"Bitcoin Is Needed More Than Ever"

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1:30Mike Belchi, welcome back to Real Vision Crypto. Hey, it's good to see you again. How are you? It's always a pleasure to have you on the show. We've got you on the show here today. We've got a little bit of a Bitcoin mini rally going. I don't know if we can bring up the chart, but pretty positive price action over the last 24 hours. On my screen, looks like it's up, call it about just under 3%. Lots going on. And in the meantime, in the background here, Mike, I've got Chair Gary Gensler going on mute on the live feed testifying down on the hill. All right. Lots going on. Yeah, lots going on indeed.

2:03Mike, let's do the 50 ,000-foot overview, what you see happening. Obviously, a lot of things happening in the space right now, as always, a lot of innovation, but also a lot of regulatory and legal talk right now happening. What's your perspective on what's happening right now? Sure. Well, the good news is that the regulators have woken up in the post-FTX era and really started to take a look at how to bring digital assets into the fold. The bad news is that there's a lot of confusion about that, in particular here in the US. And so it's causing a lot of uncertainty, actually, in the markets. Now, with the macro backstop, not related to crypto, you know, governments around the world are still tinkering with interest rates, kind of recovering from the COVID, you know, money prints.

2:51And that is going with mixed results. And, you know, Bitcoin, the price is up in the last few months, is really the beneficiary of that. So one thing is kind of on the macro angle. You know, Bitcoin is doing exactly what Bitcoin was designed to do. So it's a bit of a counterinflation hedge. And it is, in some cases, starting to look a little uncorrelated from the rest of the markets, which is very exciting. I don't know if it's going to stick completely. But when you stop tinkering with market interest rates, it turns out markets can do what markets do. And you can start to see exactly how Bitcoin has advantages or not.

3:27And then the regulatory side is kind of really related to the post-FTX saga, where lots going on here and abroad. Hey, let's talk a little bit about this macro backdrop. I know it's something that you've been thinking about, something you've been writing about, something you've been speaking about. Give us a little context on what's happening and why you believe we see the directionality that we do in prices. What's the tie-in to macro policy? Sure. So in the last couple of years, we've seen massive money printing. And this has lined the pockets of investors that start putting assets to work and they start investing in everything.

4:03And all assets go up. And we've seen this in the stock market. It just goes up and up and up seemingly forever until it doesn't. And in the last nine months, the Fed has finally started tightening rates because interest starts to raise its head. And as they increase those interest rates, all of a sudden, that free cash that people were applying to all kinds of investments, including high-risk investments, dries up. And so the markets look actually to some degree more normal because you don't have this artificial cash that's floating around everywhere. So this is where they're tinkering. The problem is that we've got inflation as a result of having done massive, massive money prints.

4:46That's going to take time to dissipate into the system. Could be years. And in the meantime, you've got politics going on. Those want to have good markets or well-performing markets. Nobody wants to be residing over a recession, so they fight over what the definition of a recession is. And in the meantime, Bitcoin, what is the attribute of Bitcoin? Bitcoin is a monetary policy which was set back in 2008 when Bitcoin was created. It is now the longest running monetary policy without human intervention, without tinkering ever in the history of mankind. We've never had a monetary policy that's been as static and consistent.

5:27So you can like it, you can hate it, but it definitely doesn't change. And because of that, it starts to see attributes that are different from other markets, which very much, of course, do change as people change their minds about how to administer them. Boy, that's so interesting. I've never really heard it discussed that way before, this idea that Bitcoin is the longest-running monetary policy in history. You're referring to the hard cap, the$21 million supply, 21 million Bitcoin supply, I should say, that is sort of immutable, at least in the code base today and also in the culture, the ethos, and in the minds of the people who care about Bitcoin, who love Bitcoin.

6:04That is really interesting. If you look at the history of fiat currency on a long enough timescale, at least, it's always the history of debasement and manipulation. that's right you know humans you know we we try to make things better it can be well-intentioned sometimes it's not well-intentioned you know you can look at history but you know we tend to change things and um you know we think we're doing it for whatever reason but it has really difficult to predict um impacts uh in terms of all the people that are using that currency so you know bitcoin is a little bit like gold people have thought of gold as kind of a static supply it turns out gold's not actually a completely static supply you know they pull out about 2 % of more gold every year.

6:45And there's some trying to mine gold off of asteroids, which I suppose could greatly impact the supply of gold if that ever succeeds. But Bitcoin actually is the only one that's actually perfect in terms of matching exact production with the theory and the policy that was set forth. So it can't be changed. And that is the feature of Bitcoin. It's very, very interesting. Yeah, I should say before I sound too radical, The reality is that we've had very moderate inflation here in the United States for most of my life, certainly. Obviously, hyperinflation in the 1970s, or at least exaggerated inflation, I don't know if it qualifies technically as hyperinflation, but very high inflation.

7:23Certainly painful inflation in the 1970s for people who are old enough to remember it. But again, on a long enough timescale for people who look at this historically, you always see this nature of some of the challenges that we're maybe, maybe beginning to see right now, which is these political trade-offs as sort of political animals that human beings engage in that increase the price. Go ahead. Yeah. You're sort of right. I think we have been beneficiaries of a couple of decades here in the U.S. of having relatively low inflation, but it hasn't been as low as it seems. They've been tinkering with the CPI, the Consumer Price Index, all the way through whenever it's convenient to make it so that it looks like inflation is under control.

8:05You can look at the long time period and you can see that the actual amount of debasement that's happened. The other thing is the U.S. is and has been for the last several decades, 60 to 70 percent of the global reserves, reserve currencies of the world. And that is a tremendous benefit. The U.S. has been very effective at exporting dollars to other countries, which effectively increases the demand. Right. So that helps keep inflation low because the supply gets spread over a very, very large base. So I'm not sure we've really had great in really low inflation when you really look at kind of in real terms, what's been happening globally.

8:48And then also a tinkering in the numbers. Mike, you are a tech guy. How did you go down this macro rabbit hole? For people who don't know, we should probably give a little bit of background and context about your work at Google, your work in developing the standards that the World Wide Web, the Web 2, is based on. Talk a little bit about that and then this transition that you made into the thinking about monetary policy and the relationship of technology to macroeconomics. Well, I am trained as a software engineer. I've been into computers since I was very, very young. I spent the bulk of my career as an engineer, engineering manager at a number of companies, tech startups usually, but spent a disproportionate amount of that time in the web browser space and search space and did a number of things there.

9:36Overall, I think that I am a bit of a, I have an entrepreneurial spirit. I like to build things from scratch and I like to innovate. And I think I've tried to pick problems that are going to have big global impacts. So, you know, early in the mid 90s, that was kind of the Web 1.0 generation. By the time we got to, I guess, Web 2.0, I was in the middle of that as well. Bitcoin, when I finally discovered it, was clearly something that is going to change the way we do money. And I, like many others, didn't really have a good grasp of what money is, which is, you know, it's funny. Like we all spend so much time thinking about money.

10:17And I do remember watching Eric Forkey's talk, I don't know, back in 2012 or whatever it was. So articulately talking about what are the unique attributes of money that we need. And when you start to realize, wait a minute, this system that we have that we never really think about why it is the way it is. It's just like rules that have been given to us that have been developed and inherited over decades and centuries. We actually can change them with software. And that's what got me excited. So it's very much the technological innovation that got me excited into digital assets and crypto. And with that, well, this is money.

10:52So you got to start learning about money. So you can call it the rabbit hole. You can call it kind of never-ending intellectual curiosity. But if you have intellectual curiosity about how things work, I think it'll lead you to going deep down paths and starting to understand how things work better. So, yes, I know more about financial markets than I ever thought I would. I certainly had never intended to be a banker. And yet here we are, you know, I guess we're running the fastest growing crypto custodian in history. But it's all just part of the job to make it so that software can do what software does, which is it helps us completely upend the way that traditional systems work and help us build new systems.

11:35Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

11:44Well, we certainly love never-ending intellectual curiosity here at Real Vision Crypto. Let's talk a little bit about this place that you're in, talking about money and innovation. What are you guys doing on the software front over at Bitco? I know that you're interested in developing wallets and using some of the new technology that's coming online in the Web3 space. Tell us a little bit about that effort and the importance of innovation in what you do. Sure. Well, the importance of innovation, let's start there. Like we're just barely scratching the surface on what can happen with digital assets.

12:14So we've talked about Bitcoin a little bit on this show already. And, you know, Bitcoin's role is that it can actually be the new type of money with a static policy that doesn't change much. But it's not very good at, you know, smart contracts and, you know, things that diverge from that store of value type of use case. It hasn't cracked the nut on payments yet. And I think more innovation will come there. But blockchains and the transparency that they bring, there's a ton that we can do here. So I'm very excited about what's happening with DeFi. I'm excited about what's happening with stable coins.

12:45I'm excited about what's happening with identity. We start to see digital property. You know, NFTs have been the first manifestation there. All of these are just early products that are coming out. I mean, it's kind of like the products that came out in the late 90s. A lot of them died, by the way. There's a lot of experimentation going on. Some of those experiments will fail. Some of the experiments that can be the most interesting haven't even started yet. So one of the important things, if you're in the digital asset space, you have to be able to keep up with innovation. So you can't get big and be happy with the wallet platform that you built from 10 years ago.

13:24You have to constantly be looking at like, wait, how is the industry changing? How can we add more product and service? For BitGo, this led us down, I think, two different paths, which we are prosecuting both. But one is, all right, this is money. It's regulated, right? It's important that we have a super high degree of compliance. We've got a lot of skeptical people out there. We have to be better at doing compliance and regulation than any traditional bank has ever had to be because there's so much skepticism about what we do. But that's the bar we do. And so that leads us down a regulated path.

13:57That doesn't sound very innovative, but it actually turns out it kind of is. So when you look at markets and the way that they work in the U.S., whether you're talking about equities, whether you're talking about derivatives, CFTC, you will see market structure. You will see exchanges. You will see broker-dealers. You will see clearinghouses. And they have roles. We don't have that in digital assets today. And so where we're spending a lot of time right now actually for BitGo is with regard to settlement. So we are a regulated custodian here in the United States in two different trust companies, one in South Dakota, one in New York.

14:33Interesting topic there about what's the best way to be regulated for that type of activity. But custodians can do settlement types of things, escrow types of things. This is natural to what we do. We also have abroad. We have Germany. We have Switzerland, Singapore coming soon. So we're doing this both local and abroad. And on the settlement front, how do you just be able to settle basically bulk trades? that are happening across the planet 24 hours a day, seven days a week. Remember, the existing banking system runs Monday through Friday, nine to five. It doesn't work well when you've got a 24-7 market.

15:07So we've got to build settlement clearing capabilities that can handle that impedance mismatch. And that's what we're doing. We've had a lot. We call it the Go Network. It's got mechanisms where you can keep assets in deep gold storage and yet trade them on exchanges without having to move them onto exchanges. We've got ways that exchanges can settle inside of BitGo between each other 24 hours a day, seven days a week, both fiat and crypto. We learned a lot from the Silvergate episode. Some people blame crypto for that. I blame the regulators for that. The problem we had is instead of having 100 banks each handling about 1 % of the crypto fiat volume, we had one bank handling 100 % of the crypto fiat volume.

15:52And that led to concentration risk. And if you've got a bank with 90 % of its revenue coming from a single industry, it doesn't matter whether it's crypto or autos or anything else, if that industry loses confidence in that bank, for whatever reason, you can have a run on the bank. It's exactly what we saw. This is fixable. And we know how to fix it. It's got to be built. So that's one side that we're building. Let me jump in there just because there's so much. to discuss it. It's so important. It's interesting. Obviously, when we're talking about this, we just went from speaking the language of software development to speaking the language of banking.

16:28Early in my career, I worked at Credit Suisse doing fintech work there. When you talk about things like clearing and settlement and custodian, these are definitely banking terms. Let's talk a little bit about this in the context and how this evolves. You mentioned this idea of the experimentation that's happening in the crypto space. We've all seen times where the where the experiments have not only failed, but the test tubes have blown up and burned the lab down. You know, one of the most notable of those, of course, is the FTX implosion. And one of the things that we saw there was kind of a, I guess if you want to translate it into software terms, you sort of have the software stack of different operating entities kind of compressed, where when you looked at the things that FTX did, in many ways, I'm not saying these were legal definitions, but it certainly looked like it was serving the purpose of a, you know, a qualified custodian, a hedge fund, an investment bank, I don't know, a swaps agent.

17:21I mean, you could literally just go down the list. It was all happening in-house. In the traditional financial space, all of these are disaggregated. They're all unpacked into different layers, often with different companies controlling those functionalities. And it serves as a kind of a safeguard, almost as a firebreak. So if you have an issue in one of them, it doesn't just spread like wildfire throughout the entire system. Talk a little bit about that, how you see this ecosystem getting built out and how you see this maturing so that we have some of those safeguards without necessarily creating some of the bureaucracy that maybe we see in the traditional banking system?

17:55Sure. Well, first off, FTX was a very simple cause. Massive fraud. And massive fraud is not crypto. Massive fraud is humans. A lot of what we're building in digital assets is very transparent, decentralized types of products. The FTX product, although many of us thought, self-included to some degree, thought that they were operating kind of with those ethos and principles, that guy was just a fraud like Bernie Madoff. And there will be frauds in the future. We should say, of course, innocent until proven guilty. He's been indicted, but the trial has not yet occurred. And this is going to be something that gets worked out in a court of law, hopefully with some transparency.

18:37And we're going to understand this process a little bit better. But to your point - But you're right. He won't go to jail until it's proven, but it will be proven. We know what happened here. This is massive fraud and didn't have anything to do with crypto, that part of it. But you can still further break down and have some lessons from FTX. So FTX actually kind of had two houses. It had the Alameda Research Component, which was sometimes that's called a hedge fund. It's really more of a prop trading firm. That's an area that we have many similar examples in traditional finance. Bill Huang's Archegos famously blew up a couple of years ago.

19:15It had nothing to do with crypto. Hedge funds, prop trading firms. And by the way, it had an impact on Credit Suisse, who was considerably exposed to precisely that. Poor Credit Suisse, not around anymore. But that's right. So those types of entities like Alameda, they're institutional investors. They want to take high risk with their stuff. They're allowed to take high risk. And if they lose it, nobody really cares. That part was OK. Now, FTX had a second part, which was FTX, the exchange. And FTX, the exchange was operating, as you pointed out, as a fully aggregated set of functions as opposed to disintermediated functions.

19:56So instead of having an exchange separate from the broker, separate from the clearing, they did all of these things. Now, this is where U.S. markets and the U.S. markets have done a good job. Generally, I think we can go faster and be more innovative. But the U.S. markets are looked to around the world as more stable, consistent, predictable markets than other places, in part because we have rules about how you participate that protect against basic. manipulation of the markets. I'm not saying it's perfect, but at least it's better than a lot of other countries. Now, in those markets, the reason we have market structure is because in order for us to have good trading, we have to know the risks that are going on in the markets, and those things are supposed to be low risk.

20:45Exchanges don't participate in leverage, right? Like the NASDAQ, that doesn't happen there, right? Broker dealers, they can extend some leverage they can do some credit but under certain sets of controls how they have backstops for it etc and then clearing you know and then through the equities world it's a little bit different it all lands down to the dtcc by the way the dtcc is just a state chartered new york trust right kind of like that go um not too different hey everyone we're gonna take another quick break and hear a word from our partners we'll be right back to the real vision crypto daily briefing

21:23So for people who don't know Depository Trust Corporation, this is the entity that ultimately takes a big role in the custodial aspect and also clearing and settling U.S. equities. Basically, 99%, or I think it's even higher than that, of all U.S. equities are actually custodied at the DTC, which is one half of the DTCC. see. But anyway, this market structure, we expect to be low risk and well understood risk. And regulators step in to make sure that the operators of those different functions, whether you're a broker dealer in exchange or whatnot, abide by certain rules so that everyone else can look at those markets in a very consistent, stable way.

22:05And we want to have good trading markets. That's a huge part of having a democratic capitalist economy. So let's talk a little bit about what's happening right now in the United States. There's certainly a perception, particularly in the crypto space, that we are seeing a regulatory tightening cycle happen in the United States. Obviously, you just have to go and turn on financial news. And it seems as though every day you have a new case being filed by SEC or CFTC against an entity operating in the crypto space. Just yesterday, we had Bittrex. Give us a little bit of context about how you see that process unfolding right now.

22:49So digital assets do have a lot of new capabilities we've never seen before. There's also some things that are happening globally, which are people taking advantage of an early system and trying to abuse it. But in general, this is a great period of time. We have needed the regulators to kind of step in along with legislators and say, this is how I want to operate these markets and define the rules. The good players, the Coinbases and the BitGo's and the regulated folks here in the United States all just want to know what the rules are. And we absolutely, we're going to abide by those rules. But the rules haven't been as clear as they need to be because digital assets open up new opportunities.

23:33And right now with the SEC, there's a lot of debate about what's a security and what's not a security. One simple way to go is say, hey, they're all securities, but they're not. That's intellectually dishonest to say that these things are all just the same. But how we regulate them does have to be defined. So I think that's being sorted out now. I think there's going to be some mistakes, some bugs. Every industry creates bugs. We tend to call them software bugs, but lawyers create bugs, regulators create bugs, legislators create bugs, and then we have to fix them. So it's going to take a couple iterations.

24:06In general, it's great that this is starting now. We knew 10 years ago that ultimately there would be a conflict where we start to figure out how to bring these into traditional markets. But the good news is once you get through that, we get better markets than we've ever had before. You know, one of the risks here that people have raised in terms of what's happening in the United States with the regulatory tightening cycle that we're seeing is this risk, this fear that there is going to be a flight offshore and the United States is going to lose its global competitiveness in a key industry. Obviously, for people who have been paying attention in the last 20 years, Silicon Valley has just generated an enormous amount of growth for the economy here in the U.S.

24:46What are the risks and what are you hearing from your clients vis-a-vis locating here in the United States or wanting to do business elsewhere? Well, we talk with clients both U.S. and abroad. We do about half our business here in the U.S., but half of it out. I was talking with a major bank, international bank, just late last week, I think it was. and they're trying to understand how they're going to interface with digital assets. Now they're ready to go. And it's a major, major brand. And they're trying to figure out do they want to work, you know, with some of the US regulatory constructs or they want to work with the frameworks outside the US.