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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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Speaker 1: and this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.

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Speaker 1: It's Friday, July two. Something we say a lot here

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Speaker 1: on the Bloomberg Crypto team is everything old is new

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Speaker 1: in crypto. And what we mean by that is while

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Speaker 1: there's a perception that ideas like the blockchain or novel

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Speaker 1: and groundbreaking, the reality is there's lots of precedents for

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Speaker 1: other concepts in crypto. This is particularly clear right now

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Speaker 1: as crypto experiences its own version of a beer Stearns moment,

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Speaker 1: which all begs the question, our concepts like Defy or

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Speaker 1: decentralized finance just reinventing traditional finance with more complexity and

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Speaker 1: a sprinkling of the blockchain, or is their genuine novelty

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Speaker 1: Here for more on these questions, I'm joined by Bloomberg

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Speaker 1: opinion columnist Matt Levine and Bloomberg reporta muy Sen Matt,

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Speaker 1: we are this is a truly exciting moment in the

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Speaker 1: history of the pod. We have none other than Matt Levine, who,

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Speaker 1: if you're not reading him, for his takes on Elon

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Speaker 1: Musk you should be reading him for his takes on crypto,

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Speaker 1: like what is wrong with you? Get it together? Subscribe

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Speaker 1: to his newsletter. And Muyao, who has been you know

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Speaker 1: since joining Bloomberg, just absolutely on fire as it relates

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Speaker 1: to covering everything defy which all seems to be melting

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Speaker 1: down in one in one direction right now. So what

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Speaker 1: we're gonna do today with these two fantastic guests is

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Speaker 1: explore a little bit how what we're seeing into centralized

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Speaker 1: finance and centralized finance have echoes of what we've seen before.

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Speaker 1: And without revealing just how old Matt and I are,

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Speaker 1: I can say that we were both around in two

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Speaker 1: thousand and eight and we're aware of the financial crisis

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Speaker 1: of that time, and we're going to make a couple

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Speaker 1: of other historical references. Does that work for you both? Yeah? Alright,

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Speaker 1: let's get started. So we are what's defy defies, you know,

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Speaker 1: show forced decentralized finance. It is one of the narrative

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Speaker 1: or innovation crypto wants to uh sort of created to

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Speaker 1: replace the traditional finance, which you know, crypto people like

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Speaker 1: to say trifi and it's basically tokenalized in every financial

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Speaker 1: instrument on blockchain and matt as two of us who

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Speaker 1: have covered you know, trad fire or whatever heard referred

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Speaker 1: to even more disparagingly as old FI, which, wow, rude,

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Speaker 1: we are we are old five. Um what about DEFY

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Speaker 1: looks to you like old five? Well, you know, I

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Speaker 1: want to be careful. I think that like there is

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Speaker 1: a sort of like core element of DeFi that is

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Speaker 1: truly decentralized, and that is different and interesting. But what's

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Speaker 1: been interesting in the last like you weeks two months

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Speaker 1: has been that so many people who were in sort

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Speaker 1: of broadly speaking, the DEFISE space turned out to be

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Speaker 1: much more centralized than people thought, and to look a

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Speaker 1: lot like the financial system of sort of you know,

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Speaker 1: late two thousand seven, where it was a lot of

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Speaker 1: like very levered players lending to each other in opaque

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Speaker 1: ways where it was hard from the outside to know

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Speaker 1: who was going to blow up when someone else blew up.

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Speaker 1: So like you know, when like Lehman Brothers collapsed, that

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Speaker 1: was that was an investment bank. For those of you

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Speaker 1: who are you know, nineteen, when Lehman by this collapse,

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Speaker 1: there is a lot of like who has exposure to Lehman?

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Speaker 1: What commercial paper flunt, what you know, money market funder,

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Speaker 1: what investment bank or what commercial bank is going to

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Speaker 1: go down because they were lending money too, Lehman. And

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Speaker 1: there there are worries like that that are repeating and

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Speaker 1: propagating through the cryptosystem where you know, there were a

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Speaker 1: couple of very high profile failures in crypto. One was

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Speaker 1: the Terra Lunar ecosystem, which I think you'd probably called

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Speaker 1: DeFi um, and the other was it was a hedge

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Speaker 1: fund called Three Arrows Capital, which is like a hedge

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Speaker 1: fund that defied stuff some other crypto stuff. And both

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Speaker 1: of those, basically, like the fallout of that has been

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Speaker 1: interesting to trace, and it wasn't I think necessarily obvious

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Speaker 1: to everyone where that fallout would go until you know,

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Speaker 1: other platforms started declaring bankrupts. And you know, you mentioned

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Speaker 1: commercial paper, which I remember when none of us cared

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Speaker 1: about commercial people, and then we all have to care

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Speaker 1: about commercial people. And I feel like I'm there again

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Speaker 1: because that's also at the center of a lot of

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Speaker 1: speculation around stable coins. Or anytime you're caring about commercial paper,

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Speaker 1: it's a bad sign, right, Yeah, No, it's just it's

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Speaker 1: not good. So you know, I know you're not nineteen

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Speaker 1: And I know you know what Lehman Brothers is, but

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Speaker 1: what are you seeing, especially as it relates to some

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Speaker 1: of the folks from you know, TRADFI who are interested

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Speaker 1: in crypto or even disparaging of too. Where do you

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Speaker 1: find yourself saying yeah, actually that's how that's similar, but

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Speaker 1: this is how that's different. Yeah, for sure, I think, yes,

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Speaker 1: I'm not that old. Oh I'm not that young. But

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Speaker 1: I want to say, like, all of my knowledge from

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Speaker 1: finance is actually from what I learned in DeFi. You know,

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Speaker 1: there are a lot of cons of in DeFi that

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Speaker 1: was claimed to be innovations, but after I talk to

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Speaker 1: people who are you know, had a ull Street experience,

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Speaker 1: So tell me, oh, that's been long existing in in

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Speaker 1: traditional finance. However, I think a classic example recently would

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Speaker 1: be uh steak East own Lato, which is easier and

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Speaker 1: steaking platform. What it is is basically, if you stake

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Speaker 1: your East with this platform, light though that you get

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Speaker 1: a deridive token called steak East instead, and can use

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Speaker 1: the stakes to trade and or to use the as

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Speaker 1: a clatteral on different other defied platform for lending and

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Speaker 1: brawling and things like that, and often time I heard

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Speaker 1: from people who had a Trifi experience that it will

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Speaker 1: tell me that sounds like security back back loans. And

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Speaker 1: you know, Matt's as you have written about, I mean everything,

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Speaker 1: but as you've written about elements of these, including this

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Speaker 1: concept of shadow banking, which really came up in that

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Speaker 1: two thousand and eight context. Are there things where you're

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Speaker 1: sort of looking at this and you're like, really, really,

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Speaker 1: we're reinventing this again. Oh sure, I mean just like

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Speaker 1: just like the very simple core of like shadow banking.

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Speaker 1: I mean, Chad, you know, a bank is an entity

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Speaker 1: that borrows short term and lends long term. Classically, there's

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Speaker 1: a lot of you know, nuance around that, but basically,

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Speaker 1: a bank is something that takes deposits that people can take,

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Speaker 1: can withdraw on demand, and it makes like mortgage lens

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Speaker 1: where people don't have to pay them back for thirty

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Speaker 1: years and so that is profitable. That's like a you know,

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Speaker 1: in vary those terms, it's an arbitrage because the mortgages

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Speaker 1: pay more than the deposits and so you can collect

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Speaker 1: the interest difference. Um. But it's conceptually very risky business,

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Speaker 1: right like, uh, if there's a run on the bank

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Speaker 1: and you don't have any money in the vault, then

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Speaker 1: you know you're getting big trouble. And so banking is

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Speaker 1: a business that has existed for hundreds of years and

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Speaker 1: ran into a lot of problems around runs on the

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Speaker 1: bank and around various sorts of shenanigans and related party

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Speaker 1: loans and whatever, and so in modern America, banking is

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Speaker 1: like pretty regulated and so like that's that's banking, right, Like,

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Speaker 1: banking has a lot of rules, and those rules are

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Speaker 1: all sort of from from bad experience, right, Like those

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Speaker 1: rules exist because something went wrong and people like, oh,

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Speaker 1: we need a new rule. And in two thousand and

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Speaker 1: eight they were like two thousands, you know, five to

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Speaker 1: two thou seven, there were there were a lot of

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Speaker 1: there's a lot of talking about shadow banks, and a

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Speaker 1: shadow bank is basically something that does that business of

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Speaker 1: borrowing short to len long, but it's not a bank,

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Speaker 1: and so can do stuff that banks are not allowed

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Speaker 1: to do. One thing that sometimes shadow banks do is

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Speaker 1: is they are even more leveraged than a bank. Right

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Speaker 1: where a bank typically has you know, like in the

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Speaker 1: ballpark of three to ten percent equity, so like most

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Speaker 1: of its loans are funded by deposits, but some of

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Speaker 1: their funded by shareholder money, and so if some of

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Speaker 1: the loans go bad, the shareholders is money off the depositors.

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Speaker 1: Shadow banks can be you know, a hundred times lever

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Speaker 1: to you know, a money market mutual fund. Arguably, shadow

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Speaker 1: bank can be like sort of almost infinitely levered. In crypto,

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Speaker 1: you sort of look around and I don't think people

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Speaker 1: knew this until like platforms like Voyager and Celsius sort

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Speaker 1: of blowing up. But you look at like these crypto

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Speaker 1: platforms and their leverage ratios are are somewhere between very high,

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Speaker 1: like you know, like four or five percent equity two

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Speaker 1: practically infinite. And if you look at like if you

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Speaker 1: look at tethers balance sheet, they're like, oh, we're totally backed,

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Speaker 1: we are super solid. And then you like do the

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Speaker 1: math and it's like they have like zero point two

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Speaker 1: percent equity and you're like, well that's very low, right,

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Speaker 1: and like and you know, you look at their assets

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Speaker 1: and you know the question is how much equity do

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Speaker 1: you need for like the kind of assets you have?

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Speaker 1: And if tether was a thing that took deposits from

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Speaker 1: like stable creint investors and invested them in like accounts

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Speaker 1: at the fed then running at zero point equity would

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Speaker 1: be great, would be like you know, more than you need.

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Speaker 1: But like, in fact, they're list of assets is like

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Speaker 1: commercial paper, which no one knows what it is, and

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Speaker 1: everyone sort of assumes the worst about their commercial paper.

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Speaker 1: But it's also it's like crypto back loans, loans to

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Speaker 1: crypto headphones and and other platforms that some of whom

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Speaker 1: have gone bankrupt and tell it's like, oh, we got

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Speaker 1: out in time, it's fine. Um, And it's like cryptocurrencies,

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Speaker 1: which like maybe those are stable coins that are fine.

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Speaker 1: Maybe those are stable coins that are not fine. Maybe

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Speaker 1: those are bitcoin, which is super volatile. And so you

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Speaker 1: look at their asset and you think, you know, is

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Speaker 1: there enough volatility in this, like in the asset side

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Speaker 1: of the balance sheet that they should have more than

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Speaker 1: zero point two equity? And I don't know, man, I'm

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Speaker 1: just like a simple old five guy, but like that

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Speaker 1: seems like a really low amount of equity for like

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Speaker 1: the asset mix that they have. And I think, you know,

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Speaker 1: if you ask, you know, tell people they're like, no, no,

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Speaker 1: it's fine, it's totally great. Like nothing can ever lose money.

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Speaker 1: Our commercial paper is money. Good. We get out of

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Speaker 1: all of our bankrupt companies just before they go back there.

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Speaker 1: If it's great, it's no problem. We'll be right back

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Speaker 1: with more from Mual and Matt on how a lot

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Speaker 1: of the complex DeFi so called innovations have existed in

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Speaker 1: trad fy for a very long time. We all you

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Speaker 1: have reported on defy for a long time. You have

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Speaker 1: spoken to people who supported Tara and Luna. You've spoken

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Speaker 1: to people who lost money on Tara and Luna, either

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Speaker 1: because they were retail investors or because they were counterparties

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Speaker 1: of Is there anything about what Matt is describing to

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Speaker 1: you in the context of, you know, how we navigated

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Speaker 1: our way through two thousand and eight that you're seeing

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Speaker 1: folks now trying to do a better job of or

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Speaker 1: is this more like you're like, wow, two thousand eight,

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Speaker 1: see like we were in better shape than we are

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Speaker 1: right now. One thing I've been thinking about, Lady, most

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Speaker 1: majority of platforms or complaints we're talking about here, who

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Speaker 1: have felt in crypto they're all centralized entities versus truly defied.

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Speaker 1: Even Terra itself, which is quite complicated in consistent that

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Speaker 1: you know, it is a defied platform, as you know,

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Speaker 1: just everything runs on terror blockchain, but you do have

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Speaker 1: do Ka and Terra Phone Labs, all these entities and

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Speaker 1: individuals behind this this platform. Like you know, literally when

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Speaker 1: do k On tweet about something and people would believe

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Speaker 1: it and then people would you know, trust his kind

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Speaker 1: of intent in terms of how he's going to save

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Speaker 1: this project and whatsoever. And all other platforms such such

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Speaker 1: as you know Voyager, which bankrupt as a result of

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Speaker 1: the contention of Serio Arrows, Touch Fund. These are all

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Speaker 1: centralizentis that had a very little transparency in terms how

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Speaker 1: how healthy their business had had been. I think this

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Speaker 1: is the one thing that I would say potentially similar

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Speaker 1: what to what happened in the Great Financial Crisis, which

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Speaker 1: I don't have much experience with, but Defy itself because

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Speaker 1: it's transparency and also because you know, majority loans that

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Speaker 1: was made on Defy are overly are overcladaized, and you

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Speaker 1: we have not really see any D five projects has

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Speaker 1: collapsed or felt in the latest crypto crash. As my

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Speaker 1: last question to both of you, is there anything when

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Speaker 1: you're talking to folks and Defy that they are looking

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Speaker 1: to transfy and they're like, hmm, maybe we should do

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Speaker 1: that and Matt. Same for you. You know, have you

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Speaker 1: observed any like defy ifications That is a terrible phrase,

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Speaker 1: but have you observed any examples of traditional lenders or

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Speaker 1: more traditional Wall Street banks adopting any DFI practices that

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Speaker 1: seem useful. That's a really good question. I think in general,

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Speaker 1: something I am confused about when I Oftentine talked to

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Speaker 1: not just Defy people, for crypto people that you know,

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Speaker 1: Defy is supposed to completely replace the whole traditional finance,

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Speaker 1: But every time when we see kind of headlines within

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Speaker 1: the involvement of Goldman Sex or Morgan Stanley with crypto,

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Speaker 1: all the crypto people get excited. They're like, oh my god,

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Speaker 1: they're doing something in Defy. They're doing something in crypto.

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Speaker 1: I think that's that's to me, it's just fascinating because

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Speaker 1: I cannot imagine any of these investment banks would take

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Speaker 1: advantage of whatever Defy is trying to create in terms

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Speaker 1: as like better than Trify for example, the transparency. But

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Speaker 1: I think, just based on what my experience talking to

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Speaker 1: all all the people in Trify and Defy, there's this

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Speaker 1: kind of this is just like a very contradictory sort

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Speaker 1: of phenomenon that they wanted Wall Street to do more

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Speaker 1: in defy, but in reality is that like that's should

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Speaker 1: not be the direction they are going. If they truly

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Speaker 1: believe in defy, they should think more that like we

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Speaker 1: are going to like beat them up and we're going

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Speaker 1: to replace them instead of oh, we're going to embrace

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Speaker 1: all these investment thanks going or other or Street giants

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Speaker 1: going to defy. Yeah. I mean what I'd say is, um,

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Speaker 1: defy is is cool, Like like if you're a person

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Speaker 1: with a certain mindset, if you're like a technologist or

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Speaker 1: like market structure person, like DeFi is like we have

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Speaker 1: built all new market structures for you to play with.

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Speaker 1: Isn't that fun? Right? And so there are efficiency reasons

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Speaker 1: why you might find like some aspects of you know,

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Speaker 1: smart contracting or whatever compose ability of functions, you might

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Speaker 1: find those things appealing, But there's also just like it's

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Speaker 1: intellectually appealing to someone who sort of works in like

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Speaker 1: the minds of the financial markets all day to like

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Speaker 1: they kind of like go over into this like holy

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Speaker 1: new territory. And so you certainly see people at banks

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Speaker 1: get excited a at like defy buzz words. I mean

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Speaker 1: like like this is sort of old news by now,

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Speaker 1: like in like two seventeen, like you couldn't go a

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Speaker 1: day without a bank announcing a blockchain project, right, Like

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Speaker 1: no one knew what it meant, but it was just

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Speaker 1: like banks like, oh my gosh, a blockchain and like

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Speaker 1: that's like, you know, that's like a sort of DEFY

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Speaker 1: is concept of like we're going to like have this

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Speaker 1: sort of shared ledger of our transactions where like there'll

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Speaker 1: be some sort of like you know, decentralization and like

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Speaker 1: open ledger of the transactions rather than like us faxing

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Speaker 1: you know, our lawyers, like the confirms or whatever. Right,

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Speaker 1: Like it just seems so shiny and efficient. Um. But

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Speaker 1: the other thing I'll say is that like a lot

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Speaker 1: of people in trad FI feel that way, but rather

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Speaker 1: than implementing a DeFi project at their bank, they quit

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Speaker 1: and become you know, like crypto hedgeman managers. Right, So,

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Speaker 1: like you mentioned Sam Bankman Freed, like he's a guy

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Speaker 1: who's like a market structured guy at a you know,

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Speaker 1: traditional market maker. And then it was like crypto crypto

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Speaker 1: seems really fun, but also I can make so much

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Speaker 1: money there, Like I said, like DeFi is like cool

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Speaker 1: and possibly more efficient in some ways. But also just

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Speaker 1: like the spreads, are you insane? And so you can

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Speaker 1: make a lot of money, and so like a lot

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Speaker 1: of people are trying to find ways for their banks

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Speaker 1: to make more money, but like these are regulated entities,

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Speaker 1: and like custody and crypto is challenging, and you know,

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Speaker 1: regular like supervisors don't necessarily like it and all this stuff.

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Speaker 1: But if you quit and just start your own crypto

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Speaker 1: hedge fund, there's like so much money to be made.

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Speaker 1: And so I think that's a lot of what's happening

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Speaker 1: in traditional finances. Everyone's scorting to do crypto, or they

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Speaker 1: were before cryptocrash, right, And on that note, thank you both,

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Speaker 1: thank you, thank you. You can find more of Muya

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Speaker 1: Shan's reporting on the Bloomberg Terminal on Bloomberg dot com

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Speaker 1: and on Twitter. She's at Muya Shen That's m u

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Speaker 1: y a O s h e N. You can also

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Speaker 1: find more of Matt Levin's columns on the Bloomberg Terminal

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Speaker 1: on Bloomberg dot com or follow him on Twitter. He's

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Speaker 1: at Matt underscore Levine. On the next episode of bloom Crypto,

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Speaker 1: Mary Catherine later has a story to tell. She was

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Speaker 1: a rising star at Black Rock when she left Wall

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Speaker 1: Street and traditional finance for crypto and decentralized finance. She's

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Speaker 1: now Chief operating Officer at unit Swap Labs, which is

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Speaker 1: the creator of the world's biggest decentralized exchange protocol. She'll

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Speaker 1: join my colleague Bloomberg Reports a Lga Karif to talk

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Speaker 1: about her belief in blockchain, what comes after the terror collapse,

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Speaker 1: and how she sees decentralized folence shaping the future. I'm

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Speaker 1: Stacy Marie Ishmael and this is Bloomberg Crypto, a daily

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Speaker 1: podcast from Bloomberg and I Heart Radio. For more shows

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Speaker 1: from I Heart Radio, visit the I Heart Radio app,

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Speaker 1: Apple Podcasts, or wherever you get your podcasts. Email your questions, comments,

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Speaker 1: or suggestions for the show to Crypto at Bloomberg dot

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Speaker 1: net and you'll find us on Twitter at Crypto. The

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Speaker 1: supervising producer of Bloomberg Crypto is Vicky ver Galina. Our

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Speaker 1: senior producer is Janet Babin. Our producer is Mohammed Perup.

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Speaker 1: Our associated producers Osanam Sidiki and Moses and um dast

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Speaker 1: to wonder At is our engineer. Original music by Leo

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Speaker 1: sidron h