And now let's get started with our first session. Please join me in welcoming Caitlin Long founder and CEO of Monte Bank and Trust Nick Carter general partner Castle Island Ventures and co-founder Quinn Metrics. And Michael Saylor chairman and CEO of MicroStrategy Inc. It's great to have you guys with me. We have three heavy heavy
heavy hitters 30 minutes and a lot to get to. I'm going to start with the rapid fire question for each of you. I'm only here in your view. What has been the most significant development in the cryptocurrency landscape. Good or bad in the past year. And Caitlin good to put you on the
spot first. Oh boy. Okay. I would say it was the battle testing that Bitcoin endured with China kicking the miners out and how the hash rate in the network fell and came right back up and we restructured and the bitcoin block chain just keeps on adding more blocks and it's even more battle tested and hard. And every time some external attack like that comes at it it just keeps on truckin. Battle tested. I like that word. Nic I know you've been following the mining discussions very closely. I want to ask you the same question. What's the most significant development we've
seen in the past twelve months. Yeah the hash rate transition was immense and incredibly revealing. But for me it was all Salvador legalizing Bitcoin and acquiring it on its balance sheet. I mean that's the first non pariah nation to officially acquire bitcoin. There are others that we sort of probably believe or it's implied own bitcoin. But El Salvador was the first truly integrated nation in our international system to actually acquire it directly and vociferously. So that was it for me. Michael I'm going to get to you in just a moment but Nick I
actually do want to follow up because a lot of people would push back and say that that roll out came with a lot of glitches a lot of problem and that it's a flash in the pan. One time happening. I mean what would you respond to that. Well I would distinguish the very real law that was passed putting Bitcoin on even par with the dollar from the software itself that was produced by the government and no government produced software is ever going to be perfect. But you know the important thing is that they've established Bitcoin as a monetary good. That's on a completely even par with the existing monetary asset there. All right. Fair point. And Michael coming to you same question. Most significant happening in crypto in last year. I think the emergence of a political consensus in the Western
world that bit coin is Western technology not Eastern technology. Following the China crackdown and that Bitcoin is property and not currency. And the acknowledgement by the head of the EU Central Bank the head of the Federal Reserve the head of the FCC Congress senators that bitcoin is digital property. You can hold it. It
is the standard by which all other properties will be judged. And I read that as a green light for institutions and mainstream investors to own Bitcoin in the Western world. I think that's the most significant thing that happened this year. All right. That was a great rapid fire and I want to zero in on regulation because I mean that's been the most interesting thing at least from my perspective that around the world but particularly in the US when you look to the Federal Reserve the Treasury Congress all sort of sharpening their focus from a regulatory lens on crypto. And just this week we had the
president's working group on financial markets release a report on stable coins. Those are designed to be linked one for one to the dollar or some other fiat basically saying that stable coin issuers essentially need to register at banks. And Caitlin 30 minutes before this panel you had a very tantalizing tweet. You said that your you'll give your first public analysis and its massive impact on crypto. So I want to start with you. I mean what's the takeaway. What's the impact. Well the takeaway is that every stable coin issuer has to get FDIC insurance now and the impact on of that is that the Bank Holding Company Act is going to apply to every stable coin issuer. What does that mean. I saw a very interesting article yesterday
that the press was starting to figure it out. The press did not figure out the real impact of all this yet but it started to yesterday that if Facebook is going to issue DRM then Facebook itself the holding company would have to become regulated by the Federal Reserve. Of course that's not going to happen but that's what the Bank Holding Company Act means. It means Federal Reserve regulation of all the affiliates. And so when I when I say there's going to be massive impact on the crypto industry it's really on the market structure. It's not in Bitcoin itself. Bitcoin is hearing all the all the the actual on chain coins are going to be fine. But where you're going to see an impact is in a lot of the trading stable coins are about 70 percent of the trading. A stable coin is on the other side of a crypto in about 70 percent of transactions.
And so what the president's working group paper has done is say and by the way they don't need congressional approval to enforce this. That that stable coin issuers have to get FDIC insurance. What's the impact of that. Well there's not a single crypto native company that has even applied for FDIC insurance yet. There's a reason for that. But that's the fact. Actually there's one that has applied but the application was withdrawn. So now all of us are starting from scratch to get FDIC insurance. It's a fascinating fact pattern because the incumbent banks already have FDIC insurance. And I certainly hope that the intent wasn't to create a structural advantage for the incumbent banks because all of these startups are now scrambling to get FDIC insurance. And I can break a little news this morning. Last night of Ortiz board voted for a monte to file for FDIC insurance. And we will
be dropping that FDIC insurance application very soon. But but most of the crypto intermediaries are not structured to become FDIC insured banks. They don't have the capital. They don't have the they the compliance. They don't have the management teams. And very importantly they're not ready to comply with the Bank Holding Company Act which puts some pretty serious restrictions on affiliates as well as on the cap tables. The banks for example are not really allowed to have preferred stock in their cap tables. And boy there's a lot of venture capital money and a lot of crypto intermediaries that don't wouldn't comply with a bank holding company act. Well I'm so thrilled because I love breaking news but Cuban I'm
curious that the fact that Monty has applied for FDIC FDIC insurance is that in direct response to this this president's working group paper. Yes. And to be clear we haven't dropped the application yet. They have our business plan. We've been in touch with them as as most of the crypto companies that are seeking some form of bank charters have been in touch with them and we look forward to working with them. The rules keep changing and we're going to figure out a way to get open. We have no problem complying with all of these rules. We are the closest among all the crypto intermediaries because we already have that bank charter and we're already in compliance with the Bank Holding Company Act. The most important question though is
how fast this is all going to happen. And and Valente is going to be a test case for that. We are. We are we're scrambling to get that application in as quickly as possible and look forward to rolling up sleeves and determining whether whether the innovators really will have the ability to compete with the incumbents. Well when you do drop that application I want you to tell me first but Michael I want to bring you in here because on our prep call we were talking about this race between sort of these private tech companies and sort of these crypto native companies and the government really to control this space. And Caitlin mentioned that a lot of the crypto native companies haven't applied for FDIC insurance and that that could create an uneven playing field. I'm curious to hear your thoughts on that and who's actually going to come out on top here. I think the record is is a seminal event. It signals the transformation of the industry from the offshore unregistered entrepreneurial organizations that have dominated it for the first decade to the institutional institutionalised publicly traded companies that are in the traditional industry. It is a green light to the JP Morgan's and the Bank of America
is on the Citigroup's of the world to issue a trillion dollars of stable coins. There's one hundred and thirty billion dollars of stable coins in the world right now. Right. They're either going to zero. If the regulators said you can't have them or they're going to a trillion followed by 10 trillion. And I think the administration knows this. And their vision is FDIC insured banks properly managed with legal teams and general counsels and compliance routines issuing billions and then hundreds of billions and then trillions of dollars not for the use stable coin use case right now is this subtle men of off shore exchanges on Saturday afternoon trading crypto. But the real use case is is Treasury remittance of Amazon and Apple and Google
and acts on cross-border or 8 billion absolute rule buying things. And so if eight billion people are going to have digital dollars in their wallets and if we're going to move trillions and tens of trillions of dollars of money around at the speed of light you're not going to do it without coming into the regulatory environment which includes FDIC insurance compliance and the like. So I think I think if you're a small crypto startup this is a bit scary. If you're Jamie Diamond you were waiting for this before you considered getting into this business. And now the question is which of the big banks are
going to move first and which of the crypto native players are going to cross the chasm to become institutional public grade. And how many of developers will stay working for them if they get acquired by big banks like we got to grow up at some point. There's a lot of Bitcoin Maxis that don't like the idea that publicly traded companies own Bitcoin. But but that doesn't stop me from buying three billion dollars of it. And there's a little friction between the past and the future. And who's going to who's going to impact this decentralized crypto economy.
Nick I want to hear your thoughts both on the paper and to Michael's point that I mean this could open the door to the big banks the JP Morgan's the Goldmans issuing a trillion dollars worth of stable coins. I also want to hear your answer to that. You know do you think that the crypto community would actually use those stable coins this bank issues stable coins or who would that be for. Well the innovation historically in the stable coin space has not come from the banks or the incumbent financial sector. It's come from startups and new crypto native firms. So I'm going to
push back a little bit here. I mean I found the paper to be perturbing and I found that it didn't grant any recognition to the structures under which stable coins are issued today like the trust charter in New York or in Nevada or under the money transmitter regime on the state by state basis. And you know these structures work pretty well frankly. There's heterogeneity there. Right. But under some of those models you have stable coin issuers as fiduciary is holding you know high quality liquid assets. So the bank charter model which sort of
implies that the institution is engaging in maturity transformation doesn't seem to fully fit with what stable coins are doing. It doesn't really reflect the fact that they're not really engaging in long term lending. And so you know I would push back a little bit and say I don't believe stable coin insurers need to be regulated as banks. That to me just seems to invite a huge amount of government oversight. And you know requiring FDIC insurance for stable point insurers
in my view doesn't really comport with the fact that what they're doing is just holding high quality assets on a one to one basis on kind of a full full reserve basis. And if you look at the FDIC I mean that's an instrument of government intervention into the financial system. You know look at historically look at Operation Choke Point. The FDIC was the means through which political dictates were handed down. So you know I find this to be ill fitting. And frankly I think you know anti-competitive because it's going to make it immensely difficult for new startups to break and become stable coin issuers. And it's going to reward the largest financial institutions. Well Nick I'm curious to hear do you think that there should be more stable coin issuers or would this structure this system which you say works very well right now be better served by just having one or two main ones. Because right now it feels like the
big boys are tether and circle and that seems to be what everyone uses. I mean it's very dynamic. If you look at the market share t'other had almost 100 percent market share and today they have a much reduced market share. USD has been very successful. But there's other stable coins issued under some of these other
regimes which in my view are regulated. I mean people describe stable currencies unregulated. That's not the case. There's other stable points that have done very well and that are you know pretty closely monitored by the relevant regulators whether it's DFS whether it's you know individual states. And so it is dynamic. And of course from you know a free market perspective I think more issuers is always better than fewer. But the president's working groups language here I think would restrict the state of issuers. All right. Well we could talk easily for an hour about stable coins but somehow we're already halfway through our session almost. I do want to say again to the audience if you have
questions feel free to submit them. But we have to talk about ETF because last month history was made in the U.S.. You saw the first Bitcoin futures backed ETF not physically backed funds launch on U.S. exchanges. And that was to a lot of fanfare. I mean the pressure is product accumulated over a billion assets in about two days which is pretty remarkable. But Caitlin I want to hear your thoughts on whether the fact that we do have U.S. Bitcoin ETF now their futures backed again the caveat there. But is that good or bad for the ecosystem overall. Oh boy. It's a double edged sword. Ever since backed entered into the scene back in twenty seventeen 2016 I've been warning that you know the leveraged players coming into crypto we're going to start applying the same leverage games that the traditional financial industry deploys. And when they do those leverage games they are creating more paper claims to bitcoin than real on bitcoin exist. And for
owners of the real launching in bitcoin like MicroStrategy they don't care that the fact that the price gets kicked around. We've had two flash crashes just since the ETF were introduced in bitcoin. The pricing is going to get kicked around periodically and probably suppressed because real demand is being satisfied by fake supply paper paper supply. Ben that does all things equal. When any time you increase the supply of something and you hold your demand constant your price is going to drop. That's that's exactly what's happening. Bitcoin is now let a lower price than it otherwise would be were it not for all these leverage games. But I will also say that those warnings that I that I had back in 2016 were were
about the leverage games that were going to be played. What I missed back then was that it wasn't the Wall Street firms that it was gonna be our own industry that was going to bring those leverage games. And so the ETF just ratcheted up by a lot. But they're but the leverage games this is one of the biggest trends of this four year Bob Bull cycle is there's so much leverage in it. And the impact of that is is going to be fascinating. We don't really know how it's going to play out. Like going through a serious response here given that MicroStrategy is a significant holder of unchained Bitcoin. I mean what's your opinion on these futures back products. First of all I'm not concerned that a spot ETF is going to re
hypothecated or lend their bitcoin out. I think that that's going to be governed. So that's not a concern of mine. I think that the destiny of bitcoin is first it's eating gold as fast as it can. And so it's going to it's going to grow to replace all gold ETF in the next 2 3 years. And ultimately it's going to emerge as the primary asset index for the Western world which means it's going to replace the role of the spider s p y. The S&P index. And to do that you need to spot ETF S and once they spot ETF role I think you'll see billions and tens of billions and hundreds of billions then trillions of dollars flow into them and the ETF will just hold the underlying bitcoin as a custodian and serve as an important institutional on ramp for institutional investors that want that monetary index DAX exposure. Michael you said spot bitcoin ETF a few times there. I mean what is the futures backed products that we are getting now. Are they
not the key to that. Yeah I think they're I mean they're inferior offerings to a spot and X but they're the best that institutional investors can get right now. But clearly the right answer is let investors buy a trillion dollars worth of Bitcoin via an ETF because the ETF plug in to the existing security structure the existing prime brokerages the existing collateral packages etc. So I think it's if you're looking for an institutional catalyst. Clearly the availability of a broad range of ETF is especially spot ETF. They're trusted
and trusted. Like if I if I bought a billion dollars of this stuff and then the person running ETF could read hypothecated 14 times that's not trusted. I don't think that's gonna happen. I don't think that's gonna be allowed. So if I have a trusted perfected spot ETF I think it's going to grow rapidly and it's going to serve a purpose as the basic monetary index of the Western world. NIKKEI what's your opinion on that. I mean in thinking about institutions in particular how big of a catalyst is the fact that we finally have Bitcoin ETF in the US. Paul Unfortunately the futures ETF is inferior and if we've got a spot ETF I think we'd be the hottest commodity ETF launch of all time attracting probably well over a hundred billion in assets within a month or so.
But the current ETF we have right now is a shadow of that and I believe it's a political restriction which is limiting the market's ability to create this product that everybody wants and this functional spot ETF and other countries that work just great. And there's no explanation for the reticence at the top levels here to approve this product which obviously should exist and would make life immensely easier for all types of different investors. Wolf I asked you to explain that reticence among U.S. regulators which I'm going to do right now. What's your best guess for why they approved a futures backed ETF over spot ETF. And I mean what is the drawback. Because I feel like we've danced around why you know the community really believes that a spot ETF would be better. Well because there's just as you know and you've reported on
this very well there's a significant cost 10 plus percentage points associated with rolling a futures based product which increases a lot of tracking error. The stated justification is that the CMC is regulated by the CFTC I suppose. But there's plenty of other commodities that have markets which are spot markets and globally traded. And you know the you know the S.E.C. doesn't really have a problem with approving to ask for those that are a problem with
approving forex inverse natural gas ETF either. So a lot of these complaints about investor protection ring completely hollow to me. And I think ultimately the motive is just simply suppressing the growth of a bitcoin. Mm hmm. Yeah. Yeah I definitely have reported a lot about contango in the last couple of weeks. And Michael I want to turn back to you because you know a lot of people made the point that it's easier to just buy physical bitcoin and that's something that MicroStrategy has been doing for several years now. But I was looking at your holdings and it did jump out to me that since the mid half of this year you know micro strategies purchases of bitcoin have cooled down in terms of the pace. And
I'm curious why that is. Well we've acquired at least five hundred million dollars worth of Bitcoin a quarter ago about 420 million this quarter. The price of Bitcoin is going up. I mean we bought along at ten thousand dollars a coin. It was a bit easier than so. Buying it at fifty thousand dollars a coin slows you down. We're going to continue to acquire it. Look I think with regard to that these ETF in the regulation
there's a rate at which the regulators can evolve and they're going at a responsible prudent fashion in their view. And if you're an investor when they finally solve all these issues it's going to be a. I think it's a thousand times easier to buy the spot ETF than it is to buy. Bitcoin is property and institution would take six months to a year to go through all the regulatory compliance due diligence checks to actually figure out how to acquire and hold and custody the property. And if it doesn't fit
into their architecture. So when when that problem gets solved the demand is going to go through the roof. The the motive to sell it is is going to disappear. The price is going to shoot up. Right. So you either do the work now and get a lower price or you wait until it's super easy and you pay a higher price and everybody gets to make that choice. I kind of like the fact that
it's hard to buy the property right now and the accounting is obtuse and they spot ETF is not there. As I said tongue in cheek with regard to the FDIC the FDIC chair was considering letting banks put it on their balance sheet when they finally work that out. Everybody all want it. Nobody else saw it. You won't be able to afford it. That's interesting. Yeah. There is sort of an exclusivity there. But I want to stick with regulation and go to you Caitlin
because you're based in Wyoming. And it's interesting that Wyoming has become this sort of crypto hotspot especially as you know the broader federal government sort of tries to work out how it actually feels about crypto. Wyoming obviously very crypto friendly. Curious to hear first. Well why that is. Why Wyoming and what other states do you think might be taking a page from Wyoming's book. Well it was opportunistic and it in fact actually we're seeing a repeat with all of these new banking rules that are coming down. We're seeing a repeat of what happened four years ago where
suddenly a lot of crypto startups lost their bank accounts. I think it's pretty clear in fact actually the FCC chair yesterday made an incredible speech that everyone with any interest in fintech needs to read where he essentially said not only are we bringing crypto into the perimeter but we are also bringing bank as a service and rent to charter arrangements into the perimeter. Translation get ready because a lot of thin texts are going to be losing their bank. U.S. dollar banking access. He all but said that yesterday and and and Wyoming got started back in 2017 in part because there was so much banking of the startups of crypto back then. And ultimately Wyoming was trying to solve a problem for the industry. And it started because Wyoming actually had an outlier money transmission statute that needed to get fixed. And thank goodness it did. And then the
legislators saw an opportunity to welcome an industry by just simply giving it legal status. It's pretty simple what Wyoming did. We just said hey bitcoin is property and we defined it under commercial law and created a roadmap for judges and parties to transactions to know exactly what their rights and obligations are under the law making it backwards compatible with the legal system. And in fact actually a very important event is about to take place later this week which is the Uniform Law Commission in the United States which recommends laws to the states. The states are actually the primary governmental unit in the United States. A lot of folks lose sight of that is not the federal government but especially with commercial. A lot of states control that. And there is an effort to actually take the concept of what Wyoming did and make it
broad. You ask the question who's followed Wyoming. A handful of states have early adopted that Uniform Law Commission proposal Texas Arkansas and Nebraska so far. And and what I would recommend to other states is early adopt that proposal if you don't. The plaintiffs lawyers are coming and your court system is going to get all tied up gummed up with with litigation over this because there's so much money in this industry now. And the right thing to do is just define what the legal status is. And
that's what brought Wyoming to the table. And then the industry flocked here because simply there was a definition of legal status. Man the American West leading the way. I love it. But somehow we only have about three minutes left. We do have a question from the audience that I want to show you to all of you. And that question is what major catalyst in your opinion will take the crypto acid industry to its next level of maturity and adoption. So we're gonna do another rapid fire. Nick I'm going to shoot that question to you first. What's the next major catalyst.
If I had to guess a major central bank acquiring Bitcoin on a par with its gold reserves looking at the share of gold it owns and acquiring that proportional amount of bitcoin in order to hedge the monetary transition that's coming here. Any guesses on what central bank that could be. I would look towards the ones that are divesting themselves from dollar assets and buying gold and indicating an openness to alternative monetary regimes which is many of them.
I would look towards the ones with sovereign wealth funds with mineral funds look to the ones that can easily turn energy into money through bitcoin mining. All right. Fair enough Michael. Same question. Next major catalyst. I mean the major catalyst would be a spot ETF for Bitcoin. Fair value accounting for four bitcoins and FDIC guidance to allow a bank to hold bitcoin without a 100 percent reserve ratio. When do you think we could see a spot ETF approved in the US. I can't speculate. I just think those are the kind of trade. Yeah OK. OK fair point. Caitlin. Same question. Next a major catalyst that's gonna take the crypto industry to the next level. I would say it doesn't need one but two to respond to what Michael just said. It's so interesting though that
regarding the FDIC and allowing banks to hold bitcoin on balance sheet all boy that's putting some serious risk if that does indeed happen right at the core of the financial system is fascinating to me that it used to be that you tried to keep risk out of the FDIC. And now the discussion is to bring all this risk into the FDIC and have levered banks holding Bitcoin. It goes back to the early proposal or early observations about Bitcoin potentially being an apex predator in the financial system. So I would hope everyone's cautious about that. But back to your question there. I don't think Bitcoin needs a catalyst. And to me price is at least interesting aspect of it. All we care about is that it keeps on truckin. And I'm very interested in the tap root upgrade that's coming for bitcoin very soon. Just hardening that technology. All we care about is that it
just keeps adding blocks and all of these market structure and bank and an ETF discussions all have to do with price. But at the end of the day as long as the core bitcoin block chain is still adding blocks then bitcoin is just fine. All right. We're going to leave it there. Great discussion guys. Thank you so much. Michael Nick and Kaitlin great to talk with
you today. Really appreciate your time. That was just the first panel of the Bloomberg Innovation Summit. We have a great day coming up so please stay tuned. And thank you to everyone who took the time to watch today.
2021-11-10