A Wall Street Guy on DeFi

It’s not breaking news to point out that there’s little awareness or understanding about what we believe is the most revolutionary development in finance — decentralized finance (DeFi) — among the Wall Street crowd.

According to Kenny Polcari, a Wall Street guy with 40 years of experience on the floor of the New York Stock Exchange (NYSE), it’s all “word salad” to him — there’s no real discernment between terms like “blockchain,” “cryptocurrency” and “DeFi.”

In this week’s Weiss Crypto Sunday Special, Chris Coney takes Kenny through the ABCs of DeFi … and along the way, learns that “decentralization” isn’t an entirely foreign concept to the traditional markets.

You can watch the interview here, or read on for the full transcript ...

Chris Coney:

Okay. It's recording. Hi there, guys, and welcome to the latest edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. Today, I'm joined by Kenny Pulcari for his first Sunday Special. Kenny, welcome to the Sunday Special, mate.

Kenny Pulcari:

Thanks for having me, Chris. I look forward to this.

Chris:

I sought you out specifically because I want to call this one “DeFi for Wall Street.” So, first question is, is it fair to consider you a Wall Street guy?

Kenny:

Yes, it is.

Chris:

So, why is that?

Kenny:

Because I spent 40 years on the floor of the New York Stock Exchange (NYSE), right at the heart of the institutional game. So, yeah. You could consider me Wall Street.

Chris:

Because you could say that someone’s a Wall Street guy, but they might work on Wall Street, not necessarily bang on the floor of the stock exchange, which is the true definition of the term, if you ask me.

Kenny:

Right.

Chris:

So, that's why I want you on. I was talking to Martin Weiss the other day and he said he's done some informal surveys around people in traditional finance. Just to test people, I can say to them, "Do you know what decentralized finance (DeFi) is?" And all of them are like, "Hmm. Is that blockchain?” And Martin is like, "Chris, you don't realize how little awareness there is about this. Why don't you use Kenny as a proxy and then basically go do a back to basics DeFi," because everyone's talking about it.

Sometimes you can have that kind of medium-to-high-level understanding without saying, "Yeah. It's the hot thing and it's the thing to invest in. It's the future." But have you ever started with the ABCs and built it up from there? No one's ever took a formal training in it.

So, the first thing I wanted to ask you was before I start flapping my gums is what do you know about DeFi and where did you learn it, if anything?

Kenny:

I know very little about DeFi. That's why this was so exciting to me because — other than hearing the word being tossed around and how they use it now to talk about fintech and about payment systems and about Bitcoin and Ethereum and decentralized finance — it’s an unknown. So, quite honestly, I'm actually looking forward to this. It's going to go past 15 minutes if you want my opinion, because there's going to be a lot to talk about.

But I think you should take it from the top. First of all, why it's even called DeFi? Certainly, it's a shortened version of decentralized finance, but so define that term.

Chris:

Okay. Sure. So, in your world, is this just like a word salad; “blockchain,” “cryptocurrency,” “DeFi?” Is it all without real discernment between what's what? Is it all like that in your head?

Kenny:

Well, that's what it feels like. I'm sure that's wrong, but that's what it feels like.

Chris:

Okay. Sure. This is what I'm getting at — that no one's ever filled it in and made clear the distinctions. Because “Bitcoin” is distinct to “cryptocurrency” is distinct to “blockchain” is distinct to “DeFi,” and while they all have a relationship with each other, they are all different things. That's what I always say.

So, okay. Let's start at the top then. So, DeFi. Why is it called DeFi? So, this is how I understand it. This is how I teach it to my students.

So, decentralized finance. So, the first word: "Decentralized.” What's that mean?

Because decentralized is the negative of the word centralized, I'll define that in a first. So, what's centralized? It means there's a central point somewhere. And that is not necessarily a location in space as in Washington DC. You can say the government is centralized in Washington D.C. You can say that, but in finance, you can say that the stock market is centralized in New York, but it's not even like that, is it? It's not like a location because you've got CME Group Inc. and you've got the stock market. It's kind of spread out, right?

Kenny:

Well, it's interesting you say that because prior to 9/11, you would have said that the stock market was very much, for lists and such, was the New York Stock Exchange.

Chris

That was the center.

Kenny:

That was the center of it.

Today, you could say that it's decentralized because the New York Stock Exchange no longer plays that significant pivotal role the way it did just because of all the other exchanges that now exist and the technology that connects them and the trading that takes place across 70 different venues vs. at just the New York Stock Exchange, right?

Chris:

Totally with you. Totally with you.

So, if it isn’t the location that's no longer centralized making it a true decentralized system, what is it? So, I define it as several prongs, really: technical infrastructure, the power over that infrastructure, who controls it and if the risk all in one place.

So, let’s start with the tech infrastructure. If you have one single web server in one office running the thing, there would be a single point of failure, a single point of attack, a single point where everything goes on. There would be a single owner of that computer who had the ability to unplug it, change the software and so on. And therefore, all of the risk is centralized. That very centralized location is a very high risk: All the power in the control and the technical infrastructure is in the same place.

So, you can begin to kind of dilute that centralization in any one of those four categories. So, the internet is a technical infrastructure that's decentralized. You've got lots of servers all around the world.

Now, it might be true that if you run a mobile app business, say, like Robinhood, you could say that it runs on a cloud service provider, which is someone like Google Cloud or Amazon Web Services or Microsoft Azure. So, that's where they've built these giant data centers. And they didn't just build one, either. They have them all on every continent. And your app doesn't really run on any one of them. That's why it's called the cloud because it just looks like one massive computer that then takes care of all of the geographic decentralization in case Africa has an earthquake or Japan falls off the face of the Earth. It's just that cloud of computers.

So, the server in the U.S. would pick up the slack, but you, as the developer of the app, don't need to care about that. You just care it's decentralized. All the servers are all around the world. There's no single point of failure. Great.

That would be decentralized from a technical perspective, but Robinhood would still have a single login to the cloud where they could delete the app, change the app, etc.

Then you've got the other prongs of centralization, like all the power is centralized in one company, all the control is centralized in one company, and while the risk of the technical failure is decentralized, even that infrastructure is owned by a single company, be it Amazon.com Inc. (Nasdaq: AMZN), Alphabet Inc. (Nasdaq: GOOGL) or Microsoft Corp. (Nasdaq: MSFT), and they've got control over that.

And why is that a problem? Well, Amazon has censored various apps built on their infrastructure because of their own reasons. Amazon had the ability to just flip a switch and just take an app off their server.

So, for true decentralization, you need to decentralize all those various prongs. So, that's what decentralization means: geographic, technical and — in terms of the control governance — the authority and risk.

So, this is truly possible in the blockchain world because it allows anyone to act as that technical infrastructure instead of having several Microsoft data centers on different continents. Anyone can use their own little computer to contribute to that massive cloud of computers and then all the computers share the load, but it doesn't matter if it's a million people with one computer each or Microsoft to have a million computers. You know what I'm saying?

Kenny:

Yeah.

Chris:

So, if Microsoft had a million computers, that's decentralized in that one way, but not in others as it's still one company. If people can join without permission and leave the network — which is how the internet works — there's no central point of the internet.

So, finance, then, decentralized finance, is the decentralization in all these areas. Yes, the technical infrastructure is decentralized by this ownerless sort of permissionless technical infrastructure. No one single person has power over that system because it all runs on open-sourced software, which means all the software code is free, open and auditable, meaning everyone knows exactly what the code says, exactly how it's going to run and. if anyone were going to put some kind of back door in there or security hole, everyone would see it.

And if you find anything funky, you can just submit that as an interesting point of view. You can say, "Look. I don't think this is secure for this reason." You discuss it with all the other informal developers. And the software evolves through a crowdsourcing activity.

So, that's one of the keys to DeFi and blockchain: All of it, 99.9% of the software that's written, is open source. So, that's good from a security point of view, it's good from a governance point of view and no single developer can just arbitrarily change the code and say, "We're shipping that product now because I've decided this is the feature I want in there." Can't do it. Doesn't work like that.

So, does that bit make sense? I said a lot there because it's a kind of an important point. So, you might then ask, "Well, what's the difference between, say, DeFi and the cloud computing thing because it sounds similar. You've got all these various computers around the world that are sharing the load in bringing these apps. So, you say, "How is that any different to Robinhood?" You just said that that runs on lots of different servers.

Well, the difference is the ownership of the infrastructure is widely diversified amongst many very different people. So, the reason that differs from the online banking systems of the world and things like Robinhood is that it's ownerless and anyone can join that network and provide some of the hosting infrastructure for it and they can come and go as they please. So, that's that first piece.

Where do we go from there? We're doing the sort of four prongs of centralization. I said earlier on that maybe DeFi or decentralized finance is the wrong term to use because it's defined by a negative. It's decentralized, like not centralized. But if it's not centralized, what is it, because you can't define something by a negative.

So, I think that if you called it networked finance, that would make a lot more sense because there are networks. There are lots of different individuals that just use the software protocols to allow them all to connect to each other and communicate with each other. Did you understand what-

Kenny:

Right, but they are, in fact, decentralized. So, I think decentralized is the proper way to define it because network finance to me almost sounds like it's a network together vs. decentralized. I think defines it better because now it's not ... Network finance almost sounds to me like we're back dependent upon a central network, whereas decentralized gives me the impression that you're no longer dependent on a central network. Am I missing something?

Chris:

No. That's interesting you say because I'm trained from the computer science world. So, it's difficult for me to break the definitions that I've learnt. But it's critical that you say what you just said, though, because if, when you hear the word network finance, it means something different, that's something I would need to know as someone who's teaching this stuff to people.

Kenny:

Right. Right. Well, that's just me. I mean, that's what it sounded. Like I said, I'm as new to this as you can get, so I'm just giving you first impressions because decentralized sounds just the way you said it. It's decentralized. It's not dependent upon a center, a one place, right?

Chris:

No one person. No one place. No one country.

Kenny:

Right. Right. I mean, which is exactly, again, and I'll just put this back to my own experience, like at the NYSE during 9/11. Prior to 9/11, the NYSE was the central marketplace. But because of all the damage that occurred to downtown Manhattan when 9/11 happened, the NYSE became neutered. It didn't, in fact, work.

And so, we have a very decentralized market system today. Some people say, "It's fragmented," or some people say, "It's fractured," because, for example, you can trade Coca-Cola (NYSE: KO) on any of 70 different venues today. Prior to 9/11, Coca-Cola traded at the New York Stock Exchange. Today, you can buy it on the Nasdaq. You can sell it on the CBOE. All these in addition to trading it on the New York Stock Exchange. And so, it's become decentralized.

Chris:

Very true. Yeah. That's a good point. So, this is where it is really nuanced, because that way you just described could have been described as decentralized finance.

Kenny:

Correct.

Chris:

Because it's fractured the bit from a centralized exchange to this competitive environment of exchanges, and each of those exchanges has a different owner.

Kenny:

Correct.

Chris:

That all still matches the description of being decentralized in that way, which is very, very interesting. So, I'm actually learning something from this as well, because I don't have that Wall Street perspective. And perhaps this is where people from my world and your world talk crossways sometimes is that we might be saying things like decentralized and rattling off the decentralized nature of it, and then someone like you goes, "Well, that's not that innovative because that's kind of how it works now."

Kenny:

Right.

Chris:

You know what I mean? So, I mean, I suppose I need some diagrams to really draw those distinctions but we've got to draw them in the air a little bit there.

So, I'll ask myself the question. So, what is the difference between that infrastructure you just described with the many exchanges trading the Coca-Cola stock and the blockchain world of decentralized finance? Okay. What is the difference and what is the benefit to an investor?

So, the major difference is that there is a standard across all of the "exchanges," in the DeFi world that all assets adhere to. So, it's totally frictionless in that way because a Coca-Cola stock, what is it? It's a piece of paper. It's a share, a certificate-

Kenny:

It's a certificate, correct.

Chris:

It’s a certificate that says, "Kenny owns these many ..." Right. But the thing is, though, there must be a central database that records that, how many shares are in issue. Where's that? Is it in a filing cabinet in Washington? Seriously. I don't know.

Kenny:

Well, it's not a filing cabinet in Washington.

Chris:

Where is it? Is it in the broker's offices? Where is the shares certificate.

Kenny:

Well, the certificates really no longer exist today. It's all been automated.

Chris:

Fine. So, that is not a thing anymore. They are digital assets, then. They must be. They must be considered digital assets.

Kenny:

Well, I guess they're digitized, but I wouldn't call it a digital asset because when you think of digital asset, you think of Bitcoin or Ethereum. I would not think of Coca-Cola as a digital asset. I would think that the certificate has been digitized because it's the 21st century, but it's not a digital asset. Don't confuse that.

Chris:

Well, I don't know because even the certificate was only a representation that, informally or formally you own-

Kenny:

That you owned a piece of that company, correct. So, now you own it. When I go out and I buy or sell Coca-Cola or General Electric Co. (NYSE: GE), I own or I am selling a piece of that company, right? If I'm buying it, then I'm becoming an owner of it. If I sell it, then I'm selling my ownership in that company represented by that share of stock.

Now, what used to physically be the exchange of physical certificates today is all done electronically so, A, it's more efficient, and, B, I would be careful, to define it as digitized, though. See, I don't think about it like that.

Chris:

You don't?

Kenny :

It's all done electronically but it's not digitized in the way that people understand digitized like non-fungible tokens (NFTs) today and all that.

Chris:

True, true.

Kenny:

It's not that.

Chris:

But it's not that ... They said there's nothing new under the sun, so the concepts are very similar. I guess that's what I'm trying to do is build bridges, because even that share certificate, that wasn't the asset. That was a representation that you had title to it and the title isn't physical. So, if it's a piece of real estate, the real estate is physical but the title is an agreement as to who owns it, but that agreement is non-physical because it's an agreement. You know what I'm saying?

Kenny:

Yeah.

Chris:

And, yes, we had a piece of paper that represented that, it's an abstraction for it. And as where the difference with the cryptos —they are native to the networks that they live on. So, the traditional financial system kind of evolved from a paper-based system in a world where all assets were physical. So, we went from physical assets to physical representation of assets like stock certificates or gold certificates or promissory notes for the amount of gold in the bank and so on.

As that evolved and then as technology and computer systems have come along, there's been this weird overlapping of what I call the dematerialization of the system. You can see it transforming slowly: Whereas once that technology infrastructure was there, you can almost have a new starting point, start from scratch. It's like, "Okay. Now, we got the internet and blockchain technology. If we were going to reinvent the idea of an asset, how would we do it today?"

And I think that is the major distinction, the hard stop between the financial system that was developed in, say, the 1900s that was all physical assets and all physical representations that was gradually computerized, and this post-internet notion where people start on the internet as a base and go forward from there with no connection to the paper-based system?

Kenny:

Okay.

Chris:

You with me?

Kenny:

Yeah. Okay. And I think that's fine and I think that's ... At least it sets up on, like you said, you got to set the foundation. You got to start the buildouts. You got to understand from the beginning how it's built. Okay.

Chris:

It's close, though. When you say that the existing system has all these exchanges and it is decentralized and the assets have been digitized ...  that's why I made the strong point about if we were going to start again and create the representation of assets, even digital system, how would we do it? And that's what blockchain allows you to do with DeFi.

The major difference is it's what turns it inside out. So, rather than ... I made a note about a spider's web. Yeah, so a spider's web. Everyone knows what a spider web looks like. It's sort of like an outer circle and then there's an inner circle and then a circle inside that and it's not a circle and then there's these connecting web thingies. There's a definite center to it and there are lots of crossing off points.

So, in the traditional financial system, there is all those central points of failure, risk and control and so on where the people who control the systems, exchanges, governments, regulators have power and control over the system at large because they can regulate it, they can censor payments, they can call up Kenny 's exchange and say, "Can you freeze that guy's account, please?" All that sort of stuff. That's why, because the control is still somewhat centralized.

But when you turn that inside out and you go from power being at a center of the spider's web at some authority's will, and then all of the investors are on the outside looking in at that central point whereas, with DeFi, it starts the other way around. It's like what if power, control and ownership of the assets were in hands of the users on the outside, and what if they had power, control and custody of their own assets? People towards the center, like the brokers and everybody else, had to then offer services to those people which they didn't have to take since you can hold your own assets perfectly securely and without any risk to them being stolen, et cetera.

And there are benefits, too. I'm just looking at it as a principle. So, that's another key distinction where decentralized finance differs from traditional finance.

Kenny:

Right. Okay.

Chris:

And also, because it was conceived in the age of the internet, I suppose the internet doesn't recognize geography, which is the trouble that governments and lawmakers are having since the internet came along. There's this brilliant thing that Andreas Antonopoulos, a blockchain cryptocurrency teacher, said: "When someone says to you, 'Well, that's illegal,' you have to say, 'Where?'" Because, as we know, certain things are legal only in certain places.

Cannabis is now state-level legal in the U.S. in several states, but still federally illegal. And it’s still very illegal in the U.K. no matter what.

On the internet, none of that is recognized because it's in cyberspace. So, when you invent things in cyberspace, these geographically-based ideas don't translate.

Kenny:

And I think that's what's changing. Like you said, that's why everyone's having such a difficult time with the governments and the internet because it's all one. The fact is, it's really all one because of the internet.

Chris:

Sure. Because of the internet. So, I'm going take that even further because I've just had another insight. So, like I said, if you had a clean slate, if you got those technologies, blockchain and the internet and you said, "Okay. Let's reinvent the idea of the asset from scratch. How would we do it given the tools that are available?" You end up with cryptocurrencies.

That is why blockchain is revolutionizing the world because now, we have these technologies, this global network called the internet and these asset tracking system databases called blockchains. Every industry one by one is now asking themselves that same question. If we were going to reinvent our industry from scratch today with things like the internet and blockchain technology, how would it be?

Now, the incumbents don't seem to want to do that because, obviously, they’re well ingrained in the way they're doing things now. Governance systems have already advanced. How do you govern a world that runs on cyberspace? Well, the blockchain industry's already well ahead on that, using blockchain technology for governance in the same way that we described. All the users get a say, everyone's got a stake in it, there's money at stake, so it's not an arbitrary vote. All the little things are governing themselves in decentralized ways. So, every little thing, every little community governs itself and so on.

Kenny:

So, what's interesting here is that we're talking about decentralized finance. Could we have decentralized everything else at some point?

Chris:

Well, yes.

Kenny:

Right? But in this case, DeFi specifically is talking about decentralization in the finance industry.

Chris:

Yes, and I would say ... Okay, so would you consider assets, ownership, finance? Probably not.

Kenny:

Would I consider what?

Chris:

Like asset ownership? It crosses over. Cars, houses, computers.

Kenny:

Yeah, but I don't necessarily consider cars and houses as finance.

Chris:

Okay. Good. I just wanted to clarify that, because you said, "Could we have decentralized everything?" So, yes.

Kenny:

I mean, are you going to have decentralized real estate?

Chris:

Well, yes and no. Well, the ownership would be decentralized. That's why I go back to title. For example, we have the Land Registry in the U.K., which is a centralized government database that has all the properties listed and the owners. And that's a central database that gets the data every time someone buys or sells a house, whether it's a listed building, a castle, whatever.

So, the government controls and owns that data and you have to request that they update it whenever you transfer ownership of the asset that you own. "Do you have that asset? Do you have the right to transfer the title?  Who do you want it transferring to?" Blah, blah, blah.

It's very slow, though, because when you have to ask a third party to do that, there's some friction in there and there's the possibility of them saying, "No."

So, when you sort of remove intermediaries by taking the center out of it, that's another aspect of decentralization. Remove all centers and you make it appear to be a person-to-person interaction. You could have a decentralized title where every property was a token on the blockchain. And then, because of that, it adheres to all the benefits I just described. I have full custody of it. It's in my possession. No one can take it. I'm the only one on the planet that can remove that from my wallet and send it somewhere else. It can't get lost.

If I broadcast the transaction that says, "Transfer ownership of my house to Kenny Pulcari, that transaction id either succeeds and it ends up in your wallet or it fails and it ends up back in my wallet. It doesn't get lost.

It's none of these bank transfers that disappear for three days when money's not in my account or in your account. None of that. It can't happen because it's all instant settlement. The ownership is all tracked, transparent, auditable, in real time, on the internet by everybody.

So, that was a long way around to say, "Yes." Anything that's an asset that has a registered owner can be decentralized.

Kenny:

Yeah. I mean, in that sense, you're right. It is an asset.

Chris:

That's what technology does. It removes friction. It speeds it up. It's like self-service, instantaneous verification of these things. So, that just seems to be what technology does. It allows you to self-serve instantaneously and cheaper all the time.

It looks like it's cooking your noodle a little bit. What's going on?

Kenny:

You know, it is, but I said this to you in the very beginning: I'm one of those guys that's starting at the bottom, so it's all very fascinating to hear. It just makes you to want to go out and learn and understand more about it than anything else, right?

Chris:

Absolutely, absolutely. So, you've seen the bell curve, right?

Kenny:

Yeah.

Chris:

You know what the bell curve is. So, of course, that applies to technology and I know as the diffusion of innovation. So, all new technologies go through the bell curve and its five segments. You get the innovators, the early adopters, early majority, late majority and the laggards.

Now, I can see this with crypto and DeFi. When you get it, depends where you sit on that bell curve. The more you can see it in your mind's eye, the less it has to develop before you get it. So, at the very early end of it, as soon as, say, the inventor of Bitcoin (BTC, Tech/Adoption Grade “A-”) sends out his scientific white paper that says, "This is the outline for Bitcoin, the blockchain technology."

Some computer scientists would have read that and gone, "That's interesting," without seeing the full vision of what it enabled. But people like Andreas Antonopoulos, who was a computer scientist, saw it and did understand a bit of economics.

This happened to me as well. The minute I read it, everything we just described, tokenization of car ownership, decentralization ... I saw it like that. But it didn't exist yet. So, I got in then and that's why I'm an evangelist, but not everyone gets it at that point because they need a lot of technical understanding or experience to get it conceptually.

Other people will need to see it working, so there's this whole phase of development and building infrastructure. So, not you in particular, but maybe you'll be the type of person where, if I actually sit down with you and say, "Right, Kenny. We're at the point now where, if you download this app from the app store, you can show me the little code on your screen and I'll send you this digital asset." And boom, there it is.

Maybe you need to see it get to that point where you go, "Oh, now I get it," as an experience. Or maybe it needs to go all the way until the laggards, where Granny Olive is wanting to sell her house, but now the whole paperless system is gone. All real estate is represented by tokens, and the only way she can sell is if she gets her phone out and then sends it via the blockchain.

She’ll finally get it because she has to. And that's on the right hand side of the bell curve — like people who clung to their VHS tapes until their old VCR broke down.

Kenny:

Right. They can't do it anymore.

Chris:

No VHS. Old VCR's broken down. No more repairmen. "I'm going to have to buy a DVD player." You know what I'm saying?

Kenny:

Yeah.

Chris:

And they get it eventually. When they finally try DVD, they go, "Oh, I should have done this ages ago." And that's the trouble.

Kenny:

Yeah. So, let me ask a question: With the evolution of this technology, it only creates more power, control and responsibility. And so, that gets all moved to the end user, which is, I guess, the ultimate definition of financial empowerment, right?

Chris:

Exactly. Exactly. That's a good point.

This is also a difficult thing that the investors are having to wrap their head around. With all that sovereignty and empowerment, you're then taking responsibility as well, which isn't really part of the existing system.

Maxine Waters was talking about cryptocurrencies, people investing and losing money. And she said, "Well, who's going to make those people whole?" And Juan and I just blew our mind because —

Kenny:

She had no clue.

Chris:

Like, what you talking about? You talking about the possibility of investing with no down side. That's basically like-

Kenny:

Right. She's got no clue. I mean, you were as horrified as we were, trust me.

But let me ask you a question.

Chris:

Okay. Go for it.

Kenny:

So, if you're going to use decentralized finance in a Wall Street model, right?

Chris:

Right. This is where I wanted to get to. Great.

Kenny:

Okay. So, great. So, pitch it to me. Tell me what you do. Tell me what the benefits are.

Chris:

Well, I want to do it the other way around because I am from the DeFi world. So, even the title of this when I came up with it, DeFi for Wall Street, shows I'm struggling. I would struggle to sell it to the Wall Street types.

The trouble is, it's a competitive infrastructure to Wall Street. It almost, I dare say, begins the process of obsoleting that model.

Kenny:

Well, it absolutely does. But that's what technology does, too. I mean, along the way, technology creates these efficiencies which ultimately then destroy what we knew to create something different. So, whether it's just the advances of technology which are going to do that or whether it's a whole new technology — like decentralization — that's going to significantly change it quickly, it's going to be changed one way or the another. Change is here and it's coming.

Chris:

Okay. Well, that's your attitude. The trouble is, everyone has a different attitude towards change, as we see on that bell curve.

Kenny:

Well, correct. Okay. And I'll be the first one to admit that, but ...

Chris:

You're open to it, though.

Kenny:

I don't see it as you have to be open to it. It's not like ...

Chris Coney:

You don't have to be, but you are.

Kenny:

Well, you do because if you're not, you're going to get run over and you're just not going to-

Chris:

Well, that's a choice.

Kenny:

The truth is, the world is going to pass you by if you don’t understand it.

Chris Coney:

Right. So, it's like you can go the easy way or the hard way.

Kenny:

No, because it's going to start to affect every single thing we do like you just said. Every asset you own, every little thing that you have is all going to become decentralized.

Chris:

Yeah, but what if you're in denial or if it never happen? What if you're that Wall Street guy?

Kenny:

I think you'll get run over. I'll just tell you an anecdote.

From my own personal experience, I absolutely thought there was no way technology was going to change the way stocks in this country were traded because it was too important. It was never going to work, they could never recreate it, they could never mimic the role of the broker.

Chris:

You were that guy.

Kenny:

I was that guy.

Chris:

Okay. Wow!

Kenny:

I was that guy. I was correct that they were never going to mimic the role of the broker in the system we had, which was trading stocks in fractional and fractions, an eighth of a dollar. And in that system, I was absolutely right. They could not recreate it.

But they could recreate it if they broke a system down and then went to sub-decimalization, creating so many different price points within the full figure. Before, there were only seven price points you could trade at between $20 and $21. Today, there's a thousand price points. There's .001, 0002, all the way to .9999.

Once they did that, then the decentralization and fragmentation happened, the fracturing of the system happened, because then other exchanges that could compete and volumes were driven to wherever it was going to get the best price ... which wasn't necessarily in the old-fashioned way.

Now, I was the first one to put my feet in the ground and say, "No. Never going to happen. Not going to do it. Not going to do it. Not going to do it." And then, all of a sudden, it started to happen and I go, "Oh, shoot! I better change the way I think."

Chris:

But that's what I was saying earlier on about perhaps you're the guy that you have to start to see it happen before you go, "Oh, now I understand."

Kenny:

Yes. I would agree, there are some people that are going to have to start to see it happen before maybe they'll change their mind. There are other people that are more insightful or more forward thinking who can already imagine it.

Chris:

And they have to be, because those are the people that build it to show it to you, right?

Kenny:

Correct. And so, I used to be the guy over there and now I'm more to the middle. I'm moving this way but I'm no longer way over here now. I'm certainly much more to the middle and much more moving because I lived it. I experienced that exact result of resisting that change.

Chris:

I'm with you.

Kenny:

I resisted it hard.

Chris:

Actually, you just helped me. What came to my mind when you were talking about the fractional ownership of stocks is really interesting because I'm always looking for deeper root causes to things.

What's been happening underneath all this stuff is computers have been getting cheaper and more powerful. That's what's really at the base of it. Why does that matter? Well, because in order to do these fancy-schmancy techno finance systems, the computer systems need to keep up.

The computer systems used to be so expensive that only the New York Stock Exchange could afford that kind of technical infrastructure. That's now a fraction of the power of your smartphone.

So, as that technology comes down in price and drastically goes up in power, you get to the point where your regular home computer can do that stuff. So, it commoditizes those advanced techniques so everyone can do them. And then you don't need "experts," big companies to do it for you because anyone can do it. But then those big players have to evolve to a higher level of complexity.

And that's really where the blockchain world comes in. You've got a relatively cheap computing infrastructure that can create these ridiculous financial systems that make fractional ownership of stocks trivial so you can pay these tiny transaction fees, get them settled in seconds. That all relies on these extremely powerful and cheap computers that we now have.

So, now, it's not a case of the big traditional finance system and all its expertise needing to die. It's how are they going to evolve to provide value in this new world? That's the question they should ask themselves. If they want to maintain their fat profit margins and all that sort of stuff, they can ... but their services are going to have to evolve on top of all this stuff. And that's their job, not mine, but it's there.

Kenny:

I would agree. I think that absolutely has to happen, but that's part of the process, I guess.

Chris:

So, in your day-to-day, what is it you do? Wealth management?

Kenny:

Well, I've left that side of the business. Like the New York Stock Exchange, I'm not there any longer, because I said that job, that role I had, no longer exists today. That job's been completely automated away. So, it just wasn't any fun for me anymore to sit there and just stare at a computer all day. It just was not what I was going to do.

So, I pivoted. I took all my years of experience and I moved into the wealth management space. And so now, I help advise high net worth individuals and others that are looking to invest and put long-term plans together and all that stuff. So, I educate them. I build plans for them. I help them understand the system. I help them understand risk management, portfolio management and wealth management

That's how I pivoted. And I happen to do it in Florida now. I'm not in New York anymore. I don't need to be in New York. I can be anywhere I want.

Chris:

So, for you, personally, that's why you've got an incentive to be open about this, because you need that meta, macro view of everything that's going on for your client's sake as well as your own.

Kenny:

Yeah, absolutely. Because you have to be able to talk to it and advise and educate. If they don't understand it themselves, they come to somebody looking for an education, as well. So, yeah. Absolutely.

Chris:

I'm with you. I've heard some people, I won't name the names because I'd probably misquote them, but someone just said things like, "When does it become a fiduciary responsibility to get your clients involved in crypto?" Because at the moment, because it's largely unregulated. You could be one of those laggard guys that are just like, "DeFi? Don't worry about it. It's going away."

Kenny:

No, but yes, I understand the conversation, but no I'm not [one of those guys]. I'm actually one of the guys that says to clients who are not considering it, “Why not?” My opinion is it should be part of everyone's portfolio ... but not any amount that's going to cause anyone to lose their life savings if something goes wrong. So, if you're in there with the 3% or 5% allocation that gives you exposure to start to understand what it is. You get to learn more about it. And if, in fact, the world changes the way we all expect it's going to, you’re participating in the growth of that.

There are other people that say to me they want to go all in, and I say, "Not with me, you're not." I won't put somebody all in because that goes against my fiduciary responsibility.

Chris:

Good call.

Kenny:

If you want to go all in, go open an account at Robinhood and take all your money and go all in, but you're not doing it with my name attached to it, right?

Chris:

Yeah. Sure.

Kenny:

I'm not telling you that you shouldn't have exposure to it. You can buy fraction, but it doesn't trade on the New York Stock Exchange; it doesn't trade on the Nasdaq. But you go to Coinbase Global Inc. (Nasdaq: COIN) or Binance or one of the other centralized exchanges and you can buy fractional ownership of a crypto.

Some people think, "Jeez. I don't have $30,000 to buy a Bitcoin." Well, you don't need $30,000 to buy a Bitcoin. You can take $50 and buy a fraction of it. You're participating. You own some of it, but, in my opinion, for anybody, you should be invested at about 3% to 5% of your portfolio.

Now, listen. If you're 22 years old and you want it to be 10% or 15% of your portfolio because you're 22 and that's what you want, I would say, "Okay. I'm okay with that if that's what you want to do." But if you're someone who's 40 or 50 and just getting into it, 5% max is what I would say to anybody until there's a better understanding of it — meaning it's going to be regulated somewhere or it becomes something that you use in your everyday life.

Right now, the Bitcoin and Ethereum (ETH, Tech/Adoption Grade “A”) that I own, I don't use them in my everyday life. I own them. They sit in my account and that's it. I don't use them to buy things. I don't do anything with them other than I own them.

Chris:

I'm with you. Yeah.

Kenny:

And so that's what I have. And so, in my case, I try to keep it about 5%. So, I fluctuate somewhere between 4% and 5% depending on where it's trading today.

Chris:

When you were saying that, I made a note. So, it would make sense to me if you change the allocation based on the proportion of the finance sector that DeFi occupies. So, if right now, say, 95% of the finance sector is still running on traditional financial rails, with crypto, DeFi and the blockchain are in the accounts with 5% of it, maybe that would be a logical allocation. And as DeFi becomes half of it, you can increase your exposure because now it's a safer bet.

Kenny:

Correct. I think you're absolutely right. And so, what I mean is, when it becomes more of a regulated product or the central banks start to ... Well, I don't think the central banks are ever going to embrace it, unless … are they going to embrace their own?

Chris:

True.

Kenny:

And so, these are the conversations you're having with investors or people that are just beginning to learn about it, just trying to understand it. "How come the Federal Reserve doesn't control it," or, "How come the European Central Bank doesn't control it?" Well, that's the whole point. They don't control it. That's the whole point.

Chris:

It is the point. Back to the bell curve thing, [central banks] don't even appear on it, because what happens when an invention comes along that threatens the very existence of the organization. They're never going to embrace it because it's an existential threat. That's the problem.

Kenny:

Right. And that is the problem I think governments around the world have, that regulatory agencies around the world are trying to wrap their heads around at the moment.

But one way or the other, is it an asset that I think people should have exposure to? 1,000%.

But is it an asset that people should be overexposed to? I would say, "No," but that's also my personality. You might be a much more aggressive person. Also, you also might be half my age. I'm 60. I'm not going all in on Bitcoin at 60. I'm just not. No.

I might increase my allocation as we move through time and as, like you said, these things start to become clearer or they're more widely accepted or regulated. Then, maybe it becomes bigger.

Chris:

I'm with you. I also don't advise people to go all in.

Kenny:

No. It would be foolish to do that.

Chris:

Well, I think so. I mean, I just gave that model where I say that whatever the proportion of DeFi represents the finance sector, that's a guideline for your allocation. But, what I've said in the past is your exposure should equal your level of understanding.

Kenny:

That's fair enough.

Chris:

The fact that I'm heavily exposed to it reflects the fact that I do this for a living and I'm studying it all the time every day. But unless you're doing that, you should never anywhere near that kind of exposure.

Kenny:

Okay. But, just to be clear so we don't send the wrong message, you might be doing it and it's what you do every day and you're heavily exposed to it. That doesn't mean that you're necessarily protected if technically Bitcoin trades down below 30,000, or even 20,000. You're still heavily invested in it, but you've just lost a lot of money.

Chris:

True.

Kenny:

Okay. So, what I'm saying is, the message is that you're heavily invested in it because it's what you do for a living. I'm heavily invested in stocks because it's what I do for a living but I'm not heavily invested in any one stock. I don't have all my eggs in one basket is the point.

Chris:

I am with you. I am with you. And actually, what I was getting at there is my understanding gives me an outlook that makes me bullish and, therefore, that's why my exposure is what is it — [it’s based on] where I think it's going, and where I think it's going is based on my deep understanding.

Kenny:

That's right. Now, listen. Like I said, I own both Bitcoin and Ethereum. I'm looking to buy more, but I think it's going to back off a little bit. So, I'm being patient. I could be wrong, but that's how I'm playing this game, because if it breaks $30,000 and trades down into the mid-$20,000s, I'm going to back up the truck because that's where I think technically it's going to go.

Doesn't mean I don't like Bitcoin. I do. I want it to come in so I can buy more. In fact, if it doesn't come in, I'm going to end up buying more because, even though it's going to have completely done something different than I expected, I still want in. So, if I'm forced to pay up because it doesn't come my way, well, that's the risk I'm willing to take.

Chris:

Young people don't have that. They don't have the benefit of patience.

Kenny:

Well, there are some people that don't. That's correct. There are some people that want instant gratification, so you're right.

Chris:

I don't think it's necessarily anything like greed on their part. It just might be a function of time relative to how long they've lived. If you're 20-

Kenny:

Well, okay. That might be true. Exactly right. So, what I'm saying is I'm not saying that it's a negative or that you shouldn't buy it. You absolutely should, but think about the guy ... I laugh because I think about the guy. What was the top tick? $64,000, whatever it was two months ago?

Chris:

Mm-hmm (affirmative). Yep.

Kenny:

So, I think about the guy that was so excited to get in, he paid the top ticket, $64,000, and it's gone down 50% from that point. Now, how does he feel? Is he sad? Is he upset? Is he angry? I don't know.

Chris:

Depends on how long he intended to hold it.

Kenny:

That's right. He might be all three. Maybe he's already out of it. Maybe he bought it at $64,000 and he sold it at $60,000 and he's out of this. Or not; maybe he kept it. Maybe he was like me and said, "Okay. I dip my toes and I get in but now that things come down 50%," so if I liked it at $64,000, I have to be in love with it at $34,000.

Chris:

That's a good goal. That's a good goal.

Kenny:

So, depends again on who you are, where you are in your life cycle, where you are in the risk scale, how much you understand of it and how you educate yourself every day about it. I think it's all very important and I think conversations like this are great.

Listen, I'll be the first one to say I've got a clearer understanding, the way you described it at the very beginning of this conversation, those are the kinds of the things that I may not have understood. The way you described it shed kind of a new light on the way I think about it. So, maybe I'm not going to wait for it to go back to the mid-$20s. Maybe this is the low and I should buy it now.

Chris:

Well, keep an eye on the Weiss newsletters because one will give you a call when it's at its low.

Kenny:

Yeah. It's very interesting because the other day when it broke $30,000, it was trading at $29,600 or whatever it was. Then, yesterday, here in America they had that “B” event, which I'm sure you heard.

Chris:

The B Word.

Kenny:

The B Word, whatever it was called. Elon Musk and Jack Dorsey and Cathy Woodward — which I thought was a very interesting combination of people. What the hell's Jack Dorsey doing in that conversation in my opinion?

Chris:

Oh, he's a big fan of Bitcoin.

Kenny:

Well, he might be a big fan of Bitcoin, but the truth is you should have been in that conversation.

Chris:

I suppose.

Kenny:

Right? And Elon Musk. What? Am I going to sit there and listen to him just pump it up? I mean, listen, he made the comment that it fell flat on its face: "I may pump it up, but I don't dump it."

Really? Really? Every time he opens his mouth, Bitcoin flies, and then he opens his mouth again and it collapses. Who's he kidding? But that's a whole other conversation.

Chris:

Well, he's actually the least relevant out of those three.

Kenny:

Well, yeah. And Cathy Wood ... Huh? I think Cathy Wood was the one you should listen to.

Chris:

Yeah, and then Jack Dorsey and then Elon Musk.

Kenny:

Yeah, absolutely. If I had to put them in that order, you're right, I would have put him in the bottom of the chain. I think they put him in there just because he's a personality that people seem to be fascinated with.

They go, "Oh, my god! Elon Musk going to talk at this event." And everybody flocks to it because it's Elon Musk. Okay, but if you heard some of his comments yesterday, you'd sit there and go, "Why am I wasting my time?"

Chris:

Well, that's almost like a self-fulfilling prophesy. He's almost like famous because he's famous. You know? So weird.

Kenny:

Exactly. Exactly. He's almost famous because he's famous. You're right. And I'm not taking anything away from the guy.

Chris:

No. I know. I'm just saying. In the crypto space.

Kenny:

No, no. Tesla Inc. (Nasdaq: TSLA) and SpaceX and whatever he's got ... I'm not taking anything away from the guy because he has, in fact, changed parts of the world. I get it. But I'm not going to him for analysis or guidance on Bitcoin. I'm going to you. I mean, that's my opinion. I think you'd run circles around him. I think you'd sit there and talk to him and he'd go, "What?" You know what I mean?

Chris:

Sure, because he's spending his days doing other things.

Kenny:

Understood. So, if I want an education or I want an understanding about Bitcoin, Elon Musk is the last person I'm going to. It's entertaining to watch but I'm not going to him for guidance. Why? He says, "Buy it," so I go out and buy it? He told me to buy Dogecoin (DOGE, Tech/Adoption Grade “B-”), so I go out and buy Dogecoin? Are you kidding me?

Chris:

I hope not.

Kenny:

No, of course not, but the sad part about it is there are people that do that.

Chris:

Well, he doesn't have a fiduciary responsibility.

Kenny:

Well, exactly right. He does not have a fiduciary responsibility, which is why he gets away with it. Anyway. Whatever. We could sit here and just chat that up all afternoon.

Chris:

We could. We'll have to do a separate one on that one. We've gone long so far, so I think we'll wind up.

Kenny, thanks very much for joining me today on this episode of the Weiss Crypto Sunday Special.

Kenny:

All right. I'll talk to you later.

Chris:

Thanks, mate.

All right, that's going to do it for this edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. Until the next one, it's bye for now.

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