Transcript
Welcome to a very crypto-focused episode of Plugged In. I’m your host, Al Dominick. I’m rolling solo from our Scottsdale studios, but I’m definitely not going to be lonely for conversation because I have Ian Andrews, CMO of the blockchain data platform company Chainalysis.
They’re doing some incredible work on behalf of government agencies, financial institutions and cryptocurrency businesses around the world to engage with the crypto ecosystem.
Ian, it is awesome to see you.
Al, I’ve got to say, when we discussed doing this, it was before the whole FTX meltdown. You picked a week to have crypto as the topic on your show. You nailed it. It is the thing everybody’s talking about this week, for sure.
You’ve got to love dumb Irish luck. Just when you think being dumb and smart has gone out of vogue, it comes back into style.
We appreciate you taking a little bit of time to share your thoughts and perspectives on what’s taking place because you’re right, everyone is talking about what’s happening in this DeFi world of ours.
A little advanced notice: I have five different artists that I pulled to give some flavor to our conversation. I’m going to use some songs to keep our conversation going. Instead of surprising you at each point where I bring up an artist, I’m just going to tell you I’ve got Fatboy Slim, Annie Lennox, Nirvana, Tears for Fears and Michael Bublé as our cruise guides today.
It feels like you hit my ’90s into early-2000s playlist right there. I love all five of those. Let’s go.
We’re off to a great start, because Fatboy Slim has a song that starts, “We’ve come a long, long way together, through the hard times and the good. I have to celebrate you, baby. I have to praise you like I should.”
I’d like you to give our listeners the CliffNotes on what it takes to build the company that you’re a part of. It’s growing while many in the DeFi space are falling apart.
For those who aren’t familiar, Chainalysis is a software company. We build technology that enables customers all around the world, now more than a thousand customers in about 75 countries, to understand what’s happening on public blockchains.
If you’re familiar with Bitcoin or Ethereum, you might know that all of that transactional data is public. It’s often called a public ledger.
But just because that information is public doesn’t mean it’s easy for humans like you and me to read. That’s what Chainalysis does.
Our customers are all the companies building businesses in the world of decentralized or centralized finance and participating in the cryptocurrency ecosystem, as well as the government agencies necessary to make that system work fairly and efficiently.
That includes financial regulators, tax authorities, law enforcement, and some national security and defense organizations. They’re all our customers, using technology to do their jobs better, protect their customers, and try to make cryptocurrency a little more trusted and safer for everybody.
When I think of Ian’s company, it essentially boils down to how you trace and understand blockchain activity.
As you mentioned, we’ve had some currency challenges where some high-flying organizations are not as high and mighty as they once were.
When I think of Annie Lennox and “No More I Love You’s,” that really relates to the current state of fear, uncertainty and doubt. That hashtag FUD comes into play because FTX’s collapse has thrown an even colder blanket on top of existing skepticism around the crypto space.
So as balance sheets are being picked apart, talk a little bit about the current state of crypto as Chainalysis sees it.
I have a couple of thoughts here.
First, I want to disclose that FTX has actually retained our company as part of the bankruptcy process to hopefully assist in returning as much money as possible to people who experienced losses as a result of that collapse.
So I can’t comment in detail on the mechanics there.
But I will say, one, it’s a terrible situation.
Two, it’s not so much specific to crypto. If we just look back a few years in finance generally, we can find cases that look a lot like FTX.
MF Global is one that comes to mind. I’ve heard a couple of people reference it lately. Large organization, charismatic CEO, ended up maybe getting pretty far out in front of themselves from a leverage perspective, and eventually evaporated a lot of customer funds.
I’m not in any way excusing what happened here with FTX.
But I think it’s important perspective that, in the crypto industry, the goal was always to move away from opaque, non-transparent organizations with broad control over funds that enable the kind of fraudulent activity that brought down FTX.
Somehow, even though the original spirit of crypto was decentralization and complete transparency, we ended up with a really big organization doing a lot of off-balance-sheet and certainly off-blockchain activity that, from everything we know now, was highly illegal.
I think we’ve lost a lot of trust in the potential of crypto. That’s the state of the industry.
It’s unfortunate because there are a lot of really smart people out there. I have a podcast, and I’ve spent the last four or five months interviewing people who are committed to building a better financial system and leveraging the technology that powers cryptocurrency ecosystems to build some really exciting products and services.
All those people are now having to explain why they can be trusted in the face of this one person who kind of drove this massive fraud.
But I’ll be honest with you, I still believe in the potential.
I think we have the opportunity to go beyond this, but we’ve got to work on the trust side. We absolutely have to work on the transparency side.
I think we’ll see a lot of people start moving toward more decentralization. We’ve actually seen some of these trend lines in our data, where people are pulling funds off centralized exchanges and maybe moving back toward some of the original spirit of the cryptocurrency movement from the early days.
I shouldn’t bury the lead. Like Ian, I remain bullish on the future, especially around the blockchain technologies that are being built really on the back of regulated institutions.
I think about accounting, reporting, insurance, lending, payments, asset management and the real estate sector. There’s incredible opportunity to apply what’s taking place and what’s being developed.
It starts with the people.
Ian mentioned that over the last few years, there has been an incredible amount of hiring of world-class, sophisticated, intelligent and creative people into the blockchain sector.
If you start with the people, then you can build your products. Once you have your people and products, your financial performance usually follows.
We do have some examples of not bad actors necessarily, but bad decision-making taking down some public trust at the moment.
Yes, history can be littered with innovations that never met their full potential, but I think the underlying blockchain technologies are still pretty impressive, and we’re just scratching the surface of how certain organizations are going to try to leverage them.
This is where I want to talk with you about Nirvana’s song “Come As You Are.”
Two big areas for financial institutions today center around authentication and identification. I think those are areas that blockchain technology can really help accelerate.
What’s your take on those two areas of opportunity?
I think it’s the biggest use case for blockchain after cryptocurrency.
For context, for people who maybe haven’t spent any time thinking about this yet, today if I want to do anything that requires proof of some attribute of me, I end up giving up my entire identity.
If you go to a bar or liquor store, you need to validate that you’re 21. But in order to validate that I’m 21, I give the person on the other side of the counter my home address, my birth date and a bunch of other information that’s kind of unnecessary to meet that test.
Now, that’s kind of a silly example.
But think about it in the context of the financial system in the United States. We have this accredited investor rule for doing things like buying equity in private companies.
Really, that’s a means test. It’s a minimum threshold of liquid assets.
It’s not, “Are you smart enough? Do you understand the industry? Are you actually going to be successful with your investment strategy?”
It’s none of that. It’s, “How much money do you have in your bank account?”
But in order to do that, you fill out a long form, give up your entire identity, and have to assert that every time you want to do an investment.
That doesn’t make a lot of sense to me. That model is cumbersome.
If we start looking at actual trading and exchange, if you’ve ever opened a bank account, again, you’re giving up all this information.
It doesn’t seem like all of that is actually necessary in the digital age in which we live.
There’s some really interesting work being done using cryptographic proof and the public nature of blockchain to assert portions of your identity.
It could be something as simple as your age to get into the liquor store, or as meaningful as your liquid asset holdings for the accredited investor rule.
It could also be something like the university you went to. UNC could say, “Yeah, Ian did in fact graduate.”
Rather than calling up the registrar’s office, I can carry a digital token that allows me to access a particular community or user group, or invest in a particular platform in the case of that accredited investor rule.
There are good examples here.
Organizations like Circle have built something called Verite, which allows me to go through a KYC, or know-your-customer, process with them, prove that I’m a real human, and then they issue me a digital token.
That allows me to go participate in a DeFi protocol where my identity actually isn’t known to the other investors I may be going in with, or even the investment company facilitating that exchange.
But they know that I am legitimate to the point required from a regulated compliance perspective.
I think we’re going to see more and more of this over time.
I love your example of going to UNC to prove that you graduated, as highly decorated as I know you were.
If I went to Washington and Lee, they’d probably give me a little scrap of paper and say, “Yes, he was here.”
But when I think about the potential applications of the technology, this is where NFTs and NTTs become really interesting.
A non-transferable token could realistically be your college diploma that lives with you. You’re never going to give that to your wife or to your kids as a memento.
Yes, it’s great that you can rock the swag, but ultimately that’s your accomplishment that you’re able to show.
As you were talking, I flashed back to a conversation I was a part of with Mike Cagney a few weeks ago.
Mike, for listeners, is the founder of SoFi. He’s currently running a company called Figure Technologies that’s doing some pretty interesting things on the blockchain. I believe Provenance is associated with Figure.
But I made a note that blockchain technology is doing something really well right now, and we shouldn’t lose sight of that with all the crypto stuff.
Essentially, you’re able to displace trust with truth.
You might have a native digital asset. In it, you can understand its composition and history.
You’re not relying on others, which allows two parties to transact in a bilateral fashion without taking on an intermediary.
That counterparty settlement risk is something he made note of. It’s the friction that causes some headache and tension that could be replaced without losing sight of the truth behind the asset you have.
Again, transacting without an intermediary is one of those longer-term applications that people are getting excited about, and I think that’s where investment continues to move.
The crypto and the tokens essentially are proofs of concept that show things work.
You can be bullish or bearish on the potential value of your Ethereum at the moment, but you shouldn’t lose sight of the fact that it shows a smart-contract concept in production.
Am I looking at that the right way?
I think you are.
The Provenance team is doing some really interesting stuff in this area. The industry term is RWA, or real-world assets, then being transacted on-chain as tokens.
It’s an interesting shift from what most of the hype cycle over the last few years in crypto has been about, which is kind of this retail boom.
I can buy some Shiba Inu, and it’s up only, and I’ll be able to sell it and make a small profit.
That has been a lot of the use case, and I think it actually led to a good amount of skepticism.
The long-term value here is much more complex financial transactions and connectivity to real-world assets.
That becomes valuable for institutions, and specifically valuable for the thing you called out: elimination of some of the middlemen, transaction facilitators and the costs associated with that.
That seems to me like a huge opportunity for improvement in the efficiency of the overall financial system.
I agree.
Ian brings out a lot of words and terminology that may not be familiar to many listeners. That’s okay. It wasn’t familiar to me.
I sat down with Ian maybe a year or so ago. We were talking about the wallets that we use to hold our currency. He introduced me to MetaMask, to the Brave browser.
This is a guy who really has his hand on the wheel of where this industry is driving, which is why I want to use Tears for Fears and their idea that “Everybody Wants to Rule the World” as a springboard for his take on crypto regulation.
As much as we want to disintermediate and reduce friction, I think there’s a growing appreciation that a level playing field benefits all parties.
Right now, it strikes me that in the United States alone there are at least six different organizations and regulatory bodies that are really jostling for control over the future of crypto.
I’m curious about your take on what’s taking place in the world of regulation.
There’s good and bad.
On one end, we have efforts like what’s going on in Europe, called the Markets in Crypto-Assets Act, or MiCA.
MiCA is doing some really important things.
First, it’s setting up a unified framework for regulation across the entire EU.
If you operate in one jurisdiction and you’re licensed there, that gives you similar license to operate across all member states in the EU.
That encourages people to operate in the regulated regime rather than set up offshore. It simplifies the level of effort for what, in many cases, are startup businesses or people entering the market without a large ongoing business.
It also starts to tackle some of the things like stablecoins, where there have been questions about what backs a stablecoin and whether it’s truly pegged.
We saw a pretty epic collapse of the Terra-Luna ecosystem, and tens of billions of dollars of value wiped out in a very short period of time earlier this year, where that turned out not to be the case.
Europe is really leading at the forefront of regulatory clarity.
In the U.S., you’re right, there are different organizations asserting different levels of control over different aspects.
I think it makes it really hard for businesses that want to operate legitimately.
In the U.S. sector, everybody we talk to is clamoring for this mythical regulatory clarity.
I think they just want a fair and consistent playbook.
That’s true from the cryptocurrency side, but also from the traditional finance folks I’ve talked to as well.
They want the same thing. They want to participate in the market, and they see a ton of uncertainty that they just can’t digest for what is an emerging and relatively small part of their business in the near term.
To get past that, there are a handful of banks that have.
Bank of New York Mellon, the folks at Signature and Silvergate are operating in the world of crypto.
In the case of BNY Mellon, they’re taking deposits as a digital asset custodian.
Silvergate and Signature both developed the ability to bank crypto businesses.
So I don’t want to give the impression that it isn’t possible.
But I have the sense that there is pent-up demand, even following the FTX collapse this week.
They see a market opportunity. They see an undeniable trend and modernization of the financial system that will happen around blockchain.
They just need the SEC, CFTC and Congress to get together and clear up some of the questions around the edges right now.
I think it’s a nice moment to remind the naysayers around crypto that this is not the time to take your victory lap.
Just because some of this is hitting the fan doesn’t mean the investments that have been made, and will continue to be made, will not drive this industry and really the economy forward in ways that we won’t be able to predict.
We won’t necessarily be able to manipulate them as we would like, but these things are happening.
To ignore them should be done at your own peril.
Ian and I are kind of nicely set up for this conversation. We’re inside. It’s toasty and warm, but outside the weather’s changing.
I’m tempted to give Mariah Carey and her Christmas album the last laugh for this podcast, but instead I’m going to go with the soothing sounds of Michael Bublé.
As he sings “It’s Beginning to Look a Lot Like Christmas,” in this crypto winter of ours, is there anything that bankers should be talking about around the holiday table that maybe they aren’t right now?
I would point to two things.
One, if you look at the stablecoin market, there are a couple of interesting companies there.
One is Circle and its project USDC, the second-largest stablecoin by issued volume. There’s about $44 billion or $45 billion sitting on their balance sheet.
Paxos is another one. They’re a digital asset custodian and also a stablecoin issuer. There’s about $26 billion there.
Those are two U.S. companies, highly regulated, operating in the U.S.
If I’m sitting in traditional finance, that’s a very interesting potential customer that I would be working hard to figure out how to bank, along with the companies that will come along in the future that look like that.
That would be one.
The other one, you touched on Provenance and the work they’re doing on connecting real-world assets into tokenized assets that can be exchanged on-chain.
That process seems like it’s only accelerating.
I think it’s coming to real estate. I think it’s coming to all sorts of other structured financial products.
I know DTCC is working on some things. The Australian Securities Exchange is also working on similar things in this area.
Those projects are only going to accelerate, and I would be working hard to figure out how you participate and can build lines of business around this.
As people start to get their arms around some of the bigger concepts that Ian surfaced, I’m going to ask him to plug some of the good work that Chainalysis is putting out.
Anything that folks should be paying attention to on your end?
If you’re interested in what people are actually doing with crypto besides speculating on some of these altcoins, we just published a report that we do every year called the Geography of Cryptocurrency Adoption.
We went around the world and looked at true grassroots adoption.
Not big institutional money or high-leverage traders, but everyday people around the world doing interesting stuff with crypto.
There are some great stories in there.
I think it paints a much more interesting picture than we’re seeing in the media right now of the legitimacy of the technology and the impact it can have on people.
So I would go check that out.
Also, if you’re interested in what’s going on in the world of cybersecurity and nation-state actors, that’s the other side of this.
We’ve got Russian cybercriminals and North Korean hackers who are working hard to compromise big companies all around the world and certainly steal digital assets.
We do a lot of work in that space, and we’ve got some great content on that that we can probably share in the show notes.
This is just another incredible resource that we really appreciate bringing to this particular episode of Plugged In.
As mentioned, he’s Ian Andrews. I’m Al Dominick.
We’ll be putting this music list up for our shadow Spotify playlist as quickly as we can.
Thanks for listening.
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