Michael, welcome to the Network State podcast.
We're going to do a special episode today where we go
through Michael Saylor's new road map and digital assets
framework. Michael, welcome.
Yeah, thanks for having me. Really happy to be here.
Awesome. OK, great.
So you just published this digital assets framework, the
principles and opportunity for the US, right?
It's PDF, it's got in more than half a million views.
Maybe you can talk through it, say you know what what you were
thinking about when you're writing this and and what the
goal is. Sure.
So first of all, for the past four years I've been watching
the the crypto debate go on, you know, in the United States and
everywhere else in the world. And I think a lot of times
everybody's yelling and there's a lot of talking past each other
and, and there's a lot of friction.
And it seems to me that if our goal is to move forward in a
constructive, progressive fashion, we'd benefit from a
framework. So I put together a digital
assets framework along with a set of principles.
And I try to talk a bit about the ideology, what's the vision
and what's the opportunity. And I did it from the United
States point of view because I think the United States really
needs to lead in the digital assets arena.
And if they do, I think it's quite likely that'll provide the
air cover that will allow similar digital assets
frameworks and in the Middle East and Singapore and Japan and
Europe, etcetera in South America.
So let's look at the different steps.
I've got a taxonomy, a taxonomy of different assets.
We talked about how we legitimize these assets and then
what are the practices we need in order to make, how do we make
this practical? And then the fourth section is
on the vision and the fifth section is really the
opportunity for the United States, so.
So why don't we start with the, yeah, exactly the taxonomy,
right. So you have 6 definitions there.
Most of them I think people have heard.
Why don't you go through them, commodity security, currency
token, NFT and A/B TI hadn't heard the last term in that
acronym, the asset backed token. But go ahead.
So there's a lot of types of digital assets.
A digital commodity is an asset without an issuer, backed by
digital power. A digital security is an asset
with an issuer, and it's backed by a security.
The third digital currency, it's an asset with an issuer, but
it's backed by a Fiat currency. A digital token would be a
fungible asset with an issuer. Then you've got digital NFTS.
It's a non fungible asset with an issuer offering digital
utility. But the difference is you could
have 10 million fungible tokens and we get that.
But if you have 100 different NFTS and they give you 100
distinct rights, then it's something different than the
token. Now the last one, digital ABT
asset backed token, a digital asset with an issuer, but backed
by a physical asset, backed by a bar of gold, backed by a barrel
of oil. So that's the taxonomy.
They're all tokenized assets and we're talking about tokenizing
the capital markets and each one of these is a different form of
property. I actually like this because it
carves it at the joints pretty well.
Let me let me go through and you see you tell me if I'm playing
this back correctly according to your definitions, right.
So digital commodity that would be Bitcoin.
That may be the only in your view is is do you think that's
the only digital asset without an issuer?
I won't say that I won't go that far.
I will say it's a very high hurdle to issue a digital asset
without an issue. It's very hard, right?
It can be done. I could, I could imagine other
digital commodities, for example, you could, I mean,
China could take Bitcoin, fork Bitcoin, create China coin and
they could say China coin is like Bitcoin, but it has special
tax privileges in China and it's only interesting to the Chinese
people and 1.5 billion people. Maybe something as simple as
you're allowed to mine China, China coin in China with Chinese
power and you're not allowed to mine Bitcoin.
You would have if everything else was the same, if there was
no issuer, you would have, in theory, a digital commodity.
Maybe it's not global property, maybe it's China property.
But the point is the real key is if you want to create a
commodity, you need to create a network, disclaim beneficial
ownership. And you can't point to anybody
that has control of the destiny of the network or has some major
beneficial ownership of it if you're going to achieve
commodity status. Interesting.
OK, great. So so let's say for now at least
digital commodity is sweet, generous, that's Bitcoin.
And then for your other things, all the other 5 categories have
an issue or so an example of a digital security would be we
would actually legalize crypto equities or crypto debt, crypto
derivatives, for example, Uber in theory could now put its
assets on chain. And, you know, in, in another
world, Uber could have given assets, you know, in its, in its
company to its driver so that they grew with the with the
organization. Can I offer just simpler one
which is yeah, go ahead. Just MicroStrategy stock, if it
was trading on Coinbase or Binance 24/7, 365 would be a
digital security, right? Apple, Apple could be, you know,
AAPL could be a digital security.
Now, I'm not saying it would only trade on finance or coin
base. It could trade on a, it could
trade on any, you know, layer 2 or any tokenized network to
speak of. But the point is it would be one
share, a token that represents a share of Microsoft stock or
Apple stock. It's backed by the stock, but
it's tokenized trading in the in the crypto world.
Yes. And also I think one of the
things we've been talking about offline was you could imagine a
site that allowed mom and pop restaurants or you know, like
small real estate operations to raise equity or debt once crypto
equity was legalized. And you could have people from
around the world do it. Obviously you'd need lock UPS,
you need, you know, various provisions for alignment.
But conceptually you could actually get a cryptographic
stock certificate. You could see all the provisions
of it. The blockchain would enforce
time stamps, all that kind of stuff, right?
If I'm not mistaken. If you had just just equity in a
private company, equity in $1,000,000 restaurant, equity in
a $10 million hotel, you know any kind of private equity,
venture capital equity, you know any partnership interest, any
claim on future cash flows, Maybe you own 1100 share of my
Airbnb business, right? Any of those look like small
Private Securities, but if you had digital assets framework,
maybe you would publish, publish the relevant disclosures, sign
up to the relevant obligations and you would put those on a
digital exchange and they trade 24/7, 365 globally.
To me, this is so obviously what should happen because let's say
you've got a hotel in, I don't know, Australia or, you know, an
inn and in Brazil or something like that.
They can put up a website, they can advertise for customers
around the world. And in fact, they can process
credit cards from around the world.
You've got a motel in the Midwest and they they're already
processing cards. They've already got a website
that anybody in the world can access.
But they can't use capital formation, which is the obvious
thing to do on chain. And of course you need all kinds
of, you know, procedures and so on for this.
But that's solvable, right? Is it?
Would you agree with? That I do agree with that.
I I think that the existing capital markets, they require
you take four years and $40 million in order to create a
equity which trades with A4 letter ticker.
And that's the 20th century why we did it.
But what if we could do it in four hours for 40 bucks?
And, and I think there's another argument which is, you know,
maybe in the 20th century, most businesses worse municipal based
or state based or nation based. There's a lot of international
podcasters. I could have a, you know, I
could have an international chess podcast with 800,000 fans
spread across every country on earth and it and it would be
very easy for me to appeal to the fans to raise capital.
What if I wanted to sell half the interest in my podcast to
them? They would want to buy it.
I would want to sell it. But right now there isn't really
a straightforward path to legit, a practical path for me to do
that in a legitimate fashion. And so if I use the 20th century
techniques, I'm at a huge disadvantage and and I won't be
able to raise money. And so we're really crippling
the 21st century global economy with 20th century rules for
capital formation. Absolutely.
And that actually brings me to the next definition, the digital
currency, right. So by your definition, which is
what we call maybe a stable coin, right, an asset with an
issuer backed by Fiat currency. So example USDC or if you put
some other Fiat currency on chain, the USDT might be that.
But USDC would be the clear version of this where you have
an on chain USDC, you have an off chain USD in a bank account.
And if you combine that with a digital security, you could,
taking your chess example, raise USDC from people around the
world. All those payments would be
tracked on chain and actually you could potentially click a
button and do your accounting. And if those people had
whatever, you know, profile information, you could
automatically and send them stock certificates.
It'd be the equivalent of what Excel was.
You know, people used to do accounting by hand, as you may
remember, with, you know, piece of paper before spreadsheets
came. I think corporate accounting is
kind of like that now. But you could in theory, have
all the transactions on chain, hit a button and it'll just
prepare your books for you. At least, you know, you decide
which pieces of that to have. But if you have both digital
currency and digital security, you could automate a ton of
compliance work. Let let me know your thoughts.
I, I think you've got, I agree. What we're talking about is
tokenizing a Fiat currency or a tokenizing a checking account.
So I mean, the, the, the trick to this is there's no question
everybody in the world wants digital dollars.
And there's no question that if I, if I live in China or if I
live in Europe and I have to pay in euros or see and why I want
tokenized local currency in those two frames of reference as
well. Just like in Brazil, you might
want tokenized real. So why do you want it?
While you want it to be a programmable, you want to move
it at the speed of light, you want to vibrate it a million
times a second, You want 8 billion AI to be able to trade
with each other 97,000 times an hour.
You know, it's like the utility is obvious.
The challenge is or you need the nation state that issues the
Fiat currency to recognize it as a legitimate and then you need
to overcome the privacy and the money transfer issues that you
know which which pop up from place to place.
I think we make huge progress simply by distinguishing the
difference between digital currency, which is really circle
or Tether versus digital commodities, which is Bitcoin
versus digital securities, which is your tokenized Apple share
versus a digital token, which might be any number of crypto
tokens with an issuer that are come, you know, that have
functionality in cyberspace or digital utility.
But they're not securities and they're not currencies and
they're not commodities. And the entire cryptocurrency
industry has been saddled by this one name currency.
And all four of those things I just mentioned are sometimes are
sometimes referred to as a cryptocurrency.
And the result is you just get massive pushback and fear and
uncertainty and and doubt. And we need to break them into
four different categories so that people understand they're
four different things for four different purposes.
I like this a lot. And so an example of the fourth
that be what most people think of when they think of crypto as
opposed to Bitcoin. So that's Etherium salon, AZ
cash Manero, something that you know, a fungible asset that
offers digital utility that's in a portfolio and then something
like a digital NFT and non fungible asset with an issuer.
Now NFTS are actually kind of interesting because historically
people have thought of them as, you know, a really expensive
piece of digital art like $1,000,000 for an NFT.
But now you can issue 1,000,000 NFTS for a dollar.
So you can issue like the equivalent of likes or you know,
Reddit style upvotes. You can issue those on chain as
little markers of things. You can issue a ticket for a
digital for a conference either online or offline.
You can use NF TS to open digital locks.
So so NF TS I think are pretty interesting.
If a smart contract is on chain code, NF TS are on chain data.
And I'm glad that you have a distinction between the fungible
and non fungible here at the digital token and digital NFT.
Any thoughts on Because NF TS are on Bitcoin too as well?
Yeah, I, I, I think if you, if you just characterize them as
digital art, you're kind of underselling them.
I think we got to think of them as, as a unique digital right.
And I think about, I think about other types of rights like maybe
I'm Tom Brady and I post on some channel like on X and I'm going
to actually sell 10 superfan tokens and numbers one through
10 actually get ranked. And their response is underneath
me. And if you always want to be the
number one respondent, you buy NFT Brady 1.
And if you want to be #2 you're Brady 2.
And if you're #10 you're Brady 10.
And, and if you owned Brady tokens one through 10, maybe
that guarantees you for all of eternity, you'll always be one
of the top 10 responses in that order.
And there might be some super fan who's willing to pay
$100,000 to make sure that their comment is always number one.
You know, underneath Brady, it's like, it's a special, right?
Maybe it's a, it's a, it's a key to unlock something, you know,
maybe it's some, maybe it is a piece of art.
But I, I think I get, you know, this is not quite true.
I'm going to give you a physical analogy and abt if I said to
you, this is a token that represents one acre out of
1,000,000 acres in Kansas and they all look the same, right?
That's a fungible token. But if I said this is 2 acres,
you know, in Palm Beach on the beach next to the country,
cough, right. When you get to the point where
it's a specific piece of, of real estate.
And now we think about specific real estate in cyberspace.
I can create real estate in cyberspace, right?
With proximity and priority. So if you, if you start to
create things that have some kind of priority or proximity
or, or, or, or Providence or, or some uniqueness, maybe there's
something there that's interesting.
And, and of course, the idea of the framework is let's just give
people the asset classes and let create a Cambrian explosion of
innovation, of which 99% probably won't be economically
successful. But on the other hand, the 1%
might be the Instagrams, the the metas, the, you know, the the
Teslas of the world. And that'll be worth all of the
other trouble. Absolutely.
And I think actually, you know, one thing I would just say on
that is I think of there being a spectrum of fungibility.
For example, you could have a one of one like a digital Mona
Lisa. You could have, right.
You take your Miami example, you've got maybe 10 acres of
land and each acre is its own NFT plot.
So that's like, you know, 9:50 and then you could get all the
way, for example, to, for example, IP address space.
As you may be aware, you've got 4 billion unique IPV, 4
addresses. And in theory, each of those
could be tradable as an individual NFT and that would be
finite, that'd be capped. There'd be a logic to it, but
it'd be sort of once you start to get to that point there they
are non fungible. You can't actually exchange one
with each other, but the pricing on one might be similar to the
pricing of another. And so then, then you get all
the way to like a fully fungible token.
So I think of there's being an interesting continuum here and
if you have any thoughts on that, then we can go to AB TS.
Yeah, it's a it's, yeah. It's just obviously a million
thoughts part spark up and we probably want to go down this
rabbit hole, but I just think about all the domains, you know,
like when you think about owning, owning a domain like I
bought frank.com and emma.com and hope.com and Angel.
Dot com great one, yes. Yeah, yeah.
Like, well, I don't, I don't know if they're actually
physical assets or intellectual property assets, but but you
might very well attach an NFT to all sorts of interesting unique
things in in cyberspace. And then they start to trade
with the price and they can be transferred at high speed,
right? It's just a a license.
Love OK great abt. So this is essentially something
which is like gold or silver or oil.
It's interesting you this is what it's useful to distinguish
that from a digital commodity because when you use the term
digital commodity, you mean an intrinsically digital commodity,
namely Bitcoin and perhaps uniquely Bitcoin, at least at
this point, as opposed to digital ABT, which is often a
commodity like gold or silver or oil that is traded on chain.
And so it's it's a commodity, but it's a basically traded on
chain as opposed to being intrinsically digital.
Would you would you agree with that?
Yeah, the distinction is a digital commodity is an asset
without an issuer. And and in order to create an
asset with an issuer, you're going to have to back it with
some kind of digital power. Whereas a a digital ABT is a
tokenized physical commodity. And that means at the end of the
day, you're going to have a warehouse with 100,000, you
know, little gold coins or, or 100,000 barrels of oil or
100,000 bushels of soybean. And that means there's going to
be a custodian, there's going to be an issuer repping to this
custodian getting audited. And now you're going to tokenize
whatever that is. And you're going to tokenize it
so that people can move it at the speed of light, so you can
slice it, so you can fractionalize it, so you can
finance it, so you get liquidity on it.
So you got transparency on 2nd programming?
Amazing. So OK, great.
You know, in math, one of my old professors used to say you can
define your way out of a problem.
And if you have the right definitions, lots of things
follow, like abstract algebra of the group, the ring, the field,
and then you can kind of just go downstream from that.
So with these definitions, why don't we go to Section 2?
Legitimacy. So like rights and
responsibilities, right? So what you want to go through
this? The path to legitimacy Issuers
exchange? Owners, go ahead.
Yeah. I mean, I think this all boils
down to there's three general types of actors.
There are issuers, people that issue digital assets.
There are exchanges, anyone that trades custodies, and then there
are owners, people that own the digital assets.
Everybody needs a set of rights that are clear.
And then there's set of responsibilities.
If we do it right, you could in theory have millions and
millions of issuers and you could have a lot of owners.
And then I don't know why there couldn't be 100,000 exchanges
dealing with millions and millions, if not 10s or hundreds
of millions of issuers dealing with billions of owners.
What are we trying to do? We're trying to create a global
real time uninterrupted process to issue trade and own digital
assets. So, so in this phase, you're
good I. Was going to say I was.
I was very closely involved with this at Coinbase because when I
I joined the CTO at the time couldn't just only had four
assets which are Bitcoin, Bitcoin cash, Litecoin and
Ethereum. And an important paradigm shift
was for us to internally realize that asset issuers were also a
kind of customer. And taking your 3 definitions,
you can think of it as A2 sided market where you have millions
and millions of owners and a few 1000 issuers or much smaller
number of issuers on this side. In the middle is the exchange,
much like let's say the New York Stock Exchange has whatever 100,
you know, stock issuers on one side and millions of traders on
the other side. So it's like a 2 sided
marketplace with these three actors.
And then realizing that the issuer is a customer, sort of
like Airbnb has guests and hosts or or Uber has riders and
drivers in exchange has in your, you know, framework owners or,
or buyers and issuers or sellers.
And the issuer is like a special kind of customer.
And of course, an issuer in one context could be a buyer in
another context. And you know, often market
participants are both buyer and seller in different contexts.
And I think that just having, you know, some routines and some
conventions, you know, with venture Capital, One of the
things I learned over the years is that every term that we had
in a deal was actually something that came from some train crash
in the past 20 or 30 or 40 years ago.
Like, for example, you know, four year vesting or lock UPS or
Co sale rights. All that kind of stuff is meant
to align, you know, you know, dozens, sometimes hundreds or
thousands of people towards the same economic goal or one party
can't just dump on the other party or what have you.
All the, all the low trust stuff that happens, you know, in, in,
in certain parts of, of crypto markets, they're actually
solutions for it. If you actually have a organized
2 sided marketplace of buyers and and sellers of of owners and
issuers. Here is to let all three of
these players operate in real time, uninterrupted globally.
But they need to be able to issue trade or own those assets
and and you need to see transactions between
individuals, corporations and machines.
So how do you actually create an API or a framework such that the
machines can trade a million times an hour with each other
and they're all working for exchanges or representing
exchanges and they're all representing issuers or
individuals. So you want a high speed, low
friction market. I mean, I think about, you know,
where would we be in the world if it costs $40 million set up a
website. Or it used to be, if we think
about computing and all the computing was centralized to IBM
mainframes in the back office or it used to be with publishing,
you, you know, first it was just the New York Times and the
Washington Post and the Wall Street Journal.
And then all the sudden people could set up their own website.
But then you got those blog services where, I mean, 80
million people or 120 million people could kind of use some
software as a service, blogging service.
And, and it all comes down to, you know, to structuring this
the right way. So if you look at the, the next
few paragraphs, right, what we're talking about is issuers
should have a right to create an issue digital assets and the
obvious responsibility is fair disclosure and then ethical
behavior. The exchanges should have a
right to custody, trade and transfer assets between their
clients and with the other between the other exchanges and
and the responsibility is is publish the asset disclosures,
protect their client assets and then avoid conflicts of
interest. And then for owners, owners want
the right to self custody, trade and transfer their assets.
So it's, you know, you're, you're back to the not your
keys, not your coins, but it's not so much an obligation to
self custody that, but a right to self custody and, and the
right to trade, the right to transfer.
That's important and the responsibility comply with the
applicable local law, whatever that might be.
And of course, what, what I think is the big idea here is
create some foundation principles like nobody has the
right to lie, cheat or steal. By the way, this is kind of
obvious. I, I don't even know if you have
to, you would have to say it except for the fact that if you
started from, from the observation that people don't
have the right to lie, cheat and steal, there's probably 100,000
pages of regulations you wouldn't have to publish because
most of them all boil down to that.
And if you simply made those, those 3 observations and then
you noted that participants are civilly and criminally liable
for their actions, you might very well eliminate 100,000
pages of regulations, years and years of review and somewhere in
the range of $10 million a year of compliance costs with lawyers
and all the back and forths that go that go into this process.
So I I think that that's the place to start.
Well, the thing actually, it's funny, when I looked at this, I
was like, wait a second, there's only three pages.
And but I like how you've set it up because you're right that by
just articulating those sort of 10 commandment like principles
that actually does distill the the intent, or at least the
stated intent of so much regulation is all the disclosure
stuff says you're not hiding something.
It's not a material misrepresentation.
AK don't lie, right? Or you're, you know, for
example, a disclosure of when an executive is going to sell, what
amount of stock don't cheat, right?
That kind of stuff, right. So lots of specific things are
sort of downstream implementations of these sort of
very simple 10 commandment style moral directives.
And yet it's it's back to this issue of of it pops up in
censorship. You know, the question is, do I
have to hire 100 lawyers and file paperwork with the
regulator for three years before I can publish my opinion on X?
Or can I actually publish the thing that I wrote on X with an
understanding that if I slandered someone, you know, if
I lied, if I lied or I cheated or I stole through my
misrepresentation, I have civil liability.
If I publish something to get somebody else killed, maybe I'm
going to get tagged for manslaughter.
But, you know, we have examples in product development and in
the media. Yeah, you don't.
It doesn't take $40 million to design a product and sell it to
someone. But if if you create a product
that's unsafe and you sell it to them and it kills them, you do
have civil liability that the thing you sold killed the
person, right. So there's a lot of industries
that function with this this set of observations.
And those are industries where people can do thing in one day
or do something in one week. But at the point that you
implement a nanny state and you take the position that no one's
allowed to say or do anything until it's gone through
progressive layers of sensors, what you really do is you choke
off 99.999% of all innovation. Everything stops.
It's the difference between, you know, pre market review versus
post market review. Do you presume everybody's a
criminal or do you allow people to transact and then make clear
that criminals will be punished afterwards and what criminal
behavior actually is? It's not really, it shouldn't be
a process violation. It should be a principal
violation. You know, one other thing I
wanted to say is that the the concept of buyers and sellers
being connected by an exchange as A2 sided marketplace is so
obvious. But there is actually one very
unique aspect of crypto versus traditional stock markets.
And maybe you have some thoughts on this.
But traditional stock markets, like when a tech company files
to go public, it's only choosing between nicey and NASDAQ, let's
say at that time. And they do compete for the
business and you know what have you.
But then after that, it's not easy.
I don't think it's actually, I'm not, I'm not aware of prominent
examples. Maybe maybe it's possible, but
to, to move the asset from one exchange to another from Nike to
NASDAQ is not that easy number one.
And then number 2 is there's no equivalent of send and receive.
People can't like load their Nike shares on or they're let's
say they're FB shares on to Nike, pull them out self
custody, load them on to NASDAQ and trade there.
It's not the equivalent that you have with Bitcoin.
Now, conversely, in offline markets, if you have, let's say
a farmer has a bunch of apples, they can go and sell them at
this supermarket or that supermarket.
They have the send and receive equivalent, but they don't have
the speed and the global aspect of the digital.
So this kind of two sided marketplace combines the scale
and speed of digital markets with the optionality of physical
markets where you can withdraw from 1 market and you know, go
and sell another market. Let me know if if you have any
thoughts on that. Yeah.
Well, what we're talking about is conveying property rights to
all of these 20th century assets that don't currently exist, for
example, right, I have a bunch of Apple shares, but I can't
take custody of them. The 20th century world is, is
one or two settlement networks, one or two custodians, one or
two exchanges. You have a very limited set of
options and there isn't really a competitive market.
So in a world where you had 1500 digital exchanges in every place
in the world and they could all handle any of these assets.
Sorry, you might, you might see someone that wanted to give you
a credit line on your Apple stock or they wanted to give you
a yield on it. Or, you know, maybe your bank
will give you an advance ratio of 50%, but there's a bank in
Europe that'll give you advance ratio of 95%.
Or they'll actually give you a mortgage where you can top up,
you know, with tokenized, you know, barrels of oil or right,
you could have competition if there was competition.
But the problem is there isn't competition that the owner of
the asset doesn't have the right to transfer, to take custody, to
transfer custody to, to shop out the asset to the near to the
highest bidder. And maybe more to the point,
what if I had an AI program and it had my entire portfolio of
assets And every minute of the day while I'm sleeping, it's
actually gathering a bid from 150,000 corporations all around
the world asking them for the highest bidder for me to loan
out the assets or custody assets or, or, or whatever they want to
do with them. And, and it's just in a fluid
way moving my capital all around the world in order to get me
what I want within my risk parameters that that can happen
in a tokenized world. But if your asset is 100 acres
of Kansas City real estate in the suburbs, there's like one
bank in Kansas City that may or may not want to finance it.
And if that bank is not interested, no other, none of
the other 100,000 banks in the world are going to want to touch
that asset. Yeah.
And I think one thing that's interesting is scale enables the
long tail. Scale is actually good for the
small because if there's only 10 lenders, one of those lenders
may not want to take a chance on some small business.
But if there's 10,000, then one of them may actually want to
take a chance on that small business.
There's more risk tolerance. If you have larger markets, you
know, there's people who are willing to try out smaller
things, you know, and it's kind of like, you know, with enough
drivers, somebody will be able to pick you up it, you know,
that they will take the job of picking up from this street in
this suburb and drive you into New York or, or what have you,
right? So there's a sense in which the
scale is actually very good for the little guy because it allows
them finally to have access to the same capital markets that
the big guys do. You know, and I get to that in
my Section 4 of the framework on vision.
So why don't, why don't we go when we go to Section 3 and 4?
So 3 practicality, right? Rational compliance to empower
innovation. And so I think this is related
to thou shall not lie, cheat or steal.
You're really trying to bring it back to simple short go back to
the spirit of the law rather than the letter of the law.
Why don't you talk about this? Well, the first principle is we
want to prioritize efficiency and innovation over friction and
bureaucracy. The existing system prioritizes
friction and bureaucracy. Everything takes too long, too
many lawyers, too much money. So how do you how do you
prioritize efficiency innovation?
Well, you start with simple principles like don't lie,
cheat, and steal. Then you define data structures
for each asset class. You know what, what are the
common data structures, right? This is, I mean, this is how you
write a computer program, right? It's not that complicated.
If you know, if, for example, you want an ABT, you want to
know what kind of asset is it, Where's the assets stored?
You know, how do I know the assets there?
How many of the assets are there?
Who's the counterparty, etcetera.
And you would have a different data structure for a currency
versus a token versus an NFT versus a, you know, a commodity.
But once you define the data structures, every digital
exchange in the world can support those data structures.
And then you can publish, you can create a client that
publishes the data structures, you create all the audits.
So that's standardized disclosure that reduces the
friction. You know, instead of like 200
pages of custom legalese for every security, you've got one
data structure and you convert a three month process into a three
hour, 3 minute or three second process.
And the second idea is industry LED compliance.
If you define the data structures, then the exchanges
can collect and publish the data, you know as a service to
the, to the issuers, to the investors, to the other traders,
etcetera. And that helps you get to the
third element here which is cap the cost.
If you want it to be a real business, you can't afford to
spend more than 100 basis points of the assets you issue in order
to issue them. So if you're going to, if you're
going to raise a. 100, that's a lot, by the way, 100 basis
points for people, for people who don't know, like one basis
point is 110 thousandth. So 100 basis points is like 1%
of your asset. That's extremely expensive.
To go ahead, what I'm saying is if you wanted to raise 100
million, you definitely can't spend more than 1,000,000, not
1%. Might be a big investment banker
fee or a fee you might pay. I came public and when we came
public sometimes, you know, the fees were up to 6% for a small
deal, 3% for a bigger deal. But, you know, we might pay 1 or
2% for a big deal if we're doing a bond deal.
But here's my point, the big point.
It costs $10 million a year in order to stay public, to be
compliant. And you might spend 30 or $40
million to get public. And so it's pretty obvious that
if you want to raise 1,000,000 bucks, you can't pay $40 million
for an insurance policy and you can't spend 10 million a year in
order to raise $1,000,000, right?
It's kind of like saying you got to basically buy a $10 million
insurance policy to publish a website or express opinion on X,
you know, it's it's or to post a video on YouTube, you got to buy
a $10 million a year, you know, liability insurance.
Policy. They were trying to push the
world in this direction over the last few years.
The establishment was and unfortunately they lost, but
they were trying to do this. Yeah, I I definitely can see it.
And here's the sad fact, Balaji, which is they did do it in 1933
for all for all publicly traded assets.
They didn't lose. If you read the history of Money
and Banking by Murray Rothbard, like something like 50 years
ago, in the last century, he wrote about the formation of the
modern SEC and he writes about the SEC 33 Act.
And one thing that he points out, long before the crypto
industry was formed, as he says, the SEC 33 and 40 Acts, they
were put in place to centralized control over the capital markets
in Washington, DC and limit access to the capital markets to
a very small cartel of large issuers that could be overseen
by the government. And, you know, he has another
observation. He thinks it was the
Rockefellers interest edging out the JP Morgan interest and
shutting down too much entrepreneurialism in New York
City. It was a it's.
Funny to say that because I wanted I wanted to put something
on screen for a second, which is exactly this.
The SEC essentially was set up to limit self allocation.
Right, to put allocation of a capital economy placed under
federal control, a planning agency would assign capital
industries and then apportion the allotted capital, right?
The need would decline, right? So a federal planning agency,
not the security industry, would operate the process by which
capital is allocated through the economy.
So the this was the whole point of the SEC was step one, control
capital allocation in the economy itself, right?
And just go ahead. Yeah, you think about it is.
And yeah, I think there's a certain Stockholm syndrome or
remember in the in Star Wars, they say these are not the
droids you're looking for and there's a Jedi mind trick.
It's like, you know, raising money from the capital markets
is not for you. You're too small.
That's not for me. I'm too small.
That's only $4 billion mega corporations, but you're not
that. So raising money is not for me.
And it didn't used to be like that.
It used to be that a small cap could, you know, could, could
get out there. It's it's modern Starbucks has
made it so expensive. Yeah, yeah.
So it comes down to the issue of are you going to let adults take
risks and lose their money, right.
Are you going to impose a $10 million insurance policy to keep
someone from taking $100,000 risk?
And if you do that, the result is that 99.9999% of the action
can't take place because of the crippling regulatory burden,
because the government wants to keep anybody from taking a risk
or, or losing their money or making an investment that might
not pay off. And, and you know, it, it comes
down to a, a free market view. Do you believe that free markets
will make the right decision or do you want a centrally planned
economy? And do you think a set of
bureaucrats at the headquarters should just decide every single
business decision and every allocation of Labor and capital,
you know, and talent in the economy so as to quote, UN
quote, not make a mistake. Well take a look at this.
So this is the peak number of listings was mid 90s and then
especially after Starbucks and so on, it basically just fell
off a Cliff to almost, you know, 70% drop in the number of, you
know, listed equities because the price went up so high.
And I thought you're phrasing just now of $10 million
insurance policy to prevent $100,000 loss by somebody.
It's really good way of thinking about it.
Where the insurance is so expensive, basically people are
only thinking about risk, they're not thinking about
reward, and they're not properly calculating the cost of that
risk. And the whole thing is just a
pile of paperwork versus being rational about it.
Yeah, I've lived through it that Bellagio because I came public
in 98 and I think there were about 10,000 plus public
companies. But over the next 20 years 60%
of them disappeared. And basically what what happened
was with Sarbanes-Oxley and, and with, with the encroachment, the
progressive encroachment of the regulators on the public
markets, it just became so brutally painful and expensive
and risky and anxiety inducing to be a public company.
People just said, you know, screw it, I'm just not, I don't
want to do this anymore. And they all went private and.
Paradoxically, that led to the rise of the great tech companies
because it meant that Zuck and others did not could not for
many years. In tech the the wisdom was don't
go public, go public as late as possible.
And the good thing about that is it meant that they controlled
their companies all the way up and so they could have voting
control and they could make bold decisions and so on for the
public. The bad part is that they
actually missed out on the upside of that with Bitcoin or
with, you know, cryptocurrencies, they actually
have an ability to get that upside.
But for many of the giant tech stocks, most the upside happened
before the public markets. There's exceptions, the big
exception being NVIDIA but or Apple arguably.
But still it's something where a lot of the upside was not
available in public markets. Because for that let me know
your thoughts. Well, I, you know, I think
there's about 5040 to 50,000 publicly traded companies in the
world. There's 4000 in the US, but that
even that really understates the problem because of the 4000 in
the US, there's only about 400 or so that are well known
seasoned issuers. So that means there's 400
companies, maybe 600 that can file a registration statement
and sell securities the next day or within a couple of days
without waiting for approval from the SEC or from a
regulator. On the other hand, there's 400
million businesses that can express an opinion or create a
product or improve a product. So if you look at, if you look
at the economy for products and services, it's evolving at a
very rapid rate. But if you look at the economy
or the in the capital markets and you look at the rate at
which we can develop capital assets, they're crippled and
evolving at a very slow rate. If I want to do something as
simple as maybe I want to tokenize the Picasso painting,
well, you own the painting. It's worth 10 million bucks and
you want to sell 100 shares of it and you'd like to float that,
you know, on an exchange. There's a global market for IT.
People would like to own it, but it would cost you $40 million to
take a company public and 10 million a year.
So you see at some point it just you can't capitalize, you can't
legally practically tokenize an asset that isn't a billion
dollar asset. So what we've done is we've
just, we've capped the market such that if you're not running
a billion dollar to trillion dollar enterprise, the capital
markets don't work for you, right?
And, and the crypto economy, the crypto markets, they've tried to
overcome that and they've issued millions and millions of crypto
assets, but they, they haven't been legitimate.
They've been deemed illegitimate.
And that's why we've had the war on crypto.
And so this framework would allow us to create legitimate
digital assets. And the way you'll know it
worked is you can actually tokenize a $10,000 asset,
100,000 a million dollar, 10 million, a 100 million, a
billion, a 10/10 billion. It's like it's hard to defend
the status quo even because yeah, there are examples of
successful companies that are monsters, but they would have
been successful despite regressive regulation.
I would argue that Apple stock would be more valuable if it was
tokenized and it could travel to any iPhone or any Android phone
anywhere in the world on Saturday afternoon.
People would find it to be better collateral than it is
right now. It would there would be a lot of
innovations. My point is it's not practical
to issue an asset if it costs more than 10 basis points a year
to stay compliant. And you can pull that number by
looking at the ETF industry and you'll see that any democratized
asset issued by BlackRock or look at like SPY or or others,
when they get to more than 10 to 20 basis points, they get
crippled. You can spend 10 basis points.
10 basis points means that over a decade you give up 1% in order
to stay compliant. But when you get to more than
that, it means it's kind of a regulatory encroachment.
It's so much friction is crippling you.
If you want the industry to come to life, you need to take the
regulators off the critical path of issuing assets.
You can't file to to tokenize your Picasso and wait for three
months. Oh my God.
Right. It's, it's the thing about this
is it's actually dead weight loss, right?
Those delays make less money for actually the government, for the
seller and for the buyer. They they just the, the whole
concept of imposing queues and waits and delays for no reason
is something that just costs everybody in the system money
and doesn't gain anybody anything maybe obviously.
And I'm the case is worse than that, Balaji, it's like I said,
three months. But the truth is, if you want to
actually tokenize an asset legitimately in the United
States, it would be 3 years of work.
It's three years of work, 30 to $40 million of accounting and
lawyering. Then it would be 3 months of
filing the paperwork. Then it would be $10 million a
year to stay compliant. So, so if you think about
everything else in our world, think about the entire
innovation economy, if it took you 3 years to publish a
webcast, if it took you 3 years to come up with a new idea,
right? It just takes too long.
And so, and, and the answer is it's like, imagine if it took
you 3 months to get permission to drive your car out of your
driveway to go across the city, right?
Or it took you 3 months of to get permission to put food in
your mouth. It should, or to breathe, right?
It's just, it's just ridiculous. But that is the problem we have
today. And the answer, of course, in an
enlightened society is if you drive your car out of your
driveway and you run over a bunch of school kids because
you're speeding and drunk, you have criminal liability and
civil liability for operating the vehicle in an unsafe
fashion. So what we ought to do, and we
do the same thing with like posting things, and we do the
same thing and every part of our economy that works, we let
people think for themselves and innovate and create and find a
customer, and then they're civilly and criminally liable
for their actions. And so here what we need to do
is just take the regulators off the critical path.
We need to have a set of data structures.
The industry will create a set of services.
And then if you have 100 Picasso's and you want to
tokenize all hundred of them, you know, you take the photo,
you post the certificate of ownership, you upload it, you
publish it, you offer it to the public, the market forms.
Maybe the IPO fails, maybe they succeed.
Maybe, you know, maybe you, you know, you sell the thing and
you're a cheating criminal. And then someone sues you and
you go to jail because you committed criminal fraud.
All that stuff just needs to happen right in a rational
fashion, needs to happen a million times faster.
So that's the idea of a practical framework to do this.
The only thing I'd I would just say about that is there there
is, it's it's possible. One thing I think about is
regulation is like binary classification.
If you know the concept of a binary classifier, for example,
you're you're you for each security issuer, either they are
good or bad and then what you detect them as being good or
bad. So you could have a true
positive, a false negative, a true negative and a false
negative. And so you know, for example,
you know, you're detecting good guys versus criminals in terms
of issuers. Or you know, you're, you're,
it's like similar to a molecular diagnostic.
You're looking at someone who's, whether they've got a disease or
don't have a disease. And then your readout, your test
says, you know, positive or negative.
It's you can have all four possibilities, true positive,
false positive, true negative, false negative.
And we actually start measuring the regulatory state by the
speed and quality and cost by which it actually makes these
classification decisions. And so you mentioned one
variable, which is they should do it a lot faster.
Another thing is we should have independent regulators.
You know, for example, if you have regulators from different
states or cities or countries and they have the same judgement
about somebody, that's actually one thing.
Versus if they have different judgements, it's sort of like,
let's say there's a driver and you know, they don't like their
rating on air on, on Uber. You know, they can actually go
to Lyft instead. And maybe they just had a bad
experience on Uber, for example. So I think that there's there's
something to that where you actually have some check and
balance on the regulator itself where you start looking at their
history of correct classifications.
Because the reason I say that is with the SEC over the last 3-4
years, they were not going after FTX.
In fact, they're meeting with Sam Baker and Freed while they
were attacking many of the legitimate projects in the
space. And Ben Horwitz has talked about
this, that it was almost like an intentional thing where they
wanted the space to be littered with scams and frauds and go
after legitimate projects so that this way it would just kind
of corrupt the whole space and, you know, go ahead.
Yeah, I'd say being charitable, it's it's just hopeless for a
government agency to to do some of these things, but.
In the West, I would agree with you, yes.
And that's why I think a lot of this is going to be led by tech
companies. So go ahead.
Well, let's take let's take eBay, right?
What we really want is a marketplace to form like eBay,
where you didn't need to get government permission and wait
for three months in order to list, you know, your comic book
collection on eBay. But at some point the sellers
have a reputation or the issuers in that case have a reputation.
But eBay had an interest. And over time, the free market
kind of figured out how to, how to figure out who to trust, who
not to trust and how to take risk and how to clear the
market. So, you know, you would think
that digital exchange like Coinbase or Binance will start
to apply, you know, AI and modern techniques to figure out
whether someone's getting ripped off or not getting ripped off.
And, and, and over time, people will work it out.
But what's clear is you kind of, that's why I think we wouldn't
have 1500 exchanges. You might all of a sudden see
Apple and Google and Meta get into the business and Microsoft
and you might get see all the banks and you might see lots of
Wall Street firms and hedge funds.
And then you've got the natural short sellers and the natural
arbitragers. And in a world like that,
there's a lot of people that will write a computer program
that sifts through 10 million things at, you know, at the
speed of the computer. And they form an opinion about
whether it's a good thing or a bad thing and they short it or
they go along it and just let the market cook, right.
The key point here is the market just doesn't work if there's a
regulator on the critical path. So they need to publish some
standards and guidelines and get out of the way.
And, and then you will actually have a, a practical path to
compliance. And then you can empower
regulation or sorry, empower innovation.
And then, you know, what you're getting is exponential
improvements. You know, you're going to get
exponential improvements in cost and speed and accessibility.
You know, just like what's happening with all these AIS
right now, you're looking at these things and they're
changing every week, right? And, and, and on the other hand,
you know, Balaji, I can legitimately tell you that I
came public in 1998. You survived quite a downturn.
You yourself are actually like, that's why you can be in
Bitcoin, because you survived this giant downturn and you
survived all the way through and rebooted.
I did, I, I lived through 99.999 point 8-7, maybe 99.9% downturn
there and back again. But here's the point I'm going
to make. I haven't seen an innovation in
the way to my stock trades on NASDAQ since we came public.
Not one. It trades the same way.
It's literally the same thing for 26 years.
You know, the only innovation is just HFT guys, which is not
really an innovation That's like it's it's it's arbitraging the
thing that shouldn't matter, which is like the ping time to,
you know, where the actual exchange is in downtown New
York. Go ahead.
I'm like, well, for the issuer, we got one thing, we got the at
the market ATM, we got that one thing that was somewhat useful
to us, but but there was nothing else.
So if you think about what happens when the regulators get
out of the way, you would have 1000 exchanges all competing to
provide the best service. The irony is within about a year
of us getting into Bitcoin, Binance was trading MSTR token
on Binance 24/7 365. So we actually had the first
innovation in the crypto economy from a company not even in the
US. And of course, and of course the
result was the German regulator shut it down like like the one
innovation that took place. And the regulator's view was we
just have to stop that as opposed to let that continues.
Let's go on to the vision. So the, the vision is instead of
taking 10 to $100 million to issue an asset, we move the
price or the cost to issue an asset to $10 to $100,000, right?
Let's let's change my orders of magnitude.
Instead of taking months and years to issue assets, let's
change it to hours or days. The amount of time it takes you
to post on Airbnb or at the amount of time it takes you to
post on eBay or the amount of time it takes you to post on X
or YouTube. Let's change it.
And then instead of having 4000 publicly traded issuers in the
US, let's shoot for 40 million. And instead of limiting access
to the capital markets to very, very large companies, let's
empower small businesses. Let's empower artists,
celebrities, mid size enterprises.
Let's a lot. Let's empower them to tokenize
assets and let's, let's expand dramatically the asset classes
right now. People think about things that
trade on Robin Hood. It's like, what can you trade?
You can trade like equity for the most part.
But if you look at the market of, of preferred stocks and
assets and commodities and collectibles and IP and brands,
most of those things don't trade via four letter ticker on Robin
Hood. It's, it's, you know, there
isn't that much art that's tokenized.
It's very difficult to do it. It's hard to tokenize real
estate. It's hard to tokenize other
things people might want to buy. If you look at publicly issued
fixed income instruments, which is 300 trillion of them, most of
them trade over the counter. The spreads the bid ask are very
wide. They're illiquid.
So it's like a 300 basis point spread to buy or sell a bond.
There is no quote. Is a dark market.
You need a $25,000 subscription of Bloomberg to even get the
quote. So why is it that we block 99%
of the investors and then we have 300 basis point spreads
instead of three basis point spreads?
And why is it that so much asset is sitting?
Why is it the most of the art in the world is sitting in vaults
underneath mountains in Switzerland and not trading,
right? They're they're, they're state,
they're dead assets in cold storage, just like your cryptos
in cold storage. And it's because we haven't
really democratized access to all these things.
So I think I think with the right framework, we can usher in
a renaissance where you can tokenize hundreds of trillions
of dollars of assets. And I'm not talking about just
Bitcoin. What I'm thinking is Bitcoin is
just the capital asset. I'm thinking that there's that
we'll get to $500 trillion worth of equity, real estate,
commodities, collectibles, arts and DID and new digital assets
that will be created and legitimized, digital NFTS,
digital tokens that never existed before, right?
And then there'll be a whole range of products and services
that come to life on top of those digitized assets that are
inconceivable right now. Like most people, if they hold
equity, like if you, if you hold $100,000 of equity, it's not
likely somebody wants to give you interest.
It's very difficult to pay, get paid interest, but there's
someone that wants to short that equity.
So in theory, you ought to be able to collect five 450 basis
points. Like if you have $1,000,000 of
of of equity, why can't you get paid SOFR on the $1,000,000 by
someone or half of SOFR? Because in theory, a bank might
very well post that block of asset and charge the SOFR rate
and split that interest with you.
And the reason that you don't get paid interest on $1,000,000
of equity, but you do get paid interest on $1,000,000 of
treasuries is because one asset gets superior treatment by your
bank and the other asset, the other asset the bank feels like
it doesn't really need to. Right.
But it could be you could have, you could have the benefits of
full custody while also maybe getting some return on that
asset where it's just much more agile.
It's more, it's more liquid, it's more visible, it's more
more collateralizable if it's on chain.
Or or maybe I would just say you ought to have the option to have
the benefits of full custody, which is you own it, it's a
bearer instrument, it's tokenized on on your handheld.
Or if you're willing to loan your assets out to a bank and
let them re hypothecate it, you ought to have a choice of 1000
different banks. And maybe there's someone in
Singapore that'll give you a better deal than the bank in New
York City or somebody in London or Paris or fill in the blank.
And you know, granted, maybe they're untrustworthy
counterparties and they're going to rug pull you.
But the, the real point is people ought to have the freedom
to own their own assets or trade their assets or custody their
assets. And the marketplace ought to be
able to form capital markets. Maybe it's not, Maybe it's I'll,
I'll give you a loan against it. Maybe it's, I'll give you
interest on it, but maybe, maybe it's something different.
Maybe it's I'll form a derivatives market.
Like for example if I can tokenize a bunch of old masters
art, then maybe someone else can create a derivative of old
masters arts and and sell me futures on it right?
Or maybe I can I can short it or go long or.
Basically, we can make, we can make all these combinations that
we couldn't make before. Yeah.
And, and, and that market comes to life when you were able to
pull a billion dollars of liquidity on a global basis.
And that market and by the way, when you publish it and you
trade it 24/7. But when you have an illiquid
pool in a dark market with someone with a monopoly on it,
when one of the problems is you've got one bank in Kansas
and they're the market maker on real estate in Kansas.
And they set the price, they set the bid ask and no one else gets
to enter that market. No one else has transparency.
And so instead of them giving you the highest common
denominator, they're the lowest common denominator.
And there's a pretty big difference in the way the
markets function when everything is up forbid to everyone all the
time in real time with with transparency.
And that's a world where everybody just gets treated
better. Absolutely.
So let me see if I can recapitulate your PDF.
You have these six definitions which cut the space in a useful
way. Next we define these three
categories. We have the buyer, the exchange
and the seller, and anybody can be any of these three things.
But the overriding principle is not paperwork, it's not cost,
it's not delay, it's not bureaucracy.
The overriding principle is just don't lie, cheat and steal.
And this 21st century securities and markets regulation, if
designed in this way, would be something where any mom and pop
could raise money, where it's similar to just like any
business can go online, any asset can go on chain, where
people can raise debt. Where if you've got a chess
podcast or a chess website in Florida which has a global
audience, you can actually raise from that audience.
All these things that are obvious to us that should happen
could happen. And the new administration could
be a leader in this. Is that a fair summary of your?
Analysis. Yeah, that is a fair summary.
Awesome. Well, Michael, this is great.
Thanks for being here. And we will.
We'll see you soon. And maybe I'll, I'll, I'll see
you in Miami next time I'm out there.
Yeah, thanks for having me.