Welcome back to Count Me In,

IMA's podcast about all things affecting
the accounting and finance world.

This is your host Adam
Larson, and for episode 156,

we welcome back Dr. Sean Stein Smith.

With the constant evolution
and advancements around crypto.

Sean joins count me in again to talk
about various reports and newsworthy

information relating to
stablecoins and digital assets.

From standards on cryptocurrency
to NFTs and decentralized finance.

You'll want to keep listening to learn
about what it all means and hear some of

the potential future implications.
Let's head over the conversation now.

So Sean,

you've joined us for a few episodes
now and in previous conversations

you've discussed blockchain. Lastly,

we talked about accounting
standards for cryptocurrencies.

Now there have been more advancements
and additional considerations around

crypto assets.

I'd first like to get your thoughts on
the report and the recommendations on

stablecoins from the president's
working group on financial markets.

I know that came out a few
weeks ago now, early November.

I was just wondering if you can kind
of summarize what was included in that

report and why it is so
important as an update.

Absolutely Mitch.

And I'm always happy to be on
here talking with you blockchain,

crypto asset updates, because it
really is one: a hot topic and two:

an area that is increasingly
of importance for everybody

working in accounting,
finance, economic roles,

whether in industry
management or elsewhere. So,

so in terms of sort of the highlights
and the core points in the president's

working group report there really
what I would say is that honestly,

on the one hand, I would say that
the involved actors, right, be it,

the OCC, FDIC,

private sector corporations
had done a pretty good job at

outlining the,

the base case and the fundamentals
for how a stablecoin operates.

Right. But on the other hand, they were,

I believe a bit overt or unbalanced
in terms of how they analyzed

the whole stablecoin ecosystem, right.

In terms of the pros and the cons. And

especially in terms of the, risks, right,

that having a actual stablecoin
based payment network actually get,

get to that level of being
used at a commercial level by

either corporations or by whole
nation states. But, overall,

probably the top two or three
points there is that one they've,

they've done a good job at researching
and trying to pull out sort

of who the, big players are out there.

And there honestly really only
are a handful of them and the,

and the bulk of the transactions
happening in any stablecoin

outlook now are handled by a,

by a handful of organizations
and the bulk of those,

transactions are also happen with coins
backed on the one-to-one basis at the US

dollar. And then two, sort
of they also did a good job,

I believe at outlining
sort of the pros and cons,

obviously more on the cons side, but,

but a pretty good job at outlining the
pros and cons of having a stablecoin

based payment network versus
the current Fiat based network.

And then three. And,

and here's where I think
there's the most promise,

but also the highest risk. On the one
hand, they also outlined and by they,

I mean, the members of the working
group, outlined really what,

what,

factors and components any
organizations trying to use a stablecoin

payment network would have to take into
account meaning who the counterparties

are, who has the insurance,

and then how are these platforms
and these connections between

these different involved
organizations able to be secure.

And then ultimately the end result of
all of that of that conversation and I

believe the actual report
was about 28 pages.

The end result kind of
mirrors the policy paper put

out by Coinbase back on October. And,

and in both of those white papers,

both of which were between
15, and 30 pages long.

So they aren't massive documents,

but the end goal or the end call
to action on both documents,

which I find quite interesting
is this call for a new

crypto specific, regulator that, that,

that has powers or is
imbued with powers by,

by Congress to directly
oversee all aspects of the,

crypto asset space.

So overall probably I would
give it like a "B Minus" in

terms of the output.
Cause on the one hand,

the working group did a good
job at outline the issues,

outlining terminology,
characteristics, and traits, and,

highlighting some of the core
issues out there. But they were,

I believe a bit unbalanced in
their outlook in terms of the

pros and the cons.

It's so funny,

you bring that up because I read through
the paper and as we got towards the

end, you know, particularly when they
summarized everything at the end,

there's a statement that they gave,

it says while the scope of this
report is limited to stablecoins,

work on digital assets and other
innovations related to cryptographic and

distributed ledger technology is
ongoing throughout the administration.

So it sounds like they are
aware that they did not cover

everything that they
needed to necessarily,

or maybe something else
is in the works. You know,

that's kinda where I was
going with my next question.

Other innovations in this space,

can you take a guess at what
they might be referring to?

I mean, man, if I had access to
that data, I mean, I'd be on a beach

somewhere, which, but probably
if I had to hazard a guess,

I would say that the top two areas,

and obviously there have been quite,

public comments out of the
SEC and the IRS in terms

of their really uptick in compliance
efforts, collection efforts,

enforcement efforts.

So I would say that probably
one output or outcome that I

am sort of eyeing to happen
during 2022 is that there is

going to be out of some agency
don't know which one yet.

I would say probably the
SEC there is going to be

some sort of,

framework or guideline to help companies
get a better handle on which type

of crypto asset falls into which,

financial instrument bucket. And by that,

I actually mean if I'm
issuing a token or a coin,

is that gonna be treated
as a, equity, security,

commodity or some other
form of instrument?

So I say on the one hand,
that's probably an area,

that they are trying
to work on and by they,

if the White House
Congress and the various,

oversight agencies, and then two,

what I would say is that currently
I'm hearing quite a bit of,

chatter about NFTs, but I haven't
hearing quite a bit about NFTs

because even though now the
conversation around NFTs is, you know,

kind of focused on like the
Board Ape NFTs and you know,

Beeple in March of this year.

And it's more athlete
and artist and artwork

focused the implications for
this new type of crypto asset

nonfunctional token, or, NFT
are actually quite broad.

So I would not be surprised
at all if, you know,

going forward NFTs are an
area that the White House

and policy makers and regulators try
to really get a handle on, right.

Because they because on the one hand,
Bitcoin is the headline news story,

but that's kind of old news,

in terms of hacks and other
policy choices, right?

Like it or not, they've sort of
outlined how they view Bitcoin.

And now in this president's working group,

they've basically started the ball
rolling on trying to regulate,

any stablecoin issuers, whether,

whether it's correct or not is
a whole other conversation. But,

and so then I would say
NFTs are the next big area.

And then DeFi is also
probably the, the next area.

I'd say NFT's more concrete,
because to be honest with you,

DeFi is still,

a fast moving and it is so new
that I don't think many policy

makers have the,

expertise to have a real
conversation around DeFi quite yet.

So let's stay there for a second.

I know you referenced getting
to NFTs and I guess, you know,

we can transition there first and we'll
jump back to, to where we need to.

NFTs were so hot, again, non
fungible tokens, so popular.

It seemed like everybody was talking
about it. as early as you know,

it seems like yesterday,
but then at the same time,

it seems like it's cooled off pretty
quickly compared to something like Bitcoin

or some of the other stablecoins.
So what, what happened?

Are we missing something or is
it still heating up? You know,

what's the status on NFTs?

NFTs are an extremely interesting area,
right? Because as I was saying, just,

earlier that the guess one of the
main focus has been on, you know,

artwork and entertainers,
Tom Brady's in it now.

John Cena is in it now, you know,

there are all of these athletes and
entertainers that have either, you know,

committed their own NFTs or have been
endorsed by NFT trading platforms

all the rest. So yes,
absolutely. Right now,

there is some fraud out there in the
NFT space and actually during the

middle of November,

there actually was a headline that
actually quite a few of the more recently

issued as of that time
NFTs dropped by 80% in

economic value,

which I think is obviously
bad if you are a holder,

of those NFTs during
that drop. But, you know,

it's a correction and it's painful,

but it's part of how the asset class is
ultimately is ultimately gonna have to

grow, right. Because sure,

NFTs are new and they're
hot sort of frothy,

but the underlying economic
opportunity in a NFT niche,

it's a traceable transparent immutable

record of ownership in a, virtual world.

And so that idea, that
concept is tremendous,

right? So that's really,

and I know saying that
that the real story is in

blockchain is an old phrase, right?
It's an old hope at this point,

folks joke about it,

but it's the first application that I've
seen LIGO mainstream that highlights

the true opportunity of blockchain
for the individual, right?

'cause most enterprise applications at
these, you know, Fortune 1000 companies,

you know,

aren't really comprehendible
to the average person on the

street. Right?

But the idea of a NFT
that now I own in the

virtual sense, right? I own
a portion. I own a share,

I own some rights to some other
asset and it's on the blockchain.

So traceable transparent,

can't be hacked and I
can prove it to anybody

at any time, anywhere. That opportunity is

absolutely I think really untapped,

but to go back your actual question. Yeah.

I mean the NFT's life cycle, it,
I think peaked in March, well,

first peak was in March,

right when we had the,
people auction. And,

you know, I say March and April was
red, hot cooled off over the summer,

much like the other crypto assets out
there. And then honestly, in the fall.

And I believe it was Tom
Brady partnering with,

I believe the company
is FTX, his partnership,

I believe it was him, Gronk,

and a whole host of other
athletes and entertainers, NBA.

Top Shot's probably the,

the mainstream platform that most
the people have heard of in the NFT

space. All of that has kind
of given the NFT space,

sort of a new, burst
of energy. So it's hot.

It isn't as hot as it had
been previously, but it is,

I think starting to ratchet
back up to those levels.

Now I am most familiar with NFTs
because of, you know, Top Shot,

like you just mentioned, and Brady
is coming out with all of his,

NFTs and all the different people
who are joining in on his group,

having conversations outside of here
and with friends and, you know, offline,

I think the challenge is
really identifying how is
this so much different than

like a picture online,
essentially, you know?

And I had this conversation
with a couple people,

and I think what you just said,

as far as the blockchain technology
and tracking everything is really the

answer, but at a very simple level,
is it the fact that it's exclusive,

right? You know, if you have a
tangible basketball card versus an NFT,

the exclusivity of it is what
adds value is that correct?

So, so a good, parallel, right.

That I've been trying to use
is that if you have a NBA

basketball card and it's
autographed by who ever your,

you know, favorite players, Kobe
Bryant, Michael Jordan, Shaq,

all the rest. Right? And so I have this,

this basketball, and it's
actually signed by that person,

Michael Jordan held the Sharpie
and actually signed. Okay.

And then on the other hand, I
have that exact same basketball.

Right. But it has the autograph of
Michael Jordan, but it was, you know,

burned into the basketball at a factory,

which one has more value? It's
the, it's the basketball that is,

that is actually connected to
the entertainer, to the artist,

to the creator of that asset. Right.

And so if I have a picture, if I have the,

Mona Lisa famous painting in the world
price with that, I'm no art expert so

I don't quite get it personally,
but, either way, right. It's a,

you know, internationally famous
paint thing, priceless why? Right.

It's priceless. And it's valuable because
it is the only one out there. Right.

It's the only real authentic version
of it as far as we know, but,

I can go online, I can Google it
right now on this podcast with you,

I can go online, pull a picture
of it, print it out, frame it,

hang it on the wall that
doesn't have any economic

value, but an NFT, right, tracing the,

the Providence and the history
of that artwork or real

estate or, athletes merchandise.

That's the true economic value there.

It is not always the asset itself.

It's the connection of the
asset to the creator of that

asset. Be it artwork,
entertainment, real estate,

it's that bright line, it's that
proof of ownership and Providence,

and anybody who's done any work
in any supply chain over the last

18 months knows the importance of
having control and having traceability

in terms of, you know, Providence
ownership of that asset on that path.

So that's the real
difference there, Mitch,

is that now I have that direct
connection to that basketball hand

sign by Michael Jordan,
as opposed to buying 85,

you know, basketballs online
that have his autographs,

but it was a copy and
paged up at some factor.

Perfect example. You're absolutely
right. It definitely makes sense.

So thank you for kind of
breaking that down step by step.

I think there is so much that
goes on in this space and

everything is changing
so rapidly, you know, it,

it's really good to provide updates
like this, take a step back,

make sure everybody really understands
what everybody is talking about before

something new comes out.
Right. And, you know,

I think you are just talking in alignment
with NFTs. You mentioned defi, right?

So I think it's only appropriate that
we kind of stay in line here. Give us

a breakdown of defi,

why it's so important and what
our listeners really need to know.

Mitch, I mean, yeah.

We could be here talking
on DeFi for eight hours,

so probably have a fresh battery.

But in terms of like the
baseline, right. DeFi,

it's an incredibly complicated topic
because it's a umbrella term, right.

DeFi can actually point to
anywhere between 12 and 15

different types of applications,

it could be yield farming,

staking block rewards, all of
which are trying to maximize the,

yield earned on crypto holdings,

but the overall idea and the goal
of any of these applications, right.

And there are any number of them
online to go into, you know,

research learn about rest, but
the overall goal here DeFi,

decentralized finance,

it's to try to really build out a
parallel financial system. Right.

Because, if we sort of
pull back for a minute,

the whole goal of blockchain
and crypto is to help develop a

parallel financial system, right.

To cut out intermediaries
payment processors banks, that,

that hasn't happened as we've seen
every major payment processor and

bank and corporation, and
actively now embrace blockchain,

crypto payments all the rest.

But the promise of, project DeFi

it's really to allow individuals
or institutions who are

trying to,

for lack of a better term exist in a

crypto based world. So Mitch,

if you have $8,000 cash hanging around,

right, you have options
could put it into bank,

could put it into Apple stock,

can buy some CPE courses at the IMA,

or can put it into a ETF,
right. But you have options.

You can either grow it,
use it all the rest.

But if I have that same
$8,000 value in tether,

right. the USDT token issued
by tether a stablecoin

issuer that's supposedly on a
one-to-one basis at the US dollar.

And I could go on a hold,
offshoot on that, but,

but it's backed by the US dollar.

And so how can I make the
best use of that money? Well,

the bulk of these DeFi
applications out there are built

to allow holders and individuals and
entrepreneurs for like me who have

their business or have holdings in crypto.

I can't deposit those at the bank. If I
can't use those to go buy Apple stock,

I can't put them into a
ETF or an IRA directly.

So then how do I earn a rate of return on

my assets?

And that's the question that most of
these DeFi applications are trying to

answer.

And so the best way to understand
DeFi is to basically kind of picture

it as trying to offer all of
the products and services,

convenience of a bank or
a traditional, brokerage,

except not involving a bank
or a traditional brokerage.

And so that's the best way to try to
think about it in terms of enterprise

applications, there are not all that
many yet for the very reason that

the regulation on these companies is
kind of still murky and it's primarily

been, regulation by lawsuit up until now.

So we've talked about a lot of different
trends going on here, and, you know,

a lot of our conversation has been US
based and things that are happening within

the United States. Just
curious, before we wrap up,

I have one more follow up question,

but as far as the things that are
happening in the US, you know,

the president's working
group, I know there was,

the infrastructure bill that's going to
include some tax reporting provisions

for digital assets, in your opinion,

what kind of implications will
these decisions have on the

global environment, as it pertains
to digital assets, you know,

clearly digital assets is not
just the US based assets. So,

what else can the global
business environment expect
down the road from things

happening.

And you

highlight a excellent point there, Mitch,

that this asset class is
not based out of any market.

This isn't based out of the US, based
out of mainland China, or Europe,

or Africa, Latin America,

anywhere it's a truly global
asset class and global

ecosystem. And so on the one hand,

I am encouraged that there are policy
moves being at least put forward

here in the US. On the other hand,

I do fear that we are
taking a bit of a heavy

handed approach to trying to
understand, and we're trying to force,

crypto assets to fit into
the current roles that

current financial instrument hold
and it could work on the surface,

but it is not gonna work going
forward. But on the other hand,

even though crypto is a
truly global industry,

it is still worth
mentioning that the US is,

I believe gonna have a important voice
in how these rules and frameworks are

ultimately crafted.

Now there are countries El Salvador

Malta, other areas of the world,
Estonia, Brazil, you know,

there are any number of other countries
that have been more active in being

pro crypto out there. So
it's important for us to

balance our attempts to protect,

investors and all the rest with the
eye towards future opportunities.

But my sort of wrap up point here in
terms of the global impacts is that the

only other global counterweight
at the US level is mainland

China.

And whether you are a fan
of this choice or not their

choice on a policy, angle to ban crypto,

basically over and over
again, to ban trading,

to ban mining to ban
holding of it. I mean,

that does basically open up the door

for the US to basically still
have a initially dominant voice in

this conversation.

So to wrap things up,
kind of in that vein, you,

you have obviously done a ton of
research on this. This is, you know,

your passion and, and highly
knowledgeable. I'm curious, you know,

talking about the report that
came out and some of the,

movement that has been made
recently, you have an opinion,

and I'd just like to kind of wrap things
up by asking you where you believe the

focus really should be when it
comes to digital assets. You know,

as far as the progressing this
whole industry really forward

with all the different trends and
all the different outcomes from these

different innovations, opportunities,
possibilities, what should be,

as far as the focus of
everybody's efforts,

what would make the most sense to bring
things to light for everybody who's

involved in this industry.

I think that the top two areas
that should be top of mind

for any policy maker, regulator,

or entrepreneur out there
in this space on the one,

it should try to be the foster
innovation and creativity,

right?

Crypto assets are a $3
trillion asset class,

and 10 years ago they hardly existed.

So it's grown incredibly fast and,

and no asset class grows that
quickly on a international basis

if there is not some underlying
economic value too. Right?

So, it's important to foster innovation
to try to attract as much capital and

people, right. You know, intellectual
capital, human capital, financial capital,

as we possibly can to these
projects because Mitch, you know,

it's awfully tempting to, to point
to, you know, incidents, right.

It could be a hack, it can
be the NFT bubble, you know,

kind of popping here and there,

but overall with blockchain and
crypto one don't exist in a bubble,

right?

They are evolving with and
being improved by automation and

RPA, AI, and IOT analytics. All of
these tools are developing hand in hand.

And so I think that overall,

everybody should be focused on trying to
create a environment and a framework to

foster innovation, and to try
to allow people the, you know,

freedom to develop the experiment and yes,

fail sometimes. But it's important
to have that creative process happen,

to be able to get to the products and
services and companies that are gonna

benefit the most people
going forward. And then two,

it's also important that
as we are doing this right,

so a good parallel that I can do all
the right now that's all phase highlight

is that as we all know the issues around,

our climate and climate change
are a big issue right now,

I won't get into the individual politics
of it, but it's an issue, right?

And so there has been a move towards

more ESG, towards more
investment, towards wind, water,

hydro power, all the rest, but all of
that can't happen overnight, right?

There has to be a
transition period off of the

coal fossil fuel model and into
a more hybrid model, right?

Some fossil fuel,
nuclear, wind, the water,

solar all the rest. And so that
has to also happen here, right?

Because at a fundamental level,

blockchain and crypto assets operate
differently in terms of the transactions

themselves and the risks and opportunities
that all involve counterparties have

to keep in mind as they try
to move into this space.

So there has to be some sort of
plan, again, building on 0.1,

there has to be a environment
and a framework to

balance innovation and creativity
with this, mindset that,

yeah, mean virtual payments,
digital they're already here,

all that we're doing now,

blockchain and crypto is
trying to sort of improve them.

But there has to be a process
to transition, you know,

countries, institutions,

individuals out of basically the
analog world that all of us live in

web 2.0 all the rest to a blockchain based

crypto, augmented future.

And I know that having that can
kind of sound high in the sky,

but it's already happening
right now. Right.

And there are trillions at, you
know, being put to work here.

Every major corporation and country

in the world is actively
doing this as we speak.

So it really isn't so farfetched,
I would just hope to see right.

That going forward, that there's
a more over focus paid to this.

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