Joey Krug Predicting the Future of US Crypto Policy | Joey Krug - Founders Fund

Transcript

[Music] what's up everybody my name is Julie Mosler with coin fund coin fund is the one of the world's first and earliest Crypton native investment firms celebrating 10 years this year of championing our Founders so exciting time for us um in a new presidential Administration there are always questions and uncertainty but actually in this era in this year we could get some clarity around regulatory questions and concerns um for digital assets so in this next section predicting the future of us crypto policy I'm so excited to

introduce to the stage Joey Krug partner at Founders Fund in conversation with Brady Dale from [Applause] axio Hello eth Denver great to see you guys out here and uh Joey great to see you yeah you too um so yeah we're here to talk about prediction markets for folks that don't know um this guy was like the true Pioneer of prediction markets he was building this uh Market called augur before ethereum even launched um he was there before anyone else believed in it um you know Joey can you give us just a little bit of reflection on that uh that history of

yours in the prediction Market space uh sure um I I was always really into the idea of um betting markets um basically ever since I was really young I used to I used to make really simple uh XL models to basically bet on horse races um and you know kind of the problem with with betting historically has been that if you start to win uh the sports books will basically kick you off and close your account um and also the liquidity is pretty fragmented like it's not a truly Global Market um and so that those are kind of the reasons why I thought be interesting to apply crypto to the idea um and basically started working on it you know late 2014 early 2015 uh which

turned out to be basically a almost a full decade too early but now you're now you're an investor in it and the and the market is going pretty well where who who have you made your bet on in the prediction Market space today yep so uh at Founders fund we led the series a of of poly Market in like late 2023 and you know I think they're kind of by far the market dominant player um and actually doing really well even after the election I think that was kind of a question a lot of people had is like will prediction markets uh still have meaningful volumes post elction uh and they're currently still doing like $30 million a day in bets um which is really really cool to see yeah I have to be

honest um I always try to be a um an optimistic sort of tech reporter but I was pretty bearish on prediction markets for quite a while and then 2024 sort of blew me and I think all kind of reporters covering this space away I mean it was really an outstanding year for the whole the whole concept right what do you think we learned out of last year out of out of last election I I think um you know I think one of the things that that was interesting for me to see is all the historical prediction markets basically only only really saw meaningful volume on political elections um and 2024 was kind of the first time

we saw the market both obviously do very well with political elections but also break out of that too um politics are only like half the volume on on poly Market the other half is a really wide range of things basically anything you could see you know on the front page of the New York Times there's basically a market on it um and I think that's probably one of the most notable or important things like even if look at the back at the old kind of web two prediction markets like in trade back in the day um if I remember right I think there were you know I think like on Election night you know poly Market did more volume than in trades like entire you know election Market did in 2012 and that was kind of what people considered

previously to be like the quote unquote Heyday of prediction markets um and then you have kind of random markets on nothing that has to do with elections like you know will Tik Tok be banned or not um and and those markets do you know 20 $30 million in volume so I think the thing we learned is that like there actually is um a certain activation threshold like in a chemical reaction where if you get enough people betting on elections and you do the marketing right you can actually get them to to you know bet on these markets about the future about other real world world events too I was really surprised today before we talked I just went and looked at Dune analytics to see what the numbers were for prediction market today and you know you mentioned that the volumes are still pretty good on on on

on a poly Market what I was surprised to see is the number of Traders are actually bigger than ever so they might not be throwing as much down but there's way there's even more people making bets or at least more wallets making bets today than there was last year so that was kind of surprising um I know as a reporter uh we were really obsessively talking about the election markets a lot inside inside axios and I'm sure it's true inside lots of different newsrooms sort of breaking down what we were seeing in those markets what do you what did you at watching The Press talk about prediction markets I I feel like we came into them with some assumptions what assumptions do you see that we sort of got wrong what's your critique of our narrative around prediction markets uh

in the last election yeah I think um I think one thing that you know some of the press got wrong is you know they'd look at the market and they'd say things like the Market's just manipulated you know it's just it's just fake data or they would say things like you know know well Nate Silver's model has you know a completely different probability than what the market says obviously Nate Silver's right in this market it's just a bunch of idiots um which is interesting because like it's pretty rare that you see like you know a mainstream media headline be like equities Traders are a bunch of morons you know apple is just totally priced wrong and you would see that like on Seeking Alpha or whatever for for like Finance people comment on

but but you don't see that from the mainstream media and and so I think that was an interesting thing and um we kind of talked about this backstage like actually got a call from the New York Times about poly Market you know around the election last year and you know one of the thing and they actually ended up doing if you're a prediction Market fan maybe you'd say it's a really unfair story I thought it was actually decently Fair um and one of the things they said is you know aren't these markets just all manipulated and I was like well you know there aren't that many rich people who just are happy to kind of endlessly lose money um you know the reason they got rich is they tend to like making money and then the other thing I think that the Press didn't really get is

there is not this like one cabal of rich people like there are rich people who are hardcore Republicans and rich people who are hardcore Democrats and then there's also rich people who just care about making money and have no political sway whatsoever and so if you have a market that's mispriced someone's going to correct the price I think two other things that are interesting about this is one po Market was was large enough where it actually incentivized some people um to make their own polling data um that where they asked the poll rather saying you know who are you going to vote for they'd say who do you think your neighbor is going to vote for and then that person bet like 40 million um on poly Market that was the French whale right yeah yeah he can everyone was sure he was some kind of scop and then it

just turned out he was just a guy with a thesis at the end of the day right yeah yeah that was uh that was that was surprising so let's turn um let's turn a little bit now uh to looking forward well I guess let's look back a little bit more so another thing we were talking about is we were discussing the whole notion of this operation choke point 2.0 and for folks who don't know there's this idea that there was some kind of coordinated campaign out of the Biden Administration perhaps to undermine the cryptocurrency industry and there's a lot of skepticism about that but the big big piece of information that came out recently that made people sort of take it a little bit more seriously is the FDIC released a bunch of papers that said it really did make it pretty clear that they they did

seem to have a a particular view of banks getting involved in that asset industry that wasn't obvious when we were talking you said as an investor you've also had some perspective on that with regard to the Securities and The Exchange Commission can you tell us some more about that yeah I think I think my my view is basically the the operation choke point thing in in the press and also in the narrative it kind of got construed as this like banking only thing where it's like the banks are cracking down on crypto um and that was true historically um and then there's kind of all the public like SEC and C FC stuff that you can see like in the in the Press um and people kind of know about that I think the thing people don't really know about

though is that the government in many cases um went to founders of of in many cases like D5 protocols not like centralized things and basically told the founders you know you you effectively have to do a settlement with us um in many cases they said you also have to sign a thing that says you will never work in crypto again and by the way this agreement you can't really talk about it publicly because there's a non-disparagement clause and the only way you can ever the only way you can ever comment on this is if Congress calls you to testify so like one of my kind of hot political things is I think there's a lot of Founders who would love to talk about how the government basically really screw them over if Congress asked them to testify and so I

think Congress should do that it's not just a banking thing it's also you know the Cs cftc the SEC um so these are deals the startup Founders made with these agencies um in lie of what like what was the swort of Damocles over their head yeah so so the swort of Damocles is these agencies would basically go to the founders um and you know they would say hey if you don't agree to this you're just going to end up in jail um which is interesting because one these agencies are inherently civil agencies so they'd have to refer it to the doj none of these matters have been referred to the doj yet and then there's also the important thing that like none of these Founders actually broke the law it was

just a crazy crazy administrative state that got really out of out of control um I realize this sounds very conspiratorial and and at first I didn't really believe it either and uh eventually one of these Founders is telling me the story I like okay like there's no way they like made it so you can't work in crypto again that seems like illegal um and so I actually got some people to like show me their settlements um and sure enough like there are clauses that say you can never work on crypto again um you can't talk about this to anyone and I guess my view is like on all that stuff I think like both going forward obviously um you know does the new admin's obviously taking a very different approach but I also think like anyone involved in that in my opinion should be fired I think it's like

completely illegal probably in many cases unconstitutional um so yeah and on just one other piece on that I know from my own reporting the things that also might sound conspiratorial but this is this is just standard practice of the SEC any any company that has a settlement with the SEC this gag rule is just a standard part of that deal it's an official policy of the SEC it's documented you know we've written about it people have um sued the agency to get rid of this gag rule but it is this this is just any settlement at all has has this kind of very hard gag in it um so yeah so you've you saw these at least some of them with your own eyes right yeah yeah I've I've like seen seen the PDFs and um yeah the gagr thing is also really weird cuz it it's it's like

couched in a settlement so I guess you can agree to certain things that you you normally the government wouldn't be able to do but also like at a surface level it feels very anti-ir Amendment like oh the government's saying that you can't criticize the government's actions that's effectively what it is um even though you didn't actually break any law and the only reason you're signing this settlement and paying like $300,000 is because they're threatening you with jail time if if you don't um just seems wrong and can you tell us who any of these companies are I would I wouldn't want to you know share just because the founders of these companies told me in confidence um they're not like ones in my portfolio or anything they're just Founders I know in the industry but I think like um I don't know it's definitely something like the journalist

side of the space to look into maybe some of them would share it you know on on background or or with their name changed or um yeah well I've got to ask you know but I I understand so okay so Joey so that I mean that is a super interesting story um looking forward I know you're a person who cares about what happens next with policy um you know what do you the the two big things we keep hearing that the Congress wants to deal with is this idea of Market structure so what does the C cftc um regulate what does the STC regulate do we create a new crypto agency who knows I mean that's probably not going to happen but um and then also stable coin so that's the agenda what's your take on that agenda is are do you coign that or

is there is there something more you want to see I I think like at a high level the the agenda is basically right the thing I would add is that um I think in the market structure bill in my view it's really important to basically exempt uh you know dii from the kind of regulatory apparatus um and and the reason for that is obviously you know anyone here who's a developer in the audience knows that like basically the existing rules and regulations for running an exchange or running a brokerage or all these things for one in defi you're not actually running it like it's a smart contract that does it and then two um in many cases they're not even like physically you know possible to actually add these things in without

just completely ripping away everything that makes it useful and interesting um and the third thing which is which is kind of interesting is like many of the provisions in the Securities and Exchange Act and the Commodities and exchange act for how exchanges get regulated actually require you to add stuff that adds in massive security vulnerabilities in a in a crypto setting like that requires you to be able to roll back trades it's like okay well someone could just hack the account that has the ability to roll back trades um and you know do something really crazy make some money you roll back a bunch of trades or or maybe you maybe you made a massive leverage bet and lost you just roll the trade back CU you hacked the person you can see how this kind of falls apart so I think um under the

Biden admin there was this bill fit 21 which passed the house it didn't really get brought to a vote in the Senate partially because of the Senate Dems partially because Biden would have vetoed it but it did had pretty good um Provisions exempting defi there's some people in the space who will crible with it but it's like certainly better than nothing uh so I think basically whatever we pass should should have you know pretty broad exemptions for defi um and do you think on defi the thing that's tricky with that I think for a lot of people is it's hard to get the the anti money laundering stuff in there they want to be able to connect um those transactions to people and have them not you know be terrorists or criminals do you I mean do you think the on andof ramps are adequate to to deal with that

or what's your take on the kyc AML question yeah I think um it's a good question I think there's like a theoretical answer and a practical answer um I think like you know obviously this doesn't work if you say it to Congress but like from a theoretical standpoint the anti-money laundering stuff just doesn't really work anyway um like it's very rare that it actually stops or catches money laundering if you want evidence of this um there's a really great Economist article that came out about a year ago which showed that Singapore became a massive oil trading Hub um where it wasn't previously and there were Traders making hundreds of millions of dollars a year trading oil and you ask well why is that it's because there's they're basically a laundering Russian oil um and then branding it as as Western Oil and it's

so basic like none of the money laundering anti-money laundering stuff really works in my view but if you you're talking to people who do believe it works I think you know the exchanges as a centralized point is a pretty good lever because um with the exception of like really secure like privacy based systems which most people aren't using today outside that it's pretty easy to trace like oh you know Joey sent money to coinbase and then withdrew it to his ethereum wallet um and then like you know you want to make sure that I'm not like sending it to Isis or whatever you could track that with like chainalysis pretty pretty well so I think it's like there's probably a good enough um in merary Solution that's not perfect all right well great well thanks for giving me some homework today Joey um thanks for shedding some light on these topics

and thanks all of you for being here and on to your next Gathering