Crypto's Next Adoption Wave with Kevin O'Leary* of O'Shares Investments

Jeremy: Hello, I'm Jeremy Allaire and this is The Money Movement. I'm here today with Kevin O'Leary, Mr. Wonderful. We're here in San Francisco at Converge, our first crypto ecosystem conference. Thousands of people here. It's a great setting and it's just wonderful to have you here with us for this conversation.

Kevin: Well, great to be here, Jeremy. I remind you, I'm an investor in you.

Jeremy: I am very aware.

Kevin: I'm very optimistic that things are going to work out here.

Jeremy: It's been quite a journey and actually maybe a good place to start. I'd love to maybe hear you talk a little bit about your own journey into this space. I've been able to have somewhat of a front-row seat to some of that, but it's been amazing to see all the things that you've gotten involved in as well, but just talk a little bit about when did that click and then what you've been up to.

Kevin: Well, I'm often reminded that I was a vocal critic of crypto in 2017.

Jeremy: There's a clip of you and I actually on television.

Kevin: You're correct and that gets shoved in my face and in other orifices all the time. I change as-- my job as a fiduciary. When rules change, I change and I have to because the people that I work with and for realized that there's tremendous opportunity in this space. I have come to the realization just on a categoric basis that within a decade this will be the 12th sector of the S&P because it provides so much productivity, so much transparency, so much opportunity for all other sectors in terms of financial services that it will find its place. We're in a difficult area now because we lack regulation, but my whole journey into it, particularly stablecoins, is the frustration I have as an international investor in payment, in the absolute inefficiency and cost of moving money between geographies which I do every day. I've detailed many catastrophes where I'm transferring capital and it gets lost for 48 hours, or it gets lost over a weekend, or I can't find what happened to it for three or four hours and I can't close transactions. It turns out that banks were never good at this and they're still not good at it.

Jeremy: The realization I had when I actually started working on Circle was like, money is essentially record-keeping systems. Like it's ledgers. Whether it's a ledger at the central bank or a ledger at a commercial bank, or the old-fashioned like ledgers that the Medici or whatever we're using. The technology when you peel back the onion and you look at underneath like what is the technology that makes money either move slow or move fast or be expensive or not expensive, is a lot of it is just this incredibly antiquated models of keeping track of this information and blockchains are a much more open, accessible, transparent, audible, real-time, publicly available infrastructure and so it is like once you have that and you start using it and you think about that compared to what you deal with in the legacy world, it's like, oh my God, this is--

Kevin: I would very much like to use it for reasons of all those plus the efficiency of moving it. Something very important happened last week when Jamie Diamond on the Hill, a manager I have ultimate respect for, I'm an investor in his company as every fiduciary is. It's a 5% weighting in any index fund. It is the best managed financial services company in the world one could argue, when he actually, there's no better words than just he took a shit on crypto in front of every legislator, which was a huge disservice but also a wake-up call to make it blatantly obvious that he was talking his own book. He can't do what you can do and he knows that. At some point, he's going to realize that because his clients are going to say, I want to use that service.

Maybe in conjunction with what I do with you, but they're just better at what they do in a payment system. To me, it was a turning point because we're kind of at a low on legislation. I know you're working hard along with others, along with me. There's private investors that go to the Hill. I'm one of them. When are we going to get some policy on this because it was a story 36 months ago that everybody understood we had to wait, but now it's becoming apparent that we are falling behind as an economy on this. You're one of the guys leading it so I'm going to reverse roles here for second. What are you doing to fix this?

Jeremy: Kevin, that's a good question. Look, a couple of thoughts. One, just on Diamond and his comments. I think it's really easy for "critics" to take a shit on things when a market price has changed, there's volatility, all this sort of stuff, and you're seeing a lot of that out there right now where people are like, oh these markets are off and I'm going to like--

Kevin: You're talking about specifically the catastrophes in stablecoin of recent times?

Jeremy: Yes, catastrophes in stablecoin. Catastrophes in other parts of crypto markets and other things as well. These lending companies that went belly up and all this sort of stuff and I think that makes it-- people who want to be critical they can come out in full force.

Kevin: Well, he's certainly doing that.

Jeremy: I think it's shallow and I think it's short-termism and it's not really thinking things through.

Kevin: Do you think he feels the threat of this change to his fundamental service as a bank?

Jeremy: I can't certainly get inside his head and thinking about this. What I would say is, and I'll come back to your question, is a payment stablecoin that is essentially a token representation of cash that is essentially a mixture of cash at the Fed and short-term US government, treasury bonds.

In some ways would be the safest digital dollar in the world. Whereas a deposit at a commercial bank, whether it's JP Morgan or any other is that's a loan to the bank. The bank is then lending the money and you got to claim on it but it's different.

I think that the idea of full reserve banking and full reserve dollar payment systems is a really powerful concept whose time has come. I do think that is threatening. That is threatening to institutions that have built their payment systems around fractional reserve lending and this.

A little bit of a digression and coming to the question of what am I doing about it? We have been advocating in many forums, in many venues for federal payment-related stablecoin legislation. I think the good news is that this is something everybody agrees about.

Kevin: Certainly on a bipartisan basis, who doesn't want to support the US dollar as a default payment system?

Jeremy: Support the US dollar. Everyone agrees there's a bunch of risk that exists and we need rules around it. We need to have clear rules so that terrible things don't happen to both end users, customers, businesses, et cetera. Everyone agrees what those risks are and basically how to address them. Meaning the kinds of high-quality liquid assets that should back these, the kinds of reporting requirements, restrictions on what you can do. Everyone agrees about that. The interesting thing is, whether it's the Fed or Treasury or Republicans or Democrats, everyone agrees on what needs to be done.

I think we're really, really close. As we speak, people are grinding it out in Washington, trying to get to land on a bill that would establish a federal model for stablecoins, which we think would be huge for the US, huge for this whole market so we're really close but we live in a federalist system. You've got states, you've got the federal government.

Kevin: I know the bill you speak of, everybody knows it's public knowledge that this thing's being worked on and those that are advocates and go to the Hill. You have issues with the states who don't want to play it that way. Everybody knows that too, so you're going to have to calm them down or whatever. I'd like you to speak to this because I want the answer, so does everybody else. You've got a turf war going on here and who's going to regulate this? Is it the Fed, is it the SEC or another agency? Who should regulate? Let's just stay on stablecoin. The one thing that would make sense to go first because we're not going to save every token here. We're not going to have a blanket bill for everything. Stablecoins could be very useful right now and who should regulate it?

Jeremy: You've said, you want to be able to use this for payments.

Kevin: Yes.

Jeremy: For all the things that you've seen as an international investor, as someone who's building businesses, works in the movement of money for all kinds of professional means

you want to be able to use this as something that is as good as cash and is accepted as a digital cash instrument all around the world. Something that is in fact a version of the dollar, just like a bank deposit is like a version of the dollar, that is the domain of the Federal Reserve.

Kevin: An eloquent solution because if I felt the Fed who regulates the dollar, the currency itself was also regulating this, it would tie the brands together for all stablecoins that we're going to use the dollar. We're speaking as if you're the only stablecoin, you're not, there's many.

Jeremy: There's many and there are going to be more. That part of this legislation is to create a way to have a clear path for whether it's banks, non-banks.

Kevin: Let there be competition. I'm fine with that.

Jeremy: Absolutely.

Kevin: Let me ask you another question. It is on the [unintelligible 00:09:48] side, let me represent the institutional market for a moment that must by definition be compliant. That means they have their own compliance departments as I have. They have auditors and they have the regulators that they report to. What's missing here, and your work is not done, is giving us the infrastructure that lets us be compliant in a fashion that's open and transparent, and easy for people to work with. Now, I've been using the Circle account for over a year now. It's getting better all the time, the treasury tab all that stuff, but you're not finished yet. In order to take cash and say, "Okay. Let's move 50 million into this thing and start paying to manage our funds."

Jeremy: For fundamental treasury operation.

Kevin: Right. Fundamental treasury operations because it's a sweep account. It needs more dashboarding, more structure. Are you working on that?

Jeremy: Yes, absolutely. One of the exciting things that we have going on here at Converge is we're going to be talking a lot about where we're going with all of our platforms. We have this concept of business banking, what is the future of treasury accounts, what are all the things that you're gonna be able to do. It's a huge investment area for us. We have a vision for what the next generation commercial financial account looks like, that is 100% digital asset-based and that allows people to seamlessly interact with counterparties, whether it's in payment experiences or in dealing with the ways in which people are interacting with DeFi and other things. We definitely are advancing it. I think coming back to the regulation question, it's really critical that everyone from the CFO, to the compliance department, to the third party accountant or accounting firm, et cetera, that everyone knows what are these financial instruments, where do I put them in my books and records, how do they get reported, how do I treat them, if I accept a payment with this from a customer, what is that. It's the unglamorous part of all this.

Kevin: Well, it's the most important though.

Jeremy: It is actually foundational. It's actually foundational.

Kevin: Here's an issue that I have and many institutions have right now. We cannot call our stablecoin. In my case, it's USDC. That does not get placed in a cash sweep on my balance sheet right now. It is essentially to my auditors and compliance a rogue currency because there's nowhere they can go to get the assurances that this is--

Jeremy: It's tangible.

Kevin: It should be considered cash. It hasn't broken a dollar and I argue, well, this should be treated as cash. They said, "Well, show me where. Show me the regulation."

Jeremy: This is the key and it ties to who should regulate this and things like that. This ties into the broader, I think, digital asset space as a whole, which is we need national statutory definitions. We need to say, "Here's what this is. It's defined at a federal level." Then everyone can say, "Okay. Here's the federal statute for what this is and here's how it's treated, if you're holding it, and how you're protected in a bankruptcy. Here's what we know it's composed of because by law it has to be and so it's a cash equivalent and here's what that is."

Kevin: To be sure, you won't care if I keep it in Zurich or if it's sitting in London-

Jeremy: Doesn't matter.

Kevin: - because that's where it's going. If you got me that, that's where it would be going.

Jeremy: The power of this is that this is dollar digital currency that works on the internet. You're going to have lots of digital asset intermediaries that provide products and services everywhere in the world, but they're going to be able to settle transactions with each other at internet speed at virtually no cost.

Kevin: Let's talk about another area of disappointment. Again, speaking now as a crypto investor across many, many positions. I've got at least 40 different projects I'm an investor in because I believe in diversification. I don't know with certainty which ones are going to get traction. The ETH Merge was a huge disappointment if you're an investor. You're down huge on that. It has merit, but it's not what people thought it was going to be and it's still misunderstood. Leaving that aside, where I see a lack of adoption now is because wallets are too complicated for the everyman.

Jeremy: Totally.

Kevin: It's a mess. It's problem for you too.

Jeremy: I think about this as like for the next 500 million people to a billion people to get involved in this, the crypto of it has to go into the background. The things that you need to know, what is this long string of texts and numbers and what if I got that wrong and I cut and paste it wrong and what are gas fees. All this stuff, way too complicated. I can tell you, for example, with email, all the underlying protocols and this and that, that makes your email go and makes it work so that when you hit send, it gets to someone else, but no one cares. They just log into their Gmail or whatever it is and it just works.

Kevin: Correct. That took a long time to actually worked.

Jeremy: It did. That was five, six years of iterating and stuff. I think that this is a critical piece of the next wave of adoption is user experience, making it safe. Safety and user experience whether you're a retail individual or a treasurer inside a company. Those have to get solved and those are the things that will unlock this on a mass scale. I 100% agree with you that we have Geoffrey Moore's famous technology adoption life cycle curve and you've got the early adopters and then the crossing chasm and then the early majority.

We're still staring over the precipices of the chasm right now. We're in the early adopter phase and the leap to the other side. The early adopter phase people tolerate.

Kevin: Give me the analogy of a baseball game. If we're going to get crypto to the 12th sector, of the S&P which I think it will get to and that will be a very big outcome for investors like me. I'm so nascent in many of these projects I don't know which ones are going to work but I only need two or three to work and they'll be very valuable. Where are we? First inning, second inning, third inning?

Jeremy: It's interesting. At Circle when we got started, yes, I founded the company with my co-founder over 9 years ago and my view was that it was a 20-year journey.

Kevin: I had hair when you started the company, so did you probably.

Jeremy: I had more hair than I have, yes. I think we had some basic ideas about what it would look like to have a protocol for dollars on the internet that could be open and interoperable and so on. Those are the ideas we had nine years ago. I thought to get to the place where this stuff works and it's fast and it's scalable, I thought it would take about 10 years. We're on schedule for that. That's the starting gate. Once you get to that then you're like now how do you scale this out for all the [crosstalk]

Kevin: You really thought 500 million people would use USDC? You can't do that on Ethereum.

Jeremy: I think you can do it. There's different scaling models that exist. Layer twos on Ethereum are showing huge promise; Polygon, Optimism, Arbitrum, these are all emerging. Then there's a lot of competition in these base protocol layers, layer ones. We're at a place though where in the next two to three years, you probably remember very well when we had the first, we had dial-up internet and then we had broadband, but it was like telephone company broadband that was four times faster than dial-up DSL. You had these things.

Kevin: It was shitty.

Jeremy: It wasn't very good, yes. We're right in that phase. We're in the DSL of blockchains and we're getting really close to the fiber optic. That's key if we can get there.

Kevin: Will you pick a platform because there's lots of competition, Solana, Polygon you mentioned a new idea. Are you going to support them all?

Jeremy: We're adding more and more here at Converge. We've announced adding Cosmos, Polkadot, Arbitrum, Optimism, NEAR and there are more on the way. We've also announced a cross-chain protocol that makes it easier for developers who are building those wallet apps to not have their users have to worry about or care so that you can send or receive no matter what you have.

Kevin: In reality, if you get regulated and are one of the regulated stablecoins, this is where the use case starts to get interesting. For the new user that comes in that is waiting for lightning-speed transactions they don't want to, if your credit card took you 40 seconds.

Jeremy: They don't want to think about it.

Kevin: You want to drag some of those platforms with you that can provide that speed.

Jeremy: Absolutely, yes. I think the important thing is there are a lot of competing infrastructures. I also use the analogy of there were 17 mobile operating systems at one point. Compact, Microsoft, Palm Pilot, Nokia, NTT, Samsung. Everybody had some other competing smartphone operating system. No one knew at the time which one was going to get the developers and which one was going to become usable by a billion people.

Obviously, Steve Jobs got it right, came in, was patient, and delivered something that everyone could build on and then was cloned obviously or copied to some degree by the Alexa Google. I think, do we have the iOS of blockchains yet? Maybe it's in front of us right now, but we're going to see that emerge. That's going to be really critical to the scale that we're talking about.

Kevin: Let's talk about something else because there's a parallel path developing for blockchain that has gotten a lot of press, ostly negative NFTs. This first iteration of apes and JPEGs and they have basically been wiped out. It's fun and it was interesting to see them trade for half a million dollars and then just get wiped out. There's also brands out there and I know this because I work in certain verticals, I'm a huge watch collector. In the watch industry, the secondary market is much larger than the primary market. Every watch that's made by Rolex is sold. There's nothing to buy from Rolex right now just an example but there's billions of dollars of Rolexs that have been in the market since the fifties that are trading every day. Unfortunately, many of them fake. What the secondary market wants is to use the blockchain through NFTs to authenticate-

Jeremy: Authentication.

Kevin: -physical assets. Now in the negotiations we're all having and the discussions we're having and I want your opinion on this, when these are used to authenticate paintings and watches and pens and jewelry and real estate and cars and all these--

Jeremy: All property.

Kevin: What is that? Is that a security because I'm going to add a little nuance to it. One of the reasons the watch industry's looking at this, and there's a group of us that are in the horological societies, I'm one of them, we're pointing out to the makers, like a Patek Philippe, an F.P. Journe, a Rolex. Every time the secondary market trades your watch you get nothing. It's trading at 400% higher than what you made it for. You're in the same situation that a rock band watches and happens to the secondary ticket market of a hot show. Wouldn't you like to get 3% to 7%?

Jeremy: That's a powerful thing.

Kevin: What is that? Now that NFT authenticates, the maker authenticates that it was made in the factory and then it starts to trade in the aftermarket. Is that a security paying a utility dividend?

Jeremy: We'll have to see what lawyers think about all that.

Kevin: What do you think?

Jeremy: I don't think so. I think that these are technologies that make it possible to have better records to authenticate property and the ownership of property. I think if you're fractionalizing the ownership, then you're crossing into--

Kevin: Not fractionalizing it. It stays with the piece from owner to owner.

Jeremy: Yes, I think the idea that you have royalties or equivalent, downstream payments that as a piece of property is bought or sold, that the originator of that property can receive a piece of the payment associated with it. You have structures like that are certain NFT protocols, like the NFTs that get minted can only be transacted and transferred through the protocol and the protocol itself includes that seigniorage, essentially for the originator and so there's ways to do it even at the protocol level. I think that's more of a commercial arrangement for the buying and selling of property versus a security. You're not making an investment for an expectation of profit through the effort of others.

Kevin: If you're buying an art down the road, and I'm a buyer, I would want the authentic-- I would want to own the NFT that authenticates that piece of work. The state of the artist should that person be passed, would get a royalty because it's trading, and every decade when it trades again at a higher lower price they get a piece. To me, that's a commodity that is not a security.

Jeremy: Right. Yes, you're dealing with the transactions of commodities.

Kevin: We could end up in a place where you fractionalize an NFT as a security with a prospectus or if it's an authentication vehicle it's a commodity. I think that's where we got to get to.

Jeremy: Yes, part of this is just how do we use NFTs and the utility that comes from them which unlocks all kinds of different forms of entitlement around ownership. Whether it's the creator or someone who possesses it, entitlements that they might get. I think early days there but it still has huge huge potential as well.

Kevin: Let me hear your thoughts on this because guys like Sam Bankman-Fried have tried, Binance has tried, the really big firms to get the message out about crypto to commercialize the message. It's been a real struggle because there's a really tight small crypto community of really rabid fans if you want to call them that. That's in my view starting to hurt this space because a lot of them don't believe in regulation, a lot of them believe in decentralized only, a lot of them are rogue in terms of the way they think. Some of them are founders of these chains. That's not helping because to get the 500 million they're talking about to use this stuff, people have to feel safe about it.

They have to think, okay this is just a better mouse trap and everybody else is using it. Where do you sit on the continuum? I could call you out on this. Are you a founder fundamentalist or are you an advocate for full regulation, full transparency or are you somewhere in the middle? Are you trying to keep everybody happy? Which I'm finding is impossible.

Jeremy: I am more in the middle but I think I've always believed that we're simultaneously building a new internet. We're building a whole new layer of the internet and it's really vital that there are first principles that can be upheld in what that infrastructure is.

Kevin: Maybe I should ask the question in a different way. More binary more black and white. Are you for regulation or not?

Jeremy: I think regulation is critical for the financial applications of this. The technology is useful in so many domains even outside of financial and so the key is-- what we don't want to do is overregulate the infrastructure layer itself because that is to me just like trying to regulate internet protocol.

Kevin: For USDC which is--

Jeremy: That makes sense. That is a [inaudible 00:26:05]

Kevin: I can't even use it if it doesn't get regulated.

Jeremy: We're only able to offer the product we do today because we actually did launch it in a regulated manner through the money transmission rules and payments supervisor.

Kevin: You built it to roll on on the regulated highway but it's not the regulated highway yet because my auditor won't let me call this cash equivalent which is extremely screwed up.

Jeremy: Clearly like it's a constant upgrading of that statutory environment.

Kevin: There is, and you will certainly get some of this in this conference and thank you for hosting it. I think it's a lot of influencers and thinkers coming here and many will air their frustration as I will because this is getting really boring. Like we got to get something done here.

Jeremy: I think that's right. I'll be beating this drum not just here but all through the remainder of this year which is like the time is now for Congress to act. This isn't just going to come from an agency issuing new rules. This requires Congress to act because it's novel and new and we need these clear statutory definitions and statutory swim lanes. Now's a critical time for the United States to act and it is making the United States look ridiculous. The fact that our Congress cannot get together on something that is so clearly going to be a vital part of the way that the internet economy works for the next decades. It's a pivotal moment from my perspective.

Kevin: I'm a little optimistic on that of late the last few weeks because when I first got to the Hill everybody was holding onto their bill as if it was their brand and now there seems to be a consensus that they don't care which bill gets advanced.

Jeremy: Whoever's got their name on it we got to figure this out.

Kevin: Which I think is a major move as we're going into the midterms to see that Haggerty and [unintelligible 00:28:04] they're all pushing whatever one was going to go. I think that's very bipartisan. I think you've been a big advocate for that. You've done a good job on that. I also believe that the one thing rule, just getting stablecoins done.

Jeremy: It's the lowest-hanging fruit.

Kevin: It's the lowest hanging fruit but it would also signal to the rest of the crypto market primarily the institutional investor market. I actually think that if you and this is a speculation, that if you got this thing done with just stablecoins and you got it regulated, it would increase the value of a lot of different positions I have including Bitcoin. They would make the assumption because we're stuck in a 17 to 22 range on Bitcoin and we're never going to get out of that if we don't get institutional support.

It's just going to sit there forever. It's not about outcome for miners of scale. They're getting awards at 7,000 to 8,000. They're trading them at 17 to 20 but it's really getting old and it's losing its momentum as an idea because it can't seem to get anywhere.

Jeremy: This is a breakthrough moment technologically in terms of user experience, in terms of regulatory, in terms of what people delivering on the real utility value of all this. I think you're dialed into all the right themes for what's needed here.

Kevin: I think I am but I go everywhere when I can talk about it to people that will listen I'm very fortunate to have a massive platform to speak to but there's a fatigue in this market now. There's a lack of adoption and there's a lack of wallets that we talked about. There's a lack of a lot of stuff and it's really coming to the front now. People are saying we got to break through this. It's like a giant log jam.

Jeremy: That is what we are trying to do as an industry and Converge we're bring all the players together and the big theme is, from speculative value to utility value. That's the key. We got to [unintelligible 00:30:07]

Kevin: You're actually the test case. You are the anchor of that. You are definitely the canary in the coal mine here, and it's a remarkable time. It would be great if you were able to announce some regulation on this thing. It would be a game changer. I'm very optimistic if anybody can do it, you can. There's a lot of people rooting for you, a lot of investors rooting for you. A lot of people that want to use the product that can't. It's really time and so let me speak on behalf of the entire industry. Get this shit together.

Jeremy: All right.

Kevin: That's what we need.

Jeremy: All right, I'll take the order. Thank you, Kevin.

Kevin: This has been fantastic. I feel like we reversed roles here.

Jeremy: I know it's a mix, but this is great. This is a great podcast. This is going to be awesome.

Kevin: No, it's great and I feel that the momentum of something is going to happen. You can sense. It's just I wish it would happen sooner than later.

Jeremy: Yes.

Kevin: Anyways, congratulations.

Jeremy: Thank you. Great to have you on.

Kevin: Thank you.