Arjun Balaji: A Financial System Built on Bitcoin

Arjun Balaji (Twitter)

The following is a transcript of a conversation between Anthony Pompliano and Arjun Balaji, CIO of Shomei Capital, about Bitcoin’s black hole pull, why enterprise blockchains and utility tokens don’t make sense, work on privacy, and more.

You can find the recording here: Off The Chain: Anthony Pompliano and Arjun Balaji.

Anthony Pompliano: All right guys, we’re here with Arjun. We’ve got a lot to talk about. I think you’re one of the realist people and one of the people who are not afraid to say what you think, and call out the projects that are frankly unworthy of existing.

Arjun Balaji: That’s almost all of them.

Pomp: How are you?

Arjun: I am doing well, man. I’m happy to be here. It’s a nice smoggy day in New York City.

Pomp: All right, so for those people that don’t know, let’s just go through real quick your background, and then we can jump into a whole bunch of different stuff.

Arjun: Sure. I will start with my birth only because it’s somewhat relevant. I was born in India. We immigrated to the US when I was about six years old, so first generation immigrants, was pushed into the lawyer, doctor, engineer type mold. My parents are conservative gold bugs. Actually, we had a rich gold culture growing up, and still do, and so I grew up, went to school in Boston.

Arjun: I was trained as an engineer and that’s when I first found Bitcoin, was in 2012, 2013 at the heyday of the Silk Road. That first run up in price. That was really exciting to watch and my politics were already aligned in that direction, in that libertarian and/or capitalist mold, and that was the first time I really had exposure to a wide group of people in that lens, so price action dies, I lost interest along with that.

Arjun: Who’s building anything? What’s going on? It wasn’t until a couple of years later that I saw what was happening in the community again and started working on and focusing on Bitcoin fulltime in 2016, and the first thing that I was exploring is the market microstructure itself.

Arjun: I was looking at, where were people trading Bitcoin? What were people using to trade Bitcoin? The markets still are very inefficient but it was far more inefficient back then. Exchange arbitrage was a very big thing. The spreads on the exchanges were very wide. There wasn’t really any … There wasn’t a lot of algorithmic execution.

Arjun: The volume was tiny, and so that was my first area of focus, and so subsequently over the next year and a half, and with all the run up in 2017, I spent a lot of my time helping people figure out how to navigate the microstructure and how to actually trade these markets and where there are opportunities to make money, and there are all sorts of questions.

Arjun: Not only all the things that I described but figuring out what the right ways to custody assets and that foregoing altogether the question of, what do I buy? I worked with a few large traditional hedge funds, helping them evangelizing Bitcoin, helping them explore the space, and have since for the last year, spent most of my time investing and trading my own money with a couple of outside investors in the process of institutionalizing that further, which is really exciting.

Pomp: Awesome. All right, we’re just going to start off with a bang here. Twenty years from now, Bitcoin, where are we, and not answers are price, but can we get to a global reserve currency? Can we get to it being used coexistence with the US dollar? What do you think is possible here?

Arjun: Sure, so I think that right now, Bitcoin is a global settlement layer. We’re already seeing that Bitcoin settles right now between one and $2 billion a day which is in US dollars which is substantial amount of money. I think that over the next 20 years, that number’s only going to continue to go up. I think over the next 20 years, we will have figured out ways to make Bitcoin viable for small scale payments as well which I don’t believe are going to be on chain.

Arjun: I think in terms of its existence in the global financial system, I see over the next 20 years, I think it’s entirely possible that central banks will hold Bitcoin reserves. I don’t know that it can achieve any reserve status currency over the next 20 years even in our wildest dreams but I think it’s entirely possible that it plays a significant role especially as smaller developing currencies start to collapse.

Arjun: I think what people often forget is that the median lifespan of most nation state-issued currencies isn’t that long and even … We look at the US dollar as having longevity and the US government being the lender of last resort, and US government in the grand scheme of things has existed, and dollars have been in circulation for a substantial amount of time. I think that especially with much smaller currencies, we’re seeing what happens with poor monetary policy.

Arjun: We’re seeing it in Iran, in Venezuela, in Turkey now, and I saw that I think you’ve put out a tweet earlier this week that [Roger Ver 00:05:45] though, but we’re seeing the collapse of currencies all over the world. I think that there’s a further conversation to be had about whether Bitcoin does become a global reserve asset itself, and this process is what a lot of the Bitcoin maximalist, of a group where I would consider myself formally in, consider hyperbitcoinization, so post hyperbitcoinization.

Arjun: Bitcoin is stable enough to be a viable means of exchange in native account all over the world, but I think well before that, there could exist in free banking type model, nation state-issued currencies that are just peg to Bitcoin, similar to how we had the gold standard, and before that in the late 19th century, early 20th century, we had all bimetallic pegs, all of which collapsed for a host of reasons. I think that the first step in that process will be actually returning to a Bitcoin reserve and this is something that Saifedean has covered in detail in the Bitcoin standard.

Arjun: I think before that, we’ll start to see substantial growth even from the volumes it’s doing today in Bitcoin’s utility as a global settlement layer where it’s already settling number step annually or comparable to gold markets.

Pomp: Absolutely, and so as this global settlement layer becomes more prevalent, do you think that these smaller currencies and smaller markets actually gravitate towards it in the short term or do you think it’s something where they’ll continue to flounder and really suffer until some other event makes this overly attractive to them? If you look at like Turkey for example right now, there’s some flight to Bitcoin but it’s not half the economy, and so how do you think about that?

Arjun: Yeah, I think that there’s two ways of thinking about it. One is over a very, very long term view and the reality is that in that very long term view, so long as it survives another day, being in Bitcoin’s almost like a black hole. It’s a black hole sucking in all assets that are weaker forms of money.

Arjun: I think that over a very, very long time horizon, it’s entirely possible that this could include the US dollar. On shorter time frames, I think it’s most relevant to even see what’s happening in Venezuela for example where citizens are swapping Bolivars for primarily dollars but also Bitcoin because even dollars despite the fact that there’s substantial number of dollars that are printed every year are still a significantly harder form of money than Bolivars.

Arjun: I think that what will happen over time is that people will always have this inclination to use their weak forms of money and to acquire and hoard stronger forms of money especially if they don’t have widespread access to it like they do Bitcoin, and so in the short term, I think that we’ll start to see the shift in economies where they absolutely have to or they have no other choice so in Venezuela, even if you had bought Bitcoin at the highest possible local rate at the peak of the market in December, your purchasing power in relative to Bolivars would still be twice what it would be if you withheld Bolivars despite the fact that Bitcoin has dropped by a factor of three.

Arjun: I think that in the short term, we’ll start to see shifts where people have no other choice especially in countries that have significant capital controls where they’re still able to bring in Bitcoin and in the long term, we’ll see. I think that it’s inevitable that we’ll see a convergence effect there.

Pomp: Absolutely. Yeah, one of the things that’s interesting to me is a lot of people are talking about the currency element of Bitcoin but there’s also a income aspect to it as well, and so earlier, we covered this thing, a gentleman from Venezuela so he’s a lawyer. He’s got three young kids and about, it sounds like two and a half, three years ago, he started to feel some of the economic pressure.

Pomp: He started a business for spare car parts, and so as he’s going through, more and more inflations hitting and right about the time where he realizes, two and a half years into his business, hey, this isn’t going to work. He discovers Bitcoin cryptocurrency, et cetera, and so he’s not poor.

Pomp: He’s not wealthy by American standards but he had a little bit of money and so he bought AntMiner S7 and so he starts mining cryptocurrency, Bitcoin specifically and then he bought another machine, and now his family literally lives off of the income that they receive from a couple of these machines. As long as he has electricity and he plugged that machine in, and he’s able to then go from Bitcoin to fiat, he’s got an income stream regardless of the economic situation around him.

Pomp: When you do the math, I think that one of the interesting parts is he was telling me that the minimum wage in Venezuela today is $1.25 in the US currency, but a S9 is mining 110, 130 bucks depending where the price difficulty is. It’s making him wealthy compared to that country’s standards in that perspective. How do you think people in those countries will continue to use cryptocurrency whether it’s trading, mining et cetera as a supplement to income, not just as a store of value?

Arjun: Sure, so I don’t … The original vision for 21 as I remember was actually that they were going to produce A6 that people were going to have all over the world that was going to be embedded in their IoT devices, on their phones, et cetera, that everyone would latently be earning Bitcoin on a continual basis and that autonomously older devices are going to be able to frictionless transact with each other, and a lot of the original visions for Bitcoin very much imagined the world expanding in this way where people would be mining their own Bitcoin, and that miners wouldn’t really be industrialized the way that they were.

Arjun: I think that was a mistake that many … Not a mistake even but just necessarily something that early Bitcoiners often didn’t anticipate. They didn’t see the growth of industrial scale mining operations especially for, concentrated in China. I think that the … The way I think regular people can be significantly impact to with Bitcoin is actually an extension of what’s already happening by the internet where they could live in a regime of substantial capital controls but so long as they have unfettered access to the internet either directly or via VPN, there’s pretty much nothing preventing them from earning global living wages so to speak.

Arjun: The best example that I can describe here is actually, recently, I bought a wallet. I bought a wallet directly from someone in Venezuela, not a Bitcoin wallet but a physical wallet and the wallet has some significance. I have it in my backpack so I’ll show you, but the wallet is made out of bolivars because this is reflective of how much the currency is worth.

Arjun: I bought it. I wanted to support this guy and his family, and now the thing that I’ve been talking to you about is setting up a storefront for him so that he could accept Bitcoin payments directly, ship things out directly, because he still has entire freedom to do that where they can earn a wage entirely independent of their financial system.

Arjun: It allows him to accept Bitcoin directly and so we’ve been working on trying to figure out the best way to get him up and running there. I think that that’s what’s really unlocked, is this frictionless commerce that can take place all over the world and it’s easy to produce commentary and say, “Transaction fees are 50 cents and it’s really hard to open a Lightning channel. Nobody’s really using the Lightning Network yet and there are all these problems.”

Arjun: I think the reality is that if you look at it bottom up and you see how people are using Bitcoin on the ground and what people’s psychosocial perception is of it, it’s easy to see how it’s changing people’s lives already.

Pomp: Absolutely and I think the incredible part is … What are we, 10 years in, less than 10 years? Yeah, and so it’s been pretty impactful on that global scale. What do you think about Wall Street? It seems like turning a corner a little bit and starting to say from the previous statement of not Bitcoin but Blockchain to now, it sounds like definite Blockchain and maybe Bitcoin is I think where we are right now where people are saying, “Maybe there is actually some value to this digital currency’s deflationary model et cetera.” How do you see that impacting one, the currency and then two, the feature outlook?

Arjun: Yeah, absolutely. I think that Wall Street is in the business of taking fees. Wall Street, it’s fundamentally investment, banking, commercial banking et cetera and so it’s a middleman business. It’s a business where you have a corporate entity who’s providing a service for clients and taking a fee for being in the middle of transactions.

Arjun: Fundamentally, Bitcoin is about the opposite of that. It’s about the ability to trustlessly disintermediate that process entirely and conduct frictionless commerce with two different parties who don’t have to know each other and it’s not a surprise to me that Wall Street historically have been receptive to Bitcoin, why they’ve chose to focus on Blockchain and not Bitcoin.

Arjun: I think that Blockchain for Wall Street is actually something that is fundamentally non-sensible because a close friend of my, [Moran 00:16:18], often likes to say that Blockchains don’t create revenues. Blockchains destroy revenues by their very nature. If done correctly, they would take away revenues from the core businesses of many banks.

Arjun: This alternate parallel capital market structure that people are building is actually a universe where traditional underwriters and middlemen don’t make any money. We’re starting to see the downstream effects of this. I see as this year have financed much and this is nothing to save the quality of these ICOs which is extraordinarily poor but I see as an aggregate, have raised more money globally than IPOs have in Q1 and Q2 this year.

Arjun: I think that there is a shift and a focus on Bitcoin but I think that it’s more driven by just demand that they’re seeing from high network clients, institutional clients about custody and trading Bitcoin, about buying it, holding it in their accounts, about providing prime broker services around it.

Arjun: I think that some of the more savvy banks are looking ahead to this but I don’t think the fundamental attitude has changed. I still see a lot of enterprise Blockchain, permission Blockchain projects, none of which have shipped anything of value. I think it’s pretty safe to say that today and a lot of these efforts have actually imploded but Wall Street, there’s a number of things that they bring.

Arjun: I think that the capital that comes with Wall Street is very important in order to institutionalize Bitcoin as a real asset class. I think the second really important thing is that with Wall Street comes a lot better security tools, custody tools, market infrastructure, liquidity, all of which is good for all Bitcoin users, not just Wall Street.

Arjun: I think the third thing that’s really interesting is that with Bitcoin is going to come … Bitcoin on Wall Street is going to come all interesting new financial products some of which I’ve been exploring but the lowest hanging fruit is ETFs and options and other derivatives products, all of which I think help contribute to Bitcoin’s path as a highly liquid saleable good.

Pomp: Absolutely. What was your first experience with Bitcoin? What drew you into it? What was the attraction to the tech?

Arjun: Yeah, so my first interaction with Bitcoin was actually transacting on the Silk Road, Free Ross. If anybody listening doesn’t know the Ross Ulbricht story, that’s in its great story, despite the fact that he was framed so Free Ross but that was my first exposure to Bitcoin and first, it just seemed like a gimmick fad, fake internet token that I didn’t even think twice about.

Arjun: I didn’t think about scarcity. I didn’t think about anything else and then later that year, in the early in 2013 was when I first started to look into it and think through. Why are people interested in this? What is the appeal? Who works on it? Admittedly and this is embarrassing, the first time I saw a Bitcoin, I actually thought it was a company.

Arjun: I didn’t realize it was this globally distributed network. I was like, what’s this company Bitcoin? Who runs it? What are they working on? I can’t find their website.

Pomp: They got some wild ideas.

Arjun: Right, exactly. I was like, this is a crazy idea. I was like, I love it, and so that was my first exposure. It wasn’t until later that I actually read the white paper. I tried running a note. I bought my first Bitcoin before that. I did a Western Union transfer to Japan actually to buy Bitcoin on Mt. Gox, still involved in that class section but it seems like we’re getting big so there’s some good things that happened.

Arjun: Once it all clicked, how it was resistant to government shutdown, what the novelty was around having a digital scarce resources et cetera. Once that clicked, everything made sense from there but it took me a long time. I remember, I looked at recently, I looked back at finding it from over five years ago to figure out what was the first thing I ever said about Bitcoin on the internet? The first thing I ever said about Bitcoin on the internet is, “I played around with Bitcoin a little bit today. Looks interesting but not sure the UX is there for the mainstream.”

Arjun: We’re here five years later and the UX is substantially better. Companies like Coinbase exist now, BitGo, Ledger. There are a number of great wallets. There are whole host of exchanges. There’s a lot of places where you can spend your Bitcoin, a lot of merchant payment tools but the UX still could use a lot of work and it’s something that dozens of teams are working on so it’s awesome.

Pomp: Absolutely. Let’s talk about the retail adaption in terms of there’s a lot of technologies in the space that are fairly deep in the weeds when it comes to how does the tech work, where can we solve some of the scalability issues et cetera and I think that they probably are not thinking as much about how do you drive adaption of that mass consumer.

Pomp: I think you mentioned that there’s going to be some financial products and things like ETFs that could potentially help open those gates to crypto. What has to happen on the UX side to make it easier for that mass consumer to not use a retail financial product like ETF et cetera but still get much easier access to buying, holding and transacting Bitcoin?

Arjun: Yes, so I think a lot of the UX actually does exist in really good ways. I think Coinbase, despite a lot of their foibles, has done a pretty job of it. I think Square’s done an amazing job. I actually think Square has now the best experience for using and working with Bitcoin but I think that the … When people say, “We need more user adaption or growth.”

Arjun: They’re often focused on the usability of products that interface with cryptocurrencies and I actually think that that’s not the main bottleneck. I think that the harder problem is actually shifting the narrative. It’s explaining and educating investors whether they’re institutional, whether they’re retail on what the merits of a non-sovereign money system could be and I think from there, branching into and exploring.

Arjun: What are other forms of money that could exist beside so a crypto money that could exist besides Bitcoin? What is the path to monetization of something like Ether et cetera but I think all that is grounded in education campaign more than an actual usability exercise.

Arjun: I think what we’ve seen in the past especially in the last retail run up is that a lot of the emphasis was around retail investors trying to seize what I’ll describe is the next Bitcoin, which I find is pretty misguided effort, but we saw Ripple run up substantially. We saw EOS and Ether run up substantially, and I think what was [inaudible 00:24:09], and we saw Cardano run up substantially especially in Asian markets where it has very broad-based appeal.

Arjun: I think that all of these users are looking for something that is better, faster, cheaper, has higher transaction throughput, et cetera, than Bitcoin. I think that that’s what’s driving a lot of retail interests is because they think that they can capture something that is meaningfully better than Bitcoin on those axes and I think that that approach is actually totally misguided.

Arjun: I don’t think it makes much sense. I think that what that reflects to me is actually that users don’t understand the value proposition of Bitcoin. They might be buying Bitcoin. They might be holding Bitcoin. They might even be using Bitcoin but I think that that education campaign is the first place to start is teaching all investors, institutional or retail, what the value propositions of Bitcoin are and what the history behind cryptocurrencies is and where value can accrue and be captured long term.

Pomp: Absolutely, and so do you think that the people who are looking for these alternative coins or improvements to Bitcoin. How much of it is human greed because I think there’s going to be appreciation of price versus they’re actually being thoughtful as to this is going to be better than Bitcoin and I truly believe that and withhold it for five years or more.

Arjun: Yeah, I think that and this is the reason why on twitter, I make jokes about this because on twitter, traders and investors are always talking about alt season. When is alt season? When are all the alt coins going to come back? What’s that shift? I think that alt season will always come back even with so many of these alt coins down, 90%.

Arjun: I think alt season will come back and the reason for that is because crypto networks have such small penetration into the global consciousness and human greed is so immense that I think it will come back and where about the greed improvement thing, I actually think that most crypto projects are driven by greed.

Arjun: I truly believe that. The cost of issuing new tokens has fallen pretty dramatically. It’s virtually zero now quite as white paper, landing page, marketing team, road show, advisor list, actual contract deployment so you can add on another two hours for that and you’re good to go. That’s what you need to raise money, and so I think that that mentality and reality has reflected in a lot of greed that we’ve seen from projects.

Arjun: I think that there are some people who in the world who have made efforts though I find them misguided. I think Vitalik is a great example of this. Originally, Vitalik tried to bring, try and complete and there’s two Bitcoin. There’s a number of reasons why the community pushed back against it, all of which in hindsight looked like great reasons and then Vitalik went and started a separate project.

Arjun: Similar things happened with the release of Monero or Zcash. I think other projects have some novelty to them but for the most part especially as you get into the long tail of say, lending projects. There’s five different crypto projects that are all working on some lending token. I think where you get into that, it’s much more grounded in greed on the part of teams or it’s an existing team that’s launching a crypto project where really, it’s a play for non-dilutive financing because that’s what all token raises are.

Arjun: There’s no corporate rights. There’s no [Pareto 00:28:04], liquidity rights, there’s really no rights of any kind, and so I think a lot of that is short termism. I think a lot of it greed driven. There are few brave projects out there that are vesting tokens which is an innovation the US technology investor market has come up with decades ago.

Arjun: There are some teams vesting tokens over very long periods of time, six or eight years which I find to be brave but something I would be terrified of as a founder. I do think it’s mostly greed driven and over the long term, I think it’s great. It’s bringing more interest to the space and really, all of these are free research projects for Bitcoin, that’s how I view it.

Arjun: Whatever it is, if it works out long term, it’ll find a way to get in. If it’s something that’s important, it’s something people value.

Pomp: You got one of my questions there. There’s something I want to start talking to you about in terms of smart contracts, zero knowledge proofs, all of these ancillary pieces of technology or concepts that are being explored by other cryptocurrencies or crypto assets you think eventually get contributed back to Bitcoin as long as they have value and sustainability to them.

Arjun: Yes, and it’s already happened. On smart contracts, the Rootstock team has spent a few years exploring this and there’s other teams exploring side chains to do smart contracts. Eric Martindale at-

Pomp: Fabric.

Arjun: Yeah, Fabric, on working on Fabric is working on a potential layer. We can call it layer three solution to building more complex scripting into Bitcoin, and so that’s already happening to an extent and I think the further Bitcoin monetizes, it’s actually going to be increasingly relevant. There’s actually another reframing here because when I say, “Hey, people are working on this stuff to push back,” I often get is, “Well, all of the DAPS are still being built elsewhere.”

Arjun: The reality is that people don’t want to waste their time. People, I think, largely, people in the Bitcoin development universe of say roughly 500, 2,000 people of which there are probably 50 or 70, 50, 75 really regular contributors to directly to Bitcoin and besides that contribution based, there’s thousands of people who work, who are building on Bitcoin or build or building services that have to interface with Bitcoin directly.

Arjun: These people don’t like to waste their time. There’s only so many of them in the world. I think that what they’re focused on building right now is the most secure protocol, that is most conservative in its assumptions, that is most safe in its method of operation and whatever else is important, let the market dictate what is important and incorporate that downstream.

Arjun: There are a number of on the privacy side, I think one of the things that’s been really interesting is this Bitcoin development culture where what it actually forces is a lot of the innovation that would be on like a base layer chain to be moved downstream, and so on the privacy angle, a lot of the interesting things that people are working on, on privacy, they’re like improvements on CoinJoin or other mixers.

Arjun: Samourai Wallet, I find really compelling as a project. They have an android app but haven’t released on IOS yet, and so a lot of the privacy components being moved to the transaction layer or a different layer I think is pretty compelling in the short to medium term future.

Arjun: I am pretty happy with the privacy projects that are out there particularly Zcash and Monero, both of which use different privacy mechanisms. I’ve been monitoring the launch of Grin pretty closely which will launch later this year or early next year which is another anonymous fair mind, interesting privacy project, and so I think that privacy is still something that’s very important for Bitcoin users and Bitcoin developers and the community of original cypherpunks that primarily Bitcoin is coalesced around.

Arjun: I’ve seen demos of different … I don’t want to name names but I’ve seen demos of different chain analysis tools and they are terrifying, man. I think that-

Pomp: Why?

Arjun: They’re terrifying because I think the logical implication of a lot of people focused on chain analysis despite the fact that it is still a little bit rudimentary, there’s still a lot of information to glean. I think that we’ll quickly move to a future where if Bitcoin is not fungible, it’s not fully fungible, we’re going to have different types of Bitcoin.

Arjun: We’re going to have clean Bitcoin. We’re going to have dirty Bitcoin and it will trade at different rates and I think that that’s not what we want in Bitcoin. I think we want fully fungible Bitcoin the same way gold is largely fungible. Cash, it has an identification in the form of serial numbers but direct transfer in cash is directly … It’s directly fungible and that’s part of the reason why drug dealers and terrorists often use US dollars. They use cash.

Pomp: It’s their choice of currency.

Arjun: Yeah, shout out, Jamie Dimon in here. He was wrong about that, and so I actually really do worry about a future where Bitcoin isn’t fully fungible and do think that fungibility is something that Bitcoin developers are pretty concentrated on and it’s something that’s improved substantially over time and there’s a number of proposals for different, everything from different signature types to full scale rearchitectures but I think any large scale privacy would be many years down the line but in the short to medium term, there are a lot of efforts focused on fungibility that I find compelling.

Pomp: Got it. All right, so I want to walk through a couple different people in the ecosystem that the position that they sit in and you tell me what you think from that perspective as to what they should do or how it impacts them.

Arjun: Sure.

Pomp: All right so the first one, if you’re the President of the United States and you see Bitcoin, what do you do and do you think it’s a threat to the country, to the US dollar? Do you think it’s something that you should embrace? How do you think through that framework if you’re sitting in the Oval Office?

Arjun: Sure. I do think Bitcoin is a threat to the US dollar but it’s not the only threat to the US dollar so I mean the renminbi is a threat to the US dollar that we know we actually have renminbi denominated. We have petro-renminbi futures contracts now, which is very relevant. If I were the president, my consideration would be, “Hey, this is a threat,” and Pierre Rochard at the Nakamoto Institute has written about this in the past. In the future where Bitcoin is a credible threat to nation states, we’ll start to see more and more speculative attacks.

Pomp: What are the most likely first couple?

Arjun: Sure. I think that the first couple, we’re already starting to see it. The French is right there in countries with no capital controls. We take Turkey this week as a perfect example, and they’re starting to get shut off, right? Just this week we’ve seen Turkish citizens gets shut off from PayPal. Soon, they’ll be shut off to other internet retailers. As their connection to the outside world is starting to get shut off … By the way, Bitcoin trading is not yet illegal in Turkey, but I do anticipate either that Bitcoin will be made illegal or that FX will shut down or that … I forgot I was going to say. Like I anticipate that this will happen in the short to medium-term future.

Pomp: You think that the first attacks are not violent in nature? They are more politically savvy in terms of trying to use either market forces, access to internet, access to communication outside [inaudible 00:36:46]?

Arjun: Yeah. I don’t think that we’re going to see full-on nation state level disputes over Bitcoin yet but I think it that would be prudent, especially given the amount of Bitcoin like this industrial Bitcoin concentration in Russia and China. It would be prudent to own some Bitcoin, right? There are few people working on this in Ghana, for example, who’ve been lobbying and working with the central banks of Africa to try to get them to hold Bitcoin exposure.

Arjun: I think we’re fully at the point right now where it’s more prudent to own a little bit than to not own any at all. I would approach it the same way if I were the president, is to do two big things. One is to make sure we own some Bitcoin, and second more importantly is to be welcoming of entrepreneurs working on truly decentralized systems. Because I think that what you have, and this has been described by number of people, but the universe where the US is not welcoming of crypto entrepreneurs is one where we effectively push away the potential architects of this open financial system elsewhere, and that’s not a place that we want to be at all.

Arjun: I think that that could come with a negative repercussions. I think the first order of priority is to be welcoming of Bitcoin and other truly open networks and technologies, while also clamping down on doubling down on investor protections and protecting retail investors from fraud, et cetera, et cetera. I think that’s less of a problem with Bitcoin specifically and more of problem with a long tail of crypto projects, but I think that both of those things are really important.

Pomp: Let’s keep going with this. As president you say, “Hey, we should own some Bitcoin. There’s $2 billion or $3 billion a day trading.” Do you just go buy as much as you possibly can over a couple of weeks and try to build $20 billion, $30 billion possession, or what do you do?

Arjun: Yeah. I think that, first, I would call the guys at the NSA and make sure that they didn’t create Bitcoin, and that this isn’t some huge NSA ruse. These things happen, right? We’ll find out 25 years from now what the NSA knew and didn’t know. Even RSA encryption in a form they’d actually come out with it privately, the NSA did four or five years before it was went through academia, but this tongue in cheek, is the first thing I would do.

Arjun: In terms of accumulating a possession, I don’t know the specifics about what disclosures would be required or which branch of the government will have to approve it, or what can be done by executive order, et cetera. The first focus rather than accumulating it would probably be this shed, better regulatory, and clarity on the environment, because the regulations that we have now are confusing. They’re bad for entrepreneurs.

Arjun: It’s confusing because it’s unclear because Bitcoin is really new, right? It doesn’t fit in to existing paradigm. It especially doesn’t fit into more traditional conceptions of money transfer businesses and money service businesses, and it’s unclear. The IRS says one thing. The SEC says another. It’s unclear what the status of it is. The SEC has attempted to shed some light on decentralization. I think that that’s also largely … It’s very up for interpretation.

Arjun: Actually, there are some problems there, I think as well, because what they’ve communicated is that there’s some slide for how decentralized something is. I think that that’s very, very hard to say, right? It leaves a lot of wiggle room. I think the first thing even more paramount to buying Bitcoin is actually clarifying what the regulatory environment is around Bitcoin and making clear that we are supported above and encourage development, and use the Bitcoin.

Arjun: We’ll see. It’s at odds with state-ish currency to some extent, right? It makes for all sorts of … Actually, even more complex regs around taxation, right? If I’m spending Bitcoin, do I have to calculate capital gains whenever I buy a cup of coffee, or is there a threshold under which it won’t matter? These are all very relevant and important questions.

Pomp: Absolutely. If you’re traditional investor, so maybe you have some working knowledge of cryptocurrency, Blockchain, Bitcoin, but you’re looking at your portfolio and your managing assets, how do you think about crypto in general, given your portfolio construction, and then how do you actually start to participate, if it all, into the asset class?

Arjun: Sure. I think that there are a couple of interesting lenses to look at Bitcoin as a traditional investor. One is Bitcoin as a form of crisis alpha, where it serves a similar function to maybe gold in that sense where it can be a non-correlated asset to the rest of the market. It could be safe haven when the rest of the markets are in turmoil, and then it’s part of having responsible portfolio. I think that’s one lens to look at it that something that people have proposed.

Arjun: I think it’s mostly incomplete because Bitcoin was born in the aftermath of the last financial crisis. Bitcoin itself has never gone through a broad-based collapse in equity markets. I think it’s unclear how it’ll perform in that universe. I actually don’t see it performing well in the event that we have, a large risk-off type market movement, absent of potential sovereign debt or currency crisis. I think that in that lens Bitcoin could actually potentially shine.

Arjun: Another lens to approach it as an institutional investor is to say, “Hey, this crypto thing is this big bet on a new trend, a new macrotrend. The trend that a lot of people have described as Web 3.0 or something else where I think the smart way … I personally believe that the smartest on a risk-adjusted basis, the smartest thing to do is just to buy Bitcoin. A lot of investors I know are opting to own a basket of cryptocurrencies which will eventually converge on the market winner or winners depending on how you think the power-law dynamics will shape out. That’s another option to play into it.

Arjun: The third is investing directly which many investors have done. The custody infrastructure for holding assets is isn’t quite there and I think that’ll change a lot in the next six to 12 months. The financial products that could exist for investors aren’t quite there yet. I think that that’s the third option is investing directly and being very wary of putting money into projects that seem appealing on the basis of Blockchain technology which I consider largely to be a scam.

Arjun: I think that a lot of the original money that came from traditional investors went into exactly that from a lot of traditional hedge fund managers, private equity investors, FinTech investors. A lot of that money went into funding private enterprise permissioned Blockchains where in that 14 to 16 period when investors thought Bitcoin was dead, they invested in all of these private Blockchain projects because that was something that they could understand, and I think that that’s a really dangerous place to be.

Arjun: If I were an institutional investor outside clients, my lens would be to allocate a very small percentage of portfolio directly to Bitcoin. If that isn’t compelling would be to allocate to a basket, and there’s a couple ways to buy baskets.

Pomp: Got it. Let’s go down the rabbit hole of this enterprise Blockchain or not Bitcoin but Blockchain. I agree with you that 99% of those use cases or applications are complete garbage, right? If you take a step back and you remove all of the hype and sexiness of the word Blockchain, we’re talking about a database, right? That is what we’re talking about it here.

Arjun: Exactly.

Pomp: In order for people to get that excited about a database, there would either have to be one some … Such a technical leap in terms of efficiency, effectiveness, et cetera, or two, there would have to be something that that database allowed us to do that we previously want to able to do before, right?

Arjun: Yeah. Enterprise Blockchains are back office automation system, right? It’s a back office upgrade essentially. The awesome part is Wall Street historically doesn’t put money into the back office, right? It puts a bare minimum because it’s not a profit center, it’s a cost center. Why invest more in the back office than you absolutely need to? This really is a way for back office teams to lobby for more financing for this essential infrastructure that needs to upgrade.

Arjun: I don’t see a lot of value being captured there because actually they’re creating hypothetically more efficient systems, right? If there’s all these improved deficiencies, I don’t see how. It might be cutting cost but I don’t see it creating and subsequent to capturing a lot of value, which is the disconnect I think a lot of people have in this ecosystem broadly. Not just in Wall Street but in general is the disconnect between value creation and value capture, I think that that problem remains just largely unsolved in many teams’ minds.

Pomp: Absolutely. If Bitcoin is that digital currency, maybe it takes some time to play up but we eventually get to, “Hey, this is a true currency that has multiple properties that we’re looking for.” Do you think that there is a world in the digital age of finance where there’s digital stocks, digital bonds, digital commodities, all of these other applications that aren’t necessarily enterprise Blockchain but they are digital assets, they’re native to this environment but they represent or have analogous properties to their non-digital peers?

Arjun: Yes, Pomp. I think we’ll tokenize the world. No. I think that all financial instruments will eventually be digital in some form, right? Even stuff that’s represented with the paper now in the basement of the SEC, I think it’s all going to be digital, it’s inevitable, and I welcome that future. That’ll be really exciting. I think that there will emerge new capital market structures altogether where deals will be financed frictionlessly all over the world. You’ll be able to move from brokers A to brokers B in a very straightforward process.

Arjun: I think that all of that infrastructure will eventually exist because I see capital markets and capital formation. I see sound money first as the largest addressable market, and not by a small difference, by many orders of magnitude. Then, second thing I find compelling is actually a recreation of a capital market structure around that, so I do think that this will be somewhat inevitable. Actually, the things that are interesting to me here are less around what a lot of … It’s more tokenized securities offerings and unique financing models, and people have proposed doing under [REGD 00:49:18] offerings here in the US.

Arjun: What I’m interested in is actually like the more subversive stuff where I would consider Binance Coin, BNB. Binance is native exchange token to be an example of what I would consider a subversive illegal securities offering is a stretch because it might be illegal only to US investors. They basically raised an ICO, issued the token in exchange for that, had some discounts and features for holders of the token, and then issued up basically a burn mechanism where they buy back tokens and subsequently burned them based on their profits every quarter.

Arjun: Now they’re launching very, very, very sizable crypto fund that’s investing in very high quality early stage projects, and they’re basically passing on returns from that fund back to users, right? What I’m describing is entirely a security, right? It’s a very unique form of security where it has this dual utility function and security-like feature where the benefits, the efforts of Binance and their team feeds right back into the security. Many people would be appalled, they would consider it super illegal. What they’ve now created is a very broad investor base of tens of thousands if not hundreds of thousands of investors all over the world, all of whom have profited substantially. The token is appreciated substantially and they’ve been fully transparent.

Arjun: I think the next levels for them is moving to a decentralized exchange model which they’ve been working on for some time, first. Second, shifting to a model where all of their cash flows are actually directly distributed on chain and they can do … Once they have a decentralized exchange going, they can even do potential buybacks and burning functions all autonomously. What happens in that universe starts to resemble something much more close to a DAO structure.

Arjun: I think the DAO was a disaster, it was still exciting, right? It was exciting for me to follow. It’s still exciting to me now. I think the potential of DAO is very underappreciated. All of these DAOs I think will have equity-like characteristics, right? I think that that will exist all over the world and all different capital formation structures and that’s really cool to me. Around that, I do see a whole new decentralized financial system forming whether all of this will have separate tokens, I don’t know whether … There’s a number of questions that remains that are how governance look in this DAO universe but it’s cool, it’s exciting.

Pomp: Absolutely. Let’s go back to this idea of a security and a utility and can something have properties of both, can it transitioned between the two, et cetera. In the traditional non-crypto world, there are shareholders that hold equity and there is utility to sometimes being a shareholder access to a shareholder meeting or event, that type of stuff. For the most part, outside of some more gimmicky type stuff, if you hold a security, it’s a security and there’s not much utility to it other than the value depreciation, et cetera.

Pomp: In this world we’re seeing the blending or that blurring of those lines. What excites you the most in terms of as long as people continue to follow the rules and regulators work with them, et cetera? What do you think is possible there? Right. Is it the Binance model or is there other things that you think could possibly be this blended security utility could be used for that could be compelling to either investors or hoarders of the token that use in the incentive model?

Arjun: Yeah. For the most part, I hate utility tokens. I think that they have little utility. I think that there hasn’t been a single utility token, a pure utility token that I’ve seen designed that is thoughtfully figured out how it could work at a future high demand equilibrium state. I think-

Pomp: Even Ether.

Arjun: Yes, including Ether. I think that my favorite actually utility token example is something like Sia. I find Sia’s model pretty compelling and the way it works is they have two different tokens. One is an equity or traditional equity token where it has all of the same class structures as equity would have. It has a separate utility token which is used for participating in the network that has a lot of qualities that utility tokens have.

Arjun: In their future high demand high-throughput state, it’s highly unlikely that the utility token is ever going to make a good investment that they’re clear with that from day one. What it does offer is exactly what it describes, right? It helps access utility in their network while the security structure actually provides recourse for investors and they have some claim, and it aligns this for the team. Because I think the problem with most utility tokens is that there is a strict conflict oftentimes that emerges between the incentives of the team and the incentives of their potential users and the incentives of their potential investors.

Arjun: Oftentimes these three things aren’t totally aligned, right? A universe where there’s high velocity in utility systems and these network tokens or these networks actually do see high usage rates is actually one where users benefit but the team or investors might not necessarily be incentivized to do work on it or participate as an investment. In a fixed supply world, oftentimes these are … It’s pragmatic for users while being more beneficial for the team or for investors, and there’s all sorts of models that people have come up with just to write a work around this.

Arjun: There’s token bonding curves and just maintain burn models, and people, they’re trying all things, right? They’re throwing a lot of things at the wall, experimenting with cryptoeconomics and tokenomics, and all of these LinkedIn buzzwords almost. The reality is that I find the security utility token, that dual token structure, that has clearly delineated what the incentives are for each party in aligning all of those in the same direction. I find that super compelling. I think it’s really cool.

Pomp: Got it. Now, I think that that’s a really interesting thought process to go through and see where that can even lead 20 years on the road, right? Let me ask this, what’s the one thought that you have or the one belief you hold that a large majority of people would disagree with you on?

Arjun: Yeah. There’s a lot of things, I would already consider myself a Bitcoin maximalist which I think it’s a minority position. I think it’s probably more interesting to see even in the universe of Bitcoin maximalist on which oftentimes to outsiders is this amorphous blob of a community where everybody is aligned and eat steak and it hates socialist and this is all the same type of person and loves guns. I love guns and hate socialist. I’m actually vegetarian, so there’s a minority position there.

Arjun: I think the more interesting question is what do I disagree with most even into Bitcoin maximalism world, and there’s two things. One is that I see credit systems and this world of banking systems being built on top of Bitcoin as being inevitable, I think people will do them, and I think that they have the potential to work for a really long time, right? A lot of Bitcoin users enthusiast especially those that were here from very early on disagree with that promise, including most recently it sparked up in a debate between Saifedean Ammous wrote the Bitcoin standard and George Selgin who is an OGE cypherpunk.

Arjun: He’s in the original cypherpunk mailing list. He’s with I believe the Cato Institute now around free banking in Bitcoin. I actually find Selgin to be very … I’m very sympathetic towards it. I think that all these sub-unique banking constructs I think will emerge on top of Bitcoin and credit systems about Bitcoin are inevitable and that we should welcome it. I don’t know if it’ll be sustainable work forever especially because there are a number of structural limitations to how Bitcoin is designed.

Arjun: These are good, that there are limitations to what non-Bitcoins bank actors can do. I find that vision of Bitcoin to be not only inevitable but pretty interesting. That’s one large thing that I disagree with in the Bitcoin maximalist universe. The second belief that I would have that is probably contradictory to many people in the Bitcoin maximalist universe is that I really do believe that, especially in the short to medium term which I would describe as even extending past to the next 10 years, I think that Bitcoin will be winner take most, not winner take all, and it will slowly increase in dominance.

Arjun: I think it’s that in a roughly 55% to 60% dominance right now and I anticipate that that’ll go up over time. I see two things as potentially being a few things as being valuable to the market that will emerge over time. I think privacy is systematically undervalued. I think everyone says they care about privacy but I don’t think that’s reflected to all into relative value of projects and teams working on privacy relative to everything else, especially in the [inaudible 00:59:45] universe. That’s one thing I think is systemically undervalued.

Arjun: I think some form of stablecoin, I don’t think any of the stablecoins that exist right now that have launched or really robust, but I think that over the next … At least over the next five years, I think a lot of them by design, will be very hard to kill, and it won’t die for a very long time. I actually see them holding some appeal, especially because I think that the design of stablecoins, though a lot of it is misguided keenzy nonsense, I think that narrative is very appealing to a lot of people I talked to on Wall Street who look at that and go, “Wait, that makes sense to me.”

Arjun: I can see this algorithm at central bank model being compelling, so I think we’ll see that as well. In terms of how to market the long term, I am sympathetically view that Bitcoin is the black hole. I think in the short to medium term that there are a lot of things that’ll hold value because of what the market views as structural limitations of Bitcoin for now.

Pomp: Got it, it makes sense. All right. Before I end, each one, I’ll let the guests ask me one question. What question would you ask me?

Arjun: I think that my biggest question that I’ve always wanted-

Pomp: I’m so scared to what you’re about to ask.

Arjun: How did you come up with the virus spreading-

Pomp: Man.

Arjun: I feel the second person to ask this.

Pomp: Really?

Arjun: Yes. Yes.

Pomp: This is the second time. Long story short, I think Twitter’s full of characters of ourselves, and so this analogy is like imagine if we were all just in the WWE on Twitter and there’s the hero, the villain, the announcer, the referee, et cetera, and those characters all have tag-ons, right? If you ever watched wrestling growing up you could probably tell me the Undertaker, The Rock, Steve Austin, all the characters. I did not have a grand plan when I first said it. It was more of just-

Arjun: You say that. You say-

Pomp: No, no, no, no, no, I swear. The idea that Blockchain, Bitcoin, crypto was just it was capturing the mental energy of so many people and it was just spreading and no one could stop it. There was this viral phenomenon or this virus, right? I tweeted at one day-

Arjun: There’s like no crash.

Pomp: A little bit. Yeah. Yeah. Yeah. When I tweeted it I put a rocket emoji next to it and next thing I knew people were tweeting back and tagging me on things and it just took on a life of its own. Look, I tend to think that there are things that take off because they have a little bit of truth to them and that’s why we latch onto them. That one is run its course, right? If you noticed I don’t really push as much anymore, I think it went … Got the idea, hey, there’s no stopping this thing.

Pomp: I’m actually surprised at how bad the crypto community is at taking what is pretty intelligent thoughtful many times complex ideas and work, and presenting it to an audience that probably doesn’t have the same passion understanding, et cetera. Taking of the complex ideas and making them simple and really delivering them to a much wider audience I think is not only compelling for Bitcoin and crypto’s sake but also it helps, right?

Pomp: I think that something like the virus is spreading is really easy for that lesser in the way to crowd to grab onto. Is that the message we want them to walk away from crypto? No, right? At the same time if that gets them interested and push them in the door then we can actually educate them I think actually it can be a viable thing.

Arjun: Yeah. This is something I’ve written about in the past because I actually think that the most interesting “fundamental” indicator to me counterintuitively is actually price section and fund flows because that’s always I view, a lot of view the crypto markets as startups with stocktakers which I think is a flawed model for a lot of the reasons I’ve described.

Arjun: I think that currency markets it’s actually much more important to focus on fund flows, right? What do people see as a future money, right? What are the narratives that they’re going to latch onto? I mentioned a lot of narratives that I personally find compelling. What are the narratives that you think institutional investors are really interested in?

Pomp: Yeah. I think that the best framework for this is they have a [inaudible 01:04:41] of capital, so they’ve got equity, debt, real estate, fixed income, et cetera. If they see ways to deploy equity, capital into this vertical that is attracted to them, they understand what they’re buying, they have a dedicated pull off, capital for it, et cetera. I look at take equity, so venture capital specifically, as it’s like something raising a VC funds thing. I have a health care focus VC fund, right?

Pomp: You’re just doing venture capital inside of the health care industry. Crypto focused VC fund, it’s just venture capital inside of crypto Blockchain space, right? I think where the institutions get off the rails or there’s a disconnect is when they’re getting pitched, “Hey, you should buy Bitcoin. You should buy these digital assets.” There’s going to be some really adopters for sure, right? They’re probably right, single digit to lower double digit and millions of dollars checks to dip their toe on the water, et cetera.

Pomp: I don’t think that the majority are ready to do that yet, right? They don’t understand, yes, a class. They don’t know where the capital come from on their side. There are just some hurdles that need to get jumped over before they’re ready to do that. I do think that if you can start to show them, “Hey, my name, it’s an infrastructure investment,” and there’s cash flow and you start to walk them to a couple of different applications of the Blockchain technology but allow them to invest without hoarding the digital assets themselves, I think that’s a much easier conversation than “Hey, go by Bitcoin.”

Pomp: I would not be surprised though at the same time if over the next 12 months that rapidly changes. I think that [ICE 01:06:22] and some of these larger names, I really put them in two buckets, some are the pretenders and some are the operators, right? The pretenders are the ones who just keep every day is in different press announcement and they’re exploring something. They’re potentially going to possibly announce a future partnership with somebody and you’re just like, “What are you guys doing?” right?

Pomp: The operators are the ones I think ICE is in that bucket where they say, “Look, we’ve already built some stuff. We’re going to continue building stuff, it’s going to launch in the next 60 days.” That type of propensity for action I think from a large player is definitely eye-opening to these institutions. Then look, we’ve seen a couple of institutions jumped already across the ecosystem, I think that we probably need another three to four months of that to continuing to happen.

Pomp: Then it’s almost going to flip very violently and people are going to say, “Look, if you do not have this in your portfolio, you actually are not fulfilling your duty because this could potentially be one of the highest performing assets in a portfolio and you don’t have any exposure.”

Arjun: Yeah. I sometimes say it’s people don’t have a choice, right? People can decide when they want to become a Bitcoin maximalist but they really don’t have a choice, right? It converges on that eventually and people will capitulate eventually about I’m not super worried about that.

Pomp: Absolutely. Last thing I’ll leave you with is I have … This is coming from somebody who fully believes in the digital age Bitcoin being the digital currency but digital stocks, bonds, commodity, and all that stuff. Not even necessarily convinced that it has to be on the Blockchain, it can just be digital. I think that when you really dig into Blockchain technology specifically, I would say over 80%, 90% of people probably started with Bitcoin and they have this well-worn path from Bitcoin to enterprise Blockchain to Altcoins, to whatever, and they end up all circling back and end up to have Bitcoin, right?

Pomp: Every single person I know has gone down some variation of that path where the intellectual curiosity takes you there, right? It’s could you actually apply this technology to this application, could you, whatever, and it just takes time, right? It’s probably 18, 24 months and people come back around and they’re always, “Man, I couldn’t save myself a bunch of time. I just saw Bitcoin, believe Bitcoin and stock with Bitcoin.”

Arjun: The more you research the space the more you look at the projects, you come back to it because there’s an elegance to it, right?

Pomp: Absolutely.

Arjun: There is this elegance of Immaculate Conception, right? It’s this elegance that came theoretically just works, right? It’s the security model which is the best in the world, right? It’s the subservience of minors to users consequent in contrast to a lot of people believe that’s how Bitcoin works. Seeing the success of the user-activated soft work initiative last year in light of segue to acts in Bitcoin cash and users controlling Bitcoin, right? What we learned last year and you can make of the commentary that you want about Bitcoin, about its transaction capacity, about a number of things.

Arjun: What you can’t criticize is that Bitcoin is hard to change and that users control Bitcoin, right? Miners don’t control Bitcoin. Businesses don’t control Bitcoin. Barry Silbert doesn’t control Bitcoin. Users control Bitcoin, and that’s really awesome. Once you realize the simplicity that that and the path to governments even trying to shut down Bitcoin it all makes sense and you can unsee that, right? Once you take that red pellet it’s ain’t over.

Pomp: We’re going to end this thing on three words, Bitcoin is beautiful.

Arjun: Yes, it is.

Pomp: Awesome. Thank you so much. I really, really appreciate this. You definitely have unique perspective in this whole world and I appreciate you’re sharing with us today.

Arjun: Yeah. See you at 100K, we’ll record again.

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You can find the recording here: Off The Chain: Anthony Pompliano and Arjun Balaji.

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