All About Crypto and Blockchain Technology

Nancy Ozawa (00:06): Well, hello and welcome to this episode of Banking Out Loud. I am Nancy Ozawa. I'm the senior vice president of marketing here at PCBB, and I'm going to be your host for today's episode. Today, we're going to discuss digital assets. We have all heard a lot about crypto or more specifically digital asset, but maybe you're like me and have lots of questions about truly understanding this crypto or, should I say, digital asset market. We have seen in the movies about thieves stealing crypto wallets or even all the stories in the news of late, but today, we're going to get a little bit more honest and get more of the real truth about all these different types of digital assets. (00:46): We are going to discuss the different types that are in the market today, the current state of public policy and regulation of these digital assets, as well as touching on blockchain technology, which is the technology used to move this type of asset around, so a lot to cover. (01:03): But we have invited a very knowledgeable digital asset expert, Div Pandya, a principal at FS Vector. Div brings deep knowledge about distributed ledger technology and digital assets to FS Vector. Most recently, he served as the associate director of public policy at the Chamber of Digital Commerce in Washington, DC, which is a trade association for blockchain and digital asset industry. So Div, welcome. You've got a wealth of experience, and I'm so excited to learn from you. Div (01:33): Thanks so much for having me, Nancy. Nancy (01:55): Absolutely. So, let's get started. first of all, our listeners might Want to get to know you a little bit more. Let's get more familiar with you and your area of expertise. So, can you start off by telling us a little bit more about your story? How you got started in digital assets or crypto space and bring it up to today? Div (01:54): Sure. I honestly... I think like a lot of folks, I tripped and stumbled into the blockchain industry. My story is that I was fresh out of law school in 2017 Looking for a job in DC, and I came across the Chamber of Digital Commerce. I didn't really know what blockchain and, and what cryptocurrency was at that point, I had read some of the headlines, from Silk Road, etc., in the past 10 years or so, but I didn't really have a, a really fundamental understanding of what this technology was, or what it was capable of. (02:24): And so, the more I started to learn about it, the more it pulled me, closer into the industry, and wanting to just learn as much as I could. And at that point, it was still very much like drinking from a fire hose. (02:38): And so, that's kind of what led me into the digital asset industry. I was at the Chamber for about four years, and then I shifted to FS Vector to serve in a... In a multi-client capacity. Nancy (02:47): Help us understand a little bit more of what FS Vector's focus and mission is? Div (02:52): Sure. FS Vector is a strategic consulting firm focused on financial services, and we specialize in fintech. We have multiple verticals here at FS Vector. One is the advisory vertical, and that provides services related to product development, compliance strategy, and licensing. (03:07): And I'm on the advocacy practice, and we focus on government relations and lobbying, messaging and strategy, um, really just focused on what's happening in Washington D.C. Nancy (03:16): Perfect. And I would imagine our listeners are gonna be very interested in the public policy angle of it, but let's kind of start with a basic foundation, 'cause I'm sure some of my listeners know a little bit more than others, but let's just talk about things to get everyone on the same page. (03:31): How do you define crypto? And I know I've used the word digital asset. How do the two go together, are the same, or subs, or what? Div (03:38): Sure. If we're gonna classify this, I would say digital assets is the broadest term you could use, and that in- incorporates basically everything that is represented digitally. (03:49): When people talk about blockchain based digital assets, they mean digital assets that are being, tracked and traded across a blockchain. that is at the... At the top. (03:58): And then if we wanted to get further into the different types of digital assets, there are financial digital assets, and there are non-financial digital assets. So, for a financial digital asset, I would include something like crypto currency, that's used for payments, or (04:14): If there's a security that is represented as a digital token, that would also fall in the financial digital asset space. With respect to non-financial digital assets, that's where I think of things like NFTs, and some of these other types of digital tokens, also sometimes referred to as cryptocurrencies, but they provide a consumptive purpose, almost like rewards points on a credit card, or your Starbucks rewards points, or something like that. (04:40): with respect to financial digital assets, For the payments aspect. the interesting thing is these types of assets can morph, and so using bitcoin as a tool for payments doesn't change the fact that its price is going to fluctuate over time, and so people will also use it, as an asset that they trade. Nancy (05:00): Okay. So, when we heard the word bitcoin, we don't just immediately think it's a payment, and it's a reliable, fixed amount. It can have that other component of the volatility of its pricing as well if it's traded? Div (05:11): Right, and most people are holding bitcoin, for trading purposes we’re just not there yet with respect to the regulatory infrastructure, to use bitcoin for payment. Nancy (05:20): Okay. Now you used an acronym, NFT. For our listeners, what is that? Div (05:25): Sorry, it's a non-fungible token. we use a lot of acronyms with this technology Nancy (05:30): Yeah. And banking in general has a lot of acronyms, so I definitely get it. So, there's a lot of focus around, crypto, and the, the payment piece. And I think the financial services component of this is probably most of interest to our listeners. (05:46): We know a lot of the scary stuff that's going on, we hear it in the news, but I'd like to hear a little bit more of the benefits of it. I mean, it was obviously thought of for a good reason, um, realizing that there's risk attached to it. (05:57): What were some of the benefits that it was supposed to achieve, and maybe actually did or did not achieve, did it deliver on its promises? Div (06:05): Sure. Well I think it depends on the type of digital assets that we're talking about. With respect to crypto currencies, and that was really one of the first use cases of blockchain technology, that was intended to be outside of the banking system, um, and a way to transact without necessarily having intermediaries involved. (06:23): That's where we have bitcoin, that's where we have ethers, and these other, digital assets That have essentially been foundational to the industry for such a very long time. (06:32): Those were intended to serve as a payment, or to facilitate payments without banks. some of the benefits there include cost efficiency, you don't need as many people involved in the process. (06:43): It is redundant, just based on the way that blockchain technology works. It is tamper resistant with the way that that data is stored. And then, one of the greatest benefits is that it's just available 24/7/365. (06:56): And so, something like that, it could be more convenient, as opposed to waiting on something like ACH or wires. Nancy (07:06): Yeah. Y- you touched on something, I just wanted to circle back to it when we talk about our own currency, and our banking accounts, if I'm understanding it correctly, is on a private ledger, It's not public information. Div (07:18): currently, assets like bitcoin, ether, etc., those are public permissions blockchains. (07:26) So, the, the public aspect is anybody can access it, and then the permissionless aspect is that anybody can read or write data to that blockchain. And that's where if you were to look at something with a block explorer, you could actually see transactions happening in real time. (07:41): And you could use the wallet address and trace a digital asset back or forward through the amount of transactions with something like a, digital asset used within a bank, either for intra or interbank transfer, you will want to have something like that, in most cases, on a private permissioned ledger that the bank is able to control (08:04): With private permission to blockchains, you have more control over that blockchain, and you can limit who's able to see it so that you don't potentially have anybody accessing your system, And the sensitive information that could be included there. Nancy (18:18): Okay. All right, I'm following you. how big is this market? I mean, has there been any estimates of how big the crypto market is? Div (08:28): So, the, the market capitalization for crypto... And that is viewable, there are many websites that track this. Right now, it is currently under $1 trillion. (08:37): It's been... It's been decreasing, just given recent events. Um, the most notable being Silvergate shutting down, that was a bank that had been serving... the digital asset and blockchain industry for almost 10 years. (08:51): But there's been a lot of activity in the past two years or so that's, that's led to a, a significant decline in the market capitalization of, the crypto currency industry from about $3 trillion in November of 2021 to about just under $1 trillion now. Nancy (09:096): Wow, that's a significant drop. Do they have any estimates of how many people are using this? Div (09:17): It's hard to get a sense of how many people. I- I've seen numbers where there are hundreds of millions of Wallet owners, and that's one metric you could use. The hard part is one person can have multiple Wallets, just in the same way that they could have multiple bank account. And so, it's hard to get a sense of exactly how many individuals, but the number... (09:38): Or at least the trend over time has been increasing, and There's been more adoption globally. Nancy (09:44): okay. I would imagine there's various different versions so they probably all have their own number of customers Div (09:52): Right. Certain Wallets can correspond with different blockchains, and, and hold different types of assets all together, but it would be hard to get that number. Nancy (10:02): Well, let's talk a little bit about public policy, 'cause I'm sure that is top of mind for a lot of our listeners right now. Before we get into where we're at today, I think it might be helpful to kind of go back a little bit, and give us a little bit of history of what public policy, when it started, and then to bring it up to now? Div (10:18): Sure. well starting almost 10 years ago is when we first started to see some more focus from the US government with respect to virtual currencies, or cryptocurrencies, and that was when Congress held its first hearing on bitcoin. That's when the Financial Crimes Enforcement Network, FinCEN, the United States Financial Intelligence Unit within the Treasury Department, issued guidance on virtual currencies, and That was from the lens of it being used for money transmission. (10:50): In 2014, we had the IRS come out with guidance that said the, treatment for virtual currency, it should be kind of as a property, and so you would have to record, capital gains with respect to dispositions of, of your virtual currency. (11:03): And that's what I was referencing earlier, when I mentioned that it's hard to transact in bitcoin and use it for payment services, just because if you were to try and buy a cup of coffee, you would have to calculate the capital gains on that, and It becomes way too difficult to use it practically as a payment tool right now. (11:19): Um, in 2015, that's when the Commodity Futures Trading Commission, the CFTC, which is one of our market regulators Came out and said that bitcoin is a commodity. In 2016, that's when we had the Securities and Exchange Commission and state security's regulators looking more closely at what was referred to as initial coin offerings. (11:40): And these were crowd funding attempts with respect to different projects, selling digital tokens to raise funds, and many of these, it was later found to have been raised in a way that should have been registered with the FCC. (11:55): And then in 2020, we had A very significant event in that the OCC came out with guidance saying that banks could engage with digital assets, and that was very important just because for the longest time, banks had been very skittish with handling digital assets. (12:13): It's been an area where there's been lack of a clear, federal, regulatory landscape for digital assets, and so, there's just extra caution banks were exercising, but it seemed to invite banks to engage more with digital assets. (12:26): And in 2020 also, we had the, the FDIC, come out with an advanced notice of proposed rulemaking with respect to banks engaging with digital assets. And so, it seemed like things were progressing towards finding the pain points within our federal regulatory landscape with digital assets, and finding ways to create more entry points for the digital asset industry, and for traditional banking, for, for more areas of intersection. Also, in 2020 and 2021, that's when the Fed, uh, the Federal Reserve, was looking at CBDC, Central Bank Digital Currencies. Div (13:03): Now 2022 was a very big year for public policy in digital assets. In March almost a year ago, we had the Biden Administration come out with the executive order on insuring the responsible development of digital assets. (13:18): That basically laid out a framework where we wanted to establish a national strategy around digital assets, we wanted the executive branch to study, the digital asset industry and the come up with recommendations for Congress so that we could then have a framework in place that would enable more actors in financial services to engage with digital assets. And so, that work began, but just a few months later, we had some very big moments in the cryptocurrency industry with the TerraUSD stable coin collapsing and de pegging from its reference asset. (13:56): We had the failure of Celsius, Voyager, and BlockFi, which were, large platforms within the digital assets industry. we had FTX happen in November, and We're still figuring out the implications of everything that occurred then now. (14:13): and just this week, we had Silvergate, which closed its doors. And so, A lot of what happened in 2022, and everything that had been building up for the past 10 years started to culminate with these different reports that the executive branch was publishing on digital assets, the Treasury playing a very leading role with respect to some of the reports that were published on investors, consumers, and businesses, and the risks with digital assets. (14:40): And then also the FSOC report, which, which pointed at the interconnectedness of digital assets, and how some of these ripple effects were, almost worsened because everything was so interconnected. (14:52): All of this is happening in 2022. And so, we receive some recommendations from the regulators through these different reports on how they could identify and, plug some of the gaps. (15:04): There were legislative proposals for Congress with respect to stable coins, their issuance, their potential use payments. And that's kind of where the conversation was in 2022, and this year, Congress is even more beefed up, with respect to digital assets, and that now there's a subcommittee with house financial services that focus on digital assets, and there's also, a subcommittee with house ag, the house agriculture committee that focus on digital assets. (15:31): Senate Banking is also now more engaged, as is the Senate agriculture committee, and so these are the main committees that would be drafting legislation with respect to this market, Because the two primary regulators over the digital asset markets so far have been the FCC and the CFTC. (15:46): And so, we're seeing a lot more coordination among the regulators now, and we're seeing A lot more attention and activity from Congress. Nancy (15:54): That's great to hear, especially as they... And it sounds like they were being very proactive in creating a framework, or wanting to create a framework, and yet they had a lot of challenges in '22 that could have set them back a bit, of not wanting to pursue further (16:08): Um, before we go too much further, you did mention that Silvergate, closed its doors this week. I know it got announced in December and it took a bit. What happened to all of the, the digital currencies that Silvergate had at that time? Div (16:20): Well, what happens... And the bankruptcy law around this isn't too great either. We're still figuring that out. Uh, my understanding is that those assets, if they haven't already been sold, they will be, but with respect to Silvergate, the important function wasn't so much that it was holding digital assets, but it was providing banking services to these different digital asset companies. (16:42): I think the biggest issue was once it started to lose clients in the digital asset space, that's when it started to have these liquidity issues, and that's ultimately what caused the bank run, and led to the current situation. (16:58): I would want to note that There are folks who have pointed to, Silvergate, and, and, some of the proceeding actions, and have used that as an example of where more guidance from the regulators would have been more helpful, how it could have protected investors. And so, there- there's an ongoing conversation there as well. Nancy (17:15): Yeah. The- there's always opportunity to learn from these events that happen, just to figure out how do we do it better, so we'd protect a bank from going under (17:23): Now, you mention, and it sounds like you were very positive as far as the amount of activity you're seeing with public policy moving forward. If you were to predict a couple years down the road, public policy, (17:34): Where do you think we would be you’re saying that the, the regulators are doing a lot more coordination amongst themselves, there's a lot more activity, which is all great synergies to have Div (17:44): It's hard to get a sense of how that'll look, and there is just political factors that we have to consider. We're a few months away from entering into the, the 2024 elections, and so eyes are turning to that. Next year is an election year. if there is a change in administration, that would impact things, if there's a... If there's a change in who controls Congress, there are a lot of factors there at play that could determine what the public policy around digital assets looks like. (18:09): So far, it seems that Within house financial services, the Republicans there have been very pro... Not pro digital assets, but pro finding a way forward to, to regulate these and, and include these within our financial system, as opposed to looking for ways to, to insulate digital assets from the traditional banking system. (18:30): And so, I'm not very optimistic when it comes to any kind of, public policy around digital assets in the next couple of years, only because there are several factors at play with the White House, with Congress, um, the elections that are upcoming, and also, just realizing that it takes a lot of time for members of Congress and others to understand this technology, what the applications of the technology are, being motivated to drive legislation forward, and then Finding a consensus around that that can be moved forward. Div (19:05): And so, it could take a couple of years before we see any legislation. I think that depends on just how active Congress is with respect to digital assets in the next year or two. Nancy (19:17): Lots of other competing priorities at the same time. Is there any specific gaps, or areas of public policy that as a government we're missing, or are we pretty well covered on the biggest issues...at this stage of the game? Div (19:29): I think the issues are well known. Whether we're able to come to agreement on a path forward is challenging, with respect to the regulators. I mean, the risks have been listed, in statements from regulators in, speeches, statement, guidance, reports, etc. (19:49): I think the issue isn't so much whether there are still areas that we need to map out, it's just finding a way to move forward so that we can protect consumers and investors, and also innovate responsibly. Nancy (20:05): Agreed. Agreed. Well, we've focused a lot about public policy, and, you know, I think that's a very hot button, for a lot of our listeners, but we also mentioned blockchain technology, and I wanted to circle back to that. (20:17): Because as you were explaining to me, the crypto is being run by the blockchain technology. So, can you help, define, blockchain for a lot of us, and then let's talk about how it can be used. Div (20:28): So blockchain is a distributed ledger technology. Distributed ledger technology is essentially technology that uses a shared tamper resistant ledger that's used for recording and transmitting data across a network. (20:42): And so, the applications are limitless in a sense, because virtually anything of value can be tracked and traded on a blockchain. Div (20:50): If you look at some of the use cases so far, they've been focused mostly around financial services and supply chain management, and it's really for that data providence aspect. So, with respect to the different types of blockchains that are out there, it depends on how you want to build your blockchain. (20:00): So, the two very popular models are you either have a public permissions blockchain, and that's what most cryptocurrencies run on, or you have something that's private and permissioned, and that's really more for enterprise use cases, where you don't necessarily want anybody to be able to access your network. Nancy (20:28): Is there an example, just to kind of bring it down a level? Um, is there an example of a private permissioned blockchain technology? that could help us shed some light on what that really looks like, or could look like? Div (20:39): Oh, of course. Um, so Corda and Quorum are actually two blockchain platforms that are popular. I believe they've been used for financial services, as I think Quorum came from J.P. Morgan, um, initially. (21:51): Those are two platforms That are private permissioned. only the pre-approved participants are able to access that network and contribute to it. (22:02): Something where you're dealing with sensitive financial, or sensitive information, that you don't necessarily want anybody to be able to access, and that's, I think, most enterprise use cases, then you would want to work with a private permissioned blockchain, as opposed to something that's public permissionless. Nancy (22:16): And what's an example of a public one? Div (22:19): Do for a public permission blockchain... And bitcoin is really the best example. Anybody can download the software, and anyone can participate, and that's the point. (22:29): anybody that wants to be a part of the network is able to be a part of the network, and transact in the digital asset that, works on that blockchain? Nancy (22:37): Okay. When we were talking earlier, you mentioned, Walmart and IBM also using blockchain, and I thought that was very interesting. Can you share that example for our listeners? Div (22:44): Of course. So, with Walmart and IBM, a few years ago, they essentially used a blockchain platform to track data. in combination with other types of technology with the internet of things, lots of sensors, and one of the biggest issues, in supply chain, especially with, with produce is anytime you have E. Coli outbreak, or some other outbreak, you have essentially two weeks to trace the information, and to find out, you know, exactly where that product came from, and trace it back to the region, or the farm Where it was first sourced. Div (23:20): Now, two weeks is a long time. people are getting sick, you're throwing away food, it's expensive, it's a time-consuming process. What IBM and Walmart did was they used blockchain technology to track all the data with respect to mangoes, and they found that instead of two weeks to find that information, they were able to track it, in I believe between three to five seconds. (23:49): So that they could be standing at the supermarket, they're looking at the product, they can scan whatever the code is on it, and be able to pull up all the, the requisite information and trace it back to the exact orchard, where that mango came from, saving a lot of time, making sure people can stay healthy. (24:07): and since then, we've had consortiums develop around supply chain, and supply chain management that use blockchain for logistics. Nancy (24:16): I think it's fascinating how it can be used in lots of different applications 'cause we always think of it as payments, but, as you just rightly showed, the- there's other, examples or use cases that can use it in other areas besides payments. Now, banking obviously, has been doing a little bit of dabbling in this area. Can you give an example of maybe a bank or two that has used blockchain? Div (34:39): So, with respect to, intra bank payments, signature bank has Signet, and that is a blockchain based platform that allows two commercial customers at Signature Bank to instantaneously transfer funds, to one another. (25:00): Now, that's intra bank payments, and You know, that's opposed to legacy technologies that might take several days to, to process. this happens instantaneously (25:08): With respect to interbank payments, there are a couple of efforts that are ongoing. There's the digital interbank network, which is a bank owned, group that uses blockchain for, for interbank payments. (25:21): There's, I believe, J.P. Morgan has Onyx, which has its link, payments platform that does the same thing, and I believe also Swift, is using blockchain for cross border payments, or at least they're... They've been performing, pilots and testing with respect to using the technology for cross border payments. (25:40): there are other applications as well. Essentially any paper-based process can be replaced, and so things like trade finance, using a blockchain based KYC registry, using blockchain for settlement and clearing, there are ways to really just expedite the process using this newer technology, that can be implemented or licensed to these banks. Nancy (26:06): Now you mentioned J.P. Morgan, and some of the bigger banks who've got, you know, a lot more investment in technology. Do you see this trickling down to the smaller banks like the community banks? (26:15): I mean, you mentioned Swift and PCBB has a, a membership in Swift, and our clients use our Swift to be sending their wires. Is that the kind of model of where community financial institutions would use it, an aggregator, or is there o-... Examples where they might invest in it themselves? Div (26:33): Yeah. So, I think the, the digital interbank network is an example of, of the banks being members that own the technology, and can use it for the inner bank payments, and those are to my understanding, smaller community banks. (26:47): and so, it, it doesn't have to necessarily be that the technology trickles down from a... From a larger bank that's developed the technology, and is then making it available for purchase, or licensed to these smaller banks. (26:59): I think there's innovation that's happening with financial technology companies that partner with banks That are helping to, to help them stay competitive. Nancy (27:08): Kind of like the banker's bank model, we're helping the- The CFIs become more competitive, or the fintech type vendors as well. Div (27:15): Exactly. Nancy (27:16): Blockchain seems like it's got lots of different applications. Do you have any predictions of what it might look like a few years from now? Do you see anything new popping up of how it will be used? Div (27:26): I think we're still figuring out different applications for blockchain that stick. In the last five or six years, there's been an explosion with respect to the types of use cases that have developed within the blockchain industry. (27:29): I don't know what the next few years will look like, but what I can tell you is if blockchain is implemented, we probably won't notice because it'll be on... It'll be on the technology side of things. (27:48): And so, we might not notice that, a bank transfer, settles almost instantly You'll, you'll notice the benefits of it, as opposed to, to really knowing, okay, the technology is, is live now. Nancy (28:00): It's kind of like, you know, the transition moved and all we know is it was more reliable, it was faster, but we really weren't as tuned in to the technology as the user of it. Div (28:08): Right. And it, it reminds me a lot of actually email and paper-based US mail, you know, you went from having a paper-based system that could take a couple of days to send a piece of mail, you had to... (28:19): put a stamp on it, and that's more costly compared to sending an email, which is free. I think that's the kind of technological revolution that blockchain enables. (28:27): it's going from, postal mail to email, and I think that it'll take years for that to, to develop. email was first developed back in the '70s, and it wasn't until the '90s, when we had the internet that helped enable that technology to really work. (28:44): And so, it might just be that we might need some other technologies to catch up, or develop in the meantime so that you can then use blockchain with it. Nancy (28:53): Yeah. And as you made an example earlier with Walmart, is AI and internet of things, it might be a combination of using those technologies as well. So, we've covered a lot of, ground in this topic. Is there anything else that you want to just tell the listeners? Something that we didn't cover but you think it's important for them to know? Div (29:11): Yeah. I think education Is a really important aspect. Essentially, this industry is still developing, it's still very nascent. We're only 10 years in, really. And so, I mean, there's, there's a long way to go, and it's just keeping on top of what's happening because this technology is just... It has the potential to revolutionize everything. Nancy (29:33): And that's a good point. I... Bankers love to read and learn more information. Is there a certain source, or certain agencies, or sources, or publications Div (9:4527): I guess it depends on, on what you'd like to know. If you wanted to monitor more about public policy, I'd say the American Banker does a great job of covering that, Coin Desk as well. They've been a real leader with respect to the digital asset industry. (29:57): if you want to learn more about use cases, I think Ledger Insights does a great job of presenting what's happening with respect to, to real life use cases. Unfortunately, you do have to jump down the rabbit hole a little bit. (30:08): and I think podcasts like, like this are actually really helpful in, in getting folks at least curious about venturing down the rabbit hole. Nancy (30:15): All right, perfect. I truly have learned a lot. you've done an amazing, process of being able to kind of boil a very hot topic, down very quickly and get into some of the issues (30:27): I've taken a lot out of it. thank you so much, and I hope that our listeners have also Got something out of this as well, maybe sparked some new ideas of how they can incorporate digital assets, or cryptocurrencies, and maybe even blockchain technology into their services that they offer to their customers. (30:43): But thank you so much, Div, for, for joining us. Div (30:46): Thank you, Nancy. Nancy (30:47): Absolutely. And if any of our listeners are interested in connecting with you, Div, how should they do that? Div (30:51): they could reach out directly at DPandya@FSVector.com, um, or, just find me on LinkedIn as well, that works too. Nancy (30:58): Good. And listeners, you’re, welcome to reach him that way, or reach out to PCBB and we'll help you get connected (31:04): Thank you for tuning in today. If you haven't already, make sure to check out other episodes and subscribe. That is the best way to be the first to know when a new episode drops. As always, we're looking for suggestions on what to cover, so if you have anything in mind, or maybe you have a guest, idea (31:20): Please let us know by emailing us at BankingOutLoud@PCBB.com. Until next time, take care.