#12 - Michael Saylor

0:00Michael, welcome to the Network Safe Podcast. We're going to do a special episode today where we go through Michael Saylor's new roadmap and digital assets framework. Michael, welcome. Yeah, thanks for having me. Really happy to be here. Awesome. Okay, great. So you just published this digital assets framework. The principle is an opportunity for the US, right? It's a PDF. It's got in more than half a million views. Maybe you can talk through it, say, you know, what you were thinking about when you're writing this and what the goal is. Sure. So first of all, for the past four years, I've been watching the crypto debate go on in the United States and everywhere else in the world.

0:42And I think a lot of times everybody's yelling and there's a lot of talking past each other and there's a lot of friction. And it seems to me that if our goal is to move forward in a constructive, progressive fashion, we'd benefit from a framework. So I put together a digital assets framework along with a set of principles, and I try to talk a bit about the ideology, what's the vision, and what's the opportunity. And I did it from the United States point of view because I think the United States really needs to lead in the digital assets arena. arena. And if they do, I think it's quite likely that'll provide the air cover that will allow similar digital assets frameworks in the Middle East and Singapore and Japan and Europe, etc., in South America.

1:32So let's look at the different steps. I've got a taxonomy. A taxonomy of different assets. We talk about how we legitimize these assets. And then what are the practices we need in order to make how do we make this practical and then uh the fourth section is on the vision and the fifth section is really the opportunity for the united states so so why don't we start with the uh yeah exactly the taxonomy right so you have six definitions there most of them i think people have heard why don't you go through them commodity security currency token nft and ABT. I hadn't heard the last term in that acronym, the asset-backed token, but go ahead.

2:15So there's a lot of types of digital assets. A digital commodity is an asset without an issuer backed by digital power. A digital security is an asset with an issuer and it's backed by a security. The third, a digital currency, it's an asset with an issuer, but it's backed by a fiat currency. A digital token would be a fungible asset with an issuer. Then you've got digital NFTs. It's a non-fungible asset with an issuer offering digital utility. But the difference is you could have 10 million fungible tokens and we get that. But if you have 100 different NFTs and they give you 100 distinct rights, then it's something different than the token.

2:59Now, the last one, digital ABT, asset-backed token. A digital asset with an issuer, but backed by a physical asset, backed by a bar of gold, backed by a barrel of oil. So that's the taxonomy. They're all tokenized assets. And we're talking about tokenizing the capital markets. And each one of these is a different form of property. I actually like this because it carves it at the joints pretty well. Let me go through and you see, tell me if I'm playing this back correctly, according to your definitions, right? So digital commodity, that would be Bitcoin. that may be the only in your view is do you think that's the only digital asset without an issuer i won't say that i won't go that far i will say uh it's a very high hurdle to issue a digital asset without an issuer it's very hard right it can be done i i could um i could imagine other digital commodities for example you could i mean china could take bitcoin fork bitcoin create china coin and they could say China coin is like Bitcoin, but it has special tax privileges in China.

4:06And it's only interesting to the Chinese people and 1.5 billion people. Maybe something as simple as you're allowed to mine China coin in China with Chinese power and you're not allowed to mine Bitcoin. You would have, if everything else was the same, if there was no issuer, you would have in theory a digital commodity. Maybe it's not global property. Maybe it's China property. But the point is, the real key is, if you want to create a commodity, you need to create a network, displaying beneficial ownership. And you can't point to anybody that has control of the destiny of the network or has some major beneficial ownership of it if you're going to achieve commodity status.

4:53Interesting. Okay, great. So let's say for now at least, digital commodity is sui generis, that's Bitcoin. And then for your other things, all the other five categories have an issuer. So an example of a digital security would be we would actually legalize crypto equities or crypto debt, crypto derivatives. For example, Uber in theory could now put its assets on chain. And, you know, in another world, Uber could have given assets, you know, in its company to its driver so that they grew with the organization. Can I offer just a simpler one? Yeah, go ahead. Just micro strategy stock, if it was trading on Coinbase or Binance, 24-7, 365 would be a digital security, right?

5:38Apple could be, you know, AAPL could be a digital security. Now, I'm not saying it would only trade on Binance or Coinbase. It could trade on any layer two or any tokenized network to speak of. But the point is, it would be one share, a token that represents a share of Microsoft stock or Apple stock. It's backed by the stock, but it's tokenized trading in the crypto world. Yes. And also, I think one of the things we had been talking about offline was you could imagine a site that allowed mom and pop restaurants or, you know, like small real estate operations to raise equity or debt once crypto equity was legalized.

6:25And you could have people from around the world do it. Obviously, you need lockups. You need, you know, various provisions for alignment. But conceptually, you could actually get a cryptographic stock certificate. You could see all the provisions of it. the blockchain would enforce timestamps, all that kind of stuff, right? If I'm not mistaken. If you had just equity in a private company, equity in a million dollar restaurant, equity in a$10 million hotel, any kind of private equity, venture capital equity, any partnership interest, any claim on future cash flows, maybe you own one 100th share of my Airbnb business, right?

7:04Any of those look like small private securities. But if you had a digital assets framework, maybe you would publish the relevant disclosures, sign up to the relevant obligations, and you would put those on a digital exchange and they trade 24-7, 365 globally. To me, this is so obviously what should happen because let's say you've got a hotel in, I don't know, Australia or an inn in Brazil or something like that, they can put up a website. They can advertise for customers around the world. And in fact, they can process credit cards from around the world. You've got a motel in the Midwest. And they're already processing cards.

7:45They've already got a website that anybody in the world can access. What they can't do is capital formation, which is an obvious thing to do on chain. And of course, you need all kinds of procedures and so on for this. But that's solvable, right? Would you agree with that? I do agree with that. I think that the existing capital markets, they require you to take four years and$40 million in order to create an equity which trades with a four-letter ticker. And that's the 20th century why we did it. But what if we could do it in four hours for$40? bucks. And I think there's another argument, which is, you know, maybe in the 20th century, most businesses were municipal based or state based or nation based.

8:32There's a lot of international podcasters. I could have, you know, I could have an international chess podcast with 800 ,000 fans spread across every country on earth. And it would be very easy for me to appeal to the fans to raise capital? What if I wanted to sell half the interest in my podcast to them? They would want to buy it. I would want to sell it. But right now, there isn't really a straightforward path to legit, a practical path for me to do that in a legitimate fashion. And so if I use the 20th century techniques, I'm at a huge disadvantage and I won't be able to raise money. And so we're really crippling the 21st century global economy with 20th century rules for capital formation.

9:21Absolutely. And that actually brings me to the next definition, the digital currency, right? So by your definition, which is what we call maybe a stable coin, right? And Ash that was an issuer backed by fiat currency. So example, USDC, or if you put some other fiat currency on chain, The USDT might be that. But USDC would be the clear version of this where you have an on-chain USDC. You have an off-chain USD in a bank account. And if you combine that with a digital security, you could, taking your chess example, raise USDC from people around the world. All those payments would be tracked on-chain.

9:59And actually, you could potentially click a button and do your accounting. And if those people had whatever profile information, you could automatically send them stock certificates. it'd be the equivalent of what Excel was. People used to do accounting by hand, as you may remember, with a piece of paper before spreadsheets came. I think corporate accounting is kind of like that now, but you could, in theory, have all the transactions on chain, hit a button, and it would just prepare your books for you. At least you decide which pieces of that to have. But if you have both digital currency and digital security, you could automate a ton of compliance work.

10:31Let me know your thoughts. I think you've got – I agree. What we're talking about is tokenizing a fiat currency or tokenizing a checking account. So, I mean, the trick to this is there's no question everybody in the world wants digital dollars. And there's no question that if I live in China or if I live in Europe and I have to pay in euros or CNY, I want tokenized local currency in those two frames of reference as well. just like in Brazil, you might want tokenized real. So why do you want it? Well, you want it to be programmable. You want to move it at the speed of light. You want to vibrate it a million times a second.

11:15You want 8 billion AIs to be able to trade with each other 97 ,000 times an hour. You know, it's like the utility is obvious. The challenge is you need the nation state that issues the fiat currency to recognize it as legitimate and the need to overcome the privacy and the money transfer issues that, you know, which pop up from place to place. I think we make huge progress simply by distinguishing the difference between digital currency, which is really circle or tether, versus digital commodities, which is Bitcoin, versus digital securities, which is your tokenized Apple share versus a digital token, which might be any number of crypto tokens with an issuer that have functionality in cyberspace or digital utility, but they're not securities and they're not currencies and they're not commodities.

12:17And the entire cryptocurrency industry has been saddled by this one name, currency. And all four of those things I just mentioned are sometimes referred to as a cryptocurrency. And the result is you just get massive pushback and fear and uncertainty and doubt. And we need to break them into four different categories so that people understand there are four different things for four different purposes. I like this a lot. And so an example of the fourth, that'd be what most people think of when they think of crypto as opposed to Bitcoin. So that's Ethereum, Solana, Zcash, Monero, something that, you know, a fungible asset that offers digital utility that's in a portfolio.

13:02And then something like a digital NFT, a non-fungible asset with an issuer. Now, NFTs are actually kind of interesting because historically people have thought of them as, you know, a really expensive piece of digital art, like a million dollars for an NFT. But now you can issue a million NFTs for a dollar. So you can issue like the equivalent of likes or, you know, Reddit style upvotes. You can issue those on chain as little markers of things. You can issue a ticket for a digital for a conference, either online or offline. You can use NFTs to open digital locks. So NFTs, I think, are pretty interesting.

13:40If a smart contract is on chain code, NFTs are on chain data. and I'm glad that you have a distinction between the fungible and non-fungible here at the digital token and digital NFT. Any thoughts on, because NFTs are on Bitcoin too as well. Yeah, I think if you just characterize them as digital art, you're kind of underselling them. I think we got to think of them as a unique digital right. And yeah, I think about other types of rights like maybe I'm Tom Brady and I post on some channel like on X and I'm going to actually sell 10 superfan tokens and numbers 1 through 10 actually get ranked and their response is underneath me.

14:29And if you always want to be the number one respondent, you buy Brady 1. And if you want to be number 2, you're Brady 2. And if you're number 10, you're Brady 10. And if you owned Brady tokens 1 through 10, maybe that guarantees you for all of eternity you'll always be one of the top 10 responses in that order and there might be some super fan who's willing to pay a hundred thousand dollars to make sure that their comment is always number one you know underneath Brady it's like uh it's a special right maybe it's a it's a it's a key to unlock something you know maybe it's some And maybe it is a piece of art, but I think, you know, this is not quite true.

15:16I'm going to give you a physical analogy and ABT. If I said to you, this is a token that represents one acre out of a million acres in Kansas, and they all look the same, right? That's a fungible token. But if I said this is two acres, you know, in Palm Beach, on the beach next to the country club, right? When you get to the point where it's a specific piece of real estate, and now we think about specific real estate in cyberspace, I can create real estate in cyberspace, right, with proximity and priority. So if you start to create things that have some kind of priority or proximity or providence or some uniqueness, maybe there's something there that's interesting.

16:08And, of course, the idea of the framework is let's just give people the asset classes and let create a Cambrian explosion of innovation, of which 99 % probably won't be economically successful. But on the other hand, the 1 % might be the Instagrams, the Metas, the Teslas of the world, and that'll be worth all of the other trouble. Absolutely. And I think actually, you know, one thing I would just say on that is I think of there being a spectrum of fungibility. For example, you could have a one of one, like a digital Mona Lisa. You could have, right, you take your Miami example, you've got maybe 10 acres of land and each acre is its own NFT plot.

16:54So that's like, you know, a 10 of 10. And then you could get all the way, for example, to, for example, IP address space, as you may be aware, you've got 4 billion unique IPv4 addresses. and in theory each of those could be tradable as an individual nft and that would be finite that'd be capped there'd be a logic to it uh but it'd be sort of once you start to get to that point there they are non-fungible you can't actually exchange one with each other but the pricing on one might be similar to the pricing of another and so then then you get all the way to like a fully fungible token so i think there's being an interesting continuum here um i don't know if you have any thoughts on that then we can go to abt's it's yeah it's just obviously a million thoughts part uh spark up and we probably want to go down this rabbit hole but i just think about all the domains you know like when you think about owning owning a domain like i bought frank.com and emma.com and hope.com and angel.com great one yes yeah you're like well i don't i don't know if they're actually physical assets or intellectual property assets but but you might very well attach an nft to all sorts of interesting unique things in in cyberspace and then they start to trade with the price and they can be transferred at high speed right it's just a a license love okay great abt so this is um essentially uh something which is like gold or silver or oil it's interesting you just this is what it's useful to distinguish that from a digital commodity because when you use the term digital commodity you mean an intrinsically digital commodity namely bitcoin and perhaps uniquely bitcoin at least at this point as opposed to digital abt which is often a commodity like gold or silver or oil that is traded on chain and so it's uh it's a commodity but it's basically traded on chain as opposed to being intrinsically digital would you agree that Yeah, the distinction is a digital commodity is an asset without an issuer.

19:03And in order to create an asset with an issuer, you're going to have to back it with some kind of digital power. Whereas a digital ABT is a tokenized physical commodity. And that means at the end of the day, you're going to have a warehouse with 100 ,000 little gold coins or 100 ,000 barrels of oil or 100 ,000 bushels of soybean. And that means there's going to be a custodian. There's going to be an issuer or repping to this custodian getting audited. And now you're going to tokenize whatever that is. And you're going to tokenize it so that people can move it at the speed of light so you can slice it, so you can fractionalize it, so you can finance it, so you get liquidity on it, so you get transparency on it, so you can program it.

19:56Amazing. So, okay, great. You know, in math, one of my old professors used to say you can define your way out of a problem. And if you have the right definitions, lots of things follow, like abstract algebra, the group, the ring, the field. And then you can kind of just go downstream from that. So with these definitions, why don't we go to section two, legitimacy. So like rights and responsibilities, right? So you want to go through this, the path to legitimacy, issuers, exchanges, owners. Go ahead. Yeah, I mean, I think this all boils down to there's three general types of actors. There are issuers, people that issue digital assets.

20:32There are exchanges, anyone that trades, custodies. And then there are owners, people that own the digital assets. Everybody needs a set of rights that are clear. And then there's a set of responsibilities. If we do it right, you could, in theory, have millions and millions of issuers. And you could have a lot of owners. And then I don't know why there couldn't be 100 ,000 exchanges dealing with millions and millions, if not tens or hundreds of millions of issuers dealing with billions of owners. What are we trying to do? We're trying to create a global, real-time, uninterrupted process to issue, trade, and own digital assets.

21:12So in this case, you're good. I was going to say, I was very closely involved with this at Coinbase because when I joined a CTO, at the time, Coinbase only had four assets, which were Bitcoin, Bitcoin Cash, Litecoin, and Ethereum. And an important paradigm shift was for us to internally realize that asset issuers were also a kind of customer. and taking your three definitions, you can think of it as a two-sided market where you have millions and millions of owners and a few thousand issuers or a much smaller number of issuers on this side. And the middle is the exchange, much like let's say the New York Stock Exchange has whatever hundred stock issuers on one side and millions of traders on the other side.

21:59So it's like a two-sided marketplace with these three actors. And then realizing that the issuer is a customer, Sort of like Airbnb has guests and hosts or Uber has riders and drivers. An exchange has in your framework owners or buyers and issuers or sellers. And the issuer is like a special kind of customer. And of course, an issuer in one context could be a buyer in another context. And often market participants are both buyer and seller in different contexts. And I think that just having some routines and some conventions with venture capital, one of the things I learned over the years is that every term that we had in a deal was actually something that came from some train crash in the past 20 or 30 or 40 years ago.

22:49Like, for example, four-year vesting or lockups or co-sale rights, all that kind of stuff is meant to align dozens, sometimes hundreds or thousands of people towards the same economic goal where one party can't just dump on the other party or what have you. All the low trust stuff that happens in certain parts of crypto markets, there are actually solutions for it if you actually have a organized two-sided marketplace of buyers and sellers, of owners and issuers. The challenge here is to let all three of these players operate in real time uninterrupted globally, but they need to be able to issue, trade, or own those assets.

23:35And you need to see transactions between individuals, corporations, and machines. So how do you actually create an API or a framework such that the machines can trade a million times an hour with each other? And they're all working for exchanges or representing exchanges. And they're all representing issuers or individuals. so you want a high speed uh low friction market i mean i think about you know where would we be in the world if it cost 40 million dollars set up a website or it used to be if we think about computing all the computing was centralized ibm mainframes in the back office or it used to be with publishing you know first it was just the new york times and the washington post and the Wall Street Journal.

24:27And then all of a sudden, people could set up their own website. But then you got those blog services where, I mean, 80 million people or 120 million people could kind of use some software as a service, blogging service. And it all comes down to structuring this the right way. So if you look at the next few paragraphs, right, what we're talking about is issuers should have a right to create and issue digital assets, and the obvious responsibility is fair disclosure and then ethical behavior. The exchanges should have a right to custody, trade, and transfer assets between their clients and between the other exchanges, and the responsibility is publish the asset disclosures, protect their client assets, and then avoid conflicts of interest.

25:25And then for owners, owners want the right to self-custody trade and transfer their assets. So it's, you know, you're back to the not your keys, not your coins. But it's not so much an obligation to self-custody, but a right to self-custody. And the right to trade, the right to transfer, that's important. And the responsibility, comply with the applicable local law, whatever that might be. And of course, what I think is the big idea here is create some foundation principles like nobody has the right to lie, cheat, or steal. By the way, this is kind of obvious. I don't even know if you have to, you would have to say it except for the fact that if you started from the observation that people don't have the right to lie, cheat, and steal, there's probably 100 ,000 pages of regulations you wouldn't have to publish because most of them all boil down to that.

26:20And if you simply made those three observations and then you noted that participants are civilly and criminally liable for their actions, you might very well eliminate 100 ,000 pages of regulations, years and years of review, and somewhere in the range of$10 million a year of compliance costs with lawyers and all the back and forths that go into this process. So I think that that's the place to start. Well, the thing actually is funny. When I looked at this, I was like, wait a second. There's only three pages. But I like how you've set it up because you're right that by just articulating those sort of Ten Commandment-like principles, that actually does distill the intent or at least the stated intent of so much regulation is all the disclosure stuff says.

27:17you're not hiding something. It's not a material misrepresentation, aka don't lie, right? Or you're, you know, for example, a disclosure of when an executive is going to sell what amount of stock, don't cheat, right? That kind of stuff, right? So lots of specific things are sort of downstream implementations of these sort of very simple Ten Commandments style moral directives. And yet it's back to this issue of it pops up in censorship. You know, the question is, do I have to hire 100 lawyers and file paperwork with the regulator for three years before I can publish my opinion on X? or can I actually publish the thing that I wrote on X with an understanding that if I slandered someone, you know, if I lied, I cheated or I stole through my misrepresentation, I have civil liability.

28:21If I publish something to get somebody else killed, maybe I'm going to get tagged for manslaughter. but you know we have examples in product development and in the media yeah you don't it doesn't take 40 million dollars to design a product and sell it to someone but if you create a product that's unsafe and you sell it to them and it kills them you do have civil liability that the thing you sold killed the person right so there's a lot of industries that function with this set of observations. And those are industries where people can do things in one day or do something in one week. But at the point that you implement a nanny state and you take the position that no one's allowed to say or do anything until it's gone through progressive layers of sensors, What you really do is you choke off 99.9999 % of all innovation.

29:23Absolutely. Everything stops. It's a difference between pre-market review versus post-market review. Do you presume everybody's a criminal or do you allow people to transact and then make clear that criminals will be punished afterwards and what criminal behavior actually is? It shouldn't be a process violation. It should be a principle violation. One other thing I wanted to say is that the concept of buyers and sellers being connected by an exchange as a two-sided marketplace is so obvious. But there is actually one very unique aspect of crypto versus traditional stock markets. Maybe you have some thoughts on this.

30:06But traditional stock markets, like when a tech company files to go public, it's only choosing between NYSE and NASDAQ, let's say, at that time. And they do compete for the business and what have you. But then after that, it's not easy. I don't think it's actually – I'm not aware of prominent examples. Maybe it's possible. But to move the asset from one exchange to another, from NYSE to NASDAQ, is not that easy, number one. And then number two is there's no equivalent of send and receive. People can't like load their NYSE shares on or their let's say their FB shares onto NYSE, pull them out, self-custody, load them onto NASDAQ and trade there.

30:47It's not the equivalent that you have with Bitcoin. Now, conversely, in offline markets, if you have let's say a farmer has a bunch of apples, they can go and sell them at this supermarket or that supermarket. They have the send and receive equivalent, but they don't have the speed and the global aspect of the digital. So this kind of two-sided marketplace combines the scale and speed of digital markets with the optionality of physical markets where you can withdraw from one market and go and sell on another market. Let me know if you have any thoughts on that. What we're talking about is conveying property rights to all of these 20th century assets that don't currently exist.

31:31For example, I have a bunch of Apple shares, but I can't take custody of them. The 20th century world is one or two settlement networks, one or two custodians, one or two exchanges. you have a very limited set of options and there isn't really a competitive market. So in a world where you had 1 ,500 digital exchanges in every place in the world and they could all handle any of these assets, you might see someone that wanted to give you a credit line on your Apple stock or they wanted to give you a yield on it Or, you know, maybe your bank will give you an advance ratio of 50%, but there's a bank in Europe that will give you an advance ratio of 95%, or they'll actually give you a mortgage where you can top up, you know, with tokenized, you know, barrels of oil.

32:31or right you could have competition if there was competition but the problem is uh there isn't competition that the owner of the asset doesn't have the right to transfer to take custody to transfer custody to uh to shop out the asset to the near to the highest bidder and maybe more to the point what if i had an ai program and it had my entire portfolio of assets and every minute of the day while I'm sleeping, it's actually gathering a bid from 150 ,000 corporations all around the world, asking them for the highest bidder for me to loan out the assets or custody assets or whatever they want to do with them.