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Speaker 1: Welcome to Crash Course, a podcast about business, political, and social disruption and what we can learn from it. I'm Tim O'Brien. Today's Crash Course Cryptocurrencies Versus Reality. One of my favorite scenes in the Social Network Aaron Sorkin's takedown about Facebook's founders is when the actor playing Harvard President Larry Summers upbraids the actor playing the dual role of the Winklevoss twins. Don't ask the university to intervene in your petty dispute with Mark Zuckerberg, he tells them, and I quote, everybody at Harvard is inventing something. I suggest again that the two of you come up with a new new project in the real world. The Winklevoss twins, who eventually walked away with tens of millions in Facebook stock and other payments, did, in need come up with new projects an asset management firm and a digital currency exchange that made them Marquie Layers in the recent cryptocurrency boom and melt out. There are other more significant crypto players think Sam Bankman Freed, for example, But the twins fascinate me because they embody the sort of collision Crash Course lives for between innovation and possible hucksterism, and between authenticity and possible manipulation. Crypto is one of the most revolutionary and overhyped inventions of the twenty first century, and how the Winkelvy intersected with that market is a tale that sheds light on finance and on financial bubbles, on what happens when everybody thinks they can get rich quickly. Joining me today to discuss all of this is Leonel Laurent, a financial columnist for Bloomberg Opinion and someone who has spent a lot of time watching crypto evolve. He's joining us today from Paris. He Leoney, thank you for being with us. Let's start by demystifying crypto for anyone who feels mystified by it. You know, I've always thought of crypto as essentially a digital currency in the cloud and a replacement for Fiat dollars, paper currency that doesn't really have a central bank behind it. It just has all the users gearing teeing one another that the value will keep going up time and time and time again. How do you describe it? How do you think of crypto? That's pretty accurate, and it's accurate. I guess in hindsight, because I think the term crypto has become very broad. It's now used to describe, as you say, any kind of virtual currency, digital currency that is not done by a bank. I think if you go back to when bitcoin first emerged, the purists, we're really focusing on the crypto part of the word cryptocurrency. So in other words, it's outside the banking system. It's decentralized because it relies on cryptography, and therefore it is pseudonymous or close tutonymous. It's private money, but it's also privacy money, and that has been the kind of and the Winklevosses story gets into that. There's always been a tension there between the real hard nuts who are in this for the privacy, for the kind of libertarian aspect of it, and those who are in it for what it became, which is money, speculation assets, nothing to do with privacy, but also nothing to do with currency, because as we've seen it's been a decade, we're still using cash, right, We're still using notes and coins and cards. No one's would use in crypto as a currency, and as we discovered over time, it had a very elastic relationship with the notion of value. But we could get into that later too, But I wanted to ask you what caused this boom. There is a real innovation here. It's an attempt to ground transactions in a different universe. And the blockchain I think has a lot of uses outside of crypto that are useful. But I was wondering, when you think about the boom, what are its foundations? Well, I think we've had several booms crypto. We had several boom and bust cycles. If you go back to the kind of first one, and this is where the Winkelvos story comes in. It really was the kind of thing that was supposed to follow a set path involving tech and venture capital, and it happened in the wake of the financial crisis. Famously, bitcoin was held up as a response to the banking failures. There was the collapse of one British bank that was literally written into one of the bitcoin transactions, right, the first one. And that kind of story really explains the first initial boom, which is it pulls in a lot of the cypherpunks and the anarchists that we're in this for the cryptography revolutions of before. But it also pulls in a lot of speculative money. The venture capital story decided a technology is going to give us a lot of answers to the questions that we pose, and we're talking like the midnots, Like what years are we talking about it? Yeah, well it's the late notes. Bitcoin comes out just around the same time as the financial crisis, and so the decade of crypto really was the twenty ten and the Winklevoss symbolized that attempt to kind of glom onto it as a venture capital style technological bet that was going to disrupt society in the way that you put it disruption. Now we can talk about the other booms that happened, but that's the first one. And then it went through several cycles where retail investors got ahold of it and began to look like a kind of stock market bubble, and the latest boom was a credit bubble. So I guess my point is this is all very financial, it's not very technological. If we look at the core tech, a lot of it is like decades old. It's a lot of things coming together. And just to really tip my hat to the crypto purists, low interest rates, right, easy money, easy money, that kind of fed this, and you get this bizarre symboidic relationship between people who want to kill central banks and people who want crypto prices to go up. And bizarrely, easy money was kind of fueling the whole ride. Well, an easy money in search of profitable returns. The low interest rate that were engineered after the financial crisis left people seeking alternate assets that could produce bigger returns than a stagnant bond market and an unpredictable equity market, and crypto benefited from that. It's also interesting to me that you talk about the foundational grounding of this universe over the last decade. And we'll talk more about this about financial bubbles and people's emotional and psychological response to them. But I wanted to dig in a little bit on that before we get into the Winkle Vye because there's a long history here, and you wrote one of your columns. While financial history should have inspired caution, it instead inspired greed and trust. So unpack that a little bit as it pertains to the crypto boom. So, as I was trying to say before, this is very financial. This is a financial story. What do I mean by that? If you come along with something new in the world of money and finance, especially after the financial crisis, come along. When you say we have something new, most people, especially those who have the knowledge of financial history, should have a bit of skepticism because if you're coming in with something that doesn't fulfill and this was widely widely analyzed when bitcoin and crypto first emerged. There are definitions of money. Money works when it is and I'm sure people have heard this before. Is it a store of value? Is it a reliable store of value? Is it a good medium of exchange? Is it a good unit of account? Bitcoin did not meet the definition of these things, and so initially there was a lot of skepticism. But the problem is that if you keep saying that, it doesn't really help. If people really believe that this time is different, and so I think that then you have to look at stories of bubbles, right, the Tulipmania, the south Sea bubble, credit bubbles. The history of private money is littered with failures. And the problem is that trying to talk about this, all people would say back to you is, yeah, but look at the crisis. Right. Even the Winkelboss Twins would refer to while they we're getting into bitcoin. Everything they read in the papers seem to confirm their bias towards bitcoin again, the Eurozone crisis, the Aurozone debt crisis, that write downs right on sovereign debt. This was the kind of economic tale of the bitcoins where they would see all of this system really on its knees and think, this is it, right, this is the failure. And what I think they didn't foresee is that this system would actually prove quite resilient and in the same way that today people like Charlie Mungun Warren Buffett are doing victory lapse around crypto. It's because there was reason to be skeptical, because if you look at history, somethings are too good to be true when they're totally disconnected from the fundamentals. Right. So that's what I mean when I said financial history should have informed a bit of caution. And when we're talking about the two hook bubble, you know, we're talking about the seventeenth century and the eighteenth century, and there are hundreds of years of bubbles behind this. In human nature over that long stretch didn't really change all that much. Greed was still a motivator and wishful thinking combined with greed could produce some very interesting bubbles, like the one we just went through with crypto. Nonetheless, there was an architecture that developed beneath this industry that I want to talk a little bit about with you too, because I think that's useful for figuring out what the winkelby we're up to. The industry essentially developed into two main arteries more or less right, exchanges and then lenders, people who were offering tokens and building markets around trading them. Is that a fair, if overly simplistic description of what the industry came to look like. Well, you've just perfectly described how we've tried to use financial sected terms, financial industry terms on an industry that is trying to create something new and in a way almost ignoring all of the lessons that got the financial industry to state whereds in today. Let's take exchanges. The exchanges in the crypto world, by calling themselves exchanges immediately conjured up images of regulated exchanges like the Chicago Mercantile Exchange and others. That is not what they were. And if we go back to the first real bitcoin boom and bust, which was in the It was about ten years ago Mount Gox, which was the biggest bit coin exchange, right went belly up. It called itself an exchange, but it really wasn't. I mean, it wasn't the kind of trusted and trustworthy regulated exchange. And even today, wait wait, wait, so what would you call it? What would you call it if you weren't going to call it an exchange, A sesspool, a trait. I'm going to be polite, and I'm going to be polite to say that even a decade on ftx, Binance, all of these places that are called exchanges their platforms, that's all. They are, their venues, and they do lots of stuff behind the scenes that no one really knows. They launched their own coins. FTX had its own token, Binants has its own token. They're brokers too, they handle your trades, they invest as well. They do everything right. I mean the phrases the house always wins. It's easy to slip into gambling language. Is this really an exchange or is it a casino? Basically, my point is that the exchange helps them out. It is nothing like a regulated exchange. But that's the catual term that was used. It gives them credibility, It gives them establishment s dial credibility, and they also suffer serve a purpose because the whole irony is that crypto it was supposed to be. You know, you could be your own bank, private money, totally decentralized. But humanity just finds decentralization awkward. It is an elite pursuit, it's a niche pursuit. So that's the big irony. In the end. People gravitating these exchanges because they are centralized and they take a lot of power and get rich. And that's why so many of the richest people in crypto billionaires. They're exchange owners. They're not people who were smart and god and early. They own the exchange, They set the rules, and they make the money. And so you're also describing another interesting phenomenon there, the development of the exchanges or a response to the market evolving and lots of various operators and smarties and others decent ending on this to see what they could do with it. Is there an emblematic moment around that, you know, that second step of going from crypto being mined and crypto being traded to crypto taking on the clothing, if not the authenticity of financial exchanges and more sophisticated markets. We may be getting a bit ahead on the Winklevoss story, but I definitely think for me, the emblematic year or moment is twenty thirteen twenty fourteen, because that's when you have the collapse of Mount Gox. So you have a narrative where an exchange got really big and very powerful and then just went bust. You have the Silk Road being shut down, so you have a sense of regulators trying to clean up a wild West. And then you have this is ten years and shut down Bray the way Silk Road shutdown in part because they worried about money laundering and crypto rather than simply being used as a libertarian currency, also being used to fund possibly fund crimes and money laundering and other dark deeds. Well, I mean, we could spend all data on matther because that is precisely what the libertarian cipherpunks were totally amenable to. That's what they want, they said, the freedom to do what you want, and that may involve that's known as the four horsemen of the crypto apocalypse, which is to say, money laundering, crime, pornography, gambling, all of this stuff they're okay with. And just to add to your point, post Silk Road came the narrative of the wild West is over now at the time for regulated exchanges, and this is when the Winklevos twins found their exchange, Gemini. This is a decade ago when they're all sitting at a hearing in front of the New York Department for Financial Services, several crypto entrepreneurs, and they're saying, the wild West is over. We've solved it and now we can get on with doing regulated business. And they were saying, we've solved the wild West problem by offering a quote unquote exchange. Right. Well, the difference was that this time the phrase this time is different always seems to apply. This time it was going to be regulated on shore in New York with a new license and it was going to be part of the Wall Street furniture. That was the narrative, at least for the Winkelvos twins and for Gemini. The idea was, don't overregulate your laws currently work. Give us a path to regulation and we will do that. And that was a decade ago. All of these questions are cyclical. They keep coming back because this is the nature of crypto. It is not a straight line, it's a constant circle. Here's a detail that I just love is the fact that you met with the winkel Vye I think back in twenty seventeen. Tell me about that, right, So that was in late twenty seventeen. It was in New York. It was really at the height of the bitcoin boom. I mean, sadly not this bitcoin boom, the last bit. There's been too many. It was late twenty seventeen. Nicola was hitting a record and the Winkelvos twins were doing a tour of Wall Street and I remember meeting with them. They were very affable, very tall, as everyone knows, very start by bed for a minute, describe them for me, because they are very tall. I think they're each like six foot five at least. Former Olympic crew rowers. Yeah, and it was a bit twin peaksy. Sorry for the terrible pun, but they were moving through the office. They had just done a tour of Wall Street and they were wearing suits. And later on, while reading the history of their adventures in crypto, you see suits are a recurring theme. They've always been seen as suits, but they were wearing suits because they wanted to blend in. They were trying to sell a product to Wall Street. They were trying to get regulatory approval. They were trying to really bring this into everyone's pocket through an ETF, through regulated products. The delusion would persist, right, But this was the kind of height of the retail mania where every question or Thanksgiving dinner was so are you going to buy bitcoin? And so we talked and yeah, this was their moment, this was their time to shine on Wall Street. What did you talk about? I mean, we talked about what their aim was, right, their view of bitcoin, which they said publicly on the TV set, which they were selling bitcoin as the new gold. Right, Bitcoin was going better than gold at being gold, It was going to be in everyone's portfolio, it was going to be a hedge against a lot of things, and it was going to be an asset to store. And as a result, it should be in the mainstream, and they were the best vehicle to get it. And as you were having that conversation with them back then, what was going on in your own mind? What did you think about the fact that two six ft five guys in suits we're saying crypto is the new goal. I mean, I was skeptical from the beginning, and I think it's been hard to well, I've always made an effort right to at least meet people who believe to try and I guess shape my own arguments right or try and hear one day the killer argument as to why this was not just speculative. But I mean, at the time I wrote, this was just the most incredible bubble I'd ever seen. And this was in twenty seventeen. I mean, this is when Big when at ten thousand seemed completely crazy, but at the time it was the most incredible burst of fomo and speculative fever that I've ever seen. The point is, it wasn't just the retail obviously, the taxi driver and the cliche of the shoeshine boy. It was the regulators. I was seeing people from the CFTC. You go on Bloomberg TV and say we need futures products because we're meeting invested demank. It felt incredible. I mean, it really just blew my mind. And at the time I was like, well, this clearly isn't going to last, and it didn't. But at the same time, it did, so I feel I was half right, half wrong. I definitely didn't think that it would survive and then bounce back and in the way that it has done. But definitely the whole thing seemed crazy. So with the images of fomo and speculative bubbles dancing in my head, Leonel, I want to take a slight break here to hear from our sponsors, and then we'll come back and dig into the Winkelvy a little bit more. We're back with Leonel, la columnist for bloom Rigg Opinion. We are digging into everything crypto via everything Twins. And the twins, of course, are the winklevost Wins, and they named their crypto exchange Gemini, the astrological symbol of twins. So I guess everything is self referential in their little world. Do you know specifically how the Winkle I became interested in crypto and how Gemini itself came to be yes, because the twins were not shy about promoting it once they'd done what they I guess considered to be a first big investment. And that first investment came obviously with a kind of second act right or a redemption narrative, because as you pointed out in the intro, they were best known as the guys who were screwed over by Zuckerberg on Facebook and who kind of had fought and fought and fought for the scraps of a settlement and who are now trying to kind of make a comeback. So their whole narrative was Act number two redemption. And the anecdote for how they discovered it, I mean, they were on vacation somewhere, partying models, alcohol, cocktails the lot, and then somebody came up to them and said, hey, man, this is the next big thing, and so they then learned all about bitcoin and got into it. What's interesting at that time, though, is that they were acting as adventure capitalists. It is not the case that they were sucked in and went to live on a kind of bitcoin funded commune. These guys had come out of Facebook, they had their own VC firm, so they really were skeptical. They asked lots of people about it. They asked all the questions that you and I and other journalists ask and when they decided they were ready for it, they went into it, not just by investing in what was then a kind of exchange they went into it by buying Bitcoin two, so they really tried to corner the market but in both hands. Then they publicized the story and well Winnow the rest. As for Gemini, as I was saying earlier, that came after the MTS collapse, and it was their new narrative, right, it was the digital goal narrative. It was the suits and ties. It was the wild West and the hoodies and the kind of silk road stuff that's yesterday's news. The real story now is going to be about getting institutional investors and Wall Street into this product. And they had a partner company in all of this, right, Genesis. Tell me a little bit about Genesis and its relationship with Gemini. So we're going to have trouble with the Genesis and the Gemman. Just hate hate these names, oh these names. But that's what we're here to do, shed light and clarity on this crazy world for our listeners. So Genesis actually comes a lot later in the story. That comes with the last boom that we experienced, which was the credit bubble boom in crypto, the pandemic boom that we all have fresh in our minds. And even though, as I was saying, the twins are next to Barry Silbert, who's the head of the Digital currency group that owns Genesis. They're sat next to him in twenty fourteen. I think at these hearings of crypto Silbert has brought into bitcoin. I think he got them from the Silk Road auction, and they're both at the same table saying the same thing. This is now a mature industry, or it's going to be a mature industry. Anyway. The big irony of this whole story is that clearly whatever bet Gem and I had made did not really work out, because over time the exchanges that got really big and powerful were the official ones FTX Finance, not in New York, far away away from regulators noses. They're the ones offering leverage, speculative and dangerous trading, and they're getting incredible traction. But you're pointing out is they're doing the things that New York regulators wouldn't let a financial exchange do, right, being a traditional financial exchange, right, which is separately why these exchanges had US arms called dot us or whatever. And let's also point out that those aren't regulators saying you can't do this, because they're just mean nasty, unthoughtful, uninnovated, dullards, but that there are, as you've pointed out, centuries of financial bubbles that have come along. And one of the responses the financial industry has learned over the years is you should embrace innovation, you should allow it to flourish, but you have to make distinctions between innovation and fraud, or innovation and self dealing, or innovation and mouthfeasance, and that a regulatory touch that makes sure that isn't occurring is good for everyone involved, as good for investors, it's good for borrowers, it's good for the companies, it's good for the development of economies. And it doesn't exist there just because it's a fence post blocking the long march of progress. And the fact that these exchanges decided to go off shore might have been a warning signal to people, right right, and it wasn't. And what's incredible is that money begets money, liquidity begets liquidity, and so money was being thrown at these platforms by venture capital firms, by institutional investors, and then we hit the pandemic and everything exploded. But I guess the point I'm trying to make is that had Gemini's story back in twenty fourteen, twenty fifteen, been it right, the story might have ended on a different note, or they might have gone away, but it didn't. It went into a new phase Gemini now when it's to go global, and when it became clear that this pandemic boom was creating a whole new threaded bubble, a whole new industry of leverage around it, they ended up joining in. And Genesis was the lender that really drove a lot of this. I mean, the amount of money that it lended, the growth of its loan book in just two years was just I mean madness, right. I think it's fifteen billion or ten billion, very short space of time. And that's the reason why today we have this feud or dispute turned bankruptcy fight between the Winklevoss twins and Silver. It's not because they were in this from the beginning. It's because they both got in. They both got swept up in this most recent credit bubble. And I think the thing to remember here when you're noting how lending spiked to fifteen billion dollars, all of this lending was in service of giving the market a big boost in terms of help the market to inflate the value of crypto, and then the crypto that was traded among all the various entities Gemini and Genesis included. Is it fair to call that self dealing or do you think it was just raw market speculation? Oh? I mean it is all speculation that if you mean, look at the way it unraveled. You had hedge funds that collapsed that then owed money to Genesis, which then had to find money which wasn't there from its parent group, which then trickled all the way down to people who had put their money with Gemini. That kind of chain reaction, in that kind of domino toppling, reveals that at the end of the day, what's there isn't real because everyone's trying to find the original money which isn't there. That the cash isn't there, right, and even today, what is the crypto economy? I think people stopped trying to say that crypto was real. People stopped trying to say that crypto was being used by people or merchants. People just gave up because it was just ely and blatantly not true. All of it was trading as an asset with hedge funds and borrowing and speculation and betting. People just stopped trying to pretend right that it was in the service of some fundamental economic good. So yeah, I would say as completely expectative, and you know, I want to stay focused on the Winkelvoss twins, but the demise of Sam Bankman Freed and FTAX and Alameda. One of the lessons from that is that these close relationships between the exchanges and between asset management firms, and the ready transmission of funds back and forth in this whirlwind that kept the price of cryptocurrency escalating, there may be plain old traditional accounting fraud and financial fraud involved in all of that. There's investigations going on right now of FTX and Alameda for those very reasons. Do you think those sort of partner relationships should have been warning signs too regulators and investors and others observing this that something hanky might have been afoot? Yes, But I also feel like crypto is one of those things where everything, everything should have been an alarm belt. Take the whole lending earned product, which is the reason why Gemini and Genesis are at loggerheads. What are they? Why are you getting interest rates. Why are you getting interest rates many times above the base central bank rate for parking your crypto? What does that mean? Who? Either it's being done at a loss by a company that just basically wants to grow and it's being given lots of money to grow, in which case what happens in the future, How sustainable is that? Or else there are incredible risks being taken on the other side of the trade to get you that interest rate, to get you that return, And that's clearly what was being done too, where that fund was being lent onto hedge funds, which we're doing very risky trades, and in the end it all just kind of toppled. So I guess my point is, yes, of course there were conflicts of interest, and yes, institutional investors and bench capital funds hedge funds clearly were far too chummy and didn't do their homework. On the other hand, there is something basic just the alarm bells. Whether it's where it's this venue located, what does it do where it's financials and why is it offered me such a generous interest rate? Right? What's the cash? Crypto seemed to be free lunches at every single floor you know, Warren Buffett has famously said he looks at lots of companies, but whatever company he looks at, he always focuses on the management, and as the management seemed competent and dedicated and capable. And I've sort of wondered about that in the context of the Winkle Vas twins. You know, during the time that they were helping engineer the cryptocurrency boom, they also were spending a lot of time in the limelight. They invested in a magazine that routinely featured topless models and Hollywood actresses. They had their own rock band. Do you think those might have been indications that they were maybe more enamored of the spotlight than they were running their own business effectively. Yeah. The thing is that the Winkle Got Twins. I mean they are tech billionaires to me, right, I mean, these are people who came out of the Facebook boom, and so a lot of their behavior I feel it is very commensurate with tech billionaires. They're very rich, and they're always going to be disconnected on some way from society. The crypto angle. Firstly, these two they're like the portrait of Dorian Gray, right, they visually represent crypto along every single step of the way. They're wearing suits when they're selling it to Wall Street. They're on Twitter with the laser eyes when it's going up a lot, and as you say, when everything is tanking, they are discreetly running away to play in a rock band. For me, there's something so decadent. They're not even doing their old rowing thing, because I mean, these guys are guild athletes. They weren't going back to some passion, they weren't doing something they're generally good at. It just seemed like they were hiding. They were going off and playing competent or okay covers of seventies rock standards days after having laid off ten percent of staff and their Twitter avatars, which used to be laser eyed ten people to buy Bye Bye. Was not just some anonymous things saying come and see our band. So for me, it just seemed like the height of decadence. It just reminded me of how tech billionaires and venture capitalists today, after having gotten so rich and having faced none of the consequences, just increasingly seemed just to be checked out. So for me, it just felt like the end of the story. It felt like by then it was too late. I mean, if that was your red alert, you're probably already losing money on crypto. Or it was like Jay Gatsby pouring Bootleg Jane into a fountain and dancing wildly around it. We've seen this before. I want to take another break, you know, to hear from our sponsors, and when we come back, we will dig a little bit more into what might be the end for the Wink of Vases and some of the recent developments around their crypto empire. We'll be right back. We are back with William l. Or Ant columns with Bloomberg Opinion, Crypto savant and always a great and fun guy to talk with. We are now in this stage in the short brief flaming history, like a medior of crypto, of what appears to be yet another epic meltdown phase. What caused the recent meltdown that we've all been witnessing, the recent meltdown? Obviously, we have in our heads a lot of things. The fact that we were locked down during the pandemic, the fact there was so much social media and so much uncertainty, we were all kind of vulnerable to a lot of new narratives such as crypto again, really is going to take over the world. And by the way, there's a very good book by Jonathan Bigle, Reckless, which is all about the most recent bubble, and that really was about credit. Because if you think about the last two booms, you had the kind of freaks and geeks revolution boom, and then you had the retail boom for Thanksgiving dinner boom. But that was always about buying, you buying bitcoin, you buying bitcoin. This one was about leverage. It was about lending and loans and trading on margin. It was really the credit bubble and all of the rest of the things that we think about, the influencers, the social media, the pandemic, uncertainty, that was all triggered as well by the price. But I think the price could not have exploded that high without the combination of people using leverage to choose the price, and at the same time institutions and big companies making bets that they thought would pay off in the pandemic. So I think it's fundamentally incredibable. And of course credit bubbles pop when interest rates start rising, and when the Federal Reserve and other central banks around the world started jacking up interest rates in response to massive inflation. Industries that were running on airplane fumes, like crypto, came under pressure, right, correct and simple reason that if you can earn a return on your cash deposit, that means that other investments that do not produce a return have to compete with that. It's really just that basic, basic math, basic math. And so before the whole irony of crypto offering you an interest rate, the whole irony is that when returns on real cash were going up, the returns on crypto and their value was sort of both falling at the same time. So there really was no contest. Crypto proved to be unprofitable tech. It proved to be nastack social media times one hundred times a thousand. It wasn't digital gold, it wasn't a hedge, wasn't a story of value. It was a tech risk on megabubble bets helped by easy money. And so when the easy money goes away, that bet falls. You had what I consider sort of an epic description of where the Winkelvy reside right now. And you describe them in one of your columns as being stuck in the financial version of the Hotel California explain that to me. Can I just quickly say the Hotel California has been a term that my colleagues and I have been banding around for years, right because Hotel California describes also just generally buying into crypto, because when the Winkelvos twins bought their first big stash of crypto after the collapse, there were a lot of people trying to get out. Crypto is about people getting in and then when an a liquid asset like crypto falls, you are faced with the choice of taking potentially huge loss just to get out. And so that's why I think also exchanges look very appealing because they're a way to sell your cryptocurrency to bring down the pile while making money of transaction fees. So I just want to kind of put that out there and say that the Hotel California issue with though it has been there in a long time, because everybody rushes in when it's going up, and everyone's terrified to sell when it's gone down. Today's Hotel California is pretty much the latest episode in a long running story which is based on the fact that they offered this product of lending where people would put their money on Gemini in hopes for a return. Gemini would straight away land that onto Genesis, the company we mentioned earlier, and now it's all kind of gone south because the market fell, Genesis's partners went bust. Now Genesis has a hole that it has to fill and it's essentially not given back the money that the clients of Gemini were told they could take any time. So the reason why it's hurts the California is because once again people who ran in when prices were going up, thinking I'm going to time this just right, but now stuck they cannot get ahold of their money. And we've seen this time and time again. But now I just think it's a byproduct of the credit bubble. But it's like another floor of the hotel, and regulators are sniffing around the Winkelwy's operation. Lawsuits have started to fly. Where do you think some of that might be headed? So the lawsuits, you might say, are coming a late in the day because we saw the first regulatory response to these lending products a year ago or less than a year ago. Because they resemble securities in US law, they look like a security, They walk like a sity. It taught like a security of regulators. These products where you're offering interest rates on crypto are securities. Now, maybe you could turn around and say, well, this is all very late in the day to be now after this fund freeze, after FTX has gone down, after this big bankruptcy fight between Gemini and Genesis. It's a bit late in the day. But I think it tells you that essentially what we're dealing with here is the real risk that these people come back for act number three at number four, at five. Remember that the Winklevos twins in their fight with Genesis, have portrayed Genesis and Barry Silbert as the ones that their own clients should be angry at. Okay, it's a bit like Billionaire A opens the door to find a huge crowd of people with pitchforks saying where's our money? And he's says, hey, WHOA, WHOA. You need to see Billionaire B, because even though I willingly gave your money to that billionaire, he's the one who did all this shady stuff. He's non transparent, go and chasing with pitchforks, And so the crowd runs to Billionaire B, led by Billionaire A, who's now picked up a pitchwalk. This is the Winkelwolf twins. They've picked their pitchfork, and they are now writing letters saying that, oh, Genesis has lost school teacher's money lost, grandmother's money lost. We're sharked. We're sharked to discover there's gambling going on in this casino. Yeah. And I really wonder without these lawsuits, right, without a real question mark over whether Gemini's own responsibility in this is worthy of regulatory attention. Without that, I wonder whether the Winkelhospons might be thinking great. I think if we do a deal with Genesis and we get some money back, we can come out of this with our reputations sort of semi preserved and get back onto doing business. So I think it could be fundamentally quite important for their future. In one of your columns about SPA, you said that, and I quote you, his apology is as hollow as his empire. Is there anyone whom you look at as a model citizen or citizens in the crypto market? I would love to say yes. I think I guess the people who I have the least contempt for are the people who are kind of honest with themselves and they wear their values on their sleeve. So, for example, the cipherpunks, okay, the real libertarians who will openly say I'm in this for my niche pursuits, for my elite pursuits of freedom and privacy and being outside government control. I kind of respect at least people who have the honesty to say that, even if I don't agree with it. And the same thing goes for the very smart people who actually design some of these cryptocurrencies, Vitalic Beuta and the designer of Ethereum. I can't say that that isn't smart. These are these very smart people. They are doing things that no ordinary person can do, and maybe in a hundred years, a thousand years, somebody will finally find it use case for it. That justifies all of this effort. But the other people, the hucksters, the people who kind of surf on it, the people who try and pretend it's tech. It's about tech and disruption revolution, and it's really just about separating people from their money. I just don't see any models or model citizens. Maybe there are people genuinely making money and getting rich, I just don't really see it as a kind of model to follow. So what have you learned from the Winkle Voss's journey about crypto, maybe something that you didn't know before, given how long you've been watching all of this unfold. I think the age of the average entrepreneur, billionaire entrepreneur, the whole second act, that act, fourth act. This is stuff that I have never seen before, or I'm just not used to this idea that you can have multiple lives. I mean, look at Michael Sailor and MicroStrategy. These are people who actually had really terrible times in previous crises. They try to bounce back, and they're going to keep bouncing back, and they're going to keep finding ways to make money. I'm just kind of stunned by a lot of it. I also think that there is something in there about this new generation of I guess privileged entrepreneur. I mean, they already have money and they have a network already, They're a new kind of entrepreneur. And I mean, I think it's also quite an American phenomenon. Tripto has become a very American phenomenon, and a lot of the stuff that's coming out as wild West is really being fit into American capitalism. So, I mean, I think I've learned a lot not all of it good. So you're telling me this is our fault, and since you're a French the decent, it's not your fault. No. Well, I mean these guys clearly Thede might from Europeans too, But I just fight it't kind of fascinating that it was basically copped it by venture capital, blessed by regulators and bankers, and this is Wall Street and Silicon Valley melded together, sold as the American dream to a whole class on Main Street. I'm not saying that no one else fell for it. I'm saying that it just seems incredible that it just really checked all the boxes of American capitalism and sounded super complex and mysterious and innovative as crypto might just as easily have been described as quote unquote snake oil. Possibly. Absolutely, the history of frauds very relevant if you go back one hundred years. These are exactly the same issues that were being grappled with. When do you regulate? How do you intervene this whole idea that actually it's very Unamerican to imposed rules. We've had all of these debates before, and I just think, yeah, as you were saying, Crypto has just recreated all of this and as far as I can see, as yet to leave. Maybe it's early days, but it's yet to leave something like the railroads or anything that's useful infrastructure behind. Yes, I could talk to you about this stuff forever, and that went by really quickly. Leonell, thanks so much for giving us a chunk of your brain and a chunk of your time. Thank you. You can follow Leonel Laurent on Twitter at Leonel R. A. Laurent, and you can read his columns on Blueberrig Opinion dot com here at crash Course, we believe that collisions can be messy, impressive, challenging, surprising, and always instructive. In today's Crash Course, I learned that the Crypto kids may be back for more. That despite their missteps and some of the meltdowns they've participated in, and maybe the wool that they pulled over our eyes, they might be coming back from more if they can get out of the Hotel California. That is what did you learn? We'd love to hear from you. You can tweet at the Bloomberg Opinion handle at Opinion or me at Tim O'Brien using the hashtag Bloomberg Crash Course. You can also subscribe to our show wherever you're listening right now and leave us a review that helps more people find the show. This episode was produced by the indispensable Anamazarakis and me. Our supervising producer is Magnus Henrickson, and we had editing help from Katie Boyce, Jeff Grocott, Mike Niezza and Christine Vanden Bilart. Blake Maples does our sound engineering, and our original theme song was posed by Luis Gara. I'm Tim O'Brien. We'll be back next week with another Crash Course
Speaker 1: Welcome to Crash Course, a podcast about business, political, and social disruption and what we can learn from it. I'm Tim O'Brien. Today's Crash Course Cryptocurrencies Versus Reality. One of my favorite scenes in the Social Network Aaron Sorkin's takedown about Facebook's founders is when the actor playing Harvard President Larry Summers upbraids the actor playing the dual role of the Winklevoss twins. Don't ask the university to intervene in your petty dispute with Mark Zuckerberg, he tells them, and I quote, everybody at Harvard is inventing something. I suggest again that the two of you come up with a new new project in the real world. The Winklevoss twins, who eventually walked away with tens of millions in Facebook stock and other payments, did, in need come up with new projects an asset management firm and a digital currency exchange that made them Marquie Layers in the recent cryptocurrency boom and melt out. There are other more significant crypto players think Sam Bankman Freed, for example, But the twins fascinate me because they embody the sort of collision Crash Course lives for between innovation and possible hucksterism, and between authenticity and possible manipulation. Crypto is one of the most revolutionary and overhyped inventions of the twenty first century, and how the Winkelvy intersected with that market is a tale that sheds light on finance and on financial bubbles, on what happens when everybody thinks they can get rich quickly. Joining me today to discuss all of this is Leonel Laurent, a financial columnist for Bloomberg Opinion and someone who has spent a lot of time watching crypto evolve. He's joining us today from Paris. He Leoney, thank you for being with us. Let's start by demystifying crypto for anyone who feels mystified by it. You know, I've always thought of crypto as essentially a digital currency in the cloud and a replacement for Fiat dollars, paper currency that doesn't really have a central bank behind it. It just has all the users gearing teeing one another that the value will keep going up time and time and time again. How do you describe it? How do you think of crypto? That's pretty accurate, and it's accurate. I guess in hindsight, because I think the term crypto has become very broad. It's now used to describe, as you say, any kind of virtual currency, digital currency that is not done by a bank. I think if you go back to when bitcoin first emerged, the purists, we're really focusing on the crypto part of the word cryptocurrency. So in other words, it's outside the banking system. It's decentralized because it relies on cryptography, and therefore it is pseudonymous or close tutonymous. It's private money, but it's also privacy money, and that has been the kind of and the Winklevosses story gets into that. There's always been a tension there between the real hard nuts who are in this for the privacy, for the kind of libertarian aspect of it, and those who are in it for what it became, which is money, speculation assets, nothing to do with privacy, but also nothing to do with currency, because as we've seen it's been a decade, we're still using cash, right, We're still using notes and coins and cards. No one's would use in crypto as a currency, and as we discovered over time, it had a very elastic relationship with the notion of value. But we could get into that later too, But I wanted to ask you what caused this boom. There is a real innovation here. It's an attempt to ground transactions in a different universe. And the blockchain I think has a lot of uses outside of crypto that are useful. But I was wondering, when you think about the boom, what are its foundations? Well, I think we've had several booms crypto. We had several boom and bust cycles. If you go back to the kind of first one, and this is where the Winkelvos story comes in. It really was the kind of thing that was supposed to follow a set path involving tech and venture capital, and it happened in the wake of the financial crisis. Famously, bitcoin was held up as a response to the banking failures. There was the collapse of one British bank that was literally written into one of the bitcoin transactions, right, the first one. And that kind of story really explains the first initial boom, which is it pulls in a lot of the cypherpunks and the anarchists that we're in this for the cryptography revolutions of before. But it also pulls in a lot of speculative money. The venture capital story decided a technology is going to give us a lot of answers to the questions that we pose, and we're talking like the midnots, Like what years are we talking about it? Yeah, well it's the late notes. Bitcoin comes out just around the same time as the financial crisis, and so the decade of crypto really was the twenty ten and the Winklevoss symbolized that attempt to kind of glom onto it as a venture capital style technological bet that was going to disrupt society in the way that you put it disruption. Now we can talk about the other booms that happened, but that's the first one. And then it went through several cycles where retail investors got ahold of it and began to look like a kind of stock market bubble, and the latest boom was a credit bubble. So I guess my point is this is all very financial, it's not very technological. If we look at the core tech, a lot of it is like decades old. It's a lot of things coming together. And just to really tip my hat to the crypto purists, low interest rates, right, easy money, easy money, that kind of fed this, and you get this bizarre symboidic relationship between people who want to kill central banks and people who want crypto prices to go up. And bizarrely, easy money was kind of fueling the whole ride. Well, an easy money in search of profitable returns. The low interest rate that were engineered after the financial crisis left people seeking alternate assets that could produce bigger returns than a stagnant bond market and an unpredictable equity market, and crypto benefited from that. It's also interesting to me that you talk about the foundational grounding of this universe over the last decade. And we'll talk more about this about financial bubbles and people's emotional and psychological response to them. But I wanted to dig in a little bit on that before we get into the Winkle Vye because there's a long history here, and you wrote one of your columns. While financial history should have inspired caution, it instead inspired greed and trust. So unpack that a little bit as it pertains to the crypto boom. So, as I was trying to say before, this is very financial. This is a financial story. What do I mean by that? If you come along with something new in the world of money and finance, especially after the financial crisis, come along. When you say we have something new, most people, especially those who have the knowledge of financial history, should have a bit of skepticism because if you're coming in with something that doesn't fulfill and this was widely widely analyzed when bitcoin and crypto first emerged. There are definitions of money. Money works when it is and I'm sure people have heard this before. Is it a store of value? Is it a reliable store of value? Is it a good medium of exchange? Is it a good unit of account? Bitcoin did not meet the definition of these things, and so initially there was a lot of skepticism. But the problem is that if you keep saying that, it doesn't really help. If people really believe that this time is different, and so I think that then you have to look at stories of bubbles, right, the Tulipmania, the south Sea bubble, credit bubbles. The history of private money is littered with failures. And the problem is that trying to talk about this, all people would say back to you is, yeah, but look at the crisis. Right. Even the Winkelboss Twins would refer to while they we're getting into bitcoin. Everything they read in the papers seem to confirm their bias towards bitcoin again, the Eurozone crisis, the Aurozone debt crisis, that write downs right on sovereign debt. This was the kind of economic tale of the bitcoins where they would see all of this system really on its knees and think, this is it, right, this is the failure. And what I think they didn't foresee is that this system would actually prove quite resilient and in the same way that today people like Charlie Mungun Warren Buffett are doing victory lapse around crypto. It's because there was reason to be skeptical, because if you look at history, somethings are too good to be true when they're totally disconnected from the fundamentals. Right. So that's what I mean when I said financial history should have informed a bit of caution. And when we're talking about the two hook bubble, you know, we're talking about the seventeenth century and the eighteenth century, and there are hundreds of years of bubbles behind this. In human nature over that long stretch didn't really change all that much. Greed was still a motivator and wishful thinking combined with greed could produce some very interesting bubbles, like the one we just went through with crypto. Nonetheless, there was an architecture that developed beneath this industry that I want to talk a little bit about with you too, because I think that's useful for figuring out what the winkelby we're up to. The industry essentially developed into two main arteries more or less right, exchanges and then lenders, people who were offering tokens and building markets around trading them. Is that a fair, if overly simplistic description of what the industry came to look like. Well, you've just perfectly described how we've tried to use financial sected terms, financial industry terms on an industry that is trying to create something new and in a way almost ignoring all of the lessons that got the financial industry to state whereds in today. Let's take exchanges. The exchanges in the crypto world, by calling themselves exchanges immediately conjured up images of regulated exchanges like the Chicago Mercantile Exchange and others. That is not what they were. And if we go back to the first real bitcoin boom and bust, which was in the It was about ten years ago Mount Gox, which was the biggest bit coin exchange, right went belly up. It called itself an exchange, but it really wasn't. I mean, it wasn't the kind of trusted and trustworthy regulated exchange. And even today, wait wait, wait, so what would you call it? What would you call it if you weren't going to call it an exchange, A sesspool, a trait. I'm going to be polite, and I'm going to be polite to say that even a decade on ftx, Binance, all of these places that are called exchanges their platforms, that's all. They are, their venues, and they do lots of stuff behind the scenes that no one really knows. They launched their own coins. FTX had its own token, Binants has its own token. They're brokers too, they handle your trades, they invest as well. They do everything right. I mean the phrases the house always wins. It's easy to slip into gambling language. Is this really an exchange or is it a casino? Basically, my point is that the exchange helps them out. It is nothing like a regulated exchange. But that's the catual term that was used. It gives them credibility, It gives them establishment s dial credibility, and they also suffer serve a purpose because the whole irony is that crypto it was supposed to be. You know, you could be your own bank, private money, totally decentralized. But humanity just finds decentralization awkward. It is an elite pursuit, it's a niche pursuit. So that's the big irony. In the end. People gravitating these exchanges because they are centralized and they take a lot of power and get rich. And that's why so many of the richest people in crypto billionaires. They're exchange owners. They're not people who were smart and god and early. They own the exchange, They set the rules, and they make the money. And so you're also describing another interesting phenomenon there, the development of the exchanges or a response to the market evolving and lots of various operators and smarties and others decent ending on this to see what they could do with it. Is there an emblematic moment around that, you know, that second step of going from crypto being mined and crypto being traded to crypto taking on the clothing, if not the authenticity of financial exchanges and more sophisticated markets. We may be getting a bit ahead on the Winklevoss story, but I definitely think for me, the emblematic year or moment is twenty thirteen twenty fourteen, because that's when you have the collapse of Mount Gox. So you have a narrative where an exchange got really big and very powerful and then just went bust. You have the Silk Road being shut down, so you have a sense of regulators trying to clean up a wild West. And then you have this is ten years and shut down Bray the way Silk Road shutdown in part because they worried about money laundering and crypto rather than simply being used as a libertarian currency, also being used to fund possibly fund crimes and money laundering and other dark deeds. Well, I mean, we could spend all data on matther because that is precisely what the libertarian cipherpunks were totally amenable to. That's what they want, they said, the freedom to do what you want, and that may involve that's known as the four horsemen of the crypto apocalypse, which is to say, money laundering, crime, pornography, gambling, all of this stuff they're okay with. And just to add to your point, post Silk Road came the narrative of the wild West is over now at the time for regulated exchanges, and this is when the Winklevos twins found their exchange, Gemini. This is a decade ago when they're all sitting at a hearing in front of the New York Department for Financial Services, several crypto entrepreneurs, and they're saying, the wild West is over. We've solved it and now we can get on with doing regulated business. And they were saying, we've solved the wild West problem by offering a quote unquote exchange. Right. Well, the difference was that this time the phrase this time is different always seems to apply. This time it was going to be regulated on shore in New York with a new license and it was going to be part of the Wall Street furniture. That was the narrative, at least for the Winkelvos twins and for Gemini. The idea was, don't overregulate your laws currently work. Give us a path to regulation and we will do that. And that was a decade ago. All of these questions are cyclical. They keep coming back because this is the nature of crypto. It is not a straight line, it's a constant circle. Here's a detail that I just love is the fact that you met with the winkel Vye I think back in twenty seventeen. Tell me about that, right, So that was in late twenty seventeen. It was in New York. It was really at the height of the bitcoin boom. I mean, sadly not this bitcoin boom, the last bit. There's been too many. It was late twenty seventeen. Nicola was hitting a record and the Winkelvos twins were doing a tour of Wall Street and I remember meeting with them. They were very affable, very tall, as everyone knows, very start by bed for a minute, describe them for me, because they are very tall. I think they're each like six foot five at least. Former Olympic crew rowers. Yeah, and it was a bit twin peaksy. Sorry for the terrible pun, but they were moving through the office. They had just done a tour of Wall Street and they were wearing suits. And later on, while reading the history of their adventures in crypto, you see suits are a recurring theme. They've always been seen as suits, but they were wearing suits because they wanted to blend in. They were trying to sell a product to Wall Street. They were trying to get regulatory approval. They were trying to really bring this into everyone's pocket through an ETF, through regulated products. The delusion would persist, right, But this was the kind of height of the retail mania where every question or Thanksgiving dinner was so are you going to buy bitcoin? And so we talked and yeah, this was their moment, this was their time to shine on Wall Street. What did you talk about? I mean, we talked about what their aim was, right, their view of bitcoin, which they said publicly on the TV set, which they were selling bitcoin as the new gold. Right, Bitcoin was going better than gold at being gold, It was going to be in everyone's portfolio, it was going to be a hedge against a lot of things, and it was going to be an asset to store. And as a result, it should be in the mainstream, and they were the best vehicle to get it. And as you were having that conversation with them back then, what was going on in your own mind? What did you think about the fact that two six ft five guys in suits we're saying crypto is the new goal. I mean, I was skeptical from the beginning, and I think it's been hard to well, I've always made an effort right to at least meet people who believe to try and I guess shape my own arguments right or try and hear one day the killer argument as to why this was not just speculative. But I mean, at the time I wrote, this was just the most incredible bubble I'd ever seen. And this was in twenty seventeen. I mean, this is when Big when at ten thousand seemed completely crazy, but at the time it was the most incredible burst of fomo and speculative fever that I've ever seen. The point is, it wasn't just the retail obviously, the taxi driver and the cliche of the shoeshine boy. It was the regulators. I was seeing people from the CFTC. You go on Bloomberg TV and say we need futures products because we're meeting invested demank. It felt incredible. I mean, it really just blew my mind. And at the time I was like, well, this clearly isn't going to last, and it didn't. But at the same time, it did, so I feel I was half right, half wrong. I definitely didn't think that it would survive and then bounce back and in the way that it has done. But definitely the whole thing seemed crazy. So with the images of fomo and speculative bubbles dancing in my head, Leonel, I want to take a slight break here to hear from our sponsors, and then we'll come back and dig into the Winkelvy a little bit more. We're back with Leonel, la columnist for bloom Rigg Opinion. We are digging into everything crypto via everything Twins. And the twins, of course, are the winklevost Wins, and they named their crypto exchange Gemini, the astrological symbol of twins. So I guess everything is self referential in their little world. Do you know specifically how the Winkle I became interested in crypto and how Gemini itself came to be yes, because the twins were not shy about promoting it once they'd done what they I guess considered to be a first big investment. And that first investment came obviously with a kind of second act right or a redemption narrative, because as you pointed out in the intro, they were best known as the guys who were screwed over by Zuckerberg on Facebook and who kind of had fought and fought and fought for the scraps of a settlement and who are now trying to kind of make a comeback. So their whole narrative was Act number two redemption. And the anecdote for how they discovered it, I mean, they were on vacation somewhere, partying models, alcohol, cocktails the lot, and then somebody came up to them and said, hey, man, this is the next big thing, and so they then learned all about bitcoin and got into it. What's interesting at that time, though, is that they were acting as adventure capitalists. It is not the case that they were sucked in and went to live on a kind of bitcoin funded commune. These guys had come out of Facebook, they had their own VC firm, so they really were skeptical. They asked lots of people about it. They asked all the questions that you and I and other journalists ask and when they decided they were ready for it, they went into it, not just by investing in what was then a kind of exchange they went into it by buying Bitcoin two, so they really tried to corner the market but in both hands. Then they publicized the story and well Winnow the rest. As for Gemini, as I was saying earlier, that came after the MTS collapse, and it was their new narrative, right, it was the digital goal narrative. It was the suits and ties. It was the wild West and the hoodies and the kind of silk road stuff that's yesterday's news. The real story now is going to be about getting institutional investors and Wall Street into this product. And they had a partner company in all of this, right, Genesis. Tell me a little bit about Genesis and its relationship with Gemini. So we're going to have trouble with the Genesis and the Gemman. Just hate hate these names, oh these names. But that's what we're here to do, shed light and clarity on this crazy world for our listeners. So Genesis actually comes a lot later in the story. That comes with the last boom that we experienced, which was the credit bubble boom in crypto, the pandemic boom that we all have fresh in our minds. And even though, as I was saying, the twins are next to Barry Silbert, who's the head of the Digital currency group that owns Genesis. They're sat next to him in twenty fourteen. I think at these hearings of crypto Silbert has brought into bitcoin. I think he got them from the Silk Road auction, and they're both at the same table saying the same thing. This is now a mature industry, or it's going to be a mature industry. Anyway. The big irony of this whole story is that clearly whatever bet Gem and I had made did not really work out, because over time the exchanges that got really big and powerful were the official ones FTX Finance, not in New York, far away away from regulators noses. They're the ones offering leverage, speculative and dangerous trading, and they're getting incredible traction. But you're pointing out is they're doing the things that New York regulators wouldn't let a financial exchange do, right, being a traditional financial exchange, right, which is separately why these exchanges had US arms called dot us or whatever. And let's also point out that those aren't regulators saying you can't do this, because they're just mean nasty, unthoughtful, uninnovated, dullards, but that there are, as you've pointed out, centuries of financial bubbles that have come along. And one of the responses the financial industry has learned over the years is you should embrace innovation, you should allow it to flourish, but you have to make distinctions between innovation and fraud, or innovation and self dealing, or innovation and mouthfeasance, and that a regulatory touch that makes sure that isn't occurring is good for everyone involved, as good for investors, it's good for borrowers, it's good for the companies, it's good for the development of economies. And it doesn't exist there just because it's a fence post blocking the long march of progress. And the fact that these exchanges decided to go off shore might have been a warning signal to people, right right, and it wasn't. And what's incredible is that money begets money, liquidity begets liquidity, and so money was being thrown at these platforms by venture capital firms, by institutional investors, and then we hit the pandemic and everything exploded. But I guess the point I'm trying to make is that had Gemini's story back in twenty fourteen, twenty fifteen, been it right, the story might have ended on a different note, or they might have gone away, but it didn't. It went into a new phase Gemini now when it's to go global, and when it became clear that this pandemic boom was creating a whole new threaded bubble, a whole new industry of leverage around it, they ended up joining in. And Genesis was the lender that really drove a lot of this. I mean, the amount of money that it lended, the growth of its loan book in just two years was just I mean madness, right. I think it's fifteen billion or ten billion, very short space of time. And that's the reason why today we have this feud or dispute turned bankruptcy fight between the Winklevoss twins and Silver. It's not because they were in this from the beginning. It's because they both got in. They both got swept up in this most recent credit bubble. And I think the thing to remember here when you're noting how lending spiked to fifteen billion dollars, all of this lending was in service of giving the market a big boost in terms of help the market to inflate the value of crypto, and then the crypto that was traded among all the various entities Gemini and Genesis included. Is it fair to call that self dealing or do you think it was just raw market speculation? Oh? I mean it is all speculation that if you mean, look at the way it unraveled. You had hedge funds that collapsed that then owed money to Genesis, which then had to find money which wasn't there from its parent group, which then trickled all the way down to people who had put their money with Gemini. That kind of chain reaction, in that kind of domino toppling, reveals that at the end of the day, what's there isn't real because everyone's trying to find the original money which isn't there. That the cash isn't there, right, and even today, what is the crypto economy? I think people stopped trying to say that crypto was real. People stopped trying to say that crypto was being used by people or merchants. People just gave up because it was just ely and blatantly not true. All of it was trading as an asset with hedge funds and borrowing and speculation and betting. People just stopped trying to pretend right that it was in the service of some fundamental economic good. So yeah, I would say as completely expectative, and you know, I want to stay focused on the Winkelvoss twins, but the demise of Sam Bankman Freed and FTAX and Alameda. One of the lessons from that is that these close relationships between the exchanges and between asset management firms, and the ready transmission of funds back and forth in this whirlwind that kept the price of cryptocurrency escalating, there may be plain old traditional accounting fraud and financial fraud involved in all of that. There's investigations going on right now of FTX and Alameda for those very reasons. Do you think those sort of partner relationships should have been warning signs too regulators and investors and others observing this that something hanky might have been afoot? Yes, But I also feel like crypto is one of those things where everything, everything should have been an alarm belt. Take the whole lending earned product, which is the reason why Gemini and Genesis are at loggerheads. What are they? Why are you getting interest rates. Why are you getting interest rates many times above the base central bank rate for parking your crypto? What does that mean? Who? Either it's being done at a loss by a company that just basically wants to grow and it's being given lots of money to grow, in which case what happens in the future, How sustainable is that? Or else there are incredible risks being taken on the other side of the trade to get you that interest rate, to get you that return, And that's clearly what was being done too, where that fund was being lent onto hedge funds, which we're doing very risky trades, and in the end it all just kind of toppled. So I guess my point is, yes, of course there were conflicts of interest, and yes, institutional investors and bench capital funds hedge funds clearly were far too chummy and didn't do their homework. On the other hand, there is something basic just the alarm bells. Whether it's where it's this venue located, what does it do where it's financials and why is it offered me such a generous interest rate? Right? What's the cash? Crypto seemed to be free lunches at every single floor you know, Warren Buffett has famously said he looks at lots of companies, but whatever company he looks at, he always focuses on the management, and as the management seemed competent and dedicated and capable. And I've sort of wondered about that in the context of the Winkle Vas twins. You know, during the time that they were helping engineer the cryptocurrency boom, they also were spending a lot of time in the limelight. They invested in a magazine that routinely featured topless models and Hollywood actresses. They had their own rock band. Do you think those might have been indications that they were maybe more enamored of the spotlight than they were running their own business effectively. Yeah. The thing is that the Winkle Got Twins. I mean they are tech billionaires to me, right, I mean, these are people who came out of the Facebook boom, and so a lot of their behavior I feel it is very commensurate with tech billionaires. They're very rich, and they're always going to be disconnected on some way from society. The crypto angle. Firstly, these two they're like the portrait of Dorian Gray, right, they visually represent crypto along every single step of the way. They're wearing suits when they're selling it to Wall Street. They're on Twitter with the laser eyes when it's going up a lot, and as you say, when everything is tanking, they are discreetly running away to play in a rock band. For me, there's something so decadent. They're not even doing their old rowing thing, because I mean, these guys are guild athletes. They weren't going back to some passion, they weren't doing something they're generally good at. It just seemed like they were hiding. They were going off and playing competent or okay covers of seventies rock standards days after having laid off ten percent of staff and their Twitter avatars, which used to be laser eyed ten people to buy Bye Bye. Was not just some anonymous things saying come and see our band. So for me, it just seemed like the height of decadence. It just reminded me of how tech billionaires and venture capitalists today, after having gotten so rich and having faced none of the consequences, just increasingly seemed just to be checked out. So for me, it just felt like the end of the story. It felt like by then it was too late. I mean, if that was your red alert, you're probably already losing money on crypto. Or it was like Jay Gatsby pouring Bootleg Jane into a fountain and dancing wildly around it. We've seen this before. I want to take another break, you know, to hear from our sponsors, and when we come back, we will dig a little bit more into what might be the end for the Wink of Vases and some of the recent developments around their crypto empire. We'll be right back. We are back with William l. Or Ant columns with Bloomberg Opinion, Crypto savant and always a great and fun guy to talk with. We are now in this stage in the short brief flaming history, like a medior of crypto, of what appears to be yet another epic meltdown phase. What caused the recent meltdown that we've all been witnessing, the recent meltdown? Obviously, we have in our heads a lot of things. The fact that we were locked down during the pandemic, the fact there was so much social media and so much uncertainty, we were all kind of vulnerable to a lot of new narratives such as crypto again, really is going to take over the world. And by the way, there's a very good book by Jonathan Bigle, Reckless, which is all about the most recent bubble, and that really was about credit. Because if you think about the last two booms, you had the kind of freaks and geeks revolution boom, and then you had the retail boom for Thanksgiving dinner boom. But that was always about buying, you buying bitcoin, you buying bitcoin. This one was about leverage. It was about lending and loans and trading on margin. It was really the credit bubble and all of the rest of the things that we think about, the influencers, the social media, the pandemic, uncertainty, that was all triggered as well by the price. But I think the price could not have exploded that high without the combination of people using leverage to choose the price, and at the same time institutions and big companies making bets that they thought would pay off in the pandemic. So I think it's fundamentally incredibable. And of course credit bubbles pop when interest rates start rising, and when the Federal Reserve and other central banks around the world started jacking up interest rates in response to massive inflation. Industries that were running on airplane fumes, like crypto, came under pressure, right, correct and simple reason that if you can earn a return on your cash deposit, that means that other investments that do not produce a return have to compete with that. It's really just that basic, basic math, basic math. And so before the whole irony of crypto offering you an interest rate, the whole irony is that when returns on real cash were going up, the returns on crypto and their value was sort of both falling at the same time. So there really was no contest. Crypto proved to be unprofitable tech. It proved to be nastack social media times one hundred times a thousand. It wasn't digital gold, it wasn't a hedge, wasn't a story of value. It was a tech risk on megabubble bets helped by easy money. And so when the easy money goes away, that bet falls. You had what I consider sort of an epic description of where the Winkelvy reside right now. And you describe them in one of your columns as being stuck in the financial version of the Hotel California explain that to me. Can I just quickly say the Hotel California has been a term that my colleagues and I have been banding around for years, right because Hotel California describes also just generally buying into crypto, because when the Winkelvos twins bought their first big stash of crypto after the collapse, there were a lot of people trying to get out. Crypto is about people getting in and then when an a liquid asset like crypto falls, you are faced with the choice of taking potentially huge loss just to get out. And so that's why I think also exchanges look very appealing because they're a way to sell your cryptocurrency to bring down the pile while making money of transaction fees. So I just want to kind of put that out there and say that the Hotel California issue with though it has been there in a long time, because everybody rushes in when it's going up, and everyone's terrified to sell when it's gone down. Today's Hotel California is pretty much the latest episode in a long running story which is based on the fact that they offered this product of lending where people would put their money on Gemini in hopes for a return. Gemini would straight away land that onto Genesis, the company we mentioned earlier, and now it's all kind of gone south because the market fell, Genesis's partners went bust. Now Genesis has a hole that it has to fill and it's essentially not given back the money that the clients of Gemini were told they could take any time. So the reason why it's hurts the California is because once again people who ran in when prices were going up, thinking I'm going to time this just right, but now stuck they cannot get ahold of their money. And we've seen this time and time again. But now I just think it's a byproduct of the credit bubble. But it's like another floor of the hotel, and regulators are sniffing around the Winkelwy's operation. Lawsuits have started to fly. Where do you think some of that might be headed? So the lawsuits, you might say, are coming a late in the day because we saw the first regulatory response to these lending products a year ago or less than a year ago. Because they resemble securities in US law, they look like a security, They walk like a sity. It taught like a security of regulators. These products where you're offering interest rates on crypto are securities. Now, maybe you could turn around and say, well, this is all very late in the day to be now after this fund freeze, after FTX has gone down, after this big bankruptcy fight between Gemini and Genesis. It's a bit late in the day. But I think it tells you that essentially what we're dealing with here is the real risk that these people come back for act number three at number four, at five. Remember that the Winklevos twins in their fight with Genesis, have portrayed Genesis and Barry Silbert as the ones that their own clients should be angry at. Okay, it's a bit like Billionaire A opens the door to find a huge crowd of people with pitchforks saying where's our money? And he's says, hey, WHOA, WHOA. You need to see Billionaire B, because even though I willingly gave your money to that billionaire, he's the one who did all this shady stuff. He's non transparent, go and chasing with pitchforks, And so the crowd runs to Billionaire B, led by Billionaire A, who's now picked up a pitchwalk. This is the Winkelwolf twins. They've picked their pitchfork, and they are now writing letters saying that, oh, Genesis has lost school teacher's money lost, grandmother's money lost. We're sharked. We're sharked to discover there's gambling going on in this casino. Yeah. And I really wonder without these lawsuits, right, without a real question mark over whether Gemini's own responsibility in this is worthy of regulatory attention. Without that, I wonder whether the Winkelhospons might be thinking great. I think if we do a deal with Genesis and we get some money back, we can come out of this with our reputations sort of semi preserved and get back onto doing business. So I think it could be fundamentally quite important for their future. In one of your columns about SPA, you said that, and I quote you, his apology is as hollow as his empire. Is there anyone whom you look at as a model citizen or citizens in the crypto market? I would love to say yes. I think I guess the people who I have the least contempt for are the people who are kind of honest with themselves and they wear their values on their sleeve. So, for example, the cipherpunks, okay, the real libertarians who will openly say I'm in this for my niche pursuits, for my elite pursuits of freedom and privacy and being outside government control. I kind of respect at least people who have the honesty to say that, even if I don't agree with it. And the same thing goes for the very smart people who actually design some of these cryptocurrencies, Vitalic Beuta and the designer of Ethereum. I can't say that that isn't smart. These are these very smart people. They are doing things that no ordinary person can do, and maybe in a hundred years, a thousand years, somebody will finally find it use case for it. That justifies all of this effort. But the other people, the hucksters, the people who kind of surf on it, the people who try and pretend it's tech. It's about tech and disruption revolution, and it's really just about separating people from their money. I just don't see any models or model citizens. Maybe there are people genuinely making money and getting rich, I just don't really see it as a kind of model to follow. So what have you learned from the Winkle Voss's journey about crypto, maybe something that you didn't know before, given how long you've been watching all of this unfold. I think the age of the average entrepreneur, billionaire entrepreneur, the whole second act, that act, fourth act. This is stuff that I have never seen before, or I'm just not used to this idea that you can have multiple lives. I mean, look at Michael Sailor and MicroStrategy. These are people who actually had really terrible times in previous crises. They try to bounce back, and they're going to keep bouncing back, and they're going to keep finding ways to make money. I'm just kind of stunned by a lot of it. I also think that there is something in there about this new generation of I guess privileged entrepreneur. I mean, they already have money and they have a network already, They're a new kind of entrepreneur. And I mean, I think it's also quite an American phenomenon. Tripto has become a very American phenomenon, and a lot of the stuff that's coming out as wild West is really being fit into American capitalism. So, I mean, I think I've learned a lot not all of it good. So you're telling me this is our fault, and since you're a French the decent, it's not your fault. No. Well, I mean these guys clearly Thede might from Europeans too, But I just fight it't kind of fascinating that it was basically copped it by venture capital, blessed by regulators and bankers, and this is Wall Street and Silicon Valley melded together, sold as the American dream to a whole class on Main Street. I'm not saying that no one else fell for it. I'm saying that it just seems incredible that it just really checked all the boxes of American capitalism and sounded super complex and mysterious and innovative as crypto might just as easily have been described as quote unquote snake oil. Possibly. Absolutely, the history of frauds very relevant if you go back one hundred years. These are exactly the same issues that were being grappled with. When do you regulate? How do you intervene this whole idea that actually it's very Unamerican to imposed rules. We've had all of these debates before, and I just think, yeah, as you were saying, Crypto has just recreated all of this and as far as I can see, as yet to leave. Maybe it's early days, but it's yet to leave something like the railroads or anything that's useful infrastructure behind. Yes, I could talk to you about this stuff forever, and that went by really quickly. Leonell, thanks so much for giving us a chunk of your brain and a chunk of your time. Thank you. You can follow Leonel Laurent on Twitter at Leonel R. A. Laurent, and you can read his columns on Blueberrig Opinion dot com here at crash Course, we believe that collisions can be messy, impressive, challenging, surprising, and always instructive. In today's Crash Course, I learned that the Crypto kids may be back for more. That despite their missteps and some of the meltdowns they've participated in, and maybe the wool that they pulled over our eyes, they might be coming back from more if they can get out of the Hotel California. That is what did you learn? We'd love to hear from you. You can tweet at the Bloomberg Opinion handle at Opinion or me at Tim O'Brien using the hashtag Bloomberg Crash Course. You can also subscribe to our show wherever you're listening right now and leave us a review that helps more people find the show. This episode was produced by the indispensable Anamazarakis and me. Our supervising producer is Magnus Henrickson, and we had editing help from Katie Boyce, Jeff Grocott, Mike Niezza and Christine Vanden Bilart. Blake Maples does our sound engineering, and our original theme song was posed by Luis Gara. I'm Tim O'Brien. We'll be back next week with another Crash Course
