Transcript
Emma Atkinson (00:05):
You're listening to Radioed,
Matt Meyer (00:07):
University of Denver podcast,
Emma Atkinson (00:09):
We’re your hosts, Emma Atkinson
Matt Meyer (00:10):
And Matt Meyer,
(00:13):
We've all been there: your neck deep in work, maybe short on cash, and your stomach begins to rumble. On a spring day in 2010, computer programmer Laszlo Hanyecz was hungry. He didn't have much money to his name, in part because he was deeply invested in emerging cryptocurrency markets. The solution he devised was forward thinking, even if, with a little hindsight, extremely expensive. Hanyecz traded 10,000 Bitcoin at the time valued at $41 for two Papa John's Pizzas fast forwarded 2021 when everyone from Tom Brady to Matt Damon to Larry David is advertising for cryptocurrency exchanges. And that 10,000 Bitcoin is valued at 690 million, an extremely expensive price for two mediocre pizzas. By 2023, cryptocurrencies evolved again with a bubble bursting and one of its largest exchanges crumbling under criminal investigation. For this episode of Radio Ed, we'll explore all that and more. We'll chat with Joshua Ross, a Daniels College of Business professor and director of entrepreneurship at DU, who teaches an undergraduate course on cryptocurrency, the blockchain and Bitcoin.
(01:14):
Then we'll hear from former Wall Street Journal reporter Paul Vigna, who began covering cryptocurrency in 2013, alongside co-author Michael J. Casey, he authored, two prominent books on cryptocurrency and blockchain technology. But first, a quick history lesson and some working definitions. All the way back, in 1983, American cryptographer, David Chaum, developed eCash, a form of cryptographic electronic money that was untraceable by a third party. By 1995, Chaum’s passion projects morphed into DigiCash, where users would harness specific encrypted keys generated by software to withdraw funds from an online bank. In 1998, there was B-Money. In 2000 bitGold. There was Litecoin, PeerCoin, NameCoin, and on, and on. In January of 2009, BitCoin was developed by Satoshi Nakamoto, who may or may not be a pseudonym for a person or group of people allegedly working in Japan. There are some educated guesses, but no one really knows.
(02:05):
At this point, cryptocurrency lived on the depths of the internet, a way to make secure transactions away from the prying eyes of government agencies or nefarious parties. In a sense, it was as good as cash, but without the backing of a government or central bank. By 2013, the Oxford English Dictionary, arbiters of what is and what isn’t a word, added Bitcoin to the ranks. The next year, cryptocurrency was officially a word. By 2019, you or I could order a pizza with Bitcoin from our phones. In 2021, El Salvador even allowed Bitcoin to be used as legal tender in the country. But what is cryptocurrency exactly? Is it currency, as the name suggests? Kind of, you can certainly use it to buy everyday items, but it's not as easy as tapping your debit card on the card reader at the grocery store. Is it an investible commodity like gold or oil?
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Again, kind of, though it exists in an entirely digital space. I know it's the worst way to start a seventh-grade history essay but stick with me. *dramatic throat clear* The Oxford English Dictionary defines cryptocurrency as, “any system of electronic money used for buying and selling online and without the need of a central bank.” In short, it's both currency and commodity, but digital and decentralized. But before we get into that, there's a few more terms you need to know. We've covered cryptocurrency with Bitcoin and Ethereum being the most popular. If you hear in other currency mentioned during these interviews, and it sounds like money used in your favorite science fiction film, there's a good chance it's a type of cryptocurrency. We'll also talk about blockchain technology, which is an essential function developed alongside cryptocurrency. Almost all cryptocurrency uses blockchain, but not all blockchain is associated with cryptocurrency.
(03:38):
Simply put, blockchain is a public ledger that is digital, decentralized and extremely difficult to change, hack or cheat. In the past decade, corporations from banks to journalistic enterprises have found a myriad of ways to incorporate the technology. Attached to both terms are non-fungible tokens or NFTs, which are digital assets held on the blockchain with provable scarcity. It's similar to cryptocurrency, but often this materializes art and video games, sports memorabilia, and a lot of other collecting spaces. Think of an art collector scooping up art, but in a digital space. Lastly, you've probably encountered the name Sam Bankman-Fried. He sports messy hair and casual clothes, but he's a 30-year-old MIT graduate who founded and once ran the now infamous cryptocurrency exchange, FTX. Think New York Stock Exchange, but purposely based in The Bahamas. With that out of the way, finally, let's jump into the interview with Joshua Ross. I asked him how cryptocurrency got so big so fast.
Joshua Ross (04:36):
That's a great question. And, so if we talk about cryptocurrency kind of broadly, instead of just Bitcoin- if you think back over the last few years, and kind of where we were as a country or in the world, we were shut down, and we had a lot of people at home and a lot of people that were getting government checks and had extra spending money, and real easy on-roads and rails to actually buy and sell different types of cryptocurrencies tokens, coins, NFTs. So, there was wild speculation, and people investing in these different tokens and coins because everything was going up, not looking at the true underlying value of what it did, what the utility was, and there were a lot of scams and probably coins that should not have received the value they did. But those were a few of the reasons why it started to grow.
Matt Meyer (05:39):
So then how did it start to crumble? What was kind of behind the crash? And even just the devaluation initially?
Joshua Ross (05:47):
Yeah, absolutely. So, at the height, Bitcoin was, I believe, 69 thousand dollars. The overall market capitalization for the cryptocurrency market was over 3 trillion dollars, and Bitcoin's market capitalization- Market capitalization is the total number of coins in circulation multiplied by the price. So, it was about 1.2 trillion dollars. And think about that for a second. That is a 1.2 trillion-dollar valuation for something that's been in existence just since 2009. So think of how the other trillion dollar companies out there at that time, the Google, the Amazon, the Microsoft… very, very few- and it took a lot longer to get to that valuation. So what you had was, as I said earlier, you had a lot of new coins and tokens that were being created, and a lot of these didn't have true utility. They were use cases that weren't really solving any problems, but there was a lot of this wild speculation.
(06:56):
Plus, then what you started to have is what's called leverage in the market. So, for example, people with Bitcoin could then take loans out against their Bitcoin, and then go buy more Bitcoin, and some of these loans could be 10 to one. So, I could have one Bitcoin and get enough 10 times that value and then go take that money and then go and invest in more Bitcoin. That's called leverage. So, one of the events that happened early on was Terra Luna, and basically what happened is, Terra is a stablecoin, and a stablecoin is pegged to the US dollar. And so stablecoins, like their name, they don't have that wild fluctuation and price like a lot of cryptocurrencies do. So people usually invest in them. Well, Terra's tied to a Luna coin, and the Terra lost its stablecoin peg, and I won't get into the details, but at that point in time, Luna was trading in, it was like $115 a coin.
(08:01):
It all of a sudden lost almost all of its value overnight, and lots of people had tremendous exposure to that coin and pretty much were wiped out, not just the retail investors, but there were different types of hedge funds and institutions that had it as well. So that was kind of the first thing- thread that started getting pulled. And then people started questioning the value and utility of a lot of their coins and started moving money out of the market. And then, at the same time, you had a number of, kind of macro headwinds. Interest rates started going up, and a lot of people felt at the time that cryptocurrency was decoupled from, like, the stock market or were starting to realize that it's actually tied to the stock market. So then what would happen is, these interest rates started going up, and people started thinking “well, I was removing money from the market.” Then also with interest rates going up, there were safer places to put your money to get a return so people started pulling money out of the market that way as well. So there was a lot of different things that were happening at that time that started to create this cascading effect on the market and on the drop in cryptocurrency as a whole.
Matt Meyer (09:24):
So do you feel like, this is more of an opinion here, but do you feel like people were ignoring some of those warning signs early on, or if it just kind of shifted away with all these outside factors kind of pushing on it?
Joshua Ross (09:37):
Oh, people completely ignored all those factors and those warning signs. I was living in San Francisco in 1999 when we had the Dot-Com crash, and they're very similar in terms of the approach and in the Dot-Coms, people were investing in all these companies that had no revenue, and the whole idea was to get market traction, to get eyeballs, and they would worry about revenue later. It was the same thing with this crypto. It's like, these things are all going up. This is the new frontier. These are opportunities that traditional ways to value things don't matter with cryptocurrency. And so people didn't ask the tough questions.
Matt Meyer (10:24):
Kind of moving into the FTX story, which is what's dominating the headlines right now, first, what makes that story so compelling and why is there so much focus on Sam Bankman-Fried?
Joshua Ross (10:35):
I think it's so compelling because what happened, happened in broad daylight, and nobody once again asked the tough questions. And also, Sam Bankman-Fried and the way he approached it and the relationships he made- nobody really ever questioned what he was doing. And what I mean by that is they spent 130 million dollars to get the naming rights for the Miami Heat stadium, so it was Crypto.Com. They had a FTX on all the major league baseball Umpire uniforms. They gave millions of dollars to politicians, both Democrat and Republicans. And they were very much a part of the lobbying movement. And so, people didn't ask the tough questions. What happened, though, to me, is what's fascinating. Sam Bankman-Fried had this company called Alameda Research, and basically their goal was to make investments. They were kind of an investment vehicle, and at some point in time, Sam Bankman-Fried decided to open up an exchange, FTX, and the, just in the traditional cryptocurrency exchange, people put in, you know, their fiat currency, and they were able to buy different types of cryptocurrencies, and he grew to be one of the largest exchanges in the world.
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What the first clue- or people should have started asking is, both Alameda Research, based in Hong Kong, and FTX, based in The Bahamas, were at a US Jurisdiction. Why was that important? That question was really never asked. So what was happening was Alameda Research, their goal was to invest in a lot of different types of cryptocurrency opportunities. And we won't get into all the details of that, but they made a lot of really huge bets that didn't pay off, and that actually failed, and they were running out of money. So, allegedly, what happened is the people at FTX created a way for the money that sat in FTX to be used over in Alameda Research. So if you or I had an account with FTX, and we had, let's say a hundred thousand dollars in there, and it showed we had a hundred thousand dollars in crypto or fiat or whatever it was, Sam Bankman-Fried might have moved that over to Alameda Research to invest in different things.
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And so what happened over time is they started becoming more and more leveraged over on Alameda Research, and taking more and more money out of FTX. And the word slowly got out, but when the run on FTX happened was- Binance, which held the FTX coin, came out public and said, “hey, we are gonna liquidate our position in this.” And, all of a sudden, they had a run on FTX people going to try to remove all of their currency- whatever currency they had in there, and they didn't have the money to support it. And that's when, all of a sudden, they became a liquid. Binance said that they were going to then purchase FTX and they went to look at their books and said, this is a bigger mess than we thought. And now they're in bankruptcy proceedings and all of that.
Matt Meyer (14:13):
Well, that sounds more, to me anyway, like a Ponzi scheme than a traditional exchange. Would you kind of agree with that characterization or is it more nuanced than that?
Joshua Ross (14:23):
Well, the whole idea with the Ponzi scheme is- you pay the first people in with the last people in’s money. And at a certain point in time that kind of house of cards falls for the obvious reasons. With FTX, I truly believe they tried to create an exchange that was in the true essence of an exchange, letting people buy and sell cryptocurrency. Where I think they went astray is they got so over leveraged with Alameda Research and they didn't understand how to fix it, and they felt that they could just kind of take these short-term borrows or loans from FTX and move them over, that they would make some of their bigger bets would start to pay off, and then they could repay FTX. I don't believe they ever thought it would get to this point, where they would have this much exposure and this much risk, but I will say their oversight, their governance, the way they ran their company was very amateur. And there there's more and more stories coming out- I was listening to a story a couple days ago, where over in The Bahamas where they were located, you know, Sam Bankman-Fried would pay these restaurants to be open 24 hours a day so he could get vegan meals 24 hours a day. It just brings me back to this whole Dot-Com, where there's no oversight, there's no governance, and that cash spigot, it's just going to stay open forever.
Matt Meyer (16:04):
Well, and there's that story where he's playing League of Legends during a very important meeting. I guess when you see that kind of mismanagement, what are you- you've talked specific, or I guess nonspecifically about some of the red flags. When you see that, what are some of the specific red flags surrounding Sam Bankman-Fried, and why is he facing criminal charges like he is now?
Joshua Ross (16:26):
Well, the red flags I think are a lot easier to see now that they've gone in and looked at their books and looked at their structure and looked at their lack of oversight. And once again, going back to my earlier point, that is one of the reasons I believe that they were- Alameda's based in Hong Kong and FTX was based in The Bahamas. In terms of the reason he's facing criminal charges, and I'm not an attorney- I believe it's as simple as the fact that he stole people's money and with the intent to use it in another place and that it wasn't his money. I think it's just as simple as that. But it'll be interesting to see the arguments because right now his main argument has been that he didn't know what was going on. And I think that the proof will have to be the proof of intent to do this, and I think that'll be the burden.
Matt Meyer (17:36):
Okay. So this, this last one here is kind of a, of a two-parter. What do you feel like the future of cryptocurrency looks like a year, five years, 10 years from now? How does it develop? Is it going to kind of continue to fluctuate like it is or what do you see in the future of cryptocurrency?
Joshua Ross (17:53):
That's a great question. It's a big question. I'll take Bitcoin first. I think Bitcoin will continue to grow in value. It will always be a store of value. I don't ever believe it is going to be a primary way to buy and sell- to use to, to purchase things. There's just too many limitations to it. But I think that it is a nice asset to hold in within your portfolio, if you want a diversified portfolio with, you know, equities, and real estate, and fixed income. I think Bitcoin makes a lot of sense because of the scarcity. When I look at cryptocurrency as a whole, I believe we are going to continue to see a shakeout in the market in terms of the types of cryptocurrencies that continue to grow. I look at areas around decentralized finance, and I believe that's where there's some real interesting opportunities for cryptocurrency and a lot of really interesting products to be developed around that.
(19:07):
So overall, I'm very optimistic about where cryptocurrency is going. I think it provides a lot of opportunity for people that live in countries that have wild inflation, your Venezuelas, your Argentinas, areas like that, where people's wealth get wiped out over a certain period of time, where they can move into a cryptocurrency- and it could be- or such as a stablecoin, it could be a lot less volatile. I look at a use case where we see these migrants and refugees from all over the world moving from one place to the other, and they're susceptible to being robbed and having all their possessions stolen. If they can keep everything in a digital wallet it's a lot more secure. So there's a lot of really interesting use cases for cryptocurrency. I'm very excited around NFTs and I love the idea of tokenization because if you can tokenize assets, it makes these assets available to more people. And so through tokenization and DeFi, decentralized finance, it democratizes the access to building assets that normally are not available to all people. And I know that was a very long-winded way to say it, but year one, year five, year 10, I don't know where we'll be, but I don't think cryptocurrency is going away. And as Jamie Diamond said the other day on CNBC, he's like, “it's a pet rock.” I don't believe it's a pet rock.
Matt Meyer (20:44):
I guess piggybacking off of that, what kind of technological advances separate from cryptocurrency could you see coming out of this? Have there been any technological advances kind of alongside cryptocurrency that can be applied to other businesses or maybe are being already applied to other businesses that'll be useful kind of moving into the future?
Joshua Ross (21:03):
So my class, I'm very clear to my students. I think cryptocurrency is very exciting. And there's a huge opportunity, like we've talked about, but I think it's just a very- one of very many applications for blockchain. And so if you look at blockchain, it's basically a distributed ledger and which means that there's no central authority that controls the ledger. And if you look at what a ledger is, it's basically a database, a bunch of data that is stored, but it's controlled, it's run by thousands of notes, thousands of computers that make decisions based on consensus. They decide whether something's right or wrong based on consensus. They could be unanimous consensus, or it could be 51% consensus. So when you start to think about that in a decentralized way, what other applications- and where I get really excited is, I think there's some really interesting things around voting.
(22:03):
If we could create a blockchain voting system, and this is actually happening right now, all of a sudden now, it would make voting a lot faster, a lot more efficient. And as we've seen in the past few years, a lot of people contest what actually happens in our voting system. With blockchain, once something's approved by consensus and written to the blockchain, it's immutable, it can't be changed. You think about that, with voting and the way in which we vote, that we'd actually be able to vote on our phones because our identity would be confirmed on the blockchain, and then our vote would be confirmed on the blockchain. So no longer on an election are we waiting 12 hours to hear when California counts up the votes, it would just be voting close, sum up the votes. So I think there's some interesting idea opportunities around there.
(23:02):
I think there's interesting idea opportunities around our digital identity. There's interesting ideas and things that are happening around social media and for us to be able to actually control and store all of our behaviors that we on social media- and then decide what we want to do with them. Because right now on social media, every click, like, share, thumbs up, whatever it is, it gets stored by one of the big five. So companies- they get to do whatever they want with that data. With the blockchain, we could actually own our own data, our own behaviors, and then decide if we want to monetize it, sell it to third party companies, or we want to keep it private. So there's just a few, I could keep going, though.
Matt Meyer (23:52):
Well, you touched on this a little bit earlier on with some of the opinions people hold around cryptocurrency and blockchain in this technology in general. What is your response to people who might say centralization is the point of some of these things or that this stuff isn't stable enough long-term to kind of keep it kind of in the public eye?
Joshua Ross (24:12):
It's a very good point and in a lot of applications it's valid. So blockchain a few years ago was a very popular term and lots of, you know, sea level people and business owners were like, “I need a blockchain strategy” without truly understanding how the blockchain worked. And a lot of those people and their businesses, what they really needed is to take a step back and a lot of times they had a solution that would be solved by a simple database. And so, there are a lot of areas that we can improve upon with blockchain, but it's still very early on in the technology, and it will still take a lot of, you know, testing and innovation around this to make really solid products because people say, “hey, blockchain for healthcare.”
(25:13):
And it's like, alright, what does that mean? Well, a decentralized healthcare system is very interesting, but then you have to start thinking about who are the stakeholders, how to get them all aligned, the healthcare companies, the governments, the doctors, the patients, the users, right? How does that all work? So, I don't think it's as simple as saying, “hey, here's a blockchain, this is perfect for blockchain.” I think there's a lot more that goes into it and it'll take a lot more time to really figure out good strategies around it and real good business applications.
Matt Meyer (25:52):
I know we've covered a lot of ground and we've gotten to a lot of points. Are there any kind of key points you feel we might have missed or anything that's critical to kind of discussing cryptocurrency, blockchain, FTX, that we may not have- we may have glossed over at some point during this?
Joshua Ross (26:07):
I think you've asked a lot of great questions. The thing that I would say to anyone that's, you know, interested in cryptocurrency and the blockchain is, start to really understand it. And if you are going to invest in a cryptocurrency, approach it like- or an NFT, you know, a non-fungible token, take time and spend some time understanding not only the use case of it, but also what problem is it solving? Who are the- what's the team behind it that has created this this token, this coin? What is their history? How big is the problem that they're solving? What's the roadmap for it? And really learn about it. Because there are opportunities, because if you look back to 1999, and I've referred back to this a couple times, with what happened in the Dot-Com, there is very few companies that are still around from late nineties. Amazon's one, Yahoo's one, but it's just the shell of that company. But look at the number of companies that have come out of Web 1.0, Web 2.0, and now we're really moving into Web 3.0. It's the same thing that's going to happen now. Find companies that are doing really interesting things, start to follow them, learn about them, and then make the decision if that is a good investment or not.
Matt Meyer (27:46):
While the future of cryptocurrency is highly contested, one thing that isn't in question is the value of the blockchain technology behind it. Former Wall Street Journal reporter, Paul Vigna, has lived and breathed the markets for 25 plus years and co-authored two important books on the technology, with his work praised by everyone from investors to lawmakers. First book is The Age of Cryptocurrency: How Bitcoin and the Blockchain are challenging the Global Economic Order, released in 2016. The second is The Truth Machine: the Blockchain and the Future of Everything, released in 2018. Vigna is one of the foremost experts on cryptocurrency in the technology that surrounds it. And he has a clear vision for how these advances have and will be implemented across a broad range of businesses.
Earlier in the episode we discussed that regardless of whether cryptocurrency continues on as an investment piece or usable currency or both, blockchain technology has broad application in a number of sectors. In your book, The Truth Machine: The Blockchain and the Future of Everything, you discuss some of those uses. Where is blockchain already being utilized and where do you feel like it has the greatest chance for disruption in the future?
Paul Vigna (28:45):
Yeah, I think they're going to be kind of parallel paths that this technology develops upon. And I think the most important one- I've been thinking this for a while now- the most important one I'll get to second. I think what you're going to see first is a lot more of the sort of independent ad hoc, you know, discovering use cases thing that you've seen so far, which is kind of in the wilds of crypto. NFTs are a great example of this. Whether you think NFTs are a good investment or not is a whole other issue, but NFTs are a use case, non-fungible tokens. This idea that you could have a singular- you know, it's basically a Bitcoin-like token that is a one of one, not a one of 21 million, but a one of one.
(29:38):
It's not fungible, we can't trade it. It exists on its own, it has certain properties. It's related to some piece of real world thing, let's say an artwork. And you can own it, you can trade it, it becomes almost becomes something you hold and you can trade it, it can be a part of a game. NFTs are parts of games and a lot of uses, and I think there was a lot of hype in the early days. People didn't really understand the technology, and so you had this sort of massive buying wave. Lot of people got wiped out and lost money, but as a thing, it's going to keep developing it, it's really interesting. That's one thing that you're going to see and you're going to see more things like that, sort of independent people just playing around with technology and finding use cases.
(30:32):
What I really earnestly believe is going to be a major application of this technology and something that you're going to see develop over the next five, ten years, is how this technology is going to be applied to traditional financial markets. And this is coming not necessarily from the coin bases of the world or Geminis or FTXs, you know- God, whatever FTX becomes, you know. It's not coming from the crypto industry, it is coming from Wall Street. And you know, I have been following this for several years now. In 2015, 2016, the banks were kind of very holding up their nose about crypto. They didn't- they thought it was, you know- Jamie Diamond still calls it a scam. They were very, very dismissive of it. 2017 though, they really started looking at this and saying, you know, even if they weren't coming out and saying it, they realized that there was something there that might help them with their business and they began exploring it.
(31:38):
And that's going on six years ago. And what you now have- the situation now is every I I'm telling you- I, you know, I haven't called every major bank in the world and asked them this, but I guarantee you it's virtually every major bank in the world has some group of people within that company that are looking at blockchain technology, how they can use it, how they can apply it, how can make their business more profitable. Goldman Sachs is doing this, JP Morgan is doing this. All the big American banks are doing it. And I'm pretty sure that all the overseas banks are doing it too. They are looking at this in a number of different ways. They are looking at this basically as, “how can we replace our back-office functions? Can we have a digital ledger that allows us to combine all the data points that we have right now sitting in separate ledgers at separate banks?
(32:38):
Can we coalesce that? Can we bring it all together? Can that make our back-office functions cheaper?” They're looking at that. I honestly believe that this is going to- over the next five or ten years, I honestly believe that this technology will be the basis, it may be- the technology may change, it may morph, it may look a little bit different. You know, it's not going to look like Bitcoin, but this technology is going to be the basis for a rewiring of the financial markets. I absolutely think that is going to happen.
Matt Meyer (33:15):
Awesome. That segue is wonderfully kind of into my second question. At the Wall Street Journal, you wrote about a lot of this, about these big investment groups that were pushing to use blockchain even in more traditional exchange settings. Do you feel like there's pros and cons to that? Do you feel like there's potential to maybe close up some of these short selling controversies with clearing houses or kind of even the trading game a little bit, so to speak?
Paul Vigna (33:40):
Sure. I think- and to take the cons side of it, which is the more problematic side and the problem is that you may not know what the cons are until you actually start experimenting with this and implementing it. So I think what you'll see a lot of- and what you're already seeing is a lot of one-off trades, a lot of experimental trades, a lot of what they'll call sandbox experiments. You know, they'll build an environment that is- it's not live, you know, it's not like JP Morgan clients can go in there, but it's, it's live in the sense that it's running. Where they can experiment with it, where they can look for the problems, they can look for the faults. You're seeing this in the DeFi world a lot where these things go out. They decentralized finance these services go live and everyone gets very excited about it, throws money at it.
(34:39):
And once they're live, they start realizing where all the holes are in the code and before they know it, some guy sitting in his living room has exploited a code for 15 million dollars. So the cons side of it for the banks is, it's hard to define, but it's obviously very real because it's one thing for a couple of 25 year old guys that spun up some code and launched it to lose money for people. It's not good. But that's one thing for banks, it's reputation-killing, it's- regulators will crush it. Like they're the- you can't. A bank like JP Morgan and Goldman Sachs can't just spin up some code and launch it. So, they're going to do a lot of experimenting with this before they figure out what works and what doesn't work. But in general, the idea is- think of it this way.
(35:31):
You have clients that are buying and trading assets, and I think you're going to see this a lot of, you know, foreign exchange overseas trading between banks. This is where this technology really becomes valuable because a trade right now, or a foreign exchange right now involves multiple parties, multiple recordkeeping operations. Everyone has their own program. It will take days to close, the trade will take days to close because it is going through all these different steps, and the money is tied up. You have to have the, you know, collateral to back it- is tied up, and that's costly. If everyone's working off the same ledger, the trade can close much faster. It's all transparent. You know beforehand if the collateral's good, you know, everything is basically happening at the same time. It could save a lot of money and a lot of time.
(36:30):
And to your point, you asked about short selling. A problem with equity- with corporate equity, is that the companies- it's not a huge problem, but it is a real problem that sometimes the companies don't actually know how many shares they've issued. They don't actually know who owns it. This has happened. Sometimes there's a famous example that's escaping me right now, but it's happened where a company will have a proxy vote at their shareholder meeting, and they will get more votes than stock outstanding. Because they don't know how much stock outstanding they have. Short sellers, you can get into a situation, especially with this sort of naked short selling, where more stock has been borrowed than actually exists. And, you know, it's a real problem. Once possible application of this technology towards corporate stocks is that you would have a much cleaner system of issuing stock, recording stock, knowing who owns your stock, how many shares are outstanding, how much could possibly be borrowed in the short market. All that stuff can become more transparent, and that would be a benefit to Wall Street, also.
Matt Meyer (37:53):
You brought this up at the beginning of our segment and it's been kind of in the news. FTX has been the big crypto story lately, and Sam Bankman-Fried as well. So, I guess, from your perspective, they got really big really fast, didn't know where all that money was, didn't know they were over leveraged with Alameda Research... I guess, from your advantage point, where do you see this going, and what is the long-term impact on crypto markets and maybe the broader financial industry as a whole?
Paul Vigna (38:20):
I think the thing about, if you look at the entire, you know, the “great crypto crash of 2022.” Look at the whole thing, and step back. Look at it from the proverbial 30 thousand foot view. What the crypto markets have really illustrated in a very, very, real way is, and it's sort of ironic, is why regulation works, why regulation is needed, why financial markets have to have rules. I used to say to people, you know, if you, if you like free markets, you'll love crypto. Cause it is the freest market on the planet. And it really was, it was an example of absolute no holds barred capitalism, runamok, digitized, atomized, immediate. The, the idea behind crypto was that you would have a transparent network that no one party could, could dominate and control and therefore manipulate, which is, which is fine and which is a good goal.
(39:31):
But all the players were very opaque and very not, and, and they were not transparent. Nobody knew what was going on inside ftx. Nobody knew, nobody still knows what's going on inside Binance. A company like Coinbase went public, so they were as transparent as any publicly regulated company in the us but most of, most of the crypto companies were not. There were no rules, there were no regulations, there were no standards if you wanted to, and, and the software was easily obtainable, easily launchable, you know, a couple of people could basically take off the shelf software and quote, launch their quote unquote exchange and they could say, Hey, we've got an exchange. And that exchange could be do nothing, could be doing nothing but manipulating the prices of assets and you wouldn't know it because it is not a transparent entity. So all of that was bad <laugh>, I mean, in a word, it, it, it was bad.
(40:37):
We've, you know, over, if you look at the history of Wall Street, we've seen this on Wall Street time and time again, going back centuries, people try to manipulate markets. There is a, a greed factor involved. There is a financial incentive. People want to make money the way you make money. One way to make money and to make a lot of money is simply to cheat. The whole reason that the s e c even exists is because you had too much of that going on in the 19th century and early 20th century. The whole reason the the Federal Reserve exists is because there was not enough, you know, you didn't have the, the financial infrastructure was not transparent enough. So over the course of decades and centuries in the traditional markets, we have implemented a lot of rules to try to to, to try to weed that out. And still it happens, right? Bernie Madoff happened the crisis of 2008 happened. It still happens even in traditional markets, which, you know, if you talk to any banker, they'll tell you that they're regulated to, you know, within an inch of their life. So for crypto, it was just, it, it was, it was, it was a, a million times what Wall Street could be. You saw what happened. And in my estimation, the, the, the real lesson there of what happened in cryptocurrencies in 2022 is that you need rules, you need regulations, you need standards.
Matt Meyer (42:11):
All right, and then for this, this portion, I want you to kind of look in your proverbial crystal ball with cryptocurrency and, and with blockchain, when all the dust settles and, and kind of this, you called it the quote unquote great crypto crash of 2022. When that, when that kind of settles down, where do you see cryptocurrency in one, five and 10 years? And where do you see blockchain in one, five and 10 years?
Paul Vigna (42:35):
I think, and, and look you know, obviously if I could answer these, these questions that you just asked, if I could answer them a hundred percent accurately, I would be running a hedge fund in Greenwich, Connecticut, and I would be making SCDs of money and I wouldn't be doing podcasts. I'd just be, you know, so I, I'm guessing everyone's guessing, but I would think in a year you're not going to see a lot of change. The most significant thing that you could see, and I don't know if you will see it, the most significant thing that you could see would be some regulations, some laws written by the US Congress. There is, there, there's, there's some momentum behind that. There's some impetus behind that. But if you look at Congress right now, I, I mean, getting them, you know, getting them to agree to anything is difficult.
(43:29):
So I don't know if you really will get any kind of meaningful legislation out of Congress, but in the short term, that would be the most significant thing that would actually help. If you look out, say, you know, five years, I think you will see the crypto markets go through another, they will turn the cycle. Right now cryptos in a, in a downswing and crypto, the crypto market has gone through this four or five times, a really sort of well-defined cycle of hype, excitement, momentum, speculation a bubble top, a blowoff, a crash, and a period where it just lays fallow. Right now, it's in the period where it's laying fallow. And I think over the next five years, between one to five, you will see that end and there will be another upswing. It won't look exactly like what it is.
(44:29):
Now, I, I think one thing, at least one thing I hope will become apparent to people is that a lot of these crypto assets are basically <laugh> in a word. They're, they're nothing. There's about 10,000 crypto assets that you could buy and sell out there. Most of them have no purpose. They serve no function. You're literally just buying and selling these things cuz you think the price is going to go up. They're nothing more than just gambling. I think there are a handful that have the potential to become something. Bitcoin has a huge name and people and it has a lot of money behind it. And, and people really want it to become something, some useful asset in the world that could happen. Ethereum is trying to build what they call their, you know, their, their global virtual computer. Ethereum could become like a, I've always said Ethereum could become a, a basically a decentralized version of Android.
(45:36):
It's an operating system that anybody can build on top of and nobody controls. It's an interesting idea, it could become something. There are a handful of other crypto projects that are like that, but most of them are really not. They're literally just something that somebody spun up cuz they could, and you're just gambling on it. I think most of those are gonna go away. You'll s and what I'm, to get to my original point, I, what I'm thinking, what I'm hoping over the next two to five years is that you'll see a couple of these projects that actually have some potential become a useful product in, in people's lives, come to the top. And those will be the ones that, that have a future over the next five to 10 years. Like I said at the beginning, I think for blockchain technology, the most important thing really, I think is you are going to see financial markets rewired.
(46:26):
And what I hope, my great hope is that that not only makes proofs profitable for banks because now they have a, a, a cheaper way of doing business. But what I really think is, is the, the biggest potential benefit is that it could really open up the capital markets to everybody. And, and the way that happens is if you're digitizing assets, you are creating environment where markets that were inaccessible to a lot of people be can become accessible to. And what the, the easiest one to, to bring up first is the market for private equity. If you are a startup in Silicon Valley, what you do is you build a product or maybe you just build a pitch deck for a product even. And you go up and down Sandhill Road, I'm using air quotes, that's like the big famous road out there where all the VCs are, and you raise money from VCs, they get a piece of your company, you build it, you hype it up, you become very valuable.
(47:38):
You sell more pieces of your company to more venture capitalists. You become huge. You go public and you make a mint. You sell most of your equity, and by the time you go public, the real value has already been captured by these private venture capitalists with a digitized system that the, those equities, that security could be issued well before you go public. Now, obviously a lot of rule rule, like I said, rules and regulations are important. A lot of rules and regulations will have to be built into this, but you could have a world where the public and the private markets are, are morphing and they are becoming more accessible to people. At the same time, that capital that you want to raise to start your business, you now have a new avenue there. There's already one, there's an exchange called I N X that that launched and what they're going to build as a platform where a company can list their securities, assuming that they're registered with the Securities and Exchange Commission.
(48:46):
You can list your securities for investment and you're basically open to just about anybody. So it will, it will allow investors to find companies, startup companies that they were not able to find before. High risk. I'm not saying that everybody should go do it, but it's there and it will allow companies access to potential investors that they couldn't get to before. And I think if that happens, you're gonna see a really large transformation in how capital moves around the world. And I think that to me, that just has the potential to be absolutely fascinating. And that's, before you talk about digitizing assets of, of really sort of illiquid market like real estate or art or any of these things. You, you know, if you own a piece of art and you want to take it and send it on a tour somewhere and make money from it, you can create a digital security that would allow investors to get a share of that royalty, almost like a dividend or an interest payment.
(49:51):
And you can sell that and you can raise money and you can pay out that money and, and people who want access to art and the potential to make money there, they have access to that. It opens up a lot of markets and it opens up a lot of avenues to investors and to potential entrepreneurs. And I really think over the next five to 10 years, assuming, like I said, all the right rules and regulations are put in, that's gonna be a big issue. But I really think you could see a just a radical transformation of the capital markets. And to me that is, that's extremely exciting. I think that could happen.
Matt Meyer (50:28):
Well, awesome, Paul. This has been a fascinating discussion, and I appreciate your time.
Paul Vigna (50:32):
Yeah, absolutely, Matt. Thanks for having me. I'd be happy to come back in one, five, or 10 years.
Matt Meyer (50:39):
That's it for this beefy episode of RadioEd this week. Thanks to Joshua Ross and Paul Vigna for joining us. You want to learn more about business and finance from some of the finest minds of the University of Denver? Check out the University of Denver's Entrepreneurship Podcast, one of the excellent podcasts coming out of the Daniels College of Business. Ross even provided a cryptocurrency and blockchain primer for Daniels that we'll link to in the Show Notes. Vigna’s two books, co-authored with Michael J. Casey, are The Age of Cryptocurrency: How Bitcoin and the Blockchain are Challenging the Global Economic Order and The Truth Machine: The Blockchain and the Future of Everything. And they're available wherever you buy your books. If you're a fan of The Walking Dead television show, make sure to check out one of Vigna’s books Guts, the Anatomy of The Walking Dead, which looks at the hit show from the perspective of the Wall Street Journal's Resident Zombie Expert. Tamara Chapman is our managing editor and Débora Rocha is our production assistant. James Swearingen arranged our theme. I'm Matt Meyer and this is Radio Ed.
