Weekend Bonus: Crypto IRL, Episode 5, with Tim and Katie

it out on YouTube. Check this out. What do you think? I see by matt Levine? And I feel pretty excited right now? Why are you excited? I love Matt Levine and I like I really like his brain. I got a surprise for you. What's that we got Matt Levine? We're gonna be talking to him. That's huge for us right now and the audience. Matt Levine, it's good to see you, good to be here. We've been really excited about doing this. Me too, I guess, so thanks for

doing this. This. Yeah, this is everything. It's a little bit exaggerated because that's single side it's single side, but it's big. It's big. I decided I'm going to call it a treatise. Is that okay? That is okay? Okay? What about a tone? Tone is like a little bit insultingly about how it's long, but sure, it's a tone it is. Okay, let's talk about how long this is and how it should be read, because I found it very educational, Like as I was reading it, I felt

like I was learning. There's a lot of things I know about crypto. I'd like to think a lot, but I feel like perhaps sort of the fine shading was missed out, Like I don't understand necessarily everything I know, and this helped to fill in some of the blanks. But how should people read this? Is this a textbook?

Is this an article? Should I read it start to finish? Ideally? No, Like I mean, the way that I thought about it was that crypto is like big enough as a topic to produce, you know, that much paper, but it's like relatively a small topic. It's like everything in crypto for the most part, has been invented in the last like twelve years or so, and so when you can do is start from the beginning and kind of um logically develop all of the things that exist in crypto today.

So that's what I tried to do. And it's not quite as something, not quite as easy as that, but like the idea is that you can sort of start if someone's nothing about crypto. You can start by saying, well, this is like what bitcoin is, and then you can sort of look at bitcoin and say, here are some generalizations of that concept. Here are some ways to take that in different directions. And that's what I tried to

do here. So you don't have to get it start to finish, because like it sort of branches into different directions. But the idea was to kind of start from nothing and develop more or less the system of crypto that exists today that you have a line pretty early on I read the whole thing, but pretty early on keeping that I did text him that I was having weird deja vu to college, for like, my partner has done

the reading, but I haven't yet finished the reading. But Professor I did finish the reading, and I liked this line that I don't have strong feelings for or against crypto. I like finance, and I like that you wrote that specifically for me. That's what it felt like, because it feels like crypto is sort of this market structure experiment and launching like an asset class at built in real time. And I wasn't around when like Bill Gross was inventing

bond trading or something like that. Like, I haven't seen this before, and it's fun to sort of watch and cover and I feel like that's where you're coming from in this piece. Yeah, And a lot of people would disagree with that, and so no, it's not a financial market structure innovation at all. It's building a new web or it's you know, it's not about the money, it's about the tech or whatever. Right, But you know, I

have my doubts that that is true to something that. Okay, so talking about people leaving trad fy going into crypto and how crypto is taking a lot of elements of the traditional finance system and just crypto a izing it. But I mean, you use the phrase in the piece ingesting the traditional finance system. You have tokenized stocks, do you have decentralized exchanges? Is that a worthy enough goal

for crypto? Like can we just say that's enough that we've created this parallel system and it works, and that's really cool, trouble done enough for what? Right? I mean, I think that would be I think that people who are like are on Twitter a lot talking about how crypto is going to change the world, would be a little disappointed if crypto if the end result of crypto

is making the financial system more efficient. But I also think that a lot of people got rich and crypto get even richer if that if that worked out right, And I also think that, um, you know, the financial system is really big, and it supports a lot of real economic activity, and I think there are many places where it is inefficient, in some places where it is you know, dangerous and has you know, a recent history of causing catastrophes, and if you improved those places by

five percent, like that would be like a really meaningful

contribution to the world. I think that most fair observers would say there are some real advantages to the cryptosystem in terms of like, um, particularly sort of like speed of innovation, and then there's some real disadvantages in terms of often speed of innovation and ability to like you know, exploit things, and and also like the sort of permissionlessness of crypto makes it a little bit more attractive to anonymous possibly criminal actors, right, but so there's real problems.

But like, uh, if you think that it's a better way to run a financial system, like having a better way to run a financial system is really valuable with the giant financial system. And I guess that's my question, Like that seems like a pretty respectable fee, like we made the system more. Like I think that, like people in crypto would say, the way that we trade crypto is way better than the way that we trade stocks in terms of like anyone can sort of access the

same exchanges. There's like less of a divide between institutional and retail traders. Um, if you want to build something, if you want to write a new derivative contract, it's sort of like a flatter hierarchy where you don't have to like sign up in is the with JP Morgan um and and everything just sort of like works on

settles a bit faster. So I think that people are real sort of gung ho about they have built um has it ingested you know, the loan market or the stock market, like really and like you know, I say like that, you know, there's in two thousand seventeen a real vogue for banks to say we're gonna move loan trade into the blockchain, and like you don't hear that anymore,

not because they did it. You know, Like there's a lot of like kind of the bank action in projects that turned out to be kind of vaporware, like are always a few years in the future, so I wouldn't say it's happened yet. But like I think that the crypto people would say that we have a good system for trading stuff, and let's trade more stuff on that system. And I think that they are having success in persuading some people in finance that, in fact, it's a good

system to trade. 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. I want to talk about trust because that's a big part of crypto and it's a big part of your peace. It was pretty fascinated with the id that we live in a world where we kind of take trust for granted, that when we open up our banking app, the money

that we see in there is actually ours. There's this tension though, because crypto is trying to build out this kind of trust list system where everything is verified, but at the same time, you do have a lot of well, I don't want to say a lot, but you do have a handful of bad actors out there who have gotten away with at this point taking a lot of people's money. It's more than a handful, more than a handfuls.

It's it's weird. There's so much bad stuff happening in a place that's supposed to be more trustworthy than the traditional system, isn't. Yeah, I mean, this is the thing I talked about a lot. I mean I think that, um, one thing I would say is that in traditional finance, like you trust that your money is in your bank account, and I could probably articulate the sort of mechanisms by which that trust is like fair, like it was like

reasonable to trust the money you rank. You can't be there, but I'm not sure that everyone could, because it's the thing that you can kind of take for granted, where you can say, the banks just give me my money, and it's just like empirically trust reliable enough that you just go around trusting it. And in some sense what you're trusting is not the bank, but like the background rules of society. You sort of expect the rule of law to work. You expect the government to sort of

do its job. You expect people to try to comply with the law. You expect there to be laws that say the bank has to give you your money, right Like you don't even you know, like check these things off the checklist. You just kind of like go around trusting these things. In crypto, there's sort of like two different aspects to it. One is that you could verify

everything or not everything. But like like there are large swaths of crypto where everything is kind of verifiable right where they are like you know, open source algorithms and like verifiable you know, proof of things, and you can prove that your bitcoins belong to you on the blockchain, and most people don't do that, just the way most people don't like sort of read the banking regulations before

putting their money in the bank. But there is a notion that all of those proofs are openly available to everyone in a way that isn't really true of traditional banking, where like, in traditional banking, like at some level, what you're trusting is that a bank examiner has gone into your bank and made sure that the money is there, that the auditor has audited the financial statements. In crypto,

everything can be verified by you. You don't do it because that would take forever, but like you trust the system in a different way. You trust the system in a way where you're like, if I had to, I could prove everything. Um So I think that's an interesting development um And it's like it leads to trust. It leads to like people who trust the system rather than verifying everything, but it leads to trust from a different path than the way we do it in the rest

of society. So used to banks working that a lot of people get into crypto, sometimes just because I want to make money, sometimes for philosophical reasons, and they're like, they don't like trust, but they're still so used to that background principle of trust that they see an ad for eight returns on their savings and they're like, well, that must be fine, right, Like, how could that go wrong? It's advertised on a website and the website looks good.

Is like, you know, I think there is sometimes an attitude of like, someone would have done something about this if it was fraud, which is you know, a very traditional finance attitude that is really much not the sort of like uh like sort of front page attitude of crypto, but it seems to have crept back in anyway. And so I mean, how how could you possibly do due diligence? Then?

I mean, because there are you've read about how there's incentives like miners, for example, have incentives not to completely you know, nuke the whole system because then they lose money. Um. But for the average person coming into crypto, like, how do you do that due diligence in the apps us of trust? I think it's hard, right, I mean I think that there are there are people who spend for room.

It's like a hobby, and you spend a lot of time familiarizing yourself with like the code and the algorithms and sort of get comfortable that like you can demonstrate that most of the stuff works, and then you're often using like kind of defy and you're trying to avoid like you're aware that you don't want to trust anyone,

and so you're trying to avoid trusted central counterparties. Right, there's a lot of people in crypto who are basically trying to minimize their contact with like trusted central counterparties.

The other way to do it is the way you do it in any other business, where like you try to find the trust really trusted central counterparties, right, And like, you know, crypto is sort of mature enough that you know not to advertise like coin Base, but like coin Base is a US public company, right, Like I don't

know that, I don't know how effectively they're regulated. Right, it's still early for everyone, right, But like if you're a US investor, you might say, I'm going to go to the biggest name that's a public company where like the guy lives in America and it doesn't want to get arrested, you know, And then you know you're hoping for the best, but you're what you're doing is trusting the same background principles of of like you know, sort of the rule of law and society that you trust

in a bank or any other you know, company. But sometimes people who work at publicly traded companies go to jail. Oh yeah, there's a reliable You talk about crypto being a pretty broad umbrella here, and I feel like that we've been talking mostly about the financial uses of crypto,

but also under that umbrella is web three. Sure, and you make the point that you know, there's not a lot of ways where crypto touches like the real economy or people's lives, but it feels like Web three theoretically there's potential there for crypto to actually affect my day to day, but you take a pretty skeptical tone to it. I think that a lot of the I don't know. I just like the use cases that people are excited about do not make me excited. You know, it's like

you can what are those use cases? Well? I mean, like I don't want to like parody it too much, but like you know, you could like buy a sword in a computer game, and you own the sword. You can go to a different computer games sword or whatever. But does he know, like the stuff you did in college, which you like, when did you play with some metaverse animal or something? Oh my god, we're talking about medo pats. No. Well, okay, so I, for example, to talk about myself the center

of my own universe. I started playing New Pets when I was eleven. I still occasionally interacted the game I played a lot in college like that. I don't know that was a sort of a metaverse, uh? I couldn't imagine that being on the blockchain and more integrated into

my life and identity. And yeah, I mean there's there's like I want in the piece to take that seriously because I think that like leaving aside you know, pats or any particular thing, Like it is the case that in my lifetime, like when I was born, almost none of my life occurred on the Internet, and now like a lot of my life occurs on the Internet in

different ways. And so like if you are building if you're trying to extract value from building systems from the for the Internet, like that's a that's like very broadly speaking, like the growth industry, right, and so like if you say people are gonna be living more in the metaverse in some broadway where they're going to spend more of their time online, like twenty years ago, I would have said, I don't want to like hang out with my friends like by like showing like sending them pictures on a

social media website. I want to like I have my friends in person, and now like I just like people's photos and Instagram, you know, Like, um, like this is true that like more of life has moved to the to like the Internet broadly speaking, and so that it is like a place where like the easiest access point for crypto to sort of like affect the world is like on the Internet. Um, that said, it's not clear that it's like easy, right, It's like your newo pets

weren't on the blockchain. It's not clear that they'd be better on the blockchain. So there's still like even if you're even if your cases like the betaverse will be everything like, that doesn't prove that like crypto is going like the blockchain is going to be the sort of like underlying engine of the metaverse. Right, is part of your skepticism about this Web three label due to the

fact that there are so many projects associated with Ponzi's. Yeah, and I mean this is not the only thing that happens in Web three, but like a really important element of crypto and like Web three is that a lot of projects have their own tokens, and a lot of people think very explicitly in terms of token omics, where your thought process is not just let me build a good product, but it's let me build a product, distribute tokens tied to that product to the users of that product,

and then they'll want the token to go up, and so they'll use the product more. And so it is hard early on to disentangle what's a good project from what is a project that has done a good job of hyping its tokens. And ah, it's not just that some projects are ponzi's, it's that, like being a ponzi is sort of baked into the nature of like a lot of what is going on and like this sort

of like crypto token economy. So with that in mind, I mean, obviously the word ponzi has a lot of negative connotations, but one thing that I think is fascinating metric is that there are people who are like enthusiastically embracing that label and they're like, no, no, Ponzi's are how we're going to build the last thing. Yeah, well

maybe it's not a bad thing, right. It's distasteful, and it like makes it hard to evaluate projects because like you have both the pondsi element and like whatever is actually going on. But it's not wrong that like giving people economic incentives early on can like traw them to projects that turn out to be good, and they can make those projects viable. Like I think it's a it's a reasonable and like very funny thought to have, and that has become sort of like normalized in crypto um.

If I could have put real money into the neo pets Ponzi early on, I absolutely would have out have bought all the neo points tokens right and like you know, like where Beanie baby is that in like an analytage. I would have spent a lot of money on them. Luckily I was like four, so I wasn't in control of my purse turns. But the problem with that is that in order for those to be worth something to you, you have to sell them to the next Katie Greifeld,

Who's you know, the next gullible little girl. This special audio only episode of Crypto I r L will be right back with more from Katie gray Field and Tim Stanovic. If you want the full video experience, head to Bloomberg dot com slash qt should talking about regulation, Yeah, I feel like there's a lot of different ways we could

get into it. I was thinking about it when you were explaining trust, and I think a big reason that we trust banks is because regulators, as you write in the piece, like there are people who regulators go inside these banks. They know what they're doing. They kick tires and search for things and make sure that everything's up to snuff. Yeah, I mean that's a somewhat optimistic picture, but yeah, that's right basically true, Okay, And that, by extension makes it so we trust banks in a way

that crypto firms aren't necessarily backed up. Yeah, So what's missing from the regulatory puzzle here? Everything? Everything? Like right, Like, it's very hard because crypto is so like so much of cryptos philosophically opposed to regulation in general, So much of it is crossed, like like from the get go is very cross border, so it's hard to know who has jurisdiction um even in the US, Like there are sort of these very sterile debates about what crypto tokens are,

are they are they secure? Like which tokens or securities? Is the SEC in charge? Is the CFTC in charge? And then like obviously a lot of stuff that happened in crypto is a substitute for banking, which is not

really the SEC or the CFTC. It's it's for banquets for like the FED in the SEC, and that's a much sort of higher level of regulation, Like that's the examiners coming into the bank and making sure that everything is is working properly, whereas the SEC is more like, if we find some fraud in your financial statements, will

go after you. Um. And like all of that in the US is like incredibly early on, where the SEC is jousting for jurisdiction and going after some of the most egregious projects and some of the less egregious but like more obvious projects um, and bank regulators are putting out papers about how stable colins should be regulated like banking,

but like not really doing it. UM. So it's very very early on, and I don't really know where it ends up, right, Like I think that a lot of people in crypto, like I think that crypto has built a system that obviates the need for regulation, where like, ah, do you find protocols are trustworthy because you can read their code, and if they're not because the code gets hacked, that's good because it's like adversarial hardening of the system

and like eventually they'll get better. Um. And you have uh this like openness and censorship resistance of like the blockchain that makes it just the better system than a system of national regulation. A lot of those people, by the way, AH are thinking internationally about regulation and think, like, you know, there are countries that are like generous to

crypto and allow a lot of like innovation. There are countries like the US that are sort of down on crypto and try to um restrict it, you know, supervise it more closely. There are countries that sort of ban it.

And then there are countries that, like, I have repressive governments that will take your savings, right, And like, if you're in like if you're sort of like in the crypto world and sort of country neutral, you're like saying that regulation is good is like not obviously true, right, Like there's places where national regulation would be bad for me, right for like for for fairness or for the rule of law. And so I think there are people who see crypto as being a more neutral rule of law

than like some of the alternatives of actual law. My bias about US regulation is that Congress is is such a difficult time legislating on controversial topics, and like it's hard to imagine a comprehensive crypto bill being passed, not impossible, hard, and and so I think that there's going to be a lot of like sort of ad hoc regulation by enforcement in the SEC saying this is a security and we're gonna get you for fraud. Probably being right about

most of those things. Um, I think it's like it's going to be much more messy and add howkin ways that are ah, probably bad for crypto. Malvin, thank you so much. Thank you for having me. This is fun, had fund had fun, he had fun. All yeah, fun with us. I feel like that's like, I don't know, we should include that, We should include that. Yeah, yeah. 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. Just in time for Halloween. On the next episode of Bloomberg Crypto, we're going to talk about brains. No no, no, no, we're not. We're gonna talk about zombie coins. It might still melt your brain. Don't say I didn't want you. 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 Faruk and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy, Marie Ishmael. Have a great weekend.