The MOST Bullish Investor on Wall Street

Transcript

the most bullish thing about eth right now is the fact that the understanding of of trafi is that it's this crypto has it like Bitcoin because I think when they fully understand it it's going to blow their brains out welcome to banglas where today we're exploring the Diaries of an eth maxi on Wall Street yes David and I came up with that title and I think it's a perfect description as usual this is Ryan Sean Adams I'm here with David Hoffman and we're here to help you become more anist Our Guest today is Sam Jernigan he is The Unofficial eth Maxi of Wall Street now those are his words Sam's been evangelizing ethereum to institutional funds and to billionaires really rich people from inside the house for the

past 5 years and giving them the eth narrative so The eth Killers don't take all of the marketing oxygen that was a discussion we had in today's episode and I think this was a fascinating look at the inside baseball of wall Street's crypto adoption and the ethereum narrative where early is an expression Sam kept coming back to and uh I definitely felt like that in the episodes very early in wall Street's understanding of the ethereum narrative today before we get into the conversation our friends and sponsors over at stake wise want you to know what they're up to in the world of liquid staking on ethereum if you're a solo Staker but your eth is locked up in a liquid because you're solo staking you can continue to be a solo Staker in the Stak wise protocol while also being able to Mint OS eth in order to use your solo

staked eth in default on layer twos in IG layer or anywhere else across the ethereum landscape you get to keep your rewards that your node is earning while doing more with your eth and if you're not a solo Staker stake wise is introducing a vaults Marketplace to choose perks that you want to add onto your stake e between custom me strategies DVT Insurance apy boost all things available through the statewise vaults Market Place there is a link in the show notes if any of this stuff peaked you Sam's been on Wall Street longer than some of you listeners have been alive probably um and so he's he's seen a thing or two about Wall Street and has just is one of those guys that was open enough to crypto to really get

pilled on crypto like in a very deep way uh and Sam's connected to a lot of just like the ethereum ogs people like Justin Drake have been like going back and forth about like the ethereum narrative why it fits inside of Wall Street but for a long time Sam's been more or less had like wearing the Wall Street gag uh if you work in Wall Street you can't really talk you don't really have to freedom of ability to express your thoughts and opinions about things uh but Sam has since left Wall Street uh so we get an exclusive Peak into uh the stories that Sam has uh from being on Wall Street in 15 years as well as just all of the times that different crypto people have come into the world of Wall Street to pitch their layer one among other things uh and so just hearing the

takes about like somebody who's a Wall Street veteran that's also Crypton native uh who finally get to tell their story after such a long time is always a pretty interesting in episode all right guys let's get right to the episode with Sam but before we do we want to thank the sponsors that made this episode possible including our number one recommended crypto exchange for crypto Natives and I guess Wall Street can use this too that is Kraken go create an account today if you want any crypto trading experience backed by worldclass security and awardwinning support teams then head over to Kraken one of the longest standing and most secure crypto Platforms in the world Kraken is on a journey to build a more accessible inclusive and fair Financial system making it simple and secure for everyone everywhere to trade crypto kraken's intuitive trading tools are designed to

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perfectly straddles both trafi and ethereum Sam Jernigan is a macro investor who spent the last 15 years is trading many different asset classes including crypto he built and ran crypto at more Capital which is one of the largest oldest macro funds in the world space New York and before that Sam launched a global macro fund that could trade digital assets this is one of the first out of Mike novag Gratz is a family office so he's done so many things in finance he help pioneered crypto options uh executed the first ever option on eth and before that he even spent some time in the belly of the beast at Bear Sterns and JP Morgan and uh to give you a sense of the straddle and what he's up to right now Sam is currently both a participant at the US monetary policy form so that

sounds pretty Central banker and also at the same time an ethereum ZK evm uh adviser to the project scroll as a layer two which you've heard about so that is deep crypto and Central Bank uh again straddling these two worlds uh Sam this episode has been a long time coming we've wanted to get you on for a while but you have not been able to because I think uh you've been under some Trad rule sets that uh have um you know not allowed you to to speak out and and talk about crypto in the way we're about to talk about it so welcome to the bankless episode thank you guys so thank you for having me I am a a longtime listener I rarely miss an episode and I'm a big fan I think you guys do a public good appreciate it so uh let's talk about we

want to get your background in a minute and how you kind of ended up here and like what you've been up to just like the behind the scenes because that's uh super interesting for for Bank list listeners what it's like in the belly of the beast but the I think the context for this episode is we want to talk about ethereum and ether and how to sell it to trafy like what narratives resonate in order to do that I think we need to set up um this term trafy is something that crypto natives use I don't know that institutions call themselves trafi they're just like f they're just like Finance right but I think that like for crypto natives yeah Finance for crypto natives right it's basically anything not crypto is trafi I mean that is maybe a simple way to

explain it but when we say the word trafi like what does that mean in your world right um I remember the first time one of my best friends is a chief Economist at uh one of the the largest banks I remember the first time I we were we were out one night remember the first time I said this word trafi to him he's like what is that what does that mean and um that was not long ago um I think um I would say you know we think about when I say Finance um you know I think about basically like the investment banking world so sales trading research Investment Banking and then that's what we call the the sell side and then the buy side would be what most people would usually consider like

hedge funds and private Equity um funds Venture funds are really outside of Wall Street really um you know I I was pointing out to somebody that like Andre and Horwitz may be a huge fund but I doubt they're even a client of JP Morgan so they're they're just they're not I think they probably use Morgan Stanley or something maybe right but the in in general Venture funds are just separate really from Wall Street or what I call trafi or what most people I think call try I think it you would be thinking of Goldman JP Morgan City Bank you know Etc the the investment banking world that comprises institutional um buy and sell side so why what I want to get out of this episode Sam uh is we are entering the

era in which crypto and trafi are becoming closer than ever we now have the Bitcoin ETF we're about to have the ethereum ETF uh and now our conversations are going to go directly into the ears of quote unquote trafi and so I I'm trying to learn how to best sell what crypto has to offer and right now that's Bitcoin and that that's it that's eth but in order to really like put the correct words in the correct order we really need to understand the audience uh and so understanding that the audience is not Venture Capital but it is Wall Street let's keep on going down that that path like what is what's the makeup of trafi who are these people that we are actually like connecting to Via the

ETFs right well I mean I think the ETFs I mean there are some hedge funds that probably okay so I mean I think uh I remember probably a couple years ago I actually uh in a chat I mentioned you guys that most major funds are now papered up that means that they are now papered they have legal documents in place with say coinbase in particular to actually trade spot um that can be a very long process I I would say we got about maybe a third of the way through that process in the last cycle I remember at one point like I think coinbase had a backlog of like a thousand funds that were waiting to to on board they simply couldn't do it and then the things kind of went off the rails um and then I would say like half

those docks probably didn't get done and it they have of the last year or a third didn't get done and then the last third probably have been getting done over the last um brief kind of emerging bull market um so yeah so most funds are actually now like more wired or papered as we say to trade uh um crypto and the the infrastructure for that's gotten a lot better like coinbase Prime which will be the primary platform that institution going to use I can't even describe to you like the evolution of that platform has gotten a lot better it's also much more Crypt native we um that we could save that for another another conversation but the the the web wallet integration particularly on the back of their win at the SEC is going to

really change things I don't I haven't seen that picked up on uh crypto Twitter but um so yeah so the the infrastructure is very good um that kind of actually goes back to my origin you know toomi is the smartorder router that was acquired by um coinbase and is now what's integrated into Prime and I was one of the first people ever demo that back in 2018 um so yeah so the infrastructures very good and a lot of accounts are are quote papered up to be able to trade spot but there are still other funds and I would say like even like just smaller Prop Shops and and then like family offices some family offices I would consider like trafi institutional right in the Wall Street

sense and then the next tier I would kind of you know I would almost kind of put them in the next tier out because they don't trade a lot or they're not as active the next tier out are going to be you know more like pensions and endowments and obviously also you know part of trafi but this is kind of like permanent allocated portfolio capital and there's that's actually a very compelling story I'm actually not surprised by the adoption of Bitcoin ETFs by large long-term allocators um and you know we can we can get into this the the the portfolio allocation benefits um and that was to to having not just Bitcoin but eth and other crypto assets that was that understanding that story from an

academic standpoint based on some work a former senior fed official friend of mine had done while he was actually at the IMF is what actually convinced me to start the first fund so I guess that's a long way of saying you know trafi is definitely going to be very involved I think in terms of selling it Bitcoin is digital gold um maybe we're seeing a little bit of a change to that with opat and some of these other initiatives I I saw uh the Stark War actual little video earlier uh from earlier today um really kind of try trying to prod the Bitcoin Community into embracing scaling embracing a lot of the technologies that ethereum has pioneered by the way um but for the time being you know Bitcoin is

just digital gold it's um and I look I understand why that has been very attractive for Bitcoin investors right it's like if we ever get to the size of gold like we're all rich we've done great like what more do we why risk why take any any of these risks you know or potential risks um that they perceive anyways to try and do more and that opened up this opportunity where ethereum you know uh um entered and said hey we can do a lot more with this Ledger than just have a uh a meme coin on it or some something that we all agree has value um like like gold I do think by the way that Bitcoin is a superior gold um that was also part of my Evolution into into the space and I

can kind of explain that um and it is a you know I was one of the first people to really begin advocating for it as a macro asset and telling the story of that as this permissionless non-sovereign asset that can be transferred you know um but you know the the part that getting to Ether you know eth took this one step further and added a turing complete adding a tur complete which maybe is a little overused term but adding a turn complete programmable environment now I think the reason people think it's very difficult to tell the story of eth is because it's so compelling you can really almost do anything with this with this uh this environment and that is a good problem for us to have telling the story of

ether being difficult is okay I can tell you one um the way I kind of view it the way I've tried to explain it uh to try people I it doesn't always stick um you know this is going to be a long process but again that's you know to the hasht early this these are good problems to have the the actual one simple way to think about a functionality of eth that every trii person can understand is very simply to uh to explain that ethereum the network is a little bit like Swift plus chips so chips so everybody now knows what Swift is Swift swift is a messaging system it does not settle right so it is literally just a format

for uh uh for banks to communicate uh or or even yeah Banks to communicate basically on sending of of dollars and increasingly other types of Securities but at the end of the day banks have to settle and they use primarily uh chips which stands for the Clearing House Corporation it goes back you should look into it it goes back probably almost 200 years it's owned by the 25 or 30 largest banks in the United States you know we're talking about gross settlements every year of hundreds of trillions um and um and fed wire um and these are basically 24-hour cycles and what ethereum is again in this one very narrow definition where I can show you

what it can do that's gamechanging to this otherwise massive and critically important Global Financial system AR uh infrastructure um is to think about ethereum the network as uh Swift plus chips so messaging of financial transactions not just cash but any type of financial transaction plus the settlement of those transactions and you pay a fee and that fee then acrs to eth which is basically the this equity and that um that is then transferred via a buyback right so when you pay a fee to do a transaction on ethereum that that eth is then burnt and it's the same as you know uh one way that you can take

that that uh that application then kind of another analogy is to say it actually lines up well from a modeling standpoint actually is to look at ethereum a little bit like um Mastercard or VISA so MasterCard and Visa you usually do not pay the fee yourself when you when you check out at you know the grocery store or restaurant but the the the merchant does they pay anywhere from a three to five% fee and imagine if that 100% of that fee was was basically uh cash flow which it's not uh it it has to pay for Opex and it has to pay for um taxes so um the drop through from cash flow those fees actually to net earnings is about or cash flow is

about 50% so they that model has very high margins uh but eth basically has 100% margins um but at any rate so you know you have to pay the employees that run MasterCard and you have to pay some marketing expenses maybe and then you have to pay taxes and the net of that if it were all to be used to buy back stock that would be very similar to what ethereum is right so but here uh MasterCard Visa traded like a 25 times price earnings multiple and I think that you know I've I've generally thought that a reasonable framework is that e ethereum should have roughly a 2X that multiple so 50 times price earnings multiple one because it's growing faster but two because it doesn't have to pay

for Opex and it doesn't have to pay for um taxes doesn't have to pay taxes so it's a very clean revenue and return of Revenue to uh to holders of the E uh Equity like asset eth and it's important to understand that for the system to be permissionless the the ownership of that asset uh which you have to use to pay the fees like oil has to also be permissionless and it has to be highly decentralized and so that's why it can't be you know eat the security or eat the publicly traded stock it has to be eat this permissionless uh crypto crypto overused but you know crypto assets

that anyone anywhere in the world can have access to and can use to access the network so Sam I think you've given us a taste a preview of the rest of this episode right where we're going to be camping on some of those subjects um I I guess a few things just just to tie off one thing what what is eth's PE ratio right now just out of curiosity uh I don't know uh if I had that it's like in the hundreds right like I don't know I I saw like 150 something in that range so uh maybe a bit more than like 2x what MasterCard and Visa are right so I think uh I would have to check I don't know off hand to be honest and so I don't I if I don't know the answer I don't want to make it up um I think you also need

to make sure to be clear issuance is a cost and I I I want to kind of set the record straight on this um I just like a lot of people watched your episode with uh Justin and Anatoli and you know anatol's had a very strange I think I said on Twitter last night naive understanding of Economics for some time I remember he said something very similar to this back in December and on Twitter um it is definitely it is definitely a uh a cost you can think about it a little bit like paying the employees right so issuance pays the miners or it pays validators and you if uh earnings are the net of that uh that

the what you're taking in in terms of the fees minus your cost that is your that's your net your net earnings going back to that Visa or Mastercard example so ethereum is the only system that uh has positive net uh you know uh net earnings net uh yield also for staking validators and you know I've seen your previous episodes on um you know the the risk-free rate another another issue I'd like to get into because I feel like I I was trying to I saw saw a previous episode you guys did on you know the risk-free rate and this um you know the staking yield I I feel a little bit guilty in a lot of

ways I actually helped point out to a lot of the uh people behind the scenes I point out to people that this was a positive ra yield The only positive real yield that is economically sustainable and generated by user activity that's very important it's the only positive yielding real positive real yielding asset in all of crypto and um part of that is occured through that buyback mechanism and part of that can be U via staking um and uh but I think that the one of the reasons I say that I kind of regret heavily pushing this understanding is that you know this is now running into this issuance problem we're having um that several very bright

researchers like ongard and Casper have have been talking about um and it's worth having us having a follow-up episode on that but you know it is very important that eat the asset maintain this this quality of a positive real yield and uh being ultrasound deflationary money in the same way that every year apple is able to buy back its stock and it's the outstanding stock of its uh of of Apple's Equity declines in value that is how that is how value from the network is returned to Apple shareholders and we need to make sure that that issuance um is the issuance curve is is adjusted to maintain that same quality for a lot of reasons uh

that uh that a company that returns its earnings via BuyBacks and in our case buy and burn the burning of of Heth used for transactions that were able to retain that that this unique and very powerful um differentiation so Sam there's there's so many uh like ways we could like Fork this conversation right like we've just brought up a ton of different topics right you know one is I'd still kind of like to get your your your background and how you came from this place of straddling sort of trafi and ethereum that's important um we you know I I feel like we've mostly talked about who trafi is and what we mean by that but I I don't think folks still understand the size of trafy right now and then you just like BR branched out

uh into a conversation around eth kind of monetary policy and um like how is ISS issuance is a cost to the network and ethereum is is kind of like the only crypto Network with the true source of yield so like I want to hit all on all of those things I'm just like not sure where to go first so let's do this let's backtrack and could you give us uh some of your background on how you came to be and then we'll hit some of those other items how you came to be here so I have um sort of um you like seen your personal trajectory a little bit from afar I've like heard rumors of of Sam sort of you know in the in the Trad five space as this liaison role between kind of trfi and particularly ethereum like I

think you've been described to me as like um you know a trafi eth Super Bowl you know kind of like a uh you know m m Michael sailor behind the scenes only for ethereum right and so I'm wondering how you took that rule can you give us the how you got into crypto you said you were originally pilled with with Bitcoin how did that start and then how did you come to the place where you are like eth pilled and having conversations with the movers and shakers in the institutional traitify world like like how did that come to be and why are you doing this sure um so uh I started my career uh in New York uh at be Sterns um in sales and trading um I uh successfully made the

transition over to um JP Morgan and um while there um you know it got the crisis right um the 08 crisis right internally um I was uh they almost fired me actually because I was trying to tell people that whole hell was about to break loose and um they were like if you don't stop telling people this we're going to like fire you anyways thankfully all hell broke loose and I kept my job and got promoted um and I I worked on a uh um a internal desk that uh uh basically traded the bank's capital or what's called proprietary trading so I worked on a I worked on a portfolio that

reported to Senior Management um and we both long short equity and Global macro you know um one of the one of the Early Trades I had there just to kind of you know I having got the crisis right I was very deeply uh learning about economics and JP Morgan has probably the best economics team period And I had this unlimited access to this huge resource both to the Publications but also to the economists and I took advantage of that and um became very good friends with um several one in particular uh former fed but senior Economist of J Morgan that's how I developed a lot of my fed Network and former staffers and and um one of

the early tra you guys had a recent interview with uh Timothy uh M uh maade um and uh where you talked a lot about the EUR dollar Futures Market that was great interview for everyone watching I highly encourage you to go watch that uh yll Futures was actually one of the biggest trades I had early in my career at JP Morgan so they're commonly used to bet on their it's a it's the market has evolved since uh since then but at the time they were the most liquid asset for trading um basically expectations about fed uh rate hiking cycles and as compared to everyone whether you know uh you know uh Bitcoin Maxis at the time

that emerged in this period of time of the crisis or five people everyone thought that the Fed was printing money and we were going to have hyperinflation and I didn't think that was the case and so the way you would do that is you would buy your doll Futures that were pricing in Fed rate hikes betting on quote lower for longer and so that was a trade we nailed both in 2010 and 2011 proprietary trading was outlawed though under the vcal rule um and so in 2012 I left um I worked at a few different macro funds um I think the kind of the the next kind of little anecdote here I think that that fits well is I think where I I was exposed to bitcoin a few times between uh 20 12 and 2014 um and I probably cost people being billionaires

talking them out of this asset that I viewed as like yeah look I think you know I thought it was uh I thought it was a joke I thought it was an incarnation of the reach for yield or this incarnation of this view that I felt was wrong that the Fed was printing money and they were going to have hyperinflation I disagreed with that you know I thought that the FED would have to keep rates low for longer uh to facilitate a slow recovery and that inflation expectations have been significantly de anchored to the to the downside or at least you know we're very low um and um so I I missed it in fact I remember it went from 100 to 50 and I declared Victory and I never I I don't

think I looked at it again for like two years so I was like see it went from 100 to 50 and that was you know that was that was the extent of it the what changed for me was in 2015 I was at a different fund I actually told this story just before covid um at the first macro conference to talk about Bitcoin for Wall Street that I ever helped put on back in 2019 um and the the my former boss was in the room um we were betting against the Chinese R&B um so in uh in 2015 2016 we have we had a very long large uh um options trade in the forward Market on basically that the dollar would go up against the Chinese R&B and when you're playing against something like you know

when you're betting against the you know CNY or cnh offshore you're playing for like this like four to six% move right this very small move and you know I remember I was on the phone with our HSBC um salesperson in uh Hong Kong and I was like hey you know are like the Chinese billionaires still trying to get money out of China like and do they still want dollars basically and he was like yeah the only thing they want more is Bitcoin I'm like what are you talking about he's like he's like they love Bitcoin they can't get enough Bitcoin they they basically they buy Bitcoin they move it out of the country and they swap it the OTC Brokers into dollars and I was like oh my God this is unbelievable you know he's like pull up the chart overlay dollar cnh verse

Bitcoin and put Bitcoin on log which you have to do so I do that and of course it's like this perfect correlation I was like holy [ __ ] you know we're playing for this like 4% move and this Bitcoin is moving like 400% and so I printed out this chart I remember I took it into my boss's office and he did not like being disturbed during the daytime by the way he liked to read in his office he's you know where it's like I'm a little bit the opposite he did not like to be disturbed so I went I was like David I'm sorry I need you to look at this we have the wrong trade on and he's like what are you talking about I was like look at this I was like we have the wrong trade on he looks down at he goes what is this

I said it's Bitcoin he looks back up at me he goes we don't trade Bitcoin I was like and you're like yeah I was like but we should be Bas I was like but we should be you know and you know that was I think you know that was the first realization that this this was a macro asset and you know I think that an important thing I wanted to kind of communicate I I did it recently at at e Denver actually at this panel I spoke to like I think you know when you think about macro we spend so much time through I think the popular press and CNBC really over like dramatizes like 25 basis points even 100 basis point hikes here from the FED if you're dealing with an asset like Bitcoin who cares right if you're

dealing with crypto this is much bigger than a small fed cycle right don't you know this this is about the movement of of of of of capital Global Capital about people about politics um this is about the for the first time in uh really ever that you've been able to instantly and permissionless transfer assets across borders and around Capital controls this is so much bigger in a lot of ways than anything the FED can do and don't let you know that is why every macr person on the planet is is literally blowing their brains out that the FED is is much higher than they ever thought they were going to hike to and yet Ethan Bitcoin are basically at all-time highs that was not possible for anyone you could have gotten on your show you know a year or

two ago and it's because they just it you know don't let the noise uh let you lose sight of of of the forest here so or was it the force for the trees maybe I have the throng um so anyways um but I think and this we'll come back when we talk about like what do try people understand about crypto like look after that experience I was like well you know we can't trade Bitcoin right and frankly just I didn't think about it again um and until later in 2017 I was hired away to another fund to cover US policy so fed policy and DC policy for another fund

and um you know one of the things I realized was that a lot of the hedge fund billionaire Founders were and this was coming out some of this in the Press but a lot of them were trading Bitcoin and Ethan their Pas and Pa um I was hearing from friends that I know at at a lot of funds when we say PA we mean personal accounts personal account yeah okay yeah I was hearing this from a lot of my friends who work at these funds and I was you know so but but none of these hedge fund macro billionaires and and guys running these funds were doing it in in the fund because they didn't want to take the risk of alarming or startling existing

investors in their fund or what we call the you don't want to take L you don't want to take LP risk on the 2% basically right so they you know so I saw an opportunity there uh so I saw an opportunity to basically a Greenfield opportunity to start a macro fund with the ability to trade digital Assets in The Docks but I I'll admit I wasn't completely convinced just because people are speculating on something doesn't mean it's a you know it belongs in a macro fund you know people speculate on Ferraris or art doesn't mean it belongs in a macr fund what and even with the experience I'd had seeing how it was being used in the context of capital flight out of China that still wasn't

enough what really what really moved the needle for me was that a friend of mine uh I think I can use his name because his his work is published and he still updates said uh you know Benson Durham who was then a uh uh I think he was a deputy director at the IMF under Christine lagard he had previously been associate director of monetary Affairs uh at the at the board at the the Federal Reserve board and he had been asked by Christine at the time to look into whether or not this is 20 late uh probably mid 2017 whether or not um what was going on in crypto was a reach for yield was this just pure speculation or was this the emergence was it possible that we were seeing the emergence of a

new asset class and for for fed economists and you know people of this ilk like that that is a very high bar and there's a lot of statistical tests that I would never even begin to explain much less do I barely understand them so but the short answer was that their surprising result was yes and the reason I knew about this because Benson knew that I had some interest and he was reaching out and talking to me and and asked me to kind of review a draft and and I was taken back because one of the findings was that it was bumping out on What's called the efficient Frontier and that basically means that and this a lot of this he ended up publishing This research in a uh uh uh the portfolio of

Journal uh a journal of portfolio Management in 2019 but it basically means and now black rock is like running away with this whole theme but it basically means that almost every portfolio should have a little bit because on a volatility adjusted basis um because of it is uncorrelated or has no correlation to any other asset it provides diversification benefits and the benefits are massive we're not talking about you know one or two% portfol diversification we're talking about you know huge huge uh uh benefits to what's called again the the efficient Frontier um and so I was like that was a that was really

convinced me to uh that I had to do this unfortunately we were just way too early uh we Mike no Gratz um you know a great um macro uh PM who had uh very publicly gotten into crypto um I was introduced to um someone who was working out of his family office anyways we uh Mike gave us uh some started capital and space to start up the the fund but um you know I think that you know I I you know everything takes longer than you think that it will even when you take account for how long it's going to take hoffet

law and it was definitely the case Not only was the whole realization of crypto as a as an asset class not yet mature the the the the tooling and the infrastructure just like the the accountants and the um you know the Auditors like none of that stuff it it was very difficult um but it was still an amazing experience I you know uh just to kind of put you back in this period of time you know my I remember my then future partner said to me you know Sam you just FY Mike is not convinced that you know Bitcoin belongs in a macro portfolio if you remember like it was really confined to venture funds at the time um and Paradigm had just raised a lot of money I think at this time and

um and um I remember um the first question Mike sent to me was uh why is Bitcoin a macro asset and I said it's a macro asset by birth it's written in the Genesis block Chancellor on brink of second bailout Jan you know 2008 he's like that's a great answer I'm going to I'm going to use that um and you know but you know it was a it was a very long and difficult be Market but it was great you know I mentioned earlier that I uh was one of the first people to use togoi which ultimately was acquired by coinbase and became integral to coinbase Prime you know Paradigm trading which is now where 70 plus perc of all options Bitcoin and eth options even CME is now uh block trades are done through

Paradigm I was one of the first people to to do that Anan is an amazing Builder um we were probably 10% of the Bitcoin options open interest at this period of time you know Bitcoin was at like 3,300 and um we uh put it you know we were the first people which this is crazy in retrospect people watching this will laugh that that know this derivative space we were the first people it even got written up by leder x leder x by the way was the the only like legitimate place to that was cftc registered and and uh to to to Really trade Bitcoin options um it was difficult though because it's fully collateralized and liquidity was low but

it took and there was only one market maker um it took us I think two or three weeks just to get like a few million notional of of options premium on in Bitcoin which is not a lot but at that time that was like 10% of the options open interest which is crazy for something that's now 20 billion uh market so it was it was an amazing experience um I got to you know see a lot of the early infrastructure that that now is being used by institutional investors that are papered up to trade spot um and um help facilitate the growth of that market um we were very early on darit so to finish out your story Sam what got you uh kind of eth

pilled as well because that's how um you've been introduced to me as well I think like maybe like three years ago it was just like hey meet Sam the guy who is popularizing the ethereum narrative to a bunch of unbelievers in trafi and so he told the story of basically crypto and Bitcoin and how you kind of like dialed in there in Bitcoin but uh correct me if I'm wrong I don't think it stopped there and uh now I I know you as more sort of a you know trafis um ethereum evangelist so tell me the unofficial self-proclaimed eth Maxi of Wall Street yeah is that is that what they say um so you know you mentioned earlier I we traded the first option on eth we um did that with a via an isda an OTC

trade I remember eth was at $100 I'm sorry 160 and um we bought no I'm sorry it was it was it was at 120 and we bought 160 six-month call um six-month calls um I remember there was no vuler for eth at that time because stabit had not yet launched and so I remember when we were negotiating we're like what are we going to use for this for the V curve and it's like we'll just take Bitcoin and add five points to it that was like that was the that was the logic that went in to figure out what the Vol the forward volatility curve of um of ethereum should look like um you know I was I never really expected to get as deep into the into

the ethereum ecosystem as I did um I was pretty happy playing this more trafi you know being an allocator and Trader in the space what kind of happens so you know Flash Forward a little bit um I was um hired to come in and I was the pretty much the only person who had really built what is a sufficiently credible institutional setup for trading digital assets at that time I was asked to come in and and and build out um crypto uh for more Capital to to to a a sufficient standard and during the course of 2021 uh in particular and I think it reached kind of a crescendo for me and

uh it's actually in December 2021 I think it was when um JP Morgan had its first and only digital asset conference um you know there you know I've and this goes a little bit into one of the bullets I put that I wanted us to talk about like what does trfi know about crypto the knowledge level is very low in a lot of ways you know I joke that trafi is worse than retail and the reason why when it comes to a fomo and the reason why is because trfi often is not allowed to use metamask or is very highly like concerned about getting caught by comlies it's a little bit vague in my prior job whether or not even I was allowed personally to use it or did that $3 you know eth transaction count as something I need to report you

know like that you know people this is not sufficiently important enough for people that they like even want to play with it right in a lot of cases that ambiguity and it's not until you really get into these deep bull cycles that people are like trying out metamask you see that those usage spikes so knowledge is unfortunately low because trfi doesn't actually know what private keys are you know the they just haven't interacted with it the same way retail has so I've actually said I think at a permissionless conference a few years ago with you guys that I actually think retail has a little bit of an advantage over trafi or the or the billionaires because they actually engage with the technology and that that's very helpful um

so I became very concerned that I was seeing a lot of at that time what what we called e Killers coming through making the rounds in in New York telling institutional investors that ethereum was going to die that you know that so and so was going to be the new it was going to replace ethereum and we you know we still see some of these coming coming around but not to the degree it reached then and I I don't think Anatoli was as guilt of this and again I'm referencing conversations that and pitches that I saw happening in trafi type environment and conferences um Ean vanon definitely went around saying this

um yeah that's the founder of for people who don't know yeah um anat not as much Kyle sanii did um but that was not actually a new thing suspects yeah Kyle told me the night the day we bought those first call options on ethereum it was at 120 I remember we were I met Anatolia during the seed round um because uh Kyle had introduced us and I remember I wasn't going to tell the story but I remember it was like nine o'clock and I was talking to Kyle on the phone and we had just again eth was at 120 we bought six month Bo 160 uh uh strike calls and I was like Kyle what do

what do you think of here he's like it's going to zero Focus let's focus on Solana I was like it reminds me of a younger version of myself this kind of you know overc confident you know when you're younger you you think you know a lot you're very over confident you know as you get older you get beat up in the market enough you become a little bit more um a little bit more humble but yeah Flash Forward to 21 I think he in particular was out there telling I remember seeing on Twitter this comment that he said he was uh getting called by all the billionaires you know what that I think that was probably true I think they probably were and he was telling them like salana is g to kill ethereum basically and so so that that whole

thing was very frustrating to me and the reason why is because guess what ethereum does not have a marketing department the way that right uh salana does it does not have a marketing department the way Ava Labs or whatever it is does that plasters the New York City Subways with Avalanche uh advertisements and then we had Luna and this thing I knew within 15 minutes of looking at it on the website this thing was a Ponzi scheme there were little toy versions of this on EOS and ethereum back in the prior bear uh prior bear Market there were everybody knew there were jokes and here this thing's actually become like a real this thing's like a huge thing I was genuinely alarmed and so I reached out to uh Justin Drake and I said look I understand that ethereum

and the EF Etc doesn't you know have any interest in or doesn't have like a any type of interaction I mean one of the problems was like JP Morgan didn't even know how to get in in touch with the EF the team that is building their blockchain solution could not get in touch with anybody at the EF and I would assume like trafi deals in like handshakes and meetings and conversations and so if they can't have that form factor they probably just have to sit on their hands well I mean they certainly not supposed to use Messengers as as the SEC has like enacted these very large fines on

messaging apps I don't know if you've seen these like billions of dollars on the banks and now they've been looking at some of the funds that's why I was not allowed to use messenger apps until I until I left my prior employment interesting um so what I would say is uh you know it just that ethereum doesn't have a marketing department there is no single person you would reach out to like I remember I said to Tyrone Lin you know who like runs Onyx at J M I was like oh my God ethereum is so decentralized this is like the like this call me to court in the future and I can like testify as to how decentralized ethereum is that literally the group running a GU client at JP Morgan cannot get in touch with anyone at the EF and so I facilitated an introduction

and the first call that took Place between JP Morgan and the EF in 2021 which is just a it's pretty remarkable but it's also a beautiful story and I think it really speaks to the robustness and I think it's getting back in a long way I apologize to like why I ended up getting pulled into this right you realize that these are assets these this is a space where you've got to do a little bit of your part when when the opportunity or when the the you know when you're kind of called upon to do that and I I had to do it in a very careful way in my prior job um you know that included for example trying to do reference calls for coinbase to keep people from going on to

FDX because anybody who was close enough to these markets looking at what Shenanigans Alam was doing I was terrified frankly that it was going to drag down my career and the respect for the space or not that we had a lot to begin with but and so I was trying to do My Little My my part right both to say you know on the on the sex side prevent a lot of Wall Street firms from onboarding at FTX unfortunately I I was not sufficiently successful and that really set us back but that was me trying to really protect my career in a lot of ways uh I didn't want us to go through this um but it was also that there was an

opportunity for me to play a little bit of a role in the ethereum ecosystem that was being filled and part of this again was that because nobody you know if when Ean vanon or Anatoli and to a much lesser extent kman comes in and tells trafi people something that's slightly sophisticated sounding they don't know any better than just to like KN along and be like yeah that makes sense you know anat in particular uh has this uh debate style where he says something kind of C licated sounding and then he laughs about it as though you should have this is obvious everybody knows this and uh it kind of almost makes you feel if if

you're not J in Drake or danker vice you you know you're not sufficiently competent or confident in your view to really refute that and I'm not saying that he always does that in a malicious or negative way I think it is just part of the way he communicates um but there was a lot of there was just you know again teral Luna was just a I needed I felt a need to try to stop a Ponzi scheme from promulgating throughout all of crypto all of f sorry traditional finance and that meant that we needed to have people that could speak on behalf of what I feel is is g to be the global settlement layer for the Global Financial system ethereum and

you know people like Justin Drake or Dan red or ongard these like really brilliant really smart Earnest um great communicators that are also uh uh researchers in ethereum space and try to get them or at least be know enough to then communicate it back to uh people in tradire well I I feel a lot of residents with that story actually one of the reasons why Ry and I started Bank lists is because there was just a void uh about the story about ethereum like no one was really telling it and as a result of that void that if the ethereum community wouldn't really fill just it just didn't really have that sort of Desire like you said

there's no marketing department at the ethereum foundation uh because the ethereum community didn't fill that void like the bitcoiners did uh and like the alt layer ones did uh just because it was free real estate uh and so that was like one of the main motivations of starting Bank list is like well let's let's make a media organization that actually can effectively tell the fair story of ethereum at least how we see it and you did it I consider myself a uh you know a a bankless acolyte follower I appreciate that and and also doing our same role inside of of the world of Wall Street right where there is a void that many of the VCS with eth killer investments will happily fill the void of like the lack of understanding around eth uh with her own with her own

narrative I'm wondering maybe you can kind of give us the download on on what is the current understanding of ether and ethereum in trafi like what do the average trafi member the Wall Street uh goer understand about ether and ethereum like how should we think about this you know I once asked someone um you know a trii person what is eth what is ethereum and the answer was ethereum is a cryptocurrency like Bitcoin but it has some utility and I was like that's actually a very good answer right um you know it's it's very concise it's it's like a very high level and it is descriptive but it under the surface of

that simple statement is like all the juicy details right and so that is probably a good line to just to think about when you like what dist they know it's a cryptocurrency like Bitcoin which is digital gold and it has some utility but they don't really know what that means and um you know one of the other topics uh this this person will be okay with me telling the story one of the other topics that we're going to get into later is like um you know have there been like uh trafi or like in particular like fed people that have been pulled in you know been been eth pilled and um you know besides my friend Benson who had

written this uh this paper one of the first papers on the portfolio benefits of having crypto Assets in a portfolio um there was a guy who worked for him at the time and um we met like five years ago and I haven't seen him since but I was in Dubai uh representing scroll and I was actually at a Arthur hazes party in the sky comes up to me behind me he goes you're Sam jigan you used to you you know my friend vinent Durham who I used to work for at the FED I was like oh my God who is this you know I turned around and I couldn't remember his name at first he was like Dion I was like oh my God Dion how are you he's like good I was like what are you doing here you know this guy used to

be a used to work for you know a you know a asset pricing theorist at the at the Federal Reserve I was like D I was like what the what are you doing here like on this you know this like beach party for Arthur Hayes in Dubai and he goes oh I uh I I'm in the crypto now I'm a a def5 founder and I was like what did you start and he was like uh term lending I was like oh my God it's brilliant one of the the missing pieces in defi is actually fixed rate lending so Dion and his partner have started uh a term. finance and um he goes uh you know what have you been up to blah blah and I told him he he asked me he goes what what do what do you think tra five people understand about crypto and I used this line and I

remember Dion looked at me he goes so you're saying I should still be buying eth I was like basically you know like the most bullish thing about eth right now is the fact that the understanding of of trafi is that it's this crypto as it like Bitcoin because I think when they fully understand it it's going to blow their brains out um you know I had a breakfast last week with uh a financial institution that has some periphery exposure to prto let's say and I had to explain this so we walked through what is digital gold uh you know Bitcoin is digital gold and you know they had uh knew the Michael sailor routine well and then I I was like but

you know for example tether which you've probably heard of usdt like of course I was like you know none of that is on bitcoin he was like what do you mean I was like there's no tether on bitcoin and he did not know this I was like I was like you know I was like all of it is on ethereum and Tron which we don't want to talk about is on ethereum and Tron and you know tether the company pays fees to the ethereum network they do not pay any fees to bitcoin and this was he he L I think he said something effect of tell me more explain this he did not know this so that the the understanding is is is pretty low even for you know I would say

people that on in trafi that are are reasonably exposed to this to already to the space and so that's a very that's very bullish but it also should again hashtag early it's it's it's early okay so trafi has very limited understanding of ethereum they they sort of like now have barely wrapped their minds around Bitcoin but by and large they don't understand ethereum and Sam you said something interesting there he said once they do understand it Minds will be blown like uh so why maybe this gets back to the conversation we were having earlier around sort of uh the the risk-free rate uh in ethereum and this idea of eth producing positive yield was

a term you said and we said we'd get back to this in in the podcast but does this have something to do with why you think trad's mind will be blown when they understand what this asset actually is G give us the case here well you know this is where this is where like you you you risk you run a lot of risk doing an hourong podcast for this because I tried to give you one very simple vertical one simple utility of ethereum say Swift messaging of financial uh money assets and the this simultaneous settlement of those funds that that alone is is going to change the world you can think about

stable coins as having pressed a button on on on an Unstoppable uh progression at this point but that alone is is a is a huge deal but you know and I think you know the natural kind of evolution of that is that if you have this this decentralized permissionless asset eth that is uh effectively accruing value and becoming whether you want to call it outright deflationary or ultrasound or whatever kind of description you want to put put around it now it becomes collateral because this is a cash flow bearing asset the cash flows from that asset are returned right now the have two primary issues primary means the first is cash flow is is bought and

burned like apple buys back its stock to return the the earnings to shareholders here the eth is burned uh to return uh the cash flows to eth holders and then some of it is uh is acred to um stakers but the system as a whole is over meaningful period of time fees are very low right now that's partly because we're still on bare Market basically I mean I I think traditionally bull market is when you're making new highs um you know we're not quite there yet in ethereum um part of that's because we're in a bare market and you know we haven't started that virtuous process of

bringing in a lot of new people playing with metamask or Argent Etc um part of it is because uh the recent upgrade uh protto Dan shard was a scalability enhancement right so this was not a minor upgrade this is one where we actually ex uh scaled ethereum in a very meaningful way we scaled it so much that fees are cheap and that's what we wanted and that is likely to be a temporary phenomenon right you know you've had Justin on here to talk about this but it's you know if anat is like you know there used to be that the salon barcas on ethereum was that fees are too high but you know guess what we did a lot of really advanced cryptographic work I mean you know the work danr does I think

he's probably probably the smartest person in all of crypto you know Dan's team these are you know cryptography ZK and very Advanced cryptographic schemes are scaling ethereum in a way that I don't even think crypto understands certainly trafi does not you know one of the things you know this this line that vitalic has that I think is hugely underappreciated is that you know ZK is uh and maybe even eventually fully homomorphic encryption but ZK is ethereum's um Transformer moment right you know uh this is hugely underappreciated uh this is a largely not just a crypto manifestation driven by ethereum but even in Academia you

know ethereum Community has driven the academic Community within cryptography around ZK and now f h and um you know so fees are the burn right now temporarily is low because we have perto Dan sharding significantly you know via the addition of blobs has has made it cheaper to transact on ethereum it's made it cheaper for l2s to consume um ethereum da um and that's great but over time that the cheaper fees will onboard a lot more users and eventually they'll go back up and that's why we will progressively increase the number of blobs and we'll also eventually have uh full DK shorting which will you know as

you guys know well basically allow infinite scaling uh for for pennies and the number of transactions will be much higher so right now temporarily the burn looks a little bit lower but again that's for good reasons it's because we have actually scaled ethereum to make uh to allow more onboarding cheaper via cheaper fees and but long term you know again with with the right thoughtful changes to the issuance curve or other appropriate adjustments such that we can keep e a outright deflationary asset it acts like collateral and now you have a permissionless decentralized collateral that exists in the world that has never

existed before and I think one of the most underappreciated bull cases that Justin Drake has laid out actually a few years ago uh at uh Devcon in bogot I guess maybe year and a half or so ago where he explained how you know what would be the What would be if you had a eth only um governance free um eth collateralized stable coin um how what would the price of eth need to be in order to provide for this utility we need eth to be ultrasound collateral to use the meme but basically deflationary collateral such that it

cannot go to zero and that is really crucial because then you can very safely again with the with the addition of moving as much governance as possible and keeping it capital efficient um which we're which we have a planned for but we're not there yet um you know eth can be collateral not just for stable coins which there's a trillions of demand for that but for other for other types of assets as well you know I I remember it was like five or six years ago I think it was Joe Lubin who like had this um had this idea he said hey like you could make an you could have a smart contracted e that was an agreement between say the US and Iran that is collateralized by eth

this permissionless collateral where they both have to put up and if one of them violates it you know neither of them can control ethereum or eth and so you could this would be a slash type of penalty right so you could you can enforce uh Behavior good actions you can in basically enforce contracts using this this this asset and that's I I don't think people have even like really wrap their head around the the design space beyond just again crypto collateralized stable coins that we can have but we're talking about trillions of additional value for this of collateral value on top of the cash flow value so you have this you have the cash flows that are crewing to this Swift

plus uh chips or fed wire settlement system right this moving of financial assets and the fees that acrew and then that then allows you to have this permissionless collateral that can be that that has an additional value so I think this is one of the reasons it's very difficult to tell the story of of of eth is said it is it's well it's infinitely kind of infinite possibilities but I would say like that is the at a high level you have the cash flow story and then you have the potential value of this permissionless collateral uh and the smallest what I I used to jokingly say this the Sam or the small smallest addressable market for

eth is 5 to 10% of Chinese deposits so call it two to four trillion doar that is the smallest addressable market for uh e the asset do you think the addressable market for ether the asset is bigger than the addressable market for Bitcoin this is a test of your eth maxing Sam so uh do you believe in the flipping do you think that's going to happen you think these are equivalent assets or is just like one destined to always be larger than the other or is ethereum going to flip in Bitcoin does that question even matter in your world the answer is yes I I the the market opportunity is definitely larger

I think that the Bitcoin Community is probably figuring that out that's why all of a sudden you're seeing you know efforts like opat and some of these turning on op codes that previously you know the the the religion of Bitcoin said was unacceptable um yes unquestionably so um does that mean that the lever evolve or evolve on time or evolve sufficiently or enable you know sufficient functionality to challenge these probably not even in like the 100% scenario of a Bitcoin Maxi or let's say like a uh let's say A you had a great guest on recently who kind of walked through some of this um I I don't

remember his name coin on the Bitcoin side talking about I'm not sure from the I remember he was from North Carolina actually because I grew up in North Carolina um we talking about so many guests so many guest but anyways you know like I think like people who want to do more with Bitcoin and have been inspired by the what ethereum has done and want to enable some of that capability even in their wildest streams I don't think they'll ever really get there I think um but um and look I mean I think you know even if you were able to get all that the the the Bitcoin Community is may not you know at the end of the day this is these are social systems I think it's underappreciated the degree to which at

the end of the day these are social systems and you know one of the things that caused me to want to put my reputation my career behind ethereum is after spending a few years now getting to know and interacting regularly with the uh the the the ethereum community the breadth of it but also the individuals that that um like say like on the the the research side um this is the this is probably the highest functioning and executing group of people anywhere in the world and um you know I I I had a better I said that better uh probably a year or

so ago to someone and I wish I could remember the exact wording but you know it it it really is I mean I I'm close enough to understand just how uh both functioning but also like the values and the way that people interact with each other you know this is one of the reasons you don't hear on Twitter you know maybe with a couple of exceptions a lot of screaming about eth or degrading Bitcoin Etc the same way the Bitcoin Maxis do is just not part of the culture so I was both impressed with the people the culture the way that people communicate with each other the the the focus on Research and not noise and um that I guess I was e pilled and you know now I'm trying to tell that story to to

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part part of the story and then as as this uh collateral asset that is like um you know supranational and exists outside of the nation state control that's the Dual story now we have a a new narrative that's sort of entering this is maybe on the shorter term time Horizon which is the ethereum ETF and going to this episode uh the reason you like Dave and I kind of prefaced it the way uh we have is because now it's time to explain some of these things for trafi and I I'm just wondering in in your mind do you see the ethereum ETF uh finally being approved moved um like what's the significance of this for trafi does it drisk things do you have any assessment of what the

impact might be for ether the asset like what the flows might look like just in the broad broadest of uh like terms how big of a deal is this for trafi to begin with you know people watching people that spend too much time on Twitter or just a normal person spends time on Twitter don't worry so much about what happens in the very short term um you know I remember when Bitcoin ETFs launched people like oh was priced down fell down for like you know like went sideways for a month and then it you know kind of ran off again and blah blah you know don't be so short-term focused um I have no expectations as to what the initial adoption of Bitcoin ETFs will

I'm sorry ethereum ETFs will look like and in the short term it just doesn't matter right but when that does happen again partly again this this if you want to be able to ur a little bit more eth over time like myself included like I hope it actually is it goes a little bit slower to be honest I hope that I get a little bit more time to to buy e below below alltime High um um so I would not pay a whole lot of attention what happens in the very short term again um but over time it's kind of inevitable that that more people will um get exposure to this asset class and a broader audience and they uh they'll be

able to do it more comfortably even those firms that are quote papered up in uh like the Wall Street firms the the the the hedge funds and family offices that are papered now to trade spot at coinbase that they're never going to do it in the same size as if they can hold it in uh an ETF form so I think that's that's one of the reasons the ETF flows on the Bitcoin had have exceeded people's expectations it's not this doesn't surprise me it's just a form factor that the organ that an organization a Wall Street organization can get more comfortable with and when I when I mean comfortable I mean size right like hundreds of millions billions of dollars we and um so I think in I think the what

will happen with eth you know it seems likely just on based on my understanding of how they're arriving at this or my my understanding until now as to as to why how the process has worked um you know they've been able to the ETF issu have been able to show a tight correlation between spot and a Bitcoin CME uh Futures and eth CME Futures and there are no C Futures on any of their asset so these two are likely to be kind of Quasi enshrined unfortunately but you know kind of Quasi andrin because of that uh narrow path by which um we're going to have spot ETFs for Bitcoin and

eth and over time when flows do come into eth say they let's say that there the organic new flows into eth there simply will not be any eth for sale you know the the the the dollar values even with fees very low on eth and of course once eth starts making new highs you know transaction transactions are going to go up fees are going to go up and that means you're back into a deflationary mode so even with the very modest amount trickle of new eat that is Flowing onto the market with activity low post Proto sharding it's it's nowhere near you know one average day of Bitcoin ETF inflows is 10x the net issuance of of eth whereas

that barely offsets the issuance of Bitcoin on a daily daily basis so I think the price reaction could be actually pretty absurd um what about the uh clearing of the ra by the way once it starts making new highs then you have new users and you're entering that cycle where now it's like supplies Contracting as more money is flowing in VI these ETFs I think it could be quite dramatic to be honest I don't again I don't know if it'll take two days to happen I don't I don't know if it'll take two years and it doesn't really matter like hope that it takes longer to be honest for me personally about I think hold on but let me just let me just there's a second der here is that I don't care if you are you know a

$100 retail investor or a hundred billion doll uh you know Bitcoin uh uh billionaire investor everyone chases and so you've got what 2530 billion in Bitcoin ETFs when eth out starts to outperform this is going to your question about the flipping that money that's sitting in those Bitcoin ETFs again this is just simple economics this is relative so in FX you value currencies on relative inflation right and the relative inflation of eth is lower so you know when the when when when eth starts outperforming Bitcoin people will chase and so money will not we're not just talking about new money into eth we're talking about money that

is the the 20 or 30 billion that is sitting in Bitcoin ETFs is now going to start chasing ethereum ETFs and so um you you already have this large pocket you know in the beginning they'll call it a a diversification of their their crypto asset investment you know so it's like maybe it's 2% of some you know pension fund right that they've got in the Black Rock ET Bitcoin ETF and so they'll say oh well the market waiting of uh you know when eth starts outperforming after a while everybody gets fomo remember you know they'll start say oh well we shouldn't have all Bitcoin we should have some of the eth ETF as well and so they'll do like a market waiting you know like oh we'll start with 10% and then well you know you know we should have two to one right

because Bitcoin is uh twice the market cap right so they'll then they'll add more eth to get a market weighting of Bitcoin to eth but it's just a it's just human nature they just F I think happening I again I don't know the timing it is very difficult in markets one of I've I've got a lot of gray hair at this point one of the things I've learned in markets is that it's hard enough to get the direction and the magnitude correct don't try to also get time correct you know leave that leave that one alone expect it to take longer and focus on the the direction of the magnitude how about this breaking of the kind of the regulatory Haze uh I don't know if that's made a big difference for for Trad right but it's like uh ethereum because of the lack of action of the SA

or you know the the sort of the Banning about of uh people like you chair chair Gensler it's been unclear what its status was uh was is it etherum of security is the SEC going to try to claim this is it a commodity and now with the sec's approval of the ethereum ETF it's just quite clearly a commodity has has was there is there a group in trafi that was just like waiting for this to happen like there was this some regulatory Haze over ethereum and they had not purchased uh ether but now they will because it is a securely a commodity or does does that not matter very much I'm not sure I don't I'm not sure I have a view on that I one thing I would say that I know from you know in

22 I think that there were some large well-known hedge fund hedge funds that were long SM and I remember I got a message from one of the large Bank uh sales coverage and I remember she basically was like Hey like uh some so somebody's telling me eth's goingon to be declared as security this is like two years ago and I was like that's not gonna happen and um it actually I wanted to give you guys credit you guys you know this is reason why you need to watch Bank list every single one is because there are alpha drops in bankless episodes that people don't realize the biggest Alpha drop that nobody realizes was in a bankless episode where Justin Drake it

was right before the merge towards the end of a conversation he you remember this the list of reasons to like be bullish on eth or like eth won't be a security or something like that and one of them was a statute of limitations yeah and I went and looked into this because I had never heard anything about this I had this was so I went and spoke to several big Law Firm lawyers including a former head of longtime head of enforcement at the SEC uh she almost would not engage with me on the conversation because she said East not a security and I was like but if it was she's like but it's not and I'm like please help me here like if it was would this would it the the and and

here's specifically what I don't think he gave this detail but here's what I figured I found out basically there was a change to the National Defense authorization Act of 2021 somebody if you want to by the way we can talk about politics and I had a brief prer on Capitol Hill in the prior life but you know if you want to get something into a bill you want to get it in What's called the Omnibus which is a spending Bill and you want to get in the defense authorization bill because everybody's got to vote to pay the troops right you got to vote to you know there's all these bases you got to raise salaries and that's that's done the authorization bill at any rate so somebody slid in a change to the statute of limitations uh into the National Defense authorization Act of 2021 that changed

the statute of limitations from 10 years to 5 years and so he was correct that there was and I again did some due diligence to to to double check this I was pretty confident that eth was not going to be a security and I um that having done some due diligence on that amongst other things um and I said as much and so the way I would answer David's question is to say that I don't think recently people have like not owned it because of or rather they've owned Bitcoin and not eth um I I think there's some of that right like it was just you know nobody wants to take headline risks like what if it is a security there's there's

that's a small segment of the market but what I can say with certain is that there were people say back in 2122 that weren't just worried about the FED raising rates and selling or FTX blowing up or whatever there was also in in Wall Street this concern even back then that again I guess 22 that eth was going to be um deemed to security so I think that there were people that otherwise probably would have been around long for the ride or maybe on the ride on it you know on again off again and they kind of got off um due to that concern back then but I think it had it people just don't own eth right right now really on Wall Street it's still pretty small relative to bitcoin people are very crowded in

that concentration in that exposure Sam one general question I think for a lot of crypto natives is like is it a good thing to have trafi on our side right it's like it feels kind of good right now uh to hear Larry think talk about U the Bitcoin ETF and he's also talked about tokenization and with black rock getting an ethereum ETF approved I know he's going to be on the media circuit talking about um ether the asset as well and and all of that is great like great right we're excited about that in general we're not really sure what they think about defi though we're not really sure what they think of the concept of a decentralization if we create a another privacy mixer on ethereum like not really sure where they'll fall on some

of these issues like decentralization and like the broadest of questions is do they consider crypto a threat uh you know could they use it the way they want maybe for tokenization of real world assets but then also be concerned and try to choke off the the defi touch points because those are those are threatening to the large institutions you know you got a bank like Wells fargon has 200,000 employees and then you have a you know a protocol like Unis swap with just like a few dozen got to like you know trillions in terms of uh trading volume like we can do so much with far less people and is that not threatening to the existing institutions and incumbents so where do you come down on this I know you're kind of like

representing uh trafi but you're also straddled in the in the crypto World here so you've got like uh you know a foot in on both sides here do you think trafi is is going to be a friend of crypto or a foe of crypto or just like something in between so I think it's good uh I do not think we want um those ET the ethereum ETFs staking um you know if there were a mass slashing event that would cause um that would cause governance risk right um you could imagine if this is actually why we need to limit the percentage of the network that is Stak um or evolve staking in a way where a portion uh that only a portion of it is

a slash staking versus non-s Slash falus introduced proposals around this so I do not think for the time being we want those ETFs staking they should be simply receiving that the risk-free rate which is the deflation you get from holding native eth that is the real risk-free rate because you can be slashed and you know it hasn't happened sufficiently up to now for people to be worried about it but it freaks me out to think about you know Black Rock having uh getting slashed like I just don't I don't want that day to happen I I we need to keep the network such that you know the risk-free rate is the deflation that 50 bips or 1% you get from holding native eth um that's really a side conversation

the next part I would say is like I think that look defi is super cool right I mean this is this is an evolution and they love it I think this is why I think I was surprised that somehow Larry Frink was able to become a crypto Maxi within such a short period of time after FX I never I will admit I did not see that happening that quick I I thought that that would take two or three times as longer like it's still this one I got a good example why I don't timing right like this I did not expect this to happen so I think that their this is remember I I said like their minds are going to be blown when they figure this out this is an example like trafi is gonna be blown away when they figure

this out and I think actually getting back to this unified Ledger you mentioned this you know the bis introduced this piece around what they call the blueprint for the for the future uh Financial system or and the GL the unified Ledger and I remember when I read the first half of it I texted a former fed friend of mine I was like the bis is trying to Fork ethereum because what they're trying to do is basically deploy a central Ledger that all other Banks and financial institutions and central banks would then settle to and that is that you know the power of a unified Ledger that enables just infinite uh uh composability and tokenization is an insanely big concept and it's going to happen and it's it's

what I would almost say it's um it's a little bit like def by growing up you know I think you'll always have the Unis swaps and these and compounds and AES of the world but I think you're going to have remember we talked about JP Morgan Onyx JP Morgan's Onyx that uses basically a the GU client that consensus maintains consensus bought that from um JP Morgan in 2021 um after JP Morgan had been maintaining it for a long time but it is Trivial so right now JP Morgan basically tokenized dollars and tokenized treasuries and solved one of the last remaining problems from the global financial crisis and this was what's

called trip party repo this is where Banks basically can't trust each other during the period of time it takes for these two assets to settle at different times so dollars and treasury settle at different times but if you tokenize them they settle at the same time and right now they're basically just doing with a small handful of counterparties so it's basically just like Goldman and JP Morgan doing what's called repo loaning each other money for a short period of time overnight barrowing dollars using treasury as the collateral which again have both been tokenized but it is Trivial to and it's private and permissioned right so but it is Trivial to connect that to the ethereum L1 and so now put yourself back in my Sam jigan

my prior seat in a very large uh Global macro fund and let's say we have um you know let's say we have JP Morgan and it you know uh trfy institutions on the buy side so hedge funds Etc we want to trust JP Morgan we need to trust JP Morgan but we would love to have the ability to also immediately move that asset with finality to settle to settle say a a margin requirement at Deutsche Bank and so if you were to connect you know the JP Morgan um uh Onyx gu client and basically make it a validity proof or basically L2 right you connect it to ethereum L1 and now if Deutsche Bank or

Goldman Sachs has a has a their own ZK rollup maybe it's a maybe it's a L2 maybe it's an L3 construction or validium in most it most likely will be some sort of a validium construction so that all of the data is not posted to the L1 it'll be posted to a data availability committee which is fine because again you know we're talking about hedge funds that want to trust that need to trust JP Morgan so we're okay that the data is housed there the data availability is there but we want the interconnectivity of being able to uh U utilize this unified Ledger the ethereum L1 so I actually think that most major Banks and financial institutions will have their own execution environments that will allow their clients to that are permissioned to

interact and execute in these permissioned environments and then move those assets around via the L1 and this is not a New Concept by the way like this is I would I've had conversations where like this is the Holy Grail this is this is the goal and this is why from my perspective when I read the BS paper I was like oh my God they're they're they're forking ethereum basically because this is really transformative like you know stable coins pushed a button that really can't be undone you know it was you know uh stable coins were were a phenomena of the prior uh bull market that did not go away and in fact they've they've proliferated and they have really legitimized the use case for for open

public systems but you could imagine this is going to reach a limit like JP Morgan is not going to allow 100% of its balance sheet to be monopolized by this this corporate squid you know Circle right so if Circle were to grow to a certain size J Morgan would be like we're not going to just like let you take over all of our deposits they're going to tokenize their own and so you have pushed a button I you know I don't know if you're familiar with tokenized deposits if you know we should we you know we should have that conversation to follow it but stable coins pushed a button that can't be really undone this is basically the global proliferation of dollars that's that for the first time

ever really anyone uh and everyone in the world no matter where you are is allowed to save hold and transact in dollars and that is that's never existed before you know China alone has more than 500 billion of capital flight a year this is this we we this is not reported obviously but it shows up in what's called IMF Aon missions data it's the difference between the current account and the capital account and so we know that money FL flows out like the average Chinese citizen is only allowed to uh hold 50 is is is only allowed to buy $50,000 a year um and they have to hold it with their domestic bank but if you have an ethereum account you can hold as much Circle or tether as you want right

uh in your in your ethereum wallet so this is a this is a really big deal right like I mean we're we see it this is why like adoption in parts of Asia and in South America has been very high for stable coins and the number of of of individuals in these countries that have either held or used salable coins for transactions but ultimately that is going to result in Banks saying hey we want to get on this too and we you know we can't have this like corporate entity with 30 employees monopolizing our balance sheet we're going to we want to tokenize our deposits and they will go on public blockchains because private per we know this from the era of the internet you know there used to be What's called the inter the intranet and you know the internet

before the internet of the worldwide web right and now you still have I'm sure maybe you guys have like a little bankless corporate you know intranet with your HR or whatever most companies do J Morgan intranet but you spend your time on the internet and I think it'll be very much the same way you know you the the the analogy of you'll have businesses and banks that will have their small permissioned private and permissioned execution environments but they're going to be connected via the ethereum L1 the the unified Global ledger so you're painting a world here Sam where trafi doesn't try to choke off crypto and defi uh at all because it's not in their best interest to do so right the the the idea of tokenization on this uh unified Global Ledger is very

appealing to them gives them an opportunity to just like upgrade their infrastructure gives them new products to sell gives them more things to financialized which is I think bullish I mean as we uh end this conversation one other topic we've we haven't uh uncovered yet is regulators and how they'll feel about all of this because it's a similar sort of you know cost benefit analysis when you get into kind of a a regulator's head or like a big government's head there are some things about crypto that are threatening to nation states incumbent powers and C ators and there's there's also clearly some benefits they're almost uh in a similar position as as the banks and so from a regulatory perspective I'm just curious your your general take on what

you think needs to happen and you also I think wanted to uh talk about we asked you part of this episode hey Sam do you have any like any Alpha to share any like you know thoughts on uh various topics and you brought up this term that I'm not super familiar with but I want to ask you about it's called Uh Chevron Defence and that that sounds like a legal mouthful something that only a regulator could love but maybe you can explain the regulatory landscape what's needed this concept of of Chevron deference what does that mean why is that important to this story sure so the the first one um again I think regulation I I I once said this uh with Matt from uh vanc on on a panel I was

like I don't I never worry about regulation because it takes care of itself and I certainly recommend 95% of the people watching this podcast don't worry about regulation since I've been in this space people have always worried about regulation and if that kept you out of it well it it has kept a lot of people out unfortunately so it doesn't mean that you don't need to call your congressman and calls work better than an email by the way call when you know when important bills are coming up Etc or when I mean you get the point but don't let it keep you out of this space that is noise that is short-term noise um so I think regulation will evolve fine um and we at least the in the very near future um we are awaiting uh this

this basically um 40 years ago fascinating story 40 years ago there was a a Supreme Court case um uh involving the Chevron Corporation uh EPA and environmental uh Defense Agency uh organization the the the short version is that the Supreme Court ruling at the time gave the power basically said hey agencies are experts we judges are not so when a law is written Ambiguously we should give deference to the agency and as it turns out the head of the EPA at that time uh and this was a win for the EPA the head of the EPA was Neil

gorsuch's mother Neil Gorsuch is the is the Supreme Court judge um his mother was head of the EPA at this time now this uh it basically again it basically says when there's a a a law that is ambiguous um say is crypto a security or a commodity if it is ambiguous the uh the courts should defer to the agency expertise basically and this has been used uh to varying degrees by both Republicans and Democrats uh Republicans used it actually to kind of to reduce a lot of Protections in the Clean Air Act and Clean Water Act under Bush uh Bush

um W people might remember that um but then that turned very hard the other way under Obama and also under Biden and so for example the the EPA uh in particular ha you know this has had huge implication I mean we haven't had immigration law in God knows how many I mean 50 years so like everything that is done is interpreted by the agencies and courts give them difference when you say agencies you're talking about The Regulators right the SEC the cftc these are sorry The Regulators the the executive agency Regulators okay so and the courts simply have to defer to them over the LA there have the the Supreme Court is currently

very conservative um as most people know and has taken a couple of strikes at this Chevron difference again goes back to the original company Chevron Corporation 40 years ago uh has taken a couple strikes at it most recently was actually last year uh they what was called the major questions Doctrine the uh uh coinbase actually took advantage of that decision uh as in part of their defense against the uh the SEC the idea being that hey the the court said hey if um if a topic is of national significance it's a major question the court should not defer to the agency for example right but then the question is like what's a major question right um well in uh October of

last year not many people noticed it I almost missed it the Supreme Court agreed to hear a case of uh I believe it's herring fisherman there's actually two cases one's called Relentless uh the other is called ler brigh V Rondo Rondo is the head of uh Commerce and what what's at issue here was is basically that these fishermen um these fishermen there was there was a law passed years ago that said that the national marine fisheries should require observers on on commercial fishing boats um the problem was that uh it cost money and the the Congress did not say how to pay for it and they didn't provision

money for it and so the agency interpreted it to say that they could charge the fishing boats it turns out that and this you you see this in the case that the cost of having an observer on every single boat was going to cost as much as 20% of the profits for these fishermen so they sued and they lost straight up into the district circuit the DC circuit where katangi Brown Jackson was sitting at the time and it uh the they they lost based on the national Marine fishery Commerce Department um claiming um Chevron Defence that they had written these rules under Chevron Defence of course this was then appealed um by ler brigh

Enterprises the name of the the fishing boat company and the SEC took up I'm sorry the Supreme Court accepted the case so they had three options they could hear the case on its Merit they could hear the case on curtailing Chevron Defence or completely removing Chevron Defence striking it down and they elected the latter too and katoni brown Jackson is recused from that case case having previously heard it as a result the sup the the conservatives on the court led by Neil Gorsuch whose Mother originally is responsible for this being in place he's leading the charge to remove Chevron Defence and so they don't have just an a normal

majority as they normally do they have a super majority because one of the liberal justices is recused and we must the the way that the Supreme Court term happen works is they accept cases and it runs from October to June so any day now that's June 4th when we're recording this could be this coming Monday it could be the Monday after but any time in the next I would say two to three weeks we are likely to get a decision in ler brigh V Rondo on Chevron Defence and you know if you Google this you're going to see articles that talk about the potential chaos that could ensue from this because the agency's ability under Chevron Defence to interpret and write

rules and regulations it was so broad it stretches across Finance it stretches across like I said uh immigration and the environment but in the hearing you should go and listen to the oral Arguments for the Supreme Court crypto comes up a number of times in the oral arguments and it's even used as an extreme example of how Chevron Defence has effectively caused a problem where this uni quote uniquely 21st century phenomena digital currencies uh is seeing overreach by a regulator that clearly doesn't have Authority so the implication there being that if and when most likely I would say 90 plus% probability Chevron is at minimum significantly curtailed if not completely

removed um it there will be no question but that c that like the regulator assault on crypto is basically done I mean it's done and that actually has significant implications about whether or not you actually want to see legislation like as it stands I can tell you you know I personally do not want uh any legislation passed you know uh it's much better like we're so early in crypto if you write something with a certain definition or understanding now it may not be relevant six months from now much less 30 years from now and it is almost impossible to get something taken out of law once it is put in law this is why

you you know like uh you hear about like these laws from like the 1800s you know they like very difficult to appeal the to repeal them you know Arizona is having to do this now uh in in the context of roie of the RO roie Wade and the abortion decision there like there's like 1800s law that they they're having to quickly repeal so you don't want I mean I think in my opinion with the exception maybe of a very narrow stable coin bill I personally would just prefer to have no regulation and that is especially true because almost any day now the agencies are going to be completely neutered the SEC is going to be done their assault on crypto is basically going to be cut off of the legs I think they know that and I think it's one of the reasons why they have

implicitly you know kind of pivoted so this is cool so just like maybe just to connect the dots and then you finish this out so if Chevron deference is overturned then it um defangs one of the core problems that crypto's had with Regulators which is like regulatory overreach these unelected uh like officials Gary genders of the world that are basically like uh hating on crypto and doing everything they can to just like put up roadblocks and it completely defangs that and I guess if we were able to thread the need needle at least in the US is we'd have uh Regulators aggressive Regulators defang from their ability to do kind of like o over over a broad rule making and then we'd also

probably have a hung Congress at least for a while so that they only get through legislation on like stable coin bills and they don't go full you know like prying into the business and trying to over regulate everything which would which would draw us into a quagmire crypto uh very interesting I had no idea that that case had anything to do with crypto and uh soal yeah it sounds like it's a big deal well Sam this has been uh excellent thank you so much for guiding us through this I do you have any just like parting thoughts on um you know like David and I have this this BET right now which is uh on the next rollup we're going to give our like pitch for uh ethereum uh like two Trad five and I just like I feel underere equipped to do

this although he like uh I'm I'm I'm definitely going to beat David right uh so yeah David's got no chance here but um he's shaking his head but like when we're talking to trafi what is kind of the the simplest pitch that we can give them is it what you you said earlier which is like hey this is Bitcoin but it has extra utility is that what ethereum is yeah how would you close this out you know I say to myself that to myself that e is like apple you and uh you know Jim Kramer has this line you know own it don't trade it and um that's the way I think about it you want to own eth um it is a it is a platform it is a secular um shift with you know unbelievable

fundamentals underneath it um you want to own it uh don't trade it that's uh that's that's how I approach it personally there you go own it don't trade it we will leave it there of course got to let you know none of this has been Financial advice it never is on Bank list crypto is risky you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot [Music] [Music]