Recording:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership, and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism. Right here, right now at the NYSE and at Ice's 12 exchanges and six clearing houses around the world. And now welcome Inside the ICE House. Here's your host, Josh King, of Intercontinental Exchange.
Josh King:
When we start out the show, I'll often draw a connection between a discussion we're about to have and something happening here at the New York Stock Exchange. But today we're heading up the street to 33 Liberty Street, home of the Federal Reserve Bank of New York. It's the largest by assets of the 12 regional banks within the Federal Reserve System, the most active by volume, and arguably the most influential. While the New York fed, like the NYSE, was designed in the Renaissance style it's also designed to be a fortress.
Josh King:
Tours of the New York Fed are available to the public, but it's not a history lesson of our nation's fiscal policies going back to Alexander Hamilton that grabs tourists' attention. No, it's the world's largest depository of monetary gold, 497,000 gold bars with a combined weight of about 6,190 tons resting literally on the bedrock of Manhattan, 80 feet below street level and 50 feet below sea level. The Federal Reserve is the gold custodian for account holders, such as the US government, other foreign governments, other central banks and official international organizations. All that gold came here during and after World War II when many countries wanted to store their reserves in a safe location. Holdings continued to increase, but peaked in 1973 at about 12,000 tons of monetary gold, almost twice what it is now. And it's been in slow decline ever since.
Josh King:
Will it fall even further? What will replace it as the reserve asset of the depositors and also institutions and family offices? Cryptocurrencies, like Bitcoin, perhaps. That might seem a risky bet for while the price of one Bitcoin peaked December 7th, 2017, it fell to as low as about $3,000 a year later. The Bitcoin winter was at full blizzard last Christmas when it approached. And what happened since? Well, it's hit 13,000 again on June 26th. And while it's been gyrating up and down a bit in the days since, it's at levels that many skeptics didn't think it would see again.
Josh King:
I'm reading the Wall Street Journal over the weekend. Britton O'Daly wrote quote, "Bitcoin is booming again. And one of the biggest beneficiaries is a fund that provides everyday investors with access to the world's most popular cryptocurrency." He went on to say that, "Grayscale Bitcoin Trust had gained 192% in just the second quarter of 2019. No fund performed better during the first half of the year." Grayscale Bitcoin Trust is part of Grayscale Investments, LLC founded by our guest today, Barry Silbert, founder and CEO of Digital Currency Group. Barry's not shy about his opinions and he has lots of opinions about the 497,000 gold bars that sit in the basement of the New York Fed and about gold in general. They call him the crypto king and he has a bone to pick with gold. Our conversation with Barry Silbert about that and much more right after this.
Recording:
And now a word from Tufin, NYSE ticker symbol, TUFN.
Recording:
We provide policy management for large organizations. Your security is only as good as your policy and we are the security policy company. So, we enable companies to implement network changes in minutes, instead of days with dramatically better security. We have over 2,000 customers worldwide. 300 companies in Global 2,000 are Tufin customers. We're going to invest more in R&D go after this huge market opportunity that we have. And it's very exciting to look at the next phase of Tufin.
Josh King:
Considered one of the foremost pioneers in cryptocurrency, Barry Silbert began buying Bitcoin in 2012 and quickly established himself as one of the earliest and most active investors in the industry. He's the founder and CEO of Digital Currency Group, a global enterprise building, supporting and investing in over 140 companies across the globe, including Coinbase, Ripple, BitPay, and Circle. DCG also owns three companies, Grayscale Investments, the largest asset manager in the Bitcoin and blockchain industry, Genesis Trading, the largest regulated OTC crypto trader and lender, and Coin Desk, a media and events business covering digital currencies that each year produces consensus invest. Barry, welcome Inside the ICE House.
Barry Silbert:
Thanks for having me.
Josh King:
When it comes to Bitcoin, how tempted are you at any particular night with your iPhone in your hand and the Twitter app open to tap it I told you?
Barry Silbert:
Look, it's been quite a journey. When I started buying in 2012, didn't tell my wife about it. Nibbling, buying pieces of Bitcoin here and there off of this exchange in Japan called Mt. Gox. And eventually I told my wife, "Hey, we now own $5,000 or $10,000 of virtual fake money."
Josh King:
Question, what per Bitcoin at that point?
Barry Silbert:
I was about $8.
Josh King:
Oh my God.
Barry Silbert:
Yeah. And the price went up, I think maybe to $15 and my wife thought I was really smart. And then the price fell down to $5 and maybe not so much anymore. But over time as the price continued to go up, I just wouldn't stop talking about it. It was one of those things where if you knew me at the time, 2012-2013, my employees at Second Market, my friends, my family, it just became a passion. Most people who get excited about Bitcoin, it becomes a real passion for them.
Josh King:
How did you find this virtual thing priced at $8 a coin from Mt. Gox? What was the first moment that you stumbled upon this thing in 2012?
Barry Silbert:
Well, I think everybody who gets involved in Bitcoin, they have an interesting journey. And so for me, 2011 is actually when I first heard about it. And if I remember correctly, I think there was a Wired article that came out. I think it was about Silk Road, this marketplace where you can go buy drugs and other bad things. And that wasn't what drew me to it. And I had just read a book by Charles Hugh Smith, a really interesting author. And the book was called an Unconventional Guide to Investing in Troubled Times.
Barry Silbert:
And at the time, this is 2011, I was really convinced that we were not through the whole credit crisis. I had thought that we were going to have another leg down because I had also read I think it was The Great Crash by Galbraith, which talked about in the '40s it was just everybody thought that we were out and then another leg down, everybody thought we were out, another leg down. And so I was just convinced that we were going to have another leg down in the market. Obviously I was wrong.
Barry Silbert:
But so I was very open, very receptive to the idea of asset classes that would theoretically perform well in periods of economic dislocation. And so I saw this Wired article, I had read this book by Charles Hugh Smith. But for me it was about nine months of being a skeptic. I just I said, "Bitcoin, super interesting. It's similar to gold, but it's digital." And the questions that I had to have answered, like everybody, was could it be shut down? Is the code real? Is this only being used by drug dealers and bad people? And over the next nine months, I became a bit of a student about money and the history of money. I became at the time, a bit of a believer in gold actually. And then started slowly buying it. The more I dug in, the more I came to appreciate that it's truly transformative. It's going to change the way that financial markets work.
Josh King:
So if you can fast forward to 2018, what was going through your head last Christmas when it almost dipped below $3,000? You're into it for $8 a coin, so you're okay. But I'm reading about Neil Armstrong talking about history 50 years ago, this month in the lunar module, as it descended toward the moon, his heartbeat elevated briefly, but then returned to this absurdly low resting rate as he approached the lunar surface. If you were connected to an EKG last December, would there have been any unusual flutters?
Barry Silbert:
Not at all, cool as a cucumber. And the reason why is Bitcoin has now gone through five 80% drawdowns in price. And in the previous four, the price hit an all time high after it recovered. And so look, after the first one, as I mentioned before, scary. The second one, you wonder is it going to come back like the last time. By the third and then the fourth, you're buying. And so in the depths of the crypto winter, we were buying Bitcoin. We were investing in companies. We were investing in entrepreneurs. And look, we're not back at the all time highs, but if history's any guide.
Josh King:
So one of the companies that is under your umbrella at DCG is Grayscale Investments. And the Journal story over the weekend that I referenced said, and I quote, "Grayscale Investments is one of several firms or groups that have pushed to be listed by a major US stock exchange. Thus far the SEC hasn't granted approval to any of them." Why the reticence and what needs to happen?
Barry Silbert:
Well, the SEC has a, look, they have a tough job here. And the issue is you have 70 year old rules in the 33 and 34 Act that are constantly needing to be updated and modernized. And here we have a new asset class that is not really equity-like, it's not fixed income-like, it's not currency-like, it's not precious metal-like. It's kind of all the above and none of the above. And so I think that the SEC, look, they've been thoughtful. They've been methodical as to how they've been approaching the whole Bitcoin ETF opportunity. And we've had many, many, many meetings and calls with the staff. And I think at this point, it's fair to say, it's not a matter of if, but when.
Barry Silbert:
And if you listen to the public commentary being put out by the chairman and the commissioners, I think the focus right now is around market surveillance, making sure that no sketchy activity with the way that the underlying assets trade relative to ETF. And then I definitely think that there's a real desire to make sure that the price that the ETFs trade off of is based on exchanges that are deemed to be regulated and well run, which is certainly one of the reasons why I'm really excited about what ICE is going to be doing this year. Is it a 2019 approval from the SEC? Probably not. But is it 2020-21? I certainly hope so.
Josh King:
I want to talk about some of the latest headlines that have been coming out of the crypto space. As of last Friday, David Solomon at Goldman Sachs was hinting at a crypto launch. JP Morgan's Jamie Dimon, of course, acknowledged that the threat of competition from cryptocurrencies is real. And KKR's Henry Kravis has said to have invested in a cryptocurrency fund offered by ParaFi Capital. You've been tweeting over the last few days, your amusement, if I can call it amusement, over some of these stories. And do I have that right, amusement? You wrote, "Come on in the pool is warm."
Barry Silbert:
Yeah, it's complete validation. I think it's a recognition that digital assets are here to stay as an asset class. I think it's a recognition that it's clear that money's going digital. And it's clear that in the future physical cash is going to go away. And it's also clear, based on history, that fiat currency tends to not exist into perpetuity. The average life of a fiat currency over the past 500 years is 27 years. So, what that means is on average in 27 years, a government will destroy their currency or value of their currency typically through debasement or through war.
Barry Silbert:
And certainly not suggesting that Bitcoin is going to displace or replace the US dollar, not going to replace the Euro anytime soon. But if you look around places like Venezuela and Argentina and all these countries around the world, it's clear that something other than the local fiat currency would have real demand and real appeal. So I think when you see JP Morgan or Goldman Sachs or Facebook or any of these folks getting involved in creating a digital form of money, it really just kind of points to where things are going in the future, which is non-fiat, distributed, decentralized digital forms of money.
Josh King:
There's been a lot of talk about what's driving the most recent volatility from trade talks with China to, as you mentioned, Facebook's announcement of Libra. What do you chalk it all up to right now?
Barry Silbert:
It's a few things. One is, as I mentioned before, if you look at the history of Bitcoin trading, 80% drawdown in price, all time highs. And so I think once the market got comfortable that the lows were in. And so what seems to have happened in the three thousands, it was really just a matter of when were we going to see the flows coming in? When were we going to see the momentum come back? And once the price recovered and got back to 4,000-5,000, I think it brought some excitement, enthusiasm, some money back into the asset class. And then you had the macro events, the China trade talks.
Barry Silbert:
But I think what's going to propel it forward though and I think what investors may be looking towards is number one, in the second half of '19, there's going to be launches of some really, really important infrastructure and on ramps. Fidelity's launching an on ramp. There's lots to talk about Ameritrade and E-Trade launching an on ramp. Backed effort is going to be really important.
Barry Silbert:
And then I think a lot of investors who are familiar with Bitcoin also know that in 2020, there's something called a having event, which is essentially every four years built into the code of Bitcoin the inflation rate drops in half. And so what it means is on a daily basis, half the amount of Bitcoin that gets created today will get created a year from now. And that has happened twice before. And each time that's happened in the past, the price of Bitcoin has gone up something like 500,000% afterwards. So, really the question is is it priced into Bitcoin? Well, it wasn't previously. And so if it's not priced in, the question is when is it going to get priced in? And so I think that there's definitely some buying happening right now with investors who see that happening next year. I think it's May of 2020 and are trying to get into Bitcoin before everybody knows about the having.
Josh King:
For those who listen to Barry Silbert in the first few minutes of our conversation and sit there in their cars, doing the dishes, mowing the lawn, and are entirely skeptical about everything that you are saying, talk to me about the five phases of Bitcoin acceptance.
Barry Silbert:
So phase one is dismissive. You hear about Bitcoin. And you that's just, that's stupid, that's silly, that's Ponzi scheme, tulip bubble, that's rat poison.
Josh King:
Some of these gold bugs who've been tweeting at you over the last few years.
Barry Silbert:
Indeed. Although, a number of gold bugs are Bitcoin fans, but it's the rat poison comment is dismissive. Phase two is skeptical. So these are people who actually spent a little bit of time going beyond the headlines and understand the basics, but say, "There's no way that's going to work. I can see why it might be interesting, but it's not going to work."
Barry Silbert:
Then you move to phase three. Phase three is intellectually curious. So this is where you start to say, "Well, why is Bill Miller of Legg Mason excited about this? Why is Mike Novogratz excited about this? Why is Jack Dorsey excited about this? Why is Elon Musk excited about this? And you start to dig in, you start to ask questions, and you start to learn.
Barry Silbert:
And then you move on to phase four, which is a believer. If you're an investor, that's when you write your first check and buy your first Bitcoin. And then some of us, some of us move on to phase five and that's evangelism. And that is running around, educating, spreading the news, spreading the gospel, and explaining to everybody around the world why Bitcoin is an amazing innovation that if successful is going to be fantastic for society.
Josh King:
Evangelism, I never would've thought that I might label CNBC's Joe Kernen with that label. But I want to hear a little bit of a commentary that he made last week on the air.
Joe Kernen:
Only Bitcoin is currency for the people, for the people themselves. I'm feeling like an evangelist almost. But is that wrong, that this looks like it's all about the money? And I don't know, who made Facebook, who put Facebook in charge of giving currency to the rest of the world, some social media site? Why should they be the ones in a position to dictate how digital currency works?
Josh King:
So, he basically copped to being a phase five evangelist.
Barry Silbert:
He did. Although over Twitter, he reversed. And he said he's actually only phase four right now, but we'll get him to five.
Josh King:
Not bad for Kernen.
Barry Silbert:
Not bad. Well, he went from-
Josh King:
You'd think he'd have a couple gold bars in the safe at home.
Barry Silbert:
I feel like he went from one to four in the course of about three weeks.
Josh King:
Speaking about going from one to four in the course of three weeks, I do think there was an inciting event. I'm not sure it was completely your advertising campaign, which we're going to get to. But let's go back a few weeks ago and hear a little bit from Brian Kelly also on CNBC on the day that Facebook announced Libra.
Speaker 7:
Facebook going full crypto, unveiling its new digital currency Libra today. The start of what the social giant calls the internet of money to rebuild a reliable and global financial infrastructure. But our resident Bitcoin baller, Brian Kelly, says it's not exactly a cryptocurrency. He's over at the plaza with a little crypto class. BK, take it away.
Brian Kelly:
Yeah, sure. So, let's get into this. This is not to put down Libra. I think this is a huge step forward for the entire space. But let's just look at how this works and what you're getting into, if you're going to do Libra. Okay. So how does it actually work? What are the mechanics? First thing you do is exchange dollars, yen, euro, whatever the basket's going to be for your Libra token. So, Facebook gives you a Libra token for your dollars. So, Facebook is now holding your dollars. You have to trust Facebook that they're going to hold onto those dollars, they're going to keep track of the ledger, and that your token's going to be worth something.
Josh King:
Barry, you wrote of the launch, "It will be remembered as just as important and transformative as the launch of the Netscape browser." What do you make of Libra?
Barry Silbert:
So if you remember the internet back in the '90s-
Josh King:
When you were driving Robert Wright around Atlanta.
Barry Silbert:
And I was at school at Emory and I think the Netscape browser had recently come out. And we as college students were for the first time getting on the worldwide web. And prior to that, the internet was a really hard concept to grasp and its utility was unclear. And if you look at the impact that Netscape had on awareness and accessibility and utility of the internet, it was transformative.
Barry Silbert:
And I think Libra, look the currency itself, I'm not sure it's going to last and I'm not sure that, as an investment, there's a separate token that they have, a security token. I'm not sure that'll be a great investment. I'm not was saying it won't be. But what I do know is if the Libra, I think they call it an association, can get it off the ground, it is going to put in the hands of billions of people around the world, a digital asset wallet. And that digital asset wallet initially, presumably would be used for Libra, but it won't end there.
Barry Silbert:
The launch serve as a catalyst for infrastructure build. All around the world, the on ramps and the off ramps will be built. The tools will be built. Developers will build on top of it. And over some period of time, the general consuming public will come to appreciate the power of frictionless movement of money cross border without having to rely upon middle men and paying exorbitant fees. And so over time, I do think that it's going to open up the floodgates to different types of digital assets, whether it's people buying Bitcoin because they want to have the digital gold analog. Or if people want to buy in game tokens that are now tradable or if they want to buy Ethereum because they want to run a smart contract. Libra's going to be an enabler of all that.
Josh King:
The general consuming public is one audience, regulators are another. Coin Desk reported a few weeks ago, that House Financial Services Committee Chairman Maxine Waters had asked Facebook to halt development of the Libra until hearings can be held. You replied that, "This really makes me appreciate just how unstoppable Bitcoin truly is. So, I've seen all the skepticism surrounding Libra, as it's predicted that Facebook will face this long path filled with regulatory scrutiny from Capitol Hill, especially given their struggle over security and privacy issues. Regulatory approval is a huge issue for innovators in the digital asset space." For the average listener, what are governments worried about?
Barry Silbert:
Well, I think one, governments are worried about the use of all different types of technology for terrorists or money laundering type activities. And that's obviously a valid concern. I think two, governments are concerned about investor protection and consumer protection, which again I think is completely valid and important. And three, I think over time, governments will start to become a bit concerned around the let's call it the competitive threat of a non-fiat currency and the impact it'll have on their ability to control and influence fiscal policy, monetary policy.
Barry Silbert:
And look, there's, there's lots of schools of thought as to whether or not that's a good thing or a bad thing. If you take the power out of central banks to try to stimulate or slow down an economy, I think within the Bitcoin circle, there's tends to be more libertarian, tends to be more focused on Austrian schools of economic thought versus Keynesian. But look, I think we're pretty far off from Bitcoin being a competitive threat to the Federal Reserve.
Josh King:
So Barry, companies like Facebook and Goldman Sachs have ready access to cash to fund their projects for as long as they take to build. But anyone who follows the crypto press knows that there's hundreds, maybe thousands of others ideas out there that are germinating. How is the funding and cash burn rate of this space given how delayed some of these projects are?
Barry Silbert:
A lot of projects raised money in let's call it '17 and early '18 via a mechanism called an ICO, an initial coin offering. And I think at the time when it was happening, we steered clear because for the most part most of these projects, projects that were raising money, were creating these tokens. That it was definitely unclear to us that the tokens even needed to exist. And so it kind of felt to us that these were essentially kind of fundraising efforts, which meant that, for the most part, they were security offerings. And it was our expectation that the SEC was not going to like that. And so that source of funding all but came to an end towards the latter half of 2018.
Barry Silbert:
And so where we sit today in 2019, there's very few projects that are now raising money via these token offerings. There's a new wave of companies that are essentially trying to tokenize their equity, kind of creating these so-called security tokens, which look, I think it's interesting. I think the idea of removing friction in the capital markets, whether it's making it easier to trade or to clear and settle. I think that's interesting.
Barry Silbert:
I'm not necessarily a big believer in the idea that by just recording the ownership of an equity on a blockchain, that that makes it all of a sudden more liquid or more valuable. But I do commend the experimentation and I do think what'll likely come out of it is a new capital formation process, which is going to be one that's global in nature. So, you're going to be able to invest in ideas and projects all around the world. I believe it's going to be a capital formation process that's going to be accessible to a broader group of investors. In the markets today in the US, there's a bifurcation between people who are rich and people who are not. And I do think that this is going to lead to a greater opportunity for all investors.
Barry Silbert:
And I also, I'm hopeful that it's also going to create a more liquid market for let's call non-public companies. There's unfortunately just too few companies going public today. And there's a real demand from investors to participate in earlier stage opportunities in businesses. And until such a time, as I think there's some rule changes that happen at the ICC, I think the public markets, the New York Stock Exchange, the Nasdaq, and others are going to continue to be the place where multibillion dollar companies go. But I want to go to the place where you can invest in a company that's worth $50 million, $100 million.
Josh King:
Right. In the here and now, you are investing in a hundred and how many companies right now?
Barry Silbert:
145 now.
Josh King:
145 companies. You've got more people lining up outside your boardroom waiting for a hearing. Whether there are ETFs or protocols, markets or developer teams for those that have got their money, but are burning it pretty fast, how is the funding for these high quality team teams holding up?
Barry Silbert:
I would say like any venture market, it ebbs and flows. I would say that the companies that we invested in, I think were for the most part smart about, if they did raise money in the form of Bitcoin or Ethereum, that they sold it for US dollars. And so for the most part, we don't see too many hitting a cash crunch. But what's also really interesting, and I hope this does change, but we've really seen a drop off in new company formation over the past six months.
Barry Silbert:
Because in '17 and '18, if you had literally a PowerPoint with the word blockchain in it, you could go raise $5 million. And so that attracted both good and not so good entrepreneurs. But over the past six months, there's actually, there's fewer companies getting started. And I think part of it is a lot of the early wins, early ideas have been pursued. And part of it is during the crypto winter, if you were working at Facebook or Google or have a high paying job somewhere, the idea of leaving that job to go start a company and raise money in the midst of a crypto winter wasn't very appealing I imagine.
Josh King:
We talked about the smaller companies. We've talked about Facebook. But do you expect the rest of the FANG stocks, Apple, Amazon, Netflix, and Google to unveil their own digital currencies? Like Armstrong going to the moon, is this a race to be first?
Barry Silbert:
Well, that's a fantastic question. And it's one that I've been asking. If you look at the initial formation group of Libra, noticeably absent were the banks and absent was Google, absent was Apple, Amazon. And so I do think that the banks are going to respond in some way. Maybe they hook up together. Maybe they hook up with another technology company. I think Google responds somehow some way. I don't think they want to see a Facebook led effort transform the way that advertising is monetized on the internet. And then Amazon and Apple are both, they can be king makers. And so there's going to be I think teams getting formed.
Josh King:
Diving into Grayscale Investments, explain for our listeners how Grayscale operates and what your mission is.
Barry Silbert:
So, Grayscale is a manager of 10 different crypto funds. Nine of those funds enable investors to invest in just single currency. So, there's a Bitcoin fund and an Ethereum fund and an XRP fund. And the 10th fund is a large cap fund that enables investors to invest across the largest cryptocurrencies. And so what's really unique about the model is, as opposed to a traditional ETF, which requires a SEC approval in order to start raising money and start existing. We started all of our funds, essentially as private vehicles, private funds, where initially institutions and high worth investors couldn't invest in those vehicles. And then after they've been around for a period of time, we've then gotten them quoted on the public market, on the OTCQX market. Of the 10 funds, three of them are now publicly quoted and the Bitcoin fund being certainly the largest and most well known and the most liquid. But it is our expectation that over the next 12 months, we'll get most, if not all, of the other 10 funds public quoted as well.
Josh King:
As I mentioned in the intro, Barry, you've got a bone to pick with gold. Here is the president of the United States, Richard Nixon, on August 15th, 1971.
Richard Nixon:
The strength of a nation's currency is based on the strength of that nation's economy. And the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Conley to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.
Josh King:
President Nixon, making an early defense of fiat currencies against gold. Give us a history lesson, at least gold makes some good jewelry.
Barry Silbert:
So well, let's first talk about what is money. Money is nothing more than what society decides it is. So over history, money's taken lots of forms. Money has been rocks, it's been salt, it's been wampum, it's been squirrel pelts. And for a period of time, precious metals, gold and otherwise, served as a medium of exchange. And then we moved into paper representation of money. And then we moved into digital representation of money. And I think it's fair to say that in the future, it's going to be digital and it's going to be what society decides it's going to be.
Barry Silbert:
And gold has played an important part from a cultural significance perspective and certainly from a historical perspective as a form of or a store of value. But I think what many gold investors don't seem to appreciate is that the next generation of investors, the next generation of asset allocators do not view gold the same way that our parents or grandparents did. And I think part of it is due in large part to that clip that you just played. If you were born in the '70s, you didn't grow up on the gold standard. And so there was never this belief ingrained in you that gold had some kind of mythical value, government supported value. And then also, fortunately, if you know, were born in the '70s, you didn't grow up and didn't have a direct exposure to war and to situations where you had to be able to keep and store value outside of the system.
Barry Silbert:
And so for younger investors, they view gold as our grandparents way of storing money. And they dismiss it. They dismiss it outright. And so over the next couple decades there's estimated $68 trillion of wealth that's going to be handed down. That's just in the US, a $68 trillion of wealth is going to be handed down from baby boomers to gen X and gen Y and millennials. I'm absolutely convinced that whatever of that $68 trillion is currently in gold, it's not going to stay in gold. Not saying it's going to go onto Bitcoin, but I know it's not going to stay into gold. And so if gold stops performing the way that gold investors think it should in periods of high inflation or macroeconomic dislocation, I think it's game over. I think investors, the next generation of investors are going to put their money elsewhere.
Josh King:
In May of this year, Grayscale Investments, of which you are the founder and CEO, launched this national multimillion dollar marketing campaign called #DropGold. I want to take a listen to your TV commercial.
Recording:
Why did you invest in gold? Are you living in the past? In a digital world, gold shouldn't weigh down your portfolio. You see where things are going. Digital currencies, like Bitcoin, are the future. They're secure, borderless, and unlike gold, they actually have utility. Leave the pack behind. It's time to drop gold. Go digital, go Grayscale.
Josh King:
Drop gold. What our listeners can't see, Barry, is a man and woman racing around what appears to be Wall Street weighed down by gold. Chaos, of course, ensues. Tell me about the germination of this creative effort.
Barry Silbert:
So, I've always wanted to do a commercial or some type of campaign to start a conversation. And that conversation is really I think to highlight both the similarities of Bitcoin and gold. But also to start to address the marketing efforts of the gold industry over the past 20 years. And it's a successful effort to create this narrative for investing in gold that I think no longer stands up. Gold today is invested in and bought by central banks and lots of investors. But look, for the most part, gold is used in the form of jewelry. Gold doesn't have much utility, gold bugs love to love point out how it's used in electronics, but the-
Josh King:
Less and less though.
Barry Silbert:
Less and less. It's down 30% over the past 10 years, whereas iPhone phone sales and iPad sales and computer sales are up 10X. So, there's a real disconnect there. And so look, I think what's interesting about Bitcoin versus gold is, as the price that Bitcoin goes up, it becomes more useful. It becomes more liquid. It becomes a better medium of exchange and it becomes a better store of value. Whereas gold, as the price goes up, it becomes less useful. You're going to use it less in electronics. It becomes harder to buy or use for jewelry. And so anyway, so this commercial, this advertising campaign, initially it was to start a conversation. But given the response that we've gotten from the gold industry and the gold bugs, we've already started producing commercials two and three because, look, it's resonating. It's really resonating.
Josh King:
You are though an investor. You don't strike me as being in a Madison Avenue boardroom coming up with creative ideas. You've got Mark Murphy at the other end of the table. He's not the most creative type in the world. How did you actually go about the work of coming up with something that would strike a smile on a lot of people's faces, but get to a real serious point.
Barry Silbert:
We did what any good CEO does and hire a fantastic, fantastic writer and producer and director named Brennan Stasiewicz, somebody who I've known for a very, very long time. He used to do commercials for MTV and does a lot of really, really awesome production work right now. So, we brought on Brennan and the directive was let's highlight the lack of utility, the weight of gold in commercial one. Commercial two, three and beyond is going to play on a little more and talk a bit more about Bitcoin.
Josh King:
What were the first signs that you got that said this piece is resonating and I'm beginning to get under people's skin?
Barry Silbert:
We launched it over the internet first and I think we got something like a million views in the first week. Even before we started putting it on TV, it was clearly embraced by the Bitcoin community. And we then started hearing from the gold industry and very, very quickly the World Gold Council, which is it's the group behind the gold ETF. And miners and gold producers put out a blog talking about how gold's better than Bitcoin. Look, we were thrilled that they were engaging. And then there were a number of gold bugs who were on Twitter and started to engage. And we've been thrilled to see that the drop gold hashtag has continued to grow in use. And again, this was intended to be provocative. It was intended to be fun. It was intended to start a conversation. And that's exactly what's happening.
Josh King:
After the break, Barry Silbert and I talk about his foray into digital currencies and how they might change the future of IPOs. That's right after this.
Recording:
And now a word from Artur Bergman, CEO of Fastly, NYSE ticker symbol FSLY.
Recording:
Fastly is our edge cloud platform. We help deliver digital experiences for amazing customers, like Spotify and Ticketmaster and New York Times. We have started eight years ago. It's been an amazing journey. We work very closely with our customers. We're a very critical part in their business. We're very selective in type of customers we want in our network. Fastly is built by developers for developers. Fastly is listed on the New York Stock Exchange.
Josh King:
Back now with Barry Silbert, founder and CEO of Digital Currency Group. We've been talking about Bitcoin's recent rise and fall in price and why investors should #DropGold, according to Barry. As we begin the second half of our conversation, a big development in the digital asset space has its seeds right here, Intercontinental Exchange. The owner of the NYSE has launch Bakkt. At your consensus invest conference last fall, Bakkt CEO Kelly Loeffler described for MIT's Michael Casey what Bakkt is trying to do. Let's take a listen.
Michael Casey:
...from when you were first pursuing this.
Kelly Loeffler:
When I think about what we're doing at Bakkt, what our peers in this space are doing, what all of you in this room are doing, I think about the headlines today, will digital assets survive. And I'd say the unequivocal answer is yes. If you look at the price discovery process, I think that's what we're really focused on. The price is merely an expression of supply and demand. So take Bitcoin, a known supply, a variable demand. The price is being expressed, but there's a lot of missing infrastructure and use cases. And that's what we're doing at Bakkt to kind of backfill for this asset class that's grown so quickly.
Josh King:
Barry Silbert, what have been the roadblocks to institutions embracing digital assets? And how does Bakkt help solve that equation?
Barry Silbert:
I would say over the past couple years, there's... I think it started with awareness and education, which I think we're doing a pretty good job as an industry creating awareness and bringing up to speed institutional investors. Up until recently, there have not been custody solutions that have checked all the boxes for an institutional investor and efforts, like Bakkt and some others, Fidelity and folks like that, I think are checking those boxes.
Josh King:
For the average listener, why is custody important?
Barry Silbert:
Well, I think for institutional investors, it's from a legal and from an accounting and from a compliance perspective, there are strict rules around how assets are held for a fiduciary on behalf of their investors. And so either you comply with those rules or you don't. And up until recently, there just weren't custody solutions that checked all the boxes.
Barry Silbert:
And then so it's education awareness, it's custody, and then it's the trading infrastructure itself. If you're going to be trading this asset class, institutional investors need to make sure that the technology is secure. They have to make sure that it's going to be up 24/7. They have to make sure that the people behind it are fully compliant. And so we're now entering that phase.
Barry Silbert:
If you think about where the cryptocurrency Bitcoin space was in the summer of '17, prior to that bubble, there was quite a bit of skepticism from the institutional community. There were not custody solutions. There were not the institutional grade trading platforms. There was limited compliance software. There were questions around regulatory status. All that's been addressed, all that's been addressed. And so really I think we're entering a phase where the conversation, when people talk about the digital asset class, it's not going to be, as Kelly mentioned, is it here to stay? Yes, it's here to stay. The conversation's going to be around, okay, what is the right allocation for an investor into this asset class? And what is the best way to deploy that capital?
Josh King:
So, institutions are one thing. On the other side of the coin, a common wrap against cryptocurrencies is that you can't do anything with them. It's just about watching the price go up and down. The engines of commerce don't really run based on it. What needs to happen for everyday consumers to have something like a Bakkt app on their phones so they can go out and buy a tall ice latte with it?
Barry Silbert:
There's a recognition in the crypto investing space that these different tokens have potentially different use cases. And some are, in my opinion, more appealing than others. So, Bitcoin is the digital gold analog and something like Ethereum is the token used to power smart contracts. And then you have tokens focusing on things around identity or provenance and things like that. So for people to start using cryptocurrency in their day to day activities, it's got to be easy to use. And so you need really good products. You need really good consumer friendly interfaces. And then you need to solve a problem.
Barry Silbert:
And I think here in the US, being able to pay for your latte is not too difficult to do. You have lots of options available to you? I do think outside the US, I think that there's a tremendous opportunity for cryptocurrency and Bitcoin and others to be used by the underbanked and the unbanked. And I believe there's a big opportunity around cross border payments and remittance and removing friction there as well. And I think there's interesting opportunities around micropayments.
Barry Silbert:
And what I'm excited about with Libra and some of these others is the ability to disremediate a lot of the friction, a lot of the costs associated with payments. So if you're able to bypass the credit card networks, if you're able to bypass the banks and if that merchant can save 5% and can avoid the cost of chargebacks and fraud, there's a lot of savings. And I think once those merchants start to pass those savings back onto the consumer, I think people will start using cryptocurrency more.
Josh King:
This hidden 5%, 3%, whatever it is, Mark Murphy and I worked for one of the big payments companies for a long time. The banks are taking their cut. Everyone is in this process that creates this friction. How aware is the general public when they actually buy a $7 latte that says 3% of that is taken right out of the system and going to intermediaries?
Barry Silbert:
So, they're not aware and they don't care. They just want to be able to buy their latte. I do think though that once everybody is buying their latte with a digital wallet, whether they're using MasterCard or Visa or whatever, if you're then given the option, pay with crypto and you get to pay $6.70 versus $7 with your MasterCard, I think people will say, "Well, that's interesting. Why do I save 30 cents here?" And if you have a wallet that's holding digital US dollars and holding Bitcoin and holding Libra and holding JP Morgan Coin and holding all these other things, and it's as easy as just hitting one button, I think that's going to drive real adoption.
Josh King:
So, let's take a little step back. Right across the street, in his first message to Congress, President George Washington stated, and I quote, "Uniformity in the currency weights and measures of the United States is an object of great importance. And will, I am persuaded, be duly attended to." He then ordered his Secretary of State, who was Thomas Jefferson, to create a plan for establishing uniformity in coinage, weights, and measures for the United States, which is later referred to as the Jefferson Report. It led to what's known today as the National Institute of Standards and Technology, the NIST, which is located just outside of Washington, DC in your hometown of Gaithersburg, Maryland. Were you interested in this stuff growing up?
Barry Silbert:
I was interested in the markets. I was interested in investing. I was interested in trying to make money. I was-
Josh King:
How? Why? Why were you interested in all this stuff?
Barry Silbert:
That's a good question. I've always been entrepreneurial. I was always-
Josh King:
Mom, dad entrepreneurs?
Barry Silbert:
No, no, no. I was always the kid with the side job, the summer job. I was kid...
Josh King:
What was your most profitable side summer job
Barry Silbert:
Baseball cards. Yeah.
Josh King:
We had John Arnold who made a killing in arbitrage of hockey cards.
Barry Silbert:
That was my first exposure to a market and a fairly inefficient market at that actually. And then the bottom fell out of that market, but I was excited about investing early on. I ended up, during school, I worked at Bear Stearns. I worked at Smith Barney. I did banking after graduation. And then eventually the desire to start a business was something I wanted to pursue and started my last company, Second Market.
Josh King:
Before we got to Second Market, though, you invested your bar mitzvah money in stocks and even landed a part-time job at a brokerage firm in DC to pay by your junior year in high school. What were the influences that drew you to putting your Hanukkah gelt into equities instead of a pair of walkie talkies?
Barry Silbert:
I think it was a fascination with stocks. Look, it's a bit of a puzzle. It's a bit of a game and your success or lack thereof is measured daily at 4:00 PM. And I think-
Josh King:
So, you focused on a small little basket or a lot of different stocks?
Barry Silbert:
I started doing, I think mutual funds was some of the first investments I made. And then that became boring. And then I tried options and I'm sure lost my shirt, then got involved in stock picking. And I came to be quite successful at finding and picking relatively lower cap, small cap companies that were less liquid in taking, for me, what were kind of relatively big stakes and then waiting. And I had some pretty big wins for a high school and college kid.
Josh King:
By 17, you'd passed the Series 7 exam, becoming one of the youngest people ever to pass the exam. You graduated from honors from Emory's Goizueta Business School in Atlanta with a degree in business administration. Spent five years at investment bank, Houlihan Lokey. And by your second year there, you joined the financial restructuring division, working on bankruptcies that rocked the early 2000s, including Enron and WorldCom. What were some of the biggest lessons you learned in this phase in banking and frankly restructuring?
Barry Silbert:
The perils of overleverage. We got involved in these situations after these companies had imploded. So, really learned how the financialization or securitization and leverage can be used for both the good and bad. As a banker, you get involved in lots of different industries. You get involved in lots of different transactions. It was a blast learning about the way that different businesses were run. It was a blast learning about how they were financed. It was a lot of fun working through these restructuring deals where it was complex negotiations between companies and creditors and all these different stakeholders. And I learned a lot, but after five years of doing it, I felt like I'd seen it all. And I was ready for the next challenge.
Josh King:
And that next challenge was Second Market. And several years into your run running Second Market, you asked your board to spend $3 million of the company's cash to buy Bitcoin, which was unrelated to the core business. And one of your board members, Lawrence Lenihan, was quoted as saying, "I thought it was absolutely crazy." How did you convince them that it wasn't?
Barry Silbert:
It was a process. While my board was certainly super excited about the Second Market business that we were building, I think they sensed in me a passion about Bitcoin that they had not seen probably since they had first met me when they invested in Second Market. So I don't know exactly what it took other than saying, "Guys, give me a shot. Trust me." And yeah, I think that $3 million today is worth 150 million.
Josh King:
Yeah. I read somewhere is $200 million. So, the board can rest easy. And so how did that morph then into the creation of Digital Currency Group? And what was your thinking to say Second Market has been a great run, but this is the core of what I need to be doing now?
Barry Silbert:
It's an interesting story because... So, I was buying Bitcoin in 2012. Then I started doing angel investing in the Bitcoin space, 2012, 2013. And in 2013 is when I went to the board and said, "Okay, I love this Bitcoin thing. Let's do something." And that was when we decided to launch the Bitcoin Trust and we launched it while I was still running Second Market. So, we launched the Bitcoin Trust and that would've been I think September of 2013. It was very well received. We raised a lot of money and we were taking in so much money that we had to set up a trading desk to go buy Bitcoin. So again, this is still under Second Market.
Barry Silbert:
So, we had the Bitcoin Trust business. We had the Bitcoin trading business. On the side, I was doing my angel investing, I was buying Bitcoin. And one day I, maybe it wasn't one day, but I just said, "Look, this is what I want to pursue. This is what I want to do with my life. I want to try to make this Bitcoin thing a thing." And so I told my board that I think it was time for me to step down running Second Market. We had a fantastic COO in place at the time that we elevated to CEO. And the plan was we were going to spin out Second Market and he was going to run it. And then we were going to merge the Bitcoin Trust business, the Bitcoin trading business, and my angel investments into a company.
Barry Silbert:
And coincidentally NASDAQ called and said, "We love the Second Market business. They had tried to launch something called the NASDAQ Private Market, which my sense was it wasn't getting a lot of traction. So, the timing was perfect. So we sold Second Market to NASDAQ. And then essentially just combined all of my Bitcoin activities into what became Digital Currency Group.
Josh King:
People have compared Digital Currency Group to Berkshire Hathaway in the digital asset space. Does the strategy of an old timer like Warren Buffet have a lot to teach relative newcomers like Barry Silbert?
Barry Silbert:
Oh, of course, of course. Despite the fact that he craps on Bitcoin every opportunity he gets, I do think that when I structured DCG, I thought long and hard about how I wanted to set it up. And I chose to set it up as a company, as opposed to a fund because I came to appreciate the value of permanent capital. And so that's something that Berkshire Hathaway has, which is the ability to make investments with very, very long term investing time horizons.
Barry Silbert:
I think Warren Buffet, he's an investor in people. I think that's something that I've tried to learn to do over the years as well. And so look, strategic long term capital, permanent capital, long term thinking, backing people, being patient. And we don't trade. We don't short. We don't use leverage. We're really just trying to back the best entrepreneurs out there. We're trying to deploy our capital in ways that we think will outperform the market, in this case, Bitcoin being the market. And at one point down the road maybe I'll take it public.
Josh King:
So as we wrap up, where do you see Bitcoin and cryptocurrency industry heading let's say over the next five years?
Barry Silbert:
Well, we're going to see some real innovation around the use of blockchain for non-financial use cases. So, things around making the financial markets more efficient on clearing and settlements. We're going to see some attempts to create efficiencies around identity and ownership, around rights, digital rights. We're going to see improved infrastructure around the on ramps and the off ramps of the asset class. We're going to see the asset class itself grow well beyond the I think it's about $300 billion today. I think it's, in the next five years, it'll capture a meaningful portion of the $8 trillion gold market. And I think we're going to see some interesting capital formation models emerge around the world, hopefully in the US, but certainly around the world around mechanisms to invest in people's ideas and projects that are blockchain based.
Josh King:
And that's your prophecy for 2024. I hope we'll see you before then for your IPO. But if not, let's come back then and test the hypothesis.
Barry Silbert:
Excellent.
Josh King:
Thanks very much, Barry, for joining us Inside the ICE House.
Barry Silbert:
Thank you for having me.
Josh King:
That's our conversation for this week. Our guest was Barry Silbert, founder and CEO of Digital Currency Group. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @icehousepodcast. Our show is produced by Theresa DeLuca and Pete Asch with production and editing from Ken Abel and Ian Wolf. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Recording:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE, nor is affiliates, make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content here in, all of which is presented solely for informational and educational purposes. Nothing here in constitution offered to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceeding conversation may have been edited for the purpose of length or clarity.
