Crypto's Future After FTX with Angie Lau of Forkast.News

Jeremy Allaire: Hello and welcome to this new episode of The Money Movement. I'm really pleased today to be joined by Angie Lau, the co-founder, CEO, and editor in Chief of Forkast.News, a fast-growing news and media organization in the digital asset space. Angie, it's been great to be chatting with you, and very excited to have this conversation with you. A lot going on in the past week and looking forward to really diving in with you.

Angie Lau: Jeremy, thank you for that. I think it's so timely and more than ever before to really dive deep into exactly what happened, how it all evolved, and what needs to be fixed. I'm just going to throw the first question out to you. I know my reaction, it was disbelief. Is this a joke? This must be a joke, right? I checked my calendar, it's not April 1st, and sure enough, it wasn't. What was your reaction?

Jeremy: I think for me, it was like shock and disbelief as well. I've gotten to know Sam Bankman-Fried, I've gotten to know a lot of other leaders in the industry as a company that operates a market-neutral platform. We work with a lot of players and I think we saw what a lot of other people saw, which at face value seemed to be a serious company that was trying to build a high-quality platform for markets. I think the concept that this was falling apart using customer funds and trading on leverage with their own high-risk tokens and all these things, was really shocking. Overall, just an incredible amount of shock and still reeling from it.

Angie: You brought up something, a term that I think most people would really tie to this at face value on the surface, and here therein lies the issue of the industry, in my view. If at face value, this is somebody who created a lot of product infrastructure, that one could argue still has a lot of value, created a seamless on-ramp into an industry that was fast growing. Where was the visibility? Where was the adherence to the rules that remained still very much opaque?

Jeremy: This gets to the core of the issue, I think, which is that if you're a global financial institution, there are certain things that you have to do and you're required to do. You need to have a CFO, most companies need to have CFOs. You need to have a financial organization, a treasury organization, an internal controls organization, and an internal audit organization. You need major global public audit firms, and you need to have detailed examinations across the risk management in the business that's ongoing, both internally and externally.

There's an enormous amount of requirements that exist, not even for a global scale financial institution, for even smaller financial institutions at a national level. Those are choices that people make, and Circle has chosen to operate with significant regulation around it and an increasing amount of regulation around it from early on. There are firms who felt like to compete with aggressive offshore companies, you needed to be an aggressive offshore company, and that those kinds of controls and that kind of accountability perhaps wasn't important. I think there are really lessons here about what is expected out of major firms.

I think there's a lot of talk, oh, we need to have proof of reserves and that's going to solve a problem. You need to have organizations that have accountability across an incredible array of fundamental controls in third-party assurances. Until we have that, and some of that can be done on-chain, and I want to talk more about that as well, but some of that can be done on-chain and so on-chain gives us a new set of tools of accountability and transparency, but for these major offshore players, market conduct rules don't exist.

There's a reason why in say, the United States capital markets and financial markets, banks can't run exchanges. There's a reason why big market making firms can't run exchanges and vice versa. There's a reason because there's conflicts of interest.

Angie: To contextualize it and it really speaks to just the speed in which the industry and FTX as a reflection of that really accelerated. It only started fundraising in 2020 as a billion-dollar valuation. Apparently made a billion dollars in trading revenue in that year. A year later, it's valued at $32 billion and everybody is fighting for allocation, the speed in which you wait and you look for signals. Let's talk about the Silicon Valley participation here, because I think what happened with FTX really is putting into question many things.

I'd love to talk to you about this, Jeremy, because right now the contagion continues and everybody is swept up. Currently, as of the recording of this conversation, November 14th, crypto.com is now under duress. Now, you are seeing it within your ecosystem, some of these centralized exchanges that we're doing incredible service to the industry and to crypto starting to falter, potentially very shaky ground. Who knows what's going to happen next? People are really wondering what's next. Let's talk about that. Where is this contagion? Do we fully know the picture? People are starting to wonder, okay, is this all really a house of cards?

Jeremy: I think you have to separate a few things. I think the first is that absolutely, with the amount of the whole in FTX's balance sheet, it appears, whatever that is, $8 billion of liabilities, which potentially is just goes to zero for people. That's 8 billion of losses. Now, to put that in perspective, we've seen investors lose $2.2 trillion of value over the past year, and so 8 billion of losses out of a 2.2 trillion correction, you put it in context. That doesn't mean that there aren't going to be institutions or individuals that are hurt pretty badly.

Likely the contagion, so to speak, will be there are funds, there are companies that are projects who just are going to have large losses and in some cases that will be terminal for them, that those businesses and projects will just end. There'll be redemptions on the funds, they won't be able to meet them, they'll have to liquidate assets. There's probably some of that that's already happened and going on. There'll be projects that kept their treasuries on a platform like FTX, et cetera. I think there's those pieces.

I think that the second piece is just about the practices of these opaque offshore exchanges. How much exposure exists? There's a lot of speculation around people, other exchanges taking their customer deposits and then re-hypothecating them to FTX who was paying an interest rate which was funding trading on Alameda. There's all kinds of discussion around those kinds of exposures, which could lead to haircuts, which could lead to further runs on exchanges and some of those could falter.

To some degree operators that are not operating to high standards to financial controls, to risk from a risk management perspective, from a customer protection, just frankly even an integrity perspective, if they get washed out, that's probably a good thing. It's probably a good thing. One could argue this is free market capitalism doing its work. The other side is, wow, these are unregulated financial institutions and a lot of people are getting hurt.

You can take your view on either side of that but I think that there will be clearly some that falter. I think the deeper lessons here have to do with-- It really comes back to fundamental ideas behind what is this space even about? What are people really trying to accomplish? This is really important. When we started Circle over nine years ago, we were excited about this idea of tokenized fiat.

A digital currency versions of fiat that could run on public networks that were transparent and auditable and efficient, where you could have financial transactions, financial contracts, commercial arrangements, codified in code through smart contracts that would facilitate a new more open, more inclusive, more transparent, more fair, more safe financial system. That's why we founded the company. That's been the origin of our pursuit.

There's another pursuit, which emerged 10 years ago, one could argue or so, which was this is an asset class to trade and speculate on. That doesn't matter what the asset is, it could be this token or that token. It could be bitcoin, trading on the idea of a digital code. There's this trading and speculation arc of crypto, and there's the crypto as a fundamental new public internet infrastructure that you can build a different commercial and financial system on top of.

I think some of the greatest excesses that we're seeing have been driven by the desire to maximize the trading and speculation side of this industry. Those have created some very large businesses and have created a lot of investments and losses and the like, but I think largely an enormous part of this industry has just lost the plot. It's lost the plot and the plot is, why are we here? What are we trying to do? What is this about? What are we trying to build? I think taking place in the last week is going to bring even greater energy and focus to how do we build that on-chain future?

Where you're able to build things out on these public and transparent and secure networks where you have more distributed and decentralized participation and control and you move away from essentially these unregulated centralized financial institutions. Crypto has given birth to a whole bunch of unregulated centralized financial institutions that have been focused on greed and access. I think we're seeing the rooster come home to roost a little bit on that and I think flushing some of that out would be great, in my opinion.

Angie: Here's the issue for the industry that we're all facing at the moment. I think we can say that the hubris has built up the speculative part of it. Certainly in this instance, if there was illegality, there was illegality and that is really the tragedy of this moment, that there was something fundamentally of value being built, but the illegality of it, you can have all the rules in the world, Jeremy, but you're not allowed to rob the bank, but you're still going to rob the bank. The rule is that it's illegal. That's just not done.

If there's that illegality, then all bets are off, but in this instance, unfortunately, there was this one person who seemed to be the white knight, the savior, the stable voice in the room. That trust is completely eroded and really the bottom has fallen out. The issue is this. When we take a look at just the geopolitical dynamics that exist in the world at the moment, we still have China who one could say, oh, proven completely right here as a centralized authority saying that crypto is illegal, but still building on blockchain innovation.

Creating a platform in which blockchains and protocols exist. Fiat, but not crypto. Now here we are in the West and this incredible innovation that is being built up, including yourself and including so many talented and smart people in the space. The way that this innovation from this perspective is being funded is through fundraising, is through sharing this idea with venture capitalists, with angels who say, "You know what? I believe in that. I want to fund that. It doesn't exist right now. It's got to grow fast, probably fall down a little bit, but I'm going to fund the ride."

Now, do you think that that is all put into question and what role do you think that Circle has to play here as a stable coin issuer, possibly the last bastion of a seamless on-ramp into this world?

Jeremy: A lot of thoughts and questions there. I think there are a few things I would say. First, I think Circle can play a huge role. As I like to say, we're being stable and being boring. We're a dollar digital currency issuer. We're not issuing some crazy token. We're not trying to compete with fiat. We're really just trying to make fiat safer and work better on the internet. We're boring in that. We tried to do this in a regulated way.

We're in the process of becoming a publicly listed company. We continue to put in place relationships and partnerships with some of the leading financial institutions in the world to solidify and strengthen this infrastructure. I've been working in DC for nine years. Sam's been there a couple of years. I've been spending time in Washington for nine years and very actively working with congress and regulators, not just in the US but around the world.

We have a large policy organization. We're going to play a very active role and continue to play a very active role on the policy side and what'll be interesting is I think people will very soon come to see that a stable coin and a stable business that is run in a compliant regulated fashion, is actually turning out to be a pretty phenomenal business. We're in public registration. We'll be updating our Q3 financial results in the near future.

I think people have to take a look and see what business this is but compared to businesses that have been focused on trading and focused on speculating, I think that the stable coin platform business is going to be a really attractive one. To me though, just getting to the core of the question is I've been talking about, and you were with us in San Francisco a month or so ago, this idea that we have to move beyond the speculative value phase and we have to move into the utility value phase of this.

That is at the heart of the issue. If all of the value creation is about creating trading platforms and speculating on tokens, we're not actually delivering on the promise.

Stable coins are obviously one example of a killer app that has high utility, and there's so much more that people can build on top of public blockchain infrastructure which is high utility for households, for firms, for consumers, for others. The focus has to be there and to the question of capital allocators, limited partners, investors, I think there's going to be a pool of capital that just says, "I got burned. I'm going to stay away from this for a while and see what happens."

I think there's another pool of capital that is super smart, high conviction, is focused on that utility value phase, iit's going to continue to invest and continue to invest. Look, there's parallels and analogies to the .com bust and collapse where you saw spectacular collapses of companies that were incredibly well funded, huge amounts of losses for retail investors, for institutional investors, and there was a period of about two to three years where people said, E-commerce is dead. Consumer internet's dead. Venture capital firms would not touch it, they wouldn't touch it. There was no investment.

You could find a few contrarian firms who are doing it, but some of the best emerging consumer platforms in technology driving the next wave of the internet happened in the 2002 to 2004 timeframe and then people came back and there was a huge bull rally that happened for several years as capital came back. I think you'll probably see something similar here and so as a company that is deeply focused on that mainstream build out of these fundamental money lego bricks and making them useful in finance and commerce, this is a great time to be working on that but I think, yes, it will be tighter capital.

Angie: I totally agree with you. It could be, and you're hearing two sides of the coin. Right now, coin. Right now, you hear a lot of, obviously, the doomsday scenario headlines, and yet underlying in the surface, people are still building, people are still creating value, people are still investing in dynamically what's changed and so leaning towards that and at the end of the day, it is a crisis in confidence.

I want to just be very, let's lay it out there because you're surrounded by it right now and they're saying, okay, USDC, you're doing business with all of these firms that are now falling, they're shaky and everybody is questioning, do you have exposure? What happens to the value of my USDC? Share that if you could.

Jeremy: I think a couple of key things. USDC itself is a full reserve instrument. It is regulated and supervised by banking and payments regulators throughout the United States. We are in a public registration with the SEC. We are audited by one of the top five global accounting firms on a regular basis. The reserves are public and transparent. We publish the reserve breakdown every week.

We have our accounting added stations every month, and these are in public registration statements where if we're making misleading statements, it would be securities fraud. The reserves are approximately 80% in short-term US government treasury bonds, and 20% in cash. We are continually increasing the visibility. Just a week ago or so, we announced the initial deployment of what is called the Circle Reserve Fund, which is a government money market fund structure that BlackRock registered through the SEC.

It is an SEC-supervised and regulated government fund structure, which will hold the treasury bill reserves of USDC and it will provide the additional layer of regulatory and supervisory qualifications that come with operating under SEC supervision. It will also provide daily visibility into all of those underlying treasury bills as well. We are taking that transparency to the highest degree. We ultimately are working towards having the cash piece of what holds is held behind USDC at the Fed. Customers can always redeem one USDC for a dollar. Now, if you have a platform that you put your USDC into.

You give them through either their terms of service or they've done something illegal, but let's just say even just through their terms of service, you've given them a right to take your USDC and lend it out to others and they make bad loans, and those people don't pay it back. You lose your money. Just like if you take dollars and put them in a bank and the bank makes bad loans and you want your money back and the bank can't pay you back, you lose your money.

If you're taking your digital money, your USDC, which is a digital cash equivalent, and you're giving it to counterparties, to centralized counterparties, you are taking risk on that. It's no different than if you give them your Bitcoin and then they run off with your Bitcoin. I think we cannot change, or influence per se all of the different people who use this form of digital money. I think that's a really key distinction, obviously, is institutions can work with Circle, can create and redeem USDC at par. It is a very safe, very sound regulated, transparent dollar financial instrument, digital cash equivalent. Obviously, what you do with that as a downstream digital asset token holder, you need to consider very carefully.

Angie: It's the great analogy that you put. It's when you're robbed at gunpoint, you don't go to the Federal Reserve in the US Treasury and say, "Hey, can you make me whole?" Unless it was the 2008 financial crisis, and then everybody is a counterparty risk to everybody else, and really the whole system is under duress, too big to fail, was deemed to be a myth, and everybody stared into the abyss of whether or not the capitalist system as we knew it was going to fall.

I would argue that possibly we are at this moment right now in a very new industry, is this the Bretton Woods moment for crypto? Where is gap? Where is FDIC? All of these functions that existed after the Great Depression, after the war. Really to establish some of the most incredible financial systems that that created so much wealth in a world that we live today. Is this that moment, Jeremy, and what does the industry need to do because every player must participate?

Jeremy: I would separate two issues here. I think one is just when we think about what full reserve money means. Full reserve money is the idea that the money itself is not created on leverage. It's a full reserve monetary system. Bitcoin itself, or ether as examples are full reserve monetary systems. You cannot fractionally reserve a Bitcoin.

There's actually only a certain number of actual Bitcoins. They're finite.

There is no mechanism in the system to create more bitcoin on leverage. Now, intermediaries can do that, and I want to come back to that. They can use their own ledgers to re hypothecate and do that. The base layer is this full reserve system. USDC is a full reserve model for money. We believe very deeply that both non-sovereign digital commodity money like Bitcoin and full reserve dollar digital currencies like USDC are a safer foundation to the financial and monetary system than fractional reserve banking.

These are things that grew out of as reactions to the great financial crisis, which were built on the idea that you had too much leverage and you had a leverage model that was at the core of banking, and in fact, this technology grew out as a reaction to that. We talk about this a lot, that we want a base layer of the banking system to be fully reserved. We think that that's possible with blockchains and dollar digital currencies and stable coins and the like.

That actually can be a safer foundation than a fractional reserve system. In terms of the pillars that we have been working on for almost a decade now, and we're making good progress, these pillars are in fact about establishing a safer foundation. In fact, we believe a foundation that you can build a more efficient, more inclusive, and safer global financial system around, so that's one pillar. The other piece though, which I think is a little bit of where what you're getting at with your question is what is the arrangement.

What are the rules of play that really need to come into place, that need to be globally accepted and adopted? I think some of that's going to come from regulation and some of that's going to come from self-regulation. At the end of the day, firms that are intermediaries for your digital currency, that are taking it and custodying it. There's going to absolutely need to be a very robust set of transparent, auditable processes and controls around the segregation of those assets.

Ideally making those assets bankruptcy remote under tight legal structures and having those kinds of fundamental consumer protections put in place. I think you'll see policymakers as a result of all of the bankruptcies of these decentralized intermediaries that were basically taking risk. Some of it legal, some it illegal with this custody collateral, that that is the gaping hole. There are no consumer protection laws on digital assets. Governments have their part to do and it needs to be consistently applied around the world.

People and institutions that are doing business in digital assets understand the safekeeping of those digital assets and the kinds of controls that have to be in place. Ideally using blockchains, it can be always known and always known to be true, because of the ability to use cryptographic proofs of assets. This is where we get to a better financial system than we have today. Right now, a bank says, here's my books and records. Someone goes and looks and tries to figure it out. Maybe once a year, there's an examination and things like that. Crypto actually can make it better. You can have a better system, but those are the kinds of things that I think need to be thought about and put in place.

Angie: I 100% agree with you. I think we are surrounded right now by a lot of noise and much of it is through the hiding in plain sight. There is so much data that is available for people to see, but none of the filters that allow us to gleam any value or really alert us to this malfeasance in a way because it's still so fragmented and siloed. I think it just reminds me, Jeremy, I don't know if you're a Twilight Zone fan but remember that episode with Burgess Meredith. It was a post-apocalyptic nuclear war. This is a man who wanted to just sit and read in solitude.

The catastrophic thing happened. He surrounded by his library of books and then in that one critical moment, he breaks his glasses. That's how I feel about this industry right now. We are surrounded by so much data and it's all there, but what is the visibility? What is the visibility? I think that transparency is not transparency's sake. It's got to be smarter than that.

Jeremy: I think users need to demand more of the platforms that they interact with, but I think the big thing here is that I think all of this hastens the move to on-chain operations and on-chain businesses. That clearly the infrastructure's gotten to a place where you can operate in exchange on chain. You can operate these financial markets primitives on chain.

You've actually seen significant growth in uniswap over the past days as people leave centralized exchanges and say, I'm going to go somewhere where I can see exactly what's going on. Not just for trading, but the idea of a corporation being an on-chain entity where its transactions are perfectly auditable and records are established, where that visibility into the fundamental health of the institution can be looked at and proven cryptographically. That's very, very powerful.

I think this hastens a greater and greater shift towards self-custody models, towards much more robust risk control models around self-custody, and to more on chain business activity. We did a big acquisition of around $200 million acquisition earlier this year of a company called Cybavo. It's basically enterprise-scale self-custody for digital assets. It's becoming the core of our entire platform in the Circle account.

Every business we want to be able to be self custody. Manage your own security, but with super, super robust risk management, security, threshold approvals, treasury management features, the kinds of things that you'd expect as an enterprise, but with that direct control and with the ability to then run your business on chain and not be dependent on centralized intermediary. We think that's the future of all corporate activity in the space and certainly for crypto firms that need to up their game.

Angie: I think 100%, we're going to see 2023 as a year of policy, the regulators must act. I think it accelerated after Terra Luna. It's accelerating at a pace right now. I think a lot of people got shaken up politically in DC and let's see where this goes, but I agree with you, Jeremy. I think this is a reckoning for the industry. There's a lot of questions being asked and rightfully so, but there was a lot of hubris here and what are the lessons learned?

Do we throw the baby out with the bath water? One thing, and I think you tweeted this out, retweeted it from Cumberland, I thought this was really spot on that no relevant chain stopped processing blocks last week during the FTX crisis and the fall. These industry-defining events are usually the predecessors of market recovery. Let's see.

Jeremy: Totally agree. I know we're coming up on time here, but I had a conversation last night with top executive from one of the most important financial institutions in the world and was chatting with them about things that were going on. Their remark was, it seems like the technology side of this stood up incredibly well and it's doing what it's supposed to be doing, and there's no issues. In fact, there are pieces of the technology that are assisting even with the policing of things that have happened.

The technology is maturing and continuing to mature at a very, very steady clip. Everyone has to up their game. Everyone needs to get focused on delivering utility. I think we will certainly see a different kind of recovery out of this.

Angie: Absolutely agree. It's much needed. It's what's required. It will be critical to really steal the future. This moment we will see the story play out in the coming weeks and months. From the ashes, it will become clear that this is a crisis of confidence and to your point, Jeremy, not a crisis of technology.

Jeremy: Absolutely. Well, appreciate the conversation with you today, Angie, and we'll surely be talking a lot more in the coming weeks and months as well.

Angie: Thanks for having me on, Jeremy. Appreciate it.

Jeremy: You're very welcome. Thanks so much.