Innovation versus regulation and the future of digital banking with Blockchain Coinvestors CEO

Innovation versus regulation and the future of digital banking with Blockchain Coinvestors CEO

Joe Kornik: Welcome to the VISION by Protiviti podcast. I'm Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we're exploring the future of money. And I'm excited to welcome in Matthew Le Merle, managing partner and CEO of Blockchain Coinvestors, which he launched in 2014 with the goal of providing broad coverage of the fastest growth blockchain companies and crypto projects. I'm pleased to turn over today's podcast to my colleague, Protiviti Managing Director, Digital Assets and Blockchain Solutions, Lata Varghese. Lata, I'll turn it over to you to begin.

Lata Varghese: Thank you, Joe. And Matthew, thank you so much for joining the podcast today.

Matthew Le Merle: Great. It's great to be here, Lata. And I'm looking forward to speaking to your audience and to your questions.

Varghese: Sure. As we dive in now, Blockchain Coinvestors might be unfamiliar to some of our listeners. And, in fact, the whole space of blockchain investing might need a little more explanation. So, can you tell us a little bit more about it and your role at Blockchain Coinvestors?

Le Merle: Yes, I'm happy to. So, along with Alison Davis, I'm the founder of Blockchain Coinvestors. We had been investing in internet and fintech here in Silicon Valley for about 20 or 20-plus years. And about 10 years ago, we saw those two innovations converging on something new. And so, the internet and fintech came together to create something called Bitcoin, which was put on top of an innovation called blockchain. And we were very taken by the arrival of the world's first digital money that worked at scale. And there are some very important reasons why we thought that that was a transformative moment.

So, we pivoted to be 100% focused on investing in blockchain. And we've done that ever since. We're the leading and most diversified funder funds in the world in early stage blockchain investing. And so, that's what we focus on. We've backed more than 800 blockchain companies and projects at this point in Europe, North America and Asia. And we do not trade. So, just to make that clear, we're early-stage venture investors, but we are not public liquid crypto traders.

Varghese: Great. And I know Blockchain Coinvestors’ position is that the move to digital money’s, commodities and assets is pretty inevitable. And in order for all that to happen, really, all of the world's financial infrastructure must be upgraded. Now, in your view, Matthew, how does that happen? Like, who leads this effort? Is it public, private sector? If I look back at how the internet adoption was driven by a large part by government investment and mandates, and enterprises had the pull factor in past computing cycles, right? So, who does the heavy lifting for all of this to occur, right?

Le Merle: So, you just said something there, which isn't quite my memory. I believe that the rollout of digital communications and content on a global basis wasn't driven by governments at all. It was driven by innovators, and the world's most innovative companies, including, of course, the world's most valuable companies of today—the Apples, Microsofts, Amazons, Googles, Facebook, Alibabas, Ten Cents, Baidu's—those were the companies that brought digital communications and content to us. It actually took a while for the incumbents, the large telcos, the large media companies to embrace the internet. And in fact, if you go back to the 90s, most of them were resisting it, they didn't want it. Blockbuster famously told us all that we didn't need downloadable content at all, we could just go to a local Blockbuster store and pick up a CD or a DVD and they had a store on every corner.

So, my remembrance is that innovation is always driven primarily by disruptive innovative companies. And the large incumbents take a while to come on board. And in fact, they resist innovation because innovation disrupts their current ways of doing business and making money.

And so, now talking about blockchain or the digitalization, as you said, of money's assets and commodities, I think it will be exactly the same. I think the most important breakthroughs of this moment are being driven by the innovators. And that could be Coinbase, that could be Anchorage, that could be Tether and Circle. And then the incumbents, some of them are working very hard to catch up. And that's why PayPal has announced its stablecoin and why Citibank has just announced it will be using tokenization to drive payment transfers for its customers. But the majority of the world's banks and payment companies will be trying to slow all of this down in this timeframe because they're not ready for it.

And then governments, the role of government is always to create pro innovation regulation, in my opinion, since innovation is the driver of jobs, GDP, and economic growth in every economy of the world. And any economy and any government that purposefully tries to slow down innovation, always regrets it later. They discover that they lose ground on a global basis and they end up not capturing the jobs and the GDP growth, if they proactively try and slow down innovation, and that's just the way it always is. And I could be talking about life sciences, I could be talking about clean energy, I could be talking about enterprise software. It's true across all areas of innovation.

Varghese: Yes, thank you for that clarifying comment. Really, I think my question was about government setting the conditions for innovation to occur with active investments also in infrastructure and other related things, right? Of course, the companies are the ones who innovate, but you do need the innovation set up to be—set up in a way where companies can actually act with conviction that their products and services can get deployed in the market.

Le Merle: Yes. Well, so I—no, I don't agree. Governments do not create the backbone or the innovation infrastructure upon which innovators build. Time after time, what we actually see is governments waste enormous amounts of money, billions and billions of dollars on infrastructure that we end up not using. And if all they would do would be to get out of the way and set pro innovation regulation, the private sector makes it happen. And so, Tesla put in the fast-charging infrastructure of America at this point, and the government didn't do it. They could have done it, by the way, the government could have simply said that every transportation node in America should have fast electronic electrical supercharging in it, because of course, at the federal, state and local level, we do have a lot of transportation agencies in America; cars, trains, planes, and auto, etc., but they didn't do it. And so, Tesla's had to build it and others are now trying to catch up. And I'm just using that as an example. I don't think government is good at innovating. I don't think large established companies are that good at innovating—a few of them are. I think that innovative companies are very good at innovating, and then the rest of us figure out later how to take those inventions. And when I say the rest of us, I mean, established companies, figure out later how to take those innovations and embed them in their own businesses. And I think that's okay. I think the process of innovation has to be driven by people and companies that are unencumbered by other distractions. And government agencies are just not that good at innovation.

Varghese: Right. And their job is to provide the regulatory clarity so that innovators can do what they're doing.

Le Merle: Yes, preferably we prefer that, but it's difficult and I appreciate that. It's very difficult for a regulator to both maintain regulation of today's industries, businesses and activities, whilst at the same time, trying to figure out what a new body of innovative regulation would be for a future that hasn't yet occurred. And so, we always have that tension. Our preference is, as you say, Lata. I mean, as investors in innovation, we prefer to have regulatory clarity, but we also appreciate that that's very hard. The thing we don't want ever is anti-innovation regulation, right? So, if I had a choice between anti-innovation regulation, pro-innovation regulation, or regulatory confusion and lack of clarity, I would pick two out of three. The one I wouldn't pick would be anti-innovation regulation. And unfortunately—well, fortunately, in the internet years—America was a leader in creating pro-innovation regulation.

Right now, every other jurisdiction in the world is leading in establishing pro-innovation regulation for digital moneys, commodities and assets. And unfortunately, in America, we have a small number of people who believe that we should be killing this innovation. And they are a small minority of people, but they're working very hard to create anti-innovation regulation. And it's holding America back. And it's actually putting America on the wrong side of this innovation, which is very unfortunate. America has always been an innovation leader. America has also been the world's financial leader. And the danger here is that we end up being neither innovative nor a financial leader. And financial services is probably America's most important industry.

Varghese: You make some fair points there, it's just that the space is inherently complex, you're trying to upgrade infrastructure. And without clarity, it just kind of slows down the innovation a fair bit and incumbents who have their regulatory moats, protecting their existing businesses, find a little more time to sort of adapt, adopt, because this is we're talking about financial services and highly regulated industries.

Le Merle: So, in terms of corporate strategy, for many companies that are not very innovative, a good strategy is to try and slow down the external environment, because they don't have the ability to compete. So, I do understand that there are incumbents that would like to slow down innovation, but at the level of national economic strategy, i.e., at the level of the country, the United States, the EU v. China, for example, it's never a good strategy to be slow on innovation. And we know that, so if we can go back decades or even hundreds of years, and we can show the most innovative countries captured the lion's share of the global economic trade and value.

And so, in terms of the competitiveness of nations, you have to be pro-innovation, there is no alternative. And so, at the level of America, we have to be pro-innovation. And along the way, we have 5,000 banks in America, not all of those 5,000 banks will survive because they won't be able to keep up. And we've seen that in other countries that have many fewer banks. We have very large nations that have 20 and 30 banks, not 5,000 banks. So, I'm using that as an example. The fallout of innovation, especially global digital innovation, is that industries become larger, economies of scale and scope get larger, but we also have concentration. And concentration means some people fail. Within blockchain, specifically, we have a lot of disruptive companies moving fast in countries around the world. We have a few very large, innovative companies, and I'll use PayPal as an example, that are moving very fast. And then we have an awful lot of incumbents that are nervous and are trying to slow everything down. And I guess my bottom line is what I've already said, which is, if I was running the UK, the U.S., the EU, Switzerland, Abu Dhabi, Dubai, Singapore, Hong Kong, I would be passing pro-innovation regulation right now for digital moneys, commodities and assets.

Varghese: Absolutely. So, clearly, the underlying innovation for the blockchain, underlying Bitcoin, that led to all of this transformation of money and that will bring about a sea change in how we transact digitally as businesses, governments, people—granted, right?—but because it is so complex as money says a lot of options, the race for that digital currency dominance is on. So, there's Bitcoin, there's central bank digital currencies, there's tokenized commercial bank deposits, which almost is a reaction from the banks to the innovation. And as you quoted, the IUSD stablecoin launched now. All this, Matthew, to me seems to suggest that it is a transformative change in payment options, but then if you have one option, why can't you have multiple options? So, do we go back to the world of private tokenized money or probably sort of trading differently deflecting the credit quality of the banks issuing them? How do you see all of this evolve? Because it's something as complex as money and value.

Le Merle: Yes, it's a great question. And there's multiple components within that. So, for your audience, let's just unbundle it a bit. The first question—and I'm a bit of a fundamentalist around consumers and consumer benefits—so, let's just start there first. If we went back to the year 2000, and all of your listeners thought about how they did communications, how they got and shared and stored their information and how they did their financial transactions and investments. And now, if they thought about this year, 2023, and how they do all of those same things, and then if they rated them by speed, cost, accessibility, and ease, what you'd discover—everyone on this listening to this would discover—is that their communications and their information sharing have become dramatically better. The consumer benefit is demonstrable. It's almost real-time. It's almost no cost. It's ubiquitous. When Google told us they would make the world's information available to all of us in real-time at no cost, we didn't believe them, but they did. And not just them, obviously, a host of others. So, the consumer benefit has been demonstrable. And we all have benefited from it. And every industry and business has changed.

Now look at commerce, finance and investing, it hasn't changed much at all. We basically use the same approach to taking a loan, paying with a credit card, transferring money internationally, it's slow, it's expensive, it's painful. We have to answer telephone calls to confirm wire transfers. It takes a week. Our investments don't settle in t-zero, they settle in three days and four days. And if we want to buy a house, it can take 90 days just to complete the mortgage and the title transfer.

So, the financial industry has not provided consumer benefit in the last 20 years in a substantial way. And so, you have to begin there. And then you have to say, “Well, okay, how did we create that consumer benefit in digital communications and content?” And it wasn't centralized. It was diverse and decentralized. One day, you had Hotmail or you had Yahoo Mail, or you had Google Mail, and there were many of them and they were competing. But they were all better than you writing a letter, putting a stamp on it and giving it to the post office. And you started exploring with, “Oh, my gosh, I can communicate to people I want in almost real-time. And this is strange. They're not charging me anything. They're showing me an advertisement which I'm not sure if I like it or don't like it, but it's free. I'm getting free global communications. What's that about?”

When we digitalize moneys, do we think we'll have more or less? And will they be central bank only or will the private sector play? And how will that play out? And I guess my expectation will be, it will be a process of disruptive innovation. It will start out with more, and then some things will win, and we'll end up with fewer. The process of innovation is chaotic, confused, decentralized and disruptive. And then over time, we begin to figure out who the winners are, and we have less. So, I'm expecting the same thing. And I'd like to think that the digital dollar is a winner, and that we'll have both central bank digital dollar perhaps, but I'm expecting we'll have private sector digital dollars. And my bet is that they'll be issued by big banks and other financial players, but maybe there'll be a role for Circle and Tether as well. And the regulators will have to set the rules of the game. But if the regulators say there will be no digital dollars, they're throwing the baby out with the bathwater because the digital dollar is, from a consumer benefit perspective, it's real-time, low-cost and easy to use. That's why so many people are using Circle and Tether. They are superior ways of transferring money. Bank of America says the invention of the stablecoin is the greatest invention in the history of money. And it's because it is real-time, low-cost, easy to use money that can operate on a global scale. And that's the holy grail of payments.

Varghese: Right. And because payments and transactions are moving across, so don't you then think that having some standardization on how these digital dollars, or types of it, is created is important because it's almost like if every bank has its own sort of ways in which this is ledgered or on crypto rail, so to say, a digital dollar, if there are different points of view on how that should get created, then what does it fundamentally sort of solve in terms of an efficiency play?

Le Merle: Yes, but you see, you can't standardize innovation. That's the equivalent—if in the Betamax-VHS moment, the government had said, “Okay, we're going to pick a standard,” which one would they have chosen? The answer was Betamax. Betamax was the superior technology. So, from an objective perspective, if you had chosen to stop innovation in that moment, we would all be on Betamax and we wouldn't never have had CDs, DVDs, or downloadable content because we would have made rigid a set of standards that said the chosen way of storing and sharing data is on Betamax tape. And governments make that mistake all the time—you can't set a standard in a moment of time when you have rapid innovation occurring because the next innovation may be superior to anything you understand today.

I think that standards are very dangerous in a world of innovation. I think that what a regulator has to do is to create a dynamic, flexible regulatory structure that provides some clarity, but still permits additional waves of innovation, and it's very difficult. So, what does that look like? Right now, what that means is what MiCA is, it's what the UK and the Swiss have done as well, other geographies are doing, which is you need a market structure bill, which basically sort of says, “We believe the shape of the industry is the following. We think the shape of the innovations is likely to be the following. And we think the likely participants of it is supposed to be the following. And we'll set some guidelines around that.” And then you need some specific clarity around definitions of what we're going to be building, which I believe digital moneys, you can call those stablecoins, if you wish. The stablecoin is a little bit of a bad name because they don't have to be stable to be digital moneys, so, that's a bit odd, but call it stablecoins. And then you need some frame of reference for digital assets. What are digital assets? And what is the process of tokenization and where do you draw the line? And Gensler was asked in Congress, he was asked, “Is a Pokémon card a security?” And he said, “No, it's not.” And then he was asked, “If I tokenize a Pokémon card, is that a security?” And he said, “I need more information.” Well, he's the regulator. So, he needs to set out the digital asset, a regulatory framework that draws the parameters. A Pokémon card is not a security, a digitalized tokenized ownership record for a Pokémon card doesn't make it a security. But if it's bundled up into an investment contract, and you're selling a large batch of Pokémon cards, and you're guaranteeing a financial return, you cross some lines, right? I mean, I can turn a Pokémon card into a security if I say certain things about it. That clarity—market structure, what's a digital money, what's a digital asset—most financial centers in the world are putting that in place. And so, that's what the UK has done, Switzerland's done, Europe's done, or at least they're close to finishing. Abu Dhabi, Dubai, Singapore, now Hong Kong, are moving very quickly to clarify those parameters.

Varghese: I don't disagree at all, Matthew, my only pushback would be if that standard is slow in emerging and if different forms of innovation come, then the efficiency that is touted by having money that moves across ledgers, both private public ledgers is able to transfer as a digital asset, where the asset is intelligent. It just takes a little more time and then there's a whole lot of other existing world processes slapped onto this, then I think it also adds cost on the infrastructure side, right?

Le Merle: Yes. Yes. So, I agree with that but that's why earlier on, I told you, I would take pro-innovation, dynamic regulation first. And then I would take no regulation and regulatory lack of clarity second because that still permits innovators to innovate. And the worst thing is anti-innovation regulation, which kills—throws the baby out with the bathwater. And the issue with that is that the world's a big place and there’s many jurisdictions. So, the danger of anti-innovation regulation is that all the innovators go somewhere else, and you lose your competitiveness of nations. And unfortunately, America is losing its competitiveness in this race to be the future of the financial system. I want America to be the global innovator and I know that we have to be the global financial hub. And if we lose the dominance of the U.S. dollar as the reserve currency, I think that we have very serious issues because we have an enormous deficit, we rely upon other people to buy our treasury securities. And if they don't want to hold dollars, we're in a very bad place.

Varghese: You actually answered the question I was going to ask you directly that do you see that rise of all these other currencies impact the U.S. dollar’s positioning as the world's reserve currency?

Le Merle: How could it make sense for China—to use China as an example—how could it make sense for China to do all of its global trade in dollars? Because China does about 30 to 35% of the world's exports, and I believe about 15 to 20% of the world's GDP. And when China trades with Brazil, Brazil's denominated in reals, and China uses renminbi or yuan, so wouldn't it make sense for, when China gives billions of dollars to Brazil, Brazil buys billions of dollars of Chinese equipment, China buys billions of dollars of commodities and Brazil buys billions of dollars of finished products from China, that they would not be denominated in dollars. They would be netted out at the level of the nation on a ledger that China and Brazil would have between the two of them. And they would maybe denominate it in real, but realistically, they would denominate it in Chinese currency. So, it would not pass through the dollar. I mean, that obviously makes sense, but the state of the world for the last 75 years, since we went off the gold standard at Bretton Woods, is that we have actually denominated Chinese global trade in US dollars, and it passes to a large extent on the Swift network. And if you're the head of the Chinese government, or the Chinese Ministry of Finance, you're going to say, “I can't have that. It's a question of national security because I just saw the U.S. turn off swift for the Russians, as an example. So, I need—as a matter of national security—I need an alternative way to transact with Brazil, all right?”

So, now you just roll that forward, and you sort of say, “Can we sit…”—“we” being Americans now— “Can we sit on our laurels and presume that the U.S. dollar and the US dollar international remittance system will always be used by everyone?” And the answer is no, we can't presume that. So, now it's about competitiveness. Now it's about—well, if the if the U.S.-based global remittance system was fast, cheap and easy to use, would it have the right to win in international trade? And the answer might be yes. But on the other hand, if it is slow, costly and hard to access, then of course people would abandon it in favor of digitalized, faster, better approaches.

And so, I come back to the earlier point, which is China, and Russia, and the euro and the EU, as examples, are preparing digitalized versions of monetary systems. And if the U.S. presumes that it can kill all that innovation, and just say, “You have to stick with dollar on Swift and you have to answer your telephone call when someone calls you up to confirm the transfer,” that we're going to lose.

Varghese: So, that potentially might be what worries you about this digitized future where the U.S. is not leading with pro-innovation regulation because then that digital channels and corridors of trade across the world are happening in other digital currencies, which the U.S. doesn't have to be in the middle, sort of, establishing trust.

Le Merle: Yes. Well, I do worry about it, but not as much as you might think because I do believe that American software engineers are the best in the world, and they consistently have demonstrated that. Now I do think there's a lot of great innovators in other places, in Europe, in Asia. There are many in India—there are many places in the world where there are great software engineers who know how to write great code. But America has been, and I believe still is, the world's greatest concentration of talent. And all we're really saying is “Government, please help us continue to maintain…”—we're early-stage venture investors. So, just to be clear, we back hundreds and hundreds of blockchain engineers that want to build software on top of distributed ledger technology and innovation. And they do great things with it. And those great things, on the one hand, some of them are well known like Coinbase and Kraken, and a lot of them you've never heard of, and they're coming fast.

Varghese: Absolutely. So, zooming up, taking out a decade or more to 2035. What can we expect? Any bold predictions?

Le Merle: Yes. Well, I don't feel that they're bold predictions, Lata but I think that this is the vision. Just go back to 2000. Remember how you did your communications and how you shared information and the devices you used and the formats you used. You were still probably using tapes, you may have transitioned to CDs and DVDs, you were using email, but it was not that great. Roll forward to today—I mean, don't forget the Apple iPhone wasn't even invented until the end of the zeros and we didn't have iTunes or apps until the end of the zeros. So, a lot of the innovation that we take for granted today is a relatively recent invention. That's called real-time free communications. It's easy to do, it's easy to use, and so is the same of every other content-based industry today.

Well, imagine that financial services was the same. What would that look like? And what it would look like was, you can transfer money to anyone in real-time, and you don't have to pay anything for payments. I think payments will become free. There won't be any friction. Retailers will not be complaining because they have a 3 or 4% margin and they have to pay one or 2% to MasterCard or Visa each time they enable the transaction. They won't be paying anything for payments, payments will be free, it'll be ubiquitous, it'll be real-time.

But then think about investments, right? Today we sort of have digitalized public equities, but it's not very good technology, it takes several days to settle and it's expensive and it's not very accessible for most people around the world. Very few people actually can buy and sell public equities easily. Well, imagine that 8 billion people have access to any investment in the world in a low-cost fractional way and they can transact in almost real-time at almost no cost. And so, investment markets become huge, liquidity becomes massive. And if we go back to what happened to public equities, we end up also with derivative products that are easy to create.

So, imagine everything, every asset in the world is digital. The state of today is most of the real estate, most of the funds, and most of the private investments are paper-based. Imagine, in this day and age, 2023, most of our investments are paper-based. So, by definition, they are slow, expensive and difficult. Well, now that's in 20.., whatever the year was, you said 2035. That is all digital. So, it is ubiquitous 24x7 trading, low-cost, easy to fractionalize, price discovery is hopefully efficient, and we can easily build derivatives and drive additional liquidity. That is the future world of investment.

Varghese: Great. Fantastic. On that note, Matthew, thanks again for doing this. I really enjoyed our conversation and that little bit of debate around sovereignty over currency and how infrastructure and all of that. I really enjoyed our conversation.

Le Merle: Thanks a lot, Lata. And for your listeners, what I do want to leave them with is what you said at the beginning. This is inevitable, we will have digital moneys, commodities and assets. And it will be beneficial for every consumer and user. It will be hard and it won't be easy. It will take time.

Varghese: On that note. Thank you again, Matthew, and back to you, Joe.

Kornik: Thanks, Lata and thanks again, Matthew. And thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to podcasts and be sure to visit vision.protiviti.com for all of our latest Future of Money content. And be sure to subscribe to sharpen your vision. Thanks for listening. I'm Joe Kornik.