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- [00:00]
A
Michael, welcome to the Network State Podcast. We're going to do a special episode today where we go through Michael Saylor's new roadmap and digital assets framework. Michael, welcome.
- [00:12]
B
Yeah, thanks for having me. Really happy to be here.
- [00:15]
A
Awesome. Okay, great. So you just published this digital assets framework, the Principles and opportunity for the U.S. right. It's a PDF. It's gotten more than half a million views. Maybe you can talk through it. Say you know what you were thinking about when you're writing this and what the goal is. Sure.
- [00:32]
B
So, first of all, for the past four years, I've been watching the crypto debate go on in the United States and everywhere else in the world. And I think a lot of times everybody's yelling and there's a lot of talking past each other and there's a lot of friction. And it seems to me that if our goal is to move forward in a constructive, progressive fashion, we benefit from a framework. I put together a digital assets framework along with a set of principles, and I try to talk a bit about the ideology, what's the vision, and what's the opportunity. I did it from the United States point of view because I think the United States really needs to lead in the digital assets arena. And if they do, I think it's quite likely that'll provide the air cover that will allow similar digital assets frameworks in the Middle east and Singapore, in Japan, in Europe, etc. In South America. So let's look at the different steps. I've got a taxonomy, a taxonomy of different assets. We talk about how we legitimize these assets and then what are the practices we need in order to make. How do we make this practical? And then the fourth section is on the vision, and the fifth section is really the opportunity for the United States.
- [01:59]
A
So why don't we start with the. Yeah, exactly, the taxonomy. Right. So you have six definitions there. Most of them I think people have heard. Why don't you go through them? Commodity security, currency token, NFT and abt. I hadn't heard the last term in that acronym, the Asset Backed Token, but go ahead.
- [02:16]
B
So there's a lot of types of digital assets. A digital commodity is an asset without an issuer backed by digital power. A digital security is an asset with an issuer and it's backed by a security. The third, a digital currency. It's an asset with an issuer, but it's backed by a fiat currency. A digital token would be a fungible asset with an issuer. Then you've got digital NFTs it's a non fungible asset with an issuer offering digital utility. But the difference is you could have 10 million fungible tokens and we get that. But if you have a hundred different NFTs and they give you 100 distinct rights, then it's something different than the token. Now the Last1, digital ABT asset backed token. A digital asset with an issuer but backed by a physical asset backed by a bar of gold backed by a barrel of oil. So that's the taxonomy. They're all tokenized assets and we're talking about tokenizing the capital markets. And each one of these is a different form of property.
- [03:21]
A
I actually like this because it carves it at the joints pretty well. Let me go through and you see, tell me if I'm playing this back correctly according to your definitions. Right. So again, digital commodity, that would be bitcoin. That may be the only. In your view, do you think that's the only digital asset without an issuer?
- [03:39]
B
I won't say that. I won't go that far. I will say it's a very high hurdle to issue a digital asset without an issuer. It's very hard, right? It can be done. I could imagine other digital commodities, for example. You could, I mean, China could take Bitcoin, fork bitcoin, create China Coin, and they could say China Coin is like Bitcoin, but it has special tax privileges in China. And it's only interesting to the Chinese people and 1.5 billion people. Maybe something as simple as you're allowed to mine China Coin in China with Chinese power and you're not allowed to mine bitcoin. You would have if everything else was the same. If there was no issuer, you would have in theory, a digital commodity. Maybe it's not global property, maybe it's China property. But the point is, the real key is if you want to create a commodity, you need to create a network, disclaim beneficial ownership. And you can't point to anybody that has control of the destiny of the network or has some major beneficial ownership of it if you're going to achieve commodity status.
- [04:53]
A
Interesting. Okay, great. So, so let's say for now at least, digital commodity is sui generis, that's bitcoin. And then for your other things, all the other five categories have an issuer. So an example of a digital security would be we would actually legalize crypto equities or crypto debt, crypto derivatives, for example, Uber in theory could now put its assets on chain and you know, in another world, Uber could have given assets, you know, in its, in its company to its driver so that they grew with the, with the organization.
- [05:26]
B
Can I offer just simpler one which is.
- [05:28]
A
Yeah, go ahead.
- [05:29]
B
Just MicroStrategy stock, if it was trading on Coinbase or Binance, 24 7, 365 would be a digital security, right? Apple. Apple could be, you know, AAPL could be a digital security. Now, I'm not saying it would only trade on Binance or Coinbase. It could trade on a, it could trade on any, you know, layer two or any tokenized network to speak of. But the point is it would be one share, a token that represents a share of Microsoft stock or Apple stock. It's backed by the stock, but it's tokenized. Trading in the, in the crypto world.
- [06:08]
A
Yes. And also I think one of the things we had been talking about offline was you could imagine a site that allowed mom and pop restaurants or you know, like small real estate operations to raise equity or debt once crypto equity was legalized. And you could have people from around the world do it. Obviously you need lockups, you need, you know, various provisions for alignment, but conceptually you could actually get a cryptographic stock certificate. You could see all the provisions of it. The blockchain would enforce timestamps, all that kind of stuff. Right. If I'm not mistaken, if you had.
- [06:43]
B
Just, just equity in a private company, equity in a million dollar restaurant, equity in a $10 million hotel, any kind of private equity, venture capital equity, any partnership interest, any claim on future cash flows, Maybe you own 1/100th share of my Airbnb business. Right. Any of those look like small private securities, but if you had digital Assets Framework, maybe you would publish, publish the relevant disclosures, sign up to the relevant obligations, and you would put those on a digital exchange and they trade 24 7, 365 globally.
- [07:24]
A
To me, this is so obviously what should happen because let's say you've got a hotel in, I don't know, Australia or you know, an inn in Brazil or something like that. They can put up a website, they can advertise for customers around the world and in fact they can process credit cards from around the world. You've got a motel in the Midwest and they're already processing cards, they've already got a website that anybody in the world can access. What they can't do is capital formation, which is an obvious thing to do on chain. And of course you need all kinds of procedures and so on for this. But that's solvable, right? Would you agree with that?
- [07:58]
B
I do agree with that. I think that the existing capital markets, they require you to take four years and $40 million in order to create equity, which trades with a four letter ticker. And that's the 20th century, why we did it. But what if we could do it in four hours for 40 bucks? And I think there's another argument, which is, you know, Maybe in the 20th century most businesses were municipal based or state based, or nation based. There's a lot of international podcasters. I could have, you know, I could have an international chess podcast with 800,000 fans spread across every country on earth, and it would be very easy for me to appeal to the fans to raise capital. What if I wanted to sell half the interest in my podcast to them? They would want to buy it, I would want to sell it. But right now there isn't really a straightforward path to legit, a practical path for me to do that in a legitimate fashion. And so if I use the 20th century techniques, I'm at a huge disadvantage and I won't be able to raise money. And so we're really crippling the 21st century global economy with 20th century rules for capital formation.
- [09:22]
A
Absolutely. And that actually brings me to the next definition, the digital currency. Right? So by your definition, which is what we call maybe a stablecoin, right, an asset with an issuer backed by fiat currency. So example, usdc, or if you put some other fiat currency on chain, the USDT might be that. But USDC would be the clear version of this where you have an on chain usdc, you have an off chain USD in a bank account. And if you combine that with the digital security, you could, taking your chess example, raise USDC from people around the world. All those payments would be tracked on chain. And actually you could potentially click a button and, and do your accounting. And if those people had whatever, you know, profile information, you could automatically send them stock certificates. It'd be the equivalent of what Excel was. You know, people used to do accounting by hand, as you may remember, with, you know, piece of paper, before spreadsheets came. I think corporate accounting is kind of like that now. But you could in theory have all the transactions on chain hit a button and it would just prepare your books for you. At least, you know, you decide which pieces of that to have. But if you have both digital currency and digital security, you could automate a ton of compliance work. Let me know your thoughts.
- [10:33]
B
I think you've got. I agree, what we're talking about is tokenizing a fiat Currency or tokenizing a checking account. So I mean, the trick to this is there's no question everybody in the world wants digital dollars. And there's no question that if I live in China or if I live in Europe and I have to pay in Euros or cny, I want tokenized local currency in those two frames, reference as well. Just like in Brazil, you might want tokenized real. So why do you want it? Well, you want it to be programmable, you want to move it at the speed of light, you want to vibrate it a million times a second. You want 8 billion AIs to be able to trade with each other 97,000 times an hour. You know, it's like the utility is obvious. The challenges are you need the nation state that issues the fiat currency to recognize it as legitimate. And then you need to overcome the privacy and the money transfer issues which pop up from place to place. I think we make huge progress simply by distinguishing the difference between digital currency, which is really circle or tether, versus digital commodities, which is bitcoin, versus digital securities, which is your tokenized Apple share, versus a digital token, which might be any number of crypto tokens with an issuer that are, you know, that have functionality in cyberspace or digital utility, but they're not securities and they're not currencies and they're not commodities. And the entire cryptocurrency industry has been saddled by this one name currency. And all four of those things I just mentioned are sometimes referred to as a cryptocurrency. And the result is you just get massive pushback and fear and uncertainty and doubt. And we need to break them into four different categories so that people understand they're four different things for four different purposes.
- [12:48]
A
I like this a lot. And so an example of the fourth, that'd be what most people think of when they think of crypto as opposed to Bitcoin. So that's Ethereum, Solana, zcash, Monero, something that, you know, a fungible asset that offers digital utility that's in a portfolio and then something like a digital NFT, a non fungible asset with an issuer. Now NFTs are actually kind of interesting because historically people have thought of them as, you know, a really expensive piece of digital art, like a million dollars for an NFT. But now you can issue a million NFTs for a dollar. So you can issue like the equivalent of likes or Reddit style upvotes. You can issue those on chain as little markers of things. You can issue a ticket For a conference, either online or offline, you can use NFTs to open digital locks. So NFTs I think are pretty interesting. If a smart contract is on chain code, NFTs are on chain data. And I'm glad that you have a distinction between the fungible and non fungible here at the digital token and digital NFT. Any thoughts on. Because NFTs are on Bitcoin. Bitcoin too, as well.
- [13:54]
B
Yeah, I think if you just characterize them as digital art, you're kind of underselling them. I think we got to think of them as a unique digital. Right. And yeah, I think about other types of rights, like maybe I'm Tom Brady and I post on some channel like on X, and I'm going to actually sell 10 superfan tokens and numbers 1 through 10 actually get ranked and their responses underneath me. And if you always want to be the number one respondent, you buy NFT Brady 1. And if you want to be number two, you're Brady 2. And if you're number 10, you're Brady 10. And if you owned Brady tokens 1 through 10, maybe that guarantees you for all of eternity you'll always be one of the top 10 responses in that order. And. And there might be some super fan who's willing to pay $100,000 to make sure that their comment is always number one. You know, underneath Brady, it's like it's a special. Right? Maybe it's a, it's a, it's a key to unlock something. You know, maybe it's, maybe it is a piece of art. But I think I get, you know, this is not quite true. I'm going to give you a physical analysis and abt if I said to you this is a token that represents one acre out of a million acres in Kansas and they all look the same. Right. That's a fungible token. But if I said this is two acres, you know, in Palm beach, on the beach next to the country club, right. When you get to the point where it's a specific piece of real estate, and now we think about specific real estate in cyberspace, I can create real estate in cyberspace, right. With proximity and priority. So if you start to create things that have some kind of priority or proximity or providence or some uniqueness, maybe there's something there that's interesting. And of course, the idea of the framework is let's just give people the asset classes and let create a Cambrian explosion of innovation of which 99% probably won't be economically successful. But on the other hand, the 1% might be the Instagrams, the metas, the Teslas of the world, and that'll be worth all of the other trouble.
- [16:36]
A
Absolutely. And I think actually, you know, one thing I would just say on that is I think of there being a spectrum of fungibility. For example, you could have a one of one like a digital Mona Lisa. You could have. Right. You take your Miami example, you've got maybe 10 acres of land and each acre is its own NFT plot. So that's like, you know, a 10 of 10. And then you could get all the way, for example, to for example, IP address space. As you may be aware, you've got 4 billion unique IPv4 addresses. And in theory, each of those could be tradable as an individual nft. And that would be finite, that'd be capped, there'd be a logic to it, but it'd be sort of, once you start to get to that point, they are non fungible, you can't actually exchange one of each other, but the pricing on one might be similar to the pricing of another. And so then you get all the way to like a fully fungible token. So I think there's being an interesting continuum here. I don't know if you have any thoughts on that, then we can go to abt.
- [17:35]
B
Yeah, it's just obviously a million thoughts spark up and we probably don't want to go down this rabbit hole, but I just think about all the domains. When you think about owning a domain, like I bought frank.com and emma.com and hope.com and angel.hope.com, great one.
- [17:52]
A
Yes.
- [17:53]
B
Yeah, like. Well, I don't know if they're actually physical assets or intellectual property assets, but you might very well attach an NFT to all sorts of interesting unique things in cyberspace and then they start to trade with the price and they can be transferred at high speed. Right. It's just a license, love.
- [18:18]
A
Okay, great. Abt. So this is essentially something which is like gold or silver or oil. It's interesting. It's useful to distinguish that from a digital commodity because when you use the term digital commodity, you mean an intrinsically digital commodity, namely Bitcoin, and perhaps uniquely Bitcoin, at least at this point, as opposed to a digital abt, which is often a commodity like gold or silver or oil that is traded on chain. And so it's a commodity, but it's basically traded on chain as opposed to being intrinsically digital. Would you agree with that?
- [18:58]
B
Yeah. The distinction is a digital Commodity is an asset without an issuer. And in order to create an asset with an issuer, you're going to have to back it with some kind of digital power. Whereas a digital ABT is a tokenized physical commodity. And that means at the end of the day, you're going to have a warehouse with 100,000, you know, little gold coins or a hundred thousand barrels of oil or a hundred thousand bushels of soybean. And that means there's going to be a custodian, there's going to be an issuer, a repping to this custodian getting audited. And now you're going to tokenize whatever that is. And you're going to tokenize it so that people can move it at the speed of light, so you can slice it, so you can fractionalize it, so you can finance it, so you get liquidity on it, so you get transparency on, so you can program it.
- [19:56]
A
Amazing. So, okay, great. You know, in math, one of my old professors used to say, you can define your way out of a problem, and if you have the right definitions, lots of things follow, like abstract algebra. The group, the ring, the field. And then you can kind of just go downstream from that. So with these definitions, why don't we go to section two? Legitimacy. So like rights and responsibilities. Right. So you want to go through this, the pathogen. See issuers, exchanges, owners. Go ahead.
- [20:25]
B
Yeah. I mean, I think this all boils down to there's three general types of actors. There are issuers, people that issue digital assets. There are exchanges, anyone that trades, custodies, and then there are owners, people that own the digital assets. Everybody needs a set of rights that are clear. And then there's a set of responsibilities. If we do it right, you could, in theory, have millions and millions of issuers, and, and you could have a lot of owners. And then I don't know why there couldn't be 100,000 exchanges dealing with millions and millions, if not tens or hundreds of millions of issuers dealing with billions of owners. What are we trying to do? We're trying to create a global, real time, uninterrupted process to issue, trade and own digital assets. So. So, you know, it's funny. Yeah, go ahead.
- [21:16]
A
I was gonna say I was, I was very closely involved with this at Coinbase, because when I joined a CTO at the time, Coinbase only had four assets, which are Bitcoin, Bitcoin, Cash, Litecoin, and Ethereum. And an important paradigm shift was for us to internally realize that asset issuers were Also a kind of customer. And, and taking your three definitions, you can think of it as a two sided market where you have millions and millions of owners and a few thousand issuers or a much smaller number of issuers on this side. In the middle is the exchange. Much like let's say the New York Stock Exchange has whatever 100 stock issuers on one side and millions of traders on the other side. So it's like a two sided marketplace with these three actors and then realizing that the issuer is a customer. Sort of like Airbnb has guests and hosts or, or Uber has riders and drivers. An exchange has in your, you know, framework owners or buyers and issuers or sellers. And the issuer is like a special kind of customer. And of course an issuer in one context could be a buyer in another context. And you know, often market participants are both buyer and seller in different contexts. And I think that just having, you know, some routines and some conventions, you know, with venture capital, one of the things I learned over the years is that every term that we had in a deal was actually something that came from some train crash in the past 20 or 30 or 40 years ago. Like for example, you know, four year vesting or lockups or co sale rights. All that kind of stuff is meant to align, you know, you know, dozens, sometimes hundreds or thousands of people towards the same economic goal where one party can't just dump on the other party or what have you. All the low trust stuff that happens in certain parts of crypto markets, there are actually solutions for it. If you actually have a organized two sided marketplace of buyers and sellers, of owners and issuers.
- [23:21]
B
The challenge here is to let all three of these players operate in real time, uninterrupted, globally. But they need to be able to issue, trade or own those assets. And you need to see transactions between individuals, corporations and machines. So how do you actually create an API or a framework such that the machines can trade a million times an hour with each other and they're all working for exchanges or representing exchanges and they're all representing issuers or individuals. So you want a high speed, low friction market. I mean, I think about, you know, where would we be in the world if it cost $40 million? Set up a website or. It used to be, if we think about computing, all the computing was centralized to IBM mainframes in the back office, or it used to be with publishing. You know, first it was just the New York Times and the Washington Post and the Wall Street Journal. And then all of a sudden people could set up their own website. But then you got those blog services where I mean 80 million people or 120 million people could kind of use some software as a service, blogging service. And it all comes down to structuring this the right way. So if you look at the next few paragraphs, right, what we're talking about is issuers should have a right to create and issue digital assets. And the obvious responsibility is fair disclosure and then ethical behavior. The exchanges should have a right to custody, trade and transfer assets between their clients and between the other exchanges. And the responsibility is publish the asset disclosures, protect their client assets, and then avoid conflicts of interest. And then for owners, owners want the right to self custody, trade and transfer their assets. So it's, you know, you're back to the, not your keys, not your coins, but it's not so much an obligation to self custody, but a right to self custody and the right to trade, the right to transfer, that's important. And the responsibility, comply with the applicable local law, whatever that might be. And of course, what I think is the big idea here is create some foundation principles like nobody has the right to lie, cheat or steal. By the way, this is kind of obvious. I don't even know if you would have to say it, except for the fact that if you started from the observation that people don't have the right to lie, cheat and steal, there's probably 100,000 pages of regulations you wouldn't have to publish because most of them all boil down to that. And if you simply made those three observations and then you noted that participants are civilly and criminally liable for their actions, you might very well eliminate 100,000 pages of regulations, years and years of review, and somewhere in the range of $10 million a year of compliance costs with lawyers and all the back and forth that go into this process. So I think that that's a place to start.
- [26:53]
A
Well, the thing actually, it's funny, when I looked at this, I was like, wait a second, there's only three pages. But I like how you've set it up because you're right that by just articulating those sort of ten commandment like principles that actually does distill the, the intent, or at least the stated intent of so much regulation is all the disclosure stuff says you're not hiding something. It's not a material misrepresentation, AKA don't lie, right? Or you're, you know, for example, a disclosure of when an executive is going to sell what amount of stock, don't cheat Right, that kind of stuff. Right. So lots of specific things are sort of downstream implementations of these sort of very simple 10 commandment style moral directives.
- [27:42]
B
And yet it's back to this issue of it pops up in censorship. You know, the question is, do I have to hire 100 lawyers and file paperwork with the regulator for three years before I can publish my opinion on X? Or can I actually publish the thing that I wrote on X with an understanding that if I slandered someone, you know, if I lied, if I lied, I cheated, or I stole through my misrepresentation, I have civil liability. If I publish something that gets somebody else killed, maybe I'm going to get tagged for manslaughter. But we have examples in product development and in the media. It doesn't take $40 million to design a product and sell it to someone. But if you create a product that's unsafe and you sell it to them and it kills them, you do have civil liability that the thing you sold killed the person. Right. So there's a lot of industries that function with this set of observations, and those are industries where people can do things in one day or do something in one week. But at the point that you implement a nanny state and you take the position that no one's allowed to say or do anything until it's gone through progressive layers of sensors, what you really do is you choke off 99.999% of all innovation. Absolutely everything stops.
- [29:26]
A
It's the difference between, you know, pre market review versus post market review. Do you presume everybody's a criminal or do you allow people to transact and then make clear that criminals will be punished afterwards? And what criminal behavior actually is, it's not really, it shouldn't be a process violation, it should be a principal violation. You know, one other thing I wanted to say is that the, the concept of buyers and sellers being connected by an exchange as a two sided marketplace is so obvious. But there is actually one very unique aspect of crypto versus traditional stock markets. And maybe you have some thoughts on this. But traditional stock markets, like when a tech company files to go public, it's only choosing between Nicee and nasdaq, let's say at that time. And they do compete for the business and you know, what have you. But then after that it's not easy. I don't think it's actually, I, I'm not, I'm not aware of prominent examples, maybe it's possible, but to, to move the asset from one exchange to another, from NYSE to Nasdaq is not that easy number one. And then number two is there's no equivalent of send and receive. People can't like load their NICE shares on or their, let's say their FB shares onto nice, pull them out self custody, load them onto Nasdaq and trade there. It's not the equivalent that you have with Bitcoin. Now conversely, in offline markets, if you have, let's say a farmer has a bunch of apples, they can go and sell them at this supermarket or that supermarket, they have the send and receive equivalent, but they don't have the speed and the global aspect of the digital. So this kind of two sided marketplace combines the scale and speed of digital markets with the optionality of physical markets where you can withdraw from one market and go and sell another market. Let me know if you have any thoughts on that.
- [31:21]
B
Yeah, well, what we're talking about is conveying property rights to all of these 20th century assets that don't currently exist. For example, right? I have a bunch of Apple shares, but I can't take custody of them. The 20th century world is one or two settlement networks, one or two custodians, one or two exchanges. You have a very limited set of options and there isn't really a competitive market. So in a world where you had 1500 digital exchanges in every place in the world and they could all handle any of these assets. Sorry, you might, you might see someone that wanted to give you a credit line on your Apple stock or they wanted to give you a yield on it, or, you know, maybe your bank will give you an advance ratio of 50%, but there's a bank in Europe that'll give you advance ratio of 95%. Or they'll actually give you a mortgage where you can top up, you know, with tokenized, you know, barrels of oil or. Right, you could have competition if there was competition. But the problem is there isn't competition, that the owner of the asset doesn't have the right to transfer, to take custody, to transfer custody, to shop out the asset to the highest bidder. And maybe more to the point, what if I had an AI program and it had my entire portfolio of assets and every minute of the day while I'm sleeping, it's actually gathering a bid from 150,000 corporations all around the world, asking them for the highest bidder for me to loan out the assets or custody assets or whatever they want to do with them. And it's just in a fluid way moving my capital all around the world in order to get Me what I want within my risk parameters. That can happen in a tokenized world. But if Your asset is 100 acres of Kansas City real estate in the suburbs, there's like one bank in Kansas City that may or may not want to finance it. And if that bank is not interested, none of the other hundred thousand banks in the world are going to want to touch that asset.
- [33:51]
A
Yeah, and I think one thing that's interesting is scale enables the long tail. Scale is actually good for the small because if there's only 10 lenders, one of those lenders may not want to take a chance on some small business. But if there's 10,000, then one of them may actually want to take a chance on that small business. There's more risk tolerance if you have larger markets, you know, there's people who are willing to try out smaller things, you know, and it's kind of like, you know, with enough drivers, somebody will be able to pick you up at, you know, they will take the job of picking up from this street in this suburb and drive you into New York or what have you, right? So there's a sense in which the scale is actually very good for the little guy because it allows them finally to have access to the same capital markets that the big guys do, you.
- [34:43]
B
Know, And I get to that in my section 4 of the framework here on vision.
- [34:48]
A
So why don't we go. Why don't we go to section three and four? So three, practicality, right? Rational compliance to empower innovation. And so I think this is related to thou shall not lie, cheat or steal. You're really trying to bring it back to simple, short. Go back to the spirit of the law rather than the letter of the law. Why don't you talk about this?
- [35:09]
B
Well, the first principle is we want to prioritize efficiency and innovation over friction and bureaucracy. The existing system prioritizes friction and bureaucracy. Everything takes too long, too many lawyers, too much money. So how do you prioritize efficiency, innovation? Well, you start with simple principles like don't lie, cheat and steal. Then you define data structures for each asset class. You know, what, what are the common data structures? Right? This is, I mean, this is how you write a computer program, right? It's not that complicated. If, you know, if, for example, you want an abt, you want to know what kind of asset is it, where's the asset stored, you know, how do I know the assets there, how many of the assets are there, who's the counterparty, etc. And you would have a different data structure. For a currency versus a token versus an NFT versus a commodity. But once you define the data structures, every digital exchange in the world can support those data structures. And then you can create a client that publishes the data structures. You create all the audits. So that's standardized disclosure that reduces the friction. Instead of like 200 pages of custom legalese for every security, you've got one data structure. And you convert a three month process into a three hour, three minute or three second process. And the second idea is industry led compliance. If you define the data structures, then the exchanges can collect and publish the data as a service to the issuers, to the investors, to the other traders, et cetera. And that helps you get to the third element here, which is cap the cost. If you want it to be a real business, you can't afford to spend more than 100 basis points of the assets you issue in order to issue them. So if you're gonna, if you're gonna raise a hundred basis points, that's a.
- [37:20]
A
Lot by the way. 100 basis points for people, for people who don't know, like 1 basis point is 1/10,000th. So 100 basis points is like 1% of your asset. That's extremely expensive to go ahead.
- [37:33]
B
What I'm saying is if you wanted to raise 100 million, you definitely can't spend more than a million. Not 1%. Might be a big investment banker fee or a fee you might pay. I came public and when we came public, sometimes, you know, the fees were up to 6% for a small deal, 3% for a bigger deal. But you know, we might pay 1 or 2% for a big deal if we're doing a bond deal. But here's my point, the big point. It costs $10 million a year in order to stay public to be compliant. And you might spend 30 or 40 million dollars to get public. And so it's pretty obvious that if you want to raise a million bucks, you can't pay $40 million for an insurance policy. And you can't spend 10 million a year in order to raise a million dollars. Right. It's kind of like saying you gotta basically buy a 10 million dollar insurance policy to publish a website or express opinion on X. You know, it's, it's, or to post a video on YouTube. You gotta buy a 10 million dollar a year, you know, liability insurance policy.
- [38:41]
A
They were trying to push the world in this direction over the last few years. The establishment was, and fortunately they lost, but they were trying to do this.
- [38:49]
B
Yeah, I definitely can see it and here's the sad fact, Balaji, which is they did do it in 1933 for all publicly traded assets. They didn't lose. If you read the history of money and banking by Murray Rothbard, like something like 50 years ago in the last century he wrote about the formation of the modern SEC and he writes about the SEC 33 Act. And one thing that he points out, long before the crypto industry was formed, as he says, the SEC 33 and 40 acts, they were put in place to centralize control over the capital markets in Washington D.C. and limit access to the capital markets to a very small cartel of large issuers that could be overseen by the government. And he has another observation. He thinks it was the Rockefellers interest edging out the JP Morgan arrogant interest in shutting down too much entrepreneurialism in New York City. It was a D.C. it's funny you.
- [39:55]
A
Say that because I wanted, I wanted to put something on screen for a second which is exactly this. The SEC essentially was set up to limit self allocation. Right. To put allocation of a capital economy placed under federal control. A planning agency would assign capital industries and then apportion the allotted capital. Right. The need would decline. Right. So a federal planning agency, not the security would operate the process by which capital is allocated through the economy. So this was the whole point of the SEC was step one, control capital allocation in the economy itself.
- [40:33]
B
Right.
- [40:33]
A
And go ahead.
- [40:35]
B
Yeah, you think about it and yeah, I think there's a certain Stockholm syndrome or remember in the, in Star wars they say these are not the droids you're looking for. And there's this Jedi mind trick. It's like, you know, raising money from the capital markets is not for you. You're too small. That's not for me. I'm too small. That's only for billion dollar mega corporations. But you're not that. So raising money is not for me.
- [41:01]
A
And didn't used to be like that. It used to be that a small cap could, you know, could get out there. It's modern star boxes make it so expensive.
- [41:10]
B
Yeah, yeah. So it comes down to the issue of are you going to let adults take risks and lose their money? Right. Are you going to impose a $10 million insurance policy to keep someone from taking $100,000 risk? And if you do that, the result is that 99.9999% of the action can't take place because of the crippling regulatory burden. Because the government wants to keep anybody from taking a risk or losing their money or making an investment. That might not pay off. And it comes down to a free market view. Do you believe that free markets will make the right decision? Or do you want a centrally planned economy and do you think a set of bureaucrats at the headquarters should just decide every single business decision and every allocation of labor and capital, you know, and talent in the economy, so as to quote, unquote, not make a mistake?
- [42:12]
A
Well, take a look at this. So this is the peak number of listings was mid-90s. And then especially after Starbucks and so on, it basically just fell off a cliff to Almost, you know, 70% drop in the number of, you know, listed equities because the price went up so high. And I thought you're phrasing just now of $10 million insurance policy to prevent $100,000 loss by somebody is really good way of thinking about it where the insurance is so expensive. Basically people are only thinking about risk, they're not thinking about reward, and they're not properly calculating the cost of that risk. And the whole thing is just a pile of paperwork versus being rational about it.
- [42:50]
B
Yeah, I've lived through that, Balaji, because I came public in 98 and I think there were about 10,000 plus public companies. But over the next 20 years, 60% of them disappeared. And basically what happened was with Sarbanes Oxley and with the encroachment, the progressive encroachment of the regulators on the public markets, it just became so brutally painful and expensive and risky and anxiety inducing to be a public company. People just said, screw it, I don't want to do this anymore. And they all went private.
- [43:32]
A
And paradoxically, that led to the rise of the great tech companies because it meant that Zuck and others did not, could not for many years in tech, the. The wisdom was, don't go public, go public as late as possible. And the good thing about that is it meant that they controlled their companies all the way up. And so they could have voting control and they could make bold decisions and so on for the public. The bad part is that they actually missed out on the upside of that. With Bitcoin or with cryptocurrencies, they actually have an ability to get that upside. But for many of the giant tech stocks, most of the upside happened before the public markets. There's exceptions. The big exception being Nvidia or Apple, arguably. But still it's something where a lot of the upside was not available in the public markets because of that. Let me know your thoughts.
- [44:21]
B
Well, I think there's about 40 to 50,000 publicly traded companies in the world. There's 4,000 in the US but that really understates the problem. Because of the 4,000 in the US there's only about 400 or so that are well known, seasoned issuers. So that means there's 400 companies, maybe 600, that can file a registration statement and sell securities the next day or within a couple of days without waiting for approval from the SEC or from a regulator. On the other hand, there's 400 million businesses that can express an opinion or create a product or improve a product. So if you look at, if you look at the economy for products and services, it's evolving at a very rapid rate. But if you look at the economy in the capital markets and you look at the rate at which we can develop capital assets, they're crippled and evolving at a very slow rate. If I want to do something as simple as maybe I want to tokenize a Picasso painting, well, you own the painting, it's worth 10 million bucks, and you want to sell 100 shares of it, and you'd like to float that, you know, on an exchange. There's a global market for it, people would like to own it, but it would cost you $40 million to take a company public and 10 million a year. So you see, at some point it just, you can't capitalize. You can't legally practically tokenize an asset that isn't a billion dollar asset. So what we've done is we've just, we've capped the market such that if you're not running a billion dollar to trillion dollar enterprise, the capital markets don't work for you. Right? And the crypto economy, the crypto markets, they've tried to overcome that and they've issued millions and millions of crypto assets, but they haven't been legitimate. They've been deemed illegitimate. And that's why we've had the war on crypto. And so this framework would allow us to create legitimate digital assets. And the way you'll know it worked is you can actually tokenize a $10,000 asset. 100,000. A million dollars. 10 million. 100 million. 10 billion. It's like, it's hard to defend the status quo even because, yeah, there are examples of successful companies that are monsters, but they would have been successful despite regressive regulation. I would argue that Apple stock would be more valuable if it was tokenized and it could travel to any iPhone or any Android phone anywhere in the world on Saturday afternoon. People would find it to be better collateral than it is right now. There would be A lot of innovations. My point is it's not practical to issue an asset if it costs more than 10 basis points a year to stay compliant. And you can pull that number by looking at the ETF industry. And you'll see that any democratized asset issued by BlackRock or look at, like, SPY or others, when they get to more than 10 to 20 basis points, they get crippled. You can spend 10 basis points. 10 basis points means that over a decade, you give up 1% in order to stay compliant. But when you get to more than that, it means it's kind of a regulatory encroachment. It's so much friction, it's crippling you. If you want the industry to come to life, you need to take the regulators off the critical path of issuing assets. You can't file to tokenize your Picasso and wait for three months.
- [48:22]
A
Oh, my God.
- [48:23]
B
Right?
- [48:23]
A
Yeah, it's.
- [48:24]
B
It's.
- [48:24]
A
The thing about this is it's actually deadweight loss, right? Those delays make less money for actually the government, for the seller and for the buyer. They. They just. The whole concept of imposing cues and weights and delays for no reason is something that just costs everybody in the system money and doesn't gain anybody anything. Maybe.
- [48:47]
B
Obviously, and I'm the case, is worse than that. Balaji. It's like I said, three months. But the truth is, if you want to actually tokenize an asset legitimately in the United States, it would be three years of work. It's three years of work, 30 to 40 million dollars of accounting and lawyering, then it would be three months of filing the paperwork. Then it would be 10 million dollars a year to stay compliant. So. So if you think about everything else in our world, think about the entire innovation economy. If it took you three years to publish a webcast, if it took you three years to come up with a new idea, right? It just takes too long. And so. And the answer is, it's like, imagine if it took you three months to get permission to drive your car out of your driveway to go across the city, right? Or it took you three months to get permission to put food in your mouth or to breathe, right? It's just ridiculous. But that is the problem we have today. And the answer, of course, in an enlightened society is if you drive your car out of your driveway and you run over a bunch of school kids because you're speeding and drunk, you have criminal liability and civil liability for operating the vehicle in an unsafe fashion. So what we ought to do, and we do the same thing with like posting things. And we do the same thing in every part of our economy that works. We let people think for themselves and innovate and create and find a customer, and then they're civilly and criminally liable for their actions. And so here, what we need to do is just take the regulators off the critical path. We need to have a set of data structures, the industry will create a set of services. And then if you have 100 PACASOs and you want to tokenize all hundred of them, you take the photo, you post the certificate of ownership, you upload it, you publish it, you offer it to the public, the market forms. Maybe the IPO fails, maybe they succeed. Maybe, you know, maybe you, you know, you sell the thing and you're a cheating criminal, and then someone sues you and you go to jail because you committed criminal fraud. All that stuff just needs to happen right? In a rational fashion. It needs to happen a million times faster. So that's the idea of a practical framework to do this.
- [51:33]
A
The only thing I would just say about that is there, there is. It's. It's possible. One thing I think about is regulation is like binary classification. If you know the concept of a binary classifier, for example, your. For each security issuer, either they are good or bad, and then what, you detect them as being good or bad. So you could have a true positive, a false negative, a true negative, and a false negative. And so, you know, for example, you know, you're detecting good guys versus criminals in terms of issuers, or, you know, you're, you're. It's like similar to a molecular diagnostic. You're looking at someone who's, whether they've got a disease or don't have a disease. And then your readout, your test says, you know, positive or negative. And so you could have all four possibilities. True positive, false positive, true negative, false negative. And we actually start measuring the regulatory state by the speed and quality and cost by which it actually makes these classification decisions. And so you mentioned one variable, which is they should do it a lot faster. Another thing is we should have independent regulators. You know, for example, if you have regulators from different states or cities or countries and they have the same judgment about somebody, that's actually one thing versus if they have different judgments. It's sort of like, let's say there's a driver and, you know, they don't like their rating on air, on, on Uber, you know, they can actually go to Lyft instead, and maybe they just had a bad experience on Uber. For example, So I think that there's, there's something to that where you actually have some check and balance on the regulator itself, where you start looking at their history of correct classifications. Because the reason I say that is with the SEC over the last three, four years, they were not going after fdx. In fact, they were meeting with Sam Bankman Fried while they were attacking many of the legitimate projects in the space. And Ben Horowitz has talked about this, that it was almost like an intentional thing where they wanted the space to be littered with scams and frauds and go after legitimate projects so that this way it would just kind of corrupt the whole space and, you know, go ahead.
- [53:50]
B
Yeah, I'd say being charitable, it's, it's just hopeless for a government agency to, to do some of these things. But it's in the West. I would agree with you.
- [54:01]
A
Yes. That's why I think a lot of this is going to be led by tech companies. So go ahead.
- [54:05]
B
Well, let's take, let's take ebay, right? What we really want is a marketplace to form like ebay, where you didn't need to get government permission and wait for three months in order to list, you know, your comic book collection on ebay. But at some point, the sellers have a reputation or the issuers in that case have a reputation. But ebay had an interest and over time, the free market kind of figured out how to, how to figure out who to trust, who not to trust, and how to take risk and how to clear the market. So, you know, you would think that digital exchange like Coinbase or Binance will start to apply, you know, AI and modern techniques to figure out whether someone's getting ripped off or not getting ripped off. And over time, people will work it out. But what's clear is you kind of. That's why I think we wouldn't have 1500 exchanges. You might all of a sudden see Apple and Google and Meta, get into the business and Microsoft and you might get, see all, all the banks and you might see lots of Wall street firms and hedge funds. And then you've got the natural short sellers and the natural arbitragers. In a world like that, there's a lot of people that will write a computer program that sifts through 10 million things at the speed of the computer, and they form an opinion about whether it's a good thing or a bad thing. And they short it or they go long it and just let the market cook. Right. The key point here is the market just doesn't work if there's a regulator on the critical path. So they need to publish some standards and guidelines, get out of the way, and then you will actually have a practical path to compliance. And then you can empower regulation or, sorry, empower innovation. And then, you know, what you're getting is exponential improvements. You know, you're going to get exponential improvements in cost and speed and accessibility. You know, just like what's happening with all these AIs right now. You're looking at these things and they're changing every week. Right. And on the other hand, you know, Balaji, I can legitimately tell you that I came public in 1998.
- [56:29]
A
You survived quite a downturn. You yourself are actually like, that's why you can be in Bitcoin, because you survived this giant downturn and you survived all the way through and rebooted.
- [56:38]
B
I did. I lived through 99.9, 99.87, maybe 99.9% downturn there and back again. But here's the point I'm going to make. I haven't seen an innovation in the way that my stock trades on NASDAQ since we came public. Not one. It trades the same way. It's literally the same thing for 26 years.
- [57:05]
A
You know, the only innovation is just HFT guys, which is not really an innovation. That's like, it's arbitraging the thing that shouldn't matter, which is like the ping time to, you know, where the actual exchange is in downtown New York. Go ahead.
- [57:19]
B
I'm like, well, for the issuer, we got one thing. We got the at the market atmosphere. We got that one thing that was somewhat useful to us, but there was nothing else. So if you think about what happens when the regulators get out of the way, you would have a thousand exchanges all competing to provide the best service. The irony is, within about a year of us getting into Bitcoin, Binance was trading MSTR token on Binance 24 7, 365. So we actually had the first innovation in the crypto economy from a company not even in the U.S. and of course, the result was the German regulators shut it down. Like the one innovation that took place. And the regulator's view was we just have to stop that as opposed to let that continue. Let's go on to the vision. So the vision is instead of taking 10 to $100 million to issue an asset, we move the price or the cost to issue an asset to $10 to $100,000. Right? Let's, let's change by orders of magnitude Instead of taking months and years to issue assets, let's change it to hours or days. The amount of time it takes you to post on Airbnb, or the amount of time it takes you to post on ebay, or the amount of time it takes you to post on X or YouTube, let's change it. And then instead of having 4,000 publicly traded issuers in the US, let's shoot for 40 million. And instead of limiting access to the capital markets to very, very large companies, let's empower small businesses, let's empower artists, celebrities, mid sized enterprises, let's empower them to tokenize assets and let's expand dramatically the asset classes. Right now, people think about things that trade on Robinhood. It's like, what can you trade? You can trade like equity for the most part. But if you look at the market of preferred stocks and assets and commodities and collectibles and IP and brands, most of those things don't trade via four letter ticker. On Robinhood, there isn't that much art that's tokenized. It's very difficult to do it. It's hard to tokenize real estate. It's hard to tokenize other things people might want to buy. If you look at publicly issued fixed income instruments, which is 300 trillion of them, most of them trade over the counter. The spreads, the bid ask are very wide, they're illiquid. So it's like a 300 basis point spread to buy or sell a bond. There is no quote. It's a dark market. You need a $25,000 subscription of Bloomberg to even get the quote. So why is it that we block 99% of the investors and then we have 300 basis point spreads instead of 3 basis point spreads? And why is it that so much asset is sitting, why is it that most of the art in the world is sitting in vaults underneath mountains in Switzerland and not trading? Right. They're dead assets in cold storage, just like your cryptos in cold storage. And it's because we haven't really democratized access to all these things. So I think with the right framework, we can usher in a renaissance where you can tokenize hundreds of trillions of dollars of assets. And I'm not talking about just bitcoin. What I'm thinking is bitcoin is just the capital asset. I'm thinking that we'll get to $500 trillion worth of equity, real estate, commodities, collectibles, arts and new digital assets that will be created and legitimized. Digital NFTs, digital tokens that never existed before, right? And then there'll be a whole range of products and services that come to life on top of those digitized assets that are inconceivable right now, like most people, if they hold equity. Like if you hold $100,000 of equity, it's not likely somebody wants to give you interest. It's very difficult to get paid interest, but there's someone that wants to short that equity. So in theory you ought to be able to collect 5, 450 basis points. If you have a million dollars of equity, why can't you get paid SOFR on the million dollars by someone or half of sofr? Because in theory, a bank might very well post that block of asset and charge the SOFR rate and split that interest with you. And the reason that you don't get paid interest on a million dollars of equity, but you do get paid interest on a million dollars of Treasuries is because one asset gets superior treatment by your bank and the other asset, the other asset, the bank feels like it doesn't really need to, right?
- [63:10]
A
But it could be, you could have, you could have the benefits of full custody while also maybe getting some return on that asset where it's just much more agile, it's more, it's more liquid, it's more visible, it's more, more collateralizable if it's on chain.
- [63:30]
B
Or maybe I would just say you ought to have the option to have the benefits of full custody, which is you own it, it's a bearer instrument, it's tokenized on your handheld. Or if you're willing to loan your assets out to a bank and let them rehypothecate it, you ought to have a choice of a thousand different banks. And maybe there's someone in Singapore that'll give you a better deal than the bank in New York City or somebody in London or Paris or fill in the blank. And you know, granted, maybe they're untrustworthy counterparties and they're going to rug pull you. But the real point is people ought to have the freedom to own their own assets or trade their assets or custody their assets and the marketplace ought to be able to form capital markets. Maybe it's not. Maybe it's I'll give you a loan against it. Maybe it's I'll give you interest on it. But maybe it's something different. Maybe it's, I'll form a derivatives market. Like for example, if I can tokenize a bunch of old masters art, then maybe someone else can create a derivative of old masters arts and sell me futures on it. Right. Or maybe I can short it or go long or basically we can make.
- [64:55]
A
All these combinations that we couldn't make before.
- [64:57]
B
Yeah. And that market comes to life when you are able to pull a billion dollars of liquidity on a global basis. And that market, and by the way, when you publish it and you trade it 24, 7. But when you have an illiquid pool in a dark market with someone with a monopoly on it, when one of the problems is you've got one bank in Kansas and they're the market maker on real estate in Kansas, and they set the price, they set the bid, ask, and no one else gets to enter that market. No one else has transparency. And so instead of, instead of them giving you the highest common denominator, they're the lowest common denominator. And there's a pretty big difference in the way the markets function when everything is up for bid to everyone, all the time, in real time with transparency. And that's a world where everybody just gets treated better.
- [66:04]
A
Absolutely. So let me see if I can recapitulate your PDF. You have these six definitions which cut the space in a useful way. Next, we define these three categories. We have the buyer, the exchange and the seller. And anybody can be any of these three things. But the overriding principle is not paperwork, it's not cost, it's not delay, it's not bureaucracy. The overriding principle is just don't lie, sheet and steal. And this 21st century securities and markets regulation, if designed in this way, would be something where any mom and pop could raise money. Where it's similar to just like any business can go online, any asset can go on chain where people can raise debt. Where if you've got a chess podcast or a chess website in Florida, which has a global audience, you can actually raise from that audience all these things that are obvious to us, that should happen, could happen, and the new administration could be a leader in this. Is that a fair summary of your analysis?
- [66:57]
B
Yeah, that is a fair summary.
- [66:59]
A
Awesome. Well, Michael, this is great. Thanks for being here and we will. We'll see you soon. And maybe I'll see you in Miami next time I'm out there.
- [67:08]
B
Yeah, thanks for having me.