Welcome everyone to the Embit podcast. I'm your host, Seamus Madan. And today, Simon Grunfield makes its 3rd appearance on the podcast. Discussing the recent crypto crash, the coin based bankruptcy scare, which applies to a lot of other crypto exchanges, and how Tara USD and Luna crashed. Quick disclaimer. The podcast is not a recommendation to buy or sell any crypto. All investments are risky, and the podcast is also not a research report.
It should be not be used as the basis of any investment decision. So for a little bit of quick background, the crypto crash list kickstarted by the crash of the Terry USD and Luna coin, of which Terry USD is a stable coin or was a stable coin. So stable coins are cryptocurrencies that are supposed to remain, quote, unquote, stable in price as they are pegged to a fiat currency or an ETF. So what are some advantages of using stablecoins over cash or crypto like Bitcoin?
The you know, the theory behind a stable coin is, as you said, something that's it's pegged already to some sort of, central bank currency. So it's pegged to the dollar. Peg to the euro. It's pegged to the pound. And it makes total sense that you would have some sort of digital asset that's pegged to if you had currency like that. Because reality is is that transacting in crypto is just far easier and way cheaper than doing it with fiat.
So, you know, you could be anywhere in the world and use your stable coins, to conduct commerce. And the beauty of, again, crypto is that it's borderless. You can transact anywhere. Doesn't matter what kind of bank they have. They just need a wallet. So the fundamental that we can understand, like, with with the value there is and again, to your point is that, stable coins are meant to be pegged to something. So how do you do that? Well, in the case of, let's say, circle USDC.
What they do is very simple. You give it them a dollar. They give you a dollar worth of USD or one USD state. And then they hold that fiat in reserve. You know, they're collecting interest on it. They're also charging different transaction fees. So Circle is effectively acting as a bank, issuing its own note if you think about it. And this is also something that the executive branch of the government has also identified.
And therefore, they're kind of classified where they're hinting that when the new regs come out either later this year or next year, that stablecoin issuers will be deemed as banks, and they may have to be regulated as such, which wouldn't be a bad thing, but it would be a very it would be an extreme approach to regulating something that's fairly easy to regulate. But anyway, that's that's that's how government approaches problems. Right? They just throw, more, more rich paper out of it.
So, okay, very simple model. You hold reserves and you're issuing tokens. Now that's fine and dandy if you're able to actually collect those reserves. Alternatively, you have a few of these tokens like what UST and Munoz doing where you have an algorithm. And this is where things go a little haywire because when you're dealing with mathematics to try to match rates on the surface. And in theory, it sounds all fine and dandy, but it is subject again to market conditions.
The dollar can go any way against the pound, against the euro, against the CAD, Aussie Dollar, Kiwi, etcetera, when you're holding a dollar, you're still holding that one dollar. If you're trying to build a digital asset that's pegged to currencies using an algorithmic secret sauce, you're basically exposing yourself, your system, the the entire economy, to a level of risk that is outside of your control and without going into too much detail, that's exactly kinda like what happened here.
Now the catalyst to this whole mess How did that occur? That's a, I think, the real important question. There are a lot of rumors circulating around multifaceted arbitrage play that was done in conjunction of Black Brock and Citadel and somehow they did. I don't know if that's really the case. I don't have direct evidence. I don't know anybody at citadel BlackRock that would confirm or deny these kind of allegations.
I know that there's been some discussions around it, but at a high level, could, you know, enterprises of that kind of magnitude affect these markets? Absolutely. Could a ill willed arbitrage trade the way that it was described that some of these institutions engage in. Could that have caused us entire crash? A 100%. And I haven't seen any kind of report or any kind of suit coming out of this that would paint a clear picture on that. But possible.
And according to the Wall Street Journal, Duquan's company, which is the one who created Terra USD in Lunicorn, was TerraForm Blabs, which raised more than $200,000,000 from light speed Ventures and Galaxy Digital to fund those crypto projects. Lunas total value balloon to more than $40,000,000,000. And then as previously mentioned, it is backed by an algorithm for, Tara, unlike other stablecoins. That are backed by a real currency.
But why was Luna and Tara able to have such a large value for some time and then what caused it to crash? Well, so first off, the the question around the value of everything is timing. So why is it timing? Because, you know, in an upmarket, you know, you don't really have to be a rocket scientist to to to to kinda, like, ride that wave. Everybody's a genius during a during a bull run.
So it's really about time when when they were able to launch the connections that they have, you mentioned galaxy, you mentioned a few others, it's like these are big names Madan. Right? So these are big names that aren't aren't just gonna write a check and just, you know, sit back. They're gonna write a check, and they're gonna make sure it to do their job strategically to make sure that that asset that they just invested in gains as much value as possible.
So it's a multi faceted approach, right, and it's not just one clear answer. Again, that when it comes to the timing, and launching properly and making sure that you have the right marketing around it and the right infrastructure to support that. It's just it's a combination of all new clubs. And then we've seen crash in cryptocurrencies such as Bitcoin recently. So what does that indicate for the crypto market as a whole? Well, first off, you know, remember, what goes up is gotta come down.
So, you know, there was a bull market in crypto for quite some time. And, alright, yeah, people are taking profits. USD Luna was a catalyst to this whole mess. But is also indicative of what's going on in the greater financial markets and the equities markets. You look at what's going on right now. You look at the S and P 500, the Dow, everything is in a bear market. You can even say that due to what's going on in the equities market, when these, when stocks fall, the dollar gets stronger.
And if the dollar is getting stronger, everything pegged to the dollar is going to get weaker. So anything pegged to Bitcoin. Okay? It's gonna get weaker. If they're in. All of these currencies are are pretty much correlated, and the the major instruments are all paired against the dollar. So it would be reasonable to assume that if the other half of the the trader is getting stronger, the other half is gonna get weaker.
There's a lot of correlation what's going on with the equity equities markets, the global financial markets as a whole. And right now, yeah, we're a bear territory. That being said, I've been slowly starting to increase my portfolio, on the crypto side because if you just look across the board, Bitcoin is down about 50% of where it was a year ago or a little over a year ago. That's a good buy opportunity.
You've got tokens like Algorand, like Stuana, like, avalanche, they're they've they're all, like, massively undervalued compared to where they were a year ago. And these are not fly by night organizations. These are companies with solid teams, solid offerings. They're here for the long run. Okay. So that's a long play with those guys. So this is a fantastic buying opportunity that 3, 4 years from now, people will be looking back and be like, shit.
I should have bought Bitcoin in 30 k. You know, it makes complete sense or should have bought Ethereum a 2 k. So I'm not I'm not really too concerned about that stuff. Again, it's part of a healthy economic life cycle. Again, it's a nice cyclical. What goes up has got to come down and and vice versa. Right.
And with assets such as investing in stocks, it's tied to a physical company, and their financials behind it When investing in cryptocurrency, how can you tell when the price is low versus too high? You have to do an analysis based on, similar but very different factors. So for example, okay, let's look at an Ethereum and let's look at polygon. At the surface, they both do the exact same thing. Except one of them does it way, way, way, way better.
In fact, right now, Polygon does the same job Ethereum does but does it in a very large magnitude better than Ethereum does it? Does it for cheaper? Does it faster? But yet, you look at the tokens and you say, well, could the value? Ethereum is trading at 2 k today Madan and Matic is below a dollar. How do you explain that? You would assume that if they're providing the exact same services, they should be valued at the same level. Well, here's where the little secret sauce comes in.
As, like, the fundamentals. It's not just the technical design, but fundamentally Ethereum is still Ethereum is still branded as the platinum standard when it comes to at least the NFT marketplace and decentralized applications. It's trusted still more. It has a wider network And as I said, it's the sterling silver standard. Why? Well, look at the NFT marketplace.
You'll see that if you go to open sea, rarerable anywhere that they support both Ethereum and Polygon, you'll notice that the cheaper NFTs are all done on Polygon, and they're way, way, way more expensive ones are all nethereum. So there's a fundamental it's not just technicals at this point. There's not a fundamental reason why one would be valued higher. Then you can go into it even further and be like, well, Ethereum has an open market cap.
There is no limit to how many Ethereum tokens are gonna be minted. Whereas with Matic, there is a a cap So how does that play into the mix? It's a little bit of a different analysis. Okay. It's not just doing your SWAT and Tesla analysis around an organization and trying to understand exactly what kind of offerings they have in value proposition that they provide, but it's it's a little bit more.
And this is what makes this market really, really interesting is how these different protocols find themselves around the the the the the the entire, you know, ecosphere of crypto and and exactly the the value that they bring individually not just from a technology perspective, but fundamentally as well. And you mentioned NFTs. In the NFT space, we've seen a big crash recently with a lot of digital art along with crypto.
Do you think this is the beginning of the dotcom era for web 3, or do you think there'll be a quicker v Shamus recovery? I think that it was the newest, shiniest toy on the block when it first started 2 years ago with NFTs. Everybody got really know, kinda like lost their shit about it. They're like, oh my god. This is like the whole new thing. Right? You had the whole 2. People compare it to the whole tulip. Right. To a mania. Yeah. To a mania. Right.
Well, again, what was this fundamentally based on? It was fundamentally based on art work and pop culture and, you know, ultimately now it's getting into it's already there. Sports and entertainment and fan engagement and you have utility coming out of it. But in the beginning, it was all about just the artwork and copyright or presumed copyrights around artwork. Look what I have with Seth Green.
Okay. So the comedian, Seth Green owned a few board apes and somehow he got fished and he lost them all. So now by virtue of not owning that token in his wallet, he now does not have the rights, the copy rights, to that artwork. It's very much like a barrel bond. If I'm holding it, I have the rights. If I then decide to hand it to you, now you have the rights. It's a it's still shaky ground.
So things like that, when those things kinda happen, it does move the needle as far as, like, wait a minute. Do I really have the value that I think I have? If this was just a paper contract that Seth had with the creator's support aid, then this would never happen. But because it's all decentralized in Web 3, it did happen. So there's massive risks. So you ask yourself, well, why the hell should I even do this on blockchain? Why don't I just pay for it properly?
The truth is it doesn't hurt to do both. One of the things that Simba is doing is we're launching an application combined with the token economy, and this this platform is kind of like the lifelock for an FTS. It's gonna be a combination of life lock and yellow pages so that people like Seth Grange, so people who own NFTs and they may have spent $2300. They may have spent a $1,000,000 on this NFT. Doesn't matter, but, they're able to do backups.
They're able to create additional enhanced use cases for their the provenance and the history that comes with those NFTs and create additional metadata that they normally wouldn't be able to do it, and it's all separated from whatever platform they're using. So they can move that NFT, wall to wall platform, Madan by doing so, they don't lose any of the information that they backed up, any of the information Madan they've uploaded on chain that will be available accessible to everybody to view.
If Seth had access to our application, anybody looking at that NFT that is now stolen in someone else's wallet They'll be able to see, hey. This belong to South Green, etcetera, etcetera. The only today, the only, repercussions that these, whoever the person is that's that stole it is experiencing is that they're blacklisted from OpenC. That's it. That's the limitation. Now I don't know if that's a limitation on OpenSeas platform.
I don't know if that's just something that, you know, they took an initiative around, but when ours goes live, every exchange out there can reference them and be like, okay. Here's the information about, you know, this fraud situation, the steps situation. We can go ahead and take the appropriate steps to also make sure that that won't be traded here as well. So it acts as a central, to some degree, a centralized repo, for all this in last night.
It's a decentralized repo for all this information that anyone plan will be able to access and sort through and see the history. See all the information that comes with all this stuff. If you're a gamer, you own an FTE that was using a certain game that won a certain battle, that was used in a certain tournament. All of that, you can actually store on Madan, and it just adds more value to the underlying non fungible. Speaking of the market has arguably failed to regulate itself recently.
Should regulators step into regulating assets like NFTs and cryptocurrencies or do you think it they should work it out on its own? And if so, how would they do that? I don't know about NFTs just yet. I don't know about how you would regulate NFT is the way you would regulate, let's say crypto. I'll say this. I'll say this. If if a a company is taking money from customers, acting as a custodian for those customers, then that company has to comply with some sort of regulatory framework.
It has to. I'm holding your funds if I'm holding your your money on your behalf for you to do stuff on my platform, then somebody should be watching me. You know, you need to feel like somebody is providing some sort of oversight. Otherwise, you're just basically throwing money at Simon and saying, okay. I trust Simon because sounds like a good guy. And you don't think I'm just gonna pack up and run away one day. Alright? Reference quadriga.
I mean, well, we could reference a whole lot of companies too, but that was the first one that came to as far as the NF team, right, if you're just keeping everything crypto, just crypto where there's no fiat involvement, I don't know if the jury's still out. I don't know how you would regulate that. That being said, and if team marketplaces are now slowest adopting fiat payments, but then again, they're using third parties that are regulated to some degree.
They either have their money transmission licenses either here or overseas. If they're overseas, they have, you know, an the equivalent of an MTL And of course, they have to work with banks, and the banks won't open up accounts for companies that they deemed high risk. So there is a little bit of a self regulated organization field within the NFT space, those that are going into fiat, but those that are just staying in crypto, Yeah.
There's there's no oversight whatsoever, and I don't know exactly how to resolve that issue right now. It's kind of like buyer beware. And in regards to the oversight for crypto, how could government regulators regulate it effectively? Well, they had to kind of treat it the same way that they would treat any kind of commodity. Not security per se, but a commodity. That's number one. So let's look at Coinbase, for example.
And I think this is a great segue into discussing Coinbase Madan all the all all the things that they've been talking about recently. Yep. So Coinbase has a number of different options when it comes to providing oversight, meaning they have a number of different options of actually providing the service that they're providing right now. While complying with different mandates.
They have money transmission licenses in all 50 states here in the US so that they can offer crypto to all states, including states like New York and California, which is extremely hard, specifically New York has the bit license. It's like your regular MTL times 10, and that was done on purpose. The way, we're not gonna talk about it right now, but it was not on purpose. So they have that.
They also have access to broker dealers if they wanted to just get institutional access, signing up institutions and working with those institutions, outside of the regular NTL business. If they just wanted to have a desk dedicated to managing risk from institutions, they can do that through their BD. What none of these guys have because it's not mandated yet, or it's not it hasn't been written out yet. None of them have any kind of federal license.
None of them have any kind of license that makes them a recognized change. You can do that. It's extremely expensive. There's nothing that makes them go down that route. And by licensed exchange, I'm talking about, like, how the Nasdaq or America a stock exchange or ice or, you know, there's there's a few smaller guys out there too, but there's not a lot of them, right, because these are legitimate stock exchanges, but there's there's a way of of going about doing that.
There's also something that they could get, which is called an, ATS alternative trading system. That has to be combined also with a broker dealer license as well. Okay. So there's so many ways of going about doing it. It really comes down to what is the best, most effective way to deploy our offering to our users using the least amount of work from a regulatory perspective. That's it. So it's up to them to decide which avenue to pursue.
Now they recently made news because they made an announcement or Armstrong Madan announcement saying, yeah, find based you know, if it folds, you guys wanna lose all your money. So you say, well, wait a minute. I know if a bank folds, I'm protected. Well, again, these guys are not banks. That's number 1. But number 2, why? Why if Coinbase fall, why would I lose even a penny of whatever funds I have there? A couple of things. A couple of reasons.
Companies like Coinbase and, for the most part, broker dealers because that's sort of like the model they're using. They're using, like, sort of like a broker or prime broker Madan. They don't use a 3rd party custodian to custody your funds. They custody your funds. The rationale behind why they would custody your funds, and they use a third party, is to provide you with better execution and better liquidity, which is true to some degree.
They can manage risk better by co mingling everyone's funds and not keeping accounts segregated. Like co mingling funds. It's much easier to transact. It's much easier for them on their books to say these two guys bought and sold, bought and sold. All of the transactions are commissions that they're booking without really conducting any kind of transactions if you think about it. It's now a centralized ledger.
Your $10 goes in, my $10 goes in, and then you and I transact, there's really no movement other than ledger entries. It's only when you do a withdrawal or I do a withdrawal when there's a real transaction that occurs, okay, or a real settlement that occurs. So they use a centralized way of providing enhanced liquidity, probably better pricing to some degree and just overall a better experience for the trader.
You could look at Uniswap or SushiSwap or any of those guys and say, well, if they fall, nothing happens to my funds, which is true, they're not commingling anything. They're not centralizing the funds. They're not they're not acting as a custodian. But the trade off there is your speed of execution and your pricing. You're probably not gonna get the same kind of pricing and the same kind of speed of execution with a centralized model versus a decentralized model.
So as a centralized model, those funds are technically under their control, belongs to them. If they fault, if they all of a sudden get to a point where we have no more liquidity in our own company, they might tap customer liquidity to keep the operation going. It's within their right to do so. I'm not gonna get into all that stuff, but until there are new regs that come out.
It's well then they're right to do so to make sure that you still have the opportunity to buy and sell crypto because remember, This isn't a privilege. This isn't written in the constitution that you need to have access to cryptocurrencies. It's a choice you made. You made a choice to go ahead and try to buy crypto. Through this organization, which is set up in in this kind of format. So, yeah, if they fault, most likely we'll be taking some of your funds with them.
I know that they claim to have insurance, but that's on the wall. It's like if their walls get hacked, if they experience some sort of disaster recovery situation, then, you know, they they're covered from that degree. But if they fault because of just poor operational management because of just businesses, just failing, then there's there's really nothing that, that would protect you. They're not a bank, so there's no FDIC. Yeah. You're pretty much on your own.
So Again, kind of buyer everywhere. You mentioned if a bank goes bankrupt, it's insured up to $250,000. And if a broker goes bankrupt, the FDIC can protect up to $500, but crypto isn't protected at all as you mentioned. What are some of the ways that the government can step into ensure? You know, that's that's that's a tricky question. I don't know. I never thought about that really. Like, how would how would government accept?
Well, so for stuff, you know, the government has to the administration has to have really, really solid simple guidelines to require crypto companies to follow. It just has to be very simple and very clear. Okay. 10, 12 guidelines, 13, whatever it is. This is how you're gonna operate your crypto business. The same way as if you were operating a, a stock exchange for alternative trading system, an ATS license. This is how you're supposed to do it.
As far as protecting user assets, The government doesn't custody crypto today. So there isn't really anything for them to issue. They, you know, they don't recognize this stuff. Now that being said, if there is a digital dollar that comes out from the Fed. Now you have an opportunity to think about it a little bit more expanded Madan say, okay. Well, now I can get this digital dollar that is backed up by the Fed, and maybe that could be insured.
That and you could technically do that, okay, which means that now if I'm using that as a deposit at Coinbase, and for whatever reason, Armstrong gets abducted by aliens or something like that. Who knows what? All of a sudden, the company just they they call it a day. Hey, that's fine because, my funds are registered with the federal government, and there you go. Here's here's here's the paper trail. That might be it.
You know, essential bank, digital currency might be might be the solution, but I guess to be determined. It we're gonna need people, lots more than me to figure that out. And, to wrap it up here with, the crypto crash and the possible recession in the next couple of months, What can we expect for the long term future of crypto? Same trajectory. And there'll be new participants coming in new new applications, new utility, new use cases for faster protocols, shinier protocols.
I think it's gonna be, an interesting interesting approach to, because I think NFTs is also, like, the non fungible token space is is empowering new use cases outside of art and entertainment outside of pop culture outside of the the crypto punks, which is just a brand lifestyle brand. Right. Outside of all that, there there are new use cases for utility.
There are things like that we're engaged when it comes to supply chain management with coffee companies or with, airplane manufacturers or if it comes to, like, a state DMV looking to put car titles on chain for NFTs. We're involved in all these kind of things. Take us a few steps forward in carbon credit marketplace as well, which Corporate Credit is a massive, massive opportunity, which is lacking a lot of transparency and accountability. Well, NFTs can help solve all that stuff.
And there are a few initiatives at the moment, that's exactly what they're doing. So I think that the nonclinical token space is also starting to find itself, again, outside of collectibles, and trading cards. And then we're gonna find more utility. Like, we're providing we are providing open source application in order to preserve value in NFTs generally, just the general preservation of value.
And we're slapping a token around that so that there's a way to power that economy, that that that whole metric. I expect that we're not gonna be alone. I expect other organizations and companies, and I know if a bunch You know, I'm gonna be, speaking at NFTN 1 c week next month. And I look going through the list, of who's gonna be there and what they're doing.
Everything from hardware vendors to decentralized application providers, marketplaces, collector communities, I mean, it's just it's it's crazy how far and how expanded this entire market has become. So I think that that'll act as a major boost to crypto. And then as the central banks start to formalize and normalize their approach to stablecoins, I think that'll also provide a very solid foundation framework for the crypto market to continue to expand. Yeah. I completely agree.
And as you mentioned, going back to web 2, we've seen very limited capabilities in the 19 nineties. And only a decade plus later, were we able to see the real whole pick sure on what web 2 was capable of. I think we're gonna see the same thing with web 3 and NFTs. There's limited capabilities now. Like, NFTs is mainly digital art I think we're gonna really see that expand over the next decade or so. Yeah. Agreed. Agreed.
And, you know, new advances in tech, new new pop culture, new new direct in our social behavior. I mean, there's just so many things that we can't really predict just yet because it just hasn't happened. You know, we haven't seen the new trend in devices or phones or the new trend in, you know, what people are wearing or or what they're meaning about whatever it is.
So, like, we have to just expect that something new is gonna happen and somehow this new technology medium will be used to help boost that. Great point. Alright, everyone. Thank you for tuning in to another episode of the input podcast. If you enjoyed the episode, make sure to leave a 5 star view down below. Thank you, Simon, for taking the time to hop on the podcast today. It was a pleasure. Absolutely, Shamus. Anytime, man.