WBD536 Audio Transcription
How Crypto Replayed the 2008 Financial Crisis with David Morris
Release date: Thursday 4th August
Note: the following is a transcription of my interview with David Morris. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
David Morris is the Chief Insights Columnist at CoinDesk. In this interview, we discuss the contagion that has ripped through the crypto market, and how it mirrors the worst failings of the 2008 financial crisis. Is regulation required for crypto to protect people from getting rekt?
“If you consider your APR a marketing tool, you’re dead in the water. That is not the business that you’re actually in…. ‘we’re gonna gather all of these customers by offering this unsustainably high APR, and then we’re going to figure out later how to deliver it’ and that doesn’t work.”
— David Morris
Interview Transcription
Peter McCormack: Morning, David. How are you?
David Morris: Good morning. Do you do the thing where you pretend not to start but you're actually starting?
Peter McCormack: Well, sometimes.
David Morris: Okay, I'll be on my guard!
Peter McCormack: Sometimes we do that, but usually we just have a conversation going and then they're like, "Have we started?" and we're like, "Yeah, we've started".
David Morris: Yeah, that's the trick; make it natural.
Peter McCormack: Yeah, man. Well, listen, you did this at short notice so thank you very much for this. My brother sent me across your article and he was like, "You've got to read this", and I think I sent it straight to Danny and said, "We've got to try and talk to this guy".
You crystalise a lot about an area I've been struggling with, with regards to regulation versus no regulation, and that's something I definitely want to get into. But most of all I think what was interesting is, you made the comparison with what happened in 2008 and Bitcoin was meant to save us from it. It was in the Genesis block and here we are, we've essentially just gone through our own crypto version of 2008. One thing I will say, you know my show's a Bitcoin show, but you can't make this show without talking about crypto; so anyone listening, I will use crypto and Bitcoin interchangeably, but we can't not do that.
David Morris: Right, but we can get into some specific things where the stuff is relevant for Bitcoin because some of the entities that we're talking about, we're holders in Bitcoin and there was some forced selling ultimately at the end that did impact Bitcoin. So, it's not some side issue, even if you are just a strict bitcoiner.
Peter McCormack: No, you cannot get away from that. So, man, "Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve", Satoshi Nakamoto, circa 2009. I've kept a lot of notes on this one, usually I do with one page.
David Morris: You do have a lot of notes; I'm actually kind of nervous.
Peter McCormack: No, don't be, man, I'm only referring to what you wrote, but I think this is an important show to make and I think it was important to have the right notes with me. So, give me the background to doing the article though, and we will share it in the show notes; everyone should read it.
David Morris: Well, no, there's not a ton of background, just that it was obvious that this was the big one, and the goal was to write a fairly comprehensive -- I think it's something like 3,000, 4,000 words, so it's like 15 pages long, and to write something fairly definitive about all of the relationships and try and do the big picture, because that's ultimately where it really takes on meaning.
You start out and you just see one bankruptcy, one default, one hack, etc, and then what does that add up to? Something really bad, and so you do eventually have to draw it all together into just one piece and try and tell one story, and that was what this was; obviously, it doesn't get everything, but the goal was to do that big picture.
Peter McCormack: So, we will work through that and I also do want to cover 2008, what happened there as well. I think the most interesting part of this to me was that 2008 was built on the back of deregulation, on the repeal of Glass-Steagall, and then following that, we had Dodd-Frank, which was to try and rebuild some confidence and stability back in the system, which I know Trump has brought back parts of. But in terms of that, it puts out there that idea of, "What is the role of regulation?"
I know certainly some people who listen to this show will be anti-all regulation, some people will be pro-minimal regulation, some people are pro-regulation, but there are trade-offs with regulation which the entire global financial system felt in 2008, and to a certain extent we have felt this year in the crypto/Bitcoin world.
David Morris: Yeah, and Glass-Steagall is exactly the right place to get to eventually. We won't get it started there, but it's about separating the roles of a financial institution and making sure that people aren't sort of mixing the pots, which is a lot of what happened here.
Peter McCormack: Well, and I think the most important part of this, and the reason I care about this, I'm not somebody who's pro-regulation for the sake of just being somebody who supports government; I'm only pro-good government and I'm only pro-small, good government. I'm very critical of the current government, whether it's ours in the UK or the US government. I'm very critical of our central banks, I'm very critical of everything they've done, but I also recognise that a small number of people can influence the lives of a lot of people.
One of the comparisons for me was, you talked about in the article how bleak it was for some of the people who lost everything they owned in ANKR, and I mentioned this in a show the other day, I always think back to the end of The Big Short where you see the family leaving their house, packing up their car, and I think of the 10 million people who lost their homes just in the US alone, outside of all the other financial devastation that was caused globally.
In a deregulated world, we aren't protected from that, and in a regulated world, we seem not protected from it. For me, I'm just most interested in what is the best system and how did people not get fucked who had nothing to do with the irresponsible leverage decisions that people made, whether it's in crypto or outside of it?
David Morris: Yeah, and I think that maybe the place that I would start in trying to diagnose the situation is actually not all that comparable to 2008, well sort of, because one of the X factors here is that it's a technology that people truly do not understand and I'm sure if you look at the people who were in LUNA, in ANKR, or people who were depositing it in Celsius, essentially it's an attempt to get some of the benefits of this crypto class that you keep hearing a lot about on the news.
If you're in LUNA, and we can talk about this because it also includes a bunch of people who are supposed financial professionals, but if you're in LUNA, you clearly don't understand what's going on at a very basic level, and I think that has been if anything the big wake-up call for me. When you think about regulation, it's painful to really articulate because you want to put faith in individuals, but you do have to start from this idea that people really do not know what they're dealing with, especially when it comes to crypto, which is technologically complicated and then you add financial complication on top of that.
I think that Sam Bankman-Fried's interview, somewhat infamous interview on Odd Lots a few months ago, talking about the DeFi black box, it was spot on; it is a black box for most people, and then you add another layer of abstraction on top of that. I don't know, there needs to be some kind of mechanism for making sure, at the very least, that people are fully aware of their risks in all of these cases, and this does include 2008; people just did not understand the risks that they were signing up for. That, I think, at the very minimum has to be, the goal of regulation would be to ensure that kind of clarity and transparency and just being upfront and making sure that at least you have to check a box that says, "I know I could lose all my money", something like that.
Peter McCormack: Yeah, and there is another area of debate that I think is worth having as well, is what and if any crimes have been committed.
David Morris: Right.
Peter McCormack: Now, again, we have a range of listeners and some people will not believe that a crime has been committed and that the state shouldn't intervene; I'm not one of those people who agree with that. I think if you lie and you defraud, you do certain things that cause people to lose everything they own, you've committed a crime. Bernie Madoff went to jail; I think it was 150 years at sentencing.
David Morris: Oh yeah, he died in prison.
Peter McCormack: Yeah, his son committed suicide. I think four people committed suicide on the back of what happened with his Ponzi scheme, and we've got no idea yet of the devastation that's been caused to what happened to the people of LUNA. So, that's a whole other area of debate, but I did open with my notes on the LUNA, Three Arrows Capital, Celsius, Voyager, contagion bubble, and I was like, "But how did it start?", and I've got, "LUNA".
David Morris: Yeah. I think that we have to be careful because I led with LUNA in mind, but it's sort of the most spectacular one of the, what I laid out, three factors that sort of kicked of the contagion, but it wasn't the first or even necessarily the biggest. We can get into this in whatever depth you want, but there was also, especially with Three Arrows, Three Arrows was ultimately the centre of the contagion.
LUNA was kind of a spark, and Three Arrows was also under water on some huge GBTC positions that seemed really ridiculous. They bought in at a premium and rode it all the way down to like a 15% or 20% discount, and Matt Walsh at Castle Island has speculated that that was kind of the first arrow that they took, and then the LUNA thing might have even been a desperation attempt to get out of that hole.
Then also stETH, the Lido Staked Ether, had some people refer to it as a de-peg, I think that's an inaccurate characterisation, but it was trading at a discount that also apparently was a hole in their sheet. But speaking of criminal versus whatever, I think that Three Arrows is a good example of how that usually plays out in reality which is that, if they had stayed solvent, none of their internal processes would have come under the kind of scrutiny that they now are.
So, if you lose everybody's money, somebody is going to find out a way that you did it criminally. You can debate the ethics of that, but in reality that's what's going to happen, is that there will be evidence of deception, of misrepresentation, of things that people can get you on criminally. Once you lose everybody's money, there's a lot of motivation for people to find those things to hang a criminal prosecution on.
Peter McCormack: Also interestingly, I didn't really know much about LUNA or Three Arrows Capital, paying full attention only to Bitcoin. I don't really look at much of the crypto stuff at all, I don't really follow many of the crypto people. I'd not taken a look at LUNA because I don't use stablecoins and I wasn't too aware of it. So, the first time I was aware was somebody in a podcast asked me about it, and Three Arrows Capital, when it was very evident that they were about to blow up, and I think I said I'd never heard of these guys; there was a lot of surprise like, "How have you not heard of these guys? They've been around for ages". I just never paid attention to them, what they do or what they're involved in, it just completely passed me by.
So, this entire contagion, I wasn't prepared for, which strangely makes me think I've got to run a Bitcoin show where I don't cover crypto because I don't want to be called a shitcoiner, but at the same time, I need to be aware of and cover crypto for the sake of at least having my listeners understand this other stuff that happens outside of Bitcoin that will affect them.
David Morris: Yeah, and we will eventually get to the conversation about regulation, I think again that's another aspect of the conversation about regulation which is that we're all in this market together --
Peter McCormack: Whether we like it or not.
David Morris: -- whether we like it or not and, of course, Bitcoin is the guy who's like, "I'm not locked in here with you, you're locked in here with me", but setting that aside, things that people do affect everybody else. It's also interesting, I had a very similar experience in terms of LUNA, and even Three Arrows to a certain extent, but LUNA was basically irrelevant in October and then by January, it flipped Binance stablecoin, whatever that was, to become number three, and that's when we, at CoinDesk, really started digging in.
I mean what's incredible, and I can talk about this at length because it's so fascinating, but we spent two days looking at LUNA and immediately it was obvious that it was doomed to failure. At the same time as we were doing this work, you have Novogratz getting his LUNA tattoo, and we can talk about that, and Three Arrows put in $200 million in February, and Celsius had a $500 million position in LUNA that it withdrew and was probably one of the ones that caused the de-peg. So, they basically got out right before the steamroller smashed them, and these are the people who are being trusted to manage your money, and they put hundreds of millions of dollars into what anybody with frankly fairly basic understanding of finance would have and should have understood as an unsustainable scheme.
That also, I think, maybe it doesn't speak to regulation because to somebody like Novogratz, he's dealing with private money, and what he has to face now is reputational damage, but like Celsius, they're going to retail, they're saying, "We're like a bank, and no bank is going to take your deposit and turn around and put it in even venture capital, much less a shitcoin". I'm sorry, I should have asked, is there a language criteria for this?
Peter McCormack: Fuck no, man. I get about an email a week telling me to calm the language down.
David Morris: Okay great, yeah, because I'm really bad. I will try and tone it down, because I'd probably beat you without trying.
Peter McCormack: Don't worry, man.
David Morris: But anyway, so this I think ultimately gets to the most infuriating part of this for me and the part where I do think there has to be some space for regulation. I'm not a big fan of accredited investor rules, but it's terrifying to think of all of these people who thought, "Oh, this DeFi stuff, it's returning 20% consistently with zero risk. I'm just going to hand my money over to Alex Mashinsky and he's going to make me rich". That was never a realistic proposition partly because we still don't even really understand what DeFi is. It's only been around in real force for two, maybe three years, and so the idea that you're going to then come and build a retail front-facing operation specifically to harvest DeFi is crazy on its face to me.
Peter McCormack: It's taking deposited funds and going to Vegas.
David Morris: Essentially, and literally that is, well not literally, sorry, very close to literally that is what happened. That's how you wind up with Celsius putting money into Badger DAO and losing $50 million in a hack and just making objectively dumb moves. Alex Mashinsky is not a money manager, he doesn't know finance, at best he's a tech guy with, honestly, a fairly decent track record, and that's one reason people I think got taken but --
Peter McCormack: That's a bit questionable.
David Morris: Well, I'm open.
Peter McCormack: I still don't think he's the investor of VoIP like he's gone round telling everyone.
David Morris: It's a complicated question, and I haven't really dug into it. Somebody said it's like saying you're the inventor a nuclear reactor; no, there's a bunch of people who put influence into that. But Mashinsky, as far as I know, God knows what he might have lied about in retrospect, but to my knowledge, he ran the company that sold all the wireless in New York City subways, so he's actually done things, and that's more than you can say for a lot of these people.
At the same time, yeah, it's finance it's not tech, it's different, so there has to be some kind of transparency there that obviously wasn't this time around. I go back and forth on this whole thing in terms of sentiment and how I feel about it because at the same, yeah, retail should have known better on some level. There is a part of me that's like, "This is an incredibly speculative thing. If you just read two articles, you're going to have your mind blown if you think this is secure and reliable", and people didn't do that.
Peter McCormack: Well, I've made a show and career on the back of the fact I can ask simple questions and be very honest about what I understand and what I don't understand. One of the things I do on purpose, and Danny knows I do this, I purposely don't go too down the rabbit hole on technical things and I purposely don't go too far down the hole on financial things because I want my understanding to be very similar to the audience.
So, if I go too far down on, say, the technical side of Bitcoin, I might lose that edge where I forget, I'm complacent about what people understand. So, I've never really fully spent all the time understanding the protocol, and that's by design. When somebody says to me, "You don't know what an xPub is?" I said, "No", and I kind of still don't know what it is, I don't use it, because I think 99% of people will be that way, so I principally keep to that.
David Morris: But I think you've hit on something really important here which is that you can understand Bitcoin at a high level and it makes sense and it seems like it should work; whereas, I'll just pick LUNA, there are a million other examples, there is no high level understanding that is compelling. The high level understanding is actually the one where you can see the holes. It's when you get Do Kwon in front of a microphone and he's spewing catchphrases at you at 100 miles a second, that's when it seems reasonable or something.
Peter McCormack: Yeah, but come on, man, how old are you?
David Morris: Obfuscation, you know.
Peter McCormack: Give me the range, you don't have to give me an exact age.
David Morris: I think I'm a couple of years younger than you; I'm in my early forties.
Peter McCormack: Yeah okay, so similar age, right. A lot of people here are making their first investments. Firstly, one of my son's friends buys crypto stuff, right, so he's barely over 18. Judging by how some of the people talk on Twitter, they're in their early 20s, mid-20s, it's a lot to try and understand at that age; I'm in my 40s, I'm still don't understand a lot of this. My only big red flag was when I was first asked about LUNA and I was told the returns they're paying and I was, "Well, that's not sustainable DeFi, I wouldn't buy that shit", but it's not a red flag for some people.
David Morris: Right, and again I think LUNA benefited from DeFi Summer where you had people, in 2020, who were very technically savvy and who were doing all of their allocation themselves personally, and getting like 100% APYs on what turned out to be just more shitcoins, but they cashed out and they got to keep some of that.
I will say about the people, and my apologies to your son if he lost in LUNA, but I think that the people in their 20s are the ones who will ultimately benefit from getting burned; they're not putting out, usually, so much capital. Even if they put out a lot of capital, it's not going to ruin them because they've got the rest of their lives ahead of them. The stories that I'm hearing that are truly nightmarish are people who are like dentists in their 50s who decided to put their entire life savings into LUNA or Celsius or whatever; those people, you'll recover in some sense, you'll go on to live a life, but your life is forever changed by that.
Peter McCormack: Well, you've destroyed your retirement.
David Morris: Yeah, and so that's when you start thinking about, "This isn't just degens anymore, there needs to be some guardrails". I also think that, speaking of the not paying attention to Celsius and LUNA, I think that for people like us, it's also true that we've been through so many cycles of this and we've seen so many of these bad projects come and go, and it's almost like blasé at a certain point; it's like, "Oh, there's another scammer running a centralized fake crypto thing [or] doing an ICO for something that, on its face, can never work". They'll come and go.
But this last cycle, I think we finally hit a critical mass in terms of just the amount of money involved and the amount of retail getting involved to where I think we do have to shift our -- and it's unfortunate, right, because, it's such a cliché but people are correct, this is like the web in 1998 or something like that, and I think that, at this point, we're reaching a level where the financialisation of crypto is actually becoming a detriment rather than an asset, because the good part in 2017/2018, even whatever the amount of frauds were, a lot of good things did get funded. Gnosis is a real operation, a real company that came out of an ICO, go back just not that far before that, Ethereum came out, and those were good because people didn't know what they were unless they really did.
Then people who were technically savvy and who were plugged in were able to see those things and be like, "Oh, I want to be involved", and there were no barriers, right, and that lack of barriers was good. But just the level of hype and sort of surface level awareness has become so high that somebody can just throw up a flag with nothing behind it and get all this money and the lack of barriers, I think, becomes a detriment. So, the bad things get money that could be going to good things, you know.
Peter McCormack: Yeah, when I think back, 2017, I was fairly green with it all; I bought Bitcoin first but then bought Ethereum and then bought 50 other shitcoins, and I got burnt mining, I got burnt on ICOs, and 2019 was a very painful start to the year.
David Morris: Sort of famously in your case, right?
Peter McCormack: Sort of famously; I wrote a little thread about it that people like, but from that I just made these very simple decisions. It was like, "Okay, fuck all this, I'm just going to focus on Bitcoin, there's enough to learn there. I'm just going to hold Bitcoin and then I'm going to go to work". Me and Danny went to work, we worked our balls off for the last three years.
David Morris: Yeah, built something.
Peter McCormack: Built something, and Danny has spare capital sometimes, I do, the company does, and we buy more Bitcoin and we stack, and we built a business and we built some reserves, and that was enough for me. These ideas of buying this token and then lending it out on this platform and getting this other token which isn't part of some farm, name it after an animal, where I have to sell it, it's all of this, just like, "I don't know what the fuck's going on here!" I didn't even want to pay attention to it.
Actually, I didn't even want to learn about crypto, that's the funny thing, I want to learn about money, and the financial system, and governance, and how humans coordinate. I want to learn around all that stuff that comes out of Bitcoin.
David Morris: This is also stuff that precedes Bitcoin, right?
Peter McCormack: Yeah.
David Morris: These are principles that drove the creation of this stuff in the first place, and it continues to blow my mind when I see people say stuff like -- Dudas was talking about some NFT stuff this morning on Twitter, and it was somebody who was saying like, "No, we need to get rid of the revenue share on NFT trading because you actually need to be generating income behind those NFTs that doesn't come just from trading them", and I'm like, "No, you've totally misunderstood".
I know you're not an NFT guy so hopefully this doesn't miss your audience too much, but just as an example of somebody who has completely missed the point of why this was invented in the first place. An NFT is not supposed to be a security; those trading fees are there to go back to the artist, it's the one thing that it's meant to do. You're just trying to recreate a security all over again and you're just running at 180 miles directly into a brick wall and it's going to hurt really bad because you don't understand the basic underlying principles, and I think that is really scary.
There are a lot of people out there who are involved in this ecosystem who don't have Clue 1 about why they're here, they're just trying to do technical trading which, by the way, this will really hopefully piss off the right people, but if you're an individual technical trader, you're just asking to lose money; it is a loser's game, it is not a good lifestyle either. If you really are trying to learn about this stuff, there are infinite opportunities and it's very easy to access as a worker, as a learning. Go get involved in a DAO, write tweets for some lame NFT project, do something where you're actually participating and contributing, don't just try and stake somewhere and think that's going to be your life, because you probably have no idea what's going on behind the scenes.
Peter McCormack: NFTs are a weird one because I'm naturally, as a bitcoiner, inclined to hate everything and be suspicious of everything, but I have seen a couple of things in NFTs that are interesting reads.
David Morris: NFTs were invented on Bitcoin.
Peter McCormack: I know, and we were with Junseth the other day, we were talking to him about them with the Rare Pepes, but I actually think it's not that that makes it interesting to me, it's still just a hash of a jpeg that exists. What makes it interesting to me is I saw recently somebody I know; I think his name's @Icebags on Twitter, I think he put on an event in Vegas and the ticket was an NFT and you got a bunch of shit that went with it. So, the fact that you can use that for certain things, I thought that was kind of interesting.
David Morris: Yeah, and like the social stuff and just the ability to be able to airdrop to a certain set of wallets. There are interesting utilities that I think will get kind of refined and developed, but I think it's another good example of a place where, again, it's dicey to talk about regulations, but if you had some kind of control where people were motivated to put their assets and their capital into something legitimate instead of something illegitimate, it would be good for everybody. How do you accomplish that? It's not easy, but…
Peter McCormack: Danny, have you ever bought an NFT?
Danny Knowles: Are you joking?
Peter McCormack: No.
Danny Knowles: No, of course not.
Peter McCormack: What do you mean, "Of course not"? It's your job, you're a producer, you need to do your research.
Danny Knowles: Not into NFTs!
Peter McCormack: Well, I thought you might have bought -- I own it. Why don't you own one?
Danny Knowles: Oh, you do have one.
Peter McCormack: I've got a Frog, haven't I?
Danny Knowles: Yeah. That's a Pepe, right?
Peter McCormack: Yeah, it's on open DAO.
Danny Knowles: Yeah.
Peter McCormack: Yeah, I've got one.
Danny Knowles: Who gave you that; Rob Hamilton?
Peter McCormack: Rob Hamilton, yeah.
David Morris: I mean, they're fun. I made the mistake in 2018, instead of buying a punk I bought a bunch of playing cards, so those were useless.
Peter McCormack: Should have got a punk, man.
David Morris: Yeah, I should have got a punk. I could have absolutely quit working forever, but…
Peter McCormack: Yeah, we went down a rabbit hole here; back to LUNA. So, I heard about the interest rates and I thought, "Oh, well that's not sustainable", but I didn't know about -- because there was the LUNA token and this token, and fuck it, I didn't know, man.
David Morris: Yeah, so you're talking about the stablecoin, the algorithmic stablecoin, not a real thing, not a real thing, doesn't exist, cannot be created, fake, fake, fake; I'm trying to drill that into people's heads because --
Peter McCormack: Well, all algorithmic stablecoins?
David Morris: All algorithmic stablecoins.
Peter McCormack: DAI?
David Morris: DAI's semi-algorithmic, but it's over-collateralised, different thing.
Peter McCormack: Okay.
David Morris: But true algorithmic stablecoins -- and this is why, by the way, as things started to get bad, LUNA was trying to collateralise itself by buying Bitcoin, which is again why bitcoiners need to worry about this.
Peter McCormack: So, hold on, because that was the first time I heard about LUNA. Someone was tweeting they're going to buy $10 billion of Bitcoin and they announced it.
David Morris: I think they made to about $3 billion before it all fell apart.
Peter McCormack: But that actually is a bit crazy the fact that they announced it, because they pushed the price up. But do we think the reason therefore that they were buying Bitcoin is they realised they were screwed?
David Morris: Oh, they realised they were screwed.
Peter McCormack: Oh, right, okay.
David Morris: I mean, the reporting that's going on, this is rumourmongering by me, so this is unconfirmed, but a little bit of what we understand is that there were people close to Do Kwon who were really trying to tell him that what he was doing was going to blow up, and he simply ignored them.
The algorithmic stablecoin thing, I'll try and give a very brief description of why they're problematic, and Bitcoin actually plays into this, it's not just that they're trying to issue a US dollar-pegged coin that has no actual US dollars backing it, it's that the way those algorithms are designed inherently creates the constant possibility of what's known as a death spiral where the arbitrage opens up in the wrong direction.
To back up just a little bit, an algorithmic stablecoin, in theory, is supposed to incentivise traders in the open market to do financial arbitrage to keep one token close to $1 by buying and selling the other one. Unfortunately, once either of those, and especially once the peg gets too far off on the dollar stablecoin or whatever the stablecoin's pegged to, then it becomes profitable to drive it further off the peg. It's very similar to what George Soros did to the pound in the, I think whether it's late 1980s or early 1990s. He found an arbitrage and then he hammered it and took all the money out, and that's ultimately what happened with LUNA.
The thing about the Bitcoin buy that's super insane, is that (a) yes, you publicly announce that you're going drive up your cost basis, but (b) it was never clear how this was going to be integrating into their balancing system in a systematic way. So, you have TFL, the "non-profit" or LFG -- sorry, I get them mixed up -- so TFL is Terraform Labs, that's the actual company, Luna Foundation Guard, I guess it's like some third party, maybe it's a non-profit, and for a while they were just sitting on the Bitcoin and saying like, "Hey, this is backing LUNA"; there was no mechanism, nothing was defined.
But the instant you put that on chain, the actual Bitcoin becomes integrated into that algorithm, somebody will then exploit it for the Bitcoin the same way they did for the profits that they got from breaking the peg. So ultimately you probably, if you have a fractionally backed stablecoin that has like 10% Bitcoin backing it, that makes it less stable not more, because you've put a mechanism out there for people to go in and actually take that Bitcoin if they have enough capital to knock you off your peg. So, it's just an insane, insane thing all the way down, fundamentally broken, never would have worked.
Peter McCormack: Yeah, and the sad thing for them is they ended up unwinding most of that Bitcoin position.
David Morris: I think all of it.
Peter McCormack: No, I thought there was like 180 Bitcoin left at the end of it or something.
David Morris: And that's the most interesting part is that they seemed to really believe that it would work.
Peter McCormack: But they unwound the position and never managed to stabilise and get the peg back.
David Morris: No, not for a second.
Peter McCormack: So they could have just let it die and then a least be sat there with $3 billion of Bitcoin.
David Morris: And them maybe their holders would have actually got a little bit more back too, and instead it all went to the arbitragers who were attacking the peg, even though it wasn't automated. If it had been automated, the risk would have been even higher, but they behaved as if it were automated the same way.
Peter McCormack: So LUNA was the spark for 3AC?
David Morris: I think it was where a lot of the margin calls started coming from and then, once those calls started coming in and they were just ghosting exchanges, that was when it was really obvious. They did have the problems beforehand, GBTC and stETH, but also, and this is I think where the criminal element starts to come into it, they had basically done the equivalent of going to every bank on the street and taking out a bunch of loans without telling them that they already had a bunch of loans from the other banks.
This is not a crypto problem, and in fact it illustrates why these big, centralised players, their lack of transparency is the problem because not even a year, maybe it was two years ago, the exact same thing happened at a hedge fund called Archegos that I think people probably have heard about, a guy named Bill Hwang, who also --
Peter McCormack: Was that the GameStop thing?
David Morris: No, no. No, this was not nearly as degen as that, and it still managed to blow itself up. A guy named Bill Hwang, one of the so-called Tiger Cubs, was running very similar to Su Zhu, he had a huge macro long bet on just a basket of equities, and he went to Citibank, I don't want to name specific names because I don't know who exactly his counterparties were, but big names like that and got a billion here, a billion there.
His entire thesis was, "If I keep buying this stock, I alone can drive the price up enough that this will somehow play out". Again, totally unsustainable, bad idea, but he managed to go and get all this debt and people -- just like when Three Arrows lost hundreds of millions of dollars, because he ultimately, as soon as things turned on him, he was screwed.
Peter McCormack: From what I understand with Three Arrows though, from those who know them, like I say, I didn't know anything about them, I just hadn't paid any attention. People were shocked, they're like, "Hold on, what?" Three Arrows, they were the ones, they were so successful previously. What did they turn, like $30 million of whatever a low number was, or $3 million up into like the billions under AUM?
David Morris: Well, that's the thing, we don't actually know, right, we assumed --
Peter McCormack: So it all could have been bullshit.
David Morris: Well, it could have all been loans, that's the thing.
Peter McCormack: Okay.
David Morris: We thought for several years that they were a prop shop, that they were just trading their own money, that Kyle and Su were geniuses who had gotten in early enough that they just had a giant pile of money under them, and it turns out that that was not true at all, or at least it was an order of magnitude different than what we thought it was in terms of what was their actual money. I'm not sure why on-chain detectives didn't figure that out at a certain point; that does seem like a gap in the intelligence. But yeah, they basically were misrepresenting the nature of their entire business.
Peter McCormack: And the one that amazes me with that is Voyager giving them were an uncollateralised loan.
David Morris: Boy, don't ask me!
Peter McCormack: Like, what?!
David Morris: Yeah, I mean $650 million to these two guys in Singapore and, yeah, I don't know what to say, it's a huge question. It makes you sort of ask a lot of deeper questions about maybe something else was going on there. I hate to cast aspersions but there is no business rationale where that makes sense, especially because Voyager was also dealing with customer funds and retail customer funds, and so I'm left without anything to say to that. I think it's the single stupidest trade of the past year; it's going to go down in history as the worst decision anybody made during this unwind.
Peter McCormack: Well, one decision killed your business.
David Morris: Yeah, absolutely, and so yeah, I have no explanation, I don't think there is one, it's insane.
Peter McCormack: And then Celsius, the last one on this. So Mashinsky's an interesting character; we've talked about him already, I've met him a few times. I've been quite clear publicly, I've never really trusted him, I've never really quite trusted Celsius.
Now I have, for full transparency, BlockFi are a sponsor of mine, we should say that, and by the way you can talk about them as much as you like, but the two companies were always put in the same bucket; my very basic different understanding of the two is that BlockFi earn their yield from lending out Bitcoin to market makers and such and started with very good rates, and their rates eventually dropped to not particularly great rates, but the reason being is they --
David Morris: They changed, they altered it according to market conditions, right?
Peter McCormack: Yeah, they didn't change, yeah.
David Morris: That's what you want from a lender.
Peter McCormack: So they altered to market conditions, but they could only pay out based on the rates of what they were lending out, and because no one was really buying from them --
David Morris: It was actually connected to what was happening in the real world.
Peter McCormack: They weren't gambling with funds in the way they did. Now look, we know quite publicly they made a GBTC bet that went wrong, and even with the unwinding of what happened with Three Arrows Capital, they lost $80 million there, but they are still --
David Morris: Which is getting off pretty easy actually compared to some other people.
Peter McCormack: Yeah, look, there have been plenty of people telling me, "Why are they still a sponsor? Why do you still support this?" The company's still functioning, it still honours withdrawals.
David Morris: I mean, they never paused withdrawals, so that puts them in a different category, but I think the thing that, in terms of red flags, when you listen to somebody like Do Kwon or Mashinsky talk and they just hammer like, "We're offering this rate, we're offering this rate, we're offering this rate", well, how are you offering a rate?
I'm doing some deeper research for a Do Kwon project that I'm working on and, if you go back just even to the beginning of year, or maybe it was late last year, there's a fascinating video of him talking to the Stanford Blockchain Club; he actually had somebody who was part of a team at Lightspeed that invested in LUNA which, again, no excuses, but this person was saying, "Oh, it's so great. There's this Anchor thing that you can get 20% yield out of it". This is a venture capital partner at Lightspeed Ventures and she thinks that 20% interest is a feature? It's madness, it's utterly insane.
I think that probably there are plenty of examples of Mashinsky taking the same tack where it's like, "Oh, we're offering this great rate. It happens to be in our corporate absolute trashcoin, but sure, come and yield farm with us", and that's not what's going on at all. If you consider your APR a marketing tool, you're dead in the water; that is not the business that you're actually in. That's, I think, the mentality that led to all of this, is like, "We're going to gather all of these customers by offering this unsustainably high APR and then we're going to figure out later how to deliver it", and that doesn't work.
Peter McCormack: Do we know how big the Celsius hole is?
David Morris: That's a good question. Oh, the hole? I thought you meant the assets.
Peter McCormack: Yeah, I meant hole in there.
David Morris: Oh no, we figured it out over the weekend I believe, $1.2 billion.
Peter McCormack: Shit!
David Morris: It's not good.
Peter McCormack: Right.
David Morris: It's like $1.2 billion out of $4.5 billion is missing, something like that.
Peter McCormack: So they beat Mt. Gox?
David Morris: Yeah, oh yeah. You know, you have to ask how that's calculated, and even then I think it's understated because, if I remember correctly what I was reading, that $1.2 billion is them still counting the Celsius token that they have on their books, which they're valuing at something like $400 million.
Peter McCormack: Well, it's zero now I would have thought.
David Morris: It's got to be; I mean, it's not zero, and we can talk about that insanity too, but it's effectively zero. Just recall back around to regulation, this whole idea that you can be like a C corp that's issuing your own token and then that is somehow an asset, we've got to get rid of that because the incentive structure is completely broken. I think that there might be cases where it's responsible, I don't know if BlockFi has their own, but --
Peter McCormack: They don't have a token.
David Morris: Okay, so again a good sign because, again, people who do not understand what's going on thought that they could just get their yield in this Celsius token and then, "Oh, here's your incentive; if you just park the Celsius token with us, we'll give you 30%, we'll give you even more of something that's worthless". So yeah, it's just completely terrible all the way down.
Peter McCormack: And that's going to be retail funds that have been lost, right?
David Morris: Yeah, yeah, it's got be mostly retail, well no, sorry, I shouldn't say that, I don't know, but I do know that their institutional lending business was waning pretty hard going into the middle part of this year.
Peter McCormack: That's a terrible scenario. I read the statement from Mashinsky where he talked about, "We will see this as a…", what did he say?
David Morris: I'm going to guess, "Learning opportunity"?
Peter McCormack: No, it was similar.
Danny Knowles: Was it on Twitter?
Peter McCormack: Yeah, you've got to find the Celsius statement.
David Morris: "I am humbled", that's another one that you can go with sometimes.
Peter McCormack: "We will look back at this moment as a…" I can't remember the word he used.
David Morris: "I will look back on this moment from prison with fondness!"
Peter McCormack: Well, he certainly faced the prospect of going to jail for this, I think that's a very serious prospect.
David Morris: Oh, I'm not joking, and this is all of them, frankly. When we're talking about regulation we can talk about enforcement too. I'm a big fan of enforcement over regulation, I think that punishing people in dramatic and meaningful ways for having misrepresented themselves might be more effective than writing the rules down on a piece of paper somewhere.
Fraud is fraud, right; those law apply across whether crypto or Beanie Babies or shoes or whatever, and so those are principles that you don't have to write anything new about. So, I do think that, in general, that a good way to go, you just have to have public officials with the backbone to enforce the laws that are already on the books.
Peter McCormack: What's that jail here in New York?
David Morris: Rikers?
Peter McCormack: Rikers, could he end up in Rikers?
David Morris: He's not going to end up in Rikers unfortunately.
Peter McCormack: What if they need a VoIP system installed?!
David Morris: He could, you know, they're unfortunately exploiting prisoners at Rikers to get calls home, so maybe he could do some good then.
Peter McCormack: So, it's a real one where I wonder what the ethical position of a libertarian would be on something like this.
David Morris: Well, he's a thief.
Peter McCormack: He's a thief, but what are the consequences that you would face in this scenario? Should it only ever be reputational?
David Morris: Well, I don't know what kind of libertarians you're talking to, but at least some of them still believe that it's the role of the state to engage in policing.
Peter McCormack: Yeah, and I think fraud is one of those things that they do believe that it should be policed.
David Morris: I mean, property rights, libertarians don't I think in general understand this sufficiently, but property rights don't exist without the state and enforcement, and you have to be willing to do that on some level because there will be people who find gaps. One other thing that we should talk about is reputational and there's the damage on the back side, but there's also who are you putting in your money with on the front side; who are these people? I think one of the reasons that Mashinsky managed to do so much damage is because he did have some leg to stand on reputationally.
Peter McCormack: Here we go, "This is the right decision for our community and company", said Alex Mashinsky, "We have a strong and experienced team in place to lead Celsius through this process". This is the best bit, "I am confident that when we look back at the history of Celsius, we will see this as a defining moment".erekl s
David Morris: Well, he's right about that!
Peter McCormack: Yeah, well he's right about that, but it's the bit afterwards. "We're acting with resolve" --
David Morris: "We unbanked everybody!"
Peter McCormack: That's that thing, I love it, banking the unbanked.
David Morris: An unbanking the banks!
Peter McCormack: Unbanking the banked! Oh God, I shouldn't laugh; I'm laughing because it's so stupid, not laughing at people's misfortune, but anyway it's this bit, "We will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company". This company has no fucking future!
David Morris: No, no, and this is the thing to watch out for, I mean this is where you get people trying to publicly navigate their way out of prosecution and reframe history and push things under the rug that they don't want remembered, and we're going to see a lot of that.
Peter McCormack: I don't think he's going to get away with it. So one of the things I wanted to do, I mean I don't know how much you know about this, but I thought it would be worth going back and talking about what happened in 2008, because I think it's a good set up to at least explore what regulation means, because again, a lot of people might not even know why 2008 happened.
I only know more about it because we made a four-part show about Steve Mnuchin at one point. We were trying to understand what happened in the 2008 Financial Crisis, and I went all the way back to as far as Clinton and what happened with the deregulation under Clinton and the repeal of Glass-Steagall, and correct me if I'm ever wrong about any of this, but the repeal of Glass-Steagall and opening up the banks to be able to trade derivatives; but also, he wanted more people to be able to have mortgages. He wanted more homeowners, which is a very progressive thing, very left thing to want, but in doing so, people had to have lesser and lesser deposits. I think prior to that you had to have like a 20% deposit, but I could be wrong.
David Morris: Yeah, we can definitely get into that a little bit. It's two different things. There is the user side, you might say, where we want to make it a little bit easier for people to get a mortgage; but then the financialisation side, and I would argue that the financial side is where the real flaw lay. Before we move on though, I do want to put in a quick plug because we talked about LUNA, and I don't want to just say, "Oh, you should have noticed this". In April, on CoinDesk, I published a lengthy piece describing exactly what was going to happen and then it happened.
Peter McCormack: Is that what you sent me?
David Morris: That's what I sent you.
Peter McCormack: We'll put that in the show notes.
David Morris: And so I just want to say, read, just be out there reading and looking in depth. The resources are available and I heard from people directly who said, "I read this piece that you wrote and I got my money out and you saved me". So, I feel pretty good about that and, yeah, read CoinDesk I guess is my quick plug there.
Peter McCormack: No, no, it's a fair plug. We'll share everything you've written on the show notes. You sent me another article, well make sure it's all in there; people should read it all.
David Morris: Yeah, but the big picture of 2008, and I'm in finance because of what happened in 2008, I was finishing my PhD and I was actually directly affected. I was Iowa at a state school and I had another six to eight months of funding left supposedly to work on my PhD which is in History of Technology, which is how I got involved in all this. But because of the Financial Crisis, in 2009 I actually got my funding pulled for a PhD programme at the University of Iowa and wound up spending that last semester working as a short order cook, working as a parking lot attendant, teaching at the local community college and finishing my PhD all at the same time instead of sitting on a nice stipend and doing nothing.
Peter McCormack: Three jobs to pay for it.
David Morris: Right, so very personal for me. And, at the high level, the 2008 Crisis absolutely looks exactly like this, because you had these things called CDOs, Collateralised Debt Obligations, which were built on top of mortgages and were essentially designed to keep banks safe when mortgages went down. But nobody was doing the maths of the total amount outstanding of these shared obligations, and so ultimately there was just not enough to cover when that actually happened.
So in a lot of ways it's similar to, if you think about the Celsius token as some kind of financial instrument based on the returns from DeFi, if those returns turned out to not be there, then your Celsius token is worthless in some of the same ways that a CDO or a multi-tranche mortgage-backed security turned out to be worthless in 2008.
It's all about promises that can't be fulfilled; if you're Alex Mashinsky, you're issuing that token, and that is a promise that there's going to be value here over the long term and then, if the financial mechanisms behind that actually don't work out, then that promise is worth nothing, and that's the very high level I think of both crises in a nutshell.
Peter McCormack: But also both crises get to the root of human greed and what human greed can do. You can buy human greed with leverage, again, a few small players can cause insurmountable damage to a large amount of people. The reason I bring up the idea of regulation, which I know is heresy in Bitcoinland, but I don't just live in Bitcoinland, I also live in two worlds; I live in a world where I have a mortgage and savings and have family, have friends. And I have plenty of friends who you're not going to be able to sell Bitcoin on an idea of complete deregulation, tiny government, you've got to go step by step.
There's this kind of contradiction whereby very critical of the state, very critical of central banks, they've caused the majority if not all the problems with regard to fiat currencies, this kind of decivilisational process we're going through, they're entirely to blame. But at the same time, some regulations out there do actually protect people, and what is the right balance? There are going to be people who say, "Have a completely free, fair, open market", which I don't think solves anything. You can have a highly overregulated market where the government have control of everything, which I also think isn't great, so where is the line? For me, I don't know where that line is but I'm interested in exploring that, and interested in exploring what it means.
David Morris: Yeah, well I would say two things first to just kind of like set the stage there which is I think that the more time I spend just repeating this line, the more I find it compelling that a perfect regime for me would be zero upfront regulation, extremely fierce backend enforcement on bad actors. That is an unrealistic scenario I think because, ultimately, it requires a lot of manpower to do that enforcement on the backend, and you'll have people kind of running into that machine all the time like a woodchipper; and ultimately; government funding for enforcement is always contingent on somebody's ability to cut that budget, right. So, if an industry decides that they don't want that, they can just lobby enough to defund that department, so it's not a realistic scenario.
What I worry about with the frontend regulation, especially in crypto, is that there are a lot of smaller scale things that really could be useful experiments; we need some kind of safe harbour where maybe, if you're not dealing with a certain amount of money or you have certain protections in place for all of your depositors, you can just go ham and do whatever you want. That would be ideal for me, because I think that there are really useful experiments that can get squashed by regulation. I was listening to something today which reminded me that we have a really clear example in crypto of prediction markets, right. Prediction markets could have been a genuinely -- you're not making any grand claims about what you're doing, it's just kind of gambling for fun mostly.
Peter McCormack: But kind of trying to give you information on what people think outcomes will be.
David Morris: Yeah, and there is some useful information that comes out of that. You still occasionally see a news piece written about what a particular prediction market is saying, this, that or the third time, and that's just impossible because of regulation. And so that, I think, is one thing that we've already lost out on because of some of the rules that are in place.
Peter McCormack: How has regulation prevented that from happening?
David Morris: Well, because it is considered gambling and so I think that, in terms of serving US customers, I know that Gnosis and Augur were both ICOs in 2017, 2018 that people were quite excited about; Gnosis has manged to make it under a different business model, but Augur has kind of gone the way of the dinosaur because they just couldn't do the regulatory thing.
Peter McCormack: I thought there were flaws in that; I haven't look at Augur for a while.
Danny Knowles: I mean, this is what we're talking to Paul Sztorc about tomorrow, because he does do drivechains on Bitcoin which allows prediction markets I think.
Peter McCormack: Okay, interesting, we'll have that conversation then.
David Morris: So anyway, the prediction innovation should be a priority. The second thing I was going to say though is that I will remind people who are so staunchly antiregulatory, that the SEC is not God and does not have infinite power. It has a lot of power and, if you run afoul of it, you can definitely get into a lot of trouble that will impact your life in a big way, unless you're Elon Musk. But the other thing to keep in mind is that there are spaces beyond regulation, there are spaces beneath regulation, there are international safe harbours that de facto exist for you to and go and do stuff that you really believe in that might not work under regulatory regime.
Peter McCormack: Or run away to when you've been busted!
David Morris: Yeah, it's a double-edged sword for sure, but I guess my only point is just that, don't think that the SEC has total control over your life if you're doing something that is well-intentioned and genuine, not to get anybody in trouble, but…
Peter McCormack: So, I've listened to some of the parts of the Dodd-Frank Act that came out in 2010 after the Crisis to just try and understand if there are things there that would be helpful, not so much as a claim that I want Bitcoin to be regulated, I don't want Bitcoin to be regulated, but I do want to identify the things they tried to work on, which I thought was quite interesting, because I'll give you an example of self-regulation in Bitcoin that would be good.
A lot of people of have talked about proof of reserves with exchanges; now that's a lot of work, but that's good self-regulation. Now, if you had all the exchanges doing proof of reserves, and the ones that didn't, that's essentially your on-chain version of a Yelp review. It's like, "Okay, well CoinDesk has proved their reserves and Kraken has proof of their reserves and Gemini have proof of their reserves, but this load of fucking," -- I'm not going to name any because I don't know any, but this, I don't know, one in Canada for example has not proofed its reserve.
David Morris: Right, that was when the discussion of proof of reserve got going, right?
Peter McCormack: Yeah, but that would be an example of some kind of self-regulation that would be good, because you can basically see which of the exchanges are operating the best way. Now look, that doesn't stop from a hack having funds stolen, but the point being is that some part of self-regulation, that would be good. Can we get there on everything? If we can get there on self-regulation that would be great.
So, the Financial Stability Oversight Council is responsible for keeping banks and other financial firms from becoming too big to fail, so they required special annual tests to ensure that these large institutions were prepared for the inevitable arrival of recessions and future financial crises. So, they run that test every year and a number of scenarios to make sure these banks can't fail, and I'm pretty sure I read about one, they ran one test a year, two, three years ago, and they actually found one failed, that would fail under that scenario. So, that's been a particularly good thing that I think exists.
I wonder if there are stress tests we can put into our system to see if it's too big to fail, but what are the things that are going to stop which are? But then I said that, look, I'm going round in circles here, because you pointed out that LUNA could fail, what was that $68 billion in…?
David Morris: Nominally, yeah, it's not real money, but nominally.
Peter McCormack: Yeah, made-up money, but the problem is, even with these things put in place, you could, unregulated, have self-regulation, these things still could fail.
David Morris: Well, you don't even have to think about that in terms of regulation. Proof of reserves should be a competitive point, especially with all of these failures frankly from exchanges. And crypto, and I do mean crypto rather than Bitcoin, but the big picture, we're technologically very well-positioned to have something like that, that level of transparency, and I think that that should be the watch word. It's very difficult if you have a hedge fund to actually put everything on chain; you don't want that level of transparency, because then people can see your trades and countertrades and it's a business strategy issue.
But for those who aren't familiar I guess, proof of reserves is this idea that you can use zero knowledge proofs and essentially provide attestations at the high level without getting into the nitty-gritty of exactly what you're doing, and it's an exciting and interesting idea and I would love to see -- I mean, I think that once one exchange implements that, then instantly everybody else is going to as well.
Peter McCormack: Didn't one do it; did Kraken do it?
Danny Knowles: Kraken have done it, yeah.
David Morris: Oh, they have? Well then I'm wrong.
Danny Knowles: I think some more have done it as well.
Peter McCormack: But it's not like it's something we talk about and it's not like I've heard anyone say, "Well, I don't use that exchange because they don't have proof of reserves".
Danny Knowles: Kraken, Coinfloor, Gate.io, BitMEX, HBTC and Ledn.
David Morris: Well, that's great.
Peter McCormack: Gate.io?
David Morris: BitMEX, that's a good one.
Peter McCormack: I'm pretty sure back in 2017 I bought XRP on Gate! Shitcoin days!
David Morris: God, confession time.
Peter McCormack: I bought like £300 of XRP in 2017, yeah, as standard. But have you heard anyone say, "Well, I don't use that exchange, it doesn't have proof of reserves"?
Danny Knowles: No, but I think you're right, I think it could be a competitive --
David Morris: Yeah, and it's a thing that you have to, over time, sort of teach people about. We know about this because this is something Nic Carter said three years ago and nobody other than people like us remember.
Peter McCormack: I think he wrote a paper on it, didn't it?
Danny Knowles: Probably, and Trace Mayer used to talk about it I'm pretty sure.
Peter McCormack: Yeah, and I guess you could do a similar thing for the likes of your Celsiuses, your Voyagers, your BlockFis.
David Morris: In theory, again, there are problems because not all of that is on-chain and you don't want it all to be too transparent, but yes, in theory, and ultimately really something that you absolutely should expect from that kind of thing. For example, we kept hearing this drum beat of Celsius lost $50 million here, $100 million here, $200 million there, and eventually you do wind up with a $1.2 billion auditable on your balance sheet.
Peter McCormack: And proof of reserves wouldn't identity if they're doing some funky things in the background?
David Morris: Yeah, or off chain or 3AC taking these loans would totally be non-transparent, and this sort of gets to I think another kind of pillar of TradFi regulation. It's tough to do it in a self-regulatory environment, but one of the reasons Three Arrows was such a bad blow up is because they were doing everything at the same time. They were a hedge fund, they were an OTC desk, they were a prop shop, they were managing treasuries for start-ups, which is insane, and when you go back to Glass-Steagall, the reason that that was important is because it prevented retails banks from also being investment banks; that was the basic Chinese wall that that set up.
Peter McCormack: And with the Volcker rule with Dodd-Frank, that would prevent banks from engaging in speculative trading activities.
David Morris: Right, exactly, and it's insane that anybody at any level ever thought this was okay.
Peter McCormack: You could put that in the place of somewhere like, you would say that if you had a Volcker rule for the likes of Celsius, they would have broken it.
David Morris: Oh, they 100% were breaking it, yes. They were not just engaging in trading of speculative assets, they were a retail operation trading in completely unregulated assets.
Peter McCormack: Unhedged.
David Morris: So it's like a bank turned around and just bought a bunch of pink sheets from whatever, I'm forgetting the word for junk bonds, and so it's on its face crazy.
Peter McCormack: You also have here that, "Enables the Securities and Exchange Commission to regulate derivative trading or contracts between two parties to agree on a financial asset or set of assets". Well, the SEC are stepping in to try and do this now anyway.
David Morris: I've got to say, I might not really totally understand the nuances of that provision because it sounds like you're regulating private contracts; I might just skip commenting on that one.
Peter McCormack: I was more focused on the regulate derivative trading. But then we had this other part of it, I don't know, "The Sarbanes-Oxley reformed corporate responsibility, held CEOs personally responsible for accounting errors, and gave protections to individuals who flagged behaviour, namely whistleblowers". Again, you can see why these all existed following 2008, we blew up the global world economy. "It requires hedge funds to register with the SEC", so it should, and were 3AC registered?
David Morris: Well, they were based in Singapore, so they were registered in Singapore I believe. It did come out later apparently that they were only authorised in Singapore to be managing $250 million, so they were breaking whatever law they were operating under it seems, and which gets to kind of another angle on this which is, you can regulate all you want but there's a lot of character involved here too and reputation does matter. But whistleblower protection, all of these things are very important, personal liability.
The other thing I will say though is that a lot of this stuff in theory does still apply to the likes of Celsius. I mean right now, we don't have to have a separate set of laws for crypto when you're just like, "I'll take your US dollars and so something with it"; that's all the same regulatory regime ultimately. And this is something else to reassure people who are on the Bitcoin end who are worried is that a lot of this regulation would, in theory, fall not on the assets, not on the blockchains. We've had some scary stuff about wallet regulations which every sane person should be 100% against.
Peter McCormack: Unhosted wallets.
David Morris: That's sacrosanct, like you absolutely cannot regulate unhosted wallets, it's -- well, different discussion.
Peter McCormack: Yeah.
David Morris: Anyway, point being a lot of these institutions were just that, institutions who were offering to manage money for you. There are already rules for that stuff, and I think it's going to come out that those rules that were already in place were being broken severely.
Peter McCormack: So my question really is what now; what about the future of this? It's definitely a question I'd like to put to somebody who's anti-regulation, as I would like, "Do you just accept the chaos and you accept markets figure themselves out? Really, how does that play out? What are the stresses on that?"
It's like you put, many retail victims of these constant failures will be turned off this for a long time, if not permanently, and just even on Bitcoin, we just want Bitcoin to be this global reserve asset, it would benefit from some more stability, more stable pricing. I think some people are going to struggle with it, it can be so volatile, and actually, you know, another four years -- because what's happened is we've had these blow-ups and things every four years in Bitcoin/crypto; another four years' time, if the market is 5X, 10X bigger again, could we have an even bigger blow-up with more crazy shit going on? How do we get away from that? If we constantly leave it down to humans, humans are greedy and will do stupid shit.
David Morris: Right, and that's the tough part if you're looking at crypto as an ecosystem that is still developing which is, in my one scenario that would be just fine by me, is all these people do go away and they don't come back for another decade or another 20 years when things are considerably more developed, even in an unregulated environment and there is some emerging stability; because ultimately, this is just not stuff that a lot of the people who were invested in it should have ever been invested in through whatever mechanism. As I mentioned, DeFi, two-year-old technology in terms of real functionality, it's hyper-novel, and the idea again that you're going to build an institution on top of that already, you're putting the cart before the horse in a big way.
I feel like a lot of crypto leading up to the crash, I don't know where we're at right now, we might still be way ahead of the fulfilment curve in terms of the valuation relative to the actual utility. I think that, even in Bitcoin, there is obviously still some divergence between what's really going on on the ground and the prices on exchange in the US, and when you start talking about more and more speculative stuff, the gap is even bigger.
So, I guess all I'm saying is that what I try and convey in my columns pretty frequently is just, if you don't understand this, don't put your money into it. I guess at a certain point, you have to accept that people just are not going to listen to that, they're not hearing the message, there are too many YouTube crypto influencers which, if you really want to start talking about regulation, make YouTubers somehow liable for the undisclosed promotion that they're doing. I don't know, that's a whole other issue, but yeah, you want people to get just the right amount of burn, might be one way of putting it.
I think looking at it from the other perspective, from a social perspective, if you're a government and you see what happened in South Korea; South Korea, their entire political system is going to be impacted by this because the level of exposure to LUNA was so high.
Peter McCormack: Wow.
David Morris: It's literally, in some small way, causing social unrest. So, if you're a government who's looking four or five years down the road and you think you might get a 5X on just the crypto market, which means a 5X on the downside for whatever percentage of people get taken in by these conmen next time around, you have to be looking at putting some kind of controls in place because then you're going to have just people starving in the streets.
Peter McCormack: Yeah, well I see a way it self-polices its way out of this in that, Mt. Gox blew up in was it 2013 or 2012?
Danny Knowles: I think it might have been the end of 2013, early 2014.
Peter McCormack: Yeah, so Mt. Gox blew up and after that, exchanges became a lot better at their technology and a lot better at their security practices, and now it's very, very rare that we see an exchange rug pull. It may not be over for now, we had, what was the Canadian one called?
Danny Knowles: Quadriga.
Peter McCormack: Quadriga blow up, but like, generally speaking, exchanges are becoming more and more trusted. Yes, "Not your keys, not your Bitcoin", take your Bitcoin off exchanges, absolutely you should, but Voyager destroyed their business, Celsius destroyed their business, BlockFi got close to the edge with some of this, you've even had Genesis. I mean, Genesis, the talk is they've lost $500 million to $1 billion somewhere in there.
David Morris: Oh, I haven't heard that yet.
Peter McCormack: Yes.
David Morris: Oh wow!
Peter McCormack: They've cracked on Genesis, right?
Danny Knowles: Yeah, yeah.
Peter McCormack: Yeah, essentially their entire balance sheet for the last few years. These are all your primary lenders out in the market, right. Who have you got left, Ledn, maybe one or two others more? If you're a survivor or you're building a new business, you've got the lessons of the previous companies, so maybe the borrowing and lending market just becomes more responsible, people aren't going to be doing $650 billion uncollateralised loans, they might not even want 30% collateralised. Maybe out of this we get a stronger borrowing and lending market and, because of that, there's just less money out there to be leveraged.
David Morris: Yeah, that would be great; I think that lower leverage is generally good. I will say, whether it's through self-regulation or governments stepping in, one major pillar of all this that we haven't talked about yet is venture capital lockups for token positions; that is one of the most egregious situations that's prevalent in crypto right now, is that you can do what Mike Novogratz did. You can buy LUNA for whatever, a dollar per LUNA, and ride it all the way up to $68 and then sell it right before it crashes and you're a genius venture capitalist even though it was obviously a Ponzi scheme from the start.
That, I think, morally I find it unbelievably offensive, but also just technically, in a market sense, the incentives are broken, you're giving somebody like Novogratz basically an incentive to say, "Do Kwon was a very compelling speaker and I thought that he could get a lot of people on side, and so I bought the token even though I knew it was a Ponzi because I believed that this guy was a good marketer". I'm not saying that's what Novo was actually saying out loud, but that is the implicit reality of what they, and a few other people, did, and that to me is unacceptable as a status quo.
I think that this is where maybe some self-regulation can come in because we need VC funds to, say, at least take a one-year lockup for God's sake, start setting some standards for the way things work because I think we really have to get it out there that if you're a VC taking like a two- or three-month lockup, you're waving a flag that says, "I am going to dump on you", and that has to stop.
Danny Knowles: We don't have the exact amount on Genesis, but it's probably still unwinding, but it says hundreds of millions.
Peter McCormack: Yeah, I mean I was told it was over $500 million.
David Morris: See, if they're getting up to $500 million I think maybe, at the time that I wrote my piece, I was only aware that they had said hundreds and I thought that maybe meant maybe meant $200 million or $300 million.
Peter McCormack: Yeah, that's just too small a number at hundreds! Fucking madness!
David Morris: Yeah, so that's not great, that is not great. No, I think that we've covered a lot. I guess the one thing that I would just hammer down that is difficult to really convey is, we're still at a stage where you have to personally engage with the individuals involved and make a judgement about their character too, and that's really tough. The sterling examples are both Do Kwon and Mashinsky were vicious when it came to responding to critics, and I don't mean vicious in a sense of being effective or actually answering criticisms, I mean engaging in personal attacks, mockery, deflection, all of these rhetorical strategies to do anything but answer the very real questions that confronted their operations.
In some ways, it informs the bigger question about regulation, because I think there are people like me who, my whole job is to look people in the eye and try and figure out who they really are, and not everybody is good at that. So, I think that there were obviously people who saw Do Kwon on CoinDesk.tv talking to Christine Lee and just dismissing the fact that he had gotten served at Mainnet, and saying the SEC doesn't matter to him and he doesn't care, and that's an obvious red flag to somebody who is in the space; or Mashinsky's various just personal attacks on people who are raising obvious objections. Whatever kind of investor you are, even outside of crypto, the personal angle is always relevant, and you can never take it for granted, but it doesn't scale right, so it's a problem.
Peter McCormack: Well, listen, I'm going to share everything you've written in the show notes. Again, thank you, brilliant stuff; I haven't paid enough attention to your column and I will now.
David Morris: Thank you.
Peter McCormack: Well, again, I don't really use CoinDesk too much, because there's too much crypto on there, but it's definitely something I need to be aware of now, even as a bitcoiner, just making sure that certain decisions or things people do can affect bitcoiners as well, whether they like it or not, so I will be paying more attention. I hope we can do this again sometime.
David Morris: Yeah, please.
Peter McCormack: I'll give you shout the next time I'm in New York.
David Morris: Absolutely.
Peter McCormack: This was fantastic, plug anything you want.
David Morris: And if can, yeah, do a bit of a plug, so definitely, if you're in Peter's position and would like to be paying more attention to what we do at CoinDesk, subscribe to The Node, which is our newsletter for the analytical magazine side of it which we call Layer 2, and I write a top for The Node twice a week; so Wednesdays and Fridays, I have an essay out about some small topic.
Yeah, I'm also on The Hash fairly frequently, which is the noon show at CoinDesk.tv where we just have kind of a fun conversation about everything under the sun, including crypto. We're a, I would say, Bitcoin-centric publication nonetheless, even though we cover everything, so maybe that's a comfortable point for some people to enter. I won't get too into the details, but as an organisation, we are sort of biased towards Bitcoin; I probably shouldn't say that. We're very Bitcoin-friendly, we're not an Ethereum publication or anything like that.
Peter McCormack: Yeah, well this is a Bitcoin show, but it's definitely useful hearing about these things to help people understand. I appreciate you coming on and, yeah, I look forward to doing this again sometime, thank you very much.
David Morris: Absolutely, thank you, an honour to be here.
Peter McCormack: Thank you.
