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Capital Decanted
S2 | Episode 7: Is this the Golden Age of Institutional Crypto Adoption with Greg Tusar and Robert Mitchnick
01:51:14
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- [00:00]
John Bowman
Foreign.
- [00:06]
Aaron Filbeck
Welcome to Capital Decanted. In this show, we say goodbye to tired market takes and superficial sound bites. Because here, instead of skimming the surface, we dive into the heart of capital allocation, striking the perfect balance and exposing the subtleties that reveal the topic's true essence. Prepare to have your perspectives challenged as we open up the issues that resonate with the hearts and minds of those shaping capital allocation. We've enlisted the wisdom of visionary leaders in the industry, and just like a meticulously crafted wine, we'll allow their insights to breathe, unfurling their hidden depths and transforming our understanding. This is Season two, Episode seven of Capital the Golden Age of Institutional Crypto Adoption. Are we really doing this? Aaron I'm John Bowman. And I'm Aaron Filbeck and we are your hosts. Well, as always, let me just start with a huge thank you to our returning title sponsor, Alternatives by Franklin Templeton. We are grateful, of course, to have them back partnering with us on this podcast and they have over 40 years of alt investing experience and 260 billion of assets under management. Their specialist investment managers have expertise across six different asset classes real estate, private equity, private credit, hedge strategies, venture capital, and digital assets. And of course, all of them operate with the client first mentality that has always defined Franklin Templeton to help prioritize investment outcomes. So thanks so much Alternatives by Franklin Templeton all right, Aaron, Cryptocurrency Capital Decanted has yet to tackle this topic in more than a season and a half. Really. And frankly, that is completely my fault. That is due to me in full disclosure here. I've always felt like the currency applications of the technology were, in my words, a sideshow to the much more transformative opportunities in Web3 and distributed blockchain computing and that I've been a believer in for a long time. So as such, as you longtime listeners know, we devoted the season one finale last year to that exact topic with Chris Dixon from A16Z. And Chris Will actually feature a couple times, at least make a couple cameo appearances in my segment, but we only intentionally adjacently covered bitcoin or crypto in that episode. So this is really the first attempt at a more thorough history and explanation of where we are in the adoption curve of cryptocurrencies. Now, I mentioned that blockchain was something that I have believed in for a long time, and that revelation really came in October of 2021. And Aaron, you're going to remember this story very viscerally. This was at our Asset Owner Roundtable on the subject of crypto in Boston. And these closed door sessions, by the way, listeners that Kaya convenes, we do a couple times a year and they're allocator only, asset owner only, so there's no GPS or service providers allowed in the room and they're Chatham House rules, so I can't quote folks specifically, but I can tell you that that particular meeting in that fall afternoon in Boston, there was probably 2 trillion ish of AUM in the room across major pensions, endowments and foundations. And I had invited Duke University's Cameron Harvey to facilitate the closed door afternoon. And Cam was an economist by trade, but he had recently become a bit of a savant in crypto and defi due to his recent book on the subject at the time. So at the beginning of the day, first of all, before the conversation really even got started, the funds in the room were asked, they were meant to show their hand and they this is about their view or experience with crypto so far. And the results, frankly were what I expected. I don't even remember this show of hands, Aaron, but of the 20 or so CIOs that were represented, as I recall, only one to date had direct crypto exposure. It's one of the endowments, which again will remain nameless, but nonetheless it was a university endowment, so meaning they directly owned coins. And there were a couple more that had exposure to dedicated crypto or blockchain venture capital funds. And then finally a couple more suggested they were investigating the space. So just the quick math there, because that was it really five or six hands. So the other 75% of funds in the room weren't even investigating, hadn't even thought of it. And I would say in a lot of cases were active skeptics actually. So that was just setting the stage for what's about to come because there was this visceral moment, to use my word, a moment ago, late in the day. And you wrote about this, Aaron, in the summary blog, where one of the participants asked a very good question on the timing of investing in developing technology, the risk associated with being too early. And that person inquired with something to the effect of quote, you could have purchased Amazon in 2005 and still made a ton of money rather than buying in 1998. And so how should we, he went on to say, think about entry point and sizing for Bitcoin. And that is when this mic drop moment happened where Cam left everyone's jaw on the table with really the quote of the day. And I still have asset owner CIOs talk to me about this moment. Cam said, quote, even if you don't have direct exposure to Defi or crypto, you may be implicitly shorting it by owning legacy technologies in business models. In other words, if you're not long, you're probably short. So what Cam was saying is that the bottom line was that if you own banks or credit card companies, payment providers, insurance companies, you were actually making an investment bet whether you liked it or not. And it was likely a bet against crypto. There was no neutral passive white space he was arguing. So other than as you might imagine, as you're listening to this, this awkward emperor has no clothes pause. The obvious takeaway is that the industry needed more guidance on how to think about the space and the avenues to invest in it. And so as the professional body that had been on the forefront of helping investors, as we often say, see around the corner, what's next, what's coming. Kaya was uniquely qualified, we believed, for that education to take place. So we begun adding significant readings to our curriculum, began publishing much more about it through our content mediums, not making a meritorious judgment one way or another, but simply trying to objectively teach how you might approach it. And under your leadership, of course, Aaron, we also launched a digital assets micro credential as well that I would strongly commend to everyone. So despite all of this, however, and even amongst the rapid price appreciation in the few years since then, there are still some major questions that remain for me. If I'm honest and most institutional investors I think, and other than a few brave first movers we've heard about through industry press, and we'll talk a bit more about when this happened, but Fairfax County, State of Michigan, State of Wisconsin and a handful of others, the space has largely remained untouched by medium to large pools of capital. And so the question is why? And I would just suggest in this brief introduction, there are at least three main reasons that this is still considered a pioneering place of caution for the moment. The first is an identity crisis of sorts. Particularly are these things commodities or securities? And it isn't an asset class at all. And I honestly don't think any of the actors in the system are particularly consistent or intellectually honest here because narratives on their purpose seem to oscillate from the libertarian anti government stance to digital gold meaning store of value, to a risk producing asset with the best return opportunity of all time of any asset class. And news flash for those investors that have been around a minute, it cannot be all of these things at once. And by the way, if anyone ever is pitching any opportunity, as all those things at once run far away. But to be fair, and perhaps most symbolically, the US government doesn't even seem to know the answer. Because the Commodities Future Trading Commission, the CFTC and the securities Exchange Commission, the SEC have been in their own hot potato mud wrestling battle themselves trying to decide who has jurisdiction. And as a result we have no cohesive regulatory regime. So that's the first, what are these things? Second, and relatedly, how do you value these instruments? The store of value positioning of Bitcoin in particular, I think is the most compelling on paper, given as we'll talk about the 21 million scarcity built into the code and the reality that there's no central bank or budget deficit or sovereign trade account or even annual inflation that can debase Bitcoin, unlike fiat currency. So this idea of Bitcoin as an idiosyncratic diversifier against economic activity, maybe even geopolitical risk, is academically compelling. But here's the problem, folks. Bitcoin increasingly behaves like a risky asset and it's grown substantially in its correlation to equity risk premia. The rest of the tokens without a scarcity argument need to depend on transaction or velocity of exchange philosophy, which is what traditional currencies and commodities typically rely on, or some adapted form of what's called Metcalfe's Law. So this network economy business model, the idea that an asset gets more valuable the more people accept and use it. And I think the CIO of Australian Superannuation Fund AMP summed this up nicely. Her name is Anna Shelley. As they were researching the space, she said, quote, the key for investors is to recognize that it's highly volatile. This is Bitcoin, very speculative, a poor diversifier, and there's no free lunch, end quote. So despite its growing mainstream acceptance, there are still existential questions within the institutional space about how it relates to fitting into a diversified portfolio. Let's call it. So that's the second is how do you structure it within a diversified portfolio? And then thirdly, and maybe most importantly, are the infrastructure on ramps in place, things like custody and prime brokerage and trading to allow for access in a way that institutional funds require and feel comfortable with. The rare cases of full service organizations that do this, like Coinbase, they were not traditional partners for those same LPs in equity and debt. So there are fiduciary concerns with these new entrants on things like security, reliability, relationships and again regulatory support to build these parallel operational ecosystems. So there's just newer players there. And there's discomfort with newness on the on ramps. So again, what are these things? How do you integrate them in a portfolio and is there a supporting infrastructure? Are still these huge outstanding questions. These are pretty important hurdles to overcome if you want the so called smart money to invest. And so while I too have dabbled in trading these coins, this has largely summed up my view until recently on the institutional side, and hence the reason for this episode that Aaron and I have created, which is that everything has changed in the last 12 months. And I'm not suggesting that we necessarily answered or completely solved those challenges, but 2024 culminating in the election, President Trump has fundamentally altered the course of this asset class, if we can call it an asset class. Trump has promised to make America the crypto capital of the world, using his words. And this is now a $3 trillion market cap space. And while still overwhelmingly retail, as I think Aaron's going to talk about a bit, the energy and regulatory, political and venture capital momentum is palpable. You cannot miss this. Whether you're a believer or a skeptic, it is overwhelming. So our question we're tackling today is whether we've reached that all important inflection point where the skids are finally greased and prepared for a torrent of institutional buyers, or whether much of what we're hearing is still a bit of anecdotal sizzle. So is this the 1998 or 2005Amazon that we're looking at? To quote that CIO from the question earlier, have we finally unleashed a golden age of adoption by sophisticated investors into crypto Are we really doing this? Hence the title of this particular episode. So our blueprint listeners for this episode is as follows. I'm going to give you a history of the trail markers of cryptography, product evolution, regulatory debates, and ecosystem development. And I'm going to attempt to weave in the perception and attitude of institutional investors, admittedly, preliminarily, along the way. And I'll do that by breaking down the short history into four phases of development that have preceded this potential golden age that we're posing as a potential new era. And I hope this history lays a valuable foundation for Aaron's segment and an enlightening conversation with I'm sure is going to be with our two guests. Aaron then is going to begin filling in gaps and details of my history with an overview of vehicle or product options and how those have fared in the marketplace. And then secondly, diving a bit more systematically into trying to tease out beyond the headlines. True institutional adoption to date from both allocators and wealth managers. And then, as I've hinted, we're honored to be joined in studio by two executives from arguably the two firms most responsible for building and shaping the crypto economy. So today, from Coinbase, the largest crypto custodian in the world, the largest crypto exchange in the US and now with their own crypto asset manager that we'll talk about a little bit later, we have Greg Tussar, head of institutional product, and from BlackRock, which needs no introduction, but the largest asset manager in the world and dominant player, as Aaron will talk about in cryptocurrency, ETFs Robby Michnick, who is head of digital. So there it is. That's where we're going. Aaron, I'm curious. Do you remember your moment where you were first introduced? Were you first mesmerized by crypto?
- [13:53]
John Bowman
I do remember the very first time crypto entered into the conversation. I was working for the wealth management firm I worked for before, and this was late 2017, leading into 2018, when crypto was reaching its new peak, right before it rolled over and it was off the chain. So we had a lot of clients calling in, asking about, how do I get into this? Should it be part of my portfolio? And it was crazy. Multiple calls a day, just given the price action. So I ended up having to do this lunch and learn for our advisors, explain what blockchain was at a very 300,000 foot level and then help with some of those questions you were getting of should I put this in my portfolio? So crazy time and learned a lot in a very short period. So how about you?
- [14:38]
Aaron Filbeck
Mine was probably, and I'm going to talk a bit about this around the same time, 17, 18. But it was when particularly the prominent CEOs of big banks and other big investors started hating on attacking crypto and bitcoin. And again, I'm going to get into this, but it was probably starting to read some of those quotes where I was like, what is this stuff? I had heard it in passing but never even investigated it until then. So, Aaron, I thought a lot about these stages and what to name them, because as one that is great with words and sound bites. I thought a lot about what to name these things and I even thought about making this the ERAS tour, but I think you'd get too excited about that. So it is just going to be four stages, not eras.
- [15:23]
John Bowman
Missed opportunity.
- [15:24]
Aaron Filbeck
Yes, no doubt. But I tickled your fancy nonetheless by even mentioning it under consideration. So four phases of history. So our first chapter is what I'm calling the primitive stage. So this is the pre Bitcoin era. Actually each of these phases starts with a longer period of time and they get shorter as we get closer to recent history. So I'll explain how that stages out and the timelines associated with each of these as we go. So as I said, first chapter is the primitive stage. None of these proto digital currencies that preceded Bitcoin had staying power, but each of them contributed design and concepts that would later embody Bitcoin. So I want to see listeners and Aaron, if you can identify some of those breadcrumbs as I talk through this. So in 1983, yes, you heard me correctly, 1983, David Chaum, a recent computer science PhD grad from Berkeley, published a paper titled Blind Signatures for Untraceable Payments. So in the paper, Chom proposed a form of electronic cash. And he conceptualized this token currency that could be transferred between individuals safely through a peer to peer ledger code. The code would ensure an encrypted signature of authenticity through what he called a quote, blinding formula that allowed for the users, the two peers, to avoid traceability and ensure privacy. Now Chom founded Digicash to try to operationalize this blind cash innovation. And in 1990, the the first cryptocurrency e cash became available. And by the way, digicash would flame out, but put a pin in some of those earlier attributes and some of the emphasis you probably already picked up on. And even as I'm explaining this, but you'll see this continue to evolve. So another early computer science guru that contributed to this body of work was a gentleman by the name of Nick Szabo. Szabo was a University of Washington computer science grad and went on to earn his law JD at GW at George Washington University. And that combination of systems engineering and contract law would be particularly relevant for Szabo, but also the future design of cryptocurrency and defi as he is credited Zabo, that is, with trying to bring the sophistication of contract law, what he called smart property, to digital commerce. Now, some of you will already begin to pick up on this language, as smart contracts were eventually a huge feature of Ethereum decades later. And we'll get to that. So in 1998, around the time Choms Digicash went bankrupt, by the way, Szabo proposed what he called bit gold, this digital marketplace that further progressed some of those blockchain techniques. And in particular he proposed this idea of mining of timestamp, blocks of proof of work and a ledger or registry. But the most revolutionary aspect of the bit gold concept had to do with its movement away from centralized status. So bitcold aimed to avoid any dependency on a centralized clearinghouse or authority, to completely avoid the middleman and introduce what we now call the decentralized trustless system of blockchain networks, which relies on cryptographic proof versus belief or trust in a third party. So Szabo's idea, while it was never implemented, offered such a direct parallel to the ultimate architecture of Bitcoin that some have speculated that Zabo is in fact Satoshi himself, which of course he denies, as everyone else denies. Aaron, I've actually never heard you deny that you're Satoshi, so maybe we should get to that a little bit later. I'll never say I figured so. Finally, Also in the mid-90s, a British cryptographer, Adam back, by the way, another individual that is commonly rumored to be Satoshi took another attempt at an early stage digital currency. So, like Bit Gold and Bitcoin today, Hashcash also used a proof of work algorithm to aid the generation and distribution of new coins. And due to that methodology, Hashcash, at least in my research, is the first cryptocurrency that begun to realize friction and headwinds with computer processing power limits and energy use. Now, of course, decades later, that digital and what you might even call moral dilemma would come to define an ESG debate in recent years that would even result in Ethereum transitioning to proof of stake in in 2022. So that's the primitive stage. You're planting the seeds for the future with a lot of this computer science work and discovery. So second on our stage tour here is the novelty stage. This is really the true beginning, but largely considered, hence its name playtime. You're fooling around on the edges of reality. So we start in August of 2008. A domain name, Bitcoin.org is registered and goes live by a person or group of persons using the pseudonym Satoshi Nakamoto. And a couple months later, On Halloween Day, 31st October 2008, that same user, Satoshi, publishes and distributes a white paper. The white paper Bitcoin, a peer to peer electronic cash system to a popular cryptography mailing list and sends it out and off to the races. It history goes with crypto, so it's worth pausing here. The legendary status of Satoshi is just staggering. I mean he joins icons that first of all only need one name for everyone to know who you're referring to. You think Madonna, Prince Shaq, LeBron. Now Satoshi. Just one name. But it's also because there is no doubt, as I've already mentioned, that while he or she, whoever this person or group of persons is, didn't invent the white paper, that for you Friday night trivia buffs was Winston Churchill. This is nonetheless unequivocally the most famous white paper in history. And then of course, as we've already said, adding to the folklore of this person, we still don't know who it is, and we probably won't ever know is my guess. At this point, their last known activity online was 2010. So only about a year and a half after all of this took place, this person disappeared from digital traceability. However, the ledger history still suggests that he again or she, owns about 1 million bitcoin, making him worth about 80 billion, which would put him in the top 15 richest people in the world. Just on today's prices, by the way. Not even on the a hundred thousand that we reached in December. That's just on the 80,000, the sell off that we've recently experienced. So that same year that Satoshi completely disappeared from existence, the first commercial transaction using Bitcoin occurred on May 22 2, 2010. Which by the way, May 22, 2010 for those that celebrate, is called Bitcoin Pizza Day. I know that's a big day in the Filback household, but that day in 2010, a programmer bought two Papa John's pizza for 10,000 Bitcoin. By the way, Aaron, I did a little research on this. That was about 40 bucks at the time. So purchasing power parody Nick held up at the time at today's prices. This is just funny to calculate. It's about a $1 billion dinner. One billion with a B dollar dinner. That's 500 million per pizza. That's about 63 million per slice. That better be a very good pizza to say the least.
- [22:30]
John Bowman
That's just classic dinner on a Filback Friday night. So no big deal.
- [22:34]
Aaron Filbeck
I know how you roll. Beyond the silliness of the pizza, we do start to see the first institutional crypto funds begin to appear in 2013. Pantera and Fortress launch the first institutional crypto funds. In 2014, Microsoft, Dell, most notably PayPal announced they will begin accepting Bitcoin. And then in 2015, we get the other historical crypto event that would forever Change the space. July 30th of 2015, Ethereum launches. So with Ethereum, Zabo's smart contracts idea and the world of Defi would open up to developers and builders in the crypto world. So a myriad of innovative developments would follow on the Ethereum network, such as decentralized applications, initial coin offerings or ICOs, and of course stablecoins, which we will get back to in a moment. So that's the novelty stage. Earth shaking creation. But honestly, only first movers and programmers we're playing with most thought were toys, honestly at this point. And of course, to be fair, every great hype cycle and new technological breakthrough always starts out looking like toys and a little silly and a little crazy. But that leads me to stage three. Stage three I'm going to call the eyebrow raising stage. Beginning in 2017. This is the stage in which, as you and I just articulated, we first stumbled upon and that's why it's named Eyebrow, because I think the world started to notice for this first time I use this terminology because it began to expand beyond those first movers and the computer science geeks and nerds to the markets and traditional financial pundits, the media, other investors and haters began emerging from traditional parts of the finance industry. And that probably is the first sign you might just be onto something doesn't assure it, but it does prove you're starting to threaten and irritate and maybe even scare the status quo. And that is worth paying attention to. So haters gonna hate Aaron as you know. So just a few fun ones. Buffett and Munger, the twins of the OG Value Investing Fair. To say that they're not big crypto fans, I think is probably an understatement. So that maybe shouldn't surprise anyone. But Buffett called crypto rat poison, and Munger took the graphic image farther, claiming it was a venereal disease and beyond contempt. So leave it to Charlie, God rest his soul, to only use extreme one liners that are maybe not for young users or for all listeners. Jamie Dimon called Bitcoin a fraud. Around this time, Larry Fink said blackrock had zero interest. Howard Marks called it an unfounded fad. And then, perhaps most famously, just as far as the language that stuck the most Michael Burry of the Big Short lore utters the most memorable description, calling them nothing but magic beans. But as I said, there's a reason. Dimon, Fink, Buffett, they're feeling compelled to ridicule. Something got their attention. Momentum is building. Crypto seems to be knocking on the door, as I said, of mainstream America. So a couple important additions to this early institutional trellis that is being constructed also happened in the late teens. 2018 A16Z and Drayson Horowitz launches their first crypto fund and an entirely new practice at this iconic VC firm that was focused on blockchain, crypto and web3 and led by Chris Dixon. By the way, our guest last year on the podcast episode I mentioned they had been early investors in Coinbase in 2014 and had dabbled in the space in their traditional VC funds, but they were the very first to build a parallel dedicated business line to this emerging technology. And I want to be clear here, Dixon was not some 25 year old crypto bro that was setting up VC space. He was a celebrated and a successful venture capital professional by this time at both Bessemer and then a 16Z he was in his 40s at this point. So this was a big deal. It added tremendous credibility. By the way, Dixon ended up being number one on the Midas list in 2022 and that practice is now 7 billion in AUM today, so by far the largest of any other GP. Morgan Creek, founded in 2004 by friend of Kaya Mark Yusko, formerly of the UNC and the Notre Dame endowments, at this point launches two new products, a dedicated private crypto fund and a crypto index fund with Bitwise in 2018. So that's the first we've heard the Bitwise name, which will go on to be a very big player in indices and ETFs. And I think a source for you through Matt Hogan of some of your segment, Aaron that has been a supporter of Kaya over the years. Mark also coins in his typical one liner fashion too, in his snarky way he begins to use the phrase probably just a fad as he closes most of his tweets at this point to poke back at the haters. Mark is always a character. So for the first time we also start to see Endowments and pensions invest in some of these VC and private equity funds focused on crypto. David Swensen, as he always did, led the counterintuitive charge and was quickly followed by Harvard, Stanford, Dartmouth, mit, UNC and Michigan on the university side. And even more surprisingly, we see the first public pension, Fairfax County, Northern Virginia, just south of dc, led by CIO Kathryn Molner invest in the Morgan Creek Fund. And there's also a very important story just as we close out this stage that will impact our discussion later with the gas that happens here as well in late 2020, Eric Peters, the CEO of One river this was a macro hedge fund only at the time. But he pulls off one of the best cloak and dagger trading stories ever. And through the course of several weeks partnering with Coinbase One river buys 600 million worth of Bitcoin, by far the largest trade to date in the cryptocurrency. And Eric tells this story in an episode with ted Seides in 2021. It's pure theater. We've linked to that episode in the show notes. But you can imagine those early days that to avoid signaling and market impact for a block that side was extremely difficult. And Peter used the full bag of forex and derivatives trading tricks he had honed for decades to pull this off. But fascinating story that again, I think it really became an iconic moment in the history of bitcoin. Cause it was a big turn in the institutional sizing and blocks of bitcoin. But it also would begin a courting relationship between One River's crypto practice and Coinbase in prime brokerage and custody that would develop into a full marriage just a few years later. So what I mean by that is that One River Digital is now Coinbase Asset Management, still run by Eric Peters, but within the Coinbase family after a 2023 acquisition. So the eyebrow raising stage would close with the all time bitcoin high at that point of 61,000 in the spring of 2021, in concert with the IPO of none other than Coinbase. So that's the third, all right, fourth and final stage that sets up our important question of today on whether we've entered a new golden age. Was Aaron the most difficult to name? I struggle with this one the most because between early 21 and 24 all kinds of crazy stuff was happening. I thought about naming this the Empire Strikes Back and I think you'll understand why in a few moments. I thought about naming it rationalization, meaning things go sideways, a lot of players exit, a lot of blow ups happen. Chaos was another one, just because it was sheer chaos in all directions. But I settled with Schizophrenia because it lost its sense of purpose and direction and shifted back and forth. From a personality standpoint, I think that's the right framing of this three year period as you had this strange mashup of continued progress and milestones, but also froth and fomo of epic historical bubble levels. And then finally regulators calling foul and beginning to circle as massive reputational headlines of fraud and failures began proliferating. So it was this huge cacophony of stuff happening that really was difficult to follow and as I said, to identify or label with one particular theme. So on the milestone side, In October of 21, the SEC approved Bitcoin Futures ETFs. By the way, that's still massively confusing to me in this history that it was that early, given the SEC position we're going to talk about on crypto, that this happened at all, but much less that it went first in futures. But oh well, bureaucrats going to be bureaucrats as we say. So also in 21, famously, El Salvador becomes the first nation to make bitcoin legal tender. And that decision, while certainly ridiculed at first, has generated a massive profit for the Central American country. May 2022 A16Z and Dixon, to continue that story, raise a $4.5 billion crypto fund for blockchain web3 and crypto VC, the largest to date by far. Just a staggering amount. That's more than half the AUM was that one raise. But then there was the froth. So the 2022 Super bowl was dubbed the Crypto bowl for the same reason that the 2000. For those of you with little gray hair, super bowl pretended the peak of the dot com bubble. And this seems like ages ago, but just to jog your memory, you had this terribly cheesy future favors. The Brave Crypto.com ad with Matt Damon that just aged horribly. The bouncing QR code by Coinbase, which I actually thought was an awesome one, that was very clever. And then, with the benefit of hindsight, the most cringeworthy of them all, Larry David's the Next Big Thing for none other than ftx. But that crypto fervor wasn't just an episodic spending spree at the Super Bowl. That same period, you might recall, saw the NFT craze. So Steph Curry and Justin Bieber joining the board. Ape Yacht Club, whose values reached 1 to 2 million each. Few crypto punks surpassed 10 million of value and most famously the Beeple digital painting sold for an astonishing 69 million. All the while we had several multi billion dollar market caps for meme coins without any purpose. Things like Dogecoin, Shiba, Inu, Pepe, these things are still around and actually still growing in value, shockingly. But it doesn't do any favors to the crypto space, quite honestly. So unjustified levels of wealth were being created that again, we're not serving this space and those true believers and builders and entrepreneurs, well. But then it all came crashing down shortly thereafter. So the final piece of the schizophrenia stage was this brutal series of crashes and blowups. This is not abnormal. In the history of the hype cycle, as we've talked about on this show previously, there's a period of inflated expectations, irrational exuberance that occurred for crypto in 21 and 22, where just as in all of history's bubbles, the confidence levels reaches unreal reasonable levels. And it follows the same script. You overbuild, you overinvest, folks get clumsy, folks get reckless, and that's when the wheels completely come off. And they come off rapidly and frighteningly and it really leaves the whole industry in a place that they can then rebuild from, from the ashes up. So over the course of several months in 2022, a string of disasters, frauds, failures, bankruptcies tore through the space that had 1998 long term capital Management parallels because of the contagion. So In May of 22, stablecoin Terra and its backing token Luna, collapsed, which led to the failure of hedge fund Three Arrows Capital. Month later in June, crypto lender Celsius blew up, which in turn took down the big broker Voyager, the exchange blockfi. And then of course, as we've already mentioned, the granddaddy of them all. Later that year it was revealed that Sam Bankman Fried's FTX Exchange, its native token FTT and SBF's hedge fund Alameda were all commingling and misappropriating client funds, which set off what you might call a massive run on the bank failure and criminal indictments. And we know the story there, so to say the least, this was a rough six months for the crypto PR machine, a true test of its resilience, ultimate staying power. The disillusionment understandably set in and so the sec, as I said earlier, started circling and under Gary Gensler and the Biden administration, they finally pounced. And I just want to pause here for a minute, Aaron, is that in hindsight it's easy to look back and we're getting a lot of these headlines and these interviews now because to look back on the Gensler regime and claim they chose to wage a law fair and enforcement campaign that stifled innovation and hurt the good actors as much, if not more than the bad apples and simply fan the flame of inconsistent and inappropriate interpretation of these out of date regulatory and legal rules, that's probably all true, but it's awfully easy to say now because I think the other side of that is to be honest and fair, at least at the time, consumer protection was paramount. You had this public outcry, all this pressure from these blowups, and the SEC was keen to try to get control of a largely unregulated industry that had been vulnerable and succumbed to fraud and contagion. And we can argue they overreacted and went too far with damaging witch hunts, which is true, but regulators always go too far when there's crisis. But we should at least, as I said, be able to understand why they acted the way they acted. So the Gensler sec, as I said, turned on the lights, got very active. They begun to pursue charges against many popular crypto exchanges arguing they had unregistered secur sales, unregulated staking trading margin, no money laundering policies, and CEOs of Kraken and Binance actually serve some jail time as a result. Chris Dixon again, as we've talked about many times from a16z, posted this recently on LinkedIn about this period of SEC enforcement. He said, quote, Transformative technologies like crypto and AI require us to separate their essence from specific uses and misuses. A hammer can build a home or it can demolish one. The question is how we maximize the good while minimizing the bad. Reactive approaches like lawsuits and piecemeal rulemaking create uncertainty and fragmentation. The Internet flourished because of forward thinking legislation like the 1996 Telecommunications act which created a cohesive national framework, end quote. So this urgent need, going back to this arm wrestling match with CFTC and sec, is this a commodity? Is this a security? Security? The idea of a refreshed national framework was probably best summed up in an editorial from Coinbase's CEO Brian Armstrong in the Wall Street Journal October of 21. And Armstrong argued that the existing regulatory structure was a misfit for the new decentralized digital marketplace as the current archaic regulatory patchwork was based of course on traditional banking and finance, with all these layers of intermediaries that all of us are used to as both consumers and and investors. So as such, they, as in Coinbase, recommended a new agency that would have complete jurisdiction over the space to eliminate the current stare down between the CFTC and SEC that had simply resulted in confusion and paralysis. And he went on to say in this editorial, of this new framework, quote, it should have three goals to ensure holders of digital assets are empowered and protected. Number one, enhance transparency through appropriate disclosure requirements. Two, protect against fraud and market manipulation and three, promote efficiency and strengthen market resiliency. Each of these goals should be accomplished while recognizing that crypto has unique and novel characteristics, end quote. So it's going to be interesting to see whether under a much more friendly Trump and Atkins administration, the new SEC commissioner, whether Coinboys still believes a new agency is warranted, or whether just reform and clarification on jurisdiction is necessary. We'll ask Greg about that in a bit when he joins us. So there you have it, Aaron. The primitive stage up to the satoshi moment, the novelty stage between 12 and 17, the eyebrow raising stage from 17 through early 21, and schizophrenia up until early 24. Now before I close and hand to Aaron, you might be thinking early 24. Well, listeners, you might notice that we're recording this in March of 25. So where, oh where, you might ask, has the last year gone? What stage does it belong to? Well, that's exactly the point of this whole episode is that returning to our purpose for today, my argument, my pitch, and Aaron, I'd love your thoughts is that if we've indeed entered a golden age for institutional adoption of crypto, and you'll need to make that call for yourself, all of you. But if it's true, I would make the case that we will ultimately look back on January of 24 about a year ago, when the SEC approved spot ETFs of Bitcoin as the dawn of this golden age. And by the way, Spot Bitcoin ETFs are now over 100 billion in AUM12 providers, although as I hinted earlier, BlackRock, Galaxy and Fidelity have the large majority of that. But there are 12 that make up this hundred billion. I mean that's real money at this point. And 24 just keeps getting better for crypto month to month. In May eth ETFs were approved. In October, an HBO documentary on bitcoin and the identity of Satoshi was released, which again, everyone's denying. And then of course, the November election. Back to where we started. My intro brought Trump back to the White House and resulted in a continued flurry of good news for crypto the appointment of a bunch of pro crypto advocates to influential positions. I mentioned Paul Atkins as chair of the sec, venture capitalist David Sachs as head of a White House crypto working group, the policy idea of a strategic sovereign bitcoin reserve, and the scheduling of a White House crypto summit, which was held just last week at the time of this taping and was attended, at least as far as I can tell, by all the major leaders in the space. And all of this is aimed again in the context of the US becoming, to quote Trump again, the crypto capital of the world, recovering all this lost ground to Singapore and to Hong Kong and the Emirates in the last few years as the center of crypto and Blockchain innovation and to give us a hint of Atkins this is Paul Atkins philosophy around the future ethos of the sec. Many are citing his co authored manifesto on the history of SEC enforcement he wrote in 2008 in the Fordham Journal of Corporate and Finance Law. Aaron, I know that's something that you look forward to arriving in your mailbox every month, but back in 2008 he co authored a piece and it stated the following quote, the enforcement decisions of the SEC must be guided by the multidimensional nature of the SEC's mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation. The difficult choices of balancing conflicting interests must be guided by the transcendent principles of predictability, fairness and transparency, culminating in the rule of law. These principles are the defining characteristics of the US Markets. End quote. So Atkins, we should point out here, clearly is citing the importance of predictability, transparency, the sense of fairness that I would say most crypto bulls argued that the Gensler regime eluded and avoided and in many cases perverted. During their three year reign. SEC Acting Chairman Mark UADA also launched a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets led by Commissioner Hester Pierce. So all of this is happening literally like 60 days. And the Trump effect culminated in Bitcoin reaching 100,000 on December 4th of 2024, almost exactly a month after the election. And 2024 also saw this new parade of LPs announcing a crypto exposure for the first time. Mubadala State of Wisconsin, Emory University, State of Florida, mostly in these new ETF offerings and even gpif, the sovereign pension of Japan, the largest pool of money in the world with 1.6 trillion US is researching and evaluating portfolio allocations in crypto. So as I close and let all of you ponder whether in fact that previous year of 2024 is the first year of this new era of the golden age. I'll also mention that in late February as a run up to again our guest segment in a few moments. Just a few weeks ago at the time of this recording, BlackRock has added a small 1 to 2% Bitcoin allocation to its target multi asset class portfolios. As far as I can tell Aaron, this is the first major asset manager traditional asset manager to include crypto officially in their firm strategic asset allocation for institutional clients. So I think that is a huge breakthrough. Perhaps yet another sign or notch that the Golden Agers will chalk up to claim a rival of this next age or chapter or era. So with that you are now caught up on history, listeners. Aaron, I am going to hand to you to fill in a ton of gaps on the truth behind the institutional adoption.
- [42:42]
John Bowman
Great. Thanks John. And if the chaotic stage is indication of that time period, I would say that the research process for this was also a chaotic stage. As I was going through and trying to read different articles and news clippings, there's just so much that's out there. And particularly when you're looking at more crypto oriented websites and news, sifting through the noise is incredibly challenging. So I'm going to go through the adoption narrative in three different parts. First, I'll talk about just broad adoption. Second, I'm going to go through what I'm calling the tales of sentiment. And then third is the current journey of adoption. And John, if you're paying attention, that spells btc. So you're welcome.
- [43:26]
Aaron Filbeck
Goodness. There you go.
- [43:28]
John Bowman
Exactly. So let's start with broad adoption here. And I'm going to use Bitcoin just to get a lay of the land. There's a lot of different altcoins out there as we just talked about, but in terms of market cap, bitcoin is about 2/3 of the market. So I think a pretty good proxy for adoption from different types of investors. Now when you add in things like Ethereum or some of the stablecoins, you're getting up to three quarters of the market. So it's pretty top heavy in terms of market cap bitwise. Put out a pretty interesting chart that breaks down the current holders of Bitcoin supply, which as we know is capped at 21 million coins. So that's the max that Bitcoin will ever be. Now about 70% of the owners of Bitcoin are individual. So right away we can say this is a very retail dominated market. Of the remaining 30%, seven and a half are lost. So these are lost wallets, people who have misplaced their passwords or were hacked or for whatever reason, they're all lost. And then 5.7% have yet to be mined. So that's about 2 million coins that are left in terms of being mined. So we're already left at about 16 to 17% of the total supply of Bitcoin. Now approximately 6% of Bitcoin's total supply is owned by funds and exchange traded products. So these are hedge funds, ETFs, other types of trusts that are out and tradable. And then the other 6% is owned directly by business and government. So these are the microstrategies, the Teslas of the world that own Bitcoin directly on their balance sheet. So you can look at all that and you can say, if you're an optimist, there's a tremendous amount of upside potential in terms of institutional adoption, just given the law of numbers. However, the reality is that the market is still very low in terms of penetration from institutions. So I thought that was interesting. Just going to lay the land of who owns what. Now, if you go into the tales of sentiment, the second category here, where is sentiment right now? And there's a lot of different surveys that are out there that measure some of this, but I found one from EY that was made right after the SEC approval of ETFs in 2024. So relatively recent, but entering that new phase that John just talked about. And on average, institutional investors were much more bullish on the space and planning to increase their allocations. So about 94% of the respondents in this survey said that they were long term believers in the market. And about two thirds of the respondents were investing in vehicles that held crypto assets. Now, when it comes to allocations, the same survey found that most allocators that were currently invested in crypto had allocations somewhere between 1 to 5%, with very few much higher than that. I think what's important also is differentiating how you access the ecosystem. And I think that's important because it'll lead to the third part of the segment, which is the actual journey towards adoption. So as I was prepping for this episode and John mentioned this, I had the chance to meet with Matt Hogan, so chief Investment officer of Bitwise, as well as Marcel Kosumovich, CIO of Coinbase Asset Management, and actually one of our co authors on the digital assets micro credential. So had some good conversations with them on just different ways of accessing the space and broader adoption. I liked the way that Matt framed ownership, and he's actually been on the record as being a crypto boglehead, which is a phrase that might actually make the real Bogle turn his grave. However, his approach when he says this is that you should own the entire market and be broadly diversified, which is hard to argue with. So he defines the market in three different categories. First is crypto assets. So this is direct ownership, owning direct tokens of Bitcoin, Ethereum, et cetera. The second category are crypto equities. So this is owning public equity shares in companies that operate in the infrastructure. So Coinbase as an example, and then private markets. So mostly venture capital, although we're starting to see some growth equity move into this space as well. So by doing this, you don't miss important parts of the ecosystem. There's different ways of accessing this and they tend to lend themselves to one of those three different categories. I think this is important context for where different investors actually do own crypto because it's currently relatively fragmented and fragmented exposure for structural reasons like access in the case of private markets, or just due to preference and ease. So we'll break this down a bit further into the different types of asset owners and you'll see what I mean. So let's talk about the different types of asset owners, their journey into this space and where they currently stand. I want to preempt this by saying again, there are a ton of stories out there, some of which are from reputable sources and some of which are from very hyperbolic sources. In fact, some websites, I felt like I was going back to the late 90s in terms of the way they looked and felt. So very weird Internet search throughout all of this. So all that to say is I'm going to try to paint a bit of a mosaic here. John gave a couple of examples already, I'll give a couple more. But again, I've grouped these different investor types into three categories. So first we'll talk about sovereign wealth funds and public plans, so more government oriented types of asset owners. Second we'll talk about endowments and foundations. And then third we'll talk about all the different categories within wealth management. So on the public plans and sovereign wealth funds side, there's a few different exceptions, but most of the public plans and sovereign wealth funds seem to still be making an infrastructure play as opposed to a direct ownership play. And these seem to be through mostly crypto equities, though in some cases venture capital depending on the type of asset owners instead of direct crypto assets. I think a lot of this may change over time, especially since the FTX fiasco ended up burning some of these asset owners with that exposure. It started as a venture play, obviously went into more direct ownership. So we're likely to see in terms of direction, and I'll have a couple of examples here, that the venture side may be slower to move and much more focused on more the public stuff. So as John mentioned, Abu Dhabi Sovereign Wealth Fund revealed in a filing this year 2025, that they had invested almost half a billion in BlackRock's Bitcoin ETF. And it's now the largest holding and represents about 2% of the fund. So one of the larger trades that took place here. There is an article, and this is one of the examples that was a little bit misleading, but there was an article from a crypto news website that talked about the Norwegian sovereign wealth fund NBIM increasing their exposure to Bitcoin. But the reality is that these guys own the market and have exposure mostly through equity exposure. So MicroStrategy, Tesla, Nexon, Riot, Metaplanet, these are all publicly traded companies that I think have caused a lot of headlines. Oh look, you know, the big sovereign wealth fund is increasing their exposure, but they're not doing it on purpose, it's just through passive exposure. So funny to read. Yay for misinformation. But you have other examples of other sovereign wealth funds. So GIC Tomasic making bets on crypto infrastructure not directly, but through equities. So GIC participated in Coinbase's Series E funding round early on and a lot of these other APAC oriented cyber wealth funds are owning through public equities. The Canadian pensions as well were early investors on the venture side, but they don't seem to be biting as much, especially since FTX there were a couple that got hammered when that fiasco took place. So that's a little bit of background on the public plan sovereign wealth funds. On the endowments and foundations front, US Endowments and foundations seem to be moving a bit faster into crypto than they were in the past, which seems to be accelerated since the election. But the size of the moves relative to the pools of capital are still relatively small and seems to be that caution is still winning at the end of the day. The way that endowments are investing is pretty mixed as well. But there seems to be a bias towards venture from the early adopters and then from those that are dipping their toes in now it's more into equity and direct asset ownership. So again, John mentioned Yale accessing early on in the late 2010s under Swensen's leadership, and they were accessing this space through GPS like Andresen. Similarly, Texas A&M was an early investor in the early 2000s again through mostly venture funds. However, as the options have grown, some have broadened in terms of what they're willing to invest in. So an example is Emory University, which became the first endowment to disclose buying a spot Bitcoin ETF after moving into it in late 2024, so after the approval took place. Similarly, the Rockefeller foundation has been on the record considering direct investment after committing to venture early on. So another story of early adoption in the private markets and now later Adoption in the Direct Asset Market there's also an article in the FT that highlighted the University of Austin going direct and raising a $5 million Bitcoin fund, which represents about 2% or so of its $200 million capital pool. However, not everyone's on board in this space. In the ENF space. In the same FT article that talked about the University of Austin, other universities like Cornell Nebraska aren't quite ready to jump in yet and don't see the value relative to risk. In some instances, this was just what is everyone else doing? I think sitting back and watching some of the other early adopters and then others are still wrapping their heads around the valuation, how it fits in a portfolio, the risk return profile, and so on. So on the wealth management side, I know it's unfair, having worked in it, to paint wealth management with a broad brush, but I think directionally we're seeing the same sentiment, although the different levels of adoption exist across the different asset owners. So if we start with the family offices, I would argue that some of the most aggressive family offices were the first true institutional like adopters of digital assets, and they did this mostly through the private markets, venture capital, but also hedge funds and investing in more tactical managers that were trading volatility being much more aggressive with direct ownership. And now we're starting to see some interest in direct ownership from a long only perspective. However, this isn't widespread as we know, once you've met one family office, you've met one family office, so the stories are still a bit more anecdotal. However, BNY Mellon put out a family office survey that was conducted earlier this year in 2025, and roughly a third are actively investing in crypto and are seeking to increase their holdings over time. So this is a bit more widespread than some of the anecdotes over the past couple of years, which I thought was interesting, but in terms of accessing the space, it's a split between crypto assets directly, as I mentioned, and then of course now that ETFs are available, investing in ETFs that specialize in either crypto equities or direct assets. However, the other 2/3 of the family offices in this survey were not as enthusiastic, which surprised me. Again, anecdotally you think of these being much more aggressive, willing to be early adopter type of investors. 6% of that 2/3 said they were exploring, 22% said they had very limited exposure, and then 38% said that they have no exposure or interest. And then further 2% claimed that they just failed completely just due to bad experiences. Another interesting thing from this survey was the interesting split between the larger family offices and the smaller family offices. Smaller family offices were actually much more interested in the space than some of the largest family offices. So not quite sure what to make of that, but interesting nonetheless. And when we look at the rest of the wealth channel. So this includes RIAs, wirehouses, IBDs, there's similar stories going on here. Again, Bitwise conducts an annual survey of the space which showed that in 2024, only 28% of RIAs, 24% of wires and 15% of IBDs actually allocate to crypto. So still a minority. However, each of these figures almost doubled from the prior year. So the direction of travel is quite interesting. When you look at 2023, it was about half of that participation rate. So again, directionally, we're seeing some increased interest, maybe some increased allocations, but still small in the minority relative to the majority. So as you can see, it's a bit of a mixed bag in terms of current adoption figures. However, the direction of travel seems to skew towards adoption over avoidance, especially for those who have already invested in the space. So I want to delineate those two of newcomers versus early adopters beyond some of the regulatory clarity that will inevitably make investors feel more comfortable. I think we should watch for a few things and John mentioned a few of these, but I'll just put a bow on it. First is the exit environment in venture capital. So we've gone through a couple of years where the exit environment has been challenging and you see this impacting the fundraising cycle. Galaxy has a report that shows this and shows the relationship fundraising versus the exit environment. And there's a direct relationship as a lot of these venture investments have failed to materialize and monetize in the public markets or to other strategic buyers. The fundraising has gone down as well. Second is froth. So John mentioned this. The froth in the crypto assets, public markets. So these direct token ownership markets. So coupled with the prior point, if we continue to see frothy activity of meme coins and straight up fraud like we saw with ftx, it sends a bad message to institutional investors who are not only concerned about the investment risk, but also the headline and in some cases regulatory risk. And then third is product stability. And I don't mean stability in terms of price, because clearly that has not happened yet. But really making sure that crypto investments can be properly housed in regulated vehicles, I think the ETF approval is a huge milestone. I Think you're right, John. We'll look back a year from now, two years from now, and look at early 24 as a huge milestone. And if we continue to get more performance history behind us, we could see investors get more comfortable with owning this in ETFs, which makes it easier, especially for the wealth channel, but also the institutional channel. We're seeing institutions utilize these vehicles. When you look at ETF ownership today of the professional investors, it's dominated by hedge funds that are high frequency traders playing volume. They may not be entirely long term investors in this space and then occasionally you'll see some investment advisors dipping their toes in. You really just don't see the asset owners as the top holders of these different vehicles. However, it was interesting talking to both Matt and Marcel and they both made parallels to the first time that gold was put in the etf. So again, not making a judgment call of whether Bitcoin is digital gold or not. But they both said that people thought it was crazy the first time that gold was put into an ETF wrapper. These were the assets that were sold in 2am TV commercials from conspiracy theorists and now they're an institutionally adopted area of the market. So we could see some parallels in terms of taking something that has historically been a much more retail oriented market and making it much more institutional. So maybe to summarize, if I could answer the question that we're posing, is this really happening? I would say kinda. I think the headlines are still ahead of the allocations to some degree and the product development is ahead of the true sentiment and allocations. However, we are seeing some real directional trends that make me think that once we get a little bit further into this year, maybe into early next, that we could see some dollars move. So, John, that's a lot. I'd be curious what you think about that, but bit of a mixed bag depending on what you look at.
- [58:47]
Aaron Filbeck
I think that the comparison to gold ETFs is an interesting one to tackle. The only thing I'd say, and I come back to this identity crisis issue, that still frustrates me and frankly doesn't do a lot of the proponents a lot of justice, is that if you're flipping back and forth between return opportunity and store of value, you're missing the point and you're not defining the asset and the portfolio role very well. My guess is, despite it being conspiracy theorists and weirdos 11 o'clock in infomercials, that gold at the time was already a much less volatile store of value type of asset than bitcoin is viewed right now. So I understand the corollary, but I do think we still struggle with Bitcoin and sometimes there's a lot of speaking out both sides of the mouth that some of these folks, I think, need to tighten their narrative a bit. So that's one thing. And what I'm hearing from you, Aaron, I think, is that despite a whole lot of headlines, you have to be discerning on which headlines are real and which are a lot more sizzle than substance. So I'm hearing from you that the jury's still out, that a lot of these anecdotes with very prominent asset owner names and headlines, that you have to dig a bit deeper, look under the hood to see whether it's actually true commitment or just accidental exposure through back to our Cam Harvey point, various interactions and avenues that were embedded in the portfolio already.
- [60:15]
John Bowman
Yeah, I think, I think if you're an optimist and a bull in the space, you can make the argument that there's a lot of infrastructure that's been put in place. If you have some regulatory clarity, there's a lot there. I would say that at the moment, and we are only two months in to the Trump administration, it's a little too early to say this is happening at the moment, but I do think that there's a lot of positive sentiment and a directional move that could lead to further adoption. But I think that's fair. John?
- [60:44]
Aaron Filbeck
Well, plenty to reflect on and debate. I think it's probably time for us to bring in the big hitters at this point, because I think Greg and Robby will bring to life and probably clarify, maybe even correct, some of the things we've said about even Coinbase and BlackRock activity. I do really want to hear from Robby, particularly on this idea of store value versus return opportunity, because again, when you see some headlines that we think bitcoin could go to 200,000 next year, and then the other one is about the greatest hedge against Ukraine, Russia risk, again, you're talking two very different purposes of a portfolio allocation. And we've got to solve that before we can have a serious sophisticated conversation about a long term allocation to an asset class. So with that, I think we should move to halftime, folks. Everybody take a break, grab your nachos, grab a refill of your drink, get ready for a fantastic conversation with Greg and with Robby. But before that, let's move to our halftime segment. Stay with us. Well, welcome back to Halftime at Capital Decanted. As we thought about Our use of halftime this season we spoke with Franklin Templeton, our title sponsor, about examining and exploring and having some dialogue about different sub themes of where the industry is and particularly the trend of democratization. This explosion and rabid appetite of wealth management professionals to seek access to other risk premia, other alternatives, but obviously with the right appropriate education. And it's that last point that we want to examine on this particular episode with my guest and good friend, senior investment strategist at Franklin Templeton, Tony Davidow. Welcome to Capital Decanta, Tony Sean, thank.
- [62:32]
C
You so much for having me.
- [62:33]
Aaron Filbeck
Well, I thought I would start perhaps at a high level to level set first of all on just the existential importance of education. Kaya exists for this purpose. You have spent much of your career certainly with different wrappers of corporations around you, but you've spent much of your career educating in different ways. Why is this such a fundamental tenet of an industry like asset management?
- [62:58]
C
I think it's a very basic question but I think it's so important, especially in the alternative world because of the complexity of it. But at the end of the day informed investors are going to have better outcomes. But I think we have to obviously consider the fact that alternatives by their bare nature are often opaque and not as well understood. And I think the temptation is to sell product as opposed to educating. So I think one of the rare things in our industry it seems like organizations like Kaya and the asset management industry and even the wealth management community is all understanding that to have a successful outcome for investors and advisors, we need to lead with education. And I think that's an incredibly positive development because at the end of the day, if advisors have good experiences and investors have good experiences, that's going to lead to further and further adoption as this grows as an important component of the overall wealth management ecosystem.
- [63:55]
Aaron Filbeck
I heard you say things like understanding and overcoming opacity and the ultimate purpose, the why are we here question. Regardless of where on that value chain, which agency you are role playing within this ecosystem, it should always come back to the client and investor outcomes. And so that ultimately is always our North Star. And perhaps to build on that answer, Tony, as we zoom in on this massive trend that I know, Franklin Templeton and you have both written and worked hard to kind of address of moving, as I said in the opening statement, alternatives making them accessible to high net worth investors, perhaps even the populace, retail investors. There is a certain sense with education and product development of a balance, a creative tension, as a fan of Kissinger, a detente. And if Those get out of whack. If one gets too ahead of another, we've got problems in the industry. I'd love your thoughts. I'm sure the listeners would benefit Tony, from where you think we are in that balance or not and where we are progressively in the journey of educating the larger high net worth asset owner in the both the benefits but also the risks of alternatives.
- [65:11]
C
Ian, if I could maybe take just a little bit of a step back and say that I think this is a key inflection point for our industry and there are three primary drivers of that. One of them, I think the market is demanding a more robust and reliable playbook. That's just factual. You need better tools to provide better outcomes. The second one is what I think you refer to and that is these product evolution which is making these products more available to a broader group of investors. But I'd offer the third leverage really is critical and that is you have to have access to world class managers. If you don't have access to world class managers and you deliver those institutional type capabilities, it's really not going to work. It's going to be a failed exercise. Where are we on the journey? I think if we used advisor adoption as a litmus test roughly across the industry we've been about a 5% allocation to alternatives for at least a decade. And if directionally we think that number should be 10, 15, 20% because you need to allocate enough to matter to change the complexion of the portfolio and the outcome for individual investors. We're still in the early innings, but again I would rather go slow and do it right as opposed to rush to get everyone invested and then have a mismatch in expectations. And John, I think the biggest mismatch in expectation that you and I have talked about quite a bit over the years is this whole notion. If we're investing in private markets, they're illiquid investments and individual investors need to think of them as long term investments even though some of the structures have more liquidity provisions. If I want to capture the illiquidity premium of owning private equity, I need to think of that as a seven to ten year investment. That's changing the mindset of the advisor and in the investor. So again we're still in the early innings, but I think if we do it the right way we're going to have a long lasting experience as opposed to doing it the wrong way. Selling it as a product where people are going to be disappointed along the way and it won't be a good outcome for anyone.
- [67:02]
Aaron Filbeck
I think that's really well said and I think in many ways your opening statement of that answer about a broader palette of options could very much be a slogan for Kaya and very much an amuse bouche to all these episodes we're trying to expose and I think give investors options to deliver on their hopes and dreams and client goals in a way that gives them a broader tool set to achieve that. And certainly we would echo what you said very well, which is we'd rather go slow and do it right than rush and find that we have to clean up a mess after. So, Tony, as always, it's great to check in with you. You always provide a certain very clear sense of wisdom on the importance of the client and education and we're grateful for your time today.
- [67:47]
C
Thank you so much for having me and I enjoyed listening to your program. Keep up the good work there.
- [67:52]
Aaron Filbeck
Thank you, Tony. And Decanters, stay tuned. We'll bring our guests into studio next. Well, welcome back to Capital Decanted and we are just thrilled, as promised, to now have in studio. Joining Aaron and I, Greg Tussar, head of Institutional product for Coinbase, and Robby Michnick, head of digital assets for BlackRock. Gentlemen, thanks so much for joining Capital Decanted.
- [68:15]
D
Thanks for having us.
- [68:16]
E
Thanks for having me on.
- [68:18]
Aaron Filbeck
Well, as you guys know, Aaron and I spent quite a bit of time unpacking the short but very busy history of crypto and tried to weave in. And you guys are going to fill in a lot of gaps and bring to life probably a lot of assumptions and perhaps even misperceptions that us laymen watching from the stands have noticed over the course of, let's call it the last 15 years. And I thought it would be fun to start with one of the iconic stories and conversations that we outlined in the beginning. And Greg, I'll jump to you from the Coinbase perspective. And that was the story I told about the fall of 2020 and actually friend of Kaya, Eric Peters and Sebastian and Marcel and a lot of those folks that were very early in trying to put together institutional product to invest in crypto, they pulled off, and I called it the biggest cloak and dagger trade in history. They pulled off this huge, at least at the time, BTC trade. And really, at least from our perspective, that consummated this courting, this dating relationship with Coinbase that ultimately led to something much more formal with the two of you and launching your own asset management shop through the raw materials, if you will, of OneRiver. So, Greg, I thought maybe you could talk through the context, the background of what eventually led to your own asset management capability.
- [69:34]
D
Sure, happy to. By way of background, I've now been at Coinbase for five years. This I think for me is 34 years in the world of financial services and seven in the world of crypto. I spent most of that in the world of electronic trading. And I had the good fortune of watching equity trading and on the run treasuries and currencies migrate to this hyper efficient world that it lives in today. And in 2017 or so I co founded a company and the idea was to try and bring some of the learnings from that world into the world of crypto. And it felt like this great wide open new space. It was easy in equities to feel like you hit the end of the earth. There were no more things to do. We were stringing microwave towers and how many feet off the perfect path were you between New York and Chicago and those kinds of things? So here was this wide open space. And so we started a company and the idea was to bring a lot of the algorithmic trading techniques into the world of crypto. And that was called Tagomi. We were too early. It was in 2017, 2018 we started and there just wasn't the wall of institutional money that we expected at that point. But we built a good product and a good brand and we got acquired in 2020. And the idea was to take that trading capability and what Coinbase had in the form of its custody business and chocolate and peanut butter, and you put them together and that became what we call Coinbase Prime. And the timing of that in the better lucky than smart category turned out to coincide with the beginning of a cycle where it became a macro topic. And OneRiver was one of many who at that moment, the bitcoin narrative really captured people's imagination. And we happened to be at the right place at the right time with some tools where if you wanted to buy a large quantum of bitcoin, some of the techniques of break the orders up into smaller pieces, try and disguise your place on the order book, et cetera, et cetera. Married together with the challenge in crypto, always operationally is, well, you're trading over here. But then, oh my goodness, I just bought a few hundred million dollars worth of bitcoin. I got to copy and paste address from this thing over into that thing to get the stuff I bought over into my cold storage. So the idea that we had those in one platform positioned us to work with somebody like Eric. And so these things coincided, the narrative, the platform and Eric's desire to put his client into the asset class for just an amazing experience. And for us at Coinbase, that was a moment where we felt, okay, I think we have product market fit for an institution. And it was at that moment that more than just one river showed up. There were quite a few macro investors and then large corporate clients that showed up wanting to put Bitcoin on balance sheet and those sorts of things. So that certainly cemented the one river Coinbase relationship because I think we were uniquely positioned to help Eric at that moment. It actually wasn't until much later, at a different point in the cycle, which I think was 2023, when Coinbase was thinking about what businesses do we want to build that are not correlated to some of our transactional revenue streams, that have, as we're thinking about our portfolio of business that have more NIM like characteristics or management fees, et cetera. And because we got to know Eric so well through that period, it became clear if we wanted to have a fiduciary capability. Eric, for the active management sleeve had assembled such an amazing team that we thought this is somebody we really want to get closer to. And that's what I think it was. March of 23 brought us to acquiring OneRiver. And the thinking was we were in the middle of a bear cycle. And one of the things I've really come to appreciate about Coinbase's this builder's mentality of building through cycles and staying heads down and so forth. So Brian, prompted to say, what things would you want to build at a down point in the cycle that you'd be happy you did on the other end of this? And asset management was that thing for us. So that's what led us to Eric and to why asset management?
- [73:09]
John Bowman
So Robby, we went through some of the evolution of adoption for a lot of these institutional asset owners, the Endowments foundation, sovereign wealth funds, who are looking at crypto. And as you go through the history, there's a lot of different reasons why people might have hesitated. Whether it was regulation, volatility, the technology, just understanding how to value these different things. But where we saw original adoption on the asset owner side was primarily through the private markets and more of an infrastructure, picks and shovel type of play. As we've looked more recently, we've started to see a little bit of interest in the direction ownership. But I'd be curious, from your perspective, are you still seeing private markets primarily? And if not, what are some of the questions that are still outstanding for a lot of these asset owners that may still be hesitating to enter into the space.
- [73:58]
E
Well, there's a lot in there. So maybe I'll start with the journey that we witnessed for a lot of our asset owner clients. And a lot of that going back to, let's call it 2020 was, I would say, the first time when you had a lot of traditional institutions, institutional capital that was becoming convinced that it might make sense to have some degree of exposure to this space. And as you alluded to, we saw most of that going into picks and shovels type investment theses, not into Bitcoin or any other crypto directly for the most part. And there were generally one of two reasons for that. One is that a lot of those allocators just had a thesis going in that the right way to play this space was to own the picks and shovels, to actually own Bitcoin. That's crazy. But we kind of believe in this thing generally blockchain and crypto, so we want some exposure. And the smart way to do it is to own the infrastructure. Plausible thesis. The second reason that that was happening was even if you didn't hold that thesis as an institution, it was basically impossible in any feasible way to set up the trading custody, et cetera, support without making it a massive organizational project and taking on a lot of risk and operational complexity because of all the different things that you have to be able to do in this space. So whether they wanted to or not, that was the option that was available. And the unfortunate thing was, even though that thesis of picks and shovels over Bitcoin itself or bitcoin and ETH was certainly plausible, at least for the most part, from a price performance perspective, at least relative to Bitcoin hasn't played out particularly well. And that bitcoin's performance through these cycles has been pretty astronomical. Certainly there are some crypto venture funds who've done extremely well, who picked more winners than average and had great returns. But for the most part, a lot of the institutional allocators who took that approach got a little bit burned. Not all, certainly not all, but a good number of them. And so now there's a reset. And what they're doing for the first time is looking at, okay, maybe we should own Bitcoin directly. That coincides very well with the launch of the spot Bitcoin and Ether ETPs in the US and maybe more to come. So that's an interesting journey to now watch them go on. And we played a role as an education partner through that. In thinking about what is the investment thesis for bitcoin, how does it fit in a portfolio risk return volatility correlation, all those assumptions that go into it and many of them are on that path now.
- [76:23]
Aaron Filbeck
Robbie, I think that's really well said, this reset idea. And by the way, thanks for calling that narrative plausible because that's been mine personally for a long time. So at least I didn't get the crazy or the foolish. And you're coming around to what we saw for years, so I appreciate that. But this picks and shovels move to the reset towards the open mindedness from institutions on owning cryptocurrency or maybe even direct coins. Greg, you talked about the crypto Winter, as it's often called, was the period, the moment in which you moved on from simply working closely as a partner with OneRiver to actually buying it. The environment, the planets had aligned, things had moved enough. So I'm curious, as you sat back, you described this evaluation process. I'm not sure if it was one meeting. It was probably a period of time where you guys were brainstorming as an executive team about what's missing, what are the gaps in Coinbase's capabilities in your holster. And you determined through some evaluation of the environment and the timing that now was the time for asset management. So you had to have a view, if I may, that institutional pools of capital were warming up and we're starting to need a partner. What did you notice that was changing between late teens and even 21 when you weren't quite ready to do that, even though you helped one river at the time, and then 23. What had really evolved since then?
- [77:39]
D
It's a good question. I guess the simplest answer would be the number of conversations with allocators about their interest in the space was one. But I would say it was really more informed by, if you have a long term view about when this is fully embraced, the capabilities you'd need to have on the shelf. Some of these things as we know, take a really long time to build and mature and build relationships and have track records and all those sorts of things. So it was a little bit more, we believe in this direction of travel rather than knowing this is the moment. And it was a directional bet as opposed to we now have enough indicia that this is the right time. And I think at Coinbase we're pretty comfortable making those kinds of directional bets and the timing is just impossible to predict, quite frankly. But a lot of these things, and this is a good example of that business similar We've been building a derivatives business, a listed futures market, and those things take time. It's building the infrastructure for them, navigating the regulatory complexity, et cetera. And I think we're very grateful that we did that, even though still taking time for traditional allocators to really embrace the space. But you have to play the long game. You have to invest in all the meetings and all the things that lead up to the moment and be willing to work with customers. Our strategy is not to compete in the beta space, nor in the venture world necessarily, but the space where One river found a lot of success. And Eric, I think, has a long history, is helping clients with more bespoke solutions, risk managing and those things. And so I think Coinbase, with its position in crypto, is uniquely equipped to be able to provide those solutions. That's the long game for us, if that makes sense.
- [79:13]
Aaron Filbeck
Yeah, well, certainly your SMA approach that Eric's early insight was parlayed through Coinbase's distribution platform has been, you're right, a very unique differentiator from most of what we see out there. You talked about the quantity of these discussions with the allocators changing. Was there any change in the substance or the types of questions they were asking that just signaled something has flipped here?
- [79:35]
D
I think the velocity of them and the depth of the questions, for sure, and they wax and wane with cycles, but with each returning cycle, you mentioned winter, it's winters, plural. Since then, with each cycle, I think the questions come back more informed and with a broader perspective on what crypto is. I think many people start their journey, the four of us probably did. Buying bitcoin, maybe you haven't bought bitcoin yet. And then you start to ask more questions and more questions, you get more curious and then you have a moment where you widen the aperture and that's the moment that you need to get to. But you have to start somewhere. So I think everybody's on that journey at different places on that journey.
- [80:12]
John Bowman
I want to stick with the bitcoin conversation a little bit here because obviously it's the largest part of the market. And Robbie, if I can come back to you on maybe to Greg's point on that directional. Just getting in at this point. You guys put out a paper at the end of last year called Sizing Bitcoin and Portfolios, which I thought was great. And there's been a lot of studies out there on the return impact that integrating a small portion into a diversified portfolio might have. But you guys took a little bit of a different angle to this, focusing more on the risk side. I like the way that that was framed. It was an interesting way of thinking about integration. Could you talk a little bit about the thought process behind this and maybe to the whole subject of this episode of why now and the justification for inclusion in a diversified portfolio?
- [80:57]
E
The why now? This was very much client driven. There was a huge amount of demand for thought leadership from us on this topic. In particular, how does bitcoin fit in a portfolio and what's a reasonable sizing? And it's a really hard question, which is why there's so little out there on it that does anything other than look at a historical backtest. But a historical backtest has its challenges. So the reason it's a hard question is traditional, fundamental valuation frameworks, traditional finance frameworks generally don't apply very well in trying to come up with value valuation around bitcoin. Same reason, by the way, that they're hard to apply to gold. But also if you think about the inputs to a portfolio optimization solution, expected returns, correlations, volatility, those are a little bit tricky too, and I'll explain why. So expected returns, Bitcoin has gone up basically a million X since it first started trading in July of 2010. And even if you narrow that and you take out the early years when the returns were particularly astronomical, it's averaged just over 50% annualized for the last decade. That is a really hard expected return assumption to then try to use as a baseline going forward because it just doesn't feel realistic to anyone. Second, volatility has not been stable and has trended pretty steadily downward over time. But it's not like you can use a historical estimate for that because on volatility you'd probably be overstating it if you just took the historical volatility. And then on correlations, this is the most fun part. The long term average correlation of bitcoin's been low, been close to zero. But there are certainly periods where it spikes and there have been episodes probably in a more concentrated way recently where that's happened. There's a lot of fundamental reasons to argue that doesn't make a lot of sense, but they've happened and they make it hard to use correlation as an input. So those are the challenges. The approach that we took was to basically say, and it's a very simple approach. If you look at the average portfolio that is a balanced portfolio is 60, 40, 70, 30 in that range, and you look at the implicit exposures that you have to the Largest stocks, which is essentially the US Mag 7. And those range from the largest end, Apple, Microsoft, Nvidia, closer to 3% in a portfolio each and the lower end closer to maybe 1.5%, say Tesla. And what is the contribution to risk, the contribution to volatility? Each of those names is giving you implicitly a lot of those are held through ETFs and index funds, but you have that exposure. What is their contribution to risk? And if we constrain the bitcoin allocation to say it should be no higher as a contribution to portfolio volatility than those names on average, what does that spit out? And that's what led to that 1 to 2% range. And the reason there's a range on the 1 to 2% is in particular the correlation assumption is difficult to pin down. So if correlation is more elevated as a go forward matter, you get closer to that 1% range. If it's less elevated, you get to 2% or beyond. So that is how we've thought about it and I think a lot of our clients have found that a helpful framework, even if it's certainly not a silver bullet.
- [83:59]
Aaron Filbeck
Robby, I love the Mag7 framework. I thought that was really creative and helpful. Just because a methodology has been so elusive here, which I think is part of the problem. We talked a bit in the intro about what we called identity crisis or schizophrenia. Is that on the one hand you've got, and I don't think frankly either, the regulatory arm wrestlings of does this belong as a commodity or a security help. I also don't think, with all due respect, that sometimes the crypto world helps because on the one hand you see headlines like this is the greatest asset class ever. It's got 50% upside per year. It's a risk on which is what you draw implicitly from that type of headline versus what I think is the most academically interesting, which is, to use your words, idiosyncratic store of value, diversified type of behavior. I mean that's when it truly adds value as a portfolio diversifier. So with all these swirling and sometimes conflicting narratives with correlation rising at the times you least don't want it, we've all seen this. If you've been around a minute, how do you expect the bitcoin conversation to stabilize? Will it be more in that store of gold? Is that the most compelling from a BlackRock perspective? Or do you still think this correlation and risky asset alignment is something that has still some legs as this becomes more mainstream?
- [85:16]
E
Well, John, you've hit on the Core of the issue, and what's interesting is that the periods of elevated correlation that we've seen recently, in my view, are almost entirely a self inflicted wound. It's actually incredible to see how much damage the industry has managed to do to itself by leaning into this risk on risk asset narrative, in spite of the fact that it makes no fundamental sense to treat it that way. Bitcoin is obviously a risky asset on a standalone basis. It's volatile, it has a relatively short track record, it's novel technology. Despite how resilient and consistent it's been through its 16 year life, it's still relatively new. That is a very different thing from being risk on. But the industry, and we can get into some of the incentives of how this could have happened, ended up embracing and perpetuating this notion of it as a risk on asset with incredibly detrimental effects. And I experience that every day, and I'm sure Greg does too. When we're talking to institutional investors who are looking at this in some cases for the first time, seriously. And that correlation comes up every single conversation. It's just confusing because the digital gold narrative investment thesis, it makes intuitive sense to a lot of these folks. It's a global, scarce, non sovereign, decentralized asset. It's not tied to any country or any one economy or monetary or political system. So it's in a sense insulated from all that and the turbulence and the risk associated with it. And yet I look at the tape and sometimes it looks like it's really highly correlated and it's risk on. So how can I actually believe in the thesis of digital gold and treat it accordingly in a portfolio? It's created immense confusion as a result. And most of it is self fulfilling because people talk about it this way and the more you talk about it this way, the more it starts to trade that way, the more it trades that way. More people keep talking about it that way until you get into some totally silly, just ridiculous situations when you take a step back. Oh, bitcoin down because tariff threat's up. No one could come on this podcast and join us today and survive a proper debate defending the position that tariffs are a headwind to Bitcoin. There's a little bit of a tortured path. You see the terrorists, higher inflation, higher inflation, interest rates higher for longer, rates higher for longer is bad for Bitcoin. I get that, but. But that is not really what the market's reacting to at this point. It's a bit of the Pavlovian dog situation where anything bad, maybe that's actually risk off and we sell bitcoin and that's had a really negative impact. I think long run the fundamentals will prevail. The long term thinkers in this space, they accumulate on these dips. They take advantage of the short term irrationality but it's certainly hurting the marginal adopter.
- [87:57]
Aaron Filbeck
That's a very self aware, objective, refreshing view. This idea that some of it is self perpetuated and self inflicted from those that were early adopters to their credit. But then you get taunts if you possibly challenge of H O D L hold on for dear life or ngmi not going to make it. This just adds to the us versus them and I don't think that whole dialogue is helpful. Let's just have a grown up conversation about what this stuff is and how do you position it in a portfolio. So I appreciate that assessment.
- [88:26]
E
Well John, it's not necessarily the early adopters and the coinbase folks actually credit them for this characterization. Greg's colleague Brian Foster in particular, I don't know if Brian created it, probably he did, but this idea of there being two layers in the bitcoin market, which is the top layer, which is a lot of hot money, speculative, often trading with leverage, high volume trading, they treat this and trade this like a risk asset and they move it up and down along with equity and tech bets that they are also trading. Those aren't necessarily brand new to the market, but they're not the OGs. Then there's the lower layer which is a much larger layer, but it trades much less and they take a much more long term buy and hold fundamental view. And they're often buying these dips because they're saying this is irrational market dislocation. Whatever is troubling equity markets actually is probably a benefit to bitcoin in the long term and they scoop it up. But that mechanism takes a little bit longer to activate. So on any given day or week it can look a certain way, look more risk on as that first layer is predominant and then ultimately the second layer takes over in the long run.
- [89:32]
Aaron Filbeck
I see. Very fair. So Greg, it's clearly a lowercase risky asset. I think we all agree with that. Whether it's a uppercase risk on asset is I think where this debate and identity case comes from. But in any case, even if you've got a lowercase risky asset, diversification is the oldest pillar in the book. And it seems to me that oddly with a security and a asset class, if we can call it that, yet of risky assets, we have actually gone the opposite way, at least in the concentration of the innovation. So we saw these milestone moments last January that Robbie already alluded to of Bitcoin spot ETFs. Finally we got eth. A few months later, it still seems like these are pretty concentrated bets. Despite these having been important innovations, the fundraising has been strong and most of it has gone to Bitcoin ETFs. So what are you thinking from a coinbase perspective and then just broadly, what are you hearing about perhaps product innovation and instruments that maybe would allow access exposure across a wider array of coins, or even picks and shovels and coins to our earlier discussion?
- [90:35]
D
I love that question. Thank you. There's a lot of things, and I would say that there are quite a few funds that would be in the quant community who are interested in this as an asset class, broadly, not specifically any given asset. But looking at the development of this whole, not been able to engage for a handful of reasons, and those reasons have been lack of clarity. I don't want to expose myself to regulatory risk. I don't know whether that thing's a commodity or security. Secondly, for those managing client funds, the need to comply with the custody rule and a whole host of things just operationally, it's been difficult. And then lastly, the inability to have an experience, if you're accustomed to a prime brokerage experience at a bank that would look and feel similar with respect to if I wanted to express a long, short portfolio, how I would do it, the operational elements of how that would all work. And I think that community is really important to, as it did in almost every other asset class, bringing order to this universe of tradable tokens. But I think with the confluence of a few things, clarity soon, number one. Number two, you asked about our roadmap. Our roadmap has been trying to bring all of those things together in a way that's compliant with the custody rule. So you can do all of those things while being in a qualified custodian at all times. Happy to go a click deeper if that's not clear. And then having that married with an experience from a long, short perspective, that looks like portfolio margin like you might get. Here's how I locate the things I want to borrow. Here are the rates for them and all of those things. And I think the entrance of that community, which I really think is on the cusp of happening, begins to broaden the universe of things that are traded. It begins to impact correlation. It begins to impact a lot of things, much in the same way that that quant equities made the asset class more efficient. Heightened bid asks it did a lot of things that were very, very, very positive. That has yet to happen. I would say there's a lot of firms that would be more in the proprietary trading group category or trading money, but not really large customer driven, customer oriented quant hedge funds. I think this will be a year where we'll see that a lot. Outside of that, specifically on the product roadmap. We're investing a lot, as I said, in derivatives, bringing that world to 24 7, which will be the first time that in the world of futures you can trade around the clock seven days a week. Investing in an on chain experience. So your ability to trade in dexes for coins that don't trade on centralized exchanges, but again, in a permissioned way. I'm also quite excited about, especially in this new environment, the world of tokenization. Now that we are starting to see some clarity and the ability to mobilize and bring some of the assets on chain and I think that will also bring some new constituents as well.
- [93:13]
Aaron Filbeck
How about on the blackrock side, Robby? I saw a headline that Franklin Templeton had done a multi coin etf. At least that was the only one I had seen. But I assume that you've got some innovation and a roadmap in your site as well going forward.
- [93:26]
E
Yeah, we're certainly constantly thinking about that. Obviously a big part of it is the temperature we're taking from our clients in terms of where they're focused, what sort of solutions they're looking for that don't exist in the market today. I think that people who might assume that we do bitcoin first, would it e second. And now there'll be a bunch of others that we do in due time. I don't think that's necessarily bright. Bitcoin's in a category of its own, ETH is in a category of its own. And then as you start to move down the table, things are just at a different scale in terms of at least market cap and liquidity today and maturity of investment thesis, et cetera. So that's constantly changing, obviously, and we evaluate that and we evaluate in the context of the regulatory environment and where our clients are and that's going to inform what may come next.
- [94:13]
John Bowman
I want to pivot a little bit to regulation and obviously some things have changed over the past couple months on the regulatory front. But. But Greg Coinbase's CEO Brian Armstrong wrote an editorial a couple years ago in the Wall Street Journal arguing for a Separate regulatory framework for crypto. And if you haven't read it to our listeners, Brian argued for a couple of things, but it all came down to the idea of introducing a new framework with some clear goals and importantly doing so under a single federal regulator instead of across some of the agencies that have all been dividing this up to some degree. Now we've clearly had an election since then which will undoubtedly impact some future policy. But be curious if this is still your view and if not, what is the ideal regulatory solution today?
- [94:58]
D
Yeah, that's a good question. As you know, we've been arguing for quite some time that we need federal level regulations to replace the state by state money transmission regime as it's called today. That's in place. And it goes without saying that at the federal level, if you were to start the regulatory landscape over again in the US it might be best not to have two completely different agencies to divide up the commodities and security side of things. And our proposal at the time three years ago was really a good way to start the conversation of if you were to do digital assets from the beginning, from first principles, how would you do it? But given where we are, what is most important from a first principles perspective as we're crafting regulation and thinking about the contours of the future digital assets at market structures that any regulation, number one, really needs to clearly define a token taxonomy. What's a security? What's a commodity? What does consumptive use mean? How do we clearly define stablecoins? And fortunately I think the regulation that's coming attempts to do all of those things. Number two, we feel pretty strongly that the CFTC be granted spot market authority. We think their current approach to regulation and how they regulate the commodity markets most closely matches what we think the future digital asset commodity landscape will need. And so we've advocated for that. And again, I think that seems to be the direction of travel on the SEC side. Giving founders clear rules of the road for capital raising in the form of tokens and tokenomics. And how that works is critically important to bringing them back into the US and making the US the strongest it can be from a future capital raising perspective for digital assets, for establishing a clear stablecoin framework so that we can start to really see the space flourish in terms of use of stablecoins for payments. Protecting defi we think is really important and it was clear from the President's executive order that personal property rights and defi and self hosted wallets be protected. So we think that's critically important. And I guess the common denominator to all of these things is just bringing clarity to all parties involved so that they can safely build their businesses and do all that within the United States.
- [97:16]
Aaron Filbeck
Robbie, I'd love your views on this too from BlackRock, largest asset manager in the world, obviously as well. One of the things we said in the intro is I think we're in agreement from a Kaya perspective that as regulators always do, the pendulum swings a little bit too hard when there's been crisis and bankruptcies and wealth destruction. I mean that's what they're paid is to protect consumers. So in hindsight, yes, there was overreaction, too much enforcement, no consistent playbook that was relevant to Brian Armstrong's point in that editorial several years ago. But I think we all agree that yes, capital formation is important, but so is consumer and investor protection. So does blackrock have a house view? What are your views about what are the tenets of how we move forward in this new administration on balancing those key goals of the sec?
- [98:02]
E
Well, I think it's important to note that, and this has come up a couple times with clients where they've said, well, it's great that you've got a more enthusiastic regulatory and political environment now, but the removal of regulation is scary to us. And it's important to remember that what's happening now is not about the removal of regulation. Up till now the US hasn't had any. So there's been enforcement actions where the SEC has deemed it necessary based on applying a legacy rule set to this new area where it typically doesn't apply particularly well, but not a actual regulatory oversight or framework of a significant kind. And so what we're going to see now actually is more regulation. And I think there may be some surprises where people who maybe thought that what this whole new regime meant was everything goes, I think they're going to be disappointed because there'll be some things that come out of this that actually restrict certain types of activities, particularly ones that would have posed excessive risks to investors, that those will actually now be within a regulatory framework and not allowed.
- [99:13]
D
I completely agree with that. I think moving from for those not aware the state by state money transmission licenses to a federal level, whether you think about the broker dealer framework or the FCM framework, either of those two frameworks, either one that you start with, and we'll have both applying to digital assets have an entirely different level of protections and all those things which we're advocating for. But I think, Robbie, you're 100% right that some of the things that come along with that may be a surprise to some, but we think along with that and within that framework that the ability now to try some innovative things while sticking to the first principles of customer protection and safekeeping and safeguarding of assets and so forth, based on early conversations, I think is quite exciting. I think that means that a lot of the inefficiencies that exist that actually are a drag on returns in a lot of ways that at the end of the day these things all bake into the cake and inert to the benefit of the end user are quite possible. And so I'm really excited about the realm of what's around the corner. Again, subject to all of the things you said, I think it's possible to do both at the same time.
- [100:21]
John Bowman
Yeah, I love the framing. There's an FT article that talks about the shift from regulation by enforcement to some true guidance. So Robby, I love that framing of there isn't anything at the moment so that will make some people happy and others may be surprised at the end of the day. So Greg, I want to turn to you for a second. Just talk about the US versus what we're seeing outside the US in that adoption seems to be happening in other places like the Middle east, parts of Asia. I remember talking to Marcel in preparation for this episode. He had a very nice tan out there in the Middle East. So as you've looked globally and been active in some of these markets, is there activity foreshadowing things that we can look at overseas that are yet to come for the US in terms of broader adoption, things we should be looking for in terms of adoption?
- [101:10]
D
Yeah, it's a great question. So we've spent a good deal of time with global regulators, in Marcel's case with the ADGM and Abu Dhabi with the Bermudian regulators, the bma and really trying to engage in jurisdictions where people are serious about investor protection and first principles about asset segregation and all the things that come along with a strong framework, but at the same time thinking innovatively about how will defi fit into that, how do self hosted wallets fit into that, what's the right regime for peer to peer trading and experimenting. And so quite frankly many of those, and those two in particular have been well ahead of the us. Europe is catching up with the implementation of MICA and other places around the globe, but we've been working most closely with those that are a little bit more forward thinking. And I think in many ways the US could learn a lot by looking at some of those jurisdictions and what's been learned as it's catching up and building its own frameworks. We're not reinventing the wheel with respect to the treatment of DEFI and those regimes and all those things. And so we've learned a lot through that. But we now think a lot of attention will turn to the US Particularly as we're implementing the market structure legislation and the stablecoin legislation. But those have been really important informative relationships for us.
- [102:23]
Aaron Filbeck
Well, as you said, Greg, and as you articulated, Robby too, I think there was just discomfort and headwinds and concern about whether you could build or form or create a new business that took part in any avenue or waypoint on this value chain because you didn't know what might be coming and you weren't clear about what the rules and, and degrees of freedom were. So I think for listeners, the really important thing to hear, despite maybe some of the demonization soundbites that come from some of the haters once in a while, is that the serious players that really want to see this succeed and like Robby articulated, be part of a diversified, serious, long term institutional portfolio, folks like coinbase, folks like BlackRock, folks like our friends at Bitwise, they are more incentivized than anybody to see a serious regulatory regime put in place to protect against the shenanigans and the malfeasance that you see in any early adopting new technology revolution. And I think that's just an important thing to remember, I think, for listeners and partakers in this system. And I'm glad to hear you guys parroting so strongly and articulately protection of the consumer and the investor narrative, which is just as important as regulatory clarity. So listen, Greg and Robbie, it's been an absolute pleasure to talk through some of these assumptions and history a bit more with those that have been on the ground and actually at the captain's wheel in many ways of what we've seen in the last few years. We wish you the best of luck and we know that we're in a better place with crypto adoption and crypto protection when we've got the two of you taking part. So thanks again for joining Capital Decanted and listeners. Stay tuned for the Last Sip. Well, welcome back, decanters, to the Last Sip. Fantastic episode. Greg and Robbie, I think really, really helped me fill in the gaps. And like I said, in many, many ways we're very balanced and refreshing and objective of where we stand. In the greatest of ironies, they might have made our decision around whether We've arrived in the golden age that we posed at the beginning of the episode. A little bit more challenging. They didn't come out of the gates, which I kind of expected. If it's Coinbase or BlackRock touting that, yes, the time has come. But I don't think you saw that. These are experienced financial professionals, experienced investment professionals and very reputable organizations. And I was really pleased with just how that conversation went. So, Aaron, what was maybe the big revelation or takeaway you had?
- [104:45]
John Bowman
I think the whole conversation with both of them on regulation was probably my biggest takeaway. I guess I knew it. But to hear them articulate the fact that there isn't regulation currently and so we're moving into an environment where there's going to be more. It's a different way of thinking about it. I guess. When you think about this current administration in the US you think of deregulation and all bets are off, but really it's all about guidance and actually putting some parameters in place. So that was just very interesting to me. How about you?
- [105:13]
Aaron Filbeck
I think to Brian Armstrong's credit at Coinbase, he has been unwavering in his suggestion that regulation is good. Not too much, but the right amount of regulation is good. And right now the wild west of confusion leads to crime and paralysis. And I applaud him. That is moving forward. And given that very few exchanges have survived, they seem to have followed the right path even without the guardrails. So they should benefit from it on building a set of values in exchange that encapsulates where this should go. So well done to them. I think perhaps outside of the regulatory element that you've just described, I really liked Robby's point on the self inflicted nature of some of the challenge of labeling this. You and I spent a lot of time in the intro and I've been particularly, I think, hard on the crypto lobby, the crypto ecosystem, in needing to clarify what this really is and how it fits. And again, I think what you're seeing is those that are truly going to bring this from anecdotal and retail to serious and institutional are just as concerned, if not more motivated to get this story straight about what it is and how it fits. And this is why I alluded to the fact when you get this mockery of this OG or Boomer, oh, you don't get it. We got to move on. You're asking questions. That's not allowed here. That doesn't help. This isn't an us versus them. It's a discovery process. It's an understanding process. And if you want to play at the adult table per se, at a blackrock or at Franklin Templeton or at a Galaxy, now, given that they're one of the major fidelity, you have to be able to answer these questions without getting defensive or without about name calling or mockery. And so I think that was really interesting. This is not about return seeking risk on, I think is what he said. This is, at least in its essence, is truly a diversifying, idiosyncratic asset class. That's what's appealing to me. As I said in the intro, academically at least. I just want to see it actually behave that way before I'm going to allocate a few percent of my, let's just say 401k or my retirement assets to it. So I think we've still got a ways to go. But I really like the way that he challenged. He looked in the mirror of the larger crypto space and said, we've got to change the way we talk about this if we want the sophisticated investors, the smart money to come in.
- [107:31]
John Bowman
I like that commentary as well. And you can't expect broad adoption if it's a clubby atmosphere that's dominated by this niche group of people. And I think you're seeing that and you probably see more and more of it as the boom bust cycles go. I feel like every time we've had a big drawdown in this space, you see a little bit more institutional allocations move in and more and more of the clubby type of people move out. And so it'll be interesting how many more boom busts need to take place for that to happen. And maybe sprinkle some regulation on top of that and we'll see where we go. But I completely agree.
- [108:03]
Aaron Filbeck
Well, to be fair, while the correlation is rising, the boom busts are getting slightly narrower. These are higher lows and continuing to move within a range. So you can actually start to see a trend line here rather than a EKG machine. That looks pretty scary. So the personal question listeners that Aaron and I agreed on is superpower. What is the superpower that you wish you had, and if you had it, how would you use it?
- [108:29]
John Bowman
Well, I think it's probably tied between two. Teleportation would be awesome. Just the ability to not have to spend so much time in transit. Especially John, I'm sure you can relate to this. Being on the road or on a plane can take up quite a bit of time. So I would use it for those purposes. Also, you could work anywhere in the world, which would be pretty cool. So that'd be number one. And then of course, I'd love to read minds. That'd be awesome too. How about you?
- [108:52]
Aaron Filbeck
Yeah, that'd be dangerous, though. I don't know if you've ever seen About Time, one of my favorite movies, one of the most underrated movies ever. But this ability to go back in time and in the movie, not to blow the complete plot, but in the movie it was used more as a mulligan to do things over. And by the way, Aaron, that would be very good. The foot in the mouth moments with your spouse or your kids, which still haunt me over the years, that would be nice to rewrite. But I think the broader super power is slightly adjacent to that, which is just the ability to create time and move between time and space a little bit. And this has never been more acute than the last 10 weeks since I entered the CEO space. And you know what you're getting into cognitively. You know that there's a few more responsibilities here that you're going to have to sacrifice things that you used to do here. And you look at the portfolio on paper and again can think through what adjustments you're going to make. But until you're sitting in that seat, and maybe I'm only speaking for myself, but at least other mentors have shared this is not completely foreign. Time goes away. And time's a finite period, obviously. And so finding time to do all these things while still the more important things of husbanding and parenting and downtime and mental health and workout is increasingly challenging. So I think it's finding ways to bend the arc of time a bit. Bit. So somewhat of a silly conversation, but hey, we can dream even here on Capital Decanted.
- [110:14]
John Bowman
I love it.
- [110:15]
Aaron Filbeck
So if you could work on helping me there. In the meantime, decanters. Thanks for listening. I hope we've given you enough. We always drop these on a Tuesday. So now you've got a month before the next episode to think through. Given all this recipe and raw materials and anecdotes and opinions, have we entered the golden age? Will we look back on January of 24? Do we have the starting point wrong? The gun could be going off, perhaps when the regulatory scheme comes in, which I think will be in very short order from the time of this recording. So all that to say is I'm not sure Aaron and I have a specific answer. In some ways, that's not what Capital Decanted is for. We're here to equip you and try to position and frame both sides with as much respect and credibility as possible. So hope that was a fun ride for you. It was certainly for me and Aaron. And thanks for joining us as always. And we'll see. See you on the next episode of Capital.