Stablecoins are Fueling a New Era of Dollar Dominance | Vance Spencer & Michael Anderson

0:00Demetri Kofinas:What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are Vance Spencer and Michael Anderson. Mike and Vance are the founders of Framework Ventures, one of the largest venture capital firms in crypto. They've been on the podcast several times before to discuss their investment outlook for this asset class, and you can easily find those previous appearances in the related section to this week's episode page at hiddenforces.io.

0:41Demetri Kofinas:We spend the first hour of this conversation discussing the current landscape in crypto, the evolution of digital assets since Michael and Vance were last on the show, and the growing institutional adoption of Bitcoin and Ethereum through ETFs and treasury strategies. We also explore recent regulatory developments, in particular, the Genius and Clarity Acts, and what they mean for stablecoin adoption and the broader crypto markets. The second hour is devoted to exploring the far-reaching implications of dollar-backed stablecoin adoption outside the United States, how regulatory differences across jurisdictions are shaping innovation and decentralized finance, and the emergence of digital asset treasury companies as major players in the crypto space.

1:26Demetri Kofinas:We also examine the practical intersections between blockchain technologies and artificial intelligence, including how AI might leverage decentralized finance applications and cryptocurrencies for the purposes of capital formation and data monetization. If you want access to all of this conversation, go to hiddenforces.io slash subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q &A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page.

2:11Demetri Kofinas:And if you still have questions, feel free to send an email to info at hiddenforces.io. And I, or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this profoundly important conversation about the future of finance and the growth opportunities facing investors with my guests, Vance Spencer and Michael Anderson.

2:55Demetri Kofinas:Vance Spencer and Michael Anderson, welcome back to Hidden Forces. Thanks for having us. We were debating whether or not this was your third or fourth appearance. I had forgotten about one of them because you guys had that... Actually, I hadn't forgotten about that wonderful wonderful appearance where you guys came on right after FTX blew up and Vance shared his experience getting some texts from SBF, which was amazing. Also on that one, I called Genesis blowing up before it blew up. So that was a little alpha for listeners. That's right. I actually highly recommend people go back and listen to that episode.

3:31Demetri Kofinas:It was fantastic. So you guys were first on the show back in 2020 during DeFi summer, and then you came back on for the SBF thing, the FTX blow up. And then you came back on a year after that, which I'd forgotten about. I hadn't forgotten about that episode, that conversation, but I kind of rolled it into the conversation with FTX in my memory banks. And in that conversation, if I'm not mistaking, you guys were feeling very bullish about where the industry was headed, in part having to do with kind of institutional capital coming in. The Bitcoin and Ethereum spot ETFs were on the way at that time.

4:02Demetri Kofinas:So we'll have a chance to cover that. But I guess maybe the best question to start the interview was just like kind of how have things in crypto evolved since you guys were last on the program? I think we kind of called a lot of the things that we were going to be discussing today, which is in the last two years, we've seen the most success out of any ETF launches in the form of Ibit and ETH, which are the two BlackRock products for Spot, Bitcoin, and ETH. We've seen institutionalization of tokenization with billions of dollars of money markets from BlackRock coming on chain. We've now got regulatory clarity in some aspects, which I know we'll talk about as well with genius just going through and getting signed by President Trump.

4:42Clarity, which is another one, has been passed through the House, now goes to the Senate. The industry is maturing and getting to a point now where we've been asking for the levels of clarity and understanding that we finally now are starting to get. I think the institutionalization and just the understanding of what this new capital asset is, which is digital assets, is a pretty fundamental shift. It's not, you know, tech trends kind of come and go every couple of years, but we don't create new asset classes very often. And I think that that's really kind of what we're doing now with digital assets.

5:15Vance, do you have anything to add there? No, I think that's a good synopsis of where the market has gone. And right after, or I guess right before FTX blew up, we had raised$400 million dollars for our third fund. And really that fund was supposed to be, you know, we're a venture fund in crypto. And what that means is you do liquid sometimes, you do venture sometimes, you do distress sometimes, but whatever the game is on the field, that's kind of what we want to play. And what we thought was going to be a venture fund ended up, you know, we called a lot of it, right, you know, during slash after Luna and FTX and bought a lot of liquid crypto pretty close to the bottom.

5:54And at that point, we had LPs bailing on us. We had LPs fighting us, call the capital and buy crypto. And I think yesterday, actually, I got an apology email from one of those LPs. Don't need to go into who it was, but I think it's pretty indicative of we were out in the wilderness for a long, long time as the industry recovered. But we were buying assets that we had high conviction in. At a certain level, it was an existential bet that crypto would continue on. And that's why we bought a lot of the majors. But then as the industry continued to develop, and especially DeFi started to actually have real earnings power and product market fit, we tended to buy those assets.

6:32And so I think right now where we are in the industry's history is it's been institutions love ETH and Bitcoin, but there's this long tail of productive assets that people are kind of ignoring that are starting to spit off serious cash flow. And that's what we're most interested in. And there's some things in our investment thesis that have not worked, mostly consumer and gaming. But I think we're kind of back to our roots, which is DeFi. And that's where we are most comfortable as well.

6:55Demetri Kofinas:I actually don't want to forget because I did at the start of this conversation, I'm an investor in framework. So bear that in mind. And we're going to talk about securities and crypto related assets today that may or may not be things that either of us own. So that I just want to throw that out there. So just walk me through this. You mentioned the fact you were buying liquid tokens. Why is this significant? What does it matter whether or not, you guys are buying assets that are currently listed and that are being marked to market. And how does that compare to how the industry was working or functioning prior to, let's say, the most recent cycles?

7:28Well, I think in a lot of ways, maybe I'll take a step back and say, traditional venture, there's really one format for getting access to deals, which is investing at private rounds and then getting liquidity either through M &A or an IPO. But crypto venture is pretty fundamentally different in that you are able to invest in private rounds where maybe it's equity, maybe it's tokens where the value accrues, but you're also able to make investments that have venture scale outcomes in the liquid markets as well. And in 2017, the overhang of the ICO craze led to a number of assets that were fundamentally productive, really attractive opportunities, but they had liquid tokens.

8:06And so in our first fund, which we started in 2019, a lot of the opportunity set was actually in liquid crypto markets for DeFi assets that were already trading and maybe even trading at 99 % depressed values to where they launched a couple years prior. And so in crypto venture, you just have a fundamentally different market structure than what you have in traditional markets. And so that's how we like to look at the field and see what opportunities we have, which is we're both doing private rounds and leading Series A type investments. But we're also looking at the open public liquid crypto markets and trying to find venture scale attractive opportunities there too.

8:45And so I think when you see depressed values through structural selling, like when Celsius was blowing up and they were foreselling all of their assets, those are great opportunities if you have dry powder to be able to go in and backstop those markets at really depressed values. That's what we're talking about when we talk about distressed investing. And in some opportunities, other assets are fundamentally productive, and we'll get into this later, but a lot of the DeFi protocols are actually cashflow positive. They're buying back their own token or distributing value back to token holders, and they're trading in the public markets at price to earnings ratios of single digits.

9:18And these are other massively huge opportunities from a venture scale perspective as well. And so you have to be able to, as a crypto venture investor, look at the entire field and be able to operate in all different vectors of it.

9:30Demetri Kofinas:Fancy anything to add to that? No, no. I mean, there's a lot of colorful anecdotes of, you know, when FTX blew up, you know, there was also someone who hacked FTX. And so they took all the alts in FTX and they just started selling them. And that was a weekend where we bought a lot. And I'm just not sure that there's many investors that can really handle that. It's a really different industry and it's getting more institutionalized, but it will always be the frontier. And I think that's why we love doing crypto. It's right on the edge. And FTX had purchased a lot of the assets that were distressed during the Celsius liquidation that Michael mentioned before, right?

10:03Demetri Kofinas:Am I correct in remembering that? And what was on the balance sheet of FTX or the collective entity of FTX was, remember, Alameda was a very, very large venture investor in the ecosystem as well. And so they had a number of investments that they had been holding onto. And some of them, I can't remember the exact percentage, but I think they bought 5 % of Robinhood and 5 % or 10 % of Anthropic, which now, in retrospect, looked like amazing investments. But at the time, I think the FTX bankruptcy proceedings ended up selling them not as high as they are now, but they were making a ton of investments off of the Alameda balance sheet as well.

10:38Demetri Kofinas:I mean, SPF mostly rolling, well, he's not in his grave, but rolling in his jail cell because he was telling everybody that this is a liquidity problem. It's not a solvency problem, right? So he's saying, I told you guys, you just gave Alameda a bit more time. I mean, wasn't Alameda, if I'm remembering correctly, it's wild how fast everything moves in this space. I mean, FTX was less than three years ago, right? It was November 2022, Correct. And if I remember correctly, because it's been a while, Alameda Research, not only was it the proprietary trading arm, but it was also the conduit. It was the primary receptacle for all the funds.

11:11Demetri Kofinas:Everything went through Alameda first, right? Including customer deposits. Yup. And when everything fell apart, it was just picking up the pieces for almost two years after that. There were funds that got trapped in FTX, one that was backed by a major pod shop that they hit us up and they said, hey, we have a week to clear our venture book and wind down the fund. Do you want to deal? And we took two days, looked over their entire venture book. We knew exactly what they're holding. We ended up executing on a few deals. And those have been some of our most profitable investments to date on a multiples basis.

11:49And so, whatever you think you're going to do with your crypto fund, usually the market has other plans. And you have to know what you're doing and you have to know why, but you really can never anticipate these types of calamities. And there's all sorts of other stuff that happened. Bad people went to jail. Alex Mashinsky from Celsius went to jail. SBF is obviously in jail. There's also bad people who, at least in our minds, got off. And then there was, frankly, good people who got in trouble for things that we thought were pretty okay. A good example of that is Roman Storm. And he's still fighting this tornado cash legal battle where he tried to build privacy-preserving software.

12:29And now he is potentially going to jail for 25 years as a result. And so it's been kind of a mixed bag in terms of holding people accountable. But I think the industry is ready to move forward and put that in the past. and like I think initially I was very angry with SBF now I'm kind of more of the mind of you know does he really deserve 25 years in jail for this it's kind of like the the CEO who got caught with the woman at the concert like how much you know flagellation is enough to get them to repent and you know I think at this point probably better to put things in the past but also have some sort of idea of forgiveness and clemency for people who have righted the wrongs

13:08Demetri Kofinas:What do you, not to press you too hard on this, fans, but what do you think would be an appropriate punishment for SPF? Because he did cost many people their life savings. I don't know. But people say the death sentence or life is the only acceptable one. I think it's kind of like a Twitter thing where it's just like max punishment all the time. If he got out in 10 or 20 years, I think that would be okay. But the 25 plus, that's really tough to be in a jail cell for that long. I think that he may have been able to get off on a much lighter sentence had he kept his mouth shut. I think it was his, what seemed like a true lack of remorse that really dug him in deeply.

13:46Demetri Kofinas:It's quite remarkable actually to watch him bury himself in real time, all the interviews he did, all those conversations he had while he was tweaking on his gaming chair. It was surreal watching that happen. So I had another question floating around in my head, maybe it'll come back, But here's another one, which is where is investor capital flowing to today? And what sectors are being left behind in your view? I would say there are a lot of crypto funds that made career ending mistakes in the years 2021, 2022, and 2023. And as a whole, over the past couple of years, and we've obviously raised the fund in 2022 and have had good luck since then, but there's a lot of people who have not been able to raise.

14:28And the long tail of crypto funds has basically died. And so you've kind of culminated into, you have Paradigm and A16Z, which will continue on because of their brand. You have us, you have Multicoin, you have Dragonfly, and then a couple of others, but that's basically the field. There's no Alameda, 300 pound gorilla in the room, swinging around liquid and also doing venture, and then also market making. There's no three arrows that is kind of cut from the same cloth in terms of a multi-strategy, huge risk type of venue. And so you have the venture funds. And what separates the winners from the losers, at least over the past few years, is if you've done liquid and if you've picked your right spots.

15:08And the people who have stuck solely to venture have kind of been the losers on average. And the ones who have been more liquid have been the winners. But now that the industry is mature enough to have real earnings, cashflow-based businesses that are investable at a Series A or higher level, the venture market is starting to come back, but certain themes have certainly died along the way. And this is just our opinion, but the things that have worked best are financial services on chain, stable coins, lending, swapping, borrowing, derivatives, the historical profit centers of crypto moving from centralized to decentralized is a major theme that's been playing out over the past few years, and will only continue to do so.

15:43There's also businesses that are B2B SaaS, security businesses that are doing quite well, that are investable. And then I think the things that have died or have not shown success to date. And gaming was a pill of our fun strategy. We've since kind of come back on that since it really hasn't played out. And then consumer also hasn't really played out. And people have this desire to make crypto, we're going to take Facebook and we're going to put it on chain. We're going to take Snapchat and we're going to put it on a blockchain. It's just not that. And that's OK. And maybe one day it will be. But today, what crypto is, is it is the world computer.

16:17It is the world stage for finance. It is the only place where finance happens at the speed of software. And every single cycle, the blockchain suck in more and more assets. There's 250 billion of stable coins. Tokenized T-bills and tokenized fixed income are flooding on chain to the tunes of 11 figures, so$10 to$30 billion today of these assets. And it's only going to continue. And so those things are doing well. Everything else is doing pretty poorly. And so there's winners and losers. But overall, the value proposition that we've talked about for so long is finally playing out. And that's a positive.

16:49And all the dumb stuff is just the NFT exchanges, the meme coins. We've speedrun those arcs in crypto and the value has been extracted and those have kind of been laid by the wayside. So that's at least my synopsis. Yeah. Only things I'd add are I think there's been a ton of capital that's been raised for what you would call traditional venture investment dollars and crypto venture investment dollars where the LPs look at you in the same bucket as they would a Sequoia or a Greylock or any other venture investor, and you're bucketized in the same format. And so what you're looking at is seed deals, Series A deals, Series B deals.

17:28But what that has left is basically a void in the capital markets going after liquid assets, and especially liquid assets that have a productive value. And not only is it Three Arrows and Alameda that are not here anymore, but Tiger Global isn't here anymore. And they were a huge mainstay in the 2021 cycle for liquid investing or even large late stage growth equity investing, but they're gone. And the liquid funds, at least the ones that we're seeing, they're raising in the tens of millions of dollars. And that's just not a large enough factor to really even be a factor. And so what I would say, to go back to the question, Dimitri, is frankly, just there's a void of capital that's in the liquid markets for these productive assets.

18:09But I think what we're starting to see is, and we can get deeper into this subject, but digital asset treasury companies, which started with micro strategy and has expanded into many, many other types and strategies of these publicly traded entities that are holding crypto. But I think they're going to start to look at this as a mechanism for raising capital for liquid assets that are productive and mature. And I think that that's kind of a recognition of this void of liquid investing and liquid capital going after public tokens.

18:39Demetri Kofinas:No, I would love to talk about that. But before we do, just one more macro, kind of zoomed out question here. And that has to do with how the... I mean, you guys have kind of spoken to this already, but I want to get more clarity on what is the sort of bullish narrative today or what is the overall narrative in crypto? Because we've gone through so many cycles. You You mentioned some of these NFT collectibles. We had back in 2016, 2017, 2018, it was the L1s. There are still some L1s that are competing for capital, but it feels like in some sense they've become kind of almost like meme coins themselves, where there's a preexisting network effect and a lot of bag holders, and they're just trying to pump the sort of interest in the L1 in order to get people to come in so they can move the price up.

19:21Demetri Kofinas:I don't know actually how much traction some of these have gotten. There was DeFi Summer, there was meme coins. Also, interestingly enough, this is another question that maybe I'll ask and then we'll continue on this path, which is, do people even talk about base layer security anymore and performance? Is that even a conversation that's happening? So let's maybe take a 10 ,000 foot or 30 ,000 foot perspective. And what we have proven over the last few years is that blockchains are a purpose-built technology for value transfer. And what we have shown is that stable coins, tokenized assets, even just crypto assets like Bitcoin and Ethereum itself are those value transfer mechanisms that will underpin all of financial services eventually.

20:01What we are still trying to prove out to the points on consumer and games and maybe NFTs is our blockchain's purpose built for data transfer as well. And having to dive into that eventually, but right now we've proven that value transfer works and that's what this technology is for. So when we're talking about what's the future, it's kind of going back to the past. We're going back to the things that in 2019 and DeFi summer, the distribution of financial services and the democratization of access to financial services is really kind of what is working and what will continue to work for blockchain.

20:32So are people talking about security at the base layer? Of course, because there's only one place that real world assets or tokenized assets are being put on chain, and that's Ethereum, because it's the most decentralized and it's the most secure. And I think that that's maybe not an abject conversation, but it's definitely part of the thought process when BlackRock wants to put their Biddle product on chain somewhere. And so I think all this stuff matters, but I think going back to first principles, it's all about financial services and value transfer. Okay.

21:01Demetri Kofinas:So that's another one. You mentioned decentralization. Decentralization used to be a huge talking point. Lots of people use the word, didn't even necessarily have a clear idea what they meant by decentralization. I don't really hear this being talked about much anymore. I just think it's almost kind of like an appendix or an appendage that's kind of there in the industry, but no one quite remembers what it was. I mean, so much of what's going on right now that seems to be underpinning the bullish thesis for crypto is institutional adoption, is regulatory legislation that sort of helps the industry, quote unquote, grow up.

21:32Demetri Kofinas:The Genius Act involves AML, KYC regs. So what's sort of the narrative around decentralization of crypto today? I think the narrative with decentralization is it's becoming more of a regulatory term in terms of if you look at the market structure bill that's coming, there's a certain percentage that one insider can own for it to be considered a decentralized commodity. There's also requirements around the types of nodes people can run and how many there have to be. And I think that's on balance a good thing. Having us as a community nebulously define what decentralization is leads to a bunch of people who are going to try to find loopholes in that and convince people that they're decentralized when they're not.

22:14And to be clear, if you build a centralized blockchain, that is a money services business and you need a regulatory landscape to capture potential wrongdoing there. Same thing with exchanges. If we can build decentralized versions of finance, we don't need something like an FTX, which is trying to compete and defraud people in that vein while they're pretending to be a good actor, but actually they're bad. And so that's where decentralization has gone. And just in terms of why Ethereum right now, and Ethereum has, I think, 75 % of all stable coins. It is basically all of the tokenized T-bills and bonds and fixed income that exists today, all of it's on Ethereum.

22:52And the reason why is decentralization, but not in a literal sense. So when DeFi Summer happened, Ethereum was the only decentralized blockchain other than Bitcoin that had real functionality. And so DeFi Summer happens, and then all of these stable coins come on chain to go farm things, to swap into tokens, to participate in the ecosystem. And then for all the coins that came on and then left in terms of stable coins, some of them stayed. And those stable coins became the capital base for more stable coins, more RWAs, more experiments that happens on chain. And so DeFi summer was kind of the moment that, you know, a thousand flowers bloom from.

23:31And it's been path dependent since then. And like a good analogy here is, you know, maybe ChatGPT, OpenAI doesn't have the best model. Maybe that's Grok now. But ChatGPT has a billion users and Grok doesn't have any. And so it doesn't matter if you can build a blockchain that's more decentralized than Ethereum. It also doesn't really matter if you can build a blockchain that's like 100 times more centralized, and it's just super fast and super cheap and great. It doesn't have the path dependence where the assets were there, and so there became more assets there. You're describing network effects here.