Gabor Gurbacs: What’s the latest with the Bitcoin ETF?

Anthony Pompliano
Oct 9, 2018 · 34 min read
Gabor Gurbacs

The following is a transcript of a conversation between Anthony Pompliano and Gabor Gurbacs, Director of Digital Asset Strategy at VanEck, where they discuss the ridiculous accreditation laws, Bitcoin and traditional ETFs, why regulators are currently concerned about crypto, and Gabor’s prediction for the growth of retail crypto projects.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Gabor Gurbacs

Anthony Pompliano: All right guys. This is going to be an awesome episode. I’ve got Gabor here from VanEck and we’ve got a lot to cover. We’re going to touch on all things ETF, retail products, and some cool stories from your background. So I appreciate you coming on.

Gabor Gurbacs: Thanks, Pomp, for having me, fun to be here.

Pomp: Absolutely. All right, so let’s get started with, you know, born outside the U.S., right? So let’s walk through kind of how your background, how you get to the U.S., and we’ll go from there.

Gabor: Yes, absolutely. So I was born in Hungary, which is in central Europe in 1990. That is the time when communism fell in Eastern Europe. My parents were also in Hungary. Probably the interesting bit going in digital assets related part of the story is that two generations of my parents suffered under various dictatorships. First, the National Socialist in the ’40s. Then, from the ’70s to the ’90s under communism. Both of these generations had issues with their property, so their properties have been confiscated. They would have been very glad if they had an asset, something like Bitcoin.

Gabor: So, ’90s kid, I started in Hungary, lived a little bit in Germany, and Italy, and then came to the US to finish up my high school in, of all places, Massachusetts, Deerfield Academy, and then went to Williams College. At Williams College I triple majored in Mathematics, Sociology, and German. I was Bitcoin class of 2012, and I was class of 2014 otherwise in math, so I did a lot of work on distributed systems and discrete mathematics and graph theory and that’s how I found Bitcoin.

Pomp: That’s amazing. Bitcoin class of 2012, I haven’t heard that one yet, so we’re gonna have to steal that one. So let’s talk about, your family grows up in Hungary right? You obviously have that experience in … before we were talking about Bitcoin transactions early on in Central Europe, didn’t exactly involve Coinbase or any of these other exchanges. How are people actually transacting Bitcoin at the time?

Gabor: Yeah that’s actually a super interesting question. I was at the Budapest Technical University and one of my friends was telling about this thing called Bitcoin and he was about to send something like $80 worth of money to a Romanian dude who he has never met on Western Union, and the plan was that he sends this $80 to this guy who he has no idea about, and he’s going to get an e-mail with his public key, and a few days later in the physical letter, he would get his private key and then he would have access to this imaginary thing on what’s called the blockchain, or really Bitcoin, and so that was Bitcoin’s rating in 2012 and in the same year, two exchanges Bitstamp and BTC-e, have been established and you know, since then we have come far. We have over the counter trading, high frequency trading, futures contracts, ETFs, that’s almost crazy to me.

Pomp: Whoa, whoa, whoa, hold on. But it’s even crazier what you described, right? So 2012 … first of all, why is your friend in Hungary sending money to somebody in Romania that they don’t know?

Gabor: Yeah, I mean, that’s … so Technical University in Hungary is just famous of producing some of the best mathematicians and combinatorics and distributed systems so he was studying distributed systems and so one of the things that we have done together is looking at how difficult it would be to destroy the internet, you know things that Eastern European guys are thinking about in Budapest, Hungary.

Gabor: So we got interested in sort of like resistance systems, systems that are resistant to stress and we found that it takes about like 81% … you need to destroy 81% of the computers in the internet in order to shut down the internet. And we were thinking about it in the context of economics and money and found Bitcoin through some of the subgroups at the university who were studying really practical systems that are in place, not in theory but in practice and he was like, you know, I need to buy this but how do you buy this and that’s how he … you just go into Reddit and sub-blogs and found this Romanian guy who was selling Bitcoin.

Pomp: That is absolutely amazing. And so what people were doing was sending one of the keys via email, and then they were literally sending the private key via snail mail. Literally a physical letter with the private key in it and so me as the recipient, I would receive the email with the public key, mail in a physical format with the private key, I could put them together and now I’ve got access to the Bitcoin.

Gabor: Yeah, that’s correct. And that was from purchase to settlement, it was probably around five, seven days and geographical distance was probably around 400, 500 miles if the guy was really in the place where he stated he was. We never figured out whether he was at that place but he delivered on the obligation. The crazier thing was that you literally have to put up the check on Western Union to a person before any of these things would happen. But yeah, that was Bitcoin trading in 2012.

Pomp: The crypto-community really trusts each other.

Gabor: Yeah, I think the systems got a little bit better.

Pomp: Absolutely. Alright, so how do you go from living in Hungary sending $ 80 to random Romanians to working at VanEck? What’s kind of the path there?

Gabor: Yup, so I graduated from Williams College and my degree was in mathematics and I reached out to a bunch of people on my network and I’m sort of known to be a power networker and I really take networking seriously. So I reached out to a bunch of folks, one of our board members introduced me to Jan van Eck, who is the CEO of VanEck today and the guy is a visionary. He runs a private company with roughly $50 billion in assets and from moment one I knew that that’s where I want to work. So I joined the ETF team at VanEck so my responsibilities were a few fold. One of them was building new ETFs for the firm, so we built some country funds, green bond funds, wide moat ETF mirroring Warren Buffet’s investment strategy. We built some EM local currency bonds and VanEck was specializing in providing access to harder to access areas so my job was to do the non-sexy work in the background.

Gabor: And we also have large clients and I think Morgan Creek is occasionally our clients but the large shops are asking for the allocation recommendation, you know why should you own gold, why should you own emerging markets and so those were the questions that I’d been fielding and because of my background in mathematics and the pick up in crypto about two years ago, one and a half, two years ago I refocused completely on crypto and basically since then I’m working on building in the right market structure for exchange traded products and digital assets related vehicles.

Pomp: Amazing. So before we get into all the digital assets and kind of the exciting, sexy stuff of today, VanEck’s got a really interesting background, right, the company itself. Let’s walk through how did the company get started and what were some of those early products like and then eventually into the gold market. But let’s really start at the founding of the company.

Gabor: So VanEck was built in 1955. That’s not yesterday so it’s one of the older private asset manager companies and it was established by John van Eck who was a visionary and he has built a few things that are real firsts in the market. In the 50s, Mr. van Eck, John van Eck that is, built the first international investors fund so after World War II, Mr. van Eck was thinking about ways in which the post-war reconstruction could be accessed and how an investor from the United States would benefit from the growth that would inevitably take place and so he built the first international fund and people are like 50s … the international stocks were like Bitcoin in the 50s. People were like, why would you invest in these things? And in the next years to come, international investing picked up so that was the first fund.

Gabor: Then in the late 60s, Mr. van Eck, I think at that point in time he had a few kids and he was employed full time and decided to do a PhD in economics of all things, because as our CEO Jan van Eck would say, that’s the kind of thing people have time for in the evening school, a PhD in economics. And Mr. van Eck was a student of Ludwig Von Mises who was an Austrian economist and a part time professor at NYU and so Mr. VanEck called the gold liquidated, I think something like 70% to 80% of his holdings and in 1968 he created the first gold equity fund in the United States. Back then, again, people asked the same questions as 13 years before, why the hell would you invest in gold, right, and what is gold good for and before the gold standard was done away, gold was fixed near $35 per ounce and so Mr. van Eck created this fund and we know that gold sort of like picked up around $1200 an ounce today and became an $8 trillion market and is the top safe haven asset today.

Gabor: And then kind of the story goes forward, Jan van Eck, our current CEO took over and in the 2000s he launched one of the first of these things called the ETFs. And ETFs became in the US around a $4 trillion industry and provide unprecedented liquidity and access to harder to access areas and so Jan, our CEO has pioneered ETFs and he built some of the largest gold equity ETFs, GDX and GDXJ and he also hired a geologist, hired folks from … there’s a bunch of international people … he also built some of the first EM equity funds, that’s really VanEck and built things like moats, and moat is our Warren Buffet-like investing structure and some of the large municipal bond funds and a few other products on the country side. So areas that were at the time harder to access, for instance Russia, Russia investing was really tough because of sanctions and we built the fund RSX provides access to Russia and we built some of the smaller cap, Indonesia, Vietnam, and smaller country exposure funds that people have a hard time investing in in a way that would be liquid.

Gabor: So fast forward in time about I think around, we started conversations like two and a half, three years ago on the topic. We wanted to see what we could do on the digital assets and so it was a natural for VanEck to kind of transition into it. And we were like, oh, okay, so our core competency now is ETFs and around 35 billion of our 48 billion is in ETFs, we wanted to build a Bitcoin ETF. And then learn about this like a whole slew of things that needs to be put in place like validation, custody, and all these market structure questions that we were not aware of at the moment, at that moment, at that time.

Pomp: Absolutely. So let’s talk about what is the parallels that you guys, who are one of the pioneers in gold and gold ETFs, et cetera, see with the digital assets space? Are there any things that you’ve learned from being at the forefront of the gold industry that you’re using today or maybe even things that you’re avoiding?

Gabor: Yes. First of all, we learned that similarly to gold, I mentioned valuation back in the 70s, people were in the same place as with Bitcoin. Gold markets were fragmented and no one really understood like what is the price of Bitcoin, right? And so we learned that we would need to put in place a benchmark that would be sufficient for pricing Bitcoin for institutional investors so through our German subsidiary, MVIS, which is a [inaudible 00:13:09] benchmark registered in that same entity, we launched regulated indices and iterated with the SEC regulators on is this good enough to price Bitcoin and so we tracked the top 50 markets with our partner, CryptoCompare, which is a UK shop, one of the probably best known shops for providing accurate data on crypto. And so I am investing that with CryptoCompare and created these benchmarks. So that was you know, pricing and valuation was one of the things.

Gabor: Secondarily, we knew that derivatives markets are gonna be built around physical things that are traded, you know as physical as Bitcoin gets, but like sure enough futures contracts by CBO and CME were at that time built and our commodity traders at VanEck were instrumental in building some of the first gold and commodity contracts so we learned for instance, that cash delivered contracts are actually an improved version of futures contracts and a lot of people talk about physically delivered Bitcoin futures but a cash delivered futures … so in the 70s, there were physically delivered futures because if you had a thousand barrels of oil you had to actually go to the port and take your thousand barrels of oil and then traders are like, well I don’t know if I want to have a thousand barrels of oil delivered so they created something called a cash delivered future and started rolling contracts and having these obligations that are never delivered. So we immediately understood that cash delivered futures like as they exist today are actually an improvement and they are useful.

Gabor: So those are two of the things actually that we learned.

Pomp: Absolutely, no, so, so fascinating. So let’s go into what an ETF is. Like ETF 101, right. So I know nothing about ETFs, pitch me on what is an ETF and why are they important.

Gabor: Liquidity is the single key word why ETFs are important. So an ETF is basically a stock plus a mutual fund equals an ETF. So a mutual fund is generally a vehicle that trades and can pool assets and provides … it’s a pooled investment vehicle that investors … different, larger amounts of investors can put money into. We have mutual funds on emerging markets, the S&P 500, and a bunch of other things. And mutual funds are sort of like, were an invention or innovation in the 70s that you can invest with other people unlike what you do kind of on a private equity basis you go yourself and not with others. The tough part of that was that mutual funds are non-transparent so that you don’t know the exact amount of holdings during the day and often during the month. So you just don’t know what the mutual fund manager holds and you put your trust into the manager that they do the right thing.

Gabor: ETFs adds the aspect of a stock to the mutual fund. So ETF by definition is an exchange traded fund, so it trades in an exchange like a stock, you have every 15 seconds you have a price tick on where it is and at the end of the day, you also have a holdings published. Insurers need to publish their holdings on a daily basis and the cool thing is at the end of the day, you can always buy at 4pm US time for US ETFs, at an ETF, an NAV. NAV is a net asset value so at the end of every day you know the exact value of the fund holdings and you can transact on them. And the reason why … so why is this … so this is what an ETF is and how do they work. Well ETFs are securities that issue shares. So say an ETF issues 100,000 shares and what then happens is companies called authorized participants like larger wirehouses, your Goldmans, JP Morgans, large companies of the world, buy the underlying of stocks of an exchange traded fund and exchange it for the share of an ETF.

Gabor: So why is that important? For instance, let’s just use the S&P 500 as an example. If you bought the S&P 500 stock by stock, it would be really hard to do if you wanted to replicate that performance. Now if a large company does the work for you and buys the underlying assets and you can just exchange it to the share of the ETF, it makes the preassign process more efficient, cheaper, and these companies hold large inventories of the underlying assets so that means that they will add liquidity whenever you would like to issue or redeem shares of a fund. So basically you get an extra set of liquidity from authorized participants who are incentivized to buy and sell securities and liquidity is the single most important key word in investing, especially in the crypto markets where if you put a $30 million order in that may impact the price of something, let’s say Bitcoin, fairly significantly.

Gabor: So ETFs by definition help with liquidity management and yeah, so they’re just … and there’s … what I call them, ETFs are sort of like the trust minimized version of stock investing cause all these parties that are like the APs are competing with each other, they don’t need to trust each other, the investor doesn’t need to trust the fund manager like the hedge fund manager or a mutual fund manager and sure enough, ETF did pick up …

Pomp: So what are the downsides to an ETF? There’s a bunch of pros obviously, especially in crypto, but what are the downsides to actually having these products available to retail investors?

Gabor: Compared to the current landscape, if you’re talking about digital assets specifically, I don’t see many downsides because ETF ad liquidity, they have AMLK requirements, generally their custodians insures underlying asset. Again, it’s the most stressless form of investing in the crypto space. Possibly, when I have conversations with some in the top, like the Brickland guys, they don’t like the idea some asset manager accumulating large amounts of bitcoin and acting on behalf of their customers because it’s kind of against the spirit of bitcoin.

Gabor: I think to myself often that isn’t it crazy that we have launched an ETF on bitcoin when bitcoin is this sort of like decentralized retail-oriented asset. Some people still prefer to hold their private keys and have different cold storage solutions for methods of storing their assets and that’s their preference. Other folks, like my mom, for instance, despite the fact that she is from Eastern Europe, she’s not very good at cryptography and she wouldn’t be able to cold store her assets and I wouldn’t want my mom to walk around with a thumb drive of like a million dollars. That wouldn’t be safe, so an ETF just kind of adds this component of security, professional asset management around it. And probably weirdly enough if you trade crypto, you know this, you get tax reporting and other reporting on your assets which is incredibly hard, all the crypto trading is jurisdiction-dependent today so that extra tax reporting component is just helpful.

Pomp: Absolutely. It’s so fascinating because with these ETF products, you get more liquidity, you get more security, right? There’s some sophistication, some validation that comes with these products, so as you guys saw, “Okay, digital assets are becoming an asset class that we wanna participate in. We’ve got all this institutional knowledge and experience from decades of working in other assets, you know gold, etc.” What was the first thing you guys filed?

Gabor: So first, we filed for a futurist based ETF. You may ask why a futurist based ETF? So the reason for that is every month, two months, we see a major hack of some sort, somewhere around the world, and today, there are no custodians in the digital asset space that are full-fledged institutional custodians that could hold exchange trade fund assets. At least, no one really puts their balance sheets behind digital asset activity in a meaningful way. I do think this is a lucrative business and we are going to see entrance coming in next few years, definitely I would say. But no custodians existed.

Gabor: The first one we filed the futurist contract didn’t exist, and so we filed for this futurist ETF hoping that there would be futurist contracts as we have seen from our commodities experience. That way what happens in futurist land is that in that point of time, my thinking was that if you don’t own bitcoins directly, the best way to own bitcoin for institutions is not owning bitcoin, so by the futurist post-margin that you’re using with the futurist commodity merchants are basically buying and selling the contract in clearing houses. That way no one has to worry about actually physically custodying bitcoin while you’re getting price exposure. Either appreciation or depreciation, you’re getting the exposure through an ETF and then, only institutions could trade futures, so I was like we wanna make it available a bit more broadly and let’s just package it and have our futurist commodities trading team do the work for them.

Pomp: And what was the regulator’s response to that first filing? Excitement? Fear? In between? Where did they really come out with that as you guys had conversations with them?

Gabor: So first, when we filed the ETF, the call that we got is that hey guys, the bitcoin futurist market doesn’t exist yet. We got rejected on that. We’re not the kind of people who give up and we kinda showed that in the gold space as well. Surely enough, we sort of expected the CBO and the CME contracts to come out at year end 2017. They did come out. We refiled. Futurist contracts now existed and we were like oh you know, we’re ready. At the same time, we sort of iterated that we built with them as we have the largest data set in the world today to price bitcoin and we have solved the valuation problem long ago. We can price it. There’s futurist contract pricing from CBO and CME. We have a secondary level pricing from MBIS to 50 platforms. We’re also kind of working with some OTC guys on pricing and then, filed again for it. And then the response was that you guys should withdraw it because the futurist market is not mature enough. There’s only like a hundred and fifty to two hundred million dollars for futurist trading. That’s small compared to other commodities.

Gabor: While the experience was that it was not the case because there’s other small- like freight futures, electricity futures, and more thinly traded futures that have ETFs on it. We said fine, you know, we’re just gonna work through your questions. There was just ever moving target. The futures effort we kinda had it on file. We had to withdraw it again. We wrote a letter if you guys are interested in reading. The audience should actually read this on why the futures market is ready for an ETF and we discussed why valuation is there, there is enough volume, there’s arbitress markets. Its rating is efficient. OTC guys are amazing, able to trade it by spreads. Sometimes, bitcoin trades at better spread than the small country ETF so I was like, “Okay, the markets are ready.” So that line is kinda ongoing and we are working with regulators. Some of the things they are now focusing on is surveillance and are the markets surveilled.

Pomp: What does that mean? So are the markets surveilled…explain that.

Gabor: For instance, the US equity in futures markets participants are generally part of something called this inter-surveillance group. It’s a group of exchanges that the larger guys are part of it. What they do is they provide trade data to parent exchanges and owner requests to the CFT, for instance. So this surveillance means that you are monitoring for lost trades and potentially illicit activities on your platform. NASDAQ happens to have probably one of the most well-known solution called SMARTS and that monitors the top manipulation patterns. Basically, it gives exchanges assurance that there’s no illicit activity on their platforms and they can also report out to other larger exchanges or regulators that we have a clean exchange. Actually, to my crypto friends, I already recommended to use SMARTS. Winklevoss Brothers and Gemini use SMARTS and some of the other exchanges are looking at it. Why is that important? Well, you know for instance, we don’t want silk road money hitting an ETF and exchanges need to put in place best practices to these sophisticated programs that monitor trading patterns that we use out of wise in the equity and futures market. The goal is to make the crypto market look exactly the same. I think we are actually decently close, probably 70% there.

Pomp: Do you think that it’s important to have those protections there because the regulators need to see it and these look similar or do you think that they actually do protect investors and there’s some of this wash trading and manipulation, etc. that’s happening and so we need to kind of clean up that volume and the trading patterns, etc.?

Gabor: First, yes, it is important. The markets need to grow up. We need grown up markets for ETFs to come in. It is important to protect. The large exchanges of the world are incredibly lucrative businesses and it’s in their best interests to be clean, at least 95% of them should be clean and they want to be. Now, it’s not just a regulatory coalition in my opinion. At the end of the day, again, you want the same protections that you experience in the US and investor and capital markets. Investment is kind of about trust, so you shouldn’t experience someone running away with your money or some exchange trading their books against you so they can pay their employees or something like that. Exchanges just need to grow up and they’re on a great path.

Pomp: No, I think that makes sense. So how do you see ETFs and other kind of retail financial products evolving in the digital asset space in the next two years?

Gabor: Right now, the digital asset space is primarily retail, so people estimate something like 90–95% of it is retail. Conversations from larger OTC markets and exchanges that I had kind of confirmed that. So retail is kind of served already if you will. The exchanges and platforms just need to get better over their practices. With respect to products, I’m really hoping that ETFs come in place because what’s available right now doesn’t offer the full protection of what ETFs do. I’m gonna give you some examples to this.

Gabor: Crypto trading platforms, for instance, do not have the best execution type of principles applied to their books. So like high frequency makers are scalping retail investors from those platforms every second. There’s kind of like best bid and offer principles when US equity exchanges and those things should be applied to crypto platforms. ETF is required to have that type of protection.

Gabor: AML and KYC. I would actually think that AML and KYC standards mostly established exchanges are amazing. It’s easier to open up a German bank account. I did this a year ago when I was at Anvas building in Frankfurt. It’s easier to open up a German bank account than getting a Tier 3 verification from a crypto exchange. I’m not kidding. You take a passport photo of your face and a timestamp in it. Banks never ask for that kind of stuff. The AML and KYC stuff is actually very well monitored. So it’s all in pace. I’m hoping for ETFs. I’m also hoping that some of the larger players who have regulatory requirements and they have skin in the game also come to the market because right now, crypto companies just kind of enjoy their monopoly in the space and fro that reason they might not give the best pricing and customer protection type of things to their customers.

Pomp: Absolutely. It sounds like today, as you guys think of digital assets, really what you’re focused on crypto currencies, bitcoins specifically, right? So they’re highly liquid assets that operate as a store value medium exchange. One of the show’s sponsors is a company called Block Estate. Basically, what they have is they’ve got a tokenized fund in the real estate space and so it’s backed by real world assets or equity. How do you think about retail products like ETFS, etc. moving away from crypto currencies or at least in an additive way looking at these equity backed tokens or security tokens? You think that’s likely to happen? We’re far away from it? Where does that kind of fit in the vision of at least what you guys are looking at?

Gabor: We’re looking at all kinds of assets. We’re launching a product around bitcoin now, but I could see the future how we would, as the market develops, look at and evaluate other sort of like security tokens. You mentioned, the real estate space is actually super interesting to me. We have a real estate ETF that invests in rates. I think rates are actually one of the main targets of these tokenized initiatives that are ongoing. So I welcome a conversation with your sponsor or really anyone in the space regarding rates or anything. We’ve been obviously pitched around gold because we’re kind of the gold experts in the space. I would say in the future, ten years down the line, I would see how ETFs would contain securitized tokens because why not? The big question there is how liquid are these things and how is its rating? That’s gonna be the single most important question anywhere. I think one needs to list these tokens at regulated platforms in order to kind of get more widespread adoption. The ETF thing is just kind of the easy way of going about investing so you don’t have to worry about tax and you know all kinds of rebalancing and activities that most of us don’t have time for. I would love to see more developments in user interfaces and apps that would provide easier access and easier regulated access to these tokens.

Pomp: Absolutely. The Block Estate guys, I wanna make sure that they get some airtime there. How do you think about other ETF type applications? So think about Bitwise, right? We built a large cap index product with Bitwise and another thing that they’re doing on their own is they’ve launched a crypto-index ETF. So whereas a lot of people have gone after bitcoin specific ETFs, they’ve said, “Look, why don’t we apply for an actual kind of top ten crypto type index in an ETF structure.” How do you think about bitcoin only or kind of a single asset ETF versus these index approaches?

Gabor: I like the Bitwise guys, you know. Matt Hogan is friends with our company for a long time.

Pomp: He’s like one of the ETF legends.

Gabor: Yeah! Love the guy. Love Hunter. They’ve done a great job at their work. I like the fund, the private fund that they have right now. I think it’s a smart thing to do. I hope that they get traction with the SEC with their multi-asset product. I would think, just kinda you know going rationally about it, that a single asset bitcoin type of ETF would be approved before a multi-asset would be. Bitcoin is more established, has more history. Some of the tokens supplies and centralization questions are still outstanding if you look at the top ten. There’s questions around dark tokens. Some investors holding near fifty percent of the supply in escrow so something like that. That’s just something to think about and regulators, I think, are looking at that too. But just to kind of support the Bitwise approach too, Vanex NVIS actually was the first one to launch a multi asset index and I spent 6 months in Frankfurt with our about 20 people analytics team to do that.

Gabor: I do believe in the power of diversification. Regardless of who the issue would be, I’m really hoping that a multi-asset product comes to market. The key there is to make sure that the tokens are clean and their liquid. Just on the indexing stuff and obviously I’m biased on this, I love what NVIS encrytpo compare does. There’s twenty people in Frankfurt. Fifteen in London. It’s rated. Basically, we have non-academic investible embassies that are also tradable. For instance, that was super important for our country funds and SMP 5 looks good, but how do you trade that? Fortunately, the SMP 5 is liquid, but maybe Vietnam and the top digital asset there is not liquid. If you guys want to check out the embassies, I’m happy to give more color around that. But multi-asset approach is just diversification. So far, it didn’t work out in past year for people because all coins are down. In 2018, the DA 10, I’m keeping an eye on that, is down like 80%. Bitcoin held up like 60, went down 62%. Our CEO and I were talking about this. We wrote a little piece for our investors on bitcoin and we said that we expected that bitcoin would lose 80 or 90% of its value and so far it’s holding up and fingers crossed. Other digital assets did not hold up as well as Bitcoin did. Again, I’m biased on this. I’m a bitcoin guy. I think there’s a case for trust minimized money and the other tokens are all dependent on their application, so I think there’s gonna be a winner in the payment space, whether it’s Ripple or Stellar lumens, there’s gonna be a winner.

Gabor: Stellar lumens, there’s gonna be a winner, and sort of asset issuance, and then Ethereum iOS type of space. We don’t know who that is yet. And so it’s interesting to monitor those. For every one winning position, there’s a hundred that competes.

Pomp: Absolutely. It is the ultimate protocol wars, right, to see kinda who becomes king in each one of these applications. Okay. So one other thing that recently got a bunch of attention is Gemini. It’s the Winklevoss twins. They launched a regulated stablecoin, right, so they were one of the first people who have essentially said, “Look, we’re gonna ensure that it’s backed one to one by US dollar. We’re gonna allow kind of external third parties to validate or audit that it’s true. And then the US dollars sit in a FDIC-insured State Street account, right. And so very similar to I think what you guys at VanEck are doing in terms of trying to legitimize or professionalize a lot of these … the products, the tokens, et cetera. How do you think that impacts just crypto in general? Big deal, not a big deal? How should people be thinking about that?

Gabor: So, getting sort of regulatory approval on pretty much anything is a big deal. And getting regulatory support and regulators to understand more about the space. So that’s a good thing I would say and it would go back to my key word, what is the liquidity of this? And sure Winklevoss brothers did a great job in general getting this approval and trying to get this product to market. And I think people look at it favorably and I do, too. I’m interested in the liquidity profile and how much control really the exchange has. Can they freeze a can, apparently in … I think it’s possible to freeze some of the assets in 48 hours turnaround or something. That’s not like bitcoin. Bitcoin cannot be frozen and that was one of the reasons we were looking at this trust list, decentralized, uncontrolled thing.

Gabor: And so that’s that, but the other … on the stablecoin front, we’ve seen from the success of Tether, as in … people have varying opinion on Tether, I think they have done a great job on solving the problems of US dollars and money. So Tether is fast, people want to see their holdings in dollars and people want to trade larger amounts of assets, and Tether’s created that market. There are questions around the audits and I’m excited for those markets to get better and improve.

Gabor: One thing that I’m most excited about probably in the stablecoin space … again I would put bitcoin in front of any other stablecoin, but as far as stablecoins go I read some things and heard some things. Circle is working on a stablecoin concept, and I think the institutions that the Circle folks are working with are just kind of work-monitoring. It’s work-monitoring new entrants, and so far the execution that the Circle team has done on pretty much anything that they have was excellent, and kind of liked how they cleaned up Polo in their acquisition. Their OTC desk was excellent.

Gabor: So I’m looking forward to see some competition in this space and what the Circle guys are coming up with, because I would think that sometimes the Winklevoss brothers stand to do everything, like a lot of things, and they have … again, they may have conflicts of interest or they may not have full resources to support everything, but the Circle guys kind of focus in on a few things, and I think they do have the resources to build something interesting. So as far as stablecoins go, that’s the one I’m monitoring.

Pomp: That’s awesome, yeah. Look, I found Jeremy and the Circle guys to be great at execution as well, and then super thoughtful about kind of where they deploy resources, et cetera. So that’s another validation there. All right, so let’s do this. Let’s do some rapid fire questions, and then we’ll wrap it up with you asking me one question. First question though is what do you think is the most controversial thought that you have in crypto, where the highest number of people would disagree with you?

Gabor: Ooh, that’s-

Pomp: What do you believe that everyone else is gonna disagree with?

Gabor: That’s kind of the Zero to One Peter Thiel question, is actually one of my favorite books. So here it is. And bitcoiners are probably gonna dislike me a little bit for this. The kind of controversial thought is that bitcoin needs an ETF. Just to go with my Game of Throne references, a lot of people are looking at VanEck as kind of Castle Black, holding the wall of institutional money, and I do think that the ETF, and the ETF comes out, then bitcoin is going to stick around for probably a century, if not longer. And the reason for that, and I don’t need to talk too much about that, is if Wall Street companies support digital assets in a meaningful way then you now have Wall Street and crypto kind of going against government. And right now Wall Street is in the middle. So I would actually encourage crypto companies, and that’s what we see, to kind of partner up, establish products that don’t fit bitcoin exactly into the existing capital markets, but bitcoin is inherently compatible, and make it work. And I think that’s the one thing that most people would disagree with me is bitcoin needs an ETF.

Pomp: But do you agree that that’s only correct as long as the ETF doesn’t create more liquidity or more kind of claims on the 21 million bitcoin, right? So basically as long as the ETF matches one to one to up to 21 million bitcoin, we’re okay, but the second that we start having more claims than there are bitcoin, we could run into some trouble, is that fair?

Gabor: I completely agree with that. In fact, what we’re trying to do is … and I can’t talk much about our security solutions, but we want … so by definition an ETF has to show its NAV. So every day in the bitcoin blockchain, you can show wallet sizes, and the ETF can show NAV, so you can show one to one correspondence, but wallet size and an NAV, and we are committed to doing that. We are committed to basically keep up bitcoin’s standards in the space.

Pomp: That’s awesome. All right, so other than VanEck, you cannot answer VanEck, what do you think is the most important company in crypto right now?

Gabor: I’m monitoring the OTC desks-

Pomp: Interesting.

Gabor: … so it’s probably the non-sexy answer again. I’m looking at Circle, DRW’s Cumberland, and Genesis. These guys have been instrumental in bringing crypto to the institutional space, and they were instrumental for exchange rate products and increased liquidity in the space. So I would say the top … actually maybe let’s just say the OTC firms, and I also think that Nasdaq surveillance system is actually a bigger deal and people don’t talk about it enough. So Nasdaq SMARTS and the OTC desk. The three U.S. OTC desk combined are the ones that I’m monitoring.

Pomp: Yeah, that’s definitely not a popular answer, but I think a really smart one. All right, so let’s say you have a magic wand, and you can wave that magic wand and change one regulation or law, what would it be?

Gabor: I am on the same page on sort of the retail and institutional investor standards. I think they are BS, and will change over time. Retail investors should be able to access private investments, and … when I was in college, I didn’t have the required amount of money to be an institutional investor, but I think it was probably smart to be able to say whether I want to invest into something or not. I expect the individual and retail and institutional investor standards to change over the next decade.

Pomp: Yeah, so you’re talking about the accreditation standards, right?

Gabor: Right.

Pomp: And the idea that … you’ll appreciate this because I’ve gone as far as to say that actually the accreditation standards are, as they currently stand, are violating the American dream. Right?

Gabor: Absolutely.

Pomp: So if you think about yourself moving to the United States, the American dream is that no matter where you come from, what language you speak, what your background is, who your parents are, or where you end up in the U.S., you should be able to build a life of wealth, right, and do it through your own effort. And so because these laws literally say you have to be rich in order to invest in some of the best investment opportunities, the rich can only get richer, right, and we’re boxing out or precluding an entire demographic of people based on wealth from investing in those opportunities, and it’s pretty ridiculous.

Gabor: It is indeed, and I actually couldn’t put it better. It hit me in the face when I started working in the financial services industry that I couldn’t invest in private securities. And I was like, wow, that’s crazy, all the Silicon Valley VCs are making bank based on just very basic probabilistic bets, and, I don’t want to put them down, but there’s not much thinking in many of those investments, you just spread it out and look for the next 1,000x unicorn. Whereas small people who have a few ten thousand dollars or assets that they kind of earned from something like their work, say, that the average New York person or something cannot invest into the next Facebook.

Gabor: I think, some people are gonna argue with me on this, but I think crypto actually opened up the door for private investing, and definitely younger people started to have, experience what it means to invest privately. And obviously these crypto projects are … and often there’s governance issues, there’s a bunch of other things, but if you guys read the SEC’s newsletter, Chairman Clayton came out with his views on how we should revisit investing in private securities. And again I accredit that to crypto and not just our work but the crypto community’s work of showing how important it is and how much interest there is in investing in private things.

Pomp: Yeah I mean, look, to me the most ridiculous part about it is we’re using wealth as a signal for intelligence, and we should probably just move to a system where we actually use intelligence as a signal for intelligence, right?

Gabor: Yeah.

Pomp: And so move to some sort of knowledge-based test, or knowledge-based system, rather than a wealth-based system. But that’s neither here nor there. We can go for hours on that one. All right. So, what one question do you have for me?

Gabor: Okay, so since you’re probably one of the most well-known guys in the crypto investing space, and you’re doing a lot for us, I’m wondering what are the three things that you are looking forward to in the next three to five years in crypto, and what should we be monitoring? So three things according to Pomp’s worldview.

Pomp: Oh man, this is a good question. All right, so three things I’m excited about next three to five years. One, right now, my partners and I are absolutely on a warpath to getting institutions off of zero, right. So right now a lot of these institutional investors, we’re talking family offices, endowments, pensions, foundations, sovereign wealths, et cetera, have zero exposure, right, and the idea that you can have zero exposure to the best performing asset class over the last five years. And it’s just pretty insane, right. And so we don’t think that they should go and put 500 baseless points, right. We don’t think that we actually even know what the right number is. There’s not kind of a one size fits all for every portfolio, but we know zero’s not the right number, right, and so we’re on this warpath to get every institution in the world off of zero, and get exposure to the asset class.

Pomp: So I think watching that happen is really important. We’ve got a couple off of zero and I think that we’ll continue to do that. And there’s a bunch of other people working to do it as well. But as more and more institutions move off zero I think it’s gonna be a really important trend.

Pomp: Two is the accreditation laws. I mean I just … it’s the one thing that irks me to death is that in a country where we are supposed to be kind of the lighthouse of freedom and prosperity, et cetera, our laws don’t reflect that, right. And so it would be one thing if kind of in practice it was hard to implement, or something like that, it’s just … no, the law is written in a way that prevents anyone from having the opportunity, right. And I think that goes against everything that we stand for, and it’s gotta change. So I think as that changes, if … Chairman Clayton said it in a very interesting way, he said, “Look, I’d love to give more people access to these private market opportunities, while keeping the same amount of investor protections,” right, so it’s not giving up protections, it’s just giving more access with the same protection. And so if they’re able to figure out a way to do that, I think that will be a huge inflection point, not only for crypto but just private investing in general and also wealth creation for Americans.

Pomp: And then the third thing is outside the U.S., right. So I think that people in the western world get very kind of insulary thinking, and they think that we are the say all be all around the world. And in some markets we are, and other markets we’re not. And I think crypto’s one of the first times where we’re seeing an industry being created on a global scale from day one, right. So a lot of people in the United States who had never traveled to, say, Asia for example and seen just the amount of intellectual talent and energy and capital and stuff that’s being put forward into this industry I think is … they just don’t have that perspective, and they’re missing out on how important it is there, right. And so if you kind of extrapolate that back to the U.S., I would almost question do we actually have enough intellectual capital being put towards this? Do we have enough kind of traditional capital being put towards this? And if we don’t do we fall behind? Is that good, is that bad, right?

Pomp: And so kind of this idea of a geographic arbitrage around talent, capital, attention, regulatory issues, et cetera, I think is going to be something that’s really important to watch. And at some point in the future may actually be a negative for the United States. I don’t think the U.S. is used to being in that position, and if we get in that position how do we respond?

Gabor: That does, sort of, actually … three years, I mean I’m also focusing, but probably you put it much better than I could … and a lot sometimes the allocations … two things is the allocation question. I know we have a lot to discuss at some point in more detail. VanEck has Jan, who is much smarter than I am, and I wrote a piece on what should be the candidate … what’s the right level of adding digital assets to a portfolio, and by the way we lived through the same thing with golden commodities so it’s an interesting evolution. Totally on the same page on the accreditation standards and kind of working on it. The international kind of realm and arbitrage, regulatory and capital arbitrage, and I’m so fascinated by Asia and how much one can learn. Spent a lot of time in Europe and the U.S. at various places, but Asia is sort of a frontier that we shouldn’t underestimate, like Singapore, Japan, China. Right now I think probably Japan and Singapore and Vietnam are something worth watching. China is a harder act to crack, but definitely interesting.

Pomp: Absolutely. No man, listen, you guys are doing some amazing work. I really appreciate your time, and I think you know all of us here are cheering for you guys to kind of break through on a couple of the applications in the public market and stuff. So good luck and thanks so much for coming on.

Gabor: Thank you, Pomp. It’s always a pleasure.


You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Gabor Gurbacs

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Anthony Pompliano

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