an open mind. They refuse to tell us why they think it's a security and instead subpoena a bunch of records from us. We comply. Demand testimony from our employees.

We comply. And then tell us they will be suing us if we proceed to launch with zero explanation as to why. And then here's number seven. And I'm, you know, this is Brian's voice. Look, we're committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we're also happy to follow that. It's nice if you actually enforce it evenly across industry.

equally, by the way. But in this case, they're refusing to offer any opinion in writing to the industry on what should be allowed and why and instead are engaging in intimidation tactics behind closed doors. Whatever the theory is here, it feels like a reach land grab versus other

regulators. Meanwhile, plenty of other crypto companies can offer a lend feature, but Coinbase is somehow not allowed to. Now, I'll just pause here in his overview of this. He's coming on pretty strong here. and the SEC does have a very interesting approach, which is they just take a bunch of information,

they request a bunch of information, they don't tell you exactly what's going on, and they're kind of mysterious in that way. I know this story from many people, from Mark Cuban, who was investigated, and other people have had to deal with the SEC. They're pretty powerful. They request a bunch of documents, and then you don't know where you stand, and it's sometimes unclear. So a lot of people came to Brian's defense here and said, yeah, you know, the SEC should be a little bit more clear on this. He goes on in all of this and says, in May of this year, I travel to D.C. to meet with every regulator and branch of government I could. The SEC was the only regulator that refused to meet with me, saying we're not meeting with any crypto companies. So that's kind of

interesting, you know, going down in his tweets or so on, if we end up in court, we may finally get the regulatory clarity the SEC refuses to provide, but regulation by litigation should be the last resort for the SEC, not the first. Our door remains open. Hopefully, the SEC steps up to create the clarity this industry deserves without harming consumers and companies in the process. Okay, really interesting. And that led me to ask my question, which is, can somebody explain to me how a crypto company can afford to pay 7% interest on your crypto holdings? Who are they loaning the crypto too?

And how much interest are those folks paying? That's the question I have about all this. Who are the people on the other side of this? I understand if you own Bitcoin that you might want to get a loan against your Bitcoin, right? You own Bitcoin, you bought it at $1,000. It went to 50. Now you're sitting on, let's say you bought 10 of these coins. Now you're sitting on $500,000.

You don't want to sell your Bitcoin because you believe in it. You're a hodeler. You want to keep it because you think it's going to $5 million. You think there's another 10x and you'll do 100x on your journey. It'll go from $1,000 a coin, you know, all the way up to $500,000 a coin, whatever you think it's going to go up. And you're going to be sitting pretty on $5 million at some point. Okay.

I get it. That's your bet you're making. It's your right to make that bet. But you want to put that money to work in your life. So you loan out your Bitcoin to somebody else and you get paid interest on it. That is what people want to do. It's also called a margin loan. So a person with assets, say like a bunch of stocks and a portfolio can get a loan against it. So that's the question I have. And I'm going to bring on our guests to discuss that very question and the Coinbase actually we've seen. needs high quality leads. Well, with 30 million companies on LinkedIn, they can help you take your startups growth to the next level. We've used LinkedIn marketing before here at this weekend startups and launch our investment firms. It's really an amazing platform, as you know, because you've been using it for over a decade. LinkedIn offers seamless tools for lead generation and brand building. First, you might want people to just become aware of your brand. Maybe you want them to read a blog post or follow your company on LinkedIn. That's great for building your brand, but you may at some point want that lead gen.

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With us is Matt Balancewig. He is the director and the head of institutional lending at Genesis. According to a LinkedIn page, Genesis is a global leader at the institutional digital asset markets and a full service digital currency prime brokerage. I heard you on Kevin Rose's podcast, I guess in the spring, talking about these loans. So maybe you could start by just telling us, what is the loan structure you provide? And you heard my question, who's on the other side of the loans? And welcome to the program.

Definitely, yeah. Thanks for having me on. I really appreciate Jason and good to be here. In terms of how these loans are structured, so there's two sides to this market, as you kind of alluded to. There's the retail deposit side, which is basically platforms that offer the ability for retail users to yield on a variety of different assets. And then there's the whole institutional side of the market, which is basically where these assets go. And Genesis is really focused on the institutional side of the market. So we're one of the largest institutional lenders in crypto. We lend, you know,

roughly 30 to 40 different assets out to institutional trading firms, hedge funds, market makers, quant trading firms. So think some of the largest kind of trading institutions out in Chicago, right, the jump trainings of the world, the Jane Streets, the Susquehannas. So these are people, just to summarize here, who work in finance and they need money to go execute a trade, am I correct? That's exactly right. Yeah. So they need capital, whether it's in in the form of crypto like BTC or ETH or dollars or stable coin like USDC, Genesis will act as basically the intermediary that faces these institutional counterparties that need it for trading purposes or just arbitrage purposes, which we can get into.

So for the trading purpose, somebody at a hedge fund says, I want to make a big trade today. I want to buy a bunch of Amazon because I think they're going to do great because of this new product coming out. They want to buy $100 million in Amazon. They would borrow from people's crypto holdings, and you would facilitate that so they can make the trade? Yeah, except in this case, it would really only pertain to like buying crypto, right? So let's say a hedge fund says, hey, I want to take a $10 million long position in Bitcoin, but I want to do it borrowing cash. So basically getting leverage on that position.

They would borrow USDC or dollars from Genesis and pay us an interest rate on that to then basically place a buy order through our trading desk to get that exposure. It's another long Bitcoin, but they did it on borrowed cash and stable coin, and they're paying an interest to get that long position. And what they're getting in return is that they didn't have to put the cash up themselves to take that position. So they're getting that inherent leverage. And the same can work basically on the other side. If they wanted to go short BTC or Ether, they borrow the BTC or ETH from Genesis to then sell through the desk to basically generate dollar proceeds.

So you could basically do it on either side, which tries if they're borrowing dollars in Stablecoin or crypto like BTC and ETH. So to use the example I was sort of leading up to before, somebody got really lucky. made this great bad of buying 10 Bitcoin for $1,000 each, it went up to $50,000. Now, they're sitting on $500,000. Some trader says, I want to buy $500,000 worth of Bitcoin. I'm going to borrow $500,000 because I'm long it. I buy it. That person is going to get paid what percent on their money, and you're going to make what

percent? Yeah, so generally people right now are paying, call it 7 to 10 percent annualized on the dollar component of the loan. So if you want to borrow dollars to get lost, long, it's pretty expensive, really because there's a lot of demand for people to get long in this market. And so therefore, cash is just expensive. If you're looking to borrow BTC or ETH to basically go short where you need it for other trading kind of working capital purposes, the rates are closer like 3%, so a lot cheaper, just one, because there's more supply in the market. And two, because

people want to be on the long side, not the short side in a bullish market like this. So let's take this trader as an example. They borrow the $500,000, they buy Bitcoin, Bitcoin goes from 50,000 to 25,000, which is something that happens every year or two with Bitcoin. It crashes and then comes back. We've seen it happen three or four times. And now they've lost $250,000. What happens? Does the person who loan it lose it?

Do you lose it? Yep, this is where collateral comes into play here. So if they're borrowing, let's say, a million dollars from Genesis to go along Bitcoin, right? We're taking the Bitcoin they purchased as collateral, plus some sort of excess margin from the borrower. So usually that's another 50%. So now we hold 150% of the value of the loan.

So if Bitcoin falls in price, they're at some point going to be underwater on their loan, which is when we're going to actually have to ask them to top up more collateral to Genesis. And if they don't top up more collateral in time, we then basically have rights to sell the Bitcoin collateral that we're holding, plus the excess margin to make ourselves whole on the loan. So that's really what our bread and butter is from a risk management perspective. And that's what we manage on a day-day basis,

is that collateral risk and market risk as the prices move around. So how much do you have loaned out at any given point in time? So right now, and Genesis is probably one of the largest lenders in the space, we have a book of roughly $11.3 billion lent out to the street, and that's to roughly call it 350 or so kind of unique institutional borrowers. So like I mentioned earlier, these are hedge funds, trading firms. It's not a retail platform. So we're specifically facing a lot of the active traders that are institutional in nature in the space.

So if I'm translating here, you have customers who are super trustworthy that have been around for a while and you know who they are. You know this customer very well. And you don't think there's a risk of them defaulting in some major way or not being able to pay back the loans in the case. Let's say there was an epic crash and it lost 99% of its value. You wouldn't be insolvent, would you? Exactly. That's right. So we're basically relying on, one, our ability to manage collateral well and take the initial levels that we think make sense relative to the volatility of the asset. And two, what is the actual credit worthiness of that counterparty? So we do take things like

financials and we do credit diligence and get pretty intimate with who our borrowers are and basically size our loans accordingly. So we're much more institutional in nature. We're dealing with some of the largest kind of most sophisticated firms in the space. And because of our underwriting and collateral management, we feel in a very good position to kind of manage the risk on a day-to-day basis. There are people out there claiming they'll give people 20, 30, 40 percent interest on their crypto holdings. What is that about? Yeah, so that's definitely like less common, right? We see interest rates on the on the cash side, usually between, you know, seven to 12 percent. There have been times in crypto when those rates have probably blown up to 20 percent.

Wow. And that's probably what you're referencing. A lot of that is just due to the market structure, right? It's due to the inefficiency in this market. And in a really, really bullish environment, there's so much demand for cash in the space that people are willing to pay interest rates in the 20, 25% range just to get long. Another reason is if you look at kind of the difference between where the spot market is trading and some of these futures markets, there's an inherent like basis between those two instruments. And so if you had cash, you could simply just buy the spot that's trading lower, sell the future, and capital. And, through that kind of basis, which is like a call to cash and carry trade. And because the markets

have starved for cash, those basis curves tend to kind of blow out in a really bullish environment. And part of that is really due to the fact that there's not much institutional balance sheet and cash in the space that's going out to fund some of these trading firms that in a traditional market, you know, there's so much cash to go around that those spreads wouldn't persist for very long. But because a lot of the banks or, you know, large asset managers don't want to kind of blend out balance sheet into the crypto space at this point, there tends to be this persistent basis that kind of creeps up, which drives the cash rates higher. How do you know if you are loaning your money to Narchegos, who then goes insolvent and Normura, I think, lost like $2.9 billion back in April.

How do you know that that doesn't happen to you? Or do you not have the ability to know that? You know, so I mean, so this is like where the difference comes in from a crypto perspective is that we're actually holding the bearer collateral, right? So in the case of Arkegos, they're super levered, you know, they're pledging assets that were already pledged. In this case, we have the Bitcoin on hand, right? Like, we have the crypto on hand. And if the price moves against us and we don't get the collateral requirement we need, we can immediately sell that into the market. That's a highly liquid market. So that's kind of the pro of operating it in crypto versus traditional markets.

So when you see the, and obviously you don't work for Coinbase, but you're in the space, when you saw Brian Armstrong's tweet last night, what was your initial reaction to it? Yeah, initial reaction was, you know, it feels like there's definitely a lot of, I mean, there's always been a lot of regulatory uncertainty in the space, specifically around lending and lending products. So, you know, on one hand, surprising to see, you know, the kind of aggressive tone that the SEC took, but also like not that surprising to see, you know, a large, you know, regulatory body like the SEC kind of come and say, hey, we're looking at this and we're taking a pretty

aggressive stance to protect kind of retail investors. You know, Genesis, I think we're a bit different in terms of the way we're structured where, you know, we're much more institutional in nature. We're really just doing direct lending to institutional counterparties. We don't have, you know, a retail deposit app or platform. And so that's kind of the stance we've taken, but totally kind of get that, you know, this is a completely gray area. It's going to be an evolving regulatory picture, but also understand, you know, Brian's push back and try and, you know, push for clarity and consistency, which makes a lot of sense. You mentioned USDA.

You operate using Circle's stable coin as your default. Yeah, so we are definitely big users of USDA. We, you know, we have the on-off ramps with Circle and Coin base to go in and out of dollars and USC at one-to-one, basically at any time. And it's a great way to basically, you know, be able to lend out dollars, but on, you know, on the blockchain, right, as an ERC20 token to counterparties that can seamlessly use that to go in and out of, you know, positions, whether it's BGCE or other crypto. So we're super active in USC. It's definitely our preferred stable coin and it's, you know, has the most liquidity out there kind of in the market.

I think Tether is bigger and people, Tether would argue they have more. liquidity. Is that true? Or does Circle have more liquidity? Because I know this is a changing landscape right now. And do you use Tether? Yeah. So Tether's, Tether obviously is, is larger from market cap perspective. And we do, we do use Tether as well. I think a lot of our counterparties overseas, you know, have a preferred means of working with Tether, partly just because of legacy reasons and that it's been around for a long time. And it's, you know, there's kind of accustomed to using it. It's also listed on a lot of exchanges. So we operate, you know, we operate in both. We obviously don't take like a view long or short on the asset. We're just simply using it as kind of a capital,

you know, working capital really for our lending business that, again, we can kind of go in and out of dollars into Tether, depending on kind of where that market is. Canada is banning Tether from their first two exchanges. New York Attorney General banned Tether. They're reportedly being investigated for the DOJ. What are your thoughts on Tether? You think that's a scam? Do you think that there's some malfeasance going on there. Do you agree with the Attorney General's position on it? I have no view really or insight to kind of take a stance there. Like, you know, until we see...

Well, you do use it. So you've taken one stance, which is you're willing to use it. Even though Canada's banning it and the New York Attorney General took action, why would you use that if you don't have to? Or do you have to because of the international people? We don't have to. I think for us, we're saying, there's still a lot of liquidity in that market, and it's very easy for us to trade and utilize.

And so we have, you know, connections to basically all the exchanges to other trades on. Until that liquidity dries up, or we see some real indication that this, you know, this might not be a liquid asset that we can really count on and rely on as a dollar-backed stable coin, then we'll likely continue to, you know, have it as part of, you know, operation. And we've obviously done our own kind of diligence from a legal perspective and are certainly kind of keeping our hand on the pulse there, you know, as we make our decisions. It's definitely an evolving, you know, a course of action for us. So I think it's a really generous, magnanimous way of saying, like, hey, you understand

that there's some risk here. You see the headlines. So maybe you're not holding it, but you'll transact in it. Am I reading correctly there? That's basically right. Like, we're not taking like a position in tether. We're not like a long tether on our balance sheet. We don't want to be subject to some potential risk that the asset does depreciate.

But we'll certainly use it so long as we know that we're not actually Delta exposed to the price appreciation or depreciation. But you wouldn't feel the same way about USDC. You would hold USDC because you feel, God, Jeremy Allaire is going to be public in the U.S. He's doing everything right. And he made it dollar for dollar back. Yeah, we would certainly hold USC. We do hold USDC on our balance sheet. It's very much, you know, dollars for USDC one to one.

And you could see that in the market, right? There's no fluctuation around the peg. It's just a $1, right? and USDT can fluctuate, you know, we might be at 1.01, we might be at 0.99. So there is some market risk there for us that we just would prefer not to have to manage. And so we'll typically just kind of use USC as the preferred coin if we need to swap in and out. I appreciate you being like super upfront and giving that like really plain English explanation. You're a great guest. Most people are not willing to talk about these things.

But you probably saw the news about this evergreen or ever grande. I don't know how to pronounce it. This Chinese real estate company. Have you seen those headlines? line starting to bubble up? I have not. I have not. So I guess the issue is around tether, they own commercial paper. There's a Chinese real estate company and people are starting to, you know, the bit finaxed and the, you know, folks who are on this like tether case are kind of obsessing about

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This is amazing episode. Back to loaning out your crypto. Is this something you think retail investors should be doing? Yeah, I think in terms of, you know, if I were to put myself in a retail investor shoes, it's really like thinking about

the platform risk you're taking, right? Everything is a risk-to-return decision. You're giving up the keys to your crypto to earn an interest rate. And so you have to be thinking about who's the counterparty I'm facing. Why are they qualified to pay me an interest rate and hold my crypto? What does their reputation look like? How large is they're offering? Who are they backed by?

All of those questions should come to mind. And then it's basically, you know, is 7, 8, 9, 10% worth that risk. And I think that risk is highly variable depending on the platform you're dealing with. I think, you know, for Genesis, right, where a highly regulated entity, We're backed by Digital Currency Group, which is one of the largest, you know, organizations in our market. We're super well capitalized, and we've been, you know, doing this since 2018 with no capital losses or defaults. So, you know, I think we're a great credit in the space, and you just have to do your diligence on the platform you're lending out to. So it's really a unique situation.

You know, there's no cookie-cutter approach to it. It's really just return to risk and doing as much diligence as you can on the platform that you're going to be lending to. So let me ask a scenario here. You are looking at people getting, you know, basis points on their savings account, you know, in their Bank of America account. In other words, they make nothing. And so people are making nothing. And then they can make, I don't know, 10 times as much, putting it in Coinbase land or whatever product is available or even offshore accounts, maybe making more. but who knows because those are smart contract based.

If somebody hacked the smart contract, their money could go away, so that's a risk. This is just my theory, but let me run this one up the flagpole and see if anybody salutes, as they say in the business. Could a theory here be that, and this is what, you know, the sort of conspiracy there is just saying, hey, the SEC is concerned that retail investors represented by Coinbase, which represents retail, crypto, writ large, are going to see these rates and pull all their money out of the banks and put their savings on Coinbase because if you can make 7%, that's pretty juicy. Like, I'm looking at a going, well, should I be in the stock market or should I just

make 7% of my money and sleep well at night? Is that very one that you think is realistic here? And if a large number of people did make this move, could the crypto economy handle that? Yeah, I think, so one, like that that's the question I think that, you know, like that's the question that's ultimately raising eyebrows from a regulator's perspective is like, you know, how can we kind of best protect the retail investor? So I do think that like, yeah, there's, it's certainly an area that's super gray. There's probably going to be a ton of, a ton more regulatory guidance that ultimately comes out, you know, by the SEC and other regulators over time.

But it's also like, that's the opportunity this market's providing right now, because of how inefficient and new it is and how much opportunity there is from a trading perspective. And it's really passing that opportunity through to investors that are willing to put their capital there. So I'm kind of somewhere in the middle there where it's, again, like, this is, you know, if you're a reasonable investor and you have a sense of risk to return, you know, that's kind of on the individual to do that assessment. But at the same time, I do understand that there's also going to be, you know, more regulation that comes out to kind of protect and better guide those investors. In terms of can the market handle it, there's a lot more

cash that the market can absorb right now. And you can kind of see that, like I mentioned earlier, and kind of the implied annualized basis of the market. It's implying right now even like 10% and on stablecoin. So, you know, also as Genesis right now, we're still borrowing more and more and more USDC and dollars from the market. I think other platforms out there are still cash hungry as well. And until the spreads kind of close and the inefficiency dries up, there's going to be this bid for cash in the market that's going to persist for some time. So if I were to translate, that people are looking for cash to invest, and that's what's creating this opportunity. That's what you mean by the spread?

Yeah, it's looking for cash to not only invest and to get long, but also to use for like trading arbitrage purposes. And this is kind of where the sophistication of the entity drives the borrowing. So market makers and hedge funds that like study, you know, differences between markets and want to capture just spreads without really taking a directional view. They need cash really as working capital to just fuel their trading. So they're not taking a directional view in investing. They're really just arbitraging spreads.

And because this is crypto and markets are really inefficient, there's a lot of spread and there's a lot of money to be made by just trading in and out of those. What keeps you up at night? Does any of this make you nervous? Yeah, I mean, I think a better way to put it is like, you know, our eyes are constantly surveilling the market. We're trying to feel out, you know, what direction are things headed? What should our stance be from a regulatory perspective as we get new guidance?

So no, I wouldn't say I'm concerned. I think this is a natural evolution of a market that's still in its nascent stages that has a long way to go from a maturation perspective. But to me, it's great to see that, yes, there are a lot of governing bodies and regulatory agencies that are understanding, hey, this market's here to stay. We need to have a view. We need to shape that view. The way that that's done, it can be more conservative or less.

But I think this is a natural evolution of a market that is in its early stages. This is going to seem like an OK boomer silly question, but I think this is probably what's going through the boomer mind of the SEC, which is if in some way the Bitcoin network was compromised. Let's just, I know that people are going to say this is impossible, but if it was hacked or a denial of service attack happened or somehow Bitcoin trading was halted because Bitcoin was compromised, what would happen? If the Bitcoin was shepherds, yeah. I mean, that's definitely like when you think about like tail risk of the space and,

you know, the asymmetrical, you know, what if scenario, that's obviously like something that's really just not likely to happen, just given how decentralized and difficult it would be to do that at this point. So it's not really a risk that like you can measure and really prepare for. But like I would think about that as just a very tail event, black swan systemic risk that if it did happen, there would be first, second, and third order consequences that, that, you know, institutions would have to manage. Maybe that means Genesis halting its own trading of Bitcoin. You know, maybe it's looking at each asset and blockchain independently.

You know, if Bitcoin were, you know, be jeopardized in some sort of capacity, you know, would we just remain lending the other assets? Would we put a pause on things holistically? I mean, there's a ton of things we'd have to think through, but it's certainly like a very improbable event at this point. I mean, if it was 0.1%, or 0.01%, 1 in 1,000, 1 in 10,000, you would basically have a trillion dollar hole in the economy. How many people home Bitcoin who holds that trillion dollars? I guess would be the question. And you would have firms like yours would be wiped out or Coinbase would be wiped out. A bunch of people who put money into it would lose that money,

would be gone. And I think that's probably what the SEC is thinking here is nobody's in charge of Bitcoin. And it's their job to think about the black. on events, right? Which is why they have FDIC insurance and why they have regulations. So I think that's probably their motivation here. And they seem like they're being maybe two protectionist, but that's probably their motivation, right? Do you think they have a nefarious motivation here? Or do you think that they're just trying to, you know, protect each other best. Yeah. Yeah, I think it's really just trying to, you know, go back to protecting the retail investor. I think through more education and understanding of the space and the technology, they're going to realize

that sure, firms can be regulated, institutions can be regulated. There's going to be laws that protect people from certain platforms. But obviously, like, the focus likely is probably not going to be on the Bitcoin blockchain itself, but on some of these institutions and platforms that, you know, might be a risk area for the average investor versus like just owning Bitcoin and it being like a chain problem or protocol problem. When you are trying to grow a startup fast, hiring engineers will slow you down like Nothing else, don't I know it? So many companies I invest in are telling me they can't get their next version out because

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So I started at Genesis about four and a half years ago, which was relatively early. We were an eight-person trading shop at the time. One of my colleagues at the hedge fund I used to work out, Bridgewater Associates, was actually the second to join Greyscale Investments, which is one of the largest asset managers in crypto. So he really started talking to me about the space. I went down the crypto rabbit hole back in 2017, saw DCG and what they were building

and where Genesis could fit in that infrastructure. And it was just an awesome bet to basically say, hey, if this infrastructure does take off, these guys are right in the middle of it. And there's so much you can do. And there's so much to be built. And there's so many ways to impact the space. So for me, it was a no-brainer.

You can always go back to traditional finance, but like having a major inflection point of technology and finance to miss that would have been, you know, it's just a bad move. So I'm glad I. What was it like working for Ray Dalio? It's supposed to be a very unique culture there where you kind of interface and criticize each other in a very deeply thoughtful way to kind of sharpen each other's blades. but you go through these 360, like, intense, I don't know if we want to call them takedowns or, you know, candidness between employees.

Did you get put into that fire line? And what was it like? Yeah, I think that that fire and that spirit was like, you know, ever persisting at Bridgewater. Like, that's, that was the culture. That was the way of being. You know, for some, it's super like unnatural. And so you feel like, you know, you're thrown into this environment that's just I call it radical transparency.

But for others, it's like, you know, you're kind of used to operating that way. You want to put your thoughts out on the table. You want to be open minded to others' opinions. You want to challenge things that don't make sense. I think if you're like used to operating like that, it wasn't, you know, it's not too, it's not too radical. What's the most cutting edge? What's the most biting things somebody said to you? I'm just curious because like they're known for saying things intensely to each other, right?

So the one, yeah, I can I can definitely say something. So the most absurd thing someone said to me is that I just think that you have an IQ problem. They said, I think I'm questioning your intellect. I just think your brightness level is not there on this topic. So I was like, wow, that's not even like, you know, I did this thing poorly or like couldn't manage this project. No, it's just you're stupid. I just think I'm dumb. Yeah, they just think I'm stupid.

So I was like, what's interesting about that is they just didn't say, I think you're dumb, Matt. They said, because that's what people tell me, they said, I think you have your IQ, your IQ challenged. Yeah, you're not bright enough for this. How old are you, Matt? I have 30 years old. 30 years old. So during the 2007 crisis and the great recession, you were 18 years old or something? I was in high school, yeah.

You were in high school. And then during the 2000, um, During the 2000 crash, you were 10 years old. Yes. Did you remember those two crashes and how does it inform your thinking in today's vibrant market? Yeah, I can tell you the 2000, you know, the dot com or 2000 crash. I was certainly not thinking about, you know, risk mitigation and really doesn't guide much of my thinking.

For the 2008-2009 crisis, definitely much more real. You know, had a lot of friends, family go through that, kind of see that real time. It really just made me think about, you know, risk. It made me think about working really hard to not be in a position to have to deal with the repercussions of something like that. And just being smarter about, you know, investing. It actually got me interested to think about, like, how would you navigate that? Like, what is a good investment then?

If everything's down 50%, how do you diversify against that? I do remember a thing that was one of the reasons that like interested, it got me interested in finance and trading and saying, you know, is there a portfolio you can create that could withstand something like this or is everybody going to have to go through this? So that one's definitely more real. But the earlier one, you know, I was, I was busy doing other stuff. What percentage of your net worth is in crypto? A fair amount. Over 50?

Yes. Over 75? No. Okay. So somewhere between 50 and 75, so you feel very bullish on crypto and you're comfortable for that risk level as a 30 year old. Definitely. Yeah, I'm in the mindset of, you know, you have to take swings. You kind of, you know, go through your life, building up your background, your abilities, and your pedigree and you get a great education. You can always fall back on that. And so, like, when you have an opportunity like this in this market, like now is the time to take risk to take swings,

especially in the things you have conviction in that you can also shape and control. So to me, it's a no brander to take risk in this market, you know, if you have the appetite for it, and you can withstand, you know, drawdowns and, like, be responsible with your own, you know, net worth and lifestyle. You have to kind of understand both sides of the trade. But for me, I'm definitely comfortable being in it. In crypto, what's your biggest holding? What are you most bullish on? Is it Bitcoin and Ethereum? Yeah, without giving away too much, I think, like, I've always been, you know, on the Bitcoin train. Obviously, it's definitely a large holding. But also, yeah, there's so many interesting projects now

that are evolving and developing, where it's hard not to try and go understand what could the market cap of those projects be, what market share could they take. There's the pace at which the market's expanding right now is, it's unparalleled, is incredible. It's a little strange, right? Yeah. It's so many interesting projects. You know, you look at the growth of just like the Solana ecosystem in the last six months and how that's exploded and all and the things being built there.

When you say growth of the ecosystem, what does that mean? Does that mean people buying it and speculating on the coin? Or is there something else that you mean by that? I mean, I mean real platforms being built on the Solana blockchain. You look at just the capital market segment, right? There's mango markets. There's serum. There's radium.

So there's this whole decentralized finance being built on Solana as an alternative to ETH. And then there's the gaming, right? There's Atlas Polis, which is a whole gaming system that's going to be built on Solana. There's NFTs now starting on Solana, right? There's the Aurora Project and the Deut. Gen Ape Society. So, like, all of this was spun off in the last six months, obviously that the work has been going on for long, but the momentum and growth is incredible.

And that's just one example of, you know, another project or chain that's being developed on. So when you look at a project, looking at the developers and the ecosystem around it and what actual services are being built on top of it for you as an indication of success, Bitcoin doesn't have much being built on top. of it. Ethereum has a lot, and now Solana seems to be really capturing people's imagination, I think, because it has less gas fees, in other words, it costs less to operate on it. Is that correct?

Yeah, Solana is just like way faster and cheaper to transacted. And so when you think about like decentralized exchanges and the growth there, right, you think about you need order books to operate really quickly, right? You can have a Dex on something that's super slow. And so that's why you're seeing like Serum and Mango and others being built on Solon. is an alternative. So, yeah, I think the blockchain really depends on like, what's the use case? What are you trying to accomplish? Right? Bitcoin's much more of a sort of value. Right? It's the first crypto ever created. It's, you know, it's got first mover advantage,

but it's really, you know, a blockchain that's, you know, pretty slow relative to something like Solana. So I do think it's really going to tie back to like how does the blockchain operate and then what are you trying to build on top of it that that's going to drive kind of just decision decision making. Another stupid question on behalf of the audience and myself. If Solana or Ethereum for that matter has all of the value of storage of, you know, capital like Bitcoin does, it's a store of value, plus it has this programming language and development built on top of it.

Why would anybody hold Bitcoin instead of Solana and Ethereum, which you have two swings at bat. People can actually use those platforms to build interesting things. and you have the store of value. Yeah, I think Bitcoin, like, there's a lot to be said for, for one, you know, it was the first mover. And two, how much infrastructure there is around Bitcoin, right, funds that are willing to trade it, people that are willing to hold it, you know, investment firms that have already allocated

to BTC, right? There's this scarcity element of it as the first crypto that's completely decentralized with a cap supply of 21 million assets, 20 million tokens. Like, that psychology of the network is always going to be there. And it's kind of already ingrained as the store of value blockchain in my mind. That doesn't mean that there might not be competitive protocols out there, but I don't think the bid for Bitcoin is going away because of that. I mean, some people have talked about this.

Like at some point they might flip and watching Solana race up the charts is pretty interesting. What's the most interesting project on Solana in your mind, the application, and what are people doing with that application? You mentioned a bunch of names. I wasn't familiar with all of them. Yeah, I think so serum is really interesting. Serum, yeah. SRM is the ticker.

S-E-R-U-M is the name of the project. But it's really just a decentralized exchange that's going to be, you know, really a functioning orderbook for a variety of different platforms and games and marketplaces and D-5 protocols that are, you know, going to be built on Solana. And then another one is Pith, which you probably have seen. seen in the headlines where it's basically like a pricing or a data Oracle that provides data to the sole ecosystem that pulls from a variety of different sources, including some of the largest trading firms in the world, right? So jump is a big lead there. Jane Street has

agreed to publish data on Pith. Genesis has agreed to publish data there. So this is super interesting, Pith. So when you say an Oracle, just to translate this for folks who are neophytes here, and I'll use myself as the neophyte. This is a way for people to get a source of data and then be able to build a smart contract on it. So an example of that might be, we're doing a weather forecast and I say, we're going to make some bet on the amount of precipitation

and who is the source of that precipitation in Ohio that we trust. Am I correct? Yeah, that's basically right, right? They're really, you know, it might be a stupid example, right? I mean, I don't know if you know. It's a good, it's real time.

on-chain, you know, data. That's basically what it is. And a variety of different publishers can publish data to that that are in that ecosystem. And so it's basically pulling from a variety of different sources, acting as the source of truth or the Oracle for a lot of different markets and data sources. And for people who don't know, that is PY-T-H. The Pith Network, is that a project, a nonprofit, an open source, or a company? I would say it's open source.

Yeah, it's open source. there's basically a community of different firms that have kind of agreed to publish data to PIF. I named a few of them, but that can be constantly expanding, right? There's no cap on those that might want to publish data to Pith. But seeing some of these larger institutions in the space agree to that and seeing Piff pull on the institutional world for pricing data, I think is encouraging and great to see like the actual adoption from some of these like firms that are, you know, more known for trading other asset classes outside of outside of crypto.

What would be an example of like an interesting data source being published in Pith? I think even like you think about, right, Genesis's world in the OTC market, there's not much data out there on OTC trades, right? There's only like on exchange. So if there's some way for us to publish, you know, here's all of our OTC trading data, that's a whole new trading, you know, trading market and data source that's really not public on chain or live anywhere today.

that's not going to be published on a platform like Pith. So that's one example. And there's a lot out there, right? But I think that's most relevant to. It would be interesting is imagine if you could publish private company share prices to it. So I could say, hey, here's what come or Grin or, you know, Steezy or when Uber and, you know, Coinbase were private or Facebook was private publishing the latest trades on secondary market. So there are people who are secondary market makers in private, you know, like second market,

which got bought by NASDAQ, but there's a bunch of these brokers. If those brokers said, hey, here's what people are paying for, you know, Coinbase before I went public or, you know, that would be super interesting. That's exactly right. Exactly right. And second market was obviously the, that's the company that Barry Silver sold to NASDAQ before we started Genesis. So it's a good example of that for sure.

All right. Listen, you have been an absolutely fantastic guest and I DM'd you an hour ago and you jumped on. I really appreciate it. Where are you based? Yeah, thanks so much for. having me. It's great to be on. I'm in, I'm in Williamsburg, Brooklyn.

Oh, really? Wow. My hometown, Brooklyn. Every time somebody says they live in Red Hook or Williamsburg, I'm like, wow, that is fascinating. Yeah, I've been there for six months, but been in New York and Manhattan for the last seven years. I heard now Manhattan is cheaper than Brooklyn. I think parts, yeah. I mean, it depends on where in Brooklyn for sure. Williamsburg is is not cheap. Like,

it's, it's, it's, uh, it's no different the pan. Yeah, it's,

it's pretty incredible. But a lot of his foster, a lot of good restaurants. I was at a wedding in Red Hook. And driving around Red Hook and there, we went to this pig beach like a barbecue place on the Buonis. And I was like,

wow, in the 80s, we used to dump bodies in here. Like, you know, after a bar fight, like this is where like people would throw guns and now. Now you're hanging out,

having some brisket and pulled to work. And having brisket and pulled pork. And having brisket and pulling pork. pull pork and the water is like not green and toxic anymore it's like almost like if you fell in there you would only die two days later as opposed to dying like within minutes but it's amazing to see people developing the waterfront on the Gowanus canal. Yeah it is it is wild it is wild there's a lot of development there. Bancor's not complaining yeah yeah yeah shout out to Brooklyn. All right thanks for coming on the show and we'll talk to soon.

Thanks much Jason. Take care. Cheers. Yeah, I see you. Williamsburg, we'll have some barbecue when I'm in New York. Love to. All right. All right, everybody. Well, there you have it. Our first live guest on the show. This is kind of an interesting thing that's happening here that you're all witnessing,

which is I think now if I can keep doing the show at 10 o'clock and keep getting to bed at a reasonable hour, people would just know I'm going to be on at 10, like CNBC, and I could just say, hey, come on the show and we send them a link. This could be like a really interesting turn of events here. So let's do questions, and that will wrap up with some Ask Jason. So if you have an Ask Jason question, I'm going to take three of them. This question is from Kevin Lund. He asks, for startups that are attempting to create a paradigm shift that requires a significant upfront course to produce an MVP, do you have any advice in securing significant investing?

Okay. So I would need a little more information, Kevin, if you want to give us a little background to what you're talking about. But I'll come up with a hypothetical one here. A hypothetical one is you want to create an electric car company, or a supersonic jet like Boom or Tesla or Nikola, whoever. So if you want to be able to raise a large amount of money to build something, and I'm going to say large, that the MVP is going to cost $10 million. So the MVP for Boom to build like a little micro version,

like a small non-human version of a sonic jet, let's just say it costs $10 million because they did build a small-scale one that I think was functional. I'm not sure. or to build the atom, I think that was the precursor to the aerial atom, was the precursor to the Tesla Roadster, number 16 of which is sitting right in my garage here. That one probably costs, let's call it, 500,000. So we'll put those two there. How do you get the credibility to do that?

Well, it's two different scales. 500,000. You can find a crazy angel investor who believes in you and thinks you're credible enough to build it and they gift it. And really what they're doing is they're investing in you and your ability to invest. Now, if it gets to 10 million or even 100 million to develop a drug, which you didn't bring up here, or let's say a medical device and it's going to cost 25 million, in order to fund that, what would you be looking for as an investor? You'd be looking at the team. You'd be looking at the plan and you'd probably talk to a bunch of people to say, is this even technically feasible? So you do some kind of study on that. That's what investors would do. So let's take varinosis, an example. A blood testing machine that takes a little drop of your blood. and runs 200 different tests.

When people who were going to invest in Theranos heard that pitch, they were like, wow, that's audacious, awesome, that would change everything. If you could just give a drop of blood or a little tiny microvial of blood, you remember that little picture of Elizabeth Holmes like this? If you could give a microvial of blood and get 200 tests, wow, that could change the world, right?

You could do this every month and get all that data, and then, you know, instead of doing it every two years and taking out eight vials to get 50 different tests done, this could change the world. And when they talk to people who were in the blood testing space, who were building blood testing machines and had PhDs in that, they said it's not possible.

The laws of physics do not allow you to run 200 tests on a tiny droplet of blood in like this little microvile. So that's why serious investors didn't invest in Elizabeth Holmes and Theranos. They got all these other weird investors who were not Silicon Valley investors and they invested.

So you would be doing some kind of deep diligence on that technology. and you would be looking at the team. So I would keep your expectation low if you have no background and you haven't built out your team. Now, if your team worked at Tesla on batteries and another person or a team worked at Waymo on self-driving

and another person worked on electric bicycles and you were going to build some new type of car, an ATV, let's say. You want to make the world's first electric ATV type of go-card or whatever. Well, if you had three people who worked at Tesla and, Toyota and Waymo. Okay, now you've got like a bench and you're saying like, here's my bench. So you'd be selling your ability

to group that talent together. It's not your God given right. You are not entitled to get funded by the venture community. They have a range of companies they can invest in and you are but one option. And you must beat out the other options in order to get their money. So that is how

I would look at that if I was you and just really have that candid discussion with yourself of do I deserve this money? And I'm Am I the best bet for that person? Does that make sense? I hope it does. All right. So we'll take two more questions.

Michael on YouTube says, do you think any of these crypto projects have actual users? Great question. I think this is the big issue, is that many of the crypto projects are based on speculation and based on people gaming the system and there's no actual use case. That's probably why the SEC believes most of them are securities, because there's nobody using them.

There's no utility to them. Now, when you look at NFTEs, people are. collecting them. People collect art in the real world. So NFTs feels to me like these are assets, like alternative assets like art. Art generally doesn't appreciate from like zero to $200,000 per animated gif like the board a yacht club has. So that's a little strange. And that kind of would be like if you bought a baseball card six months ago for 25 cents and it became worth $200,000, And usually that's a journey that happens over 20, 30, 40 years. And it's the, you know, the fact that there aren't many of those in production that makes them valuable and people's ability to connect them.

So I would say the answer to your question is I think most of these crypto projects have been based upon speculation and based upon manipulation and not utilization. And so that is scary. And that's why there's so much greed and so much market manipulation and why we're having this discussion about regulators coming in. I think the regulators are scared to death that this all collapses. And when I brought up earlier in the program with Matt, what would happen if there was a contagion and the Bitcoin network went down? Which is like, okay, boomer, Bitcoin can't go down. It's like Bitcoin hasn't gone down, but everything does go down at some point.

So Bitcoin will go down at some point, right? And Bitcoin will get hacked at some point. I mean, it's a miracle that it hasn't been, and it's only been edge cases where it's been hacked. But as the amount of money in Bitcoin goes up and the number of participant goes up, it becomes a bigger target. So people used to say this about the Mac and iOS. Like they just, Windows was the bigger target. All the hackers went there. And then all the elite people went to iOS and iOS is now the target. And people have figured out ways to, you know, a hack and spoof people's

iOS devices, as we saw in the recent hacks with that Israeli company that was giving people a way to exploit iOS devices. So just because it hasn't happened doesn't mean it won't happen. And just because it's unlikely doesn't mean, or it's improbable, doesn't mean it won't happen. Something that's very improbable, you know, to happen today, you know, for it to happen over the next 10,000 days, it might go from improbable to happen on this day today, one time. But at 10,000 spins of the roulette, you know, it might be very, very common, right? So you have to look at the arc of time. And I think that's what's got the SEC spooked here is that they're really scared that a lot of people are watching these returns and getting FOMO and the crypto space is pretty toxic

in certain subsections of it, like the Bitcoin toxicity movement, where they're like, hey, have fun being poor. OK, boomer, you don't get it. Well, that's kind of how they get you to join, you know, an MLM program or a cult. So that's what's happening, I believe, with regulation right now. Let's take a final question. Okay, Richard Wu asked for your launch accelerator. Is there an MRR target for consumer SaaS or just a Dow threshold?

Great question. So to translate into plain English, we have the launch accelerator. We give people $100,000 for 6% of their companies. We work with them for 16 weeks. We introduce them to 1,000 investors. And then most typically we will co-invest in the company down the road when they raise their seed round or their Series A if they're making progress. And, you know, it's not guaranteed, but it happens, I would say, four out of five times

that we wind up investing more money because we have the syndicate. which is the world's largest collection of angel investors in a single syndicate, 9,000 of them, I believe right now. So for a consumer SaaS company, we're actually, if the product is really good, we're starting to dip down to investing in companies. If there's two or three builders on the founder team, we'll even invest pre-revenue and before the products launch. So we've done that two or three times now. We will take a risk. This is new for us. but we've decided we will go a little bit earlier

if, let's say you have three founders, one's a designer, a UX person, and two our developers. If we see an actual team of coders and developers and designers, we will invest. If we see three people who are three idea people and business people, idea and business people, using air quotes here, well, they're not, they're going to have to hire a team. That's going to cost millions of dollars.

And why would we invest in that when we could invest in companies that have a little more traction. So that's basically where we sit. So it would depend, Richard, if you're a builder. If you're an actual coder and you build iOS apps and you've got a designer who works with you, and then you've got a data scientist who works with you. And the three of you want to come to the accelerator and you built an interesting prototype.

And we know you have product velocity. So we know the product's going to be improving, even if you don't raise a million dollars to give to a development shop, that's what we like to say. So a great question. Hey, everybody. Thanks for joining us. I'll talk to you soon. Bye.

day.