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Podcast with Dr. Sean Stein Smith: Blockchain, Facebook’s Libra, Crypto, Challenger Banks, Fintech

For the full episode audio, please check out our podcast page. 

Terry Tateossian (00:03):

Today I have Dr. Sean Stein Smith, who is an assistant professor at Lehman college for business and economics as our new guest. Welcome Sean!

Sean Stein Smith (00:51):

Afternoon. Happy to be here.

Terry Tateossian (00:52):

Thank you for being here. Sean has actually published five books around the topics of AI and financial services. Some of the books are the effect of integrated financial reporting on financial performance, strategic management, accounting, common sense finance, uh, finance for individuals and entrepreneurs. I think a lot of us could use that integrated reporting management and the, his latest book is on blockchain and artificial intelligence and financial services. What the implications and applications for financial professionals.

Sean Stein Smith (01:31):

Yeah, the mouse for right there. I don’t sleep a lot. Um, love my coffee and do you know, I mean honestly this whole area is, is so fast moving and so interesting and, and I’ve been working in it for 10 years now. So to me it’s all easy and fun and just natural to write about it, talk about it just in podcasts about it. So all the rest

Terry Tateossian (01:59):

to be one of the very few people that says talking about integrated reporting management,

Sean Stein Smith (02:06):

somebody has to do it right now.

Terry Tateossian (02:09):

Believe me, I’m fully on board. So tell me a bit about your background and how did you get into this?

Sean Stein Smith (02:16):

Sure. So probably the best way to sort of summarize it in a, in a quick manner is basically be for moving over into higher, right. About two and a half years ago, I spent about eight to nine years in industry working in corporate Canada and corporate finance working almost as a half it half the accounting role. And so as a result of that, I was always pretty hands on and interested in sort of how technology impacts processes and controls and then how that ultimately impacts the work of folks working in accounting. And finance and then sort of now sort of in the banking and sort of the markets area too. And then so this whole tidal wave of toys almost, right, you know, blockchain, AI, Bitcoin, all of that stuff is just cool stuff to analyze and to then sort of build on. Right. My own background from industry to analyze really how all these big changes are impacting every aspect of accounting, finance, markets, trading, all the rest.

Terry Tateossian (03:18):

When was the first moment when you realized, Holy cow, this is going to really impact everything?

Sean Stein Smith (03:27):

I mean I’d say probably that Holy cow moment for me was for blockchain and cryptocurrency. I’d say that was really back in 2016 or so. Right. And, and for anybody who is not seeing it, there’s a great movie on Netflix banking on Bitcoin. It’s a great movie, easy to watch and has interviews with all of the real people who were there back in like 2012 to 2013 2014 back before Bitcoin was a mainstream headline news story. And I sort of came across it almost by accident. I was doing some research, doing some work, doing my doctorate on how different technology systems can help companies better report their information. And so I heard it’s a blockchain thing and Bitcoin now at the time I was like, Bitcoin is not a big deal, whatever. I was totally wrong in there by the way. But the underlying technology, right, that blockchain, that the ability to store and to share data on a continuous basis and to do so in a manner that on the Bitcoin blockchain has been unhackable up until now. I mean that blew my mind because that changes everything. But from an accounting point of view, from an audit point of view, from a banking point of view, from a traceability point of view, I mean there’s all types of applications for it out there.

Terry Tateossian (04:47):

Tell me a bit about the work that you’re doing at Lehman college.

Sean Stein Smith (04:50):

Sure. So sure. So I’d say that Lehman, I teach courses focusing on advanced accounting, finance, accounting topics, and then honestly trying to bridge that gap between MIS, computer science and accounting. Right. Because really, I mean, ask anybody in accounting or in finance. And honestly it and the capability to work with it is more and more sort of our jobs. Right. And so that’s what I’m trying to do on top of teaching the debits and the credits, you know, cash flows, all the rest. I’m always trying to weave in those sort of hot topics. I’d be it AI, be it blockchain, crypto, be it RPA, any of those buzz words. And actually we also working on a blockchain certificate program right now as we speak. And a quick plug for, for Lehman Lehman was the first school in the CUNY system to actually issue transcripts on a blockchain based platform in may. So we have cool stuff going on there. Yeah. So very forward thinking place.

Terry Tateossian (05:52):

Yeah, I mean that’s an actual great application for blockchain in general. Yeah, there’s

Sean Stein Smith (05:58):

a lot of fraud that goes on, I believe with higher education transcripts and grades yet. And I mean, so the whole blockchain conversation, it’s primarily focused like on Bloomberg, Fox business, MSNBC, whatever your flavor is. That conversation tends to be focused on the market side of it, right on the cryptocurrency, on the trading side of it. But blockchain has implications for any industry that has information. So it’s every industry, healthcare, property records, tax records, not for profit, you know, tracking those inflows and outflows. Any industry that has information from customers or from suppliers or partners that can be augmented or improved using blockchain. So let’s talk a bit about the financial industry. What are the traditional challenges for those, I guess that haven’t necessarily lived through or have were around when the recession? I mean, so I’d say that there are a few headwinds out there right now in the financial services area at large.

Sean Stein Smith (07:02):

Probably the two that come to mind the most often are automation, right? The next tasks are automated. These institutions don’t need as many people. And so then from a bottom line point of view, short term it’s a positive. But in the future, if you and your employee base are a smaller percentage of the overall workforce, you aren’t going to be as important. And then to this as a result of that automation, the margin compression is tremendous. Right? From Vanguard, the Blackstone, black rock, all of the big behemoths, right in the private equity space. In the retail space. All of them consistently point to those two things. Automation and that automation sort of driving down margins in their industries are two of the biggest headwinds out there right now. Hence all of these sort of nontraditional companies trying to get into the space, right? Leveraging one, these automation tools and two, also trying to take advantage of the fact that as a non-bank or as a non incumbent institution, they aren’t bound by all of this regulation that a legacy institution has to comply with.

Sean Stein Smith (08:11):

Now, of course, as these entrance started getting into the payments and the money transmission business, there are some Congress people, regulators who are advocating for, well, hold on now, if you’re moving into the banking space and you’re acting like a bank walking like a bank and a, you know, talking like a bank, then you should be treated as a bank. Now, how could that be? I don’t know. This is tiny. You know, you’re tech startup, Facebook, you know, tiny company, you know, sort of a minnow out there right now. But yeah, Facebook is probably the, the prime example right now, right? For good or bad, right? Cause Facebook has been in the spotlight, well for a number of other reasons anyway, but most because they’re basically the face of this whole Libra project. Now it’s important to note and to point out that even though it’s called Facebook’s Libra and it’s Facebook that is, that’s most often linked to it from an operational point of view on paper, at least Facebook is one of 28 companies who are part of the governing body that ultimately will sort of derive and manage Libra.

Sean Stein Smith (09:20):

So even though it’s a link to most powerfully to them right here, at least, um, they’re only on paper one of a group of firms that, that, that is managing it. But yeah, during the hearings that happened earlier in July, there were some heads of banks basically saying, all right, well if Facebook wants to get into our business, then they should be treated as such. So let’s unpack that a little bit. What the heck is Libra and why do we need it? How much time do you have? So, so I had a really, so at a really sort of basic level, right? Libra is designed or it’s being marketed as a payment tool that will enable users of Facebook, right? To basically send funds back and forth and to pay for goods and services with Libra via messenger, without having to use dollars or euros or some other Fiat currency and Fiat currency.

Sean Stein Smith (10:19):

All that means is a currency issued by a government, right? But so it’s a very basic purpose. But unpacking that purpose, then there are some questions that are asked, right? So how is this Libra coin actually going to be back? Right? How is it going to have value, right? Because a us dollar has value because it’s backed by the U S government. So then how does Libra have value? And that’s where it really gets a little interesting or terrifying depending on, on who you ask. So in the hearing is that happened on July 16th and 17th. It came out during, uh, the testimony of their head of this LIBOR project, David Marcus, he stated that the coin itself is going to be supported or backed overall by half us dollar assets and then half other assets. So all of that raises some interesting questions too and well probably the one that’s most important is if I trade a hundred dollars and for a hundred Libra and then I want to trade it back out into dollars.

Sean Stein Smith (11:26):

How does that process work and my able to get back out of LIBOR after I converted in B because it’s not like some other coins out there where it’s backed one to one us dollar per coin. Then it’s a pretty basic process to follow. I converted back and forth, but if I convert it into Libra and so that LIBOR is backed only half by the us dollar and half by some other assets, how does that conversion process work for me? But more on the points of, of how it connects to the sorta financial services space is okay, fine. How was Facebook and a guarantee that Libra and sort of that underlying blockchain isn’t compliance with OFAC AML, KYC money laundering, who’s going to be in charge of making sure that if I’m trying to sign up for Facebook to purchase Libra, that I’m not doing it for some criminal reason, right?

Sean Stein Smith (12:17):

Who’s going to be in charge of that? What safeguards are in place? And all of those questions were asked and are being asked. As of right now, there are not too many satisfactory answers as far as the people in Congress are concerned, but really sort of Libra, it’s, it’s a type of cryptocurrency called the stable coin and all that. That means a stable coin and all of that means is that on paper it’s more stable, right? Then a Bitcoin which goes up and down quite a bit. And so the purpose of it is to give users here and internationally, more importantly, a unit of account or a way to do transactions to pay for goods and services that aren’t always going to be linked to the, you know, mood swings of people in power either here in the U S or overseas in terms of heads of state bankers, politicians at large.

Sean Stein Smith (13:11):

Why does Facebook or these 20 bodies need this coin? So that’s a very good question and there really hasn’t been a good answer given by Facebook’s head. Basically they’re sort of answer right now is that they’re doing this to try to give their 2.7 billion users a easy way to conduct e-commerce on their platform and so on. Facebook wasn’t e-commerce, well I didn’t know either. Right? But apparently they’re trying to sort of augment that and I think they’re doing it because they’re feeling some pressure from other big social media companies, Alibaba, 10 cent that have sort of managed to merge social search, payment processing all under one house. So I do think that’s a part of it too. Interesting. How long do you think it is before Amazon and Google come out with their own coins? Oh, I mean, well it’s very interesting because on August 1st and August 2nd, um, a press release came out that Walmart had actually filed a patent and had put information out into the marketplace for their version of a product that looks a lot like Facebook’s Libra. So, so yeah, I mean Walmart, you know, I mean the old school here, but you keeping up with the times as I’d say that that’s sort of given that information, it isn’t going to be too long before Amazon, Microsoft, even Google issue their own white papers for their own blockchain products that help with payments or other types of sort of payment processes have built under their platforms. If it’s the end of 2019 and Facebook is the only tech company that has one, I’ll be surprised.

Terry Tateossian (14:55):

Yeah, I mean in my, from my point of view, I feel like, you know, creating your own either token or currency or some type of mechanism to transact in an eco system like Facebook, like all these other social channels, social media platforms is almost like a no brainer because all of these ICO coasts that hit a couple of years ago that are now pooh-poohed everywhere and it’s a bad word. That’s ultimately what they were doing. Um, and now it’s becoming a bit more of a legitimate process I guess for Facebook is taking on it sort of, is it, can I call it an ICO?

Sean Stein Smith (15:35):

I wouldn’t call it a a ICO per se, but what I would say is that to your point, the overall, right, since 2016 right, since since Bitcoin burst out into the mainstream marketplace, there has been a shift going on all through 2017 2018 2019 and I guarantee you in 2020 basically from sort of a decentralized open source model, sort of wild West like Bitcoin back in 2015 2016 towards more of the incumbent players being involved, being a part of the blockchain crypto asset space and trying to make this ecosystem fit under current guidelines. I would definitely say that’s a trend, right? Cause IKOS have have gone quite quickly from this new cool, awesome way to raise capital on a blockchain. But you one of the highest profile ones in 2017 the KYC raised $100 million in 2017 and just earlier in June the sec filed a complaint versus that company. So, so yeah, it’s, it’s turned quite quickly on that. But ICO is have evolved into STOs security token offering, which if you actually analyze it, is awfully close to a traditional IPO. And so this whole shift from sort of decentralized, you know, open source to more centralized but not totally centralized yet, but more of the incumbents, more frameworks, more oversight is a definite trend out there.

Terry Tateossian (16:59):

Absolutely. Interesting. And I guess that the beauty of why blockchain has raised so much interest is because of that ability to decentralize and take some of the power away from companies like Facebook and Google at this point, and the banks and the financial institutions. But then you have the opposite powers trying to centralize and we’re trying to decentralize of

Sean Stein Smith (17:24):

course. Yeah. No, and it’s important to know how we got here, right? Because Bitcoin and blockchain, they, that first white paper was published on Halloween 2008 right in the teeth of the market meltdown, you know, caused or involving, depending who you ask, right? There’s, there’s blame to go around. But the big banks were a part of that meltdown, but the mortgage lenders, the banks, the credit bureaus, all of them were implicated in a way in that meltdown. And so Bitcoin and blockchain that was developed as a way to, as you put sort of decentralized that power, that authority, that custody, that sort of grip on that financial data on the financial arteries of the world and to then give it back to the individuals. But of course over time with the development of the ecosystem and the interest in blockchain by all of those incumbent players from Toyota to Walmart to JP Morgan to Microsoft to Facebook.

Sean Stein Smith (18:22):

I mean as these players, you know, one understand the value of blockchain and to see how it could touch you, threaten their business models. All of them are pouring billions of dollars and thousands of people at this tool to try to get it to work in their system for them. Absolutely. How far away do you think we are from a future predicated on Bitcoin and blockchain in banking specifically? I would say that probably the future is on Bitcoin. I don’t think that’s a viable path forward. Um, just based on the price volatility and the feedback from the regulators just on basically their current use on it. I don’t think that a banking system based on Bitcoin is a viable option. Now a banking system other based on or augmented by blockchain? I would say absolutely. That’s a real possibility. Right? Just earlier this year in February, JP Morgan launched their quorum blockchain and they’ve signed up over 200 banks to be part of their interbank information network basically to use their version of blockchain to help do commercial payments.

Sean Stein Smith (19:33):

I mean, so I mean there was a tremendous value add from a banking side to use blockchain to help with the settlement of transactions, processing of payments and confirmations on on both ends. So that I would say is a real possible future. And I’d say it’s probably much closer than we think because we have these big established incumbent players adopting it, right? Using it and there are a whole host of pilot projects basically set to launch either at the end of 2020 or early 2021 sweatshirt. That’s going to be interesting to see sort of how these products actually work. Right. If on the day when you turn it on, is it actually going to work as advertised by? Probably not perfectly, but I would say that that’s a possible future, I’d say within five to eight years. Yeah. What do you think some of the problems they’ll encounter initially?

Sean Stein Smith (20:23):

I think probably one of the basic problems that they’re going to encounter is how these blockchains talk to each other, right? How they, how they interoperate with each other. So, so we, good example that I was given is how much trouble is it at a big firm to upgrade your email system or your answering machine system? It’s always a huge mess, right? Upgrading your email system in house, right? Just inside your company. Now, uh, imagine trying to build a network to connect over 200 banks, over 500 banks, how ever big it is on top of your current systems, which aren’t perfect either. Right? And imagine all of those problems and the bugs and the coding errors and the gaps and the missing information that could possibly happen. I’d say that that’s probably the biggest issue. How they interoperate and then sort of a one B is how this ultimately gets treated from a regulatory point of view, right? So are there policies in place to make sure that as we’re transitioning or that as banks or as consumers transition from the current system to a blockchain system, how do we make sure that all of the rules and the protections, the guidelines, the frameworks, all the rest are kept in place as the whole process changes, right? So how do we keep the rules still in force and working as the whole process that they’re trying to enforce changes overnight? Right. So how does that process work?

Terry Tateossian (21:48):

Yeah. Now the 200 banks that you’re talking about, are they building their own private blockchain where it’s closed off into those particular banks and how do you envision that work?

Sean Stein Smith (22:01):

Sure. So, so from all of the, you know, data published by JP Morgan, basically they had built that, right? So basically what they did at a very high level was take the public blockchain, Ethereum, and then sort of take that source code, edit it, tweak it to make it work for them internally. And then called quorum. Basically try to create their own version of Ethereum built for their commercial payment network. And then JP Morgan serves the role as the organizing firm, but that had from basically of this IIN and so then they’d been asking banks to sign up to be a part of it. And so as a result of that, those other banks, those 200 banks, 300 banks, how ever many are signed up right at the go live date will then be linked in to that JP Morgan blockchain. That’s what a private blockchain. Hold that thought.

Terry Tateossian (22:52):

Let’s take a quick break and thank our sponsors. The production of the amplified podcast has been brought to you by social fixed medium social fixed, a transformational growth hacker agency focused on emerging technology platforms, video and podcast production, content marketing and overall startup strategy. Social fixed has helped over 300 clients generate millions of dollars in revenue fund raising and a profit. If you’d like help launching or growing your business, visit [inaudible] dot com

Terry Tateossian (23:29):

and what would be some of the areas that would be transformed through the use of this technology for them? Like what’s going to change for these banks?

Sean Stein Smith (23:38):

Sure. So I’d say probably the most obvious thing that is unchanged, first one, how long it takes transactions, who told you settle. Right? And so from a consumer point of view, I go use Apple pay to go buy some pizza. I’m done in two seconds. That transaction, it can take up to four business days to actually settle out on the back ends. That’s forever these days. I mean, I mean that’s an eternity and it’s that way because of all of the different correspondent bank relationships of correspondent balances, people have to be involved. And the fact that there are so many different systems that have to talk to each other. So if you’re able to get an industry standard or an industry platform set up where all of us basically agree to do things in a certain way, then that could really cut down on it.

Sean Stein Smith (24:27):

And JP Morgan has come out and saying that they’re upfront and goal is to cut the settlement time from days to hours and then ultimately from hours down to minutes. So that’s the huge benefit right there. And just add an extra little wrinkle in here. The vector by which that time is going to be saved is the fact that as a part of this launch, JP Morgan actually is also going to launch their own coin, the stable coin JPM and coin, but it’s only going to be used inside of that network basically to help convert the dollars, euros, Yens, whatever into JPM coin, have those transfer on that quorum blockchain and then at the end convert back into the currencies in question. So the answer or to sort of point out sort of how that time-saving actually is going to get done at JP Morgan, they are going to roll out their own coin to sort of help with that process.

Terry Tateossian (25:18):

So would, would that be considered kind of like a utility token?

Sean Stein Smith (25:23):

They didn’t go that far, but I would argue that because right now there is no case, there is no plan for these coins to be traded outside of the network. I would say so, yeah, I may be right because it’s only going to be used as a part of that blockchain. So it’s only utility is as a part of the network.

Terry Tateossian (25:42):

I guess I’m, if I’m not mistaken, I think ripple performs that same type of function into was is it international transport? Yeah, yeah,

Sean Stein Smith (25:49):

yeah. So the ripple blockchain, they were basically doing this, they were the first company to actually try to work with the banking regulators and banks to basically set up this international platform. Right. And it was very interesting to observe their reaction to the quorum launch. And even from a bigger picture point of view, international transactions or transactions between banks are, are settled via Swift and Swift has been around for decades. And so both of these projects either rippled or quorum are basically if you actually analyze them, trying to disrupt Swift and to basically be come the new standard for how payments are processing. And our transactions are settled both in truck country and inter country too, which also caused Swift to launch their own blockchain project. So it’s, it’s very interesting to see it. Yeah, it’s sort of sort of like the dominoes, you know, running around out there.

Terry Tateossian (26:48):

Yeah. I mean initially they were all against it. And now everybody’s in it. A challenger banks that are popping up right now all over the place. They, to me are a no brainer because I, I feel like going to the bank is an inconvenience. And I think a lot of people obviously, you know, may feel that way. What do you think about that?

Sean Stein Smith (27:11):

I’d say that, I mean, the idea of a fully online bank is a good idea, frankly, because then you’re able to offer the services of a bank without the costs of the branches and the people and the infrastructure on site, which as you pointed out, most people really don’t enjoy going to the bank branch anyway. So it’s not as if having those branches adds any value. Right? So the consumer experience of your bank, right? Most people just want it to be fast, convenient, and to give them the best deal possible. Right. And so I’d say that analyze through that lens if you are able to operate, obviously in compliance with all of the banking rules, but to do so without all of those costs of a legacy institution makes sense.

Terry Tateossian (27:57):

Who’s going to be the Uber

Sean Stein Smith (27:58):

challenger banks, who’s gonna be the Uber of challenge bank said that’s awfully tough. Um, there are a number of them out there who are doing good work, but I also want to point out that the incumbent players aren’t just hanging out. Right. Goldman Sachs launched a AI powered online banking platform for individuals. Marcus blush powered by AI online only. So I mean there is some pushback or some competition now from the income employers because they see it coming too, right, that the idea of a bank branch in the town is not as appealing to people and it’s not adding any value to the consumer, the experience of banking. So yeah, to me, very interesting to see. And I would not be surprised if the incumbent banks begin to buy up some of these online only banks.

Terry Tateossian (28:45):

Very good point. What do you think about crypto exchanges? I mean, they’re kind of playing in that same bank space. They’re floating in and out of regulation. And

Sean Stein Smith (28:58):

so that’s an interesting question because they aren’t perfect. Right? In may, one of the top platforms, finance had their hot wallet hacked. And without diving into too many details, a hot wallet is basically a online portal for consumers or investors to access their crypto holdings. And so they’re hot wallets or hacks and

Terry Tateossian (29:22):

wallet lives on the platform itself. It’s not like the heart versus the hard wallet, which is the USB port that you know, you lose it, you’re done. This is the temporary coins. So you transfer from your hard wallet to the portal.

Sean Stein Smith (29:38):

Yeah. And so in that hot wallet, what most folks don’t know is that on a platform like Coinbase or finance, which are the two biggest ones, most of the high profile ones here in the U S your public key and your private key are both held in that hot wall. So meaning that if that hot wallet is hacked, those hackers have direct access to your private key and therefore have direct access to your Bitcoin holdings. So in the case of finance, they has hot wall tact and it was only the Bitcoin hot waltz got hacked. And in the span of, I believe it was only a few hours over 7,000 Bitcoin were stolen worth at the time, 40 point $7 million and B because Bitcoin, yeah, that’s a lot of money and it gets better. B, because Bitcoin is not treated as an equity security. There is no FDI, C insurance, there’s no investor insurance.

Sean Stein Smith (30:36):

So then those folks are out of luck basically. Right. And so I do think that’s an important thing to keep in mind as you’re talking about crypto trading platforms and all the rest. That’s, most of these have only popped up within the last four or five, six years. So the infrastructure and the people running them, we don’t always have the, the depth of market expertise that a more long live player might. But I mean it’s a very interesting space. But the one thing that I would caution is that if you’re holding your information on a platform, I mean there is a element of risk in there.

Terry Tateossian (31:09):

Are there any exchanges that secure their users in any way?

Sean Stein Smith (31:14):

I mean, I would say that that is not something that I’ve seen advertised, right. As a function of a platform and that most individuals who are trying to sort of be more proactive in sort of safeguarding their data, probably use a, a combination, right, of the hot wallets for their certain like you know, operational costs a day to day use and then they’re cold wallets for the items that they want to hold more sort of medium to longterm. Right. And it’s basically have ultimately two separate addresses, one address linked to the hot wallet for those, you know, day to day buying pizza, buying coffee with your Bitcoin, and then the other address links offline to that cold wallet to hold onto those assets for the medium to longer term.

Terry Tateossian (32:01):

What about, I don’t know if you know of any or any examples of where the exchanges themselves have been manipulated as far as price surges. And

Sean Stein Smith (32:12):

so I would say sort of there’s a part a to that and a part B. So I would start with the price question and I know that there was some speculation back at the end of 2017 early 2018 that that huge run up in Bitcoin was caused by a few sort of large holders or a few institutions that were trying to we know increase the price, basically do a little pump and dub type of action there and was no hard evidence ever found, no charges brought. But there was a lot of conversation based on just analyzing the actual trading volumes of Bitcoin that it seems as if there could have been a few big players making big moves to help increase and then lower the price. So and in a market where there is not as much well established regulation and the individual investors aren’t as aware of how it works from a technical point of view, um, there is going to be an increased risk that if there are some well-informed players, well funded players or well established players that have large holdings that yet they could definitely have some impact on the price going up or coming down on the asset side or on the Bitcoin light coin, whatever side.

Sean Stein Smith (33:28):

But on the exchange side, um, I have not heard too much on of those being, you know, overtly or covertly sort of managed under the radar yet. But that could change with the advent of an I E O initial exchange offering that as these new platforms that as these new platforms get launched, then if they’re launched and they’re only controlled by a handful of people, then there’s a higher risk of some unethical or some bad actors sort of taking advantage of that information. They symmetry right to defraud investors, basically steal assets that are put on the platform or some other items like that. So that’s going to be interesting to watch. How many of these new platforms being launched. The IEO process actually turn out to be still here in two, three four years. That’s going to be very interesting to watch. I think

Terry Tateossian (34:20):

the last time I checked regulation for crypto exchanges in the us, I believe you were not regulated or permitted to take investor money from the U S is that still the case?

Sean Stein Smith (34:32):

I believe so. I have not heard anything to the contrary on that and I know that as far as Coinbase gov is for example, they have been trying to get more into the good graces of the regulators following their court case with the IRS back in 2017 and in 2018 they’re licensed now as a money transmitter in most States they were granted a custodial banking license, so they are trying to become more and more part of that sort of mainstream framework. More of an incumbent player mirroring our earlier conversation. Right. So sort of coming in from the wild West, but now sort of being licensed, working with regulators, trying to become more established to hopefully be able to then take investor money to help grow and, and all the rest, or to even launch their own additional tokens going forward.

Terry Tateossian (35:22):

Can you even be based in the U S if you’re a crypto exchange platform? Yes. Would you have to be based out of the U S based here? The recent Bitcoin search? It was, I think at the last time I checked up to 13,000 about a month

Sean Stein Smith (35:38):

ago up from what? What was it, eight? Yeah. And so I know earlier in the year it was down around 3,800 4,500 then it ran up and I believe that briefly touched almost $14,000 earlier in the spring, maybe April may. Now it’s been trading at around nine, $10,000. But there is a sort of, well on the crypto Twitter at the very least there’s a bullish sort of sentiment out there or feeling because that level of 10,000 is often viewed as sort of a technical breakthrough level, right? In that if it can hold that level or trade above it, then it could be set for a run-up. But what I also think is driving this is that as there’s more institutional interest and public hearings and conversations on all kinds of blockchain, be it JP Morgan, Libra, IBM, Walmart, as it becomes more sort of part of the mainstream conversation, then it’s viewed less as a criminal tool or as a high risk, uh, choice and more just as a alternative asset class.

Sean Stein Smith (36:42):

Right? And there are college endowments that have put money into crypto. There are pension funds, hedge funds, PE funds that are putting real institutional money now into this space. And so as that continues, I do think that that will help, won’t guarantee, but it will help sort of provide a floor under those prices going forward. And it’s also important to keep in mind that as of August 1st there was a press release put out that now 18 and a half million of the total 21 million Bitcoins have actually been mined. So it’s gonna be interesting to see that as we get closer to that hard cap of Bitcoins. So to what impact that has on the price of the coins out there, right? Will it behave more like gold than right, sort of a fixed level of it. And so then that drives the price or is that mining being complete?

Sean Stein Smith (37:36):

Gonna then turn it into an actual currency tool, right? Or an actual real currency option. So that’s going to be interesting to see. And depending on who you ask, um, there are folks out there saying that now Bitcoin is going to go up to $200,000 per coin. Yeah. Million dollars per coin and there are other folks out there saying that as it gets more mainstream and more accepted and more talked about and more regulated that then it could actually be used as a currency which is not going to have as big an impact on the price level that’s being treated just as a asset class. So it’s very interesting right now and it’s really hard to tell where it’s ultimately going to end up. But yeah, it has re recovered quite a bit. I believe it’s up something, um, from the beginning of the year thing is stuff something between a hundred and 200%. So I mean it’s so, so it has been a good year if you held it sort of longterm. But outside of that it’s also hard to forecast what the price is ultimately going to end up. How do you think that what you just as in

Terry Tateossian (38:36):

um, you know, there’s a finite number of Bitcoins available out on the market. They’ve almost been mine to completion. How does the Bitcoin performance or behavior impact all the other coins?

Sean Stein Smith (38:48):

So it has a big impact even right now because there were 2100 coins and tokens out there, but even even that said Bitcoin and it varies per day, but it’s being consistent between 50 and that it’s peak. Something like 62% of the overall market cap or the market value of the whole sort of crypto asset space is linked to Bitcoin. So it still has a huge impact on the overall sort of marketplace, be it ether, be it light, coin beat, XRP I mean they all pretty much track what Bitcoin does in terms of price, movements, up, down, sideways, whatever.

Terry Tateossian (39:27):

If you were looking to analyze a particular currency, what would you look at? What would be the types of elements or aspects of a coin would you look at?

Sean Stein Smith (39:38):

So if I had to analyze a specific crypto asset, be it a stable coin or more traditional cryptocurrency, I would look at a few things. One, what is its actual use case? Right? Is there a use case for it? And then part two, based on that, is there a white paper that I can read? Right. Is the coding language outlined, is that use case outlined anywhere that’s, I can actually see read and sort of analyze myself. Three is there a management team involved at Bitcoin there is no management team, but at coins, like the packs of standard Gemini dollar Libra, there are management teams, there’s a structure, there’s a hierarchy in place of who are those people and also what is their background in this space? And then 0.4, what are they doing to work with regulators, right? Are they being antagonistic, are they being cooperative?

Sean Stein Smith (40:30):

You know, and sort of what does that trend and then 0.5, what are those people saying their ultimate goal is right? Because having a goal in the white paper is one thing. But then having the goal as actually stated by management, it can be something entirely different. So then what is that goal or the purpose of this coin? Is it built to be used as a currency or is it built to be used as part of a blockchain? Right? Like the XRP JPM coin, right? Is it built to be used as almost a sort of Groupon to get goods? And services are we going to use it as part of a tokenization process? Then we’re going to tokenize a building issue, tokens for cash, you know, and then have those token holders granted access rights to the building or share of the profits, right? So how is the token going to work and how is it going to fit into the business model of some bigger picture entity, if any.

Sean Stein Smith (41:24):

Or like Bitcoin is a totally sort of decentralized untethered to any business or asset. And so the honestly put out there as a alternative, right? Um, so to the Fiat system, but sort of those are the factors that I would analyze. Who’s in charge? Is there a purpose outline? How is it linked to a business? And then how are they coordinating with regulators? Right? And the whole accounting conversation is a whole separate ball of wax, right? Because we have all of these firms launching coins, tokens, building blockchains. There is no guidance out there as to how to actually classify these things on the bound sheet, on the income statement, how to show them are they property, are they intangible assets, are they investments, are they currency equivalents, and then how do we show the gains and losses on these, you know, Bitcoins or other crypto assets.

Sean Stein Smith (42:17):

All of those are still unanswered questions at the FASBI level, at the ISP level, PCOB, all of those agencies are hopefully working on it right now. But as far as sort of public statements, public guidance, counting standards, there aren’t too many out there yet. The only agency that has come out with guidance is the IRS from 2014 and basically that guidance says anything that’s a virtual currency is treated as as property. So anytime that it moves or changes hands, it’s taxed, which has also proved to be a big headwind keeping consumers and merchants from actually using it as currency. Because if I want to use Bitcoin to buy pizza, I have to pay for the pizza, paying a sales tax on it, and then also track the price of that coin when I got it, the price of the coin when I used it and then Oh, income tax on that difference, how’s that even going to happen?

Sean Stein Smith (43:14):

I mean that’s a huge issue and and actually at the end of July, the IRS basically issued a press release saying they are going to be mailing out 10,000 letters by the end of August to people who they believe owe taxes linked to their crypto holdings and they have, if you versions of this letter, nice medium and then mean basically. So it’s going to be interesting to see sort of how that works and how that plays out. But they’ve come out pretty strongly saying that this sort of, this crypto tax enforcement is going to be a hot topic and a priority for them going forward. Because they issued a statement, I believe, and I forget if it was after the 2018 filing season or after the 2017 filing season, but they had analyzed their, their records and based on their internal workup, they estimated that only between seven and 8% of all people who owed taxes on crypto holdings actually paid them.

Sean Stein Smith (44:12):

So obviously they weren’t happy about that. I mean, I think there’s a lot of confusion for people on what it is that they even have to do. I mean it’s, it’s a huge challenge and it’s also compounded by the fact that there are platforms to trade these assets on like Coinbase. But as of right, platforms like that are under no obligation to issue you 10 and the nines. Now that’s in the process of being changed. But in 2017 when, when basically any holder of Bitcoin or some other cryptocurrency had these huge gains, there was a lot of confusion as to how to show it, what the show and then also had to get that information. So, yeah, I mean that sort of information gap and again, that that sort of lack of integration into the framework structures of the current financial system is a issue that has to be worked on.

Sean Stein Smith (45:03):

So what do you predict as far as what we have to watch out for in the next two, three years maybe? I mean, I’d say really in, in the next two, three years. I’d say that it’s almost like a two track conversation on the blockchain side. I mean, the trend has left the station, right? It’s, it’s coming. There are these big companies that have put so much money, time and people into it. It’s coming right now from a consumer point of view, we probably won’t notice it right away upfront, but, but it’s coming for pretty much every asset, whether it’s title, insurance, intellectual property, copyright payments, banking, healthcare infrastructure, power grids, all of these things are being worked on, transportation, shipping, all of these are being worked on. There are platforms being built out in all of these areas. So I do think that’s coming as far as the crypto asset side goes, that’s a little more murky, right?

Sean Stein Smith (45:56):

Right. Because there is some crack down on Bitcoin. Right. And as of right now, there aren’t any products out there for individual investors to use to buy a basket of underlying crypto assets. Right there, there have been, I think 12 or 13 ETFs filed at the sec and all of them were turned down because Bitcoin, that underlying asset is too volatile. So I do think that that’s going to be the more contentious side. Right. But I do think, and from the trends that I’ve seen here and pretty much everywhere that I go, the trend and the sort of theme is that we’re moving less towards a decentralized open source and more towards a more centralized, more sort of stable coin, more regulated type of asset space. And I’d say that’s where we will ultimately end up if coins like that once they get used as currencies.

Sean Stein Smith (46:55):

Now if they’re happy just being viewed as an asset class by themselves, I’d say that that could be a little more less regulated or less tethered. But I do think even in that crypto asset space, we’re going to see sort of a bifurcation right coins that are issued to be used for stuff, whether as a Groupon or is it token linked to a project where to be used as currency and then other coins and tokens issued to raise capital and then trade. So I do think that’s ultimately where we’re going to go, but I do think that’s going to take a few years shake out to see how that all plays out. And it’s all ultimately comes down to how the regulators see this, right? Cause if they see it as a threat to the financial system or as a threat to consumer protection, then sort of that could throw a whole wrench into the works too.

Sean Stein Smith (47:46):

So it’s going to be very interesting. I think two, three, four years going forward. What’s the one thing that you would like our audience to take away from this episode? I’d say that’s the one thing to keep in mind is if your right investor where you’re a company or you’re an entrepreneur, thinking about blockchain crypto assets, either as a fundraising tool to using your business to do an airdrop as a PR move, it’s really important to understand that every blockchain is different and that every crypto asset is different and that it’s really important to understand what you are getting into, how they work, how it’s going to help you, and then also what your potential exposure is as you’re getting into this space. Once you have a fifth book coming out, fifth book that should be coming out either at the end of 2019 or early 2020 you gotta let me know. Absolutely. So thank you so much. I think brilliant. Now, very informative and I appreciate your time being. Absolutely. Happy to do it. Yeah.

Terry Tateossian (48:45):

Thanks for listening to the amplified podcast. Follow us on our social channels and subscribe on Apple and Google podcasts, Spotify pod bean, or wherever you get your podcasts on the next episode. Stay tuned for more trailblazing insights, energy and culture to help fuel your pursuit. In the modern digital era.