Preston Byrne, an independent consultant and English lawyer, and Angela Walch, an associate professor at St. Mary’s University School of Law who focuses on blockchain technology, both explain their criticisms of the crypto space, give grades to regulators on their job so far, and how they think major players in the space can improve. They discuss what systemic risks they believe crypto could pose to the wider financial system, how the current activity in the space is accruing “legal debt,” and what it’s like being a critic in a land of believers.


Angela Walch:

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Today’s episode is a specially dedicated skeptics episode of Unchained. My guests today are Preston Byrne, an independent consultant, English lawyer, and fellow of the Adam Smith Institute and Angela Walch, an associate professor at St Mary’s University School of Law, who focuses on blockchain technology and a research fellow at University College London Center for blockchain technologies. Welcome Preston and Angela.

Angela Walch: 00:01:34
Thanks so much Laura.

Preston Byrne: 00:01:34
Howdy. Thanks

Laura Shin: 00:01:36
So before we get into your criticisms of the space, how about each of you, tell us a little bit about your histories. Preston, let’s start with you. What were you doing before and how did you learn about crypto and come to work in this space and what do you do now in it?

Preston Byrne: 00:01:53
So before I was a lawyer, a lowly junior associate at a London law firm doing securitization. And, at the time I started looking into things that I thought were interesting. New technologies, areas that I could distinguish my practice from that of my contemporaries. And I stumbled upon Bitcoin in 2013. And really the penny dropped for me when a friend of mine who’s working at a think tank and Guatemala said what if we took something like Bitcoin and turned it into an accounting system for developing countries, for example. So you could reduce the incidence of fraud in a developing economy simply by controlling the end points very tightly and using this as an alternative system for value transfer. So that plus actually Dogecoin was when the penny really dropped, because I realized you could make more than one version of these things and you can make as many as you like. And that’s how I got started back in 2013-14.

Laura Shin: 00:02:42
And when you say the penny dropped for you, what do you mean? Like you just got interested because since you are a known kind of skeptic and critic, I want to know what your feelings were? A lot of people who are not skeptics talk about falling down the rabbit hole and just getting obsessed. But is that also what happened to you?

Preston Byrne: 00:03:02 So there’s a difference between being skeptical about what people say about the technology and being skeptical about technology full stop. I’m certainly not skeptical about emerging technologies, cryptography or distributed systems. I think those are all very interesting technologies which are going to change the way we do business. What I’m deeply skeptical about is the proposition that if this coin or that one we have to invest in it now and throw a lot of your money on it and millennials, you should be putting 10 percent of your portfolio in it. That kind of talk I find extremely irresponsible and really not… this is a database technology, it’s not a penny stock. And so, I’m quite optimistic that this is going to be a useful database and networking tool, but I’m not so optimistic that it’s going to be an investment proposition like investing in Google or Amazon in 1994.

Laura Shin: 00:03:52
OK. Let’s turn to Angela. What about you? What was your prior background? How did you learn about crypto and come to work in this space and what do you do now?

Angela Walch: 00:03:59
Sure. So like Preston, I did practice law for awhile. Kind of in the business transactional side. And, in 2012 I moved into academia as a law professor. And, my research interest at the time and still remains that, was about money and how money works, how many can break, who should control money, all those kinds of questions around it. And those stemmed a lot from my experiences during the financial crisis. I lived in London at the time, so I was feeling very strongly, wow, differences in exchange rates and what causes that and got me very interested in how money works. And, as I was working on my research, Bitcoin was being talked about as potentially a new form of money. So I felt like I needed to look at that. And, once I started my research I became really, really interested in it. And I was interested in a lot of the statements that I was hearing about how it’s this just very automatic system and the software just runs. And I couldn’t get my head around that because it would seem to be that software is still coming from people. And there’s still people being involved in it and that inconsistency, I think, I’m much more interested in it and as I’ve watched the discussion happen about it and the great excitement forming. I’ve seen that there is a real need for critical thinking, clarity of thinking, critical analysis in the space. And there may well be some very interesting things happening and a lot of potential, but I don’t feel like we can know that unless we’re critically thinking, being honest about capabilities and what’s really happening. So that’s the role that I see myself trying to fill in the space is asking common sense questions.

Laura Shin: 00:06:04
This is the perfect segway to talk about the overview of your criticisms of the space. For both of you, if you were to take your criticisms and boil them down into one overarching theme or philosophy, what would that be? And Preston, why don’t we start with you?

Preston Byrne: 00:06:29
“All hat, no cattle,” really is how I would summarize it. I’ll just give an example. Right? So let’s talk about the DAO. Which was this thing that was supposed to be a de-centralized venture fund that was set up by some of the original Ethereum guys. They said, “Well, it’s going to be this decentralized venture fund. It’s going to be great and everyone’s gonna be able to invest and get returns, won’t it be wonderful.” So of course the DAO failed, first because it was hacked. So that wasn’t necessarily inevitable, but it did wind up failing for that reason. But if that hadn’t happened, and you looked at how the thing actually worked. There was actually no means where you could take an investment, turn it into another token, and then legally get the value of the token that you created with your investment to capitalize back into the DAO token. So this big bottomless hole that you just threw money into and there is no way to get anything back out. And if you had looked at that as a lawyer and you’d said, “OK, well let’s structure this correctly.” You would have been able to identify that the marketing wasn’t able to match up with the claims. But you have a lot of software guys coming at it from the first time and kind of saying, “Well, we don’t need to rely on legacy institutions. We don’t need to rely on legacy thinking, we’re just going to reinvent the wheel.” And as a consequence they wind up creating things that don’t work for the use cases that they’re advertising.

Laura Shin: 00:07:41
Preston, I actually don’t know if I understood what your criticism was of the DAO. Are you saying that there was no way for people to essentially sell their DAO tokens for US dollars? Or I didn’t fully understand what you were saying there.

Preston Byrne: 00:07:57
So with the DAO, the way the transaction worked was as follows. You gave money to the DAO smart contract, or you give ether to the DAO smart contract in exchange for which the DAO gave you DAO tokens. So let’s say its 1 to 1. You give 1 ether it gives you 1 DAO token. The DAO token then gave you rights to vote on which projects the DAO would go fund. So which it never wound up funding any, but let’s say it did. So you can vote and say I want to go fund, ABC Corporation over here because they’re going to make Marmotcoin and I think that Marmotcoin is going to be a great investment for the world. So you give the DAO instructions. You say, “Go disburse the ether that we’ve just given to you and go give it to this company.” They will go create Marmotcoin and then they will go sell Marmotcoins and I will get the return from the issuance of those Marmotcoins. At that stage, that last final piece of the transaction, no one actually thought it through, but there was no way you could get the tokens that were being issued, the Marmotcoins at the end of that transaction and put them into the hands of the people who had invested in the DAO. So they were putting money in and the money was going to create reward tokens and various other things, but there was no mechanism to go and take those tokens and whatever value was generated at that stage of the transaction and then pass it back to the DAO tokens in the form of some kind of income flow or anything else. It was just a pure speculation play and they were saying, “Well, the right to vote on which projects get the money. We’ll of course, capitalize into the value of the tokens.” But that’s not how it works. That’s a voting right, but it’s not an economic right. So what they were doing is selling something and saying this is a voting right and you will get your tokens will become more valuable. But there was no mechanism by which anything that we would recognize as having economic value could pass backwards up the chain to the DAO token holders.

Laura Shin: 00:09:42
So to summarize your criticism, it’s sort of like saying people get really pie in the sky, but then they don’t look at the details and realize that actually none of these great sounding ideas can actually be manifested in reality.

Preston Byrne: 00:09:57
Yeah. Well they can be. If you want to go and hire some lawyers and signed some documents and get a venture capitalists who knows how to manage money and have him run some money for you. This technology can be useful in that setting. Where it’s not going to be useful is if you try to sort of shortcut and get around all of those things. I mean this stuff is hard. There’s a reason you have to go to law school for three years and practice for five until they start letting you talk to clients. And so a lot of what Crypto 1.0 was doing, because it had this crypto anarchist ethos about it, was just a sort of throw the baby out with the bath water and say we aren’t going to follow any of the rules. And as a consequences, as I think we’ll talk about in a bit, people are starting to realize that, that was a pretty major mistake.

Laura Shin: 00:10:39
Well, later on we’ll come back to this idea about how you feel like what you really needed to do. Those kinds of things was actually a lawyer. First, let’s find out from Angela. If you were to boil down your criticisms into one overarching theme or philosophy, what would that be?

Angela Walch: 00:10:56
OK. Preston had a great image there. “All hat, no cattle.” I guess my image would be “running forward blindfolded, carrying scissors.” People are rushing forward without any real concepts of what they’re doing. They are assuming that the foundations of the technology are settled. They are acting as if we know that anything that we call blockchain is immutable, secure, reflects truth. It’s trustless. Well, those are all very much debated points amongst technologists in the space and yet people run forward anyway. And, I get very worried about that because people are talking about using the technology for our most critical social systems, including in government settings for money itself, financial systems, all of those things. And yet, we’re not critically thinking about what it would mean to move to this technology. We’re not being honest about its actual capability. So that gets me very, very nervous.

Laura Shin: 00:12:01
What do you worry could happen as a result of these risks that you see? What do you picture are some of the worst case scenarios?

Angela Walch: 00:12:10
Some of the worst case scenarios I see would be using these systems, like big public blockchain systems as infrastructure, which is the way that they’re discussed in many ways. Building things on top of them. And, if we put systems like property records or financial records or identity records or voting records on those and the tech is not nearly as resilient as we expect, then it all falls apart in a critical moment. Suddenly there’s a very contentious election and no one has any idea who won it. Yet we relied on this and believe that it was going to be the savior here. Or the image that is most visceral to me and most accessible after the financial crisis is another financial crisis, right? And, building financial records, building money on top of these systems, which I think are, from my perspective, quite rickety at the bottom, particularly with governance issues. And so, you come to a critical moment, the core developers and the mining community can’t make a decision about which way the software should go and again, it all falls apart and because we have widely integrated these cryptocurrencies into our financial system, for instance, perhaps through all these financial products based on them that we’re wanting to build, then you have some sort of a systemic financial crisis. So I liked thinking about worst-case scenarios basically.

Laura Shin: 00:13:48
And Preston, what about you?

Preston Byrne: 00:13:49
I don’t disagree with any of that, to be honest with you. I think that the systemic risk is real. We’re starting to see that play out with the major banks cutting off credit card access to something like Coinbase because they don’t want exposure to this stuff on their balance sheets. So yeah, I don’t really have too much to add to what Angela said on that point because I agree with it completely.

Laura Shin: 00:14:13
For both of you, whose behavior would you most like to change in the space? And by that I mean, not like any specific individual, but a group of actors, whether it’s regulators or ICO teams, or developers, or some other group. How do you feel like they’re acting that you would like to change?

Angela Walch: 00:14:40
Several parties I would say. Regulators and policy makers I would put on my list pretty high up and I would put them there because they are tasked with protecting society in many ways. It’s their job to look at things critically and make sure that they’re making good decisions on behalf of society. And I’m pretty concerned with what I see in that respect. In that, many reports that come out from prominent policy-making groups or regulators themselves seem to me to be restating things that are inaccurate about the technology and that makes me worry about their understanding and then what decisions they may ultimately make. So, I want regulators to be super skeptical. I want policy makers to be super skeptical and I want them to be cognizant of who they have advising them. There are a lot of lobbying organizations, for lack of a better word, but I think it’s fair, that have grown up in this space. Industry funded organizations, to push the cryptocurrency space forward. To push the blockchain technology space forward. And in many cases, those are the organizations that are advising policy makers and regulators. So, I want those groups, t policy makers, the powerful people, regulators, to take what they’re handed with a grain of salt and seek out diverse opinions on this. And don’t just take the pie in the sky version at face value. That’s one group I would say.

Laura Shin: 00:16:17
And so obviously, I’m the one who said not to name names, but I couldn’t help it. I immediately think of course, of Coin Center and the Chamber of Digital Commerce. Is that who you’re thinking of? Because as far as I know, definitely Coin Center is certainly industry funded. I’m not sure about the chamber of digital commerce.

Angela Walch: 00:16:33
I’m not sure who else would be funding them to be honest. I mean, they are a chamber of Commerce, right? So the business is in the industry, but I have to go back and double check their website. But, the people who are on their board are primarily, industry players, and that’s fine. I’m not saying that there’s anything wrong with the industry advocating for itself and seeking to explain what it sees as good about the technology to policymakers, to regulators. That’s absolutely fair. What I am saying is that regulators need to be aware of potential conflicts embedded in that and seek diverse perspectives and not only a single perspective.

Laura Shin: 00:17:12
What about you Preston? If there’s any group or organization whose behavior you would like to change in the space, who would that be?

Preston Byrne: 00:17:20
I don’t think you really can change anybody’s behavior in this space. You can only really align incentives in a certain way and at the moment, the incentives are lined up or at least for the last couple of years, the incentives have been lined up in favor of frankly, flagrant criminality. So where we are now is we’ve seen recent comments from the SEC, from the CFTC, from the treasury. Basically telling us that ICO promoters in particular, people who are selling coins to the public as an investment product are surprise, surprise, bound by regulation. Yet, the activities still continues and I get to this day, despite the fact that all of those announcements have come out, and I think the reason is because the market hasn’t understood, priced in or quite wrapped its head around the idea of how serious the situation is for them and they just don’t know what the consequences are to their actions.

Preston Byrne: 00:18:12
So in software they have a concept called technical debt, which is when you kind of leave feature that you need to fix or code that is slightly garbage, you leave it in because you don’t have time to fix it. And so you then call that technical debt. It’s something you need to go address later because you haven’t fixed it today. We might think of what’s going on now is kind of legal technical debt in the sense that we have companies that have said, you know, and… Think about it, let’s say you’re a small startup and one of your competitors, ICOs raises $30 million overnight in bitcoin and you’re sitting there going to VC’s and having to go through, 3-6 month diligence procedure and investment committees and it’s hard to raise. And at the end of the day you’re only getting $800,000 to $2 million for a seed stage product. You look at that and you say, “Well, I can’t win, if I’m up against a company that’s raising $30 million, not at least today.” So all of a sudden, just because one company does it, then three others say, “Well, there’s a really compelling reason for us to go do it as well.” So I think, backing up Angela’s point, the only thing that can stop this is regulatory intervention. In the US, I think they’re fairly skeptical, although there are some regulators which are routing fairly loudly for the people that they are supposed to be regulating. Which is disconcerting. In the EU, from where I hail. The European parliament, I think has been profoundly poorly advised by their advisors and some of the policy documents they put out look like they’ve been written by particular companies to say nothing of particular lobbying organizations that represent an entire industry. So I think, that’s a huge problem and it’s just going to take time for the regulators to get up to speed and they need to understand the incentives now, everyone they’re talking to has a financial incentive to make them get on board with their vision. Nobody or virtually no one out there has any financial incentive to tell people to hold their horses and slow up a bit. So there are very few of us as a consequence who are doing so.

Angela Walch: 00:20:06
Yes, that’s a good point. I’m a very poor person in the space. So, it’s hard to be a critic here because there are many incentives, right? I could do a lot better by advising ICOs and there are plenty of other places that I could be making money, but I’m an academic here, criticizing everybody.

Laura Shin: 00:20:29
Yes. But then you would pay on your reputation, which is a much bigger… Yeah. So, I think you’ve chosen the right path. But actually, I wanted to… both of you have kind of talked about regulators, but I want to get your overall bead on how the regulators have been doing. If you were to give them a grade, what grade would you give them?

Preston Byrne: 00:20:48
In my home jurisdiction of the United Kingdom, they get an F. They get an F-. They haven’t even shown up and taken the exam. We have denied them the permission to resit. I mean they really have done nothing. And despite the fact that there’s a lot of really sketchy activity happening within their borders. I think part of that is down to brexit and they don’t want to be seen to be a scaring people away. FINMA over in Switzerland I give a D, because they finally came out with some regulations, but they have numerous projects going on within their borders which are amenable to regulation and they haven’t regulated. In the US so far, gets a C-. So they get to advance to second grade and at least they’re doing something and we can see what’s coming. And to be fair, it does take a lot of time to put this stuff together. Even when you had the flagrant penny stock frauds of the 1980s, the DOJ didn’t get involved for 10 years, because you have to go build cases. the SEC didn’t get involved for several years. So it takes time to do this. It’s reassuring to see the American regulators moving, but in Europe everybody is asleep at the wheel.

Angela Walch: 00:21:56
Yeah, just focusing on what we’re seeing with the regulators in the US, like the SEC and the CFTC. I’m encouraged that they are going after things like blatant fraud. And I was encouraged after the senate banking committee hearing by the things that the head of the SEC was saying. But, I do think it’s really important for them not to think that going after these blatant frauds is their only job here. They’re making important decisions about how cryptocurrencies in particular, will be integrated or not into the financial system. And so it’s not as simple as enforcement actions. It’s what kind of products are okay? Are we thinking about systemic risks, not just risk to individual consumers. And again, I would reiterate what I was saying about regulators really need to be careful about who all they are getting advice from. And these meetings, I think the CFTC has a technology advisory committee or something that they just recently met and I believe created new working groups for DLT and cryptocurrencies. Critics should be on those. Critics should absolutely be part of the conversation. You don’t just want people who are supporters. To me, that’s one of the things that is a lesson I guess from our behaviors that led us into the financial crisis. In that, supporters of mortgage backed securities, sub-prime mortgages, these very complex derivative structures. There was a lot of cheerleading that led us into widely adopting these practices. And I’m really concerned about all the cheerleading happening here.

Laura Shin: 00:23:52
Both of you have mentioned the systemic risk that you think crypto poses to our financial system. How do you see that playing out?

Angela Walch: 00:24:01
Preston, you wrote about one scenario, didn’t you? Was that the exchanges?

Preston Byrne: 00:24:07
Yeah. So it depends on how big they let everything get right? So Bitcoin right now, its market cap on very, very thin trading is sort of one large cap company. And depending on how you look at it, it could or could not be a systemic risk. It’s depends on who is exposed to it and how much they’re exposed to. So if we want to say, let’s say $200 billion. We’ll take a round number like that and we ask ourselves is $200 billion of notional value somewhere. Does it represent a systemic risk? That depends on what people have done in relation to it. Have they lent it? Have they given it a security for obligations? Are they spending it and investing it in a particular type of asset? For example, start-ups or something else so that so that the price of that particular commodity is getting out of whack? So there are a whole bunch of different questions you can ask. What happens to the retail consumer? So let’s say we allow the bubble to continue unabated and you have every american man, woman and child or 25% of the population is in the market for $10k to $15k. I think Bitcoin fans would love that. But what happens if suddenly the system gets wiped out under those circumstances? There I think you would have a very big problem because you would just see a lot of notional wealth wiped out overnight and that would have broader consequences for the economy. And also, people are spending, they’re going into debt to go purchase bitcoin and get exposure to this market. Which is of course, your classic source of systemic risk is debt. So there are a range of areas where it could come from. And I think the way that you really ensure that it doesn’t spread is you take very proactive measures to ensure that banks keep this stuff off of their balance sheets. Because it really doesn’t belong there at the moment. We’ve heard complaints to and by the CFTC about the nature of Bitcoin and cryptocurrency markets. It’s very clear to any observer that there’s a huge amount of market manipulation which occurs. Some of the price movements and some of the Altcoins where they go up 300% in a week. That’s very clearly not organic and it’s driven from someone somewhere, that’s illegal. So, the question is how much exposure do we want the mainstream financial system to have to an asset which is so easy to manipulate and thereby is so dangerous.

Angela Walch: 00:26:25
I would add to that. It’s the complexity of our financial system that makes it difficult to say it explicitly, “like how it would actually go.” But the more bridges you build essentially between the crypto economy and the mainstream financial system, the more it becomes integrated into bank’s balance sheets with this trend of, “It’s a crypto asset now. So, I’m going to make money off of this.” And the opportunity to make big bucks off of cryptocurrencies, I think is blinding the financial system a bit to the big risks that are here. So, I could see things rapidly rushing forward. I think the bitcoin futures… that was kind of a tipping point I would say. And while the SEC is currently holding the line against these ETFs, I think wisely. I don’t know when that dam is going to break. And then once that does, I think you’ve crossed the line between, could be becoming a systemic risk to probably is a systemic risk right? So there’s a question about when something becomes a systemic risk and when you should act in relation to it, right? If you see something potentially becoming a systemic risk, if you take certain actions to get there, do you choose now not to take those actions? Or are you just, you know, la keep strolling down the path until you’re there and it’s too late. And I’d rather we anticipate those than reach them and then are shocked.

Laura Shin: 00:28:01
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Laura Shin: 00:29:41
I’m speaking with Preston Byrne an independent consultant, an English lawyer and Angela Walch an associate professor at St. Mary’s University School of Law who focuses on blockchain technology. One question I had for you, and this kind of goes back to something that Preston said earlier is I was wondering if your skeptics, because your lawyers? Meaning like, are you skeptical because blockchain technology can remove middlemen and some people are saying that it can serve as a sort of law?

Angela Walch: 00:30:11
Right, is this our conflict of interest? “We want to keep our jobs.” So, I do think it’s interesting that there are some lawyers in this space who have been the most vocal with their critiques. It’s not just lawyers though. There are other people, technologists, people who are in fintech. I’m thinking of people like Dave Furch, Steve Wilson, Izabella Kaminska. Those types are also skeptics and critics, but I don’t think it’s a coincidence that some of us are lawyers because law teaches you to be a critical thinker and to be absolutely skeptical of what your clients are telling you and to make them go through the nitty gritty of thinking through all the practicalities and what do you actually mean? How would you actually structure this metric? Are you kidding me? So lawyers jobs are to think about the what ifs, so it’s not necessarily surprising me that we both come from a legal background.

Laura Shin: 00:31:12
And Preston, I wanted to ask you about something that you’ve written about and spoken about elsewhere. Which is you’ve called Bitcoin not a Ponzi scheme, but a Nakamoto scheme. What do you, how do you describe that?

Preston Byrne: 00:31:26
So when you again applying the legal training, when you look at something like Bitcoin. You ask yourself, “Well, what is the thing and what are people actually buying?” Is it a right to something? Chances are probably not. It’s basically just a right relative to the person who previously held the coin, just by way of example. Is it a right to an income flow? Is it a security? No. Well its just kind of an internet fun buck. Which you can’t really use for anything except trading for other internet fun bucks. So, when you look at it from that perspective, there are other schemes in history which had functioned in the same way. Generally speaking, we call those pyramid schemes or Ponzi schemes. Where the right to participate in the scheme is the thing which is being sold or the ability to have some return from getting others into this game is the thing that’s being sold.

Preston Byrne: 00:32:13
The difference between what Bitcoin does and how it works. It could very well be a system for peer to peer cash, and I think if we were talking about it in 2009 when people were buying pizzas with it, then that was a use case then maybe we could have justified, that characterization. But what we’re seeing now, we ask our self what it is doing and form and substance and something where people are investing in it. They’re not spending it. Merchants aren’t accepting it. It’s not serving any useful. It’s not really gotten a huge amount of adoption for anything except speculation. And so when you ask yourself legally what that looks like, it looks like one of those pyramid or Ponzi schemes. The only difference is that nobody’s guilty and everybody’s guilty. The thing runs itself, it’s completely automatic. Relies on the interests of all of its users in order to continue in operation and succeeding. So we have to ask ourselves whether, because there’s nothing underlying it. Yeah, sure, maybe there’s nothing that makes it illegal today. But is there legally culpable conduct around marketing it or promoting it? And certainly, then when we look to the ICOs and the other schemes which are very nakedly investment schemes that are promoted by particular actors. How should we regulate those? So even though they’re extensively fully automatic, I think the view from the regulator’s point of view is that they should be regulated as investments because that’s how they function. That’s the function they perform in society.

Laura Shin: 00:33:32
So a large part of that criticism relied on the fact that Bitcoin isn’t widely used yet as payments, but if it were, then does that criticism hold up?

Preston Byrne: 00:33:43
I think if bitcoin were being issued by a single company, let’s call it “Bitcoin Inc.” It had a CEO, the infamous mythological CEO of Bitcoin. And they were selling bitcoins to people and they said, “Maybe other people will buy the bitcoins and they’ll go up in value and they’ll go down in value.” And, it was the exact same technology. The only difference was that it was run by a company based in an office in New Jersey somewhere. If that were what, how Bitcoin worked, it would almost unquestionably be illegal in the UK. And it would very likely in my, I’m not a US lawyer obviously, but from what I understand of US law, it would be very likely that it would be illegal in the United States as well. Unless you went through registration requirements and registered as a security, et cetera, et cetera, et cetera.

Preston Byrne: 00:34:33
So, the point is that Bitcoin does something which should be illegal, but it does it in a way where there’s nobody who’s culpable for the activity because the thing runs itself. And that’s something that law hasn’t really seen before. And it’s just a way of looking at it and saying, “Well, if we were to take a really extreme pessimistic view of how this stuff works, what would we say the thing is?” and it would be lazy to say it’s a pyramid scheme or a Ponzi scheme because it is neither of those things because there’s no person managing cash flows, which gives rise to legal liability in the hands of that person. The person has been removed. It’s then automated that person’s functions and it raises some interesting questions from how we think the technology will be used in the long term by automating roles of, say, transactional counter parties. But what it’s done is it’s automated away that middle man and it said you can send money back and forth to each other. And we built this whole ecosystem around it for people to invest. But the important thing is that the middleman has disappeared.

Laura Shin: 00:35:27
What if we were talking about yap stones instead? Like, do you know what I’m saying? To my mind, there is a way in which you’re describing this where it almost seems like you’re saying, “because it’s not a government issued money, that’s why it’s illegal.” But what if, it were something that society decided as money? What if it were like seashells or yap stones, like I mentioned, is that still something that you would view as a Nakamoto scheme?

Preston Byrne: 00:35:55
We use things as substitutes for money all the time. Securities in particular are frequently used. AAA rated securities are effectively as good as money. They’re IOUs which people trade at very close to par. Treasuries are also just as good as money. They’re quite similarly used as a safe storage for money that you can trade and they won’t have their value go anywhere. But we have to look at it in context. With Bitcoin, if bitcoin were money And we said, well, it’s just going to be used one for one and people are using it for goods and services and it emerged to fill that role for some reason. Then yeah. I don’t think there’s any reason why we couldn’t say, “Well, this is the new money. And for some reason, it’s vastly superior to what came before for reasons A,B,C,D,E.” I don’t think that’s going to happen because Bitcoin doesn’t scale very well to start.

Preston Byrne: 00:36:39
And secondly, if we look at the context in which Bitcoin operates, we already have money in every society in which people live. It’s a slightly inflationary money supply that devalues over time. And, what people are doing is they’re saying, “Well, we were creating these coins.” and why are we creating the coins? “So we can get a hold of other people’s money.” So if we’re being really honest with ourselves, this is not a new money that we’re dealing with. It’s a new way to obtain money from other people who think that buying the thing with their money is going to result in them making money. So some people say, “Well, yeah, it could be used as an alternative to money.” But the fact is it’s not how it’s being used. It’s being used as an investment.

Laura Shin: 00:37:24
And Angela, I wanted to ask you about a criticism that you’ve written about. You’ve said that blockchain developers are fiduciaries and that core developers and miners are actually in control of blockchains and so it’s a romantic idea that these blockchains are decentralized and that we don’t have to trust anyone. Why do you say those things? And do you think it is possible for any blockchain to be truly really decentralized?

Angela Walch: 00:37:49
Yeah. So one of the first things I said today, how I came into the space was noticing what seemed to me to be a real inconsistency, right? That these systems were just, they’re decentralized, so there’s not really any humans doing anything. And Preston was talking about that a little bit in his discussion just now. That we’ve managed to automate a lot of these things. And, once I started following all the different message boards and trying to get a sense of what was happening within the Bitcoin ecosystem particularly. You start noticing that there are people who have large followings, developers who have large followings, who seem to be very influential in what they say. How people take what they say. They make decisions. And it struck me that, “Wow, we actually have governance still happening here. We’re just not acting as if we do.” We’re acting as if the decentralization, the nominal decentralization, of the nodes in the network has meant that we’ve suddenly somehow escaped governance. And I see there as being probably a few ways that governance happens.

In Bitcoin, for example, one of the ways that governance happens is through the software development process. And, with open source software, at least this grass roots, what I called grassroots open source software development. Everyone ostensibly has the ability to make changes to the code. At least propose changes to the code. But, a small group of people actually helps to make the decisions about what actually ends up in the code and actually has commit access, meaning the ability to actually make changes to the code and that’s the core developers. And we’ve seen power struggles in Bitcoin, some core developers have fallen from power. Like Gavin Andresen after the whole Craig Wright fiasco. Like these vicious kind of turf wars, right? And to me that demonstrates that people are fighting for power and people who are participating in the system, whether it’s by buying bitcoin or building businesses on top of Bitcoin, are putting a great deal of trust in the competence of the core developers to actually think, and understand the technology well enough to make good decisions about what should be in the code. And we’re also putting a great deal of trust in the fact that they are not conflicted in a particular way. And this relates to how they’re paid. There’s been a lot in Bitcoin particularly. There’s been a lot of flux about how the core developers should be and are paid. Should they be paid by companies within the ecosystem? In which case, are they gonna make decisions for the good of the company who pays their salary or for the good of the public system? Should they just be paid by making investments in the particular coin and have to support themselves off of that? So, there’s a lot of questions here and for the core developers, I definitely see them as a power center. I see big miners, a different type of governance happening in the transaction processing network. And, that manifests through, the choice about which version of software to run. And we’ve seen like the two different power centers have meetings. The core developers and the big mining pools get together and have meetings about what should be the direction of the network. Related to this is all the research that’s come out about how concentrated mining actually is in the Bitcoin ecosystem and in others, in Ethereum as well. So, by pretending that things are, fully decentralized and no one has power. We are committing the error of failing to acknowledge power, which means the power that is there is unchecked and undefined.

Laura Shin: 00:42:14
What do you think of these blockchains that proposed on chain governance? For instance, Tezos will for any particular proposal that makes it past a certain level of support, they will pose that as a vote to all the token holders and then any change that again makes it past a certain threshold in the votes will be automatically incorporated into the blockchain and therefore it isn’t really these… I guess what you could say is like whoever is proposing is going to be limited to developers. But of course, they have no control over whether or not their changes get adopted. And then, in terms of who is paying the developers? I know systems like Tezos propose that any changes that do get adopted, that those developers who proposed them will then receive a certain amount of new tokens that have been minted for the blockchain, which will inflate the supply. But if people vote for that change, then it means that they believe that the change will likely result in an increase in the value of their tokens that makes it worth it to inflate the supply by that small amount. So for both of you Preston and Angela, what do you think of on chain governance? Do you feel like that answers these criticisms about some of these blockchains not truly being decentralized?

Preston Byrne: 00:43:44
I think it’s pretty dumb to be honest with you. I come up with these one word answers. Because when you’re a critic for a long time, right? I’ve seen this happen before, right? We’ve seen this story and what the story is, let’s again go back to the DAO. The DAO had a quorum of 10%, no 20% of the token holders. And of that 20% you needed a bare majority. So you needed 50% plus one. And, they couldn’t ever get a quorum of users to actually go and vote on which proposals they were going to advance. So it’s really hard to get your users sufficiently invested to vote at all. We know that from the experience of the DAO. First.

Preston Byrne: 00:44:34
Second, the users in most cases will not be as competent as a consensus among developers to decide which way these protocols are going to go. If we’re talking about, let’s say, the adoption of this or that proof of stake protocol for any particular blockchain. There are maybe 15 people, 20 people alive who are competent to make those kinds of decisions and have intelligent comments about whether these systems work or not. And so when, when you then say, “Well no, we’re going to turn it over to users and they’re going to decide whether we go with Casper or whether we go with Scooby Doo or whether we go with this other protocol who just came up with a stupid name for.” It doesn’t make a whole lot of sense. These users have an economic interest in the protocol when they’re buying their tokens. That doesn’t necessarily mean you should start listening to them to make development decisions. But you should. Should is a strong word. But, I don’t really think users have much business in telling developers what to do. The developers have their own incentives for making sure that their feature sets match user demand. But I think it’s one of those things, like in law, the client chooses the objectives. The lawyer chooses the means. The users, their objectives are simple, have a system that works. The developers then choose the means by which they can accomplish that. And so when you’re saying, well, we’re going to automatically push code onto the blockchain, it strikes me that… And the users also have a choice. They can vote very easily by choosing to either run the client they were running before. Or, if it’s hard forked, they can go migrate over to the new client or they can do what Ethereum Classic did and say, “We’re not running the new client, we’re running the old client because we don’t like the changes you made.” So I don’t really see why you need to put that on a blockchain because it’s just, it’s really a human thing and if the change is approved and it’s good, it works, your users will use it.

Laura Shin: 00:44:34
Angela, do you have an opinion on that?

Angela Walch: 00:46:36
As far as this on chain governance? I’m still thinking through that. What I would say is that I think it’s a step forward to acknowledge that governance is actually occurring and necessary in these systems. So I do think that is kind of an evolution from the initial Bitcoin type system. I’m not sure whether they’re… they’re still experiments I would say. And I think Preston makes a good point about whether any generic user actually has the knowledge to cast a responsible vote one way or the other about how the system should work. I know that I certainly wouldn’t be able to. I’d be essentially again going based on recommendations from developers who are trusted parties in these systems. And I think that my argument about developers functioning as fiduciaries in these systems is probably true even in the on chain governance setting because they would be essentially giving recommendations and crafting the code that actually has to work. So they’re still exercising power and being influential and people are relying on their judgment and lack of conflicts I think even in those settings.

Laura Shin: 00:47:59
Preston, I wanted to ask you about your contention that private blockchains will be more consequential than public ones. I wanted to ask you about this because and I know a common refrain, but I do think it’s true. History shows that open beats closed whether you’re talking about the internet or a nation state. So why do you believe it will be different this time?

Preston Byrne: 00:48:20
I think when people say private blockchains or permissioned blockchains are closed, they’re sort of mischaracterizing how the software is used, how it’s going to be used and how it actually functions. So when I say open and I talk about blockchain as being an open technology. Blockchains are open source database types, right? Databases have conquered the world in the last 30-35 years. But they have done so not in the sense that we take all of our data and expose it so that everybody can see it. Some things we share and expose to the world over websites and other things we don’t and we store them on servers somewhere. Blockchains, if we look at them as kind of a combination between a database and some network infrastructure in that it’s designed to hold some data and some rules about how a transaction or some other procedure is supposed to be executed. And it’s supposed to be run between a bunch of different parties. There is scope for things which are more open. Where for example, Facebook is designed to be pretty much open. Twitter is also designed to be very, very open. But if you talk to confluence that is designed to be closed. Each of those applications use databases at some point. But, that doesn’t necessarily mean that every single use of it by every single user has to be open to the public. You use different data structures or different permissions for different types of applications.

So with blockchains, it will be no different. We will have, I think many millions of them. but it depends on… Let’s say you want to do bonds, right? You want to go automate bonds, do you want to put all the bonds in the world on one blockchain where everybody can see what everybody else is doing? No. Why? Because notes, there are some transactions that people don’t have any business knowing what’s going on with a particular transaction. There are others where you know it’s going to be more public. So let’s say for example, we’re looking at repose with the central bank. That might be something which is a little more public, so you might want more transparency there. But then again, there will be private placements where you could benefit quite substantially from having an automated solution between the various bond holders and transaction parties. But where you wouldn’t want Joe Blogs on the streets to even know that the thing existed because you don’t want to publicly offer market securities, right? So there are a whole range of different applications that you can use this for. Each one of them is going to have a different set of assumptions attached with it. And the default option is not going to always be everything public all the time. Particularly for enterprise applications, particularly after the EUGDPR comes into force. So, that’s, I think the long and short answer, this completely, totally open model doesn’t reflect commercial reality.

Laura Shin: 00:51:08
And GDPR, that’s the right to be forgotten? Where you can have your data removed. Is that what that is?

Preston Byrne: 00:51:13
So they have a right to erasure in it so that’s a right to have your data removed. But also you have to preserve and protect personally identifiable information and user information which is within your possession as a data controller. So, for example, it’s not going to be sufficient just to drop a hash in of your personal information and say, well now we’ve got the hash and it’s a one-way function, you’re not gonna be able to reverse engineer and it’s SHA-256, it’s fine. The EU appears to be taking a very dim view of that and saying, “Look, if the data is exposed and if it’s conceivable or possible that it could be decrypted however unlikely, then we have to assume that that is unacceptable exposure of personal data which you are meant to keep private as a data controller.” So those issues are going to be pretty significant in the EU. Understanding how we obscure user data that eventually finds its way onto the blockchain or a blockchain as a proof of some kind.

Laura Shin: 00:52:06
That’s an interesting point that you make. I mean, certainly there are needs for privacy in the kinds of spaces that blockchains are working in, like obviously in finance. But at the same time, there are obviously are technological solutions to those issues, which is why we see things like JP Morgan Chase getting interested in things like zk-SNARKs. So we’ll see how that plays out. I mean definitely, there will be a place I think for closed systems as we have seen even with the internet. Obviously it’s not like intranets just went away, but who knows, over time, my personal opinion is that the open systems will likely become much bigger than any of the closed ones. But let’s actually revert back to what we started talking about in the beginning, which was the regulatory issues. So obviously we do have this news that the SEC recently, or not recently, but in recent months issued subpoenas to at least 80 ICO issuers. What do you think of the SEC actions so far, and where do you think they’re going with this and how do you think the regulatory actions they’re taking will shake out ultimately?

Angela Walch: 00:53:20 So I am not super active on the securities side of this. So Preston, if wanted to take that one, feel free.

Preston Byrne: 00:53:30
Subject to the proviso, again, I’m not a US qualified lawyer. But I do talk to them all the time in the space. What’s happening now has been long overdue. Whenever I speak to a practitioner, reasonably eminent global law firms, what I’ve heard for the last six, seven months is everybody kind of sitting there dumbfounded. Saying, “When is this going to happen?” Because these kinds of concerns about registering securities or rather not, marketing, unregistered securities to the public. Those are paramount in securities practice. In England, not selling securities into the United States was a very important consideration for anybody selling securities in the United Kingdom because you do not want to annoy the SEC or the US federal government. So I think as Stephen Paley from Anderson Kill, put it this way, he said, “None of this is a surprise.” And I agree with him in that respect. It’s just that the market is really full of a lot of neophytes to the world of a securities regulation and public markets. And so as a consequence, they just weren’t aware or they weren’t taking advice or I don’t know what. So, what I think is it’s the beginning of a really long enforcement journey. There’s the sending out of subpoenas that a week ago from the date of recording this podcast. When the SEC sent those out, that’s a fact finding exercise that’s not enforcement action. And so the enforcement action will come in the form of settlements in some cases and other cases, you know, maybe these companies will stand and fight. I don’t think a lot of them really are going to have the guts to do that because it’s fairly clear cut in a lot of cases, I think what they were doing. So it’s the beginning of a long journey. We’re going to see a lot of lawsuits were going to see a lot of enforcement actions. Eventually, at some point we’re going to see the department of justice get involved and eventually at some point we’re going to see the Europeans do some regulatory activity. But, as far as the US is concerned, I think the train has left the station and everyone’s just kind of bracing and waiting to see what happens next.

Laura Shin: 00:55:25
And do you think that there’s any particular type of ICO that would be legal, beyond just registering them all as securities?

Preston Byrne: 00:55:36
I think that’s out of my wheelhouse saying what is and is not legal in the United States. What I would say is that there are projects which are proceeding on the assumption that whatever you’re offering on a blockchain, if it’s being sold to the public as an investment, it’s going to be regulated as a security. So in particular, you have Templum based in New York City that’s run by Chris Pallotta, wrapped her group and that’s an interesting project and they are looking to do compliant ICOs of a sort. Or we might even call it, “An automated securities issuance” rather than ICOs. similarly a recently announced project by David Sacks of Paypal fame called Harbor. That also is another project which is proceeding on the basis that ICO coins, wherever we may find them, are likely to behave as securities and therefore should be regulated like securities.

Preston Byrne: 00:56:30
And I think that’s really interesting because then you’re saying we recognize that we have this new form of title transfer instrument or title transfer technology which is extremely efficient and gives us a really perfect record of titles. So if you want him to go and see whether it was security was encumbered, it would be really trivial to put all of that information about that security and have a blockchain manage all of that data and all of those parties saying, “Well, here’s an instrument that, the account is blocked because we pledged it to this guy. And so he’s taking control by asserting his security interest over it, by sending this transaction to that smart contract.” Right? That’s all doable on a blockchain and it’s doable in a really automatic and transparent way as opposed to sending letters and making phone calls. So you could probably automate a lot of manual labor away doing it. So these companies recognize that and I think if you nail that, you then look at what the ICO space has done to date. I think what it shows us is that there’s a huge amount of demand for non traditional or higher risk investment propositions, because people aren’t earning any money from leaving it in the banks. And so they said, “Well, how can we allocate some of our portfolio to something that’s higher risk?” So, if you can combine the desire for high risk investment with an actually legally compliance issuance and trading platform that is more effective and efficient than the current solutions for that, I think you have something very potent, which could actually be much bigger in terms of the amounts involved than what we have seen in this boom. By an order of magnitude.

Angela Walch: 00:58:01
What it does, moving towards those compliant ICOs as Preston is describing is very inconsistent though with the whole messaging that there’s been around that the democratization of investment opportunities and stuff. Essentially you’re still on the same world of who can access these investments. And so I guess I would put that on up on the list of things that may have been overstatements about the revolutionary potential of the technology, right? It’s making it more efficient perhaps, but not necessarily transforming the world about who gets to invest.

Laura Shin: 00:58:41
Right. Which is something I was actually on a podcast myself recently and found myself arguing in one direction and then being like, “And I could argue it the other way.” And then pivoting and saying, “Yeah, they should be treated like securities.” So I can see it both ways. Last question for you guys. What is it like being a critic in a land of believers?

Angela Walch: 00:59:07
Lonely. It’s sometimes tough to keep going I guess, but I feel like it’s important that some people come out and do it. If nobody’s doing it, I worry about where we’ll end up. So I do feel actually pressure and I’ve got probably about a hundred papers that I feel like I should be writing immediately to try to balance out the discussion that I see going on in this space and it’s just impossible to do it fast enough. But, I would say that there are plenty of critical thinkers out there who are not necessarily known as critics. I think there are a lot of the very well educated technologists in the space who, they follow me on Twitter for some reason and some of them have said they follow me because I offer a counter perspective to the hype. And, I think that there’s a lot that… you were asking earlier about whose behavior I would change in this space. And in addition to asking regulators and policy makers to step up and be very critical thinkers. I would ask thought leaders really to do the same. Because I think, there’s a lot of damage done potentially by non critical thought leaders proselytizing about the technology all over the place and giving an unbalanced view of it. So that’s what I would say.

Laura Shin: 00:59:07
Preston, what about you?

Preston Byrne: 01:00:54
I kinda like being alone. My favorite animal as some of your listeners may know or may not know is a marmot. And of marmots, my particular favorite is marmota monax the solitary critter, the groundhog that lives on the American east coast. They just wander around, hanging out by themselves, eat plants. Those are some of their favorite pastimes and that’s kinda how I like to live my life. Yeah, it’s a lonely world being a critic. But I think it is slightly selfish because, you look at the historical patterns of how financial manias emerge. And you look at the behavior of everybody and particularly, you look at the marketing which is selling this stuff, and then you line it up against the capabilities of the technology and you see that there’s such a huge gulf between the enthusiasm and what that enthusiasm will eventually deliver, that you know it’s inevitable at some point the party’s going to end when people are realizing that the technology has been oversold and they will ratchet back their expectations.

Preston Byrne: 01:02:03
And so I’m kind of waiting for that day to come. And, I think it’ll come from two things. Firstly, the technology being oversold. Eventually people are going to realize that they have been in many cases sold a bill of goods. And also, the regulators are going to prevent a lot of this marketing from taking place because they’re going to come down and say, “Look guys, you’re not supposed to do this, you’re not allowed to do this. If you’re going to be selling investments, you need to have a perspectus. You need to have some auditors. You need to have some lawyers go through it.” And all of those rules will be restored and the rule of law will be restored and everything will go back to normal. But we will have all of this really interesting infrastructure to do the compliant things with when that’s all done. So being lonely in the space, I’ve made some very good friends among the critics. People I really like and respect. So there aren’t many of us and I think we all know each other. So that’s been a real positive. And then of course when it all falls apart, we have the satisfaction of not maybe getting rich, but certainly of being right… As the castle is burning and the barbarians are at the gate, I’m just sitting there. “I told you guys, you really should have listened to me.” Sitting there smoking a cigarette and drinking the scotch, while everything goes down around you.

Laura Shin: 01:03:42
OK. Well, I have you both back on at that time and we’ll bring a marmot mascot as well onto the episode. All right, well it’s been great having you both as guests. Where can people get in touch with you or see your work?

Angela Walch: 01:03:58
So I’m on Twitter. I’m @angela_walch and I also have a website that catalogs my work at

Preston Byrne: 01:03:58
And I’m @prestonjbyrne on Twitter and you can also find me at

Laura Shin: 01:04:11
Great. Well thank you both so much for coming on the show. Thanks so much for joining us today. To learn more about Preston and Angela, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate review and subscribe on Apple podcasts. If you liked this episode, share with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin with help from Elaine Zelby and Fractal Recording. Thanks for listening.