RAOUL PAL: Okay, we know this is screwed,
my view is this is probably going to be the
biggest insolvency event of all history.
That's going to take a strain on the financial
system and possibly force the dollar up.
I don't know what your views on that is, and
then where does this go?
DAN MOREHEAD: Yeah, I love that US Treasury
Secretary Connolly in the '70s said the dollar
might be our currency, but it's your problem
to Europe.
It's a fact of the world that the dollar is
the reserve currency right now.
That's changed every 80 or hundred years over
the last six centuries.
It used to be the Portuguese escudo and the
Spanish real, and now it's the-- then the
pound, and now, the dollar.
There really isn't another candidate in the
fiat currency world.
I do think in the long run, and this is decades,
cryptocurrencies will become reserve currencies.
Whether it's Bitcoin or Ethereum, Ripple,
whatever, ultimately, some of those will be
reserved currencies, but government's very
slow to change and so I think that's a 10
to 20-year very slow progression, but that
would be the answer.
I actually thought the original construction
of the Libra project that Facebook created
was genius is to use a basket of four currencies.
You're creating like a virtual SDR.
The SDR is a great concept, but you couldn't
actually transact in it.
Creating a basket of currency where the Libra
does it or somebody else does it, somebody
will ultimately do it.
That could easily become a reserve currency.
It would be essentially like-- yeah?
RAOUL PAL: I love the fact that the dollar
was part of the basket.
Therefore, the basket itself should only move
up and down with let's say, global money supply.
It becomes a true stable coin in our terms
of the different world.
That's an extraordinarily powerful thing.
I think most people didn't understand what
Libra was, until it came out.
It looked at it was like, oh my God, this
is game changing.
DAN MOREHEAD: I agree.
I thought it was beautifully designed.
I thought they did an amazing job designing
it and there was so much fuss about the rollout
and that all the lightning rod attention to
Facebook, the brand, but the product they
designed was genius.
Hopefully, they'll get theirs out but if they
don't, someone will do something very, very
similar to it.
That's essentially what everyone on earth
wants, is a currency that's tied to, if they're
European, it's tied to the euro.
If they're Japanese, it's tied to the Japanese
yen.
If they're in the United Kingdom, it's tied
to the pound, and US tied to that.
It's not too volatile relative to their own
currency.
If they're in some other country or region,
it's not very volatile.
I think it's the best of both worlds.
It's not pegged to one single currency, but
there's not crazy volatility, like Bitcoin
or Eth would be.
Ultimately, someone is going to do that.
Then central banks will start using it.
Again, it's going to take decades, but central
banks will start using that, it's the only
way I see to get away from the dollar hegemony
that people are always griping about.
RAOUL PAL: I'm a little more bullish on the
time horizon because I think this event is
bigger than people could understand.
If there is an event that breaks the system,
or at least forces people to adopt different
things, and they would have adopted at this
stage, I think this would be it and again
hearing Benoît Cœuré of the ECB, and Mark
Carney and a bunch of others talking about
digital currencies, it feels like they want
to move towards this basket idea.
Now, whether it's done with Libra without
Libra or something, I think they've all spoken
about how the dollar standard just doesn't
work for them anymore.
I'm not so sure that that might be the surprise
outcome of this which will massively help
all the cryptocurrency world and everything
else because then, the world is digital off
ramps and digital on ramps.
DAN MOREHEAD: Yeah, you're right.
I think that one of the important things to
do in this distressing time is think about
the silver linings and the things that are
positive about this massive disruption in--
like you and I working from home remotely
might be part of it.
The whole world might change how they actually
do business.
There's a lot of good things that could come
up.
You're right, really focusing on our monetary
system, we might end up with blockchain being
accelerated by it.
I've seen great examples.
We're invested in a company that helps people
move money using physical fiat money, bills
and coins, converting it into bitcoin and
being able to send it to their family wherever
they live, either domestically or often in
a remittance payment.
They're seeing record volumes because the
fiat systems are grinding to a halt, where
you can still go to the safe way, pump $400
in the machine and have it pop out the other
end.
I think you're going to see some use cases
where blockchain really comes with its own
in this crisis.
RAOUL PAL: How are you seeing the space evolve
and things must be accelerating.
I've always thought of it as it's like a hive
mind of people developing an entirely new
architecture.
It's not just a financial architectures or
ownership architectures or trust architecture,
it's a number of things.
It feels like there's a hive mind of some
of the smartest people I know, are all focused
on it.
It's a huge group of people.
What are you seeing that's surfacing now out
of this that's getting your interest?
DAN MOREHEAD: The way I'd see it is in our
seven years of investing, we've seen a bunch
of different eras.
The first year was all about just exchanges
and custodians, and really basic ways to buy
bitcoin and then ultimately ripple and Eth
and other things and store it.
That was our first year to these investments.
Then the next level is using cryptocurrency
and in most cases, Bitcoin originally, to
do some cross border money movement thing.
We're invested in probably 12 or 15 companies
around the world that help people move money
across borders.
That's the thing is really coming into its
own right now.
It's really been effective.
If you think about it, the average cost of
remittances right now for the hundreds of
millions of people that migrate to earn money
for their families is 9%.
You and I are in the financial markets, none
of our base points, whatever.
It's just a number.
That's a month's wages, the migrant spends
an entire month working for their remittance
company, and their family only gets 11 months
wages.
The companies that are doing it with blockchain,
essentially are the interregnum solution,
like ultimately, people will just have blockchain
on their phone and they won't need a company
in the middle.
For the next 10 or 15 years, they're going
to use these companies that charge say 2%
or 3%.
They're seeing very, very strong growth.
A great example of that would be 5% of US
to Mexico remittance is going over Bitcoin
right now.
That's pretty wild, like it's a real use case.
That's helping humans and saving the money,
get more money back to their family.
That's what's really happening right now.
Then the companies we're funding our the next
level of that, they're doing non-financial
use cases, they're doing scaling solutions.
The two biggest blockchains, Bitcoin and Eth,
can only do seven or 10 transactions per second.
In order to compete with credit cards, we
have to do 15,000 transactions per second.
If we want all the promise of micro labor,
micro payments, we have to do orders of magnitude
more than that.
We're investing in a lot of projects that
help scalability.
Then as you and I know, there's a lot of plumbing
to trading, order routing, order management
type systems.
Some of our most recent investments are in
companies like AMBER and Tagomi that help
traders trade these things and since we've
essentially been there first at doing all
these different things, we've had to prototype
everything ourselves and so we had to build
all our order routing and stuff.
It's really hard.
There's hundreds of exchanges that trade cryptocurrencies
and then all these different regulatory environments
where it's really hard to move money around.
There's thousands of tokens you could possibly
trade.
It's a very complicated business and there's
huge need for companies to help traders do
that.
There's journalists in this space, like the
block that we're invested in.
There's just a whole lot of different ways.
We're essentially creating a new financial
system built on blockchain.
You need one of everything you have in the
existing system.
RAOUL PAL: How about custody?
Because custody is one of the things that
worries me in a solvency crisis as you and
I've gone through many times is who owns all
the shit in the end is one of the hardest
questions to solve.
How is the space working on this issue?
Because trusted ownership is one of the great
things about blockchain.
Who's doing that for the securities industry
and all of the assets that we all own in this?
DAN MOREHEAD: In crypto, you're essentially
custody-ing a password.
You're really just trying to keep custody
of the private key that can move the cryptocurrency
itself.
The custodians in the industry, like Fidelity
or Coinbase, or Bakkt or BitGo, the hugely
important thing about them is they employ
no leverage.
In the fiat system, you have Lehman Brothers
or whomever that are employing 40 to 1 leverage
across their balance sheet so when something
bad happens, problems have nothing to do with
the assets they're trying to custody, essentially
just wiped through everything on their balance
sheet.
I think the hugely different scenario here
is blockchain custodians aren't levered so
there's no systemic risk.
Then they're normally essentially isolated
from the financial markets.
There was a time when the biggest custodians
of space, which at Mt. Gox, which at the time
had 85% of market cap, they went under, essentially,
without a ripple, the price of bitcoin was
up a week later, there's no federal bailout
of MT.
Gox.
It's because they're unlevered and not backstopped
by the government that essentially keeps them
safer.
RAOUL PAL: What about the transition of the
existing securities onto blockchain?
What are the DTCC and people like that doing?
I don't know what tZERO are doing.
How does that evolve?
Because we're going to have a need for that
because we can't have another Lehman event
and in a big solvency event that's potentially
going on now, we're going to run into problems
again.
It feels like it's going to be the time and
a place for blockchain to start doing that
part of the custody.
DAN MOREHEAD: It is, and one of the lines
I love using about blockchain is that when
a technology is massively disruptive, they
call it a category killer.
Blockchain's a serial killer.
It's going to go through dozens of different
industries, including securities, transactions
and settlement.
The hugely important part of that tagline
is it's going to do it serially.
It's not going to do everything overnight.
We go through these manic waves in blockchain
where in 2013 or 2017, everyone's thinking
oh, blockchain is going to change the world
overnight.
Then we go on these depressive waves where
oh, it's a failure, it didn't do anything.
The reality is somewhere in between, and it's
going to do different industries at different
times, I have been of the belief for a long
time that the Wall Street bit of blockchain,
it definitely can happen, but it's like a
decade from now.
The reason is, it's just so complicated, and
it actually works pretty well like you and
I've been in Wall Street for a long time,
you can bitch and moan about DTCC or whatever,
but they process 100 million transactions
a day with an incredibly low fail rate at
incredibly low prices.
Like all these-- TD Ameritrade, they're going
to free trading, what's the problem with free
in two plus two, it's just not that big.
It's not broken.
Whereas like if you're a migrant and you spend
the entire month of January working for your
remittance company, that's broken.
I think it will transition to blockchain,
but I think it's going to take a decade.
There are some really exciting projects people
are trying to do in this space but as a firm,
we've essentially passed on all the centralized
Wall Street back office blockchain projects.
