Bitcoin Focus: Caitlin Long 2018- Financialization, institutional investment, banks, privacy, more!


Hello everyone this is adam meister the
bitcoinmeister the disrupt meister
welcome to the bitcoin focused show
strong man all right we’ve got Caitlyn
long for you today when she was first on
then this week in Bitcoin show a year
ago this is just a focus on everything
she said for all you people with short
attention spans it’s only 25 minutes it
cuts out all the fluff is just pure
knowledge from Caitlyn long check it out
pound that like button see yeah sure
thank you it’s great to be on your show
financialization is a word that to me
brings negative connotations I realize
that’s traces 6 Network effect and he
and I were talking about that before the
backed announcement came out which is
the first real move to using physical
bitcoins again I know physical kind of
you’ve got to put in quotation marks
that’s the financial market term to
distinguish between synthetic which is
all cash base and physical which is
actually settling in the underlying but
but financialization a lot of
financialization is bad so you really do
have to be very careful to distinguish
between the good and the bad type
financialization is basically what Wall
Street does for a living and and Wall
Street creates regularly creates as
standard operating procedure more claims
to an asset than there are real assets
that’s that’s financialization and of
course the Austrian school economics
folks among us would recognize that as
what Mises would have called circulation
credit and I need to distinguish here
good financialization includes the
regular one for one backed debt there is
absolutely nothing wrong with debt
there’s absolutely nothing wrong with
wrong with coin lending as long as it’s
100% backed by the real on chain coins
when you start to actually have off
chain claims to Bitcoin that are sold as
if they’re Bitcoin and they’re no longer
linked to the to the actual blockchain
itself that’s when you start to get that
circulation credit creepy
and that’s the bad type of
financialization I called it leverage
based financialization another way to
call it as uncovered claims to Bitcoin
that are not 100% backed by real Bitcoin
there are lots of ways that Wall Street
does this it’s very insidious and
because of the way the accounting works
auditors don’t even catch this either
it’s something that builds slowly over
time and unfortunately I think it’s
probably coming to Bitcoin all right now
that’s just stairs everyone right there
that last line unfortunately it’s coming
to Bitcoin yeah but how about it you can
keep track of it on the blockchain you
can require these companies get out a
public address you’re saying they’re
gonna be able to get away with this
somehow nobody’s doing that right look
at the products that are already out
there involving physical Bitcoin look at
gbtc look at ledger X are they
disclosing public keys nobody’s doing
that I think that Nick Bhatia wrote a
median post and I get my hat’s hats off
to him saying if we really want to do
this right and you are gonna be
commingling Bitcoin in what’s called an
omnibus account instead of holding it
for individual customers on Wall Street
you really need to be disclosing those
public keys and and I’ve been saying
that to the regulators to use the
blockchain to your advantage you can
track this stuff and verify that there
are no shenanigans happening behind the
scenes because GAAP accounting is not
going to pick this up which means the
auditors are not going to pick it up
either all right now okay so bad
financialization it’s coming but let’s
good financialization is also coming
yeah okay sure it’s already here it’s
already hit so this is we got a look at
both sides now again we people are gonna
say all of it wasn’t meant for the
bank’s Bitcoin wasn’t meant for the
bank’s we can’t stop it it’s a done deal
they are coming they’re not the Messiah
they’re not the devil either because in
the end of the day if there is a big
custodial hack one day if there is this
bad financialization I think people will
demand that you know the pub
keys are revealed are given out you know
right right I mean from what you’ve seen
here I mean you’re involved on a lot of
levels on Wall Street here do people
even understand uh what a public key and
what a private key is are they or are
they just getting into this for greed
well the people on Wall Street are well
and then regular users to its if there’s
a lot of there’s a big learning curve
here there’s just a bad look I think the
early adopters of Bitcoin clearly
understand what the difference between a
public key and private key is hats off
to Andres Antonopoulos and others who
have been saying until they’re blue in
the face you don’t own your Bitcoin if
you don’t control your private keys but
Wall Street isn’t built for that Wall
Street is not built to handle bearer
instruments they haven’t handled bearer
instruments since you know stock
certificates went immobilized and D
materialized those are the words that
the lawyers would have used in 1970s
right so now you’ve got not just fairer
instruments but digital bearer
instruments The Wall Street’s gonna have
to start managing when it’s stealing
with physical bitcoins big distinction
by the way the cash-settled contrast I
don’t care about those because the Fed
can always bail out an institution if it
gets in trouble with cash-settled
futures contracts and the like but the
physical settled Bitcoin futures that’s
different because Wall Street has to
touch these physical bitcoins and we all
know what’s happened how many hacks
there have been in the custodial
exchanges there are there is not 100%
security in those custodial exchanges
for the most part even even when there
was a big run on coinbase a couple
summers ago everybody survived it right
and that tells you they’re not really
playing three-card Monte behind the
scenes we hope but we have no way even
with those custodial exchanges to know
whether they’re playing three-card Monte
they don’t tell us what what their
public key addresses are all right these
are we’re talking about billion dollar
tremendous companies that are gonna end
up with these custodial accounts because
everyone is so many people out there
only are gonna feel comfortable
to own Bitcoin through these traditional
financial mechanisms which is again you
just said andreas gets blue in the face
screaming you know control your
private key right that’s only what you
own it is vital people don’t get that
does they’re not they don’t get it and
that was so anyway they these big
corporations are gonna become Bitcoin
banks okay yeah and these cuz what even
though they are the richest corporations
on the planet are they going to be able
to have an unhackable account unhackable
custodial organization or is one of them
eventually gonna get it’s it’s a
honeypot I know you can tell where I’m
going with this
I think worse I think one day if there’s
good one thing bitcoins gonna be worth
$80,000 and one of these things is gonna
get hacked and it’s quarters it’s gonna
be something like we never seen ugly
absolutely and and the size are just
just having this conversation yesterday
with some important people in the
industry the size of the Wall Street
firms compared to the size of the crypto
exchanges we’re talking about very
different zip codes here because Wall
Street is mass market and you know the
crypto exchanges it’s the early adopters
maybe some of the early majority that
are you know that have been involved I
think in the you know in the in the big
bubble that happened at the end of last
year you know coinbase was opening
something like a million new accounts a
day right a lot of those folks probably
don’t understand they don’t really own
Bitcoin they own an IOU from coinbase
right but but the magnitude of the Wall
Street money that’s going to be coming
in here is a different zip code because
it’s institutional money and that’s
that’s why this is it’s so important to
get this right and to your point I am
reasonably certain that one of these
guys is gonna get hacked
virtually every custodial exchange has
already been hacked and I will also say
the engineers who are in charge of those
custodial exchanges
they’ve been tried by fire the engineers
of the big Wall Street firms I worked
there for 22 years very familiar with
how they work and how their how their
tech platforms work they have not been
tried by fire and that this is not a
skill set that Wall Street technology
platforms have which is managing digital
bearer instruments so IIF I were forced
to keep my bitcoins at a Wall Street
firm versus a custodial exchange like
and I are Crafton or bit trucks I’d
rather choose one of the latter because
they’ve been tried by fire for four
years and the Wall Street firms have not
and they’re going to be doing this in
very large size and the thing that
really bugs me I’ll be very very clear
about this taxpayer-backed
Wall Street firms should not be
leveraging Bitcoin and it’s gonna happen
and that’s what and it’s gonna burn them
Wow
pound that like button everyone we’re
getting some real honest talk here and
again I I want to I want to point out
she you made a very interesting point
there you’re comparing two different
types of custodial accounts the ones
that have been tried by fire the coin
basis of the world and then the future
ones that are gonna be controlled by
these tremendous organizations and it
all sounds scary but remember people you
can avoid all that simply by getting
your treasure or your ledger nano and
controlling your own private key I mean
it is it you this all sounds scary what
she’s saying but the simple answer is
control your private key and then you
don’t have to worry about these
shenanigans sure there’s gonna be a huge
hack one day there’s going to have hurt
the Fiat price of Bitcoin you all have
to be comfortable with that fact that
one day there is going to be a
tremendous hack like you’ve never seen
before that’s gonna freak out the
mainstream world but you still have that
you will still have the same amount of
Bitcoin all right well they’re never
gonna be 100% comfortable with it I
don’t think anybody who uses it is 100%
comfortable with it right it’s to be
honest because it is scary it’s a
digital bearer instrument and you’re
always worried that something’s gonna go
wrong or that you’re gonna get hacked or
you know kidnapped or something right
that’s digital bearer instrument
inherently have higher risks that you
have to take responsibility for but but
but yeah Wall Street is going to react
Papa Cato the perfect example of this is
Citigroup announced this week that it’s
going to be creating depository receipts
for Bitcoin ok depository receipt is
just a it’s just basically like a little
trust account that’s gonna hold Bitcoin
and it’s going to clear and settle
through the Depository Trust Company we
haven’t mentioned them yet but basically
that’s where a lot of the sloppy
accounting takes place in Wall Street
that allows a lot of the
counting systems to get out of sync with
one another and the big example of that
is the old food case right right where
one-third more shares were created in
Wall Street’s accounting system these
were valid legal claims to dole food
shares that didn’t exist and that
happens through the DTC and so when I
saw that Citigroup is doing this
depository receipt with the DTC I just
left because we’re trying to fit the
square peg into the round hole
and there are going to be accidents here
the DTC is not set up to handle clearing
and settlement for a digital bearer
instrument and you know if anybody wants
to set up one for one non non leveraged
back non leveraged based
financialization bitcoin godspeed right
that’s what all the cryptocurrency
exchanges have done and you know it does
appear that they’ve survived the run on
the bank the big exception of course to
date of wealth couple of amount GOx of
course but okay Y X most recently did a
bail in that you know that if you’re
playing around with leverage with with
cryptocurrencies there is no lender of
last resort and so you really do need to
be careful who you’re doing business
with because there isn’t anybody to bail
out those those crypto entities what’s
different about Wall Street firms is
that the clearing and settlement
infrastructure is fundamentally designed
to lose track of who really owns what
and that there’s fault-tolerance Patrick
Byrne refers to at John Kenneth
Galbraith phrased the bezel in Wall
Street and it’s there and and it’s not
it’s not necessarily purposeful it’s not
necessarily nefarious it’s just inherent
in the clearing and settlement
infrastructure so now Wall Street’s
coming and saying well we want to put
Bitcoin into our clearing and settlement
infrastructure to use Jameson laughs
phrase Wall Street needs Bitcoin more
than Bitcoin needs Wall Street I’m not
sure I agree with that because one of
the one of the big Wall Street folks
with for whom I have tremendous respect
put it this way that Wall Street needs
to solve bitcoins scarcity problem they
look at that 20 million 21 million cap
and say that’s a problem we look at that
and say that’s
future that’s a feature not a bug they
look at it as a bug right and so by
creating these unpacked claims that
people think are real bitcoins and
passing them off as if they are they are
going to bring more supply that is why
the price of Bitcoin dropped on the
backk announcement I believe there
wasn’t a lot of other news in those
first couple of trading days and the
price went down 20% on the backed news
because markets this is the wisdom of
crowds markets discount future
activities when they’re announced into
the price of anything on that day and
what this is is a license from Wall
Street to start creating unpacked claims
to Bitcoin and in their words solve
bitcoins scarcity problem I don’t think
it’s a problem but they do that that
they are going to be creating they are
going to be artificially increasing the
supply that is their business model they
are going to be creating unpacked claims
to Bitcoin through all these various
insidious mechanisms like
rehypothecation like margin loans at
less than a hundred percent like
collateral substitution rights in
clearing houses where you can’t you
don’t have to post actual Bitcoin you
can post Treasuries of cash on your
exposures there are ways lots of
different ways that that that unpacked
claims the Bitcoin are going to start
leaking into the system and their
inherent in the clearing and settlement
infrastructure of Wall Street this quick
addition one of the things that would
keep Wall Street honest that would make
me say yes you’re doing this right is if
they actually offered clients as you as
she said a right to settle in physical
you talked about it we could just
withdraw our bitcoins the problem is
with the ETFs and with the futures
contracts there is no right to settle in
physical what they when you sell they’re
gonna pay you cash so if they actually
did give you the right to settle in
physical which I completely agree they
should and would be easy to do then it
would keep them honest and I’d be a lot
more comfortable I would agree that the
challenge though of course is that the
institutions like pension funds and
mutual funds will naturally want to buy
a Wall Street version of Bitcoin because
it’s because they want to fit it into
their clearing and settlement
infrastructure right they don’t want to
have to deal with holding their private
keys
the huge pension
it’s like the CalPERS of the world
absolutely could they have a capability
to do it the big hedge funds are doing
exactly that but most institutional
money is going to buy the Wall Street
version of the product and to quote Jim
Jim grant from his wonderful essay that
was printed on the 10th anniversary of
the financial crisis talking about ETFs
being the tail that wags the dog
proverbially he said look no one knows
what’s going to happen when there’s a
rush for the door in an ETF and if
indeed we have these unpacked claims
that I strongly suspect are have crept
into ETF all over the place just because
I know how Wall Street’s accounting
system works and you don’t know this
until you have a reckoning event you
couldn’t have told how big that bezzle
was in the dole food situation until
there was a merger I experienced it in
my pension business at Morgan Stanley
until we actually tried to transfer all
of the bond portfolio from the pension
fund over to the insurance company that
was providing annuities to the
pensioners and we were freezing things
in place so the musical chairs stopped
we did not know that there was
unauthorized securities lending
happening in that account that it was
not discoverable until you have that
reckoning event and what Jim grant is
talking about is these reckoning events
are going to be ugly and and you’re
gonna see a big collapse in the price
and the tracking errors on those ETFs is
going to be massive I think he’s right
but I but none of us can prove it
because with only a few limited
exceptions
we really haven’t tested the ETF market
yet yeah I looked at the Vanek solid ex
filing with the SEC for the ETF and
you’ll be interested to know I have two
beeps with it the big ones are that the
that they say nothing about custody
there’s literally one sentence in there
that says the trust has warning
exactly and they say nothing about
whether they’re going to be lending it
out there’s just nothing disclosed about
custody and the other beef I have with
all of these wall street products is
they’re not making any commitments on
Forks or airdrops
yep so you know what are you really
buying I I was joking with a regulator
or speaking with recently that I’m an
attorney but I but I’m non-practicing I
might reactivate my bar membership and
start suing fiduciaries for buying some
of this stuff because there’s no promise
in that it’s being made to the investors
where is the investor protection in this
stuff when there’s no compromise
okay then question for you though so
what type of commitment would you expect
so you know I think that’s a very
difficult thing to to expect from an
institution regarding the fork so what
would you well it is interesting I would
most like gbtc is the best one of the
ones I looked at including the the
synthetic ones the CBOE and CMI futures
which are cash settle I was merged in
the physical settles because they have
to actually deal with it as opposed to
just try to track it synthetically but
but gbtc is the best one it actually is
the most specific I think they if I
recall right they actually are doing
they said something about whatever it’s
the longest chain within 48 hours but
but one of the big but not all the other
ones including panic essentially just
says the Vanek solid x application says
that our risk and management committee
will consider the appropriate course of
action so basically there’s not you have
no enforceable legally enforceable
promise
you point out exactly the same thing is
true in these other ETFs for other
scarce assets like gold and silver is
EC’s job is investor protection and the
you know sun sunlight is is the is the
best cleanser and they don’t require
disclosures on on some of these things
and and again the thing that’s so
amazing about blockchain is we’ve got
the actual public chain why not use that
technology in forcing disclosures of
public keys so you have a verifiable net
asset value or you can verify that this
you know your
your your financial institution is
indeed not playing three-card Monte with
your own coins behind that behind the
scenes and again I want to underscore
I’m not against banks I’m not against
and I completely agree with your
statement earlier that this they are
always going to exist it’s the planning
of the three-card Monte with the client
assets that’s the long term can they
manipulate the price no long term nobody
communicated Bitcoin they definitely can
short term I think they already have but
but no bitcoins gonna win it’s too
decentralized they can’t control it they
and anybody who really tries to play
three-card Monte to trace this point the
community will just fork them and and
and reveal the magnitude of the
insolvency of the financial institution
this gets back to my earlier very strong
statement any taxpayer backed a Federal
Reserve back financial institutions
should not be leveraging
cryptocurrencies well yeah they’re
definitely interested in etherium so
that’s coming too right behind Bitcoin
maybe I don’t know six months behind
Bitcoin in terms of Wall Street creating
you know if they’re in based packages
and I think over time their goal is to
trade anything that’s liquid and do what
they do anything that’s liquid so they
they’re you know they’re they’re not
going to get involved in all these
fights between the the tribes if you
will but in in this in this industry
because they just want to do what they
do they’re they’re all about capturing
bid-offer spread and and inflating the
supply of assets so that they can trade
even more and capture more big op
bid-offer spread their you know and then
they take their money and run this is
not they’re not gonna get tribal about
this whatever’s liquid is what it is
whatever they’re gonna want to trade
yeah but I might a Bitcoin maximalist
yes I am I think it’s gonna take 20
years for that to play out and I do
think that there is real room for other
blockchains
I think aetherium has amazing
applications for tokenizing things will
they coin be the better use for that
over time maybe but right now if there
is gonna lead in in tokenizing assets
and and and there is real value to that
about because I do believe that the
cruft
happens on Wall Street can be fixed by
blockchain and at this point it’s wide
open in terms of fixing the
cruft on Wall Street with blockchain
clearly Bitcoin has a big lead on money
itself and and really aetherium is not
really going after Bitcoin in terms of
monetary yes yeah so what are your
thoughts on that it’s crazy it’s a great
question I thought where they were going
was a point that Andres made earlier
which is that the problem with Wall
Street is because of the Bank Secrecy
Act that Wall Street whales are going to
be influencing the technology upgrades
and specifically privacy upgrades and he
was making a point that the Wall Street
where whales would try to block privacy
upgrades to the Bitcoin core software
and because their compliance departments
won’t let them trade in any of the
privacy coins how would I be able to do
how would they be able they can’t in
other words if the community Forks your
upgrades upgrades Bitcoin core to
include privacy all of the in all of its
versions and Wall Street can’t follow
that because they can’t comply with the
Bank Secrecy Act his point is Wall
Street’s gonna fork into what he calls
corpo coin and that may very well be
what happens if if a privacy upgrade
takes place and Wall Street can’t follow
it for compliance reasons but that your
question or asked a slightly different
question which which is wouldn’t Wall
Street want to benefit from that because
they could play even more games if they
do and the answer is yes but I think the
bigger obstacle is Wall Street it’s not
going to be able to because of the Bank
Secrecy Act they have to know their
customers that have to comply with anti
money laundering laws and they also now
have to own the bet know who the
beneficial owner of the assets is Trump
has gone you know in the very wrong
direction on financial regulation he’s
making it worse not better
all the deregulation talk he’s had in
other industries it’s been there he’s
done some good things but in finance
he’s gone backwards we’re getting is
getting worse and
in the Bank Secrecy compliant Bank
Secrecy Act compliance in financial
services so Wall Street can’t deal in
privacy coins I just I just fascinated
by the fact that the privacy Edition is
gonna force them into a corner possibly
yes this will it will because they
cannot adopt a private cryptocurrency
they can’t they couldn’t be doing this
with Manero for example or Z cash yeah
and we the funny there we can see the
beginnings of that that truth that basic
truth because coin base which is not a
big financial organization they won’t
list Manero know that was exactly under
aces point like you know the coin basis
of the world actually had a big impact
on the debate last August they didn’t
influence it and again back to my
earlier point I wanna clarify I don’t
think Wall Street’s ever gonna be able
to control the debate but are they gonna
have a big influence because they’re
Wales and again we think coin base is a
whale wait till you see core Wall Street
market infrastructure coming in those
the coin base is not going to be a whale
compared to that you know what Wall
Street just by coinbase for pennies on
the dollar will be like them buying
Polonia X to laugh at it yeah it’s me
what we’ve seen so far in the crypto
space is really small compared to what’s
gonna be happening now that core Wall
Street infrastructure is coming into
this space it’s gonna it’s gonna have a
big impact but will it control no but
will it have an influence
just like coinbase did relatively last
year of course it because these are
gonna be big whales found that like
button everyone this show has been
freaking on fire conclusionary thoughts
hey I would just add traces point which
is if lost rates gonna come in and
suppress the price with all these these
games of fixing the supply problem
quote-unquote that just means that it’s
cheaper for the rest of us to buy it and
and what I mean by it I mean buy it and
keep your private keys because I
completely agree with everything
long-term this is gonna be you know Wall
Street can’t really mess with this this
is what the bitcoins gonna win but that
doesn’t mean in the short term that they
can’t create buying opportunities for
those of us who are not afraid to take
our own personal responsibility for our
own wealth excellent purse
but I love it personal responsibility is
the new counterculture

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