How Tokenization Is Disrupting Legacy Finance (...And What Comes Next) - Bitwise CIO Matt Hougan

Transcript

they want to have a stake in it. It's not going to look that complex a few years from now. So, [music] uh, yes, there are a ton of catalysts. Um, but bottoms always round out. It's never V-shaped. So, it's not like the Clarity is going to act pass. It's going to Clarity Act's going to pass and we're going to be back to 100,000. >> Bidd on multiple chains, but now Bidd has, you know, a DEX and soon enough Bidd will have a lend borrow, I'd imagine. And then, you know, soon enough it'll have a yield aggregation or or preferred vault aggregation service. Do you think that this is the right way to look at the space overall? It's >> like owning Green Bay, you don't get profits. Green Bay, you get some you get a cheese head or something and in Vanguard, you get to continually lower their fees. That's why their fees are

lower than everyone else. >> Welcome back to the rollup. I'm Robbie. >> I'm Andy. Robbie and I met at the University of Florida [music] in 2017 where we first found out about digital assets. We learned a lot along the way and we're bringing you [music] face to face with the leaders of our industry. >> Sit back, relax, and enjoy today's episode. >> There he is. Without further ado, Matt, welcome to the show, man. >> I'm so excited to be here. Thanks for having me. >> Absolutely. I'm I'm glad that you joined. I've been longtime follower on Twitter. Uh I think you've got a very reasonable, nuanced, and pragmatic uh approach to the space. Um and I'm excited to uh to chat about uh what you guys have going on at Bitwise. >> I love it. I appreciate the kind words.

Absolutely. Um well, I think uh there's been two pieces of news uh as of late that I think would be great to start with um that are that are right at the apex of this convergence. Um we're seeing some of the DeFi blue chips uh work with some of the largest financial institutions in the world. Um it's pretty incredible. Uh and so I'd love to just get your initial reaction to BlackRock working with Uniswap as a liquidity mechanism for their product Bidd. Uh and then also Apollo building on top of Morpho. Um your first impressions, your reaction to when you saw this in the news and we'll we'll dig into some of the nuts and bolts. >> Yeah, absolutely massive. Uh I think the market hasn't recognized what a big deal this is. It's the world's largest asset

manager integrating with the world's leading decentralized exchange to provide liquidity into Bidd. A second piece that you didn't mention is the CFO of BlackRock saying they will tokenize all their ETFs in the next 3 to 12 months. And then this massive endorsement by Apollo, which is really like the Black Rockck of Credit saying it wants to build on Morpho. I I it's it's hard to imagine the the scale of the importance. This is really opening the door to institutional DeFi. It's a huge first step. If we were in a bull market, these tokens would be plus 100%. We're not. So they're basically flat, but I really think it's a a critical event in the history of DeFi infrastructure. I'm I'm really excited about it.

>> Yeah. Um Matt, I was listening to a podcast that you did recently with the block and and you mentioned this uh Black Rockck is is I think it was the CFO mentioned that they're going to tokenize these ETFs in short time in 3 to 12 months, which you said is a foregone conclusion. It's basically happening. Yeah, that's the thing I think the crypto market may miss. When a big bank says 3 to 12 months, those things are already 90% done. This is not an experiment. It's not an idea. This is something that's happening and they're just aligning it with their marketing calendar. So, I was really taken back by that. Look, we all know Larry Frink, the CEO of Black Rockck, has said every fund, every asset, every stock will be tokenized. But I think even me, a bull in this space, thought that was a five

or 10 year period. now five or 10 years has shrunk to three to 12 months. Um I think it tells you a lot about the pace at which this is moving. >> Yeah. Um the the people in the chat they're asking you know this is a permissioned feature right? Um and you know if you look at the black rockck bidd uh partnership with unis swap you know they they're working with securitize in the middle there to make sure that there's qualified uh individuals and market participants that are you know end up getting into the bidd. um how much does the the permissioned uh you know aspect of these things separate them from the existing DeFi landscape? You know my my impression was that tokenization one of the the biggest value propositions was

always composability. So how much are we you know kind of tokenizing for tokenizing sake without actually getting the the the main benefit um versus you know kind of separating these things out. >> Sure. I mean, it would be nice if they yolo shipped for full fully uh decentralized, no AML, KYC, access to everyone, and they went from zero to 100 miles an hour overnight. That's not the way that these banks work. So, what you're saying is absolutely true. This is permission. It's controlled. It's only institutional investors. It is work. It means that the institutional investors want exposure to this probably because they want to experiment with looping strategies, maybe because they want to borrow against it as collateral.

So I would take it as two things. One, a sign that institutions want to do this and two, the necessary first step for Black Rockck to move into full-blown DeFi. I think if you back up and think about DeFi three or four years ago, there were like 10 major challenges separating us from disrupting all of finance. There were regulatory challenges, there were bandwidth challenges, there were institutional understanding challenges, and then there were these challenges around AML, KYC, and sort of digital identity. We've knocked down all of those other challenges. That's what this signals.

The market is mature enough, it is tested enough that Black Rockck is willing to attach its reputation to true decentralized exchange, true DeFi. We still need that last piece of AML KYC and decentralized identity before we take over the $10 trillion finance market, but going from zero to one is is a much bigger deal than going from one to 100. And I think we've gone from like zero to 10. >> Um and and I think the rest is just a matter of time. So you the the critics are right. It's limited, but it's a huge step. I I tend to agree with the idea of this being a stepping stone. I think I think that's the right way to think about it.

And I can't help but think that, you know, when we hear Larry Frink talk about tokenization more recently, he's also talked about basically one chain to rule them all, which I think maybe is a is an opinion that, you know, his other financial institutional counterparts may not share, but it does signal that he is already thinking about composability to the extent that everything is happening on one unified chain. >> Yeah, I think that's I think that's reasonable. Um, you know, I think no one knows at this point how it's exactly going to pan out and and my own view is it's more likely to be to be multi-chain. Um, but I do think he's thinking about where this goes. Look, some some context, you know, I come from an ETF background. Maybe I mentioned

this on on the block podcast, but I think a lot of the the push for Black Rockck into tokenization is that they actually missed the ETF game. So Black Rockck today is known as the world's largest ETF issuer, but they had to buy the ETF business from Barclay's global investors after the great financial crisis. So they missed the innovation of ETFs and had to pay up to catch up and that became a huge business. I think they see tokenization and DeFi as the next wave of that. They're determined not to miss it. Um whether it's one chain or multi-chain almost doesn't matter. um what Black Rockck thinks it'll evolve the way it evolves, but it is interesting that they're seeing the big picture. They see how this spans out over time.

>> Yeah, it it you know, one of the things that we've noticed on the show just recently has been this transition in previous cycles which I I know you've you know you guys and Bitwise have been a while around for a while I think since 2017. So you guys have been through multiple cycles. uh you've seen how the space has evolved. You know, back in would have been the DeFi summer 2020 era, you know, we started to see a lot of all L1s pop up and this was primarily, you know, around a lot of surge in DeFi as well. And so each chain had kind of the same components with their own skin around them. Every chain had a DEX, every chain had a lend borrow market, and and every chain had a yield aggregation service of of some kind. Um it was a very chain ccentric way of of

looking at the world. Um and now we've noticed that this transition has happened and it and it's taken us to more of an asset centric view of the world. And I'm I'm curious to hear your thoughts on this because now you know we're looking at Bidd on multiple chains. But now Bidd has you know a DEX and soon enough B will have a lend borrow I'd imagine and then you know soon enough it'll have a yield aggregation or or preferred vault aggregation service. Do you think that this is the right way to look at this space overall now that we have some higher quality assets coming into the ecosystem or or yeah generally kind of tell us about you know the pros and cons of of what this mental model might might give us.

>> That's a fascinating mental model. Well, I think it's probably accurate, right? It looks a lot more like the traditional market, which is how that is structured. Like there are there are multiple exchanges where stocks trade, but there is only one stock. Uh there are actually multiple prime brokers lending against that. Um even though there's one entity, the same is true on the fund side. So I think that is probably the right view of the world. I think, you know, may maybe an extension of that is there's probably a power law distribution in terms of in terms of dexes, in terms of lending markets, in terms of of vaults. Um, so I I'm not sure it will be one to rule them all. I think it's probably more like a classic um 703010 or 702010 uh distribution is is what you end up

seeing. But I I yeah look in the end the the the people who have real power in any sort of financial ecosystems are the product providers and then the customer aggregators the actual infrastructure um it's it's challenging to compete. So so I think I think when you think about where control lies I would think in the customer aggregators and the product side as much as in these actual dexes. Havachi is fast and [music] private per trading secured by ZK with Celestia underneath. Go to habachi.xyz to start trading today. Want simple? Want fast? Want every chain? Use relay.link, [music] the fastest bridge in crypto. Transfer your assets crosschain instantly [music] with very low slippage right now on relay.link.

>> I'd love to dig into that a little bit more. And we've heard this on on throughout a variety of different product and market verticals. It's those who own the end customer on on the distribution and front-end side and then the bare metal, you know, that is that is where the money's made. It's this barbell. Everything in the middle tends to get commoditized as people kind of commoditize their compliments towards the middle of the stack. And so, you know, as we're looking at the ETF market and and some more of the legacy financial products, could you just help because a lot of our audience is founders, builders, investors, but cryptonative founders, builders, and investors. Could you give us a sense of who currently owns the the majority of these two bookends in the legacy finance and ETF world?

>> Yeah, it's a great question. So in the legacy financial world, it's really the broker dealers and the financial adviserss who own all the customers and assets. So it's either Charles Schwab or if you want to go one layer deeper, it's uh it's it's Morgan Stanley, it's Meil Lynch, it's UBS, right? They have a huge chunk of the marketing power. And you see that in ETF land, right? ETFs pay effectively a listing fee to be on Charles Schwab to have access to their customers. Um and and sure like the the ETF providers have a certain amount of scale and can build great businesses. Um but yeah, really where the customers are are where it matters in cryptoland. Uh I think people don't pay enough of

attention to like the value that Phantom has created or those sorts of wallet based aggregators. I think there's a huge amount of value there and you're going to see them monetize that customer relationship and trusted brand over time would be would be my guess. Yeah. Yeah. Um, back in I think it was 2016 or 2017, there was the original article of the fat protocol thesis, >> which you know was kind of the counterpart to the social media rising of of these apps capturing and then people thought that all the value would acrew down to the L1's gas fees. Shortly thereafter, you saw the fat app thesis was kind of flipped the barbell back. I think it's been, you know, now the consensus seems to be what what you're saying, which

is essentially the fat wallet thesis. This is the portal through which people, and I think people like that, too, because it's like, oh, I got a fat wallet. >> Sounds great. >> Want that, right? >> Yeah. >> Um, and yeah, you're right. Those seem to be the entities that are owning most of the customer relationships. Um, I'd probably say, you know, the wallets and the centralized exchanges at this point are are where people see custody and that's their primary access point. >> Yeah, I think that's right. I mean, look, the the apps can be fatter than in traditional markets because they're two-sided. So, they have supply dynamics and demand dynamics and that allows them to create more defensible modes. So, I I don't think the apps get squeezed to nothing. I think they're fatter they than they are in the traditional markets. But I think the fat wallet thesis looked I mean that's how it plays

out in every other ecosystem. I would even say you're seeing it play out here. I mean the largest primitives in DeFi are tiny right now right unis swap is a $3 billion asset something like that. Uh obvious $2 billion massive business is trading 20x revenues or something like completely silly given the scale of its growth. I think that explains a lot of it. you do have this this power in the fat wallet space. Um, again, the apps don't get squeezed to nothing here because they're two-sided markets. I think that's really an important differentiation, but I do think uh there's more power in the wallets than maybe most people have historically given credit to.

>> Yeah. And and just to kind of put a number around this um or you know kind of tie up this thesis that you know the the those who own the customer relationships are able to set prices that everyone else is downstream of and can kind of just pick up the pieces afterwards. Um and so I think you know wallets are in that position now. Um and then you know we've got the other side of the barbell right on both the legacy world and and also the you know DeFi neo financial side. Um, in typical blockchain companies, you know, bare metal actually kind of is a is a somewhat neat term because ultimately these things are machines, especially in proof of work, even in proof of stake, these things kind of uh all follow down to the bottom of the stack. But in the

legacy financial world, when we're thinking about ETFs, what is considered bare metal as you get, you know, to to kind of the two barbell ends of the spectrum? Yeah, that's a great question. I actually don't know what the right analogy is. Part of me wants to say the index providers um which are the bare metal of the intellectual property behind the ETFs. And if you want to look at a beautiful chart, type in MSCI into Yahoo Finance. Uh that's the leading index provider. It's been one of the best investments in the world over the last 30 years. So I think that is like you know ultimately where it boils down to. the the barest of bare metals like the custodians are just completely commoditized and not interesting. But the the IP level at like the index level, it's been a it's been a great business uh to be in for a long time and

they've they've maybe aggregated more value even than some of the ETF issuers. Look, ETF issuers build deep relationships with customers at Bitwise. We have thousands of clients. We spend time with them. We cross-ell them from one product to another. We introduce them to crypto. you can have very strong relationships. Um, but I do think the the the index level in legacy finance is is sort of maybe the equivalent of bare metal. It's the IP uh behind asset management. >> And and where does Bitwise sit in this? You know, you got Morgan Stanley, Maril Lynch, and Charles Schwab on the one side. You've got MSCI on the on the other side. Where does Bitwise's ETF offering sit? Yeah, you know, I like to think that we cover both the asset

manager and the index side. So, we run our own indexes for our index products and design the IP there. And then even on the ETFs themselves, we try to differentiate, right? We're a large staking service provider. So, we run our own staking service. We we integrate more of that more vertical integration than maybe a traditional um asset manager. in part because we want to own the stack, in part because on the index side, we haven't been huge fans of how other people have approached indexing crypto. Um, and in part because I think, you know, people trust is at a premium in crypto for legacy finance coming in.

And so the people that we've built relationships over eight years trust us to do a large part of the asset management business. They they sort of want a trusted provider. >> Yeah. And we're we're hearing as we have more of these conversations with people that are sitting in the middle of these two worlds and able to service both sides that there's a knowledge gap there there's an education gap. And if you can sit in the in both sides, understand both of these worlds and speak both languages, you're able to serve as a trusted advisor and and and a teacher of both of these worlds to ultimately help prepare them for what's coming uh down the pipeline. like tokenized ETFs from Black every every ETF from Black Rockck is going to be tokenized. How are you helping your clientele prepare for the changes that you know that that causes

in the world? >> Yeah, I love that. I mean, that's how we built Bitwise for what it's worth. Uh about half of us come from asset management backgrounds and half of us come from the tech space because I do think you need to understand um both sides. The answer is we just spend a lot of time with clients. Uh you know, we we we do 15,000 meetings a year with adviserss. We'll meet the average adviser we have a relationship with four to six times a year. We'll send them, you know, high quality materials. Um, and we when we take something like vaults, they have never heard of the term. They want to know how a vault actually works at sort of a base level, like where money goes in, how it goes to somewhere else, how you manage risk, how you monitor the ecosystem, how you make sure the lending pools you're in aren't

fully, you know, fully allocated. Um, so they want to understand the nuts and bolts and it's just a matter of spending a lot of time with them. Uh, it's exhausting building a business, but it pays off um, eventually. So, it really is just handtohand combat with people. >> I I'd imagine vaults to asset managers are a lot like AI to everyone else like in the sense that the people that you know get caught off guard and fall behind are are maybe going to get innovated out of it. But asset managers that utilize vaults, learn about it, try to, you know, incorporate them into their asset management business are going to end up using them as a tool to further ahead their business.

>> 100%. I mean, look, I think all assets will eventually be managed in vaults. I think eat vaults will disrupt the traditional fund structure in a really fundamental way. Obviously, they're starting at a small space. They're starting with yield only. But there's nothing about the idea of sort of dematerializing asset management, making it pure IP and execution that can't be applied to basically every area in the market. Uh I think you'll see the most forwardthinking traditional asset managers um follow uh R and other leads in moving into vaults, right? I think Bitwise is maybe maybe the first sort of traditional asset manager that's building in vaults, but I think others will follow us pretty quickly because it is it's the next phase. And like you

said, look, we've seen this before. I keep coming up with ETFs because I I used to run ETF.com before I joined Bitwise, but when ETFs launched, they were disruptive to mutual funds and you had some firms that seized on that and some firms who stuck in mutual fund land. And the mutual fund firms are now effectively out of business or no one talks about them and everyone is doing ETFs. In 20 years, the same will be true with vaults. It will all be vaults. uh it's dematerialized asset management and we're hopeful that this creates a huge opportunity for the people who are first like bitwise look we're not we're not black rockck but maybe in vaults land we could become one of the leading providers at least that's uh that's the vision we're pursuing

>> very cool looking for yield that stands out infinifi gives you just that deposit stable coins and earn far more than the current savings rate infini is a battle tested reliable defy platform that is ready to Go head to infinifi.xyz. >> I want to get an understanding of what you guys are currently doing in vault and what your experience has been. But I can't help I any chance I get I want to increase my understanding and and experience of the legacy financial world and and you know coming from that world you know I I'm curious why were ETFs so transformative to the legacy financial markets? you know, what did they do to money market funds that, you know, caught the MFS, you know, caught them

off guard and why why were they so innovative? >> Yeah, they had a number of key advantages. So, one is that they're more tax efficient. Actually, in a traditional mutual fund, if you and I were in a mutual fund and you decided to sell out of the mutual fund and the stocks in the mutual fund had gone up, I would have to pay taxes at the end of the year because you sold, which is an insane reality, but that was how the old system works, right? the the word mutual means like we're all in it together. That sounds great except for when you sell and I pay your taxes. That's less great. So that was that was not a good starting point. Um they also traded intraday 9:30 to 4 instead of once per day. One of the big ironies to me is all the ETF people are now looking at tokenization and like we don't need to

trade 247. I'm like guys the mutual fund people said the same thing about ETFs. We don't need to trade 9:30 to 4. once a day is fine. So, they were more more liquid. And then after they got to scale, they were cheaper. And that's also something people don't get. Like building a vaults business now is hard. It's complex. The tools are imperfect. It's expensive. Bitwise is losing money on it because we have multiple people doing it and we're just Yes, ETFs were also more expensive than mutual funds. But at the bare metal level, ETFs are a more efficient mechanism for bringing in capital and deploying it than traditional mutual funds. So once you got to a scale, they were cheaper, more tax efficient, and more liquid. And that's why they won.

>> When I look at vaults right now, more expensive, a little corner of the market, um, sort of annoying, but in the end of the day, it's 247. it will end up being much cheaper to run for asset management and uh it'll be much easier for people to understand and I think those advantages will eventually um win out. Yeah. Um Okay. And and what are you guys currently doing in vaults? You mentioned your experience thus far lost a little bit of money. It's been difficult. It's been, you know, a tech lift. I'm also curious what the material that you're sending out to asset managers, what does that consist of and and what do you find resonates most with those asset managers that might be a little bit more traditional? They're like, I'm hearing a lot about

tokenization. I guess I got to learn, you know, I got to read up on it. What is this new vault thing? How do you help train them and and bring them up to speed? >> Yeah, sure. So, I think you should think about the vault strategy as like as like two trains moving at different paces. So what Bitwise has done is building like a really conservative prime vault that's lending into morpho pools for collateralized Bitcoin and ETH, right? The most plain vanilla thing. There are other people that are great firms that do a similar thing. The reason Bitwise maybe has a space there is because we're, you know, a registered RAIA and we have a certain like, you know, size and scale and and regulatory status and systems. And there will be some people who are using other vaults who may be interested in what Bitwise is doing.

That's like a a V1. You can imagine that serving that audience, which is mostly a crypton native audience, they will be a V2 of vaults, a V3 of vaults, more complex vaults, taking on more risk, more differentiated exposure. So that's that's one train and that's actually like the immediate monetization train if you will. That's like the the business we're serving. The other thing we're doing is we're educating people about what vaults are. They're probably the traditional legacy world. They're probably not going to allocate to vaults in the next couple of years, but they value the relationship with Bitwise. And so introducing them to this area and helping them understand it makes them feel that Bitwise can be their complete crypto provider. If we weren't doing it,

someone else would be doing it. and in two years they probably will be allocating to this space or if they're Morgan Stanley maybe they're building in the vault space they want to know and they need a steward to know that and so we are doing that as well so there's there's really serving the effectively cryptonative audience with highquality vaults from a a regulated entity and then there's educating legacy about what vaults are to build our our brand and relationship in the space. >> Yep. Got it. And so these are the these are the two trains moving at different speeds. Um, yep. And uh, you know, the the ETF uh, industry as a whole has a much higher barrier to entry. And I'm thinking about the progression again the stepping stone from mutual funds to

ETFs, two vaults. Given that the barrier of entry to curate one's own vault seems to be much lower than spinning up one's own ETF, um are you worried at all that maybe an asset manager might take this material and say, "Hey, this sounds great." Rather than allocating to Bitwise's vaults, I'm just going to go spin up my own and put all my funds in there. >> Bring it. Bring it. I mean, uh, people ask me a similar question about, are you sad that Black Rockck is in the market and has such a huge ETF in IBIT when you have been here for eight years and you only have like a couple billion dollars in BITB? Um, yes. And my assets are up 15x since Black Rockck entered the market. >> So, um, I'll take it, right? Uh, so

look, will traditional asset managers come into vaults? Absolutely. Will they be able to compete for the current users of vaults for whom Bitwise's brand is maybe more resonant than some legacy providers? We'll see. But will they grow the vault space if they come into it? Absolutely. And and remember like the the the vault space is tiny right now, >> right? >> Um the broader market is measured in hundreds of trillions of dollars. So there's plenty plenty to go. So, no, at this point it's like a rising tide. Um, I think that Black Rockck ETF analogy is a good one. >> Very cool. Um, and and as Black Rockck tokenizes more of these ETFs, vaults become more ubiquitous, composability, I

still think, is is the paramount value proposition of tokenization. Do you anticipate that these vault strategies start to incorporate tokenized ETFs uh start to incorporate tokenized treasuries? These things start to become more blended and we see a lot more of these tokenized structured products end up in vaults. >> Yes, absolutely. I think that's the direction of travel. The the um and we're really excited about that. And I think you're going to see vault managers help tokenize products and push that along so that they can use them. Uh particularly as vaults well even when vaults are really focused on yield but over time I expect them to expand to other sort of investment objectives as well. So yes um absolutely and I would

add the the the the other angle of the lower cost to entry for vaults is it's cheaper to spin up a new vault. >> So it's interesting that you mentioned structured products in legacy finance. structured products are these specialized exposures that are sold to really wealthy clients. They take time and lawyers and fees to build. Uh they're they're somewhat cumbersome, but they can be very profitable. They can be very interesting. It it's it's so much easier to build novel products in vaults. Like the not just the cost to enter, but the cost to innovate is dramatically lower that I think you're going to see a lot of specialized exposures. My bet is that much of the market will rely on brand. So I think people who built good brands in vault, the gauntlets, the stakehouses, hopefully the bitweisers of

the world. I think most of the uh money will will go into the top brands and then look at all these interesting sliver strategies as opposed to just entering the the the vault space in the wild savannah and having a billion names and trying to pick one. I think they'll aggregate to brand and then there'll be a billion strategies within brands. That's probably more of the innovation funnel. >> I I heard you talking about Vanguard Vaults. Like the branding of that is just spot on. We like to dabble a little bit in branding ourselves. Maybe Bitwise baskets. [laughter] >> I like it. I like it. Let me register the URL.

>> Yeah, we'll we'll get the marketing team on it after uh after this. Um very cool. Yeah, I I I think you know this is again just a D5 primitive that we're going to see you know spiral upwards in terms of adoption um as more tokenized products and tokenized assets come on chain. Um I I I think you know we're also going to see a lot more um of the you know a as more of these things happen onchain. Um I it happened much faster than I expected that you know black rockck started to position into uni um and Apollo started to get you know position into morph. I I did not think I thought you know I figured there was a progression like you were saying right first we tokenize the

assets then we be you know these assets become integrated and composable with DeFi. Um and then you know you end up buying the governance token if you will or the network token right you get a stake if you end up you know really uh investing heavily into a particular mechanism or protocol. This happened almost in one fell swoop. Did you think this was gonna happen so quickly or or how do you why do you think you know Black Rockck and Apollo were choosing to make these these activations now versus later once Clarity Act is enacted or or once it becomes more widely accepted?

>> Yeah. No, it's wild to me to be honest. I didn't have it on my bingo card at all. I mean seeing it it makes perfect sense, right? Um you know why why did Facebook buy uh buy Oculus or or Insta or whatever? um because it was sort of an existential threat to their business, a big new operating system, a big way to onboard customers. I think if you look at Apollo and think about what Morpho means. Um it makes a lot of sense particularly at the the the really low valuation that these protocols are operating in. And then also from a governance perspective, they want to influence the direction of travel for these protocols. So it makes sense, but it was it was shocking to me. I think I'm still a little stung. Like I'm still part of my mind is stuck in like the

Gensler era where anything crypto is toxic and large innovative asset managers are like no way. >> And I really think we're now >> not just in a positive era but in an aggressively positive era right we in crypto forget that Paul Atkins the chair of the SEC is going on CNBC and saying all assets will be tokenized and move over blockchain based rails in five years. But for Black Rockck, Paul Atkins is the most important person in the world. He is saying this is the way the market is going. And so Black Rockck is responding by saying, "Okay, we will go that way."

>> When I think about it that way, it makes perfect sense. I just didn't expect that. I think because I still have this like this Gensler anchor dragging me down behind the scenes. Um but but if you reframe it, it makes it makes a lot of sense. Well, I I think Black Rockck is moving faster than really anyone in in you know the the typical blockchain startup complex. We're we're the ones that are used to moving fast and breaking things. I heard you say yolo shipping earlier like test and prod that was the spirit of the industry and now you have you have black rockck moving this quickly because they're listening to the regulators whereas there's there's a significant drag that all of us I think still feel as a result of Gendler this you know bifurcation

between foundations and labs corporations that was created because Gendzler pushed pretty much all of these companies offshore >> caused you know these fugazi foundations to be spun up. Those were the issuing entities of the tokens. And on the other side, you had, you know, real shareholder value and venture capital pouring into Labs Corps, um, and all of the value acrruel acrruing to those equities because it it regulatorarily couldn't flow to the tokens, um, which were offshore and and and this is still being felt, I think, across the industry. And it's part of why, you know, we haven't seen kind of the catchup that a lot of us would would like to see. Yeah, I think that's exactly right. But I I think it's

important for people to recognize they had to do it right. If if you had a way to acrue value or to put it in regulatory speak, if you could profit from the actions of others, then under the Gensler era that satisfied the Howie test, you were a security and you went to jail. So you had to build a token that couldn't profit. I right like that was the rule. It couldn't profit and so they didn't. I think the mistake people make now and you're starting to see this addressed in in in things like like what a has done with aomics and then what the a will win proposal is the tokconomics can improve and there is a natural tension in the market where I don't think protocols will succeed if they don't share the value at least between the labs and the

token and maybe all of the value needs to end up in the token over time even if they're IP style purchases like what you saw in the a will win proposal. I I think people are maybe making the mistake. They're they're underestimating how much value these protocol tokens can claim in the future by changing the tokconomics over time because again we have this this ghost of Gary Gensler um keeping us in a poverty mindset. Um but I think maybe we're out of that mindset. Maybe we're going to stretch from it. >> Yeah. Yeah. the uh the ghost of Gary Gendler I think is [laughter] is right. >> That's my dream man.

>> Yeah. Um that's the next the article that right that can go out to to asset managers for for this educational material. I I think you're absolutely right. Um, there was an an article that that went out by uh Jake Travinsky and Jesse Walden of Variant Fund which kind of put some some framing around this and I think you used the the moniker protocol tokens which is exceptionally accurate I think in terms of how the value should acrue at least according to this article was that value generated onchain stays onchain acrru to tokens value accured offchain generated offchain acrru to equities and you know in the case of um the a will win proposal you know we we had Stani on the

show last week uh he was unpacking kind of you know what the proposal entails taking the two buckets you got the protocol layer um this includes a v3 a horizon a lot of you know the the uh fees that are built up in that and then you've got you know all the IP the brand the foundation the the auh.com Um all of that uh the a mobile app that they're looking to spin up all of that is in this product layer. I found it interesting a after reading you know we had Stani on first then I ended up reading this article a talking about directing a 100% of the revenues being the product layer the offchain value acrruel and the protocol layer the onchain val all of that goes to the token and I'm thinking to myself if I'm

an if I'm an investor in a labs I'm pissed like where all the revenue is going to the going to the token now you know they're going to get a lot of, you know, subsidies from the DAO treasury. But yeah, where do you where do you stand on this? Is onchain stays onchain, offchain stays offchain, or is that the right way to think about it? You have a different, you know, a different mental model here. >> Yeah, I mean, I I I like all the value going to the tokens. I think it's simpler and cleaner. Um there may be a world like a Red Hat style world where a labs entity can do corporate uh installations on open- source uh protocols but I I like the direction of travel that a is going um obviously you have to deal it's it's it's a hard situation right like you've ended up in a hard place um uh but I do think the

the the the ideal starting place if you had to do it all over again and you were freed from the Gary Gensler constraint you're starting from uh budget zero, you would probably just have it all crew in one place. >> You wouldn't have this two-headed Frankenstein. So, the extent that we can get there, even if it's painful, I think that's positive. Now, I'm not an investor in a lab, so I may feel differently if I was on the other side of the um the spectrum. But I do think thinking about where you would like from from a zero budget perspective, how you would design it, >> it'd probably just be one thing. >> Yeah.

>> Right. Um, and so if we can get there, even if it's painful, and you think this has the potential to 100x from a business entity perspective, then it's worth getting there and and solving that challenge. >> Yeah. Yeah. And, you know, we we talked earlier about, you know, one uh one vehicle on multiple venues, uh, which I think is is ultimately the place we want to land. Obviously, a is approaching it from, you know, the token angle. um they have the labs corp right which may go places as well and then you've got people on the other side take you know bitco for example recently went public you know had this native token or native equity that was tradable onchain not

really I guess it's a token kind of it's still the equity and so you know they're kind of approaching it from the other angle and so is is which model do you does this ultimately get us to the same place what they're just kind of approaching approaching it from different different uh different angles. >> Yeah. I mean I think ultimately the idea is unification and single single economic exposure and we were forced into this odd fracturing uh by a hostile regulatory environment. We still have an uncertain regulatory environment right we don't have the clarity act. We don't have fixed rules of the road. We have proposals from Atkins but we don't have uh detailed regulation. So all of these are sort of early movers in the direction. uh but but you know ultimately uh it's ideal if everything fits into

one in most cases is my view. So I do hope that we get there. >> Yeah. Um and and I I think ultimately a lot of you know the there's regulatory reasons to get there now and people want to unify the liquidity around these things. The investors want you know a unified vehicle where they can retain exposure to all of these things. um you know you guys are another one right with the vaults you've you're generating some some revenues onchain and then you know you've got plenty of off-chain products as well how are you thinking people want exposure here right like not saying bit bitwise token but you know what how are you guys approaching this you know internally >> yeah it's a great question it's above my pay grade you'd have to ask Hunter our CEO um >> we'll get him on let's get him on next

time >> let's get him on yeah I'm sure he would love to come on and uh and talk about it um I think it's a fair question, right? Like, you know, from a from a philosophical view, I think we have a problem uh with companies staying private too long. I'm not saying Bitwise is in that class. Um, but we do have we do have that problem as a society. I think it would be great to give people earlier exposure. I also think and maybe this is this is this is like not the angle you were going but I think it's true that the idea of using equity to incentivize consumer behavior in smart ways is something that society hasn't explored and becomes infinitely easier when we get security tokens and I wouldn't be surprised to see some interesting experiments along those lines. Um, yeah, I think I think that

could definitely happen. Uh, to to make a fun legacy finance point. Uh, for what it's worth, Vanguard is actually a collective. Um, it's owned by the shareholders of its funds. It doesn't acrue profits and pay it out to those shareholders and instead it continually lowers its cost to benefit those shareholders, but it's actually like pretty close to a DAO, which is almost ironic given um given given their view of crypto. But I do think you're going to see more of those experiments that align sort of shareholder incentives with um activity in a company. Uh so I don't know if Bitwise will get there, but I think you'll see other people do it.

>> Very cool. Yeah. I I wasn't aware that that Vanguard was structured that way. Um when you know you know when you say say it's structured like a collective, I guess the closest that I was thinking was like the Green Bay Packers I think are owned by citizens of Green Bay, right? >> That that's exactly right. Yeah, it's similar to that. So, if you own a Vanguard fund, you own Vanguard and uh but but like like owning Green Bay, you don't get profits. Green Bay, you get some you get a cheese head or something. And in Vanguard, you get to continually lower their fees. That's why their fees are lower than everyone else because there is no profit layer there. Um which is interesting. >> Yeah. And and ultimately, you know, provides a better product and service uh than a lot of others, you know, on on

the market. Um very very cool. Uh, Matt, I guess, you know, as we kind of close out here in the next few minutes. Um, I'm sure and I heard you, you know, discussing some market takes uh on on a couple other podcasts, but I'm not I'm not asking you to call bottoms here. I just, you know, I'm curious as far as like how you're thinking of positioning. Um, actually, what what I wanted to ask was about the DATs. A lot of people are predicting that DATs are going to be like once they unwind, it's necessary in order for this market to bottom. if we don't if the DATs don't capitulate, right, we're not going to go up. How how do you feel about, you know, these these treasury companies? Do you think it's necessary to shake them out before we go higher?

>> Um, well, I think you need to separate uh DATs. So, you have the mega dats like strategy or Bitmine or Forward that are missionaries in the space that are completely aligned with their tokens and that have high enterprise value and very low debt. Like even Micro Strategy or Strategy has very low debt compared to their Bitcoin position. I think there's no way an entity like m like strategy unwinds in the next five to 10 years and probably ever because you'd have to have Bitcoin go down 80% and then stay there for three years and then a bunch of other things happen for them to get into trouble. It's just not going to happen.

So, uh if we're waiting for them to unwind before we bottom, uh we should get into another business. It's going to be a long time. some of these lesser DATs that were late to market, I absolutely think they'll unwind and pivot. Um, but the scale of those are relatively small. So, if if if crypto natives need a body to sacrifice on the altar, I think the DAT gods will offer them up a body at some point, but it won't be like a it won't really matter because it won't be that much Bitcoin that they sell or that much ETH that they sell. Um, so I think it's more a narrative thing. You're not going to get strategy or bit mine or others um uh into trouble just mechanically,

financially it it sort of can't happen. >> Sacrifice a dad at the altar and to the to the ghost of Gary Gendler and he for he washes away all of our >> If that's what it takes, I hope someone raises their hand to be the sacrifice. Let's get it done and move on. >> Yeah. Um you've also said that you know Black Rockck you know positioning into unis swap you know Apollo into Morpho these are things that ultimately bring us out of a bare market or a crypto winter. Anything else that you think could be like a big catalyst any reg you know do you think the clarity act holds a lot of weight? anything else that you think you know is is relevant enough that it could cause some and and at the macro scale too, how much are you paying attention to, you know, the new Fed

chair, easing monetary policy, the these sorts of things as you're, you know, thinking through the investment strategy at Bitwise? >> Yeah, absolutely. Look, if you if you position yourself out three years from now and you're looking back and you're like, "Wow, how did we bottom and then go into a historic bull market?" Well, stable coins went from, you know, 300 billion to $3 trillion. Tokenization went from 20 billion to $200 trillion. Black Rockck and others were building in DeFi and buying Morpho and Unis swap tokens. You had quantum risk being put to get to bed by Bitcoin core developers. Kevin Wars cut rates more than people expected. Maybe we pass the Clarity Act, maybe we don't. But there's like so many positives. Uh, I keep hearing people saying this is worse than 2022 or worse than 2018. That's

absolutely ridiculous. There were existential threats then and no positives. When you put all of those things together, um, oh, look, in three years it will be obvious why we rallied. Those are massive markets and right now they're really undervalued. Um, I do think DeFi could lead us out. Like listen to Apollo, listen to Black Rockck, look at these valuations. Like Morphos's billion and a half dollars, largest credit fund, they want to have a stake in it. It's not going to look that complex a few years from now. So, uh, yes, there are a ton of catalysts. Um, but bottoms always round out. It's never V-shaped. So, it's not like the Clarity is going to act pass is going to clarity

act's going to pass and we're going to be back to 100,000. It's not what's going to happen. It's going to be this accumulation of good news that gets ignored until it's so weighty that it's just obvious and then we'll be at new all-time highs. >> Yeah, I think that's I think that's a prudent approach. Um Matt, LA last question I got for you is, you know, we've been thinking a lot about where the space is heading. You know, you've been around for multiple cycles. We've been around creating educational content in the in the space for multiple cycles. Um it feels like finally these institutions are being forced to innovate. uh they're they're you know evolving. Uh and then at the same time, you know, a lot of DeFi is is starting to find some product market fit. There's a lot of infrastructure that never really found product market fit. Maybe they never do. They're being forced to

innovate as well. Where these things are meeting is it it looks a lot different. It's, you know, not really seed phrases and self-custody. People want forgot password buttons and customer service. You know, they they also, you know, they they want a neoank approach. They want vaults. They want tokenization and composability. We're calling this Neo finance and and we think it has to be something that you know not DeFi 1.0 2.0. We've done that, right? Like we're trying to come up with what we think the new moniker is. I'm just curious. Do you think this is the right way to think about it? Are you know would we see Neo finance go out to some asset managers and Bitwise educational material? What do you think is the right mental model? How do you how how do you think about

neo finance? >> I like that. I like the term. I do think we're reinventing finance. I think it's way overdue. Fintech has effectively been a failure. Uh finance is the least disrupted sector in the economy. The largest financial services company in the US was created in the 1700s. That's like embarrassing. Um so I do like the idea of neo finance. I think it is important to get out of um cryptospecific terms. >> Crypto terms are limiting. Even decentralized is relatively limiting and many crypto terms are actually negative in the real world like trustless sounds bad. >> Um uh even zero knowledge proofs sound

no one wants zero knowledge sounds bad. Um so yeah I like neo finance. I do think the scale of it is right. Um yeah ultimately this like again the scale is like vaults take all of asset management. Stable coins take all of payments. Uh onchain lending markets replace all of lending. I think that's the scale that we're going. So something like NEO finance uh is a pretty good term. >> Awesome. Appreciate you saying that and appreciate you coming on today. It was a pleasure. Would love to have you on again, you know, in a couple months to to reassess where we are at hopefully in the crypto spring uh and the neo the neo finance uh next era, I guess.

>> I love it. I love it. We'll do it for sure. >> Awesome. Thanks so much, man. Really appreciate it. Thanks for having me.