Weekend Bonus: Crypto IRL, Episode 2 with Tim and Katie

slash qt or check it out on YouTube. Okay, Tim, it's a new week. You have another silly little story. I understand, how dare you? But you're right, I do have a story. This actually happened. Yeah, like all my stories actually happened, right for sure? Okay. So I'm walking to work last week. I am about to cross the street. I look up from my phone. There's a kid in front of me and he's wearing a backpack and on

the backpack it says block five. Really, And I'm thinking to myself, why does this kid have the backpack of you know, a once very highly valued that you know this sounds fake. I have I have a picture of this right here, because I was like this and so you said Block five just sounded like a story. That is a child wearing a black five back Is that your Child's not my kid? His kid is way older. I saw something the other day and I thought to myself, I have to take a picture. I have to show Stacy.

I already showed Katie. I just want to know what you think when you see this. Oh Mom, it's a Block five. It's a backpack that says Block five and it's warned by like a thirteen year old kid. Well, that person is definitely not a qualified institutional investors. Okay, And I'm thinking to myself, why does this guy have a Block five backpack? Did his parents work at Block five and did they get laid off? Was Block five?

Just like clearing inventory? Sounds like you really meditated on this. Yeah, I mean I kind of felt like I was living in some sort of metaphor here, like, you know, all that's left of Block five is this backpack. So I like that you said metaphor because in a sense, this is all just a convoluted device to get into the next episode, where we're going to talk about where we're actually going from this moment of destruction. Who are going to be the screeching phoenix? Is that rise from the fire?

And you recorded another little video. Okay, Some legendary businesses have been built in the wake of massive market downturns. Look at Disney. It came of age during the Great Depression, and Airbnb was built after the Great Recession and the housing crisis. Is the two trillion dollar blow up in crypto? Is that going to provide some fertile ground for some revolutionary new company to emerge, one that could completely change

the way that the world thinks about finance. Now that we understand how so much crypto wealth just evaporated in a few short months, let's try to understand what happens next. Who's left standing after this historic collapse? What about the lessons that we can learn from the crash? And what about the opportunities? Who are the people out there and the companies that are honkering down right now and building and what are they building? What's going to rise out

of this? How does the industry earn back the trust of people who were scared off in the sell off? And how will companies have to work with regulators who might not like crypto that much. I'm just saying, if I had a Block five backpack, I would absolutely wear it to work. Yeah, if you saw me in the building with that backpack on, I would love you would laugh. And that's all I'm trying to do is make Stacy laugh. But we should talk about where we're going, because it's

a good question. You have the Block fives and some of the other big lenders and other big success stories really come to their knees this summer, and I want to talk about next summer. I want to talk about the summer after that, the next few months and years, where we're going, whether the big players are still going to be the big players, or who is trying to rise and rebuild right now or build because it's time to build. It is time to build. I've heard that. Yeah.

I think one of the more interesting things, or one of the more interesting questions that is going to absolutely drive the direction of that answer is what's going to happen with regulation and if the whether it's the SEC or the CFTC in the US, or political pressure from other places or whatever the EU and the UK decide, they want to do. How they approach who gets to do what is not just influential but in some cases deterministic. Well,

that's the thing you just said. A lot of letters and there's any question over who actually regulates the industry going for and it feels like that is one of the big hurdles here. Who actually has any sort of say.

Our genius colleague mc levine, in one of his recent columns, pointed out that the answers to the question of who regulates crypto is almost like unknowable, right, because on the one hand, you have the SEC being very assertive about establishing its jurisdiction in certain areas, but mostly doing that through enforcement actions rather than policy. You have a very

clear and very public um. I wouldn't quite describe it as a dispute for it, but at least dissent between folks who think the CFTC should have more power in the US. And then you go to places like India where a lot of that regulation is coming through like tax policy rather than anything else. And so even in the US, whether you're thinking about you know, state level policy, New York, New Jersey have been very aggressive on what they're allowing various bills that are trying to work themselves

through the House. If one of the ones that's under consideration passes, you would have to effectively be a bank to issue stable coins. That's going to have huge consequences for the circles and the tethers and the big stable coin issues of the world. So you know, there are a lot of lawyers making a lot of money right now trying to shape the direction of that regulatory conversation. That's like, that's like an evergreen thing, right lawyers. Lawyers

make money, you have no matter what happens. What about like this being some sort of inflection point if we think about positively or negative Well, I don't I think positively because if you think about what happened up till you know, it's kind of the wild wild West, right, the idea of a lot of experimentation and really light touch regulation. And I'm not saying that by any means we've seen any sort of regulation at this point. But is this a different industry now than it was at

the beginning of the year. Well, what, some people file for bankruptcy, So there's that. Um, there are various folks whose tokens are effectively out of Commission. I mean, I think back a year ago there was a squid game token that turned out to be a complete scam, you know. So I think there have been a lot of ways in which perhaps the less capitalized players, or the ones who had insufficient risk management or due diligence, have been

like washed out a little bit. But the biggest players are still the biggest players, and in some ways they're even bigger than at the beginning of this year. You mean, like f t X coming in and essentially industry rescuing everyone. That is the narrative. But I don't look at them the same way that I look at the players that went under. Why. Uh, Well, for one, it's an exchange with many other businesses that aren't exchanges which haven't gone under.

I feel like that's the big It doesn't seem like they had the same exposure to counterparty risk that you know, the Celsius Voyager Block five has had. All of those people that you mentioned were among their various counter parties. I think what you're seeing is who are the people who either manage that exposure better than others or better capitalized in the event that one of those counter parties

blew up. And so you know, for me, the bigger question is like the tier to the sort of infrastructure players, people who you know, like maybe a couple of billion dollars in transactions at a time, mostly a retail customer base, flying slightly under the radar. They're the ones that have really been popping up with like, oh, we're seasoning withdraws and you're like, wait, I've never heard of you, Like what's going on here? Uh? And I think that part

of the market. While we'll continue to have shakeouts there, I don't see the big players changing anything drastically other than perhaps more land MS. Okay, So if you're talking about these tier one institutions coming in and being the white Knight and sort of a process of consolidation, then I'm thinking to myself, this is totally the antithesis of the promise of crypto decentralization. But what I'm hearing right now, and what I'm seeing right now, is that big, well

capitalized firms are coming in. They're buying up the dregs, the shadows of what's left from companies, and in that sense, they're getting bigger. So what we see on the other side of this is a consolidation that actually makes a fewer number of institutions much bigger and much more powerful.

That is the that runs counter to the promise of crypto. Well, if I were a bitcoin maximalist, which to be clear, I'm not, But if I'm a bitcoin maximalist, one of the things I would point out is none of those companies affect what happens to bitcoin, right Like, there are going to be people who will say, sure, but at the blockchain layer, of the protocol layer, at the level of indie developers who are still in Ukraine and trying to build interesting things, is like bombs full around them.

But it is also true that one of the things that happens when you have a crisis or a shake up or the prospect of looming regulation is you do have consolidation and you do have concentration. Is there anyone who's building and hasn't yet been acquired? I mean to go back to that narrative that we've discussed a few times that it's time to build, very popular on Twitter. Who is building right now? Are they not in my backyard?

Do not build in my backyard? All right? Mr nimby Um, I think that where folks are really paying attention is some of the like say the Defy PROTOCOLI type things

with names like Una Swamp and Sushi swamp um. I think folks are looking at the potential of they are large, but they are an interesting part of the ecosystem, like the Yuga lapses of the world, which went from hey, we have some apes in a collection, to hey, we're going to acquire various other n f T type collections and companies, to hey, we're signing deals with Hollywood and the music industry. And I think when you have that sort of we were a pure play crypto, but now

we're extending into mass media lifestyle entertainment. You give opportunities for other folks who are like, oh, here's a new place for me to play that didn't necessarily exist before.

And you know, one of my favorite types of coverage is when we find actual individuals or like the small midsize of the market who are able to be like, I am going to make a different kind of art gallery, or you know, I'm somebody working in um fashion who is able to do interesting things, or I'm a designer making virtual clothes and avatars for the methods of the world.

I'm like, that's cool. So so do we have any sort of vision of the future where we see the technology that's being experimented experimented with right now and then we start to see that in everyday items in everyday life. If you talk to people about crypto long enough, eventually you'll hear the phrase, well, the underlying technology. At that point just like take a shot. I think she just said it's time to build. I literally did not say it's time to Fine. Nick, it's awesome to see you,

it's great to be here. Thank you for including me on the new show. Thank you. It does it does look good. Your general partner at Castle Island Venturous. You guys just raised what two or fifty million for your third round earlier this year. Okay, cool, So you're like the perfect out to talk to about this stuff. I gotta tell you. I feel like at this point we've been hearing about the promises of the blockchain. It seems

like for the better part of a decade. At this point a part though and and like and crypto too. But to me, apart from making a few people just fabulously wealthy, I still haven't seen how this technology has actually made our lives better. Yeah. I mean I think a lot of the promises were pretty vacuous, to be honest with you, So, um yeah, I can't sort of endorse things that you know, my predecessors may have said.

But you know, the core thing, the number one thing we were endeavoring to solve as an industry was alternative monetary systems. Uh. Those have been built, Those exist. Whether or not they're going to achieve the penetration the you know, crypto acolytes, I think they might, that's an open question. We'll see. I think that depends on what happens in sort of the real world with you know, um, you know,

currency crises and things like that. Um, there is sort of the Web three space which I would say we're seeing real, actual world, real world use cases which are emerging, which are fairly interesting. Um. And then the last thing on point out would be stable coins. To me, that is something that a lot of early crypto people didn't understand, didn't necessarily even want, they didn't seek to build that. But those are actually, you know, proved to be the

first killer app of crypto. Use a lot of my favorite words between stable coins and Web three, but I want to start with one of the first things you said, which is alternative money systems, And this is something that we actually talk about a lot, and truly we do, so I guess we hear about crypto a lot as an investment rather than a utility. And when you say that, I mean the problem that has been trying to solve, Leaving aside all the bad promises that were made by

some of your predecessors, the alternative money system. I mean, does crypto have to be a utility, doesn't need to be used transactionally? Um? I think any monetary good um satisfies all the all the qualities of money, so um yeah,

there should definitely be transactional use. What we're seeing is the decoupling between sort of like crypto commodities like bitcoin and ether, which are you they have a lower velocity, and then versus stables, which are used um as a medium of exchange, almost as a collateral type and empirically they have higher velocities. So it's almost like that first idea that crypto assets like bitcoin would be used transactionally,

that's not really proven to be the case. Why is that though, I mean because if you think back to what every few months, there was this new news item, right every few days. Actually it was like, oh, so and so company start is accepting crypto, and then you'd see the price of bitcoin go up. It was actually this company is accepting bitcoin. Then the present bitcoin would go up, and you know, Tesla was like, Oh, we're going to start accepting bitcoin until until they didn't. Why

didn't that stick? That was kind of you know, I don't. I think it just doesn't really actually make that much sense to use a volatile crypto asset transactually for the reason that the US asserts the primacy of the dollar um from a tax perspective. Right, So even relative to foreign currencies, right, if you hold a foreign currency material amount and appreciates, you are now on the hook for you have a tax liability, right, so you have to

you know, keep track of that. There's the accounting um overhead. So it's the same with the crypto asset. You have to track your tax basis when you spend it. That is a considerable friction. That means that nobody's really willing to conduct commerce in crypto terms. They would rather stand dollars. Uh. And so that's just a barrier which I don't really see being lifted anytime soon. Why would the government give

up the privileged position that the dollar enjoys. This special audio only episode of Crypto I r L will be right back with more from Katie Greifeld and Tim Stanovic. If you want the full video experience, head to Bloomberg dot com slash qt okay, I want to talk about regulators. Um, are you scared? No? Is this an industry that can be trusted to regulate itself? It has shown no willingness to regulate itself historically, none whatsoever. So Um, it's unclear

to me what self regulation would look like. So then how do you as a VC, as an investor sort of navigate and build a portfolio with that sort of huge question mark overhang, the fact that this industry hasn't shown any willingness to regulate itself, and you have regulators over here making very worried noises haven't yet really done anything but made a lot of noise. From the securities regulation standpoint, the SEC has shown no willingness to engage

productively with the industry, none whatsoever. What would I have expected a alternative model for tokens to engage in disc closure for material facts the same way we have that in the regular you know, public equity land. But we have seen no signs whatsoever of you know, legislative moves on that front or the SEC being willing to lay

that out. So what are the repercussions of that? Does that mean that we start to see crypto firms increasingly leave the United States because there's no clear regulatory framework. You know, even though the U S is kind of challenged from that perspective, there's not that many other jurisdictions that are much better. Frankly, people thought Singapore was a safe haven proved not to be them as is just as tough as the SEC, if not worse. Um, people

thought Europe might be. Europe has new super aggressive crypto legislation. Uh. The U S still maintains the most vibrant capital markets in the world, obviously the most venture capital UH. And you know, the bulk of activity is still here. My view is stay and engage and fight if necessary, rather than fleeing to some other uh you know, tax saven or something like that. The UK is actually you know,

shown willingness to engage with the industry. But you know, I think American startups and crypto firms are going to have to, you know, do what they can with the local regulators. So if you could wave a magic wand or or go to Capitol Hill and write this legislation yourself, I mean, what are what's a framework that you would want to say? I would codify stable coins and give them access to the Central Bank directly. That would abate a lot of the questions that people have about their

reliability and their ability to be liquid in times of stress. UM. I would give issuers of tokens an ability to acknowledge that they actually are serving as a kind of pseudo equity. I would give these issuers the ability to make the salient disclosures to investors that ought to be made UM and you know, craft framework such that they could do that. And frankly, I think that the disclosure quality would be better than what we have in public markets with quarterly filings.

Because in crypto, if your business is an on Shaine component, you can get real time financials, right, you can pull the data literally directly from the block chain, and you can get financials on a per block basis. UM things are generally more transparent in crypto UM because the cash flows are on Chaine UH and you know public block chains are inherently transparent. What do you think will actually happen? Um, I think it's likely we do get stable coin legislation

maybe this year. I think the SEC will continue to stone wall us. I would like to CEFDC to assert its authority maybe over spot markets. That seems right. A lot of these things look like commodities, so you know, would be nice if they were able to um, you know, win some more discretion there. But yeah, I think, uh, you know, Canceler is very ambitious, and from his outward public statements, he has not so far appeared willing to engage, and uh so, I think it's gona a really tough

time the next few few months and years. Here I started off by asking you about the promises of crypto and the blockchain not necessarily being delivered at least what we were promised over the last decade. Let's look forward now and just think about the next decade. Ten years from now we're sitting here, what has gotten better in our lives as a result of this technology? Where are

we touching it every day? I would say you are looking an explosion of Web three consumer So one I would point out would be social media communications networks where the topology, the hierarchy is much flatter. So you, as the owner of your credentials, can choose to engage with you know, particular platform you free entry and free exit. So like I take my followers from Twitter to a new site because you own your identity right literally, what is that identity? What do I own of that identity?

Every tweet I've ever um said, Um, I would imagine a world where basically the specific platforms become much less empowered relative to the users. And we're not worried about Twitter's governance policies or their censorship policies or facebooks because there's so many more competing platforms because the costs of eggs at an entry are much lower. Um. And so I think that's an overall better situation because now you can opt into whatever platform, withever, whatever rules you want.

Arguably that's a much better situation. And we don't have, you know, the situation where governments are trying to use these platforms as choke points to gain informational control. They're not trying to influence the Mark Zuckerberg's the world. And so I want to talk a little bit more about web three, though, because I like that you're excited, but I want to be cynical, and I mean to your

point about the Mark Zuckerberg's of the world. A cynical person lights say that when you think about Web three, it's probably going to be built by the same guys who built Web two. That I know. It's a The ideal is that it's going to take power away from these huge social media companies, But realistically it wouldn't it be built by sort of existing companies that are already out there, sort of those big players who already exist, Or do you do you who do you see building it?

That was a very ineloquently phrased question. Web three will be built by a new set of entities for the for the same reason that large companies don't disrupt themselves. They don't have the institutional ability to make wholesale pivots. Facebook maybe an exception, frankly, because Zuckerberg does exercise a lot of control there, and you know he's pivoting hard into the metaverse. So we'll see what you can do there.

But generally speaking, large incumbents that are established there incentive is not to experiment and disrupt themselves, and so I think it would be a new set of entities that are much more open minded, much more willing to support natively open systems. Which is what Web three or blockchains get you is interoperability. None of these large you know, social internet platforms want interoperability. They want to lock you in. They want to create a wild garden. Right, you cannot

leave Twitter with your followers, or leave Facebook. I don't even know how Facebook works. Something used in forever, and you know, I think that's just a fundamentally much better model. Nick Carter, thanks for coming to New York, my pleasure. Thank you. What did I actually knew all of that? So I didn't learn anything because I'm extremely smart. You knew all of that. We don't even get to seed oils. I know. I did get to talk a little with Nick off camera about what he eats one meal a day,

eight pm. That's nuts, had nothing to eat. Yet I know this for long chevity purposes. I feel like that's not good for your metabolism. Well, he's gonna be laughing when we're dead, hopefully, So okay, that's a nice way down in the show. We have more chances. Yeah, this was the only episode two. We'll get your food next time. Thank you, you're so hungry. I want to see these

episodes of Crypto I r L in video. Check them out on Bloomberg Quicktake at Bloomberg dot com, slash qt, or find Katie and Tim Over on YouTube on the next episode of Bloomberg Crypto. It used to be all of say a year ago, that if you worked on wall streets and we're looking for a change, then a crypto startup was the go to place to head over to. Now, as prices full and sentiment declines right along with those prices, these buzzy crypto companies are laying off staff, including those

new fires. And what are those staffers doing heading right back to where they came from? Wool Street. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is

Vicky Verglina. Our senior producer is Janet Babin. Our producers are Mohammed Faruke and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them Death to Wonder At is our engineer. Original music by Leo Sidrin. I'm Stacy, Marie Ishmael. Have a great weekend.