Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,
Speaker 1: and this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.
Speaker 1: It's Friday, July two. Something we say a lot here
Speaker 1: on the Bloomberg Crypto team is everything old is new
Speaker 1: in crypto. And what we mean by that is while
Speaker 1: there's a perception that ideas like the blockchain or novel
Speaker 1: and groundbreaking, the reality is there's lots of precedents for
Speaker 1: other concepts in crypto. This is particularly clear right now
Speaker 1: as crypto experiences its own version of a beer Stearns moment,
Speaker 1: which all begs the question, our concepts like Defy or
Speaker 1: decentralized finance just reinventing traditional finance with more complexity and
Speaker 1: a sprinkling of the blockchain, or is their genuine novelty
Speaker 1: Here for more on these questions, I'm joined by Bloomberg
Speaker 1: opinion columnist Matt Levine and Bloomberg reporta muy Sen Matt,
Speaker 1: we are this is a truly exciting moment in the
Speaker 1: history of the pod. We have none other than Matt Levine, who,
Speaker 1: if you're not reading him, for his takes on Elon
Speaker 1: Musk you should be reading him for his takes on crypto,
Speaker 1: like what is wrong with you? Get it together? Subscribe
Speaker 1: to his newsletter. And Muyao, who has been you know
Speaker 1: since joining Bloomberg, just absolutely on fire as it relates
Speaker 1: to covering everything defy which all seems to be melting
Speaker 1: down in one in one direction right now. So what
Speaker 1: we're gonna do today with these two fantastic guests is
Speaker 1: explore a little bit how what we're seeing into centralized
Speaker 1: finance and centralized finance have echoes of what we've seen before.
Speaker 1: And without revealing just how old Matt and I are,
Speaker 1: I can say that we were both around in two
Speaker 1: thousand and eight and we're aware of the financial crisis
Speaker 1: of that time, and we're going to make a couple
Speaker 1: of other historical references. Does that work for you both? Yeah? Alright,
Speaker 1: let's get started. So we are what's defy defies, you know,
Speaker 1: show forced decentralized finance. It is one of the narrative
Speaker 1: or innovation crypto wants to uh sort of created to
Speaker 1: replace the traditional finance, which you know, crypto people like
Speaker 1: to say trifi and it's basically tokenalized in every financial
Speaker 1: instrument on blockchain and matt as two of us who
Speaker 1: have covered you know, trad fire or whatever heard referred
Speaker 1: to even more disparagingly as old FI, which, wow, rude,
Speaker 1: we are we are old five. Um what about DEFY
Speaker 1: looks to you like old five? Well, you know, I
Speaker 1: want to be careful. I think that like there is
Speaker 1: a sort of like core element of DeFi that is
Speaker 1: truly decentralized, and that is different and interesting. But what's
Speaker 1: been interesting in the last like you weeks two months
Speaker 1: has been that so many people who were in sort
Speaker 1: of broadly speaking, the DEFISE space turned out to be
Speaker 1: much more centralized than people thought, and to look a
Speaker 1: lot like the financial system of sort of you know,
Speaker 1: late two thousand seven, where it was a lot of
Speaker 1: like very levered players lending to each other in opaque
Speaker 1: ways where it was hard from the outside to know
Speaker 1: who was going to blow up when someone else blew up.
Speaker 1: So like you know, when like Lehman Brothers collapsed, that
Speaker 1: was that was an investment bank. For those of you
Speaker 1: who are you know, nineteen, when Lehman by this collapse,
Speaker 1: there is a lot of like who has exposure to Lehman?
Speaker 1: What commercial paper flunt, what you know, money market funder,
Speaker 1: what investment bank or what commercial bank is going to
Speaker 1: go down because they were lending money too, Lehman. And
Speaker 1: there there are worries like that that are repeating and
Speaker 1: propagating through the cryptosystem where you know, there were a
Speaker 1: couple of very high profile failures in crypto. One was
Speaker 1: the Terra Lunar ecosystem, which I think you'd probably called
Speaker 1: DeFi um, and the other was it was a hedge
Speaker 1: fund called Three Arrows Capital, which is like a hedge
Speaker 1: fund that defied stuff some other crypto stuff. And both
Speaker 1: of those, basically, like the fallout of that has been
Speaker 1: interesting to trace, and it wasn't I think necessarily obvious
Speaker 1: to everyone where that fallout would go until you know,
Speaker 1: other platforms started declaring bankrupts. And you know, you mentioned
Speaker 1: commercial paper, which I remember when none of us cared
Speaker 1: about commercial people, and then we all have to care
Speaker 1: about commercial people. And I feel like I'm there again
Speaker 1: because that's also at the center of a lot of
Speaker 1: speculation around stable coins. Or anytime you're caring about commercial paper,
Speaker 1: it's a bad sign, right, Yeah, No, it's just it's
Speaker 1: not good. So you know, I know you're not nineteen
Speaker 1: And I know you know what Lehman Brothers is, but
Speaker 1: what are you seeing, especially as it relates to some
Speaker 1: of the folks from you know, TRADFI who are interested
Speaker 1: in crypto or even disparaging of too. Where do you
Speaker 1: find yourself saying yeah, actually that's how that's similar, but
Speaker 1: this is how that's different. Yeah, for sure, I think, yes,
Speaker 1: I'm not that old. Oh I'm not that young. But
Speaker 1: I want to say, like, all of my knowledge from
Speaker 1: finance is actually from what I learned in DeFi. You know,
Speaker 1: there are a lot of cons of in DeFi that
Speaker 1: was claimed to be innovations, but after I talk to
Speaker 1: people who are you know, had a ull Street experience,
Speaker 1: So tell me, oh, that's been long existing in in
Speaker 1: traditional finance. However, I think a classic example recently would
Speaker 1: be uh steak East own Lato, which is easier and
Speaker 1: steaking platform. What it is is basically, if you stake
Speaker 1: your East with this platform, light though that you get
Speaker 1: a deridive token called steak East instead, and can use
Speaker 1: the stakes to trade and or to use the as
Speaker 1: a clatteral on different other defied platform for lending and
Speaker 1: brawling and things like that, and often time I heard
Speaker 1: from people who had a Trifi experience that it will
Speaker 1: tell me that sounds like security back back loans. And
Speaker 1: you know, Matt's as you have written about, I mean everything,
Speaker 1: but as you've written about elements of these, including this
Speaker 1: concept of shadow banking, which really came up in that
Speaker 1: two thousand and eight context. Are there things where you're
Speaker 1: sort of looking at this and you're like, really, really,
Speaker 1: we're reinventing this again. Oh sure, I mean just like
Speaker 1: just like the very simple core of like shadow banking.
Speaker 1: I mean, Chad, you know, a bank is an entity
Speaker 1: that borrows short term and lends long term. Classically, there's
Speaker 1: a lot of you know, nuance around that, but basically,
Speaker 1: a bank is something that takes deposits that people can take,
Speaker 1: can withdraw on demand, and it makes like mortgage lens
Speaker 1: where people don't have to pay them back for thirty
Speaker 1: years and so that is profitable. That's like a you know,
Speaker 1: in vary those terms, it's an arbitrage because the mortgages
Speaker 1: pay more than the deposits and so you can collect
Speaker 1: the interest difference. Um. But it's conceptually very risky business,
Speaker 1: right like, uh, if there's a run on the bank
Speaker 1: and you don't have any money in the vault, then
Speaker 1: you know you're getting big trouble. And so banking is
Speaker 1: a business that has existed for hundreds of years and
Speaker 1: ran into a lot of problems around runs on the
Speaker 1: bank and around various sorts of shenanigans and related party
Speaker 1: loans and whatever, and so in modern America, banking is
Speaker 1: like pretty regulated and so like that's that's banking, right, Like,
Speaker 1: banking has a lot of rules, and those rules are
Speaker 1: all sort of from from bad experience, right, Like those
Speaker 1: rules exist because something went wrong and people like, oh,
Speaker 1: we need a new rule. And in two thousand and
Speaker 1: eight they were like two thousands, you know, five to
Speaker 1: two thou seven, there were there were a lot of
Speaker 1: there's a lot of talking about shadow banks, and a
Speaker 1: shadow bank is basically something that does that business of
Speaker 1: borrowing short to len long, but it's not a bank,
Speaker 1: and so can do stuff that banks are not allowed
Speaker 1: to do. One thing that sometimes shadow banks do is
Speaker 1: is they are even more leveraged than a bank. Right
Speaker 1: where a bank typically has you know, like in the
Speaker 1: ballpark of three to ten percent equity, so like most
Speaker 1: of its loans are funded by deposits, but some of
Speaker 1: their funded by shareholder money, and so if some of
Speaker 1: the loans go bad, the shareholders is money off the depositors.
Speaker 1: Shadow banks can be you know, a hundred times lever
Speaker 1: to you know, a money market mutual fund. Arguably, shadow
Speaker 1: bank can be like sort of almost infinitely levered. In crypto,
Speaker 1: you sort of look around and I don't think people
Speaker 1: knew this until like platforms like Voyager and Celsius sort
Speaker 1: of blowing up. But you look at like these crypto
Speaker 1: platforms and their leverage ratios are are somewhere between very high,
Speaker 1: like you know, like four or five percent equity two
Speaker 1: practically infinite. And if you look at like if you
Speaker 1: look at tethers balance sheet, they're like, oh, we're totally backed,
Speaker 1: we are super solid. And then you like do the
Speaker 1: math and it's like they have like zero point two
Speaker 1: percent equity and you're like, well that's very low, right,
Speaker 1: and like and you know, you look at their assets
Speaker 1: and you know the question is how much equity do
Speaker 1: you need for like the kind of assets you have?
Speaker 1: And if tether was a thing that took deposits from
Speaker 1: like stable creint investors and invested them in like accounts
Speaker 1: at the fed then running at zero point equity would
Speaker 1: be great, would be like you know, more than you need.
Speaker 1: But like, in fact, they're list of assets is like
Speaker 1: commercial paper, which no one knows what it is, and
Speaker 1: everyone sort of assumes the worst about their commercial paper.
Speaker 1: But it's also it's like crypto back loans, loans to
Speaker 1: crypto headphones and and other platforms that some of whom
Speaker 1: have gone bankrupt and tell it's like, oh, we got
Speaker 1: out in time, it's fine. Um, And it's like cryptocurrencies,
Speaker 1: which like maybe those are stable coins that are fine.
Speaker 1: Maybe those are stable coins that are not fine. Maybe
Speaker 1: those are bitcoin, which is super volatile. And so you
Speaker 1: look at their asset and you think, you know, is
Speaker 1: there enough volatility in this, like in the asset side
Speaker 1: of the balance sheet that they should have more than
Speaker 1: zero point two equity? And I don't know, man, I'm
Speaker 1: just like a simple old five guy, but like that
Speaker 1: seems like a really low amount of equity for like
Speaker 1: the asset mix that they have. And I think, you know,
Speaker 1: if you ask, you know, tell people they're like, no, no,
Speaker 1: it's fine, it's totally great. Like nothing can ever lose money.
Speaker 1: Our commercial paper is money. Good. We get out of
Speaker 1: all of our bankrupt companies just before they go back there.
Speaker 1: If it's great, it's no problem. We'll be right back
Speaker 1: with more from Mual and Matt on how a lot
Speaker 1: of the complex DeFi so called innovations have existed in
Speaker 1: trad fy for a very long time. We all you
Speaker 1: have reported on defy for a long time. You have
Speaker 1: spoken to people who supported Tara and Luna. You've spoken
Speaker 1: to people who lost money on Tara and Luna, either
Speaker 1: because they were retail investors or because they were counterparties
Speaker 1: of Is there anything about what Matt is describing to
Speaker 1: you in the context of, you know, how we navigated
Speaker 1: our way through two thousand and eight that you're seeing
Speaker 1: folks now trying to do a better job of or
Speaker 1: is this more like you're like, wow, two thousand eight,
Speaker 1: see like we were in better shape than we are
Speaker 1: right now. One thing I've been thinking about, Lady, most
Speaker 1: majority of platforms or complaints we're talking about here, who
Speaker 1: have felt in crypto they're all centralized entities versus truly defied.
Speaker 1: Even Terra itself, which is quite complicated in consistent that
Speaker 1: you know, it is a defied platform, as you know,
Speaker 1: just everything runs on terror blockchain, but you do have
Speaker 1: do Ka and Terra Phone Labs, all these entities and
Speaker 1: individuals behind this this platform. Like you know, literally when
Speaker 1: do k On tweet about something and people would believe
Speaker 1: it and then people would you know, trust his kind
Speaker 1: of intent in terms of how he's going to save
Speaker 1: this project and whatsoever. And all other platforms such such
Speaker 1: as you know Voyager, which bankrupt as a result of
Speaker 1: the contention of Serio Arrows, Touch Fund. These are all
Speaker 1: centralizentis that had a very little transparency in terms how
Speaker 1: how healthy their business had had been. I think this
Speaker 1: is the one thing that I would say potentially similar
Speaker 1: what to what happened in the Great Financial Crisis, which
Speaker 1: I don't have much experience with, but Defy itself because
Speaker 1: it's transparency and also because you know, majority loans that
Speaker 1: was made on Defy are overly are overcladaized, and you
Speaker 1: we have not really see any D five projects has
Speaker 1: collapsed or felt in the latest crypto crash. As my
Speaker 1: last question to both of you, is there anything when
Speaker 1: you're talking to folks and Defy that they are looking
Speaker 1: to transfy and they're like, hmm, maybe we should do
Speaker 1: that and Matt. Same for you. You know, have you
Speaker 1: observed any like defy ifications That is a terrible phrase,
Speaker 1: but have you observed any examples of traditional lenders or
Speaker 1: more traditional Wall Street banks adopting any DFI practices that
Speaker 1: seem useful. That's a really good question. I think in general,
Speaker 1: something I am confused about when I Oftentine talked to
Speaker 1: not just Defy people, for crypto people that you know,
Speaker 1: Defy is supposed to completely replace the whole traditional finance,
Speaker 1: But every time when we see kind of headlines within
Speaker 1: the involvement of Goldman Sex or Morgan Stanley with crypto,
Speaker 1: all the crypto people get excited. They're like, oh my god,
Speaker 1: they're doing something in Defy. They're doing something in crypto.
Speaker 1: I think that's that's to me, it's just fascinating because
Speaker 1: I cannot imagine any of these investment banks would take
Speaker 1: advantage of whatever Defy is trying to create in terms
Speaker 1: as like better than Trify for example, the transparency. But
Speaker 1: I think, just based on what my experience talking to
Speaker 1: all all the people in Trify and Defy, there's this
Speaker 1: kind of this is just like a very contradictory sort
Speaker 1: of phenomenon that they wanted Wall Street to do more
Speaker 1: in defy, but in reality is that like that's should
Speaker 1: not be the direction they are going. If they truly
Speaker 1: believe in defy, they should think more that like we
Speaker 1: are going to like beat them up and we're going
Speaker 1: to replace them instead of oh, we're going to embrace
Speaker 1: all these investment thanks going or other or Street giants
Speaker 1: going to defy. Yeah. I mean what I'd say is, um,
Speaker 1: defy is is cool, Like like if you're a person
Speaker 1: with a certain mindset, if you're like a technologist or
Speaker 1: like market structure person, like DeFi is like we have
Speaker 1: built all new market structures for you to play with.
Speaker 1: Isn't that fun? Right? And so there are efficiency reasons
Speaker 1: why you might find like some aspects of you know,
Speaker 1: smart contracting or whatever compose ability of functions, you might
Speaker 1: find those things appealing, But there's also just like it's
Speaker 1: intellectually appealing to someone who sort of works in like
Speaker 1: the minds of the financial markets all day to like
Speaker 1: they kind of like go over into this like holy
Speaker 1: new territory. And so you certainly see people at banks
Speaker 1: get excited a at like defy buzz words. I mean
Speaker 1: like like this is sort of old news by now,
Speaker 1: like in like two seventeen, like you couldn't go a
Speaker 1: day without a bank announcing a blockchain project, right, Like
Speaker 1: no one knew what it meant, but it was just
Speaker 1: like banks like, oh my gosh, a blockchain and like
Speaker 1: that's like, you know, that's like a sort of DEFY
Speaker 1: is concept of like we're going to like have this
Speaker 1: sort of shared ledger of our transactions where like there'll
Speaker 1: be some sort of like you know, decentralization and like
Speaker 1: open ledger of the transactions rather than like us faxing
Speaker 1: you know, our lawyers, like the confirms or whatever. Right,
Speaker 1: Like it just seems so shiny and efficient. Um. But
Speaker 1: the other thing I'll say is that like a lot
Speaker 1: of people in trad FI feel that way, but rather
Speaker 1: than implementing a DeFi project at their bank, they quit
Speaker 1: and become you know, like crypto hedgeman managers. Right, So,
Speaker 1: like you mentioned Sam Bankman Freed, like he's a guy
Speaker 1: who's like a market structured guy at a you know,
Speaker 1: traditional market maker. And then it was like crypto crypto
Speaker 1: seems really fun, but also I can make so much
Speaker 1: money there, Like I said, like DeFi is like cool
Speaker 1: and possibly more efficient in some ways. But also just
Speaker 1: like the spreads, are you insane? And so you can
Speaker 1: make a lot of money, and so like a lot
Speaker 1: of people are trying to find ways for their banks
Speaker 1: to make more money, but like these are regulated entities,
Speaker 1: and like custody and crypto is challenging, and you know,
Speaker 1: regular like supervisors don't necessarily like it and all this stuff.
Speaker 1: But if you quit and just start your own crypto
Speaker 1: hedge fund, there's like so much money to be made.
Speaker 1: And so I think that's a lot of what's happening
Speaker 1: in traditional finances. Everyone's scorting to do crypto, or they
Speaker 1: were before cryptocrash, right, And on that note, thank you both,
Speaker 1: thank you, thank you. You can find more of Muya
Speaker 1: Shan's reporting on the Bloomberg Terminal on Bloomberg dot com
Speaker 1: and on Twitter. She's at Muya Shen That's m u
Speaker 1: y a O s h e N. You can also
Speaker 1: find more of Matt Levin's columns on the Bloomberg Terminal
Speaker 1: on Bloomberg dot com or follow him on Twitter. He's
Speaker 1: at Matt underscore Levine. On the next episode of bloom Crypto,
Speaker 1: Mary Catherine later has a story to tell. She was
Speaker 1: a rising star at Black Rock when she left Wall
Speaker 1: Street and traditional finance for crypto and decentralized finance. She's
Speaker 1: now Chief operating Officer at unit Swap Labs, which is
Speaker 1: the creator of the world's biggest decentralized exchange protocol. She'll
Speaker 1: join my colleague Bloomberg Reports a Lga Karif to talk
Speaker 1: about her belief in blockchain, what comes after the terror collapse,
Speaker 1: and how she sees decentralized folence shaping the future. I'm
Speaker 1: Stacy Marie Ishmael and this is Bloomberg Crypto, a daily
Speaker 1: podcast from Bloomberg and I Heart Radio. For more shows
Speaker 1: from I Heart Radio, visit the I Heart Radio app,
Speaker 1: Apple Podcasts, or wherever you get your podcasts. Email your questions, comments,
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Speaker 1: supervising producer of Bloomberg Crypto is Vicky ver Galina. Our
Speaker 1: senior producer is Janet Babin. Our producer is Mohammed Perup.
Speaker 1: Our associated producers Osanam Sidiki and Moses and um dast
Speaker 1: to wonder At is our engineer. Original music by Leo
Speaker 1: sidron h