Why the Drift Hack Is an ‘Embarrassment for the Industry’

Transcript

keeping some things under the radar right now because there's actually a roadmap. I would love to see us get more recovery policy capabilities slipped into the bill because like we need it more than ever. So I'll I'll hop in on the Circle point then and say Chris, I think post genius especially after the rules are written, this is going to become significantly more clear. And what I'll say on that is that I don't think we're going to have much of a problem and Circle will not have legal liability for freezing funds temporarily in these cases. Right, if you look at how traditional financial entities operate within the BSA, it is totally acceptable and in fact required for banks to deal with these situations by

actually taking actions to verify what's going on. So if you've ever tried to send a large wire or you've had a large ACH hit, you get that text from your bank like, "Hey, was this you?" That is essentially totally permitted and by the way, I will remind everybody, they have frozen your funds in that moment. They are not moving. The requirement though is that those not be particularly onerous or long-lasting without significantly more substantive call it weight behind that. That could be a judicial order, that could be a notice from regulators, that could be certain sort of national security concern. So they can't hold your funds indefinitely, but they can definitely hold them temporarily.

I would suggest that when our regulators have finished writing the rules for genius, it should not be surprising to anybody if US dollar stablecoin issuers have legal requirements to monitor the ecosystem and then take action in cases like this where they're going to be asked to freeze things. The other thing that I think is a little bit unexplored territory, but I expect drift will be where the rubber finally meets the road, is does Circle have liability here for not acting? I will remind everybody, even ignoring the pending license with the OCC, Circle has money transmission licenses in most US states.

Money transmitters have to take some degree of care with user funds. They can't just give your stuff away. Like if I show up at MoneyGram claiming to be Ram with no ID and they give me $12,000 that was meant for him, MoneyGram has a problem in addition to me and Ram. And so, I think it's going to be very interesting to see how it plays out in court if somebody goes after Circle for this. And the reason I think it's so interesting is that in this one it was very obviously some sort of hacker exploit that circulated on social media very quickly. And then there was about a 6-hour period where funds were moving through CCTP. So, I think it's going to be hard for Circle to argue they didn't have adequate time. Whereas Chris, to

your point, latency-wise, if this was like a sandwich attack within a single block, then I think your standard of what's feasible and what's functional is very different. So, I'll I'll go to Ram on this one saying, "Ram, you have a lot of experience with wealth management banks. How would you think about the argument I just made?" Well, it reminds me of the conversation we had last week about what happens when the legal system and the regulatory framework interacts with uh nominally decentralized trustless system. You have a conflict here. Is this fintech or is this crypto 3.0?

The The big innovation after Satoshi Nakamoto's white paper was DeFi, which we also talked about before. At least my view is that DeFi is a civilization level advance and you don't need to rely on a trusted intermediary to stand in between two parties. You can have a trustless exchange, which is truly extraordinary innovation. There has been much focus around DeFi. Uh it's an embarrassment for the industry. Now, this had protocol audits. It shows that protocol audits are not enough. Social engineering still matters. Uh the VCs spent too much money investing in L1s and L2s instead of and trying to get the quick flip as opposed to core infrastructure that's required to build trust and safety.

Institutions are going to look at this and say this system is immature. This is 2026. DeFi's been out since like 2020. It's 6 years later. And it's it's disappointing from that perspective. I think they'll continue to focus on their own systems where they have controls, you know, in the TradFi world, there are concepts of responsibility. People that have spent on American Express and disputed transaction with a merchant understand what that means to get their funds back, go through a dispute resolution process. They feel secure, they feel safe.

There's some escrowed money somewhere. Similar things happen in institutional transactions. So, there's a lot more work to be done. Uh on the espionage side, like China's been flagrantly committing espionage on American companies for a long time. I've not seen much in the way of consequences for China. I don't think that's going to stop. This isn't going to stop either. These crypto protocols are honeypots for for North Korea and they continue to have wins. What do you think about the two of five multi-sig Austin?

Oh man. I think this goes back to something I've talked about in the past, which is if you have truly decentralized systems like say Bitcoin, I do think there's at least a colorable argument, in fact, like one that I believe, to be clear, that it is decentralized an individual person should not have liability or be regulated for the conduct on there. You know, obviously like sanctions violations and all, but I'm saying if you lose your Bitcoin in a hack like this or something social engineering-wise, there was no centralized intermediary that could have stepped in to save you.

If you tell me it's a two of five multi-sig, I have a lot of questions about whether a protocol like that is actually in fact an unlicensed money transmitter. Because distinguishing this from call it immutable smart contracts where you drop the contract, it can't be modified, you burn the private keys, like everything is gone. Versus one where if you had a two of five smart like contract set up where you have the private keys, you could have upgraded that and taken control at any time. Chris, that feels to me like we both worked at banks, pretty bank-like, right? If I have the ability to just unilaterally seize control in that manner.

And so, I think it's driving us to that discussion we had last week of what is actual decentralization. Right? And it's also going to drive home Ram's point of what is security. And you know, I've jokingly said before crypto is speed running the history of finance. Well, the thing they're speed running here is why financial regulation exists. Because if you think about the framework now, nobody individually has the incentive to spend money on security because that just detracts from like building products, marketing, partnerships. But if everybody has that cost imposed upon them and then all of them need to do it. And Yeah. That matters.

That was That was even more acute in the last cycle when all these protocols were spending their money on lawyers to figure it out they were going to jail or not because of their security or not. That was a huge problem. But But like at the same time, the answer is not to blame the victim. The answer is to is to call it out as is. We had a state in, you know, attack startups. Not That's no bueno, right? And And so, that's one thing. Ram, I'm glad you're back to trustless permissionless. I thought I lost you last week, you know, when you were talking about how everything has to be trusting and everything else. So, thank you for coming back. Um you made a great point on reversibility. Uh we still have that on blockchain when it comes to real-world assets that use transfer agents. So, you can have a

permissionless chain with the with the transfer agent that who that tracks who owns what. So, that's not the problem. And even with like stablecoins, we may not have reversibility, but damn it, we have freeze and seize. And to me, it all goes back to latency and then recovery. So, I don't think we're too far off, you know, your your TradFi standard as you spoke about, and I totally get it. I'll also tell you that I was at a certain bank um where they made a wire that was a very, very big, and it was erroneous, and the hedge funds who got it said, "Sorry, guys, it's mine." Uh and there was no reversibility. I think that ended up getting worked out through a settlement.

So, it's not that clean in TradFi, either. I think we can expect more of this of the ecosystem, though. Our Microsoft's not getting these hacks. You're We're talking about moving hundreds of billions of dollars, trillions in stablecoins. Like, the standards and expectations need to be sovereign immune and institutional grade. In fact, the ethos around digital assets is sovereign immunity. So, the industry, I do think, is accountable here, and people should expect more. It's been too long. I I'll say I agree with Ram on that one and would raise a couple of points that this has brought up, which is one, if you've got teams who are not actually decentralized and not taking security seriously, I am actually okay with them

experiencing consequences for these things. If you want to around and find out with other people's money, you should be prepared for the consequences there. It's very different than building your own software. Two, to Chris's point, which I think is totally correct, part of the damage of the wasted opportunity from 2020 to 2024 by US regulators was not laying down standards and expectations so that we could be interdicting this stuff already. Like, we're doing rulemaking now. We should have been doing this in 2021, and it was a dereliction of duty not to do that. Because if we'd already made clear that, "Guys, we count upgradeable smart contracts where you have control of the keys as control, the drift thing might not have happened.

Just to be totally blunt. Like that could have been off the table. And then three, we're going to need multiply redundant choke points cuz Chris, you were correct. You started this by saying it is a nation-state attacking a startup. And it is not a reasonable expectation for any small to medium, maybe even large company to be able to withstand that amount of force. We are going to need an ecosystem with multiple points where we can interdict these things because any one person will get compromised. It's much harder to compromise like three in a row. It's a tough situation, right? Security and centralization are often paired together cuz you have those gate points, toll gates, some actor that can

supervise transactions, edit the ledger. But the issue then is you give up the principles of decentralization and permissionless trustless systems, which are more porous to attacks. And regulation and compliance will have a tendency to go toward centralization and more security breaches. So then it's like, well, hey, what have we built here? If it's it's you're trying to straddle two different objectives. That's that's just been the tension that keeps building over the last five, six years. I think part of that, right, to take some advice from another domain, is we really need to reduce the attack surface in crypto.

If you'll notice, a lot of the hacks that have occurred are relatively complex like smart contract-based protocols here. Right? Or it's like literal wrench attacks. Those are kind of your two vectors here. The Bitcoin chain itself has not been successfully compromised or hacked. Right? If you have a relatively small attack surface in terms of what you're capable of versus the decentralization, you've actually been winning in many ways. And I wonder if part of the lesson here is that if we're going to start building incredibly complex stuff in a decentralized form. We need to have way better security standards before we do that, or essentially the techno-barbarians will win.

Well, to your point, it's been mostly social engineering, actually, not wrench attacks. It's social engineering, which it's it plays into humans and their vulnerabilities. So, you have a lot lot of AI tools coming on online now, which is going to be both beneficial and a massive challenge, like through the deep fakes that we're seeing. So, it works in both directions. I want to go back to protocol liability again, and I think if you're decentralized, clearly it's hard to be liable, but if you're centralized, you know, there's there's well-trodden laws. We talk about it all the time in this show. And like, if you're grossly negligent, that's a standard where you Yeah, you probably should should be accountable. Now, of course, these protocols don't end up like executing end-user license agreements with with folks, um, but I think there's some nuance here, right? If you're grossly negligent

uh negligible, uh negligent, sorry, uh you should definitely be held accountable. And by the way, that's the ideal sort of thing for Congress to pass laws on. It's like, where do the user rights attach? Who is responsible for what? Back to the push for clarity, among other things. All right. So, let's talk about another downstream effect of crypto on-chain commerce, which we're going to call Iran's crypto war machine. So, the IRGC has been working on some interesting stuff around the Strait of Hormuz, and has what I'm going to call a toll booth now, where operators can pay $1 a barrel to 2 million per supertanker in yuan, or allegedly stablecoins via Tron. So,

this will allow people to move through the strait. Um, the system allegedly is live and documented. I believe Bloomberg and Yahoo Finance have both reported on this. And the IRGC, as we know, moved 3 billion through crypto in 2025, according to Chainalysis. And the Ministry of Defense has begun accepting crypto for arms exports. So, Chris, I'm going to start with you here. Before we get to the second part of this, do we now have the dollar on both sides of the war? Is this like that meme of the missiles and the interceptors that is my tax dollars somehow also my tax dollars? Like, what's going on here?

>> Yeah. Yeah, the Iranians are just keep buying treasuries. That's what it looks like, right? And like we said, the dollar's taking over the world. So, it's a perpetuating the US dollar as a reserve currency. Even if you hate us, you're going to use it. Yeah. I mean, look, without um getting myself in too much trouble, um what if they were to keep Like, what are we saying? Great guys, buy even more stable Use even more stable coins. You Like, keep going. Yeah, it's a great thing to use. Use as many stable coins as possible. Uh accumulate them like crazy. And then all of a sudden, um overnight, we we freeze and seize. How How does that work? Now, of course, they're smart. They're going to move.

They're going to They're going to, you know, try to to bridge that over to to Bitcoin and other things, but let's remember like we have freeze and seize capabilities for stable coins. And like I I think if they really are going down that route uh in a sustained way, I think it opens up uh the IRCG to a lot of risks. And And that's one of the beautiful things about stable coins is that those treasuries are sitting somewhere. And that somewhere is a centralized accountability. And you know, FAFA, as you said, Austin, um and I think it gives our national security apparatus a very good vector not only to freeze and seize, but sometimes maybe they just watch it a little bit and see where it goes before they freeze and seize it. So, I um

I don't understand why anyone in their right mind who's a bad guy would use stable coins. Um what do you think? Do you agree with Chris? Disagree? You know, Iran, I think continues to surprise everyone. You got uh them producing Lego videos for every tweet Trump has. Now they're adopting crypto technology. Uh they're fracturing the US alliances. They're getting record revenues on oil. Russia and China tankers are getting through. China's loving the present situation. I think it's embarrassing. I think we haven't prosecuted this conflict effectively.

We're now approaching 6 weeks in. Iran is setting terms. Trump has moved delays to delay after delay from March 26th to April 1st to now tomorrow. Um I think uh the Pentagon is way over their skis here. They made some miscalculations. Um I'm disappointed as an American in how our leaders have executed and prosecuted this campaign. We still don't have control of the uranium. Uh they're shooting down American aircraft. It's embarrassing.

So I'll say couple of points here. One, I think it's very interesting that they're using USDT. I think as Chris alleges, people greatly underestimate the public part of public blockchains. I would keep an eye on that space and see what's ultimately going to happen there. I don't know that we'll seize it. I don't know that we'll monitor it. On the actual kinetic war effort, leaving aside the straight, I'll be honest and say the fact that we've had one aircraft shot down for all of the flights that we put over Iran is actually a pretty good track record and we got both of the pilots back.

I don't That part bothers me significantly less, especially an A-10 being one of the things shot down. Like I don't know how familiar anybody is with the A-10 Warthog, but that is a >> Warthog were destroyed. Warthogs were destroyed. Shot down like you can you know, the rescue operation that's in a Well, we'll come back come back to destroying rescue operation stuff? I'm mostly concerned about like live fire aircraft where the enemy destroys them. Right, which is to say that's an A-10. That's an F-15. Now, shooting down an A-10, low altitude, strafes you with a machine gun. And by the way, that thing's not a joke, but that is a infantry support vehicle there.

I'm not totally shocked you could get one of those. Getting an F-15 to me is a little bit more interesting. Like I'd be curious to know how that happened, what they shot it down with, and where those weapons were supplied from because that was not happening earlier. Yeah, is Russia supplying passive radar to the IRGC? And why aren't we pressuring Russia? Let me chime in a little bit here. So, I actually have a little bit of experience on these types of things. I was on the USS Kearsarge in 1995 when we rescued Scott O'Grady. So, I've I've observed first hand what we call back in the Marine Corps a trap mission.

It's the most complex mission, one of the most complex missions in all the military. Was it perfectly flawless, Rob? No, it wasn't flawless because we had some issues with with some of our birds getting stuck in the sand. But what did it do? First off, it really showcased and highlighted American values, right? We galvanized these people. We galvanized every asset. We said, "You know what? One of our people, we don't care. We're all going to sacrifice. It's the It showed the >> campaign. >> I know, I'm getting I'm going to get to that. I'm getting to that. Okay. So, we pulled off one of the most strategic, difficult Remember, when you have a pilot going down, they're flying in a little like parachute. Everyone's going after them.

The The weapon system officer uses Siri training. He evaded. He escaped. He did what he was trained to do. And then, while everyone was coming, it was a full government action. What it tells you is that when the US government wants to get something done, it typically happens. And And yeah, we haven't gotten it there yet fully in the straight of Hormuz, but we put every instrument in national power to recover that that that weapon system officer, and it really showcased our values, right? Gosh, what if every organization was that good, right? Put put your people first, rehearse like hell, accomplish the mission. Things you know, and of course, no plan ever ever survives the first shots. So, what do they do? They adjusted and they overcame and they got it done, right? So, to me that was a huge boost. Saw the president

talking about it today. Now, look, we talk about the different levels of war. We all want to see this thing uh get solved, right? And how does it get solved? The Strait of Hormuz needs to get open, but I'll remind you that it was an impossible position to begin with. These guys have been ravaging the global international community for the last 50 years. You know, they have killed numerous people. They set Look what they did with the mass in Israel. So, we had we had a choice, right? Could we tolerate that as they were, you know, accelerating their quest to get nuclear weapons? If they were nuclear armed, what position would we be in right now as a globe? You know, particularly with their ability to return, it would be a terrible situation. So, it's a bad situation. It was a It was a growingly

worse situation. You know, is this a Is this Is it great to be in a war? It's awful. But, where are we? If you talk to um former uh Central Command, uh I was listening to him on Face the Nation over the weekend. He said, "We're far advanced beyond our military goals than I would have ever expected." So, we forget how young this how how how how early we are in this exercise, you know? It's It's It's been what? Like 30-something days. It's It's hasn't been that long. >> Well, I mean, if you listen to White House and Pentagon, they're saying we just need two to three more weeks and we're pretty much wrapped up. But, you know, I would never Yeah.

>> But, as a military guy, you can never put a timeline. It has to be events-based, right? So, I I I I am very um there's no way I could ever criticize the the tactical actions of the US military. I think it's been nearly flawlessly executed. Not perfect, but but they just really very very long. They've been People have been held accountable. >> so that that So so the chief this is I just want to clarify when you relieve the chief of staff of the army it has very little to do with the fighting forces. Forces are fought by combatant commands. So Admiral uh Bradley uh sorry what's his name? Cooper. Not Bradley Cooper, sorry. Admiral Cooper, Naval Academy graduate. Uh he's the one fighting the fight right now. Naval Academy graduate uh doing a good job.

The the Secretary of the Army his job is to equip the forces which is a little bit different. So you have to like kind of separate fighting versus equipping and I don't know the reasons for that. But um you know if if they relieve Admiral Cooper that would be that would be a different message and it's not. So um long story short it is what it is. It's a difficult spot. We need to get that straight opened. Uh I don't know if if Trump you know we're not sure what he's going to do come tomorrow night. Is he going to take those bridges out? >> Out. Uh Right. Ron you're going to say no way. You think he's going to taco.

He's playing the ultimatum game. He he can't even taco if you want. He's trying to taco. But it takes two to taco here. He's trying to do the taco. He's been tacoing for weeks. No one's biting the taco. Right? He gave another delay and then another delay then the five days and now you know yet another delay. It's you know the terms are being set by Iran. Iran is saying hey this is what we need. We want a permanent ceasefire and we want compensation for damages. So there's a difference between objectives and those objectives are good or not and how effective is it in prosecuting. A lot of clearly like clearly a lot of miscalculations uh you know were made here and standards of conduct in warfare were tossed out the window.

Taking out uh leadership that you no longer can negotiate with. It's not club they know who they're negotiating with. Trump said that we can't communicate with them they can't communicate. So what what response are we expecting like smoke signals here? And what signal have we sent to China and Russia around how they might conduct warfare against Taiwan, Ukraine, or Washington, D.C.? We talk about values. We compromise our own values. That's not how you conduct warfare. What what what specifically are you referring to?

Well, just the manner of the execution of this campaign. There seems to be goals and methods and efficacy. Right? So, I think I think this is they could have approached this very differently and now What we're in pretend mode. We're in pretend extend mode. It's like, "Hey, I need 2 to 3 more weeks." They can't say it's one more week cuz that's that's unrealistic. They can't say 4 weeks cuz the markets will crash. So, they're saying 2 to 3 more weeks. It's dog ate my homework and then scramble and try to put Humpty Dumpty back together again. And Trump himself today had said, he said, "Look, the Iranians IRGC and me were clear, simply needs to say that they laid mines. Whether they did or didn't, it

would close the Strait of Hormuz." So, the Pentagon's trying to prove a negative now. We're trying to prove there's no such thing as a black swan. Very hard to prove that. Part of what's interesting to me is the disconnect between the methods used versus Trump's rhetoric. Right? Because if you look at the way the war has been prosecuted, like at the tactical level as Chris was talking about previously, we've mostly dominated. They've shot down what? One, two planes? Um we bombed our own equipment to prevent it from falling into their hands. American casualties are minimal. A lot of Iranian war fighting infrastructure is absolutely zeroed right now. But Ramaswamy, as you

pointed out, we've also systematically eliminated a majority of their leadership. That is not the sort of war you would normally fight to negotiate in the short term. That's the kind of war you would prosecute to exhaust the enemy and force them to surrender. Right? So, that is a certain sort of plan that by the way, if the US rhetoric from Trump was we're just going to keep bombing you until either we you give us what we want or there's none of you is left to bomb, in some ways it would seem more aligned because that is more what the military is doing. >> more consistent. Correct. Trump Yeah, Trump is trying to send a very different message verbally about we want to negotiate, we're looking for a solution, we want the strait open in the short term. And it it

makes me question one of two things, right? One is is there a lack of coordination internally within the United States or two, because Rob, you said this earlier, so I'm just going to throw this out there, does Trump know he's full of it and primarily what he's doing is talking in a way to try to keep markets up? Oh, of course he's keeping markets up to buy time. Look, there's there's no love lost for the death of the Ayatollah, right? It's a despot. The the people deserve better, of course. The Strait of Hormuz shouldn't be controlled by a regime that seeks nuclear weapons and wants to inflict harm upon its neighbors.

Of course. Like we all get that. Okay? But this isn't going well and the public's being misled. I think it's kind of obvious. It's very obvious. Monday of last week Trump was on the tarmac saying we've got 12 points of negotiation and alignment with with Iran. And now Iran is issuing their own terms and we're doing pretend and extend again. Like this hasn't gone well and it's Hexa takes off for 9 days without any press updates. Uh they they haven't acknowledged where they could have done better.

You know, uh it's it's a weird situation when as an American you believe the Iranian characterization of the status of negotiations, which is that they're not happening and you don't trust the Pentagon. And they fired the former head of the Pentagon spokes- the former Pentagon spokesperson who had some credibility, too. The Pentagon still has an unaccounted for trillion dollars in spending. Now they want 500 billion dollars for more to get into a war, then they have to go to Congress and ask for funding to deplete munitions. We've burned 10 years of Tomahawks.

10 years with the Tomahawks. And now we need to get a ceasefire because we're offsides. This is a This is like a C- minus execution effort. >> So So what do you do, Ron? What you do is you hold your public leaders accountable. That's what you do. That's what I'm doing. And that's what we have. We have elections coming up, right? So that's the point of democracy. And again, the the strategic level of war will be controlled by those elections. I think tactically it's been a really well prosecuted campaign. Um and look, I I think in any conflict, there's always things you could do better. Could we have galvanized our uh allies better to to to get them on

side earlier? I think so. Um but I guess my question is, what do you do? Like it's easy to critique the past, play armchair quarterback, but like what do you do from here? I agree. It's a cluster. It's a cluster. I don't think everyone's recognized the kind of cluster this is, okay? My main point is to highlight and recognize that. That's my main It's To say that it's a cluster is a non-consensus view right now. That's my main observation. Let's identify the issue, then we can focus the focus on the issue.

So you're bullish crypto again? I was going to say we're we're back to long Bitcoin. >> Speaking of non-consensus, we back to I bullish again or what? Hold on. Hold on. Come back to me. Before we go further on this point, I want to talk about some other information, which is what do we make of Polymarket having bets on whether the F-15 pilots would be rescued? Um Obviously, some people were upset. Representative Seth Moulton, a Marine vet like Chris, was out there exact quote this is disgusting and shamed Polymarket into publicly removing the market. There's a number of other war bets still active on the platform though.

I think specific lives versus not is a reasonable ethical and regulatory discussion to have. Polymarket issued an apology saying it should not have been posted and quote we are investigating how this slipped through our internal safeguards. What do you guys make of that one? I will jokingly say great ad for Kalshi but other than that. I I think it's going to get harder to control these markets as they decentralize. And it's something that people are going to have to be mindful of um I I yeah I don't there's a lot of things that should not be a market. People's lives, anything that could endanger um you know I'm a military guy. Anything that could endanger military forces I I no it's no it's not good.

And so you hope that these people either self-enforce or that there are laws passed to prevent them from from listing those markets. I do think it's going to get worse before it gets better you know as you see I mean we're I've been in venture for a long time. How many prediction markets come across your desk now that you have you know a couple guys that are doing quite well. There's hundreds of them and they're all going to try to find an edge and a differentiation. If one is like hey I'm free crazy town like anything goes you know that could be their edge and I just hope I just don't want to see that. Agreed.

All right. So we'll be back in a little bit to talk about token fundamentals speaking of investing in venture capital but before we do that let's take a quick commercial break. Bitcoin changed how money works. Citrea changes how Bitcoin scales. Citrea uses Bitcoin as both the settlement and data availability layer. As Bitcoin's application layer Citrea enables the first trust minimized BTC on a fully programmable platform and a native stablecoin for Bitcoin, CTUSD.

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sure you're following Bits and Bips directly. We won't start publishing until March, but getting set up now means you'll be ready on day one. You can find the new Bits and Bips channels at unchainedcrypto.com/bitsandbips. You can also find us by searching Bits and Bips on YouTube, Apple Podcasts, Spotify, or wherever you listen. All right, everybody. Welcome back. Uh we've titled our next segment the {quote} token fundamentals crisis. So, the headline is the market cap chart looks fine, but the per token chart does not. So, Mike Ippolito from Blockworks uh has a great thread on this on

Twitter, but 750,000 tokens created since 2020, market cap per token in free fall, the median token is down 80% from the peak. The average coin is only slightly higher than where it was in 2020 and down 50% from 2021 to quote the thread. So, revenue is also decoupling from returns. Um in 2021 on-chain revenue and token prices moved together pretty tightly. Post-2021 revenue has recovered in some cases and prices didn't follow.

The reason why, {quote} revenue growth rarely became token holder returns. Investors can't trust that protocol success flows to them. And this is new. Even in the best revenue periods, token appreciation didn't follow this time around, so the transmission mechanism appears to be broken. There's also the structural problem of dilution at scale. There were roughly 5,000 tokens in 2020. There are 75,000 major tokens today. Supply has grown much faster than demand or value creation. And inflation being a known issue is a problem, but now protocol founders living in this environment and knowing these dynamics are not being honest about their token valuations.

So, there was a call to action, which is this is the biggest issue in the industry today by a long shot. Tokens are why 90% of us are here. And the demands were standard transparency metrics driven by exchanges, protocol founders to make disclosures, and investors not to buy tokens if the fundamentals don't support it. The end quote was if we don't fix this soon, the only path I will see is to leave and go to finance. So, Ram, you're an investor. What do you make of that sort of rhetoric? What do you make of that sort of threat? I would assume you are not super long altcoins here.

You set it up well. There's too much issuance. It's a basic issue, and there's lack of liquidity. There's fake marks, thinly traded markets, lack of I mean, you nailed it. Those are all the issues. They're the issues. You know, I At the same time, there are some names that look interesting now, though. I don't want to name them because they're too small market cap. So, yeah, there could be some opportunities here. It There's so much headline risk in this market that it really does matter day-to-day. We could have a different view 3 days from now. Like, everything turns on what happens Tuesday night APM.

That's That's just where we are. But, you know, sentiment is is locked up. Yeah. I I saw Ippolito's tweet. I think he completely misses nuance. I don't think there's too much issuance, and I'll tell you why. Because what are we talking about here? It's like somebody saying, "Oh, is is this I had an investor come up to me. He's just like, 'Oh, tokens. I don't like them.'" And he just He was alluding to there's too much issuance, right? I'm like, "You know what? Well, I don't like ETFs either." And he's like, "What do you mean?" And I'm like, "Dude, it's a wrapper. It doesn't matter like like if there's too many tokens or too many ETFs. It's about what's inside, right?" And like a lot of people miss this nuance. You can create a token out of anything, anytime, any place,

anywhere, very cheap, almost for nothing, right? Of course, it's going to be zero. Are you going to start to say, "Guys, enough. Like, we can't issue any tokens anymore. Um there's just too many of them." Like, I just don't buy that argument. What I do buy is that you can take value and you can wrap it in a token. And what does it do? It gives you utility. What is that utility? Anyone in the internet can access it 24/7. You can put private property into the internet and you can mobilize at any time, right? And so, like, I just this this argument drives me crazy because a token is a wrapper. You can wrap energy, you can wrap compute, you can wrap um all different types of stuff. You can wrap stocks, you can wrap bonds, right? So,

it's about what's underneath. That's what matters. And yes, fundamentals absolutely matter. And every single token project, you have to understand the fundamentals, what's underneath the hood, and that's what you underwrite. And yeah, there's some really exciting crypto-native token projects right now. Um, ones that we're super excited about. I'm not going to go into the names, either. But, um there's also 99% of it's slop. And it's just going to continue to bifurcate. So, I don't Give me more tokens. I don't care. I'm going to try to find the ones that have the value.

So, I'll say for my part, having looked at this and thought about it a bit, this is probably one of those arguments where more granularity really helps what we're looking at here. Because if we start segmenting the token universe, like, the fate of most, if not all, meme coins is probably over time on average towards zero because these are sort of cultural point-in-time things. And if you look at all goods of that sort, most of them trend towards zero. Or you have the handful with historical significance that end up in a museum. There's kind of never like a middle ground on many of those things.

But, Chris, to go the other way, if you look at protocols, I think there is where what might be happening is people are looking at the wrapper that they have around these things and being like, "Wait a minute. We have no legal rights. There's unclear governance rights. And in some cases people are taking cash flows we expected to be directed to us and directing them elsewhere. Like I think it would be a fair criticism to say at least some of these projects you unwrap the thing and what was inside of it was Right? Because if I don't get the cash flows, I don't have meaningful governance rights, and I don't have like legal ownership, what do I have?

A token. And obviously that leads to differentiation within projects, and it also matters how it's structured. I'll go back the other way and say that's the same question we also ask of equity, right? Let's take two examples in the crypto space. There are many people who probably feel very differently about Coinbase stock versus Gemini stock for a number of reasons, but one of the big ones is who has control over those kinds of things. And so I think there's an investing component here that has been undervalued by the crypto community in the past where the chickens are coming home to roost. This is probably one of the good things of institutional investors coming in, and part of what I take from Mike's thread is we either need to do significantly better

at creating value for the token holders, or maybe on some of these things the rational price is zero. And that's just market discovery. But then as a final point, let's go to the L1s. Cuz if we really look at market cap decline, many of the things at the top end of the token and space pulling these numbers down were L1s. And I think part of what we're learning here, and this is an investing lesson as well, is potentially that fat protocol thesis was wrong. Right? It's many ledgers, many options, and it's not clear to me that the value accrual is going to be to the ledger platform as opposed to apps. So, Chris, I want to throw this ball back to you first. If

you're investing like out of nowhere starting a new right now in the crypto space, are you buying the L1 thesis or are you looking at apps? I I think you're spot-on on the fat protocol thesis. Um is there value that accrues to layer ones? For sure. And you have to underwrite that differently. Um in the long term, could you see a lot of value accruing to the apps themselves? Yeah, and I think that's consensus at this point. Uh part of the problem is is we haven't seen a proliferation of like very, very successful apps. There's been a handful, um and they've done pretty well. Um you know you we we can go through some of the names if you want, but um yeah, I I I

Look, you're seeing a proliferation of blockchains. You're seeing a proliferation of of the permission private blockchains. Corporations are having their blockchains as well. And so, what are what are layer ones selling? They're selling block space. And is that a commodity? Yes. And And so, that's one way to track its value. I agree that apps are where a lot of value discovery's going to be. And then look, on the token versus equity debate, it like most things, there's nuance. How does the value accrue to each of them? And you really need to spend the time with the teams and the code and and really understanding uh the the value accruing governance mechanisms. And And it's not easy to do. It's not easy to do at all.

Ram, where would you >> I would I'd agree. I'd agree. And the the layer ones are like in a Hobbesian struggle, nasty, brutish, and short, no value capture. Maybe there's one L1 that has an interesting differentiation here, but I think yeah, I think the app layer there's some opportunities there you can do the work. But you so many names have been sold off that there's uh some babies been thrown out the bathwater there. So, I think if you do the work, can time it well. I don't think you have to rush. Think you have some time, just because the macro backdrop. Just You can be patient. Just do some work now, do the research, get a short list, and then maybe in a few weeks when the dust settles, there's something things you can look at. I think you're right.

I think you're right. I think a lot of fundamentals have been uh developing behind the scenes, but you just have like macro with like a boot on the throat of these of these projects um until the macro issues abate. Which I hope they do, Rom. Well so Certainly then, like it is a buyer's market for tokens in that regard. I would say Rom, I'll put this one back to you as I've been looking at the space and sort of thinking about it. The small subset of tokens where you have real users, durable revenue growth, feel to me like the kind of space that we should be looking at. And what I mean by that, Chris, I think you were making a variety of this point earlier,

is that a lot of people have built a lot of things in crypto that were, for lack of a better way to put it, the thing they wanted to build. Many fewer people have built the thing that the users wanted, but all of them have traded kind of in the same vein. Rom, without naming names, am I right that the things you probably find valuable are in that universe of actually accumulating >> know them, okay? The things that have true product market fit, that have real value to the end user with good teams, built the right way, we know them.

Yeah, it's 75,000. We talked about tokens issue. It's 99.9. It's 99 with like 10 nines that you can just avoid and skip. So, you know, there there will be uh I think there will be a kind of a phoenix rising from the ashes in some names that we already saw achieve good success in the last uh in the recent cycle that I think uh can continue to do well, where they maintain a community and ecosystem, and still executing well. Part of Part of what I'm also finding interesting is some of those gains potentially, for lack of a better way to put it, moving either into more regular companies or the traditional financial space. Like one of the big winners here

is potentially Stripe. Right? As they're working on everything stablecoin related. I wrote in my newsletter about how one of the crypto projects with the biggest actual KYC'd user base is MiniPay, and that's not a thing that's traditionally investable at all, cuz some people just wouldn't built it out of Opera. And so, to me, there may also be the disconnect of which of these are investable right now, but your point is the market accelerates and people see what works. You would want to put capital back to work. Ironically, in a downturn is probably the best time to be venture investing.

Agreed. Yes. So, speaking of former venture investors, um and things that have happened here, Franklin Templeton has bought 250 Digital, a liquid crypto strategies firm spun out of CoinFund uh to help launch Franklin Crypto. There's a guy we know named Chris Perkins uh who is going to head Franklin Crypto. I think Seth is also going with you to become CIO of the new division, if I'm correct, Chris. That's right, yeah. While I have a lot of things that I could talk about here, obviously, you are the expert on this one, not me, so I'm going to shut up for a bit and ask you only this question: What is 250

Crypto? What are you going to be doing with Franklin Templeton that you could talk about? And what are you excited about here? Uh thank you so much, Austin. Yes, so uh Franklin Templeton on April 1st, uh this was not an April Fools' joke, it was very, very serious. Uh they announced the acquisition of what we call 250 Digital Asset Management, uh which really encompasses uh the liquid strategies uh from my current funds. And so, uh the team and the strategies are moving across. Uh we look forward to closing the transaction very soon. Um and I'll be honest with you, I couldn't be more excited. Um we are in an institutional era, and we all know this, right? And in the asset management space, it's my desire to

provide very, very scalable outcomes um for our clients. And if you look at a company like Franklin Templeton, again, led by Jenny Johnson, they been like um I would say institutional OGs. They've been around since 2018. Um Sandy Call, she's been a dear friend of mine for for years. We actually got into crypto together back in Citigroup way back in the day. But they've set the tone from the top, and they really want to differentiate. And now as we see, you know, all of the the foundation come together for institutional adoption, when you look across the entirety of institutional clients, the pensions, the endowments, the corporations, they have a lot of risk right now because they know they need to be into

this in the space. They don't know how, and they need our help. And I couldn't be more excited to provide scalable solutions for these clients. Um what are we going to do? We're We're going to bring in uh the best talent in the world. We're going to solve the problems for our clients. You're going to hear a lot of subsequent announcements out of us. And we're also going to lead with controls, and I know it doesn't like people don't like to talk about this, but we talked about the hack in the beginning, right? We have to solve for those risks. Um you know, as you start talking to the com- clients, the legal, the risk teams, that's one of the biggest differentiators there because institutional investors need to know that those those parts of the system are the most robust. So, leading with controls, leading with people, um and

then of course solving our clients' challenges. So, I couldn't be more excited. Um you know, thank you to the CoinFund team, uh and uh the team couldn't be more pumped up uh to get to work. All right, let me throw a ball at you then this one. >> All right, let's go. Batter up. What is this thing about Benji tokens in this transaction? Say more. Oh, I think in the announcement what they talked about was that the the um they would they were using uh the money market fund to help fund uh many of the costs of the transactions, which is uh just pretty cool.

Um so you kind of got to uh how do you say? Eat your own cooking. So we're eating it uh and it's it's it's awesome. Um um you know, again, whether it's it's that strategy or any other strategies, you know, we're we're really excited. Who will the offerings be marketed to? Is it high net worth, IRAs, institutions, all the above, or is there like a focus customer segment? Uh I I think the answer is is yes. Um as you can imagine, the company uh facilitates um investment solutions for all different types of of of uh clients across the board. Their needs are nuanced and different. I think in the medium term you're going to see much more um you know, just speaking for

myself, customizable vault-based solutions for various folks where you're able to take in a lot of data, digest it with AI, and then create something very bespoke and customizable. Um but each client's going to need something nuanced and different. We have flagship strategies. You talked about the money market strategy as well. You're going to see other very institutional scalable strategies come out very very soon where we're going to solve their needs. Um you know, our goal is to be the leading active investor in the crypto space uh leveraging all that distribution and resources that Franklin brings to bear.

So for those >> I was going to say for those who are not totally familiar, by the way, Franklin is one of the earliest uh tokenized money market funds. Chris, I think it may be number two behind only Arca, who was the first. And there is a whole app and they've been working on a lot of SEC relief so that you can actually use the token to peer-to-peer transfer it. You can exchange it at a $1 value and essentially I I'm going to say something that the crypto people need to pay attention to. Use this thing as a stable coin.

Right back to institutional standards and institutional builds. You have a regulated 40 act government money market fund here being used as a money instrument which to me when we're now at the point where you can do M&A transactions using those sorts of assets now we're moving what is relatively traditional financial activity onto a blockchain. That's not D5. That's just block. True. Right? That's the thesis. Yeah. Love to hear it. Sorry. No, Franklin Templeton has been super impressive. I mean yeah. Jenny Johnson to your point she's been leading on tokenization.

She's she's way ahead of her peer group and she's the CEO of the company. Like that's the leadership and sponsorship coming from the top. She's leading the charge. That that means a lot. Yes, she I don't know if you guys know she came up the ranks through an O&T background. She was she led technology. So like it's ingrained culturally it's ingrained and she saw it early she got it. And then Sandy calls as well. One of the biggest brains in Wall Street and she's been talking about the transformation uh you know for years and I've partnered with her in the past. We've done some of like we've had so much fun building things together building big things big traditional things together.

So we're kind of putting the band back together in a way and it is going to be amazing. Well congratulations Chris. I'm happy for you. We look forward to hearing more and seeing more of the headlines and discussing them on this show. And by the way, let's get Sandy on here as a guest sometime. >> Let's do it. With with that as our final point today since I know we're at time, I will say thank you once again for joining us for this episode of Bits and Bips. We'll be back in 1 week to discuss more about how the worlds of crypto and macro are colliding. Until then, everyone.

Terrific. Have a good one. You got it, guys. Cheers, guys.