$30k BTC & Beyond? BlackRock Bitcoin ETF with Austin Campbell

Transcript

bankless Nation it's treadfy season the BlackRock the with 10 trillion dollars of AUM the biggest asset manager I think in the United States has submitted an application for a Bitcoin ETF is it going to get approved how bullish is it what does this mean for the sec's treatment of crypto but not only that Charles Schwab and Fidelity have a new uh exchange entering into the marketplace the edx markets exchange has entered the fold who is this Marketplace for how is it different and what is with the timing of all of this in the worst most hostile regulatory environment some of the biggest traditional players have decided to enter the game what is the

deal with that there's also a bunch of stable coin conversations to be had as well stable coins are under attack some of them are being labeled as Securities yet also there is a stable coin Bill going through Congress what why is this all happening at once these are some very deep very big questions about the way that the incumbents of the world are treating our industry and they're also treating it well they want to come play the game the Trad Phi conversation is definitely a conversation that I need help with so we are bringing on someone who has been in the Trad fire World Austin Campbell new to the bankless podcast is going to help us navigate some of these conversations and I will introduce him in just a second but first

a moment to talk about some of these fantastic sponsors that make this show possible especially Kraken our preferred exchange for crypto in 2023 we're going to talk about another kind of exchange but Kraken is the exchange for you we're going to talk about how that's different if you do not have an account with a kraken consider clicking the link in the show notes to sign up for one now here we're going to hear from them right now let's go Kraken Pro has easily become the best crypto trading platform in the industry the place I use to check the charts and the crypto prices even when I'm not looking to place a trade on Kraken Pro you'll have access to Advanced charting tools real-time Market data and lightning fast trade execution all inside there's spiffy new modular interface crack new customizable modular layout lets you tailor your trading

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just using the wallet so if you want to get started with Amber all the links that you need are in the show notes Bank location I would love to introduce you to Austin Campbell Austin is the managing partner of xero knowledge Consulting he's also an Adjunct professor at Columbia business school he used to work at paxos the stablecoin issuer in both portfolio management and also as the chief risk officer he was once the co-head of digital Assets in global rates at Citibank and was also at JP Morgan for over a decade so Austin knows a thing or two about the Trad world and I'm hoping he can help us navigate all of the Trad news that has surfaced in the last two weeks or so around the crypto space Austin welcome

to bankless yeah thank you for having me David so that was my attempt at your bio but maybe you want to explore a little bit this is your first uh first appearance on Bank list so welcome to the show but also just a little bit more about who Austin Campbell is and and where your where your position is in the crypto world yeah so I would say you know I I jokingly describe myself as ultimately a uh person who wandered into crypto despite being a grouchy fixed income person from traditional Finance so like my background in that space so I I started my mainstream career in traditional Finance after some time in reinsurance was largely around cash stability products so I was thinking about you know this is going to sound familiar to people who have thought

about stable coins if I've got this underlying pool of assets and I always need them to trade at a fixed price despite people coming in and out of this pool how would I make that happen and the areas in which I was originally working on that were actually in very traditional markets of the US so it was Bank Capital markets and then the 401K market so if anybody has ever looked in their 401k if you're a U.S person and seen a stable value fund that you can blame me right among many other people for making those things happen so I did that for a long time and got interested in crypto you know really because of some of the issues around 2000 and eight and how some of the Innovations of blockchain technology and the financial structure that underpins that solves a

lot of the problems that we had that really you know I don't have to preach that 2008 was incredibly destructive to people so I I didn't come at it from like call it an ideological maximalism standpoint I was very much a functionalist and like hey this solves problems and so from there I was at Stoneridge for a while that's the parent of naidig I was through City I was at paxos for a while and now I do a lot of Consulting work in the space beautiful beautiful and I think you are the perfect man to really help us uh guide us through this conversation as I said in the intro uh the Trad world is not something that I'm familiar with so I definitely need help here uh bankless listeners will know that I learned everything I know about money and finance through crypto not through

anything uh prior to crypto I want to start with this tweet that came from Delphi digital which just says over the past two weeks BlackRock files for a Bitcoin ETF NASDAQ has a lot is launching crypto custody Services Deutsche Bank seeks crypto custody Services Soros fund management says crypto is here to stay Citadel Fidelity and Charles Schwab launch a crypto exchange the institutions are here now not all of this has happened in the last two weeks NASDAQ has been doing their custody thing for a long while now but I think the the point still stands and what this tweet's really getting at is like man in the last two weeks tradify has entered the game in a very new and very big way and in over the series if that's been a year of just Onslaught

from regulators and government and just also Onslaught from Trad leaders like Jamie Diamond uh Larry Fink all these people all of a sudden Trad is entering the game so from and that's what that's what it feels like to me as a crypto native somebody who lives and breathes inside of the industry I don't know what it looks like for for the perspective of someone who is also extremely familiar with the Trad world so can you maybe you could just like summarize the sentiment of someone who is both familiar with crypto and traditional Finance like what does the last two weeks mean to you so I would say anytime something like this happens in a traditional Financial firm and you see things come together over about a two-week period that's

probably the culmination of six to 18 months of work behind the scenes everything moves slowly at these places right so like if you're the crypto startup if you live in the crypto world you're used to making decisions by getting together on telegram or you know maybe getting out of video call arguing with each other if it's a long one doing some research coming back and doing it again a few days later I launched a product at city that took a year and a half to make that kind of decision right so the time scales you operate on are just glacial compared to what you're going to see in the regular world so if BlackRock filed an ETF application they've been thinking about it for a while part of it is just Why do they pick the current moment

and I would say it's important to remember the history there if you look at ETF applications for Bitcoin ETFs there have been many of them from genuinely some pretty top-rate institutions right you've got like Fidelity you've got Invesco you've got vanack you've got Stone Ridge my old employer all people who live well within the regulated world the SEC is familiar with they're not engaging in Funny Business Like These are genuine attempts at ETFs so what's the signal for BlackRock piling on I would say it's two things one it's telling the SEC and the US government if we can't get our act together here there's a lot of things that are already happening offshore like these products exist in Canada they exist in Europe and if you block us here we're probably just going to take our

business there as part of the message another thing is that Larry Fink is pretty influential in the Democratic party I think this may be a little bit of a signal from the tradify world of we would like you to find a constructive solution to this problem not just keep blocking it because when you look and zoom out from the US and think about the global like situation you have project guardian coming out of Singapore the jfsa in Japan has been very Progressive on crypto and also very protective of consumers like FTX Japan didn't lose anybody's money and I think a lot of people don't realize this Mika just passed in Europe so I think U.S traditional Financial firms are

genuinely at the point of being very worried about being left behind and that's part of the reason you're seeing these things coming forward because you got to put the pressure on if we wait another six years you're you know in crypto terms that's like what eight Market Cycles at this point yeah certainly and so there there's a sentiment out there that uh in crypto we like to wear are conspiracy hats sometimes I think it's pretty fun to put it on and the the conspiracy here is that uh the Democratic party specifically the Biden Administration along with Gary Gensler you know Elizabeth Warren that whole axis of power has been hammering all of the crypto native companies and the crypto native industry in order to clear the way for you know the the Larry Finks

right you said like Larry Fink is very influential in the Democratic party so the conspiracy is that you know the The Regulators have been acting as an arm of the Democrats in order to clear the way for the big traditional incumbents in order to have free and easy access into a market that The Regulators have hammered how on a scale how much Merit does this sentiment have or is this just crypto people being conspiracy people so there's a great scene in the movie Forrest Gump if anybody's seen it where Forest is playing football catches the ball runs down the field scores a touchdown and then runs out of the stadium and continues running basically forever that's kind of what the crypto Community does to me with a lot of these conspiracy theories right it's like you

take an initial grade of truth but then you're like out the stadium and across the country so what I would say is this yes Regulators have hammered a lot of crypto firms however I would say there's two things going on there simultaneously I would not find this like a great plot to empower Trad fights that one just being blunt some of our Regulators are really uninformed on this technology or underinformed that don't have a complete view of what's going on in the market why the technology is important why it should be used what's Progressive like there are people in the administration and at some of the Regulators or just the goal of crypto is a scam and if it all leaves the country that's a feature not a bug on the other hand there many people at these regulators and within

the administration within the Democratic party who don't hold that view so don't take that as a monolith understand that as you describe quote the Democratic party that's kind of describing like quote half the United States like there's a big diversity of views two with that said some of the objections that Regulators have to crypto activities I would describe is completely legitimate like one of the problems in crypto is that there are people who are pridefully ignorant about the financial system and banking because they think banks are the bad guys and so they just throw it all out in reality man they have broken a lot of stuff historically in the banking and finance World learned a lot of lessons about how

not to let that happen so like one of the points that the SEC has been on about that I personally agree with is the separation of custody from Trading right like things like FTX can't happen if you have an independent custodian that holds the funds and verifies them they would know if somebody was taking all the Bitcoin and selling it to buy ftt or something like that so separating those duties probably a good thing and I can see objections to some of the models you know that exist currently where like a crypto Exchange in a very weird way is like just about the most centralized Financial like entity that could possibly exist right which is ironic for crypto to have spawned that so I don't want to completely say that everything

The Regulators are saying is bad actually I think some not all but some of the sec's critiques are correct my problems with them are more how they're going about doing it like I have some issues with rule of law and sort of extra legal and extrajudicial actions but I think some of the core of their critiques like yo there's some real BS activity around on trading going on here like watch trading front running Etc and yo your custody should probably be separated from your trading activities those I think are valid points yeah and there's a whole conversation that we're going to have as we go into the second half of this episode around uh the new exchange because that's specifically what this new exchange from Charles Schwab uh and the other backers from Citadel et cetera uh have is built

around it's built around it's an exchange without the assets right the assets come from elsewhere but I really want to First continue down this BlackRock ETF uh conversation okay so we're we're putting a pin on the whole like it's not a conspiracy but crypto people love those kind of conversations so that's why they entertain them on the flip side of things uh maybe a more gracious interpretation of events is like you said the Trad world moves slowly six to 18 months of building up to this point of eating even submitting papers in order to prepare for this and so all of the all these Trad institutions have a lot at stake even though they haven't formally entered the game yet they are planning to uh and so maybe the timing on this also comes from the fact that they are watching the SEC

and Regulators hammer down an industry that they they see profit from and so maybe they're this the signal of BlackRock choosing now to submit their Bitcoin ETF spot ETF with the SEC is also a signals like hey SEC don't kill that thing we would like to do business there uh this perhaps is a more gracious more uh charitable interpretation of timing what's your take here yeah I think that's probably closer to correct right like the things you can read from the ETF file are you know one BlackRock thinks it's important enough to throw their hat into the ring even when they know they're going to catch some PR and public slack about it and they're willing to do it anyways so that's a statement of intent to the big

guys like the blackrocks the fidelities the invescos the FedEx the stone ridges don't put their hat into the ring unless they think they can do it safely so it's also a statement about the fact that they do not think the entire crypto Market is a scam they do think this stuff has some long-term value and utility because they're not gonna like do this for something they really think is completely useless will be gone in a year it should exist in the U.S this is a statement of quite frankly the reverse at least in this case about Bitcoin I would imagine their opinions are probably similar about eth if we're being honest now a bunch of altcoids now maybe there's a discussion to be had but it's telling you they see some fundamental utility and blockchain technology and

decentralization you know when.i would describe it intellectually honest way this is a take that I saw from Jake Stravinsky that's along these same lines he says the SEC has adamantly refused to approve a spot Bitcoin ETF for years A View so entrenched that it's litigating the issue against grayscale of course a crypto native trust with BTC right now knowing that the SEC disagrees BlackRock wants to list a Bitcoin ETF on NASDAQ anyways and then he finishes up and says everyone gets how big this is right so here is the actual filing here we're looking at the report here uh this is well beyond my pay grade to even understand but I would imagine that this whatever this document is this filing

with the SEC is you know par for the course interestingly enough gray uh BlackRock has submitted 576 applications for ETFs of various kinds and it has gotten approved 575 of them so almost batting a hundred percent with a very large number of at-bats uh Austin I don't know how to interpret these kinds of documents but is there anything inside of the grayscale or excuse me the BlackRock Bitcoin ETF that we should understand like how is this thing built how is it constructed is there any nuances here that are worth understanding I mean it so this is one of the problems with the current SEC regime you read a document like this and it'll be like you know 100 pages long

and probably 10 of them have actual content the majority of it is just cya disclosures so one thing I would say is I've seen a lot of talk about oh my God BlackRock has all these things that about forks and risks and they're planting all kinds of evil it's like no the way you write a prospectus having been involved in them in the past as you sit down at a table and you list everything you could possibly think is even maybe kind of sort of a small risk to the thing and you throw it all in there because you're supposed to disclose it like if BlackRock thought there was a one percent chance that like aliens would come steal Bitcoin it would be in the ETF filing right so just to be clear this is the kitchen sink approach and you do that to cover yourself legally because

Securities litigation is awful and people get sued all the time for hey X happened I lost money and you didn't say it could happen and it's super annoying so this is more about just plaintiff's attorneys and how the U.S legal system works than any statement of intent so let's be very clear about that two beyond that it's a bone stock ETF filing like what are we gonna do here we're gonna buy Bitcoin would people give us money to buy Bitcoin and we're gonna sell Bitcoin when people want their money back the fact that I stopped talking there is kind of the point right like that's it the only thing that's novel about this compared to all of the other ETF filings is something about like surveillance and information sharing but the reality is everybody else was willing to do that

already too right they're just codifying it so this is almost like a clone of the other ETF filings which to me is actually the interesting part yeah why is that interesting there there are a bunch of Bitcoin ETFs that have been submitted and denied I think there have been many that have submitted and are still in limbo waiting we're kind of waiting to get denied uh perhaps now waiting to get approved if the SEC approves this one so what's the lay of the land what's the landscape for the other Bitcoin ETFs that have been submitted and how does the fact that BlackRock uh that they submitted this one how does that change the game yeah I mean it's kind of a statement that BlackRock thinks a lot of the previous applications were fine right so

that to me is interesting right like they're saying we think it's possible to do a very vanilla very boring Bitcoin ETF safely right obviously we would like to do it that's why they filed this thing so I think it's almost a statement more from like this is why I said it's more of a statement to the SEC at regulators and the government of like hey help us out here right they're saying we think we could do these things safely we think people should be allowed to do it that's the real message I'm taking from this I will also say on the conspiracy theory note if the SEC approves the BlackRock run while having continued to deny all the others that will be a gigantic Scandal like you you are not supposed to play favorites as a

regulator at a bare minimum if they're going to approve something they probably approve basically all of these at the exact same time right and so if if in the example is that they just approved the BlackRock ETF then all the conspiracies that the people the crypto people are saying that the SEC cleared the way for BlackRock would come true correct well that that would also like so let's leave the realm of crypto for a moment yeah if the SEC starts playing favorites by approving things for like a BlackRock or a JP Morgan in front of everybody else who filed materially identical things first you're now into gigantic political Scandal world because now this is not a neutral rules-based regulator even if you hate their interpretation of the rules now this is somebody Doling out

explicit political or financial favors to people that is not how U.S Regulators operate right like I am lucky enough to know some pretty senior Folks at some of our Regulators right like New York fed Chicago fed cftc you know the credit union administrator this is not how any of them operate they actually care a lot about fairness and fair treatment and so when you look at you know somewhat Jackie decisions that are made historically there's usually a lot more going on behind the scenes that people realize but this kind of thing no it would be shocking to me like that's credibility destroyed for the SEC even outside of crypto so uh in in that case are we going to

see what's the sec's move here like I'm I think looking at blackrock's track record they think that they can get this approved I've only missed one out of 576. and so assuming that this does get approved this kind of means that more also need to get approved at the same time so we're going to have a handful of Bitcoin ETFs and they're all going to compete on the open market what's the sec's move here because we know Gary Gensler doesn't like crypto and doesn't want to I would assume what do you think happens next yeah I mean you're going one of two paths either exactly what you just said or they've got to also deny BlackRock which I think turns up the pressure in Washington dramatically right I think if you again zooming out a lot of this is probably

happening because Europe just successfully passed Nika and is in the process of implementing it right before when you're in a world where no other major large jurisdiction really has functional crypto legislation we could all just kind of wait fine but now you're in a position where if it takes us again two to six years to get something going well Europe is way ahead at that point and so I think the pressure is being put on by some of the traditional financial institutions for that reason like the big U.S asset managers and Banks do not want to live in a world where a consumer product that is heavily demanded can be offered by all of their Global competitors that they are paralyzed um so with the assuming that we move forward and we eventually get this uh

this ETF approved and therefore others as well hopefully uh how bullish is this the idea is like there's a pipeline now between the world of Wall Street the world of tradify the the world of money that's out there that still is uncomfortable with crypto native exchanges and now there's a pipe between them and Bitcoin right and downstream of Bitcoin is like all of the risk on assets of crypto so uh What's the timing on this do you think do you have any speculation on timing and what does this do to the actual Market of crypto assets would you think yeah so I've said for a long time one of the problems that crypto has is just being completely inscrutable and unapproachable to normal human beings right so I kind of I I look at market adoption Cycles in like three

ways right like sort of canonically speaking is one is can power users use it we're there with crypto like I could use this stuff technologists can use this stuff fine the next one is could one of the peers of like my age or a little bit younger use it without incredible brain damage maybe like not honestly not really for crypto like private Keys security setting up wallets understanding what to interact with a normal like 30 year old person who's not deeply invested in this space actually it's still pretty hard for them the third stage is could my mother use it we are nowhere near by mother using it but the interesting part about an ETF is that's like something people can buy right normal two-legged

humans could buy it no they're not really using the technology but they're getting closer and so it's slower than people want but faster than it could be it's a very medium step in that regard the thing that will need to follow it to be like very very bullish is the situation where people could actually use the thing as it's intended on a blockchain in a more seamless way we're not there yet but this is one of the bricks you need to put in the wall to get people there is what I would say there's one last topic of conversation in this Bitcoin ETF which is the partners that BlackRock has brought to the table in order in order to enable this uh coinbase is the custodian for BlackRock and so sure blackrock's doing

the ETF but coinbase is holding the Bitcoin and then also Kraken has a subsidiary called CF benchmarks which is providing the price data to the ETF so the actual price that shows up on the on for the ETF is actually due to another crypto company Kraken what do you make of the partnership between BlackRock and two very native crypto exchanges what would you say is the significance of this well so what on the pricing front by response there is kind of like duh like where would you go to get good prices on crypto the people who trade all the crypto right so that makes a ton of sense to me on coinbase being the custodian I think one of the mistakes we've made in the U.S space is blocking our

traditional custody crowd from doing crypto custody effectively so I'm going to specifically lay blame on the SEC and the OCC for this they have not been able to find a regime to allow people to be qualified custodians in the U.S regulatory space like you would prefer this to be done by somebody like a State Street of Boney melon the usual custodians but Sab 121 and then the occ's refusal to approve trusts has really blocked this activity so who do you go with you go with the people who could do it so I would tell you in subways one good job coinbase like that is not a denigration of coinbase I'm glad they managed to make it through an RFP and get that done like well done to the institutional people over there and I mean that genuinely but two

also I would have a hard look again at the U.S regulatory regime of if your real goal with crypto is we don't like it because it's not safe and so what we're going to do is block anybody from doing it safely like wait what right so they've kind of you know it's a snake eating its own tail like you've really tied yourself into a knot here Austin this was a fantastic exploration into the the gray Scout with this grayscale gosh the Black Rock ETF the big one uh there's a whole entire other conversation around this new exchange edx markets uh Charles Schwab Fidelity uh Citadel are all making a big move despite the Gary guns are Crackdown just like

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acronyms in crypto edx markets has begun trading and has also completed a new funding round specifically for digital assets okay so this is a different kind of crypto exchange are you bankless listener able to exchange on edx markets and that answer is no there is no place like it's not like Kraken it's not like coinbase there's no there's no like UI to look at there's no place to sign up there's no place to submit your ID so Austin what's the deal here like what we call this a crypto exchange but but what is going on like what is what is edx markets yeah so let's work backwards by talking about how tradfi exchanges work that we can sort of move forward into

edx so in tradify world when we talk about exchanges and people use something there's actually three different components going on one is the exchange itself which is a place where people come together and buy and sell right so you can think of it as you know your classic Marketplace but importantly that's all the exchange does it's just there to take and batch orders behind the exchange there will be a custodian right of some sort which is the entity that actually is holding the assets that is not the exchange importantly and that there's also what's called a clearing agent they're the ones who make sure that things get from party a to party D when there's a trade right like that the dollars for shares of you know JP Morgan stock actually clear now

blockchain doesn't quite work that way this has been one of the problems the SEC has had so in Greek mythology there's this dude named procrusties right who would capture people and he's got a bad The Bad is always a fixed size and so if you're too short he stretches you and if you're too long he cuts some of your Libs off so that you fit exactly into the bed this is kind of the approach the SEC has taken with banging crypto into the exchange framework is like yeah we kind of don't really care about the damage do it this way so edx is basically not really customer facing because there might not be a great way to face retail yet or they want front ends to face retail for them and all it does is match orders of the assets that they think are not Securities so

this is how you end up with the situation up in 2023 launching a project like this which is it's really designed to work with what U.S regulations which are this stuff by the way were written closer to the Civil War that the present day true you know and we have an exchange that now 50 of the products they're offering in 2023 are Litecoin and Bitcoin cash so it's like let's be honest the good Innovation here about edx is splitting the exchange from custody I talked about that earlier I salute them for doing that that's a good thing the bad part is the rest of this is really like you're taking a product that's not really great for consumers or anybody to bag it into the U.S regulatory framework

rather than asking you know from a first principles basis what's good for consumers what's good for the world what's good for Innovation what are the good parts of this technology so 50 50. so just to really Define what what this thing is it does there's no place to deposit crypto because it doesn't store crypto it is just and so inside of all crypto exchanges Traders and uh bankless listeners long time crypto fans will know the term trading engine is that all this thing is it's just a trading engine plus some apis to custodians who have the actual crypto is that basically what this thing is I mean that's what a tradify exchange is right it's an order matching layer that sits on top of

custody solution so yes it seems so simple yeah so but it also for again like for people like me who came into the world of money and finance through crypto Banks I was like oh yeah you you give them your money and then and then they give you a trading engine to settle with other customers uh but we apparently what you're telling us is that in the world of Trad file we've learned the dangers of ftxs out there where like sure in the best cases it works just fine and in the best case you have the coinbase and the Krakens in the worst case or maybe even in the medium cases you have ftx's where there's a discrepancy between the exchange and the actual uh custody of funds and so I think what you're saying is like the

tradify world has learned this lesson throughout history and there's laws and regulations to separate custodianship and exchange and so this edx is an exchange for Trad world that is now slowly going to be able to custody crypto but it's an exchange meant for them that's my interpretation is that correct I mean it it's somewhat correct I would say again importantly edx is not the custodian they're using another custodian because one of the important parts there really is the separation of Duties and security you want the people due in custody to have one job don't lose your stuff right and that should be all of their incentives so that's where it works to separate these things because exchanges will have incentives to boost trading and generate profits

and create margins and do fun stuff but when the custodian they make money by just not losing your stuff and preventing funny business those two forces interacting produces a safer system right and there's multiple ways to do it you could have very strict rules for exchanges about segregate your staff segregate your funds you can't hold the currency yourself all the like crypto's got to be in cold storage and externally verified that's what they do in Japan and it worked right you could have totally separate legal entities do it but the point is don't let people just glom all these things together the conflicts of interest eventually lead to bad things happening so that part again is good the bad part of edx is like when you take crypto and you trap it into Walled Garden and you only have this janky list of assets like

we're destroying a lot of the value it's you know there's the old blockchain not crypto thing from Trad five this is almost like blockchain but also not blockchain okay so I with this perspective I can kind of see why institutions like coinbase or Kraken would offend The Regulators because I mean look at what they're doing they're trade they're trading and custodian in the same spot how dare they yet also to me like Kraken and coinbase have done a bang-up job doing exactly the thing that they said that they would do which is service customers and so like I think the hopefully what I'm worried about is that now that there's edx markets as this like Bastion of compliance for the Trad

world uh I'm I'm worried that there might be regulation that's passed that says hey coinbase hey Kraken separate your custodianship and give it to some other custodian and only run the exchange and unbundle yourself whereas and that would lose a lot of the magic right a lot of what you're what you're talking about I I don't think that would lose any of the magic if you do it properly right because think about it this way all coinbase is really doing is taking all your stuff putting it in an Omnibus account ledgering everybody's like ownership of that and letting people trade against each other there's no reason you couldn't just have a custodian running that ledger it's not that hard like stocks trade very efficiently in the United States and

they use the system that was just described it doesn't lose the Magic the part that's losing the magic is if you say like 50 of your assets are like going to bitcoin cash in 2023 that's like pants on head dumb and two if it blocks the ability of people to get their crypto in and out of it because like here's a big difference between a share of Apple stock and ethereum you could use ethereum to transact on the blockchain for utility that's not true of Apple stock right so if you ignore that distinction sort of the ironic effect is the critique of crypto is oh it's all just price speculation and like slinging [ __ ] coins becomes true because The Regulators are forcing it to be that if you can't use the tokens for actual

utility right so again this is why I raised like the procrusteanbed sort of methodology is you're saying well I've got a regulatory framework from 1940 that didn't even contemplate the internet and you damn well better fit into that if you want to operate here it's probably not the best way to do things interesting okay so what do you think this means for the long-term structure of the crypto markets from the crypto native side of things do you think eventually coinbase and Kraken and all the other uh crypto native exchanges the crypto Banks out there do become unbundled and start to look more like Trad or do they kind of get to keep what they've built which is more of a singularity of services all in the same spot I I would say the good cases we get

halfway between those two extremes which is that you want to keep the good part which is the ability to trade a variety of assets on something like an omni Ledger against each other and the ability to send assets and receive assets so that we preserve the benefits of self-custody and decentralization but we also move through a world where those Services don't all need to be provided by the same guy because the problem with the coinbase and Kraken structure is that while their conduct up to this point has been honestly pretty exemplary in the grand scheme of things that doesn't mean it will necessarily persist like I am not okay with the financial system based on trust Beyond cool and by the way all five of my successors none of whom you know will be cool for the next 50 years right so like trust but

verify is the way things need to work in this space meaning that some degree of unbundling and external verification I think is required going forward or it is inevitable that we will have problems because not all people are good people interesting interesting okay that's a nuanced take that I now have to um interpret and integrate uh and so I I guess this just is it's one part the crypto world is pulling the Trad world and being like hey this is the new meta start to look more like us and the Chad world is like well we've learned those lessons before you look a little bit more like us and then somewhere the pendulum will rest in the middle of these two extremes that that is correct like the reality is having come from

both worlds I would tell you a global neutral sort of Fairly governed open it's 24 7. is an incredible advancement in technology the ability to do it transparently is incredibly important and the ability to settle things without counterparty credit risk on either side is incredibly important these are technological innovations that had they existed in 2008 we wouldn't have had some of the problems we had and we should not lose the benefits of that on the other hand missing some of the basic risk management lessons about things like don't let your position sizes get completely out of control and maybe monitor those don't let the exchange people who make money out activity wash trade with customer assets because you

co-mingled things with the custodian like those sorts of lessons we should also learn they're kind of best practices on both sides and rather than saying all one but none of the other we should really try to take the best of both beautiful okay I feel very content about this uh this edx and exchange Marketplace conversation I want to tilt the conversation towards the world of stable coins uh tapping into your experience over at paxos uh recently busd was named a security by the SEC and their action against binance there's also a stable coin legislation Bill passing its way through Congress uh so Austin I'm wondering if you can just kind of set the table give us the lay of the land what is the state of stable coins what arises to your attention

these days yeah so I would say you know I teach at Columbia one of the things we address in my class is stable coins and I think the debate around stable coins is very confused so I like to start with the definition which is this stable coins are just a representation of a unit of fiat currency on a blockchain that's it right and so a couple of important things fall out of that one I am excluding all of the things that are like Securities tokens gold back tokens things like that they are tokenized assets but I would not call them stable coins because when people talk about stable coins they kind of mean what we think of in our heads as money and that is an important distinction two

it really means the innovation of a stable coin is just taking what we already have and putting it on a blockchain so you're changing The Ledger that has implications around like all the people who are saying like oh stable coins are a tremendous threat to the financial system it's like wait wait wait wait wait if you're telling me taking our cash Ledger and just changing The Ledger technology somehow destroys the financial system like we are screwed right like that is incredibly fragile yeah okay exactly what you're telling me is actually the financial system is a threat to stable coins right like causality is backwards and so by the way that actually kind of was true with usdc but we'll come back to that um so I would say there it's important to

understand what they are so that the question that follows on for that is okay now have you done a good job so craftsmanship is something that I focus on there and Frameworks is something that I focus on there so the whole debate around is busd is security is like to me a horrible misunderstanding of what's going on here because by sort of the description the SEC is given as I read it I find it hard to draw a distinction between busd biggest security versus PayPal being a security versus Starbucks gift cards being a security versus maybe your bank account being a security because the whole like well there's Collective efforts between parties that they pay

interest and that's why it's a security is true of all of the things I just said right and again once you understand blockchain is not magic it's just a ledger technology like well Starbucks gift cards are just a ledger technology for cash so like again what's different here so I think it's a really malformed and misguided argument that if it's true I think actually one plaintiff's attorneys you guys throw a party for yourselves because there's going to be so much Securities litigation going around you are all going to be very rich right but two it's going to [ __ ] the U.S financial system because now like Starbucks gift cards have to trade out of registered Securities Exchange like what it's excuse me it is um

it's a little bit silly and so I would say that's one part the second part though and this relates to your point about the stable coin bill is it also tells us we really really badly need legislation around these things if we put ourselves in a situation that because our Regulators are all punching each other and can't decide on taxonomy that nobody can really do stable coins effectively in the United States then let me tell you what's going to happen they'll just be outside the United States right like we live in a world where the choice that faces our Regulators in Congress is not Yes stable coins are no stable coins it's Yes stable coins or yes but offshore like the biggest winner in many ways of the drama over the past year in the stablecoin space has been tethered why

because they operate offshore they don't have to deal with a lot of this nonsense and so I would say my biggest takeaway here and like looking at the McHenry bill you know McHenry Waters if we want to be specific because the Democrats have had a lot of input there too I think that bipartisanship is great is that we need that thing badly because if we [ __ ] the ability of the dollar to be money on blockchain it's just going to be another currency okay so the the idea of b u s t s a security for listeners out there who are trying to understand that and why that is happening is it fair to just categorize that in the world of Gary Gensler wants to overreach and grab as much

jurisdictional power as possible and that's that I mean I think that's largely true there are ways you could do a stable coin where it's a security but one of the things about the whole like Howie test the SEC tries to ignore is the expectation of profit part right and it's hard to see how you have an expectation of profit with a stable coin their argument is that because binance paid interest to people to put it on the platform oh now there's an expectation of profit so it's a security and my counter is that doesn't make busd a security it might make what binance is doing with its users an investment contract but that interest is not inherent to busd and something binance chose to do on the platform right which is why I draw the analogy to Starbucks

gift cards like if they give me extra rewards for using that well there's a financial incentive for using the gift card how is that different than your busd argument and it that's why I said it's malformed I would also tell you I agree with Powell who recently said we've used stablecoids as a form of money I think he's right I think this is a product for the banking regulators they know how to handle those kinds of things that's who deals with the money in the U.S and I think that's what McHenry Waters does it gives regulatory authority to the banking Regulators it basically says yo if you want to take a deposit and say it's worth a dollar we know how to do that there's Banks there's trusts there's certain forms of secured assets you have to do it that way and that's actually correct right

like it is very simple this is just money represented on a blockchain so don't go do all the janky pre-2008 stuff like real talk for the crypto crap not that you're building in the stable coin space is new I've seen French quants blow almost all of this up and tradify the crisis right like none of this is new algo stable coins they're just self-referential Equity notes right like crypto-backed stable coins that's called a securitization right like we've seen all of this before hey tether that's a pride body market fund right like busd that's a government money market fund all of it we've seen all of it none of this is due so I would say we've learned a lot of lessons there just do the things that work that are

liquid that scale that don't break for users and call it a day like stop over complicating it we've used the line on Bank list we are speed running the history of money and Finance in the crypto industry and there's too many people in the crypto world who are I'll say like me in the sense that I came into the world of money and finance through crypto and I'm like algorithmics I was never like this but some people were algorithmic stable coins we can make Alchemy like we this is brand new new paradigm blah blah blah and then there's people who are familiar with the Trad world and can pattern match to experiments that have already come and gone in decades of old uh man that's that's a funny thing to think about the the stablecoin McHenry Bill uh

what should listeners know about that bill like what's significant about that yeah so I I uh testified in the house Financial Services hearing on that bill uh for full transparency so I've talked with some of the Congressional staff about it I've read that thing I would say here's your key takeaways at a high level one it basically says the only thing you're allowed to call stable coins are Fiat back stable coins with very clean reserves I also think again that is correct right like the reality is something like algo stable coins something like the crypto backed things they're cool they're Financial experiments I think they should be allowed to exist but you should not be able to represent safety and soundness because it's a financial experiment so I don't have a problem with dye or LUSD

existing I have a problem with them being called a stable coin like it is guaranteed they will hold the one-to-one pick I think if you want about the brand of the dollar is what's at stake here and so I think what the bill is saying is that if you're going to be to accept the brand of the dollar call yourself a stable coin then you better be real close to actual dollars and so I think that's what you mean by Clean is that like there's something dollar-like backing it yeah there's it's also a consumer safety thing like if you're going to imply that you are safe and stable you need to actually be that thing and personal opinion stable coin issuers should have liability if they break the peg they show the users the body right so if you want to call

yourself a stablecoin it should come with all of the consumer protection bells and whistles that come with guaranteed Financial products in the United States right like you should not be able to say it's stable your money is there and then it breaks the Paget you walk away being like LOL JK it was just an experiment right right so like I I'm not cool with that behavior you want to rep that you got to back it up and so the bill basically says that like you need to hold T bills certain forms of like repo they probably need to expand and fix that a little for financial reasons but that's super technical jargon and then the other part is basically saying you need to be licensed to do it right which is to say there needs to be oversight there needs to be a regulatory framework no just trust me

it's fine I'm not going to disclose things like no you basically you need to operate like a money market fund or a bank a disclose everything and I think again that's correct right if you're going to tell people I'm going to take your money it's worth a dollar trust me it'll be there you should have to prove it it's not just like hey I'm sitting in some non-extradition jurisdiction with your money and then I'll just run away if things go wrong that's how you get more of this three arrows nonsense what does this bill mean for assets like LUSD or die or frax like all of the decentralized stable coins because it kind of puts a Line in the Sand between uh stable coins is the only way that I think people could actually get the

labeling of a sable coin under this bill are like the centralized Fiat backed ones but what about what where does this leave all the decentralized ones that need to have more exotic assets as collateral the assets like the high LUSD frax how do we think about what this means for decentralized Stables so in the current bill there's a Prohibition on things like Algos which by the way I think is overdone I I've told them I think you should just take that out and focus on the consumer representations I would say the main impact is just those things could continue to exist they just need to stop calling themselves stable coins and people offering them and using them like on exchanges for payments Etc can't use those and call them stable right it's not to say you can't buy die or that die can't exist it's just that

Baker Dow probably needs to stop representing that it's going to be worth one dollar at all times right they may probably be saying we'll try to keep it at a dollar but this is experimental and there are ways it could break so maybe not but maker doubt is a tao of all Dows that are out there and there's a lot of decentralization theater that's out there maker Dao is further down along the spectrum of actually decentralized than most Dows I mean we can we can talk about where exactly on the Spectrum it is all day but at least the point of maker Dao is to be meaningfully decentralized and it is actually achieving some of that if not a majority again we can debate that but so like how great so we can't have these non-fiat backstable coins call themselves stable

coins but I as an individual and many others like me out there in the crypto world will just call die a stable coin and that is just a brand that we will associate it with and we are not maker Dao we are just the public so how does this all work this is all seemingly kind of messy no I mean that's fine right like if you and five of your friends like let's say we get to the other like David Dao right we get all people named David in the world we put them in a dow and you guys exactly their shout out to Dave Dow in the 115 days that are in a telegram I'm on uh shout out if you want to if you're Named Dave listen to this hit me up there you go there you go free marketing um but like if you guys get

together and want to use watermelons as a medium of exchange you could do that privately right like in a peer-to-peer way you want to trade a water ballad for a chair you want to trade it for a microphone like whatever have fun guys I'm saying it's much more of an issue when regulated Financial entities with legal obligations do that so can JP Morgan right say hey we're replacing the dollars in your bank account with water ballots no right so to me that distinction doesn't really matter on Twitter it doesn't matter and people like talking about things is like bam it matters as people offering Financial Services in a regulated way because those people get special blessings and special status and can do things within the U.S system that other people cannot and along with that comes a lot of

restrictions right like Dave Dow with the watermelon currency is not getting a Fed master account right but a stable coin Bank under the McHenry Waters legislation might and so I'm saying if you want to be within the regulated perimeter and get the special privileges obligations should come along with that I think the obligations of the bill honestly are pretty fair okay so if there's all of the orgs that are out there that don't are designed to be decentralized and don't ever care to get a regulatory license well then they just won't care yeah and as long as they're not lying about it like that's the point I also say like you and I can't just set up an LLC you know grab it off in space somewhere and call ourselves a bank that is actually a

crime right like you're committing financial fraud you need a bank Charter a capital if you're going to do that so to me again this is where it comes back to decentralization theater and like how you represent things and what people are doing where if you're just being honest about this hey it's like a decentralized thing it's kind of experimental we think it'll work but guys it might break that to me feels okay that's honest it's when you're going around being like no it is a stable coin it's worth a dollar right being kind of absolutist about it making false representations of safety and implying you have all the bells and whistles that's where I have a problem also in this conversation and a conversation has been immensely helpful we've talked about BlackRock we talked about the separation of Exchange in custody with uh edx we talked about

stable coins is there anything any Rock any stone that we've left unturned that we should definitely talk about before we conclude things here yeah so I would say we talk about stable coins in the U.S but again I would zoom out on that one so in traditional markets there's a thing called the euro dollar market which is basically dollars that trade offshore technically tether kind of exists so the euro dollar market as a stable coin I would just point out there are other countries working hard on this problem so shout out to the Mas in Singapore I think they've been very constructive Hong Kong is now moving forward again to reference Japan whose regulator has done a great job the jfsa has a complete framework for stable coins in Japan and now Mika has one for stable coins in Europe so a point I

would make to everybody is the action is moving International very quickly you're going to start seeing stable coins in bigger and better forms that are non-us dollar and offshore US dollars so expect the space to move pretty quickly even when we zoom out from the US Austin this has been a fantastic conversation I've I've enjoyed this quite a lot I've learned quite a lot uh if people are looking to follow you on Twitter where should they go or is there any other place that they that we should Point them to if they want to keep on learning about what you've been talking about and who you are Etc yeah I would say I'm at Campbell J Austin on Twitter uh you can find me out there and all of the other stuff I do ultimately you're going to get to through Twitter so that's probably the easiest place to

find me awesome and uh Dave in the zoom chat has reminded me that those are already in the show notes because he is an absolute chat on the bank list back end so thanks uh shout out today for that one also in Dave Dow awesome thank you so much for guiding us for this conversation I've learned quite a lot yeah absolutely thank you for having me I really enjoyed it Bank location you know the deal eth is risky Bitcoin is risky Bitcoin ETFs that are inevitably on the NASDAQ will also be risky crypto is risky at large you can lose what you put in but we are headed west we are on the frontier we are glad you are with us I've already said that we are on the frontier it's not for everyone we're but we are glad you were with us on the bank list Journey thanks

a lot