Ari Paul on Cryptocurrency Use Cases, Institutional Investors and Tether



everybody what is going on it is crypto Bobby hope you are having a great day wherever you are washed in from and welcome to another episode here of crypto happy hour I am very excited here to announce I have a special guest on the line with me is Ari Paul how's it going today Ari doing well thank you for having me I appreciate you taking the time to to join and for anybody who might not know your background personally as it comes to just general professionally and then how you got in a crypto a quick overview there I think would be very helpful sure I'll keep it really brief so I was a trader at Susquehanna national group acting as a options market maker and portfolio manager for things like commodities FX and then I was at university cago endowment for four years as an asset allocator so kind of longer-term investing so I think in my background is kind of two opposite ends of the invest expectrum very short term trading and very long term asset allocation risk management that sort of thing I got into the space I I'm not an OG I was first started buying early 2014 and it really took me a couple of years to really wrap my head around it be totally convinced and you know go all-in mentally financially and then ultimately kind of leaving you Chicago to launch blocks our awesome and appreciate the the introduction there and I've heard a couple you've kind of made it a few different rounds on some on some different TV shows and things like that and one of the I think more with the interesting things that that at least in my mind that you've said previously which is your explanation of the prominent use cases behind cryptocurrency and I would love for you to provide just an initial overview as far as what you feel like are the most prominent use cases for cryptocurrency sure so we're in this interesting space I think if your listeners are not familiar with the Gartner hype cycle it's worth googling Gartner hype cycle and selling up the chart and and looking at it so the idea that Gartner hype cycle is that most new technologies there's this kind of very common phase so first people learn about it they get really really excited and you see this explosive interest and height that often is trying it adds asset prices so that might be like the kind of hype of 90 98 the internet boomer maybe where we are with blockchain and the idea is that at some point people are disappointed because engineering takes time and user adoption takes time and getting good user interface it takes time and it doesn't happen as quickly as people hoped and so there's this kind of disillusionment and then and then you get a second wave as the fundamentals again kind of do prove out to be promising right the internet was world-changing railroads world-changing and and cryptocurrencies world-changing so I think in the crypto world there's a few different each use case has kind of its own hype cycle so three years ago in Bitcoin it was I was gonna be able to buy Bitcoin next door and that was part of the reason you had the great bull market and in 2013 it seemed like Bitcoin was really taking off like it's happening guys the whole world is gonna use cryptocurrency right and it turned out that it was just it was far far too early you didn't have good security solutions you didn't have for example very few people were using Hardware wallets and so hacks of exchanges were very common you didn't have good user interfaces and it just takes time for people to wrap their heads around these ideas so I actually think that the use case of what I what I think the coin is really trying to be primarily which is a story value that is judgment resistant I think we're actually on the right side of the hype cycle which would say bitcoin had its boom-and-bust it had its period as dissolution dissolution and I think the world is actually now adopting cryptocurrency for that store values case the other use case that I think is probably around the same place as as payment rails so obviously we have you know the huge scaling debate of how you know wait I thought Bitcoin is supposed to be p2p cash I thought were supposed to be music for coffee but these are too high because block chains are hardly and efficient as payment rails but I think again we're kind of on the right side of that so decent scaling solutions are right around the corner right whether it's charting an area more whether it's lightening that work or some other layer to solution you know it looks like we'll have something good by the end of the year and and it could even be something different from blotchiness entirely maybe someone will actually figure out how to how to make a dag work um everything else like literally every other use case I think is on the wrong side of the Gartner hype cycle so you think about if someone makes a really awesome decentralized application how many people around the world are going to be using it the next day it's a little bit like in 1995 there were a couple websites that tried to do ecommerce they tried to like sell clothing over the Internet and the problem is you only have 50 million people using the Internet and of those very few people were willing to use their credit card right it wasn't you too trustworthy sorry the same place with crypto there aren't that many people who are willing to you know use meta masks or go through whatever steps they need to to use an aetherium that it's a very very small potential user base um and even that user base a lot of people are not willing to surly trust a nude app with a large amount of money for good reason right because we've seen that smart contracts can be fatally buggy sure sure so so short-term it's real a store value in payment rails and I think we're gonna see continued adoption very quickly over the next two years for those two purposes and then longer term meaning five years sky's the limit so I I do get Syfy's with this I'm a big believer that we're probably gonna people working for dowels in five years things like an example that that Olaf Carlson we uses that I like is the idea of a car that owns itself and for example you can imagine a self-driving car that's navigating through traffic and is negotiating with other cars for basically who gets to jockey for position and travel faster where you might have like an instant bidding process and maybe the car is renting itself out and optimizing and marketing so kind of those more sci-fi areas when you have the intersection of blockchain plus AI or blocking plus Big Data III do think you're gonna see kind of every crazy idea people come up with the PAL blockchains and Krypton may get used I just think it's gonna take a lot of time yeah yeah absolutely it's it's interesting to see how quickly things can develop and the process that is going down at this point one thing I think a lot of the people that are watching would be curious about is as somebody who's gotten started into what you said I'm gonna buying your first crypto and at some point 2014 and obviously having a lot of success in the industry in the past year or so now and sorry if anybody's watching as far as the mic goes I have a new couldn't find my wired headphones so I'm using these Bluetooth headphones and they're just all over the place so apologies if you're getting any technical issues there hopefully that's better at this point in time but as far as how somebody can really gain the knowledge to be successful or just increase their capacity when it comes to personal invest in crypto currency is there anything whether it's just basic understanding or books or anything like that that individuals can do to have a better degree of success with that uh it's I think it really depends what you're trying to do so the challenge with cryptocurrency is I think it was maybe navall robbed accounts line that it's like a graduate level 400 course in in a university which is to say it's not that it's necessarily that harder that advances that it is all of these prerequisites in different fields so you know it's got cryptography 101 and engineering 101 and computer science and maybe political science because regulation is a huge element in that I think about in terms of how to price different assets and economic support Foley mine has been in trading and you know it's this huge kind of wide breadth you you need to have some level of confidence that you're actually investing well so I think it's actually kind of read all of it so if you've never had any behavioral finance read a little bit of like Richard Thaler or there's a book how we know what isn't so by I think Thomas Juliet Prowse exam right just a really good introduction to behavioral biases which is a absolute cornerstone if you're gonna be trading or investing on the engineering side it they're starting to be some resources mit has a blockchain course in there OpenCourseWare Jameson laughs is a popular website that has just a massive list of Bitcoin resources resources operate there that's yeah that's the I'll post a link to that in the comments afterwards that's one of the better websites for sure but I think a huge a huge thing to understand about crypto right now is it is the Wild West it's heavily manipulated it is also the value comes very much from storytelling so so much of cryptocurrency is so early-stage that the narrative the you know theory I'm if there iam is will have gone for years before even really attempting what it's supposed to be which is that the virtual machine of the world right um so much of a venture capital style investment at least for its first three to five years is really the story that they're telling is it valuable does it make sense and this is a credible story so how do you determine that right because because you don't want to fall for kind of a scam where someone just writes a good couple paragraphs and the answer is is talk to the insiders is get to know the best and brightest talk to the best developers I can't emphasize that enough so go to your local Bitcoin if you're in meetups and and try to get to know everyone and and talk to all the smart people in all the different areas so that's both smartest investors and developers and academic cryptographers and you know industry leaders service providers whether it's like bitpay Zappo i I think that's the single best way to learn I tend to agree with that too I think it's at least for me it's been really difficult to try to figure out like as much when I'm doing research I don't have as technical of a background as a lot of other people out there do so when I am doing research on that it's it's tough and a lot of that at least the success that I've had in any of that has been just crowdsourcing that knowledge so I think that's that's really solid advice one thing that – just from a couple past discussions and even hearing people mention just as far as your experience goes and the way you break broken this down when you look at alpha innovation alpha and beta in relation to crypto investing for somebody who's newer to the space how would you break that down at a how do you break down really the difference there at a high level and it Sesame could dive into a little bit more sure so first just the concepts or the terms for people who aren't instantly familiar so the idea beta just means your exposure to some market so typically we're talking about equities so if you have a beta of one it means you're for example 100% invested in the S&P 500 obviously it so beta could refer to a different market it could mean you're investing in global equities or US bonds or it just means your exposure to some benchmark to some market and alpha is your return on top of that so if I buy you know so if my beta exposure to US equities is one and I and it's up 10% on the 15 percent my office 5% so the challenge of cryptocurrency is it's not clear what the benchmark is it's not clear what the index or the market is so you know two years ago I think was pretty clearly Bitcoin right so so sis but just your choice as an investor cryptocurrency was basically well I could just have passively Mustin Bitcoin I don't need to hire someone to do that for me I don't know like that that's a kind of easy default choice and if I'm able to be Bitcoin that I've earned alpha as a traitor as an investor to me it's much less cleared out because bitcoin is only 32 percent of the total network at this point and let's say we have I'm not predicting this but let's say there's a flipping this year let's say aetherium or ripple I mean ripple surpassed Bitcoin in network value right so it may be that in six months or a year three years bitcoin is 10% of the network and maybe aetherium is 20% and then maybe people say your default option should be the top five or the top ten crypto assets um I actually really don't like that now so I think a lot of people are gonna lose a lot of money on passive index indexing and the space because this is in the sp500 the top ten companies are or top even 500 are mostly pretty legitimate profitable companies in crypto assets you even have an outright scam in the top ten you can a protocols but don't work at all right you can have very easy seen even a very easy manipulation and so it's an investor says well how did you do compared to a benchmark of the top ten well say I really don't care like if I know that a crypto asset is a an outright scam and the price is heavily minute related I'm not including that as investable that's not an option that's not a especially if you're at scale so as a small-time day trader you might be able to like write a scam you might be able to say okay well I know it's pump and dump but I'm still gonna buy you know early and sell to some sucker um you can't do that as a larger investor because you're just very likely to be the sucker there's not enough liquidity and not say you even want to do that but it's really not even an option so yeah um this is a long-winded way of saying it's not clear what the bait is in this industry and I don't I don't know strong opinion on what it should be I don't think there's a right answer because this is not an area like let me posit an idea it may be that 90% of all the cryptocurrency value created accrues to one asset it's a Bitcoin or to here IAM er to one thing I'm not saying that will happen but let's let's just say hypothetically right in that case this is nothing like equities right there is no top 30 index it basically means you're either going to own that thing that becomes a 30 trillion dollar asset or you missed it and the more you own of it better you're gonna do I mean we don't know that that is true but that in hindsight your benchmark will have been that one thing right whereas if we have more of a plurality world where like this hundred where you have you know hundreds of companies that are all pretty big and competing in different niches so for us the way I think about it is it's it's a little bit Bitcoin because bitcoin is still front of mine for people it's still the easiest asset it's a little bit of a top five or top ten index there's definitely some element I have the Queen sits flat and everything else in crypto goes up by of X no one's gonna be happy that you earn five percent right they're gonna say well you could just fit a monkey with a dartboard invested in anything else and done really really well so some mix of Bitcoin plus like a top 10 or top 20 is how I think of kind of our beta the beta meaning the benchmark and you've talked about this a few different times I've had some conversations with other people and something that at least in my mind is gonna fascinated me a little bit as far as institutional investors kind of diving deeper and deeper into cryptocurrency and it seems like it's either a very surface level conversation right now or just kind of at the initial out stages so far how far along do you feel like institutional do I guess maybe I'll perhaps the question do you feel like institutional investors have an interest in investing in crypto currencies and if so how far along are they at this point x in terms of doing that diligence and actually starting the process of potentially investing so they're all looking at it all the big banks have started publishing research they're all talking about it the single biggest issues custody by far so us pensions probably legally cannot invest in cryptocurrency right now because there is no good custody solution that's actually trustworthy and the census tested so I'm not saying for example the coin base or Gemini or Kingdom trust or not trustworthy I'm not I'm not fun for anybody who's not too familiar what with what in a cryptocurrency custody is canned maybe you break that down as well sure short so um the technological challenge is how do you store your cryptocurrency in a way that no one can hack or steal that's kind of the easy part at least for most crypto assets for example I believe there's no known theft from a nano LED dress at the hardware level like that like no-one's ever ever compromised one to the best of my knowledge so using a hardware wallet and store and as long as you like it was a vulnerability found in the treasurer awhile back it required physical access to the dresser so if you've used treasures from Mount alleged dresses and you store them in a bank vault to my knowledge no one's ever lost a dime doing that the soap like the raw technological side is not that hard use a hardware wallet store your private keys yourself where custody is hard it's work from the operational or even legal sense which is well who actually owns the asset so if you're a penchant let's say your trillion-dollar pension and you buy ten billion dollars for the Bitcoin and you store it in a nano LED dress well who gets to have the pet the pin to that right who has the seed backed up to that and so you can create a really hot you can do what as a PO does or a coin base or any exchange and you've this big operational infrastructure of a whole like it's a mix of technological protection so a series of passwords that are needed and operational so it's in a vault and and you need three employees who should a key to be there at the same time and there's video cameras and security guards the problem with all this processes is there's no as a third party there's no way to know that they're actually doing them so Zappo could walk me through their their underground mines as soon as I leave they might be doing some different custodial process I don't it's impossible for me to have actual confidence in how those assets are being stored so if you're a pension you know the pension can currently trust a fund manager who just has the private keys they could trust one employee or they could trust Zappo or the Qataris keenham trust but at the end of the day it's still trusting basically you know an individual someone someone's running that process right so I think the what fixes this is first the technology itself so one one key piece of this is if you can do multi-sig that's helpful and as we've seen with for example a hearing multi-sig it's been disastrous right it seems like and so recently you should not have trusted anyone including the co-founder aetherium to be confident at coding a theorem smart contract to store substantial amounts of money even his own even his own money right so um that will change over time the way the way this tends to work is new code is often buggy you gain confidence in it by you know penetration testing bug testing you bug bounties and over time you become more confident that the code is secure so there's the code element and then the operation element but the key piece will be insurance so when kingdom trusts or whoever has you know when they add the party insurance that's what I think pensions will be getting in before that endowments will probably get in in small size in the next six months so the short answer is institutions are all looking at it I am confident they will eventually get in it's not gonna be super fast it's not gonna be overnight right now the people who are in or big family offices sovereign wealth funds are tiptoeing in and indirectly so you are seeing for example VC funds so pensions and endowments are invested in firms like Sequoia Andreessen Horowitz Union Square Ventures these are the top 20 capital firms and those firms are all investing heavily in cryptocurrency magic and outside of the maybe lack of stood custody services that are really capable of handling they the needs of some of those you know some of those large scale institutional investors that you mentioned curious about liquidity as well because going back to the example they used if you buy one of those select you said if you buy one of those crypto currencies in the top 10 top 15 maybe you ride that up and then if you are a large-scale investor there's not a fantastic way to offload that to lock in any profits without setting up a cascading effect do you feel like the liquidity I know it's obviously made very big inroads over the course of a in the past six eight months but does that affect the way large-scale investors look at cryptocurrency as well just due to the lack of liquidity in comparison to maybe markets that somebody like yourself was more familiar with initially definitely so first there's a concern a question I get very very often is there's no way to get out right so people will say hey okay it's great that you think on paper you've under million dollars in Bitcoin you can actually sell that right and the numbers the exchanged volume which suggests that be very very easy to write so Bitcoin we see numbers of 10 billion dollars a day in exchange volume the truth is somewhere in between so the 10 billion dollars a day is not real in in any meaningful sense I think some of it is washed trading some of it is a lot of it is just momentum traders so what that means is that in in most markets and say equities you have both short-term market makers so you have people who are collecting kind of bid-ask spreads who are fading any move as kind of algorithmic mean reversion traders and you also have fundamental traders who act as market makers so for example if Microsoft sells off enough Warren Buffett will come in and buy it and that might be a pretty wide range it might be Microsoft might have to fall 50 percent before Buffett gets interested but at some point you fundamental people who get it in crypto you really don't right so so it's almost the opposite it's so reflexive as Bitcoin goes up it attracts more interest and more confidence and it produces more positive press headlines and you actually have more buying and as Bitcoin sells off it's always accompanied by negative headlines that's how media works that's fine negative things to write about and and and it produces a lack of confidence and and there is no fundamental value right so so obviously I think the coin is valuable but there's no number there's no price there's no with an equity you can talk about like liquidation value you can actually come up with pretty concrete numbers and say at some price I could literally take Microsoft through bankruptcy court and make money even if I have to liquidate their office chairs whereas with Bitcoin there isn't really a price like that right we you know we can try to come up with some kind of value range but it'd be extremely wide and low confidence so because of all this crypto markets are they they exhibit what's called serial autocorrelation meaning it's not a random walk if if crypto is going up since continued going up it's going down since can you going down and a lot of that volume if someone starts buying meaningful amounts of Bitcoin every trader on the planet sees it and runs and runs ahead of them and runs the market up so there's actually very little liquidity now if you want to do 100 million dollars in Bitcoin you could get it done in a day you'd probably pay a few percentage and slippage if you wanted to do half a billion you might give up seven percent in slippage these are kind of super rough guesses assuming the market wasn't like teetering on edge and you didn't push it over um so if you know for most funds in a space it's not bitcoins is viewed as liquid if you're a sovereign wealth fund looking to buy ten billion dollars of Bitcoin well that is really you know that's kind of good luck but on the smaller assets it's a huge issue so bitcoin is starting to look like a financial asset you have the futures you have ledger X options you're starting to get market making in it if you look at smaller assets something like augur or golem or its kind of anything between call it number 25 and 100 in in terms of um but like the coin market capitalist there's shockingly little liquidity so you'll have an asset looks like it's worth half a billion dollars in network value and if you wanted to buy 1% of that if you wanted to buy 5 million you might actually move the price that market by 20% and similarly if you want to sell 5 million you might you might cause it to crash 20 percent or more and so that's a huge challenge and a real an issue for many teen Agnes so here's one example of why this is an issue if you're an investor in a fun the collec scary at the end of the year and you've seen all these assets run up they haven't sold anything the fun gets to calculate their earnings there could there carry based on mark to market at the end of December 31st and so people may have a very legitimate concern that basically or those price is real like to use a comical example denta Keene rallied from twenty million dollars to two billion dollars but you couldn't but it's not like you could have sold anything in two billion dollars right as soon as people started selling like a million dollars worth that crashed back it crashed by ninety percent so imagine there was a fun invested in Des Moines and they say we're up a hundred x right we've earned you know this insane return for investors when we get we deserve to be paid based on that but then it may turn out just a couple weeks later that you know dents : crashes ninety percent the price wasn't real all that so that's a legitimate concern that investors kind of sometimes raise and then just the idea of I mean eventually you need to liquidate things right eventually you're gonna want to take profits and from a risk management or an active trading perspective it certainly hampers things only and one thing you'd mentioned before as far as Bitcoin actually looking like in some respect to real asset class now was the ledger ax CME CBOE futures you talk about how you feel like that has affected the the market for Bitcoin positive negatively any any way in particular I'd be curious to have a beer shake on how you view the futures markets how that's affected Bitcoin sure I don't think it's affected it very much so if you look at the volume it's been about very very roughly eighty million dollars a day each on see me and CBOE the ledger X options have basically not traded I mean tiny tiny volumes certainly the futures are not that there are a tiny percentage of the market and for the most part they don't seem to have been moving things so most of the the futures are basically traded in line they've traded at the same price as the underlying and some of that is there's arbitrage by market makers but what that suggests is I'll contrast it with say South Korea so there's a little bit of arbitrage between South Korea and the u.s. the reason the so-called kimchi premium the South Korea premium encrypted prices can persist for so long is it's extremely hard to arbitrage because of capital controls you can't you can sell Bitcoin in Korea and receive one but you can't take the one out of the country there's a $50,000 worth of one limit per Korean and and no company no fund has figured out a way to get around that at scale in a legal way I'm or even in the illegal way or because if they had you would see it you would see that spread would not have persisted the way it did so one thing that is is we're looking at is when South Korea prices are trading way over us prices and prices as a whole or rising you can kind of infer that it's South Korean buying that is dragging the complex up right now might be useful information so in Bitcoin we had that very briefly right when the futures launch the futures were trading at a major premium they're trading at about a 10% premium and so the futures you could think of them as dragging up the price of Bitcoin but that was only for a few days and since then the futures have not really moved things so so far I'd say the futures have not played a big role I think they will over time over time you're going to see more and more prop shops hedge funds passive allocators start using the futures as you know as the primary vehicle as institutional money gets in a large percentage of it I don't know what I'm not saying the majority but a meaningful percentage of it will use the futures because it's so much more convenient in so many ways there's no with the futures there's basically no counterparty risks you don't worry about security or custody from either a regulatory or like risk of loss perspective and just so convenient in the sense that if you imagine a nutritional hedge fund right now there'd a of a futures account they have a fund administrator who does their accounting and their bookkeeping all of that a Bitcoin futures just another future same as crude oil futures so they're ready to trade an act whereas that that person goes through fun administrator and says hey we want to buy some physical Bitcoin it's we have no idea how to handle that we don't know how to handle it from an accounting perspective a regulatory a you know doesn't fit into their systems they don't have to do an audit so I do expect it to play a bigger role over time it definitely makes sense and I think on me and like you'd said there's so many unknowns around how to handle the actual underlying asset that the futures make a ton of sense they're one thing to one thing to think about I guess in the respect of the one thing to where I'm kind of looking at was when you in the past I had mentioned something about Manero and I'm pretty fascinated by privacy coins in particular the use case around privacy coins I would love your take not necessarily Manero specifically but there's privacy coins in general what you think kind of be overall like use cases or the value behind that use case I think that would be really interesting you're about sure yes so that's that idea of kind of the Gartner hype cycle in the uses so the two that I said are currently kind of real are store value and and payment rails and those two I don't mean it there is overlap between them I'm not saying that they're like separate coins necessarily so storing your valley you anonymously is kind of a added feature some for some people it's a bonus for other people it's absolutely critical and similarly transferring value whether you transfer it you know Bitcoin is only of course pseudo anonymous law enforcement loves Bitcoin it you know so transferring and anonymously there's huge fundamental demand for that so we yeah I say sometimes that this is not super this is not entirely accurate but I'll say that there's three crypto currencies today that are actually used at all so bitcoins store value aetherium is a crowdfunding tool and Manero for darknet purchases and WikiLeaks donations that's obviously an oversimplification there's certainly other ICO platforms now there's you know other competing stories of value but that that example is meant to highlight just how little cryptocurrencies actually used right so so Manero is currently one of the very few cryptocurrencies that is actually in use there's real demand for it we see you know there's there's we can't see the transaction volume because maneras anonymous but we can get some rough idea you for example their people their academics to look at all the darknets and try to estimate that book volume and from various so yeah I mean privacy is like a basic you know basic human kind of need and tremendous demand what one point I'll make that um that is valuable so Zuko Wilcox are creators d'caché will often emphasize a really important point so you often hear people say things like people who are anti privacy will say things like oh only criminals want to do that only you know the only people who would want to use this or people with something to hide and I would hope that we would kind of feel that that's nonsense but a point Zucco makes is privacy is not about anonymity privacy is about selective disclosure so the idea is that there are things that are not a secret about me that I don't necessarily want everyone to know I wanted the ability to tell a family member to tell a friend to tell you know some circle of people but I want to have that ability right it should be under my control to disclose certain information and so you think about this even in the financial sector context so JP Morgan this was maybe nine months ago think to deal with the Z cash company to integrate or to explore ZK snark technology for their financial records and that sounds really weird right like well why would JP Morgan want the most anonymous technology on the planet and the answer is not because JP Morgan wants to hide things from everyone it's the JP Morgan wants to protect their clients information and have the ability to only selectively reveal it to the brought to the appropriate regulators so this it's it basically privacy is non-binary in that sense and a tremendous basic human need I think to I was I was having a conversation last night with somebody who's talking a little bit about chain analysis and some of the things that they have going on with with Bitcoin and having seen that in action where there's basically have a map out of all the nodes and some pretty incredible things that are gone on that just really remove any level of privacy within or any notion of privacy within Bitcoin and I think as Venera as e-cash and potentially some of these other ones but I think Manero and sea cash really specifically monaro names are gonna be in the lead as far as people actually utilizing Manero for its intended purpose of privacy but I do I do still think that's least in my mind one of the more fascinating use cases for cryptocurrency and will probably continue to develop as things like chain analysis and and all that all that type of thing continues to become more profit in terms of actually placing you and your bitcoin address is the same individual right one thing to so I'm looking at I've a kind of a tweet that you had brought up it's maybe early February and you had referred to a dinner that you had with Ripple developers and I think at one point in time you talked a little bit about the price of the ripple token and then this referring to the fact you had literally nothing but respect for the developers and I think that's kind of like an interesting topic because I feel like there's a lot of individuals just within the cryptocurrency within the crypto currency markets in general that seem to take any criticism of a price of any asset not necessarily ripple but of any asset as a direct packet at individuals I'd love to hear your take so I thought that was a pretty interesting point where you had mentioned the respect that you had for the ripple development team sure well first is people I mean the economic and stakes are becoming gigantic right I mean the ripple company at one point hits sixty billion dollars at XRP tokens on their balance sheet you know and if an individual has millions of dollars or an asset it doesn't ends on absolute right if an individual has ten thousand dollars of ripple or something else and that's all of their money they're going to be very offended and hurt and they're going to be you know there's there's a great line from Charlie Munger who's Warren Buffett's partner Charlie Munger unfortunately does not see the value of cryptocurrency but he's a otherwise he's he's otherwise a phenomenally wise in his role or something like that he's toxic I think they're not too noxious noxious yeah so but you know that's regrettable but Charlie's a brilliant guy I was highly recommend reading everything zypher written and one point that he makes repeatedly is however much you try to appreciate the power of incentives you will still underestimate their importance and the idea is that if you let's say you have an employee and you create their pay systems such that they're incentivized they're paid according to some axis according to will be a good example here let's say it's a salesperson and they're rewarded by volume of sales they will find a way to justify a way to whatever they need to do to maximize that number so there's an idea that it's saying if you have a scientist who's paid for by oil companies or who's Gor whose grants come from some political group they will however honest they are as people what a regardless of their integrity integrity it's such a powerful incentive to interpret data in a way that is beneficial to keep that money that gravy train going and the idea here is that it's you have to separate it from ethics it's like if people's incentives just end up overriding their everything so we're now talking about big money right we're talking about powerful incentives and I'll justify it when one other way doe price matters in this game so to the extent you think that there's an existential fight bitcoins trying to conquer the world in the face of say more centralized powers and then you have a more centralized coin whether it's ripple or something else price actually matters because the higher the price of something is the more if the price is strength in the economic war between cryptocurrencies and eventually between cryptocurrencies and and potentially central banks or closed systems and so there's this view that if someone floods if someone spreads bad rumors and it takes 30% off the price of Bitcoin that's actually like a wound to the Bitcoin and if your goal is for Bitcoin to conquer the world that's actually a negative development with that said my views a little bit different so I'm it's funny I I'm pretty confident in I actually like to think of Bitcoin as the honey badger and if something like whether it's another cryptocurrencies or the actions of an exchange can actually kill the honey badger at this point it deserves to die like that that means it's not the honey badger it's not maybe we kind of hope it will be and I don't care which cryptocurrency wins so I passionately once and really care about there being central center ship resistant judgment resistant store value transfer value around the world as a defense against oppression I don't care if it's Bitcoin that delivers that product right now I think the coin looks like the front-runner but if something better comes along that is a better Bitcoin than Bitcoin you know that's fine it'll serve the same purpose from my perspective but with that comment about the ripple developers one it's simply true so I mean you have good engineers good helpers who are you know just kept working hard and coding away and building a product that is usable and works and has features and is differentiated and to experimentation itself is good so there's going to be a lot of litter there's gonna be a lot of failed experiments and that's great right so not every failed experiment is a failure other other I mean for example look at Bitcoin Bitcoin was built on the backs of many failures so you had bit gold and you had hash cash and those projects failed but they ended up being a major part of the building blocks of Bitcoin right and with us that's critically important and critically valuable so even even if I disagree with the structure let's say I look at a couple grand see and I say this is broken cuz the token economics make it route zero that doesn't mean the developers aren't adding value right if they're writing new code they're creating new cryptographic techniques a new consensus mechanism I can still really respect the effort and and appreciate the effort even if I think there's some element as it makes it doom for failure sure and I think that's a really interesting point and and I tend to you know I tend to agree with it as well it's kind of separating the development it goes on with the value and there's nothing specifically – in my mind I'm a lot of times I'll I'll get briefed because I'll all something out in terms of potential overvaluation and a lot of people that might hold that asset don't don't like you too much but I think it's something that you know you kind of have to provide your read your opinion on on a consistent basis as we're looking I think obviously things have developed even more rapidly in the past couple of months and they have previously but is there any specific industry industry trends that are going on that that you find pretty interesting that you've seen kind of popping up maybe over the course of 2018 so far that you're keeping an eye on as far as crypto goes yeah you know I think we're kind of in this really interesting gap period from a regulatory perspective which is that you currently at least in the u.s. cannot trade security tokens so you can legally issue one you can you can hold an IC o—- and register it as a reg a plus or reg the offering and meet every regulatory requirement but there's no secondary market for it because there's no exchange that is legally allowed to trade those assets so we're this really weird space where obvious reasons people don't want to issue a token that then is untreatable that is no liquidity so currently you have to do a token offering and you have to and for many of these it makes sense to say well we hope that does the utility token that it's not a security the problem is the SEC has refused to issue their guidance and and they said that they think so that the head of the SEC Clayton's said that 99% or even all of I SEOs or securities and his eyes and whether that's ends up being true or not in terms of how the SEC rules in health that reports ruled you know just it's a scary gray area for a lot of people who are issuing icos and people who are investing in them and so we have this gap where there isn't really a clear legal way to do things there isn't like a it's not obvious what you're supposed to do right and and and the answer might just be just wait just don't do anything but that's not obviously not a terribly attractive answer so I think a big trend of second half of 2018 is going to be registered security token offerings I think it's gonna be able to from many angles so some of them will be token offerings that are like gold or Microsoft equity sp500 equity as a security ice token others will be more important or creative so it might be a big company offering a new share classes of token others might be entirely new business models and projects and and what's gonna be meaningful is you're gonna the first exchanges that are legally registered so there's a project called templum that is is likely to be the first and maybe even the only for a little bit kind of legal registered exchange that will offer those freedoms in this I was actually gonna ask about yeah your thoughts on is we were talking obviously talking about securitized tokens templum and then t0 I think temple maybe is going towards they're taking a little bit of a different approach and obviously t0 is raising a ton of money and implement that far along but yeah I was I was gonna ask about that and glad you started to discuss it a little bit more depth so I'm actually less clear on templum is the project that I know best and even that one I won't pretend to be an expert on t0 they I'm gonna know putting my foot in my mouth here but I'm actually a little bit less optimistic about that the way to structuring things is a bit weird in the sense that you basically have to IPO it's almost I may be misunderstanding things but I think it's almost like you're forced into all of the equity regulation so it's actually it's it does it seems less than ideal and then you have other projects like Harbor and polymath that are not addressing the regulatory side at all best of my knowledge what they're offering is like a smart is the technological side a smart contract wrapper that adds features and functionality to the token but doesn't solve the regulatory problem so so maybe maybe I should say templum antes de niro are kind of the two efforts to solve this yeah my my understanding – I guess – understanding just I've spoken to somebody from Temple recently and maybe T zeros focus was a little bit more on securitizing kind of traditional public assets kind of almost like replacing in new york stock exchange and you can definitely correct me if i'm wrong and something like templum is more if a hedge fund is trying to securitize they're offering to provide what could be – and what they have or something of that nature and I think the use case might be a little bit more I'd be a little bit stronger not that many obviously there's probably some problems – the New York Stock Exchange NASDAQ and that type of thing but I've got many problems with liquidity there but on the other end in Spectrum templum has a pretty interesting problem that they're looking to solve at least in my opinion yeah absolutely so a key theme I think is going to be I think it's probably gonna get worse before it gets better with ICT O's in the sense that yes he's going to go after more AI cos they're gonna go after they may go after some funds they'll go after some marketers I don't think it's gonna be draconian it won't be the end of the world but it's gonna have chilling effect I think I think that's gonna happen probably in the next quarter and then and that's gonna be this weird gap period where it's unclear how you're supposed to raise money and how you can actually do things and then I think you know kind of second half of 2018 especially the last quarter we'll see this huge kind of blooming of these security tokens that are all regulated and proper and that will bring huge interest from more institutional investors yeah it should be it should be interesting to watch that payout and play out she's not payout that's I definitely keep my eye on that the SEC regulation I thought was for the discussion around them we could dive into that a little bit further as far as the kind of comments me SEC and the CFTC was there anything maybe in particular that they had said that you found was was kind of interesting or struck stuck out to you from the comments from either the SEC or the CFTC in which they made in that hearing maybe two three weeks ago at this point yeah I think the main takeaway that that somehow kind of got lost in the noise a little bit with the reporting was they've really presented an extremely clear framework for the last six months they've been entirely consistent which is the things that never I see owed are not securities and we welcome them and and we are do not fear them and we embrace them so giancarlo of the CFTC saying that he encourages his kids to my Bitcoin and he loves cryptocurrency and you know and then the sec saying just we're gonna enforce existing law so and the same has been true in south korea by the way so you had some scary headlines like you know South Korean authorities raided every exchange well they were rating it to ensure compliance with AML kyc that's anti money laundering or customer type laws as well as tax payment there they weren't attacking cryptocurrency they were saying these are fly-by-night exchanges we just want to make sure you guys actually follow tax law and actually follow the banking laws right and obviously that's ownerís a lot of people in cryptocurrency world don't like those laws but the point is well it wasn't an anti crypto suite it was a we're gonna enforce the laws that are already on the books and that we enforce with other exchanges which is far more constructive that I think people interpret it as so while we're in this murky phase with icos the regulatory atmosphere in the u.s. and South Korea is extremely positive much frankly it's more positive than I expected for crypto assets as a whole and one thing that I think has been a hot subject of discussion oh if this is something that you'd be open to diving into just your overall thoughts on Heather I'm seeing a lot of comments about tender I think a little bit of back and forth with a little bit next and everybody's favorite Twitter personality or whatever but the next might be but wondering if you might be able to expand upon some of those thoughts if you'd be willing to if not totally get it sure so for a very long time I held off on waiting into that debate because I honestly just didn't feel like I had anything worth saying um it didn't yeah I mean I I it if something's a hot-button political topic and I don't have any special information like why should I open my mouth so I ended up opening my mouth because I was literally getting asked about it daily by by investors fund managers and even the media I was literally having like New York Times and Wall Street Journal asked me everyday for comments on tether and I'm like you know this is such a hot-button issue and I'm seeing such kind of stupidity on both sides and such outrageous claims and maybe there's some value and me just saying like guys I don't know anything but of what you know here's the data I have here's all I'm thinking about it so I put out this I was like a twenty one tweet tweet storm where I said this is Evan this is every conspiracy theory this is the data we actually have and this is how I'm interpreting it and that's it and I don't have the right answer I can't tell you for sure tether is uh you know I but this is kind of the way I'm thinking about it um I meant for that to be the end of it I it's probably been a mistake for me to continue engaging with like the next I I'm actually kind of done like I've I've I think we've debated every point we could debate ad nauseam so there's not really any value in going further sure but I I'm a debater at heart and when someone makes really really clear illogical arguments it's not that it's not it's not even about whether he's wrong in his conclusion it just he makes these kind of outrageous kind of chains of reasoning that are so clearly nonsensical and I can't help myself but say a does not follow be right so I'm so for your listeners I'll give you the the kind of like minute summary of the situation so tether is a claims at least to be a u.s. dollar collateralized stable coin it was an independent company or at least someone independent company before it was acquired by v annex the legal structure the corporate structure is all very unclear now we don't know who they're banking relationships are initially uh tethered was going to be audited it has not been audited initially the risk of recently there's going to be an audit that was called off and so this raises suspicions by a lot of people is this is tether a Ponzi scheme is it collateralized there's also the react use Asians the year I would say into conspiracy theory that maybe the printing of tether was similar to mount gox's really bought so mal Cox in 2013 was probably responsible for a meaningful portion of the run-up of Bitcoin from $100 twelve dollars mal Cox was using a algorithmic bot to buy fake money so there's a concern well what if Bitcoin what if the rally from $800 to $19,000 was partly tether being printed out of thin air and buying Bitcoin so my view is so here's my conclusion based on the very limited data that I have BitFenix and every other change has been insanely profitable for the last year it's very if Heather was a Ponzi scheme six months ago they could have repaid it by now and it'd be unlikely it's maybe weird gonna be burning a Ponzi scheme when they have this incredibly profitable legitimate exchange business so that's one my guess is they have the US dollars collateralizing it whether it's in a segregated bank account that's done properly from a legal regulatory perspective I have no idea but Biff connexin tether is an entity probably have US dollars to back tether second it's very unlikely if it's heather has meaningfully moved the market so one this dollar volume is just aren't enough you can't create 200 billion dollars in Bitcoin network value with a billion dollars of fake by I don't like it's not I can't prove that mathematically but as a trader as an investor it doesn't make sense to me so the idea that fake money pushed Bitcoin up for five to ten thousand and then you had actual legitimate 10 you know billions of dollars of buying at that higher price and you're still gonna call it manipulation to me doesn't really make sense so I'm pretty convinced that tether has not moved the market in you know in giant amounts over long time frames I mean it's kind of that's kind of it that's kind of it like I can't you know so if you don't use tether like if you don't use tether don't use tether like it'd be great if if the next was audited be great other words audited a one comment on that so some people are like the fact that they were an audited proves that there are bad actors are doing something illegal the reality is crypto audits are exceptionally hard exceptionally time-consuming and no exchange to my knowledge has done it and and many have tried and many have said they want to do an audit but doing an audit will sometimes require one there's very very few auditors who have know how to do it there's all players like it's a literally a couple in the US who will engage in it and those they sometimes place two mans then exchange wouldn't want to do so for example they might say you have to move your crypto currency out of cold storage to prove to us it's yours well as an exchange do you really you know you might be worried about doing that but the biggest thing I think is that people don't appreciate just you have all of these crazy amounts of crypto assets moving back and forth some of which are inherently an auditable so for example there's no way to audit iota because it's not a public blockchain there's no way for an exchange to prove they had the iota that they say they had except to move it and if it was moved at some point in the past proving to an auditor that you controlled the addresses move to I'm not saying it's impossible but it's it's exceptionally challenging there are all of these weird pitfalls that don't apply to auditing anything else and auditing of the finnex in tether is not about proving they have US dollars in bank accounts they say they do so that's a mistake that a lot of people make they say all they need to do is audit the bank account but an auditor won't sign off on something like that so this is business the auditor won't just check a box and say we just looked at a bank account ahead of billion dollars we're checking that box the auditors they're not willing to do that what if they sign off but it's a little bit like a lawyer who's like they're not they're very careful at what they put in writing and so they're going to want to audit the source of that of those funds they're gonna want to track every deposit every withdrawal from that bank account and if any of those withdrawals they can't confirm they may be unwilling to do it or it may stymie it may produce real challenges so I I don't know I wasn't in the room when the auditors first engaged and for and then walked away but it's totally plausible to me that the mere fact that they haven't been able to an audit doesn't say that much to me gotcha yeah that a good break down I mean I think there's everybody has their own opinion but I think that's that's a good break down so I appreciate that and I think yeah giving different clarification there because a lot of people I think that prior to you know prior to the discussion today just when I asked on Twitter for for some commentary yesterday people reached out a couple different times about tether I saw some tethered questions in the in a live chat here so I appreciate the be kind of advanced and your thoughts there looking like so we're coming to the end of coming to the end of the hour hear anything maybe then I pick didn't touch on in the discussion at this point in time that you would hope to to cover anything you'd like to take up the last couple minutes we have here for sure something well I wouldn't throw out one last sentence on tether and then and then I I'll be happy to riff on cloud of the political impact I think of how this may play out so the last times Heather is just I'm not telling people that it's safe right I don't know and even if it's fully lateralized there's a real regulatory risk there's a risk that the US government or another government says this is they had some minor accidental breach of anti money laundering laws like every US bank that every US bank it's fine to every year for violating at SCI money laundering laws right the US dollar gets used by fraud criminals funnel money through JP Morgan so it's very likely that someone has money has laundered money through tether and the Escarpment could use that to shut it down or seize it or find them so I just want to throw out there I'm not saying that either I do not think tether is riskless feather has risk it has regulatory risk for sure and it may also kind of party risk okay so kind of putting that aside um so something that I think is a really interesting thought process that definitely I'm not sure exactly how much I'm not quoting the sovereign individual but this is definitely inspired by the book the sovereign individual so I have to get credit where credit is due here's how I think things are gonna play out and they're actually playing out in real time right now cryptography is naturally defensive what that means is it levels the playing field an individual with the Raspberry Pi is able to encrypt a message that the NSA can't breathe what we're seeing right now is countries that are outside the US monetary system like Venezuela Iran Russia and China are all talking about launching their own cryptocurrencies obviously Venezuela no one's taking that seriously but China is gonna launch crypto yuan like that's a quarter of the world's population almost using a fiat cryptocurrency and it's the most it's incredibly or willyam so in the instance that the government will have easy visibility into every single transaction in real time and big data means they can actually analyze every single transaction that's happening in the country in real time and they can censor it in real time so once they do that they're almost certain to ban cache they'll ban anything that people are using as monetary units aside from that crypto you want so imagine if you're a political dissident in China not only can trying to freeze your money China can make sure that no one else is able to give you money and they can do it with the flip of a switch now what's the next step after that so China's gonna have to physically close their borders physically they have to not let people leave because if they let people leave what'll happen is the oligarchs will leave with a meaningful percentage of their wealth in something like Bitcoin and if you're China you don't want you don't want to have 10% your GDP we leave the country in the form of Bitcoin so you're gonna say you know I'll leave the country but borders are porous billionaires can always find ways to get out of countries so then this is where things get really sci-fi this is where people like look at me like I'm crazy so here's here's my like 10 year prediction there will be a war fought between an open and closed country over physical domicile wing of crypto refugees so what that might look what might that look like so let's say Chinese Oleg arcs a bunch of them settle in New Zealand and New Zealand says we're gonna allow Bitcoin Manero Rock the bank wrote ography and we know that means that you can hide assets from us we know that means you're not gonna pay your old taxes but it's fine because if you're like Xue Valley and everyone who comes you know in a huge percentage of population or worth millions of dollars you only need to collect a little bit of taxes to pay for services alright so if a billionaire comes to New Zealand you know they only pay you know one tenth of the taxes they should pay that still covers their cost right so countries like New Zealand may say hey you know billionaires come here we're fine with you hiding half your wealth for free or 9/10 to your wealth right give us a little bit of taxes and we're still happy and you guys are job creators and innovators and all that so then what China does at that point is basically invades New Zealand and what is invade mean I'm not sure maybe it's cyber attacks maybe it's actually finding an excuse to physically invade but I think basically right now we kind of think of the world sometimes as East versus West or liberal versus conservative this this is not liberal versus conservative so there are totalitarian left wingers and totalitarian right wingers for example the UK is pretty liberal but they're actually a pretty closed country so that they're actually leaves somewhat made cryptography illegal right they just banned actually certain types of porn and then you have other countries that are a bit more right-wing the right wing and the libertarian sets so they might be socially conservative but they still say no everyone gets to have cryptography no guns and and kind of do their own thing so I think what we're gonna have is the world dividing into open and closed and and one defining characteristic of that will be how they treat public non-fee ah cryptocurrencies or non or called public Ledger's I'm as opposed to permissioned right and and that is gonna be a major dividing line of the world I think in 10-15 years you're gonna see major physical conflict along that axis yeah I I'm gonna have to take a minute to wrap the head around that but that's it's it's it's a crazy thought process and I think – I mean there's been like you said the Venezuela thing that's coming up right now that not a lot of people are taking seriously it's still interesting the even there was a tweet I think from like Jeremy Gardner recently where he was talking about having like dinner with some border agent where with them literally the past 24 or 48 hours are you saying that if you crossed across the border with $10,000 in cash and you can't now do with $10,000 a Bitcoin they have the right to search your phone for Bitcoin which i think would be a little bit difficult to do but yeah it's yeah the bigger process is crazy yes so so right now there's border agents were probably violating the law and which border agents sometimes do but I'm a lot the kind of law that could very easily be passed it's not like we all know that you can't actually confiscate the coin at the border but what could be done what wouldn't shock me in two years let's say is for the u.s. to pass a law that says you have to declare any cryptocurrency that you own whenever you cross the border and that declaring obviously matters a lot right because any money that you declare is is at risk right so then then the US government can say well we're we're holding you for tax evasion or whether it's true or not if a central authority knows every penny that you have if you're actually forced into declaring and a failing to declare let's say you failed to clear any a dime of it they can then lock you up for ten years there's huge pressure that right they can't force you to but there's huge pressure to declare it certainly makes it far less usable it's a little bit like a lot of totalitarian regimes will do that they won't confiscate wealth right away what they'll do is categorize well they'll say oh like like tell us exactly how much gold you have right and that becomes pretty meaningful down the road if people try to flee right if people try to flee an oppressive regime so it's it's a scary to me but the US remains right now extremely liberal and extremely supportive yeah yeah I think for the most part outside of the ico commentary it's been I've been pleasantly surprised with what I've heard from the regular from the regulator so I've been happy about that but yeah the potential like you said is pretty crazy and it sounds like a bullet case for privacy coins for me but uh yeah I guess I mean it's at this point I'm coming up on the end of the hour here so i if there's any place that you know people could go to find you would love for you to just gonna let people know where they can get your thoughts on on the markets whether it's twitter if it's anywhere else yeah you know Twitter and anything I do anywhere I end up posting on Twitter and under @re David Paul so that's the probably best best place to look awesome well I really do appreciate your time sorry to everybody for the microphone issues initially on my end apologies on that but thank you so much re for joining this conversation hope you guys learned a ton I personally I learned a ton so thank you so much for that thank you thanks for having me

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