Irene:
Hi, everyone. Thank you for joining WisdomTree's Digital Assets Office Hours on the current state and future of crypto, where you'll hear from Ben Dean, WisdomTree's director of digital assets, and Matt Kress, WisdomTree's director of digital assets and advisor innovation.

Matt Kress:
Thank you, Irene. And thanks for everyone being here, more people will be trickling in. I'm really excited to jump into just the macro. We're going to talk a little bit about macro, where we're currently at, what's happening in crypto, digital assets, blockchain enabled technology. Something that, when I talk to a lot of advisors and just people that we work with, I always get asked, well, tell me about either, one, use cases, or two, I want to understand more about the macro environment, what's going on. So no one better at our firm to have on here today than Ben Dean with us. So, Ben is the host of the Crypto Clarified Podcast, in case you're looking for a new podcast to learn about just what's going on, updated, he is a director of digital assets here at WisdomTree, and he is traveling around the world all the time, talking to a lot of our biggest clients on just helping them understand the space, understand what's going on, and having discussions around crypto, digital assets, blockchain, security, things like that. So, Ben, thanks for having. Where are you at today?

Ben Dean:
Nice to be here with you, Matt. I'm speaking to you from Buenos Aires in Argentina at the moment. It's been a long trip down from London, but it's always a pleasure to be back in this part of the world where it's very active actually, in terms of the actual uses of this technology.

Matt Kress:
Yeah, we were talking about that right as we jumped on. So, we'll keep today more casual, not have a bullet point list of everything we're talking about. What is the census like? So, a lot of people, I would assume most people on the call, haven't looked at the registering list, today are probably in the US, probably advisors, or maybe a couple institutional guests as well. So in the US, I don't see Bitcoin around, I see it on the internet. What is the feeling like in Buenos Aires right now, where you're at? Why are you down there? And how are you seeing around the world? Give us an insight into the outside the US point of view of everything right now.

Ben Dean:
Sure thing. As you said in the introduction, I do spend a lot of time traveling around, visiting different people in different parts of the world, and have done that for now almost a decade. So I've seen over time how the adoption of this technology has increased in certain parts of the world, why that is happening in specific places. And at the moment, I'm here in Buenos Aires because there is a Bitcoin conference happening here. It's the longest running one. I've got to speak at that on Friday. And it's quite a big event still, as I say, longest running one, and there are very good reasons why a place like Argentina would be this way. If I can find a way to share my screen at some point, what I'll point out to you is that a country like this has got hyperinflation. When I was here in May, the blue rate, which is the unofficial rate for the peso to the dollar, was about 300 against the official rate of 150. Changing yesterday as I arrived, it was close to 900, the blue rate, compared to about 350 for the official rate.

So people in this part of the world will use this technology in one of two ways. They'll either buy Bitcoin because, compared to their local currency, it has actually shown to be a store of value in spite of its volatility between now and one, five and 10 year timeframes. People here will shrug their shoulders at the volatility. They'll say, "I'm better off having Bitcoin the last year, three or five years, than my peso." They'll also end up using what some people call stable coins, which are US dollar tokens. We might touch on this tokenization buzzword later on in the session, but essential idea is that you put US dollars in a bank account somewhere, and then you issue US dollar tokens against the holdings.

And for a country like this where paper US dollars can be difficult to find but everyone's got a cell phone, these stable coins, US dollar tokens, are quite popular. Same way in Brazil, you'll find that, Turkey, you'll find that, Vietnam, places with capital controls, and of course, the People's Republic of China, which has been seeing a lot of capital flight the last month or so. These are the two manifestations of the technology that people use, and there's some of the reasons why they use it.

Matt Kress:
And if you can't see the share screen button, I can go ahead and share screen. I think I know what you'll want to pull up as well. It should be at the bottom of your screen. Yeah, it's fascinating. I remember, man, 2010, I was in Uruguay, went down to Argentina, over to Buenos Aires, and a friend told me he had a friend to bring US dollars, and that was the first time I was introduced to the black market there, and someone wanting to get... There you go. It's sharing now. Someone wanted to get US dollars, and it was actually someone that worked at a bank, and said, "Hey, I'll give you a better rate than the bank has." It was fascinating. I know you've had similar experiences.

I think just as we think about use cases, we think about government control, and we think about just fiat where people live, are born, work, make their money, exactly what you were saying, that the crypto ownership, what you're showing here, is fascinating to think about. Because in the US, there's a lot of different narratives, whether you look at different media sites or you look at big popular news sites and headlines, or you look at the regulatory news, or you look at what's on Twitter or X, or LinkedIn, or other social content, you get all these different insights. But just pure looking at the numbers, this is fascinating, where you're talking about it, rise of crypto ownership just globally.

Ben Dean:
And look, Bitcoin was created because distrust in central banks and lacks monetary policy. But it's interesting over the years as we've seen different people solving different problems using this technology, it's so diverse. The Philippines is one of the largest remittance markets in the world, similar to Mexico, so they use it for…countries with hyperinflation, it's seen as a store of value that sits alongside gold, if you can get it, or US dollars or euros, it's better than their local currency. And then there are countries that just have dysfunctional banking systems, but have leapfrogged ahead with mobile banking. South Africa is a good example there. Mobile money, M-PESA, has been a thing for well over a decade and, well, if they're sending M-PESA money on their cell phones, it's not a very big leap for them to be sending cryptocurrencies or tokenized currencies on a different platform on their same device. It's just a wide world out there and a lot of the innovation in financial services happens out there, at least at the retail level.

Matt Kress:
Yeah. And I think that's something, when we think about just big picture trends, as adoption increases, one of the big stories around in the ideas and narratives around Bitcoin, it's just the store of wealth. A lot of people thought we'd use it every day in transfers. There's some different scalability issues with payments at a daily basis for everything we do that, in its current form, we're not seeing at the moment. But when you think of Bitcoin having a fixed supply, and global adoption on the rise for people who, if they just hold Bitcoin, they think that the number is going to go up to the right, especially in countries that they might not be able to make as much per hour as the average worker in the US or some of the other more established countries, I think it's a really fascinating idea of just understanding what's happening globally, and how's that being affected with just a fixed supply cap asset.

Ben Dean:
Yeah, there's that piece. But also remember, if you want to use the network, if I go right now and turn Argentinian pesos into Bitcoin, send them to you in the United States, and you go and turn them into US dollars where a service provider does that for you, you've really only touched the Bitcoin network for a few seconds, and you've just gotten the utility of money that moves instantaneously across borders in a way that you just cannot do in a lot of parts of the world. So there's both of those things happening at the same time. There's a lot of things happening at the same time, but it's fascinating process to watch play out.

Matt Kress:
Yeah. Faster, cheaper, use cases rise.

Ben Dean:
…no one controls the whole spiel.

Matt Kress:
And so, when we think about that, then shifting over to, we've been talking about Bitcoin, talking about Ethereum. So, Ethereum is, for people here who are... I'm guessing most people here on the call are familiar. Ethereum has ability to have a programmable, basically smart contracts code inside of token or on the protocol itself. And so there's different parts of the networks, and then there's different solutions on top of that. So, what we would say is a layer one, a base protocol, is the Ethereum blockchain. Then there's solutions that help scalable. There's a lot of different solutions for different use cases that are popping up on that one.

And so, Ether is the actual cryptocurrency on the Ethereum blockchain, the main thing. A lot of people use Ether and Ethereum interchangeably. So when we think about use cases and we think about adoption, tell us a little bit more about the difference of just Bitcoin, and we won't spend too much time here, because I know it's probably pretty basic for a lot of people, but thinking about some of these things around staking and the use case for Ethereum.

Ben Dean:
So the common misconception, Ethereum network, Ether, one and the same, that's where the story stops. The innovation that this network introduced is, as you say, it's got what's called a Turing complete programming language built into it called Solidity. People call them smart contracts, they're really just computer scripts that auto execute, and they're pretty fun to use. I use them as part of my day job at WisdomTree. But let's talk a little bit about beyond what I get to do with them. Let's talk about some of the use cases that we see people using this technology for. Now, we mentioned stable coins earlier, US dollar tokens, they run on Ethereum. If you want to send these US dollar tokens to other people, what do you need? You need Ether. That's how you pay the transaction fees. So, in that way, Ether is a little bit like putting gas in your car. Do you want the car to move? You need gas to put it in.

So they are separate things, but that is one way in which we've seen it used. Later this afternoon, I'm going to go visit somebody who's got programmable lending on what's one of these decentralized finance or DeFi apps. They do it because the banking system here, people just don't have access to that kind of facility. So they've written up a set of smart contracts that, in their whole, constitute an application, but it essentially lets people do this financial activity, get a yield on their holdings or interest in a way they can't do otherwise. If people want to go check it out on the Crypto Clarified Podcast, we had an episode with a man named Gabriel Gruber at Exactly. We speak for about 40 minutes unpacking that concept, so go check it out. That's just one example of how people are using this relatively malleable set of software tools to build financial services that are digitally native, really.

Matt Kress:
Yeah. That's a great use case. Every time the services are used, there's some sort of fee that is paid then, so that when you think of, it's not just free, you can't just use it for free, use the code, transfer money, or transfer these assets, so there's a fee there. And then there's validators that get paid the fee. So there's ability to, what you would say is stake and be part of that network, almost like just locking your Ether up for a period of time to be part of that, earn some of the fees, things like that, so there's a lot of different use cases around just that idea. And thinking of that one, so that's one application, basically. One company, one application, they're spinning it and working on a couple of different ways. But something also that we were talking about then at a high level is VC funding, and finding product market fit.

So we saw VC funding for crypto related companies. So where the money was going, they're trying to hit Moonshots. But we saw that early in, what was it? Back in October of 2020. So there's just under $300 million a month being funded into crypto. It steadily increased to September of 2021, there was $3.7 billion invested in crypto from VCs, a spike to $7 billion in October, and that's been trending back downward again, back down to $300 million last September. So there was this big rise that coincided with one of the big runs, bull runs that happened in crypto with the prices. But there are a lot of VC firms that were funding, trying to find the next Moonshot, a lot of firms that were just building and getting money and getting funding because they could. Now we're seeing that a lot of these firms in these different use cases, if they didn't find a really specific use case, like Ben, what you were talking about, they're struggling. They're having to find product market fit. They're having to find profitability. It's not just, let's just build something to build something, or just because, or, oh, we can make this network better because we're calling it better. But you have to get very specific with applications now and say, what is the specific use case? We had all this funding, we're losing runway.

So we're starting to see, I would say over the next year, at least my hypothesis, is that we're going to have a lot more of these very specific use cases that we're seeing as firms are forced to do that without just this excess of capital, and we're going to see a lot of the different ideas and things that we saw in PR and different news like public press releases and different news out there that might have had different proof of concepts, or not quite be fully profitable and tested. I think we're going to see a lot of those falling off, dropping out, and then we'll see, I think, some more late stage money coming into those firms that did find profitability, did find product market fit, so that there's going to be a lot more headlines coming next year around what's going on, how are firms like financial institutions saving money, doing things quicker in a more trusted, secure way, as we think about building to the future. Ben, what's your take on that?

Ben Dean:
Yeah, VC funding is an interesting metric. As you said, 2021 was a bumper year, it was during the fading moments before the rates start going up in the US, and money was just being sprayed everywhere. Anyone with crypto, something in the pitch deck, was getting funding. And so a lot of it's the nature of the beast, VC firms are trying to make money on maybe five max percent of companies in the portfolio that make outsize returns, and then there's a lot of losers and a lot that break even. So it's the nature of the way that works. It's no surprise. Last year, 2022, actually was roughly the same amount, most people don't realize. First half of the year still saw a huge amount of venture investment.

Now, as you say, what happens? Well, over time we find out what works and what. This is the nature of an innovative entrepreneurial ecosystem. Not very different to the internet, not very different to what's happening in AI right now, that's just the way the VCs work. Now, to your point, something I've noticed, so if you continue to track VC funding, what you're seeing right now is something interesting. Much less VC investment is happening, however the places that it goes, what I've observed, are areas where, for a long time, people who work in this ecosystem have said there need to be improvements to onboard the next bunch of adopters of the technology.

I'll give two examples right now. One is Nocturne. Nocturne is a startup based out of the US. Bain is the lead investor on it. They got a small amount of money, it couldn't have been more than 10 million US dollars, but they're bringing privacy preserving tools to this blockchain digital asset technology. We've said for a long time that there needs to be privacy controls in place because people don't want their whole bank balance being shown into the world. So they are getting funded, whereas two years ago some NFT crazy thing would've been funded, and it's a shame the capital was misallocated like that, but that's the way it goes.

The second one is around something called account abstraction, which is essentially a way in which to make the technology more usable. That is abstracting away a lot of the technical stuff like having to manage seed phrases and sign transactions constantly. Pimlico is a company based in London that just received an investment. It wasn't Bain that time though, I'd have to go and look up precisely who. Andreessen Horowitz, I should say. They've just opened an office in London and it's one of their first investments in the crypto space in London. So they've received, again, about six to 10 million, but it's extremely useful account abstraction. PayPal is looking at it, Visa is looking at it, Circle is looking at it, I look at it. It's just two great examples in the last couple of months of precisely what you're saying, and we're just going to see now how that plays out. It's a fun process to watch, very instructive, and I think the capital's being allocated a bit more efficiently than it was. Instead, now it's being sent to AI something, and I guess we'll find out in 18 months how well allocated that capital was.

Matt Kress:
Yeah. I guess Crunchbase was saying AI, sustainability, and semiconductors were taking all the funding, stealing the show, at least for late stage stuff. So I think that's fascinating what you're saying, is that these use cases aren't just one specific late already done use case, but it's a foundational use case. It's something specific, building the foundation that's going to unlock the future, and that's something that we have to always realize is Ethereum has only been here since 2015. AI was founded, I believe it was in 1951, I forgot the exact date, don't quote me on that, but it was started around there and that was the first idea. So it's not just like the ChatGPT moment where, boom, everyone knows about it, it has a use case, let's go. But we're seeing the building blocks, the foundations be created, and once you understand a little bit more around the protocol and the supply, it's anyone can go and look around some of the assets or how these things are being built, what's needed to scale, what's needed to really adopt forward.

Those things are being invested in, Ben, like you're saying, and we're starting to see either Jockey for position, or companies that might've said, "You know what? We were going to build a whole new blockchain, but now we're just going to build a scaling solution on top of one like Ethereum." Kraken just announced their big exchange. Coinbase has also built a layer two scaling solution and different solutions on top of that. So we're seeing people now choose what's the faster route to money where an audience is at, and there's a proven success in team here, and I think that's going to keep moving forward as well.

Ben Dean:
Anyone who likes technology history has seen this story before. It is Turing, and I'm reading this very nice book about Claude Shannon at the moment. They're doing this kind of stuff back in the thirties and forties with Vannevar Bush and his, what is a very early mechanical version of a computer out of MIT. It takes decades. And I have a mentor actually who went through what they call the AI winter in the 1980s when all the funding dried up. It was by no means a linear path. And we're seeing that compressed down in this case.

Bitcoin had its 15th birthday last week. As you say, Ethereum has been around for about seven years, eight years, and so it's relatively early, but it's because it's open source software and it can be accessed by anybody with an internet connection and computer, and there are lots of very talented technical minds in Bulgaria, Vietnam, Taiwan. Here in Argentina, we've got excellent technical universities. What do you expect is going to happen when you put this open source technology in front of them? Well, they're going to go and play with it and find ways to solve their own problems.

And over time, because it's an open source decentralized community of developers, it doesn't mean that somebody is going to take them all and point them in one direction. Well, Bell Labs didn't quite do that, but the Manhattan Project did. It does mean it's going to have a lot of blind alleys and there's going to be a lot of things that don't work. But over time, the lessons appreciate and eventually you end up with something that's indistinguishable from what you saw in the first few years. So go listen to the podcast, every episode I talk about technology history, I love it. But we've seen this story so many times before, it's really not news, it's just super interesting to watch it play out in real time for this way.

Matt Kress:
Yeah, absolutely. And even Visa, right? So Visa came about putting electronic strips on credit cards to help with fraud, get rid of that crazy embossing machine to take customer information and then have to transact that a day later, later that day, or a couple of days later. All those either step change or just incremental improvements change. So I know we have seven minutes left. I want to be respectful of everyone's time. I always like to ask the question, so what? I ask about everything. So what? Why does this matter? So for everyone here, for us, Ben, we're talking. So what? Why? We're looking at Bitcoin today, I'm looking at coin market cap. Bitcoin is up to, it's $37,581, the ticket just changed. If you look a year back, that's up 112% right now. Ethereum is right at just above 2000 US dollars at the moment. It's up 65.8% over the past year, not year today, but past year. So, so what, with all this stuff? Where are we going in the future? Why does this matter? Why are we even talking about this? What's your take on that, Ben, and just chat about that?

Ben Dean:
Well, you know I could speak for hours and hours and hours about this and ruminate, but I know that our audience today are financial advisors. And one of the interesting things about this, if you take it just from a purely financial perspective, very low correlation between this ecosystem and other asset classes. Of course, correlations are not stable, and around January of 2021, correlation with the NASDAQ was relatively stronger than it was. But over time, it tends to be a great diversifier for portfolios. You end up in addition with this call option on the future, which is to say, well, I can put in X amount and I can't lose more than X amount. But what we find with this is because it gives access to early stage technology before it's hit IPO, by definition, you get these asymmetric upside, it's very difficult to find that elsewhere.

You could sit around on Nvidia for the last decade and you would've done very nicely, or you could have bought Bitcoin, or you could have bought something that represents this evolving ecosystem of coins and tokens and things. Then you would've done just as well, it's just you wouldn't have had that correlation with other asset classes. There's also a last piece, which is, I don't want to be pessimistic, but this ecosystem's built on the centralized technology, and it tends to shine the most in periods where there is volatility. It's volatile in its price and it's volatile in the trial and error dynamics of the ecosystem, but also, in a world where there are problems, and people need to manage their finances, their assets and whatnot, because nobody controls this technology, it starts to look very useful.

So I'm not going to go into all the world's woes right now, but there are very good reasons in years where there are bank failures, hyperinflation, there's all kinds of conflicts that are broken out. And again, I'm not going to dust off my history book collection, but you found gold performs very well in times of crisis, so do things like the Swiss Franc. Well, here you've got as a 'centralized money', in inverted commas, that no one controls, and it's very useful if things are unstable and uncertain.

Matt Kress:
Yeah, absolutely. And even thinking, so that's like an investment type case, you're talking about, and just thinking of the high level of where that can go. Looking at the underlying blockchain, the underlying technology, the internet has made this technology available far faster than we've ever seen, more reaching than we've ever seen. The biggest part and problem now is firms and institutions, whether it's a bank, whether it's a custodian, RA, wires, asset managers like ourselves, others, is working with the regulators, but looking at and saying, what is the system, the rails under the whole financial services industry globally, how can that be changed? Does that look like a mixture of private and public blockchain bridges and all these connection points, some segregated and walled off on their own? Probably. And so when you think about the future and you think about all these headlines, everything going on, it's not tomorrow that that exists.

Now, parts of that are, and like you said, the foundation and we're building towards parts of that, but it's going to take time for some of these companies to actually implement the technology to be able to do this. And so that's one thing I get a lot and I question people ask me a lot is, why can't I do this through a tokenization? We haven't really touched on that. That's a really big macro trend and looking at primary and potential secondary markets for different types of assets regulated in different jurisdictions. But as we think about just that technology, it's fascinating because we talked about the investment case, you talked about just, what does that look like? Why are people thinking about it? What are you seeing globally? But then there's this underlying technology layer that can completely disrupt. And not even disrupt in a bad way, just make it more efficient, make faster, and make cheaper transactions, and the rails of the financial industry.

Benjamin Dean:
Yeah. Look, it's been happening for years. There was some early movers in the financial services sector who understood the technology, they knew that Ether and the Ethereum network had this smart contract scripting language. We are seeing a lot of large financial institutions now bring in teams to use this to essentially replace a lot of capital market functions in a more digitally native way. So that is definitely happening. It's easy to get the headlines caught up. Sam Bankman-Fried. Will he go free? Is he a good guy or a bad guy? What's coming with FT? It's really easy.

Or the regulators. I'll tell you, there's lots of regulators around the world who are making large strides forward. Singapore, Hong Kong, UAE, even the United Kingdom and the European Union have made changes to their regulations to accommodate the realities of this technology. As you say, that doesn't happen overnight, and large financial institutions, when they have to pull out part of their tax stack, they also aren't going to do it overnight. But we do see proof of concept, we see products rolled out now from existing financial services institutions. MoneyGram is running a lot of their services on the Stellar blockchain these days. It is happening, it's just a process that one has to monitor over time. As you say, it won't happen overnight. But bit by bit, people are wrapping their heads around the potential of this technology, and now it's just a question of people going out there and doing the hard yards to make it a reality.

Matt Kress:
Absolutely. So with that, Ben, I appreciate you jumping on, everyone being here, Irene, for hosting us. And I know we're right at the time, so if anyone has any questions, feel free to reach out. You can email us, find us on the website. You can go to wisdomtree.com, there's crypto strategies there. Find Ben at the Crypto Clarified Podcast. Ben, how often are you doing those now? Is it once a month?

Ben Dean:
Well, let's say I record them every week and then we drip feed them out depending on whether I have to travel or not.

Matt Kress:
Yeah, you've had some incredible guests going on there, so that's great content on YouTube as well.

Ben Dean:
Yeah, check it out. There's some great information there to help you navigate what is a fast moving and complex space.

Matt Kress:
Absolutely. Cool. Well, thank you, Ben, thank you everyone, and thanks Irene.

Irene:
Thank you.