Nic Carter, Partner at Castle Island Ventures: The Quality of Crypto Data and FUD Dice

Nic Carter is a Partner at Castle Island Ventures and a Co-Founder of CoinMetrics. In this conversation, we discuss financial service organizations interest in cryptocurrency, the quality of data in crypto, what areas of Bitcoin and crypto Nic is excited about investing in, and then we play a game of FUD dice. ----- Monarch is building the future for those interested in one wallet that consolidates the best services and functionality into one simple and easy to use app, Monarch will empower users to control all aspects of their Financial Kingdom from the palm of their hand. You may have heard the phrase “Not Your Keys, Not Your Crypto”. With Monarch, you own your keys and seed, meaning You own your crypto. With Monarch, you can Store, Receive, Send, Swap, Buy, Sell and earn interest on Crypto, track your portfolio, the news, the market cap and more today! We're constantly adding new services and updates too! Learn more today by visiting MonarchWallet.com/pomp or download the wallet for FREE today from Apple or Google. Visit https://monarchwallet.com/pomp/ to get your free tokens! ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:13Anthony Pompliano?

  Nic Carter is a partner at Castle Island Ventures and a co-founder of CoinMetrix. In this conversation, we discuss financial service organizations' interest in cryptocurrency, the quality of data in crypto, what areas of Bitcoin and crypto Nic is excited about investing in, and then we play the game of FUD Dice. I really enjoyed this conversation and had a lot of fun. I hope you enjoy it as well. Monarch is building the future for those interested in one wallet that consolidates the best services and functionality into a simple and easy to use application. The Monarch app and wallet will empower users to control all aspects of their financial kingdom from the palm of their hand. You may have heard the phrase "not your keys, not your crypto."

• 0:55Anthony Pompliano?

  With Monarch, you own your keys and your seed phrase, meaning you own your own crypto. With Monarch, you can store, receive, send, swap, buy, sell, and earn interest on your crypto, you can track your portfolio in the news, and you can check the market cap daily. They're constantly adding new services and updates, and you can learn more today by visiting monarchwallet.com/pomp. Again, that's monarchwallet.com/pomp, or you can download the wallet for free today from Apple or Google. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make

• 1:39Anthony Pompliano?

  a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I am here with Mr. Nick Carter himself. We've got a lot to talk about, and he actually brought me some of the dice, so we will play a little game towards the end as well, but thank you so much for coming. My pleasure, man. Thanks for having me on. For sure. All right, I think everyone knows you as this prolific Crypto investor, but maybe let's talk about life pre going to fidelity and then eventually spinning out. And then we can get into what you're doing at fidelity.

• 2:16Speaker 01

  Sure. Well, I don't know if prolific is the word, but um.

• 2:20Anthony Pompliano?

  So just go with it. Go with it.

• 2:22Speaker 01

  Prior to to fidelity, I I was I was actually at business school just before that. University of Edinburgh doing a masters in finance. And before that, I was just a I actually worked as journalist, believe it or not.

• 2:35Anthony Pompliano?

  Really?

• 2:35Speaker 01

  Yeah. So I wrote about corporate law, which is like one of the dullest topics imaginable. But it actually ended up being like fairly useful because like so much of this industry is based on like reading like the regulatory tea leaves.

• 2:50Anthony Pompliano?

  Yep.

• 2:50Speaker 01

  And be like, what's the SEC going to do next? So in some ways it was like good preparation for that.

• 2:55Anthony Pompliano?

  Absolutely.

• 2:55Speaker 01

  But yeah, I decided I wanted to get into finance. I was very into crypto. This was sort of in in 2014. So I was into Bitcoin at the time. I hadn't done anything with it seriously. And I was like, well, can I learn? How to value these assets like these this new asset class? How do I value them? And I was like, well, I might as well go to business school and and take cues from like equity valuation.

• 3:16Anthony Pompliano?

  Yep.

• 3:17Speaker 01

  But turns out, nobody at the business school cared about crypto in 2016. Which is like unsurprising. I don't think many business schools cared. So there wasn't any cryptocurrency content, which is again, not very surprising. So then I wrote my thesis. I actually had to go to the course director and ask special permission to write a thesis on on crypto assets.

• 3:39Anthony Pompliano?

  Wow.

• 3:40Speaker 01

  So and they gave me dispensation and then it was it was a hit. So it was it was successful, but it was, I think, the first thesis written at the University of Edinburgh Business School about crypto assets as an asset class directly.

• 3:52Anthony Pompliano?

  And you wrote this about crypto in general, about Bitcoin, crypto in general with a focus on Bitcoin? How did you kind of break down the thesis?

• 3:59Speaker 01

  So it was actually about the the corporate governance in crypto assets. So they covered Bitcoin or or lack thereof, basically. So it did cover Bitcoin and other sort of very, you know, decentralized public blockchains, but it for the most part, it was a cross sectional survey of 50 tokens, crypto assets, whatever you want. To call them. And I was trying to determine whether investors and ICOs had genuine governance rights, such as they might be accustomed to in, you know, in equity land. And of course, the answer was no.

• 4:33Anthony Pompliano?

  I was gonna say surprise.

• 4:35Speaker 01

  Yeah. And this was 2016, 17. So it was like still fairly early. And there nothing was very developed in terms of, you know, modes of governance, as we've seen some, you know, successful experiments today. So back in the day, basically, I was saying, look, there's no transparency here. Investors aren't, they don't have recourse. They're not really buying any cash flows or anything. They're not buying liquidation preference. And so this, I mean, all of this was fairly obvious. But this was my effort to do systematic kind of take down and see, you know, what investors actually were getting access to when they bought tokens.

• 5:15Anthony Pompliano?

  And so I think it's very obvious to people what they're not getting access to, right? Because they basically look at the equity world and they make comparisons. And, you know, if you do a chart, it's literally like equity land, yes, token land, no. Did you come away with anything that the token investors were getting access to? Or like anything that was on the, you know, quote unquote, positive side?

• 5:35Speaker 01

  Well, I mean, for, for, you know, authentic decentralized cryptocurrencies, I think it's extremely positive. You get access to a spot on the registry, which is worth something for sure. But for what I call pseudo equity, so tokens which are sold to mirror equity or to resemble equity, you're not really getting any of those guarantees at all. So that's why I've, you know, long been suspicious of them, basically.

• 6:00Anthony Pompliano?

  Yeah, I, I think that if anyone has followed you on Twitter for any period of time, the thing that you can appreciate is not only do you have a position, but the way that you approach that position is very rational, which I think in crypto, the default is just yell scam, right? Anything that you don't like, people just yell scam. Whereas you take a very systematic and rational approach to explaining why maybe something isn't as enticing as it otherwise could be.

• 6:29Speaker 01

  Well, I've done my fair share of scam calling.

• 6:33Anthony Pompliano?

  All right. So you write the thesis is well received and then you end up at Fidelity. Coming from somebody who is a Bitcoin fan and believer, why go to Fidelity? What was kind of the thought process and then what were you doing there?

• 6:47Speaker 01

  So I was actually looking to, even though I wrote the thesis on crypto assets, I didn't believe that there was a job market for finance grads in crypto.

• 6:56Anthony Pompliano?

  Oh, interesting.

• 6:57Speaker 01

  And I thought to myself, I'm like, yeah, like I love crypto. I would love to work in it, but there doesn't seem, there don't really seem to be many firms active there, you know, it's just, it's a still incredibly niche. And so I reached out to the only analyst that I'd heard of in crypto, which was Chris Bernuski. And I sent him my thesis and amazingly he like answered my cold DM, which was super cool of him. And he was at Arc Investments at the time and he actually brought me into New York. I got to meet the team. It was just amazing, especially as someone who's a complete no name. And then he actually introduced me to Matt Walsh, who was, was starting a crypto fund at Fidelity. So I actually owe a huge amount to Chris Bernuski.

• 7:41Speaker 01

  And this goes to the merit of like keeping your DMs open, which is actually why I keep mine open all the time.

• 7:47Anthony Pompliano?

  Yeah. So I keep mine open as well. You get your fair share, I'm sure of the crazies and the trolls and all that.

• 7:52Speaker 01

  I'm sure you get more.

• 7:55Anthony Pompliano?

  I just don't answer anymore. I used to try to answer everyone, even the trolls and kind of troll them back a little bit, but now I'm in the just, I'm just going to respond to people who actually are important. But so Chris at the time is at Arc Invest, which has this really cool kind of research-first approach to investing in public equities. They actually went into crypto as well. He helped facilitate that for them or kind of ignite some of that. Why choose to go to Fidelity?

• 8:21Speaker 01

  Yeah, well, I, I knew that Fidelity had a positive view of crypto, although I didn't know very much. And when I went for an interview, I sat down with Matt Walsh and David Knitsky and they were both Bitcoiners. And I was like, wow, like, how did this happen?

• 8:38Anthony Pompliano?

  How did Bitcoiners infiltrate Fidelity?

• 8:40Speaker 01

  The infiltration is like already. Complete. And when I went, I was basically conducting a litmus test like, well, you know, are we ideologically aligned here? You know, is it like a total paradox to be at a large financial institution? And also believe that crypto itself is, you know, a real transformative movement. And everything I understood from that visit was that fidelity is super, super aligned. Especially the, you know, the top leadership there is, is very much aligned with the, with the ethos of the crypto industry and with Bitcoin in particular. Which was just revelatory for me. You know, I mean, I knew that fidelity is this behemoth of asset management.

• 9:21Speaker 01

  And I guess they, you know, they, they did get turned on very early to the concept of cryptocurrency as, you know, an asset class. As opposed to just Bitcoin as a new technology. So they made that transformation relatively early on. And, you know, through Abby's guidance, they, they totally embraced the concept and now have multiple business lines.

• 9:44Anthony Pompliano?

  Yeah. So before we get started, I was, we were talking a little bit about just kind of large financial institutions in general. You know, I think there's a lot of people who are opportunistic, right? In the sense of, oh, crypto is hot today, you know, we're super excited about crypto. Oh, now we're in 2018 bear market. We forgot to talk about crypto for the last 12 months, right? And I'm sure when it comes back, like they'll be the biggest enthusiasts again, right? So they're kind of, I'll call it this false bravado around the asset. And they only are excited about it when it is a kind of beneficial to them. It doesn't seem like fidelity is that way. Fidelity kind of through the bull and bear markets for a while now has been enthusiastic and building real technology, real teams, et cetera, around this. Was that your experience?

• 10:28Speaker 01

  For sure. Yeah. So I wouldn't have gone there to work as the crypto analyst analyst if I didn't believe that they authentically, you know, were invested in this space. And they've been methodically building towards a presence in crypto assets from 2014 onwards to present. So it does take a long time to like change the tack of or to even introduce new business lines that have behemoth like Fidelity. But yeah, they've been pretty

• 10:58Speaker 01

  you know, resolute in their progress towards this. And the custody you know, business line, which is out now is good evidence there.

• 11:07Anthony Pompliano?

  Absolutely. What um, what was your biggest takeaway in terms of like the advantages that a large financial institution like a fidelity brings to Bitcoin and crypto ecosystem that maybe we wouldn't have access to otherwise, right? Like, because in my perspective, everyone always thinks about the challengers, right? Like innovation comes from the challengers, etc. But there is value, I think, to having a lot of resources, experience, large teams. Like, what was that takeaway for you?

• 11:31Speaker 01

  So they have some really key advantages. So custody is an industry where trust really matters and brands matter a lot, especially if you're an institutional allocator. You may not necessarily trust any of the new startups that are doing custody in the space. And that's not because they have no technical merit. But it's just because it takes a lot of institutional knowledge to do something as critical as custody, right? Especially in terms of mitigating key man risk. These are the kind of things that have undone custodians in crypto that don't have that accumulated, you know, thousands or hundreds of years of institutional knowledge. So that's one thing that an existing asset manager custodian can kind of do well.

• 12:15Speaker 01

  And they, you know, there's also just the brand element. So you may not necessarily trust a Coinbase for your custody. If you're, you know, a pension fund. And then it's the ability to interface with regulators and the SEC, for instance, for clarity on what constitutes a good control location. And so it's partly is just the platform that being an institution of that significance brings you.

• 12:41Anthony Pompliano?

  Yeah, look, I think it makes a lot of sense. And your idea of kind of trust, right? The trust is, what is it? I think Warren Buffett is the guy who's got the quote that says, you know, it takes a lifetime to build a reputation, five minutes to lose it. Trust is very similar, right? In that you can literally spend, you know, I was about 100 years old at this point, right? Building that trust. And if for some reason something was to happen, that could disappear very quickly as well.

• 13:05Speaker 01

  Yeah, and this is, I think, maybe a little underappreciated within the industry. People sometimes say, well, what's, why would you need to custody your funds with a third party with an institution? The whole point is to, you know, custody them yourself. And this is totally valid, but for, you know, larger institutions that want access to this, or larger funds that want access to the asset class, they just in practice cannot get direct access. And they don't want to take on that risk. They don't want to have a ledger in like the drawer of the, you know, the chief investment officer's office or something.

• 13:44Anthony Pompliano?

  I, when we went through the due diligence for public pensions, I remember sitting there with like an outsourced third party that was helping them with like operational due diligence stuff. And they didn't even necessarily know all the questions to ask, right? Because you don't normally have to ask like, hey, are you guys holding the stock certificates here? Like, that's not a thing. And so there was a little bit of two-way education going on of like, you know, if you ever diligence another crypto manager, you probably should ask like, is there the ledger in the drawer? Right? But it is, I mean, like, there's a lot of crypto funds actually manage quite a bit of money where there's one, maybe two people who have access to funds.

• 14:21Speaker 01

  Like Trezor or something, just

• 14:23Anthony Pompliano?

  Crazy.

• 14:23Speaker 01

  Just sitting there.

• 14:24Anthony Pompliano?

  Yeah, absolutely.

• 14:25Speaker 01

  It's, this asset class is very paradoxical because we never have had these bare assets, which are just strings of information. And turns out custoding a string of letters and numbers is extremely challenging.

• 14:37Anthony Pompliano?

  For sure.

• 14:38Speaker 01

  We're collectively still learning how to do it.

• 14:40Anthony Pompliano?

  And I think also, an element I think a lot about is many of the people who are making the investment decisions are investors and they don't come to the table with a lot of technical knowledge, right? So other people on their team have the technical knowledge, but the actual, you know, the CIO doesn't come from a computer science master's degree and having worked at a tech company for 20 years, right? It's just, that's a hard transition for people to make. And so I think that there's a lack of technical knowledge, which leads to even a fund manager in many cases actually trust a third party to custody the assets better than their own self or their own team.

• 15:18Speaker 01

  Yeah, I mean, it makes sense because it is a deeply technical challenge. I mean, you know, try setting up an air-gapped Monero wallet or something. That's, it's a huge pain. So. They shouldn't really be undertaking those those kind of engineering decisions, you know.

• 15:34Anthony Pompliano?

  Absolutely.

• 15:34Speaker 01

  So they probably should be outsourcing it.

• 15:36Anthony Pompliano?

  So you left Fidelity, started Castle Island, and then you also run CoinMetrix. Maybe just give us a quick overview of the fund and then of CoinMetrix.

• 15:46Speaker 01

  So Castle Island is a C-stage venture fund. We're based in Cambridge, Massachusetts. We raised in summer 2018.

• 15:57Speaker 01

  And we are focused exclusively on businesses building in or around or adjacent to public blockchains. So we believe that this is a, you know, a sea change in terms of this institutional technology, which will totally revolutionize the way that, you know, value is conveyed worldwide. But it also needs lots of enabling infrastructure and technology to function well. So custody, we've been talking about, is one thing. Things like key management on the trading side, you know, execution, any of those kind of trading facilities that'll allow, you know, conventional allocators to get access to this asset class.

• 16:38Speaker 01

  And then, you know, things that will make it more useful for normal individuals, like merchant payment processing, you know, anything on the Lightning Stack. So that's kind of where we're concerned, you know, is the intersection of financial services and and public blockchains. And then, of course, we're looking to some, you know, applications, maybe gaming, NFT, et cetera. But we're still pretty early on the application side. And I think we're, you know, this is a bit of a meme at this point, but it was still in the infrastructure phase.

• 17:06Anthony Pompliano?

  For sure. Where'd the name Castle Island come from?

• 17:08Speaker 01

  Castle Island is a place in in kind of South Boston. There's a fort. It's a Pentagon. And there's no, like, particular significance. The one story we can tell about it is that it Castle Island is neither an island and it's not really a castle. And in kind of in that same sense, we're like blockchain VCs, but we don't really like the word blockchain and we don't do tokens. So we're kind of beset by paradoxes.

• 17:41Anthony Pompliano?

  Yeah, I love the the whole like contrarian aspect of it, right?

• 17:46Speaker 01

  We were contrarians when we started because safes and tokens were still really popular then. We resolutely did not do those, but now I guess our our perspective is a bit more mainstream.

• 17:57Anthony Pompliano?

  It is. It is funny how it all it takes is an 85% drawdown in some liquid tokens to get people to start paying attention to maybe where the sustainable value is, right? When everything's going up into the right, it's easy to just everyone thinks they're a genius. Okay, so Castle Island, you guys raised that fund, you're deploying capital out of it, and then you've got CoinMetrix as well.

• 18:17Speaker 01

  Yeah, so CoinMetrix is a portfolio of company of Castle Islands. It's also a company that I founded and it started as a research project, actually way back when I was in business school. So what I was trying to do was build quantitative models to understand whether the valuation of cryptocurrencies was related to their underlying characteristics. My thesis was that there are these mini economies and if we could deeply understand the flow of funds within the economy on chain, then we could, you know, potentially predict valuation or at least understand valuation a little bit better because we kind of lack standard multiples. Obviously, there's no like PE ratios or earnings or even a concept of revenue in in public blockchains.

• 19:02Speaker 01

  So I was trying to build proxies for that or at least understand the economic characteristics of these blockchains better. So I started together with a friend scraping data from a variety of blockchains and then initially just posting online, posting CSVs. And, you know, we created a charting suite as well so people could, you know, track transaction value over time versus price, things like that. And this became really, really popular over the last two years. And when we started Castle Island, we thought, well, we have a great thing here. You know, we have this huge amount of organic interest, all these funds are using our data. All these like media outlets, why not commercialize it, retain the open source and

• 19:43Speaker 01

  free ethos, you know, and all of our, our, our code that we use to, to scrape these chains is, is open source and available on our GitHub. So we'll, we'll retain that and then also sell a subscription so that we can, you know, plow that back into R and D and make the free product better and better. So commercializing it, the objective was basically to increase the transparency of the industry and, and give people a better idea overall of how blockchains are used, what they're used for. Because, you know, it's like this eternal question. There's three, 400,000 transactions on Bitcoin in a given day and nobody knows what they're for, whether it's like payouts from mining pools, Venezuelans sending money back and forth, people just sending

• 20:28Speaker 01

  money to exchanges. There's very little insight to, into what the, the nature of the Bitcoin economy is. And that's what I wanted to discover. And so that was really why we started CoinMetrix.

• 20:37Anthony Pompliano?

  Got it. It, it, um, I think of Bitcoin from a transaction settlement network as like a sleeping giant, right? The, the metrics I saw recently were in Q1 of 2019, Venmo did, I think it was like 20, 21 billion dollars of transaction volume.

• 20:54Speaker 01

  Yeah.

• 20:55Anthony Pompliano?

  And so let's call it, they'll do somewhere between 85 and 90 billion for the year. Bitcoin last year in 2018 did over 410 billion on chain, right? And so you start to look at this and you're like, this thing is exponentially bigger, right? Or materially bigger than Venmo, which is something that you and I think of as pervasive in the developed world, right? If you look at Apple Pay, same thing, right? It's just like, it is much, much bigger, I think, than people realize. And now the question becomes, why? What are people doing with that stuff? Why is all that transactions happening?

• 21:25Speaker 01

  Totally. And then that's what we sought to investigate. I mean, I remember seeing these figures. I'm like, what the hell are people using it for? Like a couple billion dollars a day? What is happening here? Like, people are just sending money to Binance and BitMEX. It's like, that all it is. And so like, it is actually a very challenging exercise to to investigate the grand truth. It requires a lot of like tagging exchanges and custodians. Most of the volume in practice is related to exchanges, but you know, the mainstream media tends to characterize that as speculation. I see more as saving. You know, I view Bitcoin as a savings instrument. So lots of the volume is just related to individuals depositing on exchanges or withdrawing from exchanges, for sure. But and and I guess there's also

• 22:07Speaker 01

  a bit of a disanalogy between the squares and Venmos and Bitcoin, because Bitcoin is like a kind of full stack settlement network, whereas those those payment networks are dependent on the current, you know, settlement infrastructure. So that's why I sort of like to compare Bitcoin to like Fedwire or Swift, although it's not a perfect comparison.

• 22:28Anthony Pompliano?

  Yep.

• 22:29Speaker 01

  But yeah, the it is really, it scales not with count, not with transaction count or by adding more data to the ledger exponentially, but it scales in terms of transaction value, I think.

• 22:43Anthony Pompliano?

  For sure.

• 22:44Speaker 01

  And and there's kind of a growing awakening that that's maybe the better way to understand the network.

• 22:47Anthony Pompliano?

  Do you feel like some of these large financial institutions will be able to use Bitcoin or other public chains to do a lot of what they're trying to do today? Or do you think that they're going to naturally just refuse to do that and end up using these private chains that they're all building?

• 23:01Speaker 01

  Oh, that's, I mean, that's a really challenging question. It seems like we're at the tail end of a an R and D phase where the belief within many of these institutions was that the public chains were a distraction, private chains were where the interesting R and D was happening. And like hundreds of millions of dollars of R and D were plowed into this idea with with, you know, private consortium, like these consortium chains and enterprise blockchains. And now that it's been like a good four or five years since the dawn of the enterprise blockchain, a lot of those initial really hot startups and ventures have begin to

• 23:43Speaker 01

  They've begun to fall apart a little bit, or just not really bear fruit, not pay off the way that people expected them to. And that's because I don't think there really is anything frankly fundamentally new about enterprise blockchains. Although I'm sure we'll see some interesting developments in like database technology. But I do view the key fundamental innovation here as creating a digital commons where, you know, no one is excluded from transacting. And the nature of the ledger is auditable and very well understood. So I think public blockchains are the key linchpin here. Whether or not larger, you know, regulated enterprises will be comfortable transacting on them is another matter entirely.

• 24:28Speaker 01

  And it'll take them a long time to get comfortable with it.

• 24:32Speaker 01

  However, we're seeing steps in that direction though. So I think EY, it recently came out that they were, you know, productizing usages of Ethereum like on mainnet, not a fork of Ethereum, but like Ethereum itself. Obviously, the custodians custoding Bitcoin are using Bitcoin itself. And, you know, JPM, there's a question over what JPM coin is. But it's very plausible to me that they would transition that from Quorum to Ethereum mainnet because the architecture is so similar, if they ever wanted to actually open that thing up.

• 25:09Anthony Pompliano?

  Yeah.

• 25:10Speaker 01

  So I think it is a very slow process, which is totally fine. But they're gradually getting attenuated to using this public infrastructure.

• 25:18Anthony Pompliano?

  To me, it's like every individual goes through a journey, right? They discover Bitcoin, oh, this is interesting, let me learn more about it. I don't know if it's going to work, let me go figure out, maybe it's tokenization, or it's like enterprise blockchain, right? They like kind of work their way through the ecosystem and they figure out, oh, ICOs were cool. Okay, maybe that's not going to work. And then they eventually just end back up at, oh, Bitcoin's real. Right, but like there is this journey that people take where they are kind of exploratory in these different ideas. Enterprises are no different. There's many people, so they're kind of doing the same thing. The difference is you and I don't have hundreds of millions of dollars in our back pocket to go to go into R and D of enterprise blockchain, right? But like, that's the way they learn.

• 25:55Speaker 01

  Yeah, Fidelity went through the same thing. They looked at enterprise blockchains 2014, 15. So they started with mining Bitcoin and they're like, well, maybe there's more to it. Maybe blockchain itself is a general purpose technology. Let's look at that. And then they circle back around. And personally, yeah, I, you know, I.

• 26:13Anthony Pompliano?

  That's okay.

• 26:14Speaker 01

  Yeah, I think so. I mean, you know, you're operating on incomplete information at first, so you do have to explore every possibility. And I mean, I don't know if the, there's like a right place to end up, whether that's just Bitcoin or it's warranted to be more open minded than that, but I certainly went through a very similar process too.

• 26:32Anthony Pompliano?

  Yeah, absolutely. All right, I want to talk about something that you're very vocal around, which is this proof of reserves, right? And this idea that exchanges and kind of the solvency of these institutions that are in crypto, that are handling people's funds. Maybe just describe like, what is proof of reserves and why you think it's important to get started?

• 26:52Speaker 01

  So the reason that I care about this concept, proof of reserves, is that exchanges are such important members of the crypto industry, but they have typically abused that privilege, I would say. And you don't have to look far for examples of this. Obviously, Gox is one. Very recently, Quadriga, you know, was operating in a fractional reserve and collapsed. I don't think the key loss story that was the cover story is really the case. So, you know, and like unfortunately, I would say more people use or have access to crypto indirectly through exchanges than they do directly have access. And you can kind of look at the chains and confirm this.

• 27:36Speaker 01

  So there is a estimate in the Cambridge benchmarking study that about 130 million people have accounts on exchanges globally. And if I do take a guess about on-chain owners of Bitcoin. Ethereum, it's probably more in the in the in the low double-digit millions in terms of on-chain wallets. Yep. In practice, people own Bitcoin or Ethereum or other cryptocurrencies indirectly through exchanges. So they use exchanges as banks. They're not just using them on a pass-through basis. And so since exchanges resemble depository institutions almost more than they resemble, you know, like Shapeshift, for instance, would be one where it's a pass-through. They're not trading accounts. They're actually banks where people are leaving their funds in.

• 28:20Speaker 01

  Yes, because that's what people are used to. Yep. You know, and they don't quite see the disanalogy between like Chase and Coinbase. So, and, you know, not to demean Coinbase, but exchanges occupy this like they, you know, something like 15, about 15 and 20% of all Bitcoins are held with these custodians. So it's really important that they're behaving well, but they they just tend not to. Even the regulated ones, the regulatory framework in the US is like this patchwork of state-by-state regulation. You got the Bill license in New York, but there's no real federal regulation there. So exchanges operate in this like gray area a lot of the time.

• 29:00Speaker 01

  And, you know, I don't think it's really an answered question of what would happen if Kraken and Coinbase became insolvent. Would all those funds be available to depositors? So the the idea behind proof reserves is that using Bitcoins' cryptographic properties, exchanges can actually prove how much Bitcoin they have in reserve. And it's really not difficult to generate this proof. And just real quick, so that people who are listening understand fully. When you talk about reserves, explain exactly what you mean by that. A reserve is simply, if I'm a depository institution like Coinbase, I can prove to you that I have a certain number of Bitcoins under deposit. Yep. So you're holding it in some, whether it's hot storage, cold storage, whatever it is,

• 29:46Speaker 01

  you actually have those funds that you're saying that you have. Yes, under your control. Yep. And that doesn't alone prove that you're solvent. Solvent meaning that

• 29:57Speaker 01

  That you are able to fully redeem all accounts on demand immediately if you want. Because the default assumption is that you're operating a full reserve in crypto. That you can, even if there's a bank run where every depositor wants their funds back right now, you could in theory service that.

• 30:13Anthony Pompliano?

  Yeah, because the thought process is that the rehypothecation, all the fractional reserve stuff is not happening in crypto.

• 30:20Speaker 01

  That's, that's the hope.

• 30:21Anthony Pompliano?

  That's the theory.

• 30:22Speaker 01

  Yeah. And so what I am suggesting is that exchanges should be offering up these proofs. And you can do it in such a way that it doesn't compromise user privacy and that it doesn't even reveal your entire balance. You can pair it with a proof of liabilities, which is, here are the accounts under deposit and here is how much is in each account. And it gets into a little complexity, but you can generate a proof of solvency on this basis. So that, you know, you can, there's a, there's a paper called provisions, which has a zero knowledge proof. But again, not to get into the details. You can, in theory, pair this with a proof of liability and essentially prove that you are operating solvently

• 31:06Speaker 01

  and that you're not misrepresenting the funds under custody to your depositors. And I think this is important. Quadriga is a great example. So Quadriga, for a long time, was insolvent. They didn't have enough funds to cover all the deposits.

• 31:18Anthony Pompliano?

  And if there had been a bank run, that would have been exposed.

• 31:21Speaker 01

  Well, I mean, and it was exposed. It just happened, it so happened that it was catalyzed by the death of the, you know, of the founder. But for years, they didn't, they weren't able to cover user deposits. And this was like the biggest exchange in Canada, I think. So this is a really big deal. And if, if the depositors instead demanded a proof of reserve attestation, they would have known years in advance that, you know, there was either a fraud or something shady happening there. And, you know, lots of harm would have been avoided. So this is a pretty critical issue and it's surprising to me that, that people aren't taking it as seriously.

• 31:59Anthony Pompliano?

  So two questions. One of them is selfishly just out of personal interest. In this situation, would there be a way for an exchange? To basically say, yes, we have the reserve that we are expected to have. To a non-technical person who may not understand proof of reserves, the actual underlying technology of Bitcoin or other crypto assets, like almost like, it's funny to say this, but like a better business bureau rating, right? Of like, hey, you get an A plus or, you know, you kind of get a credit rating, right? Like you are deemed by somebody that says, yes, you have what you say you have. Or do you think it actually needs to be a little bit deeper in terms of the disclosures and the ability for people to check?

• 32:42Speaker 01

  So the only way to really check is, is if you pair it with an actual auditor. So a conventional auditor. So the auditor has to attest to the fiat liabilities. And then the exchange can, with this proof of reserve tool, very trivially show to them that they have the reserves. But there's, so proof of reserves is not a new concept. It actually happened a lot on exchanges in 2014. So Kraken did it, Bitstamp did it, I believe. Huobi did it, if I'm not misremembering. So after Mt. Gox collapsed, that was the catalyst. And lots of these exchanges were like, we're going to prove to you that we're fully backed. And so they did it on a one-off basis.

• 33:24Speaker 01

  And that was actually, you'd basically go in your account and like hit a checkbox and be like, verify account. And then it would, it would create a proof for you. But so the, and the funny thing is that like Kraken in particular said that this would be something they do on an ongoing basis. And then they stopped after the first one. So this is just me reminding them of, of, you know, that they claimed they would be doing this on an ongoing basis. But today, there's basically only one exchange that does this. Small UK exchange called Coinfloor. And they, to their credit, they've done a proof of reserve attestation 60 months in a row.

• 33:58Anthony Pompliano?

  Sixty.

• 33:58Speaker 01

  Six zero.

• 33:59Anthony Pompliano?

  Yeah. Oh, my God.

• 34:00Speaker 01

  Yeah, so they do.

• 34:01Anthony Pompliano?

  Five years.

• 34:02Speaker 01

  Yeah. And it's like a little crude and like, to some degree, it requires them leaking how many Bitcoins they have under custody, but.

• 34:11Anthony Pompliano?

  Why would somebody not want that known? Right? Like, why would, like, what, take the seat of the exchange owner. And so, yes, I understand the value to the users or my customers that the proof of reserves are there. Is there a business reason for not participating? What would their response be?

• 34:28Speaker 01

  One reason would be if they're actually performing secondary lending. But in that case, they are effectively behaving much more like a bank where they're lending out deposits.

• 34:37Anthony Pompliano?

  So basically, if they're doing that and they're not telling people who are doing that, then that's a problem.

• 34:40Speaker 01

  That would be, but so if they admit that they're doing it and everyone collectively agrees, okay, that's fine. Then they're not going to be able to prove reserves because they wouldn't have reserves because they'd be operating like a conventional bank. But, you know, for an institution that's meant to be full reserve, which is de facto all the exchanges in crypto.

• 35:00Speaker 01

  They shouldn't really have a business impairment, aside from maybe they don't want to leak some data like how many Bitcoins they have under custody. But to be frank with you, you know, firms like Coinmetrics can find that out without too much difficulty. The wallets are known, you can inspect the chain.

• 35:16Anthony Pompliano?

  Yeah.

• 35:17Speaker 01

  So, you know, Coinbase is like 800,000 or so Bitcoins. You know, Zappos has roughly, you know, a quarter, three quarters of a million Bitcoins. So you can look at their vaults on chain and see like Coinbase is like 25% of a Litecoin. It's not that difficult to find out what their cold wallets are. So if they're concerned about leaking the number of crypto, of like, you know, the number of Bitcoin they have. That's already basically in the public domain.

• 35:46Anthony Pompliano?

  It's already out there.

• 35:47Speaker 01

  Yeah.

• 35:47Anthony Pompliano?

  What, um, so kind of going off of this, how does this work in the legacy financial system, right? In terms of like, quote unquote, proof of reserves?

• 35:55Speaker 01

  Well, so there's no requirement that banks do this in that way because banks are guaranteed, you know, by the FDIC. So if a bank becomes insolvent, the government still guarantees all the deposits. So that's why I'm not like banging on the door of my credit union and be like, what are your reserves? Like, prove it to me. Because like, even if they fail, I'm going to be getting my funds out of there. Up to, what is it, like 250,000?

• 36:20Anthony Pompliano?

  Yeah.

• 36:20Speaker 01

  Yeah, so, but they actually still have an expectation of proving capital reserves, I believe. And like, capital ratios for midsize depositor institutions in the US happen to be corrected on this. But I think they're like 10 to 12% or something. So.

• 36:36Anthony Pompliano?

  And do you think that that type of assurances will come to crypto? Or do you think it's just, it's a different beast in terms of being able to get some sort of? I think maybe Gemini is FDIC insured or has something similar to?

• 36:50Anthony Pompliano?

  The insurance?

• 36:51Speaker 01

  I'm not 100% sure.

• 36:52Anthony Pompliano?

  Yeah, maybe not. But yeah, so what about like, do you think that there's a world where we see either FDIC insurance or something similar to crypto and then this proof of reserves thing maybe doesn't become nonexistent, but just is less important because there is the assurance there?

• 37:05Speaker 01

  Yeah, that, I mean, that certainly could happen if, if these exchanges become more tightly regulated. But the nature of the industry is it's so permissionless that exchanges just, they can appear entrepreneurially, especially in non-US jurisdictions. And then there's not that backstop of government assurance. And in that case, we then have to default to things like just trusting the brand, trusting them not to misbehave. And I don't want to trust them, you know? I would prefer that they, that they are providing us with cryptographic assurances. But in the US, it certainly could become more tightly coupled. Maybe we'll get federal regulation regarding exchanges. And maybe it ends up looking much more like the traditional banking system where they had to prove capital ratios.

• 37:49Speaker 01

  Maybe they don't even have to prove 100% reserves, for instance.

• 37:52Anthony Pompliano?

  What is your take on the percentage of institutions that are probably either intentionally or unintentionally involved in something that would be exposed negatively by proof of reserves? Are we talking about half the industry? Like, single-digit percentages? 100%? Like, just ballpark? What do you think it actually would be?

• 38:14Speaker 01

  So for the regulated exchanges, like, you know, the federal or the, you know, the serious regulated exchanges in the US, I would say most of them are totally solvent. But, you know, if you like tick down the exchange list on CoinMarketCap, I'm sure a really large fraction of those are not fully backed at all. And I'm not saying that because I have any particular knowledge, but just from historical precedent, these things often are, you know, either exit scams by the creators or they get hacked and they lose some Bitcoin, they want to cover it up. This happens all the time. Bifnax is a great example. We know right now that there is a large fraction of the funds belonging to them which are not accessible to them. But the interesting thing is that we, we know that, so we have the benefit of that

• 38:59Speaker 01

  information, so then we can withdraw our funds before it collapses.

• 39:03Anthony Pompliano?

  Yeah, maybe give an overview of like your understanding of what's going on with Bifnax and Tether, right? I think everyone saw the news and just knows that, hey, the New York Attorney General has... Stepped in, is how I'll put it. I don't even think people actually understand is it, are they suing them? Are they charging them with something? I'm less concerned about like what the nomenclature of what the regulators are doing and more about just what is the relationship between Bitfinex and Tether and then what's going on between the two that has caused concern?

• 39:31Speaker 01

  Yeah, I mean, it's incredibly murky territory. My understanding is that essentially the leadership of Bitfinex and Tether is effectively the same.

• 39:42Anthony Pompliano?

  They share a parent company for sure.

• 39:43Speaker 01

  Yeah. And there was a liability which occurred when this NAD Crypto Capital had that 50 million seized and then it was co-mingled between the two with Bitfinex using the funds held in reserve for Tether to handle that, which was, I guess, I mean, they alter the terms of service for Tether to say that it could be backed by this like quasi loan, but it was probably pretty deceptive to co-mingle the liabilities of Tether and Bitfinex, which should have been totally distinct.

• 40:24Anthony Pompliano?

  Yeah, because I think one argument is basically Bitfinex is doing an intercompany loan, they're the borrower, right, from Tether, and so that's not abnormal. On the other hand-

• 40:37Speaker 01

  Yeah, that's common.

• 40:37Anthony Pompliano?

  But you're not telling the customers this, you're changing terms of service in kind of murky ways, right? I mean, there's a whole bunch of questions, I think, where people are like, what the hell is going on?

• 40:47Speaker 01

  And this is actually roughly on the same topic as proof reserves. Since we are in this parallel financial system where we can't rely on state authorities as much to protect users, we have to default to more transparency by these institutions like Tether that are trusted by many people. And unfortunately, they haven't really been able to provide that level of transparency over their history. And this is another great case. They were very untransparent about what was actually occurring there, especially when they changed the terms of service to say, well, you know, we're not fully backed by dollars in the bank account, but we're backed by a loan. So they owe us, all of these institutions-

• 41:30Speaker 01

  Exchanges, custodians, crypto banks, et cetera. Because they live, for the most part, outside of the traditional financial system, they owe us more transparency than those institutions do. And so far, they've failed to deliver that to us.

• 41:45Anthony Pompliano?

  Yeah, the part that is really interesting, I think, in my opinion, is all this news comes out, right? And I think the really hardcore crypto enthusiasts or the people who are paying attention every day are like, whoa, the Attorney General stepped in. There's a lot of weird stuff that probably is in the gray areas going on. This should have a major impact. If you looked at the prices within 24 hours of the news, Tether was down like a half, you know, 1.5%. I think Bitcoin was down less than 5%. Like, it didn't really have the impact that I think a lot of people would have previously thought it would. Or if you said to them, hey, the New York Attorney General is going to step in, and this is what's going to be revealed. I think people would have thought, that's a really bad situation.

• 42:29Anthony Pompliano?

  It leads me to think, you know, how important is Tether to the crypto ecosystem? And let's go to the really bad situation where like Tether just completely blows up, right? What, how do you, like, how does that play out?

• 42:41Speaker 01

  Well, that would be bad. I think the reason

• 42:43Anthony Pompliano?

  That's the understatement of the year, Nick.

• 42:46Speaker 01

  I think the reason the market maybe didn't react as much as we would have expected is because the market appears to be telling us that they believe that Biffinex will actually remediate the situation. And that might be because they're training this on the model of the last time Biffinex had like a serious unplanned for liability when they're hacked in 2016, I believe. And they were able to claw their way out of that bad situation. So potentially traders are saying, well, actually, we think Biffinex might be good for it eventually down the line. Although, I mean, it looks extremely dire for them, to be frank with you. What I think Tether does, Tether is like a Euro dollar in Bitcoin, on Bitcoin,

• 43:27Speaker 01

  and it allows, you know, dollar-denominated risk to float around the crypto industry. And I think essentially what it does is it allows a lot of these totally Unregulated exchanges which are not connected to financial infrastructure in any way to operate with traders having the option to transform their risk to dollars denomination, which has meant that there's this cottage industry of totally unregulated exchanges which have emerged. And if you look at what Tether trades against, it's everything. You know, it's like the long tail of assets. So a Tether wipeout would be, I mean, it's a really significant fraction of Bitcoin volume too,

• 44:12Speaker 01

  although it's hard to determine what's real and what's not, but it's like a large fraction. But it's also a large fraction of other kind of long tail coins. So if it gets wiped out, I think it has a very negative effect on Bitcoin, but also on long tail. I think that's something that's being overlooked.

• 44:29Anthony Pompliano?

  Yeah. Do you think it's something where it blew up? Are we talking about 50% drops in prices, people completely are insolvent? And customers are stuck in terms that they can't actually get funds that they want access to? Or do you think it's less like Armageddon Day type situation? It's probably much more, hey, this is bad. There's definitely a, in the short term, you know, painful situation. But if you look at it over the long term, you know, people will talk about it like a mount cox. Hey, that was really bad what happened, but we get over it and kind of keep going.

• 45:05Speaker 01

  What I think is actually likely to happen here, if Tether ceases operations, it would be because regulators actually step in and, you know, assert, you know, jurisdiction over them. And this kind of reminds me of the way that it happened when online poker was shut down in the US in 2011. I had funds on full tilt for sure. You know, the government just stepped in, froze everything, and had this long process of accounting and remediation. And some of the poker sites were operating at a fractional reserve, actually, great like prelude to crypto.

• 45:47Speaker 01

  And eventually you're able to claim and get your funds back, although you may have taken a haircut.

• 45:52Anthony Pompliano?

  So I think- Because I think with those websites, like one day people just went and there was just basically a- Website photo from like the FBI was like this website has been seized by the FBI.

• 46:02Speaker 01

  Is it Black Friday or Black Monday? Yeah, it was a dark day. And it just it took years for everybody to get their funds out. But so, yeah, I think it would be kind of a it would be freeze operations. And then there'd be process of claiming to get your funds back. But, you know, to the extent that Tether is is three quarters backed right now. That's kind of what depositors can expect to get out of it if that happened today.

• 46:26Anthony Pompliano?

  That makes sense. Let's let's go back to Castle Island for a second. Any portfolio companies that you're really excited about that you want to kind of talk through and explain why you guys are excited about them?

• 46:36Speaker 01

  So there's one that actually was just announced today.

• 46:38Anthony Pompliano?

  Okay, all right.

• 46:39Speaker 01

  Aris X is is a regulated spot futures cryptocurrency exchange. So they are bringing kind of a maturity to this industry, which is it's it contrasts nicely with what we've been talking about thus far. So they're an exchange in the kind of the same way that the NYSE or Nasdaq is an exchange. And that normal individual or retail investors cannot get an account on the exchange. So it always struck me as kind of weird that on BitMEX, for instance, you had these like large quant firms trading against random global retail investors. It seemed very predatory.

• 47:20Speaker 01

  And I think that's, you know, that's that's why BitMEX is kind of a dangerous place to trade. So Aris X is a conventional exchange in that you would have to go through a brokerage to get access to them. If you're a retail investor. And I think this is just better for consumer protection, essentially. They're also unbundling exchange and custody, which is a really interesting. Obviously, that's the default in normal capital markets.

• 47:49Anthony Pompliano?

  All right. So this is really important, right? Because this is one thing that blew my mind in crypto is in the traditional financial system. You custody your funds in one place and you trade with those funds in another place. They are not vertically integrated in almost every situation.

• 48:04Speaker 01

  It has always struck me as like really bizarre that. Exchanges have to, as you say, vertically integrate and engage in these extremely different kinds of activities. One is custody, which is this like, you know, you have threat models and it's like, it's a huge significant challenge, requires enormous engineering resources. And the other one is like, you know, matching trades, which is a totally different kind of competency entirely. So Eris is focused on the exchange segment, not on the custody, which I think is healthy because we now we're seeing institutions specialize.

• 48:40Anthony Pompliano?

  Yep.

• 48:40Speaker 01

  And the other thing is that they are, they will have market makers live on the platform on day one. So spreads will be tight. There'll be surveillance. The whole thing is, is probably much more amenable to what the regulators want from out of this market. You know, so of course crypto is much bigger than, you know, regulated spot and futures trading in the US. But this is really important in terms of market structure, in my opinion.

• 49:04Anthony Pompliano?

  It, it almost feels like the adults are showing up a little bit. Right. I actually, in my opinion, look at what I'll call crypto incumbents, right? The people who have built very large, multi-billion dollar businesses in crypto with exchanges in custody to date. They're adults, right? They've been able to do this in a mature, regulated, kind of safe way. But there's not that many of them, right? I mean, we probably could sit here and name 10 or less that have been able to do that successfully. And now what we're starting to see is the people crossover from the traditional financial world, who understand everything from the unbundling to the regulatory, kind of bent in how to interface with those regulators.

• 49:45Anthony Pompliano?

  Do we just see consolidation with the crypto incumbents? Like, do these new players to the market just start buying up the Krakens and Coinbase's? And just saying, hey, you guys have users, you guys have been doing this a long time, got a lot of institutional knowledge, but let's come together? Or do you see this like battle for the user kind of play out over the next five years or so?

• 50:02Speaker 01

  I think the, the incumbents, the, you know, the traditional crypto exchanges that we know and love will always probably have a place in the industry. In particular, you know, retail investors love them. It does appear that they've stepped back from competing in the more institutional. Space, so like Coinbase just shuttered their office in Chicago and had departures on that front.

• 50:25Speaker 01

  And then, you know, meanwhile, you have custodians like Fidelity that are stepping in and exchanges like Aris X and Backed, which are now entering, and it seems that they're much better placed to compete in that side of the market. So I think the, eventually the industry will consolidate around a few of those kind of more sophisticated players.

• 50:46Anthony Pompliano?

  Yeah.

• 50:47Speaker 01

  But I'm certain that we'll also always have appetite for exchanges like Coinbase and Binance and so on.

• 50:55Anthony Pompliano?

  Yeah, that makes sense. Let's talk about the maturation of Bitcoin real quick and just kind of how it interfaces with institutions. If you're one of these large financial organizations, what do you do with Bitcoin? Just buy a bunch of it, put it on your balance sheet? Do you mind? Do you, you know, is it almost like the simple things that you and I would think of that you can do with Bitcoin are the things that they should be doing just at scale? Or do they just ignore it? What are they doing?

• 51:17Speaker 01

  Well, for the most part, they ignore it, but to the extent that they are engaging, it's mostly on the, you know, well, how do we, if we have clients, like, what do we tell them about it? Can we custody it for them? But I think a lot of the reluctance to engage with it has been due to its, obviously, the perceptions related to the, like, the facilitating, the darknet markets and so on, but also the instability of Bitcoin. You know, events like the fork in August 2017, the hostile, the competition from Bitcoin Cash and so on. That contributes to this air of instability. There have been, you know, a couple of critical bugs in history. It's still software and, you know, you could even say experimental software.

• 52:03Speaker 01

  And you don't really want to, like, with gold, there's no risk that the gold in your vaults transmutes into lead all of a sudden. But with Bitcoin, there's kind of like a slight risk that, that there's a critical bug and something terrible happens. So.

• 52:19Anthony Pompliano?

  Yeah.

• 52:20Speaker 01

  I mean, nothing that's not recoverable, in my opinion, but.

• 52:24Speaker 01

  The fact that it is, it's not, you know, perfectly understood yet, um, kind of explains the reluctance a little bit.

• 52:30Anthony Pompliano?

  I gave somebody this, uh, this comparison the other day and I said, it feels like to me, the institutions are like the Roman Empire, uh, emperors, right? And so they're all dressed up really nicely and all their jewelry and their white cloths and everything and they go to, uh, uh, the arena and they watch the gladiators fight it out, right? And they kill each other and they, and they're just, you know, savages in the arena. And it's entertainment, right? For the kind of elites to watch this happen and, and they're betting on it and they're doing all this stuff, but they'll never get into the arena, right? And, and so I feel like if you compare the large financial institutions, like they're the elites in the white cloths watching. And then it's like crypto Twitter is like the gladiators in the arena and just like

• 53:11Anthony Pompliano?

  all of the, uh, the drama and the just absolute, um, ju- just ruthlessness, I think, right? If you look at some of the forks and, and the, uh, the soap operas that go on around this stuff, uh, it just feels like two different worlds.

• 53:25Speaker 01

  And, uh, but, you know, it's like totally paradoxical to sit here, I'm, you know, a Bitcoiner, hardcore, et cetera, you know, ideologically motivated, and here I am talking about the institutionalization of Bitcoins, like Nick, like that's completely paradoxical. This thing is, we were meant to like take down the banks and so on. And to some degree, that's totally true. Um, and I think, you know, the, uh, the demographics that are best served by crypto are outside of the US and, or there are people that are marginalized or, you know, not well, uh, they can't engage with the, the current financial system well. So whether that's, uh, sex workers, um, people in countries that are under sanction or where, uh, Swift, you know, doesn't work or operate, um, or individuals like in the cannabis industry,

• 54:10Speaker 01

  even if what they're doing is totally legal, you know, those are the use case where, where crypto kind of makes perfect sense for them. Or if you're trying to send remittances to a channel where there's not a good efficiency there, um, so.

• 54:22Speaker 01

  You know, the immediate, you know, demographic that can benefit the most from crypto is, you know, the marginalized, those outside the US, you know, for the most part. So I'm definitely aware of the kind of the paradoxes inherent here.

• 54:36Anthony Pompliano?

  Yeah, makes sense. Before we finish up, you brought these dice. Tell us a little bit about the dice and then we'll play a game for a couple of minutes.

• 54:44Speaker 01

  So the dice, initially I made a meme actually on Photoshop where I was sick of the like the Paul Krugman's of the world, like trashing Bitcoin with like the same like 10, like, you know, like lines of attack. And so I decided to parody the critics and put all their different critiques on a different side of a 12-sided dice. At first I wanted 20 sides, but my dice manufacturers told me they couldn't fit them on the panels because they're too small. So we have addition one and addition two of the Bitcoin FUD dice here with us. And each side is a different critique and it's basically a parody of the kind of op-ed columnists that hate Bitcoin.

• 55:25Anthony Pompliano?

  All right. So I'm going to roll this three times. Each time I'm going to tell you what the critique is and then you disprove the critique. So the first one is high fees.

• 55:37Speaker 01

  Yeah, high fees, man. That's, it's a very common line of critique, that's for sure. So I guess one of the critiques relating to fees is that Bitcoin is a poor payments network if fees got too high, which is actually fair, which is why we have to build in this layered manner, maybe with the base layer being more of a settlement layer and other layers being the actual payments layers. But yeah, I mean, I fully expect fees on the base layer to be, you know, in the multiple dollars range in the future.

• 56:06Anthony Pompliano?

  Ah, toxic fans, the savages in the arena.

• 56:13Speaker 01

  Yeah, I think we're both very much accustomed to this. The, yeah, so the interesting thing there is conflating the fans with the thing itself, you know. So Bitcoin is like a neutral technology. It doesn't really have opinions, it's just a technology. But the fans.

• 56:32Speaker 01

  Are non-neutral. So the question is, is the technology valuable and useful regardless of the behavior of the fans? And I think it is.

• 56:40Anthony Pompliano?

  Yeah, I agree. And I always joke around and says, you know, Bitcoin doesn't care about your politics, your religion, your technical charts, or anything else. It is, it just is, right? It just exists. And then it's how you and I use it that we're talk about it that I think drives the sentiment. All right, last one. Oh, high fees again. They really like the high fees.

• 57:04Anthony Pompliano?

  Selfish mining.

• 57:05Speaker 01

  Oh, yeah. This was an old critique by a Cornell professor that I think you, before he released the paper, he said that his result had broken Bitcoin. It's like, sell your Bitcoin. My paper disproves Bitcoin.

• 57:20Speaker 01

  That was a classic. But yeah, I think selfish mining actually is a potential edge case with mining, but it doesn't seem to be kind of a big deal.

• 57:26Anthony Pompliano?

  What is the claim with selfish mining?

• 57:29Speaker 01

  That miners can subvert the mining process by withholding blocks and giving larger miners an advantage, I believe. But, you know, Bitcoin seems to be fine.

• 57:41Anthony Pompliano?

  The, I don't know who wrote it, but I guess they were inaccurate in breaking Bitcoin. So maybe they'll try again.

• 57:47Speaker 01

  So many professors have tried. I think it's this condition I call Satoshi Envy, where, you know, they were maybe have been active in cryptography or distributed systems engineering, and they didn't invent Bitcoin, but Bitcoin was the biggest thing in their field ever. And so they just, you know, they're so pained by this that they then engage in this like Sisyphean effort to reinvent Bitcoin or invent a better alternative when, you know, Bitcoin is perfectly sufficient and we don't need all these professor coins.

• 58:17Anthony Pompliano?

  So one of my favorite parts about this whole like Professor Envy or Satoshi Envy, as you call it, is the idea that normally if we knew who the creator was, they would just like ad homine attack non-stop that one person, right? And tell us how stupid they are, how bad they are. You know, there'd probably be some scandal, whatever. When you don't know who that person is, you can't attack the person. You have to attack the idea.

• 58:40Speaker 01

  Yeah, the idea is pretty good.

• 58:43Anthony Pompliano?

  So far, so good. 10 years in, hundreds of billions of dollars a year is not too shabby. All right, before I finish up, do rapid fire questions. What's the most important company in crypto in your opinion?

• 58:56Speaker 01

  Um, oh, okay. I believe it's Fidelity Investments.

• 59:01Anthony Pompliano?

  Fidelity, oh, why?

• 59:02Speaker 01

  I'm not just saying that because, you know, I have many friends and colleagues that work there. But I think custody and in particular defining a good control location. I think the SEC will give us clarity on that soon. That is what will make institutions comfortable with engaging with not just Bitcoin, but you know cryptocurrency more generally.

• 59:21Anthony Pompliano?

  Got it. What's the one regulation you would change or improve if you could?

• 59:25Speaker 01

  So aside from the the control location, which is kind of esoteric, I would say the IRS, I would ask for a safe harbor or an exemption in terms of the tax treatment for for small uses of Bitcoin for purchases.

• 59:39Anthony Pompliano?

  Yeah, that makes sense. What do you think your most controversial thought in crypto is?

• 59:43Speaker 01

  That time that I advocated for a dynamic block size on Bitcoin to optimize for a high level of fees or a stable level of fees. People didn't like that.

• 59:53Anthony Pompliano?

  Listen, we all have that one moment where we said something.

• 59:56Speaker 01

  Oh, I figured out how to fix Bitcoin. I just found out about Bitcoin. I'm here to fix it.

• 1:00:02Anthony Pompliano?

  I literally do not know somebody who is well respected in Bitcoin today, who if you ask them, usually you have to ask them in private, what's the one thing that you've said about Bitcoin that maybe you would take back? They all have one thing.

• 1:00:14Speaker 01

  Yeah, totally. We've all been savaged by the herd.

• 1:00:17Anthony Pompliano?

  Yeah. And by the way, that makes you appreciate it, right? You realize, hey, man, this actually, this thing works. What's the most important book you've ever read?

• 1:00:28Speaker 01

  I'm a huge Talab fan. I think that's like maybe every like white male my age is as well. But I would say Fooled by Randomness, his first book, actually. It really

• 1:00:39Anthony Pompliano?

  Was that one the best?

• 1:00:40Speaker 01

  Taught me how to think about probability, about trading. Yeah, really just an outstanding book and underappreciated relative to the rest of his canon.

• 1:00:47Anthony Pompliano?

  Yeah, that makes sense. Where can people find the dice?

• 1:00:50Speaker 01

  They can find them on the CASA store. So CASA is a portfolio company, full disclosure. But so I I gave them a box of the dice to sell. I think you can buy them on the Lightning Network.

• 1:01:00Anthony Pompliano?

  CASA is the way you spell CASA.

• 1:01:04Speaker 01

  Yes.

• 1:01:04Anthony Pompliano?

  Go check it out. I just go to the website. I think they have a store there. All right, before I let you ask me a question to end, I talk about aliens. Believer, non-believer?

• 1:01:15Speaker 01

  Uh, not, not believe.

• 1:01:16Anthony Pompliano?

  Not believer, you do not believe in aliens, you think they do not exist.

• 1:01:19Speaker 01

  Well, I mean, I don't think we've been visited by aliens.

• 1:01:23Anthony Pompliano?

  Okay, I agree with that.

• 1:01:24Speaker 01

  Uh, I think space is, you know, pretty big, like, odds are there is probably life out there. Um, if there isn't, then that's totally cause for concern, like, I'm a big believer in Fermi's paradox and the great filter. So if there wasn't any extraterrestrial life, I'd be very worried about us. Cause then it's like, well, what's gonna kill us off, you know? Um, is there a stage of civilization where you just collapse? Uh, but, uh, I don't believe that we're currently, uh, you know, in touch with aliens.

• 1:01:51Anthony Pompliano?

  Yeah, I, so I agree with you that they likely to exist, I agree, we probably never talked to them, they've never talked to us, or contacted each other, whatever, the light shield, or whatever those people wanna say. Um, but the one thing, uh, you just made me think of, I don't know why I thought of this. Could you imagine if we were just living, going through life, and then all of a sudden you woke up one day, you're the only human left on Earth? Like, there's just some catastrophic event, and literally you're just walking around, everyone else is dead, and you're the only person?

• 1:02:17Speaker 01

  I have thought about that.

• 1:02:18Anthony Pompliano?

  Really?

• 1:02:19Speaker 01

  Yeah.

• 1:02:19Anthony Pompliano?

  Like, what do you do?

• 1:02:20Speaker 01

  I don't know, it's like, I am legend, you can just do whatever you want.

• 1:02:23Anthony Pompliano?

  Like, do you just go get, like, a burger? You know, and like, try to live your life, or?

• 1:02:28Speaker 01

  Well, the burger's not gonna be good, like, in a week's time, and then you have to hunt deer in the street or something.

• 1:02:33Anthony Pompliano?

  It, it would be pretty lonely.

• 1:02:34Speaker 01

  Yeah, for sure.

• 1:02:35Anthony Pompliano?

  Yeah?

• 1:02:35Speaker 01

  Yeah.

• 1:02:36Anthony Pompliano?

  All right.

• 1:02:36Speaker 01

  And no one, no one else on Twitter, too.

• 1:02:38Anthony Pompliano?

  Oh, Tw- Twitter would, uh?

• 1:02:40Speaker 01

  That would actually be the most devastating part.

• 1:02:41Anthony Pompliano?

  The, the, depending on who you ask, some people may say Twitter would be better. They could just say all their nonsense into the ether and no one would care. Twi- Twitter's fascinating to me because, uh, it's the one place you can go, and, uh, you can say pretty much anything you want. Everything from like, here's the food I'm eating, to I'm in this city, to like, I've got this grand idea about, you know, crypto, or whatever. And, uh, you'll, one, find other weirdos that agree with or disagree with you. Uh, two, nobody is shy about letting you know their opinion. And then, three, is, uh, you are guaranteed, if you tweet enough, to meet people in real life who are the lurkers. Who they're like, oh, I read all your stuff, and like, I don't even, didn't even know you had a Twitter account.

• 1:03:20Speaker 01

  Yeah.

• 1:03:21Anthony Pompliano?

  Right? And, uh, and so you always gotta just, kinda keep it in the back of your head, there's people who are watching this, who have, I have no clue who they are.

• 1:03:27Speaker 01

  Yeah, that was the, the, I'm sure this happens to you a lot, but I started getting recognized on the street. Uh, happened to me a couple of times, and I always thought I was, like, pretty marginal, you know? And I was like, oh, God, like, Twitter is now beginning to cross the threshold into real life.

• 1:03:41Anthony Pompliano?

  Yeah, it, it is, uh- It's gonna be pretty crazy, I think, when the next bull market occurs in the sense of

• 1:03:50Anthony Pompliano?

  the people are gonna be kind of three, four years older, right? So you kind of get the the folks who came in as 20 to 25 year olds are now gonna be like 25 to 30 year olds, that type of range. And so I think there's gonna be more active, more social, like all of that. And then you're gonna get the new wave of all the kind of college kids coming in. And so it's just, I just keep thinking about, you know, is it double or triple the size of what we saw in 2017?

• 1:04:15Speaker 01

  Oh, man. I mean, if you think about it, if Bitcoin and crypto achieves the significance, we think it will, some of the Twitter influencers of today will be politicians, you know, and cult leaders in the future. So I guess we can look forward to that.

• 1:04:30Anthony Pompliano?

  My goal is to get Jameson Lopp to to come out of hiding. That's the goal. He's a

• 1:04:35Speaker 01

  Have you not had him on?

• 1:04:37Anthony Pompliano?

  No, no, he would come on. I actually haven't talked to him about it, but I should get him on here. But just the idea of like, he's so security kind of focused, right? To actually get him to come out publicly and say, this is where I live, right? Because then that means that we live in a very different world than I think we live in today.

• 1:04:54Speaker 01

  He would need to really amp up his security measures at that point.

• 1:04:57Anthony Pompliano?

  Yeah, for sure. All right, what one question do you have for me to end this thing?

• 1:05:03Speaker 01

  Okay, so let me see. On the on the spectrum of of beliefs about crypto and blockchains, I'll just briefly describe them and I want you to tell me which you think is the most defensible based on the evidence you've seen so far.

• 1:05:18Anthony Pompliano?

  Okay, interesting.

• 1:05:19Speaker 01

  So on the one hand, you have full on no coinism. You don't own crypto and you don't believe it will matter.

• 1:05:26Anthony Pompliano?

  Okay.

• 1:05:26Speaker 01

  And then you have the kind of intermediate step, which is like, you believe in blockchain technology, but not really in crypto. Then you have just pure orthodox Bitcoinism. You know, you really only think Bitcoin is the interesting thing here. And then you have like the more progressive, like multi-coinism, like there will be many assets, many chains. And then like the more extreme, like kind of techno utopian, which is we will have DAOs, virtually everything Be tokenized, like crypto is going to massively take over and will gain political significance and so on. So like where on that spectrum do you think the evidence falls in favor of the most?

• 1:06:07Anthony Pompliano?

  Okay, so I'm going to answer this in kind of two different ways. One is for the mass consumer, I think that no coinism is like the most rational thing for them, right? So they don't necessarily, they're not early adopters, right? They pretty much, their life is not going to be impacted. They don't think about investments, right? All this kind of stuff, they just go about their life every day. For that person, the odds that this is important or worth paying attention to today is like near zero, right? So from a rationality standpoint, if you are just an everyday person with no technological bent, no interest in technology or investing, and you just want to kind of, you know, go to work every day, come home to your family, enjoy your life, and that's it. No coinism to me is very rational.

• 1:06:50Speaker 01

  It makes total sense.

• 1:06:51Anthony Pompliano?

  Yeah, and like, it's just a probability game, right? Of like, how many new things come along in technology? It's not like they're freaking out because of AI.

• 1:06:59Speaker 01

  And you don't need to care about it. Or like innovations in machine learning or like self-driving cars.

• 1:07:03Anthony Pompliano?

  By the way, at some point, there's going to be an app on your phone that uses a bunch of, you know, woo-woo technology you've never heard of before, but you don't care because it gets you from point A to point B, right? And you're like, oh, it's a map. Like, that's not really a map.

• 1:07:16Anthony Pompliano?

  It's like a futuristic map, but okay. So I think that that is like the most rational thing for probably majority of the world, right? In terms of just on a pure aggregate number basis.

• 1:07:25Speaker 01

  Yeah.

• 1:07:25Anthony Pompliano?

  Now, if you go to what I'll call like the technologist perspective, this is somebody who understands technology, maybe is an early adopter or an early-ish adopter, and has a specific interest in this, right? So they're even, they've looked at it. In my opinion, it is Bitcoin has the highest probability of being successful, right? So if you just look at all, if you line up all of the different tokens and use cases, Bitcoin has the highest probability, everything from Lindy effect to just size to that's, you know, kind of where the the name brand or kind of mind share goes, all that kind of stuff. So I think that's like a high probability, in my opinion, relatively low risk today, right? In terms of it's not going to go to zero. Now, if you look at everything else, I think that's really where it gets interesting.

• 1:08:09Anthony Pompliano?

  So it's you can be Bitcoin, nothing else. You can be Bitcoin's important and there will be other things. Or you can be like Bitcoin is no more important than anything else, right? I tend to be in the second category, which is Bitcoin is the most important. Bitcoin has the highest probability of being successful, but it is not Bitcoin is the only thing in the world. Right? And I think that part of this is, um, you know, there's an argument to be made about like all these other tokens are just R and D for Bitcoin. So like in that world, it's not that those other tokens are not important at all. They're actually important from an R and D perspective for Bitcoin, right? So you can make that argument. But really where I get to like Bitcoin's the most important, but everything else, the only thing else I'm really interested in is this idea of automation, right?

• 1:08:54Anthony Pompliano?

  What I mean by automation is if you think of assets that we've previously had, we've had analog physical assets, we've had these electronic Q SIP assets, right? Um, and then we eventually got computer files that are digital assets. Those computer files have always been non-financial instruments. So music and all this kind of stuff. Blockchain, triple entry accounting, they cannot be financial instruments. To me, it's less about anything other than now the machines and algorithms are going to be able to use a digitally native asset with digitally native accounting or triple entry accounting to conduct transactions. Right? And so if you look at this as automation, I'm less interested in like, does this chain win over that chain or this token versus that token?

• 1:09:35Anthony Pompliano?

  It's just what are the things that can interface from a technology standpoint are compatible with an automated future?

• 1:09:44Anthony Pompliano?

  I don't think we know yet, right? It's kind of how I'll leave it. And the reason being, you know, look, we can talk about one that to me makes a lot of sense, but I have questions around it. So recently Jaguar Land Rover announced that they're going to use I O, right? They're going to build this digital wallet in a car. They're going to pay people for data they contribute. And then it sounds like the I O team's goal is to eventually then like whatever balance you have in the digital wallet, you can pay tolls, you can do like all this stuff, right? If it works, that's pretty transformative. Yeah. So here's how I come out on it. One is sound idea in terms of like, I actually believe that a car will be part of this like internet of things. Right? To some degree, it already is. Seems inevitable. Yeah, totally. Two is if you then wrap like the smart city concept around it, like again,

• 1:10:28Anthony Pompliano?

  high probability that we'll get somewhere there in the future. My big question has come down to, do you need a different token? Could you just do it with Bitcoin? Right? Is maybe the other tokens like a gateway drug? Right? So like a Jaguar Land Rover scared of Bitcoin. So they end up using something that they think is a specific use case token. And then eventually they kind of go through their path and end up at Bitcoin. Can you just support multi currencies? Right? So could it be a digital wallet? And you and I like Bitcoin, somebody else likes something else. And you know, somebody else says, hey, I'm a dignitary. I want to use a regulated, you know, digital dollar. Right? And that's what they want to use. I don't know how it all plays out, but I do think that Bitcoin is really important. And this idea of automation, it just, there's so much unknown.

• 1:11:13Speaker 01

  Yeah.

• 1:11:14Anthony Pompliano?

  And it's, I really want to see it happen. I tend to probably agree with you that like, most of it is going to consolidate in and around Bitcoin. Right? So whether it is, are all the transactions done on the settlement layer? Are there other layers that are built? You know, is it tangentially related? I don't know exactly, or I just go build it all myself. And so I think that's what we spend our day, you know, investing, trying to figure out. It's like, where is the world going in that vein?

• 1:11:40Speaker 01

  That's right. Well, that is a tremendous answer, man. Extremely well thought out.

• 1:11:46Anthony Pompliano?

  We are literally paid to think about this all day long. As I joke with people all the time, the podcast is just the fun stuff. Right? We actually do real work around here.

• 1:11:58Speaker 01

  I guess you can call it that.

• 1:11:59Anthony Pompliano?

  Yeah, exactly. All right, listen, this has been an absolute pleasure. We will have to do this again for sure in the future. And just keep us updated as you guys are progressing.

• 1:12:08Speaker 01

  Well, thanks for having me on, man. I really appreciate it.

• 1:12:11Anthony Pompliano?

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• 1:12:56Anthony Pompliano?

  Hey everyone, Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.