1 on 1: The current state of the market & institutional investors

https://twitter.com/kanzure/status/1043404928935444480

Bitcoin Association Guy (BAG)

BAG: I'm here with Bruce Fenton and Tone Vays. Bruce is also host of the Satoshi Roundtable and a long-term investor. Tone Vays is a derivatives trader and content creator. We're going to be talking about Wall Street. I believe you're both based in NY? How was the last 12 months?

TV: I own an apartment there, but I think I spent 9 months a year everywhere else. Bruce, I didn't know you were in NY. I don't know too many bitcoiners in NY. It's amazing how you don't do much with bitcoin in the place you live, but you do a lot everywhere else.

BF: I'm in New Hampshire actually. I used to live in NY. I'm on the board of a company there. I'm there pretty often. I grew up on Wall Street and kept in contact with my own colleagues and friends theres.

BAG: Did they all call you up and get urgent advice?

BF: Sometimes. It's been years now. They thought I went crazy when I talked about bitcoin with them 5-6 years ago. Then they got interested in. They are completely focused on the products. They don't care much about some of the bigger picture cycle issues. There's definitely a lot of interest; there's a huge lack of understanding by a lot of people on Wall Stree.t

BAG: What stage are they at? Are they thinking about it? Are they buying bitcoin?

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TV: That's all currency is, it's confidence.

BAG: Bruce, do you think people on Wall Street can be trusted with bitcoin?

BF: In this space, there's a lot of conflict. I try to get along with everyone. I like and respect people on every side of this. If you recognize that everyone in the world is motivated by self-interest, then you don't trust anyone no matter how much you like them because they might be compromised. I don't trust anybody, though, including anyone on Wall Street.

BAG: A lot of money is going into the industry. Where is that money coming from? What are the people with $100s of millions interested in? Are they investing in companies, are they distracted by tokens?

BF: That's what I did for my job for years an dyears. I placed billions of dollars in high-end private equity ufnds; I worked with private equity firms, global charities, sovereign wealth funds, placing hundreds of millions into things. I'm familiar with what those investors are looking at. When I got into bitcoin, it was way too small. Now some of the large investors are somewhat interested; it's not sovereign wealth funds and huge global pensions. The real serious money still isn't looking at this. It's low family officies are looking at this, but it's still quite small, and a lot of them in my opinion have fairly weak strategies becaues it's such a new area and it's so complex, it might make sense to... as a company, we have never sold anything or done anything as a company, I have done a lot individually but as a company we havne't. It makes sense to spend more time learning. This new wave of second tier big billionaire investors is that they're not taking the time to understand the tech. They are going after ICOs and they aren't really looking at it, and I think that's a bad strategy.

BAD: How do they engage with it? Do they put their coins on trezor and dump that in a safety vault?

BF: This is an interesting thing that has to be solved. The issue is custody. I get it. As a bitcoiner, I get the "not your keys, not your money" thing. But at a certain point, it falls apart. North of $100m, it's very difficult- I've managed this difficult for a long time- when you get into higher and higher levels that institutions need, you need really advanced systems. For most of them, they are just not comfortable with it. Hopefuly the things that Jameson is working on will make that easier for people. If I was an institution, I would be tempted to go with custodians, despite all the issues with that. A lot of these people aren't very technical; there's a lot of issues with holding your own keys.

TV: This is a big thing that people don't think about. Who is going to be the custodian for the bitcoin ETF? The nordics got shutdown by the SEC because there was miscommunication in the paperwork that said they were backed, but some people said ETN and the SEC said ETF. So they shut them down. The same thing happens with funds. A lot of these institutions, sure they know how to trade and how to invest, but they are not security experts. Whta you have is a couple of family offices that have piled into bitcoin and have been very vocal about it- the Drapers, the Novogratz, they have been vocal about it. There might be some smaller funds that are willing to take on the challenge of storing bitcoin, and they are going to be silent about it. You don't know they exist. They might not have giant positions. Pension funds and money managers- why would you want to risk-- they make money as a middle man. They make money not by making money, but by slightly beating the SP500 and collecting a percent on the money they manage. Why would they risk their entire operation because they stored bitcoin the wrong way? It makes no sense for a big fund to get involved in this, it's not their business model.

BAG: They are mostly trading. How do you see cryptocurrency exchanges being able to engage those traders? How do they fulfill the regulatory requirements or due diligence requirements? Are funds going to directly go to an exchange?

TV: There is no clear regulation on this. Right now the only option they have is GBTC, pink sheet which I believe is one of the worst designed financially traded product in the world which is one of the reasons why I think the SEC needs to make a decision on the ETF because this monopoly that GBTC has for investors, for people managing people's retirement accounts, it's terrible it's a terrible option and it's the only one. SEC needs to come up with something to compete with GBTC so that there's a real reflection of bitcoin that someone with a retirement account can use. We all know it's volatile, but GBTC is 20-200% more volatile on top of BTC's volatility. I think that was a huge mistake of the SEC to allow that in the first place, and now they have to rectify that by making something more efficient.

BAG: Have you seen large firms going to Bitfinex and putting money down and trading for whatever reason?

BF: A lot of them have done that through funds. I think this iwll be an evolving process. It's clear now and I will talk about this tomorrow-- that securities are a thing, they have been a thing for hundreds of years. It's a big part of the global economy. Anyone interested in.... securities are a real thing. If you represent those with tokens, some arlready are, they are just illegal, there's a few legal offerings, and then we have the writing on the wall for companies like coinbase which they have announced they are gloing to be ... The securities laws aren't going to be changed for this. You can be clever with some technical ways to make something not a security.

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TV: When the SEC said ethereum is not a security, that was the Chairman's opinion not the SEC's. That's a huge personal disclaimer and a personal opinion. I looked at that statement based on my understanding of what that is; how did he get tha tunderstanding? If you had different people in the room, you had the opposite opinion of ethereum's decentralization. It's a huge wild card; there's not much incentive for bitcoiners to have the SEC and explain why ethereum is centralized. The lobbying groups are starting to take off and it's hard to see whether they would win or not; we might be stuck with something for 10-15 years and it might be a mistake.

BAG: Another topic is stablecoins. Is tether anything more than a shadow banking system with exchanges that accept it as collateral? What about the copycat stablecoins coming out of Circle or who are the others building stable coins? Gemini maybe?

TV: Yes, tether has been pretty successful and others are trying to copy it with other stablecoins. I don't understand the fascination with stablecoins at all. They are just centralized. They are just like a US dollar.... but now you're able to move this US dollar around on a very technologically unstable and potentially collapsable centralized database, whether ethereum or whether it's omni, whether it's the servers of Binance... I don't know how they are going to do it. You have a US dollar, you put it on top of a centralized platform just for the ease of use. In tether's specific cause, there was questions about whether it was 100% backed. This goes back to the SEC view- is a bitcoin-backed ETF good or bad for the crypto ecosystem? Is tether fractionally reserved or not? Is that good or bad for the ecosystem? I could make the case in either direction for both of these questions. If tether implodes, which I believe it will eventually-- is that good or bad for bitcoin? I happen to think tether imploding would be good for bitcoin, because there would be a rush to sell tether and turn it into bitcoin. They might get 20-30 cents on the dollar for it, and there will be a big entrance into bitcoin to get rid of your tether. But most of the exchanges, the exchanges are goin to take the hit. If tether goes down or other stablecoins go down, the exchange is going to get stuck with it, and they will pass on those losses to the consumer in the same way that Bitfinex passed on their losses even if you don't have bitcoin you took the penalty if you were on their exchange.

BF: There's two kinds of stablecoins... there's several kinds. Some people call them stablecoins that aren't going to be stable because they don't have an understanding of how economics work and how to make something actually stable... but maybe it might be better to call it pegged coin. It's pegged to the dollar, which is easy if you're doing what Tether claims to do- which is backing it 1-to-1 with the dollar. That's useful in trading because in the investment world we have money market accounts which are a big facilitator that when trades come in from mutual funds or stocks or bonds... it's useful for firms to have their own system. The reason is that it comes down to the ledger which we all hopefully understand. How do you run a ledger? Who has the ledger of where all the dollars are? The US doesn't have a ledger like that. If you have a money market at Fidelity, how do you know you really have it? To facilitate trading and to facilitate the moving of bitcoin and ethereum and tokens and eventually security tokens, it's useful to have that kind of approach.

BAG: Is that an alternative to the international wire transfer system? It seems to work useful to use stablecoins to move large positions in US dollars to move between exchanges.

TV: Tether is very good for that. I know that a lot of people get worried when Bitfinex prints another $500m of tether. That happens when Bitfinex creates the tether and whenever someone wants to move something out of Bitfinex- because of their wire transfer problems- you can either move the BTC out of Bitfinex or you move the tether. When bitfinex starts to run out of tether because their users are moving tether out, they need to create more, so that they have it so that users can move the US dollar out of tether instead of moving the bitcoin out of tether. It's a good option because many of these exchanges are having major banking problems and they are getting around this by using tether. It works until it doesn't, and the US government decides to confiscate the underlying dollars and I don't want to speculate whether tether is or is not fractionally reserved. Does anyone know who the developers are for the omni layer? How many people are working on this? This is what tether is built on top of. There's a technological risk and a regulatory risk.

BAG: We keep hearing about government-issued tokens or cryptocurrencies. Is there any substance to this? Has it happened?

BF: I think it's hilarious because the people with the buggywhips are looking at the rockets and figuring out how to put a license plate on the horse carriage... they have never faced competition, in our lifetime or hundreds of years before that. They don't even concede what the real world is like; they sit in offices and decide monetary policy. They have no idea how the real world works. Most of them have never had a real job. Are they going to get someone like Matt to program this? Are they going to hire him to program their fiat coin? No, they couldn't possibly do anything that could have any kind of technical usefulness. If their goal is to make really good money, then you know what they would do? They would use bitcoin. They don't want that though- they want to creat esomething that looks like better money, but they have power and control.

BAG: So just cargo culting?

BF: They don't want better money. They want to control it. They don't know how competition works. They say something is real and that's real to them. This arrogance only occurs because they had a monopoly on money for more than 300 years. An open source project like Bitcoin is out with the sewar rats and inocculating itself against every form of attack; I don't see how these other guys have a chance at this at all. It would be interesting somewhat, but no more interesting than the fiat dollars, and certainly not as interesting as bitcoin.

BAG: Maybe they will build on Ripple.

TV: All governments today are interested in eliminating physical cash. No government wants physical cash. That's their end goal: eliminate physical cash. They will get there by any means they could. Whether they understand cryptocurrency or not, it doesn't matter- their goal is to eliminate physical cash. They are not really interested in something like bitcoin. They want to control the currency but eliminate the cash. They can use the right buzzwords and get people to use a digital representation of their currency. They don't want bank runs, there's nothing to withdraw if there's no cash. They can set any kind of monetary policy they want.