Unchained - The Skeptics' Episode: Preston Byrne and Angela Walch on What the Industry and Regulators Get Wrong in Crypto

Episode Date: March 13, 2018

Preston Byrne, an independent consultant and English lawyer, and Angela Walch, an associate professor at St. Mary’s University School of Law who focuses on blockchain technology, both explain their criticisms of the crypto space, give grades to regulators on their job so far, and how they think major players in the space can improve. They discuss what systemic risks they believe crypto could pose to the wider financial system, how the current activity in the space is accruing "legal debt," and what it's like being a critic in a land of believers. Preston Byrne: https://prestonbyrne.com/ Angela Walch: https://law.stmarytx.edu/academics/faculty/angela-walch/ Sponsored by Preciate: https://preciate.org/ for https://preciate.org/recognize/ and StartEngine: http://startengine.com/ for https://www.startengine.com/pages/summit   Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I'm your host, Laura Shin, an independent journalist covering all things crypto. Since you're listening to Unchained, it seems that you at least like the podcast, if not love it. If you have positive feelings whatsoever for Unchained, have you made a declaration of your love on Apple Podcasts? If not, go there and give us a top rating or review. Also, declare your love on Facebook, Twitter, Slack, Telegram, or wherever you discuss crypto. And don't forget to follow me on Twitter at Laura Shin. Unchained is sponsored by Appreciate. Founded by Ed Stevens, Precate is building the most valuable relationships on Earth. Each episode, Precite is recognizing an individual or group for their achievements in the crypto space. Give good and get good. Who in crypto will be recognized today for their achievements? Stay tuned to find out. This episode is brought to you by Start Engine. Many

influencers in the crypto world are coming together at the Start Engine ICO 2.0 summit on 20th in Santa Monica. To register and receive a 20% discount, visit startengine.com and enter the code Unchained 20. Today's episode is a specially dedicated skeptics episode of Unchained. My guest today are Preston Byrne, an independent consultant, English lawyer and fellow of the Adam Smith Institute, and Angela Walsh, an associate professor at St. Mary's University School of Law who focuses on blockchain technology and a research fellow at University College London Center for blockchain technologies. Welcome, Preston and Angela. Thanks so much, Laura. Howdy? Thanks. So before we get into your criticism of the space, how about each of you tell us a little bit about

your histories? Preston, let's start with you. What were you doing before and how did you learn about crypto and come to work in the space? And what do you do now in it? So before I was a lawyer, a lowly junior associate at a London law firm doing securitization. And at the time, I started looking into things that I thought were interesting, new technologies, you know, areas that I could distinguish my practice from that of my contemporaries. And I stumbled upon Bitcoin in 2013. And really, the penny dropped for me when a friend of mine was working at a think tank in Guatemala said, what if we took something like Bitcoin and turned it into an accounting system for developing countries, for example? So you could reduce the incidence of fraud

in a developing economy simply by controlling the endpoints very tightly. And you using this as an alternative system for value transfer. So that plus actually doge coin was when the penny really dropped because I realized you could make more than one version of these things and you could make as many as you liked. And that's how I got started back in 2013, 14. And when you say the penny dropped for you, what do you mean? Like you just got interested? Because since you are a known kind of skeptic and critic, I want to know what your feelings were. Like a lot of people who are not skeptics talk about falling down the rabbit hole and just getting obsessed. But is that also what happened to you?

So there's a difference between being skeptical about what people say about the technology and being skeptical about technology full stop. I'm certainly not skeptical about emerging technologies, cryptography, or distributed systems. I think those are all very interesting, very interesting technologies, which are going to change the way we do business. What I'm deeply skeptical about is the proposition that if, this coin or that one, we have to invest in it now and throw a lot of your money at it and millennials, you should be putting 10% of your portfolio in it. That kind of talk, I find extremely irresponsible and really not, you know, this is a database technology. It's not a penny stock. And so I'm quite optimistic that this is going to be a useful database and networking tool,

but I'm not so optimistic that it's going to be an investment proposition like investing in Google or Amazon in 1994. Okay. All right. So let's turn to Angela. What about you, what was your prior background? How did you learn about crypto and come to work in the space? And what do you do now? Sure. So like Preston, I did practice law for a while, kind of in the business transactional side. And in 2012, I moved into academia as a law professor. And my research interest at the time, and still remains that was about money. And how money works, how money can break, who should control money, all those kinds of questions around it. And those stemmed a lot from I'm, you know, my experiences during the financial crisis. I lived in London at the time,

so I was feeling very strongly, wow, differences in exchange rates and what causes that and got me very interested in how money works. And as I was working on my research, Bitcoin was being talked about as potentially a new form of money. So I felt like I needed to look at that. And And once I started my research, I became really, really interested in it. And I was interested in a lot of the statements that I was hearing about, you know, how it's this just very automatic system and the software just runs. And I couldn't get my head around that because it would seem to be that software is still coming from people and there's still people being involved in it. And that, that, that, um, inconsistent I think got me much more interested in it. And as I've watched the discussion happen about it and the great excitement forming, I've seen that there is a real need for critical thinking, clarity of thinking, critical analysis in the space. And there may well be some very interesting things happening and a lot of potential. But I don't feel like we can know that unless we,

We're critically thinking, being honest about capabilities and what's really happening. So that's the role that I see myself trying to fill in the space is asking common sense questions. So this is the perfect segue to talk about the overview of your criticisms of the space. So for both of you, if you were to take your criticisms and boil them down into one overarching theme or philosophy, what would that be? And Preston, why don't we start with you? all hat no cattle really would how I summarize it so I'll just give an example right so let's talk about the Dow which was this you know this thing that was supposed to be a decentralized venture fund that was set up by some of the original Ethereum guys and they said well it's going to be this

decentralized venture fund it's going to be great and everyone's going to be able to invest and they're going to get returns and won't it be wonderful so of course the Dow failed first because it was hacked, so that wasn't necessarily inevitable. But it did wind up failing for that reason. But if that hadn't happened, and you looked at how the thing actually worked, there was actually no means where you could take an investment, turn it into another token, and then legally get the value of the token that you'd created with your investment to capitalize back into the Dow token. So this big bottomless hole that you just threw money into, and there's no way to get anything back out. And if you had looked at that as a lawyer and you'd said, okay, well, let's structure this

correctly, you would have been able to identify that the marketing wasn't able to match up with the claims. But you have a lot of software guys coming at it from the first time and kind of saying, well, we don't need to rely on legacy institutions. We don't need to rely on legacy thinking. We're just going to reinvent the wheel. And as a consequence, they wind up creating things that don't work for the use cases that they're advertising. Wait, Preston, I actually don't know if I understood what your criticism was of the Dow. Are you saying that, like, there was no way for people to essentially like sell their Dow tokens for like US dollars? Or I, I didn't fully understand what you were saying there. So, so with the Dow, the way the transaction worked was as follows,

you gave money to the Dow smart contract, the Dow, or you gave Ether to the Dow smart contract, in exchange for which the Dow gave you Dow tokens. So let's say it was one to one, you give it one ether, it gives you one Dow token. The Dow token then gave you rights to vote on which projects the Dow would go fund. So it never wound up funding any, but let's say it did. So you could vote and say, I want to go fund, you know, ABC Corporation over here because they're going to make marmot coin. And I think that marmot coin is going to be a great investment for the world. So you give the Dow instructions, you say, go disbursed the ether that we've just given to you and go give it to this company. They will go create marmit coin, and then they will go sell marmit coins.

And I will get the return from what, you know, from the issuance of those marmot coins. At that stage, that last final piece of the transaction, no one actually thought it through, but there was no way you could get the tokens that were being issued, the marmot coins at the end of that transaction, and put them into the hands of the people who had invested in the Dow. So they were putting money in, and the money was going to create reward tokens and various other things, but there was no mechanism to go and take those tokens and whatever value was generated at that stage of the transaction and then pass it back to the Dow tokens in the form of some kind of income flow or anything else. It was just a pure speculation play. And they were saying,

well, the right to vote on which projects get the money will, of course, capitalize into the value of the tokens. But that's not how it works. That's a voting right, but it's not an economic right. So what they were doing is selling something and saying this is a voting right, and you will get, your Dow tokens will become more valuable. But there was no mechanism by which anything that we would recognize as having economic value could pass backwards up the chain to the Dow token holders. So to summarize your criticism, it's sort of like saying people get really pie in the sky, but then they don't look at the details and realize that actually none of these great-sounding ideas can actually be manifested in reality?

Yeah, well, they can be if you want to go and hire some lawyers and sign some documents and, you know, get a venture capitalist who knows how to manage money and have him run some money for you. This technology can be useful in that setting. Where it's not going to be useful is if you try to sort of short-term. cut and get around all of those things. I mean, this stuff is, this stuff is hard. There's a reason you have to go to law school for three years and practice for five until they, you know, start letting you talk to clients. And so a lot of what crypto 1.0 was doing because it had this crypto anarchist ethos about it was just to sort of throw the baby out with the bathwater and say we aren't going to follow any of the rules. And as a consequence, as I think we'll talk about in a bit, you know, people are starting to realize that that was a pretty major mistake. Well, later on, we'll come back to this idea about how you feel like what you really needed to do those kinds of things was actually a lawyer. First, let's find out from Angela.

You know, if you were to boil down your criticisms into one overarching theme or philosophy, what would that be? Okay, so Preston had a great image there. All had no cattle. I guess my image would be running forward, blindfolded, carrying scissors. In that, people are. rushing forward without any real concepts of what they're doing. They are assuming that the foundations of the technology are settled. They are acting as if, you know, we know that anything that we call blockchain is immutable, secure, reflects truth, it's trustless. Well, those are all

very much debated points amongst technologists in the space, and yet people run forward anyway. And I get very worried about that because people are talking about using the technology. for our most critical social systems, including in, you know, government settings for money itself, financial systems, all of those things. And yet, we're not critically thinking about what it would mean to move to this technology. We're not being honest about its actual capability. So that gets me very, very nervous. And so what do you worry could happen as a result of these risks that you see? Like, what do you picture are some of the worst case?

Okay, so some of the worst-case scenarios I see would be using these systems like big public blockchain systems as infrastructure, which is, you know, the way that they're discussed in many ways, building things on top of them. And if we, you know, put systems like property records or financial records or identity records or voting records on those and the tech is not nearly as resilient as we expect, then, you know, it all falls apart in a critical moment. So suddenly there's a, you know, very contentious election and no one has any idea who won it. Yet we relied on this and believed that it was going to be the savior here. Or the image that is most visceral to me and most accessible after the financial crisis is another financial crisis, right?

and building financial records, building money on top of these systems, which I think are, from my perspective, quite rickety at the bottom, particularly with governance issues. And so, you know, you come to a critical moment. The core developers and the mining community can't make a decision about, you know, which way the software should go. And, again, it all falls apart. And because we have widely integrated these cryptocurrencies into our financial system, for instance, perhaps through all these financial products based on them that we're wanting to build, then you have some sort of a systemic financial crisis. So I like thinking about, you know, worst case scenarios, basically.

And Preston, what about you? I don't disagree with any of that, to be honest with you. I think that the systemic risk is real. We're starting to see that play out with the major banks cutting off credit card access to something like Coinbase, because they don't want exposure to this stuff on their balance sheets. So, yeah, I don't really have too much to add to what Angela said on that point, because I agree with that completely. So for both of you, whose behavior would you most like to change in the space?

And by that, I mean not like any specific individual or organization, but a group of actors, whether it's like regulators or ICO teams or developers or some other group, how do you feel like they're acting that you would like to change? Several parties, I would say. Regulators and policymakers I would put on my list pretty high up. And I would put them there because they are tasked with protecting society in many ways. So it's their job to look at things critically and make sure that they're making good decisions on behalf of society. And I'm pretty concerned with what I see in that respect, in that many reports that come out from, you know, prominent policymaking groups or regulators themselves seem to me to be restating things that are inaccurate about the technology.

And that makes me worry about their understanding and then what decisions they may ultimately make. So I want regulators to be super skeptical. I want policymakers to be super skeptical. And I want them to be cognizant of who they have advising them. There are a lot of lobbying organizations, for lack of a better word, but I think it's fair, that have grown up in the space, industry-funded organizations to push the cryptocurrency space forward, to push the blockchain technology space forward. And in many cases, those are the organizations that are advising policymakers and regulators. So I want those groups, the policymakers, the powerful people, regulators, to take what they're hanging with a grain of salt and seek out diverse opinions on this and don't just take the pie in the sky version at face value. That's one group, I would say.

And so obviously, I'm the one who said not to name names, but I couldn't help it immediately think, of course, of Coin Center and the Chamber of Digital Commerce. is that who you're thinking of? Because as far as I know, definitely Coin Center is certainly industry funded. I'm not sure about the Chamber of Digital Commerce. I'm not sure who else would be funding them, to be honest. I mean, they're a Chamber of Commerce, right? So the business is in the industry. But I have to go back and double check their website. But the people who are on their board are primarily, you know, industry players. And that's fine. I'm not saying that there's anything wrong with the industry advocating for itself and seeking to explain what it sees as, good about the technology to policymakers, two regulators. That's absolutely fair. What I am saying is

that regulators need to be aware of potential conflicts embedded in that and seek diverse perspectives and not only a single perspective. And what about you, Preston? If there's any group or organization whose behavior you would like to change in the space, who would that be? I don't think you really can't change anybody's behavior in the space. You can only really align incentives in a certain way. And at the moment, the incentives are lined up, or at least for the recent past last couple of years, the incentives have been lined up in favor of, frankly, flagrant criminality. So where we are now is we've seen recent comments from the SEC, from the CFTC, from the Treasury, basically telling us that ICO promoters in particular, people who are selling

coins to the public as an investment product are, you know, surprise, surprise, bound by regulation. Yet the activity still continues, and to this day, despite the fact that all of those announcements have come out. And I think the reason is because the market hasn't understood priced in or quite wrapped its head around the idea of how serious the situation is for them. And they just don't know what there are any consequences to their actions. So in software, they have a concept called technical debt, which is when you kind of leave features that you need to fix or code that's a little slightly garbage. You leave it in because you don't have time to fix it. And so you then call that technical debt. It's something you need to go address later because you haven't fixed it today.

We might think of what's going on now as kind of legal technical debt in the sense that we have companies that have said, you know, and think about it. Let's say you're a small startup and one of your competitors, ICOs, and raises $30 million overnight in Bitcoin. And you're sitting there going to VCs and having to go through, you know, three to six month diligence procedures and investment committees. and it's hard to raise, and at the end of the day, you're only getting $800,000 to $2 million for a seed-stage product. You know, you look at that and you say, well, I can't win if I'm up against a company that's raising $30 million, not at least today.

So all of a sudden, you know, just because one company does it, then three others say, well, there's a really compelling reason for us to go do it as well. So I think for, you know, backing up Angela's point, the only thing that can stop this is regulatory intervention. In the U.S., I think they're fairly skeptical, although there are some regulators which are rooting a little fairly last for the people they're supposed to be regulating, which is disconcerting in the EU from where I hail. The European Parliament, I think, has been profoundly, poorly advised by their advisors. And some of the policy documents they put out look like they've been written by particular companies to say nothing of particular lobbying organizations that represent an entire industry. So I think that's a huge problem. And it's just going to take time for the regulators

to get up to speed. And they need to understand the incentives now, everyone that they're talking to has a financial incentive to make them get on board with their vision. Nobody or virtually no one out there has any financial incentive to tell people to hold their horses and slow up a bit. So there are very few of us as a consequence who are doing so. Yes, that's a good point. I'm very poor person in the space. I just like to say it's hard to be a critic here because there are many incentives, right? I could do a lot better by advising ICOs and there are plenty of other places that I could be making money, but I'm, you know, the scrubbing, whatever, academic here, just criticizing everybody. Yes, but then you would pay on your reputation, which is a much

bigger, yeah. So, so I think you've chosen the right path. But actually, I wanted to, you know, both of you have kind of talked about regulators, but I want to get kind of like your overall bead on how the regulators have been doing. Like, if you were to kind of give them a grade, what grade would you give them? In my home jurisdiction of the United Kingdom, they get an F. They get an F minus. They haven't even, they haven't even shown up and taken the exam. We have denied them the permission to reset. I mean, they really have done nothing, despite the fact that there's a lot of really sketchy activity happening within their borders. I think part of that's down to Brexit, and they don't want to be seen to be scaring people away. Finma over in Switzerland, I give a D,

because they finally came out with some regulations, but they have, you know, they have numerous projects going on within their borders, which are amenable to regulation and they haven't regulated. And the U.S. so far gets a C-minus. So, you know, they get to advance the second grade because they, you know, at least at least they're doing something and we can see what's coming. And to be fair, it does take a lot of time to put this stuff together. Even when you had the flagrant penny stock frauds of the 1980s, the DOJ didn't get involved for 10 years. So, because you have to go build cases. The SEC didn't get involved for several years. So it takes time to do this. It's reassuring to see the American regulators moving, but in Europe,

everybody's asleep at the wheel. Yeah. So just focusing on what we're seeing with the regulators in the U.S., like the SEC and the CFTC, I'm encouraged that they are going after things like blatant fraud. And I was encouraged after the Senate Banking Committee hearing by the things that, you know, the head of the SEC was saying. But I do think it's really important. for them not to think that going after these blatant frauds is their only job here. They're making important decisions about how cryptocurrencies in particular will be integrated or not into the financial system. And so it's not as simple as enforcement actions.

It's what kind of products are okay. Are we thinking about systemic risks, not just risk to individual consumers? And again, I mean, I would reiterate what I was saying about regulators really need to be careful about who all they are getting advice from. And these meetings, like I think the CFTC has a technology advisory committee or something that they just recently met and I believe created new working groups for DLT and cryptocurrencies. Critics should be on those. critics should absolutely be part of the conversation. You don't just want people who are supporters. I mean, to me, that's one of the things that is a lesson, I guess, from our behaviors that led us into the financial crisis in that supporters of mortgage-backed securities,

subprime mortgages, these very complex derivative structures, there was a lot of cheerleading that led us into widely adopting these practices. And I'm really concerned about all the cheerleading happening here. And so both of you have mentioned the systemic risk that you think crypto poses to our financial system. How do you see that playing out? Preston, you wrote about one scenario, didn't you? Yeah, I did. Yeah, so it depends on how big they let, they let,

they let everything get, right? So Bitcoin right now, its market cap on very, very thin trading is sort of a one large cap company. And depending on how you look at it, it could or could not be a systemic risk. It depends on who's exposed to it and how much they're exposed to. So if we want to say, let's say, $200 billion, we'll take a round number like that. And we ask ourselves, is it $200 billion, you know, $200 billion of notional value somewhere? Does it represent a systemic risk? That depends on what people have done in relation to it? Have they, you know, have they lent it? Have they, you know, given it a security for obligations? Are they spending it and investing it in a particular type of asset, for example, startups or something else so that, so that the price of that particular commodity is

getting out of whack? So there are a whole bunch of different questions you can ask. You know, what happens to the retail consumers? So let's say we allow the bubble to continue unabated. And you have every American man, woman, and child, or, you know, 25 percent of the population is in, you know, in the market for 10 to 15 grand. I think Bitcoin fans would love that, but what happens if suddenly, you know, the system gets wiped out under those circumstances? There, I think you would have a very big problem because you would just see a lot of notional wealth wiped out overnight, and that would have broader consequences for the economy. And also people are spending, they're going to debt to go purchase Bitcoin and get exposure to this market, which is, of course, your classic,

you know, classic source of systemic risk is debt. So there are a range of areas where, it could come from. And I think the way that you really ensure that it doesn't spread is you take very proactive measures to ensure that banks keep this stuff off of their balance sheets because it really doesn't belong there at the moment. We've heard complaints to and by the CFTC about the nature of Bitcoin and cryptocurrency markets. They are very clearly to any observer that there's a huge amount of market manipulation, which occurs, some of the price movements and some of the alt coins where they go up 300% in a week that's very clearly not organic and it's driven from someone somewhere and that's illegal. So the question is how much exposure

do we want the mainstream financial system to have to an asset which is so easy to manipulate and thereby is so dangerous. With AmX Platinum, $400 in annual credits for travel and dining means you not only satisfy your travel bug, but your taste buds too. That's the powerful backing of Amex. Conditions apply. Yeah, so I would add to that, right? It's the complexity of our financial system that makes it difficult to say explicitly like how it would actually go.

But the more bridges you build, essentially, between the crypto economy and the mainstream financial system, the more it becomes integrated into banks' balance sheets with this trend of, you know, oh, it's a crypto asset now, so I'm going to make money off of this. And, you know, the opportunity to make big bucks off of cryptocurrencies, I think, is blinding the financial system a bit to the big risks that are here. So I could see things rapidly rushing forward. I mean, I think the Bitcoin futures were a – that was kind of a tipping point, I would say. And while the SEC is currently holding the line against these ETFs, I think wisely, I don't know when that dam is going to break.

And then once that does, I think you've crossed the line between could be becoming a systemic risk to probably is a systemic risk, right? So there's a question about when something becomes a systemic risk and when you should act in relation to it, right? If you see something potentially becoming a systemic risk, if you take certain actions to get there, do you choose now not to take those actions? Or you just, you know, la, la, la, keep strolling down the path until you're there and it's too late. And I'd rather we anticipate those than reach them and then are, you know, shocked. Well, we'll be discussing more specific criticisms of blockchain technology and the regulation around them plus ICOs and the staff. But first, I'd like to take a quick break to tell you about our fabulous sponsors. Preciate and start engine. Now, a word from our sponsor, Preciate. Founded by Ed Stevens, Preciate is building the most valuable relationships on Earth. Each episode, Preciate recognizes an individual or group for their achievements in the

crypto space. This week, we are recognizing the efforts of Ryan Selkis, Miko Matsumura, and Michael Gollum. Their work on the ICO Governance Foundation has proven to be timely and important. Ryan, Miko, and Michael are visionaries who knew the ICO market needed better disclosure and transparency, and they are doing something about it. We appreciate it. Listeners, if you know someone in crypto who should be recognized on a future episode of Unchained, take action and go to appreciate.org slash recognize. That's appreciate.org slash recognize.

The growing crypto ecosystem is being challenged by uncertainties and regulations, and Start Engine is here to help. The SEC, CFTC, and state administrators have been issuing subpoenas by the dozens. How is this going to affect ICOs and exchanges? This is why Start Engine is launching its second edition of the ICO-2.0 summit, co-sponsored by T0, on April 20th in Santa Monica. This year's theme is the path to liquidity. Many influencers in the crypto world will be coming together to discuss how to move forward with regulated ICOs and regulated exchanges.

Come and hear crypto innovators such as Brock Pierce, investor in over 30 blockchain companies, Patrick Byron, T0 CEO, which is the next generation crypto alternative trading system, and many more leaders. To register now and receive a 20% discount, visit startengin.com and enter the code Unchained 20. I'm speaking with Preston Byrne, an independent consultant and English lawyer and Angela Walsh, an associate professor at St. Mary's University School of Law who focuses on blockchain technology. One question I had for you, and this kind of goes back to something that Preston said earlier, is I was wondering if you're both skeptics because you're lawyers, meaning, like, are you skeptical because blockchain technology can remove middlemen and some people are saying that it can serve as a sort of law? Right. Is this our conflict of interest? We want to keep our jobs. So I do think it's interesting that there are some lawyers in the space who have been the most vocal with their critiques. It's not just lawyers, though. There are other people, technologists, people who are in fintech. I'm thinking of people like Dave Birch, Steve Wilson, Isabella Kaminska, those those, those, those, types are also skeptics and critics. But I don't think it's a coincidence that some of us are

lawyers because law teaches you to be a critical thinker and to be absolutely skeptical of what your clients are telling you and to make them go through the nitty gritty of thinking through all the practicalities and what do you actually mean? How would you actually structure this metric? Are you kidding me? So lawyers jobs are to think about the what ifs. So it's not necessarily surprising me that we both come from a legal background. And Preston, I wanted to ask you about something that you've written about and spoken about elsewhere, which is you've called Bitcoin not a Ponzi scheme, but a Nakamoto scheme. What do you, how do you describe that?

So when you, again, applying the legal training, when you look at something like Bitcoin, you ask yourself, well, what is the thing and what are people actually buying? Is there a right to something? You know, chances are probably not. It's basically just a right relative to the person who previously held the coin, just by way of example. Is it a right to an income flow? Is it a security? No. Well, it's just kind of an internet fund buck, which you can't really use for anything except trading for other internet fund bucks.

So when you look at it from that perspective, there are other schemes in history, which have functioned in the same way. Generally speaking, we call those pyramid schemes or Ponzi schemes, where the right to participate in the scheme is the thing which is being. sold or the ability to have some return from marketing, you know, getting others into the scheme is the thing that's being sold. The difference between what Bitcoin does and how it works, it could very well be a system prepared of your cash. And I think if we were talking about it in 2009, when people were buying pizzas with it, then that was, you know, a use case, then maybe we could have justified that characterization. But what we're seeing now, we ask ourselves what it is doing in form and substance. It's something where people are investing it. They're not spending it.

merchants aren't accepting it. It's not serving any useful, you know, it's not really gotten a huge amount of adoption for anything except speculation. And so when you ask yourself legally what that looks like, it looks like one of those pyramid or Ponzi schemes. The only difference is that nobody's guilty and everybody's guilty. There's no, the thing runs itself. It's completely automatic. It relies on the interests of all of its users in order to continue in operation and succeeding. So we have to ask ourselves whether, you know, because there's nothing underlying it, yeah, sure, maybe there's nothing that makes it illegal today. But, you know, is there a legally culpable conduct around marketing it or promoting it? And certainly then when we look to the ICOs and the other schemes, which are very nakedly investment schemes that are promoted by particular actors, how should we regulate those? So even though they're ostensibly fully automatic, I think the view from the regulator's point of view is that they should be regulated as investments because that's how they function. That's the function they perform in society. But so a large part of that criticism relied on the fact that.

that Bitcoin isn't widely used yet as payments. But if it were, then does that criticism hold up? I think if Bitcoin were being issued by a single company, so with, you know, let's call it Bitcoin, right? It had a CEO, you know, the infamous, you know, mythological CEO of Bitcoin. And they were selling Bitcoins to people and they said, you know, maybe other people will buy the bitcoins and they'll go up in value and they'll go down in value. And it was the exact same technology. The only difference was that it was run by a company, you know, based in an office in New Jersey somewhere, if that were how Bitcoin worked, it would almost questionably be illegal, you know, in the UK, and it would very likely, you know, in my, in my non, you know, I'm not a U.S. lawyer,

obviously, but from what I understand of U.S. law, it would be very likely that it would be illegal in the United States as well, unless you went through registration requirements and registered as a security, et cetera, et cetera, et cetera. So, so the point is that Bitcoin, does something which should be illegal, but it does it in a way where there's nobody who's culpable for the activity because the thing runs itself. And that's something the law hasn't really seen before. And it's just a way of looking at it and saying, well, if we were to take a really extreme pessimist view of how this stuff works, what would we say the thing is? And it would be lazy to say it's a pyramid scheme or a Ponzi scheme because it is neither of those things,

because there's no person managing cash flows which gives rise to legal liability in the hands of that person. The person has been removed. It's then, you know, automated that person's functions. And, you know, it raises some interesting questions from how we think the technology will be used in the long term by automating roles of, say, transactional counterparties. But what it's done is it's automated away that middleman. And it's said you can send money back and forth to each other, and we've built this whole ecosystem around it for people to invest. But the important thing is that the middleman has disappeared. But what if we were talking about Yapstones instead? Like, do you know what I'm saying, to my mind, there's a way in which you're describing this where it almost seems like

you're saying, oh, because it's not a government issued money, that's why it's illegal. But what if it were something that society decided as money? What if it were like seashells or or yabstones? Like I mentioned, is that still something that you would view as a Nakamoto scheme? We use things as substitutes for money all the time. Securities in particular are frequently used, AAA rated securities are effectively as good as money, their IOUs, which people trade it very close to par. Treasuries are also just as good as money. They're quite similarly used as a safe storage for money that you can trade, and they won't have their value go anywhere.

But we have to look at it in context. If Bitcoin were money, and we said, well, it's just going to be used one for one, and people are using it for goods and services, and it emerged to fill that role for some reason. Then, yeah, I don't think there's any reason why we couldn't say, well, this is the new money. And, you know, for some reason, it's vastly superior. to what came before for reasons A, B, C, D.E.

I don't think that's going to happen because Bitcoin doesn't scale very well to start. And secondly, if we look at the context in which Bitcoin operates, we already have money in every society in which people live. There's a slightly deflationary money supply that devalues over time. And so we have to ask, and what people are doing is they're saying, well, we're creating these coins, and why are we creating the coins so we can get a hold of other people's money? So it's not like it's, so if we're being really honest with ourselves, this is not a new money that we're dealing with.

It's a new way to obtain money from other people who think that buying the thing with their money is going to result in their making money. So people say, well, yeah, could be used as an alternative to money, but the fact is it's not how it's being used, is being used as an investment. And Angela, I wanted to ask you about a criticism that you've written about. you've said that blockchain developers are fiduciaries and that core developers and miners are actually in control of blockchains. And so it's a romantic idea that these blockchains are decentralized and that we don't have to trust anyone. Why do you say those things? And do you think it is possible for any blockchain to be truly decentralized? Yeah.

So one of the first things I said today, you know, kind of how I came into the space was noticing what seemed to me to be a real. inconsistency, right, that these systems were just, they're decentralized, so there's not really any humans doing anything. And Preston was talking about that a little bit in his, in his discussion just now, that we've managed to automate a lot of these things. And once I started, you know, following all the different message boards and trying to get a sense of what was happening within, like, the Bitcoin ecosystem. particularly. You start noticing that there are people who have large followings, developers who have large followings, who seem to be very influential in what they say, how people take what they say.

They make decisions. And it struck me that, wow, we actually have governance still happening here, we're just not acting as if we do. We're acting as if this, the decentralization or the nominal decentralization of the nodes in the network has meant that we've suddenly somehow escaped governance. And I see there as being probably a few ways that governance happens in Bitcoin, for example. One of, one of the ways that governance happens is through the software development process. And, you know, with open source software, at least this grassroots, what I call grassroots open source software development, you know, everyone essentially has the ability to

make changes to the code, at least propose changes to the code. But a small group of people actually helps to make the decisions about what actually ends up in the code and actually has commit access, meaning the ability to actually make change. changes to the code, and that's the core developers. And we've seen power struggles in Bitcoin. You know, some core developers have fallen from power, like Gavin and Dresen after the whole Craig Wright fiasco and just like these vicious kind of turf wars, right? And to me, that demonstrates that people are fighting for power. And we, people who are participating in the system, whether it's by buying Bitcoin or building businesses on top of Bitcoin, are putting a

great deal of trust in the competence of the core developers to actually think and understand the technology well enough to make good decisions about what should be in the code. And we're also putting a great deal of trust in the fact that they are not conflicted in a particular way, right? And this relates to how they're paid. There's been a lot in Bitcoin, particularly, there's been a lot of flux about how the core developers should be and are paid. Should they be paid by companies within the ecosystem, in which case, are they going to make decisions for the good of the company who pays their salary or for the good of the public system? Should they just be paid by making investments in the particular coin and have to support themselves off of that? So there's a lot of questions here. And so for the core developers, I definitely see them as a power center.

I see big miners, a different type of governance happening in the transaction processing network. And that manifests through the choice about which version of software to run. And we've seen like the two different power centers have meetings, the core developers, and the big, you know, mining pools get together and have meaning. about what should be the direction of the network. So, and, you know, related to this is all the research has come out about how concentrated mining actually is in the Bitcoin ecosystem and in others in Ethereum as well. So I think we are by pretending that things are, you know, fully decentralized and no one has power,

we are committing the error of failing to acknowledge power, which means the power that is there is unchecked and undefined. And what do you think of these blockchains that propose on-chain governance? For instance, TASOS will, you know, for any particular proposal that makes it pass a certain level of support, they will pose that as a vote to all the token holders. And then any change that, again, makes it past a certain threshold in the votes will be automatically incorporated in. into the blockchain, and therefore it isn't really these, you know, I guess what you could say is like whoever's proposing is going to be limited to developers. But of course, they have no control over whether or not their changes get adopted. And then in terms of like who is paying

the developers, I know systems like Tesos propose that any changes that do get adopted, that those developers who propose them will then receive a certain amount of new tokens that have been minted for the blockchain, which will inflate the supply. But if people vote for that change, then it means that they believe that the change will likely result in an increase in the value of their tokens that makes it worth it to inflate the supply by that small amount. So what do you, for both of you, Preston and Angela, what do you think of on-chain governance? Do you feel like that answers these criticisms about some of these blockchains not truly being decentralized? I think it's pretty dumb, to be honest with you.

I mean, I come up with these one-word answers. That's dumb. I guess when you're a critic for a long time, right, you've seen this, I've seen this happen before, right? We've seen this story. And what the story is, is, let's, again, go back to the Dow. The Dow had a quorum of 10% or no, 20% of the, token holders. And of that 20%, you needed to bear majorities, so you needed 50% plus one. And they couldn't ever get a quorum of users to actually go and vote on which proposals they were going to

advance. And so with, so it's really hard to get your users sufficiently invested to vote at all. We know that from the experience of the Dow first. Second, the users, in most cases, will not be as competent as a consensus among developers to decide which way these protocols are going to go. If we're talking about, let's say, you know, the adoption of this or that proof of stake protocol for any particular blockchain, you know, there are maybe 15 people, 20 people alive who are competent to make those kinds of decisions and have intelligent comments about whether these systems work or not. So when you then say, well, no, we're going to turn it over to the users and they're going to decide whether we go with Casper or whether we go with Scooby-Doo,

or whether we go with this other protocol, you know, we just came up to the stupid name for. You're really, you're really saying, it doesn't make a whole lot of sense. It's, these are, these users have an economic interest in the protocol when they're, when they're buying their tokens. That doesn't necessarily mean you should start listening to them to make development decisions. But you should, you know, you should. Should is a strong word. But, but, yeah, I don't really think users have much business in telling developers what to do.

The developers have their own incentives for, for making sure. that their feature sets match user demand. But I think it's one of those things, again, like in law, you know, the client chooses the objectives, the lawyer chooses the means. The users, their objectives are simple, have a system that works. The developers then choose the means by which they can accomplish that. And so when you're saying, well, we're going to automatically push code onto the blockchain,

it strikes me that that's, and the users also have a choice. They can vote very easily by choosing to either run the client they were running before or if it's hard fork, they can go migrate over to the new client or they can do what Bitcoin Cash, or not Bitcoin Cash, excuse me, Ethereum Classic did. And they can say, we're not running the new client. We're running the old client because we don't like changes you made. So I don't really see why you need to put that on a blockchain because it's just, it's really a human thing. And if the change is approved and it's good and it works, your users will use it. Angela, do you have an opinion on that?

As far as like this current experiments with on-chain governance. I'm still thinking through that. What I would say is that I think it's a step forward to acknowledge that governance is actually occurring and necessary in these systems. So I do think that is kind of an evolution from the initial Bitcoin type system. I'm not sure whether they're, you know, there's still experiments, I would say. And I think Preston makes a good point about whether any generic user, actually has the knowledge to cast a responsible vote one way or the other about how the system should work. I know that I certainly wouldn't be able to. I'd be essentially, again, going based

on recommendations from developers who are trusted parties in these systems. And I mean, I think that my argument about developers functioning as fiduciaries in these systems is probably true, even in the on-chain governance setting because they would be essentially giving recommendations and crafting the code that actually has to work. So they're still exercising power and being influential and people are relying on their judgment and lack of conflicts, I think even in those settings. So Preston, I wanted to ask you about your contention that private blockchains will be more consequential than public ones. I wouldn't ask you about this because, and this is, I know, a common refrain, but I do think it's true. History shows that open beats closed, whether you're talking

about the internet or nation states. So why do you believe it will be different this time? I mean, I think when people say private blockchains or permission blockchains are closed, they're deliberately adopting, they're sort of mischaracterizing how the software is used, how it's going to be used, and how it actually functions. So when I say open, and I talk about blockchains being an open technology, blockchains are open source database types, right? And databases have conquered the world in the last 30, 35 years, but they have done so not in the sense that we take all of our data and expose it

so that everybody can see it. Some things we share and expose to the world, you know, over websites, and other things we don't, and we store them, you know, on servers somewhere. So blockchains, if we look at them as kind of an as a combination between a database and some network infrastructure, in that it's designed to hold some data and some rules about how a transaction or some other procedure is supposed to

be executed, and it's supposed to be run between a bunch of different parties. There is scope for things which are more open, where, for example, Facebook is designed to be pretty much open. Twitter is also designed to be very, very open. But if you talk to confluence, that is designed to be closed. Each of those applications, uses databases at some point, but that doesn't necessarily mean that every single use of it,

you know, by every single user, has to be open to the public. You know, you use different data structures or different permissions for different types of applications. So with blockchains, it will be no different. We will have, I think, many, many millions of them, but it depends on, let's say you want to do bonds, right? You want to go automate bonds. Do you want to show, do you want to put all the bonds in the world on one blockchain where everybody can see what everybody else is doing? No, why? Because, there are some transactions that people don't have any business knowing what's going on with a particular transaction. There are others where it's going to be more public. So let's say, for example, we're looking at repos with a central bank. That might be

something which is a little more public. So you might want more transparency there. But then, again, there will be private placements where you could benefit quite substantially from having an automated solution between the various bondholders and transaction parties, but where you wouldn't want Joe blogs on the street to even know that the thing existed because, because, you know, that you don't want to publicly offer market securities, right? So there are a whole range of different applications that you can use this for. Each one of them is going to have a different set of assumptions attached with it. And the default option is not going to always be everything public all the time, particularly for enterprise applications, particularly after the EU GDPR comes

into force. So, so, so that, that's, I think, the long and short answer. It just doesn't, this completely totally open model doesn't reflect commercial reality. Yeah, and then GDPR, that's the right to be forgotten, where you can have your data removed. Is that what that is? So they have a right to erasure in it. So that, that's a right to have your data removed. But also, you have to preserve and protect user, you know, personally identifiable information and user information, which is within your possession as a data controller. So, for example, it's not going to be sufficient just to drop a hash in of your personal information and say, well, no, we've got the hash, and it's a one-way function. You're not going to be able to reverse engineer it. It's shot 256.

It's fine. The EU appears to be taking a very dim view of that and saying, look, if the data is exposed and if it's conceivable or possible that it could be decrypted, however unlikely, then we have to assume that it is an unacceptable exposure of personal data, which you meant to keep private as a data controller. So those issues are going to be pretty significant in the EU understanding how we obscure user data that eventually finds its way onto the blockchain or a blockchain as a proof of some kind. Yeah, that's an interesting point that you make. I mean, certainly there are needs for privacy in the kinds of spaces that blockchains are working in, like, obviously in finance. But at the same time, there obviously are technological solutions to those

issues, which is why we see things like JPMorgan Chase getting interested in things like ZK Snarks. So we'll see how that plays out. I mean, definitely there will be a place, I think, for closed systems, as we have seen even with the internet. Obviously, it's not like internets just went away, but who knows, over time, my personal opinion is that the open systems will likely become much bigger than any of the closed ones. But let's actually revert back to what we started talking about in the beginning, which was the regulatory issues. So obviously we do have this news that the SEC recently, or not even so recently, but in recent months issued subpoenas to at least 80 ICO issuers. What do you think of the SEC's action so far? And where do you think they're going

with this and how do you think the regulatory actions they're taking will shake out ultimately? So I am not super active on the securities side of this. So Preston, if you wanted to take that one, feel free. Yeah, sure. So I think, I mean, subject to the proviso, again, I'm not a U.S. qualified lawyer, but I do talk to them all the time in the space. What's happening now has been long overdue whenever I speak to a practitioner, you know, reasonably eminent global law firms, What I've heard for the last six, seven months is everybody kind of sitting there dumbfounded saying when is this going to happen? Because these kind of concerns about registering securities or rather not marketing unregistered securities to the public, those are paramount in securities practice. In England, you know, not selling securities into the United States was a very important consideration for anybody selling securities in the United Kingdom because you do not want to annoy the SEC or, you know, the U.S. federal government.

So I think as Stephen Paley from Anderson Kill put it this way, he said none of this is a surprise. And I agree with him in that respect. It's just that the market is really full of a lot of neophytes to the world of securities regulation and public markets. And so as a consequence, they just weren't aware or they weren't taking advice or I don't know what. So what I think is it's the beginning of a really long enforcement journey. There's the sending out of subpoenas about a week ago from the data of. recording this podcast. When the SEC set those out, that's a fact-finding exercise. That's not enforcement action. And so the enforcement action will come in the form of settlements in some cases,

in other cases, you know, maybe these companies will stand and fight. I don't think a lot of them really are going to have a guts to do that because it's fairly clear cut in a lot of cases, I think, what they were doing. So it's the beginning of a long journey. We're going to see a lot of lawsuits. We're going to see a lot of enforcement actions. Eventually, at some point, we're going to see the Department of Justice get involved. And eventually at some point, we're going to see the Europeans do some regulatory activity. But as far as the U.S. is concerned, I think, you know, the train has left the station. And everyone's just kind of bracing and waiting to see what happens next.

And do you think that there's any particular type of ICO that would be legal beyond just registering them all as securities? I mean, I think that's out of my wheelhouse saying what is and is not legal in the United States. What I would say is that there are projects which are proceeding on the assumption that whatever you're offering on a blockchain, if it's being sold to the public as an investment, it's going to be regulated as a security. So in particular, you have Templum based in New York City that's run by Chris Pilata, so Raptor Group, and that's an interesting project, and they are looking to do compliant ICOs of a sort. Or we might even call it, you know, automated security. issuance rather than ICOs. Similarly, a recently announced project by David Sacks of

PayPal fame called Harbor. That also is another project which is proceeding on the basis that ICO coins, wherever we may find them, are likely to behave as securities and therefore should be regulated like securities. And I think that's really interesting because then you're saying we recognize that we have this new form of title transfer instrument or title transfer technology, which is extremely efficient and gives us a really, really perfect record of title. So if you wanted to go and see whether a security was encumbered, it would be really trivial to put all of that information about that security and have a blockchain manage all of that data and all of those parties saying,

well, here's an instrument. You know, it's blocked. You know, the account is blocked because we pledged it to this guy. And so he's taking control by asserting his security interest over it by sending this transaction to that smart contract, right? That's all doable on a blockchain. and it's doable in a really automatic and transparent way, as opposed to sending letters and making phone calls. So you could probably automate a lot of manual labor way doing it. So these companies

recognize that. And I think if you nail that, you then look at what the ICO space has done to date. I think what it shows us is that there's a huge amount of demand for non-traditional or higher-risk because people aren't earning any money from leaving it in the banks. And so they say, well, how can we allocate some of our portfolio to something that's higher risk? So if you can combine the desire for high-risk investment with an actually legally compliance issuance and trading platform that is more effective and efficient than the current solutions for that, I think you have something very potent, which could actually be much bigger in terms of the amounts involved than what we have seen in this boom. So by an order of magnitude.

I mean, what it does, though, I think moving towards those compliant ICOs, as Preston is describing, you know, that is very inconsistent, though, with the whole messaging that there's been around the, you know, the democratization of investment opportunities and stuff. Like, essentially, you're still in the same world of who can access, access these investments. And so I guess I would put that on the list of things that may not be, may have been overstatements about the revolutionary potential of the technology, right? Yeah. It's making it more efficient, perhaps, but not necessarily transforming the world about who gets to invest.

Right, which is something. I was actually on a podcast myself recently and found myself arguing in one direction and then being like, and I could argue it the other way. And then pivoting and saying, yeah, they should be treated like security. So I can see it both ways. Last question for you guys. What is it like being a critic in a land of believers? Lonely. It's sometimes tough to keep going, I guess, but I feel like it's important that some people come out and do it.

If nobody's doing it, I just, I worry about where we'll end up. So I do feel actually pressure, and I've got probably about 100 papers that I feel like I should be writing, you know, immediately to try. to balance out the discussion that I see going on in the space and it's just impossible to do it fast enough. But I would say that there are plenty of critical thinkers out there who are not necessarily known as critics. I think there are a lot of the very well-educated technologists in the space who, I mean, they follow me on Twitter for some reason. And some of them have said they follow me because I offer a, you know, a, you know, a, counter perspective to the hype. And I think that there's a lot that, you know, you were asking earlier about the, whose behavior I would change in the space. And in addition to, you know, asking regulators

and policymakers to step up and be very critical thinkers, I would ask thought leaders really to do the same because I think there's a lot of damage done potentially by non-critical thought leaders proselytizing about the technology all over the place and giving an unbalanced view of it. So that's what I would say. Preston, what about you? I kind of like being alone. My favorite animal, as some of your listeners may know, is a marmot. And of marmots, my particular favorite is Marmota Monax, the solitary critter.

a groundhog that lives on the American East Coast. And they just wander around, hang up by themselves, eat plants. I mean, that's, those are some of their favorite pastimes. And that's kind of, that's kind of how I like to live my life. I think it's, it's interesting being, no, I'm, I'm, I break from the Mars in that regard. But where, where was I? Before I went off on that, yeah, it's, it's a lonely world being a critic, but I think it is slightly selfish because you know, you look at the historical patterns of how financial manias emerge and you look at the behavior of everybody. And particularly, you look at the marketing, which is selling this stuff. And then you line it up against the capabilities of the technology. And you see that there's such a huge gulf between the

enthusiasm and what that enthusiasm will eventually deliver, that you know it's inevitable. At some point the party is going to end when people are realizing that the technology has been oversold and they will ratchet back their expectations. And so I'm kind of waiting for that day to come. And, you know, I think it'll come from two things. Firstly, you know, the technology being oversold. Eventually, people are going to realize that they have been, in many cases, sold a bill of goods. And also the regulators are going to prevent a lot of this marketing from taking place because they're going to come down and say, look, guys, you're not supposed to do this. You're not allowed to do this. If you're going to be selling investments, you need to have a prospectus, you need to have a,

you need to have some auditors, you need to have some lawyers, go through it. And all of those rules will be restored and, you know, the rule of law will be restored and everything will go back to normal. But we will have all of this really interesting infrastructure to do the compliant things with when that's all done. So being lonely, you know, in the space, I, you know, I've made some very good friends among the critics, people I really like and respect. So, you know, there aren't many of us, and I think we all know each other. So that's been a real positive. And then, of course, when it all falls apart, we have the satisfaction of not maybe getting rich, but certainly of being right.

You know, the moral, the moral. That's right. As the world falls apart around us. I was right. Yeah. Right. So you can smile smugly. As the castle is burning and the barbarians are at the gate, you're just sitting there going, I told you guys, you really should have listened to. to me sitting there smoking a cigarette and drinking a scotch while everything goes down around you petting your marmot. Yeah, it would marmot on your lap.

So it's blood-ed-out style. Yeah, that's pretty much it. All right. We're living for that day. Okay, well, I'll have you both back on at that time and we'll bring a marmot mascot as well onto the episode. All right, well, it's been great having you both as guests. Where can people get in touch with you or see your work?

So I'm on Twitter. I'm Angela underscore Walsh, W-A-L-C-H, and I also have a website that catalogs my work at Angelawalsh.com. Yeah, and I'm Preston-J-B-B-R-N-E, and you can also find me at PrestonB-R-N-E. Great. Well, thank you both so much for coming on the show. Thanks, Laura. It's a lot fun. Thanks so much for joining us today. To learn more about Preston and Angela, check out the notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven't already, rate, review, and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn.

Unchained is produced by me, Laura Shin, with help from Elaine Selby and Fractal Recording. Thanks for listening.